L.B. Foster Company — 2014 Q3 Form 10-Q Summary
Business context and reporting period
L.B. Foster manufactures, fabricates, and distributes products and services for rail, construction, energy, and utility markets through Rail Products, Construction Products, and Tubular Products. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $167.8 million | $162.2 million | $446.0 million | $441.5 million |
| Gross profit | $35.2 million | $31.3 million | $90.0 million | $85.3 million |
| Gross margin | 21.0% | 19.3% | 20.2% | 19.3% |
| Income from continuing operations | $9.1 million | $9.8 million | $19.6 million | $22.0 million |
| Diluted EPS from continuing operations | $0.88 | $0.95 | $1.90 | $2.15 |
| Net income | $9.1 million | $9.8 million | $19.6 million | $22.0 million |
Quarterly selling and administrative expense increased 17.6% to $20.6 million, while amortization increased 69.9% to $1.2 million. The nine-month effective tax rate was 33.3%, compared with 32.4% in 2013.
For the nine months, continuing operating cash flow was $49.6 million versus $2.5 million in 2013. Capital expenditures were $11.6 million, acquisitions used $12.8 million, dividends used $0.9 million, and cash increased $21.9 million to $86.5 million at September 30, 2014.
Total debt was $0.4 million, including capital lease obligations, and the company had no borrowings under its revolving credit facility. Available credit capacity was approximately $199.3 million under the amended U.S. facility, plus approximately $2.4 million under the U.K. facility. Stockholders’ equity was $334.5 million, compared with $316.4 million at December 31, 2013.
Material changes versus prior comparable periods
- Q3 sales increased 3.4%; nine-month sales increased 1.0%.
- Q3 gross margin expanded 170 basis points, primarily from improved Rail Products and Construction Products margins. Nine-month gross margin increased 85 basis points despite a $4.6 million concrete-tie warranty charge in the second quarter.
- Q3 continuing income declined 6.9%, and nine-month continuing income declined 10.8%, as higher selling and administrative costs, amortization, acquisition costs, consulting costs, and taxes more than offset gross-profit growth.
- Q3 Rail Products sales decreased 3.3%, although gross profit increased 7.9% and new orders increased 41.2%. Nine-month Rail sales increased 1.9%.
- Q3 Construction Products sales increased 1.2% and gross profit increased 10.6%; nine-month sales decreased 8.3%, while gross profit increased 13.4%.
- Q3 Tubular Products sales increased 114.0%, principally from Coated Products and the Ball Winch acquisition. Nine-month sales increased 29.6%, but gross margin declined because of cost overruns on a project substantially completed by September 30.
- Backlog increased to $223.2 million at September 30, 2014, from $197.5 million a year earlier and $183.1 million at December 31, 2013.
Guidance, outlook, risks, and unusual items
Management anticipated 2014 capital expenditures of $16 million to $19 million, funded by continuing operating cash flow. The filing does not provide clear full-year revenue or earnings guidance.
On July 7, 2014, the company acquired Carr Concrete for $12.5 million in cash. The acquisition was included in Construction Products and was not material to the periods presented. The company also paid a $0.5 million post-closing working-capital adjustment related to the 2013 Ball Winch acquisition.
The company maintains an $8.6 million product warranty reserve, including $7.6 million for concrete-tie claims. A dispute with Union Pacific Railroad remains unresolved regarding approximately 170,000 ties from 2013 replacement activity and additional 2014 activity. If the company is found in material breach of the amended agreement, UPRR may seek damages or terminate the agreement; future costs could materially affect results.
The amended $200 million revolving facility includes leverage and interest-coverage covenants. The company was compliant at September 30, 2014. Approximately $50.8 million of cash was held in non-U.S. accounts and management intended to indefinitely reinvest those funds outside the United States.
Other risks identified include rail and infrastructure demand, government funding, supplier and labor issues, seasonality, foreign currency movements, acquisition integration, litigation, environmental matters, tax uncertainties, and changes in accounting estimates. Environmental and litigation reserves totaled approximately $3.3 million.
Most important facts for investors to verify
- Whether the UPRR warranty dispute and concrete-tie replacement obligations result in charges above the $7.6 million reserve.
- Whether improved backlog and new orders convert into revenue and sustainable margins, particularly in Rail and Construction Products.
- Whether Tubular Products margins recover after the reported project cost overruns.
- The recurring versus acquisition-related nature of higher selling, administrative, amortization, and consulting expenses.
- The final 2014 capital-spending level and the performance and integration of Carr Concrete and Ball Winch.
- The availability and usability of foreign cash, revolving-credit capacity, and compliance with facility covenants.