L.B. Foster Company — Form 10-Q Summary
Business context and reporting period
L.B. Foster Company manufactures, fabricates, and distributes products and services for rail, construction, energy, and utility markets. 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, 2016, compared with the corresponding 2015 periods.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $114.6 million | $176.1 million | $376.9 million | $485.4 million |
| Gross profit | $19.8 million | $36.0 million | $71.6 million | $103.8 million |
| Gross margin | 17.3% | 20.5% | 19.0% | 21.4% |
| Net loss | $6.0 million | $57.4 million | $100.8 million | $47.8 million |
| Diluted loss per share | $0.58 | $5.60 | $9.82 | $4.65 |
| Operating cash flow | Not separately provided | Not separately provided | $11.9 million | $13.7 million |
Q3 selling and administrative expense was $19.8 million, down 8.3% year over year, while interest expense increased 20.2% to $1.5 million. The nine-month effective tax rate was 29.5%, compared with 14.3% in 2015, primarily reflecting the tax effects of asset impairments.
- Cash and cash equivalents were $3.7 million at September 30, 2016, down from $33.3 million at December 31, 2015.
- Total debt was $135.6 million, including $132.8 million drawn on the revolving credit facility, compared with $168.8 million at year-end 2015.
- Gross availability under the then-current credit agreement was $141.7 million, with approximately $425 thousand of outstanding letters of credit.
- Capital expenditures were $6.5 million for the first nine months, compared with $11.6 million in 2015.
- Backlog was $143.8 million at September 30, 2016, down from $174.3 million at September 30, 2015 and $164.7 million at December 31, 2015.
Material changes versus the prior comparable period
- Q3 sales declined 34.9%; nine-month sales declined 22.3%. All three segments reported lower sales.
- Q3 gross margin contracted by 320 basis points, primarily because of sharply lower Tubular and Energy Services margins. The nine-month margin declined by 240 basis points.
- Q3 net loss improved substantially because 2016 impairment charges were lower than in 2015. Excluding impairment charges, adjusted diluted EPS was approximately breakeven in Q3 2016 versus $0.63 in Q3 2015; for nine months, adjusted diluted EPS was a loss of $0.39 versus income of $1.56.
- 2016 included $135.9 million of non-cash asset impairments, including $61.1 million of goodwill, $59.8 million of definite-lived intangible assets, and $15.0 million of property, plant, and equipment. The 2015 comparable period included $80.3 million of impairments.
- Rail Products and Services sales fell 35.3% in Q3 and 25.3% year to date, reflecting lower rail traffic and infrastructure and maintenance spending. The segment reported a Q3 loss of $2.0 million.
- Construction Products sales fell 35.5% in Q3 and 22.3% year to date, primarily because of weaker piling and bridge activity and increased competition. Year-to-date orders increased 1.3%.
- Tubular and Energy Services sales fell 32.7% in Q3 and 14.5% year to date. Non-GAAP segment gross margin fell to 2.9% in Q3 from 19.7%, reflecting continued upstream and midstream oil and gas weakness.
- Operating cash flow decreased to $11.9 million from $13.7 million, while investing cash use improved materially because 2015 included $193.9 million of acquisition spending.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected continued rail-market challenges through the remainder of 2016 because of reduced commodity carloadings, intermodal traffic, and customer spending.
- Management expected significant continued headwinds in Tubular and Energy Services, particularly for test and inspection, coated services, and precision measurement products. A Birmingham coated-products facility was temporarily idled during Q3 and restarted in early October.
- Management estimated approximately $1.0 million of severance charges in Q4 2016 and approximately $0.5 million of financing-fee write-offs related to the subsequent credit amendment.
- On November 7, 2016, the company amended its credit agreement. The revolving credit limit was reduced from $275 million to $195 million, with up to $30 million of term-loan borrowing added. The amendment imposed minimum EBITDA and fixed-charge coverage requirements, a $25 million minimum undrawn liquidity requirement through June 30, 2018, restrictions on acquisitions and investments, and tighter dividend and repurchase limits.
- The company suspended its quarterly dividend beginning in Q4 2016. Dividends paid during the first nine months totaled $1.2 million, or $0.12 per share.
- The company was in compliance with its credit covenants at September 30, 2016, but liquidity was constrained by low cash balances and variable-rate debt. A 1% change in interest rates was estimated to affect annualized interest expense by approximately $1.25 million; $50 million of interest-rate swaps were scheduled to become effective in February 2017.
- The UPRR concrete-tie litigation remains material and unresolved. The company maintained a $7.5 million reserve for estimated concrete-tie warranty exposure, but stated that additional loss exposure cannot currently be estimated and could materially affect results, financial condition, and cash flows.
- The company also faced a collective action by current and former test and inspection employees concerning unpaid overtime. The filing states that no potential loss range could be estimated.
- Other principal risks include prolonged weakness in rail and energy markets, customer and project concentration, competition, international and foreign-exchange exposure, ERP implementation, working-capital requirements, debt covenant compliance, warranty claims, litigation, and environmental obligations.
Important facts for investors to verify
- Whether the revised credit agreement covenants, minimum EBITDA requirements, and minimum liquidity threshold can be satisfied during the market downturn.
- The company’s cash generation, borrowing utilization, and actual liquidity after the November 2016 credit amendment.
- The timing and magnitude of recovery in rail traffic, infrastructure spending, and upstream and midstream oil and gas activity.
- The ultimate cost and resolution of the UPRR litigation and related concrete-tie warranty claims.
- Whether additional goodwill, intangible-asset, or long-lived-asset impairments will be required if forecasts deteriorate further.
- The effect of the dividend suspension, acquisition prohibition, and tighter investment and repurchase restrictions on capital allocation.
- The outcome of the unpaid-overtime collective action and any other contingencies not currently estimable.