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 2011 fourth quarter operating results.
Fourth Quarter Results
-- Fourth quarter net income was $6.1 million or $0.60 per diluted share compared to $6.2 million or $0.60 per diluted share last year.
-- Fourth quarter net sales decreased by $10.6 million or 7.1% due to a 23.5% sales decline in the legacy L.B. Foster business, partially offset by the inclusion of Portec Rail Products Inc. sales of $27.9 million.
-- Gross Profit margin was 20.1%, 510 basis points higher than the prior year, primarily as a result of the inclusion of Portec's results in the current quarter.
-- Selling and administrative expense increased by $5.0 million or 40.3%, due principally to the inclusion of Portec Rail Products in our results.
-- Adjusted EBITDA (Earnings before interest, taxes, depreciation, amortization and other purchase accounting charges not considered amortization) decreased 10.5% to $12.9 million compared to $14.4 million in the prior year quarter.
-- Fourth quarter bookings were $127.4 million compared to $113.0 million last year, an increase of 12.7%. Excluding Portec, bookings were 10.6% lower than last year's fourth quarter. At year end, our backlog was $145.4 million, 23.2% lower than the prior year.
Product Claim Update
On July 12, 2011 the Union Pacific Railroad ("UPRR") notified the Company and CXT Incorporated, a subsidiary of the Company (CXT), of a warranty claim under CXT's 2005 supply contract relating to the sale of prestressed concrete railroad ties to the UPRR. The UPRR has asserted that a significant percentage of concrete ties manufactured in 2006 through 2010 at CXT's Grand Island, Nebraska facility fail to meet contract specifications, have workmanship defects and are cracking and failing prematurely.
Since late July 2011, the Company and CXT have been working with material scientists and prestressed concrete experts, who have been testing a representative sample of Grand Island concrete ties. While this testing is not complete, we have not identified any appreciable defects in workmanship. Additionally, a customer of the UPRR has claimed that a representative sample of ties manufactured by our Grand Island facility have failed a test contained in our product specification. As a result of this specific allegation, the UPRR has informed the Company that they currently intend to remove approximately 115,000 ties from track, which are a subset of ties subject to the July 12, 2011 claim. We are reviewing this claim and, while our review is not complete, we continue to believe that these ties do not have a material deviation from our contractual specifications. We expect that the testing required to address this product specification issue will be completed sometime during the latter part of the second quarter of 2012; however, we expect that we will continue to work collaboratively with the UPRR to address their overall product claim for some time to come.
On January 11, 2012, CXT received a subpoena from the United States Department of Transportation Inspector General ("IG") requesting records related to CXT's manufacture of concrete railroad ties in Grand Island, Nebraska. We believe that this subpoena relates to the same set of circumstances giving rise to the UPRR product claim. CXT and the Company intend to cooperate fully with the IG. We cannot predict what impact, if any, this investigation will have on the UPRR product claim or otherwise on the Company.
No adjustments have been recorded as a result of these matters as the impact, if any, cannot be estimated at this time. No assurances can be given regarding the ultimate outcome of these matters.
CEO Comments
Robert P. Bauer, L. B. Foster's president and chief executive officer, said, "Our performance in the fourth quarter was mixed. The Rail segment reported strong sales and income, while the softness in the Construction segment booking levels and backlog that we reported the last two quarters has negatively impacted sales and income. Portec Rail Products reported a strong quarter and finished the year as we had anticipated. I congratulate the team of dedicated L.B. Foster employees for reaching record sales of $591 million in 2011 while also improving our gross profit margins." Mr. Bauer went on to say, "One of my first priorities will be to focus on the product claim made by the UPRR, striving for a resolution that satisfies our customer and our shareholders." Mr. Bauer concluded by adding, "While we see some efforts in Congress to pass a new Transportation bill, we continue to experience lower levels of government spending in the construction and transit markets we serve."
Full Year Results
-- Net income for 2011 was $22.9 million or $2.22 per diluted share compared to net income of $20.5 million or $1.98 per diluted share in 2010.
-- Net sales for the twelve months of 2011 increased by $115.9 million or 24.4%, due to the inclusion of Portec Rail Product sales in 2011 and a 3.1% sales increase in the comparable L.B. Foster business.
-- Gross profit margin was 17.3%, 160 basis points higher than the prior year due to the inclusion of the results of Portec Rail Products, partially offset by unfavorable gross profit adjustments of $4.4 million related to costs incurred primarily to exit our Grand Island concrete tie facility and $4.5 million of increased unfavorable LIFO adjustments.
-- Selling and administrative expenses increased $25.1 million or 59.5% from the prior year due primarily to the inclusion of Portec's operating costs as well as a $3.1 million increase in legacy Foster costs due primarily to higher outside service expenses ($2.0 million) and higher salaries ($1.0 million).
-- The Company's income tax rate was 32.5% compared to 37.4% in the prior year. The rate reduction was due to the impact of Portec Rail Products' results and the lower effective tax rate applicable to its foreign operations as well as the receipt of state tax refunds.
-- Adjusted EBITDA for 2011 increased 12.6% to $49.1 million compared to $43.6 million in the prior year.
-- Cash generated from operating activities for the full year was $30.7 million in 2011 compared to $59.5 million in 2010.
