FreightCar America Derailed by Slowing Demand, Rising Costs

FreightCar America, Inc. (RAIL) manufactures and sells freight cars used for hauling coal, bulk commodities, steel and other metals, forest products, and automobiles for the North American market.

RAIL held its conference call on May 1, 2008, in conjunction with first quarter of fiscal 2008 earnings (3/31/2008). The company is being impacted by a short term slowdown in demand and rising material costs that it is having difficulty passing through fully to customers.

Financial Highlights

Revenues - $95.1 million.
Net income - $1.1 million.
Earnings per share - $0.10.
Order activity - 2,673 units.
Backlog of unfilled orders - 6,785 railcars. (1,450 units under firm contract)
Railcar deliveries - 1,287 units.
Cash and cash equivalents - $161.7 million.

Outlook on Coal Markets

“Coal export activity increased 19.2% in 2007 as compared to 2006 levels. This boost in activity has carried over into the first quarter and is expected to continue throughout 2008, providing a positive impact on car loadings over the remainder of this year.”

Short term – “In the near term, we expect the overall market for coal car deliveries to remain relatively soft in 2008.”

Long term – Strong demand as coal stays the fuel of choice for electricity generation in the United States – “During the next six years, approximately 75 coal-fired power plants are expected to come online, which will require approximately 40,000 coal cars. Of these 75 plants, 47 are currently either under construction, near construction or permitted for construction. These 47 plants are expected to add 24,250 megawatts of coal-fired capacity requiring approximately 20,000 coal cars.”

Management Comments

“While we've certainly felt the pressure of this difficult operating environment, our continued execution on our strategy of reducing the manufacturing footprint and a broad focus on cost reduction has positioned us to weather the current industry cycle.”

“As we navigate through this difficult stage of our industry cycle, we are facing significantly lower volume levels, which have generated pricing pressure with a corresponding impact on margins. Industry competitors are aggressively pricing products with both sales and lease rates, fostering pricing declines approaching the high single-digit percent. In our opinion, we believe that these lease rates on new railcars do not cover the owners' cost of capital.”

“We are seeing increases specifically on material costs such as base metals, both steel and aluminum. And we are subject to a variety of surcharges on raw materials and components. These surcharges are highly unpredictable and may further erode our margins.”

“The railcar sector continues to be affected by intense pricing competition, including below-market lease rates.”

Other

RAIL is closing the Johnstown, Pennsylvania factory due to higher costs relative to other facilities. (Since the conference call, RAIL lost an arbitration ruling with the United Steelworkers of America regarding the plant. The impact according to the company will be a “one-time charge of between $20.0 million and $24.5 million with the corresponding impact on cash flow of between $13.0 million and $17.5 million. This would result in an adverse impact on earnings per share of between $1.11 and $1.32 for the quarter.”)

Q & A

Second quarter orders?

“…but the order activity level for Q2 is, I'd say we are content with it at this time.”

Backlog?

“…most of the backlog is coal right now.”

Disclosure - No position.

Comments

[RichardSchweitzer]

Does RAIL produce any ship containers?

[WillMorrissett]

They produce the cars that haul single and double-stacked containers. They do not actually make containers.