Business context and reporting period
The Greenbrier Companies, Inc. (NYSE: GBX) filed this unaudited Form 10-Q for its fiscal third quarter ended May 31, 2021. Greenbrier manufactures railcars and marine vessels, provides wheel, repair and parts services, and leases railcars and manages rail fleets.
Management described results as reflecting a cyclical freight-rail downturn that began before COVID-19 and was intensified by the pandemic. It said production and deliveries were increasing as the market entered a recovery phase.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Three months ended May 31, 2021 | Prior year | Nine months ended May 31, 2021 | Prior year |
|---|---|---|---|---|
| Revenue | $450.1 | $762.6 | $1,148.8 | $2,155.8 |
| Operating earnings (loss) | $25.7 | $66.8 | $(2.1) | $147.0 |
| Net earnings attributable to Greenbrier | $19.7 | $27.8 | $0.7 | $49.1 |
| Diluted EPS | $0.59 | $0.83 | $0.02 | $1.47 |
| Margin as a percentage of revenue | 16.7% | 14.1% | 11.6% | 13.3% |
- Quarterly revenue fell 41.0%, mainly as manufacturing revenue declined 47.6% and railcar deliveries fell 48.1% to 2,800 units. Nine-month revenue fell 46.7%; manufacturing deliveries declined 52.0% to 7,200 units.
- Quarterly margin improved year over year despite lower volume, partly due to a $15.8 million favorable resolution of international warranty and other loss contingencies and a lease-transfer fee. Nine-month manufacturing margin was pressured by low production volumes and pandemic-related operating costs.
- Quarterly selling and administrative expense was $49.2 million, broadly flat year over year. Nine-month expense decreased $22.1 million, or 13.9%, to $136.4 million as a result of cost controls, lower headcount-related costs and reduced activity.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was a use of $123.8 million, compared with cash provided of $89.0 million in the prior-year period. Management attributed the change primarily to working-capital investment as production increased and lower earnings.
- Investing cash outflow was $49.3 million, including $62.8 million of capital expenditures; financing cash outflow was $42.0 million. Cash and restricted cash declined $205.2 million from August 31, 2020 to $636.9 million at May 31, 2021, including $628.2 million of unrestricted cash.
- At May 31, reported revolving notes were $325.2 million and notes payable, net, were $835.0 million. Greenbrier reported $221.3 million available to draw under committed credit facilities and stated it was in compliance with restrictive covenants.
- In April 2021, Greenbrier issued $373.8 million of 2.875% convertible senior notes due 2028 and used part of the proceeds to retire $257.1 million of convertible notes due 2024. The transactions resulted in a $4.8 million debt-extinguishment loss. The company also repurchased $20.0 million of shares in privately negotiated transactions connected with the refinancing.
- Management said existing funds, expected operating cash generation and financing sources should be sufficient for anticipated debt repayments, working capital, planned capital expenditures, affiliate investments and dividends over the next 12 months.
Outlook, commentary and risks
- Management expected recovery and market momentum during the latter half of calendar 2021, with increased production and deliveries, assuming no further COVID-19 or geopolitical shocks. The filing provides no specific earnings or revenue guidance.
- Railcar backlog was 24,800 units with an estimated value of $2.58 billion; marine backlog was $39 million. Management cited railcar deliveries into 2024 and marine deliveries into 2022, while cautioning that backlog is not necessarily indicative of future results and may be modified or canceled.
- Greenbrier’s refined leasing strategy targets approximately $200 million of annual growth in its owned fleet of Greenbrier-built leased railcars. Its newly formed GBX Leasing joint venture began operations in April, is more than 90% owned by Greenbrier, and had a $300 million non-recourse warehouse facility. Management expects the venture to be leveraged approximately 3:1 debt to equity.
- Principal risks include continued pandemic and cyclical market disruption; customer order delays or cancellations; supplier, labor and logistics constraints; cost and inflation pressures; foreign-exchange and interest-rate movements; dependence on a limited number of customers; and the ability to lease railcars at satisfactory rates and realize expected residual values.
- Environmental contingencies remain uncertain. Greenbrier has not determined its potential liability, if any, for Portland Harbor remediation or natural-resource damages and cannot estimate a potential loss range. The filing also discusses potential remediation expenses at its Portland property and assumed legacy railcar liabilities related to the ARI acquisition.
- Management reported that the annual goodwill impairment test in the third quarter found no impairment. A quarterly dividend of $0.27 per share was declared on July 9, 2021.
Important facts for investors to verify
- Whether backlog converts to deliveries and revenue on expected timing and terms, including any changes to product mix, pricing or customer orders.
- Whether rising production improves cash generation, given the substantial operating cash outflow and working-capital investment in the first nine months.
- How much quarterly profitability depended on the $15.8 million warranty and contingency resolution and the lease-transfer fee, and whether these benefits recur.
- GBX Leasing’s fleet growth, financing terms, leverage and returns, alongside Greenbrier’s available borrowing capacity and covenant headroom.
- Potential financial exposure from Portland Harbor and other environmental or legacy liabilities, which the filing says cannot yet be estimated clearly.