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RAIL > SEC Filings for RAIL > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for FREIGHTCAR AMERICA, INC.

Form 10-Q for FREIGHTCAR AMERICA, INC.


8-Aug-2014

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 Cherokee, Alabama, Danville, Illinois and Roanoke, Virginia. Our 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 aluminum-bodied coal car market. While our Danville and Roanoke facilities will continue to support our coal car products, the Shoals facility allows us to produce a broader variety of railcars in a cost-effective and efficient manner. Our Shoals facility delivered its first railcars during the fourth quarter of 2013 and production will continue to ramp up during 2014. Our Danville facility resumed production in June 2014 after being idled for fourteen months. 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 for all types of freight railcars through our FCRS subsidiary. FCRS has repair and maintenance facilities in Grand Island, Nebraska and Hastings, Nebraska and services freight cars and unit coal trains utilizing key rail corridors in the Western regions of the United States. We also lease freight cars through our JAIX Leasing Company subsidiary. As of June 30, 2014, the value of leased railcars (including inventory on lease and railcars available for lease) was $61.3 million. 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 railcar repair and maintenance and parts sales. Corporate includes administrative activities and all other non-operating activities.

Total orders for railcars in the second quarter of 2014 were 2,401 units, consisting of 2,201 new railcars, 400 leased railcars and a 200 unit customer reduction to rebuilt railcars ordered in a prior period, compared to 1,654 units ordered in the first quarter of 2014 and 693 units ordered in the second quarter of 2013, all of which were new railcars. Railcar deliveries totaled 1,635 units, consisting of 510 new railcars, 800 rebuilt railcars and 325 leased railcars in the second quarter of 2014, compared to 753 units, consisting of 288 new railcars, 390 rebuilt railcars and 75 leased railcars in the first quarter of 2014 and 710 units, consisting of 160 new railcars, 350 rebuilt railcars and 200 leased railcars in the second quarter of 2013. Total backlog of unfilled orders was 8,493 units, consisting of 5,424 new railcars, 2,290 rebuilt railcars and 779 leased railcars at June 30, 2014, compared to 7,727 units, consisting of 4,437 new railcars and 3,290 rebuilt railcars, at March 31, 2014 and 6,826 units, consisting of 3,071 new railcars, 3,680 rebuilt railcars and 75 leased railcars, at December 31, 2013. The estimated sales value of the backlog is $706 million and $492 million, respectively, as of June 30, 2014 and December 31, 2013.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2014 compared to Three Months Ended June 30, 2013

Revenues

Our consolidated revenues for the three months ended June 30, 2014 were $139.7 million compared to $47.1 million for the three months ended June 30, 2013. Manufacturing segment revenues for the three months ended June 30, 2014 were $128.8 million compared to $37.1 million for the three months ended June 30, 2013. The increase in Manufacturing segment revenues for the 2014 period compared to the 2013 period reflects the increase in the number of railcars delivered and change in product mix. Services segment revenues for the three months ended June 30, 2014 were $10.9 million compared to $10.1 million for the three months ended June 30, 2013. The increase in Services segment revenues for the 2014 period compared to the 2013 period reflects higher parts sales revenue, partially offset by lower repair volumes. Higher coal train utilization during the second quarter of 2014 reduced the volume of coal trains released for maintenance and reduced the repair volumes through our repair shops and sales of repair parts.


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Gross Profit

Our consolidated gross profit for the three months ended June 30, 2014 was $11.1 million compared to $2.3 million for the three months ended June 30, 2013, representing an increase of $8.8 million. The increase in our consolidated gross profit for the second quarter of 2014 compared to the second quarter of 2013 primarily reflects an increase in gross profit from our Manufacturing segment of $9.3 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 second quarter of 2014 compared to the second quarter of 2013 reflects the increase in deliveries. Gross profit for our Manufacturing segment for the second quarter of 2014 included costs associated with the continued ramp up of production volumes at our Shoals facility and carrying costs associated with our idled Danville facility totaling $1.8 million as well as incremental costs associated with the restart of production at Danville of $0.8 million. Gross profit for our Manufacturing segment was also impacted by a $0.8 million expense recorded during the second quarter of 2014 to settle a warranty claim. Gross profit for our Manufacturing segment for the second quarter of 2013 included start-up costs of our Shoals facility and carrying costs associated with our idled Danville facility totaling $2.5 million. The decrease in gross profit for our Services segment for the second quarter of 2014 compared to the second quarter of 2013 reflects lower repair volumes caused by increased utilization of railcars and a less profitable mix of parts sales and repair services. Our consolidated gross profit margin was 7.9% for the three months ended June 30, 2014 compared to 4.8% for the three months ended June 30, 2013.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses for the three months ended June 30, 2014 were $8.7 million compared to $7.8 million for the three months ended June 30, 2013. The increase primarily reflects the increase in legal costs due to our ongoing litigation related to our postretirement benefit plan. Manufacturing segment selling, general and administrative expenses for the three months ended June 30, 2014 were $2.7 million compared to $1.9 million for the three months ended June 30, 2013. Services segment selling, general and administrative expenses were $0.7 million for the three months ended June 30, 2014 compared to $0.9 million for the three months ended June 30, 2013. Corporate selling, general and administrative expenses for the three months ended June 30, 2014 were $5.3 million compared to $5.1 million for the three months ended June 30, 2013. 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.

Operating Income (Loss)

Our consolidated operating income for the three months ended June 30, 2014 was $2.4 million compared to consolidated operating loss of $5.6 million for the three months ended June 30, 2013. Operating income for the Manufacturing segment was $7.4 million for the three months ended June 30, 2014 compared to operating loss of $1.0 million for the three months ended June 30, 2013, reflecting the increase in deliveries. Operating income for our Manufacturing segment for the second quarter of 2014 reflected costs associated with the continued ramp up of production volumes at our Shoals facility and carrying costs associated with our idled Danville facility totaling $1.8 million as well as incremental costs associated with the restart of production at Danville of $0.8 million. Operating income for our Manufacturing segment was also impacted by a $0.8 million expense recorded during the second quarter of 2014 to settle a warranty claim. Operating loss for our Manufacturing segment for the second quarter of 2013 reflected start-up costs of our Shoals facility and carrying costs associated with our idled Danville facility totaling $2.6 million. Services segment operating income was $1.0 million for the three months ended June 30, 2014 compared to $1.6 million for the three months ended June 30, 2013. The decrease in Services segment operating income reflects lower repair volumes caused by increased utilization of trains and a less profitable mix of parts sales and repair services for the 2014 period compared to the 2013 period. Corporate costs were $6.0 million for the three months ended June 30, 2014 compared to $6.2 million for the three months ended June 30, 2013. 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 and Deferred Financing Costs

Interest expense and the amortization of deferred financing costs were $0.3 million for the three months ended June 30, 2014 compared to $0.1 million for the three months ended June 30, 2013. In addition to commitment fees on our revolving credit facility, letter of credit fees and amortization of deferred financing costs, results for the 2014 period 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.


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Income Taxes

Our income tax provision was $0.5 million for the three months ended June 30, 2014 compared to an income tax benefit of $2.2 million for the three months ended June 30, 2013. Our effective tax rate for the three months ended June 30, 2014 was 23.4% and was lower than the statutory U.S. federal income tax rate of 35% primarily due to the (14.2)% impact of a change in the valuation allowance and deferred tax assets due to changes in the mix of income from states in which we operate, which was partially offset by a 1.5% blended state tax rate and 1.1% for the effect of other differences. The effective tax rate for the three months ended June 30, 2013 was 39.4% and 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.

Net Income (Loss)

As a result of the foregoing, net income was $1.6 million for the three months ended June 30, 2014 compared to a net loss of $3.4 million for the three months ended June 30, 2013. For the three months ended June 30, 2014, our basic and diluted net income per share was $0.13, on basic and diluted shares outstanding of 11,999,750 and 12,091,052, respectively. 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.

Six Months Ended June 30, 2014 compared to Six Months Ended June 30, 2013

Revenues

Our consolidated revenues for the six months ended June 30, 2014 were $195.8 million compared to $134.7 million for the six months ended June 30, 2013. Manufacturing segment revenues for the six months ended June 30, 2014 were $176.8 million compared to $114.8 million for the six months ended June 30, 2013. The increase in Manufacturing segment revenues for the 2014 period compared to the 2013 period reflects the increase in the number of railcars delivered and product mix changes. Our Manufacturing segment delivered 2,388 units, consisting of 798 new railcars, 1,190 rebuilt railcars and 400 leased railcars, for the six months ended June 30, 2014, compared to 1,783 units, consisting of 608 new railcars, 975 rebuilt railcars and 200 leased railcars, for the six months ended June 30, 2013. Services segment revenues for the six months ended June 30, 2014 were $19.0 million compared to $19.9 million for the six months ended June 30, 2013. The decrease in Services segment revenues for the 2014 period compared to the 2013 period reflects lower repair volumes, which were partially offset by higher parts sales. Services segment revenues for the six months ended June 30, 2014 were negatively impacted by higher coal train utilization, which reduced the volume of coal trains released for maintenance and reduced the repair volumes through our repair shops and sales of repair parts.

Gross Profit

Our consolidated gross profit for the six months ended June 30, 2014 was $7.9 million compared to $7.2 million for the six months ended June 30, 2013, representing an increase of $0.7 million. The increase in our consolidated gross profit for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily reflects an increase in gross profit from our Manufacturing segment of $2.8 million, which was partially offset by a decrease in gross profit from our Services segment of $2.5 million. The increase in gross profit for our Manufacturing segment for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 reflects the increase in deliveries. Gross profit for our Manufacturing segment for the six months ended June 30, 2014 included costs associated with the continued ramp up of production volumes at our Shoals facility and carrying costs associated with our idled Danville facility totaling $4.7 million as well as incremental costs of $0.8 million associated with the restart of production at Danville during the second quarter. Gross profit for our Manufacturing segment for the six months ended June 30, 2014 was also negatively impacted by multiple weather-related production shutdowns, supply disruptions and related inefficiencies during the first quarter of 2014 totaling $1.9 million. Gross profit for our Manufacturing segment for the six months ended June 30, 2013 included start-up costs of our Shoals facility and carrying costs associated with our idled Danville facility totaling $2.5 million. The decrease in gross profit for our Services segment for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 reflects lower repair volumes caused by increased utilization of trains and a less profitable mix of parts sales and repair services. Our consolidated gross profit margin was 4.0% for the six months ended June 30, 2014 compared to 5.4% for the six months ended June 30, 2013.


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Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses for the six months ended June 30, 2014 were $17.1 million compared to $12.3 million for the six months ended June 30, 2013, representing an increase of $4.8 million. During the six months ended June 30, 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, 2014 included increases in legal costs of $0.6 million which were primarily related to our ongoing litigation relating to our postretirement benefit plan. Manufacturing segment selling, general and administrative expenses for the six months ended June 30, 2014 were $5.1 million compared to $3.6 million for the six months ended June 30, 2013. Services segment selling, general and administrative expenses for the six months ended June 30, 2014 were $1.6 million compared to $1.8 million for the six months ended June 30, 2013. Corporate selling, general and administrative expenses for the six months ended June 30, 2014 were $10.4 million compared to $6.8 million for the six months ended June 30, 2013, reflecting the reduction in the litigation reserve during the six months ended June 30, 2013. Corporate selling, general and administrative expenses for the six months ended June 30, 2013 also included $0.8 million related to the start-up of our Shoals facility.

Operating Income (Loss)

Our consolidated operating loss for the six months ended June 30, 2014 was $9.2 million compared to $5.0 million for the six months ended June 30, 2013. Operating income for the Manufacturing segment was $2.4 million for the six months ended June 30, 2014 compared to $1.1 million for the six months ended June 30, 2013, reflecting the increase in deliveries. Operating income for our Manufacturing segment for the six months ended June 30, 2014 reflected costs associated with the continued ramp up of production volumes at our Shoals facility and carrying costs associated with our idled Danville facility totaling $4.8 million as well as incremental costs of $0.8 million associated with the restart of production at Danville during the second quarter. Operating income for our Manufacturing segment for the six months ended June 30, 2013 reflected start-up costs of our Shoals facility and carrying costs associated with our idled Danville facility totaling $2.6 million. Operating income for our Manufacturing segment for the six months ended June 30, 2014 was also negatively impacted by multiple weather-related production shutdowns, supply disruptions and related inefficiencies during the first quarter of 2014 totaling $1.9 million. Services segment operating income was $0.6 million for the six months ended June 30, 2014 compared to $2.9 million for the six months ended June 30, 2013. The decrease in Services segment operating income reflects lower repair volumes caused by increased utilization of trains and a less profitable mix of parts sales and repair services for the 2014 period compared to the 2013 period. Corporate costs were $12.2 million for the six months ended June 30, 2014 compared to $9.0 million for the six months ended June 30, 2013, reflecting the $3.9 million reduction in litigation reserves from the Bral settlement. Corporate costs for the six months ended June 30, 2014 also included increases in legal costs of $0.6 million which were primarily related to our ongoing litigation relating to our postretirement benefit plan. 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 and Deferred Financing Costs

Interest expense and the amortization of deferred financing costs were $0.6 million for the six months ended June 30, 2014 compared to $0.2 million for the six months ended June 30, 2013. In addition to commitment fees on our revolving credit facility, letter of credit fees and amortization of deferred financing costs, results for the 2014 period 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

Our income tax benefit was $4.4 million for the six months ended June 30, 2014 compared to an income tax provision of $0.9 million for the six months ended June 30, 2013. Our effective tax rate for the six months ended June 30, 2014 was 45.0% and was higher than the statutory U.S. federal income tax rate of 35% primarily due to a 7.5% blended state tax rate, a 1.9% impact of a change in the valuation allowance and deferred tax assets due to changes in the mix of income from states in which we operate and 0.6% for the effect of other differences.

The income tax provision for the six months ended June 30, 2013 included a provision of $1.5 million resulting from applying changes in effective state tax rates on our deferred tax balances. 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 during the six months ended June 30, 2013. 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 for the six months ended June 30, 2013 also included 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.


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Net Income (Loss)

As a result of the foregoing, the net loss was $5.3 million for the six months ended June 30, 2014 compared to $6.1 million for the six months ended June 30, 2013. For the six months ended June 30, 2014, our basic and diluted net loss per share was $0.44 on basic and diluted shares outstanding of 11,994,667. 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.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity for the six months ended June 30, 2014 and 2013, were our cash and cash equivalent balances on hand, our securities held to maturity and our revolving credit facility.

We entered into a $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 FreightCar and certain of our subsidiaries, as borrowers, and Bank of America, N.A., as lender. The Revolving Credit Facility can be used for general corporate purposes, including working capital. As of June 30, 2014, we had no borrowings under the Revolving Credit Facility. The Credit 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 June 30, 2014, 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. The Credit 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 us. 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 our consolidated leverage ratio. Borrowings under the Revolving Credit Facility are secured by a first priority perfected security interest in substantially all of our and our subsidiaries' assets excluding railcars held by our railcar leasing subsidiary, JAIX. We also have pledged all of the equity interests in our direct and indirect domestic subsidiaries as security for the Revolving Credit Facility. The Credit Agreement has both affirmative and negative covenants, including, without limitation, a covenant requiring minimum consolidated net liquidity of $35.0 million and limitations on indebtedness, liens and investments. The Credit Agreement also provides for customary events of default.

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. As of December 31, 2013, we had no borrowings under the Revolving Credit Facility.

Our restricted cash and restricted certificates of deposit balance was $5.2 million as of June 30, 2014 and $7.8 million as of December 31, 2013, and consisted of cash and certificates of deposit used to collateralize standby letters of credit with respect to performance guarantees and to support our worker's compensation insurance claims. The decrease in restricted cash balances as of June 30, 2014 compared to December 31, 2013 was a result of decreases in standby letters of credit with respect to performance guarantees and our corresponding obligation to collateralize them. The standby letters of credit outstanding as of June 30, 2014 are scheduled to expire at various dates through October 1, 2018. We expect to establish restricted cash balances and restricted certificates of deposit in future periods to minimize bank fees related to standby letters of credit.

As of June 30, 2014, the value of leased railcars (including inventory on lease and railcars available for lease) was $61.3 million. We 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 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.


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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, 2013, our benefit obligations under our defined benefit pension plans and our postretirement benefit plan were $56.3 million and $63.3 million, respectively, which exceeded the fair values of plan assets by $0.8 million and $63.3 million, respectively. We made contributions of $0.1 million to our defined benefit pension plans during the six months ended June 30, 2014. As disclosed in Note 14 to the condensed consolidated financial statements, we expect to make contributions of $0.3 million (including contributions already made) to our defined benefit pension plans in 2014. 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 . . .

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