L.B. Foster Company — 2021 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
L.B. Foster Company provides products and services for the rail industry and solutions for critical infrastructure projects. The company operates through two segments: Rail Technologies and Services and Infrastructure Solutions, with locations in North America, South America, Europe, and Asia. This Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. The former Test and Inspection Services business is presented as a discontinued operation following its September 2020 sale.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total net sales | $116.1 million | $121.9 million | Down 4.8% |
| Gross profit | $18.8 million | $23.1 million | Down 18.6% |
| Gross margin | 16.2% | 19.0% | Down 280 bps |
| Selling and administrative expense | $18.0 million | $20.3 million | Down 11.4% |
| Loss from continuing operations | $1.3 million | $5 thousand | Lower result |
| Diluted loss per share | $0.12 | Less than $0.01 | Worsened |
| Operating cash flow from continuing operations | $7.6 million | $(4.9) million | Improved $12.5 million |
| Capital expenditures | $1.3 million | $2.8 million | Down $1.5 million |
Q1 2020 included a $1.9 million loss from discontinued operations, resulting in total net losses attributable to L.B. Foster of $1.3 million in Q1 2021 versus $1.9 million in Q1 2020. The Q1 2021 continuing-operations loss included $871 thousand of net interest expense, $1.5 million of amortization, and a $321 thousand income tax benefit.
At March 31, 2021, cash and cash equivalents were $5.0 million, total debt was $36.8 million, and net available revolving-credit capacity was $77.6 million. Total available funding capacity, including cash, was $82.6 million. The company reported a current ratio of 1.86 and stated that it was in compliance with its credit agreement covenants.
Material Changes Versus the Prior Comparable Period
- Rail Technologies and Services sales declined 5.7% to $66.2 million, but gross profit increased 2.5% to $12.8 million and segment profit increased to $2.5 million from $1.2 million. Improved friction-management consumables and services helped margins.
- Infrastructure Solutions sales declined 3.6% to $49.8 million. Gross profit fell 43.3% to $6.0 million, and the segment recorded a $666 thousand loss versus $1.6 million of profit in Q1 2020.
- The Infrastructure Solutions decline was concentrated in Coatings and Measurement, where sales fell $13.2 million because of excess pipeline capacity and weak midstream energy investment. Fabricated Steel Products and Precast Concrete Products increased sales by $9.3 million and $2.0 million, respectively.
- Gross-margin deterioration was primarily attributable to Infrastructure Solutions; Rail segment gross margin improved 150 basis points.
- Selling and administrative costs declined primarily because of lower personnel-related and travel expenses. Other expense also declined because Q1 2020 included approximately $677 thousand of non-routine relocation and restructuring charges.
- Cash from continuing operations improved substantially, supported by working-capital movements, including increases in accounts payable and deferred revenue, despite higher accounts receivable.
- Debt declined by approximately $8.3 million during the quarter. Cash nevertheless declined $2.5 million to $5.0 million after debt repayments, investing activities, exchange-rate effects, and discontinued-operation cash use.
- Backlog increased 14.6% year over year to $271.9 million and 9.6% from December 31, 2020. Infrastructure Solutions backlog increased 16.5% year over year, while Rail backlog increased 12.4%.
Guidance, Outlook, Risks, and Unusual Items
Management expects a strong sequential increase in sales from Q1 to Q2 2021, accompanied by improving profitability. The company expects gross margins to benefit from the return of consumables and service work and from operating-cost leverage. Selling and administrative spending is expected to increase in absolute terms as commercial and operating activity normalizes, although it is expected to leverage favorably against higher sales.
Management expects railway and general infrastructure projects to continue and anticipates less pandemic-related disruption as 2021 progresses. Increased rail traffic and on-site service activity could support consumable and service revenue. Federal funding for transit agencies, including support under the American Rescue Plan Act, may benefit certain served markets.
Coatings and Measurement is expected to remain weak for the foreseeable future because of continued midstream energy-market challenges. The company noted the possibility of additional shutdowns or furloughs in that business if order rates do not improve. Backlog is not a guarantee of future revenue because customers may cancel or change orders, and some product lines are not backlog-driven.
- Primary risks include COVID-19 developments, project delays, supply-chain and labor disruptions, lower rail traffic, weak oil and gas markets, inflation in manufacturing and material costs, interest-rate and foreign-currency volatility, and restrictions under the credit agreement.
- The company is exposed to variable-rate debt and maintains $50.0 million of LIBOR-based interest-rate swaps. The swap liability was $863 thousand at March 31, 2021.
- The company has an accrued Union Pacific Railroad settlement obligation of $32.0 million payable through 2024, including $8.0 million scheduled for the remainder of 2021.
- Environmental reserves were approximately $2.5 million. The company is a potentially responsible party related to the Portland Harbor Superfund Site but stated that the ultimate impact cannot be predicted and is not currently expected to be material.
- Product warranty liabilities were $1.3 million at March 31, 2021.
- No interim goodwill impairment test was required based on management’s qualitative assessment, although COVID-19 impacts remain subject to change.
- Management concluded that disclosure controls were effective as of March 31, 2021 and reported no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the expected Q2 sales recovery and profitability improvement occurred, particularly in Rail Technologies and Services.
- Whether Coatings and Measurement stabilized or continued to pressure Infrastructure Solutions margins and cash generation.
- Compliance with leverage, fixed-charge coverage, and working-capital covenants as debt-facility requirements tighten over time.
- Cash conversion and working-capital trends, including receivables, inventory, deferred revenue, and contract assets.
- Execution against the $271.9 million backlog, including potential customer cancellations, project delays, and the timing of revenue recognition.
- Required payments under the Union Pacific settlement and the company’s ability to fund them while maintaining liquidity.
- Potential effects of COVID-19, supply-chain disruptions, infrastructure spending, rail-traffic recovery, and midstream energy-market conditions.