Business Context and Reporting Period
Company: FreightCar America, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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
All figures in thousands, except per share data.
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 (Restated) |
|---|---|---|
| Revenues | $143,891 | $236,433 |
| Gross Profit | $26,278 | $16,618 |
| Gross Margin | 18.3% | 7.0% |
| Operating Income (Loss) | $12,738 | $(19,116) |
| Net Income (Loss) Attributable to FCA | $9,419 | $(10,622) |
| Diluted EPS | $0.79 | $(0.90) |
| Cash and Cash Equivalents (End of Period) | $129,192 | $152,351 |
| Net Cash Used in Operating Activities | $(42,240) | $35,859 |
| Total Debt (Borrowings) | $0 | $0 |
Liquidity: The Company has two revolving credit facilities totaling $110 million ($50 million senior secured and $60 million JAIX facility). As of June 30, 2009, there were no borrowings under either facility. Available borrowing capacity under the primary facility was approximately $5.1 million due to borrowing base limitations.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 39% year-over-year to $143.9 million, driven by a significant reduction in coal car sales due to recessionary pressures, lower coal loadings, and high utility stockpiles. Deliveries dropped from 3,613 units in the prior year to 2,181 units.
- Profitability Improvement: Despite lower revenue, Net Income turned from a loss of $10.6 million to a profit of $9.4 million. This was primarily due to a $19.9 million plant closure charge recorded in the prior year (related to the Johnstown facility) which was not present in the current period, and improved gross margins (18.3% vs 7.0%).
- Margin Expansion: Gross margin improved significantly due to a favorable product mix (fewer new cars sold relative to higher-margin lease and aftermarket revenues), higher margins on new car sales, and a $3.9 million contract termination fee recognized in Q1 2009.
- Cash Flow Deterioration: Net cash used in operating activities was $42.2 million, compared to $35.9 million provided in the prior year. This shift was driven by changes in working capital, specifically a decrease in accounts payable and increases in inventory and leased railcars held for sale.
Guidance, Outlook, Risks, and Unusual Items
- Restatement of Financials: The Company restated financial statements for periods ending Dec 31, 2008, and interim periods in 2009 due to historical accounting errors related to accounts payable and inventory valuation. These errors stemmed from flaws in internal IT and accounting processes implemented in late 2007.
- Internal Control Weaknesses: Management identified material weaknesses in internal controls over financial reporting, specifically regarding system change controls, inventory valuation, and account reconciliations. A new Oracle ERP system went live on August 1, 2009, to remediate these issues.
- Operational Adjustments: 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 production as demand improves.
- Outlook: Management expects demand for coal cars to improve once recessionary pressures subside, citing long-term growth in domestic coal consumption for power generation. However, risks include potential government policy shifts away from coal and cyclical market conditions.
- Unusual Items: The $3.9 million contract termination fee included in 2009 revenues is a non-recurring item. The prior year's results were heavily impacted by the $19.9 million Johnstown plant closure charge.
Investor Verification Checklist
- Restatement Impact: Verify the full extent of the restatement on prior year comparables and the specific adjustments made to inventory and accounts payable.
- Internal Controls: Monitor the progress of the new ERP system implementation and the remediation of material weaknesses in internal controls.
- Liquidity Constraints: Assess the impact of the reduced borrowing base availability ($5.1 million) on working capital flexibility, given the significant cash burn in operating activities.
- Market Demand: Track coal loading volumes and utility stockpile levels as leading indicators for future railcar order volumes.
- Pension Obligations: Review the funding status of defined benefit pension plans, which had a significant underfunded status ($26.7 million shortfall) as of Dec 31, 2008.