L.B. Foster Company — Q1 2017 Form 10-Q Summary
Business context and reporting period
L.B. Foster Company manufactures and distributes products and services for transportation and energy infrastructure through Rail Products and Services, Construction Products, and Tubular and Energy Services. The filing covers the unaudited three months ended March 31, 2017, compared with the three months ended March 31, 2016. Amounts are in thousands except per-share data.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $118.7 million | $126.3 million | Down 6.0% |
| Gross profit | $21.3 million | $24.0 million | Down 11.3% |
| Gross margin | 17.9% | 19.0% | Down 110 bps |
| Loss before income taxes | $(2.0) million | $(4.1) million | Improved 52.0% |
| Income tax expense/(benefit) | $0.4 million | $(1.3) million | Changed to expense |
| Net loss | $(2.4) million | $(2.8) million | Improved 14.5% |
| Diluted loss per share | $(0.23) | $(0.28) | Improved |
| Cash flow from operations | $10.7 million | $(5.1) million | Improved $15.9 million |
| Capital expenditures | $3.5 million | $3.1 million | Increased |
| Total debt at period end | $155.3 million | Not provided in filing comparison | Down from $159.6 million at Dec. 31, 2016 |
Cash and cash equivalents were $33.8 million at March 31, 2017, compared with $30.4 million at December 31, 2016. Net available borrowing capacity under the domestic facility was $44.2 million, and outstanding letters of credit were approximately $0.4 million. Accounts receivable were $76.7 million and inventories were $82.6 million.
Segment performance and material changes
- Rail Products and Services: Sales declined 12.2% to $56.5 million, primarily from lower domestic freight rail volumes and pricing. Segment profit increased to $1.5 million from $0.7 million, aided by lower selling and administrative expenses. New orders increased 59.7%, and ending backlog increased 22.3% year over year to $91.7 million.
- Construction Products: Sales increased 17.1% to $37.3 million, driven by piling and fabricated bridge activity. Segment profit increased to $1.2 million from $0.4 million. New orders increased 12.1%.
- Tubular and Energy Services: Sales declined 17.4% to $24.9 million because of weak midstream oil and gas conditions. The segment loss narrowed to $0.5 million from $1.9 million, principally because of lower amortization following the 2016 intangible-asset impairment. New orders increased 31.1%.
- Total backlog: Increased to $195.3 million at March 31, 2017 from $154.0 million at March 31, 2016 and $147.5 million at December 31, 2016.
Selling and administrative expenses declined 15.7% to $19.2 million, reflecting personnel and discretionary spending reductions, lower UPRR litigation costs, and other strategic reductions. Amortization declined 46.1% to $1.8 million following a $59.8 million definite-lived intangible-asset impairment recorded in 2016. Interest expense increased 80.2% to $2.1 million because of higher interest rates on outstanding debt.
Liquidity, debt, outlook, and risks
- Operating cash flow benefited from working-capital changes, particularly an $18.5 million increase in accounts payable, partially offset by a $9.9 million increase in accounts receivable.
- The credit facility permits $195.0 million of revolving borrowings and includes a $30.0 million term loan. The facility matures March 13, 2020; the term loan is subject to quarterly amortization through January 1, 2020.
- The company was in compliance with its debt covenants at March 31, 2017. Its rolling 12-month covenant EBITDA was $24.9 million versus a minimum requirement of $18.5 million through June 30, 2017. Minimum undrawn revolving availability is $25.0 million through June 30, 2018.
- Management expects an annual sales decline in domestic rail distribution, although it cited improved rail order activity and backlog. Upstream oil and gas demand showed signs of recovery, while midstream activity was expected to lag.
- The company is prohibited from future acquisitions under the amended credit agreement, and annual dividends or stock redemptions are limited to $1.7 million. No common-stock dividend was paid in Q1 2017.
- The UPRR concrete-tie litigation remains material and unresolved. The company maintained a total product warranty reserve of $10.2 million, including $7.6 million for concrete-tie claims, but stated that additional losses cannot currently be estimated and could materially affect results, financial condition, and cash flows.
- The company had a $6.3 million environmental reserve at March 31, 2017. It also had maximum exposure of approximately $5.8 million related to its LB Pipe joint venture, including its equity investment, revolving loan, and direct-financing lease.
- Domestic deferred tax assets remain subject to a full valuation allowance, causing potential volatility in the effective tax rate. The Q1 2017 tax provision primarily reflected Canadian and United Kingdom operations.
- Management identified risks involving rail and energy-market weakness, infrastructure funding, raw-material and manufacturing costs, foreign exchange, interest rates, indebtedness, working capital, litigation, warranty claims, regulatory matters, and international operations.
Most important facts for investors to verify
- Whether higher orders and backlog convert into revenue and margin improvement, particularly in Rail Products and Services.
- Whether domestic rail distribution sales decline as management anticipated and whether midstream energy demand remains weak.
- The company’s ability to maintain covenant compliance as minimum EBITDA requirements increase and as interest costs remain elevated.
- Developments in the UPRR litigation and whether the $7.6 million concrete-tie reserve is sufficient.
- The sustainability of operating cash flow, given the significant benefit from working-capital movements in Q1.
- The effect of the 2016 intangible impairment, future amortization, and any additional impairment testing on reported earnings.
- The impact of the full U.S. deferred-tax-asset valuation allowance on future effective tax rates and cash taxes.