L.B. Foster Company — 2020 Q3 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 unaudited quarter and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Operating segments are Rail Products and Services, Construction Products, and Tubular and Energy Services.
Management identified COVID-19-related supply-chain disruptions, customer project delays, reduced on-site access, and weaker demand—particularly in upstream oil and gas markets—as significant operating factors.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $118.4 million | $144.8 million | $381.8 million | $475.1 million |
| Gross profit | $22.1 million | $28.0 million | $73.3 million | $92.7 million |
| Gross margin | 18.6% | 19.3% | 19.2% | 19.5% |
| Income from continuing operations | $16.6 million | $3.8 million | $23.5 million | $17.8 million |
| Net income | $6.8 million | $3.1 million | $5.5 million | $16.3 million |
| Diluted EPS | $0.64 | $0.29 | $0.52 | $1.53 |
| Cash flow from continuing operations | Not provided for quarter | Not provided for quarter | $16.2 million | $10.3 million |
Amounts are presented in millions except per-share data. The unusually high continuing-operations earnings were substantially affected by a $13.7 million income-tax benefit in the quarter and an $11.7 million benefit year to date, including a $15.8 million discrete benefit related to the divestiture of Test and Inspection Services.
Segment performance and material changes
| Segment | Q3 2020 sales | Year-over-year change | Q3 2020 segment profit |
|---|---|---|---|
| Rail Products and Services | $64.0 million | Down 5.5% | $3.7 million |
| Construction Products | $37.9 million | Down 19.7% | $1.8 million |
| Tubular and Energy Services | $16.5 million | Down 44.9% | $0.6 million |
- Q3 sales declined 18.3% and gross profit declined 21.1%, primarily because of COVID-19 impacts and reduced energy-market demand.
- Rail segment profit increased 9.5% despite lower sales because of cost reductions; new orders increased 6.6% during the quarter.
- Construction sales declined because of project timing, completion of the Port Everglades project, installation delays, weather, and wildfires. Gross margin improved to 15.4% from 12.9%.
- Tubular and Energy segment profit declined 83.3%, and new orders declined approximately 50.7% in the quarter. Year-to-date sales and orders declined 29.4% and 50.8%, respectively.
- On September 4, 2020, the Company sold its upstream oil and gas Test and Inspection Services business for $4.0 million, recognizing a $10.0 million after-tax loss. Results were classified as discontinued operations for all periods presented.
- Backlog was $235.2 million at September 30, 2020, up from $193.2 million at September 30, 2019 and $229.0 million at December 31, 2019. Rail backlog was $109.1 million, Construction backlog was $118.4 million, and Tubular and Energy backlog was $7.8 million.
Cash flow, liquidity, debt, and balance sheet
- Cash and cash equivalents were $9.3 million at September 30, 2020, compared with $14.2 million at December 31, 2019.
- Continuing operating cash flow was $16.2 million for the first nine months, versus $10.3 million in 2019. Capital expenditures were $7.7 million, compared with $2.5 million in 2019.
- Total debt was $49.1 million, down from $58.2 million at year-end 2019. Debt primarily consisted of $48.9 million drawn on the revolving credit facility.
- The amended credit facility provides total commitments of $120.0 million, with $70.1 million of net availability after borrowings and letters of credit. Total available funding capacity, including cash, was $79.4 million.
- The credit facility matures April 30, 2024 and requires $5.0 million annual reductions in commitments beginning December 31, 2020. The Company was in compliance with its covenants at September 30, 2020.
- The Company had $1.3 million of interest-rate-swap liabilities and approximately $1.0 million of outstanding letters of credit.
- The Company expects approximately $9.0 million of tax refunds within the following year, primarily from CARES Act net operating loss carryback provisions and deferred tax assets related to the divestiture.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects COVID-19-related disruptions to continue through the fourth quarter of 2020 and beyond. No quantified consolidated earnings or revenue guidance was provided in the filing.
- Rail and Construction order activity was comparatively resilient, although project timing, transit budget shortfalls, depressed rail traffic, and government infrastructure funding remain risks.
- Management expects material declines in Tubular and Energy sales for the remainder of 2020 and into 2021 and is aligning costs with projected revenue. The business is being refocused toward less volatile midstream corrosion-protection and measurement applications.
- The Company remains obligated to make $36.0 million of payments under the Union Pacific Railroad settlement from the remainder of 2020 through 2024, including $4.0 million in the remainder of 2020 and $8.0 million annually from 2021 through 2024.
- Environmental reserves were $2.6 million. The Company is a potentially responsible party concerning the Portland Harbor Superfund Site but stated that the ultimate impact cannot be predicted and does not currently expect a material adverse effect.
- The Company identified risks involving COVID-19, energy-market deterioration, covenant compliance, interest rates and LIBOR reform, supply chains, customer credit, environmental matters, litigation, cybersecurity, foreign currency, and infrastructure spending.
- There were no material changes to previously disclosed risk factors, and management concluded that disclosure controls were effective as of September 30, 2020.
Investor verification checklist
- Verify the sustainability of earnings excluding the discrete tax benefits associated with the Test and Inspection Services divestiture.
- Monitor Tubular and Energy backlog, orders, margins, and the effect of continued weakness in oil and gas markets.
- Assess whether Rail and Construction backlog converts to revenue despite COVID-19-related project delays and public-sector budget pressures.
- Review compliance with amended credit-facility covenants and the scheduled commitment reductions beginning December 31, 2020.
- Confirm receipt and timing of the anticipated $9.0 million tax refund and evaluate liquidity after Union Pacific settlement payments and capital expenditures.
- Track potential exposure from the Portland Harbor environmental matter, product warranty claims, and other legal proceedings.