L.B. Foster Company — Form 10-Q Summary
Business Context and Reporting Period
L.B. Foster Company manufactures and distributes transportation and energy infrastructure products and provides related services in North America and Europe. The filing covers the quarter and six months ended June 30, 2020, with comparisons to the corresponding 2019 periods. Operations are organized into Rail Products and Services, Construction Products, and Tubular and Energy Services.
The company operated as an essential business during the COVID-19 pandemic but experienced supply-chain disruptions, customer delivery delays, restrictions on employees working onsite, and weaker demand. The energy-related businesses were particularly affected by lower oil and gas demand and customer spending.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $145.8 million, down 27.5% | $274.5 million, down 21.9% |
| Gross profit | $27.1 million; 18.6% margin | $48.7 million; 17.7% margin |
| Income before taxes | $1.6 million | $(1.1) million |
| Net income (loss) | $0.5 million; $0.05 diluted EPS | $(1.3) million; $(0.13) diluted EPS |
| Operating cash flow | Not separately reported | $6.1 million |
- Second-quarter selling and administrative expense declined 14.4% to $19.6 million, while its percentage of sales increased to 13.4% from 11.4%.
- Six-month selling and administrative expense declined 8.7% to $40.9 million, but increased as a percentage of sales to 14.9% from 12.7%.
- Six-month capital expenditures were $7.4 million, compared with $3.8 million in 2019. Net cash used in investing activities was $7.4 million.
- Cash and cash equivalents were $7.4 million at June 30, 2020, down from $14.2 million at December 31, 2019. Total assets were $397.4 million and stockholders’ equity was $163.9 million.
- Total debt was $55.6 million, primarily borrowings under the revolving credit facility, compared with $58.2 million at year-end 2019. Interest expense declined to $1.1 million in the quarter and $1.9 million for the first six months.
- Net availability under the revolving credit facility was $63.7 million, and total available funding capacity including cash was $71.1 million. Outstanding letters of credit were approximately $1.0 million.
- The current ratio was 1.86 at June 30, 2020. Management stated that cash, operating cash flow, and borrowing capacity were expected to provide sufficient liquidity.
- Total backlog was $225.9 million at June 30, 2020; approximately 11.9% related to projects expected to extend beyond June 30, 2021.
Material Changes Versus the Prior Comparable Period
- All three segments reported lower second-quarter and year-to-date sales. Six-month sales declined 18.0% in Rail Products and Services, 23.4% in Construction Products, and 28.4% in Tubular and Energy Services.
- Rail Products and Services remained profitable, with second-quarter segment profit of $5.8 million versus $7.9 million in 2019. Its gross margin improved to 20.0% from 18.7%.
- Construction Products reported second-quarter segment profit of $1.5 million versus $3.4 million and a six-month segment loss of $0.1 million versus profit of $4.2 million. Results were affected by the Boise, Idaho precast facility ramp-up.
- Tubular and Energy Services reported a second-quarter segment loss of $4.1 million versus profit of $5.0 million and a six-month loss of $3.5 million versus profit of $9.7 million. Its six-month gross margin fell to 19.0% from 24.1%.
- Gross margin increased slightly in the second quarter but declined 120 basis points for the first six months, primarily because of the energy segment’s volume reduction.
- Other expense for the second quarter included $6.96 million of restructuring, relocation, and closure costs, partially offset by a $1.87 million non-recurring distribution from an unconsolidated partnership. The company recorded $6.51 million of exit and disposal charges in the second quarter, including $3.85 million of non-cash asset impairments.
- Operating cash flow improved from a $9.4 million use in the first half of 2019 to $6.1 million provided in the first half of 2020, primarily because working-capital usage was lower.
Guidance, Outlook, Risks, and Unusual Items
- No formal consolidated numerical earnings or revenue guidance is provided in the filing. Management projected material 2020 sales declines in Tubular and Energy Services and anticipated continued pandemic-related disruptions during the third quarter and potentially thereafter.
- Rail Products and Services expected onsite London Crossrail services to resume in the third quarter. Management did not expect a notable recovery in consumable-product sales tied to freight and transit traffic in the second half of 2020.
- Construction Products expected the Boise facility to reach full operational efficiency in the third quarter. Bridge-decking backlog was expected to support near-capacity production rates.
- The company permanently closed three additional energy-service locations and discontinued Permian mobile services. These actions were expected to be substantially completed in 2020, but additional closure costs could occur.
- On June 26, 2020, the company amended its credit agreement. Revolving commitments were reduced from $140.0 million to $120.0 million, the $22.5 million remaining term loan was repaid using revolver borrowings, and annual $5.0 million facility reductions begin December 31, 2020. The facility matures April 30, 2024.
- The amended credit agreement includes leverage, fixed-charge coverage, and working-capital covenants. The company reported compliance as of June 30, 2020.
- The company remains obligated under the Union Pacific Railroad settlement, with $38.0 million of scheduled payments remaining from the second half of 2020 through 2024.
- Environmental reserves were approximately $6.0 million. The company is a potentially responsible party in the Portland Harbor Superfund matter, but management stated that a material adverse impact could not currently be predicted and was not expected based on available information.
- Key risks include the duration and severity of COVID-19, energy-market deterioration, rail traffic declines, supply-chain and onsite-service disruptions, covenant compliance, interest-rate and LIBOR transition risks, environmental liabilities, customer credit risk, and additional restructuring costs.
- The company adopted the current expected credit loss standard and reported no material effect. No interim goodwill impairment test was required as of June 30, 2020.
Important Facts for Investors to Verify
- Whether COVID-19-related demand, supply-chain, project-delay, and onsite-service impacts continued or worsened after June 30, 2020.
- Actual progress and additional costs associated with Tubular and Energy Services closures and the broader strategic review of that segment.
- Compliance with the amended credit agreement’s leverage, fixed-charge coverage, working-capital, and facility-reduction requirements.
- Liquidity trends, revolver utilization, cash generation, and the ability to fund capital expenditures, settlement payments, and lease obligations.
- Whether Rail and Construction backlog converts to revenue as scheduled and whether backlog cancellations or changes increase.
- The Boise facility’s achievement of expected operating efficiency and its effect on Construction Products margins.
- Potential additional exposure from the Union Pacific settlement, environmental proceedings, product warranty claims, and other legal matters.
- The filing text does not provide a clear formal company-wide revenue or earnings outlook for 2020.