L.B. Foster Company Reports Operating Results (10-Q)
L. B. Foster Company is engaged in the manufacture fabrication and distribution of rail and trackwork piling highway products and tubular products. For rail markets Foster provides a full line of new and usedrail trackwork and accessories to railroads mines and industry. Foster also sells and rents steel sheet piling and H-bearing pile for foundation and earth retention requirements for the construction industry. For tubular markets foster supplies pipe and pipe coatings for pipelines and produces pipe-related products for special markets. L.B. Foster Company has a market cap of $307.2 million; its shares were traded at around $30.3 with a P/E ratio of 15.7 and P/S ratio of 0.6. L.B. Foster Company had an annual average earning growth of 78.6% over the past 5 years. Highlight of Business Operations:During the second quarter of 2009, along with Union Pacific Railroad (UPRR) personnel, we inspected the ties in question to confirm the number of cracked concrete ties. Upon conclusion of this inspection, we recorded an additional charge of $1.1 million within cost of goods sold during the quarter ended June 30, 2009 bringing our cumulative warranty charge related to this issue to $2.7 million.
In May 2009, we completed the formation of a joint venture. We have a 45% ownership interest in the new joint venture and made initial capital contributions of $0.7 million in June 2009 and $0.2 million in July 2009 as part of our total initial capital contribution of $0.9 million. We are also required to make additional capital contributions of $1.4 million to the joint venture. This venture will build a facility to manufacture, market and sell various products for the energy, utility and construction markets. This investment will be accounted for under the equity method of accounting as we have the ability to exert significant influence, but not control, over operating and financial policies.
As of June 30, 2009, we reported investments in available-for-sale marketable securities with a fair value of approximately $3.9 million. In July 2009, we sold a portion of this investment for approximately $2.1 million in proceeds and recorded a corresponding gain of approximately $1.2 million.
Net income for the second quarter of 2009 was $0.26 per diluted share compared to net income per diluted share of $0.69 for the second quarter of 2008.
Our gross profit margin includes our current estimate of the impact of the LIFO method of accounting for inventory. Due principally to declining steel prices, we currently anticipate a positive adjustment resulting from our provision for LIFO and recorded our 2009 LIFO adjustment estimate as of June 30, 2009. The prior year period included an estimated negative impact caused by inflation. Gross profit was adversely affected by the $1.1 million warranty charge related to concrete ties that failed in track and adjustments of $2.6 million related to the return and subsequent write-down of concrete ties refused by the UPRR. These charges were previously discussed in more detail within the Recent Developments section and were both recorded within our Rail Products Segment.
There were two overriding causes of the decrease in our Rail Products gross profit in the 2009 second quarter. The first was a net unfavorable charge to gross profit of approximately $2.6 million in connection with the product return by the UPRR at our Grand Island, NE facility. The second cause was associated with the in track failures of our prestressed concrete railroad ties produced at our Grand Island, NE facility first identified in the first quarter of 2009. During the second quarter of 2009, we recognized an additional $1.1 million concrete tie warranty expense associated with the review completed by L.B. Foster Company and the UPRR over the impacted ties. In addition to these concrete tie related matters, our Spokane, WA facility experienced margin contraction from the lower sales of higher margin concrete turnout ties.
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