Prepared remarks
Welcome to FreightCar America Second Quarter 2025 Earnings Conference Call. Please note, this conference is being recorded. An audio replay of the conference will be available on the company's website within a few hours after this call. I would now like to turn the call over to Chris O'Dea with Riverton Investor Relations. Over to you, Chris.
Thank you, and welcome. Joining me today are Nick Randall, President and Chief Executive Officer; Mike Riordan, Chief Financial Officer; and Matt Tonn, Chief Commercial Officer. I'd like to remind everyone that statements made during this conference call related to the company's expected future performance, future business prospects or future events or plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Participants are directed to FreightCar America's Form 10-K for a description of certain business risks, some of which may be outside of the control of the company that may cause actual results to materially differ from those expressed in the forward-looking statements. We expressly disclaim any duty to provide updates to our forward-looking statements, whether as a result of new information, future events or otherwise. During today's call, there will also be a discussion of some items that do not conform to U.S. generally accepted accounting principles or GAAP.
Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the earnings release issued yesterday afternoon. Our earnings release for the second quarter of 2025 is posted on the company's website at freightcaramerica.com, along with our 8-K, which was filed premarket this morning. With that, let me now turn the call over to Nick for a few opening remarks.
Thank you, Chris. Good morning, everyone, and thank you all for joining us today. I am proud to share another quarter of strong performance of FreightCar America, marked by execution and resilience as we expanded our margins through operational efficiency and delivered solid profitability. This quarter also marks our fifth consecutive quarter of positive operating cash flow generation, finishing Q2 with over $61 million of cash on hand, while we have maintained strong commercial momentum with orders, adding 300 units to our healthy backlog for the year despite a challenging industry backdrop. Gross margins for the quarter expanded to 15% on 939 deliveries, up from 12.5% on 1,159 deliveries a year ago. Adjusted EBITDA margins increased 20 basis points compared to the prior year, and we generated adjusted free cash flow of $7.9 million. While revenues and deliveries were lower year-over-year, we have continued to utilize our lines effectively and deliver increased profitability as these strong results demonstrate the effectiveness of our manufacturing strategy and the operational commitment of our team.
On the commercial side, our broad product portfolio and value-added solutions continue to prove themselves as competitive differentiators. We secured 1,226 new orders in the quarter, largely driven by rebuilds and conversions. These orders increased our backlog to 3,624 units, up approximately 300 units from the prior quarter, though the dollar value of the backlog remained stable, reflecting a higher proportion of rebuild and conversion work. Importantly, rebuilds and conversions continue to deliver excellent value for our customers in these market conditions. This type of work exemplifies the strength of our flexible manufacturing model, enabling us to adjust quickly to customer needs while maintaining healthy profitability. Operationally, we continue to run all 4 production lines throughout the quarter, improving productivity and supporting high throughput even at a lower volume of deliveries.
This operational flexibility, which has been a hallmark of our approach remains a key advantage, allowing us to meet evolving demand and keep lead times competitive. Turning to the broader industry. The replacement cycle has moderated and industry forecast for new railcar deliveries have been revised downward for 2025. However, we remain well positioned, thanks to the diversity of our business model and our agile manufacturing presence. We continue to see strong order momentum and inquiries in our pipeline and are reaffirming our outlook for the remainder of the year. Our nimble vertically integrated model enables us to take market share and respond faster than our peers. These dynamics will position us to benefit meaningfully when new build activity picks back up. We also continue to invest in the business to strengthen our foundation for future growth. This quarter, we announced a capital investment in our tank car retrofit program as we accelerate our capability expansion and vertical integration of key components within the manufacturing process to provide our customers with the product quality and reliability they demand.
We expect this initiative to continue to enhance our margin profile and create long-term value as the tank car program ramps up over the next several years. In short, we are executing well, delivering on our commitments, and continuing to strengthen the foundation of our business. I am proud of what we have accomplished this quarter, and I'm excited about the opportunities ahead. With that, I'll turn it over to Matt to walk through our commercial operations in more detail.
Thank you, Nick, and good morning, everyone. For the second consecutive quarter, we continued to see consistent inquiry level activity and conversion to orders. During the second quarter, we booked orders for 1,226 railcars valued at $107 million. This order intake represents back-to-back quarters with a book-to-bill ratio of 1.3 and further supports that our purpose-built commercial strategy of engineering, manufacturing, and delivering high-quality railcars resonate with our broad customer base. Our commercial strategy is focused on maintaining share while remaining responsive to changing market conditions. As new railcar demand softens and customers seek a rebuild or conversion option, we leverage our expertise in flexible plant operations, providing value and optionality to our customers. Railcar conversions has been a foundational component of our heritage with over 15,000 conversions and rebodies completed in the last 20 years.
Further, our tank car retrofit program and plant readiness is advancing and on track for primary production beginning in 2026. This added capability, coupled with our modern manufacturing infrastructure, serves as a key competitive advantage, providing value to our customers, a flexible mix of new car production, conversions and rebuilds, and solid gross margin returns. From an industry perspective, we are beginning to see a softer new railcar demand environment due in large part to uncertainties around tariff policies. Although we view these economic realities as short-lived, they are affecting customer order timing, and we do expect that total 2025 industry deliveries will fall below the previously expected 40,000 units per year average. It is important to note, with over 160,000 railcars projected to reach their mandated retirement in the next 4.5 years, we fully expect overall industry annual demand to fall within the 35,000 to 40,000 range.
Despite short-term extended decision cycles in certain freight segments, our team continues to drive steady quote volume by emphasizing versatility, value, and delivery certainty. Looking ahead, we remain committed to driving high-value opportunities that align with our customers' dynamic needs. We continue to prioritize margin performance, manufacturing flexibility and a diversified order book, all factors that we believe will set us apart in moderating demand environment. With that, I'll turn it over to Mike for comments on our financial performance.
Thanks, Matt, and good morning, everyone. I'd like to begin by sharing a few second quarter highlights. Consolidated revenues for the second quarter of 2025 totaled $118.6 million with deliveries of 939 railcars compared to $147.4 million on deliveries of 1,159 railcars in the second quarter of 2024. Lower deliveries and revenue in the second quarter of 2025 were primarily driven by producing railcars during the quarter that will deliver throughout the second half of 2025. Gross profit in the second quarter of 2025 was $17.8 million with a gross margin of 15% compared to gross profit of $18.4 million and gross margin of 12.5% in the second quarter of last year. Higher gross margin performance was driven primarily by a favorable product mix and increased production efficiency. SG&A for the second quarter of 2025 totaled $10.1 million, up from $8.5 million in the second quarter of 2024. Excluding stock-based compensation, SG&A as a percentage of revenue increased approximately 260 basis points, primarily due to the timing of spend on various professional services.
We expect SG&A, excluding stock-based compensation, to decrease in the second half of the year and normalize for the full year. In the second quarter of 2025, we achieved adjusted EBITDA of $10 million compared to $12.1 million in the second quarter of 2024, driven primarily by lower deliveries. Despite the lower volume of deliveries, adjusted EBITDA margin expanded by 20 basis points in the second quarter of 2025 compared to the second quarter of 2024. Adjusted net income for the second quarter of 2025 was $3.8 million or $0.11 per share compared to adjusted net income of $3.5 million or $0.10 per share in the second quarter of last year. During the second quarter of 2025, we recorded a noncash tax benefit of approximately $52 million, primarily due to the release of a valuation allowance on U.S. deferred tax assets related to our historical net operating losses. This decision reflects our profitability over the past 2 years in the U.S. as well as our confidence in future profitability and taxable income generation in the U.S. This noncash benefit was partially offset by a $47.6 million noncash adjustment to our warrant liability.
As a reminder, the warrant liability adjustment accounted for in adjusted net income is a noncash item with no effect on shares outstanding or earnings per share calculations, reflecting only the valuation change of the warrant holders' investment as our share price appreciated during the quarter. This quarter, we generated $8.5 million in operating cash flow, marking our fifth consecutive quarter with positive cash flow from operations, our best in nearly 20 years. This is a testament to the collective FreightCar America team's efforts over the past several years to transform our business. Additionally, our adjusted free cash flow for the first half of 2025 was approximately $20.4 million, reflecting the continued execution of our commercial strategy, operational discipline, and a more efficient capital structure. We closed the quarter with $61.4 million cash on hand and no borrowings under our revolving credit facility.
Capital expenditures for the second quarter totaled $0.6 million. For the full year 2025, we now expect capital expenditures to be in the range of $9 million to $10 million. Approximately $4 million is allocated to routine capital for ongoing operations. The remaining balance is growth capital for both our tank car retrofit program that begins next year as well as future production of new tank cars. This quarter's increase in growth capital will vertically integrate aspects of our future tank car operations and strengthen our position in the market. We anticipate that this additional investment will contribute an additional $6 million of EBITDA over the next 2 years and be a meaningful contributor to gross margin expansion in future periods. Our strong cash flow generation and disciplined approach continues to support these growth investments while keeping our financial position healthy with trailing 12-month net leverage remaining around 1.2x.
Looking ahead, we're focused on ensuring that every dollar we invest supports scalable high-return opportunities. With a healthy balance sheet and steady cash flow, we are well positioned to support future growth and deliver improved profitability.
Questions and answers
Compared to the prior year period, railcar sales fell about 26%, while aftermarket sales increased almost 61%. And I was just wondering how much of that is due to productive capacity being dedicated to custom fabrications versus the timing of rail orders within the year? And what are your expectations for the third and fourth quarters?
Mark, it's Nick. I'll answer that one and then Mike may do some follow-up on some of the timing issues of it. So I think, yes, a couple of things to unpack in that question. So in Q2, we did produce a higher volume than we shipped in Q2. We produced some products that were shipped in a subsequent quarter. So from a production perspective, we are firing up, our planning process leveled out so that we don't have large swings in labor up or down. So we really utilized our capacity in an effective manner to drive our business. So that kind of really explains why there's a difference year-on-year Q2 to Q2 in the volume shipped. So yes, you'd expect to see those ship in a later quarter in the year and see that sort of smooth off. I would just clarify, though, our production capacity wouldn't be a constraint on sales. The customer demand dictates our sales rather than any capacity concerns. But the aftermarket piece, I'll let Mike add on to that.
So on a quarter-over-quarter, we continue to expand our presence in the aftermarket, and we're just seeing sales growth there that we continue to like and see in the future. But to Nick's point, production was higher in the second quarter than you'll see in the delivery numbers with a balance of cars produced and we'll deliver throughout the second half. And you'll see that maintaining the full year delivery guidance, you'll see Q3 and Q4, we expect to be much higher deliveries than what you've seen in Q1 and Q2. And all of that is simply timing to customer schedules and when they want to take cars.
And the second question is just manufacturing segment gross margins. If you look at them kind of historically, but in the first and second quarter, 13.4% and 13.5%, while the aftermarket margins were 37.4% and 36.8%. So do you think the first and second quarters are indicative of forward gross margin expectations? And how are the tank car retrofits expected to impact revenue and margin in 2026 and 2027?
I'll break this down into two parts, Mark. First, regarding 2025 and then future years. We typically don’t comment much on future years, but we can discuss the timing of tank car retrofits. For this year, we've seen our margins in Q1 and Q2 influenced by product mix and a boost in our operational productivity, especially on the whole goods side, which has benefited us. I anticipate those trends will continue through Q3 and Q4. Therefore, I don’t expect significant changes from what we've shown in Q1 and Q2. As volumes rise, shipments will increase, but margins should remain stable. We've also avoided making announcements about large layoffs or organizational changes, managing to keep our skilled workforce intact to maintain quarterly margins. This gives a good indication of what Q3 and Q4, as well as the entire year, will look like. When it comes to future years, we generally do not provide details. However, we have discussed the tank car retrofit initiative, which begins partway through 2026. You previously inquired about a fifth line; our current incremental order is about 1200 units each quarter. If we maintain that volume, we would consider adding the fifth line for those retrofits, which would influence performance. More details on this will come as we prepare for 2026, rather than in the summer of 2025.
No, it's very helpful.
So what I want to know a little bit more about, and I know you mentioned it was you said the tank line is expected to add around $6 million in EBITDA here in '26 and '27. I just want to make sure I heard that right, as well as if you give a little more color around the timing of what that might look like would be helpful.
Yes. Just to clarify, it's $6 million over two years. We've been discussing that our plant will be ready for the tank car conversion program in a few months. The contract we have begins around the middle to the end of Q2 of 2026 and will extend into 2027. We also have inquiries and other orders that we might add to that, but the specific contract you mentioned is scheduled to start in the latter half of Q2 of 2026.
Perfect. The other question I have is, I know there's been a lot of talk, especially in terms of mergers between some of the Class 1 rail carriers. How is that expecting to impact you? Or is that kind of not really going to impact you one way or another? I'm getting a lot of questions on that.
It's hard to say for certain. I believe it will have an impact on the industry. I anticipate some improvements in productivity and customer service in the railroad sector, which will ultimately benefit the overall industry. When productivity and customer service levels improve, it positively affects everyone involved. From a builder's standpoint, enhancements in rail benefit builders as well. However, it’s still too soon to comment on timing, orders, or specific products. We need to wait and see. If there are improvements for customers and end users in rail, I think that will lift the entire industry. But it's still early, and many people haven't had enough time to fully understand the details.
That makes sense. And then one more quick question is one of the things that we're seeing a lot of interest in, obviously, is AI and the massive demand and uptick in energy needed. So it looks like there's been a bit of a resurgence in coal. And my understanding is a lot of those cars have been retired as the expectation was that coal is going to kind of fizzle out. Is there a potential for increased demand in either repairs or even maybe new opened up hoppers that might develop here in the next coming quarters or even year that wasn't necessarily expected a year or 2 ago? Or is there still, would you think, ample supply that means that wouldn't necessarily be required to get additional or repaired cars?
Certainly. I will share some thoughts on this and then I'll invite Matt and Mike to contribute as well. To put it in perspective, coal remains the largest single commodity transported across railroad networks. It constitutes a significant portion of the industry. As you noted, prior to about two years ago, coal usage had been consistently declining. Any positive shift in this trend would certainly benefit those engaged in the repair, restoration, or prolonging the life of the units used for coal transport. FreightCar America possesses one of the largest fleets of coal railcars. Consequently, we are observing an increase in inquiries regarding the extension of life for existing coal-related assets within the rail network, which is encouraging. However, it is too early to assess whether this will lead to new car builds. There are many rail assets dedicated to coal, but it's uncertain how close they are to being at the end of their life cycle or if there will be conversions to or from coal. The conversion aspect is likely where we will see more activity. We handle a lot of conversions, which is beneficial for our business. In the short term, the focus is on extending the life through maintenance repairs and parts, which falls nicely under our aftermarket operations that support this sector. Mike, did I leave anything out?
No.
I wanted to circle back to gross margins. I think that you had mentioned we should see a similar gross margin level of right around 15% for the back half of this year. I just wanted to look longer term. I know there's the 1,000 tank car conversion order in the backlog, obviously, higher margin there. Do you see any reason why gross margins may step down from that 15% level long term?
I'll start with that, Brendan, and then Mike can provide any extra details. First, the product mix has a significant impact. When we look beyond our lead time window, it's challenging to determine the mix accurately. From a planning and agile manufacturing standpoint, we are confident in our ability to adapt to future customer demands. However, margins will fluctuate based on the mix, which makes long-term predictions uncertain. We have a solid pipeline and good inquiry levels, with 15% being at the higher end, but we might need to adjust that for the future periods. For the next two quarters as we move through the end of calendar year 2025, we expect our shipments in Q3 and Q4 to increase compared to Q1 and Q2. We prepared in Q2 by building ahead for some items to be shipped in the latter half of the year. The margins should remain similar, but they will depend on what gets shipped and when it happens in Q3 and Q4. Ultimately, the margins are reliant on the mix, along with our ongoing productivity improvements that are mainly driving those gross margins. Mike, do you have anything to add?
That makes sense. Just looking at gross margin gains maybe year-to-date, I guess, how much of that do you attribute to that manufacturing efficiency? And how much do you attribute to just the product mix in general?
It's challenging to break down that information easily. Certain products have a manufacturing productivity mix that influences them based on the order length, size, and volume rates we produce. I would say we are on a general path of productivity improvement, which leads to gradual enhancements in our operational productivity from quarter to quarter, and that trend is both predictable and dependable. Additionally, the fluctuations in product margins at any given time contribute to this. Therefore, our operational productivity will continue to grow each quarter as we balance any increases in pay or inflation pressures. The margins from the product mix are mainly driven by the type of product. This year, we've mentioned tank cars and tank car retrofits, which typically have higher margins. Consequently, I expect that product's performance to improve. However, determining exactly which quarter will feature particular products in the shipping schedule is more complicated than merely assessing the overall market.
That makes sense. One more question for me. I know you talked about an increase in growth CapEx as it relates to the tank car capabilities in your manufacturing. Just wondering if you could provide any color on the tank car conversion pipeline, maybe conversations that you're having with potential customers there. Just curious as to what that pipeline might look like.
Sure, I'll share some insights on that. We secured a significant order, which we have previously mentioned. There is a federal deadline at the end of 2029 for the conversion of these vehicles for use in North America. Industry estimates suggest that between 10,000 to 17,000 units may need conversion to remain operational. The owners of these units must decide whether to replace them with new models or convert them, based on the remaining usable life of their current vehicles. There is considerable interest from customers in conversions, and we regularly engage in discussions with them. Our capacity is sufficient to handle any conversion orders from customers during this timeframe. The key question is whether they prefer to switch to a new vehicle rather than opt for a conversion. We are also preparing to enter the new vehicle market and are closely monitoring these discussions, whether they involve conversions or new cars, particularly for late 2026 or calendar year 2027. We are speaking with the same customers about the same product, offering them various solutions based on their current needs.
This question is for Matthew. According to the RSI, industry-wide orders and deliveries were 11,322 and 15,726, respectively, for the first six months of 2025. I'm curious about where you think those numbers will fall for the year.
Yes, Mark, I think we're looking at another year, back-to-back years of total industry order volume that will be sub 30,000 railcars with an upturn in demand when we get into the years '26.
I'll just add that we do see based on pipeline activity, we do have an expected order increase in the second half of the year.
Okay. So like the first quarter, you were 25% of the orders and the second quarter, about 19.7%. So you expect to kind of maintain those levels? Or do you think you can continue to capture market share? And then, of course, you've got the backlog as well?
Mark, we expect to continue to have market share gains. And I would point out that our flexibility and the capabilities to work with customers on specific demands beyond just new cars is something that's not measured in terms of total market share when you compare it to ARCI numbers. However, keep in mind that conversions, rebodies, and rebuilds are a very valuable component of our offering and provide customers that optionality. So the market share numbers themselves don't tell the full story. But we do expect to see continued growth in market share based on our overall offering.
Okay. And then the last one question is just for Nick. In the recent presentation, there's mention that the fifth line is expected to increase capacity by 20% or 1,000 units. So you've got the 4 production lines at 1,250. And I was just kind of curious why it would be 1,250 versus 1,000?
It's a good question. We typically operate at a capacity of 1,250 due to the four lines, while the fifth line will be utilized for preparation to enter the tank car market, which will likely have a slower ramp-up. This explains the difference in capacity. However, I want to emphasize that capacity constraints are not anticipated to be an issue for us in the near future. Currently, we are running four lines at about 1,250 each, and we are operating at around 70% of the work week. We have the option to modify shifts and make changes to boost that capacity if needed. To directly answer your question about why the fifth line is set at 1,000 instead of 1,250, it relates to our cautious approach regarding a new product type and segment, which we need to consider in our capacity planning.
I am not showing any further questions at this time. I would now like to turn the call back over to Nick Randall for any further remarks.
So thank you. I would just like to summarize a couple of bullet points from where we finished. So at the end of Q2, we maintained strong commercial momentum with our orders driven by rebuilds and conversions, adding 300 units to our healthy backlog for this year despite, as people mentioned, a challenging industry backdrop. We expanded our gross margins to 15%, that's 250 basis points through operational efficiency and driven solid profitability. We generated $8.5 million in operating cash flow this quarter, marking our fifth consecutive quarter of positive cash from operations and adjusted free cash of $7.9 million. Our strong cash position provides flexibility to invest strategically while maintaining our financial discipline. We announced a capital investment in our tank car retrofit program, accelerating capability expansion and advancing vertical integration of key components within our manufacturing process. And we are well positioned to capitalize on market opportunities ahead and continue to deliver sustainable shareholder value. And with that, I thank you all for your time. Thank you.
Thank you. This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a great day.