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, 2009
Business Overview: A leading manufacturer, fabricator, and distributor of products for 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) | Q3 2009 | Q3 2008 | YTD 9M 2009 | YTD 9M 2008 |
|---|---|---|---|---|
| Net Sales | $92,413 | $145,550 | $283,928 | $368,824 |
| Gross Profit | $17,758 | $22,707 | $44,272 | $60,213 |
| Gross Margin % | 19.2% | 15.6% | 15.6% | 16.3% |
| Net Income | $6,144 | $8,126 | $11,815 | $22,089 |
| Diluted EPS | $0.60 | $0.76 | $1.15 | $2.01 |
| Operating Cash Flow (YTD) | $18,019 | $9,440 | ||
| Cash & Equivalents | $122,018 (as of Sept 30, 2009) | |||
| Total Debt | $22.0 million (as of Sept 30, 2009) | |||
| Debt-to-Capitalization | 8.8% |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 36.5% in Q3 2009 and 23.0% YTD compared to 2008, driven by reduced volumes and lower steel prices across all segments. The Tubular Products segment saw the steepest decline (69.1% in Q3) due to an industry-wide slowdown in energy markets.
- Profitability Impact: Net income dropped 24.4% in Q3 and 46.5% YTD. While gross margins improved in Q3 due to a favorable LIFO credit ($4.9 million) from declining steel prices, this was offset by $1.0 million in slow-moving inventory charges and $2.7 million in concrete tie warranty charges YTD.
- Segment Performance:
- Rail Products: Sales down 37.2% (Q3). Gross profit negatively impacted by concrete tie warranty charges and rejected ties from Union Pacific Railroad.
- Construction Products: Sales down 31.1% (Q3). Piling division suffered from volume and price declines, partially offset by growth in fabricated products and concrete buildings due to federal stimulus.
- Tubular Products: Sales down 69.1% (Q3). The segment reported a gross loss of $634,000 due to pricing reductions and manufacturing variances.
- One-Time Items: Q3 2009 included a $1.2 million gain on the sale of marketable securities. YTD 2008 included $2.0 million in gains from the DM&E investment sale and $1.5 million from a property sale-leaseback, which are absent in 2009.
Guidance, Outlook, and Risks
- Outlook: Management expects continued weakness in sales volumes and falling prices through 2010 due to the recessionary environment. They anticipate battling margin compression for at least the next six months but expect to remain profitable and generate positive cash flow.
- Cost Reductions: Implemented additional cost reduction measures in September 2009, including plant personnel and salaried workforce reductions.
- Joint Venture: Formed a 45% owned joint venture (LB Pipe & Coupling Products, LLC) in May 2009. The company has made $0.9 million in initial capital contributions and is obligated for an additional $1.0 million.
- Key Risks:
- Concrete Tie Warranty: Approximately $2.7 million in charges recorded YTD for in-track failures. Management believes they have accounted for all known failures but notes future costs could materially impact results.
- Government Funding: Significant reliance on federal highway and transportation funding (SAFETEA-LU), which expired in September 2009 and was only temporarily extended.
- Supplier Concentration: Construction segment relies heavily on Gerdau Ameristeel Corporation for piling products.
Investor Verification Checklist
- Warranty Exposure: Verify if the $2.7 million concrete tie warranty charge is fully reserved or if additional claims are emerging from the Grand Island and Tucson facilities.
- Backlog Quality: Review the $155.5 million backlog (down 13% YoY) to assess the timing of revenue recognition, particularly in the Transit Products division where orders are delayed until 2010.
- Joint Venture Capital Calls: Monitor the $1.0 million remaining capital obligation for the new joint venture and the timeline for facility completion.
- Liquidity Strategy: Assess the company's strategy for its $122 million cash position following the expiration of the U.S. Treasury guarantee for money market funds in September 2009.
- Government Stimulus Impact: Evaluate the actual conversion of federal stimulus funding into revenue for the Construction Products segment, given the uncertainty of long-term legislation.