L.B. Foster Company — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2015; filed November 9, 2015. The company manufactures, fabricates, and distributes products and services for rail, construction, energy, and utility markets through Rail Products and Services, Construction Products, and Tubular and Energy Services.
Financial performance and condition
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total sales | $176.1 million | $167.8 million | $485.4 million | $446.0 million |
| Gross profit | $36.0 million | $35.2 million | $103.8 million | $90.0 million |
| Gross margin | 20.5% | 21.0% | 21.4% | 20.2% |
| Net income (loss) | $(57.4) million | $9.1 million | $(47.8) million | $19.6 million |
| Diluted EPS | $(5.60) | $0.88 | $(4.65) | $1.90 |
| Operating cash flow | Not separately provided | Not separately provided | $13.7 million | $49.7 million |
- Segment sales: Q3 Rail Products and Services declined 13.8% to $88.0 million; Construction Products increased 8.4% to $54.1 million; Tubular and Energy Services increased 115.4% to $34.0 million, primarily from acquisitions.
- Nine-month segment sales: Rail declined 10.8% to $252.5 million; Construction increased 15.8% to $137.9 million; Tubular and Energy Services increased 116.5% to $95.0 million.
- Non-cash impairment: The company recorded an $80.3 million goodwill impairment charge, or $63.9 million after tax, relating to the IOS and Chemtec reporting units in Tubular and Energy Services. Excluding the after-tax impairment, reported net income would have been approximately $6.5 million in Q3 and $16.1 million for the first nine months.
- Balance sheet: Cash and cash equivalents were $33.2 million versus $52.0 million at December 31, 2014. Total assets were $611.6 million versus $495.1 million. Stockholders’ equity was $281.1 million versus $335.9 million.
- Debt and liquidity: Total debt was $207.5 million versus $26.4 million at year-end, largely reflecting acquisition financing. The amended unsecured revolving facility has $335 million of commitments, with $131.0 million of gross availability at September 30, 2015. The facility matures March 13, 2020. The company was in compliance with its financial covenants.
- Cash flow and investment: Nine-month operating cash flow was $13.7 million. Investing cash use was $205.2 million, including $193.9 million for acquisitions and $11.6 million of capital expenditures. Financing activities provided $175.7 million, primarily from debt proceeds. Cash declined by $18.8 million during the period.
- Other metrics: Backlog was $174.3 million at September 30, 2015, down from $223.2 million a year earlier and $184.4 million at December 31, 2014. The company paid dividends of $0.12 per share through nine months, versus $0.09 in the prior-year period.
Material changes versus the prior comparable period
- Sales increased 4.9% in Q3 and 8.8% for the first nine months, but the mix shifted toward acquired energy and service businesses while core rail sales weakened.
- Gross margin decreased 48 basis points in Q3 because of lower Rail and Tubular margins. Nine-month gross margin improved 121 basis points, partly because the prior-year period included higher warranty charges.
- Selling and administrative expense increased 4.7% in Q3 and 16.9% year to date, while amortization increased materially because of acquisitions.
- The company acquired IOS for $167.4 million in March 2015 and Tew Holdings for $26.5 million in January 2015. Acquisition-related revenue was approximately $24.0 million in Q3 and $77.0 million year to date.
- Debt increased substantially to fund acquisitions, and interest expense rose to $1.3 million in Q3 and $3.2 million year to date, compared with $0.1 million and $0.4 million, respectively, in the prior periods.
- Rail orders and backlog declined materially, reflecting lower Class I railroad spending and the loss of Union Pacific Railroad business. Tubular and Energy Services orders increased substantially, although the segment’s outlook deteriorated because of weak energy markets.
Guidance, outlook, risks, and unusual items
- Management expected continued short-term weakness in upstream energy markets and further effects from the loss of Union Pacific Railroad business. The filing does not provide a specific consolidated earnings or revenue guidance figure.
- Management was pursuing cost reductions, potential restructuring, and entity consolidations to improve efficiency and protect profitability during weak market conditions.
- Capital spending for 2015 was expected to range from $13 million to $15 million.
- The Union Pacific dispute concerns alleged defective concrete ties and warranty obligations. UPRR filed suit in January 2015 and terminated the concrete tie supply and Tucson lease agreements in June 2015. The company disputes the claims and cannot predict the litigation outcome or whether future costs will exceed recorded accruals.
- The company maintained a $9.4 million product warranty reserve at September 30, including $8.3 million related to concrete ties. Additional warranty charges remain possible.
- Energy-market deterioration, lower U.S. land rig counts, and reduced customer capital spending caused the IOS and Chemtec goodwill impairment. Further impairment risk could arise if forecasts or market conditions worsen.
- Approximately $29.5 million of cash was held in non-U.S. accounts and was not available for domestic operations unless repatriated. The company intended to indefinitely reinvest those funds outside the United States.
- The company entered into $35.0 million of forward-starting interest-rate swaps that become effective in February 2017; the recorded fair-value liability was approximately $0.5 million.
- Management stated that disclosure controls were effective. Integration of recently acquired businesses could require additions or changes to internal controls.
Investor verification checklist
- Verify the ongoing financial impact and ultimate resolution of the UPRR litigation, warranty claims, and termination of related business.
- Assess whether IOS and Chemtec can recover under revised energy-market forecasts and whether additional impairment charges are possible.
- Monitor leverage, covenant compliance, interest expense, borrowing availability, and cash generation following the acquisition-related debt increase.
- Reconcile reported results with management’s non-GAAP results excluding goodwill impairment and warranty charges.
- Evaluate backlog and order trends, particularly the declines in Rail and Construction Products and the acquisition-driven growth in Tubular and Energy Services.
- Confirm the sustainability of dividends and share repurchases under the revolving credit agreement’s restrictions.