UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the Transition Period from __________ to __________
Commission File Number 0-10436
L. B. FOSTER COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1324733
(State of Incorporation) (I.R.S. Employer Identification No.)
415 Holiday Drive, Pittsburgh, Pennsylvania 15220
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 928-3417
Securities registered pursuant to Section 12(b)of the Act:
Name of Each Exchange On
Title of Each Class Which Registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III or this Form 10-K or any amendment to this
Form 10-K. [x]
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 such 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
The aggregate market value on March 14, 2003 of the voting stock held by
nonaffiliates of the Company was $36,793,031. Indicate the number of shares
outstanding of each of the registrant's classes of common stock as of the latest
practicable date.
Class Outstanding at March 14, 2003
Common Stock, Par Value $.01 9,531,010 Shares
Documents Incorporated by Reference:
Portions of the Proxy Statement prepared for the 2003 annual meeting of
stockholders are incorporated by reference in Items 10, 11, 12 and 13 of Part
III.
2
PART I
ITEM 1. BUSINESS
Summary Description of Businesses
L. B. Foster Company is engaged in the manufacture, fabrication and distribution
of products that serve the nation's surface transportation infrastructure. As
used herein, "Foster" or the "Company" means L. B. Foster Company and its
divisions and subsidiaries, unless the context otherwise requires.
For rail markets, Foster provides a full line of new and used rail, trackwork,
and accessories to railroads, mines and industry. The Company also designs and
produces concrete railroad products, insulated rail joints, power rail, track
fasteners, coverboards and special accessories for mass transit and other rail
systems worldwide.
For the construction industry, the Company sells steel sheet, H-bearing and pipe
piling and rents steel sheet piling, for foundation and earth retention
requirements. In addition, Foster supplies bridge decking, expansion joints,
mechanically stabilized earth wall systems, precast concrete products and other
products for highway construction and repair.
For tubular markets, the Company supplies pipe coatings for natural gas
pipelines and utilities. The Company also produces threaded products for
industrial water well and irrigation markets.
The Company classifies its activities into three business segments: Rail
products, Construction products, and Tubular products. Financial information
concerning the segments is set forth in Note 19 to the financial statements
included in the Company's Annual Report to Stockholders for 2002. The following
table shows for the last three fiscal years the net sales generated by each of
the current business segments as a percentage of total net sales.
Percentage of Net Sales
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Rail Products 50% 51% 52%
Construction Products 45% 41% 40%
Tubular Products 5% 8% 8%
- --------------------------------------------------------------------------------
100% 100% 100%
================================================================================
3
RAIL PRODUCTS
L. B. Foster Company's rail products include heavy and light rail, relay rail,
concrete ties, insulated rail joints, rail accessories and transit products. The
Company is a major rail products supplier to industrial plants, contractors,
railroads, mines and mass transit systems.
The Company sells heavy rail mainly to transit authorities, industrial
companies, and rail contractors for railroad sidings, plant trackage, and other
carrier and material handling applications. Additionally, the Company makes some
sales of heavy rail to railroad companies and to foreign buyers. The Company
sells light rail for mining and material handling applications.
Rail accessories include trackwork, ties, track spikes, bolts, angle bars and
other products required to install or maintain rail lines. These products are
sold to railroads, rail contractors and industrial customers and are
manufactured within the Company or purchased from other manufacturers.
The Company's Allegheny Rail Products (ARP) division engineers and markets
insulated rail joints and related accessories for the railroad and mass transit
industries, worldwide. Insulated joints are made in-house and subcontracted.
The Company's Transit Products division supplies power rail, direct fixation
fastener, coverboards and special accessories primarily for mass transit
systems. Most of these products are manufactured by subcontractors and are
usually sold by sealed bid to transit authorities or to rail contractors,
worldwide.
The Company's Trackwork division sells new and used rail, rail accessories, and
produces trackwork for industrial and export markets.
The Company's Rail Technologies subsidiary developed rail signaling and
communication devices for North American railroads. On December 31, 2002, this
business was reclassified as a discontinued operation and was sold in February
2003.
The Company's CXT subsidiary manufactures engineered concrete products for the
railroad and transit industries. CXT's product line includes prestressed
concrete railroad ties and grade railroad crossing panels.
CONSTRUCTION PRODUCTS
L. B. Foster Company's construction products consist of sheet and bearing
piling, fabricated highway products, and precast concrete buildings.
Sheet piling products are interlocking structural steel sections that are
generally used to provide lateral support at construction sites. Bearing piling
products are steel H-beam sections which, in their principal use, are driven
into the ground for support of structures such as bridge piers and high-rise
buildings. Sheet piling is sold or leased and bearing piling is sold principally
to contractors and construction companies.
Other construction products consist of precast concrete buildings, sold
principally to national parks, and fabricated highway products. Fabricated
highway products consist principally of bridge decking, aluminum bridge rail and
other bridge products, which are fabricated by the Company, as well as
mechanically stabilized earth wall systems. The major purchasers of these
products are contractors for state, municipal and other governmental projects.
Sales of the Company's construction products are partly dependent upon the level
of activity in the construction industry. Accordingly, sales of these products
have traditionally been somewhat higher during the second and third quarters
than during the first and fourth quarters of each year.
4
TUBULAR PRODUCTS
The Company provides fusion bond and other coatings for corrosion protection on
oil, gas and other pipelines. The Company also supplies special pipe products
such as water well casing, column pipe, couplings, and related products for
agricultural, municipal and industrial water wells.
MARKETING AND COMPETITION
L. B. Foster Company generally markets its rail, construction and tubular
products directly in all major industrial areas of the United States through a
national sales force of 36 salespeople. The Company maintains 16 sales offices
and 14 plants or warehouses nationwide. During 2002, less than 5% of the
Company's total sales were for export.
The major markets for the Company's products are highly competitive. Product
availability, quality, service and price are principal factors of competition
within each of these markets. No other company provides the same product mix to
the various markets the Company serves. There are one or more companies that
compete with the Company in each product line. Therefore, the Company faces
significant competition from different groups of companies.
RAW MATERIALS AND SUPPLIES
Most of the Company's inventory is purchased in the form of finished or
semi-finished product. With the exception of relay rail which is purchased from
railroads or rail take-up contractors, the Company purchases most of its
inventory from domestic and foreign steel producers. There are few domestic
suppliers of new rail products and the Company could be adversely affected if a
domestic supplier ceased making such material available to the Company.
Additionally, the Company is TXI Chaparral Steel's exclusive North American
distributor of steel sheet piling and H-bearing pile. See Note 18 to the
consolidated financial statements for additional information on this matter.
The Company's purchases from foreign suppliers are subject to the usual risks
associated with changes in international conditions and to United States laws
which could impose import restrictions on selected classes of products and
antidumping duties if products are sold in the United States below certain
prices.
5
BACKLOG
The dollar amount of firm, unfilled customer orders at December 31, 2002 and
2001 by segment follows:
In thousands December 31, 2002 December 31, 2001
- --------------------------------------------------------------------------------
Rail Products $ 45,371 $ 64,641
Construction Products 59,774 59,808
Tubular Products 3,995 1,307
- --------------------------------------------------------------------------------
$109,140 $ 125,756
================================================================================
The reduction in Rail segment backlog reflects the weakness in the current rail
market as well as the absence of firm renewal commitments on contracts under
negotiation.
Approximately 87% of the December 31, 2002 backlog is expected to ship in 2003.
RESEARCH AND DEVELOPMENT
The Company's expenditures for research and development are negligible.
ENVIRONMENTAL DISCLOSURES
While it is not possible to quantify with certainty the potential impact of
actions regarding environmental matters, particularly for future remediation and
other compliance efforts, in the opinion of management compliance with
environmental protection laws will not have a material adverse effect on the
financial condition, competitive position, or capital expenditures of the
Company. However, the Company's efforts to comply with stringent environmental
regulations may have an adverse effect on the Company's future earnings.
EMPLOYEES AND EMPLOYEE RELATIONS
The Company has 712 employees, of whom 426 are hourly production workers and 286
are salaried employees. Approximately 208 of the hourly paid employees are
represented by unions. The Company has not suffered any major work stoppages
during the past five years and considers its relations with its employees to be
satisfactory.
Substantially all of the Company's hourly paid employees are covered by one of
the Company's noncontributory, defined benefit plans and a defined contribution
plan. Substantially all of the Company's salaried employees are covered by a
defined contribution plan.
6
ITEM 2. PROPERTIES
The location and general description of the principal properties which are owned
or leased by L. B. Foster Company, together with the segment of the Company's
business using the properties, are set forth in the following table:
Business Lease
Location Function Acres Segment Expires
- ---------------------------------------------------------------------------------------------------------
Birmingham, Alabama Pipe coating facility. 32 Tubular 2007
Doraville, Georgia Transit products 28 Rail Owned
facility.
Yard storage.
Niles, Ohio Rail fabrication. 35 Rail Owned
Trackwork manufac-
turing.
Yard storage.
Houston, Texas Casing, upset tub- 65 Tubular, Owned
ing, threading, Rail and
heat treating and Construction
painting. Yard storage.
Bedford, Bridge component 10 Construction Owned
Pennsylvania fabricating plant.
Georgetown, Bridge component 11 Construction Owned
Massachusetts fabricating plant.
Spokane, CXT concrete tie 21 Rail 2003
Washington and crossings
plant. Yard
storage.
Spokane, Precast Plant. 5 Construction 2007
Washington Yard Storage.
Grand Island, CXT concrete tie 9 Rail 2003
Nebraska plant.
Hillsboro, Precast concrete 9 Construction 2012
Texas facility.
Petersburg, Virginia Piling storage facility. 48 Construction Owned
Including the properties listed above, the Company has 16 sales offices and 14
warehouse, plant and yard facilities located throughout the country. The
Company's facilities are in good condition and the Company believes that its
production facilities are adequate for its present and foreseeable requirements.
The Company expects to maintain its concrete tie facilities in Spokane, WA and
Grand Island, NE.
7
ITEM 3. LEGAL PROCEEDINGS
The Company was convicted in December 2000, after a jury trial in Houston, TX,
of unlawful disposal of used oil and hazardous waste at its facility in Houston,
TX, and was fined $170,000. The Company does not believe that these convictions
are justified and has appealed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
STOCK MARKET INFORMATION
The Company had 762 common shareholders of record on January 31, 2003. Common
stock prices are quoted daily through the National Association of Security
Dealers, Inc. in its over-the-counter NASDAQ quotation service (Symbol FSTR).
The quarterly high and low bid price quotations for common shares (which
represent prices between broker-dealers and do not include markup, markdown or
commission and may not necessarily represent actual transactions) follow:
2002 2001
- --------------------------------------------------------------------------------
Quarter High Low High Low
- --------------------------------------------------------------------------------
First $6.07 $4.62 $3.65 $2.63
- --------------------------------------------------------------------------------
Second 6.05 5.03 4.30 3.40
- --------------------------------------------------------------------------------
Third 5.83 3.86 4.45 3.47
- --------------------------------------------------------------------------------
Fourth 4.64 3.75 5.00 4.10
================================================================================
DIVIDENDS
No cash dividends were paid on the Company's Common stock during 2002 and 2001.
================================================================================
The following table sets forth information as of December 31, 2002 with respect
to compensation plans under which equity securities of the Company are
authorized for issuance.
(I) (II) (III)
- ----------------------------------------------------------------------------------------------------------------------------------
Number of Number of
securities to be securities
issued upon Weighted- remaining
exercise of average exercise available for
outstanding price of future issuance under
options, outstanding plans (excluding
warrants options, warrants securities listed in
Plan Category and rights and rights column (I)
- ----------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by shareholders 1,535,500 $4.27 182,550
Equity compensation plans not approved by shareholders - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total 1,535,500 $4.27 182,550
==================================================================================================================================
8
The Company has awarded shares of its common stock to its outside directors on a
biannual basis since June, 2000 under an arrangement not approved by the
Company's shareholders. A total of 22,984 shares of common stock have been so
awarded. The Company does not contemplate issuing additional shares under this
program and has submitted for shareholder approval at the Company's 2003 Annual
Shareholders' Meeting a new plan under which outside directors will receive
2,500 shares of the Company's common stock at each annual shareholder meeting at
which such outside director is elected or re-elected, commencing with the
Company's 2003 Annual Shareholders' Meeting.
9
ITEM 6. SELECTED FINANCIAL DATA
(All amounts are in thousands except per share data)
Year Ended December 31,
Income Statement Data 2002 (1) 2001 (2)(3) 2000 (2)(4) 1999 (2) 1998 (2)(5)
- --------------------------------------------------------------------------------------------------------------------------
Net sales $ 257,950 $ 282,119 $ 264,614 $ 241,902 $ 219,412
- --------------------------------------------------------------------------------------------------------------------------
Operating profit 2,992 5,098 7,960 10,078 8,758
- --------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations (5,029) 1,303 3,743 5,091 5,230
Loss from discontinued operations,
net of tax (2,005) (666) (253) (2,588) (853)
Cumulative effect of change in accounting
principle (4,390) - - - -
- --------------------------------------------------------------------------------------------------------------------------
Net (loss) income (11,424) 637 3,490 2,503 4,377
==========================================================================================================================
Basic (loss) earnings per common share:
Continuing operations (0.53) 0.14 0.39 0.53 0.53
Discontinued operations (0.21) (0.07) (0.03) (0.27) (0.09)
Cumulative effect of change in
accounting principle (0.46) - - - -
- --------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per common share (1.20) 0.07 0.37 0.26 0.44
==========================================================================================================================
Diluted (loss) earnings per common share:
Continuing operations (0.53) 0.14 0.39 0.51 0.52
Discontinued operations (0.21) (0.07) (0.03) (0.26) (0.09)
Cumulative effect of change in
accounting principle (0.46) - - - -
- --------------------------------------------------------------------------------------------------------------------------
Diluted (loss) earnings per common share (1.20) 0.07 0.37 0.25 0.43
==========================================================================================================================
December 31,
Balance Sheet Data 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 133,984 $ 160,042 $ 177,147 $ 164,731 $ 119,434
- --------------------------------------------------------------------------------------------------------------------
Working capital 46,694 62,011 71,477 67,737 54,604
- --------------------------------------------------------------------------------------------------------------------
Long-term debt 26,991 32,758 43,484 44,136 13,829
- --------------------------------------------------------------------------------------------------------------------
Stockholders' equity 66,013 77,145 77,359 74,650 73,494
====================================================================================================================
(1) 2002 includes the following non-cash charges: a $5,050,000 write-down of
advances made to the Company's principal specialty trackwork supplier which are
not expected to be recovered; a $1,893,000 charge related to an "other than
temporary" impairment of the Company's equity investment in that trackwork
supplier; a $765,000 charge for depreciation expense from assets that had been
classified as held for resale, but the sale did not materialize; a $660,000
impairment charge to adjust assets related to the Company's rail signaling
business, classified as a discontinued operation, to their expected fair value;
a $4,390,000, net of tax, charge from the cumulative effect of a change in
accounting principle as a result of the adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"; and a
$2,232,000 charge related to mark-to-market accounting for derivative
instruments.
(2) 2001, 2000, 1999 and 1998 were restated to reflect the classification of the
Company's rail signaling business as a discontinued operation.
(3) 2001 includes pretax charges of approximately $1,879,000 related to the
Company's plan to consolidate sales and administrative functions and plant
operations.
(4) 2000 includes pretax charges of approximately $1,349,000 related to the
Company's plan to consolidate sales and administrative functions and plant
operations; a pretax gain of approximately $800,000 on the sale of an
undeveloped 62-acre property located in Houston; TX, and an after-tax gain on
the sale of the Monitor Group, classified as a discontinued operation, of
$900,000.
(5) In 1998, the Company recognized a pretax gain on the sale of the Fosterweld
division of the Tubular segment of approximately $1,700,000; a write-down of
approximately $900,000 on property subject to a sales negotiation; and a
provision for losses of approximately $900,000 relating to certain sign
structure contracts in the Construction segment.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three Months Ended Twelve Months Ended
December 31, December 31,
In thousands 2002 2001 (1) 2002 2001 (1) 2000 (1)
- -------------------------------------------------------------------------------------------------------------------------
Net Sales:
Rail Products $ 30,717 $ 35,360 $ 128,249 $ 145,054 $ 138,635
Construction Products 24,288 29,527 116,748 115,600 106,280
Tubular Products 2,001 4,668 12,953 21,055 19,511
Other - 409 - 410 188
- -------------------------------------------------------------------------------------------------------------------------
Total Net Sales $ 57,006 $ 69,964 $ 257,950 $ 282,119 $ 264,614
=========================================================================================================================
Gross Profit:
Rail Products $ 2,887 $ 2,977 $ 12,643 $ 12,728 $ 16,762
Construction Products 3,382 3,978 16,296 16,167 18,157
Tubular Products 256 1,028 2,389 4,968 3,411
Other (897) 319 (1,861) (367) (496)
- -------------------------------------------------------------------------------------------------------------------------
Total Gross Profit 5,628 8,302 29,467 33,496 37,834
- -------------------------------------------------------------------------------------------------------------------------
Expenses:
Selling and Administrative Expenses 6,852 6,507 26,475 28,398 29,874
Interest Expense 616 768 2,592 3,564 4,227
Other Expense (Income):
Impairment of Equity Investment
and Advances 5,150 - 6,943 - -
Other (434) (74) 1,097 (694) (2,506)
- -------------------------------------------------------------------------------------------------------------------------
Total Expenses 12,184 7,201 37,107 31,268 31,595
- -------------------------------------------------------------------------------------------------------------------------
(Loss) Income from Continuing Operations,
Before Income Taxes (6,556) 1,101 (7,640) 2,228 6,239
Income Tax (Benefit) Expense (2,881) 462 (2,611) 925 2,496
- -------------------------------------------------------------------------------------------------------------------------
(Loss) Income from Continuing Operations (3,675) 639 (5,029) 1,303 3,743
Loss from Discontinued Operations,
Net of Tax (1,054) (158) (2,005) (666) (253)
Cumulative Effect of Change in
Accounting Principle, Net of Tax - - (4,390) - -
- -------------------------------------------------------------------------------------------------------------------------
Net (Loss) Income $ (4,729) $ 481 $ (11,424) $ 637 $ 3,490
=========================================================================================================================
Gross Profit %:
Rail Products 9.4% 8.4% 9.9% 8.8% 12.1%
Construction Products 13.9% 13.5% 14.0% 14.0% 17.1%
Tubular Products 12.8% 22.0% 18.4% 23.6% 17.5%
Total Gross Profit % 9.9% 11.9% 11.4% 11.9% 14.3%
=========================================================================================================================
(1) Foster Technologies, the Company's rail signaling and communication
business, was classified as a discontinued operation on December 31, 2002. Prior
period results have been adjusted to reflect this classification.
11
Fourth Quarter of 2002 vs. Fourth Quarter of 2001
- -----------------------------------------------------
The Company had a loss from continuing operations of $3.7 million, or $0.39 per
share in the fourth quarter of 2002 on net sales of $57.0 million. Income from
continuing operations for the fourth quarter of 2001 was $0.6 million, or $0.07
per share on net sales of $70.0 million. A fourth quarter loss from the
discontinued operations of Foster Technologies was $1.1 million, or $0.11 per
share, compared to a loss of $0.2 million, or $0.02 per share in the prior year
fourth quarter. See Note 5 "Discontinued Operations" for more details. The
fourth quarter 2002 net loss of $4.7 million includes one-time, non-cash charges
totaling $6.6 million, or $4.2 million, net of tax.
The non-cash charges recorded in the fourth quarter of 2002 include a $5.1
million ($3.1 million, net of tax) charge related to the impairment of the
Company's investment in and advances to its principal specialty trackwork
supplier which are not expected to be recovered. The expected sale of the
Company's Newport, KY pipe coating assets did not materialize, resulting in a
non-cash charge of $0.8 million ($0.4 million, net of tax). Also in the fourth
quarter of 2002, the Company started negotiations and committed to a plan to
sell the assets related to its rail signaling and communication device business
and recorded a $0.7 million non-cash impairment charge to adjust these assets to
their expected realizable value. The operations of this business qualified as a
"component of an entity" and thus, have been classified as a discontinued
operation. See "Other Matters" for more details on these fourth quarter 2002
non-cash charges.
Results for the fourth quarter of 2001 included pretax nonrecurring charges of
$0.4 million related to the Company's plan to improve its financial performance
by consolidating sales and administrative functions and plant operations.
Sales for the fourth quarter of 2002 declined 18.5% to $57.0 million from the
same period a year ago. Rail products' net sales declined 13.1% to $30.7 million
compared to the 2001 fourth quarter. This decline is related to a general
decline in the market due to spending cutbacks for rail projects. Construction
products' net sales declined 17.7% to $24.3 million primarily due to a downturn
in sales of H-bearing pile and pipe piling as a result of high raw material
prices for pipe and increased competition for beams. Tubular products' net sales
declined 57.1% to $2.0 million as a result of poor market conditions for pipe
coating and threaded products.
The gross margin percentage for the Company declined to 9.9% in the fourth
quarter of 2002 from 11.9% in the same period of 2001. Gross margin for the
fourth quarter of 2002 includes a nonrecurring charge of $0.8 million, which
represents depreciation expense for the assets related to the Newport, KY
pipe-coating facility that had been suspended while these assets were classified
as "property held for resale". Gross margin for the fourth quarter of 2001
includes nonrecurring charges totaling $0.1 million related to the closing of
the St. Marys, WV mine tie facility. Excluding these nonrecurring charges, the
gross margin percentage for the fourth quarter of 2002 declined to 11.2% from
12.0%. The gross margin percentage for the Rail products' segment improved to
9.4% from 8.4% due to the Company's efforts to scale back certain unprofitable
operations and improve efficiencies at already profitable operations. The gross
margin percentage for the Construction segment improved slightly to 13.9% from
13.5% primarily due to the Company exiting its unprofitable sign structure
business. Tubular products' gross margin percentage declined to 12.8% from 22.0%
due to low volume inefficiencies at the plant facilities caused by the poor
market conditions mentioned above.
Excluding the prior year's fourth quarter amortization of goodwill of $0.2
million, as a result of the adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), and other
non-recurring pretax charges of $0.3 million, selling and administrative expense
increased 12.7%, or $0.8 million over the same period a year ago. This change
was due in part to bad debt recoveries experienced in the fourth quarter of
2001. Interest expense decreased by 19.8% primarily as a result of more
efficient asset utilization, which enabled the Company to reduce its corporate
borrowings by $10.8 million, or 27.9% from the same period in 2001. Other
expense (income) in the 2002 fourth quarter includes the $5.1 million charge
related to the impairment of the Company's investment in and advances to its
principal specialty trackwork supplier, mentioned above, and $0.2 million
accrued dividend income on DM&E Preferred stock. The income tax provision
related to continuing operations for the fourth quarter of 2002 was 43.9%. The
income tax provision related to continuing operations for the fourth quarter of
2001 was recorded at 42.0%. See Note 14 "Income Taxes" for more information.
The Year 2002 Compared to the Year 2001
- ---------------------------------------
For the year ended December 31, 2002, the Company recorded a loss from
continuing operations of $5.0 million, or $0.53 per share on net sales of $258.0
million. This compares to income from continuing operations of $1.3 million, or
$0.14 per share on net sales of $282.1 million for 2001. In 2002, a loss from
the discontinued operations of Foster Technologies was recorded at $2.0 million,
or $0.21 per share, compared to a loss of $0.7 million, or $0.07 per share in
the prior year. See Note 5 "Discontinued Operations" for more details.
12
In addition to the previously mentioned, fourth quarter 2002 non-cash charges,
the twelve month results include a $4.4 million, net of tax, non-cash charge
from the cumulative effect of a change in accounting principle. Other non-cash
charges recorded during the first nine months of 2002 include $2.2 million ($1.3
million net of tax) related to mark-to-market accounting for derivative
instruments as a result of the Company entering into a new credit agreement, and
$1.8 million related to an "other than temporary" impairment of the Company's
equity investment in its principal specialty trackwork supplier.
Results for 2001 included the following nonrecurring pretax charges related to
the Company's plan to improve its financial performance: employee severance and
facility exit costs of $0.9 million, asset impairments of $0.6 million, and
other related costs of $0.4 million. Substantially all components of the
restructuring charges were paid in the period incurred.
Rail products' 2002 net sales declined 11.6% to $128.2 million from the prior
year. This decline in sales can be primarily attributed to a continued depressed
market for rail distribution products and rail projects. In addition,
management's decision to sell off large quantities of used rail inventory in
2001 contributed to an increase in 2001 rail sales. Despite the unavailability
of steel sheet piling from the Company's supplier for most of 2002, Construction
products' net sales increased 1.0% to $116.7 million from $115.6 million in
2001. The increase resulted from a strong year-end 2001 backlog of fabricated
bridge products and the additional backlog received with the Greulich Bridge
Products acquisition. The Company expanded its Bedford, PA fabricated bridge
product facility to accommodate the increase in backlog. The start-up of precast
concrete building production at the Company's new Hillsboro, TX facility also
contributed to an increase in 2002 sales. Tubular products' net sales declined
38.5% due primarily to lower demand for pipe coating and threaded products.
Spending for new pipeline capital projects has decreased significantly due to
uncertainties in the energy markets.
Gross margin for the Company was 11.4% in 2002 compared to 11.9% in 2001.
Excluding the current and prior years' non-recurring pretax charges of $0.8
million and $1.0 million, respectively, gross margin fell to 11.7% in 2002 from
12.2% in 2001. Rail products' gross margin improved to 9.9% from 8.8% in the
prior year. Excluding non-recurring pretax charges in 2001, rail products' gross
margin was 9.3%. The prior 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. Construction
products' gross margin did not change from the prior year. Tubular products'
gross margin declined to 18.4% from 23.6% due to low volume inefficiencies at
plant facilities caused by poor market conditions.
Excluding the prior year's amortization of goodwill of $0.6 million and
non-recurring pretax charges of $0.9 million, selling and administrative expense
decreased by $0.5 million, or 1.7%. Other expense (income) includes $1.1 million
accrued dividend income on DM&E Preferred stock and the previously mentioned
non-cash charges of $2.2 million related to mark-to-market accounting for
derivative instruments, and $6.9 million related to the impairment of the
Company's investment in and advances to its principal specialty trackwork
supplier. Interest expense declined 27.3% from the prior year as a result of the
previously mentioned reduction in corporate borrowings. The income tax provision
for 2002, from continuing operations, was recorded at (34.2%) compared to 41.5%
in the prior year. See Note 14 "Income Taxes" for more information.
The Year 2001 Compared to the Year 2000
- ---------------------------------------
Income from continuing operations in 2001 was $1.3 million or $0.14 per share on
net sales of $282.1 million. This compares to income from continuing operations
in 2000 of $3.7 million, or $0.39 per share, on net sales of $264.6 million. The
loss from discontinued operations in 2000 included operating losses from the
Monitor Group of $0.5 million and Foster Technologies of $0.6 million, and a
$0.9 million gain on the sale of the Monitor Group.
Rail products' 2001 net sales were $145.1 million, an increase of 4.6% over the
prior year, due primarily to increases in shipments of new rail products and
concrete ties. Construction products' net sales increased to $115.6 million, an
8.8% improvement over the prior year. This increase in sales can be attributed
primarily to sales of certain fabricated bridge products and precast concrete
buildings, and an improved market for H-bearing pile. Tubular products' sales
increased 7.9% to $21.1 million, in 2001. The sales improvement was primarily
due to increased volume at the Company's Birmingham, AL pipe-coating facility.
The gross profit margin for the Company was 11.9% in 2001 compared to 14.3% in
2000. Rail products' gross margin declined to 8.8% from 12.1%, a 3.3 percentage
point reduction from the previous year. The decline was primarily due to the
competitive environment in the rail supply industry. Costs associated with the
closing of the Company's Pomeroy, OH trackwork facility also reduced Rail
products' margin. Construction products' 2001 gross profit declined to $16.2
million, a 3.1 percentage point reduction from the prior year. Sales of low
margin piling products, and costs associated with the closing of the Company's
Ephrata, PA sign structure plant and the start-
13
up of the Company's Hillsboro, TX precast concrete buildings facility all
contributed to the reduction in Construction products' margin. Tubular products'
margin improved 6.1 percentage points in 2001, due primarily to greater
efficiencies at the Birmingham, AL pipe-coating facility.
The 2001 results included the following pretax charges associated with the
Company's previously-mentioned plan to improve its financial performance:
employee severance and facility exit costs of $0.9 million, asset impairments of
$0.6 million, and other related costs of $0.4 million. Results for 2000 also
included pretax charges as follows: employee severance and facility exit costs
of $1.0 million and asset impairments and other related costs of $0.3 million.
This plan, along with reduced travel and entertainment expenditures, resulted in
a 4.9% decline in selling and administrative expense during 2001. Other income
in 2001 consisted primarily of accrued dividend income on DM&E Preferred stock.
The income tax provision for continuing operations in 2001 was recorded at 41.5%
compared to 40.0% in 2000. See Note 14 "Income Taxes" for more information.
Liquidity and Capital Resources
- -------------------------------
The Company generates operational cash flow from the sale of inventory and the
collection of accounts receivable. The Company's 2002 average turnover rate for
accounts receivable improved compared to 2001, primarily due to higher turnover
for receivables related to the Rail segment. The 2002 average turnover rate for
inventory also improved compared to 2001. Again, the Rail segment showed the
most improvement over the prior year. Working capital at December 31, 2002 was
$46.7 million compared to $62.0 million at the end of 2001. Management's
emphasis on improving working capital utilization was a primary factor in a
$13.7 million reduction in accounts receivable from December 31, 2001 and a
$10.4 million reduction in inventory for the same period.
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. No purchases were made
in 2002. During 2001, the Company purchased 25,000 shares at a cost of $75,000.
From August 1997 through December 31, 2002, the Company had repurchased 973,398
shares at a cost of approximately $5.0 million. The timing and extent of future
purchases will depend on market conditions and options available to the Company
for alternate uses of its resources.
Including the Greulich acquisition, discussed in "Other Matters", the Company
had capital expenditures of approximately $6.9 million during 2002. Capital
expenditures excluding acquisitions, in 2003, are expected to be approximately
$5.0 million, and funded by cash flow from operations and available external
financing sources.
A summary of the Company's required payments under financial instruments and
other commitments are presented in the following table:
Less than 1 - 3 4 - 5 After 5
In thousands Total 1 year years years years
- ---------------------------------------------------------------------------------------------------------------------
CONTRACTUAL CASH OBLIGATIONS
Total debt including capital leases $27,816 $ 825 $23,775 $ 378 $ 2,838
Operating lease obligations 8,728 3,119 4,029 1,543 37
OTHER FINANCIAL COMMITMENTS
Standby letters of credit 2,762 2,762 - - -
=====================================================================================================================
On September 26, 2002, the Company entered into a new credit agreement with a
syndicate of three banks led by PNC Bank, N.A. The new agreement provides for a
revolving credit facility of up to $60.0 million in borrowings to support the
Company's working capital and other liquidity requirements. The revolving credit
facility, which matures in September 2005, is secured by substantially all of
the inventory and trade receivables owned by the Company. Availability under
this agreement is limited by the amount of eligible inventory and accounts
receivable applied against certain advance rates. Proceeds from the new facility
were used to repay and retire the Company's previous credit agreement, which was
to mature in July 2003. Interest on the new credit facility is based on LIBOR
plus a spread ranging from 1.75% to 2.5%.
The agreement includes financial covenants requiring a minimum net worth and a
minimum fixed charge coverage ratio.
14
The agreement also restricts investments, indebtedness, and the sale of certain
assets. As of December 31, 2002, the Company was in compliance with all of the
agreement's covenants.
Total revolving credit agreement borrowings at December 31, 2002 were $23.0
million, a decrease of $12.0 million from the end of the prior year. At December
31, 2002, the Company had approximately $11.6 million in unused borrowing
commitment. Outstanding letters of credit at December 31, 2002 were
approximately $2.8 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.
Dakota, Minnesota and Eastern Railroad
- --------------------------------------
The Company maintains a significant investment in the Dakota, Minnesota &
Eastern Railroad Corporation (DM&E), a privately held, regional railroad, which
controls over 2,500 miles of track in eight states.
At December 31, 2002, the Company's investment was comprised of $0.2 million of
DM&E common stock, $1.5 million of Series B Preferred Stock and warrants, $6.0
million of Series C Preferred Stock and warrants, $0.8 million of Preferred
Series C-1 Stock and warrants, and $0.5 million of Series D Preferred Stock and
warrants.
On July 30, 2002, the DM&E announced the acquisition of a 1,400 mile regional
railroad formerly owned by the I&M Rail Link, LLC. The Company participated in
the financing of this acquisition with a $0.5 million investment in Series D
Preferred Stock and warrants. On a fully diluted basis, the Company's ownership
of the DM&E is approximately 13.6%. In addition, the Company has a receivable
for accrued dividend income on Preferred Stock of approximately $3.7 million.
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 $2.0
billion. The Project received final approval by the Surface Transportation Board
(STB) in January 2002. Litigation has been initiated appealing the STB's
approval of the Project. It is expected that the appeal will be decided during
the third quarter of 2003. In addition, the State of South Dakota has elected to
appeal a federal court decision to enjoin it from enforcing an eminent domain
statute. No time frame for a decision is yet known.
If the Project proves to be viable, management believes that the value of the
Company's investment in the DM&E could increase significantly. If the Project
does not come to fruition, management believes that the value of the Company's
investment is supported by the DM&E's existing business.
Other Matters
- -------------
Specialty trackwork sales of the Company's Rail segment depend primarily on one
supplier. In August 2000, the Company contributed a note, having a principal and
interest value of approximately $2.7 million, to a limited liability company
created by the Company and this trackwork supplier (the LLC) in exchange for a
30% ownership position. Of the $2.7 million initial investment, approximately
$1.7 million represented goodwill. At January 1, 2002, the Company's net equity
investment in the LLC, net of goodwill amortization prior to the adoption of
SFAS 142, was approximately $1.9 million. During 2002, the Company recognized an
impairment loss of the entire $1.9 million and wrote off this investment. The
loss in value of this investment was driven by the continued deterioration of
certain rail markets and was determined to be "other than temporary" based on
discounted cash flow projections. Equity earnings from this investment during
the three years ended December 31, 2002, 2001 and 2000 were immaterial.
The Company has historically advanced progress payments to its principal
trackwork supplier for the purpose of supporting working capital requirements
and funding raw material purchases and product fabrication costs for Company
projects. The timing differential created by these cash flows has resulted in a
significant asset related to these advances. At December 31, 2002 and 2001, the
Company had advanced to the LLC approximately $5.4 million and $2.6 million,
respectively. As a result of the operating and financial issues experienced by
the LLC, concerns regarding the recoverability of the advances led management to
conclude that a full reserve was necessary. A charge for this reserve was
recorded in the fourth quarter of 2002. The Company acknowledges the risk of
loss that exists relative to these advances and believes that substantial
uncertainty exists relative to the Company's ability to realize any measurable
amounts of these advances. During 2002, 2001 and 2000, the volume of business
the trackwork supplier conducted with the Company was approximately, $13.4
million, $13.6 million, and $12.8 million, respectively. The Company also has
approximately $10.0 million of contractual supply obligations with certain
customers related to specialty trackwork. If for any reason this supplier is
unable to perform, it could have a negative impact on earnings and cash flows.
15
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. The
anticipated 2002 sale of these assets did not materialize. Therefore, during the
fourth quarter of 2002, the Company removed the "held for resale" designation of
these assets, reclassified them as "in service", and immediately recorded a $0.8
million write-down to reflect depreciation not recorded while under the "held
for resale" designation. The Company's efforts to sell these assets continues.
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 (Foster
Technologies), headquartered in Canada, has not generated significant revenues.
During the fourth quarter of 2002, the Company began negotiations for the sale
of substantially all assets of this business. At December 31, 2002, the Company
recorded an impairment charge of approximately $0.7 million for the excess of
the book value over the expected realizable value. In February 2003, the Company
sold assets related to this business for $0.3 million.
The Company sold all of the assets related to its St. Marys, WV mine tie
operation in the fourth quarter of 2002 for $0.2 million, and recorded a nominal
gain on this 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 are being 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 the acquisition.
Management continues to evaluate the overall performance of its operations. A
decision to down-size or 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 is TXI Chaparral's exclusive distributor of steel sheet piling.
Steel sheet piling production commenced in 2001 at TXI Chaparral's Petersburg,
VA facility, but the quantity produced had not materially impacted results for
2002 or 2001. In December 2002, the Company announced the availability of a full
range of Z-pile sheet piling products. The Company expects the availability of
Z-piling to have a positive effect on 2003 earnings for the Construction
products segment. However, if TXI Chaparral fails to produce substantial
quantities of Z-piling products, earnings could be adversely impacted.
The Company's CXT subsidiary and Allegheny Rail Products division are dependent
on one customer, which is a Class I railroad, for a significant portion of their
business. CXT has a contract with this railroad for a minimum of 420,000
concrete ties per contract year, expiring in September of 2003. The Company is
currently negotiating a renewal of this contract with the railroad. If this
contract is not renewed, it could have a negative impact on the operating
results of the Company. 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 or the failure to negotiate contract renewals could have a favorable or
unfavorable impact on the operating results of the Company. Additionally,
governmental 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 December 31, 2002 was approximately $109.1 million. The
following table provides the backlog by business segment:
December 31,
In thousands 2002 2001 2000
- --------------------------------------------------------------------------------
Backlog:
Rail Products $ 45,371 $ 64,641 $ 86,351
Construction Products 59,774 59,808 52,779
Tubular Products 3,995 1,307 2,219
- --------------------------------------------------------------------------------
Total Backlog $109,140 $125,756 $141,349
================================================================================
The reduction in Rail segment backlog reflects the weakness in the current rail
market as well as the absence of firm renewal commitments on contracts under
negotiation.
Critical Accounting Policies
- ----------------------------
The Company's significant accounting policies are described in Note 1 to the
consolidated financial statements included in Item 8 of this Form 10-K. The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles
16
generally accepted in the United States. When more than one accounting
principle, or the method of its application, is generally accepted, management
selects the principle or method that is appropriate in the Company's specific
circumstance. Application of these accounting principles requires management to
make estimates that affect the reported amount of assets, liabilities, revenues,
and expenses, and the related disclosure of contingent assets and liabilities.
The following critical accounting policies related to the Company's more
significant judgments and estimates used in the preparation of its consolidated
financial statements. There can be no assurance that actual results will not
differ from those estimates.
ASSET IMPAIRMENT - The Company is required to test for asset impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
might not be recoverable. The Company applies Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144) in order to determine whether or not an asset is impaired.
This Statement indicates that if the sum of the future expected cash flows
associated with an asset, undiscounted and without interest charges, is less
than the carrying value, an asset impairment must be recognized in the financial
statements. The amount of the impairment is the difference between the fair
value of the asset and the carrying value of the asset. The Company believes
that the accounting estimate related to an asset impairment is a "critical
accounting estimate" as it is highly susceptible to change from period to
period, because it requires management to make assumptions about cash flows over
future years. These assumptions impact the amount of an impairment, which would
have an impact on the income statement. Management's assumptions about future
cash flows require significant judgment because actual operating levels have
fluctuated in the past and are expected to do so in the future.
During the fourth quarter of 2002, as a result of an ongoing evaluation of
Foster Technologies, the Company's rail signaling and communication device
business, the Company determined that it would pursue a potential sale of the
business technology and long-lived assets. Utilizing a negotiated sales price as
an indicator of fair market value for these assets, the Company determined that
an impairment of $0.7 million was required and recorded this charge in the
fourth quarter of 2002.
GOODWILL - Beginning in fiscal year 2002, goodwill is required to be evaluated
annually for impairment, in accordance with Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," (SFAS 142). SFAS 142
requires a two-step process be performed to analyze whether or not goodwill has
been impaired. Step one is to test for potential impairment, which requires that
the fair value of the reporting unit be compared to its book value. If the fair
value is higher than the book value, no impairment occurs. If the fair value is
lower than the book value, step two must be performed. Step two requires
measurement of the amount of impairment loss, if any, and requires that a
hypothetical purchase price allocation be done to determine the implied fair
value of goodwill. The resulting fair value is then compared to the carrying
value of goodwill. If the implied fair value of the goodwill is lower than the
carrying value of the goodwill, an impairment must be recorded.
The Company believes that the accounting estimate related to the goodwill
impairment is a "critical accounting estimate" because the underlying
assumptions used for the discounted cash flow can change from period to period
and these changes could cause a material impact to the income statement.
Management's assumptions about discount rates, inflation rates and other
internal and external economic conditions, such as expected growth rate, require
significant judgment regarding fluctuating rates and anticipated future
revenues. Additionally, SFAS 142 requires that the goodwill be analyzed for
impairment on an annual basis using the assumptions that apply at the time the
analysis is updated.
As discussed in the notes to the consolidated financial statements, goodwill
recorded in the Company's Rail and Construction segments was analyzed for
impairment with the implementation of SFAS 142. The fair value of the goodwill
associated with these segments was estimated using discounted cash flow
methodologies and market comparable information. Based on the analysis, the
implied fair value of the goodwill for certain product groups within these
segments was less than the book value recorded for the goodwill. Therefore, the
Company recognized a pretax impairment charge of $4.9 million, representing a
complete write-off of goodwill for those product groups for which an impairment
was determined to exist. In the fourth quarter of 2002, the Company performed
the required annual impairment test of the carrying amount of goodwill for the
product groups and concluded that no further impairment was required.
Prior to the adoption of SFAS 142, the Company assessed the impairment of
goodwill whenever events or changes in circumstances indicated that the carrying
value might not be recoverable. No such events or indicators occurred, as
prescribed by previous accounting guidance, which required the Company to
perform such an assessment.
ALLOWANCE FOR BAD DEBTS - The Company's operating segments encounter risks
associated with the collection of accounts receivable. As such, the Company
records a monthly provision for accounts receivable that are considered to be
uncollectible. In order to calculate the appropriate monthly provision, the
Company reviews its accounts receivable aging and calculates an allowance
through application of historic reserve factors to overdue receivables. This
calculation is supplemented by specific account reviews performed by the
Company's credit department. As necessary, the application of the Company's
allowance rates to specific customers are reviewed and adjusted to more
accurately reflect
17
the credit risk inherent within that customer relationship. The reserve is
reviewed for reasonableness on a monthly basis. An account receivable is
written off against the allowance when management determines it is
uncollectible.
The Company believes that the accounting estimate related to the allowance for
bad debts is a "critical accounting estimate" because the underlying assumptions
used for the allowance can change from period to period and the allowance could
potentially cause a material impact to the income statement and working capital.
Specific customer circumstances and general economic conditions may vary
significantly from management's assumptions and may impact expected earnings. At
December 31, 2002, the Company maintained an allowance for bad debts of $1.1
million, and, for the year ended December 31, 2002, the Company recognized bad
debt expense of $0.3 million.
PENSION PLANS - The calculation of the Company's net periodic benefit cost
(pension expense) and benefit obligation (pension liability) associated with its
defined benefit pension plans (pension plans) requires the use of a number of
assumptions that the Company deems to be "critical accounting estimates."
Changes in these assumptions can result in different pension expense and
liability amounts, and future actual experience can differ significantly from
the assumptions. The Company believes that the two most critical assumptions are
the expected long-term rate of return on plan assets and the assumed discount
rate.
The expected long-term rate of return reflects the average rate of earnings
expected on funds invested or to be invested in the pension plans to provide for
the benefits included in the pension liability. The Company establishes the
expected long-term rate of return at the beginning of each fiscal year based
upon information available to the Company at that time, including the plan's
investment mix and the forecasted rates of return on these types of securities.
Any differences between actual experience and assumed experience are deferred as
an unrecognized actuarial gain or loss. The unrecognized actuarial gains or
losses are amortized in accordance with Statement No. 87. Although the long-term
rate is intended to be fairly consistent, the Company has reevaluated and
reduced the rate in 2002. The expected long-term rates of return determined by
the Company for 2002 and 2001 were 7.75% and 8.00%, respectively. Pension
expense increases as the expected long-term rate of return decreases. Therefore,
the decline in this assumption had the effect of increasing the Company's
pension obligation and future pension expense.
The assumed discount rate reflects the current rate at which the pension
benefits could effectively be settled. In estimating that rate, Statement No. 87
requires the Company look to rates of return on high quality, fixed income
investments. The Company discounted its future pension liabilities using rates
of 6.75% and 7.00% as of December 31, 2002 and 2001, respectively. The Company's
pension liability increases as the discount rate is reduced. Therefore, the
decline in this assumption had the effect of increasing the Company's pension
obligation and future pension expense.
DEFERRED TAX ASSETS - The recognition of deferred tax assets requires management
to make judgments regarding the future realization of these assets. As
prescribed by Statement of Financial Accounting Standards No. 109 (SFAS 109),
valuation allowances must be provided for those deferred tax assets for which it
is more likely than not (a likelihood of more than 50 percent) that some portion
or all of the deferred tax assets will not be realized. SFAS 109 requires
management to evaluate positive and negative evidence regarding the
recoverability of deferred tax assets. Determination of whether the positive
evidence outweighs the negative and quantification of the valuation allowance
requires management to make estimates and judgments of future financial results.
The Company believes that these estimates and judgments are "critical accounting
estimates." Cumulative losses in recent periods and other negative evidence
further complicate these assessments.
The Company's financial results in recent periods have generated operating loss
carryforwards, particularly with regard to the operations of the Company's
discontinued foreign operation, Foster Technologies. Management has determined
that it is more likely than not that the Company may not realize a portion of
the deferred tax assets generated by these losses. Therefore, the Company has
provided a valuation allowance for this deferred tax asset. At December 31,
2002, the Company maintained net operating loss carryforwards and a valuation
allowance of $2.7 million and $2.6 million, respectively. See Note 14 "Income
Taxes". The Company's future ability to realize the tax benefit from these net
operating loss carryforwards may affect the Company's reported income tax
expense (benefit) and net income.
New Accounting Pronouncements
- -----------------------------
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 impact 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.
18
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
146), effective for exit or disposal activities initiated after December 31,
2002, with early application encouraged. This statement supercedes EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred,
rather than at the date of an entity's commitment to an exit plan. The Company
does not expect this standard to have a material effect on the Company's
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, and Interpretation of ARB No. 51", (FIN 46). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. Management is currently evaluating the effect
that the adoption of FIN 46 will have on its results of operations and financial
condition. The Company has not identified any off balance sheet arrangements for
which consolidation under FIN 46 is reasonably possible.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK.
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. Effective September 26, 2002, in conjunction with
the Company's debt refinancing, the Company discontinued cash flow hedge
accounting treatment for its interest rate collars and recorded a cumulative
charge to reflect mark-to-market accounting. The application of mark-to-market
accounting for the year ended December 31, 2002 has resulted in the recognition
of a non-cash charge of $2.2 million which is recorded in other expense (income)
on the Consolidated Statements of Operations. The Company continues to apply
cash flow hedge accounting to its other interest rate swap.
The Company recognizes all derivative instruments on the balance sheet at fair
value. Fluctuations in the fair values of derivative instruments designated as
cash flow hedges are recorded in accumulated other comprehensive income, and
reclassified into earnings as the underlying hedged items affect earnings. To
the extent that a change in interest rate derivative does not perfectly offset
the change in value of the interest rate being hedged, the ineffective portion
is recognized in earnings immediately.
The Company attempts to maintain a reasonable balance between fixed-rate and
floating-rate debt to keep financing costs as low as possible. The Company's
primary source of variable-rate debt comes from its revolving credit agreement
(See Note 8 to the consolidated financial statements). At December 31, 2002, the
Company had approximately $23.0 million of floating rate debt outstanding under
this agreement with an average interest rate of approximately 3.84%. While not
specifically correlated with the revolving credit agreement, the Company
maintains an economic hedge of this variable rate through the maintenance of two
interest rate collar agreements with a weighted average minimum annual interest
rate of 4.99% to a maximum weighted average annual interest rate of 5.42% (See
Note 9 to the consolidated financial statements). As discussed in Note 9, these
derivatives do not qualify for hedge accounting, as defined by Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). Since the interest rate on this debt floats
with the short-term market rate of interest, the Company is exposed to the risk
that these interest rates may decrease below the minimum annual interest rates
on the two interest rate collar agreements. The effect of a 1 percent decrease
in rate of interest below the 4.99% weighted average minimum annual interest
rate on $23.0 million of outstanding floating rate debt would result in
increased annual interest costs of approximately $0.2 million.
The Company is not subject to significant exposures to changes in foreign
currency exchange 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, the outcome of certain litigation, any inability to obtain
necessary
19
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, such as references made to future profitability,
made from time to time by representatives of the Company. The inability to
negotiate the sale of certain assets could result in an impairment in future
periods. The inability to successfully negotiate a new sales contract with a
current Class I railroad customer could have a negative impact on the operating
results of the Company. 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, the adequacy of internal
and external sources of funds to meet financing needs, taxes, inflation and
governmental regulations. Sentences containing words such as "anticipates",
"expects", or "will" generally should be considered forward-looking statements.
/s/David J. Russo
David J. Russo
Senior Vice President,
Chief Financial Officer
and Treasurer
/s/Linda K. Patterson
Linda K. Patterson
Controller
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
In thousands 2002 2001
- --------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,653 $ 4,222
Accounts receivable - net 39,363 53,036
Inventories - net 32,925 43,369
Current deferred tax assets 1,494 1,491
Other current assets 696 806
Property held for resale - 1,333
Current assets of discontinued operations 138 111
- --------------------------------------------------------------------------------
Total Current Assets 78,269 104,368
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT - NET 36,083 33,819
- --------------------------------------------------------------------------------
ASSETS OF DISCONTINUED OPERATIONS 196 1,037
- --------------------------------------------------------------------------------
OTHER ASSETS:
Goodwill and other intangibles - net 1,089 5,550
Investments 12,718 11,104
Deferred tax assets 4,454 1,184
Other assets 1,175 2,980
- --------------------------------------------------------------------------------
Total Other Assets 19,436 20,818
- --------------------------------------------------------------------------------
TOTAL ASSETS $133,984 $160,042
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
In thousands, except share data
- --------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 825 $ 809
Short-term borrowings - 5,000
Accounts payable - trade 24,094 29,269
Accrued payroll and employee benefits 2,413 2,545
Current deferred tax liabilities 1,474 1,201
Other accrued liabilities 2,695 3,524
Liabilities of discontinued operations 74 9
- --------------------------------------------------------------------------------
Total Current Liabilities 31,575 42,357
- --------------------------------------------------------------------------------
LONG-TERM DEBT 26,991 32,758
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES 4,195 4,968
- --------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES 5,210 2,814
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT
LIABILITIES (Note 17)
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock, issued 10,228,739 shares
in 2002 and 2001 102 102
Paid-in capital 35,143 35,233
Retained earnings 35,208 46,632
Treasury stock - at cost, Common stock,
703,822 shares in 2002 and 762,613
shares in 2001 (3,629) (3,926)
Accumulated other comprehensive loss (811) (896)
- --------------------------------------------------------------------------------
Total Stockholders' Equity 66,013 77,145
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $133,984 $160,042
================================================================================
See Notes to Consolidated Financial Statements.
21
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE THREE YEARS ENDED DECEMBER 31, 2002
In thousands, except per share data 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
NET SALES $ 257,950 $ 282,119 $ 264,614
- -----------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of goods sold 228,483 248,623 226,780
Selling and administrative expenses 26,475 28,398 29,874
Interest expense 2,592 3,564 4,227
Other expense (income):
Impairment of equity investment and advances 6,943 - -
Other 1,097 (694) (2,506)
- -----------------------------------------------------------------------------------------------------------
265,590 279,891 258,375
- -----------------------------------------------------------------------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS,
BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (7,640) 2,228 6,239
INCOME TAX (BENEFIT) EXPENSE (2,611) 925 2,496
- -----------------------------------------------------------------------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS,
BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (5,029) 1,303 3,743
DISCONTINUED OPERATIONS (SEE NOTE 5):
LOSS FROM DISCONTINUED OPERATIONS (2,005) (1,134) (422)
INCOME TAX BENEFIT - (468) (169)
- -----------------------------------------------------------------------------------------------------------
LOSS FROM DISCONTINUED OPERATIONS,
NET OF TAX (2,005) (666) (253)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX (4,390) - -
- -----------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (11,424) $ 637 $ 3,490
===========================================================================================================
BASIC AND DILUTED (LOSS) EARNINGS PER COMMON SHARE:
FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ (0.53) $ 0.14 $ 0.39
FROM DISCONTINUED OPERATIONS, NET OF TAX (0.21) (0.07) (0.03)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (0.46) - -
- -----------------------------------------------------------------------------------------------------------
NET (LOSS) EARNINGS PER COMMON SHARE $ (1.20) $ 0.07 $ 0.37
===========================================================================================================
See Notes to Consolidated Financial Statements.
22
L.B.FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE YEARS ENDED DECEMBER 31, 2002
In thousands 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
(Loss) income from continuing operations $ (5,029) $ 1,303 $ 3,743
Adjustment to reconcile net (loss) income to net cash
provided (used) by operating activities:
Deferred income taxes (3,290) 12 (442)
Depreciation and amortization 5,851 5,414 5,114
Loss (gain) on sale of property, plant and equipment 42 41 (879)
Impairment of equity investment and advances 6,943 - -
Unrealized loss on derivative mark-to-market 2,232 - -
Change in operating assets and liabilities:
Accounts receivable 13,646 4,597 (4,494)
Inventories 8,531 16,393 (14,205)
Other current assets 110 (442) 611
Other noncurrent assets (3,689) 44 1,258
Accounts payable - trade (5,370) (3,669) 8,499
Accrued payroll and employee benefits (132) (638) (149)
Other current liabilities (829) (293) 1,001
Other liabilities 324 (110) (166)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Continuing Operations 19,340 22,652 (109)
Net Cash (Used) Provided by Discontinued Operations (1,126) (564) 628
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 18,214 22,088 519
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of property, plant and
equipment 483 219 2,428
Capital expenditures on property, plant and
equipment (4,724) (4,807) (4,063)
Purchase of DM&E stock (500) (800) -
Acquisition of business (2,214) - -
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (6,955) (5,388) (1,635)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) proceeds of revolving credit
agreement borrowings (12,000) (11,500) 1,500
Exercise of stock options and stock awards 207 85 185
Treasury share transactions - (75) (901)
Repayments of long-term debt (54) (945) (1,207)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities (11,847) (12,435) (423)
- --------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 19 (43) (19)
- --------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (569) 4,222 (1,558)
Cash and Cash Equivalents at Beginning of Year 4,222 - 1,558
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 3,653 $ 4,222 $ -
====================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 2,791 $ 3,986 $ 4,266
====================================================================================================================
Income Taxes Paid $ 749 $ 713 $ 1,932
====================================================================================================================
During 2002, 2001 and 2000, the Company financed certain capital expenditures
totaling $1,303,000, $102,000 and $340,000, respectively, through the execution
of capital leases.
See Notes to Consolidated Financial Statements.
23
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2002
Accumulated
Other
Common Paid-in Retained Treasury Comprehensive
In thousands, except share data Stock Capital Earnings Stock Income (Loss) Total
- ----------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2000 $ 102 $35,377 $42,505 $ (3,364) $ 30 $74,650
======================================================================================================================
Net income 3,490 3,490
Other comprehensive loss net of tax:
Foreign currency translation adjustment (45) (45)
Minimum pension liability adjustment (20) (20)
- ----------------------------------------------------------------------------------------------------------------------
Comprehensive income 3,425
Exercise of options to purchase 35,500
shares of Common stock (71) 256 185
Treasury stock purchases of 223,100 shares (901) (901)
======================================================================================================================
Balance, December 31, 2000 102 35,306 45,995 (4,009) (35) 77,359
======================================================================================================================
Net income 637 637
Other comprehensive loss net of tax:
Foreign currency translation adjustment (24) (24)
Minimum pension liability adjustment (200) (200)
Cumulative transition adjustment of a
change in accounting principle (48) (48)
Unrealized derivative losses on cash flow
hedges (589) (589)
- ----------------------------------------------------------------------------------------------------------------------
Comprehensive loss (224)
Issuance of 28,014 Common shares (73) 158 85
Treasury stock purchases of 25,000 shares (75) (75)
======================================================================================================================
Balance, December 31, 2001 102 35,233 46,632 (3,926) (896) 77,145
======================================================================================================================
Net loss (11,424) (11,424)
Other comprehensive loss net of tax:
Foreign currency translation adjustment (17) (17)
Minimum pension liability adjustment (434) (434)
Unrealized derivative losses on cash flow
hedges (686) (686)
Reclassification adjustment for derivative
losses included in net losses 1,222 1,222
- ----------------------------------------------------------------------------------------------------------------------
Comprehensive loss (11,339)
Issuance of 58,791 Common shares (90) 297 207
======================================================================================================================
Balance, December 31, 2002 $ 102 $35,143 $35,208 $ (3,629) $ (811) $66,013
======================================================================================================================
See Notes to Consolidated Financial Statements.
24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant inter-company transactions have
been eliminated. The term "Company" refers to L. B. Foster Company and its
subsidiaries, as the context requires.
CASH EQUIVALENTS
The Company considers securities with maturities of three months or less, when
purchased, to be cash equivalents.
INVENTORIES
Inventories are generally valued at the lower of the last-in, first-out (LIFO)
cost or market. Approximately 24% in 2002 and 18% in 2001, of the Company's
inventory is valued at average cost or market, whichever is lower. The reserve
for slow-moving inventory is reviewed and adjusted regularly, based upon product
knowledge, physical inventory observation, and the age of the inventory.
PROPERTY, PLANT AND EQUIPMENT
Maintenance, repairs and minor renewals are charged to operations as incurred.
Major renewals and betterments which substantially extend the useful life of the
property are capitalized. Upon sale or other disposition of assets, the cost and
related accumulated depreciation and amortization are removed from the accounts
and the resulting gain or loss, if any, is reflected in income.
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives of 30 to 40 years for buildings and 3 to 10 years for
machinery and equipment. Leasehold improvements are amortized over 2 to 7 years
which represent the lives of the respective leases or the lives of the
improvements, whichever is shorter. The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Judgement is required to assess the ultimate realization of the Company's
accounts receivable, including assessing the probability of collection and the
credit-worthiness of certain customers. Reserves for uncollectible accounts are
recorded as part of selling, general and administrative expense on the
Statements of Consolidated Operations. The Company records a monthly provision
for accounts receivable that are considered to be uncollectible. In order to
calculate the appropriate monthly provision, the Company reviews its accounts
receivable aging and calculates an allowance through application of historic
reserve factors to overdue receivables. This calculation is supplemented by
specific account reviews performed by the Company's credit department. As
necessary, the application of the Company's allowance rates to specific
customers are reviewed and adjusted to more accurately reflect the credit risk
inherent within that customer relationship. The reserve is reviewed for
reasonableness on a monthly basis.
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). SFAS 142 establishes new accounting and reporting
requirements for goodwill and intangible assets, including new measurement
techniques for evaluating the recoverability of such assets. Under SFAS 142, all
goodwill amortization ceased as of January 1, 2002. Goodwill attributable to
each of the Company's reporting units was tested for impairment by comparing the
fair value of each reporting unit with its carrying value. As a result of the
adoption of SFAS 142, the Company recognized a total pre-tax charge of
$4,931,000, of which $3,664,000 related to the Rail products segment (primarily
from the 1999 acquisition of CXT Incorporated), and $1,267,000 related to the
Construction products segment (from the 1997 acquisition of the Precise
Fabricating Corporation). The fair values of these reporting units were
determined using discounted cash flows based on the projected financial
information of the reporting units. On an ongoing basis (absent of any
impairment indicators), the Company expects to perform its impairment tests
during the fourth quarter.
Under SFAS 142, the impairment charge recognized at adoption is reflected as a
cumulative effect of a change in accounting principle, effective January 1,
2002. Impairment adjustments recognized on an ongoing basis are generally
recognized as a component of continuing operations.
The carrying amount of goodwill attributable to each segment, after the non-cash
charges for the adoption of SFAS 142 at January 1, 2002 is detailed as follows:
25
Rail Construction Tubular
Products Products Products
In thousands Segment Segment Segment Total
- ------------------------------------------------------------------------------------------------------
Balance as of December 31, 2001 $3,664 $1,467 $ - $5,131
Goodwill Impairment - January 1, 2002 (3,664) (1,267) - (4,931)
Goodwill Acquired - Greulich Bridge - 150 - 150
- ------------------------------------------------------------------------------------------------------
Balance as of December 31, 2002 $ - $ 350 $ - $ 350
======================================================================================================
As required by SFAS 142, the Company reassessed the useful lives of its
identifiable intangible assets and determined that no changes were required. As
the Company has no indefinite lived intangible assets, all intangible assets
will continue to be amortized over their remaining useful lives ranging from 5
to 10 years, with a total weighted average amortization period of less than
seven years. The components of the Company's intangible assets are as follows:
December 31, 2002 December 31, 2001
Gross Gross
Carrying Accumulated Carrying Accumulated
In thousands Amount Amortization Amount Amortization
- -------------------------------------------------------------------------------------------
Licensing agreements $400 $ (87) $375 $(23)
Non-compete agreements 350 (70) - -
Patents 200 (54) 100 (33)
- -------------------------------------------------------------------------------------------
Total $950 $(211) $475 $(56)
===========================================================================================
Amortization expense for the year ended December 31, 2002, 2001 and 2000 was
$155,000, $61,000 and $43,000, respectively. Future estimated amortization
expense is as follows:
Estimated
Amortization
In thousands Expense
- --------------------------------------------------------------------------------
For the year ended December 31,
2003 $155
2004 155
2005 155
2006 155
Thereafter 119
================================================================================
Had the Company been accounting for goodwill under SFAS 142 for all periods
presented, the Company's net (loss) income and basic and diluted (loss) earnings
per common share for the years ended December 31, 2002, 2001 and 2000 would have
been as follows:
In thousands, except per share amounts 2002 2001 2000
- -----------------------------------------------------------------------------------------------
Reported net (loss) income $(11,424) $ 637 $ 3,490
Goodwill amortization, net of tax - 423 372
- -----------------------------------------------------------------------------------------------
Adjusted net (loss) income $(11,424) $ 1,060 $ 3,862
===============================================================================================
Basic (loss) earnings per common share:
Reported net (loss) income $ (1.20) $ 0.07 $ 0.37
Goodwill amortization, net of tax - 0.04 0.04
- -----------------------------------------------------------------------------------------------
Adjusted basic (loss) earnings per common share $ (1.20) $ 0.11 $ 0.41
===============================================================================================
Diluted (loss) earnings per common share:
Reported net (loss) income $ (1.20) $ 0.07 $ 0.37
Goodwill amortization, net of tax - 0.04 0.04
- -----------------------------------------------------------------------------------------------
Adjusted diluted (loss) earnings per common share $ (1.20) $ 0.11 $ 0.40
===============================================================================================
ENVIRONMENTAL REMEDIATION AND COMPLIANCE
Environmental remediation costs are accrued when the liability is probable and
costs are estimable. Environmental compliance costs, which principally include
the disposal of waste generated by routine operations, are expensed as incurred.
Capitalized environmental costs are depreciated, when appropriate, over their
useful life.
26
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income (loss) by the
weighted average of common shares outstanding during the year. Diluted earnings
per share is calculated by using the weighted average of common shares
outstanding adjusted to include the potentially dilutive effect of outstanding
stock options utilizing the treasury stock method.
REVENUE RECOGNITION
The Company's revenues are composed of product sales and products and services
provided under long-term contracts. The Company recognizes revenue upon shipment
of material from stock inventory or upon billing of material shipped directly to
the customer from a Company vendor. Title passes to the customer upon shipment.
Revenue is reported net of freight for sales from stock inventory and direct
shipments. Freight recorded for the years ended December 31, 2002, 2001 and 2000
amounted to $11,340,000, $11,332,000 and $8,903,000, respectively. Revenues from
long-term contracts are generally recognized using the percentage-of-completion
method based upon the proportion of actual costs incurred to estimated total
costs. For certain products, the percentage of completion is based upon actual
labor and engineering costs to estimated total labor and engineering costs. For
certain other products, the Company recognizes revenues based upon the units
delivered compared to total units ordered by the customer.
As certain long-term contracts extend over one or more years, revisions to
estimates of costs and profits are reflected in the accounting period in which
the facts that require the revisions become known. At the time a loss on a
contract becomes known, the entire amount of the estimated loss is recognized on
the financial statements. The Company has historically made reasonable
dependable estimates of the extent of progress towards completion, contract
revenues, and contract costs on its long-term contracts. However, due to
uncertainties inherent in the estimation process, actual results could differ
materially from those estimates.
Revenue from contract change orders and claims is recognized when the settlement
is probable and the amount can be reasonably estimated. Contract costs include
all direct material, labor, subcontract costs and those indirect costs related
to contract performance. Costs in excess of billings, and billings in excess of
costs are classified as a current asset.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of accounts receivable, accounts
payable, short-term and long-term debt, and interest rate agreements.
The carrying amounts of the Company's financial instruments at December 31, 2002
and 2001 approximate fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123" (SFAS 148) effective for fiscal years
ending after December 31, 2002 and for interim periods beginning after December
15, 2002. This statement amends Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123), to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results.
The Company has adopted the disclose-only provisions of SFAS 123, but applies
the intrinsic value method of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its stock option plans. Accordingly, no compensation expense
has been recognized.
The following table illustrates the effect on the Company's (loss) income from
continuing operations and (loss) earnings per share had compensation expense for
the Company's stock option plans been applied using the method required by SFAS
123. Refer to Note 12 "Stock Options" for more information regarding stock based
compensation.
In thousands,except
per share amounts 2002 2001 2000
- --------------------------------------------------------------------------------
Net (loss) income from continuing
operations, as reported $ (5,029) $1,303 $3,743
Add: Stock-based employee
compensation expense included
in reported net (loss) income, net
of related tax effects - - -
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects 270 260 315
- --------------------------------------------------------------------------------
Pro forma (loss) income from
continuing operations $ (5,299) $1,043 $3,428
================================================================================
(Loss) earnings per share from
continuing operations:
Basic and diluted, as reported $ (0.53) $ 0.14 $ 0.39
Basic and diluted, pro forma $ (0.56) $ 0.11 $ 0.36
================================================================================
27
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
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. Effective September 26, 2002, in conjunction with
the Company's debt refinancing, the Company discontinued cash flow hedge
accounting treatment for its interest rate collars and has applied
mark-to-market accounting prospectively. Adjustments in the fair value of these
instruments are recorded as Other Expense (Income). The Company continues to
apply cash flow hedge accounting to the interest rate swap.
At contract inception, the Company designates its derivative instruments as
hedges. The Company recognizes all derivative instruments on the balance sheet
at fair value. Fluctuations in the fair values of derivative instruments
designated as cash flow hedges are recorded in accumulated other comprehensive
income, and reclassified, as adustments to interest expense, as the underlying
hedged items affect earnings. To the extent that a change in interest rate
derivative does not perfectly offset the change in value of the interest rate
being hedged, the ineffective portion is recognized in earnings immediately.
The Company is not subject to significant exposures to changes 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 these transactions over the duration of the transactions. At
December 31, 2002 and 2001, the Company did not have any foreign currency
forward contracts outstanding.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial 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 impact 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.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
146), effective for exit or disposal activities initiated after December 31,
2002, with early application encouraged. This statement supercedes EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred,
rather than at the date of an entity's commitment to an exit plan. The Company
does not expect this standard to have a material effect on the Company's
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, and Interpretation of ARB No. 51", (FIN 46). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. Management is currently evaluating the effect
that the adoption of FIN 46 will have on its results of operations and financial
condition. The Company has not identified any off balance sheet arrangements for
which consolidation under FIN 46 is reasonably possible.
28
NOTE 2.
ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2002 and 2001 are summarized as follows:
In thousands 2002 2001
- --------------------------------------------------------------------------------
Trade $40,357 $53,542
Allowance for doubtful accounts (1,063) (812)
Other 69 306
- --------------------------------------------------------------------------------
$39,363 $53,036
================================================================================
The increase in current year reserves is due to fully reserved accounts. Bad
debt expense (income) was $256,000, $(20,000), and $108,000 in 2002, 2001 and
2000, respectively.
The Company's customers are principally in the Rail, Construction and Tubular
segments of the economy. As of December 31, 2002 and 2001, trade receivables,
net of allowance for doubtful accounts, from customers in these markets were as
follows:
In thousands 2002 2001
- --------------------------------------------------------------------------------
Rail $19,016 $28,158
Construction 18,793 22,732
Tubular 1,485 1,840
- --------------------------------------------------------------------------------
$39,294 $52,730
================================================================================
Credit is extended on an evaluation of the customer's financial condition and
generally collateral is not required.
NOTE 3.
INVENTORIES
Inventories at December 31, 2002 and 2001 are summarized as follows:
In thousands 2002 2001
- --------------------------------------------------------------------------------
Finished goods $21,700 $33,995
Work-in-process 6,343 5,551
Raw materials 6,731 5,756
- --------------------------------------------------------------------------------
Total inventories at current costs 34,774 45,302
- --------------------------------------------------------------------------------
Less:
Current cost over LIFO
stated values (1,249) (1,333)
Inventory valuation reserve (600) (600)
- --------------------------------------------------------------------------------
$32,925 $43,369
================================================================================
At December 31, 2002 and 2001, the LIFO carrying value of inventories for book
purposes exceeded the LIFO value for tax purposes by approximately $5,082,000
and $5,034,000, respectively. During 2002, inventory quantities were reduced
resulting in a liquidation of certain LIFO inventory layers carried at costs
which were higher than the costs of current purchases. The effect of these
reductions in 2002 was to increase cost of goods sold by $714,000. During 2001,
liquidation of LIFO layers carried at costs that were lower than current
purchases resulted in a decrease to cost of goods sold of $307,000. During 2000,
liquidation of LIFO layers carried at costs that were higher than current
purchases resulted in an increase to cost of goods sold of $18,000.
NOTE 4.
PROPERTY HELD FOR RESALE
Property held for resale at December 31, 2002 and 2001 consists of the
following:
In thousands 2002 2001
- --------------------------------------------------------------------------------
Location:
Birmingham, AL $ - $ 1,333
- --------------------------------------------------------------------------------
Property held for resale $ - $ 1,333
================================================================================
Operations at the Tubular segment'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. In 2000, the machinery and equipment from this operation was
dismantled and transferred to the Company's Birmingham, AL location. The
expected sale of these assets did not materialize in 2002. In accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impaiment or Disposal of Long-Lived Assets", these assets were reclassified as
held and used and a $765,000 non-cash charge was recognized representing
depreciation that had been suspended while these assets were classified as held
for resale.
29
NOTE 5.
DISCONTINUED OPERATIONS
During the fourth quarter of 2002, the Company started negotiations and
committed to a plan to sell the assets related to the Rail segment's rail
signaling and communications device business in 2003 and recorded a $660,000
non-cash impairment loss to adjust these assets to their fair value. The
operations of the rail signaling and communication device business qualify as a
"component of an entity" under Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" and thus,
have been reclassified as discontinued operations in the fourth quarter of 2002,
and prior periods have been restated. The rail signaling and communication
device business was sold effective February 28, 2003.
In the fourth quarter of 1999, the Company made the decision to discontinue the
operations of the Monitor Group, a developer of portable mass spectrometers. In
September 2000, the Company sold the assets of the Monitor Group for $1,500,000
cash. The disposition of the Monitor Group represented the disposal of a
business segment under Accounting Principles Board "APB" Opinion No. 30.
Accordingly, results of the operation were classified as discontinued, and prior
periods have been restated.
The following table reconciles net (loss) income from continuing operations
before the cumulative effect of a change in accounting principle to net (loss)
income before the cumulative effect of a change in accounting principle:
In thousands 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Net (loss) income from continuing operations
(before the cumulative effect of a change in
accounting principle) $(5,029) $1,303 $3,743
Discontinued operations
Loss from operations of the rail signaling
and communication device business
(including a pretax provision for the
disposal of assets in 2002 of $660,000) (2,005) (1,134) (1,040)
Income from the operations of the
Monitor Group, (including a pretax
gain on disposal of $1,500,000) - - 618
Income tax benefit - 468 169
- ----------------------------------------------------------------------------------------------------
Loss from discontinued operations (2,005) (666) (253)
- ----------------------------------------------------------------------------------------------------
Net (loss) income before cumulative effect
of a change in accounting principle $ (7,034) $637 $3,490
====================================================================================================
The 2002 non-cash impairment loss to adjust the assets of the rail signaling and
communication device business to fair value was recorded to the following asset
classes:
In thousands
- --------------------------------------------------------------------------------
Intangibles $ 611
Equipment 49
- --------------------------------------------------------------------------------
Total impairment loss $ 660
================================================================================
30
The following table details balance sheet information for discontinued
operations:
In thousands 2002 2001
- --------------------------------------------------------------------------------
Current assets
Accounts receivable $ 1 $ 28
Inventory 118 75
Other current assets 19 8
- --------------------------------------------------------------------------------
Total current assets 138 111
- --------------------------------------------------------------------------------
Other assets
Property, plant and equipment - net 95 132
Intangibles - net 101 905
- --------------------------------------------------------------------------------
Total other assets 196 1,037
- --------------------------------------------------------------------------------
Total assets 334 1,148
- --------------------------------------------------------------------------------
Current liabilities
Accounts payable - trade 69 21
Accrued payroll and employee benefits 1 1
Other accrued liabilities 4 (13)
- --------------------------------------------------------------------------------
Total current liabilities 74 9
- --------------------------------------------------------------------------------
Net assets of discontinued operations $260 $1,139
================================================================================
31
NOTE 6.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2002 and 2001 consists of the
following:
In thousands 2002 2001
- --------------------------------------------------------------------------------
Land $ 6,541 $ 6,352
Improvements to land and leaseholds 7,438 6,465
Buildings 7,675 6,060
Machinery and equipment,
including equipment under
capitalized leases 50,188 44,676
Construction in progress 181 717
- --------------------------------------------------------------------------------
72,023 64,270
- --------------------------------------------------------------------------------
Less accumulated depreciation
and amortization, including
accumulated amortization of
capitalized leases 35,940 30,451
- --------------------------------------------------------------------------------
$36,083 $33,819
================================================================================
Depreciation expense for the years ended December 31, 2002, 2001 and 2000
amounted to $5,696,000, $5,353,000 and $5,071,000, respectively.
NOTE 7.
OTHER ASSETS AND INVESTMENTS
The Company holds investments in the stock of the Dakota, Minnesota & Eastern
Railroad Corporation (DM&E), which is recorded at its historical cost of
$8,993,000 and $8,493,000 at December 31, 2002 and 2001, respectively. This
investment is comprised of $193,000 of DM&E Common stock, $1,500,000 of DM&E
Series B Preferred Stock and Common stock warrants, $6,000,000 in DM&E Series C
Preferred Stock and Common stock warrants, $800,000 in DM&E Series C1 Preferred
Stock and Common stock warrants, and $500,000 in DM&E Series D Preferred Stock
and Common stock warrants. The Company accrued dividend income on these
issuances of $1,114,000, $881,000 and $813,000 in 2002, 2001 and 2000,
respectively. The Company had a receivable for accrued dividend income on these
issuances of $3,725,000, $2,611,000 and $1,730,000 in 2002, 2001 and 2000,
respectively. Although the market value of the investments in DM&E stock are not
readily determinable, management believes the fair value of this investment
exceeds its carrying amount.
In August 2000, the Company contributed a note, having a principal and interest
value of approximately $2,700,000, to a limited liability company created by the
Company and its principal trackwork supplier in exchange for a 30% ownership
position. Of the $2,700,000 initial investment, approximately $1,700,000
represented goodwill. During 2002, the Company recognized an impairment loss of
approximately $1,893,000 to write off this investment. The loss in the value of
this investment was driven by the continued deterioration of certain rail
markets and was determined to be "other than temporary" based on discounted cash
flow projections. The Company's proportionate share of the unaudited financial
results for this investment was immaterial for the years ended December 31,
2002, 2001 and 2000.
NOTE 8.
BORROWINGS
On September 26, 2002, the Company entered into a new credit agreement with a
syndicate of three banks led by PNC Bank, N.A. The new agreement provides for a
revolving credit facility of up to $60,000,000 in borrowings to support the
Company's working capital and other liquidity requirements. The revolving credit
facility, which matures in September 2005, is secured by substantially all of
the inventory and trade receivables owned by the Company. Availability under the
agreement is limited by the amount of eligible inventory and accounts
receivable, applied against certain advanced rates. Proceeds from the new
facility were used to repay and retire the Company's previous credit agreement,
which was to mature in July 2003. Interest on the new credit facility is based
on LIBOR plus a spread ranging from 1.75% to 2.5%.
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 capital expenditures. The agreement also restricts investments,
indebtedness, and the sale of certain assets. As of December 31, 2002, the
Company was in compliance with all the agreement's covenants.
At December 31, 2002, 2001 and 2000, the weighted average interest rate on
short-term borrowings was 3.84%, 5.41% and 8.12%, respectively. At December 31,
2002 the Company had borrowed $23,000,000 under the agreement, which was
classified as long-term (See Note 9). Under the agreement, the Company had
approximately $11,645,000 in unused borrowing commitment at December 31, 2002.
32
NOTE 9.
LONG-TERM DEBT AND RELATED MATTERS
Long-term debt at December 31, 2002 and 2001 consists of the following:
In thousands 2002 2001
- --------------------------------------------------------------------------------
Revolving Credit Agreement with
weighted average interest rate of
3.84% at December 31, 2002 and
5.41% at December 31, 2001,
expiring September 26, 2005 $23,000 $30,000
- --------------------------------------------------------------------------------
Lease obligations payable in
installments through 2012 with a
weighted average interest rate of
7.33% at December 31, 2002 and
8.30% at December 31, 2001 1,897 1,522
- --------------------------------------------------------------------------------
Massachusetts Industrial Revenue
Bond with an average interest
rate of 1.58% at December 31,
2002 and 2.89% at December 31,
2001, payable March 1, 2013 2,045 2,045
- --------------------------------------------------------------------------------
Pennsylvania Economic Development
Financing Authority Tax Exempt
Pooled Bond payable in installments
from 2005 through 2021 with an
average interest rate of 1.63% at
December 31, 2002 400 -
- --------------------------------------------------------------------------------
Pennsylvania Department of
Community and Economic Develop-
ment Machinery and Equipment
Loan Fund payable in installments
through 2009 with a fixed interest
rate of 3.75% 474 -
- --------------------------------------------------------------------------------
27,816 33,567
Less current maturities 825 809
- --------------------------------------------------------------------------------
$26,991 $32,758
================================================================================
The $23,000,000 revolving credit borrowings included in long-term debt were
obtained under the revolving loan agreement discussed in Note 8 and are subject
to the same terms and conditions. The borrowings are classified as long-term
because the Company does not anticipate reducing the borrowings below
$23,000,000 during 2003.
The Massachusetts Industrial Revenue Bond is secured by a $2,085,000 standby
letter of credit.
The Pennsylvania Economic Development Financing Authority Tax-Exempt Pooled Bond
is secured by a $410,000 standby letter of credit.
The Company uses interest rate collars to manage interest rate exposure on
variable-rate debt. The Company has a LIBOR-based interest rate collar
agreement, which became effective in March 2001 and expires in March 2006, with
a notional value of $15,000,000, a maximum annual interest rate of 5.60%, and a
minimum annual interest rate of 5.00%. The counterparty to the collar agreement
has the option, on March 6, 2005, to convert the $15,000,000 collar to a
one-year, fixed-rate instrument with interest payable at an annual rate of
5.49%. The Company also has a LIBOR-based interest rate collar agreement, which
became effective in April 2001 and expires in April 2006, with a notional value
of $10,000,000, a maximum annual interest rate of 5.14%, and a minimum annual
interest rate of 4.97%. The counter-party to the collar agreement has the
option, on April 18, 2004, to convert the $10,000,000 collar to a two-year
fixed-rate instrument with interest payable at an annual rate of 5.48%. Other
expense (income) for 2002 includes a non-cash charge of $2,232,000 related to
the mark-to-market accounting for these derivative instruments as a result of
the Company entering into a new credit agreement late in the third quarter. The
new agreement, as discussed in Note 8, discontinued the hedging relationship of
the Company's interest rate collars with the underlying debt instrument.
Although these derivatives are not deemed to be effective hedges of the new
credit facility, in accordance with the provisions of SFAS 133, the Company has
retained these instruments as protection against interest rate risk associated
with the new credit agreement and the Company will continue to record the
mark-to-market adjustments on the interest rate collars, through 2006, in its
consolidated income statement.
The Company also has an interest rate swap agreement related to variable rate
borrowings, which expires in December 2004, has a notional value of $2,453,000
at December 31, 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 fair value of the swap at December 31, 2002 is a $171,000 liability
and is classified within other long-term liabilities on the Consolidated Balance
Sheets. At the current fair value based on prevailing interest rates as of
December 31, 2002, the $101,000 of other comprehensive loss related to this
derivative, which is net of tax, will be reclassified into earnings as the
underlying hedged items affect earnings, over the term of the agreement.
The maturities of long-term debt for each of the succeeding five years
subsequent to December 31, 2002 are as follows: 2003 - $825,000; 2004 -
$461,000; 2005 - $23,314,000; 2006 - $329,000; 2007 and after - $2,887,000.
33
NOTE 10.
STOCKHOLDERS' EQUITY
At December 31, 2002 and 2001, the Company had authorized shares of 20,000,000
in Common stock and 5,000,000 in Preferred stock. No Preferred stock has been
issued. The Common stock has a par value of $.01 per share. No par value has
been assigned to the Preferred stock.
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. As of December 31, 2002,
the Company had repurchased 973,398 shares at a total cost of approximately
$5,016,800. No purchases were made in 2002. The timing and extent of future
purchases will depend on market conditions and options available to the Company
for alternative uses of its resources.
No cash dividends on Common stock were paid in 2002, 2001, or 2000.
NOTE 11.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss, net of tax, for the
years ended December 31, 2002 and 2001, are as follows:
In thousands 2002 2001
- --------------------------------------------------------------------------------
Cumulative transition adjustment
of a change in accounting
principle (SFAS 133) $ - $ (48)
Unrealized derivative losses
on cash flow hedges (101) (589)
Foreign currency translation
adjustment (56) (39)
Minimum pension liability
adjustment (654) (220)
- --------------------------------------------------------------------------------
$(811) $(896)
================================================================================
NOTE 12.
STOCK OPTIONS
The Company has two stock option plans currently in effect under which future
grants may be issued: The 1985 Long-Term Incentive Plan (1985 Plan) and the 1998
Long-Term Incentive Plan for Officers and Directors (1998 Plan).
The 1985 Plan, as amended and restated in March 1994, provides for the award of
options to key employees and directors to purchase up to 1,500,000 shares of
Common stock at no less than 100% of fair market value on the date of the grant.
The 1998 Plan as amended and restated in May 2001, provides for the award of
options to key employees and directors to purchase up to 900,000 shares of
Common stock at no less than 100% of fair market value on the date of the grant.
Both Plans provide for the granting of "nonqualified options" and "incentive
stock options" with a duration of not more than ten years from the date of
grant. The Plans also provide that, unless otherwise set forth in the option
agreement, options are exercisable in installments of up to 25% annually
beginning one year from date of grant. Stock to be offered under the Plans may
be authorized from unissued Common stock or previously issued shares which have
been reacquired by the Company and held as Treasury shares. At December 31,
2002, 2001 and 2000, Common stock options outstanding under the Plans had option
prices ranging from $2.75 to $6.00, with a weighted average price of $4.27,
$4.05 and $4.26 per share, respectively.
The weighted average remaining contractual life of the stock options outstanding
for the three years ended December 31, 2002 are: 2002 - 6.4 years; 2001 - 6.7
years; and 2000 - 7.1 years.
The Option Committee of the Board of Directors which administers the Plans may,
at its discretion, grant stock appreciation rights at any time prior to six
months before an option's expiration date. Upon exercise of such rights, the
participant surrenders the exercisable portion of the option in exchange for
payment (in cash and/or Common stock valued at its fair market value) of an
amount not greater than the spread, if any, by which the average of the high and
low sales prices quoted in the Over-the-Counter Exchange on the trading day
immediately preceding the date of exercise of the stock appreciation right
exceeds the option price. No stock appreciation rights were issued or
outstanding during 2002, 2001 or 2000.
Options for 55,500 shares were exercised during 2002 with a weighted average
exercise price of $3.45. No options were exercised in 2001; however, during
2000, options exercied totaled 35,500 shares with a weighted average exercise
price of $3.32.
34
Certain information for the three years ended December 31, 2002 relative to
employee stock options is summarized as follows:
2002 2001 2000
- --------------------------------------------------------------------------------
Number of shares under
Incentive Plan:
Outstanding at
beginning of year 1,402,750 1,187,500 950,500
Granted 251,500 356,000 462,500
Canceled (63,250) (140,750) (190,000)
Exercised (55,500) - (35,500)
- --------------------------------------------------------------------------------
Outstanding at
end of year 1,535,500 1,402,750 1,187,500
================================================================================
Exercisable at
end of year 1,040,500 916,250 721,375
================================================================================
Number of shares available
for future grant:
Beginning of year 370,800 136,050 408,550
================================================================================
End of year 182,550 370,800 136,050
================================================================================
Pro forma information regarding net income and earnings per share for options
granted is required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS
123. The fair value of stock options used to compute pro forma net income and
earnings per share disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2002, 2001 and 2000, respectively: risk-free
interest rates of 4.94%, 5.24% and 6.02%; dividend yield of 0.0% for all three
years; volatility factors of the expected market price of the Company's Common
stock of .32, .31 and .29; and a weighted-average expected life of the option of
ten years. The weighted average fair value of options granted at December 31,
2002, 2001, and 2000 was $2.75, $1.91 and $2.26, respectively.
Had compensation expense for the Company's stock option plans been determined in
accordance with SFAS 123, the Company's net (loss) income from continuing
operations and diluted (loss) earnings per share would have been: $(5,299,000)
or $(0.56) per share in 2002, $1,043,000 or $0.11 per share in 2001, and
$3,428,000 or $0.36 per share in 2000.
35
NOTE 13.
(LOSS) EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted (loss)
earnings per common share:
In thousands, except Years ended December 31,
per share amounts 2002 2001 2000
- --------------------------------------------------------------------------------
Numerator:
Numerator for basic
and diluted earnings
per common share -
net (loss) income available
to common stockholders:
(Loss) income from
continuing operations $(5,029) $1,303 $3,743
Loss from discontinued
operations (2,005) (666) (253)
Cumulative effect of
change in accounting
principle (4,390) - -
- --------------------------------------------------------------------------------
Net (loss) income $(11,424) $637 $3,490
================================================================================
Denominator:
Weighted average shares 9,494 9,429 9,490
- --------------------------------------------------------------------------------
Denominator for basic earnings
per common share 9,494 9,429 9,490
Effect of dilutive securities:
Contingent issuable shares 13 44 53
Employee stock options 140 34 15
- --------------------------------------------------------------------------------
Dilutive potential common
shares 153 78 68
Denominator for diluted
earnings per common
share - adjusted weighted
average shares and
assumed conversions 9,647 9,507 9,558
================================================================================
Basic and diluted (loss)
earnings per common
share:
Continuing operations $ (0.53) $ 0.14 $ 0.39
Discontinued operations (0.21) (0.07) (0.03)
Cumulative effect of
change in accounting
principle (0.46) - -
- --------------------------------------------------------------------------------
Basic and diluted (loss)
earnings per common
share $ (1.20) $ 0.07 $ 0.37
================================================================================
In 2002, the Company did not include dilutive securities in the calculation of
weighted average common shares because of their anti-dilutive effect due to the
net loss incurred.
Weighted average shares issuable upon the exercise of stock options which were
antidilutive and were not included in the calculation were 352,000, 684,000 and
791,000 in 2002, 2001 and 2000, respectively.
NOTE 14.
INCOME TAXES
At December 31, 2002 and 2001, the tax benefit of net operating loss
carryforwards available for foreign and state income tax purposes was
approximately $2,666,000 and $2,166,000, respectively. For financial reporting
purposes, a valuation allowance of $1,974,000 has been recognized to offset the
deferred tax assets related to the state and foreign net operating loss
carryforwards. The Company's valuation allowance for deferred tax assets was
increased by $411,000 during 2002 and $357,000 during 2001 to reflect the
uncertainty regarding the Company's ability to utilize state and foreign net
operating loss carryforwards, which begin to expire in 2005. Additionally, at
December 31, 2002, the Company wrote down the value of its investment and
advances with its specialty trackwork supplier by $6,943,000, creating a
deferred tax asset of approximately $2,491,000. For financial reporting
purposes, a valuation allowance of $667,000 has been recognized to offset a
portion of the deferred tax asset due to the uncertainty of the Company's
ability to utilize the entire deferred tax asset. The change in the net deferred
tax asset (liability) reflects $541,000 in deferred tax assets related to
adoption of SFAS 142 in which the Company recognized $4,931,000 in goodwill
impairment as the cumulative effect of a change in accounting principle for book
purposes, as well as the change in minimum pension liability and derivative
instruments which are recorded, net of tax, in accumulated other comprehensive
loss. Significant components of the Company's deferred tax liabilities and
assets as of December 31, 2002 and 2001 are as follows:
In thousands 2002 2001
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 4,195 $ 4,968
Inventories 1,474 1,201
- --------------------------------------------------------------------------------
Total deferred tax liabilities 5,669 6,169
- --------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivables 362 295
Net operating loss
carryforwards 2,666 2,166
Minimum pension liability 453 139
Derivative instruments 70 442
Writedown of investment
and advances 2,491 -
Goodwill 541 -
Other - net 2,006 1,196
- --------------------------------------------------------------------------------
Total deferred tax assets 8,589 4,238
Valuation allowance for
deferred tax assets 2,641 1,563
- --------------------------------------------------------------------------------
Deferred tax assets 5,948 2,675
- --------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 279 $ (3,494)
================================================================================
36
Significant components of the provision for income taxes from continuing
operations are as follows:
In thousands 2002 2001 2000
- --------------------------------------------------------------------------------
Current:
Federal $ 615 $ 757 $2,777
State 64 156 161
- --------------------------------------------------------------------------------
Total current 679 913 2,938
- --------------------------------------------------------------------------------
Deferred:
Federal (2,904) (2) (398)
State (386) 14 (44)
- --------------------------------------------------------------------------------
Total deferred (3,290) 12 (442)
- --------------------------------------------------------------------------------
Total income tax expense $(2,611) $ 925 $2,496
================================================================================
The reconciliation of income tax from continuing operations computed at
statutory rates to income tax expense (benefit) is as follows:
2002 2001 2000
- --------------------------------------------------------------------------------
Statutory rate (34.0%) 34.0% 34.0%
State income tax (2.6) 11.8 0.8
Foreign income tax - - 5.1
Nondeductible expenses (1.9) 1.8 0.1
Other 4.3 (6.1) -
- --------------------------------------------------------------------------------
(34.2%) 41.5% 40.0%
================================================================================
(Loss) income from continuing operations before income taxes included a loss
from domestic operations of $(12,571,000) in 2002, and income of $2,228,000 in
2001, and $6,239,000 in 2000.
NOTE 15.
RENTAL AND LEASE INFORMATION
The Company has capital and operating leases for certain plant facilities,
office facilities, and equipment. Rental expense for the years ended December
31, 2002, 2001, and 2000 amounted to $4,008,000, $4,145,000 and $4,058,000,
respectively. Generally, the land and building leases include escalation
clauses.
The following is a schedule, by year, of the future minimum payments under
capital and operating leases, together with the present value of the net minimum
payments as of December 31, 2002:
Capital Operating
In thousands Leases Leases
- --------------------------------------------------------------------------------
Year ending December 31,
2003 $ 868 $ 3,119
2004 457 2,537
2005 264 1,492
2006 264 1,236
2007 and thereafter 361 344
- --------------------------------------------------------------------------------
Total minimum lease payments 2,214 $8,728
Less amount representing interest 317
- --------------------------------------------------------------------------------
Total present value of minimum
payment 1,897
Less current portion of such
obligations 761
- --------------------------------------------------------------------------------
Long-term obligations with
interest rates ranging from
3.66% to 11.42% $1,136
================================================================================
Assets recorded under capital leases are as follows:
In thousands 2002 2001
- --------------------------------------------------------------------------------
Machinery and equipment
at cost $3,029 $2,827
Buildings 399 -
Land 219 -
- --------------------------------------------------------------------------------
3,647 2,827
Less accumulated amortization 1,371 1,367
- --------------------------------------------------------------------------------
Net property, plant and
equipment 2,276 1,460
- --------------------------------------------------------------------------------
Machinery and equipment held
for resale, at cost - 2,033
Less accumulated amortization/
valuation - 827
- --------------------------------------------------------------------------------
Net property held for resale - 1,206
- --------------------------------------------------------------------------------
Net prepaid expenses 77 67
- --------------------------------------------------------------------------------
Net capital lease assets $2,353 $2,733
================================================================================
37
NOTE 16.
RETIREMENT PLANS
Substantially all of the Company's hourly paid employees are covered by one of
the Company's noncontributory, defined benefit plans and a defined contribution
plan. Substantially all of the Company's salaried employees are covered by a
defined contribution plan established by the Company.
The hourly plan assets consist of various mutual fund investments. The following
tables present a reconciliation of the changes in the benefit obligation, the
fair market value of the assets and the funded status of the plan, with the
accrued pension cost in other non-current liabilities in the Company's balance
sheets:
In thousands 2002 2001
- --------------------------------------------------------------------------------
Changes in benefit obligation:
Benefit obligation at beginning
of year $ 2,668 $ 2,747
Service cost 54 75
Interest cost 183 175
Actuarial losses (gains) 151 (224)
Benefits paid (101) (105)
- --------------------------------------------------------------------------------
Benefit obligation at end
of year $ 2,955 $ 2,668
================================================================================
Change to plan assets:
Fair value of assets at
beginning of year $ 2,013 $ 2,383
Actual loss on plan assets (380) (328)
Employer contribution 108 63
Benefits paid (101) (105)
- --------------------------------------------------------------------------------
Fair value of assets at
end of year $ 1,640 $ 2,013
================================================================================
Funded status $(1,315) $ (655)
Unrecognized actuarial loss 1,151 473
Unrecognized net transition
asset (45) (55)
Unrecognized prior service
cost 53 62
- --------------------------------------------------------------------------------
Accrued benefit cost $ (156) $ (175)
================================================================================
Amounts recognized in the
statement of financial
position consist of:
Accrued benefit liability $ (1,315) $ (655)
Intangible asset 53 62
Accumulated other compre-
hensive loss 1,106 418
- --------------------------------------------------------------------------------
Net amount recognized $ (156) $ (175)
================================================================================
The Company's funding policy for defined benefit plans is to contribute the
minimum required by the Employee Retirement Income Security Act of 1974. Net
periodic pension costs for the three years ended December 31, 2002 are as
follows:
In thousands 2002 2001 2000
- --------------------------------------------------------------------------------
Components of net
periodic benefit cost:
Service cost $ 54 $ 75 $ 61
Interest cost 183 175 179
Actual loss on
plan assets 380 328 204
Amortization of prior
service cost (9) (9) (16)
Recognized net actuarial loss (519) (531) (420)
- --------------------------------------------------------------------------------
Net periodic
benefit cost $ 89 $ 38 $ 8
================================================================================
Assumptions used to measure the projected benefit obligation and develop net
periodic pension costs for the three years ended December 31, 2002 were:
2002 2001 2000
- --------------------------------------------------------------------------------
Assumed discount rate 6.75% 7.00% 7.00%
================================================================================
Expected rate of return on
plan assets 7.75% 8.00% 8.00%
================================================================================
Amounts applicable to the Company's pension plans with accumulated benefit
obligations in excess of plan assets are as follows:
In thousands 2002 2001 2000
- --------------------------------------------------------------------------------
Projected benefit obligation $2,955 $2,668 $2,747
Accumulated benefit obligation 2,955 2,668 2,718
Fair value of plan assets 1,640 2,013 2,383
================================================================================
The Company's defined contribution plan, available to substantially all salaried
employees, contains a matched savings provision that permits both pretax and
after-tax employee contributions. Participants can contribute from 2% to 15% of
their annual compensation and receive a matching employer contribution up to 3%
of their annual compensation.
Further, the plan requires an additional matching employer contribution, based
on the ratio of the Company's pretax income to equity, up to 3% of the
employee's annual compensation. Additionally, the Company contributes 1% of all
salaried employees' annual compensation to the plan without regard for employee
contribution. The defined contribution plan expense was $373,000 in 2002,
$558,000 in 2001, and $877,000 in 2000.
38
NOTE 17.
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 increasingly stringent
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, 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 condition or liquidity of the Company, although the resolution in any
reporting period of one or more of these matters could have a material effect on
the Company's results of operations for that period.
At December 31, 2002, the Company had outstanding letters of credit of
approximately $2,762,000.
NOTE 18.
RISKS AND UNCERTAINTIES
The Company's future operating results may be affected by a number of factors.
Deteriorating market conditions could have a material adverse impact on any of
the Company's operating segments. The Company is dependent upon a number of
major suppliers. If a supplier had operational problems or ceased making
material available to the Company, operations could be adversely affected.
Specialty trackwork sales of the Company's Rail segment depend primarily on one
source, in which the Company maintains a 30% ownership position. During the
third quarter of 2002, the Company recorded a $1,793,000 "other than temporary"
impairment charge related to its equity investment in this supplier. On December
31, 2002, the Company wrote down $5,050,000 of advances made to this supplier
and the remaining $100,000 in its equity investment. These advances are not
expected to be recoverable. The Company has approximately $10.0 million of
contractual supply obligations with certain customers related to specialty
trackwork. If, for any reason, this supplier is unable to perform, the Company
could experience a negative impact on earnings and cash flows.
The Company is TXI Chaparral's exclusive North American distributor of steel
sheet piling. Steel sheet piling production commenced in 2001 at TXI Chaparral's
Petersburg, VA facility, but the quantity produced has not materially impacted
results for 2002 or 2001. In December 2002, the Company announced the
availability of a full range of Z-pile sheet piling products. The Company
expects the availability of Z-piling to have a positive effect on 2003 earnings
for the Construction products segment. However, if TXI Chaparral fails to
produce substantial quantities of Z-piling products, earnings could be adversely
impacted.
The Company's CXT subsidiary and Allegheny Rail Products division are dependent
on one customer for a significant portion of their business. In addition, a
substantial portion of the Company's operations are heavily dependent on
governmental funding of infrastructure projects. Significant changes in the
level of government funding of these projects or the failure to negotiate
contract renewals, could have a favorable or unfavorable impact on the operating
results of the Company. Additionally, governmental 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.
39
NOTE 19.
BUSINESS SEGMENTS
L. B. Foster 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 and tubular products.
The Company's Rail segment provides a full line of new and used rail, trackwork
and accessories to railroads, mines and industry. The Rail segment also designs
and produces concrete ties, insulated rail joints, power rail, track fasteners,
coverboards and special accessories for mass transit and other rail systems.
Foster Technologies, the Company's rail signaling and communication business,
was classified as a discontinued operation on December 31, 2002. Prior period
results have been adjusted to reflect this classification. See Note 5,
"Discontinued Operations".
The Company's Construction segment sells and rents steel sheet piling, H-bearing
pile, and other piling products for foundation and earth retention requirements.
In addition, the Company's Fabricated Products division sells bridge decking,
heavy steel fabrications, expansion joints and other products for highway
construction and repair. The Geotechnical division designs and supplies
mechanically-stabilized earth wall systems while the Buildings division produces
precast concrete buildings.
The Company's Tubular segment supplies pipe coatings for pipelines and
utilities. Additionally, this segment produces pipe-related products for special
markets, including water wells and irrigation.
The Company markets its products directly in all major industrial areas of the
United States, primarily through a national sales force.
The following table illustrates revenues, profits/losses, assets,
depreciation/amortization and capital expenditures of the Company by segment.
Segment profit is the earnings before income taxes and includes internal cost of
capital charges for assets used in the segment at a rate of, generally 1% per
month. The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies except that the
Company accounts for inventory on a First-In, First-Out (FIFO) basis at the
segment level compared to a Last-In, First-Out (LIFO) basis at the consolidated
level.
In thousands 2002
- -----------------------------------------------------------------------------------------------------------------
Expenditures
Net Segment Segment Depreciation/ for Long-Lived
Sales Profit/(Loss) Assets Amortization Assets
- -----------------------------------------------------------------------------------------------------------------
Rail Products $128,249 $ (1,511) $ 57,475 $ 2,429 $ 909
Construction Products 116,748 1,007 44,385 1,719 4,705
Tubular Products 12,953 714 6,243 350 1,149
- -----------------------------------------------------------------------------------------------------------------
Total $257,950 $ 210 $108,103 $ 4,498 $ 6,763
=================================================================================================================
In thousands 2001
- -----------------------------------------------------------------------------------------------------------------
Expenditures
Net Segment Segment Depreciation/ for Long-Lived
Sales Profit/(Loss) Assets Amortization Assets
- -----------------------------------------------------------------------------------------------------------------
Rail Products $145,054 $ (3,122) $ 71,083 $ 3,001 $ 1,750
Construction Products 115,600 1,807 49,018 1,617 2,526
Tubular Products 21,055 2,850 8,236 603 263
- -----------------------------------------------------------------------------------------------------------------
Total $281,709 $ 1,535 $128,337 $ 5,221 $ 4,539
=================================================================================================================
40
In thousands 2000
- -----------------------------------------------------------------------------------------------------------------
Expenditures
Net Segment Segment Depreciation/ for Long-Lived
Sales Profit Assets Amortization Assets
- -----------------------------------------------------------------------------------------------------------------
Rail Products $138,635 $ 99 $ 84,395 $ 2,346 $ 1,572
Construction Products 106,280 4,429 53,944 1,391 2,261
Tubular Products 19,511 1,531 9,058 630 211
- -----------------------------------------------------------------------------------------------------------------
Total $264,426 $ 6,059 $147,397 $ 4,367 $ 4,044
=================================================================================================================
One customer accounted for more than 11% of consolidated net sales in 2002.
While the Company expects this relationship to continue, the loss of this
customer could affect the operations of the Rail segment. No customer accounted
for more than 10% of consolidated sales in 2001 or 2000. Sales between segments
are immaterial.
Reconciliations of reportable segment net sales, profit, assets, depreciation
and amortization, and expenditures for long-lived assets to the Company's
consolidated totals are illustrated as follows:
In thousands 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Net Sales from Continuing Operations
Total for reportable segments $ 257,950 $ 281,709 $ 264,426
Other net sales - 410 188
- -----------------------------------------------------------------------------------------------------------------
$ 257,950 $ 282,119 $ 264,614
=================================================================================================================
(Loss) Income from Continuing Operations
- -----------------------------------------------------------------------------------------------------------------
Total for reportable segments $ 210 $ 1,535 $ 6,059
Adjustment of inventory to LIFO 84 357 162
Unallocated other (expense) income (8,040) 694 2,506
Other unallocated amounts 106 (358) (2,488)
- -----------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations,
before income taxes and cumulative
effect of change in accounting principle $ (7,640) $ 2,228 $ 6,239
=================================================================================================================
Assets
- -----------------------------------------------------------------------------------------------------------------
Total for reportable segments $ 108,103 $ 128,337 $ 147,397
Unallocated corporate assets 20,429 25,556 23,913
LIFO and market value inventory reserves (1,849) (1,933) (2,290)
Unallocated property, plant and equipment 6,967 6,934 6,816
Assets of discontinued operations 334 1,148 1,311
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 133,984 $ 160,042 $ 177,147
=================================================================================================================
Depreciation/Amortization
- -----------------------------------------------------------------------------------------------------------------
Total reportable for segments $ 4,498 $ 5,221 $ 4,367
Other 1,353 193 747
- -----------------------------------------------------------------------------------------------------------------
$ 5,851 $ 5,414 $ 5,114
=================================================================================================================
Expenditures for Long-Lived Assets
- -----------------------------------------------------------------------------------------------------------------
Total for reportable segments $ 6,763 $ 4,539 $ 4,044
Expenditures included in acquisition of business (1,025) - -
Expenditures financed under capital leases (1,303) (102) (340)
Expenditures included in property held for sale - - (99)
Other expenditures 289 370 458
- -----------------------------------------------------------------------------------------------------------------
$ 4,724 $ 4,807 $ 4,063
=================================================================================================================
Approximately 97% of the Company's total net sales were to customers in the
United States, and a majority of the remaining sales were to other North
American countries.
All of the Company's long-lived assets are located in North America and almost
100% of those assets are located in the United States.
41
NOTE 20.
RESTRUCTURING, IMPAIRMENT, AND OTHER NON-RECURRING CHARGES
The expected sale of the Company's Newport, KY pipe coating assets did not
materialize, resulting in a 2002 fourth quarter non-cash charge of $765,000.
This charge represents depreciation expense that had been suspended while these
assets were classified as held for resale.
Also during the fourth quarter of 2002, the Company started negotiations and
committed to a plan to sell the assets related to its rail signaling business.
The Company recorded a $660,000 non-cash impairment loss to adjust these assets
to their fair value. The operations of the rail signaling business qualify as a
"component of an entity" and thus, have been classified as discontinued
operations in 2002. See Note 5, "Discontinued Operations".
Both of these transactions were recorded in accordance with the provisions of
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets".
Other non-cash charges that were recorded in 2002 include: $6,943,000 impairment
of the Company's investment in and advances to its principal specialty trackwork
supplier; $4,390,000 (net of tax) from the cumulative effect of a change in
accounting principle, as a result of the adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"; and
$2,232,000 related to mark-to-market accounting for derivative instruments, as a
result of the Company entering into a new credit agreement, which discontinued
the hedging relationship of the Company's interest rate collars with the
underlying debt instrument.
A two-year plan to improve the Company's financial performance by consolidating
sales and administrative functions, and plant operations was implemented during
2001 and 2000. Results for 2001 included pretax charges of $1,879,000 related to
the plan. These charges consisted of employee severances and facility exit costs
of $845,000; asset impairments of $606,000; and other related costs of $428,000.
Results for 2000 also included pretax charges related to the above-mentioned
plan of $1,349,000. These charges consisted of employee severances and facility
exit costs of $1,011,000; asset impairments of $173,000; and other related costs
of $165,000.
Costs associated with the consolidation of sales and administrative functions
were charged to selling and administrative expense, while costs associated with
the consolidation of plant operations, including substantially all impairment
charges, were included in cost of sales, on the Company's Consolidated
Statements of Operations. Substantially all components of the restructuring
charges were paid in the period incurred.
42
NOTE 21.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 2002 and 2001
is presented below:
In thousands, except per share amounts 2002
- ---------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter(1) Quarter Quarter(2)(3) Quarter(4)(5)(6) Total
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $ 63,173 $ 70,806 $ 66,965 $ 57,006 $ 257,950
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit $ 6,795 $ 8,700 $ 8,344 $ 5,628 $ 29,467
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations $ 28 $ 1,063 $ (2,445) $ (3,675) $ (5,029)
- ---------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations $ (317) $ (332) $ (302) $ (1,054) $ (2,005)
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in
accounting principle $ (4,390) $ - $ - $ - $ (4,390)
- ---------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (4,679) $ 731 $ (2,747) $ (4,729) $ (11,424)
- ---------------------------------------------------------------------------------------------------------------------------
Basic and diluted (loss) earnings
per common share:
From continuing operations $ - $ 0.11 $ (0.26) $ ( 0.39) $ (0.53)
From discontinued operations $ (0.03) $ (0.03) $ (0.03) $ (0.11) $ (0.21)
From cumulative effect of change in
accounting principle $ (0.46) $ - $ - $ - $ (0.46)
- ---------------------------------------------------------------------------------------------------------------------------
Basic and diluted (loss) earnings
per common share $ (0.50) $ 0.08 $ (0.29) $ (0.50) $ (1.20)
===========================================================================================================================
(1) During the third quarter of 2002, the Company completed its goodwill
impairment testing required by the adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" and recorded a
$4,390,000 non-cash charge. In accordance with this standard, this charge was
recognized as the cumulative effect of a change in accounting principle as of
the date of adoption, January 1, 2002, and accordingly, previously reported
amounts have been restated to reflect the adoption of this standard. 2) Includes
a non-cash charge of $2,260,000 related to the mark-to-market accounting for
derivative instruments as a result of the Company entering into a new credit
agreement late in the third quarter, which discontinued the hedging relationship
of the Company's interest rate collars with the underlying debt instrument. 3)
Includes a $1,793,000 "other than temporary" impairment charge related to the
Company's equity investment in its principal specialty trackwork supplier. 4)
Includes a $5,050,000 write-down of uncollectible advances made to the Company's
principal specialty trackwork supplier and the remaining $100,000 balance in its
equity investment. 5) Includes a $765,000 charge for depreciation expense that
had been suspended while the Company's Newport, KY pipe-coating assets were
classified as held for resale. 6) During the fourth quarter, the Company
committed to a plan to sell the assets related to its rail signaling business
and recorded a $660,000 impairment loss to adjust the assets to their expeced
realizable value. Accordingly, this business was reclassified as a discontinued
operation and prior periods continuing operations have been restated by the
amount reflected as discontinued operations.
43
In thousands, except per share amounts 2001
- ----------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter(1)(2) Quarter(1)(2) Quarter(1)(2) Quarter(1)(2) Total
- ----------------------------------------------------------------------------------------------------------------------------
Net sales $ 56,090 $ 80,274 $ 75,791 $ 69,964 $ 282,119
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit $ 5,340 $ 10,135 $ 9,719 $ 8,302 $ 33,496
- ----------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations $ (1,685) $ 1,176 $ 1,173 $ 639 $ 1,303
- ----------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations $ (180) $ (185) $ (143) $ (158) $ (666)
- ----------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (1,865) $ 991 $ 1,030 $ 481 $ 637
- ----------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per common share:
From continuing operations $ (0.18) $ 0.12 $ 0.12 $ 0.07 $ 0.14
From discontinued operations $ (0.02) $ (0.02) $ (0.02) $ (0.02) $ (0.07)
- ----------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per common share $ (0.20) $ 0.11 $ 0.11 $ 0.05 $ 0.07
- ----------------------------------------------------------------------------------------------------------------------------
Diluted (loss) earnings per common share:
From continuing operations $ (0.18) $ 0.12 $ 0.12 $ 0.07 $ 0.14
From discontinued operations $ (0.02) $ (0.02) $ (0.02) $ (0.02) $ (0.07)
- ----------------------------------------------------------------------------------------------------------------------------
Diluted (loss) earnings per common share $ (0.20) $ 0.10 $ 0.11 $ 0.05 $ 0.07
============================================================================================================================
(1) The quarterly results include charges related to the Company's previously
announced plan of consolidating sales and administrative functions and plant
operations. For the first, second, third and fourth quarters, these pretax
charges were $1,356,000, $140,000, $10,000 and $373,000, respectively. (2) The
previously reported continuing operations have been restated to reflect the
classification of the Company's rail signaling business as a discontinued
operation.
Note 22.
Subsequent Event
In February 2003, the Company sold assets related to its rail signaling and
communications device business (Foster Technologies) for $300,000. These assets,
classified as a discontinued operation on December 31, 2002, were comprised of a
patent, associated intellectual property, inventory and equipment.
44
REPORT OF INDEPENDENT AUDITORS AND RESPONSIBILITY FOR FINANCIAL STATEMENTS
To the Board of Directors and Stockholders of L. B. Foster Company:
- -------------------------------------------------------------------
We have audited the accompanying consolidated balance sheets of L. B. Foster
Company and Subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, common stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2002. Our
audits also included the financial statement schedule listed in the index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of L. B. Foster
Company and Subsidiaries at December 31, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As described in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Accounting Standards No. 142, "Goodwill
and Other Intangible Assets", effective January 1, 2002.
As described in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Accounting Standards No. 133, "Accounting
for Derivatives and Hedging Activities", effective January 1, 2001.
/s/Ernst & Young LLP
Pittsburgh, Pennsylvania
January 28, 2003
To the Stockholders of L. B. Foster Company:
- --------------------------------------------
The management of L. B. Foster Company is responsible for the integrity of all
information in the accompanying consolidated financial statements and other
sections of the annual report. Management believes the financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States that reflect, in all material respects, the substance of events
and transactions, and that the other information in the annual report is
consistent with those statements. In preparing the financial statements,
management makes informed judgments and estimates of the expected effects of
events and transactions being accounted for currently.
The Company maintains a system of internal accounting control designed to
provide reasonable assurance that assets are safeguarded and that transactions
are executed in accordance with management's authorization and are properly
recorded to permit the preparation of financial statements in accordance with
accounting principles generally accepted in the United States. Underlying the
concept of reasonable assurance is the evaluation of the costs and benefits
derived from control. This evaluation requires estimates and judgments by the
Company. The Company believes that its internal accounting controls provide an
appropriate balance between costs and benefits.
The Board of Directors pursues its oversight role with respect to the financial
statements through the Finance and Audit Committee which is composed of outside
directors. The Finance and Audit Committee meets periodically with management,
the internal audit department and our independent auditors to discuss the
adequacy of the internal accounting control, the quality of financial reporting
and the nature, extent and results of the audit effort. Both the internal audit
department and the independent auditors have free access to the Finance and
Audit Committee.
/s/Stan L. Hasselbusch
Stan L. Hasselbusch
President and
Chief Executive Officer
/s/David J. Russo
David J. Russo
Senior Vice President,
Chief Financial Officer
and Treasurer
45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors is set forth under "Election of Directors"
in the Company's Proxy Statement for the 2003 annual meeting of stockholders
("2003 Proxy Statement"). Such information is incorporated herein by reference.
Information concerning the executive officers who are not directors of the
Company is set forth below. With respect to the period prior to August 18, 1977,
references to the Company are to the Company's predecessor, Foster Industries,
Inc.
Name Age Position
Alec C. Bloem 52 Senior Vice President - Concrete Products
Samuel K. Fisher 50 Senior Vice President - Rail
Robert J. Howard 47 Vice President - Human Resources
Gregory W. Lippard 34 Vice President - Rail Product Sales
Linda K. Patterson 53 Controller
David J. Russo 44 Senior Vice President,
Chief Financial Officer
and Treasurer
David L. Voltz 50 Vice President, General Counsel and
Secretary
Donald F. Vukmanic 51 Vice President - Piling Products
David J. A. Walsh 50 Vice President - Fabricated Products
46
Mr. Bloem was elected Senior Vice President - Concrete Products in March 2000,
having previously served as Vice President - Geotechnical and Precast Division
from October 1999, and President - Geotechnical Division from August 1998. Prior
to joining the Company in August 1998, Mr. Bloem served as Vice President- VSL
Corporation.
Mr. Fisher was elected Senior Vice President - Rail in October 2002, having
previously served as Senior Vice President - Product Management since June 2000.
From October 1997 until June 2000, Mr. Fisher served as Vice President - Rail
Procurement. Prior to October 1997, he served in various other capacities with
the Company since his employment in 1977.
Mr. Howard was elected Vice President - Human Resources in June 2002. Mr. Howard
was Vice President - Human Resources of Bombardier Transportation, the former
Daimler Chrysler Rail Systems, a supplier of rail vehicles, transportation
systems and services, worldwide, from January 1992 until June 2002. Mr. Howard
also served as the Director of Employee Relations with USAirways from 1981 until
1992.
Mr. Lippard was elected Vice President - Rail Product Sales in June 2000. Prior
to re-joining the Company in 2000, Mr. Lippard served as Vice President -
International Trading for Tube City, Inc. from June 1998. Mr. Lippard served in
various other capacities with the Company since his initial employment in 1991.
Ms. Patterson was elected Controller in February 1999, having previously served
as Assistant Controller since May 1997 and Manager of Accounting since March
1988. Prior to March 1988, she served in various other capacities with the
Company since her employment in 1977.
Mr. Russo was elected Vice President and Chief Financial Officer in July 2002.
In December 2002, Mr. Russo was promoted to the office of Sr. Vice President and
Chief Financial Officer and elected to the additional office of Treasurer. Mr.
Russo was Corporate Controller of WESCO International Inc., a distributor of
electrical construction products, electrical and industrial MRO supplies and
integrated supply services, from 1999 until joining L. B. Foster Company in
2002. Mr. Russo also served as Corporate Controller of Life Fitness Inc., an
international designer, manufacturer and distributor of aerobic and strength
training fitness equipment, primarily to the commercial marketplace (health
clubs), from 1991 until 1998.
Mr. Voltz was elected Vice President, General Counsel and Secretary in December
1987. Mr. Voltz joined the Company in 1981.
Mr. Vukmanic was elected Vice President - Piling Products in August 2000. Prior
to August 2000, Mr. Vukmanic served as National Sales Manager - Piling from
February 1999, Vice President and Controller from February 1997, and Controller
from February 1988. Mr. Vukmanic joined the Company in 1977.
Mr. Walsh was elected Vice President - Fabricated Products in February 2001.
Prior to joining the Company in February 2001, Mr. Walsh served as General
Manager of IKG-Greulich, a business unit of Harsco Corp., from February 1998,
and as Vice President of Harris Specialty Chemicals Inc. from January 1995.
Officers are elected annually at the organizational meeting of the Board of
Directors following the annual meeting of stockholders.
47
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under "Executive Compensation" in the 2003 Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under "Ownership of Securities by Management" and
"Principal Stockholders" in the 2003 Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under "Certain Transactions" in the 2003 Proxy
Statement is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) Within the 90 days prior to the date of this Annual Report on Form 10-K, an
evaluation was carried out under the supervision and with the participation of
L. B. Foster Company's management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-14 and
15d-14 under the Securities Act of 1934).
(b) Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the design and operation of these disclosure controls and
procedures were effective, and that there were no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements
-----------------------
The following consolidated financial statements, accompanying notes and
Report of Independent Auditors in the Company's Annual Report to
Stockholders for 2002 have been included in Item 8 of this Report:
Consolidated Balance Sheets at December 31, 2002 and 2001.
Consolidated Statements of Income for the Three Years Ended December 31,
2002, 2001 and 2000.
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 2002, 2001 and 2000.
Consolidated Statements of Stockholders' Equity for the Three Years Ended
December 31, 2002, 2001 and 2000.
48
Notes to Consolidated Financial Statements.
Report of Independent Auditors.
2. Financial Statement Schedule
-------------------------------
Schedules for the Three Years Ended December 31, 2002, 2001 and 2000:
II - Valuation and Qualifying Accounts.
The remaining schedules are omitted because of the absence of the
conditions upon which they are required.
3. Exhibits
-----------
The exhibits marked with an asterisk are filed herewith. All exhibits are
incorporated herein 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.
* 4.0 Rights Agreement, dated as of May 15, 1997, between L. B. Foster
Company and American Stock Transfer & Trust Company, including
the form of Rights Certificate and the Summary of Rights
attached thereto.
4.0.1 Amended Rights Agreement dated as of May 14, 1998 between L. B.
Foster Company and American Stock Transfer & Trust Company,
filed as Exhibit 4.0.1 to Form 10-Q for the quarter ended
June 30, 1998.
4.0.2 Revolving Credit and Security Agreement dated September 26,
2002, between L. B. Foster Company and PNC Bank, N.A., filed as
Exhibit 4.0.2 to Form 10-Q for the quarter ended September 30,
2002.
10.12 Lease between CXT Incorporated and Pentzer Development Corpora-
tion, 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 Development Corporation, filed as Exhibit 10.12.1 to
Form 10-K for the year ended December 31, 1999.
* 10.12.2 Amendment dated November 7, 2002 to lease between CXT Incorpor-
ated and Pentzer Develop ment Corporation.
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.
* 10.13.1 Amendment dated June 29, 2001 between CXT Incorporated and Crown
West Realty.
10.14 Lease between CXT Incorporated and Pentzer Development Corpora-
tion, 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 Com-
pany, dated February 13, 1998, and filed as Exhibit 10.15 to
Form 10-K for the year ended December 31, 1999.
49
* 10.17 Lease between Registrant and City of Hillsboro, TX dated Febru-
ary 22, 2002.
* 10.19 Lease Between the Registrant and American Cast Iron Pipe Company
for Pipe-Coating Facility in Birmingham, AL dated December 11,
1991.
10.19.1 Amendment to Lease between the 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 10.0 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. **
10.34 Amended and Restated 1998 Long-Term Incentive Plan for Officers
and Directors, 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. **
10.46 Leased Vehicle Plan, as amended October 16, 2002 and filed as
Exhibit 10.46 to Form 10-Q for the quarter ended September 30,
2002. **
* 10.51 Supplemental Executive Retirement Plan. **
* 10.52 Outside Directors Stock Award Plan. **
* 10.53 Directors' resolutions under which directors' compensation was
established, dated October 15, 2002. **
19 Exhibits marked with an asterisk are filed herewith.
* 23.7 Consent of Independent Auditors.
** Identifies management contract or compensatory plan or arrange-
ment required to be filed as an Exhibit.
50
(b) Reports on Form 8-K
No reports on Form 8-K were filed during 2002.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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
March 26, 2003
By:/s/ Stan L. Hasselbusch
(Stan L. Hasselbusch,
President and Chief
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Position Date
---- -------- ----
By: /s/ Lee B. Foster II Chairman of the Board March 26, 2003
(Lee B. Foster II) and Director
By:/s/ Stan L. Hasselbusch President, Chief March 26, 2003
(Stan L. Hasselbusch) Executive Officer
and Director
By: /s/Henry J. Massman, IV Director March 26, 2003
(Henry J. Massman, IV)
By: /s/Diane B. Owen Director March 26, 2003
(Diane B. Owen)
By: /s/David J. Russo Senior Vice President, March 26, 2003
(David J. Russo) Chief Financial Officer
and Treasurer
By: /s/Linda K. Patterson Controller March 26, 2003
(Linda K. Patterson)
By: /s/John W. Puth Director March 26, 2003
(John W. Puth)
By: /s/William H. Rackoff Director March 26, 2003
(William H. Rackoff)
52
FORM OF SARBANES-OXLEY SECTION 302(A) CERTIFICATION
I, Stan L. Hasselbusch, certify that:
1. I have reviewed this Annual Report on Form 10-K of L. B. Foster
Company;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Annual Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Annual Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Annual Report (the "Evaluation Date");
and
c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based
in our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Annual Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 26, 2003 /s/Stan L. Hasselbusch
Stan L. Hasselbusch
President and Chief Executive Officer
53
FORM OF SARBANES-OXLEY SECTION 302(A) CERTIFICATION
I, David J. Russo, certify that:
1. I have reviewed this Annual Report on Form 10-K of L. B. Foster
Company;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Annual Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this Annual Report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this Annual Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this Annual Report (the "Evaluation Date");
and
c) presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based
in our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
Annual Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 26, 2003 /s/David J. Russo
David J. Russo
Senior Vice President,
Chief Financial Officer and
Treasurer
54
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 Annual 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 Annual Report fairly presents, in all
material respects, the financial condition and results of operations of L. B.
Foster Company.
March 26, 2003 /s/Stan L. Hasselbusch
Stan L. Hasselbusch
President and
Chief Executive Officer
March 26, 2003 /s/David J. Russo
David J. Russo
Senior Vice President,
Chief Financial Officer and
Treasurer
S-1
L. B. FOSTER COMPANY AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(In Thousands)
Additions
---------------------------
Balance at Charged to Balance
Beginning Costs and at End
of Year Expenses Other Deductions of Year
----------- ----------- ----------- ---------- -----------
2002
- ----
Deducted from assets to which
they apply:
Allowance for doubtful accounts $ 812 $ 256 $ $ 6 (1) $ 1,062
============ =========== =========== =========== ===========
Provision for decline in market
value of inventories $ 600 $ $ $ $ 600
============ =========== =========== =========== ===========
Not deducted from assets:
Provision for special
termination benefits $ 388 $ 169 $ $ 328 (2) $ 229
============ =========== =========== =========== ===========
Provision for environmental
compliance & remediation $ 340 $ 47 $ $ 62 (2) $ 325
============ =========== =========== =========== ===========
2001
- ----
Deducted from assets to which
they apply:
Allowance for doubtful accounts $ 1,564 $ (20) $ $ 732 (1) $ 812
============ =========== =========== =========== ===========
Provision for decline in market
value of inventories $ 600 $ $ $ $ 600
============ =========== =========== =========== ===========
Not deducted from assets:
Provision for special
termination benefits $ 391 $ 156 $ $ 159 (2) $ 388
============ =========== =========== =========== ===========
Provision for environmental
compliance & remediation $ 213 $ 154 $ $ 27 (2) $ 340
============ =========== =========== =========== ===========
2000
- ----
Deducted from assets to which
they apply:
Allowance for doubtful accounts $ 1,555 $ 108 $ $ 99 (1) $ 1,564
============ =========== =========== =========== ===========
Provision for decline in market
value of inventories $ 600 $ $ $ $ 600
============ =========== =========== =========== ===========
Not deducted from assets:
Provision for special
termination benefits $ 5 $ 524 $ $ 138 (2) $ 391
============ =========== =========== =========== ===========
Provision for environmental
compliance & remediation $ 214 $ 49 $ $ 50 (2) $ 213
============ =========== =========== =========== ===========
(1) Notes and accounts receivable written off as uncollectible. (2) Payments
made on amounts accrued and reversals of accruals.