SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☒||Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934|
For the fiscal year ended December 31, 2020
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 0-10436
L.B. FOSTER COMPANY
(Exact name of registrant as specified in its charter)
|(State of Incorporation)|| ||(I.R.S. Employer Identification No.)|
415 Holiday Drive, Suite 100, Pittsburgh, Pennsylvania
|(Address of principal executive offices)|| ||(Zip Code)|
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
|Title of Each Class||Trading Symbol(s)||Name of Each Exchange On Which Registered|
|Common Stock, Par Value $0.01||FSTR||NASDAQ Global Select Market|
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 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|| ||☐||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 $126,070,586.
As of February 24, 2021, there were 10,738,899 shares of the registrant’s common stock, par value $0.01 per share, outstanding.
Documents Incorporated by Reference:
Portions of the Definitive Proxy Statement for the 2021 Annual Meeting of Shareholders (“2021 Proxy Statement”) are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K. The 2021 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Form 10-K relates.
TABLE OF CONTENTS
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; a continued deterioration in the prices of oil and natural gas and the related impact on the upstream and midstream energy markets; a continuation or worsening of the adverse economic conditions in the markets we serve, whether as a result of the current COVID-19 pandemic, including its impact on travel and demand for oil and gas, the continued deterioration 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 COVID-19 pandemic; environmental matters, including any costs associated with any remediation and monitoring; the risk of doing business in international markets, including compliance with anti-corruption and bribery laws, foreign currency fluctuations and inflation, 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 disposition of the IOS Test and Inspection Services business and acquisition of LarKen Precast, LLC 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 effective implementation of an enterprise resource planning system; changes in current accounting estimates and their ultimate outcomes; the adequacy of internal and external sources of funds to meet financing needs, including our ability to negotiate any additional necessary amendments to our credit agreement or the terms of any new credit agreement, and reforms regarding the use of LIBOR as a benchmark for establishing applicable interest rates; the Company’s ability to manage its working capital requirements and indebtedness; domestic and international taxes, including estimates that may impact taxes; domestic and foreign government regulations, including tariffs; economic conditions and regulatory changes caused by the United Kingdom’s exit from the European Union; 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 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.
(Dollars in thousands, except share data unless otherwise noted)
ITEM 1. BUSINESS
Summary Description of Businesses
Formed in 1902, L.B. Foster Company is a Pennsylvania corporation with its principal office in Pittsburgh, PA. L.B. Foster Company provides products and services for the rail industry and solutions to support critical infrastructure projects. The Company’s innovative engineering and product development solutions inspire the safety, reliability, and performance of its customer’s challenging requirements. The Company maintains locations in North 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.
For the fourth quarter and year ended December 31, 2020, the Company realigned its operating segments under two senior business leaders to provide clear line of sight around the opportunities for growth and asset leverage in each of the two segments. L.B. Foster’s business portfolio and external business segment reporting structure will be consolidated into two primary segments: Rail Technologies and Services and Infrastructure Solutions. The Rail Technologies and Services segment will consist of businesses previously positioned within the Rail Products and Services segment. The Infrastructure Solutions segment will combine all businesses previously within the legacy Construction Products and Tubular and Energy Services segments. Each segment will report to a business line executive that will have responsibility for the segment’s performance.
The following table shows the net sales generated by each business segment as a percentage of total net sales for the years ended December 31, 2020, 2019, and 2018:
| ||Percentage of Net Sales|
|Rail Technologies and Services||56 ||%||52 ||%||55 ||%|
|Infrastructure Solutions||44 ||48 ||45 |
|100 ||%||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 industrial companies throughout the world. The Rail segment has sales offices throughout North America and Europe, and works on rail projects where it offers products manufactured by the Company, or sourced from numerous supply chain partners, and also offers aftermarket services. The Rail segment is comprised of the Rail Technologies and Rail Products business units.
The Company’s Rail Technologies business unit engineers, manufactures, and fabricates friction management products and application systems, railroad condition monitoring systems and equipment, wheel impact load detection systems, wayside data collection and management systems, and also provides aftermarket services. The Company’s friction management products control the friction at the rail/wheel interface and help 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. Friction management products include mobile and wayside systems that apply lubricants and liquid or solid friction modifiers. In addition, the business unit provides controls, display, and telecommunication solutions for the transit, control room, and customer information and display sectors. These products and systems are designed, engineered, manufactured, fabricated, serviced, and marketed by certain wholly-owned subsidiaries located in the United States (“U.S.”), Canada, the United Kingdom (“U.K.”), and Germany.
The Rail Products business is comprised of the Company’s Rail Distribution, Allegheny Rail Products, Transit Products, Track Components, 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, and 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.
Track Components - The Track Components division manufactures track spikes and anchors at the Company’s facility in St. Jean Richelieu, Quebec.
Concrete Ties - This division manufactures engineered concrete railroad ties for freight and passenger railroads and industrial accounts at its facility in Spokane, WA.
The Infrastructure Solutions segment is comprised of several manufacturing, distribution, and service businesses that provide a variety of products and services for the transportation, energy, and general infrastructure markets, primarily in North America. The Infrastructure Solutions segment is composed of the Precast Concrete Products, Fabricated Steel Products, and Coatings and Measurement business units.
Precast Concrete Products
The Precast Concrete Products business unit primarily manufactures concrete buildings for national, state, and municipal parks. This business unit manufactures restrooms, concession stands, and other protective storage buildings available in multiple designs, textures, and colors. The Company is a leading high-end supplier in terms of volume, product options, and capabilities. This business unit also manufactures various other precast products such as sounds walls, burial vaults, bridge beams, box culverts, septic tanks, and other custom pre-stressed and precast concrete products. The products are manufactured in Boise, ID, Hillsboro, TX, and Waverly, WV. The Company commenced precast product operations at its new facility located in Boise, ID, in the first quarter of 2020. This move is part of an initiative focusing on regional growth opportunities and logistical savings associated with fabricating products in a more centralized location closer to the Company’s existing and prospective customer base.
Fabricated Steel Products
The Fabricated Steel Products business unit provides fabricated bridge products and piling to infrastructure end markets. The Fabricated Steel Products business unit, via a sales force deployed throughout the United States, markets and sells products both domestically and internationally. Following are summaries of those product offerings:
Fabricated Bridge Products - The fabricated bridge products facility in Bedford, PA manufactures a number of fabricated steel and aluminum products primarily for the highway, bridge, and transit industries, including concrete reinforced steel grid deck, open steel grid deck, aluminum bridge railing, and stay-in-place steel bridge forms.
Piling Products - Sheet piling products are interlocking structural steel sections that are generally used to provide lateral support at construction sites. Bearing piling products are steel H-beam sections which are driven into the ground for support of structures such as bridge piers and high-rise buildings. Piling is often used in water and land applications, including cellular cofferdams and OPEN CELL® structures in inland river systems and ports.
Piling products are sourced from various manufacturers and either sold or rented to project owners and contractors. This business unit offers its customers various types and dimensions of structural beam piling, sheet piling, and pipe piling. The Company is a preferred distributor of domestic PZC steel sheet piling for its primary supplier.
Coatings and Measurement
The Coatings and Measurement business unit provides protective coating services, threaded pipe, 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 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 is located in Willis, TX. The Willis, TX facility applies specialty outside and inside diameter coatings for a wide variety of pipe diameters for oil and gas transmission, mining, and waste water pipelines, as well as provides custom coatings for specialty pipe fittings and connections.
Threaded Products - 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.
Precision Measurement Products and Systems - The Company manufactures and provides turnkey solutions for metering and injection systems 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 Technologies and Services directly in all major industrial areas of the United States, Canada, and Europe. Infrastructure Solutions is primarily marketed domestically. The Company employs a sales force of approximately 89 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 2020, 2019, and 2018, approximately 20%, 20%, and 24%, respectively, of the Company’s total sales were outside the United States.
The major markets for the Company’s products are highly competitive. Product availability, quality, service, and price are principal factors of competition within each of these markets. No other company provides the same product mix to the various markets the Company serves. However, there are one or more companies that compete with the Company in each product line. Therefore, the Company faces significant competition from different groups of companies.
Raw Materials and Supplies
Most of the Company’s products are purchased in the form of finished or semi-finished products. The Company purchases the majority of its supplies from domestic and foreign steel producers. Generally, the Company has a number of vendor options. However, the Company has an arrangement with a steel mill to distribute steel sheet piling in North America. Should sheet piling from its present supplier not be available for any reason, the Company risks not being able to provide such product to its customers.
The Company’s purchases from foreign suppliers are subject to foreign currency exchange rate changes and the usual risks associated with changes in international conditions, as well as United States and international laws that could impose import restrictions on selected classes of products and for anti-dumping duties if products are sold in the United States at prices that are below specified prices.
The Company’s backlog represents the sales price of received customer purchase orders or contracts in which the performance obligations have not been met, and 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. The backlog as of December 31, 2020 and 2019 by business segment was as follows:
| ||December 31,|
|Rail Technologies and Services||$||121,231 ||$||103,694 |
|Infrastructure Solutions||127,001 ||125,338 |
|Total ||$||248,232 ||$||229,032 |
Approximately 13.4% of the December 31, 2020 backlog was related to projects that is expected to extend beyond 2021.
Patents and Trademarks
The Company owns a number of domestic and international patents and trademarks, primarily related to its Rail Technologies products. 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.
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 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, Equity, 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 is committed to
employing and advancing 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 developed 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.
Health and Safety
L.B. Foster promotes 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 is committed to meet or exceed the requirements of all applicable environmental, health and safety (“EHS”) regulations as the Company raises its standards of excellence. Among its core values are safety, teamwork, and innovation, which the Company will rely on 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 11 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.
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 process of 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.
The proactive planning and implementation of action steps towards our employees’ career goals. Developmental experiences can consist of training, developing, mentoring, and coaching.
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.
An ongoing process of communication between a supervisor and an employee that occurs throughout the year, in support of accomplishing the strategic objectives of the organization.
As of December 31, 2020, the Company had approximately 1,130 employees, 774 located within the United States, 71 within Canada, and 285 in Europe. There were 624 hourly production workers and 506 salaried employees. Of the hourly production workers, approximately 92 were represented by unions.
Three collective bargaining agreements covering approximately 34, 29, and 29 employees are scheduled to expire in March 2025, August 2021, and September 2021, respectively. As a result of the Company’s relocation of the concrete products operations from Spokane, WA to Boise, ID, a separation agreement was executed with the collective bargaining unit representing the employees affected by this relocation. This agreement had no impact on the employees under the same collective bargaining agreement at the concrete tie operation in Spokane, WA. The Company has not suffered any major work stoppages during the past five years and considers its relations with its employees to be satisfactory.
All of the Company’s hourly paid employees are covered by one of the Company’s defined benefit plans or defined contribution plans. All of the Company’s salaried employees are similarly covered by one of the Company’s defined benefit 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.
The Company makes certain filings with the Securities and Exchange Commission (“SEC”), including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments and exhibits to those reports, available free of charge through its website, www.lbfoster.com, as soon as reasonably practicable after they are filed with the SEC. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. These filings, including the Company’s filings, are available at the SEC’s internet site at www.sec.gov. The Company’s press releases and recent investor presentations are also available on its website.
Executive Officers of the Registrant
Information concerning the executive officers of the Company is set forth below:
|Robert P. Bauer||62||President and Chief Executive Officer|
|Patrick J. Guinee||51||Senior Vice President, General Counsel, and Secretary|
|John F. Kasel||55||Senior Vice President and Chief Operating Officer|
|Brian H. Kelly||61||Senior Vice President - Human Resources and Administration|
|James M. Kempton||46||Corporate Controller and Principal Accounting Officer|
|Gregory W. Lippard||52||Senior Vice President - Rail Technologies and Services|
|William M. Thalman||54||Senior Vice President and Chief Financial Officer|
|William F. Treacy||61||Senior Vice President - Infrastructure Solutions|
Mr. Bauer was elected President and Chief Executive Officer upon joining the Company in 2012. Prior to joining the Company, beginning in 2011, Mr. Bauer served as President of the Refrigeration Division of the Climate Technologies business of Emerson Electric Company, a diversified global manufacturing and technology company. From 2002 until 2011, Mr. Bauer served as President of Emerson Network Power’s Liebert Division.
Mr. Guinee serves as Senior Vice President, General Counsel, and Secretary and was elected Vice President, General Counsel, and Secretary in 2014. Prior to joining the Company, Mr. Guinee served as Vice President - Securities 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. Kasel was elected Senior Vice President and Chief Operating Officer in December 2019, having previously served as Senior Vice President - Rail and Construction since 2017, 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. Kempton was appointed Corporate Controller and Principal Accounting Officer of the Company in February 2020. Prior to joining the Company, Mr. Kempton served as Executive Vice President and Chief Financial Officer of Caliburn International from August 2018 to January 2020. He was previously employed by Michael Baker International from October 2013 to August 2018, last serving as Executive Vice President and Chief Financial Officer. From January 2007 to October 2013, Mr. Kempton was employed by Michael Baker Corporation most recently as Vice President, Corporate Controller, and Treasurer from April 2009 to October 2013. Prior to Michael Baker, he worked at Ernst & Young, LLP from October 1997 to January 2007, as an engagement senior manager.
Mr. Lippard serves as Senior Vice President - Rail Technologies and Services, and was previously Vice President - Rail Technologies and Services from November 2020 to February 2021, Vice President - Rail from January 2020 to November 2020 and Vice President - Rail Products from September 2017 to December 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. 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., most recently serving as Vice President - Advanced Material Solutions since 2016 and Vice President - Transformation Office since 2019, prior to which 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. Prior to Kennametal, Mr. Thalman was employed by Wesco, Inc., from 2002 to 2004 as Corporate Controller, and by The Carbide/Graphite
Group, Inc. as Vice President and Treasurer and Manager of External Reporting and Investor Relations from 1993 to 2002. He also worked in public accounting at Coopers & Lybrand (now PriceWaterhouseCoopers) from 1988 to 1993.
Mr. Treacy serves as Senior Vice President - Infrastructure Solutions, and was previously Vice President - Infrastructure Solutions from November 2020 to February 2021, Vice President - Tubular and Energy Services from September 2017 to November 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
We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could have a material and adverse effect on our business, financial condition, and results of operations. The following risks highlight what we believe to be the more material factors that have affected us and could affect us in the future. We have grouped the risk factors into six categories for ease of reading, and without any reflection on the importance of, or likelihood of, any particular category. We may also be affected by unknown risks or risks that we currently believe 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 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.
The COVID-19 pandemic could continue to adversely affect our business.
The COVID-19 pandemic is adversely affecting, and is expected to continue to 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. While COVID-19 has adversely affected each of the markets we serve, the impact on the upstream and midstream energy markets has been particularly adverse, and has contributed to deteriorating prices of oil and natural gas, weakened demand, and reduced customer spending. We expect these adverse market conditions, particularly in the oil and gas markets, to continue, noting that in 2020, the Company exited its upstream Test and Inspection Services business, reducing its overall exposure to oil and gas market volatility, but its Coatings and Measurement businesses remain. In the rail, transit, friction management, and fabricated steel products businesses, governmental stay-at-home and work-from-home orders both 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. While the majority of our employees have generally been permitted to continue to work because our businesses are regarded as essential, U.S. and non-domestic governmental pandemic mitigation measures such as stay-at-home orders have slowed travel and movement of goods throughout the world, contributing to reduction in demand for our products and services. 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.
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, actions which involve a number of inherent risks and uncertainties. Material acquisitions, dispositions, and other strategic transactions involve numerous risks, including, but not limited to:
•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, depressed 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.
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 2020, and certain other divisions may be transitioned during 2021 and in subsequent years. The system implementation is intended to enable us to better meet the information requirements of our users, increase our integration efficiencies, and identify additional synergies in the future. The implementation of our ERP system is complex because of the wide range of processes and systems to be integrated across our business. Any disruptions, delays, or deficiencies in the design, operation, or implementation of our various systems, or in the performance of our systems, particularly any disruptions, delays, or deficiencies that impact our operations, could adversely affect our ability to effectively run and manage our business, including our ability to receive, process, ship, and bill for orders in a timely manner or our ability to properly manage our inventory or accurately present our inventory availability or pricing. Project delays, business interruptions, or loss of expected benefits could have a material and adverse effect on our business, financial condition, or results of operations.
We are subject to cybersecurity risks and may incur increasing costs in an effort to minimize those risks.
Our business employs systems and websites that allow for the storage and transmission of proprietary or confidential information regarding our customers, employees, job applicants, and other parties, including financial information, intellectual property, and personal identification information. Security breaches and other disruptions could compromise our information, expose us to liability, and harm our reputation and business. 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, we believe that it will not result in a material adverse effect on our business operations, though our investigation is ongoing. 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. In addition, our Piling division is predominantly dependent upon one supplier for sheet piling while our Protective Coatings division is predominately dependent on two suppliers of epoxy coating. A significant downturn in the business of one or more of these suppliers, a disruption in their manufacturing operations, an unwillingness to continue to sell to us, or a disruption in the availability of existing and new piling, 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 Concrete Ties and Precast Concrete Products businesses. No assurances can be given that our financial results would not be adversely affected if prices or availability of these materials were to change in a significantly unfavorable manner.
Labor disputes may have a material and adverse effect on our operations and profitability.
Three of our manufacturing facilities are staffed by employees represented by labor unions. Approximately 92 employees employed at these facilities are currently working under three separate collective bargaining agreements. Disputes with regard to the terms of these agreements or our potential inability to renegotiate acceptable contracts with these unions could result in, among other things, strikes, work stoppages, slowdowns, or lockouts, which could cause a disruption of our operations and have a material and adverse effect on our results of operations, financial condition, and liquidity.
Actions of activist shareholders could be disruptive and potentially costly and the possibility that activist shareholders may seek changes that conflict with our strategic direction could cause uncertainty about the strategic direction of our business.
In February 2016, the Company entered into an agreement with an activist investor, Legion Partners Asset Management, LLC and certain of its affiliates (collectively, “Legion Partners”), which had acquired a greater than 10% stake in our common stock. This agreement expired by its terms on February 13, 2018, and Legion Partners remains a greater than 5% owner of Company stock.
Activist investors may attempt to effect changes in the Company’s strategic direction and how the Company is governed, or to acquire control over the Company. Some investors seek to increase short-term shareholder value by advocating corporate actions, such as financial restructuring, increased borrowing, special dividends, stock repurchases, or even sales of assets or the entire company. While the Company welcomes varying opinions from all shareholders, activist campaigns that contest or conflict with our strategic direction could have an adverse effect on the Company’s results of operations and financial condition, as responding to proxy contests and other actions by activist shareholders can disrupt our operations, be costly and time-consuming, and divert the attention of the Company’s board and senior management from the pursuit of business strategies. In addition, perceived uncertainties as to our future direction as a result of changes to the composition of our Board may lead to the perception of a change in the direction of the business, instability or lack of continuity, which may be exploited by our competitors, may cause concern to our current or potential customers, may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel and business partners. These types of actions could cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
Our success is highly dependent on the continued service and availability of qualified personnel.
Much of our future success depends on the continued availability and service of key personnel, including our Chief Executive Officer, the executive team, and other highly skilled employees. Changes in demographics, training requirements, and the availability of qualified personnel could negatively affect our ability to compete and lead to a reduction in our profitability.
We may not foresee or be able to control certain events that could adversely affect our business.
Unexpected events, including fires or explosions at our facilities, natural disasters, 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 in 2020 and 2021 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.
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 intellectual property including proprietary rail product formulations and systems and component designs, and we own a number of patents and trademarks under the intellectual property laws of the United States, 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 could impede growth into new markets where we do not have such protections and result in a greater supply of similar products in such markets, which in turn could result in a loss of pricing power and reduced revenue. 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.
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. No impairments of goodwill or intangible assets were recorded in 2020, 2019, or 2018. Impairment charges were recorded on long-lived assets related to 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 refinancings or asset dispositions could be effected on a timely basis or on satisfactory terms, if at all, particularly if credit market conditions deteriorate. Furthermore, there can be no assurance that refinancings or asset dispositions would be permitted by the terms of our credit agreements or debt instruments. Our existing credit agreements contain, and any future debt agreements we may enter into may contain, certain financial tests and other covenants that limit our ability to incur indebtedness, acquire other businesses, and 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.
Certain portions of our variable rate debt, including our revolving credit facility, currently uses LIBOR as a benchmark for establishing the interest rate. The SEC staff has stated that “[i]t is expected that a number of private-sector banks currently reporting information used to set LIBOR will stop doing so after 2021 when their current reporting commitment ends, which could either cause LIBOR to stop publication immediately or cause LIBOR’s regulator to determine that its quality has degraded to the degree that it is no longer representative of its underlying market.” The consequences of this and other developments with respect to LIBOR cannot be entirely predicted but may result in an increase in the interest cost of our variable rate debt.
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. Item 3 - Legal Proceedings and 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, for additional discussion related to relating to legal proceedings and compliance risks
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.
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 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 United States 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. 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.
A portion of our sales are derived from our international operations, which expose us to certain risks inherent in doing business on an international level.
Doing business outside the United States subjects the Company to various risks, including changing economic and political conditions, work stoppages, exchange controls, currency fluctuations, armed conflicts, and unexpected changes in U.S. and foreign laws relating to tariffs, trade restrictions, transportation regulations, foreign investments, and taxation. Increasing sales to foreign countries, including 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 terms of this new relationship between the U.K. and the E.U. remains subject to uncertainties. There has been volatility in 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%, 9%, and 11% of our total revenue for the years ended December 31, 2020, 2019, and 2018, respectively. During the years ended December 31, 2020, 2019, and 2018, 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
ITEM 2. PROPERTIES
The location and general description of the principal properties that are owned or leased by L.B. Foster Company, together with the segment of the Company’s business using such properties, are set forth in the following table:
|Location||Function||Acres||Business Segment||Lease Expiration|
|Bedford, PA||Bridge component fabricating plant||16||Infrastructure Solutions||Owned|
|Birmingham, AL||Protective coatings facility||32||Infrastructure Solutions||2022|
|Burnaby, BC, Canada||Friction management products plant||N/A||Rail Technologies and Services||2021|
|Columbia City, IN||Rail processing facility and yard storage||22||Rail Technologies and Services||Owned|
|Hillsboro, TX||Precast concrete facility||9||Infrastructure Solutions||Owned|
|Magnolia, TX||Threading facility||34||Infrastructure Solutions||Owned|
|Nampa, ID||Precast concrete facility||12||Infrastructure Solutions||2029|
|Niles, OH||Rail fabrication, friction management products, and yard storage||35||Rail Technologies and Services||Owned|
|Petersburg, VA||Piling storage facility||35||Infrastructure Solutions||Owned|
|Pueblo, CO||Rail joint manufacturing facility||9||Rail Technologies and Services||Owned|
|Saint-Jean-sur-Richelieu, QC, Canada||Rail anchors and track spikes manufacturing plant||17||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||2020|
|Waverly, WV||Precast concrete facility||85||Infrastructure Solutions||Owned|
|Willis, TX||Protective coatings facility||16||Infrastructure Solutions||Owned|
|Willis, TX||Measurement services facility||13||Infrastructure Solutions||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 22 warehouses, plants, and yard facilities located throughout the United States, Canada, and Europe. The Company’s facilities are in good condition and suitable for the Company’s business as currently conducted and as currently planned to be conducted.
ITEM 3. LEGAL PROCEEDINGS
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.
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 299 common shareholders of record on February 24, 2021. 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. Common stock is traded on the NASDAQ Global Select Market under the symbol: FSTR.
During 2020, 2019, and 2018 the Company did not declare any quarterly dividends.
The Company’s April 30, 2019 credit facility, and 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 facility agreement) has occurred prior to or after giving effect to the dividend, distribution, or redemption.
(In whole dollars)
The Company’s 2020 peer group (“2020 Peer Group”), which is compromised of companies that we believe have comparable characteristics and are in the same industry or line-of-business, consists of Alamo Group, Inc., Ampco-Pittsburgh Corporation, CIRCOR International, Inc., Columbus McKinnon Corporation, Gibraltar Industries, Inc., Hawkins, Inc., Haynes International, Inc., Houston Wire & Cable Company, Insteel Industries Inc., Lindsay Corporation, Lydall Inc., Manitex International, Inc., NN Inc., Orion Group Holdings, Inc., Quanex Building Products Corporation, Raven Industries Inc., Sterling Construction Co. Inc., and The Gorman-Rupp Company.
The following tables compare total shareholder returns for the Company over the last five years to the NASDAQ Composite Index and the 2020 Peer Group assuming a $100 investment made on December 31, 2015. Each of the three measures of cumulative total return assumes reinvestment of dividends. The stock performance shown on the graph below is not necessarily indicative of future price performance.
|L.B. Foster Company||$||100.00 ||$||100.46 ||$||200.54 ||$||117.44 ||$||143.15 ||$||111.17 |
|NASDAQ Composite||100.00 ||108.87 ||141.13 ||137.12 ||187.44 ||271.64 |
|2020 Peer Group||100.00 ||141.27 ||148.26 ||114.93 ||144.37 ||159.67 |
Securities Authorized for Issuance Under Equity Compensation Plans
Under the 2006 Omnibus Incentive Plan, from May 2006 through May 2017, non-employee directors were automatically awarded fully-vested shares of the Company’s common stock as determined by the Board of Directors (“Board”) at each annual shareholder meeting at which such non-employee director is elected or re-elected. Since May 2018, the non-employee directors have received annual awards of forfeitable restricted shares subject to a one-year vesting requirement. During 2020, pursuant to the 2006 Omnibus Incentive Plan, the Company issued approximately 50,000 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, in addition to the annual restricted stock award, those non-employee directors serving on the Board Strategy Committee have been awarded restricted shares on an annual basis subject to a one-year vesting requirement. During 2020, 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, 2020, there were approximately 216,000 fully vested shares issued under the 2006 Omnibus Incentive Plan to non-employee directors. During the quarter ended June 30, 2017, the Nomination and Governance Committee and Board of Directors jointly approved the Deferred Compensation Plan for Non-Employee Directors under the 2006 Omnibus Incentive Plan, which permits non-employee directors of the Company to defer receipt of earned cash and/or stock compensation for service on the Board. As of December 31, 2020, approximately 66,000 deferred share units were allotted to the accounts of non-employee directors pursuant to the Deferred Compensation Plan for Non-Employee Directors.
The Company grants eligible employees restricted stock and performance unit awards under the 2006 Incentive Omnibus Plan. The forfeitable restricted stock awards granted prior to March 2015 generally time-vest after a four-year period, and those granted after March 2015 generally time-vest ratably over a three-year period, unless indicated otherwise in the underlying restricted stock award agreement. Performance unit awards are offered annually under separate three-year long-term incentive programs. Performance units are subject to forfeiture and will be converted into common stock of the Company based upon the Company’s performance relative to performance measures and conversion multiples as defined in the underlying program.
With respect to awards made prior to December 31, 2016, the Company will withhold or employees may tender shares of restricted stock when issued to pay for withholding taxes. Since 2017, the Company has withheld shares of restricted stock for satisfaction of tax withholding obligations. During 2020, 2019, and 2018, the Company withheld 95,285, 34,198, and 11,445 shares, respectively, for this purpose. The values of the shares withheld were $1,665, $621, and $316 in 2020, 2019, and 2018, respectively.
Issuer Purchases of Equity Securities
The Company’s purchases of equity securities for the three months ended December 31, 2020 were as follows:
|Total number of shares purchased (1)||Average price paid per share||Total number of shares purchased as part of publicly announced plans or programs||Approximate dollar value of shares that may yet be purchased under the plans or programs|
|October 1, 2020 - October 31, 2020||356 ||$||13.98 ||— ||$||— |
|November 1, 2020 - November 30, 2020||— ||— ||— ||— |
|December 1, 2020 - December 31, 2020||— ||— ||— ||— |
|Total||356 ||$||19.67 ||— ||$||— |
1.Reflects shares withheld by the Company to pay taxes upon vesting of restricted stock.
ITEM 6. SELECTED FINANCIAL DATA
Omitted pursuant to amendments to Item 301 of Regulation S-K effective February 10, 2021.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except share data unless otherwise noted)
Executive Level Overview
2020 Developments and 2021 Outlook
During 2020, the Company:
•Produced net sales of $497,411, a decrease of $119,017, or 19.3% from 2019;
•Increased backlog(a) by 8.4% over the prior year end to $248,232, despite new orders(a) decreasing by 16.3%;
•Generated net income from continuing operations of $25,823, or $2.42 per diluted share;
•Divested the IOS Test and Inspection Services business from the Infrastructure Solutions segment, resulting in the recognition of an income tax benefit of $15,840 in continuing operations;
•Reported adjusted EBITDA(b) (earnings before interest, taxes, depreciation, amortization, and certain expenses) of $31,993;
•Effectively managed working capital levels, resulting in $20,549 of net cash provided by operating activities;
•Reduced borrowings by $13,114, or 22.6%, to $45,024, resulting in net debt(b) of $37,460;
•Successfully implemented cost containment programs, including in response to the COVID-19 pandemic, resulting in $8,880 decline year over year in selling and administrative expense;
•Amended the Company’s credit agreement, resulting in the termination of its term loan outstanding of $22,500 and a decrease in the maximum capacity of its revolver from $140,000 to $115,000 as of December 31, 2020;
•Continued operations during the COVID-19 pandemic while minimizing any business interruptions and addressing safety concerns of our employees and customers through implementation of our Pandemic Action Plan which includes measures such as enhanced disinfecting, temperature screenings, social distancing, telework, wearing masks, limiting access to facilities to only essential third parties, and adhering to travel and quarantine recommendations issued by the U.S. Centers for Disease Control and various national, state, provincial, and local departments of health where our facilities are located.
•Completed the relocation of the CXT Concrete Buildings facility from Spokane, WA to Boise, ID; and
•Realigned the Company’s operating segments under two senior business leaders to provide clear line of sight around the opportunities for growth and asset leverage in each of the two segments.
(a) The Company defines new orders as a contractual agreement between the Company and a third-party in which the Company will, or has the ability to, satisfy the performance obligations of the promised products or services under the terms of the agreement. The Company defines backlog as contractual commitments to customers for which the Company’s performance obligations have not been met, including with respect to new orders and contracts for which the Company has not begun any performance. Management utilizes new orders and backlog to evaluate the health of the industries in which the Company operates, the Company’s current and future results of operations and financial prospects, and strategies for business development. The Company believes that new orders and backlog are useful to investors as supplemental metrics by which to measure the Company’s current performance and prospective results of operations and financial performance. The Company defines its book-to-bill ratio as new orders divided by revenue. Management uses the book-to-bill key performance indicator as a monitoring metric for the levels of backlog a business unit is building (greater than 1.0) or consuming (less than 1.0), which may provide management and investors an indication of current market activity.
(b) The following tables display reconciliations of non-GAAP financial measures for the years ended December 31, 2020, 2019, and 2018. 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 EBITDA enhances investors’ ability to compare historical periods as it adjusts for the impact of financing methods, tax law and strategy changes, and depreciation and amortization. In addition, EBITDA is a financial measurement that management and the Company’s Board of Directors use in their financial and operational decision-making and in the determination of certain compensation programs. Adjusted EBITDA includes certain adjustments to EBITDA. In 2020, the Company made adjustments to exclude the impact of relocation and restructuring costs and the proceeds from an unconsolidated partnership. In 2019, the Company made adjustments to exclude the U.S. defined benefit plan settlements, costs associated with relocation and closure activities, including nonoperational start-up costs related to the Boise, ID facility. 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 and debt to the non-GAAP financial measures are presented below.
|Year Ended December 31,|
|Adjusted EBITDA Reconciliation|
|Income from continuing operations||$||25,823 ||$||47,974 |
|Interest expense, net||3,761 ||4,911 |
|Income tax benefit||(11,841)||(23,835)|
|Depreciation||7,850 ||7,944 |
|Amortization||5,729 ||6,445 |
|Total EBITDA from continuing operations||31,322 ||43,439 |
|Relocation and restructuring costs||2,545 ||1,768 |
|Proceeds from unconsolidated partnership||(1,874)||— |
|U.S. pension settlement expense||— ||2,210 |
|Adjusted EBITDA from continuing operations||$||31,993 ||$||47,417 |
|December 31,||September 30,||December 31,|
|Net Debt Reconciliation|
|Total debt||$||45,024 ||$||49,104 ||$||58,152 |
|Less: cash and cash equivalents||(7,564)||(9,311)||(14,178)|
|Net debt||$||37,460 ||$||39,793 ||$||43,974 |
As a result of the ongoing pandemic, the Company has continued to experience disruptions in supply chains, delays in deliveries to customers, and customer unwillingness to have the Company’s employees work on site where safe distance measures are difficult to follow, as well as general weakness in demand as certain travel and work restrictions continued to be in place in most areas. Most notably, the collapse in oil demand associated with reduced travel resulting from the COVID-19 pandemic, which led to a significant drop in demand for certain products and services offered by our Infrastructure Solutions segment, has persisted. In the rail, transit, friction management, steel construction, and fabricated bridge businesses governmental stay-at-home and work-from-home orders both 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 pandemic mitigation efforts, adversely impacting our business. The Company anticipates continued disruption at least through the first half of 2021 as various restrictive measures have remained in effect in the major markets we serve. The Company has experienced minimal disruption with its on-premise workforce up to this point, and the Company expects to continue to operate under its pandemic protocols with minimal changes.
The Company’s strong balance sheet should continue to allow the Company to effectively manage operations through the current environment and remain a leading provider of products and services to the global infrastructure markets. During the fourth quarter of 2020, the Company reduced its net debt to $37,460 as of December 31, 2020 from $39,793 as of September 30, 2020, a reduction of $2,333. The Company’s total available funding capacity was $76,838 as of December 31, 2020.
In the fourth quarter of 2020, the Company realigned its operating segments under two senior business leaders to provide clear line of sight around the opportunities for growth and asset leverage in each of the two segments. The Rail Technologies and Services, consisting of businesses previously reported in the former Rail Products and Services segment, reflects the Company’s current focus on serving transit and freight railway operators and related infrastructure. The Company has been evolving from a track components supplier to one that has been introducing solutions that deliver greater benefits to operating efficiency, reducing disruption and improving safety through the deployment of more advanced technology in its solutions. Services have become a greater part of the Company’s offerings as end users look to the Company for expertise in managing more sophisticated systems often coupled with these new technologies. The former Construction Products segment and former Tubular and Energy segment were realigned into the Infrastructure Solutions operating segment, as these businesses collectively provide a variety of products and services for infrastructure markets to support the efficient transportation of people, goods, commodities, and for general civil works, primarily in the United States. Engineering and construction firms and general contractors seek assistance from the Company for design and application engineering help when addressing needs across highway, bridge, ports, railways, heavy civil, marine, water and storm water, agricultural, commercial, and residential projects. The Company’s expertise in fabricated steel, precast concrete, measurement systems and corrosion protection coupled with competencies around managing large complex projects results in custom solutions for each project. Within the product offerings, there is a significant overlap of infrastructure markets, including water, transportation, energy, chemical and fabrication infrastructure markets.
The fourth quarter has historically seen a decline in activity for the Company, but the current year was more severe as sales for the fourth quarter of 2020 declined by 18.2% when compared to the prior year quarter. This contributed to a year-over-year sales decline of 19.3%. Along with the sales decline in the current year, both the Rail Technologies and Services and Infrastructure Solutions segments reported reduced order activity during 2020, as compared to 2019, primarily as a result of the COVID-19 pandemic. However, new order activity did outpace revenue volume for the year, which we consider a favorable indicator for the Company. The book-to-bill ratio for the Rail segment was 1.08 for 2020, which drove the year-over-year increase in backlog of $17,537, or 16.9%. This increase highlights the ongoing spending in the infrastructure markets served by the Rail segment despite pockets of weakness associated with rail and transit traffic volume and transportation related projects and services due to the pandemic. Infrastructure Solutions backlog increased by $1,663 or 1.3% from the prior year despite a $27,643 decline in the Coatings and Measurement business unit, which principally serves the midstream energy markets. The energy market continues to have an unfavorable outlook and the industry expects significant difficulties in funding ongoing development activity that requires the Company’s services. As such, the Company has experienced continued weakness in new order activity in the businesses serving the energy market and is forecasting sales to decline significantly year-over-year for its Coatings and Measurement business unit in 2021.
Despite the significant decrease in revenue year-over-year, and the significant challenges experienced by the midstream energy market focused businesses in 2020, the Company was able to generate a gross margin of 19.1%, a 50 basis point decline from 2019, with the Rail segment reflecting a 20 basis point increase year-over-year to 20.0%. In addition, the Company decreased its selling, general and administrative costs to $73,644, a 10.8% decline from 2019, partially due to cost reduction actions taken during the year. As a result, the Company was able to generate income before taxes from continuing operations of $13,982 in 2020, and after the impact of the tax benefits generated in the IOS Test and Inspection Services divestiture, the Company produced net income from continuing operations of $25,823, or $2.42 per diluted share.
The Rail segment is anticipating further recovery in Rail Technologies, although continued pandemic-related lockdowns in the U.K. may hamper such recovery in the near term. Rail Products bookings were strong in the fourth quarter of 2020, reflecting a $15,064 increase over the third quarter of 2020. As the Company monitors the budget shortfalls incurred by transit operators, projects associated with long-term planning have been moving forward. However, the Company is not expecting a notable improvement in the sales of consumable products until passenger and freight volumes improve.
The 1.3% increase in the Infrastructure Solutions segment backlog as compared to December 31, 2019 resulted from increases in the Fabricated Steel Products and Precast Concrete Products business units. The Fabricated Steel Products division experienced substantial year-over-year increases in backlog of $22,276 as a result of securing several key projects during the year. In particular, the backlog for bridge decking is expected to continue to result in production rates at near capacity levels in 2021. The Precast Concrete Products division continues to benefit from new infrastructure projects in the regions it serves, which is reflected in a year-over-year backlog increase of $7,030. While this business often depends on municipal, state, and federal spending that may experience budget pressures, these programs could benefit from continued government spending on infrastructure and economic stimulus efforts related to civil construction projects. Offsetting these increases in the Infrastructure Solutions segment was the reduction in the Coatings and Measurement division’s backlog, which fell by $27,643 from December 31, 2019. This decline is primarily due to Coatings and Measurement’s exposure to the midstream energy market, and the associated weakness in demand for oil in 2020. New orders for Coatings and Measurement reached its lowest point in the fourth quarter of 2020 at $6,057. Current project inquiries lead the Company to believe that the first half of 2021 will improve modestly from this level.
Since the middle of 2019, the upstream energy markets that the Company served have deteriorated as prices of oil and natural gas declined due to weakening demand. This deterioration accelerated as a result of the global COVID-19 pandemic and the associated reduction in demand due to reduced travel and movement of goods throughout the world. As U.S. exploration and production companies have reduced production and implemented spending cuts, demand for much of what the Company did in its upstream oil and gas test and inspection business (“Test and Inspection Services”) had sharply declined. Consequently, the Company did not see a path to earning acceptable returns for the Test and Inspections Services business. As a result, on September 4, 2020, the Company completed the sale of the issued and outstanding membership interests of its Test and Inspection Services business. Proceeds from the sale were $4,000 and resulted in a loss of $10,034, net of tax. As a result of the sale of this business, the Company recognized an aggregate of $18,978 in tax benefits, including tax benefits recognized in discontinued operations, for the year ended December 31, 2020. In addition, the Company anticipates receiving approximately $9,008 in tax refunds within the next year due to extended carryback provisions in the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (“CARES Act”), and the acceleration of existing deferred tax assets related to the sale. The sale represents a strategic shift away from providing services to the upstream oil and gas market. The Company believes that this divestiture also changes the risk profile of the Company by: (a) eliminating dependence on the upstream energy market and the liability associated with serving upstream applications; (b) reducing exposure to a volatile industry that can turn off demand quickly under poor conditions; and (c) avoiding the price and production cyclicality of the global oil market. On a prospective basis, the Company’s Coatings and Measurement business will continue to be focused on core competencies around corrosion protection and measurement systems in midstream pipeline applications, where the market has been much less volatile and tends to have longer term investments and associated backlog compared to upstream activities. The Company has reflected the results of operations of the Test and Inspection Services business as discontinued operations in the Consolidated Financial Statements and recast the Infrastructure Solutions segment results for all periods presented.
In October 2020, during the COVID-19 pandemic, the Company was the subject of a cyber-attack (the “Cybersecurity Event”). Upon becoming aware of the Cybersecurity Event, the Company immediately notified federal law enforcement, acted quickly to take its systems offline, and began assessing the nature of the attack, all as part of its comprehensive response. The Company was able to act quickly to restore normal operations with no material operational, financial, or other impact to the Company. The Company maintains a cyber insurance policy that assisted with risk mitigation of the Cybersecurity Event and any potential future events. As part of the Company’s response, it has implemented enhanced cybersecurity measures across its network. The investigation of the Cybersecurity Event is ongoing with assistance from external cybersecurity, forensics, and legal experts and advisors, and the Company will make any and all appropriate regulatory filings and disclosures once the investigation is complete. While the investigation is ongoing, the Company does not expect any adverse impact on its operations, financial results or performance, or reputation.
Year-to-date Results Comparison
Results of Operations
|Year Ended December 31,||Percent|
|Percent of Total Net Sales|
Year Ended December 31,
|2020||2019||2020 vs. 2019||2020||2019|
|Rail Technologies and Services||$||276,447 ||$||321,808 ||(14.1)||%||55.6 ||%||52.2 ||%|
|Infrastructure Solutions||220,964 ||294,620 ||(25.0)||44.4 ||47.8 |
|Total net sales||$||497,411 ||$||616,428 ||(19.3)||%||100.0 ||%||100.0 ||%|
|Year Ended December 31,||Percent|
|Gross Profit Percentage|
Year Ended December 31,
|2020||2019||2020 vs. 2019||2020||2019|
|Rail Technologies and Services||$||55,263 ||$||63,667 ||(13.2)||%||20.0 ||%||19.8 ||%|
|Infrastructure Solutions||39,743 ||57,271 ||(30.6)||18.0 ||19.4 |
|Total gross profit||$||95,006 ||$||120,938 ||(21.4)||%||19.1 ||%||19.6 ||%|
|Year Ended December 31,||Percent|
|Percent of Total Net Sales|
Year Ended December 31,
|2020||2019||2020 vs. 2019||2020||2019|
|Selling and administrative expenses||$||73,644 ||$||82,524 ||(10.8)||%||14.8 ||%||13.4 ||%|
|Amortization expense||5,729 ||6,445 ||(11.1)||1.2 ||1.0 |
|Interest expense - net||3,761 ||4,911 ||(23.4)||0.8 ||0.8 |
|Other (income) expense - net||(2,110)||2,919 ||(172.3)||(0.4)||0.5 |
|Income from continuing operations before income taxes||$||13,982 ||$||24,139 ||(42.1)||%||2.8 ||%||3.9 ||%|
|Income tax benefit||(11,841)||(23,835)||50.3 ||(2.4)||(3.9)|
|Income from continuing operations||$||25,823 ||$||47,974 ||(46.2)||%||5.2 ||%||7.8 ||%|
Fiscal 2020 Compared to Fiscal 2019 — Company Analysis
Net sales of $497,411 for the year ended December 31, 2020 decreased by $119,017, or 19.3%, compared to the prior year. Both of the reporting segments contributed to the decrease, with Infrastructure Solutions decreasing by 25.0% and Rail Technologies and Services decreasing by 14.1% from the prior year. The sales decline was primarily attributable to the circumstances around the COVID-19 pandemic, resulting in reduced demand in each of the business units within the segments and most severely impacting the Coatings and Measurement business unit, which principally serves the midstream energy market, within the Infrastructure Solutions segment.
Gross profit decreased by $25,932 from the prior year to $95,006 for 2020. This decrease was attributable to both of the segments, with Infrastructure Solutions decreasing by $17,528 and Rail Technologies and Services decreasing by $8,404. Along with the decrease in gross profit, gross profit margin for 2020 was 19.1%, or 50 basis points (“bps”) lower than the prior year. The decrease in the current year margin was due to the Infrastructure Solutions segment, which was impacted by decreased sales volume, primarily
within the Coatings and Measurement business unit, that outpaced decreases in expense. The 2020 gross profit margin decline was partially offset by a 20 bps increase in the Rail Technologies and Services segment.
Selling and administrative expenses decreased by $8,880, or 10.8%, from the prior year. The decrease was primarily attributable to decreases in personnel related expenses of $7,149 from the prior year, including a $2,019 decrease in stock-based compensation expense, and a reduction in third-party services of $2,116 compared to the prior year. These decreases were partially offset by an increase in bad debt expense of $441 when compared to the prior year. As a result of the suppressed sales levels in 2020, selling and administrative expenses increased by 140 bps as a percentage of net sales as compared to the prior year.
For the year ended December 31, 2020, the Company recorded expense of $673 related to relocation and closure activities and income of $1,874 from an unconsolidated partnership distribution recorded in “Other (income) expense - net.” Interest expense, net of interest income, for the year ended December 31, 2020 was reduced by $1,150 as a result of the $13,114 reduction in outstanding debt.
The Company’s effective income tax rate for 2020 was (84.7)%, compared to (98.7)% in the prior year period. The Company’s income tax benefit from continuing operations for 2020 included a discrete income tax benefit of $15,840, net of valuation allowance, related to the disposition of the Test and Inspection Services business. During 2019, the Company reversed $29,648 of its valuation allowance previously recorded against U.S. deferred tax assets. The positive evidence considered in evaluating U.S. deferred tax assets included cumulative financial income over the three-year period ended December 31, 2020, as well as the composition and reversal patterns of existing taxable and deductible temporary differences between financial reporting and tax. Based on our evaluation, the Company believed it was appropriate to rely on forecasted future taxable income to support its U.S. deferred tax assets. The amount of deferred tax assets considered to be realizable, however, could be adjusted if negative evidence outweighs additional subjective evidence such as our projections for growth.
Net income from continuing operations for the year ended December 31, 2020 was $25,823, or $2.42 per diluted share, compared to net income from continuing operations for the 2019 period of $47,974, or $4.51 per diluted share.
Results of Operations — Segment Analysis
Rail Technologies and Services
|2020||2019||2020 vs. 2019||2020 vs. 2019|
|Net Sales||$||276,447 ||$||321,808 ||$||(45,361)||(14.1)||%|
|Gross Profit||$||55,263 ||$||63,667 ||$||(8,404)||(13.2)||%|
|Gross Profit Percentage||20.0 ||%||19.8 ||%||0.2 ||%||1.0 ||%|
|Segment Profit||$||16,321 ||$||19,641 ||$||(3,320)||(16.9)||%|
|Segment Profit Percentage||5.9 ||%||6.1 ||%||(0.2)||%||(3.3)||%|
Rail Technologies and Services segment sales decreased by $45,361, or 14.1%, compared to the prior year. The sales decline was driven almost equally by our Rail Products and Rail Technologies business units, which experienced year-over-year declines of $21,882, or 10.5%, and $23,479, or 20.7%, respectively. The decreases were due primarily to impacts experienced as a result of the pandemic, including: reductions in demand for North American transit projects and friction management consumable products and services as freight and transit rail customer traffic declined, as well as reduced activity levels on the London Crossrail project in the U.K., as the project nears its completion and continues to experience temporary work stoppages due to stay-at-home orders implemented.
Segment gross profit decreased by $8,404, or 13.2%, which was driven by decreases in sales volumes across the segment. The Rail segment gross profit margin increased by 20 bps over the prior year, which is attributable to management’s cost control measures as well as a more favorable product mix of higher margin offerings, especially within the Rail Products business unit. The Rail segment profit for 2020 was $16,321, a segment profit margin of 5.9%, compared to $19,641, and a margin of 6.1% for 2019.
During 2020, the new orders within the Rail Technologies and Services segment decreased by 10.7% when compared to the prior year. Each of the business units within the segment had decreases in new orders compared to 2019, which were primarily related to declines in order activity for global transit projects, friction management consumables, and on-track services. Despite the decline in new orders, backlog increased by 16.9% compared to the prior year, ending 2020 at $121,231, which illustrates expected future spending in markets served despite challenges faced in the current year.
On September 4, 2020, we sold our Test and Inspection Service business to an unrelated third party buyer. Proceeds from the sale were $4,000 and resulted in a loss of $10,034 net of tax. The sale represents a strategic shift away from providing services to the upstream oil and gas market. We believe that this divestiture also changes the risk profile of our Company by (a) eliminating dependence on the upstream energy market and the liability associated with serving upstream applications; (b) reducing exposure to a volatile industry that can turn off demand quickly under poor conditions; and (c) avoiding the price and production cyclicality of the global oil market. On a prospective basis, our Coatings and Measurement businesses will continue to be focused on core competencies
around corrosion protection and measurement systems in midstream pipeline applications, where the market has been much less volatile and tends to have longer term investments and associated backlog compared to upstream activities. We have reflected the results of operations of the Test and Inspection Services business as discontinued operations in our Consolidated Financial Statements and recast the segment results for all periods presented.
|2020||2019||2020 vs. 2019||2020 vs. 2019|
|Net Sales||$||220,964 ||$||294,620 ||$||(73,656)||(25.0)||%|
|Gross Profit||$||39,743 ||$||57,271 ||$||(17,528)||(30.6)||%|
|Gross Profit Percentage||18.0 ||%||19.4 ||%||(1.5)||%||(7.5)||%|
|Segment Profit||$||8,250 ||$||23,615 ||$||(15,365)||(65.1)||%|
|Segment Profit Percentage||3.7 ||%||8.0 ||%||(4.3)||%||(53.4)||%|
The Infrastructure Solutions segment sales decreased by $73,656, or 25.0%, compared to the prior year, which was attributable to each of the business units within the segment. Coatings and Measurement experienced a sales decrease of 35.6%, primarily due to the pandemic-related deteriorated oil and gas market conditions in addition to already weakened demand for crude oil. The Fabricated Steel Products sales decrease of 25.1% was primarily driven by the completion of the Port Everglades project in 2019 without a comparably sized project in 2020. The Precast Concrete Products sales decline of 7.5% was primarily attributable to down time as a result of the move to the new precast concrete facility in Boise, ID.
The Infrastructure Solutions segment gross profit decreased by $17,528, or 30.6%, compared to the prior year. The gross profit decrease was primarily due to depressed sales volume within the segment and plant inefficiencies during the production ramp-up of the new precast concrete facility in Boise, ID. The aforementioned items also contributed to a 150 bps reduction in gross profit margin for the segment. The segment profit of $8,250 decreased by $15,365 compared to the prior year to 3.7% of net sales. Included within segment profit for 2020 and 2019 are relocation and closure costs of $673 and $1,768, respectively, related to our closure of the Spokane, WA concrete building facility and subsequent relocation of operations to Boise, ID, which was completed during the first quarter of 2020. This relocation is part of an initiative to focus on regional growth opportunities and logistical savings associated with a more centralized location closer to the Company’s existing and prospective customer base.
For 2020, the Infrastructure Solutions segment had a 22.5% decrease in new orders compared to the prior year period. This decrease was primarily attributable to the Coatings and Measurement business unit. The segment’s backlog as of December 31, 2020 was $127,001, a 1.3% increase compared to the prior year end.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash and cash equivalents, cash generated by operations, and the available capacity under our revolving credit facility, which provides for a total commitment of up to $115,000, of which $69,274 was available for borrowing as of December 31, 2020. Our 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, and outstanding purchase obligations. Our total debt was $45,024 and $58,152 as of December 31, 2020 and December 31, 2019, respectively, and was primarily comprised of borrowings under our revolving credit facility.
The following table reflects our available funding capacity as of December 31, 2020:
|December 31, 2020|
|Cash and cash equivalents||$||7,564 |
|Total availability under the credit agreement||$||115,000 |
|Outstanding borrowings on revolving credit facility||(44,777)|
|Letters of credit outstanding||(949)|
|Net availability under the revolving credit facility||69,274 |
|Total available funding capacity||$||76,838 |
Our cash flows are impacted from period to period by fluctuations in working capital. While we place an emphasis on working capital management in our operations, factors such as our contract mix, commercial terms, days sales outstanding (“DSO”), and market conditions as well as seasonality may impact our working capital. We regularly assess our receivables for collectability, and provide allowances for doubtful accounts where appropriate. We believe that our reserves for doubtful accounts are appropriate as of December 31, 2020, but adverse changes in the economic environment, including further deterioration of demand for crude oil and natural gas in the energy markets, and adverse financial conditions of our customers resulting from, among other things, the COVID-19 pandemic, may impact certain of our customers’ ability to access capital and compensate us for our products and services, as well as impact demand for our products and services.
The change in cash and cash equivalents for the years ended December 31, 2020, 2019, and 2018 were as follows:
|Year Ended December 31,|
|Net cash provided by continuing operating activities||$||20,549 ||$||26,242 ||$||26,536 |
|Net cash (used in) provided by continuing investing activities||(10,319)||(5,096)||3,761 |
|Net cash used in continuing financing activities||(15,277)||(18,209)||(55,337)|
|Effect of exchange rate changes on cash and cash equivalents||(195)||525 ||(308)|
|Net cash (used in) provided by discontinued operations||(1,372)||434 ||(2,048)|
|Net (decrease) increase in cash and cash equivalents||$||(6,614)||$||3,896 ||$||(27,396)|
Cash Flows from Operating Activities
During the year ended December 31, 2020, net cash provided by operating activities was $20,549, compared to $26,242 during the prior year period. For the year ended December 31, 2020, income and adjustments to income from continuing operating activities provided $36,521, compared to $37,216 in 2019. Working capital and other assets and liabilities, used $15,972 in the current period compared to $10,974 during 2019, including payments of $8,000 and $10,000, in 2020 and 2019, respectively, related to the Union Pacific Railroad Concrete Tie Settlement.
The Company’s calculation of days sales outstanding was 51 days as of December 31, 2020 compared to 49 days as of December 31, 2019. We believe our receivables portfolio is strong.
Cash Flows from Investing Activities
For the year ended December 31, 2020, the Company had capital expenditures of $9,179, a $3,153 increase from 2019. The current year expenditures were primarily related to plant expansions and a plant relocation within our Infrastructure Solutions segment, the purchase of a continuous welded rail car and unloader within our Rail Technologies and Services segment, and general plant and operational improvements throughout the Company. The capital expenditures during 2019 related to a plant expansion within our Infrastructure Solutions segment, progress payments towards the purchase of a continuous welded rail car and unloader within our Rail Technologies and Services segment, and general plant and operational improvements. The Company received proceeds of $16 from the sale of assets during the year ended December 31, 2020, compared to $930 in 2019. The prior year proceeds were primarily attributable to the sale of land and improvements in Castle Rock, CO. Cash used in investing activities for 2020 also includes cash paid of $1,156 for the asset acquisition of LarKen Precast, LLC in Boise, Idaho to expand our precast concrete offerings in that region.
Cash Flows from Financing Activities
The Company reduced its outstanding debt by $13,114 during the year ended December 31, 2020, primarily from operational cash flows, net proceeds from the sale of the Test and Inspection Services business, and excess international cash repatriation. During the year ended December 31, 2019, the Company reduced outstanding debt by $2,584, primarily utilizing proceeds from operational cash flows and the sale of non-core assets. During the years ended December 31, 2020 and 2019, the Company paid financing fees of $498 and $836, respectively, related to its amended credit facility agreements. For the years ended December 31, 2020 and 2019, the Company repurchased 95,285 and 34,198 shares of its stock, respectively, for $1,665 and $621, respectively. These shares were withheld from employees to pay their withholding taxes in connection with the vesting of stock awards.
The Company generated $20,549 from cash flows from operations during 2020, which was primarily utilized to make payments against our outstanding debt and to fund capital expenditures. As of December 31, 2020, we had $7,564 in cash and cash equivalents and $69,274 of availability under our revolving credit facility.
Our principal uses of cash in recent years have been to fund our operations, including capital expenditures, and to service our indebtedness. We view our short and long-term liquidity as being dependent on our results of operations, changes in working capital and our borrowing capacity. As of December 31, 2020, our current ratio, which we define as current assets divided by current liabilities, was 2.05.
Non-domestic cash balances of $6,995 are held in various locations throughout the world. Management determined that should the cash balances of our Canadian and U.K. subsidiaries exceed our projected working capital needs, excess funds will be repatriated. The Company repatriated $5,387 of excess cash during 2020.
On June 26, 2020, we entered into an amendment to our credit agreement (as amended, “First Amendment”) that reduced the total commitments under the revolving credit facility to $120,000 from $140,000. The First Amendment requires additional $5,000 annual reductions to the revolving credit facility capacity beginning on December 31, 2020 through the maturity of the facility on April 30, 2024. As a result, the revolving credit facility has $115,000 of total capacity as of December 31, 2020. In addition, the First Amendment terminated the existing term loan by drawing on the revolving credit facility. Borrowings under the First Amendment continue to bear interest rates based upon either the base rate or Euro-rate plus applicable margins. However, the First Amendment increased the applicable margins on the interest rates, and implemented an interest rate floor of 100 basis points. The First Amendment
also modified the covenants associated with the credit agreement. For a discussion of the terms and availability of the Company’s credit facilities, please see Part II, Item 8, Financial Statements and Supplementary Data, Note 10 of the Notes to Consolidated Financial Statements contained in this Annual Report on Form 10-K.
As of December 31, 2020, the Company was in compliance with the covenants in the Amended Credit Agreement.
To reduce the impact of interest rate changes on outstanding variable-rate debt, the Company entered into forward starting LIBOR-based interest rate swaps with notional values totaling $50,000. The swaps became effective on February 28, 2017 at which point they effectively converted a portion of the debt from variable to fixed-rate borrowings during the term of the swap contract. As of December 31, 2020 and December 31, 2019, the swap liability was $1,097 and $480, respectively. The Company continues to monitor the impact of the dissolution of LIBOR and its effect on our LIBOR-based interest rate swaps.
On September 4, 2020, the Company sold its Test and Inspection Services business for gross proceeds of $4,000. As a result of this divestiture, the Company has reclassified the results of this business into discontinued operations. Due to the sale of this business, the Company recognized approximately $18,978 in tax benefits, including tax benefits recognized in discontinued operations, for the year ended December 31, 2020. In addition, the Company anticipates receiving approximately $9,008 in tax refunds within the next year due to extended carryback provisions in the CARES Act and the acceleration of existing deferred tax assets related to the sale. For additional information regarding the Test and Inspection Services sale, please refer to Note 3 of the Notes to Consolidated Financial Statements contained in this Annual Report on Form 10-K.
We believe that the combination of our cash and cash equivalents, cash generated from operations and the capacity under our revolving credit facility will provide us with sufficient liquidity to provide the flexibility to operate the business in a prudent manner, enable us to continue to service our outstanding debt and to selectively pursue accretive bolt-on acquisitions to augment our core service offerings.
Although backlog is not necessarily indicative of future operating results, the following table provides the backlog by business segment:
| ||December 31,|
|Rail Technologies and Services||$||121,231 ||$||103,694 ||$||97,447 |
|Infrastructure Solutions||127,001 ||125,338 ||120,681 |
|Total backlog ||$||248,232 ||$||229,032 ||$||218,128 |
While a considerable portion of our business is backlog driven, certain businesses, including the Rail Technologies 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 United States. The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. The following critical accounting policies, which are reviewed by the Company’s Audit Committee of the Board of Directors, relate to the Company’s more significant estimates and judgments used in the preparation of its consolidated financial statements. Actual results could differ from those estimates.
For a summary of the Company’s significant accounting policies, see Part II, Item 8, Financial Statements and Supplementary Data, Note 1 to the Consolidated Financial Statements, which is incorporated by reference into this Item 7.
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 United States. 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 total labor costs, depending upon which measure the Company believes best depicts the Company’s performance to date under the terms of the contract. A certain portion of the Company’s revenue recognized over time under these long-term agreements is recognized using an output method, specifically units delivered, based upon certain customer acceptance and delivery requirements. Contract assets from over time contracts are recorded in “Inventories - net” 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 3 to the Consolidated Financial Statements, which is incorporated by reference into this Item 7.
Goodwill - Goodwill is the cost of an acquisition less the fair value of the identifiable net assets of the acquired business. Goodwill is required to be tested for impairment at least annually. The Company performs its annual impairment test in the fourth quarter, or whenever events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
The Company may first consider qualitative factors to assess whether there are indicators that it is more likely than not that the fair value of a reporting unit may not exceed its carrying amount. The quantitative goodwill impairment analysis involves comparing the fair value of a reporting unit to its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss equal to the excess amount up to the goodwill balance is recorded as an impairment to goodwill of the reporting unit. The Company uses a combination of a discounted cash flow method and a market approach to determine the fair values of the reporting units.
A number of significant assumptions and estimates are involved in 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 4 to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 7.
Intangible Assets and Long-Lived Assets - The Company tests intangible assets and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted future cash flows of the asset or asset group to their carrying amount. If the carrying value of the assets exceeds their estimated undiscounted future cash flows, an impairment loss would be determined as the difference between the fair value of the assets and its carrying value. Typically, the fair value of the assets would be determined using a discounted cash flow model which would be sensitive to judgments of what constitutes an asset group and certain assumptions such as estimated future financial performance, discount rates, and other assumptions that marketplace participants would use in their estimates of fair value. 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 4 to the Consolidated Financial Statements included herein, which is incorporated by reference into this Item 7.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Dollars in thousands)
Interest Rate Risk
In the ordinary course of business, the Company is exposed to interest rate risks that may adversely affect funding costs associated with its variable-rate debt. To reduce the impact of interest rate changes on a portion of this variable-rate debt, the Company entered into forward starting interest rate swap agreements, which effectively convert a portion of the debt from a variable to a fixed-rate borrowing during the term of the swap contracts. See Part II, Item 8, Financial Statements and Supplementary Data, Note 18, to the Consolidated Financial Statements included herein, for additional information.
For the year ended December 31, 2020, a 1% change in the interest rate for variable rate debt would have increased or decreased interest expense by approximately $905.
The Company does not purchase or hold any derivative financial instruments for trading purposes. At contract inception, the Company designates its derivative instruments as hedges. The Company recognizes all derivative instruments on the balance sheet at fair value. Fluctuations in the fair values of derivative instruments designated as cash flow hedges are recorded in accumulated other comprehensive income and reclassified into earnings within other income as the underlying hedged items affect earnings. To the extent that a change in a derivative does not perfectly offset the change in value of the interest rate being hedged, the ineffective portion is recognized in earnings immediately.
The Company has entered into three forward starting LIBOR-based interest rate swap agreements with notional values totaling $50,000. At December 31, 2020 and 2019, the interest rate swap liability was $1,097 and $480, respectively.
Foreign Currency Exchange Rate Risk
The Company is subject to exposures to changes in foreign currency exchange rates. The Company may manage its exposure to changes in foreign currency exchange rates on firm sale and purchase commitments by entering into foreign currency forward contracts. The Company’s risk management objective is to reduce its exposure to the effects of changes in exchange rates on these transactions over the duration of the transactions. The Company did not engage in foreign currency hedging transactions during the three-year period ended December 31, 2020.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of L.B. Foster Company and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of L.B. Foster Company and Subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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 3, 2021 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 to complete|
|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. 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 productivity, cost and availability of materials, and timing of funding by customers. 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 subjective auditor judgment because of the significant management judgment necessary to develop the estimated total project costs and labor costs 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 and costs remaining to complete.
To test the total estimates to complete for contracts, our audit procedures included, among others, obtaining an understanding of the contract, evaluating the consistency of estimated costs with the initial budget, and comparing the composition of costs to date with the composition of the costs in the estimates to complete for a sample of contracts. We also performed a retrospective review of management’s cost estimates for a sample of completed contracts by comparing initial estimates with the actual historical data to assess management’s ability to estimate.
|Income Tax – valuation allowances on deferred tax assets|
|Description of the Matter|
As explained in Notes 1 and 14 to the consolidated financial statements, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. The Company makes judgments regarding the future realization of deferred tax assets and a valuation allowance must be provided for those assets which it is more likely than not (a likelihood of more than 50%) that some portion or all of the assets will not be realized. The Company evaluates positive and negative evidence regarding the recoverability of deferred tax assets. The determination of whether the positive evidence outweighs the negative evidence and the quantification of the valuation allowance requires the Company to make estimates and judgments of future financial results. At December 31, 2020, the Company had total deferred tax assets of $47.1 million, net of $1.5 million of valuation allowances.
Auditing the Company’s assertion that it was more likely than not that the deferred tax assets would be realized and the related measurement of the valuation allowance was complex due to the highly judgmental nature of the projections of future sources and amounts of taxable income, which rely on significant assumptions, such as the timing of future reversals of existing temporary differences, assessing the impact of tax planning strategies, and making projections of future taxable income. Certain of these significant assumptions are forward looking and could be materially affected by 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 controls over the Company’s process to assess the realizability of the deferred tax assets and measurement of the valuation allowances, including controls over management’s review of the significant assumptions described above.|
To test the realizability of the deferred tax assets and measurement of the valuation allowances, our audit procedures included, among others, evaluating the methodologies used, the significant assumptions for each type of evidence discussed above, and testing the completeness and accuracy of the underlying data used by the Company in its analysis. For example, as part of our evaluation of management’s significant assumptions, we involved our tax professionals to assist in our evaluation of the relevant tax laws and regulations in the various jurisdictions, including considering whether the estimated future sources of taxable income were of the appropriate character to utilize the deferred tax assets in the relevant time period. We evaluated the cumulative income or loss positions of the Company’s various jurisdictions, assessed management’s model of estimated future reversals of existing temporary differences and evaluated the Company’s forecasts of future profits for the purposes of assessing the reasonableness of the Company’s estimated future taxable income. We also compared the forecast of future taxable income with other forecasted financial information prepared by the Company and performed sensitivity analyses of the significant assumptions to evaluate the changes in realizability of deferred tax assets that would result from changes in the assumptions. In addition, we evaluated the Company’s income tax disclosures related to the matters described above.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1990
March 3, 2021
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
|Cash and cash equivalents||$||7,564 ||$||14,178 |
|Accounts receivable - net (Note 6)||58,298 ||73,616 |
|Inventories - net (Note 7)||116,460 ||118,461 |
|Other current assets||12,997 ||4,101 |
|Current assets of discontinued operations (Note 3)||— ||6,308 |
|Total current assets||195,319 ||216,664 |
|Property, plant, and equipment - net (Note 8)||62,085 ||60,435 |
|Operating lease right-of-use assets - net (Note 9)||16,069 ||11,280 |
|Goodwill (Note 5)||20,340 ||19,565 |
|Other intangibles - net (Note 5)||36,897 ||42,113 |
|Deferred tax assets (Note 14)||38,481 ||19,522 |
|Other assets||1,204 ||1,119 |
|Other assets of discontinued operations (Note 3)||— ||34,473 |
|TOTAL ASSETS||$||370,395 ||$||405,171 |
|LIABILITIES AND STOCKHOLDERS’ EQUITY|
|Accounts payable ||$||54,787 ||$||63,029 |
|Deferred revenue (Note 4)||7,144 ||8,446 |
|Accrued payroll and employee benefits||9,182 ||13,194 |
|Current portion of accrued settlement (Note 18)||8,000 ||8,000 |
|Current maturities of long-term debt (Note 10)||119 ||2,877 |
|Other accrued liabilities||15,740 ||15,560 |
|Current liabilities of discontinued operations (Note 3)||330 ||5,638 |
|Total current liabilities||95,302 ||116,744 |
|Long-term debt (Note 10)||44,905 ||55,275 |
|Deferred tax liabilities (Note 14)||4,085 ||4,751 |
|Long-term portion of accrued settlement (Note 18)||24,000 ||32,000 |
|Long-term operating lease liabilities (Note 9)||13,516 ||9,012 |
|Other long-term liabilities||11,757 ||11,916 |
|Long-term liabilities of discontinued operations (Note 3)||— ||5,611 |
Common stock, par value $0.01, authorized 20,000,000 shares; shares issued at December 31, 2020 and December 31, 2019, 11,115,779; shares outstanding at December 31, 2020 and December 31, 2019, 10,563,290 and 10,422,091, respectively (Note 11)
|111 ||111 |
|Paid-in capital||44,583 ||49,204 |
|Retained earnings||165,107 ||157,525 |
Treasury stock - at cost, common stock, shares at December 31, 2020 and December 31, 2019, 552,489 and 693,688, respectively (Note 11)
|Accumulated other comprehensive loss (Note 12)||(20,268)||(20,183)|
|Total stockholders’ equity||176,830 ||169,862 |
|TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY||$||370,395 ||$||405,171 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
|Year Ended December 31,|
|Sales of goods||$||421,307 ||$||505,200 ||$||459,694 |
|Sales of services||76,104 ||111,228 ||121,370 |
|Total net sales||497,411 ||616,428 ||581,064 |
|Cost of goods sold||344,306 ||414,461 ||378,398 |
|Cost of services sold||58,099 ||81,029 ||89,198 |
|Total cost of sales||402,405 ||495,490 ||467,596 |
|Gross profit||95,006 ||120,938 ||113,468 |
|Selling and administrative expenses||73,644 ||82,524 ||82,745 |
|Amortization expense (Note 4)||5,729 ||6,445 ||6,966 |
|Concrete Tie Settlement expense (Note 18)||— ||— ||43,400 |
|Interest expense - net||3,761 ||4,911 ||6,134 |
|Other (income) expense - net (Note 19)||(2,110)||2,919 ||(1,208)|
|Income (loss) from continuing operations before income taxes||13,982 ||24,139 ||(24,569)|
|Income tax (benefit) expense||(11,841)||(23,835)||6,017 |
|Income (loss) from continuing operations||25,823 ||47,974 ||(30,586)|
|Loss from discontinued operations before income taxes||(23,979)||(6,742)||(2,142)|
|Income tax benefit||(5,738)||(1,336)||(1,560)|
|Loss from discontinued operations (Note 3)||(18,241)||(5,406)||(582)|
|Net income (loss)||$||7,582 ||$||42,568 ||$||(31,168)|
|Basic earnings (loss) per common share:|
|From continuing operations||$||2.45 ||$||4.61 ||$||(2.95)|
|From discontinued operations||(1.73)||(0.52)||(0.06)|
|Basic earnings (loss) per common share||$||0.72 ||$||4.09 ||$||(3.01)|
|Diluted earnings (loss) per common share:|
|From continuing operations||$||2.42 ||$||4.51 ||$||(2.95)|
|From discontinued operations||(1.71)||(0.51)||(0.06)|
|Diluted earnings (loss) per common share (Note 13)||$||0.71 ||$||4.00 ||$||(3.01)|
The accompanying notes are an integral part of these Consolidated Financial Statements.
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|Year Ended December 31,|
|Net income (loss)||$||25,823 ||$||47,974 ||$||(30,586)|
|Other comprehensive (loss) income, net of tax:|
|Foreign currency translation adjustment||1,500 ||2,033 ||(4,405)|
Unrealized (loss) gain on cash flow hedges, net of tax benefit of $277, $296, and $0, respectively
Cash flow hedges reclassified to earnings, net of tax expense of $197, $0, and $0, respectively
|273 ||— ||— |
Pension and post-retirement benefit plans (expense) benefit, net of tax (benefit) expense of $(325), $523, and $(36), respectively
Reclassification of pension liability adjustments to earnings, net of tax expense of $9, $26, and $4, respectively*
|21 ||61 ||71 |
|Other comprehensive (loss) income||(85)||2,641 ||(4,424)|
|Comprehensive income (loss)||$||25,738 ||$||50,615 ||$||(35,010)|
* 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.
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|Year Ended December 31,|
|CASH FLOWS FROM OPERATING ACTIVITIES:|
|Income (loss) from continuing operations||$||25,823 ||$||47,974 ||$||(30,586)|
|Adjustments to reconcile net income (loss) to cash provided by (used in) continuing operating activities:|
|Deferred income taxes||(4,317)||(30,392)||(1,598)|
|Depreciation||7,850 ||7,944 ||8,066 |
|Amortization||5,729 ||6,445 ||6,966 |
|Concrete Tie Settlement expense (Note 18)||— ||— ||43,400 |
|Equity (income) loss in nonconsolidated investments||(20)||(17)||7 |
|Loss (gain) on sales and disposals of property, plant, and equipment||47 ||(103)||511 |
|Loss on derivative||273 ||— ||— |
|Stock-based compensation||1,136 ||3,155 ||3,836 |
|Pension settlement||— ||2,210 ||— |
|Change in operating assets and liabilities:|
|Accounts receivable||15,722 ||3,368 ||(9,654)|
|Inventories||3,279 ||6,500 ||(23,502)|
|Other current assets||583 ||1,349 ||25 |
|Prepaid income tax||(9,108)||437 ||(249)|
|Other noncurrent assets||(2,870)||(402)||1,319 |
|Accounts payable||(8,947)||(13,024)||24,726 |
|Deferred revenue||(1,315)||1782 ||(3,491)|
|Accrued payroll and employee benefits||(4,085)||1,130 ||1,637 |
|Accrued settlement||(8,000)||(10,000)||— |
|Other current liabilities||(4,074)||(998)||5,893 |
|Other liabilities||2,843 ||(1116)||(770)|
|Net cash provided by continuing operating activities||20,549 ||26,242 ||26,536 |
|Net cash (used in) provided by discontinued operating activities||(|