L.B. Foster Company — First-Quarter 2018 Form 10-Q Summary
Business context and reporting period
L.B. Foster manufactures and distributes products and services for transportation and energy infrastructure in North America and Europe. Reported segments are Rail Products and Services, Construction Products, and Tubular and Energy Services. The filing covers the three months ended March 31, 2018; financial statements are unaudited and amounts are in thousands except per-share data.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $122,454 | $118,702 | 3.2% increase |
| Gross profit | $22,028 | $21,252 | 3.7% increase |
| Gross margin | 18.0% | 17.9% | 10 basis-point increase |
| Loss before taxes | $(1,497) | $(1,991) | Improved by $494 |
| Net loss | $(2,022) | $(2,422) | Improved by $400 |
| Diluted loss per share | $(0.20) | $(0.23) | Improved by $0.03 |
| Operating cash flow | $2,591 | $10,748 | Decrease of $8,157 |
| Capital expenditures | $723 | $3,453 | Decrease of $2,730 |
Segment sales were $62,170 for Rail Products and Services, $28,900 for Construction Products, and $31,384 for Tubular and Energy Services. Segment profit was $2,048, $18, and $1,885, respectively. Total backlog was $220,301 at March 31, 2018, compared with $195,302 a year earlier and $166,905 at December 31, 2017.
Cash and cash equivalents were $10,984 at March 31, 2018, down from $37,678 at year-end 2017. Total debt was $102,404, down from $129,966, and consisted primarily of revolving credit borrowings. The company had $68,502 of net available domestic borrowing capacity and approximately $425 of outstanding letters of credit. The credit facility matures March 13, 2020.
Operating cash flow declined primarily because of $4,110 of higher bonus payments and a $3,822 inventory increase associated with anticipated stronger second-quarter revenue. Financing activities used $27,873, principally reflecting net debt repayments. Approximately $10,665 of cash was held in non-domestic bank accounts.
Material changes versus the prior comparable period
- Rail Products and Services sales increased 10.1% and segment profit increased 148.8%, supported by European transit activity and continued North American Class 1 freight rail strength.
- Construction Products sales declined 22.6% and segment profit fell 98.9%, primarily because of lower piling and fabricated bridge volume and product mix.
- Tubular and Energy Services sales increased 26.0%, and the segment moved from a $680 loss to $1,885 of profit, reflecting stronger upstream and midstream orders and lower selling and administrative expenses.
- Selling and administrative expenses increased 6.4%, substantially because of $1,182 of additional litigation costs related to the Union Pacific Railroad matter.
- Net interest expense declined 8.0% because of lower debt. Other income increased by $613, primarily from foreign-exchange gains involving the Canadian dollar.
- Cash flow from operations was materially lower despite the smaller net loss, reflecting working-capital uses and higher bonus payments.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal full-year revenue or earnings guidance. Management cited positive trends in North American freight rail, global transit projects, recovering upstream oil and gas activity, stronger midstream orders, increased orders in each segment, and backlog growth. Management also stated that increased Construction Products orders and backlog were encouraging despite weak first-quarter results.
The company adopted ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method. Management reported no material impact on financial position, results, cash flows, or backlog. Adoption of the intra-entity transfer tax standard reduced opening retained earnings by $305.
The principal contingency is the continuing litigation with Union Pacific Railroad concerning concrete tie warranty obligations. The company maintained a total product warranty reserve of $8,706, including approximately $7,630 for concrete tie claims. Trial remained scheduled for October 1, 2018, but the company stated that any additional loss or range of loss cannot currently be estimated and that the ultimate outcome could materially affect results, financial condition, and cash flows.
The company also faces potential environmental obligations related to the Portland Harbor Superfund Site. Environmental reserves were approximately $6,134 at March 31, 2018. Management did not believe current environmental matters would materially affect the company, but noted that future compliance costs could adversely affect earnings.
Debt covenant requirements remain important. The company reported compliance at March 31, 2018, including rolling twelve-month covenant EBITDA of $38,214 versus a required minimum of $29,000 and minimum undrawn availability requirements. The minimum EBITDA requirement rises to $31,000 at June 30, 2018; leverage requirements are reinstated beginning with the September 30, 2018 quarter. The company is prohibited from making future acquisitions under the amended credit agreement.
Domestic deferred tax assets remain fully reserved, so the company receives no U.S. tax benefit from domestic pretax losses. The effective tax rate was negative 35.1%, and the company continues to evaluate provisional effects of the Tax Cuts and Jobs Act and GILTI provisions.
Management identified possible risks from market weakness, rail and energy demand, material costs, tariffs and trade policy, foreign currency, United Kingdom regulatory changes, funding for infrastructure projects, litigation, warranty claims, environmental matters, working capital, leverage, and covenant compliance. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether Rail Products and Tubular and Energy Services growth and backlog conversion offset the sharp Construction Products decline.
- Whether operating cash flow improves after the first-quarter bonus payments and inventory build.
- Compliance with the $31,000 minimum EBITDA covenant at June 30, 2018 and subsequent leverage and fixed-charge coverage requirements.
- The progression, settlement prospects, trial outcome, and potential unreserved exposure of the UPRR concrete tie litigation.
- Whether the $7,630 concrete tie warranty reserve remains adequate as claims develop.
- Final accounting effects of the Tax Cuts and Jobs Act, GILTI, and upcoming lease-accounting adoption.
- Potential impairment of Rail Products and Services goodwill if anticipated market recovery does not occur.