L.B. Foster Company 10-Q Summary
Business context and reporting period
L.B. Foster Company manufactures, fabricates, and distributes products and services for rail, construction, energy, and utility markets. The filing covers the unaudited quarter and six months ended June 30, 2015, compared with the corresponding 2014 periods. Reportable segments are Rail Products and Services, Construction Products, and Tubular and Energy Services.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total sales | $171.4 million | $166.8 million | $309.3 million | $278.2 million |
| Gross profit | $37.1 million | $30.7 million | $67.7 million | $54.8 million |
| Gross margin | 21.6% | 18.4% | 21.9% | 19.7% |
| Income before taxes | $7.8 million | $10.2 million | $14.5 million | $15.6 million |
| Net income | $5.4 million | $6.9 million | $9.6 million | $10.5 million |
| Diluted EPS | $0.52 | $0.67 | $0.93 | $1.02 |
- Quarterly sales increased 2.7%, while six-month sales increased 11.2%. Acquired businesses contributed $30.3 million of Q2 sales and $50.3 million year to date.
- Quarterly gross profit increased 20.8%; the margin improvement principally reflected the absence of a $4.6 million prior-year concrete-tie warranty charge and improved Rail and Construction performance. The Tubular and Energy Services margin declined because of product mix and weaker Coated Pipe margins.
- Selling and administrative expense increased 23.9% in Q2 and 23.7% year to date, driven primarily by acquired businesses, personnel costs, and acquisition and integration expenses. Amortization increased to $3.5 million in Q2 from $1.2 million.
- Operating cash flow was negative $1.9 million for the first six months, versus positive $31.7 million in 2014, primarily because of working-capital timing and lower accounts payable and accrued liabilities.
- Investing cash flow was negative $202.0 million, including $193.9 million for acquisitions and $8.2 million of capital expenditures. Financing cash flow was positive $189.0 million, principally from $254.3 million of debt proceeds.
- Cash and equivalents were $35.6 million at June 30, 2015, compared with $52.0 million at December 31, 2014. Approximately $26.6 million of cash was held outside the United States.
- Total debt increased to $218.5 million from $26.4 million at year-end, including $214.2 million drawn on the revolving facility. Gross domestic borrowing availability was $120.3 million, and the company was in compliance with its debt covenants.
- Total assets increased to $701.8 million from $495.1 million, largely because of acquisitions. Goodwill increased to $162.6 million and net intangible assets to $141.4 million.
Material changes versus the prior comparable period
- Rail Products and Services sales declined 19.2% in Q2 and 9.1% year to date. Lower volumes, steel-price reductions, reduced Union Pacific Railroad sales, and the nearing completion of the Honolulu transit project were cited. Q2 rail new orders declined 22.9%.
- Construction Products sales increased 18.4% in Q2 and 21.1% year to date, aided by acquired businesses, favorable weather, higher concrete shipments, pricing, and plant efficiencies.
- Tubular and Energy Services sales increased 99.7% in Q2 and 117.2% year to date, primarily from the IOS and Chemtec acquisitions. Segment margins declined to 19.7% in Q2 from 25.0% because of mix and lower Coated Pipe margins.
- The company acquired Tew Holdings for $26.5 million in January 2015 and Inspection Oilfield Services for $167.4 million in March 2015. IOS included a potential $60 million three-year EBITDA-based earn-out, but no obligation was accrued at June 30 because management determined the minimum target was unlikely to be achieved.
- Backlog was $207.8 million at June 30, compared with $247.8 million a year earlier and $184.4 million at December 31, 2014.
- Dividends paid increased to $0.04 per share in Q2 and $0.08 per share year to date, versus $0.03 and $0.06, respectively, in 2014.
Guidance, outlook, risks, contingencies, and unusual items
- Management anticipated continued short-term uncertainty in energy markets and accelerated reductions in Union Pacific Railroad sales while the concrete-tie warranty dispute remained unresolved. The filing does not provide specific earnings or revenue guidance.
- Management expected 2015 capital expenditures of approximately $15 million to $17 million.
- Union Pacific filed litigation in January 2015 concerning concrete ties and related warranty obligations. Union Pacific terminated the concrete-tie supply agreement and Tucson lease in June 2015; the company recorded a $0.4 million impairment charge for Tucson assets. The company disputes the claims and cannot predict the litigation or settlement outcome.
- Total product warranty reserves were $9.1 million at June 30, including $7.8 million related to concrete ties. Management warned that additional claims or developments could materially affect results, financial condition, or cash flow.
- Continued weakness in oil and gas markets could impair the value of goodwill and other assets acquired in the energy businesses. The company stated that acquired energy businesses may not achieve the long-term forecasts supporting their valuations.
- Other risks include economic and infrastructure spending conditions, rail traffic, energy prices, customer concentration, acquisition integration, supplier and labor issues, foreign currency, regulation, seasonality, working-capital requirements, and leverage.
- The amended $335 million revolving credit facility matures March 13, 2020 and includes a leverage covenant of no more than 3.25 to 1.00 and minimum interest coverage of 3.00 to 1.00. Borrowings also restrict certain dividends, acquisitions, investments, debt, liens, and asset sales.
- Management concluded that disclosure controls were effective. Integration of acquired businesses may require additions or changes to internal controls.
Important facts for investors to verify
- Progress, potential damages, reserves, and cash exposure related to the Union Pacific warranty litigation and contract termination.
- Whether energy-market weakness results in goodwill or intangible-asset impairment, particularly in Tubular and Energy Services.
- Acquisition integration, acquired-business margins, IOS earn-out probability, and the sustainability of acquisition-driven revenue growth.
- Operating cash-flow recovery, working-capital requirements, debt paydown, interest expense, covenant headroom, and remaining revolving-credit availability.
- Rail backlog and new-order trends, including the effect of reduced or eliminated Union Pacific business.
- Actual 2015 capital expenditures relative to the stated $15 million to $17 million expectation and any changes to management’s outlook.