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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2002
-------------
Commission File Number 0-10436
-------
L. B. Foster Company
(Exact name of Registrant as specified in its charter)
Pennsylvania 25-13247733
(State of Incorporation) (I. R. S. Employer Identification No.)
415 Holiday Drive, Pittsburgh, Pennsylvania 15220
(Address of principal executive offices) (Zip Code)
(412) 928-3417
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate the number of shares of each of the registrant's classes of common
stock as of the latest practicable date.
Class Outstanding at August 2, 2002
----- -----------------------------
Common Stock, Par Value $.01 9,527,522 Shares
2
L.B. FOSTER COMPANY AND SUBSIDIARIES
INDEX
PART I. Financial Information Page
- ------------------------------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. Other Information
- ---------------------------
Item 1. Legal Proceedings 19
Item 4. Results of Votes of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 22
Certification under Section 906 of the
Sarbanes-Oxley Act of 2002 23
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, December 31,
2002 2001
---------------- ----------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $4,401 $4,222
Accounts and notes receivable:
Trade 49,697 52,730
Other 269 334
---------------- ----------------
49,966 53,064
Inventories 36,429 43,444
Current deferred tax assets 1,491 1,491
Other current assets 1,143 814
Property held for resale 1,333 1,333
---------------- ----------------
Total Current Assets 94,763 104,368
---------------- ----------------
Property, Plant & Equipment - At Cost 68,414 64,465
Less Accumulated Depreciation (32,490) (30,514)
---------------- ----------------
35,924 33,951
---------------- ----------------
Other Assets:
Goodwill 5,281 5,131
Other intangibles - net 1,630 1,324
Investments 11,723 11,104
Deferred tax assets 1,640 1,184
Other assets 2,942 2,980
---------------- ----------------
Total Other Assets 23,216 21,723
---------------- ----------------
TOTAL ASSETS $153,903 $160,042
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $748 $809
Short-term borrowings - 5,000
Accounts payable - trade 27,370 29,290
Accrued payroll and employee benefits 2,425 2,546
Current deferred tax liabilities 1,201 1,201
Other accrued liabilities 3,008 3,511
---------------- ----------------
Total Current Liabilities 34,752 42,357
---------------- ----------------
Long-Term Borrowings 30,000 30,000
---------------- ----------------
Other Long-Term Debt 3,194 2,758
---------------- ----------------
Deferred Tax Liabilities 4,968 4,968
---------------- ----------------
Other Long-Term Liabilites 3,153 2,814
---------------- ----------------
STOCKHOLDERS' EQUITY:
Common stock 102 102
Paid-in capital 35,159 35,233
Retained earnings 47,074 46,632
Treasury stock (3,685) (3,926)
Accumulated other comprehensive loss (814) (896)
---------------- ----------------
Total Stockholders' Equity 77,836 77,145
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $153,903 $160,042
================ ================
See Notes to Condensed Consolidated Financial Statements.
4
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
Three Months Six Months
Ended Ended
June 30, June 30,
---------------------- -------------------------
2002 2001 2002 2001
---------------------- -------------------------
(Unaudited) (Unaudited)
Net Sales $70,821 $80,274 $133,994 $136,364
Cost of Goods Sold 62,111 70,139 118,489 120,889
--------- --------- ---------- ----------
Gross Profit 8,710 10,135 15,505 15,475
Selling and Administrative
Expenses 6,860 7,721 13,550 15,476
Interest Expense 633 935 1,307 1,896
Other Income (230) (203) (510) (417)
--------- --------- ---------- ----------
7,263 8,453 14,347 16,955
--------- --------- ---------- ----------
Income (Loss) Before Income Taxes 1,447 1,682 1,158 (1,480)
Income Tax Expense (Benefit) 716 691 716 (606)
--------- --------- ---------- ----------
Net Income (Loss) $731 $991 $442 ($874)
========= ========= ========== ==========
Basic Earnings/(Loss) Per Share $0.08 $0.11 $0.05 ($0.09)
========= ========= ========== ==========
Diluted Earnings/(Loss) Per Share $0.08 $0.10 $0.05 ($0.09)
========= ========= ========== ==========
See Notes to Condensed Consolidated Financial Statements.
5
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months
Ended June 30,
2002 2001
----------- ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $442 ($874)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 2,551 2,873
Loss on sale of property, plant and equipment 19 14
Change in operating assets and liabilities:
Accounts receivable 3,071 (4,647)
Inventories 7,774 11,699
Other current assets (329) (471)
Other noncurrent assets (587) 747
Accounts payable - trade (2,115) (3,823)
Accrued payroll and employee benefits (121) (262)
Other current liabilities (519) (1,411)
Other liabilities (20) (27)
----------- ------------
Net Cash Provided by Operating Activities 10,166 3,818
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property,
plant and equipment 238 215
Capital expenditures on property,
plant and equipment (2,956) (1,704)
Purchase of DM&E stock - (800)
Acquisition of business (2,214) -
----------- ------------
Net Cash Used by Investing Activities (4,932) (2,289)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of revolving credit agreement
borrowings (5,000) (1,000)
Exercise of stock options and stock awards 168 78
Treasury stock acquisitions - (75)
Repayment of long-term debt (243) (474)
----------- ------------
Net Cash Used by Financing Activities (5,075) (1,471)
----------- ------------
Effect of exchange rate on cash 20 (13)
----------- ------------
Net Increase in Cash and Cash Equivalents 179 45
Cash and Cash Equivalents at Beginning of Period 4,222 -
----------- ------------
Cash and Cash Equivalents at End of Period $4,401 $45
=========== ============
Supplemental Disclosure of Cash Flow Information:
Interest Paid $1,462 $2,210
=========== ============
Income Taxes Paid $729 $419
=========== ============
During the first six months of 2002 and 2001, the Company financed certain
capital expenditures totaling $618,000 and $98,000, respectively, through the
execution of capital leases.
See Notes to Condensed Consolidated Financial Statements.
6
L. B. FOSTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
--------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all estimates and
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included, however, actual results could differ from
those estimates. The results of operations for these interim periods are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2002. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 2001.
2. ACCOUNTING PRINCIPLES
---------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141)
and Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). These statements change the accounting for
business combinations, goodwill, and intangible assets.
SFAS 141 eliminates the pooling-of-interests method of accounting for business
combinations except for qualifying business combinations that were initiated
prior to July 1, 2001. SFAS 141 supersedes Accounting Principles Board Opinion
No. 16 (APB 16): however, certain purchase accounting guidance in APB 16, as
well as certain of its amendments and interpretations, have been carried forward
to SFAS 141. SFAS 141 changes the criteria to recognize intangible assets
separately from goodwill. The requirements of SFAS 141 are effective for any
business combination accounted for by the purchase method that is completed
after June 30, 2001.
The Company adopted the non-amortization provisions of SFAS 142 on January 1,
2002, which resulted in a $0.1 million increase to the second quarter's net
income, a $0.2 million increase to the six month's ended June 30, 2002 net
income, and is expected to increase full-year net income by approximately $0.4
million. The Company has approximately $5.1 million of goodwill subject to the
impairment testing provisions of SFAS 142. The Company has completed the first
step of the initial impairment test for all reporting units and the results
indicate $4.9 million of goodwill is subject to impairment review. The Company
expects to finalize the measurement of the impairment in the third quarter. The
expected transition impairment, while not yet quantified, will be retroactively
recorded to the required date of adoption, January 1, 2002. Management
anticipates this non-cash charge could have a material impact on its
consolidated financial statements.
The following table provides comparative earnings and earnings per share had the
non-amortization provisions of SFAS 142 been adopted for all periods presented:
7
Three Months Ended Six Months Ended
June 30 June 30
(in thousands, except per share amounts) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------
Reported net Income/(loss) $ 731 $ 991 $442 ($874)
Amortization of goodwill, net of tax - 104 - 207
- -----------------------------------------------------------------------------------------------
Adjusted net income/(loss) $ 731 $1,095 $442 ($667)
===============================================================================================
Basic earnings/(loss) per share:
Reported net Income/(loss) $0.08 $0.11 $0.05 ($0.09)
Amortization of goodwill, net of tax - 0.01 - 0.02
- -----------------------------------------------------------------------------------------------
Adjusted basic earnings/(loss) per share: $0.08 $0.12 $0.05 ($0.07)
===============================================================================================
Diluted earnings/(loss) per share:
Reported net Income/(loss) $0.08 $0.10 $0.05 ($0.09)
Amortization of goodwill, net of tax - 0.01 - 0.02
- -----------------------------------------------------------------------------------------------
Adjusted diluted earnings/(loss) per share: $0.08 $0.11 $0.05 ($0.07)
===============================================================================================
As of June 30, 2002, the Company had $1.6 million of intangible assets that will
continue to be amortized over their remaining useful lives ranging from 60 to
120 months. The Company had no indefinite-lived intangible assets.
In June 2001, the FASB issued Statement of Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" (SFAS 143), effective for fiscal
years beginning after June 15, 2002. SFAS 143 provides accounting requirements
for retirement obligations associated with tangible long-lived assets. The
obligations affected are those for which there is a legal obligation to settle
as a result of existing or enacted law. The Company does not believe this
standard will have an impact on its consolidated financial statements.
In August 2001 the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144),
effective for fiscal years beginning after December 31, 2001. This statement
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121), and provides a
single accounting model for long-lived assets to be disposed of. On January 1,
2002, the Company adopted SFAS 144 and the adoption did not have a material
impact on the Company's consolidated financial statements.
3. ACCOUNTS RECEIVABLE
-------------------
Credit is extended on an evaluation of the customer's financial condition and,
generally, collateral is not required. Credit terms are consistent with industry
standards and practices. Trade accounts receivable at June 30, 2002 and December
31, 2001 have been reduced by an allowance for doubtful accounts of ($890,000)
and ($812,000), respectively. Bad debt expense was $82,000 and $165,000 for the
six-month periods ended June 30, 2002 and 2001, respectively.
8
4. INVENTORIES
-----------
Inventories of the Company at June 30, 2002 and December 31, 2001 are summarized
as follows in thousands:
June 30, December 31,
2002 2001
--------------- ---------------
Finished goods $25,095 $34,070
Work-in-process 8,621 5,551
Raw materials 4,646 5,756
--------------- ---------------
Total inventories at current costs 38,362 45,377
(Less):
Current costs over LIFO
stated values (1,333) (1,333)
Inventory valuation reserve (600) (600)
--------------- ---------------
$36,429 $43,444
=============== ===============
Inventories of the Company are generally valued at the lower of last-in,
first-out (LIFO) cost or market. Other inventories of the Company are valued at
average cost or market, whichever is lower. An actual valuation of inventory
under the LIFO method can be made only at the end of each year based on the
inventory levels and costs at that time. Accordingly, interim LIFO calculations
must necessarily be based on management's estimates of expected year-end levels
and costs.
5. BORROWINGS
----------
On June 30, 2002, the Company's maximum borrowing capacity under the revolving
credit agreement was reduced from $63,500,000 to $61,500,000 in accordance with
the original terms and conditions of the revolving credit agreement. The
interest rate is, at the Company's option, based on the prime rate, the domestic
certificate of deposit rate (CD rate) or the Euro-bank rate (LIBOR). The
interest rates are established quarterly based upon cash flow and the level of
outstanding borrowings to debt as defined in the agreement. These rates can
range from the prime rate to prime plus 0.25%, the CD rate plus 0.575% to 1.8%,
or the LIBOR rate plus 0.575% to 1.8%. Borrowings under the agreement, which
expires July 1, 2003, are secured by eligible accounts receivable, inventory,
and the pledge of the Company-held DM&E Railroad Preferred Stock.
The agreement includes financial covenants requiring a minimum net worth, a
minimum level for the fixed charge coverage ratio, and a maximum level for the
consolidated total indebtedness to EBITDA ratio. The agreement also restricts
investments, indebtedness, and the sale of certain assets. As of June 30, 2002,
the Company was in compliance with all of the agreement's covenants.
9
6. EARNINGS PER COMMON SHARE
-------------------------
The following table sets forth the computation of basic and diluted earnings per
common share:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except earnings per share) 2002 2001 2002 2001
- --------------------------------------------------------------------------------
Numerator:
Numerator for basic and diluted
earnings per common share -
net income available to common
stockholders:
- --------------------------------------------------------------------------------
Net Income (Loss) $731 $991 $442 ($874)
================================================================================
Denominator:
Weighted average shares 9,495 9,431 9,468 9,424
- --------------------------------------------------------------------------------
Denominator for basic earnings
per common share 9,495 9,431 9,468 9,424
Effect of dilutive securities:
Contingent issuable shares pursuant to
the Company's Incentive
Compensation Plans 7 32 19 14
Employee stock options 220 37 205 36
- --------------------------------------------------------------------------------
Dilutive potential common shares 227 69 224 50
Denominator for diluted earnings
per common share - adjusted weighted
average shares and assumed conversions 9,722 9,500 9,692 9,474
================================================================================
Basic earnings (loss) per common share $0.08 $0.11 $0.05 ($0.09)
================================================================================
Diluted earnings (loss) per common share $0.08 $0.10 $0.05 ($0.09)
================================================================================
7. COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------
The Company is subject to laws and regulations relating to the protection of the
environment and the Company's efforts to comply with environmental regulations
may have an adverse effect on the Company's future earnings. In the opinion of
management, compliance with the present environmental protection laws will not
have a material adverse effect on the financial condition, results of
operations, cash flows, competitive position, or capital expenditures of the
Company.
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position of the Company.
At June 30, 2002, the Company had outstanding letters of credit of approximately
$2,697,000.
8. BUSINESS SEGMENTS
-----------------
The Company is organized and evaluated by product group, which is the basis for
identifying reportable segments. The Company is engaged in the manufacture,
fabrication and distribution of rail, construction
10
and tubular products. The following tables illustrate revenues and
profits/(losses) of the Company by segment:
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
Net Segment Net Segment
(in thousands) Sales Profit/(Loss) Sales Profit/(Loss)
- -----------------------------------------------------------------------------------------------------
Rail products $34,315 ($224) $ 64,270 ($958)
Construction products 31,975 709 62,009 816
Tubular products 4,531 476 7,715 621
- -----------------------------------------------------------------------------------------------------
Total $70,821 $961 $133,994 $479
=====================================================================================================
Three Months Ended
June 30, 2001
Reported Adjusted
Net Segment Goodwill Segment
(in thousands) Sales Profit Amortization Profit
- -----------------------------------------------------------------------------------------------------
Rail products $44,275 $ 299 $ 54 $ 353
Construction products 30,719 814 56 870
Tubular products 5,280 764 - 764
- -----------------------------------------------------------------------------------------------------
Total $80,274 $1,877 $ 110 $1,987
=====================================================================================================
Six Months Ended
June 30, 2001
Reported Adjusted
Net Segment Goodwill Segment
(in thousands) Sales Profit/(Loss) Amortization Profit/(Loss)
- -----------------------------------------------------------------------------------------------------
Rail products $ 71,184 ($2,701) $ 108 $(2,593)
Construction products 54,723 207 112 319
Tubular products 10,457 1,278 - 1,278
- -----------------------------------------------------------------------------------------------------
Total $136,364 ($1,216) $ 220 $ (996)
=====================================================================================================
In connection with the adoption of SFAS 142 the Company adjusted the reporting
of its segment results to exclude amortization of goodwill from its operating
segments for the prior year periods presented.
Segment profits, as shown above, include internal cost of capital charges for
assets used in the segment at a rate of, generally, 1% per month.
The following table provides a reconciliation of reportable net profit/(loss) to
the Company's consolidated total had the non-amortization provisions of SFAS 142
been adopted for all periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------
Income (loss) for reportable segments $ 961 $1,877 $ 479 ($1,216)
Goodwill amortization for reportable segments - 110 - 220
- -------------------------------------------------------------------------------------------------------
Adjusted income (loss) for reportable segments 961 1,987 479 (996)
Cost of capital for reportable segments 3,278 3,369 6,027 6,596
Interest expense (633) (935) (1,307) (1,896)
Other income 230 203 510 417
Unallocated goodwill amortization - 28 - 56
Corporate expense and other unallocated charges (2,389) (2,832) (4,551) (5,381)
- -------------------------------------------------------------------------------------------------------
Adjusted income (loss) before income taxes $1,447 $1,820 $1,158 ($1,204)
=======================================================================================================
11
The Company's emphasis on improving working capital utilization has resulted in
a reduction to inventory and accounts receivable for the Rail segment of
approximately $14,000,000, from December 31, 2001. However, the Construction
segment's net assets increased approximately $7,000,000 from December 31, 2001
due primarily to the growth of the Company's Fabricated Products division. This
division acquired assets from the Greulich Bridge Products Division of Harsco
Corporation (See Other Matters section of Management's Discussion and Analysis
of Financial Condition & Results of Operations), and expanded its Bedford, PA
operations.
10. COMPREHENSIVE INCOME (LOSS)
---------------------------
Comprehensive income (loss) represents net income (loss) plus certain
stockholders' equity changes not reflected in the Condensed Consolidated
Statements of Income. The components of comprehensive income (loss), net of tax,
were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------
Net Income/(Loss) $731 $ 991 $442 ($874)
Cumulative transition adjustment of a change
in accounting principle (SFAS No. 133) - - - (48)
Unrealized derivative gains (losses) on cash
flow hedges (SFAS No. 133) (95) 75 82 (37)
Foreign currency translation gains (losses) 30 26 0 (3)
- ---------------------------------------------------------------------------------------------
Comprehensive income (loss) $666 $1,092 $524 ($962)
=============================================================================================
12
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ---------------------------------
2002 2001 2002 2001
---------------------------------- ---------------------------------
(Dollars in thousands)
Net Sales:
Rail Products $34,315 $44,275 $ 64,270 $ 71,184
Construction Products 31,975 30,719 62,009 54,723
Tubular Products 4,531 5,280 7,715 10,457
---------------------------------- ---------------------------------
Total Net Sales $70,821 $80,274 $133,994 $136,364
================================== =================================
Gross Profit:
Rail Products $3,530 $4,668 $6,382 $6,018
Construction Products 4,597 4,442 8,244 7,524
Tubular Products 930 1,236 1,481 2,471
Other (347) (211) (602) (538)
---------------------------------- ---------------------------------
Total Gross Profit 8,710 10,135 15,505 15,475
---------------------------------- ---------------------------------
Expenses:
Selling and administrative
expenses 6,860 7,721 13,550 15,476
Interest expense 633 935 1,307 1,896
Other income - net (230) (203) (510) (417)
---------------------------------- ---------------------------------
Total Expenses 7,263 8,453 14,347 16,955
---------------------------------- ---------------------------------
Income (Loss) Before Income Taxes 1,447 1,682 1,158 (1,480)
Income Tax Expense (Benefit) 716 691 716 (606)
---------------------------------- ---------------------------------
Net Income (Loss) $731 $991 $442 ($874)
================================== =================================
Gross Profit %:
Rail Products 10.3% 10.5% 9.9% 8.5%
Construction Products 14.4% 14.5% 13.3% 13.7%
Tubular Products 20.5% 23.4% 19.2% 23.6%
Total Gross Profit 12.3% 12.6% 11.6% 11.3%
================================== =================================
13
Second Quarter 2002 Results of Operations
- -----------------------------------------
The Company recorded second quarter 2002 net income of $0.7 million or $0.08 per
diluted share on net sales of $70.8 million. This compares to net income of $1.0
million or $0.10 per diluted share on net sales of $80.3 million, for the second
quarter of 2001. Results for last year's second quarter included nonrecurring
pretax charges of $0.1 million related to the Company's plan to consolidate
sales and administrative functions and plant operations, and $0.1 million of
goodwill amortization.
Rail products' 2002 second quarter net sales were $34.3 million, a 22.5% decline
from last year's second quarter net sales of $44.3 million. This decline was due
primarily to weak market conditions in the Company's rail distribution business.
Construction products' net sales increased 4.1% to $32.0 million in the second
quarter of 2002. This was the result of an increase in revenue recognized for
fabricated bridge products, and an increase in the production capacity for
precast concrete buildings, since the start-up of the Company's new Hillsboro,
TX facility in the fourth quarter of 2001. Tubular products' sales declined
14.2% from the same quarter of 2001 due primarily to low demand for coated pipe.
Changes in net sales are generally the result of changes in volume rather than
changes in prices.
The gross profit margin for the total Company was 12.3% in the second quarter of
2002 compared to 12.6% in the same quarter last year. The 2001 second quarter
nonrecurring pretax charges, discussed above, reduced the gross margin by 0.1
percentage points. Rail products' profit margin declined 0.2 percentage points
to 10.3% from the same period last year. Excluding nonrecurring pretax charges
in the second quarter of 2001, Rail products' profit margin for the second
quarter of 2002 declined 0.3 percentage points. Repair and maintenance costs at
the Grand Island, NE concrete tie plant and a decline in production levels for
certain CXT rail products had a negative impact on margins, during the second
quarter of 2002. Construction products' margin was almost the same as last
year's second quarter. Tubular products' 2.9 percentage point drop in gross
margin was primarily the result of low volume inefficiencies at the Birmingham,
AL pipe-coating facility caused by the sales decline, mentioned above.
Excluding the prior year's second quarter non-recurring pretax charges of $0.1
million and amortization expense of $0.1 million, selling and administrative
expenses declined 8.6% compared to the same period of 2001. This decline can be
attributed to cost control measures and the elimination of the sign structure
business. Other income in the second quarter of 2002 includes approximately $0.3
million accrued dividend income on the DM&E Preferred Stock. Other income in the
same period of 2001 included $0.2 million accrued dividend income on the DM&E
Preferred Stock. The decline in interest expense resulted from the reduction of
debt. The Company's effective tax rate increased significantly in 2002 due to
continued losses at its Canadian signaling operations. The provision for income
taxes was recorded at approximately 49% in the second quarter of 2002 as
compared to approximately 41% in the second quarter of 2001.
First Six Months of 2002 Results of Operations
- ----------------------------------------------
The Company recorded net income of $0.4 million, or $0.05 per diluted share on
net sales of $134.0 million for the first six months of 2002. This compares to a
net loss of $0.9 million, or $0.09 per diluted share on net sales of $136.4
million for the same period in 2001. Results for the first six months of 2002 do
not include the transitional goodwill impairment charges that the Company
expects to record as a result of adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets". The Company has
completed the first step of the transitional goodwill impairment test for all
reporting units and the results indicate impairment. The Company has $4.9
million subject to impairment review and expects to finalize the measurement of
the impairment in the third quarter. The expected transition impairment will be
recognized as the cumulative effect of a change in accounting principle and will
be retroactively recorded to the required date of adoption, January 1, 2002.
Results for the first six months of 2001 included nonrecurring pretax charges of
$1.5 million related to the Company's plan to consolidate sales and
administrative functions and plant operations, and $0.3 million of goodwill
amortization.
14
Rail products' net sales for the first half of 2002 were $64.3 million, a 9.7%
decline from the prior year period. This decline in sales can be attributed to
poor market conditions for rail, and management's decision to reduce levels of
used rail inventory in 2001. Construction products' net sales improved 13.3%
from last year's first six months. This improvement was primarily due to a
strong 2001 year-end backlog of fabricated bridge products and the January 2002
acquisition of the net assets of Gruelich Bridge Products. (See Other Matters.)
The availability of some sheet piling in the first quarter of 2002, and the
production of precast concrete buildings at the new Hillsboro, TX facility, also
contributed to the increase in sales for 2002. Pipe products' sales declined
26.2% due primarily to lower demand for pipe coating services during the first
four months of 2002.
The gross margin percentage for the Company was 11.6% in the first six months of
2002 and 11.3% in the same period of 2001. The pretax charges, discusses above,
reduced the 2001 gross margin by 0.7 percentage points. During the first six
months of 2002, Rail products' profit margins improved to 9.9%, an increase of
1.4 percentage points from the same period in 2001. Last year was negatively
impacted by costs associated with the shutdown of the Company's trackwork
facility in Pomeroy, OH and the reduction of used rail inventory through low
margin sales. Excluding these non-recurring pretax charges in the first half of
2001, rail products' gross margin improved 0.5 percentage points in 2002.
Construction products' profit margins declined 0.4 percentage points primarily
as a result of costs associated with the start-up of the Company's Hillsboro, TX
facility.
Excluding the prior year's non-recurring pretax charges of $0.5 million and
amortization expense of $0.3 million, selling and administrative expenses
declined 8.0% compared to the same period of 2001. This decline can be
attributed to cost control measures and the elimination of the sign structure
business. Other income in 2002 includes approximately $0.6 million accrued
dividend income on the DM&E Preferred Stock. Other income in the same period of
2001 included $0.4 million accrued dividend income on the DM&E Preferred Stock.
The decline in interest expense resulted from the reduction of debt. The
provision for income taxes was recorded at approximately 62% in the first six
months of 2002 and approximately 41% in the first six months of 2001. Exclusive
of the non-deductible Canadian losses, the Company's 2002 effective tax rate is
41%.
Liquidity and Capital Resources
- -------------------------------
The Company generates operational cash flow from the sale of inventory and the
collection of accounts receivable. During the first six months of 2002, the
average turnover rate for accounts receivable improved over the same period in
2001. The average inventory turnover rate for the first six months of 2002 also
improved over the average rate for the same period in 2001. Working capital at
June 30, 2002 was $60.0 million compared to $62.0 million at December 31, 2001.
Management's emphasis on improving working capital utilization resulted in an
$11.7 million reduction in inventory and a $12.3 million reduction in
receivables since June 30, 2001. These improvements have allowed the Company to
reduce debt by $15.6 million from a year ago.
The Company's Board of Directors has authorized the purchase of up to 1,500,000
shares of its Common stock at prevailing market prices. The timing and extent of
purchases will depend on market conditions and options available to the Company
for alternative uses of its resources. No purchases were made in the first half
of 2002. In the first half of 2001, the Company purchased 25,000 shares at a
cost of $75,000. From August 1997 through June 2002, the Company had repurchased
973,398 shares at a cost of approximately $5.0 million.
Including the Greulich acquisition, discussed in Other Matters, the Company had
capital expenditures of approximately $5.2 million in the first six months of
2002. Total capital expenditures in 2002 are expected to be approximately $7.0
million and are anticipated to be funded by cash flow from operations and
available external financing sources.
Total revolving credit agreement borrowings at June 30, 2002 were $30.0 million,
a decrease of $5.0 million from December 31, 2001. At June 30, 2002, amounts
available under this facility were
15
approximately $16.4 million. Outstanding letters of credit at June 30, 2002 were
approximately $2.7 million. The letters of credit expire annually and are
subject to renewal. Management believes its internal and external sources of
funds are adequate to meet anticipated needs.
The revolving credit agreement interest rate is, at the Company's option, based
on the prime rate, the domestic certificate of deposit rate (CD rate) or the
Euro-bank rate (LIBOR). The interest rates are established quarterly based upon
cash flow and the level of outstanding borrowings to debt as defined in the
agreement. These rates can range from the prime rate to prime plus 0.25%, the CD
rate plus 0.575% to 1.8%, or the LIBOR rate plus 0.575% to 1.8%. Borrowings
under the agreement, which expires July 1, 2003, are secured by eligible
accounts receivable, inventory, and the pledge of the Company-held Dakota,
Minnesota & Eastern Railroad Corporation Preferred Stock.
The agreement includes financial covenants requiring a minimum net worth, a
minimum level for the fixed charge coverage ratio, and a maximum level for the
consolidated total indebtedness to EBITDA ratio. The agreement also restricts
investments, indebtedness, and the sale of certain assets. As of June 30, 2002,
the Company was in compliance with all of the agreement's covenants.
Dakota, Minnesota & Eastern Railroad
- ------------------------------------
The Company maintains a significant investment in the Dakota, Minnesota &
Eastern Railroad Corporation (DM&E), a privately held, regional railroad, which
operates over 1,100 miles of track in five states.
At June 30, 2002, the Company's investment was comprised of, $0.2 million of
DM&E common stock, $1.5 million of the Series B Preferred Stock and warrants,
$6.0 million of the Series C Preferred Stock and warrants, and $0.8 million of
DM&E Preferred Series C-1 Stock and warrants. In addition, the Company has a
receivable for accrued dividend income on Preferred Stock of $3.2 million. (See
Other Matters for recent developments.)
In June 1997, the DM&E announced its plan to build an extension from the DM&E's
existing line into the low sulfur coal market of the Powder River Basin in
Wyoming and to rebuild approximately 600 miles of its existing track (the
Project). The estimated cost of this project is expected to be in excess of $1.5
billion. The Project received final approval by the Surface Transportation Board
(STB) in January 2002. Litigation has been initiated challenging the STB's
approval of the Project and the DM&E's right to utilize eminent domain.
If the Project proves to be viable, management believes that the value of the
Company's investment in the DM&E could increase significantly.
Other Matters
- -------------
On July 30, 2002, the DM&E announced the acquisition of the 1,400 mile regional
railroad formerly owned by the I&M Rail Link, LLC. The Company participated in
the financing of this acquisition with an additional $0.5 million investment for
Series D Preferred Stock and warrants. On a fully diluted basis, the Company's
ownership in the DM&E is approximately 13.6%.
In July 2002, the Company agreed to sell substantially all of the assets at its
St. Marys, WV mine tie facility. Management expects this sale to close in the
third quarter of 2002 and anticipates a nominal gain on the sale.
On January 4, 2002, the Company acquired substantially all of the equipment,
inventory, intellectual property, and customer backlog of the Greulich Bridge
Products Division of Harsco Corporation. The purchase price of approximately
$2.2 million consisted of: equipment of $1.0 million, inventory (net of trade
payables) of $0.5 million, intangible assets of $0.5 million, and goodwill of
$0.2 million. These assets will be utilized in the Company's fabricated bridge
products operations in the Construction products segment, and the results of
operations of these assets have been included in the consolidated financial
statements since the date of acquisition. The acquisition established the
Company as the leading supplier of bridge decking
16
in the United States and is expected to result in production efficiencies and
increased business volume. The goodwill associated with this transaction is
expected to be deductible for tax purposes.
Operations at the Company's Newport, KY pipe-coating facility were suspended in
1998 in response to unfavorable market conditions. In 1999, the Company recorded
an impairment loss to reduce these assets to their anticipated market value.
Management is currently negotiating the sale of these assets. Provided the sale
is consummated pursuant to the current terms and conditions of the negotiations,
management believes the proceeds will be sufficient to recover the net book
value of the assets.
In 1998, the Company purchased assets, primarily comprised of intellectual
property related to the business of supplying rail signaling and communication
devices, for approximately $1.7 million. To date, this operation, headquartered
in Canada, has not generated significant revenues. The Company continues to
develop and test, in the market, products associated with the acquired
intellectual property. While market acceptance of these products is expected,
the Company is also exploring the sale of the intellectual property or a
strategic joint venture. Projected cash flows from any of these options will be
adequate to support the carrying value of the operation.
Management continues to evaluate the overall performance of its operations. A
decision to terminate an existing operation could have a material adverse effect
on near-term earnings but would not be expected to have a material adverse
effect on the financial condition of the Company.
Outlook
- -------
The Company has an exclusive agreement with a steel mill to distribute sheet
piling in North America. Although production of sheet piling commenced in the
first quarter of 2001, the Company continues to have difficulty in obtaining
piling on a consistent basis. The quantity acquired to date has not materially
impacted results, and management does not expect this situation to improve
through the remainder of 2002.
Specialty trackwork sales of the Company's Rail segment depend primarily on one
source, in which the Company maintains a 30% ownership position. At June 30,
2002 and 2001, the Company had advanced to this supplier inventory progress
payments of $4.5 million and $6.9 million, respectively. During the first six
months of 2002 and 2001, the volume of business the supplier conducted with this
Company was approximately $6.8 million and $3.6 million, respectively. If, for
any reason, this supplier is unable to perform, the Company could experience a
negative short-term effect on earnings and cash flows.
The Company's CXT subsidiary and Allegheny Rail Products division are dependent
on one Class I railroad for a significant portion of their business. In
addition, a substantial portion of the Company's operations is heavily dependent
on governmental funding of infrastructure projects. Significant changes in the
level of government funding of these projects could have a favorable or
unfavorable impact on the operating results of the Company. Additionally,
government actions concerning taxation, tariffs, the environment, or other
matters could impact the operating results of the Company. The Company's
operating results may also be affected by adverse weather conditions.
Although backlog is not necessarily indicative of future operating results,
total Company backlog at June 30, 2002, was approximately $130.9 million. The
following table provides the backlog by business segment:
17
Backlog
------------------------------------------------------
June 30, December 31, June 30,
(In thousands) 2002 2001 2001
- -------------------------------------------------------------------------------
Rail Products $58,829 $64,641 $88,319
Construction Products 69,262 59,808 59,598
Tubular Products 2,791 1,307 2,790
- -------------------------------------------------------------------------------
Total $130,882 $125,756 $150,707
===============================================================================
The reduction in rail segment backlog from a year ago reflects the effect of CXT
billings against long-term production contracts. Total billings under these
contracts were $18.7 million since July 1, 2001.
Critical Accounting Policies
- ----------------------------
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States.
When more than one accounting principle, or method of its application, is
generally accepted, management selects the principle or method that is
appropriate in the Company's specific circumstances. Application of these
accounting principles requires management to make estimates about the future
resolution of existing uncertainties. As a result, actual results could differ
from these estimates. In preparing these financial statements, management has
made its best estimates and judgements of the amounts and disclosures included
in the financial statements giving due regard to materiality. For more
information regarding the Company's critical accounting policies, please see the
discussion in Management's Discussion & Analysis of Financial Condition and
Results of Operations in Form 10-K for the year ended December 31, 2001.
Market Risk and Risk Management Policies
- ----------------------------------------
The Company uses derivative financial instruments to manage interest rate
exposure on variable-rate debt, primarily by using interest rate collars and
variable interest rate swaps. One interest rate collar agreement, which expires
in March 2006, has a notional value of $15.0 million with a maximum annual
interest rate of 5.60%, and a minimum annual interest rate of 5.00%, and is
based on LIBOR. The counter-party to the collar agreement has the option, on
March 6, 2005, to convert the $15.0 million note to a one-year fixed-rate
instrument with interest payable at an annual rate of 5.49%. A second interest
rate collar agreement, which expires in April 2006, has a notional value of
$10.0 million with a maximum annual interest rate of 5.14%, and a minimum annual
interest rate of 4.97%, and is based on LIBOR. The counter-party to the collar
agreement has the option, on April 18, 2004, to convert the $10.0 million note
to a two-year fixed-rate instrument with interest payable at an annual rate of
5.48%. The interest rate swap agreement, which expires in December 2004, has a
notional value of $2.8 million at June 30, 2002 and is designed to fix the total
interest rate at 7.42%. The Company is obligated to pay additional interest on
the swap if LIBOR exceeds 7.249%.
The Company is not subject to significant exposure to change in foreign currency
exchange rates. The Company does, however, hedge the cash flows of operations of
its Canadian subsidiary. The Company manages its exposures to changes in foreign
currency exchange rates on firm sales and purchase commitments by entering into
foreign currency forward contracts. The Company's risk management objective is
to reduce its exposure to the effects of changes in exchange rates on sales
revenue over the duration of the transaction. At June 30, 2002, the Company had
outstanding foreign currency forward contracts to purchase $525,000 Canadian for
approximately $330,000 US.
During the three months ended June 30, 2002 and 2001, unrealized net gains
(losses) on derivative instruments of approximately ($95,000) and $75,000,
respectively, net of related tax effects, were recorded
18
in comprehensive income (loss). During the six months ended June 30, 2002 and
2001, unrealized net gains (losses) on derivative instruments of approximately
$82,000 and ($37,000), respectively, net of related tax effects, were recorded
in comprehensive income (loss).
The Company may enter into additional swaps or other financial instruments to
set all or a portion of its borrowings at fixed rates.
Forward-Looking Statements
- --------------------------
Statements relating to the potential value or viability of the DM&E or the
Project, or management's belief as to such matters, are forward-looking
statements and are subject to numerous contingencies and risk factors. The
Company has based its assessment on information provided by the DM&E and has not
independently verified such information. In addition to matters mentioned above,
factors which can adversely affect the value of the DM&E, its ability to
complete the Project or the viability of the Project include the following:
labor disputes, any inability to obtain necessary environmental and government
approvals for the Project in a timely fashion, the DM&E's ability to continue to
obtain interim funding to finance the project, the expense of environmental
mitigation measures required by the Surface Transportation Board, an inability
to obtain financing for the Project, competitors' response to the Project,
market demand for coal or electricity and changes in environmental laws and
regulations.
The Company wishes to caution readers that various factors could cause the
actual results of the Company to differ materially from those indicated by
forward-looking statements made from time to time in news releases, reports,
proxy statements, registration statements and other written communications
(including the preceding sections of this Management's Discussion and Analysis),
as well as oral statements made from time to time by representatives of the
Company. Additional delays in production of steel sheet piling would, for
example, have an adverse effect on the Company's performance. The inability to
negotiate the sale of certain assets could result in an impairment in future
periods. Except for historical information, matters discussed in such oral and
written communications are forward-looking statements that involve risks and
uncertainties, including but not limited to general business conditions, the
availability of material from major suppliers, the impact of competition, the
seasonality of the Company's business, taxes, inflation and governmental
regulations. Sentences containing words such as "anticipates", "expects", or
"will" generally should be considered forward-looking statements.
19
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
See Note 7, "Commitments and Contingent Liabilities", to the Condensed
Consolidated Financial Statements.
Item 4. RESULTS OF VOTES OF SECURITY HOLDERS
------------------------------------
At the Company's annual meeting on May 15, 2002, the following individuals were
elected to the Board of Directors:
For Withheld
Name Election Authority
- -----------------------------------------------------------------------
Lee B. Foster II 8,521,614 437,898
Stan L. Hasselbusch 8,535,911 423,601
Henry J. Massman IV 8,842,416 117,096
Diane B. Owen 8,848,707 110,805
John W. Puth 8,848,514 110,998
William H. Rackoff 8,842,416 117,096
The stockholders also voted to approve Ernst & Young LLP as the Company's
independent auditors for the fiscal year ended December 31, 2002. The following
table sets forth the results of the vote for independent auditors:
For Against
Approval Approval Abstained
- -----------------------------------------------------------------------
8,781,231 92,981 85,300
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a) EXHIBITS
--------
Unless marked by an asterisk, all exhibits are incorporated by reference:
3.1 Restated Certificate of Incorporation as amended to date,
filed as Appendix B to the Company's April 17, 1998 Proxy
Statement.
3.2 Bylaws of the Registrant, as amended to date, filed as
Exhibit 3B to Form 8-K on May 21, 1997.
4.0 Rights Amendment, dated as of May 14, 1998 between L. B.
Foster Company and American Stock Transfer & Trust
Company, including the form of Rights Certificate and the
Summary of Rights attached thereto, filed as Exhibit 4B to
Form 8-A dated May 23, 1997.
4.0.1 Amended Rights Agreement dated as of May 14, 1998 between
L. B. Foster Company
20
and American Stock Transfer & Trust Company, filed as
Exhibit 4.0.1 to Form 10-Q for the quarter ended June 30,
1998.
4.1 Third Amended and Restated Loan Agreement by and among the
Registrant and Mellon Bank, N. A., PNC Bank, National
Association and First Union National Bank, Dated as of
June 30, 1999 and filed as Exhibit 4.1 to Form 10-Q for
the quarter ended June 30, 1999.
10.12 Lease between CXT Incorporated and Pentzer Development
Corporation, dated April 1, 1993, filed as Exhibit 10.12
to Form 10-K for the year ended December 31, 1999.
10.12.1 Amendment dated March 12, 1996 to lease between CXT
Incorporated and Pentzer Corporation, filed as Exhibit
10.12.1 to Form 10-K for the year ended December
31, 1999.
10.13 Lease between CXT Incorporated and Crown West Realty,
L. L. C., dated December 20, 1996, filed as Exhibit 10.13
to Form 10-K for the year ended December 31, 1999.
10.14 Lease between CXT Incorporated and Pentzer Development
Corporation, dated November 1, 1991 and filed as Exhibit
10.14 to Form 10-K for the year ended December 31, 1999.
10.15 Lease between CXT Incorporated and Union Pacific Railroad
Company, dated February 13, 1998, and filed as Exhibit
10.15 to Form 10-K for the year ended December 31, 1999.
10.16 Lease between Registrant and Greentree Buildings
Associates for Headquarters office, dated as of June 9,
1986, as amended to date, filed as Exhibit 10.16 to Form
10-K for the year ended December 31, 1988.
10.16.1 Amendment dated June 19, 1990 to lease between Registrant
and Greentree Buildings Associates, filed as Exhibit
10.16.1 to Form 10-Q for the quarter ended June 30, 1990.
10.16.2 Amendment dated May 29, 1997 to lease between Registrant
and Greentree Buildings Associates, filed as Exhibit
10.16.2 to Form 10-Q for the quarter ended June 30, 1997.
10.17 Lease between Registrant and the City of Hillsboro for
property located in Hill County, TX, dated February 22,
2002.
10.19 Lease between Registrant and American Cast Iron Pipe
Company for pipe-coating facility in Birmingham, AL dated
December 11, 1991, filed as Exhibit 10.19 to form 10-K for
the year ended December 31, 1991.
10.19.1 Amendment to Lease between Registrant and American Cast
Iron Pipe Company for pipe coating facility in Birmingham,
AL, dated November 15, 2000, and filed as Exhibit 10.19.2
to Form 10-K for the year ended December 31, 2000.
10.20 Asset Purchase Agreement, dated June 5, 1998 by and among
the Registrant and Northwest Pipe Company, filed as
Exhibit 10.20 to Form 8-K on June 18, 1998.
10.21 Stock Purchase Agreement, dated June 3, 1999, by and among
the Registrant and the shareholders of CXT Incorporated,
filed as Exhibit 10.0 to Form 8-K on July 14, 1999.
10.33.2 Amended and Restated 1985 Long-Term Incentive Plan, as
amended and restated February 26, 1997, filed as Exhibit
10.33.2 to Form 10-Q for the quarter ended June 30, 1997.
**
21
10.34 Amended and Restated 1998 Long-Term Incentive Plan, as
amended and restated February 2, 2001, filed as Exhibit
10.34 to Form 10-K for the year ended December 31, 2000.
**
10.45 Medical Reimbursement Plan, filed as Exhibit 10.45 to Form
10-K for the year ended December 31, 1992. **
10.46 Leased Vehicle Plan, as amended and restated, filed as
Exhibit 10.46 to form 10-K for the year ended December 31,
2000. **
10.50 L. B. Foster Company 2002 Incentive Compensation Plan,
filed as Exhibit 10.50 to Form 10-Q for the quarter ended
March 31, 2002. **
10.51 Supplemental Executive Retirement Plan, filed as Exhibit
10.51 to Form 10-K for the year ended December 31, 1994.
**
19 Exhibits marked with an asterisk are filed herewith.
** Identifies management contract or compensatory plan or
arrangement required to be filed as an Exhibit.
b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the six-month
period ended June 30, 2002.
22
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
L.B. FOSTER COMPANY
--------------------
(Registrant)
Date: August 14, 2002 By:/s/David J. Russo
---------------- -----------------------
David J. Russo
Vice President and
Chief Financial Officer
(Duly Authorized Officer of Registrant)
23
CERTIFICATION UNDER SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the
undersigned certifies that this periodic report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and that information contained in this periodic report fairly presents, in all
material respects, the financial condition and results of operations of L. B.
Foster Company.
/s/Stan L. Hasselbusch
---------------------------
Stan L. Hasselbusch
President and
Chief Executive Officer
August 14, 2002
/s/David J. Russo
---------------------------
David J. Russo
Vice President and
Chief Financial Officer
August 14, 2002