L.B. Foster Company — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2011. L.B. Foster manufactures, fabricates and distributes rail, construction and tubular products and services. Reportable segments are Rail Products, Construction Products and Tubular Products. The 2011 results include Portec Rail Products, acquired December 15, 2010.
Financial performance and liquidity
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Net sales | $173.7 million | $119.5 million | $290.8 million | $201.5 million |
| Gross profit | $26.3 million | $20.3 million | $43.8 million | $32.4 million |
| Gross margin | 15.1% | 17.0% | 15.0% | 16.1% |
| Income before taxes | $9.2 million | $9.4 million | $10.1 million | $12.0 million |
| Net income | $6.4 million | $6.0 million | $7.1 million | $7.7 million |
| Diluted EPS | $0.61 | $0.58 | $0.68 | $0.75 |
| Operating cash flow | Not separately provided | Not separately provided | $(10.4) million | $16.7 million |
Second-quarter sales increased 45.4%, while net income increased 6.4%. Year-to-date sales increased 44.3%, but net income declined 8.9%. Selling and administrative expense increased 55.9% in the quarter and 62.7% year to date, primarily due to Portec Rail and integration costs. Amortization increased materially because of acquired intangible assets.
At June 30, 2011, cash and cash equivalents were $45.7 million, total debt was $3.1 million, and stockholders’ equity was $263.0 million. The company had no borrowings under its new revolving facility, approximately $123.9 million of available borrowing capacity, and $1.2 million of outstanding letters of credit. Total debt was approximately 1.2% of capitalization. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Portec Rail contributed approximately $28.4 million of second-quarter sales and $51.5 million of first-half sales, plus $9.8 million and $14.8 million of gross profit, respectively.
- Rail Products second-quarter sales increased 72.8% and gross profit increased 101.2%; Construction Products sales increased 23.4%, but gross profit declined 6.7%; Tubular Products sales increased 26.5% and gross profit increased 61.0%.
- Construction Products margins declined because of lower concrete-building volumes, unfavorable manufacturing variances and competitive pricing. Segment backlog declined 30.9% from June 30, 2010.
- Gross profit included approximately $4.4 million of second-quarter charges related to the Grand Island, Nebraska concrete-tie operation: approximately $3.0 million for a customer contractual obligation, $0.8 million for unsalable inventory and $0.6 million for warranty claims.
- Year-to-date operating cash flow declined by $27.1 million, primarily because higher sales increased accounts receivable and inventory requirements and deferred revenue declined.
- The company entered into a new five-year, unsecured $125.0 million revolving credit facility on May 2, 2011, replacing its former revolver and term loan arrangements.
- The company repurchased 48,043 shares for approximately $1.5 million and paid approximately $0.5 million of dividends during the first half of 2011.
Guidance, outlook, risks and unusual items
Management did not provide specific revenue or earnings guidance. It expects to remain profitable and generate cash flow exceeding capital expenditures, debt service, dividends and share repurchases. Management expects 2011 capital expenditures of approximately $7.5 million to $8.5 million.
Management cited slower-than-expected economic growth, expiration of stimulus legislation, uncertainty regarding a new surface transportation bill, state budget deficits, government funding dependence and competitive pricing pressure. Total backlog was approximately $191.4 million at June 30, 2011, compared with $189.3 million at December 31, 2010 and $207.2 million at June 30, 2010.
On July 12, 2011, Union Pacific Railroad asserted that a significant percentage of approximately 1.6 million concrete ties manufactured at Grand Island from 2006 through 2010 were defective or failed prematurely. The company had not accrued an amount for this claim because the number of affected ties and the alleged defects were not specified and the potential exposure could not be reasonably estimated. Management stated that the ultimate resolution could materially adversely affect financial statements, results of operations, liquidity and capital resources.
Other contingencies include environmental and litigation matters, Portec shareholder litigation, product warranty claims and the company’s exposure to its joint venture. Environmental and litigation reserves were approximately $2.8 million at June 30, 2011, while total product warranty accruals were approximately $4.7 million, including approximately $2.5 million related to concrete ties.
The company was winding down the Grand Island facility, with completion expected in the third quarter of 2011. It also had approximately $0.3 million of remaining required capital contributions to its joint venture. The United Kingdom working-capital facility, with approximately $2.2 million of availability, was scheduled to expire August 31, 2011, and the company was negotiating an extension.
Important facts for investors to verify
- Scope, validity and ultimate cost of Union Pacific’s concrete-tie warranty claim and whether additional accruals become necessary.
- Whether Portec Rail integration delivers expected growth, synergies and margins after acquisition-related amortization and inventory step-up effects.
- Sustainability of Rail Products performance after excluding Portec Rail and the Grand Island-related charges.
- Construction Products backlog, pricing and margins amid reduced government stimulus and transportation-funding uncertainty.
- Conversion of higher sales into operating cash flow and working-capital requirements.
- Completion costs and remaining liabilities associated with closing the Grand Island facility.
- Compliance with revolving-credit covenants and the status of the United Kingdom facility extension.