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, 2003
Business Overview: The Company manufactures, fabricates, and distributes rail, construction, and tubular products. Operations are organized into three reportable segments: Rail Products, Construction Products, and Tubular Products. The Company also holds a significant investment in the Dakota, Minnesota & Eastern Railroad (DM&E).
Key Financial Metrics
| Metric (in thousands) | Q2 2003 | Q2 2002 | YTD 6mo 2003 | YTD 6mo 2002 |
|---|---|---|---|---|
| Net Sales | $75,796 | $70,806 | $135,315 | $133,979 |
| Gross Profit | $9,196 | $8,700 | $16,129 | $15,495 |
| Gross Margin % | 12.1% | 12.3% | 11.9% | 11.6% |
| Income from Continuing Ops | $1,123 | $1,063 | $1,187 | $1,091 |
| Net Income (Loss) | $1,086 | $731 | $920 | $(3,948) |
| Diluted EPS (Net Income) | $0.11 | $0.08 | $0.10 | $(0.42) |
| Cash from Operations (YTD) | N/A | $1,911 | $10,779 | |
| Capital Expenditures (YTD) | $(1,281) | $(2,929) | ||
| Total Debt (Long-Term + Current) | N/A | $21,805 | $23,815 | |
| Working Capital | $46,797 | $46,694 |
Note: YTD figures for Cash Flow and Capital Expenditures are for the six months ended June 30. Debt figures are derived from the Balance Sheet (Current maturities + Long-Term Borrowings + Other Long-Term Debt).
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 7.0% in Q2 2003 compared to Q2 2002, driven by a 10% increase in Rail Products (transit and welded rail) and a 4.7% increase in Construction Products. YTD sales increased slightly by 1.0%.
- Profitability: Net income for the six months ended June 30, 2003, was $0.9 million, a significant improvement over the $3.9 million net loss in the same period of 2002. The 2002 loss included a $4.4 million non-cash charge related to the adoption of SFAS No. 142 (Goodwill).
- Discontinued Operations: The Company sold substantially all assets of its Foster Technologies subsidiary (rail signaling) in February 2003. This segment is now classified as discontinued. The loss from discontinued operations was $0.3 million for the six months of 2003, compared to $0.6 million in 2002.
- Debt Reduction: Total debt decreased by approximately $2.0 million year-to-date due to strong operating cash flows and a reduction in corporate borrowings.
- Segment Margins: Rail Products gross margin improved to 11.2% (from 10.3% last year), while Construction Products margin declined to 13.0% (from 14.4%) due to increased competition and lower margins on specific earth retention systems.
Guidance, Outlook, and Risks
- Outlook: Management expects earnings to improve in the Piling division due to a consistent supply of sheet piling from an exclusive steel mill agreement. However, the Company anticipates reduced volumes from a major Class I railroad customer after a contract expires in September 2003.
- Backlog: Total backlog at June 30, 2003, was $120.2 million, down from $130.9 million at June 30, 2002, primarily due to a reduction in Rail segment backlog.
- Capital Expenditures: Expected to be approximately $5.0 million for 2003, funded by operating cash flow and external financing.
- Risks and Contingencies:
- Government Funding: Operations are heavily dependent on government infrastructure spending; budget shortfalls have negatively impacted Construction segment sales.
- Supplier Concentration: Specialty trackwork sales depend on a single supplier. The Company wrote off $7.3 million related to this supplier in 2002, and future activity is expected to decrease.
- Legal Proceedings: The Company is involved in an ongoing appeal regarding a 2000 conviction for unlawful disposal of used oil and hazardous waste in Texas.
- DM&E Investment: The value of the Company's investment in the Dakota, Minnesota & Eastern Railroad depends on the viability of a $2.0 billion track extension project, which faces litigation and regulatory hurdles.
Investor Verification Checklist
- Discontinued Operations: Verify the final shutdown costs and the potential release of the $1.6 million valuation allowance related to Foster Technologies' net operating losses.
- Supplier Risk: Monitor the performance and financial stability of the single supplier for specialty trackwork, given the history of write-offs and expected volume decline.
- Contract Renewals: Track the status of the contract with the Class I railroad customer expiring in September 2003 and the impact of reduced volumes on the Rail segment.
- Government Spending: Assess the impact of state budget shortfalls on the Construction segment's backlog and future revenue recognition.
- DM&E Project Status: Review updates on the litigation and regulatory approvals for the DM&E Powder River Basin extension project, which could significantly impact the value of the Company's investment.