L.B. Foster Company — 2016 First-Quarter 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. The company reports three segments: Rail Products and Services, Construction Products, and Tubular and Energy Services. This unaudited Form 10-Q covers the three months ended March 31, 2016, with comparisons to March 31, 2015. Dollar amounts are in thousands unless otherwise stated.
Financial performance and key metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total sales | $126,310 | $137,907 | Down 8.4% |
| Gross profit | $23,960 | $30,653 | Down 21.8% |
| Gross margin | 19.0% | 22.2% | Down 326 basis points |
| Income before taxes | $(4,149) | $6,665 | Declined to a loss |
| Net income (loss) | $(2,832) | $4,285 | Declined to a loss |
| Diluted EPS | $(0.28) | $0.41 | Declined $0.69 |
| Operating cash flow | $(5,107) | $(7,429) | Use improved by $2,322 |
| Capital expenditures | $3,125 | $4,466 | Down $1,341 |
| Total debt at period end | $174,911 | Not provided for prior comparable quarter | $168,754 at Dec. 31, 2015 |
| Cash and equivalents at period end | $30,883 | $37,550 | Down $6,667 year over year |
Selling and administrative expense increased 2.5% to $22,817, amortization increased 51.4% to $3,266, and interest expense increased 90.9% to $1,170. The effective tax rate was 31.7%, compared with 35.7% in the prior-year quarter.
Segment results and material changes
| Segment | Q1 2016 sales | Change in sales | Q1 2016 gross margin | Key factor |
|---|---|---|---|---|
| Rail Products and Services | $64,292 | Down 17.2% | 21.7% | Lower infrastructure and maintenance spending, reduced customer volumes, and approximately $6,800 lower UPRR sales |
| Construction Products | $31,880 | Down 7.0% | 17.5% | Weaker precast, piling, and bridge activity; pricing pressure from lower steel prices |
| Tubular and Energy Services | $30,138 | Up 16.2% | 15.2% | Acquired test and inspection revenue and higher coated-services sales, offset by severe upstream oil and gas weakness |
Sales growth in Tubular and Energy Services did not translate into profitability: segment gross profit fell 24.0% and margin declined 810 basis points. The company attributed the deterioration primarily to weakness in test and inspection services and the upstream oil and gas market.
Company backlog was $154,009 at March 31, 2016, down from $164,707 at December 31, 2015 and $217,325 at March 31, 2015. Rail backlog declined to $74,917, while Construction Products backlog increased to $56,991 and Tubular and Energy Services backlog declined to $22,101.
Cash flow, debt, and liquidity
- Operating activities used $5,107, primarily reflecting the quarterly loss and working-capital outflows. Accounts receivable days sales outstanding improved to 49 days from 56 days at December 31, 2015.
- Investing activities used $3,603, including $3,125 of capital expenditures and a $575 loan to the LB Pipe joint venture. No acquisitions occurred in the quarter, compared with $189,200 of acquisition spending in Q1 2015.
- Financing activities provided $5,504. Debt proceeds of $43,304 exceeded debt repayments of $37,142, primarily reflecting revolver borrowings for working capital.
- The company had $30,883 of cash and $163,061 of gross available capacity under its domestic revolving credit facility. Approximately $29,107 of cash was held in non-domestic accounts and was not available for domestic operations unless repatriated.
- The $335,000 unsecured revolving facility matures March 13, 2020. The company was in compliance with its leverage and interest-coverage covenants at March 31, 2016, but expected to work with lenders during the second quarter to amend the leverage-ratio definition to support continued compliance.
- Forward-starting LIBOR swaps with total notional value of $50,000 become effective in February 2017. Their recorded liability increased to $1,786 from $196 at December 31, 2015.
Outlook, commentary, risks, and unusual items
- No formal numerical earnings or revenue guidance is provided in the filing.
- Management anticipated continued rail-market challenges as customers respond to significantly reduced railcar loadings. Rail new orders fell 40.8% year over year.
- Management stated that test and inspection margins would remain challenged for the remainder of 2016 because of the weak upstream oil and gas market. Tubular and Energy Services new orders fell 13.2%, and coated-product orders fell 43.8%.
- UPRR litigation and related concrete-tie warranty matters remain material contingencies. The company maintained an $8,731 product-warranty reserve, including $7,461 related to concrete ties. Management stated that litigation or settlement outcomes may differ materially from accrued amounts and could materially affect results, financial condition, and cash flow.
- The company incurred $880 of UPRR-related litigation costs in the quarter and reported $715 of other expense, compared with $803 of other income in the prior-year quarter, primarily due to foreign-currency effects.
- The LB Pipe joint venture generated a $250 equity loss in Q1 2016. The company’s reported maximum exposure to the joint venture, including its investment, loan, and direct-financing lease, was $6,531 at March 31, 2016.
- Recent acquisitions increased amortization, interest expense, and selling and administrative costs. The company was integrating acquired businesses and beginning an enterprise-resource-planning transition, which could require changes to internal controls.
- Other key risks include sustained energy-price weakness, rail and infrastructure spending declines, customer concentration and loss of future revenues, raw-material and labor costs, foreign-currency movements, acquisition integration, covenant compliance, warranty claims, litigation, and environmental or other legal proceedings.
Most important facts for investors to verify
- Whether rail demand, order rates, backlog, and UPRR-related revenue recover or continue to decline.
- Whether Tubular and Energy Services can restore margins despite ongoing upstream oil and gas weakness.
- The company’s ability to amend and remain compliant with the revolving credit facility’s leverage covenant.
- Whether operating cash flow turns positive and debt balances decline without relying on additional revolver borrowings.
- The ultimate scope, cost, and timing of the UPRR concrete-tie litigation and related warranty obligations.
- The financial impact of the ERP implementation and integration of recent acquisitions.
- The recoverability of goodwill and long-lived assets, particularly in energy-related reporting units exposed to sustained market weakness.