L.B. Foster Company — Q2 2021 Form 10-Q Summary
Business context and reporting period
L.B. Foster Company provides products and services for the rail industry and critical infrastructure projects through two segments: Rail Technologies and Services and Infrastructure Solutions. The filing covers the quarter and six months ended June 30, 2021, compared with the corresponding 2020 periods. Test and Inspection Services was classified as a discontinued operation effective in 2020.
Financial performance and liquidity
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Net sales | $154.5 million | $141.6 million | $270.6 million | $263.5 million |
| Gross profit | $26.2 million | $28.1 million | $45.0 million | $51.3 million |
| Gross margin | 16.9% | 19.9% | 16.6% | 19.5% |
| Income from continuing operations | $2.9 million | $7.0 million | $1.6 million | $7.0 million |
| Diluted EPS from continuing operations | $0.27 | $0.66 | $0.15 | $0.66 |
| Net income attributable to L.B. Foster Company | $2.9 million | $0.5 million | $1.6 million | $(1.3) million |
| Cash flow from continuing operations | Not separately provided | Not separately provided | $6.8 million | $8.1 million |
The filing reports $4.1 million of cash and cash equivalents at June 30, 2021, including approximately $3.2 million held in non-domestic accounts. Total debt was $37.2 million, primarily revolving credit borrowings, compared with $45.0 million at December 31, 2020. The revolving facility had $115.0 million of capacity, $0.5 million of outstanding letters of credit, and $77.5 million of net availability, subject to covenant restrictions. The Company was in compliance with its debt covenants. The current ratio was 1.88.
Accounts receivable increased to $78.4 million from $58.3 million at year-end, while inventories declined modestly to $114.2 million from $116.5 million. Total assets were $379.9 million and total stockholders’ equity was $180.9 million at June 30, 2021.
Material changes versus the prior comparable period
- Second-quarter sales increased 9.2%, led by an 18.5% increase in Rail Technologies and Services. Infrastructure Solutions sales decreased 1.3%.
- Six-month sales increased 2.7%; Rail sales rose 6.8%, while Infrastructure Solutions declined 2.3%.
- Gross margin declined 300 basis points in the quarter and 290 basis points year to date. Infrastructure Solutions was the primary driver, particularly the Coatings and Measurement business.
- Second-quarter segment profit increased 2.5% in Rail Technologies and Services to $6.0 million but declined 51.7% in Infrastructure Solutions to $2.3 million.
- Second-quarter continuing-operations income declined 59.1% to $2.9 million. The 2020 comparable period benefited from a non-recurring $1.4 million after-tax distribution from an unconsolidated partnership.
- Operating cash flow from continuing operations decreased to $6.8 million from $8.1 million for the first six months. Cash used for capital expenditures declined to $2.2 million from $5.7 million.
- Debt declined by $7.8 million during the first six months, while cash decreased by $3.4 million to $4.1 million.
Outlook, commentary, risks, and unusual items
- Backlog was $253.2 million at June 30, 2021, up 12.4% from June 30, 2020 and 2.0% from December 31, 2020. Approximately 10.8% was expected to extend beyond June 30, 2022.
- Management expects year-over-year revenue growth in the second half of 2021, supported by backlog, infrastructure investment, and improving operating conditions. Management described Rail activity as healthy and expected easing United Kingdom restrictions to support European rail operations.
- Coatings and Measurement remains exposed to weak midstream energy markets and deferred pipeline investment. Management expects difficulties to continue through at least the remainder of 2021 and indicated that additional shutdowns or furloughs could occur if order rates do not improve.
- Elevated steel, concrete, and other commodity prices, supply-chain delays, and material availability may increase production costs, delay projects, and compress margins.
- COVID-19, potential new variants, customer delays, rail traffic, energy-market weakness, infrastructure funding, interest rates, covenant compliance, foreign currency, cybersecurity, labor matters, litigation, and environmental obligations remain material risks.
- The Company remains subject to the Union Pacific Railroad concrete-tie settlement, with $30.0 million of scheduled payments remaining from the second half of 2021 through 2024. Environmental reserves were $2.5 million, including potential exposure related to the Portland Harbor Superfund Site.
- The Company completed the sale of Test and Inspection Services in 2020. The prior-year periods included discontinued-operation losses of $6.4 million for the quarter and $8.3 million year to date; there was no discontinued-operation activity in 2021.
- Management concluded that disclosure controls were effective as of June 30, 2021, with no material changes to internal control over financial reporting.
Investor verification points
- Verify the sustainability of backlog conversion, particularly the timing and margins of Infrastructure Solutions projects.
- Monitor Coatings and Measurement demand, pipeline investment, potential furloughs, and the effect of commodity inflation on gross margins.
- Assess liquidity after working-capital needs, scheduled settlement payments, debt service, and the April 2024 revolving-facility maturity.
- Review covenant headroom and the impact of variable-rate debt, interest-rate swaps, and LIBOR transition.
- Track receivables, contract assets, deferred revenue, and cash conversion as sales recover from pandemic-related disruptions.
- Evaluate potential exposure from environmental matters, product warranties, legal proceedings, and the remaining Union Pacific settlement obligations.