L.B. Foster Company — Form 10-Q Summary
Business Context and Reporting Period
L.B. Foster Company is a global provider of engineered products, technology solutions, and services supporting infrastructure markets. Operations are reported in three segments: Rail, Technologies, and Services; Precast Concrete Products; and Steel Products and Measurement. This report covers the three months ended March 31, 2023, compared with the same period in 2022. The company is an accelerated filer and smaller reporting company.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $115.5 million | $98.8 million | Up 16.9% |
| Gross profit | $23.3 million | $16.4 million | Up 41.6% |
| Gross margin | 20.2% | 16.6% | Up 360 bps |
| Operating profit (loss) | $0.5 million | $(2.3) million | Improved $2.8 million |
| Net loss attributable to L.B. Foster | $(2.2) million | $(1.6) million | Loss increased $0.6 million |
| Diluted loss per share | $(0.20) | $(0.15) | Unfavorable $0.05 |
| Operating cash flow | $6.9 million | $(7.6) million | Improved $14.6 million |
| Capital expenditures | $0.7 million | $1.8 million | Down $1.1 million |
Interest expense increased to $1.4 million from $0.4 million, while other expense was $1.8 million compared with other income of $0.6 million in the prior-year quarter. The current-quarter other expense primarily reflected a $2.0 million loss on the Chemtec divestiture. The effective tax rate was 19.9%, compared with 24.3%; the U.S. deferred tax asset valuation allowance limits tax benefits from domestic losses.
At March 31, 2023, cash and cash equivalents were $2.6 million, total debt was $80.1 million, and net availability under the revolving credit facility was $49.1 million. Including cash, total available funding capacity was $51.7 million. The company was in compliance with its debt covenants and had approximately $1.1 million of outstanding letters of credit.
Material Changes Versus the Prior Comparable Period
- Sales increased $16.7 million, supported by 11.5% organic growth and 9.3% contribution from acquisitions, partly offset by a 3.9% decline from divestitures.
- Gross margin expanded due to portfolio changes, improved product mix, pricing, and stronger operating performance.
- Higher selling and administrative expenses, including acquisition-related and personnel costs, increased 23.8% to $21.4 million.
- Rail, Technologies, and Services sales increased 1.1%, while segment operating profit rose to $2.4 million from $1.0 million.
- Precast Concrete Products sales increased 61.8%, primarily due to the VanHooseCo acquisition; the segment operating loss narrowed to $0.3 million from $0.8 million.
- Steel Products and Measurement sales increased 33.6%, and its operating loss narrowed to $0.01 million from $2.1 million.
- Cash from operations improved primarily because of working-capital movements and collection of $3.0 million in federal income tax refunds.
- Debt declined by approximately $12.0 million, aided by operating cash flow and proceeds from the Chemtec divestiture.
- Backlog was $259.9 million, up from $244.6 million at March 31, 2022 but down from $272.3 million at December 31, 2022. Approximately 8.9% of backlog was expected to extend beyond March 31, 2024.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide explicit quantitative full-year revenue or earnings guidance. Management stated that it is continuing its transformation into a technology-focused infrastructure solutions provider, with emphasis on Rail Technologies, Precast Concrete, organic growth, and debt reduction. The Chemtec sale reduced energy-market exposure and generated proceeds used in part to repay debt.
- The $2.0 million Chemtec divestiture loss materially affected reported net loss.
- The company acquired VanHooseCo and Skratch in 2022 and divested Track Components and Chemtec as part of its portfolio transformation.
- The revolving credit facility has $130.0 million of commitments and matures August 13, 2026. Borrowings are subject to base-rate or SOFR-based pricing and financial covenants.
- The company must pay $8.0 million under the Union Pacific Railroad settlement during the remainder of 2023 and another $8.0 million in 2024.
- Environmental reserves were approximately $2.4 million. The company is a potentially responsible party relating to the Portland Harbor Superfund Site, but management currently does not expect a material adverse effect; an unfavorable future allocation could be material.
- Key risks include inflation and supply-chain disruption, labor availability, interest-rate volatility, covenant compliance, working-capital requirements, customer and project delays, infrastructure funding, foreign currency and geopolitical conditions, cybersecurity, litigation, product warranty claims, and execution of acquisitions and divestitures.
- No interim goodwill impairment test was required as of March 31, 2023, although unfavorable changes in projections could result in future impairment charges.
- Management concluded that disclosure controls were effective and reported no material changes to internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether improved gross margins and segment performance persist after the one-time Chemtec divestiture impact.
- The company’s ability to generate recurring positive operating cash flow and continue reducing its approximately $80 million debt balance.
- Compliance with the gross leverage and fixed-charge coverage covenants, particularly after the temporary leverage accommodation expires June 30, 2023.
- Backlog conversion, order trends, and the decline in Rail, Technologies, and Services backlog.
- Execution and profitability of the VanHooseCo acquisition and other strategic portfolio actions.
- Potential cash requirements from the Union Pacific settlement, environmental matters, litigation, and warranty claims.
- The effect of higher interest rates, supply-chain costs, labor expenses, and the U.S. deferred tax asset valuation allowance on future earnings.