UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| (Mark One) | |||||
| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||||
For the fiscal year ended | |||||
Or
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
(Exact name of registrant as specified in its charter)
| (State of Incorporation) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
Registrant’s telephone number, including area code:
(412 ) 928-3400
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange On Which Registered | ||||||
Securities registered pursuant to Section 12(g) of the Act:
None
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 Section 15(d) of the 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 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 | ☐ | ☒ | ||||||||||||||||||
| Non-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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 $133,127,563 .
As of February 28, 2023, there were 10,958,727 shares of the registrant’s common stock, par value $0.01 per share, outstanding.
Documents Incorporated by Reference:
TABLE OF CONTENTS
| PART I | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| Item 7. | ||||||||
| Item 7A. | ||||||||
| Item 8. | ||||||||
| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| Item 9C. | ||||||||
| PART III | ||||||||
| Item 10. | ||||||||
| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| PART IV | ||||||||
| Item 15. | ||||||||
| Item 16. | ||||||||
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Forward-Looking Statements
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 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 are based on management’s current expectations and assumptions about future events that involve inherent risks and uncertainties and 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 and decisions regarding our strategic growth initiatives, market position, and product development. 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: the COVID-19 pandemic, and any future global health crises, and the related social, regulatory, and economic impacts and the response thereto by the Company, our employees, our customers, and national, state, or local governments; volatility in the prices of oil and natural gas and the related impact on the midstream energy markets, which could result in cost mitigation actions, including shutdowns or furlough periods; a continuation or worsening of the adverse economic conditions in the markets we serve, including recession, whether as a result of the COVID-19 pandemic or otherwise, including its impact on labor markets and supply chains, macroeconomic factors, including the impact of inflation and pricing pressures, travel and demand for oil and gas, the continued volatility in the prices for oil and gas, governmental travel restrictions, project delays, and budget shortfalls, or otherwise; volatility in the global capital markets, including interest rate fluctuations, which could adversely affect our ability to access the capital markets on terms that are favorable to us; restrictions on our ability to draw on our credit agreement, including as a result of any future inability to comply with restrictive covenants contained therein; a continuing decrease in freight or transit rail traffic, including as a result of the ongoing COVID-19 pandemic, strikes, or labor stoppages; environmental matters, including any costs associated with any remediation and monitoring of such matters; the risk of doing business in international markets, including compliance with anti-corruption and bribery laws, foreign currency fluctuations, and trade restrictions or embargoes; our ability to effectuate our strategy, including cost reduction initiatives, and our ability to effectively integrate acquired businesses or to divest businesses, such as the recent dispositions of the Track Components, Piling, and IOS Test and Inspection businesses, and acquisitions of the Skratch Enterprises Ltd., Intelligent Video Ltd., and VanHooseCo Precast LLC businesses and to realize anticipated benefits; costs of and impacts associated with shareholder activism; continued customer restrictions regarding the on-site presence of third party providers due to the COVID-19 pandemic; the timeliness and availability of materials from our major suppliers, including any continuation or worsening of the disruptions in the supply chain experienced as a result of the COVID-19 pandemic, 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; cyber-security risks such as data security breaches, malware, ransomware, “hacking,” and identity theft, which could disrupt our business and may result in misuse or misappropriation of confidential or proprietary information, and could result in the disruption or damage to our systems, increased costs and losses, or an adverse effect to our reputation; the continuing effectiveness of our ongoing 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 any new credit agreement, and reforms regarding the use of SOFR 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 taxes; domestic and foreign government regulations, including tariffs; economic conditions and regulatory changes caused by the United Kingdom’s exit from the European Union; geopolitical conditions, including the conflict in Ukraine; 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 and the outcome of litigation and product warranty claims. 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 current or 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.
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PART I
(Dollars in thousands, except share data unless otherwise noted)
ITEM 1. BUSINESS
Summary Description of Businesses
Founded in 1902, L.B. Foster Company is a Pennsylvania corporation with its principal office in Pittsburgh, PA. L.B. Foster Company is a global technology solutions provider of engineered, manufactured products and services that builds and supports infrastructure. The Company’s innovative engineering and product development solutions address the safety, reliability, and performance needs of its customers’ most challenging requirements. The Company maintains locations in North America, South America, Europe, and Asia. As used herein, “L.B. Foster,” the “Company,” “we,” “us,” and “our” or similar references refer collectively to L.B. Foster Company and its subsidiaries, unless the context indicates otherwise.
The following table shows the net sales for each business segment as a percentage of total net sales for the years ended December 31, 2022 and 2021:
| Percentage of Net Sales | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Rail, Technologies, and Services | 60 | % | 58 | % | ||||||||||
| Precast Concrete Products | 21 | 14 | ||||||||||||
| Steel Products and Measurement | 19 | 28 | ||||||||||||
| 100 | % | 100 | % | |||||||||||
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, Technologies, and Services
The Company’s Rail, Technologies, and Services (“Rail”) segment is comprised of several manufacturing, distribution, and service businesses that provide a variety of products, solutions, and services for freight and passenger railroads and other industrial companies throughout the world. The Rail segment has sales offices throughout North America, South America, Europe, and Asia, and works on rail projects where it offers products manufactured by the Company, or sourced from numerous supply chain partners. The Rail segment also offers contract project management and aftermarket services. The Rail reporting segment is comprised of the Rail Products, Global Friction Management, and Technology Services and Solutions business units.
Rail Products
The Rail Products business unit is comprised of the Company’s Rail Distribution, Allegheny Rail Products, Transit Products, and Concrete Tie divisions. Following are summaries of those divisions:
Rail Distribution - This division 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, tie plates, 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.
Allegheny Rail Products (“ARP”) - ARP engineers and manufactures insulated rail joints and related accessories for freight and passenger railroads and industrial customers. Insulated joints are manufactured domestically at the Company’s facilities in Pueblo, CO and Niles, OH.
Transit Products - This division supplies designed, engineered, and outsourced-manufactured direct fixation fasteners, coverboards, and special accessories primarily for passenger railroad systems. Transit Products also manufactures power rail, also known as third rail, at its facility in Niles, OH. These products are usually sold to contractors or by sealed bid to passenger railroads.
Concrete Ties - This division manufactures engineered concrete railroad ties for freight and passenger railroads and industrial accounts at its facility in Spokane, WA.
Track Components - The Track Components division manufactured track spikes and anchors at a facility in St-Jean-sur-Richelieu, Quebec. The Company completed the sale of the assets of this division in August of 2022.
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Global Friction Management
The Company’s Global Friction Management business unit engineers, manufactures, and fabricates friction management products and application systems for its rail customers. It also provides aftermarket services managing its friction management solutions for customers. The Company’s friction management products optimize performance at the rail to wheel interface, which helps our customers reduce fuel consumption, improve operating efficiencies, extend the life of operating assets such as rail and wheels, reduce track stresses, and lower the related maintenance and operating costs of its rail customers. 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, serviced, and marketed in the United States (“U.S.”), Canada, the United Kingdom (“U.K.”), and Germany.
Technology Services and Solutions
The Company’s Technology Services and Solutions business unit engineers and manufactures railroad condition monitoring systems and equipment, wheel impact load detection systems, wayside data collection and management systems, and rockfall, flood, earthworks, and bridge strike monitoring. These offerings create a smart interface between conventional rail products and intelligent digital technologies to monitor safety, increase network velocity, and enable the digital railway. In addition, the business unit provides controls, display, and telecommunication contract management solutions for the transit, control room, and customer information and display sectors to enhance safety, operational efficiency, and customer experience. These products, systems, and services are designed, engineered, serviced, and marketed in the U.S., U.K., and Germany. In June of 2022, the Company acquired the stock of Skratch Enterprises Ltd. (“Skratch”), located in Telford, United Kingdom. Skratch offers a single-point supply solution model for clients, and enables large scale deployments of its intelligent digital signage solutions. Skratch’s service offerings include design, prototyping and proof of concept, hardware and software, logistics and warehousing, installation, maintenance, content management, and managed monitoring.
Precast Concrete Products
The Precast Concrete Products (“Precast”) segment manufactures precast concrete products for the North American civil infrastructure market. Under its CXT® brand, Precast manufactures restrooms, concession stands, and other protective storage buildings available in multiple designs, textures, and colors for national, state, and municipal parks. The Company is a leading, high-end supplier of precast buildings in terms of volume, product options, and capabilities. Precast also manufactures various other precast concrete products such as sounds walls, bridge beams, box culverts, septic tanks, and other custom pre-stressed and precast concrete products at its Boise, ID, Hillsboro, TX, and Waverly, WV manufacturing facilities.
In August of 2022, the Company acquired the operating assets of VanHooseCo Precast, LLC (“VanHooseCo”), a privately-held business headquartered in Loudon, Tennessee specializing in precast concrete walls, water management products, and forms for the commercial and residential infrastructure markets. VanHooseCo has an existing manufacturing site in Loudon, near Knoxville, and a new facility recently commissioned in Lebanon, TN near Nashville. The Company also entered into license agreements for VanHooseCo’s ENVIROCAST® pre-insulated concrete walls and ENVIROKEEPER® water retention and management product lines. The acquisition expands L.B. Foster’s addressable market to include commercial and residential developers, as well as state and local agencies in Tennessee and surrounding states, and provides a platform for further investment and organic growth in the expanding precast concrete infrastructure market.
Steel Products and Measurement
The Company’s Steel Products and Measurement segment provides custom engineered solutions and services that help to build and maintain critical civil and energy infrastructure throughout the Americas. Steel Products and Measurement designs, manufactures, and supplies a variety of steel bridge products to contractors performing installation and repair work to North American transportation infrastructure network. It also provides solutions in corrosion protection, measurement, and control systems for the safe transportation and accurate measurement of gas and liquids in pipelines as well as threaded pipe for water well applications. The Steel Products and Measurement reporting segment is comprised of the Fabricated Steel Products and Coatings and Measurement business units.
Fabricated Steel Products
The Fabricated Steel Products business unit provides fabricated bridge products to infrastructure end markets and provides threading services for agricultural, municipal and industrial water well applications. The Fabricated Steel Products business unit markets and sells products primarily in North America.
Bridge Products - The 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 decking, open steel grid deck, aluminum bridge railing, and stay-in-place steel bridge forms.
Water Well Threading - The Company’s Magnolia, TX facility cuts, threads, and paints pipe primarily for water well applications for the agriculture industry and municipal water authorities and, to a lesser extent, threading services for the Oil Country Tubular Goods markets.
Piling Products - On September 24, 2021, the Company completed the sale of its Piling Products division. The Company retained all pre-closing receivables and liabilities associated with the division. The sale included substantially all inventory and fixed assets associated with the division.
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Coatings and Measurement
The Coatings and Measurement business unit provides protective coating services and precision measurement products to infrastructure end markets. The following is a summary of those product and service offerings:
Protective Coatings - There are two pipeline coating services locations that make up our Protective Coatings division. Our 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 use in pipeline projects throughout North America.
The second location, situated in Willis, TX, 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 custom coatings for specialty pipe fittings and connections.
Precision Measurement Products and Systems - The Company manufactures and provides turnkey solutions for metering and injection systems primarily for the oil, and, to a lesser extent, gas industry. The Willis, TX 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 Willis, TX location also manufactures and installs additive and dye injection systems. These systems are used to inject performance additives and/or dyes into petroleum products.
Marketing and Competition
L.B. Foster Company generally markets its Rail products and services directly in all major industrial areas of the U.S., Canada, and Europe. Precast and Steel Products and Measurement products and 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 December 31, 2022 and 2021, approximately 24% of the Company’s total sales were outside the U.S.
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.
Raw Materials and Supplies
The Company purchases a variety of raw materials from its supplier base including steel, aggregate, epoxy, electronics, and components, from both domestic and foreign suppliers. Products are also purchased in the form of finished or semi-finished products which the majority of it is supplied from domestic and foreign steel producers. Generally, the Company has a number of vendor options.
The Company’s purchases from foreign suppliers are subject to foreign currency exchange rate changes and the risks associated with changes in international conditions, as well as U.S. and international laws that could impose import restrictions on selected classes of products and for anti-dumping duties if products are sold in the U.S. at prices that are below specified prices.
Backlog
The Company’s backlog represents the sales price of customer purchase orders or contracts in which the performance obligations have not been met, and therefore are precluded from revenue recognition. Although the Company believes that the orders included in backlog are firm, 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.
Patents and Trademarks
The Company owns a number of domestic and international patents and trademarks, primarily related to products in its Global Friction Management and Technology Services and Solutions business units, as well as its Precast Concrete Products business unit. The Company’s business segments are not dependent upon any individual patents or related group of patents, nor any individual licenses or distribution rights. The Company believes that, in the aggregate, the rights under its patents, trademarks, and licenses are generally important to its operations, but considers neither any individual patent, nor any licensing or distribution rights related to a specific process or product, to be of material importance in relation to its total business.
Environmental Disclosures
Information regarding environmental matters is included in Part II, Item 8, Financial Statements and Supplementary Data, Note 18 to the Consolidated Financial Statements included in this Annual Report on Form 10-K, which is incorporated by reference into this Item 1.
Human Capital Management
People are the heart of L.B. Foster’s success. The Company strives to create and promote a culture that makes L.B. Foster a great place to work. The Company seeks to attract and retain employees that embody and demonstrate its values, which are
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summarized in our SPIRIT model, focusing on Safety, People, Integrity, Respect, Innovation, and Teamwork. The Company uses these six principles to guide its employees every day. The expectation of all employees, at every level of the organization, is to execute our business strategy in a manner that adheres to these core values and demonstrates commitment to the L.B. Foster SPIRIT.
Diversity and Inclusion
The Company is dedicated to the principle of equal employment opportunity and the provision of a workplace free from discrimination and harassment in accordance with all applicable federal, state, and local laws and regulations. This statement and accompanying practices, which pertain to all persons involved in Company operations, prohibit unlawful discrimination by any employee and apply to all terms, conditions, and privileges of employment. Additionally, the Company will also make reasonable accommodations for individuals with known disabilities who are otherwise qualified to perform a job. The Company aims to employ and advance in employment qualified women, minorities, individuals with disabilities, covered veterans, and other classes at all levels of employment. The Company has implemented initiatives to advance diversity and inclusion, including changes to recruitment, onboarding, and employee training, and has facilitated the Spark initiative, which is an employee resource group targeting all employees interested in furthering the mission of empowerment and professional growth of women in the workplace.
Environmental, Social, and Governance Matters
As part of its ongoing commitment to good corporate stewardship, in 2022 the Company hired an employee in a newly created full-time role to focus on and enhance its sustainability and environmental, social, and governance (“ESG”) initiatives. The position is intended to facilitate collaboration with the Board of Directors, senior leadership, investors, employees, customers, and societal and civic organizations to integrate ESG policies, frameworks, goals, and metrics into the Company’s business risk and opportunity strategies. The new role leads cross-functional efforts to coordinate, execute, improve, and communicate the Company’s ESG efforts. Additionally, the Company has created an employee-led Social Responsibility Committee to promote and execute the Company's values surrounding social responsibility internally.
Health and Safety
L.B. Foster aims to promote a culture of environmental, health, safety, and sustainability (“EHSS”) excellence that strives to protect the environment as well as the safety and health of our employees, business, customers, and communities where we operate. The Company strives to meet or exceed the requirements of all applicable environmental, health, and safety (“EHS”) regulations as the Company raises its standards of excellence. Consistent with its core values of safety, teamwork, and innovation, the Company aims to create more advanced solutions around sustainability. The Company emphasizes continual improvement in its EHSS performance, particularly as it applies to preventing pollution and reducing the environmental impact of its operations while maximizing opportunities for environmental and social benefits. The Company continually strives to develop best practices in EHS management based on international standards such as ISO 14001:2015 and ISO 45001:2018. The Company has 10 locations/businesses throughout North America and Europe that Environmental Management Systems has independently assessed and are compliant with the requirements of ISO 14001:2015 and ISO 45001:2018.
Additionally, the Company has facilitated the formation of an internal, employee-led Wellness Committee to promote initiatives and values Company-wide that focus on all aspects of health and wellness.
Leadership and Talent Management
The Company’s executive leadership team sets the Company’s strategic direction and is dedicated to sustainable profitable growth through its commitment to providing quality products and services to its customers and treating our customers, suppliers, and employees as partners. L.B. Foster cultivates and empowers talent through performance management, career planning/development, and succession planning, creating an environment for people to be successful in achieving our strategic plan through the following areas:
Talent Acquisition and Onboarding
The Company is committed to finding and hiring the best-qualified candidate (from within or outside of the organization) for a job opening, in a timely and cost-effective manner. The recruitment process includes analyzing the requirements of a job, meeting with hiring management to determine the appropriate qualifications and experience for the position, attracting qualified candidates to that job, providing opportunities to advance diversity in the workforce, screening and selecting applicants, hiring, and ultimately integrating the new employee to the organization.
Development Planning
The Company actively promotes proactive planning and implementation of action steps towards our employees’ career goals. Developmental experiences can consist of training, developing, mentoring, and coaching.
Succession Planning
A process for identifying and developing employees with the potential to fill key business leadership positions within the Company are key to future success. Succession planning increases the availability of experienced and capable employees that are prepared to assume these critical roles as they become available.
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Performance Management
We strongly encourage an ongoing process of communication between a supervisor and an employee throughout the year, in support of accomplishing the strategic objectives of the organization.
Workforce
As of December 31, 2022, the Company had 1,131 employees, 867 located within the U.S., 43 within Canada, 215 in Europe, and 6 within other locations. There were 527 hourly production workers and 604 salaried employees. Of the hourly production workers, approximately 44 were represented by unions.
Two collective bargaining agreements covering approximately 24 and 20 employees are scheduled to expire in March 2025, and September 2025, respectively. The Company divested its Track Components division on August 1, 2022, which included the collective bargaining agreement with employees of that business division. The Company has not suffered any major work stoppages in recent history and considers its relations with its employees to be satisfactory.
All of the Company’s hourly and salaried employees are covered by one of its defined benefit plans or defined contribution plans.
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 Principal 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, the Company’s 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.
Available Information
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:
| Name | Age | Position | ||||||||||||
| Brian H. Friedman | 44 | Vice President - Steel Products and Measurement | ||||||||||||
| Patrick J. Guinee | 53 | Senior Vice President, General Counsel, and Secretary | ||||||||||||
| Peter D. V. Jones | 56 | Vice President - Technology Services and Solutions | ||||||||||||
| John F. Kasel | 57 | President and Chief Executive Officer | ||||||||||||
| Brian H. Kelly | 63 | Senior Vice President - Human Resources and Administration | ||||||||||||
| Gregory W. Lippard | 54 | Senior Vice President - Rail | ||||||||||||
| Robert A. Ness | 59 | Vice President - Precast Concrete Products | ||||||||||||
| Sean M. Reilly | 50 | Corporate Controller and Principal Accounting Officer | ||||||||||||
| William M. Thalman | 56 | Senior Vice President and Chief Financial Officer | ||||||||||||
| William F. Treacy | 63 | Senior Vice President and Chief Growth Officer | ||||||||||||
Mr. Friedman was elected Vice President - Steel Products and Measurement in October 2021, having previously served as Vice President - Coatings and Measurement since joining the Company in May of 2019. Prior to joining the Company, Mr. Friedman was employed by ABB Ltd from 2012 to 2019 in various roles including Director Global Product Management and Manufacturing Unit Manager. Previously, he served in various research and development and operations role for Hunter Fan Company from 2001 to 2012.
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 and 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 and Securities and Assistant Secretary.
Mr. Jones has worked at L.B. Foster since 2010. Mr. Jones was elected Vice President - Technology Services and Solutions in October 2021, having previously served as Vice President - Global Technology and Managing Director of L.B. Foster Rail Technologies (UK) Ltd having held the latter position from 2010 to 2021. Prior to L.B. Foster, Mr. Jones held the position of Managing Director of Portec Rail Products (UK) Ltd from 2006 to 2010.
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Mr. Kasel was elected President and Chief Executive Officer in July 2021, having previously served as Senior Vice President and Chief Operating Officer since December 2019, Senior Vice President - Rail and Construction from 2017 to 2019, Senior Vice President - Rail Products and Services from 2012 to 2017, Senior Vice President - Operations and Manufacturing from 2005 to 2012, and Vice President - Operations and Manufacturing from 2003 to 2005. 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 serves as Senior Vice President - Rail, and was previously Vice President - Rail Technologies and Services from 2020 to 2021, Vice President - Rail from January 2020 to November 2020 and Vice President - Rail Products from 2017 to 2019. From 2000 to 2017, he served as Vice President - Rail Product Sales. 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. Ness was elected Vice President - Precast Concrete Products in January 2021, having previously served as Director, Operations of CXT Precast since June 2020. Previously, Mr. Ness served as the Rail Business Controller beginning from 2012 to 2020 and Division Controller role he had held since his initial employment with the Company in 2006.
Mr. Reilly was appointed Controller and Principal Accounting Officer of the Company in January 2022. Prior to joining the Company, Mr. Reilly most recently served as Vice President of Finance - Metal Cutting Division, at Kennametal, Inc. since April 2019. Prior to that role, Mr. Reilly served in roles of increasing responsibility at Kennametal, Inc., including as Director of Finance - Infrastructure division, from 2016 to 2019; Director of Finance - Integrated Supply Chain and Logistics from 2015 to 2016; Director of Finance - Asia from 2013 to 2015 in Singapore and Earthworks Controller from 2007 to 2012.
Mr. Thalman was appointed Senior Vice President and Chief Financial Officer of the Company in February 2021. Prior to joining the Company, Mr. Thalman was employed by Kennametal, Inc. from February 2004 through February 2021, most recently serving as Vice President - Advanced Material Solutions since 2016 and Vice President - Transformation Office since 2019. Prior to these roles, he served in roles of increasing responsibility, including: Vice President - Finance Infrastructure, Director of Finance - M&A and Planning, Director of Finance – Kennametal Europe, Director of Finance - MSSG Americas, Assistant Corporate Controller, and Director of Financial Reporting.
Mr. Treacy was appointed Senior Vice President and Chief Growth Officer in October 2021, and was previously Senior Vice President - Infrastructure Solutions in 2021, Vice President - Infrastructure Solutions from November 2020 to February 2021, Vice President - Tubular and Energy Services from 2017 to 2020. Mr. Treacy 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
The Company operates in a changing environment that involves numerous known and unknown risks and uncertainties that could have a material and adverse effect on its business, financial condition, and results of operations. The following risk factors highlight what it believes to be the more material factors that have affected the Company and could affect it in the future. The Company has grouped the risk factors into five categories for ease of reading, and without any reflection on the importance of, or likelihood of, any particular category. The Company may also be affected by unknown risks or risks that it currently believes are immaterial. If any one or more such events actually occur, our business, financial condition, and results of operations could be materially and adversely affected. One should carefully consider the following risk factors and other information contained in this Annual Report on Form 10-K and any other risks discussed in our other periodic filings with the SEC before deciding to invest in our common stock.
Business and Operational Risks
Our inability to successfully manage acquisitions, divestitures, and other significant transactions could harm our financial results, business, and prospects.
As part of our business strategy, we acquire or divest businesses or assets, enter into strategic alliances and joint ventures, or make investments to realize anticipated benefits, which are actions that involve a number of inherent risks and uncertainties. Material acquisitions, dispositions, and other strategic transactions involve numerous risks, including, but not limited to:
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•we may not be able to identify suitable acquisition candidates, or we may not be able to dispose of assets, at prices we consider attractive;
•we may not be able to compete successfully for identified acquisition candidates, complete future acquisitions or accurately estimate the financial effect of acquisitions on our business;
•future acquisitions may require us to spend significant cash and incur additional debt, resulting in additional leverage;
•we may have difficulty retaining an acquired company’s key employees or clients;
•we may not be able to realize the operating efficiencies, synergies, costs savings, or other benefits expected;
•we may have difficulty integrating acquired businesses, resulting in unforeseen difficulties, such as incompatible accounting, information management or other control systems, or the need to significantly update and improve the acquired business’s systems and internal controls;
•we may assume potential liabilities for actions of the target before the acquisition, including as a result of a failure to comply with applicable laws;
•we may be subject to material indemnification obligations related to any assets that we dispose;
•acquisitions or dispositions may disrupt our business or divert our management from other responsibilities; and
•as a result of an acquisition, we may need to record write-downs from future impairments of intangible assets, which could reduce our future reported earnings.
If these factors limit our ability to integrate the operations of our acquisitions or to execute other strategic transactions successfully or on a timely basis, we may not meet our expectations for future results of operations. In addition, our growth and operating strategies for businesses we acquire may be different from the strategies that such target businesses currently are pursuing. If our strategies are not the proper strategies for a company we acquire or with which we partner, it could have a material adverse effect on our business, financial condition, and results of operations. Further, there can be no assurance that we will be able to maintain or enhance the profitability of any acquired business or consolidate the operations of any acquired business to achieve cost savings.
In addition, there may be liabilities that we fail, or are unable, to discover in the course of performing due diligence investigations on each company or business that we have already acquired or disposed of or may acquire or dispose of in the future. Such liabilities could include those arising from employee benefits contribution obligations of a prior owner or non-compliance with, or liability pursuant to, applicable federal, state, or local environmental requirements by us or by prior owners for which we, as a successor or predecessor owner, may be responsible. In addition, there may be additional costs relating to acquisitions and dispositions including, but not limited to, possible purchase price adjustments. There can be no assurance that rights to indemnification by sellers of assets to us, even if obtained, will be enforceable, collectible or sufficient in amount, scope or duration to fully offset the possible liabilities associated with the business or property acquired. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business. 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 as rapidly as projected, if at all.
Prolonged negative economic conditions, volatile 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 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 depressed 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, a trend toward renewable or alternative energy resources, 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. During 2022 and 2021, the Company experienced increased costs in labor and materials as a result of the inflationary environment, competitive labor market, and supply chain constraints, which adversely impacted the Company’s profitability. We expect that these adverse impacts will continue but we are unable to predict the extent, nature, or duration of the impacts on our results of operations and financial condition at this time.
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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 planning (“ERP”) system transition. Certain divisions of our Company migrated into the new ERP system during 2016, additional divisions have since migrated, including during 2022. We also began the implementation of a global financial planning and consolidation system during 2021 that became operational in 2022. The system implementations are 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. In October 2020, we experienced a cyber-attack on our information technology systems. While the cyber-attack caused temporary disruption and interference with our operations, it did not result in a material adverse effect on our business operations. Despite the steps we take to deter and mitigate cybersecurity risks, we 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 including data and security breaches, malware, ransomware, hacking, and identity theft. 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 the adoption of 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 (“E.U.”) and the U.K. which are, in some respects, more stringent than U.S. standards, could be significant. Any compromise or breach of our security, including from the cyber-attack that we experienced or any future attack, 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.
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. 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 rail or coating products and services 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.
Many 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 precast products and ties offerings. Our technology based solutions and services are dependent on electronic components and the ability to source these items. During 2022, the Company experienced increased raw material costs due to supply chain constraints and the inflationary environment. 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.
Two of our manufacturing facilities are staffed by employees represented by labor unions. Approximately 44 employees employed at these facilities are currently working under two 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.
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.
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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. As a result of the pandemic, the Company is experiencing a tight labor market which has constricted the labor pool and driven up labor costs as we compete for talent. 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.
A pandemic could continue to adversely affect our business.
The COVID-19 pandemic is adversely affecting, and any future pandemics could adversely affect, our operations and supply chains and we have experienced and expect to continue to experience unpredictable reductions in demand for certain of our products and services. If we do not successfully manage our supply chain or identify new sources of supplies, we may be unable to satisfy customer orders, which could harm our reputation and customer relationships and materially adversely affect our business, financial condition, and operating results. Though we have implemented and enhanced safety measures and protocols in accordance with local government orders, a pandemic-related outbreak at any one of our facilities could result in production delays or otherwise interrupt our operations. While the COVID-19 pandemic has adversely affected each of the markets we serve, the impact on the midstream energy markets has been particularly adverse, and has contributed to volatility in the prices of oil and natural gas, weakened demand, and reduced customer spending. In the rail, transit, friction management, and fabricated steel products businesses, governmental stay-at-home orders and government and business work-from-home orders and arrangements in the U.S. and globally, particularly in the U.K., have resulted in reduced traffic and demand for our products and services, and many public works projects have been deferred or delayed as a result of governmental pandemic mitigation efforts, adversely impacting our businesses. U.S. and non-domestic governmental and private pandemic mitigation measures such as stay-at-home orders have slowed travel and movement of goods throughout the world, contributing to a reduction in demand for our products and services. Such measures have also contributed to a tight labor market which in turn adversely impacts our supply chain. We expect that these adverse impacts will continue but we are unable to predict the extent, nature, or duration of the impacts on our results of operations and financial condition at this time.
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, such as hurricanes, flooding, and winter storms causing power failures or travel restrictions with respect to our operations, armed conflicts, terrorism, health epidemics or pandemics, such as COVID-19, and related restrictions on travel, economic or political uncertainties or instability, civil unrest, strikes, unplanned outages, equipment failures, failure to meet product specifications, or disruptions in certain areas of our operations, may cause our operating costs to increase or otherwise negatively impact our financial performance.
Competitive Risks
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 operate. 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 possess and in some cases license intellectual property including proprietary rail product and precast concrete formulations and systems and component designs, and we own a number of patents and trademarks under the intellectual property laws of the U.S., Canada, Europe, and other countries in which product sales are possible. While we have not perfected patent and trademark protection of our proprietary intellectual property for all products in all countries, we periodically assess our portfolio to determine the need for pursuing further protection. The decision not to obtain patent and trademark protection in additional countries may result in other companies copying and marketing products that are based upon our proprietary intellectual property. This, and failure to continue such licenses, could impede growth into new markets where we do not have such protections and result in a greater supply of similar
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products in such markets, which in turn could result in a loss of pricing power and reduced revenue. In some cases, we may decide that the best way to protect our intellectual property is to retain proprietary information as trade secrets and confidential information rather than to apply for patents, which would involve disclosure of proprietary information to the public. Any misappropriation or reverse engineering of our trade secrets could result in competitive harm and may result in costly and time-consuming litigation. If any of these events should occur, it could materially adversely affect our results of operations and financial condition.
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 rail customers or decline in sales orders from other 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.
Financial Risks
Our future performance and market value could cause write-downs of long-lived and intangible assets in future periods.
We are required under U.S. generally accepted accounting principles to review intangible and long-lived 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 cause the carrying value of our intangible and long-lived assets to 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. In 2022, the Company recorded goodwill impairment related to its Fabricated Bridge reporting unit. No impairments of goodwill or intangible assets were recorded in 2021. Impairment charges were recorded on long-lived assets related to the Company's precision measurement products and systems business during 2022 and the since divested IOS Test and Inspection Services business during 2020.
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 service our indebtedness, which would reduce the availability of our cash flows to fund working capital, capital expenditures, expansion efforts, or other general corporate purposes;
•limit our flexibility in planning for, or reacting to, changes in our business and the industries 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, acquisitions, or other 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 refinancing 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 refinancing 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 any such future debt agreements 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.
The phase-out of LIBOR and transition to SOFR as a benchmark interest rate will have uncertain and possibly adverse side effects.
In advance of the cessation of the London Interbank Offered Rate (“LIBOR”) on June 30, 2023, on August 12, 2022, the Company amended its Credit Agreement to obtain approval for the VanHooseCo acquisition and temporarily modify certain financial covenants to accommodate the transaction. The Second Amendment also provided for the conversion from LIBOR-based to be based on the Secured Overnight Financing Rate (“SOFR”). Due to the broad use of LIBOR as a reference rate, the impact of this transition to SOFR could adversely affect our financing costs, including spread pricing on our senior secured facilities and any other variable rate debt obligations, as well as our operations and cash flows. There is no guarantee that the transition from LIBOR to SOFR will not
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result in financial market disruptions, significant increases in benchmark rates, or borrowing costs to borrowers, any of which could affect our interest expense and earnings and may have an adverse effect on our business, results of operations, financial condition, and stock price. Whether or not SOFR attains market acceptance as a LIBOR replacement tool remains uncertain.
Legal, Tax, and Regulatory Risks
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 have sold. There is the potential that an outcome 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.
Violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws and other foreign governmental regulations, 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.
The U.S. Foreign Corrupt Practices Act and other similar 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.
Our foreign operations are subject to governmental regulations in the countries in which we operate, as well as U.S. laws. These regulations include those related 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.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
We have certain tax attributes, including U.S. federal, state and foreign operating loss carryforwards, and federal research and development credits, which may be available to offset future taxable income in certain jurisdictions. Realization of these net operating loss and research and development credit carryforwards depends on future income, and there is a risk that certain of our existing carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our operating results and financial condition.
In addition, under Sections 382 and 383 of the Internal Revenue Code, if a corporation undergoes an “ownership change,” generally defined as a greater than 50% change (by value) in ownership by “5 percent shareholders” over a rolling three-year period, the corporation’s ability to use its pre-change net operating loss carryovers and other pre-change tax attributes, such as research and development credits, to offset its post-change income or taxes may be limited. Similar rules apply under U.S. state tax laws. We have, and may in the future, experience ownership changes as a result of shifts in our stock ownership. As a result, if we earn net taxable income, our ability to use our pre-change U.S. net operating loss carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us.
Changes in our tax rates or exposure to additional income tax liability could impact our profitability and management projections, estimates, and judgments, particularly with respect to reserves for litigation, deferred tax assets, and the fair market value of certain assets and liabilities, may be inaccurate and 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 if we determine, based on evidence available at the time the determination is made, that it is more likely than not 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 amount of deferred taxes recognized, which can result in 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, contained in this Annual Report on Form 10-K, for additional discussion of our deferred taxes.
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 and are therefore subject to a variety of legal proceedings and compliance risks, including those described in Item 3 - Legal Proceedings and in Part II, Item 8, Financial
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Statements and Supplementary Data, Note 18 to the Consolidated Financial Statements, contained in this Annual Report on Form 10-K. Like other companies engaged in environmentally sensitive businesses, we are required to comply with numerous laws and regulations, including environmental matters relating to, among other things, the treatment, disposal, and storage of wastes, investigation and remediation of contaminated soil and groundwater, the discharge of effluent into waterways, and the emissions of substances into the air. We are required to obtain various authorizations, permits, approvals, and certificates from governmental agencies. The Company could be subject to liability with respect to remediation of past contamination in the operation of some of its current and former facilities and remediation of contamination by former owners or operators of the Company’s current or former facilities. Compliance with emerging regulatory initiatives, delays, discontinuations, or reversals of existing regulatory policies in the markets in which we operate, including costs associated with any required environmental remediation and monitoring, could have an adverse effect on our business, results of operations, cash flows, and financial condition.
A substantial portion of our operations is 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.
Government actions in the U.S. or other countries where we have a higher concentration of business may change tax policy, trade policy, or enact other legislation that could create an unfavorable environment for the Company, making it more difficult to compete or adversely impact our operating results.
The United States-Mexico-Canada Trade Agreement (“USMCA”) and certain other international trade agreements could affect our business, financial condition, and results of operations.
On July 1, 2020, the USMCA became effective, replacing the North American Free Trade Agreement. It is uncertain how the USMCA will impact foreign trade and our international operations. However, given the amount of North American trade that moves by truck and rail, it could have a significant impact on supply and demand for the raw materials that we use in manufacturing processes and for finished goods in the markets we serve, and could adversely impact the amount, movement, and patterns of products that we ship. Potential material modifications to USMCA, or certain other international trade agreements, including with respect to the modification of trade agreements with or among the E.U. and the U.K., may have a material adverse effect on our business, financial condition, and results of operations.
Legislative or regulatory initiatives related to climate change could have a material adverse effect on our business.
Greenhouse gases may have an adverse effect on global temperatures, weather patterns, and the frequency and severity of extreme weather and natural disasters. Such events could have a negative effect on our business. Concern over climate change may result in new or additional legislative and regulatory requirements to reduce or mitigate the effects of climate change on the environment, which could result in future tax, transportation cost, and utility increases. Moreover, natural disasters and extreme weather conditions may impact the productivity of our facilities, the operation of our supply chain, or consumer buying patterns. Any of these risks could have a material adverse effect on our business.
International Risks
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 U.S. subjects the Company to various risks, including changing economic and political conditions, work stoppages, exchange controls, currency fluctuations, armed conflicts, and unexpected changes in U.S. and foreign laws relating to tariffs, trade restrictions, transportation regulations, foreign investments, and taxation. Increasing sales to foreign countries, including Brazil, Canada, China, India, Mexico, the U.K., and countries within the E.U., expose 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, be 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 U.S. dollar, Canadian dollar, British pound, and Euro may result in volatile earnings that reflect exchange rate translation in our Canadian and European sales and operations. If the U.S. 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 U.S. 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 exit from the European Union could adversely affect our business.
Pursuant to a June 2016 referendum, the U.K. left the E.U. on January 31, 2020, commonly referred to as “Brexit.” The U.K. government and the E.U. operated under a transitional arrangement that expired on December 31, 2020. The EU-UK Trade and Cooperation Agreement was agreed in principle and became provisionally operative on January 1, 2021, and formally in force on May 1, 2021, and terms of this new relationship between the U.K. and the E.U. remains subject to uncertainties. There has been volatility in
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currency exchange rate fluctuations between the U.S. dollar relative to the British pound, which could continue. The 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 as negotiations of trade deals between the U.K. and the E.U., and also between the U.K. and other countries, possibly including the U.S., occur during the near future. Brexit is an unprecedented event, and, accordingly, it is unclear what long-term economic, financial, trade, and legal effects will result.
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 9% and 11% of our total revenue for the years ended December 31, 2022 and 2021, respectively. During the years ended December 31, 2022 and 2021 less than 1% of our consolidated net revenue was from the U.K. operation’s sales exported to E.U. members.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
16
ITEM 2. PROPERTIES
The location and general description of the principal properties that are owned or leased by the Company, together with the segment of the Company’s business using such properties, are set forth in the following table:
| Location | Function | Acres | Business Segment | Lease Expiration | ||||||||||||||||||||||
| Bedford, PA | Bridge component fabricating plant | 16 | Steel Products and Measurement | Owned | ||||||||||||||||||||||
| Birmingham, AL | Protective coatings facility | 32 | Steel Products and Measurement | 2027 | ||||||||||||||||||||||
| Burnaby, BC, Canada | Friction management products plant | N/A | Rail, Technologies, and Services | 2024 | ||||||||||||||||||||||
| Columbia City, IN | Rail processing facility and yard storage | 22 | Rail, Technologies, and Services | Owned | ||||||||||||||||||||||
| Hillsboro, TX | Precast concrete facility | 9 | Precast Concrete Products | Owned | ||||||||||||||||||||||
| Lebanon, TN | Precast concrete facility | 10 | Precast Concrete Products | 2028 | ||||||||||||||||||||||
| Loudon, TN | Precast concrete facility | 51 | Precast Concrete Products | Owned | ||||||||||||||||||||||
| Magnolia, TX | Threading facility | 34 | Steel Products and Measurement | Owned | ||||||||||||||||||||||
| Nampa, ID | Precast concrete facility | 12 | Precast Concrete Products | 2029 | ||||||||||||||||||||||
| Niles, OH | Rail fabrication, friction management products, and yard storage | 35 | Rail, Technologies, and Services | Owned | ||||||||||||||||||||||
| Nottingham, United Kingdom | Technology solutions manufacturing | 4 | Rail, Technologies, and Services | Owned | ||||||||||||||||||||||
| Pueblo, CO | Rail joint manufacturing facility | 9 | Rail, Technologies, and Services | Owned | ||||||||||||||||||||||
| Sheffield, United Kingdom | Track component and friction management products facility | N/A | Rail, Technologies, and Services | 2030 | ||||||||||||||||||||||
| Spokane, WA | Concrete tie plant | 13 | Rail, Technologies, and Services | 2025 | ||||||||||||||||||||||
| Waverly, WV | Precast concrete facility | 85 | Precast Concrete Products | Owned | ||||||||||||||||||||||
| Willis, TX | Protective coatings facility | 16 | Steel Products and Measurement | Owned | ||||||||||||||||||||||
| Willis, TX | Measurement services facility | 13 | Steel Products and Measurement | Owned | ||||||||||||||||||||||
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 17 sales offices, including its headquarters in Pittsburgh, PA, and 19 warehouses, plants, and yard facilities located throughout the U.S., Canada, Europe, China, and Brazil. 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
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 18 to the Consolidated Financial Statements, contained in this Annual Report on Form 10-K, which is incorporated by reference into this Item 3.
ITEM 4. MINE SAFETY DISCLOSURES
This item is not applicable to the Company.
17
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
(Dollars in thousands, except share data unless otherwise noted)
Stock Market Information
The Company had 305 common shareholders of record on February 28, 2023. The number of record holders does not include stockholders who are beneficial owners but whose shares are held in “street name” by brokers and other nominees or persons, partnerships, associates, corporations, or other entities identified in security position listings maintained by depositories. The Company's common stock is traded on the NASDAQ Global Select Market under the symbol: FSTR.
Dividends
During 2022 and 2021 the Company did not declare any quarterly dividends.
The Company’s August 13, 2021 credit facility, as amended, permits it to pay dividends and distributions and to make redemptions with respect to its stock providing no event of default or potential default (as defined in the credit facility) has occurred prior to or after giving effect to the dividend, distribution, or redemption.
Securities Authorized for Issuance Under Equity Compensation Plans
Under the 2006 Omnibus Incentive Plan, as amended and restated in May 2018 (“Omnibus Plan”), and continuing under the 2022 Equity and Incentive Compensation Plan (“Equity and Incentive Plan”) approved by shareholders on June 2, 2022, since May 2018, at each annual meeting of shareholders, where non-employee directors were elected or reelected, as part of their compensation, the non-employee members of the Board of Directors (“Board”) have received annual awards of forfeitable restricted shares subject to a one-year vesting requirement from the date of the grant. Prior to that date, such directors received fully-vested shares. During 2022, pursuant to the Equity and Incentive Compensation Plan, the Company issued approximately 46,000 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. Commencing in 2020 and ending in December 2021, in addition to the annual restricted stock award, those non-employee directors serving on the Board Strategy Committee were awarded restricted shares on an annual basis subject to a one-year vesting requirement from the date of grant until that committee was disbanded in 2021. During 2022, there were no 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, 2022, there were approximately 321,000 fully vested shares issued under the Omnibus Plan to all non-employee directors who were serving at the time of grant or on the date of vesting of the underlying award. 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 Omnibus Plan, as amended and restated effective December 1, 2022 pursuant to the 2022 Equity and Incentive Compensation Plan, which permits non-employee directors of the Company to defer receipt of earned cash and/or stock compensation for service on the Board. As of December 31, 2022, approximately 46,000 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 Omnibus Plan and Equity and Incentive Plans. The forfeitable restricted stock awards 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. Commencing in 2022, performance units may be earned annually and converted into performance restricted stock units which settle in common stock at the end of the three year program.
Since 2017, the Company has withheld shares of restricted stock for satisfaction of tax withholding obligations. During 2022 and 2021, the Company withheld 27,636 and 45,288 shares, respectively, for this purpose. The values of the shares withheld were $410 and $732 in 2022 and 2021, respectively.
Issuer Purchases of Equity Securities
The Company’s purchases of equity securities for the three months ended December 31, 2022 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, 2022 - October 31, 2022 | — | $ | — | — | $ | — | ||||||||||||||||||||
| November 1, 2022 - November 30, 2022 | — | — | — | — | ||||||||||||||||||||||
| December 1, 2022 - December 31, 2022 | 600 | 9.35 | — | — | ||||||||||||||||||||||
| Total | 600 | $ | 9.35 | — | $ | — | ||||||||||||||||||||
1.Reflects shares withheld by the Company to pay taxes upon vesting of restricted stock.
18
ITEM 6. [RESERVED]
Omitted pursuant to amendments to Item 301 of Regulation S-K effective February 10, 2021.
19
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except share data unless otherwise noted)
2022 Developments
During 2022, the Company:
•Produced net sales of $497,497, a decrease of $16,123, or 3.1%, over 2021, reflective of organic growth of 5.6% and growth due to acquisitions of 4.0%, which was offset by a 12.8% reduction due to divestitures;
•Reported gross profit margin of 18.0% for the year, a 120-basis point improvement over prior year;
•Continued its business transformation with the acquisitions of Skratch Enterprises Ltd. and VanHooseCo Precast LLC, for consideration of $7,402 and $52,146, respectively, which contributed to the $68,118 increase in its net debt;
•Divested the Track Components business, resulting in cash proceeds of $7,795;
•Incurred a net loss of $45,677 due to a $37,895 deferred tax asset valuation allowance, pre-tax asset impairment charges of $8,016, and an unfavorable impact from the settlement of long-term commercial contracts for $3,956;
•Reported adjusted EBITDA(a) (earnings before interest, taxes, depreciation, amortization, and certain adjustments), of $24,179; an increase of 29.4% compared to the prior year;
•Amended its Credit Agreement to obtain approval for the VanHooseCo acquisition and temporarily modify certain financial covenants to accommodate the transaction.
(a) The following tables display reconciliations of non-GAAP financial measures for the years ended December 31, 2022 and 2021. 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 as many investors utilize EBITDA to enhance their 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 2022, the Company made adjustments to exclude acquisition and divestiture related costs, VanHooseCo acquisition-related inventory step-up amortization and contingent consideration expense, the gain from insurance proceeds, the Crossrail project settlement amount, impairment charges, and the loss (gain) on the sale of the Track Components and Piling Products businesses, respectively. In 2021, the Company made adjustments to exclude the gain associated with the sale of the Piling Products business. The Company views net debt, which is total debt less cash and cash equivalents, as an important metric of the operational and financial health of the organization and useful to investors as an indicator of our ability to incur additional debt and to service our existing debt. Non-GAAP financial measures are not a substitute for GAAP financial results and should only be considered in conjunction with the Company’s financial information that is presented in accordance with GAAP. Quantitative reconciliations of EBITDA, adjusted EBITDA, and debt to the non-GAAP financial measures are presented below.
| Year Ended December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Adjusted EBITDA Reconciliation | ||||||||||||||
| Net (loss) income, as reported | $ | (45,677) | $ | 3,471 | ||||||||||
| Interest expense - net | 3,340 | 2,956 | ||||||||||||
| Income tax expense | 36,681 | 1,119 | ||||||||||||
| Depreciation expense | 8,635 | 8,051 | ||||||||||||
| Amortization expense | 6,144 | 5,836 | ||||||||||||
| Total EBITDA from continuing operations | $ | 9,123 | $ | 21,433 | ||||||||||
| Acquisition and divestiture costs | 2,235 | — | ||||||||||||
| Commercial contract settlement | 3,956 | — | ||||||||||||
| Insurance proceeds | (790) | — | ||||||||||||
| Loss on divestiture of Track Components | 467 | — | ||||||||||||
| Gain on divestiture of Piling Products | (489) | (2,741) | ||||||||||||
| VanHooseCo inventory adjustment to fair value amortization | 1,135 | — | ||||||||||||
| VanHooseCo contingent consideration | 526 | — | ||||||||||||
| Impairment expense | 8,016 | — | ||||||||||||
| Adjusted EBITDA | $ | 24,179 | $ | 18,692 | ||||||||||
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| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Net Debt Reconciliation | ||||||||||||||
| Total debt | $ | 91,879 | $ | 31,251 | ||||||||||
| Less: cash and cash equivalents | (2,882) | (10,372) | ||||||||||||
| Net debt | $ | 88,997 | $ | 20,879 | ||||||||||
Acquisitions and Divestitures
On June 21, 2022 and August 12, 2022, the Company acquired the stock of Skratch for $7,402, and acquired the operating assets of VanHooseCo for $52,146, net of cash acquired at closing, respectively. Skratch has been included in the Company’s Technology Services and Solutions business unit within the Rail, Technologies, and Services segment and VanHooseCo has been included within the Precast Concrete Products segment. Skratch and VanHooseCo’s net sales were $2,975 and $17,788, respectively, for the year ended December 31, 2022.
On August 1, 2022, the Company divested the assets of its Track Components division for $7,795, subject to indemnification obligations and working capital adjustments. The Track Components division was included in the Rail Products business unit within the Rail, Technologies, and Services segment. The Track Components division's net sales were $9,244 and $14,139 for the year ended December 31, 2022 and 2021, respectively.
On September 24, 2021, the Company completed the sale of its Piling Products division for $23,902 in total proceeds. The Company retained all pre-closing receivables and liabilities associated with the division. The sale included substantially all inventory associated with the division, as well as the related fixed assets. The Piling Products division was included in the Fabricated Steel Products business unit within the Steel Products and Measurement segment. The Piling Products division net sales were $60,819 for the year ended December 31, 2021.
21
Year-to-date Results Comparison
Results of Operations
| Year Ended December 31, | Percent Increase/(Decrease) | Percent of Total Net Sales Year Ended December 31, | ||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||
| Net sales | $ | 497,497 | $ | 513,620 | (3.1) | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||
| Gross profit | 89,611 | 86,302 | 3.8 | 18.0 | 16.8 | |||||||||||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||||||||
| Selling and administrative expenses | 82,657 | 75,995 | 8.8 | 16.6 | 14.8 | |||||||||||||||||||||||||||
| Amortization expense | 6,144 | 5,836 | 5.3 | 1.2 | 1.1 | |||||||||||||||||||||||||||
| Goodwill and long-lived assets impairment charges (Note 5) | 8,016 | — | 100.0 | 1.6 | — | |||||||||||||||||||||||||||
| Operating (loss) profit | (7,206) | 4,471 | ** | (1.4) | 0.9 | |||||||||||||||||||||||||||
| Interest expense - net | 3,340 | 2,956 | 13.0 | 0.7 | 0.6 | |||||||||||||||||||||||||||
| Other income - net | (1,550) | (3,075) | 49.6 | (0.3) | (0.6) | |||||||||||||||||||||||||||
| (Loss) income from continuing operations before income taxes | (8,996) | 4,590 | ** | (1.8) | 0.9 | |||||||||||||||||||||||||||
| Income tax expense | 36,681 | 1,119 | ** | 7.4 | 0.2 | |||||||||||||||||||||||||||
| (Loss) income from continuing operations | $ | (45,677) | $ | 3,471 | ** | (9.2) | % | 0.7 | % | |||||||||||||||||||||||
| Diluted (loss) earnings per common share | $ | (4.25) | $ | 0.34 | ||||||||||||||||||||||||||||
** Data excluded as management believes it is not meaningful.
Fiscal 2022 Compared to Fiscal 2021 — Company Analysis
Net sales of $497,497 for the year ended December 31, 2022 decreased by $16,123, or 3.1%, compared to the prior year. The change in sales is due in part to the divestitures of the Track Components and Piling Products businesses. Declines from divestitures were partially offset by organic growth in all three segments and the acquisitions of Skratch and VanHooseCo in 2022. Divestitures drove a 12.8% decline in sales, while organic growth and acquisitions drove a 5.6% and 4.0% increase in sales, respectively. Included in the organic sales growth of 5.6% is a $3,956 reduction in sales related to the multi-year Crossrail project in the Company’s Technology Services and Solutions group in the United Kingdom (“Crossrail Settlement”). This settlement reduced both sales and gross profit in 2022.
Gross profit increased by $3,309, or 3.8%, and gross profit margin expanded by 120 basis points to 18.0% despite the impact of the $3,956 Crossrail Settlement. The improvement in gross profit is due to the portfolio changes that are a part of the Company’s strategic transformation. In 2021, the Company sold the Piling Products business and in 2022 it sold the Track Components business, both of which have a lower gross profit margin than the Skratch and VanHooseCo businesses that were acquired in 2022. Gross profit was also negatively impacted in 2022 by a $1,135 purchase accounting adjustment related to the VanHooseCo acquired inventory. In the Company’s legacy business, gross profit was negatively impacted by raw material and labor inflation which was mitigated by pricing actions in the latter part of 2022.
Selling and administrative expenses increased by $6,662, or 8.8%, over the prior year. The increase was primarily attributable to strategic transformation costs of $2,235 in 2022, an increase in personnel related costs of $2,676, including a $435 increase in stock-based compensation expense, and an increase in third-party supplies and services of $1,231 compared to the prior year. Selling and administrative expenses as a percentage of net sales increased to 16.6% from 14.8% due to the increased spending. The net impact of the acquisitions and divestitures was not significant to the change in selling and administrative expenses year over year; however, the 2022 expense included $526 of retention costs associated with the VanHooseCo acquisition.
The Company’s annual goodwill test included a quantitative analysis to determine whether it was more likely than not that the fair value of each reporting unit is less than its carrying value. During 2022, the Company recorded a non-cash impairment charge of $3,011 associated with the Fabricated Bridge reporting unit goodwill, which resides in the Steel Products and Measurement segment, as a result of its annual goodwill test. No other reporting units were impaired as a result of goodwill testing procedures.
The Company also recorded an impairment charge of $4,883 for intangible assets as a result of procedures performed. Such procedures determined that the carrying value of the long-lived asset group related to its Precision Measurement Products and Systems business would not be recoverable. The now fully impaired assets were part of the Steel Products and Measurement segment. For further discussion on the impairment charges, refer to Note 5 of the Notes to the Consolidated Financial Statements.
Interest expense increased by $384, or 13.0%, due to higher outstanding debt throughout the year. The outstanding debt balance increased to $91,879 as of December 31, 2022, compared to $31,251 as of December 31, 2021. The increase in debt was primarily to
22
fund the acquisition of VanHooseCo, which had a purchase price of $52,146, net of cash acquired and the Skratch acquisition, which had a purchase price of $7,402.
Other income for the year ended December 31, 2022 included pre-tax income of $489 from the 2021 sale of the Piling Products division, $790 in insurance proceeds, and $325 received to recover costs associated with environmental cleanup activities. Other expense for the year ended December 31, 2022 included a $467 loss related to the sale of the Track Components business. In the prior year, the Company recorded pre-tax income of $2,741 from the gain on sale of the Piling Products division, all of which was recorded in “Other income-net.”
The Company’s effective income tax rate for 2022 was (407.7)%, compared to 24.4% in the prior year period. The Company’s current year income tax provision included $37,895 expense related to the increase in its valuation allowance against deferred tax assets. For further discussion on the valuation allowance, refer to Note 14 of the Notes to the Consolidated Financial Statements.
As a result of the pre-tax $8,016 impairment charges, the $3,956 pre-tax Crossrail Settlement, and the valuation allowance, the net loss for the year ended December 31, 2022 was $45,677, or $4.25 per diluted share, compared to net income for the 2021 year of $3,471, or $0.34 per diluted share.
Results of Operations — Segment Analysis
Rail, Technologies, and Services
| Year Ended December 31, | Increase/(Decrease) | Percent Increase/(Decrease) | ||||||||||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | 2022 vs. 2021 | |||||||||||||||||||||||
| Net Sales | $ | 300,592 | $ | 299,749 | $ | 843 | 0.3 | % | ||||||||||||||||||
| Gross Profit | $ | 59,499 | $ | 57,249 | $ | 2,250 | 3.9 | % | ||||||||||||||||||
| Gross Profit Percentage | 19.8 | % | 19.1 | % | 0.7 | % | 3.6 | % | ||||||||||||||||||
| Segment Operating Profit | $ | 11,454 | $ | 14,165 | $ | (2,711) | (19.1) | % | ||||||||||||||||||
| Segment Operating Profit Percentage | 3.8 | % | 4.7 | % | (0.9) | % | (19.4) | % | ||||||||||||||||||
Rail, Technologies, and Services segment sales increased by $843, or 0.3%, compared to the prior year. The acquisition of Skratch resulted in $2,975, or 1.0%, of the increase in sales and the divestiture of the Track Components business resulted in a reduction in sales of $4,895, or 1.6%. Organic sales represented $2,763, or 0.9%, of the total increase in sales year over year and were driven by the Rail Products and Global Friction Management business units, which had increases in sales of $4,041 and $3,642, respectively. The sales volume increase was primarily driven by the Company’s Rail Distribution business and increased demand for Friction Management in North American markets served. The Technology Services and Solutions business unit decreased by $6,633, or 12.9%, driven by the $3,956 Crossrail Settlement as well as an unfavorable foreign currency impact.
Segment gross profit increased by $2,250, or 3.9%, compared to the prior year. The improvement in gross profit dollars and margins is primarily due to the portfolio changes that were a part of our strategic transformation. The Track Components business, which was sold in 2022, had lower gross profit margins than the Skratch business that was acquired in 2022. Gross profit was also impacted in 2022 by the $3,956 Crossrail Settlement. The Rail, Technologies, and Services segment gross profit margin increased by 70 basis points from the prior year due to the portfolio changes made and higher gross profit margins realized in Rail Products.
Segment operating profit declined by $2,711, or 19.1%, compared to the prior year. The decline was driven by the $3,956 Crossrail Settlement and increased employment, travel and entertainment, and advertising costs from the prior year. Additionally, the Skratch acquisition contributed $619 more in selling and administrative expenses in 2022 than the Track Components business that was sold.
During 2022, new orders within the Rail, Technologies, and Services segment increased by 11.5% compared to the prior year. The increase in new orders was attributable to the Rail Products and Global Friction Management business units. Segment backlog increased by 9.0% compared to the prior year, ending 2022 at $105,241.
23
Precast Concrete Products
| Year Ended December 31, | Increase/(Decrease) | Percent Increase/(Decrease) | ||||||||||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | 2022 vs. 2021 | |||||||||||||||||||||||
| Net Sales | $ | 104,212 | $ | 70,990 | $ | 33,222 | 46.8 | % | ||||||||||||||||||
| Gross Profit | $ | 18,334 | $ | 12,491 | $ | 5,843 | 46.8 | % | ||||||||||||||||||
| Gross Profit Percentage | 17.6 | % | 17.6 | % | — | % | — | % | ||||||||||||||||||
| Segment Operating Profit | $ | 1,692 | $ | 1,545 | $ | 147 | 9.5 | % | ||||||||||||||||||
| Segment Operating Profit Percentage | 1.6 | % | 2.2 | % | (0.6) | % | (25.4) | % | ||||||||||||||||||
The Precast Concrete Product segment sales increased by $33,222, or 46.8%, compared to the prior year. The acquisition of VanHooseCo contributed $17,788, or 25.1%, of the increase in sales year over year. Sales in the legacy business increased $15,434, or 21.7% year over year, due to a strong demand environment both in the southern and northeastern United States markets.
The Precast Concrete Products segment gross profit increased by $5,843, or 46.8%, compared to the prior year. The gross profit increase was primarily due to increased sales volume within the segment. The gross profit margin remained flat at 17.6%, driven by higher margins associated with the VanHooseCo business, offset by inflationary pressures, including raw material costs, and manufacturing inefficiencies in our legacy Precast business. Although the VanHooseCo margins were accretive to the Precast Concrete Products segment, the gross profit included a $1,135 purchase accounting adjustment related to acquired inventory that negatively impacted margins.
The segment profit of $1,692, increased by $147, compared to the prior year, and was 1.6% of net sales. Operating profit was driven by increased selling and administrative expenses associated with higher personnel costs of $2,647, and an increase in third-party supplies and services of $853, and an increase of $526 in retention costs associated with VanHooseCo from the prior year. The increases to selling and administrative expenses were partially driven by the acquired VanHooseCo business.
For 2022, the Precast Concrete Products segment had a 16.9% increase in new orders and the backlog also increased by 17.3% compared to the prior year. The increase in orders and backlog is attributed to the VanHooseCo acquisition.
Steel Products and Measurement
| Year Ended December 31, | (Decrease)/Increase | Percent (Decrease)/Increase | ||||||||||||||||||||||||
| 2022 | 2021 | 2022 vs. 2021 | 2022 vs. 2021 | |||||||||||||||||||||||
| Net Sales | $ | 92,693 | $ | 142,881 | $ | (50,188) | (35.1) | % | ||||||||||||||||||
| Gross Profit | $ | 11,778 | $ | 16,562 | $ | (4,784) | (28.9) | % | ||||||||||||||||||
| Gross Profit Percentage | 12.7 | % | 11.6 | % | 1.1 | % | 9.6 | % | ||||||||||||||||||
| Segment Operating Loss | $ | (10,824) | $ | (2,402) | $ | (8,422) | (350.6) | % | ||||||||||||||||||
| Segment Operating Loss Percentage | (11.7) | % | (1.7) | % | (10.0) | % | (594.6) | % | ||||||||||||||||||
Sales for the Steel Products and Measurement segment in 2022 decreased by $50,188, or 35.1%, compared to the prior year. The decline is attributable to the divested Piling Products business, which drove a sales decrease of $60,819. The decline in sales was partially offset by a $10,631, or 17.5%, increase in the balance of the segment. The Coatings and Measurement business experienced a sales increase of $10,496, or 37.7%, primarily due to increased activity in both traditional markets served and adjacent market applications.
The Steel Products and Measurement segment 2022 gross profit decreased by $4,784, or 28.9%, compared to the prior year due to the sale of the Piling Products business. Gross profit margin increased 110 basis points due to the sale of the less profitable Piling Products business.
The segment operating loss of $10,824, up $8,422 over last year, was driven by a goodwill impairment charge of $3,011 in the Fabricated Bridge business unit and the $5,005 impairment charge for intangible assets related to its Precision Measurement Products and Systems business based in Willis, TX.
For 2022, the Steel Products and Measurement segment had a $4,427, or 3.3%, decrease in new orders compared to the prior year period driven by a $59,288 decline in orders due to the sale of the Piling Products business, offset in part, by strong increases in orders in all of the other businesses. The segment’s backlog as of December 31, 2022 was $86,509, a 92.3% increase compared to the prior year end driven by all business units but primarily the Coatings and Measurement business unit.
24
Liquidity and Capital Resources
The Company’s principal sources of liquidity are its existing cash and cash equivalents, cash generated by operations, and the available capacity under its revolving credit facility, which provides for a total commitment of up to $130,000, of which $37,814 was available for borrowing as of December 31, 2022, subject to covenant restrictions. The Company’s primary needs for liquidity relate to working capital requirements for operations, capital expenditures, debt service obligations, payments related to the Union Pacific Railroad Settlement, tax obligations, outstanding purchase obligations, and acquisitions. The Company’s total debt, including finance leases, was $91,879 and $31,251 as of December 31, 2022 and December 31, 2021, respectively, and was primarily comprised of borrowings under its revolving credit facility.
The following table reflects available funding capacity as of December 31, 2022:
| December 31, 2022 | ||||||||||||||
| Cash and cash equivalents | $ | 2,882 | ||||||||||||
| Credit agreement: | ||||||||||||||
| Total availability under the credit agreement | $ | 130,000 | ||||||||||||
| Outstanding borrowings on revolving credit facility | (91,567) | |||||||||||||
| Letters of credit outstanding | (619) | |||||||||||||
| Net availability under the revolving credit facility | 37,814 | |||||||||||||
| Total available funding capacity | $ | 40,696 | ||||||||||||
The Company’s cash flows are impacted from period to period by fluctuations in working capital, as well as its overall profitability. While the Company places an emphasis on working capital management in its operations, factors such as its contract mix, commercial terms, days sales outstanding (“DSO”), and market conditions as well as seasonality may impact its working capital. The Company regularly assesses its receivables and contract assets for collectability and realization, and provides allowances for credit losses where appropriate. The Company believes that its reserves for credit losses are appropriate as of December 31, 2022, but adverse changes in the economic environment and adverse financial conditions of its customers resulting from, among other things, pandemics including COVID-19, may impact certain of its customers’ ability to access capital and compensate the Company for its products and services, as well as impact demand for its products and services.
The change in cash and cash equivalents for the years ended December 31, 2022 and 2021 were as follows:
| Year Ended December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Net cash used in continuing operating activities | $ | (10,576) | $ | (810) | ||||||||||
| Net cash (used in) provided by continuing investing activities | (56,418) | 17,822 | ||||||||||||
| Net cash provided by (used in) continuing financing activities | 60,240 | (13,904) | ||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (736) | (47) | ||||||||||||
| Net cash used in discontinued operations | — | (253) | ||||||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (7,490) | $ | 2,808 | ||||||||||
Cash Flows from Operating Activities
During the year ended December 31, 2022, net cash used in operating activities was $10,576, compared to $810 from continuing operations during the prior year. For the year ended December 31, 2022, net loss and adjustments to reconcile net loss from operating activities provided $15,246, compared to $16,745 in 2021. Working capital and other assets and liabilities used $25,822 in the current period compared to $17,555 during 2021, including payments of $8,000 in 2022 and 2021 related to the Union Pacific Railroad Concrete Tie Settlement.
The Company’s calculation of DSO was 48 days as of December 31, 2022 compared to 45 days as of December 31, 2021.
Cash Flows from Investing Activities
For the year ended December 31, 2022, the Company had capital expenditures of $7,633, a $3,013 increase from 2021. The expenditures were primarily related to plant expansions within our Precast segment, including those related to the second VanHooseCo operating location, implementations of the Company’s ERP system, and general plant and operational improvements throughout the Company. The capital expenditures during 2021 relate to plant expansions within our Precast segment, including expenditures related to the relocation of the Precast Boise facility in 2020, the implementations of the Company’s ERP system, and general plant and operational improvements throughout the Company. In 2022, the Company received cash proceeds of $8,800 primarily from the sale of its Track Components business. Cash used for investing activities for the year ended December 31, 2022 included cash paid of $57,852 for the acquisitions of VanHooseCo and Skratch in 2022. In 2021 the Company received cash proceeds of $22,707 from the sale of the Piling Products business.
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Cash Flows from Financing Activities
The Company increased its outstanding debt by $60,832 during the year ended December 31, 2022, primarily from the borrowings used to fund the acquisitions of Skratch and VanHooseCo. During the year ended December 31, 2021, the Company reduced outstanding debt by $13,735, primarily from the net proceeds from the sale of the Piling Products division. During the years ended December 31, 2022 and 2021, the Company paid financing fees of $182 and $406, respectively, related to its Credit Agreement (as defined below). For the years ended December 31, 2022 and 2021, the Company repurchased 27,636 and 45,288 shares of its stock, respectively, for $410 and $732, respectively, all of which were withheld from employees to pay their withholding taxes in connection with the vesting of stock awards.
Financial Condition
The Company used $10,576 from cash flows from operations during 2022, which was primarily utilized to fund working capital needs. As of December 31, 2022, the Company had $2,882 in cash and cash equivalents and $37,814 of availability under its revolving credit facility, subject to covenant restrictions.
Principal uses of cash in recent years have been to fund operations, including capital expenditures, and service indebtedness. The Company views its short and long-term liquidity as being dependent on its results of operations, changes in working capital, and borrowing capacity.
Non-domestic cash balances of $2,012 are held in various locations throughout the world. Should management determine that the cash balances of its foreign subsidiaries exceed its projected working capital needs, excess funds may be repatriated and subject to additional income taxes.
On August 13, 2021, the Company entered into the Fourth Amended and Restated Credit Agreement (as amended, modified and supplemented, the “Credit Agreement”). The Credit Agreement modifies the prior revolving credit facility, as amended, to provide more favorable terms to the Company and extends the maturity date from April 30, 2024 to August 13, 2026. The Credit Agreement provides for a five-year, revolving credit facility that permits aggregate borrowings of the Borrowers (as defined in the Credit Agreement) up to $130,000 (a $15,000 increase over the previous commitment) with a sublimit of the equivalent of $25,000 U.S. dollars that is available to the Canadian and United Kingdom borrowers in the aggregate. The Credit Agreement’s incremental loan feature permits the Company to increase the available commitments under the facility by up to an additional $50,000 subject to the Company’s receipt of increased commitments from existing or new lenders and the satisfaction of certain conditions. On August 12, 2022, the Company amended its Credit Agreement to obtain approval for the VanHooseCo acquisition and temporarily modify certain financial covenants to accommodate the transaction. The Second Amendment permitted the Company to acquire the operating assets of VanHooseCo and modified the maximum gross leverage ratio covenant through June 30, 2023 to accommodate the transaction. The Second Amendment also added an additional tier to the pricing grid and provided for the conversion from LIBOR-based to SOFR-based borrowings. For a discussion of the terms and availability of the credit facilities, please refer to Note 10 of the Notes to Consolidated Financial Statements contained in this Annual Report on Form 10-K. As of December 31, 2022, the Company was in compliance with the covenants in the Credit Agreement.
To reduce the impact of interest rate changes on outstanding variable-rate debt, the Company amended and entered into forward starting SOFR-based interest rate swaps with notional values totaling $20,000 and $20,000 effective August 12, 2022 and August 31, 2022, respectively, at which point they effectively converted a portion of the debt from variable to fixed-rate borrowings during the term of the swap contract. The Company also accounted for $50,000 of interest rate swaps that became effective February 2017 as cash flow hedges. During the year ended December 31, 2020, the Company dedesignated the cash flow hedges and now accounts for the $50,000 tranche of interest rate swaps on a mark-to-market basis with changes in fair value recorded in current period earnings. During February 2022, the $50,000 tranche of interest rate swaps expired. As of December 31, 2022 and December 31, 2021 the swap asset was $1,930 and $175, respectively. The swap liability was $159 as of December 31, 2021.
On August 1, 2022, the Company divested the assets of its rail spikes and anchors Track Components business located in St-Jean-sur-Richelieu, Quebec, Canada. Cash proceeds from the transaction were $7,795, subject to indemnification obligations and working capital adjustments, resulting in a pre-tax loss of $467. The Track Components business was reported in the Rail Products business unit within the Rail, Technologies, and Services segment. On September 24, 2021, the Company executed the sale of its Piling Products division for $23,902 in total proceeds, resulting in a pre-tax gain of $489. The Piling Products division was included in the Fabricated Steel business unit within the Steel Products and Measurement segment.
The Company believes that the combination of its cash and cash equivalents, cash generated from operations, and the capacity under its revolving credit facility will provide sufficient liquidity to provide the flexibility to operate the business in a prudent manner, continue to service outstanding debt, and to selectively pursue accretive acquisitions to further the Company’s strategic initiatives.
26
Backlog
Although backlog is not necessarily indicative of future operating results, the following table provides the backlog by business segment:
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Rail, Technologies, and Services | $ | 105,241 | $ | 96,573 | ||||||||||
| Precast Concrete Products | 80,501 | 68,636 | ||||||||||||
| Steel Products and Measurement | 86,509 | 44,980 | ||||||||||||
| Total backlog | $ | 272,251 | $ | 210,189 | ||||||||||
While a considerable portion of the Company’s business is backlog driven, certain businesses, including the Global Friction Management business unit, 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 U.S. 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.
Income Taxes - The recognition of deferred tax assets requires management to make judgments regarding the future realization of these assets. As prescribed by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“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 of the U.S. Indefinite reinvestment is determined by management’s judgment about and intentions concerning the future operations of the Company. There has been no material changes in the underlying assumptions and estimates used in these calculations in the relevant period.
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.
Revenue Recognition - We account for revenue in accordance with the 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
27
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 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 considerations, 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. There has been no material changes in the underlying assumptions and estimates used in these calculations in the relevant period.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 4 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 the estimation of 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. There has been no material changes in the underlying assumptions and estimates used in these calculations in the relevant period. 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 5 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. There has been no material changes in the underlying assumptions and estimates used in these calculations in the relevant period. 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.
Additional information concerning the impairments is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 5 to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 7.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not applicable to a smaller reporting company.
29
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
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, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, 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, 2022, 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 10, 2023 expressed an unqualified opinion thereon.
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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Revenue recognition – contract estimates | ||||||||
| Description of the Matter | As explained in Notes 1 and 4 to the consolidated financial statements, revenue is recognized when the Company satisfies its performance obligations under a contract. The Company’s performance obligations under long-term agreements with its customers are generally satisfied 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. For the year ended December 31, 2022, the Company recorded $67.1 million of over time input method revenue within net sales on its consolidated statement of operations. Accounting for these long-term agreements involves the use of various techniques to estimate total revenues and costs. 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 costs, sub-contractor costs, material costs, and total collections from the customer. Significant changes in the above estimates could impact the timing and amount of revenue and profitability of the Company’s long-term contracts. Auditing these estimates requires auditor judgment because of the significant management judgment necessary to develop the estimated assumptions at completion due to the size and identified risks for each contract. | |||||||
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of relevant internal controls over the Company’s process relating to the determination of estimates for long-term projects. For example, we evaluated the design and tested the operating effectiveness of controls over management’s review of the current status of long-term projects, accumulation of costs incurred, costs remaining to complete and total contract value. To test the total estimates for long term contracts, our audit procedures included, among others, obtaining an understanding of the contract, evaluating the consistency of estimated costs with the initial budget, and understanding margin changes throughout the life of the contract. We also performed a retrospective review of management’s estimates for a sample of completed contracts by comparing initial estimates with the actual historical data to assess management’s ability to estimate. | |||||||
| Valuation of goodwill for the Rail Technologies and Precast Concrete Products Reporting Units | ||||||||
| Description of the Matter | At December 31, 2022, the Company had $30.7 million of goodwill on its consolidated balance sheet. As more fully described in Notes 1 and 5 to the consolidated financial statements, during 2022, weakened economic conditions, unfavorable changes in foreign exchange rates, and recent increases in the cost of certain materials, labor, and other inflation-related pressures unfavorably impacted the financial results. Because of these challenging market conditions, the Company was required to perform a quantitative test of goodwill for these reporting units. Significant assumptions used in the Company’s fair value estimate included revenue growth, EBITDA contribution, and market participant assumptions. Auditing the goodwill test was complex, as it included estimating the fair value of the reporting units. In particular, the fair value estimates are sensitive to the significant assumptions named above, which are affected by expected future market or economic conditions. | |||||||
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company’s goodwill impairment review process, including controls over management’s review of the valuation model and the significant assumptions underlying the fair value determination, as described above. To test the fair value of the reporting unit, our audit procedures included, among others, involving our valuation specialists to assist in assessing the valuation methodologies utilized by the Company and its valuation expert and testing the significant assumptions and underlying data used by the Company. We compared the significant assumptions used by management to historical performance and other relevant factors. We performed sensitivity analyses of significant assumptions to evaluate the changes in fair values that would result from changes in the assumptions. We reviewed the reconciliation of the fair value of the reporting units to the market capitalization of the Company and assessed the resulting control premium. | |||||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1990
March 10, 2023
30
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Accounts receivable - net (Note 6) | ||||||||||||||
| Contract assets (Note 4) | ||||||||||||||
| Inventories - net (Note 7) | ||||||||||||||
| Other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant, and equipment - net (Note 8) | ||||||||||||||
| Operating lease right-of-use assets - net (Note 9) | ||||||||||||||
| Other assets: | ||||||||||||||
| Goodwill (Note 5) | ||||||||||||||
| Other intangibles - net (Note 5) | ||||||||||||||
| Deferred tax assets (Note 14) | ||||||||||||||
| Other assets | ||||||||||||||
| TOTAL ASSETS | $ | $ | ||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Deferred revenue (Note 4) | ||||||||||||||
| Accrued payroll and employee benefits | ||||||||||||||
| Current portion of accrued settlement (Note 18) | ||||||||||||||
| Current maturities of long-term debt (Note 10) | ||||||||||||||
| Other accrued liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt (Note 10) | ||||||||||||||
| Deferred tax liabilities (Note 14) | ||||||||||||||
| Long-term portion of accrued settlement (Note 18) | ||||||||||||||
| Long-term operating lease liabilities (Note 9) | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Stockholders’ equity: | ||||||||||||||
Common stock, par value $ | ||||||||||||||
| Paid-in capital | ||||||||||||||
| Retained earnings | ||||||||||||||
Treasury stock - at cost, common stock, shares at December 31, 2022 and December 31, 2021, | ( | ( | ||||||||||||
| Accumulated other comprehensive loss (Note 12) | ( | ( | ||||||||||||
| Total L.B. Foster Company stockholders’ equity | ||||||||||||||
| Noncontrolling interest | ||||||||||||||
| Total stockholders’ equity | ||||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
| Year Ended December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Sales of goods | $ | $ | ||||||||||||
| Sales of services | ||||||||||||||
| Total net sales (Note 4) | ||||||||||||||
| Cost of goods sold | ||||||||||||||
| Cost of services sold | ||||||||||||||
| Total cost of sales | ||||||||||||||
| Gross profit | ||||||||||||||
| Selling and administrative expenses | ||||||||||||||
| Amortization expense (Note 5) | ||||||||||||||
| Goodwill and long-lived assets impairment charges (Note 5) | ||||||||||||||
| Operating (loss) income | ( | |||||||||||||
| Interest expense - net | ||||||||||||||
| Other income - net (Note 19) | ( | ( | ||||||||||||
| (Loss) income before income taxes | ( | |||||||||||||
| Income tax expense (Note 14) | ||||||||||||||
| Net (loss) income | ( | |||||||||||||
| Net loss attributable to noncontrolling interest | ( | ( | ||||||||||||
| Net (loss) income attributable to L.B. Foster Company | ( | |||||||||||||
| Discontinued operations: | ||||||||||||||
| Income from discontinued operations before income taxes | ||||||||||||||
| Income tax expense (Note 14) | ||||||||||||||
| Income from discontinued operations | ||||||||||||||
| Net (loss) income attributable to L.B. Foster Company | $ | ( | $ | |||||||||||
| Basic (loss) earnings per common share: | ||||||||||||||
| From continuing operations | $ | ( | $ | |||||||||||
| From discontinued operations | ||||||||||||||
| Basic (loss) earnings per common share (Note 13) | $ | ( | $ | |||||||||||
| Diluted (loss) earnings per common share: | ||||||||||||||
| From continuing operations | $ | ( | $ | |||||||||||
| From discontinued operations | ||||||||||||||
| Diluted (loss) earnings per common share (Note 13) | $ | ( | $ | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
32
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
| Year Ended December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Net (loss) income from continuing operations | $ | ( | $ | |||||||||||
| Other comprehensive (loss) income, net of tax: | ||||||||||||||
| Foreign currency translation adjustment | ( | ( | ||||||||||||
Unrealized gain on cash flow hedges, net of tax expense of $ | ||||||||||||||
Cash flow hedges reclassified to earnings, net of tax expense of $ | ||||||||||||||
Pension and post-retirement benefit plans benefit, net of tax benefit of $ | ||||||||||||||
Reclassification of pension liability adjustments to earnings, net of tax expense of $ | ||||||||||||||
| Total comprehensive (loss) income from continuing operations | ( | |||||||||||||
| Less comprehensive loss attributable to noncontrolling interest: | ||||||||||||||
| Net loss attributable to noncontrolling interest | ( | ( | ||||||||||||
| Foreign currency translation adjustment | ( | |||||||||||||
| Amounts attributable to noncontrolling interest | ( | ( | ||||||||||||
| Comprehensive (loss) income from continuing operations attributable to L.B. Foster Company | $ | ( | $ | |||||||||||
* Reclassifications out of Accumulated other comprehensive loss for pension obligations are reflected in Selling and administrative expense.
The accompanying notes are an integral part of these Consolidated Financial Statements.
33
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Year Ended December 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||
| (Loss) income from continuing operations | $ | ( | $ | |||||||||||
| Adjustments to reconcile net (loss) income to cash (used in) provided by continuing operating activities: | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Depreciation | ||||||||||||||
| Amortization | ||||||||||||||
| Asset impairments | ||||||||||||||
| Equity income in nonconsolidated investment | ( | ( | ||||||||||||
| (Gain) loss on sales and disposals of property, plant, and equipment | ( | |||||||||||||
| Stock-based compensation | ||||||||||||||
| Loss (gain) on asset divestiture | ( | |||||||||||||
| Change in operating assets and liabilities: | ||||||||||||||
| Accounts receivable | ( | |||||||||||||
| Contract assets | ( | |||||||||||||
| Inventories | ( | ( | ||||||||||||
| Other current assets | ||||||||||||||
| Other noncurrent assets | ( | |||||||||||||
| Accounts payable | ( | |||||||||||||
| Deferred revenue | ||||||||||||||
| Accrued payroll and employee benefits | ||||||||||||||
| Accrued settlement | ( | ( | ||||||||||||
| Other current liabilities | ( | |||||||||||||
| Other liabilities | ( | |||||||||||||
| Net cash used in continuing operating activities | ( | ( | ||||||||||||
| Net cash used in discontinued operating activities | ( | |||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||
| Proceeds from the sale of property, plant, and equipment | ||||||||||||||
| Capital expenditures on property, plant, and equipment | ( | ( | ||||||||||||
| Acquisitions, net of cash acquired | ( | ( | ||||||||||||
| Proceeds from asset divestiture | ||||||||||||||
| Capital contributions to nonconsolidated investment | ( | |||||||||||||
| Net cash (used in) provided by continuing investing activities | ( | |||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||
| Repayments of debt | ( | ( | ||||||||||||
| Proceeds from debt | ||||||||||||||
| Debt issuance costs | ( | ( | ||||||||||||
| Treasury stock acquisitions | ( | ( | ||||||||||||
| Investment of noncontrolling interest | ||||||||||||||
| Net cash provided by (used in) continuing financing activities | ( | |||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | ||||||||||||
| Net (decrease) increase in cash and cash equivalents | ( | |||||||||||||
| Cash and cash equivalents at beginning of period | ||||||||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||
| Interest paid | $ | $ | ||||||||||||
| Income taxes (received) paid | $ | ( | $ | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
34
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
| Common Stock | Paid-in Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Noncontrolling Interest | Total | ||||||||||||||||||||||||||||||||||||||