FreightCar America, Inc.: Form 10-Q for the period ended Mar 31, 2024

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain forward-looking statements including, in particular, statements about our plans, strategies and prospects. We have used the words “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “likely,” “unlikely,” “intend” and similar expressions in this report to identify forward-looking statements. We have based these forward-looking statements on our current views with respect to future events and financial performance. However, forward-looking statements inherently involve potential risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These potential risks and uncertainties relate to, among other things, the cyclical nature of our business; adverse economic and market conditions, including inflation; material disruption in the movement of rail traffic for deliveries; fluctuating costs of raw materials, including steel and aluminum; delays in the delivery of raw materials; our ability to maintain relationships with our suppliers of railcar components; successfully onboarding our new chief executive officer; the highly 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 risk of lack of acceptance of our new railcar offerings; and other competitive factors. The factors listed above are not exhaustive. Other sections of this Quarterly Report on Form 10-Q include additional factors that could materially and adversely affect our business, financial condition and results of operations. New factors emerge from time to time and it is not possible for management to predict the impact of all of these factors on our business, financial condition or results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results. 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.

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 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. We also provide railcar rebody services and railcar conversions that repurpose idled rail assets back into revenue service, supply railcar parts, and service freight cars. We have been manufacturing railcars since 1901.

Total new orders received for railcars for the three months ended March 31, 2024 were 384 units, consisting of 275 new railcars and 109 rebuilt railcars, compared to orders for 1,960 units, consisting of 1,770 new railcars and 190 rebuilt railcars for the three months ended March 31, 2023. Total backlog of unfilled orders was 2,075 units at March 31, 2024, compared to 2,914 railcars as of December 31, 2023. The estimated sales value of the backlog was $238 million and $348 million, respectively, as of March 31, 2024 and December 31, 2023. The decrease in the number of orders for new railcars for the three months ended March 31, 2024 compared to the prior year period is a reflection of mixed levels of confidence in the economic outlook.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2024 compared to Three Months Ended March 31, 2023

Revenues

Our consolidated revenues for the three months ended March 31, 2024 were $161.1 million compared to $81.0 million for the three months ended March 31, 2023. Manufacturing segment revenues for the three months ended March 31, 2024 were $155.7 million compared to $77.6 million for the corresponding prior year period. The $78.1 million increase in Manufacturing segment revenues was primarily driven by an increase in the volume of railcar units delivered during the quarter, which includes the railcars impacted by the closure of the U.S.-Mexico border in December 2023. Railcar deliveries in the three months ended March 31, 2024 totaled 1,223 units, consisting entirely of new railcars, compared to 738 units in the same period of 2023, consisting of 639 new railcars and 99 rebuilt railcars. Corporate and Other revenues were $5.3 million for the three months ended March 31, 2024 compared to $3.4 million for the three months ended March 31, 2023.

Gross Profit

Our consolidated gross profit was $11.4 million for the three months ended March 31, 2024 compared to $7.5 million for the three months ended March 31, 2023. Manufacturing segment gross profit was $8.7 million for the three months ended March 31, 2024 compared to $6.4 million for the three months ended March 31, 2023. The $3.9 million increase in consolidated gross profit and $2.3 million increase in Manufacturing segment gross profit reflects a favorable volume variance partially offset by an unfavorable product mix.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses for the three months ended March 31, 2024 were $7.5 million compared to $6.4 million for the three months ended March 31, 2023. The $1.1 million increase in consolidated selling, general and administrative expenses for the three months ended March 31, 2024 was primarily due to a $0.9 million increase in stock-based compensation expenses. Manufacturing segment selling, general and administrative expenses were $0.5 million for the three months ended March 31, 2024 compared to $0.8 million for the three months ended March 31, 2023. The $0.3 million decrease in Manufacturing selling, general and administrative expenses for the three months ended March 31, 2024 was primarily due to a $0.2 million decrease in consulting expenses. Manufacturing segment selling, general and administrative expenses for the three months ended March 31, 2024 were 0.3% of revenue, compared to 1.0% of revenue for the three months ended March 31, 2023. Corporate and Other selling, general and administrative expenses were $7.0 million for the three months ended March 31, 2024 compared to $5.6 million for the three months ended March 31, 2023. The $1.4 million increase in Corporate and Other selling, general and administrative expenses is primarily a result of the previously mentioned increase in stock-based compensation expenses in the current year.

Operating Income (Loss)

Our consolidated operating income for the three months ended March 31, 2024 was $3.9 million compared to a $1.1 million consolidated operating income for the three months ended March 31, 2023 driven primarily by the previously mentioned gross profit, partially offset by the previously mentioned increase in selling, general and administrative expenses. Operating income for the Manufacturing segment was $8.3 million for the three months ended March 31, 2024 compared to an operating income of $5.6 million for the three months ended March 31, 2023, reflecting the increase in railcars delivered during the three months ended March 31, 2024 compared to the 2023 period. Corporate and Other operating loss was $4.4 million for the three months ended March 31, 2024 compared to $4.5 million for the three months ended March 31, 2023. The $0.1 million decrease in operating loss is primarily a result of the decrease in Corporate and Other gross profit, offset by the previously mentioned increase in stock-based compensation expenses.

Income Taxes

Our income tax benefit was $2.6 million for the three months ended March 31, 2024 compared to our income tax provision of $0.1 million for the three months ended March 31, 2023 primarily due to an increase in the mix of forecasted earnings and permanent items.

Net Loss

As a result of the changes and results discussed above, as well as the change in fair value of the warrant liability, net loss was $11.6 million for the three months ended March 31, 2024 compared to $5.0 million for the three months ended March 31, 2023. For the three months ended March 31, 2024, basic and diluted net loss per share was $0.54 compared to $0.19 for the three months ended March 31, 2023.

LIQUIDITY AND CAPITAL RESOURCES

(In thousands, except for share and per share data and unless otherwise noted)

Our primary sources of liquidity are our cash and cash equivalent balances on hand and our credit and debt facilities outlined below.

Revolving Credit Facility

Total outstanding debt under the Company’s revolving credit facility consists of $30,002 as of March 31, 2024 and $29,415 as of December 31, 2023.

As of March 31, 2024, a revolving line of credit maturing on October 31, 2024 existed in the maximum aggregate principal amount of up to $45,000, secured by a standby letter of credit in the principal amount of $25,000 and the Company’s accounts receivable. In connection with the standby letter of credit, the Company has agreed to pay an affiliate of the lender a fee due and payable in cash of $375 per quarter.

The standby letter of credit bears interest at the prime rate of interest (“Prime”) plus 1.5%, or 10% as of March 31, 2024. Advances secured by the Company’s accounts receivable bear interest at Prime plus 2%, or 10.5% as of March 31, 2024.

Warrant

The Company issued warrants to OC III LFE II LP (“OC III LFE”) and various affiliates of OC III LFE (collectively, the “Warrantholder”) in previous years. In May 2023, the Company issued a warrant to OC III LFE to purchase 1,636,313 shares of the Company’s Common Stock (the “2023 Warrant”), exercisable for a term of ten (10) years from date of issuance with a per share exercise price of $3.57.

Preferred Shares

In May 2023, the Company issued to OC III LFE 85,412 shares of non-convertible Series C Preferred Stock, $0.01 par value per share with an initial stated and fair value of $85,412 or $1,000 per share (the “Preferred Stock”). As of March 31, 2024, 85,412 shares of the Preferred Stock remain issued and outstanding. The Company classifies the Preferred Stock as mezzanine equity (temporary equity outside of permanent equity) since a deemed liquidation event following a change of control may require redemption of the Preferred Stock that is not solely within the control of the Company.

The Preferred Stock ranks senior to the Common Stock with respect to payment of dividends and distribution of assets upon liquidation, dissolution and winding up. Dividends accrue at a rate of 17.5% per annum on the initial stated value. Accrued dividends, whether or not declared, are cumulative. The Preferred Stock will not participate in any dividends paid to the holders of shares of Common Stock.

The Company may redeem the outstanding Preferred Stock at any time by payment of the initial stated value plus accrued dividends. If the Company has not redeemed on or prior to the fourth anniversary of issuance, the dividend rate will increase by 0.5% for every quarter thereafter until redeemed in full. OC III LFE has the right to request the Company redeem at any time after the sixth anniversary of issuance. If the Company does not redeem within six months after receipt of a redemption request, OC III LFE will be entitled to certain limited voting rights.

Additional Liquidity Factors

Our restricted cash, restricted cash equivalents and restricted certificates of deposit balances were $1.1 million and $0.7 million as of March 31, 2024 and December 31, 2023, respectively. Restricted deposits of $0.3 million as of each of March 31, 2024 and December 31, 2023 relate to a customer deposit for the purchase of railcars. Restricted deposits of $0.1 million as of each of March 31, 2024 and December 31, 2023 are used to collateralize standby letters of credit with respect to performance guarantees. The standby letters of credit outstanding as of March 31, 2024 are a requirement as long as the performance guarantees are in place. Restricted deposits of $0.7 million and $0.3 million as of March 31, 2024 and December 31, 2023, respectively, are used to collateralize foreign currency derivatives.

Based on our current level of operations and known changes in planned volume based on our backlog, we believe that our cash balances will be sufficient to meet our expected liquidity needs for at least the next twelve months. Our long-term liquidity is contingent upon future operating performance and our ability to continue to meet financial covenants under our revolving credit facilities, any other indebtedness and the availability of additional financing if needed. 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.

Based upon our operating performance and capital requirements, we may, from time to time, be required to raise additional funds through additional offerings of our equity or debt and through long-term borrowings. There can be no assurance that long-term debt, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. Our failure to raise capital if and when needed could have a material adverse effect on our results of operations and financial condition.

Cash Flows

The following table summarizes our cash flow activities for the three months ended March 31, 2024 and 2023:

(In thousands)

Operating Activities. Our net cash used in operating activities reflects net loss adjusted for non-cash charges and changes in operating assets and liabilities. Cash flows from operating activities are affected by several factors, including fluctuations in business volume, contract terms for billings and collections, the timing of collections on our contract receivables, processing of bi-weekly payroll and associated taxes, payments to our suppliers and other operating activities. 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.

Our net cash used in operating activities for the three months ended March 31, 2024 was $25.3 million compared to net cash used in operating activities of $7.7 million for the three months ended March 31, 2023. Our net cash used in operating activities for the three months ended March 31, 2024 reflects changes in working capital, including increases in accounts receivable of $28.6 million, offset by decreases in inventory of $17.0 million and in accounts payable of $7.9 million. The increase in accounts receivable relates to the timing of collections with current railcar builds based on contractual payment terms. Decreases in accounts payable and inventory relate to inventory on hand at December 31, 2023 used in production of railcars delivered in the first quarter of 2024. Our net cash used in operating activities for the three months ended March 31, 2023 reflects changes in working capital, including increases in inventory of $19.7 million offset by decreases in VAT receivable of $3.0 million and increases in accounts payable of $9.7 million.

Investing Activities. Net cash used in investing activities for the three months ended March 31, 2024 was $1.0 million and consisted of capital expenditures related to the expansion of the Castaños Facility. Net cash used in investing activities for the three months ended March 31, 2023 was $2.0 million and consisted of capital expenditures related to the construction in progress for the Castaños Facility operations.

Financing Activities. Net cash used in financing activities for the three months ended March 31, 2024 was $0.3 million which included net borrowings on revolving line of credit of $0.6 million and principal payments on the finance lease of $0.8 million. Net cash used in financing activities for the three months ended March 31, 2023 was $0.4 million which included net borrowings on revolving line of credit of $0.2 million, principal payments on the finance lease of $0.1 million and employee stock settlements of $0.1 million.

Capital Expenditures

Our capital expenditures were $1.0 million in the three months ended March 31, 2024, compared to $2.0 million in the three months ended March 31, 2023. We anticipate capital expenditures during 2024 to be in the range of $5.0 million to $7.0 million, primarily related to maintenance of current production lines at the Castaños Facility.

Management’s Report on Internal Control over Financial Reporting

The Company’s management evaluated, with the participation of the Company’s principal executive officer and principal financial officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of March 31, 2024. Based on their evaluation, the Company’s management concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2024.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act) during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.