FreightCar America, Inc. 2010 10-K Summary
Business Context and Reporting Period
This summary covers the Annual Report (Form 10-K) for FreightCar America, Inc. for the fiscal year ended December 31, 2010. The Company is the leading manufacturer of aluminum-bodied railcars in North America, specializing in coal cars which represented 90% of deliveries in 2010. In November 2010, the Company acquired the business assets of DTE Rail Services, Inc. (now FreightCar Rail Services, LLC) to expand into railcar repair, maintenance, and fleet management services.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Revenues | $142.9 million | $248.5 million |
| Gross Profit | $2.7 million | $36.5 million |
| Gross Margin | 1.9% | 14.7% |
| Net Loss | $(12.8) million | $4.9 million (Income) |
| EPS (Basic/Diluted) | $(1.07) | $0.42 |
| Cash and Equivalents | $61.8 million | $98.0 million |
| Total Debt | $0 | $0 |
| Operating Cash Flow | $(42.1) million | $22.9 million |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 42% to $142.9 million, primarily due to a 34% drop in railcar deliveries (2,229 units in 2010 vs. 3,377 in 2009) driven by reduced industry demand for coal cars.
- Margin Compression: Gross margin collapsed to 1.9% from 14.7% due to under-utilization of fixed manufacturing capacity and competitive pricing pressures. The 2009 margin included a $3.9 million contract termination fee not present in 2010.
- Net Loss: The Company reported a net loss of $12.8 million, a reversal from the $4.9 million net income in 2009.
- Backlog Growth: Despite lower deliveries, the backlog of firm orders increased significantly from 265 railcars ($24.8 million value) in 2009 to 2,054 railcars ($144.3 million value) in 2010.
- Acquisition: The Company spent $23.3 million to acquire DTE Rail Services, funded by cash from operations, adding repair and maintenance capabilities.
Guidance, Outlook, and Risks
- Outlook: Management expects recent orders to improve manufacturing capacity utilization in 2011. However, new railcar pricing is expected to remain competitive, keeping pressure on margins. The Company anticipates a recovery in railcar demand in 2011-2012.
- Liquidity: The Company maintains a $30 million revolving credit facility with no borrowings outstanding as of year-end. Management believes cash balances and operating cash flows will meet 2011 liquidity needs.
- Key Risks:
- Cyclicality: The railcar industry is highly cyclical; downturns in economic conditions could reduce sales volumes and prices.
- Customer Concentration: The top three customers accounted for 78% of total revenue in 2010 (63%, 10%, and 5% respectively).
- Supplier Dependence: The Company relies on a single supplier for roll-formed center sills, a critical structural component used in 76% of 2010 production.
- Raw Material Costs: Substantially all backlog contracts are fixed-rate; increases in aluminum and steel costs cannot be passed to customers.
- Pension Obligations: Defined benefit pension plans are underfunded by $15.5 million, and postretirement benefits are unfunded by $65.3 million.
Investor Verification Checklist
- Verify the conversion rate of the $144.3 million backlog into actual revenue in 2011, noting that backlog does not guarantee sales.
- Monitor the impact of the DTE Rail Services acquisition on diversifying revenue streams away from the cyclical coal car market.
- Assess the Company's ability to maintain margins given the fixed-rate nature of backlog contracts and potential volatility in aluminum and steel prices.
- Review the funding status and contribution requirements for the underfunded pension and postretirement benefit plans.
- Track the performance of the top three customers, which represent the vast majority of sales volume.