FreightCar America, Inc.: Form 10-Q for the period ended Sep 30, 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; 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 highly competitive nature of our industry; 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 and repair services, railcar conversion services that repurpose idled rail assets back into revenue service, and supply railcar parts. We have been manufacturing railcars since 1901.

Total net railcar orders received for the nine months ended September 30, 2024 were 4,040 units, consisting of 2,645 new railcars and 1,395 rebuilt railcars, compared to orders for 3,356 units, consisting of 3,166 new railcars and 190 rebuilt railcars for the nine months ended September 30, 2023. Total backlog of unfilled orders was 3,611 units at September 30, 2024, compared to 2,914 railcars as of December 31, 2023. The estimated sales value of the backlog was $372 million and $348 million as of September 30, 2024 and December 31, 2023, respectively. The increase in the number of net railcar orders received for the nine months ended September 30, 2024 compared to the prior year period is primarily a reflection of the Company’s increased production capacity year-over-year.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2024 compared to Three Months Ended September 30, 2023

Revenues

Our consolidated revenues for the three months ended September 30, 2024 were $113.3 million compared to $61.9 million for the three months ended September 30, 2023. Manufacturing segment revenues for the three months ended September 30, 2024 were $109.1 million compared to $58.6 million for the corresponding prior year period. The $50.5 million increase in Manufacturing segment revenues was primarily driven by an increase in the volume of railcar units delivered during the quarter. Railcar deliveries in the three months ended September 30, 2024 totaled 961 units, consisting entirely of new railcars, compared to 503 units in the same period of 2023, consisting of 382 new railcars and 121 rebuilt railcars. Corporate and Other revenues were $4.2 million for the three months ended September 30, 2024 compared to $3.3 million for the three months ended September 30, 2023.

Gross Profit

Our consolidated gross profit was $16.2 million for the three months ended September 30, 2024 compared to $9.2 million for the three months ended September 30, 2023. Manufacturing segment gross profit was $14.3 million for the three months ended September 30, 2024 compared to $7.9 million for the three months ended September 30, 2023. The $7.0 million increase in consolidated gross profit and $6.4 million increase in Manufacturing segment gross profit reflects a favorable volume variance. Corporate and Other gross profit was $1.9 million for the three months ended September 30, 2024 compared to $1.3 million for the three months ended September 30, 2023.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses were $7.5 million for each of the three months ended September 30, 2024 and 2023. Manufacturing segment selling, general and administrative expenses were $0.5 million for the three months ended September 30, 2024, compared to $0.6 million for the three months ended September 30, 2023. Manufacturing segment selling, general and administrative expenses for the three months ended September 30, 2024 were 0.5% of revenue, compared to 1.0% of revenue for the three months ended September 30, 2023. Corporate and Other selling, general and administrative expenses were $7.0 million for the three months ended September 30, 2024 compared to $6.9 million for the three months ended September 30, 2023.

Operating Income

Our consolidated operating income for the three months ended September 30, 2024 was $8.7 million compared to $1.4 million for the three months ended September 30, 2023 driven primarily by the previously mentioned favorable volume variance, partially offset by the previously mentioned loss on pension settlement. Operating income for the Manufacturing segment was $13.8 million for the three months ended September 30, 2024 compared to $7.4 million for the three months ended September 30, 2023, reflecting the increase in railcars delivered during the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Corporate and Other operating loss was $5.2 million for the three months ended September 30, 2024 compared to $6.0 million for the three months ended September 30, 2023.

(Loss) Gain on Change in Fair Market Value of Warrant Liability

Our loss on change in fair market value of Warrant liability was $110.0 million for the three months ended September 30, 2024 compared to our gain on change in fair market value of Warrant liability of $4.3 million for the three months ended September 30, 2023. The change in fair market value of Warrant liability is driven by the fluctuation of stock price used to remeasure the liability at the end of each period.

Income Taxes

Our income tax provision was $3.4 million for the three months ended September 30, 2024 compared to our income tax provision of $0.2 million for the three months ended September 30, 2023. The increase in income tax expense is primarily explained by the mix of forecasted earnings in the U.S. and Mexico, as well as the impact of permanent and discrete items predominantly in Mexico.

Net (Loss) Income

As a result of the changes discussed above, net loss was $107.0 million for the three months ended September 30, 2024 compared to net income of $3.2 million for the three months ended September 30, 2023. For the three months ended September 30, 2024, basic and diluted net loss per share was $3.57, compared to basic and diluted net loss per share of $0.03 for the three months ended September 30, 2023.

Nine Months Ended September 30, 2024 compared to Nine Months Ended September 30, 2023

Revenues

Our consolidated revenues for the nine months ended September 30, 2024 were $421.7 million compared to $231.5 million for the nine months ended September 30, 2023. Manufacturing segment revenues for the nine months ended September 30, 2024 were $407.3 million compared to $221.9 million for the corresponding prior year period. The $185.4 million increase in Manufacturing segment revenues was primarily driven by an increase in the volume of railcar units delivered during the current period, which includes delivery in the first quarter of 2024 of railcars that had been temporarily impacted by the closure of the U.S.-Mexico border in December 2023. Railcar deliveries in the nine months ended September 30, 2024 totaled 3,343 units, consisting of 3,233 new railcars and 110 rebuilt railcars, compared to 2,001 units in the same period of 2023, consisting of 1,686 new railcars and 315 rebuilt railcars. Corporate and Other revenues were $14.4 million for the nine months ended September 30, 2024 compared to $9.6 million for the nine months ended September 30, 2023.

Gross Profit

Our consolidated gross profit was $46.0 million for the nine months ended September 30, 2024 compared to $29.7 million for the nine months ended September 30, 2023. Manufacturing segment gross profit was $39.0 million for the nine months ended September 30, 2024 compared to $26.0 million for the nine months ended September 30, 2023. The $16.3 million increase in consolidated gross profit and $13.0 million increase in Manufacturing segment gross profit primarily reflects a favorable volume variance. Corporate and Other gross profit was $7.0 million for the nine months ended September 30, 2024 compared to $3.7 million for the nine months ended September 30, 2023.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses for the nine months ended September 30, 2024 were $23.5 million compared to $19.8 million for the nine months ended September 30, 2023. The $3.7 million increase in consolidated selling, general and administrative expenses for the nine months ended September 30, 2024 was primarily due to increases in stock-based compensation expenses of $1.8 million and legal expenses of $1.8 million. Manufacturing segment selling, general and administrative expenses were $1.4 million for the nine months ended September 30, 2024 compared to $1.9 million for the nine months ended September 30, 2023. The $0.5 million decrease in Manufacturing selling, general and administrative expenses for the nine months ended September 30, 2024 was primarily due to a $0.4 million decrease in consulting expenses. Manufacturing segment selling, general and administrative expenses for the nine months ended September 30, 2024 were 0.3% of revenue, compared to 0.9% of revenue for the nine months ended September 30, 2023. Corporate and Other selling, general and administrative expenses were $22.1 million for the nine months ended September 30, 2024 compared to $17.9 million for the nine months ended September 30, 2023. The $4.2 million increase in Corporate and Other selling, general and administrative expenses is primarily a result of the previously mentioned increases in stock-based compensation expenses and legal expenses in the current year.

Litigation Settlement

During the nine months ended September 30, 2024, we recorded a pre-tax litigation settlement of $3.2 million related to a dispute with a former lessee of our railcars. During the nine months ended September 30, 2023, we did not record any litigation settlements.

Operating Income

Our consolidated operating income for the nine months ended September 30, 2024 was $25.7 million compared to a $10.2 million consolidated operating income for the nine months ended September 30, 2023 driven primarily by the previously mentioned favorable volume variance, partially offset by the previously mentioned increase in selling, general and administrative expenses. Operating income for the Manufacturing segment was $40.8 million for the nine months ended September 30, 2024 compared to an operating income of $24.8 million for the nine months ended September 30, 2023, reflecting the increase in railcars delivered during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Corporate and Other operating loss was $15.1 million for the nine months ended September 30, 2024 compared to $14.6 million for the nine months ended September 30, 2023. The $0.5 million increase in operating loss is primarily a result of the previously mentioned increases in selling, general and administrative expenses.

Loss on Change in Fair Market Value of Warrant Liability

Our loss on change in fair market value of Warrant liability was $125.6 million for the nine months ended September 30, 2024, compared to our loss on change in fair market value of Warrant liability of $1.9 million for the nine months ended September 30,

2023. The change in fair market value of Warrant liability is driven by the fluctuation of stock price used to remeasure the liability at the end of each period.

Loss on Extinguishment of Debt

There was no loss on extinguishment of debt for the nine months ended September 30, 2024. Loss on extinguishment of debt for the nine months ended September 30, 2023 was $14.9 million due to the settlement of the Credit Agreement through the issuance of Series C Preferred Stock and the termination of the M&T Credit Agreement and Forbearance Agreement (refer to our Annual Report on Form 10-K issued on March 18, 2024 for defined terms).

Income Taxes

Our income tax benefit was $3.3 million for the nine months ended September 30, 2024 compared to our income tax provision of $0.9 million for the nine months ended September 30, 2023. The increase in income tax expense is primarily explained by the mix of forecasted earnings in the U.S. and Mexico, as well as the impact of permanent and discrete items predominantly in Mexico.

Net Loss

As a result of the changes discussed above, net loss was $110.4 million for the nine months ended September 30, 2024 compared to $20.7 million for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, basic and diluted net loss per share was $4.07, compared to basic and diluted net loss per share of $0.94 for the nine months ended September 30, 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

As of September 30, 2024, a revolving line of credit maturing on October 31, 2024 exists 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 OC III LFE (as defined below) a fee due and payable in cash of $375 per quarter.

The Company had no outstanding debt and remaining availability of $41,373 under this facility as of September 30, 2024. As of December 31, 2023, the Company had $29,415 in outstanding debt and remaining availability of $10,853 under this facility.

The standby letter of credit bears interest at the prime rate of interest (“Prime”) plus 1.5%, or 9.5% as of September 30, 2024. Advances secured by the Company’s accounts receivable bear interest at Prime plus 2%, or 10% as of September 30, 2024.

The revolving line of credit was subsequently amended on October 30, 2024 to extend the maturity date from October 31, 2024 to December 31, 2024, decrease the maximum aggregate principal amount from up to $45,000 to up to $20,000, and remove the standby letter of credit in the principal amount of $25,000 along with the $375 quarterly fee in connection with the standby letter of credit.

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 which are exercisable on the terms described in Note 10 - Warrants.

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 September 30, 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 $3.7 million and $0.7 million as of September 30, 2024 and December 31, 2023, respectively. Restricted deposits of $0.3 million as of each of September 30, 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 September 30, 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 September 30, 2024 are a requirement as long as the performance guarantees are in place. Restricted deposits of $3.3 million and $0.3 million as of September 30, 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 for various reasons, such as future railcar demand; 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 nine months ended September 30, 2024 and 2023:

(In thousands)

Operating Activities. Our net cash provided by (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 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 could lead to significant fluctuations in our operating profits and cash from operating activities.

Our net cash provided by operating activities for the nine months ended September 30, 2024 was $39.0 million compared to net cash used in operating activities of $26.4 million for the nine months ended September 30, 2023. Our net cash provided by operating activities for the nine months ended September 30, 2024 reflects changes in working capital, including a decrease in inventory of $40.9 million, offset by an increase in accounts receivable of $17.9 million. The decrease in inventory relates to raw materials on hand at December 31, 2023 used in production of railcars delivered in 2024, as well as finished goods on hand at December 31, 2023 delivered in 2024 due to the closure of the US-Mexico border in December 2023. The increase in accounts receivable relates to the timing of collections with current railcar builds based on contractual payment terms. Our net cash used in operating activities for the nine months ended September 30, 2023 reflects changes in working capital, primarily an increase in inventory of $57.2 million related to inventory to be used in production of railcars to be delivered during the fourth quarter of 2023, offset by an increase of $19.6 million customer deposits received during the nine months ended September 30, 2023.

Investing Activities. Net cash used in investing activities for the nine months ended September 30, 2024 was $3.7 million and consisted of capital expenditures related to the enhancement of machinery and equipment on current production lines of our facility in Castaños, Coahuila, Mexico (the “Castaños Facility”). Net cash used in investing activities for the nine months ended September 30, 2023 was $0.6 million and consisted of $8.4 million proceeds from the sale of railcars available for lease, net of selling costs, offset by capital expenditures of $9.0 million related to the expansion of the Castaños Facility.

Financing Activities. Net cash used in financing activities for the nine months ended September 30, 2024 was $31.0 million which included net repayments on revolving line of credit of $29.4 million and principal payments on the finance lease of $1.6 million. Net cash provided by financing activities for the nine months ended September 30, 2023 was $4.5 million which primarily included $13.3 million proceeds from the issuance of Series C Preferred Stock, net of issuance costs, partially offset by net repayments on revolving line of credit of $7.9 million.

Capital Expenditures

Our capital expenditures were $3.7 million in the nine months ended September 30, 2024, compared to $9.0 million in the nine months ended September 30, 2023, a decrease primarily due to the completion of the Castaños Facility expansion in 2023. We anticipate capital expenditures during 2024 to be in the range of $5.0 million to $6.0 million, primarily related to the enhancement of machinery and equipment on 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 September 30, 2024. Based on their evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 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 September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.