December 11, 2007
Via Facsimile
Mr. David Humphrey
Branch Chief
Securities and Exchange Commission
100 F Street N.E.
Washington, D.C. 20549-3561
RE: L.B. Foster Company
Form 10-K for fiscal year ended December 31, 2006
Filed March 15, 2007
File No. 000-10436
Dear Mr. Humphrey,
We are writing in response to your May 31, 2007 follow up letter to our response
to the comment letter received from the Staff of the Securities and Exchange
Commission (the "SEC") dated April 9, 2007, with respect to L.B. Foster
Company's (the "Company") Form 10-K for the fiscal year ended December 31, 2006.
The italicized paragraphs below restate the numbered paragraphs in the Staff's
comment letter, and the discussion set out below each such paragraph is the
Company's response to the Staff's comments.
Form 10-K for the year ended December 31, 2006
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Liquidity and Capital Resources, Page 22
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2) With regard to our previous comment number 2, we believe that, should you
choose to continue to disclose debt as a percentage of total
capitalization, you should increase your discussion of why this percentage
is meaningful and how it should be interpreted by investors. Please confirm
that you will expand your disclosure accordingly.
The Company concurs. To the extent we continue to disclose this metric, we
will expand our disclosure to include why we believe it is meaningful and
how it should be interpreted.
Note 1. Summary of Significant Accounting Policies, Page 35
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2) We note your response to our previous comment number 5, including your
reference to Note 7. We do not object to the disclosure of your specific
accounting treatment of the investment in DM&E railroad in Note 7. However,
we believe that Note 1 should contain disclosure of your general accounting
policy for investments, including the applicability of SFAS 115, or any
other applicable accounting guidance , and how management determines
whether a decrease in value has occurred which is other than temporary.
We acknowledge your response and will, in future filings, include the
following type of investment accounting policy discussion:
Investments
The Company has a series of investments in a privately held entity for
business and strategic purposes. These investments are accounted for under the
cost method as the Company does not have the ability to exercise significant
influence over the investee and are included in "Investments" in the
consolidated balance sheet. Under the cost method, the investments are recorded
at their initial cost and are periodically evaluated for impairment. During the
Company's review for impairment, it examines the investees' actual and
forecasted operating results, financial position, liquidity, and the Company's
own prepared estimates of future cash flows, as well as business and industry
factors in assessing whether a decline in value of an equity investment has
occurred that is other-than-temporary. When such a decline in value is
identified, the fair value of the equity investment is estimated based on the
preceding factors and an impairment loss is recognized in "Other income" in the
consolidated statements of operations. During our review for the periods ended
December 31, 2006, 2005 and 2004, the Company did not identify any impairment
indicators which could have a significant adverse affect on the fair value of
the investment. See Note 7 for additional information regarding the Company's
investments.
Note 7. Other Assets and Investments, Page 42
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3) We refer to your responses to our previous comment numbers 4 and 6
regarding your determination of the fair value of your investment in
DM&E. You have stated that you are provided annual financial statements
of DM&E which you use, in addition to internally estimated cash flows,
to assess the fair value of your investment. However, the information
available publicly shows DM&E as a company that has been trying for
many years to find funding for their Powder River Basin Project, with
no success in obtaining either private or government sponsored funding
due to uncertainty regarding their ability to repay the loan, thus
making the future of this major project uncertain. Additionally, DM&E
appears to have had financial difficulties starting prior to 1998,
which were addressed only through a RRIF loan. As there is no financial
information for DM&E available to the public, these facts are the only
indications of the current financial condition of DM&E. Please provide
specific evidence to support management's assertion that the investment
in DM&E, including recorded and unpaid dividends, is significantly more
than the investment recorded in the financial statements. Also, as
previously requested, please provide us with a summary of the cash flow
estimates used to determine the amount of dividend income recorded with
respect to your investment in DM&E
The Company understands that, due to the intense opposition of its
proposed Powder River Basin Project, there has been a significant
amount of negative commentary publicly directed toward the DM&E
Railroad, much of which is speculative and incorrect. In fact, the DM&E
just received, through an Eighth Circuit Court Ruling, final approval
to proceed with the Powder River Basin Project in January, 2007, so
they have not been trying to get financing for years, other than the
RRIF application process, which commenced late in 2005. The DM&E is a
substantial and well run enterprise, whose operating ratios compare
favorably to the North American Regional and Class One Railroads and it
generates strong positive cash flows.
We have supplementally provided our internal cash flow estimates as
requested to support our assertions of financial strength.
Subsequent Transaction
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The above commentary relates to L.B. Foster's long time past practice
of evaluating the value of its investment in the DM&E Railroad. On
October 4, 2007, the DM&E agreed to be acquired by the Canadian Pacific
Railway Limited (the "CP"). This agreement resulted in a payment to the
Registrant of approximately $148.8 million and a gain of approximately
$122.9 million after recording all previously un-recorded dividend
income.
4) We refer to your response to our previous comment number 7 and your
reasons for continuing to record dividend income from the DM&E.
However, it still remains unclear why you continue to record dividend
income, as it seems that you may have no reasonable expectation of
collecting this receivable in the foreseeable future. Based on the
information provided, it appears that, regardless of available cash
flow, DM&E is currently strictly prohibited from paying cash dividends
for an extended period of time. However, even before this restriction,
DM&E had not paid any dividends in many years, and has given no
indication that they intend to do so after the restriction is lifted,
as you state that they conserve their cash to invest in engineering
studies and other costs related to the purposed Powder River Basin
Project. In addition, your concerns regarding the financial condition
of DM&E have caused you to record less than the full value of
dividends. In this regard, your basis for continuing to record any
dividend income remains unclear. As such, please provide evidence that
collection of this dividend is reasonably assured. If such evidence is
not available, consideration must be given to the guidance in SFAS 5
regarding the accrual of a loss contingency for the entire dividend
receivable balance.
The DM&E is strictly prohibited from paying dividends, but only until
December of 2007. Commencing in December 2007, the DM&E can begin to
pay a significant amount of dividends based upon a formula that
requires dividends to be funded from EBITDA after first paying for a
minimum amount of capital expenditures.
Our previously mentioned concerns regarding the DME relate back to the
1998 to 2001 time-frame, when we stopped accruing dividends at 100
cents on the dollar. You have probably read about the railroad
renaissance in this country and have seen the related increase in the
operating results and market capitalizations of the publicly traded
North American railroads. This industry strength was not lost on the
DM&E. The strong markets in which it operates, the outstanding job the
DM&E has done in improving its core business, as well as absorbing a
synergistic and accretive 2002 acquisition have all resulted in a
profitable, valuable franchise. The reason for recording less than 100%
of the dividends today is related entirely to one of anticipated time
of receipt as opposed to financial weakness.
As mentioned previously, the DM&E can begin to pay a substantial amount
of dividends beginning in December of this year. We project that
dividends will begin to be paid in the December, 2007 to June 2008 time
frame.
As far as the intent of the DM&E to pay dividends, the preferred stock
issued by the DM&E is by far the most expensive component of its
capital structure today. We believe that they have every intention to
begin paying dividends once the loan covenant restriction has lapsed at
the end of 2007. We also believe that the DM&E has considered the
possibility of refinancing the various series of preferred stock with a
cheaper form of preferred equity. This new issuance and retirement of
equity is allowed under the current Railroad Rehabilitation and
Improvement Financing Loan and is a possible scenario that would not
only result in the full payment of all dividends due L.B. Foster, but
it would also return all of the original principal invested as well.
We will, in future filings, include the following type of discussion
regarding our rationale for recording the current levels of dividend
income:
Dakota Minnesota and Eastern Railroad
In December 1998, in conjunction with the issuance of Series C
Preferred Stock and warrants, the DM&E ceased paying dividends on the
Series B shares. The terms of the Series B Preferred Stock state in the
event that regular dividends are not paid timely, dividends accrue at
an accelerated rate until those dividends are paid. In addition,
penalty interest accrues and compounds annually until such dividends
are paid. Subsequent issuances of Series C, C-1, and D Preferred Stock
have all assumed distribution priority over the previous series, with
series D not redeemable until 2008. As subsequent preferred series were
issued, we stopped recording the full amount due on all preferred
series given the delay in anticipated realization of the dividends and
the priority of redemption of the various issuances. We continue to
record dividend income of approximately $1.0 million per year from the
DM&E. We are recording an amount significantly less than the full
amount due us since we are uncertain when we will receive these
proceeds and not due to any concern of financial weakness. The DM&E is
a substantial and well run enterprise, whose operating ratios are
comparable to other regional and class one railroads and it generates
strong positive cash flows. However, certain debt covenants related to
DM&E borrowings have strictly prohibited the DM&E from paying dividends
for the past several years. This prohibition will become less
restrictive in December 2007 and we believe the DM&E will be able to
begin paying a significant amount of dividends based upon a formula
that requires dividends to be funded from EBITDA after first paying for
a minimum amount of capital improvements. We anticipate that the DM&E
will start to pay its preferred dividends in the December 2007 to June
2008 time frame.
Subsequent Transaction
----------------------
The above commentary relates to L.B. Foster's long time past practice
of evaluating the probability of when it expected the DM&E to pay
dividends to the Company and how much it would receive at those
anticipated times. As mentioned above, on October 4, 2007, the DM&E
agreed to be acquired by the CP. This agreement resulted in a payment
to the Registrant of approximately $148.8 million, which included
approximately $8.5 million of dividend income that the Company had
deferred due to the uncertainty of when the actual receipt of those
proceeds would occur as well as approximately $8.4 million of dividends
receivable that the Company had previously recorded over several years.
Pursuant to Rule 12b-4 of the Securities Exchange Act, as amended, we request
that, upon completion of this review, the Staff return to us all supplemental
materials provided in connection with this review.
The Company acknowledges that:
o The Company is responsible for the adequacy of and accuracy of the disclosure
in the filings;
o The Staff's comments or changes to disclosure in response to Staff's comments
in the filings reviewed by the Staff do not foreclose the SEC from taking any
action with respect to the filing; and
o The Company may not assert the Staff's comments as a defense in any proceeding
initiated by the SEC or any person under the federal securities laws of the
United States.
Should you have any questions or wish to discuss further, please feel to contact
me by:
Phone: (412) 928-3450
Email: drusso@lbfosterco.com
Sincerely,
/s/ David J. Russo
David J. Russo
Senior Vice President, Treasurer and Chief Financial Officer