L.B. Foster Company — Q2 2022 Form 10-Q Summary
Business context and reporting period
L.B. Foster Company is a global provider of engineered and manufactured infrastructure products and services, operating through Rail, Technologies, and Services; Precast Concrete Products; and Steel Products and Measurement. This Form 10-Q covers the quarter and six months ended June 30, 2022, with comparisons to the corresponding 2021 periods. The statements are unaudited and prepared under U.S. GAAP.
On June 21, 2022, the Company acquired U.K.-based Skratch Enterprises Ltd. for $7.4 million. The acquisition added approximately $5.3 million of goodwill and was included in Technology Services and Solutions. The Company also disclosed the August 1, 2022 divestiture of its rail spikes and anchors Track Components business for expected cash proceeds of $7.8 million, subject to adjustments.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $131.5 million, down 14.9% | $230.3 million, down 14.9% |
| Gross profit | $23.3 million; 17.7% margin | $39.7 million; 17.3% margin |
| Operating profit | $2.5 million, down 49.6% | $0.2 million, down 95.5% |
| Net income attributable to L.B. Foster | $2.0 million; $0.18 diluted EPS | $0.4 million; $0.04 diluted EPS |
| Operating cash flow | Not separately provided | $(13.4) million, versus $6.8 million provided |
Six-month income before taxes was $0.7 million, compared with $2.4 million in 2021. The effective tax rate was 29.4% for the quarter and 44.5% year to date, compared with 28.5% and 34.1%, respectively, in the prior-year periods. Other income was $0.7 million in the quarter and $1.3 million year to date, primarily reflecting insurance proceeds and a favorable $0.5 million purchase-price adjustment related to the Piling Products divestiture.
At June 30, 2022, cash and cash equivalents were $7.7 million, total debt was $49.3 million, accounts receivable were $72.3 million, and inventories were $73.4 million. The revolving credit facility had $130.0 million of commitments and matured August 13, 2026. The filing reports net available borrowing capacity of approximately $81.5 million in the MD&A and $80.1 million in the supporting liquidity table, subject to covenant restrictions. The Company was in compliance with its credit covenants.
Capital expenditures were $3.0 million year to date, and investing cash outflows included $5.7 million for the Skratch acquisition. The current portion and long-term portion of the Union Pacific Railroad settlement totaled $22.0 million at June 30, 2022, with scheduled payments of $6.0 million for the remainder of 2022, $8.0 million in 2023, and $8.0 million in 2024.
Material changes versus the prior comparable period
- Sales declined primarily because the divested Piling Products division reduced year-over-year sales by $22.1 million in the second quarter and $42.9 million year to date.
- Rail, Technologies, and Services sales decreased 7.9% in the quarter, although backlog increased 28.7% year over year to $132.0 million and gross margin improved modestly.
- Precast Concrete Products sales increased 17.6% in the quarter and 17.9% year to date, but gross margin declined to 14.2% in the quarter because of higher raw-material and labor costs and unfavorable mix. The segment recorded an operating loss of $0.1 million in the quarter and $0.9 million year to date.
- Steel Products and Measurement sales declined 42.8% in the quarter and 44.3% year to date, mainly because of the Piling Products divestiture. Segment gross margin improved to 16.4% in the quarter due to mix, but year-to-date segment operating results remained a loss of $1.4 million.
- Consolidated second-quarter gross margin increased 80 basis points to 17.7%, despite lower volume and inflationary costs. Selling and administrative expenses declined 1.9%, but increased as a percentage of sales to 14.7% from 12.8%.
- Operating cash flow deteriorated by $20.2 million year to date, principally because receivables, inventories, and other working-capital items consumed cash.
- Backlog was $250.8 million at June 30, 2022, down 0.9% from the prior year but up 2.5% sequentially. Approximately 5.3% was expected to extend beyond June 30, 2023.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management stated that orders and backlog remained strong, infrastructure investment supports a favorable longer-term outlook for North American freight and transit markets, and the Company has capacity for organic and acquisitive growth. Management expects inflationary cost pressure to continue through 2022 but cited pricing actions, mix improvements, and a 110-basis-point sequential margin improvement as evidence of progress. Supply-chain, labor, raw-material, service-partner, and COVID-19 effects eased during the quarter but remain risks.
Key disclosed risks include recession and demand weakness, rail traffic declines, inflation and material costs, supply-chain disruptions, labor availability, interest-rate and currency volatility, credit-facility covenant compliance, cybersecurity, ERP implementation, international and geopolitical conditions including the Ukraine conflict, environmental matters, customer concentration or loss, and integration or divestiture execution.
The Company maintains a $2.5 million environmental reserve related to environmental obligations. It is a potentially responsible party concerning the Portland Harbor Superfund Site; management does not currently expect a material adverse effect, but states that an unfavorable resolution could be material. Product warranty accruals were $0.8 million at June 30, 2022. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Investor verification points
- Reconcile the two reported figures for net available revolver capacity: approximately $81.5 million in MD&A versus $80.1 million in the liquidity table.
- Assess whether pricing and mix improvements can offset persistent inflation, especially in Precast Concrete Products.
- Monitor working-capital recovery, given the $13.4 million year-to-date operating cash outflow and increased inventory and receivables.
- Evaluate the sustainability and quality of the $250.8 million backlog, including cancellation risk and the portion extending beyond one year.
- Track Skratch and subsequent Intelligent Video acquisition integration, as well as the Track Components divestiture and related proceeds.
- Review debt levels, variable-rate exposure, interest-rate swaps, covenant headroom, and required Union Pacific settlement payments.
- Follow developments in the Portland Harbor environmental matter and other product-liability, warranty, and legal contingencies.