RAIL

Business Context and Reporting Period

Company: FreightCar America, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Industry: Manufacturer of aluminum-bodied and steel-bodied railcars, specializing in coal-carrying units.
Operations: Manufacturing facilities in Danville, Illinois (owned) and Roanoke, Virginia (leased). The Johnstown, Pennsylvania facility was closed in May 2008.

Key Financial Metrics (Year Ended Dec 31, 2009)

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 67% to $248.5 million, driven by a 67% drop in railcar deliveries (3,377 vs. 10,276) due to reduced industry demand for coal-carrying cars and recession-driven reductions in electricity demand.
• Margin Expansion: Despite lower volume, gross margin improved to 14.7% from 8.9%. This was driven by a favorable product mix and a $3.9 million contract termination fee, offsetting lower sales volume.
• Backlog Contraction: Firm order backlog plummeted 89% to 265 units ($24.8 million) from 2,424 units ($183.4 million) in 2008.
• Plant Closure Impact: The company recorded $0.5 million in plant closure income in 2009 (insurance recoveries and adjustments), compared to $20.0 million in charges in 2008 related to the Johnstown facility closure.
• Employee Reduction: Total employees dropped from 875 in 2008 to 188 in 2009 as the company adjusted labor levels to match production requirements.

Guidance, Outlook, and Risks

• Outlook: Management expects the long-term outlook for railcar demand to be positive due to the replacement of aging fleets and increased rail traffic, anticipating a recovery in demand in 2011-2012. Subsequent to year-end, the company received orders for over 3,000 new railcars for delivery in 2010 and 2011.
• Liquidity: The company holds $98 million in cash and has no outstanding debt. It maintains two revolving credit facilities ($50 million and $60 million) with no borrowings as of year-end. Management believes current cash and credit availability are sufficient for 2010 liquidity needs.
• Key Risks:
  • Cyclicality: The railcar industry is highly cyclical; demand is sensitive to economic conditions and coal prices.
  • Customer Concentration: Top three customers accounted for 44% of 2009 revenue.
  • Supplier Dependence: Reliance on a single supplier for cold-rolled center sills (used in 99% of 2009 production).
  • Internal Controls: The company previously identified material weaknesses in internal controls (inventory valuation, system change controls) which led to a restatement of 2007 and 2008 financials. These were remediated via a new ERP system implemented in August 2009, and controls were deemed effective as of Dec 31, 2009.
  • Pension Obligations: Defined benefit pension plans are underfunded by $15.5 million; postretirement benefit obligations are unfunded by $63.3 million.

Investor Verification Checklist

• Backlog Conversion: Verify if the 3,000+ new orders received post-year-end are converting to revenue as projected in 2010, given the historical volatility of order timing.
• Margin Sustainability: Assess whether the 14.7% gross margin is sustainable without the one-time $3.9 million termination fee and favorable mix, as raw material costs (aluminum/steel) fluctuate.
• Supplier Risk: Monitor the relationship with the sole supplier of cold-rolled center sills, as any disruption would halt production.
• Pension Funding: Track future cash requirements for pension and postretirement benefit contributions, which could impact free cash flow.
• Internal Controls: Confirm continued effectiveness of the new Oracle ERP system and internal controls in subsequent quarterly filings to ensure no recurrence of prior accounting errors.