Business Context and Reporting Period
Company: L. B. Foster Company (FOSTER L B CO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 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 Sept 30, 2010 | Nine Months Ended Sept 30, 2010 |
|---|---|---|
| Net Sales | $125,561 | $327,067 |
| Gross Profit | $20,042 | $52,430 |
| Gross Margin | 16.0% | 16.0% |
| Net Income | $6,513 | $14,253 |
| Diluted EPS | $0.63 | $1.38 |
| Operating Cash Flow (9mo) | $32,655 | |
| Cash and Equivalents (Sept 30, 2010) | $144,183 | |
| Total Debt (Sept 30, 2010) | $16,400 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 28.3% in Q3 2010 compared to Q3 2009, and 9.4% year-to-date. Growth was driven by improved volumes in Rail and Construction segments and a 141% surge in Tubular Products sales.
- Profitability: Net income rose 6.0% in Q3 and 20.6% year-to-date. Gross profit margins improved year-to-date primarily due to the absence of $5.3 million in concrete tie warranty charges recorded in 2009 and improved manufacturing variances.
- LIFO Impact: The LIFO credit to gross profit was significantly lower in 2010 ($0.7M in Q3, $1.4M YTD) compared to 2009 ($4.9M in Q3, $6.7M YTD), reducing reported gross profit relative to the prior year.
- Acquisitions: The company acquired Interlocking Deck Systems International, LLC (IDSI) in March 2010 for $7.0 million, adding to the Construction Products segment. Goodwill increased from $350,000 to $3.2 million.
- Segment Performance:
- Rail Products: Sales up 28.3% in Q3; gross profit margin improved to 12.5% from 12.0%.
- Construction Products: Sales up 21.2% in Q3; gross profit margin stable at 17.3%.
- Tubular Products: Sales up 141.0% in Q3; returned to profitability with a 25.9% gross margin after a loss in the prior year.
Guidance, Outlook, and Risks
- Portec Acquisition: The company is in the process of acquiring Portec Rail Products, Inc. for approximately $114.9 million ($11.80 per share). The tender offer was extended to November 15, 2010. The transaction is subject to antitrust clearance, which may require the divestiture of Portec's Huntington, WV facility and certain rail joint assets. A $2.0 million termination fee is payable under specific conditions.
- Outlook: Management expects to battle margin compression for at least the next six months due to soft demand and heightened competition. However, the company expects to remain profitable and generate positive cash flow. Total backlog increased 14.8% to $204.9 million as of September 30, 2010.
- Key Risks:
- Warranty Claims: Ongoing discussions with Union Pacific Railroad regarding potential warranty claims on concrete ties manufactured in 2004-2005. While management believes current estimates ($0.8 million remaining) are reasonable, future costs could be material.
- Government Funding: Operations rely heavily on federal infrastructure spending (SAFETEA-LU), which has been extended only through December 31, 2010, creating uncertainty for future demand.
- Customer Concentration: Significant reliance on Union Pacific Railroad for concrete tie sales and Class 1 railroads for ARP facilities.
Investor Verification Checklist
- Verify the status and closing conditions of the Portec Rail Products acquisition, specifically regarding DOJ antitrust divestiture requirements.
- Monitor the resolution of concrete tie warranty claims with Union Pacific Railroad and potential impact on future earnings.
- Assess the impact of the expiration of SAFETEA-LU funding on the Construction Products segment backlog and future orders.
- Review the final purchase price allocation for the IDSI acquisition once the measurement period concludes.
- Confirm the renewal status of supply agreements with major customers, particularly the Grand Island, NE facility contract with Union Pacific Railroad.