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, 2001
------------------
Commission File Number 0-10436
---------
L. B. Foster Company
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 25-13247733
-------------------------- -----------------
(State of Incorporation) (I. R. S. Employer Identification No.)
415 Holiday Drive, Pittsburgh, Pennsylvania 15220
---------------------------------------------- -------
(Address of principal executive offices) (Zip Code)
(412) 928-3417
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate the number of shares of each of the registrant's classes of common
stock as of the latest practicable date.
Class Outstanding at November 1, 2001
- ------------------------------- -------------------------------
Common Stock, Par Value $.01 9,466,126 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 Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. Other Information
- ----------------------------
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
2001 2000
- --------------------------------------------------------------------------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $1,613 $ -
Accounts and notes receivable:
Trade - net 58,224 56,472
Other 948 1,134
- --------------------------------------------------------------------------------
59,172 57,606
Inventories - net 42,293 59,811
Current deferred tax assets 2,055 2,055
Other current assets 763 373
Property held for resale 1,333 1,333
- --------------------------------------------------------------------------------
Total Current Assets 107,229 121,178
- --------------------------------------------------------------------------------
Property, Plant & Equipment - At Cost 63,146 58,499
Less Accumulated Depreciation (29,868) (25,476)
- --------------------------------------------------------------------------------
33,278 33,023
- --------------------------------------------------------------------------------
Property Held for Resale - 1,089
Other Assets:
Goodwill and other intangibles - net 6,280 6,772
Investments 10,884 9,423
Deferred tax assets 1,242 1,242
Other assets 3,427 4,420
- --------------------------------------------------------------------------------
Total Other Assets 21,833 21,857
- --------------------------------------------------------------------------------
TOTAL ASSETS $162,340 $177,147
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $994 $926
Short-term borrowings 500 6,500
Accounts payable - trade 30,274 33,008
Accrued payroll and employee benefits 2,892 3,503
Current deferred tax liabilities 1,947 1,947
Other accrued liabilities 3,607 3,817
- --------------------------------------------------------------------------------
Total Current Liabilities 40,214 49,701
- --------------------------------------------------------------------------------
Long-Term Borrowings 36,000 40,000
- --------------------------------------------------------------------------------
Other Long-Term Debt 2,809 3,484
- --------------------------------------------------------------------------------
Deferred Tax Liabilities 5,413 5,413
- --------------------------------------------------------------------------------
Other Long-Term Liabilites 1,202 1,190
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock 102 102
Paid-in capital 35,233 35,306
Retained earnings 46,151 45,995
Treasury stock (3,919) (4,009)
Accumulated other comprehensive loss (865) (35)
- --------------------------------------------------------------------------------
Total Stockholders' Equity 76,702 77,359
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $162,340 $177,147
================================================================================
See Notes to Condensed Consolidated Financial Statements.
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
Three Months Nine Months
Ended Ended
September 30, September 30,
- --------------------------------------------------------------------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Net Sales $75,884 $74,428 $212,248 $205,609
Cost of Goods Sold 66,125 64,269 187,014 176,899
- --------------------------------------------------------------------------------
Gross Profit 9,759 10,159 25,234 28,710
Selling and Admin-
istrative Expenses 7,315 7,993 22,791 23,351
Interest Expense 900 1,195 2,796 3,130
Other Income (203) (1,331) (620) (2,205)
- --------------------------------------------------------------------------------
8,012 7,857 24,967 24,276
- --------------------------------------------------------------------------------
Income From Continuing
Operations, Before
Income Taxes 1,747 2,302 267 4,434
Income Tax Expense 717 920 111 1,774
- --------------------------------------------------------------------------------
Income From Continuing
Operations 1,030 1,382 156 2,660
Income From Discontinued
Operations, Net of
Taxes 0 736 0 371
- --------------------------------------------------------------------------------
Net Income $1,030 $2,118 $156 $3,031
================================================================================
Basic and Diluted
Earnings Per Common
Share From:
Continuing Operations $0.11 $0.15 $0.02 $0.28
Discontinued Operations 0.00 0.08 0.00 0.04
- --------------------------------------------------------------------------------
Basic and Diluted
Earnings Per Common
Share $0.11 $0.23 $0.02 $0.32
================================================================================
See Notes to Condensed Consolidated Financial Statements.
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months
Ended September 30,
2001 2000
- --------------------------------------------------------------------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $156 $2,660
Adjustments to reconcile net income
to net cash provided (used) by
continuing operations:
Depreciation and amortization 4,234 3,828
Loss (gain) on sale of property,
plant and equipment 16 (766)
Change in operating assets and
liabilities:
Accounts receivable (1,548) (14,364)
Inventories 17,518 (12,862)
Other current assets (390) 145
Other noncurrent assets 224 2,004
Accounts payable - trade (2,734) 15,729
Accrued payroll and employee
benefits (611) 215
Other current liabilities (1,015) 81
Other liabilities 12 420
- --------------------------------------------------------------------------------
Net Cash Provided (Used) by Cont-
inuing Operations 15,862 (2,910)
Net Cash Provided by Discontinued
Operations 954
- --------------------------------------------------------------------------------
Net Cash Provided (Used) by Oper-
ating Activities 15,862 (1,956)
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property,
plant and equipment 216 1,690
Capital expenditures on property,
plant and equipment (2,938) (3,480)
Purchase of DM&E stock (800)
- --------------------------------------------------------------------------------
Net Cash Used by Investing Activities (3,522) (1,790)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) proceeds of revolv-
ing credit agreement borrowings (10,000) 4,915
Exercise of stock options 92 185
Treasury stock acquisitions (75) (796)
Repayment of long-term debt (709) (813)
- --------------------------------------------------------------------------------
Net Cash (Used) Provided by Fin-
ancing Activities (10,692) 3,491
- --------------------------------------------------------------------------------
Effect of exchange rate on cash (35) (11)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and
Cash Equivalents 1,613 (266)
Cash and Cash Equivalents at Begin-
ning of Period 0 1,558
- --------------------------------------------------------------------------------
Cash and Cash Equivalents at End of
Period $1,613 $1,292
================================================================================
Supplemental Disclosure of Cash Flow
Information:
Interest Paid $3,152 $3,097
================================================================================
Income Taxes Paid $695 $1,797
================================================================================
During the first nine months of 2001 and 2000, the Company financed certain
capital expenditures totaling $102,000 and $225,000, respectively, through the
execution of capital leases.
See Notes to Condensed Consolidated Financial Statements.
L. B. FOSTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
- -----------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all estimates and
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included, however, actual results could differ from
those estimates. The results of operations for these interim periods are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2001. 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, 2000.
2. ACCOUNTING PRINCIPLES
- ------------------------
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and reporting
standards for derivative financial instruments and hedging activities and
requires the transition adjustment from adoption to be reported in net income or
other comprehensive income, as appropriate, as the cumulative effect of a change
in accounting principle. In accordance with the transition provisions of SFAS
No. 133, the Company recorded a cumulative transition adjustment to decrease
other comprehensive income by approximately $48,000, net of related tax effects,
to recognize the fair value of its derivative instruments as of the date of
adoption. During the three months and nine months ended September 30, 2001,
unrealized net losses on derivative instruments of approximately $726,000 and
$763,000, respectively, net of related tax effects, were recorded in other
comprehensive income. See Note 11 Comprehensive Income (Loss) in the Notes to
Condensed Consolidated Financial Statements.
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 has a LIBOR-based interest rate collar
agreement, which expires in March 2006, with a notional value of $15.0 million,
a maximum annual interest rate of 5.60%, and a minimum annual interest rate of
5.00%. The counter-party to the collar agreement has the option, on March 6,
2005, to convert the $15.0 million note to a one-year fixed-rate instrument with
interest payable at an annual rate of 5.49%. The fair value of the collar at
September 30, 2001, which is designated as a cash flow hedge instrument, is a
$0.4 million liability and is classified within other current liabilities on the
Condensed Consolidated Balance Sheets. The Company also has a LIBOR-based
interest rate collar agreement, which became effective in April 2001 and expires
in April 2006, with a notional value of $10.0 million, a maximum annual interest
rate of 5.14%, and a minimum annual interest rate of 4.97%. The counter-party to
the collar agreement has the option, on April 18, 2004, to convert the $10.0
million note to a two-year fixed-rate instrument with interest payable at an
annual rate of 5.48%. The fair value of the collar at September 30, 2001, which
is designated as a cash flow hedge instrument, is less than a $0.3 million
liability and is classified within other current liabilities on the Condensed
Consolidated Balance Sheets. The Company also has an interest rate swap
agreement, which expires in December 2004, with a notional value of $3.3 million
at September 30, 2001 that is designed to fix the total interest rate at 7.42%.
The Company is obligated to pay additional interest on the swap if LIBOR exceeds
7.249%. The fair value of the swap at September 30, 2001 is a $0.1 million
liability and is classified within other current liabilities on the Condensed
Consolidated Balance Sheets. At the current fair value based on prevailing
interest rates as of September 30, 2001, the $0.8 million of other comprehensive
loss related to these derivatives will be reclassified into earnings, as the
underlying hedged items affect earnings, over the term of the agreements.
The Company is not subject to significant exposure to change in foreign currency
exchange rates. The Company does, however, hedge the cash flows of operations of
its Canadian subsidiary. The Company manages its exposures to changes in foreign
currency exchange rates on firm sales and purchase commitments by entering into
foreign currency forward contracts. The Company's risk management objective is
to reduce its exposure to the effects of changes in exchange rates on sales
revenue over the duration of the transaction. At September 30, 2001, the Company
had outstanding foreign currency forward contracts to purchase $0.345 million
Canadian for approximately $0.228 million US.
The Company recognizes all derivative instruments on the balance sheet at fair
value at the end of each quarter. 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. The amount of accumulated other comprehensive loss that
is expected to be reclassified into earnings over the next twelve months, based
on prevailing interest rates as of September 30, 2001, is $0.2 million, net of
related tax effects. To the extent that a change in an 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. For the quarter
and nine-month period ended September 30, 2001, hedge ineffectiveness was not
material.
New Accounting Pronouncements
- -----------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141)
and Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). These statements change the accounting for
business combinations, goodwill, and intangible assets.
SFAS 141 eliminates the pooling-of-interests method of accounting for business
combinations except for qualifying business combinations that were initiated
prior to July 1, 2001. SFAS 141 supersedes Accounting Principles Board Opinion
No. 16 (APB 16): however, certain purchase accounting guidance in APB 16, as
well as certain of its amendments and interpretations, have been carried forward
to SFAS 141. SFAS 141 changes the criteria to recognize intangible assets
separately from goodwill. The requirements of SFAS 141 are effective for any
business combination accounted for by the purchase method that is completed
after June 30, 2001.
Under SFAS 142, goodwill and indefinite lived intangible assets are no longer
amortized but are reviewed annually, or more frequently, if impairment
indicators arise, for impairment. Separable intangible assets that have finite
lives will continue to be amortized over their useful lives, with no maximum
life. The amortization provisions of SFAS 142 apply to goodwill and intangible
assets acquired after June 30, 2001. With respect to goodwill and intangible
assets acquired prior to July 1, 2001, companies are required to adopt SFAS 142
in their fiscal year beginning after December 15, 2001. Because of the different
transition dates for goodwill and intangible assets acquired on or before June
30, 2001, and those acquired after that date, pre-existing goodwill and
intangibles will be amortized during this transition period until adoption,
whereas new goodwill and indefinite lived intangible assets acquired after June
30, 2001 will not.
The Company is currently evaluating adoption of SFAS 142 and has not yet
determined the impact on the overall financial condition of the Company, if any,
that may result. Amortization of existing goodwill is $0.8 million, annually.
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, 2001 and
December 31, 2000 have been reduced by an allowance for doubtful accounts of
$(1,325,000) and $(1,564,000), respectively. Bad debt expense was $250,000 and
$58,000 for the nine- month periods ended September 30, 2001 and 2000,
respectively.
4. INVENTORIES
- --------------
Inventories of the Company at September 30, 2001 and December 31, 2000 are
summarized as follows in thousands:
September 30, December 31,
2001 2000
Finished goods $33,504 $41,618
Work-in-process 5,892 13,519
Raw materials 5,187 6,964
------------------ ------------------
Total inventories at current costs 44,583 62,101
(Less):
Current costs over LIFO
stated values (1,690) (1,690)
Inventory valuation reserve (600) (600)
------------------ ------------------
$42,293 $59,811
================== ==================
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. DISCONTINUED OPERATIONS
- --------------------------
In the fourth quarter of 1999, the Company made the decision to discontinue the
operations of the Monitor Group, a developer of portable mass spectrometers. In
September of 2000, the Company sold the assets of the Monitor Group for
$1,500,000 cash.
The nine months ended September 30, 2000 includes net income from discontinued
operations of approximately $371,000 which consists of a $900,000 gain (net of
tax) on the sale and an operating loss of approximately $529,000 (net of tax).
6. BORROWINGS
- -------------
In accordance with the original terms and conditions of the Company's revolving
credit agreement, the line of credit was reduced, during 2000, to $64,025,000
due to asset sales. The interest rate is, at the Company's option, based on the
Euro-bank rate (LIBOR), the domestic certificate of deposit rate (CD rate) or
the prime rate. The interest rates are established quarterly based upon cash
flow and the level of outstanding borrowings to debt as defined in the
agreement. Interest rates range from the LIBOR rate plus 0.575% to 1.8%, the CD
rate plus 0.575% to 1.8%, to the prime rate to prime plus 0.25%. Borrowings
under the agreement, which expires July 1, 2003, are secured by eligible
accounts receivable, inventory, and the pledge of the Company-held DM&E
Preferred Stock.
The agreement includes financial covenants requiring a minimum net worth, a
minimum level for the fixed charge coverage ratio, and a maximum level for the
consolidated total indebtedness to EBITDA ratio. The agreement also restricts
investments, indebtedness, and the sale of certain assets.
7. 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) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Numerator:
Numerator for basic and diluted earnings per
common share - net income
available to common stockholders:
Income from continuing operations $1,030 $1,382 $156 $2,660
Income from discontinued operations 736 371
- -----------------------------------------------------------------------------------------------------------------
Net Income $1,030 $2,118 $156 $3,031
=================================================================================================================
Denominator:
Weighted average shares 9,435 9,456 9,427 9,502
- -----------------------------------------------------------------------------------------------------------------
Denominator for basic earnings
per common share 9,435 9,456 9,427 9,502
Effect of dilutive securities:
Contingent issuable shares pursuant to
the Company's Incentive
Compensation Plans 55 49 20 56
Employee stock options 33 6 36 27
- -----------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 88 55 56 83
Denominator for diluted earnings
per common share - adjusted weighted
average shares and assumed conversions 9,523 9,511 9,483 9,585
=================================================================================================================
Basic earnings per common share:
Continuing operations $0.11 $0.15 $0.02 $0.28
Discontinued operations 0.00 0.08 0.00 0.04
- -----------------------------------------------------------------------------------------------------------------
Basic earnings per common share $0.11 $0.23 $0.02 $0.32
=================================================================================================================
Diluted earnings per common share:
Continuing operations $0.11 $0.15 $0.02 $0.28
Discontinued operations 0.00 0.08 0.00 0.04
- -----------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $0.11 $0.23 $0.02 $0.32
=================================================================================================================
8. COMMITMENTS AND CONTINGENT LIABILITIES
- -----------------------------------------
The Company is subject to laws and regulations relating to the protection of the
environment and the Company's efforts to comply with environmental regulations
may have an adverse effect on the Company's future earnings. In the opinion of
management, compliance with the present environmental protection laws will not
have a material adverse effect on the financial condition, results of
operations, cash flows, competitive position, or capital expenditures of the
Company.
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position of the Company.
At September 30, 2001, the Company had outstanding letters of credit and bankers
acceptance of approximately $3,703,000.
9. 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 Nine Months Ended
September 30, 2001 September 30, 2001
------------------------------------------- -------------------------------------------
Net Segment Net Segment
(in thousands) Sales Profit/Loss Sales Profit/(Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
Rail products $38,604 ($469) $109,788 ($3,170)
Construction products 31,350 1,096 86,073 1,303
Tubular products 5,930 1,012 16,387 2,290
- ------------------------------------------------------------------------------------------------------------------------------------
Total $75,884 $1,639 $212,248 $423
====================================================================================================================================
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
------------------------------------------- -------------------------------------------
Net Segment Net Segment
(in thousands) Sales Profit Sales Profit/(Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
Rail products $38,862 $415 $107,420 ($283)
Construction products 30,148 1,322 83,096 3,684
Tubular products 5,381 527 14,915 1,249
- ------------------------------------------------------------------------------------------------------------------------------------
Total $74,391 $2,264 $205,431 $4,650
====================================================================================================================================
Segment profits, as shown above, include internal cost of capital charges for
assets used in the segment at a rate of, generally, 1% per month. The following
table provides a reconciliation of reportable net profit/(loss) to the Company's
consolidated total:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
(in thousands) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
Net Profit
- -------------------------------------------------------------------------------------------------------------------------------
Total for reportable segments $1,639 $2,264 $423 $4,650
Cost of capital for reportable segments 3,364 3,156 9,960 9,054
Interest expense (900) (1,195) (2,796) (3,130)
Other income 203 1,331 620 2,205
Corporate expense and other unallocated charges (2,559) (3,254) (7,940) (8,345)
- -------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations,
before income taxes $1,747 $2,302 $267 $4,434
===============================================================================================================================
There has been no change in the measurement of segment profit/(loss) from
December 31, 2000. The Company's emphasis on improving working capital
utilization has resulted in an inventory reduction of approximately $8,000,000
in the rail segment and $8,400,000 in the construction segment from December 31,
2000.
10. RESTRUCTURING, IMPAIRMENT, AND OTHER SPECIAL CHARGES
- --------------------------------------------------------
Results for the first nine months of 2001 include pretax charges of $1,506,000
related to the Company's previously announced plan to improve its financial
performance by consolidating sales and administrative functions, and plant
operations. These charges consist of the following: restructuring costs of
$472,000; asset impairments of $606,000, and other related costs of $428,000.
Results for the first nine months of 2000 include the following pretax charges:
restructuring costs of $1,001,000, asset impairments of $60,000 and other
personnel related costs of $165,000. The total pretax charges recorded to date
associated with the shutdown and relocation of Company operations are
approximately $2,855,000, with a current planned estimate of $3,200,000 by its
fiscal 2001 year-end. The costs accrued for the implemented programs were based
upon management estimates using the latest information available at the time
that the accrual was established. Substantially all components of the
restructuring charges were paid in the period incurred.
11. COMPREHENSIVE INCOME (LOSS)
- -------------------------------
Comprehensive income (loss) represents net income plus certain stockholders'
equity changes not reflected in the Condensed Consolidated Statements of Income.
The components of comprehensive income (loss), net of tax, were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
(in thousands) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Net Income $1,030 $2,118 $156 $3,031
Cumulative transition adjustment of a change in
accounting principle (SFAS No. 133) 0 0 (48) 0
Unrealized derivative losses on cash flow hedges
(SFAS No. 133) (726) 0 (763) 0
Foreign currency translation losses (16) (7) (19) (18)
- ------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $288 $2,111 ($674) $3,013
==================================================================================================================
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
2001 2000 2001 2000
---------------------------------- ----------------------------------
(Dollars in thousands)
Net Sales:
Rail Products $38,604 $38,862 $109,788 $107,420
Construction Products 31,350 30,148 86,073 83,096
Tubular Products 5,930 5,381 16,387 14,915
Other 0 37 0 178
---------------------------------- ----------------------------------
Total Net Sales $75,884 $74,428 $212,248 $205,609
================================== ==================================
Gross Profit:
Rail Products $3,773 $4,534 $9,791 $13,133
Construction Products 4,665 4,856 12,189 13,717
Tubular Products 1,469 990 3,940 2,623
Other (148) (221) (686) (763)
---------------------------------- ----------------------------------
Total Gross Profit 9,759 10,159 25,234 28,710
---------------------------------- ----------------------------------
Expenses:
Selling and administrative expenses 7,315 7,993 22,791 23,351
Interest expense 900 1,195 2,796 3,130
Other income - net (203) (1,331) (620) (2,205)
---------------------------------- ----------------------------------
Total Expenses 8,012 7,857 24,967 24,276
---------------------------------- ----------------------------------
Income From Continuing Operations
Before Income Taxes 1,747 2,302 267 4,434
Income Tax Expense 717 920 111 1,774
---------------------------------- ----------------------------------
Income From Continuing Operations 1,030 1,382 156 2,660
Income From Discontinued Operations,
Net of Taxes 0 736 0 371
---------------------------------- ----------------------------------
Net Income $1,030 $2,118 $156 $3,031
================================== ==================================
Gross Profit %:
Rail Products 9.8% 11.7% 8.9% 12.2%
Construction Products 14.9% 16.1% 14.2% 16.5%
Tubular Products 24.8% 18.4% 24.0% 17.6%
Total Gross Profit 12.9% 13.6% 11.9% 14.0%
================================== ==================================
Third Quarter 2001 Results of Operations
- ----------------------------------------
Income from continuing operations for the third quarter of 2001 was $1.0 million
or $0.11 per diluted share. This compares to income from continuing operations
of $1.4 million or $0.15 per diluted share for last year's third quarter, which
included a $0.63 million or $0.07 per share net gain from the sale of property
and gain on investments. Last year's third quarter also included a net gain of
$0.74 million or $0.08 per share from discontinued operations, resulting from
the sale of Monitor Group. For the three months ended September 30, 2001,
revenues were $75.9 million versus $74.4 million for the same period last year.
Rail products' 2001 third quarter net sales remained relatively the same as in
the year earlier quarter. Construction products' net sales increased 4.0% to
$31.4 million in the third quarter of 2001, as a result of increased shipments
of bridge and building products. Tubular products' sales increased 10.2% from
the same quarter of 2000 as sales of threaded products improved. Changes in net
sales are generally the result of changes in volume rather than changes in
prices.
The gross profit margin for the total Company was 12.9% in the third quarter of
2001 and 13.6% in the 2000 third quarter. The pretax charges related to the
Company's plan to improve its financial performance by consolidating sales and
administrative functions and plant operations had no effect on margins in the
2001 and 2000 third quarters. Rail products' profit margin declined 1.9
percentage points primarily due to the competitive environment created by the
spending cutbacks of the Class I railroads. Construction products' margins
declined 1.2 percentage points, resulting from continuing price deterioration in
the H-bearing pile market. Tubular products' 6.4 percentage point increase in
gross margin is the result of continued improvements in productivity and an
emphasis on manufacturing excellence.
Selling and administrative expenses declined 9.3% from the third quarter of
2000. Other income in the third quarter of 2001 includes $0.2 million accrued
dividend income on the DM&E Preferred Stock. Other income in the same period of
2000 included $0.7 million from the sale of a Houston, TX property, $0.4 million
income on the collection of certain notes receivable, and $0.2 million accrued
dividend income on the DM&E Preferred Stock. The provision for income taxes was
recorded at 41% and 40% in the third quarters of 2001 and 2000, respectively.
First Nine Months of 2001 Results of Operations
- -----------------------------------------------
Income from continuing operations for the first nine months of 2001 was $0.2
million or $0.02 per share on net sales of $212.2 million. This compares to
income from continuing operations in the first nine months of 2000 of $2.7
million or $0.28 per share on net sales of $205.6 million. Net income from
discontinued operations in the first nine months of 2000 included operating
losses of $0.5 million (net of tax) and a $0.9 million gain (net of tax) on the
sale of the Monitor Group.
The current year results include the following pretax charges: restructuring
costs of $0.5 million, asset impairments of $0.6 million, and other related
costs of $0.4 million. These charges, totaling $1.5 million ($0.09 per share,
net of tax) are related to the Company's previously announced plan to improve
its financial performance. This compares to pretax charges of $1.2 million
($0.08 per share, net of tax) related to the plan through September 2000 which
consist of restructuring costs of $1.0 million, asset impairments of $0.06
million and other charges of $0.2 million. The total pretax charges associated
with the shutdown and relocation of Company operations recorded to date were
$2.9 million of the $3.2 million planned estimate.
Rail products' net sales for the first nine months of 2001 were $109.8 million,
an increase of 2.2% over last year's sales for the same period. This is
primarily due to an increase in sales of concrete ties and new standard rail, as
well as an increase in rail project work. Construction products' year to date
net sales increased 3.6% over the same period last year as sales volumes of
bridge decking and buildings increased. Tubular products' net sales increased
9.9%, primarily due to an improved pipe coating market, as demand for oil and
gas pipelines has increased.
The gross margin percentage for the total Company was 11.9% in the first nine
months of 2001 and 14.0% in the same period of 2000. The pretax charges
discussed above reduced the 2001 gross margin percentage by 0.4 and had no
effect on gross margin percentages in 2000. Rail products' gross margin
percentage declined in the first nine months of 2001 to 8.9% from 12.2% in the
year earlier quarter. Excluding the pretax charges discussed above, the gross
margin percentage for rail products through September 2001 was 9.5%. Class I
railroad spending cutbacks continue to have a negative impact on margins. In
addition, pricing weakness in the used rail market combined with a Company
effort to reduce inventory, particularly used rail, adversely impacted gross
margins. The gross margin percentage for construction products declined 2.3
percentage points to 14.2% from a year ago primarily due to pricing weakness in
the bearing pile market. Tubular products' gross margin percentage in the first
nine months of 2001 increased 6.5 percentage points to 24.0% from the same
period last year. This increase in margin is a result of greater efficiencies at
the Birmingham, AL coated pipe facility.
Selling and administrative expenses declined 2.5% from last year. Other income
in 2001 includes $0.7 million accrued dividend income on the DM&E Preferred
Stock. Other income in 2000 included a gain of $0.8 million on the sale of
property in Langfield, TX, accrued dividend income of $0.6 million on the DM&E
Preferred Stock, and $0.6 million in DM&E interest income. The provision for
income taxes was recorded at 41% and 40% in 2001 and 2000, respectively.
Liquidity and Capital Resources
- -------------------------------
The Company generates internal cash flow from the sale of inventory and the
collection of accounts receivable. During the first nine months of 2001, the
average turnover rate for accounts receivable was higher than during the same
period in 2000. The average inventory turnover rate for the first nine months of
2001 was slightly higher than during the same period in 2000. Working capital at
September 30, 2001 was $67.0 million compared to $71.5 million at December 31,
2000.
Management's emphasis on improving working capital utilization has resulted in a
$16.2 million reduction in inventory and a $7.0 million reduction in trade
receivables since September 30, 2000. These improvements have allowed the
Company to reduce debt by $10.0 million in 2001.
During the first quarter of 1999, the Company announced a program to purchase up
to 1,000,000 shares of its common stock. During 2001, the Company purchased
25,000 shares at a cost of $75,000. Purchases under this program total 473,398
shares at a cost of $2.3 million.
The Company had capital expenditures of approximately $2.9 million in 2001.
Capital expenditures in 2001 are expected to be at similar levels as during the
previous year and are anticipated to be funded by cash flow from operations and
available external financing sources.
Total revolving credit agreement borrowings at September 30, 2001 were $36.5
million, a decrease of $10.0 million from December 31, 2000. At September 30,
2001 the Company had $19.2 million in unused borrowing commitment. Outstanding
letters of credit and bankers acceptance at September 30, 2001 were $3.7
million. Management believes its internal and external sources of funds are
adequate to meet anticipated needs.
The Company's revolving credit agreement includes financial covenants requiring
a minimum net worth, a minimum level for the fixed charge coverage ratio, and a
maximum level for the consolidated total indebtedness to EBITDA ratio. The
agreement also restricts investments, indebtedness, and the sale of certain
assets.
Dakota, Minnesota & Eastern Railroad
- ------------------------------------
The Company maintains a significant investment in the Dakota, Minnesota &
Eastern Railroad Corporation (DM&E), a privately held, regional railroad, which
operates over 1,100 miles of track in five states.
At September 30, 2001, the Company's investment was comprised of, $0.2 million
of DM&E common stock, $1.5 million of the Series B Preferred Stock and warrants,
$6.0 million of the Series C Preferred Stock and warrants, and $0.8 million of
DM&E Preferred Series C-1 Stock and warrants. In addition, the Company has a
receivable for accrued dividend income on Preferred Stock of $2.2 million. On a
fully diluted basis, the Company owns approximately 16% of the DM&E's common
stock.
In June 1997, the DM&E announced its plan to build an extension from the DM&E's
existing line into the low sulfur coal market of the Powder River Basin in
Wyoming and to rebuild approximately 600 miles of its existing track (the
Project). The estimated cost of this project is expected to be in excess of $1.5
billion.
The Project is subject to approval by the Surface Transportation Board (STB). In
December 1998, the STB made a finding that the DM&E had satisfied the
transportation aspects of applicable regulations. The STB announced on October
30, 2001 that they had completed the final Environmental Impact Statement (EIS)
for the DM&E's proposed Powder River Basin expansion project, and that the final
EIS should be published on November 19, 2001.
The DM&E has stated that it could repay project debt and cover its operating
costs if it captures a 5% market share in the Powder River Basin. If the Project
proves to be viable, management believes that the value of the Company's
investment in the DM&E could increase dramatically.
Other Matters
- -------------
In October 2001, the Company implemented additional reductions in administrative
and sales support related to the previously mentioned restructuring. Severance
costs are expected to be approximately $0.25 million. Expectations are that
these reductions will produce a cost savings of $1.2 million annually.
The Company has agreed to sell its Doraville, GA property for approximately $3.7
million. Although the sale is subject to various contingencies, it is expected
to close late in the fourth quarter of 2001.
In September 2001, the Company entered into an agreement with Concrete
Solutions, Inc. (CSI) to manufacture and market CSI's patented SoundSorb(R)
acoustical material as part of the Company's line of engineered concrete
products in North America. Production of the new product will be undertaken at
the Company's locations across the country, including the new concrete products
manufacturing facility in Hillsboro, TX.
The contemplated sale of the Company's 65-acre property in Houston, TX did not
materialize as expected in the second quarter of 2001. Management continues to
evaluate the use of this property.
During the first quarter of 2001, the Company decided to expand its concrete
products operations, primarily the fabrication of precast buildings. To better
serve the southwest and southern markets, the Company entered into agreements to
lease land, a building and production equipment in Hillsboro, TX. Production at
this facility commenced in October of 2001.
In August 1998, the Company purchased assets primarily comprised of intellectual
properties related to the business of supplying rail signaling and communication
devices for approximately $1.7 million. The Company shipped limited product in
the second quarter of 2001. Management continues to evaluate the performance of
this operation.
The rail segment of the business depends on one source, in which the Company
currently maintains a 30% ownership position, for fulfilling certain trackwork
contracts. At September 30, 2001, the Company had inventory progress payments of
$6.7 million committed to this supplier. If, for any reason, this supplier is
unable to perform, the Company could experience a negative short-term effect on
earnings.
The Company's CXT subsidiary and Allegheny Rail Products division are dependent
on one Class I railroad customer for a significant portion of their business. In
addition, much of the Company's business depends on governmental funding of
infrastructure projects. Significant changes in the level of government funding
of these projects could have a favorable or unfavorable impact on the operating
results of the Company. Additionally, governmental actions concerning taxation,
tariffs, the environment or other matters could impact the operating results of
the Company. The Company's operating results may also be affected by adverse
weather conditions.
Management continues to evaluate the overall performance of its operations. A
decision to terminate an existing operation could have a material adverse effect
on near-term earnings but would not be expected to have a material adverse
effect on the financial condition of the Company.
Outlook
- -------
The Company is TXI Chaparral's exclusive North American distributor of steel
sheet piling and H-bearing pile. Shipments of H-bearing pile began in the third
quarter of 1999 from Chaparral's Petersburg, VA facility. Sheet piling
production commenced at this facility in late March of 2001. Significant
quantities of steel sheet piling were produced in the third quarter, but
unfortunately, it was too late to have any impact on the quarter. The Company
anticipates a full complement of sheet piling products available over the next
six to eight quarters and expects this to have a positive effect on earnings.
Although backlog is not necessarily indicative of future operating results,
total Company backlog at September 30, 2001, was approximately $137.5 million.
The following table provides the backlog by business segment:
Backlog
------------------------------------------------------
September 30, December 31, September 30,
(In thousands) 2001 2000 2000
- --------------------------------------------------------------------------------
Rail Products $76,621 $86,351 $95,642
Construction Products 57,771 52,779 52,717
Tubular Products 3,150 2,219 2,252
- --------------------------------------------------------------------------------
Total $137,542 $141,349 $150,611
================================================================================
The reduction in rail segment backlog from a year ago reflects the effect of CXT
long-term production contracts. Total shipments under these contracts were $15.6
million since October 1, 2000.
Market Risk and Risk Management Policies
- ----------------------------------------
On January 1, 2001 the Company adopted the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This statement established
accounting and reporting standards for 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, as
well as, variable interest rate swaps. One interest rate collar agreement, which
expires in March 2006, has a notional value of $15.0 million with a maximum
annual interest rate of 5.60%, and a minimum annual interest rate of 5.00%, and
is based on LIBOR. The counter-party to the collar agreement has the option, on
March 6, 2005, to convert the $15.0 million note to a one-year fixed-rate
instrument with interest payable at an annual rate of 5.49%. A second interest
rate collar agreement, which expires in April 2006, has a notional value of
$10.0 million with a maximum annual interest rate of 5.14%, and a minimum annual
interest rate of 4.97%, and is based on LIBOR. The counter-party to the collar
agreement has the option, on April 18, 2004, to convert the $10.0 million note
to a two-year fixed-rate instrument with the interest payable at an annual rate
of 5.48%. The interest rate swap agreement, which expires in December 2004, has
a notional value of $3.3 million at September 30, 2001 and is designed to fix
the total interest rate at 7.42%. The Company is obligated to pay additional
interest on the swap if LIBOR exceeds 7.249%.
The Company is not subject to significant exposure to change in foreign currency
exchange rates. The Company does, however, hedge the cash flows of operations of
its Canadian subsidiary. The Company manages its exposures to changes in foreign
currency exchange rates on firm sales and purchase commitments by entering into
foreign currency forward contracts. The Company's risk management objective is
to reduce its exposure to the effects of changes in exchange rates on sales
revenue over the duration of the transaction. At September 30, 2001, the Company
had outstanding foreign currency forward contracts to purchase $0.345 million
Canadian for approximately $0.228 million US.
During the three months and nine months ended September 30, 2001, unrealized net
losses on derivative instruments of approximately $726,000 and $763,000,
respectively, net of related tax effects, were recorded in other comprehensive
income.
The Company may enter into additional swaps or other financial instruments to
set all or a portion of its borrowings at fixed rates.
Forward-Looking Statements
- --------------------------
Statements relating to the potential value or viability of the DM&E or the
Project, or management's belief as to such matters, are forward-looking
statements and are subject to numerous contingencies and risk factors. The
Company has based its assessment on information provided by the DM&E and has not
independently verified such information. In addition to matters mentioned above,
factors which can adversely affect the value of the DM&E, its ability to
complete the Project or the viability of the Project include the following:
labor disputes, any inability to obtain necessary environmental and government
approvals for the Project in a timely fashion, the DM&E's ability to continue to
obtain interim funding to finance the project through the approval process, the
expense of environmental mitigation measures required by the Surface
Transportation Board, an inability to obtain financing for the Project,
competitor's response to the Project, market demand for coal or electricity and
changes in environmental laws and regulations.
The Company wishes to caution readers that various factors could cause the
actual results of the Company to differ materially from those indicated by
forward-looking statements made from time to time in news releases, reports,
proxy statements, registration statements and other written communications
(including the preceding sections of this Management's Discussion and Analysis),
as well as oral statements made from time to time by representatives of the
Company. Additional delays in Chaparral's production of steel sheet piling
would, for example, have an adverse effect on the Company's performance. The
estimate for nonrecurring charges through 2001 are subject to change as the
Company further develops its plans. Except for historical information, matters
discussed in such oral and written communications are forward-looking statements
that involve risks and uncertainties, including but not limited to general
business conditions, the availability of material from major suppliers, the
impact of competition, the seasonality of the Company's business, taxes,
inflation and governmental regulations. Sentences containing words such as
"anticipates", "expects", or "will" generally should be considered
forward-looking statements.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 8, "Commitments and Contingent Liabilities", to the Condensed
Consolidated Financial Statements.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
Unless marked by an asterisk, all exhibits are incorporated by reference:
3.1 Restated Certificate of Incorporation as amended to date, filed as
Appendix B to the Company's April 17, 1998 Proxy Statement.
3.2 Bylaws of the Registrant, as amended to date, filed as Exhibit 3B to
Form 8-K on May 21, 1997.
4.0 Rights Amendment, dated as of May 14, 1998 between L. B.
Foster Company and American Stock Transfer & Trust
Company, including the form of Rights Certificate and the
Summary of Rights attached thereto, filed as Exhibit 4B to
Form 8-A dated May 23, 1997.
4.0.1 Amended Rights Agreement dated as of May 14, 1998 between L. B.
Foster Company and American Stock Transfer & Trust Company, filed as
Exhibit 4.0.1 to Form 10-Q for the quarter ended June 30, 1998.
4.1 Third Amended and Restated Loan Agreement by and among the
Registrant and Mellon Bank, N. A., PNC Bank, National
Association and First Union National Bank, Dated as of June
30, 1999 and filed as Exhibit 4.1 to Form 10-Q for the
quarter ended June 30, 1999.
10.12 Lease between CXT Incorporated and Pentzer Development
Corporation, dated April 1, 1993, filed as Exhibit 10.12 to
Form 10-K for the year ended December 31, 1999.
10.12.1 Amendment dated March 12, 1996 to lease between CXT
Incorporated and Pentzer Corporation, filed as Exhibit
10.12.1 to Form 10-K for the year ended December
31, 1999.
10.13 Lease between CXT Incorporated and Crown West Realty, L. L. C.,
dated December 20, 1996, filed as Exhibit 10.13 to Form 10-K for the
year ended December 31, 1999.
10.14 Lease between CXT Incorporated and Pentzer Development
Corporation, dated November 1, 1991 and filed as Exhibit
10.14 to Form 10-K for the year ended December 31, 1999.
10.15 Lease between CXT Incorporated and Union Pacific Railroad
Company, dated February 13, 1998, and filed as Exhibit 10.15
to Form 10-K for the year ended December 31, 1999.
10.16 Lease between Registrant and Greentree Buildings Associates
for Headquarters office, dated as of June 9, 1986, as
amended to date, filed as Exhibit 10.16 to Form 10-K for the
year ended December 31, 1988.
10.16.1 Amendment dated June 19, 1990 to lease between Registrant
and Greentree Buildings Associates, filed as Exhibit 10.16.1
to Form 10-Q for the quarter ended June 30, 1990.
10.16.2 Amendment dated May 29, 1997 to lease between Registrant and
Greentree Buildings Associates, filed as Exhibit 10.16.2 to
Form 10-Q for the quarter ended June 30, 1997.
10.17 Lease between Registrant and Hillsboro Loan Investors, L. P. for
property located in Hill County, TX, dated February 14, 2001, filed
as Exhibit 10.17 to Form 10-K for the year ended December 31, 2000.
10.19 Lease between Registrant and American Cast Iron Pipe Company for
pipe-coating facility in Birmingham, AL dated December 11, 1991,
filed as Exhibit 10.19 to form 10-K for the year ended December 31,
1991.
10.19.1 Amendment to Lease between Registrant and American Cast Iron
Pipe Company for pipe coating facility in Birmingham, AL,
dated November 15, 2000.
10.20 Asset Purchase Agreement, dated June 5, 1998 by and among
the Registrant and Northwest Pipe Company, filed as Exhibit
10.20 to Form 8-K on June 18, 1998.
10.21 Stock Purchase Agreement, dated June 3, 1999, by and among
the Registrant and the shareholders of CXT Incorporated,
filed as Exhibit 10.0 to Form 8-K on July 14, 1999.
10.33.2 Amended and Restated 1985 Long-Term Incentive Plan, as
amended and restated February 26, 1997, filed as Exhibit
10.33.2 to Form 10-Q for the quarter ended June 30, 1997. **
10.34 Amended and Restated 1998 Long-Term Incentive Plan, as
amended and restated February 2, 2001, filed as Exhibit
10.34 to Form 10-K for the year ended December 31, 2000. **
10.45 Medical Reimbursement Plan, filed as Exhibit 10.45 to Form 10-K
for the year ended December 31, 1992. **
10.46 Leased Vehicle Plan, as amended and restated, filed as Exhibit
10.46 to form 10-K for the year ended December 31, 2000. **
10.50 L.B. Foster Company 2001 Incentive Compensation Plan, filed
as Exhibit 10.50 to Form 10-K for the year ended December
31, 2000. **
10.51 Supplemental Executive Retirement Plan, filed as Exhibit 10.51 to
Form 10-K for the year ended December 31, 1994. **
19 Exhibits marked with an asterisk are filed herewith.
** Identifies management contract or compensatory plan or
arrangement required to be filed as an Exhibit.
b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the nine-month
period ended September 30, 2001.
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 13, 2001 By /s/Lee B. Foster
- ------------------------ --------------------------
Lee B. Foster II
Chairman of the Board
and Chief Executive Officer
(Duly Authorized Officer of Registrant)