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LB Foster Co. (FSTR -0.28%)
Q4 2019 Earnings Call
Feb 25, 2020, 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Greetings, and welcome to the L.B. Foster Company Fourth Quarter and Year-End 2019 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]

It is now my pleasure to introduce our moderator, Judy Balog, Investor Relations Manager. Thank you. Ms. Balog, you may begin.

Judith Balog -- Investor Relations Manager

Thank you. Good evening, ladies and gentlemen. Thank you for joining us for L.B. Foster Company's earnings conference call to review the Company's fourth quarter and full-year 2019 operating results. My name is Judy Balog and I am the Investor Relations Manager of L.B. Foster. Hosting the call today is Mr. Robert Bauer, L.B. Foster's President and CEO. Also on the call is, Mr. James Maloney, L.B. Foster's Chief Financial Officer.

In addition to our press release, we have a fourth quarter presentation on our website under the Investor Relations tab for those who have online access. This evening, Jim will review the Company's fourth quarter financial results. Afterward, Bob will review the Company's fourth quarter and full-year performance, and provide an update on significant business issues and market developments. We will then open the session for questions.

During today's call, our commentary and responses to your questions may contain forward-looking statements, including items such as the Company's outlook for our businesses and markets, cash flows, margins, operating costs, capital expenditures, and other key business metrics, issues and projections. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from statements we make today.

These forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise or publicly release the results of any revisions to these statements in light of new information, except as required by securities laws. All participants are encouraged to refer to L.B. Foster's annual report on Form 10-K for the year ended December 31st, 2018 as updated by subsequent items filed with the Securities and Exchange Commission for additional information regarding risk factors that may affect our results.

In addition to the results provided in accordance with the United States generally accepted accounting principles, our commentary includes non-GAAP earnings before interest, tax, depreciation and amortization or EBITDA statements, non-GAAP adjusted EBITDA, non-GAAP net debt and other adjusted results. A reconciliation of net income or loss to non-GAAP adjusted net income, EBITDA, adjusted EBITDA and adjusted diluted earnings per share and a reconciliation of total debt to net debt have been included within the Company's 8-K filing.

Statements referring to adjusted net income, EBITDA, adjusted EBITDA, adjusted diluted earnings per share and net debt are considered non-GAAP measures. And while they are not intended to replace the presentation of our financial results in accordance with GAAP, the Company believes that the presentation of these measures provides additional meaningful information for investors to facilitate the comparison of past, present and forecasted operating results. Our accompanying earnings presentation reconciles these non-GAAP measures to the corresponding GAAP measure.

With that, we will commence our financial review discussion, and I will turn it over to Jim.

James Maloney -- Senior Vice President and Chief Financial Officer

Thank you, Judy. Thank you all for joining us today. I'm going to cover the fourth quarter and year-to-date results. I am happy to report that we have achieved the measures we have communicated on our Q3 call regarding exceeding $45 million of adjusted EBITDA, improving operating cash flows in Q4, increasing orders and backlog, reducing of our net debt, improving our leverage ratio and achieving a capital spend of $9 million within the range we communicated.

Typically, I start each call with our topline results. But first, I would like to discuss several actions we took, which we believe will improve our operating results and reduce our balance sheet exposure. Also, I will talk about our income taxes since there was a large tax benefit recorded in Q4. In Q4, we offered a lump sum settlement payment to participants in our U.S. pension plan. This pension plan provides a limited benefit to current employees since the plan is frozen and most of the participants in the plan no longer work for the Company. We decided to offer lump sum settlement payments in December and about 60% of the participants accepted the offer. These settlement payments were paid from the pension plan. A lump sum settlement offer was determined by evaluating the estimated future cash outflow that was required by the Company compared to just settling much of the pension liability now.

Settling the pension liability with 60% of the participants derisks our balance sheet by reducing exposure to fluctuations in interest rates and investment returns. During 2019, the Company recorded a $2 million charge for the pension settlement. We will continue to monitor the remainder of the pension plan in an effort to reduce balance sheet exposure. In Q4, we decided to relocate a precast facility and took a number of actions aimed at reducing cost and risk by closing three service centers in our test and inspection division. The Company recorded a total charge of $3 million for these separate actions.

Our CXT precast buildings facility located in Spokane, Washington was relocated to Boise, Idaho. This move is expected to grow the business by moving production closer to served markets and reducing logistic costs. Our test and inspection division decided to close three facilities. Also, in the last several weeks, we've started operations in Casper, Wyoming, which is a new test and inspection facility, because we believe this is an underserved market. These changes are designed to position the business to improve efficiencies, increase sales, and enhance operating results.

In Q4, we released $30 million of valuation allowance against our U.S. deferred tax assets. Since we initially recorded the valuation allowance in 2016, the Company's operating results have improved substantially and we now believe we will be able to realize these deferred tax assets in the future.

For the purpose of helping you understand the underlying business performance, many of our comments today will be based on results excluding the one-time charges and the one-time tax benefit I just discussed. As a result, I will often refer to adjusted EBITDA, adjusted net income or adjusted diluted earnings per share. I will now speak about Q4 sales and gross profit.

During the fourth quarter, our sales were $149 million compared to $165 million, a $15 million or 9.2% decrease. During Q4, consolidated gross profit decreased $3 million, or 10.5% over the prior-year quarter. Gross profit margin of 18.3% was a reduction of 30 basis points from the prior-year quarter. The decrease in sales and profit in the quarter were due to three main reasons. First, our Rail Products segment was impacted by timing of transit orders and softening in the U.S. freight rail market, which negatively impacted sales in our Rail Products business by 16.2% and negatively impacted our gross profit by 34.2%. Recall the Q4 of last year had unusually high sales, because we had near-record backlog levels going into Q4 and demand for the products to continue shipping into year-end.

Second, the weakness in the upstream market continued during the fourth quarter, which negatively impacted sales and gross profit in our test and inspection and threaded business. Finally, piling sales declined in Q4 due to significant shipments last year, because of the significant backlog entering the quarter. We shipped $23 million of beginning backlog in our piling business during the fourth quarter 2018. We did not carry a similar backlog into Q4 of this year, which negatively impacted sales and gross profit in our Construction segment.

Now moving on to expenses. Our consolidated selling and administrative expenses decreased $1 million or 5.7% to $21 million in the fourth quarter. Net interest expense was reduced by $452,000, or 33.7% for the fourth quarter. The Company's income tax benefit for the year was $25 million. Our tax benefit included $30 million resulting from the release of the valuation allowance against our U.S. deferred tax assets. Our effective tax rate, excluding the valuation allowance benefit, would have been 26% for the year, and I would expect our effective tax rate for 2020 and beyond to be closer to 26% to 28% rather than our historical tax rates, which have been volatile over the past few years due to the valuation allowance.

Our fourth quarter adjusted net income was $1 million or $0.08 per adjusted diluted share compared to $2 million or $0.21 per adjusted diluted share last year. For the full year, our adjusted net income was $17 million or $1.62 per adjusted diluted share compared to $12 million or $1.17 per adjusted diluted share in the prior year. This represents a 39% increase in full-year earnings.

Adjusted EBITDA totaled $10 million in the fourth quarter, a decrease of $2 million compared to last year. The full-year adjusted EBITDA totaled $46 million, a $4 million improvement over the prior year. As a percent of sales, full-year adjusted EBITDA was 7%, a 40 basis point improvement compared to the prior year.

Now turning to the balance sheet. Our trade working capital decreased $9 million compared to September 30th, 2019 due to the decrease in accounts receivable of $6 million, decline in inventory of $9 million, and a decrease in accounts payable of $7 million during the fourth quarter. As we expected, our net debt decreased to $44 million at December 31st, and our leverage ratio dropped below 1 times.

Now, I will speak to our cash flow activities. Our cash provided from operating activities in the fourth quarter was $16 million compared to $4 million in 2018. The $12 million increase in operating cash flow was primarily related to continued profits and trade working capital improvements. During the full year, our capital expenditures were $9 million. The 2019 expenditures relate to plant expansion, automation integration programs, and our new facility in Casper, Wyoming. Additionally, we have expenditures for a new facility in Boise, Idaho.

Now on to new orders and backlog. As we said in the past, our quarterly order activity varies quarter-over-quarter due to the timing of customer projects, especially when we receive a large order for a project in any given quarter. For that reason, we have been providing information on a full-year basis, which is included in our earnings presentation materials posted on our website.

I am especially happy to report that our fourth quarter new orders were $182 million, an increase of 31.5% compared to last year's fourth quarter. The increase in orders for the quarter was due to all three reporting segments. Backlog stood at $230 million at the end of the fourth quarter, an increase of $36 million or 18.5% during the quarter. The backlog was also an increase of $10 million, or 4.4% compared to the December 31st, 2018 backlog. Bob will provide more details on orders and backlog activity.

That concludes my comments on the fourth quarter. So with that, I will now turn it over to Bob.

Robert Bauer -- President and Chief Executive Officer

Thank you, Jim, and hello, everyone. We were aiming for a strong finish to 2019. And in many respects, I feel like we accomplished that with notable achievements in fourth quarter and full-year cash flow, an increase in backlog at year-end, driven by strong fourth quarter orders, solid working capital performance, and some internal records on our safety performance this year.

As Jim discussed, we did recognize some additional expenses in the fourth quarter related to a number of actions aimed at reducing cost and risk, with pension liability in our Energy Services operations, as well as becoming more competitive in our precast concrete business. Our improving profitability put us in a good position to fund these actions. We felt the timing was right, particularly with the pension liability and these are actions intended to improve performance and lower risk going forward.

Before I begin my remarks about the Company performance, I'm going to cover the two operational actions that were not pension-related. The Tubular segment realized approximately $1.7 million in charges related to closing three service centers in our test and inspection services division. These service centers were located in Oklahoma and Louisiana, which currently are not among the more favored drilling locations as return on investment in these locations are often less attractive than other markets.

In our particular case, we didn't see a path to acceptable profitability for these locations and therefore decided to cease operations there. These actions are part of an ongoing effort to improve the performance of this division, which continues to dilute our earnings and continues to face some risk as suppliers to oil and gas developers are being affected by adjustments they're making to meet positive cash flow targets.

The market has once again become more volatile and exploration projects that aren't achieving targeted cash flow are more likely to be canceled these days. In light of this, we are continuing to push forward with a two-part strategy to improve the performance of this division. Part one is continuing to make the adjustments necessary to maximize profitability in regions, where market conditions are still favorable, such as the Permian region, and the Rockies where we are opening a new service center in Wyoming, as the demand shifts from Colorado and adjacent areas into Wyoming. Part two is to continue analyzing the ongoing market dynamics and make the appropriate changes necessary to address any underperforming locations.

We also announced in the fourth quarter that we were moving our Spokane, Washington factory that makes precast concrete buildings to Boise, Idaho. This move was driven by the opportunity to access attractive markets that we are not well positioned to serve from Washington. The move is designed to extend our reach into underserved areas, including markets in California, providing significant opportunities for growth.

It also improves our ability to expand our product line, it substantially increases our served geographic market, and we're putting capital to work in a business that has demonstrated an ability to grow and create value. This location also provides us with an opportunity to find better bolt-on acquisitions that can bring additional products and local expertise that can accelerate momentum around serving new geographies.

I'll turn now to the operating results. And as I turn to remarks on our operating performance, I'm going to use adjusted results that exclude the charges for the actions I spoke of and the pension costs, which are detailed in our earnings release. I'm also going to focus more on full-year results since Jim covered detail on the fourth quarter.

Among the highlights of our full-year operating results, include sales growth of 4.5%, a year-end backlog increase of over 4%, adjusted EBITDA that grew by 10%, adjusted EPS that grew by 39%, and operating cash flow of over $29 million. It was another year of topline growth and significant bottom line growth, despite seeing a little slowdown in order input during the year as we faced some project timing delays.

As we discussed during the course of the year, transit projects, which now make up approximately 55% of our Rail segment sales, did not materialize at the rate we projected. In addition, some weakness emerged in the U.S. freight rail market and the upstream energy market during the year. But as we closed out the fourth quarter, we managed to book $182 million in new orders and build backlog which rose $36 million in the fourth quarter alone to finish above last year's level.

We were very encouraged by the year-end strength as certain projects we were forecasting finally broke loose. Two key projects from transit rail operators in North America provided a significant boost to new orders. Protective coatings and measurement systems for new pipeline projects also had a good quarter and piling orders for transportation infrastructure were well above prior-year quarter, resulting in a strong increase in backlog in the fourth quarter, which typically declines at year-end.

Our full-year sales growth was driven by the Construction segment, where growth in precast concrete products and bridge decking were up double-digit, leading to the 15% sales increase for Construction. Two strategic growth programs. First, expanding the precast concrete product offering. And second, expanding into bridge accessories were a big factor in the growth. And while piling projects weren't driving the increase, we saw a nice increase in sales of those products too.

The Rail segment had a great year, led by our core rail products in North America and largely driven by transit agency programs. We saw nice gains from our friction management business that is seeing growth around the world, an expansion of services in all markets, but the expected winding down of London's Crossrail project was too much to overcome resulting in a roughly flat year for the segment.

Finally, the Tubular segment grew a modest 1%, impacted by the slowdown in service orders for test inspection and threading services for oil country tubular goods and other tubulars. This division, as mentioned earlier, had a very tough second half leading to a sales decline for the division of approximately 15% for the year. On the other hand, it was a very good year for protective coatings and measurement systems as the need for pipeline capacity is being addressed and our facility expansion program for measurement systems allowed for 25% growth in this division.

Turning to new orders and backlog, the fourth quarter bookings increase of 32% was fueled by rail products for transit projects. These were the projects we spoke about last quarter that were about to break loose and a big increase in the Construction segment that included a large precast concrete project for one of the transit programs.

Last quarter, we discussed the signs of strength that could emerge in the fourth quarter. And we were very pleased to reach $182 million in new orders, which is up $38 million sequentially from Q3 and up $44 million from Q4 of last year. This has put the 2020 beginning backlog of $230 million, $10 million above last year with each business segment fairly close to where it was a year ago.

Tubular is up about $7 million, driven by an increase in protective coatings. The Rail segment is up about $6 million as a result of transit project work. And the Construction segment is below last year by about $3 million, but with a significant shift from piling to precast concrete as the Port Everglades piling project was in last year's backlog and the new Dallas Metro Transit project is in the precast backlog this year.

Now turning to segment profit, excluding the one-time charges for the test and inspection business, Tubular segment profit was slightly above last year, as a result of measurement systems and protective coatings, leveraging the added volume as well as other cost actions, particularly in the measurement division that boosted profit and was substantial enough to overcome the headwind in the test and inspection services division.

Rail segment profit was marginally above prior year, as the volume lost in Europe from Crossrail was too much to overcome, despite a very good year in profit increase from rail products.

The Construction segment profit, when adjusted for the charges related to moving our Spokane concrete factory, finished approximately 10% above prior year. A solid year in bridge decking and concrete products helped overcome a tough year in piling that was the result of project and customer cost we discussed last quarter for the Port Everglades project.

We continue to be very pleased with working capital performance and our ability to fund the capex required for strategic growth programs. Most of the capital spending in 2019 was directed at growth initiatives or projects to drive operating efficiency. There was little need for maintenance spending. In 2020, we will have at least $4 million of maintenance capital spending resulting from our decision to replace a rail delivery train among our fleet used to deliver welded rail.

Once again, inventory management was a factor in delivering working capital efficiency and maximizing cash flow performance. As in recent quarters, we directed the balance of the free cash flow toward debt reduction. We exceeded our internal forecast for net debt at year-end by reaching $44 million. Our interest costs are declining and we are in a position to pursue acquisitions that support our strategic plan.

The top priorities for acquisitions include: first, rail technologies that bring lower operating costs, disruption management, and improved safety to all rail operators; secondary, our precast concrete products that can drive scale with product and geographic expansion with double-digit EBITDA profit margin potential; and thirdly, is the highly selective measurement and corrosive protection coating solutions for industrial markets that build on our core competencies in this area.

I'll finish with some comments on the 2020 outlook. We are starting the year with a backlog of $230 million, as I mentioned, which should give us a good start to the year keeping in mind that Q1 is usually our lowest volume quarter. We have a favorable view of transportation and general infrastructure markets and a more positive outlook could develop for North American freight rail. We're anxious to see if the recent trade policy actions provide a boost to commodities and intermodal volume for freight rail.

The general infrastructure market in the U.S. is expected to be good and could benefit from any lift in government spending aimed at improving infrastructure. Our market risk in 2020 is expected to come from oil and gas developers that may put continued pressure on suppliers for test and inspection services. Pipeline projects are expected to continue, but there could be periods of delays on new starts if more serious disruption occurs in the upstream market. To a lesser extent, we'll be monitoring the risk associated with Brexit. Our European business is U.K.-centric and may be affected by trade developments toward year-end, if they lead to a recession in the U.K. or other trade disputes.

Regarding operating performance, we're aiming for another year of improving profitability and sufficient cash flow to reduce debt, unless we find an acquisition to support the strategy I spoke of earlier. And although we have a great starting backlog, we expect first quarter sales to be slightly below prior year's first quarter as a result of scheduled shipments.

I want to wrap-up now by thanking all of our employees for delivering a good year and particularly the operating leaders that were together in February discussing the opportunities ahead of us and the enthusiasm around continued improvement. We have a great team doing some extraordinary work and I'm grateful to be working with a committed team of individuals focused on creating value for our stakeholders.

With that, I'll turn it back to the operator and we'll be happy to take your questions.

Questions and Answers:


Thank you. [Operator Instructions] And our first question comes from Chris Van Horn with B. Riley FBR. Please state your question.

Chris Van Horn -- B. Riley FBR -- Analyst

Good afternoon. Thanks for taking my call.

Robert Bauer -- President and Chief Executive Officer

Hello, Chris. Thanks for joining us.

Chris Van Horn -- B. Riley FBR -- Analyst

I just want to start with the orders. Obviously, congrats on a really strong quarter there. And could you talk about was it timing-related? Was there really good competitive factors? And then, what kind of -- with those orders, what kind of visibility do you have heading into 2020 for those revenues?

Robert Bauer -- President and Chief Executive Officer

Well, there were a number of good developments. And as I think back to our call last quarter, we were talking about the third quarter being just a little more sluggish than we thought, and the number of projects that we thought were going to break loose. And that's what happened in the fourth quarter.

We booked two really key significant transit projects. I think there were both good wins. They're always competitive. But I think these were examples where we have a great product offering, and in both cases, had a number of different products that we're furnishing on those projects. So, we just went through a period where they were just inadept [Phonetic] in some of that project activity, but as we thought, we would see a pretty good fourth quarter.

And then, there is in Construction were really solid orders, even orders for piling were good. Our precast concrete business continues to remain strong. So, the backlog that we currently have, it is spread out over time. As I said just a moment ago, it's not front-end loaded here in the first quarter. So, it's not going to push our sales up in a strong way in the first quarter, but it is kind of spread throughout the entire first half and then some of it even into the second half of 2020.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay, got it. Thanks for that. And then, could you comment on rail technologies? In the past, that's been -- you talked about that as an opportunity for growth. And maybe what some of your customers are saying on the technology side, and what maybe you're doing from a competitive perspective to get some of your newer products out there.

Robert Bauer -- President and Chief Executive Officer

Yeah. There's three things that happen in rail technologies. The first is friction management. The second is our services business. And the third one, we referred to a lot of times as automation solutions or technology solutions. Friction management is a product we provide worldwide. We have been a leader in that technology for sometimes. That includes friction modifiers and other lubricants that are used to dispense onto the track, and they manage the wheel-to-rail interface in a rail application, for both freight rail and transit rail.

We've continued to push innovation in all of those solutions. We have had a good product pipeline that's been innovative for the friction management products where we're providing customers more and more benefits along those lines. So, it's an exciting product for us. There's a lot of room for growth. It was historically used in very demanding areas where there was a lot of wear and tear on the track, but it's being used in more areas now as customers recognize its benefits.

In the service area, we continue to grow on-track services. On one hand, it supports that friction management product. So, we're out on track, and we're managing some of those friction management and other lubricants that are dispensed on the track. We're doing maintenance and repair-type operations. And then, the other part of services is our -- we like to call it telecom solutions piece. That piece is actually bigger in Europe, and it is aimed at transit systems. And that's where we're providing services for the integration of security systems, passenger, information systems, security, and access control on transit operations. Think of it as subway stations.

And then that final area, I called technology solutions or automation solutions. This is where we're using some novel technologies and some technologies that we lift off the shelf that have been around for a while, for example the use of LiDAR technology to detect debris at rail crossings or on track. They are used in rock-fall detection for example in remote areas where you can't see those sorts of problems ahead of a train. We have displays and smart communications that are aimed at disruption management and passenger information systems. So, these are products that are using more state-of-the-art equipment and even software behind those operations that we're looking at as one of the areas where we're going to focus more and more of our investment and think there's some serious opportunities for growth there and in more profitable product lines.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay. Got it. Thank you for that color. And then on the Union Pacific as a customer, any update in terms of them coming back to the table with orders or revenues for you?

Robert Bauer -- President and Chief Executive Officer

Yes. The update is very positive. We restored that relationship early in the year as you know, but for everybody's information, that relationship -- the commercial relationship was restored earlier this year. And we had an agreement for them to buy a minimum amount of products from us every year over the course of the next six years, and they have met that obligation. So, we have ramped up that business, I would say, pretty quickly.

We went through a few new approval processes that they asked us for. I would like to say that, we passed with flying colors, because we met it or exceeded every one of them. And so, we're back to providing a number of different products to them. And we're delighted about that, and we expect the relationship to continue to improve from here.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay. Great. And then you mentioned, you're doing a number of moves in terms of relocation and closure. And it sounds like you're going to constantly look at the portfolio for additional opportunities. And you mentioned logistic cost savings on the move to Boise. Anything you can quantify for us either from a total perspective or from each of your initiatives that might -- where that might show up if it's on the COGS line and by how much?

Robert Bauer -- President and Chief Executive Officer

Well, it would be on the COGS line. I would struggle putting a number together for you right now. In businesses like our precast concrete products, we're shipping concrete buildings and other large precast products. And you just don't want to ship those very far. Some of them you've got to be within 100 miles to 200 miles of a customer. Some of them can make it further than that. But when you get out to 400 miles or 500 miles, it starts to be difficult to compete. This was also mentioned as part of the issues with our piling business as well.

Large piling projects, we're shipping a lot of steel. And so, this is -- it's an area that we're constantly working on. In some of these businesses, I would tell you that, as a percent of sales and cost of goods sold, this component can be in the double-digit area. That's probably one of the ways I can handicap it for you. So, it's not insignificant. But it's not in everything that we do. Those are a couple of examples of the ones that we're going after and we're going to continue to take advantage of that where we can get a good return on our investment.

Chris Van Horn -- B. Riley FBR -- Analyst

Okay. Thank you so much for the time guys.

Robert Bauer -- President and Chief Executive Officer

Yes. Thank you.


Our next question comes from Chris Sakai with Singular Research. Please state your question.

Chris Sakai -- Singular Research -- Analyst

Hi, everyone. Thanks. Thank you for taking my question. I had a question on what you guys -- what your take is on the coronavirus, and have you guys thought about how it might impact your business and by how much?

Robert Bauer -- President and Chief Executive Officer

Well, Chris, this is probably a good day to be thinking about it. I didn't -- neither Jim nor I included it in our comments, because we're really at this point in time aren't prepared with any good example of how it is affecting our business. We do not have a lot of sales in China. We do have a commercial operation there with a few people in it, because we do provide some of these friction management solutions I spoke of in China and have an exciting project going on there. But it's not very clear to us today, as to how this is going to unfold. I would not call our business in China, a material impact to the Company. And I think, it's just a little too early for us to tell, what the long-term impact of this might be both globally and locally to our business. So, we've decided to steer clear of that right now, until we get a better idea of what's going to unfold.

Chris Sakai -- Singular Research -- Analyst

And just a question, I guess, on your debt levels, it looks like you reduced it by about $17 million this quarter. I wanted to get your take on the reasoning there and if you're looking to reduce it even further in the coming quarters.

James Maloney -- Senior Vice President and Chief Financial Officer

Yeah. So Chris, this is Jim Maloney. So, we're planning to continue to pay down debt over the coming quarters, unless there is capital spend that will grow or further improve the Company's operations, or as Bob alluded to during his comments, certain acquisitions in our Rail or Construction segment. So, those are really the main plans for our operating cash flow in 2020.

Chris Sakai -- Singular Research -- Analyst

Okay. All right. Thanks. Thanks for the answers.

James Maloney -- Senior Vice President and Chief Financial Officer

Yeah. Thank you.

Robert Bauer -- President and Chief Executive Officer

Thank you, Chris.


Thank you. Our next question comes from Brett Kearney with Gabelli & Company. Please state your question.

Brett Kearney -- Gabelli & Company -- Analyst

Hi, guys. Thanks for taking my questions.

Robert Bauer -- President and Chief Executive Officer

Hello, Brett.

Brett Kearney -- Gabelli & Company -- Analyst

Hi. So, Bob, it sounds like the outlook for transit rail continues to be positive. I guess could you give any more color -- detail what you're hearing and seeing maybe timing this year 2021, I guess, on your core kind of U.S. transit rail market? And then, any additional opportunities you all see from your solid performance over in London as they talk about maybe the HS2 additional rail project there? And then, I think, up north Montreal has a pretty significant commuter rail project going on. So, I guess, just anything you're seeing in kind of your major trends on rail markets.

Robert Bauer -- President and Chief Executive Officer

Well, we are bullish on the entire North America transit market. Both the U.S. and Canada, all of the cities that are using transit rail maybe just about all of them have projects under way to a greater or lesser extent. But there are some really big projects going on. So, one of the ones that I was speaking about that we won in the fourth quarter was Dallas Area Rapid Transit system. So, we got a fair amount of work from them that included a good shot in the arm for our rail business, but that was the one where we also got some sound walls for our precast concrete business.

I mean these have become significant projects. There appears to be a willingness to fund these projects by local, municipal and state governments, along with other bond measures and those sorts of things that are funding it, and in some of these areas, just revenue that comes from commuters. But even in systems that have been around a long time like Chicago's system, we're getting maintenance work and work regarding changes and expansion for those kinds of facilities as well.

We've been doing OK in Canada. We're working in Toronto and Montreal. I think the investment in those locations is going to continue as well. Those markets I would call some of our home territory, just like in the U.S. So, we've got to focus on winning those kinds of projects. And so, our outlook is for continued spending and the ridership continues to increase. In London, we're pretty certain, HS2 is going to move forward. I mean, it's just a matter really of timing with which they get that program really revved up. I think it's an exciting project. It's going to link the Midlands into London Underground and allow people in Central England to commute into work in London in less than an hour, which is what their goal is.

We can see work out of that. I expect we will see work out of it. We're a big player right now in the London Underground and we keep expanding both our products and services we offer. So we're looking -- to us HS2 is going to be a project that we expect to get some portion of and that will help some of our continued growth in that European area.

Brett Kearney -- Gabelli & Company -- Analyst

Terrific. And then, if I could just ask one more, I guess, you continue to strengthen the balance sheet. It sounds like you have a few focus areas you would like to prioritize should acquisition opportunities arise. I guess, can you help us think about what maybe the funnel looks like there? Is there anything you're kind of keeping an eye on at this point or could potentially be if valuation levels kind of reset to be more favorable call in the next 12 months to 18 months as a catalyst for an action on your end?

Robert Bauer -- President and Chief Executive Officer

Well, I would tell you with regard to valuation levels, they just need to be a reasonable period for us to move forward. I know there are some that are lofty. And if they get a little bit too lofty for us, we're just going to have to pass on some of those things, but that is not going to limit our opportunities. We have always been looking around the rail services area. And those are services that are either dealing with track infrastructure or the maintenance away or this transit system automation-type work. So, if we see things in that area and that could also include those automation solutions that I was speaking about and anything that could fall into this category that we now call disruption management, where we're doing a lot of more sophisticated monitoring of the maintenance away and of conditions that would cause disruption or even worse derailment events or those sorts of things.

So, those will be among our priorities. Friction management will be among our priorities. We do have a few irons in the fire meaning companies we're looking at in the friction management area, nothing warm. When I say looking at, I'm talking about companies that we would like to get to know and potentially see if there's an opportunity there and if they like us.

And then, the other area that we are spending up to be a bit more aggressive with is precast concrete products. We think there is a tremendous opportunity for us to add on to a business where we have demonstrated that it can grow, that we can earn double-digit EBIT margins, that we're getting in our particular case great return on capital. And there is a highly fragmented market with lots of geography and lots of potential to add new products. And that's what we've been doing in our existing business. And we've demonstrated with that, that we can create some nice returns from it. So, where we can fill some geographic and some product void, we're going to look to do that as well.

Brett Kearney -- Gabelli & Company -- Analyst

That makes a lot of sense. Thanks so much for the time guys.

Robert Bauer -- President and Chief Executive Officer

Yeah. Thanks, Brett. Thank you.


[Operator Instructions] Our next question comes from David Wright with Henry Investment. Please state your question.

David Wright -- Henry Investment -- Analyst

Hi. Good afternoon. In your -- at the end of the prepared remarks, you talked about for your operating performance you'd be looking for improving profitability in 2020. Are you looking for improved profit in 2020?

Robert Bauer -- President and Chief Executive Officer

At this point, we believe that the market is going to look pretty good in 2020. So, the answer is yes. You can tell by that remark that we weren't offering specific guidance at this point, because our lack of visibility particularly into the second half of the year makes for a difficult environment for us to do that. But every indication is that we ought to see growth. And as we work on areas where we're improving cost and efficiency in our business, we have some internal targets to improve our margins associated with that gross margins and bottom line margins.

So, those are internal targets that we have in the Company. I'm sure people would like us to quantify those, but we're going to stop short of doing that at this point and suggest that as long as the markets hang in there. I mentioned a couple of the risk areas in energy and hopefully there's an upturn in North American freight rail. There's every reason to think it should get a little better than it was in 2019. Those could help -- that could help provide a boost for us.

David Wright -- Henry Investment -- Analyst

Okay. And then, just to follow-up on the acquisition question. Recognizing you're trying to pay down debt and look after the balance sheet, can you tell us sort of what size range that you need to do something? Is it if we can add sales by X percent that's good, or if we don't go over a certain leverage ratio that fits? How do you think about the financial aspect?

Robert Bauer -- President and Chief Executive Officer

I would start by telling you that the size of a target asset is not driving our strategy necessarily. That our strategy has more to do with the factors I was speaking of just finding in friction management, really finding the right technology and the company that has great products in a good position in the marketplace. They do by the way tend to be somewhat smaller these days. They aren't big companies in that market. And the other in this precast concrete area, we are looking at businesses that are like -- almost like our plants within that division. So once again, these aren't super large. And we're trying to basically scale up our business there, so that we have an even greater national footprint.

So, it's the right target that's driving our division more -- our decision more than anything else with maybe one exception. And that's what their profit margins look like. I mean we're looking to acquire companies that we can quickly, if they're not already there, get into double-digit bottom line profit margin -- EBIT profit margins. So, that is one of our filters.

But then, I'll finish by saying that we are going to be very mindful of what that leverage ratio looks like. I mean, we're not going to drive that up too high too fast. We like the way our balance sheet does look right now. So, you're not going to see something that I would describe as super aggressive. And I would not expect our number to be rising up. Right now, we're finishing the year at just below 1.0 leverage ratio and you're not going to see something going up into the mid-2s. I would not project that at this point. But again, I would say that it's our strategy that's going to guide that. And if there is something that changes that, then we will have to invest.

David Wright -- Henry Investment -- Analyst

Thank you for those really helpful comments. The context is very informative.

Robert Bauer -- President and Chief Executive Officer

You're welcome. Thank you.


Ladies and gentlemen, there are no further questions at this time. I'll now turn it back to Bob Bauer for closing remarks. Thank you.

Robert Bauer -- President and Chief Executive Officer

Yeah. Thank you, operator. Well, I appreciate everybody joining us this quarter. We appreciate all the good questions here at the end, and we look forward to catching up with you in the first quarter of 2020. Thank you very much.


[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Judith Balog -- Investor Relations Manager

James Maloney -- Senior Vice President and Chief Financial Officer

Robert Bauer -- President and Chief Executive Officer

Chris Van Horn -- B. Riley FBR -- Analyst

Chris Sakai -- Singular Research -- Analyst

Brett Kearney -- Gabelli & Company -- Analyst

David Wright -- Henry Investment -- Analyst

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