L.B. Foster Reports Second Quarter Operating Results
Second Quarter Results
Product Claim
On July 12, 2011 the 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 manufacture of prestressed concrete railroad ties for 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. Approximately 1.6 million ties were sold from Grand Island to the UPRR during the period the UPRR has claimed nonconformance. The 2005 contract calls for each concrete tie which fails to conform to the specifications or has a material defect in workmanship to be replaced with 1.5 new concrete ties, provided, that UPRR within five years of a concrete tie's production, notifies CXT of such failure to conform or such defect in workmanship. The UPRR's notice does not specify how many ties manufactured during this period are defective nor which specifications it claims were not met or the nature of the alleged workmanship defects. CXT believes it uses sound workmanship processes in the manufacture of concrete ties and has not agreed with the assertions in the UPRR's warranty claim notice. The UPRR has also notified CXT that ties have failed a certain test that is specified in the 2005 contract. CXT has not been able as yet to verify this test failure or the test protocols used. CXT is in the process of reviewing the warranty claim asserted in UPRR's notice and related matters and will conduct a thorough battery of tests of a sample of the concrete ties in question. No adjustments were made in the second quarter as a result of this claim as the impact, if any, cannot be estimated at this time. No assurances can be given regarding the ultimate outcome of this matter.
CEO Comments
Stan L. Hasselbusch, L.B. Foster's president and chief executive officer, said, "Our performance in the second quarter was negatively impacted by the charges related to exiting the CXT Grand Island, NE facility as well as to issues with concrete ties manufactured at Grand Island. We are taking the claim made by the UPRR very seriously and we will be performing tests and evaluating test results in the coming weeks. We have retained material science and prestressed concrete specialists to assist us with this matter." Mr. Hasselbusch went on to say, "The rest of the business reported strong second quarter sales, however our margins were negatively impacted by the mix of business as our distribution sales grew by approximately 40% over the prior year. Additionally our distribution business gross margins have declined due to intense competition and softening demand as evidenced by our backlog, which is weaker than the prior year. Regarding the Portec acquisition, we are pleased with the progress of the Portec integration and the many prospects for business development with the Class I Railroads and the international markets." Mr. Hasselbusch concluded by adding, "The lack of any progress related to new transportation legislation and steadily decreasing government spending on infrastructure are creating negative headwinds for our construction and transit markets. As we move through 2011, we expect to continue to experience a highly competitive market environment and we are concerned about the likelihood of a satisfactory resolution of transportation legislation as well as appropriate funding mechanisms for such a bill."
First Half 2011 Results
L.B. Foster Company will conduct a conference call and webcast to discuss its second quarter 2011 operating results and business conditions on Thursday, August 4, 2011 at 11:00am ET. The call will be hosted by Mr. Stan Hasselbusch, President and Chief Executive Officer. Listen via audio on the L.B. Foster web site: http://www.lbfoster.com, by accessing the Investor Relations page. The replay can also be heard via telephone at +1-888-286-8010 by entering pass code 92668051.
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 those matters set forth in Item 22, "Commitments and Contingencies" and in Item 1A, "Risk Factors" of the company's Form 10-K for the year ended December 31, 2010, 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
Reconciliation of GAAP to Non-GAAP Financial Measures
L.B. Foster (Foster) reports its financial results in accordance with generally accepted accounting principles (GAAP). However, Foster believes that certain non-GAAP financial measures are useful in managing our performance. One such non-GAAP measure is Adjusted EBITDA.
Adjusted EBITDA, which Foster defines as net income before interest, taxes, depreciation, amortization and other non-cash charges (principally related to purchase accounting adjustments, such as the $2.5 million charge taken in the first quarter of 2011 related to the write-up of inventory owned by Portec to fair value less cost to sell on the date of acquisition) is used due to its wide acceptance as a measure of operating profitability before non-operating expenses (interest and taxes) and noncash charges (depreciation and amortization and other noncash charges). Additionally, Adjusted EBITDA is one of the performance measures used in Foster's debt covenant calculations and incentive compensation plan.
This non-GAAP financial measure is not a substitute for GAAP financial results and should only be considered in conjunction with Foster's financial information that is presented in accordance with GAAP. A quantitative reconciliation of GAAP net income to Adjusted EBITDA is provided in the table below.
