L.B. Foster Company — Q1 2020 Form 10-Q Summary
Business context and reporting period
L.B. Foster Company manufactures and distributes products and provides services for transportation and energy infrastructure across North America and Europe. The filing covers the three months ended March 31, 2020. Operating segments are Rail Products and Services, Construction Products, and Tubular and Energy Services. The company was generally classified as an essential business during COVID-19-related restrictions but experienced supply-chain disruptions, delayed customer acceptance, reduced on-site activity, and weaker demand.
Financial performance and condition
- Revenue: Net sales were $128.8 million, down 14.4% from $150.5 million in Q1 2019. Rail Products and Services sales declined 7.3%, Construction Products declined 22.3%, and Tubular and Energy Services declined 21.1%.
- Profitability: Gross profit was $21.7 million versus $29.2 million, and gross margin decreased to 16.8% from 19.4%. The company reported a net loss of $1.9 million, or $0.18 diluted loss per share, compared with net income of $3.7 million, or $0.35 diluted earnings per share.
- Operating results: Segment profit declined to $0.1 million from $9.0 million. Construction Products reported a $1.6 million segment loss, while Rail Products and Services earned $1.2 million and Tubular and Energy Services earned $0.6 million.
- Cash flow: Operating activities used $6.9 million, compared with $13.5 million used in Q1 2019. Capital expenditures were $4.4 million versus $2.6 million. Financing activities provided $4.3 million, primarily reflecting increased borrowings.
- Liquidity: Cash and cash equivalents were $6.4 million at March 31, 2020, down from $14.2 million at December 31, 2019. Net availability under the revolving credit facility was $98.8 million, producing total available funding capacity of $105.2 million including cash.
- Debt: Total debt was $64.2 million, up from $58.2 million at year-end 2019, including $40.7 million outstanding under the revolving facility and $23.1 million under the term loan. The company was in compliance with its debt covenants.
- Balance sheet: Total assets were $399.1 million and stockholders’ equity was $162.5 million at March 31, 2020. The current ratio was 1.93. The company had $237.7 million of backlog, including approximately 7.9% expected to extend beyond March 31, 2021.
Material changes versus the prior comparable period
- All three operating segments experienced lower sales and profit, with the largest margin deterioration in Tubular and Energy Services.
- Tubular and Energy Services gross margin fell to 17.4% from 25.0%, and segment profit fell 86.9% to $0.6 million, reflecting reduced oil and gas activity and lower fixed-cost absorption.
- Construction Products moved from a $0.8 million segment profit to a $1.6 million loss, partly because of relocation and start-up costs related to the Boise, Idaho precast facility. The segment incurred $0.7 million of such costs and expects full operating efficiency by Q3 2020.
- Rail Products and Services segment profit declined 66.3% to $1.2 million, primarily because of lower freight and transit activity, weaker friction-management demand, and delays affecting the London Crossrail project.
- Selling and administrative expense decreased 2.7%, but increased as a percentage of sales because of the revenue decline. Net interest expense decreased 39.7% to $0.8 million.
- Cash decreased by $7.8 million during the quarter. Debt increased by $6.0 million, primarily for seasonal operating funding.
- The company adopted the current expected credit loss standard and reported no material impact on financial position, results of operations, or opening retained earnings.
Guidance, outlook, risks, contingencies, and unusual items
- COVID-19 and market outlook: Management expected continued disruption during Q2 2020 and potentially beyond. Rail Products and Services and Construction Products had steady proposal activity and continuation of planned projects, while the outlook for Tubular and Energy Services was materially less favorable.
- Energy business closures: On April 30, 2020, the company approved the permanent closure of three locations serving the Niobrara and Bakken regions and the discontinuance of Permian mobile services. The company expects approximately $5.5 million to $7.0 million of exit and disposal charges during Q2 and the remainder of 2020, including $1.5 million to $2.5 million of estimated cash charges and $4.0 million to $4.5 million of estimated non-cash charges.
- Other unusual costs: Q1 included $0.2 million of costs associated with previously announced Test, Inspection, and Threading Services closures and $0.7 million of Boise facility relocation and start-up costs.
- Settlement obligation: The company has $40.0 million of remaining scheduled payments under the Union Pacific Railroad concrete-tie settlement, including $8.0 million during the remainder of 2020 and $8.0 million annually through 2024.
- Environmental matters: The company maintained environmental reserves of approximately $6.1 million. It remains a potentially responsible party in the Portland Harbor Superfund matter but stated that the ultimate impact cannot be predicted and does not currently expect a material adverse effect.
- Other risks: Key risks include further COVID-19 effects, oil and natural gas price deterioration, customer credit losses, supply-chain interruptions, covenant compliance, variable interest rates, foreign currency movements, environmental liabilities, litigation, and the transition away from LIBOR.
- Interest-rate exposure: The company had $50.0 million of LIBOR-based interest-rate swaps, with a liability of $1.6 million at March 31, 2020. A 1% change in variable-rate debt rates would affect annualized interest expense by approximately $0.2 million based on the filing’s sensitivity analysis.
Important facts for investors to verify
- Whether COVID-19-related disruptions and the energy-market downturn produce additional revenue declines, margin compression, impairments, or restructuring charges after March 31, 2020.
- Actual timing and cost of the announced energy-service closures compared with the estimated $5.5 million to $7.0 million range.
- Progress toward full operating efficiency at the Boise facility and the effect on Construction Products margins.
- Backlog conversion, cancellations, and new orders, particularly in the energy segment where backlog declined to $26.7 million from $34.1 million at December 31, 2019.
- Cash generation, debt utilization, covenant compliance, and availability under the revolving credit facility as operating conditions evolve.
- Customer collectability and potential increases in credit-loss reserves under the newly adopted expected-credit-loss model.
- Developments in the Portland Harbor environmental matter, the Union Pacific settlement, and other legal or warranty claims.