UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1999
Commission File Number 0-10436
L. B. Foster Company
(Exact name of Registrant as specified in its charter)
Pennsylvania 25-13247733
(State of Incorporation) (I.R.S. Employer Identification No.)
415 Holiday Drive, Pittsburgh, Pennsylvania 15220
(Address of principal executive offices) (Zip Code)
(412) 928-3417
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate the number of shares of each of the registrant's classes of common
stock as of the latest practicable date.
Class Outstanding at August 3, 1999
Common Stock, Par Value $.01 9,580,640 Shares
L.B. FOSTER COMPANY AND SUBSIDIARIES
INDEX
PART I. Financial Information Page
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Income 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated
Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. Other Information
Item 1. Legal Proceedings 18
Item 4. Results of Votes of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signature 21
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, December 31,
1999 1998
- --------------------------------------------------------------------------------
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents $ 1,160 $ 874
- --------------------------------------------------------------------------------
Accounts and notes receivable:
Trade 57,870 46,510
Other 1,002 801
- --------------------------------------------------------------------------------
58,872 47,311
- --------------------------------------------------------------------------------
Inventories 45,771 36,418
Current deferred tax assets 115
Other current assets 1,076 614
Property held for resale 4,604
- --------------------------------------------------------------------------------
Total Current Assets 111,598 85,217
- --------------------------------------------------------------------------------
Property, Plant & Equipment - at cost 53,423 43,573
Less Accumulated Depreciation (29,366) (23,128)
- --------------------------------------------------------------------------------
24,057 20,445
- --------------------------------------------------------------------------------
Property Held for Resale 615 615
Other Assets:
Goodwill and intangibles 17,560 5,666
Investments 8,231 1,693
Other assets 4,279 5,798
- --------------------------------------------------------------------------------
Total Other Assets 30,070 13,157
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 166,340 $ 119,434
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Current maturities of long-term debt $ 944 $ 1,098
Short-term borrowings 18,165 2,275
Accounts payable 22,971 19,667
Accrued payroll and employee benefits 3,630 4,498
Current deferred tax liabilities 562 334
Other accrued liabilities 528 2,454
- --------------------------------------------------------------------------------
Total Current Liabilities 46,800 30,326
- --------------------------------------------------------------------------------
Long-Term Borrowings 40,000 10,000
Other Long-Term Debt 3,623 3,829
Deferred Tax Liabilities 678 678
Other Long-Term Liabilities 1,403 1,107
Stockholders' Equity:
Common stock 102 102
Paid-in capital 35,377 35,431
Retained earnings 41,700 40,002
Treasury stock (3,364) (2,046)
Accumulated other comprehensive income 21 5
- --------------------------------------------------------------------------------
Total Stockholders' Equity 73,836 73,494
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 166,340 $ 119,434
================================================================================
See Notes to Condensed Consolidated Financial Statements.
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
Three Months Six Months
Ended Ended
June 30, June 30,
- --------------------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------
(unaudited)
Net Sales $ 58,743 $ 58,876 $112,526 $108,217
- --------------------------------------------------------------------------------
Costs and Expenses:
Cost of Goods Sold 50,154 49,953 97,093 92,200
Selling and Administrative
Expenses 6,510 6,278 12,550 11,934
Interest Expense 523 479 921 1,069
Other Income (297) (1,070) (657) (1,403)
- --------------------------------------------------------------------------------
56,890 55,640 109,907 103,800
- --------------------------------------------------------------------------------
Income Before Income Taxes 1,853 3,236 2,619 4,417
Income Tax Expense 615 1,295 921 1,770
- --------------------------------------------------------------------------------
Net Income $ 1,238 $ 1,941 $ 1,698 $ 2,647
================================================================================
Basic Earnings Per Share $ 0.12 $ 0.19 $ 0.17 $ 0.26
================================================================================
Diluted Earnings Per Share $ 0.12 $ 0.19 $ 0.17 $ 0.26
================================================================================
Cash Dividend per Common
Share $ - $ - $ - $ -
================================================================================
See Notes to Condensed Consolidated Financial Statements.
L.B. Foster Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In Thousands)
Six Months
Ended June 30,
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities: (unaudited)
Net income $ 1,698 $ 2,647
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Deferred income taxes 369
Depreciation and amortization 1,473 1,534
Loss (gain) on sale of property, plant & equipment 21 (1,218)
Change in operating assets and liabilities:
Accounts receivable (1,572) 2,767
Inventories (7,427) (3,547)
Property held for resale (3) 205
Other current assets (303) 59
Other non-current assets 175 (404)
Accounts payable - trade (891) 6,977
Accrued payroll and employee benefits (1,565) 804
Other current liabilities (1,926) 902
Other liabilities 296 (108)
- --------------------------------------------------------------------------------
Net Cash (Used) Provided by Operating Activities (10,024) 10,987
- --------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from sale of property, plant and equipment 5 489
Proceeds from sale of Fosterweld 7,258
Capital expenditures on property, plant and equipment (1,497) (1,048)
Purchase of DM&E stock (6,000)
Acquisition of CXT (17,389)
- --------------------------------------------------------------------------------
Net Cash (Used) Provided by Investing Activities (24,881) 6,699
- --------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds (repayments) from issuance of revolving
credit agreement borrowings 45,890 (18,691)
CXT debt repayment (8,845)
Proceeds from Industrial Revenue Bond 2,045
Exercise of stock options and stock awards 329 308
Treasury stock acquisitions (1,702) (694)
Repayments of long-term debt (491) (690)
- --------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 35,181 (17,722)
- --------------------------------------------------------------------------------
Effect of exchange rate on cash 10
Net Increase (Decrease) in Cash and Cash Equivalents 286 (36)
Cash and Cash Equivalents at Beginning of Period 874 1,156
- --------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 1,160 $ 1,120
================================================================================
Supplemental Disclosures of Cash Flow Information:
Interest Paid $ 948 $ 1,176
================================================================================
Income Taxes Paid $ 1,767 $ 815
================================================================================
During 1999, the Company financed the purchase of certain capital expenditures
and maint. agreements totaling $246,000 through the issuance of capital leases.
During the first half of 1998, no capital expenditures were financed through
capital leases.
See Notes to Condensed Consolidated Financial Statements.
L. B. FOSTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
- -----------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all estimates and
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included; however, actual results could differ from
those estimates. The results of operations for these interim periods are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1998.
2. ACCOUNTING PRINCIPLES
- ------------------------
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued in June 1998. This
statement establishes accounting and reporting standards for derivative
financial instruments and hedging activities. This statement will be adopted by
the Company in 2001 and is not expected to have a material effect on the
consolidated financial statements.
3. ACCOUNTS RECEIVABLE
- ----------------------
Credit is extended on an evaluation of the customer's financial condition and,
generally, collateral is not required. Credit terms are consistent with industry
standards and practices. Trade accounts receivable at June 30, 1999 and December
31, 1998 have been reduced by an allowance for doubtful accounts of $(1,473,000)
and $(1,438,000), respectively. Bad debt expense was $42,000 and $104,000 for
the six month periods ended June 30, 1999 and 1998, respectively.
4. INVENTORIES
- --------------
Inventories of the Company at June 30, 1999 and December 31, 1998 are summarized
as follows in thousands:
June 30, December 31,
1999 1998
- --------------------------------------------------------------------------------
Finished goods $ 36,872 $ 26,877
Work-in-process 6,459 7,779
Raw materials 5,244 4,546
- --------------------------------------------------------------------------------
Total inventories at current costs: 48,575 39,202
(Less):
Current costs over LIFO
stated values (2,204) (2,184)
Reserve for decline in market value
of inventories (600) (600)
- --------------------------------------------------------------------------------
$ 45,771 $ 36,418
================================================================================
Inventories of the Company are generally valued at the lower of last-in,
first-out (LIFO) cost or market. Other inventories of the Company are valued at
average cost or market, whichever is lower. An actual valuation of inventory
under the LIFO method can be made only at the end of each year based on the
inventory levels and costs at that time. Accordingly, interim LIFO calculations
must necessarily be based on management's estimates of expected year-end levels
and costs.
5. PROPERTY HELD FOR RESALE
- ---------------------------
Property held for resale at June 30, 1999 and December 31, 1998 consists of the
following:
June 30, December 31,
(in thousands) 1999 1998
- ---------------------------------------------------------------------
Location:
Monitor Group, Cheswick, PA $ 1,773
Newport, KY 1,554
Pomeroy, OH 729
Marrero, LA 615 $ 615
St. Marys, WV 548
- ---------------------------------------------------------------------
Property held for resale $ 5,219 $ 615
- ---------------------------------------------------------------------
Less current portion 4,604
- ---------------------------------------------------------------------
$ 615 $ 615
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
The Company's mass spectrometer unit, the Monitor Group, is located in Cheswick,
Pennsylvania. Results to date have been well below management expectations.
After a comprehensive review of Monitor Group's progress, management has decided
to divest and reclassify the $1,800,000 of Monitor Group's intangible assets as
held for resale. Management believes that ultimately, the disposition of Monitor
Group will not materially affect the financial position or cash flows of the
Company, although the outcome could be material to the reported results of
operations for the period in which it occurs.
In September of 1998, the Company suspended production at its Newport, Kentucky
pipe coating facility due to unfavorable market conditions. Management intends
to dispose of the assets and has reclassified the machinery and equipment as
assets held for resale. Management anticipates that the proceeds from such a
sale will be at least $1,500,000, the net book value of such equipment.
The letter of intent which the Company signed in April, 1999 to sell its Mining
Division has expired. The Company continues to explore the divestiture of this
Division which is comprised principally of the Company's facilities and
inventory located at Pomeroy, Ohio and St. Marys, West Virginia.
The Marrero, Louisiana location was formerly used for yard storage. Assets of
the location consist of land no longer used in the Company's business. The land
is currently being leased to a third party.
6. BORROWINGS
- -------------
On June 30, 1999, the Company's $45,000,000 revolving credit agreement was
amended and increased to $70,000,000. The interest rate is, at the Company's
option, based on the prime rate, the domestic certificate of deposit rate (CD
rate) or the Euro-bank rate (LIBOR). The interest rates are established
quarterly based upon cash flow and the level of outstanding borrowings to debt
as defined in the agreement. Interest rates range from prime, to prime plus
.25%, the CD rate plus .575% to 1.8% and the LIBOR rate plus .575% to 1.8%.
Borrowings under the agreement, which expires on July 1, 2003, are secured by
eligible accounts, inventory and the pledge of the Company held Dakota Minnesota
& Eastern Railroad Corporation Preferred stock.
The agreement includes financial covenants requiring a minimum net worth, a
minimum level for the fixed charge coverage ratio and a maximum level for the
consolidated total indebtedness to EBITDA ratio. The agreement restricts
investments, indebtedness and the sale of certain assets.
7. EARNINGS PER COMMON SHARE
- ----------------------------
The following table sets forth the computation of basic and diluted earnings per
common share:
Three Months Ended Six Months Ended
(in thousands, June 30, June 30,
except earnings per share) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Numerator:
Numerator for basic and diluted
earnings per common share -
net income available to common
stockholders $1,238 $1,941 $1,698 $2,647
======= ======= ======= ======
Denominator:
Weighted average shares 9,710 10,014 9,748 10,015
------- ------- ------- ------
Denominator for basic earnings
per common share 9,710 10,014 9,748 10,015
Effect of dilutive securities:
Contingent issuable shares
pursuant to the Company's
1997 and 1998 Incentive
Compensation Plans 53 18 41 12
Employee stock options 251 198 253 205
------- ------- ------- ------
Dilutive potential common shares 304 216 294 217
Denominator for diluted earnings
per common share - adjusted
weighted average shares and
assumed conversions 10,014 10,230 10,042 10,232
======= ======= ======= ======
Basic earnings per common share $0.12 $0.19 $0.17 $0.26
======= ====== ======= ======
Diluted earnings per common share $0.12 $0.19 $0.17 $0.26
======= ====== ======= ======
8. COMMITMENTS AND CONTINGENT LIABILITIES
- -----------------------------------------
The Company is subject to laws and regulations relating to the protection of the
environment and the Company's efforts to comply with environmental regulations
may have an adverse effect on the Company's future earnings. In the opinion of
management, compliance with the present environmental protection laws will not
have a material adverse effect on the financial condition, competitive position,
or capital expenditures of the Company.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amounts of
ultimate liability with respect to these actions will not materially effect the
financial position of the Company.
At June 30, 1999, the Company had outstanding letters of credit of approximately
$2,635,000.
9. BUSINESS SEGMENTS
- --------------------
The Company is organized and evaluated by product group, which is the basis for
identifying reportable segments. The Company is engaged in the manufacture,
fabrication and distribution of rail, construction, tubular products and
portable mass spectrometers (Monitor Group). The following tables illustrates
revenues and profits/(losses) of the Company by segment:
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
Net Segment Net Segment
(in thousands) Sales Profit/(Loss) Sales Profit/(Loss)
- --------------------------------------------------------------------------------
Rail products $35,068 $944 $66,485 $1,155
Construction products 15,596 872 30,892 956
Tubular products 8,124 885 14,988 1,319
Monitor Group (467) (899)
- --------------------------------------------------------------------------------
Total $58,788 $2,234 $112,365 $2,531
================================================================================
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
Net Segment Net Segment
(in thousands) Sales Profit/(Loss) Sales Profit/(Loss)
- --------------------------------------------------------------------------------
Rail products $29,364 $1,368 $56,836 $2,247
Construction products 13,143 1,050 25,110 1,547
Tubular products 16,228 995 25,951 777
Monitor Group 26 (347) 26 (687)
================================================================================
Total $58,761 $3,066 $107,923 $3,884
================================================================================
Segment profits, as shown above, include internal cost of capital charges for
assets used in the segment at a rate of, generally, 1% per month. The following
table provides a reconciliation of reportable net profit/(loss) to the Company's
consolidated total:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Net Profit/(Loss)
- --------------------------------------------------------------------------------
Total for reportable segments $2,234 $3,066 $2,531 $3,884
Other income 297 1,070 657 1,403
Other unallocated amounts (678) (900) (569) (870)
================================================================================
Income before income taxes $1,853 $3,236 $2,619 $4,417
================================================================================
There has been no change in the measurement of segment profit/(loss) from
December 31, 1998. There has been no significant change in construction or
tubular segment assets from December 31, 1998. There has been a significant
increase in the Rail segment's assets due to the acquisition of CXT Incorporated
and increases in relay rail's inventory and transit products' accounts
receivable.
10. ACQUISITIONS
- ----------------
On June 30, 1999, the Company acquired all of the outstanding stock of CXT
Incorporated (CXT) for $17,389,000. The acquisition was accounted for as a
purchase and, accordingly, the operations of CXT are included in the
Consolidated Financial Statements from the date of acquisition.
The preliminary fair value of the assets acquired and liabilities assumed is as
follows (in thousands):
Current assets $ 12,190
Property, plant & equipment 5,995
Goodwill 12,202
Other assets 967
Current liabilities (10,885)
Debt (3,080)
- ---------------------------------------
Purchase price $ 17,389
=======================================
The Company expects to finalize all purchase accounting adjustments within one
year of the acquisition. Any difference between the amounts reflected above and
the final amounts could result in an adjustment to goodwill. Goodwill is being
amortized over 15 years.
The unaudited pro forma combined historical results as if CXT had been acquired
at the beginning of 1999 and 1998, respectively, are estimated to be:
Six Months Ended June 30,
(Dollars in thousands, except per share data) 1999 1998
- ---------------------------------------------------------------------------
Net Sales $ 132,191 $ 124,349
Net Income 1,921 2,397
Basic Earnings per common share: $ 0.19 $ 0.23
The pro forma results presented above are not necessarily indicative of what
actually would have occurred if the acquisition had been completed as of the
beginning of each of the periods presented, nor are they necessarily indicative
of future results.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------
(Dollars in thousands)
Net Sales:
Rail Products $ 35,068 $ 29,364 $ 66,485 $ 56,836
Construction Products 15,596 13,143 30,892 25,110
Tubular Products 8,124 16,228 14,988 25,951
Monitor Group 26 26
Other (45) 115 161 294
- --------------------------------------------------------------------------------
Total Net Sales 58,743 58,876 112,526 108,217
================================================================================
Gross Profit:
Rail Products 4,532 4,400 8,171 8,438
Construction Products 3,351 2,935 5,944 5,442
Tubular Products 1,427 2,140 2,451 3,022
Monitor Group (354) (211) (668) (426)
Other (367) (341) (465) (459)
- --------------------------------------------------------------------------------
Total Gross Profit 8,589 8,923 15,433 16,017
- --------------------------------------------------------------------------------
Expenses:
Selling and Administrative
Expenses 6,510 6,278 12,550 11,934
Interest Expense 523 479 921 1,069
Other (Income) Expense (297) (1,070) (657) (1,403)
- --------------------------------------------------------------------------------
Total Expenses 6,736 5,687 12,814 11,600
- --------------------------------------------------------------------------------
Income Before Income Taxes 1,853 3,236 2,619 4,417
Income Tax Expense 615 1,295 921 1,770
- --------------------------------------------------------------------------------
Net Income $ 1,238 $ 1,941 $ 1,698 $ 2,647
================================================================================
Gross Profit %:
Rail Products 13% 15% 12% 15%
Construction Products 21% 22% 19% 22%
Tubular Products 18% 13% 16% 12%
Monitor Group N/A N/A N/A N/A
Other N/A N/A N/A N/A
Total Gross Profit % 15% 15% 14% 15%
================================================================================
Note: Prior year segment information has been restated to be consistent with
FASB No. 131, "Disclosures about Segments of an Enterprise and Related
Information".
Second Quarter 1999 Results of Operations
- -----------------------------------------
Net income for the second quarter of 1999 was $1.2 million or $0.12 per share on
net sales of $58.7 million. This compares to a 1998 second quarter net income of
$1.9 million or $0.19 per share on net sales of $58.9 million. The 1998 income
included a nonrecurring gain of $1.7 million from the sale of the Fosterweld
Division and a $0.9 million write-down for a property held for sale.
Rail products' 1999 second quarter net sales were $35.1 million or an increase
of 19% over the same period last year. This increase was due primarily to
increased shipments of new rail and transit products, which more than offset the
decline in used rail which resulted from the deferral of rail change-out
projects by western railroads. Construction products' net sales increased 19%
from the year earlier quarter as a result of sales generated by the Foster
Geotechnical Division acquired in August of 1998. This increase exceeded the
decreases in the Company's sheet piling sales and rentals which continue to
suffer from lack of supply. Tubular products' sales decreased 50% from the same
quarter of 1998 due to the June 1998 sale of the Company's Fosterweld Division
and the closing of the Company's Newport pipe coating facility. Changes in net
sales are primarily the result of changes in volume rather than changes in
prices.
The gross margin percentage for the total Company was 15% in both the second
quarters of 1999 and 1998. Rail products' gross margin percentage in the second
quarter of 1999 was 13% versus 15% in the year earlier quarter. This decline is
the result of a change in the mix of rail products sold. The gross margin
percentage for construction products declined almost 1% in the second quarters
of 1999 compared to the 1998 second quarter. The depletion of rental piling
inventory is primarily the cause of this decline. Tubular products' gross margin
percentage in the second quarter of 1999 increased to 18% from 13% in the same
period last year, primarily due to more efficient operations at the Langfield,
Texas threading facility and the halting of production of lower margin coated
pipe at the Company's Newport facility.
The Monitor Group had costs and expenses totaling $0.4 million in the second
quarter of 1999 compared to $0.3 million in the second quarter of 1998. No
revenues were recorded in the second quarter of 1999 and 1998 second quarter
revenues were negligible. See Other Matters section of the MD&A for further
discussion of the Monitor Group.
Selling and administrative expenses increased 4% in the 1999 second quarter in
comparison to the same period last year principally due to expenses associated
with the operation of the Company's Geotechnical Division, acquired in August
1998. Interest expense increased 9% over the year earlier quarter due to an
increase in outstanding borrowings. Other income included approximately $0.3
million of accrued interest and dividends on the DM&E notes and stock. The
provision for income taxes was recorded at 33% in the second quarter of 1999,
due to the implementation of certain tax planning strategies, compared to 40% in
the 1998 second quarter.
First Six Months of 1999 Results of Operations
- ----------------------------------------------
Net income for the first six months of 1999 was $1.7 million or $0.17 per share
on net sales of $112.5 million. This compares to a net income of $2.6 million or
$0.26 per share on net sales of $108.2 million for the same period last year.
Rail products' net sales in the first half of 1999 were $66.5 million or 17%
higher than sales in the first half of 1998. This increase is attributable to
higher volume sales of new rail. Construction products' year to date net sales
increased 23% from the first six months of 1998 as a result of sales generated
by the Foster Geotechnical Division acquired in August of 1998. Net sales of
tubular products declined 42% in the first half of 1999 compared to the first
half of 1998 due primarily to the sale of the Company's Fosterweld Division and
the closing of the Newport pipe coating facility.
The gross margin percentage for the Company in the first six months of 1999 was
14% compared to 15% in the prior year. Rail products' gross margin percentage
declined to 12% from 15% primarily due to a change in the mix of rail products
sold. During the first half of 1999, the gross margin percentage for
Construction products declined to 19% from 22%. The depletion of rental piling
inventory was the primary reason for this decline. Tubular products' gross
margin percentage improved to 16% from 12% as a result of more efficient
operations at the Langfield threading facility and the closing of the Newport
pipe coating facility.
Selling and administrative expenses for the first half of 1999 increased 5% from
the first half of 1998, primarily due to the operating expenses associated with
the Company's Geotechnical Division, acquired in August 1998. Interest expense
declined 14% due to the paydown of the Company's revolving credit borrowings
with funds received from the sale of its Fosterweld facility. The provision for
income taxes is recorded at 35% for the first half of 1999, due to the
implementation of certain tax planning strategies, versus 40% in the same period
last year.
Liquidity and Capital Resources
- -------------------------------
The Company generates internal cash flow from the sale of inventory and the
collection of accounts receivable. During the first six months of 1999 the
average turnover rate for accounts receivable was lower than during the same
period last year due to slower collections on certain rail and construction
products' sales. The average turnover rate for inventory was higher in 1999 than
in 1998, primarily in coated pipe and new rail products. Working capital at June
30, 1999 was $64.8 million compared to $54.9 million at December 31, 1998.
Year to date, the Company had total non-acquisition capital expenditures of $1.4
million. In addition, the Company completed the 500,000 share buy-back of its'
common stock in January 1999. The cost of this program which commenced in 1997,
was $2.8 million. During the first quarter of 1999, the Company announced
another program to purchase up to an additional 1,000,000 shares. As of June 30,
1999, 225,298 shares had been purchased under this program at a cost of $1.3
million. Capital expenditures in 1999, excluding acquisitions, are expected to
be approximately $5.5 million. This includes the planned creation of a $2.8
million piling storage yard near the Chaparral plant in Richmond, Virginia and
the $1.0 million purchase of a welded rail delivery train. The acquisition of
CXT Incorporated resulted in a $17.4 million purchase of stock and the
assumption of $8.2 million of bank debt. Capital expenditures in 1999, excluding
acquisitions, are anticipated to be funded by cash flows from operations.
Total revolving credit agreement borrowings at June 30, 1999 were $58.2 million,
or an increase of $45.9 million from the end of the prior year. At June 30, 1999
the Company had $9.2 million in unused borrowing commitment. Outstanding letters
of credit at June 30, 1999 were $2.6 million. Management believes its internal
and external sources of funds are adequate to meet anticipated needs.
In connection with the previously announced acquisition of CXT Incorporated and
the plant investment and working capital associated with the Chaparral piling
sales buildup, the Company increased its revolving credit agreement to $70.0
million. The interest rate is, at the Company's option, based on the prime rate,
the domestic certificate of deposit rate (CD rate) or the Euro-bank rate
(LIBOR). The interest rates are established quarterly based upon cash flow and
the level of outstanding borrowings to debt as defined in the agreement.
Interest rates range from prime, to prime plus .25%, the CD rate plus .575% to
1.8% and the LIBOR rate plus .575% to 1.8%. Borrowings under the agreement,
which expires on July 1, 2003, are secured by eligible accounts, inventory and
the pledge of the Company held Dakota Minnesota & Eastern Railroad Corporation
Preferred stock.
The agreement includes financial covenants requiring a minimum net worth, a
minimum level for the fixed charge coverage ratio and a maximum level for the
consolidated total indebtedness to EBITDA ratio. The agreement restricts
investments, indebtedness and the sale of certain assets.
Dakota, Minnesota & Eastern Railroad
- ------------------------------------
The Company maintains a significant investment in the Dakota, Minnesota &
Eastern Railroad Corporation (DM&E), a privately held, regional railroad which
operates over 1,100 miles of track in five states.
At December 31, 1998, the Company's investment in the stock was recorded in the
Company's accounts at its historical cost of $1.7 million, comprised of $0.2
million of common stock and $1.5 million of the DM&E's Series B Preferred Stock
and warrants. On January 13, 1999, the Company increased its investment in the
DM&E by acquiring $6.0 million of DM&E Series C Preferred Stock and warrants. On
a fully diluted basis, the Company owns approximately 16% of the DM&E's common
stock. Although the market value of the DM&E stock is not readily determinable,
management believes that this investment, regardless of the DM&E's Powder River
Basin project, is worth significantly more than its historical cost.
The DM&E announced in June 1997 that it plans to build an extension from the
DM&E's existing line into the low sulfur coal market of the Powder River Basin
in Wyoming and to rebuild approximately 600 miles of existing track (the
"Project"). The DM&E has also announced that the estimated cost of this project
is $1.4 billion. Morgan Stanley & Co., Inc., has been retained by the DM&E to
assist in identifying strategic partners or potential acquirers of all or a
portion of the equity of the DM&E.
The Project is subject to approval by the Surface Transportation Board (STB). In
December 1998, the STB made a finding that the DM&E had satisfied the
transportation aspects of applicable regulations. The STB still must address the
extent and nature of the project's environmental impact and whether such impact
can be adequately mitigated. New construction on this project may not begin
until the STB reaches a final decision.
The DM&E has stated that it could repay project debt and cover its operating
costs if it captures a 5% market share in the Powder River Basin. If the Project
proves to be viable, management believes that the value of the Company's
investment in the DM&E could increase dramatically.
Other Matters
- -------------
In May 1998, the Company acquired the assets of the Monitor Group for $2.5
million, of which $2.2 million was allocated to intangible assets. In addition,
the Company has cumulatively funded operating and development expenses totaling
$2.7 million at June 30, 1999, including $0.5 million for amortization of
intangibles. Results to date have been well below management expectations. After
a comprehensive review of Monitor Group's progress, management has decided to
divest and reclassify the $1.8 million of Monitor Group's assets as held for
resale. Management believes that ultimately, the disposition of Monitor Group
will not materially affect the financial position or cash flows of the Company,
although the outcome could be material to the reported results of operations for
the period in which it occurs.
In September of 1998, the Company suspended production at its Newport, Kentucky
pipe coating facility due to unfavorable market conditions. Management intends
to dispose of the assets and has reclassified the machinery and equipment as
assets held for resale. Management anticipates that the proceeds from such a
sale will be at least $1.5 million, the net book value of such equipment.
The letter of intent which the Company signed in April, 1999 to sell its Mining
Division has expired. The Company continues to explore the divestiture of this
Division which is comprised principally of the Company's facilities and
inventory located at Pomeroy, Ohio and St. Marys, West Virginia.
On June 30, 1999, the Company acquired CXT Incorporated (CXT). Based in Spokane,
Washington, CXT is a manufacturer of engineered prestressed and precast concrete
products primarily used in the railroad and transit industries. The addition of
CXT is viewed by management as an opportunity to vertically integrate the
Company's transit products segment and to increase the Company's product
offerings to Class I railroads.
In August 1999, the Company executed an agreement to sell, subject to certain
contingencies, an undeveloped 62 acre portion of a 127 acre Houston, Texas
property for approximately $2.0 million. The sale, if consummated, is expected
to be completed by year end and will not have a material impact on the Company's
earnings.
Management continues to evaluate the overall performance of certain operations.
A decision to terminate an existing operation could have a material adverse
effect on near-term earnings but would not be expected to have a material
adverse effect on the financial condition of the Company.
Year 2000 Impact on Computer Systems
- ------------------------------------
Because many existing computer programs have been programmed to use a two digit
number to represent the year (e.g., "98" for "1998"), the Company has analyzed
its computer software systems to ensure that they are capable of correctly
identifying the year "2000" and beyond in all computer transactions. The Company
understands the seriousness of this issue and its Board of Directors has
requested an update of the Company's year 2000 compliance at each Board Meeting.
The Company installed integrated accounting and distribution software licensed
from a national vendor in 1992 and has periodically installed updated releases
of the software to take advantage of technological advances and improvements
over prior releases in the ordinary course of business. The current releases of
this vendor's software are year 2000 compliant. The Company installed the year
2000 compliant release including modifications unrelated to the year 2000 issue
to suit the Company's business in May 1998. The Company completed the testing of
these modifications and placed these systems in production in January 1999.
Management does not anticipate any adverse impact in becoming year 2000
compliant. The costs associated with the installation of the year 2000 compliant
release are considered by Management to be in the ordinary course of business
and are not material to its financial results.
In addition, the Company has conducted a review of its production equipment and
has determined that it is year 2000 compliant. The Company has also surveyed key
vendors and suppliers to determine the extent of their year 2000 compliance
readiness and planned action to become year 2000 compliant.
The Company has minimal direct or indirect computer data transfers with outside
customers, vendors, and suppliers other than major banks, whose year 2000
compliance efforts are well underway. Based on this fact as well as internal
assessments, and formal and informal communications with customers, vendors, and
suppliers, the Company presently believes that the year 2000 compliance issue
should not have an adverse impact on the Company's financial position, results
of operations or cash flow. A failure of third party vendors or suppliers to be
year 2000 compliant could affect these beliefs and is not quantifiable.
The most reasonably likely worse case scenario of failure by the Company or its
suppliers or customers to resolve year 2000 problems would be a temporary
inability on the part of the Company to timely process orders and to deliver
finished products to customers. Delays in meeting customers' orders would affect
the timing of billings to and payments received from customers in respect of
orders and could result in other liabilities. Customers' year 2000 problems
could also delay the timing of payments to the Company for orders.
Outlook
- -------
Since March 1997, the Company had not had a domestic sheet piling supplier.
Revenues from piling products declined and continue to be at reduced levels as
the Company's remaining piling inventory is liquidated. The Company, however,
has become Chaparral Steel's exclusive North American distributor of steel sheet
piling and "H" bearing pile. Chaparral's new Richmond, Virginia facility
recently commenced operations and expects to make H-bearing pile available in
the third quarter of 1999, and steel sheet piling ready for sale in the fourth
quarter of 1999.
The rail segment of the business depends on one source for fulfilling certain
trackwork contracts. As of June 30, the Company has provided $9.7 million of
working capital to this supplier in the form of loans and progress payments. If,
for any reason, this supplier is unable to perform, the Company could experience
a short-term negative effect on earnings.
A substantial portion of the Company's operations is heavily dependent on
governmental funding of infrastructure projects. Significant changes in the
level of government funding of these projects could have a favorable or
unfavorable impact on the operating results of the Company. Additionally,
governmental actions concerning taxation, tariffs, the environment or other
matters could impact the operating results of the Company. The Company's
operating results may also be affected by adverse weather conditions.
Although backlog is not necessarily indicative of future operating results,
total Company backlog at June 30, 1999, excluding the recently acquired CXT
backlog, was approximately $105.5 million. The following table provides the
backlog by business segment:
Backlog
- ------------------------------------------------------------------------------
June 30, December 31,
1999 1998 1998
- ------------------------------------------------------------------------------
(Dollars in thousands)
Rail Products $ 63,293 $ 51,155 $ 62,481
Construction Products 39,548 25,115 42,542
Tubular Products
excluding Fosterweld 2,620 7,776 3,541
Fosterweld 58
Monitor Group 34
- ------------------------------------------------------------------------------
Total $105,461 $ 84,138 $108,564
==============================================================================
Market Risk and Risk Management Policies
- ----------------------------------------
The Company is not subject to significant exposure to change in foreign currency
exchange rates. The Company does not hedge the cash flows of operations of its
Canadian subsidiary. The Company manages its exposures to changes in foreign
currency exchange rates on firm sales commitments by entering into foreign
currency forward contracts. The Company's risk management objective is to reduce
its exposure to the effects of changes in exchange rates on sales revenue over
the duration of the transaction.
As of June 30, 1999, the Company had outstanding foreign currency forward
contracts to purchase $0.3 million Canadian for $0.2 million US.
The Company is also exposed to changes in interest rates primarily from its
long-term debt arrangements. The Company uses interest rate derivative
instruments to manage exposure to interest rate changes.
The Company has entered into an interest rate swap agreement as the fixed rate
payor to reduce the impact of changes in interest rates on a portion of its
revolving borrowings. At June 30, 1999 the swap agreement had a notional value
of $8,000,000 at 5.48%, and expires in January 2001. The swap agreement's
floating rate is based on LIBOR. Any amounts paid or received under the
agreement are recognized as adjustments to interest expense. Neither the fair
market value of the agreement nor the interest expense adjustments associated
with the agreement has been material.
Forward-Looking Statements
- --------------------------
Statements relating to the potential value or viability of the DM&E or the
Project, or management's belief as to such matters, are forward-looking
statements and are subject to numerous contingencies and risk factors. The
Company has based its assessment on information provided by the DM&E and has not
independently verified such information. In addition to matters mentioned above,
factors which can adversely affect the value of the DM&E, its ability to
complete the Project or the viability of the Project include the following:
labor disputes, any inability to obtain necessary environmental and government
approvals for the Project in a timely fashion, the expense of environmental
mitigation measures required by the Surface Transportation Board, an inability
to obtain financing for the Project, competitor's response to the Project,
market demand for coal or electricity and changes in environmental laws and
regulations.
The Company wishes to caution readers that various factors could cause the
actual results of the Company to differ materially from those indicated by
forward-looking statements made from time to time in news releases, reports,
proxy statements, registration statements and other written communications
(including the preceding sections of this Management's Discussion and Analysis),
as well as oral statements made from time to time by representatives of the
Company. Except for historical information, matters discussed in such oral and
written communications are forward-looking statements that involve risks and
uncertainties, including but not limited to general business conditions, the
availability of material from major suppliers, the impact of competition, the
seasonality of the Company's business, taxes, inflation and governmental
regulations.
PART II OTHER INFORMATION
-------------------------
Item 1. LEGAL PROCEEDINGS
See Note 8, "Commitments and Contingent Liabilities", to the Condensed
Consolidated Financial Statements.
Item 4. RESULTS OF VOTES OF SECURITY HOLDERS
At the Company's annual meeting on May 20, 1999, the following individuals were
elected to the Board of Directors:
For Withheld
Name Election Authority
---- -------- ---------
L. B. Foster II 9,266,273 156,861
Henry J. Massman IV 9,267,073 156,061
John W. Puth 9,266,973 156,161
William H. Rackoff 9,267,073 156,061
Richard L. Shaw 9,267,073 156,061
The stockholders also voted to approve the 1998 Long-Term Incentive Plan:
Against
For Approval Approval Abstained
------------ -------- ---------
7,428,195 1,665,449 329,490
Additionally, the shareholders voted to approve Ernst & Young, LLP as the
Company's independent auditors for the fiscal year ended December 31, 1999. The
following table sets forth the results of the vote for independent auditors:
Against
For Approval Approval Abstained
------------ -------- ---------
9,279,568 26,021 42,276
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
Unless marked by an asterisk, all exhibits are incorporated by reference:
3.1 Restated Certificate of Incorporation as amended to date, filed as
Appendix B to the Company's April 17, 1998 Proxy Statement.
3.2 Bylaws of the Registrant, as amended to date, filed as Exhibit 3B
to Form 8-K on May 21, 1997.
4.0 Rights Agreement, dated as of May 15, 1997, between L.B. Foster
Company and American Stock Transfer & Trust Company, including the
form of Rights Certificate and the Summary of Rights attached
thereto, filed as Exhibit 4A to Form 8-A dated May 23, 1997.
4.0.1 Amended Rights Agreement dated as of May 14, 1998, between L. B.
Foster Company and American Stock Transfer & Trust Company, filed
as Exhibit 4.0.1 to Form 10-Q for the quarter ended June 30, 1998.
* 4.1 Third Amended and Restated Loan Agreement by and among the
Registrant and Mellon Bank, N.A., PNC Bank, National Association,
and First Union National Bank dated as of June 30, 1999.
10.15 Lease between the Registrant and Amax, Inc. for manufacturing
facility at Parkersburg, West Virginia, dated as of October 19,
1978, filed as Exhibit 10.15 to Registration Statement No.
2-72051.
10.16 Lease between Registrant and Greentree Building Associates for
Headquarters office, dated as of June 9, 1986, as amended to date,
filed as Exhibit 10.16 to Form 10-K for the year ended December
31, 1988.
10.16.1 Amendment dated June 19, 1990 to lease between Registrant and
Greentree Building Associates, filed as Exhibit 10.16.1 to Form
10-Q for the quarter ended June 30, 1990.
10.16.2 Amendment dated May 29, 1997 to lease between Registrant and
Greentree Building Associates, filed as Exhibit 10.16.2 to Form
10-Q for the quarter ended June 30, 1997.
10.19 Lease between the Registrant and American Cast Iron Pipe Company
for Pipe-Coating facility in Birmingham, Alabama dated December
11, 1991, filed as Exhibit 10.19 to Form 10-K for the year ended
December 31, 1991.
10.19.1 Amendment to Lease between the Registrant and American Cast Iron
Pipe Company for Pipe-Coating facility in Birmingham, Alabama
dated April 15, 1997, filed as Exhibit 10.19.1 to Form 10-Q for
the quarter ended March 31, 1997.
10.20 Asset Purchase Agreement, dated June 5, 1998, by and among the
Registrant and Northwest Pipe Company, filed as Exhibit 10.0 to
Form 8-K on June 18, 1998.
10.21 Stock Purchase Agreement dated June 3, 1999, by and among the
Registrant and the shareholders of CXT Incorporated, filed as
Exhibit 10.0 to Form 8-K on July 14, 1999.
10.33.2 Amended and Restated 1985 Long-Term Incentive Plan, as amended and
restated February 26, 1997, filed as Exhibit 10.33.2 to Form 10-Q
for the quarter ended June 30, 1997. **
10.34 Amended and Restated 1998 Long-Term Incentive Plan for Officers
and Directors, as amended and restated February 24, 1999 and filed
as Exhibit 10.34 to Form 10-K for the year ended December 31,
1998. **
10.45 Medical Reimbursement Plan, filed as Exhibit 10.45 to Form 10-K
for the year ended December 31, 1992. **
10.46 Leased Vehicle Plan, as amended to date, filed as Exhibit 10.46
to Form 10-K for the year ended December 31, 1997. **
10.49 Lease agreement between Newport Steel Corporation and Registrant
dated as of October 12, 1994 and filed as Exhibit 10.49 to Form
10-Q for the quarter ended September 30, 1994.
10.49.1 Amendment to lease between Registrant and Newport Steel
Corporation dated March 13, 1998 and filed as Exhibit 10.49.1 to
Form 10-K for the year ended December 31, 1997.
10.50 L.B. Foster Company 1999 Incentive Compensation Plan, filed as
Exhibit 10.50 to Form 10-K for the year ended December 31, 1998.
**
10.51 Supplemental Executive Retirement Plan, filed as Exhibit 10.51 to
Form 10-K for the year ended December 31, 1994. **
19 Exhibits marked with an asterisk are filed herewith.
* 27 Financial Data Schedule
** Identifies management contract or compensatory plan or
arrangement required to be filed as an Exhibit.
b) Reports on Form 8-K
On July 14, 1999 the Registrant filed a Current Report on Form 8-K
announcing the June 30, 1999 purchase of all outstanding stock of CXT
Incorporated.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
L.B. FOSTER COMPANY
(Registrant)
Date: August 13, 1999 By /s/ Roger F. Nejes
---------------- ---------------------
Roger F. Nejes
Sr. Vice President-
Finance and Administration
& Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer
of Registrant)