L.B. Foster Company — Q1 2019 Form 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 report covers the three months ended March 31, 2019; comparative amounts are for the three months ended March 31, 2018. Amounts are in thousands, except per-share data.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $150,469 | $122,454 | 22.9% increase |
| Gross profit | $29,162 | $22,192 | 31.4% increase |
| Gross margin | 19.4% | 18.1% | 130 basis-point increase |
| Income (loss) before taxes | $4,328 | $(1,333) | Improved |
| Net income (loss) | $3,690 | $(1,858) | Improved |
| Diluted earnings (loss) per share | $0.35 | $(0.18) | Improved |
| Operating cash flow | $(13,546) | $2,591 | Declined |
| Capital expenditures | $2,572 | $723 | Increased |
Selling and administrative expense increased 7.1% to $21,917, but declined to 14.6% of sales from 16.7%. Net interest expense decreased 28.2% to $1,355. The effective tax rate was 14.7%, compared with (39.4)% in the prior-year quarter, reflecting realization of certain U.S. deferred tax assets previously subject to a valuation allowance.
At March 31, 2019, cash and cash equivalents were $9,039, total debt was $90,182, and reported net available borrowing capacity was $105,361. Current assets were $259,023 versus current liabilities of $137,473. Accounts receivable were $99,518 and inventories were $142,714. The company had $250 of outstanding letters of credit and was in compliance with its credit agreement covenants.
Segment Performance
| Segment | Q1 2019 Sales | Sales Change | Q1 2019 Segment Profit |
|---|---|---|---|
| Rail Products and Services | $75,694 | 21.8% increase | $3,479 |
| Construction Products | $37,345 | 29.2% increase | $834 |
| Tubular and Energy Services | $37,430 | 19.3% increase | $4,688 |
Material Changes Versus the Prior Comparable Period
- All three segments reported higher sales and segment profit. Tubular and Energy Services produced the largest margin improvement, with gross margin increasing to 25.0% from 19.9%.
- Construction Products benefited from higher volume, favorable production rates, and product mix; segment profit increased to $834 from $18.
- Rail Products and Services sales increased primarily from North American new rail distribution volume and transit opportunities, although gross margin declined modestly to 18.8% from 19.2%.
- Operating cash flow turned negative because of increased accounts receivable and inventory, higher contract assets, and a $2,000 payment under the Union Pacific Railroad settlement.
- Debt increased by approximately $15,200 from December 31, 2018, primarily to fund working capital. Cash declined by $1,243 during the quarter.
- The company adopted ASC 842 lease accounting on January 1, 2019, recognizing $13,585 of right-of-use assets and corresponding lease liabilities without affecting earnings, cash flows, or existing covenants.
- The company adopted ASU 2018-02 and reclassified $633 of stranded tax effects from accumulated other comprehensive loss to retained earnings.
Outlook, Commentary, Risks, and Unusual Items
Management stated that it was encouraged by transit-related rail orders, continued growth in Tubular and Energy Services orders, and the company’s backlog. Total backlog was $250,052 at March 31, 2019, compared with $220,301 at March 31, 2018. Approximately 3.1% of backlog was expected to extend beyond March 31, 2020. The filing does not provide a specific full-year revenue, earnings, or cash-flow guidance target.
On April 30, 2019, after quarter-end, the company entered into a new five-year revolving credit agreement. The facility permits borrowings of up to $140,000, includes potential incremental capacity of $50,000 and potential additional term loans of $25,000, and extends maturity to April 30, 2024 from March 13, 2020. The agreement permits acquisitions subject to specified liquidity, covenant, and transaction limits.
The company settled the Union Pacific Railroad concrete tie litigation in March 2019. It agreed to pay $50,000, including $2,000 paid immediately and $48,000 in installments through December 2024. UPRR also agreed to purchase an aggregate $48,000 of products and services through 2024, subject to the settlement terms.
Key disclosed risks include working-capital needs and indebtedness, variable interest rates and LIBOR-related changes, economic weakness in served markets, rail and energy demand, material and labor costs, tariffs and regulation, foreign currency fluctuations, international and Brexit-related conditions, customer concentration or loss, litigation, warranty claims, environmental obligations, ERP implementation, and the ability to execute cost-reduction and growth initiatives. The company is also identified as a potentially responsible party in the Portland Harbor Superfund matter; management does not currently expect a material adverse impact, and environmental reserves were approximately $6,110 at March 31, 2019.
Investor Verification Checklist
- Verify whether the strong first-quarter sales and margin gains are sustainable, particularly in Tubular and Energy Services and Construction Products.
- Monitor conversion of the $250,052 backlog into revenue, including order trends and the portion subject to performance, timing, or customer-acceptance risks.
- Assess working-capital requirements, inventory and receivable growth, and the potential for recurring negative operating cash flow.
- Review debt levels, interest-rate exposure, covenant compliance, and available capacity under the April 30, 2019 credit agreement.
- Track required payments and expected customer purchases under the $50,000 Union Pacific settlement.
- Evaluate potential exposure from the Portland Harbor environmental matter and other legal, warranty, and contingent liabilities.
- Consider tax-rate variability because the company continues to maintain a full valuation allowance against U.S. deferred tax assets.