L.B. Foster Company — 2013 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
L.B. Foster manufactures, fabricates, and distributes products and services for rail, construction, energy, and utility markets through Rail Products, Construction Products, and Tubular Products. The filing covers the three and six months ended June 30, 2013. Prior-period results were reclassified to present the sold Shipping Systems Division and Precise Structural Products business as discontinued operations.
Key Financial Metrics
Amounts are in thousands, except per-share data.
| Metric | Three Months 2013 | Three Months 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Net sales | $149,936 | $163,180 | $279,257 | $277,471 |
| Gross profit | $29,175 | $12,334 | $54,023 | $33,986 |
| Gross margin | 19.5% | 7.6% | 19.3% | 12.2% |
| Income from continuing operations | $7,257 | $(3,321) | $12,208 | $(342) |
| Net income | $7,295 | $(2,071) | $12,222 | $1,298 |
| Diluted EPS | $0.71 | $(0.20) | $1.19 | $0.13 |
- Second-quarter sales declined 8.1%; six-month sales increased 0.6%.
- Six-month cash flow from continuing operating activities was an outflow of $522, compared with an inflow of $3,630 in the prior-year period. Working capital used $17,906, including a $19,700 increase in accounts receivable.
- Capital expenditures were $3,126 year to date, compared with $4,810 in 2012. Management expected full-year 2013 capital spending of $7,000 to $8,000.
- Cash and cash equivalents were $94,678 at June 30, 2013, compared with $101,464 at December 31, 2012. Cash declined by $6,786 during the first six months.
- Total debt was $38, consisting of capital lease obligations. No borrowings were outstanding under the $125,000 revolving credit facility, with $124,144 of availability. Including other facilities, management reported total credit availability of $126,251.
- The company was in compliance with its credit agreement covenants. Outstanding letters of credit were approximately $856.
- The quarterly dividend increased to $0.03 per share from $0.025 in the prior-year quarter; six-month dividends paid were $0.06 per share.
Segment Performance and Material Changes
| Segment | Q2 2013 Sales | Change vs. Q2 2012 | Q2 2013 Gross Margin |
|---|---|---|---|
| Rail Products | $90,892 | (10.3%) | 19.2% |
| Construction Products | $43,697 | (8.7%) | 15.3% |
| Tubular Products | $15,347 | 10.0% | 34.1% |
- Rail Products sales decreased because of lower precast concrete tie and rail technology sales. Reported margin improved sharply because the prior-year quarter included a $19,000 concrete-tie warranty charge; excluding that charge, 2013 rail margin declined approximately 1.3% due to project mix and competitive pricing.
- Construction Products sales were pressured by state and local funding constraints, a slow non-residential market, and federal sequestration. Project-management efficiencies modestly improved margin.
- Tubular Products benefited from higher coated-product volumes, favorable material pricing, and manufacturing efficiencies. Management stated that the favorable comparison was expected to turn negative in the second half because of reduced coated-products backlog and delayed customer purchasing decisions.
- Six-month continuing-operations sales increased 2.6% in Rail Products and 13.8% in Tubular Products, but declined 6.6% in Construction Products.
- Selling and administrative expense increased 8.0% in the quarter and 4.5% year to date, primarily from higher salaried headcount, travel, and research and development costs.
- Backlog from continuing operations was $220,266 at June 30, 2013, compared with $252,047 a year earlier and $210,918 at December 31, 2012. Tubular Products backlog declined to $2,685 from $13,045 a year earlier.
Outlook, Risks, Contingencies, and Unusual Items
- No formal earnings or revenue guidance was provided. Management expected 2013 capital spending of $7,000 to $8,000, funded by operating cash flow.
- The concrete-tie warranty reserve was $11,815 at June 30, 2013, including approximately $11,021 related to defective ties supplied under a 2005 contract. The company continues to work with Union Pacific Railroad to identify and replace defective ties, and future claims or new information could materially affect results.
- The company faces risks from rail traffic levels, infrastructure funding, federal sequestration, supplier availability, competition, labor conditions, seasonality, working-capital requirements, taxes, foreign exchange, inflation, and governmental regulation.
- Environmental and litigation reserves were approximately $2,133. Management stated that existing proceedings are not expected to materially affect financial condition or liquidity, but individual resolutions could materially affect a reporting period.
- CXT continued cooperating with a U.S. Department of Transportation Inspector General subpoena concerning concrete railroad ties manufactured at the Grand Island, Nebraska facility.
- The company held approximately $36,941 of cash in non-domestic accounts; repatriation could subject those funds to U.S. income taxes.
- Discontinued operations contributed only $38 of second-quarter income and $14 of six-month income in 2013, versus $1,250 and $1,640, respectively, in 2012. The prior-year results included substantial effects from the sale of discontinued businesses and related tax items.
Important Facts for Investors to Verify
- Whether concrete-tie warranty claims remain within the $11,021 reserve and whether additional claims or replacements emerge.
- Whether Rail Products margins recover after adjusting for the prior-year $19,000 warranty charge and whether competitive pricing continues to pressure profitability.
- Whether the sharp decline in Tubular Products backlog translates into weaker second-half sales and margins.
- Whether operating cash flow improves as accounts receivable and other working-capital uses normalize.
- Whether federal and local infrastructure funding constraints continue to affect Construction Products demand.
- Whether the United Kingdom working-capital facility, scheduled to expire August 31, 2013, is renewed on substantially similar terms.
- The filing’s unaudited interim results and management estimates, particularly warranty reserves, LIFO calculations, tax rates, pension contributions, and impairment assessments.