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RAIL > SEC Filings for RAIL > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for FREIGHTCAR AMERICA, INC.

Form 10-Q for FREIGHTCAR AMERICA, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

You should read the following discussion in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q. This discussion contains forward-looking statements that are based on management's current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Statements."

We believe we are the leading manufacturer of aluminum-bodied railcars and coal-carrying railcars in North America, based on the number of railcars delivered. We also manufacture other types of railcars, refurbish and rebuild railcars, and sell forged, cast and fabricated parts for the railcars we produce as well as those manufactured by others, provide general railcar repair and maintenance, inspections, railcar fleet management services for all types of freight railcars and provide freight cars for lease. Our primary customers are railroads, shippers and financial institutions.

Our operating activities are divided into two reportable segments, Manufacturing and Services. Our Manufacturing segment includes new railcar manufacturing, used railcar sales, railcar leasing and major railcar rebuilds. Our Services segment includes general railcar repair and maintenance, inspections, parts sales and railcar fleet management services. Corporate includes selling, general and administrative expenses not related to production of goods and services, such as retiree pension and other postretirement benefit costs, and all other non-operating activity.

Our railcar manufacturing facilities are located in Danville, Illinois and Roanoke, Virginia. Both facilities have the capability to manufacture a variety of types of railcars, including aluminum-bodied and steel-bodied railcars. We have repair and maintenance and inspection facilities in Clinton, Indiana, Grand Island, Nebraska and Hastings, Nebraska.

Total orders for railcars in the third quarter of 2012 were 225 units, all of which were new railcars, compared to 961 units, consisting of 600 new railcars and 361 used railcars, ordered in the second quarter of 2012 and 2,840 units, all of which were new railcars, ordered in the third quarter of 2011. Railcar deliveries totaled 1,618 units, consisting of 998 new railcars and 620 rebuilt railcars, in the third quarter of 2012, compared to 2,786 units, consisting of 1,815 new railcars, 361 used railcars sold and 610 leased railcars delivered, in the second quarter of 2012 and 1,515 units, all of which were new railcars, delivered in the third quarter of 2011. Total backlog of unfilled orders was 3,716 units, consisting of 1,036 new railcars and 2,680 rebuilt railcars, at September 30, 2012, compared to 8,303 units, consisting of 5,003 new railcars and 3,300 rebuilt railcars, at December 31, 2011.

The market for the Company's products continued to weaken in the third quarter of 2012. Coal loadings continued to decline and were down 7.3% from the same period last year. In addition, the railroads continued their operational improvements with coal unit average train speeds up 10.3% for the quarter compared to the third quarter 2011. Lastly, the weak economic recovery is impacting total railcar loadings which decreased by 1.9% in the third quarter of 2012 compared to the third quarter of 2011. The net impact of the above was a slowdown in non-tank car deliveries. Non-tank car deliveries were 7,854 units which were down over 40% from the first two quarters of 2012. The backlog of non-tank cars continued to decrease and was 14,695 units or about two quarters of production at the current delivery rate.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2012 compared to Three Months Ended September 30, 2011

Revenues

Our consolidated revenues for the three months ended September 30, 2012 were $160.6 million compared to $130.1 million for the three months ended September 30, 2011. Manufacturing segment revenues for the third quarter of 2012 were $152.5 million compared to $122.2 million for the third quarter of 2011. The increase in Manufacturing segment revenues for the 2012 period compared to the 2011 period reflects the increase in the number of rebuilt railcars delivered, higher revenue per new railcar and the sale of 240 leased railcars that were delivered in the prior quarter. Our Manufacturing segment delivered 1,618 units, consisting of 998 new railcars and 620 rebuilt railcars in the third quarter of 2012, compared to 1,515 units, all of which were new railcars delivered in the third quarter of 2011. Services segment revenues for the three months ended September 30, 2012 were $8.1 million compared to $7.9 million for the three months ended September 30, 2011.


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Gross Profit

Our consolidated gross profit for the three months ended September 30, 2012 was $16.1 million compared to $9.1 million for the three months ended September 30, 2011. The increase in our consolidated gross profit for the third quarter of 2012 compared to the third quarter of 2011 reflects an increase in gross profit from our Manufacturing segment of $7.4 million, which was partially offset by a decrease in gross profit from our Services segment of $0.5 million. The increase in gross profit for our Manufacturing segment for the third quarter of 2012 compared to the third quarter of 2011 is due to a higher number of railcars delivered, higher revenue per new railcar and the sale of 240 leased railcars that were delivered in the prior quarter, which were partially offset by unfavorable production variances related to production line changeover costs. The decrease in gross profit for our Services segment for the third quarter of 2012 compared to the third quarter of 2011 reflects lower parts sales volume, an unfavorable parts sales mix, an unfavorable repair work mix and increased operating costs in our repair business. These decreases reflect a drop in repair programs that generate higher gross profit per railcar repaired. Our consolidated gross margin rate was 10.0% for the three months ended September 30, 2012 compared to 7.0% for the three months ended September 30, 2011.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses for the three months ended September 30, 2012 were $8.2 million compared to $7.3 million for the three months ended September 30, 2011. The increase reflects increases in compensation of $0.4 million and external services costs of $1.1 million, which were partially offset by decreases in product development costs of $0.2 million. Manufacturing segment selling, general and administrative expenses for the three months ended September 30, 2012 were $1.9 million compared to $1.4 million for the three months ended September 30, 2011. Services segment selling, general and administrative expenses were $1.0 million for the three months ended September 30, 2012 compared to $0.9 million for the three months ended September 30, 2011. Corporate selling, general and administrative expenses for the three months ended September 30, 2012 were $5.4 million compared to $5.0 million for the three months ended September 30, 2011.

Operating Income

Our consolidated operating income for the three months ended September 30, 2012 was $7.9 million, compared to $1.8 million for the three months ended September 30, 2011. Operating income for the Manufacturing segment was $13.9 million for the three months ended September 30, 2012 compared to $6.9 million for the three months ended September 30, 2011. The improvement in operating income for the Manufacturing segment reflects increased deliveries and higher revenue per new railcar, which were partially offset by unfavorable production variances related to production line changeover costs. Services segment operating income was $0.6 million for the three months ended September 30, 2012 compared to $1.1 million for the three months ended September 30, 2011. The decrease in Services segment operating income was primarily due to lower parts sales volume and an unfavorable parts sales mix as well as increased operating costs in our repair business. Corporate costs were $6.6 million for the three months ended September 30, 2012 compared to $6.2 million for the three months ended September 30, 2011. The increase in Corporate costs was primarily due to increases in compensation and external services costs.

Income Taxes

The income tax provision was $3.0 million for the three months ended September 30, 2012, compared to $4.2 million for the three months ended September 30, 2011. The effective tax rate for the three months ended September 30, 2012 and 2011, was 38.8% and 239.0%, respectively. The effective tax rate for the three months ended September 30, 2012 was higher than the statutory U.S. federal income tax rate of 35% primarily due to a 4.6% blended state tax rate and other permanent adjustments, partially offset by 1.4% for the impact of tax-deductible goodwill. The income tax provision for the three months ended September 30, 2011 includes recapture of $4.1 million of tax benefits recorded in the first half of 2011. The recapture results from applying the change in the effective tax rate forecasted for the full year to pre-tax earnings recorded in the first half of the year.

Net Income (Loss) Attributable to FreightCar America

As a result of the foregoing, net income attributable to FreightCar America was $4.8 million for the three months ended September 30, 2012, reflecting an increase of $7.2 million from net loss attributable to FreightCar America of $2.4 million for the three months ended September 30, 2011. For the three months ended September 30, 2012, our basic and diluted net income per share was $0.40 on basic and diluted shares outstanding of 11,936,780 and 11,943,558, respectively. For the three months ended September 30, 2011, our basic and diluted net loss per share was $0.20, on basic and diluted shares outstanding of 11,919,803.


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Nine Months Ended September 30, 2012 compared to Nine Months Ended September 30, 2011

Revenues

Our consolidated revenues for the nine months ended September 30, 2012 were $560.9 million compared to $299.9 million for the nine months ended September 30, 2011. Manufacturing segment revenues for the nine months ended September 30, 2012 were $534.7 million compared to $273.6 million for the nine months ended September 30, 2011. The increase in Manufacturing segment revenues for the 2012 period compared to the 2011 period reflects the increase in the number of railcars delivered, higher revenue per railcar and the sale of 128 leased railcars that were delivered in the prior year. Our Manufacturing segment delivered 7,017 units, consisting of 4,959 new railcars, 441 used railcars sold, 997 railcars leased and 620 rebuilt railcars, for the nine months ended September 30, 2012, compared to 3,699 units, consisting of 3,592 new railcars, 17 used railcars sold and 90 railcars leased, for the nine months ended September 30, 2011. Services segment revenues for the nine months ended September 30, 2012 were $26.2 million compared to $26.3 million for the nine months ended September 30, 2011 as a result of increased revenues from our repair business, which were partially offset by lower parts sales.

Gross Profit

Our consolidated gross profit for the nine months ended September 30, 2012 was $56.9 million compared to $15.3 million for the nine months ended September 30, 2011, representing an increase of $41.6 million. The increase in our consolidated gross profit for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 reflects an increase in gross profit from our Manufacturing segment of $42.8 million, which was partially offset by a decrease in gross profit from our Services segment of $1.2 million. Corporate costs were flat for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The increase in gross profit for our Manufacturing segment for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 is due to a higher number of railcars delivered, higher revenue per railcar and improved utilization of our manufacturing capacity during 2012, which were partially offset by unfavorable production variances related to production line changeover costs. The decrease in gross profit for our Services segment for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 reflects lower parts sales volume, an unfavorable parts sales mix, unfavorable repair work mix and increased operating costs in our repair business. These decreases reflect a drop in repair programs that generate higher gross profit per railcar repaired. Our consolidated gross margin rate was 10.1% for the nine months ended September 30, 2012 compared to 5.1% for the nine months ended September 30, 2011.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses for the nine months ended September 30, 2012 were $24.6 million compared to $20.2 million for the nine months ended September 30, 2011. The increase reflects increases in compensation of $2.7 million, external services costs of $2.6 million and legal fees of $0.4 million, which were partially offset by decreases in product development costs of $1.3 million. Manufacturing segment selling, general and administrative expenses were $4.8 million for the nine months ended September 30, 2012 compared to $4.6 million for the nine months ended September 30, 2011. Services segment selling, general and administrative expenses were $2.7 million for the nine months ended September 30, 2012 compared to $2.6 million for the nine months ended September 30, 2011. Corporate selling, general and administrative expenses for the nine months ended September 30, 2012 were $16.9 million compared to $13.0 million for the nine months ended September 30, 2011.

Gain on Sale of Railcars Available for Lease

Gain on sale of railcars available for lease for the nine months ended September 30, 2012 was $1.0 million and represented the gain on sale of 128 leased railcars with a net book value of $10.4 million. Gain on sale of railcars available for lease for the nine months ended September 30, 2011 was $1.0 million and represented the gain on sale of 76 leased railcars with a net book value of $5.5 million.


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Operating Income (Loss)

Our consolidated operating income for the nine months ended September 30, 2012 was $33.3 million, compared to an operating loss of $3.9 million for the nine months ended September 30, 2011. Operating income for the Manufacturing segment was $51.7 million for the nine months ended September 30, 2012 compared to $9.2 million for the nine months ended September 30, 2011. The improvement in operating income for the Manufacturing segment reflects increased deliveries, higher revenue per railcar and improved utilization of our manufacturing capacity. Services segment operating income was $2.1 million for the nine months ended September 30, 2012 compared to $3.4 million for the nine months ended September 30, 2011. The decrease in Services segment operating income was primarily due to lower parts sales volume, higher operating costs for our repair business and an increase in selling, general and administrative expenses for the 2012 period compared to the 2011 period. Corporate costs were $20.5 million for the nine months ended September 30, 2012 compared to $16.5 million for the nine months ended September 30, 2011. The increase in Corporate costs was primarily due to increases in compensation and external services.

Income Taxes

The income tax provision was $12.9 million for the nine months ended September 30, 2012, compared to an income tax benefit of $0.5 million for the nine months ended September 30, 2011. The effective tax rate for the nine months ended September 30, 2012 and 2011, was 39.2% and 12.3%, respectively. The effective tax rate for the nine months ended September 30, 2012 was higher than the statutory U.S. federal income tax rate of 35% primarily due to a 4.6% blended state tax rate and other permanent items, partially offset by 1.8% for the impact of tax-deductible goodwill. The effective tax rate for the nine months ended September 30, 2011 reflected the anticipated full year 2011 effective tax rate as of September 30, 2011 and was lower than the statutory U.S. federal income tax rate of 35% due to the impact of tax-deductible goodwill which was partially offset by the impact of state taxes. The effective tax rate for the nine months ended September 30, 2011 also included increases in statutory state income tax rates in certain states in which we operate.

Net Income (Loss) Attributable to FreightCar America

As a result of the foregoing, net income attributable to FreightCar America was $20.1 million for the nine months ended September 30, 2012, reflecting an increase of $23.6 million from a net loss attributable to FreightCar America of $3.5 million for the nine months ended September 30, 2011. For the nine months ended September 30, 2012, our basic and diluted net income per share was $1.68 and $1.67, respectively, on basic and diluted shares outstanding of 11,930,943 and 11,976,272, respectively. For the nine months ended September 30, 2011, our basic and diluted net loss per share was $0.30, on basic and diluted shares outstanding of 11,914,278.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity for the nine months ended September 30, 2012 and 2011, were our cash and cash equivalent balances on hand and our revolving credit facility. On July 29, 2010, we entered into a $30.0 million senior secured revolving credit facility pursuant to a Loan and Security Agreement dated as of July 29, 2010 (the "Revolving Loan Agreement") among the Company and certain of its subsidiaries, as borrowers (collectively, the "Borrowers"), and Fifth Third Bank, as lender. The proceeds of the revolving credit facility can be used for general corporate purposes, including working capital. The Revolving Loan Agreement also contains a sub-facility for letters of credit not to exceed $20.0 million. As of each of September 30, 2012 and December 31, 2011, we had no borrowings or outstanding letters of credit under the revolving credit facility.

The Revolving Loan Agreement has a term ending on July 29, 2013 and revolving loans outstanding thereunder will bear interest at a rate of LIBOR plus an applicable margin of 2.50% or at prime, as selected by the Borrowers. We are required to pay a non-utilization fee of 0.35% on the unused portion of the revolving loan commitment. Borrowings under the Revolving Loan Agreement are secured by our accounts receivable, inventory and certain other assets, and borrowing availability is tied to a borrowing base of eligible accounts receivable and inventory. The Revolving Loan Agreement has both affirmative and negative covenants, including, without limitation, a minimum tangible net worth covenant and limitations on indebtedness, liens and investments. The minimum tangible net worth covenant effectively limits potential dividends to $75.3 million as of September 30, 2012. The Revolving Loan Agreement also provides for customary events of default. As of September 30, 2012, we had borrowing capacity of $30.0 million under the Revolving Loan Agreement and we were in compliance with all of the covenants contained in the agreement.

Our restricted cash balance was $15.5 million as of September 30, 2012 and $1.8 million as of December 31, 2011, and consisted of cash used to collateralize standby letters of credit with respect to performance guarantees and to support our worker's compensation insurance claims. The standby letters of credit outstanding as of September 30, 2012 are scheduled to expire at various dates through December 2015. We expect to establish restricted cash balances in future periods to minimize bank fees related to standby letters of credit while maximizing our ability to borrow under the revolving credit facility.


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As of September 30, 2012, the value of inventory on lease and railcars available for lease totaled $51.0 million. We may continue to offer railcars for lease to certain customers and pursue opportunities to sell leased railcars in our portfolio. Additional railcars available for lease may be funded by cash flows from operations or we may pursue a new credit facility or both, as we evaluate our liquidity and capital resources.

Based on our current level of operations and known changes in planned volume based on our backlog, we believe that our proceeds from operating cash flows and our cash balances, together with amounts available under our revolving credit facility, will be sufficient to meet our expected liquidity needs. Our long-term liquidity is contingent upon future operating performance and our ability to continue to meet financial covenants under our revolving credit facility and any other indebtedness. We may also require additional capital in the future to fund working capital, organic growth opportunities, including new plant and equipment and development of railcars, joint ventures, international expansion and acquisitions, and these capital requirements could be substantial. Management continuously evaluates manufacturing facility requirements based on market demand and may elect to make capital investments at higher levels in the future.

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. Benefits under our pension plans are now frozen and will not be impacted by increases due to future service. The most significant assumptions used in determining our benefit obligations are the discount rate used on our pension and postretirement welfare obligations and expected return on pension plan assets. As of December 31, 2011, our benefit obligation under our defined benefit pension plans and our postretirement benefit plan was $62.4 million and $65.1 million, respectively, which exceeded the fair value of plan assets by $14.1 million and $65.1 million, respectively. We made contributions of $2.1 million to our defined benefit pension plans during the nine months ended September 30, 2012 and expect to make $2.6 million in total contributions to our defined benefit pension plans during 2012. Our defined benefit pension plans are in compliance with the minimum funding levels established in the Pension Protection Act of 2006. Funding levels will be affected by future contributions, investment returns on plan assets, growth in plan liabilities and interest rates. Assuming that the plans are fully funded as that term is defined in the Pension Protection Act, we will be required to fund the ongoing growth in plan liabilities on an annual basis. We made payments to our postretirement benefit plan of $3.7 million during the nine months ended September 30, 2012, and expect to make $5.1 million in total payments to our postretirement benefit plan in 2012.

A substantial portion of our postretirement benefit plan obligation relates to a settlement with the union representing employees at our Company's and its predecessors' Johnstown manufacturing facilities. The terms of that settlement require us to pay until November 30, 2012 certain monthly amounts toward the cost of retiree health care coverage. We are currently engaged in negotiations related to the expiring settlement agreement but the outcome of those negotiations and the impact on our postretirement benefit plan obligation cannot be determined at this time. Our postretirement benefit plan obligation could significantly increase or decrease if payments were to cease, if litigation should ensue or if the parties should agree on a modified settlement. We anticipate funding pension plan contributions and postretirement benefit plan payments with cash from operations and available cash.

Based upon our operating performance, capital requirements and obligations under our pension and welfare benefit plans, we may, from time to time, be required to raise additional funds through additional offerings of our common stock and through long-term borrowings. There can be no assurance that long-term debt, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. Our failure to raise capital if and when needed could have a material adverse effect on our results of operations and financial condition.

Contractual Obligations

The following table summarizes our contractual obligations as of September 30, 2012, which also includes the Amendment to Lease dated as of October 11, 2012, by and between Norfolk Southern Railway Company and Johnstown America Corporation. The effect that these obligations and commitments would be expected to have on our liquidity and cash flow in future periods is as follows:


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                                                       Payments Due by Period
                                                                 2-3          4-5        After
  Contractual Obligations             Total        1 Year       Years        Years      5 Years
                                                           (In thousands)
  Operating leases                   $ 41,995     $  3,357     $  7,427     $ 7,315     $ 23,896
  Material and component purchases     55,126       31,054       24,072          -            -

  Total                              $ 97,121     $ 34,411     $ 31,499     $ 7,315     $ 23,896

Material and component purchases consist of non-cancelable agreements with suppliers to purchase materials used in the manufacturing process. Purchase commitments for aluminum are made at a fixed price and are typically entered into after a customer places an order for railcars. The estimated amounts above may vary based on the actual quantities and price.

The above table excludes $3.6 million related to a reserve for unrecognized tax benefits and accrued interest and penalties at September 30, 2012 because the timing of the payout of these amounts cannot be determined.

We are also required to make minimum contributions to our pension and postretirement welfare plans. See Note 13 to the unaudited condensed consolidated financial statements regarding our expected contributions to our pension plans and our expected postretirement welfare benefit payments for 2012.

Cash Flows

The following table summarizes our net cash provided by (used in) operating
activities, investing activities and financing activities for the nine months
ended September 30, 2012 and 2011:



                                                  Nine Months Ended
                                                    September 30,
                                                  2012          2011
                                                    (In thousands)
              Net cash provided by (used in):
              Operating activities              $ 38,528      $ (4,038 )
              Investing activities                (9,523 )       8,206
              Financing activities                (2,203 )         (73 )

              Total                             $ 26,802      $  4,095

. . .

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