Section 1: 10-K (FORM 10-K)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2015
or
¨ 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 1300, 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of class
Common stock, par value $0.01 per share
Name of Each Exchange on Which Registered
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 ¨ NO x
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 ¨ NO x
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 x NO ¨
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. ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
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.:
Large accelerated filer ¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Accelerated filer
x
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO x
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2015 was $250.2 million,
based on the closing price of $20.88 per share on the Nasdaq Global Market.
As of February 19, 2016, there were 12,344,544 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the 2015 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, 2015.
Documents
Part of Form 10-K
Part III
Table of Contents
FREIGHTCAR AMERICA, INC.
TABLE OF CONTENTS
PART I
PART II
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
Page
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9
15
15
15
16
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
17
Item 6.
Item 7.
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
PART IV
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits, Financial Statement Schedules
SIGNATURES
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Table of Contents
PART I
Item 1.
Business.
OVERVIEW
We are a diversified manufacturer of railcars and railcar components. We design and manufacture a broad variety of railcar types for transportation
of bulk commodities and containerized freight products primarily in North America, including open top hoppers, covered hoppers, and gondolas
along with intermodal and non-intermodal flat cars. We and our predecessors have been manufacturing railcars since 1901. Over the last several
years, we have introduced a number of new or redesigned railcar types. We believe we are the leading manufacturer of aluminum-bodied railcars
including coal cars in North America, based on the number of railcars delivered.
Our railcar manufacturing facilities are located in Cherokee, Alabama (“Shoals”), Danville, Illinois and Roanoke, Virginia. Our Shoals facility is an
important part of our long-term growth strategy as we continue to expand our railcar product and service offerings outside of our traditional coal
car market. While our Danville and Roanoke facilities will continue to support our coal car products, we believe the Shoals facility will allow us to
produce a broader variety of railcars in a cost-effective and efficient manner. Our Shoals facility delivered its first railcars during the fourth quarter
of 2013 and production continued to ramp up during 2014 and 2015. Our Danville facility resumed production in June 2014 after being idled for 14
months. Given the challenged coal market and the completion of our recent rebuild program, operations at our Danville facility will be significantly
curtailed in 2016.
We also lease freight cars through our JAIX Leasing Company subsidiary. We offer railcar leasing and refurbishment alternatives to our
customers, an approach designed to enhance our position as a full service provider to the railcar industry. Although we continually look for
opportunities to package our leased assets for sale to our leasing company partners, these leased assets may not be converted to sales, and may
remain revenue producing assets into the foreseeable future.
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. Through September 30, 2015, FreightCar Rail Services, LLC (“FCRS”) provided railcar repair and maintenance and inspections for all types
of freight railcars. FCRS had repair and maintenance and inspection facilities in Grand Island, Nebraska and Hastings, Nebraska and serviced
freight cars and unit coal trains utilizing key rail corridors in the Midwest and Western regions of the United States. On September 30, 2015, the
Company sold its railcar repair and maintenance services business. The sale allows the Company to increase its focus on its railcar manufacturing,
parts and leasing business as the Company continues to broaden its product portfolio through the introduction of new railcar types and
implements operational improvements, enhancing productivity through training, technology and automation. During the fourth quarter of 2013 we
decided to close our underperforming maintenance and repair shop in Clinton, Indiana and during the third quarter of 2014, those repair shop
assets were sold to a strategic buyer.
Our primary customers are railroads, shippers and financial institutions, which represented 69%, 17% and 15%, respectively, of our total sales
attributable to each type of customer for the year ended December 31, 2015. In the year ended December 31, 2015, we delivered 8,980 railcars,
including 3,395 coal cars, which compared to 7,102 railcars, including 4,038 coal cars, delivered in the year ended December 31, 2014. Our deliveries
for the year ended December 31, 2015 included 2,600 rebuilt railcars compared to 3,090 rebuilt railcars delivered in 2014. Our total backlog of firm
orders for railcars decreased from 14,791 railcars as of December 31, 2014 to 9,840 railcars as of December 31, 2015. Our backlog as of December 31,
2015 includes a variety of railcar types almost all of which were orders for non-coal cars. The estimated sales value of our backlog is $926 million as
of December 31, 2015. As of December 31, 2014, 77% of our backlog consisted of orders for non-coal cars. Our backlog as of December 31, 2015
included no rebuilt railcars compared to 2,600 rebuilt railcars in our backlog as of December 31, 2014.
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, and
amendments thereto, 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 1300, Chicago, Illinois 60606.
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OUR PRODUCTS AND SERVICES
We design and manufacture a broad variety of freight cars including covered hoppers, open top hoppers, gondolas, intermodal and non-intermodal
flat cars that transport numerous types of dry bulk and containerized freight products.
In the last five years, we have added 31 new or redesigned products to our portfolio, including various covered hopper car products with cubic
capacities from 3,282 cubic foot to 6,250 cubic foot; 52’ and 66’ mill gondolas; coil gondolas; triple hoppers and hybrid aluminum/stainless steel
railcars; ore hopper and gondola railcars; ballast hopper cars; aggregate hopper cars (with manual, independent or fully automatic transverse or
longitudinal door systems); intermodal flats (including the 3-unit, 53-foot well cars) and non-intermodal flat cars (including slab, hot slab, ribbon
rail and bulkhead flats). Focused product development activity continues in areas where we can leverage our technical knowledge base and
capabilities to realize market opportunities.
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. We 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. Through September 30, 2015, we also
provided general railcar repair and maintenance and inspections for all types of freight-carrying railcars. Many of our railcars are produced 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, but weighs significantly less than traditional multiple-piece center sills. In addition to railcars designed for use in North America, we have
manufactured railcars for export to Latin America and the Middle East. Railroads outside of North America are constructed with a variety of track
gauges that are sized differently than in North America, which requires us, in some cases, to alter our manufacturing specifications accordingly.
Any of the railcar types listed below may be further developed to meet the characteristics of the materials being transported and customer
specifications.
•
Stainless Steel and Hybrid Stainless Steel/Aluminum Coal Cars. We manufacture a series of stainless steel and hybrid stainless steel and
aluminum AutoFlood and BethGon coal cars designed to serve the Eastern railroads. These coal cars are designed to withstand the rigors of
Eastern coal transportation service. They offer a unique balance of maximized payload, light weight, efficient unloading and long service life.
Our coal car product offerings include aluminum-bodied flat-bottom gondola railcars and steel or stainless steel-bodied triple hopper railcars
for coal, metallurgical coke and petroleum coke service.
•
•
•
•
•
VersaFlood Series. Our VersaFlood™ series open-top hopper railcars include steel, stainless steel or hybrid steel and aluminum-bodied
designs equipped with three-pocket (transverse gate) or two-pocket (longitudinal gate) discharge door systems with manual, independent or
fully automatic door operation. The VersaFlood™ product series offers versatile design options for transportation of aggregates, sand or
minerals.
Covered Hopper Cars. Our covered hopper railcar product offerings encompass a wide range of cubic foot (cf) capacity designs for shipping
dry bulk commodities of varying densities including: 3,282 cf covered hopper cars for cement, sand and roofing granules; 4,300 cf covered
hopper cars for potash or similar commodities; 5,200 cf and 5,400 cf covered hopper cars for grain and other agricultural products; and 6,250
cf covered hopper cars for plastic pellets.
Dynastack Series. Our intermodal doublestack railcar product offerings include a stand-alone 40 foot well car, the DynaStack® articulated, 5-
unit, 40 foot and the DynaStack® 3-unit, 53 foot well cars for transportation of international and domestic containers.
Boxcars. Our high capacity boxcar railcar product offering, featuring an inside length of 60’9”, capacity of 7,550 cf, double plug doors,
galvanized steel roof panels and nailable steel floors, primarily designed for transporting paper products, paper rolls, lumber and wood
products and foodstuffs.
Aluminum Coal Cars. The BethGon® is the leader in the aluminum-bodied coal gondola railcar segment. 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 car in
North America. Our current BethGon II features lighter
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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 reliability.
Our aluminum bodied open-top hopper railcar, the AutoFlood™, is a five-pocket coal car equipped with a bottom discharge gate mechanism.
We began manufacturing AutoFlood railcars in 1984, and introduced the AutoFlood II and AutoFlood III designs in 1996 and 2002,
respectively. Both the AutoFlood II and AutoFlood III designs incorporate the automatic rapid discharge system, the MegaFlo™ door
system, a patented mechanism that uses an over-center locking design, enabling the cargo door to close with tension rather than by
compression. Further, AutoFlood railcars can be equipped with rotary couplers to permit rotary unloading.
Other Railcar Types. Our portfolio of railcar types also includes 52’ and 66’ mill gondola railcars used to transport steel products and scrap;
slab, hot slab and coil steel railcars designed specifically for transportation of steel slabs and coil steel products, respectively; non-
intermodal flat railcars and bulkhead flat railcars designed to transport a variety of products, including machinery and equipment, steel and
structural steel components (including pipe), wood and forest products and other bulk industrial products; woodchip hopper and gondola
railcars designed to haul woodchips and municipal waste or other low-density commodities; and a variety of non-coal carrying open top
hopper railcars designed to carry ballast, iron ore, taconite pellets and other bulk commodities; the AVC™ Aluminum Vehicle Carrier design
used to transport commercial and light vehicles (automobiles and trucks) from assembly plants and ports to rail distribution centers; and the
articulated bulk container railcar designed to carry dense bulk products such as waste products in 20 foot containers.
MANUFACTURING
We have railcar production facilities in Cherokee, Alabama, Danville, Illinois and Roanoke, Virginia. Our facilities are each certified or approved for
certification by the Association of American Railroads (the “AAR”), which sets railcar manufacturing industry standards for quality control. Our
Shoals manufacturing facility delivered its first railcars during the fourth quarter of 2013 and provides a solid platform from which to pursue a broad
range of non-coal car business including intermodal well cars, non-intermodal flat cars and various open-top hopper, covered hopper and gondola
cars. During the fourth quarter of 2014, we announced a $10 million expansion at our Shoals facility to add additional production capacity to meet
demand for our new types of railcars. The new production capacity became operational in the second quarter of 2015. During 2015, we added
approximately 360 employees to support increased production levels at our Shoals facility. Our Danville facility resumed production in June 2014
after being idled for 14 months. We will continue to adjust salaried and hourly labor personnel levels at all of our facilities to coincide with
production requirements.
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, painting it and then applying decals. 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.
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 railroads, financial institutions and shippers. 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.
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In 2015, revenue from three customers, Norfolk Southern Railway Company, CSX Transportation Inc. and CitiCorp Railmark, Inc, accounted for
approximately 22%, 19% and 10%, respectively, of total revenue. In 2015, sales to our top five customers accounted for approximately 64% of total
revenue. In 2014, revenue from three customers, CSX Transportation Inc., SMBC Rail Services and Progress Rail Services Corporation, accounted
for approximately 36%, 20% and 13%, respectively, of total revenue. In 2014, sales to our top five customers accounted for approximately 86% of
total revenue. Our railcar sales to customers outside the United States were $62.6 million and $18.3 million in 2015 and 2014, respectively. Many of
our 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 contract administrators, a manager of customer
service and support staff. The regional sales managers are responsible for managing customer relationships. Our contract administrators are
responsible for preparing proposals and other inside sales activities. Our manager of customer service is responsible for after-sale follow-up and in-
field product performance reviews.
RESEARCH AND DEVELOPMENT
We utilize the latest engineering methods, tools and processes to ensure that new products and processes meet our customers’ requirements and
are delivered in a timely manner. We develop and introduce new railcar designs as a result of a combination of customer feedback and close
observation of developing market trends. We work closely with our customers to understand their expectations and design railcars that meet their
needs. New product designs are tested and validated for compliance with AAR standards prior to introduction. This comprehensive approach
provides the criteria and direction that ensure we are developing products that our customers desire and perform as expected. Costs associated
with research and development are expensed as incurred and totaled $0.4 million, $0.3 million and $0.4 million for the years ended December 31,
2015, 2014 and 2013, respectively.
BACKLOG
We define backlog as the value of those products or services which our customers have committed in writing to purchase from us or lease from us
when built, but which have not yet been recognized as sales. Our contracts may 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 in some cases, 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.
Railcar backlog at start of period
Railcars delivered
Railcar orders
Railcar backlog at end of period (1)
Year Ended December 31,
2014
2015
14,791
(8,980)
4,029
9,840
6,826
(7,102)
15,067
14,791
2013
2,881
(3,821)
7,766
6,826
Estimated revenue from backlog at end of period (in thousands) (2)
$925,977
$1,268,907
$492,018
(1) Railcar backlog includes 0, 2,600 and 3,680 rebuilt railcars as of December 31, 2015, 2014 and 2013, respectively.
(2)
Estimated revenue from backlog reflects the total revenue attributable to the backlog reported at the end of the particular period as if such
backlog were converted to actual sales. Estimated revenue from 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. Although we continually look for
opportunities to package our leased assets for sale to our leasing company partners, these leased assets may not be converted to sales.
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Although our reported backlog is typically converted to sales within two years, our reported backlog may not be converted to sales in any
particular period, if at all, and the actual sales 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 customer acceptance of the
railcar may cause our revenues and income from operations to vary substantially each quarter, which will result in significant fluctuations in our
quarterly results.”
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 raw materials and components purchasing is critical to our profitability. We enjoy generally strong relationships with our
suppliers, which helps to ensure access to supplies when railcar demand is high.
Our primary aluminum suppliers are Sapa Extrusions and Constellium N.V. (formerly Alcan Inc.). Aluminum prices generally are fixed at the time a
railcar order is accepted, mitigating the effect of future fluctuations in prices. Our primary stainless steel supplier is Crompion International, L.L.C.
and our primary carbon steel suppliers are International Truck and Engine Investments Corporation, an affiliate of Navistar, Inc., O’Neal Steel Inc.
and Roll Form Group.
Our primary component suppliers include Amsted Industries, Inc., which supplies us with truck components, brake components, couplers and
bearings, and Summit Railroad Products, Inc., which supplies us with axles and wheels. Roll Form Group is the sole supplier of our roll-formed
center sills, which were used in 77% and 88% of our new railcars produced in 2015 and 2014, respectively. A center sill is the primary structural
component of a railcar. In addition, during 2013, we entered into an agreement with International Truck and Engine Investments Corporation, an
affiliate of Navistar, Inc., pursuant to which it has contracted to supply us with various fabricated parts, components and subassemblies as well as
providing truck and wheel and axle assembly services and blast and paint finishing services primarily for our Shoals facility. Other suppliers
provide brake systems, castings, bearings, fabrications and various other components. The railcar industry is periodically 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 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. No single supplier
accounted for more than 16% and 17% of our total purchases in 2015 and 2014, respectively. Our top ten suppliers accounted for 58% and 65% of
our total purchases in 2015 and 2014, respectively.
COMPETITION
We operate in a competitive marketplace. Competition is based on price, delivery timing, product design, reputation for product quality 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., The Greenbrier Companies, Inc., American Railcar Industries, Inc. and National Steel Car Limited.
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.
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INTELLECTUAL PROPERTY
We have several U.S. and international patents and pending applications, registered trademarks, copyrights and trade names. Key patents include
our one-piece center sill, our hopper railcar with automatic individual door system and our railroad car tub. The protection of our intellectual
property is important to our business.
EMPLOYEES
As of December 31, 2015, we had 1,662 employees, of whom 233 were salaried and 1,429 were hourly wage earners, and approximately 381, or 23%,
of our employees were members of unions. As of December 31, 2014, we had 1,381 employees, of whom 230 were salaried and 1,151 were hourly
wage earners, and approximately 402, or 29%, of our employees were members of unions. 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 as well as providers of railcar repair and maintenance services. 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 provider of railcar repair and maintenance services, 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 investigative or remedial costs or other liabilities that could be material or that could interfere with the operation of
our business.
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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. and
international 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 previous
industry cycle, industry-wide railcar deliveries declined from a peak of 74,729 railcars in 2006 to a low of 16,535 railcars in 2010. During this period,
our railcar production declined from approximately 18,764 railcars in 2006 to 2,229 railcars in 2010. Our industry and the markets for which we supply
railcars are influenced by factors that are beyond our control, including U.S. and international 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.
We operate in a 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. In addition to
price, competition is based on delivery timing, product performance and technological innovation, quality, 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 and impair our ability 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 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.
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 accounted for, in the aggregate,
approximately 68% of our total sales for the five-year period. In 2015, sales to our top three customers accounted for approximately 22%, 19% and
10%, respectively, of our total sales. In 2014, sales to our top three customers accounted for approximately 36%, 20% and 13%, 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, financial condition and results of operations.
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The variable purchase patterns of our customers and the timing of completion, delivery and customer acceptance of orders may cause our
revenues 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, replenish or increase 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 delivered and product mix of railcars delivered in any given quarterly period.
Additionally, because we record the sale of a new and rebuilt railcar at the time (1) we complete production, (2) the railcar is accepted by the
customer following inspection, (3) the risk for any damage or loss with respect to the railcar passes to the customer, and (4) title to the railcar
transfers to the customer, and not when the order is taken, the timing of the 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.
Our ability to sell new railcars may be limited by other factors, including the availability and price of used railcars offered for sale and new or
used railcars offered for lease by leasing companies and others.
Our customers may consider alternatives to the purchase of new railcars, including the purchase of used railcars, refurbishment of existing railcars
or the lease of new or used railcars. Our competitors may also be able to offer railcar leases at favorable lease rates, negatively impacting our ability
to sell new railcars, which may result in price reductions, reduced margins and loss of market share. These additional competitive factors could
negatively affect our prospects, business, financial condition and results of operations.
The potential cost volatility 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 steel and aluminum. The cost of steel, aluminum and all other
materials (including scrap metal) used in the production of our railcars represents a significant majority of our direct manufacturing costs. Our
business is subject to the risk of price increases and periodic delays in the delivery of aluminum, steel and other materials, all of which are beyond
our control. Any fluctuations in the price or availability of aluminum or steel, or any other material used in the production of our railcars, may have
a material adverse effect on our business, results of operations or financial condition. In addition, if any of our suppliers were unable to continue
its business or were to seek bankruptcy relief, the availability or price of the materials we use could be adversely affected. 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.
Limitations on the supply of 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 various components for our railcars. In the future, suppliers of railcar components may be unable to meet the
short-term or longer-term demand of our industry for certain railcar components. In the event that any of our suppliers of railcar components were
to stop or reduce their production, go out of business, refuse to continue their business relationships with us, become subject to work stoppages
or ration their supply of components, our business could be disrupted. During periods of high or rapidly increasing railcar demand, we have in the
past experienced challenges sourcing certain railcar components to meet our production requirements. In addition, 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 components, 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
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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 railcar components
than we currently pay. Such circumstances could have a material adverse impact on our customer relationships, financial condition and results of
operations.
RISKS RELATED TO OUR BUSINESS
Lack of acceptance of our new railcar offerings by our customers could adversely affect our business.
Our growth 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.
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 sales to other countries, subjects us to various risks, including changing
economic, legal and political conditions, work stoppages, 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, more stringent rules relating to labor or the environment, adverse tax consequences and price exchange controls could limit our
operations and make the 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 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 or lease from
us when built, that have not yet been recognized as revenue. In this annual report on Form 10-K, we have disclosed our backlog, or the number of
railcars for which we have purchase orders or firm operating leases for railcars to be built, 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 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 could 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 or could prevent the backlog from being converted to sales, thereby extending the date on which we will deliver the associated railcars and
realize revenues attributable to such railcar backlog.
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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 that new railcars produced by us will be free from defects in material and workmanship under normal use and service identified for a
period of up to five years from the time of sale. 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 property damage, 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. These types of product liability and warranty claims may result in
costly product recalls, significant repair costs and damage to our reputation, all of which could adversely affect our results of operations. This risk
may increase over the short-term due to our limited warranty claim experience for our new product offerings.
Business that we may acquire in the future may fail to perform to expectations or we may be unable to successfully integrate acquired business
with our existing business.
We may engage in future acquisitions, which in each case could materially affect our business, operating results, and financial condition. However,
we may not be able to find suitable acquisition candidates, and we may not be able to complete such acquisitions on favorable terms, if at all.
Future acquisitions may not strengthen our competitive position or achieve our desired goals and may disrupt our ongoing operations, divert
management from day-to-day responsibilities, increase our expenses and reduce our cash available for operations and other uses. There can be no
assurance that we will be able to effectively manage the integration of businesses we may acquire in the future, or be able to retain and motivate
key personnel from those businesses.
If we lose key personnel, our operations and ability to manage the day-to-day aspects of our business may 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 may 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 in the railcar industry and other
manufacturing and capital equipment industries, it could 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.
Shortages of skilled labor may adversely impact our operations.
We depend on skilled labor in the manufacture and repair 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 maintain or increase production rates and could cause
our labor costs to increase.
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.
As of December 31, 2015, we had a collective bargaining agreement with a union representing approximately 11% of our total active labor force that
expires on March 31, 2017 and a collective bargaining agreement with a union representing approximately 12% of our total active labor force that
expires on October 31, 2018. 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.
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We rely upon a single supplier to supply us with all of our roll-formed 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 roll-formed 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.
Of the new railcars that we produced in 2015 and 2014, 77% and 88%, respectively, were manufactured using this roll-formed 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 roll-formed 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 roll-formed 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 roll-formed center sills than we currently pay.
Equipment failures, delays in deliveries or extensive damage to our facilities could lead to production or service curtailments or shutdowns.
We have railcar production facilities in Cherokee, Alabama, Danville, Illinois and Roanoke, Virginia. An interruption in railcar production
capabilities at these facilities, as a result of equipment failure or other factors, could reduce or prevent our production of 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.
The Company may be unable to renew its lease arrangements at its manufacturing facilities at commercially acceptable terms
Our manufacturing operations are located at facilities that are leased from third parties. As each lease expires, we may be unable to negotiate
renewals on commercially acceptable terms. Failure to renew our leases at commercially acceptable terms could have a potential adverse impact on
our operations.
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 car 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 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.
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Our information technology and other systems are subject to cybersecurity risk, including the misappropriation of customer information and
other breaches of information security. Security breaches and other disruptions could compromise our information, expose us to liability and
harm our reputation and business.
In the ordinary course of our business, we collect and store sensitive data on our networks, including intellectual property, our proprietary
business information and that of our customers, suppliers and business partners and personally identifiable information and other personal
information of our customers and employees. While we continually work to safeguard our systems and to mitigate potential security risks, our
information and processes are exposed to increasing global information security threats and more sophisticated and targeted computer crime,
which may result in our data being subject to a security breach, a system failure, a computer virus, malicious software or unauthorized or fraudulent
use by our employees or other third parties. Any compromise of our data security and access to or public disclosure or loss of personal or
confidential business information could result in legal claims or proceedings with third parties, liability or regulatory penalties under the laws that
protect the privacy of personal information, disruption of our operations, damage to our reputation, loss of business or remediation costs, any of
which could have a material adverse effect on our prospects, business, financial condition and results of operations.
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.
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, enter into certain transactions with affiliates, make investments and other restricted payments and
create liens. Our failure to comply with these financial covenants and other covenants under our revolving credit facility could lead to an event of
default under the agreement governing any other indebtedness that we may have outstanding at the time, permitting the lenders to accelerate all
borrowings under such agreement 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. Our failure to raise capital if and when needed could have a material adverse effect on our results of
operations and financial condition.
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 December 31, 2015, the trading price of our common stock ranged from a low of $12.82 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 and our reported backlog, 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.
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Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
The following table presents information on our leased and owned operating properties as of December 31, 2015:
Use
Corporate headquarters
Railcar assembly and component
manufacturing
Railcar assembly and component
manufacturing
Railcar assembly and component
manufacturing
Location
Chicago, Illinois
Danville, Illinois
Roanoke, Virginia
15,540 square feet
Size
308,665 square feet on 36.5 acres of
land
383,709 square feet on 15.5 acres of
land
Leased or
Owned
Lease
Expiration Date
Leased March 31, 2022
Owned
—
Leased
December 31, 2024
Cherokee, Alabama
712,608 square feet
Leased
December 31, 2021
Administrative
Johnstown, Pennsylvania
29,500 square feet on 1.02 acres of
land
Owned
—
Parts warehouse
Johnstown, Pennsylvania
86,000 square feet
Leased December 31, 2016
Item 3.
Legal Proceedings.
The Company is involved in various warranty and repair claims and, in certain cases, related pending and threatened 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 and
legal provisions, if any, are not expected to be material to the Company’s consolidated financial condition, results of operations or cash flows.
On July 8, 2013, the Company filed a Complaint for Declaratory Judgment (the “Complaint”) in the United States District Court for the Northern
District of Illinois, Eastern Division (the “Illinois Court”). The case named as defendants the United Steel, Paper & Forestry, Rubber,
Manufacturing, Energy, Allied Industrial & Services Workers International Union, AFL-CIO, CLC (the “USW”), as well as approximately 650
individual Retiree Defendants (as defined in the Complaint). On July 9, 2013, the USW and certain Retiree Defendants (collectively, the
“Pennsylvania Plaintiffs”) filed a putative class action in the United States District Court for the Western District of Pennsylvania (the
“Pennsylvania Court”), captioned as Zanghi, et al. v. FreightCar America, Inc., et al., Case No. 3:13-cv-146. Both of the complaints related to the
Company’s decision to terminate welfare benefits previously provided to the Retiree Defendants.
On August 20, 2015, the Company reached a settlement agreement with the USW and the other plaintiffs. Pursuant to the settlement agreement, the
parties agreed that (1) USW will create a voluntary employee’s beneficiary association trust fund (the “VEBA”) that will administer the payment of
health and welfare benefits to class members and will be administered independently of the Company, (2) the Company will make a one-time
contribution to the VEBA of $31.5 million, (3) the Company will pay an award for plaintiffs’ attorneys’ fees in the amount of $1.3 million, (4) if the
Company fails to make the required payments to the VEBA prior to February 16, 2016, interest on the unpaid amounts will accrue at a rate of 5% per
annum, subject to a cap of $250,000, and (5) class members will fully and finally release all claims against the Company in accordance with the terms
of the settlement agreement. The Pennsylvania Court granted final approval of the settlement on January 19, 2016. The plaintiffs had until
February 18, 2016 to file an appeal of the court order granting final approval of the settlement. On February 17, 2016 certain class members
requested a 30-day extension to file an appeal, which the Pennsylvania Court denied on February 22, 2016. The Company expects to make the cash
settlement payment on or after March 23, 2016.
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On April 17, 2015 and September 30, 2015, National Steel Car Limited (“NSC”) filed Complaints for Patent Infringement against the Company in the
United States District Court for the Northern District of Illinois (Eastern Division) in Chicago, Illinois. The Complaints assert five United States
patents against certain aggregate gondola freight cars sold to Martin-Marietta and Progress Rail. The Complaints seek injunctive relief and an
unspecified amount of damages. On January 29, 2016, NSC amended the Complaints, alleging that eighteen offers to sell made by the Company also
infringed NSC’s patents. The Company filed its Answer to NSC’s Amended Complaint on February 16, 2016, responding to NSC’s newly raised
allegations, and adding new affirmative defenses as well as counterclaims for non-infringement and invalidity. The Company believes that the
complaints are without merit and intends to vigorously defend against the allegations. While the ultimate outcome of these 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 position, results of operations or cash flows.
On September 29, 2008, Bral Corporation, a supplier of certain railcar parts to us, filed a complaint against us in the U.S. District Court for the
Western District of Pennsylvania (the “Pennsylvania Lawsuit”). The complaint alleged that we breached an exclusive supply agreement with Bral
by purchasing parts from CMN Components, Inc. (“CMN”) and sought damages in an unspecified amount, attorneys’ fees and other legal costs.
On December 14, 2007, Bral sued CMN in the U.S. District Court for the Northern District of Illinois, alleging among other things that CMN
interfered in the business relationship between Bral and us (the “Illinois Lawsuit”) and seeking damages in an unspecified amount, attorneys’ fees
and other legal costs. On October 22, 2008, we entered into an Assignment of Claims Agreement with CMN under which CMN assigned to us its
counterclaims against Bral in the Illinois Lawsuit and we agreed to defend and indemnify CMN against Bral’s claims in that lawsuit. On March 4,
2013, Bral Corporation and the Company agreed to settle the Illinois Lawsuit and the Pennsylvania Lawsuit. The settlement resulted in a $3.9 million
reduction in litigation reserves, which favorably impacted our results of operations for the year ended December 31, 2013.
In addition to the foregoing, we are involved in certain other pending and threatened legal proceedings, including commercial disputes and
workers’ compensation and employee matters arising out of the conduct of our business. While the ultimate outcome of these other legal
proceedings cannot be determined at this time, it is the opinion of management that the resolution of these other actions will not have a material
adverse effect on our financial condition, results of operations or cash flows.
Item 4.
Mine Safety Disclosures.
Not applicable
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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 19, 2016, there were approximately 85 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 January 1, 2014, as reported on the Nasdaq Global Market.
2015
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2014
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Dividend Policy
Common Stock Price
High
Low
Dividend
Declared
$
$
$
$
$
$
$
$
24.48
22.94
31.59
31.78
34.85
36.52
26.82
26.45
$
$
$
$
$
$
$
$
16.93
16.99
20.88
22.67
24.12
21.58
23.10
21.60
$
$
$
$
$
$
$
$
0.09
0.09
0.09
0.09
0.06
0.06
0.06
0.06
The 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. The ability of our board of directors to declare a
dividend on our common stock is limited by Delaware law. On February 8, 2016, our board of directors declared a cash dividend of $0.09 per share
of our common stock, payable on February 26, 2016, to shareholders of record at the close of business on February 18, 2016.
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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 January 1, 2011 through
December 31, 2015 and compares it with the cumulative total return on the NASDAQ Composite Index and DJ Transportation Index. The
comparison assumes $100 was invested on January 1, 2011 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.
FreightCar America, Inc.
NASDAQ Composite Index
DJ Transportation Index
Dec.
31,
Dec.
31,
Dec.
31,
Dec.
31,
Dec.
31,
Dec.
31,
Jun 30,
Jun 30,
Jun 30,
2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015
100.00 87.56 72.39 79.78 78.36 59.74 94.16 89.02 93.92 75.05 70.40
100.00 105.00 99.17 112.35 116.48 132.12 163.21 173.30 187.27 198.32 200.31
100.00 107.07 100.01 104.63 107.49 125.91 151.97 169.55 190.08 169.34 158.83
Jun 30,
Jun 30,
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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, 2015 was derived from our audited
consolidated financial statements and other operational information reported on Form 10-K. 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. (in thousands, except for share and
per share data and railcar amounts)
Statements of Operations Data
Revenues
Gross profit
Selling, general and administrative expense
Gain on sale of railcars available for lease
Gain on sale of railcar repair and maintenance services
business and facility
Restructuring and impairment charges
Net income (loss)(1)(2)(3)
2015
772,854
82,661
41,663
(1,187)
(4,578)
—
31,805
$
$
Year Ended December 31,
2013
2012
2014
$
$
598,518
42,343
35,317
(1,403)
(1,078)
—
5,904
$
$
290,393
13,225
27,464
(604)
—
10,452
(19,295)
$
$
677,449
64,986
32,736
(989)
—
—
19,095
2011
486,986
31,946
28,660
(2,227)
—
—
4,935
$
$
Weighted average common shares outstanding - basic
Weighted average common shares outstanding - diluted
12,175,955
12,217,755
12,001,587
12,103,520
11,954,238
11,954,238
11,932,926
11,969,337
11,916,292
11,962,196
Per share data:
Net income (loss) per common share - basic
Net income (loss) per common share - diluted
Dividends declared per common share
Other financial and operating data:
Investment in property, plant and equipment and railcars
on operating leases
Railcars delivered
Railcar orders
Railcar backlog at period end
Estimated revenue from backlog at period end
Balance sheet data (at period end):
Cash and cash equivalents
Restricted cash and restricted certificates of deposit
Marketable securities
Total assets
Total debt, including capital leases
Total stockholders’ equity
$
$
$
$
$
$
2.59
2.58
0.36
$
$
$
0.49
0.49
0.24
16,699
8,980
4,029
9,840
925,977
83,068
6,896
26,951
406,904
—
235,111
$
11,802
7,102
15,067
14,791
$ 1,268,907
$
113,532
6,015
47,961
385,252
—
198,695
$
$
$
$
$
$
(1.61)
(1.61)
0.24
17,317
3,821
7,766
6,826
492,018
145,506
7,780
38,988
417,719
—
202,535
$
$
$
$
$
$
1.60
1.60
0.24
9,088
8,325
2,903
2,881
197,597
98,509
14,700
41,978
388,565
—
211,331
$
$
$
$
$
$
0.41
0.41
—
1,996
6,188
12,437
8,303
599,824
101,870
1,815
—
345,463
—
197,334
(1)
(2)
(3)
For the year ended December 31, 2015, we recorded a gain on the sale of our railcar repair and maintenance services business of $4.6 million.
For the year ended December 31, 2014, we recorded a gain on the sale of our closed railcar repair and maintenance facility of $1.1 million.
For the year ended December 31, 2013, we recorded impairment charges to write down assets at our idled Danville manufacturing facility of
$7.6 million, impairment charges to write down assets at our closed Clinton, Indiana maintenance and repair shop of $1.6 million, other
charges related to the closure of our Clinton maintenance and repair shop of $303,000 and Corporate severance charges of $1.6 million.
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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 a diversified manufacturer of railcars and railcar components. We design and manufacture a broad variety of railcar types for transportation
of bulk commodities and containerized freight products primarily in North America, including open top hoppers, covered hoppers, and gondolas
along with intermodal and non-intermodal flat cars. We and our predecessors have been manufacturing railcars since 1901. Over the last several
years, we have introduced a number of new or redesigned railcar types. We believe we are the leading manufacturer of aluminum-bodied railcars
including coal cars in North America, based on the number of railcars delivered.
Our railcar manufacturing facilities are located in Cherokee, Alabama (“Shoals”), Danville, Illinois and Roanoke, Virginia. Our Shoals facility is an
important part of our long-term growth strategy as we continue to expand our railcar product and service offerings outside of our traditional coal
car market. While our Danville and Roanoke facilities will continue to support our coal car products, our Shoals facility allows us to produce a
broader variety of railcars in a cost-effective and efficient manner. During the fourth quarter of 2014, we announced a $10 million expansion at our
Shoals facility to add additional production capacity to meet demand for our new types of railcars. The new production capacity became
operational in the second quarter of 2015. During 2015, we added approximately 360 employees to support increased production levels at our
Shoals facility. Our Danville facility resumed production in June 2014 after being idled for 14 months. We will continue to adjust salaried and hourly
labor personnel levels at all of our facilities to coincide with production requirements. Given the challenged coal market and the completion of our
recent rebuild program, operations at our Danville facility will be significantly curtailed in 2016.
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. Between November 2010, when we acquired the business assets of DTE Rail Services, Inc., and September 2015 when we sold our repair
and maintenance services business, we provided railcar repair and maintenance for all types of freight railcars through our FCRS subsidiary. The
sale allows us to increase our focus on our railcar manufacturing, parts and leasing business as we continue to broaden our product portfolio
through the introduction of new railcar types and implement operational improvements, enhancing productivity through training, technology and
automation. FCRS had repair and maintenance facilities in Grand Island, Nebraska and Hastings, Nebraska and serviced freight cars and unit coal
trains utilizing key rail corridors in the Midwest and Western regions of the United States. We also lease freight cars through our JAIX Leasing
Company subsidiary. As of December 31, 2015, the value of leased railcars was $24.7 million.
Railcar deliveries totaled 8,980 units, consisting of 6,280 new railcars, 2,600 rebuilt railcars and 100 railcars leased, for the year ended December 31,
2015, compared to 7,102 units, consisting of 3,937 new railcars, 3,090 rebuilt railcars and 75 railcars leased, delivered in 2014. Our total backlog of
firm orders for railcars decreased by 4,951 railcars, from 14,791 railcars as of December 31, 2014 to 9,840 railcars as of December 31, 2015. Our primary
customers are railroads, shippers and financial institutions.
Through September 30, 2015, the Company’s operations comprised two reportable segments, Manufacturing and Services. As of October 1, 2015,
the Company’s operations comprise two operating segments, Manufacturing and Parts, and one reportable segment, Manufacturing. The
Company’s Manufacturing segment includes new railcar manufacturing, used railcar sales, railcar leasing and major railcar rebuilds. The
Company’s Parts operating segment is not expected to be of continuing significance for separate reporting and has been combined with corporate
and other non-operating activities as Corporate and Other.
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 the railroads, operating lessors and shippers to continue to evaluate freight demand for dry bulk commodities and containerized
freight and to continue to repair, maintain and upgrade their fleets to maximize the productivity of their railcar equipment.
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FINANCIAL STATEMENT PRESENTATION
Revenues
Our Manufacturing segment revenues are generated primarily from sales of the railcars that we manufacture. Our Manufacturing segment sales
depend on industry demand for new railcars, which is driven by overall economic conditions and the demand for railcar transportation of various
products, such as coal, steel products, minerals, cement, motor vehicles, forest products and agricultural commodities. Our Manufacturing segment
sales are also affected by competitive market pressures that impact our market share, the prices for our railcars and by the types of railcars sold.
Our Manufacturing segment revenues also include revenues from major railcar rebuilds and lease rental payments received with respect to railcars
under operating leases. Our Corporate and Other revenue sources include parts sales and, through September 30, 2015, revenues related to the
maintenance and repair of railcars.
We generally manufacture railcars under firm orders from our customers. We recognize revenue, when (1) we complete the individual railcars,
(2) the railcars are accepted by the customer following inspection, (3) the risk of any damage or other loss with respect to the railcars passes to the
customer and (4) title to the railcars transfers to the customer. Deliveries include new and used cars sold, cars built and contracted under operating
leases and rebuilt cars. We value used railcars received at their estimated fair market value. Revenues derived from a single sales contract that
contains multiple products and services are allocated based on the relative fair value of each item to be delivered and recognized in accordance
with the applicable revenue recognition criteria for the specific unit of accounting. The variable purchase patterns of our customers and the timing
of completion, delivery and customer acceptance of railcars may cause our revenues 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 operating costs. Factors that have affected our cost of sales include the cost of steel and aluminum and the
cost of railcar components, which have been impacted by the increase in industry demand. As we expanded, although we strove to reduce
manufacturing costs at our manufacturing facilities, our cost of sales has been negatively impacted by production inefficiencies and idle capacity
as we entered into new railcar markets and invested in diversifying our product portfolio. A portion of the contracts covering our backlog at
December 31, 2015 are fixed-rate contracts. Therefore, if material costs were to increase, we will likely not be able to pass on these increased costs
to our customers. We manage material price increases by locking in prices where possible.
Operating income (loss)
Operating income (loss) represents revenues less cost of sales, gain on sale of railcars available for lease, gain on sale of railcar repair and
maintenance services business, selling, general and administrative expenses, and restructuring and impairment charges.
RESULTS OF OPERATIONS
Year Ended December 31, 2015 compared to Year Ended December 31, 2014
Revenues
Our consolidated revenues for the year ended December 31, 2015 were $772.9 million compared to $598.5 million for the year ended December 31,
2014. Manufacturing segment revenues for the year ended December 31, 2015 were $745.7 million compared to $562.7 million for the year ended
December 31, 2014. The increase in Manufacturing segment revenues reflects the increase in the number of railcars delivered, a higher mix of new
versus rebuilt railcars and changes in the product mix of new railcars. Our Manufacturing segment delivered 8,980 units, consisting of 6,280 new
railcars, 2,600 rebuilt railcars and 100 railcars leased, for the year ended December 31, 2015, compared to 7,102 units, consisting of 3,937 new railcars,
3,090 rebuilt railcars and 75 railcars leased, for the year ended December 31, 2014. Manufacturing segment revenues for the year ended
December 31, 2014 included the sale of 274 leased railcars, of which 74 were delivered during 2014 and 200 were delivered in 2013. Corporate and
Other revenues for the year ended December 31, 2015 were $27.1 million compared to $35.8 million for the year ended December 31, 2014. The
decrease in Corporate and other revenues for 2015 compared to 2014 reflects the sale of FCRS on September 30, 2015.
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Gross Profit
Our consolidated gross profit for the year ended December 31, 2015 was $82.7 million compared to $42.3 million for the year ended December 31,
2014. The increase reflects increases in gross profit from our Manufacturing segment of $38.5 million and increases in gross profit from Corporate
and other of $1.8 million. The increase in gross profit for our Manufacturing segment for the year ended December 31, 2015 compared to the year
ended December 31, 2014 reflects the increase in deliveries, a higher mix of new versus rebuilt railcars, changes in the product mix of new railcars
and improvement in production efficiencies. Gross profit for our Manufacturing segment for the year ended December 31, 2015 included
approximately $2.3 million of costs associated with the continued ramp up of the additional production capacity at our Shoals facility.
Manufacturing segment gross profit for the year ended December 31, 2014 included costs associated with the ramp up of production volumes at
Shoals, carrying costs associated with our idled Danville facility and incremental costs associated with the restart of production at Danville, which
together totaled $6.5 million. Manufacturing segment gross profit for the year ended December 31, 2014 also included the impact of multiple
weather-related production shutdowns, supply disruptions and related inefficiencies totaling $1.9 million and a $0.8 million expense recorded to
settle a warranty claim. The increase in gross profit for Corporate and Other for the year ended December 31, 2015 compared to the year ended
December 31, 2014 reflects an increase in gross profit on parts sales and repair services. Our consolidated gross profit margin was 10.7% for the
year ended December 31, 2015 compared to 7.1% for the year ended December 31, 2014 as a result of the items noted above.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses for the year ended December 31, 2015 were $41.7 million compared to $35.3 million for the
year ended December 31, 2014. Selling, general and administrative expenses for the year ended December 31, 2015 included increases in third-party
sales commissions, salaries and wages, incentive compensation and legal costs. Manufacturing segment selling, general and administrative
expenses for the year ended December 31, 2015 were $12.3 million compared to $11.0 million for the year ended December 31, 2014 primarily due to
higher third-party sales commissions and salaries and wages. Corporate and Other selling, general and administrative expenses were $29.3 million
for the year ended December 31, 2015 compared to $24.3 million for the year ended December 31, 2014. The increase in Corporate and Other selling,
general and administrative expenses for the year ended December 31, 2015 compared to the year ended December 31, 2014, reflected increases in
incentive compensation, salaries and wages and legal costs, which were partially offset by decreases in selling, general and administrative
expenses due to the sale of FCRS.
Gain on Sale of Railcars Available for Lease
Gain on sale of railcars available for lease for the year ended December 31, 2015 was $1.2 million and represented the gain on sale of leased railcars
with a net book value of $6.4 million. Gain on sale of railcars available for lease for the year ended December 31, 2014 was $1.4 million and
represented the gain on sale of leased railcars with a net book value of $12.2 million.
Gain on Sale of Railcar Repair and Maintenance Services Business and Facility
On September 30, 2015, we sold our railcar repair and maintenance services business for an aggregate purchase price of $20.0 million. The sale
included assets of FCRS, which operated our railcar repair and maintenance services business, and FreightCar Short Line, Inc. (“FCSL”), which
owned a short-line railway. On September 30, 2015, $2.0 million of the aggregate purchase price was placed into escrow in order to secure the
indemnification obligations of FCRS and FCSL under the asset purchase agreement relating to the sale and $0.4 million was used to pay certain
liabilities of FCRS and FCSL, resulting in cash proceeds to us of $17.6 million. As a result of the sale, we recorded a pre-tax gain of $4.6 million for
the year ended December 31, 2015.
In December 2013, we closed our underperforming maintenance and repair shop in Clinton, Indiana, reduced the carrying values of repair shop
assets to their estimated fair market value, representing the estimated salvage values of building, equipment and rail at the facility and the estimated
sales value of the associated land, and recorded restructuring and impairment charges of $1.7 million. As a result of the sale of the repair shop
assets to a strategic buyer in September 2014, we recorded a pre-tax gain of $1.1 million for the year ended December 31, 2014.
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Operating Income (Loss)
Our consolidated operating income for the year ended December 31, 2015 was $46.8 million compared to $9.5 million for the year ended
December 31, 2014. Operating income for the Manufacturing segment was $69.2 million for the year ended December 31, 2015 compared to $32.2
million for the year ended December 31, 2014, reflecting the increase in deliveries, a higher mix of new versus rebuilt railcars, changes in the product
mix of new railcars and improvement in production efficiencies. Manufacturing segment operating income for the year ended December 31, 2015
included approximately $2.3 million of costs associated with the continued ramp up of the additional production capacity at our Shoals facility.
Manufacturing segment operating income for the year ended December 31, 2015 was also negatively impacted by multiple weather-related
production shutdowns, supply disruptions and related inefficiencies. Manufacturing segment operating income for the year ended December 31,
2014 included costs associated with the ramp up of production volumes at Shoals, carrying costs associated with our idled Danville facility and
incremental costs associated with the restart of production at Danville, which together totaled $6.5 million. Manufacturing segment operating
income for the year ended December 31, 2014 also included the impact of multiple weather-related production shutdowns, supply disruptions and
related inefficiencies totaling $1.9 million and a $0.8 million expense recorded to settle a warranty claim. Corporate and Other operating loss was
$22.4 million for the year ended December 31, 2015 compared to an operating loss of $22.6 million for the year ended December 31, 2014 reflecting an
increase in operating income from repair and maintenance services of $5.1 million, which was partially offset by an increase in corporate costs of
$5.0 million. The increase in repair and maintenance services operating income reflects the $4.6 million gain on sale of our railcar repair and
maintenance services business during 2015 and the $1.1 million gain on sale of our underperforming maintenance and repair shop during 2014. The
increase in corporate costs for the year ended December 31, 2015 compared to the year ended December 31, 2014 reflected increases in incentive
compensation, salaries and wages and legal costs.
Interest Expense and Deferred Financing Costs
Interest expense and the amortization of deferred financing costs were $0.2 million for the year ended December 31, 2015 compared to $1.1 million
for the year ended December 31, 2014. In addition to commitment fees on our revolving credit facility, letter of credit fees and amortization of
deferred financing costs, results for 2014 included non-cash imputed interest on a customer advance for leased railcars delivered for which revenue
could not be recognized until all contingencies had been resolved.
Income Taxes
The income tax provision was $14.8 million for the year ended December 31, 2015 compared to $2.6 million for the year ended December 31, 2014.
The effective tax rates for the years ended December 31, 2015 and 2014, were 31.8% and 30.3%, respectively. Our effective tax rate for the year
ended December 31, 2015 was lower than the statutory U.S. federal income tax rate of 35% primarily due to the (3.6)% impact of the domestic
manufacturing deduction, the (2.7)% impact of federal and state tax credits, including the research and development tax credit, and the (1.0)%
impact of changes in the valuation allowance, which were partially offset by a 3.2% blended state tax rate and 0.9% for the effect of other
differences. Our effective tax rate for the year ended December 31, 2014 was lower than the statutory U.S. federal income tax rate of 35% primarily
due to the (9.4)% impact of a research and development tax credit and the (2.4)% impact of changes in the valuation allowance, which were partially
offset by a 5.8% blended state tax rate and the 1.3% impact of changes in uncertain tax positions.
Net Income (Loss)
As a result of the foregoing, our net income was $31.8 million for the year ended December 31, 2015 compared to $5.9 million for the year ended
December 31, 2014. For the year ended December 31, 2015, our basic and diluted net income per share were $2.59 and $2.58, respectively, on basic
and diluted shares outstanding of 12,175,955 and 12,217,755, respectively. For the year ended December 31, 2014, our basic and diluted net income
per share were $0.49 on basic and diluted shares outstanding of 12,001,587 and 12,103,520, respectively.
Year Ended December 31, 2014 compared to Year Ended December 31, 2013
Revenues
Our consolidated revenues for the year ended December 31, 2014 were $598.5 million compared to $290.4 million for the year ended December 31,
2013. Manufacturing segment revenues for the year ended December 31, 2014
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were $562.7 million compared to $253.8 million for the year ended December 31, 2013. The increase in Manufacturing segment revenues reflects the
significant increase in the number of railcars delivered and product mix changes. Our Manufacturing segment delivered 7,102 units, consisting of
3,937 new railcars, 3,090 rebuilt railcars and 75 railcars leased, for the year ended December 31, 2014, compared to 3,821 units, consisting of 992 new
railcars, 99 used railcars, 2,530 rebuilt railcars and 200 railcars leased, for the year ended December 31, 2013. Manufacturing segment revenues for
the year ended December 31, 2014 included the sale of 274 leased railcars, of which 74 were delivered during 2014 and 200 were delivered in 2013.
Corporate and Other revenues for the year ended December 31, 2014 were $35.8 million compared to $36.6 million for the year ended December 31,
2013 and reflected lower repair volumes, which were partially offset by higher parts sales. The severe winter weather during 2014 led to higher coal
train utilization, which reduced the volume of coal cars released for maintenance and reduced the repair volumes through our repair shops and
sales of repair parts.
Gross Profit
Our consolidated gross profit for the year ended December 31, 2014 was $42.3 million compared to $13.2 million for the year ended December 31,
2013, representing an increase of $29.1 million. The increase in our consolidated gross profit for the year ended December 31, 2014 compared to the
year ended December 31, 2013 reflects an increase in gross profit from our Manufacturing segment of $30.8 million, which was partially offset by a
decrease in Corporate and other gross profit of $1.7 million. The increase in gross profit for our Manufacturing segment reflects the significant
increase in deliveries and lower production inefficiencies at our idled Danville facility and our Shoals facility as it continued to ramp up production
levels to support our backlog growth and product expansion. Costs associated with the continued ramp up of production volumes at our Shoals
facility, carrying costs associated with our idled Danville facility and incremental costs associated with the restart of production at Danville totaled
$6.5 million for the year ended December 31, 2014. Gross profit for our Manufacturing segment for the year ended December 31, 2014 was
negatively impacted by multiple weather-related production shutdowns, supply disruptions and related inefficiencies during the first quarter of
2014 totaling $1.9 million. Gross profit for our Manufacturing segment for the year ended December 31, 2013 included start-up costs of our Shoals
facility and carrying costs associated with our idled Danville facility totaling $9.5 million. Gross profit for our Manufacturing segment for the year
ended December 31, 2013 also included a $1.7 million charge for projected costs in excess of selling price related to an order that was delivered in
2014. Customer lead times on this order required us to source key components from higher-priced suppliers in order to meet the customer’s delivery
requirements. The decrease in Corporate and Other gross profit for the year ended December 31, 2014 compared to the year ended December 31,
2013 reflects lower repair volumes caused by increased utilization of trains and a less profitable mix of parts sales and repair services, partially
offset by higher parts sales volumes. Corporate and Other gross profit for the year ended December 31, 2014 also was negatively impacted by the
severe winter weather, which reduced the repair volumes through our repair shops and sales of repair parts during the first quarter of 2014. Our
consolidated gross profit margin was 7.1% for the year ended December 31, 2014 compared to 4.6% for the year ended December 31, 2013.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses for the year ended December 31, 2014 were $35.3 million compared to $27.5 million for the
year ended December 31, 2013, representing an increase of $7.8 million. Selling, general and administrative expenses for the year ended
December 31, 2014 included increases in the provision for incentive compensation of $3.5 million, sales commissions of $0.5 million and legal costs
of $0.3 million, which were partially offset by decreases in Shoals start-up costs. During the year ended December 31, 2013, we settled the Bral
litigation (see note 17 to our consolidated financial statements), which resulted in a $3.9 million reduction in litigation reserves. Manufacturing
segment selling, general and administrative expenses for the year ended December 31, 2014 were $11.0 million compared to $7.3 million for the year
ended December 31, 2013. Corporate and Other selling, general and administrative expenses for the year ended December 31, 2014 were $24.3 million
compared to $20.1 million for the year ended December 31, 2013, reflecting the reduction in the litigation reserve during 2013, increases in the
provision for incentive compensation and the non-cash pension settlement cost. Corporate and Other selling, general and administrative expenses
for the year ended December 31, 2013 included $1.3 million related to the start-up of our Shoals facility.
Gain on Sale of Railcars Available for Lease
Gain on sale of railcars available for lease for the year ended December 31, 2014 was $1.4 million and represented the gain on sale of leased railcars
with a net book value of $12.2 million. Gain on sale of railcars available for lease for the year ended December 31, 2013 was $0.6 million and
represented the gain on sale of leased railcars with a net book value of $6.2 million.
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Gain on Sale of Railcar Repair and Maintenance Services Business and Facility
In December 2013, we closed our underperforming maintenance and repair shop in Clinton, reduced the carrying values of the repair shop assets to
their estimated fair market value, representing the estimated salvage values of building, equipment and rail at the facility and the estimated sales
value of the associated land, and recorded restructuring and impairment charges of $1.7 million. During the first quarter of 2014 we classified the
repair shop assets as held for sale. Sale of the repair shop assets to a strategic buyer during the third quarter of 2014 resulted in a gain of $1.1
million.
Restructuring and Impairment Charges
During the fourth quarter of 2013, we recorded restructuring and impairment charges of $10.5 million, which consisted of non-cash charges of $7.6
million related to our Danville manufacturing facility, $1.6 million related to our closed railcar maintenance and repair shop in Clinton, Corporate
severance charges of $1.1 million and other charges of $0.1 million. Substantially all of the severance payments were made during 2014.
Operating Income (Loss)
Our consolidated operating income for the year ended December 31, 2014 was $9.5 million compared to an operating loss of $24.1 million for the
year ended December 31, 2013. Operating income for the Manufacturing segment was $32.2 million for the year ended December 31, 2014 compared
to operating loss of $3.4 million for the year ended December 31, 2013. The increase in operating income for our Manufacturing segment reflects the
significant increase in deliveries and lower production inefficiencies at our Shoals and Danville facilities as they continued to ramp up production
levels to support our backlog growth and product expansion. Costs associated with the continued ramp up of production volumes at our Shoals
facility, carrying costs associated with our idled Danville facility and incremental costs associated with the restart of production at Danville totaled
$6.5 million for the year ended December 31, 2014. Operating income for our Manufacturing segment for the year ended December 31, 2014 was
negatively impacted by multiple weather-related production shutdowns, supply disruptions and related inefficiencies during the first quarter of
2014 totaling $1.9 million. The operating loss for our Manufacturing segment for the year ended December 31, 2013 included start-up costs of our
Shoals facility and carrying costs associated with our idled Danville facility totaling $9.5 million. The operating loss for our Manufacturing segment
for the year ended December 31, 2013 also included restructuring and impairment charges of $7.6 million and a $1.7 million charge for projected
costs in excess of selling price related to an order that was delivered in 2014. Corporate and other operating loss was $22.6 million for the year
ended December 31, 2014 compared to $20.7 million for the year ended December 31, 2013. The increase in Corporate and Other operating loss for
the year ended December 31, 2014 compared to the year ended December 31, 2013 reflects increases in corporate costs of $4.3 million and increases
in operating income from parts and services. Repair and maintenance services operating income for the year ended December 31, 2014 was
negatively impacted by the severe winter weather which reduced the repair volumes through our repair shops and sales of repair parts during the
first quarter of 2014. Repair and maintenance services operating income for the year ended December 31, 2014 included a $1.1 million gain on sale of
a previously closed repair shop to a strategic buyer while repair and maintenance services operating income for the year ended December 31, 2013
included restructuring and impairment charges of $1.7 million. Corporate costs were $26.1 million for the year ended December 31, 2014 compared to
$21.9 million for the year ended December 31, 2013. The increase in Corporate costs reflects the reduction in the litigation reserve related to Bral
during 2013, increases in the provision for incentive compensation and a non-cash pension settlement costs of $1.0 million during 2014. Corporate
costs for the year ended December 31, 2013 included $1.3 million related to the start-up of our Shoals facility and $1.6 million related to Corporate
severance.
Interest Expense and Deferred Financing Costs
Interest expense and the amortization of deferred financing costs were $1.1 million for the year ended December 31, 2014 compared to $0.8 million
for the year ended December 31, 2013. In addition to commitment fees on our revolving credit facility, letter of credit fees and amortization of
deferred financing costs, results for 2014 and 2013 included non-cash imputed interest on a customer advance for leased railcars delivered for
which revenue could not be recognized until all contingencies had been resolved.
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Income Taxes
The income tax provision was $2.6 million for the year ended December 31, 2014 compared to an income tax benefit of $5.5 million for the year ended
December 31, 2013. The effective tax rates for the years ended December 31, 2014 and 2013, were 30.3% and 22.3%, respectively. Our effective tax
rate for the year ended December 31, 2014 was lower than the statutory U.S. federal income tax rate of 35% primarily due to the (9.4)% impact of a
research and development tax credit and the (2.4)% impact of changes in the valuation allowance, which were partially offset by a 5.8% blended
state tax rate and the 1.3% impact of changes in uncertain tax positions. The addition of our Shoals facility in 2013 changed the mix of projected
income from states in which we operate, resulting in changes in our estimated state tax apportionment and effective state tax rates. The income tax
benefit for the year ended December 31, 2013 included a provision of $2.2 million resulting from applying these changes in effective state tax rates
on our deferred tax balances. Additionally, projected taxable income in certain states in which we operate may not be sufficient to realize the full
value of net operating loss carryforwards. As a result, the income tax benefit for the year ended December 31, 2013 also included the recognition of
a valuation allowance of $2.3 million against deferred tax assets related to net operating loss carryforwards in certain states in which we operate.
Net Income (Loss)
As a result of the foregoing, net income was $5.9 million for the year ended December 31, 2014 compared to a net loss of $19.3 million for the year
ended December 31, 2013. For the year ended December 31, 2014, our basic and diluted net income per share were $0.49 on basic and diluted shares
outstanding of 12,001,587 and 12,103,520, respectively. For the year ended December 31, 2013, our basic and diluted net loss per share were $1.61
on basic and diluted shares outstanding of 11,954,238.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity for the years ended December 31, 2015 and 2014, were our cash provided by operations, cash and cash equivalent
balances on hand, our securities held to maturity and our revolving credit facilities.
We entered into a $50.0 million senior secured revolving credit facility (the “Revolving Credit Facility”) pursuant to a Credit Agreement dated as of
July 26, 2013 (the “Credit Agreement”) by and among us and certain of our subsidiaries, as borrowers, and Bank of America, N.A., as lender. The
Revolving Credit Facility can be used for general corporate purposes, including working capital. As of December 31, 2015 and 2014, we had no
borrowings under the Revolving Credit Facility. The Credit Facility Agreement also contains a sub-facility for letters of credit not to exceed the
lesser of $30.0 million and the amount of the senior secured revolving credit facility at such time. As of December 31, 2015 and 2014, we had $6.9
million and $6.0 million, respectively, in outstanding letters of credit under the Revolving Credit Facility and therefore had $43.1 million and $44.0
million, respectively, available for borrowing under the Revolving Credit Facility. The Credit Agreement has a term ending on July 26, 2016 and
revolving loans outstanding thereunder will bear interest at a rate of LIBOR plus an applicable margin of 1.50% or at a base rate, as selected by us.
Base rate loans will bear interest at the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate or (c) LIBOR plus 1.00%. We are required
to pay a non-utilization fee of between 0.10% and 0.30% on the unused portion of the revolving loan commitment depending on our quarterly
average balance of unrestricted cash and our consolidated leverage ratio. Borrowings under the Revolving Credit Facility are secured by a first
priority perfected security interest in substantially all of our and our subsidiaries’ assets excluding railcars held by our railcar leasing subsidiary,
JAIX. We also have pledged all of the equity interests in our direct and indirect domestic subsidiaries as security for the Revolving Credit Facility.
The Credit Agreement has both affirmative and negative covenants, including, without limitation, a covenant requiring a minimum consolidated net
liquidity of $35.0 million and limitations on indebtedness, liens and investments. The Credit Agreement also provides for customary events of
default. During the first half of 2016, we will be evaluating renewal or refinancing alternatives for our current revolving loan agreement and expect
to have a new agreement in place by July 26, 2016.
Our restricted cash and restricted certificates of deposit balance was $6.9 million as of December 31, 2015 and $6.0 million as of December 31, 2014,
and consisted of cash and certificates of deposit used to collateralize standby letters of credit with respect to performance guarantees and to
support our worker’s compensation insurance claims. The increase in restricted cash balances as of December 31, 2015 compared to December 31,
2014 was a result of decreases in standby letters of credit with respect to performance guarantees and our corresponding obligation to collateralize
them. The standby letters of credit outstanding as of December 31, 2015 are scheduled to expire at various dates through January 31, 2018. We
expect to establish restricted cash balances and restricted certificates of deposit in future periods to minimize bank fees related to standby letters of
credit.
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As of December 31, 2015, the value of leased railcars (including inventory on lease and railcars available for lease) was $24.7 million. We continue
to offer railcars for lease to certain customers and pursue opportunities to sell leased railcars in our portfolio.
Based on our current level of operations and known changes in planned volume based on our backlog, we believe that our operating cash flows,
our marketable securities and our cash balances, together with amounts available under our revolving credit facility, will be sufficient to meet our
expected liquidity needs. 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 working
capital as demand for railcars increases, payments for contractual obligations, organic growth opportunities, including new plant and equipment
and development of railcars, joint ventures, international expansion and acquisitions, and these capital requirements could be substantial.
We provide pension and retiree welfare benefits to certain salaried and hourly employees upon their retirement. Benefits under our pension plans
are now frozen and will not be impacted by increases due to future service. 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. As of
December 31, 2015, our benefit obligation under our defined benefit pension plans and our postretirement benefit plan was $53.4 million and $72.9
million, respectively, which exceeded the fair value of plan assets by $6.7 million and $72.9 million, respectively. We made no contributions to our
defined benefit pension plans during 2015 and as disclosed in Note 14 to the consolidated financial statements, we do not expect to make any
contributions to our defined benefit pension plans in 2016. The Pension Protection Act of 2006 provides for changes to the method of valuing
pension plan assets and liabilities for funding purposes as well as minimum funding levels. Our defined benefit pension plans are in compliance
with the minimum funding levels established in the Pension Protection Act. Funding levels will be affected by future contributions, investment
returns on plan assets, growth in plan liabilities and interest rates. Assuming that the plans are fully funded as that term is defined in the Pension
Protection Act, we will be required to fund the ongoing growth in plan liabilities on an annual basis.
During the fourth quarter of 2014, we offered certain of our former employees the option to receive a lump-sum pension payment or annuity in order
to satisfy in full our future pension liabilities to such former employees. Payments of $3.3 million to eligible former employees who elected to
participate in the offer were paid in December 2014 from existing pension plan assets and constituted a complete settlement of our pension
liabilities with respect to such former employees. The discount rates and actuarial assumptions used to calculate the payouts were determined
according to federal regulations and approximated those used to calculate our pension obligation for financial reporting purposes. A non-cash
settlement charge of $1.0 million was recognized in the fourth quarter of 2014 in connection with the settlement payments. This charge resulted
from the recognition in earnings of a portion of the losses recorded in accumulated other comprehensive loss based on the portion of the
obligation settled.
We made payments to our postretirement benefit plan of $0.4 million related to salaried participants during 2015. A substantial portion of our
postretirement benefit plan obligation relates to an expired settlement agreement with the union representing employees at the Company’s and its
predecessors’ Johnstown manufacturing facilities. The terms of that settlement agreement (the “2005 Settlement Agreement”) required us to pay
until November 30, 2012 certain monthly amounts toward the cost of retiree health care coverage. We engaged in voluntary negotiations for two
years in an effort to reach a consensual agreement related to the expired 2005 Settlement Agreement but no agreement was reached. We terminated,
effective November 1, 2013, our contributions for medical coverage and life insurance benefits to affected retirees and sought declaratory relief to
confirm our rights under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), to reduce or terminate retiree medical
coverage and life insurance benefits pursuant to the plans that were the subject of the 2005 Settlement Agreement. On July 9, 2013, the union and
certain retiree defendants filed suit in the United States District Court for the Western District of Pennsylvania regarding the same dispute (see
Note 17). On August 20, 2015, we reached a settlement agreement with the union and the other plaintiffs. Under the terms of the settlement
agreement, we will make a one-time cash payment of $32.8 million in exchange for full and final resolution of the matter. The Pennsylvania Court
granted final approval of the settlement on January 19, 2016. The plaintiffs had until February 18, 2016 to file an appeal of the court order granting
final approval of the settlement. On February 17, 2016, certain class members requested a 30-day extension to file an appeal, which the
Pennsylvania Court denied on February 22, 2016. We expect to make the cash settlement payment on or after March 23, 2016. We anticipate
funding pension plan contributions, postretirement benefit plan payments and payment of the $32.8 million settlement amount with cash from
operations and available cash.
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Our recorded postretirement benefit plan obligation through December 31, 2015 assumed for accounting purposes a continuation of those monthly
payments after November 30, 2012 because the status of the settlement had not yet met the requirements for settlement accounting. A transaction
meets the criteria to be accounted for as a settlement when a transaction is irrevocable, relieves the employer of primary responsibility for the
benefit obligation, and eliminates significant risks related to the obligation and the assets used to effect the settlement. Settlement accounting will
be triggered when we make the cash settlement payment and will result in a pre-tax gain of approximately $19 million and a reduction in our
postretirement benefit obligation of approximately $67 million.
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 funds through additional offerings of our common stock and through long-term borrowings. There can be no assurance
that long-term debt or equity offerings, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing
may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. Our failure to raise capital if and when needed
could have a material adverse effect on our results of operations and financial condition.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2015, and the effect that these obligations would be expected to
have on our liquidity and cash flow in future periods:
Contractual Obligations
Operating leases
Material and component purchases
Total
Payments Due by Period
(in thousands)
2-3
Total
After
1 Year Years Years 5 Years
$67,604 $ 9,909 $19,192 $19,702 $18,801
—
$83,734 $18,108 $27,123 $19,702 $18,801
—
8,199
16,130
7,931
4-5
Material and component purchases consist of non-cancelable agreements with suppliers to purchase materials used in the manufacturing process.
The estimated amounts above may vary based on the actual quantities and price.
The above table excludes $4.3 million related to a reserve for unrecognized tax benefits and accrued interest and penalties at December 31, 2015
because the timing of the payout of these amounts cannot be determined. We are also required to make minimum contributions to our pension
plans and postretirement welfare plans as described above. The above table also excludes the $32.8 million one-time cash payment related to the
2015 settlement agreement described above.
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, 2015, 2014 and 2013:
(Amounts in thousands)
Net cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Total
2015
2014
2013
$(65,685)
35,732
(511)
$(30,464)
$ (6,026)
(3,206)
(22,742)
$(31,974)
$32,243
(619)
15,373
$46,997
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 operating assets and liabilities. Cash flows from operating activities are affected
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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 payments to our suppliers. As some of our customers accept delivery of
new railcars in train-set quantities, 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.
Our net cash used in operating activities for the year ended December 31, 2015 was $65.7 million compared to $6.0 million for the year ended
December 31, 2014. Our net cash used in operating activities for the year ended December 31, 2015 included decreases in customer deposits and
other liabilities, increases in accounts receivable and increases in inventory, which were partially offset by cash from operations. Our net cash used
in operating activities for the year ended December 31, 2014 included decreases in customer deposits which were partially offset by changes in
working capital and cash from operations. Our net cash provided by operating activities for the year ended December 31, 2013 included a customer
deposit of $89.3 million for railcars to be delivered in 2014, which was partially offset by changes in working capital and additions to the lease fleet.
Investing Activities. Net cash provided by investing activities for the year ended December 31, 2015 was $35.7 million compared to net cash used in
investing activities of $3.2 million for the year ended December 31, 2014. Net cash provided by investing activities for the year ended December 31,
2015 included proceeds from maturity of securities (net of purchases) of $21.0 million, proceeds from the sale of our railcar repair and maintenance
services business and facility of $17.6 million, state and local incentives received of $15.7 million and proceeds from sale of railcars available for
lease of $7.6 million, which were partially offset by purchases of property, plant and equipment of $16.7 million (including purchases of equipment
of $10.9 million for our Shoals facility), purchases of restricted certificates of deposit of $0.9 million (net of maturities) related to increases in
collateralization obligations with respect to letters of credit for performance guarantees and the cost of railcars available for lease of $8.7 million.
Net cash used in investing activities for the year ended December 31, 2014 included purchases of securities held to maturity of $9.0 million (net of
proceeds from redemptions) and purchases of property, plant and equipment of $11.8 million (including purchases of equipment of $9.4 million for
our Shoals facility), which were partially offset by proceeds from sale of property, plant and equipment, assets held for sale and railcars available
for lease totaling $15.8 million. Net cash used in investing activities for the year ended December 31, 2014 also included restricted cash withdrawals
(net of deposits and purchases of restricted certificates of deposit) of $1.8 million related to decreases in collateralization obligations with respect
to letters of credit for performance guarantees.
Net cash used in investing activities for the year ended December 31, 2013 included purchases of property plant and equipment of $17.3 million,
which were partially offset by maturities of securities (net of purchases) of $3.0 million, changes in restricted cash and restricted certificates of
deposit of $6.9 million related to decreases in collateralization obligations with respect to letters of credit for performance guarantees and proceeds
from the sale of railcars available for lease of $6.7 million.
Financing Activities. Net cash used in financing activities for the year ended December 31, 2015 was $0.5 million compared to $22.7 million for the
year ended December 31, 2014. Net cash used in financing activities for the year ended December 31, 2015 included $4.4 million of cash dividends
paid to our stockholders, a $(1.1) million impact of the settlement of employee taxes on vested restricted shares and stock option exercise and $4.9
million proceeds from stock option exercise. Net cash used in financing activities for the year ended December 31, 2014 included the net decrease in
a customer advance for production of leased railcars delivered during 2013 for which revenue could not be recognized until all contingencies had
been resolved in 2014. Net cash provided by financing activities for the year ended December 31, 2013 included proceeds of a $19.4 million
customer advance for production of leased railcars delivered, which was partially offset by advance repayments of $0.9 million. Financing activities
for each of the years ended December 31, 2014 and 2013, included $2.9 million of cash dividends paid to our stockholders.
Capital Expenditures
Our capital expenditures were $16.7 million for the year ended December 31, 2015 compared to $11.8 million for the year ended December 31, 2014.
Capital expenditures were primarily capital investments for our Shoals facility, which continued to ramp up production during 2014 and 2015.
Excluding unforeseen expenditures, we expect that total capital expenditures will be approximately $12 million for 2016, including capital
expenditures for our Shoals facility.
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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 net deferred tax assets, 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 ASC 360, Property, Plant and Equipment, 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 price of an asset group, a significant adverse change
in the manner in or extent to which an asset group is used, a current year operating loss combined with a history of operating losses or a current
expectation that, more likely than not, a long-lived asset group will be sold or otherwise disposed of significantly before the end of its previously
estimated useful life. If indicators of impairment are present, we then determine if the carrying value of the asset group is recoverable by comparing
the carrying value of the asset group to total undiscounted future cash flows of the asset group. If the carrying value of the asset group is not
recoverable, an impairment loss is measured based on the excess of the carrying amount of asset group over the estimated fair value of the asset
group.
Based on our backlog for coal car orders as of December 31, 2013 and the soft industry outlook, we were unable to predict when our Danville
manufacturing facility would resume operations and therefore we tested the long-lived assets at our Danville facility for impairment as of
December 31, 2013. The carrying values of property, plant and equipment at the Danville facility were reduced to their estimated fair market values,
resulting in a pre-tax impairment charge of $7.6 million for the year ended December 31, 2013. Fair market values were estimated using the market
approach for items in which there is an active secondary market where recent sales of comparable assets exist. The market approach establishes
value through analysis of recent sales of comparable property. An analysis is made of the differences between the comparable properties and the
subject property, and the sales prices are correspondingly adjusted to arrive at indications of the subject property’s value. In instances where
market data was available but deemed too incomplete to apply a complete market approach, the market relationship data available was used to
adjust the cost approach analysis. In instances where market data was unavailable the cost approach analysis was used. The cost approach
recognizes that a prudent investor would not ordinarily pay more for an asset than the cost to replace it new. The first step is to estimate the
reproduction/replacement cost new of an asset using current materials, prices and labor. The cost new is then reduced by the amount of
depreciation resulting from physical deterioration, functional obsolescence and economic/external obsolescence that are inherent in the asset. The
resulting depreciated replacement cost is an indication of the fair value of an asset providing all elements of depreciation are addressed.
Due to management’s decision to close the Clinton maintenance and repair shop, we also evaluated the recoverability of its long-lived assets and
as a result reduced the carrying values of property, plant and equipment to their estimated fair market values, resulting in a pre-tax charge of $1.5
million for the year ended December 31, 2013. The estimated fair market values represent estimated salvage values of buildings, equipment and rail
at the facility and the estimated sales value for the associated land.
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We did not perform an impairment analysis of long-lived assets during 2015 or 2014 because we did not identify any impairment indicators that we
believe would have required long-lived assets at our facilities to be tested for recoverability during 2015 or 2014.
Impairment of goodwill
We assess the carrying value of goodwill for impairment as required by ASC 350, Intangibles – Goodwill and Other, annually or more frequently
whenever events occur and circumstances change indicating potential impairment. During our annual goodwill impairment assessments as of
August 1, 2015 and 2014, management estimated the value of our reporting units that carry goodwill using the income approach which indicates the
fair value of a business based on the present value of the cash flows that the business can be expected to generate in the future and the market
approach, which uses the price at which shares of similar companies are exchanged to estimate the fair value of a company’s equity. Within the
income approach, the discounted cash flow method was used, and within the market approach, the guideline company method was used. Fair value
based on the income approach was given a 60% weighting and fair value based on the market approach was given a 40% weighting.
Management determined that there are three reporting units for the purposes of testing goodwill: Manufacturing, Repairs and Maintenance and
Parts. For each reporting unit with goodwill (Manufacturing with $21.5 million and Repairs and Maintenance with $0.6 million as of August 1, 2015),
we concluded that the estimated fair value of each reporting unit’s net assets exceeded the carrying value as of the dates of our impairment tests
for 2015, 2014 and 2013. 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 net assets were less than their carrying value.
The discounted cash flow method involves management making estimates with respect to a variety of factors that will significantly impact the
future performance of the business, including:
•
future railcar volume projections based on an industry-specific outlook for railcar demand;
•
estimated margins on railcar sales and maintenance and repair services;
•
estimated growth rate for selling, general and administrative costs;
•
future effective tax rate for our Company; and
•
weighted-average cost of capital (“WACC”) used to discount future performance of our Company.
Because these estimates form a basis for the determination of whether or not an impairment charge should be recorded, these estimates are
considered to be critical accounting estimates.
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. Our estimated margins used in the discounted cash flow method are based primarily on historical margins.
Management estimated a WACC of 14% for our August 1, 2015 goodwill impairment valuation analyses for our Manufacturing reporting unit. The
market approach was used in evaluating goodwill impairment for our Repair and Maintenance reporting unit as of August 1, 2015.
In addition to estimating the fair value of the net assets of our Manufacturing reporting unit using the discounted cash flow method in the base
case scenario, we also estimated the fair value of the net assets in our Manufacturing reporting unit using the discounted cash flow method for
alternate scenarios, including the impact of a decrease in earnings before income tax margin of one hundred basis points or the impact of a one
hundred basis point increase in the WACC used in the discounted cash flow method. We compared the estimated fair value of the net assets in our
Manufacturing reporting unit using the discounted cash flow method in the base case scenario to the alternate scenarios. Each of these alternate
scenarios reduced the estimated fair value of the net assets in our Manufacturing reporting unit using the discounted cash flow method compared
to the estimated fair value of the net assets in our Manufacturing reporting unit in the base case. However, in all scenarios, the estimated fair value
of the net assets in our Manufacturing reporting unit exceeded the carrying value.
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During our annual goodwill impairment assessment as of August 1, 2014, in addition to estimating the fair value of the net assets of our Repair and
Maintenance reporting unit using the discounted cash flow method in the base case scenario, we also estimated the fair value of the net assets in
our Repair and Maintenance reporting unit using the discounted cash flow method for an alternate scenario that included the impact of a one
hundred basis point increase in the WACC used in the discounted cash flow method. We compared the estimated fair value of the net assets in our
Repair and Maintenance reporting unit using the discounted cash flow method in the base case scenario to the alternate scenario. The alternate
scenario reduced the estimated fair value of the net assets in our Repair and Maintenance reporting unit using the discounted cash flow method
compared to the estimated fair value of the net assets in our Repair and Maintenance reporting unit in the base case. However, in the alternate
scenario, the estimated fair value of the net assets in our Repair and Maintenance reporting unit exceeded the carrying value.
The guideline company method values a business by comparing the subject company to similar publicly traded companies. The application of the
guideline company method consists of several steps including:
•
identifying the most similar publicly traded companies to the reporting unit;
•
reviewing financial and supplemental data, such as market prices and business descriptions for the selected companies;
•
calculating valuation multiples for the selected publicly traded guideline companies;
•
•
•
performing comparative analysis to select valuation multiples and then applying them to the financial data of the reporting unit to arrive at a
preliminary indication of the value of the reporting units invested capital on a marketable, minority basis;
applying a control premium to the indicated equity values on a marketable, minority basis to arrive at the indicated value of common equity
on a marketable, controlling basis; and
where appropriate, making adjustments to add the appropriate balances related to cash and short-term investments, excess working capital
and the benefits of net operating loss carryforwards.
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 2015, we assumed that the expected long-term rate of return on pension plan assets on a plan by plan basis would range from 5.30% to 6.12%.
As permitted under ASC 715, 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 hundred basis points in the expected long-term rate of
return on plan assets would have the following effect:
Effect on net periodic benefit cost
1% Increase
1% Decrease
(in thousands)
$
(488)
$
488
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, 2015, we determined this rate on our postretirement welfare plan to be 4.39%, an increase of 0.36%
from the 4.03% rate used at December 31, 2014. At December 31, 2015, we determined this rate on our
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pension plans on a plan by plan basis with results ranging from 4.40% to 4.50%. A change of one hundred basis points in the discount rate would
have the following effect:
Effect on net periodic benefit cost
1% Increase
1% Decrease
$
(in thousands)
139
$
(180)
In October 2015, the Society of Actuaries published updated mortality improvement assumptions for U.S. plans, scale (MP-2015), which reflects
additional data that the Social Security Administration has released since prior assumptions (MP-2014) were developed. Scale (MP-2015) results in
lower projected mortality improvement than scale (MP-2014). We have historically utilized the Society of Actuaries’ published mortality data in our
plan assumptions. Accordingly, we adopted MP-2015 for purposes of measuring our pension and postretirement obligations at December 31, 2015.
For the years ended December 31, 2015, 2014 and 2013, we recognized consolidated pre-tax pension (benefit) cost of $(0.3) million, $0.2 million and
$(0.5) million, respectively. We currently do not expect to make any contributions to our pension plans during 2015. However, we may elect to
adjust the level of contributions based on a number of factors, including performance of pension investments and changes in interest rates. The
Pension Protection Act of 2006 provided for changes to the method of valuing pension plan assets and liabilities for funding purposes as well as
requiring minimum funding levels. Our defined benefit pension plans are in compliance with minimum funding levels established in the Pension
Protection Act. Funding levels will be affected by future contributions, investment returns on plan assets, growth in plan liabilities and interest
rates. Once the plan is 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.
For the years ended December 31, 2015, 2014 and 2013, we recognized a consolidated pre-tax postretirement welfare benefit cost of $3.7 million, $3.7
million and $3.6 million, respectively.
A substantial portion of our postretirement benefit plan obligation relates to an expired settlement agreement with the union representing
employees at the Company’s and its predecessors’ Johnstown manufacturing facilities. The terms of that settlement agreement (the “2005
Settlement Agreement”) required us to pay until November 30, 2012 certain monthly amounts toward the cost of retiree health care coverage. We
engaged in voluntary negotiations for two years in an effort to reach a consensual agreement related to the expired 2005 Settlement Agreement but
no agreement was reached. We terminated, effective November 1, 2013, our contributions for medical coverage and life insurance benefits to
affected retirees and sought declaratory relief to confirm our rights under the Employee Retirement Income Security Act of 1974, as amended
(“ERISA”), to reduce or terminate retiree medical coverage and life insurance benefits pursuant to the plans that were the subject of the 2005
Settlement Agreement. On July 9, 2013, the union and certain retiree defendants filed suit in the United States District Court for the Western
District of Pennsylvania regarding the same dispute (see Note 17). On August 20, 2015, we reached a settlement agreement with the union and the
other plaintiffs. Under the terms of the settlement agreement, we will make a one-time cash payment of $32.8 million in exchange for full and final
resolution of the matter. The Pennsylvania Court granted final approval of the settlement on January 19, 2016. The plaintiffs had until February 18,
2016 to file an appeal of the court order granting final approval of the settlement. On February 17, 2016, certain class members requested a 30-day
extension to file an appeal, which the Pennsylvania Court denied on February 22, 2016. We expect to make the cash settlement payment on or after
March 23, 2016. We anticipate funding pension plan contributions, postretirement benefit plan payments and payment of the $32.8 million
settlement amount with cash from operations and available cash.
Our recorded postretirement benefit plan obligation through December 31, 2015 assumed for accounting purposes a continuation of those monthly
payments after November 30, 2012 because the status of the settlement had not yet met the requirements for settlement accounting. A transaction
meets the criteria to be accounted for as a settlement when a transaction is irrevocable, relieves the employer of primary responsibility for the
benefit obligation, and eliminates significant risks related to the obligation and the assets used to effect the settlement. Settlement accounting will
be triggered when we make the cash settlement payment and will result in a pre-tax gain of approximately $19 million and a reduction in our
postretirement benefit obligation of approximately $67 million.
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Income taxes
We account for income taxes under the asset and liability method prescribed by ASC 740, Income Taxes. 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.
Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect our best assessment of estimated future
taxes to be paid. 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 record net deferred tax assets to the extent we believe these
assets will more likely than not be realized. In evaluating whether it is more likely than not that our net deferred tax assets will be realized, we
consider both positive and negative evidence including the reversal of existing taxable temporary differences, taxable income in prior carryback
years if carryback is permitted under the tax law and such taxable income has not previously been used for carryback, future taxable income
exclusive of reversing temporary differences and carryforwards based on near-term and longer-term projections of operating results and the length
of the carryforward period. We evaluate the realizability of our net deferred tax assets and assess the valuation allowance on a quarterly basis,
adjusting the amount of such allowance, if necessary. 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.
At December 31, 2015, we had total net deferred tax assets of $34.7 million. Although realization of our net deferred tax assets is not certain,
management has concluded that, based on the positive and negative evidence considered, we will more likely than not realize the full benefit of the
deferred tax assets except for our deferred tax assets in certain states in which we operate. At December 31, 2015, we had a valuation allowance of
$5.8 million against the tax benefit of net operating loss carryforwards in certain states in which we operate.
Product warranties
Warranty terms are based on the negotiated railcar sales contracts. We typically warrant that new railcars produced by us will be free from defects
in material and workmanship under normal use and service identified for a period of up to five years from the time of sale. The Company also
provides limited warranties with respect to certain rebuilt railcars. With respect to parts and materials manufactured by others and incorporated by
us in our products, such parts and materials may be covered by the warranty provided by the original manufacturer. We establish a warranty
reserve at the time of sale to account for future warranty charges. The warranty reserve consists of two categories: assigned claims and
unassigned claims. The unassigned warranty reserve is calculated based on historical warranty costs adjusted for estimated material price changes
and other factors. Once a warranty claim is filed for railcars under warranty, the estimated cost to correct the defect is moved from the unassigned
reserve to the assigned reserve and tracked separately.
Revenue recognition
We recognize revenues on new and rebuilt railcars when (1) individual cars are completed, (2) the railcars are accepted by the customer following
inspection, (3) the risk for any damage or other loss with respect to the railcars passes to the customer and (4) title to the railcars transfers to the
customer. We do not record any returns or allowances against sales. Revenues derived from a single sales contract that contains multiple products
and services are allocated based on the relative fair value of each item to be delivered and recognized in accordance with the applicable revenue
recognition criteria for the specific unit of accounting. We value used railcars received at their estimated fair market value at the date of receipt less
a normal profit margin.
When we retain substantial risk of ownership in railcars sold to customers, the proceeds received by us are not treated as a sale but are accounted
for as a customer advance by recording the proceeds as a liability. Customer advances on our consolidated balance sheets are reported net of any
repayments made by us and include imputed interest that is included in interest expense on our consolidated statements of operations.
Through September 30, 2015, we recognized service-related revenue from maintenance and repairs and inspections when all significant
maintenance or repair or inspections services have been completed, quality accepted and delivery has occurred. We recognize revenue from parts
sales when the risk of any damage or loss and title passes to the customer and delivery has occurred.
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We recognize operating lease revenue on Inventory on Lease on a contractual basis and recognize operating lease revenue on Railcars Available
for Lease on a straight-line basis over the life of the lease. We recognize revenue from the sale of Inventory on Lease on a gross basis in
manufacturing sales and cost of sales if the manufacture of the railcars and the sales process is completed within 12 months. We recognize revenue
from the sale of Railcars Available for Lease on a net basis as Gain (Loss) on Sale of Railcars Available for Lease since the sale represents the
disposal of a long-term operating asset.
We recognize a loss when we have a contractual commitment to manufacture railcars at an estimated cost in excess of the contractual selling price.
We report amounts billed to customers for shipping and handling as part of sales in accordance with ASC 605-45, Revenue Recognition –
Principal Agent Consideration, and reports related costs in cost of sales.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2015-17, Income Taxes
(Topic 740: Balance Sheet Classification of Deferred Taxes), which simplifies the presentation of deferred income taxes by requiring that deferred
tax assets and liabilities be classified as noncurrent in a classified statement of financial position. Early adoption is permitted and we adopted the
new guidance in the fourth quarter of 2015 on a prospective basis. Adoption of this ASU resulted in a reclassification of our net current deferred
tax asset to the net noncurrent deferred tax asset in our consolidated balance sheet as of December 31, 2015. No prior periods were retrospectively
adjusted.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330), which requires entities to measure most inventory at the lower of cost and net
realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. Under ASU
2015-11, inventory is measured at the lower of cost and net realizable value, which eliminates the need to determine replacement cost and evaluate
whether it is above the ceiling (net realizable value) or below the floor (net realizable value less normal profit margin). ASU 2015-11 defines net
realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and
transportation. This standard is effective prospectively for annual reporting periods beginning after December 15, 2016 (early adoption is
permitted). We are currently evaluating the impact that this guidance will have on our consolidated financial statements and related disclosures.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt
issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the
related debt liability rather than as an asset. Amortization of the debt issuance costs will continue to be reported as interest expense. This standard
is effective retrospectively for annual reporting periods beginning after December 15, 2016 (early adoption is permitted). The adoption of these
changes is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) Amendments to the Consolidation Analysis, which changes the
analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. All legal entities are subject
to reevaluation under the revised consolidation model. The new guidance affects the following areas: (1) limited partnerships and similar legal
entities; (2) evaluating fees paid to a decision maker or a service provider as a variable interest; (3) the effect of fee arrangements on the primary
beneficiary determination; (4) the effect of related parties on the primary beneficiary determination; and (5) certain investment funds. This standard
is effective for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. If an entity early adopts the guidance in an interim period, any adjustments should be reflected as of the
beginning of the fiscal year that includes that interim period. A reporting entity may apply the amendments in this guidance using a modified
retrospective approach by recording a cumulative effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity
also may apply the amendments retrospectively. The adoption of these changes is not expected to have a material impact on our consolidated
financial position, results of operations or cash flows.
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In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which outlines a
single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current
revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to
depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue
and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs
incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the
new standard. The ASU is effective for annual reporting periods beginning after December 15, 2017 and early adoption as of December 15, 2016 is
permitted. We are currently assessing the impact of this standard on our financial position, results of operations and cash flows.
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic
360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the criteria for
reporting discontinued operations and expands disclosures about discontinued operations. Under the new guidance, only disposals representing a
strategic shift that has (or will have) a major effect on an entity’s operations should be presented as discontinued operations when the component
of an entity or group of components of an entity is classified as held for sale or is disposed of by sale or other means. Examples include a disposal
of operations in a major geographic area, a major line of business or a major equity method investment. This standard was effective prospectively
for reporting periods beginning after December 15, 2014. The adoption of these changes did not have a material impact on our consolidated
financial position, results of operations or cash flows.
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” 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;
the competitive nature of our industry;
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 customer acceptance of orders;
the availability and price of used railcars offered for sale and new or used railcars offered for lease;
fluctuating costs of raw materials, including steel and aluminum, and delays in the delivery of raw materials;
limitations on the supply of railcar components;
international economic and political risks to the extent we expand our sales of products and services internationally;
the risk of lack of acceptance of our new railcar offerings by our customers;
our reported backlog may not indicate what our future sales will be;
potential significant warranty claims;
acquisitions may fail to perform to expectations or we may fail to successfully integrate acquired businesses into our existing business;
the risk of losing key personnel;
shortages of skilled labor;
risks relating to our relationship with our unionized employees and their unions;
our reliance on a single supplier for our roll-formed center sills;
the risk of equipment failures, delays in deliveries or extensive damage to our facilities;
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•
•
•
•
•
•
the risk that we are unable to renew our lease arrangements at our manufacturing facilities at commercially acceptable terms;
the risk of failing to adequately protect our intellectual property;
cybersecurity risks relating to our information technology and other systems;
our ability to maintain relationships with our suppliers of railcar components;
the cost of complying with environmental laws and regulations; and
various covenants in the agreements 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.”
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
We have a $50 million senior secured revolving credit facility, the proceeds of which can be used for general corporate purposes, including
working capital. 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. As of December 31, 2015, we had $6.9 million in outstanding letters of credit under the
Revolving Credit Facility and therefore had $43.1 million available for borrowing under the Revolving Credit Facility.
The production of railcars and our operations require substantial amounts of aluminum and steel. The cost of aluminum, steel and all other
materials (including scrap metal) used in the production of our railcars represents a significant majority of our direct manufacturing costs. Our
business is subject to the risk of price increases and periodic delays in the delivery of aluminum, steel and other materials, all of which are beyond
our control. Any fluctuations in the price or availability of aluminum or steel, or any other material used in the production of our railcars, may have
a material adverse effect on our business, results of operations or financial condition. In addition, if any of our suppliers were unable to continue
its business or were to seek bankruptcy relief, the availability or price of the materials we use could be adversely affected. When market conditions
permit us to do so, we negotiate contracts with our customers that allow for variable pricing to protect us against future changes in the cost of raw
materials. When raw material prices increase rapidly or to levels significantly higher than normal, we may not be able to pass price increases
through to our customers, which could adversely affect our operating margins and cash flows.
We are not exposed to any significant foreign currency exchange risks as our general policy is to denominate foreign sales and purchases in U.S.
dollars.
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Item 8.
Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
FreightCar America, Inc.
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of FreightCar America, Inc. and subsidiaries (the “Company”) as of December 31,
2015 and 2014, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedule listed in the Index at Item 15.
These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the financial statements and financial statement schedule 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.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of FreightCar America, Inc. and
subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s
internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2016 expressed an
unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
March 4, 2016
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
FreightCar America, Inc.
Chicago, Illinois
We have audited the internal control over financial reporting of FreightCar America, Inc. and subsidiaries (the “Company”) as of December 31,
2015, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission. The Company’s management is responsible 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 the Company’s internal control over financial reporting based on
our audit.
We conducted our audit 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 effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
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 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 company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based
on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
financial statements and financial statement schedule as of and for the year ended December 31, 2015 of the Company and our report dated
March 4, 2016 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
March 4, 2016
39
Table of Contents
FreightCar America, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share and per share data)
Assets
Current assets
Cash and cash equivalents
Restricted cash and restricted certificates of deposit
Marketable securities
Accounts receivable, net of allowance for doubtful accounts of $82 and $188,
respectively
Inventories, net
Other current assets
Deferred income taxes, net
Total current assets
Property, plant and equipment, net
Railcars available for lease, net
Goodwill
Deferred income taxes, net
Other long-term assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities
Accounts and contractual payables
Accrued payroll and employee benefits
Accrued postretirement benefits
Reserve for worker’s compensation
Accrued warranty
Customer deposits and deferred revenue
Income taxes payable
Other current liabilities
Total current liabilities
Accrued pension costs
Accrued postretirement benefits, less current portion
Deferred income state and local incentives, long-term
Accrued taxes and other long-term liabilities
Total liabilities
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, 2015 and 2014)
Common stock, $0.01 par value, 50,000,000 shares authorized, 12,731,678 shares
issued at December 31, 2015 and 2014
Additional paid in capital
Treasury stock, at cost, 402,166 and 665,869 shares at December 31, 2015 and 2014,
respectively
Accumulated other comprehensive loss
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31, 2015
December 31, 2014
$
$
$
$
83,068
6,896
26,951
39,708
115,354
8,704
—
280,681
42,596
24,729
21,521
34,722
2,655
406,904
34,304
8,303
405
4,165
9,239
8,615
4,180
3,346
72,557
6,673
72,497
12,190
7,876
171,793
—
127
93,939
(17,516)
(21,078)
179,639
235,111
406,904
$
$
$
$
113,532
6,015
47,961
4,086
82,259
7,173
12,139
273,165
43,239
22,897
22,128
21,553
2,270
385,252
34,010
6,462
409
3,387
8,742
43,977
121
1,217
98,325
7,210
73,474
—
7,548
186,557
—
127
100,303
(29,971)
(24,017)
152,253
198,695
385,252
See notes to the consolidated financial statements
40
Table of Contents
FreightCar America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for share and per share data)
Revenues
Cost of sales
Gross profit
Selling, general and administrative expenses
Gain on sale of railcars available for lease
Gain on sale of railcar repair and maintenance services business and facility
Restructuring and impairment charges
Operating income (loss)
Interest expense and deferred financing costs
Other income
Income (loss) before income taxes
Income tax provision (benefit)
Net income (loss)
Net income (loss) per common share - basic
Net income (loss) per common share - diluted
Weighted average common shares outstanding - basic
Weighted average common shares outstanding - diluted
Dividends declared per common share
$
Year Ended December 31,
2014
598,518
556,175
42,343
35,317
(1,403)
(1,078)
—
9,507
(1,077)
42
8,472
2,568
5,904
2015
772,854
690,193
82,661
41,663
(1,187)
(4,578)
—
46,763
(243)
116
46,636
14,831
31,805
$
2.59
2.58
$
$
0.49
0.49
2013
290,393
277,168
13,225
27,464
(604)
—
10,452
(24,087)
(809)
64
(24,832)
(5,537)
(19,295)
(1.61)
(1.61)
$
$
$
$
$
$
$
$
12,175,955
12,001,587
11,954,238
12,217,755
12,103,520
11,954,238
$
0.36
$
0.24
$
0.24
See notes to the consolidated financial statements
41
Table of Contents
FreightCar America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income (loss)
Other comprehensive income (loss) net of tax:
Pension liability adjustments, net of tax
Postretirement liability adjustments, net of tax
Other comprehensive income (loss)
Comprehensive income (loss)
See notes to the consolidated financial statements
42
Year Ended December 31,
2014
$31,805 $ 5,904
2015
2013
$(19,295)
154
2,785
2,939
34,744
(4,160)
(4,725)
(8,885)
(2,981)
6,926
4,081
11,007
(8,288)
Table of Contents
FreightCar America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except for share data)
Balance, January 1, 2013
Net loss
Other comprehensive income
Stock options exercised
Restricted stock awards
Employee stock settlement
Forfeiture of restricted stock awards
Stock-based compensation recognized
Deficiency of tax benefit from stock-based
compensation
Cash dividends
Balance, December 31, 2013
Net income
Other comprehensive loss
Stock options exercised
Restricted stock awards
Employee stock settlement
Forfeiture of restricted stock awards
Stock-based compensation recognized
Excess tax benefit from stock-based
compensation
Cash dividends
Balance, December 31, 2014
Net income
Other comprehensive income
Stock options exercised
Restricted stock awards
Employee stock settlement
Forfeiture of restricted stock awards
Stock-based compensation recognized
Excess tax benefit from stock-based
compensation
Cash dividends
Balance, December 31, 2015
Additional
Paid In
Accumulated
Other
Total
Treasury Stock Comprehensive Retained Stockholders’
Amount Capital
Shares Amount
Loss
Earnings
Equity
Common Stock
Shares
12,731,678 $
— —
— —
— —
— —
— —
— —
— —
127 $ 100,402 (752,167) $(34,488) $
— — —
— — —
523
(330) 11,498
3,327
(3,327) 72,635
(98)
(4,244)
(9,986)
(234)
2,289 — —
—
234
12,731,678 $
— —
— —
127 $
— —
— —
— —
— —
— —
— —
— —
(3) — —
— — —
99,265 (682,264) $(30,970) $
— — —
— — —
299
6,610
(148)
1,093
(1,093) 24,212
(225)
(8,770)
(5,657)
(168)
2,084 — —
—
168
12,731,678 $
— —
— —
27 — —
— — —
127 $ 100,303 (665,869) $(29,971) $
— — —
— — —
(5,772) 240,410 10,697
2,955
(2,955) 66,017
(1,052)
— (35,989)
(6,735)
(145)
145
2,183 — —
— —
— —
— —
— —
— —
— —
— —
(26,139) $ 171,429 $
— (19,295)
11,007 —
— —
— —
— —
— —
— —
—
— —
(2,889)
—
(15,132) $ 149,245 $
5,904
(8,885) —
— —
— —
— —
— —
— —
— —
(2,896)
—
(24,017) $ 152,253 $
— 31,805
2,939 —
— —
— —
— —
— —
— —
— —
— —
127 $
12,731,678 $
35 — —
— — —
93,939 (402,166) $(17,516) $
— —
(4,419)
—
(21,078) $ 179,639 $
See notes to the consolidated financial statements
43
211,331
(19,295)
11,007
193
—
(98)
—
2,289
(3)
(2,889)
202,535
5,904
(8,885)
151
—
(225)
—
2,084
27
(2,896)
198,695
31,805
2,939
4,925
—
(1,052)
—
2,183
35
(4,419)
235,111
Table of Contents
FreightCar America, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash flows (used in) provided by operating activities:
Restructuring and impairment charges
Depreciation and amortization
Recognition of deferred income from state and local incentives
Gain on sale of railcars available for lease
Gain on sale of railcar repair and maintenance services business and facility
Deferred income taxes
Stock-based compensation recognized
Other non-cash items, net
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Inventory on lease
Other assets
Accounts and contractual payables
Accrued payroll and employee benefits
Income taxes receivable/payable
Accrued warranty
Customer deposits and other liabilities
Accrued pension costs and accrued postretirement benefits
Net cash flows (used in) provided by operating activities:
Cash flows from investing activities
Restricted cash deposits
Restricted cash withdrawals
Purchase of restricted certificates of deposit
Maturity of restricted certificates of deposit
Purchase of securities held to maturity
Proceeds from maturity of securities
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment and railcars available for lease
Proceeds from sale of railcar repair and maintenance services business and facility
Cost of railcars available for lease
State and local incentives received
Net cash flows provided by (used in) investing activities:
Cash flows from financing activities
Deferred financing costs
Stock option exercise
Employee stock settlement
Excess tax benefit from stock-based compensation
Cash dividends paid to stockholders
Customer advance for production of leased railcars
Reduction in customer advance for production of leased railcars
Net cash flows (used in) provided by financing activities:
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental cash flow information
Interest paid
Income tax refunds received
Income taxes paid
See notes to the consolidated financial statements
Year Ended December 31,
2015
2014
2013
$ 31,805
$
5,904
$ (19,295)
—
10,028
(1,415)
(1,187)
(4,578)
(2,679)
2,183
1,465
(38,398)
(37,043)
116
(1,642)
137
2,033
6,374
497
(34,802)
1,421
(65,685)
—
—
(2,165)
1,284
(32,944)
54,004
(16,699)
7,654
17,589
(8,724)
15,733
35,732
—
4,925
(1,052)
35
(4,419)
—
—
(511)
(30,464)
113,532
$ 83,068
—
10,069
—
(1,403)
(1,078)
1,991
2,084
996
(52)
(16,248)
16,839
(1,142)
16,379
2,465
(3,957)
1,785
(48,757)
8,099
(6,026)
(1,017)
4,192
(1,410)
—
(68,956)
60,002
(11,802)
13,661
2,124
—
—
(3,206)
—
151
(225)
27
(2,896)
—
(19,799)
(22,742)
(31,974)
145,506
$113,532
10,452
10,077
—
(604)
—
(5,721)
2,289
575
8,953
7,455
(16,955)
527
(17,575)
(3,686)
5,590
(668)
57,182
(6,353)
32,243
(3,175)
14,700
(4,605)
—
(59,963)
63,000
(17,317)
—
6,741
—
—
(619)
(336)
193
(98)
—
(2,889)
19,400
(897)
15,373
46,997
98,509
$145,506
$
$
109
646
$ 13,371
$
$
$
78
$
143
573
$ —
220
$
581
44
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
Note 1 – Description of the Business
FreightCar America, Inc. (“FreightCar”) operates primarily in North America through its direct and indirect subsidiaries, JAC Operations, Inc.,
Johnstown America, LLC, Freight Car Services, Inc., JAIX Leasing Company (“JAIX”), FreightCar Roanoke, LLC, FreightCar Mauritius Ltd.
(“Mauritius”), FreightCar Rail Services, LLC (“FCRS”), FreightCar Short Line, Inc. (“FCSL”), FreightCar Alabama, LLC and FreightCar (Shanghai)
Trading Co., Ltd. (herein collectively referred to as the “Company”), and manufactures a wide range of railroad freight cars, supplies railcar parts
and leases freight cars. The Company designs and builds high-quality railcars, including coal cars, bulk commodity cars, covered hopper cars,
intermodal and non-intermodal flat cars, mill gondola cars, coil steel cars and boxcars. The Company is headquartered in Chicago, Illinois and has
facilities in the following locations: Cherokee, Alabama; Danville, Illinois; Grand Island, Nebraska; Johnstown, Pennsylvania; Roanoke, Virginia;
and Shanghai, People’s Republic of China.
Through September 30, 2015, the Company’s operations comprised two reportable segments, Manufacturing and Services. As of October 1, 2015,
the Company’s operations comprise one reportable segment, Manufacturing. The Company and its direct and indirect subsidiaries are all Delaware
corporations or Delaware limited liability companies except Mauritius, which is incorporated in Mauritius, and FreightCar (Shanghai) Trading Co.,
Ltd., which is organized in the People’s Republic of China. The Company’s direct and indirect subsidiaries are all wholly owned.
Note 2 – Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of FreightCar America, Inc. and all of its direct and indirect subsidiaries.
All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) 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, workers’ compensation
accruals, pension and postretirement benefit assumptions, stock compensation, evaluation of goodwill, other intangibles and property, plant and
equipment for impairment and the valuation of deferred taxes. Actual results could differ from those estimates.
Cash and Cash Equivalents
On a daily basis, cash in excess of current operating requirements is invested in various highly liquid investments. The Company considers all
unrestricted short-term investments with maturities of three months or less when acquired to be cash equivalents. The amortized cost of cash
equivalents approximate fair value because of the short maturity of these instruments.
The Company’s cash and cash equivalents are primarily deposited with one U.S. financial institution. Such deposits are in excess of federally
insured limits.
Restricted Cash and Restricted Certificates of Deposit
The Company establishes restricted cash balances and restricted certificates of deposit to collateralize certain standby letters of credit with respect
to purchase price payment guarantees and performance guarantees and to support the Company’s worker’s compensation insurance claims. The
restrictions expire upon completing the Company’s related obligation.
45
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
Financial Instruments
Management estimates that all financial instruments (including cash equivalents, restricted cash and restricted certificates of deposit, marketable
securities, accounts receivable and accounts payable) as of December 31, 2015 and 2014, have fair values that approximate their carrying values.
Upon purchase, the Company categorizes debt securities as securities held to maturity, securities available for sale or trading securities. Debt
securities that the Company has the positive intent and ability to hold to maturity are classified as securities held to maturity and are reported at
amortized cost adjusted for amortization of premium and accretion of discount on a level yield basis. Debt securities that are bought and held
principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and
losses included in earnings. Debt securities not classified as either held-to-maturity or trading securities are classified as securities available for
sale and are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a component of other comprehensive
income, which is included in stockholders’ equity, net of deferred taxes.
Fair Value Measurements
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The
Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of
assets and liabilities and the placement within the fair value hierarchy levels.
The Company classifies the inputs to valuation techniques used to measure fair value as follows:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities.
Level 2
—
Inputs other than quoted prices for Level 1 inputs that are either directly or indirectly observable for the asset or liability including
quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive
markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived from observable
market data by correlation or other means.
Level 3 — Unobservable inputs for the asset or liability, including situations where there is little, if any, market activity for the asset or liability.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined on a first-in, first-out basis and includes material, labor and
manufacturing overhead. The Company’s inventory consists of work in progress and finished goods for individual customer contracts, used
railcars acquired upon trade-in and railcar parts retained for sale to external parties.
Leased Railcars
The Company offers railcar leases to its customers at market rates with terms and conditions that have been negotiated with the customers. It is the
Company’s strategy to actively market these leased assets for sale to leasing companies and financial institutions rather than holding them to
maturity. If, as of the date of the initial lease, management determines that the sale of the leased railcars is probable, and transfer of the leased
railcars is expected to qualify for recognition as a completed sale within one year, then the leased railcars are classified as current assets on the
balance sheet (Inventory on Lease). In determining whether it is probable that the leased railcars will be sold
46
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
within one year, management considers general market conditions for similar railcars and considers whether market conditions are indicative of a
potential sales price that will be acceptable to the Company to sell the cars within one year. Inventory on Lease is carried at the lower of cost or
market value and is not depreciated. At the one-year anniversary of the initial lease or such earlier date when management no longer believes the
leased railcars will be sold within one year of the initial lease, the leased railcars are reclassified from current assets (Inventory on Lease) to long-
term assets (Railcars Available for Lease). Railcars Available for Lease are depreciated over 40 years from the date the railcars are placed in service
under the initial lease and evaluated for impairment on a quarterly basis.
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 original estimated useful lives of the assets or lease term if shorter, which are as follows:
Description of Assets
Buildings and improvements
Leasehold improvements
Machinery and equipment
Software
Life
15-40 years
6-10 years
3-7 years
3-7 years
Maintenance and repairs are charged to expense as incurred, while major refurbishments 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 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 price of an asset group, a significant
adverse change in the manner or extent in which an asset group is used, a current year operating loss combined with history of operating losses, or
a current expectation that, more likely than not, a long-lived asset group will be sold or otherwise disposed of significantly before the end of its
previously estimated useful life.
For assets to be held and 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. 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. Recoverability of the carrying value of the asset group is determined by
comparing the carrying value of the asset group to total undiscounted future cash flows of the asset group. If the carrying value of the asset group
is not recoverable, an impairment loss is measured based on the excess of the carrying amount of asset group over the estimated fair value of the
asset group. An impairment loss for an asset group reduces only the carrying amounts of a long-lived asset or assets of the group being evaluated.
Research and Development
Costs associated with research and development are expensed as incurred and totaled approximately $379, $332 and $382 for the years ended
December 31, 2015, 2014 and 2013, respectively. Such costs are reported within selling, general and administrative expenses in the consolidated
statements of operations.
Goodwill and Intangible Assets
The Company assesses the carrying value of goodwill for impairment as required by ASC 350, Intangibles – Goodwill and Other, annually or more
frequently whenever events occur and circumstances change indicating
47
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
potential impairment. During its annual goodwill impairment assessments as of August 1, 2015, 2014 and 2013, management estimated the value of
the Company’s reporting units that carry goodwill using the income approach, which indicates the fair value of a business based on the present
value of the cash flows that the business can be expected to generate in the future, and the market approach, which uses the price at which shares
of similar companies are exchanged to estimate the fair value of a company’s equity. Within the income approach, the discounted cash flow method
was used, and within the market approach, the guideline company method was used. Fair value based on the income approach was given a 60%
weighting and fair value based on the market approach was given a 40% weighting. The market approach was used in evaluating goodwill
impairment for the Services reporting unit as of August 1, 2015. Management concluded that the estimated fair value of the Company’s reporting
units exceeded the carrying value as of the dates of the Company’s impairment tests for 2015, 2014 and 2013 and therefore no impairment charges
were recorded.
Patents are amortized on a straight-line method over their remaining legal lives from the date of acquisition. Customer related intangible assets are
amortized from the date of acquisition based on the estimated cash flows to be generated from the intangibles. The Company assesses the carrying
value of patents and customer related intangible assets for impairment whenever events occur and circumstances change indicating potential
impairment.
Income Taxes
For federal income tax purposes, the Company files a consolidated federal tax return. The Company also files state tax returns in states where the
Company has operations. In conformity with ASC 740, 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 net 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. In making this determination, management evaluates both positive evidence, such as cumulative pre-tax income
for previous years, the projection of future taxable income, the reversals of existing taxable temporary differences and tax planning strategies, and
negative evidence, such as any recent history of losses and any projected losses. Management also considers the expiration dates of net operating
loss carryforwards in the evaluation of net deferred tax assets. Management evaluates the realizability of the Company’s net deferred tax assets
and assesses the valuation allowance on a quarterly basis, adjusting the amount of such allowance as necessary.
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 its 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.
Product Warranties
Warranty terms are based on the negotiated railcar sales contracts. The Company typically warrants that new railcars produced by it will be free
from defects in material and workmanship under normal use and service identified for a period of up to five years from the time of sale. The
Company also provides limited warranties with respect to certain rebuilt railcars. With respect to parts and materials manufactured by others and
incorporated by the Company in its products, such parts and materials may be covered by the warranty provided by the original manufacturer. The
Company establishes a warranty reserve at the time of sale to account for future warranty charges. The warranty reserve consists of two
categories: assigned claims and unassigned claims. The unassigned warranty reserve is calculated based on historical warranty costs adjusted for
estimated material price changes and other factors. Once a warranty claim is filed for railcars under warranty, the estimated cost to correct the
defect is moved from the unassigned reserve to the assigned reserve and tracked separately.
48
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
State and Local Incentives
The Company records state and local incentives when there is reasonable assurance that the incentive will be received and the Company is able to
comply with the conditions attached to the incentives received. State and local incentives related to assets are recorded as deferred income and
recognized on a straight-line basis over the useful life of the related long-lived assets of seven to nine years.
Revenue Recognition
Revenues on new and rebuilt railcars are recognized when (1) individual cars are completed, (2) the railcars are accepted by the customer following
inspection, (3) the risk for any damage or other loss with respect to the railcars passes to the customer and (4) title to the railcars transfers to the
customer. There are no sales returns or allowances. Revenues derived from a single sales contract that contains multiple products and services are
allocated based on the relative fair value of each item to be delivered and recognized in accordance with the applicable revenue recognition criteria
for the specific unit of accounting. When the Company retains substantial risk of ownership in railcars sold to customers, the proceeds received by
the Company are not treated as a sale but are accounted for as a customer advance by recording the proceeds as a liability. Customer advances on
the Company’s consolidated balance sheets are reported net of any repayments made by the Company and include imputed interest that is
included in interest expense on the Company’s consolidated statements of operations.
The Company recognizes service-related revenue from maintenance and repairs and inspections when all significant maintenance or repair or
inspections services have been completed, quality accepted and delivery has occurred. The Company recognizes revenue from parts sales when
the risk of any damage or loss and title passes to the customer and delivery has occurred.
The Company recognizes operating lease revenue on Inventory on Lease on a contractual basis and recognizes operating lease revenue on
Railcars Available for Lease on a straight-line basis over the life of the lease. The Company recognizes revenue from the sale of Inventory on Lease
on a gross basis in manufacturing sales and cost of sales if the manufacture of the railcars and the sales process is completed within 12 months.
The Company recognizes revenue from the sale of Railcars Available for Lease on a net basis as Gain (Loss) on Sale of Railcars Available for Lease
since the sale represents the disposal of a long-term operating asset.
The Company reports amounts billed to customers for shipping and handling as part of sales in accordance with ASC 605-45, Revenue
Recognition – Principal Agent Consideration, and reports related costs in cost of sales.
Earnings Per Share
The Company computes earnings (loss) per share using the two-class method, which is an earnings (loss) allocation formula that determines
earnings (loss) per share for common stock and participating securities. The Company’s participating securities are its grants of restricted stock
which contain non-forfeitable rights to dividends. Basic earnings (loss) per share attributable to common shareholders is computed by dividing net
income (loss) attributable to common shareholders by the weighted average common shares outstanding. The calculation of diluted earnings per
share includes the effect of any dilutive equity incentive instruments. The Company uses the treasury stock method to calculate the effect of
outstanding dilutive equity incentive instruments, which requires the Company to compute total proceeds as the sum of (1) the amount the
employee must pay upon exercise of the award, (2) the amount of unearned stock-based compensation costs attributed to future services and
(3) the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the award. Equity incentive
instruments for which the total employee proceeds from exercise exceed the average fair value of the same equity incentive instrument over the
period have an anti-dilutive effect on earnings per share during periods with net income from continuing operations, and accordingly, the Company
excludes them from the calculation.
49
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
Recent Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2015-17, Income Taxes
(Topic 740: Balance Sheet Classification of Deferred Taxes), which simplifies the presentation of deferred income taxes by requiring that deferred
tax assets and liabilities be classified as noncurrent in a classified statement of financial position. The ASU is effective for financial statements
issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted and the
Company adopted the new guidance in the fourth quarter of 2015 on a prospective basis. Adoption of this ASU resulted in a reclassification of the
Company’s net current deferred tax asset to the net noncurrent deferred tax asset in its consolidated balance sheet as of December 31, 2015. No
prior periods were retrospectively adjusted.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330), which requires entities to measure most inventory at the lower of cost and net
realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. Under ASU
2015-11, inventory is measured at the lower of cost and net realizable value, which eliminates the need to determine replacement cost and evaluate
whether it is above the ceiling (net realizable value) or below the floor (net realizable value less normal profit margin). ASU 2015-11 defines net
realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and
transportation. This standard is effective prospectively for annual reporting periods beginning after December 15, 2016 (early adoption is
permitted). The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements and related
disclosures.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt
issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the
related debt liability rather than as an asset. Amortization of the debt issuance costs will continue to be reported as interest expense. This standard
is effective retrospectively for annual reporting periods beginning after December 15, 2016 (early adoption is permitted). The adoption of these
changes is not expected to have a material impact on the consolidated financial position, results of operations or cash flows of the Company.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) Amendments to the Consolidation Analysis, which changes the
analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. All legal entities are subject
to reevaluation under the revised consolidation model. The new guidance affects the following areas: (1) limited partnerships and similar legal
entities; (2) evaluating fees paid to a decision maker or a service provider as a variable interest; (3) the effect of fee arrangements on the primary
beneficiary determination; (4) the effect of related parties on the primary beneficiary determination; and (5) certain investment funds. This standard
is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. If an entity early adopts the guidance in an interim period, any adjustments should be reflected as of the beginning of
the fiscal year that includes that interim period. A reporting entity may apply the amendments in this guidance using a modified retrospective
approach by recording a cumulative effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity also may
apply the amendments retrospectively. The adoption of these changes is not expected to have a material impact on the consolidated financial
position, results of operations or cash flows of the Company.
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which outlines a
single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current
revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to
depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue
and cash flows arising from customer contracts, including significant judgments and
50
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a
modified retrospective approach for the adoption of the new standard. The ASU is effective for annual reporting periods beginning after
December 15, 2017 and early adoption as of December 15, 2016 is permitted. The Company is currently assessing the impact of this standard on the
Company’s financial position, results of operations and cash flows.
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic
360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the criteria for
reporting discontinued operations and expands disclosures about discontinued operations. Under the new guidance, only disposals representing a
strategic shift that has (or will have) a major effect on an entity’s operations should be presented as discontinued operations when the component
of an entity or group of components of an entity is classified as held for sale or is disposed of by sale or other means. Examples include a disposal
of operations in a major geographic area, a major line of business or a major equity method investment. This standard was effective prospectively
for reporting periods beginning after December 15, 2014. The adoption of these changes did not have a material impact on the consolidated
financial position, results of operations or cash flows of the Company.
Note 3 – Fair Value Measurements
The following table sets forth by level within the ASC 820 fair value hierarchy the Company’s financial assets that were recorded at fair value on a
recurring basis and the Company’s non-financial assets that were recorded at fair value on a non-recurring basis.
Recurring Fair Value Measurements
ASSETS:
Cash equivalents
Restricted certificates of deposit
Escrow receivable
Recurring Fair Value Measurements
ASSETS:
Cash equivalents
Restricted certificates of deposit
As of December 31, 2015
Level 1 Level 2 Level 3
Total
$33,150
$ 6,896
$ —
$ —
$ —
$ —
$ —
$ —
$ 1,910
$33,150
$ 6,896
$ 1,910
As of December 31, 2014
Level 1 Level 2 Level 3
Total
$50,070
$ 6,015
$ —
$ —
$ —
$ —
$50,070
$ 6,015
As stated in Note 24, the sale of the Company’s railcar repair and maintenance services business on September 30, 2015 resulted in $1,960 of the
aggregate purchase price being placed into escrow (recorded as a long-term receivable) in order to secure the indemnification obligations of FCRS
and FCSL. The fair market value of the escrow receivable above represents the $1,960 escrow balance, net of the fair value of the indemnification
obligations, which was estimated using the discounted probability-weighted cash flow method.
Note 4 – Marketable Securities
The Company’s current investment policy is to invest in cash, certificates of deposit, U.S. treasury securities, U.S. government agency obligations
and money market funds invested in U.S. government securities. Marketable securities as of December 31, 2015 of $26,951 consisted of U.S.
treasury securities and certificates of deposit held to maturity with original maturities of greater than 90 days and up to one year. Marketable
securities as of December 31, 2014 of $47,961 consisted of U.S. treasury securities held to maturity with original maturities of greater than 90 days
and up to one year. Due to the short-term nature of these securities and their low interest rates, there is no material difference between their fair
market values and amortized costs.
51
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
Note 5 – Inventories
Inventories, net of reserve for excess and obsolete items, consist of the following:
Work in process
Finished new railcars
Parts and service inventory
Total inventories, net
December 31,
2015
$108,099
2,538
4,717
$115,354
2014
$76,453
—
5,806
$82,259
Inventory on the Company’s consolidated balance sheets includes reserves of $3,793 and $2,381 relating to excess or slow-moving inventory for
parts and work in process at December 31, 2015 and 2014, respectively.
Note 6 – Leased Railcars
Inventory on lease at December 31, 2015 was $0 and at December 31, 2014 was $116. Railcars available for lease at December 31, 2015 was $24,729
(cost of $27,954 and accumulated depreciation of $3,225) and at December 31, 2014 was $22,897 (cost of $26,852 and accumulated depreciation of
$3,955). The Company’s lease utilization rate for railcars in its lease fleet was 73% and 100% on December 31, 2015 and 2014, respectively.
Depreciation expense on railcars available for lease was $499, $986 and $1,169 for the years ended December 31, 2015, 2014 and 2013, respectively.
Leased railcars at December 31, 2015 are subject to lease agreements with external customers with terms of up to five and a half years and are
accounted for as operating leases.
Future minimum rental revenues on leases at December 31, 2015 are as follows:
Year ending December 31, 2016
Year ending December 31, 2017
Year ending December 31, 2018
Year ending December 31, 2019
Year ending December 31, 2020
Thereafter
$1,715
1,706
1,118
1,001
1,001
275
$6,816
Note 7 – Restructuring and Impairment Charges
During the fourth quarter of 2013, the Company recorded restructuring and impairment charges of $10,452 which are reported as a separate line item
on the Company’s consolidated statements of operations. These charges consisted of non-cash charges of $7,592 related to the Company’s then
idled Danville, Illinois manufacturing facility, $1,620 related to the Company’s closed railcar maintenance and repair shop in Clinton, Corporate
severance charges of $1,119 and other charges of $121.
The Company tested the long-lived assets at its Danville manufacturing facility for impairment as of December 31, 2013 because the Company was
unable to predict when the Danville facility would resume operations based on the Company’s backlog for coal car orders and the soft industry
outlook. The carrying values of property, plant and
52
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FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
equipment at the Danville facility were reduced to their estimated fair market values, resulting in non-cash impairment charges of $7,024 for
buildings and improvements and $568 for machinery and equipment for the year ended December 31, 2013.
As part of the Company’s strategic initiative to improve the contribution of its Services business to the Company’s results of operations,
management evaluated the long-term profitability of each of its railcar maintenance and repair shops during the fourth quarter of 2013 and decided
to close its underperforming maintenance and repair shop in Clinton. As a result of this decision, the Company evaluated the recoverability of its
long-lived assets and reduced the carrying values of property, plant and equipment to their estimated fair market values, resulting in non-cash
impairment charges of $1,113 for buildings and improvements, $270 for machinery and equipment and $131 for land for the year ended December 31,
2013. The Company also recorded a non-cash impairment charge of $106 related to customer intangibles and recorded other charges of $121 related
to the Clinton closure during the fourth quarter of 2013. During the third quarter of 2014, these assets were sold to a third party resulting in a gain
on sale of $1,078, which is included in gain on sale of railcar repair and maintenance services business and facility in the consolidated statement of
operations for the year ended December 31, 2014.
The Company revised its Corporate management reporting structure as part of the leadership transition following the retirement of the Company’s
previous President and Chief Executive Officer during the fourth quarter of 2013, resulting in severance charges of $1,119 being recorded during the
fourth quarter of 2013. Substantially all of the severance payments were made during 2014.
The components of the restructuring and impairment charges for the year ended December 31, 2013, are as follows:
Impairment charge for Manufacturing segment land, building and equipment
Impairment charge for Services segment land, building and equipment
Impairment charge for Services segment customer intangibles
Employee severance as a result of Corporate restructuring
Other charges related to Services segment impairment
Total restructuring and impairment charges
$ 7,592
1,514
106
1,119
121
$10,452
Note 8 – Property, Plant and Equipment
Land (including easements)
Buildings and improvements
Leasehold improvements
Machinery and equipment
Software
Cost of buildings and improvements, leasehold improvements, machinery,
equipment and software
Less: Accumulated depreciation and amortization
Buildings and improvements, leasehold improvements, machinery, equipment and
software, net of accumulated depreciation and amortization
Construction in process
Total property, plant and equipment, net
December 31,
$
2015
151
2,370
8,994
62,217
9,018
2014
$ 1,976
10,731
6,983
50,771
8,299
82,599
(41,094)
76,784
(38,747)
41,505
940
$ 42,596
38,037
3,226
$ 43,239
Depreciation expense for the years ended December 31, 2015, 2014 and 2013, was $8,858, $8,363 and $8,168, respectively.
53
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FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
Note 9 – Intangible Assets and Goodwill
Intangible assets consist of the following:
Patents
Accumulated amortization
Patents, net of accumulated amortization
Customer-related intangibles
Accumulated amortization
Customer-related intangibles, net of accumulated amortization
Total amortizing intangibles
Manufacturing segment goodwill
Services segment goodwill
Total goodwill
December 31,
2015
$ 13,097
(12,738)
359
—
—
—
359
$
$ 21,521
—
$ 21,521
2014
$ 13,097
(12,147)
950
1,194
(491)
703
$ 1,653
$ 21,521
607
$ 22,128
Amounts in the table above as of December 31, 2015 reflect reductions of $623 in customer-related intangibles, net of accumulated amortization,
and $607 in Services segment goodwill related to the Company’s sale of its railcar repair and maintenance services business on September 30, 2015
(see Note 24).
Amortization expense related to customer intangibles, which is included in selling, general and administrative expenses, was $81, $129 and $149 for
the years ended December 31, 2015, 2014 and 2013, respectively. Patents are being amortized on a straight-line method over their remaining legal life
from the date of acquisition and have a weighted average remaining life of 1 year. Amortization expense related to patents, which is included in cost
of sales, was $591, $590 and $591 for the years ended December 31, 2015, 2014 and 2013, respectively.
Estimated future intangible amortization at December 31, 2015 is as follows:
Year ending December 31, 2016
Thereafter
$ 359
—
$ 359
Note 10 – Product Warranties
Warranty terms are based on the negotiated railcar sales contracts. The Company typically warrants that new railcars produced by it will be free
from defects in material and workmanship under normal use and service identified for a period of up to five years from the time of sale. The changes
in the warranty reserve for the years ended December 31, 2015, 2014 and 2013, are as follows:
Balance at the beginning of the year
Current year provision
Reductions for payments, costs of repairs and other
Adjustments to prior warranties
Balance at the end of the year
54
2015
$ 8,742
3,209
(1,611)
(1,101)
$ 9,239
December 31,
2014
$6,957
2,259
(748)
274
$8,742
2013
$ 7,625
480
(1,046)
(102)
$ 6,957
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
Adjustments to prior warranties includes changes in the warranty reserve for warranties issued in prior periods due to expiration of the warranty
period, revised warranty cost estimates and other factors.
Note 11 – State and Local Incentives
During the year ended December 31, 2015, the Company received cash payments of $15,733 for Alabama state and local incentives related to the
Company’s capital investment and employment levels at its Cherokee, Alabama (“Shoals”) facility. Under the incentive agreements, a certain
portion of the incentives may be repayable by the Company if targeted levels of employment are not maintained for a period of six years from the
date of the incentive. The Company’s level of employment at its Shoals facility currently exceeds and is expected to continue to exceed the
minimum targeted levels of employment. In the event that any portion of the incentives is required to be paid back, the amount is unlikely to exceed
the deferred liability balance at December 31, 2015.
The changes in deferred income from these incentives for the years ended December 31, 2015, 2014 and 2013, are as follows:
Balance at the beginning of the year
State and local incentives received during the year
Recognition of state and local incentives as a reduction of cost of sales
Balance at the end of the year, including current portion
2015
$ —
15,733
(1,415)
$14,318
December 31,
2014
$ —
—
—
$ —
2013
$ —
—
—
$ —
Note 12 – Revolving Credit Facility
The Company entered into a $50,000 senior secured revolving credit facility (the “Revolving Credit Facility”) pursuant to a Credit Agreement dated
as of July 26, 2013 (the “Credit Agreement”) by and among FreightCar and certain of its subsidiaries, as borrowers (together the “Borrowers”), and
Bank of America, N.A., as lender. The Revolving Credit Facility can be used for general corporate purposes, including working capital. As of
December 31, 2015 and 2014, the Company had no borrowings under the Revolving Credit Facility. The Credit Agreement also contains a sub-
facility for letters of credit not to exceed the lesser of $30,000 and the amount of the senior secured revolving credit facility at such time. As of
December 31, 2015 and 2014, the Company had $6,896 and $6,015, respectively, in outstanding letters of credit under the Revolving Credit Facility
and therefore had $43,104 and $43,985, respectively, available for borrowing under the Revolving Credit Facility. The Credit Agreement has a term
ending on July 26, 2016 and revolving loans outstanding thereunder will bear interest at a rate of LIBOR plus an applicable margin of 1.50% or at a
base rate, as selected by the Company. Base rate loans will bear interest at the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate or
(c) LIBOR plus 1.00%. The Company is required to pay a non-utilization fee of between 0.10% and 0.30% on the unused portion of the revolving
loan commitment depending on the Company’s quarterly average balance of unrestricted cash and the Company’s consolidated leverage ratio.
Borrowings under the Revolving Credit Facility are secured by a first priority perfected security interest in substantially all of the Borrowers’ assets
excluding railcars held by its railcar leasing subsidiary, JAIX. The Borrowers also have pledged all of the equity interests in the Company’s direct
and indirect domestic subsidiaries as security for the Revolving Credit Facility. The Credit Agreement has both affirmative and negative covenants,
including, without limitation, a covenant requiring a minimum consolidated net liquidity of $35,000 and limitations on indebtedness, liens and
investments. The Credit Agreement also provides for customary events of default. During the first half of 2016, the Company will be evaluating
renewal or refinancing alternatives for its current revolving loan agreement and expects to have a new agreement in place by July 26, 2016.
55
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FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
Note 13 – Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) consist of the following:
Year ended December 31, 2015
Pension liability activity:
Actuarial loss
Reclassification adjustment for amortization of net loss (pre-tax cost of sales
Pre-Tax
Tax
After-Tax
$
(190)
$
(67)
$
(123)
of $333 and selling, general and administrative expenses of $107)
440
163
277
Postretirement liability activity:
Actuarial gain
Reclassification adjustment for amortization of net loss (pre-tax cost of sales
3,621
1,273
2,348
of $567 and selling, general and administrative expenses of $80)
647
237
410
Reclassification adjustment for amortization of prior service cost (pre-tax
cost of sales of $37 and selling, general and administrative expenses of
$5)
Year ended December 31, 2014
Pension liability activity:
Actuarial loss
Reclassification adjustment for amortization of net loss (pre-tax cost of sales
42
$ 4,560
15
$ 1,621
27
2,939
$
$ (7,608)
$(2,687)
$
(4,921)
of $977 and selling, general and administrative expenses of $200)
1,177
416
761
Postretirement liability activity:
Actuarial loss
Reclassification adjustment for amortization of net loss (pre-tax cost of sales
(7,917)
(2,796)
(5,121)
of $332 and selling, general and administrative expenses of $39)
371
131
240
Reclassification adjustment for amortization of prior service cost (pre-tax
cost of sales of $215 and selling, general and administrative expenses of
$26)
Year ended December 31, 2013
Pension liability activity:
Actuarial gain
Reclassification adjustment for amortization of net loss (pre-tax cost of sales
241
$(13,736)
85
$(4,851)
156
(8,885)
$
$ 10,168
$ 3,582
$
6,586
of $470 and selling, general and administrative expenses of $54)
524
184
340
Postretirement liability activity:
Actuarial gain
Reclassification adjustment for amortization of net loss (pre-tax cost of sales
5,448
1,919
3,529
of $578 and selling, general and administrative expenses of $34)
612
216
396
Reclassification adjustment for amortization of prior service cost (pre-tax
cost of sales of $228 and selling, general and administrative expenses of
$13)
241
$ 16,993
85
$ 5,986
156
$ 11,007
56
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FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
The components of accumulated other comprehensive loss consist of the following:
Unrecognized pension cost, net of tax of $6,429 and $6,525
Unrecognized postretirement cost, net of tax of $6,461 and $7,986
December 31,
2015
$(10,484)
(10,594)
$(21,078)
2014
$(10,638)
(13,379)
$(24,017)
Note 14 – Employee Benefit Plans
The Company has qualified, defined benefit pension plans that were established to provide benefits to certain employees. These plans are frozen
and participants are no longer accruing benefits. The Company also provides certain postretirement health care benefits for certain of its salaried
and hourly retired employees. Generally, employees may become eligible for health care benefits if they retire after attaining specified age and
service requirements. These benefits are subject to deductibles, co-payment provisions and other limitations.
A substantial portion of the Company’s postretirement benefit plan obligation relates to an expired settlement agreement with the union
representing employees at the Company’s and its predecessors’ Johnstown manufacturing facilities. The terms of that settlement agreement (the
“2005 Settlement Agreement”) required the Company to pay until November 30, 2012 certain monthly amounts toward the cost of retiree health care
coverage. The Company engaged in voluntary negotiations for two years in an effort to reach a consensual agreement related to the expired 2005
Settlement Agreement but no agreement was reached. The Company terminated, effective November 1, 2013, its contributions for medical coverage
and life insurance benefits to affected retirees and sought declaratory relief to confirm the Company’s rights under the Employee Retirement
Income Security Act of 1974, as amended (“ERISA”), to reduce or terminate retiree medical coverage and life insurance benefits pursuant to the
plans that were the subject of the 2005 Settlement Agreement. On July 9, 2013, the union and certain retiree defendants filed suit in the United
States District Court for the Western District of Pennsylvania regarding the same dispute (see Note 17). On August 20, 2015, the Company reached
a settlement agreement with the union and the other plaintiffs. Pursuant to the settlement agreement, the parties agreed that (1) the union will create
a voluntary employee’s beneficiary association trust fund (the “VEBA”) that will administer the payment of health and welfare benefits to class
members and will be administered independently of the Company, (2) the Company will make a one-time contribution to the VEBA of $31,450,
(3) the Company will pay an award for plaintiffs’ attorneys’ fees in the amount of $1,300, (4) if the Company fails to make the required payments to
the VEBA prior to February 16, 2016, interest on the unpaid amounts will accrue at a rate of 5% per annum, subject to a cap of $250, and (5) class
members will fully and finally release all claims against the Company in accordance with the terms of the settlement agreement. The Pennsylvania
Court granted final approval of the settlement on January 19, 2016. The plaintiffs had until February 18, 2016 to file an appeal of the court order
granting final approval of the settlement. On February 17, 2016, certain class members requested a 30-day extension to file an appeal, which the
Pennsylvania Court denied on February 22, 2016. The Company expects to make the cash settlement payment on or after March 23, 2016.
The Company’s recorded postretirement benefit plan obligation through December 31, 2015 assumed for accounting purposes a continuation of
those monthly payments after November 30, 2012 because the status of the settlement had not yet met the requirements for settlement accounting.
A transaction meets the criteria to be accounted for as a settlement when a transaction is irrevocable, relieves the employer of primary
responsibility for the benefit obligation, and eliminates significant risks related to the obligation and the assets used to effect the settlement.
Settlement accounting will be triggered when the Company makes the cash settlement payment and will result in a pre-tax gain of approximately $19
million and a reduction in the postretirement benefit obligation of approximately $67 million.
Generally, contributions to the plans are not less than the minimum amounts required under ERISA 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.
57
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FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
The changes in benefit obligation, change in plan assets and funded status as of December 31, 2015 and 2014, are as follows:
Change in benefit obligation
Benefit obligation – Beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Lump-sum settlement payments
Benefit obligation – End of year
Change in plan assets
Plan assets – Beginning of year
Return on plan assets
Employer contributions
Benefits paid
Lump-sum settlement payments
Plan assets at fair value – End of year
Funded status of plans – End of year
Amounts recognized in the Consolidated Balance Sheets
Noncurrent assets
Current liabilities
Noncurrent liabilities
Net amount recognized at December 31
Pension Benefits
2015
2014
Postretirement Benefits
2015
2014
$58,017
—
2,319
(2,800)
(4,096)
—
53,440
50,807
56
—
(4,096)
—
46,767
$ (6,673)
$56,341
—
2,642
6,799
(4,471)
(3,294)
58,017
55,544
2,811
217
(4,471)
(3,294)
50,807
$ (7,210)
Pension Benefits
2015
2014
$ —
—
(6,673)
$ (6,673)
$ —
—
(7,210)
$ (7,210)
$
$
$
$
73,883
70
2,970
(3,621)
(400)
—
72,902
—
—
400
(400)
—
—
(72,902)
$
$
63,312
63
2,999
7,917
(408)
—
73,883
—
—
408
(408)
—
—
(73,883)
Postretirement Benefits
2015
2014
—
(405)
(72,497)
(72,902)
$
$
—
(409)
(73,474)
(73,883)
Amounts recognized in accumulated other comprehensive loss but not yet recognized in earnings at December 31, 2015 and 2014, are as follows:
Net actuarial loss
Prior service cost
Pension Benefits
2014
2015
$17,163
$16,913
—
—
$17,163
$16,913
Postretirement Benefits
2015
16,813
242
17,055
2014
21,081
284
21,365
$
$
$
$
During the fourth quarter of 2014, the Company offered certain of its former employees the option to receive a lump-sum pension payment or
annuity in order to satisfy in full the Company’s future pension liabilities to such former
58
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FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
employees, with payments beginning in the fourth quarter of 2014. Payments of $3,294 to eligible former employees who elected to participate in the
offer were paid in December 2014 from existing pension plan assets and constituted a complete settlement of the Company’s pension liabilities with
respect to such former employees. The discount rates and actuarial assumptions used to calculate the payouts were determined according to
federal regulations and approximated those used to calculate our pension obligation for financial reporting purposes as of December 31, 2014. A
non-cash settlement charge of $966 was recognized in the fourth quarter of 2014 in connection with the settlement payments. This charge resulted
from the recognition in earnings of a portion of the losses recorded in accumulated other comprehensive loss based on the portion of the
obligation settled.
The estimated net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive loss into net periodic
benefit cost in 2016 is $460. 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 2016 are $145 and $17, respectively.
Components of net periodic benefit cost for the years ended December 31, 2015, 2014 and 2013, are as follows:
Pension Benefits
2015
2014
2013
Postretirement Benefits
2015
2014
2013
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized prior service cost
Amortization of unrecognized net loss
Lump-sum settlement cost
Total net periodic benefit cost
63 $
70 $
73
$ — $ — $ — $
2,627
2,970
2,642
—
—
(3,620)
241
42
—
612
647
211
—
—
966
199 $ (496) $ 3,729 $ 3,674 $ 3,553
2,319
(3,046)
—
440
—
$ (287) $
2,999
—
241
371
—
2,526
(3,546)
—
524
—
The increase (decrease) in accumulated other comprehensive loss (pre-tax) for the years ended December 31, 2015 and 2014, are as follows:
Net actuarial loss (gain)
Amortization of net actuarial loss
Amortization of prior service cost
Total recognized in accumulated other comprehensive loss
(gain)
Pension
Benefits
190
$
(440)
—
$
(250)
$
$
2015
Postretirement
Benefits
Pension
Benefits
$ 7,608
(1,177)
—
(3,621)
(647)
(42)
(4,310)
$ 6,431
2014
Postretirement
Benefits
$
$
7,917
(371)
(241)
7,305
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as of December 31, 2015:
2016
2017
2018
2019
2020
2021 through 2025
Pension
Benefits
$ 3,795
3,516
3,412
3,365
3,342
16,376
Postretirement Benefits
405
$
396
381
372
374
1,940
59
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FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
The postretirement benefit payments in the table above represent benefit payments for the Company’s salaried retirees. The Company expects to
make the previously described $31,450 cash settlement payment related to the postretirement benefits for its hourly retirees on or after March 23,
2016. The Company does not expect to make any contributions to its pension plans in 2016 to meet its minimum funding requirements.
The assumptions used to determine end of year benefit obligations are shown in the following table:
Discount rates
Pension Benefits
2015
4.47%
2014
4.15%
Postretirement Benefits
2014
2015
4.39%
4.03%
The discount rate is determined using a yield curve model that uses yields on high quality corporate bonds (AA rated or better) to produce a
single equivalent rate. The yield curve model excludes callable bonds except those with make-whole provisions, private placements and bonds with
variable rates.
In October 2015, the Society of Actuaries published updated mortality improvement assumptions for U.S. plans, scale (MP-2015), which reflects
additional data that the Social Security Administration has released since prior assumptions (MP-2014) were developed. Scale (MP-2015) results in
lower projected mortality improvement than scale (MP-2014). The Company has historically utilized the Society of Actuaries’ published mortality
data in its plan assumptions. Accordingly, the Company adopted MP-2015 for purposes of measuring its pension and postretirement obligations at
December 31, 2015.
The assumptions used in the measurement of net periodic cost are shown in the following table:
Discount rate
Expected return on plan assets
4.15%
6.24%
4.91%
6.76%
4.11%
6.98%
Pension Benefits
2014
2013
2015
Postretirement Benefits
2014
4.75%
N/A
2015
4.03%
N/A
2013
3.95%
N/A
As benefits under these postretirement healthcare 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’ weighted average asset allocations at December 31, 2015 and 2014, and target allocations for 2016, by asset
category, are as follows:
Asset Category
Cash and cash equivalents
Equity securities
Fixed income securities
Real estate
Plan Assets at December 31,
2014
2015
Target Allocation
2016
2%
55%
38%
5%
100%
1%
55%
38%
6%
100%
0% - 5%
45% - 65%
30% - 50%
4% - 6%
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 under a broad range of
potential economic and financial scenarios, maximize the long-term investment return with an acceptable level of risk based on such obligations,
and broadly diversify investments
60
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FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
across and within the capital markets to protect asset values against adverse movements in any one market. The Company’s investment strategy
balances the requirement to maximize returns using potentially higher return generating assets, such as equity securities, with the need to manage
the risk of such investments with less volatile assets, such as fixed-income securities. Investment practices must comply with the requirements of
ERISA and any other applicable laws and regulations. The Company, in consultation with its investment advisors, has determined a targeted
allocation of invested assets by category and it works with its advisors to reasonably maintain the actual allocation of assets near the target. 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’s pension plan assets are invested in one mutual fund for each fund classification. The following table presents the fair value of
pension plan assets classified under the appropriate level of the ASC 820 fair value hierarchy (see Note 2 for a description of the fair value
hierarchy) as of December 31, 2015 and 2014:
Pension Plan Assets
Mutual funds:
Fixed income funds
Large cap funds
Small cap funds
International funds
Real estate funds
Cash and equivalents
Total
Pension Plan Assets
Mutual funds:
Fixed income funds
Large cap funds
Small cap funds
International funds
Real estate funds
Cash and equivalents
Total
As of December 31, 2015
Level 1 Level 2 Level 3
Total
$17,926
14,718
4,371
6,538
2,520
694
$46,767
$ —
—
—
—
—
—
$ —
$ —
—
—
—
—
—
$ —
$17,926
14,718
4,371
6,538
2,520
694
$46,767
As of December 31, 2014
Level 1 Level 2 Level 3
Total
$19,276
15,422
5,024
7,382
2,982
721
$50,807
$ —
—
—
—
—
—
$ —
$ —
—
—
—
—
—
$ —
$19,276
15,422
5,024
7,382
2,982
721
$50,807
The Company also maintains qualified defined contribution plans, which provide benefits to their employees based on employee contributions and
employee earnings, with discretionary contributions allowed. Expenses related to these plans were $2,857, $1,649 and $1,465 for the years ended
December 31, 2015, 2014 and 2013, respectively.
61
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
Note 15 - Income Taxes
The provision (benefit) for income taxes for the periods indicated includes current and deferred components as follows:
Current taxes
Federal
State
Deferred taxes
Federal
State
Interest expense, gross of related tax effects
Total provision (benefit)
Year Ended December 31,
2015
2014
2013
$16,768
751
17,519
$ 325
93
418
$ —
14
14
(2,767)
88
(2,679)
(9)
$14,831
1,666
325
1,991
159
$2,568
(11,554)
5,833
(5,721)
170
$ (5,537)
The provision (benefit) for income taxes for the periods indicated differs from the amounts computed by applying the federal statutory rate as
follows:
Statutory U.S. federal income tax rate
State income taxes, net of federal tax benefit
Valuation allowance
Goodwill amortization
Domestic manufacturing deduction
Nondeductible expenses
State rate and other changes on deferred taxes
Federal and state credits
Uncertain tax positions
Other
Effective income tax rate
62
Year Ended December 31,
2014
35.0%
5.8%
(2.4)%
0.0%
0.0%
1.0%
2.1%
(9.4)%
1.3%
(3.1)%
30.3%
2015
35.0%
3.2%
(1.0)%
0.0%
(3.6)%
0.2%
0.4%
(2.7)%
0.4%
(0.1)%
31.8%
2013
(35.0)%
(2.5)%
9.0%
(3.4)%
0.0%
0.4%
8.8%
0.0%
0.4%
0.0%
(22.3)%
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
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:
Description
Accrued postretirement and pension benefits
Intangible assets
Accrued workers’ compensation costs
Accrued warranty costs
Accrued rent
Accrued bonuses
Accrued vacation
Accrued contingencies
Deferred gain
Deferred state and local incentive revenue
Accrued severance
Inventory valuation
Property, plant and equipment and railcars on operating leases
Deferred revenue
Net operating loss carryforwards
Credit carryforwards
Stock-based compensation expense
Other
Valuation allowance
Deferred tax assets (liabilities)
Decrease in valuation allowance
December 31, 2015
December 31, 2014
Assets
$28,033
—
1,536
3,573
1,109
1,951
779
1,431
—
5,417
6
2,810
—
29
5,873
—
2,618
131
55,296
(5,797)
$49,499
$ (422)
Liabilities
—
$
(2,832)
—
—
—
—
—
—
(741)
—
—
—
(11,204)
—
—
—
—
—
(14,777)
$
(14,777)
Assets
$28,569
—
1,268
3,396
1,113
1,438
658
1,374
—
—
43
1,713
—
30
8,299
1,828
2,892
—
52,621
(6,219)
$46,402
$ (397)
Liabilities
—
$
(2,832)
—
—
—
—
—
—
—
—
—
—
(9,613)
—
—
—
—
(264)
(12,709)
—
(12,709)
$
In the consolidated balance sheets, these deferred tax assets reflect the net temporary differences between the carrying amount of assets and
liabilities for financial reporting and income tax purposes. During November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of
Deferred Taxes, which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as
noncurrent in a statement of financial position. The Company early adopted ASU 2015-17 effective in the fourth quarter of 2015 on a prospective
basis. Adoption of this ASU resulted in a reclassification of our net current deferred tax asset to the net noncurrent deferred tax asset in our
consolidated balance sheet as of December 31, 2015. No prior periods were retrospectively adjusted.
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. Although
realization of our net deferred assets is not certain, management has concluded that, based on the positive and negative evidence considered, we
will more likely than not realize the full benefit of the deferred tax assets except for our deferred tax assets in certain states. The Company has
certain pretax state net operating loss carryforwards of $99,762, which will expire between 2020 and 2033, of which $94,518 have a full valuation
allowance recorded. In addition to the state valuation allowances, the Company has also provided a full valuation allowance against net operating
losses associated with the foreign jurisdictions in which it operates. The remaining losses associated with these jurisdictions will begin to expire in
2016.
63
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
A reconciliation of the beginning and ending gross amounts of unrecognized tax benefits for the years ended December 31, 2015, 2014 and 2013,
were as follows:
Beginning of year balance
Increases in current period tax positions
End of year balance
2015
$2,444
59
$2,503
2014
$2,172
272
$2,444
2013
$2,172
—
$2,172
The total estimated unrecognized tax benefit that, if recognized, would affect the Company’s effective tax rate by approximately $1,581, $1,523 and
$1,251 as of December 31, 2015, 2014 and 2013, respectively. Due to the nature of the Company’s unrecognized tax benefits, the Company does not
expect changes in its unrecognized tax benefit reserve in the next twelve months to have a material impact on its financial statements. The
Company’s income tax provision included $110 of expense (net of a federal tax benefit of $60), $110 of expense (net of a federal tax benefit of $60)
and $96 of expense (net of a federal tax benefit of $75) related to interest and penalties for the years ended December 31, 2015, 2014 and 2013,
respectively. The Company records interest and penalties within tax expense (benefit). Such expenses brought the balance of accrued interest and
penalties to $2,086, $1,916 and $1,745 at December 31, 2015, 2014 and 2013, respectively.
The Company and/or its subsidiaries file income tax returns with the U.S. Federal government and in various state and foreign jurisdictions. A
summary of tax years that remain subject to examination is as follows:
Jurisdiction
U.S. Federal
States:
Pennsylvania
Texas
Illinois
Virginia
Colorado
Indiana
Nebraska
Alabama
Foreign:
India
Mauritius
Earliest Year Open to
Examination
2010
2000
2008
2009
2012
2010
2010
2010
2013
2008
2009
Note 16 - Stock-Based Compensation
The Company’s incentive compensation plan, titled “The 2005 Long Term Incentive Plan” (as restated to incorporate all amendments, the
“Incentive Plan”), was approved by the Company’s board of directors and ratified by the stockholders. The Incentive Plan is intended to provide
incentives to attract, retain and motivate employees and directors, to provide for competitive compensation opportunities, to encourage long-term
service, to recognize individual contributions and reward achievement of performance goals. The Company believes that the Incentive Plan
promotes the creation of long-term value for its stockholders by better aligning the interests of its employees and directors with those of its
stockholders. The Incentive 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
Incentive Plan). The Incentive Plan will terminate as to future awards on May 17, 2023. Under the Incentive Plan, 2,459,616 shares of common stock
have been reserved for issuance (from either authorized but unissued shares or treasury shares), of which 873,378 were available for issuance at
December 31, 2015.
64
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
The Company recognizes stock-based compensation expense for stock option awards based on the fair value of the award on the grant date using
the Black-Scholes option valuation model. Expected life in years for all stock options awards was determined using the simplified method. The
Company believes that it is appropriate to use the simplified method in determining the expected life for options because the Company does not
have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term for stock options and due to the
limited number of stock option grants to date. Expected volatility was based on the historical volatility of the Company’s stock. The risk-free
interest rate was based on the U.S. Treasury bond rate for the expected life of the option. The expected dividend yield was based on the latest
annualized dividend rate and the current market price of the underlying common stock on the date of the grant. The Company recognizes stock-
based compensation for restricted stock awards over the vesting period based on the fair market value of the stock on the date of the award,
calculated as the average of the high and low trading prices for the Company’s common stock on the award date.
In January 2015, the Company granted performance shares with a performance measurement period from January 1, 2015 through December 31,
2017. The shares will vest and be earned on December 31, 2017, if at all, based on the Company’s three-year cumulative basic earnings per share,
provided that a minimum three-year average return on invested capital goal is also met or exceeded. The earnings per share threshold and return on
invested capital goal were established by the Company’s board of directors on the grant date. The Company recognizes stock-based compensation
cost for performance shares over the vesting period based on the fair market value of the Company’s stock on the award date multiplied by the
estimated number of shares to be awarded based on the probable outcome of the performance conditions. As of December 31, 2015, the probable
outcome of the performance conditions was estimated to be at the target level.
Grant date fair values of stock option awards were estimated using the Black-Scholes option valuation model with the following assumptions:
Grant
Year
2014
2013
2013
2013
2013
2012
2011
2011
Grant
Date
1/15/2014
1/14/2013
1/18/2013
5/1/2013
10/4/2013
1/12/2012
1/13/2011
10/3/2011
Estimated Life
6 years
6 years
6 years
6 years
6 years
6 years
6 years
6 years
Expected
Volatility
Expected
Dividend
Yield
Risk Free
Interest Rate
51.03%
51.36%
51.38%
51.43%
51.46%
50.86%
49.74%
49.83%
0.94%
0.98%
0.99%
1.19%
1.17%
0.00%
0.00%
0.00%
1.68%
0.78%
0.77%
0.65%
1.41%
0.84%
1.93%
0.87%
Grant Date
Fair Value
Per Share
11.58
$
10.70
$
10.82
$
8.79
$
9.03
$
11.23
$
14.61
$
6.61
$
Stock-based compensation expense of $2,183, $2,084 and $2,289 is included within selling, general and administrative expense for the years ended
December 31, 2015, 2014 and 2013, respectively. The total income tax benefit recognized on the consolidated statements of operations for share-
based compensation arrangements was $768, $735 and $806 for the years ended December 31, 2015, 2014 and 2013, respectively.
65
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
A summary of the Company’s stock options activity and related information at December 31, 2015 and 2014, and changes during the years then
ended, is presented below:
Outstanding at the beginning of the year
Granted
Exercised
Forfeited or expired
Outstanding at the end of the year
Exercisable at the end of the year
Options
Outstanding
794,978
—
(240,410)
(46,785)
507,783
364,306
(per share)
19.41
$
20.48
19.47
24.80
24.91
$
$
December 31,
2015
Weighted-
Average
Exercise
Price
Options
2014
Weighted-
Average
Exercise
Price
(per share)
23.46
$
25.55
22.90
25.11
19.41
$
Outstanding
662,048
191,685
(6,610)
(52,145)
794,978
492,468
$
23.58
The weighted-average grant-date fair value per share of stock options granted during the years ended December 31, 2014 and 2013, was $11.58 and
$10.04, respectively. There were no stock options granted during 2015.
A summary of the Company’s stock options outstanding as of December 31, 2015 is presented below:
Options outstanding
Vested or expected to vest
Options exercisable
Weighted-
Average
Remaining
Contractual
Term
(in years)
6.5
6.5
6.1
Weighted-
Average
Exercise
Price
(per share)
24.80
$
24.77
$
24.91
$
Aggregate
Intrinsic
Value
$
$
$
2
2
2
Options
Outstanding
507,783
488,025
364,306
The intrinsic value of stock options exercised during the year ended December 31, 2015 was $2,258. Cash received from exercise of stock options
during the year ended December 31, 2015 was $4,925. The intrinsic value of stock options exercised during the year ended December 31, 2014 was
$26. Cash received from exercise of stock options during the year ended December 31, 2014 was $151. As of December 31, 2015, there was $700 of
total unrecognized compensation expense related to nonvested options, which will be recognized over the remaining requisite service period of 12
months.
66
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
A summary of the Company’s nonvested restricted shares as of December 31, 2015 and 2014, and changes during the years then ended is
presented below:
Nonvested at the beginning of the year
Granted
Vested
Forfeited or expired
Nonvested at the end of the year
Expected to vest
December 31,
2015
2014
Weighted-
Average
Grant Date
Fair Value
(per share)
24.04
$
24.04
24.47
23.99
23.75
$
Shares
74,147
24,212
(35,827)
(5,657)
56,875
Weighted-
Average
Grant Date
Fair Value
(per share)
22.40
$
25.48
21.64
23.97
24.04
$
Shares
56,875
66,017
(30,840)
(6,735)
85,317
77,024
$
23.59
48,651
$
23.53
The weighted-average grant-date fair value per share of stock awards granted during the years ended December 31, 2015, 2014 and 2013, was
$24.04, $25.48 and $22.47, respectively. The fair value of stock awards vested during the years ended December 31, 2015, 2014 and 2013, was $754,
$903 and $612, respectively, based on the value at vesting date. As of December 31, 2015, there was $965 of total unrecognized compensation
expense related to nonvested restricted stock awards, which will be recognized over the average remaining requisite service period of 35 months.
Note 17 - Risks and Contingencies
The Company is involved in various warranty and repair claims and, in certain cases, related pending and threatened 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 and
legal provisions, if any, are not expected to be material to the Company’s consolidated financial condition, results of operations or cash flows.
On July 8, 2013, the Company filed a Complaint for Declaratory Judgment (the “Complaint”) in the United States District Court for the Northern
District of Illinois, Eastern Division (the “Illinois Court”). The case named as defendants the United Steel, Paper & Forestry, Rubber,
Manufacturing, Energy, Allied Industrial & Services Workers International Union, AFL-CIO, CLC (the “USW”), as well as approximately 650
individual Retiree Defendants (as defined in the Complaint). On July 9, 2013, the USW and certain Retiree Defendants (collectively, the
“Pennsylvania Plaintiffs”) filed a putative class action in the United States District Court for the Western District of Pennsylvania (the
“Pennsylvania Court”), captioned as Zanghi, et al. v. FreightCar America, Inc., et al., Case No. 3:13-cv-146. Both of the complaints related to the
Company’s decision to terminate welfare benefits previously provided to the Retiree Defendants.
On August 20, 2015, the Company reached a settlement agreement with the USW and the other plaintiffs. Pursuant to the settlement agreement, the
parties agreed that (1) USW will create a voluntary employee’s beneficiary association trust fund (the “VEBA”) that will administer the payment of
health and welfare benefits to class members and will be administered independently of the Company, (2) the Company will make a one-time
contribution to the VEBA of $31,450, (3) the Company will pay an award for plaintiffs’ attorneys’ fees in the amount of $1,300, (4) if the Company
fails to make the required payments to the VEBA prior to February 16, 2016, interest on the unpaid amounts will accrue at a rate of 5% per annum,
subject to a cap of $250, and (5) class members will fully and finally release all claims against the Company in accordance with the terms of the
settlement agreement. The Pennsylvania Court granted final approval of the settlement on January 19, 2016. The plaintiffs had until February 18,
2016 to file an appeal of the court order granting final approval of the settlement. On February 17, 2016, certain class members requested a 30-day
extension to file an appeal, which the Pennsylvania Court denied on February 22, 2016. The Company expects to make the cash settlement payment
on or after March 23, 2016.
67
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
On April 17, 2015 and September 30, 2015, National Steel Car Limited (“NSC”) filed Complaints for Patent Infringement against the Company in the
United States District Court for the Northern District of Illinois (Eastern Division) in Chicago, Illinois. The Complaints assert five United States
patents against certain aggregate gondola freight cars sold to Martin-Marietta and Progress Rail. The Complaints seek injunctive relief and an
unspecified amount of damages. On January 29, 2016, NSC amended the Complaints, alleging that eighteen offers to sell made by the Company also
infringed NSC’s patents. The Company filed its Answer to NSC’s Amended Complaint on February 16, 2016, responding to NSC’s newly raised
allegations, and adding new affirmative defenses as well as counterclaims for non-infringement and invalidity. The Company believes that the
complaints are without merit and intends to vigorously defend against the allegations. While the ultimate outcome of these 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 position, results of operations or cash flows.
On September 29, 2008, Bral Corporation, a supplier of certain railcar parts to the Company, filed a complaint against the Company in the U.S.
District Court for the Western District of Pennsylvania (the “Pennsylvania Lawsuit”). The complaint alleged that the Company breached an
exclusive supply agreement with Bral by purchasing parts from CMN Components, Inc. (“CMN”) and sought damages in an unspecified amount,
attorneys’ fees and other legal costs. On December 14, 2007, Bral sued CMN in the U.S. District Court for the Northern District of Illinois, alleging
among other things that CMN interfered in the business relationship between Bral and the Company (the “Illinois Lawsuit”) and seeking damages
in an unspecified amount, attorneys’ fees and other legal costs. On October 22, 2008, the Company entered into an Assignment of Claims
Agreement with CMN under which CMN assigned to the Company its counterclaims against Bral in the Illinois Lawsuit and the Company agreed
to defend and indemnify CMN against Bral’s claims in that lawsuit. On March 4, 2013, Bral Corporation and the Company agreed to settle the
Illinois Lawsuit and the Pennsylvania Lawsuit. The settlement resulted in a $3,884 reduction in litigation reserves, which favorably impacted the
Company’s results of operations for the year ended December 31, 2013.
In addition to the foregoing, the Company is involved in certain other pending and threatened legal proceedings, including commercial disputes
and workers’ compensation and employee matters arising out of the conduct of its business. While the ultimate outcome of these other legal
proceedings cannot be determined at this time, it is the opinion of management that the resolution of these other actions will not have a material
adverse effect on the Company’s financial condition, results of operations or cash flows.
Note 18 - Other Commitments
The Company leases certain property and equipment under long-term operating leases expiring at various dates through 2024. The leases generally
contain specific renewal options at lease-end at the then fair market amounts.
Future minimum lease payments at December 31, 2015 are as follows:
2016
2017
2018
2019
2020
Thereafter
$ 9,909
9,572
9,621
9,693
10,009
18,800
$67,604
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, 2015, 2014 and 2013, was $10,413, $9,583 and $8,893, respectively.
68
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
The Company is party to certain non-cancelable fixed price agreements to purchase fixed amounts of materials used in the manufacturing process.
These purchase commitments are typically entered into after a customer places an order for railcars. The Company expects to take delivery of such
materials during 2016. In addition, the Company has other non-cancelable agreements with its suppliers to purchase certain materials used in the
manufacturing process. The commitments may vary based on the actual quantities ordered and be subject to the actual price when ordered. At
December 31, 2015, the Company had purchase commitments under these agreements as follows:
2016
2017
2018
2019
2020
Thereafter
$ 8,200
7,930
—
—
—
—
$16,130
Purchases related to these agreements were approximately $24,537, $18,188 and $19,273 for the years ended December 31, 2015, 2014 and 2013,
respectively.
Note 19 – Earnings Per Share
The weighted average common shares outstanding are as follows:
Weighted average common shares outstanding
Dilutive effect of employee stock options and restricted share awards
Weighted average diluted common shares outstanding
2015
Year Ended December 31,
2014
12,001,587
101,933
12,103,520
2013
11,954,238
—
11,954,238
12,175,955
41,800
12,217,755
The Company computes earnings (loss) per share using the two-class method, which is an earnings (loss) allocation formula that determines
earnings (loss) per share for common stock and participating securities. The Company’s participating securities are its grants of restricted stock
which contain non-forfeitable rights to dividends. The Company computes basic earnings per share by dividing net income (loss) allocated to
common shareholders by the weighted average number of shares outstanding during the year. Diluted earnings per share is calculated to give
effect to all potentially dilutive common shares that were outstanding during the year. Weighted average diluted common shares outstanding
include the incremental shares that would be issued upon the assumed exercise of stock options and the assumed vesting of nonvested share
awards. For the years ended December 31, 2015, 2014 and 2013, 475,847, 397,697 and 737,473 shares, respectively, were not included in the weighted
average common shares outstanding calculation as they were anti-dilutive.
69
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
Note 20 – Revenue Sources and Concentration of Sales
The following table sets forth the Company’s sales resulting from various revenue sources for the periods indicated below:
New railcar sales
Rebuild railcar sales
Used railcar sales
Parts sales
Leasing revenues
Maintenance and repair revenues
Other sales
Year ended December 31,
2015
$607,110
136,025
—
9,845
2,654
17,020
200
$772,854
2014
$352,501
204,009
74
15,758
6,069
19,612
495
$598,518
2013
$103,543
142,977
1,238
10,825
5,776
24,866
1,168
$290,393
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 22%, 19% and 10%, respectively, of revenues for the year ended December 31, 2015. Sales to the
Company’s top three customers accounted for 36%, 20% and 13%, respectively, of revenues for the year ended December 31, 2014. Sales to the
Company’s top three customers accounted for 45%, 12% and 6%, respectively, of revenues for the year ended December 31, 2013. The Company’s
sales to customers outside the United States were $62,589, $18,331 and $21,421 in 2015, 2014 and 2013, respectively.
Note 21 - Labor Agreements
A collective bargaining agreement at one of the Company’s facilities that covers approximately 11% and 13% of the Company’s active labor force
at December 31, 2015 and 2014, respectively, expires on March 31, 2017. A collective bargaining agreement at a facility that covers approximately
12% and 16% of the Company’s active labor force at December 31, 2015 and 2014, respectively, expires on October 31, 2018. The facility was idled
during 2013 and resumed production in June 2014. Given the challenged coal market and the completion of the Company’s recent rebuild program,
operations at the facility will be significantly curtailed in 2016.
Note 22 - Selected Quarterly Financial Data (Unaudited)
Quarterly financial data is as follows:
2015
Revenues
Gross profit
Net (loss) income (1)
Net(loss) income per common share-basic
Net (loss) income per common share-diluted
2014
Revenues
Gross profit
Net (loss) income (2)
Net(loss) income per common share-basic
Net (loss) income per common share-diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 92,804
4,553
(2,073)
(0.17)
(0.17)
$
$
$235,637
21,806
7,397
0.60
0.60
$
$
$241,114
29,050
14,827
1.20
$
1.20
$
$203,299
27,252
11,654
0.95
$
0.94
$
$ 56,086
(3,152)
(6,949)
(0.58)
(0.58)
$
$
$139,688
11,054
1,615
0.13
0.13
$
$
$190,280
18,819
6,432
0.53
0.53
$
$
$212,464
15,622
4,806
0.40
0.39
$
$
(1)
Results for the third quarter of 2015 include a $4,578 gain on the sale of the Company’s railcar repair and maintenance services business.
70
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
(2)
Results for the third quarter of 2014 include a $1,078 gain on the sale of the Company’s closed railcar maintenance and repair facility.
Note 23 – Segment Information
On September 30, 2015, the Company sold its railcar repair and maintenance services business. Through September 30, 2015, the Company’s
operations comprised two reportable segments, Manufacturing and Services. As of October 1, 2015, the Company’s operations comprise two
operating segments, Manufacturing and Parts, and one reportable segment, Manufacturing. The Company’s Manufacturing segment includes new
railcar manufacturing, used railcar sales, railcar leasing and major railcar rebuilds. The Company’s Parts operating segment is not expected to be of
continuing significance for separate reporting and has been combined with corporate business activities that are not considered operating
segments as Corporate and Other. Prior period segment information has been recast to include general railcar repair and maintenance and
inspections through September 30, 2015 and parts sales through December 31, 2015 in Corporate and Other.
Segment operating income is an internal performance measure used by the Company’s Chief Operating Decision Maker to assess the performance
of each segment in a given period. Segment operating income includes all external revenues attributable to the segments as well as operating costs
and income that management believes are directly attributable to the current production of goods and services. The Company’s management
reporting package does not include interest revenue, interest expense or income taxes allocated to individual segments and these items are not
considered as a component of segment operating income. Segment assets represent operating assets and exclude intersegment accounts, deferred
tax assets and income tax receivables. The Company does not allocate cash and cash equivalents to its operating segments as the Company’s
treasury function is managed at the corporate level. The accounting policies of the business segments are the same as those described in the
summary of significant accounting policies in Note 2. Intersegment revenues were not material in any period presented.
71
Table of Contents
FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
Revenues:
Manufacturing
Corporate and Other
Consolidated Revenues
Operating Income (Loss):
Manufacturing
Corporate and Other
Consolidated Operating Income (Loss)
Consolidated interest expense and deferred financing costs
Consolidated other income
Consolidated Income (Loss) Before Income Taxes
Depreciation and Amortization:
Manufacturing
Corporate and Other
Consolidated Depreciation and Amortization
Capital Expenditures:
Manufacturing
Corporate and Other
Consolidated Capital Expenditures
Year Ended December 31,
2015
2014
2013
$745,723
27,131
$772,854
$562,719
35,799
$598,518
$253,777
36,616
$290,393
$ 69,165
(22,402)
46,763
(243)
116
$ 46,636
$ 32,150
(22,643)
9,507
(1,077)
42
8,472
$
$ (3,361)
(20,726)
(24,087)
(809)
64
$ (24,832)
$
7,170
2,858
$ 10,028
$
6,858
3,211
$ 10,069
$
6,485
3,592
$ 10,077
$ 14,843
1,856
$ 16,699
$ 10,952
850
$ 11,802
$ 15,835
1,482
$ 17,317
Assets:
Manufacturing
Corporate and Other
Total Operating Assets
Consolidated income taxes receivable
Consolidated deferred income taxes, current
Consolidated deferred income taxes, long-term
Consolidated Assets
December 31, 2015
December 31, 2014
$
$
238,841
133,341
372,182
—
—
34,722
406,904
$
$
157,505
193,891
351,396
164
12,139
21,553
385,252
Note 24 – Sale of Repair and Maintenance Services Business
On September 30, 2015, the Company sold its railcar repair and maintenance services business for an aggregate purchase price of $20,000. The sale
included assets of FCRS, which operated the Company’s railcar repair and maintenance services business, and FCSL, which owned a short-line
railway. The net book value of assets that were sold was $14,283, which included accounts receivable of $2,776, inventory of $2,537, property plant
and equipment of $7,740 and intangible assets of $1,230. The sale will allow the Company to increase its focus on its railcar manufacturing, parts
and leasing business as the Company continues to broaden its product portfolio through the introduction of new railcar types and implements
operational improvements, enhancing productivity through training, technology and automation. The asset purchase agreement relating to the sale
(the “Asset Purchase Agreement”) contains customary representations, warranties, covenants and indemnities. On September 30, 2015,
72
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FreightCar America, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands, except for share and per share data)
$1,960 of the aggregate purchase price was placed into escrow (which is recorded as a long-term receivable) in order to secure the indemnification
obligations of FCRS and FCSL under the Asset Purchase Agreement and $451 was used to settle certain liabilities of FCRS and FCSL, resulting in
cash proceeds to the Company of $17,589. Twenty-five percent (25%) of the escrow amount, reduced by the amount of any pending claims, will be
released to FCRS on each of the dates that are 18 months and three years after the closing date of the transaction and the remaining amount,
reduced by the amount of any pending claims, will be released to FCRS on the fifth anniversary of the closing date of the transaction. As a result of
the sale, the Company recorded a pre-tax gain of $4,578.
In December 2013, the Company closed its underperforming maintenance and repair shop in Clinton, Indiana, reduced the carrying values of repair
shop assets to their estimated fair market value, representing the estimated salvage values of building, equipment and rail at the facility and the
estimated sales value of the associated land, and recorded restructuring and impairment charges of $1,741. Sale of the repair shop assets to a
strategic buyer in September 2014 resulted in a pre-tax gain of $1,078.
73
Table of Contents
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, management evaluated the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by our annual report on Form 10-K for the
fiscal year ended December 31, 2015 (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be
disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission’s rules and forms.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management, under the supervision of the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) promulgated
under the Exchange Act, is a process designed by, or under the supervision of, the Chief Executive Officer and Chief Financial Officer and effected
by the 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 reporting purposes in accordance with GAAP. Internal control over financial reporting includes
those policies and procedures that:
•
•
•
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with GAAP;
Provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with appropriate
authorization of management and the board of directors; and
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.
As of the end of the Company’s 2015 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 (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s system of internal control over financial reporting is designed to provide
reasonable assurance to the Company’s management and board of directors regarding the reliability of financial records used in preparation of the
Company’s published financial statements. As all internal control systems have inherent limitations, even systems determined to be effective can
provide only reasonable assurance with respect to financial statement preparation and presentation. Based on its assessment, management has
concluded that the Company’s internal control over financial reporting was effective as of December 31, 2015.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2015 has been audited by Deloitte & Touche LLP,
an independent registered public accounting firm, as stated in their report appearing herein.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There has been no change in our internal control over financial reporting during the last fiscal quarter of 2015 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
74
Table of Contents
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 “Governance of the
Company,” “Stock Ownership,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Executive Officers,” “Compensation Discussion and
Analysis” 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, 2015.
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” 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, 2015.
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, 2015.
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, 2015.
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 after the end of our fiscal year ended
December 31, 2015.
75
Table of Contents
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. and Subsidiaries
Reports of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of December 31, 2015 and 2014.
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013.
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2015, 2014 and 2013.
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2015, 2014 and 2013.
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013.
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)
(c)
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.
Additional Financial Statement Schedules
None.
76
Table of Contents
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 4, 2016
By:
/s/ JOSEPH E. MCNEELY
Joseph E. McNeely, 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
President and Chief Executive Officer (principal executive officer)
and Director
Date
March 4, 2016
/s/ JOSEPH E. MCNEELY
Joseph E. McNeely
/s/ MATTHEW S. KOHNKE
Matthew S. Kohnke
/s/ JOSEPH J. MALIEKEL
Joseph J. Maliekel
/s/ WILLIAM D. GEHL
William D. Gehl
/s/ JAMES D. CIRAR
James D. Cirar
/s/ THOMAS A. MADDEN
Thomas A. Madden
/s/ MALCOLM F. MOORE
Malcolm F. Moore
/s/ ANDREW B. SCHMITT
Andrew B. Schmitt
/s/ S. CARL SODERSTROM, JR.
S. Carl Soderstrom, Jr.
Vice President, Finance, Chief Financial Officer and Treasurer
(principal financial officer)
March 4, 2016
Vice President and Corporate Controller (principal accounting
officer)
March 4, 2016
Chairman of the Board and Director
March 4, 2016
Director
Director
Director
Director
Director
77
March 4, 2016
March 4, 2016
March 4, 2016
March 4, 2016
March 4, 2016
Table of Contents
FreightCar America, Inc. and Subsidiaries
Schedule II – Valuation and Qualifying Accounts
For the Years Ended December 31, 2015, 2014 and 2013
(in thousands)
Year Ended December 31, 2015
Allowance for doubtful accounts
Deferred tax assets valuation allowance
Inventory reserve
Year Ended December 31, 2014
Allowance for doubtful accounts
Deferred tax assets valuation allowance
Inventory reserve
Year Ended December 31, 2013
Allowance for doubtful accounts
Deferred tax assets valuation allowance
Inventory reserve
Balance at
Beginning
of Period
Additions
Charged to
Costs and
Expenses
Deductions,
Accounts
Charged Off and
Recoveries of
Amounts
Previously
Written Off
$
$
$
188
6,219
2,381
221
6,616
1,793
299
4,582
1,565
78
$
$
$
—
—
1,458
—
—
1,252
—
2,034
697
$
$
$
(106)
(422)
(46)
(33)
(397)
(664)
(78)
—
(469)
Balance at
End of
Period
$
$
$
82
5,797
3,793
188
6,219
2,381
221
6,616
1,793
Table of Contents
EXHIBIT INDEX
2.1
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Asset Purchase Agreement, dated September 30, 2015, by and among FreightCar Rail Services, LLC, FreightCar Short Line, Inc. and
ARS Nebraska, LLC. (incorporated by reference to Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2015 filed with the Commission on November 3, 2015).
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).
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).
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).
Letter agreement regarding Terms of Employment dated August 27, 2010 by and between FreightCar America, Inc. and Joseph E.
McNeely (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on
August 27, 2010).
Letter agreement regarding Terms of Employment dated April 30, 2013 by and between FreightCar America, Inc. and Joseph E. McNeely
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 2, 2013).
Letter agreement regarding Terms of Employment dated October 4, 2013 by and between FreightCar America, Inc. and Joseph E.
McNeely (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on
October 4, 2013).
Letter agreement regarding Terms of Employment dated July 9, 2013 by and between FreightCar America, Inc. and Charles F. Avery, Jr.
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on July 22, 2013)
Letter agreement regarding Terms of Employment dated December 13, 2012 by and between FreightCar America, Inc. and Kathleen M.
Boege (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on January 4,
2013).
Employment agreement of Thomas P. McCarthy dated as of June 4, 2007, by and between FreightCar America, Inc. and Thomas P.
McCarthy (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31,
2010)
Amendment to employment agreement of Thomas P. McCarthy dated as of December 29, 2008. (incorporated by reference to Exhibit
10.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010)
Letter agreement regarding Terms of Employment dated November 17, 2015 by and between FreightCar America, Inc. and Georgia L.
Vlamis (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on
December 2, 2015).
Letter agreement regarding Terms of Employment dated January 19, 2016 by and between FreightCar America, Inc. and Matthew S.
Kohnke (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on
January 25, 2016).
FreightCar America, Inc. 2005 Long Term Incentive Plan (Restated to incorporate all Amendments) (incorporated by reference to
Appendix I to the Company’s Proxy Statement for the annual meeting of stockholders held on May 17, 2013 filed with the Commission
on April 12, 2013).
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).
79
Table of Contents
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
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).
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).
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).
Form of Performance 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 16, 2015).
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).*
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).*
Second Amendment to the Lease Agreement, dated as of February 1, 2008, by and between Norfolk Southern Railway Company and
Johnstown America Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2008 filed with the Commission on May 12, 2008).
Amendment to Lease, dated as of October 12, 2012, by and between Norfolk Southern Railway Company and Johnstown America
Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2012 filed with the Commission on November 9, 2012).*
Amendment to Lease Agreement, dated as of November 23, 2015, by and between Norfolk Southern Railway Company and Johnstown
America Corporation.**
Sublease, dated as of February 19, 2013, by and between Navistar, Inc. and FreightCar Alabama, LLC (incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013 filed with the Commission
on May 10, 2013).*
Amendment to Sublease, dated as of March 11, 2013, by and among Teachers’ Retirement Systems of Alabama, Employees’ Retirement
System of Alabama, Navistar, Inc. and FreightCar Alabama, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2013 filed with the Commission on May 10, 2013).*
Second Amendment to Sublease and Consent to Sublease, dated October 27, 2014, by and among Teachers’ Retirement Systems of
Alabama, Employees’ Retirement System of Alabama, Navistar, Inc. and FreightCar Alabama, LLC.**
Credit Agreement, dated as of July 26, 2013, by and among FreightCar America, Inc. and certain of its subsidiaries and Bank of America,
N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on August 1,
2013).
Security and Pledge Agreement, dated as of July 26, 2013, by and among FreightCar America, Inc. and certain of its subsidiaries and
Bank of America, N.A. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the
Commission on August 1, 2013).
FreightCar America, Inc. Executive Severance Plan (and Summary Plan Description) (incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q filed with the Commission on September 30, 2009).
80
Table of Contents
10.27
10.28
10.29
10.30
21
23
31.1
31.2
32
Amendment of the FreightCar America, Inc. Executive Severance Plan dated December 4, 2012. (incorporated by reference to Exhibit
10.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012)
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).
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 20, 2009).
Form of Indemnification Agreement between FreightCar America, Inc. and each of its current directors (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 24, 2010).
Subsidiaries of FreightCar America, Inc.
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101PRE
XBRL Taxonomy Extension Presentation Linkbase Document
*
**
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.
Confidential treatment has been requested 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.
(Back To Top)
81
Section 2: EX-10.20 (EX-10.20)
AMENDMENT TO LEASE AGREEMENT
Exhibit 10.20
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE REDACTED PORTIONS OF THIS AGREEMENT, WHICH ARE
DENOTED BY ***. A COMPLETE COPY OF THIS AGREEMENT, INCLUDING THE REDACTED PORTIONS, HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
THIS AMENDMENT TO LEASE AGREEMENTS (this “Amendment”) is made as of the 23rd day of November 2015 by and between
NORFOLK SOUTHERN RAILWAY COMPANY, a Virginia corporation (the “Landlord”) and JOHNSTOWN AMERICA CORP, a Pennsylvania
corporation (the “Tenant”).
RECITALS:
A. WHEREAS Landlord and Tenant entered into that certain Lease Agreement dated December 20, 2004 for approximately 11.6 acres of
real property and certain improvements located thereon located in Roanoke, Virginia, all as more particularly described in the Lease Agreement (the
“Track 1 Premises”), which Lease Agreement has been amended by that certain First Amendment to Lease Agreement dated as of December 1,
2005, that certain Second Amendment to Lease Agreement dated as of February 1, 2008 (as so amended, the “Track 1 Lease”), and that certain
Third Amendment to Lease Agreement dated as of October 11, 2012.
B. WHEREAS Landlord and Tenant entered into that certain Lease Agreement dated September 1, 2006 for approximately 3.9 acres of
real property and certain improvements located thereon located in Roanoke, Virginia, all as more particularly described in the Lease Agreement (the
“Track 2 Premises”), which Lease Agreement has been amended by that certain First Amendment to Lease Agreement dated as of February 1, 2008
(as so amended, the “Track 2 Lease”), and that certain Second Amendment to Lease Agreement dated as of October 11, 2012.
C. WHEREAS Landlord and Tenant entered into that certain Lease Agreement dated February 15,2008 for approximately 47,000 square
feet of space in the southern end of the Foundry Building located in Roanoke, Virginia (the “Foundry Premises,” and collectively with the Track 1
Premises and the Track 2 Premises, the “Leased Premises”), all as more particularly described in the Lease Agreement (the “Foundry Lease,” each
of the Track 1 Lease, the Track 2 Lease and the Foundry Lease are individually referred to as a “Lease,” and collectively, the “Leases”) and that
certain Second Amendment to Lease Agreement dated as of October 11, 2012.
D. WHEREAS Landlord and Tenant have agreed to amend the Track 1 Lease, the Track 2 Lease and the Foundry Lease as hereinafter
provided. All capitalized terms not specifically defined herein shall have the meanings given or ascribed to them in the specified lease.
NOW THEREFORE, in consideration of the mutual agreements hereinafter contained, and for $10.00 and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:
1. Base Rental. Commencing as of the 1st day of December, 2015, and expiring at midnight on the 31st day of December, 2024, Base Rental for
the Leased Premises shall be payable as set forth on Exhibit A attached hereto and made a part hereof, and Section 3 of each Lease is hereby
amended accordingly.
2. Counterparts. This Amendment may be executed on any number of separate counterparts and all of said counterparts taken together shall
be deemed to constitute one and the same instrument.
3. Governing Law. This amendment is governed by and shall be construed under the laws of the Commonwealth of Virginia.
4. Effect of Amendment. Except as herein specifically amended, each Lease shall remain in full force and effect.
[SIGNATURE PAGE TO FOLLOW]
2
IN WITNESS WHEREOF, the parties hereto have executed this Amendment in duplicate, each part being an original, as of the 23rd day of
November, 2015.
Witness: As To Landlord
LANDLORD:
/s/ Loven Isom
Signature
Name: Loven Isom
Witness: As To Landlord
/s/ Martina Chitwood
Signature
Name: Martina Chitwood
Witness: As To Tenant
/s/ Joseph Maliekel
Signature
Name: Joseph Maliekel
Witness: As To Landlord
/s/ Joseph Maliekel
Signature
Name: Joseph Maliekel
NORFOLK SOUTHERN RAILWAY COMPANY
a Virginia Corporation
/s/ SG Portnell
By:
Name: SG Portnell
Title: Real Estate Manager
Date of Landlord Signature: 11-23-15
[SEAL]
TENANT:
NORFOLK SOUTHERN RAILWAY COMPANY
a Virginia Corporation
/s/ Joseph Maliekel
By:
Name: Joseph Maliekel
Title: Corporate Controller
Date of Landlord Signature: 11-21-15
3
[SEAL]
EXHIBIT A
BASE RENTAL SCHEDULE
Monthly
Rental
Abatement
$***
$***
$***
$***
$***
$***
$***
$***
$***
$***
Total Monthly
Base Rental
$***
$***
$***
$***
$***
$***
$***
$***
$***
$***
Annual Base Rental
$***
$***
$***
$***
$***
$***
$***
$***
$***
N/A
Monthly Base Rental
$***
$***
$***
$***
$***
$***
$***
$***
$***
$***
4
Lease Year
12/1/2015 - 11/30/2016
12/1/2016 - 11/30/2017
12/1/2017 - 11/30/2018
12/1/2018 - 11/30/2019
12/1/2019 - 11/30/2020
12/1/2020 - 11/30/2021
12/1/2021 - 11/30/2022
12/1/2022 - 11/30/2023
12/1/2023 - 11/30/2024
12/1/2024 - 12/31/2024
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Section 3: EX-10.23 (EX-10.23)
Exhibit 10.23
EXECUTION VERSION
SECOND AMENDMENT TO SUBLEASE
AND CONSENT TO SUBLEASE
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE REDACTED PORTIONS OF THIS AGREEMENT, WHICH ARE DENOTED
BY ***. A COMPLETE COPY OF THIS AGREEMENT, INCLUDING THE REDACTED PORTIONS, HAS BEEN FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION.
THIS SECOND AMENDMENT TO SUBLEASE AND CONSENT TO SUBLEASE (this “Amendment”) is made and entered into this
October 27, 2014 and effective as of October 1, 2014 (the “Second Amendment Effective Date”), by and among TEACHERS’ RETIREMENT
SYSTEMS OF ALABAMA, an instrumentality of the State of Alabama, and EMPLOYEES’ RETIREMENT SYSTEM OF ALABAMA, an
instrumentality of the State of Alabama (collectively, the “Landlord”), NAVISTAR, INC., a Delaware corporation (“Tenant” or “Sublandlord”), and
FREIGHTCAR ALABAMA, LLC, a Delaware limited liability company (“Subtenant”). Landlord, Tenant/Sublandlord, and Subtenant are sometimes
referred to herein collectively as the “Parties” and individually as a “Party.”
Recitals
A. Landlord entered into that certain Industrial Facility Lease (the “Lease”), dated as of September 29, 2011, with Tenant, whereby Landlord
leased to Tenant the Leased Premises (as defined in the Lease).
B. A short form or memorandum of the Lease has been recorded in the land records of Colbert County, Alabama on October 25, 2011 in Book
2011, Page 22555.
C. Pursuant to that certain Sublease (as amended by that certain Amendment to Sublease ***, dated as of March 11, 2013, collectively, the
“Sublease”), dated as of February 19, 2013, Tenant has subleased to Subtenant a portion of the Facility referred to as the “Subleased Premises,”
and granted to Subtenant the exclusive use of certain areas of the Leased Premises referred to therein as the “Exclusive Use Areas,” all as more
particularly described in the Sublease. A true and complete copy of the Sublease has been delivered to Landlord. Capitalized terms used herein, but
not defined herein, shall have the meanings ascribed to them in the Sublease.
D. Sublandlord and Subtenant mutually desire that the Sublease be amended on an subject to the following terms and conditions.
For and in consideration of the respective covenants and agreements of the Parties herein set forth, and other good and valuable
consideration, the receipt and sufficiency of all of which are hereby acknowledged by the Parties, the Parties do hereby agree as follows:
Agreement
ARTICLE 1
AMENDMENTS TO SUBLEASE
Section 1.1 Amendment of “Background” Recitals. From and after the Second Amendment Effective Date, the Sublease is amended by
substituting the following new Section C. of the “Background” recitals on the initial page of the Sublease:
C. Sublandlord desires to (i) sublease to Subtenant a portion of the Facility consisting of approximately 698,685 square feet of
space to be occupied by Subtenant (the “FCA Controlled Subleased Space”), as more particularly set forth on the floor plan attached
hereto as Exhibit B, (ii) grant to Subtenant the non-exclusive right to use a shared area in the Facility comprised of approximately ***
square feet of space (the “Shared Use Area”) as more particularly set forth on the floor plan attached hereto as Exhibit B, for which
Subtenant shall be obligated to pay Sublease Base Rent and its share of costs and expenses on 13,923 square feet of such Shared Use
Area, as more particularly set forth herein (the “FCA Shared Use Area”) (the 712,608 square feet of space comprising the FCA
Controlled Subleased Space and the FCA Shared Use Area shall be collectively referred to herein as the “FCA Space”), (iii) sublease to
Subtenant a portion of the Facility consisting of approximately *** square feet of space to be occupied by Sublandlord (the “Navistar
Controlled Subleased Space”) (the FCA Controlled Subleased Space and the Navistar Controlled Subleased Space shall be collectively
referred to herein as the “Subleased Premises”), as more particularly set forth on the floor plan attached hereto as Exhibit B, and
(iv) grant to Subtenant the exclusive use of those areas of the Premises identified as being for the exclusive use of Subtenant (the
“Exclusive Use Areas”), as more particularly set forth on the site plan attached hereto as Exhibit C.
Exhibit B referenced in the substituted paragraph above shall be replaced in the Sublease with Exhibit B attached to this Amendment.
Section 1.2 Demising of Additional Space. Within thirty (30) days following the Second Amendment Effective Date, Sublandlord shall cause
the portion of the Facility added to the FCA Controlled Subleased Space in Section 1.1 of this Amendment above (the “Additional Subleased
Space”) to be separately demised as part of the existing FCA Controlled Subleased Space (the “Amendment Demising Work”). The Amendment
Demising Work shall be performed at Sublandlord’s sole cost. Sublandlord shall determine the method, means and material for completing the
Amendment Demising Work, subject to Subtenant’s prior approval, which shall not be unreasonably withheld, delayed or conditioned. Sections
1.2(c) and 1.2 (d) of the Sublease related to Sublandlord access to the Sublease Premises and Subtenant Delay shall apply to the Amendment
Demising Work hereunder.
Section 1.3 Amendment of Section 3.1 of Sublease. From and after the Second Amendment Effective Date, the Sublease is amended by
substituting the following new Section 3.1:
3.1 Sublease Base Rent. Subtenant shall pay to Sublandlord base rent for the Subleased Premises (“Sublease Base Rent”), in the
amount of $*** per year (calculated by multiplying $*** per square foot per year by *** square feet, which is the sum of the square
footage comprising the FCA Space and the Navistar Controlled Subleased Space), payable in equal monthly installments of $*** each.
If Subtenant timely exercises any option to extend the Term of this Sublease for any Sublease Extension Term in accordance with
Section 2.2 hereof, Subtenant shall pay to Sublandlord Sublease Base Rent for the Subleased Premises during any such Sublease
Extension Term in the amount of $*** per year (calculated by multiplying
2
$*** per square foot per year by *** square feet, which is the sum of the square footage comprising the FCA Space and the Navistar
Controlled Subleased Space), payable in equal monthly installments of $*** each.
Section 1.4 Amendment of Section 3.3(d) of Sublease. From the after the Second Amendment Effective Date, the Sublease is amended by
substituting the following new Section 3.3(d):
(d) “Subtenant’s Proportionate Share” shall mean 33.14%, which has been determined by dividing the number of square feet in
the FCA Space (712,608 square feet), by the number of square feet in the Facility (2,150,000 square feet).
Section 1.5 Common Use Assets. From and after the Second Amendment Effective Date, the Sublease is amended by adding the following
equipment to the list of Common Use Assets specified on Exhibit D to the Sublease:
***
***
***
Section 1.6 Shared Use Area. From and after the Second Amendment Effective Date, the Sublease is amended by adding the following new
Section 1.4:
1.4 Shared Use Area. Subtenant shall have the right to access and use the Shared Use Area jointly with Sublandlord and other
subtenants or tenants of the Premises in accordance with the terms and provisions of the Master Lease and this Sublease. All of such
use of the Shared Use Area shall be such as will not unreasonably obstruct or interfere with the joint use thereof, and shall be in
compliance with all applicable laws and the Master Lease. Sublandlord shall
provide facility services to the Shared Use Area to the same extent as Sublandlord is required to provide such services to the Common
Areas pursuant to Section 5.5 of the Sublease.
Section 1.7 Other Provisions of Sublease. Sublandlord and Subtenant hereby agree that notwithstanding the foregoing specified
amendments of the Sublease, all other terms and conditions of the Sublease shall remain in full force and effect. In the case of any inconsistency
between the provisions of the Sublease and this Amendment, the provisions of this Amendment shall govern and control.
ARTICLE 2
CONSENT TO SUBLEASE AMENDMENT
Section 2.1 Consent. Landlord hereby consents to the foregoing and to the sublease of the Subleased Premises by Tenant to Subtenant
pursuant to the Sublease, as amended by this Amendment.
Section 2.2 Non-Disturbance. So long as there is no Sublease Event of Default which remains uncured, Landlord covenants and agrees that
Subtenant’s possession and use of the Subleased Premises and Exclusive Use Areas and Subtenant’s rights and privileges under the Sublease,
including any extensions or renewals thereof which may be effected in accordance with any
3
option or right granted therein, shall not be diminished or interfered with by Landlord, and Subtenant’s occupancy of the Subleased Premises and
Exclusive Use Areas shall not be disturbed during the term of the Sublease or any renewal or extension thereof.
ARTICLE 3
GENERAL PROVISIONS
Section 3.1 Notices. Any notice, request, demand, instruction or other document to be given or served hereunder or under any document or
instrument executed pursuant hereto shall be in writing and shall be delivered personally, sent by nationally recognized overnight courier service,
delivery fee prepaid, or sent by United States registered or certified mail, return receipt requested, postage prepaid, in each case addressed to the
parties at their respective addresses set forth below. Any such notice shall be effective (a) upon receipt if delivered personally, (b) on the next
business day after confirmed deposit with a nationally recognized overnight courier service, and (b) three (3) business days after deposit in the
United States registered or certified mail. A party may change its address for receipt of notices by service of a notice of such change in accordance
herewith.
If to Landlord:
The Retirement Systems of Alabama
201 South Union Street
Montgomery, AL 36130
Attn: Hunter Harrell
with a copy to:
If to Tenant:
Navistar, Inc.
2701 Navistar Drive
Lisle, IL 60532
Attention: Director, Corporate Real Estate
with a copy to:
If to Subtenant:
with a copy to:
Navistar, Inc.
2701 Navistar Drive
Lisle, IL 60532
Attention: General Counsel
FreightCar America, Inc.
Two North Riverside Plaza
Suite 1300
Chicago, IL 60606
Telecopy: 312-928-0890
Attention: General Counsel
McDermott Will & Emery LLP
227 West Monroe Street
Suite 4700
Chicago, IL 60606
Attention: Gerald R. Offutt
4
IN WITNESS WHEREOF, this Agreement has been executed by the Parties as of the date first stated above.
Landlord:
Teachers’ Retirement Systems Of Alabama
Tenant:
Subtenant:
/s/ David G. Bronner
By:
Name: David G. Bronner
Title: CEO
Employees’ Retirement System Of Alabama
/s/ David G. Bronner
By:
Name: David G. Bronner
Title: CEO
Navistar, Inc.
/s/ Jim Moran
By:
Name: Jim Moran
Title: SVP & Treasurer
FreightCar Alabama, LLC
/s/ Joseph E. McNeely
By:
Name: Joseph E. McNeely
Title: President and Chief Executive Officer
5
EXHIBIT B
***
6
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Section 4: EX-21 (EX-21)
SUBSIDIARIES OF FREIGHTCAR AMERICA, INC.
Name of Subsidiary
JAC Operations Inc.
Johnstown America, LLC
Freight Car Services, Inc.
JAIX Leasing Company
FreightCar Roanoke, LLC
FreightCar Rail Services, LLC
FreightCar Rail Management Services, LLC
FreightCar Short Line, Inc.
FreightCar Mauritius Ltd.
FreightCar Alabama, LLC
FreightCar (Shanghai) Trading Co., Ltd.
Exhibit 21
Percent Ownership
by Registrant
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
All subsidiaries are Delaware corporations or Delaware limited liability companies except FreightCar Mauritius Ltd., which is incorporated in
Mauritius, and FreightCar (Shanghai) Trading Co., Ltd., which is organized in the Peoples Republic of China.
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Section 5: EX-23 (EX-23)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements No: 333-131981 and 333-184820 on Form S-8 of our reports dated March 4,
2016, relating to the consolidated financial statements and financial statement schedule of FreightCar America, Inc. and subsidiaries (the
“Company”), and the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of the
Company for the year ended December 31, 2015.
Exhibit 23
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
March 4, 2016
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Section 6: EX-31.1 (EX-31.1)
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Joseph E. McNeely, certify that:
1. I have reviewed this Annual Report on Form 10-K of FreightCar America, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Exhibit 31.1
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined by Exchange Act Rules 13a-15(f) and 15d-15
(f)) for the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, 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;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 4, 2016
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Section 7: EX-31.2 (EX-31.2)
By:
/s/ JOSEPH E. MCNEELY
Joseph E. McNeely
President and Chief Executive Officer
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Matthew S. Kohnke, certify that:
1. I have reviewed this Annual Report on Form 10-K of FreightCar America, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined by Exchange Act Rules 13a-15(f) and 15d-15
(f)) for the registrant and have:
a)
b)
c)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, 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;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 4, 2016
By:
/s/ MATTHEW S. KOHNKE
Matthew S. Kohnke
Vice President, Finance,
Chief Financial Officer and Treasurer
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Section 8: EX-32 (EX-32)
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32
In connection with the Annual Report of FreightCar America, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2015 as filed
with the Securities and Exchange Commission on the date hereof (the “Report”), we, Joseph E. McNeely, President and Chief Executive Officer, and
Matthew S. Kohnke, Vice President, Finance, Chief Financial Officer and Treasurer, respectively, of the Company, certify pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:
(1)
(2)
the Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 4, 2016
Date: March 4, 2016
By:
By:
/s/ JOSEPH E. MCNEELY
Joseph E. McNeely
President and Chief Executive Officer
/s/ MATTHEW S. KOHNKE
Matthew S. Kohnke
Vice President, Finance,
Chief Financial Officer and Treasurer
A signed copy of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be
retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
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