FSTR

Business Context and Reporting Period

Company: L. B. Foster Company (Foster)

Filing Type: Form 10-K (Annual Report)

Period Ended: December 31, 2006

Business Overview: Foster is a manufacturer, fabricator, and distributor of products for rail, construction, energy, and utility markets. Operations are classified into three segments: Rail Products (49% of sales), Construction Products (46% of sales), and Tubular Products (5% of sales). The company operates 14 sales offices and 15 warehouse/plant facilities across the U.S.

Key Financial Metrics (Year Ended Dec 31, 2006)

Cash Flow: Net cash used by operating activities was $13.7 million, primarily due to increases in working capital (inventory and receivables) and capital expenditures of $16.9 million. Net cash provided by financing activities was $24.9 million.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 19.6% to $389.8 million. Rail Products sales rose 19.9% and Construction Products sales rose 22.7%, driven by increased concrete tie and sheet piling sales. Tubular Products sales declined 5.1%.
• Profitability: Net income more than doubled to $13.5 million. Gross margin improved 1.9 percentage points to 13.2%, aided by increased billing margins and a $0.6 million reduction in LIFO expense.
• Discontinued Operations: The company sold its Geotechnical division in February 2006, resulting in a $3.0 million gain. This division is now classified as discontinued operations.
• Balance Sheet: Total debt increased significantly to $58.1 million (from $36.9 million) to fund expansion and working capital. Inventory increased by $32.8 million, primarily due to rail inventory buildup.

Outlook, Risks, and Management Commentary

• Backlog: Total backlog at year-end was $141.4 million, a 41% increase from 2005. Construction segment backlog grew significantly to $66.1 million.
• Capital Expenditures: 2006 spending was $16.9 million for new facilities in Tucson, AZ, and Pueblo, CO. 2007 spending is expected to be approximately $10.0 million.
• Key Risks:
  • DM&E Railroad Investment: Foster holds a ~13.4% investment in the Dakota, Minnesota & Eastern Railroad (DM&E). The Federal Railroad Administration (FRA) denied a $2.5 billion loan application for the DM&E's Powder River Basin project in February 2007, creating uncertainty regarding the project's viability and the investment's future value.
  • Customer Concentration: Significant reliance on Union Pacific Railroad for concrete tie sales (contracts through 2010 and 2012).
  • Raw Materials: Exposure to steel, cement, and aggregate price volatility.
  • Legal: Pending litigation regarding concrete railroad crossing panels (potential damages $2.1M–$2.5M) and a pipe coating dispute.
• Dividends: No cash dividends were paid in 2006; none are planned in the foreseeable future.

Investor Verification Checklist

• DM&E Project Status: Verify the impact of the FRA loan denial on the DM&E Railroad project and the potential valuation of Foster's investment.
• Working Capital Trends: Monitor the $32.8 million increase in inventory and $16.7 million increase in receivables to ensure they align with sales growth and do not indicate obsolescence or collection issues.
• Legal Contingencies: Track the resolution of the Texas transit project panel dispute and the pipe coating lawsuit.
• Debt Covenants: Confirm continued compliance with the revolving credit facility covenants, particularly the fixed charge coverage ratio, given the increased debt load.
• Facility Ramp-up: Assess the operational efficiency and cost performance of the new Tucson, AZ, and Pueblo, CO, facilities.