L.B. Foster Company — Q1 2015 Form 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 company reports three segments: Rail Products and Services, Construction Products, and Tubular and Energy Services. This unaudited quarterly filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $137.9 million | $111.4 million | +23.8% |
| Gross profit | $30.7 million | $24.1 million | +27.0% |
| Gross margin | 22.2% | 21.7% | +56 basis points |
| Income before taxes | $6.7 million | $5.3 million | +25.3% |
| Net income | $4.3 million | $3.6 million | +17.4% |
| Diluted EPS | $0.41 | $0.35 | +17.1% |
| Effective tax rate | 35.7% | 31.4% | +430 basis points |
| Operating cash flow | $(7.4) million | $32.2 million | Declined $39.6 million |
| Capital expenditures | $4.5 million | $3.5 million | +$1.0 million |
| Cash and equivalents | $37.6 million | $91.1 million at March 31, 2014 | Down from $52.0 million at Dec. 31, 2014 |
| Total debt | $218.2 million | $26.4 million at Dec. 31, 2014 | +$191.8 million sequentially |
Net margin was approximately 3.1% in Q1 2015 versus 3.3% in Q1 2014. Selling and administrative expense increased 23.4% to $22.3 million, primarily from acquired-business personnel costs and acquisition expenses. Amortization increased 89.0% to $2.2 million.
- Rail Products and Services sales increased 5.7% to $77.7 million; gross margin improved to 23.4% from 22.4%.
- Construction Products sales increased 25.2% to $34.3 million; gross margin declined to 19.1% from 20.9% because of project mix and lower margins in piling and bridge products.
- Tubular and Energy Services sales increased 146.2% to $25.9 million, primarily from acquisitions; gross margin improved to 23.3% from 20.2%.
Liquidity, debt, and cash flow
Operating activities used $7.4 million, principally because working-capital movements used $16.5 million. Accounts receivable collections provided $16.0 million, while inventories used $8.3 million and accounts payable used $12.5 million.
Investing activities used $193.7 million, including $189.2 million for acquisitions and $4.5 million for capital expenditures. Financing activities provided $189.1 million, primarily from $219.9 million of new borrowings, partially offset by $28.1 million of debt repayments and $1.7 million of financing fees.
On March 13, 2015, the company amended and restated its revolving credit facility, increasing the maximum commitment to $335.0 million and extending maturity to March 13, 2020. At March 31, 2015, gross available domestic borrowing capacity was $118.3 million, outstanding letters of credit were approximately $0.4 million, and the company was in compliance with its debt covenants. The facility includes a maximum leverage ratio of 3.25 to 1.00 and minimum interest coverage of 3.00 to 1.00.
Approximately $29.7 million of cash was held in non-domestic accounts and was not available for domestic operations unless repatriated. The company paid $0.04 per share in dividends during the quarter, compared with $0.03 in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue growth was driven by acquisitions and improved performance in Tubular and Energy Services, with additional growth in Construction Products and Rail Products and Services.
- The company acquired Tew Holdings for $26.4 million on January 13, 2015, and Inspection Oilfield Services for approximately $166.9 million on March 13, 2015. The company also reflected the full-quarter impact of the December 2014 Chemtec acquisition.
- Acquisition spending and related debt financing materially increased total assets, goodwill, intangible assets, and debt. Goodwill increased from $82.9 million at December 31, 2014 to $215.1 million at March 31, 2015.
- Cash flow from operations turned negative because of working-capital timing, compared with strong positive operating cash flow in Q1 2014.
- The effective tax rate increased primarily because the prior-year quarter benefited from recognition of previously unrecognized uncertain state tax positions.
- Backlog was $217.3 million at March 31, 2015, down from $253.3 million at March 31, 2014 but up from $184.4 million at December 31, 2014.
Guidance, outlook, risks, and unusual items
- Management anticipated 2015 capital expenditures of approximately $18 million to $22 million.
- Management cited short-term uncertainty in energy markets and expected reductions in Union Pacific Railroad sales while the concrete-tie warranty dispute remains unresolved.
- Union Pacific Railroad filed litigation on January 23, 2015, alleging warranty and contract breaches concerning concrete railroad ties. The company disputes the claims and intends to defend itself vigorously, but states that future costs or an adverse outcome could materially affect results, financial condition, and cash flows.
- The concrete-tie warranty reserve was $10.3 million at March 31, 2015, including approximately $9.1 million related to concrete ties. The company cannot predict whether future costs will exceed current accruals.
- The company stated that UPRR canceled certain purchase orders and that new UPRR orders had declined significantly. Rail segment new orders declined 6.1% year over year.
- Energy-market weakness, lower energy prices, reduced rail traffic, infrastructure funding levels, acquisition integration, foreign-currency movements, material costs, customer concentration, and debt covenant compliance are identified risks.
- The IOS acquisition purchase-price allocation remained preliminary. The company had not estimated potential earn-out payments of up to $60.0 million and had not recorded IOS intangible-asset amortization pending valuation work; related adjustments were expected in Q2 2015.
- The company reported no required goodwill impairment test for the quarter and no material changes to critical accounting policies.
Important facts for investors to verify
- Reconcile acquisition-related revenue and earnings with pro forma results; pro forma Q1 2015 net sales were $154.0 million and pro forma diluted EPS was $0.42, versus $0.73 for Q1 2014.
- Monitor debt reduction, interest expense, leverage, covenant headroom, and the remaining $118.3 million of domestic borrowing availability.
- Assess operating cash conversion and working-capital requirements following the acquisitions.
- Track UPRR litigation, order cancellations, warranty claims, reserve adequacy, and any settlement or judgment exposure.
- Verify the final IOS purchase-price allocation, earn-out liability, acquired intangible assets, and resulting amortization.
- Evaluate whether backlog conversion and new-order trends offset weakness in rail and energy markets.
- Confirm the company’s ability to integrate acquired businesses while maintaining margins and liquidity.