L.B. Foster Company — Q2 2018 Form 10-Q Summary
Business Context and Reporting Period
L.B. Foster manufactures and distributes transportation and energy infrastructure products and services in North America and Europe. Operations are organized into Rail Products and Services, Construction Products, and Tubular and Energy Services. The filing covers the quarter and six months ended June 30, 2018; financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $172.9 million, up 19.3% | $295.3 million, up 12.1% |
| Gross profit | $32.5 million; 18.8% margin | $54.5 million; 18.5% margin |
| Income before taxes | $5.6 million, up 60.4% | $4.1 million, up 172.9% |
| Net income | $4.9 million versus $3.0 million | $2.9 million versus $0.6 million |
| Diluted EPS | $0.47 versus $0.29 | $0.28 versus $0.06 |
| Operating cash flow | Not separately provided | $7.9 million versus $29.9 million |
At June 30, 2018, cash and cash equivalents were $13.3 million, total debt was $99.0 million, and net available borrowing capacity under the domestic revolving facility was $71.7 million. Debt declined from $130.0 million at December 31, 2017. Capital expenditures were $1.8 million during the first six months, while proceeds from asset sales were $2.1 million.
Working capital increased modestly from December 31, 2017, but accounts receivable increased to $96.3 million and inventories to $101.3 million. The company reported $231.3 million of backlog at June 30, 2018, including approximately 11.7% expected to extend beyond June 30, 2019.
Segment Performance and Changes Versus Prior Period
- Rail Products and Services: Second-quarter sales increased 32.5% to $91.9 million and segment profit increased 48.3% to $5.3 million. Growth reflected stronger Rail Technologies and Rail Products activity, including transit and North American freight rail demand. Backlog rose 61.7% year over year to $126.9 million.
- Construction Products: Second-quarter sales decreased 7.2% to $42.2 million and segment profit decreased 44.0% to $2.9 million. Piling demand and pricing weakened, while fabricated bridge results reflected the absence of a prior-year mega-project. Backlog increased 9.1% year over year to $82.4 million.
- Tubular and Energy Services: Second-quarter sales increased 29.1% to $38.8 million, and segment profit improved to $4.5 million from a $0.1 million loss. Results benefited from stronger upstream and midstream markets, higher volume, and improved margins.
Second-quarter gross margin declined 30 basis points year over year, primarily because of lower margins in Construction Products and Rail Products and Services, partly offset by substantially improved Tubular and Energy Services margins. Selling and administrative expenses increased 13.6%, driven principally by personnel costs and $1.6 million of additional UPRR-related litigation costs. Net interest expense declined 23.4% because of lower debt and improved borrowing spreads.
For the first six months, sales increased 12.1%, while gross margin declined 10 basis points to 18.5%. Selling and administrative expenses increased 10.1%, including $2.8 million of additional UPRR litigation costs. The effective tax rate was 29.1% versus 60.1% in the prior-year period; the company maintains a full valuation allowance on U.S. deferred tax assets.
Liquidity, Debt, and Cash Flow
Operating cash flow declined to $7.9 million from $29.9 million, primarily because higher receivables and inventories consumed cash and the prior-year period included approximately $11.8 million of tax refunds. Financing activities used $31.2 million, including $99.9 million of debt repayments partially offset by $69.0 million of new borrowings. The company repatriated approximately $24.7 million of excess international cash to facilitate debt reduction.
The revolving credit facility matures March 13, 2020. The company was in compliance with its credit covenants at June 30, 2018. The minimum EBITDA covenant and minimum liquidity covenant applied through June 30, 2018; the maximum gross leverage covenant was scheduled to resume for the September 30, 2018 quarter. The company had $50.0 million of LIBOR-based interest-rate swaps outstanding.
Outlook, Risks, Contingencies, and Unusual Items
Management expressed confidence in rail infrastructure demand, increasing North American freight rail activity, global transit opportunities, strong Construction Products backlog, and continued recovery in upstream and midstream energy markets. The filing does not provide specific consolidated earnings or revenue guidance.
- UPRR concrete tie litigation: The company maintained approximately $7.7 million of reserves for concrete tie warranty exposure within an $8.7 million total warranty reserve. Trial was scheduled for October 1, 2018, but management could not estimate any additional loss or range of loss. A materially adverse outcome could affect earnings, financial condition, and cash flow.
- Other contingencies: Environmental reserves were approximately $6.1 million. The company received an EPA notice concerning the Portland Harbor Superfund Site but did not expect current environmental matters to have a material adverse effect.
- Accounting changes: ASC 606 revenue recognition was adopted January 1, 2018 with no material effect. Adoption of the intra-entity transfer tax standard reduced opening retained earnings by $0.3 million. The company expects the forthcoming lease standard to materially affect the balance sheet but not credit covenants.
- Other risks: The filing highlights tariffs and trade agreements, cybersecurity, international operations and currency movements, energy prices, infrastructure funding, supplier and labor issues, tax-law developments, foreign regulations, and the company’s ability to manage working capital and debt.
- Unusual items: The company recorded a $0.3 million loss on the sale of land during the quarter and recognized foreign currency-related other income during the six-month period.
Important Facts for Investors to Verify
- Whether improved rail and energy demand offsets continued weakness and margin pressure in Construction Products.
- The timing and financial outcome of the UPRR litigation and whether the $7.7 million concrete-tie reserve is adequate.
- Compliance with reinstated leverage requirements and the company’s ability to reduce debt while maintaining sufficient liquidity.
- Whether working-capital investment in receivables and inventory converts into operating cash flow during the second half of 2018.
- The final effects of the Tax Cuts and Jobs Act, GILTI accounting, and the future lease-standard adoption.
- The sustainability of the $231.3 million backlog and the extent to which backlog converts into revenue and profit.