L.B. Foster Company
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

Good day ladies and gentlemen and welcome to the Third Quarter 2013 L.B. Foster Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we’ll facilitate a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. David Russo, Chief Financial Officer. You may begin.

[David J. Russo:]

Thank you, Francis. Good morning ladies and gentlemen. Thank you for joining us for L.B. Foster Company’s earnings conference call to review the company’s third quarter 2013 operating results. My name is David Russo, and I am the Chief Financial Officer of L.B. Foster. Hosting the call today is Mr. Robert Bauer, L.B. Foster’s President and CEO. This morning, Bob will provide an overview of the company’s third quarter performance, give an update on business issues and discuss market conditions. Afterward I will review the company’s third quarter financial performance and then we will open up the session for questions. Means to access this conference call via webcast were disclosed in our earnings press release and were posted on the L.B. Foster Company website under the Investor Relations page. This webcast will be archived and available for seven days. During today’s call, our commentary and responses to your questions may contain forward-looking statements including items such as the company’s outlook for our markets in 2013 and beyond, cash flows, margins and capital expenditures. These statements involve the number of risks and uncertainties that could cause actual results to differ materially. These forward-looking statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise or publically release the results of any revisions to these statements in light of new information or future events. All participants are encouraged to refer to L.B. Foster’s Annual Report on Form 10-K for the year ended December 31, 2012, as well as to other documents filed with the Securities and Exchange Commission for additional information about L.B. Foster and to learn more about the Risk Factors that may affect our results. With that, we will commence our discussion and I will turn it over to Bob Bauer.

[Robert P. Bauer:]

Thank you, Dave and good morning everyone, thank you for joining us. We reported earnings of $0.95 per share today bringing our year-to-date earnings to $2.15 as we run through the financial summary you’ll see that our company continues to perform well, the gross profit margins are holding up and our balance sheet remains strong. On a positive note construction piling orders are now running well above last year’s level following the changing order patterns that we discussed last quarter when at the same time we also described delays in spending for coated pipe that would unfavorably affect our Tubular segment business. I’ll begin by summarizing the key results from Q3 the way I’ll do this is I think there is really three key takeaways from our operating results. First construction orders have been positive now for two quarters and are well ahead of prior year levels, the upturn arrived two quarters later than we originally bought but it’s finally improved and it’s helping contribute to company profits. The second point lower than expected order input for coated products from pipeline customers it started in the second quarter resulted in much lower sales volume for Tubular products which has an unfavorable impact on profit margins. So Tubular segment margins which were better than the company average and losing volume in this segment is difficult for us to offset. Third and finally our Rail business continues to perform well, profit margins remain solid and the third quarter gross profit margins were 60 basis points better than prior year adjusted results suggested for the concrete tie charges. Although we aren’t really seeing growth in capital spending with strong enough to offset the declines we expected this year in concrete tie sales and our track components products. Those are kind of the three key takeaways if I were to mention a fourth it would be about cash flow, Dave will speak to cash flow results in some detail which on the surface low for the quarter and low on a year-to-date basis. But keep in mind that our receivables were among the most significant contributor to use in cash which usually increases during this time as the third quarter is our largest volume quarter. Our collections are not losing ground nor is their problem with bad debts and both inventory and payables contributed the cash in the quarter and on a year-to-date basis and of course for the year there is also an impact from the warranty tie replacements. So I think the details are important to understand there and we’re not having a problem with cash flow from an operational standpoint. With that backdrop in mind, let me expand on some of these remarks to help you think about our business, I will start with the Tubular segment because of its unfavorable impact on margins, so sales for Tubular were down $6 million in the third quarter that is 45% down from prior year, our gross profit fell just about $2.8 million on that decline and we reported gross profit margins of 21.8% this was the result of deleverage from the volume declined and the fact that we decided during the downturn to keep the experience workforce on board and conduct maintenance in the plant which has been operating around the clock and many months over the past year. On a year-to-date basis this business doesn’t look as – the nine months results showed sales down by $2.8 million or 7.7% from prior year-to-date sales and on a year-to-date basis the gross profit margins only 70 basis points below prior year-to-date levels. I expect this business segment to be impacted in the same way in the upcoming fourth quarter, which we had factored into the forecast. We discussed last quarter when we identified the changing market conditions that were kind of headline there in our last quarter call as to why the changing conditions it is not uncommon to see energy market customers make rapid changes in project priorities and take actions have favorable impact on their cost, which is why we commented several times when the sales were up 50% year-over-year and then how we didn’t see this rate actually continuing for year or two when things were going really good last year was just to steep up an increase. I do see us returning to those sales volume levels at some point. It’s very hard to predict exactly when, but we remain bullish on the oil and gas markets, particularly the segment serving the shale area of production, which is driving demand for coated pipe and OCTG products. Switching gears to our rail business. Our Rail business segment sales were down 4.9% in the third quarter. This time last year, we had very strong sales in rail distribution in concrete ties. We are getting the benefit of shipping backlog for the Honolulu transit project, which was $4.7 million in sales in the third quarter. We have approximately $10 million scheduled to ship from that project in Q4. And the transit market remains very active with projects across the country, but there is nothing really the size of the Honolulu project out there on the drilling board, but it does look like a very healthy market it will continue in the 2014 and I think even 2015. On a year-to-date basis, the rail business sales are flat with prior year. This is running very close to the actual unit volume demand in the industry and while the reported results by the Class 1 carriers has been excellent, it’s really been driven by price increases and mix of commodities along with the productivity improvements that are impacting their operating ratios. The unit volume increases are not among the headlines that are favorably impacting the results. In fact if I would go through a few statistics as I think support that in the third quarter capital spending among the six Class 1 rails report was up 1.8%. And commodity car loads in the quarter were up only 0.6% and I will now call that increase just 2.5% due to motor vehicles and petroleum strength. But if you look or include the positive 0.6% in the quarter that really only brings the year-to-date change for commodity car loads after nine months to a negative 1%. If you’re in Intermodal that looks pretty good, it’s a good place to be with 4% growth. But in our case, it really doesn’t have a favorable weighted impact on our business. So as I sum this up, I don’t really see unit volume growth in the industry. Even though the industry certainly remains healthy, I think those numbers are not going to be quite as strong. As I see the market going forward, the best results will come from companies that have solutions that will positively impact the operating efficiency and throughput of the rail operations that’s where our focus is, that’s where we started investing more this year. We did add some spending to support this initiative in 2013 and while we still have predominantly maintenance and new track infrastructure products, our new R&D initiatives will be focused on this efficiency and throughput and anything that can also impact safety, which is obviously important to the rail operators. Turning to the Construction segment, orders in the third quarter were up 59%, bringing the nine months year-to-date orders to $154 million that’s up 25% over prior year this is really the best indication of the strengthening that’s taking place in the markets that we serve, now the Construction segment sales in Q3 were just over $49 million up 7% from prior year and on a year-to-date basis you’ll see that our sales still show a decline of 1.8% versus the prior year as a result of the first half weakness. So there is a very different picture when looking at the incoming orders versus our published sales results, so our backlog at the end of September stood just over $83 million in this business segment up from $54 million last September that’s an increase of almost $30 million, our piling backlog is up $15 million to $44 million, our bridge backlog is up $13 million to $24 million. So this segment of our business now is really looking different here in the latest quarter, with regard to our operating performance ending the third quarter with EPS of $0.95 a share and net income of 6% of sales while that’s below where we wanted to be I think it was as good as last year operationally. But on slightly lower sales and with the big reduction in Tubular segment profits which are a bit of a headwind our SG&A spending did increase as a percent of sales as a result of the investments we decided to make for growth. These are long-term decisions and ones that we feel strongly about that will pay off for our shareholders, we did throttle the spending back after changing our forecast last quarter, but we kept the highest priority growth investments intact. Before I conclude and wrap up here I wanted to say something about capital spending, capital spending after nine months is well below our planned levels we spent $5.6 million so far this year which is mostly been aimed at planned improvements and cost reductions. The shortfall to plan is expected really to move into next year when capital spending will certainly increase. We have plans to invest in our existing coating plant which I discussed we’re moving into the corrugated bridge for market opening up new opportunities in a much larger bridge market space than we currently serve. We’re planning on expanding capacity in rail distribution operations and there are a number of service operations, we’re starting up that require vehicles and equipment to operate these are all programs but in my opinion will build a stronger business with greater capability than we currently have and that will in turn build value for our shareholders. So with that overview I hope that gives you some good insights into the current business conditions. Let me end by just thanking the team at L.B. Foster for everything that they’ve contributed here in the quarter and in 2013 as we head down the back stretch here of this year, I think we’ll be pretty happy what the company has accomplished this year. So with that I’m going to turn it back over to Dave Russo and he’ll go through his remarks.

[David J. Russo:]

Thank you, Bob. In order to frame up our discussion today, I would note that L.B. Foster’s third quarter 2012 results contained a $3 million warranty charge, which was included in our cost of sales. This charge was an addition to a $19 million charge recorded in the second quarter of 2012 and as I’m sure everyone knows these charges were related to a product warranty claim regarding concrete ties manufactured at our Grand Island, Nebraska facility, which was closed in the first quarter of 2011. Well my discussion would focus primarily on our GAAP results, when we feel that beneficial to the audience, I will refer to adjusted results, which assumes the exclusion of these adjustments in order to present another look at quarter-to-quarter and nine months-to-nine month comparative results. So I will begin with sales for the third quarter of 2013, which were $162.2 million, compared to a $170.3 million in the prior year a 4.8% decrease. The sales reduction was due to a 45% decline in Tubular segment sales and a 4.9% decrease in Rail segment sale, partially offset by 7.3% increase in Construction segment sales. The Rail segment sales decline, as Bob mentioned was due principally to a reduction in concrete ties sales and reduced rail distribution sales, partially offset by nice improvement in our transit product sales and the strong performance by our Allegheny Rail Products division. The Tubular segment sales decrease was due to volume related declines in our Coated Products division. The Construction segment sales improvements was due principally to stronger piling sales and to a lesser extent concrete buildings, partially offset by a reduction in sales of our fabricated bridge products. On a year-to-date basis, consolidated sales were down slightly as Tubular sales declined 7.7%, Rail decreased only slightly by 0.4% and Construction sales trail 2013 by 1.8%. As mentioned in our earnings release, backlog stood at $197.5 million at the end of Q3, down $28.2 million or 12.5% from the third quarter of 2012 and 10.3% lower than June of this year. The year-over-year reduction was due to a 28% decrease in our Rail segment backlog and the 79.7% decline in our Tubular segment backlog, partially offset by a 52.7% improvement in our Construction segment backlog. Third quarter bookings were down 5.5% compared to the third quarter of 2012, bookings declined from last year’s third quarter in our Tubular segment by about 54% and by 24% in our Rail segment, but increased in the Construction segment by 59%. Year-to-date bookings declined 20.3% from the prior year, excluding the $60 million Honolulu Transit Project order that we received in the second quarter of 2012, new orders decreased by 10%. Looking into our market activity, this quarter and the several construction, which is a key end use market for our Construction products segment has experienced somewhat inconsistent performance during this year, this widely this first sector was up overall by 8.2% last year, but is essentially flat through August of 2013 due to increases in the transportation and power sectors offset by weakness in the conservation and development as well as highway and bridges sector. The weakest has been the conservation and development sector, which is the primary driver in many borders of our piling business, although as we have mentioned our piling business has hit a trough and we have seen nice increases in their order entry for the last two quarters. Now regarding our rail business as Bob mentioned North American Class I railroad commodity car loads increased 5.6% in Q3 as compared with prior year and Intermodal increased by 4.1% additionally Class I railroads reported strong results overall in the third quarter with two railroads reporting record profits and two additional roads reporting record revenues. During the third quarter of this year, our Tucson Tie Facility operated between 65% and 70% of capacity principally for the UPRR, this year in Tucson we are producing 200,000 ties to be sold and 100,000 ties for warranty replacements which is one of the primary factors causing the decrease in concrete tied sales and referred to earlier for the quarter. In Spokane we’re producing concrete ties for transit authorities other Class I railroads, contractors and industrial customers. We continue to see robust employee bidding activity and the Spokane facility has been highly utilized. Our Spokane facility experienced a record year last year and while we expect another strong performance in 2013, we do not expect it to match 2012 results. As a percentage of this quarter’s consolidated sales Tubular accounted for 5% of sales, construction was 30% and rail was 65%. As we projected last quarter based on change in order patterns and backlog this mix of business changed in favor of rail and construction and away from tubular. Gross profit margins were 19.3% in the third quarter of 2013, compared to 18% in the prior year, this increase was due principally to the $3 million warranty charge taken in the third quarter of last year excluding that charge prior year gross margin would have been 19.8%. The reduction in gross margins then from 2012 to 2013 was due to the lower volume of Tubular segment sales as compared to the prior year quarter as well as the lower gross margins achieved by the Tubular segment from volume related deleveraging in the current year. Moving on to cost and expenses selling and administrative expenses increased by $1 million or 5.8% to $17.5 million in the third quarter of 2013 due to increases related to salaried head count partially offset by reduction in concrete tie testing cost, SG&A expense represented 10.8% of sales in the third quarter of 2013 as compared to 9.7% of sales last year. For the nine months period SG&A expense increased by $2.5 million or 5% to $52.6 million and represented a 11.9% of sales in 2013 compared to a 11.2% of sales last year. Our third quarter pre-tax income was $14 million or 8.6% of sales compared to $13.1 million in the prior year. Once again excluding the warranty charge in the prior year pre-tax income would have been approximately $6.1 million or 9.5% of sales. Pre-tax income for the nine months period was $32.6 million this year or 7.4% of sales excluding to prior year warranty adjustments that are comparable prior year pre-tax income would have been $33.9 million or 7.6% of sales. As mentioned in our earning release the effective tax rate for the third quarter of 2013 was 30.2% compared to 35.4% in 2012. The lower rate in 2013 was favorably impacted by discrete tax items related to certain state income tax matters Third quarter EPS from continuing operations was $0.95, as Bob has mentioned, compared to $0.83 in the prior year quarter. Once again adjusting for warranty charges, EPS would have been $1 per diluted share last year. Earnings per share from continuing operations was $2.15 per diluted share for the first nine months of last year, compared to $0.80 in the prior year, adjusting for warranty adjustments in the prior year. Earnings per share would have been $2.14, compared to the $2.15 this year. Turning to the balance sheet, working capital net of cash increased by $9.4 million in the current year quarter; accounts receivable increased by $9.7 million or $12.3%, due principally to our mix of sales, favoring businesses with higher DSOs as well as certain large projects ramping up and paying a little slower than our normal accounts. Our DSO at September 30, 2013 increased to 46 days from 44 days at June 30 of 2013, due mostly the items mentioned above, DSO at September 30, 2012 was 42 days. We do believe that our air portfolio was in very good condition. Our inventory decreased by $5.1 million and accounts payable and deferred revenue increased by $1.6 million in the third quarter. Our cash generated from continuing operating activities was $3 million, compared to $21.6 million in the prior year, and for the first nine months of 2013 cash generated by continuing operating activities was $2.5 million, compared to $25.3 million in the prior year. The year-to-date reduction in cash from operations was caused by changes in working capital, including reductions in differed revenue, warranty liability as well as increased accounts receivable, also adding to the unfavorable comparison or increased tax payments and lower depreciation and amortization for the nine months in 2013. We expect to see improvement in cash flows during the fourth quarter of this year and still expect our full year cash flow from operating activities to exceed capital expenditures debt service payments, dividends and share repurchases. Our capital expenditures as Bob mentioned were $5.6 million for the first nine months of this year, compared to $6.3 million last year. This spend was principally for items such as planned production equipment and inventory handling equipment. We anticipate that the companies 2013 capital expenditures will range between $7 million and $8 million cash at September 30 this year was $96 million, up $1.3 million from June of this year and down $5.5 million from December 31, 2012. Our cash was invested principally in AAA rated money market funds and other short-term instruments for preservation of principle and quick access to funds have been the priority. Looking forward, we believe that the trend in sales that commenced in Q3 will continue into the fourth quarter as we anticipate our Tubular segment sales will continue to weaken and our Construction segment sales improve compared to the prior year. That concludes my comments on the third quarter of 2013 and we’ll now open up the session for questions and answers.

[Operator:]

Thank you. (Operator Instructions) And our first question is from the line of Robert Kosowsky from Sidoti. You may begin.

[Robert Kosowsky:]

Hi, good morning guys how are you doing?

[Robert P. Bauer:]

Good morning Rob.

[David J. Russo:]

Good morning, Rob.

[Robert Kosowsky:]

Hi, I just have quick questions on the construction backlog, just wounding what the gross margins looks in there and kind of any commentary on industry pricing potentially on the particularly on the piling side? And also just on what kind of piling projects you’re seeing now for a bid?

[Robert P. Bauer:]

Well, we normally do keep track closely of the gross margin in that business. It’s not something that I would put in a forecast. I would tell you though that as just generally the convictions of that business aren’t really changing that the margins going forward should be consistent what the way we’ve been performing. Pricing has been stable in the marketplace. I think a number people would predict it maybe going out into the future that steel prices might begin to move up. I think it’s a bit difficult to speculate on that right now or certainly capacity out there in the industry. But for the coming quarter or so, I don’t really think the conditions are going to change much.

[Robert Kosowsky:]

Okay. And then what kind of projects that you’re seeing on the piling side?

[Robert P. Bauer:]

Well, they are the typical projects that we always see in the heavy civil construction market. There is projects in sports, there is projects in highways, there is a little bit more expanding from some of these state governments and other government funded projects that are out there. I can’t point at anything or as I would say to you is as unique in anyway from what we’ve historically do.

[Robert Kosowsky:]

Okay. And then I finally add some second difficulties. I was wondering if you had mentioned how much revenue was from Honolulu project and what your thoughts are as far as the revenue cadence for the remaining in orders to $40 million or so that $30 million of that?

[David J. Russo:]

Yeah, I did make mentioned of the fact that the, it was $4.7 million in Q3 and that we have approximately 10 million scheduled to ship in Q4 and there will still be some shipments in 2014 before we concluded that project.

[Robert Kosowsky:]

Okay. Thank you very much and sorry for making you to repeat it.

[David J. Russo:]

No problem, thanks Rob.

[Operator:]

Your next question will come from the line of Mike Baudendistel from Stifel.

[Michael Baudendistel:]

Thanks and good morning.

[Robert P. Bauer:]

Good morning.

[David J. Russo:]

Hi Mike.

[Michael Baudendistel:]

I’m just wondering on the backlog going down sort of looking for the company overall going down sequentially from the second quarter or third quarter, is that roughly in line with what you would expect seasonally?

[David J. Russo:]

Yeah, its matter of fact, if we take a look at the decline from June to September like 10.3% this year and I think it was right around 10.5% last year.

[Michael Baudendistel:]

Great that makes senses. And then receivables with the commentary there, is that something you expect to reverse from the coming quarters or you expect that this stay a little bit higher?

[David J. Russo:]

Well, it will stay a little bit higher for a while until some of these larger projects ramp down Mike. But when you take a look at our discussion has been cash flow, so it compares to change and receivables this year versus the change last year and there’s a lot of factors driving that negative comparison that we started the year in much better shape 2013 in our AR and DSO than we did a year ago and all things like that create that negative comparison when we look at our sales in Q3 this year compared to Q3 of last year. I would tell you that I think our sales will probably, I’m sorry our AR is probably $3 million to $4 million too high but this year I think our AR was only $2.5 million higher than last year. So it’s those changes that create some of that negative comparison and we do need to generate more cash especially we expect to in Q4 from collection of receivables. But I think that will some of that negative comparison will hang around for another three months to six months but it will diminish.

[Michael Baudendistel:]

Okay, that’s helpful. And on the Tubular business on the coating side is that business becoming any more competitive at all or is it just opens the margin decline was due to the planned improvements that you talked about and maybe lower volume overall?

[Robert P. Bauer:]

I wouldn’t describe it from our standpoint that’s really having any changes in the competitive landscape. You might hear something different if you were to talk to people in the pipe business because there is some capacity coming on, from people that are making this field play they might think it’s a little more competitive and in our case including in fact [indiscernible] into the market but in our case, we are coding the pipe. So we are in the converting end of it, and there is always enough competition it keeps some pricing pressure on but I wouldn’t describe it as it changing competitive landscape compared to what we have seen out there now for the last few years.

[Michael Baudendistel:]

Okay. And how much does the plant improvements cost you in the quarter, given us most of that?

[Robert P. Bauer:]

No I really didn’t put a summary of that together but what we did is when we believe that this order input pattern would be short-lived we wanted to hang on to our workforce, we didn’t want to lose the skill we had in that plant we just took the opportunity to perform a good deal of maintenance, we kept several heads on in the factory that you wouldn’t otherwise keep it is just volume related. So with purely a volume issue and I want to think of it this way, we kept our headcount relatively flat in the plant while volume was off considerably. So we expect that volume to come back to up to where the headcount levels are justified.

[Michael Baudendistel:]

Good and just one final one for me I don’t think I heard you comment on your 2013 guidance that you previously gave for revenue and EPS is that guidance still good and some report?

[Robert P. Bauer:]

Yeah, in this particular call we thought that there wasn’t really a need to come back to that subject in fact we’re thinking about just bidding on a routine where we will give a mid-year update which we did last time that whether that as we look at where we are today, we felt was accurate guidance for the balance of the year and nothing new to cause us to change that.

[Michael Baudendistel:]

Great, thanks very much.

[Operator:]

(Operator Instructions) Your next question comes from the line of Ben Oveson from D. A. Davidson. You may begin.

[Ben V. Oveson:]

Good morning.

[Robert P. Bauer:]

Good morning, Ben.

[David J. Russo:]

Good morning, Ben

[Ben V. Oveson:]

I was just wondering what’s your tax rate would be going forward.

[David J. Russo:]

We would expect it to be in the 34.5% to 35% range.

[Ben V. Oveson:]

Okay, thank you. And then one last one on your oil and gas projects, what’s causing those to be delayed?

[Robert P. Bauer:]

Well, the best that we put out finger on is these end user are making adjustments in their project schedules and they do that for a variety of reason sometimes its gas prices, some times its inventory, some times they’re trying to time the market with regard to the cost of the product like the actual coated pipe that they’re buying. We believe that there is a all of those things for that play, sometimes their shifting resources between some of the areas where they do this work and we’re stronger in some areas than others. So there is actually number of things that play and I think from our standpoint, we don’t feel like we can point to anyone item that really driving that a delay, but a variety of different things that they wrestle with all the time. And some times what’s goes down like this and sometimes its rocket back up like it was last year. But they can move things around, which sharp changes on us from time-to-time, it’s not uncommon.

[Ben V. Oveson:]

Great, thanks.

[Operator:]

At this time, we have no other questions. I’d like to turn the call over back to Mr. Robert Bauer from your closing remarks.

[Robert P. Bauer:]

All right, well, it was a brief one. I hope that’s because we are clear and everything is easy to understand. I appreciate you joining us on this quarter and in months like the next time we’ll be talking we will be in 2014. So we’ll look forward and we’ll look forward to laying out some details about how we see 2014 and unfolding at that point. So thanks again for joining us and have a good day.

[Operator:]

And ladies and gentlemen, this concludes your presentation. You may now disconnect.