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 September 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 November 2, 2004
Common Stock, Par Value $.01 10,034,395 Shares
2
L.B. FOSTER COMPANY AND SUBSIDIARIES
INDEX
-----
PART I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of 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 6. Exhibits 21
Signature 24
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
2004 2003
-------------- --------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 183 $ 4,134
Accounts and notes receivable:
Trade 49,495 34,668
Other 39 105
-------------- --------------
49,534 34,773
Inventories 46,034 36,894
Current deferred tax assets 1,413 1,413
Other current assets 916 877
Property held for resale - 446
-------------- --------------
Total Current Assets 98,080 78,537
-------------- --------------
Property, Plant & Equipment - At Cost 70,709 70,814
Less Accumulated Depreciation (39,472) (37,679)
-------------- --------------
31,237 33,135
-------------- --------------
Other Assets:
Goodwill 350 350
Other intangibles - net 470 585
Investments 14,450 13,707
Deferred tax assets 4,107 4,095
Other assets 72 750
-------------- --------------
Total Other Assets 19,449 19,487
-------------- --------------
TOTAL ASSETS $148,766 $131,159
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 459 $ 611
Short-term borrowings expected to be
refinanced, due September 2005 22,775 -
Accounts payable - trade 32,160 23,874
Accrued payroll and employee benefits 3,448 2,909
Current deferred tax liabilities 1,749 1,749
Other accrued liabilities 3,603 2,550
-------------- --------------
Total Current Liabilities 64,194 31,693
-------------- --------------
Long-Term Borrowings - 17,000
-------------- --------------
Other Long-Term Debt 3,505 3,858
-------------- --------------
Deferred Tax Liabilities 3,653 3,653
-------------- --------------
Other Long-Term Liabilites 2,707 4,411
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock 102 102
Paid-in capital 35,100 35,018
Retained earnings 40,923 38,399
Treasury stock (724) (2,304)
Accumulated other comprehensive loss (694) (671)
-------------- --------------
Total Stockholders' Equity 74,707 70,544
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $148,766 $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 Nine Months
Ended Ended
September 30, September 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
-------------------------------- --------------------------------
(Unaudited) (Unaudited)
Net Sales $ 85,858 $ 75,802 $ 228,137 $ 211,117
Cost of Goods Sold 76,534 66,261 203,498 185,447
--------------- -------------- --------------- --------------
Gross Profit 9,324 9,541 24,639 25,670
Selling and Administrative Expenses 6,993 7,096 20,448 20,493
Interest Expense 452 576 1,384 1,733
Other Income (222) (381) (1,266) (755)
--------------- -------------- --------------- --------------
7,223 7,291 20,566 21,471
--------------- -------------- --------------- --------------
Income From Continuing Operations Before
Income Taxes 2,101 2,250 4,073 4,199
Income Taxes 759 871 1,549 1,633
--------------- -------------- --------------- --------------
Income From Continuing Operations 1,342 1,379 2,524 2,566
Discontinued Operations:
Loss From Operations of Foster Technologies - (70) - (510)
Income Tax Benefit - (1,616) - (1,789)
--------------- -------------- --------------- --------------
Income From Discontinued Operations - 1,546 - 1,279
--------------- -------------- --------------- --------------
Net Income $ 1,342 $ 2,925 $ 2,524 $ 3,845
=============== ============== =============== ==============
Basic & Diluted Earnings Per Common Share:
From Continuing Operations $ 0.13 $ 0.14 $ 0.25 $ 0.27
From Discontinued Operations, Net of Tax - 0.16 - 0.13
--------------- -------------- --------------- --------------
Basic & Diluted Earnings Per Common Share $ 0.13 $ 0.30 $ 0.25 $ 0.40
=============== ============== =============== ==============
See Notes to Condensed Consolidated Financial Statements.
5
L. B. FOSTER COMPANY AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months
Ended September 30,
2004 2003
------------- -------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 2,524 $ 2,566
Adjustments to reconcile net income to net cash (used) provided
by operating activities:
Depreciation and amortization 3,915 3,831
(Gain) loss on sale of property, plant and equipment (302) 211
Unrealized gain on derivative mark-to-market (406) (217)
Change in operating assets and liabilities:
Accounts receivable (14,761) (10,522)
Inventories (9,140) (3,774)
Other current assets (39) (348)
Other noncurrent assets (66) (548)
Accounts payable - trade 8,286 6,396
Accrued payroll and employee benefits 539 759
Other current liabilities 1,053 1,457
Other liabilities (1,333) (379)
------------- -------------
Net Cash Used by Operating Activities (9,730) (568)
------------- -------------
Net Cash Provided by Discontinued Operations - 147
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment 982 9
Capital expenditures on property, plant and equipment (2,135) (2,037)
------------- -------------
Net Cash Used by Investing Activities (1,153) (2,028)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) of revolving credit agreement borrowings 5,775 (828)
Exercise of stock options and stock awards 1,662 304
Repayments of long-term debt (505) (663)
------------- -------------
Net Cash Provided (Used) by Financing Activities 6,932 (1,187)
------------- -------------
Net Decrease in Cash and Cash Equivalents (3,951) (3,636)
Cash and Cash Equivalents at Beginning of Period 4,134 3,653
------------- -------------
Cash and Cash Equivalents at End of Period $ 183 $ 17
============= =============
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 1,208 $ 1,559
============= =============
Income Taxes Paid $ 185 $ 269
============= =============
During the first nine months of 2003, the Company financed $186,000 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 Financial Accounting Standards Board (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 Standard 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 Nine Months Ended
September 30, September 30,
In thousands, except per share amounts 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------
Net income from continuing operations, as reported $1,342 $1,379 $2,524 $2,566
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 40 61 185 203
- ---------------------------------------------------------------------------------------------------------------------------
Pro forma income from continuing operations $1,302 $1,318 $2,339 $2,363
===========================================================================================================================
Earnings per share from continuing operations:
Basic, as reported $0.13 $0.14 $0.25 $0.27
Basic, pro forma $0.13 $0.14 $0.24 $0.25
Diluted, as reported $0.13 $0.14 $0.25 $0.27
Diluted, pro forma $0.13 $0.13 $0.23 $0.24
===========================================================================================================================
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
third quarter of 2004 or 2003. The following weighted-average assumptions were
used for grants in the nine months ending September 30, 2004 and 2003,
respectively: risk-free interest rates of 4.74% and 3.56%; dividend yield of
0.0% for both periods; volatility factors of the expected market price of the
Company's Common stock of .28 and .32; and a weighted-average expected life of
the option of ten years. The weighted-average fair value of the options granted
in the nine months ending September 30, 2004 and 2003 was $3.91 and $2.11,
respectively.
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 September 30, 2004 and
December 31, 2003 have been reduced by an allowance for doubtful accounts of
($970,000) and ($827,000), respectively. Bad debt expense was $143,000 and
$123,000 for the nine-month periods ended September 30, 2004 and 2003,
respectively.
4. INVENTORIES
- --------------
Inventories of the Company at September 30, 2004 and December 31, 2003 are
summarized as follows in thousands:
September 30, December 31,
2004 2003
- ------------------------------------------------------------------------------
Finished goods $ 27,258 $ 20,216
Work-in-process 11,024 7,379
Raw materials 10,696 11,133
- ------------------------------------------------------------------------------
Total inventories at current costs 48,978 38,728
(Less):
LIFO reserve (2,344) (1,234)
Inventory valuation reserve (600) (600)
- ------------------------------------------------------------------------------
$ 46,034 $ 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 a defined contribution
plan. 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 nine months ended September 30,
2004 and 2003 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------
Service cost $ 14 $ 15 $ 42 $ 44
Interest cost 51 49 152 147
Expected return on plan assets (44) (34) (132) (100)
Amortization of prior service cost 2 2 6 6
Recognized net actuarial loss 13 13 39 39
- --------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 36 $ 45 $ 107 $ 136
==================================================================================================
The Company expects to contribute $360,000 to its defined benefit plans in 2004.
As of September 30, 2004, $338,000 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 nine months
ended September 30 was $452,000 in 2004 and $404,000 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 September 30,
2004, the remaining available borrowings under this agreement were approximately
$23,957,000. Interest on the credit facility is based on LIBOR plus a spread
ranging from 1.75% to 2.50%. The balance outstanding on this facility is
$22,775,000 and has been reclassified as "short-term borrowings expected to be
refinanced" in the current liability section of the September 30, 2004 Condensed
Consolidated Balance Sheets, since the agreement expires in less than twelve
months. The Company has already received proposals and intends to renew or
replace this credit agreement prior to its expiration in September 2005.
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 September 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 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. During the third quarter of 2003, the Company recognized a $1,616,000
income tax benefit from the release of a valuation allowance against foreign net
operating losses that were utilized as a result of the dissolution of this
subsidiary.
Net sales and the results from discontinued operations were as follows:
Three Months Ended Nine Months Ended
In thousands September 30, 2003 September 30, 2003
- --------------------------------------------------------------------------------
Net sales $ - $ 1
- --------------------------------------------------------------------------------
Pretax operating loss $ (70) $ (440)
Pretax loss on disposal - (70)
Income tax benefit 1,616 1,789
- --------------------------------------------------------------------------------
Income from discontinued operations $ 1,546 $ 1,279
================================================================================
9. EARNINGS PER COMMON SHARE
- ----------------------------
The following table sets forth the computation of basic and diluted earnings per
common share:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except earnings per share) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------------------
Numerator:
Numerator for basic and diluted
earnings per common share -
net income available to common
stockholders:
Income from continuing operations $ 1,342 $ 1,379 $ 2,524 $ 2,566
Income from discontinued operations - 1,546 - 1,279
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,342 $ 2,925 $ 2,524 $ 3,845
===================================================================================================================================
Denominator:
Weighted average shares 10,018 9,593 9,924 9,562
- -----------------------------------------------------------------------------------------------------------------------------------
Denominator for basic earnings
per common share 10,018 9,593 9,924 9,562
Effect of dilutive securities:
Contingent issuable shares - - - 1
Employee stock options 288 181 313 119
- -----------------------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 288 181 313 120
Denominator for diluted earnings
per common share - adjusted weighted
average shares and assumed conversions 10,306 9,774 10,237 9,682
===================================================================================================================================
Basic and diluted earnings per common
share:
Continuing operations $ 0.13 $ 0.14 $ 0.25 $ 0.27
Discontinued operations - 0.16 - 0.13
- -----------------------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per common share $ 0.13 $ 0.30 $ 0.25 $ 0.40
===================================================================================================================================
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.
In 2000, the Company's subsidiary sold concrete railroad crossing panels to a
general contractor on a Texas transit project. Due to a variety of factors,
including deficiencies in the owner's project specifications, the panels have
deteriorated and the owner either has replaced or is in the process of replacing
these panels. The general contractor and the owner are currently engaged in
dispute resolution procedures, which probably will continue through the second
quarter of 2005. The general contractor has notified the Company that, depending
on the outcome of these proceedings, it may file a suit against the Company's
subsidiary. Although no assurances can be given, the Company believes that it
has meritorious defenses to such claims and will vigorously defend against such
a suit.
In the second quarter of 2004, a gas company filed a complaint against the
Company in Allegheny County, PA, alleging that in 1989 the Company had applied
epoxy coating on 25,000 feet of pipe and that, as a result of inadequate surface
preparation of the pipe, the coating had blistered and deteriorated. The Company
does not believe that the gas company's alleged problems are the Company's
responsibility. Although no assurances can be given, the Company believes that
it has meritorious defenses to such claims and will vigorously defend against
such a suit.
Another gas supply company filed suit against the Company in August, 2004, in
Erie County, NY alleging that pipe coating which the Company furnished in 1989
had deteriorated and that the gas supply company has incurred $1,000,000 in
damages. The Company does not, however, believe that the gas supply company's
alleged problem is the Company's responsibility. Although no assurances can be
given, the Company believes that it has meritorious defenses to such claims and
will vigorously defend against such a suit.
At September 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 of the Company by segment:
Three Months Ended Nine Months Ended
September 30, 2004 September 30, 2004
- --------------------------------------------------------------------------------
Net Segment Net Segment
(in thousands) Sales Profit Sales Profit
- --------------------------------------------------------------------------------
Rail products $ 40,996 $ 1,258 $115,682 $ 3,252
Construction products 40,535 1,517 99,731 618
Tubular products 4,327 511 12,724 1,270
- --------------------------------------------------------------------------------
Total $ 85,858 $ 3,286 $228,137 $ 5,140
================================================================================
11
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
- --------------------------------------------------------------------------------
Net Segment Net Segment
(in thousands) Sales Profit Sales Profit
- --------------------------------------------------------------------------------
Rail products $ 35,790 $ 546 $105,125 $ 2,422
Construction products 35,228 1,553 92,661 1,834
Tubular products 4,784 840 13,331 1,763
- --------------------------------------------------------------------------------
Total $ 75,802 $ 2,939 $211,117 $ 6,019
================================================================================
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 from December 31, 2003.
The following table provides a reconciliation of reportable net profit to the
Company's consolidated total:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Income for reportable segments $ 3,286 $ 2,939 $ 5,140 $ 6,019
Cost of capital for reportable segments 2,732 2,552 7,812 7,639
Interest expense (452) (576) (1,384) (1,733)
Other income 222 381 1,266 755
Corporate expense and other unallocated charges (3,687) (3,046) (8,761) (8,481)
- -------------------------------------------------------------------------------------------------------------------
Income from continuing operations, before income taxes $ 2,101 $ 2,250 $ 4,073 $ 4,199
===================================================================================================================
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 Nine Months Ended
September 30, September 30,
(in thousands) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $1,342 $2,925 $2,524 $3,845
Unrealized derivative gains on cash flow hedges 9 17 37 41
Foreign currency translation (losses) gains (66) - (60) 8
Reclassification adjustment for foreign currency
translation losses included in net income - - - 48
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $1,285 $2,942 $2,501 $3,942
====================================================================================================================================
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
12
agreement. If the bid is successful, the Company will be required to establish a
new facility and to substantially renovate an existing facility to service this
agreement, which would require a significant capital investment. Depending on
the results of the bidding process, the value of our two existing tie facilities
with total net assets of approximately $6,565,000 may become partially impaired.
The results of this process are expected to be finalized in the fourth quarter
of 2004.
14. 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. 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 $579,000 as of September 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.
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 third quarter of 2004 and 2003, the Company recognized
$31,000 of income and $327,000 of income, respectively, to adjust these
instruments to fair value. For the nine months ended September 2004 and 2003,
the Company recognized $406,000 of income and $217,000 of income, 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. MANAGEMENT'S 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
- -------------------
Due to the escalation of steel prices, the Company recorded a $1.0 million LIFO
provision in the third quarter of 2004. A number of factors, including product
mix, ending inventory levels, and steel prices will determine the additional
LIFO provision to be recorded in the fourth quarter.
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 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.
On October 13, 2004, the FASB concluded that Statement 123R, "Share-Based
Payment, an Amendment of FASB Statements No. 123 and 95" (SFAS 123R), which
would require all companies to measure compensation cost for all shared-based
payments (including employee stock options) at fair value, would be effective
for public companies for interim or annual periods beginning after June 15,
2005. This Statement would eliminate the ability to account for stock-based
compensation transactions using APB 25 and, generally, would require instead
that such transactions be accounted for using a fair-value based method, with a
binomial or lattice model preferred to the Black-Scholes valuation model. The
FASB's current plan is to issue a final Statement on or around December 15,
2004. The Company is currently evaluating the impact of SFAS 123R.
14
Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
2004 2003 2004 2003
----------------------------------- ----------------------------------
(Dollars in thousands)
Net Sales:
Rail Products $ 40,996 $ 35,790 $115,682 $105,125
Construction Products 40,535 35,228 99,731 92,661
Tubular Products 4,327 4,784 12,724 13,331
----------------------------------- ----------------------------------
Total Net Sales $ 85,858 $ 75,802 $228,137 $211,117
=================================== ==================================
Gross Profit:
Rail Products $ 4,344 $ 3,727 $ 12,442 $ 11,735
Construction Products 5,383 5,144 11,908 12,307
Tubular Products 921 1,224 2,561 3,076
Other (1,324) (554) (2,272) (1,448)
----------------------------------- ----------------------------------
Total Gross Profit 9,324 9,541 24,639 25,670
----------------------------------- ----------------------------------
Expenses:
Selling and administrative expenses 6,993 7,096 20,448 20,493
Interest expense 452 576 1,384 1,733
Other income (222) (381) (1,266) (755)
----------------------------------- ----------------------------------
Total Expenses 7,223 7,291 20,566 21,471
----------------------------------- ----------------------------------
Income From Continuing Operations
Before Income Taxes 2,101 2,250 4,073 4,199
Income Tax Expense 759 871 1,549 1,633
----------------------------------- ----------------------------------
Income From Continuing Operations 1,342 1,379 2,524 2,566
Discontinued Operations:
Loss From Operations of Foster Technologies - (70) - (510)
Income Tax Benefit - (1,616) - (1,789)
----------------------------------- ----------------------------------
Income From Discontinued Operations - 1,546 - 1,279
----------------------------------- ----------------------------------
Net Income $ 1,342 $ 2,925 $ 2,524 $ 3,845
=================================== ==================================
Gross Profit %:
Rail Products 10.6% 10.4% 10.8% 11.2%
Construction Products 13.3% 14.6% 11.9% 13.3%
Tubular Products 21.3% 25.6% 20.1% 23.1%
Total Gross Profit 10.9% 12.6% 10.8% 12.2%
15
Third Quarter 2004 Results of Operations
- ----------------------------------------
Net income for the third quarter of 2004 was $1.3 million ($0.13 per share) on
net sales of $85.9 million. Net income for the third quarter of 2003 was $2.9
million ($0.30 per share) and included $1.5 million ($0.16 per share) from
discontinued operations primarily related to tax benefits from the dissolution
of the Company's Foster Technologies subsidiary. The third quarter of 2003
income from continuing operations was $1.4 million ($0.14 per share) on net
sales of $75.8 million.
Net sales for the third quarter of 2004 were $10.1 million higher than in the
same period of 2003. The improvement came from our Rail and Construction
segments. Rail segment sales increased almost 15% due primarily to an increase
in sales of rail distribution products. Construction products' net sales also
increased 15% due to an increase in sales of piling products, primarily H-beam
piling. Tubular products' sales declined almost 10% due to a reduction in pipe
coating service sales as certain pipeline projects have been delayed due to
rising steel costs.
The Company's gross profit margin declined to 10.9% in the third quarter of 2004
compared to 12.6% in the same period of 2003. Rail products' profit margin
remained steady in the third quarter comparison. The 1.3 percentage point
decline in Construction products' margin was due primarily to decreased margins
in our fabricated products business as heightened competition for less business
has decreased selling prices, and lower volumes have created plant
inefficiencies at our fabricated products facilities. Tubular products' gross
profit margin fell 4.3 percentage points as volumes through our Birmingham, AL
pipe-coating plant decreased and resulted in unabsorbed plant expenses. The
Company uses the LIFO method to value its inventory and accordingly, an
estimated LIFO provision of $1.0 million was recorded as a result of escalating
steel prices. The LIFO charge reduced the consolidated gross profit margin by
1.1 percentage points.
Selling and administrative expenses declined 1% from the same prior year period.
Interest expense declined 21.5% from the prior year period 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 decreased almost 42%, or $0.2
million, primarily as a result of a decrease in the mark-to-market income
adjustment recorded in the third quarter of 2004 related to our remaining
interest rate collar.
First Nine Months of 2004 Results of Operations
- -----------------------------------------------
For the first nine months of 2004, net income was $2.5 million ($0.25 per share)
on net sales of $228.1 million. Net income for the first nine months of 2003 was
$3.8 million ($0.40 per share) on net sales of $211.1 million. The prior year
results included income from discontinued operations of $1.3 million ($0.13 per
share) primarily related to tax benefits from the dissolution of the Company's
Foster Technologies subsidiary.
Net sales for 2004 increased 8.1% over the first nine months of 2003. Rail
segment sales increased 10.0% due primarily to an increase in rail distribution
and concrete tie sales. Construction products' net sales increased 7.6% due to
an increase in H-beam piling sales. Tubular products' sales declined 4.6% from
last year's first nine months. As previously mentioned, the high cost of steel
has caused certain pipeline project delays and, in turn, our pipe-coating
service sales have declined.
The Company's gross profit margin declined 1.4 percentage points to 10.8%. All
three of the Company's segments contributed to the decline. Rail products'
profit margin declined 0.4 percentage points due to the write-down of
slow-moving inventory for trackwork and transit products, and scrap variances
recorded in the concrete tie operations. The 1.4 percentage point decline in
Construction products' margin was due, in part, to the previously-mentioned
decline in margins for our fabricated products businesses, as well as low volume
inefficiency costs at our Spokane, WA concrete buildings plant during the first
half of 2004. Tubular products' gross profit margin declined 3.0 percentage
points due to unabsorbed plant expenses that resulted from the decline in pipe
coating sales, mentioned above. As a result of escalating steel prices, the
16
Company recorded an estimated LIFO provision of $1.1 million that reduced its
consolidated gross profit margin by 0.5 percentage points.
Selling and administrative expenses remained at 2003 levels. Interest expense
declined 20.0% 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 $0.5 million primarily as a result of the
year-to-date 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."
Liquidity and Capital Resources
The Company's capitalization is as follows:
September 30, December 31,
(in thousands) 2004 2003
- --------------------------------------------------------------------------------
Debt:
Revolving credit facility $ 22,775 $ 17,000
Capital leases 1,248 1,616
Other (primarily revenue bonds) 2,716 2,853
- --------------------------------------------------------------------------------
Total Debt 26,739 21,469
- --------------------------------------------------------------------------------
Equity 74,707 70,544
- --------------------------------------------------------------------------------
Total Capitalization $ 101,446 $ 92,013
================================================================================
Debt as a percentage of capitalization (debt plus equity) increased to 26% from
23% at the 2003 year end. Working capital was $33.9 million at September 30,
2004 compared to $46.8 million at December 31, 2003. This decrease is mainly
attributable to the reclassification of the Company's revolving credit facility,
which expires in September 2005, to "short-term borrowings expected to be
refinanced." The Company has already received proposals and intends to renew or
replace this credit agreement prior to its expiration.
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:
September 30,
(in thousands) 2004 2003
- --------------------------------------------------------------------------------
Liquidity needs:
Working capital and other assets and liabilities $ (15,461) $ (6,959)
Capital expenditures, net of asset sales (1,153) (2,028)
Scheduled debt service obligations - net (505) (663)
Cash interest (1,208) (1,559)
- --------------------------------------------------------------------------------
Net liquidity requirements (18,327) (11,209)
- --------------------------------------------------------------------------------
Liquidity sources (uses):
Internally generated cash flows before interest 6,939 7,950
Credit facility activity 5,775 (828)
Equity transactions 1,662 304
Other - 147
- --------------------------------------------------------------------------------
Net liquidity sources 14,376 7,573
- --------------------------------------------------------------------------------
Net Change in Cash $ (3,951) $ (3,636)
================================================================================
Capital expenditures were $2.1 million for the first nine months of 2004
compared to $2.0 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. A successful outcome will require the Company to establish a
17
new facility and to substantially renovate an existing facility. 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 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 September 30,
2004 were $22.8 million, an increase of $5.8 million from December 31, 2003. At
September 30, 2004, remaining available borrowings under this facility were
approximately $24.0 million. The balance outstanding on this facility has been
reclassified as "short-term borrowings expected to be refinanced" in the current
liability section of the September 30, 2004 Condensed Consolidated Balance
Sheets, since the agreement expires in less than twelve months. The Company has
already received proposals and intends to renew or replace this credit agreement
prior to its expiration in September 2005.
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 this transaction, see "Other Matters". As of September 30,
2004, the Company was in compliance with all of the agreement's covenants.
Outstanding letters of credit at September 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.
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 September 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 $5.5 million. The Company owns approximately
13.6% of the DM&E.
18
In December 1998, in conjunction with the issuance of Series C Preferred Stock
and warrants, the DM&E ceased paying dividends on the Series B shares. The terms
of the Series B Preferred Stock state in the event that regular dividends are
not paid timely, dividends accrue at an accelerated rate until those dividends
are paid. In addition, penalty interest accrues and compounds annually until
such dividends are paid. Subsequent issuances of Series C, C-1, and D Preferred
Stock have all assumed distribution priority over the previous series, with
series D not redeemable until 2008. As subsequent preferred series were issued,
the Company, using its own valuation estimate, began reserving against the
accelerated, penalty and compounded dividends on all preferred series given the
delay in anticipated realization of the asset and the priority of redemption of
the various issuances. At September 30, 2004, this reserve was approximately
$3.5 million. The Company continues to evaluate the adequacy of this reserve.
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 exceed $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.
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 nine months of 2004 and 2003, the volume of business the
supplier conducted with the Company was approximately $1.5 million and $7.9
million, respectively. Substantially all of the order backlog has been
completed.
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. During the first nine
months of 2003, losses from this business were principally due to losses
incurred up to the sale date, as well as certain charges taken primarily related
to employee severance costs and an accrual for the remaining lease obligation.
Income from this business during the third quarter of 2003 consisted of a tax
benefit which resulted primarily from the release of a $1.6 million valuation
allowance against foreign net operating losses.
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.
19
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. If our bid is successful, we will be required to establish a new
facility and to substantially renovate an existing facility to service this
agreement, which would require a significant capital investment. Depending on
the results of the bidding process, the value of our two existing tie facilities
with total net assets of approximately $6.6 million may become partially
impaired. The results of this process are expected to be finalized in the fourth
quarter of 2004.
Steel is a key component in the products that we sell. The high price of scrap
steel, which is used by mini-mills to manufacture many steel products, continues
to play a significant role in our businesses. 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 have, on
occasion, found 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. While insufficient sheet piling was available for the
first half of 2004, the supply has improved during the third quarter.
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 May,
2005, 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. Our fabricated products and rail transit
businesses continue to be slow and are experiencing more competitive pressure
due to the lack of new legislation. 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 September 30, 2004, was approximately $102.8 million.
The following table provides the backlog by business segment:
Backlog
-------------------------------------------------------------
September 30, December 31, September 30,
(In thousands) 2004 2003 2003
- ------------------------------------------------------------------------------------------------------
Rail Products $ 26,620 $ 37,529 $ 25,084
Construction Products 73,460 67,100 74,219
Tubular Products 2,687 1,035 1,731
- ------------------------------------------------------------------------------------------------------
Total $ 102,767 $ 105,664 $ 101,034
======================================================================================================
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
20
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
$579,000 as of September 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 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 third quarter of 2004 and 2003, the Company recognized
$31,000 of income and $327,000 of income, respectively, to adjust these
instruments to fair value. For the nine months ended September 2004 and 2003,
the Company recognized $406,000 of income and $217,000 of income, 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 rate of interest below the 5.00%
minimum annual interest rate on $22.0 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.
21
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 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 "believes," "intends,"
"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 6. 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.
22
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.
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, and filed as Exhibit 10.16 to Form 10-Q
for the quarter ended June 30, 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.
23
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.
10.33.2 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, filed
as Exhibit 10.46 to Form 10-Q for the quarter ended June 30, 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.
** Identifies management contract or compensatory plan or arrangement
required to be filed as an Exhibit.
24
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: November 12, 2004 By: /s/David J.Russo
----------------- --------------------
David J. Russo
Senior Vice President,
Chief Financial Officer and Treasurer
(Duly Authorized Officer of Registrant)