Greenbrier Companies, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended February 28, 2021. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Business context and reporting period
Greenbrier manufactures railcars and marine vessels, operates a Wheels, Repair & Parts business, and leases railcars and provides fleet services. Results reflect a freight-rail market downturn that began before COVID-19 and was intensified by the pandemic. The company reported approximately 24,900 manufacturing backlog units valued at $2.51 billion, with railcar deliveries extending into 2024 and marine deliveries into 2022. Backlog is not a guarantee of future revenue and may be modified or canceled.
Key financial metrics
| Metric | Q2 FY2021 | Six months FY2021 | Comparison |
|---|---|---|---|
| Revenue | $295.6 million | $698.6 million | Down 52.6% and 49.9%, respectively, year over year |
| Gross margin | $17.7 million; 6.0% of revenue | $58.3 million; 8.4% of revenue | Prior-year margins were 13.8% and 12.8% |
| Operating income (loss) | $(25.7) million | $(27.8) million | Prior-year income was $38.4 million and $80.2 million |
| Net income (loss) attributable to Greenbrier | $(9.1) million; $(0.28) per diluted share | $(19.0) million; $(0.58) per diluted share | Prior-year income was $13.6 million and $21.3 million |
| Cash from operating activities | Not separately presented in the supplied filing text | $(94.8) million | Prior-year six-month use was $133.2 million |
| Capital expenditures | Not separately presented in the supplied filing text | $50.4 million | Prior-year six-month amount was $40.8 million |
At February 28, 2021, cash and cash equivalents were $593.5 million, restricted cash was $8.6 million, revolving notes were $275.8 million, and notes payable, net, were $793.2 million. Gross debt on these balance-sheet line items totaled approximately $1.07 billion. The company reported $115.4 million available under committed credit facilities and compliance with debt covenants. Cash and restricted cash declined $240.0 million from August 31, 2020.
Material changes versus the prior comparable period
- Manufacturing was the primary source of the decline: Q2 revenue fell 58.8%, railcar deliveries fell 54.1% to 1,700, and segment operating results shifted from $46.1 million profit to a $17.2 million loss. For the six-month period, deliveries fell 54.2% to 4,400.
- Management attributed weaker manufacturing margins to lower production volumes and pandemic-related operating costs. Q2 manufacturing margin was 0.2%, versus 13.8% a year earlier.
- Wheels, Repair & Parts revenue declined 21.5% in Q2 and 22.9% for the six months, mainly on lower volumes and demand.
- Leasing & Services revenue declined 48.7% in Q2 and 25.6% for the six months, primarily because of fewer sales of railcars purchased from third parties. Segment operating profit also fell, including from lower equipment-disposition gains.
- Selling and administrative expense decreased 20.5% in Q2 and 20.0% for the six months, reflecting headcount reductions and lower controllable spending. Equipment-disposition gains were also substantially lower than in the prior-year periods.
Outlook, management commentary, risks and unusual items
- Management said it believed the markets were entering a recovery phase, with momentum expected in the latter half of calendar 2021, assuming no further COVID-19 or geopolitical shocks. The filing provides no formal earnings or revenue guidance.
- In February 2021, Greenbrier announced a strategy to grow its owned portfolio of Greenbrier-built leased railcars by approximately $200 million annually. GBX Leasing began operations in March 2021, after the reporting date, with a $300 million non-recourse warehouse facility and an initial railcar and lease contribution valued at approximately $130 million. The venture is expected to use about 3:1 debt-to-equity leverage; execution, financing, leasing rates, residual values and tax benefits are key uncertainties.
- The six-month tax benefit was $29.1 million on a $48.5 million pretax loss. Management cited accelerated depreciation and CARES Act tax-loss carrybacks to years with higher tax rates.
- COVID-19, the cyclical downturn, customer order delays or cancellations, supplier disruption, facility closures, and higher borrowing needs could further affect operations, liquidity and conversion of backlog to revenue.
- Environmental contingencies remain uncertain. Greenbrier is among potentially responsible parties at the Portland Harbor Superfund site; the company stated that available information was insufficient to estimate its potential liability. The EPA’s estimated site-wide cleanup cost is $1.7 billion, not a Greenbrier-specific estimate. Separate Oregon DEQ investigation and remediation matters could also result in significant costs.
- Other exposures include assumed potential legacy railcar retrofit and repair liabilities related to the ARI acquisition, warranty-estimate uncertainty, foreign-exchange and interest-rate risk, and possible impairment risk for goodwill in reporting units with limited fair-value headroom.
- The company declared a $0.27 per-share quarterly dividend on April 6, 2021. Its share repurchase authorization had $100 million remaining at quarter-end; no shares were repurchased in the six-month period.
Most important facts for investors to verify
- Whether railcar demand, production volumes and manufacturing margins recover as management expects, and whether the backlog converts on schedule and at expected pricing.
- Cash generation, working-capital needs, capital spending, debt maturities, facility availability and covenant headroom as the business navigates the downturn.
- GBX Leasing’s actual deployment, leverage, financing costs, lease rates, cash returns and effect on consolidated debt and results.
- The potential financial exposure and timing of Portland Harbor and Oregon DEQ matters, including future cost allocation and remedial-design obligations.
- The sustainability of tax benefits, dividends and repurchase capacity, and whether pandemic-related and other operating costs remain elevated.