L.B. Foster Company 2022 Form 10-K Summary
Business Context and Reporting Period
L.B. Foster Company is a global provider of engineered, manufactured products and technology-enabled services supporting rail, civil infrastructure, precast concrete, energy, and measurement markets. The filing covers the fiscal year ended December 31, 2022, with comparisons to fiscal 2021. Reportable segments were Rail, Technologies, and Services; Precast Concrete Products; and Steel Products and Measurement.
2022 included the acquisitions of Skratch Enterprises Ltd. and VanHooseCo Precast LLC, the divestiture of Track Components, and the ongoing strategic transformation toward higher-margin businesses.
Key Financial Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $497.5 million | $513.6 million | Down 3.1% |
| Gross profit | $89.6 million | $86.3 million | Up 3.8% |
| Gross margin | 18.0% | 16.8% | Up 120 bps |
| Operating income (loss) | $(7.2) million | $4.5 million | Unfavorable change |
| Net income (loss) | $(45.7) million | $3.5 million | Unfavorable change |
| Diluted EPS | $(4.25) | $0.34 | Unfavorable change |
| Adjusted EBITDA | $24.2 million | $18.7 million | Up 29.4% |
| Cash flow from continuing operations | $(10.6) million | $(0.8) million | Higher use of cash |
| Capital expenditures | $7.6 million | $4.6 million | Up $3.0 million |
| Total debt | $91.9 million | $31.3 million | Up $60.6 million |
| Net debt | $89.0 million | $20.9 million | Up $68.1 million |
Year-end cash was $2.9 million. The $130.0 million revolving credit facility had $37.8 million of net availability after borrowings and letters of credit, producing total stated available funding capacity of $40.7 million. The facility matures August 13, 2026. The Company was in compliance with its credit covenants at year-end.
Accounts receivable increased to $82.5 million from $55.9 million, inventories increased to $75.7 million from $62.9 million, and days sales outstanding increased to 48 days from 45 days.
Material Changes Versus the Prior Comparable Period
- Sales declined because divestitures reduced revenue by 12.8%, partially offset by 5.6% organic growth and 4.0% acquisition-related growth.
- Rail, Technologies, and Services sales were broadly flat at $300.6 million, while segment operating profit declined 19.1% to $11.5 million. Backlog increased 9.0% to $105.2 million.
- Precast Concrete Products sales increased 46.8% to $104.2 million, primarily from the VanHooseCo acquisition and strong legacy demand. Backlog increased 17.3% to $80.5 million.
- Steel Products and Measurement sales declined 35.1% to $92.7 million, principally due to the 2021 Piling Products divestiture. The segment recorded an operating loss of $10.8 million, including impairment charges. Backlog increased 92.3% to $86.5 million.
- Consolidated backlog increased 29.5% to $272.3 million. Approximately 8.3% was expected to extend beyond December 31, 2023; backlog is not necessarily indicative of future results.
- Gross margin improved despite inflation and supply-chain pressures, but selling and administrative expenses increased 8.8% to $82.7 million, or 16.6% of sales versus 14.8%.
- Net loss included an $8.0 million pre-tax impairment charge, a $3.956 million unfavorable Crossrail commercial contract settlement, and a $37.895 million deferred tax asset valuation allowance.
- Debt increased primarily to fund the $52.1 million VanHooseCo acquisition and $7.4 million Skratch acquisition. The Company also divested Track Components for cash proceeds of $7.8 million.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide explicit 2023 revenue, earnings, or margin guidance. Management stated that cash, operating cash generation, and revolving-credit capacity were expected to provide sufficient liquidity for operations, debt service, and selective acquisitions, subject to business performance, working-capital needs, borrowing capacity, and covenant compliance.
- Management expects inflationary effects on labor and materials, supply-chain constraints, and competitive labor-market pressures to continue, although the timing and magnitude are uncertain.
- The Company transitioned credit agreement borrowings from LIBOR-based pricing to SOFR-based pricing and entered into SOFR interest-rate swaps with aggregate notional values of $40.0 million.
- The credit agreement was amended to approve the VanHooseCo acquisition and temporarily modify the maximum gross leverage covenant through June 30, 2023.
- The Company must pay $8.0 million annually in 2023 and 2024 under the Union Pacific Railroad settlement. The settlement also includes targeted purchases from the Company.
- The Company maintains environmental reserves of approximately $2.5 million and remains a potentially responsible party in the Portland Harbor Superfund matter. Management stated that the ultimate impact cannot currently be predicted and that an unfavorable resolution could be material.
- Key risks include leverage and covenant compliance, interest-rate increases, acquisition integration, impairment of goodwill and intangible assets, contract-estimate changes, inflation, supply-chain disruption, customer concentration, government infrastructure funding, cybersecurity, foreign-exchange volatility, litigation, warranty claims, environmental liabilities, and geopolitical or macroeconomic conditions.
- Goodwill impairment testing identified limited headroom in the Rail Technologies and Precast reporting units, creating potential future impairment risk if results or projections deteriorate.
- In the first quarter of 2023, the Board authorized up to $15.0 million of common-stock repurchases through February 2026, subject to liquidity and covenant restrictions.
Important Facts for Investors to Verify
- Whether operating cash flow improves sufficiently to support working capital, capital expenditures, settlement payments, and debt service.
- Progress in reducing leverage and maintaining compliance with the amended credit agreement, particularly after the temporary covenant modification expires.
- Integration, profitability, and cash contribution from VanHooseCo and Skratch.
- Whether Rail and Precast backlog converts into revenue and margin as expected, and whether Steel Products and Measurement improves after the divestiture-related comparison effects.
- Potential additional goodwill or long-lived-asset impairments, especially in reporting units with limited valuation headroom.
- Future changes to the $40.6 million deferred tax asset valuation allowance and the realizability of federal, state, and foreign tax attributes.
- Exposure and potential allocation of liability related to the Portland Harbor environmental matter and other litigation or warranty claims.
- Whether the Company’s long-term contract estimates, including the $67.1 million of over-time input-method revenue, remain accurate as costs, funding, and project conditions change.
The consolidated financial statements received an unqualified audit opinion, and management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2022. However, the assessments excluded the internal controls of the two 2022 acquisitions, which represented 17.9% of consolidated assets and 4.2% of consolidated sales.