UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended June 30, 1999 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 August 3, 1999 Common Stock, Par Value $.01 9,580,640 Shares
L.B. FOSTER COMPANY AND SUBSIDIARIES INDEX PART I. Financial Information Page Item 1. Financial Statements: Condensed Consolidated Balance Sheets 2 Condensed Consolidated Statements of Income 3 Condensed Consolidated Statements of Cash Flows 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. Other Information Item 1. Legal Proceedings 18 Item 4. Results of Votes of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 19 Signature 21
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS L.B. FOSTER COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) June 30, December 31, 1999 1998 - -------------------------------------------------------------------------------- ASSETS (unaudited) Current Assets: Cash and cash equivalents $ 1,160 $ 874 - -------------------------------------------------------------------------------- Accounts and notes receivable: Trade 57,870 46,510 Other 1,002 801 - -------------------------------------------------------------------------------- 58,872 47,311 - -------------------------------------------------------------------------------- Inventories 45,771 36,418 Current deferred tax assets 115 Other current assets 1,076 614 Property held for resale 4,604 - -------------------------------------------------------------------------------- Total Current Assets 111,598 85,217 - -------------------------------------------------------------------------------- Property, Plant & Equipment - at cost 53,423 43,573 Less Accumulated Depreciation (29,366) (23,128) - -------------------------------------------------------------------------------- 24,057 20,445 - -------------------------------------------------------------------------------- Property Held for Resale 615 615 Other Assets: Goodwill and intangibles 17,560 5,666 Investments 8,231 1,693 Other assets 4,279 5,798 - -------------------------------------------------------------------------------- Total Other Assets 30,070 13,157 - -------------------------------------------------------------------------------- TOTAL ASSETS $ 166,340 $ 119,434 ================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt $ 944 $ 1,098 Short-term borrowings 18,165 2,275 Accounts payable 22,971 19,667 Accrued payroll and employee benefits 3,630 4,498 Current deferred tax liabilities 562 334 Other accrued liabilities 528 2,454 - -------------------------------------------------------------------------------- Total Current Liabilities 46,800 30,326 - -------------------------------------------------------------------------------- Long-Term Borrowings 40,000 10,000 Other Long-Term Debt 3,623 3,829 Deferred Tax Liabilities 678 678 Other Long-Term Liabilities 1,403 1,107 Stockholders' Equity: Common stock 102 102 Paid-in capital 35,377 35,431 Retained earnings 41,700 40,002 Treasury stock (3,364) (2,046) Accumulated other comprehensive income 21 5 - -------------------------------------------------------------------------------- Total Stockholders' Equity 73,836 73,494 - -------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 166,340 $ 119,434 ================================================================================ 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 Six Months Ended Ended June 30, June 30, - -------------------------------------------------------------------------------- 1999 1998 1999 1998 - -------------------------------------------------------------------------------- (unaudited) Net Sales $ 58,743 $ 58,876 $112,526 $108,217 - -------------------------------------------------------------------------------- Costs and Expenses: Cost of Goods Sold 50,154 49,953 97,093 92,200 Selling and Administrative Expenses 6,510 6,278 12,550 11,934 Interest Expense 523 479 921 1,069 Other Income (297) (1,070) (657) (1,403) - -------------------------------------------------------------------------------- 56,890 55,640 109,907 103,800 - -------------------------------------------------------------------------------- Income Before Income Taxes 1,853 3,236 2,619 4,417 Income Tax Expense 615 1,295 921 1,770 - -------------------------------------------------------------------------------- Net Income $ 1,238 $ 1,941 $ 1,698 $ 2,647 ================================================================================ Basic Earnings Per Share $ 0.12 $ 0.19 $ 0.17 $ 0.26 ================================================================================ Diluted Earnings Per Share $ 0.12 $ 0.19 $ 0.17 $ 0.26 ================================================================================ Cash Dividend per Common Share $ - $ - $ - $ - ================================================================================ See Notes to Condensed Consolidated Financial Statements.
L.B. Foster Company and Subsidiaries Condensed Consolidated Statements of Cash Flows (In Thousands) Six Months Ended June 30, - -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Cash Flows from Operating Activities: (unaudited) Net income $ 1,698 $ 2,647 Adjustments to reconcile net income to net cash provided (used) by operating activities: Deferred income taxes 369 Depreciation and amortization 1,473 1,534 Loss (gain) on sale of property, plant & equipment 21 (1,218) Change in operating assets and liabilities: Accounts receivable (1,572) 2,767 Inventories (7,427) (3,547) Property held for resale (3) 205 Other current assets (303) 59 Other non-current assets 175 (404) Accounts payable - trade (891) 6,977 Accrued payroll and employee benefits (1,565) 804 Other current liabilities (1,926) 902 Other liabilities 296 (108) - -------------------------------------------------------------------------------- Net Cash (Used) Provided by Operating Activities (10,024) 10,987 - -------------------------------------------------------------------------------- Cash Flows from Investing Activities: Proceeds from sale of property, plant and equipment 5 489 Proceeds from sale of Fosterweld 7,258 Capital expenditures on property, plant and equipment (1,497) (1,048) Purchase of DM&E stock (6,000) Acquisition of CXT (17,389) - -------------------------------------------------------------------------------- Net Cash (Used) Provided by Investing Activities (24,881) 6,699 - -------------------------------------------------------------------------------- Cash Flows from Financing Activities: Proceeds (repayments) from issuance of revolving credit agreement borrowings 45,890 (18,691) CXT debt repayment (8,845) Proceeds from Industrial Revenue Bond 2,045 Exercise of stock options and stock awards 329 308 Treasury stock acquisitions (1,702) (694) Repayments of long-term debt (491) (690) - -------------------------------------------------------------------------------- Net Cash Provided (Used) by Financing Activities 35,181 (17,722) - -------------------------------------------------------------------------------- Effect of exchange rate on cash 10 Net Increase (Decrease) in Cash and Cash Equivalents 286 (36) Cash and Cash Equivalents at Beginning of Period 874 1,156 - -------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Period $ 1,160 $ 1,120 ================================================================================ Supplemental Disclosures of Cash Flow Information: Interest Paid $ 948 $ 1,176 ================================================================================ Income Taxes Paid $ 1,767 $ 815 ================================================================================ During 1999, the Company financed the purchase of certain capital expenditures and maint. agreements totaling $246,000 through the issuance of capital leases. During the first half of 1998, no capital expenditures were financed through 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, 1999. 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, 1998. 2. ACCOUNTING PRINCIPLES - ------------------------ Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998. This statement establishes accounting and reporting standards for derivative financial instruments and hedging activities. This statement will be adopted by the Company in 2001 and is not expected to have a material effect on the consolidated financial statements. 3. ACCOUNTS RECEIVABLE - ---------------------- Credit is extended on an evaluation of the customer's financial condition and, generally, collateral is not required. Credit terms are consistent with industry standards and practices. Trade accounts receivable at June 30, 1999 and December 31, 1998 have been reduced by an allowance for doubtful accounts of $(1,473,000) and $(1,438,000), respectively. Bad debt expense was $42,000 and $104,000 for the six month periods ended June 30, 1999 and 1998, respectively. 4. INVENTORIES - -------------- Inventories of the Company at June 30, 1999 and December 31, 1998 are summarized as follows in thousands: June 30, December 31, 1999 1998 - -------------------------------------------------------------------------------- Finished goods $ 36,872 $ 26,877 Work-in-process 6,459 7,779 Raw materials 5,244 4,546 - -------------------------------------------------------------------------------- Total inventories at current costs: 48,575 39,202 (Less): Current costs over LIFO stated values (2,204) (2,184) Reserve for decline in market value of inventories (600) (600) - -------------------------------------------------------------------------------- $ 45,771 $ 36,418 ================================================================================
Inventories of the Company are generally valued at the lower of last-in, first-out (LIFO) cost or market. Other inventories of the Company are valued at average cost or market, whichever is lower. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected year-end levels and costs. 5. PROPERTY HELD FOR RESALE - --------------------------- Property held for resale at June 30, 1999 and December 31, 1998 consists of the following: June 30, December 31, (in thousands) 1999 1998 - --------------------------------------------------------------------- Location: Monitor Group, Cheswick, PA $ 1,773 Newport, KY 1,554 Pomeroy, OH 729 Marrero, LA 615 $ 615 St. Marys, WV 548 - --------------------------------------------------------------------- Property held for resale $ 5,219 $ 615 - --------------------------------------------------------------------- Less current portion 4,604 - --------------------------------------------------------------------- $ 615 $ 615 - --------------------------------------------------------------------- - --------------------------------------------------------------------- The Company's mass spectrometer unit, the Monitor Group, is located in Cheswick, Pennsylvania. Results to date have been well below management expectations. After a comprehensive review of Monitor Group's progress, management has decided to divest and reclassify the $1,800,000 of Monitor Group's intangible assets as held for resale. Management believes that ultimately, the disposition of Monitor Group will not materially affect the financial position or cash flows of the Company, although the outcome could be material to the reported results of operations for the period in which it occurs. In September of 1998, the Company suspended production at its Newport, Kentucky pipe coating facility due to unfavorable market conditions. Management intends to dispose of the assets and has reclassified the machinery and equipment as assets held for resale. Management anticipates that the proceeds from such a sale will be at least $1,500,000, the net book value of such equipment. The letter of intent which the Company signed in April, 1999 to sell its Mining Division has expired. The Company continues to explore the divestiture of this Division which is comprised principally of the Company's facilities and inventory located at Pomeroy, Ohio and St. Marys, West Virginia. The Marrero, Louisiana location was formerly used for yard storage. Assets of the location consist of land no longer used in the Company's business. The land is currently being leased to a third party.
6. BORROWINGS - ------------- On June 30, 1999, the Company's $45,000,000 revolving credit agreement was amended and increased to $70,000,000. The interest rate is, at the Company's option, based on the prime rate, the domestic certificate of deposit rate (CD rate) or the Euro-bank rate (LIBOR). 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 prime, to prime plus .25%, the CD rate plus .575% to 1.8% and the LIBOR rate plus .575% to 1.8%. Borrowings under the agreement, which expires on July 1, 2003, are secured by eligible accounts, inventory and the pledge of the Company held Dakota Minnesota & Eastern Railroad Corporation 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 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 Six Months Ended (in thousands, June 30, June 30, except earnings per share) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Numerator: Numerator for basic and diluted earnings per common share - net income available to common stockholders $1,238 $1,941 $1,698 $2,647 ======= ======= ======= ====== Denominator: Weighted average shares 9,710 10,014 9,748 10,015 ------- ------- ------- ------ Denominator for basic earnings per common share 9,710 10,014 9,748 10,015 Effect of dilutive securities: Contingent issuable shares pursuant to the Company's 1997 and 1998 Incentive Compensation Plans 53 18 41 12 Employee stock options 251 198 253 205 ------- ------- ------- ------ Dilutive potential common shares 304 216 294 217 Denominator for diluted earnings per common share - adjusted weighted average shares and assumed conversions 10,014 10,230 10,042 10,232 ======= ======= ======= ====== Basic earnings per common share $0.12 $0.19 $0.17 $0.26 ======= ====== ======= ====== Diluted earnings per common share $0.12 $0.19 $0.17 $0.26 ======= ====== ======= ====== 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, competitive position, or capital expenditures of the Company.
The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amounts of ultimate liability with respect to these actions will not materially effect the financial position of the Company. At June 30, 1999, the Company had outstanding letters of credit of approximately $2,635,000. 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, tubular products and portable mass spectrometers (Monitor Group). The following tables illustrates revenues and profits/(losses) of the Company by segment: Three Months Ended Six Months Ended June 30, 1999 June 30, 1999 Net Segment Net Segment (in thousands) Sales Profit/(Loss) Sales Profit/(Loss) - -------------------------------------------------------------------------------- Rail products $35,068 $944 $66,485 $1,155 Construction products 15,596 872 30,892 956 Tubular products 8,124 885 14,988 1,319 Monitor Group (467) (899) - -------------------------------------------------------------------------------- Total $58,788 $2,234 $112,365 $2,531 ================================================================================ Three Months Ended Six Months Ended June 30, 1998 June 30, 1998 Net Segment Net Segment (in thousands) Sales Profit/(Loss) Sales Profit/(Loss) - -------------------------------------------------------------------------------- Rail products $29,364 $1,368 $56,836 $2,247 Construction products 13,143 1,050 25,110 1,547 Tubular products 16,228 995 25,951 777 Monitor Group 26 (347) 26 (687) ================================================================================ Total $58,761 $3,066 $107,923 $3,884 ================================================================================
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 Six Months Ended June 30, June 30, (in thousands) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Net Profit/(Loss) - -------------------------------------------------------------------------------- Total for reportable segments $2,234 $3,066 $2,531 $3,884 Other income 297 1,070 657 1,403 Other unallocated amounts (678) (900) (569) (870) ================================================================================ Income before income taxes $1,853 $3,236 $2,619 $4,417 ================================================================================ There has been no change in the measurement of segment profit/(loss) from December 31, 1998. There has been no significant change in construction or tubular segment assets from December 31, 1998. There has been a significant increase in the Rail segment's assets due to the acquisition of CXT Incorporated and increases in relay rail's inventory and transit products' accounts receivable. 10. ACQUISITIONS - ---------------- On June 30, 1999, the Company acquired all of the outstanding stock of CXT Incorporated (CXT) for $17,389,000. The acquisition was accounted for as a purchase and, accordingly, the operations of CXT are included in the Consolidated Financial Statements from the date of acquisition. The preliminary fair value of the assets acquired and liabilities assumed is as follows (in thousands): Current assets $ 12,190 Property, plant & equipment 5,995 Goodwill 12,202 Other assets 967 Current liabilities (10,885) Debt (3,080) - --------------------------------------- Purchase price $ 17,389 ======================================= The Company expects to finalize all purchase accounting adjustments within one year of the acquisition. Any difference between the amounts reflected above and the final amounts could result in an adjustment to goodwill. Goodwill is being amortized over 15 years.
The unaudited pro forma combined historical results as if CXT had been acquired at the beginning of 1999 and 1998, respectively, are estimated to be: Six Months Ended June 30, (Dollars in thousands, except per share data) 1999 1998 - --------------------------------------------------------------------------- Net Sales $ 132,191 $ 124,349 Net Income 1,921 2,397 Basic Earnings per common share: $ 0.19 $ 0.23 The pro forma results presented above are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of each of the periods presented, nor are they necessarily indicative of future results.
Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended Six Months Ended June 30, June 30, - -------------------------------------------------------------------------------- 1999 1998 1999 1998 - -------------------------------------------------------------------------------- (Dollars in thousands) Net Sales: Rail Products $ 35,068 $ 29,364 $ 66,485 $ 56,836 Construction Products 15,596 13,143 30,892 25,110 Tubular Products 8,124 16,228 14,988 25,951 Monitor Group 26 26 Other (45) 115 161 294 - -------------------------------------------------------------------------------- Total Net Sales 58,743 58,876 112,526 108,217 ================================================================================ Gross Profit: Rail Products 4,532 4,400 8,171 8,438 Construction Products 3,351 2,935 5,944 5,442 Tubular Products 1,427 2,140 2,451 3,022 Monitor Group (354) (211) (668) (426) Other (367) (341) (465) (459) - -------------------------------------------------------------------------------- Total Gross Profit 8,589 8,923 15,433 16,017 - -------------------------------------------------------------------------------- Expenses: Selling and Administrative Expenses 6,510 6,278 12,550 11,934 Interest Expense 523 479 921 1,069 Other (Income) Expense (297) (1,070) (657) (1,403) - -------------------------------------------------------------------------------- Total Expenses 6,736 5,687 12,814 11,600 - -------------------------------------------------------------------------------- Income Before Income Taxes 1,853 3,236 2,619 4,417 Income Tax Expense 615 1,295 921 1,770 - -------------------------------------------------------------------------------- Net Income $ 1,238 $ 1,941 $ 1,698 $ 2,647 ================================================================================ Gross Profit %: Rail Products 13% 15% 12% 15% Construction Products 21% 22% 19% 22% Tubular Products 18% 13% 16% 12% Monitor Group N/A N/A N/A N/A Other N/A N/A N/A N/A Total Gross Profit % 15% 15% 14% 15% ================================================================================ Note: Prior year segment information has been restated to be consistent with FASB No. 131, "Disclosures about Segments of an Enterprise and Related Information".
Second Quarter 1999 Results of Operations - ----------------------------------------- Net income for the second quarter of 1999 was $1.2 million or $0.12 per share on net sales of $58.7 million. This compares to a 1998 second quarter net income of $1.9 million or $0.19 per share on net sales of $58.9 million. The 1998 income included a nonrecurring gain of $1.7 million from the sale of the Fosterweld Division and a $0.9 million write-down for a property held for sale. Rail products' 1999 second quarter net sales were $35.1 million or an increase of 19% over the same period last year. This increase was due primarily to increased shipments of new rail and transit products, which more than offset the decline in used rail which resulted from the deferral of rail change-out projects by western railroads. Construction products' net sales increased 19% from the year earlier quarter as a result of sales generated by the Foster Geotechnical Division acquired in August of 1998. This increase exceeded the decreases in the Company's sheet piling sales and rentals which continue to suffer from lack of supply. Tubular products' sales decreased 50% from the same quarter of 1998 due to the June 1998 sale of the Company's Fosterweld Division and the closing of the Company's Newport pipe coating facility. Changes in net sales are primarily the result of changes in volume rather than changes in prices. The gross margin percentage for the total Company was 15% in both the second quarters of 1999 and 1998. Rail products' gross margin percentage in the second quarter of 1999 was 13% versus 15% in the year earlier quarter. This decline is the result of a change in the mix of rail products sold. The gross margin percentage for construction products declined almost 1% in the second quarters of 1999 compared to the 1998 second quarter. The depletion of rental piling inventory is primarily the cause of this decline. Tubular products' gross margin percentage in the second quarter of 1999 increased to 18% from 13% in the same period last year, primarily due to more efficient operations at the Langfield, Texas threading facility and the halting of production of lower margin coated pipe at the Company's Newport facility. The Monitor Group had costs and expenses totaling $0.4 million in the second quarter of 1999 compared to $0.3 million in the second quarter of 1998. No revenues were recorded in the second quarter of 1999 and 1998 second quarter revenues were negligible. See Other Matters section of the MD&A for further discussion of the Monitor Group. Selling and administrative expenses increased 4% in the 1999 second quarter in comparison to the same period last year principally due to expenses associated with the operation of the Company's Geotechnical Division, acquired in August 1998. Interest expense increased 9% over the year earlier quarter due to an increase in outstanding borrowings. Other income included approximately $0.3 million of accrued interest and dividends on the DM&E notes and stock. The provision for income taxes was recorded at 33% in the second quarter of 1999, due to the implementation of certain tax planning strategies, compared to 40% in the 1998 second quarter. First Six Months of 1999 Results of Operations - ---------------------------------------------- Net income for the first six months of 1999 was $1.7 million or $0.17 per share on net sales of $112.5 million. This compares to a net income of $2.6 million or $0.26 per share on net sales of $108.2 million for the same period last year.
Rail products' net sales in the first half of 1999 were $66.5 million or 17% higher than sales in the first half of 1998. This increase is attributable to higher volume sales of new rail. Construction products' year to date net sales increased 23% from the first six months of 1998 as a result of sales generated by the Foster Geotechnical Division acquired in August of 1998. Net sales of tubular products declined 42% in the first half of 1999 compared to the first half of 1998 due primarily to the sale of the Company's Fosterweld Division and the closing of the Newport pipe coating facility. The gross margin percentage for the Company in the first six months of 1999 was 14% compared to 15% in the prior year. Rail products' gross margin percentage declined to 12% from 15% primarily due to a change in the mix of rail products sold. During the first half of 1999, the gross margin percentage for Construction products declined to 19% from 22%. The depletion of rental piling inventory was the primary reason for this decline. Tubular products' gross margin percentage improved to 16% from 12% as a result of more efficient operations at the Langfield threading facility and the closing of the Newport pipe coating facility. Selling and administrative expenses for the first half of 1999 increased 5% from the first half of 1998, primarily due to the operating expenses associated with the Company's Geotechnical Division, acquired in August 1998. Interest expense declined 14% due to the paydown of the Company's revolving credit borrowings with funds received from the sale of its Fosterweld facility. The provision for income taxes is recorded at 35% for the first half of 1999, due to the implementation of certain tax planning strategies, versus 40% in the same period last year. Liquidity and Capital Resources - ------------------------------- The Company generates internal cash flow from the sale of inventory and the collection of accounts receivable. During the first six months of 1999 the average turnover rate for accounts receivable was lower than during the same period last year due to slower collections on certain rail and construction products' sales. The average turnover rate for inventory was higher in 1999 than in 1998, primarily in coated pipe and new rail products. Working capital at June 30, 1999 was $64.8 million compared to $54.9 million at December 31, 1998. Year to date, the Company had total non-acquisition capital expenditures of $1.4 million. In addition, the Company completed the 500,000 share buy-back of its' common stock in January 1999. The cost of this program which commenced in 1997, was $2.8 million. During the first quarter of 1999, the Company announced another program to purchase up to an additional 1,000,000 shares. As of June 30, 1999, 225,298 shares had been purchased under this program at a cost of $1.3 million. Capital expenditures in 1999, excluding acquisitions, are expected to be approximately $5.5 million. This includes the planned creation of a $2.8 million piling storage yard near the Chaparral plant in Richmond, Virginia and the $1.0 million purchase of a welded rail delivery train. The acquisition of CXT Incorporated resulted in a $17.4 million purchase of stock and the assumption of $8.2 million of bank debt. Capital expenditures in 1999, excluding acquisitions, are anticipated to be funded by cash flows from operations. Total revolving credit agreement borrowings at June 30, 1999 were $58.2 million, or an increase of $45.9 million from the end of the prior year. At June 30, 1999 the Company had $9.2 million in unused borrowing commitment. Outstanding letters of credit at June 30, 1999 were $2.6 million. Management believes its internal
and external sources of funds are adequate to meet anticipated needs. In connection with the previously announced acquisition of CXT Incorporated and the plant investment and working capital associated with the Chaparral piling sales buildup, the Company increased its revolving credit agreement to $70.0 million. The interest rate is, at the Company's option, based on the prime rate, the domestic certificate of deposit rate (CD rate) or the Euro-bank rate (LIBOR). 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 prime, to prime plus .25%, the CD rate plus .575% to 1.8% and the LIBOR rate plus .575% to 1.8%. Borrowings under the agreement, which expires on July 1, 2003, are secured by eligible accounts, inventory and the pledge of the Company held Dakota Minnesota & Eastern Railroad Corporation 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 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 December 31, 1998, the Company's investment in the stock was recorded in the Company's accounts at its historical cost of $1.7 million, comprised of $0.2 million of common stock and $1.5 million of the DM&E's Series B Preferred Stock and warrants. On January 13, 1999, the Company increased its investment in the DM&E by acquiring $6.0 million of DM&E Series C Preferred Stock and warrants. On a fully diluted basis, the Company owns approximately 16% of the DM&E's common stock. Although the market value of the DM&E stock is not readily determinable, management believes that this investment, regardless of the DM&E's Powder River Basin project, is worth significantly more than its historical cost. The DM&E announced in June 1997 that it plans 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 existing track (the "Project"). The DM&E has also announced that the estimated cost of this project is $1.4 billion. Morgan Stanley & Co., Inc., has been retained by the DM&E to assist in identifying strategic partners or potential acquirers of all or a portion of the equity of the DM&E. 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 still must address the extent and nature of the project's environmental impact and whether such impact can be adequately mitigated. New construction on this project may not begin until the STB reaches a final decision. 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 May 1998, the Company acquired the assets of the Monitor Group for $2.5 million, of which $2.2 million was allocated to intangible assets. In addition, the Company has cumulatively funded operating and development expenses totaling $2.7 million at June 30, 1999, including $0.5 million for amortization of intangibles. Results to date have been well below management expectations. After a comprehensive review of Monitor Group's progress, management has decided to divest and reclassify the $1.8 million of Monitor Group's assets as held for resale. Management believes that ultimately, the disposition of Monitor Group will not materially affect the financial position or cash flows of the Company, although the outcome could be material to the reported results of operations for the period in which it occurs. In September of 1998, the Company suspended production at its Newport, Kentucky pipe coating facility due to unfavorable market conditions. Management intends to dispose of the assets and has reclassified the machinery and equipment as assets held for resale. Management anticipates that the proceeds from such a sale will be at least $1.5 million, the net book value of such equipment. The letter of intent which the Company signed in April, 1999 to sell its Mining Division has expired. The Company continues to explore the divestiture of this Division which is comprised principally of the Company's facilities and inventory located at Pomeroy, Ohio and St. Marys, West Virginia. On June 30, 1999, the Company acquired CXT Incorporated (CXT). Based in Spokane, Washington, CXT is a manufacturer of engineered prestressed and precast concrete products primarily used in the railroad and transit industries. The addition of CXT is viewed by management as an opportunity to vertically integrate the Company's transit products segment and to increase the Company's product offerings to Class I railroads. In August 1999, the Company executed an agreement to sell, subject to certain contingencies, an undeveloped 62 acre portion of a 127 acre Houston, Texas property for approximately $2.0 million. The sale, if consummated, is expected to be completed by year end and will not have a material impact on the Company's earnings. Management continues to evaluate the overall performance of certain 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. Year 2000 Impact on Computer Systems - ------------------------------------ Because many existing computer programs have been programmed to use a two digit number to represent the year (e.g., "98" for "1998"), the Company has analyzed its computer software systems to ensure that they are capable of correctly identifying the year "2000" and beyond in all computer transactions. The Company understands the seriousness of this issue and its Board of Directors has requested an update of the Company's year 2000 compliance at each Board Meeting. The Company installed integrated accounting and distribution software licensed from a national vendor in 1992 and has periodically installed updated releases of the software to take advantage of technological advances and improvements over prior releases in the ordinary course of business. The current releases of
this vendor's software are year 2000 compliant. The Company installed the year 2000 compliant release including modifications unrelated to the year 2000 issue to suit the Company's business in May 1998. The Company completed the testing of these modifications and placed these systems in production in January 1999. Management does not anticipate any adverse impact in becoming year 2000 compliant. The costs associated with the installation of the year 2000 compliant release are considered by Management to be in the ordinary course of business and are not material to its financial results. In addition, the Company has conducted a review of its production equipment and has determined that it is year 2000 compliant. The Company has also surveyed key vendors and suppliers to determine the extent of their year 2000 compliance readiness and planned action to become year 2000 compliant. The Company has minimal direct or indirect computer data transfers with outside customers, vendors, and suppliers other than major banks, whose year 2000 compliance efforts are well underway. Based on this fact as well as internal assessments, and formal and informal communications with customers, vendors, and suppliers, the Company presently believes that the year 2000 compliance issue should not have an adverse impact on the Company's financial position, results of operations or cash flow. A failure of third party vendors or suppliers to be year 2000 compliant could affect these beliefs and is not quantifiable. The most reasonably likely worse case scenario of failure by the Company or its suppliers or customers to resolve year 2000 problems would be a temporary inability on the part of the Company to timely process orders and to deliver finished products to customers. Delays in meeting customers' orders would affect the timing of billings to and payments received from customers in respect of orders and could result in other liabilities. Customers' year 2000 problems could also delay the timing of payments to the Company for orders. Outlook - ------- Since March 1997, the Company had not had a domestic sheet piling supplier. Revenues from piling products declined and continue to be at reduced levels as the Company's remaining piling inventory is liquidated. The Company, however, has become Chaparral Steel's exclusive North American distributor of steel sheet piling and "H" bearing pile. Chaparral's new Richmond, Virginia facility recently commenced operations and expects to make H-bearing pile available in the third quarter of 1999, and steel sheet piling ready for sale in the fourth quarter of 1999. The rail segment of the business depends on one source for fulfilling certain trackwork contracts. As of June 30, the Company has provided $9.7 million of working capital to this supplier in the form of loans and progress payments. If, for any reason, this supplier is unable to perform, the Company could experience a short-term negative effect on earnings. A substantial portion of the Company's operations is heavily dependent on governmental funding of infrastructure projects. Significant changes in the level of government funding of these projects could have a favorable or unfavorable impact on the operating results of the Company. Additionally, governmental actions concerning taxation, tariffs, the environment or other matters could impact the operating results of the Company. The Company's operating results may also be affected by adverse weather conditions.
Although backlog is not necessarily indicative of future operating results, total Company backlog at June 30, 1999, excluding the recently acquired CXT backlog, was approximately $105.5 million. The following table provides the backlog by business segment: Backlog - ------------------------------------------------------------------------------ June 30, December 31, 1999 1998 1998 - ------------------------------------------------------------------------------ (Dollars in thousands) Rail Products $ 63,293 $ 51,155 $ 62,481 Construction Products 39,548 25,115 42,542 Tubular Products excluding Fosterweld 2,620 7,776 3,541 Fosterweld 58 Monitor Group 34 - ------------------------------------------------------------------------------ Total $105,461 $ 84,138 $108,564 ============================================================================== Market Risk and Risk Management Policies - ---------------------------------------- The Company is not subject to significant exposure to change in foreign currency exchange rates. The Company does not 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 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. As of June 30, 1999, the Company had outstanding foreign currency forward contracts to purchase $0.3 million Canadian for $0.2 million US. The Company is also exposed to changes in interest rates primarily from its long-term debt arrangements. The Company uses interest rate derivative instruments to manage exposure to interest rate changes. The Company has entered into an interest rate swap agreement as the fixed rate payor to reduce the impact of changes in interest rates on a portion of its revolving borrowings. At June 30, 1999 the swap agreement had a notional value of $8,000,000 at 5.48%, and expires in January 2001. The swap agreement's floating rate is based on LIBOR. Any amounts paid or received under the agreement are recognized as adjustments to interest expense. Neither the fair market value of the agreement nor the interest expense adjustments associated with the agreement has been material. 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 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. 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. PART II OTHER INFORMATION ------------------------- Item 1. LEGAL PROCEEDINGS See Note 8, "Commitments and Contingent Liabilities", to the Condensed Consolidated Financial Statements. Item 4. RESULTS OF VOTES OF SECURITY HOLDERS At the Company's annual meeting on May 20, 1999, the following individuals were elected to the Board of Directors: For Withheld Name Election Authority ---- -------- --------- L. B. Foster II 9,266,273 156,861 Henry J. Massman IV 9,267,073 156,061 John W. Puth 9,266,973 156,161 William H. Rackoff 9,267,073 156,061 Richard L. Shaw 9,267,073 156,061 The stockholders also voted to approve the 1998 Long-Term Incentive Plan: Against For Approval Approval Abstained ------------ -------- --------- 7,428,195 1,665,449 329,490 Additionally, the shareholders voted to approve Ernst & Young, LLP as the Company's independent auditors for the fiscal year ended December 31, 1999. The following table sets forth the results of the vote for independent auditors: Against For Approval Approval Abstained ------------ -------- --------- 9,279,568 26,021 42,276
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 Agreement, dated as of May 15, 1997, between L.B. Foster Company and American Stock Transfer & Trust Company, including the form of Rights Certificate and the Summary of Rights attached thereto, filed as Exhibit 4A 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. 10.15 Lease between the Registrant and Amax, Inc. for manufacturing facility at Parkersburg, West Virginia, dated as of October 19, 1978, filed as Exhibit 10.15 to Registration Statement No. 2-72051. 10.16 Lease between Registrant and Greentree Building 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 Building 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 Building Associates, filed as Exhibit 10.16.2 to Form 10-Q for the quarter ended June 30, 1997. 10.19 Lease between the Registrant and American Cast Iron Pipe Company for Pipe-Coating facility in Birmingham, Alabama 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 the Registrant and American Cast Iron Pipe Company for Pipe-Coating facility in Birmingham, Alabama dated April 15, 1997, filed as Exhibit 10.19.1 to Form 10-Q for the quarter ended March 31, 1997. 10.20 Asset Purchase Agreement, dated June 5, 1998, by and among the Registrant and Northwest Pipe Company, filed as Exhibit 10.0 to
Form 8-K on June 18, 1998. 10.21 Stock Purchase Agreement dated June 3, 1999, by and among the Registrant and the shareholders of CXT Incorporated, filed as Exhibit 10.0 to Form 8-K on July 14, 1999. 10.33.2 Amended and Restated 1985 Long-Term Incentive Plan, as amended and restated February 26, 1997, filed as Exhibit 10.33.2 to Form 10-Q for the quarter ended June 30, 1997. ** 10.34 Amended and Restated 1998 Long-Term Incentive Plan for Officers and Directors, as amended and restated February 24, 1999 and filed as Exhibit 10.34 to Form 10-K for the year ended December 31, 1998. ** 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 to date, filed as Exhibit 10.46 to Form 10-K for the year ended December 31, 1997. ** 10.49 Lease agreement between Newport Steel Corporation and Registrant dated as of October 12, 1994 and filed as Exhibit 10.49 to Form 10-Q for the quarter ended September 30, 1994. 10.49.1 Amendment to lease between Registrant and Newport Steel Corporation dated March 13, 1998 and filed as Exhibit 10.49.1 to Form 10-K for the year ended December 31, 1997. 10.50 L.B. Foster Company 1999 Incentive Compensation Plan, filed as Exhibit 10.50 to Form 10-K for the year ended December 31, 1998. ** 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. * 27 Financial Data Schedule ** Identifies management contract or compensatory plan or arrangement required to be filed as an Exhibit. b) Reports on Form 8-K On July 14, 1999 the Registrant filed a Current Report on Form 8-K announcing the June 30, 1999 purchase of all outstanding stock of CXT Incorporated.
SIGNATURE Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. L.B. FOSTER COMPANY (Registrant) Date: August 13, 1999 By /s/ Roger F. Nejes ---------------- --------------------- Roger F. Nejes Sr. Vice President- Finance and Administration & Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer of Registrant)