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| RAIL > SEC Filings for RAIL > Form 10-K on 13-Mar-2009 | All Recent SEC Filings |
13-Mar-2009
Annual Report
During the third quarter of 2008, we launched a project to replace several
legacy systems in which all of our business transactions are recorded and
processed with a new enterprise-wide reporting and management software platform
("ERP") system. This system is expected to provide us with improved
transactional processing, control and management tools compared to the systems
that we are currently using. We believe that, once our new ERP system fully
implemented and operational, IT system will facilitate better transactional
reporting and oversight, improve our internal control over financial reporting
and function as an important component of our disclosure controls and
procedures. Since the project is still in the development stage, there have been
no changes to our disclosure controls and procedures or internal controls over
financial reporting during 2008 related to the new ERP system
FINANCIAL STATEMENT PRESENTATION
Revenues
Our revenues are generated primarily from sales of the railcars that we
manufacture. Our sales depend on industry demand for new railcars, which is
driven by overall economic conditions and the demand for railcar transportation
of various products, such as coal, motor vehicles, steel products, forest
products, minerals, cement and agricultural commodities. Our sales are also
affected by competitive market pressures that impact the prices for our railcars
and by the types of railcars sold. Revenues for 2008 also include lease payments
received from railcars under operating leases to the same customer base to which
we sell railcars.
We generally manufacture railcars under firm orders from our customers. We
recognize sales, which we sometimes refer to as deliveries, of new and rebuilt
railcars when we complete the individual railcars, the railcars are accepted by
the customer following inspection, the risk of any damage or other loss with
respect to the railcars passes to the customer and title to the railcars
transfers to the customer. Deliveries include new, used and repair/refurbished
cars sold and cars contracted under operating leases in that period. With
respect to sales transactions involving the trading-in of used railcars, in
accordance with accounting rules, we recognize sales for the entire transaction
when the cash consideration received is in excess of 25% of the total
transaction value and on a pro rata portion of the total transaction value when
the cash consideration received is less than 25% of the total transaction value.
We value used railcars received at their estimated fair market value less a
normal profit margin. The variable purchase patterns of our customers and the
timing of completion, delivery and acceptance of customer orders may cause our
sales and income from operations to vary substantially each quarter, which will
result in significant fluctuations in our quarterly results.
Cost of sales
Our cost of sales includes the cost of raw materials such as aluminum and steel,
as well as the cost of finished railcar components, such as castings, wheels,
truck components and couplers, and other specialty components. Our cost of sales
also includes labor, utilities, freight, manufacturing depreciation and other
manufacturing overhead costs. Factors that have affected our cost of sales
include the recent volatility in the cost of steel and aluminum, our closure of
our Johnstown, Pennsylvania facility and our efforts to reduce the costs of new
products that we have recently introduced.
Prices for steel and aluminum, the primary raw material components of our
railcars, and surcharges on steel and railcar components were at historically
high levels for the first half of 2008 and since then prices have dropped
significantly. We were able to pass on increased material costs to our customers
with respect to a portion of our railcar deliveries in 2008. Notwithstanding
fluctuations in the cost of raw materials, a significant majority of the
contracts covering our current backlog include provisions that allow for
variable pricing to protect us against future changes in the cost of raw
materials
Operating income
Operating income represents total sales less cost of sales, selling, general and
administrative expenses, compensation expense under stock option and restricted
share award agreements and plant closure charges.
RESULTS OF OPERATIONS
Year Ended December 31, 2008 compared to Year Ended December 31, 2007
Revenues
Our sales for the year ended December 31, 2008 were $746.4 million as compared
to $817.0 million for the year ended December 31, 2007 while railcar deliveries
of 10,349 were 67 units above the 2007 level. Railcar deliveries for the year
ended December 31, 2008, including delivery of 9,022 new cars sold and delivery
of 735 leased cars that have not yet been sold as well as delivery of 519 used
cars sold and 73 rebuild/refurbishment cars sold. The decrease in sales revenue
was due primarily to heightened competition and general market conditions as
average railcar pricing declined between 2007 and 2008. This reflects a shift in
product mix to car types with different material costs and, more importantly,
pricing pressures dictated by softer demand. Our coal-carrying railcars remain
an essential part of our portfolio. Deliveries of our BethGon® II and AutoFlood
III™ coal-carrying railcars comprised 69% of our total railcar deliveries for
the year ended December 31, 2008.
Gross Profit
Gross profit for the year ended December 31, 2008 was $55.7 million as compared
to $103.4 million for the year ended December 31, 2007, representing a decrease
of $47.7 million. The corresponding margin rate was 7.5% for the year ended
December 31, 2008 compared to 12.7% for the year ended December 31, 2007. The
change in margin rate was driven primarily by sharp cost increases on raw
material inputs and the aggressive pricing environment in which we are
operating. The margin for 2008 was negatively impacted by material price
increases and surcharges that we were unable to pass on to our customers due to
fixed price sales contracts. We expect most future contracts to include variable
pricing provisions to mitigate this risk in the future. For the year ended
December 31, 2007, we were able to pass on increases in raw material costs to
our customers with respect to 80% of our railcar deliveries.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31,
2008 were $31.7 million as compared to $38.9 million for the year ended
December 31, 2007, representing a decrease of $7.2 million. Selling, general and
administrative expenses were 4.3% of our sales for 2008 and 4.8% for 2007. The
decrease in selling, general and administrative expenses for the year ended
December 31, 2008 compared to 2007 was primarily attributable to reductions in
outside professional services of $1.3 million, contingent liabilities of
$3.9 million and incentive plan costs of $2.2 million.
Plant Closure Charges
Plant closure charges for the year ended December 31, 2008 represent the
incremental costs associated with our decision, in December 2007, to close our
Johnstown, Pennsylvania manufacturing facility. As a result of the previously
described global settlement, total plant closure costs incurred through
December 31, 2008 were $50.9 million. These costs include charges arising under
our pension and postretirement benefit plans as well as employee termination and
related closure costs. See Note 3 to the consolidated financial statements.
Interest Expense/Income
Total interest expense for each of the years ended December 31, 2008 and 2007
was $0.7 million. Interest expense consisted of third-party interest expense and
the amortization of deferred financing costs. Interest income for the year ended
December 31, 2008 was $3.8 million as compared to $8.3 million for the year
ended December 31, 2007, representing a decrease of $4.5 million as both
interest rates and our cash balances decreased compared to 2007 levels.
Income Taxes
The provision for income taxes was $2.5 million for the year ended December 31,
2008, compared to a provision for income taxes of $14.8 million for the year
ended December 31, 2007. The effective tax rates for the years ended
December 31, 2008 and 2007, were 34.7% and 35.9%, respectively. The effective
tax rate for the year ended December 31, 2008 was lower than the statutory U.S.
federal income tax rate of 35% due to a decrease of 8.5% for goodwill, decrease
of 13.9% due to a change in the blended state rate, an increase of 19.6% caused
by a change in the valuation allowance and an increase of 1.9% for the effect of
other differences. The increase in the valuation
allowance was primarily due to plant closure charges in 2008 that caused the
Pennsylvania deferred tax assets to increase resulting in a corresponding
increase to the valuation allowance. The effective tax rate for the year ended
December 31, 2007 was slightly higher than the statutory U.S. federal income tax
rate due to the addition of a 1.9% blended state rate and a 2.8% increase caused
by a change in the valuation allowance. These increases were virtually offset by
a decrease in the effective rate caused by the domestic manufacturing deduction.
Net Income
As a result of the foregoing, net income was $4.6 million for the year ended
December 31, 2008, reflecting a decrease of $21.9 million from net income of
$26.5 million for the year ended December 31, 2007. For 2008, our basic and
diluted net income per share were both $0.39, on basic and diluted shares
outstanding of 11,788,400 and 11,833,132 respectively. For 2007, our basic and
diluted net income per share were $2.18 and $2.17, respectively, on basic and
diluted shares outstanding of 12,115,712 and 12,188,901, respectively. Net
income for both 2008 and 2007 was significantly impacted by plant closure costs,
with pre-tax charges of $20.0 million in 2008 and pre-tax charges of
$30.8 million in 2007.
Year Ended December 31, 2007 compared to Year Ended December 31, 2006
Sales
Our sales for the year ended December 31, 2007 were $817.0 million as compared
to $1,444.8 million for the year ended December 31, 2006 while railcar
deliveries of 10,282 were 8,482 units below the 2006 level. The decrease in
sales revenue and deliveries was due primarily to lower industry volume as well
as lower demand for coal cars. In addition, the competitive environment
increased as demand slackened with a negative impact on the price of railcars.
Average railcar pricing declined between 2006 and 2007. The decline in average
selling price was partially offset by a shift in product mix. Our coal-carrying
railcars remain an essential part of our portfolio. Deliveries of our BethGon®
II and AutoFlood III™ coal-carrying railcars comprised 85% of our total railcar
deliveries for the year ended December 31, 2007.
Gross Profit
Gross profit for the year ended December 31, 2007 was $103.4 million as compared
to $233.5 million for the year ended December 31, 2006, representing a decrease
of $130.1 million. The decrease in gross profit was due primarily to lower
volume. In addition, the gross margin was impacted by lower operating leverage
due to the change in volume and the lower pricing environment. Favorable product
mix and continuous cost reduction efforts partially mitigated the impact of
lower production activity and the adverse pricing environment. For the year
ended December 31, 2007, we were able to pass on increases in raw material costs
to our customers with respect to 80% of our railcar deliveries.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31,
2007 were $38.9 million as compared to $34.4 million for the year ended
December 31, 2006, representing an increase of $4.5 million. Selling, general
and administrative expenses were 4.8% of our sales for 2007 and 2.4% for 2006.
The increase was primarily attributable to higher employee compensation costs of
$3.0 million, a special charge of $3.8 million for contingency losses related to
litigation and a $1.1 million increase in investment for product development
programs. These increases were partially offset by a reduction in the costs of
outside professional services of $1.8 million. Increases in selling, general and
administrative expenses for 2007 were also partially offset by decreases in
several expense categories that were not significant individually but have
helped to minimize the impact of the increases previously described.
Plant Closure Charges
In December 2007 we incurred plant closure charges of $30.8 million. These
charges include net curtailment losses and special termination and contractual
benefit costs of $27.7 million arising under our pension and other
postretirement benefit plans as well as contractual employee termination
benefits of $2.2 million for severance and medical insurance. These charges also
include a non-cash impairment of the carrying value of certain assets at our
Johnstown manufacturing facility of $950,000.
Interest Expense/Income
Total interest expense for each of the years ended December 31, 2007 and 2006,
was $0.7 million. For the years ended December 31, 2007 and 2006, interest
expense consisted of third-party interest expense and the amortization of
deferred financing costs. Interest income for the year ended December 31, 2007
was $8.3 million as compared to $5.9 million for the year ended December 31,
2006, representing an increase of $2.4 million, primarily attributable to a
higher average cash balance during 2007. Interest income represents the proceeds
of short-term investments of our cash balances, which decreased by approximately
7.1% at December 31, 2007 compared to December 31, 2006. Interest rates rose
steadily during 2006 and into 2007 but decreased significantly during the second
half of 2007.
Income Taxes
The provision for income taxes was $14.8 million for the year ended December 31,
2007, as compared to a provision for income taxes of $75.5 million for the year
ended December 31, 2006. The effective tax rates for the years ended
December 31, 2007 and 2006, were 35.9% and 37.0%, respectively. The effective
rate for the year ended December 31, 2007 was slightly higher than the statutory
U.S. federal income tax rate due to the addition of a 1.9% blended state rate
and a 2.8% increase caused by a change in the valuation allowance. These
increases were virtually offset by a decrease in the effective rate caused by
the domestic manufacturing deduction. The effective tax rate for the year ended
December 31, 2006 was higher than the statutory U.S. federal income tax rate of
35% due to a 4.2% blended state rate less a 2.2% effect for other permanent
differences.
Net Income
As a result of the foregoing, net income and net income attributable to common
stockholders each were $26.5 million for the year ended December 31, 2007,
reflecting a decrease of $102.2 million from net income and net income
attributable to common stockholders of $128.7 million for the year ended
December 31, 2006. For 2007, our basic and diluted net income per share were
$2.18 and $2.17, respectively, on basic and diluted shares outstanding of
12,115,712 and 12,188,901, respectively. For 2006, our basic and diluted net
income per share were $10.23 and $10.07, respectively, on basic and diluted
shares outstanding of 12,586,889 and 12,785,015, respectively. The reduction in
net income for 2007 compared to 2006 is primarily the result of decreased sales
volumes during 2007.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity for the years ended December 31, 2008 and 2007
was our cash generated by cash flows from operations in prior periods. See "Cash
Flows."
On August 24, 2007, we entered into the Second Amended and Restated Credit
Agreement with the lenders party thereto (collectively, the "Lenders") and
LaSalle Bank National Association ("LaSalle") as administrative agent (as
amended by the First Amendment to Second Amended and Restated Credit Agreement
dated as of September 30, 2008 and the Second Amendment to Second Amended and
Restated Credit Agreement dated as of March 11, 2009 the "Credit Agreement").
The proceeds of the revolving credit facility under the Credit Agreement are
used to finance our working capital requirements through direct borrowings and
the issuance of stand-by letters of credit. The Credit Agreement consists of a
total facility of $50.0 million senior secured revolving credit facility,
including: (i) a sub-facility for letters of credit in an amount not to exceed
$50.0 million; and (ii) a sub-facility for a swing line loan in an amount not to
exceed $5.0 million. The amount available under the revolving credit facility is
based on the lesser of (i) $50.0 million or (ii) an amount equal to a percentage
of eligible accounts receivable plus a percentage of eligible finished inventory
plus a percentage of semi-finished inventory.
The Credit Agreement has a term ending on May 31, 2012 and bears interest at a
rate of LIBOR plus an applicable margin of between 1.50% and 2.25% depending on
Revolving Loan Availability (as defined in the Credit Agreement). We are
required to pay a commitment fee of between 0.175% and 0.250% based on Revolving
Loan Availability. Borrowings under the Credit Agreement are collateralized by
substantially all of our assets and guaranteed by an unsecured guarantee made by
JAIX in favor of LaSalle for the benefit of the Lenders. The Credit Agreement
has both affirmative and negative covenants, including a minimum fixed charge
coverage ratio and limitations on debt, liens, dividends, investments,
acquisitions and capital expenditures. The Revolving Credit Agreement also
provides for customary events of default.
As of December 31, 2008 and 2007, we had no borrowings under our revolving
credit facilities. We had $11.5 million and $8.8 million in outstanding letters
of credit under the letter of credit sub-facility as of December 31, 2008 and
2007, respectively which reduced the amount available for borrowing under the
facility. Under the revolving credit facility, our subsidiaries are permitted to
pay dividends and transfer funds to the Company without restriction.
Also on September 30, 2008, JAIX entered into a Credit Agreement (as amended by
the First Amendment to Credit Agreement dated as of March 11, 2009, the "JAIX
Credit Agreement") to be used to fund our leasing operations. The JAIX Credit
Agreement consists of a $60 million senior secured revolving credit facility.
The JAIX Credit Agreement has a term ending on March 31, 2012 and bears interest
at the Eurodollar Loan Rate (as defined in the JAIX Credit Agreement) plus 2.00%
for the first two years of the JAIX Credit Agreement (the "Revolving Period")
and plus 2.50% for the remainder of the term until the termination date. JAIX is
required to pay an annual commitment fee of 0.30% during the Revolving Period.
Borrowings under the JAIX Credit Agreement are collateralized by substantially
all of the assets of JAIX. Additionally, FCA guaranteed the JAIX Revolving
Credit Facility.
Availability under the JAIX Revolving Credit Facility is based on a percentage
of the Eligible Railcar Leases (as defined in the agreement) held under the JAIX
Revolving Credit Facility. For the first two years the facility requires
interest only payments, thereafter the amount drawn on each group of Eligible
Railcars under lease is required to be repaid in equal installments at the 6, 12
and 18 month anniversaries of such leases The Revolving Credit Agreement has
both affirmative and negative covenants, including, without limitation, a
minimum fixed charge coverage ratio, a minimum tangible net worth, a requirement
to deposit restricted cash and limitations on debt, liens, dividends,
investments, acquisitions and capital expenditures. The JAIX Credit Agreement
also provides for customary events of default. As of December 31, 2008 we had no
borrowings under the JAIX Revolving Credit Agreement.
As of December 31, 2008, we were in compliance with all covenant requirements
under our revolving credit facilities.
During 2008, in response to competitive market conditions, the Company
selectively began to produce and offer railcars under operating lease
arrangements with certain customers. These term of the leases vary but generally
is less than three years. The Company also continually evaluates opportunities
to package and sell its leases to its operating lease customers. As of
December 31, 2008, the value of railcars under operating leases was
$46.7 million, the investment in which was funded by cash flows from operations
rather than the JAIX Credit Agreement. In 2009, the Company anticipates that it
will continue to offer railcars under operating leases to certain customers and
pursue opportunities to sell leases in its portfolio. Additional railcars under
lease may be funded by cash flows from operations, borrowings under its credit
facilities, or both, as the Company evaluates its liquidity and capital
resources.
Based on our current level of operations, we believe that our proceeds from
operating cash flows and our cash balances, together with amounts available
under our revolving credit facilities, will be sufficient to meet our
anticipated liquidity needs for 2009. Our long-term liquidity is contingent upon
future operating performance and our ability to continue to meet financial
covenants under our revolving credit facilities and any other indebtedness. We
may also require additional capital in the future to fund organic growth
opportunities and cost reduction programs, including new plant and equipment,
development of railcars, joint ventures and acquisitions, and these capital
requirements could be substantial. Management continuously evaluates
manufacturing facility requirements based upon market demand and may elect to
make capital investments at higher levels in the future. We are also exploring
product diversification initiatives and international and other opportunities.
Our long-term liquidity needs also depend to a significant extent on our
obligations related to our pension and welfare benefit plans. We provide pension
and retiree welfare benefits to certain salaried and hourly employees upon their
retirement. The most significant assumptions used in determining our net
periodic benefit costs are the discount rate used on our pension and
postretirement welfare obligations and expected return on pension plan assets.
Our management expects that any future obligations under our pension plans that
are not currently funded will be funded out of our future cash flow from
operations. As of December 31, 2008, our benefit obligation under our defined
benefit pension plans and our postretirement benefit plan was $59.7 million and
$60.7 million, respectively, which exceeded the fair value of plan assets by
$26.7 million and $60.7 million, respectively. As disclosed in Note 11 to the
consolidated financial statements, we expect to make contributions relating to
our defined benefit pension plans
. . .
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