FreightCar America, Inc. - Annual Report: 2007 (Form 10-K)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2007
or
| o | 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)
| Delaware (State or other jurisdiction of incorporation or organization) Two North Riverside Plaza, Suite 1250, Chicago, Illinois (Address of principal executive offices) |
25-1837219 (I.R.S. Employer Identification No.) 60606 (Zip Code) |
(800) 458-2235
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of class | Name of Each Exchange on Which Registered | |
| Common stock, par value $0.01 per share | Nasdaq Global Market |
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. YES o NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. YES o NO þ
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 þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment of this Form 10-K. 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):
| Large Accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). YES o NO þ
The aggregate market value of the registrant’s common stock held by non-affiliates of the
registrant as of June 30, 2007 was $582.3 million, based on the closing price of $47.84 per share
on the Nasdaq Global Market.
As of March 7, 2008, there were 11,854,846 shares of the registrant’s common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
| Documents | Part of Form 10-K | |
| Portions of the registrant’s definitive Proxy Statement for the 2008 annual meeting of stockholders to be filed pursuant to Regulation 14A within 120 days of the end of the registrant’s fiscal year ended December 31, 2007 |
Part III |
FREIGHTCAR AMERICA, INC.
TABLE OF CONTENTS
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PART I
Item 1. Business.
OVERVIEW
We are the leading manufacturer of aluminum-bodied railcars in North America, based on the number
of railcars delivered. We specialize in the production of aluminum-bodied coal-carrying railcars,
which represented 86% of our deliveries of railcars in 2007 and 96% of our deliveries of railcars
in 2006, while the balance of our production consisted of a broad spectrum of railcar types,
including aluminum-bodied and steel-bodied railcars. We also refurbish and rebuild railcars and
sell forged, cast and fabricated parts for all of the railcars we produce, as well as those
manufactured by others.
We are the leading North American manufacturer of coal-carrying railcars. We estimate that we have
manufactured 80% of the coal-carrying railcars delivered over the three years ended December 31,
2007 in the North American market. Our BethGon® railcar has been the leading
aluminum-bodied coal-carrying railcar sold in North America for nearly 20 years. Over the last 25
years, we believe we have built and introduced more types of coal-carrying railcars than all other
manufacturers in North America combined.
Our facilities are located in Danville, Illinois, Johnstown, Pennsylvania and Roanoke, Virginia.
Each of our facilities has the capability to manufacture a variety of types of railcars, including
aluminum-bodied and steel-bodied railcars. We commenced operations at our leased manufacturing
facility in Roanoke, Virginia in December 2004, and we delivered the first railcar manufactured at
the Roanoke facility during the second quarter of 2005.
Our primary customers are shippers, railroads and financial institutions, which represented 51%,
27% and 21%, respectively, of our total sales attributable to each type of customer for the year
ended December 31, 2007. In the year ended December 31, 2007, we delivered 10,282 new railcars,
including 8,821 aluminum-bodied coal-carrying railcars. Our total backlog of firm orders for new
railcars decreased from 9,315 railcars as of December 31, 2006 to 5,399 railcars as of December 31,
2007, representing estimated sales of $697 million and $422 million as of December 31, 2006 and
2007, respectively, attributable to such backlog.
We and our predecessors have been manufacturing railcars since 1901. On April 11, 2005, we
completed an initial public offering of shares of our common stock. On September 27, 2005, we
completed a secondary public offering of shares of our common stock by selling stockholders.
Our Internet website is www.freightcaramerica.com. We make available free of charge on or through
our website items related to corporate governance, including, among other things, our corporate
governance guidelines, charters of various committees of the Board of Directors and our code of
business conduct and ethics. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K are available on our website and on the SEC’s website at www.sec.gov.
Any stockholder of our company may also obtain copies of these documents, free of charge, by
sending a request in writing to Investor Relations at FreightCar America, Inc., Two North Riverside
Plaza, Suite 1250, Chicago, Illinois 60606.
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OUR PRODUCTS AND SERVICES
We design and manufacture aluminum-bodied and steel-bodied railcars that are used in various
industries. In particular, we have expertise in the manufacture of aluminum-bodied coal-carrying
railcars.
The types of railcars listed below include the major types of railcars that we are capable of
manufacturing; however, some of the types of railcars listed below have not been ordered by any of
our customers or manufactured by us in a number of years.
Any of the railcar types listed below may be further developed with particular characteristics,
depending on the nature of the materials being transported and customer specifications. In
addition, we refurbish and rebuild railcars and sell forged, cast and fabricated parts for all of
the railcars that we manufacture, as well as those manufactured by others.
We manufacture two primary types of coal-carrying railcars: gondolas and open-top hoppers. We build
all of our coal-carrying railcars using a patented one-piece center sill, the main longitudinal
structural component of the railcar. The one-piece center sill provides a higher carrying capacity
and weighs significantly less than traditional multiple-piece center sills.
| • | BethGon Series. The BethGon is the leader in the aluminum-bodied coal-carrying gondola railcar segment. We believe the BethGon railcar can carry more coal than traditional gondola railcars. Since we introduced the steel BethGon railcar in the late 1970s and the aluminum BethGon railcar in 1986, the BethGon railcar has become the most widely used coal-carrying railcar in North America. The BethGon railcar represented 57%, 45% and 33% of all the railcars we delivered in 2007, 2006 and 2005, respectively, and 52%, 41% and 28% of total revenue in 2007, 2006 and 2005, respectively. We have continuously improved the BethGon’s design since we began making this railcar. The improvements have been aimed at increasing carrying capacity and reducing weight while maintaining structural integrity. In 1986, we introduced the use of aluminum construction. The use of aluminum lowered each railcar’s weight from approximately 60,000 pounds to approximately 42,000 pounds. We believe the new design increased hauling capacity by approximately nine tons per railcar over traditional flat-bottomed gondolas and lowered the railcar’s center of gravity, providing a smoother ride with less wear on the railcar. In 1994, we introduced a higher payload aluminum gondola coal-carrying railcar, called the AeroFlo™ BethGon, which had redesigned sides for improved aerodynamics and greater fuel efficiency. In 2001, we introduced a new gondola coal-carrying railcar, the BethGon II, which has a lighter weight, higher capacity and increased durability suitable for long-haul coal-carrying railcar service. We have received several patents on the features of the BethGon II and continue to explore ways to increase the BethGon II’s capacity and improve its reliability. | |
| • | AutoFlood Series. Our aluminum open-top hopper railcar, the AutoFlood, is a five-pocket coal-carrying railcar equipped with a bottom discharge gate mechanism. We began manufacturing AutoFlood railcars in 1984, and, in 1996, we introduced the AutoFlood II™. The AutoFlood II has smooth exterior sides that we believe maximize loading capacity and increase efficiency by reducing wind drag. The AutoFlood II’s automatic rapid discharge system, the MegaFlo™ door system, incorporates a patented mechanism that uses an over-center locking design, enabling the cargo door to close with tension rather than by compression. The MegaFlo door system, which opens to its full width in only two seconds, provides a door opening which we believe is significantly wider than any competing door system and does not require periodic door adjustments. In addition, the MegaFlo door system design reduces wear on the railcar. In 2002, we introduced the AutoFlood III™, which has a smooth interior side that maintains the features of the MegaFlo door system while improving the railcar’s flow characteristics for coal types that are difficult to unload. AutoFlood railcars can be equipped with rotary couplers to also permit rotary unloading. In 2007, our production of the AutoFlood III represented 19% of the total deliveries in the coal-carrying railcar market and 33% of the coal-carrying railcars we produced. The AutoFlood series represented 28%, 51% and 57% of all the railcars we delivered in 2007, 2006 and 2005, respectively, and 31%, 54% and 58% of total revenue in 2007, 2006 and 2005, respectively. | |
| • | Other Coal-Carrying Railcars. We also manufacture a variety of other types of aluminum and steel-bodied coal-carrying railcars, including triple hopper, hybrid aluminum/stainless steel and flat bottom gondola railcars. |
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Our portfolio of other railcar types that we offer includes:
| • | Aluminum Vehicle Carrier. In 2000, we designed and introduced our aluminum vehicle-carrying railcar, combining our expertise with aluminum-bodied railcars and our experience in building flat railcars. Our first aluminum vehicle carrier railcar design, the AVC™, has a lightweight, integrated design and is used to transport automobiles, commercial and conversion vans, pickup trucks and sport utility vehicles from assembly plants and ports to rail distribution centers. An aluminum body eliminates the need to paint the railcar during its expected lifetime. Our design helps to ensure that vehicles are delivered damage-free. AVCs are purchased by financial institutions, shippers and railroads. We had our first sale of the AVC in 2003. |
| • | Articulated Bulk Container Railcar. Our articulated bulk container railcar has high strength and capacity and is designed to carry dense bulk products up to 59,000 pounds in 20 foot containers. We sell our articulated bulk container railcars primarily to shippers of high-density waste. |
| • | Intermodal Double Stack Railcar. Our intermodal double stack railcar is used to transport containers that may also be transported by truck or ship, allowing cargo to be transported through different modes without loading and unloading of the containers. |
| • | Small Covered Hopper Railcar. Our small covered hopper railcar is used to transport high-density products such as roofing granules, fly ash, sand and cement. This railcar features our patented one-piece cold-rolled center sill, 30-inch diameter hatch covers and bottom-unloading outlets. |
| • | Mill Gondola Railcar. Our mill gondola railcar is used to transport steel products and scrap and features our patented one-piece cold-rolled center sill, cast draft sills, pinned side-to-end connections and a choice of welded or riveted sides. |
| • | Slab Railcar. We believe that our slab railcar is the first railcar manufactured specifically to transport steel slabs. The slab railcar is a spine-type flat railcar that is approximately 20,000 pounds lighter than a standard mill gondola railcar that is also used to transport steel slabs, allowing customers to haul more steel slabs per railcar and more railcars in a train. |
| • | Coil Steel Railcar. Our coil steel railcar has a transverse trough design that allows easy loading or unloading using overhead cranes or forklifts. This feature allows railroads to compete with truck haulage for the transportation of steel coils. |
| • | Flat Railcar. We produce a variety of standard and heavy-duty flat railcars that can carry a variety of products, including machinery and equipment, steel and other bulky industrial products. Our high capacity flat railcar is used to transport, among other things, electrical transformers and generators. |
| • | Bulkhead Flat Railcar. Our bulkhead flat railcar has end bulkheads designed to retain the load, which can include forest products, steel and structural components. |
| • | Hybrid Center Beam Flat Railcar. Our FleXibeam™ center beam flat railcar is used to haul forest products, such as plywood, oriented strand board and dimensional lumber, and steel products, such as structural steel and pipe. The FleXibeam hauls approximately 14,000 pounds of additional product than a conventional center beam flat railcar, and its short high-strength center beam partition allows easy loading of steel and other products with overhead cranes. |
| • | Woodchip Gondola Railcar. Our woodchip gondola railcar is used to haul woodchips and municipal waste or other high-volume, low-density commodities. It has rotary couplers and incorporates our patented one-piece cold-rolled center sill and tub design. |
| • | Other Open-Top Hopper Railcars. We offer a variety of open-top hopper railcar designs to carry aggregates, iron ore, taconite pellets, petroleum coke and other bulk commodities. These railcars represented 8% and 4% of our railcar deliveries and total revenue in 2007 and 2006, respectively. |
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| • | International Railcar Designs. We have established a licensing arrangement with a railcar manufacturer in Brazil pursuant to which our technology is used to produce various types of railcars in Brazil. In addition, we manufacture coal-carrying railcars for export to Latin America and have manufactured intermodal railcars for export to the Middle East. Railroads outside of North America have a variety of track gauges that are sized differently than in North America, which requires us, in some cases, to alter manufacturing specifications for foreign sales. We are also exploring opportunities in other international markets. |
| • | Spare Parts. We sell replacement parts for our railcars and railcars built by others. |
We have added 16 new or redesigned products to our portfolio in the last five years, including the
AVC, slab railcar, coil steel railcar, triple hopper railcars and hybrid aluminum/stainless steel
railcars. We expect to continue introducing new or redesigned products.
MANUFACTURING
We operate railcar production facilities in Danville, Illinois, Johnstown, Pennsylvania, and
Roanoke, Virginia. Our Danville, Johnstown and Roanoke facilities are each certified or approved
for certification by the Association of American Railroads, or the AAR, which sets railcar
manufacturing industry standards for quality control.
In December 2007, we announced that we planned to close our manufacturing facility located in
Johnstown, Pennsylvania. This action was taken to further our strategy of maintaining our
competitive position by optimizing production at our low-cost facilities and continuing our focus
on cost control.
Our manufacturing process involves four basic steps: fabrication, assembly, finishing and
inspection. Each of our facilities has numerous checkpoints at which we inspect products to
maintain quality control, a process that our operations management continuously monitors. In our
fabrication processes, we employ standard metal working tools, many of which are computer
controlled. Each assembly line typically involves 15 to 20 manufacturing positions, depending on
the complexity of the particular railcar design. We use mechanical fastening in the fitting and
assembly of our aluminum-bodied railcar parts, while we typically use welding for the assembly of
our steel-bodied railcars. For aluminum-bodied railcars, we begin the finishing process by cleaning
the railcar’s surface and then applying the decals. In the case of steel-bodied railcars, we begin
the finishing process by blasting the surface area of the railcar and then painting it. We use
water-based paints to reduce the emission of volatile organic compounds, and we meet state and U.S.
federal regulations for control of emissions and disposal of hazardous materials. Once we have
completed the finishing process, our employees, along with representatives of the customer
purchasing the particular railcars, inspect all railcars for adherence to specifications.
We have focused on making our manufacturing facilities more flexible and cost-efficient while at
the same time reducing product change-over times and improving product quality. We developed many
of these improvements with the participation of our manufacturing employees, management and
customers. We have implemented manufacturing concepts, whereby various manufacturing steps are
accomplished in one location within the facility to eliminate unnecessary movement of parts within
the facility, improve production rates and reduce inventories. These improvements are intended to
provide us with increased flexibility in scheduling the production of orders and to minimize down
time resulting from railcar type change-overs, thereby increasing the efficiency and lowering the
cost of our manufacturing operations.
CUSTOMERS
We have strong long-term relationships with many large purchasers of railcars. Long-term customer
relationships are particularly important in the railcar industry, given the limited number of
buyers of railcars.
Our customer base consists mostly of North American financial institutions, shippers and railroads.
We believe that our customers’ preference for reliable, high-quality products, the relatively high
cost for customers to switch manufacturers, our technological leadership in developing and
enhancing innovative products and the competitive pricing of our railcars have helped us maintain
our long-standing relationships with our customers.
In 2007, revenue from three customers, Burlington Northern Santa Fe Railway Company, Norfolk
Southern Corporation, and TXU Energy, accounted for approximately 15%, 11% and 11% of total
revenue, respectively. In 2007, sales to our top ten customers accounted for approximately 82% of
total revenue. Our sales to customers
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outside the United States were $86.0 million in 2007. While
we maintain strong relationships with our customers and we serve over 70 active customers, many
customers do not purchase railcars every year since railcar fleets are not necessarily replenished
or augmented every year. The size and frequency of railcar orders often results in a small number
of customers representing a significant portion of our sales in a given year.
SALES AND MARKETING
Our direct sales group is organized geographically and consists of regional sales managers and
product line managers, a manager of customer service and support staff. The regional sales managers
are responsible for managing customer relationships. Our product line managers are responsible for
product planning and contract administration. Our manager of customer service is responsible for
after-sale follow-up and in-field product performance reviews.
RESEARCH AND DEVELOPMENT
Our railcar research and development activities provide us with an important competitive advantage.
We believe that we are a leader in introducing new and improved railcar designs that respond to the
needs of our customers. Railcar designs have been historically slow to change in our industry. We
have introduced 16 new railcar designs or product-line extensions in the last five years. Our
research and development team, working within our engineering group, is dedicated to the design of
new products. In addition, the team continuously identifies design upgrades for our existing
railcars, which we implement as part of our effort to reduce costs and improve quality. We
introduce new railcar designs as a result of a combination of customer feedback and close
observation of market demand trends. Our engineers use current modeling software and
three-dimensional modeling technology to assist with product design. New product designs are tested
for compliance with AAR standards prior to introduction. Costs associated with research and
development are expensed as incurred and totaled $2.0 million, $0.9 million and $0.4 million for
the years ended December 31, 2007, 2006 and 2005, respectively.
BACKLOG
We define backlog as the value of products or services to which our customers have committed in
writing to purchase from us, which have not been recognized as sales. Our contracts include
cancellation clauses under which customers are required, upon cancellation of the contract, to
reimburse us for costs incurred in reliance on an order and to compensate us for lost profits.
However, customer orders may be subject to customer requests for delays in railcar deliveries,
inspection rights and other customary industry terms and conditions, which could prevent or delay
backlog from being converted into sales.
The following table depicts our reported railcar backlog in number of railcars and estimated future
sales value attributable to such backlog, for the periods shown.
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Railcar backlog at start of period |
9,315 | 20,729 | 11,397 | |||||||||
New railcars delivered |
(10,282 | ) | (18,764 | ) | (13,031 | ) | ||||||
New railcar orders |
6,366 | 7,350 | 22,363 | |||||||||
Railcar backlog at end of period |
5,399 | 9,315 | 20,729 | |||||||||
Estimated backlog at end of
period (in thousands)(1) |
$ | 422,054 | $ | 697,054 | $ | 1,412,424 | ||||||
| (1) | Estimated backlog reflects the total sales attributable to the backlog reported at the end of the particular period as if such backlog were converted to actual sales. Estimated backlog does not reflect potential price increases and decreases under customer contracts that provide for variable pricing based on changes in the cost of raw materials. |
We expect that all of our reported backlog as of December 31, 2007 will be converted to sales by
the end of 2008. However, our reported backlog may not be converted to sales in any particular
period, if at all, and the actual sales
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from these contracts may not equal our reported backlog
estimates. See Item 1A. “Risk Factors—Risks Related to Our Business—The level of our reported
backlog may not necessarily indicate what our future sales will be and our actual sales may fall
short of the estimated sales value attributed to our backlog.” In addition, due to the large size
of railcar orders and variations in the mix of railcars, the size of our reported backlog at the
end of any given period may fluctuate significantly. See Item 1A. “Risk Factors—Risks Related to
the Railcar Industry—The variable purchase patterns of our customers and the timing of completion,
delivery and acceptance of customer orders may cause our sales and income from operations to vary
substantially each quarter, which will result in significant fluctuations in our quarterly
results.” We currently do not have any backlog for rebuilt railcars.
SUPPLIERS AND MATERIALS
The cost of raw materials and components represents a substantial majority of the manufacturing
costs of most of our railcar product lines. As a result, the management of purchasing raw materials
and components is critical to our profitability. As our products are made to order, we do not
purchase materials or components until we receive an order and we time deliveries to minimize
in-process inventory. We enjoy strong relationships with our suppliers, which helps to ensure
access to supplies when railcar demand is high.
Our primary aluminum suppliers are Alcoa Inc. and Alcan Inc. Aluminum prices generally are fixed at
the time a railcar order is accepted, mitigating the effect of future fluctuations in prices. We
purchase steel primarily from U.S. sources, except for our cold-rolled center sills, which we
purchase from a single Canadian supplier. A center sill is the primary structural component of a
railcar. Our center sill is formed into its final shape without heating by passing steel plate
through a series of progressive rolls.
Our primary component suppliers include Amsted Industries, Inc., which supplies us with castings
and couplers through its American Steel Foundries subsidiary, wheels through its Griffin Wheel
Company subsidiary, draft components through its Keystone subsidiary and bearings through its
Brenco subsidiary. Roll Form Group, a division of Samuel Manu-Tech, Inc., is the sole supplier of
our cold-rolled center sills, which were used in 96% and 100% of our railcars produced in 2007 and
2006, respectively. Other suppliers provide brake systems, wheels, castings, axles and bearings.
The railcar industry is subject to supply constraints for some of the key railcar components. See
Item 1A. “Risk Factors—Risks Related to the Railcar Industry—Limitations on the supply of wheels
and other railcar components could adversely affect our business because they may limit the number
of railcars we can manufacture.”
Except as described above, there are usually at least two suppliers for each of our raw materials
and specialty components, and we actively purchase from over 200 suppliers. No single supplier
accounted for more than 28% and 25% of our total purchases in 2007 and 2006, respectively. Our top
ten suppliers accounted for 67% and 65% of our total purchases in 2007 and 2006, respectively.
COMPETITION
We operate in a highly competitive marketplace. Competition is based on price, product design,
reputation for product quality, reliability of delivery and customer service and support.
We have
four principal competitors in the North American railcar market that
primarily manufacture railcars for third-party customers, which
are Trinity Industries, Inc., National Steel Car Limited, The Greenbrier Companies, Inc. and
American Railcar Industries, Inc. Trinity Industries is our only current competitor in the North
American aluminum-bodied coal-carrying railcar market.
Competition in the North American market from railcar manufacturers located outside of North
America is limited by, among other factors, high shipping costs and familiarity with the North
American market.
INTELLECTUAL PROPERTY
We have several U.S. and non-U.S. patents and pending applications, registered trademarks,
copyrights and trade names. Our key patents are for our one-piece center sill, our MegaFlo™ door
system and our top chord and side stake for coal-carrying railcars. The protection of our
intellectual property is important to our business.
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We also use a proprietary software system that integrates our accounting and production systems,
including quality control, purchasing, inventory control and accounts receivable. We have an
experienced team in place to operate the hardware, software and communications platforms.
EMPLOYEES
As of December 31, 2007, we had 576 employees, of whom 168 were salaried and 408 were hourly wage
earners. As of December 31, 2007, approximately 300, or 52%, of our employees were members of
unions.
As described in Note 16 to the consolidated financial statements, we are involved in a class action
lawsuit with certain members of the United Steelworkers of America. The union which as of December
31, 2007, represents approximately 87% of the workers at our Johnstown manufacturing facility has
also filed grievance proceedings with us. While we consider relations with our employees to be
good at our other facilities, they may not remain that way. See Item 1A. “Risk Factors—Risks
Related to Our Business—Labor disputes could disrupt our operations and divert the attention of
our management and may have a material adverse effect on our operations and profitability.”
REGULATION
The Federal Railroad Administration, or FRA, administers and enforces U.S. federal laws and
regulations relating to railroad safety. These regulations govern equipment and safety compliance
standards for freight railcars and other rail equipment used in interstate commerce. The AAR
promulgates a wide variety of rules and regulations governing safety and design of equipment,
relationships among railroads with respect to freight railcars in interchange and other matters.
The AAR also certifies freight railcar manufacturers and component manufacturers that provide
equipment for use on railroads in the United States. New products must generally undergo AAR
testing and approval processes. As a result of these regulations, we must maintain certifications
with the AAR as a freight railcar manufacturer, and products that we sell must meet AAR and FRA
standards.
We are also subject to oversight in other jurisdictions by foreign regulatory agencies and to the
extent that we expand our business internationally, we will increasingly be subject to the
regulations of other non-U.S. jurisdictions.
ENVIRONMENTAL MATTERS
We are subject to comprehensive federal, state, local and international environmental laws and
regulations relating to the release or discharge of materials into the environment, the management,
use, processing, handling, storage, transport or disposal of hazardous materials, or otherwise relating to the
protection of human health and the environment. These laws and regulations not only expose us to
liability for our own negligent acts, but also may expose us to liability for the conduct of others
or for our actions that were in compliance with all applicable laws at the time these actions were
taken. In addition, these laws may require significant expenditures to achieve compliance, and are
frequently modified or revised to impose new obligations. Civil and criminal fines and penalties
may be imposed for non-compliance with these environmental laws and regulations. Our operations
that involve hazardous materials also raise potential risks of liability under the common law.
Environmental operating permits are, or may be, required for our operations under these laws and
regulations. These operating permits are subject to modification, renewal and revocation. We
regularly monitor and review our operations, procedures and policies for compliance with these laws
and regulations. Despite these compliance efforts, risk of environmental liability is inherent in
the operation of our businesses, as it is with other companies engaged in similar businesses. We
believe that our operations and facilities are in substantial compliance with applicable laws and
regulations and that any noncompliance is not likely to have a material adverse effect on our
operations or financial condition.
Future events, such as changes in or modified interpretations of existing laws and regulations or
enforcement policies, or further investigation or evaluation of the potential health hazards of
products or business activities, may give rise to additional compliance and other costs that could
have a material adverse effect on our financial condition and operations. In addition, we have in
the past conducted investigation and remediation activities at properties that we own to address
historic contamination. To date, such costs have not been material. Although we believe we have
satisfactorily addressed all known material contamination through our remediation activities, there
can be no assurance that these activities have addressed all historic contamination. The discovery
of historic contamination or the release of hazardous substances into the environment could require
us in the future to incur
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investigative or remedial costs or other liabilities that could be
material or that could interfere with the operation of our business.
In addition to environmental laws, the transportation of commodities by railcar raises potential
risks in the event of a derailment or other accident. Generally, liability under existing law in
the United States for a derailment or other accident depends on the negligence of the party, such
as the railroad, the shipper or the manufacturer of the railcar or its components. However, for the
shipment of certain hazardous commodities, strict liability concepts may apply.
Item 1A. Risk Factors.
The factors described below are the principal risks that could materially adversely affect our
operating results and financial condition. Other factors may exist that we do not consider
significant based on information that is currently available. In addition, new risks may emerge at
any time, and we cannot predict those risks or estimate the extent to which they may affect us.
RISKS RELATED TO THE RAILCAR INDUSTRY
We operate in a highly cyclical industry, and our industry and markets are influenced by factors
that are beyond our control, including U.S. economic conditions. Such factors could adversely
affect demand for our railcar offerings.
Historically, the North American railcar market has been highly cyclical and we expect it to
continue to be highly cyclical. During the most recent industry cycle, industry-wide railcar
deliveries declined from a peak of 75,704 railcars in 1998 to a low of 17,736 railcars in 2002.
During this period, our railcar production declined from approximately 9,000 railcars in 1998 to
4,067 railcars in 2002. Industry-wide railcar deliveries again peaked in 2006 with deliveries of
74,729 before declining to 63,156 in 2007. Our railcar production trended downward from 18,764 in
2006 to 10,282 in 2007. Our industry and the markets for which we supply railcars are influenced
by factors that are beyond our control, including U.S. economic conditions. Downturns in economic
conditions could result in lower sales volumes, lower prices for railcars and a loss of profits.
The cyclicality of the markets in which we operate may adversely affect our
operating results and cash flow. In addition, fluctuations in the demand for our railcars may
cause comparisons of our sales and operating results between different fiscal years to be less
meaningful as indicators of our future performance.
The current high cost of the raw materials that we use to manufacture railcars, especially aluminum
and steel, and delivery delays associated with these raw materials may adversely affect our
financial condition and results of operations.
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. The prices for steel and aluminum, the
primary raw material inputs of our railcars, increased in 2005, 2006 and 2007 as a result of strong
demand, limited availability of production inputs for steel and aluminum, including scrap metal,
industry consolidation and import trade barriers. In addition, the price and availability of other
railcar components that are made of steel have been adversely affected by the increased cost and
limited availability of steel. 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. Deliveries of our materials may also fluctuate
depending on supply and demand for the material or governmental regulation relating to the
material, including regulation relating to the importation of the material.
We depend upon a small number of customers that represent a large percentage of our sales. The loss
of any single customer, or a reduction in sales to any such customer, could have a material adverse
effect on our business, financial condition and results of operations.
Since railcars are typically sold pursuant to large, periodic orders, a limited number of customers
typically represent a significant percentage of our railcar sales in any given year. Over the last
five years, our top five customers in each year based on sales represented, in the aggregate,
approximately 52% of our total sales for the five-year period. In
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2007, sales to our top three
customers accounted for approximately 15%, 11% and 11%, respectively, of our total sales. In 2006,
sales to our top three customers accounted for approximately 12%, 11% and 9%, respectively, of our
total sales. Although we have long-standing relationships with many of our major customers, the
loss of any significant portion of our sales to any major customer, the loss of a single major
customer or a material adverse change in the financial condition of any one of our major customers
could have a material adverse effect on our business and financial results.
The variable purchase patterns of our customers and the timing of completion, delivery and
acceptance of customer orders may cause our sales and income from operations to vary substantially
each quarter, which will result in significant fluctuations in our quarterly results.
Most of our individual customers do not make purchases every year, since they do not need to
replace or replenish their railcar fleets on a yearly basis. Many of our customers place orders for
products on an as-needed basis, sometimes only once every few years. As a result, the order levels
for railcars, the mix of railcar types ordered and the railcars ordered by any particular customer
have varied significantly from quarterly period to quarterly period in the past and may continue to
vary significantly in the future. Therefore, our results of operations in any particular quarterly
period may be significantly affected by the number of railcars ordered and delivered and product
mix of railcars ordered in any given quarterly period. Additionally, because we record the sale of
a railcar at the time we complete production, the railcar is accepted by the customer following
inspection, the risk for any damage or loss with respect to the railcar passes to the customer and
title to the railcar transfers to the customer, and not when the order is taken, the timing of
completion, delivery and acceptance of significant customer orders will have a considerable effect
on fluctuations in our quarterly results. As a result of these quarterly fluctuations, we believe
that comparisons of our sales and operating results between quarterly periods may not be meaningful and,
as such, these comparisons should not be relied upon as indicators of our future performance.
Limitations on the supply of wheels and other railcar components could adversely affect our
business because they may limit the number of railcars we can manufacture.
We rely upon third-party suppliers for wheels and other components for our railcars. For the year
ended December 31, 2004, due to a shortage of wheels and other railcar components, our deliveries
were limited to 7,484 railcars, even though we had orders and production capacity to manufacture
more railcars. The limited supply of wheels and other railcar components did not impact our
deliveries for the years ended December 31, 2005, 2006 and 2007. While the availability of railcar
components continued to improve during 2007, the railcar industry continues to be adversely
impacted by shortages of wheels and other components as a result of reorganization and
consolidation of domestic suppliers, increased demand for new railcars and railroad maintenance
requirements. Suppliers of railcar components may be unable to meet the short-term or longer-term
demand of our industry for wheel and other railcar components. In the event that any of our
suppliers of railcar components were to stop or reduce the production of wheels or the other
railcar components that we use, go out of business, refuse to continue their business relationships
with us or become subject to work stoppages, our business would be disrupted. We have in the past
experienced challenges sourcing these railcar components to meet our increasing production
requirements. Our ability to increase our railcar production to expand our business and/or meet any
increase in demand, with new or additional manufacturing capabilities, depends on our ability to
obtain an adequate supply of these railcar components. While we believe that we could secure
alternative sources for these components, we may incur substantial delays and significant expense
in doing so, the quality and reliability of these alternative sources may not be the same and our
operating results may be significantly affected. In an effort to secure a supply of wheels, we have
developed foreign sources that require deposits on some occasions. In the event of a material
adverse business condition, such deposits may be forfeited. In addition, if one of our competitors
entered into a preferred supply arrangement with, or was otherwise favored by, a particular
supplier, we would be at a competitive disadvantage, which could negatively affect our operating
results. Furthermore, alternative suppliers might charge significantly higher prices for wheels or
other railcar components than we currently pay. Under such circumstances, the disruption to our
business could have a material adverse impact on our customer relationships, financial condition
and operating results.
We operate in a highly competitive industry and we may be unable to compete successfully against
other railcar manufacturers.
We operate in a competitive marketplace and face substantial competition from established
competitors in the railcar industry in North America. We have four principal competitors that
primarily manufacture railcars for third-party customers. Some of these manufacturers have greater
financial and technological resources than us, and they may increase their participation in the
railcar segments in which we compete. Railcar purchasers’ sensitivity to price and
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strong price
competition within the industry have historically limited our ability to increase prices. In
addition to price, competition is based on product performance and technological innovation,
quality, reliability of delivery, customer service and other factors. In particular, technological
innovation by any of our existing competitors, or new competitors entering any of the markets in
which we do business, could put us at a competitive disadvantage. We may be unable to compete
successfully against other railcar manufacturers or retain our market share in our established
markets. Increased competition for the sales of our railcar products, particularly our
coal-carrying railcars, could result in price reductions, reduced margins and loss of market share,
which could negatively affect our prospects, business, financial condition and results of
operations.
Further consolidation of the railroad industry may adversely affect our business.
Over the past 12 years, there has been a consolidation of railroad carriers operating in North
America. Railroad carriers are large purchasers of railcars and represent a significant portion of
our historical customer base. Future consolidation of railroad carriers may adversely affect our
sales and reduce our income from operations because with fewer railroad carriers, each railroad
carrier will have proportionately greater buying power and operating efficiency, which may
intensify competition among railcar
manufacturers to retain customer relationships with the consolidated railroad carriers and cause
our prices to decline.
RISKS RELATED TO OUR BUSINESS
We rely significantly on the sales of our coal-carrying railcars. Future demand for coal could
decrease, which could adversely affect our business, financial condition and results of operations.
Coal-carrying railcars are our primary railcar type, representing 85% and 95% of our sales in 2007
and 2006, respectively, and 88% and 96% of the total railcars that we delivered in 2007 and 2006,
respectively. Fluctuations in the price of coal relative to other energy sources may cause utility
companies, which are significant customers of our coal-carrying railcar lines, to select an
alternative energy source to coal, thereby reducing the strength of the market for coal-carrying
railcars. For example, if utility companies were to begin preferring oil instead of coal as an
energy source, demand for our coal-carrying railcar lines would decrease and our operating results
may be negatively affected.
The U.S. federal and state governments may adopt new legislation and/or regulations, or judicial or
administrative interpretations of existing laws and regulations, that materially adversely affect
the coal industry and/or our customers’ ability to use coal or to continue to use coal at present
rates. Such legislation or proposed legislation and/or regulations may include proposals for more
stringent protections of the environment that would further regulate and tax the coal industry.
This legislation could significantly reduce demand for coal, adversely affect the demand for our
coal-carrying railcars and have a material adverse effect on our financial condition and results of
operations.
We rely upon a single supplier to supply us with all of our cold-rolled center sills for our
railcars, and any disruption of our relationship with this supplier could adversely affect our
business.
We rely upon a single supplier to manufacture all of our cold-rolled center sills for our railcars,
which are based upon our proprietary and patented process. A center sill is the primary
longitudinal structural component of a railcar, which helps the railcar withstand the weight of the
cargo and the force of being pulled during transport. Our center sill is formed into its final
shape without heating by passing steel plate through a series of rollers. Substantially all of the
railcars that we produced in 2007 and 2006 were manufactured using this cold-rolled center sill.
Although we have a good relationship with our supplier and have not experienced any significant
delays, manufacturing shortages or failures to meet our quality requirements and production
specifications in the past, our supplier could stop production of our cold-rolled center sills, go
out of business, refuse to continue its business relationship with us or become subject to work
stoppages. While we believe that we could secure alternative manufacturing sources, our present
supplier is currently the only manufacturer of our cold-rolled center sills for our railcars. We
may incur substantial delays and significant expense in finding an alternative source, our results
of operations may be significantly affected and the quality and reliability of these alternative
sources may not be the same. Moreover, alternative suppliers might charge significantly higher
prices for our cold-rolled center sills than we currently pay. The prices for our cold-rolled
center sills may also be impacted by the rising cost of steel and all other materials used in the
production of our cold-rolled center sills. Under such circumstances, the disruption to our
business may have a material adverse impact on our financial condition and results of operations.
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Equipment failures, delays in deliveries or extensive damage to our facilities could lead to
production or service curtailments or shutdowns.
We have production facilities in Danville, Illinois, Johnstown, Pennsylvania and Roanoke, Virginia.
An interruption in production capabilities at these facilities, as a result of equipment failure or
other reasons, could reduce or prevent the production of our railcars. A halt of production at any
of our manufacturing facilities could severely affect delivery times to our customers. Any
significant delay in deliveries to our customers could result in the termination of contracts,
cause us to lose future sales and negatively affect our reputation among our customers and in the
railcar industry and our results of operations. Our facilities are also subject to the risk of
catastrophic loss due to unanticipated events, such as fires, explosions, floods or weather
conditions. We may experience plant shutdowns or periods of reduced production as a result of
equipment failures, delays in deliveries or extensive damage to any of our facilities, which could
have a material adverse effect on our business, results of operations or financial condition.
An increase in health care costs could adversely affect our results of operations.
The cost of health care benefits in the United States has increased significantly, leading to
higher costs for us to provide health care benefits to our active and retired employees, and we
expect these costs to increase in the future. If these costs continue to rise, our results of
operations will be adversely affected. We are unable to limit our costs by changing or eliminating
coverage under our employee benefit plans because a significant majority of our employee benefits
are governed by union agreements. For example, as of December 31, 2007, our postretirement benefit
obligation was $53.1 million, all of which is unfunded. Although the Johnstown settlement during
2003 limits our future liabilities for health care coverage for our retired unionized Johnstown
employees, we will continue to fund 100% of the health care coverage costs of our active employees.
If our costs under our employee benefit plans for active employees exceed our projections, our
business and financial results could be materially adversely affected.
Our pension obligations are currently underfunded. We may have to make significant cash payments to
our pension plans, which would reduce the cash available for our business.
As of December 31, 2007, our accumulated benefit obligation under our defined benefit pension plans
exceeded the fair value of plan assets by $10.4 million. The underfunding was caused, in part, by
fluctuations in the financial markets that have caused the valuation of the assets in our defined
benefit pension plans to decrease. Further, additional benefit obligations were added to our
existing defined benefit pension plans on November 15, 2004 as a result of the Johnstown settlement
during 2003 and in December 2007 as a result of plan curtailment and special termination benefit
costs (as described in Note 3 and Note 13 to the Consolidated Financial Statements). We made
contributions to our pension plans of $5.4 million during the year ended December 31, 2007.
Management expects that any future obligations under our pension plans that are not currently
funded will be funded from our future cash flow from operations. If our contributions to our
pension plans are insufficient to fund the pension plans adequately to cover our future pension
obligations, the performance of the assets in our pension plans does not meet our expectations or
other actuarial assumptions are modified, our contributions to our pension plans could be
materially higher than we expect, which would reduce the cash available for our business.
The level of our reported backlog may not necessarily indicate what our future sales will be and
our actual sales may fall short of the estimated sales value attributed to our backlog.
We define backlog as the sales value of products or services to which our customers have committed
in writing to purchase from us, that have not been recognized as sales. In this report on Form
10-K, we have disclosed our backlog, or the number of railcars for which we have purchase orders,
in various periods and the estimated sales value (in dollars) that would be attributable to this
backlog once the backlog is converted to actual sales. We consider backlog to be an indicator of
future sales of railcars. However, our reported backlog may not be converted into sales in any
particular period, if at all, and the actual sales (including any compensation for lost profits and
reimbursement for costs) from such contracts may not equal our reported estimates of backlog value.
For example, we rely on third-party suppliers for heavy castings, wheels and components for our
railcars and if these third parties were to stop or reduce their
supply of heavy castings, wheels and other components, our actual sales would fall short of the
estimated sales value attributed to our backlog. Also, customer orders may be subject to
cancellation, inspection rights and other customary industry terms, and delivery dates may be
subject to delay, thereby extending the date on which we will deliver the associated railcars and
realize revenues attributable to such railcar backlog. Furthermore, any contract included in our
reported backlog that actually generates sales may not be profitable.
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Therefore, our current level
of reported backlog may not necessarily represent the level of sales that we may generate in any
future period.
As a public company, we are required to comply with the reporting obligations of the Exchange Act
and Section 404 of the Sarbanes-Oxley Act of 2002. If we fail to comply with the reporting
obligations of the Exchange Act and Section 404 of the Sarbanes-Oxley Act or if we fail to maintain
adequate internal controls over financial reporting, our business, results of operations and
financial condition could be materially adversely affected.
As a public company, we are required to comply with the periodic reporting obligations of the
Exchange Act, including preparing annual reports and quarterly reports. Our failure to prepare and
disclose this information in a timely manner could subject us to penalties under federal securities
laws, expose us to lawsuits and restrict our ability to access financing. In addition, we are
required under applicable law and regulations to design and implement internal controls over
financial reporting, and evaluate our existing internal controls with respect to the standards
adopted by the Public Company Accounting Oversight Board. During the course of our evaluation, we
may identify areas requiring improvement and may be required to design enhanced processes and
controls to address issues identified through this review. This could result in significant delays
and costs to us and require us to divert substantial resources, including management time, from
other activities.
If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we
can conclude on an ongoing basis that we have effective internal controls over financial reporting
in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for
us to produce reliable financial reports and are important to help prevent fraud. As a result, any
failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of
investor confidence in the reliability of our financial statements, which in turn could harm our
business and negatively impact the trading price of our common stock.
If we lose key personnel, our operations and ability to manage the day-to-day aspects of our
business will be adversely affected.
We believe our success depends to a significant degree upon the continued contributions of our
executive officers and key employees, both individually and as a group. Our future performance will
substantially depend on our ability to retain and motivate them. If we lose key personnel or are
unable to recruit qualified personnel, our ability to manage the day-to-day aspects of our business
will be adversely affected.
The loss of the services of one or more members of our senior management team could have a material
adverse effect on our business, financial condition and results of operations. Because our senior
management team has many years of experience with our company and within the railcar industry and
other manufacturing industries, it would be difficult to replace any of them without adversely
affecting our business operations. Our future success will also depend in part upon our continuing
ability to attract and retain highly qualified personnel. We do not currently maintain “key person”
life insurance.
Labor disputes could disrupt our operations and divert the attention of our management and may have
a material adverse effect on our operations and profitability.
On August 15, 2007, a lawsuit was filed against us in the U.S. District Court for the Western
District of Pennsylvania by certain members of the United Steelworkers of America (the “USWA”) on
behalf of themselves and others similarly situated. The plaintiffs are employees at our Johnstown,
Pennsylvania, manufacturing facility and allege that they and other workers at the facility were
laid off to prevent them
from becoming eligible for certain retirement benefits, in violation of federal law. The lawsuit
seeks, among other things, an injunction requiring us to return the laid-off employees to work. On
January 11, 2008, the District Court issued a preliminary injunction directing us to reinstate
certain of the laid-off employees for pension purposes, pending further proceedings in the lawsuit.
We appealed the District Court’s order to the U.S. Court of Appeals for the Third Circuit and
asked the District Court to stay the preliminary injunction pending the appeal. On February 11,
2008 the District Court denied our request to stay the preliminary injunction, but on March 4, 2008
the Court of Appeals granted a stay of the preliminary injunction pending the appeal. The Court of
Appeals order says that while the appeal is pending, we cannot take any action, including closing
the Johnstown plant, that would preclude the plaintiffs from qualifying for the pensions at issue
in the lawsuit. The ultimate outcome of this lawsuit cannot be determined at this time, and we
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are unable at present to assess whether its resolution would have a material adverse effect on our
financial condition, results of operations or cash flows.
On April 1, 2007, the USWA filed a grievance (No. 07 054) on behalf of certain workers at our
Johnstown manufacturing facility, alleging that we had violated the collective bargaining agreement
(the “CBA”). Under the CBA, until May 15, 2008 we are to provide at least 40 hours of work per
week to employees with 20 or more years of service. We have provided such work to all employees
with 20 or more years of continuous service. In the grievance proceeding, the USWA contends that
the requirement applies to workers with at least 20 years of total service, including periods of
employment prior to a break in their service. The USWA seeks reinstatement or a make-whole remedy,
including reimbursement of lost wages and benefits for all affected employees through the term of
the CBA, which ends May 15, 2008. Arbitration hearings were conducted on October 5, 2007 and
December 5, 2007, and the parties are scheduled to file briefs on March 11, 2008. The ultimate
outcome of this grievance proceeding cannot be determined at this time, and we are unable at
present to assess whether its resolution would have a material adverse effect on our financial
condition, results of operations or cash flows.
Although the disputes with our employees and the USWA have not resulted in strikes or other labor
protests, any future disputes with the unions representing our employees could result in strikes or
other labor protests which could disrupt our operations and divert the attention of management from
operating our business. If we were to experience a strike or work stoppage, it could be difficult
for us to find a sufficient number of employees with the necessary skills to replace these
employees. Any such labor disputes could have a material adverse effect on our financial
condition, results of operations or cash flows.
Shortages of skilled labor may adversely impact our operations.
We depend on skilled labor in the manufacture of railcars. Some of our facilities are located in
areas where demand for skilled laborers often exceeds supply. Shortages of some types of skilled
laborers may restrict our ability to increase production rates and could cause our labor costs to
increase.
Lack of acceptance of our new railcar offerings by our customers could adversely affect our
business.
Our strategy depends in part on our continued development and sale of new railcar designs and
design changes to existing railcars to penetrate railcar markets in which we currently do not
compete and to expand or maintain our market share in the railcar markets in which we currently
compete. We have dedicated significant resources to the development, manufacturing and marketing of
new railcar designs. We typically make decisions to develop and market new railcars and railcars
with modified designs without firm indications of customer acceptance. New or modified railcar
designs may require customers to alter their existing business methods or threaten to displace
existing equipment in which our customers may have a substantial capital investment. Many railcar
purchasers prefer to maintain a standardized fleet of railcars and railcar purchasers with
established railcar fleets are generally resistant to railcar design changes. Therefore, any new or
modified railcar designs that we develop may not gain widespread acceptance in the marketplace and
any such products may not be able to compete successfully with existing railcar designs or new
railcar designs that may be introduced by our competitors.
Our production of new railcar product lines may not be initially profitable and may result in
financial losses.
When we begin production of a new railcar product line, we usually anticipate that our initial
costs of production will be higher due to initial labor and operating inefficiencies associated
with new manufacturing processes. Due to pricing pressures in our industry, the pricing for the new
railcars in customer contracts usually does not reflect the initial additional costs, and our costs
of production may exceed the anticipated revenues until we are able to gain labor efficiencies. For
example, in 2005, we had losses of $1.5 million relating to our contract for the manufacture of box
railcars, a type of railcar that we had not manufactured in the past. To the extent that the total
costs of production significantly exceed our anticipated costs of production, we may be unable to
gain any profit from our sale of the railcars or we may incur a loss.
We may pursue acquisitions that involve inherent risks, any of which may cause us not to realize
anticipated benefits.
Our business strategy includes the potential acquisition of businesses and entering into joint
ventures and other business combinations that we expect would complement and expand our existing
products and services and the markets where we sell our products and services and improve our
market position. We may not be able to
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successfully identify suitable acquisition or joint venture
opportunities or complete any particular acquisition, combination, joint venture or other
transaction on acceptable terms. We cannot predict the timing and success of our efforts to acquire
any particular business and integrate the acquired business into our existing operations. Also,
efforts to acquire other businesses or the implementation of other elements of this business
strategy may divert managerial resources away from our business operations. In addition, our
ability to engage in strategic acquisitions may depend on our ability to raise substantial capital
and we may not be able to raise the funds necessary to implement our acquisition strategy on terms
satisfactory to us, if at all. Our failure to identify suitable acquisition or joint venture
opportunities may restrict our ability to grow our business. In addition, we may not be able to
successfully integrate businesses that we acquire in the future, which could have a material
adverse effect on our business, results of operations and financial condition.
We might fail to adequately protect our intellectual property, which may result in our loss of
market share, or third parties might assert that our intellectual property infringes on their
intellectual property, which would be costly to defend and divert the attention of our management.
The protection of our intellectual property is important to our business. We rely on a combination
of trademarks, copyrights, patents and trade secrets to protect our intellectual property. However,
these protections might be inadequate. For example, we have patents for portions of our railcar
designs that are important to our market leadership in the coal-carrying railcar segment. Our
pending or future trademark, copyright and patent applications might not be approved or, if
allowed, might not be sufficiently broad. Conversely, third parties might assert that our
technologies or other intellectual property infringe on their proprietary rights. In either case,
litigation may result, which could result in substantial costs and diversion of our and our
management team’s efforts. Regardless of whether we are ultimately successful in any litigation,
such litigation could adversely affect our business, results of operations and financial condition.
We are subject to a variety of environmental laws and regulations and the cost of complying with
environmental requirements or any failure by us to comply with such requirements may have a
material adverse effect on our business, financial condition and results of operations.
We are subject to a variety of federal, state and local environmental laws and regulations,
including those governing air quality and the handling, disposal and remediation of waste products,
fuel products and hazardous substances. Although we believe that we are in material compliance with
all of the various regulations and permits applicable to our business, we may not at all times be
in compliance with such requirements. The cost of complying with environmental requirements may
also increase substantially in future years. If we violate or fail to comply with these
regulations, we could be fined or otherwise sanctioned by regulators. In addition, these
requirements are complex, change frequently and may become more stringent over time, which could
have a material adverse effect on our business. We have in the past conducted investigation and
remediation activities at properties that we own to address historic
contamination. However, there can be no assurance that these remediation activities have addressed
all historic contamination. Environmental liabilities that we incur, including those relating to
the off-site disposal of our wastes, if not covered by adequate insurance or indemnification, will
increase our costs and have a negative impact on our profitability.
Our warranties may expose us to potentially significant claims, which may damage our reputation and
adversely affect our business, financial condition and results of operations.
We warrant the workmanship and materials of many of our manufactured new products under limited
warranties, generally for periods of five years or less. Accordingly, we may be subject to a risk
of product liability or warranty claims in the event that the failure of any of our products
results in personal injury or death, or does not conform to our customers’ specifications. Although
we currently maintain product liability insurance coverage, product liability claims, if made, may
exceed our insurance coverage limits or insurance may not continue to be available on commercially
acceptable terms, if at all. We have never experienced any material losses attributable to warranty
claims, but it is possible for these types of warranty claims to result in costly product recalls,
significant repair costs and damage to our reputation, all of which would adversely affect our
results of operations.
We use and rely significantly on a proprietary software system to manage our accounting and
production systems, the failure of which may lead to data loss, significant business interruption
and financial loss.
We use and rely significantly on a proprietary software system that integrates our accounting and
production systems, including production engineering, quality control, purchasing, inventory
control and accounts receivable
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systems. In the future, we may discover significant errors or
defects in this software system that we may not be able to correct. If this software system is
disrupted or fails for any reason, or if our systems or facilities are infiltrated or damaged by
unauthorized persons or a software virus, we could experience data loss, financial loss and
significant business interruption. If that happens, we may be unable to meet production targets,
our customers may terminate contracts, our reputation may be negatively affected, and there could
be a material adverse effect on our business and financial results.
The agreement governing our revolving credit facility contains various covenants that, among other
things, limit our discretion in operating our business and provide for certain minimum financial
requirements.
The agreement governing our revolving credit facility contains various covenants that, among other
things, limit our management’s discretion by restricting our ability to incur additional debt,
redeem our capital stock, enter into certain transactions with affiliates, pay dividends and make
other distributions, make investments and other restricted payments and create liens. Our failure
to comply with the financial covenants set forth above and other covenants under our revolving
credit facility could lead to an event of default under the agreements governing any other
indebtedness that we may have outstanding at the time, permitting the lenders to accelerate all
borrowings under such agreements and to foreclose on any collateral. In addition, any such events
may make it more difficult or costly for us to borrow additional funds in the future.
To the extent we expand our sales of products and services internationally, we will increase our
exposure to international economic and political risks.
Conducting business outside the United States, for example through our joint venture in India and
our sales to South America, subjects us to various risks, including changing economic, legal and
political conditions, work stoppages, exchange controls, currency fluctuations, terrorist
activities directed at U.S. companies, armed conflicts and unexpected changes in the United States
and the laws of other countries relating to tariffs, trade restrictions, transportation
regulations, foreign investments and taxation. If we fail to obtain and maintain certifications of
our railcars and railcar parts in the various countries where we may operate, we may be unable to
market and sell our railcars in those countries.
In addition, unexpected changes in regulatory requirements, tariffs and other trade barriers, more
stringent rules relating to labor or the environment, adverse tax consequences and price exchange
controls could limit our operations and make the manufacture and distribution of our products
internationally more difficult. Furthermore, any material changes in the quotas, regulations or
duties on imports imposed by the U.S. government and agencies or on exports by non-U.S. governments
and their respective agencies could affect our ability to export the railcars that we manufacture
in the United States. The uncertainty of the legal environment could limit our ability to enforce
our rights effectively.
The market price of our securities may fluctuate significantly, which may make it difficult for
stockholders to sell shares of our common stock when desired or at attractive prices.
Since our initial public offering in April 2005 until February 29, 2008, the trading price of our
common stock ranged from a low of $16.51 per share to a high of $78.34 per share. The price for
our common stock may fluctuate in response to a number of events and factors, such as quarterly
variations in operating results, the cyclical nature of the railcar market, announcements of new
products by us or our competitors, changes in financial estimates and recommendations by securities
analysts, the operating and stock price performance of other companies that investors may deem
comparable to us, and news reports relating to trends in our markets or general economic
conditions. Additionally, volatility or a lack of positive performance in our stock price may
adversely affect our ability to retain key employees, all of whom have been granted stock options
or other stock awards.
Item 1B. Unresolved Staff Comments.
None.
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Item 2. Properties.
We own railcar production facilities in Danville, Illinois and Johnstown, Pennsylvania and we lease
a railcar production facility in Roanoke, Virginia. The following table presents information on our
leased and owned operating properties as of December 31, 2007:
| Leased or | Lease | |||||||
| Use | Location | Size | Owned | Expiration Date | ||||
Corporate headquarters |
Chicago, Illinois | 8,574 square feet | Leased | September 30, 2013 | ||||
Railcar assembly and |
Danville, Illinois | 308,665 square feet | Owned | — | ||||
component |
on 36.5 acres of land | |||||||
manufacturing |
||||||||
Railcar assembly and |
Roanoke, Virginia | 383,709 square feet | Leased | November 30, 2014* | ||||
component |
on 15.5 acres of land | |||||||
manufacturing |
||||||||
Railcar assembly and |
Johnstown, Pennsylvania | 564,983 square feet | Owned | — | ||||
component |
on 31.9 acres of land | |||||||
manufacturing |
||||||||
Administrative |
Johnstown, Pennsylvania | 29,500 square feet | Owned | — | ||||
| on 1.02 acres of | ||||||||
| land | ||||||||
Light storage |
Johnstown, Pennsylvania | 1,633 square feet on | Owned | — | ||||
| 14.26 acres of land | ||||||||
Parts warehouse |
Johnstown, Pennsylvania | 86,000 square feet | Leased | December 31, 2016 | ||||
| * | The lease agreement provides that we or Norfolk Southern, the lessor, can terminate this lease at any time after December 31, 2009. |
As of December 31, 2007, our facilities in Danville, Illinois and Roanoke, Virginia operated one
daily shift; we believe our capacity is suitable and adequate for our current operations. Our
facilities have the capacity to operate additional shifts should the need arise for additional
capacity.
In December 2007, we announced that we planned to close our manufacturing facility located in
Johnstown, Pennsylvania. This action was taken to further our strategy of optimizing production at
our low-cost facilities and continuing our focus on cost control. We had entered into decisional
bargaining with the union representing our Johnstown employees regarding labor costs at our
Johnstown facility, but did not reach an agreement with the union that would have allowed us to
continue to operate the facility in a cost-effective way.
Item 3. Legal Proceedings.
On August 15, 2007, a lawsuit was filed against us in the U.S. District Court for the Western
District of Pennsylvania by Samuel W. Pollak, Jr. and Robert A. Hayden, Jr. (subsequently amended
to Kenneth J. Sowers, Anthony J. Zanghi and Robert A. Hayden, Jr.), on behalf of themselves and
others similarly situated. The plaintiffs are employees at our Johnstown, Pennsylvania
manufacturing facility and allege that they and other workers at the facility were laid off by us
to prevent them from becoming eligible for certain retirement benefits, in violation of federal
law. The lawsuit seeks, among other things, an injunction requiring us to return the laid-off
employees to work. On January 11, 2008, the District Court issued a preliminary injunction
directing us to reinstate certain of the laid-off employees for pension purposes, pending further
proceedings in the lawsuit. We have appealed the District Court’s order to the U.S. Court of
Appeals for the Third Circuit and we asked the District Court to stay the preliminary injunction pending the appeal. On February 11, 2008 the District Court denied our
request to stay the
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preliminary injunction, but on March 4, 2008 the Court of Appeals granted a
stay of the preliminary injunction pending the appeal. The Court of Appeals order says that while
the appeal is pending, we cannot take any action, including closing the Johnstown plant, that would
preclude the plaintiffs from qualifying for the pensions at issue in the lawsuit. We dispute the
plaintiffs’ allegations in this lawsuit and intend to vigorously defend against the plaintiffs’
claims. The ultimate outcome of this lawsuit cannot be determined at this time, and management
currently is unable to assess whether its resolution would have a material adverse effect on our
financial condition, results of operations or cash flows.
On April 1, 2007, the United Steelworkers of America (the “USWA”) filed a grievance (No. 07 054) on
behalf of certain workers at our Johnstown manufacturing facility, alleging that we had violated
the collective bargaining agreement (the “CBA”). Under the CBA, until May 15, 2008 we are to
provide at least 40 hours of work per week to employees with 20 or more years of service. We have
provided such work to all employees with 20 or more years of continuous service. In the grievance
proceeding, the USWA contends that the requirement applies to workers with at least 20 years of
total service, including periods of employment prior to a break in their service. The USWA seeks
reinstatement or a make-whole remedy, including reimbursement of lost wages and benefits for all
affected employees through the term of the CBA, which ends May 15, 2008. Arbitration hearings were
conducted on October 5, 2007 and December 5, 2007, and the parties are scheduled to file briefs on
March 11, 2008. The ultimate outcome of this grievance proceeding cannot be determined at this
time, and we are unable at present to assess whether its resolution would have a material adverse
effect on our financial condition, results of operations or cash flows.
In addition to the foregoing, 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. Commercial disputes during 2007 included a contract dispute with a
component parts supplier. 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 4. Submission of Matters to a Vote of Security Holders.
None.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Our common stock has been quoted on the Nasdaq Global Market under the symbol “RAIL” since April 6,
2005. Prior to that time, there was no public market for our common stock. As of February 29,
2008, there were approximately 45 holders of record of our common stock, which does not include
persons whose shares of common stock are held by a bank, brokerage house or clearing agency. The
following table sets forth quarterly high and low closing prices of our common stock since April 6,
2005, as reported on the Nasdaq Global Market.
| Common stock price | ||||||||
| High | Low | |||||||
2007 |
||||||||
Fourth quarter |
$ | 43.20 | $ | 32.29 | ||||
Third quarter |
$ | 54.60 | $ | 38.20 | ||||
Second quarter |
$ | 51.80 | $ | 45.14 | ||||
First quarter |
$ | 58.87 | $ | 46.85 | ||||
2006 |
||||||||
Fourth quarter |
$ | 57.07 | $ | 48.79 | ||||
Third quarter |
$ | 60.05 | $ | 45.10 | ||||
Second quarter |
$ | 76.57 | $ | 46.60 | ||||
First quarter |
$ | 72.10 | $ | 47.06 | ||||
2005 |
||||||||
Fourth quarter |
$ | 49.55 | $ | 35.45 | ||||
Third quarter |
$ | 40.87 | $ | 19.01 | ||||
Second quarter (from April 6, 2005) |
$ | 22.00 | $ | 17.55 | ||||
Dividend Policy
Prior to September 2005, our board of directors had never declared any cash dividends on our common
stock. Beginning in September 2005, we paid a recurring quarterly cash dividend of $0.03 per share
of common stock. In November 2006, the quarterly cash dividend increased to $0.06 per share of
common stock.
We are a holding company and, as such, our ability to pay dividends is subject to the ability of
our subsidiaries to generate earnings and cash flows and distribute them to us. Our declaration and
payment of future dividends will be at the discretion of our board of directors and will depend on,
among other things, general economic and business conditions, our strategic plans, our financial
results, contractual and legal restrictions on the payment of dividends by us and our subsidiaries
and such other factors as our board of directors considers to be relevant.
Our revolving credit facility contains covenants that limit our ability to pay dividends to holders
of our common stock except under certain circumstances. Additionally, the ability of our board of
directors to declare a dividend on our common stock is limited by Delaware law.
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Performance Graph
The following performance graph and related information shall not be deemed “soliciting material”
or to be “filed” with the Securities and Exchange Commission, nor shall such information be
incorporated by reference into any future filing under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically
incorporates it by reference into such filing.
The following graph illustrates the cumulative total stockholder return on our common stock during
the period from April 6, 2005, which is the date our common stock was initially listed on the
Nasdaq Global Market, through December 31, 2007 and compares it with the cumulative total return on
the NASDAQ Composite Index and DJ Transportation Index. The comparison assumes $100 was invested
on April 6, 2005 in our common stock and in each of the foregoing indices and assumes reinvestment
of dividends, if any. The performance shown is not necessarily indicative of future performance.
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG FREIGHTCAR AMERICA,
NASDAQ COMPOSITE INDEX AND DJ TRANSPORTATION INDEX
AMONG FREIGHTCAR AMERICA,
NASDAQ COMPOSITE INDEX AND DJ TRANSPORTATION INDEX
ASSUMES $100 INVESTED ON APR. 06, 2005
ASSUMES DIVIDENDS REINVESTED
ASSUMES DIVIDENDS REINVESTED
| Dollar Value of $100 Invested on April 6, 2005 | ||||||||||||||||||||||||||||
| April 6, | June 30, | Dec. 31, | June 30, | Dec. 31, | June 30, | Dec. 31, | ||||||||||||||||||||||
| 2005 | 2005 | 2005 | 2006 | 2006 | 2007 | 2007 | ||||||||||||||||||||||
FreightCar America,
Inc. |
$ | 100.00 | $ | 94.29 | $ | 228.96 | $ | 264.59 | $ | 264.72 | $ | 228.94 | $ | 168.02 | ||||||||||||||
Nasdaq Composite
Index |
$ | 100.00 | $ | 103.48 | $ | 111.17 | $ | 110.07 | $ | 122.69 | $ | 132.37 | $ | 134.89 | ||||||||||||||
DJ Transportation
Index |
$ | 100.00 | $ | 94.18 | $ | 113.89 | $ | 134.44 | $ | 125.07 | $ | 140.61 | $ | 126.85 | ||||||||||||||
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Item 6. Selected Financial Data.
The selected financial data presented for each of the years in the five-year period ended December
31, 2007 was derived from our audited consolidated financial statements. The selected financial
data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition
and Results of Operations and the consolidated financial statements and notes thereto included in
Item 7 and Item 8, respectively, of this annual report on Form 10-K.
| Year Ended December 31, | ||||||||||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
| (in thousands, except share and per share data and railcar amounts) | ||||||||||||||||||||
Statements of operations data: |
||||||||||||||||||||
Sales |
$ | 817,025 | $ | 1,444,800 | $ | 927,187 | $ | 482,180 | $ | 244,349 | ||||||||||
Cost of sales |
713,661 | 1,211,349 | 820,638 | 468,309 | 225,216 | |||||||||||||||
Gross profit |
103,364 | 233,451 | 106,549 | 13,871 | 19,133 | |||||||||||||||
Selling, general and administrative expense (1)(2) |
38,914 | 34,390 | 28,461 | 32,660 | 14,318 | |||||||||||||||
Curtailment and impairment charges(8) |
30,836 | — | — | — | — | |||||||||||||||
Operating income (loss) |
33,614 | 199,061 | 78,088 | (18,789 | ) | 4,815 | ||||||||||||||
Interest income |
8,349 | 5,860 | 1,225 | 282 | 128 | |||||||||||||||
Interest expense |
420 | 352 | 11,082 | 13,856 | 12,704 | |||||||||||||||
Amortization and write-off of deferred financing costs |
232 | 306 | 776 | 459 | 977 | |||||||||||||||
Income (loss) before income taxes |
41,311 | 204,263 | 67,455 | (32,822 | ) | (8,738 | ) | |||||||||||||
Income tax provision (benefit) |
14,843 | 75,530 | 21,762 | (7,962 | ) | (1,318 | ) | |||||||||||||
Net income (loss) |
26,468 | 128,733 | 45,693 | (24,860 | ) | (7,420 | ) | |||||||||||||
Redeemable preferred stock dividends accumulated |
— | — | 311 | 1,062 | 1,063 | |||||||||||||||
Net income (loss) attributable to common stockholders |
$ | 26,468 | $ | 128,733 | $ | 45,382 | $ | (25,922 | ) | $ | (8,483 | ) | ||||||||
Weighted average common shares outstanding — basic |
12,115,712 | 12,586,889 | 11,135,440 | 6,888,750 | 6,875,000 | |||||||||||||||
Weighted average common shares outstanding—diluted |
12,188,901 | 12,785,015 | 11,234,075 | 6,888,750 | 6,875,000 | |||||||||||||||
Per share data: |
||||||||||||||||||||
Net income (loss) per share attributable to common
stockholders — basic |
$ | 2.18 | $ | 10.23 | $ | 4.08 | $ | (3.76 | ) | $ | (1.23 | ) | ||||||||
Net income (loss) per share attributable to common
stockholders — diluted |
$ | 2.17 | $ | 10.07 | $ | 4.04 | $ | (3.76 | ) | $ | (1.23 | ) | ||||||||
Dividends declared per common share |
$ | 0.24 | $ | 0.15 | $ | 0.06 | $ | 0.00 | $ | 0.00 | ||||||||||
Other financial and operating data: |
||||||||||||||||||||
Capital expenditures |
$ | 6,073 | $ | 6,903 | $ | 7,520 | $ | 2,215 | $ | 369 | ||||||||||
New railcars delivered |
10,282 | 18,764 | 13,031 | 7,484 | 4,550 | |||||||||||||||
New railcar orders |
6,366 | 7,350 | 22,363 | 12,437 | 9,927 | |||||||||||||||
New railcar backlog |
5,399 | 9,315 | 20,729 | 11,397 | 6,444 | |||||||||||||||
Estimated backlog(4) |
$ | 422,054 | $ | 697,054 | $ | 1,412,424 | $ | 747,842 | $ | 365,876 | ||||||||||
Balance sheet data (at period end): |
||||||||||||||||||||
Cash and cash equivalents |
$ | 197,042 | $ | 212,026 | $ | 61,737 | $ | 11,213 | $ | 20,008 | ||||||||||
Restricted cash(5) |
— | — | — | 12,955 | 11,698 | |||||||||||||||
Total assets |
355,884 | 419,981 | 225,282 | 191,143 | 140,052 | |||||||||||||||
Total debt(6) |
93 | 154 | 224 | 56,058 | 51,778 | |||||||||||||||
Rights to additional acquisition consideration, including
accumulated accretion(3)(7) |
— | — | — | 28,581 | 22,865 | |||||||||||||||
Total redeemable preferred stock |
— | — | — | 12,182 | 11,120 | |||||||||||||||
Total stockholders’ equity (deficit) |
198,072 | 203,869 | 92,199 | (37,089 | ) | (19,710 | ) | |||||||||||||
| (1) | On December 7, 2004, in accordance with our then-existing shareholders’ agreement, our board of directors approved the grant of certain options to purchase an aggregate of 1,014 Units to certain of our directors and officers at an exercise price of $0.01 per Unit. The grant became effective on December 23, 2004. Each Unit consisted of 550 shares of our common stock and one share of our Series A voting preferred stock. We recorded a non-cash expense of $8.9 million based on the estimated value per Unit as of December 23, 2004. All of these options were exercised prior to April 11, 2005, pursuant to which we issued 557,700 shares of our common stock and 1,014 shares of our Series A voting preferred stock, and all of our Series A voting preferred stock was redeemed with the net proceeds from our initial public offering. On April 11, 2005, immediately following the |
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| completion of our initial public offering, we granted to certain of our executive officers certain options to purchase an aggregate of 329,808 shares of our common stock under the 2005 Long Term Incentive Plan. On December 6, 2005, our board of directors approved the award of 37,500 shares of restricted stock to certain of our employees pursuant to our 2005 Long Term Incentive Plan. In addition, on December 6, 2005, one of our officers was granted stock options pursuant to the 2005 Long Term Incentive Plan. We recorded a non-cash charge of $358,000 in the aggregate for the year ended December 31, 2005 in connection with the issuance of the foregoing stock options and restricted share awards. We recorded a non-cash charge of $2.1 million for the year ended December 31, 2006 in connection with the issuance of the foregoing options and restricted share awards and the issuance of additional restricted share awards in 2006. We recorded a non-cash charge of $2.8 million for the year ended December 31, 2007 in connection with the issuance of the foregoing options and restricted share awards and the issuance of additional restricted share awards in 2007. | ||
| (2) | On November 15, 2004, we entered into the Johnstown settlement and recorded a $9.2 million charge with respect to the year ended December 31, 2004. As part of the Johnstown settlement, we agreed to pay back wages equal to $1.4 million to the covered employees and recorded a $0.8 million cash charge for expenses related to the Johnstown settlement in the year ended December 31, 2004. We also recorded $7.0 million of non-cash expense in the year ended December 31, 2004 related to pension and postretirement termination benefits accrued with respect to retired unionized employees at our Johnstown facility. For the year ended December 31, 2005, we recorded a charge of $370,000 relating to a change in estimate of the charge resulting from the Johnstown settlement consisting of a retroactive payment to unionized Johnstown employees for certain previously unpaid work hours. For the year ended December 31, 2007 we recorded a contingent liability accrual of $3.9 million. | |
| (3) | “Rights to additional acquisition consideration” refers to the additional acquisition consideration related to the acquisition of our business in 1999 that became due, and was paid, upon the completion of our initial public offering in April 2005. | |
| (4) | Estimated backlog reflects the total sales attributable to the backlog reported at the end of the particular period as if such backlog were converted to actual sales. Estimated backlog does not reflect potential price increases or decreases under most of our customer contracts that provide for variable pricing based on changes in the cost of raw materials or the possibility that contracts may be canceled or railcar delivery dates delayed and does not reflect the effects of any cancellation or delay of railcar orders that may occur. See Item 1. “Business—Backlog.” | |
| (5) | Our restricted cash for the years ended December 31, 2004 and 2003 included cash collateral of $3.8 million plus interest held in escrow for our participation in a residual support guarantee agreement with respect to railcars that we sold to a customer that are presently leased by the customer to a third party. Our restricted cash for the years ended December 31, 2004 and 2003 also included $7.5 million held in a restricted cash account as additional collateral for our former revolving credit facility, which was released to us after we entered into our revolving credit facility agreement. Our restricted cash balance for the year ended December 31, 2004 also included $1.2 million in escrow, representing security for workers’ compensation insurance. As of December 31, 2005, we no longer had any remaining restricted cash. Restricted cash in the amount of $13.0 million was released during the year ended December 31, 2005 as follows: the $7.5 million attributable to cash held as additional collateral under the former revolving credit facility was released upon signing the new credit facility agreement; $1.2 million held in escrow as security for worker’s compensation insurance was replaced by a letter of credit; and $4.3 million held in escrow for a residual support guaranty relating to railcars we sold to a financial institution that are leased by a third-party customer was released by the financial institution. | |
| (6) | Our total debt includes current maturities of long-term debt and our variable rate demand industrial revenue bonds due 2010, which are classified as short-term debt. We repaid all of our debt that existed prior to the initial public offering with the net proceeds of the initial public offering and available cash. | |
| (7) | Our recorded liability under the rights to additional acquisition consideration was based on the fair value of the rights to additional acquisition consideration at the time that we acquired our business from TTII in 1999, using a discount rate of 25% and an expected redemption period of seven years. As a result of our initial public offering, we were required to pay the additional acquisition consideration in the aggregate amount of $35.0 million. | |
| 8) | For the year ended December 31, 2007, we recorded curtailment and impairment charges of $30.8 million relating to the planned closure of our Johnstown facility, which included curtailment and special termination benefits for our pension and postretirement benefit plans of $27.7 million, one-time employee termination benefits of $2.2 million and fixed asset impairment charges of $950,000. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
You should read the following discussion in conjunction with our consolidated financial statements
and related notes included elsewhere in this annual report on Form 10-K. This discussion contains
forward-looking statements that are based on management’s 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 “ — 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. 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, Johnstown, Pennsylvania and
Roanoke, Virginia. All of our manufacturing facilities have the capability to manufacture a variety
of types of railcars.
In the twelve months ended December 31, 2007, we delivered 10,282 new railcars, compared to our
delivery of 18,764 new railcars in the twelve months ended December 31, 2006. Our total backlog of
firm orders for new railcars decreased by approximately 42%, from 9,315 railcars as of December 31,
2006 to 5,399 railcars as of December 31, 2007. The backlog as of December 31, 2007 represented
estimated sales of $422 million, while the
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backlog as of December 31, 2006 represented estimated sales of $697 million. Approximately 92% of
our backlog as of December 31, 2007 consisted of coal-carrying railcars.
Prices for steel and aluminum, the primary raw material components of our railcars, and surcharges
on steel and railcar components remain at historically high levels. Notwithstanding fluctuations in
the cost of raw materials, a significant majority of the contracts covering our current backlog
include provisions that allow for variable pricing to protect us against future changes in the cost
of raw materials. We were able to pass on increased material costs to our customers with respect to
approximately 80% of our railcar deliveries in 2007.
With respect to the supply of components, while the availability of railcar components improved
during 2007, the railcar industry continues to be adversely impacted by shortages of wheels and
other components as a result of reorganization and consolidation of domestic suppliers, increased
demand for new railcars and railroad maintenance requirements. Currently, we believe that these
shortages will not significantly impact our ability to meet our delivery requirements as domestic
suppliers have improved their delivery capabilities.
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 believe that
the long-term outlook for railcar demand is positive, due to increased rail traffic and the
replacement of aging railcar fleets. We also believe that the long-term outlook for our business,
including the demand for our coal-carrying railcars, is positive, based on our long-term supply
agreements, our expanding product portfolio, our operational efficiency in manufacturing railcars
and our international opportunities. However, U.S. economic conditions may not result in a
sustained economic recovery, and our business is subject to these and significant other risks that
may cause our current positive outlook to change. See Item 1A. “Risk Factors.”
In April 2005, we completed an initial public offering of shares of our common stock. In connection
with the offering, we offered and sold 5,100,000 shares of our common stock and certain selling
stockholders offered and sold 4,675,000 shares (including 1,275,000 shares following the exercise
of the underwriters’ over-allotment option) at a price of $19.00 per share. Our net proceeds from
the initial public offering, after deducting underwriting discounts, commissions and estimated
offering-related expenses payable by us, were approximately $85.3 million. We used the net proceeds
from the offering and our available cash to repay our existing indebtedness, redeem all of our
outstanding redeemable preferred stock, pay amounts due under the rights to additional acquisition
consideration, pay amounts due in connection with the termination of certain management services
and other agreements with certain of our stockholders and pay related fees and expenses. See “-
Liquidity and Capital Resources.”
In September 2005, we completed a secondary offering of our common stock whereby the selling
stockholders, including all of our executive officers and certain of our directors, offered and
sold 2,626,317 shares (including 342,563 shares following the exercise of the underwriters’
over-allotment option) at a price of $40.50 per share. We did not sell any shares and did not
receive any proceeds from the sale of shares by the selling stockholders. We incurred $0.8 million
of expenses in connection with the secondary offering.
In January 2007, our Board of Directors announced a share repurchase program of up to $50 million.
These shares were purchased in the open market through the third quarter of 2007. The total number
of shares purchased was 1,048,300 at an average cost of $47.70 per share.
In December 2007, we announced that we planned to close our manufacturing facility located in
Johnstown, Pennsylvania. This action was taken to further our strategy of maintaining our
competitive position by optimizing production at our low-cost facilities and continuing our focus
on cost control. We had entered into decisional bargaining with the union representing our
Johnstown employees regarding labor costs at our Johnstown facility, but did not reach an agreement
with the union that would have allowed us to continue to operate the facility in a cost-effective
way.
FINANCIAL STATEMENT PRESENTATION
Sales
Our sales are generated primarily from sales of the railcars that we manufacture. Our sales depend
on industry demand for new railcars, which is driven by overall economic conditions and the demand
for railcar transportation
24
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of various products, such as coal, motor vehicles, steel products, forest products, minerals,
cement and agricultural commodities. Our sales are also affected by competitive market pressures
that impact the prices for our railcars and by the types of railcars sold.
We generally manufacture railcars under firm orders from our customers. We recognize sales, which
we sometimes refer to as deliveries, of new and rebuilt railcars when we complete the individual
railcars, the railcars are accepted by the customer following inspection, the risk of any damage or
other loss with respect to the railcars passes to the customer and title to the railcars transfers
to the customer. With respect to sales transactions involving the trading-in of used railcars, in
accordance with accounting rules, we recognize sales for the entire transaction when the cash
consideration received is in excess of 25% of the total transaction value and on a pro rata portion
of the total transaction value when the cash consideration received is less than 25% of the total
transaction value. We value used railcars received at their estimated fair market value less a
normal profit margin. Sales of used railcars for the years ended December 31, 2007, 2006 and 2005,
were not material. The variable purchase patterns of our customers and the timing of completion,
delivery and acceptance of customer orders may cause our sales and income from operations to vary
substantially each quarter, which will result in significant fluctuations in our quarterly results.
Cost of sales
Our cost of sales includes the cost of raw materials such as aluminum and steel, as well as the
cost of finished railcar components, such as castings, wheels, truck components and couplers, and
other specialty components. Our cost of sales also includes labor, utilities, freight,
manufacturing depreciation and other manufacturing overhead costs. Factors that have affected our
cost of sales include the recent increases in the cost of steel and aluminum, our plans to close
our Johnstown, Pennsylvania facility and our efforts to reduce the costs of new products that we
have recently introduced.
We rely upon third-party suppliers for wheels and other components for our railcars. For the year
ended December 31, 2004, due to a shortage of wheels and other railcar components, our deliveries
were limited to 7,484 railcars, even though we had orders and production capacity to manufacture
more railcars. The limited supply of wheels and other railcar components did not impact our
deliveries for the years ended December 31, 2005, 2006 and 2007. While the availability of railcar
components continued to improve during 2007, the railcar industry continues to be adversely
impacted by shortages of wheels and other components as a result of reorganization and
consolidation of domestic suppliers, increased demand for new railcars and railroad maintenance
requirements. Currently, we believe that these shortages will not significantly impact our ability
to meet our delivery requirements as domestic suppliers have improved their delivery capabilities.
Customer orders may be subject to cancellation, customer requests for delays in railcar deliveries,
inspection rights and other customary industry terms and conditions. See Item 1A. “Risk
Factors—Risks Related to the Railcar Industry—Limitations on the supply of wheels and other
railcar components could adversely affect our business because they may limit the number of
railcars we can manufacture.”
The prices for steel and aluminum, the primary raw material inputs of our railcars, increased in
2005, 2006 and 2007 as a result of strong demand, limited availability of production inputs for
steel and aluminum, including scrap metal, industry consolidation and import trade barriers. In
addition, the price and availability of other railcar components that are made of steel have been
adversely affected by the increased cost and limited availability of steel. 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. The costs for raw steel and aluminum have increased by approximately 156% and 67%,
respectively, during the period from October 2003 through December 31, 2007. The availability of
scrap metal has been limited by exports of scrap metal to China, and as a result, steel producers
have charged scrap metal surcharges in excess of agreed-upon prices. In addition, the price and
availability of other railcar components that are made of steel have been adversely affected by the
increased cost and limited availability of steel. During the year ended December 31, 2005, our
gross profit was adversely impacted by higher costs of approximately $1.5 million associated with
increased material, labor and other costs related to a contract to manufacture box cars. For the
years ended December 31, 2007 and 2006, we were able to pass on increases in raw material costs to
our customers with respect to 80% and 98% of our railcar deliveries, respectively.
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Operating income
Operating income represents total sales less cost of sales, selling, general and administrative
expenses, compensation expense under stock option and restricted share award agreements,
curtailment and impairment charges and the provision for the settlement of labor disputes in 2005.
RESULTS OF OPERATIONS
Year Ended December 31, 2007 compared to Year Ended December 31, 2006
Sales
Our sales for the year ended December 31, 2007 were $817.0 million as compared to $1,444.8 million
for the year ended December 31, 2006 while railcar deliveries of
10,282 were 8,482 units below the
2006 level. The decrease in sales revenue and deliveries was due primarily to lower industry
volume as well as lower demand for coal cars. In addition, the competitive environment increased
as demand slackened with a negative impact on the price of railcars. Average railcar pricing
declined between 2006 and 2007. The decline in average selling price was partially offset by a
shift in product mix. Our coal-carrying railcars remain an essential part of our portfolio.
Deliveries of our BethGon® II and AutoFlood III™ coal-carrying railcars comprised 85% of
our total railcar deliveries for the year ended December 31, 2007.
Gross Profit
Gross profit for the year ended December 31, 2007 was $103.4 million as compared to $233.5 million
for the year ended December 31, 2006, representing a decrease of $130.1 million. The decrease in
gross profit was due primarily to lower volume. In addition, the gross margin was impacted by lower
operating leverage due to the change in volume and the lower pricing environment. Favorable
product mix and continuous cost reduction efforts partially mitigated the impact of lower
production activity and the adverse pricing environment. For the year ended December 31, 2007, we
were able to pass on increases in raw material costs to our customers with respect to 80% of our
railcar deliveries.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31, 2007 were $38.9
million as compared to $34.4 million for the year ended December 31, 2006, representing an increase
of $4.5 million. Selling, general and administrative expenses were 4.8% of our sales for 2007 and
2.4% for 2006. The increase was primarily attributable to higher employee compensation costs of
$3.0 million, a special charge of $3.8 million for contingency losses related to litigation and a
$1.1 million increase in investment for product development programs. These increases were
partially offset by a reduction in outside professional services of $1.8 million. Increases in
selling, general and administrative expenses for 2007 were also partially offset by decreases in
several expense categories that were not significant individually but have helped to minimize the
impact of the increases previously described.
Curtailment and Impairment Charges
In December 2007 we incurred curtailment and impairment charges of $30.8 million. These charges
include net curtailment losses and special termination and contractual benefit costs of $27.7
million arising under our pension and other postretirement benefit plans as well as contractual
employee termination benefits of $2.2 million for severance and medical insurance. These charges
also include a non-cash impairment of the carrying value of certain assets at our Johnstown
manufacturing facility of $950,000. It is anticipated that payments for employee termination
benefits will be made during 2008 while pension and postretirement benefits will be funded through
plan assets and future Company contributions to the pension and postretirement plans.
Interest Expense/Income
Total interest expense for each of the years ended December 31, 2007 and 2006, was $0.7 million.
For the years ended December 31, 2007 and 2006, interest expense consisted of third-party interest
expense and the amortization of deferred financing costs. Interest income for the year ended
December 31, 2007 was $8.3 million as compared to $5.9 million for the year ended December 31,
2006, representing an increase of $2.4 million, primarily attributable to a higher average cash
balance during 2007. Interest income represents the proceeds of short-term investments of
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our cash balances, which decreased by approximately 7.1% at December 31, 2007 compared to December
31, 2006. Interest rates rose steadily during 2006 and into 2007 but decreased significantly
during the second half of 2007.
Income Taxes
The provision for income taxes was $14.8 million for the year ended December 31, 2007, as compared
to a provision for income taxes of $75.5 million for the year ended December 31, 2006. The
effective tax rates for the years ended December 31, 2007 and 2006, were 35.9% and 37.0%,
respectively. The effective rate for the year ended December 31, 2007 was slightly higher than the
statutory U.S. federal income tax rate due to the addition of a 1.9% blended state rate and a 2.8%
increase caused by a change in the valuation allowance. These increases were virtually offset by a
decrease in the effective rate caused by the domestic manufacturing deduction. The effective tax
rate for the year ended December 31, 2006 was higher than the statutory U.S. federal income tax
rate of 35% due to a 4.2% blended state rate less a 2.2% effect for other permanent differences.
Management anticipates that the effective tax rate in 2008 will be similar to the effective rates
for 2007 and 2006 excluding the impacts of discrete tax items.
Net Income
As a result of the foregoing, net income and net income attributable to common stockholders each
were $26.5 million for the year ended December 31, 2007, reflecting a decrease of $102.2 million
from net income and net income attributable to common stockholders of $128.7 million for the year
ended December 31, 2006. For 2007, our basic and diluted net income per share were $2.18 and
$2.17, respectively, on basic and diluted shares outstanding of 12,115,712 and 12,188,901,
respectively. For 2006, our basic and diluted net income per share were $10.23 and $10.07,
respectively, on basic and diluted shares outstanding of 12,586,889 and 12,785,015, respectively.
The reduction in net income for 2007 compared to 2006 is primarily the result of decreased sales
volumes during 2007.
Year Ended December 31, 2006 compared to Year Ended December 31, 2005
Sales
Our sales for the year ended December 31, 2006 were $1,444.8 million as compared to $927.2 million
for the year ended December 31, 2005, representing an increase of $517.6 million. Included in our
sales for the year ended December 31, 2005 was $5.5 million attributable to the recognition of
deferred revenue related to a customer contract from a prior year. The increase in sales was
primarily due to our delivery of an additional 5,733 railcars in the year ended December 31, 2006,
compared to the same period in 2005, representing an increase of 44% in deliveries, and higher
pricing. The increased volume of railcar deliveries reflects increased demand for our coal-carrying
railcars. Deliveries of our BethGon® II and AutoFlood III™ coal-carrying railcars
comprised 96% of our total railcar deliveries for the year ended December 31, 2006.
Gross Profit
Gross profit for the year ended December 31, 2006 was $233.5 million as compared to $106.5 million
for the year ended December 31, 2005, representing an increase of $127.0 million. Included in our
gross profit for the year ended December 31, 2005 was $5.5 million attributable to the recognition
of deferred revenue. The increase in gross profit was primarily due to our increased sales volume,
increased operating leverage attributable to higher volume, higher pricing and improved
productivity. For the year ended December 31, 2006, we were able to pass on increases in raw
material costs to our customers with respect to 98% of our railcar deliveries. During the year
ended December 31, 2006, our gross profit was adversely impacted by non-recoverable materials costs
of approximately $1.8 million. During the year ended December 31, 2005, our gross profit was
adversely impacted by higher costs of approximately $1.5 million associated with increased
material, labor and other costs related to a contract to manufacture box cars.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31, 2006 were $34.4
million as compared to $28.5 million for the year ended December 31, 2005, representing an increase
of $5.9 million. Selling, general and administrative expenses were 2.4% of our sales for the year
ended December 31, 2006 and 3.1% for 2005. The
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increase in expenses was primarily attributable to increased stock-based compensation expense of
$1.7 million, increased public company expenses of $1.1 million primarily associated with the
implementation of Sarbanes-Oxley requirements and legal fees, increased expenses of $1.5 million
relating to our bonus and employee benefit programs, increased investments in product development
programs, costs related to the transition of executive management and increased expenses related to
the incremental business volume in 2006. The increased stock-based compensation is related to the
full-year impact of restricted shares awarded in the fourth quarter of 2005 and the implementation
of Statement of Financial Accounting Standards (“SFAS”) No. 123 (R). See Note 15 to the
consolidated financial statements. Included in the December 31, 2005 expense was a provision for
the settlement of labor disputes of $0.4 million.
Interest Expense/Income
Total interest expense for the year ended December 31, 2006 was $0.7 million as compared to $11.9
million for the year ended December 31, 2005, representing a decrease of $11.2 million. The
decrease was a result of our initial public offering in April 2005 and the related changes in our
financing structure which significantly reduced our outstanding debt. For the year ended December
31, 2006, interest expense consisted of third-party interest expense and the amortization of
deferred financing costs. For the year ended December 31, 2005, interest expense consisted
primarily of the accretion of additional interest on the rights to additional acquisition
consideration of $6.4 million, related-party interest of $3.3 million and third-party interest
expense of $1.4 million. Interest income for the year ended December 31, 2006 was $5.9 million as
compared to $1.2 million for the year ended December 31, 2005. Interest income represents the
proceeds of short-term investments of our cash balances, which increased substantially over the
period.
Income Taxes
The provision for income taxes was $75.5 million for the year ended December 31, 2006, as compared
to a provision for income taxes of $21.8 million for the year ended December 31, 2005. The
effective tax rates for the years ended December 31, 2006 and 2005, were 37.0% and 32.3%,
respectively. The effective tax rate for the year ended December 31, 2006 was higher than the
statutory U.S. federal income tax rate of 35% due to the addition of a 4.2% blended state rate less
a 2.2% effect for other permanent differences. The effective tax rate for the year ended December
31, 2005 was lower than the statutory U.S. federal income tax rate of 35% due to the addition of a
2.1% blended state rate less a 0.3% effect for other permanent differences and a 4.5% effect for
previously non-deductible interest expense on the rights to additional acquisition consideration
which became deductible for income tax purposes upon payment of the additional acquisition
consideration.
Net Income
As a result of the foregoing, net income was $128.7 million for the year ended December 31, 2006,
reflecting an increase of $83.0 million from net income of $45.7 million for the year ended
December 31, 2005. Net income attributable to common stockholders was $128.7 million for the year
ended December 31, 2006, as compared to net income of $45.4 million attributable to common
stockholders for the same period in 2005. For the year ended December 31, 2006, our basic and
diluted net income per share were $10.23 and $10.07, respectively, on basic and diluted shares
outstanding of 12,586,889 and 12,785,015, respectively. For the prior year, our basic and diluted
net income per share were $4.08 and $4.04, respectively, on basic and diluted shares outstanding of
11,135,440 and 11,234,075, respectively. Net income for the year ended December 31, 2005 was
favorably impacted by net income of $2.9 million applicable to the recognition of deferred revenue.
Basic and diluted earnings per share were favorably impacted in 2005 by $0.27 per share
attributable to the recognition of deferred revenue.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity for the years ended December 31, 2007 and 2006 was cash flows
generated from operations. From the year ended December 31, 2006 to the year ended December 31,
2007, the change in net cash provided by operating activities was a decrease of $112.8 million. See
"- Cash Flows.”
On August 24, 2007, we entered into a Second Amended and Restated Credit Agreement (the “Revolving
Credit Agreement”) with LaSalle Bank National Association (“LaSalle”) and the lenders party thereto
(collectively, the “Lenders”) amending and restating the terms of our revolving credit facility
(the “revolving credit facility”). The proceeds of the revolving credit facility are available to
finance our working capital requirements through direct borrowings and the issuance of stand-by
letters of credit. The Revolving Credit Agreement amends and restates the
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Amended and Restated Credit Agreement, dated as of April 11, 2005, by and among us, LaSalle and the
lenders party thereto (the “previous credit agreement”). The Revolving Credit Agreement provides
for a $100.0 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 $10.0 million. The amount available under the revolving credit
facility is based on the lesser of (i) $100.0 million or (ii) an amount equal to a percentage of
eligible accounts receivable plus a percentage of eligible finished inventory plus a percentage of
semi-finished inventory. The previous credit agreement provided for a total revolving credit
facility of the lesser of (i) $50.0 million or (ii) an amount equal to a percentage of eligible
accounts receivable plus a percentage of eligible finished inventory plus a percentage of
semi-finished inventory with a sub-facility for letters of credit totaling $30.0 million.
The Revolving Credit Agreement has a term ending on May 31, 2012 and bears interest at a rate of
LIBOR plus an applicable margin of between 0.875% and 1.500% depending on Revolving Loan
Availability (as defined in the Revolving Credit Agreement). We are required to pay a commitment
fee of between 0.175% and 0.250% based on Revolving Loan Availability. The previous credit
agreement had a three-year term ending on April 11, 2008 and bore interest at a rate of LIBOR plus
an applicable margin of between 1.75% and 3.00% depending on our ratio of consolidated senior debt
to consolidated EBITDA (as defined in the previous credit agreement). Borrowings under the
Revolving Credit Agreement are collateralized by substantially all of our assets. The Revolving
Credit Agreement has both affirmative and negative covenants, including, without limitation, a
minimum fixed charge coverage ratio and limitations on debt, liens, dividends, investments,
acquisitions and capital expenditures. The Revolving Credit Agreement also provides for customary
events of default. As of December 31, 2007, we were in compliance with all covenant requirements
under the Revolving Credit Agreement. As of December 31, 2007 and December 31, 2006, we had no
borrowings under the revolving credit facility. We had $8.8 million and $18.3 million in
outstanding letters of credit under the letter of credit sub-facility as of December 31, 2007 and
December 31, 2006, respectively, and the ability to borrow $39.5 million under the revolving credit
facility as of December 31, 2007. Under the revolving credit facility, our subsidiaries are
permitted to pay dividends and transfer funds to us without restriction.
Based on our current level of operations, we believe that our proceeds from operating cash flows,
together with amounts available under our revolving credit facility and cash on hand, will be
sufficient to meet our anticipated liquidity needs for 2008. Our long-term liquidity is contingent
upon future operating performance and our ability to continue to meet financial covenants under our
revolving credit facility 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, development of railcars, 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
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, 2007, our benefit obligation
under our defined benefit pension plans and our postretirement benefit plan was $55.4 million and
$53.1 million, respectively, which exceeded the fair value of plan assets by $10.4 million and
$53.1 million, respectively. As disclosed in Note 13 to the consolidated financial statements, we
expect to make contributions relating to our defined benefit pension plans of approximately $6.8
million in 2008. However, we may elect to adjust the level of 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. In August 2006, President Bush signed the Pension
Protection Act of 2006 into law. Included in this legislation are changes to the method of valuing
pension plan assets and liabilities for funding purposes, as well as minimum funding levels
required by 2008. Our defined benefit pension plans are in compliance with minimum funding levels
established in the Pension Protection Act and are expected to be fully funded by 2009. This
expectation 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 within 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.
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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 business, results of operations and financial condition.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2007, 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) | ||||||||||||||||||||
Capital leases from long-term debt |
$ | 93 | $ | 65 | $ | 28 | $ | — | $ | — | ||||||||||
Operating leases |
14,187 | 1,856 | 3,761 | 4,122 | 4,448 | |||||||||||||||
Material and component purchases |
131,852 | 32,806 | 82,887 | 16,159 | — | |||||||||||||||
Total |
$ | 146,132 | $ | 34,727 | $ | 86,676 | $ | 20,281 | $ | 4,448 | ||||||||||
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.
In addition to the contractual obligations set forth above, we also will have interest payment
obligations on any borrowings under the revolving credit facility. See Note 9 to the consolidated
financial statements.
We also pay consulting fees to one of our directors. The amount paid for his consulting services
was $50,000 for each of the years ended December 31, 2007, 2006 and 2005. The agreement governing
this arrangement will expire in April 2008. See Note 21 to the consolidated financial statements.
The above table excludes $3.4 million of long-term liabilities for unrecognized tax benefits and
accrued interest and penalties at December 31, 2007 because the timing of the payout of these
liabilities cannot be determined.
We are a party to employment agreements with our President and Chief Executive Officer and our Vice
President, Finance, Chief Financial Officer and Treasurer as well as other members of our executive
management team. See Item 11. “Executive Compensation.”
We are also required to make minimum contributions to our pension and postretirement welfare plans.
See Note 13 to the consolidated financial statements regarding our expected contributions to our
pension plans and our expected postretirement welfare benefit payments for 2008.
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Cash Flows
The following table summarizes our net cash provided by or used in operating activities, investing
activities and financing activities for the years ended December 31, 2007, 2006 and 2005:
| 2007 | 2006 | 2005 | ||||||||||
Net cash provided by (used in): |
||||||||||||
Operating activities |
$ | 41,398 | $ | 154,156 | $ | 65,814 | ||||||
Investing activities |
(6,062 | ) | (5,821 | ) | 5,435 | |||||||
Financing activities |
(50,320 | ) | 1,954 | (20,725 | ) | |||||||
Total |
$ | (14,984 | ) | $ | 150,289 | $ | 50,524 | |||||
Operating Activities. Our net cash provided by or used in operating activities reflects net income
or loss 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 year ended December 31, 2007 was $41.4
million as compared to net cash provided by operating activities of $154.2 million for the year
ended December 31, 2006. The decrease of $112.8 million in net cash provided by operating
activities was primarily due to the reduction of $84.9 million in net income adjusted for non-cash
items and a decrease of $35.6 million generated by working capital accounts such as accounts
receivable and inventories, net of accounts payable, partially offset by the increase of $7.7
million in cash applicable to payroll, pensions and postretirement obligations.
Our net cash provided by operating activities for the year ended December 31, 2006 was $154.2
million as compared to net cash provided by operating activities of $65.8 million for the year
ended December 31, 2005. The increase of $88.4 million in net cash provided by operating activities
was primarily due to the addition of $68.9 million in net income adjusted for non-cash items and an
increase of $39.5 million generated by working capital accounts such as accounts receivable and
inventories, net of accounts payable, partially offset by the use of $20.0 million in cash
applicable to payroll, pensions and postretirement obligations.
Investing Activities. Net cash used in investing activities for the year ended December 31, 2007
was $6.1 million as compared to net cash used in investing activities of $5.8 million for the year
ended December 31, 2006. For the year ended December 31, 2007, $4.3 million of the $6.1 million of
total capital expenditures was used for cost reduction initiatives and the expansion of production
capacity to accommodate the manufacture of a new railcar type.
Net cash used in investing activities for the year ended December 31, 2006 was $5.8 million as
compared to net cash provided by investing activities of $5.4 million for the year ended December
31, 2005. The $5.8 million of net cash used in investing activities for the year ended December 31,
2006 consisted of capital expenditures of $6.9 million partially offset by the proceeds of $1.1
million from the sale of property, plant and equipment, primarily $1.0 million from the sale of the
Shell plant in Johnstown, Pennsylvania. For the year ended December 31, 2006, $3.3 million of the
$6.9 million of total capital expenditures were used for the expansion of production capacity to
accommodate the manufacture of hybrid stainless steel/aluminum coal-carrying railcars.
Financing Activities. Net cash used in financing activities for the year ended December 31, 2007
was $50.3 million as compared to net cash provided by financing activities of $2.0 million for the
year ended December 31, 2006. Net cash used in financing activities for the year ended December
31, 2007 included $50.0 million for stock repurchases, $2.9 million to pay cash dividends to our
stockholders and $0.2 million related to deferred financing costs. These were partially offset by
the receipt of $2.1 million for stock options exercised and $0.8 million in excess tax benefit from
stock-based compensation.
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Net cash provided by financing activities for the year ended December 31, 2006 was $2.0 million as
compared to net cash used in financing activities of $20.7 million for the year ended December 31,
2005. Net cash provided by financing activities for the year ended December 31, 2006 included $2.1
million in stock options exercised and $1.8 million in excess tax benefit from stock-based
compensation. These were partially offset by the use of $1.9 million to pay cash dividends to our
stockholders.
Capital Expenditures
Our capital expenditures were $6.1 million in the year ended December 31, 2007 as compared to $6.9
million in the year ended December 31, 2006. For the year ended December 31, 2007, $4.3 million of
the $6.1 million of total capital expenditures was used for the expansion of production capacity to
accommodate the manufacture of hybrid stainless steel/aluminum coal-carrying railcars.
Our capital expenditures were $6.9 million in the year ended December 31, 2006 as compared to $7.5
million in the year ended December 31, 2005. For the year ended December 31, 2006, $3.3 million of
the $6.9 million total capital expenditures were used at a manufacturing facility, primarily
relating to cost reduction initiatives and the expansion of production capacity to accommodate a
new railcar type. The remaining $3.6 million of capital expenditures for the year ended December
31, 2006 were comprised primarily of expenditures for machinery and equipment and building
improvements at our Danville, Johnstown and Roanoke production facilities.
Excluding unforeseen expenditures, management expects that capital expenditures will be
approximately $5.9 million in 2008. These expenditures will be used to maintain our existing
facilities and update manufacturing equipment. Management continuously evaluates manufacturing
facility requirements based upon market demand and may elect to make capital investments at higher
levels in the future.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with accounting principles generally
accepted in the United States. The preparation of our financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of sales and expenses during the reporting period. Significant estimates include long-lived
assets, goodwill, pension and postretirement benefit assumptions, the valuation reserve on the net
deferred tax asset, warranty accrual and contingencies and litigation. Actual results could differ
from those estimates.
Our critical accounting policies include the following:
Long-lived assets
We evaluate long-lived assets, including property, plant and equipment, under the provisions of
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses
financial accounting and reporting for the impairment of long-lived assets and for long-lived
assets to be disposed of. For assets to be held or used, we group a long-lived asset or assets with
other assets and liabilities at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities. An impairment loss for an asset
group reduces only the carrying amounts of a long-lived asset or assets of the group being
evaluated. Our estimates of future cash flows used to test the recoverability of a long-lived asset
group include only the future cash flows that are directly associated with and that are expected to
arise as a direct result of the use and eventual disposition of the asset group. Our future cash
flow estimates exclude interest charges.
We test long-lived assets for recoverability whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. These changes in circumstances may
include a significant decrease in the market value of an asset or the extent or manner in which an
asset is used. We routinely evaluate our manufacturing footprint to assess our manufacturing
capacity and cost of production in an effort to optimize production at our low-cost manufacturing
facilities. In December 2007, we announced our planned closure of our manufacturing facility
located in Johnstown, Pennsylvania and, as a result, we tested long-lived assets at our Johnstown
facility for recoverability using estimated fair values. We recorded impairment charges of
$950,000 for land, building and improvements during 2007. There were no impairment charges
recorded for long-lived assets during 2006 or 2005.
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Impairment of goodwill and intangible assets
We have recorded on our balance sheet both goodwill and intangible assets, which consist primarily
of patents and an intangible asset related to our defined benefit plans. On December 31, 2006 the
adoption of SFAS No. 158 resulted in the derecognition of the intangible asset related to our
defined benefit pension plans. See Note 13 to the consolidated financial statements. We perform the
goodwill impairment test required by SFAS No. 142, Goodwill and Other Intangible Assets, as of
January 1 of each year. We also test goodwill for impairment between annual tests if an event
occurs or circumstances change that may reduce the fair value of our Company below its carrying
amount. These events or circumstances include the testing for recoverability under SFAS No. 144.
Accordingly we tested goodwill for impairment as of December 31, 2007 in connection with our
testing of long-lived assets at our Johnstown facility for recoverability, in addition to
performing our annual test as of January 1, 2007. We also tested goodwill and intangible assets
for impairment on January 1, 2006 and January 1, 2005. We have not noted any such impairment.
We test goodwill for impairment at least annually based on management’s assessment of the fair
value of our assets as compared to the carrying value of our assets. Additional steps, including an
allocation of the estimated fair value to our assets and liabilities, would be necessary to
determine the amount, if any, of goodwill impairment if the fair value of our assets and
liabilities were less than their carrying value. The process of assessing fair value involves
management making estimates with respect to future sales volume, pricing, economic and industry
data, anticipated cost environment and overall market conditions, and because these estimates form
the basis for the determination of whether or not an impairment charge should be recorded, these
estimates are considered to be critical accounting estimates.
Our method to determine fair value to test goodwill for impairment considers three valuation
approaches: the discounted cash flow method, the guideline company method and the transaction
method. The results of each of these three methods are reviewed by management and a fair value is
then assigned. For our latest valuation, as of December 31, 2007, management estimated that the
fair value of our company exceeded the carrying value of our company by a substantial amount.
The discounted cash flow method involves significant judgment based on a market-derived rate of
return to discount short-term and long-term projections of the future performance of our company.
The major assumptions that influence future performance include:
| • | volume projections based on an industry-specific outlook for railcar demand and specifically coal railcar demand; | |
| • | estimated margins on railcar sales; and | |
| • | weighted-average cost of capital (or WACC) used to discount future performance of our company. |
We use industry data to estimate volume projections in our discounted cash flow method. We believe
that this independent industry data is the best indicator of expected future performance assuming
that we maintain a consistent market share, which management believes is supportable based on
historical performance. While a negative 1% adjustment to the volume projections used in the
discounted cash flow method would reduce the excess of the fair value of our company compared to
its carrying value by approximately 2%, management estimates that the fair value would still exceed
the carrying value by a substantial amount.
Our estimated margins used in the discounted cash flow method are based primarily on historical
margins. The price of raw materials has increased significantly since November 2003. Aluminum and
steel prices have historically accounted for approximately 30% to 35% of our total cost of sales.
Changes in aluminum and steel prices typically only affect margins on signed contracts for railcars
forming part of our backlog as management historically has used aluminum and steel prices at the
time a contract is signed as the basis for its selling price. Some of our contracts provide for raw
material cost escalation and, with respect to the year ended December 31, 2007, we were able to
pass through to our customers raw material cost increases on 80% of railcar deliveries. However,
there is no assurance that our customers will accept variable pricing in the future, which would
subject our margins and performance to variability primarily in the event of changes in the price
of aluminum and steel. While an increase of 1% in aluminum and steel prices for backlog and
projected volume in the discounted cash flow method would reduce the excess of the fair value of
our company compared to its carrying value by approximately 2%, management estimates that the fair
value would still exceed the carrying value by a substantial amount.
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The WACC used to discount our future performance in the discounted cash flow method is based on an
estimated rate of return of companies in our industry and interest rates for corporate debt rated
“Baa” or the equivalent by Moody’s Investors Service. Management estimated a WACC of 14% for our
December 31, 2007 goodwill impairment valuation analysis based on our mix of equity and debt. While
an increase of 1% in the WACC used in the discounted cash flow method would reduce the excess of
the fair value of our company compared to its carrying value by approximately 15%, management
estimates that the fair value would still exceed the carrying value by a substantial amount.
The assumptions supporting our estimated future cash flows, including the discount rate used and
estimated terminal value, reflect our best estimates.
The guideline company method and transaction method use market valuation multiples of similar
publicly traded companies for the guideline company method and recent transactions for the
transaction method and, as a result, involve less judgment in their application.
Pensions and postretirement benefits
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 expected return on pension plan assets and the discount rate used to calculate the present
value of our pension and postretirement welfare plan liabilities.
In 2007, we assumed that the expected long-term rate of return on pension plan assets would be
8.25%. As permitted under SFAS No. 87, the assumed long-term rate of return on assets is applied to
a calculated value of plan assets, which recognizes changes in the fair value of plan assets in a
systematic manner over five years. This produces the expected return on plan assets that is
included in our net periodic benefit cost. The difference between this expected return and the
actual return on plan assets is deferred. The net deferral of past asset gains (losses) affects the
calculated value of plan assets and, ultimately, future net periodic benefit cost. We review the
expected return on plan assets annually and would revise it if conditions should warrant. A change
of one percentage point in the expected long-term rate of return on plan assets would have the
following effect:
| 1% Increase | 1% Decrease | |||||||
| (in thousands) | ||||||||
Effect on net periodic benefit cost |
$ | (425 | ) | $ | 425 | |||
At the end of each year, we determine the discount rate to be used to calculate the present value
of our pension and postretirement welfare plan liabilities. The discount rate is an estimate of the
current interest rate at which our pension liabilities could be effectively settled at the end of
the year. In estimating this rate, we look to rates of return on high-quality, fixed-income
investments that receive one of the two highest ratings given by a recognized ratings agency. At
December 31, 2007, we determined this rate to be 6.40%, an increase of 0.50% from the 5.90% rate
used at December 31, 2006. A change of one percentage point in the discount rate would have the
following effect:
| 1% Increase | 1% Decrease | |||||||
| (in thousands) | ||||||||
Effect on net periodic benefit cost |
$ | (1,051 | ) | $ | 1,200 | |||
For the years ended December 31, 2007, 2006 and 2005, we recognized consolidated pre-tax pension
cost of $17.1 million, $4.0 million and $4.7 million, respectively. Pension costs for 2007 include
pension plan curtailment losses and special termination benefit costs of $14.5 million resulting
from our plant closure decision (See Note 3 Curtailment and Impairment Charges and Note 13 Employee
Benefit Plans for a description of these actions). We currently expect to contribute approximately
$6.8 million to our pension plans during 2008. However, we may elect to adjust the level of
contributions based on a number of factors, including performance of pension investments, changes
in interest rates and changes in workforce compensation. In August 2006, President Bush signed the
Pension Protection Act into law. Included in this legislation are changes to the method of valuing
pension plan assets and liabilities for funding purposes, as well as minimum funding levels
required by 2008. Our defined benefit pension plans are in compliance with minimum funding levels
established in the Pension Protection Act and are expected to be fully funded by 2009. This
expectation will be affected by future contributions, investment returns on plan assets, growth in
plan liabilities and interest rates. Assuming that the plan is fully funded as that term is
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defined within 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.
For the years ended December 31, 2007, 2006 and 2005, we recognized a consolidated pre-tax
postretirement welfare benefit cost of $18.9 million, $5.6 million and $5.9 million, respectively.
Postretirement welfare benefit costs for 2007 include plan curtailment losses and contractual
benefit charges of $13.2 million resulting from our plant closure decision (See Note 3 Curtailment
and Impairment Charges and Note 13 Employee Benefit Plans for a description of these actions). We
currently expect to pay approximately $5.2 million during 2008 in postretirement welfare benefits.
Income taxes
On January 1, 2007, we adopted the Financial Accounting Standards Board (the “FASB”) Interpretation
(“FIN”) No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Standard
No. 109. FIN No. 48 prescribes a comprehensive model for how a company should recognize, measure,
present and disclose in its financial statements, uncertain tax positions that it has taken or
expects to take on a tax return. This Interpretation requires that a company recognize in its
financial statements the impact of tax positions that meet a “more likely than not” threshold,
based on the technical merits of the position. The tax benefits recognized in the financial
statements from such a position should be measured based on the largest benefit that has a greater
than fifty percent likelihood of being realized upon ultimate settlement.
Management judgment is required in developing our provision for income taxes, including the
determination of deferred tax assets, liabilities and any valuation allowances recorded against the
deferred tax assets. We evaluate quarterly the realizability of our net deferred tax assets and
assess the valuation allowance, adjusting the amount of such allowance, if necessary. The factors
used to assess the likelihood of realization are our forecast of future taxable income and the
availability of tax planning strategies that can be implemented to realize the net deferred tax
assets. Failure to achieve forecasted taxable income might affect the ultimate realization of the
net deferred tax assets. Factors that may affect our ability to achieve sufficient forecasted
taxable income include, but are not limited to, increased competition, a decline in sales or
margins and loss of market share.
We record net deferred tax assets to the extent we believe these assets will more likely than not
be realized. In making such determinations, we consider all available positive and negative
evidence, including scheduled reversals of deferred tax liabilities, projected future taxable
income, tax planning strategies and recent financial operations. In the event we were to determine
that we would be able to realize our deferred income tax assets in the future in excess of their
net recorded amount, we would make an adjustment to the valuation allowance which would reduce the
provision for income taxes.
At December 31, 2007, we had total net deferred tax assets of $34.6 million. Although realization
of our net deferred tax assets is not certain, management has concluded that we will more likely
than not realize the full benefit of the deferred tax assets except for our net deferred tax assets
in Pennsylvania. At December 31, 2007, we had a valuation allowance of $3.6 million, based on
management’s conclusion that it was more likely than not that certain of our net deferred tax
assets in Pennsylvania would not be realized.
We provide for deferred income taxes based on differences between the book and tax bases of our
assets and liabilities and for items that are reported for financial statement purposes in periods
different from those for income tax reporting purposes. The deferred tax liability or asset amounts
are based upon the enacted tax rates expected to apply to taxable income in the periods in which
the deferred tax liability or asset is expected to be settled or realized. The deferred tax
liabilities and assets that we record relate to the enacted federal, Illinois and Virginia tax
rates, since net operating loss carryforwards and deferred tax assets arising under Pennsylvania
state law have been fully reserved. A 1% change in the rate of federal income taxes would increase
or decrease our deferred tax assets by $0.7 million. A 1% change in the rate of Illinois income
taxes would increase or decrease our deferred tax assets by $0.2 million. A 1% change in the rate
of Virginia income taxes would increase or decrease our deferred tax assets by $26,000.
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Product warranties
We establish a warranty reserve for railcars sold and estimate the amount of the warranty accrual
based on the history of warranty claims for the type of railcar, adjusted for significant known
claims in excess of established reserves. Warranty terms are based on the negotiated railcar sales
contracts and typically are for periods of one to five years.
Revenue recognition
We generally manufacture railcars under firm orders from third parties. We recognize revenue on new
and rebuilt railcars when we complete the individual railcars, the railcars are accepted by the
customer following inspection, the risk for any damage or other loss with respect to the railcars
passes to the customer and title to the railcars transfers to the customer. Revenue from leasing is
recognized ratably during the lease term. Pursuant to Accounting Principles Board (APB) Opinion No.
29, Accounting for Non-Monetary Transactions, and Emerging Issues Task Force (EITF) Issue No. 01-2,
Interpretations of APB No-29, on transactions involving used railcar trades, we recognize revenue
for the entire transaction when the cash consideration is in excess of 25% of the total transaction
value and on a pro rata portion of the total transaction value when the cash consideration is less
than 25% of the total transaction value. We value used railcars received at their estimated fair
market value at date of receipt less a normal profit margin.
Compensation expense under stock option agreements and restricted stock awards
We have historically granted certain stock-based awards to employees and directors in the form of
non-qualified stock options, incentive stock options and restricted stock. At the date that an
award is granted, we determine the fair value of the award and recognize the compensation expense
over the requisite service period, which typically is the period over which the award vests. The
restricted stock units are valued at the fair market value of our stock on the grant date. The
fair value of stock options is estimated using the Black-Scholes option-pricing model. Determining
the fair value of stock options at the grant date requires us to apply judgment and use highly
subjective assumptions, including expected stock-price volatility, expected exercise behavior,
expected dividend yield and expected forfeitures. While the assumptions that we develop are based
on our best expectations, they involve inherent uncertainties based on market conditions and
employee behavior that are outside of our control. If actual results are not consistent with the
assumptions used, the stock-based compensation expense reported in our financial statements could
be impacted.
Contingencies and litigation
We are subject to the possibility of various loss contingencies related to certain legal
proceedings arising in the ordinary course of business. We consider the likelihood of loss or the
incurrence of a liability, as well as our ability to reasonably estimate the amounts of loss, in
the determination of loss contingencies. We accrue an estimated loss contingency when it is
probable that a liability has been incurred and the amount of loss can be reasonably estimated. We
regularly evaluate current information available to us based on our ongoing monitoring activities
to determine whether the accruals should be adjusted. If the amount of the actual loss is greater
than the amount we have accrued, this would have an adverse impact on our operating results in that
period. During the fourth quarter of 2007 we recorded contingency losses of $3.9 million which are
included in our Consolidated Statements of Income in “Selling, general and administrative expense”.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment, which establishes the
accounting for transactions in which an entity exchanges its equity instruments or certain
liabilities based upon the entity’s equity instruments for goods or services. The revision to SFAS
No. 123 generally requires that publicly traded companies measure the cost of employee services
received in exchange for an award of equity instruments based on the fair value of the award on the
grant date. That cost 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. We adopted SFAS No.
123 (R) effective January 1, 2006 using the modified prospective method and, as such, results for
prior periods have not been restated.
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In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes — An
Interpretation of FASB Standard No. 109. FIN No. 48 prescribes a recognition threshold and
measurement attribute for financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return, and also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We adopted the
provisions of FIN No. 48 on January 1, 2007. As a result of the implementation of FIN No. 48, we
recorded an increase in gross unrecognized tax benefits of $2.6 million and a decrease to retained
earnings and accumulated other comprehensive loss of $1.9 million and $94,000, respectively. We
expect the amount of our unrecognized tax benefits to change in the next twelve months, however, we
do not expect the change to have a significant impact on our results of operations or financial
condition. We recognize accrued interest related to unrecognized tax benefits and penalties in
income tax expense in our consolidated statements of income. As of January 1, 2007, we recorded a
liability of $681,000 for the payment of interest and penalties.
In September 2006, 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 categories, including a separate reconciliation of
the beginning and ending balances for each major category of assets and liabilities. SFAS No. 157
is 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. Other than the enhanced disclosures required, we do not
expect the provisions of SFAS No. 157 to have a material impact on our financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans — An amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS
No. 158 requires the recognition of the funded status of a benefit plan in the balance sheet; the
recognition in other comprehensive income of gains or losses and prior service costs or credits
arising during the period but which are not included as components of periodic benefit cost; the
measurement of defined benefit plan assets and obligations as of the balance sheet date; and
disclosure of additional information about the effects on periodic benefit cost for the following
fiscal year arising from delayed recognition of gains and losses in the current period. We adopted
SFAS No. 158 as of December 31, 2006. See Note 13 to the Consolidated Financial Statements for
additional disclosures required by SFAS No. 158 and the effects of adoption.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS No. 159 permits companies to measure certain financial instruments and
certain other items at fair value. The standard requires that unrealized gains and losses on items
for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007, although earlier adoption is permitted. We do
not intend to apply the provisions of SFAS No. 159 to any of our existing financial assets or
liabilities, therefore the provisions of SFAS No. 159 are not expected to have a material impact on
our 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. We are in the process of evaluating the requirements
of SFAS No. 141 (R) but expect only prospective impact on our financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51. SFAS No. 160 amends Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary
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and for the deconsolidation of a subsidiary. This standard defines a noncontrolling interest,
sometimes called minority interest, as the portion of equity in a subsidiary not attributable
directly or indirectly to a parent. SFAS No. 160 requires, among other items, that a
noncontrolling interest be included in the consolidated statement of financial position within
equity separate from the parent’s equity, consolidated net income be reported at amounts inclusive
of both the parent’s and the noncontrolling interest’s shares and, separately, the amounts of
consolidated net income attributable to the parent and the noncontrolling interest all on the
consolidated statement of income. If a subsidiary is deconsolidated, SFAS No. 160 requires any
retained noncontrolling equity investment in the former subsidiary to be measured at fair value and
a gain or loss to be recognized in net income based on such fair value. SFAS No. 160 is effective
for fiscal years beginning after December 15, 2008. We are in the process of evaluating the
requirements of SFAS No. 160 and have not yet determined the impact on our financial statements.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K 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 prospectus 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 management’s 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.”
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We have a $100.0 million revolving credit facility, which provides for financing of our working
capital requirements and contains a $50.0 million sub-facility for letters of credit and a $10.0
million sub-facility for a swing line loan. As of December 31, 2007, there were no borrowings under
the revolving credit facility and we had issued approximately $8.8 million in letters of credit
under the sub-facility for letters of credit. We are exposed to interest rate risk on the
borrowings under the revolving credit facility and do not plan to enter into swaps or other hedging
arrangements to manage this risk, because we do not believe this interest rate risk to be
significant. On an annual basis, a 1% change in the interest rate in our revolving credit facility
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. The prices for steel and aluminum, the
primary raw material inputs of our railcars, increased in 2005, 2006 and 2007 as a result of strong
demand, limited availability of production inputs for steel and aluminum, including scrap metal,
industry consolidation and import trade barriers. In addition, the price and availability of other
railcar components that are made of steel have been adversely affected by the increased cost and
limited availability of steel. 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. However, current market conditions and competitive pricing have
limited our ability to negotiate variable pricing contracts. 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.
To the extent that we are unsuccessful in passing on increases in the cost of aluminum and steel to
our customers, a 1% increase in the cost of aluminum and steel would increase our average cost of
sales by approximately $215 per railcar, which, for the year ended December 31, 2007, would have
reduced income before income taxes by approximately $2.2 million.
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.
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Item 8. Financial Statements and Supplementary Data.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of FreightCar America, Inc. and its subsidiaries (the “Company”) is responsible for
establishing and maintaining adequate internal control over financial reporting. The Company’s
internal control over financial reporting is a process designed under the supervision of the
Company’s principal executive and principal financial officers to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the Company’s financial
statements for external reporting purposes in accordance with accounting principles generally
accepted in the United States of America.
As of the end of the Company’s 2007 fiscal year, management conducted an evaluation of the
effectiveness of the Company’s internal control over financial reporting based on the framework
established in Internal Control— Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this assessment, management has
determined that the Company’s internal control over financial reporting as of December 31, 2007 is
effective.
The effectiveness of the Company’s internal control over financial reporting as of December 31,
2007 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm,
as stated in their report appearing herein.
Inherent Limitations on Effectiveness of Controls
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does
not expect that our disclosure controls and procedures or our internal control over financial
reporting will prevent or detect all error and all fraud. A control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. The design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered relative to their costs.
Further, because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
March 12, 2008
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
FreightCar America, Inc.
FreightCar America, Inc.
We have audited the accompanying consolidated balance sheets of FreightCar America, Inc. and
subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated
statements of income, stockholders’ equity (deficit), and cash flows for each of the three years in
the period ended December 31, 2007. Our audits also included the financial statement schedule
listed in the Index at Item 15(a)(2). We also have audited the Company’s internal control over
financial reporting as of December 31, 2007, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for these financial statements and financial
statement schedule, for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on these financial statements and financial statement schedule and an
opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles and
that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of FreightCar America, Inc. and subsidiaries as of
December 31, 2007 and 2006, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31,
2007, based on the criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
41
Table of Contents
As discussed in Note 2 to the consolidated financial statements, on December 31, 2006, the Company
adopted Statement of Financial Accounting Standards (“SFAS”) No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
March 11, 2008
March 11, 2008
42
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FreightCar America, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share data)
(in thousands except share and per share data)
| December 31, | December 31, | |||||||
| 2007 | 2006 | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 197,042 | $ | 212,026 | ||||
Accounts receivable, net of allowance for doubtful accounts of $223 and $191, respectively |
13,068 | 11,369 | ||||||
Inventories |
49,845 | 106,643 | ||||||
Other current assets |
7,223 | 5,045 | ||||||
Deferred income taxes |
13,520 | 8,462 | ||||||
Total current assets |
280,698 | 343,545 | ||||||
Property, plant and equipment, net |
26,921 | 25,905 | ||||||
Goodwill |
21,521 | 21,521 | ||||||
Deferred income taxes |
21,035 | 22,955 | ||||||
Other long-term assets |
5,709 | 6,055 | ||||||
Total assets |
$ | 355,884 | $ | 419,981 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 39,525 | $ | 103,038 | ||||
Accrued payroll and employee benefits |
13,320 | 13,120 | ||||||
Accrued postretirement benefits |
5,188 | 3,480 | ||||||
Income taxes payable |
— | 9,816 | ||||||
Accrued warranty |
10,551 | 12,051 | ||||||
Customer deposits |
19,836 | 11,652 | ||||||
Other current liabilities |
7,100 | 3,831 | ||||||
Total current liabilities |
95,520 | 156,988 | ||||||
Accrued pension costs |
10,685 | 9,576 | ||||||
Accrued postretirement benefits, less current portion |
47,890 | 49,455 | ||||||
Other long-term liabilities |
3,717 | 93 | ||||||
Total liabilities |
157,812 | 216,112 | ||||||
Commitments and contingencies |
||||||||
Stockholders’ equity |
||||||||
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 December 31, 2007 and 2006) |
— | — | ||||||
Common stock, $0.01 par value, 50,000,000 shares authorized, 12,731,678 and 12,681,511
shares issued at December 31, 2007 and 2006, respectively |
127 | 127 | ||||||
Additional paid in capital |
99,270 | 99,981 | ||||||
Treasury stock, at cost, 918,257 shares at December 31, 2007 |
(43,597 | ) | — | |||||
Accumulated other comprehensive loss |
(9,857 | ) | (26,774 | ) | ||||
Retained earnings |
152,129 | 130,535 | ||||||
Total stockholders’ equity |
198,072 | 203,869 | ||||||
Total liabilities and stockholders’ equity |
$ | 355,884 | $ | 419,981 | ||||
See notes to the consolidated financial statements.
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FreightCar America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(in thousands, except share and per share data)
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Sales |
$ | 817,025 | $ | 1,444,800 | $ | 927,187 | ||||||
Cost of sales |
713,661 | 1,211,349 | 820,638 | |||||||||
Gross profit |
103,364 | 233,451 | 106,549 | |||||||||
Selling, general and administrative expense
(including non-cash stock-based compensation expense
of $2,804, $2,130 and $358, respectively) |
38,914 | 34,390 | 28,461 | |||||||||
Curtailment and impairment charges |
30,836 | — | — | |||||||||
Operating income |
33,614 | 199,061 | 78,088 | |||||||||
Interest income |
8,349 | 5,860 | 1,225 | |||||||||
Interest expense |
420 | 352 | 11,082 | |||||||||
Amortization and write-off of deferred financing costs |
232 | 306 | 776 | |||||||||
Income before income taxes |
41,311 | 204,263 | 67,455 | |||||||||
Income tax provision |
14,843 | 75,530 | 21,762 | |||||||||
Net income |
26,468 | 128,733 | 45,693 | |||||||||
Redeemable preferred stock dividends accumulated |
— | — | 311 | |||||||||
Net income attributable to common stockholders |
$ | 26,468 | $ | 128,733 | $ | 45,382 | ||||||
Net income per common share attributable to common
stockholders—basic |
$ | 2.18 | $ | 10.23 | $ | 4.08 | ||||||
Net income per common share attributable to common
stockholders—diluted |
$ | 2.17 | $ | 10.07 | $ | 4.04 | ||||||
Weighted average common shares outstanding—basic |
12,115,712 | 12,586,889 | 11,135,440 | |||||||||
Weighted average common shares outstanding—diluted |
12,188,901 | 12,785,015 | 11,234,075 | |||||||||
Dividends declared per common share |
$ | 0.24 | $ | 0.15 | $ | 0.06 | ||||||
See notes to the consolidated financial statements.
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FreightCar America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except for share data)
(in thousands, except for share data)
| Common Stock | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||
| (Pre-merger Company) | Additional | Other | Retained | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Common Stock | Paid In | Treasury Stock | Comprehensive | Earnings | Stockholders’ | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Shares | Amount | Loss | (Deficit) | Equity (Deficit) | |||||||||||||||||||||||||||||||||||||
Balance, January 1, 2005 |
6,138,000 | $ | — | 737,000 | $ | — | — | $ | — | $ | 8,900 | — | $ | — | $ | (5,055 | ) | $ | (40,934 | ) | $ | (37,089 | ) | |||||||||||||||||||||||||
Net income |
— | — | — | — | — | — | — | — | — | — | 45,693 | 45,693 | ||||||||||||||||||||||||||||||||||||
Additional minimum pension
liability (see Note 10) |
— | — | — | — | — | — | — | — | — | (501 | ) | — | (501 | ) | ||||||||||||||||||||||||||||||||||
Comprehensive income |
— | — | — | — | — | — | — | — | — | — | — | 45,192 | ||||||||||||||||||||||||||||||||||||
Stock options exercised |
557,700 | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Shares exchanged in merger
(see Note 12) |
(6,695,700 | ) | — | (737,000 | ) | — | 7,432,700 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Redeemable preferred stock
dividends accumulated, but
undeclared |
— | — | — | — | — | — | — | — | — | — | (311 | ) | (311 | ) | ||||||||||||||||||||||||||||||||||
Redemption of preferred stock
with liquidation preference in
excess of par value |
— | — | — | — | — | — | (507 | ) | — | — | — | — | (507 | ) | ||||||||||||||||||||||||||||||||||
Issuance of common stock |
— | — | — | — | 5,100,000 | 125 | 85,181 | — | — | — | — | 85,306 | ||||||||||||||||||||||||||||||||||||
Restricted stock awards |
— | — | — | — | 37,500 | 1 | 1,870 | — | — | — | — | 1,871 | ||||||||||||||||||||||||||||||||||||
Unvested restricted stock |
— | — | — | — | — | — | (1,746 | ) | — | — | — | — | (1,746 | ) | ||||||||||||||||||||||||||||||||||
Stock-based compensation
recognized |
— | — | — | — | — | — | 234 | — | — | — | — | 234 | ||||||||||||||||||||||||||||||||||||
Cash dividends |
— | — | — | — | — | — | — | — | — | — | (751 | ) | (751 | ) | ||||||||||||||||||||||||||||||||||
Balance, December 31, 2005 |
— | — | — | — | 12,570,200 | 126 | 93,932 | — | — | (5,556 | ) | 3,697 | 92,199 | |||||||||||||||||||||||||||||||||||
Net income |
— | — | — | — | — | — | — | — | — | — | 128,733 | 128,733 | ||||||||||||||||||||||||||||||||||||
Additional minimum pension
liability, net of tax (see
Notes 10 and 13) |
— | — | — | — | — | — | — | — | — | 1,950 | — | 1,950 | ||||||||||||||||||||||||||||||||||||
Comprehensive income |
— | — | — | — | — | — | — | — | — | — | — | 130,683 | ||||||||||||||||||||||||||||||||||||
Adjustment related to initial
application of SFAS No. 158 —
pension liability, net of tax
(see Notes 10 and 13) |
— | — | — | — | — | — | — | — | — | (7,599 | ) | — | (7,599 | ) | ||||||||||||||||||||||||||||||||||
Adjustment related to initial
application of SFAS No. 158 —
postretirement liability, net
of tax (see Notes 10 and 13) |
— | — | — | — | — | — | — | — | — | (15,569 | ) | — | (15,569 | ) | ||||||||||||||||||||||||||||||||||
Stock options exercised |
— | — | — | — | 109,936 | 1 | 2,088 | — | — | — | — | 2,089 | ||||||||||||||||||||||||||||||||||||
Restricted stock awards |
— | — | — | — | 3,542 | — | 221 | — | — | — | — | 221 | ||||||||||||||||||||||||||||||||||||
Forfeiture of restricted stock
awards |
— | — | — | — | (2,167 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Unvested restricted stock |
— | — | — | — | — | — | (125 | ) | — | — | — | — | (125 | ) | ||||||||||||||||||||||||||||||||||
Stock-based compensation
recognized |
— | — | — | — | — | — | 2,034 | — | — | — | — | 2,034 | ||||||||||||||||||||||||||||||||||||
Excess tax benefit from
stock-based compensation |
— | — | — | — | — | — | 1,831 | — | — | — | — | 1,831 | ||||||||||||||||||||||||||||||||||||
Cash dividends |
— | — | — | — | — | — | — | — | — | — | (1,895 | ) | (1,895 | ) | ||||||||||||||||||||||||||||||||||
Balance, December 31, 2006 |
— | — | — | — | 12,681,511 | 127 | 99,981 | — | — | (26,774 | ) | 130,535 | 203,869 | |||||||||||||||||||||||||||||||||||
Net income |
— | — | — | — | — | — | — | — | — | — | 26,468 | 26,468 | ||||||||||||||||||||||||||||||||||||
Pension liability activity, net
of tax |
— | — | — | — | — | — | — | — | — | 6,868 | — | 6,868 | ||||||||||||||||||||||||||||||||||||
Postretirement liability
activity, net of tax |
— | — | — | — | — | — | — | — | — | 10,049 | — | 10,049 | ||||||||||||||||||||||||||||||||||||
Comprehensive income |
— | — | — | — | — | — | — | — | — | — | — | 43,385 | ||||||||||||||||||||||||||||||||||||
Adjustment for adoption of
FIN No. 48 (see Note 2) |
— | — | — | — | — | — | — | — | — | — | (1,936 | ) | (1,936 | ) | ||||||||||||||||||||||||||||||||||
Stock repurchases |
— | — | — | — | — | — | — | (1,048,300 | ) | (50,000 | ) | — | — | (50,000 | ) | |||||||||||||||||||||||||||||||||
Stock options exercised |
— | — | — | — | — | — | (3,322 | ) | 109,936 | 5,410 | — | — | 2,088 | |||||||||||||||||||||||||||||||||||
Restricted stock awards |
— | — | — | — | 52,000 | — | (1,030 | ) | 20,940 | 1,030 | — | — | — | |||||||||||||||||||||||||||||||||||
Forfeiture of restricted stock
awards |
— | — | — | — | (1,833 | ) | — | 37 | (833 | ) | (37 | ) | — | — | — | |||||||||||||||||||||||||||||||||
Stock-based compensation
recognized |
— | — | — | — | — | — | 2,804 | — | — | — | — | 2,804 | ||||||||||||||||||||||||||||||||||||
Excess tax benefit from
stock-based compensation |
— | — | — | — | — | — | 800 | — | — | — | — | 800 | ||||||||||||||||||||||||||||||||||||
Cash dividends |
— | — | — | — | — | — | — | — | — | — | (2,938 | ) | (2,938 | ) | ||||||||||||||||||||||||||||||||||
Balance, December 31, 2007 |
— | $ | — | — | $ | — | 12,731,678 | $ | 127 | $ | 99,270 | (918,257 | ) | $ | (43,597 | ) | $ | (9,857 | ) | $ | 152,129 | $ | 198,072 | |||||||||||||||||||||||||
See notes to the consolidated financial statements.
45
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FreightCar America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(in thousands)
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Cash flows from operating activities |
||||||||||||
Net income |
$ | 26,468 | $ | 128,733 | $ | 45,693 | ||||||
Adjustments to reconcile net income to net cash flows provided by operating activities
Curtailment and impairment charges |
30,836 | — | — | |||||||||
Depreciation and amortization |
3,910 | 5,442 | 7,810 | |||||||||
Non-cash interest expense related to Senior Notes and rights to additional
acquisition consideration |
— | — | 9,635 | |||||||||
Other non-cash items |
2,160 | 259 | 1,569 | |||||||||
Deferred income taxes |
(11,911 | ) | 2,568 | 4,817 | ||||||||
Provision for settlement of labor disputes |
— | — | 370 | |||||||||
Compensation expense under stock option and restricted share award agreements |
2,804 | 2,130 | 358 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
(1,699 | ) | (7,515 | ) | 282 | |||||||
Inventories |
54,875 | (31,554 | ) | (1,871 | ) | |||||||
Other current assets |
(312 | ) | (1,012 | ) | (3,599 | ) | ||||||
Accounts payable |
(62,742 | ) | 42,448 | (10,487 | ) | |||||||
Accrued payroll and employee benefits |
(2,004 | ) | 3,414 | 6,812 | ||||||||
Income taxes receivable/payable |
(11,922 | ) | 5,581 | 4,235 | ||||||||
Accrued warranty |
(1,500 | ) | 4,173 | 1,914 | ||||||||
Customer deposits and other current liabilities |
11,448 | 11,614 | (6,211 | ) | ||||||||
Accrued pension costs and accrued postretirement benefits |
987 | (12,125 | ) | 4,487 | ||||||||
Net cash flows provided by operating activities |
41,398 | 154,156 | 65,814 | |||||||||
Cash flows from investing activities |
||||||||||||
Restricted cash withdrawals, net |
— | — | 12,955 | |||||||||
Proceeds from sale of property, plant and equipment |
11 | 1,082 | — | |||||||||
Purchases of property, plant and equipment |
(6,073 | ) | (6,903 | ) | (7,520 | ) | ||||||
Net cash flows (used in) provided by investing activities |
(6,062 | ) | (5,821 | ) | 5,435 | |||||||
Cash flows from financing activities |
||||||||||||
Payments on long-term debt |
(60 | ) | (71 | ) | (59,331 | ) | ||||||
Deferred financing costs paid |
(211 | ) | — | — | ||||||||
Stock repurchases |
(50,000 | ) | — | — | ||||||||
Issuance of common stock (net of issuance costs and deferred offering costs) |
2,089 | 2,089 | 87,320 | |||||||||
Excess tax benefit from stock-based compensation |
800 | 1,831 | — | |||||||||
Redemption of preferred stock and payment of accumulated dividends |
— | — | (13,000 | ) | ||||||||
Payments of additional acquisition consideration |
— | — | (34,963 | ) | ||||||||
Cash dividends paid to stockholders |
(2,938 | ) | (1,895 | ) | (751 | ) | ||||||
Net cash flows (used in) provided by financing activities |
(50,320 | ) | 1,954 | (20,725 | ) | |||||||
Net (decrease) increase in cash and cash equivalents |
(14,984 | ) | 150,289 | 50,524 | ||||||||
Cash and cash equivalents at beginning of year |
212,026 | 61,737 | 11,213 | |||||||||
Cash and cash equivalents at end of year |
$ | 197,042 | $ | 212,026 | $ | 61,737 | ||||||
Supplemental cash flow information |
||||||||||||
Cash paid for: |
||||||||||||
Interest (includes, for the year ended December 31, 2005, $26,790 related to
additional acquisition consideration and $28,361 relating to Senior Notes and
previously accrued but unpaid PIK Notes) |
$ | 515 | $ | 360 | $ | 56,506 | ||||||
Income tax refunds received |
$ | 70 | $ | — | $ | — | ||||||
Income taxes paid |
$ | 37,147 | $ | 65,581 | $ | 12,718 | ||||||
Non-cash transactions: |
||||||||||||
(Decrease) increase in balance of property, plant and equipment on account |
$ | (771 | ) | $ | 1,076 | $ | — | |||||
Capital lease obligations incurred for equipment |
$ | — | $ | — | $ | 244 | ||||||
See notes to the consolidated financial statements.
46
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FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2007, 2006 and 2005
(in thousands, except for share and per share data)
For the Years Ended December 31, 2007, 2006 and 2005
(in thousands, except for share and per share data)
Note 1 — Description of the Business
FreightCar America, Inc. (“America”), through its direct and indirect wholly owned subsidiaries,
JAC Intermedco, Inc. (“Intermedco”), JAC Operations, Inc. (“Operations”), Johnstown America
Corporation (“JAC”), Freight Car Services, Inc. (“FCS”), JAIX Leasing Company (“JAIX”), JAC Patent
Company (“JAC Patent”) and FreightCar Roanoke, Inc. (“FCR”) (herein collectively referred to as the
“Company”) manufactures, rebuilds, repairs, sells and leases freight cars used for hauling coal,
other bulk commodities, steel and other metals, forest products and automobiles. The Company has
facilities in Danville, Illinois, Roanoke, Virginia and Johnstown, Pennsylvania. The Company’s
operations comprise one operating segment. The Company and its direct and indirect wholly owned
subsidiaries are all Delaware corporations.
Note 2 — Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of America, Intermedco,
Operations, JAC, FCS, JAIX, JAC Patent and FCR. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Significant estimates include the valuation of used railcars received in sale transactions,
useful lives of long-lived assets, warranty and workers’ compensation accruals, pension and
postretirement benefit assumptions, stock compensation and the valuation reserve on the net
deferred tax asset. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all unrestricted short-term investments with original maturities of three
months or less when acquired to be cash equivalents.
On a daily basis, cash in excess of current operating requirements is invested in various highly
liquid investments having a typical maturity date of three months or less at the date of
acquisition. These investments are carried at cost, which approximates market value, and are
classified as cash equivalents.
Inventories
Inventories are stated at the lower of first-in, first-out cost or market and include material,
labor and manufacturing overhead. The Company’s inventory consists of raw materials, work in
progress and finished goods for individual customer contracts. Management established a reserve of
$1,177 relating to slow-moving inventory for raw materials or work in progress at December 31,
2007. Management has determined that no reserve, including reserves for obsolete inventory, was
necessary for raw materials, work in progress or finished new railcar inventory at December 31,
2006.
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Property, Plant and Equipment
Property, plant and equipment are stated at acquisition cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated useful lives of the
assets, which are as follows:
| Description of Assets | Life | |
Buildings and improvements
|
10-40 years | |
Machinery and equipment
|
3-12 years |
Maintenance and repairs are charged to expense as incurred, while major replacements and
improvements are capitalized. The cost and accumulated depreciation of items sold or retired are
removed from the property accounts and any gain or loss is recorded in the consolidated statement
of operations upon disposal or retirement.
Long-Lived Assets
The Company evaluates long-lived assets under the provisions of Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”),
which addresses financial accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. For assets to be held or used, the Company groups a long-lived
asset or assets with other assets and liabilities at the lowest level for which identifiable cash
flows are largely independent of the cash flows of other assets and liabilities. An impairment loss
for an asset group reduces only the carrying amounts of a long-lived asset or assets of the group
being evaluated. Estimates of future cash flows used to test the recoverability of a long-lived
asset group include only the future cash flows that are directly associated with and that are
expected to arise as a direct result of the use and eventual disposition of the asset group. The
future cash flow estimates used by the Company exclude interest charges.
The Company tests long-lived assets for recoverability whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. These changes in
circumstances may include a significant decrease in the market value of an asset or the extent or
manner in which an asset is used. The Company routinely evaluates its manufacturing footprint to
assess its manufacturing capacity and cost of production in an effort to optimize production at its
low-cost manufacturing facilities. In December 2007, the Company announced the planned closure of
its manufacturing facility located in Johnstown, Pennsylvania, and as a result, it tested
long-lived assets at the Johnstown facility for recoverability using estimated fair values. Fair
values were estimated using the cost approach based on the assumption that the reproduction or
replacement cost normally sets the upper limit of value and the sales comparison approach which
relies on the assumption that value can be measured by the selling prices of similar assets.
Impairment charges of $950 were recorded for land, building and improvements during 2007. There
were no impairment charges recorded for long-lived assets during 2006 or 2005.
Research and Development
Costs associated with research and development are expensed as incurred and totaled approximately
$1,966, $890 and $385 for the years ended December 31, 2007, 2006 and 2005, respectively. Such
costs are reflected within selling, general and administrative expenses in the consolidated
statements of income.
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
2007, 2006 and 2005.
The Company tests goodwill for impairment between annual tests if an event occurs or circumstances
change that may reduce the fair value of the Company below its carrying amount. These events or
circumstances include an impairment recorded under SFAS No. 144. Accordingly, the Company tested
goodwill for impairment as of
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December 31, 2007 in connection with its testing of long-lived assets at the Johnstown facility for
recoverability, in addition to performing its annual test as of January 1, 2007. There was no
adjustment required based on the impairment test as of December 31, 2007.
Patents are amortized on a straight-line method over their remaining legal life from the date of
acquisition.
Income Taxes
For Federal income tax purposes, the Company files a consolidated federal tax return. JAC files
separately in Pennsylvania and FCR files separately in Virginia. The Company files a combined
return in Illinois. The Company’s operations are not significant in any states other than
Illinois, Pennsylvania and Virginia. In conformity with SFAS No. 109, Accounting for Income Taxes,
the Company provides for deferred income taxes on differences between the book and tax bases of its
assets and liabilities and for items that are reported for financial statement purposes in periods
different from those for income tax reporting purposes. Management evaluates deferred tax assets
and provides a valuation allowance when it believes that it is more likely than not that some
portion of these assets will not be realized.
Tax benefits related to uncertain tax positions taken or expected to be taken on a tax return are
recorded when such benefits meet a more likely than not threshold. Otherwise, these tax benefits
are recorded when a tax position has been effectively settled, which means that the appropriate
taxing authority has completed their examination even though the statute of limitations remains
open, or the statute of limitation expires. Interest and penalties related to uncertain tax
positions are recognized as part of the provision for income taxes and are accrued beginning in the
period that such interest and penalties would be applicable under relevant tax law until such time
that the related tax benefits are recognized.
The Company recognizes accrued interest related to unrecognized tax benefits and penalties in
income tax expense in the consolidated statements of income.
Product Warranties
The Company establishes a warranty reserve for new railcar sales at the time of sale, estimates the
amount of the warranty accrual for new railcars sold based on the history of warranty claims for
the type of railcar, and adjusts the reserve for significant known claims in excess of established
reserves.
Revenue Recognition
Revenues on new and rebuilt railcars are recognized when individual cars are completed, the
railcars are accepted by the customer following inspection, the risk for any damage or other loss
with respect to the railcars passes to the customer and title to the railcars transfers to the
customer. There are no returns or allowances recorded against sales. Pursuant to Accounting
Principles Board (“APB”) Opinion No. 29, Accounting for Non-Monetary Transactions, and Emerging
Issues Task Force (“EITF”) Issue No. 01-2, Interpretations of APB No. 29, revenue is recognized for
the entire transaction on transactions involving used railcar trades when the cash consideration is
in excess of 25% of the total transaction value and on a pro-rata portion of the total transaction
value when the cash consideration is less than 25% of the total transaction value. Used railcars
received are valued at their estimated fair market value at the date of receipt less a normal
profit margin. Revenue from leasing is recognized ratably during the lease term.
The Company’s sales to customers outside the United States were $85,980, $43,493 and $47,930 in
2007, 2006 and 2005, respectively.
The Company accrues for loss contracts when it has a contractual commitment to manufacture railcars
at an estimated cost in excess of the contractual selling price.
The Company records amounts billed to customers for shipping and handling as part of sales in
accordance with EITF 00-10, Accounting for Shipping and Handling Fees and Costs, and records
related costs in cost of sales.
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Financial Instruments
Management estimates that all financial instruments (including cash and long-term debt) as of
December 31, 2007 and 2006, have fair values that approximate their carrying values.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner sources. Comprehensive
income (loss) consists of net income (loss) and unrecognized pension and postretirement benefit
cost, which is shown net of tax.
Earnings Per Share
Basic earnings per share are calculated as net income attributable to common stockholders divided
by the weighted-average number of common shares outstanding during the respective period. The
Company includes contingently issuable shares in its calculation of the weighted average number of
common shares outstanding. Contingently issuable shares are shares subject to options which require
little or no cash consideration. Diluted earnings per share are calculated by dividing net income
attributable to common stockholders by the weighted-average number of shares outstanding plus
dilutive potential common shares outstanding during the year.
Stock-Based Compensation
Prior to January 1, 2006, the Company accounted for its stock-based compensation plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related interpretations. As a result, the Company recognized stock-based
compensation expense based on the intrinsic value or the difference between the exercise price and
the market value at the grant-date. For periods after January 1, 2006, the Company applies the
provisions of SFAS No. 123 (R), Share-Based Payment, for its stock-based compensation plan based on
the modified prospective basis. As a result, the Company recognizes stock-based compensation
expense for stock awards based on the grant-date fair value of the award. See Note 15.
The following table illustrates the effect on net income attributable to common stockholders and
earnings per share attributable to common stockholders if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based compensation for the periods prior to the
adoption of SFAS No. 123 (R).
| Year Ended | ||||
| December 31, | ||||
| 2005 | ||||
Net income attributable to common stockholders, as reported |
$ | 45,382 | ||
Add: Stock-based employee compensation expense determined under the
intrinsic value method, net of tax |
228 | |||
Deduct: Stock-based employee compensation expense determined under the
fair value method, net of tax |
(567 | ) | ||
Net income attributable to common stockholders, pro forma |
$ | 45,043 | ||
Net income per common share attributable to common stockholders — basic
|
||||
As reported |
$ | 4.08 | ||
Pro forma |
$ | 4.05 | ||
Net income per common share attributable to common stockholders — diluted
|
||||
As reported |
$ | 4.04 | ||
Pro forma |
$ | 4.01 | ||
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Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment, which establishes the
accounting for transactions in which an entity exchanges its equity instruments or certain
liabilities based upon the entity’s equity instruments for goods or services. The revision to SFAS
No. 123 generally requires that publicly traded companies measure the cost of employee services
received in exchange for an award of equity instruments based on the fair value of the award on the
grant date. That cost 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 Company adopted
SFAS No. 123 (R) effective January 1, 2006 using the modified prospective method and, as such,
results for prior periods have not been restated.
In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes — An
Interpretation of FASB Standard No. 109. FIN No. 48 prescribes a recognition threshold and
measurement attribute for financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return, and also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted the
provisions of FIN No. 48 on January 1, 2007. As a result of the implementation of FIN No. 48, the
Company recorded an increase in gross unrecognized tax benefits of $2,638 and a decrease to
retained earnings and accumulated other comprehensive loss of $1,936 and $94, respectively. It is
expected that the amount of unrecognized tax benefits will change in the next twelve months.
However, the Company does not expect the change to have a significant impact on its results of
operations or financial condition. The Company recognizes accrued interest related to unrecognized
tax benefits and penalties in income tax expense in the consolidated statements of income. As of
January 1, 2007, the Company recorded a liability of $681 for the payment of interest and
penalties.
In September 2006, the FASB issued 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
categories, including a separate reconciliation of the beginning and ending balances for each major
category of assets and liabilities. SFAS No. 157 is 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.
Other than the enhanced disclosures required, the Company does not expect the provisions of SFAS
No. 157 to have a material impact on the Company’s financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans — An amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS
No. 158 requires the recognition of the funded status of a benefit plan in the balance sheet; the
recognition in other comprehensive income of gains or losses and prior service costs or credits
arising during the period but which are not included as components of periodic benefit cost; the
measurement of defined benefit plan assets and obligations as of the balance sheet date; and
disclosure of additional information about the effects on periodic benefit cost for the following
fiscal year arising from delayed recognition of gains and losses in the current period. The Company
adopted SFAS No. 158 as of December 31, 2006. See Note 13 for additional disclosures required by
SFAS No. 158 and the effects of adoption.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS No. 159 permits companies to measure certain financial instruments and
certain other items at fair value. The standard requires that unrealized gains and losses on items
for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007, although earlier adoption is permitted. The
Company does not intend to apply the provisions of SFAS No. 159 to any of its existing financial
assets or liabilities, therefore the provisions of SFAS No. 159 are not expected to have a material
impact on the Company’s financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations which retains the
fundamental requirements in SFAS No. 141, including that the purchase method be used for all
business combinations and for an
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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. The Company is in the process of evaluating the requirements of SFAS No. 141 (R) but expect
only prospective impact on the Company’s financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51. SFAS No. 160 amends Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This standard
defines a noncontrolling interest, sometimes called minority interest, as the portion of equity in
a subsidiary not attributable, directly or indirectly to a parent. SFAS No. 160 requires, among
other items, that a noncontrolling interest be included in the consolidated statement of financial
position within equity separate from the parent’s equity, consolidated net income be reported at
amounts inclusive of both the parent’s and the noncontrolling interest’s shares and, separately,
the amounts of consolidated net income attributable to the parent and the noncontrolling interest
all on the consolidated statement of income. If a subsidiary is deconsolidated, SFAS No. 160
requires any retained noncontrolling equity investment in the former subsidiary be measured at fair
value and a gain or loss to be recognized in net income based on such fair value. SFAS No. 160 is
effective for fiscal years beginning after December 15, 2008. The Company is in the process of
evaluating the requirements of SFAS No. 160 and has not yet determined the impact on the Company’s
financial statements.
Note 3 — Curtailment and Impairment Charges
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 Company’s strategy of optimizing
production at its low-cost facilities and continuing its focus on cost control. The Company had
entered into decisional bargaining with the union representing its Johnstown employees regarding
labor costs at the Johnstown facility, but did not reach an agreement with the union that would
have allowed the Company to continue to operate the facility in a cost-effective way. In December
2007, the Company incurred curtailment and impairment charges of $30,836, which are reported as a
separate line item on the Company’s Consolidated Statements of Income. It is anticipated that
payments for employee termination benefits will be made during 2008, while pension benefits will be
funded through plan assets and future Company contributions to the pension plans. Payments for
postretirement benefits will be made from operating cash flows.
The components of the curtailment and impairment charges for the year ended December 31, 2007, are
as follows:
Pension plan curtailment loss and special termination benefit costs |
$ | 14,478 | ||
Postretirement plan curtailment loss and contractual benefit charges |
13,204 | |||
Contractual employee termination benefits — severance |
2,126 | |||
Contractual employee termination benefits — medical insurance |
78 | |||
Impairment charge for plant building and land |
950 | |||
Total curtailment and impairment charges |
$ | 30,836 | ||
Note 4 — Initial and Secondary Public Offerings
On April 5, 2005, the Company’s registration statement on Form S-1 (Registration No. 333-123384)
was declared effective and, on that same date, the Company filed a registration statement on Form
S-1 pursuant to Rule 462(b) under the Securities Act (Registration No. 333-123875) (collectively,
the “Registration Statement”). Pursuant to the Registration Statement, as amended, the Company
registered 9,775,000 shares of common stock (5,100,000 shares offered by the Company and 4,675,000
shares offered by selling stockholders, including 1,275,000 shares offered by selling stockholders
pursuant to the exercise of the underwriters’ over-allotment option), par value $0.01 per share,
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with an aggregate offering price of $185,725. On April 11, 2005, the Company and the selling
stockholders completed the sale of 9,775,000 shares of common stock to the public at a price of
$19.00 per share and the offering was completed. The Company did not receive any proceeds from the
sale of shares by the selling stockholders. UBS Securities LLC, Jefferies & Company, Inc., CIBC
World Markets Corp. and LaSalle Debt Capital Markets acted as underwriters for the offering. The
stock offering resulted in gross proceeds to the Company of $96,900. Expenses related to the
offering are as follows: $6,783 for underwriting discounts and commissions and $4,811 for other
expenses, for total expenses of $11,594. None of the expenses resulted in direct or indirect
payments to any of the Company’s directors, officers or their associates, to persons owning 10% or
more of the Company’s common stock or to any of the Company’s affiliates. The Company received net
proceeds of approximately $85,306 in the offering.
The proceeds of the offering and available cash were used as follows: $48,361 was used for the
repayment of the Senior Notes, $34,963 was used for payment under the rights to additional
acquisition consideration, $13,000 was used for the redemption of the redeemable preferred stock,
$5,371 was used for the repayment of the term loan, $5,232 was used for the repayment of the
industrial revenue bonds and $900 was used for payments related to the termination of management
services and other agreements. In conjunction with these payments, early termination fees of $110
and a write-off of deferred financing costs of $439 were recorded in April 2005 related to the term
loan repayment. In addition, in April 2005, the Company recorded charges of $766 related to
unamortized discount on the senior notes and $4,617 related to the rights to additional acquisition
consideration.
In September 2005, the Company completed a secondary offering of its common stock whereby the
selling stockholders, including all of the Company’s executive officers and certain of the
Company’s directors, offered and sold 2,626,317 shares (including 342,563 shares following the
exercise of the underwriters’ over-allotment option) at a price of $40.50 per share. The Company
did not sell any shares and did not receive any proceeds from the sale of shares by the selling
stockholders. The Company incurred $834 of expenses in connection with the secondary offering,
which were recognized in the consolidated statement of operations.
Note 5 — Inventories
Inventories consist of the following:
| December 31, | ||||||||
| 2007 | 2006 | |||||||
Work in progress |
$ | 48,088 | $ | 102,515 | ||||
Finished new railcars |
1,757 | 4,128 | ||||||
Total inventories |
$ | 49,845 | $ | 106,643 | ||||
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Note 6 — Property, Plant and Equipment
Property, plant and equipment consists of the following:
| December 31, | ||||||||
| 2007 | 2006 | |||||||
Land |
$ | 701 | $ | 722 | ||||
Buildings and improvements |
20,559 | 24,743 | ||||||
Machinery and equipment |
40,228 | 36,098 | ||||||
Cost of buildings, improvements, machinery and equipment |
60,787 | 60,841 | ||||||
Less: Accumulated depreciation and amortization |
(35,697 | ) | (40,397 | ) | ||||
Buildings, improvements, machinery and equipment net of
accumulated depreciation and amortization |
25,090 | 20,444 | ||||||
Construction in process |
1,130 | 4,739 | ||||||
Total property, plant and equipment |
$ | 26,921 | $ | 25,905 | ||||
Depreciation expense for the years ended December 31, 2007, 2006 and 2005 was $3,320, $4,852 and
$7,220, respectively.
The Company monitors its long-lived assets for impairment indicators on an ongoing basis in
accordance with SFAS No. 144. If impairment indicators exist, the Company performs the required
analysis and records impairment charges in accordance with SFAS No.144. In conducting its
analysis, the Company compares undiscounted cash flows expected to be generated from the long-lived
assets to the related net book values. If assets are found to be impaired, the amount of the
impairment loss is measured by comparing the net book values and the fair values of the long-lived
assets. In December 2007, the Company announced the planned closure of its manufacturing facility
located in Johnstown, Pennsylvania and, as a result it tested long-lived assets at the Johnstown
facility for recoverability using estimated fair values. Fair values were estimated using the cost
approach based on the assumption that the reproduction or replacement cost normally sets the upper
limit of value and the sales comparison approach, which relies on the assumption that value can be
measured by the selling prices of similar assets. Impairment charges of $21 were recorded for land
and $929 for building and improvements during 2007 and are reported in “Curtailment and impairment
charges” in the consolidated statements of income.
Note 7 — Intangible Assets
Intangible assets consist of the following:
| December 31, | ||||||||
| 2007 | 2006 | |||||||
Patents |
$ | 13,097 | $ | 13,097 | ||||
Accumulated amortization |
(8,014 | ) | (7,424 | ) | ||||
Patents, net of accumulated amortization |
$ | 5,083 | $ | 5,673 | ||||
Patents are being amortized on a straight-line method over their remaining legal life from the date
of acquisition. The weighted average remaining life of the Company’s patents is 9 years.
Amortization expense related to patents, which is included in cost of sales, was $590 for each of
the years ended December 31, 2007, 2006 and 2005. The Company estimates amortization expense for
each of the three years in the period ending December 31, 2010 will be approximately $590 and for
each of the two years ending December 31, 2012 will be $586.
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Note 8 — 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 years ended December 31, 2007, 2006
and 2005 are as follows:
| December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Balance at the beginning of the year |
$ | 12,051 | $ | 7,878 | $ | 5,964 | ||||||
Warranties issued during the year |
3,353 | 6,056 | 4,887 | |||||||||
Reductions for payments, costs of repairs and other |
(4,853 | ) | (1,883 | ) | (2,973 | ) | ||||||
Balance at the end of the year |
$ | 10,551 | $ | 12,051 | $ | 7,878 | ||||||
Note 9 — Revolving Credit Facility
On August 24, 2007, the Company entered into a Second Amended and Restated Credit Agreement (the
“Revolving Credit Agreement”) with LaSalle Bank National Association (“LaSalle”) and the lenders
party thereto (collectively, the “Lenders”) amending and restating the terms of the Company’s
revolving credit facility (the “revolving credit facility”). The proceeds of the revolving credit
facility are used to finance the working capital requirements of the Company through direct
borrowings and the issuance of stand-by letters of credit. The Revolving Credit Agreement amends
and restates the Amended and Restated Credit Agreement, dated as of April 11, 2005, by and among
the Company, LaSalle and the lenders party thereto (the “previous credit agreement”). The
Revolving Credit Agreement provides for a $100,000 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 $10,000. The amount available under
the revolving credit facility is based on the lesser of (i) $100,000 or (ii) an amount equal to a
percentage of eligible accounts receivable plus a percentage of eligible finished inventory plus a
percentage of semi-finished inventory. The previous credit agreement provided for a total
revolving credit facility of the lesser of (i) $50,000 or (ii) an amount equal to a percentage of
eligible accounts receivable plus a percentage of eligible finished inventory plus a percentage of
semi-finished inventory with a sub-facility for letters of credit totaling $30,000.
The Revolving Credit Agreement has a term ending on May 31, 2012 and bears interest at a rate of
LIBOR plus an applicable margin of between 0.875% and 1.500% depending on Revolving Loan
Availability (as defined in the Revolving Credit Agreement). The Company is required to pay a
commitment fee of between 0.175% and 0.250% based on Revolving Loan Availability. The previous
credit agreement had a three-year term ending on April 11, 2008 and bore interest at a rate of
LIBOR plus an applicable margin of between 1.75% and 3.00% depending on the Company’s ratio of
consolidated senior debt to consolidated EBITDA (as defined in the previous credit agreement).
Borrowings under the Revolving Credit Agreement are collateralized by substantially all of the
assets of the Company. The Revolving Credit Agreement has both affirmative and negative covenants,
including, without limitation, a minimum fixed charge coverage ratio and limitations on debt,
liens, dividends, investments, acquisitions and capital expenditures. The Revolving Credit
Agreement also provides for customary events of default. As of December 31, 2007, the Company was
in compliance with all covenant requirements under the Revolving Credit Agreement. As of December
31, 2007 and 2006, the Company had no borrowings under the revolving credit facility. Any
borrowings under the revolving credit facility would have bore interest at 6.10%, as of December
31, 2007. The Company had $8,828 and $18,321 in outstanding letters of credit under the letter of
credit sub-facility as of December 31, 2007 and 2006, respectively, and the ability to borrow
$39,517 under the revolving credit facility as of December 31, 2007. Under the revolving credit
facility, the Company’s subsidiaries are permitted to pay dividends and transfer funds to the
Company without restriction.
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Note 10 — Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) consist of the following:
| Pre-Tax | Tax | After-Tax | ||||||||||
Year ended December 31, 2005 |
||||||||||||
Additional minimum pension liability |
$ | (602 | ) | $ | 101 | $ | (501 | ) | ||||
Year ended December 31, 2006 |
||||||||||||
Additional minimum pension liability |
$ | 3,168 | $ | (1,218 | ) | $ | 1,950 | |||||
Adjustment related to initial
application of SFAS No. 158 —
pension liability (See Note 13) |
(12,049 | ) | 4,450 | (7,599 | ) | |||||||
Adjustment related to initial
application of SFAS No. 158 —
postretirement liability (See Note
13) |
(24,685 | ) | 9,116 | (15,569 | ) | |||||||
| $ | (33,566 | ) | $ | 12,348 | $ | (21,218 | ) | |||||
Year ended December 31, 2007 |
||||||||||||
Pension liability activity |
$ | 10,905 | $ | (4,037 | ) | $ | 6,868 | |||||
Postretirement liability activity |
15,954 | (5,905 | ) | 10,049 | ||||||||
| $ | 26,859 | $ | (9,942 | ) | $ | 16,917 | ||||||
The components of accumulated other comprehensive loss consist of the following:
| December 31, | ||||||||
| 2007 | 2006 | |||||||
Unrecognized pension cost, net of tax of $2,524 and $6,561 |
$ | 4,337 | $ | 11,205 | ||||
Unrecognized postretirement cost, net of tax of $3,211 and $9,116 |
5,520 | 15,569 | ||||||
| $ | 9,857 | $ | 26,774 | |||||
Note 11 — Rights to Additional Acquisition Consideration
Under the share purchase agreement (the “Purchase Agreement”) relating to the acquisition of the
Company’s business in 1999 from TTII, the Company was required to pay $20,000 of additional
acquisition consideration plus accreted value (also referred to as the Rights to Additional
Acquisition Consideration) to TTII upon the occurrence of certain events. These events included an
initial public offering satisfying certain conditions, the sale of a majority of the Company’s
assets, the repayment of the borrowings under a prior term loan and the Senior Notes, subject to
certain conditions, and the liquidation or dissolution of the Company. The amount payable upon a
triggering event under the Rights to Additional Acquisition Consideration at redemption was $20,000
plus an accreted value that compounded at a rate of 10% annually, and was $34,089 at December 31,
2004. Subsequent to the closing of the Purchase Agreement, TTII sold its interest in the Rights to
Additional Acquisition Consideration to certain stockholders of the Company, one of which
subsequently sold all of its Rights to Additional Acquisition Consideration to an unrelated third
party (see Note 21). Following the completion of the Company’s initial public offering on April 11,
2005, all amounts due under the Rights to Additional Acquisition Consideration were paid (see Note
4).
Note 12 — Stockholders’ Equity
On April 1, 2005, the Company’s former parent company, also named FreightCar America, Inc., merged
with and into the Company, then a newly formed, wholly owned subsidiary of the former parent
company and then named
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FCA Acquisition Corp. The Company is authorized to issue 50 million shares of common stock with a
par value of $0.01 per share, and 2.5 million shares of preferred stock with a par value of $0.01
per share. As a result of the merger, all of the holders of the issued and outstanding shares of
Class A voting common stock and Class B non-voting common stock of the former parent company
received, in exchange for their shares, such number of shares of the common stock of the Company
equal to the aggregate number of their shares multiplied by 550. The holders of the issued and
outstanding shares of Series A voting preferred stock and Series B non-voting preferred stock of
the former parent company received, in exchange for their shares and on a one-for-one basis, shares
of the Company’s Series A voting preferred stock and Series B non-voting preferred stock with
identical terms (except that the par value of the Series A voting preferred stock and the Series B
non-voting preferred stock was changed from $500 per share to $0.01 per share and the liquidation
preference of the Series A voting preferred stock and the Series B non-voting preferred stock was
changed to include the value of the accrued liquidation preference of the pre-merger shares of
preferred stock). Immediately following the merger, the Company, which was the surviving
corporation in the merger, changed its name to “FreightCar America, Inc.”
Prior to September 22, 2005, the only dividends that the Company had ever paid were the accumulated
dividends on the preferred stock that were paid upon the redemption of the preferred stock on April
11, 2005. On September 22, 2005, the Company began paying a regular quarterly cash dividend to
common stockholders.
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.
Pension benefits that accrued as a result of employee service before June 4, 1999 remained the
responsibility of TTII, the former owner of JAC, FCS, JAIX and JAC Patent (for employee service
during the period October 28, 1991 through June 3, 1999), or Bethlehem Steel Corporation
(“Bethlehem”) (for employee service prior to October 28, 1991), the owner of JAC prior to TTII. The
Company initiated new pension plans for such employees for service subsequent to June 3, 1999,
which essentially provide benefits similar to the former plans.
The Company also provides certain postretirement health care benefits for certain of its retired
salaried and hourly employees. 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.
As discussed in Note 2, the Company adopted SFAS No. 158 as of December 31, 2006. SFAS No. 158
requires that the Company recognize on a prospective basis the funded status of its defined benefit
pension and other postretirement benefit plans on the consolidated balance sheet and recognize as a
component of accumulated other comprehensive income (loss), net of tax, the gains or losses and
prior service costs or credits that arise during the period but are not recognized as components of
net periodic benefit cost. Additional minimum pension liabilities and related intangible assets are
also derecognized upon adoption of the new standard. The adjustments for SFAS No. 158 affected the
Company’s Consolidated Balance Sheet at December 31, 2006 as follows:
Decrease in prepaid pension benefit cost |
$ | (266 | ) | |
Decrease in intangible asset |
(6,099 | ) | ||
Increase in accrued pension benefits |
(5,684 | ) | ||
Increase in accrued postretirement benefits |
(24,685 | ) | ||
Increase in accumulated other comprehensive loss, pretax |
(36,734 | ) | ||
Increase in deferred tax assets |
13,566 | |||
Increase in accumulated other comprehensive loss, net of tax |
$ | (23,168 | ) | |
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Costs of benefits relating to current service for those employees to whom the Company is
responsible to provide benefits are expensed currently. The changes in benefit obligation, change
in plan assets and funded status as of December 31, 2007 and 2006, are as follows:
| Postretirement | ||||||||||||||||
| Pension Benefits | Benefits | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Change in benefit obligation |
||||||||||||||||
Benefit obligation—Beginning of year |
$ | 49,065 | $ | 46,590 | $ | 52,936 | $ | 51,433 | ||||||||
Service cost |
2,229 | 2,386 | 683 | 683 | ||||||||||||
Interest cost |
2,771 | 2,511 | 2,946 | 2,843 | ||||||||||||
Plan amendment |
— | — | — | 106 | ||||||||||||
Plan curtailment |
(54 | ) | — | 40 | — | |||||||||||
Actuarial loss (gain) |
(4,930 | ) | 67 | (3,719 | ) | 969 | ||||||||||
Special termination benefit loss |
8,952 | — | 3,028 | — | ||||||||||||
Benefits paid |
(2,640 | ) | (2,489 | ) | (2,836 | ) | (3,098 | ) | ||||||||
Benefit obligation—End of year |
55,393 | 49,065 | 53,078 | 52,936 | ||||||||||||
Change in plan assets |
||||||||||||||||
Plan assets—Beginning of year |
39,489 | 19,437 | — | — | ||||||||||||
Actual return on plan assets |
2,750 | 3,934 | — | — | ||||||||||||
Employer contributions |
5,373 | 18,607 | 2,836 | 3,098 | ||||||||||||
Benefits paid |
(2,639 | ) | (2,489 | ) | (2,836 | ) | (3,098 | ) | ||||||||
Plan assets at fair value—End of year |
44,973 | 39,489 | — | — | ||||||||||||
Funded status of plans—End of year |
$ | (10,420 | ) | $ | (9,576 | ) | $ | (53,078 | ) | $ | (52,936 | ) | ||||
| Postretirement | ||||||||||||||||
| Pension Benefits | Benefits | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Amounts recognized in the
Consolidated Balance Sheets |
||||||||||||||||
Noncurrent assets |
$ | 265 | $ | — | $ | — | $ | — | ||||||||
Current liabilities |
— | — | (5,188 | ) | (3,481 | ) | ||||||||||
Noncurrent liabilities |
(10,685 | ) | (9,576 | ) | (47,890 | ) | (49,455 | ) | ||||||||
Net amount recognized at December 31 |
$ | (10,420 | ) | $ | (9,576 | ) | $ | (53,078 | ) | $ | (52,936 | ) | ||||
The accumulated benefit obligation for the Company’s defined benefit pension plans was $53,434 and
$43,359 at December 31, 2007 and 2006, respectively.
Amounts recognized in accumulated other comprehensive loss but not yet recognized in earnings at
December 31, 2007 and 2006 are as follows:
| Postretirement | ||||||||||||||||
| Pension Benefits | Benefits | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Net actuarial loss |
$ | 5,972 | $ | 10,708 | $ | 7,142 | $ | 11,235 | ||||||||
Prior service cost |
889 | 7,058 | 1,589 | 13,450 | ||||||||||||
| $ | 6,861 | $ | 17,766 | $ | 8,731 | $ | 24,685 | |||||||||
The estimated net loss and prior service cost for the defined benefit pension plan that will be
amortized from accumulated other comprehensive loss into net periodic benefit cost in 2008 are $27
and $103, respectively. The estimated net loss and prior service cost for the postretirement
benefit plan that will be amortized from accumulated other comprehensive loss into net periodic
benefit cost in 2008 are $162 and $224, respectively. The Company’s decision in December 2007 to
close its manufacturing facility in Johnstown, Pennsylvania significantly affected current and
future employment
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levels and resulted in a decrease in the estimated remaining future service years for the employees
covered by the plans. The decrease in the estimated remaining future service years resulted in plan
curtailments for the defined benefit pension plans and the postretirement benefit plan and caused
the Company to immediately recognize a substantial portion of the net actuarial loss and prior
service cost relating to these plans that had not yet been recognized in earnings. Curtailment
charges of $5,526 and $10,175 were recognized for the Company’s pension and postretirement plans,
respectively during 2007. In addition, the plant closure decision triggered contractual special
pension benefits and contractual termination benefits of $8,952 and $3,028, that were recognized
for the Company’s pension and postretirement plans, respectively during 2007. These pension and
postretirement benefit costs are included in “Curtailment and impairment charges” on the
consolidated statements of income.
Components of net periodic benefit cost for the years ended December 31, 2007, 2006 and 2005 are as
follows:
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
| 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||||||||||||||
Components of net periodic benefit cost |
||||||||||||||||||||||||
Service cost |
$ | 2,229 | $ | 2,386 | $ | 2,243 | $ | 683 | $ | 683 | $ | 729 | ||||||||||||
Interest cost |
2,771 | 2,511 | 2,392 | 2,946 | 2,843 | 2,974 | ||||||||||||||||||
Settlement of labor dispute |
— | — | 388 | — | — | — | ||||||||||||||||||
Expected return on plan assets |
(3,508 | ) | (2,161 | ) | (1,500 | ) | — | — | — | |||||||||||||||
Amortization of unrecognized prior service cost |
712 | 712 | 662 | 1,725 | 1,648 | 1,809 | ||||||||||||||||||
Amortization of unrecognized net loss |
441 | 558 | 525 | 374 | 400 | 338 | ||||||||||||||||||
Curtailment recognition |
5,526 | — | — | 10,176 | — | — | ||||||||||||||||||
Contractual benefit charge |
8,952 | — | — | 3,028 | — | — | ||||||||||||||||||
Total net periodic benefit cost |
$ | 17,123 | $ | 4,006 | $ | 4,710 | $ | 18,932 | $ | 5,574 | $ | 5,850 | ||||||||||||
The (decrease) increase in accumulated other comprehensive loss (pre-tax) for the year ended
December 31, 2007 is as follows:
| Postretirement | ||||||||
| Pension Benefits | Benefits | |||||||
Net actuarial gain |
$ | (4,173 | ) | $ | (3,718 | ) | ||
Amortization of net actuarial gain |
(441 | ) | (374 | ) | ||||
Amortization of prior service cost |
(712 | ) | (1,725 | ) | ||||
Curtailment — prior service cost |
(5,457 | ) | (10,137 | ) | ||||
Curtailment — net actuarial gain |
(122 | ) | — | |||||
Total recognized in accumulated
other comprehensive loss |
$ | (10,905 | ) | $ | (15,954 | ) | ||
The following benefit payments, which reflect expected future service, as appropriate, were
expected to be paid as of December 31, 2007:
| Pension | Postretirement | |||||||
| Benefits | Benefits | |||||||
2008 |
$ | 5,478 | $ | 5,188 | ||||
2009 |
4,997 | 5,335 | ||||||
2010 |
4,859 | 5,271 | ||||||
2011 |
4,696 | 5,176 | ||||||
2012 |
4,531 | 5,005 | ||||||
The Company expects to contribute approximately $6,750 to its pension plans in 2008.
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The assumptions used to determine end of year benefit obligations are shown in the following table:
| Postretirement | ||||||||||||||||
| Pension Benefits | Benefits | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Discount rate |
6.40 | % | 5.90 | % | 6.40 | % | 5.90 | % | ||||||||
Rate of compensation increase |
3.00%-4.00 | % | 3.00%-4.00 | % | ||||||||||||
The assumptions used in the measurement of net periodic cost are shown in the following table:
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
| 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||||||||||||||
Discount rate |
5.90 | % | 5.75 | % | 6.00 | % | 5.90 | % | 5.75 | % | 6.00 | % | ||||||||||||
Expected return on
plan assets |
8.25 | % | 8.25 | % | 8.50 | % | — | — | — | |||||||||||||||
Rate of
compensation
increase |
3.00%-4.00 | % | 3.00%-4.00 | % | 3.00%-4.00 | % | — | — | — | |||||||||||||||
Assumed health care cost trend rates at December 31 are set forth below:
| 2007 | 2006 | 2005 | ||||||||||
Health care cost trend rate assigned for next year |
9.00 | % | 10.00 | % | 11.00 | % | ||||||
Rate to which cost trend is assumed to decline |
5.50 | % | 5.50 | % | 5.00 | % | ||||||
Year the rate reaches the ultimate trend rate |
2014 | 2014 | 2011 | |||||||||
As benefits under these plans have been capped, assumed health care cost trend rates have no effect
on the amounts reported for the health care plans.
The Company’s pension plans’ investment policy, weighted average asset allocations at December 31,
2007 and 2006, and target allocations for 2008, by asset category, are as follows:
| Plan Assets at | Target | |||||||||||
| December 31, | Allocation | |||||||||||
| 2007 | 2006 | 2008 | ||||||||||
Asset Category |
||||||||||||
Equity securities |
72 | % | 72 | % | 70 | % | ||||||
Debt securities |
28 | % | 28 | % | 30 | % | ||||||
| 100 | % | 100 | % | 100 | % | |||||||
The basic goal underlying the pension plan investment policy is to ensure that the assets of the
plans, along with expected plan sponsor contributions, will be invested in a prudent manner to meet
the obligations of the plans as those obligations come due. Investment practices must comply with
the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”) and any other
applicable laws and regulations.
The long term return on assets was estimated based upon historical market performance, expectations
of future market performance for debt and equity securities and the related risks of various
allocations between debt and equity securities. Numerous asset classes with differing expected
rates of return, return volatility and correlations are utilized to reduce risk through
diversification.
The Company also maintains qualified defined contribution plans, which provide benefits to their
employees based on employee contributions, years of service, employee earnings or certain
subsidiary earnings, with discretionary
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contributions allowed. Expenses related to these plans were $1,421,
$1,662 and $1,202 for the years ended December 31, 2007, 2006 and 2005, respectively.
Note 14 — Income Taxes
The provision (benefit) for income taxes for the periods indicated includes current and deferred
components as follows:
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Current taxes |
||||||||||||
Federal |
$ | 21,772 | $ | 62,433 | $ | 15,472 | ||||||
State |
4,789 | 10,529 | 1,473 | |||||||||
| 26,561 | 72,962 | 16,945 | ||||||||||
Deferred taxes |
||||||||||||
Federal |
(10,377 | ) | 1,935 | 4,715 | ||||||||
State |
(1,534 | ) | 633 | 102 | ||||||||
| (11,911 | ) | 2,568 | 4,817 | |||||||||
Interest expense, gross of related tax effects |
193 | |||||||||||
Total |
$ | 14,843 | $ | 75,530 | $ | 21,762 | ||||||
The provision (benefit) for income taxes for the periods indicated differs from the amounts
computed by applying the federal statutory rate as follows:
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Statutory U.S. federal income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income taxes, net of federal tax benefit |
1.9 | % | 4.2 | % | 2.1 | % | ||||||
Valuation allowance |
2.8 | % | (0.7 | )% | (0.5 | )% | ||||||
Goodwill amortization for tax reporting purposes |
(1.4 | )% | (0.3 | )% | (0.6 | )% | ||||||
Deductible interest expense on rights to
additional acquisition consideration |
— | — | (4.5 | )% | ||||||||
Manufacturing deduction |
(3.4 | )% | (1.0 | )% | — | |||||||
Nondeductible expenses |
— | — | 0.5 | % | ||||||||
Other |
1.0 | % | (0.2 | )% | 0.3 | % | ||||||
Effective income tax rate |
35.9 | % | 37.0 | % | 32.3 | % | ||||||
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Deferred income taxes result from temporary differences in the financial and tax basis of assets
and liabilities. Components of deferred tax assets (liabilities) consisted of the following:
| December 31, 2007 | December 31, 2006 | |||||||||||||||
| Description | Assets | Liabilities | Assets | Liabilities | ||||||||||||
Accrued post-retirement and pension benefits-long term |
$ | 22,338 | $ | — | $ | 23,534 | $ | — | ||||||||
Intangible assets |
1,137 | — | 1,817 | — | ||||||||||||
Accrued workers’ compensation costs |
1,083 | — | 988 | — | ||||||||||||
Accrued warranty costs |
5,003 | — | 4,567 | — | ||||||||||||
Accrued bonuses |
57 | — | 195 | — | ||||||||||||
Accrued vacation |
915 | — | 1,165 | — | ||||||||||||
Accrued contingencies |
2,784 | — | — | — | ||||||||||||
Accrued severance |
787 | — | — | — | ||||||||||||
Inventory valuation |
1,637 | — | 766 | — | ||||||||||||
Property, plant and equipment |
— | (984 | ) | — | (939 | ) | ||||||||||
State net operating loss carryforwards |
1,875 | — | 1,478 | — | ||||||||||||
Reserve on loss contract |
— | — | 711 | — | ||||||||||||
Stock compensation expense |
920 | — | 497 | — | ||||||||||||
Other |
588 | — | — | (441 | ) | |||||||||||
| 39,124 | (984 | ) | 35,718 | (1,380 | ) | |||||||||||
Valuation allowance |
(3,585 | ) | — | (2,921 | ) | — | ||||||||||
Deferred tax assets (liabilities) |
$ | 35,539 | $ | (984 | ) | $ | 32,797 | $ | (1,380 | ) | ||||||
Increase (decrease) in valuation allowance |
$ | 664 | $ | (770 | ) | |||||||||||
In the consolidated balance sheets, these deferred tax assets and liabilities are classified as
current or noncurrent, based on the classification of the related asset or liability for financial
reporting. A deferred tax asset or liability that is not related to an asset or liability for
financial reporting, including deferred tax assets related to carryforwards, is classified
according to the expected reversal date of the temporary differences as of the end of the year. A
valuation allowance is provided when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. A valuation allowance of $3,585 and $2,921 has been
recorded at December 31, 2007 and 2006, respectively, as management concluded it was more likely
than not that certain net Pennsylvania deferred tax assets would not be realized. In addition, the
Company had Pennsylvania net operating loss carryforwards of $28,871, which will expire between
2021 and 2026.
As a result of the implementation of FIN No. 48, the Company recorded an increase in gross
unrecognized tax benefits of $2,638 and a decrease to retained earnings and accumulated other
comprehensive loss of $1,936 and $94, respectively. As of January 1, 2007, the Company recorded a
liability of $681 for the payment of interest and penalties. Changes in the liability for
unrecognized tax benefits following FIN No. 48 adoption for the year ended December 31, 2007 were
as follows:
| 2007 | ||||
Beginning of year balance |
$ | 2,638 | ||
Increases in prior period tax positions |
— | |||
Decreases in prior period tax positions |
(80 | ) | ||
Increases in current period tax positions |
263 | |||
Settlements |
— | |||
End of year balance |
$ | 2,821 | ||
The total estimated unrecognized tax benefit that, if recognized, would affect the Company’s
effective tax rate was approximately $2,573. It is expected that the amount of unrecognized tax
benefits will change in the next twelve months. However, the Company does not expect the change to
have a significant impact on its results of operations or financial condition. For the year ended
December 31, 2007, the Company’s income tax provision included $117 of expense (net of a federal tax benefit of $70) related to
interest, which increased the balance of accrued interest to $868 at December 31, 2007.
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The Company, and/or one of its subsidiaries, files income tax returns with the U.S. Federal
government and in various state jurisdictions. A summary of tax years that remain subject to
examination is as follows:
| Earliest Year | ||||
| Open To | ||||
| Jurisdiction | Examination | |||
U.S. Federal |
2003 | |||
States: |
||||
Pennsylvania |
2003 | |||
Virginia |
2005 | |||
Illinois |
2003 | |||
Note 15 — Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment, which establishes the
accounting for transactions in which an entity exchanges its equity instruments or certain
liabilities based upon the entity’s equity instruments for goods or services. The revision to SFAS
No. 123 generally requires that publicly traded companies measure the cost of employee services
received in exchange for an award of equity instruments based on the fair value of the award on the
grant date. That cost 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 Company adopted
SFAS No. 123 (R) effective January 1, 2006 using the modified prospective method and, as such,
results for prior periods have not been restated.
On April 11, 2005, the Company adopted a stock option plan titled “The 2005 Long-Term Incentive
Plan” (the “Plan”). The Plan is intended to provide incentives to attract, retain and motivate
employees and directors. The Company believes that such awards better align the interests of its
employees and directors with those of its stockholders. The Plan provides for the grant to eligible
persons of stock options, share appreciation rights, or SARs, restricted shares, restricted share
units, or RSUs, performance shares, performance units, dividend equivalents and other share-based
awards, referred to collectively as the awards. Option awards generally vest based on one to three
years of service and have 10 year contractual terms. Share awards generally vest over one to three
years. Certain option and share awards provide for accelerated vesting if there is a change in
control (as defined in the Plan). The Plan was effective April 11, 2005 and will terminate as to
future awards on April 11, 2015. Under the Plan, 659,616 shares of common stock have been reserved
for issuance, of which, 265,627 were available for issuance at December 31, 2007. Prior to January
1, 2006, the Company accounted for the Plan under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations.
Stock-based compensation expense of $2,804, $2,130 and $358 is included within selling, general and
administrative expense for the years ended December 31, 2007, 2006 and 2005, respectively. The
total income tax benefit recognized on the income statement for share-based compensation
arrangements was $1,049, $787 and $130 for the years ended December 31, 2007, 2006 and 2005,
respectively.
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option valuation model. No stock options were issued in 2007 and 2006. The following assumptions
were used to value the 2005 stock options: expected lives of the options ranging between 5.5 and
6.5 years, expected volatility of 35%, risk-free interest rates ranging between 4.17% and 4.24% and
an expected dividend yield of 0.5%. Expected life in years is determined by using the simplified
method allowed by the Securities and Exchange Commission in accordance with Staff Accounting
Bulletin No. 107. Expected volatility is based on the historical volatility of stock for comparable
public companies and the implied volatility is derived from current publicly traded call option
prices of comparable public companies. The risk-free interest rate is based on the U.S. Treasury
bond rate for the expected life of the option. The expected dividend yield is based on the latest
annualized dividend rate and the current market price of the underlying common stock.
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Stock Option Activity
A summary of the Company’s stock options activity and related information at December 31, 2007 and
2006, and changes during the years then ended is presented below:
| December 31, | ||||||||||||||||
| 2007 | 2006 | |||||||||||||||
| Weighted- | Weighted- | |||||||||||||||
| Average | Average | |||||||||||||||
| Exercise | Exercise | |||||||||||||||
| Options | Price | Options | Price | |||||||||||||
| Outstanding | (per share) | Outstanding | (per share) | |||||||||||||
Outstanding at the beginning of the year |
229,872 | $ | 20.34 | 339,808 | $ | 19.91 | ||||||||||
Granted |
— | — | ||||||||||||||
Exercised |
(109,936 | ) | 19.00 | (109,936 | ) | 19.00 | ||||||||||
Forfeited or expired |
(54,968 | ) | 19.00 | — | ||||||||||||
Outstanding at the end of the
year |
64,968 | $ | 23.76 | 229,872 | $ | 20.34 | ||||||||||
Exercisable at the end of the year |
6,666 | $ | 49.90 | 3,333 | $ | 49.90 | ||||||||||
A summary of the Company’s stock options outstanding as of December 31, 2007 is presented below:
| Weighted- | ||||||||||||||||
| Average | Weighted- | |||||||||||||||
| Remaining | Average | |||||||||||||||
| Contractual | Exercise | Aggregate | ||||||||||||||
| Options | Term | Price | Intrinsic | |||||||||||||
| Outstanding | (in years) | (per share) | Value | |||||||||||||
Options outstanding |
64,968 | 7.4 | $ | 23.76 | $ | 892 | ||||||||||
Vested or expected to vest |
64,968 | 7.4 | $ | 23.76 | $ | 892 | ||||||||||
Options exercisable |
6,666 | 7.9 | $ | 49.90 | — | |||||||||||
The total intrinsic value of stock options exercised during the years ended December 31, 2007 and
2006, was $3,193 and $4,926, respectively. The cash received from exercise of stock option awards
was $2,089 during each of the years ended December 31, 2007 and 2006. The actual tax benefit
realized for the tax deductions from exercise of the stock option awards was $1,270 and $1,951 for
the years ended December 31, 2007 and 2006, respectively, of which $835 and $1,734, respectively
was recorded to additional paid in capital as excess tax benefit from stock-based compensation. As
of December 31, 2007, there was $206 of total unrecognized compensation expense related to
nonvested options, which will be recognized over the average remaining requisite service period of
0.4 years.
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Nonvested Stock Activity
A summary of the Company’s nonvested shares as of December 31, 2007 and 2006, and changes during
the years then ended is presented below:
| December 31, | ||||||||||||||||
| 2007 | 2006 | |||||||||||||||
| Weighted- | Weighted- | |||||||||||||||
| Average | Average | |||||||||||||||
| Grant Date | Grant Date | |||||||||||||||
| Fair Value | Fair Value | |||||||||||||||
| Shares | (per share) | Shares | (per share) | |||||||||||||
Nonvested at the beginning of the
year |
25,021 | $ | 51.53 | 37,500 | $ | 49.90 | ||||||||||
Granted |
72,940 | 53.85 | 3,542 | 62.31 | ||||||||||||
Vested |
(12,442 | ) | 53.18 | (13,854 | ) | 50.13 | ||||||||||
Forfeited or expired |
(2,666 | ) | 49.90 | (2,167 | ) | 49.90 | ||||||||||
Nonvested at the end of the year |
82,853 | $ | 53.38 | 25,021 | $ | 51.53 | ||||||||||
Expected to vest |
82,853 | $ | 53.38 | 24,021 | $ | 51.60 | ||||||||||
The fair value of stock awards vested during the years ended December 31, 2007 and 2006, was $600
and $911, respectively, based on value at vesting date. The actual tax benefit realized for the tax
deductions from vesting of the stock awards was $239 and $361 for the years ended December 31, 2007
and 2006, respectively. For the year ended December 31, 2007, the actual tax benefit realized for
the tax deductions from vesting of the stock awards reduced additional paid in capital as excess
tax benefit from stock-based compensation by $35. For the year ended December 31, 2006, the actual
tax benefit realized for the tax deductions from vesting of the stock awards of $97 was recorded to
additional paid in capital as excess tax benefit from stock-based compensation. As of December 31,
2007, there was $2,630 of total unrecognized compensation expense related to nonvested stock
awards, which will be recognized over the average remaining requisite service period of 1.8 years.
Note 16 — Risks and Contingencies
The Company is involved in various warranty and repair claims and related threatened and pending
legal proceedings with its customers in the normal course of business. In the opinion of
management, the Company’s potential losses in excess of the accrued warranty provisions, if any,
are not expected to be material to the Company’s financial condition, results of operations or cash
flows.
The Company relies upon third-party suppliers for railcar heavy castings, wheels and other
components for its railcars. In particular, it purchases a substantial percentage of its railcar
heavy castings and wheels from subsidiaries of one entity. The Company also relies upon a single
supplier to manufacture all of its cold-rolled center sills for its railcars. Any inability by
these suppliers to provide the Company with components for its railcars, any significant decline in
the quality of these components or any failure of these suppliers to meet the Company’s planned
requirements for such components may have a material adverse impact on the Company’s financial
condition and results of operations. While the Company believes that it could secure alternative
manufacturing sources for these components, the Company may incur substantial delays and
significant expense in doing so, the quality and reliability of these alternative sources may not
be the same and the Company’s operating results may be significantly affected.
On August 15, 2007, a lawsuit was filed against the Company in the U.S. District Court for the
Western District of Pennsylvania by Samuel W. Pollak, Jr. and Robert A. Hayden, Jr. (subsequently
amended to Kenneth J. Sowers, Anthony J. Zanghi and Robert A. Hayden, Jr.), on behalf of themselves
and others similarly situated. The plaintiffs are employees at the Company’s Johnstown,
Pennsylvania manufacturing facility and allege that they and other workers at the facility were
laid off by the Company to prevent them from becoming eligible for certain retirement benefits, in
violation of federal law. The lawsuit seeks, among other things, an injunction requiring the
Company to return the laid-off employees to work. On January 11, 2008, the District Court issued a
preliminary injunction
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directing the Company to reinstate certain of the laid-off employees for pension purposes, pending
further proceedings in the lawsuit. The Company has appealed the District Court’s order to the
U.S. Court of Appeals for the Third Circuit and has asked the District Court to stay the
preliminary injunction pending the appeal. On February 11, 2008, the District Court denied the
Company’s request to stay the preliminary injunction, but on March 4, 2008 the Court of Appeals
granted a stay of the preliminary injunction pending the appeal. The Court of Appeals order says
that while the appeal is pending, the Company cannot take any action, including closing the
Johnstown plant, that would preclude the plaintiffs from qualifying for the pensions at issue in
the lawsuit. The Company disputes the plaintiffs’ allegations in this lawsuit and intends to
vigorously defend itself against the plaintiffs’ claims. The ultimate outcome of this lawsuit
cannot be determined at this time, and management currently is unable to assess whether its
resolution would have a material adverse effect on the Company’s financial condition, results of
operations or cash flows.
On April 1, 2007, the United Steelworkers of America (the “USWA”) filed a grievance (No. 07 054) on
behalf of certain workers at the Company’s Johnstown manufacturing facility, alleging that the
Company had violated the collective bargaining agreement (the “CBA”). Under the CBA, until May 15,
2008 the Company is to provide at least 40 hours of work per week to employees with 20 or more
years of service. The Company has provided such work to all employees with 20 or more years of
continuous service. In the grievance proceeding, the USWA contends that the requirement applies to
workers with at least 20 years of total service, including periods of employment prior to a break
in their service. The USWA seeks reinstatement or a make-whole remedy, including reimbursement of
lost wages and benefits for all affected employees through the term of the CBA, which ends May 15,
2008. Arbitration hearings were conducted on October 5, 2007 and December 5, 2007, and the parties
are scheduled to file briefs on March 11, 2008. The ultimate outcome of this grievance proceeding
cannot be determined at this time, and management currently is unable to assess whether its
resolution would have a material adverse effect on the Company’s financial condition, results of
operations or cash flows.
In addition to the foregoing, 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. Commercial disputes during 2007 included a contract dispute with a
component parts supplier. 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 Company’s financial condition, future results of
operations or cash flows.
On a quarterly basis, the Company evaluates the potential outcome of all significant contingencies
utilizing guidance provided in FASB Statement No. 5, Accounting for Contingencies. As required by
FASB 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 Company’s financial statements indicates that in management’s 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. During the fourth quarter of 2007, the Company recorded contingency losses of $3,884,
related to all the above matters which are reported in the Company’s Consolidated Statements of
Income in “Selling, general and administrative expense”.
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Note 17 — Other Commitments
The Company leases certain property and equipment under long-term operating leases expiring at
various dates through 2016. The leases generally contain specific renewal or purchase options at
lease-end at the then fair market amounts.
Future minimum lease payments at December 31, 2007 are as follows:
2008 |
$ | 1,856 | ||
2009 |
1,758 | |||
2010 |
2,003 | |||
2011 |
2,040 | |||
2012 |
2,082 | |||
Thereafter |
4,448 | |||
| $ | 14,187 | |||
The Company is liable for maintenance, insurance and similar costs under most of its leases and
such costs are not included in the future minimum lease payments. Total rental expense for the
years ended December 31, 2007, 2006 and 2005 was approximately $2,156, $1,894 and $1,701,
respectively.
The Company has aluminum purchase commitments, which are non-cancelable agreements to purchase
fixed amounts of materials used in the manufacturing process. Purchase commitments are made at a
fixed price and are typically entered into after a customer places an order for railcars. At
December 31, 2007, the Company had aluminum purchase commitments of $10,417 for 2008.
The Company has wheel and axle purchase commitments consisting of a non-cancelable agreement with
one of its suppliers to purchase materials used in the manufacturing process. The Company has
center sill purchase commitments consisting of a non-cancelable agreement with one of its suppliers
to purchase center sills used in the manufacturing process. The estimated amounts may vary based
on the actual quantities and price. At December 31, 2007, the Company had wheel and axle purchase
commitments of $17,620, $35,884, $36,880 and $7,302 for 2008, 2009, 2010 and 2011, respectively,
and center sill purchase commitments of $4,769, $5,062, $5,061, $5,061 and $3,796 for 2008, 2009,
2010, 2011 and 2012, respectively.
The Company has employment agreements with certain members of management which provide for base
compensation, bonus, incentive compensation, employee benefits and severance payments under certain
circumstances. The employment agreements generally have terms that range between two and three
years and automatically extend for one-year periods until terminated prior to the end of the term
by either party upon 90 days notice. Annual base compensation for the executives with employment
agreements ranges between $221 and $550. Certain of the executives are entitled to participate in
management incentive plans and other benefits as made available to the Company’s executives.
See Note 21 regarding management, deferred financing and consulting fees that the Company has paid
and continues to pay to certain of its stockholders.
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Note 18 — Earnings Per Share
The weighted average common shares outstanding are computed as follows:
| Year Ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
Weighted average common shares
outstanding |
12,115,712 | 12,586,889 | 11,135,440 | |||||||||
Dilutive effect of employee
stock options and restricted
share awards |
73,189 | 198,126 | 98,635 | |||||||||
Weighted average diluted common
shares outstanding |
12,188,901 | 12,785,015 | 11,234,075 | |||||||||
For the years ended December 31, 2007 and 2005, 70,940 and 10,000 shares, respectively, were not
included in the weighted average common shares outstanding calculation as they were anti-dilutive.
No shares were anti-dilutive for the year ended December 31, 2006.
Note 19 — Operating Segment and Concentration of Sales
The Company’s operations consist of a single reporting segment. The Company’s sales include new
railcars, used railcars, leasing and other. The following table sets forth the Company’s sales
resulting from new railcars, used railcars, leasing and other for the periods indicated below:
| Year ended December 31, | ||||||||||||
| 2007 | 2006 | 2005 | ||||||||||
New railcar sales |
$ | 800,542 | $ | 1,435,391 | $ | 911,139 | ||||||
Used railcar sales |
5,928 | — | 6,884 | |||||||||
Leasing revenues |
39 | 222 | 55 | |||||||||
Other sales |
10,516 | 9,187 | 9,109 | |||||||||
| $ | 817,025 | $ | 1,444,800 | $ | 927,187 | |||||||
Due to the nature of its operations, the Company is subject to significant concentration of risks
related to business with a few customers. Sales to the Company’s top three customers accounted for
15%, 11% and 11%, respectively, of revenues for the year ended December 31, 2007. Sales to the
Company’s top three customers accounted for 12%, 11% and 9%, respectively, of revenues for the year
ended December 31, 2006. Sales to the Company’s top three customers accounted for 16%, 14% and 8%,
respectively, of revenues for the year ended December 31, 2005.
Note 20 — Labor Agreements
A collective bargaining agreement at one of the Company’s facilities covers approximately 10% and
27% of the Company’s active labor force at December 31, 2007 and 2006, respectively, under an
agreement that expires on May 15, 2008. In December 2007, the Company announced that it planned to
close this manufacturing facility located in Johnstown, Pennnsylvania. See Note 3 Curtailment and
Impairment Charges for a description of these actions and Note 15 on related litigation with the
Johnstown union.
An additional collective bargaining agreement at a different facility covers approximately 35% and
28% of the Company’s active labor force at December 31, 2007 and 2006, respectively, under an
agreement that expires in October 2008.
An additional collective bargaining agreement at a different facility covers approximately 7% and
4% of the Company’s active labor force at December 31, 2007 and 2006, respectively, and would have
covered approximately
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5% of the Company’s active employees if it had been in place at December 31, 2005. The agreement
was ratified on February 1, 2006 and expires on January 31, 2011.
Note 21 — Related Party Transactions
In June 1999, the Company and all of its direct and indirect subsidiaries entered into a management
agreement with a stockholder who owned 17% of the outstanding shares of the Company’s common stock
immediately prior to our initial public offering, which provides that he will provide general
oversight and supervision of the Company’s business and that of its subsidiaries and, upon request,
evaluate the long-range corporate and strategic plans, general financial operation and performance
of the Company’s subsidiaries and strategies for their capitalization. In consideration of these
management services, the Company and two of its subsidiaries, JAC Intermedco, Inc. and JAC
Operations, Inc., agreed to pay the stockholder an aggregate base fee of $350 per year, payable
monthly.
Before becoming public in 2005 the Company terminated certain agreements and the Company paid a
total of $900 in connection with the termination of these agreements.
In June 1999, the Company and certain of its subsidiaries entered into a consulting agreement with
one of the Company’s directors, which provides that he will provide the Company with consulting
services on all matters relating to the Company’s business and that of the Company’s subsidiaries
and will serve as a member of the Company’s board of directors. The agreement provides for a
consulting fee of $50 per year. Payments for these services totaled $50 for each of the years ended
December 31, 2007, 2006 and 2005. This agreement will expire in April 2008.
Note 22 — Subsequent Events
In January 2008, the Company announced that it had entered into a joint venture with Titagarh
Wagons Limited of Kolkata, India to develop freight railcars for the Indian market. Under the
terms of the joint venture agreement, FreightCar America and Titagarh will initially develop
prototype cars based on FreightCar America’s designs and assess the market opportunity in India.
If the initial stage is successful and market conditions are
favorable, then it is expected that the joint venture company
will begin railcar production in India beginning in 2009 using manufacturing methods that FreightCar America
has developed.
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Note 23 — Selected Quarterly Financial Data (Unaudited)
Quarterly financial data is as follows:
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| (in thousands except for share and per share data) | ||||||||||||||||
2007 |
||||||||||||||||
Sales |
$ | 322,451 | $ | 195,360 | $ | 162,112 | $ | 137,102 | ||||||||
Gross profit |
44,133 | 24,693 | 19,398 | 15,140 | ||||||||||||
Net income
(loss)
attributable
to common
stockholders
(1) |
22,952 | 11,453 | 8,681 | (16,618 | ) | |||||||||||
Net income
(loss) per
common
share
attributable
to common
stockholders
—basic
(1) |
1.82 | 0.94 | 0.73 | (1.42 | ) | |||||||||||
Net income
(loss) per
common
share
attributable
to common
stockholders
—diluted
(1) |
$ | 1.80 | $ | 0.93 | $ | 0.73 | $ | (1.42 | ) | |||||||
2006 |
||||||||||||||||
Sales |
$ | 292,793 | $ | 365,417 | $ | 395,759 | $ | 390,831 | ||||||||
Gross profit |
41,134 | 65,593 | 65,217 | 61,507 | ||||||||||||
Net income
attributable
to common
stockholders |
21,373 | 36,601 | 36,794 | 33,965 | ||||||||||||
Net income
per common
share
attributable
to common
stockholders
—basic |
1.71 | 2.91 | 2.92 | 2.69 | ||||||||||||
Net income
per common
share
attributable
to common
stockholders
—diluted |
$ | 1.67 | $ | 2.86 | $ | 2.88 | $ | 2.65 | ||||||||
| (1) | Results for the fourth quarter 2007 include curtailment and impairment charges of $30.8 million (See Note 3 Curtailment and Impairment Charges for a description of these actions). |
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. 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, our 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 Exchange Act) as of
the end of the period covered by this annual report on Form 10-K (the “Evaluation Date”). Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of
the Evaluation Date, our disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission’s rules and forms.
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Changes In Internal Controls
There has been no change in our internal control over financial reporting during the last fiscal
quarter that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
See Management’s Report on Internal Control Over Financial Reporting in Item 8 of this Form 10-K
See Report of Independent Registered Public Accounting Firm in Item 8 of this Form 10-K
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information required to be disclosed by this item is hereby incorporated by reference to the
information under the captions “Board of Directors,” “Stock Ownership,” “Section 16(a) Beneficial
Ownership Reporting Compliance” and “Executive Compensation” in our definitive Proxy Statement to
be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the
Securities and Exchange Commission within 120 days after the end of our fiscal year ended December
31, 2007.
Item 11. Executive Compensation.
Information required to be disclosed by this item is hereby incorporated by reference to the
information under the captions “Executive Compensation”, “Board of Directors”, “Compensation
Discussion and Analysis” and “Director Compensation for the Year Ended December 31, 2007” in our
definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is
anticipated to be filed with the Securities and Exchange Commission within 120 days after the end
of our fiscal year ended December 31, 2007.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Information required to be disclosed by this item is hereby incorporated by reference to the
information under the captions “Stock Ownership” and “Equity Compensation Plan Information” in our
definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is
anticipated to be filed with the Securities and Exchange Commission within 120 days after the end
of our fiscal year ended December 31, 2007.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required to be disclosed by this item is hereby incorporated by reference to the
information under the captions “Certain Transactions” and “Board of Directors” in our definitive
Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be
filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year
ended December 31, 2007.
Item 14. Principal Accounting Fees and Services.
Information required to be disclosed by this item is hereby incorporated by reference to the
information under the caption “Fees of Independent Registered Public Accounting Firm and Audit
Committee Report” in our definitive Proxy Statement to be filed pursuant to Regulation 14A, which
Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120
days of our fiscal year ended December 31, 2007.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
Exhibits
| (a) | Documents filed as part of this report: |
The following financial statements are included in this Form10-K:
1. Consolidated Financial Statements of FreightCar America, Inc.
Management’s Report on Internal Control Over Financial Reporting.
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of December 31, 2007 and 2006.
Consolidated Statements of Income for the years ended December 31, 2007, 2006 and
2005.
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended
December 31, 2007, 2006 and 2005.
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006
and 2005.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedule
The following financial statement schedule is a part of this Form 10-K and should be read in
conjunction with our audited consolidated financial statements.
Schedule II — Valuation and Qualifying Accounts
All other financial statement schedules are omitted because such schedules are not required
or the information required has been presented in the aforementioned financial statements.
3. The exhibits listed on the “Exhibit Index” to this Form 10-K are filed with this Form 10-K or
incorporated by reference as set forth below.
| (b) | The exhibits listed on the “Exhibit Index” to this Form 10-K are filed with this Form 10-K or incorporated by reference as set forth below. | |
| (c) | Additional Financial Statement Schedules |
None.
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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: March 12, 2008 | By: | /s/ Christian Ragot | ||
| Christian Ragot, President and | ||||
| Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
| Signature | Title | Date | ||
| /s/ Christian Ragot
|
President and Chief
Executive Officer (principal executive officer) and Director |
March 12, 2008 | ||
| /s/ Kevin P. Bagby
|
Vice President, Finance and Chief Financial Officer (principal financial officer and principal accounting officer) | March 12, 2008 | ||
| /s/ Thomas M. Fitzpatrick
|
Chairman of the Board and Director | March 12, 2008 | ||
| /s/ James D. Cirar
|
Director | March 12, 2008 | ||
| /s/ William D. Gehl
|
Director | March 12, 2008 | ||
| /s/ Thomas A. Madden
|
Director | March 12, 2008 | ||
| /s/ S. Carl Soderstrom
|
Director | March 12, 2008 | ||
| /s/ Robert N. Tidball
|
Director | March 12, 2008 | ||
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FreightCar America, Inc. and Subsidiaries
Schedule II — Valuation and Qualifying Accounts
For the Years Ended December 31, 2007, 2006 and 2005
(in thousands)
For the Years Ended December 31, 2007, 2006 and 2005
(in thousands)
| Accounts Charged Off | ||||||||||||||||
| and Recoveries of | ||||||||||||||||
| Balance at | Additions Charged to | Amounts Previously | ||||||||||||||
| Beginning of Period | Costs and Expenses | Written Off | Balance at End of Period | |||||||||||||
Year Ended December 31,
2007 |
||||||||||||||||
Allowance for
doubtful
accounts |
$ | 191 | $ | 47 | $ | (15 | ) | $ | 223 | |||||||
Deferred tax
assets valuation
allowance |
2,921 | 664 | — | 3,585 | ||||||||||||
Inventory reserve |
— | 1,951 | $ | (774 | ) | 1,177 | ||||||||||
Year Ended December 31,
2006 |
||||||||||||||||
Allowance for
doubtful
accounts |
$ | 115 | $ | 79 | $ | (3 | ) | $ | 191 | |||||||
Deferred tax
assets valuation
allowance |
3,691 | — | (770 | ) | 2,921 | |||||||||||
Year Ended December 31,
2005 |
||||||||||||||||
Allowance for
doubtful
accounts |
$ | 116 | $ | 36 | $ | (37 | ) | $ | 115 | |||||||
Deferred tax
assets valuation
allowance |
3,795 | — | (104 | ) | 3,691 | |||||||||||
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Table of Contents
EXHIBIT INDEX
| 3.1 | Certificate of Ownership and Merger of FreightCar America, Inc. into
FCA Acquisition Corp., as amended (incorporated by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with
the Commission on September 7, 2006). |
|||
| 3.2 | Third Amended and Restated By-laws of FreightCar America, Inc.
(incorporated by reference to Exhibit 3.1 to the Company’s Current
Report filed on Form 8-K filed with the Commission on September 28,
2007). |
|||
| 4.1 | Form of Registration Rights Agreement, by and among FreightCar
America, Inc., Hancock Mezzanine Partners, L.P., John Hancock Life
Insurance Company, Caravelle Investment Fund, L.L.C., Trimaran
Investments II, L.L.C., Camillo M. Santomero, III, and the investors
listed on Exhibit A attached thereto (incorporated by reference to
Exhibit 4.3 to Registration Statement Nos. 333-123384 and 333-123875
filed with the Commission on April 4, 2005). |
|||
| 10.1 | Employment Agreement, dated as of November 22, 2004, between JAC
Holdings International, Inc. and Kevin P. Bagby (incorporated by
reference to Exhibit 10.2 to Registration Statement Nos. 333-123384
and 333-123875 filed with the Commission on March 17, 2005). |
|||
| 10.2 | Amendment to Employment Agreement, dated as of December 21, 2004,
between FreightCar America, Inc. and Kevin P. Bagby (incorporated by
reference to Exhibit 10.3 to Registration Statement Nos. 333-123384
and 333-123875 filed with the Commission on March 17, 2005). |
|||
| 10.3 | Employment Agreement, dated as of December 20, 2004, between
FreightCar America, Inc. and Edward J. Whalen (incorporated by
reference to Exhibit 10.4 to Registration Statement Nos. 333-123384
and 333-123875 filed with the Commission on March 17, 2005). |
|||
| 10.4 | Employment Agreement, dated as of December 20, 2004, between
FreightCar America, Inc. and Glen T. Karan (incorporated by reference
to Exhibit 10.5 to Registration Statement Nos. 333-123384 and
333-123875 filed with the Commission on March 17, 2005). |
|||
| 10.5 | Employment Agreement, dated as of January 3, 2007, between FreightCar
America, Inc. and Christian Ragot (incorporated by reference to
Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2006 filed with the Commission on March 13, 2007). |
|||
| 10.6 | Employment Agreement, dated as of May 1, 2007, between FreightCar
America, Inc. and Charles Magolske. |
|||
| 10.7 | 2005 Long-Term Incentive Plan and Form of Option Agreement
(incorporated by reference to Exhibit 10.6 to Registration Statement
Nos. 333-123384 and 333-123875 filed with the Commission on March
17, 2005). |
|||
| 10.8 | First Amendment to the FreightCar America, Inc. 2005 Long-Term
Incentive Plan (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed with the Commission on
December 19, 2006). |
|||
| 10.9 | Second Amendment to the FreightCar America, Inc. 2005 Long-Term
Incentive Plan (incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10Q for the quarterly period
ended March 31, 2007 filed with the Commission on May 9, 2007). |
|||
| 10.10 | Form of Restricted Share Award Agreement for the Company’s employees
(incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed with the Commission on December 12, 2005). |
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Table of Contents
| 10.11 | Form of Restricted Share Award Agreement for the Company’s
independent directors (incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed with the Commission
on January 27, 2006). |
|||
| 10.12 | Form of Restricted Share Award Agreement for the Company’s employees
(incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed with the Commission on January 15, 2008). |
|||
| 10.13 | Form of Stock Option Award Agreement for the Company’s employees
(incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed with the Commission on January 15, 2008). |
|||
| 10.14 | Lease Agreement, dated as of December 20, 2004, by and between
Norfolk Southern Railway Company and Johnstown America Corporation
(the “Lease Agreement”) (incorporated by reference to Exhibit 10.27
to Registration Statement Nos. 333-123384 and 333-123875 filed with
the Commission on April 4, 2005).* |
|||
| 10.15 | Amendment to the Lease Agreement, dated as of December 1, 2005
(incorporated by reference to Exhibit 10.11 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2005).* |
|||
| 10.16 | Second Amended and Restated Credit Agreement, dated as of August 24,
2007, by and among Johnstown America Corporation, Freight Car
Services, Inc., JAC Operations, Inc., JAIX Leasing Company and
FreightCar Roanoke, Inc. as the Co-Borrowers, the lenders party
thereto, LaSalle Bank National Association, as Administrative Agent
and Arranger, and National City Business Credit, Inc., as Collateral
Agent (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the Commission on August 28,
2007). |
|||
| 10.17 | Management Incentive Plan of Johnstown America Corporation
(incorporated by reference to Exhibit 10.29 to Registration
Statement Nos. 333-123384 and 333-123875 filed with the Commission
on March 17, 2005). |
|||
| 10.18 | Consulting Agreement, dated as of June 3, 1999, between Rabbit Hill
Holdings, Inc., Johnstown America Corporation, Freight Car Services,
Inc., JAIX Leasing Company and JAC Patent Company and James D. Cirar
(incorporated by reference to Exhibit 10.10 to Registration
Statement Nos. 333-123384 and 333-123875 filed with the Commission
on March 17, 2005). |
|||
| 10.19 | Amendment to Consulting Agreement, dated March 7, 2005, between
FreightCar America, Inc. and James D. Cirar (incorporated by
reference to Exhibit 10.10.1 to Registration Statement Nos.
333-123384 and 333-123875 filed with the Commission on March 17,
2005). |
|||
| 10.20 | Form of Letter of Resignation (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed with the
Commission on December 19, 2006). |
|||
| 10.21 | Letter of Resignation (incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed with the Commission
on January 29, 2007). |
|||
| 10.22 | Agreement, dated as of January 25, 2007 between FreightCar America,
Inc. and Edward J. Whalen (incorporated by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K filed with the
Commission on January 25, 2007). |
|||
| 10.23 | Agreement, dated as of January 25, 2007 between FreightCar America,
Inc. and Kevin P. Bagby (incorporated by reference to Exhibit 10.2
to the Company’s Current Report on Form 8-K filed with the
Commission on January 25, 2007). |
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| 10.24 | Agreement, dated as of March 8, 2007 between FreightCar America,
Inc. and Kenneth D. Bridges (incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed with the
Commission on March 12, 2007). |
|||
| 21 | Subsidiaries of FreightCar America, Inc. (incorporated by reference
to Exhibit 21.1 to Registration Statement Nos. 333-123384 and
333-123875 filed with the Commission on March 17, 2005). |
|||
| 23 | Consent of Independent Registered Public Accounting Firm. |
|||
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|||
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|||
| 32 | Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
| * | Confidential treatment has been granted for the redacted portions of this exhibit. A complete copy of the exhibit, including the redacted portions, has been filed separately with the Securities and Exchange Commission. |
77