FSTR

Business Context and Reporting Period

Company: L. B. Foster Company (FOSTER L B CO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: A leading manufacturer, fabricator, and distributor of products for rail, construction, utility, and energy markets. Operations are organized into three segments: Rail Products, Construction Products, and Tubular Products.

Key Financial Metrics

Note: Q1 2006 Net Income included $2.7 million from discontinued operations (Geotechnical division sale), whereas Q1 2007 discontinued income was nominal ($8,000).

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 31.5% ($26.5 million) driven by strong performance across all segments. Rail products sales rose 37.1%, Construction products 21.3%, and Tubular products 53.6%.
• Profitability: Income from continuing operations increased 156% year-over-year. Gross margin expanded 1.2 percentage points to 12.8%.
• Segment Performance:
  • Rail: Sales growth attributed to increased distribution volume and new concrete tie production in Tucson, AZ. Margins declined 1.0% due to operational issues at the Tucson facility.
  • Construction: Margins improved 3.7% to 16.4% due to better performance in piling sales.
  • Tubular: Margins surged 9.9% to 24.8% driven by improved billing margins and volumes in coated pipe.
• Debt and Liquidity: Total debt increased to $69.1 million (from $58.1 million) due to higher working capital needs and capital investments. Borrowings under the revolving credit facility increased by $11.7 million. Working capital increased to $106.3 million.
• Cash Flow: Net cash used by operating activities was $7.8 million, primarily due to a $10.3 million increase in inventory and a $5.3 million decrease in accounts payable.

Outlook, Risks, and Contingencies

• Outlook: Management expects concrete tie production to continue increasing to satisfy the Union Pacific Railroad supply agreement. Total backlog from continuing operations stands at $195.8 million. Capital spending for 2007 is anticipated to be under $10.0 million.
• Supplier Risk: A significant portion of Construction segment sales relies on Chaparral Steel Company. Chaparral has retained Goldman Sachs to review strategic alternatives (mergers, sales, etc.), which could adversely affect the Company's ability to distribute products.
• Investment Risk (DM&E): The Company holds a significant investment in Dakota, Minnesota & Eastern Railroad (DM&E). The Federal Railroad Administration denied a $2.5 billion loan application for DM&E's expansion project in February 2007, creating uncertainty regarding the project's viability and the value of the Company's investment.
• Legal Contingencies:
  • Texas Transit Project: Potential liability of less than $800,000 regarding deteriorated concrete railroad crossing panels.
  • Gas Company Lawsuit: A complaint filed in 2004 alleging defective pipe coating; management believes it has meritorious defenses.
• Real Estate Sale: The Company entered an agreement to sell 63 acres of real estate in Houston, TX for approximately $7.6 million. Closing is anticipated in June 2007, subject to purchaser approval.

Investor Verification Checklist

• Supplier Concentration: Verify the status of Chaparral Steel Company's strategic review and potential impact on supply chain stability.
• DM&E Investment: Monitor the outcome of DM&E's alternative financing efforts for the Powder River Basin project, as this impacts the valuation of the Company's $16.9 million investment.
• Tucson Facility Performance: Track the resolution of operational issues at the Tucson, AZ concrete tie facility to ensure margin recovery in the Rail segment.
• Working Capital Trends: Assess the sustainability of the $10.3 million inventory increase and the Company's ability to curb cash invested in working capital as stated in management commentary.
• Real Estate Transaction: Confirm the closing of the Houston property sale and the terms of the leaseback arrangement.