UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2024
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-51237
FREIGHTCAR AMERICA, INC.
(Exact name of registrant as specified in its charter)
Delaware
25-1837219
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
125 South Wacker Drive, Suite 1500
Chicago, Illinois
60606
(Address of principal executive offices)
(Zip Code)
(800) 458-2235
(Registrant’s telephone number, including area code)
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.01 per share
RAIL
The Nasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
If an emerging growth company, indicate by a check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
As of May 1, 2024, there were 18,710,586 shares of the registrant’s common stock outstanding.
INDEX TO FORM 10-Q
ItemNumber
PageNumber
PART I – FINANCIAL INFORMATION
1.
Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited) as ofMarch 31, 2024 and December 31, 2023
3
Condensed Consolidated Statements of Operations (Unaudited) for theThree Months Ended March 31, 2024 and 2023
4
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three Months Ended March 31, 2024 and 2023
5
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2024 and 2023
6
Condensed Consolidated Statements of Cash Flows (Unaudited) for theThree Months Ended March 31, 2024 and 2023
7
Notes to Condensed Consolidated Financial Statements (Unaudited)
8
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
4.
Controls and Procedures
21
PART II – OTHER INFORMATION
Legal Proceedings
22
Unregistered Sales of Equity Securities and Use of Proceeds
3.
Defaults Upon Senior Securities
Mine Safety Disclosures
5.
Other Information
6.
Exhibits
Signatures
23
2
Item 1. Financial Statements.
FreightCar America, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except for share data)
(Unaudited)
March 31,2024
December 31,2023
Assets
Current assets
Cash, cash equivalents and restricted cash equivalents
$
13,977
40,560
Accounts receivable, net of allowance for doubtful accounts of $82 and $18 respectively
35,040
6,408
VAT receivable
3,959
2,926
Inventories, net
109,778
125,022
Assets held for sale
629
—
Related party asset
902
638
Prepaid expenses
6,533
4,867
Total current assets
170,818
180,421
Property, plant and equipment, net
30,673
31,258
Railcars available for lease, net
2,842
Right of use asset operating lease
2,724
2,826
Right of use asset finance lease
39,676
40,277
Other long-term assets
4,778
1,835
Total assets
248,669
259,459
Liabilities, Mezzanine Equity and Stockholders’ Deficit
Current liabilities
Accounts and contractual payables
75,918
84,417
Related party accounts payable
2,394
2,478
Accrued payroll and other employee costs
4,975
5,738
Accrued warranty
1,468
1,602
Current portion of long-term debt
30,002
29,415
Other current liabilities
7,309
13,711
Total current liabilities
122,066
137,361
Warrant liability
52,454
36,801
Accrued pension costs
1,106
1,046
Lease liability operating lease, long-term
3,038
3,164
Lease liability finance lease, long-term
41,084
41,273
Other long-term liabilities
2,278
2,562
Total liabilities
222,026
222,207
Commitments and contingencies
Mezzanine equity
Series C Preferred stock, $0.01 par value, 85,412 shares authorized, 85,412 shares issued and outstanding at each of March 31, 2024 and December 31, 2023, respectively. Liquidation value $99,285 and $95,048 at March 31, 2024 and December 31, 2023, respectively.
83,602
83,458
Stockholders’ deficit
Preferred stock, $0.01 par value, 2,500,000 shares authorized (100,000 shares each designated as Series A voting and Series B non-voting, 0 shares issued and outstanding at March 31, 2024 and December 31, 2023)
Common stock, $0.01 par value, 50,000,000 shares authorized, 18,345,488 and 17,903,437 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively
214
210
Additional paid-in capital
94,783
94,067
Accumulated other comprehensive income
2,607
2,365
Accumulated deficit
(154,563
)
(142,848
Total stockholders' deficit
(56,959
(46,206
Total liabilities, mezzanine equity and stockholders’ deficit
See Notes to Condensed Consolidated Financial Statements (Unaudited).
Condensed Consolidated Statements of Operations
(In thousands, except for share and per share data)
Three Months Ended
March 31,
2024
2023
Revenues
161,058
80,999
Cost of sales
149,655
73,514
Gross profit
11,403
7,485
Selling, general and administrative expenses
7,493
6,388
Operating income
3,910
1,097
Interest expense
(2,391
(6,600
(Loss) gain on change in fair market value of Warrant liability
(15,653
613
Other expense
(14
(36
Loss before income taxes
(14,148
(4,926
Income tax (benefit) provision
(2,577
111
Net loss
(11,571
(5,037
Net loss per common share – basic
(0.54
(0.19
Net loss per common share – diluted
Weighted average common shares outstanding – basic
29,580,182
26,545,463
Weighted average common shares outstanding – diluted
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
Other comprehensive income, net of tax:
Unrealized gain on foreign currency derivatives
207
Pension and postretirement liability adjustments, net of tax
35
41
Comprehensive loss
(11,329
(4,996
Condensed Consolidated Statements of Stockholders’ Deficit
FreightCar America Stockholders
Accumulated
Mezzanine Equity
Additional
Other
Total
Series C Preferred Stock
Common Stock
Paid-In
Comprehensive
Retained
Stockholders'
Shares
Amount
Capital
(Loss) Income
Deficit
Balance, December 31, 2022
-
17,223,306
203
89,104
1,022
(118,913
(28,584
Other comprehensive income
Restricted stock awards
309,348
(3
Employee stock settlement
(31,888
(106
Vesting of restricted stock units
42,815
145
Stock-based compensation recognized
492
Equity Fees
158,878
533
535
Balance, March 31, 2023
17,702,459
208
90,165
1,063
(123,950
(32,514
Balance, December 31, 2023
85,412
17,903,437
242
Issuance of Series C preferred shares, net of issuance costs
144
(144
563,455
(5
(14,615
(40
Forfeiture of restricted stock awards
(106,789
(1
1
760
Balance, March 31, 2024
18,345,488
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31,
Cash flows from operating activities
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization
1,396
1,072
Non-cash lease expense on right-of-use assets
703
731
Loss (gain) on change in fair market value for Warrant liability
15,653
(613
(91
Non-cash interest expense
1,539
4,264
Other non-cash items, net
Changes in operating assets and liabilities:
Accounts receivable
(28,632
904
(999
2,960
Inventories
16,963
(19,698
Related party asset, net
(348
(362
(7,884
9,695
Income taxes payable, net
(3,937
(517
Lease liability
(1,057
(1,191
Other assets and liabilities
(8,115
180
Net cash flows used in operating activities
(25,322
(7,704
Cash flows from investing activities
Purchase of property, plant and equipment
(966
(1,960
Net cash flows used in investing activities
Cash flows from financing activities
Borrowings on revolving line of credit
13,037
31,688
Repayments on revolving line of credit
(12,450
(31,884
Financing lease payments
(842
(147
Net cash flows used in financing activities
(295
(449
Net decrease in cash and cash equivalents
(26,583
(10,113
Cash, cash equivalents and restricted cash equivalents at beginning of period
37,912
Cash, cash equivalents and restricted cash equivalents at end of period
27,799
Supplemental cash flow information
Interest paid
852
2,340
Income taxes paid
403
151
Non-cash transactions
Change in unpaid construction in process
(155
539
Accrued PIK interest paid through issuance of PIK Note
1,658
Issuance of equity fee
Notes to Condensed Consolidated Financial Statements
(In thousands, except for share and per share data and unless otherwise noted)
Note 1 – Description of the Business
FreightCar America, Inc. (“FreightCar” or the “Company”) operates primarily in North America through its direct and indirect subsidiaries, and designs and manufactures a wide range of railroad freight cars, completes railcar rebody services and railcar conversions that repurpose idled rail assets back into revenue service, supplies railcar parts, and services freight cars. The Company designs and builds high-quality railcars, including bulk commodity cars, covered hopper cars, intermodal and non-intermodal flat cars, mill gondola cars, coil steel cars, coal cars and boxcars, and also specializes in railcar repairs, complete rebody services and the conversion of railcars for re-purposed use. The Company is headquartered in Chicago, Illinois and has facilities in the following locations: Johnstown, Pennsylvania; Shanghai, People’s Republic of China; and Castaños, Coahuila, Mexico (the “Castaños Facility”).
Note 2 – Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of FreightCar America, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The foregoing financial information has been prepared in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial reporting. The preparation of the financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full year. The accompanying interim financial information is unaudited; however, the Company believes the financial information reflects all adjustments (consisting of items of a normal recurring nature) necessary for a fair presentation of financial position, results of operations and cash flows in conformity with GAAP. The 2023 year-end balance sheet data was derived from the audited financial statements as of December 31, 2023. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with GAAP have been condensed or omitted. Certain prior year amounts have been reclassified, where necessary, to conform to the current year presentation. These interim financial statements should be read in conjunction with the audited financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Note 3 – Revenue Recognition
The following table disaggregates the Company’s revenues by major source:
Railcar sales
155,597
76,996
Parts sales
5,330
3,400
Revenues from contracts with customers
160,927
80,396
Leasing revenues
131
603
Total revenues
Contract Balances and Accounts Receivable
Contract assets represent the Company’s rights to consideration for performance obligations that have been satisfied but for which the terms of the contract do not permit billing at the reporting date. The Company had no contract assets as of March 31, 2024 and December 31, 2023. The Company may receive cash payments from customers in advance of the Company satisfying performance obligations under its sales contracts resulting in deferred revenue or customer deposits, which are considered contract liabilities. Deferred revenue and customer deposits are classified as either current or long-term in the condensed consolidated balance sheet based on the timing of when the Company expects to recognize the related revenue. There was no deferred revenue or customer deposits as of March 31, 2024. Deferred revenue and customer deposits included in other current liabilities in the Company’s condensed consolidated balance sheet was $5,686 as of December 31, 2023 and was recognized as revenue during the three months ended March 31, 2024. The Company has also not experienced significant historical credit losses.
Performance Obligations
The Company is electing not to disclose the value of the remaining unsatisfied performance obligations with a duration of one year or less as permitted by ASU 2014-09, Revenue from Contracts with Customers. The Company had remaining unsatisfied performance obligations as of March 31, 2024 with expected duration of greater than one year of $14,850.
Note 4 – Segment Information
The Company’s operations consist of two operating segments, Manufacturing and Parts, and one reportable segment, Manufacturing. The Company’s Manufacturing segment includes new railcar manufacturing, railcar repairs, complete railcar rebody services, railcar conversions for repurposed use, and servicing railcars. The Company’s Parts operating segment is not significant for reporting purposes and has been combined with corporate and other non-operating activities as Corporate and Other.
Segment operating income is an internal performance measure used by the Company’s Chief Operating Decision Maker to assess the performance of each segment in a given period. Segment operating income includes all external revenues attributable to the segments as well as operating costs and income that management believes are directly attributable to the current production of goods and services. The Company’s internal management reporting package does not include interest revenue, interest expense or income taxes allocated to individual segments and these items are not considered as a component of segment operating income. Segment assets represent operating assets and exclude intersegment accounts, deferred tax assets and income tax receivables. The Company does not allocate cash and cash equivalents and restricted cash and restricted cash equivalents to its operating segments as the Company’s treasury function is managed at the corporate level. Intersegment revenues were not material in any period presented.
Revenues:
Manufacturing
155,728
77,599
Corporate and Other
Consolidated revenues
Operating income (loss):
8,279
5,628
(4,369
(4,531
Consolidated operating income
Consolidated interest expense
Consolidated other expense
Consolidated loss before income taxes
Depreciation and amortization:
1,273
932
123
140
Consolidated depreciation and amortization
Capital expenditures:
921
1,879
45
81
Consolidated capital expenditures
966
1,960
December 31,
Assets:
215,570
207,093
28,839
51,158
Total operating assets
244,409
258,251
Consolidated income taxes receivable
4,260
1,208
Consolidated assets
9
Geographic Information
Long Lived Assets(a)
United States
4,358
7,377
Mexico
68,715
69,826
73,073
77,203
(a) Long lived assets include property plant and equipment, net, railcars available for lease, net, and right-of-use (ROU) assets.
Note 5 – Fair Value Measurements
The following table sets forth by level within the fair value hierarchy the Company’s financial assets that were recorded at fair value on a recurring basis and the Company’s non-financial assets that were recorded at fair value on a non-recurring basis.
Recurring Fair Value Measurements
As of March 31, 2024
Level 1
Level 2
Level 3
Liabilities:
Foreign currency derivative asset
813
As of December 31, 2023
606
Non-recurring Fair Value Measurements
During the Three Months Ended March 31, 2024
During the Year Ended December 31, 2023
The fair value of the Company’s Warrant liability recorded in the Company’s financial statements, determined using the quoted price of the Company’s common stock, par value $0.01 per share (the “Common Stock”), in an active market, exercise prices of $0.01 per share and $3.57 per share, and number of shares exercisable at March 31, 2024 and December 31, 2023, is a Level 2 measurement.
The fair value of the Company’s foreign currency derivative asset determined using exit prices obtained from each counterparty, which are based on currency spot and forward rates at March 31, 2024 and December 31, 2023 in an active market, is a Level 2 measurement. See Note 15 - Derivatives.
The fair value of the Company's fleet of triple hopper aggregate railcars determined using a cost plus market approach for a portion of the assets and a market-based approach for the remainder of the assets at December 31, 2023, is a Level 3 measurement. In the first quarter of 2024, the Company gained possession of these railcars. The portion of railcars intended to be sold in their current condition were classified as assets held for sale, while the remaining railcars intended to be converted into a new car type were classified as inventory as of March 31, 2024.
10
Note 6 – Restricted Cash
The Company establishes restricted cash balances when required by customer contracts and to collateralize standby letters of credit. The carrying value of restricted cash approximates fair value.
The Company’s restricted cash balances are as follows:
Restricted cash from customer deposit
282
Restricted cash to collateralize standby letters of credit
103
Restricted cash to collateralize foreign currency derivatives
700
320
Total restricted cash and restricted cash equivalents
1,085
705
Note 7 – Inventories
Inventories, net of reserve for excess and obsolete items, consist of the following:
Raw materials
75,249
65,639
Work in process
21,703
31,138
Finished railcars
7,712
23,196
Parts inventory
5,114
5,049
Total inventories, net
Inventory on the Company’s condensed consolidated balance sheets includes reserves of $1,733 and $1,594 relating to excess or slow-moving inventory for parts and raw materials at March 31, 2024 and December 31, 2023, respectively.
Note 8 – Product Warranties
Warranty terms are based on the negotiated railcar sale, rebody or conversion contract, as applicable. The Company generally warrants that new railcars produced by it will be free from defects in material and workmanship under normal use and service identified for a period of up to five years from the time of sale. Changes in the warranty reserve for the three months ended March 31, 2024 and 2023 are as follows:
Balance at the beginning of the year
1,940
Current year provision
169
251
Reductions for payments, costs of repairs and other
(173
(186
Adjustments to prior warranties
(130
(71
Balance at the end of the year
1,934
Adjustments to prior warranties include changes in the warranty reserve for warranties issued in prior periods due to expiration of the warranty period, revised warranty cost estimates and other factors.
Note 9 – Revolving Credit Facility
Total outstanding debt under the Company’s revolving credit facility consists of $30,002 as of March 31, 2024 and $29,415 as of December 31, 2023.
As of March 31, 2024, a revolving line of credit maturing on October 31, 2024 exists in the maximum aggregate principal amount of up to $45,000, secured by a standby letter of credit in the principal amount of $25,000 and the Company’s accounts receivable. In connection with the standby letter of credit, the Company has agreed to pay an affiliate of the lender a fee due and payable in cash of $375 per quarter.
11
The standby letter of credit bears interest at the prime rate of interest (“Prime”) plus 1.5%, or 10% as of March 31, 2024. Advances secured by the Company’s accounts receivable bear interest at Prime plus 2%, or 10.5% as of March 31, 2024.
The fair value of debt approximates its carrying value as of March 31, 2024 and December 31, 2023.
Note 10 – Warrants
The Company issued warrants to OC III LFE II LP (“OC III LFE”) and various affiliates of OC III LFE (collectively, the “Warrantholder”) in previous years to purchase a number of shares of Common Stock equal to 23% (the “2020 Warrant”), 5% (the “2021 Warrant”), and 5% (the “2022 Warrant”) of the outstanding Common Stock (after giving effect to such issuance) on a fully-diluted basis at the time the warrants are exercised. The 2020 Warrant, 2021 Warrant, and 2022 Warrant each have a per share exercise price of $0.01 and a term of ten (10) years from date of issuance.
The 2020 Warrant, issued in November 2020, was exercisable for an aggregate of 8,644,388 and 8,712,618 shares of Common Stock as of March 31, 2024 and December 31, 2023, respectively. The 2021 Warrant, issued in December 2021, was exercisable for an aggregate of 1,879,215 and 1,894,047 shares of Common Stock as of March 31, 2024 and December 31, 2023, respectively. The 2022 Warrant, issued in April 2022, was exercisable for an aggregate of 1,879,215 and 1,894,047 shares of Common Stock as of March 31, 2024 and December 31, 2023, respectively. The Company also issued a warrant to the Warrantholder in May 2023 to purchase an aggregate of 1,636,313 shares of Common Stock (the “2023 Warrant”), exercisable for a term of ten (10) years from date of issuance with a per share exercise price of $3.57.
The 2020 Warrant, 2021 Warrant, 2022 Warrant and 2023 Warrant are collectively referred to herein as the “Warrant”. As of March 31, 2024, the Warrants is classified as a liability and subject to fair value remeasurement at each balance sheet date. The fair value of the Warrant at March 31, 2024 and December 31, 2023 was $52,454 and $36,801, respectively. The change in fair value of the Warrant is reported on a separate line in the condensed consolidated statements of operations.
Note 11 – Mezzanine Equity
In May 2023, the Company issued to OC III LFE 85,412 shares of non-convertible Series C Preferred Stock, $0.01 par value per share, with an initial stated and fair value of $85,412 or $1,000 per share (the “Preferred Stock”). As of March 31, 2024, 85,412 shares of the Preferred Stock remain issued and outstanding. The Company classifies the Preferred Stock as mezzanine equity (temporary equity outside of permanent equity) since a deemed liquidation event following a change of control may require redemption of the Preferred Stock that is not solely within the control of the Company.
The Preferred Stock ranks senior to the Common Stock with respect to payment of dividends and distribution of assets upon liquidation, dissolution and winding up. Dividends accrue at a rate of 17.5% per annum on the initial stated value of the Preferred Stock. Accrued dividends, whether or not declared, are cumulative. OC III LFE will not participate in any dividends paid to holders of Common Stock.
The Company may redeem outstanding shares of Preferred Stock at any time by payment of the initial stated value plus accrued dividends. If the Company has not redeemed all of the outstanding shares of Preferred Stock on or prior to the fourth anniversary of issuance, the dividend rate will increase by 0.5% for every quarter thereafter until redeemed in full (the “Dividend Rate Increase”). OC III LFE has the right to request the Company redeem all of the outstanding shares of Preferred Stock at any time after the sixth anniversary of issuance. If the Company does not redeem all of the outstanding shares of Preferred Stock within six months after receipt of a redemption request, OC III LFE will be entitled to certain limited voting rights.
The Preferred Stock has similar characteristics of an “Increasing Rate Security” as described by SEC Staff Accounting Bulletin Topic 5Q, Increasing Rate Preferred Stock. As a result, and as the Company has the ability to redeem all of the outstanding shares of the Preferred Stock before the occurrence of a Dividend Rate Increase, the discount on outstanding shares of Preferred Stock is considered an unstated dividend cost that is amortized over the period preceding commencement of the Dividend Rate Increase using the effective interest method, by charging imputed dividend cost against retained earnings, or additional paid in capital in the absence of retained earnings, and increasing the carrying amount of the outstanding shares of Preferred Stock by a corresponding amount. Accordingly, the discount is amortized over four years using the effective yield method. Issuance costs of $2,301 were allocated against the outstanding shares of the Preferred Stock upon issuance. The Company recognized discount amortization of $144 during the three months ended March 31, 2024. The Company did not recognize any discount amortization during the three months ended March 31, 2023.
12
Note 12 – Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income consist of the following:
Three months ended March 31, 2024
Pre-Tax
Tax
After-Tax
Pension liability activity:
Reclassification adjustment for amortization of net loss (pre-tax other income)
Foreign currency derivative asset activity:
Three months ended March 31, 2023
The components of accumulated other comprehensive income consist of the following:
Unrecognized pension income, net of tax of $6,282 and $6,282, respectively
1,794
1,759
Note 13 – Stock-Based Compensation
Total stock-based compensation was $760 and $(91) for the three months ended March 31, 2024 and 2023, respectively. As of March 31, 2024, there was $2,129 of unearned compensation expense related to restricted stock awards, which will be recognized over the remaining weighted average requisite service period of 27 months. As of March 31, 2024, there was $2,057 of unearned compensation expense related to time-vested stock options, which will be recognized over the remaining requisite service period of 27 months. As of March 31, 2024, there was no unearned compensation expense related to cash settled stock appreciation rights.
In June 2023, the Company issued 300,000 inducement stock options (the “Inducement Options”) outside of The FreightCar America, Inc. 2022 Long Term Incentive Plan to one individual. As of March 31, 2024, there was $286 of unrecognized compensation expense related to the Inducement Options, which will be recognized over the remaining requisite service period of 27 months.
Note 14 – Employee Benefit Plans
The Company has a qualified, defined benefit pension plan (the “Plan”) that was established to provide benefits to certain employees. The Plan is frozen and participants are no longer accruing benefits. Generally, contributions to the Plan were not less than the minimum amounts required under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and not more than the maximum amount that can be deducted for federal income tax purposes. The Plan assets are held by an independent trustee and consist primarily of equity and fixed income securities.
The components of net periodic benefit cost (benefit) for the three months ended March 31, 2024 and 2023, are as follows:
Pension Benefits
Interest cost
135
Expected return on plan assets
(75
(81
Amortization of unrecognized net income
95
The Company made no contributions to its defined benefit pension plan for the three months ended March 31, 2024 and 2023. The Company expects to make no contributions to its pension plan in 2024.
The Company also maintains qualified defined contribution plans, which provide benefits to employees based on employee contributions and employee earnings with discretionary contributions allowed.
13
Note 15 – Derivatives
The Company’s operations and expenditures in its normal course of business are subject to opportunities and risks related to foreign currency fluctuations. The Company currently utilizes foreign currency forward contracts to protect against downward currency exposure by hedging Mexican Peso denominated expenses against the risk of volatility in foreign currency exchange rates between the Mexican Peso and the U.S. Dollar.
During 2023 and 2024, the Company entered into forward contracts to hedge the Company’s anticipated and probable Mexican Peso denominated expenses against the foreign currency rate exposure. The contracts have terms between one and 12 months and require the Company to exchange currencies at agreed-upon rates at each settlement date. The counterparties to the contracts consist of a limited number of major domestic and international financial institutions. The Company classifies these contracts as cash flow hedges in accordance with ASC 815, Derivatives and Hedging. The Company does not have any non-designated derivatives.
The Company assesses the assumed effectiveness of the contracts at each reporting period. The foreign currency derivatives are recorded on the balance sheet at fair value. The Company records unrealized gains or losses related to changes in the fair value of the forward contracts in other comprehensive income as long as the contracts are assumed to be effective. Amounts accumulated in other comprehensive income (loss) are reclassified to the condensed consolidated statements of operations on the same line as the items being hedged when the hedged item impacts earnings or upon determination that the contract is no longer assumed to be effective.
The notional amounts of outstanding foreign currency derivatives are as follows:
Notional Amount
Derivative instruments designated as hedges:
Foreign currency derivatives
10,815
11,562
The fair value of outstanding foreign currency derivatives designated as hedges are as follows:
Fair Value
Prepaid expenses:
The pre-tax realized gain on foreign currency derivatives is recognized in the condensed consolidated statements of operations as follows:
Amount of (Gain) Recognized
Three Months EndedMarch 31,
Location of Realized (Gain) Recognized in the Condensed Consolidated Statements of Operations
Derivative instruments designated as cash flow hedges:
(231
14
Note 16 – Earnings (Loss) Per Share
The weighted-average common shares outstanding are as follows:
Numerator:
Accretion of financing fees
Accrued dividends on Series C Preferred Stock
(4,237
Net loss available to common stockholders - basic
(15,952
Net loss available to common stockholders - diluted
Denominator:
Weighted average common shares outstanding
17,128,417
16,792,292
Issuance of Warrants
12,451,765
9,753,171
Weighted average common shares outstanding - basic
Weighted average common shares outstanding - diluted
The Company computes earnings per share using the two-class method, which is an earnings allocation formula that determines earnings per share for Common Stock and participating securities. The Company’s participating securities are its grants of restricted stock which contain non-forfeitable rights to dividends. The Company allocates earnings between both classes; however, in periods of undistributed losses, they are only allocated to common shares as the unvested restricted stockholders do not contractually participate in losses of the Company. The Company computes basic earnings per share by dividing net income allocated to common shareholders by the weighted average number of shares outstanding during the period. Warrants issued in connection with the Company's long-term debt were issued at a nominal exercise price and are considered outstanding at the date of issuance. The 2023 Warrant was issued out-of-the money and the Company will apply the treasury stock method to the 2023 Warrant when computing earnings per share. Diluted earnings per share is calculated to give effect to all potentially dilutive common shares that were outstanding during the period. Weighted average diluted common shares outstanding include the incremental shares that would be issued upon the assumed exercise of stock options and the assumed vesting of nonvested share awards. For the three months ended March 31, 2024 and 2023, 4,781,274 and 2,086,898 shares, respectively, were not included in the weighted average common shares outstanding calculation as they were anti-dilutive.
Note 17 – Related Parties
The following persons are owners of Fabricaciones y Servicios de México, S.A. de C.V. (“Fasemex”): Jesús Gil, a director of the Company and former VP, Operations; and Alejandro Gil and Salvador Gil, siblings of Jesús Gil. Fasemex owns approximately 10.6% of the outstanding shares of Common Stock as of March 31, 2024 and provides steel fabrication services to the Company. The lessors of the Castaños Facility are Jesús Gil, Alejandro Gil, and Salvador Gil. Distribuciones Industriales JAS S.A. de C.V. (“DI”) is owned by Alejandro Gil and Salvador Gil and provides material and safety supplies to the Company. Maquinaria y equipo de transporte Jova S.A. de C.V (“METJ”) is owned by Jorge Gil, a sibling of Jesús Gil, and provides trucking services to the Company. Fasemex, DI, METJ, Jesús Gil, Alejandro Gil, Salvador Gil, and Jorge Gil are collectively referred to as the “Gil Family”.
The Company paid $7,647 and $5,636 to the Gil Family during the three months ended March 31, 2024 and 2023, respectively, related to steel fabrication services, rent and security deposit payments for the Castaños Facility, material and safety supplies, trucking services and royalty payments.
Commercial Specialty Truck Holdings, LLC (“CSTH”) is minority owned by James R. Meyer, a member of our Board, our former CEO, and beneficial owner of over 5% of our Common Stock. The Company sold specialty parts supplies in an amount equal to $208 to CSTH during the three months ended March 31, 2024. The Company sold no specialty parts supplies to CSTH during the three months ended March 31, 2023.
Related party asset on the condensed consolidated balance sheet of $902 as of March 31, 2024 includes other receivables of $188 from CSTH and other assets of $714 from the Gil Family. Related party accounts payable on the condensed consolidated balance sheet of $2,394 as of March 31, 2024 is payable to the Gil Family. Related party asset on the condensed consolidated balance sheet of $638 as of December 31, 2023 includes other receivables of $517 from the Gil Family and $121 from CSTH. Related party accounts payable on the condensed consolidated balance sheet of $2,478 as of December 31, 2023 is payable to the Gil Family.
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Note 18 – Income Taxes
The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items. The Company’s reported effective income tax rate was 18.2% and (2.3)% for the three months ended March 31, 2024 and 2023, respectively. The effective tax rate of 18.2% for the three months ended March 31, 2024 was higher than the effective tax rate for the three months ended March 31, 2023 primarily due to an increase in the mix of forecasted earnings and permanent items. The effective tax rate for the first quarter of 2024 varies from the U.S. statutory tax rate of 21% primarily due to earnings from international jurisdictions and permanent differences, predominantly Mexico, taxed at higher tax rates and a full valuation allowance in the U.S. The effective tax rate for the first quarter of 2023 was lower than the 21% U.S. statutory tax rate primarily due to earnings from international jurisdictions and permanent differences and discrete events, predominantly Mexico, taxed at higher tax rates and a full valuation allowance in the U.S.
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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 potential risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These potential risks and uncertainties relate to, among other things, the cyclical nature of our business; adverse economic and market conditions, including inflation; material disruption in the movement of rail traffic for deliveries; fluctuating costs of raw materials, including steel and aluminum; delays in the delivery of raw materials; our ability to maintain relationships with our suppliers of railcar components; successfully onboarding our new chief executive officer; the highly competitive nature of our industry; our reliance upon a small number of customers that represent a large percentage of our sales; the variable purchase patterns of our customers and the timing of completion; delivery and customer acceptance of orders; the risk of lack of acceptance of our new railcar offerings; and other competitive factors. The factors listed above are not exhaustive. Other sections of this Quarterly Report on Form 10-Q include additional factors that could materially and adversely affect our business, financial condition and results of operations. New factors emerge from time to time and it is not possible for management to predict the impact of all of these factors on our business, financial condition or results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, in order to reflect changes in circumstances or expectations or the occurrence of unanticipated events except to the extent required by applicable securities laws.
OVERVIEW
You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements.”
We are a diversified manufacturer of railcars and railcar components. We design and manufacture a broad variety of railcar types for transportation of bulk commodities and containerized freight products primarily in North America. We also provide railcar rebody services and railcar conversions that repurpose idled rail assets back into revenue service, supply railcar parts, and service freight cars. We have been manufacturing railcars since 1901.
Total new orders received for railcars for the three months ended March 31, 2024 were 384 units, consisting of 275 new railcars and 109 rebuilt railcars, compared to orders for 1,960 units, consisting of 1,770 new railcars and 190 rebuilt railcars for the three months ended March 31, 2023. Total backlog of unfilled orders was 2,075 units at March 31, 2024, compared to 2,914 railcars as of December 31, 2023. The estimated sales value of the backlog was $238 million and $348 million, respectively, as of March 31, 2024 and December 31, 2023. The decrease in the number of orders for new railcars for the three months ended March 31, 2024 compared to the prior year period is a reflection of mixed levels of confidence in the economic outlook.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2024 compared to Three Months Ended March 31, 2023
Our consolidated revenues for the three months ended March 31, 2024 were $161.1 million compared to $81.0 million for the three months ended March 31, 2023. Manufacturing segment revenues for the three months ended March 31, 2024 were $155.7 million compared to $77.6 million for the corresponding prior year period. The $78.1 million increase in Manufacturing segment revenues was primarily driven by an increase in the volume of railcar units delivered during the quarter, which includes the railcars impacted by the closure of the U.S.-Mexico border in December 2023. Railcar deliveries in the three months ended March 31, 2024 totaled 1,223 units, consisting entirely of new railcars, compared to 738 units in the same period of 2023, consisting of 639 new railcars and 99 rebuilt railcars. Corporate and Other revenues were $5.3 million for the three months ended March 31, 2024 compared to $3.4 million for the three months ended March 31, 2023.
Gross Profit
Our consolidated gross profit was $11.4 million for the three months ended March 31, 2024 compared to $7.5 million for the three months ended March 31, 2023. Manufacturing segment gross profit was $8.7 million for the three months ended March 31, 2024 compared to $6.4 million for the three months ended March 31, 2023. The $3.9 million increase in consolidated gross profit and $2.3 million increase in Manufacturing segment gross profit reflects a favorable volume variance partially offset by an unfavorable product mix.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses for the three months ended March 31, 2024 were $7.5 million compared to $6.4 million for the three months ended March 31, 2023. The $1.1 million increase in consolidated selling, general and administrative expenses for the three months ended March 31, 2024 was primarily due to a $0.9 million increase in stock-based compensation expenses. Manufacturing segment selling, general and administrative expenses were $0.5 million for the three months ended March 31, 2024 compared to $0.8 million for the three months ended March 31, 2023. The $0.3 million decrease in Manufacturing selling, general and administrative expenses for the three months ended March 31, 2024 was primarily due to a $0.2 million decrease in consulting expenses. Manufacturing segment selling, general and administrative expenses for the three months ended March 31, 2024 were 0.3% of revenue, compared to 1.0% of revenue for the three months ended March 31, 2023. Corporate and Other selling, general and administrative expenses were $7.0 million for the three months ended March 31, 2024 compared to $5.6 million for the three months ended March 31, 2023. The $1.4 million increase in Corporate and Other selling, general and administrative expenses is primarily a result of the previously mentioned increase in stock-based compensation expenses in the current year.
Operating Income (Loss)
Our consolidated operating income for the three months ended March 31, 2024 was $3.9 million compared to a $1.1 million consolidated operating income for the three months ended March 31, 2023 driven primarily by the previously mentioned gross profit, partially offset by the previously mentioned increase in selling, general and administrative expenses. Operating income for the Manufacturing segment was $8.3 million for the three months ended March 31, 2024 compared to an operating income of $5.6 million for the three months ended March 31, 2023, reflecting the increase in railcars delivered during the three months ended March 31, 2024 compared to the 2023 period. Corporate and Other operating loss was $4.4 million for the three months ended March 31, 2024 compared to $4.5 million for the three months ended March 31, 2023. The $0.1 million decrease in operating loss is primarily a result of the decrease in Corporate and Other gross profit, offset by the previously mentioned increase in stock-based compensation expenses.
Income Taxes
Our income tax benefit was $2.6 million for the three months ended March 31, 2024 compared to our income tax provision of $0.1 million for the three months ended March 31, 2023 primarily due to an increase in the mix of forecasted earnings and permanent items.
Net Loss
As a result of the changes and results discussed above, as well as the change in fair value of the warrant liability, net loss was $11.6 million for the three months ended March 31, 2024 compared to $5.0 million for the three months ended March 31, 2023. For the three months ended March 31, 2024, basic and diluted net loss per share was $0.54 compared to $0.19 for the three months ended March 31, 2023.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are our cash and cash equivalent balances on hand and our credit and debt facilities outlined below.
Revolving Credit Facility
As of March 31, 2024, a revolving line of credit maturing on October 31, 2024 existed in the maximum aggregate principal amount of up to $45,000, secured by a standby letter of credit in the principal amount of $25,000 and the Company’s accounts receivable. In
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connection with the standby letter of credit, the Company has agreed to pay an affiliate of the lender a fee due and payable in cash of $375 per quarter.
Warrant
The Company issued warrants to OC III LFE II LP (“OC III LFE”) and various affiliates of OC III LFE (collectively, the “Warrantholder”) in previous years. In May 2023, the Company issued a warrant to OC III LFE to purchase 1,636,313 shares of the Company’s Common Stock (the “2023 Warrant”), exercisable for a term of ten (10) years from date of issuance with a per share exercise price of $3.57.
Preferred Shares
In May 2023, the Company issued to OC III LFE 85,412 shares of non-convertible Series C Preferred Stock, $0.01 par value per share with an initial stated and fair value of $85,412 or $1,000 per share (the “Preferred Stock”). As of March 31, 2024, 85,412 shares of the Preferred Stock remain issued and outstanding. The Company classifies the Preferred Stock as mezzanine equity (temporary equity outside of permanent equity) since a deemed liquidation event following a change of control may require redemption of the Preferred Stock that is not solely within the control of the Company.
The Preferred Stock ranks senior to the Common Stock with respect to payment of dividends and distribution of assets upon liquidation, dissolution and winding up. Dividends accrue at a rate of 17.5% per annum on the initial stated value. Accrued dividends, whether or not declared, are cumulative. The Preferred Stock will not participate in any dividends paid to the holders of shares of Common Stock.
The Company may redeem the outstanding Preferred Stock at any time by payment of the initial stated value plus accrued dividends. If the Company has not redeemed on or prior to the fourth anniversary of issuance, the dividend rate will increase by 0.5% for every quarter thereafter until redeemed in full. OC III LFE has the right to request the Company redeem at any time after the sixth anniversary of issuance. If the Company does not redeem within six months after receipt of a redemption request, OC III LFE will be entitled to certain limited voting rights.
Additional Liquidity Factors
Our restricted cash, restricted cash equivalents and restricted certificates of deposit balances were $1.1 million and $0.7 million as of March 31, 2024 and December 31, 2023, respectively. Restricted deposits of $0.3 million as of each of March 31, 2024 and December 31, 2023 relate to a customer deposit for the purchase of railcars. Restricted deposits of $0.1 million as of each of March 31, 2024 and December 31, 2023 are used to collateralize standby letters of credit with respect to performance guarantees. The standby letters of credit outstanding as of March 31, 2024 are a requirement as long as the performance guarantees are in place. Restricted deposits of $0.7 million and $0.3 million as of March 31, 2024 and December 31, 2023, respectively, are used to collateralize foreign currency derivatives.
Based on our current level of operations and known changes in planned volume based on our backlog, we believe that our cash balances will be sufficient to meet our expected liquidity needs for at least the next twelve months. Our long-term liquidity is contingent upon future operating performance and our ability to continue to meet financial covenants under our revolving credit facilities, any other indebtedness and the availability of additional financing if needed. We may also require additional capital in the future to fund working capital as demand for railcars increases, payments for contractual obligations, organic growth opportunities, including new plant and equipment and development of railcars, joint ventures, international expansion and acquisitions, and these capital requirements could be substantial.
Based upon our operating performance and capital requirements, we may, from time to time, be required to raise additional funds through additional offerings of our equity or debt and through long-term borrowings. There can be no assurance that long-term debt, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. Our failure to raise capital if and when needed could have a material adverse effect on our results of operations and financial condition.
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Cash Flows
The following table summarizes our cash flow activities for the three months ended March 31, 2024 and 2023:
Net cash used in:
Operating activities
Investing activities
Financing activities
Operating Activities. Our net cash used in operating activities reflects net loss adjusted for non-cash charges and changes in operating assets and liabilities. Cash flows from operating activities are affected by several factors, including fluctuations in business volume, contract terms for billings and collections, the timing of collections on our contract receivables, processing of bi-weekly payroll and associated taxes, payments to our suppliers and other operating activities. As some of our customers accept delivery of new railcars in train-set quantities, variations in our sales lead to significant fluctuations in our operating profits and cash from operating activities.
Our net cash used in operating activities for the three months ended March 31, 2024 was $25.3 million compared to net cash used in operating activities of $7.7 million for the three months ended March 31, 2023. Our net cash used in operating activities for the three months ended March 31, 2024 reflects changes in working capital, including increases in accounts receivable of $28.6 million, offset by decreases in inventory of $17.0 million and in accounts payable of $7.9 million. The increase in accounts receivable relates to the timing of collections with current railcar builds based on contractual payment terms. Decreases in accounts payable and inventory relate to inventory on hand at December 31, 2023 used in production of railcars delivered in the first quarter of 2024. Our net cash used in operating activities for the three months ended March 31, 2023 reflects changes in working capital, including increases in inventory of $19.7 million offset by decreases in VAT receivable of $3.0 million and increases in accounts payable of $9.7 million.
Investing Activities. Net cash used in investing activities for the three months ended March 31, 2024 was $1.0 million and consisted of capital expenditures related to the expansion of the Castaños Facility. Net cash used in investing activities for the three months ended March 31, 2023 was $2.0 million and consisted of capital expenditures related to the construction in progress for the Castaños Facility operations.
Financing Activities. Net cash used in financing activities for the three months ended March 31, 2024 was $0.3 million which included net borrowings on revolving line of credit of $0.6 million and principal payments on the finance lease of $0.8 million. Net cash used in financing activities for the three months ended March 31, 2023 was $0.4 million which included net borrowings on revolving line of credit of $0.2 million, principal payments on the finance lease of $0.1 million and employee stock settlements of $0.1 million.
Capital Expenditures
Our capital expenditures were $1.0 million in the three months ended March 31, 2024, compared to $2.0 million in the three months ended March 31, 2023. We anticipate capital expenditures during 2024 to be in the range of $5.0 million to $7.0 million, primarily related to maintenance of current production lines at the Castaños Facility.
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Item 4. Controls and Procedures.
Management’s Report on Internal Control over Financial Reporting
The Company’s management evaluated, with the participation of the Company’s principal executive officer and principal financial officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of March 31, 2024. Based on their evaluation, the Company’s management concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2024.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act) during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings.
From time to time, the Company is involved in certain pending and threatened legal proceedings in the normal course of business. In the opinion of management, the Company is not aware of any such proceedings that are expected to be material to the Company’s consolidated financial condition, results of operations, or cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Item 6. Exhibits.
10.1
Amendment No. 6 to the Term Loan Credit Agreement dated as of January 30, 2023 (incorporated by reference to Exhibit 10.22.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the Commission on March 27, 2023).
10.2
Amendment No. 7 to the Term Loan Credit Agreement dated as of February 27, 2023 (incorporated by reference to Exhibit 10.22.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the Commission on March 27, 2023).
10.3
Royalty Agreement, dated January 23, 2024, by and between the Company and Alejandro Gil Benavides.
10.4
Royalty Agreement, dated January 23, 2024, by and between the Company and Jesús Salvador Gil Benavides.
10.5
Royalty Agreement, dated January 23, 2024, by and between the Company and Salvador Gil Benavides.
10.6
Termination Agreement dated January 23, 2024, by and among the Company, Fabricaciones y Servicios de México, S.A. de C.V., Agben de Mexico, S.A. de C.V., Industrial Mexicana Fasemex, S.A. de C.V., Proveedora Industrial para el Manejo de Materiales, S.A. de C.V. and Fasemex, Inc.
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 8, 2024
By:
/s/ NICHOLAS J. RANDALL
Nicholas J. Randall, President and Chief Executive Officer
(Principal Executive Officer)
/s/ MICHAEL A. RIORDAN
Michael A. Riordan, Vice President, Finance, Chief Financial Officer and Treasurer (Principal Financial Officer)
/s/ JUAN CARLOS FUENTES SIERRA
Juan Carlos Fuentes Sierra, Corporate Controller and Chief Accounting Officer
(Principal Accounting Officer)