L.B. Foster Company — Q3 2019 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. Operations are organized into Rail Products and Services, Construction Products, and Tubular and Energy Services. The filing covers the quarter and nine months ended September 30, 2019; financial statements are unaudited and presented in thousands, except per-share data.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $154.3 million | $167.1 million | $505.7 million | $462.4 million |
| Gross profit | $27.7 million | $31.3 million | $94.0 million | $86.6 million |
| Gross margin | 17.9% | 18.7% | 18.6% | 18.7% |
| Income before taxes | $3.1 million | $6.4 million | $18.7 million | $11.3 million |
| Net income | $3.1 million | $6.4 million | $16.3 million | $10.0 million |
| Diluted EPS | $0.29 | $0.61 | $1.53 | $0.95 |
| Operating cash flow | Not separately provided | Not separately provided | $13.3 million | $22.4 million |
At September 30, 2019, cash and cash equivalents were $15.4 million, total debt was $73.0 million, and net available borrowing capacity was $91.2 million. The company was in compliance with its credit agreement covenants. Total backlog was $194.1 million, compared with $251.6 million at September 30, 2018 and $220.4 million at December 31, 2018.
Material changes versus comparable periods
- Third-quarter sales declined 7.7%, driven by a 19.8% decline in Rail Products and Services and a 4.1% decline in Tubular and Energy Services. Construction Products sales increased 13.6%.
- Third-quarter gross margin fell 80 basis points, while selling and administrative expenses increased 2.8% and rose to 14.4% of sales from 13.0%.
- Third-quarter net income declined 52.2% and diluted EPS declined from $0.61 to $0.29.
- Nine-month sales increased 9.4%, with growth in all three segments. Nine-month net income increased 63.4%, while diluted EPS increased from $0.95 to $1.53.
- Nine-month operating cash flow decreased $9.1 million, primarily because working capital and other assets and liabilities used $18.7 million, including $6.0 million of payments under the Union Pacific settlement.
- Rail backlog declined 19.1%, Construction Products backlog declined 26.4%, and Tubular and Energy Services backlog declined 22.8% from the prior-year period.
- The company adopted lease accounting guidance on January 1, 2019, recognizing $13.2 million of operating lease right-of-use assets and corresponding liabilities at September 30, 2019. The adoption did not affect reported earnings, cash flows, or debt covenant compliance.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management cited timing of transit projects, the approaching completion of the London Crossrail project, weaker upstream energy-market conditions, project delays, and lower order activity as important operating factors.
- A new five-year credit agreement entered into April 30, 2019 increased the revolving facility authorization to $140.0 million, extended maturity to April 30, 2024, and permits additional incremental borrowings subject to conditions.
- The company entered into a $50.0 million notional LIBOR-based interest-rate swap arrangement; the swaps had a $657 thousand liability at September 30, 2019.
- Under the Union Pacific concrete-tie settlement, the company is obligated to pay $48.0 million in installments through December 2024 after an initial $2.0 million payment. The company also expects cumulative purchases of $48.0 million from Union Pacific and related entities through 2024.
- The company maintains approximately $6.1 million of environmental reserves and remains identified as a potentially responsible party for the Portland Harbor Superfund Site. Management states that the ultimate exposure cannot be predicted but does not currently expect a material adverse effect.
- Subsequent to quarter-end, the company announced plans to relocate its prefabricated concrete-building operation from Spokane, Washington, to Boise, Idaho, in the first quarter of 2020. Expected exit, relocation, severance, retention, cleanup, and restoration costs are approximately $1.0 million to $1.5 million, subject to change.
- Other disclosed risks include rail and energy-market weakness, material and labor costs, tariffs, foreign currency, Brexit-related uncertainty, cybersecurity, supply availability, litigation and warranty claims, environmental compliance, taxes, and refinancing or covenant-related liquidity risks.
Important facts for investors to verify
- Whether the third-quarter decline in rail and energy activity is temporary or reflects sustained lower demand.
- Whether backlog conversion and new-order trends stabilize, particularly after the significant year-over-year backlog decline.
- The timing and final cost of the Spokane-to-Boise facility relocation.
- Cash requirements for the Union Pacific settlement, environmental obligations, capital expenditures, and lease commitments.
- Compliance with credit agreement covenants and the company’s liquidity relative to total debt and settlement obligations.
- The potential effect of the U.S. deferred-tax-asset valuation allowance and resulting variability in the effective tax rate.
- The ultimate exposure from the Portland Harbor Superfund matter and other legal, product warranty, and environmental claims.