UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1998
Commission File Number 0-10436
L. B. Foster Company
(Exact name of Registrant as specified in its charter)
Pennsylvania 25-13247733
(State of Incorporation) (I.R.S. Employer Identification No.)
415 Holiday Drive, Pittsburgh, Pennsylvania 15220
(Address of principal executive offices) (Zip Code)
(412) 928-3417
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate the number of shares of each of the registrant's classes of common
stock as of the latest practicable date.
Class Outstanding at October 27, 1998
----- -------------------------------
Class A Common Stock, Par Value $.01 9,981,343 Shares
L.B. FOSTER COMPANY AND SUBSIDIARIES
INDEX
-----
PART I. Financial Information Page
- ------- --------------------- ----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Income 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated
Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
1998 1997
----------------------------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents .................... $ 3,493 $ 1,156
--------- ---------
Accounts and notes receivable:
Trade ...................................... 35,262 45,022
Other ...................................... 3,288 2,564
--------- ---------
38,550 47,586
--------- ---------
Inventories .................................. 40,889 43,365
--------- ---------
Current deferred tax assets .................. 567 123
--------- ---------
Other current assets ......................... 696 557
--------- ---------
Property held for resale ..................... 3,461
--------- ---------
Total Current Assets ....................... 84,195 96,248
--------- ---------
Property, Plant & Equipment-At Cost ............ 43,775 42,134
Less Accumulated Depreciation .................. (22,845) (21,359)
--------- ---------
20,930 20,775
--------- ---------
Property Held for Resale ....................... 615 615
--------- ---------
Other Assets:
Goodwill and Intangibles ..................... 5,960 4,484
Investments .................................. 1,707 1,693
Other Assets ................................. 3,398 3,154
--------- ---------
Total Other Assets ........................ 11,065 9,331
--------- ---------
TOTAL ASSETS ................................... $ 116,805 $ 126,969
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ......... $ 1,174 $ 1,309
Short-term borrowings ........................ 18,111
Accounts payable ............................. 18,765 12,524
Accrued payroll and employee benefits ........ 3,748 3,008
Other accrued liabilities .................... 1,183 1,219
--------- ---------
Total Current Liabilities .................. 24,870 36,171
--------- ---------
Long-Term Borrowings ........................... 11,000 15,000
--------- ---------
Other Long-Term Debt ........................... 4,074 2,530
--------- ---------
Deferred Tax Liabilities ....................... 1,518 554
--------- ---------
Other Long-Term Liabilities .................... 1,991 2,206
--------- ---------
Stockholders' Equity:
Class A Common stock ......................... 102 102
Paid-in capital .............................. 35,426 35,434
Retained earnings ............................ 38,985 35,625
Treasury stock ............................... (1,161) (653)
--------- ---------
Total Stockholders' Equity ................. 73,352 70,508
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY .......................... $ 116,805 $ 126,969
========= =========
See Notes to Condensed Consolidated Financial Statements.
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------
(Unaudited)
Net Sales ................ $ 50,368 $ 56,935 $ 158,585 $ 165,145
Cost of Goods Sold ....... 43,155 48,836 135,355 143,152
--------- --------- --------- ---------
Gross Profit ............. 7,213 8,099 23,230 21,993
Selling and Admin-
istrative Expenses ... 5,849 5,624 17,783 16,484
Interest Expense ...... 308 665 1,377 1,845
Other (Income) Expense (130) (209) (1,533) (316)
--------- --------- --------- ---------
6,027 6,080 17,627 18,013
--------- --------- --------- ---------
Income Before Income Taxes 1,186 2,019 5,603 3,980
Income Tax Expense ....... 473 807 2,243 1,490
--------- --------- --------- ---------
Net Income ............... $ 713 $ 1,212 $ 3,360 $ 2,490
========= ========= ========= =========
Basic Earnings Per
Common Share ............ $0.07 $0.12 $0.33 $0.24
===== ===== ===== =====
Diluted Earnings
Per Common Share $0.07 $0.12 $0.33 $0.24
===== ===== ===== =====
Cash Dividend per
Common Share .... $-- $-- $-- $--
===== ===== ===== =====
See Notes to Condensed Consolidated Financial Statements.
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months
Ended September 30,
-------------------
1998 1997
-------------------
(Unaudited)
Cash Flows from Operating Activities:
Net Income .......................................... $ 3,360 $ 2,490
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Deferred income taxes ............................... 520 1,437
Depreciation and amortization ....................... 2,197 1,943
Gain on sale of property, plant and equipment ....... (1,271) (113)
Change in operating assets and liabilities:
Accounts receivable ................................. 10,499 5,373
Inventories ......................................... (1,196) (5,192)
Property held for resale ............................ 200 (32)
Other current asset ................................. (128) (9)
Other non-current assets ............................ (494) (317)
Accounts payable .................................... 7,492 (5,911)
Accrued payroll and employee benefits ............... 830 (857)
Other current liabilities ........................... (36) (1,029)
Other liabilities ................................... (215) 64
-------- --------
Net Cash Provided (Used) by Operating Activities ...... 21,758 (2,153)
-------- --------
Cash Flows from Investing Activities:
Proceeds from sale of property, plant and equipment . 687 1,542
Proceeds from sale of Fosterweld .................... 7,258
Capital expenditures on property, plant and equipment (1,953) (1,505)
Purchase of DM&E stock .............................. (1,500)
Acquisition of business ............................. (3,774) (2,500)
-------- --------
Net Cash Provided (Used) by Investing Activities ...... 2,218 (3,963)
-------- --------
Cash Flows from Financing Activities:
(Repayments) proceeds from issuance of revolving
credit agreement borrowings ....................... (22,111) 7,000
Proceeds from industrial revenue bond ............... 2,045
Exercise of stock options ........................... 308 540
Treasury share transactions ......................... (909) (513)
Issuance (repayments) of other long-term debt ....... (972) (1,056)
-------- --------
Net Cash (Used) Provided by Financing Activities ...... (21,639) 5,971
-------- --------
Net (Decrease) Increase in Cash and Cash Equivalents .... 2,337 (145)
Cash and Cash Equivalents at Beginning of Period ....... 1,156 1,201
-------- --------
Cash and Cash Equivalents at End of Period .............. $ 3,493 $ 1,056
======== ========
Supplemental Disclosures of Cash Flow Information:
Interest Paid ....................................... $ 1,488 $ 1,788
======== ========
Income Taxes Paid ................................... $ 1,578 $ 585
======== ========
During 1998 and 1997, the Company financed the purchase of certain capital
expenditures totaling $336,000 and $33,500, respectively, through the issuance
of capital leases.
See Notes to Condensed Consolidated Financial Statements.
L. B. FOSTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all estimates and
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included, however, actual results could differ from
those estimates. The results of operations for these interim periods are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. Certain items previously reported in specific financial
statement captions were reclassified in 1997. The reclassifications had no
effect on income. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1997. The acquisitions of business in the
third quarter of 1998 were not material to the financial statements of the
Corporation.
2. ACCOUNTING PRINCIPLES
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information". The Company has had no material transactions under the provisions
of SFAS No. 130 and the Company does not anticipate that the reporting
requirements of SFAS No. 131 will have a material impact on existing
disclosures.
Financial Accounting Standards Board Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," was issued in February 1998.
This statement revises employers' disclosures about pension and postretirement
benefit plans. It does not change the measurement or recognition of those plans.
The Company will adopt this statement in 1998.
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998. This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The effect of adopting this statement is not expected to be material to the
Company.
3. ACCOUNTS RECEIVABLE
Credit is extended on an evaluation of the customer's financial condition and,
generally, collateral is not required. Credit terms are consistent with industry
standards and practices. Trade accounts receivable at September 30, 1998 and
December 31, 1997 have been reduced by an allowance for doubtful accounts of
$1,516,000 and $1,468,000, respectively. Bad debt expense was $34,000 and
$224,000 for the nine month periods ended September 30, 1998 and 1997,
respectively.
4. INVENTORIES
Inventories of the Company at September 30, 1998 and December 31, 1997 are
summarized as follows in thousands:
September 30, December 31,
1998 1997
-------- --------
Finished goods .................................. $ 32,794 $ 30,380
Work-in-process ................................. 3,429 7,826
Raw materials ................................... 4,971 8,369
-------- --------
Total inventories at current costs .............. 41,194 46,575
(Less):
Current costs over LIFO
stated values ................................. (2,610) (2,610)
Reserve for the decline in market
value of inventories .......................... (600) (600)
-------- --------
$ 37,984 $ 43,365
======== ========
Inventories of the Company are generally valued at the lower of last-in,
first-out (LIFO) cost or market. Other inventories of the Company are valued at
average cost or market, whichever is lower. An actual valuation of inventory
under the LIFO method can be made only at the end of each year based on the
inventory levels and costs at that time. Accordingly, interim LIFO calculations
must necessarily be based on management's estimates of expected year-end levels
and costs.
5. REVOLVING CREDIT AGREEMENT
On August 13, 1998 the Company entered into a senior secured revolving credit
facility for $45,000,000 with its banks. The amended agreement replaces the
November, 1995 revolving credit agreement that had a maturity date of July,
1999.
The interest rate is, at the Company's option, based on the prime rate, the
domestic certificate of deposit rate (CD rate) or the Euro-bank rate. The
interest rates are adjusted quarterly based on the ratio of total indebtedness
to Earnings Before Income Taxes, Depreciation and Amortization (EBITDA) as
defined in the agreement. The ranges are prime to prime plus 0.125%, the CD rate
plus 0.35% to the CD rate plus 1.375%, and the Euro-bank rate plus 0.35% to the
Euro-bank rate plus 1.375%. Borrowings under the agreement, which expires July
31, 2002, are secured by accounts receivable and inventory.
The agreement includes financial covenants requiring a minimum net worth, a
fixed charge coverage ratio, and a maximum ratio of total indebtedness to
EBITDA.
6. OTHER (INCOME)/EXPENSE
Other income included a gain of $1,700,000 for the sale of the Fosterweld
facility, a gain of $185,000 for the sale of a Navasota, Texas facility, and a
write-down of $900,000 for a Houston, Texas property currently under a sale
agreement. In 1998 and 1997, the Fosterweld Division had revenues of $5,188,000
and $12,225,000 with operating profit of $702,000 and $1,365,000, respectively.
7. EARNINGS PER COMMON SHARE
In 1997, the Company adopted Financial Accounting Standards Board Statement No.
128, "Earnings Per Share" (SFAS No. 128). Statement No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and certain
convertible securities. Diluted earnings per share uses the average market
prices during the period in calculating the dilutive effect of options under the
treasury stock method.
The following table sets forth the computation of basic and diluted net income
per common share (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1998 1997 1998 1997
Numerator:
Numerator for basic and diluted
net income per common share -
net income available to common
stockholders .................. $ 713 $ 1,212 $ 3,360 $ 2,490
======= ======= ======= =======
Denominator:
Weighted average shares ....... 10,003 10,129 10,003 10,141
------- ------- ------- -------
Denominator for basic net income
per common share .............. 10,003 10,129 10,003 10,141
Effect of dilutive securities:
Employee stock options ........ 213 231 224 135
------- ------- ------- -------
Dilutive potential common shares 213 231 224 135
Denominator for diluted net
income per common share -
adjusted weighted average
shares and assumed conversions 10,216 10,360 10,227 10,276
======= ======= ======= =======
Basic net income per common share . $ 0.07 $ 0.12 $ 0.33 $ 0.24
======= ======= ======= =======
Diluted net income per common share $ 0.07 $ 0.12 $ 0.33 $ 0.24
======= ======= ======= =======
8. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is subject to laws and regulations relating to the protection of the
environment and the Company's efforts to comply with environmental regulations
may have an adverse effect on the Company's future earnings. In the opinion of
management, compliance with the present environmental protection laws will not
have a material adverse effect on the financial condition, competitive position,
or capital expenditures of the Company.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amounts of
ultimate liability with respect to these actions will not materially effect the
financial position of the Company. At September 30, 1998, the Company had
outstanding letters of credit of approximately $2,902,000.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
=================== =================
1998 1997 1998 1997
==================== =================
(Dollars in thousands)
Net Sales:
Rail Products $26,085 $30,654 83,076 79,803
Construction Products 13,054 11,981 38,232 45,164
* Tubular Products 11,229 14,301 37,251 40,179
Other 26
-------------------- ----------------
Total Net Sales 50,368 56,936 158,585 165,146
===================== =================
Gross Profit:
Rail Products 4,229 4,038 12,427 10,332
Construction Produc 1,604 2,569 6,920 7,413
** Tubular Products 1,615 1,677 4,544 4,525
Other (235) (185) (661) (277)
--------------------- ----------------
Total Gross Profit 7,213 8,099 23,230 21,993
--------------------- ----------------
Expenses:
Selling and administrative
expenses 5,849 5,624 17,783 16,484
Interest expense 308 665 1,377 1,845
Other (income) expense (130) (209) (1,533) (316)
---------------------- ----------------
Total Expens 6,027 6,080 17,627 18,013
---------------------- ----------------
Income Before Income T 1,186 2,019 5,603 3,980
Income Tax Expense 473 807 2,243 1,490
----------------------- ----------------
Net Income $713 $1,212 $3,360 $2,490
======================== ================
Gross Profit %:
Rail Products 16.2% 13.2% 15.0% 12.9%
Construction Products 12.3% 21.4% 18.1% 16.4%
Tubular Products 14.4% 11.7% 12.2% 11.3%
Total Gross Profit% 14.3% 14.2% 14.6% 13.3%
======================== ================
* Net Sales
Coated and Threaded Pipe 11,198 11,370 32,055 31,246
Fosterweld 31 2,931 5,196 8,933
------------------------- ----------------
Total Tubular Products 11,229 14,301 37,251 40,179
========================= ================
** Gross Profit
Coated and Threaded Pipe 1,458 1,244 3,667 3,234
Fosterweld 157 433 877 1,291
========================= ================
Total Tubular Products 1,615 1,677 4,544 4,525
========================= ================
Third Quarter 1998 Results of Operations
- ----------------------------------------
Net income for the 1998 third quarter was $0.7 million or $0.07 per share on net
sales of $50.4 million. This compares to a 1997 third quarter net income of $1.2
million or $0.12 per share on net sales of $56.9 million.
Rail products' 1998 third quarter net sales were $26.1 million or a decrease of
15% over the same period last year. This decrease was due primarily to delays in
shipments of transit products and a decrease in relay rail sales over the prior
year which offset increased sales of Allegheny Rail Products. Construction
products' net sales increased 9% from the year earlier quarter as a result of
sales generated by the Foster Geotechnical Division acquired in August of 1998,
which offset the declines in piling sales. Tubular products' sales decreased 22%
from the same quarter of 1997 due to the June 1998 sale of the Company's
Fosterweld Division. Changes in net sales are primarily the result of changes in
volume rather than changes in prices.
The gross margin percentage for the total Company was 14% in the 1998 and 1997
third quarters. Rail products' gross margin percentage in the third quarter of
1998 was 16% versus 13% in the year earlier quarter primarily due to record
sales and profits of Allegheny Rail Products. The gross margin percentage for
construction products declined 9% from the year earlier quarter primarily due to
a $0.9 million write-down of certain catenary sign structure contracts. Tubular
products' gross margin percentage in the third quarter of 1998 increased 2% from
the same period last year.
The Monitor Group had development expenses totaling $0.3 million including $0.1
million for amortization of intangible assets. Revenues for the quarter were
negligible and below management expectations.
Selling and administrative expenses increased 4% in the 1998 third quarter in
comparison to the same period last year principally due to expenses associated
with the operation of the Company's recently acquired, Precise and Geotechnical
Divisions. Interest expense decreased 46% over the year earlier quarter due to
reduction in outstanding borrowings principally resulting from the receipt of
Fosterweld sale proceeds. Other income included a gain of $0.2 million from the
sale of a Navasota, Texas facility. The provision for income taxes was recorded
at 40% in the third quarters of 1998 and 1997.
First Nine Months of 1998 Results of Operations
- -----------------------------------------------
Net income for the first nine months of 1998 was $3.4 million or $0.33 per share
on sales of $158.6 million. This compares to a net income of $2.5 million or
$0.24 per share for the same period last year on net sales of $165.1 million.
Rail products' net sales in the first nine months of 1998 were $83.1 million
compared to $79.8 million in 1997. This 4% increase resulted from higher volume
sales of new rail and Allegheny Rail products. Construction products' net sales
declined 15% to $38.2 million compared to $45.2 million in the first nine months
of 1997 as the loss of sheet piling sales more than offset the increase in
bridge and highway product sales. Net sales of tubular products for the first
nine months of 1998 declined 7.0% from the year earlier period as a result of
the sale of the Company's Fosterweld Division.
The gross margin percentage for the Company during the first nine months of 1998
increased to 15% from 13% in the same period last year. Rail products' gross
margin percentage increased to 15% from 13% primarily due to relay rail's lower
cost of sales from certain projects and the previously mentioned higher volume
of Allegheny Rail Products' sales. The gross margin percentage for construction
products increased to 18% from 16% as a result of high demand for a limited
supply of piling products and the addition of the Foster Geotechnical Division.
Tubular products' gross margin percentage was 12% in first nine months of 1998
compared to 11% in 1997 primarily due to higher margins on coated pipe products.
The Monitor Group had development expenses totaling $0.8 million including $0.2
million for amortization of intangible assets. Revenues for the period were
negligible and below management expectations.
Selling and administrative expenses for the first nine months of 1998 increased
8% from the same period of 1997. The increase was due to added expenses
associated with the operation of the Company's recently acquired Precise and
Geotechnical Divisions. Interest expense decreased 25% due to reduction in
outstanding borrowings principally resulting from the receipt of Fosterweld sale
proceeds. The provision for income taxes is recorded at 40% versus 37% in 1997.
Liquidity and Capital Resources
- -------------------------------
The Company generates internal cash flow from the sale of inventory and the
collection of accounts receivable. During the first nine months of 1998 the
average turnover rate for accounts receivable was lower than the same period
last year due to slower collections of certain transit contracts. The average
turnover rate for inventory was higher in 1998 than in 1997, primarily in new
rail and Allegheny Rail products. Working capital at September 30, 1998 was
$59.3 million compared to $60.1 million at December 31, 1997.
Year to date, the Company had total capital expenditures of $2.0 million. In
addition, the Company repurchased $0.9 million of its common stock in accordance
with the Company's previously announced program to repurchase 500,000 shares.
Since inception of this program, the Company repurchased 288,744 shares at $1.5
million. Capital expenditures in 1998, excluding acquisitions, are expected to
be consistent with 1997 and are anticipated to be funded by cash flows from
operations.
Total revolving credit agreement borrowings at September 30, 1998 were $11.0
million, or a decrease of $22.1 million from the end of the prior year. At
September 30, 1998 the Company had $31.1 million in unused borrowing commitment.
The Company borrowed $2.0 million through an industrial revenue bond to finance
part of the Precise Fabricating Corporation acquisition. Outstanding letters of
credit at September 30, 1998 were $2.9 million. Management believes its internal
and external sources of funds are adequate to meet anticipated needs.
On August 13, 1998 the Company amended its $45,000,000 senior secured revolving
credit agreement. The amended agreement replaces the November, 1995 revolving
credit agreement that had a maturity date of July, 1999. This amended agreement
expires July 31, 2002 and can be extended under certain conditions.
The interest rate is, at the Company's option, based on the prime rate, the
domestic certificate of deposit rate (CD rate) or the Euro-bank rate. The
interest rates are adjusted quarterly based on the ratio of total indebtedness
to EBITDA as defined in the agreement. The ranges are prime to prime plus
0.125%, the CD rate plus 0.35% to the CD rate plus 1.375%, and the Euro-bank
rate plus 0.35% to the Euro-bank rate plus 1.375%. Borrowings under the
agreement are secured by accounts receivable and inventory. The agreement
includes financial covenants requiring a minimum net worth, a fixed charge
coverage ratio, and a maximum ratio of total indebtedness to EBITDA.
Other Matters
- -------------
The Company owns 13% of the Dakota, Minnesota & Eastern Railroad Corporation
(DM&E), a privately held, regional railroad which operates over 1,100 miles of
track in five states. The Company's investment in the stock is recorded in the
Company's accounts at its historical cost of $1.7 million, comprised of $0.2
million of common stock and $1.5 million of the DM&E's Series B Preferred Stock
and warrants. Although this investment's market value is not readily
determinable, management believes that this investment, without taking into
account the DM&E's proposed Powder River Basin project discussed below, would be
worth significantly more than its historical cost.
The DM&E announced in June 1997 that it plans to build an extension from the
DM&E's existing line into the low sulfur coal market of the Powder River Basin
in Wyoming and to rebuild approximately 600 miles of existing track (the
"Project"). The DM&E has also announced that the estimated cost of this project
is $1.4 billion. The Project is subject to approval by the Surface
Transportation Board (STB).
In February 1998, the DM&E filed its application with the Surface Transportation
Board seeking authority to construct approximately 280 miles of new railroad
line. The DM&E has indicated that this new railroad line could be available to
carry Power River Basin coal within two years after regulatory approval is
obtained. The DM&E anticipates that the STB will reach a preliminary decision in
December 1998. This approval would be subject to completion of the Environmental
Impact Statement (EIS) and acceptable mitigation of environmental issues that
may arise in the EIS.
Morgan Stanley & Co., Inc., has been retained by the DM&E to assist in
identifying strategic partners or potential acquirers of all or a portion of the
equity of the DM&E. The DM&E has stated that the DM&E could repay project debt
and cover its operating costs if it captures a 5% market share in the Powder
River Basin. If the Project proves to be viable, management believes that the
value of the Company's investment in the DM&E could increase dramatically.
In May of 1998, with the approval of its shareholders, the Company
reincorporated from Delaware to Pennsylvania. The principal reason for
reincorporating the Company in Pennsylvania is to eliminate the Company's
liability of approximately $50,000 per year under the Delaware franchise tax.
Pennsylvania corporations that have a class of stock registered under the
Securities Exchange Act of 1934 are automatically subject to certain
antitakeover provisions of the Pennsylvania Business Corporation Law of 1988, as
amended, unless the articles of incorporation provide that those provisions
shall not apply to the corporation. The Company has opted out of those
antitakeover provisions by having its articles of incorporation expressly state
that they shall not apply to the corporation.
In June of 1998, the Company sold to Northwest Pipe Company of Portland, Oregon,
the plant, equipment, inventory, leasehold and contract rights and miscellaneous
assets related to its Fosterweld pipe manufacturing facility in Wood County,
West Virginia. The purchase price for the plant, buildings, equipment, leasehold
and contract rights and miscellaneous assets was $5.3 million and inventory net
of payables of approximately $2.0 million. Also in June of 1998, the Company
agreed, subject to certain contingencies, to sell certain Houston, Texas
property for approximately $3.8 million. This property is currently under a
sales agreement and the Company has accrued $0.9 million for the loss on the
projected sale. Management expects this transaction to be completed in the first
quarter of 1999.
In July of 1998, the Company purchased, for approximately $1.5 million, assets
primarily comprised of intellectual property related to the business of
supplying rail signaling and communication devices.
In August of 1998, the Company purchased $1.1 million of fixed assets and
patents and $1.0 million of associated working capital of the Geotechnical
Division of VSL Corporation. The Geotechnical Division is a leading designer and
supplier of mechanically-stabilized earth wall systems.
In September of 1998, the Company suspended production at its Newport, Kentucky
pipe coating facility due to unfavorable market conditions. Management is
currently evaluating the long term viability of this operation.
Management continues to evaluate the overall performance of certain operations.
A decision to terminate an existing operation could have a material adverse
effect on near-term earnings but would not be expected to have a material
adverse effect on the financial condition of the Company.
Year 2000 Impact on Computer Systems
- ------------------------------------
Because many existing computer programs have been programmed to use a two digit
number to represent the year (e.g., "98" for "1998"), the Company has analyzed
its computer software systems to ensure that they are capable of correctly
identifying the year "2000" and beyond in all computer transactions. The Company
understands the seriousness of this issue and its Board of Directors has
requested an update of the Company's year 2000 compliance at each Board Meeting.
The Company completed the installation of new integrated accounting and
distribution software licensed from a national vendor in 1992 and has
periodically installed updated releases of the software to take advantage of
technological advances and improvements over prior releases in the ordinary
course of business. The current releases of this vendor's software are year 2000
compliant. The Company installed the year 2000 compliant release including
modifications unrelated to the year 2000 issue to suit the Company's business in
May 1998. The Company expects to complete the testing of these modifications and
to place these systems in production in 1998. Management believes that this
schedule is achievable and does not anticipate any adverse impact in becoming
year 2000 compliant. The costs associated with the installation of the year 2000
compliant release are considered by Management to be in the ordinary course of
business and are not material to its financial results.
In addition, the Company has conducted a review of its production equipment and
has determined that it is year 2000 compliant. The Company has also surveyed key
vendors and suppliers to determine the extent of their year 2000 compliance
readiness and planned action to become year 2000 compliant.
The Company has minimal direct or indirect computer data transfers with outside
customers, vendors, and suppliers other than major banks, whose year 2000
compliance efforts are well underway. Based on this fact as well as internal
assessments, and formal and informal communications with customers, vendors, and
suppliers, the Company presently believes that the year 2000 compliance issue
should not pose significant operating problems or have a material impact on the
Company's consolidated financial position, results of operations or cash flow. A
failure of third party vendors or suppliers to be year 2000 compliant could
affect these beliefs and is not quantifiable.
Outlook
- -------
The Company has not had a domestic sheet piling supplier since March 1997.
Revenues from piling products have declined and will continue to be at reduced
levels as the Company's remaining piling inventory is liquidated. The Company,
however, will become Chaparral Steel's exclusive domestic distributor of steel
sheet piling when Chaparral Steel's manufacturing facility, being constructed in
Richmond, Virginia, begins operations in 1999.
The rail segment of the business depends on one source for fulfilling certain
trackwork contracts. The Company has provided $9.0 million of working capital to
this supplier in the form of loans and progress payments. If, for any reason,
this supplier is unable to perform, the Company could experience a short-term
negative effect on earnings.
During 1995, the Company entered into an interest rate swap agreement to reduce
the impact of changes in interest rates on a portion of its revolving credit
borrowings. The LIBOR interest rate on the $10.0 million swap agreement, which
expires June 1999, is 6.142%. The Company believes that the credit and market
risks associated with this agreement are not material. Any additional interest
expense incurred under the agreement is accrued and paid quarterly.
The Company's operations are, in part, dependent on governmental funding of
infrastructure projects. Significant changes in the level of government funding
of these projects could have a favorable or unfavorable impact on the operating
results of the Company. Additionally, governmental actions concerning taxation,
tariffs, the environment or other matters could impact the operating results of
the Company. The Company is also dependent on the availability of rail cars and
weld trains to ship its products. The Company has experienced delays in certain
projects due to the lack of availability of rail cars. The current merger
activities in the railroads have exacerbated this problem. The Company can
provide no assurances that a solution to the problem will occur in the
near-term. The Company's operating results may also be affected by adverse
weather conditions.
Although backlog is not necessarily indicative of future operating results,
total Company backlog at September 30, 1998, was approximately $87.5 million.
The following table provides the backlog by business segment as adjusted for the
exclusion of the Fosterweld Division.
Backlog
----------------------------------
September 30, December 31,
1998 1997 1997
----------------------------------
(Dollars in thousands)
Rail Products ....... $58,519 $38,359 $51,584
Construction Products 22,585 21,599 23,284
Tubular Products .... 6,427 6,989 3,955
Less Fosterweld ... 2,940 2,295
------- ------- -------
Tubular Products Net 6,427 4,049 1,660
------- ------- -------
Total Backlog ..... $87,531 $64,007 $76,528
======= ======= =======
Forward-Looking Statements
- --------------------------
Statements relating to the potential value or viability of the DM&E or the
Project, or management's belief as to such matters, are forward-looking
statements and are subject to numerous contingencies and risk factors. The
Company has based its assessment on information provided by the DM&E and has not
independently verified such information. In addition to matters mentioned above,
factors which can adversely affect the value of the DM&E, its ability to
complete the Project or the viability of the Project include the following:
labor disputes, any inability to obtain necessary environmental and government
approvals for the Project in a timely fashion, an inability to obtain financing
for the Project, competitor's response to the Project, market demand for coal or
electricity and changes in environmental laws and regulations. The Company
wishes to caution readers that various factors could cause the actual results of
the Company to differ materially from those indicated by forward-looking
statements made from time to time in news releases, reports, proxy statements,
registration statements and other written communications (including the
preceding sections of this Management's Discussion and Analysis), as well as
oral statements made from time to time by representatives of the Company. Except
for historical information, matters discussed in such oral and written
communications are forward-looking statements that involve risks and
uncertainties, including but not limited to general business conditions, the
availability of material from major suppliers, the impact of competition, the
seasonality of the Company's business, taxes, inflation and governmental
regulations.
PART II OTHER INFORMATION
-------------------------
Item 1. LEGAL PROCEEDINGS
- -------------------------
See Note 8, "Commitments and Contingent Liabilities", to the Condensed
Consolidated Financial Statements.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
-----------
Unless marked by an asterisk, all exhibits are incorporated by reference:
3.1 Restated Certificate of Incorporation as amended to date, filed as
Appendix B to the Company's April 17, 1998 Proxy Statement.
3.2 Bylaws of the Registrant, as amended to date, filed as Exhibit 3B
to Form 8-K on May 21, 1997.
4.0 Rights Agreement, dated as of May 15, 1997, between L.B. Foster
Company and American Stock Transfer & Trust Company, including the
form of Rights Certificate and the Summary of Rights attached
thereto, filed as Exhibit 4A to Form 8-A dated May 23, 1997.
4.0.1 Amended Rights Agreement dated as of May 14, 1998, between L.
B. Foster Company and American Stock Transfer & Trust Company,
filed as Exhibit 4.0.1 to Form 10-Q for the quarter ended June 30,
1998.
* 4.1 Second Amended and Restated Loan Agreement by and among the
Registrant and Mellon Bank, N.A., PNC Bank, National
Association, and First Union National Bank dated as of August 13,
1998.
10.15 Lease between the Registrant and Amax, Inc. for manufacturing
facility at Parkersburg, West Virginia, dated as of October 19,
1978, filed as Exhibit 10.15 to Registration Statement No.
2-72051.
10.16 Lease between Registrant and Greentree Building Associates for
Headquarters office, dated as of June 9, 1986, as amended to date,
filed as Exhibit 10.16 to Form 10-K for the year ended December
31, 1988.
10.16.1 Amendment dated June 19, 1990 to lease between Registrant and
Greentree Building Associates, filed as Exhibit 10.16.1 to Form
10-Q for the quarter ended June 30, 1990.
10.16.2 Amendment dated May 29, 1997 to lease between Registrant and
Greentree Building Associates, filed as Exhibit 10.16.2 to Form
10-Q for the quarter ended June 30, 1997.
10.19 Lease between the Registrant and American Cast Iron Pipe Company
for Pipe-Coating facility in Birmingham, Alabama dated December
11, 1991, filed as Exhibit 10.19 to Form 10-K for the year ended
December 31, 1991.
10.19.1 Amendment to Lease between the Registrant and American Cast Iron
Pipe Company for Pipe-Coating facility in Birmingham, Alabama
dated April 15, 1997, filed as Exhibit 10.19.1 to Form 10-Q for
the quarter ended March 31, 1997.
10.20 Asset Purchase Agreement, dated June 5, 1998, by and among the
Registrant and Northwest Pipe Company, filed as Exhibit 10.0 to
Form 8-K on June 18, 1998.
10.33.2 Amended and Restated 1985 Long-Term Incentive Plan, as amended and
restated February 26, 1997, filed as Exhibit 10.33.2 to Form 10-Q
for the quarter ended June 30, 1997. **
* 10.34 1998 Long-Term Incentive Plan for Officers and Directors.
10.45 Medical Reimbursement Plan, filed as Exhibit 10.45 to Form 10-K
for the year ended December 31, 1992. **
10.46 Leased Vehicle Plan, as amended to date, filed as Exhibit 10.46
to Form 10-K for the year ended December 31, 1997. **
10.49 Lease agreement between Newport Steel Corporation and Registrant
dated as of October 12, 1994 and filed as Exhibit 10.49 to Form
10-Q for the quarter ended September 30, 1994.
10.49.1 Amendment to lease between Registrant and Newport Steel
Corporation dated March 13, 1998 and filed as Exhibit 10.49.1 to
Form 10-K for the year ended December 31, 1997.
10.50 L.B. Foster Company 1998 Incentive Compensation Plan, filed as
Exhibit 10.50 to Form 10-K for the year ended December 31, 1997.
**
10.51 Supplemental Executive Retirement Plan, filed as Exhibit 10.51 to
Form 10-K for the year ended December 31, 1994. **
19 Exhibits marked with an asterisk are filed herewith.
* 27 Financial Data Schedule as of September 30, 1998.
** Identifies management contract or compensatory plan or
arrangement required to be filed as an Exhibit.
b) Reports on Form 8-K
On May 21, 1998, the Registrant filed a Current Report on Form 8-K announcing
the reincorporation of the Company from Delaware to Pennsylvania effective May
14, 1998.
On June 18, 1998, the Registrant filed a Current Report on Form 8-K and an
Amended Current Report on Form 8-K/A announcing that L. B. Foster Company sold
its spiralweld pipe manufacturing facility to Northwest Pipe Company.
On June 24, 1998, the Registrant filed an Amended Current Report on Form 8-K/A,
amending the Current Report filed on Form 8-K on June 18, 1998. The Amended
Current Report provides pro forma financial information.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
L.B. FOSTER COMPANY
-------------------
(Registrant)
Date: November 5, 1998 By /s/ Roger F. Nejes
- ---------------------- ---------------------
Roger F. Nejes
Sr. Vice President-
Finance and Administration
& Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer
of Registrant)