FreightCar America, Inc. - 10-Q Summary (Period Ended Sep 30, 2010)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for FreightCar America, Inc., filed for the period ended September 30, 2010. The Company is a leading manufacturer of aluminum-bodied and coal-carrying railcars in North America, with facilities in Danville, Illinois, and Roanoke, Virginia. Operations include manufacturing, rebuilding, repairing, selling, and leasing freight cars. The Company operates as a single segment.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Revenues | $41.3 million | $91.9 million |
| Gross Profit (Loss) | ($0.8) million | $2.8 million |
| Gross Margin | (2.0%) | 3.0% |
| Operating Income (Loss) | ($7.3) million | ($15.3) million |
| Net Loss Attributable to FreightCar America | ($4.7) million | ($9.3) million |
| Diluted EPS | ($0.39) | ($0.78) |
| Cash and Cash Equivalents (Sep 30, 2010) | $95.7 million | |
| Net Cash Used in Operating Activities (9 Months) | ($32.6) million | |
| Debt | No borrowings under the new $30 million revolving credit facility. |
Material Changes vs. Prior Period
- Revenue Decline: Revenues for the nine months ended September 30, 2010, dropped to $91.9 million from $199.0 million in the prior year period. This decrease is primarily due to lower coal car sales driven by reduced industry demand. The 2009 period included a $3.9 million contract termination fee not present in 2010.
- Profitability Reversal: The Company reported a net loss of $9.3 million for the nine months of 2010, compared to net income of $10.5 million in the same period of 2009. Gross margin contracted significantly from 16.7% in 2009 to 3.0% in 2010 due to low production levels and competitive pricing pressures.
- Cash Flow Shift: Operating cash flow turned negative, using $32.6 million in the first nine months of 2010, compared to providing $19.3 million in 2009. This was driven by the operating loss and increases in working capital (inventory up $12.3 million; accounts receivable up $3.4 million), partially offset by an $8.9 million increase in customer deposits.
- Order Backlog: Total backlog of unfilled orders was 2,417 units at September 30, 2010, down from 3,000 units at June 30, 2010, but significantly higher than the 265 units at December 31, 2009.
Outlook, Risks, and Unusual Items
- Market Outlook: Management anticipates continued challenging market conditions for coal-carrying railcars through the remainder of 2010 and into 2011 due to economic factors and railcars currently in storage. However, long-term demand is expected to remain due to the aging fleet of steel-bodied cars and projected growth in domestic coal consumption.
- Subsequent Acquisition: On November 1, 2010, the Company acquired the business assets of DTE Rail Services Inc. for approximately $23.3 million, funded by cash from operations. This move aims to diversify revenue sources and reduce cyclicality by expanding into railcar repair and fleet management services.
- Liquidity and Credit: The Company entered into a new $30 million senior secured revolving credit facility in July 2010, replacing prior facilities. As of September 30, 2010, there were no borrowings under this facility. Management believes current cash balances and the credit facility are sufficient to meet liquidity needs for the next year.
- Risks: Key risks include the cyclical nature of the railcar industry, reliance on a small number of customers, fluctuating raw material costs (aluminum and steel), and significant pension and postretirement benefit obligations. The Company has unfunded pension and postretirement obligations totaling approximately $78.8 million as of December 31, 2009.
Investor Verification Checklist
- Verify the sustainability of the $8.9 million increase in customer deposits and the timing of their conversion to revenue in Q4 2010.
- Monitor the integration and financial impact of the DTE Rail Services Inc. acquisition completed in November 2010.
- Assess the Company's ability to maintain compliance with the covenants of the new $30 million revolving credit facility, particularly the minimum tangible net worth covenant.
- Review future cash flow projections given the significant unfunded pension and postretirement benefit obligations.
- Track raw material price trends (aluminum and steel) and the Company's ability to pass these costs to customers given the current low demand environment.