Business Context and Reporting Period
Company: L. B. Foster Company (Foster)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Business Overview: Foster manufactures, fabricates, and distributes products for the nation's surface transportation infrastructure. Operations are divided into three segments: Rail Products (45% of sales), Construction Products (49% of sales), and Tubular Products (6% of sales). The company serves railroads, mines, the construction industry, and utility markets.
Key Financial Metrics
| Metric | 2005 | 2004 |
|---|---|---|
| Net Sales | $353.5 million | $297.9 million |
| Operating Profit | $8.9 million | $2.7 million |
| Net Income | $5.4 million | $1.5 million |
| Diluted EPS | $0.52 | $0.14 |
| Total Assets | $178.3 million | $134.1 million |
| Working Capital | $56.1 million | $46.8 million |
| Long-Term Debt | $29.3 million | $17.4 million |
| Stockholders' Equity | $80.0 million | $73.7 million |
Liquidity: The company maintains a $75.0 million revolving credit facility (expiring May 2010). As of December 31, 2005, $20.8 million was borrowed, with approximately $36.1 million in remaining availability. Cash and cash equivalents totaled $1.6 million.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 19% year-over-year, driven by a 28% increase in Construction Products (primarily sheet piling) and a 23% increase in Tubular Products (coated pipe). Rail Products sales grew 9%.
- Profitability: Net income increased significantly from $1.5 million to $5.4 million. This was aided by a reduction in LIFO charges ($1.5 million in 2005 vs. $3.5 million in 2004) and improved gross margins (11.3% in 2005 vs. 10.3% in 2004).
- Balance Sheet: Total assets grew 33% due to increased inventory ($26.9 million increase) and capital expenditures ($10.8 million in 2005 vs. $1.6 million in 2004) related to new concrete tie facilities in Tucson, AZ, and Grand Island, NE.
- Debt: Total debt increased to $36.9 million from $18.0 million to fund working capital requirements and expansion projects.
Outlook, Risks, and Contingencies
Management Commentary & Outlook:
- Backlog: Total backlog at year-end was $129.5 million, a significant increase from $100.1 million in 2004. Approximately 4% of this backlog extends beyond 2006.
- Expansion: The company is constructing a new concrete tie facility in Tucson, AZ, and upgrading facilities in Grand Island, NE, to fulfill a long-term contract with a Class I railroad (Union Pacific) through 2012.
- Legislation: The passage of the SAFETEA-LU transportation funding bill in August 2005 is expected to support future demand, though management does not anticipate a positive impact on 2006 results immediately.
Risks and Contingencies:
- Raw Materials: The company is heavily dependent on steel prices and availability. A sudden fall in steel prices could negatively impact inventory valuation, while rising costs or shortages could affect margins.
- Supplier Reliance: Foster relies on a limited number of suppliers for key products, including new rail and sheet piling. Disruptions at these suppliers could adversely affect operations.
- Investment in DM&E Railroad: Foster holds a 13.4% interest in the Dakota, Minnesota & Eastern Railroad. The value of this investment is tied to the approval and success of a major rail extension project into the Powder River Basin, which received final approval in February 2006.
- Legal Proceedings: The company faces several lawsuits, including claims regarding deteriorated concrete crossing panels (Texas), pipe coating issues (Pennsylvania), and a claim by the Colorado Contractors Trust regarding unpaid employee health contributions (seeking over $300,000). Management believes it has meritorious defenses.
- Subsequent Event: In February 2006, the company sold its Geotechnical division assets for $4.0 million plus net asset value, expecting a net gain of approximately $3.0 million.
Investor Verification Checklist
- Inventory Valuation: Verify the impact of LIFO liquidations and the adequacy of reserves for slow-moving inventory given the $26.9 million increase in inventory levels.
- Capital Expenditures: Confirm the timeline and cost overruns for the new Tucson, AZ concrete tie facility and the Grand Island, NE upgrade, as delays could materially impact operating results.
- DM&E Railroad Investment: Assess the progress of the Powder River Basin rail extension project and the likelihood of dividend realization on the preferred stock holdings.
- Customer Concentration: Review the terms and stability of the long-term contract with the Class I railroad (Union Pacific), which is critical to the Rail segment's future revenue.
- Legal Exposure: Monitor the resolution of the Texas transit project dispute and the Colorado Contractors Trust lawsuit for potential financial impact.