L.B. Foster Company — Form 10-Q Summary
Business context and reporting period
L.B. Foster manufactures and distributes products and services for transportation and energy infrastructure in North America and Europe. Reportable segments are Rail Products and Services, Construction Products, and Tubular and Energy Services. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017, filed November 8, 2017.
Financial highlights
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $131.5 million | $114.6 million | $395.1 million | $376.9 million |
| Gross profit | $26.4 million | $19.8 million | $75.4 million | $71.6 million |
| Gross margin | 20.1% | 17.3% | 19.1% | 19.0% |
| Income before taxes | $3.0 million | $(9.4) million | $4.5 million | $(142.9) million |
| Net income (loss) | $3.2 million | $(6.0) million | $3.8 million | $(100.8) million |
| Diluted EPS | $0.31 | $(0.58) | $0.37 | $(9.82) |
| Operating cash flow | Not separately provided | Not separately provided | $27.5 million | $11.9 million |
- Q3 sales increased 14.7%; nine-month sales increased 4.8%.
- Q3 gross margin improved 280 basis points, driven by higher margins in all three segments. Nine-month gross margin increased 10 basis points.
- Selling and administrative expense declined 9.0% for the nine months to $60.0 million. Interest expense increased 45.4% to $6.3 million, primarily because of higher rates on outstanding debt.
- 2016 included $135.9 million of non-cash asset impairment charges for the first nine months; no asset impairment charges were recorded in the comparable 2017 period.
Liquidity, debt and balance sheet
- September 30, 2017 cash and equivalents were $35.0 million, compared with $30.4 million at December 31, 2016. Approximately $34.0 million was held in non-domestic accounts.
- Total debt was $138.3 million, down from $159.6 million at year-end 2016. Debt consisted primarily of $123.5 million drawn on the revolving credit facility and a $13.1 million term loan.
- Net available borrowing capacity under the domestic facility was $46.1 million, with approximately $0.4 million of outstanding letters of credit. The facility matures March 13, 2020.
- Operating activities generated $27.5 million of cash; investing activities used $3.9 million, including $5.3 million of capital expenditures; financing activities used $21.4 million, primarily for debt repayments.
- Working capital increased materially, including accounts receivable of $79.3 million and inventories of $104.0 million at September 30, 2017, versus $66.6 million and $83.2 million, respectively, at December 31, 2016.
- The company was in compliance with its credit agreement covenants. Rolling twelve-month covenant EBITDA was $32.1 million versus a required minimum of $23.0 million for the September 30, 2017 quarter.
Material changes versus the prior comparable period
- Rail Products and Services: Q3 sales rose 9.1% to $62.1 million and segment profit improved to $3.5 million from a $2.0 million loss. Nine-month sales were essentially flat at $187.9 million, while segment profit improved to $8.9 million from a $26.5 million loss.
- Construction Products: Q3 sales rose 12.2% to $39.1 million and segment profit rose 149.8% to $3.4 million. Nine-month sales increased 13.8% to $121.9 million and segment profit increased 59.3% to $9.2 million.
- Tubular and Energy Services: Q3 sales increased 32.3% to $30.3 million and segment profit was $2.3 million versus a $7.0 million loss. Nine-month sales increased 5.0% to $85.2 million and segment profit was $1.8 million versus a $111.9 million loss.
- Total backlog was $189.6 million at September 30, 2017, up 32.0% from $143.8 million a year earlier. Rail backlog rose 60.6% and Tubular and Energy Services backlog nearly doubled; Construction backlog declined 1.1%.
- The company stopped paying dividends during the 2017 periods, compared with $0.04 per share in Q3 2016 and $0.12 per share for the first nine months of 2016.
- The company agreed to sell its 45% interest in L B Pipe & Coupling Products, LLC, remeasured the investment to $3.9 million, and recorded a $0.4 million impairment charge.
Guidance, outlook, management commentary and risks
- No formal revenue or earnings guidance is provided in the filing.
- Management cited signs of recovery in North American freight rail, strength in global transit projects, and improving upstream oil and gas and midstream activity. Rail and Tubular order activity increased substantially, while Construction order activity weakened in certain piling markets.
- The credit agreement prohibits future acquisitions through maturity, limits annual dividends and share redemptions to $1.7 million, and requires minimum liquidity of $25.0 million through June 30, 2018. The company was compliant at quarter-end.
- The company maintains a $9.6 million product warranty reserve, including $7.6 million for concrete tie claims. The Union Pacific Railroad litigation remains unresolved; the company cannot estimate any additional loss or range of loss, and adverse results could materially affect operations, financial condition and cash flows.
- The company received an EPA General Notice Letter concerning potential responsibility for the Portland Harbor Superfund Site. Environmental reserves were $6.3 million, and management did not believe the matter would have a material effect based on currently available information.
- Future impairment remains a risk, particularly if anticipated market recoveries do not occur in the Rail Products and Services segment. The company recorded no goodwill impairment test-triggering event through September 30, 2017.
- The company expects to adopt the new revenue recognition standard on January 1, 2018 using the modified retrospective approach. It expects the new lease standard to have a material balance-sheet impact because of its significant operating leases.
Most important facts for investors to verify
- Whether rail, energy and infrastructure-market recoveries sustain the improved order rates and backlog.
- Progress and ultimate exposure in the UPRR concrete tie warranty litigation, including whether the $7.6 million reserve is adequate.
- Compliance with rising EBITDA and fixed-charge coverage requirements and the ability to refinance or repay debt before the 2020 maturity.
- Cash conversion as receivables and inventories grow, particularly after the significant working-capital investment in 2017.
- Potential future goodwill or long-lived-asset impairments if market recoveries weaken.
- Effects of the January 1, 2018 revenue-standard adoption and later lease-standard adoption on reported revenue, earnings, controls and balance-sheet leverage.