10-Q 1 q2_04.txt L.B.FOSTER COMANY 2004 SECOND QUARTER 10-Q 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, 2004 ------------- Commission File Number 0-10436 ------- L. B. Foster Company -------------------- (Exact name of Registrant as specified in its charter) Pennsylvania 25-1324733 ------------ ---------- (State of Incorporation) (I. R. S. Employer Identification No.) 415 Holiday Drive, Pittsburgh, Pennsylvania 15220 ------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (412) 928-3417 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] Indicate the number of shares of each of the registrant's classes of common stock as of the latest practicable date. Class Outstanding at August 2, 2004 ----- ----------------------------- Common Stock, Par Value $.01 10,014,770 Shares L.B. FOSTER COMPANY AND SUBSIDIARIES INDEX ----- PART I. Financial Information Page ------------------------------ ---- Item 1. Financial Statements: Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 21 Item 4. Controls and Procedures 21 PART II. Other Information --------------------------- Item 1. Legal Proceedings 21 Item 4. Results of Votes of Security Holders 21 Item 6. Exhibits and Reports on Form 8-K 22 Signature 25 3 L. B. FOSTER COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) June 30, December 31, 2004 2003 -------------- -------------- ASSETS (Unaudited) Current Assets: Cash and cash equivalents $ 2,723 $ 4,134 Accounts and notes receivable: Trade 46,043 34,668 Other 345 105 -------------- -------------- 46,388 34,773 Inventories 37,330 36,894 Current deferred tax assets 1,413 1,413 Other current assets 1,142 877 Property held for resale - 446 -------------- -------------- Total Current Assets 88,996 78,537 -------------- -------------- Property, Plant & Equipment - At Cost 70,832 70,814 Less Accumulated Depreciation (38,902) (37,679) -------------- -------------- 31,930 33,135 -------------- -------------- Other Assets: Goodwill 350 350 Other intangibles - net 508 585 Investments 14,202 13,707 Deferred tax assets 4,073 4,095 Other assets 418 750 -------------- -------------- Total Other Assets 19,551 19,487 -------------- -------------- TOTAL ASSETS $ 140,477 $ 131,159 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt $ 481 $ 611 Accounts payable - trade 27,783 23,874 Accrued payroll and employee benefits 3,271 2,909 Current deferred tax liabilities 1,749 1,749 Other accrued liabilities 2,756 2,550 -------------- -------------- Total Current Liabilities 36,040 31,693 -------------- -------------- Long-Term Borrowings 21,000 17,000 -------------- -------------- Other Long-Term Debt 3,623 3,858 -------------- -------------- Deferred Tax Liabilities 3,653 3,653 -------------- -------------- Other Long-Term Liabilites 3,070 4,411 -------------- -------------- STOCKHOLDERS' EQUITY: Common stock 102 102 Paid-in capital 35,030 35,018 Retained earnings 39,581 38,399 Treasury stock (985) (2,304) Accumulated other comprehensive loss (637) (671) -------------- -------------- Total Stockholders' Equity 73,091 70,544 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 140,477 $ 131,159 ============== ============== See Notes to Condensed Consolidated Financial Statements. 4
L. B. FOSTER COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Amounts) Three Months Six Months Ended Ended June 30, June 30, -------------------------------- -------------------------------- 2004 2003 2004 2003 -------------------------------- -------------------------------- (Unaudited) (Unaudited) Net Sales $ 76,827 $ 75,796 $ 142,279 $ 135,315 Cost of Goods Sold 67,494 66,600 126,964 119,186 --------------- -------------- --------------- -------------- Gross Profit 9,333 9,196 15,315 16,129 Selling and Administrative Expenses 7,054 6,830 13,455 13,397 Interest Expense 469 578 932 1,157 Other Income (350) (54) (1,044) (374) --------------- -------------- --------------- -------------- 7,173 7,354 13,343 14,180 --------------- -------------- --------------- -------------- Income From Continuing Operations Before Income Taxes 2,160 1,842 1,972 1,949 Income Taxes 865 719 790 762 --------------- -------------- --------------- -------------- Income From Continuing Operations 1,295 1,123 1,182 1,187 Discontinued Operations: Loss From Operations of Foster Technologies - (60) - (440) Income Tax Benefit - (23) - (173) --------------- -------------- --------------- -------------- Loss on Discontinued Operations - (37) - (267) --------------- -------------- --------------- -------------- Net Income $ 1,295 $ 1,086 $ 1,182 $ 920 =============== ============== =============== ============== Basic & Diluted Earnings (Loss) Per Common Share: From Continuing Operations $ 0.13 $ 0.12 $ 0.12 $ 0.12 From Discontinued Operations, Net of Tax - - - (0.03) --------------- -------------- --------------- -------------- Basic & Diluted Earnings Per Common Share $ 0.13 $ 0.11 $ 0.12 $ 0.10 =============== ============== =============== ============== See Notes to Condensed Consolidated Financial Statements.
5
L. B. FOSTER COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Six Months Ended June 30, 2004 2003 ------------- ------------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations $ 1,182 $ 1,187 Adjustments to reconcile net income to net cash (used) provided by operating activities: Depreciation and amortization 2,595 2,597 (Gain) loss on sale of property, plant and equipment (308) 6 Unrealized (gain) loss on derivative mark-to-market (374) 110 Change in operating assets and liabilities: Accounts receivable (11,615) (4,831) Inventories (436) (7,765) Other current assets (265) (426) Other noncurrent assets (163) (347) Accounts payable - trade 3,909 10,260 Accrued payroll and employee benefits 362 189 Other current liabilities 580 786 Other liabilities (1,285) 145 ------------- ------------- Net Cash (Used) Provided by Operating Activities (5,818) 1,911 ------------- ------------- Net Cash Provided by Discontinued Operations - 245 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property, plant and equipment 982 2 Capital expenditures on property, plant and equipment (1,541) (1,281) ------------- ------------- Net Cash Used by Investing Activities (559) (1,279) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds (repayments) of revolving credit agreement borrowings 4,000 (2,000) Exercise of stock options and stock awards 1,331 246 Repayments of long-term debt (365) (457) ------------- ------------- Net Cash Provided (Used) by Financing Activities 4,966 (2,211) ------------- ------------- Net Decrease in Cash and Cash Equivalents (1,411) (1,334) Cash and Cash Equivalents at Beginning of Period 4,134 3,653 ------------- ------------- Cash and Cash Equivalents at End of Period $ 2,723 $ 2,319 ============= ============= Supplemental Disclosure of Cash Flow Information: Interest Paid $ 827 $ 1,071 ============= ============= Income Taxes Paid $ 173 $ 260 ============= ============= During the first six months of 2004 the Company did not finance any capital expenditures through the execution of capital leases. During the first six months of 2003, the Company financed $158,000 of capital expenditures through the execution of capital leases. See Notes to Condensed Consolidated Financial Statements.
6 L. B. FOSTER COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. FINANCIAL STATEMENTS ----------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all estimates and adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. However, actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. Amounts included in the balance sheet as of December 31, 2003 were derived from our audited balance sheet. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2003. 2. ACCOUNTING PRINCIPLES ------------------------ In December 2003, the FASB issued Statement of Financial Accounting Standard No. 132 (Revised 2003) - "Employers' Disclosures about Pensions and Other Post-retirement Benefits" (SFAS 132R), that replaces existing FASB disclosure requirements for pensions and other post-retirement benefit plans. SFAS 132R requires companies to provide more complete details about their plan assets, benefit obligations, cash flows, benefit costs and other relevant information. In addition to expanded disclosures, the standard improves information available to investors in interim financial statements. With certain exceptions, SFAS 132R was effective for fiscal years ending after December 31, 2003 and for quarters beginning after December 31, 2003. See Note 6 for the additional disclosures required by SFAS 132R. Stock-based compensation ------------------------ The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), and applies the intrinsic value method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its stock option plans. Accordingly, no compensation expense has been recognized. The following table illustrates the effect on the Company's income from continuing operations and earnings per share had compensation expense for the Company's stock option plans been applied using the method required by SFAS 123.
Three Months Ended Six Months Ended June 30, June 30, In thousands, except per share amounts 2004 2003 2004 2003 ----------------------------------------------------------------------------------------------------------------------------- Income from continuing operations, as reported $1,295 $1,123 $1,182 $1,187 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects - - - - Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects 45 79 96 141 ----------------------------------------------------------------------------------------------------------------------------- Pro forma income from continuing operations $1,250 $1,044 $1,086 $1,046 ============================================================================================================================= Earnings per share from continuing operations: Basic, as reported $0.13 $0.12 $0.12 $0.12 Basic, pro forma $0.13 $0.11 $0.11 $0.11 Diluted, as reported $0.13 $0.12 $0.12 $0.12 Diluted, pro forma $0.12 $0.11 $0.11 $0.11 =============================================================================================================================
7 Pro forma information regarding net income and earnings per share for options granted has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement No. 123. The fair value of stock options used to compute pro forma net income and earnings per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model. There were no stock options granted to employees in the first or second quarter of 2004. The following weighted-average assumptions were used for grants in the second quarter of 2003: risk-free interest rates of 3.56%; dividend yield of 0.0%; volatility factors of the expected market price of the Company's Common stock of .32; and a weighted-average expected life of the option of ten years. The weighted-average fair value of the options granted in the second quarter of 2003 was $2.11. 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, 2004 and December 31, 2003 have been reduced by an allowance for doubtful accounts of ($960,000) and ($827,000), respectively. Bad debt expense was $133,000 and $85,000 for the six-month periods ended June 30, 2004 and 2003, respectively. 4. INVENTORIES -------------- Inventories of the Company at June 30, 2004 and December 31, 2003 are summarized as follows in thousands: June 30, December 31, 2004 2003 -------------------------------------------------------------------------------- Finished goods $ 19,375 $ 20,216 Work-in-process 8,012 7,379 Raw materials 11,897 11,133 -------------------------------------------------------------------------------- Total inventories at current costs 39,284 38,728 (Less): LIFO reserve (1,354) (1,234) Inventory valuation reserve (600) (600) -------------------------------------------------------------------------------- $ 37,330 $ 36,894 ================================================================================ 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 --------------------------- In August 2003, the Company reached an agreement to sell, modify, and install the Company's former Newport, KY pipe coating machinery and equipment and reclassified these assets as "held for resale". During the first quarter of 2004, the Company recognized a $493,000 gain on net proceeds of $939,000 from the sale of these assets. 8 6. RETIREMENT PLANS ------------------- Substantially all of the Company's hourly paid employees are covered by one of the Company's noncontributory, defined benefit plans and defined contribution plans. Substantially all of the Company's salaried employees are covered by a defined contribution plan established by the Company. The Company's funding policy for defined benefit plans is to contribute the minimum required by the Employee Retirement Income Security Act of 1974. Net periodic pension costs for the three months and six months ended June 30, 2004 and 2003 are as follows: Three Months Ended Six Months Ended June 30, June 30, (in thousands) 2004 2003 2004 2003 ------------------------------------------------------------------------------- Service cost $ 14 $ 15 $ 28 $ 30 Interest cost 51 49 102 98 Expected return on plan assets (44) (34) (88) (68) Amortization of prior service cost 2 2 4 4 Amortization of net loss 13 13 26 26 ------------------------------------------------------------------------------- Net periodic benefit cost $ 36 $ 45 $ 72 $ 90 =============================================================================== The Company expects to contribute $360,000 to its defined benefit plans in 2004. As of June 30, 2004, $253,250 of contributions have been made. The Company's defined contribution plan for the salaried employees allows all eligible participants to contribute up to 41% (30% maximum on a pre-tax basis and 11% maximum on an after-tax basis, subject to IRS limitations) of their compensation to the Plan. The Plan calls for the Company to contribute 1% of the employee's compensation plus $0.50 for each $1.00 contributed by the employee, subject to a maximum of from 4% to 6% of the employee's compensation, based on the years of service. The expense associated with the defined contribution plans for the six months ended June 30 was $307,000 in 2004 and $267,000 in 2003. 7. BORROWINGS ------------- On September 26, 2002, the Company entered into a new credit agreement with a syndicate of three banks led by PNC Bank, N.A. The agreement provides for a revolving credit facility of up to $60,000,000 in borrowings to support the Company's working capital and other liquidity requirements. The revolving credit facility, which matures in September 2005, is secured by substantially all of the inventory and trade receivables owned by the Company. Availability under the agreement is limited by the amount of eligible inventory and accounts receivable applied against certain advance rates. At June 30, 2004, the remaining available borrowings under this agreement were approximately $24,365,000. Interest on the credit facility is based on LIBOR plus a spread ranging from 1.75% to 2.50%. The agreement includes financial covenants requiring a minimum net worth and a minimum level for the fixed charge coverage ratio. The agreement also restricts dividends, investments, indebtedness, and the sale of certain assets. On September 8, 2003, the first amendment to this agreement allowed for the sale of the Company's equity interest in a specialty trackwork supplier. For more information regarding the transaction, see "Other Matters" in the Management's Discussion and Analysis section of this report. As of June 30, 2004, the Company was in compliance with all of the agreement's covenants. 9 8. DISCONTINUED OPERATIONS -------------------------- In February 2003, substantially all of the assets of the Rail segment's rail signaling and communication device business were sold for $300,000. The operations of the rail signaling and communication device business qualified as a "component of an entity" under Statement of Financial Accounting Standards No 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" and thus, the operations were classified as discontinued and prior periods have been restated. Net sales and loss from discontinued operations were as follows: Three Months Ended Six Months Ended In thousands June 30, 2003 June 30, 2003 -------------------------------------------------------------------------------- Net sales $ - $ 1 -------------------------------------------------------------------------------- Pretax operating loss $ (60) $ (370) Pretax loss on disposal - (70) Income tax benefit 23 173 -------------------------------------------------------------------------------- Loss from discontinued operations $ (37) $ (267) ================================================================================ 9. EARNINGS (LOSS) PER COMMON SHARE ----------------------------------- The following table sets forth the computation of basic and diluted earnings (loss) per common share:
Three Months Ended Six Months Ended June 30, June 30, (in thousands, except earnings per share) 2004 2003 2004 2003 ------------------------------------------------------------------------------------------------------------------------ Numerator: Numerator for basic and diluted earnings (loss) per common share - net income (loss) available to common stockholders: Income from continuing operations $ 1,295 $ 1,123 $ 1,182 $ 1,187 Loss from discontinued operations - (37) - (267) ------------------------------------------------------------------------------------------------------------------------ Net income $ 1,295 $ 1,086 $ 1,182 $ 920 ======================================================================================================================== Denominator: Weighted average shares 9,945 9,568 9,876 9,546 ------------------------------------------------------------------------------------------------------------------------ Denominator for basic earnings per common share 9,945 9,568 9,876 9,546 Effect of dilutive securities: Contingent issuable shares - - - 2 Employee stock options 309 103 326 85 ------------------------------------------------------------------------------------------------------------------------ Dilutive potential common shares 309 103 326 87 Denominator for diluted earnings per common share - adjusted weighted average shares and assumed conversions 10,254 9,671 10,202 9,633 ======================================================================================================================== Basic and diluted earnings (loss) per common share: Continuing operations $ 0.13 $ 0.12 $ 0.12 $ 0.12 Discontinued operations - (0.00) - (0.03) ------------------------------------------------------------------------------------------------------------------------ Basic and diluted earnings per common share $ 0.13 $ 0.11 $ 0.12 $ 0.10 ========================================================================================================================
10 10. COMMITMENTS AND CONTINGENT LIABILITIES ------------------------------------------ The Company is subject to laws and regulations relating to the protection of the environment and the Company's efforts to comply with environmental regulations may have an adverse effect on its future earnings. In the opinion of management, compliance with the present environmental protection laws will not have a material adverse effect on the financial condition, results of operations, cash flows, competitive position, or capital expenditures of the Company. The Company is subject to legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, these proceedings will not materially affect the financial position of the Company. At June 30, 2004, the Company had outstanding letters of credit of approximately $2,913,000. 11. BUSINESS SEGMENTS --------------------- The Company is organized and evaluated by product group, which is the basis for identifying reportable segments. The Company is engaged in the manufacture, fabrication and distribution of rail, construction and tubular products. The following tables illustrate revenues and profits/(losses) of the Company by segment:
Three Months Ended Six Months Ended June 30, 2004 June 30,2004 ----------------------------------------------------------------------------- Net Segment Net Segment (in thousands) Sales Profit Sales Profit/(Loss) ---------------------------------------------------------------------------------------------------------- Rail products $ 39,099 $ 1,377 $ 74,686 $ 1,994 Construction products 32,421 157 59,196 (899) Tubular products 5,307 756 8,397 759 ---------------------------------------------------------------------------------------------------------- Total $ 76,827 $ 2,290 $ 142,279 $ 1,854 ==========================================================================================================
Three Months Ended Six Months Ended June 30, 2003 June 30,2003 ----------------------------------------------------------------------------- Net Segment Net Segment (in thousands) Sales Profit Sales Profit ---------------------------------------------------------------------------------------------------------- Rail products $ 37,709 $ 1,195 $ 69,335 $ 1,876 Construction products 33,469 808 57,433 281 Tubular products 4,618 558 8,547 923 ---------------------------------------------------------------------------------------------------------- Total $ 75,796 $ 2,561 $ 135,315 $ 3,080 ==========================================================================================================
Segment profits, as shown above, include internal cost of capital charges for assets used in the segment at a rate of, generally, 1-% per month. There has been no change in the measurement of segment profit/(loss) from December 31, 2003. Accounts receivable for the Rail segment increased approximately $6,900,000 from year-end, primarily related to an increase in sales of new rail distribution products. 11 The following table provides a reconciliation of reportable net profit to the Company's consolidated total:
Three Months Ended Six Months Ended June 30, June 30, (in thousands) 2004 2003 2004 2003 ------------------------------------------------------------------------------------------------------------------- Income for reportable segments $ 2,290 $ 2,561 $ 1,854 $ 3,080 Cost of capital for reportable segments 2,682 2,662 5,080 5,087 Interest expense (469) (578) (932) (1,157) Other income 350 54 1,044 374 Corporate expense and other unallocated charges (2,693) (2,857) (5,074) (5,435) ------------------------------------------------------------------------------------------------------------------- Income from continuing operations, before income taxes $ 2,160 $ 1,842 $ 1,972 $ 1,949 ===================================================================================================================
12. COMPREHENSIVE INCOME ------------------------ Comprehensive income represents net income plus certain stockholders' equity changes not reflected in the Condensed Consolidated Statements of Operations. The components of comprehensive income, net of tax, were as follows:
Three Months Ended Six Months Ended June 30, June 30, (in thousands) 2004 2003 2004 2003 ------------------------------------------------------------------------------------------------------------------------------ Net income $ 1,295 $ 1,086 $ 1,182 $ 920 Unrealized derivative gains on cash flow hedges 16 14 28 24 Foreign currency translation gains 24 - 6 8 Reclassification adjustment for foreign currency translation losses included in net income - - - 48 ------------------------------------------------------------------------------------------------------------------------------ Comprehensive income $ 1,335 $ 1,100 $ 1,216 $ 1,000 ==============================================================================================================================
13. RISKS AND UNCERTAINTIES --------------------------- The Company's CXT Rail operations and Allegheny Rail Products division are dependent on a Class I railroad for a significant portion of their business. An agreement to supply concrete ties to this railroad expired in September 2003. The Company is still selling ties to this customer, although there are no longer annual minimum quantity requirements. In December 2003, the Company bid on a new concrete tie supply agreement that is expected to be a 5 to 8 year commitment. If the bid is successful, the Company will be required to establish one or more new facilities to service this agreement, which would require a significant capital investment. If the Company is unsuccessful in the bidding process, it may cause the value of its two existing tie facilities with total net assets of approximately $7,055,000 to be partially impaired. Although an agreement has not yet been signed, the Company expects to have a new agreement in place by the end of the third quarter. 14. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES ----------------------------------------------------------- The Company does not purchase or hold any derivative financial instruments for trading purposes. The Company uses derivative financial instruments to manage interest rate exposure on variable-rate debt, primarily by using interest rate collars and variable interest rate swaps. The Company's primary source of variable-rate debt comes from its revolving credit agreement. In conjunction with the Company's debt refinancing in the third quarter of 2002, the Company discontinued cash flow hedge accounting treatment for its interest rate collars and has applied mark-to-market accounting prospectively. 12 The Company has a LIBOR-based interest rate collar agreement, which became effective in March 2001 and expires in March 2006, with a notional value of $15,000,000, a maximum annual interest rate of 5.60% and a minimum annual interest rate of 5.00%. The counterparty to the collar agreement has the option, on March 6, 2005, to convert the $15,000,000 collar to a one-year, fixed-rate instrument with interest payable at an annual rate of 5.49%. The fair value of this collar agreement was a liability of $611,000 as of June 30, 2004. The Company also had a LIBOR-based interest rate collar agreement, which became effective in April 2001 and would have expired in April 2006, with a notional value of $10,000,000, a maximum annual interest rate of 5.14%, and a minimum annual interest rate of 4.97%. The counter-party to the collar agreement had the option, on April 18, 2004, to convert the $10,000,000 collar to a two-year fixed-rate instrument with interest payable at an annual rate of 5.48%. In April 2004, prior to the counter-party option, the Company terminated this interest rate collar agreement by purchasing it for its fair value of $707,000. The Company records the mark-to-market adjustments on these interest rate collars in its Condensed Consolidated Statements of Operations. During the second quarter of 2004 and 2003, the Company recognized $416,000 of income and $121,000 of expense, respectively, to adjust these instruments to fair value. For the six months ended June 2004 and 2003, the Company recognized $374,000 of income and $110,000 of expense, respectively, to adjust these instruments to fair value. The Company continues to apply cash flow hedge accounting to interest rate swaps. The Company recognizes all derivative instruments on the balance sheet at fair value. Fluctuations in the fair values of derivative instruments designated as cash flow hedges are recorded in accumulated other comprehensive income, and reclassified into earnings as the underlying hedged items affect earnings. To the extent that a change in interest rate derivative does not perfectly offset the change in value of the interest rate being hedged, the ineffective portion is recognized in earnings immediately. The Company is not subject to significant exposures to changes in foreign currency exchange rates. The Company will, however, manage its exposure to changes in foreign currency exchange rates on firm sales and purchase commitments by entering into foreign currency exchange contracts. The Company's risk management objective is to reduce its exposure to the effects of changes in exchange rates on these transactions over the duration of the transaction. 13 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ------------------------------------------------------------------------------- OF OPERATIONS ------------- Overview -------- General ------- L. B. Foster Company is a manufacturer, fabricator and distributor of products utilized in the transportation infrastructure, construction and utility markets. The Company is comprised of three business segments: Rail products, Construction products and Tubular products. Recent Developments ------------------- In April 2004, we terminated an interest rate collar agreement by purchasing it for its fair market value of $0.7 million. See the "Market Risk and Risk Management Policies" section of this Management's Discussion and Analysis for more information on this matter. Critical Accounting Policies ---------------------------- The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, or method of its application, is generally accepted, management selects the principle or method that is appropriate in the Company's specific circumstances. Application of these accounting principles requires management to make estimates about the future resolution of existing uncertainties. As a result, actual results could differ from these estimates. In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements giving due regard to materiality. There have been no material changes in the Company's policies or estimates since December 31, 2003. For more information regarding the Company's critical accounting policies, please see the discussion in Management's Discussion & Analysis of Financial Condition and Results of Operations in Form 10-K for the year ended December 31, 2003. New Accounting Pronouncements ----------------------------- In December 2003, the FASB issued Statement of Financial Accounting Standard No. 132 (Revised 2003) - "Employers' Disclosures about Pensions and Other Post-retirement Benefits" (SFAS 132R), that replaces existing FASB disclosure requirements for pensions and other post-retirement benefit plans. SFAS 132R requires companies to provide more complete details about their plan assets, benefit obligations, cash flows, benefit costs and other relevant information. In addition to expanded disclosures, the standard improves information available to investors in interim financial statements. With certain exceptions, SFAS 132R is effective for fiscal years ending after December 31, 2003 and for quarters beginning after December 31, 2003. See Note 6 to the consolidated financial statements in this 10-Q which presents the additional disclosures required by SFAS 132R. 14 Results of Operations ---------------------
Three Months Ended Six Months Ended June 30, June 30, ----------------------------------- ---------------------------------- 2004 2003 2004 2003 ----------------------------------- ---------------------------------- (Dollars in thousands) Net Sales: Rail Products $ 39,099 $ 37,709 $ 74,686 $ 69,335 Construction Products 32,421 33,469 59,196 57,433 Tubular Products 5,307 4,618 8,397 8,547 ----------------------------------- ---------------------------------- Total Net Sales $ 76,827 $ 75,796 $ 142,279 $ 135,315 =================================== ================================== Gross Profit: Rail Products $ 4,676 $ 4,222 $ 8,098 $ 8,008 Construction Products 3,992 4,357 6,525 7,163 Tubular Products 1,205 1,050 1,640 1,852 Other (540) (433) (948) (894) ----------------------------------- ---------------------------------- Total Gross Profit 9,333 9,196 15,315 16,129 ----------------------------------- ---------------------------------- Expenses: Selling and administrative 7,054 6,830 13,455 13,397 expenses Interest expense 469 578 932 1,157 Other income (350) (54) (1,044) (374) ----------------------------------- ---------------------------------- Total Expenses 7,173 7,354 13,343 14,180 ----------------------------------- ---------------------------------- Income From Continuing Operations Before Income Taxes 2,160 1,842 1,972 1,949 Income Tax Expense 865 719 790 762 ----------------------------------- ---------------------------------- Income From Continuing Operations 1,295 1,123 1,182 1,187 Discontinued Operations: Loss From Operations of Foster Technologies - (60) - (440) Income Tax Benefit - (23) - (173) ----------------------------------- ---------------------------------- Loss on Discontinued Operations - (37) - (267) ----------------------------------- ---------------------------------- Net Income $ 1,295 $ 1,086 $ 1,182 $ 920 =================================== ================================== Gross Profit %: Rail Products 12.0% 11.2% 10.8% 11.5% Construction Products 12.3% 13.0% 11.0% 12.5% Tubular Products 22.7% 22.7% 19.5% 21.7% Total Gross Profit 12.1% 12.1% 10.8% 11.9%
15 Second Quarter 2004 Results of Operations ----------------------------------------- Net income for the second quarter of 2004 was $1.3 million ($0.13 per diluted share) on net sales of $76.8 million. These results compare favorably to the second quarter of 2003 in which net income was $1.1 million ($0.11 per diluted share) on net sales of $75.8 million. Net sales for the second quarter of 2004 were $1.0 million higher than the same period in 2003. This improvement came primarily from our Rail and Tubular segments. Rail segment sales increased 3.7% due primarily to an increase in concrete tie sales. Also increasing, but to a lesser extent, were our rail distribution and transit products businesses. Construction products' net sales declined 3.1% as the lack of a new federal highway and transit bill continues to hurt our fabricated products business. Additionally, delays in federal spending for concrete buildings, due to wildfire concerns, contributed to the decline of Construction products sales. Tubular products' sales increased 14.9% and can be attributed to increases in threaded product sales to the water well market. The Company's gross profit margin remained steady at 12.1% in the second quarters of 2004 and 2003. Rail products' profit margin increased 0.8 percentage points, primarily due to improvements in the concrete tie and rail distribution businesses mentioned above. The 0.7 percentage point decline in Construction products' margin was due, in part, to decreased margins at our fabricated products business as heightened competition for less business has decreased selling prices and lower volumes have created plant inefficiencies at the concrete building plants as well as the fabricated products facilities. Tubular products' gross profit margin held steady at 22.7% in the second quarter comparisons. Selling and administrative expenses increased 3.3% compared to the second quarter of 2003. Interest expense declined 18.9% from the prior year due principally to the April 2004 retirement of a $10.0 million notional amount LIBOR-based interest rate collar agreement. See "Market Risk and Risk Management Policies" for more details on this matter. Other Income increased $0.3 million primarily as a result of the mark-to-market adjustment we recorded related to our remaining interest rate collar. The second quarter 2004 effective tax rate was 40% compared to 39% in last year's second quarter. First Six Months of 2004 Results of Operations ---------------------------------------------- For the first six months of 2004, net income was $1.2 million ($0.12 per diluted share) on net sales of $142.3 million. Net income for the first six months of 2003 was $0.9 million ($0.10 per diluted share) on net sales of $135.3 million. The prior year results include a net loss from discontinued operations of $0.3 million ($0.03 per diluted share). Net sales for 2004 increased 5.1% over the first six months of 2003. Rail segment sales increased 7.7% due primarily to an increase in rail distribution, transit, and concrete tie sales. Construction products' net sales increased 3.1% due to an increase in H-beam piling sales. Tubular products' sales declined 1.8% from last year's first six months due to delays in natural gas transmission pipeline projects. While the high cost of steel is partially responsible for the 50% increase in threaded pipe sales, it has also caused these pipeline delays and, in turn, our coated pipe sales have declined approximately 50%. The Company's six month gross profit margin declined 1.1 percentage points to 10.8%. All three of the Company's segments contributed to the decline. Rail products' profit margin declined 0.7 percentage points due to the mix of products sold and low volume inefficiencies at our Niles, OH trackwork facility. The 1.5 percentage point decline in Construction products' margin was due, in part, to weaker sales of higher margin fabricated highway products and low volume inefficiency costs at our Spokane, WA concrete buildings plant. Tubular products' gross profit margin declined 2.2 percentage points due to the higher steel costs mentioned above. Selling and administrative expenses remained at 2003 levels. Interest expense declined 19.4% from the prior year as a result of the previously mentioned collar retirement and a reduction in average borrowing levels during the current year. Other Income increased $0.7 million primarily as a result of the 16 previously mentioned second quarter mark-to-market adjustment recorded by the Company related to our remaining interest rate collar and the first quarter gain on the sale of the Company's former Newport, KY pipe coating machinery and equipment which had been classified as "held for resale." The effective tax rate during the first half of 2004 was 40% compared to 39% for the same period last year. Liquidity and Capital Resources ------------------------------- The Company's capitalization is as follows: June 30, December 31, (in thousands) 2004 2003 ------------------------------------------------------------------------------ Debt: Revolving credit facility $ 21,000 $ 17,000 Capital leases 1,283 1,616 Other (primarily revenue bonds) 2,821 2,853 ------------------------------------------------------------------------------ Total Debt 25,104 21,469 ------------------------------------------------------------------------------ Equity 73,091 70,544 ------------------------------------------------------------------------------ Total Capitalization $ 98,195 $ 92,013 ============================================================================== Debt as a percentage of capitalization (debt plus equity) increased to 26% from 23% at the 2003 year end. Working capital was $53.0 million at June 30, 2004 compared to $46.8 million at December 31, 2003. The Company's liquidity needs arise from seasonal working capital requirements, capital expenditures, acquisitions and debt service obligations. The following table summarized the impact of these items: June 30, (in thousands) 2004 2003 ----------------------------------------------------------------------------- Liquidity needs: Working capital and other assets and liabilities $ (8,913) $ (1,989) Capital expenditures, net of asset sales (559) (1,279) Scheduled debt service obligations - net (365) (457) Cash interest 827 1,071 ----------------------------------------------------------------------------- Net liquidity requirements (9,010) (2,654) ----------------------------------------------------------------------------- Liquidity sources (uses): Internally generated cash flows before interest 2,268 2,829 Credit facility activity 4,000 (2,000) Equity transactions 1,331 246 Other - 245 ----------------------------------------------------------------------------- Net liquidity sources 7,599 1,320 ----------------------------------------------------------------------------- Net Change in Cash $ (1,411) $ (1,334) ============================================================================= Capital expenditures were $1.5 million for the first six months of 2004 compared to $1.3 million in the same period of 2003. The amount of capital spending in 2004 will depend upon the outcome of the Company's bid on a concrete tie contract, as a successful outcome will require the construction of one or more facilities. Excluding business acquisitions and the potential concrete tie facilities, capital expenditures for 2004 are expected to be approximately $4.0 million, and funded by cash flow from operations and available external financing sources. The Company's Board of Directors has authorized the purchase of up to 1,500,000 shares of its Common stock at prevailing market prices. No purchases have been made since the first quarter of 2001. From August 1997 through March 2001, the Company had repurchased 973,398 shares at a cost of 17 approximately $5.0 million. The timing and extent of future purchases will depend on market conditions and options available to the Company for alternate uses of its resources. The Company has an agreement that provides for a revolving credit facility of up to $60.0 million in borrowings to support the Company's working capital and other liquidity requirements. The revolving credit facility, which matures in September 2005, is secured by substantially all of the Company's inventory and trade receivables. Availability under this agreement is limited by the amount of eligible inventory and accounts receivable applied against certain advance rates. Interest on the credit facility is based on LIBOR plus a spread ranging from 1.75% to 2.5%. Total revolving credit agreement borrowings at June 30, 2004 were $21.0 million, an increase of $4.0 million from December 31, 2003. At June 30, 2004, remaining available borrowings under this facility were approximately $24.4 million. Outstanding letters of credit at June 30, 2004 were approximately $2.9 million. The letters of credit expire annually and are subject to renewal. Management believes its internal and external sources of funds are adequate to meet anticipated needs for the foreseeable future. The credit agreement includes financial covenants requiring a minimum net worth and a minimum fixed charge coverage ratio. The primary restrictions to this agreement include investments, indebtedness, and the sale of certain assets. On September 8, 2003, the first amendment to this agreement allowed for the sale of the Company's equity interest in a specialty trackwork supplier. For more information regarding the transaction, see "Other Matters". As of June 30, 2004, the Company was in compliance with all of the agreement's covenants. Off-Balance Sheet Arrangements ------------------------------ The Company's off-balance sheet arrangements include operating leases, purchase obligations and standby letters of credit. A schedule of the Company's required payments under financial instruments and other commitments as of December 31, 2003 are included in "Liquidity and Capital Resources" section of the Company's 2003 Annual Report filed on Form 10-K. There have been no significant changes to the Company's contractual obligations relative to the information presented in the Form 10-K. These arrangements provide the Company with increased flexibility relative to the utilization and investment of cash resources. Dakota, Minnesota & Eastern Railroad ------------------------------------ The Company maintains a significant investment in the Dakota, Minnesota & Eastern Railroad Corporation (DM&E), a privately held, regional railroad, which controls over 2,500 miles of track in eight states. At June 30, 2004, the Company's investment was comprised of $0.2 million of DM&E common stock, $1.5 million of Series B Preferred Stock and warrants, $6.0 million of Series C Preferred Stock and warrants, $0.8 million of Preferred Series C-1 Stock and warrants, and $0.5 million of Series D Preferred Stock and warrants. In addition, the Company has a receivable for accrued dividend income on Preferred Stock of approximately $5.2 million. The Company owns approximately 13.6% of the DM&E. In June 1997, the DM&E announced its plan to build an extension from the DM&E's existing line into the low sulfur coal market of the Powder River Basin in Wyoming and to rebuild approximately 600 miles of its existing track (the Project). The estimated cost of this project is expected to be in excess of $2.0 billion. The Surface Transportation Board (STB) approved the Project in January 2002. In October 2003, however, the 8th U.S. Circuit Court of Appeals remanded the matter to the STB and instructed the STB to address, in its environmental impact statement, the Project's effects on air quality, noise and vibration, and preservation of historic sites. On January 30, 2004, the 8th U. S. Circuit Court of Appeals denied petitions seeking a rehearing of the case. If the Project proves to be viable, management believes that the value of the Company's investment in the DM&E could increase significantly. If the Project does not come to fruition, management believes that the value of the Company's investment is supported by the DM&E's existing business. 18 In December 2003, the DM&E received a Railroad Rehabilitation and Improvement Financing (RRIF) Loan in the amount of $233.0 million from the Federal Railroad Administration. Funding provided by the 25-year loan was used to refinance debt and upgrade infrastructure along parts of its existing route. Other Matters ------------- Specialty trackwork sales of the Company's Rail segment have declined since a decision was made to terminate our relationship with a principal trackwork supplier during the third quarter of 2002. In the third quarter of 2003, we exchanged our minority ownership interest and advances to this supplier for a $5.5 million promissory note from the supplier's owner, with principal and accrued interest to be repaid beginning in January 2008. The value of this note has been fully reserved and no gain or loss was recorded on this transaction. During the first six months of 2004 and 2003, the volume of business the supplier conducted with the Company was approximately $1.6 million and $6.5 million, respectively. Most of the combined order backlog was completed in 2003 and approximately $0.4 million remained at June 30, 2004. If this supplier is unable to perform, it could have a further negative impact on earnings and cash flows. During the first quarter of 2003, the Company sold certain assets and liabilities of its Foster Technologies subsidiary, engaged in the rail signaling and communication device business, for $0.3 million. This subsidiary had been classified as a discontinued operation in December 2002. The loss from this business in the first six months of 2003 was principally due to losses incurred up to the sale date, as well as certain charges taken for employee severance costs and lease obligations. We continue to evaluate the overall performance of our operations. A decision to down-size or terminate an existing operation could have a material adverse effect on near-term earnings but would not be expected to have a material adverse effect on the financial condition of the Company. Outlook ------- Our CXT Rail operations and Allegheny Rail Products division are dependent on a Class I railroad for a significant portion of their business. Our agreement to supply concrete ties to this railroad expired in September 2003. We are still selling ties to this customer, although there are no longer annual minimum quantity requirements. In December 2003, we bid on a new concrete tie supply agreement that is expected to be a 5 to 8 year commitment. If our bid is successful, we will be required to establish one or more new facilities to service this agreement, which would require a significant capital investment. If we are unsuccessful in the bidding process, it may cause the value of our two existing tie facilities with total net assets of approximately $7.1 million to be partially impaired. Although an agreement has not yet been signed, the Company expects to have a new agreement in place by the end of the third quarter. Steel is a key component in the products that we sell. In the past year, the price of scrap steel, which is used by mini-mills to manufacture many steel products, has more than doubled. Although steel scrap prices moderated somewhat in June, they have risen significantly during the month of July. Producers and other suppliers continue to quote high prices or are quoting monthly price surcharges. Some of our suppliers are experiencing supply problems. Since many of the Company's projects can be six months to twenty-four months in duration, we find ourselves caught in the middle of some of these pricing and availability issues. While we believe this highly unusual situation to be temporary in nature, it could have a negative impact on the Company's sales volumes, results of operations and cash flows until the market normalizes. In 2003, we received an increased but still limited supply of sheet piling from our exclusive supplier. The sheet piling supply is still not adequately consistent and reliable for our piling business to grow profitably. We expect this year to be pivotal in determining whether sheet piling will contribute to the future growth of this business. 19 Last year we began implementing Lean Enterprise (Lean) across the organization. Lean is a methodology as well as a mindset, utilized in managing a business that focuses on the execution and continuous improvement of all business processes with the objective of maximizing speed and flexibility at the lowest cost. Proper implementation of Lean can lead to other benefits such as better quality control and improved worker safety. Lean has commenced at all of our manufacturing facilities and the preliminary results have been positive, with significant improvement in productivity in several manufacturing processes. For these improvements to make a significant impact on our financial results, we must experience increased volumes at these facilities. A substantial portion of the Company's operations is heavily dependent on governmental funding of infrastructure projects. Significant changes in the level of government funding of these projects could have a favorable or unfavorable impact on the operating results of the Company. The most recent extension of the federal highway and transit bill (TEA-21) is to expire in September, 2004, as reauthorization of a successor bill continues to be delayed. A new highway and transit bill is important to the future growth and profitability of many of the Company's businesses. Additionally, government actions concerning taxation, tariffs, the environment, or other matters could impact the operating results of the Company. The Company's operating results may also be affected negatively by adverse weather conditions. Although backlog is not necessarily indicative of future operating results, total Company backlog at June 30, 2004, was approximately $119.4 million. The following table provides the backlog by business segment: Backlog -------------------------------------------------- June 30, December 31, June 30, (In thousands) 2004 2003 2003 -------------------------------------------------------------------------------- Rail Products $ 37,702 $ 37,529 $ 41,023 Construction Products 78,030 67,100 74,780 Tubular Products 3,639 1,035 4,421 -------------------------------------------------------------------------------- Total $119,371 $105,664 $120,224 ================================================================================ The increase in Construction segment backlog from December 31, 2003, resulted from increases in concrete buildings and earth retention walls, and piling backlog. Increases in threaded pipe and pipe coating services improved the Tubular segment backlog from 2003 year end. The decline in Rail segment backlog from June 30, 2003 reflects a reduction in transit products backlog, while the increase in Construction products' backlog resulted primarily from an increase in concrete earth retention wall backlog. Market Risk and Risk Management Policies ---------------------------------------- The Company does not purchase or hold any derivative financial instruments for trading purposes. The Company uses derivative financial instruments to manage interest rate exposure on variable-rate debt, primarily by using interest rate collars and variable interest rate swaps. The Company's primary source of variable-rate debt comes from its revolving credit agreement. In conjunction with the Company's debt refinancing in the third quarter of 2002, the Company discontinued cash flow hedge accounting treatment for its interest rate collars and has applied mark-to-market accounting prospectively. The Company has a LIBOR-based interest rate collar agreement, which became effective in March 2001 and expires in March 2006, with a notional value of $15,000,000, a maximum annual interest rate of 5.60% and a minimum annual interest rate of 5.00%. The counterparty to the collar agreement has the option, on March 6, 2005, to convert the $15,000,000 collar to a one-year, fixed-rate instrument with interest payable at an annual rate of 5.49%. The fair value of this collar agreement was a liability of $611,000 as of June 30, 2004. The Company also had a LIBOR-based interest rate collar agreement, which became effective in April 2001 and expires in April 2006, with a notional value of $10,000,000, a maximum annual interest rate of 5.14%, and a minimum annual interest rate of 4.97%. The counter-party to the collar agreement had the option, on 20 April 18, 2004, to convert the $10,000,000 collar to a two-year fixed-rate instrument with interest payable at an annual rate of 5.48%. In April 2004, prior to the counter-party option, the Company terminated this interest rate collar agreement by purchasing it for its fair value of $707,000. Although these derivatives are not deemed to be effective hedges of the new credit facility in accordance with the provisions of SFAS 133, the Company retained these instruments as protection against interest rate risk associated with the new credit agreement and the Company records the mark-to-market adjustments on these interest rate collars in its consolidated statements of operations. During the second quarter of 2004 and 2003, the Company recognized $416,000 of income and $121,000 of expense, respectively, to adjust these instruments to fair value. For the six months ended June 2004 and 2003, the Company recognized $374,000 of income and $110,000 of expense, respectively, to adjust these instruments to fair value. The Company continues to apply cash flow hedge accounting to interest rate swaps. The Company recognizes all derivative instruments on the balance sheet at fair value. Fluctuations in the fair values of derivative instruments designated as cash flow hedges are recorded in accumulated other comprehensive income, and reclassified into earnings as the underlying hedged items affect earnings. To the extent that a change in interest rate derivative does not perfectly offset the change in value of the interest rate being hedged, the ineffective portion is recognized in earnings immediately. The remaining interest rate collar agreement has a minimum annual interest rate of 5.00% to a maximum annual interest rate of 5.60%. Since the interest rate on the revolving credit agreement floats with the short-term market rate of interest, the Company is exposed to the risk that these interest rates may decrease below the minimum annual interest rate on the interest rate collar agreement. The effect of a 1% decrease in the applicable interest rate below the 5.00% minimum annual interest rate on $21.0 million of outstanding floating rate debt would result in increased annual interest costs of approximately $0.2 million. The Company is not subject to significant exposures to changes in foreign currency exchange rates. The Company will, however, manage its exposure to changes in foreign currency exchange rates on firm sales and purchase commitments by entering into foreign currency exchange contracts. The Company's risk management objective is to reduce its exposure to the effects of changes in exchange rates on these transactions over the duration of the transaction. 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, the outcome of certain litigation, any inability to obtain necessary environmental and government approvals for the Project in a timely fashion, the DM&E's ability to continue to obtain interim funding to finance the Project, the expense of environmental mitigation measures required by the Surface Transportation Board, an inability to obtain financing for the Project, competitors' response to the Project, market demand for coal or electricity and changes in environmental laws and regulations. The Company cautions readers that various factors could cause the actual results of the Company to differ materially from those indicated by forward-looking statements made from time to time in news releases, reports, proxy statements, registration statements and other written communications (including the preceding sections of this Management's Discussion and Analysis), as well as oral statements, such as references made to the future profitability, made from time to time by representatives of the Company. Additional delays in a Virginia steel mill's production of sheet piling products, or failure to produce substantial quantities of sheet piling products could adversely impact the Company's earnings. The inability to successfully negotiate a new sales contract with a current Class I railroad customer could have a negative impact on the operating results of the Company. The Company's businesses could be affected adversely by continued price increases in the steel scrap market. Except for historical information, matters 21 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, the adequacy of internal and external sources of funds to meet financing needs, taxes, inflation and governmental regulations. Sentences containing words such as "anticipates", "expects", or "will" generally should be considered forward-looking statements. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------------------------------------ See the "Market Risk and Risk Management Policies" section under Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 4. CONTROLS AND PROCEDURES a) As of the end of the period covered by this report, L. B. Foster Company (the Company) carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rules 13a - 15(e) and 15d - 15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to timely alert them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. b) There have been no significant changes in the Company's internal controls over financial reporting that occurred in the period covered by this report that have materially affected or are likely to materially affect the Company's internal controls over financial reporting. PART II OTHER INFORMATION ------------------------- Item 1. LEGAL PROCEEDINGS ------------------------- See Note 10, "Commitments and Contingent Liabilities", to the Condensed Consolidated Financial Statements. Item 4. RESULTS OF VOTES OF SECURITY HOLDERS -------------------------------------------- At the Company's annual meeting held on May 26, 2004, the following individuals were elected to the Board of Directors: For Withheld Name Election Authority -------------------------------------------------------------------------------- Lee B. Foster II 9,411,804 36,174 Stan L. Hasselbusch 9,365,949 82,029 Henry J. Massman IV 9,411,990 35,988 Diane B. Owen 9,411,990 35,988 John W. Puth 9,388,108 59,870 William H. Rackoff 9,411,890 36,088 22 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, filed as Exhibit 3.1 to Form 10-Q for the quarter ended March 31, 2003. 3.2 Bylaws of the Registrant, as amended to date, filed as Exhibit 3.2 to Form 10-K for the year ended December 31, 2002. 4.0 Rights Amendment, dated as of May 15, 1997 between L. B. Foster Company and American Stock Transfer & Trust Company, including the form of Rights Certificate and the Summary of Rights attached thereto, filed as Exhibit 4.0 to Form 10-K for the year ended December 31, 2002. 4.0.1 Amended Rights Agreement dated as of May 14, 1998 between L.B. Foster Company and American Stock Transfer and Trust Company, filed as Exhibit 4.0.1 to Form 10-Q for the quarter ended March 31, 2003. 4.0.2 Revolving Credit and Security Agreement dated as of September 26, 2002, between L. B. Foster Company and PNC Bank, N. A., filed as Exhibit 4.0.2 to Form 10-Q for the quarter ended September 30, 2002. 4.0.3 First Amendment to Revolving Credit and Security Agreement dated September 8, 2003, between the Registrant and PNC Bank, N.A, filed as Exhibit 4.0.3 to Form 10-Q for the quarter ended September 30, 2003. 10.12 Lease between CXT Incorporated and Pentzer Development Corporation, dated April 1, 1993, filed as Exhibit 10.12 to Form 10-K for the year ended December 31, 1999. 10.12.1 Second Amendment dated March 12, 1996 to lease between CXT Incorporated and Crown West Realty, LLC, successor, filed as Exhibit 10.12.1 to Form 10-K for the year ended December 31, 1999. 10.12.2 Third Amendment dated November 7, 2002 to lease between CXT Incorporated and Crown West Realty, LLC, filed as Exhibit 10.12.2 to Form 10-K for the year ended December 31, 2002. 10.12.3 Fourth Amendment dated December 15, 2003 to lease between CXT Incorporated and Crown West Realty, LLC, filed as Exhibit 10.12.3 to Form 10-K for the year ended December 31, 2003. 10.13 Lease between CXT Incorporated and Crown West Realty, L. L. C., dated December 20, 1996, filed as Exhibit 10.13 to Form 10-K for the year ended December 31, 1999. 10.13.1 Amendment dated June 29, 2001 between CXT Incorporated and Crown West Realty, filed as Exhibit 10.13.1 to Form 10-K for the year ended December 31, 2002. 10.15 Lease between CXT Incorporated and Union Pacific Railroad Company, dated February 13, 1998, and filed as Exhibit 10.15 to Form 10-K for the year ended December 31, 1999. 10.15.1 Renewal Rider for lease between CXT Incorporated, Union Pacific Railroad Company and Nevada Railroad Materials, Inc., dated December 17, 2003, and filed as Exhibit 10.15.1 to Form 10-K for the year ended December 31, 2003. 23 10.15.2 Renewal Rider for lease between CXT Incorporated and Union Pacific Railroad Company dated December 17, 2003 and filed as Exhibit 10.15.2 to Form 10-K for the year ended December 31, 2003. * 10.16 Lease between Registrant and Suwanee Creek Business Center, LLC dated February 13, 2004. 10.17 Lease between Registrant and the City of Hillsboro, TX dated February 22, 2002, filed as Exhibit 10.17 to Form 10-K for the year ended December 31, 2002. 10.19 Lease between Registrant and American Cast Iron Pipe Company for pipe-coating facility in Birmingham, AL dated December 11, 1991, filed as Exhibit 10.19 to Form 10-K for the year ended December 31, 2002. 10.19.1 Amendment to Lease between Registrant and American Cast Iron Pipe Company for pipe-coating facility in Birmingham, AL dated November 15, 2000, and filed as Exhibit 10.19.2 to Form 10-K for the year ended December 31, 2000. 10.20 Equipment Purchase and Service Agreement by and between the Registrant and LaBarge Coating LLC, dated July 31, 2003, and filed as Exhibit 10.20 to Form 10-Q for the quarter ended September 30, 2003. * 10.21 Stock Purchase Agreement, dated June 3, 1999 by and among the Registrant and the shareholders of CXT Incorporated. 10.33.2 Amended and Restated 1985 Long-Term Incentive Plan as of February 26, 1997, filed as Exhibit 10.33.2 to Form 10-Q for the quarter ended March 31, 2003. ** 10.34 Amended and Restated 1998 Long-Term Incentive Plan as of February 2, 2001, filed as Exhibit 10.34 to Form 10-K for the year ended December 31, 2000. ** 10.45 Medical Reimbursement Plan effective January 1, 2004, filed as Exhibit 10.45 to Form 10-K for the year ended December 31, 2003. ** * 10.46 Leased Vehicle Plan as amended and restated on June 9, 2004. ** 10.51 Supplemental Executive Retirement Plan, filed as Exhibit 10.51 to Form 10-K for the year ended December 31, 2002. ** 10.52 Outside Directors' Stock Award Plan, filed as Exhibit 10.52 to Form 10-K for the year ended December 31, 2002. ** 10.53 Directors' resolutions dated May 13, 2003, under which directors' compensation was established, filed as Exhibit 10.53 to Form 10-Q for the quarter ended June 30, 2003. ** 10.55 2004 Management Incentive Compensation Plan, filed as Exhibit 10.55 to Form 10-K for the year ended December 31, 2003. 19 Exhibits marked with an asterisk are filed herewith. * 31.1 Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. * 31.2 Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. * 32.0 Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002. 24 ** Identifies management contract or compensatory plan or arrangement required to be filed as an Exhibit. b) Reports on Form 8-K On April 20, 2004, the Registrant filed a current report on Form 8-K under Item 12 announcing first quarter results. On July 21, 2004, the Registrant filed a current report on Form 8-K under Item 12 announcing second quarter results. 25 SIGNATURE --------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. L.B. FOSTER COMPANY ------------------- (Registrant) Date: August 12, 2004 By: /s/David J. Russo --------------- --------------------- David J. Russo Senior Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer of Registrant)