L.B. Foster Company — Form 10-Q Summary
Business Context and Reporting Period
L.B. Foster Company provides products and services to the rail industry and solutions for critical infrastructure projects. The company operates through Rail Technologies and Services and Infrastructure Solutions. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $130.1 million | $118.4 million | $400.7 million | $381.8 million |
| Gross profit | $22.3 million | $22.1 million | $67.3 million | $73.3 million |
| Gross margin | 17.1% | 18.6% | 16.8% | 19.2% |
| Income from continuing operations | $2.2 million | $16.6 million | $3.8 million | $23.5 million |
| Diluted EPS from continuing operations | $0.21 | $1.56 | $0.36 | $2.21 |
| Net income attributable to L.B. Foster | $2.3 million | $6.8 million | $4.0 million | $5.5 million |
- Q3 sales increased 9.9%, led by a 15.6% increase in Rail Technologies and Services. Infrastructure Solutions sales increased 3.2%.
- Q3 selling and administrative expense increased 17.5% to $20.1 million, or 15.4% of sales, compared with 14.4% in the prior-year quarter.
- For the first nine months, sales increased 4.9%, but gross profit declined 8.3% and gross margin fell 240 basis points, primarily because of weakness in Infrastructure Solutions.
- Cash used in continuing operating activities was $6.8 million in the first nine months, compared with $16.2 million of cash provided in the prior-year period.
- Capital expenditures were $3.6 million. Investing cash flow was positive $18.9 million, including $22.7 million of proceeds from the Piling Products divestiture.
- Cash and cash equivalents were $6.4 million at September 30, 2021, compared with $7.6 million at December 31, 2020.
- Total debt was $32.5 million, including $32.3 million drawn under the revolving credit facility, compared with $45.0 million at year-end 2020.
- The amended revolving credit facility provides total commitments of $130.0 million, with $97.1 million of net available borrowing capacity and $103.5 million of total available funding capacity including cash.
- The company reported compliance with its credit agreement covenants as of September 30, 2021. The facility matures August 13, 2026.
- Current assets of $194.6 million exceeded current liabilities of $97.9 million; the reported current ratio was 1.99.
Material Changes Versus the Prior Comparable Period
- Rail Technologies and Services sales increased $10.0 million in Q3 and $19.8 million year to date, supported by rail distribution, European service activity, and improving market conditions.
- Rail gross margin declined 140 basis points in Q3 because of product mix and inflationary cost pressure; nine-month margin declined 40 basis points.
- Infrastructure Solutions Q3 sales rose modestly, but gross profit declined $0.8 million and margin fell 180 basis points. Nine-month gross profit declined $9.0 million and margin fell 510 basis points.
- Coatings and Measurement remained under pressure from excess U.S. pipeline capacity and deferred midstream infrastructure investment. Its nine-month sales declined $28.6 million.
- The company completed the sale of its Piling Products division on September 24, 2021, for expected proceeds of $23.9 million and recognized a $2.7 million gain. The division generated Q3 sales of $16.3 million and nine-month sales of $59.2 million before divestiture.
- Q3 and nine-month 2020 results included a significant discrete tax benefit related to the sale of the Test and Inspection Services business. This benefit materially inflated prior-year earnings and contributed to the year-over-year decline in 2021 continuing-operations income.
- Consolidated backlog was $231.7 million at September 30, 2021, down 1.5% from September 30, 2020. Excluding the divested Piling Products backlog, Infrastructure Solutions backlog increased 19.6% year over year.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management did not provide specific quantitative earnings or revenue guidance in the filing.
- Management expects potential benefits from infrastructure investment, particularly if a U.S. federal infrastructure bill is enacted, and believes the divestiture proceeds and expanded credit facility provide funding flexibility for organic and acquisitive growth in 2022 and beyond.
- Inflation in labor and other input costs is expected to pressure margins, particularly in Precast Concrete Products and Fabricated Steel Products. The company is pursuing mitigation actions.
- Supply-chain disruptions, raw-material availability, labor constraints, service-partner disruptions, and continuing COVID-19 effects remain important operating risks.
- Global ridership remains below pre-pandemic levels and may continue to weigh on friction-management consumables, especially internationally. The company remains optimistic about longer-term North American freight and transit markets.
- The Coatings and Measurement outlook remains weak because pipeline projects continue to be deferred despite higher energy prices.
- The company has an accrued Union Pacific Railroad settlement obligation of $28.0 million payable through December 2024, including $4.0 million in the remainder of 2021 and $8.0 million in each of 2022 through 2024.
- The company maintains environmental reserves of approximately $2.5 million. Its potential liability related to the Portland Harbor Superfund Site cannot be reliably estimated; management currently does not expect a material adverse effect, but an unfavorable resolution could be material.
- Other risks include variable interest rates and LIBOR transition, credit-covenant compliance, foreign currency exposure, cybersecurity, ERP implementation, litigation, product warranties, taxes, regulation, and customer concentration or loss.
- No interim goodwill impairment test was required as of September 30, 2021, based on management’s qualitative assessment.
- Management concluded that disclosure controls were effective and reported no material changes to internal control over financial reporting during the nine months.
Important Facts for Investors to Verify
- Whether margin pressure from inflation, supply-chain constraints, and product mix persists or improves.
- The sustainability of Rail segment growth and the conversion of its $109.8 million backlog into revenue and cash flow.
- The recovery prospects for Coatings and Measurement and the effect of the Piling Products divestiture on future Infrastructure Solutions results.
- Operating cash flow trends, given the $6.8 million use of cash in the first nine months of 2021 and increased inventory and receivables.
- Compliance with leverage and fixed-charge coverage covenants and the availability of the revolving credit facility.
- Cash requirements for the Union Pacific settlement, pension contributions, capital expenditures, and other commitments.
- Potential exposure from the Portland Harbor environmental matter and other legal or warranty claims.
- Whether infrastructure legislation or other public investment produces the expected demand benefits.