Business Context and Reporting Period
Company: L. B. Foster Company (FOSTER L B CO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 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) | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Sales | $97,744 | $93,441 |
| Gross Profit | $13,682 | $15,621 |
| Gross Margin | 14.0% | 16.7% |
| Net Income | $3,019 | $6,306 |
| Diluted EPS | $0.29 | $0.57 |
| Cash and Cash Equivalents | $98,965 | $117,199 |
| Total Debt | $26,000 | $27,500 |
| Operating Cash Flow | ($12,130) | ($9,194) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 4.6% year-over-year, driven primarily by a 17.7% increase in Rail Products sales due to higher volumes in new distribution businesses and price increases. This offset a 9.8% decline in Construction Products sales.
- Profitability Decline: Net income decreased 52.1% to $3.0 million. This decline is largely attributable to the absence of one-time gains in the prior year (Q1 2008 included $2.0 million from the DM&E investment sale and $1.5 million from a property sale-leaseback).
- Margin Compression: Gross margin fell from 16.7% to 14.0%. The Rail Products segment margin dropped significantly from 15.4% to 8.3% due to a $1.6 million warranty charge for failed concrete ties and reduced volumes from Union Pacific Railroad.
- Cash Flow: Operating cash flow turned negative, using $12.1 million compared to $9.2 million in the prior year. The primary driver was a significant pay-down of trade accounts payable ($21.9 million outflow), partially offset by collections on receivables and inventory utilization.
Outlook, Risks, and Unusual Items
Unusual Items
- Warranty Charge: The Company recorded a $1.6 million charge in Cost of Goods Sold related to the failure of prestressed concrete railroad ties manufactured in 2004 at the Grand Island, NE facility. The cause is attributed to equipment fatigue prior to 2005. Management believes this is a reasonable estimate but notes future costs could be material.
- Share Repurchases: The Company repurchased 86,141 shares of common stock for approximately $1.9 million during the quarter.
Guidance and Outlook
- Economic Environment: Management anticipates margin compression for at least the next six months due to the global recession, reduced demand, and falling commodity prices.
- Segment Specifics: Rail Products sales and gross profit are expected to decline in 2009 due to reduced Class 1 railroad capital spending. Construction Products may see mitigation from the American Recovery and Reinvestment Act stimulus bill, though heavy civil markets remain soft.
- Financial Position: The Company maintains a strong liquidity position with approximately $99 million in cash and $85.1 million in available credit under its revolving facility. Management expects to remain profitable and generate positive cash flow in 2009.
Risks and Contingencies
- Legal Proceedings: The Company is defending against claims regarding pipe coating (1989), an overpass failure in Utah (2000), and environmental contamination in Oklahoma (1978). Management believes it has meritorious defenses and insurance coverage for these matters.
- Government Funding: Operations rely heavily on federal funding (SAFETEA-LU) which expires in September 2009. Uncertainty regarding reauthorization poses a risk to the Construction segment.
- Supplier Concentration: The Construction segment relies heavily on Gerdau Ameristeel Corporation for piling products.
Investor Verification Checklist
- Warranty Exposure: Verify if the $1.6 million charge for concrete tie failures is sufficient or if additional reserves will be needed as investigations continue.
- Union Pacific Contract: Monitor the status of the concrete tie purchasing agreement with Union Pacific Railroad, as volumes are currently at ~40% capacity.
- Working Capital Trends: Assess the sustainability of the significant pay-down of trade payables and its impact on future operating cash flows.
- Stimulus Impact: Evaluate the actual impact of the American Recovery and Reinvestment Act on the Construction Products backlog and bookings.
- Debt Covenants: Confirm continued compliance with the amended credit agreement covenants, specifically the fixed charge coverage ratio and net worth requirements.