L.B. Foster Company — Form 10-Q Summary
Business context and reporting period
L.B. Foster Company manufactures and distributes products and services for transportation and energy infrastructure in North America and Europe. Reportable segments are Rail Products and Services, Construction Products, and Tubular and Energy Services. This unaudited filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Net sales | $144.9 million | $136.0 million | $263.6 million | $262.3 million |
| Gross profit / margin | $27.7 million / 19.1% | $27.8 million / 20.5% | $49.0 million / 18.6% | $51.8 million / 19.7% |
| Income (loss) before taxes | $3.5 million | $(129.4) million | $1.5 million | $(133.6) million |
| Net income (loss) | $3.0 million | $(92.0) million | $0.6 million | $(94.8) million |
| Diluted EPS | $0.29 | $(8.96) | $0.06 | $(9.25) |
| Operating cash flow | Not separately provided | Not separately provided | $29.9 million | $6.6 million |
At June 30, 2017, cash and cash equivalents were $35.5 million, total debt was $138.0 million, and net available borrowing capacity under the domestic credit facility was $49.0 million. Total debt declined from $159.6 million at December 31, 2016. Accounts receivable were $77.0 million, inventories were $84.6 million, and total assets were $393.0 million.
Six-month investing cash use was $4.5 million, including $4.6 million of capital expenditures. Financing cash use was $21.7 million, primarily reflecting debt repayments. Cash increased $5.1 million during the six months to $35.5 million.
Material changes versus the prior comparable period
- Second-quarter sales increased 6.5%, while six-month sales increased 0.5%.
- Second-quarter gross margin declined 140 basis points to 19.1%; six-month gross margin declined 110 basis points to 18.6%.
- Selling and administrative expense declined 11.7% in the quarter and 13.7% year to date, reflecting personnel, discretionary spending, and UPRR litigation-cost reductions.
- Interest expense increased 32.0% in the quarter and 52.0% year to date because of higher interest rates and debt-related costs.
- 2016 included $128.9 million of non-cash asset impairment charges. No impairment charges were recorded in 2017, materially improving reported earnings comparisons.
- Rail Products and Services sales increased 2.7% in the quarter but declined 4.5% year to date. Construction Products sales increased 12.7% in the quarter and 14.6% year to date. Tubular and Energy Services sales increased 6.8% in the quarter but declined 5.7% year to date.
- Total backlog was $176.0 million at June 30, 2017, up from $149.2 million a year earlier and $147.5 million at December 31, 2016.
Outlook, commentary, risks, and unusual items
- Management reported improving order activity and backlog, particularly in rail and energy-related businesses, but expects lower annual sales in domestic rail distribution because of lower price per ton.
- The upstream oil and gas market showed signs of recovery; management expects the measurement midstream business to lag the upstream business.
- The Birmingham, Alabama facility lease expired July 31, 2017. Renewal discussions were ongoing, and production obligations with the landlord extend through October 2017. Renewal-related costs may be incurred.
- The UPRR concrete-tie litigation remains unresolved. The company maintains a $9.2 million total product warranty reserve, including $7.6 million for concrete-tie claims, but cannot estimate any additional loss or range of loss. Future costs could materially affect results, financial condition, and cash flows.
- The company received an EPA General Notice Letter concerning potential responsibility for the Portland Harbor Superfund Site. Environmental reserves were approximately $6.3 million; management did not believe the matter would materially affect financial condition based on information available at June 30, 2017.
- The credit agreement requires minimum liquidity of $25.0 million through June 30, 2018. The company reported compliance with its covenants at June 30, 2017; rolling 12-month covenant EBITDA was $26.2 million versus a $18.5 million requirement for the quarter.
- The credit agreement restricts acquisitions and limits dividends, share redemptions, investments, and asset sales. The term loan is scheduled to mature through final repayment on January 1, 2020, while the revolving facility matures March 13, 2020.
- The company has a full valuation allowance on U.S. deferred tax assets, producing potentially volatile effective tax rates. The six-month 2017 effective tax rate was 60.1%.
- Management identified no material changes to previously disclosed risk factors. The company plans to adopt revenue-recognition standard ASU 2014-09 on January 1, 2018 using the modified retrospective approach and expects the lease standard to materially affect the balance sheet when adopted.
Facts investors should verify
- Whether backlog conversion, rail order trends, and energy-market recovery translate into sustained revenue and margin improvement.
- Compliance with the credit agreement’s EBITDA, fixed-charge coverage, liquidity, and leverage requirements as covenant thresholds increase.
- The ultimate cost and timing of the UPRR litigation and related concrete-tie warranty claims.
- The outcome and cost of renewing the Birmingham facility lease.
- Potential liabilities related to the Portland Harbor environmental matter and other environmental reserves.
- The effect of higher interest rates, variable-rate debt, and the $50.0 million interest-rate swap portfolio on future interest expense.
- The impact of adoption of revenue-recognition and lease accounting standards on reported results, controls, and balance-sheet presentation.