L.B. Foster Company: 2011 Q3 Form 10-Q Summary
Business context and reporting period
L.B. Foster Company manufactures, fabricates and distributes rail, construction and tubular products and services. The filing covers the quarter and nine months ended September 30, 2011, with comparisons to the corresponding 2010 periods. Results include Portec Rail Products, acquired December 15, 2010, within Rail Products.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | Change |
|---|
| Net sales | $162.7 million | $125.6 million | +29.6% |
| Gross profit | $30.8 million | $20.0 million | +53.6% |
| Gross margin | 18.9% | 16.0% | +2.9 points |
| Income before taxes | $14.3 million | $10.1 million | +41.2% |
| Net income | $9.7 million | $6.5 million | +49.5% |
| Diluted EPS | $0.95 | $0.63 | +$0.32 |
| Metric | Nine months 2011 | Nine months 2010 | Change |
|---|
| Net sales | $453.5 million | $327.1 million | +38.7% |
| Gross profit | $74.5 million | $52.4 million | +42.2% |
| Gross margin | 16.4% | 16.0% | +0.4 points |
| Net income | $16.8 million | $14.3 million | +17.8% |
| Diluted EPS | $1.62 | $1.38 | +$0.24 |
| Operating cash flow | $10.0 million | $32.7 million | -$22.6 million |
- Q3 segment sales were Rail $91.8 million, Construction $62.1 million and Tubular $8.8 million. Rail sales increased 67.3%, Construction declined 1.2% and Tubular increased 12.2%.
- Q3 segment gross margins were 20.6% for Rail, 16.4% for Construction and 28.3% for Tubular.
- Cash and cash equivalents were $57.1 million at September 30, 2011, versus $74.8 million at December 31, 2010.
- Total debt was $2.8 million, down from $4.8 million at year-end 2010. Debt represented approximately 1.0% of capitalization.
- The company had $123.9 million of availability under its $125.0 million unsecured revolving credit facility and was in compliance with all covenants.
- Capital expenditures were $8.1 million, acquisitions used $9.0 million, share repurchases used $6.5 million and dividends used $0.8 million during the first nine months.
- Basic and diluted dividends paid per share were $0.075 for the first nine months of 2011; no dividends were paid in the comparable 2010 period.
Material changes versus the prior comparable period
- Portec Rail contributed $26.5 million of Q3 sales and $78.2 million of nine-month sales, and reported nine-month net income of $5.2 million. The acquisition also increased selling and administrative expense and amortization.
- Rail Products benefited from Portec Rail and higher distribution volumes. Excluding Portec Rail and concrete tie matters, management estimated the nine-month Rail gross margin at approximately 13.4%, broadly flat with 2010.
- Construction Products sales increased 15.0% year to date, but gross profit declined 3.9% and margin fell to 15.2% from 18.2%, reflecting lower concrete-building volumes, unfavorable manufacturing variances, competition and lower pricing.
- Tubular Products sales increased 19.7% year to date and gross profit increased 55.5%, primarily from higher volumes and market expansion.
- Operating cash flow declined primarily because working capital used approximately $15.0 million, compared with providing $11.1 million in 2010, as receivables and inventories increased with higher sales.
- The effective tax rate decreased to 31.7% in Q3 and 31.2% year to date, from 35.5% and 35.6%, respectively, due mainly to lower foreign tax rates, tax-position reserve releases and approximately $0.5 million of state tax refunds.
- Backlog declined to $153.0 million from $204.9 million at September 30, 2010, including a 36.3% decline in Construction Products backlog.
Guidance, outlook, risks and unusual items
- Management expected the company to remain profitable and generate cash flow in excess of capital expenditures, debt service, dividends and share repurchases. It expected approximately $9.0 million of 2011 capital spending, funded by operating cash flow.
- Management cited slower-than-expected economic growth, expiration or uncertainty of infrastructure stimulus and transportation legislation, state budget deficits and increased competition as headwinds.
- The company recorded approximately $5.0 million of 2011 charges related to concrete tie matters, including approximately $4.4 million in the second quarter and approximately $0.9 million in third-quarter charges. It also recorded a $2.976 million second-quarter charge related to exiting the Grand Island, Nebraska facility.
- Union Pacific Railroad asserted that a significant portion of approximately 1.6 million concrete ties produced at Grand Island from 2006 through 2010 may be defective. The claim did not quantify affected ties or specify the alleged defects. Testing was expected to conclude in the first quarter of 2012; no additional accrual was recorded because the exposure could not be reasonably estimated. Management stated that the ultimate outcome could materially adversely affect results, liquidity and capital resources.
- The concrete tie warranty reserve was $3.3 million at September 30, 2011, within total product warranty liabilities of $5.6 million. Future claims or new information could require additional charges.
- The Grand Island facility was being wound down after UPRR declined to extend its supply agreement. Management expected the wind-down to be completed in the first quarter of 2012 and did not expect a significant adverse liquidity effect.
- The company recognized approximately $0.6 million of previously deferred gain from terminating the Langfield, Texas sale-leaseback, with approximately $0.8 million of deferred gain remaining to be amortized.
- The company repurchased 278,655 shares for approximately $6.5 million under a $25.0 million authorization, including 230,612 shares for approximately $4.9 million in the third quarter.
- The company had a maximum exposure of approximately $4.2 million related to its equity-method joint venture and associated financing lease, and approximately $0.1 million remained on required joint-venture capital contributions.
- Environmental and ordinary-course litigation reserves were approximately $2.6 million. Portec Rail shareholder litigation was resolved through payment of approximately $1.05 million, and other disclosed matters were settled for recorded or immaterial amounts.
Most important facts for investors to verify
- Progress and ultimate cost of the UPRR concrete-tie warranty claim, including testing results, affected units and any required accrual.
- Whether Portec Rail produces expected synergies and offsets higher selling, administrative and amortization expenses.
- Construction Products backlog, pricing and margin trends amid reduced government stimulus and transportation-funding uncertainty.
- Conversion of earnings into operating cash flow as receivables, inventories and other working-capital needs normalize.
- Remaining share-repurchase authorization, dividend policy and the effect of capital allocation on cash balances.
- Final purchase-price allocation for Portec Rail, including goodwill, intangible assets and future amortization.
