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, 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 November 1, 1999
Common Stock, Par Value $.01 9,580,640 Shares
<PAGE>
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 6. Exhibits and Reports on Form 8-K 18
Signature 21
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
1999 1998
------------- -----------
ASSETS (unaudited)
Current Assets:
Cash and cash equivalents ..................... $ 973 $ 874
Accounts and notes receivable:
Trade ....................................... 53,718 46,510
Other ....................................... 1,218 801
------------- -----------
54,936 47,311
Inventories ................................... 47,019 36,418
Current deferred tax assets ................... 115
Other current assets .......................... 1,781 614
Property held for resale ...................... 9,148
------------- -----------
Total Current Assets ........................ 113,972 85,217
------------- -----------
Property, Plant & Equipment - at cost .......... 54,792 43,573
Less Accumulated Depreciation .................. (21,433) (23,128)
------------- -----------
33,359 20,445
Property Held for Resale ....................... 615 615
Other Assets:
Goodwill and intangibles ...................... 3,496 5,666
Investments ................................... 7,693 1,693
Other assets .................................. 6,051 5,798
------------- -----------
Total Other Assets .......................... 17,240 13,157
TOTAL ASSETS ................................... $ 165,186 $ 119,434
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Current maturities of long-term debt ............ $ 1,080 $ 1,098
Short-term borrowings ........................... 11,120 2,275
Accounts payable ................................ 25,850 19,667
Accrued payroll and employee benefits ........... 3,807 4,498
Current deferred tax liabilities ................ 704 334
Other accrued liabilities ....................... 1,669 2,454
------------- -----------
Total Current Liabilities ...................... 44,230 30,326
------------- -----------
Long-Term Borrowings ............................. 40,000 10,000
Other Long-Term Debt ............................. 4,038 3,829
Deferred Tax Liabilities ......................... 678 678
Other Long-Term Liabilities ...................... 1,550 1,107
Stockholders' Equity:
Common stock .................................... 102 102
Paid-in capital ................................. 35,377 35,431
Retained earnings ............................... 42,552 40,002
Treasury stock .................................. (3,364) (2,046)
Accumulated other comprehensive income .......... 23 5
------------- -----------
Total Stockholders' Equity ..................... 74,690 73,494
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......... $165,186 $119,434
============= ===========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
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,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(unaudited)
Net Sales .................. $ 63,073 $ 50,368 $ 175,599 $ 158,585
--------- --------- --------- ---------
Costs and Expenses:
Cost of Goods Sold ........ 53,359 43,155 150,452 135,355
Selling and Administrative
Expenses ................ 7,359 5,849 19,909 17,783
Interest Expense .......... 1,237 308 2,158 1,377
Other Income .............. (234) (130) (891) (1,533)
--------- --------- --------- ---------
61,721 49,182 171,628 152,982
--------- --------- --------- ---------
Income Before Income Taxes . 1,352 1,186 3,971 5,603
Income Tax Expense ......... 500 473 1,421 2,243
--------- --------- --------- ---------
Net Income ................. $ 852 $ 713 $ 2,550 $ 3,360
========= ========= ========= =========
Basic Earnings Per Common
Share .................... $ 0.09 $ 0.07 $ 0.26 $ 0.33
========= ========= ========= =========
Diluted Earnings Per Common
Share .................... $ 0.09 $ 0.07 $ 0.26 $ 0.33
========= ========= ========= =========
Cash Dividend per Common
Share $ $ $ $
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
L.B. Foster Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In Thousands)
Nine Months
Ended September 30,
1999 1998
-------- --------
Cash Flows from Operating Activities: (unaudited)
Net income ............................................ $ 2,550 $ 3,360
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Deferred income taxes ................................ (288) 520
Depreciation and amortization ........................ 2,730 2,197
Loss (gain) on sale of property, plant & equipment ... 72 (1,271)
Change in operating assets and liabilities:
Accounts receivable ................................... 2,364 10,499
Inventories ........................................... (8,675) (1,196)
Property held for resale .............................. (18) 200
Other current assets .................................. (1,008) (128)
Other non-current assets .............................. 1,133 (494)
Accounts payable ...................................... 1,988 7,492
Accrued payroll and employee benefits ................. (1,388) 830
Other current liabilities ............................. (785) (36)
Other liabilities ..................................... 443 (215)
-------- --------
Net Cash (Used) Provided by Operating Activities ....... (882) 21,758
-------- --------
Cash Flows from Investing Activities:
Proceeds from sale of property, plant and equipment ... 206 687
Proceeds from sale of Fosterweld ...................... 7,258
Capital expenditures on property, plant and equipment . (3,727) (1,953)
Purchase of DM&E stock ................................ (6,000)
Acquisition of business ............................... (17,389) (3,774)
-------- --------
Net Cash (Used) Provided by Investing Activities ....... (26,910) 2,218
-------- --------
Cash Flows from Financing Activities:
Proceeds (repayments) from issuance of revolving
credit agreement borrowings .......................... 38,845 (22,111)
CXT debt repayment .................................... (8,845)
Proceeds from Industrial Revenue Bond ................. 2,045
Exercise of stock options and stock awards ............ 329 308
Treasury share transactions ........................... (1,702) (909)
Repayments of other long-term debt .................... (749) (972)
-------- --------
Net Cash Provided (Used) by Financing Activities ....... 27,878 (21,639)
-------- --------
Effect of exchange rate changes on cash ................ 13
Net Increase in Cash and Cash Equivalents .............. 99 2,337
Cash and Cash Equivalents at Beginning of Period ....... 874 1,156
-------- --------
Cash and Cash Equivalents at End of Period ............. $ 973 $ 3,493
======== ========
Supplemental Disclosures of Cash Flow Information:
Interest Paid .......................................... $ 1,274 $ 1,488
======== ========
Income Taxes Paid ...................................... $ 2,261 $ 1,578
======== ========
During 1999 and 1998, the Company financed the purchase of certain capital
expenditures and maintenance agreements totaling $1,056,000 and 336,000,
respectively, through the issuance of capital leases.
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
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 (FASB) 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. In June 1999, FASB Statement No.
137, "Accounting for Derivative Instruments and Hedging Activities: Deferral of
the Effective Date of FASB Statement No. 133" was issued. This statement delays
the effective date to all fiscal quarters of all fiscal years beginning after
June 15, 2000. 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 September 30, 1999 and
December 31, 1998 have been reduced by an allowance for doubtful accounts of
$(1,528,000) and $(1,438,000), respectively. Bad debt expense was $100,000 and
$34,000 for the nine month periods ended September 30, 1999 and 1998,
respectively.
<PAGE>
4. INVENTORIES
Inventories of the Company at September 30, 1999 and December 31, 1998 are
summarized as follows in thousands:
September 30, December 31,
1999 1998
-------- --------
Finished goods ................................. $ 34,014 $ 26,877
Work-in-process ................................ 11,039 7,779
Raw materials .................................. 4,840 4,546
-------- --------
Total inventories at current costs: ............ 49,893 39,202
(Less):
Current costs over LIFO
stated values ................................. (2,274) (2,184)
Reserve for decline in market value
of inventories ................................ (600) (600)
-------- --------
$ 47,019 $ 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 September 30, 1999 and December 31, 1998 consists of
the following:
September 30, December 31,
(in thousands) 1999 1998
- -------------------------------------------------------------------------------
Location:
Real Estate, Doraville, GA ..................... $3,055
Monitor Group, Cheswick, PA .................... 1,773
Coated Pipe Assets, Newport, KY ................ 1,528
Real Estate, Langfield, TX ..................... 1,500
Mining Division Assets, Pomeroy, OH ............ 744
Real Estate, Marrero, LA ....................... 615 $ 615
Mining Division Assets, St. Marys, WV .......... 548
------ ------
Property held for resale ......................... $9,763 $ 615
------ ------
Less current portion ............................. 9,148
------ ------
$ 615 $ 615
====== ======
<PAGE>
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.
The Company continues to explore the divestiture of its Mining Division which is
comprised principally of the Company's facilities and inventory located at
Pomeroy, Ohio and St. Marys, West Virginia.
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.
In August 1999, the Company executed a letter of intent for the sale of real
estate located in Doraville, Georgia for approximately $3.2 million. This real
estate includes one building and approximately 28 acres of land.
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.
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 receivable, 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.
<PAGE>
7. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
common share:
Three Months Ended Nine Months Ended
(in thousands, September 30, September 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 $ 852 $ 713 $2,550 $3,360
======= ======= ======= =======
Denominator:
Weighted average shares 9,581 10,003 9,692 10,003
------- ------- ------- -------
Denominator for basic
earnings per common share 9,581 10,003 9,692 10,003
Effect of dilutive securities:
Contingent issuable shares
pursuant to the Company's
1997 and 1998 Incentive
Compensation Plans 53 18 45 14
Employee stock options 272 195 252 210
------ ------- ------- -------
Dilutive potential common
shares 325 213 297 224
Denominator for diluted
earnings per common share
- adjusted weighted average
shares and assumed conversions 9,906 10,216 9,989 10,227
======= ======= ======= =======
Basic earnings per common share $0.09 $0.07 $0.26 $0.33
======= ======= ======= =======
Diluted earnings per common share $0.09 $0.07 $0.26 $0.33
======= ======= ======= =======
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, 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 illustrate
revenues and profits/(losses) of the Company by segment:
<PAGE>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
Net Segment Net Segment
(in thousands) Sales Profit/(Loss) Sales Profit/(Loss)
- -------------------------------------------------------------------------------
Rail products $39,636 $1,118 $106,121 $2,273
Construction products 17,304 419 48,196 1,375
Tubular products 5,988 503 20,976 1,822
Monitor Group 48 (337) 48 (1,236)
- -------------------------------------------------------------------------------
Total $62,976 $1,703 $175,341 $4,234
===============================================================================
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
Net Segment Net Segment
(in thousands) Sales Profit/(Loss) Sales Profit/(Loss)
- -------------------------------------------------------------------------------
Rail products $26,113 $1,464 $82,949 $3,710
Construction products 13,063 (701) 38,173 847
Tubular products 11,243 731 37,194 1,507
Monitor Group (343) 26 (1,030)
===============================================================================
Total $50,419 $1,151 $158,342 $5,034
===============================================================================
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 Nine Months Ended
September 30, September 30,
(in thousands) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
Net Profit/(Loss)
- -------------------------------------------------------------------------------
Total for reportable segments $1,703 $1,151 $4,234 $5,034
Cost of capital for reportable
segments 3,062 2,340 8,113 7,582
Interest expense (1,237) (308) (2,158) (1,377)
Other income 234 130 891 1,533
Corporate expense and other
unallocated charges (2,410) (2,127) (7,109) (7,169)
===============================================================================
Income before income taxes $1,352 $1,186 $3,971 $5,603
===============================================================================
There has been no change in the measurement of segment profit/(loss) from
December 31, 1998. There has been no significant change in the Construction or
Monitor segment assets from December 31, 1998. The Rail segment's assets have
increased primarily due to the addition of CXT Incorporated (See Note 10).
Increases in relay rail's inventory and transit products' accounts receivable
also contributed to the asset increase. The Tubular segment's inventory and
accounts receivable have decreased due to the closing of the Newport facility.
<PAGE>
10. ACQUISITIONS
On June 30, 1999, the Company acquired all of the outstanding stock of CXT
Incorporated (CXT) for $17,389,000. After post closing adjustments, the purchase
price should increase by approximately $125,000. 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 ............................. 18,197
Other assets ............................................ 967
Bank debt - current portion ............................. (5,765)
Other current liabilities ............................... (5,120)
Bank debt - long-term ................................... (3,080)
--------
Purchase price .......................................... $ 17,389
========
The Company expects to finalize all purchase accounting adjustments within one
year of the acquisition.
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:
Nine Months Ended September 30,
1999 1998
(Dollars in thousands, except per share data)
- ---------------------------------------------------------------------------
Net Sales $ 195,264 $ 183,254
Net Income 2,755 2,900
Basic Earnings per share: $ 0.28 $ 0.29
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.
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------
(Unaudited, dollars in thousands)
Net Sales:
Rail Products $ 39,636 $ 26,113 $ 106,121 $ 82,949
Construction Products 17,304 13,063 48,196 38,173
Tubular Products 5,988 11,243 20,976 37,194
Monitor Group 48 48 26
Other 97 (51) 258 243
------ ------ ------ -------
Total Net Sales 63,073 50,368 175,599 158,585
====== ====== ======= =======
Gross Profit:
Rail Products 6,177 4,324 14,348 12,762
Construction Products 2,993 1,665 8,937 7,110
Tubular Products 969 1,644 3,420 4,666
Monitor Group (250) (235) (918) (661)
Other (175) (185) (640) (647)
------ ------ ------ -------
Total Gross Profit 9,714 7,213 25,147 23,230
------ ------ ------ -------
Expenses:
Selling and Administrative
Expenses 7,359 5,849 19,909 17,783
Interest Expense 1,237 308 2,158 1,377
Other (Income) Expense (234) (130) (891) (1,533)
------ ------ ------ -------
Total Expenses 8,362 6,027 21,176 17,627
------ ------ ------ -------
Income Before Income Taxes 1,352 1,186 3,971 5,603
Income Tax Expense 500 473 1,421 2,243
------ ------ ------ -------
Net Income $ 852 $ 713 $ 2,550 $ 3,360
====== ====== ======= =======
Gross Profit %:
Rail Products 15.6% 16.6% 13.5% 15.4%
Construction Products 17.3% 12.7% 18.5% 18.6%
Tubular Products 16.2% 14.6% 16.3% 12.5%
Monitor Group N/A N/A N/A N/A
Other N/A N/A N/A N/A
Total Gross Profit % 15.4% 14.3% 14.3% 14.6%
====== ====== ======= =======
Note: Prior year segment information has been restated to be consistent with
FASB No. 131, "Disclosures about Segments of an Enterprise and Related
Information".
<PAGE>
THIRD QUARTER 1999 RESULTS OF OPERATIONS
Net income for the third quarter of 1999 was $0.9 million or $0.09 per share on
net sales of $63.1 million. This compares to a 1998 third quarter net income of
$0.7 million or $0.07 per share on net sales of $50.4 million.
Rail products' 1999 third quarter net sales were $39.6 million or an increase of
51.8% over the same period last year. This increase was due primarily to sales
by the recently acquired CXT Incorporated (CXT) and an increase in shipments of
transit products. Construction products' net sales increased 32.5% from the year
earlier quarter as a result of "H" bearing pile becoming available for sale, a
100% increase in shipments of Precise fabricated products, and sales generated
by the Foster Geotechnical Division, acquired in August of 1998. This increase
offset the decline in the Company's sheet piling sales and rentals which
continue to suffer from lack of supply. Tubular products' sales decreased 46.8%
from the same quarter of 1998 due to the closing of the Company's Newport pipe
coating facility in September, 1998. 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 15.4% in the third quarter
of 1999 and 14.3% for the same period of 1998. Rail products' gross margin
percentage in the third quarter of 1999 was 15.6% versus 16.6% 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 climbed to
17.3% in the third quarter of 1999 compared to 12.7% in the 1998 third quarter,
which was negatively impacted by a $0.9 million provision for losses on certain
sign structure contracts. Tubular products' gross margin percentage increased to
16.2% from 14.6% in the year earlier quarter, primarily due to the halting of
production of lower margin coated pipe at the Company's Newport facility.
The Monitor Group had costs and expenses totaling $0.3 million in the third
quarters of 1999 and 1998. Revenues for the third quarter of 1999 were
negligible and no revenues were recorded in the third quarter of 1998. See Other
Matters section of the MD&A for further discussion of the Monitor Group.
Selling and administrative expenses increased 25.8% in the 1999 third quarter in
comparison to the same period last year principally due to expenses associated
with the operation of CXT, acquired in June 1999. Interest expense increased
over the year earlier quarter due primarily to an increase in outstanding
borrowings for the acquisition of CXT. Other income included approximately $0.3
million of accrued interest and dividends on the Dakota, Minnesota and Eastern
Railroad, (DM&E) notes and stock. The provision for income taxes was recorded at
37.0% in the third quarter of 1999, due to the implementation of tax planning
strategies, compared to 39.9% in the 1998 third quarter.
FIRST NINE MONTHS OF 1999 RESULTS OF OPERATIONS
Net income for the first nine months of 1999 was $2.6 million or $0.26 per share
on net sales of $175.6 million. This compares to a net income of $3.4 million or
$0.33 per share on net sales of $158.6 million for the same period last year.
Rail products' net sales for the first nine months of 1999 were $106.1 million
or 27.9% higher than sales in the same period of 1998. This increase is
attributable to higher volume sales of new rail and transit products, as well as
<PAGE>
additional sales from the recently acquired CXT subsidiary. Construction
products' year to date net sales increased 26.3% from the same period of 1998,
primarily as a result of sales generated by the Foster Geotechnical Division
acquired in August of 1998. Net sales of tubular products declined 43.6% in 1999
compared to the first nine months 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 nine months of 1999 is
14.3% compared to 14.6% in the prior year. Rail products' gross margin
percentage declined to 13.5% from 15.4% primarily due to a change in the mix of
rail products sold. The gross margin percentage for construction products
remained near 18.5% during the first nine months of both 1999 and 1998. Tubular
products' gross margin percentage improved to 16.3% from 12.5% 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 1999 increased 12.0% from the first nine
months of 1998, primarily due to the operating expenses associated with CXT and
the Company's Geotechnical Division, acquired in June 1999 and August 1998,
respectively. Interest expense increased 56.7% due to an increase in outstanding
borrowings for the acquisition of CXT. The provision for income taxes is
recorded at 35.8% for the first nine months of 1999, due to the implementation
of tax planning strategies, versus 40.0% 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 nine months of 1999 the
average turnover rate for accounts receivable was lower than during the same
period last year due to slower collections of certain rail and construction and
tubular products' sales. The average turnover rate for inventory was higher in
1999 than in 1998, primarily for coated pipe products. Working capital at
September 30, 1999 was $69.7 million compared to $54.9 million at December 31,
1998.
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 September 30, 1999, 225,298 shares had
been purchased under this program at a cost of $1.3 million.
Year to date, the Company had total non-acquisition capital expenditures,
including capital leases, of $4.7 million. Capital expenditures in 1999,
excluding acquisitions, are expected to be approximately $6.9 million. This
includes the 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 included 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 September 30, 1999 were $51.1
million, or an increase of $38.8 million from the end of the prior year. At
September 30, 1999 the Company had $16.2 million in unused borrowing commitment.
Outstanding letters of credit at September 30, 1999 were $2.6 million.
<PAGE>
Management believes its internal and external sources of funds are adequate to
meet anticipated needs.
In connection with the plant investment and anticipated working capital
associated with the Chaparral piling sales program, and the acquisition of CXT,
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's DM&E 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 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., was 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.
<PAGE>
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
$3.0 million at September 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.
The Company continues to explore the divestiture of its Mining 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. 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.
In August 1999, the Company signed a letter of intent for the sale of real
estate located in Doraville, Georgia for approximately $3.2 million. This real
estate includes one building and approximately 28 acres of land.
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.
<PAGE>
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
Revenues from piling products declined following the closure of Bethlehem's
structural mill, and continue to be at reduced levels as the Company's remaining
sheet piling inventory is liquidated. The Company has become Chaparral Steel's
exclusive North American distributor of steel sheet piling and "H" bearing pile.
Shipments of "H" bearing pile began very late in the third quarter from
Chaparral's new Richmond, Virginia facility while steel sheet piling production
is not expected until March of next year.
The rail segment of the business depends on one source for fulfilling certain
trackwork contracts. As of September 30, the Company has provided $10.9 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
<PAGE>
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 September 30, 1999 was approximately $166.3 million.
The following table provides the backlog by business segment:
Backlog
September 30, December 31,
(Dollars in thousands) 1999 1998 1998
-------- -------- --------
(1) Rail Products ............... $121,367 $ 58,518 $ 62,481
Construction Products ....... 43,351 22,585 42,542
Tubular Products
excluding Fosterweld ...... 1,543 6,409 3,541
Fosterweld .................. 19
Monitor Group
-------- -------- --------
Total Backlog ......... $166,261 $ 87,531 $108,564
======== ======== ========
(1) September 1999 includes $68.4 million associated with the recent acquisition
of CXT.
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 September 30, 1999, the Company had outstanding foreign currency forward
contracts to purchase $0.15 million Canadian for $0.10 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 September 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
<PAGE>
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. Additional delays in Chaparral's production of "H" bearing pile or
steel sheet piling would, for example have an adverse effect on the Company's
performance. 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. Sentences containing words such as "anticipates", "expects", or
"will" generally should be considered forward-looking statements.
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.
<PAGE>
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, filed as
Exhibit 4.1 to Form 10-Q for the quarter ended June 30, 1999.
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. **
<PAGE>
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.
<PAGE>
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 12, 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)
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