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, 1998 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 October 27, 1998 ----- ------------------------------- Class A Common Stock, Par Value $.01 9,981,343 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 9 PART II. Other Information Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 15 Signature 18
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS L. B. FOSTER COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) September 30, December 31, 1998 1997 ---------------------------- ASSETS (Unaudited) Current Assets: Cash and cash equivalents .................... $ 3,493 $ 1,156 --------- --------- Accounts and notes receivable: Trade ...................................... 35,262 45,022 Other ...................................... 3,288 2,564 --------- --------- 38,550 47,586 --------- --------- Inventories .................................. 40,889 43,365 --------- --------- Current deferred tax assets .................. 567 123 --------- --------- Other current assets ......................... 696 557 --------- --------- Property held for resale ..................... 3,461 --------- --------- Total Current Assets ....................... 84,195 96,248 --------- --------- Property, Plant & Equipment-At Cost ............ 43,775 42,134 Less Accumulated Depreciation .................. (22,845) (21,359) --------- --------- 20,930 20,775 --------- --------- Property Held for Resale ....................... 615 615 --------- --------- Other Assets: Goodwill and Intangibles ..................... 5,960 4,484 Investments .................................. 1,707 1,693 Other Assets ................................. 3,398 3,154 --------- --------- Total Other Assets ........................ 11,065 9,331 --------- --------- TOTAL ASSETS ................................... $ 116,805 $ 126,969 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt ......... $ 1,174 $ 1,309 Short-term borrowings ........................ 18,111 Accounts payable ............................. 18,765 12,524 Accrued payroll and employee benefits ........ 3,748 3,008 Other accrued liabilities .................... 1,183 1,219 --------- --------- Total Current Liabilities .................. 24,870 36,171 --------- --------- Long-Term Borrowings ........................... 11,000 15,000 --------- --------- Other Long-Term Debt ........................... 4,074 2,530 --------- --------- Deferred Tax Liabilities ....................... 1,518 554 --------- --------- Other Long-Term Liabilities .................... 1,991 2,206 --------- --------- Stockholders' Equity: Class A Common stock ......................... 102 102 Paid-in capital .............................. 35,426 35,434 Retained earnings ............................ 38,985 35,625 Treasury stock ............................... (1,161) (653) --------- --------- Total Stockholders' Equity ................. 73,352 70,508 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................... $ 116,805 $ 126,969 ========= ========= 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, -------------------------------------------------------- 1998 1997 1998 1997 -------------------------------------------------------- (Unaudited) Net Sales ................ $ 50,368 $ 56,935 $ 158,585 $ 165,145 Cost of Goods Sold ....... 43,155 48,836 135,355 143,152 --------- --------- --------- --------- Gross Profit ............. 7,213 8,099 23,230 21,993 Selling and Admin- istrative Expenses ... 5,849 5,624 17,783 16,484 Interest Expense ...... 308 665 1,377 1,845 Other (Income) Expense (130) (209) (1,533) (316) --------- --------- --------- --------- 6,027 6,080 17,627 18,013 --------- --------- --------- --------- Income Before Income Taxes 1,186 2,019 5,603 3,980 Income Tax Expense ....... 473 807 2,243 1,490 --------- --------- --------- --------- Net Income ............... $ 713 $ 1,212 $ 3,360 $ 2,490 ========= ========= ========= ========= Basic Earnings Per Common Share ............ $0.07 $0.12 $0.33 $0.24 ===== ===== ===== ===== Diluted Earnings Per Common Share $0.07 $0.12 $0.33 $0.24 ===== ===== ===== ===== 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) Nine Months Ended September 30, ------------------- 1998 1997 ------------------- (Unaudited) Cash Flows from Operating Activities: Net Income .......................................... $ 3,360 $ 2,490 Adjustments to reconcile net income to net cash provided (used) by operating activities: Deferred income taxes ............................... 520 1,437 Depreciation and amortization ....................... 2,197 1,943 Gain on sale of property, plant and equipment ....... (1,271) (113) Change in operating assets and liabilities: Accounts receivable ................................. 10,499 5,373 Inventories ......................................... (1,196) (5,192) Property held for resale ............................ 200 (32) Other current asset ................................. (128) (9) Other non-current assets ............................ (494) (317) Accounts payable .................................... 7,492 (5,911) Accrued payroll and employee benefits ............... 830 (857) Other current liabilities ........................... (36) (1,029) Other liabilities ................................... (215) 64 -------- -------- Net Cash Provided (Used) by Operating Activities ...... 21,758 (2,153) -------- -------- Cash Flows from Investing Activities: Proceeds from sale of property, plant and equipment . 687 1,542 Proceeds from sale of Fosterweld .................... 7,258 Capital expenditures on property, plant and equipment (1,953) (1,505) Purchase of DM&E stock .............................. (1,500) Acquisition of business ............................. (3,774) (2,500) -------- -------- Net Cash Provided (Used) by Investing Activities ...... 2,218 (3,963) -------- -------- Cash Flows from Financing Activities: (Repayments) proceeds from issuance of revolving credit agreement borrowings ....................... (22,111) 7,000 Proceeds from industrial revenue bond ............... 2,045 Exercise of stock options ........................... 308 540 Treasury share transactions ......................... (909) (513) Issuance (repayments) of other long-term debt ....... (972) (1,056) -------- -------- Net Cash (Used) Provided by Financing Activities ...... (21,639) 5,971 -------- -------- Net (Decrease) Increase in Cash and Cash Equivalents .... 2,337 (145) Cash and Cash Equivalents at Beginning of Period ....... 1,156 1,201 -------- -------- Cash and Cash Equivalents at End of Period .............. $ 3,493 $ 1,056 ======== ======== Supplemental Disclosures of Cash Flow Information: Interest Paid ....................................... $ 1,488 $ 1,788 ======== ======== Income Taxes Paid ................................... $ 1,578 $ 585 ======== ======== During 1998 and 1997, the Company financed the purchase of certain capital expenditures totaling $336,000 and $33,500, respectively, through the issuance 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, 1998. Certain items previously reported in specific financial statement captions were reclassified in 1997. The reclassifications had no effect on income. 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, 1997. The acquisitions of business in the third quarter of 1998 were not material to the financial statements of the Corporation. 2. ACCOUNTING PRINCIPLES In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". The Company has had no material transactions under the provisions of SFAS No. 130 and the Company does not anticipate that the reporting requirements of SFAS No. 131 will have a material impact on existing disclosures. Financial Accounting Standards Board Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," was issued in February 1998. This statement revises employers' disclosures about pension and postretirement benefit plans. It does not change the measurement or recognition of those plans. The Company will adopt this statement in 1998. 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 instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The effect of adopting this statement is not expected to be material to the Company. 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, 1998 and December 31, 1997 have been reduced by an allowance for doubtful accounts of $1,516,000 and $1,468,000, respectively. Bad debt expense was $34,000 and $224,000 for the nine month periods ended September 30, 1998 and 1997, respectively.
4. INVENTORIES Inventories of the Company at September 30, 1998 and December 31, 1997 are summarized as follows in thousands: September 30, December 31, 1998 1997 -------- -------- Finished goods .................................. $ 32,794 $ 30,380 Work-in-process ................................. 3,429 7,826 Raw materials ................................... 4,971 8,369 -------- -------- Total inventories at current costs .............. 41,194 46,575 (Less): Current costs over LIFO stated values ................................. (2,610) (2,610) Reserve for the decline in market value of inventories .......................... (600) (600) -------- -------- $ 37,984 $ 43,365 ======== ======== 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. REVOLVING CREDIT AGREEMENT On August 13, 1998 the Company entered into a senior secured revolving credit facility for $45,000,000 with its banks. The amended agreement replaces the November, 1995 revolving credit agreement that had a maturity date of July, 1999. 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. The interest rates are adjusted quarterly based on the ratio of total indebtedness to Earnings Before Income Taxes, Depreciation and Amortization (EBITDA) as defined in the agreement. The ranges are prime to prime plus 0.125%, the CD rate plus 0.35% to the CD rate plus 1.375%, and the Euro-bank rate plus 0.35% to the Euro-bank rate plus 1.375%. Borrowings under the agreement, which expires July 31, 2002, are secured by accounts receivable and inventory. The agreement includes financial covenants requiring a minimum net worth, a fixed charge coverage ratio, and a maximum ratio of total indebtedness to EBITDA. 6. OTHER (INCOME)/EXPENSE Other income included a gain of $1,700,000 for the sale of the Fosterweld facility, a gain of $185,000 for the sale of a Navasota, Texas facility, and a write-down of $900,000 for a Houston, Texas property currently under a sale agreement. In 1998 and 1997, the Fosterweld Division had revenues of $5,188,000 and $12,225,000 with operating profit of $702,000 and $1,365,000, respectively. 7. EARNINGS PER COMMON SHARE In 1997, the Company adopted Financial Accounting Standards Board Statement No. 128, "Earnings Per Share" (SFAS No. 128). Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and certain convertible securities. Diluted earnings per share uses the average market prices during the period in calculating the dilutive effect of options under the treasury stock method. The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share amounts): Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------ 1998 1997 1998 1997 Numerator: Numerator for basic and diluted net income per common share - net income available to common stockholders .................. $ 713 $ 1,212 $ 3,360 $ 2,490 ======= ======= ======= ======= Denominator: Weighted average shares ....... 10,003 10,129 10,003 10,141 ------- ------- ------- ------- Denominator for basic net income per common share .............. 10,003 10,129 10,003 10,141 Effect of dilutive securities: Employee stock options ........ 213 231 224 135 ------- ------- ------- ------- Dilutive potential common shares 213 231 224 135 Denominator for diluted net income per common share - adjusted weighted average shares and assumed conversions 10,216 10,360 10,227 10,276 ======= ======= ======= ======= Basic net income per common share . $ 0.07 $ 0.12 $ 0.33 $ 0.24 ======= ======= ======= ======= Diluted net income per common share $ 0.07 $ 0.12 $ 0.33 $ 0.24 ======= ======= ======= ======= 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 September 30, 1998, the Company had outstanding letters of credit of approximately $2,902,000.
Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended Nine Months Ended September 30, September 30, =================== ================= 1998 1997 1998 1997 ==================== ================= (Dollars in thousands) Net Sales: Rail Products $26,085 $30,654 83,076 79,803 Construction Products 13,054 11,981 38,232 45,164 * Tubular Products 11,229 14,301 37,251 40,179 Other 26 -------------------- ---------------- Total Net Sales 50,368 56,936 158,585 165,146 ===================== ================= Gross Profit: Rail Products 4,229 4,038 12,427 10,332 Construction Produc 1,604 2,569 6,920 7,413 ** Tubular Products 1,615 1,677 4,544 4,525 Other (235) (185) (661) (277) --------------------- ---------------- Total Gross Profit 7,213 8,099 23,230 21,993 --------------------- ---------------- Expenses: Selling and administrative expenses 5,849 5,624 17,783 16,484 Interest expense 308 665 1,377 1,845 Other (income) expense (130) (209) (1,533) (316) ---------------------- ---------------- Total Expens 6,027 6,080 17,627 18,013 ---------------------- ---------------- Income Before Income T 1,186 2,019 5,603 3,980 Income Tax Expense 473 807 2,243 1,490 ----------------------- ---------------- Net Income $713 $1,212 $3,360 $2,490 ======================== ================ Gross Profit %: Rail Products 16.2% 13.2% 15.0% 12.9% Construction Products 12.3% 21.4% 18.1% 16.4% Tubular Products 14.4% 11.7% 12.2% 11.3% Total Gross Profit% 14.3% 14.2% 14.6% 13.3% ======================== ================ * Net Sales Coated and Threaded Pipe 11,198 11,370 32,055 31,246 Fosterweld 31 2,931 5,196 8,933 ------------------------- ---------------- Total Tubular Products 11,229 14,301 37,251 40,179 ========================= ================ ** Gross Profit Coated and Threaded Pipe 1,458 1,244 3,667 3,234 Fosterweld 157 433 877 1,291 ========================= ================ Total Tubular Products 1,615 1,677 4,544 4,525 ========================= ================
Third Quarter 1998 Results of Operations - ---------------------------------------- Net income for the 1998 third quarter was $0.7 million or $0.07 per share on net sales of $50.4 million. This compares to a 1997 third quarter net income of $1.2 million or $0.12 per share on net sales of $56.9 million. Rail products' 1998 third quarter net sales were $26.1 million or a decrease of 15% over the same period last year. This decrease was due primarily to delays in shipments of transit products and a decrease in relay rail sales over the prior year which offset increased sales of Allegheny Rail Products. Construction products' net sales increased 9% from the year earlier quarter as a result of sales generated by the Foster Geotechnical Division acquired in August of 1998, which offset the declines in piling sales. Tubular products' sales decreased 22% from the same quarter of 1997 due to the June 1998 sale of the Company's Fosterweld Division. 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 14% in the 1998 and 1997 third quarters. Rail products' gross margin percentage in the third quarter of 1998 was 16% versus 13% in the year earlier quarter primarily due to record sales and profits of Allegheny Rail Products. The gross margin percentage for construction products declined 9% from the year earlier quarter primarily due to a $0.9 million write-down of certain catenary sign structure contracts. Tubular products' gross margin percentage in the third quarter of 1998 increased 2% from the same period last year. The Monitor Group had development expenses totaling $0.3 million including $0.1 million for amortization of intangible assets. Revenues for the quarter were negligible and below management expectations. Selling and administrative expenses increased 4% in the 1998 third quarter in comparison to the same period last year principally due to expenses associated with the operation of the Company's recently acquired, Precise and Geotechnical Divisions. Interest expense decreased 46% over the year earlier quarter due to reduction in outstanding borrowings principally resulting from the receipt of Fosterweld sale proceeds. Other income included a gain of $0.2 million from the sale of a Navasota, Texas facility. The provision for income taxes was recorded at 40% in the third quarters of 1998 and 1997. First Nine Months of 1998 Results of Operations - ----------------------------------------------- Net income for the first nine months of 1998 was $3.4 million or $0.33 per share on sales of $158.6 million. This compares to a net income of $2.5 million or $0.24 per share for the same period last year on net sales of $165.1 million. Rail products' net sales in the first nine months of 1998 were $83.1 million compared to $79.8 million in 1997. This 4% increase resulted from higher volume sales of new rail and Allegheny Rail products. Construction products' net sales declined 15% to $38.2 million compared to $45.2 million in the first nine months of 1997 as the loss of sheet piling sales more than offset the increase in bridge and highway product sales. Net sales of tubular products for the first nine months of 1998 declined 7.0% from the year earlier period as a result of the sale of the Company's Fosterweld Division. The gross margin percentage for the Company during the first nine months of 1998 increased to 15% from 13% in the same period last year. Rail products' gross margin percentage increased to 15% from 13% primarily due to relay rail's lower cost of sales from certain projects and the previously mentioned higher volume
of Allegheny Rail Products' sales. The gross margin percentage for construction products increased to 18% from 16% as a result of high demand for a limited supply of piling products and the addition of the Foster Geotechnical Division. Tubular products' gross margin percentage was 12% in first nine months of 1998 compared to 11% in 1997 primarily due to higher margins on coated pipe products. The Monitor Group had development expenses totaling $0.8 million including $0.2 million for amortization of intangible assets. Revenues for the period were negligible and below management expectations. Selling and administrative expenses for the first nine months of 1998 increased 8% from the same period of 1997. The increase was due to added expenses associated with the operation of the Company's recently acquired Precise and Geotechnical Divisions. Interest expense decreased 25% due to reduction in outstanding borrowings principally resulting from the receipt of Fosterweld sale proceeds. The provision for income taxes is recorded at 40% versus 37% in 1997. 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 1998 the average turnover rate for accounts receivable was lower than the same period last year due to slower collections of certain transit contracts. The average turnover rate for inventory was higher in 1998 than in 1997, primarily in new rail and Allegheny Rail products. Working capital at September 30, 1998 was $59.3 million compared to $60.1 million at December 31, 1997. Year to date, the Company had total capital expenditures of $2.0 million. In addition, the Company repurchased $0.9 million of its common stock in accordance with the Company's previously announced program to repurchase 500,000 shares. Since inception of this program, the Company repurchased 288,744 shares at $1.5 million. Capital expenditures in 1998, excluding acquisitions, are expected to be consistent with 1997 and are anticipated to be funded by cash flows from operations. Total revolving credit agreement borrowings at September 30, 1998 were $11.0 million, or a decrease of $22.1 million from the end of the prior year. At September 30, 1998 the Company had $31.1 million in unused borrowing commitment. The Company borrowed $2.0 million through an industrial revenue bond to finance part of the Precise Fabricating Corporation acquisition. Outstanding letters of credit at September 30, 1998 were $2.9 million. Management believes its internal and external sources of funds are adequate to meet anticipated needs. On August 13, 1998 the Company amended its $45,000,000 senior secured revolving credit agreement. The amended agreement replaces the November, 1995 revolving credit agreement that had a maturity date of July, 1999. This amended agreement expires July 31, 2002 and can be extended under certain conditions. 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. The interest rates are adjusted quarterly based on the ratio of total indebtedness to EBITDA as defined in the agreement. The ranges are prime to prime plus 0.125%, the CD rate plus 0.35% to the CD rate plus 1.375%, and the Euro-bank rate plus 0.35% to the Euro-bank rate plus 1.375%. Borrowings under the agreement are secured by accounts receivable and inventory. The agreement includes financial covenants requiring a minimum net worth, a fixed charge coverage ratio, and a maximum ratio of total indebtedness to EBITDA.
Other Matters - ------------- The Company owns 13% of the Dakota, Minnesota & Eastern Railroad Corporation (DM&E), a privately held, regional railroad which operates over 1,100 miles of track in five states. The Company's investment in the stock is 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. Although this investment's market value is not readily determinable, management believes that this investment, without taking into account the DM&E's proposed Powder River Basin project discussed below, would be 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. The Project is subject to approval by the Surface Transportation Board (STB). In February 1998, the DM&E filed its application with the Surface Transportation Board seeking authority to construct approximately 280 miles of new railroad line. The DM&E has indicated that this new railroad line could be available to carry Power River Basin coal within two years after regulatory approval is obtained. The DM&E anticipates that the STB will reach a preliminary decision in December 1998. This approval would be subject to completion of the Environmental Impact Statement (EIS) and acceptable mitigation of environmental issues that may arise in the EIS. 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 DM&E has stated that the DM&E 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. In May of 1998, with the approval of its shareholders, the Company reincorporated from Delaware to Pennsylvania. The principal reason for reincorporating the Company in Pennsylvania is to eliminate the Company's liability of approximately $50,000 per year under the Delaware franchise tax. Pennsylvania corporations that have a class of stock registered under the Securities Exchange Act of 1934 are automatically subject to certain antitakeover provisions of the Pennsylvania Business Corporation Law of 1988, as amended, unless the articles of incorporation provide that those provisions shall not apply to the corporation. The Company has opted out of those antitakeover provisions by having its articles of incorporation expressly state that they shall not apply to the corporation. In June of 1998, the Company sold to Northwest Pipe Company of Portland, Oregon, the plant, equipment, inventory, leasehold and contract rights and miscellaneous assets related to its Fosterweld pipe manufacturing facility in Wood County, West Virginia. The purchase price for the plant, buildings, equipment, leasehold and contract rights and miscellaneous assets was $5.3 million and inventory net of payables of approximately $2.0 million. Also in June of 1998, the Company
agreed, subject to certain contingencies, to sell certain Houston, Texas property for approximately $3.8 million. This property is currently under a sales agreement and the Company has accrued $0.9 million for the loss on the projected sale. Management expects this transaction to be completed in the first quarter of 1999. In July of 1998, the Company purchased, for approximately $1.5 million, assets primarily comprised of intellectual property related to the business of supplying rail signaling and communication devices. In August of 1998, the Company purchased $1.1 million of fixed assets and patents and $1.0 million of associated working capital of the Geotechnical Division of VSL Corporation. The Geotechnical Division is a leading designer and supplier of mechanically-stabilized earth wall systems. In September of 1998, the Company suspended production at its Newport, Kentucky pipe coating facility due to unfavorable market conditions. Management is currently evaluating the long term viability of this operation. 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 completed the installation of new 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 expects to complete the testing of these modifications and to place these systems in production in 1998. Management believes that this schedule is achievable and 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 pose significant operating problems or have a material impact on the Company's consolidated 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.
Outlook - ------- The Company has not had a domestic sheet piling supplier since March 1997. Revenues from piling products have declined and will continue to be at reduced levels as the Company's remaining piling inventory is liquidated. The Company, however, will become Chaparral Steel's exclusive domestic distributor of steel sheet piling when Chaparral Steel's manufacturing facility, being constructed in Richmond, Virginia, begins operations in 1999. The rail segment of the business depends on one source for fulfilling certain trackwork contracts. The Company has provided $9.0 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. During 1995, the Company entered into an interest rate swap agreement to reduce the impact of changes in interest rates on a portion of its revolving credit borrowings. The LIBOR interest rate on the $10.0 million swap agreement, which expires June 1999, is 6.142%. The Company believes that the credit and market risks associated with this agreement are not material. Any additional interest expense incurred under the agreement is accrued and paid quarterly. The Company's operations are, in part, 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 is also dependent on the availability of rail cars and weld trains to ship its products. The Company has experienced delays in certain projects due to the lack of availability of rail cars. The current merger activities in the railroads have exacerbated this problem. The Company can provide no assurances that a solution to the problem will occur in the near-term. 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 September 30, 1998, was approximately $87.5 million. The following table provides the backlog by business segment as adjusted for the exclusion of the Fosterweld Division.
Backlog ---------------------------------- September 30, December 31, 1998 1997 1997 ---------------------------------- (Dollars in thousands) Rail Products ....... $58,519 $38,359 $51,584 Construction Products 22,585 21,599 23,284 Tubular Products .... 6,427 6,989 3,955 Less Fosterweld ... 2,940 2,295 ------- ------- ------- Tubular Products Net 6,427 4,049 1,660 ------- ------- ------- Total Backlog ..... $87,531 $64,007 $76,528 ======= ======= ======= 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, 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 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 Second 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 August 13, 1998. 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. 10.33.2 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 1998 Long-Term Incentive Plan for Officers and Directors.
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 1998 Incentive Compensation Plan, filed as Exhibit 10.50 to Form 10-K for the year ended December 31, 1997. ** 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 as of September 30, 1998. ** Identifies management contract or compensatory plan or arrangement required to be filed as an Exhibit. b) Reports on Form 8-K On May 21, 1998, the Registrant filed a Current Report on Form 8-K announcing the reincorporation of the Company from Delaware to Pennsylvania effective May 14, 1998. On June 18, 1998, the Registrant filed a Current Report on Form 8-K and an Amended Current Report on Form 8-K/A announcing that L. B. Foster Company sold its spiralweld pipe manufacturing facility to Northwest Pipe Company. On June 24, 1998, the Registrant filed an Amended Current Report on Form 8-K/A, amending the Current Report filed on Form 8-K on June 18, 1998. The Amended Current Report provides pro forma financial information.
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 5, 1998 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)