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EX-32.0 - 906 CERTIFICATION - FOSTER L B COexh320.htm
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EX-31.2 - CFO CERTIFICATION - FOSTER L B COexh312.htm


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
for the quarterly period ended June 30, 2010

Or

[  ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
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)

(412) 928-3417
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).*
Yes [ ]
No [ ]

* The registrant has not yet been phased into the interactive data requirements.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer [ ]
Accelerated filer [X]
Non-accelerated filer [ ]
Smaller reporting company [ ]
   
(Do not check if a smaller reporting company)
 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ]
No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
Outstanding at July 26, 2010
Common Stock, Par Value $.01
10,245,964 Shares







INDEX

PART I. Financial Information
Page
   
 
Item 1. Financial Statements:
   
   
         
     
         
     
         
     
         
 
     
 
     
 
     
PART II. Other Information
 
     
     
         
     
         
   
         
     
         
     
         
     
         



 
ITEM 1.  FINANCIAL STATEMENTS
           
L. B. FOSTER COMPANY AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In Thousands)
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS
 
(Unaudited)
       
Current Assets:
           
Cash and cash equivalents
  $ 131,318     $ 124,845  
Accounts and notes receivable:
               
Trade
    61,616       59,062  
Other
    319       2,116  
      61,935       61,178  
Inventories
    94,164       98,982  
Current deferred tax assets
    3,671       3,678  
Prepaid income taxes
    -       248  
Other current assets
    1,240       1,161  
Total Current Assets
    292,328       290,092  
                 
Property, Plant & Equipment - At Cost
    105,271       102,289  
Less Accumulated Depreciation
    (69,045 )     (64,882 )
      36,226       37,407  
                 
Other Assets:
               
Goodwill
    3,211       350  
Other intangibles - net
    1,757       25  
Investments
    3,739       3,358  
Deferred tax assets
    1,554       1,574  
Other assets
    1,347       362  
Total Other Assets
    11,608       5,669  
TOTAL ASSETS
  $ 340,162     $ 333,168  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities:
               
Current maturities of other long-term debt
  $ 3,099     $ 2,787  
Current maturities of long-term debt, term loan
    11,667       2,619  
Accounts payable - trade
    40,111       52,777  
Deferred revenue
    22,149       9,062  
Accrued payroll and employee benefits
    5,077       6,106  
Other accrued liabilities
    5,334       6,409  
Total Current Liabilities
    87,437       79,760  
                 
Long-Term Debt, Term Loan
    -       10,476  
Other Long-Term Debt
    3,047       2,721  
Deferred Tax Liabilities
    1,870       1,893  
Other Long-Term Liabilities
    5,695       5,726  
                 
STOCKHOLDERS' EQUITY:
               
Common stock
    111       111  
Paid-in capital
    46,709       47,660  
Retained earnings
    220,527       212,787  
Treasury stock - at cost
    (24,929 )     (27,574 )
Accumulated other comprehensive loss
    (305 )     (392 )
Total Stockholders' Equity
    242,113       232,592  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 340,162     $ 333,168  
                 
See Notes to Condensed Consolidated Financial Statements.
               



 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(In Thousands, Except Per Share Amounts)
 
                         
   
Three Months
   
Six Months
 
   
Ended June 30,
   
Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
Net Sales
  $ 119,504     $ 99,348     $ 201,506     $ 200,961  
Cost of Goods Sold
    99,189       86,516       169,118       174,447  
Gross Profit
    20,315       12,832       32,388       26,514  
                                 
Selling and Administrative Expenses
    10,774       8,612       19,967       17,639  
Interest Expense
    241       333       486       661  
Interest Income
    (107 )     (212 )     (181 )     (507 )
Equity in Losses of Nonconsolidated Investments
    94       -       241       -  
Other Income
    (51 )     (186 )     (153 )     (329 )
      10,951       8,547       20,360       17,464  
                                 
Income Before Income Taxes
    9,364       4,285       12,028       9,050  
                                 
Income Tax Expense
    3,377       1,633       4,288       3,379  
                                 
Net Income
  $ 5,987     $ 2,652     $ 7,740     $ 5,671  
                                 
Basic Earnings Per Share
  $ 0.59     $ 0.26     $ 0.76     $ 0.56  
                                 
Diluted Earnings Per Share
  $ 0.58     $ 0.26     $ 0.75     $ 0.55  
                                 
See Notes to Condensed Consolidated Financial Statements.
                         
                                 




 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(In Thousands)
 
   
Six Months
 
   
Ended June 30,
 
   
2010
   
2009
 
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
             
Net income
  $ 7,740     $ 5,671  
Adjustments to reconcile net income to net cash used
               
by operating activities:
               
Deferred income taxes
    (43 )     11  
Depreciation and amortization
    4,396       4,311  
Equity in losses of nonconsolidated investments
    241       -  
Loss (gain) on sale of property, plant and equipment
    1       (1 )
Deferred gain amortization on sale-leaseback
    (107 )     (107 )
Stock-based compensation
    799       545  
Excess tax benefit from share-based compensation
    (623 )     (56 )
Unrealized loss on derivative mark-to-market
    11       32  
                 
Change in operating assets and liabilities:
               
Accounts receivable
    (757 )     14,282  
Inventories
    5,736       8,623  
Other current assets
    55       (420 )
Prepaid income tax
    871       (1,464 )
Other noncurrent assets
    72       15  
Accounts payable - trade
    421       (16,686 )
Accrued payroll and employee benefits
    (1,029 )     (3,677 )
Other current liabilities
    (1,075 )     (300 )
Other liabilities
    3       17  
Net Cash Provided by Operating Activities
    16,712       10,796  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from sale of property, plant and equipment
    -       1  
Acquisitions
    (5,050 )     -  
Capital contributions to equity method investment
    (500 )     (650 )
Capital expenditures on property, plant and equipment
    (2,700 )     (2,306 )
Net Cash Used by Investing Activities
    (8,250 )     (2,955 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayments of long-term debt, term loan
    (1,428 )     (1,428 )
Proceeds from exercise of stock options and stock awards
    272       21  
Excess tax benefit from share-based compensation
    623       56  
Treasury stock acquisitions
    -       (1,863 )
Repayments of other long-term debt
    (1,456 )     (1,611 )
Net Cash Used by Financing Activities
    (1,989 )     (4,825 )
                 
Net Increase in Cash and Cash Equivalents
    6,473       3,016  
                 
Cash and Cash Equivalents at Beginning of Period
    124,845       115,074  
Cash and Cash Equivalents at End of Period
  $ 131,318     $ 118,090  
                 
Supplemental Disclosure of Cash Flow Information:
               
                 
Interest Paid
  $ 398     $ 593  
Income Taxes Paid
  $ 3,199     $ 7,253  
                 
The Company financed $0.1 million in certain capital expenditures through the execution of capital leases during the first six months of 2010.  There were no such expenditures during the 2009 period.
 
                 
See Notes to Condensed Consolidated Financial Statements.
               



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all estimates and adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  However, actual results could differ from those estimates.  The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 2010.  Amounts included in the balance sheet as of December 31, 2009 were derived from our audited balance sheet.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2009.

Certain accounts in the prior year consolidated financial statements have been reclassified for comparative purposes to conform with the presentation in the current year consolidated financial statements, including reclassification of certain shipping and handling costs from sales to cost of goods sold.

2. NEW ACCOUNTING PRINCIPLES

In June 2009, the FASB issued changes to the consolidation guidance applicable to a variable interest entity (VIE).  FASB ASC Topic 810, “Consolidation,” amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis.  The qualitative analysis will include, among other things, consideration of who has the power to direct the activities that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.  This standard also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE.  Previously, FIN 46R required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred.   FASB ASC 810 also requires enhanced disclosures about an enterprise’s involvement with a VIE.  The Company adopted the changes issued by the FASB to accounting for VIE’s on January 1, 2010.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, “Improving Disclosures about Fair Value Measurements.”  This Update provides amendments to FASB ASC 820, “Fair Value Measurements,” that requires entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.  In addition, the Update requires entities to present separately information about purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3).  The disclosures related to Level 1 and Level 2 fair value measurements are effective for the Company beginning in 2010 and the disclosures related to Level 3 fair value measurements are effective for the Company in 2011.  The Update requires only new disclosures and had no impact on the Company’s financial statements.

3. BUSINESS SEGMENTS

The Company is organized and evaluated by product group, which is the basis for identifying reportable segments. The Company is engaged in the manufacture, fabrication and distribution of rail, construction and tubular products.



The following table illustrates revenues and profits of the Company by segment:

   
Three Months Ended,
   
Six Months Ended,
 
   
June 30, 2010
   
June 30, 2010
 
   
Net
   
Segment
   
Net
   
Segment
 
(in thousands)
 
Sales
   
Profit
   
Sales
   
Profit
 
Rail products
  $ 52,685     $ 3,011     $ 93,745     $ 4,999  
Construction products
    59,179       6,800       95,381       8,326  
Tubular products
    7,640       962       12,380       804  
  Total
  $ 119,504     $ 10,773     $ 201,506     $ 14,129  
                                 
   
Three Months Ended,
   
Six Months Ended,
 
   
June 30, 2009
   
June 30, 2009
 
   
Net
   
Segment
   
Net
   
Segment
 
(in thousands)
 
Sales
   
Profit/(Loss)
   
Sales
   
Profit/(Loss)
 
Rail products
  $ 46,362     $ (1,131 )   $ 102,672     $ (1,049 )
Construction products
    47,867       3,088       85,784       5,329  
Tubular products
    5,119       44       12,505       1,404  
  Total
  $ 99,348     $ 2,001     $ 200,961     $ 5,684  

Segment profits, as shown above, include internal cost of capital charges for assets used in the segment at a rate of, generally, 1% per month. There has been no change in the measurement of segment profit from December 31, 2009.

The following table provides a reconciliation of reportable segment net profit to the Company’s consolidated total:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in thousands)
 
2010
   
2009
   
2010
   
2009
 
Income for reportable segments
  $ 10,773     $ 2,001     $ 14,129     $ 5,684  
Cost of capital for reportable segments
    4,158       4,764       8,056       9,699  
Interest expense
    (241 )     (333 )     (486 )     (661 )
Interest income
    107       212       181       507  
Equity in losses of nonconsolidated investments
    (94 )     -       (241 )     -  
Other income
    51       186       153       329  
LIFO credit
    452       1,507       751       1,757  
Corporate expense and other unallocated charges
    (5,842 )     (4,052 )     (10,515 )     (8,265 )
Income before income taxes
  $ 9,364     $ 4,285     $ 12,028     $ 9,050  

4. ACQUISITIONS

Interlocking Deck Systems International, LLC

On March 23, 2010, the Company purchased, pursuant to an Asset Purchase Agreement (Purchase Agreement), certain assets of Interlocking Deck Systems International, LLC (IDSI) for $7,000,000.  The purchase price included $5,050,000 in cash paid on the closing date and $1,000,000 payable on the first anniversary of the closing, as defined in the Purchase Agreement, and $950,000 payable on the second anniversary of the closing, with the deferred payment obligations being embodied in a promissory note.  No liabilities were assumed in this acquisition. The proforma results for this acquisition are not material to the Company’s financial results.



The acquisition of IDSI will strengthen the Company’s position as a leading supplier of steel bridge decking.  The acquisition has been accounted for in accordance with ASC 805, “Business Combinations.”  The Company is in the process of completing its fair market appraisals, including the valuation of certain identifiable intangible assets. Accordingly, the preliminary purchase price allocation is subject to change. The following table presents the preliminary allocation of the aggregate purchase price based on estimated fair values:

   
(in thousands)
 
Equipment
  $ 1,241  
Inventory
    918  
Proprietary software
    90  
Non-compete agreements
    1,830  
Goodwill
    2,861  
Net assets acquired
  $ 6,940  

Due to the timing of the closing, the above purchase price allocation is based on a preliminary valuation.  The measurement period for purchase price allocations ends as soon as information on the facts and circumstances becomes available, but does not exceed a period of 12 months.  If new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized for assets assumed, the Company will retrospectively adjust the amounts recognized as of the acquisition date.

The amount allocated to goodwill reflects the premium paid for the right to control the business acquired and synergies the Company expects to realize from expanding our steel bridge decking business and from eliminating redundant selling and administrative responsibilities and workforce efficiencies.  The goodwill is deductible for tax purposes and has been allocated to our Construction Products Segment.

Pursuant to the Purchase Agreement, other than the specifically identified assets included above, no other assets or liabilities of IDSI were included in the acquisition.  IDSI will retain the use of certain of the acquired equipment for a limited transition period to allow IDSI to fulfill existing bids and backlog orders of the business.  IDSI will retain all risk and be liable for any damage, loss, destruction or deterioration of the equipment and will deliver any such equipment to the Company, after the transition period, in the same condition as on the closing date.

Acquisition costs were approximately $17,000 for the three and six month periods ended June 30, 2010 and were classified as “Selling and administrative expenses.”

Portec Rail Products, Inc.

On February 16, 2010, the Company, Foster Thomas Company, a West Virginia corporation and a wholly-owned subsidiary of the Company (Purchaser), and Portec Rail Products, Inc., a West Virginia corporation (Portec), entered into an Agreement and Plan of Merger (Merger Agreement).

Pursuant to the terms of the Merger Agreement, Purchaser commenced a tender offer (Offer) for all of the issued and outstanding shares of common stock, $1.00 par value per share (Company Common Stock), of Portec at a price equal to $11.71 per share of Company Common Stock (Shares), or approximately $112,400,000, net to the seller in cash (Per-Share Amount), without interest (and subject to applicable withholding taxes). Upon the terms and subject to the conditions set forth in the Merger Agreement, following a successful completion of the Offer, Purchaser will be merged with and into Portec with Portec surviving the merger as a wholly-owned subsidiary of the Company (Merger). In the Merger, each Share (other than Shares owned by the Company, Purchaser, or shareholders, if any, who have perfected statutory dissenters’ rights under West Virginia law) will be converted into the right to receive the Per-Share Amount, without interest (and subject to applicable withholding taxes).  The consummation of the Merger is conditioned, among other matters, upon the receipt of necessary approvals under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act).



Concurrently with the execution of the Merger Agreement, the Company also entered into a Tender and Voting Agreement, dated as of February 16, 2010 (Tender Agreement), with Purchaser and all of the directors and executive officers of Portec (Shareholders). The Shareholders have agreed to tender all of the Shares that each of them owns, including any Shares which such Shareholder acquires ownership of after the date of the Tender Agreement and prior to the termination of the Tender Agreement, to Purchaser in the Offer. Furthermore, each Shareholder has agreed, at any meeting of the shareholders of Portec, to vote all Shares (a) in favor of adopting the Merger Agreement and any transactions contemplated thereby, including the Merger, (b) against any alternative transaction proposal and (c) against any action that would delay, prevent or frustrate the Offer and the Merger and the related transactions contemplated by the Merger Agreement.

On May 13, 2010, the Company, Purchaser and Portec executed the First Amendment to the Merger Agreement ("First Amendment") pursuant to which the Drop Dead Date was extended until the close of business on August 31, 2010. The Company and Portec executed a timing agreement dated as of April 29, 2010 with the Antitrust Division pursuant to which the Company and Portec agreed, subject to certain conditions, that they would not consummate the Merger before July 16, 2010, without the Antitrust Division's consent.

On June 24, 2010, the Court of Common Pleas of Allegheny County, Pennsylvania dissolved the preliminary injunction issued on April 21, 2010, which had enjoined the completion of the Company's offer to purchase all of the outstanding Shares of Portec.

On July 30, 2010, in accordance with the terms of the Merger Agreement the Purchaser extended the Offer until 12:00 midnight (one minute after 11:59 p.m.) New York City, New York time on Monday, August 16, 2010, unless further extended.

The Antitrust Division of the US Department of Justice (DOJ) has raised antitrust concerns to the Company's proposed acquisition of Portec. The DOJ has expressed concern that the proposed acquisition may have a potentially anti-competitive effect with respect to the merged company's rail joint business. As a condition to the proposed acquisition, the DOJ may seek various restructuring alternatives which may or may not be acceptable to the Company, possibly including the sale of certain assets associated with the merged company's rail joint business.

Acquisition costs were approximately $684,000 and $1,155,000 for the three and six month periods ended June 30, 2010 and were classified as “Selling and administrative expenses.”

5.  GOODWILL AND OTHER INTANGIBLE ASSETS

The change in the carrying amount of goodwill by segment for the six month period ended June 30, 2010 is as follows (in thousands):

   
(in thousands)
 
Balance at December 31, 2009
  $ 350  
Goodwill from acquisition of IDSI
    2,861  
Balance at June 30, 2010
  $ 3,211  

The goodwill from the IDSI acquisition is included in the Construction Products segment.

The components of the Company’s intangible assets are as follows:

   
June 30, 2010
   
December 31, 2009
 
   
Gross
         
Gross
       
   
Carrying
   
Accumulated
   
Carrying
   
Accumulated
 
   
Amount
   
Amortization
   
Amount
   
Amortization
 
   
(in thousands)
 
Non-compete agreements
  $ 2,180     $ (442 )   $ 350     $ (350 )
Patents
    125       (106 )     125       (100 )
    $ 2,305     $ (548 )   $ 475     $ (450 )




In connection with the acquisition of IDSI, the Company preliminarily recorded $1,830,000 of additional non-compete agreements.  The non-compete agreements will be amortized over a period of 60 months.  The amount recorded as non-compete agreements is an estimate as of June 30, 2010 and is subject to adjustment during the measurement period.

As the Company has no indefinite lived intangible assets, all intangible assets are amortized over their useful lives ranging from 5 to 10 years.  Amortization expense for the three and six month periods ending June 30, 2010 was approximately $95,000 and $98,000, respectively.  Amortization expense for the three and six month periods ending June 30, 2009 was approximately $3,000 and $6,000 respectively.  Estimated amortization expense over the succeeding five years is as follows:

   
(In thousands)
 
2010
  $ 189  
2011
    379  
2012
    366  
2013
    366  
2014
    366  
Thereafter
    91  
    $ 1,757  

6. ACCOUNTS RECEIVABLE
 
Credit is extended based upon an evaluation of the customer’s financial condition and, generally, collateral is not required.  Credit terms are consistent with industry standards and practices.  Trade accounts receivable at June 30, 2010 and December 31, 2009 have been reduced by an allowance for doubtful accounts of ($1,317,000) and ($1,055,000), respectively.

7. INVENTORIES

Inventories of the Company at June 30, 2010 and December 31, 2009 are summarized in the following table:

   
June 30,
   
December 31,
 
(in thousands)
 
2010
   
2009
 
Finished goods
  $ 85,514     $ 92,190  
Work-in-process
    7,047       7,814  
Raw materials
    17,719       16,049  
                 
Total inventories at current costs
    110,280       116,053  
Less:
               
LIFO reserve
    (9,526 )     (10,277 )
Inventory valuation reserve
    (6,590 )     (6,794 )
    $ 94,164     $ 98,982  

Inventories of the Company are generally valued at the lower of last-in, first-out (LIFO) cost or market.  Other inventories of the Company are valued at average cost or market, whichever is lower.  An actual valuation of inventory under the LIFO method is made at the end of each year based on the inventory levels and costs at that time.  Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end levels and costs.

8. INVESTMENTS

Investments of the Company at June 30, 2010 and December 31, 2009 are summarized in the following table:
   
June 30,
   
December 31,
 
(in thousands)
 
2010
   
2009
 
Available-for-sale marketable equity securities
  $ 2,080     $ 1,958  
Equity method investment
    1,659       1,400  
    $ 3,739     $ 3,358  




Additional information regarding the Company’s marketable securities is as follows:

   
June 30, 2010
 
         
Gross
   
Gross
       
         
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
Available-for-sale marketable equity securities
 
$
794
   
$
1,286
   
$
-
   
$
2,080
 
                                 
   
December 31, 2009
 
           
Gross
   
Gross
         
           
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(In thousands)
 
Available-for-sale marketable equity securities
 
$
794
   
$
1,164
   
$
-
   
$
1,958
 

9. INVESTMENT IN JOINT VENTURE

During 2009 the Company completed the formation of a joint venture with L B Industries, Inc. and James Legg for a period of 9.5 years.  The Company, along with L B Industries, Inc., has a 45% ownership interest in the joint venture, L B Pipe & Coupling Products, LLC (JV), which commenced operations in January 2010.  The venture manufactures, markets and sells various products for the energy, utility and construction markets.

Under applicable guidance for variable interest entities in ASC 810, “Consolidation,” the Company determined that the JV is a variable interest entity, as the JV has not demonstrated that it has sufficient equity to support its operations without additional financial support. The Company concluded that it is not the primary beneficiary of the variable interest entity, as the Company does not have a controlling financial interest and does not have the power to direct the activities that most significantly impact the economic performance of the JV. Accordingly, the Company concluded that the equity method of accounting remains appropriate.

The Company’s exposure to loss results from its capital contributions, net of the Company’s share of the venture’s gains or losses, and its net investment in the direct financing lease covering the facility used by the JV for its operations.  The carrying amounts with the maximum exposure to loss of the Company at June 30, 2010 are as follows:

   
(in thousands)
 
Equity method investment
  $ 1,659  
Net investment in direct financing lease
    1,029  
    $ 2,688  

The Company is leasing 5 acres of land and a facility to the JV over a period of 9.5 years, with a 5.5 year renewal period.  Monthly rent over the term of the lease is approximately $10,000, with a balloon payment of approximately $488,000 which is required to be paid either at the termination of the lease, allocated over the renewal period or during the initial term of the lease.  This lease qualifies as a direct financing lease under the applicable guidance in ASC 840-30, “Leases.” At June 30, 2010, the Company maintained a net investment in this direct financing lease of approximately $1,029,000.

The Company recorded equity in the losses of the JV of approximately $94,000 and $241,000 for the three and six month periods ended June 30, 2010.

10. DEFERRED REVENUE

Deferred revenue consists of customer payments received for which the sales process has been substantially completed but the right to recognize revenue has not yet been met.  Deferred revenue as of June 30, 2010 related primarily to one customer.  The Company has significantly fulfilled its obligations under the contract and the customer has paid, but due to the Company’s continuing involvement with the material while in storage, revenue is precluded from being recognized until the customer takes possession.



11. BORROWINGS

The Company’s maximum credit line is $90,000,000 under a fourth amendment to the Amended and Restated Revolving Credit and Security Agreement (Agreement) with a syndicate of three banks led by PNC Bank, N.A.  The revolving credit facility is secured by substantially all of the trade receivables and inventory owned by the Company.  Revolving credit facility availability under the Agreement is limited by the amount of eligible accounts receivable and inventory, applied against certain advance rates, and are limited to 85% of eligible receivables and 60% of eligible inventory.  Additionally, the fourth amendment established a $20,000,000 term loan that was immediately applied to pay down existing amounts outstanding on the revolving credit facility.  The term loan is being amortized on a term of seven years with a balloon payment on the remaining outstanding principal due at the maturity of the Agreement, May 2011.  If average availability should fall below $10,000,000 over a 30-day period, the loans become immediately secured by a lien on the Company’s equipment that is not encumbered by other liens.

Revolving credit facility borrowings placed in LIBOR contracts are priced at prevailing LIBOR rates, plus 1.25%.  Borrowings placed in other tranches are priced at the prevailing prime rate, minus 1.00%.  The term loan base rate spread is fixed at prime minus 0.75% and the LIBOR spread is fixed at plus 1.50%.

The Company is permitted to use various additional debt instruments to finance capital expenditures, outside of borrowings under the Agreement, under limitations as defined in the Agreement.  Under the amended Agreement, the Company maintains dominion over its cash at all times, as long as excess availability stays over $5,000,000 and there is no uncured event of default.

In March 2009, the Company entered into a fifth amendment to the Agreement which became effective as of December 31, 2008 and changed certain financial covenants included in the Agreement by creating an exclusion standard in the Agreement.  This standard, which is met by the Company when revolving credit facility borrowings do not exceed $20,000,000 and unused borrowing commitment is at least $50,000,000, allows for certain items, as defined in the amendment, to be excluded in determining the fixed charge coverage ratio.  Additionally, the amendment redefines the Company’s calculation of earnings before interest and taxes by excluding any charges and credits related to the Company’s LIFO method of accounting for inventory.

The fifth amendment also includes a revised minimum net worth covenant and a revised maximum level for annual consolidated capital expenditures of $15,000,000.  

In November 2009, the Company entered into a sixth amendment to the Agreement.  This amendment permits the Company to spend up to $15,000,000, subject to overall limitations on acquisitions, to acquire non-domestic entities which do not become a borrower, as defined by the Agreement, to the Agreement.  This amendment also raised the limit to $15,000,000 on the amount of assets, as defined in the Agreement, which the Company is permitted to sell.  Additionally, the sixth amendment eliminated the unscheduled prepayments of debt from the calculation of the fixed charge coverage ratio, as defined in the agreement.

As of June 30, 2010, the Company was in compliance with all of the Agreement’s covenants.

Under the term loan, the Company had $11,667,000 outstanding at June 30, 2010 all of which was classified as current.  At December 31, 2009 the Company had $13,095,000 outstanding of which $10,476,000 was noncurrent.

At June 30, 2010, there were no outstanding borrowings under the revolving credit facility and the Company had approximately $69,419,000 in unused borrowing availability.

The Company’s ability to pay cash dividends is limited by the Agreement.



12. EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per common share:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in thousands, except earnings per share)
 
2010
   
2009
   
2010
   
2009
 
Numerator:
                       
Numerator for basic and diluted earnings per common share -
                       
net income available to common stockholders:
  $ 5,987     $ 2,652     $ 7,740     $ 5,671  
Denominator:
                               
Weighted average shares
    10,190       10,148       10,181       10,176  
Denominator for basic earnings per common share
    10,190       10,148       10,181       10,176  
                                 
Effect of dilutive securities:
                               
Employee stock options
    82       101       85       101  
Other stock compensation plans
    41       26       38       41  
Dilutive potential common shares
    123       127       123       142  
Denominator for diluted earnings per common share -
                               
adjusted weighted average shares and assumed conversions
    10,313       10,275       10,304       10,318  
Basic earnings per common share
  $ 0.59     $ 0.26     $ 0.76     $ 0.56  
Diluted earnings per common share
  $ 0.58     $ 0.26     $ 0.75     $ 0.55  

13. STOCK-BASED COMPENSATION

The Company applies the provisions of FASB ASC 718, “Compensation – Stock Compensation,” to account for the Company’s share-based compensation.  Share-based compensation cost is measured at the grant date based on the calculated fair value of the award and is recognized over the employees’ requisite service period.  The Company recorded stock compensation expense of $584,000 and $422,000 for the three month periods ended June 30, 2010 and 2009, respectively, and $799,000 and $545,000 for the six month periods ended June 30, 2010 and 2009, respectively, related to stock option awards, restricted stock awards and performance unit awards as discussed below.

Stock Option Awards

The Company recorded no stock compensation expense related to stock option awards for the three and six month periods ended June 30, 2010.  The Company recorded stock compensation expense of $9,000 and $25,000 for the three and six month periods ended June 30, 2009, respectively, with related deferred tax benefits of $3,000 and $9,000, respectively.

There were no nonvested awards at June 30, 2010 and 2009.  There were no stock options granted during the first six months of 2010 or 2009.

At June 30, 2010 and 2009, common stock options outstanding under the plans had option prices ranging from $2.75 to $14.77, with a weighted average exercise price of $6.68 and $5.59 per share, respectively.

The weighted average remaining contractual life of the stock options outstanding at June 30, 2010 and 2009 were 3.1 years.



Options exercised during the three and six month periods ended June 30, 2010 totaled 50,000 and 70,000 shares, respectively.  The weighted average exercise price per share of the options exercised during the six month period ended June 30, 2010 was $3.90.  The total intrinsic value of options exercised during the three and six month periods ended June 30, 2010 was $1,112,000 and $1,638,000, respectively.  Options exercised during the six month period ended June 30, 2009 totaled 5,500 shares.  The weighted average exercise price per share of the options exercised during the six month period ended June 30, 2009 was $3.78.  The total intrinsic value of options exercised during the six month period ended June 30, 2009 was $153,000.

A summary of the option activity as of June 30, 2010 is presented below.
 

 
               
Weighted
   
         
Weighted
   
Average
   
         
Average
   
Remaining
 
Aggregate
         
Exercise
   
Contractual
 
Intrinsic
   
Shares
   
Price
   
Term
 
Value
Outstanding and Exercisable at January 1, 2010
    180,950     $ 5.60       2.7    
Granted
    -       -       -    
Canceled
    -       -       -    
Exercised
    (70,000 )     3.90       -    
Outstanding and Exercisable at June 30, 2010
    110,950     $ 6.68       3.1  
$2,134,678

The total intrinsic value of options outstanding and exercisable at June 30, 2009 was $4,632,000.

Shares issued as a result of stock option exercises generally are previously issued shares which have been reacquired by the Company and held as Treasury shares or authorized but previously unissued common stock.

Restricted Stock Awards

During the six month periods ended June 30, 2010 and 2009 there were 12,000 and 10,500, respectively, fully vested restricted stock awards granted to the outside directors of the Company.  The weighted average fair value per share of these restricted stock awards was $28.32 and $29.89, respectively.  Compensation expense recorded by the Company related to these restricted stock awards was approximately $340,000 and $314,000, respectively, for the six month periods ended June 30, 2010 and 2009.

A summary of the restricted stock awards activity as of June 30, 2010 is presented below.

               
Weighted
       
         
Weighted
   
Average
       
         
Average
   
Remaining
   
Aggregate
 
   
Restricted
   
Fair
   
Contractual
   
Fair
 
   
Shares
   
Value
   
Term
   
Value
 
Outstanding at January 1, 2010
    -     $ -       -     $ -  
Granted
    12,000       28.32               339,840  
Vested
    (12,000 )     28.32               (339,840 )
Canceled
    -       -                
Outstanding at June 30, 2010
    -     $ -       -     $ -  




For the six month periods ended June 30, 2010 and 2009, the Company granted approximately 32,000 and 18,000 shares, respectively, of restricted stock to individuals who are not outside directors:

               
Aggregate
   
         
Grant Date
   
Fair
   
Grant Date
 
Units
   
Fair Value
   
Value
 
Vesting Date
March 3, 2009
    17,561     $ 20.63     $ 362,283  
March 3, 2013
March 3, 2010
    12,185       31.92       388,945  
March 3, 2014
May 28, 2010
      2,500       28.07         70,175  
February 28, 2012
May 28, 2010
    17,500       28.07       491,225  
May 28, 2014

Performance Unit Awards

Under separate three year incentive plans pursuant to the 2006 Omnibus Plan, as amended, the Company granted the following performance units during the six month periods ended June 30:

                   
Aggregate
   
             
Grant Date
   
Fair
   
Incentive Plan
 
Grant Date
 
Units
   
Fair Value
   
Value
 
Vesting Date
  2009 - 2011  
March 3, 2009
    52,672     $ 20.63     $ 1,086,623  
March 3, 2012
  2010 - 2012  
March 2, 2010
    36,541       31.83       1,163,100  
March 2, 2013

These awards can be earned based upon the Company’s performance relative to performance measures as defined in the plan.  These awards are subject to forfeiture, cannot be transferred until four years after their grant date and will be converted into common stock of the Company based upon conversion multiples as defined in the underlying plan.  The aggregate fair value in the above table is based upon reaching 100% of the performance targets as defined in the underlying plan.  The number of shares awarded under the 2010 – 2012 Three Year Incentive Plan was determined using an average grant date fair value of $29.39 over a ten day period in February 2010.  The number of shares awarded under the 2009 – 2011 Three Year Incentive Plan was determined using an average grant date fair value of $23.21 over a ten day period in February 2009.

Relative to the restricted stock awards granted to the non-outside directors and the performance unit awards, the Company recorded compensation expense of $244,000 and $99,000, respectively, for the three month periods ended June 30, 2010 and 2009.  For the six month periods ended June 30, 2010 and 2009, the Company recorded compensation expense of $459,000 and $206,000, respectively, for these awards.  Shares issued as a result of restricted stock awards generally are previously issued shares which have been reacquired by the Company and held as Treasury shares or authorized but previously unissued common stock.

These forfeitable restricted stock awards time-vest after a four year holding period, unless indicated otherwise by the underlying agreement.

14. RETIREMENT PLANS

Retirement Plans

The Company has four plans covering all hourly and salaried employees, specifically two defined benefit plans (one active and one frozen) and two defined contribution plans. Employees are eligible to participate in these specific plans based on their employment classification. The Company's funding to the defined benefit and defined contribution plans is governed by the Employee Retirement Income Security Act of 1974 (ERISA), applicable plan policy and investment guidelines.  The Company policy is to contribute at least the minimum funding required by ERISA.



Defined Benefit Plans

Net periodic pension costs for both plans for the three and six month periods ended June 30, 2010 and 2009 are as follows:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in thousands)
 
2010
   
2009
   
2010
   
2009
 
Service cost
  $ 7     $ 7     $ 13     $ 14  
Interest cost
    66       65       133       130  
Expected return on plan assets
    (71 )     (57 )     (141 )     (114 )
Prior service cost
    -       1       -       2  
Recognized net actuarial loss
    27       35       52       70  
Net periodic benefit cost
  $ 29     $ 51     $ 57     $ 102  

The Company expects to contribute approximately $177,000 to its defined benefit plans in 2010.  Contributions through June 30, 2010 were approximately $44,000.

Defined Contribution Plans

The Company has a defined contribution plan that covers all non-union hourly and all salaried employees. This plan permits both pretax and after-tax employee contributions. Participants can contribute, subject to statutory limitations, between 1% and 75% of eligible pre-tax pay and between 1% and 100% of eligible after-tax pay.  The Company's employer match is 100% of the first 1% of deferred eligible compensation and, based on years of service, up to 50% of the next 6% of deferred eligible compensation, for a total maximum potential match of 4%.  The Company may also make discretionary contributions to the Plan.  The expense associated with this plan for the three and six month periods ended June 30, 2010 was $472,000 and $782,000.  The expense associated with this plan for the three and six month periods ended June 30, 2009 was $338,000 and $753,000.

The Company also has a defined contribution plan for union hourly employees with contributions made by both the participants and the Company based on various formulas.  The expense associated with this active plan for the three month periods ended June 30, 2010 and 2009 was $9,000 and for the six month periods ended June 30, 2010 and 2009 was $16,000.

15. FAIR VALUE MEASUREMENTS

FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements.  ASC 820 does not require any new fair value measurements, but it does apply to existing accounting pronouncements that require or permit fair value measurements.  The Company applies the provisions of Topic 820 to all its assets and liabilities that are being measured and reported on a fair value basis.

ASC 820 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost).  Topic 820 enables readers of financial statements to assess the inputs used to develop those measurements by establishing a hierarchy, which prioritizes those inputs used, for ranking the quality and reliability of the information used to determine fair values.  The standard requires that each asset and liability carried at fair value be classified into one of the following categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.



The Company has an established process for determining fair value for its financial assets and liabilities, principally cash and cash equivalents, available-for-sale securities and foreign exchange contracts.  Fair value is based on quoted market prices, where available.  If quoted market prices are not available, fair value is based on assumptions that use as inputs market-based parameters.  The following sections describe the valuation methodologies used by the Company to measure different financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is generally classified.  Where appropriate the description includes details of the key inputs to the valuations and any significant assumptions.

Cash equivalents.  Included within “Cash and cash equivalents” are principally investments in tax-free and taxable money market funds with municipal bond issuances as the underlying securities as well as government agency obligations and corporate bonds, all of which maintain AAA credit ratings.  Also included within cash equivalents are our investments in bank certificates of deposit.  The Company uses quoted market prices to determine the fair value of these investments and they are classified in Level 1 of the fair value hierarchy.  The carrying amounts approximate fair value because of the short maturity of the instruments.

Available-for-sale equity securities.  The Company uses quoted market prices to determine the fair value of its available-for-sale securities.  These instruments consist of exchange-traded equity securities, are included within “Investments” and are classified in Level 1 of the fair value hierarchy.  Unrealized gains and temporary unrealized losses are included in accumulated other comprehensive income or loss, respectively.

Derivative contracts.  The Company uses significant other observable inputs that are readily available in public markets or can be derived from information available in publicly quoted markets to determine the fair value of its derivative contracts.  These instruments consist of foreign exchange contracts, are included within “Other accrued liabilities,” and are classified in Level 2 of the fair value hierarchy.  Fluctuations in the fair values of derivative instruments are recorded in accumulated other comprehensive loss and reclassified into earnings as the underlying hedged items affect earnings.  There were no such instruments as of June 30, 2010.



The following assets and liabilities were measured at fair value on a recurring basis subject to the disclosure requirements of ASC Topic 820 at June 30, 2010 and December 31, 2009:

         
Fair Value Measurements at Reporting Date Using
 
         
Quoted Prices in
   
Significant
       
         
Active Markets
   
Other
   
Significant
 
         
for Identical
   
Observable
   
Unobservable
 
   
June 30,
   
Assets
   
Inputs
   
Inputs
 
(in thousands)
 
2010
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets
                       
Money market funds
  $ 120,311     $ 120,311     $ -     $ -  
Bank certificates of deposit
    10,051       10,051       -       -  
Cash equivalents at fair value
    130,362       130,362       -       -  
                                 
Available-for-sale equity securities
    2,080       2,080       -       -  
                                 
    $ 132,442     $ 132,442     $ -     $ -  
                                 
           
Fair Value Measurements at Reporting Date Using
 
           
Quoted Prices in
   
Significant
         
           
Active Markets
   
Other
   
Significant
 
           
for Identical
   
Observable
   
Unobservable
 
   
December 31,
   
Assets
   
Inputs
   
Inputs
 
(in thousands)
    2009    
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets
                               
Money market funds
  $ 109,131     $ 109,131     $ -     $ -  
Bank certificates of deposit
    15,115       15,115       -       -  
Cash equivalents at fair value
    124,246       124,246       -       -  
                                 
Available-for-sale equity securities
    1,958       1,958       -       -  
                                 
    $ 126,204     $ 126,204     $ -     $ -  
                                 
Liabilities
                               
Derivatives
  $ (18 )   $ -     $ (18 )   $ -  
Total other accrued liabilities
    (18 )     -       (18 )     -  
                                 
    $ (18 )   $ -     $ (18 )   $ -  

16. COMPREHENSIVE INCOME

Comprehensive income represents net income plus certain stockholders’ equity changes not reflected in the Condensed Consolidated Statements of Operations.  The components of comprehensive income, net of tax, were as follows:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(in thousands)
 
2010
   
2009
   
2010
   
2009
 
Net income
  $ 5,987     $ 2,652     $ 7,740     $ 5,671  
Market value adjustments for investments
    (27 )     866       76       654  
Unrealized derivative gains on cash flow hedges
    -       25       11       34  
Comprehensive income
  $ 5,960     $ 3,543     $ 7,827     $ 6,359  




17. COMMITMENTS AND CONTINGENT LIABILITIES

The Company is subject to laws and regulations relating to the protection of the environment, and the Company’s efforts to comply with environmental regulations may have an adverse effect on its future earnings.  In the opinion of management, compliance with the present environmental protection laws will not have a material adverse effect on the financial condition, results of operations, cash flows, competitive position, or capital expenditures of the Company.

The Company is subject to legal proceedings and claims that arise in the ordinary course of its business.  In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial condition or liquidity of the Company.  The resolution, in any reporting period, of one or more of these matters could have a material effect on the Company’s results of operations for that period.

In November 2005, the City of Clearfield, Utah, filed suit in the Second District Court, Davis County, Utah, against the Utah Department of Transportation, a general contractor, four design engineers and/or consultants, a bonding company and the Company. The City alleged that the design and engineering of an overpass in 2000 had been faulty and that the Company had provided the mechanical stabilized earth wall system for the project.  The City alleged that the embankment to the overpass began, in 2001, to fail and slide away from the stabilized earth wall system, resulting in damage in excess of $3,000,000.  The City has agreed to settle its claims against several of the defendants and this settlement has been challenged by other defendants.  The Company believes that it has meritorious defenses to these claims, that the Company's products complied with all applicable specifications and that other factors accounted for any alleged failure.  The Company has referred this matter to its insurance carrier, which, although it reserved its right to deny coverage, has undertaken the defense of this claim.

On April 21, 2010, the Court of Common Pleas of Allegheny County, Pennsylvania (Court) entered an order in the matter captioned In re Portec Rail Products, Inc. Shareholders Litigation preliminarily enjoining Purchaser from completing the Offer.  On June 24, the Court dissolved the preliminary injunction.

In March 2009, the Company discovered that some of the prestressed concrete railroad ties manufactured in 2004 and 2005 by its CXT Rail operation in Grand Island, NE had failed in track.  The Company believes the cause was related to equipment fatigue on one production line at its Grand Island, NE facility before it was retrofitted with new equipment in the fall of 2005.  The Company recorded a charge of $1,600,000 within cost of goods sold for the Company’s estimate of cracked concrete ties for the three month period ended March 31, 2009.

During the second quarter of 2009, the Company, along with customer personnel, inspected the ties in question to confirm the number of cracked concrete ties.  Upon conclusion of this inspection, the Company recorded an additional charge of $1,124,000 within cost of goods sold during the second quarter ended June 30, 2009 bringing the cumulative warranty charge related to this issue to $2,724,000.

For certain manufactured products, the Company maintains a product liability accrual which is adjusted on a monthly basis as a percentage of cost of sales.  This product liability accrual is periodically adjusted based on the identification or resolution of known individual product liability claims.  The following table illustrates the Company’s product warranty accrual:

 
    (in thousands)  
Balance at December 31, 2009
  $ 3,367  
Additions to warranty liability
    554  
Warranty liability utilized
    (1,910 )
Balance at June 30, 2010
  $ 2,011  

Included within the above table is the remaining concrete tie warranty related to the previously discussed cracked concrete tie charges of approximately $819,000 as of June 30, 2010.  While the Company believes this is a reasonable estimate of this potential warranty claim, this estimate could change due to new information and future events.  We have had recent discussions with a large customer regarding additional ties that this customer contends are damaged ties subject to warranty replacement.  We believe that most of these ties are either structurally sound or damaged due to causes other than those which would require warranty replacement.  Based upon our preliminary assessment, we do not believe that these requests for warranty replacements, which relate to ties made with equipment and processes that were replaced in 2005, are valid.  There can be no assurance at this point that future potential costs pertaining to this claim or other potential future claims will not have a material impact on our results of operations.

At June 30, 2010 the Company had outstanding letters of credit of approximately $803,000.



18. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

The Company adopted the required enhanced disclosures of FASB ASC Topic 815, “Derivatives and Hedging” on January 1, 2009.  Topic 815 requires enhanced disclosures about an entity’s derivative and hedging activities, including (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows.

The Company does not purchase or hold any derivative financial instruments for trading purposes. The Company uses derivative financial instruments to manage interest rate exposure on variable-rate debt, primarily by using interest rate collars and variable interest rate swaps. The Company’s primary source of variable-rate debt comes from its revolving credit agreement.

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 into earnings within other income as the underlying hedged items affect earnings. To the extent that a change in interest rate derivative does not perfectly offset the change in value of the interest rate being hedged, the ineffective portion is recognized in earnings immediately.

The Company is not subject to significant exposures to changes in foreign currency exchange rates. The Company will, however, manage its exposure to changes in foreign currency exchange rates on firm sale and purchase commitments by entering into foreign currency forward contracts. The Company’s risk management objective is to reduce its exposure to the effects of changes in exchange rates on these transactions over the duration of the transactions.

In the fourth quarter of 2008, the Company entered into a commitment with a notional amount of approximately $630,000 to buy Euro funds based on the anticipated receipt of Euro funds from the purchase of certain rail in the first quarter of 2009.  During the first quarter of 2009, the Company determined that the receipt of Euros would not coincide with the purchase commitment and the Company recorded a loss of approximately $7,000 to record this commitment at market which was reported as “Other (Income) Expense” within the Consolidated Statements of Operations.

In the first quarter of 2009, the Company entered into commitments with notional amounts totaling approximately $974,000 to buy Euro funds based on the anticipated receipt of Euro funds from the purchase of certain rail in the second quarter of 2009.  During the second quarter of 2009, these commitments matured for a realized gain of approximately $105,000.  

In the fourth quarter of 2009, the Company entered into commitments with notional amounts totaling approximately $2,624,000 to sell Canadian funds based on the anticipated receipt of Canadian funds from the sale of certain rail in first quarter of 2010.  During the first quarter of 2010, the Company determined that the receipt of Canadian funds would not coincide with the purchase commitment and the Company recorded a loss of approximately $59,000 to record this commitment at market.  During the first quarter of 2010, the Company entered into commitments with notional amounts totaling approximately $2,683,000 to sell Canadian funds based on the anticipated receipt of Canadian funds from the aforementioned sale of certain rail in the first quarter of 2010.  This contract matured for a realized gain of approximately $59,000.  These gains and losses were reported as “Other Income” within the Consolidated Statements of Operations.





Overview
General

L. B. Foster Company is a leading manufacturer, fabricator and distributor of products for the rail, construction, utility and energy markets.  The Company is comprised of three business segments: Rail products, Construction products and Tubular products.

Recent Developments

On February 16, 2010 we entered into a Merger Agreement with Portec to acquire all of the issued and outstanding shares of Portec’s common stock at a price equal to $11.71 per share, or approximately $112.4 million.  Concurrently with the execution of the Merger Agreement, we also made a cash Tender Offer to purchase all of the shares of Portec.  As of July 29, 2010, Shareholders collectively owning 6,185,458 shares, approximately 64.41% of the outstanding Shares, agreed to tender all such shares and vote in favor of adopting the Merger Agreement.

On May 13, 2010, the Company, Purchaser and Portec executed the First Amendment to the Merger Agreement ("First Amendment") pursuant to which the Drop Dead Date was extended until the close of business on August 31, 2010. The Company and Portec executed a timing agreement dated as of April 29, 2010 with the Antitrust Division pursuant to which the Company and Portec agreed, subject to certain conditions, that they would not consummate the Merger before July 16, 2010, without the Antitrust Division's consent.

On June 24, 2010, the Court of Common Pleas of Allegheny County, Pennsylvania dissolved the preliminary injunction issued on April 21, 2010, which had enjoined the completion of the Company's offer to purchase all of the outstanding Shares of Portec.

On July 30, 2010, in accordance with the terms of the Merger Agreement the Purchaser extended the Offer until 12:00 midnight (one minute after 11:59 p.m.) New York City, New York time on Monday, August 16, 2010, unless further extended.

The Antitrust Division of the US Department of Justice (DOJ) has raised antitrust concerns to the Company's proposed acquisition of Portec. The DOJ has expressed concern that the proposed acquisition may have a potentially anti-competitive effect with respect to the merged company's rail joint business. As a condition to the proposed acquisition, the DOJ may seek various restructuring alternatives which may or may not be acceptable, possibly including the sale of certain assets associated with the merged company's rail joint business.




Critical Accounting Policies

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States.  When more than one accounting principle, or method of its application, is generally accepted, management selects the principle or method that is appropriate in the Company’s specific circumstances.  Application of these accounting principles requires management to make estimates about the future resolution of existing uncertainties.  As a result, actual results could differ from these estimates.  In preparing these financial statements, management has made its best estimates and judgments of the amounts and disclosures included in the financial statements giving due regard to materiality.  There have been no material changes in the Company’s critical accounting policies or estimates since December 31, 2009.  For more information regarding the Company’s critical accounting policies, please see the Management’s Discussion & Analysis of Financial Condition and Results of Operations in Form 10-K for the year ended December 31, 2009.

New Accounting Pronouncements

In June 2009, the FASB issued changes to the consolidation guidance applicable to a variable interest entity (VIE).  FASB ASC Topic 810, “Consolidation,” amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis.  The qualitative analysis will include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.  This standard also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE.  Previously, FIN 46R required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred.   FASB ASC 810 also requires enhanced disclosures about an enterprise’s involvement with a VIE.  We adopted the changes issued by the FASB to accounting for VIE’s on January 1, 2010.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, “Improving Disclosures about Fair Value Measurements.”  This Update provides amendments to FASB ASC 820, “Fair Value Measurements,” that requires entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.  In addition, the Update requires entities to present separately information about purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3).  The disclosures related to Level 1 and Level 2 fair value measurements are effective for the Company beginning in 2010 and the disclosures related to Level 3 fair value measurements are effective for the Company in 2011.  The Update requires only new disclosures and had no impact on our financial statements.

Quarterly Results of Operations

     
Three Months Ended
   
Percent of Total Net Revenues
   
Percent
 
     
June 30,
   
Three Months Ended June 30,
   
Increase/(Decrease)
 
     
2010
   
2009
   
2010
   
2009
   
2010 vs. 2009
 
     
Dollars in thousands
Net Sales:
                               
 
Rail Products
  $ 52,685     $ 46,362       44.1 %     46.7 %     13.6 %
 
Construction Products
    59,179       47,867       49.5       48.2       23.6  
 
Tubular Products
    7,640       5,119       6.4       5.2       49.2  
 
Total Net Sales
  $ 119,504     $ 99,348       100.0 %     100.0 %     20.3 %
                                           
     
Three Months Ended
   
Gross Profit Percentage
   
Percent
 
     
June 30,
   
Three Months Ended June 30,
   
Increase/(Decrease)
 
        2010       2009       2010       2009    
2010 vs. 2009
 
     
Dollars in thousands
Gross Profit:
                                       
 
Rail Products
  $ 6,839     $ 2,940       13.0 %     6.3 %     132.6 %
 
Construction Products
    11,917       8,128       20.1       17.0       46.6  
 
Tubular Products
    1,545       619       20.2       12.1       149.6  
 
LIFO Credit
    452       1,507       0.4       1.5       **  
 
Other
    (438 )     (362 )     (0.4 )     (0.4 )     21.0  
 
Total Gross Profit
  $ 20,315     $ 12,832       17.0 %     12.9 %     58.3 %
                                           
     
Three Months Ended
   
Percent of Total Net Revenues
   
Percent
 
     
June 30,
   
Three Months Ended June 30,
   
Increase/(Decrease)
 
        2010       2009       2010       2009    
2010 vs. 2009
 
     
Dollars in thousands
Expenses:
                                         
 
Selling and Administrative Expenses
  $ 10,774     $ 8,612       9.0 %     8.7 %     25.1 %
 
Interest Expense
    241       333       0.2       0.3       (27.6 )
 
Interest Income
    (107 )     (212 )     (0.1 )     (0.2 )     (49.5 )
 
Equity in Losses of Nonconsolidated Investment
    94       -       0.1       -       **  
 
Other Income
    (51 )     (186 )     (0.0 )     (0.2 )     (72.6 )
 
Total Expenses
    10,951       8,547       9.2 %     8.6 %     28.1 %
                                           
Income Before Income Taxes
    9,364       4,285       7.8 %     4.3 %     118.5 %
Income Tax Expense
    3,377       1,633       2.8       1.6       106.8  
                                           
Net Income
  $ 5,987     $ 2,652       5.0 %     2.7 %     125.8 %
                                           
 
** Results of calculation are not meaningful for presentation purposes.
           

Second Quarter 2010 Compared to Second Quarter 2009 – Company Analysis

Net income for the second quarter of 2010 was $0.58 per diluted share which compares favorably to net income for the second quarter of 2009 of $0.26 per diluted share.  The 2010 improvement in gross profit is due principally to negative adjustments of approximately $3.7 million taken in the 2009 period due to concrete tie problems as well as a $2.1 million improvement in manufacturing variances in 2010 as compared to the prior year quarter.

Acquisition costs of approximately $0.7 million, primarily related to our acquisition of Portec, increased bad debts expense of approximately $0.5 million and increased results-driven incentive compensation costs of approximately $1.0 million resulted in increased selling and administrative expenses over the prior year quarter.  Included in net income for the current period is our share of the losses from our equity investment in the joint venture, which is reported as “Equity in Losses of Nonconsolidated Investment.”  As the joint venture had not yet commenced significant revenue-generating activities, we recorded our 45% share of its start-up related expenses for the current quarter.  The decreased effective income tax rate for the second quarter of 2010 to 36.1% from 38.1% in the prior year quarter resulted from an increased domestic manufacturing deduction.

 
Results of Operations – Segment Analysis

Rail Products

   
Three Months Ended
   
Increase/
   
Percent
 
   
June 30,
   
(Decrease)
   
Increase/(Decrease)
 
   
2010
   
2009
   
2010 vs. 2009
   
2010 vs. 2009
 
   
Dollars in thousands
 
Net Sales
  $ 52,685     $ 46,362     $ 6,323       13.6 %
                                 
Gross Profit
  $ 6,839     $ 2,940     $ 3,899       132.6  
Gross Profit Percentage
    13.0 %     6.3 %     6.6 %     104.7 %

Second Quarter 2010 Compared to Second Quarter 2009

Our rail distribution and Allegheny Rail Products (ARP) divisions contributed improved sales performance in the 2010 second quarter.  Both of these divisions have experienced an increase in the sales volumes in the current quarter compared to the prior year.  While CXT concrete ties sales increased in the current period, during the second quarter of 2009 the UPRR refused to accept, due to the alleged quality of certain raw materials, certain prestressed concrete railroad ties produced at our Grand Island, NE facility reducing sales by approximately $2.8 million.  Partially offsetting these developments are inconsistent market conditions which have negatively impacted our trackwork division.

The product rejection previously mentioned caused a corresponding negative impact of approximately $2.6 million within our CXT concrete tie gross profit.  Additionally, we recognized an additional $1.1 million tie warranty expense associated with the tie failures first identified in the first quarter of 2009.  Excluding these two prior period issues, the rest of our divisions within the Rail Products segment reported gross profits generally consistent with the prior period.



Construction Products

   
Three Months Ended
   
Increase/
   
Percent
 
   
June 30,
   
(Decrease)
   
Increase/(Decrease)
 
   
2010
   
2009
   
2010 vs. 2009
   
2010 vs. 2009
 
   
Dollars in thousands
 
Net Sales
  $ 59,179     $ 47,867     $ 11,312       23.6 %
                                 
Gross Profit
  $ 11,917     $ 8,128     $ 3,789       46.6 %
Gross Profit Percentage
    20.1 %     17.0 %     3.2 %     18.6 %

Second Quarter 2010 Compared to Second Quarter 2009

With the exception of the flat results within our fabricated products division, the rest of our Construction Products divisions reported improved sales in the 2010 period, led by our concrete buildings division.  Our concrete buildings division benefitted from significantly increased orders received from federal agencies, much of which is attributable to stimulus legislation.  Improved sales volumes of sheet piling offset declines in sales prices yielding piling sales growth.

All of the divisions within our Construction Products segment experienced margin growth in the current quarter over the prior year period with the exception of our piling division.  Our piling division continues to experience margin pressure in the current highly competitive market, although improved volumes have helped to mitigate this unfavorable impact.  Improved sales volumes are also reducing unfavorable plant expenses throughout the segment.

Tubular Products

   
Three Months Ended
   
Increase/
   
Percent
 
   
June 30,
   
(Decrease)
   
Increase/(Decrease)
 
   
2010
   
2009
   
2010 vs. 2009
   
2010 vs. 2009
 
   
Dollars in thousands
 
Net Sales
  $ 7,640     $ 5,119     $ 2,521       49.2 %
                                 
Gross Profit
  $ 1,545     $ 619     $ 926       149.6 %
Gross Profit Percentage
    20.2 %     12.1 %     8.1 %     67.2 %

Second Quarter 2010 Compared to Second Quarter 2009

The second quarter of 2010 has yielded growth in new orders having a favorable impact in the volumes at both our coated pipe and threaded products divisions over the prior year quarter.  This increase in sales volumes has positively impacted the gross profit margins within our coated division.  Our threaded products division has experienced margin growth due to improved purchase price variances in 2010 over the prior period.

Year-to-date Results of Operations

     
Six Months Ended
   
Percent of Total Net Revenues
   
Percent
 
     
June 30,
   
Six Months Ended June 30,
   
Increase/(Decrease)
 
     
2010
   
2009
   
2010
   
2009
   
2010 vs. 2009
 
     
Dollars in thousands
Net Sales:
                               
 
Rail Products
  $ 93,745     $ 102,672       46.5 %     51.1 %     (8.7 ) %
 
Construction Products
    95,381       85,784       47.3       42.7       11.2  
 
Tubular Products
    12,380       12,505       6.1       6.2       (1.0 )
 
Total Net Sales
  $ 201,506     $ 200,961       100.0 %     100.0 %     0.3 %