Business Context and Reporting Period
Company: L. B. Foster Company (FOSTER L B CO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: A leading manufacturer, fabricator, and distributor of products for rail, construction, utility, and energy markets. Operations are organized into three segments: Rail Products, Construction Products, and Tubular Products.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Sales | $93,771 | $191,515 |
| Gross Profit | $12,832 | $26,514 |
| Gross Margin | 13.7% | 13.8% |
| Net Income | $2,652 | $5,671 |
| Diluted EPS | $0.26 | $0.55 |
| Cash and Cash Equivalents | $118,090 | $118,090 |
| Operating Cash Flow (6mo) | N/A | $10,796 |
| Total Debt | $24,472 | $24,472 |
| Working Capital | $204,922 | $204,922 |
Note: Total Debt calculated as Current Maturities ($5,813) + Long-Term Term Loan ($11,905) + Other Long-Term Debt ($6,754).
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 27.8% in Q2 2009 and 14.2% year-to-date compared to 2008, driven by reduced demand in rail distribution, construction piling, and energy markets.
- Profitability Compression: Net income dropped 65.4% in Q2 and 59.4% year-to-date. Gross margins contracted significantly across all segments due to volume declines and pricing pressures.
- Unusual Charges: The Rail Products segment incurred significant charges related to concrete railroad ties:
- $1.1 million warranty charge in Q2 for in-track failures (cumulative $2.7 million YTD).
- $2.6 million charge for rejected ties due to raw material quality issues.
- LIFO Impact: Declining steel prices resulted in a LIFO credit of $1.5 million in Q2 and $1.7 million YTD, contrasting with a LIFO expense in the prior year.
- One-Time Gains in Prior Year: The 2008 period included $2.0 million gain from the sale of a DM&E investment and $1.5 million from a Houston property sale-leaseback, which were absent in 2009.
Guidance, Outlook, and Risks
- Outlook: Management expects continued margin compression for at least the next six months due to the recession and falling commodity prices. However, the company anticipates remaining profitable and generating positive cash flow.
- Capacity Utilization: Concrete tie facilities in Grand Island, NE, and Tucson, AZ, are operating at approximately 40% capacity due to reduced purchasing by Union Pacific Railroad (UPRR).
- Joint Venture: Formed a new joint venture in May 2009 (45% ownership) to manufacture products for energy/utility markets. Initial capital contribution of $0.9 million made, with $1.4 million additional contributions required.
- Key Risks:
- Warranty Uncertainty: Future costs related to concrete tie failures could materially impact results if estimates change.
- Government Funding: Construction segment relies on federal highway funding (SAFETEA-LU), which expires in September 2009 with uncertain renewal terms.
- Contract Renewals: Significant portion of Rail Products revenue depends on contract renewals with Class 1 railroads.
Investor Verification Checklist
- Concrete Tie Liability: Verify the sufficiency of the $4.1 million warranty accrual and monitor for additional charges related to the Grand Island facility failures.
- UPRR Contract Status: Confirm the volume of concrete tie purchases by Union Pacific Railroad for the remainder of 2009 and the status of contract renewals through 2010/2012.
- Joint Venture Progress: Track the timeline and capital requirements for the new energy/utility joint venture facility.
- Backlog Trends: Monitor the 26.9% year-over-year decline in total backlog ($140.5 million) and its impact on future revenue visibility.
- Debt Covenants: Review compliance with the amended credit agreement covenants, specifically the fixed charge coverage ratio and net worth requirements.