UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the Fiscal Year Ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the Transition Period from __________ to __________
Commission File Number 0-10436
L. B. FOSTER COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1324733
(State of Incorporation) (I.R.S. Employer Identification No.)
415 Holiday Drive, Pittsburgh, Pennsylvania 15220
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 928-3417
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange On
Title of Each Class Which Registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III or this Form 10-K or any amendment to this
Form 10-K. [x]
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 such 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
The aggregate market value on March 13, 2002 of the voting stock held by
nonaffiliates of the Company was $52,546,151. Indicate the number of shares
outstanding of each of the registrant's classes of common stock as of the latest
practicable date.
Class Outstanding at March 13, 2002
Common Stock, Par Value $.01 9,480,488 Shares
Documents Incorporated by Reference:
Portions of the Proxy Statement prepared for the 2002 annual meeting of
stockholders are incorporated by reference in Items 10, 11, 12 and 13 of
Part III.
PART I
ITEM 1. BUSINESS
Summary Description of Businesses
L. B. Foster Company is engaged in the manufacture, fabrication and distribution
of products that serve the nation's surface transportation infrastructure. As
used herein, "Foster" or the "Company" means L. B. Foster Company and its
divisions and subsidiaries, unless the context otherwise requires.
For rail markets, Foster provides a full line of new and used rail, trackwork,
and accessories to railroads, mines and industry. The Company also designs and
produces concrete railroad products, insulated rail joints, power rail, track
fasteners, coverboards, signaling and communication devices, and special
accessories for mass transit and other rail systems worldwide.
For the construction industry, the Company sells steel sheet, H-bearing and pipe
piling, and rents steel sheet piling, for foundation and earth retention
requirements. In addition, Foster supplies bridge decking, expansion joints,
mechanically stabilized earth wall systems, precast concrete products and other
products for highway construction and repair.
For tubular markets, the Company supplies pipe coatings for natural gas
pipelines and utilities. The Company also produces threaded products for
industrial water well and irrigation markets.
The Company classifies its activities into three business segments: Rail
products, Construction products, and Tubular products. Financial information
concerning the segments is set forth in Note 20 to the financial statements
included in the Company's Annual Report to Stockholders for 2001. The following
table shows for the last three fiscal years the net sales generated by each of
the current business segments as a percentage of total net sales.
Percentage of Net Sales
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Rail Products 51% 52% 59%
Construction Products 41% 40% 31%
Tubular Products 8% 8% 10%
- --------------------------------------------------------------------------------
100% 100% 100%
================================================================================
As of January 1, 2000, the Company elected to change the reporting segment of
its Buildings division, acquired with the 1999 CXT Incorporated acquisition,
from rail to construction products. The 1999 results have been restated to
conform to the current presentation.
RAIL PRODUCTS
L. B. Foster Company's rail products include heavy and light rail, relay rail,
concrete ties, insulated rail joints, rail accessories, transit products and
signaling and communication devices. The Company is a major rail products
supplier to industrial plants, contractors, railroads, mines and mass transit
systems.
The Company sells heavy rail mainly to transit authorities, industrial
companies, and rail contractors for railroad sidings, plant trackage, and other
carrier and material handling applications. Additionally, the Company makes some
sales of heavy rail to railroad companies and to foreign buyers. The Company
sells light rail for mining and material handling applications.
Rail accessories include trackwork, ties, track spikes, bolts, angle bars and
other products required to install or maintain rail lines. These products are
sold to railroads, rail contractors and industrial customers and are
manufactured within the Company or purchased from other manufacturers.
The Company's Allegheny Rail Products (ARP) division engineers and markets
insulated rail joints and related accessories for the railroad and mass transit
industries, worldwide. Insulated joints are made in-house and subcontracted.
The Company's Transit Products division supplies power rail, direct fixation
fastener, coverboards and special accessories primarily for mass transit
systems. Most of these products are manufactured by subcontractors and are
usually sold by sealed bid to transit authorities or to rail contractors,
worldwide.
The Company's Trackwork division sells new and used rail, rail accessories,
trackwork from the Niles, OH plant and iron clad ties from the Watson-Haas
Lumber division in St. Marys, WV. The Niles, OH plant also produces trackwork
for industrial and export markets.
The Company's Rail Technologies subsidiary develops rail signaling and
communication devices for North American railroads.
The Company's CXT subsidiary manufactures engineered concrete products for the
railroad and transit industries. CXT's product line includes prestressed
concrete railroad ties and grade railroad crossing panels.
CONSTRUCTION PRODUCTS
L. B. Foster Company's construction products consist of sheet and bearing
piling, fabricated highway products, and precast concrete buildings.
Sheet piling products are interlocking structural steel sections that are
generally used to provide lateral support at construction sites. Bearing piling
products are steel H-beam sections which, in their principal use, are driven
into the ground for support of structures such as bridge piers and high-rise
buildings. Sheet piling is sold or leased and bearing piling is sold principally
to contractors and construction companies.
Other construction products consist of precast concrete buildings, sold
principally to national parks, and fabricated highway products. Fabricated
highway products consist principally of bridge decking, aluminum bridge rail and
other bridge products, which are fabricated by the Company, as well as
mechanically stabilized earth wall systems. The major purchasers of these
products are contractors for state, municipal and other governmental projects.
Sales of the Company's construction products are partly dependent upon the level
of activity in the construction industry. Accordingly, sales of these products
have traditionally been somewhat higher during the second and third quarters
than during the first and fourth quarters of each year.
TUBULAR PRODUCTS
The Company provides fusion bond and other coatings for corrosion protection on
oil, gas and other pipelines. The Company also supplies special pipe products
such as water well casing, column pipe, couplings, and related products for
agricultural, municipal and industrial water wells.
MARKETING AND COMPETITION
L. B. Foster Company generally markets its rail, construction and tubular
products directly in all major industrial areas of the United States through a
national sales force of 38 salespeople. The Company maintains 16 sales offices
and 14 plants or warehouses nationwide. During 2001, less than 5% of the
Company's total sales were for export.
The major markets for the Company's products are highly competitive. Product
availability, quality, service and price are principal factors of competition
within each of these markets. No other company provides the same product mix to
the various markets the Company serves. There are one or more companies that
compete with the Company in each product line. Therefore, the Company faces
significant competition from different groups of companies.
RAW MATERIALS AND SUPPLIES
Most of the Company's inventory is purchased in the form of finished or
semi-finished product. With the exception of relay rail which is purchased from
railroads or rail take-up contractors, the Company purchases most of its
inventory from domestic and foreign steel producers. There are few domestic
suppliers of new rail products and the Company could be adversely affected if a
domestic supplier ceased making such material available to the Company.
Additionally, the Company is TXI Chaparral Steel's exclusive North American
distributor of steel sheet piling and H-bearing pile. See Note 19 to the
consolidated financial statements for additional information on this matter.
The Company's purchases from foreign suppliers are subject to the usual risks
associated with changes in international conditions and to United States laws
which could impose import restrictions on selected classes of products and
antidumping duties if products are sold in the United States below certain
prices.
BACKLOG
The dollar amount of firm, unfilled customer orders at December 31, 2001 and
2000 by segment follows:
In thousands December 31, 2001 December 31, 2000
- --------------------------------------------------------------------------------
Rail Products $ 64,641 $ 86,351
Construction Products 59,808 52,779
Tubular Products 1,307 2,219
- --------------------------------------------------------------------------------
$125,756 $ 141,349
================================================================================
The reduction in Rail segment backlog reflects CXT long-term production
contracts. Total billings under these contracts were $16.1 million in 2001.
Approximately 85% of the December 31, 2001 backlog is expected to ship in 2002.
RESEARCH AND DEVELOPMENT
The Company's expenditures for research and development are negligible.
ENVIRONMENTAL DISCLOSURES
While it is not possible to quantify with certainty the potential impact of
actions regarding environmental matters, particularly for future remediation and
other compliance efforts, in the opinion of management compliance with
environmental protection laws will not have a material adverse effect on the
financial condition, competitive position, or capital expenditures of the
Company. However, the Company's efforts to comply with stringent environmental
regulations may have an adverse effect on the Company's future earnings.
EMPLOYEES AND EMPLOYEE RELATIONS
The Company has 686 employees, of whom 420 are hourly production workers and 266
are salaried employees. Approximately 206 of the hourly paid employees are
represented by unions. The Company has not suffered any major work stoppages
during the past five years and considers its relations with its employees to be
satisfactory.
Substantially all of the Company's hourly paid employees are covered by one of
the Company's noncontributory, defined benefit plans and a defined contribution
plan. Substantially all of the Company's salaried employees are covered by a
defined contribution plan.
ITEM 2. PROPERTIES
The location and general description of the principal properties which are owned
or leased by L. B. Foster Company, together with the segment of the Company's
business using the properties, are set forth in the following table:
Business Lease
Location Function Acres Segment Expires
- --------------------------------------------------------------------------------
Birmingham, Alabama Pipe coating 32 Tubular 2007
facility.
Doraville, Georgia Fabrication of 28 Tubular, Owned
components for Rail and
highways. Construction
Yard storage.
Niles, Ohio Rail fabrication. 35 Rail Owned
Trackwork manufac-
turing.
Yard storage.
Houston, Texas Casing, upset tub- 65 Tubular, Owned
ing, threading, Rail and
heat treating and Construction
painting. Yard
storage.
Bedford, Bridge component 10 Construction Owned
Pennsylvania fabricating plant.
Pittsburgh, Corporate Head- - Corporate 2007
Pennsylvania quarters.
Georgetown, Bridge component 11 Construction Owned
Massachusetts fabricating plant.
Spokane, CXT concrete tie, 26 Rail 2003
Washington crossings and pre-
cast plants. Yard
storage.
Grand Island, CXT concrete tie 9 Rail 2003
Nebraska plant.
Hillsboro, Precast concrete 9 Construction 2002
Texas * facility.
Petersburg, Piling storage 48 Construction Owned
Virginia facility.
Including the properties listed above, the Company has 16 sales offices and 14
warehouse, plant and yard facilities located throughout the country. The
Company's facilities are in good condition and the Company believes that its
production facilities are adequate for its present and foreseeable requirements.
* The Company will maintain its presence at the Hillsboro facility via execution
of a capital lease in 2002.
ITEM 3. LEGAL PROCEEDINGS
The Company was convicted, after a jury trial in Houston, TX, of unlawful
disposal of used oil and hazardous waste at its facility in Houston, TX, and was
fined $170,000. The Company does not believe that these convictions are
justified and has appealed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
Stock Market Information
- ------------------------
The Company had 788 common shareholders of record on January 31, 2002. Common
stock prices are quoted daily through the National Association of Security
Dealers, Inc. in its over-the-counter NASDAQ quotation service (Symbol FSTR).
The quarterly high and low bid price quotations for common shares (which
represent prices between broker-dealers and do not include markup, markdown or
commission and may not necessarily represent actual transactions) follow:
2001 2000
- --------------------------------------------------------------------------------
Quarter High Low High Low
- --------------------------------------------------------------------------------
First $3.65 $2.63 $5.50 $4.00
- --------------------------------------------------------------------------------
Second 4.30 3.40 4.31 3.19
- --------------------------------------------------------------------------------
Third 4.45 3.47 4.00 3.19
- --------------------------------------------------------------------------------
Fourth 5.00 4.10 3.56 2.50
================================================================================
Dividends
- ---------
No cash dividends were paid on the Company's Common stock during 2001 and 2000.
================================================================================
ITEM 6. SELECTED FINANCIAL DATA
(All amounts are in thousands except per share data)
Year Ended December 31,
Income Statement Data 2001 (1) 2000 (2) 1999 1998 (3) 1997
- --------------------------------------------------------------------------------------------------------------------
Net sales $ 282,242 $ 264,614 $ 241,923 $ 219,449 $ 220,343
- --------------------------------------------------------------------------------------------------------------------
Operating profit 3,964 6,920 9,327 8,478 7,912
- --------------------------------------------------------------------------------------------------------------------
Income from continuing operations 637 3,119 4,618 5,065 3,765
Income (loss) from discontinued
operations, net of tax - 371 (2,115) (688) (478)
- --------------------------------------------------------------------------------------------------------------------
Net income 637 3,490 2,503 4,377 3,287
====================================================================================================================
Basic earnings (loss) per common share:
Continuing operations 0.07 0.33 0.48 0.51 0.37
Discontinued operations - 0.04 (0.22) (0.07) (0.05)
- --------------------------------------------------------------------------------------------------------------------
Basic earnings per common share 0.07 0.37 0.26 0.44 0.32
====================================================================================================================
Diluted earnings (loss) per common share:
Continuing operations 0.07 0.33 0.46 0.50 0.37
Discontinued operations - 0.04 (0.21) (0.07) (0.05)
- --------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share 0.07 0.37 0.25 0.43 0.32
====================================================================================================================
December 31,
Balance Sheet Data 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 160,042 $ 177,147 $ 164,731 $ 119,434 $ 126,969
- --------------------------------------------------------------------------------------------------------------------
Working capital 62,011 71,477 67,737 54,604 60,096
- --------------------------------------------------------------------------------------------------------------------
Long-term debt 32,758 43,484 44,136 13,829 17,530
- --------------------------------------------------------------------------------------------------------------------
Stockholders' equity 77,145 77,359 74,650 73,494 70,527
====================================================================================================================
(1) 2001 includes pretax charges of approximately $1,879,000 related to the
Company's plan to consolidate sales and administrative functions and plant
operations.
(2) 2000 includes pretax charges of approximately $1,349,000 related to the
Company's plan to consolidate sales and administrative functions and plant
operations, a pretax gain of approximately $800,000 on the sale of an
undeveloped 62-acre property located in Houston, TX, and an after-tax gain on
the sale of the Monitor Group, classified as a discontinued operation, of
$900,000.
(3) In 1998, the Company recognized a pretax gain on the sale of the Fosterweld
division of the Tubular segment of approximately $1,700,000, a write-down of
approximately $900,000 on property subject to a sales negotiation, and a
provision for losses of approximately $900,000 relating to certain sign
structure contracts in the Construction segment.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended Twelve Months Ended
December 31, December 31,
In thousands 2001 2000 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Net Sales:
Rail Products $ 35,390 $ 31,215 $ 145,177 $ 138,635 $ 141,952
Construction Products 29,527 23,184 115,600 106,280 75,010
Tubular Products 4,668 4,596 21,055 19,511 24,676
Other 409 10 410 188 285
- ----------------------------------------------------------------------------------------------------------------------
Total Net Sales $ 69,994 $ 59,005 $ 282,242 $ 264,614 $ 241,923
======================================================================================================================
Gross Profit:
Rail Products $ 2,992 $ 3,629 $ 12,783 $ 16,762 $ 20,699
Construction Products 3,978 4,440 16,167 18,157 13,412
Tubular Products 1,028 788 4,968 3,411 3,952
Other 319 267 (367) (496) (978)
- ----------------------------------------------------------------------------------------------------------------------
Total Gross Profit 8,317 9,124 33,551 37,834 37,085
- ----------------------------------------------------------------------------------------------------------------------
Expenses:
Selling and Administrative Expenses 6,796 7,563 29,587 30,914 27,758
Interest Expense 768 1,097 3,564 4,227 3,230
Other Income - Net (74) (301) (694) (2,506) (1,184)
- ----------------------------------------------------------------------------------------------------------------------
Total Expenses 7,490 8,359 32,457 32,635 29,804
- ----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations,
Before Income Taxes 827 765 1,094 5,199 7,281
Income Tax Expense 346 306 457 2,080 2,663
- ----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations 481 459 637 3,119 4,618
Income (Loss) from Discontinued Operations,
Net of Tax - - - 371 (2,115)
- ----------------------------------------------------------------------------------------------------------------------
Net Income $ 481 $ 459 $ 637 $ 3,490 $ 2,503
======================================================================================================================
Gross Profit %:
Rail Products 8.5% 11.6% 8.8% 12.1% 14.6%
Construction Products 13.5% 19.2% 14.0% 17.1% 17.9%
Tubular Products 22.0% 17.1% 23.6% 17.5% 16.0%
Total Gross Profit % 11.9% 15.5% 11.9% 14.3% 15.3%
======================================================================================================================
As of January 1, 2000, the Company elected to change the reporting segment of
its Buildings division, acquired with the 1999 CXT acquisition, from rail to
construction products. The 1999 results have been restated to conform to the
current presentation.
FOURTH QUARTER OF 2001 VS. FOURTH QUARTER OF 2000
- -------------------------------------------------
Income from continuing operations was $0.5 million or $0.05 per share for the
fourth quarters of 2001 and 2000. Net sales in 2001 were $70.0 million, an
increase of 18.6% from the comparable quarter last year.
Rail products' net sales of $35.4 million was an increase of 13.4% over the 2000
fourth quarter. This improvement reflects an increase in shipments of concrete
ties and new rail. Construction products' net sales in the 2001 fourth quarter
increased 27.4% from the 2000 fourth quarter, primarily due to increased sales
of precast concrete buildings, and improved volume in the "H" bearing pile
market. Tubular products' net sales were consistent with last year's fourth
quarter. Changes in net sales are primarily the result of changes in volume
rather than changes in pricing.
The gross margin percentage for the Company declined to 11.9% in the 2001 fourth
quarter from 15.5% in the same period last year. The gross margin percentage for
the Rail products segment declined to 8.5% from 11.6% which is primarily the
result of a highly competitive rail supply market created by the continued
spending cutbacks of Class I railroads, and the general economic downturn.
Construction products' gross margin percentage declined to 13.5% from 19.2% due
to costs related to the start-up of the Company's new Hillsboro, TX facility
which produces precast concrete buildings, a decline in sales and margins for
geotechnical products, and a decline in margins for certain fabricated products.
The gross margin percentage for Tubular products increased 4.9 percentage points
in the fourth quarter of 2001 from the same period last year primarily due to
more efficient operations at the Birmingham, AL plant.
Results for the fourth quarter of 2001 include pretax nonrecurring charges of
$0.37 million related to the Company's plan to improve its financial performance
by consolidating sales and administrative functions and plant operations.
Results for the fourth quarter of 2000 included pretax nonrecurring charges and
asset impairments of $0.12 million related to the plan. A concerted effort to
contain costs has resulted in reduced travel and entertainment expense, the
primary reason for the 10.1% decline in 2001 fourth quarter selling and
administrative expenses from the same period last year. The income tax provision
for the fourth quarter of 2001 was recorded at 41.8% compared to 40.0% in the
2000 fourth quarter. See Note 14 to the consolidated financial statements for
more information regarding income taxes.
THE YEAR 2001 COMPARED TO THE YEAR 2000
- ---------------------------------------
Income from continuing operations in 2001 was $0.6 million or $0.07 per share on
net sales of $282.2 million. This compares to income from continuing operations
in 2000 of $3.1 million or $0.33 per share on net sales of $264.6 million. Net
income from discontinued operations in 2000 included operating losses of $0.5
million, net of tax, and a $0.9 million gain, net of tax, on the sale of the
Monitor Group.
Rail products' 2001 net sales were $145.2 million, an increase of 4.7% over the
prior year, due primarily to increases in shipments of new rail products and
concrete rail ties. Construction products' net sales increased to $115.6
million, an 8.8% improvement over the prior year. This increase in sales can be
attributed primarily to sales of certain fabricated bridge products and precast
concrete buildings, and an improved market for "H" bearing pile. Tubular
products' sales increased 7.9%, to $21.1 million, in 2001. The sales improvement
is primarily due to increased volume at the Company's Birmingham, AL
pipe-coating facility.
The gross profit margin for the Company was 11.9% in 2001 compared to 14.3% in
2000. Rail products' gross margin declined to $12.8 million, a 3.3 percentage
point reduction from the previous year. The decline is primarily due to the
previously-mentioned competitive environment in the rail supply industry. Costs
associated with the closing of the Company's Pomeroy, OH trackwork facility also
reduced Rail products' margins. Construction products' gross profit margin
declined to $16.2 million, a 3.1 percentage point reduction from a year ago.
Sales of low margin piling products, and costs associated with the closing of
the Company's Ephrata, PA sign structure plant and the start-up of the Company's
Hillsboro, TX precast concrete buildings facility all contributed to the
reduction in Construction products' margins. Tubular products' margins improved
6.1 percentage points in 2001, due primarily to greater efficiencies at the
Birmingham, AL pipe coating facility.
The current year results include the following pretax charges related to the
Company's previously-mentioned plan to improve its financial performance:
employee severances and facility exit costs of $0.9 millions, asset impairments
of $0.6 million, and other related costs of $0.4 million. Results for 2000 also
included pretax charges as follows: employee severances and facility exit costs
of $1.0 million, asset impairments and other related costs of $0.3 million. This
plan, along with reduced travel and entertainment expenditures, resulted in a
4.3% decline in selling and administrative expenses during 2001. Other income in
2001 consisted primarily of accrued dividend income on the DM&E Preferred Stock.
The income tax provision for 2001 was recorded at 41.8% compared to 40.0% in
2000. See Note 14 to the consolidated financial statements for more information
regarding income taxes.
THE YEAR 2000 COMPARED TO THE YEAR 1999
- ---------------------------------------
Income from continuing operations for 2000 was $3.1 million or $0.33 per share
on net sales of $264.6 million. Income from continuing operations in 1999 was
$4.6 million or $0.46 per diluted share on net sales of $241.9 million.
Net operating losses (net of tax) from the Monitor Group, classified as a
discontinued operation on December 31, 1999, were $0.5 million and $0.9 million
in 2000 and 1999, respectively. In September 2000, the Company sold the assets
of the Monitor Group for $1.5 million cash which resulted in a $0.9 million
gain, net of tax, reflected in discontinued operations.
Rail products' net sales declined 2.3% to $138.6 million despite the inclusion
of CXT Incorporated (CXT) results in 2000. Rail sales, excluding CXT results,
declined 14.5% from the prior year. The decline from 1999 reflected the downturn
in the rail supply industry as a result of spending cutbacks by the major
railroads which adversely impacted shipments and margins. Construction products'
sales rose 41.7% as improved availability and strong demand increased shipments
of "H" bearing pile and flat web sheet piling in the first three quarters of
2000. Tubular products' sales declined 20.9% in 2000 versus 1999 as a result of
a downturn in the pipe coating market during the first nine months of 2000.
Additionally, 1999 results included the sale of the remaining coated pipe
inventory from the Newport facility.
The gross margin percentages for the Company in 2000 and 1999 were 14.3% and
15.3%, respectively. Rail products' gross margin percentage declined to 12.1%
from 14.6% due to the downturn in the rail supply industry which resulted in
excess capacity and pressure on margins throughout the industry. The gross
margin percentage for Construction products declined 0.8 percentage points as
improving results in the Buildings division offset lower margins on sign
structure projects. Tubular products' gross margin percentage improved 1.5
percentage points due to more efficient operations at the Langfield, TX pipe
threading facility.
Results for 2000 included nonrecurring pretax charges totaling $1.3 million
related to the Company's plan to improve its financial performance by
consolidating sales and administrative functions and plant operations. These
charges were comprised of approximately $1.0 million for severance, of which
$0.6 million had been paid prior to year-end, and $0.3 million of asset
impairments and other administrative costs. The costs accrued for the
implemented programs were based upon management estimates using the latest
information available at the time the accrual was established.
Selling and administrative expenses increased 11.4% over 1999 due to the
inclusion of expenses associated with CXT operations and the special charges
previously mentioned. Interest expense increased from 1999 due to an increase in
outstanding borrowings associated with the acquisition of CXT in June of 1999.
Other income in 2000 included approximately $0.8 million from the sale of a
Houston, TX property, $0.8 million accrued dividend income on DM&E Preferred
Stock, $0.6 million DM&E interest income, and $0.3 million of interest collected
on other receivables. The provision for income taxes was recorded at 40.0% in
2000 compared to 36.6% in 1999. The 1999 provision reflected the implementation
of certain one-time tax planning strategies.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company generates operational cash flow from the sale of inventory and the
collection of accounts receivable. During 2001, the average turnover rate for
accounts receivable improved over 2000, especially for rail and construction
products. The average turnover rate for inventory was higher in 2001 than in
2000 particularly for piling, and certain rail products. Working capital at
December 31, 2001 was $62.0 million compared to $71.5 million in 2000.
Management's emphasis on improving working capital utilization has resulted in a
$16.4 million reduction in inventory and a $3.7 million reduction in trade
receivables since December 31, 2000. These improvements have allowed the Company
to reduce debt by $12.3 million in 2001.
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. The timing and extent of
the purchases will depend on market conditions. As of December 31, 2001, the
Company had repurchased 973,398 shares at a total cost of approximately $5.0
million.
The Company had capital expenditures of approximately $4.8 million in 2001.
Capital expenditures in 2002, including the Greulich acquisition discussed in
Other Matters, are expected to be approximately $5.5 million and are anticipated
to be funded by cash flow from operations and available external financing
sources.
A summary of the Company's required payments under financial instruments
(excluding interest accretion on debt other than capital leases) and other
commitments are presented in the following table:
Less than 1 - 3 4 - 5 After 5
In thousands Total 1 year years years years
- -----------------------------------------------------------------------------------------------------
Contractual Cash Obligations
Total debt including capital leases $38,567 $ 5,809 $30,704 $ 9 $ 2,045
Operating lease obligations 11,809 3,416 5,382 2,704 307
Other Financial Commitments
Standby letters of credit and open
bankers acceptance 3,357 3,357 - - -
=====================================================================================================
Total revolving credit agreement borrowings at December 31, 2001, were $35.0
million, a decrease of $11.5 million from the end of the prior year. At December
31, 2001, the Company had approximately $14.6 million in unused borrowing
commitment. Outstanding letters of credit and open bankers acceptance at
December 31, 2001 were approximately $3.4 million. The letters of credit expire
annually and are subject to renewal. A bankers acceptance for $1.3 million is
payable on the May 28, 2002 maturity date. Management believes its internal and
external sources of funds are adequate to meet anticipated needs.
The revolving credit agreement 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 0.25%, the CD rate plus
0.575% to 1.8%, and the LIBOR rate plus 0.575% to 1.8%. Borrowings under the
agreement, which expire 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 convenants 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 also restricts
investments, indebtedness, and the sale of certain assets. As of December 31,
2001, the Company was in compliance with all of the agreement's covenants.
DAKOTA, MINNESOTA AND EASTERN RAILROAD
- --------------------------------------
The Company maintains a significant investment in the Dakota, Minnesota &
Eastern Railroad Corporation (DM&E), a privately-held, regional railroad which
operates over 1,100 miles of track in five states.
At December 31, 2001, the Company's investment was comprised of, $0.2 million of
DM&E common stock, $1.5 million of the Series B Preferred Stock and warrants,
$6.0 million of the Series C Preferred Stock and warrants and $0.8 million of
DM&E Preferred Series C-1 Stock and warrants. In addition, the Company has a
receivable for accrued dividend income on Preferred Stock of $2.6 million. On a
fully diluted basis, the Company owns approximately 16% of the DM&E's common
stock.
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 the Project is expected to be in excess of $1.5
billion. The Project received final approval by the Surface Transportation Board
(STB) in January 2002.
The DM&E has stated that it could repay project debt and cover its operating
costs if it captures a 5% market share in the Powder River Basin. If the Project
proves to be viable, management believes that the value of the Company's
investment in the DM&E could increase dramatically.
OTHER MATTERS
- -------------
In January 2002, the Company acquired substantially all of the equipment,
inventory backlog, and intellectual property of the Greulich Bridge Products
Division of Harsco Corporation, for approximately $2.2 million. These assets
will be utilized in the Company's fabricated bridge products operations in the
Construction products segment.
During 2001, the Company recorded an impairment loss of approximately $0.3
million to write down unusable assets at its Pomeroy, OH facility. This facility
was closed and the remaining assets were transferred for use to the Company's
Niles, OH trackwork production facility.
In September 2001, the Company entered into an agreement with Concrete
Solutions, Inc. (CSI) to manufacture and market CSI's patented SoundSorb
acoustical material as part of the Company's line of engineered concrete
products in North America. Production of the new product will be undertaken at
the Company's locations across the country.
The contemplated sale of the Company's 65-acre Houston, TX property did not
materialize as expected in the second quarter of 2001. Management continues to
evaluate the use of this property.
During the first quarter of 2001, the Company decided to expand its concrete
products operations, primarily the fabrication of precast buildings. To better
serve the southwest and southern markets, the Company has entered into
agreements to lease land, a building and production equipment in Hillsboro, TX.
Production at this facility commenced in October 2001.
Also in the first quarter of 2001, the Company decided to phase out its sign
structure production operations and terminate the lease for a facility in
Ephrata, PA. The remaining backlog will be completed at the Company's Doraville,
GA facility.
Operations at the Company's Newport, KY pipe coating facility were suspended in
1998 in response to unfavorable market conditions. In 1999, the Company recorded
an impairment loss to reduce these assets to their anticipated market value.
During 2000, the machinery and equipment from this operation was dismantled and
transferred to the Company's Birmingham, AL location. Management is currently
negotiating the sale of these assets and believes that the equipment will be
sold in 2002.
In 1998, the Company purchased assets primarily comprised of intellectual
properties related to the business of supplying rail signaling and communication
devices for approximately $1.7 million. Management is evaluating the performance
of this operation.
Management continues to evaluate the overall performance of its 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.
OUTLOOK
- -------
The Company is TXI Chaparral's exclusive North American distributor of steel
sheet piling. Steel sheet piling commenced in 2001 at TXI Chaparral's
Petersburg, VA facility, but the quantity produced did not materially impact the
2001 results. The Company anticipates a full complement of sheet piling products
to be available over the next 18 to 24 months, and expects this to have a
positive effect on earnings. However, TXI Chaparral's failure to produce a full
complement of sheet piling products could have an adverse impact on earnings.
Specialty trackwork sales of the Company's Rail segment depend primarily on one
source, in which the Company currently maintains a 30% ownership position. At
December 31, 2001 and 2000, the Company had advanced to this supplier inventory
progress payments of $2.6 million and $6.1 million, respectively. During 2001,
2000, and 1999, the volume of business the supplier conducted with the Company
was approximately $13.6 million, $12.8 million, and $10.1 million, respectively.
If, for any reason, this supplier is unable to perform, the Company could
experience a negative short-term effect on earnings.
The Company's CXT subsidiary and Allegheny Rail Products division are dependent
on one Class I railroad customer for a significant portion of their business. In
addition, a substantial portion of the Company's operations are heavily
dependent on governmental funding of infrastructure projects. Significant
changes in the level of government funding of these projects could have a
favorable or unfavorable impact on the operating results of the Company.
Additionally, governmental actions concerning taxation, tariffs, the environment
or other matters could impact the operating results of the Company. The
Company's operating results may also be affected by adverse weather conditions.
Although backlog is not necessarily indicative of future operating results,
total Company backlog at December 31, 2001, was approximately $125.8 million.
The following table provides the backlog by business segment:
December 31,
In thousands 2001 2000 1999
- --------------------------------------------------------------------------------
Backlog:
Rail Products $ 64,641 $ 86,351 $107,457
Construction Products 59,808 52,779 45,463
Tubular Products 1,307 2,219 2,012
- --------------------------------------------------------------------------------
Total Backlog $125,756 $141,349 $154,932
================================================================================
The 1999 presentation has been restated to reflect the January 1, 2000 change in
reporting segment of the Buildings division, acquired in the 1999 CXT
Incorporated acquisition, from rail to construction products. This change
resulted in a backlog shift of $3.6 million.
The reduction in Rail segment backlog reflects the effect of CXT billings
against long-term production contracts. Total billings under these contracts
were $16.1 million in 2001 and $16.7 million in 2000.
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 the 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.
REVENUE RECOGNITION - The Company's revenues are composed of product sales and
products and services provided under long-term contracts. The Company recognizes
revenues upon shipment of material from stock inventory or upon billing of
material shipped directly to the customer from a Company vendor. Title passes to
the customer upon shipment. Revenues from long-term contracts are generally
recognized using the percentage-of-completion method based upon the proportion
of actual costs incurred to estimated total costs. For certain products, the
percentage of completion is based upon actual labor and engineering costs to
estimated total labor and engineering costs. For certain other products, the
Company recognizes revenues based upon the units delivered compared to total
units ordered by the customer.
As certain long-term contracts extend over one or more years, revisions to
estimates of costs and profits are reflected in the accounting period in which
the facts that require the revisions become known. At the time a loss on a
contract becomes known, the entire amount of the estimated loss is recognized in
the financial statements. The Company has historically made reasonable
dependable estimates of the extent of progress towards completion, contract
revenues, and contract costs on its long-term contracts. However, due to
uncertainties inherent in the estimation process, actual results could differ
materially from those estimates.
Revenue from contract change orders and claims is recognized when the settlement
is probable and the amount can be reasonably estimated. Contract costs include
all direct material, labor, subcontract costs and those indirect costs related
to contract performance. Costs and estimated profits in excess of billings are
classified as a current asset. Amounts billed in excess of costs and estimated
profits are classified as a current liability.
ASSET IMPAIRMENT - The Company reviews long-lived assets, including goodwill and
other intangible assets, comprised primarily of acquired intellectual property,
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment charge is
recognized when the projected net undiscounted future cash flows from an asset's
use (inclusive of any proceeds from disposition) are less than the asset's
carrying value and the asset's carrying value exceeds its fair value.
At December 31, 2001, the Company carried goodwill and other intangible assets,
net of accumulated amortization, of $6.5 million. For 2001 and earlier years,
the Company was required to evaluate whether goodwill and intangibles presented
on the balance sheet were impaired based upon the undiscounted future cash flows
of the operating unit for which the assets related. When factors indicate
impairment of these assets, the excess unamortized asset, relative to the
asset's estimated fair value, is immediately charged to operations. The Company
continues to develop and test, in the market, products associated with the
acquired intellectual property. Management believes that, upon market acceptance
of these products, the carrying value of the intellectual property will be
recovered.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). Effective for fiscal years beginning after December 15,
2001, SFAS 142 provides the authoritative guidance for evaluating and
recognizing impairment of goodwill. In addition, in August 2001, the FASB issued
Statement of Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144), which is effective for fiscal years
beginning after December 31, 2001. SFAS 144 provides the prospective guidance
for determining and recording impairments of the Company's other long-lived
assets, including finite-lived intangible assets and intellectual property.
Please refer to New Accounting Pronouncements for further discussion of these
new rules.
INVENTORIES - Inventories are generally valued at the lower of the last-in,
first-out (LIFO) cost or market. Approximately 18% in 2001 and 13% in 2000, of
the Company's inventory is valued at average cost or market, whichever is lower.
Costs include direct material, direct labor, applicable manufacturing and
engineering overhead, and other direct costs. The reserve for slow-moving
inventory is reviewed and adjusted regularly, based upon product knowledge,
physical inventory observation, and the age of the inventory.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS - The Company provides a reserve for
uncollectible accounts through a combination of the aging of accounts and
identified, specific-account reviews. The Company has developed reserve factors
based upon prior collection of aged accounts and applies those factors to the
current aging to determine the Company's reserve requirement. The Company's
credit department may adjust these reserves, based upon a review of specific
customer balances. The provision is adjusted monthly to reflect changes in the
Company's receivable aging and current customer developments.
CONTINGENCIES - The Company is subject to various domestic environmental laws
and regulations that govern the discharge of pollutants into the air, ground,
and water, and may require the Company to investigate and remediate the effects
of the release and disposal of pollutants at sites associated with past and
present operations. The Company accrues environmental remediation costs when the
liability becomes probable and costs the Company expects to incur become
estimable. Environmental compliance costs, which principally include the
disposal of waste by routine operations, are expensed as incurred. Capitalized
environmental costs are depreciated, when appropriate, over their useful life.
Reserves maintained for environmental matters were not significant at December
31, 2001 or 2000, nor did the Company incur significant environmental compliance
or remediation costs for the three-year period ended December 31, 2001. These
reserves are reviewed periodically and, as investigation and remediation
progresses, any necessary adjustments to the reserves are recorded. Based upon
currently available information, management does not believe that future
environmental costs, in excess of those accrued, will have a significant impact
on the Company's financial condition or liquidity. However, the resolution in
any reporting period of one or more of these matters could have a material
adverse effect on the Company's operations for that period. In addition, there
can be no assurance that additional future developments, administrative actions,
or liabilities relating to environmental matters will not have a material
adverse effect on the Company's financial condition or results of operation.
NEW ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial Accounting Standards
Board issued SFAS 141 and SFAS 142, effective for fiscal years beginning after
December 15, 2001. These standards change the accounting for business
combinations, goodwill, and intangible assets.
SFAS 141 eliminates the pooling-of-interest method of accounting for business
combinations and clarifies the criteria for recognizing intangible assets
separately from goodwill. The requirements of SFAS 141 are effective for any
business combination accounted for by the purchase method that is completed
after June 30, 2001.
Under SFAS 142, goodwill and indefinite lived intangible assets are no longer
amortized but are reviewed annually, or more frequently if impairment indicators
arise, for impairment. Separable intangible assets that have finite lives will
continue to be amortized over their useful lives, with no maximum life. In
addition, SFAS 142 changes the test for goodwill impairment. The new impairment
test is a two-step process. The first step is a comparison of the fair value of
the reporting unit to its carrying amount, including goodwill. If this step
indicates impairment, then the loss is measured as the excess of the recorded
value over its implied fair value.
The Company will apply these new rules for accounting for goodwill and
intangibles beginning in the first quarter of 2002. Application of the
non-amortization provisions is expected to result in an increase in net income
of approximately $0.6 million per year. The Company has yet to perform the
transitional impairment test, and although management expects to record a charge
in 2002, the amount of that charge has not been quantified and any impact on the
overall financial condition of the Company, has yet to be determined.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" (SFAS 143), effective for
fiscal years beginning after June 15, 2002. SFAS 143 provides accounting
requirements for retirement obligations associated with tangible long-lived
assets. The obligations affected are those for which there is a legal obligation
to settle as a result of existing or enacted law. The Company does not believe
this standard will have an impact on its consolidated financial statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144), effective for fiscal years beginning after December 15, 2001. This
statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121), and
provides a single accounting model for long-lived assets to be disposed of. The
Company has not yet made a determination of the impact of this standard on its
consolidated financial statements.
MARKET RISK AND RISK MANAGEMENT POLICIES
- ----------------------------------------
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 is not subject to significant exposures to change in foreign
currency exchange rates. The Company does, however, 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 and purchase
commitments by entering into foreign currency forward contracts. The Company's
risk management objective is to reduce its exposure to the effects of changes in
exchange rates on sales revenue over the duration of the transaction. At
December 31, 2001, the Company did not have any foreign currency forward
contracts outstanding.
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 an 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.
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). This statement established accounting and reporting
standards for derivative financial instruments and hedging activities and
required the transition adjustment from adoption to be reported in net income or
other comprehensive income, as appropriate, as the cumulative effect of a change
in accounting principle. See Note 1 to the consolidated financial statements.
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 assessments on information provided by the DM&E and has
not independently verified such information. In addition to matters mentioned
above, factors which can adversely affect the value of the DM&E, its ability to
complete the Project or the viability of the Project include the following:
labor disputes, any inability to obtain necessary environmental and governmental
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, competitors' responses to the Project,
market demand for coal or electricity and changes in environmental and other
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 TXI Chaparral's production of 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.
/s/ Stan L. Hasselbusch
Stan L. Hasselbusch
President and Chief Executive Officer
/s/Linda K. Patterson
Linda K. Patterson
Controller
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
ASSETS
In thousands 2001 2000
- --------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,222 $ -
Accounts receivable - net 53,064 57,606
Inventories - net 43,444 59,811
Current deferred tax assets 1,491 2,055
Other current assets 814 373
Property held for resale 1,333 1,333
- --------------------------------------------------------------------------------
Total Current Assets 104,368 121,178
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT - NET 33,951 33,023
- --------------------------------------------------------------------------------
PROPERTY HELD FOR RESALE - 1,089
- --------------------------------------------------------------------------------
OTHER ASSETS:
Goodwill and other intangibles - net 6,455 6,772
Investments 11,104 9,423
Deferred tax assets 1,184 1,242
Other assets 2,980 4,420
- --------------------------------------------------------------------------------
Total Other Assets 21,723 21,857
- --------------------------------------------------------------------------------
TOTAL ASSETS $160,042 $177,147
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
In thousands, except share data
- --------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 809 $ 926
Short-term borrowings 5,000 6,500
Accounts payable - trade 29,290 33,008
Accrued payroll and employee benefits 2,546 3,503
Current deferred tax liabilities 1,201 1,947
Other accrued liabilities 3,511 3,817
- --------------------------------------------------------------------------------
Total Current Liabilities 42,357 49,701
- --------------------------------------------------------------------------------
LONG-TERM DEBT 32,758 43,484
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES 4,968 5,413
- --------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES 2,814 1,190
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 18)
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock, issued 10,228,739 shares in 2001
and 2000 102 102
Paid-in capital 35,233 35,306
Retained earnings 46,632 45,995
Treasury stock - at cost, Common stock, 762,613
shares in 2001 and 765,627 shares in 2000 (3,926) (4,009)
Accumulated other comprehensive loss (896) (35)
- --------------------------------------------------------------------------------
Total Stockholders' Equity 77,145 77,359
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $160,042 $177,147
================================================================================
See Notes to Consolidated Financial Statements.
L.B.FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME FOR
THE THREE YEARS ENDED DECEMBER 31, 2001
In thousands, except per share data 2001 2000 1999
- ---------------------------------------------------------------------------------------------------
NET SALES $282,242 $264,614 $241,923
- ---------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of goods sold 248,691 226,780 204,838
Selling and administrative expenses 29,587 30,914 27,758
Interest expense 3,564 4,227 3,230
Other income - net (694) (2,506) (1,184)
- ---------------------------------------------------------------------------------------------------
281,148 259,415 234,642
- ---------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS,
BEFORE INCOME TAXES 1,094 5,199 7,281
INCOME TAX EXPENSE 457 2,080 2,663
- ---------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 637 3,119 4,618
- ---------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF TAX - 371 (2,115)
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 637 $ 3,490 $ 2,503
===================================================================================================
BASIC EARNINGS (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS $ 0.07 $ 0.33 $ 0.48
DISCONTINUED OPERATIONS - 0.04 (0.22)
- ---------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE $ 0.07 $ 0.37 $ 0.26
===================================================================================================
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS $ 0.07 $ 0.33 $ 0.46
DISCONTINUED OPERATIONS - 0.04 (0.21)
- ---------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE $ 0.07 $ 0.37 $ 0.25
===================================================================================================
See Notes to Consolidated Financial Statements.
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE YEARS ENDED DECEMBER 31, 2001
In thousands 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 637 $ 3,119 $ 4,618
Adjustment to reconcile net income to net cash provided
(used) by operating activities:
Deferred income taxes 12 (442) (133)
Depreciation and amortization 5,641 5,386 4,493
Loss (gain) on sale of property, plant and equipment 41 (879) 76
Change in operating assets and liabilities:
Accounts receivable 4,569 (4,494) 2,243
Inventories 16,367 (14,210) (5,839)
Other current assets (441) 608 (208)
Other noncurrent assets 44 1,258 (839)
Accounts payable - trade (3,718) 8,562 544
Accrued payroll and employee benefits (637) (156) (1,576)
Other current liabilities (306) 1,001 862
Other liabilities (110) (166) 249
- ---------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Continuing Operations 22,099 (413) 4,490
Net Cash Provided (Used) by Discontinued Operations - 954 (1,159)
- ---------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 22,099 541 3,331
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of property, plant and
equipment 219 2,428 4,410
Capital expenditures on property, plant and
equipment (4,818) (4,085) (5,031)
Purchase of DM&E stock (800) - (6,000)
Acquisition of business - - (17,514)
- ---------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (5,399) (1,657) (24,135)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) proceeds of revolving credit
agreement borrowings (11,500) 1,500 32,725
Exercise of stock options and stock awards 85 185 330
Treasury share transactions (75) (901) (1,702)
Repayments of long-term debt (945) (1,207) (9,881)
- ---------------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Financing Activities (12,435) (423) 21,472
Effect of exchange rate changes on cash (43) (19) 16
- ---------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 4,222 (1,558) 684
Cash and Cash Equivalents at Beginning of Year - 1,558 874
- ---------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 4,222 $ - $ 1,558
=========================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 3,986 $ 4,266 $ 2,376
=========================================================================================================
Income Taxes Paid $ 713 $ 1,932 $ 2,869
=========================================================================================================
During 2001, 2000 and 1999, the Company financed certain capital expenditures
totaling $102,000, $340,000 and $1,052,000, respectively, through the execution
of capital leases.
See Notes to Consolidated Financial Statements.
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2001
Accumulated
Other
Common Paid-in Retained Treasury Comprehensive
In thousands, except share data Stock Capital Earnings Stock Income (Loss) Total
======================================================================================================================
Balance, January 1, 1999 $ 102 $35,431 $40,002 $ (2,046) $ 5 $73,494
======================================================================================================================
Net income 2,503 2,503
Other comprehensive income net of tax:
Foreign currency translation adjustment 25 25
- ----------------------------------------------------------------------------------------------------------------------
Comprehensive income 2,528
Exercise of options to purchase 39,000
shares of Common stock (54) 384 330
Treasury stock purchases of 288,809 shares (1,702) (1,702)
======================================================================================================================
Balance, December 31, 1999 102 35,377 42,505 (3,364) 30 74,650
======================================================================================================================
Net income 3,490 3,490
Other comprehensive loss net of tax:
Foreign currency translation adjustment (45) (45)
Minimum pension liability adjustment (20) (20)
- ----------------------------------------------------------------------------------------------------------------------
Comprehensive income 3,425
Exercise of options to purchase 35,500
shares of Common stock (71) 256 185
Treasury stock purchases of 233,100 shares (901) (901)
======================================================================================================================
Balance, December 31, 2000 102 35,306 45,995 (4,009) (35) 77,359
======================================================================================================================
Net income 637 637
Other comprehensive loss net of tax:
Foreign currency translation adjustment (24) (24)
Minimum pension liability adjustment (200) (200)
Cumulative transition adjustment of a change
in accounting principle (48) (48)
Unrealized derivative losses on cash flow
hedges (589) (589)
- ----------------------------------------------------------------------------------------------------------------------
Comprehensive loss (224)
Issuance of 28,014 Common shares (73) 158 85
Treasury stock purchases of 25,000 shares (75) (75)
======================================================================================================================
Balance, December 31, 2001 $ 102 $35,233 $46,632 $ (3,926) $ (896) $77,145
======================================================================================================================
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION - The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany transactions have been eliminated.
The term "Company" refers to L. B. Foster Company and its subsidiaries, as the
context requires.
CASH EQUIVALENTS - The Company considers securities with maturities of three
months or less, when purchased, to be cash equivalents.
INVENTORIES - Inventories are generally valued at the lower of the last-in,
first-out (LIFO) cost or market. Approximately 18% in 2001 and 13% in 2000, of
the Company's inventory is valued at average cost or market, whichever is lower.
The reserve for slow-moving inventory is reviewed and adjusted regularly, based
upon product knowledge, physical inventory observation, and the age of the
inventory.
PROPERTY, PLANT AND EQUIPMENT - Maintenance, repairs and minor renewals are
charged to operations as incurred. Major renewals and betterments which
substantially extend the useful life of the property are capitalized. Upon sale
or other disposition of assets, the cost and related accumulated depreciation
and amortization are removed from the accounts and the resulting gain or loss,
if any, is reflected in income. Depreciation and amortization are provided on a
straight-line basis over the estimated useful lives of 30 to 40 years for
buildings and 3 to 10 years for machinery and equipment. Leasehold improvements
are amortized over 2 to 7 years which represent the lives of the respective
leases or the lives of the improvements, whichever is shorter. The Company
reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
GOODWILL AND OTHER INTANGIBLE ASSETS - The Company's intangible assets consist
primarily of goodwill and acquired intellectual property. Goodwill recorded by
the Company represents the excess of the purchase price over the estimated fair
value of the net assets acquired. Through the year ended December 31, 2001, the
Company amortized intangible assets on a straight-line basis over periods of 8
to 25 years and established useful lives on the acquisition date based upon the
asset's estimated future benefit. An impairment charge is recognized when the
projected net undiscounted cash flows from an asset's use (inclusive of any
proceeds from disposition) are less than the asset's carrying value and the
asset's carrying value exceeds its fair value. The excess, unamortized asset,
relative to the asset's estimated fair value, is immediately expensed.
Amortization expense was $797,000, $743,000 and $660,000 in 2001, 2000, and
1999, respectively. At December 31, 2001 and 2000, accumulated amortization
totaled $2,283,000 and $1,486,000, respectively. In June 2001, the Financial
Accounting Standards Board issued Statement of Financial Standards No. 141,
"Business Combinations" (SFAS 141), and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), effective
for fiscal years beginning after December 15, 2001. Please refer to New
Accounting Pronouncements for discussion of these new rules.
ENVIRONMENTAL REMEDIATION AND COMPLIANCE - Environmental remediation costs are
accrued when the liability is probable and costs are estimable. Environmental
compliance costs, which principally include the disposal of waste generated by
routine operations, are expensed as incurred. Capitalized environmental costs
are depreciated, when appropriate, over their useful life.
EARNINGS PER SHARE - Basic earnings per share is calculated by dividing net
income by the weighted average of common shares outstanding during the year.
Diluted earnings per share is calculated by using the weighted average of common
shares outstanding adjusted to include the potentially dilutive effect of
outstanding stock options.
REVENUE RECOGNITION - The Company's revenues are composed of product sales and
products and services provided under long-term contracts. The Company recognizes
revenues upon shipment of material from stock inventory or upon billing of
material shipped directly to the customer from a Company vendor. Title passes to
the customer upon shipment. Revenues from long-term contracts are generally
recognized using the percentage-of-completion method based upon the proportion
of actual costs incurred to estimated total costs. For certain products, the
percentage of completion is based upon actual labor and engineering costs to
estimated total labor and engineering costs. For certain other products, the
Company recognizes revenues based upon the units delivered compared to total
units ordered by the customer.
As certain long-term contracts extend over one or more years, revisions to
estimates of costs and profits are reflected in the accounting period in which
the facts that require the revisions become known. At the time a loss on a
contract becomes known, the entire amount of the estimated loss is recognized in
the financial statements. The Company has historically made reasonable
dependable estimates of the extent of progress towards completion, contract
revenues, and contract costs on its long-term contracts. However, due to
uncertainties inherent in the estimation process, actual results could differ
materially from those estimates.
Revenue from contract change orders and claims is recognized when the settlement
is probable and the amount can be reasonably estimated. Contract costs include
all direct material, labor, subcontract costs and those indirect costs related
to contract performance. Costs and estimated profits in excess of billings are
classified as a current asset. Amounts billed in excess of costs and estimated
profits are classified as a current liability.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist of accounts receivable, accounts payable, short-term and long-term debt,
and interest rate agreements.
The carrying amounts of the Company's financial instruments at December 31, 2001
approximate fair value.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
STOCK-BASED COMPENSATION - The Company grants stock options for a fixed number
of shares to employees with an exercise price equal to the fair value of the
shares at the date of grant. The Company follows the requirements of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in
accounting for stock-based compensation, and, accordingly, recognizes no
compensation expense for stock option grants.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES - The Company uses
derivative financial instruments to manage interest exposure on variable-rate
debt, primarily by using interest rate collars and variable interest rate swaps.
The Company is not subject to significant exposures to change in foreign
currency exchange rates. The Company does, however, 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 and purchase
commitments by entering into foreign currency forward contracts. The Company's
risk management objective is to reduce its exposure to the effects of changes in
exchange rates on sales revenue over the duration of the transaction. At
December 31, 2001, the Company did not have any foreign currency forward
contracts outstanding.
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 an 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.
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). This statement establishes accounting and reporting
standards for derivative financial instruments and hedging activities and
required the transition adjustment from adoption to be reported in net income or
other comprehensive income, as appropriate, as the cumulative effect of a change
in accounting principle. In accordance with the transition provisions of SFAS
133, the Company recorded a cumulative transition adjustment to decrease
accumulated other comprehensive income by approximately $48,000, net of related
tax effects, to recognize the fair value of its derivative instruments as of the
date of adoption. During the year ended December 31, 2001, unrealized net losses
on derivative instruments of approximately $589,000, net of related tax effects,
were recorded in other comprehensive income.
NEW ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 141, "Business
Combinations" (SFAS 141) and Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" (SFAS 142), effective for fiscal
years beginning after December 15, 2001. These standards change the accounting
for business combinations, goodwill, and intangible assets.
SFAS 141 eliminates the pooling-of-interest method of accounting for business
combinations and clarifies the criteria for recognizing intangible assets
separately from goodwill. The requirements of SFAS 141 are effective for any
business combination accounted for by the purchase method that is completed
after June 30, 2001.
Under SFAS 142, goodwill and indefinite lived intangible assets are no longer
amortized but are reviewed annually, or more frequently if impairment indicators
arise, for impairment. Separable intangible assets that have finite lives will
continue to be amortized over their useful lives, with no maximum life. In
addition, SFAS 142 changes the test for goodwill impairment. The new impairment
test is a two-step process. The first step is a comparison of the fair value of
the reporting units to its carrying amount, including goodwill. If this step
indicates impairment, then the loss is measured as the excess of the recorded
value over its implied fair value.
The Company will apply these new rules for accounting for goodwill and
intangibles beginning in the first quarter of 2002. Based upon current
amortization, application of the nonamortization provisions is expected to
result in an increase in net income of $553,000 per year. The Company has yet to
perform the annual impairment test and has not yet determined the impact on the
overall financial condition of the Company that may result. At December 31,
2001, the Company had goodwill and finite-lived intangible assets of $5,131,000
and $1,324,000, respectively.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" (SFAS 143), effective for
fiscal years beginning after June 15, 2002. SFAS 143 provides accounting
requirements for retirement obligations associated with tangible long-lived
assets. The obligations affected are those for which there is a legal obligation
to settle as a result of existing or enacted law. The Company does not believe
this standard will have an impact on its consolidated financial statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144), effective for fiscal years beginning after December 15, 2001. This
statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121), and
provides a single accounting model for long-lived assets to be disposed of. The
Company has not yet made a determination of the impact of this standard on its
consolidated financial statements.
NOTE 2.
ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2001 and 2000 are summarized as follows:
In thousands 2001 2000
- --------------------------------------------------------------------------------
Trade $53,542 $58,036
Allowance for doubtful accounts (812) (1,564)
Other 334 1,134
- --------------------------------------------------------------------------------
$53,064 $57,606
================================================================================
The decline in current year reserves is the result of the write-off of fully
reserved accounts. Bad debt (income) expense was $(20,000), $108,000, and
$180,000 in 2001, 2000, and 1999, respectively.
The Company's customers are principally in the Rail, Construction and Tubular
segments of the economy. As of December 31, 2001 and 2000, trade receivables,
net of allowance for doubtful accounts, from customers in these markets were as
follows:
In thousands 2001 2000
- --------------------------------------------------------------------------------
Rail $28,158 $29,752
Construction 22,732 23,722
Tubular 1,840 2,998
- --------------------------------------------------------------------------------
$52,730 $56,472
================================================================================
Credit is extended on an evaluation of the customer's financial condition and
generally collateral is not required. Accounts receivable reserves are based
upon an aging of accounts plus identified, specific receivables.
NOTE 3.
INVENTORIES
Inventories at December 31, 2001 and 2000 are summarized as follows:
In thousands 2001 2000
- --------------------------------------------------------------------------------
Finished goods $34,070 $41,618
Work-in-process 5,551 13,519
Raw materials 5,756 6,964
- --------------------------------------------------------------------------------
Total inventories at current costs 45,377 62,101
================================================================================
Less:
Current cost over LIFO stated values (1,333) (1,690)
Inventory valuation reserve (600) (600)
- --------------------------------------------------------------------------------
$43,444 $59,811
================================================================================
At December 31, 2001 and 2000, the LIFO carrying value of inventories for book
purposes exceeded the LIFO value for tax purposes by approximately $5,034,000
and $4,407,000, respectively. During 2001, inventory quantities were reduced
resulting in a liquidation of certain LIFO inventory layers carried at costs
which were lower than the costs of current purchases. The effect of these
reductions in 2001 was to decrease cost of goods sold by $307,000. During 2000
and 1999, liquidation of LIFO layers carried at costs that were higher than
current purchases resulted in an increase to cost of goods sold of $18,000 and
$531,000, respectively.
NOTE 4.
PROPERTY HELD FOR RESALE
Property held for resale at December 31, 2001 and 2000 consists of the
following:
In thousands 2001 2000
- --------------------------------------------------------------------------------
Location:
Birmingham, AL $ 1,333 $ 1,333
Pomeroy, OH - 653
St. Marys, WV - 436
- --------------------------------------------------------------------------------
Property held for resale 1,333 2,422
- --------------------------------------------------------------------------------
Less current portion 1,333 1,333
- --------------------------------------------------------------------------------
$ - $ 1,089
================================================================================
During 2001, the Company recorded an impairment loss of $307,000 to write down
unusable assets at the Pomeroy, OH facility. The remaining assets were
transferred for use at the Niles, OH trackwork production facility.
The St. Marys, WV location was reclassified to property, plant and equipment in
2001, as management continues to explore the divestiture of these assets.
Operations at the Newport, KY pipe coating facility were suspended in 1998 in
response to unfavorable market conditions. In 1999, the Company recorded an
impairment loss to reduce these assets to their anticipated market value. In
2000, the machinery and equipment from this operation was dismantled and
transferred to the Company's Birmingham, AL location. Management is currently
negotiating the sale of these assets and believes that the equipment will be
sold in 2002.
In 2000, the Company sold an undeveloped 62-acre portion of the 127-acre
Houston, TX property and recorded an approximate pretax gain of $800,000.
NOTE 5.
DISCONTINUED OPERATIONS
In the fourth quarter of 1999, the Company made the decision to discontinue the
operations of the Monitor Group, a developer of portable mass spectrometers. In
September 2000, the Company sold the assets of the Monitor Group for $1,500,000
cash. The disposition of the Monitor Group represented the disposal of a
business segment under Accounting Principles Board "APB" Opinion No. 30.
Accordingly, results of the operation were classified as discontinued.
Net sales and income (loss) from the discontinued operation were as follows:
In thousands 2000 1999
- --------------------------------------------------------------------------------
Net sales $ 1 $ 73
- --------------------------------------------------------------------------------
Pretax operating loss $ (882) $(1,347)
Pretax provision for the
disposal of assets - (1,984)
Pretax gain on disposal 1,500
Income tax (expense) benefit (247) 1,216
- --------------------------------------------------------------------------------
Income (loss) from
discontinued operations $ 371 $(2,115)
================================================================================
In 1999, the provision for the disposal of assets included a complete write-off
of all assets of the Monitor Group. The write-off consisted of the following
components:
In thousands
- --------------------------------------------------------------------------------
Intangibles $ 1,764
Inventory 209
Equipment 11
- --------------------------------------------------------------------------------
Total assets $ 1,984
================================================================================
NOTE 6.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 2001 and 2000 consists of the
following:
In thousands 2001 2000
- --------------------------------------------------------------------------------
Land $ 6,352 $ 6,312
Improvements to land and leaseholds 6,469 6,019
Buildings 6,104 4,825
Machinery and equipment, including
equipment under capitalized leases 44,823 41,008
Construction in progress 717 335
- --------------------------------------------------------------------------------
64,465 58,499
- --------------------------------------------------------------------------------
Less accumulated depreciation and
amortization, including accumulated
amortization of capitalized leases 30,514 25,476
- --------------------------------------------------------------------------------
$ 33,951 $ 33,023
================================================================================
NOTE 7.
OTHER ASSETS AND INVESTMENTS
The Company holds investments in the stock of the Dakota, Minnesota & Eastern
Railroad Corporation (DM&E), which is recorded at its historical cost of
$8,493,000 and $7,693,000 at December 31, 2001 and 2000, respectively. This
investment is comprised of $193,000 of DM&E Common stock, $1,500,000 of DM&E
Series B Preferred Stock and common stock warrants, $6,000,000 in DM&E Series C
Preferred Stock and common stock warrants, and $800,000 in DM&E Series C1
Preferred Stock and common stock warrants. The Company accrued dividend income
on the Series B and C Preferred Stock of $881,000 and $813,000 in 2001 and 2000,
respectively. The Company had a receivable for accrued dividend income on the
Series B and C Preferred Stock of $2,611,000 and $1,730,000 in 2001 and 2000,
respectively. Although the market value of the investments in DM&E stock are not
readily determinable, management believes the fair value of this investment
exceeds its carrying amount.
In August 2000, the Company contributed a note, having a principal and interest
value of approximately $2,700,000, to a limited liability company created by the
Company and its trackwork supplier in exchange for a 30% ownership position. The
Company accounts for this investment in accordance with the provisions of APB
18, "The Equity Method of Accounting for Investments in Common Stock" (APB 18).
In conjunction with the contribution the Company recorded goodwill of
approximately $1,700,000, which was being amortized on a straight-line basis
over fifteen years. Goodwill related to this equity method investment will no
longer be amortized upon the Company's adoption of SFAS 142. Equity investments
will continue to be tested for impairment according to the provisions of APB 18.
The Company did not record any equity earnings from this investment during the
years ended December 31, 2001 and 2000, since its proportionate share of the
unaudited financial results for this investment were immaterial.
NOTE 8.
BORROWINGS
On December 31, 2001, the $64,025,000 revolving credit agreement was reduced to
$63,500,000, in accordance with the original terms and conditions of the
revolving credit agreement. 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 0.25%, the CD rate
plus 0.575% to 1.8%, and the LIBOR rate plus 0.575% to 1.8%. Borrowings under
the agreement, which expire July 1, 2003, are secured by eligible accounts
receivable, inventory, and the pledge of the Company-held DM&E 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 also restricts
investments, indebtedness, and the sale of certain assets. As of December 31,
2001, the Company was in compliance with all the agreement's covenants.
At December 31, 2001, 2000 and 1999, the weighted average interest rate on
short-term borrowings was 5.41%, 8.12% and 6.78%, respectively. At December 31,
2001 and 2000, the Company had borrowed $35,000,000 and $46,500,000,
respectively under the agreement of which $30,000,000 and $40,000,000,
respectively, was classified as long-term (see Note 9). Under the agreement, and
inclusive of collateral limitations, the Company had approximately $14,584,000
in unused borrowing commitment at December 31, 2001.
NOTE 9.
LONG-TERM DEBT AND RELATED MATTERS
Long-term debt at December 31, 2001 and 2000 consists of the following:
In thousands 2001 2000
- --------------------------------------------------------------------------------
Revolving Credit Agreement with
weighted average interest rate of
5.41% at December 31, 2001 and
8.12% at December 31, 2000,
expiring July 1, 2003 $30,000 $40,000
- --------------------------------------------------------------------------------
Lease obligations payable in
installments through 2006 with a
weighted average interest rate of
8.30% at December 31, 2001 and
8.24% at December 31, 2000 1,522 2,365
- --------------------------------------------------------------------------------
Massachusetts Industrial Revenue
Bond with an average interest
rate of 2.89% at December 31,
2001 and 4.75% at December 31,
2000, payable March 1, 2013 2,045 2,045
- --------------------------------------------------------------------------------
33,567 44,410
Less current maturities 809 926
- --------------------------------------------------------------------------------
$32,758 $43,484
================================================================================
The $30,000,000 revolving credit borrowings included in long-term debt were
obtained under the revolving loan agreement discussed in Note 8 and are subject
to the same terms and conditions. This portion of the borrowings is classified
as long-term because the Company does not anticipate reducing the borrowings
below $30,000,000 during 2002.
The Massachusetts Industrial Revenue Bond is secured by a $2,085,000 standby
letter of credit.
The Company uses derivative financial instruments to manage exposure on
variable-rate debt, primarily by using interest rate collars and variable
interest rate swaps. The Company has a LIBOR-based interest rate collar
agreement, which 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 note to a one-year, fixed-rate instrument with
interest payable at an annual rate of 5.49%. The fair value of the collar at
December 31, 2001, which is designated as a cash flow hedge instrument, is a
$526,000 liability and is classified within other long-term liabilities on the
Consolidated Balance Sheets. The Company also has 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 counterparty to the
collar agreement has the option, on April 18, 2004, to convert the $10,000,000
note to a two-year fixed-rate instrument with interest payable at an annual rate
of 5.48%. The fair value of the collar agreement, which is designated as a cash
flow hedge instrument, is a $375,000 liability and is classified within other
long-term liabilities on the Consolidated Balance Sheets. The Company also has
an interest rate swap agreement, which expires in December 2004, has a notional
value of $3,130,000 at December 31, 2001, and is designed to fix the total
interest rate at 7.42%. The Company is obligated to pay additional interest on
the swap if LIBOR exceeds 7.249%. The fair value of the swap at December 31,
2001 is a $178,000 liability and is classified within other long-term
liabilities on the Consolidated Balance Sheets. At the current fair value based
on prevailing interest rates as of December 31, 2001, the $637,000 of other
comprehensive loss related to these derivatives, which is net of tax, will be
reclassified into earnings as the underlying hedged items affect earnings, over
the term of the agreements.
The amount of other comprehensive loss that is expected to be reclassified into
earnings over the next twelve months, based on prevailing interest rates as of
December 31, 2001, is $494,000, net of related tax effects. To the extent that a
change in an 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. For the year ended December 31, 2001, hedge
ineffectiveness was not material.
The maturities of long-term debt for each of the succeeding five years
subsequent to December 31, 2001 are as follows: 2002 - $809,000; 2003 -
$30,538,000; 2004 - $166,000; 2005 - $5,000; 2006 and after - $2,049,000.
NOTE 10.
STOCKHOLDERS' EQUITY
At December 31, 2001 and 2000, the Company had authorized shares of 20,000,000
in Common stock and 5,000,000 in Preferred stock. No Preferred stock has been
issued. The Common stock has a par value of $.01 per share. No par value has
been assigned to the Preferred stock.
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. The timing and extent of
the purchases will depend on market conditions. As of December 31, 2001, the
Company had repurchased 973,398 shares at a total cost of approximately
$5,016,800.
No cash dividends on Common stock were paid in 2001, 2000, or 1999.
NOTE 11.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss), net of tax, for
the years ended December 31, 2001 and 2000, are as follows:
In thousands 2001 2000
- --------------------------------------------------------------------------------
Cumulative transition adjustment of a
change in accounting principle $ (48) $ -
Unrealized derivative losses on cash
flow hedges (589) -
Foreign currency translation adjustment (39) (15)
Minimum pension liability adjustment (220) (20)
- --------------------------------------------------------------------------------
$(896) $ (35)
================================================================================
NOTE 12.
STOCK OPTIONS
The Company has two stock option plans currently in effect under which future
grants may be issued: The 1985 Long-Term Incentive Plan (1985 Plan) and the 1998
Long-Term Incentive Plan (1998 Plan).
The 1985 Plan, as amended and restated in March 1994, provides for the award of
options to key employees and directors to purchase up to 1,500,000 shares of
Common stock at no less than 100% of fair market value on the date of the grant.
The 1998 Plan as amended and restated in May 2001, provides for the award of
options to key employees and directors to purchase up to 900,000 shares of
Common stock at no less than 100% of fair market value on the date of the grant.
Both Plans provide for the granting of "nonqualified options" and "incentive
stock options" with a duration of not more than ten years from the date of
grant. The Plans also provide that, unless otherwise set forth in the option
agreement, options are exercisable in installments of up to 25% annually
beginning one year from date of grant. Stock to be offered under the Plans may
be authorized from unissued Common stock or previously issued shares which have
been reacquired by the Company and held as Treasury shares. At December 31,
2001, 2000 and 1999, Common stock options outstanding under the Plans had option
prices ranging from $2.63 to $6.00, with a weighted average price of $4.05,
$4.26 and $4.24 per share, respectively.
The weighted average remaining contractual life of the stock options outstanding
for the three years ended December 31, 2001 are: 2001 - 6.7 years; 2000 - 7.1
years; and 1999 - 6.3 years.
The Option Committee of the Board of Directors which administers the Plans may,
at its discretion, grant stock appreciation rights at any time prior to six
months before an option's expiration date. Upon exercise of such rights, the
participant surrenders the exercisable portion of the option in exchange for
payment (in cash and/or Common stock valued at its fair market value) of an
amount not greater than the spread, if any, by which the average of the high and
low sales prices quoted in the Over-the-Counter Exchange on the trading day
immediately preceding the date of exercise of the stock appreciation right
exceeds the option price. No stock appreciation rights were issued or
outstanding during 2001, 2000 or 1999.
No options were exercised during 2001. Options exercised during 2000 and 1999
totaled 35,500 and 39,000 shares, respectively. The weighted average exercise
price per share of the options in 2000 and 1999 was $3.32 and $3.35,
respectively.
Certain information for the three years ended December 31, 2001 relative to
employee stock options is summarized as follows:
2001 2000 1999
- --------------------------------------------------------------------------------
Number of shares under Incentive Plan:
Outstanding at beginning of year 1,187,500 950,500 967,500
Granted 356,000 462,500 135,000
Canceled (140,750) (190,000) (113,000)
Exercised - (35,500) (39,000)
- -----------------------------------