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RAIL > SEC Filings for RAIL > Form 10-K on 15-Mar-2013All Recent SEC Filings

Show all filings for FREIGHTCAR AMERICA, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for FREIGHTCAR AMERICA, INC.


15-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

You should read the following discussion in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report on Form 10-K. 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 "Forward-Looking Statements."

We believe we are the leading manufacturer of aluminum-bodied railcars and coal cars in North America, based on the number of railcars delivered. Our railcar manufacturing facilities are located in Danville, Illinois and Roanoke, Virginia. In February 2013, we sub leased approximately 25% of a state-of-the-art production facility located in the Shoals region of Alabama that was designed to efficiently build a wide variety of railcar types. This transaction is an important part of our long-term growth strategy as we continue to expand our railcar product and service offerings outside of our traditional coal car market. While our existing facilities will continue to support our coal car products, the Shoals facility will allow us to produce a broader variety of railcars in a cost-effective and efficient manner. In addition, the facility layout, automated production equipment, proximity to key suppliers and new supply agreements will increase our flexibility and make us more competitive in the marketplace.

We refurbish and rebuild railcars and sell forged, cast and fabricated parts for all of the railcars we produce, as well as those manufactured by others. We provide railcar repair and maintenance, inspections and railcar fleet management services for all types of freight railcars through our FCRS subsidiary. FCRS has repair and maintenance and inspection facilities in Clinton, Indiana, Grand Island, Nebraska and Hastings, Nebraska and services freight cars and unit coal trains utilizing key rail corridors in the Midwest and Western regions of the United States. We also lease freight cars through our JAIX Leasing Company subsidiary. Our primary customers are financial institutions, shippers and railroads.

Railcar deliveries totaled 8,325 units, consisting of 5,487 new railcars, 441 used railcars, 1,400 rebuilt railcars and 997 railcars leased, for the year ended December 31, 2012, compared to 6,188 units, consisting of 5,745 new railcars, 79 used railcars sold and 364 leased railcars delivered, in the same period of 2011. Our total backlog of firm orders for railcars decreased by 5,422 railcars, from 8,303 railcars as of December 31, 2011 to 2,881 railcars as of December 31, 2012.

We have 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 administrative activities and all other non-operating activity.

The North American railcar market is highly cyclical and the trends in the railcar industry are closely related to the overall level of economic activity. We expect railroads and utilities to continue to upgrade their fleets of aging steel-bodied coal cars to modern, higher-capacity aluminum, hybrid aluminum and stainless steel, and stainless steel bodied coal cars.

FINANCIAL STATEMENT PRESENTATION

Revenues

Our Manufacturing segment revenues are generated primarily from sales of the railcars that we manufacture. Our Manufacturing segment 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, steel products, minerals, cement, motor vehicles, forest products and agricultural commodities. Our Manufacturing segment sales are also affected by competitive market pressures that impact our market share, the prices for our railcars and by the types of railcars sold. Our Manufacturing segment revenues also include revenues from major railcar rebuilds and lease rental payments received with respect to railcars under operating leases. Our Services segment revenue sources include parts sales, revenues related to the general maintenance and repair and inspections of railcars and revenue for fleet management services.


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We generally manufacture railcars under firm orders from our customers. We recognize revenue, when (1) we complete the individual railcars, (2) the railcars are accepted by the customer following inspection, (3) the risk of any damage or other loss with respect to the railcars passes to the customer and
(4) title to the railcars transfers to the customer. Deliveries include new and used cars sold, cars built and contracted under operating leases and rebuilt cars. We value used railcars received at their estimated fair market value. The variable purchase patterns of our customers and the timing of completion, delivery and customer acceptance of railcars may cause our revenues 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 operating costs. Factors that have affected our cost of sales include the recent volatility in railcar deliveries, the cost of steel and aluminum, and our efforts to continually reduce manufacturing costs at our manufacturing facilities. A portion of the contracts covering our backlog at December 31, 2012 are fixed-rate contracts. Therefore, if material costs were to increase, we may not be able to pass on these increased costs to our customers.

Operating income (loss)

Operating income (loss) represents revenues less cost of sales, gain on sale of railcars available for lease, selling, general and administrative expenses, and plant sale income.

RESULTS OF OPERATIONS

Year Ended December 31, 2012 compared to Year Ended December 31, 2011

Revenues

Our consolidated revenues for the year ended December 31, 2012 were $677.4 million compared to $487.0 million for the year ended December 31, 2011. Manufacturing segment revenues for the year ended December 31, 2012 were $644.0 million compared to $453.1 million for the year ended December 31, 2011. The increase in Manufacturing segment revenues for 2012 compared to 2011 reflects a higher number of railcars delivered and higher average revenue per railcar. Our Manufacturing segment delivered 8,325 units, consisting of 5,487 new railcars, 441 used railcars, 1,400 rebuilt railcars and 997 railcars leased, for the year ended December 31, 2012, compared to 6,188 units, consisting of 5,745 new railcars, 79 used railcars sold and 364 leased railcars for the year ended December 31, 2011. Services segment revenues for the year ended December 31, 2012 were $33.4 million compared to $33.9 million for the year ended December 31, 2011. The slight decrease in Services segment revenues for 2012 compared to 2011 reflects lower repair volumes and an unfavorable repair and parts sales mix.

Gross Profit

Our consolidated gross profit for the year ended December 31, 2012 was $65.0 million compared to $31.9 million for the year ended December 31, 2011, representing an increase of $33.1 million. The increase in our consolidated gross profit for the year ended December 31, 2012 compared to the year ended December 31, 2011 reflects an increase in gross profit from our Manufacturing segment of $34.0 million, which was partially offset by a decrease in gross profit from our Services segment of $0.8 million. The increase in gross profit for our Manufacturing segment for the year ended December 31, 2012 compared to the year ended December 31, 2011 is due to a higher number of railcars delivered and higher revenue per railcar 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 year ended December 31, 2012 compared to the year ended December 31, 2011 reflects lower parts sales volume, an unfavorable parts sales mix, an unfavorable repair work mix and increased operating costs in our repair business. Our consolidated gross margin rate was 9.6% for the year ended December 31, 2012 compared to 6.6% for the year ended December 31, 2011.


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Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2012 were $32.7 million compared to $28.7 million for the year ended December 31, 2011, representing an increase of $4.0 million, or 14%. The increase reflects increases in compensation of $2.6 million, external services costs of $2.9 million and legal fees of $0.5 million, which were partially offset by a decrease in product development costs of $1.6 million. Manufacturing segment selling, general and administrative expenses were $6.4 million for the year ended December 31, 2012 compared to $6.0 million for the year ended December 31, 2011. Services segment selling, general and administrative expenses were $3.9 million for the year ended December 31, 2012 compared to $3.2 million for the year ended December 31, 2011. Corporate selling, general and administrative expenses for the year ended December 31, 2012 were $22.4 million compared to $19.5 million for the year ended December 31, 2011.

Gain on Sale of Railcars Available for Lease

Gain on sale of railcars available for lease for the year ended December 31, 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 year ended December 31, 2011 was $2.2 million and represented the gain on sale of 264 leased railcars with a net book value of $9.2 million.

Operating Income (Loss)

Our consolidated operating income for the year ended December 31, 2012 was $33.2 million, compared to $5.5 million for the year ended December 31, 2011. Operating income for the Manufacturing segment was $58.3 million for the year ended December 31, 2012 compared to $25.9 million for the year ended December 31, 2011. The increase in operating income for our Manufacturing segment for the year ended December 31, 2012 compared to the year ended December 31, 2011 was due to a higher number of railcars delivered and higher revenue per railcar during 2012, which were partially offset by unfavorable production variances related to production line changeover costs and lower sales of railcars available for lease. Services segment operating income was $2.1 million for the year ended December 31, 2012 compared to $3.7 million for the year ended December 31, 2011. The decrease in operating income for our Services segment for the year ended December 31, 2012 compared to the year ended December 31, 2011 reflects lower parts sales volume, an unfavorable parts sales mix, an unfavorable repair work mix and increased operating costs in our repair business. Corporate costs were $27.2 million for the year ended December 31, 2012 compared to $24.1 million for the year ended December 31, 2011. The increase in Corporate costs was primarily due to increases in compensation and external services.

Interest Expense/Income

Interest expense (consisting of commitment fees on our revolving credit facility and letter of credit fees) and amortization of deferred financing costs for the year ended December 31, 2012 were $0.4 million compared to $0.2 million for the year ended December 31, 2011. Increases in interest expense for 2012 resulted primarily from letter of credit fees.

Income Taxes

The income tax provision was $13.8 million for the year ended December 31, 2012, compared to $0.4 million for the year ended December 31, 2011. The effective tax rates for the years ended December 31, 2012 and 2011, were 41.9% and 6.7%, respectively. The effective tax rate for the year ended December 31, 2012 was higher than the statutory U.S. federal income tax rate of 35% primarily due the state tax provision based on a 5.4% blended state tax rate and a provision of $1.4 million resulting from applying changes in state tax rates on our deferred tax balances partially offset by a $0.6 million benefit for tax deductible goodwill. The changes in state tax rates resulted from changes in our estimated state tax apportionment and the expected timing of our utilization of state net operating loss carryforwards. The effective tax rate for the year ended December 31, 2011 was lower than the statutory U.S. federal income tax rate of 35% primarily due to a $0.6 million benefit for tax-deductible goodwill and a benefit of $1.7 million resulting from applying a change in statutory state tax rates and a change in the estimated state tax apportionment on our deferred tax balances.


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Net Income (Loss) Attributable to FreightCar America

As a result of the foregoing, net income attributable to FreightCar America was $19.1 million for the year ended December 31, 2012, reflecting an increase of $14.2 million from $4.9 million for the year ended December 31, 2011. For 2012, our basic and diluted net income per share were both $1.60, on basic and diluted shares outstanding of 11,932,926 and 11,969,367, respectively. For 2011, our basic and diluted net income per share were both $0.41, on basic and diluted shares outstanding of 11,916,292 and 11,962,196, respectively.

Year Ended December 31, 2011 compared to Year Ended December 31, 2010

Revenues

Our consolidated revenues for the year ended December 31, 2011 were $487.0 million compared to $142.9 million for the year ended December 31, 2010. Manufacturing segment revenues for the year ended December 31, 2011 were $453.1 million compared to $126.0 million for the year ended December 31, 2010. The increase in Manufacturing segment revenues for 2011 compared to 2010 reflects a higher number of railcars delivered and higher average revenue per railcar. Our Manufacturing segment delivered 6,188 units (5,824 sold and 364 leased) for the year ended December 31, 2011, compared to deliveries of 2,229 units (2,079 sold and 150 leased) for the year ended December 31, 2010. Services segment revenues for the year ended December 31, 2011 were $33.9 million compared to $16.9 million for the year ended December 31, 2010. The increase in Services segment revenues for 2011 compared to 2010 reflects the inclusion of FCRS revenues for the full year of 2011 compared to 2010, which included FCRS revenues for two months, partially offset by lower parts sales.

Gross Profit

Our consolidated gross profit for the year ended December 31, 2011 was $31.9 million compared to $2.7 million for the year ended December 31, 2010, representing an increase of $29.2 million. The increase in our consolidated gross profit for 2011 compared to 2010 reflects an increase in gross profit from our Manufacturing segment of $29.6 million and a decrease in Corporate costs of $0.8 million, which were partially offset by a decrease in gross profit from our Services segment of $1.2 million. The increase in gross profit for our Manufacturing segment for 2011 compared to 2010 levels is due to a higher number of railcars delivered, higher average revenue per railcar and improved utilization of our manufacturing capacity during 2011. The decrease in gross profit for our Services segment for 2011 compared to 2010 levels reflects lower parts sales and parts sales mix differences. Our consolidated gross margin rate was 6.6% for the year ended December 31, 2011 compared to 1.9% for the year ended December 31, 2010.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2011 were $28.7 million compared to $24.6 million for the year ended December 31, 2010, representing an increase of $4.1 million, or 16%. This increase reflects increases in employee bonuses and stock compensation costs of $3.2 million, salaries of $1.6 million and product development costs of $1.1 million. These increases were partially offset by decreases in severance and management contract costs of $1.2 million and consulting costs of $1.1 million. Manufacturing segment selling, general and administrative expenses for the year ended December 31, 2011 were $6.0 million compared to $5.9 million for the year ended December 31, 2010. Services segment selling, general and administrative expenses for the year ended December 31, 2011 were $3.2 million compared to $0.6 million for the year ended December 31, 2010. The increase in Services segment selling, general and administrative expenses was primarily due to the inclusion of FCRS selling, general and administrative expenses for the full year of 2011 compared to two months of 2010. Corporate selling, general and administrative expenses for the year ended December 31, 2011 were $19.5 million compared to $18.1 million for the year ended December 31, 2010.

Gain on Sale of Railcars Available for Lease

Gain on sale of railcars available for lease for the year ended December 31, 2011 was $2.2 million and represented the gain on sale of 264 leased railcars (with a net book value of $9.2 million) that the Company held in excess of twelve months from the date the railcars were initially leased. There was no gain on sale of railcars available for lease for the year ended December 31, 2010.


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Plant Closure and Sale

Plant closure and sale income for the year ended December 31, 2010 represents the gain on the sale of our Johnstown manufacturing facility. There was no plant closure and sale income for the year ended December 31, 2011.

Operating Income (Loss)

Our consolidated operating income for the year ended December 31, 2011 was $5.5 million, compared to an operating loss of $21.5 million for the year ended December 31, 2010. Operating income for the Manufacturing segment was $25.9 million for the year ended December 31, 2011, compared to an operating loss of $5.8 million for the year ended December 31, 2010. The improvement in operating income for the Manufacturing segment reflects increased deliveries, gain on sale of railcars available for lease and improved utilization of our manufacturing facilities. Services segment operating income was $3.7 million for the year ended December 31, 2011 compared to $7.4 million for the year ended December 31, 2010. The decrease in Services segment operating income was primarily due to lower parts sales volume and an unfavorable parts sales mix for the 2011 period compared to 2010. Corporate costs were $24.1 million for the year ended December 31, 2011 compared to $23.1 million for the year ended December 31, 2010. The increase in Corporate costs was primarily due to increases in employee bonuses and stock compensation costs which were partially offset by decreases in severance and management contract costs and consulting costs.

Interest Expense/Income

Interest expense (consisting of commitment fees on our revolving credit facility and letter of credit fees) and deferred financing costs for the year ended December 31, 2011 were $0.2 million compared to $1.0 million for the year ended December 31, 2010. Amortization and write-off of deferred financing costs for the year ended December 31, 2010 included write-offs related to our prior credit facilities of $0.5 million. Reductions in interest expense for the 2011 period also resulted from a lower fee structure in our current revolving credit facility compared to our prior revolving credit facilities and increased utilization of cash-backed letters of credit rather than letters of credit backed by our revolving credit facility.

Income Taxes

The income tax provision was $0.4 million for the year ended December 31, 2011, compared to an income tax benefit of $9.5 million for the year ended December 31, 2010. The effective tax rates for the years ended December 31, 2011 and 2010, were 6.7% and 42.5%, respectively. The effective tax rate for the year ended December 31, 2011 was lower than the statutory U.S. federal income tax rate of 35% primarily due to a $0.6 million benefit for tax-deductible goodwill and a benefit of $1.7 million resulting from applying a change in statutory state tax rates and a change in the estimated state tax apportionment on our deferred tax balances. The effective tax rate for the year ended December 31, 2010 was higher than the statutory U.S. federal income tax rate of 35% due to a 6.3% blended state tax rate and an increase of 2.7% for tax deductible goodwill offset by 1.6% for the impact of the domestic manufacturing deduction and nondeductible expenses.

Net Income (Loss) Attributable to FreightCar America

As a result of the foregoing, net income attributable to FreightCar America was $4.9 million for the year ended December 31, 2011, reflecting an increase of $17.7 million from net loss attributable to FreightCar America of $12.8 million for the year ended December 31, 2010. For 2011, our basic and diluted net income per share were both $0.41, on basic and diluted shares outstanding of 11,916,292 and 11,962,196, respectively. For 2010, our basic and diluted net loss per share was $1.07, on basic and diluted shares outstanding of 11,896,148.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity for the years ended December 31, 2012 and 2011, were our cash provided by operations, cash and cash equivalent balances on hand, our securities held to maturity and our revolving credit facilities. 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 December 31, 2012, we had no borrowings or outstanding letters of credit under the revolving credit facility or any expectations to draw upon the revolving credit facility.


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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 $64.5 million as of December 31, 2012. The Revolving Loan Agreement also provides for customary events of default. As of December 31, 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. During the first half of 2013, we will be evaluating renewal or refinancing alternatives for our current revolving loan agreement and expect to have a new agreement in place by July 29, 2013.

Our restricted cash balance was $14.7 million as of December 31, 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 December 31, 2012 are scheduled to expire at various dates through March 31, 2013. 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.

As of December 31, 2012, the value of railcars available for lease was $43.4 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, our marketable securities 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 as demand for railcars increases, 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 net periodic benefit costs are the discount rate used on our pension and postretirement welfare obligations and expected return on pension plan assets. As of December 31, 2012, our benefit obligation under our defined benefit pension plans and our postretirement benefit plan was $65.0 million and $69.3 million, respectively, which exceeded the fair value of plan assets by $12.2 million and $69.3 million, respectively. We made contributions of $2.6 million to our defined benefit pension plans during 2012. As disclosed in Note 11 to the consolidated financial statements, we expect to make contributions of $759,000 to our defined benefit pension plans in 2013. The Pension Protection Act of 2006 provides for changes to the method of valuing pension plan assets and liabilities for funding purposes as well as minimum funding levels. Our defined benefit pension plans are in compliance with the minimum funding levels established in the Pension Protection Act. 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 $4.9 million during 2012. . . .

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