L B Foster Co (FSTR) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter L.B. Foster earnings conference call. My name is [Emmanuel] and I will be your operator for today.

At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. David Russo, Chief Financial Officer. Please proceed, sir.

Good afternoon, ladies and gentlemen. Thank you for joining us for L.B. Foster Company's earnings conference call to review the Company's third-quarter 2008 operating results. My name is David Russo and I'm the Chief Financial Officer of L.B. Foster. Also on the call today is Mr. Stan Hasselbusch, L.B. Foster's President and CEO. This afternoon, Stan will provide an overview of the Company's third-quarter performance, give an update on critical business issues and discuss market conditions. Afterward, I will review the earnings press release issued earlier this morning before we 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 Web site under the Investor Relations page. This webcast will be archived and available for seven days.

Today's call includes forward-looking statements and information within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to future events and expectations and include known and unknown risks and uncertainties. Future actual results may differ greatly from these statements and expectations that are expressed today. All participants are encouraged to refer to L.B. Foster's annual report on Form 10-K for the year ended December 31, 2007 as well as to other documents filed with the Securities and Exchange Commission for additional information about L.B. Foster.

With that, we will commence our discussion and I will turn it over to Stan Hasselbusch.

Thank you, David, and thanks to all of you for attending our third-quarter 2008 earnings call and webcast. This morning, we announced increased sales and increased adjusted operating results for the third quarter of 2008.

Sales were $145.6 million for the quarter compared to $135.8 million in the third quarter of 2007. Income from continuing operations was $8.1 million or $0.76 per diluted share. This compares favorably to adjusted income of $7 million or $0.64 per share in the third quarter of 2007 after excluding incremental dividend income related to the sale of our investment in the DM&E railroad. David will discuss the financials in detail later, but first I would like to talk about operational performance.

Let's begin with rail products. Overall revenues were up 7% led by new rail in which revenues were up 50%. This increase was a result of both higher transaction pricing and a 26% increase in tonnage shipped.

Concrete tie sales were down 25% in the quarter. Comparisons for the year in concrete ties remain unfavorable almost exclusively because of the volume drop-off at the Union Pacific Railroad. We currently expect production between Grand Island and Tucson for the Union Pacific to be approximately 400,000 ties this year, which is down from 775,000 ties produced at those two facilities in 2007.

Our expectations are that consumption levels by the UP will increase in 2009. While the number of carloads shipped remains flat, class 1 railroads continue to report record earnings, benefiting from improved operating efficiencies, strong revenue per unit growth and increased fuel cost recoveries.

Capital expenditure growth will again exceed double digits with the class 1s this year. This is a paradigm shift because a leveling or drop-off of carload shipments has historically led to a corresponding drop in the level of spending. This clearly has not been the case in 2008.

Next year's outlook for rail spending is mixed. Initial forecasts are leaning towards a modest 2% to 5% growth in CapEx spending from the class 1s. However, we are encouraged by expected transit spending in 2009.

Record rider ship levels are leading to increased funding. We're tracking 12 separate transit builds on the November ballot and the recent passage of the Rail Safety Improvement Act of 2008 included provisions to increase Amtrak's spending by 100% over the next five years.

In tubular, sales were led by our Threaded Products Group in Houston. Revenues in the quarter were 44% ahead of 2007. This was our best quarter since the first quarter of 1988 when we were still in the oil country tubular business. Tubular products results in the quarter were a combination of Zola performances by both micropile and pump column.

Construction sales were $69.8 million, 12% over the third-quarter 2007 thanks to precast buildings. This division manufactures concrete restrooms for the parks and recreation industry. Precast was acquired as part of the CXT acquisition in 1999. The third quarter of 2008 revenues were $11.7 million, 46% ahead of the third quarter last year.

Piling sales for the quarter were 5% ahead of last year led by two flat sheet pile contracts sold by Paul Whitworth and his piling sales group in our Hayward, California office. We expect the heavy civil construction market to be flat for the balance of 2008 into 2009. With the rapid run-up of rises from various construction materials this year as well as ongoing turmoil in our financial markets, many projects have been delayed or postponed. Additionally, funding at the state and local levels has been negatively impacted by budget shortfalls due to reduced overall tax receipts.

Funding will remain a concern in 2009. At the federal level, the Highway Trust Fund was re-established for fiscal 2009. One wild-card for next year is the possibility that a second stimulus package is currently being discussed on Capitol Hill. Two key components of this proposal, federal money for infrastructure spending and funds to shore-up state budgets, will positively impact the heavy civil construction market.

Last quarter, we talked about the escalation of steel prices and their impact on our performance. Since then, we have seen a downturn in scrap prices, a key component in the production of new rail and piling by our strategic supply partners. We know this will eventually have an affect on our purchasing and selling prices, but we also believe that, because the primary steel products we sell are uniquely rolled and sold into specialized markets that remain solid and are not commoditized as other types of steel, we will not be as significantly impacted.

So far, 2008 has proven to be a great year for L.B. Foster Company. We have maintained our consecutive run of quarter year-over-year increases in earnings per share and our profit margins have never been better. As the year -- excuse me, as we consider our potential performance for the balance of the year and into 2009, like any other companies operating in this chaotic economic and financial environment, we certainly have our concerns. In our lifetimes, we have never experienced the types of challenges that we're currently facing. While I feel our strong balance sheet and excellent returns provide us with a measure of confidence, as I look ahead, we're still subject to the ramifications of the upheaval in global financial markets.

As I had mentioned, steel prices are and will continue to be under pressure for the foreseeable future, but I also believe that our key end markets -- rail, construction and energy -- remain solid. The long-term fundamental need, especially in the United States, to maintain and grow our infrastructure and the leadership role that L.B. Foster has as a key supplier to these markets suggests to me that we are well positioned for future success.

Now, I would like to turn this back to David for the financial review.

Thank you, Stan. Before I begin the discussion on operating results, I would like to remind everyone about the impact that the sale of our investment in the DM&E Railroad had on last year's third-quarter results. As most of you are aware, the DM&E sale closed in October of last year and the resulting gain of approximately $122.9 million was reflected in our fourth-quarter results.

We did, however, record incremental dividend income in the third quarter of $8.5 million that had previously been deferred. This amount was in addition to the normal recurring $247,000 of dividend income that we had been reporting on a quarterly basis. In an effort to discuss meaningful comparative results, my discussion will exclude this incremental income all the way down the income statement.

Again, the amount was just under $8.5 million. Tax provided on that dividend was approximately $900,000, so that the net amount was approximately $7.6 million with a corresponding diluted EPS of approximately $0.69 per share.

Okay. So with that long-winded introduction, I will begin.

Sales for the third quarter of 2008 were $145.6 million compared to $135.8 million in the prior-year, a 7.2% increase which we leveraged into a 22% increase in pretax income. The sales increase was due to a 6.8% increase in rail product sales and a 12% increase in construction product sales, partially offset by 15.8% decrease in tubular product sales, compared to last year's third quarter.

The construction product sales increase was due to increases in our precast buildings, fabricated products and piling divisions. Third-quarter tubular sales decreased due to a decline in coated product sales, partially offset by an increase in threaded product sales. The coated product sales decline is due more to the record performance turned in by this division last year.

We noted, during the first-quarter call, that the first-quarter sales increase compared to the prior-year would not continue into the remainder of the year as our Coated Division went into a third shift throughout the summer and into September of 2007. The energy markets served by our Coated Division have been robust for the past two years and subject to any significant impact resulting from the recent credit crisis, we would expect that strength to continue throughout 2009 and beyond.

Our Threaded Pipe division continues to successfully address its core water well market and pursues additional opportunities in the OCTG and micropile markets to expand its customer base and fully load its facility.

The rail sales increase of 6.8% was driven by rail distribution. While concrete tie sales declined in the third quarter compared to last year, our Spokane facility generated a nice increase. Tie production was up 3% compared to the second quarter of 2008 but was down approximately 25% compared to the prior-year third quarter due principally to reductions at the facilities that serve the Union Pacific Railroad.

Our Grand Island and Tucson facilities were approximately 50% utilized for the Union Pacific Railroad and we're actively marketing both heavy haul ties as well as a newly developed industrial concrete tie from Grand Island. The new industrial tie is currently being produced and sold. We also continue to review cost reduction opportunities at these operations.

In Spokane, we continue to produce concrete ties for other class 1 railroads, transit authorities, contractors and industrial customers, and we continue to experience solid inquiry and bidding activity. As a percentage of consolidated sales, tubular accounted for 7% of sales, construction was 48%, and rail was 45%.

As mentioned in our earnings release, backlog stood at $178.9 million at the end of the third quarter, up 8% over the third quarter of 2007. Bookings for the third quarter decreased by 3% to $115.8 million. Year-to-date bookings were $412.8 million, flat with the prior year.

Gross profit margins were 15.6% in the third quarter, an increase of 14 basis points over last year's third quarter. While the increase was slight overall, it was comprised of an increase in gross profit before manufacturing and other variances, as well as decreased unfavorable manufacturing variances. These were partially offset by a significant increase in LIFO expense. Third-quarter LIFO expense was approximately $5.1 million, compared to $600,000 last year.

The businesses that drove the margin improvement in the third quarter were Allegheny Rail Products due principally to plant process improvements as well as product mix, threaded products due primarily to product mix and increased volumes, and piling products.

SG&A expense increased 2% to $10.1 million in the third quarter of 2008, due primarily to salaries and advertising expenses. SG&A represented 6.9% of sales in the third quarter of 2008 as compared to 7.3% of sales in last year's third quarter, a 35 basis point decrease. On a year-to-date basis, SG&A was 8% of sales compared to 7.1% of sales last year.

As a result of the foregoing, third-quarter operating income was $12.6 million, compared to $11 million dollars in last year's third quarter, a $1.5 million or 13.8% improvement. As a percentage of sales, operating income was 8.6% in this year's quarter versus 8.1% last year.

Interest expense was $500,000 in the third quarter of 2008, $426,000 or 46% less than the third quarter of last year. The decrease was due principally to a decrease in average borrowings during the third quarter of 2008 as compared to 2007, and to a lesser extent to lower interest rates on certain debt instruments. The lower borrowings are a result of the strong cash flow generated from operations in the second half of 2007.

As I mentioned during previous calls, none of the DM&E proceeds have been used to pay down debt. Since June of 2007, we have paid down approximately $25.7 million of debt with internally generated cash flows.

Third-quarter pretax income from continuing operations was $12.7 million, compared to $10.4 million in last year's third quarter, a $2.3 million or 22% increase. As a percentage of sales, third-quarter 2008 pretax was 7.7% versus 7.6% in last year's quarter.

The third-quarter 2008 income tax provision was 35.9% compared to 32.6% in last year's third quarter. Once again, as a reminder, this tax rate excludes the dividend income as a discrete item.

Income from continuing operations increased 16.6% to $8.1 million or $0.76 per diluted share, compared to $7 million or $0.64 per diluted share last year.

Turning to the balance sheet, debt at the end of the third quarter was $29.3 million, compared to $34.2 million at the end of 2007 and $35.5 million last September. As I previously mentioned, the $25.7 million decrease in debt during the past 15 months was due to cash generated from operations.

Capital expenditures were $900,000 for the third quarter, compared to $1.1 million in the prior-year quarter. On a year-to-date basis, capital expenditures were $4 million, compared to $3.8 million in 2007.

We expect capital expenditures to be less than $600 million for all of 2008. We also expect to generate strong cash flow from operating activities in the fourth quarter.

The most notable use of cash in the third quarter was the repurchase of the Company's common stock pursuant to its share repurchase program that was announced on May 12 of this year. As noted in our earnings release, since the second quarter, we purchased an additional 380,947 shares for approximately $10.9 million. Program to-date totals reflect that we purchased 794,309 shares for a little less than $24.8 million, so the current Board authorization is substantially complete. While we believe the amount and the timeframe authorized by our board to accomplish the share purchase program was prudent, we also believe that the recent downturn in the markets provided us an opportunity to accelerate the program, and we did so. This program does not conflict with our stated acquisitions strategy. On the contrary, we believe that the combination of the two will help provide balance and long-term value for our shareholders.

Debt as a percentage of capitalization was 12% at the end of September, compared to 22% at the end of September last year. Our leverage ratio is just under 0.6-to-1, down from 0.8-to-1 at the end of December 2007, and our interest coverage strengthened to almost 23-to-1.

Cash at 9/30/2008 was $111.8 million and we had over $107 million invested principally in AAA-rated money market funds, all of which today are guaranteed by the U.S. Treasury.

With regard to working capital, Accounts Receivable and inventory, net of Accounts Payable, declined by $400,000 compared to the second quarter and increased $10.5 million from year end. Accounts Receivable decreased by $4.4 million during the quarter, primarily due to the $6.9 million sales decrease in September as compared to June of 2008, while DSO increased to 45 days from 41 days at the end of the second quarter. We believe our Accounts Receivable portfolio continues to be in excellent condition. L.B. Foster's bad debt expense has consistently been below 0.1% of sales.

Inventory increased $14.9 million during the third quarter of 2008, primarily due to commodity price increases in 2008 that have impacted the price we pay for most items, especially steel. This has certainly impacted our piling and rail [drivings] and we've partially mitigated the impact on inventory by carrying lower quantities in several areas. Additionally, in the third quarter, we had several customer delays of shipments that had a negative impact on our inventory balances.

As far as 2009 is concerned, we have seen recent anecdotal evidence of both strength and weakness with more evidence of weakness, but we cannot determine today the extent nor the duration of any effects of the credit crisis and volatility we have witnessed over the past several weeks, nor are we willing, at this early stage, to predict the period of time that these effects may last. What we can do is to continue to run our business with a balance of opportunism while managing risk in an uncertain environment. Having said that, we enter this period of uncertainty in an extremely strong financial position with the ability to take advantage of opportunities and weather the storm, if need be, as future circumstances dictate.

In summary, the first three quarters of 2008 have been challenging in many ways but also rewarding as we have aggressively pursued a number of opportunities and continue to do so. We believe the fourth quarter will contain similar challenges and opportunities, and we are continually impressed with the efforts and resourcefulness of our 660 employees.

That concludes my comments on the third quarter. We will now open up the session to questions. Emmanuel?

(Operator Instructions). James Bank.

Good afternoon. I understood LIBOR has come down a little bit but the majority of the debt you guys have outstanding is going to be based on that. Is there any risk at all there to consider going forward?

Well, there is -- we obviously don't have much debt, James. I think the amount that is based on -- or that is variable based on LIBOR is about $16 million. So, no, we always look for a little bit of a mix between fixed and floating. With the low amount of debt we have, we don't really view that as any kind of a risk at all.

Great. Could you split the billing margin improvement with the positive variance from manufacturing improvement in the quarter?

Manufacturing was about a little more than 50 basis points.

Okay, and the balance was billing margins?

Yes, billing margins and price variances.

Okay, great. The LIFO expense in the third quarter, that $5 million, is that a run rate maybe for the fourth quarter?

The fourth quarter is not going to be -- we don't expect at least at this point in time for the fourth quarter to be as high as the third. We have really recorded LIFO year-to-date to reflect our full-year forecast. So, the nine months is expected to be three-fourths of the full-year.

Okay. How much on your inventory, with regard to piling and rail, are you hanging onto that has been older than August, let's say, the month of August?

Let me just say this, James. Our inventory at the end of the quarter was $120 million, which was about $25 million over the end of -- compared to last quarter last year. 77% of that inventory is in new rail and piling. Of that inventory, which totals a little over $90 million, we feel that 75% of the rail inventory, the new rail inventory, which is $27 million, is committed. It has been sold or -- it is either a work in process or waiting to be released.

We also think that, in the piling side of our business, which has got approximately $65 million in new piling, that over half of that is either committed, is a work in process, part of our rental pool, or has actually shifted and we have not been able to recognize the revenue. So, we really -- those two products where we've had $93 million in inventory, for the most part $55 million of that inventory is committed and we probably half have $38 million at risk, which is really quite low overall.

I think when we talk about inventory, there's no doubt about it. Inventory is a concern as we go forward. We do have a little risk, and I think we've got a little risk in relay rail, which is driven exclusively by scrap pricing. Scrap pricing, as we have talked about and we have seen in the last two months, has dropped considerably. We have about $3 million in relay rail, so there is some risk there. We have noticed and we have known that [very] pile, which we don't carry a lot of inventory, announcements have come out as far as an $80 a ton drop in there. We don't feel we have got much exposure but there is a little bit there.

The other side of it where we're doing very good is in threaded pipe. We have seen some of the pipe prices, which are driven by flat rolled, are down approximately $100 a ton. So, we've got a little bit of risk there. We have got $120 million on the balance sheet and I think that, overall, there is risk out there. Don't get me wrong. I mean, it is something that we are on the product groups about every day to really watch what we buy and really watch at how we go forward and our costs that we're paying. But it is $120 million with the bulk of it probably committed.

In addition to that James, one other thing I will tell you is even though, to Stan's point, we do have $120 million on the balance sheet, about $15 million of that has already been paid for; it just has not shipped.

Okay, Stan, thank you for that detailed explanation, very helpful. What is your outlook on steel? What would be your position if you guys had to throw it out there?

You know, it is a crap shoot. It has been up and down this year. We really don't know where it is going. It would be unfair for anybody for us to speculate. You're hearing that pretty much across the board in the industry.

Okay. Then one last one and then I will jump back in line. If you are able to, can you split your piling sales in the construction segment? Are you able to split that between federal, work and state work?

No. I will tell you this much, that most of it is state work or private work. We don't do a lot of direct federal work. Federal monies are used in the state projects but they are mostly bid through the states and they are federally supported is how that works. The highway bill (inaudible) funds the state governments and most of that, almost all of that exclusively goes through the states and it's bit through the states.

Okay, so the next highway act, should there be one coming out in '09, that is really pivotal then to the piling?

The only area that really is direct with the federal government is we do a lot -- we've done work in the last -- a lot of work in the last couple of years with the Corps of Engineers.

Okay, great. Thank you.

Mark Grzymski.

Good afternoon, gentlemen (technical difficulty) 21st Century Equity. Continuing in this same vein of state versus federal, are you seeing a large disparity in terms of regional activity in your Construction segment?

You know, not I don't think in particular, no. The populous states get the bulk of the money and that is how that pretty much goes, Mark. But I think what we talked about a little earlier, what we are seeing some because of the drop-off in tax receipts, that state-only bids have dropped off. There are some jobs that are out there that we're very much aware of because of the economic and financial situation which have been delayed, postponed. We have not seen a lot of cancellations, but there is that concern that we have out there about the future.

Do your products, do they have applications to high-speed rail?

Absolutely. They do.

It's a products unit, Mark.

So, would that -- assuming -- I know it's sort of a pipe dream but California is kind of complaining high-speed rail again. Would the existing infrastructure there need to be upgraded significantly or how exactly might that potentially play into your hands?

It would have to be upgraded. I believe that they could use some of the existing lines but they would significantly have to be upgraded as far as the type of rail, the applications, the connectors and how that is installed. That would all be new.

Okay. Then in terms of the tubular --.

That is one of the many projects. I think that as a state is on the budget. I think, when I talk about 12 transit projects, they have a -- (inaudible) state budget in Rhode Island and California along with ten individual cities and that California program I believe is around $10 billion.

Right. I believe it is on the upcoming referendum.

It is on the November ballot.

In terms of the Tubular Products division, do you guys compete at all with fiberglass piping products?

No, no, no.

Oh no?

We have two products. We have got a threaded steel product, which is in the pump column for well drilling, and then we also are in the micropile with smaller diameter threaded pile application, and then we coat pipe for the gas transmission industry at Birmingham at our Coated Pipe division. We don't compete with fiberglass.

Okay. Then I am just curious. In terms of the mindset people have regarding rail freight and oil prices and the compelling economics of rail freight, are you seeing any sort of significant paradigm shift where people are saying gee, oil prices are kind of -- well, they've come down recently. There is going to be pricing pressure there going forward and, you know, investing in the rail system at this point in time makes more prudent sense?

I'm not sure that I totally understand what you're saying but as we discussed in my earlier remarks, this is times that you have not seen before in the rail industry. I know that the rail industry are coming out the last couple of days with, again, record profits and they are spending record levels. They have got really have an opportunity to really to continue to leverage their position against truck transportation. The profits are being driven by -- a part of it is being driven because of oil pricing that they're passing onto the customers.

Right. The last question -- in terms of the -- what kind of acquisition environment are you seeing out there in terms of the pricing of companies and just the general environment?

Mark, I think the amount of activity has certainly slowed down and we have seen valuations fall to a certain extent. We would like to see them fall a little further, at least in some of the areas we are looking at. But I think there is certainly a lot fewer buyers out there today than what there was eight or nine months ago or even quite honestly three or four months ago. But the folks that are out there are selling have fewer opportunities. There's a lot of private equity firms that really are just running what they have and they are not in the market today. We don't view that as a long-term scenario, certainly, but if you are asking recently within the last couple of months, it has slowed substantially and you see mostly strategics out there in the marketplace, on the buy side anyway.

Okay, great. Thanks a lot.

Liam Burke.

Thank you. David, how are you?

Good, Liam. How are you doing?

Fine, thank you. Could you give me a free cash flow number for the first nine months of the year?

Free cash flow was a little over $8 million, $8.5 million.

Okay. Then you would expect it to be strong in the fourth quarter as well?

We do expect a good fourth quarter from cash flow, yes.

Okay, great, thank you. In terms of the Allegheny insulated bonded joints, is that business just chugging along?

We've had a good year. We are having -- really getting some benefits out of the efficiencies in the move that we did to Pueblo and it's -- we are having a good year.

Great, thank you.

Scott Blumenthal.

Good afternoon, Stan and Dave. Does the backlog number contain the October 1 announcement for the L.A. County metro?

No, it doesn't. No, that is in the October numbers.

Okay. Have you disclosed the revenue impact of that order to us?

I thought there was a press release on that.

Yes.

Yes, we have.

There was a tonnage number there but I don't think that it had any financial figures. Maybe I might have missed it.

No, I think it was a tonnage disclosure. We don't have it in front of us.

I don't have it in front of us. We can get you --

Anyway, whatever was in the release, Scott, we don't have it in front of us but that is all we have announced about it and that is probably all we will announce about it.

Okay, fair enough, Dave. Then, is there anything that we should read into the bookings? Is Q3 usually a quarter in which we have a kind of a book-to-bill of less than 1 or was this particularly weak?

No, that actually is fairly typical. If you take a look at last year, it was fairly close to what we did last year. If you take a look, typically backlog comes down. If you take a look at how backlog came down this year from Q2 to Q3, it came down to just about the same percentage rate last year.

As you go through the year, our best booking quarter is normally the first quarter and it drops off. I think that our booking were flat in the third quarter and they would drop -- are expected to be dropped off in the fourth quarter, which is typically our slowest month from a booking standpoint.

Okay, that is very helpful.

Back to the other question that -- the previous question about the overall year-to-year comp for Allegheny billings, we are at about $17 million overall for the first three quarters, which is about 15% ahead of last year.

Okay. Stan, if you would -- and I apologize for this. Could you go through the rail side of the inventory again?

I was talking about new rail and we've got $27 million in new rail, of which about 75% of that is committed. In a relay rail, we are sitting on about $3 million, which part of that is committed.

The other significant inventory amounts are really in our tie division then, Scott.

Okay. All right, great. Thank you.

Tom Spiro.

Hello, everybody. Nice quarter. I have a couple of questions. One, I'm not sure whether Stan or Dave mentioned anecdotally signs of strength, signs of weakness. I wondered if you might share with us a couple of those anecdotes?

You know what, Tom? They relate to customer and vendor situations, and we really don't want to disclose specific to the customers or vendors. But, let's say that we have heard some news here and there that there are some mills that are turning product away because they don't want to sit on a whole lot of scrap right now, given the environment in scrap. We have got some customers that are more upbeat, quite honestly, than we expected for next year. So, it is a variety, but we really don't want to get into specific names or even product lines, to be honest with you.

The customer delays at the end of Q3, which segment where they in, Construction and Piling?

They were primarily in Piling.

I'm sorry? Did those orders get shipped early in this quarter or are they still being delayed?

They will ship this quarter. They have not as of yet.

I see. Certainly, there is a potential for business for Foster and for lots of folks to slow over the next few quarters. Have you folks begun contingency planning as to SG&A and those kinds of things if business does slow?

We are in the middle of our --

(multiple speakers) right now, our annual operating plan is in that process right now and that is a point of discussion.

Lastly, lots has changed in the last couple of months. The financial environment obviously is radically different and Foster's stock has come down a long way as well. I was curious whether these developments have caused you folks to think differently about acquisitions, more aggressive, most aggressive about acquisitions versus stock repurchase. How have these major changes informed your own thinking?

Well, Tom, I will tell you they have had an impact in that our stock price has certainly come down along with most other companies. So, in general, valuations have come down and we would expect to, on the buy side, be able to take advantage of that when we are looking at acquisitions. But that is certainly not scaring us away from looking at acquisitions.

This significant reduction we have seen in market values, we don't know whether it is going to continue or it is going to reverse itself soon or what the future really holds. But if you look at longer-term points of view, there are some attractive multiples out there today, for the right company, we would take advantage of. So, it has not stopped us but we certainly do look at value and risk is certainly ever-present on our minds as we look at some of these things.

Does it cause you to reduce the size of the target you might consider, you just won't shoot for such a big one?

You know, no because that is not really how we target to begin with. If it is a larger company that we are looking at, obviously we are cognizant of the higher amount of risk and we take that into consideration when we value and when we perform due diligence.

When you're trying to decide what is the best use of the cash, stock repurchase versus acquisition, has your thinking there changed?

Not substantially because it's sort of an ongoing process. There is a balance to it. We look at share repurchases sort of in light of what kind of operating cash flow we're putting down. We want to provide a nice balance of value to the shareholder. When we see significant reductions in our share price like we did this most recent period, we took advantage of it. Having said all of that, during my little chat, I mentioned that our current authorization is principally full. So right now, we are not really authorized to buy back more than a couple of hundred thousand dollars worth of stock at this point in time.

Okay, well, thanks much.

James Bank.

Hi, guys. Just a quick follow-up -- I don't know if you just went over this too quickly, but Dave could you just give me the segment sales increase for the third quarter again?

I would be happy to. Tubular was down 15.8%. Rail was up 6.8%. Construction was up 12%.

Okay. What was up 44% in the tubular space?

That was threaded pipe. It's an operation we have down in Houston.

It is one of the two pipe businesses we have.

Right. Terrific. That is all I have.

Brian Rafn.

Good afternoon, guys. A question for you on your free cash flow allocation. Can you talk, one, what your budgets are maybe next year? I think you said $6 million for this year on property, plant and equipment CapEx. What are you looking for next year and what's your thoughts on deleveraging the balance sheet with internal cash flow?

Brian, number one, we're actually right now just in the midst of budgeting for next year. We're trying to finalize some of those. But we are certainly going to be, as a company, looking at capital projects, obviously with some discrimination as far as the best projects will win. We certainly want to keep that number down in this environment.

But as far as deleveraging with cash flow, that is not out of the question. It is not out of the question, but in this environment today with equity valuations as low as they are, we'd probably err towards maybe looking towards another equity repurchase as opposed to a debt reduction. But it really depends on what the future holds. We do want to keep enough powder out there for acquisitions, should one really look very attractive.

Okay. Can you give us kind of a ballpark as to what -- historically there's been a lot of questions as to the size of deals you would look at. Given the current asset base, sales revenue (inaudible), what is your sweet spot per se?

As I mentioned, we typically don't target by size, but I would say our sweet spot would be in the $40 million to $120 million range.

Okay. Specifically, can you give us a sense of -- you mentioned it in one of your plans -- what kind of capacity utilization you're running across your different divisions?

I would have to give you a report by division because it varies rather -- the variances are sort of large by division. We talked about our concrete tie divisions that serve the UP being at 50%. Our Spokane facility is higher than 50% but probably closer to 70%, and our tubular products divisions are in that same range. They are being utilized higher.

Yes. We -- for example, in coated, I think that we have about 50% total capacity available for the balance of this year. We are booked pretty much through the first of the quarter next year on one shift. So there is really -- there is capacity availability there and that is pretty similar to the other thread. I think we have got capacity available at our fab plants. I think that is not a challenge for us next year.

We are looking and we continue to work on process improvements at our plants and we are really starting to get the traction this year of lean, which we've had in place now for close to five years and we are really starting to get the benefit of that across the board. We have had winning situations. We are getting it as we strive for operation excellence in our plants. Our next move with lean is to be a total lean enterprise and we've got that in place going forward also. So that has really helped with some of the capacity constraints that we thought we may have had a couple of years we are getting the benefits of (inaudible) across the board.

Okay. What are you guys seeing relative to -- and you mentioned it in the SG&A line -- as far as kind of wage and salary inflation? What are you guys seeing relative to your healthcare costs?

Actually, we've had very good experience on our healthcare costs. This year, they have been lower than they have been the past couple of years.

Actually, the last two years have been down. I think last year was down over the previous year and this year right now is through September that I saw was trending down also.

Okay. Kind of your sense wage-salary growth low single digits -- give us a sense payroll-wise?

Low single digits.

Okay, all right. Thanks guys. I appreciate it. Good job.

At this time, there are no more questions in queue.

Thank you all very much. I hope you will have a good Thanksgiving holiday season coming up then. I look forward to talking to you after the first of the year. Thanks again.

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