Business Context and Reporting Period
Company: FreightCar America, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: 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 railcars. The Company operates as a single segment.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2008 (Restated) |
|---|---|---|---|
| Revenues | $55,131 | $199,022 | $474,441 |
| Gross Profit | $6,879 | $33,157 | $39,207 |
| Gross Margin | 12.5% | 16.7% | 8.3% |
| Operating Income (Loss) | $284 | $13,022 | $(4,002) |
| Net Income (Loss) Attributable to FCA | $1,069 | $10,488 | $(579) |
| Diluted EPS | $0.09 | $0.88 | $(0.05) |
| Cash and Cash Equivalents | $129,192 | $129,192 | $113,691 (Dec 31, 2008) |
| Net Cash Used in Operating Activities | N/A | $(27,142) | $19,310 |
| Total Debt | $0 | $0 | $0 |
Note: The Company had no borrowings under its revolving credit facilities as of September 30, 2009. Outstanding letters of credit totaled $2.6 million.
Material Changes vs. Prior Period
- Revenue Decline: Revenues for the nine months ended September 30, 2009, dropped 58% to $199.0 million from $474.4 million in the prior year. This was driven by a significant decrease in coal car sales due to reduced industry demand, high railcar storage levels, and recession-driven reductions in electricity demand.
- Profitability Improvement: Despite lower revenues, the Company reported a net income of $10.5 million for the nine months ended September 30, 2009, compared to a net loss of $0.6 million in the same period of 2008. This turnaround was primarily due to the absence of $20.1 million in plant closure charges recorded in 2008 related to the Johnstown facility closure.
- Margin Expansion: Gross margin improved to 16.7% in the first nine months of 2009 from 8.3% in 2008. This increase was attributed to a favorable product mix (fewer new car sales, which have lower margins, and higher lease/after-market revenues) and a $3.9 million contract termination fee received in Q1 2009.
- Cash Flow Deterioration: Net cash used in operating activities was $27.1 million for the nine months ended September 30, 2009, compared to $19.3 million provided in the prior year. This shift was driven by changes in working capital, specifically a $55.3 million increase in accounts receivable and a $65.7 million increase in inventory.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Market Conditions: Management anticipates continued challenges in the coal-carrying railcar market through the remainder of 2009 and into 2010 due to recessionary pressures, ample utility stockpiles, and natural gas substitution.
- Production Status: The Roanoke facility ceased production of new railcars in July 2009 due to reduced demand but remains operational for related activities. Management expects to resume new railcar production as demand improves.
- Backlog: Total backlog of unfilled orders stood at 777 units as of September 30, 2009, down from 1,472 units at June 30, 2009, and 2,620 units at December 31, 2008.
- Liquidity: Management believes current cash balances, proceeds from operations, and available credit facilities ($7.7 million available under the primary borrowing base) are sufficient to meet liquidity needs for the next 12 months.
Risks and Contingencies
- Restatement and Internal Controls: The Company restated prior period financial statements due to historical accounting errors related to accounts payable and inventory valuation. These errors were attributed to material weaknesses in internal controls over financial reporting, specifically regarding system change controls, inventory valuation, and account reconciliations. While a new Oracle ERP system was implemented in August 2009 to address these issues, management concluded that disclosure controls and procedures were not effective as of September 30, 2009.
- Raw Material Costs: The Company is exposed to price fluctuations in aluminum and steel, which represent a significant majority of direct manufacturing costs. The Company does not currently hedge these risks.
- Pension Obligations: As of December 31, 2008, the Company's benefit obligations under defined benefit pension plans exceeded the fair value of plan assets by $26.7 million. Future funding requirements depend on investment returns and interest rates.
Unusual Items
- Contract Termination Fee: Included in revenues for the nine months ended September 30, 2009, is a $3.9 million fee received from a customer for reducing the number of railcars to be purchased under a contract.
- Plant Closure Charges: The prior year (2008) included $20.1 million in charges related to the closure of the Johnstown, Pennsylvania facility, which significantly impacted comparability.
Investor Verification Checklist
- Restatement Impact: Verify the full extent of the restatement on prior year comparables and the specific nature of the accounting errors regarding accounts payable and inventory.
- Internal Control Remediation: Monitor the progress of the new Oracle ERP system implementation and the timeline for remediation of material weaknesses in internal controls.
- Working Capital Trends: Analyze the significant increase in accounts receivable and inventory levels to assess potential collection risks or inventory obsolescence.
- Credit Facility Availability: Confirm the current borrowing base availability, which dropped to $7.7 million from $38.5 million at year-end 2008, and its impact on liquidity flexibility.
- Coal Market Recovery: Assess the timeline for recovery in coal loadings and the potential for the Roanoke facility to resume full production.