Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Note 1. Summary of Significant Accounting Policies
Note 2. Business Segments
Note 3. Revenue
Note 4. Goodwill and Other Intangible Assets
Note 5. Accounts Receivable
Note 6. Inventory
Note 7. Property, Plant, and Equipment
Note 8. Investments
Note 9. Deferred Revenue
Note 10. Long-Term Debt and Related Matters
Note 11. Stockholders' Equity
Note 12. Accumulated Other Comprehensive Loss
Note 13. Earnings per Common Share
Note 14. Income Taxes
Note 15. Stock-Based Compensation
Note 16. Retirement Plans
Note 17. Rental and Lease Information
Note 18. Fair Value Measurements
Note 19. Commitments and Contingent Liabilities
Note 20. Other Income
Note 21. Quarterly Financial Information (Unaudited)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers, and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
Foster L B Earnings 2018-12-31
FSTR 10K Annual Report
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 0-10436
L.B. FOSTER COMPANY
(Exact name of registrant as specified in its charter)
(State of Incorporation)
(I.R.S. Employer Identification No.)
415 Holiday Drive, Pittsburgh, Pennsylvania
(Address of principal executive offices)
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange On Which Registered
Common Stock, Par Value $0.01
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was $220,886,039.
Outstanding at March 11, 2019
Common Stock, Par Value $0.01
Documents Incorporated by Reference:
Portions of the Proxy Statement prepared for the 2019 Annual Meeting of Shareholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K. The 2019 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
This Annual Report on Form 10-K contains “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. Many of the forward-looking statements are located in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Sentences containing words such as “believe,” “intend,” “plan,” “may,” “expect,” “should,” “could,” “anticipate,” “estimate,” “predict,” “project,” or their negatives, or other similar expressions of a future or forward-looking nature generally should be considered forward-looking statements. Forward-looking statements in this Annual Report on Form 10-K may concern, among other things, L.B. Foster Company’s (the “Company’s”) expectations relating to our strategy, goals, projections, and plans regarding our financial position, liquidity, capital resources, and results of operations; the outcome of litigation and product warranty claims; decisions regarding our strategic growth initiatives, market position, and product development; all of which are based on current estimates that involve inherent risks and uncertainties. The Company has based these forward-looking statements on current expectations and assumptions about future events. While the Company considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory, and other risks and uncertainties, most of which are difficult to predict and many of which are beyond the Company’s control. The Company cautions readers that various factors could cause the actual results of the Company to differ materially from those indicated by forward-looking statements. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Among the factors that could cause the actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties related to: environmental matters, including any costs associated with any remediation and monitoring; a resumption of the economic slowdown we experienced in previous years in the markets we serve; the risk of doing business in international markets; our ability to effectuate our strategy, including cost reduction initiatives, and our ability to effectively integrate acquired businesses and realize anticipated benefits; costs of and impacts associated with shareholder activism; a decrease in freight or passenger rail traffic; the timeliness and availability of materials from our major suppliers as well as the impact on our access to supplies of customer preferences as to the origin of such supplies, such as customers' concerns about conflict minerals; labor disputes; the continuing effective implementation of an enterprise resource planning system; changes in current accounting estimates and their ultimate outcomes; the adequacy of internal and external sources of funds to meet financing needs, including our ability to negotiate any additional necessary amendments to our credit agreement or the terms of a new credit agreement, and reforms regarding the use of LIBOR as a benchmark for establishing applicable interest rates; the Company’s ability to manage its working capital requirements and indebtedness; domestic and international taxes, including estimates that may impact these amounts, including as a result of any interpretations, regulatory actions, and amendments to the Tax Cuts and Jobs Act (the “Tax Act”); foreign currency fluctuations; inflation; domestic and foreign government regulations, including tariffs; economic conditions and regulatory changes caused by the United Kingdom’s pending exit from the European Union, including the possibility of a “no-deal Brexit;” sustained declines in energy prices; a lack of state or federal funding for new infrastructure projects; an increase in manufacturing or material costs; the loss of future revenues from current customers; and risks inherent in litigation. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying the forward-looking statements prove incorrect, actual outcomes could vary materially from those indicated. Significant risks and uncertainties that may affect the operations, performance, and results of the Company’s business and forward-looking statements include, but are not limited to, those set forth under Item 1A, “Risk Factors,” and elsewhere in this Annual Report on Form 10-K and our other periodic filings with the Securities and Exchange Commission.
The forward-looking statements in this report are made as of the date of this report and we assume no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise, except as required by the federal securities laws.
Classification as a Smaller Reporting Company
L.B. Foster Company's Annual Report on Form 10-K for the year ended December 31, 2018 has been prepared following the Securities and Exchange Commission guidelines for a smaller reporting company as defined by 229.10 (Item 10) of Regulation S-K. The rules and guidelines for a smaller reporting company allow for scaled disclosures under Regulation S-K and Regulation S-X. The Company's Form 10-K has also met the requirements that apply to accelerated filers.
(Dollars in thousands, except share data unless otherwise noted)
ITEM 1. BUSINESS
Summary Description of Businesses
Formed in 1902, L.B. Foster Company is a Pennsylvania corporation with its principal office in Pittsburgh, PA. L.B. Foster Company is a leading manufacturer and distributor of products and service provider for transportation and energy infrastructure with locations in North America and Europe. As used herein, “Foster,” the “Company,” “we,” “us,” and “our” or similar references refer collectively to L.B. Foster Company and its subsidiaries, unless the context otherwise requires.
The following table shows the net sales generated by each business segment as a percentage of total net sales for the years ended December 31, 2018 and 2017:
Percentage of Net Sales
Rail Products and Services
Tubular and Energy Services
Financial information concerning these segments is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 2 to the Consolidated Financial Statements contained in this Annual Report on Form 10-K, which is incorporated by reference into this Item 1.
Rail Products and Services
The Company’s Rail Products and Services (“Rail”) segment is comprised of several manufacturing, distribution, and service businesses that provide a variety of products and services for freight and passenger railroads and industrial companies throughout the world. The Rail segment has sales offices throughout North America and Europe, and works on rail projects where it offers products manufactured by the Company, or sourced from numerous supply chain partners, and aftermarket services. The Rail segment is comprised of the following business units: Rail Products and Rail Technologies.
The Rail Products business is comprised of the Company’s Rail Distribution, Allegheny Rail Products, Transit, and Concrete Tie divisions.
Rail Distribution sells new rail mainly to passenger and short line freight railroads, industrial companies, and rail contractors for the replacement of existing lines or expansion of new lines. Rail accessories sold by the Rail Distribution division include track spikes, bolts, angle bars, and other products required to install or maintain rail lines. These products are manufactured by the Company or purchased from other manufacturers and distributed accordingly. Rail Distribution also sells trackwork products to Class II and III railroads, industrial, and export markets.
The Company’s Allegheny Rail Products (“ARP”) division engineers and fabricates insulated rail joints and related accessories for freight and passenger railroads and industrial customers. Insulated joints are manufactured at the Company’s facilities in Pueblo, CO and Niles, OH.
The Company’s Transit Products division supplies power rail, direct fixation fasteners, coverboards, and special accessories primarily for passenger railroad systems. These products are fabricated at Company facilities or by subcontractors and are usually sold by sealed bid to passenger railroads or to rail contractors.
The Concrete Tie division manufactures engineered concrete railroad ties for freight and passenger railroads and industrial companies at its facility in Spokane, WA.
The Company’s Rail Technologies business unit engineers, manufactures, and fabricates friction management products and application systems, railroad condition monitoring systems and equipment, wheel impact load detection, rail anchors and spikes, wayside data collection and management systems, epoxy and nylon-encapsulated insulated rail joints, and track fasteners, and provides aftermarket services. The Company’s friction management products control the friction at the rail/wheel interface, helping our customers reduce fuel consumption, improve operating efficiencies, extend the life of operating assets such as rail and wheels, reduce track stresses, and lower related maintenance and operating costs. Friction management products include mobile and wayside systems that apply lubricants and liquid or solid friction modifiers. These products and systems are designed, engineered, manufactured, fabricated, and marketed by certain wholly-owned subsidiaries located in the United States, Canada, the United Kingdom, and Germany.
The Construction Products (“Construction”) segment is composed of the following business units: Piling and Fabricated Bridge Products and Precast Concrete Products.
Piling and Fabricated Bridge Products
Sheet piling products are interlocking structural steel sections that are generally used to provide lateral support at construction sites. Bearing piling products are steel H-beam sections which are driven into the ground for support of structures such as bridge piers and high-rise buildings. Piling is often used in water and land applications including cellular cofferdams and OPEN CELL® structures in inland river systems and ports.
Piling products are sourced from various manufacturers and either sold or rented to project owners and contractors. The Piling division, via a sales force deployed throughout the United States, markets and sells piling products domestically and internationally. This division offers its customers various types and dimensions of structural beam piling, sheet piling, and pipe piling. The Company is the primary distributor of domestic steel sheet piling for its primary supplier.
The Fabricated Bridge Products facility in Bedford, PA manufactures a number of fabricated steel and aluminum products primarily for the highway, bridge, and transit industries including concrete reinforced steel grid deck, open steel grid deck, aluminum bridge railing, and stay-in-place steel bridge forms.
Precast Concrete Products
The Precast Concrete Products unit primarily manufactures concrete buildings for national, state, and municipal parks. This unit manufactures restrooms, concession stands, and other protective storage buildings available in multiple designs, textures, and colors. The Company is a leading high-end supplier in terms of volume, product options, and capabilities. The unit also manufactures various other precast products such as burial vaults, bridge beams, box culverts, septic tanks, and other custom pre-stressed and precast concrete products. The products are manufactured in Spokane, WA, Hillsboro, TX, and Waverly, WV.
Tubular and Energy Services
The Tubular and Energy Services (“Tubular and Energy”) segment has two primary business units: Protective Coatings and Measurement Systems and Test, Inspection, and Threading Services. The segment provides products and services predominantly to the mid and upstream oil and gas markets.
Protective Coatings and Measurement Systems
The Protective Coatings and Measurement Systems business unit consists of operations at two primary locations. The Birmingham, AL facility coats the outside and inside diameter of pipe primarily for oil and gas transmission pipelines. This location partners with its primary customer, a pipe manufacturer, to market fusion bonded epoxy coatings, abrasion resistant coatings, and internal linings for a wide variety of pipe diameters for pipeline projects throughout North America.
The second location is in Willis, TX and consists of two operating facilities. One facility applies specialty outside and inside diameter coatings for a wide variety of pipe diameters for oil and gas transmission, mining, and waste water pipelines as well as provides custom coatings for specialty fittings and connections. The second facility manufactures and provides a turnkey solution for metering and injection systems for the oil, and, to a lesser extent, gas industry. This location operates a fabrication plant that builds metering systems for custody transfer applications including crude oil and other petroleum-based products. These systems are used at well sites, pipelines, refineries, chemical plants, and loading/unloading facilities. The location also manufactures and installs additive and dye injection systems. These systems are used to inject performance additives and/or dyes into petroleum products.
Test, Inspection, and Threading Services
The Company provides inspection and tubular integrity management services for the upstream oil and gas industry. Services include non-destructive testing, inspection, and other asset integrity services such as repair and threading for Oil Country Tubular Goods (“OCTG”) and drill tools. Inspection and testing of these products, which include replaceable and re-usable products such as casing, production tubing, drill pipe, directional motors, drill collars, and related equipment, is a critical preventative measure to ensure personnel and well-site safety, enhance efficiency, and avoid costly equipment failures and well-site shutdowns. The Company offers these services in every major oil and gas producing region throughout the United States.
The Company provides asset integrity services such as repair and threading for tubular and drill tools. Our facilities cut, thread, and paint pipe primarily for water well applications for the agriculture industry, municipal water authorities, and OCTG markets.
Marketing and Competition
L.B. Foster Company generally markets its Rail Products and Services directly in all major industrial areas of the United States, Canada, and Europe. The Construction Products and Tubular and Energy Services are primarily marketed domestically. The Company employs a sales force of approximately 79 people that is supplemented with a network of agents across Europe, South America, and Asia to reach current customers and cultivate potential customers in these areas. For the years ended 2018 and 2017, approximately 23% and 19%, respectively, of the Company’s total sales were outside the United States.
The major markets for the Company’s products are highly competitive. Product availability, quality, service, and price are principal factors of competition within each of these markets. No other company provides the same product mix to the various markets
the Company serves. However, there are one or more companies that compete with the Company in each product line. Therefore, the Company faces significant competition from different groups of companies.
During 2018 and 2017, no single customer accounted for more than 10% of the Company’s consolidated net sales.
Raw Materials and Supplies
Most of the Company’s products are purchased in the form of finished or semi-finished products. The Company purchases the majority of its supplies from domestic and foreign steel producers. Generally, the Company has a number of vendor options. However, the Company has an arrangement with a steel mill to distribute steel sheet piling in North America. Should sheet piling from its present supplier not be available for any reason, the Company risks not being able to provide such product to its customers.
The Company’s purchases from foreign suppliers are subject to foreign currency exchange rate changes as well as the usual risks associated with changes in international conditions and to United States and international laws that could impose import restrictions on selected classes of products and for anti-dumping duties if products are sold in the United States at prices that are below specified prices.
The Company’s backlog represents the sales price of received customer purchase orders or contracts in which the performance obligations have not been met, and thus are precluded from revenue recognition. Although we believe that the orders included in backlog are firm, our customers may cancel or change their orders with limited advance notice; however, these instances are rare. Backlog should not be considered a reliable indicator of the Company’s ability to achieve any particular level of revenue or financial performance. The backlog as of December 31, 2018 and 2017 by business segment is as follows:
Rail Products and Services
Tubular and Energy Services
Approximately 6.7% of the December 31, 2018 backlog is related to projects that will extend beyond 2019.
Research and Development
Expenditures for research and development approximated $2,646 and $2,241 in 2018 and 2017, respectively. These expenditures were predominately associated with expanding product lines and capabilities within the Company’s Rail Technologies business.
Patents and Trademarks
The Company owns a number of domestic and international patents and trademarks primarily related to its Rail Technologies products. Our business segments are not dependent upon any individual patent or related group of patents, or any licenses or distribution rights. We believe that, in the aggregate, the rights under our patents, trademarks, and licenses are generally important to our operations, but we do not consider any individual patent or trademark, or any licensing or distribution rights related to a specific process or product, to be of material importance in relation to our total business.
Information regarding environmental matters is included in Part II, Item 8, Financial Statements and Supplementary Data, Note 19 to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 1.
Employees and Employee Relations
As of December 31, 2018, the Company had approximately 1,480 employees, 1,298 located within the Americas and 182 located in Europe. There were 828 hourly production workers and 652 salaried employees. Of the hourly production workers, approximately 139 are represented by unions. The Company has not suffered any major work stoppages during the past five years and considers its relations with its employees to be satisfactory.
Two collective bargaining agreements covering approximately 35 and 78 employees were successfully renegotiated during 2017 and are scheduled to expire in March 2020 and September 2021, respectively.
Substantially all of the Company’s hourly paid employees are covered by one of the Company’s noncontributory, defined benefit plans or defined contribution plans. Substantially all of the Company’s salaried employees are covered by defined contribution plans.
Concrete Tie Settlement Agreement
On March 13, 2019, the Company and its subsidiary, CXT Incorporated (“CXT”) entered into a Settlement Agreement (the “Settlement Agreement”) with Union Pacific Railroad (“UPRR”) to resolve the pending litigation in the matter of Union Pacific
Railroad Company v. L.B. Foster Company and CXT Incorporated, Case No. CI 15-564, in the District Court for Douglas County, Nebraska. The lawsuit related to UPRR's claims that the Company and CXT breached their express warranty, implied covenant of good faith and fair dealing, and anticipatorily repudiated their warranty obligations with respect to the manufacture and sale of pre-stressed concrete railroad ties to UPRR, and UPRR sought to recover damages in an amount to be determined at trial for the value of unfulfilled warranty replacement ties and ties likely to become warranty eligible, costs for cover for replacement ties, and various incidental and consequential damages. The Company denied liability to UPRR and asserted that UPRR's conduct was wrongful and unjustified and asserted defenses and counterclaims.
Under the Settlement Agreement, the Company and CXT will pay UPRR the aggregate amount of $50,000 without pre-judgment interest, beginning with a $2,000 immediate payment, and with the remaining $48,000 paid in installments over a six-year period commencing on the effective date of the Settlement Agreement through December 2024 pursuant to a Promissory Note. Additionally, commencing in January 2019 and through December 2024, UPRR has agreed to purchase from the Company and its subsidiaries and affiliates, a cumulative total amount of $48,000 of products and services, targeting $8,000 of annual purchases per year beginning in 2019 per letters of intent under the Settlement Agreement. The Settlement Agreement also includes a mutual release of all claims and liability regarding or relating to all CXT pre-stressed concrete railroad ties with no admission of liability and dismissal of the litigation with prejudice. Additional information regarding this matter is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 19 to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 1.
Financial Information about Liquidity and Capital Resources
Information concerning the Company’s liquidity and capital resources and the Company’s working capital requirements can be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included herein, which is incorporated by reference into this Item 1.
Financial Information about Geographic Areas
Financial information about geographic areas is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 2 to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 1.
Financial Information about Segments
Financial information about segments is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 2 to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 1.
Code of Ethics
L.B. Foster Company has a legal and ethical conduct policy applicable to all directors and employees, including its Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer. This policy is posted on the Company’s website, www.lbfoster.com. The Company intends to satisfy the disclosure requirement regarding certain amendments to, or waivers from, provisions of its policy by posting such information on the Company’s website. In addition, our ethics hotline can also be used by employees and others for the anonymous communication of concerns about financial controls, human resource concerns, and other reporting matters.
The Company makes certain filings with the Securities and Exchange Commission (“SEC”), including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments and exhibits to those reports, available free of charge through its website, www.lbfoster.com, as soon as reasonably practicable after they are filed with the SEC. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. These filings, including the Company's filings, are available at the SEC's internet site at www.sec.gov. The Company’s press releases and recent investor presentations are also available on its website.
Executive Officers of the Registrant
Information concerning the executive officers of the Company is set forth below:
Robert P. Bauer
President and Chief Executive Officer
Patrick J. Guinee
Senior Vice President, General Counsel, and Secretary
Todd M. James
Controller and Chief Accounting Officer
John F. Kasel
Senior Vice President - Rail and Construction
Brian H. Kelly
Senior Vice President - Human Resources and Administration
Gregory W. Lippard
Vice President - Rail Sales and Products and Services
James P. Maloney
Senior Vice President, Chief Financial Officer, and Treasurer
Mr. Bauer was elected President and Chief Executive Officer upon joining the Company in 2012. Prior to joining the Company, beginning in 2011, Mr. Bauer served as President of the Refrigeration Division of the Climate Technologies business of Emerson Electric Company, a diversified global manufacturing and technology company. From 2002 until 2011, Mr. Bauer served as President of Emerson Network Power’s Liebert Division.
Mr. Guinee serves as Senior Vice President, General Counsel, and Secretary and was elected Vice President, General Counsel, and Secretary in 2014. Prior to joining the Company, Mr. Guinee served as Vice President - Securities & Corporate and Assistant Secretary at Education Management Corporation from 2013 to early 2014, and was employed by H. J. Heinz Company from 1997 to 2013, last serving as Vice President - Corporate Governance & Securities and Assistant Secretary.
Mr. James was elected Controller and Chief Accounting Officer in April 2018. Prior to joining the Company, Mr. James most recently served as Senior Director, Technical Accounting and Financial Reporting, at EQT Corporation and, prior to its merger with EQT Corporation, Rice Energy Inc. from 2014 to 2018. Mr. James last served as Senior Manager, Assurance at PricewaterhouseCoopers LLP, from 2005 to 2014.
Mr. Kasel was elected Senior Vice President - Rail and Construction in September 2017, having previously served as Senior Vice President - Rail Products and Services since 2012, Senior Vice President - Operations and Manufacturing since 2005, and Vice President - Operations and Manufacturing since 2003. Mr. Kasel served as Vice President of Operations for Mammoth, Inc., a Nortek company from 2000 to 2003.
Mr. Kelly serves as Senior Vice President - Human Resources and Administration and was elected Vice President - Human Resources and Administration in 2012, having previously served as Vice President, Human Resources since 2006. Prior to joining the Company, Mr. Kelly headed Human Resources for 84 Lumber Company from 2004. Previously, he served as a Director of Human Resources for American Greetings Corp. from 1994 to 2004.
Mr. Lippard was elected Vice President - Rail Sales and Products and Services in September 2017, having previously served as Vice President - Rail Product Sales since 2000. Prior to re-joining the Company in 2000, Mr. Lippard served as Vice President - International Trading for Tube City, Inc. from 1998. Mr. Lippard served in various other capacities with the Company after his initial employment in 1991.
Mr. Maloney was elected Senior Vice President, Chief Financial Officer, and Treasurer in September 2017. Prior to joining the Company, Mr. Maloney served as Chief Financial Officer of First Insight, Inc. from 2014 to 2017. Mr. Maloney served as Vice President - Global Financial Planning and Supply Chain Finance for H. J. Heinz Company from 2012 to 2014. He served as Director of Finance from 2009 to 2012 and Controller from 2005 to 2009 for the Heinz North American operating unit.
Mr. Treacy was elected Vice President - Tubular and Energy Services in September 2017, having previously served as Director of Technology and General Manager, Transit Products within the Rail Products and Services segment since 2013. Prior to joining the Company, Mr. Treacy served as Interim President of Tuthill Vacuum and Blower Systems from 2012 to 2013. Mr. Treacy previously served as General Manager, Crane Vending Solutions for Crane Co. from 2009 to 2011 and was employed by Parker Hannifin from 2000 to 2009, last serving as Vice President of Operations Development.
Officers are elected annually at the organizational meeting of the Board of Directors following the annual meeting of stockholders.
ITEM 1A. RISK FACTORS
Risks and Uncertainties
We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could have a material and adverse effect on our business, financial condition, and results of operations. The following risks highlight some of the more significant factors that have affected us and could affect us in the future. We may also be affected by unknown risks or risks that we currently believe are immaterial. If any such events actually occur, our business, financial condition, and results of operations could be materially and adversely affected. You should carefully consider the following factors and other information contained in this Annual Report on Form 10-K before deciding to invest in our common stock.
Our inability to successfully manage divestitures and other significant transactions could harm our financial results, business, and prospects.
As part of our business strategy, we may divest businesses or assets, enter into strategic alliances and joint ventures, and make investments to realize anticipated benefits, which actions involve a number of inherent risks and uncertainties. We can give no assurances that the opportunities will be consummated or that financing will be available. We may not be able to achieve the synergies and other benefits we expect from strategic transactions as successfully or rapidly as projected, if at all.
Our future performance and market value could cause additional write-downs of long-lived and intangible assets in future periods.
We are required under U.S. generally accepted accounting principles to review intangible assets for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, goodwill is required to be tested for impairment at least annually. Factors that may be considered to be a change in circumstances indicating that the carrying value of our intangible assets may not be recoverable include, but are not limited to, a decline in stock price and resulting market capitalization, a
significant decrease in the market value of an asset, or a significant decrease in operating or cash flow projections. No impairments of goodwill or long-lived assets were recorded in 2018 and 2017.
No assurances can be given that we will not be required to record future significant charges related to tangible or intangible asset impairments.
Our indebtedness could materially and adversely affect our business, financial condition, and results of operations and prevent us from fulfilling our obligations.
Our indebtedness could materially and adversely affect our business, financial condition, and results of operations. For example, it could:
•require us to dedicate a substantial portion of our cash flows to payments of our indebtedness, which would reduce the availability of our cash flow to fund working capital, capital expenditures, expansion efforts, and other general corporate purposes;
•limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•place us at a competitive disadvantage compared to our competitors that have less debt; and
•limit, among other things, our ability to borrow additional funds for working capital, capital expenditures, or general corporate purposes.
Our inability to comply with covenants in place or our inability to make the required principal and interest payments may cause an event of default, which could have a substantial adverse impact to our business, financial condition, and results of operations. There is no assurance that refinancings or asset dispositions could be effected on a timely basis or on satisfactory terms, if at all, particularly if credit market conditions deteriorate. Furthermore, there can be no assurance that refinancings or asset dispositions would be permitted by the terms of our credit agreements or debt instruments. Our existing credit agreements contain, and any future debt agreements we may enter into may contain, certain financial tests and other covenants that limit our ability to incur indebtedness, acquire other businesses, and may impose various other restrictions. Our ability to comply with financial tests may be adversely affected by changes in economic or business conditions beyond our control, and these covenants may limit our ability to take advantage of potential business opportunities as they arise. We cannot be certain that we will be able to comply with the financial tests and other covenants, or, if we fail to do so, that we will be able to obtain waivers or amended terms from our lenders. An uncured default with respect to one or more of the covenants could result in the amounts outstanding being declared immediately due and payable, which may also trigger an obligation to redeem our outstanding debt securities and repay all other outstanding indebtedness. Any such acceleration of our indebtedness would have a material and adverse effect on our business, financial condition, and results of operations.
Certain of our variable rate debt, including our revolving credit facility, currently uses LIBOR as a benchmark for establishing the interest rate. LIBOR is the subject of recent proposals for reform. These reforms may cause LIBOR to perform differently than in the past or to disappear entirely. The consequences of these developments with respect to LIBOR cannot be entirely predicted but may result in an increase in the interest cost of our variable rate debt.
Prolonged low energy prices and other unfavorable changes in U.S., global, or regional economic and market conditions could adversely affect our business.
We could be adversely impacted by prolonged negative changes in economic conditions affecting either our suppliers or customers as well as the capital markets. Negative changes in government spending may result in delayed or permanent deferrals of existing or potential projects. No assurances can be given that we will be able to successfully mitigate various prolonged uncertainties including materials cost variability, delayed or reduced customer orders and payments, and access to available capital resources outside of operations.
In addition, volatile market conditions and low energy prices could continue for an extended period, which would negatively affect our business prospects and reduce profitability. Historically, oil and natural gas prices have been volatile and are subject to fluctuations in response to changes in supply and demand, market uncertainty, and a variety of additional factors that are beyond our control. Sustained declines or significant and frequent fluctuations in the price of oil and natural gas may have a material and adverse effect on our operations and financial condition.
Our ability to maintain or improve our profitability could be adversely impacted by cost pressures.
Our profitability is dependent upon the efficient use of our resources. Rising inflation, labor costs, labor disruptions, and other increases in costs due to tariffs or other reasons in the geographic areas in which we operate could have a significant adverse impact on our profitability and results of operations.
Management projections, estimates, and judgments may not be indicative of our future performance.
Our management team is required to use certain estimates in preparing our financial statements, including accounting estimates to determine reserves related to litigation, deferred tax assets, and the fair market value of certain assets and liabilities. Certain asset and liability valuations are subject to management’s judgment and actual results are influenced by factors outside our control.
We are required to maintain a valuation allowance for deferred tax assets and record a charge to income and equity if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. This evaluation process involves significant management judgment about assumptions that are subject to change from period to period. The use of different estimates can result in changes in the amounts of deferred tax items recognized, which can result in equity and earnings volatility because such changes are reported in current period earnings. See Part II, Item 8, Financial Statements and Supplementary Data, Note 14 to the Consolidated Financial Statements included herein, for additional discussion of our deferred taxes.
Our business operates in highly competitive markets and a failure to react to changing market conditions could adversely impact our business.
We face strong competition in each of the markets in which we participate. A slow response to competitor pricing actions and new competitor entries into our product lines could negatively impact our overall pricing. Efforts to improve pricing could negatively impact our sales volume in all product categories. We may be required to invest more heavily to maintain and expand our product offerings. There can be no assurance that new product offerings will be widely accepted in the markets we serve. Significant negative developments in any of these areas could adversely affect our financial results and condition.
If we are unable to protect our intellectual property and prevent its improper use by third parties, our ability to compete may be harmed.
We own a number of patents and trademarks under the intellectual property laws of the United States, Canada, Europe, and other countries where product sales are possible. However, we have not perfected patent and trademark protection of our proprietary intellectual property for all products in all countries. The decision not to obtain patent and trademark protection in other countries may result in other companies copying and marketing products that are based upon our proprietary intellectual property. This could impede growth into new markets where we do not have such protections and result in a greater supply of similar products in such markets, which in turn could result in a loss of pricing power and reduced revenue.
Our success is in part dependent on the accuracy and proper utilization of our management information and communications systems.
We are currently working through an enterprise resource program (“ERP”) system transition. Certain divisions of our Company migrated into the new ERP system during 2016 while certain other divisions may be transitioned during 2019 and subsequent years. The system implementation is intended to enable us to better meet the information requirements of our users, increase our integration efficiencies, and identify additional synergies in the future. The implementation of our ERP system is complex because of the wide range of processes and systems to be integrated across our business. Any disruptions, delays, or deficiencies in the design, operation, or implementation of our various systems, or in the performance of our systems, particularly any disruptions, delays, or deficiencies that impact our operations, could adversely affect our ability to effectively run and manage our business, including our ability to receive, process, ship, and bill for orders in a timely manner or our ability to properly manage our inventory or accurately present our inventory availability or pricing. Project delays, business interruptions, or loss of expected benefits could have a material and adverse effect on our business, financial condition, or results of operations.
We are subject to cybersecurity risks and may incur increasing costs in an effort to minimize those risks.
Our business employs systems and websites that allow for the storage and transmission of proprietary or confidential information regarding our customers, employees, job applicants, and other parties, including financial information, intellectual property, and personal identification information. Security breaches and other disruptions could compromise our information, expose us to liability, and harm our reputation and business. The steps we take to deter and mitigate these risks may not be successful. We may not have the resources or technical sophistication to anticipate or prevent current or rapidly evolving types of cyber-attacks. Data and security breaches can also occur as a result of non-technical issues, including an intentional or inadvertent breach by our employees or by persons with whom we have commercial relationships. Federal, state, and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use, and disclosure of personal information obtained from customers and individuals. The costs of compliance with, and other burdens imposed by, such data privacy laws and regulations, including those of the European Union and the United Kingdom which are, in some respects, more stringent than U.S. standards, could be significant. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, legal and financial exposure, negative impacts on our customers’ willingness to transact business with us, and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation.
We are dependent upon key customers.
We could be adversely affected by changes in the business or financial condition of a customer or customers. A prolonged decrease in capital spending by our railroad customers could negatively impact our sales and profitability. No assurances can be given that a significant downturn in the business or financial condition of a current customer, or customers, or potential litigation with a current customer, would not also impact our future results of operations and/or financial condition.
An adverse outcome in any pending or future litigation or pending or future warranty claims against the Company or its subsidiaries or our determination that a customer has a substantial product warranty claim could negatively impact our financial results and/or our financial condition.
We are party to various legal proceedings. In addition, from time to time our customers assert claims against us relating to the warranties which apply to products we sell. There is the potential that a result materially adverse to us or our subsidiaries in pending or future legal proceedings or pending or future product warranty claims could materially exceed any accruals we have established and adversely affect our financial results and/or financial condition. In addition, we could suffer a significant loss of business from a customer who is dissatisfied with the resolution of a warranty claim.
A portion of our sales are derived from our international operations, which expose us to certain risks inherent in doing business on an international level.
Doing business outside the United States subjects the Company to various risks, including changing economic and political conditions, work stoppages, exchange controls, currency fluctuations, armed conflicts, and unexpected changes in United States and foreign laws relating to tariffs, trade restrictions, transportation regulations, foreign investments, and taxation. Increasing sales to foreign countries, including Canada, China, Mexico, the United Kingdom (“U.K.”), and countries within the European Union (“E.U.”), exposes the Company to increased risk of loss from foreign currency fluctuations and exchange controls as well as longer accounts receivable payment cycles. We have little control over most of these risks and may be unable to anticipate changes in international economic and political conditions and, therefore, unable to alter our business practices in time to avoid the adverse effect of any of these possible changes.
Changes in exchange rates for foreign currencies may reduce international demand for our products or increase our labor or supply costs in non-U.S. markets. Fluctuations in the relative values of the United States dollar, Canadian dollar, British pound, and Euro may result in volatile earnings to reflect exchange rate translation in our Canadian and European sales and operations. If the United States dollar strengthens in value as compared to the value of the Canadian dollar, British pound, or Euro, our reported earnings in dollars from sales in those currencies will be unfavorable. Conversely, a favorable result will be reported if the United States dollar weakens in value as compared to the value of the Canadian dollar, British pound, or Euro.
Economic conditions and regulatory changes caused by the United Kingdom’s pending exit from the European Union could adversely affect our business.
In June 2016, the U.K. held a referendum in which voters approved an exit from the E.U., commonly referred to as “Brexit.” The U.K. government has initiated a process to withdraw from the E.U. and is negotiating the terms of its separation. There is also the chance of what is being called a “no-deal Brexit,” where no formal agreement is made between the U.K. and E.U. regarding the terms of separation prior to the U.K.'s exit from the E.U. Since the announcement of Brexit and, most recently, possible no-deal Brexit, there has been volatility in currency exchange rate fluctuations between the U.S. dollar relative to the U.K. pound, which could continue. The announcement of Brexit and pending withdrawal of the U.K. from the E.U. has also created market volatility and could continue to contribute to instability in global financial and foreign exchange markets, political institutions, and regulatory agencies.
The majority of our U.K. operations are heavily concentrated within the U.K. borders; however, this could adversely affect the future growth of our U.K. operations into other European locations. Our U.K. operations represented approximately 11% and 10% of our total revenue for the years ended December 31, 2018 and 2017, respectively. During the years ended December 31, 2018 and 2017, less than 1% of our consolidated net revenue was from U.K. operation's sales exported to E.U. members other than the U.K.
Material modification to the North American Free Trade Agreement (“NAFTA”) and certain other international trade agreements could affect our business, financial condition, and results of operations.
The current Presidential administration has made comments suggesting it is not supportive of certain international trade agreements, including the NAFTA. On November 30, 2018, the United States-Mexico-Canada Agreement (“USMCA”) was signed by the parties, but a renegotiation of NAFTA remains to be ratified by U.S. Congress. At this time, it remains unclear what the current administration and Congress would or would not do with respect to these international trade agreements. While the Company is a net exporter out of the United States, potential material modifications to NAFTA, or certain other international trade agreements, including USMCA, may have a material adverse effect on our business, financial condition, and results of operations.
Violations of foreign governmental regulations, including the U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws, could result in fines, penalties, and criminal sanctions against the Company, its officers, or both and could have a material and adverse effect on our business.
Our foreign operations are subject to governmental regulations in the countries in which we operate as well as U.S. laws. These include regulations relating to currency conversion, repatriation of earnings, taxation of our earnings and the earnings of our personnel, and the increasing requirement in some countries to make greater use of local employees and suppliers, including, in some jurisdictions, mandates that provide for greater local participation in the ownership and control of certain local business assets.
The U.S. Foreign Corrupt Practices Act and similar other worldwide anti-corruption laws, such as the U.K. Bribery Act, prohibit improper payments for the purpose of obtaining or retaining business. Although we have established an internal control structure, corporate policies, compliance, and training processes to reduce the risk of violation, we cannot ensure that these procedures protect us from violations of such policies by our employees or agents. Failure to comply with applicable laws or regulations could
subject us to fines, penalties, and suspension or debarment from contracting. Events of non-compliance could harm our reputation, reduce our revenues and profits, and subject us to criminal and civil enforcement actions. Violations of such laws or allegations of violation could disrupt our business and result in material adverse results to our operating results or future profitability.
Certain divisions of our business depend on a small number of suppliers. The loss of any such supplier could have a material and adverse effect on our business, financial condition, and result of operations.
In our Rail Products business unit, we rely on a limited number of suppliers for key products that we sell to our customers. In addition, our Piling division is predominantly dependent upon one supplier for sheet piling while our Protective Coatings division is predominately dependent on two suppliers of epoxy coating. A significant downturn in the business of one or more of these suppliers, a disruption in their manufacturing operations, an unwillingness to continue to sell to us, or a disruption in the availability of existing and new piling and rail products may adversely impact our financial results.
Fluctuations in the price, quality, and availability of the primary raw materials used in our business could have a material and adverse effect on our operations and profitability.
Most of our businesses utilize steel as a significant product component. The steel industry is cyclical and prices and availability are subject to these cycles as well as to international market forces. We also use significant amounts of cement and aggregate in our Concrete Ties and Precast Concrete Products businesses. No assurances can be given that our financial results would not be adversely affected if prices or availability of these materials were to change in a significantly unfavorable manner.
Labor disputes may have a material and adverse effect on our operations and profitability.
Four of our manufacturing facilities are staffed by employees represented by labor unions. Approximately 139 employees employed at these facilities are currently working under three separate collective bargaining agreements. Disputes with regard to the terms of these agreements or our potential inability to renegotiate acceptable contracts with these unions could result in, among other things, strikes, work stoppages, slowdowns, or lockouts, which could cause a disruption of our operations and have a material and adverse effect on our results of operations, financial condition, and liquidity.
Actions of activist shareholders could be disruptive and potentially costly and the possibility that activist shareholders may seek changes that conflict with our strategic direction could cause uncertainty about the strategic direction of our business.
In February 2016, the Company entered into an agreement with an activist investor, Legion Partners Asset Management, LLC and various of its affiliates (collectively, “Legion Partners”) that had filed a Schedule 13D with the SEC with respect to the Company. Pursuant to that agreement, the Company agreed to appoint a representative of Legion Partners to the Company’s Board of Directors and Legion Partners agreed to various standstill provisions and to vote for the Company’s director nominees at the Company’s 2016 and 2017 Annual Meetings of Shareholders. This agreement expired by its terms on February 13, 2018.
Although our agreement with Legion Partners expired, activist investors may attempt to effect changes in the Company’s strategic direction and how the Company is governed, or to acquire control over the Company. Some investors seek to increase short-term shareholder value by advocating corporate actions such as financial restructuring, increased borrowing, special dividends, stock repurchases, or even sales of assets or the entire company. While the Company welcomes varying opinions from all shareholders, activist campaigns that contest or conflict with our strategic direction could have an adverse effect on the Company’s results of operations and financial condition as responding to proxy contests and other actions by activist shareholders can disrupt our operations, be costly and time-consuming, and divert the attention of the Company’s board and senior management from the pursuit of business strategies. In addition, perceived uncertainties as to our future direction as a result of changes to the composition of our Board may lead to the perception of a change in the direction of the business, instability or lack of continuity, which may be exploited by our competitors, may cause concern to our current or potential customers, may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel and business partners. These types of actions could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
Our success is highly dependent on the continued service and availability of qualified personnel.
Much of our future success depends on the continued availability and service of key personnel, including our Chief Executive Officer, the executive team, and other highly skilled employees. Changes in demographics, training requirements, and the availability of qualified personnel could negatively affect our ability to compete and lead to a reduction in our profitability.
We may not foresee or be able to control certain events that could adversely affect our business.
Unexpected events including fires or explosions at our facilities, natural disasters, armed conflicts, unplanned outages, equipment failures, failure to meet product specifications, or a disruption in certain of our operations, may cause our operating costs to increase or otherwise impact our financial performance.
Shifting federal, state, local, and foreign regulatory policies impose risks to our operations.
We are subject to regulation by federal, state, local, and foreign regulatory agencies. We are required to comply with numerous laws and regulations and to obtain various authorizations, permits, approvals, and certificates from governmental agencies.
Compliance with emerging regulatory initiatives, delays, discontinuations, or reversals of existing regulatory policies in the markets in which we operate could have an adverse effect on our business, results of operations, cash flows, and financial condition.
A substantial portion of our operations are heavily dependent on governmental funding of infrastructure projects. Many of these projects have “Buy America” or “Buy American” provisions. Significant changes in the level of government funding of these projects could have a favorable or unfavorable impact on our operating results. Additionally, government actions concerning “Buy America” provisions, taxation, tariffs, the environment, or other matters could impact our operating results.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
The location and general description of the principal properties which are owned or leased by L.B. Foster Company, together with the segment of the Company’s business using such properties, are set forth in the following table:
Bridge component fabricating plant
Protective coatings facility
Tubular and Energy
Burnaby, BC, Canada
Friction management products plant
Threading, test, and inspection facility
Tubular and Energy
Columbia City, IN
Rail processing facility and yard storage
Precast concrete facility
Threading, test, and inspection facility
Tubular and Energy
Threading, test, and inspection facility
Tubular and Energy
Tubular and Energy
Test and inspection facility
Tubular and Energy
Rail fabrication, friction management products, and yard storage
Piling storage facility
Rail joint manufacturing facility
Saint-Jean-sur-Richelieu, QC, Canada
Rail anchors and track spikes manufacturing plant
Sheffield, United Kingdom
Track component and friction management products facility
Concrete tie plant
Precast concrete facility
Precast concrete facility
Protective coatings facility
Tubular and Energy
Measurement services facility
Tubular and Energy
Included in the table above are certain facilities leased by the Company for which there is no acreage included in the lease. For these properties a “N/A” has been included in the “Acres” column.
Including the properties listed above, the Company has a total of 24 sales offices, including its headquarters in Pittsburgh, PA, and 30 warehouses, plants, and yard facilities located throughout the United States, Canada, and Europe. The Company’s facilities are in good condition and suitable for the Company’s business as currently conducted and as currently planned to be conducted.
ITEM 3. LEGAL PROCEEDINGS
On March 13, 2019, the Company and its subsidiary, CXT Incorporated (“CXT”) entered into a Settlement Agreement (the “Settlement Agreement”) with Union Pacific Railroad (“UPRR”) to resolve the pending litigation in the matter of Union Pacific Railroad Company v. L.B. Foster Company and CXT Incorporated, Case No. CI 15-564, in the District Court for Douglas County, Nebraska. The lawsuit related to UPRR's claims that the Company and CXT breached their express warranty, implied covenant of good faith and fair dealing, and anticipatorily repudiated their warranty obligations with respect to the manufacture and sale of pre-stressed concrete railroad ties to UPRR, and UPRR sought to recover damages in an amount to be determined at trial for the value of unfulfilled warranty replacement ties and ties likely to become warranty eligible, costs for cover for replacement ties, and various incidental and consequential damages. The Company denied liability to UPRR and asserted that UPRR's conduct was wrongful and unjustified and asserted defenses and counterclaims.
Under the Settlement Agreement, the Company and CXT will pay UPRR the aggregate amount of $50,000 without pre-judgment interest, beginning with a $2,000 immediate payment, and with the remaining $48,000 paid in installments over a six-year period commencing on the effective date of the Settlement Agreement through December 2024 pursuant to a Promissory Note. Additionally, commencing in January 2019 and through December 2024, UPRR has agreed to purchase from the Company and its subsidiaries and affiliates, a cumulative total amount of $48,000 of products and services, targeting $8,000 of annual purchases per year beginning in 2019 per letters of intent under the Settlement Agreement. The Settlement Agreement also includes a mutual release of all claims and liability regarding or relating to all CXT pre-stressed concrete railroad ties with no admission of liability and dismissal of the litigation with prejudice.
Additional information regarding the Company’s legal proceedings and other commitments and contingencies is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 19 to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 3.
ITEM 4. MINE SAFETY DISCLOSURES
This item is not applicable to the Company.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Stock Market Information
(Dollars in thousands, except share data unless otherwise noted)
The Company had 315 common shareholders of record on March 11, 2019. Common stock prices are quoted daily through the NASDAQ Global Select Market quotation service (Symbol: FSTR). The following table sets forth the range of high and low sales prices per share of our common stock for the periods indicated:
During 2018 and 2017, the Company did not declare any quarterly dividends.
The Company’s November 7, 2016 credit facility permits it to pay dividends and distributions and make redemptions with respect to its stock providing no event of default or potential default (as defined in the facility agreement) has occurred prior to or after giving effect to the dividend, distribution, or redemption. Dividends, distributions, and redemptions are capped at $1,700 per year when funds are drawn on the facility.
Securities Authorized for Issuance Under Equity Compensation Plans
Under the 2006 Omnibus Incentive Plan, from May 24, 2006 through May 2017, non-employee directors were automatically awarded fully-vested shares of the Company’s common stock as determined by the Board of Directors at each annual shareholder meeting at which such non-employee director is elected or re-elected. Since May 2018, the non-employee directors have received annual awards of forfeitable restricted shares subject to a one-year vesting requirement. During 2018, pursuant to the 2006 Omnibus Incentive Plan, the Company issued approximately 22,000 shares of the Company’s common stock for the annual non-employee director equity award, which shares vest on the one-year anniversary of the date of grant. During 2018, the Company issued approximately 2,000 shares to certain non-employee directors who elected the option to receive fully-vested shares of the Company’s common stock in lieu of director cash compensation. Through December 31, 2018, there were approximately 191,000 fully vested shares issued under the 2006 Omnibus Incentive Plan to non-employee directors. During the quarter ended June 30, 2017, the Nomination and Governance Committee and Board of Directors jointly approved the Deferred Compensation Plan for Non-Employee Directors under the 2006 Omnibus Incentive Plan, which permits non-employee directors of the Company to defer receipt of earned cash and/or stock compensation for service on the Board. During 2018, approximately 42,000 deferred share units were allotted to the accounts of non-employee directors pursuant to the Deferred Compensation Plan for Non-Employee Directors.
The Company grants eligible employees restricted stock and performance unit awards under the 2006 Incentive Omnibus Plan. The forfeitable restricted stock awards granted prior to March 2015 generally time-vest after a four-year period, and those granted after March 2015 generally time-vest ratably over a three-year period, unless indicated otherwise in the underlying restricted stock award agreement. Performance unit awards are offered annually under separate three-year long-term incentive programs. Performance units are subject to forfeiture and will be converted into common stock of the Company based upon the Company’s performance relative to performance measures and conversion multiples as defined in the underlying program.
With respect to awards made prior to December 31, 2016, the Company will withhold or employees may tender shares of restricted stock when issued to pay for withholding taxes. Since 2017, the Company will withhold shares of restricted stock for satisfaction of tax withholding obligations. During 2018 and 2017, the Company withheld 11,445 and 7,277 shares, respectively, for this purpose. The values of the shares withheld were $316 and $103 in 2018 and 2017, respectively. Awards made since January 1, 2019 provide that the Company will withhold shares of restricted stock to satisfy tax withholding obligations.
Issuer Purchases of Equity Securities
The Company’s purchases of equity securities for the three months ended December 31, 2018 were as follows:
Total number of shares purchased (1)
Average price paid per share
Total number of shares purchased as part of publicly announced plans or programs
Approximate dollar value of shares that may yet be purchased under the plans or programs
October 1, 2018 - October 31, 2018
November 1, 2018 - November 30, 2018
December 1, 2018 - December 31, 2018
1Reflects shares withheld by the Company to pay taxes upon vesting of restricted stock. No such shares were withheld during the three months ended December 31, 2018.
ITEM 6. SELECTED FINANCIAL DATA
This item is not applicable to a smaller reporting company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except share data unless otherwise noted)
Executive Level Overview
2018 Developments and 2019 Outlook
During 2018, we:
•Increased net sales by $90,592, or 16.9%, to $626,969;
•Increased new orders by 24.6% resulting in a backlog of $220,418, which is a 32.1% increase over the prior year end;
•Generated a net loss of $31,168, or $3.01 loss per diluted share, as a result of the settlement discussed below;
•Reported adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, and certain expenses) of $41,436; (a)
•Effectively managed working capital levels, resulting in $25,964 of net cash provided by operating activities;
•Reduced borrowings by $54,984, or 42.3%, to $64,700 of net debt and became subject to the lowest tier interest rate spread under our credit agreement;
•Effectuated cost containment programs resulting in a 100 basis points decline year over year in selling and administrative expense as a percent of sales;
•Recorded a $43,400 expense related to the settlement of the concrete tie matter (“Concrete Tie Settlement”) with Union Pacific Railroad (“UPRR”);
•Divested non-core assets that yielded cash proceeds of $6,264.
(a) The following table displays a reconciliation of non-GAAP financial measures for the years ended December 31, 2018 and 2017. EBITDA is a financial metric utilized by management to evaluate the Company’s performance on a comparable basis. The Company believes that EBITDA is useful to investors as a supplemental way to evaluate the ongoing operations of the Company’s business since EBITDA enhances investors’ ability to compare historical periods as it adjusts for the impact of financing methods, tax law and strategy changes, and depreciation and amortization. In addition, EBITDA is a financial measurement that management and the Company’s Board of Directors use in their financial and operational decision-making and in the determination of certain compensation programs. Adjusted EBITDA includes certain adjustments to EBITDA. In 2018, the Company made adjustments to exclude in impact of the UPRR Concrete Tie Settlement.
Year Ended December 31,
Adjusted EBITDA Reconciliation
Net (loss) income
Interest expense, net
Income tax expense
Concrete Tie Settlement expense
* Year ended December 31, 2017 amounts have been revised to reflect the change in inventory accounting method, as described in Notes 1 and 6 to the Consolidated Financial Statements.
During 2018, the Company saw strengthening new order activity within each of our three segments compared to our prior year, as many of the markets we serve continued to expand. This momentum led to increased operating results while still maintaining a strong backlog as we move into 2019. While sales increased over the prior year, the Company's gross margins were unfavorably impacted by increasing pricing pressures as well as product mix dilution by increasing contributions from our lower margin product lines. We were able to continue our containment of selling and administrative expenses, which were reduced on a percent of sales basis, despite having a significant increase in litigation expenses when compared to the prior year. Our operating teams were able to successfully manage working capital levels while sales increased over the prior year. The operating cash generated along with the international cash repatriation and proceeds from the sale of non-core assets, allowed us to continue to reduce our outstanding debt and significantly improve our leverage ratio throughout the year.
In 2018, our Rail Products and Services segment reported increased sales in both our North American and European markets when compared to the prior year. The North American freight rail market supported our sales growth as we saw capital spending reported by Class I operators continue to grow throughout the year. The North American freight rail market also demonstrated improvements through its growth in both commodity carloads and intermodal traffic. While the outlook for coal shipments is not expected to drive future growth, we anticipate intermodal traffic to continue to increase as the capacity within the truck market continues to be tight.
Freight rail operators are prioritizing spending against safety improvement, operating efficiency, and other cost reduction activities. The Company continues to target products and solutions to help improve safety and operating efficiency as well as introduce services that contribute to extending the useful life of certain rail equipment and lowering maintenance costs for operators. As friction management becomes increasingly important to freight railroads as operators see the demonstrated savings and reduced wear and tear, our initiatives around growth and service contracts for friction management are continuing to move forward. Our on-track services in the United States continued to expand during 2018, providing installation, maintenance, monitoring, and inspection of our on-track products.
We continued to see transit operators investing in infrastructure with expansion and modernization of existing operations across both North America and Europe. Our sales in Europe increased significantly in 2018 as service work related to the Crossrail transit system project has strengthened considerably. We have expanded our service team in the U.K. to meet the requirements of these major projects for London Underground rail, as it has brought a previously unserved market to us by way of one of our 2015 acquisitions. Much of this work is directed to on-track services for the integration of driver automation, passenger information systems, access control, and security system interface. The North American transit networks were also favorably impacted by funding for capacity expansion as ridership levels on a macro basis increased.
During the year, we did experience increases in steel input costs as steel suppliers reacted to conditions brought about by tariffs and quotas on foreign made steel. We were able to manage our operations through the fluctuating environment and more specifically, capitalize on our distribution business, where rising prices are typically viewed as favorable. As we exit 2018, we believe our current cost structure in our Rail Products and Services segment reflected positive results in 2018 and positions us to meet our increased 2019 projections that is supported by an ending backlog that is over 40% higher than the prior year end.
Continued improvement in the Tubular and Energy Services segment was provided by both the midstream and upstream markets we serve. A number of favorable energy market indicators helped to drive this growth, including the price of oil, as low cost developers in the U.S. were better positioned to increase output due to substantial productivity gains, and we continued to see rising rig counts in the U.S. This led to an increased need for tubulars in order to support the growth in wells and well depth, which drove the demand for our services. The increased activity in pipeline projects was most prominent in the regions where production increases are taking place and where capacity shortfalls or the need to reach new locations exists. The segment was able to benefit from these constraints in pipeline capacity, as this helped to fuel the growth within our protective coatings offerings. We later began to experience this project activity strength within our measurement systems business as the same midstream customers are in need of measurement systems as these pipeline are constructed.
Our upstream energy market continued to strengthen during 2018 as well, with sales increasing in Test, Inspection, and Threaded services over the prior year. While we were pleased with the sales and profit growth within this market, pricing became a challenge as we continued to work diligently to restore margins back to prior levels.
As our 2018 results have shown, we believe there is continued widespread need for domestic pipeline infrastructure in both the short and long term and that new demand will be driven by already developed wells, future export potential, and the continuing transition from coal to natural gas plants. Industry projections for 2019 suggest that global demand for oil and gas should continue to rise, which correlates to the increased order activity during the second half of 2018 that led to a favorable ending backlog as we exited 2018.
Our Construction Products segment reported suppressed results during 2018, which had reductions in profit within each division when compared to the prior year. While sales did decline compared to the prior year, margin declines were more evident due to piling product mix and more competitively priced orders placed in 2017 that were recognized in 2018, an unexpected production interruption within our Precast Concrete Products business unit, our bridge decking business being unfavorably impacted by the lack of a major project during 2018, and, to a lesser extent, pricing pressure caused by uncertainty surrounding steel tariffs.
During the first half of 2018, our piling sales were below prior year levels as we continued to see reduced order activity within our commodity piling that had begun in 2017. As we moved through the second half of 2018, our piling business had a significant increase in new order activity from our ability to secure key projects and market space where we increased our focus. This volume increase was reflected in our commodity piling, which was one of our weak areas during the time of declining steel prices. Our bridge decking line was unfavorably impacted during the current year primarily by the lack of a mega project. We were able to secure a number of small and midsize projects in 2018; however, due to the competitive nature of these types of projects, our profit margins were also reduced when compared to the prior year. We continue to believe that neither the dynamics of this market nor the number of structurally deficient, obsolete bridges have changed in a meaningful way and we have identified a number of very large projects being planned for late 2019 through 2021. Management was pleased with the strength the Piling and Fabricated Bridge Products business unit exited 2018 with, as both new orders and ending backlog significantly surpassed our 2017 levels.
The Precast Concrete Products business unit increased its 2018 sales when compared to the prior year, primarily through buildings sales to various federal and municipal agencies. With the recent expansion of one of its facilities, the business was able to grow its market reach as well as increase its product offerings. While sales increased over the prior year levels, profit was reduced year over year as the business experienced an unexpected production interruption which caused numerous inefficiencies during the period. We were able to correct this issue and restore the facility's performance, although there are upcoming projects planned to further increase the standards of our precast operations. Our anticipated operational improvements, coupled with a sizable increase in backlog over the prior year, has positioned Precast Concrete products for a successful 2019.
Our management team we have assembled to oversee operations has done an exceptional job focusing on cost control as we continued to grow during 2018. Management intends to stay focused on prudent working capital management and operating cash flow to continue to pay down our outstanding debt. We believe that the Company’s expenses and operating leverage now provide the agility to succeed in the cyclical markets in which we participate. Our long-term objective is to continue the modernization of the entire Company with the ongoing integration of our enterprise resource program system from which we can grow and leverage best in class business processes.
UPRR Product Warranty Claim
On January 23, 2015, UPRR filed a Complaint and Demand for Jury Trial in the District Court for Douglas County, NE against the Company and its subsidiary, CXT, asserting, among other matters, that the Company breached its express warranty, breached an implied covenant of good faith and fair dealing, and anticipatorily repudiated its warranty obligations, and that UPRR’s exclusive and limited remedy provisions in the supply agreement have failed of their essential purpose which entitles UPRR to recover all incidental and consequential damages. The Complaint seeks to cancel all duties of UPRR under the contract, to adjudge the Company as having no remaining rights under the contracts, and to recover damages in an amount to be determined at trial for the value of unfulfilled warranty replacement ties and ties likely to become warranty eligible, for costs of cover for replacement ties, and for various incidental and consequential damages. The amended 2005 supply agreement provides that UPRR’s exclusive remedy is to receive a replacement tie that meets the contract specifications for each tie that failed to meet the contract specifications or otherwise contained a material defect provided that the Company receives written notice of such failure or defect within 15 years after that tie was produced. The amended 2005 supply agreement provides that the Company’s warranty does not apply to ties that (a) have been repaired or altered without the Company’s written consent in such a way as to affect the stability or reliability thereof, (b) have been subject to misuse, negligence, or accident, or (c) have been improperly maintained or used contrary to the specifications for which such ties were produced. The amended 2005 supply agreement also continues to provide that the Company’s warranty is in lieu of all other express or implied warranties and that neither party shall be subject to or liable for any incidental or consequential damages to the other party. The dispute is largely based on (1) claims submitted that the Company believes are for ties claimed for warranty replacement that are inaccurately rated under concrete tie rating guidelines and procedures agreed to in 2012 and incorporated by amendment to the 2005 supply agreement and are not the responsibility of the Company and claims that do not meet the criteria of a warranty replacement and (2) UPRR’s assertion, which the Company vigorously disputes, that UPRR in future years will be entitled to warranty replacement ties for virtually all of the ties manufactured for the UPRR at the Company's former facility in Grand Island, Nebraska. Many thousands of Grand Island ties have been performing in track for over ten years. In addition, a significant amount of Grand Island ties were rated by both parties in the excellent category of the rating system.
By Fourth Amended Scheduling Order dated March 21, 2018, certain interim pretrial deadlines for the close of discovery and various submittals were changed but the October 1, 2018 trial date set fourth in UPRR's Second Amended Notice of Trial under the prior Third Amended Scheduling Order remained in place. By Order dated August 20, 2018, the Fourth Amended Scheduling Order was amended to reschedule the trial date from October 1, 2018 to April 29, 2019, establish a January 21, 2019 deadline for the completion of fact discovery, and change the other interim pretrial deadlines. During the first six months ended June 30, 2018, the Company continued fact discovery and prepared and exchanged expert reports. During the second quarter of 2018 and thereafter, the Company engaged in both trial preparation efforts and also discussions and efforts with UPRR to resolve the matter.
On March 13, 2019, the Company and its subsidiary, CXT, entered into a Settlement Agreement (the “Settlement Agreement”) with UPRR to resolve the pending litigation in the matter. Under the Settlement Agreement, the Company and CXT will pay UPRR the aggregate amount of $50,000 without pre-judgment interest, beginning with a $2,000 immediate payment, and with the remaining $48,000 paid in installments over a six-year period commencing on the effective date of the Settlement Agreement through December 2024 pursuant to a Promissory Note. Additionally, commencing in January 2019 and through December 2024, UPRR has agreed to purchase from the Company and its subsidiaries and affiliates, a cumulative total amount of $48,000 of products and services, targeting $8,000 of annual purchases per year beginning in 2019 per letters of intent under the Settlement Agreement. The Settlement Agreement also includes a mutual release of all claims and liability regarding or relating to all CXT pre-stressed concrete railroad ties with no admission of liability and dismissal of the litigation with prejudice. Prior to the effects of the Settlement Agreement, the Company had previously accrued $6,600 for concrete tie warranty replacements. Therefore, the Company recognized $43,400 in expense for the year ended December 31, 2018 for the remaining amount per the Settlement Agreement. Further detail on the Settlement Agreement is disclosed in Note 19 to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data of this report.
Fiscal 2018 Compared to Fiscal 2017 — Company Analysis
Net sales of $626,969 for the year ended December 31, 2018 increased by $90,592, or 16.9%, compared to the prior year. The Tubular and Energy Services and Rail Products and Services segments reported increases of 25.6% and 24.8%, respectively, over the prior year. These increases were partially offset by a reduction in our Construction Products sales of 1.9% compared to the prior year.
Gross profit increased by $11,898 over the prior year to $117,159 for 2018. This increase was attributable to the gross profit of our Rail Products and Services and Tubular and Energy Services segments which increased by $10,072 and $9,189, respectively. These increases were partially offset by a reduction of $7,363 within our Construction Products segment. While gross profit increased, gross profit margin for 2018 was 18.7%, or 90 basis points (“bps”) lower than the prior year. The current year margin was primarily impacted by the dilutive effect of our increased volume contributions from our lower margin distribution businesses, stiff pricing competition from smaller bridge decking projects, and an unexpected production interruption within one of our Precast Concrete Products facilities.
Selling and administrative expenses increased by $7,158, or 8.9%, over the prior year. The increase was primarily attributable to an increase in personnel-related expenses of $3,374 over the prior year, legal costs related to the UPRR matter of $4,810, over twice as much as the prior year period, and professional service and insurance costs which increased by $1,912 compared to the prior year. These increases were partially offset by a reduction in bad debt expense of $2,289 in the current year. As a result of our cost containment programs, selling and administrative expenses were reduced by 100 bps as a percentage of net sales as compared to the prior year.
For the year ended December 31, 2018, the Company recorded an expense of $43,400 related to the UPRR Concrete Tie Settlement. Interest expense, net of interest income, for the year ended December 31, 2018 was reduced by $1,916 as a result of the $54,984 reduction in outstanding debt as well as entering the lowest tier of the interest rate spread, per our credit agreement.
The Company’s effective income tax rate for 2018 was (16.7)%, compared to 46.7% in the prior year period. The Company’s 2018 effective income tax rate was significantly affected by an increase to our domestic valuation allowance against deferred tax assets resulting from the effects of the Concrete Tie Settlement. The Company's 2017 effective income tax rate included a tax expense of $3,298 related to the one-time transition tax on earnings of foreign subsidiaries provided for in the U.S. Tax Cuts and Jobs Act.
Net loss for the year ended December 31, 2018 was $31,168, or $3.01 loss per diluted share, compared to net income for the 2017 period of $5,361, or $0.51 income per diluted share.
Results of Operations — Segment Analysis
Rail Products and Services
Year Ended December 31,
2018 vs. 2017
2018 vs. 2017
Gross Profit Percentage
Segment Profit Percentage
Rail Products and Services segment sales increased $63,397, or 24.8%, compared to the prior year. The increase was attributable to both our Rail Technologies and Rail Products business units, which increased by 30.6% and 21.0%, respectively. The Rail Technologies growth was primarily attributable to the European transit market in which we were able to capitalize on opportunities with transit agencies who are expanding to serve additional geographic areas as well as increased passenger traffic. Our Rail Products business unit was favorably impacted by increased activity in both the freight and transit markets. The Company was encouraged by the impact of North American carload traffic during 2018, particularly intermodal traffic levels, as well as its ability to capitalize on opportunities with the expansion of the global transit market.
Segment gross profit increased by $10,072, or 19.3%, supported by increases in both our Rail Products and Rail Technologies business units. Segment gross profit margin decreased by 90 bps principally attributable to lower margin product mix in Rail Technologies and, to a lesser extent, the dilutive impact of increased sales from lower margin distribution lines within Rail Products. Gross profit was also unfavorably impacted by a charge of $611 within our Rail Technologies business unit related to a commercial decision to support a customer concern for an automation project. The Rail Products and Services segment profit for 2018 was $19,468, a segment profit margin of 6.1%, compared to $11,078, and a margin of 4.3% for 2017. Although the segment's selling and administrative expenses increased over the prior year, management was encouraged by the cost containment activities resulting in a 240 bps reduction in selling and administrative expense as a percent of sales. The 2018 segment profit included an expense of $169 related to diligence activities from a business opportunity to expand our technological offerings that did not materialize.
During 2018, the Rail Products and Services segment increased new orders by 33.7% compared to the prior year. Each of the business units within the segment had increases in new orders compared to 2017. The growth in new orders strengthened backlog by 41.5% compared to the prior year, ending 2018 at $97,447.
Year Ended December 31,
2018 vs. 2017
2018 vs. 2017
Gross Profit Percentage
Segment Profit Percentage
Construction Products segment sales decreased $3,148, or 1.9%, compared to the prior year, which was attributable to our bridge products. The Fabricated Bridge sales decrease was primarily driven by the lack of large projects during the current year compared to the activities related to the completion of the Peace Bridge mega project in 2017. Partially offsetting this decline were increases in our Piling and Precast Concrete Products. Piling started 2018 slowly as the reduced order volume from 2017 carried into the current year; however, significant order activity during the second half of 2018 provided for an increase in sales levels over the prior year. Precast Concrete Products experienced increases in their buildings sales, which were primarily driven by orders from federal and municipal agencies.
The Construction Products segment's gross profit decreased by $7,363, or 24.3%, compared to the prior year. The gross profit decrease was primarily due to sales volume, as the segment was unable to secure a mega bridge project during 2018. The gross profit was also unfavorably impacted, to a lesser extent, by an unexpected production interruption within one of our Precast Concrete Products facilities. The segment profit of $6,798 decreased by $7,242 compared to the prior year to 4.3% of net sales. While the segment profit was significantly impacted by reduced gross profit, it was favorably impacted by a reduction in selling and administrative expenses of $121 compared to the prior year.
For 2018, the Construction Products segment had a 17.8% increase in new orders compared to the prior year period. This increase was supported by all product groups within the segment and was most significant in the second half of 2018. The segment's backlog as of December 31, 2018 was $95,419, a 33.8% increase as compared to the prior year end.
Tubular and Energy Services
Year Ended December 31,
2018 vs. 2017
2018 vs. 2017
Gross Profit Percentage
Segment Profit Percentage
Tubular and Energy Services segment sales increased by $30,343, or 25.6%, compared to the prior year. The increase was supported by each business unit within the segment. The increase in demand for midstream infrastructure led to a 31.4% increase in Protective Coatings and Measurement Systems sales, while our upstream Test, Inspection, and Threading Services sales grew 17.9% over the prior year.
Tubular and Energy Services gross profit increased by $9,189, which was favorably impacted by both sales volume and improved margins within each division of the segment. The segment profit increased to $12,647, or 8.5% of net sales, in 2018 compared to $3,483, or 2.9% of net sales, in 2017. Cost containment programs proved successful during 2018 as selling and administrative expenses declined 270 bps as a percent of sales when compared to the prior year. In 2018, segment profit was negatively impacted by the sale of a 54.5 acre greenfield plot of land which resulted in a $269 loss, a $786 loss on the sale or disposal of multiple fixed assets, and expenses of $586 related to a site closure as management positions the segment away from non-core assets. During 2017, our Protective Coatings and Measurement Systems business unit incurred a $839 warranty charge which negatively impacted the gross and segment profit.
The Tubular and Energy Services segment had an increase in new orders of 14.7% compared to the prior year period. New orders increased during 2018 as both the upstream and midstream energy markets showed strength during the year, which significantly impacted our Test, Inspection, and Threading Services business unit operating results. The increase in new orders lead to a 3.0% increase in backlog, with a December 31, 2018 balance of $27,552.
Total debt as of December 31, 2018 and 2017 was $74,982 and $129,966, respectively, and was primarily comprised of borrowings on the revolving credit facility. Our need for liquidity relates primarily to working capital requirements for operating activities, debt service payments, and capital expenditures.
The change in cash and cash equivalents for the years ended December 31, 2018 and 2017 are as follows:
Year Ended December 31,
Net cash provided by operating activities
Net cash provided (used) by investing activities
Net cash used by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash Flows from Operating Activities
During the year ended December 31, 2018, net cash provided by operating activities was $25,964 compared to $39,372 during the prior year period. For the year ended December 31, 2018, income and adjustments to income from operating activities provided $34,367 compared to $25,688 in 2017. Working capital and other assets and liabilities used $8,403 in the current period compared to providing $13,684 during 2017. During the year ended December 31, 2017, the Company received $11,773 from federal income tax refunds.
The Company’s calculation of days sales outstanding was 50 days as of December 31, 2018 and 2017. We believe our receivables portfolio is strong.
Cash Flows from Investing Activities
For the year ended December 31, 2018, the Company had capital expenditures of $5,251, an $898 reduction from 2017. The current year expenditures were primarily related to general plant and operational improvements. The capital expenditures during 2017 related to rail assets installed as part of a long-term service contract and, to a lesser extent, general plant and operational improvements. The Company received proceeds of $2,389 from the sale of assets during the year ended December 31, 2018 compared to $1,462 in 2017. The current year proceeds were primarily from the sale of a greenfield site in Willis, TX in the Tubular and Energy Services segment. On August 1, 2018, the Company executed the sale of its 45% ownership in L B Pipe and Couplings Products, LLC (“L B Pipe JV”), which provided $3,875 and $1,235 from the sale of its ownership interest and repayment of revolving line of credit from L B Pipe JV, respectively.
Cash Flows from Financing Activities
The Company reduced its outstanding debt by $54,984 during the year ended December 31, 2018 primarily from international excess cash repatriation, proceeds from the sale of non-core assets, and operational cash flows. During the year ended December 31, 2017, the Company reduced outstanding debt by approximately $29,600, primarily from operational cash flows.
The Company generated $25,964 from cash flows from operations during 2018 that was utilized to make payments against our revolving credit facility and fund capital expenditures. As of December 31, 2018, we had $10,282 in cash and cash equivalents and $120,567 of availability under the Second Amendment to the Second Amended and Restated Credit Agreement while carrying $74,982 in total debt. We believe this liquidity will provide adequate flexibility to operate the business in a prudent manner, continue to service our revolving debt facility, and be better leveraged to weather any future downturn in our markets.
Non-domestic cash balances of $8,058 are held in various locations throughout the world. Management determined that the cash balances of our Canadian and United Kingdom subsidiaries exceeded our projected capital needs and, as such, repatriated $31,517 in excess funds from our international operations during 2018.
As of December 31, 2018, the Company was in compliance with the covenants in the Second Amendment.
To reduce the impact of interest rate changes on outstanding variable-rate debt, the Company entered into forward starting LIBOR-based interest rate swaps with notional values totaling $50,000. The swaps became effective on February 28, 2017 at which point they effectively convert a portion of the debt from variable to fixed-rate borrowings during the term of the swap contract. As of December 31, 2018 and 2017, the swap asset was $675 and $222, respectively.
For a discussion of the terms and availability of the Company's credit facilities, please see Part II, Item 8, Financial Statements and Supplementary Data, Note 10 of the Notes to Consolidated Financial Statements contained in this Annual Report on Form 10-K.
A summary of the Company’s required payments under financial instruments and other commitments as of December 31, 2018 are presented in the following table:
Less than 1 year
More than 5 years
Contractual Cash Obligations
Revolving credit facility (1)
Pension plan contributions
U.S. transition tax (2)
Concrete Tie Settlement (3)
Purchase obligations not reflected in the financial statements
Total contractual cash obligations
Other Financial Commitments
Standby letters of credit
1Repayments of outstanding loan balances are disclosed in Note 10 to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data of this report.
2Further detail on the U.S. Tax Cuts and Jobs Act transition tax is disclosed in Note 14 to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data of this report.
3Further detail on the UPRR Concrete Tie Settlement is disclosed in Note 19 to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data of this report.
Other long-term liabilities include items such as deferred income taxes which are not contractual obligations by nature. The Company cannot estimate the settlement years for these items and has excluded them from the above table.
Management believes its internal and external sources of funds are adequate to meet anticipated needs, including those disclosed above, for the foreseeable future.
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements include the operating leases, purchase obligations, and standby letters of credit disclosed within the contractual obligations table above in the “Liquidity and Capital Resources” section. These arrangements provide the Company with increased flexibility relative to the utilization and investment of cash resources.
Although backlog is not necessarily indicative of future operating results, the following table provides the backlog by business segment:
Rail Products and Services
Tubular and Energy Services
While a considerable portion of our business is backlog driven, certain businesses, including the Test, Inspection, and Threading Services and the Rail Technologies business units, are not driven by backlog and therefore have insignificant levels of backlog throughout the year.
Critical Accounting Policies and Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. The following critical accounting policies, which are reviewed by the Company’s Audit Committee of the Board of Directors, relate to the Company’s more significant estimates and judgments used in the preparation of its consolidated financial statements. Actual results could differ from those estimates.
For a summary of the Company’s significant accounting policies, see Part II, Item 8, Financial Statements and Supplementary Data, Note 1 to the Consolidated Financial Statements, which is incorporated by reference into this Item 7.
Revenue Recognition - We account for revenue in accordance with the Financial Accounting Standards Board's (“FASB”) Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers,” whereby the unit of account is a performance obligation. The majority of the Company’s revenue is from products transferred and services rendered to customers at a point in time. The Company recognizes revenue at the point in time at which the customer obtains control of the product or service, which is generally when product title passes to the customer upon shipment or the service has been rendered to the customer. In limited cases, title does not transfer, and revenue is not recognized until the customer has received the products at its physical location.
The Company also derives revenue from products and services provided under long-term agreements with its customers. The transaction price of a long-term agreement is allocated to each distinct performance obligation. The majority of the Company’s long-term contracts have a single performance obligation as the promise to transfer products or services is not separately identifiable from other promises in the contract and, therefore, not distinct. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing services.
The Company’s performance obligations under long-term agreements with its customers are generally satisfied as over time. Revenue under these long-term agreements is generally recognized over time either using an input measure based upon the proportion of actual costs incurred to estimated total project costs or an input measure based upon actual labor costs as a percentage of estimated total labor costs, depending upon which measure the Company believes best depicts the Company’s performance to date under the terms of the contract. A certain portion of the Company’s revenue recognized over time under these long-term agreements is recognized using an output method, specifically units delivered, based upon certain customer acceptance and delivery requirements. Contract assets from over time contracts are recorded in “Inventory” within the Consolidated Balance Sheets and contract liabilities from over time contracts are recorded in “Deferred revenue” within the Consolidated Balance Sheets.
Accounting for these long-term agreements involves the use of various techniques to estimate total revenues and costs. The Company estimates profit on these long-term agreements as the difference between total estimated revenues and expected costs to complete a contract and recognizes that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events that may span several years. These assumptions include, among other things, labor productivity, cost and availability of materials, and timing of funding by customers. The nature of these long-term agreements may give rise to several types of variable consideration, such as claims, awards, and incentive fees. Historically, these amounts of variable consideration have not been considered significant. Contract estimates may include additional revenue for submitted contract modifications if there exists an enforceable right to the modification, the amount can be reasonably estimated, and its realization is probable. These estimates are based on historical collection experience, anticipated performance, and the Company’s best judgment at that time. These amounts are generally included in the contract’s transaction price and are allocated over the remaining performance obligations. As significant changes in the above estimates could impact the timing and amount of revenue and profitability of our long-term contracts, we review and update contract-related estimates regularly. In the event a contract loss becomes known, the entire amount of the estimated loss is recognized in the Consolidated Statements of Operations.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 3 to the Consolidated Financial Statements, which is incorporated by reference into this Item 7.
Goodwill - Goodwill is the cost of an acquisition less the fair value of the identifiable net assets of the acquired business. Goodwill is required to be tested for impairment at least annually. The Company performs its annual impairment test in the fourth quarter, or whenever events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
The Company may first consider qualitative factors to assess whether there are indicators that it is more likely than not that the fair value of a reporting unit may not exceed its carrying amount. The quantitative goodwill impairment analysis involves comparing the fair value of a reporting unit to its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss equal to the excess amount up to the goodwill balance is recorded as an impairment to goodwill of the reporting unit. The Company uses a combination of a discounted cash flow method and a market approach to determine the fair values of the reporting units.
A number of significant assumptions and estimates are involved in estimating the fair value of reporting units, including the identification of macroeconomic conditions, industry and market considerations, cost factors, and overall financial performance. The estimated fair value of a reporting unit is sensitive to changes in assumptions, including forecasted future operating cash flows, weighted-average cost of capital, terminal growth rates, and industry multiples.
The Company considers historical experience and available information at the time the fair values of its reporting units are estimated. The Company believes the estimates and assumptions used in estimating the fair value of its reporting units are reasonable and appropriate; however, different assumptions and estimates could materially impact the estimated fair value of its reporting units and the resulting determinations about goodwill impairment. This could materially impact the Company’s Consolidated Statements of Operations and Consolidated Balance Sheets. Future estimates may differ materially from current estimates and assumptions.
Additional information concerning the impairments is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 4 to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 7.
Intangible Assets and Long-Lived Assets - The Company tests intangible assets and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable.
Recoverability of assets is determined by comparing the estimated undiscounted future cash flows of the asset or asset group to their carrying amount. If the carrying value of the assets exceeds their estimated undiscounted future cash flows, an impairment loss would be determined as the difference between the fair value of the assets and its carrying value. Typically, the fair value of the assets would be determined using a discounted cash flow model which would be sensitive to judgments of what constitutes an asset group and certain assumptions such as estimated future financial performance, discount rates, and other assumptions that marketplace participants would use in their estimates of fair value. The accounting estimate related to asset impairments is highly susceptible to change from period to period because it requires management to make assumptions about the existence of impairment indicators and cash flows over future years. These assumptions impact the amount of an impairment, which would have an impact on the Consolidated Statements of Operations.
Product Warranty - The Company maintains a warranty reserve for the repair or replacement of defective products. For certain manufactured products, warranty reserves are established as a percentage of cost of sales. For long-term construction projects, a product warranty accrual is established when a claim is known and quantifiable. The product warranty accrual is periodically adjusted based on the identification or resolution of known individual product warranty claims. The underlying assumptions used to calculate the product warranty accrual can change from period to period and are dependent upon estimates of the amount and cost of future product repairs or replacements.
For additional information regarding the Company’s product warranty, refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 19 to the Consolidated Financial Statements which is incorporated by reference into this Item 7.
Contingencies and Litigation - In the ordinary course of business, various legal and regulatory claims and proceedings are pending or threatened against the Company. The Company records a liability for such claims and proceedings when an unfavorable outcome of a matter is deemed to be probable and the resulting loss can be reasonably estimated. The likelihood of an unfavorable outcome is determined based on, amongst other considerations, available defense and settlement strategies, facts and circumstances of the specific matter, views and opinions of legal counsel and others involved in the matter, and the outcome of other similar historical matters. If management determines that an unfavorable outcome is probable, the amount of loss is estimated by assessing a range of outcomes and its associated likelihood if reasonably estimable. Legal matters are continually reviewed to determine any change in judgment on a certain matter and future results of operations could be materially affected by changes in our assumptions or the outcome of such proceedings.
The Company’s operations are subject to national, state, foreign, and/or local laws and regulations that impose limitations and prohibitions on the discharge and emission of, and establish standards for the use, disposal, and management of, regulated materials and waste. These regulations impose liability for the costs of investigation, remediation, and damages resulting from present and past spills, disposals, or other releases of hazardous substances or materials. Liabilities are recorded when remediation efforts are probable and the costs can be reasonably estimated. Estimates are generally not reduced by potential claims for recovery. Claims for recovery are recognized as agreements are reached with third parties or as amounts are received. Established reserves are periodically reviewed and adjusted to reflect current remediation progress, prospective estimates of required activity, and other factors that may be relevant, including changes in technology or regulations.
Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 19 to the Consolidated Financial Statements for additional information regarding the Company’s commitments and contingent liabilities, which is incorporated by reference into this Item 7.
Income Taxes - The recognition of deferred tax assets requires management to make judgments regarding the future realization of these assets. As prescribed by ASC 740, “Income Taxes,” valuation allowances must be provided for those deferred tax assets for which it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. This guidance requires management to evaluate positive and negative evidence regarding the recoverability of deferred tax assets. The determination of whether the positive evidence outweighs the negative evidence and quantification of the valuation allowance requires management to make estimates and judgments of future financial results.
The Company evaluates all tax positions taken on its federal, state, and foreign tax filings to determine if the position is more likely than not to be sustained upon examination. For positions that meet the more likely than not to be sustained criteria, the largest amount of benefit to be realized upon ultimate settlement is determined on a cumulative probability basis. A previously recognized tax position is derecognized when it is subsequently determined that a tax position no longer meets the more likely than not threshold to be sustained. The evaluation of the sustainability of a tax position and the expected tax benefit is based on judgment, historical experience, and other assumptions. Actual results could differ from those estimates upon subsequent resolution of identified matters.
The Company’s income tax rate is significantly affected by the tax rate on global operations. In addition to local country tax laws and regulations, this rate depends on the extent earnings are indefinitely reinvested outside the United States. Indefinite reinvestment is determined by management’s judgment about and intentions concerning the future operations of the Company.
Refer to Part II, Item 8, Financial Statements and Supplementary Data, Note 14 which is incorporated by reference into this Item 7, for additional information regarding the Company’s deferred tax assets. The Company’s ability to realize these tax benefits may affect the Company’s reported income tax expense and net income.
New Accounting Pronouncements - See Part II, Item 8, Financial Statements and Supplementary Data, Note 1 to the Consolidated Financial Statements, included herein for information regarding new accounting pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not applicable to a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of L.B. Foster Company and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of L.B. Foster Company and Subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15 (a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 18, 2019 expressed an unqualified opinion thereon.
Change in Accounting Principle
As discussed in Notes 1 and 6 to the consolidated financial statements, in 2018 the Company elected to change its method of accounting for certain inventory in the United States to the average cost method, while in prior years, these inventories were accounted for using the last-in, first-out (“LIFO”) method.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1990
Common stock, par value $0.01, authorized 20,000,000 shares; shares issued at December 31, 2018 and December 31, 2017, 11,115,779; shares outstanding at December 31, 2018 and December 31, 2017, 10,366,007 and 10,340,576, respectively (Note 11)
Treasury stock - at cost, common stock, shares at December 31, 2018 and December 31, 2017, 749,772 and 775,203, respectively (Note 11)
Accumulated other comprehensive loss (Note 12)
Total stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
* The amounts as of December 31, 2017 have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 6 to the Consolidated Financial Statements.
The accompanying notes are an integral part of these Consolidated Financial Statements.
* The amounts for the twelve months ended December 31, 2017 have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 6 to the Consolidated Financial Statements.
The accompanying notes are an integral part of these Consolidated Financial Statements.