L.B. Foster Company — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2013, filed November 5, 2013. 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. Prior-year Shipping Systems Division and Precise Structural Products results are presented as discontinued operations.
Financial performance and liquidity
| Metric | Three months ended Sept. 30, 2013 | Three months ended Sept. 30, 2012 | Nine months ended Sept. 30, 2013 | Nine months ended Sept. 30, 2012 |
|---|---|---|---|---|
| Net sales | $162.2 million | $170.3 million | $441.5 million | $447.8 million |
| Gross profit | $31.3 million | $30.7 million | $85.3 million | $64.7 million |
| Gross margin | 19.3% | 18.0% | 19.3% | 14.4% |
| Income from continuing operations | $9.8 million | $8.5 million | $22.0 million | $8.1 million |
| Net income | $9.8 million | $8.2 million | $22.0 million | $9.5 million |
| Diluted EPS from continuing operations | $0.95 | $0.83 | $2.15 | $0.80 |
| Effective tax rate from continuing operations | 30.2% | 35.4% | 32.4% | 37.6% |
Operating cash flow from continuing operations was $2.5 million for the first nine months, down from $25.3 million in the prior-year period, primarily because working capital used $27.0 million, including higher receivables and tax payments. Capital expenditures were $5.6 million. Management expects 2013 capital spending of approximately $7.0 million to $8.0 million.
Cash and cash equivalents were $96.0 million at September 30, 2013, compared with $101.5 million at December 31, 2012. Total debt was approximately $48 thousand, and the company had $124.2 million of unused U.S. revolving-credit capacity plus approximately $2.2 million of U.K. capacity. The company was in compliance with its debt covenants. Nine-month dividends were $0.09 per share, and the quarterly dividend had been increased to $0.03 per share.
Material changes versus the prior comparable periods
- Third-quarter sales declined 4.8%; nine-month sales declined 1.4%.
- Third-quarter continuing-operations income increased 15.7%, while nine-month income increased 170.9%, benefiting substantially from the absence of the prior-year concrete-tie warranty charges.
- The 2012 third quarter included a $3.0 million warranty charge; the 2012 nine-month period included a $22.0 million product-warranty charge. Excluding the 2012 nine-month charge, the 2013 gross margin was slightly below the prior-year adjusted margin.
- Rail Products third-quarter sales decreased 4.9%, but gross profit increased 13.3%. Construction Products sales increased 7.3%, while Tubular Products sales decreased 45.0% and gross profit decreased 63.5%.
- Year-to-date backlog decreased to $197.5 million from $210.9 million at December 31, 2012 and $225.7 million at September 30, 2012. Rail and Tubular backlog declined, partly offset by higher Construction Products backlog.
- Selling and administrative expense increased 5.8% in the quarter and 5.0% year to date, primarily due to salaried headcount and travel costs.
- Other income improved by $1.25 million in the quarter and approximately $1.0 million year to date, primarily from foreign-exchange gains and recovery of previously written-off escrowed funds.
Outlook, risks, contingencies, and unusual items
- Management expects Tubular Products weakness to continue through the fourth quarter because of lower orders and reduced coated-products backlog.
- The company expects the Union Pacific Railroad to complete its 2013 defective-concrete-tie replacement program in the fourth quarter. The warranty reserve was $7.8 million at September 30, including approximately $6.9 million for concrete-tie claims. Management cautions that future claims or new information could materially affect results.
- Management expects approximately $555 thousand of U.S. defined-benefit pension contributions and $264 thousand of U.K. contributions during 2013; nine-month contributions were approximately $332 thousand and $191 thousand, respectively.
- Key stated risks include rail-traffic levels, government funding and sequestration affecting infrastructure projects, competition, supplier and labor issues, seasonality, working-capital requirements, taxes, foreign-currency movements, inflation, regulatory matters, and warranty outcomes.
- The company is responding to a Department of Transportation Inspector General subpoena concerning concrete railroad ties manufactured at its Grand Island, Nebraska facility and states that it is cooperating fully.
- Environmental and litigation reserves were approximately $2.1 million. Management does not expect existing matters to materially affect financial condition or liquidity, but individual-period results could be materially affected by resolutions.
- No foreign-currency hedging transactions were entered into during the first nine months of 2013. No goodwill impairment test was required during the period.
Most important facts for investors to verify
- Whether the $7.8 million warranty reserve adequately covers remaining concrete-tie replacements and any new claims.
- Fourth-quarter Tubular Products orders, backlog conversion, and margin trends.
- Rail and total backlog levels relative to reported sales and project timing.
- Conversion of reported earnings into operating cash flow, particularly receivables, taxes, deferred revenue, and accrued liabilities.
- Impact of federal infrastructure funding reductions and sequestration on Construction Products demand.
- Progress and potential financial implications of the Inspector General inquiry and other legal or regulatory matters.
- Whether the company maintains its strong liquidity and covenant position while funding capital expenditures, dividends, pension obligations, and potential investments.