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RAIL > SEC Filings for RAIL > Form 10-K on 14-Mar-2014All Recent SEC Filings

Show all filings for FREIGHTCAR AMERICA, INC.

Form 10-K for FREIGHTCAR AMERICA, INC.


14-Mar-2014

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 Cherokee, Alabama, Danville, Illinois and Roanoke, Virginia. Based on our backlog for coal car orders as of December 31, 2013 our Danville facility is idle but remains available to resume operations if more coal car production capacity is needed. The Shoals facility, our new state-of-the-art production facility, was designed to efficiently build a wide variety of railcar types. The Shoals facility 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 and Roanoke 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. Our Shoals facility delivered its first railcars during the fourth quarter of 2013 and production will continue to ramp up during 2014.

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 and inspections for all types of freight railcars through our FCRS subsidiary. FCRS has repair and maintenance and inspection facilities in 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. As part of our strategic initiative to improve the contribution of our services business to our results of operations, we evaluated the long-term profitability of each of our railcar maintenance and repair shops during the fourth quarter of 2013. As a result of this analysis, we decided to close our underperforming maintenance and repair shop in Clinton, Indiana.

We also lease freight cars through our JAIX Leasing Company subsidiary. As of December 31, 2013, the value of leased railcars (including inventory on lease and railcars available for lease) was $53.1 million.

Railcar deliveries totaled 3,821 units, consisting of 992 new railcars, 99 used railcars, 2,530 rebuilt railcars and 200 railcars leased, for the year ended December 31, 2013, compared to 8,325 units, consisting of 5,487 new railcars, 441 used railcars, 1,400 rebuilt railcars and 997 leased railcars, delivered in the same period of 2012. Our total backlog of firm orders for railcars increased by 3,945 railcars, from 2,881 railcars as of December 31, 2012 to 6,826 railcars as of December 31, 2013. Our primary customers are railroads, financial institutions and shippers.

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 the railroads, operating lessors and shippers to continue to evaluate freight demand for dry bulk commodities and containerized freight and to continue to repair, maintain and upgrade their fleets to maximize the productivity of their railcar equipment.

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


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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.

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, 2013 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 (loss) income

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

RESULTS OF OPERATIONS

Year Ended December 31, 2013 compared to Year Ended December 31, 2012

Revenues

Our consolidated revenues for the year ended December 31, 2013 were $290.4 million compared to $677.4 million for the year ended December 31, 2012. Manufacturing segment revenues for the year ended December 31, 2013 were $253.8 million compared to $644.0 million for the year ended December 31, 2012. The decrease in Manufacturing segment revenues for 2013 compared to 2012 reflects significantly fewer railcars delivered and a greater number of lower revenue per car rebuilt railcars. Our Manufacturing segment delivered 3,821 units, consisting of 992 new railcars, 99 used railcars, 2,530 rebuilt railcars and 200 leased railcars, for the year ended December 31, 2013, compared to 8,325 units, consisting of 5,487 new railcars, 441 used railcars, 1,400 rebuilt railcars and 997 leased railcars, for the year ended December 31, 2012. Services segment revenues for the year ended December 31, 2013 were $36.6 million compared to $33.4 million for the year ended December 31, 2012. The increase in Services segment revenues for 2013 compared to 2012 reflects higher parts sales revenue and higher repair volumes.

Gross Profit

Our consolidated gross profit for the year ended December 31, 2013 was $13.2 million compared to $65.0 million for the year ended December 31, 2012, representing a decrease of $51.8 million. The decrease in our consolidated gross profit for the year ended December 31, 2013 compared to the year ended December 31, 2012 reflects a decrease in gross profit from our Manufacturing segment of $52.7 million, which was partially offset by an increase in gross profit from our Services segment of $0.6 million. The decrease in gross profit for our Manufacturing segment for the year ended December 31, 2013 compared to the year ended December 31, 2012 reflects the significant decrease in deliveries and $9.5 million related to under-absorption of overhead costs due to low start-up volumes and costs associated with ramping up the labor force at our Shoals facility and the carrying costs associated with our idled Danville facility during 2013. Gross profit for our Manufacturing segment for the year ended December 31, 2013 included a $1.7 million charge for projected costs in excess of selling price related to an order to


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be delivered in 2014. Customer lead times on this order required us to source key components from higher-priced suppliers in order to meet the customer's delivery requirements. Manufacturing segment gross profit for the year ended December 31, 2013 was also negatively impacted by production inefficiencies and higher operating costs. The increase in gross profit for our Services segment for the year ended December 31, 2013 compared to the year ended December 31, 2012 reflects higher parts sales and an increase in higher-margin program repairs. Our consolidated gross margin rate was 4.6% for the year ended December 31, 2013 compared to 9.6% for the year ended December 31, 2012.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2013 were $27.5 million compared to $32.7 million for the year ended December 31, 2012, representing a decrease of $5.2 million, or 16%. The decrease reflects a decrease in our Bral litigation reserve of $3.9 million, decreases in incentive compensation of $3.6 million and a decrease in consulting costs of $2.2 million, which were partially offset by increases in salaries of $1.6 million, Shoals start-up costs of $1.3 million, legal fees of $0.9 million relating to the postemployment benefit plan dispute and increases in stock compensation of $0.6 million. Manufacturing segment selling, general and administrative expenses were $7.3 million for the year ended December 31, 2013 compared to $6.4 million for the year ended December 31, 2012. Services segment selling, general and administrative expenses were $3.8 million for the year ended December 31, 2013 compared to $3.9 million for the year ended December 31, 2012. Corporate selling, general and administrative expenses for the year ended December 31, 2013 were $16.4 million compared to $22.4 million for the year ended December 31, 2012 reflecting the reduction in the litigation reserve and decreases in incentive compensation and consulting costs, which were partially offset by higher legal fees related to the postemployment benefit plan dispute. Corporate selling, general and administrative expenses for the year ended December 31, 2013 included $1.3 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 year ended December 31, 2013 was $0.6 million and represented the gain on sale of leased railcars with a net book value of $6.2 million. 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 leased railcars with a net book value of $10.4 million.

Restructuring and Impairment Charges

Restructuring and impairment charges were $10.5 million for the year ended December 31, 2013 and consisted of the items described below. There were no restructuring and impairment charges for the year ended December 31, 2012.

Although we are committed to maintaining our status as a market leader in coal car manufacturing and do not have plans to permanently close our Danville manufacturing facility, the current industry outlook for the all-aluminum coal car market remains soft. Based on our backlog for coal car orders as of December 31, 2013 and given the soft current industry outlook, we are unable to predict when our Danville manufacturing facility will resume operations and therefore we tested the long-lived assets at the Danville facility for impairment as of December 31, 2013. The carrying values of property, plant and equipment at the Danville facility were reduced to their estimated fair market values, resulting in a non-cash impairment charge of $7.6 million for the year ended December 31, 2013.

As part of our strategic initiative to improve the contribution of our Services business to our results of operations, we evaluated the long-term profitability of each of our railcar maintenance and repair shops during the fourth quarter of 2013. As a result of this analysis we decided to close our underperforming maintenance and repair shop in Clinton, Indiana. We evaluated the long-lived assets at our Clinton maintenance and repair shop for impairment and reduced the carrying values of property, plant and equipment to their estimated fair market values, resulting in a non-cash impairment charge of $1.5 million for the year ended December 31, 2013. We also recorded a non-cash impairment charge of $0.1 million related to customer intangibles and recorded other charges of $0.1 million related to the Clinton closure during the fourth quarter of 2013.

We revised our Corporate management reporting structure as part of the leadership transition following the retirement of our previous President and Chief Executive Officer during the fourth quarter of 2013, resulting in severance charges of $1.1 million being recorded during the fourth quarter of 2013.


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Operating (Loss) Income

Our consolidated operating loss for the year ended December 31, 2013 was $24.1 million compared to operating income of $33.2 million for the year ended December 31, 2012. Operating loss for the Manufacturing segment was $3.4 million for the year ended December 31, 2013 compared to operating income of $58.3 million for the year ended December 31, 2012, reflecting the significant decrease in deliveries, $9.5 million related to the start-up of the Shoals facility and the carrying costs associated with our idled Danville facility and non-cash fixed asset impairment charges of $7.6 million for our idled Danville facility. Our Manufacturing segment operating loss for the year ended December 31, 2013 also included a $1.7 million charge for projected costs in excess of selling price related to an order to be delivered in 2014. Manufacturing segment operating loss for the year ended December 31, 2013 was also impacted by production inefficiencies and higher operating costs. Services segment operating income was $1.2 million for the year ended December 31, 2013 compared to $2.1 million for the year ended December 31, 2012, primarily as a result of the non-cash impairment charges of $1.6 million related to our closed Clinton maintenance and repair shop. Corporate costs were $21.9 million for the year ended December 31, 2013 compared to $27.2 million for the year ended December 31, 2012. The decrease in Corporate costs was primarily due to the reduction in the litigation reserve and decreases in incentive compensation and consulting costs, which were partially offset by higher legal fees relating to the postemployment benefit plan dispute. Corporate costs for the year ended December 31, 2013 included $1.3 million related to the start-up of our Shoals facility and $1.6 million related to corporate severance.

Interest Expense and Deferred Financing Costs

Interest expense and the amortization of deferred financing costs were $0.8 million for the year ended December 31, 2013 compared to $0.4 million for the year ended December 31, 2012. In addition to commitment fees on our revolving credit facility, letter of credit fees and amortization of deferred financing costs, 2013 results included non-cash imputed interest on a customer advance for leased railcars delivered for which revenue cannot be recognized until all contingencies have been resolved.

Income Taxes

The income tax benefit was $5.5 million for the year ended December 31, 2013 compared to an income tax provision of $13.8 million for the year ended December 31, 2012. The effective tax rates for the years ended December 31, 2013 and 2012, were 22.3% and 41.9%, respectively. The addition of our Shoals facility changed the mix of projected income from states in which we operate, resulting in changes in our estimated state tax apportionment and effective state tax rates. The income tax benefit for the year ended December 31, 2013 included a provision of $2.2 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 benefit for the year ended December 31, 2013 also included the recognition of a valuation allowance of $2.3 million against deferred tax assets related to net operating loss carryforwards in certain states in which we operate. 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, which was 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.

Net (Loss) Income Attributable to FreightCar America

As a result of the foregoing, net loss attributable to FreightCar America was $19.3 million for the year ended December 31, 2013 compared to net income of $19.1 million for the year ended December 31, 2012. For 2013, our basic and diluted net loss per share were both $1.61, on basic and diluted shares outstanding of 11,954,238. 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.


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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.

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 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 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


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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 and Deferred Financing Costs

Interest expense (consisting of commitment fees on our revolving credit facility and letter of credit fees) and the 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.

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.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity for the years ended December 31, 2013 and 2012, were our cash provided by operations, cash and cash equivalent balances on hand, our securities held to maturity and our revolving credit facilities.

We entered into a new $50.0 million senior secured revolving credit facility (the "Revolving Credit Facility") pursuant to a Credit Agreement dated as of July 26, 2013 (the "Credit Agreement") by and among us and certain of our subsidiaries, as borrowers, and Bank of America, N.A., as lender, and cancelled our previous credit facility. The Revolving Credit Facility can be used for general corporate purposes, including working capital. As of December 31, 2013, we had no borrowings under the Revolving Credit Facility. The Credit Facility Agreement 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. As of December 31, 2013, we had $4.6 million in outstanding letters of credit under the Revolving Credit Facility and therefore had $45.4 million available for borrowing under the Revolving Credit Facility. . . .

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