UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 2004
-------------
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)
(412) 928-3417
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate the number of shares of each of the registrant's classes of common
stock as of the latest practicable date.
Class Outstanding at August 2, 2004
----- -----------------------------
Common Stock, Par Value $.01 10,014,770 Shares
L.B. FOSTER COMPANY AND SUBSIDIARIES
INDEX
-----
PART I. Financial Information Page
- ------------------------------ ----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 21
Item 4. Controls and Procedures 21
PART II. Other Information
- ---------------------------
Item 1. Legal Proceedings 21
Item 4. Results of Votes of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
Signature 25
3
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, December 31,
2004 2003
-------------- --------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 2,723 $ 4,134
Accounts and notes receivable:
Trade 46,043 34,668
Other 345 105
-------------- --------------
46,388 34,773
Inventories 37,330 36,894
Current deferred tax assets 1,413 1,413
Other current assets 1,142 877
Property held for resale - 446
-------------- --------------
Total Current Assets 88,996 78,537
-------------- --------------
Property, Plant & Equipment - At Cost 70,832 70,814
Less Accumulated Depreciation (38,902) (37,679)
-------------- --------------
31,930 33,135
-------------- --------------
Other Assets:
Goodwill 350 350
Other intangibles - net 508 585
Investments 14,202 13,707
Deferred tax assets 4,073 4,095
Other assets 418 750
-------------- --------------
Total Other Assets 19,551 19,487
-------------- --------------
TOTAL ASSETS $ 140,477 $ 131,159
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 481 $ 611
Accounts payable - trade 27,783 23,874
Accrued payroll and employee benefits 3,271 2,909
Current deferred tax liabilities 1,749 1,749
Other accrued liabilities 2,756 2,550
-------------- --------------
Total Current Liabilities 36,040 31,693
-------------- --------------
Long-Term Borrowings 21,000 17,000
-------------- --------------
Other Long-Term Debt 3,623 3,858
-------------- --------------
Deferred Tax Liabilities 3,653 3,653
-------------- --------------
Other Long-Term Liabilites 3,070 4,411
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock 102 102
Paid-in capital 35,030 35,018
Retained earnings 39,581 38,399
Treasury stock (985) (2,304)
Accumulated other comprehensive loss (637) (671)
-------------- --------------
Total Stockholders' Equity 73,091 70,544
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 140,477 $ 131,159
============== ==============
See Notes to Condensed Consolidated Financial Statements.
4
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Three Months Six Months
Ended Ended
June 30, June 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
-------------------------------- --------------------------------
(Unaudited) (Unaudited)
Net Sales $ 76,827 $ 75,796 $ 142,279 $ 135,315
Cost of Goods Sold 67,494 66,600 126,964 119,186
--------------- -------------- --------------- --------------
Gross Profit 9,333 9,196 15,315 16,129
Selling and Administrative Expenses 7,054 6,830 13,455 13,397
Interest Expense 469 578 932 1,157
Other Income (350) (54) (1,044) (374)
--------------- -------------- --------------- --------------
7,173 7,354 13,343 14,180
--------------- -------------- --------------- --------------
Income From Continuing Operations Before
Income Taxes 2,160 1,842 1,972 1,949
Income Taxes 865 719 790 762
--------------- -------------- --------------- --------------
Income From Continuing Operations 1,295 1,123 1,182 1,187
Discontinued Operations:
Loss From Operations of Foster Technologies - (60) - (440)
Income Tax Benefit - (23) - (173)
--------------- -------------- --------------- --------------
Loss on Discontinued Operations - (37) - (267)
--------------- -------------- --------------- --------------
Net Income $ 1,295 $ 1,086 $ 1,182 $ 920
=============== ============== =============== ==============
Basic & Diluted Earnings (Loss) Per Common Share:
From Continuing Operations $ 0.13 $ 0.12 $ 0.12 $ 0.12
From Discontinued Operations, Net of Tax - - - (0.03)
--------------- -------------- --------------- --------------
Basic & Diluted Earnings Per Common Share $ 0.13 $ 0.11 $ 0.12 $ 0.10
=============== ============== =============== ==============
See Notes to Condensed Consolidated Financial Statements.
5
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months
Ended June 30,
2004 2003
------------- -------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 1,182 $ 1,187
Adjustments to reconcile net income to net cash (used) provided
by operating activities:
Depreciation and amortization 2,595 2,597
(Gain) loss on sale of property, plant and equipment (308) 6
Unrealized (gain) loss on derivative mark-to-market (374) 110
Change in operating assets and liabilities:
Accounts receivable (11,615) (4,831)
Inventories (436) (7,765)
Other current assets (265) (426)
Other noncurrent assets (163) (347)
Accounts payable - trade 3,909 10,260
Accrued payroll and employee benefits 362 189
Other current liabilities 580 786
Other liabilities (1,285) 145
------------- -------------
Net Cash (Used) Provided by Operating Activities (5,818) 1,911
------------- -------------
Net Cash Provided by Discontinued Operations - 245
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment 982 2
Capital expenditures on property, plant and equipment (1,541) (1,281)
------------- -------------
Net Cash Used by Investing Activities (559) (1,279)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) of revolving credit agreement borrowings 4,000 (2,000)
Exercise of stock options and stock awards 1,331 246
Repayments of long-term debt (365) (457)
------------- -------------
Net Cash Provided (Used) by Financing Activities 4,966 (2,211)
------------- -------------
Net Decrease in Cash and Cash Equivalents (1,411) (1,334)
Cash and Cash Equivalents at Beginning of Period 4,134 3,653
------------- -------------
Cash and Cash Equivalents at End of Period $ 2,723 $ 2,319
============= =============
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 827 $ 1,071
============= =============
Income Taxes Paid $ 173 $ 260
============= =============
During the first six months of 2004 the Company did not finance any capital
expenditures through the execution of capital leases. During the first six
months of 2003, the Company financed $158,000 of capital expenditures through
the execution of capital leases.
See Notes to Condensed Consolidated Financial Statements.
6
L. B. FOSTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
- -----------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all estimates and
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. However, actual results could differ from
those estimates. The results of operations for interim periods are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2004. Amounts included in the balance sheet as of December 31, 2003
were derived from our audited balance sheet. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2003.
2. ACCOUNTING PRINCIPLES
- ------------------------
In December 2003, the FASB issued Statement of Financial Accounting Standard No.
132 (Revised 2003) - "Employers' Disclosures about Pensions and Other
Post-retirement Benefits" (SFAS 132R), that replaces existing FASB disclosure
requirements for pensions and other post-retirement benefit plans. SFAS 132R
requires companies to provide more complete details about their plan assets,
benefit obligations, cash flows, benefit costs and other relevant information.
In addition to expanded disclosures, the standard improves information available
to investors in interim financial statements. With certain exceptions, SFAS 132R
was effective for fiscal years ending after December 31, 2003 and for quarters
beginning after December 31, 2003. See Note 6 for the additional disclosures
required by SFAS 132R.
Stock-based compensation
- ------------------------
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), and 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 income from
continuing operations and earnings per share had compensation expense for the
Company's stock option plans been applied using the method required by SFAS 123.
Three Months Ended Six Months Ended
June 30, June 30,
In thousands, except per share amounts 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations, as reported $1,295 $1,123 $1,182 $1,187
Add: Stock-based employee compensation expense included in
reported net 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 45 79 96 141
- -----------------------------------------------------------------------------------------------------------------------------
Pro forma income from continuing operations $1,250 $1,044 $1,086 $1,046
=============================================================================================================================
Earnings per share from continuing operations:
Basic, as reported $0.13 $0.12 $0.12 $0.12
Basic, pro forma $0.13 $0.11 $0.11 $0.11
Diluted, as reported $0.13 $0.12 $0.12 $0.12
Diluted, pro forma $0.12 $0.11 $0.11 $0.11
=============================================================================================================================
7
Pro forma information regarding net income and earnings per share for options
granted has been determined as if the Company had accounted for its employee
stock options under the fair value method of Statement No. 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. There were no stock options granted to employees in the
first or second quarter of 2004. The following weighted-average assumptions were
used for grants in the second quarter of 2003: risk-free interest rates of
3.56%; dividend yield of 0.0%; volatility factors of the expected market price
of the Company's Common stock of .32; and a weighted-average expected life of
the option of ten years. The weighted-average fair value of the options granted
in the second quarter of 2003 was $2.11.
3. ACCOUNTS RECEIVABLE
- ----------------------
Credit is extended on an evaluation of the customer's financial condition and,
generally, collateral is not required. Credit terms are consistent with industry
standards and practices. Trade accounts receivable at June 30, 2004 and December
31, 2003 have been reduced by an allowance for doubtful accounts of ($960,000)
and ($827,000), respectively. Bad debt expense was $133,000 and $85,000 for the
six-month periods ended June 30, 2004 and 2003, respectively.
4. INVENTORIES
- --------------
Inventories of the Company at June 30, 2004 and December 31, 2003 are summarized
as follows in thousands:
June 30, December 31,
2004 2003
- --------------------------------------------------------------------------------
Finished goods $ 19,375 $ 20,216
Work-in-process 8,012 7,379
Raw materials 11,897 11,133
- --------------------------------------------------------------------------------
Total inventories at current costs 39,284 38,728
(Less):
LIFO reserve (1,354) (1,234)
Inventory valuation reserve (600) (600)
- --------------------------------------------------------------------------------
$ 37,330 $ 36,894
================================================================================
Inventories of the Company are generally valued at the lower of last-in,
first-out (LIFO) cost or market. Other inventories of the Company are valued at
average cost or market, whichever is lower. An actual valuation of inventory
under the LIFO method can be made only at the end of each year based on the
inventory levels and costs at that time. Accordingly, interim LIFO calculations
must necessarily be based on management's estimates of expected year-end levels
and costs.
5. PROPERTY HELD FOR RESALE
- ---------------------------
In August 2003, the Company reached an agreement to sell, modify, and install
the Company's former Newport, KY pipe coating machinery and equipment and
reclassified these assets as "held for resale". During the first quarter of
2004, the Company recognized a $493,000 gain on net proceeds of $939,000 from
the sale of these assets.
8
6. RETIREMENT PLANS
- -------------------
Substantially all of the Company's hourly paid employees are covered by one of
the Company's noncontributory, defined benefit plans and defined contribution
plans. Substantially all of the Company's salaried employees are covered by a
defined contribution plan established by the Company.
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 months and six months ended June 30, 2004
and 2003 are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2004 2003 2004 2003
- -------------------------------------------------------------------------------
Service cost $ 14 $ 15 $ 28 $ 30
Interest cost 51 49 102 98
Expected return on plan assets (44) (34) (88) (68)
Amortization of prior service cost 2 2 4 4
Amortization of net loss 13 13 26 26
- -------------------------------------------------------------------------------
Net periodic benefit cost $ 36 $ 45 $ 72 $ 90
===============================================================================
The Company expects to contribute $360,000 to its defined benefit plans in 2004.
As of June 30, 2004, $253,250 of contributions have been made.
The Company's defined contribution plan for the salaried employees allows all
eligible participants to contribute up to 41% (30% maximum on a pre-tax basis
and 11% maximum on an after-tax basis, subject to IRS limitations) of their
compensation to the Plan. The Plan calls for the Company to contribute 1% of the
employee's compensation plus $0.50 for each $1.00 contributed by the employee,
subject to a maximum of from 4% to 6% of the employee's compensation, based on
the years of service.
The expense associated with the defined contribution plans for the six months
ended June 30 was $307,000 in 2004 and $267,000 in 2003.
7. 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 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 advance rates. At June 30, 2004,
the remaining available borrowings under this agreement were approximately
$24,365,000. Interest on the credit facility is based on LIBOR plus a spread
ranging from 1.75% to 2.50%.
The agreement includes financial covenants requiring a minimum net worth and a
minimum level for the fixed charge coverage ratio. The agreement also restricts
dividends, investments, indebtedness, and the sale of certain assets. On
September 8, 2003, the first amendment to this agreement allowed for the sale of
the Company's equity interest in a specialty trackwork supplier. For more
information regarding the transaction, see "Other Matters" in the Management's
Discussion and Analysis section of this report. As of June 30, 2004, the Company
was in compliance with all of the agreement's covenants.
9
8. DISCONTINUED OPERATIONS
- --------------------------
In February 2003, substantially all of the assets of the Rail segment's rail
signaling and communication device business were sold for $300,000. The
operations of the rail signaling and communication device business qualified 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,
the operations were classified as discontinued and prior periods have been
restated.
Net sales and loss from discontinued operations were as follows:
Three Months Ended Six Months Ended
In thousands June 30, 2003 June 30, 2003
- --------------------------------------------------------------------------------
Net sales $ - $ 1
- --------------------------------------------------------------------------------
Pretax operating loss $ (60) $ (370)
Pretax loss on disposal - (70)
Income tax benefit 23 173
- --------------------------------------------------------------------------------
Loss from discontinued operations $ (37) $ (267)
================================================================================
9. EARNINGS (LOSS) PER COMMON SHARE
- -----------------------------------
The following table sets forth the computation of basic and diluted earnings
(loss) per common share:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except earnings per share) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------
Numerator:
Numerator for basic and diluted
earnings (loss) per common share -
net income (loss) available to common
stockholders:
Income from continuing operations $ 1,295 $ 1,123 $ 1,182 $ 1,187
Loss from discontinued operations - (37) - (267)
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 1,295 $ 1,086 $ 1,182 $ 920
========================================================================================================================
Denominator:
Weighted average shares 9,945 9,568 9,876 9,546
- ------------------------------------------------------------------------------------------------------------------------
Denominator for basic earnings
per common share 9,945 9,568 9,876 9,546
Effect of dilutive securities:
Contingent issuable shares - - - 2
Employee stock options 309 103 326 85
- ------------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 309 103 326 87
Denominator for diluted earnings
per common share - adjusted weighted
average shares and assumed conversions 10,254 9,671 10,202 9,633
========================================================================================================================
Basic and diluted earnings (loss) per common
share:
Continuing operations $ 0.13 $ 0.12 $ 0.12 $ 0.12
Discontinued operations - (0.00) - (0.03)
- ------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per common share $ 0.13 $ 0.11 $ 0.12 $ 0.10
========================================================================================================================
10
10. COMMITMENTS AND CONTINGENT LIABILITIES
- ------------------------------------------
The Company is subject to laws and regulations relating to the protection of the
environment and the Company's efforts to comply with environmental regulations
may have an adverse effect on its future earnings. In the opinion of management,
compliance with the present environmental protection laws will not have a
material adverse effect on the financial condition, results of operations, cash
flows, competitive position, or capital expenditures of the Company.
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, these proceedings
will not materially affect the financial position of the Company.
At June 30, 2004, the Company had outstanding letters of credit of approximately
$2,913,000.
11. BUSINESS SEGMENTS
- ---------------------
The Company is organized and evaluated by product group, which is the basis for
identifying reportable segments. The Company is engaged in the manufacture,
fabrication and distribution of rail, construction and tubular products. The
following tables illustrate revenues and profits/(losses) of the Company by
segment:
Three Months Ended Six Months Ended
June 30, 2004 June 30,2004
-----------------------------------------------------------------------------
Net Segment Net Segment
(in thousands) Sales Profit Sales Profit/(Loss)
- ----------------------------------------------------------------------------------------------------------
Rail products $ 39,099 $ 1,377 $ 74,686 $ 1,994
Construction products 32,421 157 59,196 (899)
Tubular products 5,307 756 8,397 759
- ----------------------------------------------------------------------------------------------------------
Total $ 76,827 $ 2,290 $ 142,279 $ 1,854
==========================================================================================================
Three Months Ended Six Months Ended
June 30, 2003 June 30,2003
-----------------------------------------------------------------------------
Net Segment Net Segment
(in thousands) Sales Profit Sales Profit
- ----------------------------------------------------------------------------------------------------------
Rail products $ 37,709 $ 1,195 $ 69,335 $ 1,876
Construction products 33,469 808 57,433 281
Tubular products 4,618 558 8,547 923
- ----------------------------------------------------------------------------------------------------------
Total $ 75,796 $ 2,561 $ 135,315 $ 3,080
==========================================================================================================
Segment profits, as shown above, include internal cost of capital charges for
assets used in the segment at a rate of, generally, 1-% per month. There has
been no change in the measurement of segment profit/(loss) from December 31,
2003. Accounts receivable for the Rail segment increased approximately
$6,900,000 from year-end, primarily related to an increase in sales of new rail
distribution products.
11
The following table provides a reconciliation of reportable net profit to the
Company's consolidated total:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Income for reportable segments $ 2,290 $ 2,561 $ 1,854 $ 3,080
Cost of capital for reportable segments 2,682 2,662 5,080 5,087
Interest expense (469) (578) (932) (1,157)
Other income 350 54 1,044 374
Corporate expense and other unallocated charges (2,693) (2,857) (5,074) (5,435)
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations, before income taxes $ 2,160 $ 1,842 $ 1,972 $ 1,949
===================================================================================================================
12. COMPREHENSIVE INCOME
- ------------------------
Comprehensive income represents net income plus certain stockholders' equity
changes not reflected in the Condensed Consolidated Statements of Operations.
The components of comprehensive income, net of tax, were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,295 $ 1,086 $ 1,182 $ 920
Unrealized derivative gains on cash flow hedges 16 14 28 24
Foreign currency translation gains 24 - 6 8
Reclassification adjustment for foreign currency translation losses
included in net income - - - 48
- ------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 1,335 $ 1,100 $ 1,216 $ 1,000
==============================================================================================================================
13. RISKS AND UNCERTAINTIES
- ---------------------------
The Company's CXT Rail operations and Allegheny Rail Products division are
dependent on a Class I railroad for a significant portion of their business. An
agreement to supply concrete ties to this railroad expired in September 2003.
The Company is still selling ties to this customer, although there are no longer
annual minimum quantity requirements. In December 2003, the Company bid on a new
concrete tie supply agreement that is expected to be a 5 to 8 year commitment.
If the bid is successful, the Company will be required to establish one or more
new facilities to service this agreement, which would require a significant
capital investment. If the Company is unsuccessful in the bidding process, it
may cause the value of its two existing tie facilities with total net assets of
approximately $7,055,000 to be partially impaired. Although an agreement has not
yet been signed, the Company expects to have a new agreement in place by the end
of the third quarter.
14. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
- -----------------------------------------------------------
The Company does not purchase or hold any derivative financial instruments for
trading purposes. 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. The Company's primary source of
variable-rate debt comes from its revolving credit agreement. In conjunction
with the Company's debt refinancing in the third quarter of 2002, the Company
discontinued cash flow hedge accounting treatment for its interest rate collars
and has applied mark-to-market accounting prospectively.
12
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 fair value of
this collar agreement was a liability of $611,000 as of June 30, 2004. The
Company also had a LIBOR-based interest rate collar agreement, which became
effective in April 2001 and would have expired 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 had 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%. In April
2004, prior to the counter-party option, the Company terminated this interest
rate collar agreement by purchasing it for its fair value of $707,000.
The Company records the mark-to-market adjustments on these interest rate
collars in its Condensed Consolidated Statements of Operations. During the
second quarter of 2004 and 2003, the Company recognized $416,000 of income and
$121,000 of expense, respectively, to adjust these instruments to fair value.
For the six months ended June 2004 and 2003, the Company recognized $374,000 of
income and $110,000 of expense, respectively, to adjust these instruments to
fair value. The Company continues to apply cash flow hedge accounting to
interest rate swaps.
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 is not subject to significant exposures to changes in foreign
currency exchange rates. The Company will, however, manage its exposure to
changes in foreign currency exchange rates on firm sales and purchase
commitments by entering into foreign currency exchange 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 transaction.
13
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Overview
--------
General
- -------
L. B. Foster Company is a manufacturer, fabricator and distributor of products
utilized in the transportation infrastructure, construction and utility markets.
The Company is comprised of three business segments: Rail products, Construction
products and Tubular products.
Recent Developments
- -------------------
In April 2004, we terminated an interest rate collar agreement by purchasing it
for its fair market value of $0.7 million. See the "Market Risk and Risk
Management Policies" section of this Management's Discussion and Analysis for
more information on this matter.
Critical Accounting Policies
----------------------------
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States.
When more than one accounting principle, or method of its application, is
generally accepted, management selects the principle or method that is
appropriate in the Company's specific circumstances. Application of these
accounting principles requires management to make estimates about the future
resolution of existing uncertainties. As a result, actual results could differ
from these estimates. In preparing these financial statements, management has
made its best estimates and judgments of the amounts and disclosures included in
the financial statements giving due regard to materiality. There have been no
material changes in the Company's policies or estimates since December 31, 2003.
For more information regarding the Company's critical accounting policies,
please see the discussion in Management's Discussion & Analysis of Financial
Condition and Results of Operations in Form 10-K for the year ended December 31,
2003.
New Accounting Pronouncements
-----------------------------
In December 2003, the FASB issued Statement of Financial Accounting Standard No.
132 (Revised 2003) - "Employers' Disclosures about Pensions and Other
Post-retirement Benefits" (SFAS 132R), that replaces existing FASB disclosure
requirements for pensions and other post-retirement benefit plans. SFAS 132R
requires companies to provide more complete details about their plan assets,
benefit obligations, cash flows, benefit costs and other relevant information.
In addition to expanded disclosures, the standard improves information available
to investors in interim financial statements. With certain exceptions, SFAS 132R
is effective for fiscal years ending after December 31, 2003 and for quarters
beginning after December 31, 2003. See Note 6 to the consolidated financial
statements in this 10-Q which presents the additional disclosures required by
SFAS 132R.
14
Results of Operations
---------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- ----------------------------------
2004 2003 2004 2003
----------------------------------- ----------------------------------
(Dollars in thousands)
Net Sales:
Rail Products $ 39,099 $ 37,709 $ 74,686 $ 69,335
Construction Products 32,421 33,469 59,196 57,433
Tubular Products 5,307 4,618 8,397 8,547
----------------------------------- ----------------------------------
Total Net Sales $ 76,827 $ 75,796 $ 142,279 $ 135,315
=================================== ==================================
Gross Profit:
Rail Products $ 4,676 $ 4,222 $ 8,098 $ 8,008
Construction Products 3,992 4,357 6,525 7,163
Tubular Products 1,205 1,050 1,640 1,852
Other (540) (433) (948) (894)
----------------------------------- ----------------------------------
Total Gross Profit 9,333 9,196 15,315 16,129
----------------------------------- ----------------------------------
Expenses:
Selling and administrative 7,054 6,830 13,455 13,397
expenses
Interest expense 469 578 932 1,157
Other income (350) (54) (1,044) (374)
----------------------------------- ----------------------------------
Total Expenses 7,173 7,354 13,343 14,180
----------------------------------- ----------------------------------
Income From Continuing Operations
Before Income Taxes 2,160 1,842 1,972 1,949
Income Tax Expense 865 719 790 762
----------------------------------- ----------------------------------
Income From Continuing Operations 1,295 1,123 1,182 1,187
Discontinued Operations:
Loss From Operations of Foster Technologies - (60) - (440)
Income Tax Benefit - (23) - (173)
----------------------------------- ----------------------------------
Loss on Discontinued Operations - (37) - (267)
----------------------------------- ----------------------------------
Net Income $ 1,295 $ 1,086 $ 1,182 $ 920
=================================== ==================================
Gross Profit %:
Rail Products 12.0% 11.2% 10.8% 11.5%
Construction Products 12.3% 13.0% 11.0% 12.5%
Tubular Products 22.7% 22.7% 19.5% 21.7%
Total Gross Profit 12.1% 12.1% 10.8% 11.9%
15
Second Quarter 2004 Results of Operations
- -----------------------------------------
Net income for the second quarter of 2004 was $1.3 million ($0.13 per diluted
share) on net sales of $76.8 million. These results compare favorably to the
second quarter of 2003 in which net income was $1.1 million ($0.11 per diluted
share) on net sales of $75.8 million.
Net sales for the second quarter of 2004 were $1.0 million higher than the same
period in 2003. This improvement came primarily from our Rail and Tubular
segments. Rail segment sales increased 3.7% due primarily to an increase in
concrete tie sales. Also increasing, but to a lesser extent, were our rail
distribution and transit products businesses. Construction products' net sales
declined 3.1% as the lack of a new federal highway and transit bill continues to
hurt our fabricated products business. Additionally, delays in federal spending
for concrete buildings, due to wildfire concerns, contributed to the decline of
Construction products sales. Tubular products' sales increased 14.9% and can be
attributed to increases in threaded product sales to the water well market.
The Company's gross profit margin remained steady at 12.1% in the second
quarters of 2004 and 2003. Rail products' profit margin increased 0.8 percentage
points, primarily due to improvements in the concrete tie and rail distribution
businesses mentioned above. The 0.7 percentage point decline in Construction
products' margin was due, in part, to decreased margins at our fabricated
products business as heightened competition for less business has decreased
selling prices and lower volumes have created plant inefficiencies at the
concrete building plants as well as the fabricated products facilities. Tubular
products' gross profit margin held steady at 22.7% in the second quarter
comparisons.
Selling and administrative expenses increased 3.3% compared to the second
quarter of 2003. Interest expense declined 18.9% from the prior year due
principally to the April 2004 retirement of a $10.0 million notional amount
LIBOR-based interest rate collar agreement. See "Market Risk and Risk Management
Policies" for more details on this matter. Other Income increased $0.3 million
primarily as a result of the mark-to-market adjustment we recorded related to
our remaining interest rate collar.
The second quarter 2004 effective tax rate was 40% compared to 39% in last
year's second quarter.
First Six Months of 2004 Results of Operations
- ----------------------------------------------
For the first six months of 2004, net income was $1.2 million ($0.12 per diluted
share) on net sales of $142.3 million. Net income for the first six months of
2003 was $0.9 million ($0.10 per diluted share) on net sales of $135.3 million.
The prior year results include a net loss from discontinued operations of $0.3
million ($0.03 per diluted share).
Net sales for 2004 increased 5.1% over the first six months of 2003. Rail
segment sales increased 7.7% due primarily to an increase in rail distribution,
transit, and concrete tie sales. Construction products' net sales increased 3.1%
due to an increase in H-beam piling sales. Tubular products' sales declined 1.8%
from last year's first six months due to delays in natural gas transmission
pipeline projects. While the high cost of steel is partially responsible for the
50% increase in threaded pipe sales, it has also caused these pipeline delays
and, in turn, our coated pipe sales have declined approximately 50%.
The Company's six month gross profit margin declined 1.1 percentage points to
10.8%. All three of the Company's segments contributed to the decline. Rail
products' profit margin declined 0.7 percentage points due to the mix of
products sold and low volume inefficiencies at our Niles, OH trackwork facility.
The 1.5 percentage point decline in Construction products' margin was due, in
part, to weaker sales of higher margin fabricated highway products and low
volume inefficiency costs at our Spokane, WA concrete buildings plant. Tubular
products' gross profit margin declined 2.2 percentage points due to the higher
steel costs mentioned above.
Selling and administrative expenses remained at 2003 levels. Interest expense
declined 19.4% from the prior year as a result of the previously mentioned
collar retirement and a reduction in average borrowing levels during the current
year. Other Income increased $0.7 million primarily as a result of the
16
previously mentioned second quarter mark-to-market adjustment recorded by the
Company related to our remaining interest rate collar and the first quarter gain
on the sale of the Company's former Newport, KY pipe coating machinery and
equipment which had been classified as "held for resale."
The effective tax rate during the first half of 2004 was 40% compared to 39% for
the same period last year.
Liquidity and Capital Resources
-------------------------------
The Company's capitalization is as follows:
June 30, December 31,
(in thousands) 2004 2003
- ------------------------------------------------------------------------------
Debt:
Revolving credit facility $ 21,000 $ 17,000
Capital leases 1,283 1,616
Other (primarily revenue bonds) 2,821 2,853
- ------------------------------------------------------------------------------
Total Debt 25,104 21,469
- ------------------------------------------------------------------------------
Equity 73,091 70,544
- ------------------------------------------------------------------------------
Total Capitalization $ 98,195 $ 92,013
==============================================================================
Debt as a percentage of capitalization (debt plus equity) increased to 26% from
23% at the 2003 year end. Working capital was $53.0 million at June 30, 2004
compared to $46.8 million at December 31, 2003.
The Company's liquidity needs arise from seasonal working capital requirements,
capital expenditures, acquisitions and debt service obligations. The following
table summarized the impact of these items:
June 30,
(in thousands) 2004 2003
- -----------------------------------------------------------------------------
Liquidity needs:
Working capital and other assets and liabilities $ (8,913) $ (1,989)
Capital expenditures, net of asset sales (559) (1,279)
Scheduled debt service obligations - net (365) (457)
Cash interest 827 1,071
- -----------------------------------------------------------------------------
Net liquidity requirements (9,010) (2,654)
- -----------------------------------------------------------------------------
Liquidity sources (uses):
Internally generated cash flows before interest 2,268 2,829
Credit facility activity 4,000 (2,000)
Equity transactions 1,331 246
Other - 245
- -----------------------------------------------------------------------------
Net liquidity sources 7,599 1,320
- -----------------------------------------------------------------------------
Net Change in Cash $ (1,411) $ (1,334)
=============================================================================
Capital expenditures were $1.5 million for the first six months of 2004 compared
to $1.3 million in the same period of 2003. The amount of capital spending in
2004 will depend upon the outcome of the Company's bid on a concrete tie
contract, as a successful outcome will require the construction of one or more
facilities. Excluding business acquisitions and the potential concrete tie
facilities, capital expenditures for 2004 are expected to be approximately $4.0
million, and funded by cash flow from operations and available external
financing sources.
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 have been
made since the first quarter of 2001. From August 1997 through March 2001, the
Company had repurchased 973,398 shares at a cost of
17
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.
The Company has an agreement that 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 Company's inventory and
trade receivables. Availability under this agreement is limited by the amount of
eligible inventory and accounts receivable applied against certain advance
rates. Interest on the credit facility is based on LIBOR plus a spread ranging
from 1.75% to 2.5%. Total revolving credit agreement borrowings at June 30, 2004
were $21.0 million, an increase of $4.0 million from December 31, 2003. At June
30, 2004, remaining available borrowings under this facility were approximately
$24.4 million. Outstanding letters of credit at June 30, 2004 were approximately
$2.9 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 for the foreseeable future.
The credit agreement includes financial covenants requiring a minimum net worth
and a minimum fixed charge coverage ratio. The primary restrictions to this
agreement include investments, indebtedness, and the sale of certain assets. On
September 8, 2003, the first amendment to this agreement allowed for the sale of
the Company's equity interest in a specialty trackwork supplier. For more
information regarding the transaction, see "Other Matters". As of June 30, 2004,
the Company was in compliance with all of the agreement's covenants.
Off-Balance Sheet Arrangements
------------------------------
The Company's off-balance sheet arrangements include operating leases, purchase
obligations and standby letters of credit. A schedule of the Company's required
payments under financial instruments and other commitments as of December 31,
2003 are included in "Liquidity and Capital Resources" section of the Company's
2003 Annual Report filed on Form 10-K. There have been no significant changes to
the Company's contractual obligations relative to the information presented in
the Form 10-K. These arrangements provide the Company with increased flexibility
relative to the utilization and investment of cash resources.
Dakota, Minnesota & Eastern Railroad
------------------------------------
The Company maintains a significant investment in the Dakota, Minnesota &
Eastern Railroad Corporation (DM&E), a privately held, regional railroad, which
controls over 2,500 miles of track in eight states.
At June 30, 2004, 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. In addition, the Company has a receivable for accrued dividend income
on Preferred Stock of approximately $5.2 million. The Company owns approximately
13.6% of the DM&E.
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 Surface Transportation Board (STB) approved the Project in January
2002. In October 2003, however, the 8th U.S. Circuit Court of Appeals remanded
the matter to the STB and instructed the STB to address, in its environmental
impact statement, the Project's effects on air quality, noise and vibration, and
preservation of historic sites. On January 30, 2004, the 8th U. S. Circuit Court
of Appeals denied petitions seeking a rehearing of the case.
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.
18
In December 2003, the DM&E received a Railroad Rehabilitation and Improvement
Financing (RRIF) Loan in the amount of $233.0 million from the Federal Railroad
Administration. Funding provided by the 25-year loan was used to refinance debt
and upgrade infrastructure along parts of its existing route.
Other Matters
-------------
Specialty trackwork sales of the Company's Rail segment have declined since a
decision was made to terminate our relationship with a principal trackwork
supplier during the third quarter of 2002. In the third quarter of 2003, we
exchanged our minority ownership interest and advances to this supplier for a
$5.5 million promissory note from the supplier's owner, with principal and
accrued interest to be repaid beginning in January 2008. The value of this note
has been fully reserved and no gain or loss was recorded on this transaction.
During the first six months of 2004 and 2003, the volume of business the
supplier conducted with the Company was approximately $1.6 million and $6.5
million, respectively. Most of the combined order backlog was completed in 2003
and approximately $0.4 million remained at June 30, 2004. If this supplier is
unable to perform, it could have a further negative impact on earnings and cash
flows.
During the first quarter of 2003, the Company sold certain assets and
liabilities of its Foster Technologies subsidiary, engaged in the rail signaling
and communication device business, for $0.3 million. This subsidiary had been
classified as a discontinued operation in December 2002. The loss from this
business in the first six months of 2003 was principally due to losses incurred
up to the sale date, as well as certain charges taken for employee severance
costs and lease obligations.
We continue to evaluate the overall performance of our 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
-------
Our CXT Rail operations and Allegheny Rail Products division are dependent on a
Class I railroad for a significant portion of their business. Our agreement to
supply concrete ties to this railroad expired in September 2003. We are still
selling ties to this customer, although there are no longer annual minimum
quantity requirements. In December 2003, we bid on a new concrete tie supply
agreement that is expected to be a 5 to 8 year commitment. If our bid is
successful, we will be required to establish one or more new facilities to
service this agreement, which would require a significant capital investment. If
we are unsuccessful in the bidding process, it may cause the value of our two
existing tie facilities with total net assets of approximately $7.1 million to
be partially impaired. Although an agreement has not yet been signed, the
Company expects to have a new agreement in place by the end of the third
quarter.
Steel is a key component in the products that we sell. In the past year, the
price of scrap steel, which is used by mini-mills to manufacture many steel
products, has more than doubled. Although steel scrap prices moderated somewhat
in June, they have risen significantly during the month of July. Producers and
other suppliers continue to quote high prices or are quoting monthly price
surcharges. Some of our suppliers are experiencing supply problems. Since many
of the Company's projects can be six months to twenty-four months in duration,
we find ourselves caught in the middle of some of these pricing and availability
issues. While we believe this highly unusual situation to be temporary in
nature, it could have a negative impact on the Company's sales volumes, results
of operations and cash flows until the market normalizes.
In 2003, we received an increased but still limited supply of sheet piling from
our exclusive supplier. The sheet piling supply is still not adequately
consistent and reliable for our piling business to grow profitably. We expect
this year to be pivotal in determining whether sheet piling will contribute to
the future growth of this business.
19
Last year we began implementing Lean Enterprise (Lean) across the organization.
Lean is a methodology as well as a mindset, utilized in managing a business that
focuses on the execution and continuous improvement of all business processes
with the objective of maximizing speed and flexibility at the lowest cost.
Proper implementation of Lean can lead to other benefits such as better quality
control and improved worker safety.
Lean has commenced at all of our manufacturing facilities and the preliminary
results have been positive, with significant improvement in productivity in
several manufacturing processes. For these improvements to make a significant
impact on our financial results, we must experience increased volumes at these
facilities.
A substantial portion of the Company's operations is heavily dependent on
governmental funding of infrastructure projects. Significant changes in the
level of government funding of these projects could have a favorable or
unfavorable impact on the operating results of the Company. The most recent
extension of the federal highway and transit bill (TEA-21) is to expire in
September, 2004, as reauthorization of a successor bill continues to be delayed.
A new highway and transit bill is important to the future growth and
profitability of many of the Company's businesses. Additionally, government
actions concerning taxation, tariffs, the environment, or other matters could
impact the operating results of the Company. The Company's operating results may
also be affected negatively by adverse weather conditions.
Although backlog is not necessarily indicative of future operating results,
total Company backlog at June 30, 2004, was approximately $119.4 million. The
following table provides the backlog by business segment:
Backlog
--------------------------------------------------
June 30, December 31, June 30,
(In thousands) 2004 2003 2003
- --------------------------------------------------------------------------------
Rail Products $ 37,702 $ 37,529 $ 41,023
Construction Products 78,030 67,100 74,780
Tubular Products 3,639 1,035 4,421
- --------------------------------------------------------------------------------
Total $119,371 $105,664 $120,224
================================================================================
The increase in Construction segment backlog from December 31, 2003, resulted
from increases in concrete buildings and earth retention walls, and piling
backlog. Increases in threaded pipe and pipe coating services improved the
Tubular segment backlog from 2003 year end.
The decline in Rail segment backlog from June 30, 2003 reflects a reduction in
transit products backlog, while the increase in Construction products' backlog
resulted primarily from an increase in concrete earth retention wall backlog.
Market Risk and Risk Management Policies
----------------------------------------
The Company does not purchase or hold any derivative financial instruments for
trading purposes. 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. The Company's primary source of
variable-rate debt comes from its revolving credit agreement. In conjunction
with the Company's debt refinancing in the third quarter of 2002, the Company
discontinued cash flow hedge accounting treatment for its interest rate collars
and has applied mark-to-market accounting prospectively. 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 fair value of this collar
agreement was a liability of $611,000 as of June 30, 2004. The Company also had
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 had the option, on
20
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%. In April 2004,
prior to the counter-party option, the Company terminated this interest rate
collar agreement by purchasing it for its fair value of $707,000.
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
retained these instruments as protection against interest rate risk associated
with the new credit agreement and the Company records the mark-to-market
adjustments on these interest rate collars in its consolidated statements of
operations. During the second quarter of 2004 and 2003, the Company recognized
$416,000 of income and $121,000 of expense, respectively, to adjust these
instruments to fair value. For the six months ended June 2004 and 2003, the
Company recognized $374,000 of income and $110,000 of expense, respectively, to
adjust these instruments to fair value. The Company continues to apply cash flow
hedge accounting to interest rate swaps.
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 remaining interest rate collar agreement has a minimum annual interest rate
of 5.00% to a maximum annual interest rate of 5.60%. Since the interest rate on
the revolving credit agreement 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 rate on the interest rate collar
agreement. The effect of a 1% decrease in the applicable interest rate below the
5.00% minimum annual interest rate on $21.0 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. The Company will, however, manage its exposure to
changes in foreign currency exchange rates on firm sales and purchase
commitments by entering into foreign currency exchange 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 transaction.
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 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 cautions 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 the future profitability, made from
time to time by representatives of the Company. Additional delays in a Virginia
steel mill's production of sheet piling products, or failure to produce
substantial quantities of sheet piling products could adversely impact the
Company's earnings. 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. The Company's businesses could be affected
adversely by continued price increases in the steel scrap market. Except for
historical information, matters
21
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
See the "Market Risk and Risk Management Policies" section under Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Item 4. CONTROLS AND PROCEDURES
a) As of the end of the period covered by this report, L. B. Foster Company
(the Company) carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant
to Exchange Act Rules 13a - 15(e) and 15d - 15(e). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are
effective to timely alert them to material information relating to the
Company (including its consolidated subsidiaries) required to be included
in the Company's periodic SEC filings.
b) There have been no significant changes in the Company's internal controls
over financial reporting that occurred in the period covered by this report
that have materially affected or are likely to materially affect the
Company's internal controls over financial reporting.
PART II OTHER INFORMATION
-------------------------
Item 1. LEGAL PROCEEDINGS
- -------------------------
See Note 10, "Commitments and Contingent Liabilities", to the Condensed
Consolidated Financial Statements.
Item 4. RESULTS OF VOTES OF SECURITY HOLDERS
- --------------------------------------------
At the Company's annual meeting held on May 26, 2004, the following individuals
were elected to the Board of Directors:
For Withheld
Name Election Authority
- --------------------------------------------------------------------------------
Lee B. Foster II 9,411,804 36,174
Stan L. Hasselbusch 9,365,949 82,029
Henry J. Massman IV 9,411,990 35,988
Diane B. Owen 9,411,990 35,988
John W. Puth 9,388,108 59,870
William H. Rackoff 9,411,890 36,088
22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
a) EXHIBITS
Unless marked by an asterisk, all exhibits are incorporated by reference:
3.1 Restated Certificate of Incorporation, filed as Exhibit 3.1 to
Form 10-Q for the quarter ended March 31, 2003.
3.2 Bylaws of the Registrant, as amended to date, filed as Exhibit
3.2 to Form 10-K for the year ended December 31, 2002.
4.0 Rights Amendment, 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, filed as Exhibit 4.0 to Form 10-K for the year ended
December 31, 2002.
4.0.1 Amended Rights Agreement dated as of May 14, 1998 between L.B.
Foster Company and American Stock Transfer and Trust Company,
filed as Exhibit 4.0.1 to Form 10-Q for the quarter ended March
31, 2003.
4.0.2 Revolving Credit and Security Agreement dated as of 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.
4.0.3 First Amendment to Revolving Credit and Security Agreement dated
September 8, 2003, between the Registrant and PNC Bank, N.A,
filed as Exhibit 4.0.3 to Form 10-Q for the quarter ended
September 30, 2003.
10.12 Lease between CXT Incorporated and Pentzer Development
Corporation, dated April 1, 1993, filed as Exhibit 10.12 to
Form 10-K for the year ended December 31, 1999.
10.12.1 Second Amendment dated March 12, 1996 to lease between CXT
Incorporated and Crown West Realty, LLC, successor, filed as
Exhibit 10.12.1 to Form 10-K for the year ended December 31,
1999.
10.12.2 Third Amendment dated November 7, 2002 to lease between CXT
Incorporated and Crown West Realty, LLC, filed as Exhibit
10.12.2 to Form 10-K for the year ended December 31, 2002.
10.12.3 Fourth Amendment dated December 15, 2003 to lease between CXT
Incorporated and Crown West Realty, LLC, filed as Exhibit
10.12.3 to Form 10-K for the year ended December 31, 2003.
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, filed as Exhibit 10.13.1 to Form 10-K for the year
ended December 31, 2002.
10.15 Lease between CXT Incorporated and Union Pacific Railroad
Company, dated February 13, 1998, and filed as Exhibit 10.15 to
Form 10-K for the year ended December 31, 1999.
10.15.1 Renewal Rider for lease between CXT Incorporated, Union Pacific
Railroad Company and Nevada Railroad Materials, Inc., dated
December 17, 2003, and filed as Exhibit 10.15.1 to Form 10-K for
the year ended December 31, 2003.
23
10.15.2 Renewal Rider for lease between CXT Incorporated and Union
Pacific Railroad Company dated December 17, 2003 and filed as
Exhibit 10.15.2 to Form 10-K for the year ended December 31,
2003.
* 10.16 Lease between Registrant and Suwanee Creek Business Center, LLC
dated February 13, 2004.
10.17 Lease between Registrant and the City of Hillsboro, TX dated
February 22, 2002, filed as Exhibit 10.17 to Form 10-K for the
year ended December 31, 2002.
10.19 Lease between Registrant and American Cast Iron Pipe Company for
pipe-coating facility in Birmingham, AL dated December 11, 1991,
filed as Exhibit 10.19 to Form 10-K for the year ended December
31, 2002.
10.19.1 Amendment to Lease between Registrant and American Cast Iron
Pipe Company for pipe-coating facility in Birmingham, AL dated
November 15, 2000, and filed as Exhibit 10.19.2 to Form 10-K for
the year ended December 31, 2000.
10.20 Equipment Purchase and Service Agreement by and between the
Registrant and LaBarge Coating LLC, dated July 31, 2003, and
filed as Exhibit 10.20 to Form 10-Q for the quarter ended
September 30, 2003.
* 10.21 Stock Purchase Agreement, dated June 3, 1999 by and among the
Registrant and the shareholders of CXT Incorporated.
10.33.2 Amended and Restated 1985 Long-Term Incentive Plan as of
February 26, 1997, filed as Exhibit 10.33.2 to Form 10-Q for the
quarter ended March 31, 2003. **
10.34 Amended and Restated 1998 Long-Term Incentive Plan as of February
2, 2001, filed as Exhibit 10.34 to Form 10-K for the year ended
December 31, 2000. **
10.45 Medical Reimbursement Plan effective January 1, 2004, filed as
Exhibit 10.45 to Form 10-K for the year ended December 31, 2003.
**
* 10.46 Leased Vehicle Plan as amended and restated on June 9, 2004. **
10.51 Supplemental Executive Retirement Plan, filed as Exhibit 10.51 to
Form 10-K for the year ended December 31, 2002. **
10.52 Outside Directors' Stock Award Plan, filed as Exhibit 10.52 to
Form 10-K for the year ended December 31, 2002. **
10.53 Directors' resolutions dated May 13, 2003, under which directors'
compensation was established, filed as Exhibit 10.53 to Form 10-Q
for the quarter ended June 30, 2003. **
10.55 2004 Management Incentive Compensation Plan, filed as Exhibit
10.55 to Form 10-K for the year ended December 31, 2003.
19 Exhibits marked with an asterisk are filed herewith.
* 31.1 Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
* 31.2 Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
* 32.0 Certification of Chief Executive Officer and Chief Financial
Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
24
** Identifies management contract or compensatory plan or
arrangement required to be filed as an Exhibit.
b) Reports on Form 8-K
On April 20, 2004, the Registrant filed a current report on Form
8-K under Item 12 announcing first quarter results.
On July 21, 2004, the Registrant filed a current report on Form
8-K under Item 12 announcing second quarter results.
25
SIGNATURE
---------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
L.B. FOSTER COMPANY
-------------------
(Registrant)
Date: August 12, 2004 By: /s/David J. Russo
--------------- ---------------------
David J. Russo
Senior Vice President,
Chief Financial Officer and Treasurer
(Duly Authorized Officer of Registrant)