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Article by DailyStocks_admin    (12-26-07 03:51 AM)

The Daily Magic Formula Stock for 12/26/2007 is FreightCar America Inc. According to the Magic Formula Investing Web Site, the ebit yield is 44% and the EBIT ROIC is >100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

OVERVIEW

We are the leading manufacturer of aluminum-bodied railcars in North America, based on the number of railcars delivered. We specialize in the production of coal-carrying railcars, which represented 96% of our deliveries of railcars in 2006 and 93% of our deliveries of railcars in 2005, while the balance of our production consisted of a broad spectrum of railcar types, including aluminum-bodied and steel-bodied railcars. We also refurbish and rebuild railcars and sell forged, cast and fabricated parts for all of the railcars we produce, as well as those manufactured by others. We have currently chosen not to offer significant railcar leasing services, as we have made a strategic decision not to compete with our customers that provide railcar leasing services, which represent a significant portion of our revenue.

We are the leading North American manufacturer of coal-carrying railcars. We estimate that we have manufactured 81% of the coal-carrying railcars delivered over the three years ended December 31, 2006 in the North American market. Our BethGon ® railcar has been the leading aluminum-bodied coal-carrying railcar sold in North America for nearly 20 years. Over the last 25 years, we believe we have built and introduced more types of coal-carrying railcars than all other manufacturers in North America combined.

Our manufacturing facilities are located in Danville, Illinois, Johnstown, Pennsylvania and Roanoke, Virginia. Each of our manufacturing facilities has the capability to manufacture a variety of types of railcars, including aluminum-bodied and steel-bodied railcars. We commenced operations at our leased manufacturing facility in Roanoke, Virginia in December 2004, and we delivered the first railcar manufactured at the Roanoke facility during the second quarter of 2005.

Our primary customers are financial institutions, railroads and shippers, which represented 49%, 10%, and 41%, respectively, of our total sales attributable to each type of customer for the year ended December 31, 2006. In the year ended December 31, 2006, we delivered 18,764 new railcars, including 17,959 aluminum-bodied coal-carrying railcars. Our total backlog of firm orders for new railcars decreased from 20,729 railcars as of December 31, 2005 to 9,315 railcars as of December 31, 2006, representing estimated sales of $1.4 billion and $697 million, respectively, attributable to such backlog.

We and our predecessors have been manufacturing railcars since 1901. From 1923 to 1991, our business was owned and operated by Bethlehem Steel Corporation. In 1991, Transportation Technologies Industries, Inc., or TTII (then known as Johnstown America Industries, Inc.), purchased our business from Bethlehem Steel. In June 1999, TTII sold our railcar business to an investor group led by certain members of TTII’s management who became our management. In December 2004, we changed our name from JAC Holdings International, Inc. to FreightCar America, Inc. to better reflect our business of manufacturing railcars.

Prior to April 1, 2005, our company was named FCA Acquisition Corp. On April 1, 2005, our former parent company, also named FreightCar America, Inc., merged with and into FCA Acquisition Corp., with FCA Acquisition Corp. being the surviving corporation. In connection with the merger, FCA Acquisition Corp. changed its name to FreightCar America, Inc. We refer to our former parent company’s merger with FCA Acquisition Corp., the name change and related share exchanges as the merger. The surviving corporation of the merger is incorporated in Delaware.

On April 11, 2005, we completed an initial public offering of shares of our common stock. On September 27, 2005, we completed a secondary public offering of shares of our common stock by selling stockholders.

Our internet website is www.freightcaramerica.com. We make available free of charge on or through our website items related to corporate governance, including, among other things, our corporate governance guidelines, charters of various committees of the Board of Directors and our code of business conduct and ethics. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K are available on our website and on the SEC’s website at www.sec.gov. Any stockholder of our company may also obtain copies of these documents, free of charge, by sending a request in writing to Investor Relations at FreightCar America, Inc., Two North Riverside Plaza, Suite 1250, Chicago, Illinois 60606.

OUR PRODUCTS AND SERVICES

We design and manufacture aluminum-bodied and steel-bodied railcars that are used in various industries. In particular, we have expertise in the manufacture of aluminum-bodied coal-carrying railcars

The types of railcars listed below include the major types of railcars that we are capable of manufacturing; however, some of the types of railcars listed below have not been ordered by any of our customers or manufactured by us in a number of years.

Any of the railcar types listed below may be further developed with particular characteristics, depending on the nature of the materials being transported and customer specifications. In addition, we refurbish and rebuild railcars and sell forged, cast and fabricated parts for all of the railcars that we manufacture, as well as those manufactured by others.

We manufacture two primary types of coal-carrying railcars: gondolas and open-top hoppers. We build all of our coal-carrying railcars using a patented one-piece center sill, the main longitudinal structural component of the railcar. The one-piece center sill provides a higher carrying capacity and weighs significantly less than traditional multiple-piece center sills.

BethGon Series . The BethGon is the leader in the aluminum-bodied coal-carrying gondola railcar segment. We believe the BethGon railcar can carry more coal than traditional gondola railcars. Since we introduced the steel BethGon railcar in the late 1970s and the aluminum BethGon railcar in 1986, the BethGon railcar has become the most widely used coal-carrying railcar in North America. The BethGon railcar represented 45%, 33% and 48% of all the railcars we delivered in 2006, 2005 and 2004, respectively, and 41%, 28% and 37% of total revenue in 2006, 2005 and 2004, respectively.

We have continuously improved the BethGon’s design since we began making this railcar. The improvements have been aimed at increasing carrying capacity and reducing weight while maintaining structural integrity. In 1986, we introduced the use of aluminum construction. The use of aluminum lowered each railcar’s weight from approximately 60,000 pounds to approximately 42,000 pounds. We believe the new design increased hauling capacity by approximately nine tons per railcar over traditional flat-bottomed gondolas and lowered the railcar’s center of gravity, providing a smoother ride with less wear on the railcar. In 1994, we introduced a higher payload aluminum gondola coal-carrying railcar, called the AeroFlo™ BethGon, which had redesigned sides for improved aerodynamics and greater fuel efficiency. In 2001, we introduced a new gondola coal-carrying railcar, the BethGon II, which has a lighter weight, higher capacity and increased durability suitable for long-haul coal-carrying railcar service. We have received several patents on the features of the BethGon II and continue to explore ways to increase the BethGon II’s capacity and improve its reliability.


AutoFlood Series . Our aluminum open-top hopper railcar, the AutoFlood, is a five-pocket coal-carrying railcar equipped with a bottom discharge gate mechanism. We began manufacturing AutoFlood railcars in 1984, and, in 1996, we introduced the AutoFlood II™. The AutoFlood II has smooth exterior sides that we believe maximize loading capacity and increase efficiency by reducing wind drag. The AutoFlood II’s automatic rapid discharge system, the MegaFlo™ door system, incorporates a patented mechanism that uses an over-center locking design enabling the cargo door to close with tension rather than compression. The MegaFlo door system, which opens to its full width in only two seconds, provides a door opening which we believe is approximately 68% wider than any competing door system and does not require periodic door adjustments. In addition, the MegaFlo door system design reduces wear on the railcar. In 2002, we introduced the AutoFlood III™, which has a smooth interior side that maintains the features of the MegaFlo door system while improving the railcar’s flow characteristics for coal types that are difficult to unload. AutoFlood railcars can be equipped with rotary couplers to also permit rotary unloading. In 2006, our production of the AutoFlood III represented 34% of the total deliveries in the coal-carrying railcar market and 53% of the coal-carrying railcars we produced. The AutoFlood series represented 51%, 57% and 30% of all the railcars we delivered in 2006, 2005 and 2004, respectively, and 54%, 58% and 30% of total revenue in 2006, 2005 and 2004, respectively.


Other Coal-Carrying Railcars. We also manufacture a variety of other types of aluminum and steel-bodied coal-carrying railcars, including triple hopper, hybrid aluminum/stainless steel and flat bottom gondola railcars.



Our portfolio of other railcar types that we offer includes:


Aluminum Vehicle Carrier . In 2000, we designed and introduced our aluminum vehicle-carrying railcar, combining our expertise with aluminum-bodied railcars and our experience in building flat railcars. Our first aluminum vehicle carrier railcar design, the AVC™, has a lightweight, integrated design and is used to transport automobiles, commercial and conversion vans, pickup trucks and sport utility vehicles from assembly plants and ports to rail distribution centers. An aluminum body eliminates the need to paint the railcar during its expected lifetime. Our design helps to ensure that vehicles are delivered damage-free. AVCs are purchased by financial institutions, shippers and railroads. We had our first sale of the AVC in 2003. The AVC series represented 15% of total revenue in 2004.


Articulated Bulk Container Railcar . Our articulated bulk container railcar has high strength and capacity and is designed to carry dense bulk products up to 59,000 pounds in 20 foot containers. We sell our articulated bulk container railcars primarily to shippers of high-density waste.


Intermodal Double Stack Railcar. Our intermodal double stack railcar is used to transport containers that may also be transported by truck or ship, allowing cargo to be transported through different modes without loading and unloading the containers.


Small Covered Hopper Railcar . Our small covered hopper railcar is used to transport high-density products such as roofing granules, fly ash, sand and cement. This railcar features our patented cold-rolled center sill, 30-inch diameter hatch covers and bottom-unloading outlets.


Mill Gondola Railcar . Our mill gondola railcar is used to transport steel products and scrap and features our one-piece cold-rolled center sill, cast draft sills, pinned side-to-end connections and a choice of welded or riveted sides.


Slab Railcar . We believe that our slab railcar is the first railcar manufactured specifically to transport steel slabs. The slab railcar is a spine-type flat railcar that is approximately 20,000 pounds lighter than a standard mill gondola railcar that is also used to transport steel slabs, allowing customers to haul more steel slabs per railcar and more railcars in a train.


Coil Steel Railcar . Our coil steel railcar has a transverse trough design that allows easy loading or unloading using overhead cranes or fork lifts. This feature allows railroads to compete with truck haulage for the transportation of steel coils.


Flat Railcar . We produce a variety of standard and heavy-duty flat railcars that can carry a variety of products, including machinery and equipment, steel and other bulky industrial products. Our high capacity flat railcar is used to transport, among other things, electrical transformers and generators.

Bulkhead Flat Railcar . Our bulkhead flat railcar has end bulkheads designed to retain the load, which can include forest products, steel and structural components.


Hybrid Center Beam Flat Railcar . Our FleXibeam™ center beam flat railcar is used to haul forest products, such as plywood, oriented strand board, dimensional lumber and steel products, such as structural steel and pipe. The FleXibeam hauls approximately 14,000 pounds of additional product than a conventional center beam flat railcar, and its short high-strength center beam partition allows easy loading of steel and other products with overhead cranes.


Woodchip Gondola Railcar . Our woodchip gondola railcar is used to haul woodchips and municipal waste or other high volume, low-density commodities. It has rotary couplers and incorporates our one-piece cold-rolled center sill and tub design.


Other Open-Top Hopper Railcars . We offer a variety of open-top hopper railcar designs to carry aggregates, iron ore, taconite pellets, petroleum coke and other bulk commodities. These railcars represented 4% of our railcar deliveries and total revenue in 2006.


International Railcar Designs . We have established a licensing arrangement with a railcar manufacturer in Brazil pursuant to which our technology is used to produce various types of railcars in Brazil. In addition, we manufacture coal-carrying railcars for export to Colombia and have manufactured intermodal railcars for export to Saudi Arabia. Railroads outside of North America have a variety of track gauges that are sized differently than in North America, which requires us, in some cases, to alter manufacturing specifications for foreign sales. We are also exploring opportunities in other international markets.

Spare Parts . We sell replacement parts for our railcars and railcars built by others.

We have added 18 new or redesigned products to our portfolio in the last five years, including the AutoFlood III, AVC, slab railcar, coil steel railcars, triple hopper railcars and hybrid aluminum/stainless steel railcars. We expect to continue introducing new or redesigned products.

MANUFACTURING

We operate railcar production facilities in Danville, Illinois, Johnstown, Pennsylvania, and Roanoke, Virginia. Our Danville, Johnstown and Roanoke facilities are each certified or approved for certification by the Association of American Railroads, or the AAR, which sets railcar manufacturing industry standards for quality control.

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 our steel-bodied railcars. For aluminum-bodied railcars, we begin the finishing process by cleaning the railcar’s surface and then applying the decals. In the case of steel-bodied railcars, we begin the finishing process by blasting the surface area of the railcar and then painting it. We use water-based paints to reduce the emission of volatile organic compounds, and we meet state and U.S. federal regulations for control of emissions and disposal of hazardous materials. Once we have completed the finishing process, our employees, along with representatives of the customer purchasing the particular railcar, inspect all railcars for adherence to specifications.

We have focused on making our manufacturing facilities more flexible and cost-efficient while at the same time reducing product change-over times and improving product quality. We developed many of these improvements with the participation of our manufacturing employees, management and customers. We have implemented manufacturing concepts, whereby various manufacturing steps are accomplished in one location within the facility to eliminate unnecessary movement of parts within the facility, improve production rates and reduce inventories. These improvements are intended to provide us with increased flexibility in scheduling the production of orders and to minimize down time resulting from railcar type change-overs, thereby increasing the efficiency and lowering costs of our manufacturing operations.

CUSTOMERS

We have strong long-term relationships with many large purchasers of railcars. Long-term customer relationships are particularly important in the railcar industry, given the limited number of buyers of railcars.

Our customer base consists mostly of North American financial institutions, shippers and railroads. We believe that our customers’ preference for reliable, high-quality products, the relatively high cost for customers to switch manufacturers, our technological leadership in developing and enhancing innovative products and competitive pricing of our railcars have helped us maintain our long standing relationships with our customers.

In 2006, revenue from two customers, The CIT Group/Equipment Financing, Inc. and General Electric Capital Rail Services Corporation, accounted for approximately 12% and 11% of total revenue, respectively. In 2006, sales to our top ten customers accounted for approximately 77% of total revenue. Our sales to customers outside the United States were $43.5 million in 2006. While we maintain strong relationships with our customers and we serve over 70 active customers, many customers do not purchase railcars every year since railcar fleets are not necessarily replenished or augmented every year. The size and frequency of railcar orders often results in a small number of customers representing a significant portion of our sales in a given year.


SALES AND MARKETING

Our direct sales group is organized geographically and consists of regional sales managers and product line managers, a manager of customer service and support staff. The regional sales managers are responsible for managing customer relationships. Our product line managers are responsible for product planning and contract administration. Our manager of customer service is responsible for after-sale follow-up and in-field product performance reviews.

RESEARCH AND DEVELOPMENT

Our railcar research and development activities provide us with an important competitive advantage. We believe that we are a leader in introducing new and improved railcar designs that respond to the needs of our customers. Railcar designs have been historically slow to change in our industry. We have introduced 18 new railcar designs or product-line extensions in the last five years. Our research and development team, working within our engineering group, is dedicated to the design of new products. In addition, the team continuously identifies design upgrades for our existing railcars, which we implement as part of our effort to reduce costs and improve quality. We introduce new railcar designs as a result of a combination of customer feedback and close observation of market demand trends. Our engineers use current modeling software and three-dimensional modeling technology to assist with product design. New product designs are tested for compliance with AAR standards prior to introduction. Costs associated with research and development are expensed as incurred and totaled $0.9 million, $0.4 million and $0.3 million for the years ended December 31, 2006, 2005 and 2004, respectively.

CEO BACKGROUND

Christian Ragot , 48, has served as a director since January 29, 2007. He has been our Chief Operating Officer since January 29, 2007. According to the terms of his employment agreement with us, Mr. Ragot will serve as our President and Chief Executive Officer beginning on April 30, 2007. Mr. Ragot served as President of Terex Utilities and Roadbuilding at Terex Corporation from 2004 to 2007. Previously, Mr. Ragot held various senior executive leadership positions, including President of Terex Utilities, President of American Crane, Senior Vice-President, Sales and Aftermarket Services, and other senior-level positions at Terex Corporation.
William D. Gehl , 60, has served as Chairman and Chief Executive Officer of Gehl Company since April 2003. Prior to that time, he had served as President and Chief Executive Officer of Gehl Company since November 1992 and as Chairman of Gehl Company since April 1996. Mr. Gehl is a member of the board of directors of Gehl Company, ASTEC Industries, Inc. and Mason Wells, Inc., a private equity investment firm.
Directors whose terms continue until 2009:
James D. Cirar , 60, has served as a director since June 1999 and is the chairman of our strategy and growth committee. Mr. Cirar is a private investor and Managing Director of TMB Industries. He was a director of Transportation Technologies Industries, Inc. (TTI) and President and CEO of TTI’s foundry group from January 2000 until the company was acquired by Accuride Corporation in 2005. Mr. Cirar was Chairman of two of our subsidiaries, Johnstown America Corporation and Freight Car Services, Inc., from September 1998 to June 1999. From September 1995 to August 1998, he was the President and CEO of Johnstown America Corporation.
Robert N. Tidball , 68, has served as a director since April 2005 and is the chairman of our nominating and corporate governance committee. From 1989 to January 2001, Mr. Tidball was the President, CEO and a director of PLM International, Inc., after which he retired.
S. Carl Soderstrom, Jr., 53, has served as a director since April 2005 and is the chairman of our audit committee. Mr. Soderstrom was employed by ArvinMeritor, Inc. and its predecessor companies from 1986 to 2004 and served as Senior Vice President and Chief Financial Officer of ArvinMeritor, Inc. from July 2001 to December 2004. Mr. Soderstrom is a member of the board of directors of Lydall, Inc. and serves as a member of the Audit Committee and Chairman of the Corporate Governance Committee of Lydall, Inc.


SHARE OWNERSHIP

James D. Cirar owns 862 shares beneficially owned, Robert N. Tidball owns 862 shares beneficially owned, S. Carl Soderstrom, Jr owns 862 shares beneficially owned.

COMPENSATION

Annual Incentive Awards
Pursuant to the terms of his employment agreement, Mr. Carroll received an annual cash bonus equal to 1% of the Company’s operating earnings before taxes, interest, depreciation and amortization (“EBITDA”) for the 2006 calendar year. Cash bonuses were paid to the other NEOs under the Company’s Salaried Bonus Plan, which provides additional compensation to participants based on the Company’s Return on Net Assets (“RONA”), which is defined as Operating Income divided by Average Net Assets. The Salaried Bonus Plan defines “Operating Income” for the Company as earnings computed under generally accepted accounting principles, after accrual for current year’s salaried bonus expenses and before interest, taxes and other income and expenses excluded from operating income by generally accepted accounting principles. The Salaried Bonus Plan defines “Average Net Assets” as the sum of average annual (computed on a monthly basis) receivables, inventory and property, plant and equipments net of accumulated depreciation, less payables.
The Salaried Bonus Plan is open to all salaried personnel selected by the CEO and the compensation committee. Participants in the Salaried Bonus Plan typically must be actively employed by the Company on the payment date to receive a bonus award. Participants who are not actively employed by the Company on the payment date are entitled to receive a partial bonus award in certain circumstances. In 2007, Mr. Ragot, our current chief operating officer who will become our CEO on April 30, 2007, will participate in the Salaried Bonus Plan.

MANAGEMENT DISCUSSION FROM LATEST 10K

OVERVIEW

You should read the following discussion in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report on Form 10-K. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements. See “ — Forward-Looking Statements.”

We are the leading manufacturer of aluminum-bodied railcars and coal-carrying railcars in North America, based on the number of railcars delivered. We also refurbish and rebuild railcars and sell forged, cast and fabricated parts for the railcars we produce, as well as those manufactured by others. We have chosen not to offer significant railcar leasing services, as we have made a strategic decision not to compete with our customers that provide railcar leasing services, which represent a significant portion of our revenue. Our primary customers are financial institutions, railroads, and shippers.

Our manufacturing facilities are located in Danville, Illinois, Johnstown, Pennsylvania and Roanoke, Virginia. All of our manufacturing facilities have the capability to manufacture a variety of types of railcars.

In the twelve months ended December 31, 2006, we delivered 18,764 new railcars, compared to our delivery of 13,031 new railcars in the twelve months ended December 31, 2005. Our total backlog of firm orders for new railcars decreased by approximately 55%, from 20,729 railcars as of December 31, 2005 to 9,315 railcars as of December 31, 2006. The backlog as of December 31, 2006 represented estimated sales of $697 million, while the backlog as of December 31, 2005 represented estimated sales of $1,412 million. Approximately 92% of our backlog as of December 31, 2006 consisted of coal-carrying railcars.



Prices for steel and aluminum, the primary raw material components of our railcars, and surcharges on steel and railcar components remain at historically high levels. Notwithstanding fluctuations in the cost of raw materials, a significant majority of the contracts covering our current backlog include provisions that allow for variable pricing to protect us against future changes in the cost of raw materials. We were able to pass on increased material costs to our customers with respect to approximately 98% of our railcar deliveries in 2006.

With respect to the supply of components, while the availability of railcar components improved during 2006, the railcar industry continues to be adversely impacted by shortages of wheels and other components as a result of reorganization and consolidation of domestic suppliers, increased demand for new railcars and railroad maintenance requirements. Currently, we believe that these shortages will not significantly impact our ability to meet our delivery requirements as domestic suppliers have improved their delivery capabilities.

The North American railcar market is highly cyclical and the trends in the railcar industry are closely related to the overall level of economic activity. We expect railroads and utilities to continue to upgrade their fleets of aging steel-bodied coal-carrying railcars to lighter and more durable aluminum-bodied coal-carrying railcars. Despite the decline in our backlog, we believe that the long-term outlook for railcar demand is positive, due to increased rail traffic and the replacement of aging railcar fleets. We also believe that the long-term outlook for our business, including the demand for our coal-carrying railcars, is positive, based on our long-term supply agreements, our expanding product portfolio, our operational efficiency in manufacturing railcars and our international opportunities. However, U.S. economic conditions may not continue to improve in the future or result in a sustained economic recovery, and our business is subject to these and significant other risks that may cause our current positive outlook to change. See Item 1A. “Risk Factors.”

In April 2005, we completed an initial public offering of shares of our common stock. In connection with the offering, we offered and sold 5,100,000 shares of our common stock and certain selling stockholders offered and sold 4,675,000 shares (including 1,275,000 shares following the exercise of the underwriters’ over-allotment option) at a price of $19.00 per share. Our net proceeds from the initial public offering, after deducting underwriting discounts, commissions and estimated offering-related expenses payable by us, were approximately $85.3 million. We used the net proceeds from the offering and our available cash to repay our existing indebtedness, redeem all of our outstanding redeemable preferred stock, pay amounts due under the rights to additional acquisition consideration, pay amounts due in connection with the termination of certain management services and other agreements with certain of our stockholders and pay related fees and expenses. See “—Liquidity and Capital Resources.”

In September 2005, we completed a secondary offering of our common stock whereby the selling stockholders, including all of our executive officers and certain of our directors, offered and sold 2,626,317 shares (including 342,563 shares following the exercise of the underwriters’ over-allotment option) at a price of $40.50 per share. We did not sell any shares and did not receive any proceeds from the sale of shares by the selling stockholders. We incurred $0.8 million of expenses in connection with the secondary offering.

In January 2007, our Board of Directors announced a share repurchase program of up to $50 million. These shares are to be purchased in the open market beginning in the first quarter of 2007.

FINANCIAL STATEMENT PRESENTATION

Sales

Our sales are generated primarily from sales of the railcars that we manufacture. Our sales depend on industry demand for new railcars, which is driven by overall economic conditions and the demand for railcar transportation of various products, such as coal, motor vehicles, steel products, forest products, minerals, cement and agricultural commodities. Our sales are also affected by competitive market pressures that impact the prices for our railcars and by the types of railcars sold.

We generally manufacture railcars under firm orders from our customers. We recognize sales, which we sometimes refer to as deliveries, of new and rebuilt railcars when we complete the individual railcars, the railcars are accepted by the customer following inspection, the risk of any damage or other loss with respect to the railcars passes to the customer and title to the railcars transfers to the customer. With respect to sales transactions involving the trading-in of used railcars, in accordance with accounting rules, we recognize sales for the entire transaction when the cash



consideration received is in excess of 25% of the total transaction value and on a pro rata portion of the total transaction value when the cash consideration received is less than 25% of the total transaction value. We value used railcars received at their estimated fair market value less a normal profit margin. There were no sales of used railcars for the year ended December 31, 2006. Sales of used railcars for the years ended December 31, 2005 and 2004, were not material. The variable purchase patterns of our customers and the timing of completion, delivery and acceptance of customer orders may cause our sales and income from operations to vary substantially each quarter, which will result in significant fluctuations in our quarterly results.

Cost of sales

Our cost of sales includes the cost of raw materials such as aluminum and steel, as well as the cost of finished railcar components, such as castings, wheels, truck components and couplers, and other specialty components. Our cost of sales also includes labor, utilities, freight, manufacturing depreciation and other manufacturing overhead costs. Factors that have affected our cost of sales include the recent increases in the cost of steel and aluminum and our efforts to lower manufacturing costs in our Johnstown, Pennsylvania facility and to reduce the costs of new products that we have recently introduced.

We purchase, and we believe most of our competitors purchase, a substantial percentage of wheels and other railcar components from subsidiaries of Amsted Industries Inc. For the year ended December 31, 2004, due to a shortage of wheels and other railcar components from Amsted Industries, our deliveries were limited to 7,484 railcars, even though we had orders and production capacity to manufacture more railcars. The limited supply of wheels and other railcar components did not impact our deliveries for the years ended December 31, 2005 and 2006. While the availability of railcar components has continued to improve during 2006, the railcar industry continues to be adversely impacted by shortages of wheels and other components as a result of reorganization and consolidation of domestic suppliers, increased demand for new railcars and railroad maintenance requirements. Currently, we believe that these shortages will not significantly impact our ability to meet our delivery requirements as domestic suppliers have improved their delivery capabilities. Customer orders may be subject to cancellation, customer requests for delays in railcar deliveries, inspection rights and other customary industry terms and conditions. See Item 1A. “Risk factors—Risks related to the railcar industry—Limitations on the supply of wheels and other railcar components could adversely affect our business because they may limit the number of railcars we can manufacture.”

The prices for steel and aluminum, the primary raw material inputs of our railcars, increased sharply in 2004 and have further increased in 2005 and 2006 as a result of strong demand, limited availability of production inputs for steel and aluminum, including scrap metal, industry consolidation and import trade barriers. The costs for raw steel and aluminum have increased by approximately 161% and 90%, respectively, during the period from October 2003 through December 31, 2006. The availability of scrap metal has been limited by exports of scrap metal to China, and as a result, steel producers have charged scrap metal surcharges in excess of agreed-upon prices. In addition, the price and availability of other railcar components that are made of steel have been adversely affected by the increased cost and limited availability of steel. During the year ended December 31, 2006, our gross profit was adversely impacted by non-recoverable increases in the cost of materials of approximately $1.8 million. During the years ended December 31, 2005 and 2004, our gross profit was adversely impacted by higher costs of approximately $1.5 million and $8.9 million, respectively, associated with increased material, labor and other costs related to a contract to manufacture box cars. For the years ended December 31, 2006 and 2005, we were able to pass on increases in raw material costs to our customers with respect to 98% and 96% of our railcar deliveries, respectively.

Operating income

Operating income represents total sales less cost of sales, selling, general and administrative expenses, intangible asset amortization expense, compensation expense under stock option and restricted share award agreements, and the provision for the settlement of labor disputes in 2005 and 2004.



RESULTS OF OPERATIONS

Year Ended December 31, 2006 compared to Year Ended December 31, 2005

Sales

Our sales for the year ended December 31, 2006 were $1,444.8 million as compared to $927.2 million for the year ended December 31, 2005, representing an increase of $517.6 million. Included in our sales for the year ended December 31, 2005 was $5.5 million attributable to the recognition of deferred revenue related to a customer contract from a prior year. The increase in sales was primarily due to our delivery of an additional 5,733 railcars in the year ended December 31, 2006, compared to the same period in 2005, representing an increase of 44% in deliveries, and higher pricing. The increased volume of railcar deliveries reflects increased demand for our coal-carrying railcars. Deliveries of our BethGon ® II and AutoFlood III™ coal-carrying railcars comprised 96% of our total railcar deliveries for the year ended December 31, 2006.

Gross Profit

Gross profit for the year ended December 31, 2006 was $233.5 million as compared to $106.5 million for the year ended December 31, 2005, representing an increase of $127.0 million. Included in our gross profit for the year ended December 31, 2005 was $5.5 million attributable to the recognition of deferred revenue. The increase in gross profit was primarily due to our increased sales volume, increased operating leverage attributable to higher volume, higher pricing and improved productivity. For the year ended December 31, 2006, we were able to pass on increases in raw material costs to our customers with respect to 98% of our railcar deliveries. During the year ended December 31, 2006, our gross profit was adversely impacted by non-recoverable materials costs of approximately $1.8 million. During the year ended December 31, 2005, our gross profit was adversely impacted by higher costs of approximately $1.5 million associated with increased material, labor and other costs related to a contract to manufacture box cars.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2006 were $34.4 million as compared to $28.5 million for the year ended December 31, 2005, representing an increase of $5.9 million. Selling, general and administrative expenses were 2.4% of our sales for the year ended December 31, 2006 and 3.1% for 2005. The increase in expenses was primarily attributable to increased stock-based compensation expense of $1.7 million, increased public company expenses of $1.1 million primarily associated with the implementation of Sarbanes-Oxley requirements and legal fees, increased expenses of $1.5 million relating to our bonus and employee benefit programs, increased investments in product development programs, costs related to the transition of executive management and increased expenses related to the incremental business volume in 2006. The increased stock-based compensation is related to the full-year impact of restricted shares awarded in the fourth quarter of 2005 and the implementation of Statement of Financial Accounting Standards (“SFAS”) No. 123 (R). See Note 14 to the consolidated financial statements. Included in the December 31, 2005 expense was a provision for the settlement of labor disputes of $0.4 million. See Note 20 to the consolidated financial statements.

Interest Expense

Total interest expense for the year ended December 31, 2006 was $0.7 million as compared to $11.9 million for the year ended December 31, 2005, representing a decrease of $11.2 million. The decrease was a result of our initial public offering in April 2005 and the related changes in our financing structure which significantly reduced our outstanding debt. For the year ended December 31, 2006, interest expense consisted of third-party interest expense and the amortization of deferred financing costs. For the year ended December 31, 2005, interest expense consisted primarily of the accretion of additional interest on the rights to additional acquisition consideration of $6.4 million, related-party interest of $3.3 million and third-party interest expense of $1.4 million. Interest income for the year ended December 31, 2006 was $5.9 million as compared to $1.2 million for the year ended December 31, 2005. Interest income represents the proceeds of short-term investments of our cash balances, which increased substantially over the period.



Income Taxes

The provision for income taxes was $75.5 million for the year ended December 31, 2006, as compared to a provision for income taxes of $21.8 million for the year ended December 31, 2005. The effective tax rates for the years ended December 31, 2006 and 2005, were 37.0% and 32.3%, respectively. The effective tax rate for the year ended December 31, 2006 was higher than the statutory U.S. federal income tax rate of 35% due to the addition of a 4.2% blended state rate less a 2.2% effect for other permanent differences. The effective tax rate for the year ended December 31, 2005 was lower than the statutory U.S. federal income tax rate of 35% due to the addition of a 2.1% blended state rate less a 0.3% effect for other permanent differences and a 4.5% effect for previously non-deductible interest expense on the rights to additional acquisition consideration which became deductible for income tax purposes upon payment of the additional acquisition consideration.

Net Income

As a result of the foregoing, net income was $128.7 million for the year ended December 31, 2006, reflecting an increase of $83.0 million from net income of $45.7 million for the year ended December 31, 2005. Net income attributable to common stockholders was $128.7 million for the year ended December 31, 2006, as compared to net income of $45.4 million attributable to common stockholders for the same period in 2005. For the year ended December 31, 2006, our basic and diluted net income per share were $10.23 and $10.07, respectively, on basic and diluted shares outstanding of 12,586,889 and 12,785,015, respectively. For the prior year, our basic and diluted net income per share were $4.08 and $4.04, respectively, on basic and diluted shares outstanding of 11,135,440 and 11,234,075, respectively. Net income for the year ended December 31, 2005 was favorably impacted by net income of $2.9 million applicable to the recognition of deferred revenue. Basic and diluted earnings per share were favorably impacted in 2005 by $0.27 per share attributable to the recognition of deferred revenue.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

OVERVIEW

You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this quarterly report on Form 10-Q. This discussion contains forward-looking statements that are based on 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 “Cautionary Statement Regarding Forward-Looking Statements.”

We are the leading manufacturer of aluminum-bodied railcars and coal-carrying railcars in North America, based on the number of railcars delivered. We also refurbish and rebuild railcars and sell forged, cast and fabricated parts for the railcars we produce, as well as those manufactured by others. Our primary customers are financial institutions, railroads and shippers.

Our manufacturing facilities are located in Danville, Illinois, Johnstown, Pennsylvania and Roanoke, Virginia. All of our manufacturing facilities have the capability to manufacture a variety of types of railcars.

During the three months ended June 30, 2007, we delivered 2,679 railcars, compared to our delivery of 4,711 new railcars during the three months ended June 30, 2006. Our total backlog of firm orders was 5,589 units at June 30, 2007, compared with 6,006 units at March 31, 2007 and 16,846 units at June 30, 2006. While our backlog declined during the second quarter of 2007, orders in the railcar industry tend to be uneven and our long-term business prospects remain strong. The backlog as of June 30, 2007 represents estimated sales of $437 million, while the backlog as of June 30, 2006 represented estimated sales of $1,198 million.

Prices for steel and aluminum, the primary raw material components of our railcars, and surcharges on steel and railcar components remain at historically high levels. Notwithstanding fluctuations in the cost of raw materials, a majority of the contracts covering our current backlog include provisions that allow for variable pricing to protect us against future changes in the cost of raw materials. We were able to pass on increased material costs to our customers with respect to a majority of our railcar deliveries in the three months ended June 30, 2007.

The North American railcar market is highly cyclical and the trends in the railcar industry are closely related to the overall level of economic activity. We expect railroads and utilities to continue to upgrade their fleets of aging steel-bodied coal-carrying railcars to lighter and more durable aluminum-bodied coal-carrying railcars. Despite the decline in our backlog, we believe that the long-term outlook for railcar demand is positive, due to the use of coal as the primary fuel for electricity generation, planned electrical capacity additions and the replacement of aging railcar fleets. We also believe that the long-term outlook for our business, including the demand for our coal-carrying railcars, is positive, based on our long-term supply agreements, our expanding product portfolio, our operational efficiency in manufacturing railcars and our international opportunities. However, U.S. economic conditions may not continue to improve in the future or result in a sustained economic recovery, and our business is subject to these and significant other risks that may cause our current positive outlook to change.

Our stock repurchase program was approved by the Board of Directors in January 2007. The program authorizes the repurchase of up to $50 million in shares in open market purchases at prevailing prices. We began repurchasing shares of our common stock in the open market during the first quarter of 2007. As of June 30, 2007, we had repurchased 599,729 shares of common stock for an aggregate of $29.6 million.


RESULTS OF OPERATIONS

Three Months Ended June 30, 2007 compared to Three Months Ended June 30, 2006

Sales

Our sales for the three months ended June 30, 2007 were $195.4 million as compared to $365.4 million for the three months ended June 30, 2006, representing a decrease of $170.0 million. The decrease in sales was primarily due to lower industry volumes, lower demand for coal cars, a less favorable product mix and a more competitive pricing environment. Revenues from our BethGon II ® , AutoFlood III™ and other coal-carrying railcars comprised 99% of our total revenues for the three months ended June 30, 2007 and 2006.

Gross Profit

Gross profit for the three months ended June 30, 2007 was $24.7 million as compared to $65.6 million for the three months ended June 30, 2006, representing a decrease of $40.9 million. Gross margins for the three months ended June 30, 2007 were 12.6% compared to 18.0% during the same period a year ago, reflecting a less favorable product mix. The decrease in gross profit was primarily due to lower volumes, and related leverage, and a more competitive pricing environment. In addition, production rates were adjusted during the three months ended June 30, 2007, which adversely impacted conversion cost. The adjustment to the production rates substantially reduced production at the Johnstown facility and adversely impacted our gross margins. For the three months ended June 30, 2007, we were able to pass on increases in raw material costs to our customers with respect to a majority of our railcar deliveries.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended June 30, 2007 were $8.7 million compared to $8.2 million for the three months ended June 30, 2006, representing an increase of $0.5 million. Selling, general and administrative expenses were 4.4% of our sales for the three months ended June 30, 2007 compared to 2.3% for the three months ended June 30, 2006. The increase in selling, general and administrative expenses is primarily attributable to product development costs related to our intermodal design of $0.4 million and management transition expenses of $0.4 million, partially offset by reductions to other expenses of $0.3 million.

Interest Expense/Income

Total interest expense for the three months ended June 30, 2007 and 2006, was $0.2 million. For the three months ended June 30, 2007 and 2006, interest expense consisted of third-party interest expense and amortization of deferred financing costs. Interest income for the three months ended June 30, 2007 was $2.3 million, compared to $1.2 million for the three months ended June 30, 2006. Interest income represents income earned on short-term investments of our cash balances, which increased substantially compared to the three months ended June 30, 2006.

Income Taxes

The provision for income taxes was $6.6 million for the three months ended June 30, 2007, as compared to a provision of $21.8 million for the three months ended June 30, 2006. The effective tax rate for the three months ended June 30, 2007 was 36.7% compared to 37.4% for the three months ended June 30, 2006. The effective tax rate for the three months ended June 30, 2007 was higher than the statutory U.S. federal income tax rate of 35% due to the addition of a 4.1% blended state rate, less a 2.0% effect for the domestic manufacturing deduction and less a 0.4% effect from other differences. The effective tax rate for the three months ended June 30, 2006 was higher than the statutory U.S. federal income tax rate of 35% due to the addition of a 3.6% blended state rate less a 1.0% effect for domestic manufacturing deductions and less a 0.2% effect for other permanent differences.

Net Income

As a result of the foregoing, net income was $11.5 million for the three months ended June 30, 2007, reflecting a decrease of $25.1 million from net income of $36.6 million for the three months ended June 30, 2006. For the three months ended June 30, 2007, our basic and diluted net income per share was $0.94 and $0.93, respectively, on basic and diluted shares outstanding of 12,227,256 and 12,307,011, respectively. For the three months ended June 30, 2006, our basic and diluted net income per share was $2.91 and $2.86, respectively, on basic and diluted shares outstanding of 12,574,372 and 12,787,789, respectively.

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