L.B. Foster Company (NASDAQ: FSTR), a leading manufacturer, fabricator, and distributor of products and services for rail, construction, energy and utility markets, today reported its second quarter 2012 operating results highlighted by a record for orders booked during any quarter in its history of $212.3 million. The Company also announced a $19.0 million pre-tax charge ($1.27 per diluted share) related to a product warranty claim the Company has been investigating since July 2011.
Second Quarter Results
Second quarter net sales of $164.9 million decreased by $6.6 million or 3.8% due to a 32.0% decline in Construction segment sales, partially offset by a 14.1% increase in Rail segment sales and a 44.4% increase in Tubular segment sales.
Gross profit margin was 7.7%, 720 basis points lower than the prior year, due to the $19.0 million warranty charge recorded in the second quarter to reflect management’s best estimate of the cost it expects to incur to settle a product claim related to concrete railroad ties manufactured in our Grand Island, NE facility that was shut down in February 2011. Gross profit in the second quarter of 2011 included $4.4 million ($0.26 per diluted share) of unfavorable gross profit adjustments related to the closure of this facility and certain warranty costs. Excluding concrete tie charges from both second quarter periods would result in gross profit margins of 19.2% in 2012 compared to 17.5% in 2011.
Second quarter loss from continuing operations was $3.2 million or $0.31 per diluted share compared to income from continuing operations of $6.2 million or $0.59 per diluted share last year. Excluding concrete tie charges from both second quarter periods, second quarter earnings from continuing operations per diluted share would have been $0.87 and $0.86 in 2012 and 2011, respectively.
Second quarter bookings were $212.3 million compared to $125.3 million last year, an increase of 69.4%. The June 2012 backlog was $255.3 million, 34.4% higher than June 2011.
Selling and administrative expense increased by $0.6 million or 3.6%, due principally to the costs related to concrete tie testing as well as increased salaries and benefits expenses. Approximately $1.2 million ($0.08 per diluted share) of incentive compensation expense was reversed in the second quarter of 2012 as a result of the warranty adjustment.
The Company’s income tax rate from continuing operations was 27.3% compared to 30.3% in the prior year.
Cash provided from continuing operating activities for the second quarter of 2012 was $5.8 million compared to cash used by continuing operating activities of $5.8 million in the second quarter of 2011.
The Company sold the assets and liabilities of its railway load securement business during the second quarter of 2012 to Holland L.P. The operating results of this division as well as a $3.5 million pre-tax gain on the sale have been classified as discontinued operations.
Robert P. Bauer, L.B. Foster’s President and Chief Executive Officer, commented, “For the last three quarters, we have been reporting on the status of the Union Pacific warranty claim involving the performance of concrete ties made at our Grand Island facility between 2006 and 2011. We have completed sufficient testing and analysis that has helped us better understand Union Pacific’s concern. In a combined effort, we analyzed ties in Union Pacific track. In parallel, we conducted more significant forensic analyses of our own. Based upon our findings, we believe we have discovered conditions that can shorten the life of a concrete tie. All of this testing, analysis and recent findings, as well as our ability to perform field testing during the second quarter, were critical steps to enable us to uncover and define the scope of the problem and, ultimately, the corrective action plan. We have taken a $19.0 million charge this quarter to support our corrective action plan. While we are eager to put this problem behind us, we are also very focused on proceeding in a manner that will satisfy our customers.”
Mr. Bauer went on to say, “It is important to note that our underlying business performance was very good this quarter. Excluding the charge, diluted EPS from continuing operations would have been $0.87 and our backlog ended the quarter at $255.3 million. The record bookings this quarter is a reflection of our customer’s confidence in L.B. Foster. Winning several marquee projects this quarter has raised our confidence in the rail and energy markets.”
Product Warranty Claim
L.B. Foster has taken a warranty charge of $19.0 million. This charge is based upon the number of ties that do not meet our quality standards and will require replacement. We believe the conditions causing the quality issues were largely concentrated during a manufacturing period between 2006 and 2007. In addition to the Union Pacific, we are in the process of handling other customer claims as well. While the Company is making every effort to satisfy customer concerns, no assurance can be given:
i. that our customers will agree to our estimates used to settle these claims;
ii. that we will not have to provide more replacement ties in order to settle these claims, which would result in additional warranty charges;
iii. regarding the ultimate outcome and cost of potential litigation if these claims are not settled.
Business Segment Highlights
Rail segment sales increased 14.1% driven by strong sales in our core new rail and concrete tie businesses, and the insulated joint product line. We continue to see rail customers embrace our friction management products which also had a good quarter including strong operating margins in the United States. We received our largest order ever ($60 million) for an elevated transit system in Honolulu, HI and capital spending by the Class 1 railroads should continue through the year and has contributed to a very strong backlog at our concrete tie manufacturing plants for the remainder of 2012. The $19.0 million tie adjustment negatively impacted gross profit in 2012.
Gross Profit %
Construction sales declined 32.0% in the quarter. This comparison was due principally to the Piling product line, although all construction segment businesses experienced declines. Our CXT buildings business was up in the quarter compared to the prior two quarters. The recently announced transportation bill was viewed by most as a 27 month extension of SAFETEA-LU. Despite the tough market conditions, we were able to keep gross profit margins in line with the prior year period.
Gross Profit %
Tubular product sales were very strong in the second quarter as end markets in oil & gas and water well applications are driven by energy and agriculture. The growth in these two sectors should continue in 2012, but at a lower rate than the first half. Our Birmingham, AL coating facility has implemented a second shift due to the current backlog and our expectation that this sector will remain strong through 2013. Gross profit margins reached 29.0% reflecting considerable leverage on the higher sales and our ability to efficiently run the plants.
Gross Profit %
First Half 2012 Results
Net sales for the first six months of 2012 decreased by $6.0 million or 2.1%, due to a 25.2% decline in Construction segment sales, partially offset by a 10.8% increase in Rail segment sales and a 50.8% improvement in Tubular segment sales.
Gross profit margin was 12.4%, 240 basis points lower than the prior year period due to the aforementioned concrete tie warranty charge.
Selling and administrative expenses increased $2.4 million or 7.6% from the prior year due primarily to concrete tie testing costs as well as salaries and benefits expense, partially offset by the incentive compensation reversal required due to the product claim warranty charge.
Income from continuing operations was less than $0.1 million or $0.00 per diluted share compared to $6.8 million or $0.65 per diluted share in 2011.
Cash provided from continuing operating activities was $3.5 million for the first half of 2012 compared to $9.6 million of cash used by continuing operating activities in 2011.
L.B. Foster Company will conduct a conference call and webcast to discuss its second quarter 2012 operating results on Wednesday August 8, 2012 at 11:00am ET. The call will be hosted by Mr. Robert Bauer, President and Chief Executive Officer. Listen via audio on the L.B. Foster web site: www.lbfoster.com, by accessing the Investor Relations page. The replay can also be heard via telephone at (888) 843-7419 by entering pass code 33046212#.
This release may contain forward-looking statements that involve risks and uncertainties. Statements that do not relate strictly to historical or current facts are forward-looking. When we use the words “believe,” “intend,” “expect,” “may,” “should,” “anticipate,” “could,” “estimate,” “plan,” “predict,” “project,” or their negatives, or other similar expressions, the statements which include those words are usually forward-looking statements. Actual results could differ materially from the results anticipated in any forward-looking statement. Accordingly, investors should not place undue reliance on forward-looking statements as a prediction of actual results. The Company has based these forward-looking statements on current expectations and assumptions about future events. While the Company considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks and uncertainties, most of which are difficult to predict and many of which are beyond the Company’s control. The risks and uncertainties that may affect the operations, performance and results of the Company’s business and forward-looking statements include, but are not limited to, an economic slowdown in the markets we serve; a decrease in freight or passenger rail traffic; a lack of state or federal funding for new infrastructure projects; an increase in manufacturing or material costs; resolution of the product claim and the Inspector General subpoena; and those matters set forth in Item 8, Footnote 21, “Commitments and Contingent Liabilities” and in Item 1A, “Risk Factors” of the Company’s Form 10-K for the year ended December 31, 2011, as updated by any subsequent Form 10-Qs. The Company urges all interested parties to read these reports to gain a better understanding of the many business and other risks that the Company faces. The forward-looking statements contained in this press release are made only as of the date hereof, and the Company assumes no obligation and does not intend to update or revise these statements, whether as a result of new information, future events or otherwise.
L.B. Foster Company
415 Holiday Drive
Pittsburgh, PA 15220
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Three Months Ended
Six Months Ended
COSTS AND EXPENSES:
Cost of goods sold
Selling and administrative expenses
(Gain) loss on joint venture
Other (income) expense
(LOSS) INCOME FROM CONTINUING OPERATIONS,
BEFORE INCOME TAXES
INCOME TAX (BENEFIT) EXPENSE
(LOSS) INCOME FROM CONTINUING OPERATIONS
INCOME FROM DISCONTINUED OPERATIONS,
BEFORE INCOME TAXES
INCOME TAX EXPENSE
INCOME FROM DISCONTINUED OPERATIONS
NET (LOSS) INCOME
BASIC (LOSS) EARNINGS PER COMMON SHARE:
FROM CONTINUING OPERATIONS
FROM DISCONTINUED OPERATIONS
BASIC (LOSS) EARNINGS PER COMMON SHARE
DILUTED (LOSS) EARNINGS PER COMMON SHARE:
FROM CONTINUING OPERATIONS
FROM DISCONTINUED OPERATIONS
DILUTED (LOSS) EARNINGS PER COMMON SHARE
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC
AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING – DILUTED*
* Since the Company incurred a loss applicable to common shareholders in the three months ended June 30, 2012 period, the inclusion of dilutive securities in the calculation of weighted average common shares is anti-dilutive and therefore, there is no difference between basic and diluted earnings per share.
L.B. Foster Company and Subsidiaries
Condensed Consolidated Balance Sheets
Cash and cash items
Accounts and notes receivable:
Current deferred tax assets
Prepaid income tax
Other current assets
Current assets of discontinued operations
Total Current Assets
Property, plant & equipment-net
Other intangibles – net
Other non-current assets
Assets of discontinued operations
Total Other Assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current maturities on other long-term debt
Accounts payable-trade and other
Accrued payroll and employee benefits
Current deferred tax liabilities
Other accrued liabilities
Current liabilities of discontinued operations
Total Current Liabilities
OTHER LONG-TERM DEBT
DEFERRED TAX LIABILITIES
OTHER LONG-TERM LIABILITIES
Class A Common stock
Accumulated other comprehensive loss
Total Stockholders’ Equity
L.B. Foster Company
Non-GAAP Financial Measures
This earnings release contains certain non-GAAP financial measures. These financial measures include gross profit margins excluding concrete tie costs and earnings per share from continuing operations excluding concrete tie costs. The Company believes that these non-GAAP measures are useful to investors in order to provide a better understanding of these measures excluding certain costs incurred in both 2011 and 2012 related to its Grand Island facility closing as well as warranty and other charges taken related to concrete ties manufactured at this facility.