L.B. Foster Company — 2013 Q1 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 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. Shipping Systems Division and Precise Structural Products were sold in 2012 and are presented as discontinued operations.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $129.3 million | $114.3 million | +13.2% |
| Gross profit | $24.8 million | $21.7 million | +14.8% |
| Gross margin | 19.2% | 18.9% | +30 basis points |
| Income from continuing operations | $5.0 million | $3.0 million | +66.2% |
| Continuing-operations diluted EPS | $0.48 | $0.29 | +65.5% |
| Net income | $4.9 million | $3.4 million | +46.3% |
| Diluted EPS | $0.48 | $0.33 | +45.5% |
| Cash flow from continuing operations | $(17.6) million | $(2.9) million | Greater use of cash |
Continuing-operations income before tax was $7.4 million versus $4.5 million, with an effective tax rate of 33.5% versus 33.7%. Selling and administrative expense increased 1.2% to $17.1 million, while amortization was essentially unchanged at $0.7 million. Comprehensive income was $3.2 million, reduced by a $1.7 million foreign currency translation loss.
Segment sales were $81.4 million for Rail Products, up 22.2%; $36.8 million for Construction Products, down 4.0%; and $11.1 million for Tubular Products, up 19.5%. Segment profit increased to $9.3 million from $6.2 million.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $81.4 million at March 31, 2013, down from $101.5 million at December 31, 2012.
- Total debt was approximately $44 thousand, consisting of capital lease obligations. There were no borrowings under the $125 million U.S. revolving credit facility.
- Available credit capacity was approximately $124.6 million, including $122.5 million under the U.S. facility and $2.2 million under the U.K. facility. Outstanding letters of credit were approximately $2.5 million.
- Operating cash use reflected a $25.0 million working-capital investment, principally from higher accounts receivable related to seasonal ramp-up and increased late-quarter sales. Accounts receivable rose to $72.1 million from $59.7 million.
- Capital expenditures were $1.0 million, and management expected full-year 2013 capital spending of $9 million to $10 million, funded by operating cash flow.
- Cash dividends increased to $0.03 per share from $0.025 per share. No shares were repurchased under the authorization, although 12,057 shares were withheld for employee tax obligations.
Material changes, outlook, and unusual items
- Rail Products benefited from higher rail distribution and transit volumes, including the Honolulu elevated transit system project. Rail margin declined 70 basis points because growth was concentrated in lower-margin divisions.
- Construction Products sales declined primarily because of lower fabricated bridge-product sales; margin improved 50 basis points due partly to higher concrete-building sales.
- Tubular Products benefited from increased volumes in threaded and coated products, with a substantially stable gross margin.
- Backlog from continuing operations was $248.1 million at March 31, 2013, up from $210.9 million at December 31, 2012 and $196.5 million at March 31, 2012. Rail Products represented $174.4 million of backlog.
- Warranty reserves totaled $15.1 million, including $14.1 million related to potentially defective concrete ties supplied under a 2005 contract. Management’s estimate of required replacements did not change during the quarter, but future claims and costs could be material.
- The Company continued cooperating with a Department of Transportation Inspector General subpoena concerning concrete ties manufactured at its Grand Island, Nebraska facility.
- Management identified risks from rail-traffic levels, government infrastructure funding and sequestration, supplier availability, competition, seasonality, working-capital needs, foreign currency, taxes, environmental and legal matters, and warranty claims.
- The U.K. working-capital facility, which had no borrowings, was scheduled to expire June 30, 2013; management intended to renew it.
- Discontinued operations contributed a $24 thousand loss in Q1 2013 versus $390 thousand of income in Q1 2012, reflecting the 2012 divestitures.
Most important facts for investors to verify
- Whether strong rail-related backlog converts into revenue and cash flow, particularly the Honolulu transit project.
- Whether seasonal working-capital usage reverses and operating cash flow supports the $9 million to $10 million capital-spending expectation.
- Any changes in the $14.1 million concrete-tie warranty reserve, required replacements, or related legal and regulatory proceedings.
- The effect of federal sequestration and infrastructure funding on Construction Products and Rail Products demand.
- Renewal of the U.K. credit facility and continued compliance with the U.S. revolving-credit covenants.
- Potential foreign-exchange effects, including the $36.8 million of cash held in non-U.S. accounts and the accumulated foreign currency translation loss.