Greenbrier Companies, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2018. Unless otherwise indicated, financial amounts below are in USD millions. Comparisons are with the corresponding 2017 period.
Business context
Greenbrier manufactures railcars and marine vessels, provides wheels and parts, and operates railcar leasing and services businesses. It also holds a 50% equity-method interest in GBW, a railcar repair joint venture. At May 31, manufacturing backlog was approximately 24,200 railcars valued at $2.35 billion, plus $12 million of marine backlog. Management cautions that backlog may change and is not a guarantee of revenue or delivery timing.
Financial performance and liquidity
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Revenue | $641.4 | $439.2 | $1,830.3 | $1,557.8 |
| Gross margin | $108.5 | $89.7 | $303.2 | $321.4 |
| Gross margin percentage | 16.9% | 20.4% | 16.6% | 20.6% |
| Earnings from operations | $71.5 | $48.5 | $193.9 | $202.7 |
| Net earnings attributable to Greenbrier | $33.0 | $32.8 | $120.8 | $92.3 |
| Diluted earnings per share | $1.01 | $1.03 | $3.75 | $2.91 |
- Q3 revenue rose 46.0%, led by Manufacturing, where deliveries increased 96.2% to 5,100 railcars. Manufacturing revenue rose 60.9%, but its margin rate declined to 16.1% from 22.7%, mainly due to product mix. Consolidated margin percentage also fell.
- For the nine-month period, revenue rose 17.5%, while operating earnings declined 4.3%. Manufacturing operating profit fell 21.2% to $178.6 million as lower margins and expanded international operating costs outweighed higher deliveries.
- Leasing & Services operating profit increased to $26.7 million in Q3 and $71.0 million year to date, aided by higher equipment-sale gains and improved margins. Net gain on equipment dispositions was $14.8 million in Q3 and $39.8 million year to date, versus $1.6 million and $4.8 million, respectively, a year earlier.
- Q3 loss from unconsolidated affiliates was $12.8 million, including Greenbrier’s $9.5 million after-tax share of GBW’s noncash goodwill impairment. GBW recorded a $26.4 million pretax impairment, citing continuing declines in sales and profitability.
- Nine-month net earnings attributable to Greenbrier increased 30.9%, helped by lower taxes under the Tax Act and higher equipment-sale gains. The diluted EPS comparison also reflects changes in the weighted-average share count.
- Nine-month operating cash flow was $79.6 million, compared with $77.9 million. Investing cash outflow was $6.7 million versus $51.5 million, reflecting $129.8 million of asset-sale proceeds and $118.7 million of capital expenditures. Financing cash outflow was $82.0 million, including dividends and a $69.4 million distribution to a joint-venture partner.
- Cash and cash equivalents were $590.0 million at May 31, down from $611.5 million at August 31, 2017. Balance-sheet revolving notes were $20.3 million and notes payable, net, were $437.8 million, versus $4.3 million and $558.2 million, respectively. The reduction in notes payable largely reflects conversion of the 2018 convertible notes.
- Committed credit facilities totaled $628.4 million; the company reported $396.0 million available to draw. It was in compliance with debt covenants. Management said existing funds, operating cash flow and financing sources are expected to cover anticipated debt repayment, working capital, planned capital expenditures, affiliate investments and dividends over the next 12 months.
Material changes and unusual items
- The $119.1 million 3.5% convertible notes due 2018 matured on April 1, 2018 and converted into approximately 3.4 million common shares. Outstanding shares increased to 32.2 million at May 31, from 28.5 million at August 31, 2017.
- The Tax Act resulted in a $34.3 million deferred-tax remeasurement benefit and an $11.5 million transition-tax expense, both recognized in Q2 as provisional discrete items. The nine-month effective tax rate was 13.1%, compared with 28.8% in 2017. The company said no adjustments to those provisional amounts were made in Q3.
- The company consolidated Greenbrier-Astra Rail from June 1, 2017. Astra’s European operations contributed $105.6 million of revenue and an immaterial operating loss in the nine months ended May 31, 2018. A €30 million deferred payment was paid on June 1, 2018.
- Capital expenditures were $118.7 million year to date. Management expected FY2018 capital expenditures of approximately $65 million for Manufacturing, $5 million for Wheels & Parts, and $115 million for Leasing & Services and corporate; expected proceeds from leased-railcar sales were $150 million.
- The quarterly dividend was $0.25 per share; a further quarterly dividend of $0.25 was declared June 28, 2018. No shares were repurchased in the quarter or nine-month period; $88.0 million remained available under the repurchase authorization, which expires March 31, 2019.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings forecast. Management describes railcar demand, product mix, order conversion, operating execution, and leasing-portfolio changes as factors affecting results. Principal disclosed risks include order cancellations or delays; cyclical demand and industry capacity; steel, component and labor availability and cost; customer and supplier concentration; foreign exchange and interest-rate movements; and the ability to maintain financing and covenant flexibility. European credit facilities had maturities ranging from December 2018 through June 2019 and were continually renewed.
Environmental exposure remains uncertain. Greenbrier is among the potentially responsible parties at the Portland Harbor Superfund site; the EPA’s cleanup estimate for the entire site was $1.7 billion, but the filing says responsibility has not been allocated and the company cannot estimate its potential liability or loss range. The company also disclosed a Yakama Nation natural-resource-damages lawsuit, with damages unspecified, and ongoing state investigations at its Portland property. Greenbrier stated that its expenditures to date were not material, but future remediation costs could be significant. A prior foreign commercial litigation matter was settled for less than an approximately $10 million reduced judgment.
The company expects to adopt the new revenue-recognition standard on September 1, 2018 and currently expects its policies to remain substantially unchanged, subject to continued evaluation. It plans to adopt the new lease standard beginning September 1, 2019 and was still assessing its impact.
Investor verification priorities
- Assess whether backlog converts to deliveries and revenue on expected timing and pricing, and whether Manufacturing margins recover from the product-mix decline.
- Evaluate the sustainability of Leasing & Services earnings, including equipment-disposition gains, fleet utilization and the planned portfolio rebalancing.
- Review GBW’s ongoing operating performance and remaining goodwill after its impairment, as well as Greenbrier’s exposure to other unconsolidated affiliates.
- Track the final accounting for Tax Act provisional amounts, transition-tax payments, and the effective tax rate in subsequent periods.
- Monitor Portland Harbor and related environmental proceedings for allocation of cleanup costs, scope changes, and any estimate of Greenbrier’s potential liability.
- Confirm access to credit facilities, renewal of European lines, covenant compliance, capital spending and cash generation against management’s stated liquidity expectations.