FreightCar America, Inc. - 10-Q Summary (Period Ended June 30, 2012)
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2012. FreightCar America, Inc. is a leading manufacturer of aluminum-bodied and coal-carrying railcars in North America. The company operates through two primary segments: Manufacturing (new railcar production, used sales, leasing, and rebuilds) and Services (repair, maintenance, parts sales, and fleet management). The company is headquartered in Chicago, Illinois, with manufacturing facilities in Danville, Illinois, and Roanoke, Virginia.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2012 |
|---|---|---|
| Total Revenues | $181.2 million | $400.3 million |
| Gross Profit | $17.0 million | $40.8 million |
| Operating Income | $9.4 million | $25.4 million |
| Net Income (Attributable to FreightCar America) | $5.6 million | $15.3 million |
| Diluted EPS | $0.46 | $1.28 |
| Cash and Cash Equivalents | $107.4 million (as of June 30, 2012) | |
| Restricted Cash | $17.0 million (as of June 30, 2012) | |
| Debt | No borrowings under $30.0 million revolving credit facility | |
| Operating Cash Flow (6 Months) | $14.9 million |
Material Changes vs. Prior Period
- Revenue Surge: Consolidated revenues increased significantly compared to the prior year periods. For the six months ended June 30, 2012, revenue was $400.3 million versus $169.8 million in 2011. This was driven by a higher volume of railcar deliveries (5,399 units in H1 2012 vs. 2,184 units in H1 2011) and higher revenue per railcar.
- Profitability Turnaround: The company moved from an operating loss of $5.7 million in the first half of 2011 to an operating income of $25.4 million in the first half of 2012. Net income attributable to the company improved from a loss of $1.1 million to a profit of $15.3 million.
- Margin Expansion: Consolidated gross margin rates improved to 10.2% for the six months ended June 30, 2012, compared to 3.7% in the prior year period, attributed to improved manufacturing capacity utilization.
- Backlog Reduction: Total backlog of unfilled orders decreased to 5,109 units at June 30, 2012, down from 8,303 units at December 31, 2011, reflecting strong delivery volumes.
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that coal demand softened in Q2 2012 due to low industrial production, a mild winter, and low natural gas prices. North America coal loadings were 10.6% lower than Q2 2011, and coal cars in storage increased to 33,000 units.
- Liquidity: The company maintains a $30.0 million senior secured revolving credit facility with no outstanding borrowings. Management believes current cash balances and operating cash flows are sufficient to meet liquidity needs. Dividends declared were $0.12 per share for the six-month period.
- Capital Expenditures: Capital expenditures were $3.2 million for the first half of 2012. Management expects approximately $7.3 million in capital expenditures for the remainder of 2012 to maintain and expand facilities.
- 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 potential warranty claims. The company is also involved in ongoing litigation with Bral Corporation regarding supply agreements, though management does not expect a material adverse effect.
- Pension Obligations: The company expects to contribute approximately $2.6 million to defined benefit pension plans and $5.1 million to postretirement benefit plans in 2012.
Investor Verification Checklist
- Verify the sustainability of the revenue increase given the reported softening in coal demand and the reduction in the order backlog.
- Monitor the impact of raw material price fluctuations (aluminum and steel) on future gross margins, as these represent a significant majority of direct manufacturing costs.
- Review the status of the pending litigation with Bral Corporation and CMN Components, Inc., specifically the summary judgment motions.
- Assess the company's ability to maintain dividend payments given the minimum tangible net worth covenant which limits potential dividends to $67.8 million as of June 30, 2012.
- Track the utilization of the $30.0 million revolving credit facility and any changes in borrowing base availability tied to accounts receivable and inventory.