L.B. Foster Company: Q1 2022 Form 10-Q Summary
Business context and reporting period
L.B. Foster Company is a global provider of engineered, manufactured infrastructure products and services. The company operates through three reporting segments: Rail, Technologies, and Services; Precast Concrete Products; and Steel Products and Measurement. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $98.8 million | $116.1 million | Down 14.9% |
| Gross profit | $16.4 million | $18.8 million | Down 12.7% |
| Gross margin | 16.6% | 16.2% | Up 40 basis points |
| Operating loss | $2.3 million | $0.7 million | Loss increased |
| Net loss attributable to L.B. Foster | $1.6 million | $1.3 million | Loss increased 24.5% |
| Diluted loss per share | $0.15 | $0.12 | Loss increased $0.03 |
| Cash flow from continuing operations | $(7.6) million | $7.6 million | Declined $15.3 million |
| Capital expenditures | $1.8 million | $1.3 million | Increased $0.4 million |
Cash and cash equivalents were $6.2 million at March 31, 2022, compared with $10.4 million at December 31, 2021. Total debt was $35.6 million, primarily borrowings under the revolving credit facility, versus $31.3 million at year-end. The company had $93.9 million of net revolver availability and total available funding capacity of $100.1 million, subject to covenant restrictions. The current ratio was 2.08.
Accounts receivable were $59.1 million, inventories were $67.8 million, and contract assets were $34.3 million at March 31, 2022. Total assets were $347.4 million and total stockholders’ equity was $181.7 million.
Material changes versus the prior comparable period
- Sales declined $17.3 million, including a $20.8 million year-over-year reduction attributable to the divested Piling Products division. Excluding that divestiture, management stated that sales increased year over year.
- Rail, Technologies, and Services sales declined 3.8% to $63.7 million, while gross margin improved to 19.7% from 19.3%. Segment operating profit declined to $1.0 million from $2.2 million.
- Precast Concrete Products sales increased 18.4% to $15.0 million, but gross margin declined to 16.3% from 19.6% because of raw-material and labor inflation, supply-chain disruption, and engineering staffing shortages. The segment reported a $0.8 million operating loss.
- Steel Products and Measurement sales declined 46.0% to $20.1 million, largely because of the Piling Products divestiture. Gross margin fell to 7.3% from 9.5%, and the segment operating loss increased to $2.1 million.
- Selling and administrative expense decreased 4.0% to $17.3 million, but increased to 17.5% of sales from 15.5% because of lower volume and higher travel costs.
- Net interest expense declined to $0.4 million from $0.9 million, while other income was $0.6 million, including $0.5 million of insurance proceeds.
- Operating working capital used $9.0 million of cash, compared with providing $5.3 million in the prior-year period. Inventory and other current assets increased, while accounts payable and deferred revenue also increased.
- Backlog was $244.6 million at March 31, 2022, up 16.4% sequentially from December 31, 2021 but down from $271.9 million at March 31, 2021. The prior-year comparison was significantly affected by the Piling Products divestiture.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide specific full-year revenue or earnings guidance. Management expects the second quarter to benefit from historically stronger seasonality, supported by order and backlog levels. Management expressed a positive longer-term outlook for North American freight, transit, and infrastructure markets, including potential benefits from the U.S. Infrastructure Investment and Jobs Act.
Inflationary pressure is expected to continue affecting margins throughout 2022. Management is pursuing pricing, cost mitigation, and operational actions, particularly in Precast Concrete Products and Steel Products and Measurement. Supply-chain disruptions, labor availability, raw-material costs, service-partner constraints, and lingering COVID-19 effects remain significant operating risks.
The amended revolving credit agreement provides $130.0 million of commitments and matures August 13, 2026. The company was in compliance with its financial covenants at March 31, 2022. Borrowings are subject to variable interest rates, although interest-rate swaps hedge portions of the exposure. The company also identifies risks related to interest rates, foreign currency, energy markets, infrastructure funding, geopolitical conditions including the Ukraine conflict, cybersecurity, ERP implementation, customer demand, litigation, environmental matters, and product warranties.
The company has an accrued $24.0 million of remaining payments under the Union Pacific Railroad settlement, payable through 2024. Environmental reserves were $2.5 million. The company remains a potentially responsible party in the Portland Harbor Superfund matter, but management does not currently expect the matter to have a material adverse effect; the ultimate exposure cannot be predicted clearly.
Other unusual items included $1.2 million of proceeds from an asset divestiture in investing cash flows, $0.5 million of insurance proceeds in other income, and the expiration in February 2022 of $50.0 million of interest-rate swaps. A new $20.0 million swap tranche became effective in March 2022.
Important facts for investors to verify
- Whether margin-improvement actions offset inflation, labor, and supply-chain pressures during the remainder of 2022.
- Sales, orders, and backlog trends excluding the divested Piling Products division, particularly in Steel Products and Measurement.
- Conversion of the $244.6 million backlog into revenue, including customer cancellations, timing, and projects extending beyond March 31, 2023.
- Cash generation and working-capital requirements, given negative first-quarter operating cash flow and increased revolver borrowings.
- Compliance with the revolving credit facility’s leverage and fixed-charge coverage covenants as operating results and interest rates change.
- Potential cash requirements from the Union Pacific settlement, environmental proceedings, warranty claims, and other litigation.
- The impact of the company’s seasonal second-quarter demand pattern and the absence of formal quantitative earnings guidance.