L.B. Foster Company — Form 10-Q Summary
Business context and reporting period
L.B. Foster Company manufactures, fabricates, and distributes products and services for rail, construction, energy, and utility markets through three segments: Rail Products and Services, Construction Products, and Tubular and Energy Services. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Financial performance and condition
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Net sales | $136.0 million | $171.4 million | $262.3 million | $309.3 million |
| Gross profit | $27.8 million | $37.1 million | $51.8 million | $67.7 million |
| Gross margin | 20.5% | 21.6% | 19.7% | 21.9% |
| Net income (loss) | $(92.0) million | $5.4 million | $(94.8) million | $9.6 million |
| Diluted EPS | $(8.96) | $0.52 | $(9.25) | $0.93 |
| Operating cash flow | Not separately provided | Not separately provided | $6.6 million | $(1.9) million |
- Second-quarter sales declined 20.7%; six-month sales declined 15.2%. All three segments reported lower quarterly sales.
- Second-quarter selling and administrative expense decreased 4.0% to $23.3 million; six-month expense decreased 0.8% to $46.1 million. Cost reductions were partly offset by higher UPRR litigation and ERP implementation costs.
- The company recorded $128.9 million of non-cash asset impairments, producing a $38.0 million tax benefit and a $90.9 million after-tax impact. Excluding the impairment charge, adjusted diluted EPS was $(0.11) for the quarter and $(0.38) for the six months.
- Cash and cash equivalents were $32.8 million at June 30, 2016, compared with $33.3 million at December 31, 2015. Approximately $29.5 million was held in non-domestic accounts and was intended to remain reinvested outside the United States.
- Total debt was $168.4 million, including $165.3 million outstanding under the revolving credit facility. The amended domestic facility had $109.3 million of gross available borrowing capacity and matures March 13, 2020. The company was in compliance with its debt covenants at quarter-end.
- Capital expenditures were $5.1 million in the first six months, versus $8.2 million in the prior-year period. Dividends paid were $0.08 per share for the six months.
- Backlog was $149.2 million at June 30, 2016, down from $164.7 million at December 31, 2015 and $207.8 million at June 30, 2015.
Material changes versus the prior comparable periods
- Rail Products and Services quarterly sales decreased 22.3% to $67.5 million; segment loss was $25.2 million versus profit of $6.4 million, primarily because of a $28.3 million goodwill impairment and lower volumes. Six-month sales declined 19.9%.
- Construction Products quarterly sales decreased 18.5% to $40.3 million, while segment profit declined to $3.9 million from $5.2 million. Construction gross margin improved to 22.0% from 20.8%.
- Tubular and Energy Services quarterly sales decreased 19.6% to $28.1 million; segment loss was $103.0 million versus profit of $0.4 million, including $100.6 million of asset impairments. Six-month gross margin declined to 14.2% from 21.2%.
- Impairments included $56.8 million of goodwill, $57.2 million of definite-lived intangible assets, and $15.0 million of property, plant, and equipment. The impairment analyses were substantially complete but subject to finalization in the third quarter.
- Operating cash flow improved from a $1.9 million use in the first six months of 2015 to $6.6 million provided in 2016, while investing cash use fell substantially because the prior-year period included $193.9 million of acquisition spending.
Guidance, outlook, risks, and unusual items
- The filing does not provide explicit numerical full-year revenue or earnings guidance.
- Management expects continued challenges in rail markets because of reduced commodity carloadings, intermodal traffic, infrastructure spending, and customer capital spending. Rail orders declined 30.6% for the first six months.
- Management expects Tubular and Energy Services to face significant headwinds through the remainder of 2016 because of weak oil and gas markets, reduced rig activity, delayed midstream projects, competitive pricing, and lower orders. Segment orders declined 27.9% year to date.
- The company is exposed to material uncertainty from the Union Pacific Railroad concrete-tie warranty dispute and litigation. The company had an $8.7 million product warranty reserve at June 30, including $7.5 million related to concrete ties, but stated that additional loss exposure cannot currently be estimated and could materially affect results, liquidity, and cash flows.
- The June 29, 2016 credit amendment reduced the maximum credit line from $335.0 million to $275.0 million and introduced or revised leverage, dividend, investment, and acquisition restrictions. The maximum leverage ratio was 4.75 to 1.00 for June 30 and September 30, 2016, with progressively lower limits thereafter.
- The company entered into forward-starting LIBOR interest-rate swaps with $50.0 million of notional value, effective February 2017. The swap liability was $2.5 million at June 30, 2016.
- Other risks include economic weakness, rail and energy market declines, foreign currency exposure, Brexit-related uncertainty, ERP implementation, acquisition integration, environmental obligations, warranty claims, and variable-rate debt. Environmental reserves were $6.6 million.
Important facts for investors to verify
- Whether the third-quarter finalization of the impairment analyses results in additional charges or revisions.
- The company’s ability to remain within tightening leverage covenants while operating with substantial debt and declining sales.
- Developments, reserves, and potential damages in the UPRR litigation and concrete-tie warranty matter.
- Whether rail and energy order trends, backlog, margins, and segment cash generation stabilize or continue to deteriorate.
- The availability and location of cash, including the restricted practical availability of non-domestic balances for U.S. operations.
- The effect of the credit agreement’s dividend, repurchase, investment, and acquisition restrictions on capital allocation.
- The eventual impact of pending revenue, lease, and stock-compensation accounting standards.