Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These risks and uncertainties relate to, among other things, risks relating to the potential financial and operational impacts of the COVID-19 pandemic, the cyclical nature of our business, the competitive nature of our industry, our reliance upon a small number of customers that represent a large percentage of our sales, the variable purchase patterns of our customers and the timing of completion, delivery and customer acceptance of orders, fluctuating costs of raw materials, including steel and aluminum, and delays in the delivery of raw materials, the risk of lack of acceptance of our new railcar offerings by our customers, risks relating to our relationship with our unionized employees and their unions 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 rebuild and convert railcars and sell forged, cast and fabricated parts for all of the railcars we produce, as well as those manufactured by others. We also lease freight cars. Our primary customers are financial institutions, railroads and shippers.
On September 10, 2020, we announced our plan to permanently close the Shoals Facility in light of the cyclical industry downturn, which was magnified by the global pandemic. The closure will reduce costs and align our manufacturing capacity with the current railcar market. We ceased production at the Shoals Facility in February 2021.
Total new orders received for railcars for the six months ended June 30, 2022 were 1,900 units, consisting of 1,602 new railcars and 298 rebuilt railcars, compared to orders for 1,433 units, consisting of 800 new railcars and 633 rebuilt railcars for the six months ended June 30, 2021. Total backlog of unfilled orders was 2,972 units at June 30, 2022, compared to 2,323 railcars as of December 31, 2021. The estimated sales value of the backlog was $320 million and $240 million, respectively, as of June 30, 2022 and December 31, 2021. The increase in the number of orders for new railcars for the six months ended June 30, 2022 compared to the prior year period is a reflection of improvement in the railcar equipment market.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2022 compared to Three Months Ended June 30, 2021
Revenues
Our consolidated revenues for the three months ended June 30, 2022 were $56.8 million compared to $37.4 million for the three months ended June 30, 2021. Manufacturing segment revenues for the three months ended June 30, 2022 were $53.6 million compared to $35.2 million for the corresponding prior year quarter. The $18.4 million increase in Manufacturing segment revenues was largely driven by an increase in the volume of railcar units delivered. Railcar deliveries totaled 468 units for the second quarter of 2022, consisting of 411 new railcars and 57 rebuilt railcars, compared to 313 new railcars delivered in the second quarter of 2021.
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Corporate and Other revenues were $3.2 million for the three months ended June 30, 2022 compared to $2.2 million for the three months ended June 30, 2021.
Gross Profit
Our consolidated gross profit was $6.6 million for the three months ended June 30, 2022 compared to $2.0 million for the three months ended June 30, 2021. Manufacturing segment gross profit was $5.5 million for the three months ended June 30, 2022 compared to $1.1 million for the three months ended June 30, 2021. The $4.6 million increase in consolidated gross profit and $4.4 million increase in Manufacturing segment gross profit reflect a favorable volume variance and favorable margins per car.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses for the three months ended June 30, 2022 were $4.1 million compared to $6.3 million for the three months ended June 30, 2021. The $2.2 million decrease was primarily due to decreases in stock-based compensation related fair value adjustments for cash-settled stock appreciation rights awarded to employees in prior periods. Manufacturing segment selling, general and administrative expenses were $0.6 million for the three months ended June 30, 2022, compared to $0.9 million for the three months ended June 30, 2021. Manufacturing segment selling, general and administrative expenses for the three months ended June 30, 2022 were 1.1% of revenue, compared to 2.7% of revenue for the three months ended June 30, 2021. Corporate and Other selling, general and administrative expenses were $3.5 million for the three months ended June 30, 2022 compared to $5.4 million for the three months ended June 30, 2021. Corporate and Other selling, general and administrative expenses for the three months ended June 30, 2022 included decreases in stock-based compensation of $2.7 million.
Restructuring and Impairment Charges
Restructuring and impairment charges were not material for the three months ended June 30, 2022 and 2021.
Operating Income (Loss)
Our consolidated operating income for the three months ended June 30, 2022 was $2.5 million compared to $4.2 million operating loss for the three months ended June 30, 2021. Operating income for the Manufacturing segment was $4.9 million for the three months ended June 30, 2022 compared to operating income of $0.2 million for the three months ended June 30, 2021, reflecting the increase in railcars delivered during the three months ended June 30, 2022 compared to the 2021 period. Corporate and Other operating loss was $2.4 million for the three months ended June 30, 2022 compared to operating loss of $4.4 million for the three months ended June 30, 2021. The decrease in operating loss is primarily a result of the previously described decreases in Corporate and Other stock-based compensation costs.
Income Taxes
Our income tax provision was $1.6 million for the three months ended June 30, 2022 compared to $0.5 million for the three months ended June 30, 2021.
Net Income (Loss)
As a result of the changes and results discussed above, as well as the $18.7 million gain on change in fair market value of warrant liability, net income was $14.5 million for the three months ended June 30, 2022 compared to a $4.2 million net loss for the three months ended June 30, 2021. For the three months ended June 30, 2022, basic and diluted net income per share was $0.58 compared to basic and diluted net loss per share of $0.24 for the three months ended June 30, 2021.
Six Months Ended June 30, 2022 compared to Six Months Ended June 30, 2021
Revenues
Our consolidated revenues for the six months ended June 30, 2022 were $150.0 million compared to $69.7 million for the six months ended June 30, 2021. Manufacturing segment revenues for the six months ended June 30, 2022 were $143.7 million compared to $65.2 million for the corresponding prior year period. The $78.5 million increase in Manufacturing segment revenues was largely driven by an increase in the volume of railcar units delivered. Railcar deliveries in the six months ended June 30, 2022 totaled 1,251 units, consisting of 848 new railcars and 403 rebuilt railcars, compared to 622 units in the same period of 2021, consisting of 473 new railcars and 149 rebuilt railcars. Corporate and Other revenues were $6.3 million for the six months ended June 30, 2022 compared to $4.5 million for the six months ended June 30, 2021.
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Gross Profit
Our consolidated gross profit was $16.6 million for the six months ended June 30, 2022 compared to $3.3 million for the six months ended June 30, 2021. Manufacturing segment gross profit was $14.8 million for the six months ended June 30, 2022 compared to $2.2 million for the six months ended June 30, 2021. The $13.3 million increase in consolidated gross profit and $12.6 million increase in Manufacturing segment gross profit reflect a favorable volume variance and favorable margins per car.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses for the six months ended June 30, 2022 were $14.8 million compared to $15.4 million for the six months ended June 30, 2021. The $0.7 million decrease in consolidated selling, general and administrative expenses for the six months ended June 30, 2022 was primarily due to decreases in stock-based compensation related to fair value adjustments for cash-settled stock appreciation rights awarded to employees in prior periods. Manufacturing segment selling, general and administrative expenses were $1.4 million for the six months ended June 30, 2022, compared to $1.5 million for the six months ended June 30, 2021. Manufacturing segment selling, general and administrative expenses for the six months ended June 30, 2022 were 1.0% of revenue, compared to 2.2% of revenue for the six months ended June 30, 2021. Corporate and Other selling, general and administrative expenses were $13.4 million for the six months ended June 30, 2022 compared to $14.0 million for the six months ended June 30, 2021. The $0.6 million decrease in Corporate and Other selling, general and administrative expenses is primarily a result of decreases in Corporate and Other stock-based compensation costs of $1.5 million.
Restructuring and Impairment Charges
There were no restructuring and impairment charges for the six months ended June 30, 2022. Restructuring and impairment charges of $6.5 million for the six months ended June 30, 2021 primarily represented costs related to relocating some of the Shoals Facility’s equipment to the Castaños Facility.
Operating Income (Loss)
Our consolidated operating income for the six months ended June 30, 2022 was $1.9 million compared to a $18.7 million operating loss for the six months ended June 30, 2021. Operating income for the Manufacturing segment was $13.4 million for the six months ended June 30, 2022 compared to an operating loss of $5.8 million for the six months ended June 30, 2021, reflecting the increase in railcars delivered during the six months ended June 30, 2022 compared to the 2021 period. Manufacturing segment operating loss for the six months ended June 30, 2021 included restructuring and impairment charges of $6.5 million while there were no restructuring and impairment charges for the six months ended June 30, 2022. Corporate and Other operating loss was $11.5 million for the six months ended June 30, 2022 compared to $12.9 million for the six months ended June 30, 2021. The $1.4 million increase in operating loss is primarily a result of the previously described decreases in Corporate and Other stock-based compensation costs.
Income Taxes
Our income tax provision was $1.9 million for the six months ended June 30, 2022 compared to $0.6 million for the six months ended June 30, 2021.
Net Income (Loss)
As a result of the changes and results discussed above, net loss was $11.3 million for the six months ended June 30, 2022 compared to $43.3 million for the six months ended June 30, 2021. For the six months ended June 30, 2022, basic and diluted net loss per share was $0.47 compared to $2.19 for the six months ended June 30, 2021.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are our cash and cash equivalent balances on hand and our credit and debt facilities outlined below.
Term Loan Credit Agreement
On October 13, 2020, the Company entered into a Credit Agreement (as amended from time to time, the “Term Loan Credit Agreement”) by and among the Company, as guarantor, FreightCar North America, LLC (“Borrower” and together with the Company and certain other subsidiary guarantors, collectively, the “Loan Parties”), CO Finance LVS VI LLC, as lender (the “Lender”), and U.S. Bank National Association, as disbursing agent and collateral agent (“Agent”). Pursuant to the Term Loan Credit Agreement, the
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Lender committed to the extension of a term loan credit facility in the principal amount of $40.0 million, consisting of a single term loan to be funded upon the satisfaction of certain conditions precedent set forth in the Term Loan Credit Agreement, including stockholder approval of the issuance of the Company's common stock, par value $0.01 per share (the "Common Stock"), underlying the Warrant (as defined below) (the funding date of such term loan, the “Closing Date”). FreightCar America, Inc. stockholders approved the issuance of the Common Stock underlying the Warrant at a special stockholders’ meeting on November 24, 2020. The $40.0 million term loan closed and was funded on November 24, 2020. The Company incurred $2.9 million in deferred financing costs related to the Term Loan Credit Agreement. The deferred financing costs are presented as a reduction of the long-term debt balance and amortized to interest expense over the term of the Term Loan Credit Agreement.
The Term Loan Credit Agreement has a term ending five years following the Closing Date. The term loan outstanding under the Term Loan Credit Agreement bears interest, at Borrower’s option and subject to the provisions of the Term Loan Credit Agreement, at Base Rate (as defined in the Term Loan Credit Agreement) or Eurodollar Rate (as defined in the Term Loan Credit Agreement) plus the Applicable Margin (as defined in the Term Loan Credit Agreement) for each such interest rate set forth in the Term Loan Credit Agreement. As of June 30, 2022, the interest rate on the original advance of $40.0 million under the Term Loan Credit Agreement was 14.0%.
The Term Loan Credit Agreement has both affirmative and negative covenants, including, without limitation, minimum liquidity, limitations on indebtedness, liens and investments. The Term Loan Credit Agreement also provides for customary events of default. Pursuant to the terms and conditions set forth in the Term Loan Credit Agreement and the related loan documents, each of the Loan Parties granted to Agent a continuing lien upon all of such Loan Parties’ assets to secure the obligations of the Loan Parties under the Term Loan Credit Agreement.
On May 14, 2021, the Loan Parties entered into an Amendment No. 2 to the Term Loan Credit Agreement (the “Second Amendment”) with Lender and the Agent pursuant to which the principal amount of the term loan credit facility was increased by $16.0 million to a total of $56.0 million, with such additional $16.0 million (the “Additional Loan”) to be funded upon the satisfaction of certain conditions precedent set forth in the Second Amendment. The Additional Loan closed and was funded on May 17, 2021. The Company incurred $0.5 million in deferred financing costs related to the Second Amendment which are presented as a reduction of the long-term debt balance and amortized on a straight-line basis to interest expense over the term of the Second Amendment. The Additional Loan bears interest at the same rate as the original term loan.
Pursuant to the Second Amendment, in the event that the Additional Loan was not repaid in full by March 31, 2022, the Company was to issue to the Lender and/or an affiliate of the Lender a warrant (the “March 2022 Warrant”) to purchase a number of shares of Common Stock equal to 5% of the outstanding Common Stock on a fully-diluted basis at the time the March 2022 Warrant is exercised (after giving effect to such issuance). Because the Company believed that it was probable that the Additional Warrant would be issued the Company recorded an additional warrant liability of $7,351 during the third quarter of 2021. The March 2022 Warrant was issued on April 4, 2022 with an exercise price of $0.01 and a term of ten (10) years. As of June 30, 2022 and December 31, 2021, the March 2022 Warrant was exercisable for an aggregate of 1,439,940 and zero (0) shares of Common Stock, respectively with a per share exercise price of $0.01.
Pursuant to the Second Amendment, the Company was required to among other things, i) obtain a term sheet for additional financing of no less than $15.0 million by July 31, 2021 and ii) file a registration statement on Form S-3 registering Company securities by no later than August 31, 2021. The Company has met each of the aforementioned obligations. The Form S-3 registering Company securities was filed with the Securities and Exchange Commission on August 27, 2021 and became effective on September 9, 2021.
On July 30, 2021, the Loan Parties entered into an Amendment No. 3 to Credit Agreement (the "Third Amendment") with the Lender and the Agent, pursuant to which, among other things, Lender obtained a standby letter of credit (as may be amended from time to time, the “Third Amendment Letter of Credit”) from Wells Fargo Bank, N.A., in the principal amount of $25,000 for the account of the Company and for the benefit of the “Revolving Loan Lender”(as defined below).
On December 30, 2021, the Loan Parties entered into an Amendment No. 4 to Credit Agreement (the “Fourth Amendment”) with the Lender and the Agent, pursuant to which the principal amount of the term loan credit facility was increased by $15.0 million to a total of $71.0 million, with such additional $15.0 million (the “Delayed Draw Loan”) to be funded, at the Borrower’s option, upon the satisfaction of certain conditions precedent set forth in the Fourth Amendment. The Borrower has the option to draw on the Delayed Draw Loan through January 31, 2023 and may choose not to do so.
The Delayed Draw Loan, if funded, will bear the same interest rate as the original term loan.
Reimbursement Agreement
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Pursuant to the Third Amendment, on July 30, 2021, the Company, the Lender, Alter Domus (US) LLC, as calculation agent, and the Agent entered into a reimbursement agreement (the “Reimbursement Agreement”), pursuant to which, among other things, the Company agreed to reimburse the Agent, for the account of the Lender, in the event of any drawings under the Third Amendment Letter of Credit by the Revolving Loan Lender.
In addition, pursuant to the Reimbursement Agreement, the Company shall make certain other payments as set forth below, so long as the Third Amendment Letter of Credit remains outstanding:
Letter of Credit Fee
The Company shall pay to Agent, for the account of Lender, an annual fee of $0.5 million, which shall be due and payable quarterly beginning on August 2, 2021, and every three months thereafter.
Equity Fee
Every three months (the “Measurement Period”), commencing on August 6, 2021, the Company shall pay to the Lender (or, so long as Lender is the sole provider of the Third Amendment Letter of Credit, to OC III LVS XII LP, if Lender has timely notified the Company in writing of such designation) a fee (the “Equity Fee”) payable in shares of Common Stock. The Equity Fee shall be calculated by dividing $1.0 million by the volume weighted average price of the Common Stock on the Nasdaq Capital Market for the ten (10) trading days ending on the last business day of the applicable Measurement Period. The Company can opt to pay the Equity Fee in cash, in the amount of $1.0 million, if, and only if, (x) the Company has already issued as Equity Fees a number of shares of Common Stock equal to (I) 5.0% multiplied by (II) the total number of shares of Common Stock outstanding as of July 30, 2021, rounded down to the nearest whole share of Common Stock, and (y) the Company has at least $15.0 million of Repayment Liquidity after giving effect to such payment. The term Repayment Liquidity, as defined in the Term Loan Credit Agreement, means (a) all unrestricted and unencumbered cash and cash equivalents of the Loan Parties, plus (b) the undrawn and available portion of the commitments under that certain Amended and Restated Loan and Security Agreement by and among the Revolving Loan Parties and the Revolving Loan Lender (as described below), minus (c) all accounts payable of the Loan Parties that are more than 30 days past due.
The Equity Fee shall no longer be paid once the Company has issued to Lender and/or OC III LVS XII LP Equity Fees in an amount of Common Stock equal to 9.99% multiplied by the total number of shares of Common Stock outstanding as of July 30, 2021, rounded down to the nearest whole share of Common Stock, or 1,547,266 shares of Common Stock (the “Maximum Equity”). Through June 30, 2022, the Company has paid Equity Fees totaling 879,012 shares of Common Stock.
The issuance of each Equity Fee under the Reimbursement Agreement will be made in reliance on the exemption from registration contained in Section 4(a)(2) of the Securities Act for offers and sales of securities that do not involve a “public offering.”
Cash Fee
The Company shall pay to the Agent, for the account of the Lender (or, so long as the Lender is the sole provider of the Third Amendment Letter of Credit, to OC III LVS XII LP, if the Lender has timely notified the Company in writing of such designation) a cash fee (the “Cash Fee”) which shall be due and payable in cash quarterly beginning on the date that the Maximum Equity has been issued and thereafter on the business day immediately succeeding the last business day of the applicable Measurement Period. The Cash Fee shall be equal to $1.0 million, provided that, in the quarter in which the Maximum Equity is issued, such fee shall be equitably reduced by the value of any Equity Fee issued by the Company that quarter.
Warrant
In connection with the entry into the Term Loan Credit Agreement, the Company issued to an affiliate of the Lender (the “Warrantholder”) a warrant (the “Warrant”), pursuant to that certain warrant acquisition agreement, dated as of October 13, 2020 (the “Warrant Acquisition Agreement”), by and between the Company and the Lender to purchase a number of shares of Common Stock equal to 23% of the outstanding Common Stock on a fully-diluted basis at the time the Warrant is exercised (after giving effect to such issuance). The Warrant is exercisable for a term of ten years from the date of the issuance of the Warrant. The Warrant was issued on November 24, 2020 after the Company received stockholder approval of the issuance of the Common Stock issuable upon exercise of the Warrant by the Warrantholder. In connection with the issuance of the Warrant, the Company and the Lender entered into a registration rights agreement (the “Registration Rights Agreement”) as of the Closing Date of November 24, 2020. As of June 30, 2022 and December 31, 2021, the Warrant was exercisable for an aggregate of 6,623,724 and 6,098,217 shares, respectively, of Common Stock with a per share exercise price of $0.01.The Company determined that the Warrant should be accounted for as a derivative instrument and classified as a liability on its Consolidated Balance Sheets primarily due to the instrument obligating the
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Company to settle the Warrant in a variable number of shares of Common Stock. The Warrant was recorded at fair value and is treated as a discount on the term loan. The discount on the associated debt is amortized over the life of the Term Loan Credit Agreement and included in interest expense.
Pursuant to the Fourth Amendment and a warrant acquisition agreement, dated as of December 30, 2021 (the “Warrant Acquisition Agreement”), the Company issued to the Lender a warrant (the “December 2021 Warrant”) to purchase a number of shares of Common Stock equal to 5% of the Company’s outstanding Common Stock on a fully-diluted basis at the time the December 2021 Warrant is exercised (after giving effect to such issuance). The December 2021 Warrant has an exercise price of $0.01 and a term of ten years. As of June 30, 2022 and December 31, 2021, the December 2021 Warrant was exercisable for an aggregate of 1,439,940 and 1,325,699 shares, respectively, of Common Stock with a per share exercise price of $0.01.
In addition, to the extent the Delayed Draw Loan is funded, the Company has agreed to issue to the Lender a warrant (the “3% Additional Warrant”) to purchase up to a number of shares of Common Stock equal to 3% of the Company’s outstanding Common Stock on a fully-diluted basis at the time the 3% Additional Warrant is exercised (after giving effect to such issuance). The 3% Additional Warrant, if issued, will have an exercise price of $0.01 and a term of ten years.
Siena Loan and Security Agreement
On October 8, 2020, the Company entered into a Loan and Security Agreement (the “Siena Loan Agreement”) by and among the Company, as guarantor, and certain of its subsidiaries, as borrowers (together with the Company, the “Revolving Loan Parties”), and Siena Lending Group LLC, as lender (“Revolving Loan Lender”). Pursuant to the Siena Loan Agreement, the Revolving Loan Lender provided an asset backed credit facility, in the maximum aggregate principal amount of up to $20.0 million, (the "Maximum Revolving Facility Amount") consisting of revolving loans (the "Revolving Loans").
The Siena Loan Agreement provided for a revolving credit facility with maximum availability of $20.0 million, subject to borrowing base requirements set forth in the Siena Loan Agreement, which generally limited availability under the revolving credit facility to (a) 85% of the value of eligible accounts and (b) up to the lesser of (i) 50% of the lower of cost or market value of eligible inventory and (ii) 85% of the net orderly liquidation value of eligible inventory, and as reduced by reserves established by the Revolving Loan Lender from time to time in accordance with the Siena Loan Agreement.
On July 30, 2021, the Revolving Loan Parties and the Revolving Loan Lender entered into an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan and Security Agreement”), which amended and restated the terms and conditions of the Siena Loan Agreement in its entirety.
Pursuant to the Amended and Restated Loan and Security Agreement, the Maximum Revolving Facility Amount was increased to $25.0 million, provided, however, that the outstanding balance of all Revolving Loans may not exceed the lesser of (A) the Maximum Revolving Facility Amount minus the Availability Block and (B) an amount equal to the issued and undrawn portion of the Third Amendment Letter of Credit (as defined above) minus the Availability Block. The term “Availability Block”, as defined in the Amended and Restated Loan and Security Agreement, means 3.0% of the issued and undrawn amount under the Third Amendment Letter of Credit.
The Amended and Restated Loan and Security Agreement has a term ending on October 8, 2023. Revolving Loans outstanding under the Amended and Restated Loan and Security Agreement bear interest, subject to the provisions of the Amended and Restated Loan and Security Agreement, at an interest rate of 2% per annum in excess of the Base Rate (as defined in the Siena Loan Agreement).
The Amended and Restated Loan and Security Agreement contains affirmative and negative covenants, including, without limitation, limitations on future indebtedness, liens and investments. The Amended and Restated Loan and Security Agreement also provides for customary events of default. Pursuant to the terms and conditions set forth in the Amended and Restated Loan and Security Agreement, each of the Revolving Loan Parties granted the Revolving Loan Lender a continuing lien upon certain assets of the Revolving Loan Parties to secure the obligations of the Revolving Loan Parties under the Amended and Restated Loan and Security Agreement.
On February 23, 2022, the Revolving Loan Parties and the Revolving Loan Lender entered into a First Amendment to Amended and Restated Loan and Security Agreement (the “First Amendment to Amended and Restated Loan and Security Agreement”), pursuant to which, among other things, the Maximum Revolving Facility Amount was increased to $35 million; provided, however, that after giving effect to each Revolving Loan and each letter of credit made available to the Revolving Loan Parties, (A) the outstanding balance of all Revolving Loans and the Letter of Credit Balance (which is defined in the Amended and Restated Loan and Security Agreement as the sum of (a) the aggregate undrawn face amount of all outstanding Letters of Credit and (b) all interest, fees and costs due or, in Lender’s estimation, likely to become due in connection therewith) will not exceed the lesser of (x) the Maximum
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Revolving Facility Amount and (y) the Borrowing Base (as defined in the First Amendment to Amended and Restated Loan and Security Agreement), and (B) none of the other Loan Limits (as defined in the First Amendment to Amended and Restated Loan and Security Agreement) for Revolving Loans will be exceeded.
Revolving Loans outstanding under the First Amendment to Amended and Restated Loan and Security Agreement bear interest, subject to the provisions of the First Amendment to Amended and Restated Loan and Security Agreement, at a rate of 2% per annum in excess of the Base Rate (as defined in the Amended and Restated Loan and Security Agreement). Notwithstanding the foregoing, Revolving Loans made in respect of Excess Availability (as defined in the First Amendment to Amended and Restated Loan and Security Agreement) arising from clause (b) of the definition of “Borrowing Base” bear interest, subject to the provisions of the First Amendment to Amended and Restated Loan and Security Agreement, at a rate of 1.5% per annum in excess of the Base Rate (as defined in the Amended and Restated Loan and Security Agreement). As of June 30, 2022, the interest rate on outstanding debt under the First Amendment to Amended and Restated Loan and Security Agreement was 6.25%.
As of June 30, 2022, the Company had $25.0 million in outstanding debt under the Siena Loan Agreement and remaining borrowing availability of $0.6 million. As of December 31, 2021, the Company had $24.0 million in outstanding debt under the Siena Loan Agreement and remaining borrowing availability of $0.1 million. The Company incurred $1.1 million in deferred financing costs related to the Siena Loan Agreement and incurred $1.0 million in additional deferred financing costs related to the Amended and Restated Loan and Security Agreement. The deferred financing costs are presented as an asset and amortized to interest expense on a straight-line basis over the term of the Siena Loan Agreement.
M&T Credit Agreement
On April 16, 2019, FreightCar America Leasing 1, LLC, an indirect wholly-owned subsidiary of the Company (“FreightCar Leasing Borrower”), entered into a Credit Agreement (the “M&T Credit Agreement”) with M & T Bank, N.A., as lender (“M&T”). Pursuant to the M&T Credit Agreement, M&T extended a revolving credit facility to FreightCar Leasing Borrower in an aggregate amount of up to $40.0 million for the purpose of financing railcars to be leased to third parties.
On April 16, 2019, FreightCar Leasing Borrower also entered into a Security Agreement with M&T (the “M&T Security Agreement”) pursuant to which it granted a security interest in all of its assets to M&T to secure its obligations under the M&T Credit Agreement.
On April 16, 2019, FreightCar America Leasing, LLC, a wholly-owned subsidiary of the Company and parent of FreightCar Leasing Borrower (“FreightCar Leasing Guarantor”), entered into (i) a Guaranty Agreement with M&T (the “M&T Guaranty Agreement”) pursuant to which FreightCar Leasing Guarantor guarantees the repayment and performance of certain obligations of FreightCar Leasing Borrower and (ii) a Pledge Agreement with M&T (the “M&T Pledge Agreement”) pursuant to which FreightCar Leasing Guarantor pledged all of the equity of FreightCar Leasing Borrower held by FreightCar Leasing Guarantor.
The loans under the M&T Credit Agreement are non-recourse to the assets of the Company or its subsidiaries other than the assets of FreightCar Leasing Borrower and FreightCar Leasing Guarantor.
The M&T Credit Agreement had a term that ended on April 16, 2021 (the “Term End”). Loans outstanding thereunder bear interest, accrued daily, at the Adjusted LIBOR Rate (as defined in the M&T Credit Agreement) or the Adjusted Base Rate (as defined in the M&T Credit Agreement). The M&T Credit Agreement has both affirmative and negative covenants, including, without limitation, maintaining an Interest Coverage Ratio (as defined in the M&T Credit Agreement) of not less than 1.25:1.00, measured quarterly, and limitations on indebtedness, loans, liens and investments. The M&T Credit Agreement also provides for customary events of default.
On August 7, 2020, FreightCar Leasing Borrower received notice (the “First Notice”) from M&T that, based on an appraisal (the “Appraisal”) conducted by a third party at the request of M&T with respect to the railcars in FreightCar Leasing Borrower’s Borrowing Base (as defined in the M&T Credit Agreement) under the M&T Credit Agreement, the unpaid principal balance under the M&T Credit Agreement exceeded the availability under the M&T Credit Agreement as of the date of the Appraisal by $5.1 million (the “Payment Demand Amount”). In the First Notice, M&T Bank: (a) asserted that an Event of Default under the M&T Credit Agreement has occurred because FreightCar Leasing Borrower did not pay the Payment Demand Amount to M&T within five days of the asserted change in availability; (b) demanded payment of the amount within five days of the date of the First Notice; and (c) terminated the commitment to advance additional loans under the M&T Credit Agreement.
On December 18, 2020, FreightCar Leasing Borrower received a revised notice (the “Second Notice,” and together with the First Notice, the “Notices”) from M&T asserting that: (a) as a result of the continuing Event of Default that M&T alleged to have occurred under the M&T Credit Agreement, M&T has declared a default and accelerated and demands immediate payment by FreightCar Leasing Borrower of $10.1 million (the “Outstanding Amount”); (b) FreightCar Leasing Borrower is liable for all interest that
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continues to accrue on the Outstanding Amount; and (c) FreightCar Leasing Borrower is liable for all attorneys’ fees, costs and expenses as set forth in the M&T Credit Agreement.
On April 20, 2021, FreightCar Leasing Borrower received a notice from M&T that an Event of Default had occurred due to all amounts outstanding under the M&T Credit Agreement not having been paid by the Term End.
On December 28, 2021 (the “Execution Date”), FreightCar Leasing Borrower, FreightCar Leasing Guarantor (together with the FreightCar Leasing Borrower, the “Obligors”), the Company, FreightCar America Railcar Management, LLC, a Delaware limited liability company (“FCA Management”), and M&T, entered into a Forbearance and Settlement Agreement (the “Forbearance Agreement”) with respect to the M&T Credit Agreement and its related Credit Documents (as defined in the M&T Credit Agreement), as well as certain intercompany services agreements related thereto.
Pursuant to the Forbearance Agreement, the Obligors will continue to perform and comply with all of their performance obligations (as opposed to payment obligations) under certain provisions of the M&T Credit Agreement (primarily related to information obligations and the preservation of the collateral pledged by FreightCar Leasing Borrower to M&T pursuant to the M&T Security Agreement, between FreightCar Leasing Borrower and M&T (the “Collateral”)) and all the provisions of the M&T Security Agreement. During the period from Execution Date until the termination of the Forbearance Agreement, M&T may not take any action against the Obligors or exercise or enforce any rights or remedies provided for in the Credit Documents or otherwise available to it.
On December 1, 2023, or sooner if requested by M&T (the “Turnover Date”), FreightCar Leasing Borrower shall execute and deliver to M&T documents required to deliver and assign to M&T all the leased railcars and related leases serving as Collateral for the M&T Credit Agreement.
Upon the Turnover Date and the Obligors’ performance of their respective obligations under the Forbearance Agreement, including the delivery of certain Collateral to M&T upon the Turnover Date, all Obligations (as defined in the M&T Credit Agreement) shall be deemed satisfied in full, M&T shall no longer have any further claims against the Obligors under the M&T Credit Documents and the Credit Documents shall automatically terminate and be of no further force or effect except for the provisions thereof that expressly survive termination.
The Forbearance Agreement contains customary releases at execution for all affiliates of the Company (other than the Obligors) and agreements to deliver final releases with respect to the Obligors upon their performance under the Forbearance Agreement. The Company also agreed to turn over to M&T on the Effective Date certain rents in the amount of $0.7 million that it had previously collected as servicing agent for FreightCar Leasing Borrower, and to continue to provide such services through the Turnover Date without a service fee, and after the Turnover Date through the return of the railcars serving as Collateral, for a service fee.
As of June 30, 2022 and December 31, 2021, FreightCar Leasing Borrower had $7.4 million and $7.9 million, respectively, in outstanding debt under the M&T Credit Agreement, which was collateralized by leased railcars with a carrying value of $6.5 million and $6.6 million, respectively. As of June 30, 2022, the interest rate on outstanding debt under the M&T Credit Agreement was 5.75%.
Additional Liquidity Factors
Our restricted cash, restricted cash equivalents and restricted certificates of deposit balances were $3.9 million and $5.0 million as of June 30, 2022 and December 31, 2021, respectively. Restricted deposits of $0.3 million as of each of June 30, 2022 and December 31, 2021, relate to a customer deposit for purchase of railcars. Restricted deposits of $3.6 million as of June 30, 2022 and $4.7 million as of December 31, 2021 are used to collateralize standby letters of credit with respect to performance guarantees. The standby letters of credit outstanding as of June 30, 2022 are scheduled to expire at various dates through December 10, 2022.
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, our Term Loan Credit Agreement and 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. Additionally, we have recovered $35.4 million in Value Added Tax ("VAT") refunds during the six months ended June 30, 2022 relating to production at the Castaños Facility. We continue to work through the VAT refund process as a part of our working capital structure.
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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 Common Stock or debt and through long-term borrowings such as the $40.0 million term loan under the Term Loan Credit Agreement. 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 six months ended June 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
|
(In thousands) |
|
Net cash (used in) provided by: |
|
|
|
|
|
|
Operating activities |
|
$ |
(2,396 |
) |
|
$ |
(44,109 |
) |
Investing activities |
|
|
(2,808 |
) |
|
|
(818 |
) |
Financing activities |
|
|
495 |
|
|
|
11,610 |
|
Total |
|
$ |
(4,709 |
) |
|
$ |
(33,317 |
) |
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 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. We do not usually experience business credit issues, although a payment may be delayed pending completion of closing documentation.
Our net cash used in operating activities for the six months ended June 30, 2022 was $2.4 million compared to net cash used in operating activities of $44.1 million for the six months ended June 30, 2021. Our net cash used in operating activities for the six months ended June 30, 2022 reflects changes in working capital, including an increase in customer deposits of $15.4 million and a decrease in VAT receivable of $16.9 million, all of which were partially offset by increases in both accounts receivable of $13.9 million and inventory of $16.9 million. Increases in customer deposits for the six months ended June 30, 2022 represented a cash advance for cars to be delivered in the third quarter of 2022. Increases in prepayments are due to inventory to be used in production of railcars to be delivered during the second half of 2022. Our VAT receivable decreased as a result of recovering VAT refunds during the six months ended June 30, 2022, while accounts receivable increased as a result of a higher volume of railcars delivered during the six months ended June 30, 2022. Our net cash used in operating activities for the six months ended June 30, 2021 reflects changes in working capital, including increases in VAT receivable of $16.8 million and decreases in deferred revenue of $4.4 million.
Investing Activities. Net cash used in investing activities for the six months ended June 30, 2022 was $2.8 million and consisted of capital expenditures related to the expansion of the Castaños Facility. Net cash used in investing activities for the six months ended June 30, 2021 was $0.8 million and included capital expenditures of $1.4 million related to the construction in progress for our Castaños Facility and the $0.4 million proceeds from sale of equipment from our Shoals Facility.
Financing Activities. Net cash provided by financing activities for the six months ended June 30, 2022 was $0.5 million which consisted of $49.3 million of borrowings on our revolving line of credit, offset by $48.8 million of repayments on our revolving line of credit. Net cash provided by financing activities for the six months ended June 30, 2021 was $11.6 million, which primarily consisted of proceeds from issuance of long-term debt of $16.0 million, partially offset by net repayments on our revolving line of credit of $3.8 million.
Capital Expenditures
Our capital expenditures were $2.8 million in the six months ended June 30, 2022, compared to $1.4 million in the six months ended June 30, 2021. We anticipate capital expenditures during 2022 to be in the range of $7 million to $8 million, primarily related to the expansion of our Castaños Facility.
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