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61% gain is a nice week's work


In normal times, shareholders would revolt against a company that reports a 91 percent decline in net income. But these are not normal times for RailWorks Corp.

Surprised to hear that the troubled Baltimore County-based company earned a small first-quarter profit, investors briefly sent its shares up by more than 100 percent Thursday before they fell back later Thursday and yesterday. Still, shares of RailWorks ended the week with a 61 percent gain.

The upswing at least partially reverses a downward slide that began when company officials announced in September that they would implement a major restructuring plan in the face of mounting debts and shrinking cash reserves.

The rail construction and transportation services company reported a $60 million loss for 2000 and was forced to accept tighter credit terms from lenders.

Things turned around in the first quarter of 2001, thanks to various austerity measures and an intense focus on improving cash flow. The result was a $200,000 quarterly profit - a sharp decline from the $2.3 million the company earned in first-quarter 2000, but enough to ease investor concerns about a potential bankruptcy.

RailWorks' stock closed yesterday at $3.04 per share, up $1.15 from Monday's closing price of $1.89. The shares have been trading under $4 since Sept. 28, when news of the restructuring sent them into a 54 percent plunge, from $8.38 to $3.88.

"It's kind of unusual to see such a quick return to profitability," said Morgan Keegan & Co. analyst Arthur W. Hatfield, who expected the company to lose money in the most recent quarter.

"This is a company that quite honestly looked death in the face there for a while."

John G. Larkin, RailWorks' chairman and chief executive, attributes the unexpected first-quarter profit to the success of the company's sweeping restructuring plan, which abruptly ended an aggressive acquisition strategy and put the focus back on generating cash from core businesses.

"So far, we've been able to stay on course," Larkin said minutes after the company's stock briefly climbed above $4 on Thursday. "The underlying business is very encouraging."

However, analysts say RailWorks faces more difficult months ahead.

$10 million due in fall

The company must generate enough cash to pay a roughly $10 million debt payment due in the fall. The company's credit line isn't high enough to cover the payment, one analyst said, which means that RailWorks officials may have to consider selling more assets, renegotiating terms with lenders or seeking new investors.

"I'd say we're looking at a broad range of alternatives that would lead to a deleveraging of the balance sheet," Larkin said.

RailWorks also still faces the prospect of losing its listing on the Nasdaq stock market, a development that could affect the value of its shares.

The national market requires companies to maintain a minimum bid price of $5 per share - something RailWorks has failed to do for months.

The company's shareholders authorized a reverse stock split last week that could boost shares above the $5 minimum, but company officials haven't decided how they will proceed.

Board members are expected to make a decision on the reverse split next week. Analysts say the decision will be affected by the rising stock price.

Despite RailWorks' improved outlook, S&P; Ratings Service has no short-term plans to reward the company with a higher corporate credit rating. The firm downgraded RailWorks' credit rating from BB-minus to B in January.

"From our perspective, we've been more concerned with their October interest payment," said Joel Levington, an analyst with S&P.;

"It's still going to be a hurdle that they're still going to have to overcome."

Bullish in long term

But with demand for rail services high and a business backlog worth more than $938 million, analysts are bullish about the company's long-term prospects.

"They had short-term issues with the balance sheet that they had to rectify, but it sounds like they've been working very hard on rectifying those issues, and they're making progress," Hatfield said.

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