L.B. Foster Company 2016 Form 10-K Summary
Business context and reporting period
L.B. Foster Company manufactures and distributes products and services for transportation and energy infrastructure. The filing covers the fiscal year ended December 31, 2016, with comparisons to 2015 and 2014. Reportable segments were Rail Products and Services, Construction Products, and Tubular and Energy Services.
- 2016 revenue mix: Rail 49%, Construction 30%, and Tubular and Energy Services 21%.
- Approximately 19% of 2016 sales were generated outside the United States.
- The company had approximately 1,241 employees at year-end.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $483.5 million | $624.5 million | Down 22.6% |
| Gross profit | $90.4 million | $133.7 million | Down 32.4% |
| Gross margin | 18.7% | 21.4% | Down 271 bps |
| Operating profit/(loss) | $(5.2) million | $28.8 million | Declined |
| Net income/(loss) | $(141.7) million | $(44.4) million | Loss increased |
| Diluted EPS | $(13.79) | $(4.33) | Declined |
| Adjusted EBITDA | $18.5 million | $60.6 million | Down 69.4% |
| Cash provided by operating activities | $18.4 million | $56.2 million | Down $37.8 million |
| Capital expenditures | $7.7 million | $14.9 million | Down 48.6% |
| Total debt at year-end | $159.6 million | $168.8 million | Down $9.2 million |
| Cash and cash equivalents | $30.4 million | $33.3 million | Down $2.9 million |
| Working capital | $117.3 million | $122.8 million | Down $5.6 million |
The 2016 net loss included $135.9 million of non-cash asset impairment charges, comprising $61.1 million of goodwill impairments, $59.8 million of definite-lived intangible asset impairments, and $15.0 million of tangible long-lived asset impairments. Management also recorded a $29.7 million valuation allowance against deferred tax assets and $7.9 million of deferred taxes and withholding taxes on certain unremitted foreign earnings.
At December 31, 2016, the company reported $67.5 million of availability under its amended credit facility. The filing states that the company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Rail Products and Services revenue declined 27.3% to $239.1 million; the segment shifted from $27.0 million of profit in 2015 to a $26.2 million loss in 2016.
- Construction Products revenue declined 17.5% to $145.6 million, while segment profit declined 36.8% to $8.2 million.
- Tubular and Energy Services revenue declined 17.1% to $98.8 million; the segment loss increased to $116.1 million from $81.3 million, primarily because of impairment charges and weak energy markets.
- Rail results were pressured by lower North American freight rail spending, reduced commodity carloads, pricing pressure, and approximately $12.6 million of lower sales to Union Pacific Railroad.
- Energy results were affected by prolonged low oil and gas prices, reduced midstream and upstream capital spending, lower orders, and competitive pricing.
- Construction backlog improved, particularly in fabricated bridge and precast concrete products, despite lower sales in piling and other commoditized steel products.
- Total backlog declined to $147.5 million from $164.7 million. Rail backlog declined to $62.7 million and Tubular and Energy Services backlog declined to $12.8 million, while Construction backlog increased to $72.0 million.
- The company reduced selling and administrative expenses by 7.2%, eliminated approximately $12 million of annualized expenses through workforce and operating restructuring, and incurred $1.9 million of severance and other one-time charges.
- The quarterly dividend was suspended in the fourth quarter of 2016. Dividends paid during the year totaled $0.12 per share.
- The company amended its credit agreement in November 2016, reducing permitted revolving borrowings to $195 million and adding a $30 million term loan. The amendment prohibits future acquisitions while the facility remains outstanding and limits annual dividends and stock redemptions to $1.7 million under specified conditions.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide a specific numerical revenue or earnings forecast in the filing. Management stated that its cost structure entering 2017 was appropriate for its projections, but additional cost reductions could be made if business activity weakened.
- Management expected North American freight rail spending to decline further in 2017, while viewing passenger transit, safety, efficiency, and intermodal-related opportunities as longer-term growth areas.
- The U.K. rail outlook was described as more favorable for 2017, although Brexit-related economic and currency uncertainty remains a risk.
- Management expected gradual recovery potential in energy infrastructure and noted improving rig counts and inquiry activity in upstream inspection services, but continued to face low energy-market demand and pricing pressure.
- Construction entered 2017 with improved backlog and order entry, although excess global steel capacity and depressed factory utilization were expected to sustain competitive pricing.
- The new ERP system was implemented at two rail divisions in 2016, with additional implementation planned for 2017 and later years. Delays, disruption, or inaccurate information could adversely affect operations.
- The UPRR litigation regarding allegedly defective concrete ties remains a significant contingency. The company stated that it cannot estimate any additional loss or range of loss based on currently available information, and an adverse result could materially affect earnings, liquidity, cash flows, and financial condition. The year-end concrete-tie warranty reserve was approximately $7.6 million; the total product warranty reserve was $10.2 million.
- The company recorded a $0.9 million charge for an employment-related settlement in principle and a $1.2 million warranty charge related to a transit project.
- Other principal risks include debt covenant compliance, variable interest rates, steel and other raw-material costs, supplier concentration, labor disputes, cybersecurity, foreign currency movements, government infrastructure funding, regulatory changes, and future impairment charges.
- The company entered into interest-rate swaps with total notional value of $50 million, effective in February 2017, to convert a portion of variable-rate debt to fixed-rate debt.
Important facts for investors to verify
- Reconcile the company’s ability to satisfy the minimum EBITDA, fixed-charge coverage, and minimum liquidity requirements under the amended credit agreement as 2017 progresses.
- Review the UPRR litigation docket, warranty reserve assumptions, potential replacement-tie exposure, and any settlement or trial developments.
- Assess whether rail and energy demand, pricing, backlog conversion, and segment margins stabilize or deteriorate further.
- Evaluate the likelihood of additional goodwill, intangible, or tangible-asset impairments, particularly in Rail Technologies and Tubular and Energy Services.
- Monitor cash generation, debt amortization, refinancing needs, dividend suspension, and the company’s restricted ability to pursue acquisitions or repurchases.
- Note that the filing’s MD&A states $18.4 million of cash provided by operating activities, while the consolidated cash-flow statement displays $(18.4) million; this apparent presentation inconsistency should be verified against the filed financial statements and XBRL data.