L.B. Foster Company — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2012, filed November 7, 2012. L.B. Foster manufactures, fabricates and distributes products and services for rail, construction, utility and energy markets through Rail Products, Construction Products and Tubular Products segments. Results were reclassified to present the sold Shipping Systems Division and Precise Structural Products business as discontinued operations.
Key financial metrics
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Net sales | $170.3 million, up 7.6% | $447.8 million, up 1.4% |
| Gross profit | $30.7 million; 18.0% margin | $64.7 million; 14.4% margin |
| Income from continuing operations | $8.5 million, or $0.83 diluted EPS | $8.1 million, or $0.80 diluted EPS |
| Net income | $8.2 million, or $0.81 diluted EPS | $9.5 million, or $0.93 diluted EPS |
| Operating cash flow from continuing operations | Not provided for the quarter | $24.6 million |
Compared with the prior year, quarterly continuing-operations income declined 9.5%, while nine-month continuing-operations income declined 50.0%. The nine-month effective tax rate increased to 37.6% from 31.0%; the quarterly rate increased to 35.4% from 31.5%.
At September 30, 2012, cash and cash equivalents were $100.7 million, total debt was approximately $0.4 million, and stockholders’ equity was $281.4 million. The company had no borrowings under its $125 million revolving credit facility, approximately $123.8 million of available capacity, and $1.2 million of outstanding letters of credit. The company was in compliance with its debt covenants.
Capital expenditures were $6.3 million for the nine months, and management expected full-year 2012 capital spending of $8.0 million to $9.0 million. Cash dividends were $0.025 per share for the quarter and $0.075 per share year to date.
Segment performance and changes versus prior period
- Rail Products: Third-quarter sales increased 24.2% to $111.0 million, but gross margin declined to 17.2% from 20.2%. Nine-month sales increased 15.8% to $279.0 million, while gross margin declined to 12.7% from 17.1%, primarily because of concrete-tie warranty charges.
- Construction Products: Third-quarter sales decreased 23.6% to $45.9 million and gross profit decreased 27.3% to $7.2 million. Nine-month sales decreased 25.1% to $132.2 million. Management cited lower piling volumes, fewer new orders and continued softness in construction markets.
- Tubular Products: Third-quarter sales increased 52.9% to $13.4 million and gross margin rose to 32.8% from 28.3%. Nine-month sales increased 51.6% to $36.7 million, driven by energy-related demand and increased capacity at the Birmingham coating facility.
- Operating cash flow from continuing operations increased from $10.7 million to $24.6 million year to date, primarily because working capital provided cash rather than using cash in the prior-year period.
- Cash increased by $26.9 million from December 31, 2011, compared with a $17.7 million decrease in the prior-year period. The increase included $10.5 million of proceeds from discontinued operations and $1.3 million of favorable foreign-exchange effects.
Guidance, outlook, risks and unusual items
- The company recorded $22.0 million of 2012 warranty charges related to Grand Island, Nebraska concrete railroad ties, including an additional $3.0 million in the third quarter. The total concrete-tie warranty reserve was $27.2 million, within a total product-warranty reserve of $28.1 million.
- The company agreed with Union Pacific Railroad on a process to identify and replace defective ties and revised the applicable policy from a five-year warranty with a 1.5-to-1 replacement ratio to a 15-year warranty with a 1-to-1 replacement ratio. Future warranty costs could exceed the reserve and materially affect results.
- The Department of Transportation Inspector General subpoenaed records relating to the Grand Island concrete-tie operations. The company stated that it was cooperating with the investigation.
- Management expected strong rail and energy markets to support continued performance, but anticipated a weakened or only slightly improving construction market into 2013. Tubular growth was expected to continue at a slower rate than in 2012.
- Management stated that it expected operating cash flow to exceed capital expenditures, scheduled debt service, share repurchases and dividends. It expected capital spending of $8.0 million to $9.0 million for 2012.
- The company sold the Shipping Systems Division for $8.6 million and Precise Structural Products for $2.6 million, recognizing a combined pretax gain of approximately $3.2 million. The discontinued operations generated $1.4 million of net income for the nine months but a $0.2 million net loss in the third quarter.
- Foreign-currency hedge settlements generated an approximately $0.2 million third-quarter loss, and a derivative liability of approximately $47,000 was recorded at September 30, 2012.
- Other risks include raw-material price and availability, adverse weather, production or quality problems, dependence on government and railroad spending, foreign-currency fluctuations, regulatory changes, construction-market weakness and the adequacy of warranty estimates.
Important facts for investors to verify
- Validate the ultimate number, replacement cost and timing of Grand Island concrete-tie claims, including any effect of the UPRR agreement and the Inspector General inquiry.
- Reconcile the filing’s stated backlog of approximately $255.7 million with the segment table showing total continuing-operations backlog of $225.7 million at September 30, 2012; the filing text does not explain the discrepancy.
- Assess whether the company’s near-term rail and tubular-market strength can offset continued Construction Products weakness.
- Review covenant calculations, available revolver capacity, foreign cash balances and the company’s ability to fund working capital and capital expenditures without drawing on debt.
- Consider the effect of discontinued operations, unusually high warranty charges, elevated tax rates and other nonrecurring items when comparing earnings trends.