L.B. Foster Company: 2014 Second-Quarter 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 six months ended June 30, 2014. Dollar amounts are in thousands except per-share data.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2014 | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2014 | Six Months Ended June 30, 2013 |
|---|---|---|---|---|
| Net sales | $166,832 | $149,936 | $278,246 | $279,257 |
| Gross profit | $30,700 | $29,175 | $54,827 | $54,023 |
| Gross margin | 18.4% | 19.5% | 19.7% | 19.3% |
| Income from continuing operations | $6,848 | $7,257 | $10,497 | $12,208 |
| Diluted EPS from continuing operations | $0.66 | $0.71 | $1.02 | $1.19 |
| Net income | $6,862 | $7,295 | $10,511 | $12,222 |
| Cash flow from continuing operations | Not separately provided | Not separately provided | $31,579 | $(522) |
Quarterly sales increased 11.3%, while quarterly income from continuing operations declined 5.6%. Year-to-date sales declined 0.4% and income from continuing operations declined 14.0%. The effective tax rate from continuing operations was 32.9% for the quarter and 32.4% year to date, compared with 34.6% and 34.1%, respectively, in the prior-year periods.
Segment Performance
- Rail Products: Second-quarter sales increased 18.3% to $107,484; gross profit increased 6.1% to $18,527. Six-month sales increased 5.0% to $180,980, while gross profit increased 1.3% to $34,957.
- Construction Products: Second-quarter sales decreased 4.3% to $41,810, but gross profit increased 15.4% to $7,693. Six-month sales decreased 14.1% to $69,193, while gross profit increased 15.2% to $13,405.
- Tubular Products: Second-quarter sales increased 14.3% to $17,538, while gross profit decreased 16.2% to $4,391. Six-month sales increased 6.1% to $28,073, while gross profit decreased 22.8% to $6,521.
Liquidity, Cash Flow, Debt, and Balance Sheet
- Cash and cash equivalents were $87,555 at June 30, 2014, compared with $64,623 at December 31, 2013.
- Net cash from continuing operating activities was $31,579 for the first six months, compared with cash used of $522 in the prior-year period. Management attributed the improvement primarily to collections of large project receivables and improved working-capital management.
- Capital expenditures were $7,682 year to date, compared with $3,126 in the prior-year period. Management expects 2014 capital spending of $18,000 to $22,000, funded by operating cash flow.
- Total debt was $398, consisting primarily of capital lease obligations. There were no borrowings under the $125,000 revolving credit facility, and available borrowing capacity was $121,959. Total credit-facility availability was reported at $124,494, including international facilities.
- The Company was in compliance with its credit agreement covenants. Outstanding letters of credit were approximately $3,041.
- Approximately $52,111 of cash was held in non-domestic accounts and management intended to reinvest those funds outside the United States.
- Working capital included inventories of $84,617 and deferred revenue of $8,345 at June 30, 2014.
Material Changes and Unusual Items
- A $4,608 second-quarter warranty charge was recorded in the Rail Products segment for concrete railroad ties. The charge reduced gross margin and was partially offset by a $344 reduction in incentive compensation costs.
- The total product warranty reserve increased to $9,594, including $8,537 related to concrete tie claims. The reserve included a $4,000 increase based on updated estimates of ties requiring replacement.
- Tubular Products margins were pressured by cost overruns on a complex project and volume-related deleveraging.
- Selling and administrative expenses increased 9.2% in the quarter and 7.2% year to date, primarily due to personnel costs and consulting costs associated with evaluating a new enterprise resource planning system.
- Amortization increased to $1,172 in the quarter and $2,313 year to date, principally reflecting acquired intangible assets.
- Backlog from continuing operations was approximately $247,798 at June 30, 2014, up from $220,266 at June 30, 2013 and $183,111 at December 31, 2013.
- On July 7, 2014, the Company agreed to acquire substantially all assets and liabilities of Carr Concrete Corporation for approximately $12,300, funded with cash. The purchase price included $1,000 to be held in escrow and remained subject to a working-capital adjustment.
- The Company adopted no material new accounting policy during the period. It was evaluating the potential impact of the new revenue-recognition standard, ASU 2014-09, effective for fiscal years beginning after December 15, 2016.
Outlook, Risks, and Contingencies
- The filing provides a 2014 capital-expenditure expectation of $18,000 to $22,000 but does not provide specific revenue or earnings guidance.
- The principal reported contingency is the unresolved dispute with Union Pacific Railroad regarding eligibility and replacement of approximately 170,000 concrete ties associated with 2013 warranty activity. UPRR could seek damages or terminate the agreement if the Company is found to be in material breach.
- Future warranty costs could exceed the current reserve and materially affect results, financial condition, or cash flows.
- Other risk factors include rail and infrastructure spending levels, supplier availability, labor disputes, competition, seasonality, foreign-currency fluctuations, acquisition integration, accounting estimates, environmental and legal matters, tax changes, and conflict-minerals sourcing requirements.
- Management stated that environmental and ordinary-course legal matters were not expected to materially affect financial condition or liquidity, although individual matters could materially affect results in a particular period.
- The Company reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the period.
Investor Verification Points
- Confirm the ultimate cost and resolution of the UPRR concrete-tie warranty dispute and whether the $9,594 warranty reserve is adequate.
- Assess whether Tubular Products project cost overruns and margin pressure persist.
- Evaluate the sustainability of the strong operating cash flow improvement and working-capital benefit.
- Verify completion, purchase-price adjustments, and integration results for the Carr Concrete acquisition.
- Compare actual 2014 capital expenditures with the $18,000 to $22,000 expectation and monitor backlog conversion.
- Review the effect of higher selling, administrative, consulting, and amortization expenses on future operating margins.
- Assess the availability and repatriation constraints of non-domestic cash and continued compliance with credit-facility covenants.