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, 2007
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
(Amounts in thousands, except per share data)
| Metric | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Net Sales | $135,753 | $394,966 |
| Gross Profit | $20,994 | $56,422 |
| Gross Margin | 15.5% | 14.3% |
| Net Income | $14,531 | $24,461 |
| Diluted EPS | $1.32 | $2.24 |
| Cash and Equivalents | $5,746 | $5,746 (Balance Sheet) |
| Working Capital | $83,843 | $83,843 (Balance Sheet) |
| Total Debt | $35,503 | $35,503 (Balance Sheet) |
| Operating Cash Flow (9mo) | N/A | $28,959 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 41.6% in Q3 2007 and 41.4% for the nine-month period compared to 2006. Growth was driven by all three segments: Rail (+34.1% Q3), Construction (+40.9% Q3), and Tubular (+106% Q3).
- Profitability: Net income surged to $14.5 million in Q3 2007 from $3.7 million in Q3 2006. This increase is largely attributable to a one-time $8.5 million dividend income recognition related to the Dakota, Minnesota & Eastern Railroad (DM&E) merger announcement.
- Excluding Dividend Income: Core income from continuing operations was $7.0 million ($0.64 diluted EPS) in Q3 2007, compared to $3.4 million ($0.32 diluted EPS) in Q3 2006.
- Debt Reduction: Total debt decreased significantly from $58.1 million at year-end 2006 to $35.5 million at September 30, 2007. The company paid down the revolving credit facility entirely and utilized a new $20 million term loan.
- Discontinued Operations: The Geotechnical division, sold in 2006, resulted in a nominal loss of $18,000 in Q3 2007, compared to income of $258,000 in Q3 2006.
Outlook, Risks, and Unusual Items
Unusual Items
- DM&E Merger: In October 2007 (subsequent to the reporting period), the DM&E merger with Canadian Pacific Railway (CP) was consummated. The company received approximately $148.8 million, recording a pre-tax gain of approximately $122.9 million in Q4 2007. Additionally, $8.5 million of previously unrecorded dividend income was recognized in Q3 2007.
- Future Contingent Payments: The company may receive up to 12.25% of future milestone payments from CP related to the Powder River Basin (PRB) expansion project, contingent on construction commencement and coal tonnage thresholds.
Outlook and Management Commentary
- Backlog: Total backlog from continuing operations was $165.8 million as of September 30, 2007.
- Operations: The company anticipates continued strength in all segments but does not expect the rapid growth rates of Q3 to persist in Q4. Production at the new Tucson, AZ concrete tie facility is stabilizing after workforce challenges.
- Capital Allocation: Proceeds from the DM&E sale are currently invested in short-term tax-free securities. Options under consideration include debt reduction, strategic acquisitions, organic reinvestment, or share repurchases.
Risks and Contingencies
- Customer Concentration: Significant dependence on Union Pacific Railroad for concrete tie sales and Chaparral Steel (now Gerdau Ameristeel) for steel sheet piling.
- Contract Loss: A primary customer for track panels at the Pueblo, CO facility is not renewing its contract, representing approximately $9.4 million in revenue for the nine months ended September 30, 2007. Management does not expect a material adverse impact.
- Legal Proceedings: Ongoing litigation regarding concrete railroad crossing panels in Texas and epoxy coating on pipes in Pennsylvania. Management believes liabilities will not be material.
- Market Risks: Exposure to steel and concrete price fluctuations, government funding changes for infrastructure, and "Buy America" provisions.
Investor Verification Checklist
- DM&E Gain Timing: Verify the exact timing and tax implications of the $122.9 million pre-tax gain recorded in Q4 2007 following the October merger consummation.
- Dividend Income Sustainability: Confirm that the $8.5 million dividend income recognized in Q3 2007 is a non-recurring item and not indicative of future operating earnings.
- Debt Covenant Compliance: Review the amended credit agreement terms, specifically the fixed charge coverage ratio and capital expenditure covenants, to ensure continued compliance.
- Customer Concentration: Assess the impact of the non-renewal of the Pueblo, CO track panel contract and the potential shift in DM&E business to CP-related entities.
- Contingent Milestone Payments: Evaluate the probability of the CP commencing the PRB expansion project to determine the likelihood of receiving future contingent payments.