L.B. Foster Company — Form 10-Q Summary
Business Context and Reporting Period
L.B. Foster Company manufactures and distributes products and services for transportation and energy infrastructure in North America and Europe. Its operating segments are Rail Products and Services, Construction Products, and Tubular and Energy Services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018, filed November 2, 2018.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $167.1 million | $131.5 million | $462.4 million | $395.1 million |
| Gross profit | $29.6 million | $26.4 million | $84.1 million | $75.4 million |
| Gross margin | 17.7% | 20.1% | 18.2% | 19.1% |
| Income before taxes | $4.7 million | $3.0 million | $8.8 million | $4.5 million |
| Net income | $5.0 million | $3.2 million | $7.9 million | $3.8 million |
| Diluted EPS | $0.47 | $0.31 | $0.75 | $0.37 |
For the nine months, operating cash flow was $22.4 million, compared with $27.5 million in the prior-year period. Capital expenditures were $3.2 million, versus $5.3 million. Cash used in financing was $53.8 million, primarily reflecting debt repayments. Cash declined to $9.6 million from $37.7 million at December 31, 2017.
Total debt was $76.5 million at September 30, 2018, down from $130.0 million at year-end 2017. The company reported $119.2 million of net available borrowing capacity under its domestic revolving facility, $425 thousand of outstanding letters of credit, and compliance with its credit covenants. The principal facility matures March 13, 2020. Approximately $7.3 million of cash was held in non-domestic accounts.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 27.1%; nine-month sales increased 17.1%.
- Rail Products and Services sales increased 36.1% in the quarter and 27.0% year to date, supported by transit, rail infrastructure, and North American rail distribution activity.
- Tubular and Energy Services sales increased 35.5% in the quarter and 30.5% year to date, with substantially higher segment profit.
- Construction Products sales increased 6.2% in the quarter but declined 7.6% year to date. Segment profit fell 58.3% in the quarter and 57.8% year to date due to pricing pressure, project mix, and a production interruption.
- Gross margin declined 240 basis points in the quarter and 90 basis points year to date. Management cited weaker Construction Products and Rail segment margins, distribution mix, and higher LIFO expense.
- Interest expense declined 32.5% in the quarter and 21.2% year to date, primarily due to lower debt and favorable credit-facility pricing.
- Backlog increased to $251.6 million from $189.6 million at September 30, 2017 and $166.9 million at December 31, 2017. Approximately 10.0% of backlog was expected to extend beyond September 30, 2019.
- The company sold its 45% interest in L B Pipe and Coupling Products, LLC for $3.9 million and received $1.2 million of loan repayment plus accrued interest.
- The company adopted ASC 606 using the modified retrospective method with no material impact. Adoption of a tax-related accounting standard reduced opening retained earnings by $305 thousand.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide a clear quantitative full-year revenue, earnings, or cash-flow guidance range. Management expressed optimism regarding rail traffic, global transit projects, upstream and midstream energy activity, and the strong third-quarter order intake that increased backlog.
- The UPRR concrete-tie litigation remains unresolved. The April 29, 2019 trial date was retained, and the company stated that any additional loss or range of loss cannot currently be estimated. The outcome could materially affect results, financial condition, and cash flows.
- The company maintained a $9.4 million product-warranty reserve, including $7.7 million related to concrete-tie claims. A $611 thousand charge was recorded for a commercial decision supporting a customer concern on an automation project.
- UPRR litigation costs were $4.5 million in the first nine months, an increase of $3.0 million from the prior-year period.
- The company had $6.1 million of environmental reserves and is potentially involved in the Portland Harbor Superfund Site matter. Management does not currently expect present environmental requirements to have a material effect, but future costs remain uncertain.
- Interest-rate exposure remains material: a 1% change in rates on variable-rate debt would affect annualized interest expense by approximately $857 thousand. The company had $50 million of LIBOR-based interest-rate swaps.
- The company expects the new lease standard to materially affect the balance sheet when adopted, although it does not expect an effect on credit-agreement covenants.
- Additional risks include tariffs and trade-policy changes, foreign-currency movements, energy-market conditions, infrastructure funding, material and labor costs, supply availability, taxes, ERP implementation, and the company’s ability to manage working capital and indebtedness.
Investor Verification Points
- Verify the sustainability of revenue and order growth, particularly the elevated backlog in Rail and Construction.
- Monitor Construction Products pricing, production execution, project mix, and margin recovery.
- Assess liquidity after the substantial debt reduction and the relatively low $9.6 million cash balance.
- Track UPRR litigation developments, warranty utilization, and whether the existing $7.7 million concrete-tie reserve remains adequate.
- Review covenant headroom, the March 2020 debt maturity, variable-rate exposure, and interest-rate swap terms.
- Evaluate the effect of the upcoming lease standard and the finalization of provisional Tax Act and GILTI accounting.