L.B. Foster Company (FSTR) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Second Quarter 2015 L.B. Foster Earnings Conference Call. My name is Jasmine, and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to your host for today Mr. David Russo, L.B. Foster Chief Financial Officer. Please proceed.

Thank you, Jasmine. Good morning, ladies and gentlemen. Thank you for joining us for L.B. Foster Company's earnings conference call to review the company's second quarter 2015 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 review the company's second quarter performance and provide an update on significant business issues as well as company and market developments. Afterward, I will review the company's second 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 30 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 businesses and markets, cash flows, margins, operating costs, capital expenditures and other key business metrics and issues. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from statements we make today. 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, except as required by law. All participants are encouraged to refer to L.B. Foster's Annual Report on Form 10-K for the year ended December 31, 2014, as updated by any subsequent Form 10-Qs or other pertinent items 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. In addition to the results provided in accordance with United States Generally Accepted Accounting Principles, our commentary includes certain non-GAAP statements including earnings before interest, taxes, depreciation and amortization as well as results that exclude certain charges related to the Union Pacific Railroad and warranty claim and lawsuit. A reconciliation of U.S. GAAP to these non-GAAP measurements have been included within the company's 8-K filing. Statements referring to EBITDA or adjusted EBITDA are considered non-GAAP measurements and while they are not intended to replace the presentation of our financial results in accordance with GAAP, the company believes that the presentation of the EBITDA, especially after the recent acquisitions will provide additional meaningful information to investors to facilitate the comparison of past, present and forecasted operating results. With that, we will commence our discussion and I will turn it over to Bob Bauer.

Thank you, Dave, good morning, everyone. Thank you for joining us today. We’ve quite a bit to cover today as there are number of points to make to help you understand what affected the quarter in the year-to-date results. Two of the more significant topics that I'll speak to are the impact on earnings from the energy acquisitions and the change in the overall outlook for 2015. Before I cover those I'll comment on the overall results and performance of the company as mentioned in our press release. Sales were up 3% for the quarter and up 11% for the first six months, acquisitions were the key contributors to the increases our Tubular and Energy Services segment more than doubled sales on a year-to-date basis and the bulk of the acquisitions are in there. Construction is up 21% for the first half of the year and 18% in the second quarter. Our Precast business is really been going well and our Piling business was also up. These increases helped us overcome declines in the Rail business segment which were driven by first greatly reduced volume from Union Pacific Railroad and two what were expected sales declines from transit products, our rail distribution business and our European business, which also included some headwinds from currency. Our gross margins continue to improve they were up 70 basis points in the quarter and 60 basis points on a year-to-date basis when comparing to the prior year results. And those again are adjusted for concrete tie related charges that they’ve spoke of in both years for comparison purposes. When I look at the marketplace and take into consideration that pressure on steel prices persisted through the quarter. I feel like we've been managing through this environment fairly well right now, still content varies considerably across our product lines in some segments the impact from steel prices affects the top line sales more, in other segments it has more of an impact on raw material costs and inflation or deflation in the recent case here happens to be more significant. But we tend to be able to adjust cost to avoid any margin compression and so our margins have looked pretty good. In my opinion, the net gross margin performance for the rail segment again adjusted for these warranty charges was up over 100 basis points in the quarter and in the first half. Our construction gross margins reached 20.8% in the quarter that was up 240 basis points and it’s up 70 basis points for the first half. These two businesses did a great job helping us overcome the difficult environment that we faced in the tubular and energy services were our gross margins were 500 basis points below last year's results in the quarter and 200 basis points below prior year-to-date results. SG&A increases that we have reported coupled with the interest and amortization charges that are in our reported results unfavorably impacted the pretax income, which resulted in a dilutive effect on pretax profit margins and EPS in the quarter in the first half. I think that’s the most significant news for the results that we reported. The SG&A increases, they’re largely driven by the new companies we added, but the net result is that the acquisitions were not accretive to earnings in the quarter. EBITDA for the second quarter was down 5%, but for the first half of 2015 it's up almost 12% at $28.8 million. The impact from acquisitions on EBITDA has been favorable through the first half of the year. So what I’d like to do is talk a little bit more about the acquisitions. As a reminder, we closed on two energy businesses that is IOS and Chemtec Energy Services. And we also closed on TEW Engineering, a UK-based rail and automation systems company, this all happened from the last day of 2014 through the first quarter of this year in 2015. We remain very pleased with each of these companies. TEW Engineering has a great potential not only in adding value to our European business, but also in solutions that can help us penetrate rail and transportation customers world-wide. Their engineering team is going to be a significant asset to our rail business organization. IOS and Chemtec are equally attractive as two additions in our tubular and energy services business. However, the first half of 2015 includes results that do reflect the weak market conditions that have been brought about by the fall in oil prices. We anticipated these conditions and as we described in prior months, we decided to enter these businesses of the time that we believed was near the low point in the market cycle. And this brought opportunities to acquire great companies with valuations that took into account. The fact that oil prices were dropping and production growth would slow in the U.S. I’d also took into account our view that price volatility was based on global market share strategies and not on a prolonged recession. And so we assume that one of the prices of oil would not rebound prior levels, but the U.S. would still need tubular services and products to keep oil production even flat at $9 million barrels per day and the production would begin growing again after market stability returned. In addition gas is also at a low point in conversion to using gas as a primary fuel source versus other sources like coal continued to progress. We’re specifically seeing this in the utility industry. So this environment is primarily an issue for IOS more than it is for Chemtec. Chemtec Energy Services is a measurement solutions company that’s mostly focused on midstream pipeline markets and wasn't expected to be impacted as much by declining oil prices. So if I go back to our investment thesis it projected that drilling in completions would increase in the next five years for long-term strategies that we believed in once our market stability returned these markets would continue to grow and the thesis was based on two key drivers that the current E&P production level will not keep production even at flat output levels and that’s factoring in productivity as well. And second that inventories for tubular products required for drilling and encasing including lateral drilling had been depleted in the marketplace and that inventory would need to be restored. Our investment thesis also projected that spending by pipeline operators especially midstream applications would continue as the need for lowering cost to transport liquids and gas would continue to drive demand as well as the need to continue accessing these new development territories. Now for the last six months, we've had time to watch the market react to the new environment on factors already been an uptick in the rig count some might think of about has a bit of a head fake maybe it is, but we certainly expect some long-lasting changes that are going to take place in the E&P market, some of this includes much greater emphasis on return on investment by well or by location. There is going to be much quicker reaction to the changing conditions the kind of reactions whether as price spikes get in and get out quickly, take advantage of those sorts of things, but they're going to be I think much more responsive in the market and there is going to be much greater emphasis on cost reduction and cost controls. And in our opinion more positioned to help with these, we are making changes to provide even greater differentiation along those lines. We are closer to the customer with wider coverage across the U.S. than most other suppliers are capable of being very responsive as operators want to get in quickly, in and out quickly, our field services can perform test and inspection at the jobsite in some cases helping lower cost and we can work with anyone's tubular side including foreign pipe which is the operator's decision and their inventory. We think that puts us in a very unique position. In the midstream area we continue to see less disruption to project activity although some of the customers reserve or in both E&P and the midstream business. As an example, our coated products business which has significant exposure to midstream customers it’s have the 20% increase in booking orders in the first half of 2015 and our backlog at the end of the quarter was up 41%. Sales in the second half of 2015 for coated products are expected to improve. We have completed our factory upgrade in Birmingham, we have improved productivity and delivery capability and we’re seeing pipeline operators keep projects moving forward as the product still needs to get from point A to point B. So some of the same factors are contributing to demand for the measurement systems and solutions that Chemtec Energy provides. Their code activity is roughly equivalent to where it was in 2014. The competition however is a little tougher. There is some price pressure that’s bleeding over into this segment I think from the E&P segment, but the need to move product from point A to point B more efficiently as operators discussing projects that in our view are intended to go forward and we are going to continue to monitor as closely as we certainly face an environment that’s very difficult to predict. So let me turn to this dilutive impact on earnings that we had while Q2 in the first half sales and gross margins have been favorable compared to prior year, net earnings and profit margins of declined on a year-over-year basis. We previously anticipated that the recent acquisitions would be accretive. However the energy market conditions have impacted volume and pricing enough that the income from acquisitions was not sufficient to cover the increases in both interest and the amortization costs associated with them. In the first half interest and amortization charges alone are up $5 million over the prior year that's a 32% EPS headwind that we needed to overcome. We did overcome some of that, but not all of it. Our first half results also include costs associated with closing these acquisitions. And then in addition to that our Rail business is continuing to make adjustments for the loss of sales from Union Pacific. We did recognize costs in the quarter related to our inefficiencies as the sales volume decline and their number of operations dealing with volume adjustments which are taken place that are more rapid pace than we originally predicted. Rail segment sales for your information the Union Pacific for this quarter were $5.7 million so in comparison that’s down from $9.8 million in the second quarter of 2014. Looking at SG&A, they reported SG&A increases as I mentioned are largely from the acquisition impacted but in addition there's acquisition-related costs there is also costs associated with the Union Pacific litigation that are in there. We are continuing to fund our SAP project, which is going very well at this point, but we are deferring other expenses everywhere we possibly can at this point. So that has led us to our revised outlook. Our revised outlook is no longer anticipating improvements in the energy market in 2015. Sales for IOS and Chemtec have been reduced in the second half to reflect this current outlook. We've also lowered sales for Rail products due to the termination of our supply contract on concrete ties with Union Pacific. And sales of Rail products to UP they were approximately $24 million in the second half of 2014, that’s last year second half. And so these sales will not occur in the second half of 2015. We widened our forecasted sales range for the full year as many of the factors discussed led do environment that’s making it more difficult to forecast. Without an improvement in sales volume the acquisitions will continue to have an unfavorable impact on EPS for the next two quarters. We lowered and widened our range on forecasted earnings as well and have also reflected the dilutive impacts of the acquisitions are having. In addition the EPS forecast is also taken into account a reduction in earnings from our joint venture, LB Pipe & Coupling which serves the Oil Country Tubular Goods markets we don’t consolidate that acquisition but we do benefit from the earnings to it which typically contribute each year that business is off. And there is a reduction of the rail profitability due to the sales volume adjustments that I just spoke of. Now EBITDA on the other hand continues to improve over prior year reach $28.8 million in the first half of 2015 and were forecasting EBITDA in the range between $65 million and $71 million which would be an improvement over the 2014 non-GAAP number of $60 million. And we will continue to focus on EBITDA improvements over prior year as well as cash flow for the balance of the year, by the way IOS and Chemtec our cash flow positive both have taken actions to lower costs to align with their business levels. We are going carefully manage SG&A spending in all areas of our business in the coming quarters assuming there's no change in sales activity and that means improvement in sales activity and we’re going to carefully manage capital spending over the remainder of the year and intend to reduce what was originally planned for the year. So we’ve got some work to do and we’re getting after that. And so with that I hope that give you some insight into our view of things. I am going to return it back to Dave here and he’ll go through the second quarter and some other important numbers.

Thank you, Bob. As discussed in our earnings press release L.B. Foster's operating results included certain costs related to the Union Pacific product warranty claims and lawsuit. In the second quarter of 2015 we incurred charges of approximately $4,000 related to the write-down of certain assets in Tucson, Arizona attributable to the receipt of a termination notice from Union Pacific regarding our concrete tie supply agreement. We also incurred just over a $150,000 of litigation costs in the second quarter. In the second quarter of 2014 as we have discussed previously, we incurred a $4.6 million pretax warranty charge related to concrete railroad ties. There will be times during my discussion when I specifically exclude these costs to facilitate more meaningful comparison of operating results. With that net sales for the second quarter of 2015 were $171.4 million compared to $166.8 million in the prior year a 2.7% increase. The sales increase was due to a 99.7% increase in tubular and energy services segment sales and an 18.4% improvement in construction segment sales partially offset by 19.2% decline in rail products and services segment sales. The tubular and energy segment sales increase was due to the sales contributions made by the December 2014 Chemtec Energy Services acquisition and the March 2015 Inspection Oilfield Services acquisition partially offset by a decline in coded and threaded product sales. The construction product segment sales increase was due to increased sales in our precast concrete products division, which includes the third quarter 2014 Carr Concrete products acquisition as well as to an increase in piling product sales. The decrease in rail products and services segment sales was due to reduced sales in the Rail Distribution, Allegheny Rail Products, transit products and rail technologies businesses partially offset by sales contribution from our January 2015 TEW Engineering acquisition. So these reductions in an rail sales were attributable to a number of factors including a $4.1 million reduction in Union Pacific Railroad sales, a $1.3 million reduction in sales due to fluctuations in currency rates a general softening in rail products. In general as Class I commodity car loadings declined by 7.6% and sales in our transit products business were also negatively impacted by $3.6 million due to its Honolulu Transit Project coming to a close. As a percentage of second quarter of 2015 sales tubular accounted for 20%, construction was 29% and rail totaled 51% of consolidated sales. As mentioned in our earnings release second quarter bookings were $163.2 million an increase of 1% compared to last year’s second quarter due to a significant contribution from acquisitions completed since the third quarter of 2014. Tubular and energy service bookings increased 224% excluding our recent acquisitions tubular bookings would have increased by 41.5%. Rail products and services bookings declined by 22.9% in the current year quarter. On a year-to-date basis rail bookings are down by 14.5%. Construction products bookings declined by 7.4% principally due to order reductions in the piling business partially offset by bookings of Carr Concrete products which we acquired in Q3 of last year. Order backlog stood at $207.8 million at the end of the second quarter of this year down 16.2% from the second quarter of 2014. The decreases was principally due to reductions in our rail distribution concrete ties in piling products businesses partially offset by the backlog of acquired businesses as well as increased backlog in certain of our legacy businesses including transit products and coated products. Gross profit margin was 21.6% in the second quarter of 2015, 70 basis point higher than the prior year quarter after excluding the prior year and current year warranty related charges from the Union Pacific Railroad warranty and for lawsuit. The improvement was principally due to increased rail and construction margins partially offset by lower tubular gross profit margins. Our rail improvement was due to operational improvements and our rail technologies and concrete tie businesses. The construction segment expansion was principally due to increased piling products margins and volume driven precast buildings gross margins. Selling and administrative expenses as Bob mentioned increased by $4.7 million or 23.9% to $24.3 million in the second quarter principally due to the inclusion of costs of our acquired businesses, increased personnel related costs in our base business as well as integration activity costs. Second quarter S&A expense represented 14.2% of sales as compared to 11.7% of sales in the prior year quarter. Second quarter pretax income was $7.8 million or 4.6% of sales compared to $10.2 million or 6.1% of sales in the prior year. After excluding costs related to the Union Pacific warranty and lawsuit pretax income declined by 42.5% to $8.3 million for the quarter. As mentioned in our earnings press release, the effective tax rate for the second quarter of 2015 was 31.5% compared to 32.9% in the second quarter 2014. The decrease in the rate was due principally due to the recognition of favorable uncertain state tax positions during this year’s second quarter. EBITDA has adjusted for warranty and litigation costs in the current and prior year quarters was $16.8 million for the second quarter of 2015 compared to $17.6 million in the prior year quarter a decrease of 4.4%. On a year-to-date basis however adjusted EBITDA was $28.8 million compared to $25.8 million an increase of $3 million or 11.7%. Turning to the balance sheet working capital net of cash increased by $12.8 million in the second quarter this was due principally to accounts receivable increase by $9.8 million in the quarter. Our business DSO at June 30, 2015 remained at 49 days, but the consolidated company DSO was 51 days as all acquisitions now have enough history to be included in the calculation. Inventory remained relatively unchanged from March 2015 as did accounts payable and deferred revenue. Cash provided by operating activities in the second quarter was $5.5 million compared to a prior year and $0.5 million dollars usage of cash. On a year-to-date basis cash used in operating activity was $1.9 million in 2015 compared to cash generated in the prior year of $31.7 million. As we have discussed on previous calls the prior year was favorably impacted by significant reduction in accounts receivable which was anticipated as we resolved slow collections on certain projects and customers that built up in the second half of 2013. Capital expenditures were $3.8 million compared to $4.2 million in the prior year quarter and year-to-date we have spent $8.2 million in 2015 compared to $7.7 million last year. We anticipate spending approximately $15 million to $17 million in capital programs for all of 2015 which includes our ERP program. The 2015 anticipated capital programs are inherent in all three business segments and are aimed at providing new and expanded manufacturing capabilities and improved service and product availability to the customer, and increased manufacturing efficiencies in future periods that we believe will improve shareholder value on a longer-term basis, based upon recent results however we have scaled-back certain capital programs until we see improved cash flow performance. We anticipate that full year cash generated from operating activities will exceed capital expenditures debt service payments, dividends and share repurchases in 2015. Debt at the end of June was $218.5 million relatively unchanged for March. As described in more detail previously our new revolving credit agreement was amended and restated during the first quarter to accommodate the increased acquisition activity. So in summary we intend to proactively manage expenses, capital expenditures and are resulting cash flows very closely during the coming months. That concludes my comments on the second quarter. And I will now send it back to Jasmine to open up the session for questions.

[Operator Instructions] And our first question comes from the line of Brent Thielman from D.A. Davidson. Please [Technical Difficulty].

Hi, good morning.

Hello Brent.

I guess within that new EBITDA guidance what you are building in for the energy acquisitions and can you remind us what you are kind of assuming for EBITDA?

You’re talking about…

For the energy acquisitions is what you are - what you are building in for the year for EBITDA?

There are so many different acquisitions that we have that are you know starting in Q3 of last year with Carr Concrete all the way through IOS in March of this year that we’re just not going necessarily break them out right now. And especially to provide the deltas as far as what we originally expected and what we expect currently.

Okay, but I guess I mean just thinking about the energy business in general, kind of going to the second half of just kind of a quarterly run rate we should think about I mean in terms of profit contribution?

Yes, I mean obviously we - coming into the year we expected the energy acquisitions to be accretive and we’ve certainly based on recent run rate of the quarter Brent, have changed our focus on that they obviously struggled more than we originally anticipated. So while there is obviously still positive EBITDA coming in future quarters the expectations of the energy acquisitions especially have declined substantially from Q1 to where we are right now.

Okay and then just on the rail side I mean your 19% decline in sales that the margins are holding up fairly nicely is there an anomaly in there or and as we this pressure into the second half but do you expect that slip a bit more.

There's no anomaly in the gross profit numbers if you are kind of asking whether or not there was sort of a one-time impact or something that made the number favorable when you might have expected it to be less favorable given the volume loss there is you know there is some favorable mix in there. We do have a more product sales and the little less distribution sales that’s helping gross profit margins. But we basically have a lot of cost reductions that have been coming through we've got some restructuring in facilities that are helping we’re consolidating some products into some of our existing factories we’ve been moving a factory from my Montréal into Niles Ohio, those things are leading to just better management of our cost of goods sold. So there's clearly an impact in there from that.

And then I guess just lastly I know you're still digesting these deal to an extent love to get your thoughts I guess on appetite to look at maybe more aggressive buyback at this point any color there?

Yes, buyback of shares.

That’s right.

Yes, we are approved to do that. We are continuing to have some conversations along those lines and given where the stock price is I'm sure that we’re going to have more discussions about pulling the trigger on some of that.

Okay, thank you.

We don’t have a number to put out there right now, can’t tell you anything specific about it, but it's certainly an attractive point.

Okay, understood. Thank you.

And our next question comes from the line of Mike Baudendistel from Stifel. Please proceed.

Thank you. First with the reduced guidance for the acquisitions does that change your thinking at all as far as having to pay the earn out associated with IOS acquisition?

Yes absolutely. I can't tell you exactly where it's going to land until we have a little bit more time under our belt. But it is - it just isn't likely to be very much if anything at all. But you got to wait for a more definitive answer on that, but it's going to be awful difficult to do anything significant there given the way 2015 is shaping up.

Okay that's helpful. And then I just want to make sure I understand your rationale for the reduction in the guidance for the acquisitions. And it sounds like that lower energy prices should not have been unexpected because the lower energy prices were already there before the acquisitions were completed and negotiated. And was a more of the markets responded more negatively to lower energy prices than you were anticipating or was it some mostly other factors that you described in the midstream et cetera.

Now, you hit it with them, I think your middle point there the market reaction in the anticipated level of business that we thought we were going to see, it just didn't come in. So we had clearly lowered our forecasts for all of the energy related acquisitions. The one that we knew would be impacted most was IOS. It’s I guess, I’d say I can it is the forecast that we are missing the most. And so while we thought we had it lowered to the point that we were in any pretty safe area, we didn't lower it enough. And so it's just been a bit more severe and it hit us a little faster than we had anticipated.

Okay. And then on the Union Pacific business, I guess it was under the impression that there was a longer-term contract in place with Union Pacific where they would by a specified number of concrete ties. Was I right about that and so that they walk away from that contract completely?

You were right about that and that is precisely what happened, may have chosen to send us a termination of our supply agreement to provide concrete ties, which they have claimed was a result of our breach of contract and we would claim that we are not in breach of the contract.

Okay. And then the last one from me I guess the data has been about whether the Union Pacific is fully surprising of the shares at this point. I mean can you help me quantify some of the risks from here in terms of legal costs you are expected to incur or what they're suing you for or anything that might be helpful there?

Well, I'll state what I believe I can that we have adjusted the forecast now for the company sales to appropriately reflect going forward the fact that we are not doing business with Union Pacific. So for example there are concrete ties sales that are no longer in our forecasts. So we've made the adjustments in that new outlook that take that into consideration. We also have in our reported results for the quarter in the first half litigation costs that we have experienced and we have litigation costs and everything associated with that litigation, we have costs for that in our second half forecast for 2015. I think beyond that I'm not sure that I could comment on anything else related to that litigation outcome other than the fact that there is still a reserve that is on our box for warranty related charges for concrete ties the we believe is appropriate under the current circumstances.

Okay. Great, thanks very much.

That’s okay.

That’s helpful.

Okay. Thanks Mike.

And our next question comes from the line of Beth Lilly from GAMCO Investors. Please proceed.

Good morning.

Good morning.

I have several questions so the reduced guidance I'm trying to understand part of it is due to your acquisitions, but and part of it’s due to the loss of the Union Pacific business right?

Correct.

Okay. So can you split out - can you divide up in terms of what’s due to the acquisitions and what’s due to the UK?

Those are numbers that we decided to not provide that level of detail on this call at this point.

Okay. So let's talk more about the UP. So in terms of the UP and several different levels of questions here. What’s the number of ties that are still in dispute with that?

Well, you're going to go into a lot of details and I think what we have to do is we got to use our 10-Q which has a lot of that information in it. If I start to answer that we’re are going to be on here for a while. We are providing that in our 10-Q filing, we’ve listed the 2013 dispute, the 2014 dispute essentially to put those numbers out there to help people understand where the dispute stands at this point.

Okay, because I have the queue in front of me and it doesn't - it only talks about one and a half million ties that you had your original supply contract. I mean so I'm trying to figure out the original dispute was resolved and then they came back and said there were more ties and so is it 3 million ties now been earned in dispute I mean I’m looking for the numbers and I can't find them here?

Yes, okay. Yes, well I guess it was the 10-K that we had outlined more of those disputes in there, let me put it into two categories for you. There are disputes over the ties that have been submitted on warranty claims. What that refers to is the fact that there were claims that they made four ties to be replaced under warranty that we are stating are not eligible for warranty for a variety of reasons. The second part of your question I think then has to be put into a category of how many ties are in the field still and what made the claim that is a number I can provide you the latter one and so it’s something that we just can't say the number to. We furnish them originally 3 million ties that are far less than that in track now because many have been replaced and we just - I didn't bring those numbers into this call with me on the ones that have been submitted already because we have been putting them out there and print before and they are not in this queue, but they are in prior document.

Okay.

We are happy to furnish those as the follow-up because we have furnished them in the past and writing and so that's nothing that we can’t dig up from prior correspondence.

Yes. Okay. So is there any way that you can quantify the potential liability then with UP.

I cannot quantify that for you we have a dispute its underway it is now moved into a category of litigation and we are basically telling anyone that were defending our position because we believe were doing the right thing for the company and for the shareholders.

Okay. So the second question I have been is - so that the UP has basically they have what’s that they're terminating the supply contract. So you will know are you disputing that there was a contract are you just letting them walk away.

They have chosen to terminate the supply agreement that pertains to concrete ties that we sell them.

Okay.

And so there were other products that we have sold them as well they're not all under contract.

Okay.

We are just disputing that we are not in breach of the contract, but that is not changing the direction that this is taken.

Got it, got it, Okay. And have you talked about what's the total amount of revenue, you gave us the revenue with the UP this quarter which was five point with it strictly ties that you supply to them this quarter of $5.7 million.

No, no that is sale all of the numbers that we are quoting our total sales of rail products.

Got it.

Because we're essentially moving down the path where all of those sales are going away concrete ties and other products. So we mentioned what happened - the difference in the quarter from prior years it down $4 million from last year to this year. And then I also quote effected in the second half of 2014 we sold them approximately $24 million worth of all rail products which are not now expected in the second half of 2015.

Okay. Okay.

So that’s a headwind comparison for the second half of 2015.

Got it. Okay, okay. And then one last question about so it sounds like then you're just expecting the UP to go ways the customer that?

That is the position that Union Pacific has taken with us we’ve coursed didn't want to see a move in that direction, but once they move forward with their decision to take our concrete tie dispute toward litigation they also have taken the decision to end our commercial relationship at this point.

Yes, is it far to go and replace that concrete tie business with another customer or can you go find some can you go to the other Tier 2 or the other Tier 1 railroads and try to fill that capacity?

Our sales to Union Pacific for concrete ties were in the neighborhood of $10 million per year. It is not easy to replace that with other customers because the concrete tie market is not that large today nor easy to take share. There is a possibility that we can replace some of that including in the transit market and other areas but it's not something would be able to do you know in a short period of time. But I would say you know we’re talking about $10 million of sales in a $700 million of annual sales company.

Yes, okay great. Thank you I appreciate the answering all my questions.

Thank you.

And our next question comes from the line of [indiscernible] with Macquarie Capital. Please proceed.

Good morning and thank you for your time. I wanted to pick up on rail sales to get back to the detail about sales decline year-on-year about $20 million of declines you have been about $8 million the Union Pacific and transit, but what are the other big drivers of the remaining $20 million in revenue from that going forward? Thank you.

Well, that the areas that we mentioned you mentioned transit. So you're aware of that one there is our rail distribution business. Our distribution business compared to prior years not quite running at the same pace that really means base rail product that we sell to the short lines and to the transits is off. And we are seeing some decline in our Allegheny Rail Product business as well. And again I'm speaking of non-Union Pacific impact here. It’s been just a little bit softer than where we were at this time last year. So volume is down in the area of freight rail if you listen into what's going on in the freight rail market. So we’re seeing some of that but the other area that I mentioned to was Europe. And we have plan to be down in Europe, because we just - we had a great year there last year in our automation handling business. And it was just going to be difficult for us to have a repeat performance. So that's one of the other areas that’s off.

So in the $12 million, which would be the first remaining the third biggest level of the decline year-on-year? Next to Union Pacific…

It would be our rail distribution piece.

Okay, appreciate that.

Yes, that would be more than half.

Is that Union Pacific just maybe get back to the prior questions, it’s make get easy for us you would seem like the sales under dispute about $50 million order of magnitude of which you placed the warranty for half is that fair and processes is there that potential litigation the cost of additional replacement it should be other half of $25 million. I also point that 10-Q that Union Pacific is not saying ties out of the Tucson facility also. So can you frame for us, how much you still going to get out of there and then maybe add to this $5 million total ties estimate? Thank you.

Just a moment. Maybe we would just compare. I'm not sure we’re getting the right sense of what your question is?

I am asking if you can compare this broad calculation at the value of sales in Union Pacific for the period under this year it’s about $60 dollars and you've already replaced warranty from reserve usage. But half of that though your total maximum exposure would be the remaining half. If that’s there and then what is the extra potential ability from this Tuscon new allegation from Union Pacific that sales from that facility are also - come up in the 10-Q this morning?

So it sounds like you are asking about the reserve but also about sales. So hopefully we provided enough information on the sales so that you can, you know understand how much sales are coming out. There is no impact with that on the reserve. We believe we make an excellent product at our existing concrete tie facilities, which includes Tucson and Spokane. And that any issues related to the Tucson facility with Union Pacific we’re taking up with Union Pacific we have always stated that our products in Tucson and Spokane are in compliance with any customer specifications including Union Pacific's. So I think I might just leave that one there. And that the on the subject of litigation I wouldn't confuse litigation costs with the reserve, it sits on our books for warranty, and that reserve is for the replacement of ties in the field and not for pending or future litigation costs,

Right, right. So I was wondering about the reserve that you set up, how much more that reserve could be increased. If you have to replace all of the ties in the field?

That is speculating on something that we continually mentioned that we won't do when we have a reserve on the books, that reserve on the books we believe is accurately sized for what we think is the future exposure that we are truly obligated to replace based on the agreement that we have with the customer.

Okay. I appreciate that. And then just few follow-up, on goodwill right, you mentioned in your Q that you think that there is a possibility the results for the acquisitions may come below your expectations compared to the filing book. So is it possible that we’ll see an impairment before the fourth quarter and any impact on covenants. It seems there is no capital structure covenant in your agreement which you can confirm that and any potential impact on cash taxes. And you could tie that up maybe just remind us you said you continue to believe in the long-term outlook. So are you telling us you are seeing a lot only just for this year for this acquisition whereas your longer term has remained probably unchanged?

There were a lot of questions in there I’m not sure I got them all, but your first question related to the Q and evaluation of the intangible assets. What we were basically saying there is that we bought obviously we are not a private equity firm, but we buy companies for the long-term. We still strongly believe in the strategy behind the acquisition of the energy companies and we certainly would hope that short-term hit in actual versus where our original expectations were wouldn't have a significant impact, but given what the rules are we will certainly - probably be reviewing the evaluation and the intangible assets in the third quarter of this year to really take a hard look at that and we just finished some strategic planning at the companies that we have what we believe our fresh outlooks on a lot of our businesses and will be incorporating that information, but other than that we certainly can't predict how that will come out.

Okay. I appreciate that and then my last question would you say that based on litigation expenses from the current quarter is the reasonable for [indiscernible] going forward?

We think that will probably increase some which is - that was part of why our guidance changed so the lawsuit wasn't really - we really didn’t commenced anything the lawsuit wasn’t even served to the company until the second quarter so that’s when we started incurring costs and depending on how we - the aggressiveness of schedule and depositions and interrogatories and what have you will impact how they mounts, but we expected to increase in the third and fourth quarter compared to the second.

Appreciated. Thank you very much.

There are no remaining questions at this time.

Okay. Thank you everyone. We appreciate the questions. We know there is a lot of things for you to sort through here and we will continue to do our best to give you as much visibility into the results as we can and including the forecast and outlook for the business. So thanks for joining us and we will talk to you next quarter.