L.B. Foster Company
L.B. Foster Company
Sales: $241.92 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: FSTR
NAIC: 331221 Rolled Steel Shape Manufacturing; 33121 Iron & Steel Pipe and Tube Manufacturing from Purchased Steel; 327332 Concrete Pipe Manufacturing
L.B. Foster Company manufactures and distributes rail and trackwork, piling, highway products, earth wall systems, tubular products, and portable mass spectrometers. The company began as a distributor of recycled rail to coal miners, but it has diversified into other industrial segments to serve customers in construction, transit, chemical, utility, and agricultural markets. Approximately 55 percent of L.B. Foster’s revenues are derived from rail products, which include a full line of new and used rail, trackwork, and accessories. The company operates nine manufacturing plants and 15 sales offices.
L.B. Foster Company was founded by Lee B. Foster, who in 1902 started the company to distribute steel rail. During its early years, the company used mules to pull track out of coal mines, operating as a railway track recycler that resold “relay” rail. Although L.B. Foster counted rail distribution as one of its business segments for the duration of the century, the company’s diversification in later years added several new facets to its business that eventually overshadowed its original relay distribution business. As the company evolved, it diversified into the tubular and sheet products market, coupling its ventures into other realms of the steel business with geographic expansion. After more than a half century of business, the company’s roots in the celebrated steel city of Pittsburgh were planted firmly, but longevity did not necessarily impart prolific growth. In terms of revenues, L.B. Foster’s stature remained relatively diminutive until it struck upon a market that recorded explosive growth. The company’s heyday arrived during the 1970s.
L.B. Foster latched onto the business that ignited its growth when it reached an agreement with Nippon Steel. The company agreed to take oil field pipe from Nippon Steel and process the pipe for use in oil rigs. L.B. Foster threaded the pipe and finished it, putting the company in a position to reap the benefits of a rapidly expanding oil exploration market. From 1973 to the early 1980s, the oil exploration market enjoyed astounding growth, creating a demand for finished pipe that exceeded supply. While other processors struggled to keep pace with the growth, L.B. Foster rose to the occasion, processing more than one million tons of pipe.
1977 Leveraged Buyout
Ironically, the decade that delivered the greatest growth to L.B. Foster also marked the beginning of troubled times, precipitating a protracted financial tailspin. The problems surfaced not long after the Foster family ceded ownership of the company. In 1977, Kohlberg Kravis Roberts & Co. (KKR) acquired L.B. Foster through a leveraged buyout (LBO), taking over the company that had evolved into a distributor and manufacturer of construction, rail, and tubular products. At the time, L.B. Foster was recording robust growth, exuding enviable financial health that KKR sought to cash in on four years later. In 1981, KKR and its backers sold 19 percent of L.B. Foster to the public, raising $31 million from the offering. The proceeds from the stock sale represented a financial boon for KKR considering that the company had paid $57 million for the 81 percent of L.B. Foster it controlled after the offering. It was not the last time L.B. Foster shareholders’ loss would be KKR’s gain.
At the time of the public offering, L.B. Foster was saddled with $64 million in long-term debt, or more than one-third of the company’s market value. Shareholders eagerly paid $17 per share for a piece of the debt-laden company, but their zeal quickly soured when market conditions placed a stranglehold on L.B. Foster. In December 1981, not long after KKR officials celebrated the successful offering of L.B. Foster stock, the oil services industry was beset by a depression. The market that had vaulted L.B. Foster toward unprecedented riches began to sputter, causing the U.S. oil rig count to diminish significantly. Consequently, the pipe finishing plants that had worked feverishly to keep pace with demand experienced an alarming respite, as production at L.B. Foster’s pipe finishing plants fell below 70 percent of capacity. The company’s chairman, Milton Porter, subsequently made a regrettable decision. Porter, who had married into the Foster family during the 1940s, saw the recessive conditions in the oil exploration market as an opportunity to expand. He attempted to double the company’s production capacity, hoping to better position L.B. Foster for the eventual upswing in oil exploration activity. The strategy backfired. Losses escalated throughout the first half of the 1980s, as the company’s revenues from tubular products sank precipitously, falling from $367 million in 1981 to $176 million by 1985.
The errant decision to double capacity in the face of plunging demand was the first in a series of imprudent decisions that stripped L.B. Foster of its vitality. Porter retired in 1984, leaving the company in a precarious state. He was replaced by a longtime business associate of KKR named Edward Mabbs, who joined L.B. Foster from Incom International, where he had served as chief executive officer for the previous decade. Mabbs assumed his new title with more than a modicum of anxiety. L.B. Foster was floundering and seemingly destined for more profound trouble. Robert Kanters, an analyst who closely followed L.B. Foster, visited Mabbs not long after the new chief executive officer moved into his new office. In a November 2, 1987 interview with Forbes magazine, Kanters offered some insight into Mabbs’s mindset. “Mabbs had me in his office showing me all these graphs and charts and telling me why they had to do something other than oil tube threading,” Kanters revealed. “He was saying the drill count is terrible, and we don’t see this thing going anywhere for a long time. Mabbs said that we have to do something.” What followed was another egregious mistake made by an L.B. Foster leader.
Reportedly, Mabbs was under pressure from L.B. Foster’s three KKR board members to diversify. Their advice, for which they charged L.B. Foster a $2.5 million fee to provide, convinced Mabbs to complete two acquisitions that moved the company into businesses entirely distinct from its core businesses. In February 1986, Mabbs paid $302 million to Kidde, Inc. for five architectural hardware and banking equipment businesses, which immediately mired L.B. Foster in debt. Annual interest payments stemming from the acquisitions were more than $42 million, thrusting the company into an untenable position. Mabbs quit, moving on to retirement in Florida, which paved the way for another KKR-appointed chief executive officer, Jerry Goldress. Goldress, who had helped rescue other KKR companies, faced grimmer prospects than his predecessors had, inheriting a company that was teetering on the brink of bankruptcy. “We had too much debt,” he was quoted as saying in the November 2, 1987 issue of Forbes. “Creditor pressure was being brought to bear, and we were in trouble with our suppliers.”
Backed into a corner, Goldress chose the only option available for the beleaguered company. He decided to divest the illconceived acquisitions. The banking equipment group was sold in June 1987, followed by the sale of the architectural hardware group two months later. L.B. Foster obtained $337 million from the sale of the two divisions, which erased much of the company’s debt but could do little to erase damage that had been done. L.B. Foster’s stock, which had sold for $17 per share in 1981, had plummeted to barely more than $2 per share by 1987.
Shortly after completing the divestitures, Goldress stepped down as chief executive officer, having guided the company through its initial stage of restructuring. Goldress stayed on as chairman and relinquished his other title to Joseph H. Dugan, who became the fourth L.B. Foster chief executive officer in a three-year span. Unlike his predecessors, Dugan took control of a company without grave financial ills. Long-term debt had slipped below $10 million, and with finances under control, optimism—long absent from company headquarters—had returned. Company officials believed they could construct a sizable business around spiralweld pipe, used to transport water, as well as record appreciable growth in the company’s traditional businesses in oil field pipe, rail products, and construction products. Along with the renewed optimism came an important change in the company’s operating strategy. Roughly 65 percent of L.B. Foster’s revenues were derived from the marketing products made by other companies, while the rest was collected from fabricating its own products. Dugan wanted more of a balance, announcing that in the future L.B. Foster would concentrate on manufacturing more of the products it marketed. Toward this end, the company committed to opening a new spiralweld pipe facility in Houston.
- L.B. Foster Company is formed to distribute used rail to coal mine.
- Kohlberg Kravis Roberts & Co. acquire L.B. Foster in a leveraged buyout.
- Public offering coincides with the collapse of the U.S. oil exploration market.
- Architectural hardware and banking equipment businesses are acquired.
- Acquisitions are sold to reduce soaring debt.
- Lee B. Foster II is appointed president.
- Company enters mass spectrometer market.
- CXT Inc. is acquired.
The restructuring process continued under Dugan’s stewardship, nearing its end by the time Dugan resigned from the company to return to consulting work in 1990. Goldress resigned as chairman as well in 1990, replaced by James Wilcox. For Dugan’s replacement, the board of directors returned the company to its roots. In May 1990, Lee B. Foster II was selected to head the company.
Foster Family Member Guides Company Through the 1990s
The founder’s grandson, Foster gave the company what it had lacked throughout the 1980s: enduring leadership. Foster, who led the company throughout the 1990s, had been part of the family business for more than 15 years by the time he was appointed its leader. He had majored in engineering and anthropology at Cornell University and the University of Pittsburgh, forgoing a future in his academic disciplines to join L.B. Foster in 1974. Foster started as a clerk before joining the company’s sales force, which took him to L.B. Foster offices in Orlando, Atlanta, and Houston. He took charge of the company’s international sales program in 1980, and several years later he was selected to head the company’s Southwest region. In his last post before completing his ascent of the company’s managerial ladder, Foster was in charge of L.B. Foster’s tubular products division, serving in such capacity from 1986 to 1989.
Foster, in his early 40s when he took command of the company, reiterated Dugan’s commitment to the manufacturing side of L.B. Foster’s business. By manufacturing more of the products it sold, the company could realize greater profit margins in value-added steel products such as threaded and coated pipe. Before the company could begin any significant investments in fabricating facilities, however, its core businesses needed to recover fully from the travesties of the 1980s. Much of L.B. Foster’s business was dependent on federal government spending directed toward infrastructure projects, such as highways, bridges, and railways. Unfortunately for Foster, the first few years of his reign were pocked by a national recession, which hampered the company’s recovery from its earlier miscues. In 1993 the federal government announced $30 billion in transportation and highway spending, giving the company “a significant shot in the arm,” according to Foster’s assessment in the March 8, 1993 issue of the Pittsburgh Business Times. The spending package provided a welcomed boost to the company’s core businesses, but lackluster financial results continued to characterize L.B. Foster’s performance during the decade. Foster’s response, evident during the latter half of the decade, was to enter new markets through acquisitions and create more diverse distribution channels for the company’s expertise in rail, construction, and tubular products.
Late 1990s Acquisitions
During the late 1990s, there were several significant deals completed by Foster that described his company’s progress at the end of the century. In May 1997, the company acquired Monitor Group Inc. from Industrial Scientific Corp., organizing the acquisition into a separate L.B. Foster division. Monitor Group manufactured portable mass spectrometers used to measure gas compositions and concentrations, a new field of business for L.B. Foster. The applications for Monitor Group’s spectrometers were varied, including monitoring air quality for the mining industry and as a process monitor and diagnostic tool in chemical manufacturing industries.
L.B. Foster’s next acquisition represented less of a distant reach, strengthening one of the company’s core competencies rather than moving it far afield. In November 1997, the company acquired Georgetown, Massachusetts-based Precise Fabrication Corporation. The addition of Precise, a steel fabricator, gave the company a regional manufacturing facility in the New England market and it enabled the company to offer a comprehensive selection of components to the highway, bridge, and transit markets. A similar advantage was gained from L.B. Foster’s next acquisition, completed in December 1997. The company purchased Watson-Haas Lumber Company, a supplier of iron clad and steel ties to the mining industry. Like the purchase of Precise, Watson-Haas’s inclusion within the company’s fold enabled L.B. Foster to offer its customers a more complete package of products, specifically all the rail and track requirements demanded by the mining industry.
As the 1990s drew to a close, appreciable financial growth continued to elude L.B. Foster. Although the company was consistently profitable, its revenues were essentially flat, increasing a mere $8 million between 1994 and 1999. By the end of the decade, the Monitor Group had not yet generated any revenues, frustrating company officials who had miscalculated the acquisition’s market readiness. L.B. Foster executives suffered through another delay, after operating without a domestic sheet piling supplier from March 1997 forward. In September 1997, the company reached an agreement with Chaparral Steel to become the firm’s exclusive North American distributor of steel sheet piling and “H” bearing pile, but the agreement was pending the completion of Chaparral’s new Richmond, Virginia facility. By the end of the decade, the Richmond facility had not been completed. Two acquisitions that the company hoped would produce more immediate results were completed in 1998 and 1999. In August 1998, L.B. Foster acquired the Geotechnical Division of VSL Corporation, giving the company a leading supplier of mechanically stabilized earth wall systems. In June 1999, the company purchased CXT Inc., a manufacturer of engineered prestressed and precast concrete products used in the railroad and transit industries. As L.B. Foster prepared for the 21st century, hopes were pinned on these new acquisitions to provide a spark to the company’s financial totals.
Foster Rail; Foster Piling; Foster Precise; Foster Fabricated Products; Foster Coated Pipe.
ABC-NACO Inc.; DaimlerChrysler Rail Systems; AMSTED Industries Incorporated.
Antonelli, Cesca, “L.B. Foster Could Pile on the Profits with Chaparral Distribution,” Pittsburgh Business Times, September 12,1997, p. 6.
Clements, Jonathan, “Thank You, Kohlberg Kravis,” Forbes, November 2, 1987, p. 38.
Cotter, Wes, “Will Infrastructure Finally Rescue L.B. Foster?,” Pittsburgh Business Times, March 8, 1993, p. 12.
“Foster Buys Fabricator,” American Metal Market, November 20, 1997, p. 3.
Haflich, Frank, “Northwest Pipe Buying Foster Unit,” American Metal Market, March 2, 1998, p. 3.
Kovatch, Karen, “Industrial Scientific Corp. Unloads Its Monitor Unit to Eager L.B. Foster,” Pittsburgh Business Times, March 31, 1997, p. 2.
“L.B. Foster Acquires Midwest Rail Assets,” Railway Age, July 1993, p. 22.
“L.B. Foster Ups Railroad Stake,” American Metal Market, January 22, 1999, p. 4.
Petry, Corinna, “Chaparral, Foster Join Forces on Piling,” American Metal Market, September 5, 1997, p. 2.
Teaff, Rick, “Foster Returns to Family Ties,” Pittsburgh Business Times, May 14, 1990, p. 10.
——, “L.B. Foster Keeps Bonds with Its Railroading Past,” Pittsburgh Business Times, May 22, 1989, p. 2S.
——, “L.B. Foster Leaves Restructure Year with Profits,” Pittsburgh Business Times, February 15, 1988, p. 8.
—Jeffrey L. Covell