FreightCar America Justifies Production Move To Mexico

The COVID-19 pandemic, high number of railcars in storage and low rail volumes hastened FreightCar America RAIL decision to move all of its railcar production to Mexico.

In September, FreightCar America said it would close its Shoals facility in Alabama and move all of its railcar production to the Castaños facility in Mexico by 2021. It had previously taken part in a 50-50 joint venture (JV) for the facility but it acquired the other 50% from the JV partner this fall, meaning that FreightCar America now fully owns the facility.

"We must change our cost structure and we must do so quickly. We cannot afford to sustain the current level of losses and we must put quarters like this one behind us once and for all. This move gets us to where we need to be," said FreightCar America Chief Commercial Officer Matt Tonn during his company's third-quarter earnings call Tuesday.

The company reported that it sustained a net loss of $40.3 million, or $3.03 per diluted share, in the third quarter of 2020 compared with a net loss of $35.7 million, or $2.83 per diluted share, a year ago.

Tonn explained further, "The bottom line is this was the best solution available to us. We will not find a better deal. And remember that we are in the middle of a pandemic, causing great uncertainty. We need to reposition this business and we need to do it now. We need this capital to complete the restructuring, reassure our customers that we have the same power, backstop the business through the pandemic and fund our future working capital and growth investment needs."

By moving all of its railcar production to Mexico, FreightCar America hopes to solidify its role as a "pure-play manufacturer" as opposed to having a lease fleet to fall back on like its competitors, according to FreightCar America President and CEO Jim Meyer.

"Many people know the majority of railcars purchased every year are purchased by leasing companies. Our built competitors, of course, compete in that space as well. We don't," Meyer said. "And so the idea that a leasing company can come and work with us and know that there's not a competitive or conflicting discussion potentially, it resonates very well with our customers."

Meyer continued, "So our position is a pure-play manufacturer. But because that's our only business principally, we need to be, frankly, very, very good. We need to be the very best at it. And we think we can do that. And we think what we'll define best is a combination of cost and quality and on-time performance. So that's the position and….the ideas for the underlying structure behind it."

The company expects its "break-even economics" to be less than 2,000 cars per year, and the facility will have the ability to scale quickly to increase production, Meyer said.

The facility is now fully certified by the Association of American Railroads, and FreightCar America will begin shipping its first railcars from the facility this week, according to Meyer.

With production moving to Castaños, FreightCar America is closing its Shoals facility in Cherokee, Alabama, and all railcar production will move to Castaños by early 2021. It has also negotiated the early termination of its lease at Shoals.

The production of aftermarket parts will remain in Richland, Pennsylvania, according to Meyer.

Third-quarter financial results

FreightCar America expects the majority of its backlog of 2020 orders to be shipped in the second half of the year. The company shipped fewer cars in the third quarter so that it could shift some of its orders from Shoals to Castaños and take advantage of the certification timing and the improved economics of the new facility, said FreightCar America Chief Financial Officer Chris Eppel.

The company expects to deliver between 750 and 850 railcars in the second half of 2020.

FreightCar America's order backlog was 1,776 railcars at the end of the third quarter, compared with 1,839 railcars at the end of the second quarter. Backlog value is estimated at $195 million.

Gross loss was $4.1 million in the third quarter, improving from a gross loss of $6.1 million in the second quarter of 2020 and a gross loss of $5.4 million in the third quarter of 2019 amid cost reductions and a mix of higher-margin railcars, offset by lower production volumes.

Meanwhile, the third-quarter net loss of $40.3 million was partially attributable to $30.1 million in restructuring impairment charges that arose from FreightCar America's exit from its Shoals facility, Eppel said.