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
For the Fiscal Year Ended December 31, 2002
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
The aggregate market value on March 14, 2003 of the voting stock held by
nonaffiliates of the Company was $36,793,031. 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 14, 2003
Common Stock, Par Value $.01 9,531,010 Shares
Documents Incorporated by Reference:
Portions of the Proxy Statement prepared for the 2003 annual meeting of
stockholders are incorporated by reference in Items 10, 11, 12 and 13 of Part
III.
2
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 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 19 to the financial statements
included in the Company's Annual Report to Stockholders for 2002. 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
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Rail Products 50% 51% 52%
Construction Products 45% 41% 40%
Tubular Products 5% 8% 8%
- --------------------------------------------------------------------------------
100% 100% 100%
================================================================================
3
RAIL PRODUCTS
L. B. Foster Company's rail products include heavy and light rail, relay rail,
concrete ties, insulated rail joints, rail accessories and transit products. 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, and
produces trackwork for industrial and export markets.
The Company's Rail Technologies subsidiary developed rail signaling and
communication devices for North American railroads. On December 31, 2002, this
business was reclassified as a discontinued operation and was sold in February
2003.
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.
4
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 36 salespeople. The Company maintains 16 sales offices
and 14 plants or warehouses nationwide. During 2002, 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 18 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.
5
BACKLOG
The dollar amount of firm, unfilled customer orders at December 31, 2002 and
2001 by segment follows:
In thousands December 31, 2002 December 31, 2001
- --------------------------------------------------------------------------------
Rail Products $ 45,371 $ 64,641
Construction Products 59,774 59,808
Tubular Products 3,995 1,307
- --------------------------------------------------------------------------------
$109,140 $ 125,756
================================================================================
The reduction in Rail segment backlog reflects the weakness in the current rail
market as well as the absence of firm renewal commitments on contracts under
negotiation.
Approximately 87% of the December 31, 2002 backlog is expected to ship in 2003.
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 712 employees, of whom 426 are hourly production workers and 286
are salaried employees. Approximately 208 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.
6
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 facility. 32 Tubular 2007
Doraville, Georgia Transit products 28 Rail Owned
facility.
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.
Georgetown, Bridge component 11 Construction Owned
Massachusetts fabricating plant.
Spokane, CXT concrete tie 21 Rail 2003
Washington and crossings
plant. Yard
storage.
Spokane, Precast Plant. 5 Construction 2007
Washington Yard Storage.
Grand Island, CXT concrete tie 9 Rail 2003
Nebraska plant.
Hillsboro, Precast concrete 9 Construction 2012
Texas facility.
Petersburg, Virginia Piling storage facility. 48 Construction Owned
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 expects to maintain its concrete tie facilities in Spokane, WA and
Grand Island, NE.
7
ITEM 3. LEGAL PROCEEDINGS
The Company was convicted in December 2000, 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 762 common shareholders of record on January 31, 2003. 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:
2002 2001
- --------------------------------------------------------------------------------
Quarter High Low High Low
- --------------------------------------------------------------------------------
First $6.07 $4.62 $3.65 $2.63
- --------------------------------------------------------------------------------
Second 6.05 5.03 4.30 3.40
- --------------------------------------------------------------------------------
Third 5.83 3.86 4.45 3.47
- --------------------------------------------------------------------------------
Fourth 4.64 3.75 5.00 4.10
================================================================================
DIVIDENDS
No cash dividends were paid on the Company's Common stock during 2002 and 2001.
================================================================================
The following table sets forth information as of December 31, 2002 with respect
to compensation plans under which equity securities of the Company are
authorized for issuance.
(I) (II) (III)
- ----------------------------------------------------------------------------------------------------------------------------------
Number of Number of
securities to be securities
issued upon Weighted- remaining
exercise of average exercise available for
outstanding price of future issuance under
options, outstanding plans (excluding
warrants options, warrants securities listed in
Plan Category and rights and rights column (I)
- ----------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by shareholders 1,535,500 $4.27 182,550
Equity compensation plans not approved by shareholders - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total 1,535,500 $4.27 182,550
==================================================================================================================================
8
The Company has awarded shares of its common stock to its outside directors on a
biannual basis since June, 2000 under an arrangement not approved by the
Company's shareholders. A total of 22,984 shares of common stock have been so
awarded. The Company does not contemplate issuing additional shares under this
program and has submitted for shareholder approval at the Company's 2003 Annual
Shareholders' Meeting a new plan under which outside directors will receive
2,500 shares of the Company's common stock at each annual shareholder meeting at
which such outside director is elected or re-elected, commencing with the
Company's 2003 Annual Shareholders' Meeting.
9
ITEM 6. SELECTED FINANCIAL DATA
(All amounts are in thousands except per share data)
Year Ended December 31,
Income Statement Data 2002 (1) 2001 (2)(3) 2000 (2)(4) 1999 (2) 1998 (2)(5)
- --------------------------------------------------------------------------------------------------------------------------
Net sales $ 257,950 $ 282,119 $ 264,614 $ 241,902 $ 219,412
- --------------------------------------------------------------------------------------------------------------------------
Operating profit 2,992 5,098 7,960 10,078 8,758
- --------------------------------------------------------------------------------------------------------------------------
(Loss) income from continuing operations (5,029) 1,303 3,743 5,091 5,230
Loss from discontinued operations,
net of tax (2,005) (666) (253) (2,588) (853)
Cumulative effect of change in accounting
principle (4,390) - - - -
- --------------------------------------------------------------------------------------------------------------------------
Net (loss) income (11,424) 637 3,490 2,503 4,377
==========================================================================================================================
Basic (loss) earnings per common share:
Continuing operations (0.53) 0.14 0.39 0.53 0.53
Discontinued operations (0.21) (0.07) (0.03) (0.27) (0.09)
Cumulative effect of change in
accounting principle (0.46) - - - -
- --------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per common share (1.20) 0.07 0.37 0.26 0.44
==========================================================================================================================
Diluted (loss) earnings per common share:
Continuing operations (0.53) 0.14 0.39 0.51 0.52
Discontinued operations (0.21) (0.07) (0.03) (0.26) (0.09)
Cumulative effect of change in
accounting principle (0.46) - - - -
- --------------------------------------------------------------------------------------------------------------------------
Diluted (loss) earnings per common share (1.20) 0.07 0.37 0.25 0.43
==========================================================================================================================
December 31,
Balance Sheet Data 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 133,984 $ 160,042 $ 177,147 $ 164,731 $ 119,434
- --------------------------------------------------------------------------------------------------------------------
Working capital 46,694 62,011 71,477 67,737 54,604
- --------------------------------------------------------------------------------------------------------------------
Long-term debt 26,991 32,758 43,484 44,136 13,829
- --------------------------------------------------------------------------------------------------------------------
Stockholders' equity 66,013 77,145 77,359 74,650 73,494
====================================================================================================================
(1) 2002 includes the following non-cash charges: a $5,050,000 write-down of
advances made to the Company's principal specialty trackwork supplier which are
not expected to be recovered; a $1,893,000 charge related to an "other than
temporary" impairment of the Company's equity investment in that trackwork
supplier; a $765,000 charge for depreciation expense from assets that had been
classified as held for resale, but the sale did not materialize; a $660,000
impairment charge to adjust assets related to the Company's rail signaling
business, classified as a discontinued operation, to their expected fair value;
a $4,390,000, net of tax, charge from the cumulative effect of a change in
accounting principle as a result of the adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"; and a
$2,232,000 charge related to mark-to-market accounting for derivative
instruments.
(2) 2001, 2000, 1999 and 1998 were restated to reflect the classification of the
Company's rail signaling business as a discontinued operation.
(3) 2001 includes pretax charges of approximately $1,879,000 related to the
Company's plan to consolidate sales and administrative functions and plant
operations.
(4) 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.
(5) 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.
10
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 2002 2001 (1) 2002 2001 (1) 2000 (1)
- -------------------------------------------------------------------------------------------------------------------------
Net Sales:
Rail Products $ 30,717 $ 35,360 $ 128,249 $ 145,054 $ 138,635
Construction Products 24,288 29,527 116,748 115,600 106,280
Tubular Products 2,001 4,668 12,953 21,055 19,511
Other - 409 - 410 188
- -------------------------------------------------------------------------------------------------------------------------
Total Net Sales $ 57,006 $ 69,964 $ 257,950 $ 282,119 $ 264,614
=========================================================================================================================
Gross Profit:
Rail Products $ 2,887 $ 2,977 $ 12,643 $ 12,728 $ 16,762
Construction Products 3,382 3,978 16,296 16,167 18,157
Tubular Products 256 1,028 2,389 4,968 3,411
Other (897) 319 (1,861) (367) (496)
- -------------------------------------------------------------------------------------------------------------------------
Total Gross Profit 5,628 8,302 29,467 33,496 37,834
- -------------------------------------------------------------------------------------------------------------------------
Expenses:
Selling and Administrative Expenses 6,852 6,507 26,475 28,398 29,874
Interest Expense 616 768 2,592 3,564 4,227
Other Expense (Income):
Impairment of Equity Investment
and Advances 5,150 - 6,943 - -
Other (434) (74) 1,097 (694) (2,506)
- -------------------------------------------------------------------------------------------------------------------------
Total Expenses 12,184 7,201 37,107 31,268 31,595
- -------------------------------------------------------------------------------------------------------------------------
(Loss) Income from Continuing Operations,
Before Income Taxes (6,556) 1,101 (7,640) 2,228 6,239
Income Tax (Benefit) Expense (2,881) 462 (2,611) 925 2,496
- -------------------------------------------------------------------------------------------------------------------------
(Loss) Income from Continuing Operations (3,675) 639 (5,029) 1,303 3,743
Loss from Discontinued Operations,
Net of Tax (1,054) (158) (2,005) (666) (253)
Cumulative Effect of Change in
Accounting Principle, Net of Tax - - (4,390) - -
- -------------------------------------------------------------------------------------------------------------------------
Net (Loss) Income $ (4,729) $ 481 $ (11,424) $ 637 $ 3,490
=========================================================================================================================
Gross Profit %:
Rail Products 9.4% 8.4% 9.9% 8.8% 12.1%
Construction Products 13.9% 13.5% 14.0% 14.0% 17.1%
Tubular Products 12.8% 22.0% 18.4% 23.6% 17.5%
Total Gross Profit % 9.9% 11.9% 11.4% 11.9% 14.3%
=========================================================================================================================
(1) Foster Technologies, the Company's rail signaling and communication
business, was classified as a discontinued operation on December 31, 2002. Prior
period results have been adjusted to reflect this classification.
11
Fourth Quarter of 2002 vs. Fourth Quarter of 2001
- -----------------------------------------------------
The Company had a loss from continuing operations of $3.7 million, or $0.39 per
share in the fourth quarter of 2002 on net sales of $57.0 million. Income from
continuing operations for the fourth quarter of 2001 was $0.6 million, or $0.07
per share on net sales of $70.0 million. A fourth quarter loss from the
discontinued operations of Foster Technologies was $1.1 million, or $0.11 per
share, compared to a loss of $0.2 million, or $0.02 per share in the prior year
fourth quarter. See Note 5 "Discontinued Operations" for more details. The
fourth quarter 2002 net loss of $4.7 million includes one-time, non-cash charges
totaling $6.6 million, or $4.2 million, net of tax.
The non-cash charges recorded in the fourth quarter of 2002 include a $5.1
million ($3.1 million, net of tax) charge related to the impairment of the
Company's investment in and advances to its principal specialty trackwork
supplier which are not expected to be recovered. The expected sale of the
Company's Newport, KY pipe coating assets did not materialize, resulting in a
non-cash charge of $0.8 million ($0.4 million, net of tax). Also in the fourth
quarter of 2002, the Company started negotiations and committed to a plan to
sell the assets related to its rail signaling and communication device business
and recorded a $0.7 million non-cash impairment charge to adjust these assets to
their expected realizable value. The operations of this business qualified as a
"component of an entity" and thus, have been classified as a discontinued
operation. See "Other Matters" for more details on these fourth quarter 2002
non-cash charges.
Results for the fourth quarter of 2001 included pretax nonrecurring charges of
$0.4 million related to the Company's plan to improve its financial performance
by consolidating sales and administrative functions and plant operations.
Sales for the fourth quarter of 2002 declined 18.5% to $57.0 million from the
same period a year ago. Rail products' net sales declined 13.1% to $30.7 million
compared to the 2001 fourth quarter. This decline is related to a general
decline in the market due to spending cutbacks for rail projects. Construction
products' net sales declined 17.7% to $24.3 million primarily due to a downturn
in sales of H-bearing pile and pipe piling as a result of high raw material
prices for pipe and increased competition for beams. Tubular products' net sales
declined 57.1% to $2.0 million as a result of poor market conditions for pipe
coating and threaded products.
The gross margin percentage for the Company declined to 9.9% in the fourth
quarter of 2002 from 11.9% in the same period of 2001. Gross margin for the
fourth quarter of 2002 includes a nonrecurring charge of $0.8 million, which
represents depreciation expense for the assets related to the Newport, KY
pipe-coating facility that had been suspended while these assets were classified
as "property held for resale". Gross margin for the fourth quarter of 2001
includes nonrecurring charges totaling $0.1 million related to the closing of
the St. Marys, WV mine tie facility. Excluding these nonrecurring charges, the
gross margin percentage for the fourth quarter of 2002 declined to 11.2% from
12.0%. The gross margin percentage for the Rail products' segment improved to
9.4% from 8.4% due to the Company's efforts to scale back certain unprofitable
operations and improve efficiencies at already profitable operations. The gross
margin percentage for the Construction segment improved slightly to 13.9% from
13.5% primarily due to the Company exiting its unprofitable sign structure
business. Tubular products' gross margin percentage declined to 12.8% from 22.0%
due to low volume inefficiencies at the plant facilities caused by the poor
market conditions mentioned above.
Excluding the prior year's fourth quarter amortization of goodwill of $0.2
million, as a result of the adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), and other
non-recurring pretax charges of $0.3 million, selling and administrative expense
increased 12.7%, or $0.8 million over the same period a year ago. This change
was due in part to bad debt recoveries experienced in the fourth quarter of
2001. Interest expense decreased by 19.8% primarily as a result of more
efficient asset utilization, which enabled the Company to reduce its corporate
borrowings by $10.8 million, or 27.9% from the same period in 2001. Other
expense (income) in the 2002 fourth quarter includes the $5.1 million charge
related to the impairment of the Company's investment in and advances to its
principal specialty trackwork supplier, mentioned above, and $0.2 million
accrued dividend income on DM&E Preferred stock. The income tax provision
related to continuing operations for the fourth quarter of 2002 was 43.9%. The
income tax provision related to continuing operations for the fourth quarter of
2001 was recorded at 42.0%. See Note 14 "Income Taxes" for more information.
The Year 2002 Compared to the Year 2001
- ---------------------------------------
For the year ended December 31, 2002, the Company recorded a loss from
continuing operations of $5.0 million, or $0.53 per share on net sales of $258.0
million. This compares to income from continuing operations of $1.3 million, or
$0.14 per share on net sales of $282.1 million for 2001. In 2002, a loss from
the discontinued operations of Foster Technologies was recorded at $2.0 million,
or $0.21 per share, compared to a loss of $0.7 million, or $0.07 per share in
the prior year. See Note 5 "Discontinued Operations" for more details.
12
In addition to the previously mentioned, fourth quarter 2002 non-cash charges,
the twelve month results include a $4.4 million, net of tax, non-cash charge
from the cumulative effect of a change in accounting principle. Other non-cash
charges recorded during the first nine months of 2002 include $2.2 million ($1.3
million net of tax) related to mark-to-market accounting for derivative
instruments as a result of the Company entering into a new credit agreement, and
$1.8 million related to an "other than temporary" impairment of the Company's
equity investment in its principal specialty trackwork supplier.
Results for 2001 included the following nonrecurring pretax charges related to
the Company's plan to improve its financial performance: employee severance and
facility exit costs of $0.9 million, asset impairments of $0.6 million, and
other related costs of $0.4 million. Substantially all components of the
restructuring charges were paid in the period incurred.
Rail products' 2002 net sales declined 11.6% to $128.2 million from the prior
year. This decline in sales can be primarily attributed to a continued depressed
market for rail distribution products and rail projects. In addition,
management's decision to sell off large quantities of used rail inventory in
2001 contributed to an increase in 2001 rail sales. Despite the unavailability
of steel sheet piling from the Company's supplier for most of 2002, Construction
products' net sales increased 1.0% to $116.7 million from $115.6 million in
2001. The increase resulted from a strong year-end 2001 backlog of fabricated
bridge products and the additional backlog received with the Greulich Bridge
Products acquisition. The Company expanded its Bedford, PA fabricated bridge
product facility to accommodate the increase in backlog. The start-up of precast
concrete building production at the Company's new Hillsboro, TX facility also
contributed to an increase in 2002 sales. Tubular products' net sales declined
38.5% due primarily to lower demand for pipe coating and threaded products.
Spending for new pipeline capital projects has decreased significantly due to
uncertainties in the energy markets.
Gross margin for the Company was 11.4% in 2002 compared to 11.9% in 2001.
Excluding the current and prior years' non-recurring pretax charges of $0.8
million and $1.0 million, respectively, gross margin fell to 11.7% in 2002 from
12.2% in 2001. Rail products' gross margin improved to 9.9% from 8.8% in the
prior year. Excluding non-recurring pretax charges in 2001, rail products' gross
margin was 9.3%. The prior year was negatively impacted by costs associated with
the shutdown of the Company's trackwork facility in Pomeroy, OH and the
reduction of used rail inventory through low margin sales. Construction
products' gross margin did not change from the prior year. Tubular products'
gross margin declined to 18.4% from 23.6% due to low volume inefficiencies at
plant facilities caused by poor market conditions.
Excluding the prior year's amortization of goodwill of $0.6 million and
non-recurring pretax charges of $0.9 million, selling and administrative expense
decreased by $0.5 million, or 1.7%. Other expense (income) includes $1.1 million
accrued dividend income on DM&E Preferred stock and the previously mentioned
non-cash charges of $2.2 million related to mark-to-market accounting for
derivative instruments, and $6.9 million related to the impairment of the
Company's investment in and advances to its principal specialty trackwork
supplier. Interest expense declined 27.3% from the prior year as a result of the
previously mentioned reduction in corporate borrowings. The income tax provision
for 2002, from continuing operations, was recorded at (34.2%) compared to 41.5%
in the prior year. See Note 14 "Income Taxes" for more information.
The Year 2001 Compared to the Year 2000
- ---------------------------------------
Income from continuing operations in 2001 was $1.3 million or $0.14 per share on
net sales of $282.1 million. This compares to income from continuing operations
in 2000 of $3.7 million, or $0.39 per share, on net sales of $264.6 million. The
loss from discontinued operations in 2000 included operating losses from the
Monitor Group of $0.5 million and Foster Technologies of $0.6 million, and a
$0.9 million gain on the sale of the Monitor Group.
Rail products' 2001 net sales were $145.1 million, an increase of 4.6% over the
prior year, due primarily to increases in shipments of new rail products and
concrete 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 was 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 8.8% from 12.1%, a 3.3 percentage
point reduction from the previous year. The decline was primarily due to the
competitive environment in the rail supply industry. Costs associated with the
closing of the Company's Pomeroy, OH trackwork facility also reduced Rail
products' margin. Construction products' 2001 gross profit declined to $16.2
million, a 3.1 percentage point reduction from the prior year. Sales of low
margin piling products, and costs associated with the closing of the Company's
Ephrata, PA sign structure plant and the start-
13
up of the Company's Hillsboro, TX precast concrete buildings facility all
contributed to the reduction in Construction products' margin. Tubular products'
margin improved 6.1 percentage points in 2001, due primarily to greater
efficiencies at the Birmingham, AL pipe-coating facility.
The 2001 results included the following pretax charges associated with the
Company's previously-mentioned plan to improve its financial performance:
employee severance and facility exit costs of $0.9 million, asset impairments of
$0.6 million, and other related costs of $0.4 million. Results for 2000 also
included pretax charges as follows: employee severance and facility exit costs
of $1.0 million and asset impairments and other related costs of $0.3 million.
This plan, along with reduced travel and entertainment expenditures, resulted in
a 4.9% decline in selling and administrative expense during 2001. Other income
in 2001 consisted primarily of accrued dividend income on DM&E Preferred stock.
The income tax provision for continuing operations in 2001 was recorded at 41.5%
compared to 40.0% in 2000. See Note 14 "Income Taxes" for more information.
Liquidity and Capital Resources
- -------------------------------
The Company generates operational cash flow from the sale of inventory and the
collection of accounts receivable. The Company's 2002 average turnover rate for
accounts receivable improved compared to 2001, primarily due to higher turnover
for receivables related to the Rail segment. The 2002 average turnover rate for
inventory also improved compared to 2001. Again, the Rail segment showed the
most improvement over the prior year. Working capital at December 31, 2002 was
$46.7 million compared to $62.0 million at the end of 2001. Management's
emphasis on improving working capital utilization was a primary factor in a
$13.7 million reduction in accounts receivable from December 31, 2001 and a
$10.4 million reduction in inventory for the same period.
The Company's Board of Directors has authorized the purchase of up to 1,500,000
shares of its Common stock at prevailing market prices. No purchases were made
in 2002. During 2001, the Company purchased 25,000 shares at a cost of $75,000.
From August 1997 through December 31, 2002, the Company had repurchased 973,398
shares at a cost of approximately $5.0 million. The timing and extent of future
purchases will depend on market conditions and options available to the Company
for alternate uses of its resources.
Including the Greulich acquisition, discussed in "Other Matters", the Company
had capital expenditures of approximately $6.9 million during 2002. Capital
expenditures excluding acquisitions, in 2003, are expected to be approximately
$5.0 million, and funded by cash flow from operations and available external
financing sources.
A summary of the Company's required payments under financial instruments 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 $27,816 $ 825 $23,775 $ 378 $ 2,838
Operating lease obligations 8,728 3,119 4,029 1,543 37
OTHER FINANCIAL COMMITMENTS
Standby letters of credit 2,762 2,762 - - -
=====================================================================================================================
On September 26, 2002, the Company entered into a new credit agreement with a
syndicate of three banks led by PNC Bank, N.A. The new agreement provides for a
revolving credit facility of up to $60.0 million in borrowings to support the
Company's working capital and other liquidity requirements. The revolving credit
facility, which matures in September 2005, is secured by substantially all of
the inventory and trade receivables owned by the Company. Availability under
this agreement is limited by the amount of eligible inventory and accounts
receivable applied against certain advance rates. Proceeds from the new facility
were used to repay and retire the Company's previous credit agreement, which was
to mature in July 2003. Interest on the new credit facility is based on LIBOR
plus a spread ranging from 1.75% to 2.5%.
The agreement includes financial covenants requiring a minimum net worth and a
minimum fixed charge coverage ratio.
14
The agreement also restricts investments, indebtedness, and the sale of certain
assets. As of December 31, 2002, the Company was in compliance with all of the
agreement's covenants.
Total revolving credit agreement borrowings at December 31, 2002 were $23.0
million, a decrease of $12.0 million from the end of the prior year. At December
31, 2002, the Company had approximately $11.6 million in unused borrowing
commitment. Outstanding letters of credit at December 31, 2002 were
approximately $2.8 million. The letters of credit expire annually and are
subject to renewal. Management believes its internal and external sources of
funds are adequate to meet anticipated needs.
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
controls over 2,500 miles of track in eight states.
At December 31, 2002, the Company's investment was comprised of $0.2 million of
DM&E common stock, $1.5 million of Series B Preferred Stock and warrants, $6.0
million of Series C Preferred Stock and warrants, $0.8 million of Preferred
Series C-1 Stock and warrants, and $0.5 million of Series D Preferred Stock and
warrants.
On July 30, 2002, the DM&E announced the acquisition of a 1,400 mile regional
railroad formerly owned by the I&M Rail Link, LLC. The Company participated in
the financing of this acquisition with a $0.5 million investment in Series D
Preferred Stock and warrants. On a fully diluted basis, the Company's ownership
of the DM&E is approximately 13.6%. In addition, the Company has a receivable
for accrued dividend income on Preferred Stock of approximately $3.7 million.
In June 1997, the DM&E announced its plan to build an extension from the DM&E's
existing line into the low sulfur coal market of the Powder River Basin in
Wyoming, and to rebuild approximately 600 miles of its existing track (the
Project). The estimated cost of this project is expected to be in excess of $2.0
billion. The Project received final approval by the Surface Transportation Board
(STB) in January 2002. Litigation has been initiated appealing the STB's
approval of the Project. It is expected that the appeal will be decided during
the third quarter of 2003. In addition, the State of South Dakota has elected to
appeal a federal court decision to enjoin it from enforcing an eminent domain
statute. No time frame for a decision is yet known.
If the Project proves to be viable, management believes that the value of the
Company's investment in the DM&E could increase significantly. If the Project
does not come to fruition, management believes that the value of the Company's
investment is supported by the DM&E's existing business.
Other Matters
- -------------
Specialty trackwork sales of the Company's Rail segment depend primarily on one
supplier. In August 2000, the Company contributed a note, having a principal and
interest value of approximately $2.7 million, to a limited liability company
created by the Company and this trackwork supplier (the LLC) in exchange for a
30% ownership position. Of the $2.7 million initial investment, approximately
$1.7 million represented goodwill. At January 1, 2002, the Company's net equity
investment in the LLC, net of goodwill amortization prior to the adoption of
SFAS 142, was approximately $1.9 million. During 2002, the Company recognized an
impairment loss of the entire $1.9 million and wrote off this investment. The
loss in value of this investment was driven by the continued deterioration of
certain rail markets and was determined to be "other than temporary" based on
discounted cash flow projections. Equity earnings from this investment during
the three years ended December 31, 2002, 2001 and 2000 were immaterial.
The Company has historically advanced progress payments to its principal
trackwork supplier for the purpose of supporting working capital requirements
and funding raw material purchases and product fabrication costs for Company
projects. The timing differential created by these cash flows has resulted in a
significant asset related to these advances. At December 31, 2002 and 2001, the
Company had advanced to the LLC approximately $5.4 million and $2.6 million,
respectively. As a result of the operating and financial issues experienced by
the LLC, concerns regarding the recoverability of the advances led management to
conclude that a full reserve was necessary. A charge for this reserve was
recorded in the fourth quarter of 2002. The Company acknowledges the risk of
loss that exists relative to these advances and believes that substantial
uncertainty exists relative to the Company's ability to realize any measurable
amounts of these advances. During 2002, 2001 and 2000, the volume of business
the trackwork supplier conducted with the Company was approximately, $13.4
million, $13.6 million, and $12.8 million, respectively. The Company also has
approximately $10.0 million of contractual supply obligations with certain
customers related to specialty trackwork. If for any reason this supplier is
unable to perform, it could have a negative impact on earnings and cash flows.
15
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. The
anticipated 2002 sale of these assets did not materialize. Therefore, during the
fourth quarter of 2002, the Company removed the "held for resale" designation of
these assets, reclassified them as "in service", and immediately recorded a $0.8
million write-down to reflect depreciation not recorded while under the "held
for resale" designation. The Company's efforts to sell these assets continues.
In 1998, the Company purchased assets, primarily comprised of intellectual
property related to the business of supplying rail signaling and communication
devices, for approximately $1.7 million. To date, this operation (Foster
Technologies), headquartered in Canada, has not generated significant revenues.
During the fourth quarter of 2002, the Company began negotiations for the sale
of substantially all assets of this business. At December 31, 2002, the Company
recorded an impairment charge of approximately $0.7 million for the excess of
the book value over the expected realizable value. In February 2003, the Company
sold assets related to this business for $0.3 million.
The Company sold all of the assets related to its St. Marys, WV mine tie
operation in the fourth quarter of 2002 for $0.2 million, and recorded a nominal
gain on this sale.
On January 4, 2002, the Company acquired substantially all of the equipment,
inventory, intellectual property, and customer backlog of the Greulich Bridge
Products Division of Harsco Corporation. The purchase price of approximately
$2.2 million consisted of: equipment of $1.0 million, inventory (net of trade
payables) of $0.5 million, intangible assets of $0.5 million, and goodwill of
$0.2 million. These assets are being utilized in the Company's fabricated bridge
products operations in the Construction products segment, and the results of
operations of these assets have been included in the consolidated financial
statements since the date of the acquisition.
Management continues to evaluate the overall performance of its operations. A
decision to down-size or terminate an existing operation could have a material
adverse effect on near-term earnings but would not be expected to have a
material adverse effect on the financial condition of the Company.
Outlook
- -------
The Company is TXI Chaparral's exclusive distributor of steel sheet piling.
Steel sheet piling production commenced in 2001 at TXI Chaparral's Petersburg,
VA facility, but the quantity produced had not materially impacted results for
2002 or 2001. In December 2002, the Company announced the availability of a full
range of Z-pile sheet piling products. The Company expects the availability of
Z-piling to have a positive effect on 2003 earnings for the Construction
products segment. However, if TXI Chaparral fails to produce substantial
quantities of Z-piling products, earnings could be adversely impacted.
The Company's CXT subsidiary and Allegheny Rail Products division are dependent
on one customer, which is a Class I railroad, for a significant portion of their
business. CXT has a contract with this railroad for a minimum of 420,000
concrete ties per contract year, expiring in September of 2003. The Company is
currently negotiating a renewal of this contract with the railroad. If this
contract is not renewed, it could have a negative impact on the operating
results of the Company. In addition, a substantial portion of the Company's
operations is heavily dependent on governmental funding of infrastructure
projects. Significant changes in the level of government funding of these
projects or the failure to negotiate contract renewals 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, 2002 was approximately $109.1 million. The
following table provides the backlog by business segment:
December 31,
In thousands 2002 2001 2000
- --------------------------------------------------------------------------------
Backlog:
Rail Products $ 45,371 $ 64,641 $ 86,351
Construction Products 59,774 59,808 52,779
Tubular Products 3,995 1,307 2,219
- --------------------------------------------------------------------------------
Total Backlog $109,140 $125,756 $141,349
================================================================================
The reduction in Rail segment backlog reflects the weakness in the current rail
market as well as the absence of firm renewal commitments on contracts under
negotiation.
Critical Accounting Policies
- ----------------------------
The Company's significant accounting policies are described in Note 1 to the
consolidated financial statements included in Item 8 of this Form 10-K. The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles
16
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
circumstance. Application of these accounting principles requires management to
make estimates that affect the reported amount of assets, liabilities, revenues,
and expenses, and the related disclosure of contingent assets and liabilities.
The following critical accounting policies related to the Company's more
significant judgments and estimates used in the preparation of its consolidated
financial statements. There can be no assurance that actual results will not
differ from those estimates.
ASSET IMPAIRMENT - The Company is required to test for asset impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
might not be recoverable. The Company applies Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144) in order to determine whether or not an asset is impaired.
This Statement indicates that if the sum of the future expected cash flows
associated with an asset, undiscounted and without interest charges, is less
than the carrying value, an asset impairment must be recognized in the financial
statements. The amount of the impairment is the difference between the fair
value of the asset and the carrying value of the asset. The Company believes
that the accounting estimate related to an asset impairment is a "critical
accounting estimate" as it is highly susceptible to change from period to
period, because it requires management to make assumptions about cash flows over
future years. These assumptions impact the amount of an impairment, which would
have an impact on the income statement. Management's assumptions about future
cash flows require significant judgment because actual operating levels have
fluctuated in the past and are expected to do so in the future.
During the fourth quarter of 2002, as a result of an ongoing evaluation of
Foster Technologies, the Company's rail signaling and communication device
business, the Company determined that it would pursue a potential sale of the
business technology and long-lived assets. Utilizing a negotiated sales price as
an indicator of fair market value for these assets, the Company determined that
an impairment of $0.7 million was required and recorded this charge in the
fourth quarter of 2002.
GOODWILL - Beginning in fiscal year 2002, goodwill is required to be evaluated
annually for impairment, in accordance with Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," (SFAS 142). SFAS 142
requires a two-step process be performed to analyze whether or not goodwill has
been impaired. Step one is to test for potential impairment, which requires that
the fair value of the reporting unit be compared to its book value. If the fair
value is higher than the book value, no impairment occurs. If the fair value is
lower than the book value, step two must be performed. Step two requires
measurement of the amount of impairment loss, if any, and requires that a
hypothetical purchase price allocation be done to determine the implied fair
value of goodwill. The resulting fair value is then compared to the carrying
value of goodwill. If the implied fair value of the goodwill is lower than the
carrying value of the goodwill, an impairment must be recorded.
The Company believes that the accounting estimate related to the goodwill
impairment is a "critical accounting estimate" because the underlying
assumptions used for the discounted cash flow can change from period to period
and these changes could cause a material impact to the income statement.
Management's assumptions about discount rates, inflation rates and other
internal and external economic conditions, such as expected growth rate, require
significant judgment regarding fluctuating rates and anticipated future
revenues. Additionally, SFAS 142 requires that the goodwill be analyzed for
impairment on an annual basis using the assumptions that apply at the time the
analysis is updated.
As discussed in the notes to the consolidated financial statements, goodwill
recorded in the Company's Rail and Construction segments was analyzed for
impairment with the implementation of SFAS 142. The fair value of the goodwill
associated with these segments was estimated using discounted cash flow
methodologies and market comparable information. Based on the analysis, the
implied fair value of the goodwill for certain product groups within these
segments was less than the book value recorded for the goodwill. Therefore, the
Company recognized a pretax impairment charge of $4.9 million, representing a
complete write-off of goodwill for those product groups for which an impairment
was determined to exist. In the fourth quarter of 2002, the Company performed
the required annual impairment test of the carrying amount of goodwill for the
product groups and concluded that no further impairment was required.
Prior to the adoption of SFAS 142, the Company assessed the impairment of
goodwill whenever events or changes in circumstances indicated that the carrying
value might not be recoverable. No such events or indicators occurred, as
prescribed by previous accounting guidance, which required the Company to
perform such an assessment.
ALLOWANCE FOR BAD DEBTS - The Company's operating segments encounter risks
associated with the collection of accounts receivable. As such, the Company
records a monthly provision for accounts receivable that are considered to be
uncollectible. In order to calculate the appropriate monthly provision, the
Company reviews its accounts receivable aging and calculates an allowance
through application of historic reserve factors to overdue receivables. This
calculation is supplemented by specific account reviews performed by the
Company's credit department. As necessary, the application of the Company's
allowance rates to specific customers are reviewed and adjusted to more
accurately reflect
17
the credit risk inherent within that customer relationship. The reserve is
reviewed for reasonableness on a monthly basis. An account receivable is
written off against the allowance when management determines it is
uncollectible.
The Company believes that the accounting estimate related to the allowance for
bad debts is a "critical accounting estimate" because the underlying assumptions
used for the allowance can change from period to period and the allowance could
potentially cause a material impact to the income statement and working capital.
Specific customer circumstances and general economic conditions may vary
significantly from management's assumptions and may impact expected earnings. At
December 31, 2002, the Company maintained an allowance for bad debts of $1.1
million, and, for the year ended December 31, 2002, the Company recognized bad
debt expense of $0.3 million.
PENSION PLANS - The calculation of the Company's net periodic benefit cost
(pension expense) and benefit obligation (pension liability) associated with its
defined benefit pension plans (pension plans) requires the use of a number of
assumptions that the Company deems to be "critical accounting estimates."
Changes in these assumptions can result in different pension expense and
liability amounts, and future actual experience can differ significantly from
the assumptions. The Company believes that the two most critical assumptions are
the expected long-term rate of return on plan assets and the assumed discount
rate.
The expected long-term rate of return reflects the average rate of earnings
expected on funds invested or to be invested in the pension plans to provide for
the benefits included in the pension liability. The Company establishes the
expected long-term rate of return at the beginning of each fiscal year based
upon information available to the Company at that time, including the plan's
investment mix and the forecasted rates of return on these types of securities.
Any differences between actual experience and assumed experience are deferred as
an unrecognized actuarial gain or loss. The unrecognized actuarial gains or
losses are amortized in accordance with Statement No. 87. Although the long-term
rate is intended to be fairly consistent, the Company has reevaluated and
reduced the rate in 2002. The expected long-term rates of return determined by
the Company for 2002 and 2001 were 7.75% and 8.00%, respectively. Pension
expense increases as the expected long-term rate of return decreases. Therefore,
the decline in this assumption had the effect of increasing the Company's
pension obligation and future pension expense.
The assumed discount rate reflects the current rate at which the pension
benefits could effectively be settled. In estimating that rate, Statement No. 87
requires the Company look to rates of return on high quality, fixed income
investments. The Company discounted its future pension liabilities using rates
of 6.75% and 7.00% as of December 31, 2002 and 2001, respectively. The Company's
pension liability increases as the discount rate is reduced. Therefore, the
decline in this assumption had the effect of increasing the Company's pension
obligation and future pension expense.
DEFERRED TAX ASSETS - The recognition of deferred tax assets requires management
to make judgments regarding the future realization of these assets. As
prescribed by Statement of Financial Accounting Standards No. 109 (SFAS 109),
valuation allowances must be provided for those deferred tax assets for which it
is more likely than not (a likelihood of more than 50 percent) that some portion
or all of the deferred tax assets will not be realized. SFAS 109 requires
management to evaluate positive and negative evidence regarding the
recoverability of deferred tax assets. Determination of whether the positive
evidence outweighs the negative and quantification of the valuation allowance
requires management to make estimates and judgments of future financial results.
The Company believes that these estimates and judgments are "critical accounting
estimates." Cumulative losses in recent periods and other negative evidence
further complicate these assessments.
The Company's financial results in recent periods have generated operating loss
carryforwards, particularly with regard to the operations of the Company's
discontinued foreign operation, Foster Technologies. Management has determined
that it is more likely than not that the Company may not realize a portion of
the deferred tax assets generated by these losses. Therefore, the Company has
provided a valuation allowance for this deferred tax asset. At December 31,
2002, the Company maintained net operating loss carryforwards and a valuation
allowance of $2.7 million and $2.6 million, respectively. See Note 14 "Income
Taxes". The Company's future ability to realize the tax benefit from these net
operating loss carryforwards may affect the Company's reported income tax
expense (benefit) and net income.
New Accounting Pronouncements
- -----------------------------
In June 2001, the FASB issued Statement of 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 impact 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 31, 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. On January 1,
2002, the Company adopted SFAS 144 and the adoption did not have a material
impact on the Company's consolidated financial statements.
18
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
146), effective for exit or disposal activities initiated after December 31,
2002, with early application encouraged. This statement supercedes EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred,
rather than at the date of an entity's commitment to an exit plan. The Company
does not expect this standard to have a material effect on the Company's
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, and Interpretation of ARB No. 51", (FIN 46). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. Management is currently evaluating the effect
that the adoption of FIN 46 will have on its results of operations and financial
condition. The Company has not identified any off balance sheet arrangements for
which consolidation under FIN 46 is reasonably possible.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK.
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. Effective September 26, 2002, in conjunction with
the Company's debt refinancing, the Company discontinued cash flow hedge
accounting treatment for its interest rate collars and recorded a cumulative
charge to reflect mark-to-market accounting. The application of mark-to-market
accounting for the year ended December 31, 2002 has resulted in the recognition
of a non-cash charge of $2.2 million which is recorded in other expense (income)
on the Consolidated Statements of Operations. The Company continues to apply
cash flow hedge accounting to its other interest rate swap.
The Company recognizes all derivative instruments on the balance sheet at fair
value. Fluctuations in the fair values of derivative instruments designated as
cash flow hedges are recorded in accumulated other comprehensive income, and
reclassified into earnings as the underlying hedged items affect earnings. To
the extent that a change in interest rate derivative does not perfectly offset
the change in value of the interest rate being hedged, the ineffective portion
is recognized in earnings immediately.
The Company attempts to maintain a reasonable balance between fixed-rate and
floating-rate debt to keep financing costs as low as possible. The Company's
primary source of variable-rate debt comes from its revolving credit agreement
(See Note 8 to the consolidated financial statements). At December 31, 2002, the
Company had approximately $23.0 million of floating rate debt outstanding under
this agreement with an average interest rate of approximately 3.84%. While not
specifically correlated with the revolving credit agreement, the Company
maintains an economic hedge of this variable rate through the maintenance of two
interest rate collar agreements with a weighted average minimum annual interest
rate of 4.99% to a maximum weighted average annual interest rate of 5.42% (See
Note 9 to the consolidated financial statements). As discussed in Note 9, these
derivatives do not qualify for hedge accounting, as defined by Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). Since the interest rate on this debt floats
with the short-term market rate of interest, the Company is exposed to the risk
that these interest rates may decrease below the minimum annual interest rates
on the two interest rate collar agreements. The effect of a 1 percent decrease
in rate of interest below the 4.99% weighted average minimum annual interest
rate on $23.0 million of outstanding floating rate debt would result in
increased annual interest costs of approximately $0.2 million.
The Company is not subject to significant exposures to changes in foreign
currency exchange rates.
Forward-Looking Statements
- --------------------------
Statements relating to the potential value or viability of the DM&E or the
Project, or management's belief as to such matters, are forward-looking
statements and are subject to numerous contingencies and risk factors. The
Company has based its assessment on information provided by the DM&E and has not
independently verified such information. In addition to matters mentioned above,
factors which can adversely affect the value of the DM&E, its ability to
complete the Project or the viability of the Project include the following:
labor disputes, the outcome of certain litigation, any inability to obtain
necessary
19
environmental and government approvals for the Project in a timely fashion, the
DM&E's ability to continue to obtain interim funding to finance the Project, the
expense of environmental mitigation measures required by the Surface
Transportation Board, an inability to obtain financing for the Project,
competitors' response to the Project, market demand for coal or electricity and
changes in environmental laws and regulations.
The Company 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, such as references made to future profitability,
made from time to time by representatives of the Company. The inability to
negotiate the sale of certain assets could result in an impairment in future
periods. The inability to successfully negotiate a new sales contract with a
current Class I railroad customer could have a negative impact on the operating
results of the Company. 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, the adequacy of internal
and external sources of funds to meet financing needs, taxes, inflation and
governmental regulations. Sentences containing words such as "anticipates",
"expects", or "will" generally should be considered forward-looking statements.
/s/David J. Russo
David J. Russo
Senior Vice President,
Chief Financial Officer
and Treasurer
/s/Linda K. Patterson
Linda K. Patterson
Controller
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
L.B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
In thousands 2002 2001
- --------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,653 $ 4,222
Accounts receivable - net 39,363 53,036
Inventories - net 32,925 43,369
Current deferred tax assets 1,494 1,491
Other current assets 696 806
Property held for resale - 1,333
Current assets of discontinued operations 138 111
- --------------------------------------------------------------------------------
Total Current Assets 78,269 104,368
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT - NET 36,083 33,819
- --------------------------------------------------------------------------------
ASSETS OF DISCONTINUED OPERATIONS 196 1,037
- --------------------------------------------------------------------------------
OTHER ASSETS:
Goodwill and other intangibles - net 1,089 5,550
Investments 12,718 11,104
Deferred tax assets 4,454 1,184
Other assets 1,175 2,980
- --------------------------------------------------------------------------------
Total Other Assets 19,436 20,818
- --------------------------------------------------------------------------------
TOTAL ASSETS $133,984 $160,042
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
In thousands, except share data
- --------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 825 $ 809
Short-term borrowings - 5,000
Accounts payable - trade 24,094 29,269
Accrued payroll and employee benefits 2,413 2,545
Current deferred tax liabilities 1,474 1,201
Other accrued liabilities 2,695 3,524
Liabilities of discontinued operations 74 9
- --------------------------------------------------------------------------------
Total Current Liabilities 31,575 42,357
- --------------------------------------------------------------------------------
LONG-TERM DEBT 26,991 32,758
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES 4,195 4,968
- --------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES 5,210 2,814
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT
LIABILITIES (Note 17)
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock, issued 10,228,739 shares
in 2002 and 2001 102 102
Paid-in capital 35,143 35,233
Retained earnings 35,208 46,632
Treasury stock - at cost, Common stock,
703,822 shares in 2002 and 762,613
shares in 2001 (3,629) (3,926)
Accumulated other comprehensive loss (811) (896)
- --------------------------------------------------------------------------------
Total Stockholders' Equity 66,013 77,145
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $133,984 $160,042
================================================================================
See Notes to Consolidated Financial Statements.
21
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE THREE YEARS ENDED DECEMBER 31, 2002
In thousands, except per share data 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
NET SALES $ 257,950 $ 282,119 $ 264,614
- -----------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of goods sold 228,483 248,623 226,780
Selling and administrative expenses 26,475 28,398 29,874
Interest expense 2,592 3,564 4,227
Other expense (income):
Impairment of equity investment and advances 6,943 - -
Other 1,097 (694) (2,506)
- -----------------------------------------------------------------------------------------------------------
265,590 279,891 258,375
- -----------------------------------------------------------------------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS,
BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (7,640) 2,228 6,239
INCOME TAX (BENEFIT) EXPENSE (2,611) 925 2,496
- -----------------------------------------------------------------------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS,
BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (5,029) 1,303 3,743
DISCONTINUED OPERATIONS (SEE NOTE 5):
LOSS FROM DISCONTINUED OPERATIONS (2,005) (1,134) (422)
INCOME TAX BENEFIT - (468) (169)
- -----------------------------------------------------------------------------------------------------------
LOSS FROM DISCONTINUED OPERATIONS,
NET OF TAX (2,005) (666) (253)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX (4,390) - -
- -----------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (11,424) $ 637 $ 3,490
===========================================================================================================
BASIC AND DILUTED (LOSS) EARNINGS PER COMMON SHARE:
FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ (0.53) $ 0.14 $ 0.39
FROM DISCONTINUED OPERATIONS, NET OF TAX (0.21) (0.07) (0.03)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (0.46) - -
- -----------------------------------------------------------------------------------------------------------
NET (LOSS) EARNINGS PER COMMON SHARE $ (1.20) $ 0.07 $ 0.37
===========================================================================================================
See Notes to Consolidated Financial Statements.
22
L.B.FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE YEARS ENDED DECEMBER 31, 2002
In thousands 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
(Loss) income from continuing operations $ (5,029) $ 1,303 $ 3,743
Adjustment to reconcile net (loss) income to net cash
provided (used) by operating activities:
Deferred income taxes (3,290) 12 (442)
Depreciation and amortization 5,851 5,414 5,114
Loss (gain) on sale of property, plant and equipment 42 41 (879)
Impairment of equity investment and advances 6,943 - -
Unrealized loss on derivative mark-to-market 2,232 - -
Change in operating assets and liabilities:
Accounts receivable 13,646 4,597 (4,494)
Inventories 8,531 16,393 (14,205)
Other current assets 110 (442) 611
Other noncurrent assets (3,689) 44 1,258
Accounts payable - trade (5,370) (3,669) 8,499
Accrued payroll and employee benefits (132) (638) (149)
Other current liabilities (829) (293) 1,001
Other liabilities 324 (110) (166)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Continuing Operations 19,340 22,652 (109)
Net Cash (Used) Provided by Discontinued Operations (1,126) (564) 628
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 18,214 22,088 519
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of property, plant and
equipment 483 219 2,428
Capital expenditures on property, plant and
equipment (4,724) (4,807) (4,063)
Purchase of DM&E stock (500) (800) -
Acquisition of business (2,214) - -
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (6,955) (5,388) (1,635)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) proceeds of revolving credit
agreement borrowings (12,000) (11,500) 1,500
Exercise of stock options and stock awards 207 85 185
Treasury share transactions - (75) (901)
Repayments of long-term debt (54) (945) (1,207)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities (11,847) (12,435) (423)
- --------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 19 (43) (19)
- --------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (569) 4,222 (1,558)
Cash and Cash Equivalents at Beginning of Year 4,222 - 1,558
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 3,653 $ 4,222 $ -
====================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 2,791 $ 3,986 $ 4,266
====================================================================================================================
Income Taxes Paid $ 749 $ 713 $ 1,932
====================================================================================================================
During 2002, 2001 and 2000, the Company financed certain capital expenditures
totaling $1,303,000, $102,000 and $340,000, respectively, through the execution
of capital leases.
See Notes to Consolidated Financial Statements.
23
L. B. FOSTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2002
Accumulated
Other
Common Paid-in Retained Treasury Comprehensive
In thousands, except share data Stock Capital Earnings Stock Income (Loss) Total
- ----------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2000 $ 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 223,100 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
======================================================================================================================
Net loss (11,424) (11,424)
Other comprehensive loss net of tax:
Foreign currency translation adjustment (17) (17)
Minimum pension liability adjustment (434) (434)
Unrealized derivative losses on cash flow
hedges (686) (686)
Reclassification adjustment for derivative
losses included in net losses 1,222 1,222
- ----------------------------------------------------------------------------------------------------------------------
Comprehensive loss (11,339)
Issuance of 58,791 Common shares (90) 297 207
======================================================================================================================
Balance, December 31, 2002 $ 102 $35,143 $35,208 $ (3,629) $ (811) $66,013
======================================================================================================================
See Notes to Consolidated Financial Statements.
24
NOTES TO THE 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 inter-company 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 24% in 2002 and 18% in 2001, 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Judgement is required to assess the ultimate realization of the Company's
accounts receivable, including assessing the probability of collection and the
credit-worthiness of certain customers. Reserves for uncollectible accounts are
recorded as part of selling, general and administrative expense on the
Statements of Consolidated Operations. The Company records a monthly provision
for accounts receivable that are considered to be uncollectible. In order to
calculate the appropriate monthly provision, the Company reviews its accounts
receivable aging and calculates an allowance through application of historic
reserve factors to overdue receivables. This calculation is supplemented by
specific account reviews performed by the Company's credit department. As
necessary, the application of the Company's allowance rates to specific
customers are reviewed and adjusted to more accurately reflect the credit risk
inherent within that customer relationship. The reserve is reviewed for
reasonableness on a monthly basis.
GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). SFAS 142 establishes new accounting and reporting
requirements for goodwill and intangible assets, including new measurement
techniques for evaluating the recoverability of such assets. Under SFAS 142, all
goodwill amortization ceased as of January 1, 2002. Goodwill attributable to
each of the Company's reporting units was tested for impairment by comparing the
fair value of each reporting unit with its carrying value. As a result of the
adoption of SFAS 142, the Company recognized a total pre-tax charge of
$4,931,000, of which $3,664,000 related to the Rail products segment (primarily
from the 1999 acquisition of CXT Incorporated), and $1,267,000 related to the
Construction products segment (from the 1997 acquisition of the Precise
Fabricating Corporation). The fair values of these reporting units were
determined using discounted cash flows based on the projected financial
information of the reporting units. On an ongoing basis (absent of any
impairment indicators), the Company expects to perform its impairment tests
during the fourth quarter.
Under SFAS 142, the impairment charge recognized at adoption is reflected as a
cumulative effect of a change in accounting principle, effective January 1,
2002. Impairment adjustments recognized on an ongoing basis are generally
recognized as a component of continuing operations.
The carrying amount of goodwill attributable to each segment, after the non-cash
charges for the adoption of SFAS 142 at January 1, 2002 is detailed as follows:
25
Rail Construction Tubular
Products Products Products
In thousands Segment Segment Segment Total
- ------------------------------------------------------------------------------------------------------
Balance as of December 31, 2001 $3,664 $1,467 $ - $5,131
Goodwill Impairment - January 1, 2002 (3,664) (1,267) - (4,931)
Goodwill Acquired - Greulich Bridge - 150 - 150
- ------------------------------------------------------------------------------------------------------
Balance as of December 31, 2002 $ - $ 350 $ - $ 350
======================================================================================================
As required by SFAS 142, the Company reassessed the useful lives of its
identifiable intangible assets and determined that no changes were required. As
the Company has no indefinite lived intangible assets, all intangible assets
will continue to be amortized over their remaining useful lives ranging from 5
to 10 years, with a total weighted average amortization period of less than
seven years. The components of the Company's intangible assets are as follows:
December 31, 2002 December 31, 2001
Gross Gross
Carrying Accumulated Carrying Accumulated
In thousands Amount Amortization Amount Amortization
- -------------------------------------------------------------------------------------------
Licensing agreements $400 $ (87) $375 $(23)
Non-compete agreements 350 (70) - -
Patents 200 (54) 100 (33)
- -------------------------------------------------------------------------------------------
Total $950 $(211) $475 $(56)
===========================================================================================
Amortization expense for the year ended December 31, 2002, 2001 and 2000 was
$155,000, $61,000 and $43,000, respectively. Future estimated amortization
expense is as follows:
Estimated
Amortization
In thousands Expense
- --------------------------------------------------------------------------------
For the year ended December 31,
2003 $155
2004 155
2005 155
2006 155
Thereafter 119
================================================================================
Had the Company been accounting for goodwill under SFAS 142 for all periods
presented, the Company's net (loss) income and basic and diluted (loss) earnings
per common share for the years ended December 31, 2002, 2001 and 2000 would have
been as follows:
In thousands, except per share amounts 2002 2001 2000
- -----------------------------------------------------------------------------------------------
Reported net (loss) income $(11,424) $ 637 $ 3,490
Goodwill amortization, net of tax - 423 372
- -----------------------------------------------------------------------------------------------
Adjusted net (loss) income $(11,424) $ 1,060 $ 3,862
===============================================================================================
Basic (loss) earnings per common share:
Reported net (loss) income $ (1.20) $ 0.07 $ 0.37
Goodwill amortization, net of tax - 0.04 0.04
- -----------------------------------------------------------------------------------------------
Adjusted basic (loss) earnings per common share $ (1.20) $ 0.11 $ 0.41
===============================================================================================
Diluted (loss) earnings per common share:
Reported net (loss) income $ (1.20) $ 0.07 $ 0.37
Goodwill amortization, net of tax - 0.04 0.04
- -----------------------------------------------------------------------------------------------
Adjusted diluted (loss) earnings per common share $ (1.20) $ 0.11 $ 0.40
===============================================================================================
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.
26
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income (loss) 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 utilizing the treasury stock method.
REVENUE RECOGNITION
The Company's revenues are composed of product sales and products and services
provided under long-term contracts. The Company recognizes revenue 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.
Revenue is reported net of freight for sales from stock inventory and direct
shipments. Freight recorded for the years ended December 31, 2002, 2001 and 2000
amounted to $11,340,000, $11,332,000 and $8,903,000, respectively. 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 on
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 in excess of billings, and billings in excess of
costs are classified as a current asset.
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, 2002
and 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
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123" (SFAS 148) effective for fiscal years
ending after December 31, 2002 and for interim periods beginning after December
15, 2002. This statement amends Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123), to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results.
The Company has adopted the disclose-only provisions of SFAS 123, but applies
the intrinsic value method of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its stock option plans. Accordingly, no compensation expense
has been recognized.
The following table illustrates the effect on the Company's (loss) income from
continuing operations and (loss) earnings per share had compensation expense for
the Company's stock option plans been applied using the method required by SFAS
123. Refer to Note 12 "Stock Options" for more information regarding stock based
compensation.
In thousands,except
per share amounts 2002 2001 2000
- --------------------------------------------------------------------------------
Net (loss) income from continuing
operations, as reported $ (5,029) $1,303 $3,743
Add: Stock-based employee
compensation expense included
in reported net (loss) income, net
of related tax effects - - -
Deduct: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects 270 260 315
- --------------------------------------------------------------------------------
Pro forma (loss) income from
continuing operations $ (5,299) $1,043 $3,428
================================================================================
(Loss) earnings per share from
continuing operations:
Basic and diluted, as reported $ (0.53) $ 0.14 $ 0.39
Basic and diluted, pro forma $ (0.56) $ 0.11 $ 0.36
================================================================================
27
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
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. Effective September 26, 2002, in conjunction with
the Company's debt refinancing, the Company discontinued cash flow hedge
accounting treatment for its interest rate collars and has applied
mark-to-market accounting prospectively. Adjustments in the fair value of these
instruments are recorded as Other Expense (Income). The Company continues to
apply cash flow hedge accounting to the interest rate swap.
At contract inception, the Company designates its derivative instruments as
hedges. 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, as adustments to interest expense, as the underlying<