FreightCar America (NASDAQ: RAIL) intends to close its Shoals manufacturing facility in Alabama and move all its operations to Mexico, the railcar manufacturer said Thursday.
The Chicago-based company already operates in Castaños, Mexico, via a 50-50 venture with Fabricaciones y Servicios de México, S.A. de C.V., also known as Fasemex. FreightCar America is seeking to acquire the remaining 50% and consolidate all of its production there by January. It has signed a letter of intent and is negotiating the transaction.
The pandemic-induced downturn in rail volumes from earlier this year exacerbated the “current realities of depressed railcar demand,” FreightCar America said. The company attributed its decision to the need to adopt a more flexible business structure, which would enable the company to realign costs to the near-term demand environment.
Earlier this year, FreightCar America temporarily shut down the Shoals facility, located in Cherokee, Alabama, because of a reported positive case of the coronavirus. And in late 2019, the manufacturer closed a facility in Roanoke, Virginia.
“The efforts of our Shoals team helped us to reduce our breakeven production levels by roughly one-third since the start of the plan. However, the ongoing impact of the industry downturn has been further intensified by the COVID-19 pandemic and required an additional and significant response to both protect our franchise and reposition the business for immediate success post-downturn,” said FreightCar America President and CEO Jim Meyer.
The company said the action could result in savings of more than $20 million in annual fixed costs and lower its production breakeven to less than 2,000 railcars per year.
As a result of these measures, FreightCar America expects pretax cash charges of approximately $6 million to $8 million by the end of the first quarter of 2021 because of employee-related and other shutdown costs.
FreightCar America said the Castaños facility has the capacity to expand production capacity. The manufacturing facility recently began working on its first order, and a second production line could be operational by year’s end. Additional lines also could be added later should market conditions improve. Each production line would have a capacity of approximately 1,000 cars per year.
“The Castaños plant is the newest purpose-built railcar manufacturing facility in Mexico and we have the ability to increase its scale as market demand rebounds. It is roughly one-fifth the size of Shoals and will lower our fixed costs by approximately $20 million per year,” Meyer said. “The consolidation will significantly reduce our breakeven production levels from 6,000 railcars before our ‘Back-to-Basics’ plan was started to under 2,000 railcars per year once the new plant is fully operational. To date, we have hired a very experienced workforce at Castaños, have started production on the first line and are preparing for [Association of American Railroads] certification.”
The company expects to wrap up production at the Shoal facility by the end of this year, although it intends to produce railcars there through December. It plans to sell some of its assets at the Shoals facility. Its landlord at the Shoals facility is the Retirement Systems of Alabama.
“Today’s news is both a sad end and a new beginning for FreightCar America. We owe our Shoals team a great deal of gratitude and thank them for everything they have done for the company. We will provide transition assistance for them as part of the planned shutdown,” Meyer said. “As we look forward, we do so with an eye to become the lowest cost and highest quality producer in our industry. We will operate from a new position of strength and our portfolio will not only be more competitive, it will be broader in scope and capability given our improved cost structure.”
Meyer continued, “We remain committed to completing the work against the 750-to-1,000 delivery goal we set for the second half of 2020. Our customers have been very consistent on the importance of the company as an alternative supplier, and we believe they will be highly supportive of these decisions as today’s announcement makes us a much stronger partner moving forward. Lastly, we ended the second quarter with over $52 million in cash and cash equivalents and will continue to prioritize our balance sheet while we invest prudently in our future through today’s strategic announcement.”
FreightCar America designs and produces railcars such as open top hopper cars, covered hopper cars, intermodal and non-intermodal flat cars, mill gondola cars, coil steel cars, boxcars and coal cars, and it also specializes in the conversion of railcars for repurposed use.
It has other facilities in Johnstown, Pennsylvania, and Shanghai.
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