Once a rapidly growing rail services company with a promising $900 million business backlog, RailWorks Corp. finds itself on the verge of bankruptcy after reporting yesterday a $38.1 million second-quarter net loss that violated the terms of its bank loans.
RailWorks, which employs about two dozen people at its headquarters in Baltimore County and more than 3,000 nationwide, also announced yesterday that John G. Larkin has resigned as chairman and Michael R. Azarela has resigned as president, leaving a team of outside consultants in charge of turning the company around or arranging a sale to outside investors.
John Kennedy remains chief executive officer of RailWorks.
The news was followed by a 77 percent drop in the company's share price, or 75 cents, to 22 cents per share.
Standard & Poor's downgraded the company's corporate credit rating to CCC-minus, down from a CCC-plus rating issued last week. A triple-C rating is reserved for companies extremely vulnerable to nonpayment, said Joel Levington, associate director of corporate finance at Standard & Poor's.
"I think it's fair to say they are in a pretty onerous position right now. There's potential they could work their way out of it, but they're looking up a very, very steep hill right now and they don't have much time to get to the top of that hill," Levington said.
With its stock nearly worthless and its cash position in negative territory, analysts see little chance of a recovery for the company.
"I can't imagine a scenario where they can get any liquidity. It's hard to see that," said Arthur W. Hatfield, an analyst with Morgan Keegan in Memphis, Tenn. "I think the changes that they are doing are probably too little, too late at this point."
The cash-strapped rail construction and equipment company is attempting to renegotiate bank terms for the fourth time since initiating an emergency restructuring plan last fall amid growing debt and diminishing cash flow.
Without major concessions from lenders, the company said yesterday, it doesn't expect to be able to make a $10 million bond interest payment due Oct. 15 or be able to continue financing operations.
Company officials took no questions from analysts after a brief conference call yesterday and did not respond to phone messages left at their headquarters.
The loss reported yesterday for the second quarter amounts to $2.44 per share, excluding extraordinary items, compared with net income of $5.4 million, or 35 cents per share, in the second-quarter last year.
The loss included charges of $33.7 million, or $2.19 per share. The charges include $12 million in reserves to account for disputed change orders; $7.1 million for doubtful accounts receivable; $600,000 from expenses related to its renegotiated - and more restrictive - bank terms; and $14 million related to the sale of its W.T. Byler unit - a move designed to free needed cash reserves and eliminate expenses.
The losses continued despite rising revenue. The company reported second-quarter revenue of $198.3 million, up 28.2 percent over second-quarter 2000 revenue of $154.7 million.
"For some reason, they could not turn that revenue to cash," Hatfield said. "You really have to question the quality of the revenue they are booking."
RailWorks was formed about three years ago when 14 companies that supply and service rail companies merged to take advantage of economies of scale.
Known in financial circles as a "roll-up," the company grew rapidly, acquiring dozens of similar companies and going public in 1998 at $12 per share.
The strategy of a roll-up is to acquire competitors quickly, drive up revenues and boost the stock price to help finance more acquisitions.
Popular with investors in the mid-1990s, the formula fell out of favor after several prominent roll-ups stumbled, leaving the organizational concept with a tarnished image on Wall Street.
RailWorks has been no exception. After growing to 35 companies and piling up revenue of $468 million in 1999, the company ran into cash-flow trouble last fall and has been unable to recover despite its sizable business backlog.
"The business is somewhat unique and the concept was actually pretty good, but the execution certainly lacked in the internal controls," Levington said.
As of June 30, the company was carrying debt of $368 million, up about $1 million over the first quarter that ended March 31. Much of the company's long-term debt - $356.5 million - was reclassified as short-term debt after the company recently violated the latest terms of its bank debt.
Those terms, which became effective June 18, included an increase in the company's revolving credit limit to $111 million through Sept. 30. RailWorks' second-quarter loss put it in violation of those terms, and the company's bank group issued a notice of default Aug. 13.
Without a new credit agreement, the company will likely fail to meet its Oct. 15 interest payment, said Shaun K. Donnellan, who has been appointed as RailWorks' chief restructuring adviser.
Donnellan, who spoke during yesterday's conference call, is a turnaround specialist and president of Glass & Associates Inc.
RailWorks also has hired restructuring specialists at Dresdner Kleinwort Wasserstein Inc. to advise the board on a recovery strategy.