L.B. Foster Company — Form 10-Q Summary
Business Context and Reporting Period
L.B. Foster Company is a global provider of engineered and manufactured infrastructure products and services. The filing covers the quarter and nine months ended September 30, 2022. Operations are reported through Rail, Technologies, and Services; Precast Concrete Products; and Steel Products and Measurement.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net sales | $130.0 million, essentially unchanged | $360.3 million, down 10.1% |
| Gross profit | $23.1 million; 17.8% margin | $62.8 million; 17.4% margin |
| Operating profit/(loss) | $(1.1) million | $(0.9) million |
| Net income/(loss) attributable to L.B. Foster | $(2.1) million; $(0.20) per diluted share | $(1.6) million; $(0.16) per diluted share |
| Cash flow from continuing operations | Not separately provided | $(18.8) million |
| Capital expenditures | Not separately provided | $4.6 million |
| Cash and equivalents | $4.9 million at September 30, 2022 | |
| Total debt | $98.9 million at September 30, 2022 |
Third-quarter selling and administrative expense increased 12.8% to $22.6 million, or 17.4% of sales, versus 15.4% in the prior-year quarter. Net interest expense increased 37.5% to $1.0 million. The effective tax rate was 7.7% for the quarter and 8.7% year to date; the quarter included a $0.3 million discrete tax expense related to undistributed Canadian earnings.
Material Changes Versus the Prior Comparable Period
- Quarterly sales were flat overall, reflecting organic growth of 8.7% and acquisition growth of 5.5%, offset by a 14.3% reduction from divestitures.
- Rail, Technologies, and Services sales increased 4.6%, but segment operating profit declined 82.6% to $0.5 million. Results included a $3.956 million unfavorable settlement adjustment on certain Crossrail commercial contracts.
- Precast Concrete Products sales increased 60.6% and operating profit increased to $1.2 million, supported by the VanHooseCo acquisition and stronger legacy business margins.
- Steel Products and Measurement sales declined 37.6% following the Piling Products divestiture, while its operating profit improved to $0.3 million because of a more favorable mix and lower selling and administrative costs.
- Year-to-date sales declined 10.1%, gross profit declined 6.6%, and the Company moved from $5.0 million of operating profit to a $0.9 million operating loss.
- Backlog was $272.8 million at September 30, 2022, up 17.7% from the prior year and up from $210.2 million at December 31, 2021. Approximately 10.1% was expected to extend beyond September 30, 2023.
Acquisitions, Divestitures, and Unusual Items
- The Company acquired VanHooseCo Precast LLC on August 12, 2022, for approximately $52.2 million net of cash acquired. The acquisition contributed $6.4 million of sales and $0.4 million of operating profit from acquisition through quarter-end.
- The Company acquired Skratch Enterprises Ltd. on June 21, 2022, for $7.4 million.
- The Company divested its Track Components business on August 1, 2022, receiving $7.8 million of cash proceeds and recording a $0.4 million loss on sale.
- The prior-year quarter included a $2.7 million gain from the Piling Products divestiture; the current quarter included the Track Components loss instead.
- Precast results included an $0.9 million purchase-accounting adjustment for acquired VanHooseCo inventory.
Liquidity, Debt, Outlook, and Risks
The revolving credit facility has total commitments of $130.0 million and matures August 13, 2026. At September 30, 2022, borrowings were $98.8 million, letters of credit were $0.6 million, and net available borrowing capacity was $30.7 million. Total available funding capacity, including cash, was $35.6 million. The Company was in compliance with its credit agreement covenants.
The credit agreement was amended to approve the VanHooseCo acquisition, temporarily modify leverage covenant terms through June 30, 2023, add pricing terms, and permit conversion from LIBOR-based to SOFR-based borrowings. The Company entered into two SOFR-based interest-rate swaps with notional values of $20.0 million each to reduce variable-rate exposure.
Management stated that cash, operating cash generation, and revolver availability should provide sufficient liquidity for operations, capital expenditures, debt service, settlement payments, and acquisitions. Management remains optimistic about longer-term North American freight, transit, and infrastructure investment trends, including potential benefits from the Infrastructure Investment and Jobs Act, but did not provide specific financial guidance in the filing.
Key risks include inflation in labor and raw materials, supply-chain disruption, recessionary demand conditions, higher interest rates, covenant and liquidity constraints, integration of acquisitions, execution of portfolio transformation initiatives, foreign-currency exposure, cybersecurity, environmental obligations, customer and project delays, and litigation or warranty claims. The Company remains obligated to pay $20.0 million under the Union Pacific Railroad settlement through 2024. It also maintains a $2.5 million environmental reserve related principally to environmental matters, including the Portland Harbor Superfund Site; management states that the ultimate exposure cannot be predicted.
Most Important Facts for Investors to Verify
- Whether the Crossrail settlement and other strategic-transformation costs are nonrecurring or could recur.
- VanHooseCo and Skratch integration performance, including whether expected synergies and margins are achieved.
- Available revolver capacity, leverage and fixed-charge covenant compliance, and the effect of higher interest rates.
- Conversion of the $272.8 million backlog into revenue and cash, including cancellation, timing, and margin risks.
- Working-capital trends, particularly the increase in accounts receivable and inventories and the negative operating cash flow.
- Potential liability from the Portland Harbor environmental matter, product claims, and the Union Pacific settlement.
- The filing’s interim results are not necessarily indicative of full-year results, and no specific full-year guidance is provided.