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, 2006
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
All figures in thousands, except per share data.
| Metric | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 |
|---|---|---|
| Net Sales | $95,868 | $279,336 |
| Gross Profit | $13,890 | $37,139 |
| Gross Margin | 14.5% | 13.3% |
| Net Income (Continuing Ops) | $3,440 | $7,725 |
| Net Income (Total) | $3,698 | $10,564 |
| Diluted EPS (Total) | $0.34 | $0.98 |
| Cash and Equivalents | $3,764 | $3,764 (Ending Balance) |
| Total Debt | $50,625 (Total Capitalization) | $50,625 (Total Capitalization) |
| Working Capital | $72,547 | $72,547 |
Debt Structure: Total debt was $50.6 million, comprising $30.6 million in revolving credit facility borrowings, $17.4 million in capital leases/interim financing, and $2.6 million in other debt. Debt-to-capitalization ratio increased to 35%.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 5.4% in Q3 and 12.1% for the nine-month period compared to 2005. Rail products sales drove growth (up 20.1% in Q3, 13.0% YTD) due to concrete tie and new rail distribution sales. Construction products sales were down 5.1% in Q3 due to project delays but up 13.4% YTD.
- Profitability: Income from continuing operations rose 55.8% in Q3 and 74.8% YTD. Gross margins improved across Rail and Construction segments due to better billing margins and favorable steel costs.
- Discontinued Operations: The company sold its Geotechnical Division in February 2006, recognizing a gain of approximately $3.0 million. This contributed $2.8 million to net income for the nine months ended September 30, 2006.
- Expenses: Selling and administrative expenses increased 12.7% in Q3 and 16.4% YTD, primarily due to higher employee-related costs and benefits. Interest expense increased 14.7% in Q3 and 36.1% YTD due to higher interest rates and increased borrowings for facility expansions.
- Balance Sheet: Inventory increased $13.4 million to $80.4 million, driven by increased rail and piling inventory. Accounts receivable increased $6.3 million.
Guidance, Outlook, and Risks
- Capital Expenditures: The company anticipates total capital spending in 2006 to range from $14.0 million to $15.0 million, focused on new facilities in Tucson, AZ, Pueblo, CO, and Grand Island, NE.
- Backlog: Total backlog from continuing operations was approximately $170.8 million as of September 30, 2006, a significant increase from $100.2 million at year-end 2005.
- Outlook: Operations are heavily dependent on Union Pacific Railroad (UPRR) for concrete tie supply agreements through 2010 and 2012. The company notes that delays in passing the federal highway funding bill (SAFETEA-LU) have hampered volumes and margins in the Fabricated Products group.
- Risks and Contingencies:
- Legal Proceedings: Pending disputes regarding concrete railroad crossing panels in Texas and epoxy coating issues on pipe in Pennsylvania. The company believes it has meritorious defenses.
- Investment Risk: Significant investment in Dakota, Minnesota & Eastern Railroad (DM&E). The value of this investment depends on the viability of a $2.0+ billion track extension project, which faces regulatory and environmental challenges.
- Market Risk: Exposure to interest rate fluctuations on variable-rate debt and foreign currency exchange rates on Canadian rail sales.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings excluding the one-time $3.0 million gain from the Geotechnical Division sale.
- Capital Expenditure Execution: Monitor the completion and commissioning of new facilities in Tucson, AZ, and Pueblo, CO, as delays could materially impact results.
- DM&E Investment Valuation: Assess the status of the DM&E Powder River Basin project and regulatory approvals, as this significantly impacts the valuation of the company's investment.
- Working Capital Trends: Review the $13.4 million increase in inventory and $6.3 million increase in receivables to ensure they align with sales growth and do not indicate collection or obsolescence issues.
- Debt Covenants: Confirm continued compliance with the revolving credit facility covenants, specifically the fixed charge coverage ratio and capital expenditure limits.