UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2005
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
Commission File Number 0-10436
L. B. Foster Company
--------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 25-1324733
------------ ----------
(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
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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 by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
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 25, 2005
- ----------------------------- -------------------------------
Common Stock, Par Value $.01 10,181,495 Shares
L.B. FOSTER COMPANY AND SUBSIDIARIES
INDEX
-----
PART I. Financial Information Page
- ------------------------------ ----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of 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 22
Item 4. Controls and Procedures 22
PART II. Other Information
- ---------------------------
Item 1. Legal Proceedings 22
Item 5. Other Information 22
Item 6. Exhibits 22
Signature 26
PART I. FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
2005 2004
---------------- ----------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $3,405 $280
Accounts and notes receivable:
Trade 60,978 39,759
Other 1,408 170
---------------- ----------------
62,386 39,929
Inventories 66,273 42,014
Current deferred tax assets 1,289 1,289
Other current assets 837 786
---------------- ----------------
Total Current Assets 134,190 84,298
---------------- ----------------
Property, Plant & Equipment - At Cost 81,420 70,467
Less Accumulated Depreciation (41,390) (40,089)
---------------- ----------------
40,030 30,378
---------------- ----------------
Other Assets:
Goodwill 350 350
Other intangibles - net 315 430
Investments 15,439 14,697
Deferred tax assets 3,877 3,877
Other assets 198 65
---------------- ----------------
Total Other Assets 20,179 19,419
---------------- ----------------
TOTAL ASSETS $194,399 $134,095
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $777 $477
Short-term borrowings 10,542 112
Accounts payable - trade 48,659 27,736
Accrued payroll and employee benefits 4,956 3,308
Current deferred tax liabilities 3,942 3,942
Other accrued liabilities 5,489 1,892
---------------- ----------------
Total Current Liabilities 74,365 37,467
---------------- ----------------
Long-Term Borrowings 32,062 14,000
---------------- ----------------
Other Long-Term Debt 3,804 3,395
---------------- ----------------
Deferred Tax Liabilities 2,898 2,898
---------------- ----------------
Other Long-Term Liabilities 2,068 2,592
---------------- ----------------
STOCKHOLDERS' EQUITY:
Common stock 102 102
Paid-in capital 35,510 35,131
Retained earnings 44,453 39,879
Treasury stock (148) (654)
Accumulated other comprehensive loss (715) (715)
---------------- ----------------
Total Stockholders' Equity 79,202 73,743
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $194,399 $134,095
================ ================
See Notes to Condensed Consolidated Financial Statements.
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
-------------------------------- -------------------------------
(Unaudited) (Unaudited)
Net Sales $97,533 $85,858 $270,655 $228,137
Cost of Goods Sold 85,911 76,534 240,273 203,498
-------------- -------------- -------------- --------------
Gross Profit 11,622 9,324 30,382 24,639
Selling and Administrative Expenses 7,896 6,993 23,036 20,448
Interest Expense 778 452 1,775 1,384
Other Income (478) (222) (1,205) (1,266)
-------------- -------------- -------------- --------------
8,196 7,223 23,606 20,566
-------------- -------------- -------------- --------------
Income Before Income Taxes 3,426 2,101 6,776 4,073
Income Tax Expense 1,078 759 2,202 1,549
-------------- -------------- -------------- --------------
Net Income $2,348 $1,342 $4,574 $2,524
============== ============== ============== ==============
Basic Earnings Per Common Share $0.23 $0.13 $0.45 $0.25
============== ============== ============== ==============
Diluted Earnings Per Common Share $0.22 $0.13 $0.44 $0.25
============== ============== ============== ==============
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,
2005 2004
------------- -------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,574 $2,524
Adjustments to reconcile net income to net cash used
by operating activities:
Depreciation and amortization 3,727 3,915
Gain on sale of property, plant and equipment (344) (302)
Unrealized gain on derivative mark-to-market (521) (406)
Change in operating assets and liabilities:
Accounts receivable (22,457) (14,761)
Inventories (24,259) (9,140)
Other current assets (51) (39)
Other noncurrent assets (876) (66)
Accounts payable - trade 20,737 8,286
Accrued payroll and employee benefits 1,648 539
Other current liabilities 4,118 1,053
Other liabilities (524) (1,333)
------------- -------------
Net Cash Used by Operating Activities (14,228) (9,730)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property, plant and equipment 3,216 982
Capital expenditures on property, plant and equipment (12,714) (2,135)
------------- -------------
Net Cash Used by Investing Activities (9,498) (1,153)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit agreement borrowings 17,950 5,775
Proceeds from other short-term borrowings 8,507 -
Exercise of stock options and stock awards 885 1,662
Repayments of long-term debt (491) (505)
------------ -------------
Net Cash Provided by Financing Activities 26,851 6,932
------------ -------------
Net Increase (Decrease) in Cash and Cash Equivalents 3,125 (3,951)
Cash and Cash Equivalents at Beginning of Period 280 4,134
------------- -------------
Cash and Cash Equivalents at End of Period $3,405 $183
============= =============
Supplemental Disclosure of Cash Flow Information:
Interest Paid $1,511 $1,208
============= =============
Income Taxes Paid $10 $185
============= =============
During the first nine months of 2005 the Company financed $3.2 million in
capital expenditures through short-term borrowings and the execution of capital
leases. There were no capital expenditures financed through the execution of
capital leases or short-term borrowings during the first nine months of 2004.
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 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. NEW 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 25, "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, as disclosed in Note 9.
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.
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, 2005 and
December 31, 2004 have been reduced by an allowance for doubtful accounts of
($979,000) and ($1,019,000), respectively. Bad debt expense was ($32,000) and
$143,000 for the nine-month periods ended September 30, 2005 and 2004,
respectively.
4. INVENTORIES
- --------------
Inventories of the Company at June 30, 2005 and December 31, 2004 are summarized
as follows in thousands:
September 30, December 31,
2005 2004
- ---------------------------------------------------------------------------
Finished goods $ 54,925 $ 27,929
Work-in-process 5,485 8,452
Raw materials 12,943 11,751
- ---------------------------------------------------------------------------
Total inventories at current costs 73,353 48,132
(Less):
LIFO reserve (5,639) (4,702)
Inventory valuation reserve (1,441) (1,416)
- ---------------------------------------------------------------------------
$ 66,273 $ 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
- -------------------
Currently there are five qualified retirement plans covering all hourly and
salaried employees, specifically two defined benefit plans and three defined
contribution plans. Employees are eligible to participate under these specific
plans based on their employment classification of salary or hourly status.
The Company's funding to the defined benefit and defined contribution plans is
governed by the Employee Retirement Income Security Act of 1974, applicable plan
policy and investment guidelines. The Company policy is to contribute no less
than the minimum funding requirements of ERISA.
Net periodic pension costs for the three months and nine months ended September
30, 2005 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2005 2004 2005 2004
- -------------------------------------------------------------------------------
Service cost $14 $14 $44 $42
Interest cost 53 51 158 152
Expected return on plan assets (52) (44) (155) (132)
Amortization of prior service cost 2 2 6 6
Amortization of net loss 14 13 41 39
- -------------------------------------------------------------------------------
Net periodic benefit cost $31 $36 $94 $107
===============================================================================
The Company contributed $291,000 to its defined benefit plans as of September
30, 2005 and anticipates no additional contributions in the current year.
The Company's defined contribution plan, for 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 Company may also make discretionary contributions to the plan.
The expense associated with the defined contribution plan for the nine months
ended September 30 was $856,000 in 2005 and $711,000 in 2004.
7. BORROWINGS
- -------------
In May 2005, the Company and certain of its subsidiaries entered into an amended
and restated credit agreement with a consortium of commercial banks which
provided for a $60,000,000 five year revolving credit facility expiring in May
2010. In September 2005, the Company's maximum credit line was increased to
$75,000,000 under the First Amendment to the Revolving Credit and Security
Agreement. 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 receivables 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 are 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. As of September 30, 2005, the Company was in compliance with all of the
agreement's covenants.
The Company has interim financing arrangements with two banks to provide funding
for the expansion of the Concrete Tie division. At September 30, 2005,
approximately $10.0 million of this funding is classified
as short-term borrowings. The Company expects to convert the majority of this
amount to long-term debt through the execution of capital leases.
8. EARNINGS PER COMMON SHARE
- ----------------------------
The following table sets forth the computation of basic and diluted earnings per
common share:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except earnings per share) 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------
Numerator:
Numerator for basic and diluted
earnings per common share -
net income available to common
stockholders: $ 2,348 $ 1,342 $ 4,574 $ 2,524
============================================================================================================================
Denominator:
Weighted average shares 10,150 10,018 10,101 9,924
- ----------------------------------------------------------------------------------------------------------------------------
Denominator for basic earnings
per common share 10,150 10,018 10,101 9,924
Effect of dilutive securities:
Employee stock options 384 288 352 313
- ----------------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 384 288 352 313
Denominator for diluted earnings
per common share - adjusted weighted
average shares and assumed conversions 10,534 10,306 10,453 10,237
============================================================================================================================
Basic earnings per common share $ 0.23 $ 0.13 $ 0.45 $ 0.25
============================================================================================================================
Diluted earnings per common share $ 0.22 $ 0.13 $ 0.44 $ 0.25
============================================================================================================================
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 Company will adopt SFAS 123R
effective January 1, 2006.
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.
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands, except per share amounts) 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------
Net income from continuing operations, as reported $2,348 $1,342 $4,574 $2,524
Add: Stock-based employee compensation expense
included in reported net income, 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 28 40 156 185
- --------------------------------------------------------------------------------------------------------
Pro forma income from continuing operations $2,320 $1,302 $4,418 $2,339
========================================================================================================
Earnings per share from continuing operations:
Basic, as reported $0.23 $0.13 $0.45 $0.25
Basic, pro forma $0.23 $0.13 $0.44 $0.24
Diluted, as reported $0.22 $0.13 $0.44 $0.25
Diluted, pro forma $0.22 $0.13 $0.42 $0.23
========================================================================================================
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 third quarter
of 2005 or 2004. The following weighted-average assumptions were used for grants
in nine months ending September 30, 2005 and 2004, respectively: risk-free
interest rates of 3.87% and 4.74%; dividend yield of 0.0% for both periods;
volatility factors of the expected market price of the Company's Common stock of
..25 and .28; and a weighted-average expected life of the option of ten years.
The weighted-average fair value of the options granted in the nine months ending
September 30, 2005 and 2004 was $4.01 and $3.91, respectively.
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. The resolution, in any
reporting period, of one or more of these matters, could have; however, 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, certain 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 its subsidiary
has meritorious defenses to such claims and that its subsidiary 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.
The Trustees of the Colorado Contractors Trust (the "Trust") filed suit on
November 3, 2005 in the District Court, County of Denver, Colorado against the
Company, its bonding company, the general contractor and the general
contractor's bonding companies. The Trust is a multiple employer employee
benefit plan. The Trust alleges that a supplier, which the Company used in
connection with a project in the Denver, CO area, failed to pay the Trust
required contributions for employee health coverage. The Trust alleges that the
Company is liable as an "alter ego" of its supplier. In addition, the Company
may have indemnification obligations with respect to similar claims against the
general contractor and its bonding companies. Although the amount of the Trust's
claim is unclear, the Trust apparently seeks more than $300,000, plus interest
and attorneys' fees. The Company intends to vigorously defend itself against the
Trust's claims.
At September 30, 2005 the Company had outstanding letters of credit of
approximately $2,938,000.
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 tables illustrate revenues and profits of the Company by segment:
Three Months Ended, Nine Months Ended,
September 30, September 30,
2005 2005
- --------------------------------------------------------------------------------
Net Segment Net Segment
(in thousands) Sales Profit Sales Profit
- --------------------------------------------------------------------------------
Rail products .............. $ 38,167 $ 406 $123,688 $ 4,146
Construction products ...... 53,196 2,480 130,778 1,848
Tubular products ........... 6,170 1,181 16,189 2,102
- --------------------------------------------------------------------------------
Total .................... $ 97,533 $ 4,067 $270,655 $ 8,096
================================================================================
Three Months Ended, Nine Months Ended,
September 30, September 30,
2004 2004
- --------------------------------------------------------------------------------
Net Segment Net Segment
(in thousands) Sales Profit Sales Profit
- --------------------------------------------------------------------------------
Rail products .............. $ 40,996 $ 1,258 $115,682 $ 3,252
Construction products ...... 40,535 1,517 99,731 618
Tubular products ........... 4,327 511 12,724 1,270
- --------------------------------------------------------------------------------
Total .................... $ 85,858 $ 3,286 $228,137 $ 5,140
================================================================================
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 Nine Months Ended
September 30, September 30,
(in thousands) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Income for reportable segments ................................. $ 4,067 $ 3,286 $ 8,096 $ 5,140
Cost of capital for reportable segments ........................ 3,467 2,732 9,275 7,812
Interest expense ............................................... (778) (452) (1,775) (1,384)
Other income ................................................... 478 222 1,205 1,266
Corporate expense and other unallocated charges ................ (3,808) (3,687) (10,025) (8,761)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes ..................................... $ 3,426 $ 2,101 $ 6,776 $ 4,073
====================================================================================================================================
12. COMPREHENSIVE INCOME
- ------------------------
Comprehensive income represents net income plus certain stockholders' equity
changes not reflected in the Condensed Consolidated Statements of Operations.
The components of comprehensive income, net of tax, were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Net income ....................................................... $ 2,348 $ 1,342 $ 4,574 $ 2,524
Unrealized derivative gains on cash flow hedges .................. - 9 - 37
Foreign currency translation (losses) gains ...................... - (66) - (60)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income ............................................. $ 2,348 $ 1,285 $ 4,574 $ 2,501
====================================================================================================================================
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 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 $15.0 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 $87,000 as
of September 30, 2005 and is recorded in "Other accrued 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 third quarter of 2005 and
2004, the Company recognized income of $94,000 and $31,000, respectively, to
adjust these instruments to fair value. For the nine months ended September
2005 and 2004, the Company recognized income of $319,000 and $406,000,
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. The remaining Canadian dollar sell commitment was
executed on September 30, 2005 at a loss of $130,000. During the third quarter
and first nine months of 2005, the Company recognized a loss of $48,000 and
income of $72,000, respectively, to adjust these commitments to fair value.
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
- -------------------
Subsequent to the January 2005 completion of a concrete tie supply agreement
between the Union Pacific Railroad and the Company, we commenced site
development and construction of new manufacturing equipment for installation at
our existing Grand Island, NE facility and a greenfield site in Tucson, AZ. The
Grand Island facility (GI facility) was shut down on July 10, 2005 while we
installed new tie-manufacturing equipment. The newly refurbished plant commenced
concrete tie production on September 21, 2005, on time and on budget. We are
currently in the commissioning stage and expect to be in full production in
January 2006. Construction on our Tucson facility has been delayed due to
permitting issues. We are working closely with the city of Tucson and expect to
commence tie production in the second quarter of 2006. We anticipate a poor
fourth quarter in our concrete tie business due to lower volumes; however, we
are pleased with the progress being made at the GI facility and expect
production volumes to continue to increase as we bring more equipment on line.
Lease commitments to finance the significant capital expenditures were completed
with two separate banks in July. We expect the project expenditures to range
between $18 million and $20 million, with some of the spending for the Tucson
facility occurring in early 2006.
On September 15, 2005, we amended our new credit agreement, which was completed
in May 2005, to increase the credit line from $60 million to $75 million. Except
for an increase in the inventory sub limit from $35 million to $45 million, all
terms and conditions remain the same.
Certain of our businesses, especially our Fabricated Products group, have been
hampered with low volumes and margins due to the lack of successor legislation
to TEA-21, which was a highway and transportation funding bill that expired in
September 2003. On August 10, 2005, new legislation was enacted (SAFETEA-LU)
authorizing $286 billion for United States transportation improvement spending.
We do not expect this new legislation to have a positive impact on these
businesses in 2006.
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 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, as disclosed in Note 9.
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.
Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- -------------------------------
2005 2004 2005 2004
---------------------------------- -------------------------------
(Dollars in thousands)
Net Sales:
Rail Products ........................................ $ 38,167 $ 40,996 $ 123,688 $ 115,682
Construction Products ................................ 53,196 40,535 130,778 99,731
Tubular Products ..................................... 6,170 4,327 16,189 12,724
--------- --------- --------- ---------
Total Net Sales .................................. $ 97,533 $ 85,858 $ 270,655 $ 228,137
========= ========= ========= =========
Gross Profit:
Rail Products ........................................ $ 3,623 $ 4,344 $ 13,675 $ 12,442
Construction Products ................................ 6,967 5,383 14,859 11,908
Tubular Products ..................................... 1,664 921 3,519 2,561
Other ................................................ (632) (1,324) (1,671) (2,272)
--------- --------- --------- ---------
Total Gross Profit ............................... 11,622 9,324 30,382 24,639
--------- --------- --------- ---------
Expenses:
Selling and administrative expenses .................. 7,896 6,993 23,036 20,448
Interest expense ..................................... 778 452 1,775 1,384
Other income ......................................... (478) (222) (1,205) (1,266)
--------- --------- --------- ---------
Total Expenses ................................... 8,196 7,223 23,606 20,566
--------- --------- --------- ---------
Income before Income Taxes ................................. 3,426 2,101 6,776 4,073
Income Tax Expense ......................................... 1,078 759 2,202 1,549
--------- --------- --------- ---------
Net Income ................................................. $ 2,348 $ 1,342 $ 4,574 $ 2,524
========= ========= ========= =========
Gross Profit %:
Rail Products 9.5% 10.6% 11.1% 10.8%
Construction Products 13.1% 13.3% 11.4% 11.9%
Tubular Products 27.0% 21.3% 21.7% 20.1%
Total Gross Profit 11.9% 10.9% 11.2% 10.8%
Third Quarter 2005 Results of Operations
- ----------------------------------------
Net income for the third quarter of 2005 was $2.3 million ($0.22 per diluted
share) on net sales of $97.5 million. Net income for the third quarter of 2004
was $1.3 million ($0.13 per diluted share) on net sales of $85.9 million.
Net sales for the Company increased $11.7 million, or 13.6%, compared to the
prior year third quarter. Rail segment's sales declined 6.9% primarily due to a
decline in sales of new rail distribution products. The decline in concrete ties
sales also contributed to lower rail segment sales. Construction products' net
sales increased 31.2% due mainly to increases in sheet piling sales. As
mentioned last quarter, the Company has continued to increase its offering of
new sections of sheet piling as they have become available by our primary piling
supplier. Many of these sections have improved strength to weight ratios and
enhance our competitive position in the marketplace. Tubular products' sales
increased 42.6% in comparison to the third quarter of 2004 due to an increase in
coated pipe sales. Our Coated Pipe division is benefiting from new pipeline
projects, which were previously on hold due to higher steel prices.
The Company's gross profit margin increased 1.0 percentage point to 11.9%
compared to last year's third quarter. Rail products' profit margin declined 1.1
percentage points to 9.5% due primarily to costs related to satisfying the new
concrete tie contract with the Union Pacific Railroad. Construction products'
gross profit margin remained near 13% in the comparable periods. Tubular
products' gross profit margin improved by 5.7 percentage points due to improved
absorption of plant expenses at the Birmingham, AL pipe-coating facility, as a
result of increased volume. Also contributing to the overall increase in gross
margin was a $0.7 million reduction in LIFO charges.
Selling and administrative expenses increased 12.9% from the same prior year
period due to increases in employee compensation and benefits. Interest expense
increased 72.1% from the prior year period due principally to increased
borrowings and increased interest rates. The increase in borrowings is due
primarily to working capital requirements related to increased volumes, as well
as the Company's approach to stocking more sheet piling inventory, as it becomes
available, to accommodate higher margin stock sales. Other income increased $0.3
million due to rental income and increased income from a mark-to-market
adjustment recorded by the Company related to its remaining interest rate
collar. Income taxes in the third quarter were recorded at approximately 31.5%
compared to 36.1% a year ago. The prior year rate reflects an increase in the
valuation allowance provided against certain deferred assets.
First Nine Months of 2005 Results of Operations
- -----------------------------------------------
For the first nine months of 2005, net income was $4.6 million ($0.44 per
diluted share) on net sales of $270.7 million. Net income for the first nine
months of 2004 was $2.5 million ($0.25 per diluted share) on net sales of $228.1
million.
Net sales for 2005 increased 18.6% compared to the first nine months of 2004.
Rail segment sales increased 6.9% due mainly to an increase in sales of rail
distribution products. Construction products' sales increased 31.1% primarily as
a result of an increase in sheet piling sales due to a more complete product
offering and a healthy construction market. Tubular products' sales are up
27.2%. Our Coated Pipe division benefited from the new pipeline projects
mentioned above in the third quarter discussion.
The Company's 11.2% gross profit margin is up slightly over the same period last
year. Rail products' gross margin remained near 11% for the 2005 and 2004 nine
month periods. Construction products had a gross margin decline of 0.5
percentage points due primarily to low margins in our fabricated products
business. A delay in the passing of a new federal highway and transit bill until
August of 2005 negatively impacted competitive bidding opportunities in the
marketplace and resulted in lower margins. Tubular products' gross margin
increased 1.6 percentage points because of the previously-mentioned absorption
of plant expenses at the Birmingham, AL pipe-coating facility. Also contributing
to the increase in gross margin was a $0.2 million reduction in LIFO charges.
Selling and administrative expenses rose 12.7% due to increases in employee
compensation and benefits, and audit fees. Interest expense rose 28.3% as a
result of the previously-mentioned increase in borrowings and interest rates.
Other income declined by $0.1 million compared to the previous year. which
included a $0.5 million gain from the sale of the Company's 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 32.5%
compared to 38.0% in 2004. As previously mentioned, the prior year rate reflects
an increase in the valuation allowance provided against certain deferred assets.
Liquidity and Capital Resources
The Company's capitalization is as follows:
Debt: September 30, December 31,
In millions 2005 2004
- --------------------------------------------------------------------------------
Revolving Credit Facility ......................... $ 32.1 $ 14.1
Capital Leases .................................... 1.9 1.1
Other Short-term Borrowings ....................... 10.5 -
Other (primarily revenue bonds) ................... 2.7 2.8
- --------------------------------------------------------------------------------
Total Debt .................................... 47.2 18.0
- --------------------------------------------------------------------------------
Equity ............................................ 79.2 73.7
- --------------------------------------------------------------------------------
Total Capitalization .............................. $ 126.4 $ 91.7
================================================================================
Debt as a percentage of capitalization (debt plus equity) increased to 37% from
20% at year-end 2004, as a result of the aforementioned expansion efforts.
Working capital was $59.8 million at September 30, 2005 compared to $46.8
million at December 31, 2004. Trade accounts receivable increased $21.2 million,
principally due to increased sales volumes. Inventory increased $24.3 million
and accounts payable increased $20.9 million to accommodate orders and the
previously-mentioned increase in piling inventory.
The Company's liquidity needs arise from seasonal working capital requirements,
capital expenditures, acquisitions and debt service obligations. The following
table summarizes the year-to-date impact of these items:
September 30,
In millions 2005 2004
- --------------------------------------------------------------------------------
Liquidity needs:
- ----------------
Working capital and other assets and liabilities ......... ($ 21.7) ($ 15.5)
Capital expenditures, net of asset sales ................. (9.5) (1.2)
Scheduled debt service obligations - net ................. (0.5) (0.5)
Cash interest ............................................ (1.5) (1.2)
- --------------------------------------------------------------------------------
Net liquidity requirements ........................... (33.2) (18.4)
- --------------------------------------------------------------------------------
Liquidity sources:
- ------------------
Internally generated cash flows before interest .......... 8.9 6.9
Credit facility activity ................................. 18.0 5.8
Other borrowings activity ................................ 8.5 -
Equity transactions ...................................... 0.9 1.7
- --------------------------------------------------------------------------------
Net liquidity sources ................................ 36.3 14.4
- --------------------------------------------------------------------------------
Net Change in Cash ....................................... $ 3.1 ($ 4.0)
================================================================================
Capital expenditures were $12.7 million for the first nine months of 2005
compared to $2.1 million for the same 2004 period. The Company anticipates its
total capital spending in 2005 to range from $18.0 to $22.0 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 are being 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, including proceeds of $2.9 million received for the
sale of real estate in Doraville, GA in the third quarter. The Company recorded
a nominal gain on the sale.
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.
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 credit
agreement provided for a $60.0 million, five-year revolving credit facility
expiring in May 2010. On September 13, 2005, the Company's maximum credit line
was increased to $75.0 million under the First Amendment to the Revolving Credit
and Security Agreement. 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 receivables 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 $5.0 million and there is no uncured event of default.
Long-term revolving credit agreement borrowings at September 30, 2005 were $32.1
million, an increase of $18.1 million from December 31, 2004. At September 30,
2005, remaining available borrowings under this facility were approximately
$39.2 million. Outstanding letters of credit at September 30, 2005 were
approximately $2.9 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 level for
the fixed charge coverage ratio and a maximum amount of annual consolidated
capital expenditures; however, expenditures up to $20.0 million 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. As of September 30, 2005, the
Company was in compliance with all of the agreement's covenants.
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 September 30, 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 $6.4 million. The Company's ownership in the
DM&E is approximately 13.4%.
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 $4.8 million at September 30,
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. The public comment period on the SEIS closed on June 6, 2005.
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.
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.
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. 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. To accommodate
the contract's requirements, CXT has upgraded the
manufacturing equipment at its Grand Island, NE plant and will build a new
facility in Tucson, AZ. Engineering, site development and equipment
manufacturing related to these facilities commenced in the first quarter of
2005. As previously mentioned, we stopped manufacturing ties at our Grand Island
facility in July to prepare for the installation of new manufacturing equipment.
In September, the plant began casting ties and expects to be in full production
next January. The Company will continue to experience a temporary decline in
concrete tie production and related sales through the end of 2005.
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 and 2005,
additional sections are important for us to compete effectively in the
structural steel market.
Although backlog is not necessarily indicative of future operating results,
total Company backlog at September 30, 2005, was approximately $137.1 million.
The following table provides the backlog by business segment:
Backlog
---------------------------------------------------------
September 30, December 31, September 30,
(In thousands) 2005 2004 2004
- --------------------------------------------------------------------------------
Rail Products $ 46,709 $ 29,079 $ 26,620
Construction Products 87,121 67,736 73,460
Tubular Products 3,312 3,249 2,687
- --------------------------------------------------------------------------------
Total $ 137,142 $ 100,064 $ 102,767
================================================================================
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.
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 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 $15.0 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 $0.1 million
as of September 30, 2005 and is recorded in "Other accrued 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 third
quarter of 2005 and 2004, the Company recognized income of $94,000 and $31,000,
respectively, to adjust these instruments to fair value. For the nine months
ended September 30, 2005 and 2004, the Company recognized income of $0.3 million
and $0.4 million, 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 $32.1 million of outstanding floating rate debt would
result in increased annual interest costs of approximately $0.3 million.
The Company is not subject to significant exposures to changes in foreign
currency exchange rates. The Company may 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. The remaining Canadian dollar sell commitment was
executed on September 30, 2005 at a loss of $130,000. During the third quarter
and first nine months of 2005, the Company recognized a loss of $48,000 and
income of $72,000, respectively, to adjust these commitments to fair value.
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.
A substantial portion of the Company's operations is heavily dependent on
governmental funding of infrastructure projects. Significant changes in the
level of government funding of these projects could have a favorable or
unfavorable impact on the operating results of the Company. Additionally,
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.
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, including delays or problems
obtaining permits. 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
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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.
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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See Note 10, "Commitments and Contingent Liabilities", to the Condensed
Consolidated Financial Statements.
Item 5. OTHER INFORMATION
- -------------------------
None.
Item 6. EXHIBITS
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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.
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, filed as Exhibit 10.0 to Form 10-Q for the
quarter ended March 31, 2005.
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.
10.12.1 Second Amendment dated March 12, 1996 to lease between CXT
Incorporated 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.
10.14 Lease of property in Tucson, AZ between CXT Incorporated and the
Union Pacific Railroad Company, dated May 27, 2005, filed as
Exhibit 10.14 to Form 10-Q for the quarter ended June 30, 2005.
10.15 Lease of property in Grand Island, NE between CXT Incorporated
and the Union Pacific Railroad Company, dated May 27, 2005, filed
as Exhibit 10.15 to Form 10-Q for the quarter ended June 30, 2005.
10.15.1 Industry Track Contract between CXT Incorporated and the Union
Pacific Railroad Company, dated May 27, 2005, filed as Exhibit
10.15.1 to Form 10-Q for the quarter Ended June 30, 2005.
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.
10.33.2 Amended and Restated 1985 Long-Term Incentive Plan as of May 25,
2005, filed as Exhibit 10.33.2 to Form 10-Q for the quarter ended
June 30, 2005. **
10.34 Amended and Restated 1998 Long-Term Incentive Plan as of May 25,
2005, filed as Exhibit 10.34 to Form 10-Q for the quarter ended
June 30, 2005. **
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' resolution dated July 26, 2005 under which directors'
compensation was established, filed as Exhibit 10.53 to Form 8-K on
July 27, 2005. **
10.53.1 Directors' resolution dated May 25, 2005 under which Mr.
Hasselbusch's salary was Adjusted, filed as Exhibit 10.53.1 to
Form 10-Q for the quarter ended June 30, 2005. **
10.53.2 Directors' resolution dated July 26, 2005 under which Mr. Voltz's
salary was adjusted, filed as Exhibit 10.53.2 to Form 10-Q for the
quarter ended June 30, 2005. **
10.55 Management Incentive Compensation Plan for 2005, filed as Exhibit
10.55 to Form 8-K on February 22, 2005. **
10.56 2005 Three Year Incentive Plan, filed as Exhibit 10.56 to Form 8-K
on May 31, 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.
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* 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.
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 8, 2005 By:/s/David J. Russo
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David J. Russo
Senior Vice President,
Chief Financial Officer and Treasurer
(Duly Authorized Officer of Registrant)