FreightCar America anticipates challenging headwinds

A photograph of a railcar.

FreightCar America (NASDAQ: RAIL) is starting to ramp up railcar production, but its executives warned that the company could see an extended downturn that includes high volumes of railcars in storage.

“We are planning for a prolonged, deep down cycle, and one that requires us to make adjustments to both the direction and speed to what we have focused on over the past couple of years,” said FreightCar America President and CEO Jim Meyer during the company’s first-quarter earnings call on Monday.

Meyer also said operations are “returning to light but meaningful production” at its Shoals facility in Alabama, with two out of four production lines already in service. A third line is in the early stages of starting up, he said.

FreightCar America hasn’t received any cancellation requests for ordered railcars, although the company won’t be building any new railcars if there isn’t a firm order behind them, Meyer said.

The company is also proceeding with plans to build a manufacturing plant in Castaños, Mexico. The plant is installing equipment through June, and FreightCar America hopes to secure a first order for the plant so that it can start production there sometime in the third quarter. 

FreightCar America has said previously that its joint venture with Fabricaciones y Servicios de México, S.A. de C.V. (Fasemex) to build railcars in Castaños was part of the company’s efforts to improve operating efficiency by lowering production costs and consolidating its manufacturing footprint.

“With our industry in a downturn and available capacity at near-historic highs, we will be entering an extremely competitive marketplace, potentially for the next several years. Because of this, we need to be in Mexico more than ever,” Meyer said.

FreightCar America also received a loan from the CARES Act’s Paycheck Protection Program, Meyer said. 

First-quarter financials

FreightCar America posted a net loss of $16.9 million, $1.29 per diluted share, in the first quarter of 2020, compared with a net loss of $14 million, or $1.12 per diluted share, for the first quarter of 2019.

First-quarter revenue totaled $5.2 million on deliveries of 11 units, compared with $70.7 million for the same period a year ago. But the company’s backlog was 1,939 railcars worth approximately $221 million in the first quarter, compared with 1,650 railcars a year ago. 

Selling, general and administrative expenses were $7.4 million in the first quarter, compared with $7.7 million in 2019. FreightCar America’s total assets were worth $251 million, of which $60.5 million was cash, compared with $245 million, of which nearly $66.6 million was cash, in the first quarter of 2019.

Source: FreightCar America

Meyer said the company has been deploying a “Back to Basics” strategy for more than two years. The strategy, which consists of changes to the company’s cost structure and manufacturing footprint, focuses on increasing the company’s liquidity so that FreightCar America can be prepared when demand for rail equipment rebounds.

On the call, Meyer highlighted some of the ways FreightCar America has been cutting costs, such as reducing material costs by an average of $5,000 per railcar; closing the Roanoke, Virginia, facility, which saves $5 million in fixed costs; exiting two manufacturing facilities; and shrinking the company’s square footage at the Shoals facility in Alabama. A new agreement at the Shoals facility, which will take effect in January 2022, is expected to generate cost savings of $7 million per year.

“We were obviously disappointed with our delivery figures for the quarter, a result of timing and weakness in the backlog, line startups in the quarter, and lost production days at the end of the quarter due to COVID-19,” Meyer said in a release. “However, our Shoals facility is back in production, and based on what we know today, we expect deliveries to ramp up as we move through the year. Our backlog increased sequentially, and we’ve seen no order cancellations to date. We understand we are in a very uncertain world, and we are planning for a number of possible scenarios as we move forward.”

Meyer also said the company is working to ensure safe conditions for its workers. The two workers who contracted COVID-19, forcing the Shoals facility to temporarily halt production in early April, are now healthy and back at work, he said.