L.B. Foster Company — 2014 First-Quarter Form 10-Q Summary
Business context and reporting period
L.B. Foster manufactures, fabricates, and distributes products and services for rail, construction, energy, and utility markets through Rail Products, Construction Products, and Tubular Products segments. This unaudited Form 10-Q covers the three months ended March 31, 2014, with comparison to March 31, 2013. Results exclude businesses classified as discontinued operations.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $111.4 million | $129.3 million | Down 13.8% |
| Gross profit | $24.1 million | $24.8 million | Down 2.9% |
| Gross margin | 21.7% | 19.2% | Up 245 basis points |
| Income from continuing operations | $3.6 million | $5.0 million | Down 26.3% |
| Diluted EPS from continuing operations | $0.35 | $0.48 | Down $0.13 |
| Net cash from continuing operating activities | $32.1 million | $(17.2) million | Improved by $49.4 million |
| Cash and equivalents at March 31 | $91.1 million | $81.4 million | Up $9.7 million year over year |
Net income was $3.6 million versus $4.9 million in the prior-year quarter. The effective tax rate declined to 31.4% from 33.5%, primarily reflecting recognition of previously unrecognized state tax benefits. Selling and administrative expense increased 5.2% to $18.0 million, and amortization increased 62.8% to $1.1 million, principally reflecting acquisition-related intangible assets.
- Rail Products sales declined 9.7% to $73.5 million; gross margin increased to 22.4% from 20.9%.
- Construction Products sales declined 25.6% to $27.4 million, while gross margin increased to 20.9% from 13.5%.
- Tubular Products sales declined 5.2% to $10.5 million; gross margin fell to 20.2% from 28.9%.
- Backlog was $253.3 million at March 31, 2014, up from $248.1 million at March 31, 2013 and $183.1 million at December 31, 2013.
Liquidity, debt, and cash flow
Operating cash flow benefited substantially from collections of large project receivables; accounts receivable declined to $66.8 million from $98.4 million at year-end. Capital expenditures were $3.5 million, compared with $1.0 million in the prior-year quarter. Financing cash uses included $0.3 million of dividends and $0.7 million of shares withheld for employee tax obligations.
- Total debt, primarily capital lease obligations, was $0.4 million at March 31, 2014.
- No borrowings were outstanding under the $125 million revolving facility; approximately $124.2 million remained available.
- Including U.K. availability, total credit-facility availability was approximately $126.7 million.
- The Company was in compliance with applicable debt covenants.
- Approximately $48.7 million of cash was held in non-domestic accounts and was intended to remain indefinitely reinvested outside the United States.
Material changes, outlook, and unusual items
Management attributed the sales decline primarily to weather-related project delays and supply-chain issues in Construction Products. Despite lower sales, Construction Products reported materially improved margins, new orders up 51.5%, and backlog up 37.9% year over year. Tubular Products reported new orders up 87.8% and backlog up 61.1% year over year. Rail Products benefited from a higher mix of manufactured products.
The Company expects 2014 capital expenditures of approximately $18 million to $22 million, funded by operating cash flow. No broader earnings or revenue guidance is provided in the filing. A $0.03 per-share quarterly dividend remained authorized. The Company paid $0.03 per share during the quarter and did not make open-market repurchases under its $15 million authorization.
The Company paid a $0.5 million post-closing working-capital adjustment related to the 2013 Ball Winch acquisition. The acquisition contributed to Tubular Products and increased amortization expense. No goodwill impairment test was required during the quarter.
Risks, contingencies, and other considerations
- The Company maintained a $7.0 million product-warranty reserve, including approximately $6.1 million for concrete-tie claims.
- L.B. Foster and Union Pacific Railroad had not resolved a dispute involving approximately 170,000 ties replaced in 2013. Additional claims, damages, or termination of the amended supply agreement could materially affect results and financial condition.
- Environmental and litigation reserves totaled approximately $2.2 million; management did not expect existing matters to materially affect liquidity or financial condition, but individual-period results could be affected.
- Key forward-looking risks include rail and infrastructure spending, seasonality and weather, supply-chain availability, competition, foreign-currency movements, tax matters, working-capital requirements, warranty claims, and regulatory developments.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the Union Pacific concrete-tie dispute is resolved and whether the $6.1 million warranty reserve remains adequate.
- Whether the strong backlog and order growth convert into revenue after weather and supply-chain delays.
- Whether Tubular Products margins recover from volume-related deleveraging and lower pricing.
- Whether planned 2014 capital spending remains within the $18 million–$22 million range and is funded by operating cash flow.
- The availability and restrictions of offshore cash, including potential tax costs of repatriation.