L.B. Foster Company 10-Q Summary
Business Context and Reporting Period
L.B. Foster Company manufactures and distributes products and services for transportation and energy infrastructure in North America and Europe. Its operating segments are Rail Products and Services, Construction Products, and Tubular and Energy Services. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $200.9 million, up 16.2% | $351.4 million, up 19.0% |
| Gross profit | $37.1 million | $66.3 million |
| Gross margin | 18.5%, down 60 basis points | 18.9%, up 20 basis points |
| Income before taxes | $11.2 million, up 82.6% | $15.6 million, up 222.6% |
| Net income | $9.6 million, up 76.0% | $13.3 million versus $3.6 million |
| Diluted earnings per share | $0.90 versus $0.52 | $1.25 versus $0.34 |
- Second-quarter sales increased in all segments: Rail Products and Services rose 10.4%, Construction Products rose 31.3%, and Tubular and Energy Services rose 13.7%.
- Six-month segment sales increased 15.0%, 30.4%, and 16.2%, respectively. Six-month segment profit increased 54.9% in Rail, 47.7% in Construction, and 51.0% in Tubular and Energy Services.
- Six-month selling and administrative expenses increased 2.2%, but declined to 12.7% of sales from 14.8%. Lower legal costs related to the Union Pacific Railroad litigation partly offset higher personnel, third-party service, and bad-debt expenses.
- Cash flow from operations was negative $9.4 million for the six months, compared with positive $7.9 million in 2018. Working capital used $33.2 million, including increases in receivables and inventories and a $4.0 million settlement payment.
- Capital expenditures were $3.8 million, compared with $1.8 million in the prior-year period. Financing activities provided $14.7 million, and cash increased $1.7 million to $12.0 million.
- Total debt was $91.1 million at June 30, 2019, compared with $75.0 million at December 31, 2018. The balance included $65.3 million drawn on the revolving facility and a $25.0 million term loan.
- The amended credit facility provides up to $140.0 million of revolving borrowings, matures April 30, 2024, and had $73.8 million of net available borrowing capacity at quarter-end. The Company was in compliance with its financial covenants.
- Accounts receivable were $98.7 million, inventories were $134.4 million, and stockholders’ equity was $136.2 million at June 30, 2019.
Material Changes Versus Prior Comparable Period
- Revenue growth was broad-based, with particularly strong volume in Rail Products, Piling and Fabricated Bridge, Precast Concrete Products, and Protective Coatings and Measurement Systems.
- Second-quarter consolidated gross margin declined because Construction Products and Tubular and Energy Services margins decreased by 250 and 150 basis points, respectively. Rail margin increased by 90 basis points.
- Six-month gross margin improved modestly, led by Tubular and Energy Services and Rail Products, partially offset by lower Construction Products margin.
- The effective tax rate was 15.0% in the second quarter and 14.9% for the six months, compared with 11.8% and 25.9%, respectively, in 2018. The rate benefited from realization of U.S. deferred tax assets previously subject to a valuation allowance, but management expects tax-rate variability.
- Total backlog declined to $209.3 million from $231.3 million at June 30, 2018 and $220.4 million at December 31, 2018. Rail backlog fell 25.9% year over year, while Construction and Tubular backlog increased 8.3% and 18.5%, respectively.
- Rail new orders decreased 32.9% in the second quarter and 16.9% for the six months, primarily in new rail distribution products. Management attributed part of the Rail Technologies decline to the nearing completion of the London Crossrail project.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide specific full-year revenue, earnings, or cash-flow guidance. Management expressed encouragement regarding order growth in Tubular and Energy Services, particularly in the midstream market, but noted lower Rail orders and backlog.
- Remaining performance obligations were approximately $209.3 million at June 30, 2019; approximately 11.2% was expected to extend beyond June 30, 2020.
- The Company entered into a settlement with Union Pacific Railroad requiring aggregate payments of $50.0 million, including $2.0 million paid immediately and $48.0 million in installments through December 2024. The Company also agreed to target $48.0 million of cumulative purchases from UPRR through 2024. The accrued settlement liability was $46.0 million at June 30, 2019.
- The Company remains identified as a potentially responsible party concerning the Portland Harbor Superfund Site. The EPA estimates total site remediation costs at approximately $1.1 billion on a net-present-value basis and $1.7 billion undiscounted, but the Company states that its individual exposure is uncertain and does not currently expect a material adverse effect. Environmental reserves were approximately $6.1 million.
- The Company adopted the new lease standard on January 1, 2019, recognizing $13.2 million of operating lease right-of-use assets and corresponding liabilities. The adoption did not affect operations, cash flows, or credit covenant compliance.
- Variable-rate debt is partly hedged through $50.0 million of LIBOR-based interest-rate swaps. The swaps had a $0.5 million liability at June 30, 2019, compared with a $0.7 million asset at December 31, 2018.
- Key disclosed risks include economic weakness, rail and energy market demand, infrastructure funding, material and manufacturing costs, tariffs and regulation, foreign currency, international operations and Brexit, supplier availability, litigation, environmental obligations, working-capital needs, indebtedness, interest rates and potential LIBOR reforms.
- Disclosure controls and procedures were deemed effective, and no other material changes to internal control over financial reporting were reported beyond implementation of lease-related processes.
Investor Verification Checklist
- Verify whether the negative operating cash flow and increased borrowings reflect temporary working-capital investment or a continuing liquidity trend.
- Assess the sustainability of revenue growth and segment margins, particularly the margin pressure in Construction Products and Tubular and Energy Services.
- Monitor Rail orders and backlog, including the effect of the London Crossrail completion and lower new rail distribution orders.
- Review compliance with credit-facility covenants, available borrowing capacity, debt maturities, interest-rate exposure, and the April 2024 facility maturity.
- Evaluate the remaining Union Pacific settlement payments and the related product-purchase commitments through 2024.
- Track developments in the Portland Harbor environmental matter and whether the Company’s estimated exposure changes.
- Consider variability in the effective tax rate resulting from the U.S. deferred-tax-asset valuation allowance and jurisdictional income mix.