FreightCar America, Inc. (RAIL) Q3 2026 Earnings Call Transcript

Welcome to the call. Thank you.

Welcome to Freight Car America's third quarter 2026 earnings conference call. At this time, all persistent lines are in listen-only mode. For those of you participating on the conference call, there will be an opportunity for your questions at the end of today's prepared remarks. Please note the conference is being recorded. An audio replay of the conference call 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'Day with JBG CAP Advisory. Please go ahead.

Thank you, and welcome. Joining me today are Nick Randall, President and Chief Executive Officer, Mike Reardon, Chief Financial Officer, and Matt Ton, Chief Commercial Officer. I'd like to remind everyone that statements made during the conference call relating 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 FreightCarAmerica's Form 10-K for 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 are released for the third quarter, 2026, posted on the company's website at freightcaramerica.com, along with our 8K, which was filed at market close yesterday. With that, let me now turn the call over to Nick for a few opening remarks. Thank you, Chris, and good morning, everyone.

Thank you for joining us today. Before discussing where we are headed, I want to acknowledge our performance through the first nine months. Our financial results have fallen short of the expectations we set coming into the year. We addressed the changes to our outlook in October, and our third quarter results were consistent with the permanent image figures we provided. Our focus now is on translating the commercial progress we have made into a stronger financial performance. There are three areas I want to discuss this morning. First, our aftermarket platform continues to grow and is becoming a more meaningful part of freight car America. Second, industry indicators are improving, although this is yet to translate into broad-based growth in new rail car demand. Third, our backlog is stronger than it was a year ago, even after the removal of tank car retrofit order, and provides visibility into production extending into 2027. Let me start with the aftermarket. Revenue grew 65% year-over-year in the third quarter, reflecting organic growth in parts and components and contributions from our acquisitions. Following quarter end, we completed our third aftermarket acquisition in less than a year, an independent, Michigan-based supplier of OEM and replacement rail car components and fastening solutions. This acquisition brings complementary products and established customers and supplier relationships across North America. It broadens the components available through our network and creates opportunities to serve both new and existing customers. Building an integrated back-to-market platform with greater scale is central to our long-term strategy. These businesses support customers' ongoing maintenance and replacement needs across the life of a rail car. As we bring them together, we see opportunities to expand sales, improve operating efficiency, and increase their contribution to earnings. While aftermarket remains a smaller part of our overall business today, we believe its stronger margin profile and repeatable demand can improve the resilience of FreightCar America over time. Turning to the market, rail traffic and fleet utilization indicators continue to move in an encouraging direction. Traffic has strengthened across a broad range of categories, and fewer railcars are in storage. This, coupled with aging fleets, continues to support replacement needs, which supports the long-term opportunity. However, those indicators have not yet translated into broad-based increase industry-wide new railcar demand. Customers remain measured in their investment Thank you. While we are encouraged by the direction of these underlying signals, we continue to remain disciplined in how we plan production and pursue orders. Matt will discuss the market and our commercial activity in more detail. Now to our backlog. We ended the quarter with 2,660 railcars on order, valued at approximately $284 million. That is 28% above the $222 million reported a year ago, even though the prior year backlog included the tank car retro-pick order that has since been removed. Through the first nine months of 2026, our new rail car order intake exceeded our total for 2025 by more than 50%. In a market that remains well below placement levels, I believe that represents meaningful commercial progress. Our approach creates value from combined engineering flexibility, flexible and high-quality manufacturing supported by responsiveness to customer requirements. We continue to earn repeat business and multi-year commitments through that approach. Our priority is to convert those orders into profitable deliveries. On our financial performance, third quarter deliveries of 662 railcars resulted in lower revenue and profitability for the quarter. The commercial progress I've described has not yet translated into the level of earnings we expect from this business. Our priorities are to deliver against the production schedule, maintain cost discipline, and continue building the aftermarket contribution. We expect the financial progress to become more visible in the fourth quarter, and our attention is on execution. In summary, while improving industry indicators give us reason for cautious optimism, the timing and extent of increase in rail car demand remain uncertain. Our existing backlog gives us production visibility extending into next year. Our lowest structural cost base and flexible manufacturing footprint position us to execute that work and respond to changes in customer demand. Our focus will remain on the profitability of the work we deliver. In aftermarket, we continue to integrate our three recent acquisitions and believe they will continue to contribute to our growth as we build the aftermarket platform. With that, I'll turn it over to Matt to discuss the market environment and our commercial performance in greater detail.

Thanks, Nick, and good morning, everyone. I'll offer some perspective on the market environment and our commercial activity during the quarter. Industry order activity remains below historic levels, though it has improved in the third quarter, with new orders across the industry totaling approximately 6,800 units compared to approximately 3,100 units in the prior year period. Industry orders exceeded deliveries for the second consecutive quarter. Within that environment, we continue to gain market share. On a trailing 12-month basis, excluding tank cars and autoracks, we captured approximately 25% of industry new rail car orders in our addressable market, and approximately 17% of the overall market, up from approximately 21% and 13% a year ago, respectively. In addition, our order share of total industry orders has grown every year since 2022. The third quarter further demonstrates our commitment to a disciplined commercial strategy with a clear focus on pricing integrity, margin performance, and the quality of our order book. While we remain aggressive in pursuing new business, we are equally prepared to exercise the discipline when market conditions do not support our objectives. We believe sustainable growth is achieved through sound commercial decisions, not simply by securing incremental volume at any price. Our strategy is not built on being the lowest price producer or pursuing market share at any cost. Instead, we compete on the strength of our engineering, product differentiation, manufacturing flexibility, and proven execution capabilities. We believe maintaining this commercial discipline, particularly in a competitive pricing environment, positions Freight Car America to deliver stronger, long-term performance while building sustainable customer relationships. Importantly, this discipline does not come at the expense of order momentum, including conversions. Total orders through the first nine months of 2026 reached approximately 4,200 units, representing a 44% increase over the approximately 2,900 units ordered during the comparable period last year. At quarter end, our backlog stood at 2,660 units valued at approximately 284.5 million, compared with 2,750 units valued at approximately 220 million a year ago. This represents a 28% increase in backlog value despite a modest reduction in unit count, reflecting a favorable shift in the value of our committed business. Equally important is the quality of the customers behind that backlog. Our order book is supported by repeat business from established blue-chip customers, including railroads, railcar lessors, and industrial shippers. These are sophisticated buyers who recognize the value of our engineering product quality and execution capabilities. Their continued commitment to Freight Car America reinforces the strength of our customer relationships and their confidence in our ability to deliver. Our backlog remains diversified across new rail car builds, conversions, and specialized programs, with every order representing a firm customer commitment. Our commercial philosophy is straightforward. We will compete aggressively for the right business, but we will not allow competitors' pricing decisions to dictate our own. Our focus remains on building a high-quality order book, strengthening relationships with industry-leading customers, protecting margins, and delivering profitable, sustainable growth. As Nick mentioned, the underlying demand picture continues to improve as well. In the third quarter, key carload categories tracked by the Association of American Railroads grew year-over-year, matching the second quarter. Weekly carload volume was the highest for any quarter since 2019. Green carloads grew 5%, petroleum products grew 9%, and primary metal products grew 10%, all commodities that move in the rail cars we build. Excluding coal, carloads through September were the most since 2018. The fleet data points in the same direction. Rail cars and storage fell 17.7% of North America fleet on October 1st, the lowest share since April 2023, and the fewest cars on an absolute basis since 2022. Those cars are coming out of storage because shippers need them, and as the active fleet tightens, the replacement cycle moves closer. With the mandated 50-year retirement age, we continue to expect industry demand to improve in 2027. As industry demand returns for long-term replacement levels, we believe our differentiated product portfolio, discipline, commercial execution, and deep customer relationships position Freight Car America to deliver a sustainable, profitable growth. With that, I'll turn the call over to Mike to walk through the financials in more detail.

Thanks, Matt, and good morning, everyone. I'd like to begin with a few third quarter highlights. Revenue for the quarter was $76.5 million compared to $160.5 million in the third quarter of 2025, and we delivered 662 railcars compared with 1,304 units in the prior year period. Revenue and deliveries were consistent with the preliminary results reported on October 19. Aftermarket revenue was $10.8 million, an increase of 65% year-over-year, given by organic growth in parts and components, together with the contribution from our acquisition. Aftermarket gross margin was 44.5% in the quarter, and the segment generated $4 million of segment income, providing a meaningful contribution of profitability during a period of lower manufacturing volumes. We are pleased with the progress integrating our recently acquired businesses into our broader aftermarket operations. with synergies tracking in line with our expectations. Working with our commercial and operation teams, we are focused on expanding sales across our combined customer base and improving sourcing and inventory deployment across our locations. These efforts support organic growth and better product availability and customer service while maintaining discipline on working capital and returns on invested capital. Gross profit was $6.7 million, representing a gross margin of 8.8%, compared with gross profit of $24.2 million, and a margin of 15.1% in the prior year period. The decline primarily reflects lower delivery volumes and the resulting reduction in fixed cost absorption, partially offset by the higher mix of aftermarket revenue. The third quarter was the first full quarter, with the benefit of the workforce realignment we completed in the second quarter. The program is delivering savings in line with the approximately $12 million of annualized structural savings we outlined on our last call. The realignment preserves our installed manufacturing capacity and the critical capabilities needed to scale production, positioning us for operating leverage as volumes recover. Selling general and administrative expenses were $9.8 million, or 12.7% of revenue, compared with $9.6 million, or 6% of revenue in the prior year period. The increase as a percentage of revenue primarily reflects lower rail car deliveries in revenue. We expect fourth quarter SG&A dollars to remain broadly consistent with the third quarter. We reported net income of $8,000 or zero per diluted share. This result included a $4.7 million non-cash gain associated with the remeasurement of our warrant liability, reflecting the change in our share price during the quarter. Excluding non-cash and other adjusted items, adjusted net loss was $9.5 million, or $0.28 per share, compared with the adjusted net income of $7.8 million, or $0.24 per saluted share, in the prior year period. Adjusted EBITDA was $0.1 million, compared with $15.9 million in the prior year period. The decline primarily reflected the lower volumes and fixed cost absorption I described, and the result was consistent with the preliminary range we provided on October 19th. Turning the cash flow into balance sheet. Cash flow from operating activities was $25.4 million in the quarter, and free cash flow was approximately $25 million, with capital expenditures of $0.3 million. A meaningful portion of this cash flow came from favorable working capital timing. We expect that benefit to reverse during the fourth quarter. We ended September with $86.8 million of cash and cash equivalents and $100.4 million of total debt, with no borrowings under a revolving credit facility. Year-to-date, capital expenditures totaled $1.2 million. For the full year, we now expect capital expenditures of approximately $2 to $3 million, reflecting maintenance capital and the completion of the vertical integration investments we have previously discussed. Turning to capital allocation, we completed the acquisition of Trinity Equipment Company in October, our third aftermarket transaction in less than a year. The acquisition is consistent with our discipline capital allocation framework and expands our participation in customers' ongoing maintenance and replacement needs. As previously announced, we expect the transaction to be immediately accreted. Our existing manufacturing footprint provides the capacities for higher rail car volumes. This positioned us to direct growth capital towards opportunities that broaden our aftermarket business and improve the durability of our earnings and cash flow, while maintaining the financial flexibility to support our operating requirements. Moving to our full-year outlook, we are reaffirming the guidance we provided on October 19th. We continue to expect rail car deliveries of $3,100 to $3,300, revenue of $370 million to $410 million, and adjusted EBITDA of $15 million to $19 million. Our lower cost base and the growing contribution from aftermarket position us to improve earnings and cash generation as volumes recover. We will continue to balance investments and growth with operating requirements, financial flexibility, and returns on invested capital. With that, we'll now open the line for Q&A.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and the confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from the line of Mark Reichman with Noble Capital. Please receive your questions.

Thank you. Good morning. Just looking at the full year guidance, you know, that implies fourth quarter adjusted EBITDA of roughly 10.5 million to 14.5 million versus the, you know, the 0.1 million in the third quarter. And I was just wondering, you know, how much visibility do you have into your fourth quarter deliveries, your product mix and profitability at this point? And what would be the wild cards between, you know, the low end and high end of that?

Hey, Mark. Good morning. It's Nick. You know, I think as we go into the fourth quarter, from the order security or the backlog, that's booked for Q4. So the wild card on trying to land orders is limited. Anything we land would be accretive to what was in that guidance. So then it looks down to just, as I mentioned in my notes about the execution piece. Typically, we put risk mitigation around weather or rail delays, but that's what we will focus on. Being able to drive our plant execution to the SIOP plant is typically where we've been stronger, being able to hold that capability in the really last couple of quarters. But yeah, I think it's certainly not on order bookings. The orders in that guidance were secured for Q4, hence the guidance.

Right. Now, you know, Michael, he did a great job in terms of explaining the gross margin decline, you know, to 2.9%. You know, he talked about the fixed cost absorption, the lower production volumes, and the product mix. And I was just wondering, you know, what manufacturing gross margin would you consider sustainable at normalized production levels?

Hey, Mark, this is Mike. I think looking long term, you know, very low, you know, low double digits is sustainable. If we look back at what we've done on a more normalized demand environment, manufacturing margins have been around, you know, 10, 11 percent. I think that's a sustainable long term as demand comes back.

And Michael, you know, given your $86.8 million of cash, how are you kind of prioritizing debt reduction versus, you know, aftermarket acquisitions and other investment? I think your gross term debt was roughly $104 million at the end of September.

Yeah, so as I mentioned, we did have favorable working capital timing in Q3 that will reverse in Q4, a high point in Q3, but we do look at both those on a go-forward basis. What is the most accretive to us if we find a good acquisition that's within our framework, or if it's pay down of the debt, we toggle both and do the one that maximizes the value for shareholders.

And my last question is really for Nick. You know, you've really done a great job, you know, growing, you know, the aftermarket business. You have a strong rebodying, you know, product, you know, business. And I was just wondering, are there any other types of ancillary services or other markets?

I mean, you've kind of distinguished yourself as not, you know, entering the leasing business. Are there any opportunities, you know, to provide?

We've done, historically, we've done adjacent things for the maintenance of way items and other manufacturing facility, other manufactured products that support the rail industry. We've grown the aftermarket business. We've acquired both distributors and people who provide OEM products, and we've got a nice process that we're building together where not only are we supporting the rail customers with new car builds, we do conversions and aftermarket which supports those rail cars. Rail car customers through the life cycle of a rail car. And there are other areas that are adjacent. It's probably a bit too early to start talking about what they are. We may talk about those in the future. But certainly the way you asked the question, where you described that, yeah, we have We've grown our core competency, and we will continue to add to those core competencies, and you continue to add through that customer network, through distribution network, and through the industry position we have, because I think, you know, as we generate that capital for investment, that's where we'll start to look at it. Which ones are most accretive, and how do we best integrate it into our organization? So a lot more to come on that, Mark, but I think, yeah, that's the right way of thinking about it, for sure.

Thank you very much. I really appreciate it. Thanks, Mark.

The next question is from the line of Brendan McCarthy with Sidoti. Pleased to see you with your questions.

Great. Good morning, everybody. Thanks for taking my questions here. Just a quick follow-up on the aftermarkets business. You've done about three acquisitions in the past 12 months. I know we've talked about this industry being highly fragmented, but can you give us an idea of what the runway for additional token acquisitions might look like? Is three to four per year a reasonable forecast there?

Let me answer what it looks like, and then we can think about what a reasonable runway. You know, it is a fragmented market, and there are certainly some unmet needs or some opportunities to enhance service or better service the rail industry across that broader aftermarket network. The three in the first sort of 12 months has been a very, I guess, enjoyable process for us, welcoming the new members to our freight car family and been able to improve the services for our customers. And as long as those conditions are still true, we would continue to expand that aftermarket acquisition program. As Mike mentioned before, we look at our capital allocation and we look at what's the best way to enhance value for shareholders. So we will continue to look at that. And sometimes there's a flurry of activity, then there's a pause by working behind the scenes. So it's a little bit hard to forecast. You know, the run rate. I would definitely characterize our appetite and our interest in it will not wane, and we will continue to look very, very hard and deep at all the opportunities that we see there. And as that appetite turns into potential, obviously, we'll try and expedite those as best as possible. Damaging the customers, our own integration, but certainly an area where we see a lot of interest, and certainly an area where we see continued appetite and continued interest from our sides, for sure. Mike, anything I missed?

No, I think you hit that on the head. You know, we have a strategy for the aftermarket, and acquisitions have been a tool to help that, but it's not a – we don't have a mandate for a number of acquisitions due each period.

Understood. I appreciate the detail, and it makes a lot of sense just looking, especially looking at the Q3 segment gross margin was 45 percent, came in meaningfully above that kind of low 30 percent range that I think you've signaled in or on prior calls. What drove that increase in the quarter, and is that structural or is it more just temporary?

Yeah, Brendan, so we have our aftermarket is now more broad. There are different categories of it, and Q3 was heavily influenced by mix of some of our proprietary products that we sell, which tend to carry a slightly higher margin profile than the distribution side of the business.

Got it. Okay.

And then one quick question on the manufacturing side of business.

Looking ahead to the anticipated recovery in 2027 at the industry level, and I don't want to get into the numbers because I know you haven't given, you know, 2027 guidance yet, but maybe you can just talk about, maybe from a qualitative perspective, and give us an idea of how much of your anticipated 2027 production is already supported by the backlog Thank you. You know, how much additional orders you may need in the company. Can we get guidance on the next out years? I'll just reflect on... This year, you know, the order book for this year compared to where it was last year. But in the Q3 this year, we'd already exceeded by a large margin the order. With orders intake as

a predictor of deliveries later, whether it's three months, six months, or nine months later, that should give a good indication of the trajectory and the size of the order book we have. We have a much larger backlog now than we did this time last year going to the next year. So if you think about both the rates at which we are acquiring new orders, which is great, and the size of our backlog as it's building, as we move into 2027, we are moving into 2027 with one of the highest rates of booked orders as we sit here on early November of 2026. So we will give guidance on 2027, obviously, at the right time, but certainly the momentum that the commercial organization has built and the order entry and the order booking rates. Certainly gave me confidence that we would finish the end of this year with more of 2027 booked than we did when we entered 2026, if that makes sense.

Absolutely. That's helpful context. And when you look at that backlog, the implied ASP has been on a trend upward in recent quarters. Can you talk about what you're seeing in terms of pricing? Have you had to make any pricing concessions recently, just given the competitive dynamics?

Hey, Brendan. One quick clarification on the backlog. So, as you know, we did remove a large retrofit order, which is going to dramatically increase the average selling prices. Those are the retrofits cost substantially less than a new car. So, part of the big jump from Q2 to Q3 to ASP was simply the roll-off of conversion orders. And retrofit orders out of our backlog, whether they delivered already or were ones we removed for the future. That's the main driver of the jump you're going to see there. And then I'll turn to Nick for any comments on competitive.

Yeah, I think it's going to be similar to the way we think about the orders booked, you know. Even in the freight cars, Mike mentioned, we back out the conversions or the rebuilds because there are different ASP. When you think about the freight cars, there's a large discrepancy between the mix, but really what we look at is the sectors or the segments that are driving that growth. As Matt mentioned before, we've seen all those sectors that we're interested in grow across the industry based in car loads and the amount of cars coming out of storage into the marketplace. The grain and agricultural ones drive a lot of covered hoppers, and that's very good for us. The aggregate ones drive the Gons and our Versafood product, which is very good for us. And then you've got the drive on some of the flat car products and the highly customized products building up for next year as well. So there would be a mix. Implication as they go through, some are better than others. But I think as the first question that may have been from you or from Mark on how you should think about the overall gross margins, I think it would be consistent with the answer Mike gave there. That mix would drive that sort of gross margin slightly into that low teens.

Understood. Thanks for the color there. That's all from me.

Thank you. The next question is in the line of Aaron Reed with North Coast Research. Please receive their questions.

Great. Thank you very much. I was wondering if you'd shed a little light. I mean, you've had a lot of success in, you know, taking market share. I wonder if you'd give us a little more color on, you know, what's driving your gains in the new rail car orders right now?

Yeah, I'll start there. Then Matt can add in some color on there. You know, we've said for a long time that we are not trying to be the lowest cost producer in the... In the marketplace, and we really focus on a strong value proposition, and that strong value proposition really has three tenets to it. One is that we have customer responsiveness or an ease of doing business, which is unquestionable, that we really respond to what the customers need and how they are being treated. We have an engineering and a configuration option based on the DNA of our shared platforms across our freight car processes, where we can configure and customize a car to exactly what our customer needs without too many compromises needing to be made. And that is very important for our customers. And that we have a build, execution, and quality that we are able to deliver on time, in full, to exactly what the customers need when they want it. And I think those three things are consistent, have been consistent over the last couple of years, and will continue to be consistent needs of our customers as the market and the industry responds back to its normal sort of upper 30s or 40,000 a year run rate. So we're not trying to win market share, as Matt said. We truly want to, truly want to.

When we look at, you know, manufacturing opportunities, it looks like there's still quite a bit of opportunity in both covered, hopped, and flat cars. I was wondering if you could give us any more idea as to, you know, what is the size of that opportunity? What are you doing in that space to really grow it, or is that something you're just kind of pointing out, but you're not proactively trying to take share in? I was wondering if you could just give us a little more color around that.

Yeah, I'll talk a bit about that and then make it up. So when you think about the industry, covered hoppers are typically the largest sector in the industry. And on a normalized 40,000 run rate, they're going to be, you know, 15 to 16,000 covered hoppers. So it's probably the largest single There's an amount we want to be able to build. We don't want to fill our entire plant with covered hoppers, but we want to make sure we have a strong showing in our product portfolio, a unique product that has a value proposition, and we can build those rates. And then you repeat the same process through the different products. Our Versaflood product, which is an open-top hopper, we have a We have a really strong market share on that. We have a product that is really great for our customers, really fits their needs. So when you look at the different types, we really match our competencies and our capabilities to the size and the volumes that our customers want that overlaps with the value proposition we offer. The manufacturing configuration is something that we've built a platform where we can reconfigure our manufacturing capabilities. I'm going to say with some relative ease, but it can be done. So we can modify our manufacturing footprint and modify our manufacturing capabilities to match what our customers want at the time they want it. So really, it's about understanding which orders and which places in the market we are truly aligned well with in a disciplined way. And then making sure that we satisfy those customer requirements and we've built a configurable and sort of somewhat modular jigs and fixtures elements in our manufacturer footprint that we can adjust our manufacturing footprint to match the customer demand as opposed to the other way around, which can be sometimes difficult.

Matt, listen. That's helpful. Thank you. Thank you. As a reminder, to ask a question, you may press star 1. Thank you.

Ladies and gentlemen, at this time, this concludes our question and answer session and will also conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.