Business Context and Reporting Period
Company: L. B. Foster Company (FOSTER L B CO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
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) | Q3 2008 | Q3 2007 | 9 Months 2008 | 9 Months 2007 |
|---|---|---|---|---|
| Net Sales | $145,550 | $135,753 | $368,824 | $394,966 |
| Gross Profit | $22,707 | $20,994 | $60,213 | $56,422 |
| Gross Margin % | 15.6% | 15.5% | 16.3% | 14.3% |
| Net Income | $8,126 | $14,531 | $22,089 | $24,461 |
| Diluted EPS | $0.76 | $1.32 | $2.01 | $2.24 |
| Operating Cash Flow (9mo) | $9,440 (vs. $28,959 in 2007) | |||
| Cash & Equivalents | $111,755 (as of Sept 30, 2008) | |||
| Total Debt | $29.3 million (as of Sept 30, 2008) | |||
| Working Capital | $205.3 million (as of Sept 30, 2008) |
Material Changes vs. Prior Period
- Revenue: Q3 sales increased 7.2% year-over-year, driven by Rail (+6.8%) and Construction (+12.0%) segments. However, year-to-date sales decreased 6.6% due to volume declines in Rail and Tubular products.
- Profitability: Net income for Q3 2008 ($8.1M) was significantly lower than Q3 2007 ($14.5M). The prior year included $8.5M in dividend income from the DM&E investment, which was sold in late 2007. Excluding this one-time income, Q3 2007 adjusted net income was $7.0M.
- Margins: Gross margins improved across segments. Construction Products margin rose 4.9 percentage points to 21.7%, and Rail Products rose 2.7 percentage points to 15.6%, aided by price increases and operational efficiencies. These gains were partially offset by a $5.1M LIFO charge in Q3.
- Cash Flow: Operating cash flow dropped 67.4% year-to-date to $9.4M. This decline was primarily due to a $15.8M increase in accounts receivable and a $17.9M increase in inventory, driven by commodity cost increases and customer delivery delays.
- Capital Allocation: The company repurchased $19.8M of its own stock during the first nine months of 2008.
Guidance, Outlook, and Risks
- Outlook: Management notes mixed signals for 2009, with increasing evidence of economic weakness. They cite a strong financial position ($111.8M cash, $85.4M credit availability) to weather potential downturns.
- Raw Material Costs: Scrap steel costs declined over 80% from July to October 2008. While this reduces input costs, it is expected to lead to selling price decreases in the Construction segment, potentially impacting future sales dollars and margins.
- Customer Concentration: Significant exposure to Union Pacific Railroad (UPRR) for concrete ties. UPRR purchases in 2008 are expected to be ~48% lower than 2007 levels. Management expects 2009 levels to improve.
- Strategic Shifts: The company is limiting the use of foreign suppliers for North American rail distribution, which may reduce short-term sales but is intended to improve long-term results.
- Legal Contingencies: The company is defending against lawsuits regarding pipe coating (Allegheny County, PA) and an overpass failure (Clearfield, UT). Management believes it has meritorious defenses and insurance coverage, though resolution could impact future results.
Investor Verification Checklist
- Inventory Valuation: Verify the impact of the $7.8M LIFO charge on year-to-date gross profit and the adequacy of inventory reserves given the sharp decline in scrap steel prices.
- Working Capital Trends: Monitor the days sales outstanding (increased to 45 days) and inventory levels to assess if the cash flow decline is a temporary seasonal issue or a structural collection problem.
- UPRR Contract Renewals: Track the status of concrete tie contracts with Union Pacific Railroad, as a 48% volume drop in 2008 poses a significant risk to the Rail segment.
- Share Repurchase Program: Confirm the remaining authorization under the $25M program (approx. $0.2M remaining as of Oct 2008) and the status of the new $15M authorization approved in October 2008.
- Legal Exposure: Review updates on the gas company and City of Clearfield lawsuits to ensure no material liability has emerged that would impact liquidity.