e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2009
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-51237
FREIGHTCAR AMERICA, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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25-1837219 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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Two North Riverside Plaza, Suite 1250 |
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Chicago, Illinois
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60606 |
(Address of principal executive offices)
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(Zip Code) |
(800) 458-2235
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES o NO þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o |
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Accelerated filer þ
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Non-accelerated filer o (Do not check if a smaller reporting
company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). YES o NO þ
As of September 25, 2009, there were 11,950,885 shares of the registrants common stock
outstanding.
FREIGHTCAR AMERICA, INC.
INDEX TO FORM 10-Q
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
FreightCar America, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
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December 31, |
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June 30, |
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2008 |
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2009 |
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(as restated) |
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(In thousands) |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
152,351 |
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$ |
129,192 |
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Accounts receivable, net of allowance for
doubtful accounts of $193 and $330,
respectively |
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6,139 |
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73,120 |
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Inventories |
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40,598 |
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31,096 |
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Leased railcars held for sale |
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28,088 |
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11,490 |
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Property, plant and equipment held for sale |
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2,461 |
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Other current assets |
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2,963 |
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6,789 |
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Deferred income taxes, net |
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12,695 |
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16,003 |
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Total current assets |
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245,295 |
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267,690 |
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Property, plant and equipment, net |
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28,223 |
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30,582 |
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Railcars on operating leases |
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43,013 |
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34,735 |
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Goodwill |
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21,521 |
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21,521 |
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Deferred income taxes, net |
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19,335 |
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23,281 |
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Other long-term assets |
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5,059 |
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5,484 |
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Total assets |
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$ |
362,446 |
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$ |
383,293 |
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Liabilities and Stockholders Equity |
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Current liabilities |
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Accounts payable |
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$ |
28,892 |
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$ |
47,328 |
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Accrued payroll and employee benefits |
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4,339 |
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9,530 |
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Accrued postretirement benefits |
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5,364 |
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5,364 |
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Accrued warranty |
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10,768 |
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11,476 |
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Customer deposits |
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2,365 |
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7,367 |
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Other current liabilities |
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8,714 |
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7,939 |
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Total current liabilities |
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60,442 |
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89,004 |
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Accrued pension costs |
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27,540 |
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26,763 |
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Accrued postretirement benefits, less current portion |
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54,397 |
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55,293 |
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Other long-term liabilities |
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6,234 |
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7,407 |
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Total liabilities |
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148,613 |
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178,467 |
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Stockholders equity |
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Preferred stock, $0.01 par value; 2,500,000
shares authorized (100,000 shares each
designated as Series A voting and Series B
non-voting); 0 shares issued and outstanding
at June 30, 2009 and December 31, 2008 |
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Common stock, $0.01 par value; 50,000,000
shares authorized, 12,731,678 shares issued
at June 30, 2009 and December 31, 2008 |
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127 |
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127 |
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Additional paid in capital |
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97,112 |
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98,253 |
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Treasury stock, at cost; 781,593 and 821,182
shares at June 30, 2009 and December 31,
2008, respectively |
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(36,997 |
) |
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(38,871 |
) |
Accumulated other comprehensive loss |
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(16,134 |
) |
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(16,471 |
) |
Retained earnings |
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169,672 |
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161,687 |
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Total FreightCar America stockholders equity |
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213,780 |
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204,725 |
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Noncontrolling interest in India JV |
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53 |
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101 |
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Total stockholders equity |
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213,833 |
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204,826 |
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Total liabilities and stockholders equity |
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$ |
362,446 |
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$ |
383,293 |
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See Notes to Condensed Consolidated Financial Statements.
3
FreightCar America, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2008 |
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2008 |
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2009 |
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(as restated) |
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2009 |
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(as restated) |
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(In thousands, except share and per share data) |
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Revenues |
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$ |
104,328 |
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$ |
141,335 |
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$ |
143,891 |
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$ |
236,433 |
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Cost of sales |
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88,345 |
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133,939 |
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117,613 |
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219,815 |
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Gross profit |
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15,983 |
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7,396 |
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26,278 |
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16,618 |
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Selling, general and administrative expense (including
non-cash stock-based compensation expense of $553, $729,
$1,091 and $1,692, respectively) |
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6,713 |
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7,283 |
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14,035 |
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15,869 |
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Plant closure (income) charges |
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(116 |
) |
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1,602 |
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(495 |
) |
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19,865 |
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Operating income (loss) |
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9,386 |
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(1,489 |
) |
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12,738 |
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(19,116 |
) |
Interest (expense) income, net |
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(133 |
) |
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649 |
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(295 |
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1,892 |
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Operating income (loss) before income taxes |
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9,253 |
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(840 |
) |
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12,443 |
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(17,224 |
) |
Income tax provision (benefit) |
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2,268 |
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(472 |
) |
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3,072 |
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(6,602 |
) |
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Net income (loss) |
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6,985 |
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(368 |
) |
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9,371 |
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(10,622 |
) |
Less: Net loss attributable to non-controlling
interest in India JV |
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(37 |
) |
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(48 |
) |
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Net income (loss) attributable to FreightCar America |
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$ |
7,022 |
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$ |
(368 |
) |
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$ |
9,419 |
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$ |
(10,622 |
) |
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Net income (loss) per common share attributable to
FreightCar America basic |
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$ |
0.59 |
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$ |
(0.03 |
) |
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$ |
0.79 |
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$ |
(0.90 |
) |
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Net income (loss) per common share attributable to
FreightCar America diluted |
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$ |
0.59 |
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$ |
(0.03 |
) |
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$ |
0.79 |
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$ |
(0.90 |
) |
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Weighted average common shares outstanding basic |
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11,860,809 |
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11,780,327 |
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11,855,319 |
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11,760,063 |
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Weighted average common shares outstanding
diluted |
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11,863,999 |
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11,780,327 |
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11,858,272 |
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11,760,063 |
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Dividends declared per common share |
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$ |
0.06 |
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$ |
0.00 |
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$ |
0.12 |
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$ |
0.12 |
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See Notes to Condensed Consolidated Financial Statements.
4
FreightCar America, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (Unaudited)
(in thousands, except for share data)
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FreightCar America Shareholders |
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Accumulated |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid In |
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Treasury Stock |
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Comprehensive |
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Retained |
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Noncontrolling |
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Stockholders |
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Shares |
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Amount |
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Capital |
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Shares |
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Amount |
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Loss |
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|
Earnings |
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|
Interest |
|
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Equity |
|
Balance, December 31, 2007
(as restated) |
|
|
12,731,678 |
|
|
$ |
127 |
|
|
$ |
99,270 |
|
|
|
(918,257 |
) |
|
$ |
(43,597 |
) |
|
$ |
(9,857 |
) |
|
$ |
153,120 |
|
|
|
|
|
|
$ |
199,063 |
|
|
|
|
|
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|
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|
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|
|
|
|
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Net loss (as restated) |
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,622 |
) |
|
|
|
|
|
|
(10,622 |
) |
Pension liability activity, net
of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63 |
|
|
|
|
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|
|
|
|
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|
63 |
|
Postretirement liability
activity, net of tax |
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|
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|
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|
|
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|
167 |
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|
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|
167 |
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Comprehensive loss (as restated) |
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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|
(10,392 |
) |
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|
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|
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|
|
|
|
|
|
|
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|
Stock options exercised |
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|
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|
|
|
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|
(939 |
) |
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|
32,981 |
|
|
|
1,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
627 |
|
Restricted stock awards |
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|
|
|
|
|
|
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|
(2,305 |
) |
|
|
48,547 |
|
|
|
2,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
recognized |
|
|
|
|
|
|
|
|
|
|
1,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,693 |
|
Deficiency of tax benefit from
stock-based compensation |
|
|
|
|
|
|
|
|
|
|
(192 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(192 |
) |
Cash dividends |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,425 |
) |
|
|
|
|
|
|
(1,425 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008 (as
restated) |
|
|
12,731,678 |
|
|
$ |
127 |
|
|
$ |
97,527 |
|
|
|
(836,729 |
) |
|
$ |
(39,726 |
) |
|
$ |
(9,627 |
) |
|
$ |
141,073 |
|
|
|
|
|
|
$ |
189,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 (as
restated) |
|
|
12,731,678 |
|
|
$ |
127 |
|
|
$ |
98,253 |
|
|
|
(821,182 |
) |
|
$ |
(38,871 |
) |
|
$ |
(16,471 |
) |
|
$ |
161,687 |
|
|
$ |
101 |
|
|
$ |
204,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,419 |
|
|
|
(48 |
) |
|
|
9,371 |
|
Pension liability activity, net
of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267 |
|
|
|
|
|
|
|
|
|
|
|
267 |
|
Postretirement liability
activity, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards |
|
|
|
|
|
|
|
|
|
|
(1,874 |
) |
|
|
39,589 |
|
|
|
1,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
recognized |
|
|
|
|
|
|
|
|
|
|
1,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,091 |
|
Deficiency of tax benefit from
stock-based compensation |
|
|
|
|
|
|
|
|
|
|
(358 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(358 |
) |
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,434 |
) |
|
|
|
|
|
|
(1,434 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2009 |
|
|
12,731,678 |
|
|
$ |
127 |
|
|
$ |
97,112 |
|
|
|
(781,593 |
) |
|
$ |
(36,997 |
) |
|
$ |
(16,134 |
) |
|
$ |
169,672 |
|
|
$ |
53 |
|
|
$ |
213,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
5
FreightCar America, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
|
|
|
|
2008 |
|
|
|
2009 |
|
|
(as restated) |
|
|
|
(In thousands) |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Net income (loss) attributable to FreightCar America |
|
$ |
9,419 |
|
|
$ |
(10,622 |
) |
Adjustments to reconcile net income (loss) to net cash flows used in
operating activities |
|
|
|
|
|
|
|
|
Plant closure (income) charges |
|
|
|
|
|
|
19,865 |
|
Depreciation and amortization |
|
|
2,541 |
|
|
|
1,992 |
|
Other non-cash items |
|
|
292 |
|
|
|
(547 |
) |
Deferred income taxes |
|
|
7,049 |
|
|
|
(8,720 |
) |
Compensation expense under stock option and restricted share
award agreements |
|
|
1,091 |
|
|
|
1,692 |
|
Noncontrolling interest in India JV |
|
|
(48 |
) |
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
66,981 |
|
|
|
6,262 |
|
Inventories |
|
|
(9,658 |
) |
|
|
(46,789 |
) |
Leased railcars held for sale |
|
|
(16,598 |
) |
|
|
(46,101 |
) |
Other current assets |
|
|
48 |
|
|
|
(6,184 |
) |
Accounts payable |
|
|
(17,830 |
) |
|
|
67,242 |
|
Accrued payroll and employee benefits |
|
|
(5,191 |
) |
|
|
(4,257 |
) |
Income taxes receivable/payable |
|
|
3,824 |
|
|
|
1,020 |
|
Accrued warranty |
|
|
(708 |
) |
|
|
365 |
|
Other current liabilities and customer deposits |
|
|
(5,083 |
) |
|
|
(17,898 |
) |
Deferred revenue, non-current |
|
|
(488 |
) |
|
|
|
|
Accrued pension costs and accrued postretirement benefits |
|
|
218 |
|
|
|
440 |
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) operating activities |
|
|
35,859 |
|
|
|
(42,240 |
) |
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Cost of railcars on operating leases produced or acquired |
|
|
(8,802 |
) |
|
|
|
|
Purchases of property, plant and equipment |
|
|
(2,431 |
) |
|
|
(2,925 |
) |
|
|
|
|
|
|
|
Net cash flows used in investing activities |
|
|
(11,233 |
) |
|
|
(2,925 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Payments on long-term debt |
|
|
(28 |
) |
|
|
(32 |
) |
Deferred financing costs paid |
|
|
(5 |
) |
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
627 |
|
Excess tax benefit from stock-based compensation |
|
|
|
|
|
|
(192 |
) |
Cash dividends paid to stockholders |
|
|
(1,434 |
) |
|
|
(1,425 |
) |
|
|
|
|
|
|
|
Net cash flows used in financing activities |
|
|
(1,467 |
) |
|
|
(1,022 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
23,159 |
|
|
|
(46,187 |
) |
Cash and cash equivalents at beginning of period |
|
|
129,192 |
|
|
|
197,042 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
152,351 |
|
|
$ |
150,855 |
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
175 |
|
|
$ |
1,276 |
|
|
|
|
|
|
|
|
Income tax refunds received |
|
$ |
(7,750 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
6
FreightCar America, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share data)
Note 1 Description of the Business
FreightCar America, Inc. (America), through its direct and indirect wholly owned subsidiaries
(herein collectively referred to as the Company), manufactures, rebuilds, repairs, sells and
leases railroad freight cars used for hauling coal, other bulk commodities, steel and other metals,
forest products, intermodal containers and automobiles and trucks. The Company has manufacturing
facilities in Danville, Illinois and Roanoke, Virginia. The Companys operations comprise one
operating segment. The Company and its direct and indirect wholly owned subsidiaries are all
Delaware corporations.
Note 2 Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of America, JAC
Intermedco, Inc. (Intermedco), JAC Operations, Inc. (Operations), Johnstown America Corporation
(JAC), FreightCar Services, Inc. (FCS), JAIX Leasing Company (JAIX), JAC Patent Company (JAC
Patent) and FreightCar Roanoke, Inc. (FCR). All significant intercompany accounts and
transactions have been eliminated in consolidation. The foregoing financial information has been
prepared in accordance with the accounting principles generally accepted in the United States of
America (GAAP) and rules and regulations of the Securities and Exchange Commission (the SEC)
for interim financial reporting. The preparation of the financial statements in accordance with
GAAP requires management to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from these estimates. The
results of operations for the three and six months ended June 30, 2009 are not necessarily
indicative of the results to be expected for the full year. The accompanying interim financial
information is unaudited; however, the Company believes the financial information reflects all
adjustments (consisting of items of a normal recurring nature) necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with GAAP. Certain
information and note disclosures normally included in the Companys annual financial statements
prepared in accordance with GAAP have been condensed or omitted. These amended interim financial
statements should be read in conjunction with the audited financial statements contained in the
Companys amended annual report on Form 10-K/A for the year ended December 31, 2008.
Note 3 Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (the FASB), issued Statement of
Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value and expands disclosures about fair
value measurements. SFAS No. 157 requires companies to disclose the fair value of their financial
instruments according to a fair value hierarchy as defined in the standard. Additionally,
companies are required to provide enhanced disclosure regarding financial instruments in one of the
valuation categories, including a separate reconciliation of the beginning and ending balances for
each major category of assets and liabilities. SFAS No. 157 was effective for financial assets and
financial liabilities for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The FASB deferred the effective date of SFAS No. 157 for all
nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in
the financial statements on at least an annual basis, until January 1, 2009 for calendar year-end
entities. Implementation of the provisions of SFAS No. 157 did not have a material impact on the
Companys financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which retains the
fundamental requirements of SFAS No. 141, including that the purchase method be used for all
business combinations and for an acquirer to be identified for each business combination. SFAS No.
141(R) defines the acquirer as the entity that obtains control of one or more businesses in a
business combination and establishes the acquisition date as the date that the acquirer achieves
control instead of the date that the consideration is transferred. This standard requires an
acquirer in a business combination to recognize the assets acquired, liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as
of that date. It also requires the recognition of assets acquired and liabilities assumed arising
from certain contractual contingencies as of the acquisition date, measured at their
acquisition-date fair values. SFAS No. 141(R) is effective for any business combination with an
acquisition date on or after January 1, 2009. Implementation of SFAS No. 141(R) will have only
prospective impact on the Companys financial statements.
7
In December 2008, the FASB issued FASB Staff Position No. FAS 132 (R)-1, Employers Disclosures
about Postretirement Benefit Plan Assets (FSP 132 (R)-1). FSP 132 (R)-1 requires additional
disclosures about plan assets for defined benefit pension and other postretirement benefit plans.
FSP 132 (R)-1 is effective for fiscal years ending after December 15, 2009. Upon initial
application, the provisions of this FSP are not required for earlier periods that are presented for
comparative purposes. Since FSP 132 (R)-1 requires enhanced disclosures, without a change to
existing standards relative to measurement and recognition, the adoption of FSP 132 (R)-1 will not
have an impact on the Companys results of operations or financial position.
As of January 1, 2009, the Company adopted the provisions of SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements: An amendment of ARB No. 51. SFAS No. 160 requires the
Company to present its interest in less than 100% owned subsidiaries in which it retains control as
a component of shareholders equity in the balance sheet and recharacterize the component formerly
known as minority interest as noncontrolling interest. SFAS No. 160 also requires the Company to
show the amount of net income attributable to both the Company and the noncontrolling interest on
the face of the statement of operations and in the summary of comprehensive income. The effect of
adoption was an increase of $101 to total stockholders equity on the Companys December 31, 2008
balance sheet, and a corresponding decrease to minority interests.
As of June 30, 2009, the Company adopted the provisions of SFAS No. 165, Subsequent Events. SFAS
No. 165 establishes general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or available to be issued.
Specifically, SFAS No. 165 sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet date in its
financial statements, and the disclosures that an entity should make about events or transactions
that occurred after the balance sheet date. The adoption of SFAS No. 165 had no impact on the
Companys financial statements since management already followed a similar approach prior to the
adoption of this standard. In connection with the preparation of the condensed consolidated
financial statements and in accordance with SFAS No. 165, management evaluated subsequent events
after the balance sheet date of June 30, 2009 through September 30, 2009, the date the financial
statements were issued.
Note 4 Plant Closure
In December 2007, the Company announced that it planned to close its manufacturing facility located
in Johnstown, Pennsylvania. This action was taken to further the Companys strategy of optimizing
production at its low-cost facilities and continuing its focus on cost control.
On May 6, 2008, an arbitrator issued a ruling in a grievance proceeding brought against the Company
by the United Steelworkers of America (the USWA). The grievance proceeding, which was first
filed by the USWA on April 1, 2007, surrounded the interpretation of provisions in the collective
bargaining agreement (CBA) covering employees at the Johnstown facility. The dispute involved
the interpretation of language regarding the classification of employees years of service and the
Companys obligations to employees based on their years of service. The arbitrators ruling held
the Company responsible for providing back pay and appropriate benefits to affected employees, a
group that included over one-half of the workers who were employed at the Johnstown facility at the
time the grievance was filed. As a result of the ruling, the Company recorded an additional amount
for the Companys estimate of the probable cost of the back pay and benefits under the ruling
during the three months ended March 31, 2008. On June 4, 2008, the Company filed a lawsuit against
the USWA asking the court to vacate the arbitrators ruling.
On June 24, 2008, the Company announced a tentative global settlement that would resolve all legal
disputes relating to the Johnstown facility and its workforce, including the Sowers/Hayden class
action litigation, the above-mentioned contested arbitration ruling and other pending grievance
proceedings. The settlement, with the USWA and the plaintiffs in the Sowers/Hayden lawsuit, was
ratified by the Johnstown USWA membership on June 26, 2008 and approved by the court on November
19, 2008. The time for an appeal of the courts order has now expired and the settlement is final.
As a consequence, all existing legal disputes relating to the Companys Johnstown, Pennsylvania
manufacturing facility and its workforce, including the Sowers/Hayden class action litigation and
contested grievance ruling, are now resolved and closed. Under the terms of the settlement, the
collective bargaining agreement between the Company and the USWA was terminated effective May 15,
2008 and the Johnstown facility was closed. The settlement provided special pension benefits to
certain workers at the Johnstown facility and deferred vested benefits to other workers, as well as
health care benefits, severance pay and/or settlement bonus payments to workers depending on their
years of service at the facility.
The components of the plant closure charges incurred for the six months ended June 30, 2009 and 2008 are as follows:
8
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
Pension plan curtailment loss and special termination benefit costs |
|
$ |
|
|
|
$ |
9,826 |
|
Postretirement plan curtailment loss and contractual benefit charges |
|
|
|
|
|
|
8,889 |
|
Employee termination benefits |
|
|
(166 |
) |
|
|
(374 |
) |
Insurance recoveries and other related costs |
|
|
(329 |
) |
|
|
1,524 |
|
|
|
|
Total plant closure (income) charges |
|
$ |
(495 |
) |
|
$ |
19,865 |
|
|
|
|
Note 5 Inventories
Inventories are stated at the lower of first-in, first-out cost or market and include material,
labor and manufacturing overhead. The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Work in progress |
|
$ |
34,932 |
|
|
$ |
23,618 |
|
Finished new railcars |
|
|
2,184 |
|
|
|
5,513 |
|
Used railcars acquired upon trade-in |
|
|
3,482 |
|
|
|
1,965 |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
40,598 |
|
|
$ |
31,096 |
|
|
|
|
|
|
|
|
Note 6 Leased Railcars
In response to competitive market conditions, the Company began offering railcar leasing to its
customers on a selective and limited basis during 2008. The Company offers railcar leases to its
customers generally at market rates with terms and conditions that have been negotiated with the
customers. Railcar leases generally have terms of up to seven years. It is the Companys strategy
to generally offer these leased assets for sale to leasing companies and financial institutions as
market opportunities arise, rather than holding them to maturity.
Initially as of the date of manufacture and on a quarterly basis thereafter the Company evaluates
leased railcars under the provisions of SFAS No. 144 to determine if the leased railcars qualify as
assets held for sale. If all of the held for sale criteria of SFAS No. 144 are met, including
the determination by management that the sale of the railcars is probable, and transfer of the
railcars is expected to qualify for recognition as a completed sale within one year, then the
leased railcars are treated as assets held for sale and classified as current assets on the balance
sheet (leased assets held for sale). In determining whether it is probable that the leased
railcars will be sold within one year, management considers general market conditions for similar
railcars and considers whether those market conditions are indicative of a potential sales price
that will be acceptable to the Company to sell the cars within one year. Leased railcars held for
sale are carried at the lower of carrying value or fair value less cost to sell and are not
depreciated.
Leased railcars that do not meet all of the held for sale criteria are included in railcars on
operating leases on the balance sheet and are depreciated over 40 years.
The Company recognizes operating lease revenue on leased railcars on a straight-line basis over the
life of the lease. The Company recognizes revenue from the sale of railcars under operating leases
on a gross basis in manufacturing sales and cost of sales if the railcars are sold within 12 months
as the manufacture of the railcars and the sale is within the 12-month period specified by SFAS No.
144 and represents the completion of the sales process. The Company recognizes revenue from the
sale of railcars under operating leases on a net basis in leasing revenue as a gain (loss) on sale
(i.e. net) of leased railcars if the railcars are held in excess of 12 months as the sale
represents the disposal of a long-term asset.
Leased railcars at June 30, 2009 included leased railcars classified as held for sale of $28,088
and railcars on operating leases classified as long-term assets of $43,013. Due to a decline in
asset values in the current market, an impairment write-down of $360 related to these railcars on
operating leases was recorded during the first six months of 2009. Leased railcars at December 31,
2008 included leased railcars classified as held for sale of $11,490 and railcars on operating
leases classified as long-term assets of $34,735.
9
Leased railcars at June 30, 2009 are subject to lease agreements with external customers with terms
of up to seven years.
Future minimum rental revenues on leased railcars at June 30, 2009 are as follows:
|
|
|
|
|
Six months ending December 31, 2009 |
|
$ |
2,637 |
|
Year ending December 31, 2010 |
|
|
5,029 |
|
Year ending December 31, 2011 |
|
|
3,800 |
|
Year ending December 31, 2012 |
|
|
1,349 |
|
Thereafter |
|
|
2,308 |
|
|
|
|
|
|
|
$ |
15,123 |
|
|
|
|
|
Note 7 Property, Plant and Equipment
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Buildings and improvements |
|
$ |
19,056 |
|
|
$ |
20,918 |
|
Machinery and equipment |
|
|
24,438 |
|
|
|
42,352 |
|
|
|
|
|
|
|
|
Cost of buildings, improvements, machinery and equipment |
|
|
43,494 |
|
|
|
63,270 |
|
Less: Accumulated depreciation and amortization |
|
|
(19,836 |
) |
|
|
(38,996 |
) |
|
|
|
|
|
|
|
Buildings, improvements, machinery and equipment, net
of accumulated depreciation and amortization |
|
|
23,658 |
|
|
|
24,274 |
|
Land |
|
|
151 |
|
|
|
701 |
|
Construction in process |
|
|
4,414 |
|
|
|
5,607 |
|
|
|
|
|
|
|
|
Total property, plant and equipment, net |
|
$ |
28,223 |
|
|
$ |
30,582 |
|
|
|
|
|
|
|
|
During the second quarter of 2009, land, building and equipment at the Companys Johnstown
manufacturing facility, which was closed in December 2007, were classified as available for sale.
The facility had a net book value of $2,461 at June 30, 2009, which included land, building and
equipment in the amounts of $550, $1,468 and $443, respectively.
Note 8 Goodwill and Intangible Assets
The Company performs the goodwill impairment test required by SFAS No. 142, Goodwill and Other
Intangible Assets, as of January 1 of each year. The valuation uses a combination of methods to
determine the fair value of the Company (which consists of one reporting unit) including prices of
comparable businesses, a present value technique and recent transactions involving businesses
similar to the Company. There was no adjustment required based on the annual impairment tests for
2009 and 2008.
Goodwill and intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Patents |
|
$ |
13,097 |
|
|
$ |
13,097 |
|
Accumulated amortization |
|
|
(8,900 |
) |
|
|
(8,604 |
) |
|
|
|
|
|
|
|
Patents, net of accumulated amortization |
|
|
4,197 |
|
|
|
4,493 |
|
Goodwill |
|
|
21,521 |
|
|
|
21,521 |
|
|
|
|
|
|
|
|
Total goodwill and intangible assets |
|
$ |
25,718 |
|
|
$ |
26,014 |
|
|
|
|
|
|
|
|
Patents are being amortized on a straight-line method over their remaining legal life. The
weighted average remaining life of the Companys patents is 8 years. Amortization expense related
to patents, which is included in cost of sales, was $296 for each of the six months ended June 30,
2009 and 2008. The Company estimates amortization expense for each of the two years in the period
ending December 31, 2010 will be approximately $590 and for each of the two years in the period
ending December 31, 2012 will be approximately $586 and for the year ending December 31, 2013 will
be approximately $582.
10
The Company evaluates its patent intangibles for impairment at least annually and has identified no
impairment during 2008 or 2009.
Note 9 Product Warranties
Warranty terms are based on the negotiated railcar sales contracts and typically are for periods of
one to five years. The changes in the warranty reserve for the three months ended June 30, 2009 and
2008, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Balance at the beginning of the period |
|
$ |
10,870 |
|
|
$ |
10,173 |
|
|
$ |
11,476 |
|
|
$ |
10,551 |
|
Provision for warranties issued during the period |
|
|
358 |
|
|
|
1,223 |
|
|
|
468 |
|
|
|
1,721 |
|
Reductions for payments, cost of repairs and other |
|
|
(460 |
) |
|
|
(480 |
) |
|
|
(1,176 |
) |
|
|
(1,356 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
10,768 |
|
|
$ |
10,916 |
|
|
$ |
10,768 |
|
|
$ |
10,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10 Revolving Credit Facilities
On August 24, 2007, the Company entered into the Second Amended and Restated Credit Agreement with
the lenders party thereto (collectively, the Lenders) and LaSalle Bank National Association
(LaSalle) as administrative agent (as amended by the First Amendment to Second Amended and
Restated Credit Agreement dated as of September 30, 2008 and the Second Amendment to Second
Amended and Restated Credit Agreement dated as of March 11, 2009, the Credit Agreement). The
proceeds of the revolving credit facility under the Credit Agreement can be used to finance the
working capital requirements of the Company through direct borrowings and the issuance of stand-by
letters of credit. The Credit Agreement consists of a total facility of $50,000 senior secured
revolving credit facility, including: (i) a sub-facility for letters of credit in an amount not to
exceed $50,000; and (ii) a sub-facility for a swing line loan in an amount not to exceed $5,000.
The amount available under the revolving credit facility is based on the lesser of (i) $50,000 or
(ii) the borrowing base representing a portion of working capital calculated as a percentage of
eligible accounts receivable plus percentages of eligible finished and semi-finished inventory,
less a $20,000 borrowing base reserve. Since the Companys accounts receivable and inventory
balances fluctuate considerably based on the cyclical nature of the business and the timing of
orders, the amount available for borrowing also fluctuates considerably. Under the borrowing base
calculation, the amount available for borrowing was $5,058 and $38,510 as of June 30, 2009 and
December 31, 2008, respectively.
The Credit Agreement has a term ending on May 31, 2012 and bears interest at a rate of LIBOR plus
an applicable margin of between 1.50% and 2.25% depending on Revolving Loan Availability (as
defined in the Credit Agreement). The Company is required to pay a commitment fee of between 0.175%
and 0.250% based on Revolving Loan Availability. Borrowings under the Credit Agreement are
collateralized by substantially all of the assets of the Company and guaranteed by an unsecured
guarantee made by JAIX in favor of LaSalle for the benefit of the Lenders. The Credit Agreement has
both affirmative and negative covenants, including a minimum fixed charge coverage ratio and
limitations on debt, liens, dividends, investments, acquisitions and capital expenditures. The
Credit Agreement also provides for customary events of default.
As of June 30, 2009 and December 31, 2008, the Company had no borrowings under the Credit
Agreement. The Company had $2,689 and $11,490 in outstanding letters of credit under the letter of
credit sub-facility as of June 30, 2009 and December 31, 2008, respectively. Under the revolving
credit facility, the Companys subsidiaries are permitted to pay dividends and transfer funds to
the Company without restriction.
JAIX Revolving Credit Facility
Also on September 30, 2008, JAIX entered into a Credit Agreement (as amended by the First Amendment
to Credit Agreement dated as of March 11, 2009, the JAIX Credit Agreement) with the lenders party
thereto (collectively, the JAIX
11
Lenders). The JAIX Credit Agreement consists of a $60,000 senior secured revolving credit
facility. The JAIX Credit Agreement has a term ending on March 31, 2012 and bears interest at the
Eurodollar Loan Rate (as defined in the JAIX Credit Agreement) plus 2.00% for the first two years
of the JAIX Credit Agreement (the Revolving Period) and plus 2.50% for the remainder of the term
until the termination date. JAIX is required to pay an annual commitment fee of 0.30% during the
Revolving Period. Borrowings under the JAIX Credit Agreement are collateralized by substantially
all of the assets of JAIX. Additionally, America guaranteed the JAIX Credit Agreement.
Availability under the JAIX Credit Agreement is based on a percentage of the Eligible Railcar
Leases (as defined in the agreement) held under the JAIX Credit Agreement. For the first two years
the facility requires interest only payments, thereafter the amount drawn on each group of Eligible
Railcars under lease is required to be repaid in equal installments at the 6, 12 and 18 month
anniversaries of such leases. The JAIX Credit Agreement has both affirmative and negative
covenants, including, without limitation, a minimum fixed charge coverage ratio, a minimum tangible
net worth, a requirement to deposit restricted cash and limitations on debt, liens, dividends,
investments, acquisitions and capital expenditures. The JAIX Credit Agreement also provides for
customary events of default. As of June 30, 2009 and December 31, 2008, the Company had no
borrowings under the JAIX Credit Agreement.
As more fully described in Note 17, the Company has restated its interim unaudited condensed
consolidated financial statements and the related disclosures as of and for the quarterly period
ended March 31, 2009 as well as the consolidated financial statements and related disclosures for
the fiscal years ended December 31, 2008 and 2007. The restatement has caused the Company to fail
to comply with certain representations and covenants in each of the Credit Agreement and the JAIX
Credit Agreement referred to above. The Company has received waivers of these representations and
covenants from the lenders under each of the credit agreements. These waivers are subject to the
conditions subsequent that the Company file its quarterly report on Form 10-Q for the period ended
June 30, 2009 and comply with the other representations and covenants under the credit agreements
by September 30, 2009. The Company was otherwise in compliance with the representations and
covenants contained in these agreements as of June 30, 2009.
Note 11 Stock-Based Compensation
On January 14, 2009, the Company awarded 10,000 shares of restricted stock to an employee of the
Company pursuant to its 2005 Long Term Incentive Plan. The restricted stock will vest in three
equal annual installments beginning on January 14, 2010. Vesting of the award is subject to the
recipients continued employment with the Company. Stock compensation expense will be recognized
over the vesting period based on the fair market value of the stock on the date of the award based
on traded market prices for the Companys stock.
During the second quarter of 2009, the Company awarded 13,665 shares of restricted stock to certain
employees of the Company pursuant to its 2005 Long Term Incentive Plan. Each restricted stock
award will vest in three equal annual installments beginning on the first anniversary of the award,
with the continued vesting of each award subject to the recipients continued employment with the
Company. Stock compensation expense will be recognized over the vesting period based on the fair
market value of the stock on the date of the award based on traded market prices for the Companys
stock.
On May 12, 2009, the Company awarded 1,000 non-qualified stock options to a certain employee of the
Company pursuant to its 2005 Long Term Incentive Plan. The stock options will vest in three equal
annual installments beginning on May 12, 2010 and have a contractual term of 10 years. The
exercise price of each option is $17.84, which was the fair market value of the Companys stock on
the date of the grant. The Company recognizes stock compensation expense based on the fair value
of the award on the grant date using the Black-Scholes option valuation model. The estimated fair
value of $8.13 per option will be recognized over the period during which an employee is required
to provide service in exchange for the award, which is usually the vesting period. The following
assumptions were used to value the 2009 stock options: expected lives of the options of 6 years;
expected volatility of 53.17%; risk-free interest rate of 2.02%; and expected dividend yield of
1.37%. Expected life in years was determined using the simplified method allowed by the Securities
and Exchange Commission in accordance with Staff Accounting Bulletin No. 110. Expected volatility
was based on the historical volatility of the Companys stock. The risk-free interest rate was
based on the U.S. Treasury bond rate for the expected life of the option. The expected dividend
yield was based on the latest annualized dividend rate and the current market price of the
underlying common stock on the date of the grant.
On May 13, 2009, the Company awarded 15,924 shares of restricted stock to certain individuals for
service on the Companys board of directors pursuant to its 2005 Long Term Incentive Plan. The
restricted stock awarded on May 13, 2009
12
will vest on May 13, 2010. Stock compensation expense will be recognized over the vesting period
based on the fair market value of the stock on the date of the award based on traded market prices
for the Companys stock.
As of June 30, 2009, there was $630 of unearned compensation expense related to the stock options
and restricted stock granted during the six months ended June 30, 2009, which will be recognized
over the average remaining requisite service period of 24 months.
Note 12 Comprehensive Income
Comprehensive income consists of net operating income or loss and the unrecognized pension and
postretirement costs, which are shown net of tax.
Net operating income or loss reported in the Condensed Consolidated Statements of Operations to
total comprehensive income is reconciled as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net operating income (loss) |
|
$ |
7,022 |
|
|
$ |
(368 |
) |
|
$ |
9,419 |
|
|
$ |
(10,622 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service
costs and actuarial losses, net
of tax |
|
|
169 |
|
|
|
64 |
|
|
|
337 |
|
|
|
230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
7,191 |
|
|
$ |
(304 |
) |
|
$ |
9,756 |
|
|
$ |
(10,392 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13 Employee Benefit Plans
The Company has qualified, defined benefit pension plans covering substantially all of the
employees of JAC, Operations and JAIX. The Company uses a measurement date of December 31 for all
of its employee benefit plans. Generally, contributions to the plans are not less than the minimum
amounts required under the Employee Retirement Income Security Act and not more than the maximum
amount that can be deducted for federal income tax purposes. The plans assets are held by
independent trustees and consist primarily of equity and fixed income securities.
The Company also provides certain postretirement health care benefits for certain of its salaried
and hourly retired employees. Generally, employees may become eligible for health care benefits if
they retire after attaining specified age and service requirements. These benefits are subject to
deductibles, co-payment provisions and other limitations
The components of net periodic benefit cost for the three months and six months ended June 30, 2009
and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Pension Benefits |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
150 |
|
|
$ |
282 |
|
|
$ |
300 |
|
|
$ |
564 |
|
Interest cost |
|
|
976 |
|
|
|
842 |
|
|
|
1,952 |
|
|
|
1,684 |
|
Plant closure cost |
|
|
|
|
|
|
5,299 |
|
|
|
|
|
|
|
9,826 |
|
Expected return on plan assets |
|
|
(737 |
) |
|
|
(940 |
) |
|
|
(1,474 |
) |
|
|
(1,879 |
) |
Amortization of prior service cost |
|
|
26 |
|
|
|
|
|
|
|
52 |
|
|
|
|
|
Amortization of unrecognized net loss |
|
|
188 |
|
|
|
7 |
|
|
|
376 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
603 |
|
|
$ |
5,490 |
|
|
$ |
1,206 |
|
|
$ |
10,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Postretirement Benefit Plan |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
12 |
|
|
$ |
17 |
|
|
$ |
24 |
|
|
$ |
34 |
|
Interest cost |
|
|
993 |
|
|
|
808 |
|
|
|
1,986 |
|
|
|
1,616 |
|
Plant closure cost |
|
|
|
|
|
|
4,784 |
|
|
|
|
|
|
|
8,889 |
|
Amortization of prior service cost |
|
|
56 |
|
|
|
56 |
|
|
|
112 |
|
|
|
112 |
|
Amortization of unrecognized net loss |
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,061 |
|
|
$ |
5,706 |
|
|
$ |
2,122 |
|
|
$ |
10,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys decision in December 2007 to close its manufacturing facility in Johnstown,
Pennsylvania significantly affected current and future employment levels and resulted in a decrease
in the estimated remaining future service years for the employees covered by the plans. In
addition, the plant closure decision triggered contractual special pension benefits for the
Companys pension plan and contractual termination benefits for the Companys postretirement plan
during 2008. These pension and postretirement benefit costs are included in Plant closure
charges on the consolidated statements of operations. The Company recorded additional pension and
postretirement benefit costs under SFAS No. 88 and SFAS No. 106 of $9,826 and $8,889, respectively,
during the six months ended June 30, 2008.
The Company made no contributions to the Companys defined benefit pension plans for the three
months and six months ended June 30, 2009 and 2008. Total contributions to the Companys defined
benefit pension plans in 2009 are expected to be approximately $12,566. The Company made payments
to the Companys postretirement benefit plan of approximately $1,673 and $931, respectively, for
the three months ended June 30, 2009 and 2008, and $2,905 and $1,810, respectively, for the six
months ended June 30, 2009 and 2008. Total payments to the Companys postretirement benefit plan in
2009 are expected to be approximately $5,364. As of December 31, 2008, the Companys benefit
obligations under its defined benefit pension plans and its postretirement benefit plan were
$59,688 and $60,657, respectively, which exceeded the fair value of plan assets by $26,689 and
$60,657, respectively.
The Company also maintains qualified defined contribution plans which provide benefits to employees
based on employee contributions, years of service, employee earnings or certain subsidiary
earnings, with discretionary contributions allowed. Expenses related to these plans were $251 and
$344 for the three months ended June 30, 2009 and 2008, respectively, and $674 and $827 for the six
months ended June 30, 2009 and 2008, respectively.
Note 14 Contingencies
The Company is involved in certain threatened and pending legal proceedings, including commercial
disputes and workers compensation and employee matters arising out of the conduct of its business.
While the ultimate outcome of these legal proceedings cannot be determined at this time, it is
the opinion of management that the resolution of these actions will not have a material adverse
effect on the Companys financial condition, results of operations or cash flows.
The Company is involved in various warranty and repair claims with its customers in the normal
course of business. In the opinion of management, the Companys potential losses in excess of the
accrued warranty provisions, if any, are not expected to be material to the Companys financial
condition, results of operations or cash flows.
On a quarterly basis, the Company evaluates the potential outcome of all significant contingencies
utilizing guidance provided in SFAS No. 5, Accounting for Contingencies. As required by SFAS No.
5, the Company estimates the likelihood that a future event or events will confirm the loss of an
asset or incurrence of a liability. When information available prior to issuance of the Companys
financial statements indicates that in managements judgment, it is probable that an asset had been
impaired or a liability had been incurred at the date of the financial statements and the amount of
loss can be reasonably estimated, the contingency is accrued by a charge to income.
Note 15 Earnings Per Share
Shares used in the computation of the Companys basic and diluted earnings per common share are
reconciled as follows:
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Weighted average common shares outstanding |
|
|
11,860,809 |
|
|
|
11,780,327 |
|
|
|
11,855,319 |
|
|
|
11,760,063 |
|
Dilutive effect of employee stock options and
nonvested share awards |
|
|
3,190 |
|
|
|
|
|
|
|
2,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding |
|
|
11,863,999 |
|
|
|
11,780,327 |
|
|
|
11,858,272 |
|
|
|
11,760,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding include the incremental shares that would
be issued upon the assumed exercise of stock options and the assumed vesting of nonvested share
awards. For each of the three and six months ended June 30, 2009, there were 160,240 stock options
and 43,182 shares of nonvested share awards which were anti-dilutive and not included in the above
calculation. Because the Company had a net loss for each of the three months and six months ended
June 30, 2008, all stock options and shares of nonvested share awards were anti-dilutive and not
included in the above calculation for that period.
Note 16 Sales Contract Termination Revenue
During the first quarter of 2009, the Company received a termination fee of $3,935 from a customer
in connection with reducing the number of railcars to be purchased under a previously agreed-to
contract. The contract termination fee is included in Revenues on the condensed consolidated
statements of operations for the six months ended June 30, 2009.
Note 17 Restatement of Condensed Consolidated Financial Statements
On July 28, 2009, the Company announced that it had identified historical accounting errors
relating to accounts payable. The accounting errors have resulted in the understatement of
cumulative net earnings since the fourth quarter of 2007.
The Company undertook a review to determine the total amount of the errors and the accounting
periods in which the errors occurred. The Companys review determined that the errors were
attributable to flaws in the design of internal IT and accounting processes to account for receipt
of certain goods that were implemented in the fourth quarter of 2007. These flaws represented
material weaknesses in the Companys internal controls relating to changes in information systems,
inventory valuation and account reconciliations. Management identified the accounting errors in
connection with the implementation of a new enterprise-wide reporting and management software
platform system to improve processes and strengthen controls throughout the Company.
The Companys review was overseen by the audit committee of the board of directors of the Company
(the Audit Committee) with the assistance of management, and legal counsel, IT consultants and
forensic accountants engaged by management. The Audit Committee concluded on July 27, 2009 that
the Companys previously issued audited consolidated financial statements as of and for the fiscal
years ended December 31, 2008 and December 31, 2007, and unaudited interim consolidated financial
statements as of and for the quarterly periods ended March 31, 2009, September 30, 2008, June 30,
2008 and March 31, 2008 should no longer be relied upon because of these errors in the financial
statements. The Companys board of directors agreed with the Audit Committees conclusions. After
analyzing the size and timing of the errors, the Company determined that, in the aggregate, the
errors were material and would require the Company to restate certain of its previously issued
financial statements. Cumulatively, the errors misstated operating income, pre-tax income and net
income for the periods involved, together with related cash flows. Inventories, accounts payable
and to a lesser extent, leased assets were also impacted.
The Company has restated its consolidated balance sheets and the related consolidated statements of
income, statements of stockholders equity and statements of cash flows as of and for the years
ended December 31, 2008 and 2007 as reported in its amended annual report on Form 10-K/A for the
fiscal year ended December 31, 2008. The Company restated its condensed consolidated balance sheet
as of March 31, 2009 and condensed consolidated statements of operations and cash flows for the
three months ended March 31, 2009 and 2008 as reported in its amended quarterly report on Form
10-Q/A for the period ended March 31, 2009. The Company has also restated the
accompanying condensed consolidated statements of operations and cash flows for the six months
ended June 30, 2008. The following discloses each line item on the Companys condensed
consolidated financial statements as originally reported in the Companys quarterly report on Form
10-Q for the quarterly period ended June 30, 2008 filed with the Securities and Exchange Commission
on August 11, 2008, the increase
(decrease) in each line item on the Companys condensed consolidated financial statements as a
result of the restatement and each line item on the Companys condensed consolidated financial
statements as restated.
15
Condensed Consolidated Statement of Operations
(in thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008 |
|
|
|
As Previously |
|
|
Effect of |
|
|
|
|
|
|
Reported |
|
|
Restatement |
|
|
Restated |
|
|
|
|
Revenues |
|
$ |
236,433 |
|
|
$ |
|
|
|
$ |
236,433 |
|
Cost of sales |
|
|
220,521 |
|
|
|
(706 |
) |
|
|
219,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
15,912 |
|
|
|
706 |
|
|
|
16,618 |
|
Selling, general and administrative expense (including non-cash stock-based
compensation expense of $1,692) |
|
|
15,869 |
|
|
|
|
|
|
|
15,869 |
|
Plant closure charges |
|
|
19,865 |
|
|
|
|
|
|
|
19,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(19,822 |
) |
|
|
706 |
|
|
|
(19,116 |
) |
Interest income, net |
|
|
1,892 |
|
|
|
|
|
|
|
1,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss before income taxes |
|
|
(17,930 |
) |
|
|
706 |
|
|
|
(17,224 |
) |
Income tax benefit |
|
|
(6,829 |
) |
|
|
227 |
|
|
|
(6,602 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(11,101 |
) |
|
|
479 |
|
|
|
(10,622 |
) |
Less: Net (loss) income attributable to noncontrolling interest in India JV |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to FreightCar America |
|
$ |
(11,101 |
) |
|
$ |
479 |
|
|
$ |
(10,622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share attributable to FreightCar America basic |
|
$ |
(0.94 |
) |
|
$ |
0.04 |
|
|
$ |
(0.90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share attributable to FreightCar America diluted |
|
$ |
(0.94 |
) |
|
$ |
0.04 |
|
|
$ |
(0.90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingbasic |
|
|
11,760,063 |
|
|
|
|
|
|
|
11,760,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingdiluted |
|
|
11,760,063 |
|
|
|
|
|
|
|
11,760,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.12 |
|
|
|
|
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
For disclosures regarding the increase (decrease) to the condensed consolidated statements of
operations for the three months ended June 30, 2008, see the Companys Form 10-K/A for the year
ended December 31, 2008.
16
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008 |
|
|
|
As Previously |
|
|
Effect of |
|
|
|
|
|
|
Reported |
|
|
Restatement |
|
|
Restated |
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to FreightCar America |
|
$ |
(11,101 |
) |
|
$ |
479 |
|
|
$ |
(10,622 |
) |
Adjustments to reconcile net (loss) income to net cash flows used in operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Plant closure charges |
|
|
19.865 |
|
|
|
|
|
|
|
19.865 |
|
Depreciation and amortization |
|
|
1,992 |
|
|
|
|
|
|
|
1,992 |
|
Other non-cash items |
|
|
(547 |
) |
|
|
|
|
|
|
(547 |
) |
Deferred income taxes |
|
|
(8,720 |
) |
|
|
|
|
|
|
(8,720 |
) |
Compensation expense under stock option and restricted share award agreements |
|
|
1,692 |
|
|
|
|
|
|
|
1,692 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
6,262 |
|
|
|
|
|
|
|
6,262 |
|
Inventories |
|
|
(44,560 |
) |
|
|
(2,229 |
) |
|
|
(46,789 |
) |
Leased railcars held for sale |
|
|
(46,380 |
) |
|
|
279 |
|
|
|
(46,101 |
) |
Other current assets |
|
|
(6,184 |
) |
|
|
|
|
|
|
(6,184 |
) |
Accounts payable |
|
|
65,998 |
|
|
|
1,244 |
|
|
|
67,242 |
|
Accrued payroll and employee benefits |
|
|
(4,257 |
) |
|
|
|
|
|
|
(4,257 |
) |
Income taxes receivable/payable |
|
|
793 |
|
|
|
227 |
|
|
|
1,020 |
|
Accrued warranty |
|
|
365 |
|
|
|
|
|
|
|
365 |
|
Other current liabilities and customer deposits |
|
|
(17,898 |
) |
|
|
|
|
|
|
(17,898 |
) |
Accrued pension costs and accrued postretirement benefits |
|
|
440 |
|
|
|
|
|
|
|
440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in operating activities |
|
|
(42,240 |
) |
|
|
|
|
|
|
(42,240 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(2,943 |
) |
|
|
|
|
|
|
(2,943 |
) |
Proceeds from sale of property, plant and equipment |
|
|
18 |
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in investing activities |
|
|
(2,925 |
) |
|
|
|
|
|
|
(2,925 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt |
|
|
(32 |
) |
|
|
|
|
|
|
(32 |
) |
Issuance of common stock |
|
|
627 |
|
|
|
|
|
|
|
627 |
|
Excess tax benefit from stock-based compensation |
|
|
(192 |
) |
|
|
|
|
|
|
(192 |
) |
Cash dividends paid to stockholders |
|
|
(1,425 |
) |
|
|
|
|
|
|
(1,425 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in financing activities |
|
|
(1,022 |
) |
|
|
|
|
|
|
(1,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(46,187 |
) |
|
|
|
|
|
|
(46,187 |
) |
Cash and cash equivalents at beginning of period |
|
|
197,042 |
|
|
|
|
|
|
|
197,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
150,855 |
|
|
$ |
|
|
|
$ |
150,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
1,276 |
|
|
$ |
|
|
|
$ |
1,276 |
|
|
|
|
|
|
|
|
|
|
|
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
OVERVIEW
All of the financial information presented in this Item 2 has been adjusted to reflect the
restatement of our condensed consolidated financial statements for the three months and six months
ended June 30, 2008. The restatement is more fully described in Note 17 to the condensed
consolidated financial statements. You should read the following discussion in conjunction with our
condensed consolidated financial statements and related notes included elsewhere in this quarterly
report on Form 10-Q. This discussion contains forward-looking statements that are based on
managements current expectations, estimates and projections about our business and operations. Our
actual results may differ materially from those currently anticipated and expressed in such
forward-looking statements. See Cautionary Statement Regarding Forward-Looking Statements.
We are the leading manufacturer of aluminum-bodied railcars and coal-carrying railcars in North
America, based on the number of railcars delivered over the past decade. We also refurbish and
rebuild railcars and sell forged, cast and fabricated parts for the railcars we produce, as well as
those manufactured by others. Our primary customers are shippers, railroads and financial
institutions.
Our manufacturing facilities are located in Danville, Illinois and Roanoke, Virginia. Each of our
manufacturing facilities has the capability to manufacture a variety of types of railcars,
including aluminum-bodied and steel-bodied railcars.
In response to reduced industry demand for railcars over the short-term, our Roanoke manufacturing
facility ceased production of new railcars in July 2009 but remains in operation for related activities
with a limited work force. We do not anticipate additional costs related to this reduction in force and
expect to resume production of
new railcars at our Roanoke facility in the future as industry demand improves.
Net orders for new railcars totaled 694 units in the second quarter of 2009 compared to 538 units
ordered (new orders of 1,438 units less cancelled orders of 900 units) in the second quarter of
2008 and orders of 339 units for the first quarter of 2009. Railcar deliveries totaled 1,207 units
in the second quarter of 2009, compared to 2,326 units delivered in the second quarter of 2008 and
974 units delivered in the first quarter of 2009. Railcar deliveries do not include 360 railcars
sold in the second quarter of 2009 that were previously under lease. There were no railcars sold
in the second quarter of 2008 or the first quarter of 2009 that were previously under lease. Total
backlog of unfilled orders was 1,472 units at June 30, 2009, compared with 1,985 units at March 31,
2009 and 2,620 units at December 31, 2008.
The North American railcar market is highly cyclical and the trends in the railcar industry are
closely related to the overall level of economic activity. We expect railroads and utilities to
continue to upgrade their fleets of aging steel-bodied coal-carrying railcars to lighter and more
durable aluminum-bodied coal-carrying railcars. Despite the decline in our backlog, we expect the
demand for coal cars to improve once the current recessionary pressures are behind us. Roughly
half of our nations electrical power is generated from coal and there are approximately 23 new
power plants, representing around 14,600 megawatts of coal-fired capacity, currently under
construction. The U.S. Energy Information Administration has projected continued growth in
domestic coal consumption for electric power generation through 2030. Factors such as these
suggest that our main products and services should be in demand for the foreseeable future.
However, future government policies and the potential of a long-term shift away from coal, the
primary fuel source for electric power generation, would mitigate this demand.
During 2008, management, after a thorough evaluation of the Companys current information
technology systems and its future needs, determined to upgrade the Companys existing information
technology system to a fully integrated ERP system to be provided by Oracle Corporation. The
Companys new enterprise-wide financial reporting system went live on August 1, 2009. In addition
to the implementation of the ERP system and in connection with the restatement of our consolidated
financial statements for the years ended December 31, 2008 and 2007, and our condensed consolidated
financial statements for the three months ended March 31, 2009 and 2008, there have been changes in
our internal control over financial reporting as more fully described in Item 4 of this quarterly
report on Form 10-Q.
Restatement of Consolidated Financial Statements
On July 28, 2009, we announced that we had identified historical accounting errors relating to
accounts payable. The accounting errors have resulted in the understatement of cumulative net
earnings since the fourth quarter of 2007. The accounting errors did not result from any changes
in our accounting policies or misapplication of Generally Accepted Accounting Principles (GAAP).
We undertook a review to determine the total amount of the errors and the accounting periods in
which the errors occurred. Our review determined that the errors were attributable to flaws in the
design of internal IT and accounting processes to account for receipt of certain goods that were
implemented in the fourth quarter of
18
2007. These flaws represented material weaknesses in the Companys internal controls relating to
changes in information systems, inventory valuation and account reconciliations
Our review was overseen by the Audit Committee with the assistance of management, and legal
counsel, IT consultants and forensic accountants engaged by management. After analyzing the size
and timing of the errors, we determined that, in aggregate, the errors were material and would
require us to restate certain of our previously issued financial statements. On September 16, 2009,
we filed an amended annual report on Form 10-K/A with the Securities and Exchange Commission
(SEC) to restate our financial statements for the years ended December 31, 2008 and 2007, and for
the quarterly periods ended March 31, 2008, June 30, 2008 and September 30, 2008. On that date, we
also filed an amended quarterly report on Form 10-Q/A with the SEC to restate our quarterly
financial statements for the period ended March 31, 2009. In addition, we have restated
our interim condensed consolidated statements of operations and cash flows for the six month period
ended June 30, 2008, as reported in this quarterly report on Form 10-Q.
The effects of the restatement on selected statement of operations line items for the three and six
month periods ended June 30, 2008, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
Increase/(Decrease) in statement of |
|
Ended June 30, |
|
Ended June 30, |
operations line items (in thousands) |
|
2008 |
|
2008 |
| | |
Cost of sales |
|
$ |
(767 |
) |
|
$ |
(706 |
) |
Gross profit |
|
|
767 |
|
|
|
706 |
|
Operating income (loss) before income
taxes |
|
|
767 |
|
|
|
706 |
|
Income tax provision (benefit) |
|
|
249 |
|
|
|
227 |
|
Net income (loss) |
|
|
518 |
|
|
|
479 |
|
RESULTS OF OPERATIONS
Three Months Ended June 30, 2009 compared to Three Months Ended June 30, 2008
Revenues
Our sales for the three months ended June 30, 2009 were $104.3 million compared to $141.3 million
for the three months ended June 30, 2008. Total deliveries in the second quarter of 2009 were
1,207 units, compared to 2,326 total units delivered in the second quarter of last year. The
decrease in sales revenue was due primarily to lower coal car sales driven by reduced industry
demand. Coal loadings in the second quarter of 2009 have significantly decreased from 2008 levels,
and the number of railcars in storage remains high. Recession-driven reductions in demand for
electricity, ample utility stockpiles, lower production and decelerating export activity
contributed to the decline in coal activity during 2009. We continue to aggressively pursue market
opportunities and believe that we are maintaining our strong market position.
Gross Profit
Our gross profit for the second quarter of 2009 was $16.0 million, compared to $7.4 million for the
second quarter of 2008, an increase of $8.6 million. The corresponding margin rate was 15.3% for
the second quarter of 2009, compared with 5.2% generated in the second quarter of 2008. The
increase in the margin rate quarter over quarter was due to a variety of factors: (i) a decrease in
the number of new cars sold (the gross margin rate on new sales is less than the margin rate on
other revenues, resulting in a product mix that is favorable to the margin rate); (ii) higher
margin rates on new car sales; and (iii) increases in lease and after-market revenues, which generally
carry higher margin rates than revenues from the sale of new cars. The margin rate for the second
quarter of 2008 was negatively impacted by sharp cost increases in raw materials, primarily in the
form of surcharges, and a loss contingency reserve of $3.7 million related to these cost increases
that was accrued during the second quarter of 2008.
19
Selling, General and Administrative Expense
Selling, general and administrative expenses for the three months ended June 30, 2009 were $6.7
million compared to $7.3 million for the three months ended June 30, 2008, representing a decrease
of $0.6 million. The decrease in selling, general and administrative expenses for the second
quarter of 2009 compared to the 2008 period is primarily attributable to reductions in salaries and
benefits as we reduced headcount in line with the size of the business over the past 12 months,
partially offset by costs incurred in connection with the restatement of our financial statements.
Plant Closure Charges
Results for the three months ended June 30, 2008 include plant closure charges of $1.6 million
which represent the incremental costs associated with our decision, in December 2007, to close our
Johnstown, Pennsylvania manufacturing facility. These costs included charges arising under our
pension and postretirement benefit plans as well as employee termination and related closure costs.
Interest Income
Interest income, net for the three months ended June 30, 2009 decreased $0.8 million compared to
the three months ended June 30, 2008 as both interest rates and our average cash balances decreased
compared to 2008 levels.
Income Taxes
The income tax provision was $2.3 million, at an effective tax rate of 24.5%, for the three months
ended June 30, 2009, compared to an income tax benefit of $0.5 million, at an effective tax rate of
56.2%, for the three months ended June 30, 2008. The effective tax rate for the second quarter of
2009 was lower than the statutory U.S. federal income tax rate of 35% primarily due to a reduction
of 15.1% for the positive effect of tax-deductible goodwill, partially offset by an increase in the
blended state rate of 1.9%. The effective tax rate for the second quarter of 2008 was higher than
the statutory U.S. federal income tax rate of 35% primarily due to a change in annualized income
that significantly impacted the financial statements.
Net Income Attributable to FreightCar America
As a result of the foregoing, net income attributable to FreightCar America was $7.0 million for
the three months ended June 30, 2009, compared to a net loss attributable to FreightCar America of
$0.4 million for the three months ended June 30, 2008. For the three months ended June 30, 2009,
our basic and diluted net income per share was $0.59, on basic and diluted shares outstanding of
11,860,809 and 11,863,999, respectively. For the three months ended June 30, 2008, our basic and
diluted net loss per share was $0.03, on basic and diluted shares outstanding of 11,780,327.
Six Months Ended June 30, 2009 compared to Six Months Ended June 30, 2008
Revenues
Our sales for the six months ended June 30, 2009 were $143.9 million compared to $236.4 million for
the six months ended June 30, 2008. Revenues for the first half of 2009 include $3.9 million
generated from contract termination fees resulting from a customers reduction of a sales order.
Total deliveries in the first half of 2009 were 2,181 units, compared to 3,613 total units
delivered in the first half of last year. The decrease in sales revenue was due primarily to lower
coal car sales driven by reduced industry demand. Coal loadings in 2009 have significantly
decreased from 2008 levels, and the number of railcars in storage remains high. Recession-driven
reductions in demand for electricity, ample utility stockpiles, lower production and decelerating
export activity contributed to the decline in coal activity during 2009. We continue to
aggressively pursue market opportunities and believe that we are maintaining our strong market
position.
Gross Profit
Our gross profit for the six months ended June 30, 2009 was $26.3 million, compared to $16.6
million for the six months ended June 30, 2008, an increase of $9.7 million. The corresponding
margin rate was 18.3% for the six months ended June 30, 2009, compared with 7.0% generated in the
corresponding period of 2008. The increase in the margin rate year over year was due to a variety
of factors: (i) a decrease in the number of new cars sold (the gross margin rate on new sales is
less than the margin rate on other revenues, resulting in a product mix that is favorable to the
margin rate); (ii) higher margin rates on new car sales; (iii) increases in lease and after-market
revenues, which generally carry higher margin rates than revenues from the sale of new cars: and
(iv) the contract termination fee recorded in the first quarter of 2009 as previously disclosed.
20
Selling, General and Administrative Expense
Selling, general and administrative expenses for the six months ended June 30, 2009 were $14.0
million compared to $15.9 million for the six months ended June 30, 2008, representing a decrease
of $1.8 million. The decrease in selling, general and administrative expenses for the six months
ended June 30, 2009 compared to the 2008 period is primarily attributable to reductions in salaries
and benefits of $1.1 million (including a reduction in stock-based compensation of $0.6 million),
outside professional services of $0.4 million and research and development costs of $0.6 million.
We continue to reduce costs to align our overhead structure with the size of the business.
Plant Closure Charges
Results for the six months ended June 30, 2008 include previously disclosed plant closure charges
of $19.9 million. These costs include charges of $18.7 million arising under our pension and
postretirement benefit plans as well as related closure costs.
Interest Income
Interest income, net for the six months ended June 30, 2009 decreased $2.2 million compared to the
six months ended June 30, 2008 as both interest rates and our average cash balances decreased
compared to 2008 levels.
Income Taxes
The income tax provision was $3.1 million, at an effective tax rate of 24.7%, for the six months
ended June 30, 2009, compared to an income tax benefit of $6.6 million, at an effective tax rate of
38.3%, for the six months ended June 30, 2008. The effective tax rate for the six months ended
June 30, 2009 was lower than the statutory U.S. federal income tax rate of 35% primarily due to a
reduction of 15.1% for the positive effect of tax-deductible goodwill, partially offset by an
increase in the blended state rate of 1.9%, an increase due the FIN 48 reserve of 2.1% and an
increase due to nondeductible expenses of 0.7%. The effective tax rate for the six months ended
June 30, 2008 included an income tax benefit of $7.4 million resulting from $19.9 million of plant
closure charges. The effective tax rate for the six months ended June 30, 2008 was higher than the
statutory U.S. federal income tax rate of 35% primarily due to the addition of a 7.5% blended state
rate and a 10.9% effect from other differences, less the positive impact of tax-deductible goodwill
of 15.1%.
Net Income Attributable to FreightCar America
As a result of the foregoing, net income attributable to FreightCar America was $9.4 million for
the six months ended June 30, 2009, compared to a net loss attributable to FreightCar America of
$10.6 million for the six months ended June 30, 2008. For the six months ended June 30, 2009, our
basic and diluted net income per share was $0.79, on basic and diluted shares outstanding of
11,855,319 and 11,858,272, respectively. For the six months ended June 30, 2008, our basic and
diluted net loss per share was $0.90, on basic and diluted shares outstanding of 11,760,063.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity for the six months ended June 30, 2009 and 2008, were our cash
balances on hand, our leased railcars held for sale and our two revolving credit facilities.
On August 24, 2007, we entered into the Second Amended and Restated Credit Agreement (as amended
by the First Amendment to Second Amended and Restated Credit Agreement dated as of September 30,
2008 and the Second Amendment to Second Amended and Restated Credit Agreement dated as of March 11,
2009, the Credit Agreement). The proceeds of the revolving credit facility under the Credit
Agreement can be used to finance our working capital requirements through direct borrowings and the
issuance of stand-by letters of credit. The Credit Agreement consists of a total facility of $50.0
million senior secured revolving credit facility, including: (i) a sub-facility for letters of
credit in an amount not to exceed $50.0 million; and (ii) a sub-facility for a swing line loan in
an amount not to exceed $5.0 million. The amount available under the revolving credit facility is
based on the lesser of (i) $50.0 million or (ii) the borrowing base representing a portion of
working capital calculated as a percentage of eligible accounts receivable plus percentages of
eligible finished and semi-finished inventory, less a $20.0 million borrowing base reserve. Since
our accounts receivable and inventory balances fluctuate considerably based on the cyclical nature
of our business and the timing of orders, the amount available for borrowing also fluctuates
considerably. Under the borrowing base calculation, the amount available for borrowing was $5.1
million and $38.5 million as of June 30, 2009 and December 31, 2008, respectively.
21
The Credit Agreement has a term ending on May 31, 2012 and bears interest at a rate of LIBOR plus
an applicable margin of between 1.50% and 2.25% depending on Revolving Loan Availability (as
defined in the Credit Agreement). We are required to pay a commitment fee of between 0.175% and
0.250% based on Revolving Loan Availability. Borrowings under the Credit Agreement are
collateralized by substantially all of our assets and guaranteed by an unsecured guarantee made by
JAIX in favor of LaSalle for the benefit of the Lenders. The Credit Agreement has both affirmative
and negative covenants, including a minimum fixed charge coverage ratio and limitations on debt,
liens, dividends, investments, acquisitions and capital expenditures. The Credit Agreement also
provides for customary events of default.
As of June 30, 2009 and December 31, 2008, we had no borrowings under our revolving credit
facilities. We had $2.7 million and $11.5 million in outstanding letters of credit under the
letter of credit sub-facility as of June 30, 2009 and December 31, 2008, respectively, which
reduced the amount available for borrowing under the facility. Under the Credit Agreement, our
subsidiaries are permitted to pay dividends and transfer funds to the Company without restriction.
On September 30, 2008, JAIX entered into a Credit Agreement (as amended by the First Amendment to
Credit Agreement dated as of March 11, 2009, the JAIX Credit Agreement) that can be used to fund
our leasing operations. The JAIX Credit Agreement consists of a $60.0 million senior secured
revolving credit facility. The JAIX Credit Agreement has a term ending on March 31, 2012 and bears
interest at the Eurodollar Loan Rate (as defined in the JAIX Credit Agreement) plus 2.00% for the
first two years of the JAIX Credit Agreement (the Revolving Period) and plus 2.50% for the
remainder of the term until the termination date. JAIX is required to pay an annual commitment fee
of 0.30% during the Revolving Period. Borrowings under the JAIX Credit Agreement are collateralized
by substantially all of the assets of JAIX. Additionally, America guaranteed the JAIX Credit
Agreement.
Availability under the JAIX Credit Agreement is based on a percentage of the Eligible Railcar
Leases (as defined in the agreement) held under the JAIX Credit Agreement. For the first two years
the facility requires interest only payments, thereafter the amount drawn on each group of Eligible
Railcars under lease is required to be repaid in equal installments at the 6, 12 and 18 month
anniversaries of such leases The JAIX Credit Agreement has both affirmative and negative
covenants, including, without limitation, a minimum fixed charge coverage ratio, a minimum tangible
net worth, a requirement to deposit restricted cash and limitations on debt, liens, dividends,
investments, acquisitions and capital expenditures. The JAIX Credit Agreement also provides for
customary events of default. As of June 30, 2009, we had no borrowings under the JAIX Credit
Agreement.
As more fully described in Note 17 to the condensed consolidated financial statements, we have
restated our consolidated financial statements and the related disclosures for the fiscal years
ended December 31, 2008 and 2007, and our condensed consolidated financial statements as of and for
the three months ended March 31, 2009 and 2008. The restatement has caused us to fail to comply
with certain representations and covenants in each of the Credit Agreement and the JAIX Credit
Agreement referred to above. We have received waivers of these representations and covenants from
the lenders under each of the credit agreements. These waivers are subject to the conditions
subsequent that the Company file its quarterly report on Form 10-Q for the period ended June 30,
2009 and comply with the other representations and covenants under the credit agreements by
September 30, 2009. We were otherwise in compliance with the representations and covenants
contained in these agreements as of June 30, 2009.
During 2008, in response to competitive market conditions, we selectively began to produce and
offer railcars under operating lease arrangements with certain customers. We also continually
evaluate opportunities to package and sell our leases to our leasing company customers. As of June
30, 2009, the value of railcars under operating leases was $71.1 million, the investment in which
was funded by cash flows from operations rather than the JAIX Credit Agreement. We anticipate that
we will continue to offer railcars under operating leases to certain customers and pursue
opportunities to sell leases in our portfolio. Additional railcars under lease may be funded by
cash flows from operations, borrowings under our credit facilities, or both, as the Company
evaluates its liquidity and capital resources. Leased railcars held for sale are current assets
and are therefore a source of liquidity.
During the first quarter of 2009 we established a restricted cash balance in lieu of standby
letters of credit with respect to a purchase price payment guarantee in the amount of $3.9 million
and a performance guarantee in the amount of $0.3 million. The restriction expired upon our
delivery of railcars to the U.S. port of departure for shipment to Colombia, which occurred during
the second quarter of 2009. We expect to establish restricted cash balances in future periods to
minimize bank fees related to standby letters of credit while maximizing our ability to borrow
under our revolving credit facilities.
22
Based on our current level of operations, we believe that our proceeds from operating cash flows
and our cash balances, together with the value of leased railcars held for sale and amounts
available under our revolving credit facilities, will be sufficient to meet our anticipated
liquidity needs for 2009. Our long-term liquidity is contingent upon future operating performance
and our ability to continue to meet financial covenants under our revolving credit facilities and
any other indebtedness. We may also require additional capital in the future to fund organic
growth opportunities and cost reduction programs, including new plant and equipment and the
development of railcars and pursuit of strategic opportunities, including joint ventures and
acquisitions, and these capital requirements could be substantial. Management continuously
evaluates manufacturing facility requirements based upon market demand and may elect to make
capital investments at higher levels in the future. We are also exploring product diversification
initiatives and international and other market opportunities.
Our long-term liquidity needs also depend to a significant extent on our obligations related to our
pension and welfare benefit plans. We provide pension and retiree welfare benefits to certain
salaried and hourly employees upon their retirement. The most significant assumptions used in
determining our net periodic benefit costs are the discount rate used on our pension and
postretirement welfare obligations and expected return on pension plan assets. Our management
expects that any future obligations under our pension plans that are not currently funded will be
funded out of our future cash flow from operations. As of December 31, 2008, our benefit obligation
under our defined benefit pension plans and our postretirement benefit plan
was $59.7 million and $60.7 million, respectively, which exceeded the fair value of plan assets by
$26.7 million and $60.7 million, respectively. In July 2009 and September 2009, we made
contributions relating to our defined benefit pension plans of $0.5 million and $11.6 million,
respectively. We may elect to adjust the level of future contributions to our pension plans based
on a number of factors, including performance of pension investments, changes in interest rates and
changes in workforce compensation. The Pension Protection Act of 2006 provides for changes to the
method of valuing pension plan assets and liabilities for funding purposes as well as minimum
funding levels. Our defined benefit pension plans are in compliance with the minimum funding levels
established in the Pension Protection Act. Funding levels will be affected by future
contributions, investment returns on plan assets, growth in plan liabilities and interest rates.
Assuming that the plans are fully funded as that term is defined in the Pension Protection Act, we
will be required to fund the ongoing growth in plan liabilities on an annual basis. We anticipate
funding pension contributions with cash from operations.
Based upon our operating performance, capital requirements and obligations under our pension and
welfare benefit plans, we may, from time to time, be required to raise additional funds through
additional offerings of our common stock and through long-term borrowings. There can be no
assurance that long-term debt, if needed, will be available on terms attractive to us, or at all.
Furthermore, any additional equity financing may be dilutive to stockholders and debt financing, if
available, may involve restrictive covenants. Our failure to raise capital if and when needed could
have a material adverse effect on our results of operations and financial condition.
Contractual Obligations
The following table summarizes our contractual obligations as of June 30, 2009, and the effect that
these obligations and commitments would be expected to have on our liquidity and cash flow in
future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
|
|
|
|
2-3 |
|
|
4-5 |
|
|
After |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Operating leases |
|
$ |
14,894 |
|
|
$ |
2,446 |
|
|
$ |
5,216 |
|
|
$ |
5,088 |
|
|
$ |
2,144 |
|
Material and component purchases |
|
|
131,324 |
|
|
|
38,081 |
|
|
|
56,164 |
|
|
|
37,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
146,218 |
|
|
$ |
40,527 |
|
|
$ |
61,380 |
|
|
$ |
42,167 |
|
|
$ |
2,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material and component purchases consist of non-cancelable agreements with suppliers to purchase
materials used in the manufacturing process. Purchase commitments for aluminum are made at a fixed
price and are typically entered into after a customer places an order for railcars. The estimated
amounts above may vary based on the actual quantities and price.
The above table excludes $4.9 million of long-term liabilities for unrecognized tax benefits and
accrued interest and penalties at June 30, 2009 because the timing of the payout of these
liabilities cannot be determined.
23
Cash Flows
The following table summarizes our net cash used in operating activities, investing activities and
financing activities for the six months ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
|
|
|
|
2008 |
|
|
|
2009 |
|
|
(as restated) |
|
|
|
(In thousands) |
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
35,859 |
|
|
$ |
(42,240 |
) |
Investing activities |
|
|
(11,233 |
) |
|
|
(2,925 |
) |
Financing activities |
|
|
(1,467 |
) |
|
|
(1,022 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
23,159 |
|
|
$ |
(46,187 |
) |
|
|
|
|
|
|
|
Operating Activities. Our net cash used in operating activities reflects net income adjusted for
non-cash charges and changes in net working capital (including non-current assets and liabilities).
Cash flows from operating activities are affected by several factors, including fluctuations in
business volume, contract terms for billings and collections, the timing of collections on our
contract receivables, processing of bi-weekly payroll and associated taxes, and payment to our
suppliers. Our working capital accounts also fluctuate from quarter to quarter due to the timing of
certain events, such as the payment or non-payment for our railcars. As some of our customers
accept delivery of new railcars in train-set quantities, consisting on average of 120 to 135
railcars, variations in our sales lead to significant fluctuations in our operating profits and
cash from operating activities. We do not usually experience business credit issues, although a
payment may be delayed pending completion of closing documentation, and a typical order of railcars
may not yield cash proceeds until after the end of a reporting period.
Our net cash provided by operating activities for the six months ended June 30, 2009 was $35.9
million compared to net cash used in operating activities of $42.2 million for the six months ended
June 30, 2008. The increase of $78.1 million in cash flows from operating activities (year over
year) was primarily due to an increase of $155.9 million generated by working capital accounts such
as accounts receivable, inventories and leased assets held for sale, partially offset by a decrease
of $85.1 million in accounts payable.
Investing Activities. Net cash used in investing activities for the six months ended June 30, 2009
was $11.2 million compared to $2.9 million for the six months ended June 30, 2008. Net cash used in
investing activities for the six months ended June 30, 2009, consisted of the cost of railcars
under operating leases produced or acquired of $8.8 million and capital expenditures of $2.4
million. Net cash used in investing activities for the six months ended June 30, 2008 consisted of
capital expenditures.
Financing Activities. Net cash used in financing activities was $1.5 million for the six months
ended June 30, 2009 and consisted primarily of cash dividends to our stockholders. Net cash used
in financing activities for the six months ended June 30, 2008 was $1.0 million and consisted
primarily of cash dividends to our stockholders, partially offset by the proceeds from stock
options exercised.
Capital Expenditures
Our capital expenditures were $2.4 million in the six months ended June 30, 2009 compared to $2.9
million in the six months ended June 30, 2008. Excluding unforeseen expenditures, management
expects that capital expenditures will be approximately $5.0 million for the remainder of 2009.
These expenditures will be used to maintain our existing facilities and update manufacturing
equipment. Capital expenditures for the remainder of 2009 will also include IT-related costs,
primarily related to our implementation of a new ERP system.
24
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains certain forward-looking statements including, in
particular, statements about our plans, strategies and prospects. We have used the words may,
will, expect, anticipate, believe, estimate, plan, intend and similar expressions in
this report to identify forward-looking statements. We have based these forward-looking statements
on our current views with respect to future events and financial performance. Our actual results
could differ materially from those projected in the forward-looking statements.
Our forward-looking statements are subject to risks and uncertainties, including:
|
|
the cyclical nature of our business; |
|
|
adverse economic and market conditions; |
|
|
fluctuating costs of raw materials, including steel and aluminum, and delays in the
delivery of raw materials; |
|
|
our ability to maintain relationships with our suppliers of railcar components; |
|
|
our reliance upon a small number of customers that represent a large percentage of our
sales; |
|
|
the variable purchase patterns of our customers and the timing of completion, delivery and
acceptance of customer orders; |
|
|
the highly competitive nature of our industry; |
|
|
risks relating to our relationship with our unionized employees and their unions; |
|
|
our ability to manage our health care and pension costs; |
|
|
our reliance on the sales of our aluminum-bodied coal-carrying railcars; |
|
|
shortages of skilled labor; |
|
|
the risk of lack of acceptance of our new railcar offerings by our customers; |
|
|
the cost of complying with environmental laws and regulations; |
|
|
the costs associated with being a public company; |
|
|
potential significant warranty claims; and |
|
|
various covenants in the agreement governing our indebtedness that limit our managements
discretion in the operation of our businesses. |
Our actual results could be different from the results described in or anticipated by our
forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections
and may be better or worse than anticipated. Given these uncertainties, you should not rely on
forward-looking statements. Forward-looking statements represent our estimates and assumptions only
as of the date that they were made. We expressly disclaim any duty to provide updates to
forward-looking statements, and the estimates and assumptions associated with them, in order to
reflect changes in circumstances or expectations or the occurrence of unanticipated events except
to the extent required by applicable securities laws. All of the forward-looking statements are
qualified in their entirety by reference to the factors discussed under Item 1A. Risk Factors in
our amended annual report on Form 10-K/A for the year ended December 31, 2008 filed with the
Securities and Exchange Commission.
25
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We have a $50.0 million revolving credit facility, which provides for financing of our working
capital requirements and contains a sub-facility for letters of credit and a $5.0 million
sub-facility for a swing line loan. As of June 30, 2009, there were no borrowings under the
revolving credit facility and we had issued approximately $2.7 million in letters of credit under
the sub-facility for letters of credit.
We also have a $60.0 million revolving credit facility, which provides for the financing of the
production or acquisition of railcars to be leased. As of March 31, 2009, there were no borrowings
under this credit facility. On an annual basis, a 1% change in the interest rate in our revolving
credit facilities will increase or decrease our interest expense by $10,000 for every $1.0 million
of outstanding borrowings.
The production of railcars and our operations require substantial amounts of aluminum and steel.
The cost of aluminum, steel and all other materials (including scrap metal) used in the production
of our railcars represents a significant majority of our direct manufacturing costs. Our business
is subject to the risk of price increases and periodic delays in the delivery of aluminum, steel
and other materials, all of which are beyond our control. Any fluctuations in the price or
availability of aluminum or steel, or any other material used in the production of our railcars,
may have a material adverse effect on our business, results of operations or financial condition.
In addition, if any of our suppliers were unable to continue its business or were to seek
bankruptcy relief, the availability or price of the materials we use could be adversely affected.
We currently do not plan to enter into any hedging arrangements to manage the price risks
associated with raw materials, although we may do so in the future. Historically, we have either
renegotiated existing contracts or entered into new contracts with our customers that allow for
variable pricing to protect us against future changes in the cost of raw materials. When raw
material prices increase rapidly or to levels significantly higher than normal, we may not be able
to pass price increases through to our customers, which could adversely affect our operating
margins and cash flows.
We are not exposed to any significant foreign currency exchange risks as our general policy is to
denominate foreign sales and purchases in U.S. dollars.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, management evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)), as of the end of the period covered by this
quarterly report on Form 10-Q (the Evaluation Date). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, our
disclosure controls and procedures were not effective to ensure that information required to be
disclosed in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and Exchange
Commissions rules and forms.
Background of Restatement
On July 28, 2009, the Company announced that it had identified historical accounting errors
relating to accounts payable. The accounting errors have resulted in the understatement of
cumulative net earnings since the fourth quarter of 2007. The Company undertook a review to
determine the total amount of the errors and the accounting periods in which the errors occurred.
The Company purchases certain components for the manufacture of railcars that are assembled by
third parties. After assembly, the components are shipped to one of the Companys manufacturing
locations. The Company owns the components during the third-party assembly, even though the
components are not delivered to the Company until assembly is complete. These components are made
from commodity metals (e.g., steel and aluminum). Price revisions of commodity metals are
reflected in surcharges by the suppliers.
In October 2007, the Company put in place a new process that was intended to allow it to better
track and reconcile inventory held at third-party assemblers. The process included a new program
within the Companys information technology operating system (the third-party inventory processing
system) that was intended to capture third-party inventory activity, post this activity, and
accrue the related payable (the unvouchered payable) in advance of receiving an invoice. In
connection with
26
the implementation of the Companys new Enterprise Resource Planning (ERP) system, the Company
discovered that the balance in the unvouchered payables account was significantly overstated.
Examples of the types of transactions that were improperly accounted for and contributed to this
overstatement include:
|
(1) |
|
Surcharge Processing The differences between the estimated surcharge amounts (which
were used to determine the accrual amount) and the actual surcharge amount listed on the
invoice were not consistently reflected as adjustments to the carrying value of inventory
by the third-party inventory processing system and a significant portion of these
differences remained in the unvouchered payables account rather than properly being
relieved to the cost of the assembled components. |
|
|
(2) |
|
Credit Memo Recording Credit memos were incorrectly recorded by the Company. In
certain cases, when a credit memo received from a vendor was processed, the amount of the
credit memo was improperly posted to the unvouchered payables account rather than relieved
to the cost of the inventory. |
The Company has determined that these errors occurred due to flaws in the testing and design of the
third-party inventory processing system noted above as well as a failure of the accounting controls
designed to detect such errors. Due to the nature and amount of the errors, the Company has
concluded that these IT and accounting deficiencies represent material weaknesses as more fully
described below.
The Companys review was overseen by the Audit Committee with the assistance of management, and
legal counsel, IT consultants and forensic accountants engaged by management. The Audit Committee
concluded on July 27, 2009 that the Companys previously issued audited consolidated financial
statements as of and for the fiscal years ended December 31, 2008 and December 31, 2007, and
unaudited interim consolidated financial statements as of and for the quarterly periods ended March
31, 2009, September 30, 2008, June 30, 2008 and March 31, 2008 should no longer be relied upon
because of these errors in the financial statements. The Companys board of directors agreed with
the Audit Committees conclusions.
Description of Material Weaknesses
A material weakness in internal control over financial reporting is defined as a deficiency, or a
combination of deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the Companys annual or interim financial
statements will not be prevented or detected on a timely basis.
As disclosed in our amended annual report on Form 10-K/A for the fiscal year ended December 31,
2008, management identified the following control deficiencies as of December 31, 2008 that
constituted material weaknesses:
System Change Controls
The Companys controls to test changes in its information system did not operate effectively. Upon
implementation, the third-party inventory processing system was not appropriately tested prior to
migration to the production environment. As a result, inaccurate and incomplete programming logic
was utilized in the third-party inventory processing system.
Inventory Valuation Controls
The Companys controls to value assembled components did not operate effectively. The third-party
inventory processing system did not consistently or accurately calculate inventory values or
appropriately relieve the corresponding unvouchered payables to the cost of the assembled
components. As a result, inaccurate amounts were recorded to inventories, cost of sales, leased
assets held for sale, railcars on operating leases, and unvouchered payables.
Account Reconciliation Controls
The Companys controls to reconcile unvouchered payables were not designed effectively. The
reconciliation did not contain a sufficient level of detail or analysis to detect errors in the
account balance. As a result, misstatements in the unvouchered payables account were not detected
in a timely manner.
These material weaknesses resulted in material errors recorded within inventories, cost of sales,
leased assets held for sale, railcars on operating leases and unvouchered payables.
In connection with the preparation of our amended annual report on Form 10-K/A for the fiscal year
ended December 31, 2008, and restatement of the Companys 2008 and 2007 consolidated financial
statements, management, under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, reassessed its evaluation of
27
the effectiveness of our internal control over financial reporting as of December 31, 2008 based on
the framework established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). As a result of that reassessment,
management identified control deficiencies as of December 31, 2008 that constituted material
weaknesses and, accordingly, the Chief Executive Officer and Chief Financial Officer concluded that
the Company did not maintain effective internal control over financial reporting as of December 31,
2008.
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2009, the Company began implementing the remediation measures
described below, including policies and procedures covering the reconciliation of the unvouchered
payables account and more accurate recording of credit memos and surcharges. This implementation
process is continuing. Additionally, the new ERP system, described below, is designed to enhance
internal control over the entire accounting and financial reporting process. Management believes
that the remediation measures described below will remediate the identified control deficiencies.
However, management continues to evaluate and work to improve its internal control over financial
reporting. It may be determined that additional measures must be taken to address these control
deficiencies.
Remediation Steps to Address Material Weaknesses
In response to the material weaknesses identified above, management, under the supervision of the
Chief Executive Officer and Chief Financial Officer, proposed and has begun to implement the
measures described below to address the material weaknesses, in addition to the implementation of
the new ERP system that was already in progress. This remediation effort is intended both to
address the identified material weaknesses and to enhance the Companys overall financial control
environment.
ERP System
During the fiscal year ended December 31, 2008, management, after a thorough evaluation of its
current information technology systems and its future needs, determined to upgrade its existing
information technology system to a fully integrated ERP system to be provided by Oracle
Corporation. Design, implementation and testing of the system has been completed as of August 1,
2009. Management believes that the integrated and standardized features of the new system will
eliminate all of the system design and implementation limitations of the old software that
contributed to the material weaknesses, including the proper processing of vendor credit memos and
differences between estimated and actual surcharges on third-party inventory. Among these
improvements is the elimination of non-integrated stand-alone operating and general ledger systems,
as well as the creation of a complete and detailed listing, or subsidiary ledger, of balances and
amounts in the unvouchered payables account. Management expects the ERP system to significantly
improve the Companys internal control framework.
Account Reconciliations
Management is in the process of revising its policies and procedures for the reconciliation of
significant balance sheet accounts to provide for a more robust and detailed reconciliation to
support month-end and quarterly balances. In connection with the implementation of the new ERP
system, management is preparing a procedure governing the reconciliation of the unvouchered
payables account and other accounts, which will be distributed to the appropriate accounting and
supervisory personnel prior to the end of the third quarter of 2009.
The material weaknesses identified by management are not fully remediated as of the date of the
filing of this quarterly report on Form 10-Q. The Company has performed substantive procedures in
an effort to ensure that the financial information reflected in this report is supported and the
financial statements are fairly presented as of the date of this report. At the direction of the
Audit Committee management has begun to develop a detailed plan and timetable for the
implementation of the above-referenced remediation measures to the extent they are not already
complete and will monitor their implementation. In addition, under the direction of the Audit
Committee, management will continue to review and make necessary changes to the overall design of
the system of internal controls and the control environment, as well as policies and procedures to
improve the overall effectiveness of internal control over financial reporting.
28
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in certain threatened and pending legal proceedings, including commercial disputes
and workers compensation and employee matters arising out of the conduct of our business. While
the ultimate outcome of these legal proceedings cannot be determined at this time, it is the
opinion of management that the resolution of these actions will not have a material adverse effect
on our financial condition, results of operations or cash flows.
Item 1A. Risk Factors.
There have been no material changes from the risk factors previously disclosed in Item 1A of our
2008 amended annual report on Form 10-K/A.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Our annual meeting of stockholders was held on May 13, 2009. The purpose of the meeting was to
consider and vote upon proposals to (i) elect three directors who were nominated for election as
Class I directors to three-year terms, and (ii) ratify the appointment of our independent
registered public accounting firm for 2009. The 10,755,679 shares present in person or by proxy
were voted as follows with respect to each proposal:
|
1. |
|
To elect three directors who were nominated for election as Class I directors to three-year terms: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes For |
|
Votes Withheld |
James D. Cirar |
|
|
9,832,197 |
|
|
|
923,482 |
|
S. Carl Soderstrom, Jr. |
|
|
9,822,378 |
|
|
|
933,301 |
|
Robert N. Tidball |
|
|
9,312,854 |
|
|
|
1,442,825 |
|
|
2. |
|
To ratify the appointment of Deloitte & Touche LLP as our
independent registered public accounting firm for fiscal year
2009: |
|
|
|
|
|
|
|
|
|
|
|
Votes |
|
|
Votes For |
|
Against |
|
Abstentions |
10,710,956 |
|
|
29,444 |
|
|
|
15,279 |
|
Item 5. Other Information.
None.
29
Item 6. Exhibits.
|
(a) |
|
Exhibits filed as part of this Form 10-Q: |
|
10.1 |
|
FreightCar America Inc. Executive Severance Plan (and Summary Plan Description). |
|
|
23 |
|
Consent of Independent Registered Public Accounting Firm. |
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
32 |
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
FREIGHTCAR AMERICA, INC.
|
|
Date: September 30, 2009 |
By: |
/s/ Christian B. Ragot
|
|
|
|
Christian B. Ragot, President and |
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
By: |
/s/ Christopher L. Nagel
|
|
|
|
Christopher L. Nagel, Vice President, Finance and |
|
|
|
Chief Financial Officer |
|
31
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
23
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
10.1
|
|
FreightCar America Inc. Executive Severance Plan (and Summary Plan Description). |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
32