Business Context and Reporting Period
Company: L. B. Foster Company (FOSTER L B CO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: A leading manufacturer, fabricator, and distributor of products for the rail, construction, utility, and energy markets. Operations are organized into three segments: Rail Products, Construction Products, and Tubular Products.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2010 |
Six Months Ended June 30, 2010 |
Six Months Ended June 30, 2009 |
|---|---|---|---|
| Net Sales | $119,504 | $201,506 | $200,961 |
| Gross Profit | $20,315 | $32,388 | $26,514 |
| Gross Margin % | 17.0% | 16.1% | 13.2% |
| Net Income | $5,987 | $7,740 | $5,671 |
| Diluted EPS | $0.58 | $0.75 | $0.55 |
| Operating Cash Flow (6mo) | $16,712 | ||
| Total Debt | $17.8 million | ||
| Cash & Equivalents | $131.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 20.3% in Q2 2010 compared to Q2 2009, driven by growth in Construction Products (+23.6%) and Tubular Products (+49.2%). Year-to-date sales were flat (+0.3%) due to a decline in Rail Products (-8.7%).
- Profitability Improvement: Net income for Q2 2010 rose 125.8% year-over-year. This was primarily due to the absence of $3.7 million in negative adjustments related to concrete tie failures recorded in Q2 2009 and improved manufacturing variances.
- Segment Performance:
- Rail Products: Sales declined YTD due to lower selling prices and weak industrial demand, though gross profit improved significantly due to the lack of prior-year warranty charges.
- Construction Products: Sales and gross profit increased, benefiting from federal stimulus legislation and increased orders for concrete buildings and fabricated bridges.
- Tubular Products: Q2 sales surged, but YTD sales declined slightly (-1.0%) with compressed margins in the coated pipe division.
- Acquisitions: The company acquired Interlocking Deck Systems International, LLC (IDSI) for $7.0 million in March 2010, strengthening its steel bridge decking position.
Guidance, Outlook, and Risks
- Portec Acquisition: The company is in the process of acquiring Portec Rail Products, Inc. for approximately $112.4 million. The deal faces antitrust scrutiny from the DOJ regarding the rail joint business. A preliminary injunction was dissolved in June 2010, and the tender offer was extended to August 16, 2010.
- Market Outlook: Management expects to battle margin compression for at least the next three months due to soft demand and heightened competition. However, the company anticipates remaining profitable and generating positive cash flow.
- Government Funding: Operations rely heavily on federal infrastructure funding (SAFETEA-LU), which has been extended through December 31, 2010. Uncertainty remains regarding the timing and level of successor legislation.
- Warranty Contingencies: The company faces ongoing discussions with Union Pacific Railroad regarding potential warranty claims on concrete ties manufactured in 2004-2005. While management believes most claims are invalid, future costs could materially impact results.
- Liquidity: The company maintains a strong financial position with $131.3 million in cash and $69.4 million in unused credit facility availability. Total debt is $17.8 million.
Investor Verification Checklist
- Portec Merger Status: Monitor the resolution of DOJ antitrust concerns and the final closing date of the $112.4 million Portec acquisition.
- Concrete Tie Warranty Exposure: Verify the outcome of negotiations with Union Pacific Railroad regarding alleged tie defects and potential additional warranty charges.
- Rail Segment Demand: Assess the impact of weak Class 1 railroad capital spending on future Rail Products sales volumes and pricing.
- Government Stimulus Impact: Track the expiration of SAFETEA-LU and the passage of new transportation funding legislation to gauge future Construction Products demand.
- Capital Allocation: Confirm the funding source for the Portec acquisition and the impact on the company's cash balance and leverage ratios post-closing.