L. B. Foster Company 2011 Form 10-K Summary
Business Context and Reporting Period
L. B. Foster Company manufactures, fabricates and distributes products for rail, construction, energy and utility markets. Reportable segments are Rail Products, Construction Products and Tubular Products. This Form 10-K covers the fiscal year ended December 31, 2011; fourth-quarter results are also presented. The company acquired Portec Rail Products in December 2010, so 2011 includes a full year of Portec operations.
- Rail Products represented 54.7% of 2011 sales, Construction Products 39.8% and Tubular Products 5.5%.
- International sales were approximately 15% of total sales, compared with 5% in 2010.
- Portec generated $106.1 million of 2011 sales and $8.6 million of net income.
Financial Performance and Key Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $590.9 million | $475.1 million | 24.4% |
| Gross profit | $102.2 million | $74.6 million | 37.0% |
| Gross margin | 17.3% | 15.7% | Up 1.6 points |
| Operating profit | $32.1 million | $32.0 million | 0.3% |
| Net income | $22.9 million | $20.5 million | 11.7% |
| Diluted EPS | $2.22 | $1.98 | 12.1% |
| Net margin | 3.9% | 4.3% | Down 0.4 points |
| Cash flow from operations | $30.7 million | $59.5 million | Down $28.8 million |
| Capital expenditures | $11.9 million | $6.2 million | Up $5.8 million |
Operating profit was approximately 5.4% of sales. Selling and administrative expense increased to $67.2 million from $42.1 million, primarily because of the full-year inclusion of Portec, UPRR claim testing costs, Portec integration costs and higher outside services and salaries. The effective tax rate declined to 32.5% from 37.4%.
At December 31, 2011, cash and cash equivalents were $73.7 million, working capital was $155.3 million, total debt was approximately $2.4 million and stockholders’ equity was $269.8 million. The company had no borrowings under its revolving credit facility and approximately $123.9 million of available capacity. The company paid $1.0 million of dividends and repurchased 278,655 shares for approximately $6.5 million.
Fourth-Quarter Results
| Metric | Q4 2011 | Q4 2010 | Change |
|---|---|---|---|
| Net sales | $137.4 million | $148.0 million | Down 7.1% |
| Gross profit | $27.6 million | $22.2 million | Up 24.6% |
| Gross margin | 20.1% | 15.0% | Up 5.1 points |
| Net income | $6.1 million | $6.2 million | Down 2.2% |
| Diluted EPS | $0.60 | $0.60 | Flat |
- Rail sales increased 19.6%, helped by $23.1 million of Portec sales; Rail gross margin rose to 22.5% from 12.3%.
- Construction sales declined 31.4% because of lower piling and concrete-building volumes; backlog and new orders were lower.
- Tubular sales increased 18.1% and gross margin increased to 32.6% from 26.1%.
- Fourth-quarter results included approximately $1.8 million of incremental warranty charges and approximately $1.4 million of UPRR-related testing costs.
Material Changes Versus the Prior Comparable Period
- Portec materially increased consolidated sales, Rail segment profitability and amortization expense, but also increased selling and administrative expenses.
- Rail sales increased 52.4% to $323.5 million and Rail gross profit increased 120.3% to $60.3 million, largely because of Portec.
- Construction sales were essentially flat for the year, but gross profit declined 9.1% and margin fell to 15.6% from 17.1%.
- Tubular sales increased 19.3% and gross profit increased 53.1%, with margin rising to 27.3%.
- Backlog declined to $145.4 million from $189.3 million. Rail backlog fell to $68.1 million and Construction backlog fell to $66.6 million, partly offset by Tubular backlog increasing to $10.8 million.
- Operating cash flow declined because working capital used $7.9 million in 2011, compared with providing $28.7 million in 2010.
- The Grand Island, Nebraska concrete-tie facility was wound down and closed in February 2012. The company recorded approximately $4.4 million of related cost-of-goods-sold charges in 2011.
Outlook, Risks, Contingencies and Unusual Items
Management expected rail and tubular markets to remain favorable in 2012, while construction markets were expected to remain weak. Management anticipated Class I railroad capital spending would increase approximately 7% to 9% in 2012 and expected the company to remain profitable and generate cash flow in excess of capital expenditures, debt service, dividends and share repurchases. No formal revenue or earnings guidance was provided.
- UPRR warranty claim: Union Pacific asserted that a significant percentage of approximately 1.6 million concrete ties produced at Grand Island from 2006 through 2010 were defective or nonconforming. UPRR indicated it intended to remove approximately 115,000 ties. The company recorded no accrual for this specific claim because the potential exposure could not be reasonably estimated. The contract may require replacement of nonconforming ties at a ratio of 1.5 new ties for each failed tie.
- DOT Inspector General subpoena: CXT received a January 2012 subpoena for records related to Grand Island tie manufacturing. The company stated that it would cooperate and could not predict the effect on the UPRR matter.
- Warranty reserves: Product warranty accrual increased to $6.6 million from $4.4 million, including approximately $4.6 million related to concrete-tie matters. No specific reserve was recorded for the UPRR claim.
- Customer and market concentration: One customer represented approximately 10% of 2011 sales. Construction activity depends substantially on government infrastructure funding, and transportation legislation and state budgets remained uncertain.
- Raw materials and competition: Steel price and availability, dependence on certain suppliers, competitive bidding and pricing pressure could affect margins.
- Other unusual items: The company recognized a $577,000 pretax gain from early termination of the Houston sale-leaseback. It also recorded approximately $1.5 million of Portec integration costs and $1.9 million of research and development expense.
- Audit and controls: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective.
Investor Verification Items
- Track the scope, testing results, negotiations and ultimate financial exposure of the UPRR concrete-tie claim and DOT Inspector General investigation.
- Verify whether the Tucson, Arizona UPRR supply agreement was extended beyond December 31, 2012 and assess the effect of the Grand Island closure on Rail segment utilization and profitability.
- Assess whether the $145.4 million backlog converted to revenue and whether Construction backlog continued to decline.
- Reconcile operating cash flow with earnings and monitor working-capital investment, inventory levels and receivables collection.
- Evaluate the sustainability of Portec’s contribution, integration savings and elevated amortization and selling expenses.
- Review the company’s ability to fund capital expenditures, dividends, repurchases and potential acquisitions from internally generated cash.
- Monitor warranty reserves, pension underfunding, contractual obligations of $47.4 million and the company’s $1.1 million of outstanding letters of credit.