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RAIL > SEC Filings for RAIL > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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

Form 10-Q for FREIGHTCAR AMERICA, INC.


9-Aug-2013

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 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 cars in North America, based on the number of railcars delivered. Our railcar manufacturing facilities are located in Danville, Illinois; Roanoke, Virginia; and Cherokee, Alabama. Additionally, 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 and FCRMS subsidiaries. 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.

In February 2013, we subleased approximately 25% of a state-of-the-art production facility located in the Shoals region of Alabama. Our Shoals production facility was designed to efficiently build a wide variety of railcar types and 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 Danville, Illinois and Roanoke, Virginia facilities will continue to support our coal car products, our 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. Deliveries of the first railcars produced at the Shoals facility are expected in the third quarter of 2013.

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 costs.

Total orders for railcars in the second quarter of 2013 were 693 units, all of which were new railcars, compared to 274 units, consisting of 174 new railcars and 100 rebuilt railcars, ordered in the first quarter of 2013 and 961 units, consisting of 600 new railcars and 361 used railcars, ordered in the second quarter of 2012. Railcar deliveries totaled 710 units, consisting of 160 new railcars, 200 leased railcars and 350 rebuilt railcars, in the second quarter of 2013, compared to 1,073 units, consisting of 448 new railcars and 625 rebuilt railcars, in the first quarter of 2013 and 2,786 units, consisting of 1,815 new railcars, 361 used railcars sold and 610 leased railcars, in the second quarter of 2012. Total backlog of unfilled orders was 2,065 units, consisting of 1,040 new railcars and 1,025 rebuilt railcars, at June 30, 2013, compared to 2,881 units, consisting of 981 new railcars and 1,900 rebuilt railcars, at December 31, 2012. Subsequent to June 30, 2013, orders for over 5,500 railcars were received, which include orders for about 4,000 rebuilt coal cars to serve the Eastern coal market.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2013 compared to Three Months Ended June 30, 2012

Revenues

Our consolidated revenues for the three months ended June 30, 2013 were $47.1 million compared to $181.2 million for the three months ended June 30, 2012. Manufacturing segment revenues for the three months ended June 30, 2013 were $37.1 million compared to $171.8 million for the three months ended June 30, 2012. The decrease in Manufacturing segment revenues for the 2013 period compared to the 2012 period reflects the decrease in the number of railcars delivered and an unfavorable product mix. Services segment revenues for the three months ended June 30, 2013 were $10.1 million compared to $9.4 million for the three months ended June 30, 2012. The increase in Services segment revenues for the 2013 period compared to the 2012 period reflects higher parts sales revenue and repair volumes.


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Gross Profit

Our consolidated gross profit for the three months ended June 30, 2013 was $2.3 million compared to $17.0 million for the three months ended June 30, 2012, representing a decrease of $14.7 million. The decrease in our consolidated gross profit for the second quarter of 2013 compared to the second quarter of 2012 reflects a decrease in gross profit from our Manufacturing segment of $15.8 million, which was partially offset by an increase in gross profit from our Services segment of $0.9 million. The decrease in gross profit for our Manufacturing segment for the second quarter of 2013 compared to the second quarter of 2012 reflects the decrease in deliveries and the impact of $1.9 million related to the start-up of our Shoals facility and the idling of our Danville facility in the second quarter of 2013. The increase in gross profit for our Services segment for the second quarter of 2013 compared to the second quarter of 2012 reflects higher parts sales and an increase in higher- margin program repairs. Our consolidated gross margin rate was 4.8% for the three months ended June 30, 2013 compared to 9.4% for the three months ended June 30, 2012.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses for the three months ended June 30, 2013 were $7.8 million compared to $7.6 million for the three months ended June 30, 2012, representing an increase of $0.2 million. Consulting costs decreased by $0.7 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 but these decreases were more than offset by various increases in other selling, general and administrative expenses. Manufacturing segment selling, general and administrative expenses for the three months ended June 30, 2013 were $1.9 million compared to $1.4 million for the three months ended June 30, 2012. Services segment selling, general and administrative expenses for the three months ended June 30, 2013 of $0.9 million were flat compared to the comparable period of 2012. Corporate selling, general and administrative expenses for the three months ended June 30, 2013 were $5.1 million compared to $5.3 million for the three months ended June 30, 2012. Corporate selling, general and administrative expenses for the three months ended June 30, 2013 included $0.8 million related to the start-up of our Shoals facility.

Gain on Sale of Railcars Available for Lease

Gain on sale of railcars available for lease for each of the three months ended June 30, 2013 and June 30, 2012, were not material and represented recognition of deferred gains on sale and leaseback transactions in prior periods.

Operating (Loss) Income

Our consolidated operating loss for the three months ended June 30, 2013 was $5.6 million, compared to operating income of $9.4 million for the three months ended June 30, 2012. Operating loss for the Manufacturing segment was $1.0 million for the three months ended June 30, 2013 compared to operating income of $15.3 million for the three months ended June 30, 2012. The reduction in operating income for the Manufacturing segment reflects the decrease in deliveries and the impact of $1.9 million related to the start-up of our Shoals facility and the idling of our Danville facility in the second quarter of 2013. Services segment operating income was $1.6 million for the three months ended June 30, 2013 compared to $0.7 million for the three months ended June 30, 2012. The increase in Services segment operating income was primarily due to higher parts sales volume and higher volume of program repairs for the 2013 period compared to the 2012 period. Corporate costs were $6.2 million for the three months ended June 30, 2013 compared to $6.6 million for the three months ended June 30, 2012. The decrease in Corporate costs was primarily due to a reduction in consulting costs. Corporate costs for the three months ended June 30, 2013 included $0.8 million related to the start-up of our Shoals facility.

Interest Expense

Interest expense was $0.1 million for each of the three months ended June 30, 2013 and 2012. Interest expense primarily relates to commitment fees on our revolving credit facility and letter of credit fees.

Income Taxes

The income tax benefit was $2.2 million for the three months ended June 30, 2013, compared to an income tax provision of $3.8 million for the three months ended June 30, 2012. The effective tax rate for the three months ended June 30, 2013 was 39.4% compared to an effective tax rate of 40.3% for the three months ended June 30, 2012. The effective tax rate for the three months ended June 30, 2013 was higher than the statutory U.S. federal income tax rate of 35% primarily due to the 10.8% impact of changes in the valuation allowance, which was partially offset by the 3.2% benefit of changes in state tax rates applied against our deferred tax assets and other permanent adjustments. The effective tax rate for the three months ended June 30, 2012 was higher than the statutory U.S. federal income tax rate of 35% primarily due to a 4.2% blended state tax rate and other permanent adjustments.


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Net (Loss) Income

As a result of the foregoing, the net loss was $3.4 million for the three months ended June 30, 2013, reflecting a decrease of $9.0 million from net income of $5.6 million for the three months ended June 30, 2012. For the three months ended June 30, 2013, our basic and diluted net loss per share was $0.29 on basic and diluted shares outstanding of 11,950,652.

For the three months ended June 30, 2012, our basic and diluted net income per share was $0.47 and $0.46, on basic and diluted shares outstanding of 11,931,565 and 11,983,901, respectively.

Six Months Ended June 30, 2013 compared to Six Months Ended June 30, 2012

Revenues

Our consolidated revenues for the six months ended June 30, 2013 were $134.7 million compared to $400.3 million for the six months ended June 30, 2012. Manufacturing segment revenues for the first half of 2013 were $114.8 million compared to $382.2 million for the first half of 2012. The decrease in Manufacturing segment revenues for the 2013 period compared to the 2012 period reflects the decrease in the number of railcars delivered and an unfavorable product mix. Our Manufacturing segment delivered 1,783 units, consisting of 608 new railcars, 200 leased railcars and 975 rebuilt railcars, in the first half of 2013, compared to 5,399 units, consisting of 3,961 new railcars, 441 used railcars sold and 997 leased railcars, in the first half of 2012. Services segment revenues for the six months ended June 30, 2013 were $19.9 million compared to $18.1 million for the six months ended June 30, 2012. The increase in Services segment revenues for the 2013 period compared to the 2012 period reflects higher parts sales revenue and higher repair volumes.

Gross Profit

Our consolidated gross profit for the six months ended June 30, 2013 was $7.2 million compared to $40.8 million for the six months ended June 30, 2012, representing a decrease of $33.6 million. The decrease in our consolidated gross profit for the first half of 2013 compared to the first half of 2012 reflects a decrease in gross profit from our Manufacturing segment of $35.2 million, which was partially offset by an increase in gross profit from our Services segment of $1.5 million. The decrease in gross profit for our Manufacturing segment for the first half of 2013 compared to the first half of 2012 reflects the decrease in deliveries and the impact of $2.6 million related to the start-up of our Shoals facility and the idling of our Danville facility in the first half of 2013. The increase in gross profit for our Services segment for the first half of 2013 compared to the first half of 2012 reflects higher parts sales and an increase in higher margin program repairs. Our consolidated gross margin rate was 5.4% for the six months ended June 30, 2013 compared to 10.2% for the six months ended June 30, 2012.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses for the six months ended June 30, 2013 were $12.3 million compared to $16.3 million for the six months ended June 30, 2012, representing a decrease of $4.0 million. During the first half of 2013 we settled the Bral litigation (see note 14 to our condensed consolidated financial statements), which resulted in a $3.9 million reduction in litigation reserves. Selling, general and administrative expenses for the six months ended June 30, 2013 also included decreases in consulting costs. Manufacturing segment selling, general and administrative expenses for the six months ended June 30, 2013 were $3.6 million compared to $2.9 million for the six months ended June 30, 2012. Services segment selling, general and administrative expenses for the six months ended June 30, 2013 were $1.8 million compared to $1.9 million for the six months ended June 30, 2012. Corporate selling, general and administrative expenses for the six months ended June 30, 2013 were $6.8 million compared to $11.6 million for the six months ended June 30, 2012, reflecting the reduction in the litigation reserve (partially offset by related legal expenses) and decreases in consulting costs. Corporate selling, general and administrative expenses for the six months ended June 30, 2013 included $0.8 million related to the start-up of our Shoals facility.

Gain on Sale of Railcars Available for Lease

Gain on sale of railcars available for lease for the six months ended June 30, 2013 were not material and represented recognition of deferred gains on sale and leaseback transactions in prior periods. Gain on sale of railcars available for lease for the six months ended June 30, 2012 was $1.0 million and represented the gain on sale of leased railcars with a net book value of $10.4 million.


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Operating (Loss) Income

Our consolidated operating loss for the six months ended June 30, 2013 was $5.0 million, compared to consolidated operating income of $25.4 million for the six months ended June 30, 2012. Operating income for the Manufacturing segment was $1.1 million for the six months ended June 30, 2013 compared to $37.9 million for the six months ended June 30, 2012. The reduction in operating income for the Manufacturing segment reflects the decrease in deliveries and the impact of $2.6 million related to the start-up of our Shoals facility and the idling of our Danville facility in the six months ended June 30, 2013. Services segment operating income was $2.9 million for the six months ended June 30, 2013 compared to $1.4 million for the six months ended June 30, 2012. The increase in Services segment operating income was primarily due to higher parts sales volume and higher volume of program repairs for the 2013 period compared to the 2012 period. Corporate costs were $9.0 million for the six months ended June 30, 2013 compared to $13.9 million for the six months ended June 30, 2012. The decrease in Corporate costs was primarily due to a reduction in the litigation reserve (partially offset by related legal expenses) and decreases in consulting costs. Corporate costs for the six months ended June 30, 2013 included $0.8 million related to the start-up of our Shoals facility.

Interest Expense

Interest expense was $0.2 million for each of the six months ended June 30, 2013 and 2012, and primarily related to commitment fees on our revolving credit facility and letter of credit fees.

Income Taxes

The income tax provision was $0.9 million for the six months ended June 30, 2013, compared to $9.9 million for the six months ended June 30, 2012. The addition of our Shoals facility changed the mix of income from states in which we operate, resulting in changes in our estimated state tax apportionment and effective state tax rates. The income tax provision for the six months ended June 30, 2013 included a provision of $1.5 million resulting from applying these changes in effective state tax rates on our deferred tax balances. Additionally, projected taxable income in certain states in which we operate may not be sufficient to realize the full value of net operating loss carryforwards. As a result, the income tax provision also includes the recognition of a valuation allowance of $2.5 million against deferred tax assets related to net operating loss carryforwards in certain states in which we operate. These discrete tax provisions during the six months ended June 30, 2013 were partially offset by $0.9 million of discrete tax benefits recorded during the period associated with tax- deductible goodwill. Excluding these discrete items, our forecasted full-year effective tax rate applied against pre-tax income for the six months ended June 30, 2013 was 44.6%. The effective tax rate for the six months ended June 30, 2012 was 39.3% and 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.

Net (Loss) Income

As a result of the foregoing, net loss was $6.1 million for the six months ended June 30, 2013, reflecting a decrease of $21.4 million from net income of $15.3 million for the six months ended June 30, 2012. For the six months ended June 30, 2013, our basic and diluted net loss per share was $0.51 on basic and diluted shares outstanding of 11,947,058. For the six months ended June 30, 2012, our basic and diluted net income per share was $1.28 on basic and diluted shares outstanding of 11,927,992 and 11,992,808 respectively.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity for the six months ended June 30, 2013 and 2012, were our cash and cash equivalent balances on hand, our securities held to maturity, our lease fleet and our revolving credit facility.

On July 26, 2013, we entered into a new $50.0 million senior secured revolving credit facility and cancelled our previous credit facility. The new revolving credit facility can be used for general corporate purposes, including working capital. As of August 9, 2013, we had no borrowings under the new revolving credit facility. The new revolving credit facility also contains a sub-facility for letters of credit not to exceed the lesser of $30.0 million and the amount of the senior secured revolving credit facility at such time. We had no outstanding letters of credit under the new revolving credit facility as of August 9, 2013.


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We entered into the new revolving credit facility pursuant to a Credit Agreement dated July 26, 2013 (the "Revolving Loan Agreement") by and among FreightCar and certain of its subsidiaries as borrowers and guarantors (together with the Company, the "Borrowers"), and Bank of America, N.A., as lender. The Revolving Loan Agreement has a term ending on July 26, 2016 and revolving loans outstanding thereunder will bear interest at a rate of LIBOR plus an applicable margin of 1.50% or at a base rate, as selected by the Company. Base rate loans will bear interest at the highest of (a) the Federal Funds Rate plus 0.50%,
(b) the prime rate or (c) LIBOR plus 1.00%. We are required to pay a non-utilization fee of between 0.10% and 0.30% on the unused portion of the revolving loan commitment depending on our quarterly average balance of unrestricted cash and the our consolidated leverage ratio. Borrowings under the Revolving Loan Agreement are secured by a first priority perfected security interest in substantially all of our assets excluding railcars held by our railcar leasing subsidiary, JAIX. We also agreed to pledge all of the equity interests in our direct and indirect domestic subsidiaries. The Revolving Loan Agreement has both affirmative and negative covenants, including, without limitation, a minimum consolidated net liquidity of $35.0 million and limitations on indebtedness, liens and investments. The Revolving Loan Agreement also provides for customary events of default.

The Revolving Loan Agreement replaces our prior revolving credit facility pursuant to a Loan and Security Agreement dated as of July 29, 2010 among FreightCar and certain of its subsidiaries as borrowers (collectively, the "Borrowers"), and Fifth Third Bank, as lender (the "Prior Credit Agreement"), which was terminated and cancelled effective July 26, 2013 and otherwise would have matured on June 29, 2013. As of June 30, 2013 and December 31, 2012, we had no borrowings or outstanding letters of credit under the Prior Credit Agreement. As of June 30, 2013, we had borrowing capacity of $30.0 million under the Prior Credit Agreement and we were in compliance with all of the covenants contained in the agreement.

Our restricted cash balance was $3.6 million as of June 30, 2013 and $14.7 million as of December 31, 2012, 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 June 30, 2013 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.

As of June 30, 2013, the value of leased railcars was $59.8 million. We may continue to offer railcars for lease to certain customers and pursue opportunities to sell leased railcars in our portfolio.

Based on our current level of operations and known changes in planned volume based on our backlog, we believe that our cash balances and our marketable securities, 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.

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 $61,000 in contributions to our defined benefit pension plans during the first six months of 2013 and expect to make approximately $0.8 million in total contributions to our defined benefit pension plans during 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 $2.5 million during the six months ended June, 2013. A substantial portion of our postretirement benefit plan obligation relates to a settlement with the union representing employees at the Company's and its predecessors' Johnstown manufacturing facilities. The terms of that settlement required us to pay until November 30, 2012 certain monthly amounts toward the cost of retiree health care coverage. We engaged in voluntary negotiations for two years in an effort to reach a consensual agreement related to the expired settlement agreement but no agreements were reached. In July 2013, we provided notice of our intent to terminate, effective October 1, 2013, our


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contributions for medical coverage and life insurance benefits to those retirees who were receiving benefit contributions under the settlement agreement. On July 8, 2013, we filed a complaint seeking declaratory relief from the United States District Court for the Northern District of Illinois to confirm our right to reduce or terminate retiree medical coverage and life insurance benefits pursuant to our plans and, on July 9, 2013, the union and certain retiree defendants filed suit in the United States District Court for the Western District of Pennsylvania regarding the same dispute (See Note 14 to the Condensed Consolidated Financial Statements). The outcome of the pending litigation and the impact on our postretirement benefit plan obligation cannot be determined at this time. When we terminate, effective October 1, 2013 our contributions to fund our postretirement benefit plan, then we would make approximately $2.9 million in payments to the plan in 2013. We would have made approximately $4.9 million in payments to the plan in 2013 based on the expired settlement agreement. However, the Company's postretirement benefit plan obligation could significantly increase or decrease as a result of the litigation or if the parties agree to an alternative settlement agreement. 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
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