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 March 31, 2005
Commission File Number 0-10436
L. B. Foster Company
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(Exact name of Registrant as specified in its charter)
Pennsylvania 25-1324733
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(State of Incorporation) (I. R. S. Employer Identification No.)
415 Holiday Drive, Pittsburgh, Pennsylvania 15220
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(Address of principal executive offices) (Zip Code)
(412) 928-3417
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [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 April 29, 2005
----- -----------------------------
Common Stock, Par Value $.01 10,076,020 Shares
L.B. FOSTER COMPANY AND SUBSIDIARIES
INDEX
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PART I. Financial Information Page
- ------------------------------ ----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 21
Item 4. Controls and Procedures 21
PART II. Other Information
- ---------------------------
Item 1. Legal Proceedings 22
Item 5. Other Information 22
Item 6. Exhibits 22
Signature 25
3
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
March 31, December 31,
2005 2004
---------------- ----------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 4,708 $ 280
Accounts and notes receivable:
Trade 47,559 39,759
Other 248 170
---------------- ----------------
47,807 39,929
Inventories 52,314 42,014
Current deferred tax assets 1,289 1,289
Other current assets 1,332 786
---------------- ----------------
Total Current Assets 107,450 84,298
---------------- ----------------
Property, Plant & Equipment - At Cost 72,806 70,467
Less Accumulated Depreciation (41,213) (40,089)
---------------- ----------------
31,593 30,378
---------------- ----------------
Other Assets:
Goodwill 350 350
Other intangibles - net 392 430
Investments 14,944 14,697
Deferred tax assets 3,878 3,877
Other assets 65 65
---------------- ----------------
Total Other Assets 19,629 19,419
---------------- ----------------
TOTAL ASSETS $158,672 $134,095
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 775 $ 477
Short-term borrowings - 112
Accounts payable - trade 45,902 27,736
Accrued payroll and employee benefits 2,705 3,308
Current deferred tax liabilities 3,942 3,942
Other accrued liabilities 2,331 1,892
---------------- ----------------
Total Current Liabilities 55,655 37,467
---------------- ----------------
Long-Term Borrowings 19,000 14,000
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Other Long-Term Debt 4,199 3,395
---------------- ----------------
Deferred Tax Liabilities 2,898 2,898
---------------- ----------------
Other Long-Term Liabilites 2,362 2,592
---------------- ----------------
STOCKHOLDERS' EQUITY:
Common stock 102 102
Paid-in capital 35,179 35,131
Retained earnings 40,507 39,879
Treasury stock (515) (654)
Accumulated other comprehensive loss (715) (715)
---------------- ----------------
Total Stockholders' Equity 74,558 73,743
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $158,672 $134,095
================ ================
See Notes to Condensed Consolidated Financial Statements.
4
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Three Months
Ended
March 31,
---------------------------------------
2005 2004
---------------------------------------
(Unaudited)
Net Sales $75,314 $65,452
Cost of Goods Sold 67,314 59,470
----------------- -----------------
Gross Profit 8,000 5,982
Selling and Administrative Expenses 7,169 6,401
Interest Expense 424 463
Other Income (500) (694)
----------------- -----------------
7,093 6,170
----------------- -----------------
Income (Loss) Before Income Taxes 907 (188)
Income Tax Expense (Benefit) 279 (75)
----------------- -----------------
Net Income (Loss) $628 ($113)
================= =================
Basic & Diluted Earnings (Loss) Per Common Share $ 0.06 ($ 0.01)
================= =================
See Notes to Condensed Consolidated Financial Statements.
5
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months
Ended March 31,
2005 2004
------------- -------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 628 ($ 113)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Deferred income taxes (1) -
Depreciation and amortization 1,227 1,276
Loss (gain) on sale of property, plant and equipment 11 (493)
Unrealized (gain) loss on derivative mark-to-market (253) 42
Change in operating assets and liabilities:
Accounts receivable (7,878) (9,648)
Inventories (10,300) (4,040)
Other current assets (546) (623)
Other noncurrent assets (247) 47
Accounts payable - trade 18,166 10,202
Accrued payroll and employee benefits (603) (57)
Other current liabilities 439 (86)
Other liabilities 23 51
------------- -------------
Net Cash Provided (Used) by Operating Activities 666 (3,442)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment 1 41
Capital expenditures on property, plant and equipment (1,216) (1,231)
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Net Cash Used by Investing Activities (1,215) (1,190)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) of revolving credit agreement borrowings 4,888 (178)
Exercise of stock options and stock awards 187 901
Repayments of long-term debt (98) (189)
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Net Cash Provided by Financing Activities 4,977 534
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Net Increase (Decrease) in Cash and Cash Equivalents 4,428 (4,098)
Cash and Cash Equivalents at Beginning of Period 280 4,134
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Cash and Cash Equivalents at End of Period $ 4,708 $ 36
============= =============
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 327 $ 424
============= =============
Income Taxes Paid $ - $ 6
============= =============
During the first three months of 2005 the Company financed $1.2 million in
capital expenditures through the execution of capital leases. There were no
capital expenditures financed through the execution of capital leases during the
first three months of 2004.
See Notes to Condensed Consolidated Financial Statements.
6
L. B. FOSTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
- -----------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all estimates and
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. However, actual results could differ from
those estimates. The results of operations for interim periods are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2005. Amounts included in the balance sheet as of December 31, 2004
were derived from our audited balance sheet. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2004.
2. ACCOUNTING PRINCIPLES
- ------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123(R), "Share-Based Payment" (SFAS 123R). SFAS 123R replaces FASB
Statement No. 123, "Accounting for Stock Based Compensation" (SFAS 123),
supersedes APB 21, "Accounting for Stock Issued to Employees," and amends FASB
Statement No. 95, "Statement of Cash Flows." Generally, the approach in SFAS
123R is similar to the approach described in SFAS 123. However, SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values. Disclosure of the effect of expensing the fair value of equity
compensation is currently required under existing literature. The statement also
requires the tax benefit associated with these share based payments be
classified as financing activities in the Statement of Cash Flows rather then
operating activities as currently permitted. In April 2005, the Securities and
Exchange Commission delayed the effective date of this statement until the
beginning of the first annual reporting period that begins after June 15, 2005.
The Company will begin recording compensation expense utilizing modified
prospective application in its 2006 first quarter financial statements. Adoption
of this standard is not expected to have a material effect on its financial
position or results of operations.
On October 22, 2004, President Bush signed the American Jobs Creation Act of
2004 (the Act). The Act provides a deduction for income from qualified domestic
production activities, which will be phased in from 2005 through 2010. When
fully phased-in, this deduction will be equal to 9 percent of the lesser of (a)
"Qualified Production Activities Income" (QPAI), as defined in the act, or (b)
taxable income (after utilization of any net operating loss carryforwards. In
all cases, the deduction is limited to 50 percent of W-2 wages of the taxpayer.
In return, the Act also provides for a two-year phase-out (except for certain
pre-existing binding contracts) of the existing Extraterritorial Income
Exclusion (ETI) benefit for foreign sales that the World Trade Organization
(WTO) ruled was an illegal export subsidy.
On December 1, 2004, FASB Staff Position (FSP) No. FAS109-1, "Application of
FASB Statement 109, Accounting for Income Taxes, to the Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004", was
issued. FSP No. 109-1 clarifies that this tax deduction should be accounted for
as a special deduction in accordance with SFAS No. 109, "Accounting for Income
Taxes". As such the special deduction has no effect on deferred tax assets and
liabilities existing at the date of enactment. Rather, the impact of this
deduction will be reported in the period in which the deduction is claimed on
our tax return beginning in 2005. The Company has assessed the impact of this
deduction and for 2005, anticipates a de minimis benefit due to the anticipated
utilization of net operating loss carryforwards.
7
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 March 31, 2005 and
December 31, 2004 have been reduced by an allowance for doubtful accounts of
($1,074,000) and ($1,019,000), respectively. Bad debt expense was $56,000 and
$41,000 for the three-month periods ended March 31, 2005 and 2004, respectively.
4. INVENTORIES
- --------------
Inventories of the Company at March 31, 2005 and December 31, 2004 are
summarized as follows in thousands:
March 31, December 31,
2005 2004
- ---------------------------------------------------------------------------
Finished goods $ 41,333 $ 27,929
Work-in-process 6,977 8,452
Raw materials 10,469 11,751
- ---------------------------------------------------------------------------
Total inventories at current costs 58,779 48,132
(Less):
LIFO reserve (4,802) (4,702)
Inventory valuation reserve (1,663) (1,416)
- ---------------------------------------------------------------------------
$ 52,314 $ 42,014
===========================================================================
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 is made at the end of each year based on the inventory
levels and costs at that time. Accordingly, interim LIFO calculations are based
on management's estimates of expected year-end levels and costs.
5. PROPERTY HELD FOR RESALE
- ---------------------------
In August 2003, the Company reached an agreement to sell, modify, and install
the Company's former Newport, KY pipe coating machinery and equipment and
reclassified these assets as "held for resale". During the first quarter of
2004, the Company recognized a $493,000 gain on net proceeds of $939,000 from
the sale of these assets.
6. RETIREMENT PLANS
- -------------------
Substantially all of the Company's hourly paid employees are covered by one of
the Company's noncontributory, defined benefit plans and defined contribution
plans. Substantially all of the Company's salaried employees are covered by a
defined contribution plan established by the Company.
The Company's funding policy for defined benefit plans is to contribute the
minimum required by the Employee Retirement Income Security Act of 1974. Net
periodic pension costs for the three months ended March 31, 2005 and 2004 are as
follows:
8
Three Months Ended
March 31,
(in thousands) 2005 2004
- ---------------------------------------------------------------------------
Service cost $14 $14
Interest cost 53 51
Expected return on plan assets (52) (44)
Amortization of prior service cost 2 2
Amortization of net loss 14 13
- ---------------------------------------------------------------------------
Net periodic benefit cost $31 $36
===========================================================================
The Company expects to contribute $254,000 to its defined benefit plans in 2005.
No contributions were made in the first quarter.
The Company's defined contribution plan, available to substantially all salaried
employees, contains a matched savings provision that permits both pretax and
after-tax employee contributions. Participants can contribute up to 41% of their
annual compensation and receive a matching employer contribution up to 3% of
their annual compensation.
Further, the plan requires an additional matching employer contribution, based
on the ratio of the Company's pretax income to equity, up to 3% of the
employee's annual compensation. Additionally, the Company contributes 1% of all
salaried employees' annual compensation to the plan without regard for employee
contribution.
The expense associated with the defined contribution plans for the three months
ended March 31 was $180,000 in 2005 and $163,000 in 2004.
7. BORROWINGS
- -------------
On September 26, 2002, the Company entered into a credit agreement with a
syndicate of three banks led by PNC Bank, N.A. The agreement provides for a
revolving credit facility of up to $60,000,000 in borrowings to support the
Company's working capital and other liquidity requirements. In January 2005, the
agreement was amended to extend the maturity date from September 2005 to April
2006. The revolving credit facility is secured by substantially all of the
inventory and trade receivables owned by the Company. Availability under the
agreement is limited by the amount of eligible inventory and accounts
receivable, applied against certain advance rates. Borrowings under the credit
facility bear interest at either the base rate or the LIBOR rate plus an
applicable spread based on the fixed charge coverage ratio. The base rate is
equal to the higher of (a) PNC Bank's base commercial lending rate or (b) the
Federal Funds Rate plus .50%. The base rate spread ranges from 0% to .50%, and
the LIBOR spread ranges from 1.75% to 2.50%. Base-rate loans are structured as
revolving borrowings, whereby the Company's lockbox receipts are immediately
applied against any outstanding borrowings. The Company classifies base-rate
borrowings as short-term obligations, in accordance with current accounting
requirements. At March 31, 2005, no base-rate loans were outstanding. At
December 31, 2004, $112,000 in base-rate loans were outstanding.
The agreement includes financial covenants requiring a minimum net worth and a
minimum level for the fixed charge coverage ratio and a maximum level for the
consolidated capital expenditures. The agreement also restricts investments,
indebtedness, and the sale of certain assets. As of March 31, 2005, the Company
was in compliance with all of the agreement's covenants. At March 31, 2005 the
Company had borrowed $19,000,000 under the agreement, which was classified as
long-term, and had approximately $38,809,000 in unused borrowing commitment.
In May 2005, the Company entered into an amended and restated credit agreement
with a consortium of commercial banks. See Note 14, Subsequent Event.
9
8. EARNINGS (LOSS) PER COMMON SHARE
- -----------------------------------
The following table sets forth the computation of basic and diluted earnings
(loss) per common share:
Three Months Ended
March 31,
(in thousands, except earnings per share) 2005 2004
- --------------------------------------------------------------------------------------------
Numerator:
Numerator for basic and diluted
earnings (loss) per common share -
net income (loss) available to common
stockholders: $ 628 ($ 113)
============================================================================================
Denominator:
Weighted average shares 10,066 9,806
- --------------------------------------------------------------------------------------------
Denominator for basic earnings (loss)
per common share 10,066 9,806
Effect of dilutive securities:
Employee stock options 329 343
- --------------------------------------------------------------------------------------------
Dilutive potential common shares 329 343
Denominator for diluted earnings (loss)
per common share - adjusted weighted
average shares and assumed conversions 10,395 10,149
============================================================================================
Basic and diluted earnings (loss) per common share $ 0.06 ($ 0.01)
============================================================================================
9. STOCK-BASED COMPENSATION
- ---------------------------
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS
123) and applies the intrinsic value method of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation expense has been recognized.
The following table illustrates the effect on the Company's income from
continuing operations and earnings per share had compensation expense for the
Company's stock option plans been applied using the method required by SFAS 123.
10
Three Months Ended
March 31,
In thousands, except per share amounts 2005 2004
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) from continuing operations, as reported $628 ($113)
Add: Stock-based employee compensation expense included in
reported net income (loss), net of related tax effects - -
Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards, net of related tax effects 44 51
- -----------------------------------------------------------------------------------------------------------------
Pro forma income (loss) from continuing operations $584 ($164)
=================================================================================================================
Earnings (loss) per share from continuing operations:
Basic and diluted, as reported $0.06 ($0.01)
=================================================================================================================
Basic and diluted, pro forma $0.06 ($0.02)
=================================================================================================================
Pro forma information regarding net income and earnings per share for options
granted has been determined as if the Company had accounted for its employee
stock options under the fair value method of Statement No. 123. The fair value
of stock options used to compute pro forma net income and earnings per share
disclosures is the estimated present value at grant date using the Black-Scholes
option-pricing model. There were no stock options granted in the first quarter
of 2005 or 2004.
10. COMMITMENTS AND CONTINGENT LIABILITIES
- ------------------------------------------
The Company is subject to laws and regulations relating to the protection of the
environment, and the Company's efforts to comply with environmental regulations
may have an adverse effect on its future earnings. In the opinion of management,
compliance with the present environmental protection laws will not have a
material adverse effect on the financial condition, results of operations, cash
flows, competitive position, or capital expenditures of the Company.
The Company is subject to legal proceedings and claims that arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial condition or liquidity of the Company. Although the resolution, in any
reporting period, of one or more of these matters, could have a material effect
on the Company's results of operations for that period.
In 2000, the Company's subsidiary sold concrete railroad crossing panels to a
general contractor on a Texas transit project. Due to a variety of factors,
including deficiencies in the owner's project specifications, the panels have
deteriorated and the owner either has replaced or is in the process of replacing
these panels. The general contractor and the owner are currently engaged in
dispute resolution procedures, which probably will continue through 2005. The
general contractor has notified the Company that, depending on the outcome of
these proceedings, it may file a suit against the Company's subsidiary. Although
no assurances can be given, the Company believes that it has meritorious
defenses to such claims and will vigorously defend against such a suit.
In the second quarter of 2004, a gas company filed a complaint against the
Company in Allegheny County, PA, alleging that in 1989 the Company had applied
epoxy coating on 25,000 feet of pipe and that, as a result of inadequate surface
preparation of the pipe, the coating had blistered and deteriorated. The Company
does not believe that the gas company's alleged problems are the Company's
responsibility. Although no assurances can be given, the Company believes that
it has meritorious defenses to such claims and will vigorously defend against
such a suit.
Another gas supply company filed suit against the Company in August, 2004, in
Erie County, NY alleging that pipe coating which the Company furnished in 1985
had deteriorated and that the gas supply company has incurred $1,000,000 in
damages. The Company does not, however, believe that the gas supply company's
alleged problem is the Company's responsibility. Although no assurances can be
given, the
11
Company believes that it has meritorious defenses to such claims and will
vigorously defend against such a suit.
At March 31, 2005 the Company had outstanding letters of credit of approximately
$3,499,000.
11. BUSINESS SEGMENTS
- ---------------------
The Company is organized and evaluated by product group, which is the basis for
identifying reportable segments. The Company is engaged in the manufacture,
fabrication and distribution of rail, construction and tubular products. The
following table illustrates revenues and profits of the Company by segment:
Three Months Ended,
March 31, 2005 March 31, 2004
---------------------------------------------------------------------
Net Segment Net Segment
(in thousands) Sales Profit/(Loss) Sales Profit/(Loss)
- ----------------------------------------------------------------------------------------------------
Rail products $38,258 $1,947 $35,587 $ 617
Construction products 33,131 (1,234) 26,775 (1,056)
Tubular products 3,925 179 3,090 3
- ----------------------------------------------------------------------------------------------------
Total $75,314 $ 892 $65,452 ($ 436)
====================================================================================================
Segment profits, as shown above, include internal cost of capital charges for
assets used in the segment at a rate of, generally, 1% per month. There has been
no change in the measurement of segment profit from December 31, 2004.
The following table provides a reconciliation of reportable net profit (loss) to
the Company's consolidated total:
Three Months Ended
March 31,
(in thousands) 2005 2004
- -------------------------------------------------------------------------------
Income (loss) for reportable segments $ 892 ($ 436)
Cost of capital for reportable segments 2,660 2,398
Interest expense (424) (463)
Other income 500 694
Corporate expense and other
unallocated charges (2,721) (2,381)
- -------------------------------------------------------------------------------
Income (loss) before income taxes $ 907 ($ 188)
===============================================================================
12. COMPREHENSIVE INCOME (LOSS)
- -------------------------------
Comprehensive income (loss) represents net income (loss) plus certain
stockholders' equity changes not reflected in the Condensed Consolidated
Statements of Operations. The components of comprehensive income (loss), net of
tax, were as follows:
12
Three Months Ended
March 31,
(in thousands) 2005 2004
- --------------------------------------------------------------------------
Net income (loss) $628 ($113)
Unrealized derivative gains on
cash flow hedges - 12
Foreign currency translation losses - (18)
- --------------------------------------------------------------------------
Comprehensive income (loss) $628 ($119)
==========================================================================
13. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
- -----------------------------------------------------------
The Company does not purchase or hold any derivative financial instruments for
trading purposes. The Company uses derivative financial instruments to manage
interest rate exposure on variable-rate debt, primarily by using interest rate
collars and variable interest rate swaps. The Company's primary source of
variable-rate debt comes from its revolving credit agreement. In conjunction
with the Company's debt refinancing in the third quarter of 2002, the Company
discontinued cash flow hedge accounting treatment for the interest rate collars
it had in place and applied mark-to-market accounting prospectively.
During the first quarter of 2005, the Company had one LIBOR-based interest rate
collar agreement remaining. This agreement became effective in March 2001 and
expires in March 2006, has a notional value of $15 million, a maximum annual
interest rate of 5.60% and a minimum annual interest rate of 5.00%. The
counterparty to the agreement had the option, which was exercised on March 6,
2005, to convert the collar to a one year, fixed-rate instrument with interest
payable at an annual rate of 5.49%. The fair value of this instrument was a
liability of $0.3 million as of March 31, 2005 and is recorded in "Other
long-term liabilities".
With the debt refinancing in 2002, the collar agreements were not deemed to be
an effective hedge of the new credit facility in accordance with the provisions
of SFAS 133. However, the Company retained these instruments as protection
against interest rate risk associated with the new credit agreement and the
Company records the mark-to-market adjustments on these instruments in its
consolidated statements of operations. During the first quarter of 2005 and
2004, the Company recognized $149,000 of income and a loss of $42,000,
respectively, to adjust these instruments to fair value.
The Company recognizes all derivative instruments on the balance sheet at fair
value. Fluctuations in the fair values of derivative instruments designated as
cash flow hedges are recorded in accumulated other comprehensive income, and
reclassified into earnings as the underlying hedged items affect earnings. To
the extent that a change in interest rate derivative does not perfectly offset
the change in value of the interest rate being hedged, the ineffective portion
is recognized in earnings immediately.
The Company is not subject to significant exposures to changes in foreign
currency exchange rates. The Company will, however, manage its exposure to
changes in foreign currency exchange rates on firm sale and purchase commitments
by entering into foreign currency forward contracts. The Company's risk
management objective is to reduce its exposure to the effects of changes in
exchange rates on these transactions over the duration of the transactions.
During 2004, the Company entered into commitments to sell Canadian funds based
on the anticipated receipt of Canadian funds from the sale of certain rail.
During the fourth quarter of 2004, circumstances indicated that the timing of
the anticipated receipt of Canadian funds were not expected to coincide with the
sale commitments and the Company recorded a $0.2 million loss to record these
commitments at market. During the first quarter of 2005, the Company recognized
$104,000 of income to adjust these commitments to fair value.
13
14. SUBSEQUENT EVENT
- --------------------
In May 2005, the Company and certain of its subsidiaries entered into an amended
and restated credit agreement with a consortium of commercial banks. The new
credit agreement provides for a $60,000,000 five year revolving credit facility
expiring in May 2010. Borrowings under the agreement are secured by
substantially all the inventory and trade receivables owned by the Company, and
are limited to 85% of eligible accounts receivable and 60% of eligible
inventory.
Borrowings under the amended credit agreement will bear interest at interest
rates based upon either the base rate or LIBOR plus or minus applicable margins.
The base rate is the greater of (a) PNC Bank's base commercial lending rate or
(b) the Federal Funds Rate plus .50%. The base rate spread ranges from a
negative 1.00% to a positive 0.50%, and the LIBOR spread ranges from 1.50% to
2.50%. The interest rates on the Company's initial borrowings were LIBOR plus
1.50% and the base rate minus 1.00%. Under the amended credit agreement, the
Company maintains dominion over its cash at all times, as long as excess
availability stays over $5,000,000 and there is no uncured event of default.
The agreement includes financial covenants requiring, a minimum level for the
fixed charge coverage ratio and a maximum amount of annual consolidated capital
expenditures; however, expenditures for plant construction and refurbishment
related to the Company's recent concrete tie supply agreement will be excluded
from these covenants. The agreement also includes a minimum net worth covenant
and restricts certain investments, other indebtedness, and the sale of certain
assets.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Overview
General
- -------
L. B. Foster Company is a manufacturer, fabricator and distributor of products
utilized in the transportation infrastructure, construction and utility markets.
The Company is comprised of three business segments: Rail products, Construction
products and Tubular products.
Recent Developments
- -------------------
On May 5, 2005, we entered into an amended and restated credit agreement with a
consortium of commercial banks. The new agreement provides for a $60.0 million
five year revolving credit facility expiring in May 2010.
Critical Accounting Policies
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States.
When more than one accounting principle, or method of its application, is
generally accepted, management selects the principle or method that is
appropriate in the Company's specific circumstances. Application of these
accounting principles requires management to make estimates about the future
resolution of existing uncertainties. As a result, actual results could differ
from these estimates. In preparing these financial statements, management has
made its best estimates and judgments of the amounts and disclosures included in
the financial statements giving due regard to materiality. There have been no
material changes in the Company's policies or estimates since December
14
31, 2004. For more information regarding the Company's critical accounting
policies, please see the Management's Discussion & Analysis of Financial
Condition and Results of Operations in Form 10-K for the year ended December 31,
2004.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123(R), "Share-Based Payment" (SFAS 123R),
which is a revision of Statement of Financial Accounting Standard No. 123 and
supersedes APB Opinion No. 25. SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be valued at fair
value on the date of grant, and to be expensed over the applicable vesting
period. Pro forma disclosure of the income statement effects of share-based
payments is no longer an alternative. In addition, companies must also recognize
compensation expense related to any awards that are not fully vested as of the
effective date. Compensation expense for the unvested awards will be measured
based on the fair value of the awards previously calculated in developing the
pro forma disclosures in accordance with SFAS 123. SFAS 123R was originally
effective for reporting periods that began after June 15, 2005. In April 2005,
the SEC announced the adoption of a new rule allowing companies to implement
SFAS 123R at the beginning of their next fiscal year that begins after June 15,
2005. The Company will begin recording compensation expense utilizing modified
prospective application in its 2006 first quarter financial statements. Adoption
of this standard is not expected to have a material effect on its financial
position or results of operations.
On October 22, 2004, President Bush signed the American Jobs Creation Act of
2004 (the Act). The Act provides a deduction for income from qualified domestic
production activities, which will be phased in from 2005 through 2010. When
fully phased-in, this deduction will be equal to 9 percent of the lesser of (a)
"Qualified Production Activities Income" (QPAI), as defined in the act, or (b)
taxable income (after utilization of any net operating loss carryforwards. In
all cases, the deduction is limited to 50 percent of W-2 wages of the taxpayer.
In return, the Act also provides for a two-year phase-out (except for certain
pre-existing binding contracts) of the existing Extraterritorial Income
Exclusion (ETI) benefit for foreign sales that the World Trade Organization
(WTO) ruled was an illegal export subsidy.
On December 1, 2004, FASB Staff Position (FSP) No. FAS109-1, "Application of
FASB Statement 109, Accounting for Income Taxes, to the Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act of 2004", was
issued. FSP No. 109-1 clarifies that this tax deduction should be accounted for
as a special deduction in accordance with SFAS No. 109, "Accounting for Income
Taxes". As such the special deduction has no effect on deferred tax assets and
liabilities existing at the date of enactment. Rather, the impact of this
deduction will be reported in the period in which the deduction is claimed on
our tax return beginning in 2005. The Company has assessed the impact of this
deduction and for 2005, anticipates a de minimis benefit due to the anticipated
utilization of net operating loss carryforwards.
15
Results of Operations
Three Months Ended
March 31,
-----------------------------------
2005 2004
-----------------------------------
(Dollars in thousands)
Net Sales:
Rail Products $38,258 $35,587
Construction Products 33,131 26,775
Tubular Products 3,925 3,090
-----------------------------------
Total Net Sales $75,314 $65,452
===================================
Gross Profit:
Rail Products $4,893 $3,422
Construction Products 2,840 2,533
Tubular Products 631 435
Other (364) (408)
-----------------------------------
Total Gross Profit 8,000 5,982
-----------------------------------
Expenses:
Selling and administrative
expenses 7,169 6,401
Interest expense 424 463
Other income (500) (694)
-----------------------------------
Total Expenses 7,093 6,170
-----------------------------------
Income (Loss) before Income Taxes 907 (188)
Income Tax Expense (Benefit) 279 (75)
-----------------------------------
Net Income (Loss) $628 ($113)
===================================
Gross Profit %:
Rail Products 12.8% 9.6%
Construction Products 8.6% 9.5%
Tubular Products 16.1% 14.1%
Total Gross Profit 10.6% 9.1%
First Quarter 2005 Results of Operations
- ----------------------------------------
Net income for the first quarter of 2005 was $0.6 million ($0.06 per share) on
net sales of $75.3 million and compares favorably to a first quarter 2004 net
loss of $0.1 million ($0.01 per share) on net sales of $65.5 million.
Net sales for the Company increased $9.9 million compared to the prior year
first quarter. The 7.5% increase in Rail segment sales is primarily due to
increases in sales of new and relay rail products. Construction products' net
sales increased 23.7% due mainly to an increase in sheet piling sales, as
additional sheet piling sections became available from our supplier. Tubular
products' sales increased 27%
16
in comparison to the first quarter of 2004. Last year's sales were negatively
impacted by a decline in major pipeline installations, as higher steel costs
caused these projects to be delayed.
The Company's gross profit margin increased 1.5 percentage points to 10.6%
compared to last year's first quarter. Rail products' profit margin increased
3.2 percentage points to 12.8% due to customer and product mix. The 0.9
percentage point decline in Construction products' margin was due primarily to
low margins in our fabricated products business, as selling prices declined, and
lower volumes caused increased plant inefficiencies. Tubular products' gross
profit margin increased 2.0 percentage points. Last year's first quarter profit
margin had been reduced due to the previously-mentioned delays in major natural
gas pipeline projects.
Selling and administrative expenses increased 12.0% from the same prior year
period due to increases in employee benefits, advertising and audit fees.
Interest expense declined 8.4% from the prior year period due principally to the
April 2004 retirement of a $10.0 million notional amount LIBOR-based interest
rate collar agreement offset in part by increased interest rates. Other income
decreased 28.0%, or $0.2 million, as prior year results included a gain from the
sale of our former Newport, KY pipe coating machinery and equipment which had
been classified as "held for resale". Income taxes in the current year are
recorded at approximately 31% compared to 40% in the prior year first quarter.
The prior year rate reflects an increase in the valuation allowance to reflect
the uncertainty regarding the Company's ability to utilize certain state net
operating loss carryforwards prior to their expiration.
Liquidity and Capital Resources
The Company's capitalization is as follows:
Debt: March 31, December 31,
In millions 2005 2004
- --------------------------------------------------------------------------------
Revolving Credit Facility $19.0 $14.1
Capital Leases 2.2 1.1
Other (primarily revenue bonds) 2.8 2.8
- --------------------------------------------------------------------------------
Total Debt 24.0 18.0
- --------------------------------------------------------------------------------
Equity 74.6 73.7
- --------------------------------------------------------------------------------
Total Capitalization $98.6 $91.7
- --------------------------------------------------------------------------------
Debt as a percentage of capitalization (debt plus equity) increased to 24% from
20% at year-end 2004. Working capital was $51.8 million at March 31, 2005
compared to $46.8 million at December 31, 2004.
The Company's liquidity needs arise from seasonal working capital requirements,
capital expenditures, acquisitions and debt service obligations. The following
table summarizes the impact of these items:
17
March 31,
In millions 2005 2004
- --------------------------------------------------------------------------------
Liquidity needs:
- ----------------
Working capital and other assets and liabilities ($1.0) ($4.2)
Capital expenditures, net of asset sales (1.2) (1.2)
Scheduled debt service obligations - net (0.1) (0.2)
Cash interest (0.3) (0.4)
- --------------------------------------------------------------------------------
Net liquidity requirements (2.6) (6.0)
- --------------------------------------------------------------------------------
Liquidity sources:
- ------------------
Internally generated cash flows before interest 1.9 1.2
Credit facility activity 4.9 (0.2)
Equity transactions 0.2 0.9
- --------------------------------------------------------------------------------
Net liquidity sources 7.0 1.9
- -------------------------------------------------------------------------------
Net Change in Cash $4.4 ($4.1)
================================================================================
Capital expenditures were $1.2 million for the first three months of 2005 and
2004. The Company anticipates its total capital spending in 2005 to exceed $15.0
million, largely due to its commitment to fulfill its concrete tie agreement
with the Union Pacific Railroad. A new facility will be built in Tucson, AZ and
substantial improvements will be made to the Company's existing Grand Island, NE
facility. These expenditures will be funded by cash flow from operations and
available external financing sources. Since the new or improved facilities are
expected to be completed in the fourth quarter of 2005 and into the first
quarter of 2006, most of the volume and productivity improvements will not be
realized until 2006.
The Company's Board of Directors has authorized the purchase of up to 1,500,000
shares of its Common stock at prevailing market prices. No purchases have been
made since the first quarter of 2001. From August 1997 through March 2001, the
Company had repurchased 973,398 shares at a cost of approximately $5.0 million.
The timing and extent of future purchases will depend on market conditions and
options available to the Company for alternate uses of its resources.
The Company has an agreement that provides for a revolving credit facility of up
to $60.0 million in borrowings to support the Company's working capital and
other liquidity requirements. In January 2005, the agreement was amended to
extend the maturity date from September 2005 to April 2006. The revolving credit
facility is secured by substantially all of the Company's inventory and trade
receivables. Availability under this agreement is limited by the amount of
eligible inventory and accounts receivable applied against certain advance
rates. Borrowings under the credit facility bear interest at either the base
rate or the LIBOR plus an applicable spread based on the fixed charge coverage
ratio. The base rate is equal to the higher of (a) PNC Bank's base commercial
lending rate or (b) the Federal Funds Rate plus .50%. The base rate spread
ranges from 0% to .50%, and the LIBOR spread ranges from 1.75% to 2.50%.
Base-rate loans are structured as revolving borrowings, whereby the Company's
lockbox receipts are immediately applied against any outstanding borrowings. The
Company classifies base-rate borrowings as short-term obligations, in accordance
with current accounting requirements. At March 31, 2005, no base-rate loans were
outstanding. At December 31, 2004, $0.1 million in base-rate loans were
outstanding.
Long-term revolving credit agreement borrowings at March 31, 2005 were $19.0
million, an increase of $5.0 million from December 31, 2004. At March 31, 2005,
remaining available borrowings under this facility were approximately $38.8
million. Outstanding letters of credit at March 31, 2005 were approximately $3.5
million. The letters of credit expire annually and are subject to renewal.
Management believes its internal and external sources of funds are adequate to
meet anticipated needs for the foreseeable future.
The credit agreement includes financial covenants requiring a minimum net worth
and a minimum level for the fixed charge coverage ratio. The primary
restrictions to this agreement include investments,
18
indebtedness, and the sale of certain assets. As of March 31, 2005, the Company
was in compliance with all of the agreement's covenants.
On May 5, 2005, the Company entered into an amended and restated credit
agreement. See Note 14, Subsequent Event for details of the new agreement.
Off-Balance Sheet Arrangements
The Company's off-balance sheet arrangements include operating leases, purchase
obligations and standby letters of credit. A schedule of the Company's required
payments under financial instruments and other commitments as of December 31,
2004 are included in "Liquidity and Capital Resources" section of the Company's
2004 Annual Report filed on Form 10-K. There have been no significant changes to
the Company's contractual obligations relative to the information presented in
the Form 10-K. These arrangements provide the Company with increased flexibility
relative to the utilization and investment of cash resources.
Dakota, Minnesota & Eastern Railroad
The Company maintains a significant investment in the Dakota, Minnesota &
Eastern Railroad Corporation (DM&E), a privately held, regional railroad, which
controls over 2,500 miles of track in eight states.
At March 31, 2005, the Company's investment was comprised of $0.2 million of
DM&E common stock, $1.5 million of Series B Preferred Stock and warrants, $6.0
million of Series C Preferred Stock and warrants, $0.8 million of Preferred
Series C-1 Stock and warrants, and $0.5 million of Series D Preferred Stock and
warrants. In addition, the Company has a receivable for accrued dividend income
on Preferred Stock of approximately $6.0 million. The Company owns approximately
13.6% of the DM&E.
In December 1998, in conjunction with the issuance of Series C Preferred Stock
and warrants, the DM&E ceased paying dividends on the Series B shares. The terms
of the Series B Preferred Stock state in the event that regular dividends are
not paid timely, dividends accrue at an accelerated rate until those dividends
are paid. In addition, penalty interest accrues and compounds annually until
such dividends are paid. Subsequent issuances of Series C, C-1, and D Preferred
Stock have all assumed distribution priority over the previous series, with
series D not redeemable until 2008. As subsequent preferred series were issued,
the Company, based on its own valuation estimate, stopped recording the full
amount due on all preferred series given the delay in anticipated realization of
the asset and the priority of redemption of the various issuances. The amount of
dividend income not recorded was approximately $4.1 million at March 31, 2005.
The Company will only recognize this income upon redemption of the respective
issuances or payment of the dividends.
In June 1997, the DM&E announced its plan to build an extension from the DM&E's
existing line into the low sulfur coal market of the Powder River Basin in
Wyoming and to rebuild approximately 600 miles of its existing track (the
Project). The estimated cost of this project is expected to be in excess of $2.0
billion. The Surface Transportation Board (STB) approved the Project in January
2002. In October 2003, however, the 8th U.S. Circuit Court of Appeals remanded
the matter to the STB and instructed the STB to address, in its environmental
impact statement, the Project's effects on air quality, noise and vibration, and
preservation of historic sites. On January 30, 2004, the 8th U. S. Circuit Court
of Appeals denied petitions seeking a rehearing of the case. On April 15, 2005,
the STB issued a draft Supplemental Environmental Impact Statement (SEIS) on the
Project. The STB will make its final decision after reviewing public comments on
the SEIS.
If the Project proves to be viable, management believes that the value of the
Company's investment in the DM&E could increase significantly. If the Project
does not come to fruition, management believes that the value of the Company's
investment is supported by the DM&E's existing business.
19
In December 2003, the DM&E received a Railroad Rehabilitation and Improvement
Financing (RRIF) Loan in the amount of $233.0 million from the Federal Railroad
Administration. Funding provided by the 25-year loan was used to refinance debt
and upgrade infrastructure along parts of its existing route.
Other Matters
We have reached an agreement for a three year contract with the union
representing our employees at the Bedford, PA fabricated products facility.
Although the previous agreement had expired in March 2005, employees continued
to work under terms of the old contract during negotiations.
We continue to evaluate the overall performance of our operations. A decision to
down-size or terminate an existing operation could have a material adverse
effect on near-term earnings but would not be expected to have a material
adverse effect on the financial condition of the Company.
Outlook
Our CXT Rail operations and Allegheny Rail Products division are dependent on a
Class I railroad for a significant portion of their business. In January 2005,
the CXT Rail operation was awarded a long-term contract from this Class I
railroad for the supply of prestressed concrete railroad ties. To accommodate
the contract's requirements, CXT will upgrade its manufacturing equipment at its
Grand Island, NE plant and build a new facility in Tucson, AZ. Engineering, site
development and equipment manufacturing related to these facilities commenced in
the first quarter of 2005. The Class I railroad has agreed to purchase ties from
the Grand Island facility through December 2009, and the Tucson, AZ facility
through December 2012.
Steel is a key component in the products that we sell. During most of 2004,
producers and other suppliers quoted continually increasing product prices and
some of our suppliers experienced supply shortages. Since many of the Company's
projects can be six months to twenty-four months in duration, we have, on
occasion, found ourselves caught in the middle of some of these pricing and
availability issues. The high price of steel continues to impact our business,
although the pricing volatility that we experienced in 2004 has moderated and we
expect less volatility in the current year. However, if this situation were to
resurface, if could have a negative impact on the Company's results of
operations and cash flows.
In the second half of 2004, our primary supplier of sheet piling improved its
capability to provide a significantly larger amount of sheet piling than in
previous years. This supplier also increased the number of sections it provides
to us, although there are still sections that remain unavailable. While
management's outlook is positive considering the developments in 2004,
additional sections are important for us to compete effectively in the
structural steel market.
A substantial portion of the Company's operations is heavily dependent on
governmental funding of infrastructure projects. Significant changes in the
level of government funding of these projects could have a favorable or
unfavorable impact on the operating results of the Company. The most recent
extension of the federal highway and transit bill (TEA-21) is to expire in May,
2005, as reauthorization of a successor bill continues to be delayed. A new
highway and transit bill is important to the future growth and profitability of
many of the Company's businesses. Our fabricated products and rail transit
businesses continue to be slow and to experience more competitive pressure due
to the lack of new legislation. Additionally, government actions concerning
taxation, tariffs, the environment, or other matters could impact the operating
results of the Company. The Company's operating results may also be affected
negatively by adverse weather conditions.
Although backlog is not necessarily indicative of future operating results,
total Company backlog at March 31, 2005, was approximately $137.0 million. The
following table provides the backlog by business segment:
20
Backlog
------------------------------------------------------
March 31, December 31, March 31,
(In thousands) 2005 2004 2004
- --------------------------------------------------------------------------------
Rail Products $ 51,955 $ 29,079 $ 46,038
Construction Products 78,016 67,736 67,886
Tubular Products 7,035 3,249 4,695
- --------------------------------------------------------------------------------
Total $ 137,006 $ 100,064 $ 118,619
================================================================================
Market Risk and Risk Management Policies
The Company does not purchase or hold any derivative financial instruments for
trading purposes. The Company uses derivative financial instruments to manage
interest rate exposure on variable-rate debt, primarily by using interest rate
collars and variable interest rate swaps. The Company's primary source of
variable-rate debt comes from its revolving credit agreement. In conjunction
with the Company's debt refinancing in the third quarter of 2002, the Company
discontinued cash flow hedge accounting treatment for the interest rate collars
it had in place and applied mark-to-market accounting prospectively.
During the first quarter of 2005, the Company had one LIBOR-based interest rate
collar agreement remaining. This agreement became effective in March 2001 and
expires in March 2006, has a notional value of $15 million, a maximum annual
interest rate of 5.60% and a minimum annual interest rate of 5.00%. The
counterparty to the agreement had the option, which was exercised on March 6,
2005, to convert the collar to a one year, fixed-rate instrument with interest
payable at an annual rate of 5.49%. The fair value of this instrument was a
liability of $0.3 million as of March 31, 2005 and is recorded in "Other
long-term liabilities".
With the debt refinancing in 2002, the collar agreements were not deemed to be
an effective hedge of the new credit facility in accordance with the provisions
of SFAS 133. However, the Company retained these instruments as protection
against interest rate risk associated with the new credit agreement and the
Company records the mark-to-market adjustments on these instruments in its
consolidated statements of operations. During the first quarter of 2005 and
2004, the Company recognized $149,000 of income and a loss of $42,000,
respectively, to adjust these instruments to fair value.
The Company recognizes all derivative instruments on the balance sheet at fair
value. Fluctuations in the fair values of derivative instruments designated as
cash flow hedges are recorded in accumulated other comprehensive income, and
reclassified into earnings as the underlying hedged items affect earnings. To
the extent that a change in interest rate derivative does not perfectly offset
the change in value of the interest rate being hedged, the ineffective portion
is recognized in earnings immediately.
Since the interest rate on the revolving credit agreement floats with the
short-term market rate of interest, the Company is exposed to the risk that the
interest rate may decrease below the 5.49% fixed rate on the remaining
agreement. The effect of a 1% decrease in rate of interest below the 5.49%
annual interest rate on $15 million of outstanding floating rate debt would
result in increased annual interest costs of approximately $0.2 million.
The Company is not subject to significant exposures to changes in foreign
currency exchange rates. The Company will, however, manage its exposure to
changes in foreign currency exchange rates on firm sale and purchase commitments
by entering into foreign currency forward contracts. The Company's risk
management objective is to reduce its exposure to the effects of changes in
exchange rates on these transactions over the duration of the transactions.
During 2004, the Company entered into commitments to sell Canadian funds based
on the anticipated receipt of Canadian funds from the sale of certain rail.
During the fourth quarter of 2004, circumstances indicated that the timing of
the anticipated receipt of Canadian funds were not expected to coincide with the
sale commitments and the Company recorded a $0.2 million loss to record these
commitments at market. During the first quarter of 2005, the Company recognized
$104,000 of income to adjust these commitments to fair value.
21
Forward-Looking Statements
Statements relating to the potential value 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 and its ability to complete the
Project include the following: labor disputes, the outcome of certain
litigation, any inability to obtain necessary environmental and government
approvals for the Project in a timely fashion, the DM&E's ability to continue to
obtain interim funding to finance the Project, the expense of environmental
mitigation measures required by the Surface Transportation Board, an inability
to obtain financing for the Project, competitors' response to the Project,
market demand for coal or electricity and changes in environmental laws and
regulations.
The Company cautions readers that various factors could cause the actual results
of the Company to differ materially from those indicated by forward-looking
statements made from time to time in news releases, reports, proxy statements,
registration statements and other written communications (including the
preceding sections of this Management's Discussion and Analysis), as well as
oral statements, such as references made to the future profitability, made from
time to time by representatives of the Company. An inability to produce a full
complement of piling products by a Virginia steel mill could adversely impact
the growth of the Piling division. Delays or problems encountered at our
concrete tie facilities during construction or implementation could have a
material, negative impact on the Company's operating results. The Company's
businesses could be affected adversely by significant increases in the price of
steel. 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, labor disputes, the impact of
competition, the seasonality of the Company's business, the adequacy of internal
and external sources of funds to meet financing needs, taxes, inflation and
governmental regulations. Sentences containing words such as "believes,"
"intends," "anticipates," "expects," or "will" generally should be considered
forward-looking statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
See the "Market Risk and Risk Management Policies" section under Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Item 4. CONTROLS AND PROCEDURES
- -------------------------------
a) As of the end of the period covered by this report, L. B. Foster Company
(the Company) carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant
to Exchange Act Rules 13a - 15(e) and 15d - 15(e). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are
effective to timely alert them to material information relating to the
Company (including its consolidated subsidiaries) required to be included
in the Company's periodic SEC filings.
b) There have been no significant changes in the Company's internal controls
over financial reporting that occurred in the period covered by this report
that have materially affected or are likely to materially affect the
Company's internal controls over financial reporting.
22
PART II OTHER INFORMATION
-------------------------
Item 1. LEGAL PROCEEDINGS
- -------------------------
See Note 10, "Commitments and Contingent Liabilities", to the Condensed
Consolidated Financial Statements.
Item 5. OTHER INFORMATION
- --------------------------
On May 5, 2005, the Company and certain of its subsidiaries entered into an
amended and restated credit agreement with PNC Bank, N.A., LaSalle Bank, N.A.,
and First Commonwealth Bank. The new agreement provides for a $60.0 million five
year revolving credit facility expiring in May 2010, and is filed as Exhibit
10.0 to this form 10-Q. See Note 14, Subsequent Event located in the Notes to
Condensed Consolidated Financial Statements.
Item 6. EXHIBITS
- ----------------
Unless marked by an asterisk, all exhibits are incorporated by reference:
3.1 Restated Certificate of Incorporation, filed as Exhibit 3.1 to Form
10-Q for the quarter ended March 31, 2003.
3.2 Bylaws of the Registrant, as amended to date, filed as Exhibit 3.2
to Form 10-K for the year ended December 31, 2002.
4.0 Rights Amendment, dated as of May 15, 1997 between L. B. Foster
Company and American Stock Transfer & Trust Company, including the
form of Rights Certificate and the Summary of Rights attached
thereto, filed as Exhibit 4.0 to Form 10-K for the year ended
December 31, 2002.
4.0.1 Amended Rights Agreement dated as of May 14, 1998 between L. B.
Foster Company and American Stock Transfer and Trust Company, filed
as Exhibit 4.0.1 to Form 10-Q for the quarter ended March 31, 2003.
4.0.2 Revolving Credit and Security Agreement dated as of September 26,
2002, between L. B. Foster Company and PNC Bank, N. A., filed as
Exhibit 4.0.2 to Form 10-Q for the quarter ended September 30,
2002.
4.0.3 First Amendment to Revolving Credit and Security Agreement dated
September 8, 2003, between the Registrant and PNC Bank, N.A, filed
as Exhibit 4.0.3 to Form 10-Q for the quarter ended September 30,
2003.
4.0.4 Second Amendment to Revolving Credit and Security Agreement dated
January 28, 2005, between Registrant and PNC Bank, N.A., filed as
Exhibit 4.0.4 to Form 8-K on February 2, 2005.
4.0.5 Third Amendment to Revolving Credit and Security Agreement dated
January 28, 2005, between Registrant and PNC Bank, N.A., filed as
Exhibit 4.0.5 to Form 8-K on February 2, 2005.
* 10.0 Amended and Restated Revolving Credit Agreement dated May 5, 2005,
between Registrant and PNC Bank, N.A, LaSalle Bank N.A., and First
Commonwealth Bank.
10.12 Lease between CXT Incorporated and Pentzer Development Corporation,
dated April 1, 1993, filed as Exhibit 10.12 to Form 10-K for the
year ended December 31, 2004.
23
10.12.1 Second Amendment dated March 12, 1996 to lease between CXT Incorp-
orated and Crown West Realty, LLC, successor, filed as Exhibit
10.12.1 to Form 10-K for the year ended December 31, 2004.
10.12.2 Third Amendment dated November 7, 2002 to lease between CXT
Incorporated and Crown West Realty, LLC, filed as Exhibit 10.12.2
to Form 10-K for the year ended December 31, 2002.
10.12.3 Fourth Amendment dated December 15, 2003 to lease between CXT
Incorporated and Crown West Realty, LLC, filed as Exhibit 10.12.3
to Form 10-K for the year ended December 31, 2003.
10.12.4 Fifth Amendment dated June 29, 2004 to lease between CXT
Incorporated and Park SPE, LLC, filed as Exhibit 10.12.4 to Form
10-K for the year ended December 31, 2004.
10.13 Lease between CXT Incorporated and Crown West Realty, L. L. C.,
dated December 20, 1996, filed as Exhibit 10.13 to Form 10-K for
the year ended December 31, 2004.
10.13.1 Amendment dated June 29, 2001 between CXT Incorporated and Crown
West Realty, filed as Exhibit 10.13.1 to Form 10-K for the year
ended December 31, 2002.
10.15 Lease between CXT Incorporated and Union Pacific Railroad Company,
dated February 13, 1998, and filed as Exhibit 10.15 to Form 10-K,
for the year ended December 31, 2004.
10.15.1 Renewal Rider for lease between CXT Incorporated, Union Pacific
Railroad Company and Nevada Railroad Materials, Inc., dated
December 17, 2003, and filed as Exhibit 10.15.1 to Form 10-K for
the year ended December 31, 2003.
10.15.2 Renewal Rider for lease between CXT Incorporated and Union Pacific
Railroad Company dated December 17, 2003 and filed as Exhibit
10.15.2 to Form 10-K for the year ended December 31, 2003.
10.16 Lease between Registrant and Suwanee Creek Business Center, LLC
dated February 13, 2004, and filed as Exhibit 10.16 to Form 10-Q
for the quarter ended June 30, 2004.
10.17 Lease between Registrant and the City of Hillsboro, TX dated
February 22, 2002, filed as Exhibit 10.17 to Form 10-K for the year
ended December 31, 2002.
10.19 Lease between Registrant and American Cast Iron Pipe Company for
pipe-coating facility in Birmingham, AL dated December 11, 1991,
filed as Exhibit 10.19 to Form 10-K for the year ended December 31,
2002.
10.19.1 Amendment to Lease between Registrant and American Cast Iron Pipe
Company for pipe-coating facility in Birmingham, AL dated November
15, 2000, and filed as Exhibit 10.19.2 to Form 10-K for the year
ended December 31, 2000.
10.20 Equipment Purchase and Service Agreement by and between the
Registrant and LaBarge Coating LLC, dated July 31, 2003, and filed
as Exhibit 10.20 to Form 10-Q for the quarter ended September 30,
2003.
^ 10.21 Agreement for Purchase and Sales of Concrete Railroad Ties between
CXT Incorporated and the Union Pacific Railroad dated January 24,
2005, and filed as Exhibit 10.21 to Form 10-K for the year ended
December 31, 2004.
10.22 Manufacturing Agreement between CXT Incorporated and Grimbergen
Engineering & Projects, B.V. dated January 24, 2005, and filed as
Exhibit 10.22 to Form 10-K for the year ended December 31, 2004.
24
10.33.2 Amended and Restated 1985 Long-Term Incentive Plan as of February
26, 1997, filed as Exhibit 10.33.2 to Form 10-Q for the quarter
ended March 31, 2003. **
10.34 Amended and Restated 1998 Long-Term Incentive Plan as of February
2, 2001, filed as Exhibit 10.34 to Form 10-K for the year ended
December 31, 2000. **
10.45 Medical Reimbursement Plan effective January 1, 2004, filed as
Exhibit 10.45 to Form 10-K for the year ended December 31, 2003. **
10.46 Leased Vehicle Plan as amended and restated on June 9, 2004, filed
as Exhibit 10.46 to Form 10-Q for the quarter ended June 30, 2004.
**
10.51 Supplemental Executive Retirement Plan, filed as Exhibit 10.51 to
Form 10-K for the year ended December 31, 2002. **
10.52 Outside Directors' Stock Award Plan, filed as Exhibit 10.52 to Form
10-K for the year ended December 31, 2002. **
10.53 Directors' resolutions dated May 13, 2003, under which directors'
compensation was established, filed as Exhibit 10.53 to Form 10-Q
for the quarter ended June 30, 2003. **
10.55 Management Incentive Compensation Plan for 2005, filed as Exhibit
10.55 to Form 8-K on February 22, 2005. **
* 31.1 Certification of Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
* 31.2 Certification of Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act of 2002.
* 32.0 Certification of Chief Executive Officer and Chief Financial
Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------------------------------------------------------------------------
* Exhibits marked with an asterisk are filed herewith.
** Identifies management contract or compensatory plan or arrangement
required to be filed as an Exhibit.
^ Portions of this exhibit have been omitted pursuant to a
confidential treatment request.
25
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: May 9, 2005 By:/s/David J. Russo
- ------------------- ----------------------
David J. Russo
Senior Vice President,
Chief Financial Officer and Treasurer
(Duly Authorized Officer of Registrant)