FreightCar America is ready to handle any increase in tank car demand should federal regulators speed up the timeline to replace or retrofit DOT-111 tank cars to DOT-117 cars, company executives said during the rail car manufacturer’s first-quarter 2023 earnings call.
Regulators are considering hastening the timeline to fully implement DOT-117 tank cars into the U.S. rail car pool from 2029 to 2025 in light of rail safety concerns following the Feb. 3 derailment of a Norfolk Southern train in East Palestine, Ohio.
Chicago-headquartered FreightCar America (NYSE: RAIL) does not manufacture flammable liquid tank cars such as the DOT-117 model.
However, if other rail car manufacturers are busy producing DOT-117 tank cars, that could leave the market open for FreightCar America to produce tank cars that carry nonflammable material, officials said during the company’s earnings call Tuesday. Such tank cars would carry commodities such as vegetable oils.
“I’ll just say that we believe that that regulation is likely to occur and that will probably create some opportunities for us. … I do believe that it’s going to have an impact on the demand for cars that are in the non-hazmat service,” Matt Tonn, FreightCar America chief commercial officer, said.
FreightCar America garnered approval from the Association of American Railroads for three tank car designs, which consist of three car types “that really are the core of the market … and cover a disproportionately favorable percentage of the tank car market,” President and CEO Jim Meyer said.
As the company looks ahead, the supply chain issues that FreightCar America expects to manage are partly related to market dynamics facing the freight rail industry at large. The Class I railroads have been struggling with hiring and having a sufficient labor force, and they are also struggling with their material suppliers, Meyer said.
These hindrances are “affecting everybody’s output and on-time delivery. And obviously, when parts don’t come in on time, our cars don’t get built the way they were intended to get built, and they don’t ship when they’re intended to be shipped. So it just adds all sorts of unwanted inefficiencies on our end,” Meyer said.
To compensate, FreightCar America has developed a longer planning horizon with suppliers because the company knows what rail cars it’s planning to build this year, Meyer said. The company is also making further investments into its fabrication shop to double its capacity.
The market dynamics FreightCar America experienced in 2022 also provide the company with “a very good understanding of where the chronic pain points are,” Meyer said.
In prepared remarks, Meyer said the company entered into a refinancing agreement that will close in May. That refinancing will provide FreightCar America with additional capital to invest in new initiatives to accelerate the next phase of growth as well as help to eliminate debt on the balance sheet, he said.
The company expects to grow its production lines operating in Mexico from three to four by late summer, and it anticipates doubling the capacity of its paint shop. These efforts will enable the facility to produce 5,000-plus units per year.
FreightCar America had a backlog of 2,445 rail cars valued at $288 million at the close of 2022. Orders in 2022 totaled 3,208 rail cars, with 1,066 booked in the fourth quarter.
First-quarter 2023 revenue was $364.8 million, up 80% year over year amid deliveries of 3,184 rail cars.
The company sustained a net loss of $9.7 million, or 37 cents per share, and an adjusted net loss of $8.1 million, or 31 cents per share, in the first quarter. This is compared to net income of nearly $1.2 million, or 6 cents per share, in the first quarter of 2022.
The net loss in the first quarter was due primarily to noncash items, including a $4.5 million impairment on leased rail cars, one-time Mexican VAT costs of $1.9 million and noncash income of $4.7 million due to the change in fair market value of the warrant liability, according to the company.
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