L.B. Foster Company — 2012 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
L.B. Foster manufactures, fabricates, and distributes products and services for rail, construction, utility, and energy markets through Rail Products, Construction Products, and Tubular Products segments. The filing covers the unaudited three months ended March 31, 2012, compared with the three months ended March 31, 2011.
Financial Performance and Position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $118.5 million | $117.1 million | 1.2% increase |
| Gross profit | $22.9 million | $17.5 million | 30.9% increase |
| Gross margin | 19.3% | 14.9% | Up 4.4 percentage points |
| Income before taxes | $5.1 million | $1.0 million | 418.0% increase |
| Net income | $3.4 million | $0.7 million | 396.2% increase |
| Diluted EPS | $0.33 | $0.07 | Increase of $0.26 |
| Operating cash flow | $(2.4) million | $(3.4) million | $1.0 million improvement |
- Segment sales were $69.2 million for Rail Products, $40.0 million for Construction Products, and $9.3 million for Tubular Products.
- Segment profit increased to $6.7 million from $3.2 million. Rail Products profit rose to $3.7 million from $0.7 million, Construction Products declined to $0.7 million from $1.7 million, and Tubular Products increased to $2.3 million from $0.7 million.
- Cash and cash equivalents were $67.8 million at March 31, 2012, compared with $73.7 million at December 31, 2011.
- Total debt was approximately $1.1 million, or 0.4% of capitalization, compared with $2.4 million at year-end 2011. No borrowings were outstanding under the $125.0 million revolving credit facility, and available capacity was $123.8 million.
- Total assets were $371.1 million and stockholders’ equity was $274.4 million at March 31, 2012.
- Capital expenditures were $2.5 million. The company expects full-year 2012 capital spending of approximately $9.0 million to $10.0 million.
- Cash used in investing activities was $2.5 million, compared with $11.8 million in the prior-year period, which included a $9.0 million acquisition payment.
- Cash used in financing activities was $1.8 million, including $0.3 million of dividends, $0.2 million of treasury stock purchases for tax withholding, and $1.4 million of debt repayments.
Material Changes Versus the Prior Comparable Period
- Rail Products sales increased 7.2% and gross profit increased 43.7%, helped by higher rail distribution volumes and improved U.K. friction-management volumes. The prior-year quarter included approximately $2.5 million of nonrecurring purchase-accounting inventory step-up expense related to the Portec Rail acquisition.
- Construction Products sales declined 14.4% because of lower backlog, fewer new orders, and weak market conditions. Gross margin nevertheless improved slightly to 13.8% from 13.5%.
- Tubular Products sales increased 61.7% and gross profit increased 129.6%, primarily due to higher coated-pipe volumes.
- Selling and administrative expenses increased 11.7%, including approximately $0.9 million of concrete-tie testing costs associated with the UPRR warranty claim.
- Other income improved by approximately $0.6 million, including approximately $0.3 million of additional gains related to a revision of the remaining term of a former Houston facility lease.
- The effective tax rate increased to 33.9% from 31.0%, principally because U.K. statutory rate changes had reduced the prior-year rate.
- Backlog declined to $201.7 million from $237.1 million at March 31, 2011, but increased from $145.4 million at December 31, 2011. Rail backlog increased year over year, while Construction Products backlog declined.
Guidance, Outlook, Risks, and Unusual Items
- Management expects strong Class 1 railroad capital spending and robust rail traffic to support Rail Products. It expects energy and water-well markets to continue growing, but at a slower rate than in the first quarter.
- Construction Products is expected to remain challenged through 2012 because of weak market conditions, lower backlog, state budget pressures, and uncertainty regarding successor transportation legislation.
- Management expects to remain profitable and generate operating cash flow in excess of capital expenditures, scheduled debt service, dividends, and share repurchases.
- The most significant contingency is a warranty claim from Union Pacific Railroad involving potentially defective or nonconforming concrete ties manufactured at CXT’s Grand Island, Nebraska facility. UPRR indicated that approximately 115,000 ties may be removed from track, and a Department of Transportation Inspector General subpoena seeks related records.
- The company has not accrued for the UPRR claim because the potential outcome cannot reasonably be estimated. Management states that an unfavorable resolution could materially affect earnings, liquidity, financial condition, and capital resources.
- The company maintained a total product warranty accrual of $6.7 million at March 31, 2012, including approximately $5.3 million for concrete-tie warranties. The filing’s MD&A separately refers to a concrete-tie warranty reserve of approximately $4.8 million; investors should reconcile these amounts.
- The UPRR Tucson supply agreement runs through 2012 and its extension remains uncertain. First-quarter Tucson sales were approximately $6.2 million, with a 2.2% gross margin, and related long-lived assets had a net book value of approximately $3.7 million.
- The company was in compliance with its credit-facility covenants. The U.K. working-capital facility had approximately $2.4 million of availability and expired June 30, 2012; no borrowings or performance bonds were outstanding at March 31, 2012.
- A foreign-currency hedge with a notional amount of approximately $0.7 million had a liability fair value of approximately $13,000 at quarter-end.
- The interim results are not necessarily indicative of full-year results, and the company identifies seasonality, raw-material prices and availability, production issues, customer concentration, litigation, environmental matters, transportation funding, and access to financing as risks.
Important Facts for Investors to Verify
- Progress and estimated exposure related to the UPRR concrete-tie claim, including test results, potential tie removals, legal or regulatory developments, and any required accrual.
- Whether the UPRR Tucson supply contract was extended beyond 2012 and the effect on facility utilization and asset recoverability.
- Construction Products backlog, order intake, transportation-funding legislation, and state infrastructure spending.
- Whether the expected $9.0 million to $10.0 million of 2012 capital expenditures and anticipated positive operating cash flow were achieved.
- Reconciliation of the $5.3 million concrete-tie warranty reserve in Note 13 with the approximately $4.8 million amount cited in MD&A.
- The filing states that outstanding letters of credit were approximately $1.2 million “at December 31, 2012,” a date inconsistent with the March 31, 2012 filing period; the correct reporting date and amount should be confirmed.