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: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, (in thousands, except earnings per share) 2001 2000 2001 2000 - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 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 ================================================================================================================= </TABLE> 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: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, 2001 September 30, 2001 ------------------------------------------- ------------------------------------------- Net Segment Net Segment (in thousands) Sales Profit/Loss Sales Profit/(Loss) - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> 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 ==================================================================================================================================== </TABLE> <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, 2000 September 30, 2000 ------------------------------------------- ------------------------------------------- Net Segment Net Segment (in thousands) Sales Profit Sales Profit/(Loss) - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> 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 ==================================================================================================================================== </TABLE> 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: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, --------------------------------- --------------------------------- (in thousands) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 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 =============================================================================================================================== </TABLE> 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: <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 (in thousands) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> 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 ================================================================================================================== </TABLE>
Management's Discussion and Analysis of Financial Condition and Results of Operations <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------- ---------------------------------- 2001 2000 2001 2000 ---------------------------------- ---------------------------------- (Dollars in thousands) <S> <C> <C> <C> <C> 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% ================================== ================================== </TABLE>
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)