L.B. Foster Company (FSTR) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Q4 2015 L.B. Foster Earnings Conference Call. My name is Ashley, and I will be your operator for today. At this time, all participants are in listen-only mode. And we will conduct a question-and-answer session at the end of the conference. [Operator Instructions] I would now like to turn the call over to your host for today, David Russo, Chief Financial Officer. Please proceed.

Thank you, Ashley. Good morning, ladies and gentlemen. And, thank you for joining us for L.B. Foster Company’s earnings conference call to review the Company’s fourth 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. We do have a fourth quarter presentation on our website under our Investor Relations tab for those that have online access. This morning, Bob will review the Company’s fourth quarter performance and provide an update on significant business issues, as well as Company and market development. Afterward, I will review the Company’s fourth quarter financial results. And then, we will open up the session for questions. 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, issues and projections. 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, except as required by securities laws. 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. We do intend to file our form 10-K a little later today. In addition to the results provided in accordance with United States Generally Accepted Accounting Principles, our commentary includes certain non-GAAP statements including EBITDA, adjusted EBITDA as well as results that exclude certain non-recurring items including an impairment charge, charges related to the Union Pacific Railroad Warranty Claim and the gain on the self concrete tie assets in Tucson, Arizona. Reconciliations of U.S. GAAP to these non-GAAP measurements have been included within the Company’s 8-K filing. Statements referring to EBITDA, adjusted EBITDA, adjusted gross margins 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 these metrics provides additional meaningful information for investors to facilitate the comparison of past, present and forecasted operating results. With that we will commence our discussion and I’ll turn it over to Bob Bauer.

Thank you, Dave, and good morning everyone. Thanks for joining us. First, I want to let you know that my comments are going to go in the order of the exhibits that we put on our website, if you are following along with some of those. The focus of my discussion is going to be aimed at our current business climate and the steps we are taking to adjusting to certain changing market conditions. I do want to start though by spending a moment just on a few of the facts for the full year, which are certainly key highlights for our business, the fact that we had a record year in sales of $625 million, held our adjusted gross profit margins flat at 21.6% in the face of some tough markets, lower sales volume, and declining steel prices through the year. And our adjusted EBITDA of $59 million along with $56 million in operating cash flow for the year that led to debt reduction, was certainly for us a great way to finish the year. Those are few of the highlights that represent some of our key accomplishments throughout the year, and a lot of credit goes to our management team for that. But of course, the center of attention will be on our deteriorating markets through the course of 2015 and certain operations, which have been undergoing changes, as a result of the declining sales volume. It has been a year of transition, as we pointed out earlier in the year when we saw changing conditions, particularly in the freight rail industry in North America as well, as a weakening ail market in Europe and the unfortunate loss of business from Union Pacific Railroad, all of which created a headwind for our Rail business that wasn’t anticipated as the year started. We did expect 2015 to be a difficult year for our energy related businesses, although the outlook deteriorated throughout the year as the price of declined further and it stayed down longer, became a source of market volatility. And as we decided to take on more exposure to this market, we did so with a forecast that anticipated a severe drop in market activity. But the forecast was short of the decline that actually took place. The severity of the weakness led to the impairment charge we took in the third quarter related to goodwill for Chemtec and the IOS acquisitions. And these charges are among the exceptions noted on our adjusted performance results. As I mentioned during our last call, we might see the upstream operators preserve cash in Q4, taking dramatic steps to reduce inventory and idle [ph] operations that weren’t profitable. Some of our significant customers did exactly that and our upstream test and inspection services business turned in the worst quarter of the year, that’s our IOS business. And from time to time, I will refer to that as our test and inspection services business or inspection services to be brief. The commodity cycles also had a substantial impact on steel prices. Steel factory utilization is expected to remain at depressed levels into 2016. There is enough global capacity that’s sufficient to keep prices at very competitive levels, especially on pipe products. So, let me go into the sales results and some of our segment discussions. I mentioned that full year sales were $625 million. The Company’s full year overall results include $93 million in incremental sales from acquisitions. This helped offset the decline in our base business of 10% year-over-year due to a loss of revenue related to the items I just mentioned. So, our base business without acquisitions had a tough year. And as you will see, as I go through the segment discussions, there were pockets of weakness or other issues that really affected all three of our business segments. Our results in 2015 included a significant impact from acquisitions, in both sales and the impact on profitability. We finished the year with our new companies contributing to earnings for the most part with the significant exception being IOS. The acquisitions changed our sales mix as well the loss of volume in Rail coupled with the size of our Tubular and Energy acquisitions have changed their respective percentages the most, Rail declining to 53% and Tubular and Energy increasing to 19%. I specifically wanted to call attention to the Tubular and Energy segment, as the 19% of total sales is well within the percentage limit we wanted in this segment. As we added exposure to the energy markets, we wanted to keep the percent of sales below 30%. And within this segment, 70% primarily serves midstream pipeline and other applications and 30% serves the upstream markets where the test and inspection services business is focused. So, let me turn into the -- turn to the Rail business segment results. I am going to start with the fourth quarter. The deterioration in the North American freight rail markets started about mid-year. The commodity cycle has really caught up to the freight rail market as low prices for commodities that led to industrial and energy market weakness that’s translated in the reductions and freight volume along with the significant impact on crude by rail projects. Our Q4 sales revenue which declined 16.5% from prior year was driven by weakness in North America freight rail as well as a weak European market, and of course the loss from Union Pacific sales. So, let me give you a few specifics on this. If you look at the sales decline of 16.5%, it included $20 million of the decline that was partially offset by $5 million that came from the TEW Engineering acquisitions. So, Union Pacific accounted for $9.7 million of the year-over-year decline and all other sales fell by $10.4 million, which is really more in line with the market softness. The North America freight rail had a big impact. Commodity carloads in the quarter were down 11.4%. Coal continues to decline. And in the fourth quarter, those carloads were off by more than 11% in the quarter. Petroleum was down 14%. And you could see this in the announcements made by the Class One railroads where some had significant declining volume and operating ratios announced for their fourth quarter results. So, we began curtailing spending in the second half of 2015. And the spending that is getting priority among the freight rail operators is direct to that safety improvement, operating efficiency and other cost reductions, which is where our Company continues to focus on new products and the solutions that we’re bringing the market. Funding for transit rail projects in North America continued at a steady pace in 2015. We continue to believe the transit market will grow over the long run, although year-over-year sequential growth may not be as steady or consistent. We believe that the global transit market represents a good opportunity for the Company. And we now have proven capabilities, designing and building automation solutions for passenger transit systems through our true TEW Engineering business, which includes innovative solutions that help transit system operators improve infrastructure and lower cost. Looking at full year results, the full year sales for the Rail segment reflect the conditions and the comments I’ve just made because the market experienced weakness as the year progressed. Our year-over-year declines in sales volume were less than those presented in Q4. The entire segment declined 12.2% with Union Pacific having an impact of over $26 million on sales, which fell to $15.2 million for the year. If you exclude acquisitions, the balance of the Rail segment business was down by 10.4% with TEW adding $15 million in sales from the acquisition, which occurred back in January of 2015. I’m really pleased with our gross margins for the Rail segment coming in at 23.2% for the year, 10 basis points better than prior year adjusted results. These results reflect substantial work that was done by our operating people that adjusted the lower volume in weak markets. The decline of steel prices were very well managed. And under the circumstances, I believe this was a great result for the year. Our European operations within this had a tough year, as network rail delayed many projects. I expect TEW to have a very favorable impact going forward on the success of this business. Their talent for automation solutions is top flight. And I see them changing the content of value-added solutions across our entire Rail business. So, turning now to Construction. The heavy civil construction markets have really held up fairly well through the year, although we have been faced with an environment of very low steel prices that has led to increasingly difficult circumstances for us and winning business for commodity piling products. The Company performed well in our core product areas of bridge decking intended largely for fabrication projects and in sheet piling for railway, highway and port projects and also in our precast concrete buildings. Where the Company did not perform as well was in our non-sheet piling products such as pipe pile for heavy civil projects where they became very price competitive due to the declining steel prices. So for the full year, Construction sales were only down $2.5 million. This is the result of our precast concrete buildings being up about $16 million offset by our piling business, which was down about $16 million. And the piling decline was significant in Q4, which is what drove the Construction decline in the quarter. The precast buildings division did extremely well and was a real bright spot in 2015. Our management team capitalized on new market opportunities that led to significant growth. This team has created some real momentum around new products and integration with our car concrete acquisition. And this division is delivering some very nice results. So, the Construction segment finished the fourth quarter with gross margins of 19.4%, up 170 basis points on down sales and with a tough pricing environment in a large segment of the business, which is a direct reflection on the margin improvement and success of the precast buildings business, I just spoke of. But the bridge business also had a very good year on margins and has been executing very well as well. So now, I’m going turn to the Tubular and Energy Services business, the third and final segment. Overall growth was driven by acquisitions. Among our legacy businesses, credit products has traditionally been a solid performer but saw sales slide as the Southeast region saw much lower activity due to wet conditions in the agricultural market this year. Coated products which had sales that were roughly flat, is continuing to see efficiency gains from new factory technology that we’ve invested in. But, the real story in this segment however is related to how the test and inspection services business performed. This segment faced some rapidly changing spending patterns, particularly in the upstream exploration and production market throughout the year, as the price of oil declined and forecast for recovery continued to be pushed out. Operators were making continuous adjustments to production plans, which we had to react to. Marketing conditions throughout 2015 deteriorated as end users focused more on cash flow and liquidity needs. This has really impacted the test and inspection services business, which has significant exposure to investment in drilling and hydraulic fracturing applications. The precision measurement systems business was not affected nearly as much, although the business fell short of our forecast and did feel some impact from what was happening in the energy economy. Some of the pipeline operators got caught up in the concern for liquidity and some made changes to investments, as they witnessed cutbacks and changing plans by E&P firms. But we finished 2015 with a solid backlog for both, coated pipe and precision measurement systems, both aimed at pipeline applications. Both of these divisions have backlog that is close to capacity through the second quarter of 2016. We have had some nice success with partners and important operators in the midstream segment, helping us get off to a good start for this year. We have an order in-house for example, for a customer requiring over 500 miles of coated pipe, another project requiring coating on both the outside and inside diameter on the pipe, which we’re uniquely suited to address with some of these investments that we’ve made in our facilities. And we also have a number of critical metering systems we’re building this quarter, the majority of which are for customers that focus on midstream applications. So, we believe that there are widespread needs across the U.S. The pipeline infrastructure long-term and new demand that will be driven by already developed wells, the potential for future exporting and the transition from coal to natural gas plants, which is the same trend as coal to natural gas that’s hurting our rail customers, which is helping us with pipeline customers. So gross margins finished the year at 18.9% down from 21.8% in the prior year. More importantly, they dropped in Q4, as a result of the deteriorating performance of the test and inspection services business. So, at 11.8% in Q4, the results are an indication of a very depressed conditions of the upstream segment that this business depends on. As oil fell throughout the latter months of 2015 into the year-end, we saw substantial volume come out of this division and have suffered losses, as a result. Let me talk about some of the restructuring going on there. It caused us to take numerous restructuring actions, which included consolidation of facilities and closures in markets that did not have sustainable demand. We temporarily closed or consolidated 10 service center operations. We’ve reduced regions and combined some of the region management. Headcount reductions have totaled close to 600 in the last 15 months. So, we’ve taken a lot of actions. While the business exited the year at a low point in sales, it has not had a quarterly sequential increase in sales yet. Therefore, Q4 sales, they are the lowest quarterly sales for 2015 with this business. But I do want to point out that the inspection services sales are running at 5% of Company sales in Q4. And for the year, their sales are approximately 6% of Company sales. Because of this impact, we wanted to help you understand how it is affecting total Company results, we broke out as we’re looking at EPS and on some of the bridge schedules that you’ll see. You’ll see that using the adjusted results to reflect our true operational performance. Inspection services results for Q4 included a loss of $0.25 per share. So, the remainder of the Company earned $0.44 for a combined total of $0.19 per share consolidated on an adjusted basis. And similarly, full year results show that IOS reported a $0.34 loss for the year, as the remainder of the Company reported an adjusted $2.15 per share for a combined $1.81 per share, again all non-GAAP results on coating there. So ,as you look at how Q4 wound up, both reported and adjusted, the reported results for the quarter include sales of $139 million, down $22 million from prior year. The reported EPS declined to $0.32. Our adjusted EPS in the quarter was $0.85 in prior 2014, which I’ll compared to the $0.19 for the fourth quarter of 2015 that just ended. We provided a bridge schedule in this deck to point out the impact from the lost revenue in the year from Union Pacific as well as other market weakness that occurred that had a $0.45 impact on EPS. The acquisition performance was also responsible for the impact to EPS with IOS being the principal reason. Full year 2015 reported results reflect the loss reported that includes the impairment charges taken in the third quarter. The adjusted results will reflect 2015 EPS of the $1.81 versus $3.02 last year. And in 2014, the results were adjusted primarily for charges related to concrete tie warranty. In 2015, there is also some concrete tie warranty charges but the adjustments were also related to the impairment charges and some gains from asset sales. So, if you look at to 2015 EPS bridge for the full year, the full year bridge shows the EPS impact from all business activity separate from the impact from acquisitions. Again, Union Pacific had the most significant impact followed by other market weakness and impact from issues related to steel pricing. The inspection services division had a $0.34 impact to the full year EPS, while the some of the other acquired companies were accretive to the adjusted earnings results. So, our attention these days is very much focused on the programs intended to recover the lost earnings and restore profitability levels. Of course some market rebound would help but in the mean time we are working on growth programs that will drive sales to replace what was lost from Union Pacific as well as the other market weakness. We are going to look to our acquisitions for growth which were all intended to bring us better platforms for organic growth from new services to new markets we’re entering to automation solutions that can help transit rail customers, also new products such as our ENDURA-JOINT for railroad crossing signals and new precast concrete products that we are launching, they are all getting very positive reviews. We will look to TEW Engineering to help us build scale and capability in Europe that will lead to improved efficiency and effectiveness there. And we have a lot of opportunity in gas measurement systems, where we are under penetrated compared to our position in liquids measurements. In addition to that, we are certainty going to be focusing on improving margins. The inspection services business will be a key focus of course but all the new companies have upside potential. And as we apply our long-term profit planning process and other lean initiatives, we expect that they will contribute to margin improvement as well. So, I am going to wrap up my comments on the quarter and the year with operating cash flow. Working capital performance in the fourth quarter helped us close the year with strong cash flow capping off another great year of cash flow performance. We finished Q4 with over $42 million in operating cash flow, which drove the full year results of $56.2 million for the year. Our inventory results finished the year strong, as we struggled through the middle part of the year making adjustments, as we experienced declining volume. We finished the year with only $1.3 million more in inventory than the prior year-end. So, I think we did a pretty good job with that. We also made adjustments to capital spending as weakness arrived, taking spending down from prior year levels. And we are making further adjustments in this area to take capital spending down further, as we look into 2016. So, I’ll -- let me turn to the outlook now for 2016. I am going to begin with the Rail segment. Spending in 2016 by the freight rail operators in North America is expected to decline. The Class One carriers have already announced reductions in capital spending for 2016 that will be in the area of about 15% below the 2015 levels. And this is often a good proxy for regional railroad spending as well, which we depend on. The European market, which was weak in 2015 as a better outlook, the outlook for network Rail in the UK market is expected to be more favorable for 2016, based on the announcements that we follow and we’re already beginning to see this backlog build. Taking these market factors into consideration and remembering that we have about $50 million of Union Pacific sales to replace from 2015, we’ve put our Rail segment sales for 2016 in the range of flat to down 5% for the year. Looking at the Construction segment sales, our forecast is to be in the range of flat to up 5%, as we believe we will see good market conditions for our precast concrete products. We also forecast good market conditions for heavy civil construction spending, and recent announcement support that including the announcements for the transportation bill. Our bridge business has a decent backlog to start the year. And piling products finished 2015 at a low level from which I think we can build on in 2016, even if the pricing environment remains challenging. And our third segment the Tubular and Energy Services segment is really all about whether we see strength in the upstream E&P segment as operators react to the price of oil. We did break out the inspection services business from the balance of the business group to highlight the fact that our backlog coupled with spending outlook for our other divisions is expected to lead the way with sales growth in the range of 5% to 15%. But the inspection services business could be in the range of either up 10% [Technical Difficulty] depending on the direction several of our customers take. [Technical Difficulty]. So, totaling that all up, our guidance on total sales for the year is coming in, in the range of $610 to $640 million. With that EBITDA is expected to be between $48 million to $52 million and EPS in the range of $1 to $1.40. This takes into consideration a weak start to the year in our first quarter that is still being impacted by energy market weakness. So, if you look at our first quarter guidance, we expect Q1 to have sales of approximately $130 million with EBITDA of around $7 million and EPS is forecast to be a loss of between $0.05 and $0.10. And our inspection services business with that is currently operating at the low end of our guidance range. So, I’m going to close with this comment about the fact that our management team intends to stay focused on execution of our plans and ways to streamline products and plant efficiency along with those recovery programs that I mentioned. And supporting this effort as well as our plan to go live with our new ERP system in the second quarter here that will start with operations from two Rail divisions. Our long-term objective is to bring modernization needed to the overall Company and develop a platform from which we can grow and leverage best-in-class business processes. And we believe that the things that we are doing with this new ERP system are clearly going to take us in that direction. So, I’m going to stop there and I’m going to turn it back over to Dave, who is going to go through a few other numbers and results discussion with you. And will take some questions as soon as he’s finished.

Thank you, Bob. As disclosed in our earnings release, L.B. Foster’s fourth quarter 2015 operating results did include $2.3 million pretax gain related to the sale of certain assets at our Tucson, Arizona concrete tie facility, which were sold during the fourth quarter. This gain favorably impacted EPS by approximately $0.13 per diluted share and was included in other income and expense. Similar to Bob, the order of my comments will follow the slide presentation that is on our website. So, I will start with the comparative P&L for the fourth quarter. Net sales for the fourth quarter 2015 were $139.1 million compared to $161.1 million in the prior year, a $22 million or 13.7% decline. Gross profit margin was 21.5% in the fourth quarter of 2015 compared to 19.6% last year. Last year, of course includes concrete tie warranty charges about $4.8 million. As a percentage of sales, SG&A increased to 17.6%. As a result of the lack of leverage from lower sales at our IOS test and inspection services business. Amortization expense increased by $2.1 million due to the acquisitions transacted since the fourth quarter of 2014. Interest expense increased due to increased borrowings. Due to the acquisitions that we’ve transacted recently, our revolving credit agreement is a $335 million facility, currently bearing interest at approximately 2% per annum. Other income expense was a favorable $4.3 million in the fourth quarter, principally due to a number of items, largely the $2.3 million gain on the sale of the concrete tie assets in Tucson, foreign exchange gains of approximately $600,000, proceeds from steel price fixing settlement of $400,000. So there’s a few items in there that tally up to that $4.3 million which certainly is favorable compared to the prior year. The next slide we look at our results on at an adjusted basis. So, it does exclude the gain from the sale of the Tucson assets in 2015 and warranty charges, high warranty charges from 2014. Excluding the warranty costs from fourth quarter ‘14, adjusted gross margin in the current quarter declined by approximately 110 basis points compared to the prior year. The decline is partially due to lower Tubular and Rail segment GP margins partially offset by an increase in Construction segment margins. The decline in Tubular margins was due to the impact of the acquisitions, while our Rail segment GP margins were negatively affected by lower concrete tie margins in 2015 along with lower margins from our rail distribution business, partially due to declining steel prices and the impact of inventory pricing adjustments in the quarter. Partially offsetting these declines in margin was an improvement due to the strong performance from our precast concrete buildings business and our bridge -- our fabricated bridge products along with a favorable LIFO adjustment driven by the declining steel prices. Fourth quarter adjusted pretax income which excludes the gain on Tucson was $2.9 million or 2.1% of sales compared to $14.1 million or 8.7% of sales in the prior year. The $11.2 million reduction in pretax income was due principally to the dilutive impact of the test and inspection services acquisition as well as the interest in amortization costs, and a reduction in Rail segment revenues and related profitability due principally to lost Union Pacific Railroad revenues as well as weaker freight sales. The effective tax rate for the fourth quarter of ‘15 was 35.2% compared to 37.5% in the fourth quarter last year. The Company’s effective income tax rate compares favorably to the prior year quarter, principally due to decreased non-deductible expenses and rate reductions in foreign jurisdictions. Adjusted fourth quarter net income was $1.9 million or $0.19 per diluted share in ‘15 compared to $8.8 million or $0.85 in the prior year. Adjusted EBITDA was $11.2 million in the fourth quarter compared to $17.4 million last year, a decrease of 36%. Sales by segment: Net sales for the fourth quarter of ‘15 were $139 million compared to $161 million or 13.7% decline. The decline was due to a 22% reduction in Rail sales and a 35.6% decline in Construction segment sales partially offset by a 3.8% increase in Tubular and Energy Services sales. Acquisitions added $19 million to sales for the fourth quarter. And the Tubular and Energy Services [Technical Difficulty] was due to an increase in our pipe coating services sales and that was partially offset by decline in credit product sales. The Construction Products sales decline in the fourth quarter was primarily due to a 54% decline in piling product sales, reflecting challenging market conditions due to declining steel pricing, making us less competitive in the pipe piling and H beam categories. The decline in rail products and services was due to lower sales of all product categories, except for transit products. These declines were due to a number of factors including a $9.7 million reduction in UP sales compared to the prior year period, unfavorable foreign currency conversion rates and market related sales reductions to freight rail customers due to lower fourth quarter capital expenditures. As a percentage of fourth quarter sales, Rail accounted for 55%, Construction was 28% and Tubular was 17% of sales. Moving on to expenses, consolidated selling and administrative expenses increased by $3 million to $24.5 million or 13.8% in the fourth quarter of 2015 due to the cost of businesses acquired after the fourth quarter of ‘14. Excluding the S&A of acquired companies selling and administrative expenses declined by $0.6 million or 2.8%. For the full year, net sales for the full year of ‘15 were $624.5 million, an increase of 2.9% over the prior year. The sales increase was due to 121.8% increase in Tubular partially offset by a 12.2% decline in Rail segment sales and 1.4% decline in Construction segment sales. Gross profit margin was 21.4% in 2015 compared to 20% in ‘14. Concrete tie warranty cost of $1.1 million and $9.4 million were included in 2015 and 2014 results, respectively. The full year, as reported income statement shows, the $80.3 million impairment charge that was recorded in third quarter which wrote down the good will of the IOS inspection and testing acquisition by $69.9 million and the Chemtec precision measurement systems business by $10.4 million. The as adjusted results for the year -- adjusted 2015 results for concrete tie warranty charges, the impairment charge we just discussed as well as the gain on the sale of Tucson concrete tie assets. 2014 was adjusted for concrete tie warranty charges of $9.4 million. So, on an as adjusted basis, gross profit margins were flat at 21.6% for both years. Adjusted gross profit margin for our Rail segment was 23.2% in 2015 compared to 23.1% in ‘14, so basically flat, an increase of 10 basis points, largely due to product mix related improvements in our Rail Technologies GP margin. Gross profit margin for our Construction segment was 19.4% this year compared to 18.1% last year, an improvement of approximately 130 basis points. This improvement was primarily due to strong performance for our concrete buildings business due to high volumes which resulted in plant efficiencies in 2015, along with another strong performance by our fabricated bridge products business this year, which was helped along by product efficiencies and new business with our rail product [ph] business. Gross profit margin for our Tubular and Energy Services segment was 18.9% in this year compared to 21.8% in 2014. This decline was attributable to the impact of the test and inspection services. Acquisition, which was challenged by competitive pricing pressure and declining sales volume that negatively impacted gross profit margin performance in 2015. Additionally gross profit margin for our credit products business declined over 400 basis points this year due to a decline in volumes in 2015 coupled with declining steel prices. On a year-to-date basis, adjusted EBITDA was $59 million compared to $60.3 million last year, decline of $1.3 million or 2.1%. While the adjusted EBITDA reduction is 2.1%, the net income variance is 40% which is largely due to the increase in interest expense and amortization expense caused by recent acquisition activity. Year-to-date sales by segment, excluding acquisitions Tubular and Energy Services declined by $6.5 million or 12.2% this year compared to 2014 due to 26.2% sales decline in our credit products business, which was adversely impacted by heavy rainfall and flooding conditions in the early parts of this year in the Southeastern in the United States, which reduced demand for our products, while our primary market is irrigation and agriculture related. Coating services sales also declined by about 4.7%. The Construction Products segment sales decline was primarily due to a decline in piling product sales partially offset by strong year from our precast buildings business which increased sales by almost 43% this year and that was driven by strong demand in the southwestern United States and across all market segments whether they be federal, state or municipal, along with the impact from a full year sales of our product concrete business which was acquired in July of 2014. The decline in rail products and services sales was due to lower sales of all product categories as in the quarter except for transit products. In the Rail segment sales decline this year were once again due to Union Pacific Railroad where the sales decline was $26 million for the full year, unfavorable foreign currency rates impacting us by a little over $5 million and just overall sales reductions to freight rail customers due to lower volumes, as we know that freight rail CapEx was down and impacted negatively by decline in car loading this year. Year-to-date SG&A consolidated selling and admin expenses increased by $12.8 million to $92.6 million due to the cost of businesses acquired during 2014 and ‘15. Excluding those acquired companies our selling and administrative declined by $0.8 million or 1%. Turning to the balance sheet, working capital net of cash declined by $38.5 million compared to the third quarter. Accounts receivable decreased by $32.4 million during the fourth quarter. Our core business DSO did increase to 53 days as the end of December compared to 50 days of September, largely driven by the sales reductions. Consolidated DSO was 56 days as compared to 53 at September. And our inventory actually decreased by $2.4 million during the fourth quarter as accounts payable and deferred revenue increased by $0.4 million. Other notable items on the balance sheet reflect increases in property, plant and equipment, other intangible assets as well as long-term debt. Moving on to cash flow, cash provided by operating activities in the fourth quarter was $42.5 million compared to $17 million last year. Capital expenditures were $3.3 million compared to $5.5 million in the prior year. And we are obviously very pleased that we achieved the significant reduction in debt during the fourth quarter. For the full year, cash provided by operating activities was $56.2 million this year compared to $66.7 last year. These two years of back to back cash generation is certainly a record for the Company and is the result of a lot of hard work by everyone in the organization. While we are not projecting another year as strong as the prior two, we do expect to generate solid free cash flow in 2016, as the working capital initiatives are continuing, and we expect to cut capital spending to the range of $6 million to $8 million this year. Capital expenditures for 2015 were $14.9 million compared to $17.1 million last year. The 2015 capital programs have been in all three business segments along with significant expenditures for our new ERP system. Our capital investments are focused at providing new and expanded manufacturing capabilities, improving service and product availability to our customers and increasing our operating efficiency in future periods that we believe will improve shareholder value on a long-term basis. While our capital allocation protocols have been solid, potential returns on projects in softer markets become less attractive and much easier to cancel or defer except for a couple of capital programs that we expect will have paybacks due to their correlation to business already secured or driven by longer term strategic growth. Otherwise, we look to keep capital in check this year, say for these projects and some necessary maintenance items. We anticipate the cash generated from operating activities in 2016 will exceed our capital expenditures, debt service payments, dividends and share repurchases, thereby allowing us to continue to delever. As mentioned in our earnings release, our fourth quarter 2015 bookings were $114.7 million a decline of 0.3% compared to last year due to a significant contribution from our acquisitions, as bookings would have been about 22% lower without acquisitions. Full year bookings were $586.7 million, decline for $12.2 million or 2% from 2014. Annual orders for Rail segment were weaker than 2014 due to lower volumes and decreased pricing due to declining [Indiscernible] Decreased bookings for other trend [ph] products and rail technologies was due to reduced activity with the Union Pacific Railroad as both softness in the freight rail market. Our piling fab business, bookings declined due principally due to declining steel prices where we remained a little less competitive in certain commodity pricing dependent piling products. Our order backlogs stood at $164.7 million at the end of the year, down $19.7 million or 10.7% from 2014. The decrease was principally due to reductions in a rail distribution, our transit business and piling products partially offset by increased backlog from the acquisitions as well as our pipe focused services business. So, we did not repurchase any stock in the fourth quarter of 2015. However, that is something we will continue to watch. Debt at the end of the December [Technical Difficulty] compared to $218.2 million at the end of March, reduction of $49.4 million. Debt at December 31, 2014 was $26.4 million and that was of course before the March test and inspection services acquisition. Maximizing free cash flow this year will continue to be a primary focus of this management team. Our primary use of capital will be to delever the Company, although we will consider alternative uses of capital as leverage continues to decline. And that concludes my comments on the fourth quarter of 2015 and I’ll now turn it back to Ashley and open up the session for questions.

[Operator Instructions] Your first question comes from the line of Brent Thielman of Davidson. Please proceed.

I just want to spend a minute on cash flow here, obviously great finish to the year. It sounds like Dave, I think I heard $6 million to $8 million in CapEx in ‘16, obviously below depreciation. Can you expand on that a little bit, why or how you can take it so low to the depreciation here in ‘16?

Well, 6 to 8, Brent, is still well above maintenance CapEx. So that has a couple of projects. And it’s certainly the continuation of our ERP implementation. It’s got a project in there for our coated pipe facility where we are completing an improvement program, so that we can much more efficiently and with better quality coat the inner dimension of pipe for large projects. So that’s certainly within our wheelhouse to bring CapEx that low -- or lower should we desire to but we still are looking at opportunities that are out there, for example the pipe coating business. So, we’re still investing where there’s pretty quick and good returns.

I would add to that Brent, that we spent quite a bit in the last two years, so we made a number of investments here in facilities and some programs. So that’s one of the ways that we’re able to bring it down as well.

Okay. So, the $6 million to $8 million in essence that a lot of growth projects could be kind of a recurring level going forward. Is that fair?

It’s probably fair, if you’re trying to say that could we stay in that range, if we didn’t have a lot of growth investments. I think on one hand I would say that I think we are going to have some of those, probably not to the extent we had in the past. But I’d probably broaden that range of maybe 6 to 10 that I think is probably a range we can stay in unless we have some other big facility investments, and we do have one that we’re thinking about on the horizon but it’s uncertain right now, as to when we’ll pull the trigger on that.

And then as far as using that cash, do you specific targets for debt or levels of leverage you feel the Company should be operating at in this environment?

Yes, I mean we do have. We had internal targets last year, we exceeded them. We have targets this year too. We’re not prepared at this point in time to come out with debt targets or free cash flow goals for the year but once again, more than paying for all of our debt service, CapEx, things like that and still delevering adequately we believe.

And then moving to rail, can you comment on some successes and I guess your ability to kind of find new customers and help offset the loss of business from UNP, particularly thinking about how 2016 develops there?

Well, I would say that you’re going to find that in a couple of areas. One will be in some of the programs we have underway with similar type Class One carriers in the freight rail industry in North America. We have a few programs underway on new products that are going fairly well. Our friction management business continues to grow and we’ve got a couple of new products in that area. And we have a few things that I can’t talk about right now, with some of them specifically that we think is going to improve penetration of a few of those accounts. I would then turn to the transit rail market, both in the U.S. -- or North America as well as in Europe. We have added focus on transit rail for U.S. projects, we’ve made some investments in selling activity there, and we think that’s going to help us here in our home area. But in addition to that two things going on in Europe. One, the focus on transit rail over there but coupled with our TEW Engineering acquisition, we now have these capabilities related to automation solutions for the rail industry, most of which is directed at transit where we’re bringing automation into a variety of different applications that can help transit rail carriers run more efficiently and reduce costs. So, those are a couple of the things that we’re going after there.

[Operator Instructions] Your next question comes from the line of Brady Cox with Stifel. Please proceed.

Thanks guys. I just wanted to follow up quickly on that rail question, I guess just to see, A, considering the CapEx outlook from the Class One being down about 15% and the 5% headwind still going this year from UP, we would have thought that maybe that revenue outlook for 2016 might have been a little bit lower. I know you said transit maybe a little better, Europe’s a little better and there’s some new products maybe on the freight side, but can you just help us bridge the gap between sort the Class One CapEx outlook and the 5% UP headwind and revenue maybe up -- or revenue maybe being flat in 2016?

Well, we provided the flat to down 5%. And of course when you take 5% off of our total Rail business, you get a pretty sizable number. So, I think the low end is certainly taking into -- well, all of -- both of them are taking into consideration what you just said about $15 million of UP business we’ve got to replace. We think that the market is going to be pretty strong right now in Europe. So, our plans at the moment have a nice increase there. We also are looking to the transit market in the U.S. for the plan that looks pretty good. So, there are some improvements that are coming from those couple of areas that we think are -- they are defiantly on the positive side for the year. Rail distribution is probably the one business that we do have to watch through the year and we’ve got to keep our eye on where steel pricing goes with that and how that might affect the top line. But we believe we are already operating at a low point coming out of Q4 here. And while we’ll still see some pressure on steel prices into 2016, we believe we’ve taken that into consideration as well. But keep in mind that capital spending that we talk about is Class One, it is a proxy we use for market strength, but that’s only about a third of our total Rail business sales. We’ve got some nice programs going on with the short line. And we get a fair amount of maintenance spending. So, it doesn’t have to just come from capital type projects. We are in that space where when the volume declines in the industry, they can spend a bit more time in maintenance and we get business from the maintenance budgets. So, all of those things were taking in the consideration with that forecast.

Okay, thanks for the detail. And can you just remind us about how much of your rail business is transit oriented?

That number -- it’s about a third.[Multiple Speaker]

Okay, perfect. And then next, I wanted to go I guess into the test and inspection business. I think in the press release, you talked about there being maybe some recovery in the second half of the year. Can you talk a little bit about what gives you confidence in the market improving in the second half? And if there is maybe sort of a price per barrel threshold baked into assumption, so say it will stay in the $30 to $35 per barrel range, which is still expected to improve in the second half?

Well, we keep our eye more on production than we do the price of oil. Of course, those two are going to be related but we are watching rig counts and we are watching production levels. There may not be as close a correlation between price and those number going into 2016 as production rolls over, and it has been rolling over meaning that is on the decline now in the U.S. And at some point, while there’s excess supply in the market and pretty high inventories, there is a point at which you’ve got to start the production -- the exploration and production activity again with new wells or that production is going to be on the decline. So, the forecasting in this business is very difficult at the moment. It is why we put such a wide range on it. I know if you look in the marketplace, you can find about as many people who think that the price has to be up substantially going out of the end of 2016 in the $40 to $50, even up near $60 a barrel range and there are people that think that the price is going to be depressed for quite a long time. So, we are going to avoid putting specifics out there that is tied to a certain price. We actually build the forecast from talking to certain customers and some assumptions that we make on production levels and prove that that we come up with our forecast. I would tell you that my personal view is that I think the logic I see on the forecast, it says that there will be some pick up in the second half of 2016, seems to be the most reasonable. But there have been a lot of forecast that have been incorrect over the last 12 months. And it’s clearly an environment that’s disruptive and difficult to forecast at the moment.

And as part of that maybe there is some sort of testing requirements that can only be delayed so long or is that not a big piece of it?

No. The better way to think about that is that we provide testing and inspection of drill pipe, casing pipe, all sorts of tubulars that are used in that E&P process that are needed all the time for those particular tubulars. There just happens to be an excess supply of inventory that the customers now have as a result of the fact that there is a lot less drilling activity. So, the need for the test and inspection doesn’t go away. It’s just down because of rig counts being down and drilling activity associated with that’s being down and inventory brought as a result.

And then maybe my last question here, I guess in the fourth quarter relative to at least where we had our numbers that one of the sort variances was SG&A being up a little bit from the third quarter level. Can you guys just talk about sort of what level of SG&A you are contemplating for 2016 or if there’s much in that cost structure that can be decreased in sort of the lower revenue environment?

Well, we are doing a lot to hold the line on increases. Part of the increase in that business when I look at it year-over-year has come from the fact that we had a loss of our base business that was replaced by acquired sales that came with higher SG&A, particularly when you put the interest and amortization costs with it. In Q4, we always deleverage on SG&A because our sales fall seasonally. And our SG&A doesn’t change seasonally like sales does. So, you are always going to see the some of that impact in there. But I would tell you that generally speaking we are paying extremely close attention to where that level is. We -- given our business conditions as you can imagine, we are not bringing new people into the Company at this time and we are looking for new ERP system and the number of other efficiency programs that we have to try to work that number down a little further. I would also add that two things were having an impact on SG&A that are of note for 2016. The ERP program and long with it comes amortization of the software that we purchased last year that’s not in significant; and the other item are the legal expenses that we are incurring due to the litigations with UP. So that one, one day I expect to go away. I’d like to have that sooner rather than later, but that’s there right now. But the added amortization with software system is a headwind that we are going to see from here going forward.

Your next question comes from the line of Beth Lilly of Gabelli Investors. Please proceed.

I have two questions. One is, can you even say much on the call about the UP and status of the ongoing litigation; can you give us any update on where things are at?

We didn’t provide any additional information on that because there really wasn’t anything of material information to present since our last call. The dispute continues to be in a litigation process. And so that processed is moving forward, as we attempt to resolve the issue. But there is nothing really to report that we can report on that subject.

What about the costs in the quarter that were incurred to legal expenses and such; could you break that out?

Well, we didn’t break out the legal. Let me make sure, I understand what detail. Ask the question again.

How much -- the legal expenses paid and then were there any other expense -- was there anything in the income statement related to the UP besides legal expenses?

Nothing beside -- well we have some G&A that relates to the ongoing litigation thus, whether it’s some legal fees and/or consulting fees, all rolling up in the G&A. But we have not disclosed that. In the past, we’ve given -- we actually had a sort of a delta quarter-over-quarter when this was ramping up. But what we can tell you is that the fourth quarter was around $450,000. And I think our estimates for 2016 are in the $1.2 million to $1.4 million range.

1.2 to 1.4 you said?

Yes.

Okay, got it. And then, can you talk about the addition of Brad Vizi to the board, and what do you think he brings to the board and what qualifications and why you decided to add him?

Well, Brad is associated with Legion Partners and together they have taken a position in the Company now that’s put them as our largest shareholder. And in recognition of that and his perspective on shareholders view of the Company along with his understanding of capital market and investments in companies like ours, he has been investing in small cap companies and analyzing companies like ours for a number of years. The board recognizing that we had a retirement that was also taking place with one of our directors that’s been around 10 years, have decided to add Brad to the board, I think before this retirement occurs. But to really get a good perspective on the shareholders point of view of things as well as again his understanding of looking at companies like ours and how we can create value, in addition to the things we know how to work on, day to day in our operations and design of new products and those sorts of things, there’s certainly an important element of understanding efficient uses of capital and looking at other means to create shareholder value that we believe Brad has some good ideas on and we have welcomed his participation on the board.

There are no more questions at this time, I will now turn the call back over to Robert Bauer, CEO.

Well thanks to everyone. I know we’re a little long winded this time due to the fact that not only do we have the quarter but the close of the year and so many different things that were moving around in 2015. But, we appreciate your attention and joining us on the call. And we look forward to talking with you next quarter. Thank you very much.