L.B. Foster Company (FSTR) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 L.B. Foster Earnings Conference Call. My name is Amecia and I’ll be your operator for today. [Operator Instructions] I would now like to turn the call over to Mr. David Russo. Please proceed.

Thank you, Amecia, good morning, ladies and gentlemen. Thank you for joining us for L.B. Foster Company’s earnings conference call to review the company’s fourth quarter 2011 operating results. My name is David Russo and I am the Chief Financial Officer of L.B. Foster. Hosting the call today is our newly appointed President and CEO, Mr. Robert Bauer. This afternoon Bob will provide a brief overview of the company’s fourth quarter performance and also give some general remarks. Afterward, I will review the earnings press release issued earlier this morning 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 7 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 2012, our thoughts regarding the concrete type product claim, cash flows, margins, and capital expenditures. These statements involve a 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 publicly 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, 2010, as well as 2 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. Additionally, while forward-looking statements will be made today, L.B. Foster Company’s policy prohibits us from providing specific earnings guidance. With that, we will commence our discussion and I will turn it over to Bob Bauer.

Thank you, Dave. Thank you to everyone for joining us today. Before we begin our comments on the quarter and the year I’d like to make a few remarks. First, as I'm sure you already know or have seen in our press release, I joined L.B. Foster on February 1. I'm extremely excited about being here and I very much look forward to working on the many opportunities the company has for continued growth and profitability. As we handle questions today, I'm sure I’ll depend on Dave to handle the bulk of them which I expect will be on our fourth quarter results. Second, I'll like to recognize the contribution that Stan Hasselbusch has made over his 40 years with the company and particularly in the last decade as the company’s president and CEO. I'm fortunate to take over a business that’s in very good condition and I know he would give a lot of credit to the employees at L.B. Foster, so I’ll do that on his behalf. There is a great team of people here and it’s obvious to me that they are energized above the path towards continuous improvement in accelerating our growth rate which will benefit our shareholders. Finally, I appreciate the confidence you’ve placed in our management team and I'm looking forward to future discussions with many of you regarding the company’s strategy. Over the course of the next 2 quarters I’ll be looking for opportunities to meet with shareholders and analysts and anyone that’s interested in L.B. Foster as we begin to talk more about ways to accelerate the company’s growth. Before I turn it back over to David to discuss the details of the fourth quarter and the full year results, I wanted to make a few comments about the company’s performance. As I said in the press release, the company achieved record sales in 2011 at $591 million up 24% over last year. This was helped, of course, by the acquisition of Portec Rail Products which was acquired at the end of 2010. The base company without Portec or the legacy L.B. Foster business, as we have referred to it in the past, grew at 3.1%. As we go forward, we will report Portec together with our existing rail businesses and will no longer refer to a legacy business. We plan to continue to integrate those businesses further and it won't make sense for us to separate the reporting. The rail products business, excluding Portec Rail Products was up 5% for the year and our tubular products business was very strong in 2011 with over 19% sales increase. Our construction business, however, remain challenging through the year ending the year flat with 2010, resulting in an overall increase of 3.1% that I mentioned without the acquisition. The rail market has been looking pretty good. The North American Class I Railroads ended the year with strong rail traffic in the fourth quarter, resulting in 2011 being a pretty good year for them and in several cases leading the record revenue and earnings. We closely monitor the revenue ton miles traffic measurements and they hit historical highs in the fourth quarter increasing by 4.4% year-over-year and ending up 3.2% in 2011. We are seeing the growth trend continue into the first 6 weeks of 2012 with rail traffic up by over 2% year over year. This momentum led the record levels of capital spending by the railroads in 2011 where their spending exceeded $14 billion. That was up 33% for the year. And already this year 6 of the 7 Class I North American railroads have announced capital spending plans for 2012, many of them expecting to increase spending by high single digits this year. As I mentioned a minute ago, our construction products businesses remain challenged through 2011 ending the year flat with 2010, but down considerably in this latest quarter, which Dave will expand upon. We will be looking for ways to keep this business growing, despite some of the uncertainty around the transportation bill or the pressures that exist for state the local budgets. While non-residential construction spending was down again in 2011, we do think that it has bottomed. Finally, our tubular products business had a great year in 2011 with sales up over 19%. Our team did a great job responding to the new opportunities in this segment. Our backlog is up, order rates continue to be very solid and we are still seeing an uptick in bidding opportunities. I want to turn my attention to margins. With regard to the margins in the business, as you analyze margins there are significant impact from Portec Rail Products which carries higher gross margins and higher SG&A as well. But overall, this business has favorable impact on our profitability. As for the whole company, we were very pleased with the company’s net income of $22.9 million for the year, which was up 11.7% over prior year and our EBITDA performance which increased by 12.6% over the prior year. That helped us generate $30.7 million in cash for the year and the company’s balance sheet continues to remain very solid. I will close my comments with a comment on Union Pacific and the statements that we had made in our press release. I know there is a lot of concern over the Union Pacific warranty claim and the impact it could have on our company. We will continue to keep you updated as we get relevant facts towards the resolution of this issue. We have retained experts to help us analyze the field performance of the CXT ties that are in question and their findings continue to support our position that the product meets the specifications of the contract. I will be working diligently to put this issue behind us and of course, it will be aimed at satisfying Union Pacific, which is a very valued customer of ours. With that I will turn it back over to Dave Russo and he will go through a deeper discussion on our fourth quarter and financial results.

Thank you, Bob. Sales for the fourth quarter of 2011 were $137.4 million compared to $148 million in the prior year, a 7.1% decrease. The sales decline was due to a 31.4% reduction in construction product sales, partially offset by a 19.6% increase in rail product sales and an 18.1% increase in tubular product sales compared to the fourth quarter of last year. The construction products’ fourth quarter sales decline was due to a 32.7% reduction in piling sales and a 47.6% decline in concrete building sales. These were partially offset by a 10.5% increase in our fabricated products business sales. As we have mentioned in previous quarters, our concrete buildings division has had a weak year in 2011, especially when comparing it to a record year in 2010. This anticipated decline was due to the conclusion of stimulus spending by the federal government in early 2011. Even though the concrete buildings division has a backlog that is still 23% lower than the last year, we do anticipate an uptick in state spending in 2012 that could improve the backlog and the performance in the second half of this year. The total construction segment backlog at the end of 2011 was about 35% lower than December 2010. While that's not where we want to see it, the year-over-year reduction did show a little improvement compared to the Q3 over Q3 comparison last quarter. The construction markets in which we participate ended 2011 mix with heavy civil construction relatively flat and non-residential construction down about 4.5% percent. Further, our visibility into 2012 is a bit cloudy due to the lack of a new transportation bill and an uncertain rebound in non-residential construction, which we believe may have bottomed. The fourth quarter tubular product sales increase was principally due to an improved sales performance in our coated products business. Our overall tubular segment backlog is significantly above that of last year and we expect a strong performance from this segment in 2012. The rail sales improvement was principally due to a significant increase in Portec Rail Product sales partially offset by a 20% decline in rail distribution sales and a 23% decrease in concrete ties sales. As a reminder, the Portec acquisition closed on December 15th of 2010. So we only have the last 2 weeks of Portec’s 2010 sales in our consolidated 2010 results. As Bob mentioned, since we will have the full year Portec Rail Products results when reporting our 2012 earnings, we will not continue to report discreet Portec results, nor will it be necessary to report what we have referred to as Legacy Foster results. Our rail segment ended the quarter with bookings up 52% over last year. However, our backlog was lower by 19.5%. As Bob mentioned, capital spending among the Class I railroads is strong and we anticipate that strength to translate into increased business in our rail segment. We are also seeing some projects come forward in transit and industrial applications although not at the pace we would like. Under its current operating parameters, our Tucson tie facility is operating at approximately 80% of capacity for the Union Pacific Railroad. The Tucson supply contract with the U.P. Railroad expires at the end of 2012 and we hope to extend that agreement in the coming months. In Spokane we continue to produce concrete ties for transit authorities, Class I railroads, contractors and industrial customers. We continue to see robust inquiry in bidding activity and we are close to capacity at that facility as well. Our Spokane facility reported very strong sales and profitability not only in the fourth quarter, but also for the entire year. Our update regarding the Union Pacific Railroad product claim described in our earnings release continues to be somewhat limited as our testing process, while purposeful and thorough is still unfinished. We believe the most significant changes from our last update is that we were notified by the Union Pacific Railroad that a customer of theirs has claimed that a sample of our Grand Island ties failed the specification contained in our supply agreement. While this claim was disclosed in our second quarter of 2011 earnings release, we are now aware that as a result of this test failure, the U.P. has notified us that it intends to remove approximately 115,000 Grand Island ties from track. Our testing has been focused upon that specific test failure claim and we hope to be largely complete with that testing sometime in the second quarter of this year. Thus far, our test results have not indicated any defects in workmanship or significant deviations from specification. As mentioned in our earnings press release, because we still have a significant amount of testing yet to perform we have not recorded any charges in the fourth quarter for this claim as it is impossible to reasonably estimate the liability, if any, we might have. As a percentage of sales of this quarter’s consolidated sales, the tubular segment accounted for 6%, construction was 39%, and rail was 55% of consolidated sales. As mentioned in our earnings release, backlog stood at a $145.4 million at the end of the year, down 23% from December of 2010. Consolidated bookings for the fourth quarter increased by 12.7% compared to last year’s fourth quarter and full year 2011 bookings increased 8% to $548.2 million. Our gross profit margins were 20.1% in the fourth quarter of 2011, an increase of 510 basis points from last year’s fourth quarter. The increase in margin was due principally to the inclusion of Portec Rail Products as well as a slight uptick in L.B. Foster margins. Full year gross profit margins were 17.3% compared to 15.7% last year, an increase of 160 basis points. This increase was due to the addition of Portec Rail Products as well, partially offset by a reduction in Foster margins caused by charges relating to exiting our Grand Island ties facility, increased warranty charges related to concrete ties, and increased unfavorable LIFO expense. Our selling and administrative expenses increased by $5 million in the fourth quarter or 40.3% to $17.5 million, primarily due to the inclusion of Portec’s S&A expense as well as a couple of legacy L.B. Foster costs including integration costs and testing of concrete ties. SG&A represented 12.8% of sales for the fourth quarter of 2011 as compared to 8.5% of sales in the fourth quarter of 2010. The increase principally being the result of the inclusion of Portec as its S&A expense as a percentage of sales has historically been higher than that of Foster. For the full year, selling and administrative expenses increased $25.1 million or 60% due principally to the addition of Portec Rail Product’s costs and to a lesser extend increase cost at Foster that were principally related to the often mentioned testing of concrete ties as well as integration costs. Amortization expense in the fourth quarter of 2011 was $700,000 compared to $300,000 last year. The increase due to the amortization of definitive live intangible assets originating from the Portec Rail Products acquisition. For the 12 month period this amortization expense was $2.8 million compared to $400,000 last year. Fourth quarter operating income was $9.6 million, compared to $10.8 million last year, a $1.2 million reduction. As provided in our earnings release we disclose the calculation of adjusted EBITDA which we believe is meaningful for a company which has made a significant acquisition as it compares the results of operations excluding certain non-cash items to provide another measure that reflects how business is performing. For the fourth quarter of 2011, adjusted EBITDA was $12.9 million compared to $14.4 million in the prior year, a 10.5% decrease. As a percentage of sales, adjusted EBITDA was 9.4% of sales in the current quarter versus 9.7% in the prior quarter. On a year-to-date basis adjusted EBITDA was $49.1 million compared to $43.6 million last year, an increase of 12.6%. Interest expense was $179,000 in the fourth quarter of 2011, 41.5% less than the same period last year due to reduced average borrowings. Our pre-tax income for the fourth quarter of 2011 was $9.5 million compared to $10.6 million in the last year’s fourth quarter, a decrease of 10.1%. The fourth quarter 2011 effective income tax rate was 36% compared to 41.2% last year. The reduction was principally due to the impact of Portec Rail Products’ results and the relatively lower effective tax rate applicable to its foreign operations, and last year it was negatively impacted by non-deductable acquisition expenses. Our 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. The full year earnings per share in 2011 was $2.22 per diluted share compared to $1.98 per diluted share last year, an increase of $0.24 or 12%. Turning to the balance sheet, debt at the end of the fourth quarter was $2.4 million compared to $4.8 million at the end of last year. We continue to pare down the debt and it’s primarily comprised of capital leases. Capital expenditures for the quarter were $3.8 million compared to $2.8 million in the prior year. For the year, capital expenditures were approximately $11.9 million in 2011 compared to $6.2 million in 2010. Our CapEx in ’11 was for items such as our new threaded pipe facility in Magnolia, Texas, new yard improvements and equipment, new plant improvements and new plant equipment, new mobile equipment, computer network and telecom equipment, and building out a new facility in Vancouver for one of our friction management divisions. Similar to 2010, in 2011 we anticipated that our 2011 cash generated from operating activities would exceed capital expenditures, scheduled debt service payments, share repurchases and dividends, and it did exceed it by a comfortable margin. We also expect the same occurrence in 2012 where we expect our cash flows from operations to be able to fund all of those items: CapEx, debt service, share repurchases and dividends. During the fourth quarter we did not purchase any shares of the company’s common stock pursuant to the board of directors’ share repurchase authorization that was announced in May of 2011. Since the authorization began in May of this year, we have purchased 278,655 shares at an average price of $23.25 per share for a total cost of $6.5 million. Approximately 18.5 million remains on the outstanding authorizations. As we previously stated, we believe that the combination of the share repurchase program, the quarterly dividend initiated in 2011 and our acquisition strategy gives us the tools that we need to use as opportunities arise and as market conditions dictate in order to provide long term value for our shareholders. Cash at the end of December 2011 was $73.7 million which was invested principally in AAA rated money market funds and other short term instruments, where preservation of principal and quick access to funds has been the priority. Working capital net of cash decreased by $7.6 million compared to September 2011, an increase by $14.9 million compared to the end of last year. This was largely due to a liability we had from the Portec Rail Products acquisition which was not paid until January of 2011. Accounts receivable decreased by $12.8 million during the quarter while DSO stood at 47 days. We believe our AR portfolio remains in very good condition. Inventory decreased by $1.6 million during the fourth quarter of ’11 while accounts payable and deferred revenues declined by $5.1 million. Looking forward, we believe that we will continue to experience a continued competitive environment in the construction markets that we participate in as only slowly improving state and local budgets and no reauthorization of the transportation bill will provide headwinds in an already weak market. While we hold out hope that Congress will move a new transportation bill ahead, many unresolved issues remain that will make passage problematic. However, Class I railroads, steadily improving volumes, and announced plans for capital spending in 2012 bode well for our rail segment. Finally, we expect our tubular segment to continue the trend we saw in 2011 as we move into our new threading facility and work closely with our joint venture partner, and also as new natural gas demand continues to grow. I would also like to mention before we close that 2 weeks ago, L.B. Foster had its 2012 safety focus week and we believe it was a great success. Every one of our facilities was actively engaged in improving our safety systems during that week. Safety is one of our company’s core values and I continue to be very impressed by the ownership our workforce takes in driving towards a 0 injury safety culture. That concludes my comments on the fourth quarter of 2011 and we will now open up the session for questions. Amecia?

[Operator Instructions] The first question comes from the line of Brent Thielman with D. A. Davidson & Co.

Yes, my first question I guess is a clarification on the product claim. Is the 115,000 ties specified by U.P.’s customer separate from the 1.6 million ties you manufactured for U.P. and we still think about that 1.6 million as kind of a total potential liability here?

The 115,000 ties is a part of that 1.6 million Brent. I think we tried to say it that way, but it’s a substandard at 1.6, so it’s already included in the $1.6 million ties. So it’s not additive, the 1.6 million ties obviously was the ties that we made for the U.P. during that timeframe that’s in question. While it’s not the total amount manufactured, what we manufactured during that time period was probably 97% for the Union Pacific Railroad. So that’s the majority of it.

Okay, so that 1.6 million is still kind of what we should think about in terms of maximum liability of ties here.

Yes.

Okay. And then separate from that, I guess on the gross margins and that moved up, is that a function sort of construction products becoming sort of a lesser portion in the mix where you have seen margins ramp up in rail products, particularly as I look at it versus Q3?

Well, we’ve had -- it’s not so much the decreased mix in construction, but I guess, number one, what we’ve added which is the Portec acquisition. And as well as we’ve had -- even though we had some sales declines in the construction business we actually had some margin upticks in some of the businesses like piling actually increased their margins in the fourth quarter this year, and our new rail business actually turned in some nice margins this year as well. So, as well as our transit business. So we’ve had some nice improvement in a number of different product areas, it’s not just mix.

Okay, and one more and I’ll turn it over. But on SG&A I think you said most of the increase was associated with Portec. Can you give a dollar figure how much sort of expense is associated with the claim and how much you kind of anticipate here in the first half of 2012?

Yes, I mean most of our -- a lot of our cost obviously has been internal resources Brent, but for the fourth quarter we probably spend about $600,000 to $700,000 with outside consultants and testing labs and that sort of thing. I would think it’s probably going to be easily that much $600,000 to $700,000 for the first half of 2012.

The next question comes from the line of Robert Kosowsky with Sidoti & Company.

I was just wondering if you could go over the U.P. customer claim and so was the genesis of this claim, did it come from this customer or is this customer something else that happened in addition or once the U.P. kind of raised awareness of this alleged issue?

No, it really came -- I mean, it was a fairly sizeable project where we supplied ties to the U.P. and they were actually improving a track the day use as well, but they were doing it in conjunction with another entity. And it was this entity/customer that did some of their own tests with an outside lab and their claim is that this outside lab who we’re familiar with failed -- really this one specific test. We are currently reviewing those test results and we are not getting the same results from our consultants and from our labs. We obviously have a little issue there with regard to the difference in results and certainly why, what's causing some of those differences. That’s what we are looking into today and testing.

Okay. So just to be clear the U.P. allegedly found something wrong and then this customer came in after the fact. So it’s kind of 2 distinct discoveries.

I honestly don’t know which happened first, Rob. A lot of this happened right before our second quarter earnings release. We were notified by the U.P. of its customer test results but we don’t know exactly when they were taken.

Okay, and then what is the DOT investigation here, it was kind of new to me, just kind of any background you can give on that.

It’s new to us too to be honest with you. We were a little surprised. But we got a subpoena from the United States Department of Transportation Inspector General’s office early in January, requesting information related to the manufacture of the concrete ties in Grand Island. Any more than that as far as the genesis or how or why, we honestly don’t know. All we do know today is that we are proceeding with them, we are cooperating fully, we already have provided quite a bit of information to them and I am assuming they are sifting through it and I am sure we will be communicating with them in the future once they digest it.

Okay, and I guess onto more pleasant subjects, the cash flow was great this year. Do you see further opportunities on working capital and what are you looking for a CapEx in 2012, any big projects that we should be aware of?

Well, with regard to working capital next year yes, there’s opportunities in a couple of different ways. Number one, as a matter of fact in our offices today we have quite a few folks from around the world, primarily from the Portec Rail Products Group and they are going through a -- we call a cash to cash Kaizon [ph]. So they are in here and -- because they want to improve their numbers as well. We haven’t -- historically the Portec organization were more focused on the P&L which is certainly a good thing. Not quite as much on the balance sheet and they are very focused on it now and we believe they are going to be able to drive their working capital down a little bit, Rob. With the rest of the organization it’s all about maintaining that working capital as we grow as well and not letting that working capital expand as we grow the business.

Okay, that's helpful. And then just some kind of outlook -- I know you don’t give quantitative guidance but any kind of help you can give for how we are supposed to be approaching 2012, maybe you’re looking for some nice margin expansion this year even if revenue is flattish, maybe up low single digits, is that kind of the right way of looking at it? And I know that you did have some purchase accounting adjustments in there too, so.

We did, you are correct. Those obviously are from the ones that hit the inventory write-ups. It will not reoccur certainly and that was 2.5 million that impacted the first quarter of last year. So, you won’t see that as well. We do have plans in a couple of different product lines to expand margins. But I will tell you that the construction business continues to see an intensely competitive environment as well. So we are going to do what we can to expand margins wherever we can.

Okay, but basically just looking at the piling business as just -- it’s pretty cutthroat right now just given the low volume cyclically.

It’s very competitive.

Our next question comes from the line of Liam Burke with Janney Capital Markets.

Dave, you mentioned in the prepared statements that rail distribution was down 10%.

Yes.

Okay, and when you discussed that it looked like year-to-date that the actual rail product distribution had been pretty strong. Are you seeing any falling off from that or do you have continued momentum there?

Falling off in what part Liam?

The rail distribution part of the business.

Are you comparing the latest quarter to the year?

Yes.

Yes, because for the year the business was up.

For the year rail was up.

For the quarter new rail distribution was down 10% but for the year it was up substantially, it was up over 25%.

Okay, how does it look -- I mean is this a trend where the new rail is trending down or are you looking for this as a...

No, it’s more -- obviously you are aware Liam we don’t sell new rail to the Class I. So it’s the transit market and the Class IIs and the industrial customers. In 2011 we did announce it in -- in late 2010 we had a really big project in New England. It was actually stimulus-related and it was a $25 million project, most of which went in 2011 and so that certainly helped the top line for the rail business this year, but we are also going after other business. We just did a sizeable job down in Columbia a week ago. There’s other projects we are going after and I don’t -- we are not really looking for a significant decline in the new rail business.

Great. Also just to touch on the SG&A side, you’d been pretty pleased with how the Portec integration has been going, obviously with sales, they haven’t lost any momentum on the sales side. On the expense side have you consolidated what you think you can do or is there any more to be done there?

I would tell you there is more to be done. I think we are more than half way through that, but we will continue in 2011 with what we think will be further opportunity in the area of consolidation. It will primarily be in the area of sales and maybe some in the technical support and engineering areas.

Okay. And Dave just one more on the working capital, you mentioned accounts receivable inventory and account payables being the change. Is that from third quarter of 2011 or is that from year end 2010?

Most of them were -- they were from third quarter, Liam. If it was a year ago I thought, I had mentioned that, but most of them were September.

[Operator Instructions] The next question comes from the line of Alan Brochstein, A.B. Analytical Services.

I just want to congratulate you and learn a little bit more about your decision to come to the company. It wasn’t really clear to me from the original press release. You were at Emerson a long time, right?

I was in Emerson 17 years, and thanks for the congratulations. I'm excited about being here. This is a great company, and there is a great management team in place and the opportunity to do a number of things with it, as management and the board looks to accelerate the growth of the company and globalize the business more and take advantage of some of the significant trends in the market place that we think we have number of core competencies from which to capitalize on. So as I look at this business, I think it’s a great place for me to be to work this team that’s here, and to bring some of the expertise that I have in the area of strategic planning and growth, and some of the tools that I know that we can work on for continued margin expansion as well, in order to change the company to a billion dollar business or more.

I was trying to see what type of M&A experience you might have gotten at Emerson. I saw there was an Aperture acquisition. I wasn’t sure if you were involved with Avocent a little bit. Can you talk about some of your M&A experience through what you learned at Emerson?

Yes. I was the one that led the Aperture acquisition which was a software company as well as I did Avocent which was in Server Management Appliances for data centers. I was involved in Chloride acquisition in 2010. So the 2 acquisitions in 2010 that were the largest deals that Emerson made, Chloride and Avocent were in my business group. Prior to that I had acquisitions of companies that were anywhere from $10 million to $200 million in sales, roughly 4 or 5 of them, I would say that were in the United States as well as Europe and Asia. I have been involved in joint ventures with the company and different countries around the world. I guess in all I have never counted them up but I think I probably have been involved in about 6 or 7 acquisitions in my time with the company. In fact, maybe more, because they go back to the acquisition in prior business groups as well when I was in industrial automation. I have done a number of them along the way that include bringing forward those proposals to the Emerson management team all the way through closing the deal.

Great, and just one last question. I know the Portec acquisition seems like a really smart acquisition, and it took a long time. I know you are new to the job right now, but should we expect more M&A in the next year or is that going to take a while, what is your outlook for the M&A front?

I don’t know if I could predict that we will have something that will take place in the next year. We will have to see something that’s awful attractive here pretty soon in order to get something like that done, I think. You can expect to see some going forward, because of the cash of the company is throwing off through our operating performance, is clearly a way that we can help grow the company, but we want to make sure that we are acquiring the right businesses the ones it have some synergies with this company. And once it can take us into the areas where we want to be. Where we can get into maybe more higher technology products, areas that might bring service opportunities to us, and ways where we can just strengthen our overall business model. So as we turn our attention to that we will look both inside of our core markets as well as in some adjacent markets that we serve today and that’s an area that we will increase our attention to as we develop our strategic plans in the coming year, but it’s a bit hard for me right now to tell you what the time frame might be around that.

And the next question comes from the line of Bryan [ph] [indiscernible] Capital.

Can you talk a little bit, maybe a question for Dave what you seeing in inflation commodity prices steel, aggregates, anything that you might look at wage and salary, inflation and/or benefit.

Well, we do have some wage inflation that occurs annually. The -- some of the obviously the commodities we deal in are certainly steel, carbon steel aggregates and cement. Typically, what we do is we are locked into at least 1-year contracts on a lot of our concrete components, Bryan [ph]. So and we obviously price our deals accordingly, so we are usually able to at least recoup those increases. From the steel side, there is obviously the piling business and the rail business, use the carbon steel, the long hot rolled products. And we are seeing some uptick in steel pricing but it’s not extremely steep. As a matter of fact, some of the mills are having trouble holding some of the price increases most recently. So there’s some strength in prices but we don’t see anything right now that leads us to believe that we are going to have any runaway increases this year.

Yes, Dave, if you went back year-over-year what was you be on, say from a year ago, on carbon steel, hot roll?

You know what, it varies, but right now about 20%.

Okay, all right. And then you talked about certainly the bogey you look at with CapEx for the Class I railroads, when you look at the demand from rail road for you guys is it track, is it more concrete ties or is it more focused on what Portec provides?

We hope all 3. But, I mean we are certainly -- when the railroads give us their CapEx numbers, Bryan [ph] we don’t get usually enough discrete information to know exactly how much is going to be up our alley, and necessarily in which areas. But we have been fairly fortunate on the track component side. As we mentioned our Spokane facility’s close to capacity and with the orders we have been seeing across Class I and industrial and transit. Not that we can’t change that capacity, by the way, it’s not like we are totally full up. We can go to a second shift, and we can add capacity. It just takes a little bit effort and some extra manpower. But then on the concrete tie side, Spokane is full up, Tucson is not at capacity but it’s running pretty close for the U.P. And Portec has -- they are not necessarily a backlog driven company so we can't necessarily always tell the next 6 months based on their backlog, but their product acceptance has improved quite a bit. I would tell you over the last 12 months they’ve done a great job proving to a lot of folks that not only do -- does their product lines reduce the wear on the rail, but it also improves fuel efficiency and that’s very attractive to the railroads.

Sure, sure. The insulation in those concrete ties, not specifically Union Pacific, but are those installations on concrete, are those rail lines point to point or are those primarily just for more load bearing and see like a rail yard?

It depends. I mean there are some projects that are pretty big and they are point to point. Other ones are specifically for curbs and heavy haul areas.

Okay, okay. I didn’t hear you what you thought your CapEx number from a cash flow standpoint for 2012?

We, right now, based on some of the opportunities we are seeing we are thinking between $8 million and $10 million.

Okay, okay and then your debt deleverage plans for 2012 what might you pay down?

Well, there is only 2.4 out there. Just typical debt service will knock down probably half of that this year.

Okay, okay. And then if you guys now you’ve had had Portec in 2011, what do you -- you talked a little bit about the cash collection cycle or whatever, the Kaison [ph], any other issues looking at factory expansions, capacity, the ability to extend product, niche acquisitions, what do you see from the standpoint of managing Portec?

Well, when you say acquisitions are you talking about other acquisitions?

If you look just Portec, specifically that you guys now manage it. Are there specifically would you say, well, we probably have to add some capacity there or there may be some product lines that we want to extend or we might want to do some R&D or how do you see managing the Portec business, where would you -- or is it something that is nearly refinements and really aren’t huge issues in managing the business?

Well, yes, I would say it’s definitely more than that because as you look at their product lines there are some great technologies there to begin with, but that team has a number of ideas of additional new products that they would like to fund that we think we absolutely can fund. There are opportunities to take those products into customers that the current rail team has access to that they weren’t approaching in the past. So, we believe we have some additional synergies where we can open customers to those product lines. There’s clearly opportunities to take some of those products into other countries as well, which is something that we’ll focus on in the coming year. I don’t see it as an issue where any of that growth is constrained by capacity inside of that company at this point. So, the bulk of our attention will really be on trying to make sure we invest in the best product programs going forward and then expanding into these markets that we think are under served by their products.

Okay. And then one final one. Could you give me a sense, capacity utilization, if you look at railroad construction in tubular, how many shifts might you be running in the different areas, maybe over time, what you might think of capacity? Just give me a sense from where you are operating. You talked a little bit about Spokane and its capacity -- give me a sense of the whole manufacturing footprint, if you could?

You mean across the board, Bryan [ph] or?

You don’t have to go by factor, but maybe just division by division, railroad versus construction versus tubular. Give me a sense, are you running 3 shifts in the rail side, 1 in the construction?

We are typically -- right now for the most part we are running one shift in the rail business.

Okay. Okay and then across the other 2 tubular and the other, construction?

Tubular, we just ramped up a bit over the last month or so because we have got some orders that are sort of stuck together a little bit. We’ve got a lot of stuff that is customer required coming up over the next 4 to 5 months. So we are running a couple of shifts in tubular.

We have just opened a new plant there in Texas which has much greater throughput than the prior facility as well.

Okay, and then anything, any headcount additions, any overtime that you might be seeing across the different divisions?

Nothing significantly different in where we are at today, no.

The next question comes from the line of Robert Kosowsky with Sidoti & Company.

Yes, just a couple of follow-up question. What was the backlog for the 3 segments? I think I missed it.

We gave the total backlog Rob. We didn’t disclose the backlog by segment.

Okay. So wait for the K to come out, then. Okay. And then one other question, too. If you take out the Grand Island portion of the comparison, what was the legacy rail business up, just trying to get a sense of how that compares to what the Class I CapEx was?

The rail business was, for the year or for the quarter are you talking about?

For the year, and I'm trying to isolate -- take out the fact that you were shipping tie in 2010 versus the fact you weren’t -– I want to exclude that, just kind of...

Yes, my comments, legacy was up 5%.

Yes. It was up 5% and do you want to adjust for Grand Island?

Yes, just the fact you weren’t making ties at Grand Island the entire time in ‘11. So just a kind of?

Well, if you adjust for Grand Island then the rail business would have been up closer to probably 13%.

The next question comes from the line of Scott Blumenthal with Emerald Advisers.

Bob, could you talk about how you are looking right now at your construction business? Obviously that’s the business that’s struggling a little bit right now. And kind of what your outlook is for -- sales remain flat, do you think that you need to do anything with this business over next few quarters? Are you inclined, based upon what you know about the market right now, are you inclined to maybe shrink the business a little bit or do you see at this point that this is a time maybe to expand and invest in it?

Well, obviously when you take a look at some of the market dynamics there were parts of that that didn’t help us this year. But setting that aside, this is not a business that we are looking at intentionally shrinking in any way. In fact, in many parts of it, there is as much opportunity in it as we think there is in our rail segments. There is a portion of some of this comparison that comes off of 2010 where there were some spending, that stimulus money, and those types of projects helped it, which makes some of our year-over-year comparisons a bit difficult. But we are as optimistic about that business as we are in many of our businesses and we will be looking at places where we can invest again in some of our product lines and areas we think are going to be the higher growth markets. I need a little bit of time to take a look at that and develop I think a deeper opinion on it, but it’s clearly not one that I would say fits into a category where we are going to intentionally decrease it or in some way put it in idle.

Okay. So it sounds like from your comments that you are implying to invest a bit in it at this point because of your outlook. Do you look at maybe kind of consolidating some of the current product lines that you are in, meaning consolidating the marketplace or you are looking for new services, niches, and the construction materials business, and maybe you can give us some example of some of the type of things that you are thinking about.

If your comment is around consolidating means consolidate the marketplace by acquiring people to do the same thing that we do, I would probably tend to say that’s not what where we are going to head, but again it may be a little bit too early to tell, but that doesn’t strike me as the most valuable way for us to move forward. I think the construction business, like our other businesses, there’s a lot of ideas that we have about spaces that we could move into, regions of the world we can move into, and in some cases some of those are a little bit more difficult than a few of our other products, but I think there’s opportunities throughout Latin America, particularly in that segment and I think our bridge business could be one that could continue to grow in the future as infrastructure spending favors that particular category. There is a lot of worn out infrastructure in this country and a whole lot of other places. So we think that we will be able to take advantage of that, going forward.

Okay, sure is. Can you talk then -- I guess this one is for Dave. Dave, you made a comment a few minutes ago about only having a couple of million dollars of debt. You are sitting on a pretty nice pile of cash there. Can you talk maybe about the priorities for that?

Well, the priorities for it is going to be pursuant to -- Bob has been here all of 3 weeks Scott, but he has hit the ground running really hard. One of his priorities is to assess and more than likely develop strategy further. Strategy is what's going to drive our acquisitions and other things that we do. And that’s where obviously we want to have the liquidity to be able to do that. So I still view us as in growth mode, so we are going to -- we initiated the dividend last year. We will certainly, on an opportunistic basis look at share repurchases, but the brunt of our liquidity I believe will be reserved for organic growth and acquisitions.

Okay, maybe you will have a different answer to that question after Bob has been here for 4 weeks.

We’ll let you know.

Ladies and gentlemen, this concludes the question and answer session for today’s call. I would now like to hand the call over to Mr. Robert Bauer for closing remarks.

Well, I appreciate all of your questions. I appreciate your interest in the business. I will look forward to some of the future calls that we have. I am optimistic about what 2012 holds for the company. So, I am sure as the next few quarters unfold you will have a lot more things to ask us about and I look forward to meeting with several of you in the coming months here. So thank you for joining us today.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect.