GREENBRIER COMPANIES INC quarterly report, Q2 FY2019

Greenbrier Companies, Inc. — Form 10-Q Summary

Reporting period: Fiscal second quarter and six months ended February 28, 2019. Amounts are in U.S. dollars; financial statement figures are unaudited. Greenbrier manufactures railcars and marine vessels, provides railcar repair, wheel and parts services, and leases and manages railcars.

Financial performance and liquidity

Metric	Three months ended Feb. 28, 2019	Six months ended Feb. 28, 2019
Revenue	$658.7 million, up 4.7% year over year	$1,263.2 million, up 6.3%
Gross margin dollars / rate	$53.8 million / 8.2%, versus $105.3 million / 16.7%	$126.4 million / 10.0%, versus $194.7 million / 16.4%
Operating earnings	$18.1 million, versus $60.9 million	$54.5 million, versus $122.3 million
Net earnings attributable to Greenbrier	$2.8 million; diluted EPS $0.08	$20.7 million; diluted EPS $0.63
Operating cash flow	Not separately presented for the quarter	$(146.6) million, versus $(7.7) million

Segment developments: Manufacturing revenue fell 7.0% in the quarter, while operating profit fell 77.9% to $14.0 million. Its margin rate dropped to 6.9% from 16.2%, reflecting product mix, manufacturing inefficiencies, supplier delivery failures in Europe, and $6.5 million of contract loss accruals. Management said it was addressing these issues and expected gross margins to improve.
Wheels, Repair & Parts revenue increased 41.2% in the quarter, partly because 12 repair shops returned to Greenbrier after the GBW joint venture was discontinued. Segment operating profit declined 44.9% to $2.8 million amid repair inefficiencies and site-closure costs.
Leasing & Services revenue rose 99.2% in the quarter, primarily from resales of railcars bought from third parties; operating profit increased 30.5% to $21.0 million, helped by higher equipment-disposition gains. The segment’s margin rate fell to 24.4% from 51.0% as those resales carry lower margins. Owned railcars on lease were 97.4% at quarter-end.
Cash and debt: Cash and cash equivalents were $341.5 million, plus $21.6 million of restricted cash, at February 28, 2019, down from combined cash and restricted cash of $539.5 million at August 31, 2018. Revolving notes were $22.3 million and notes payable, net, were $486.1 million. The filing reports $690.1 million of aggregate senior secured credit facilities and $24.0 million of North American letters of credit; availability is subject to borrowing-base and covenant restrictions.
Operating cash use reflected lower earnings and working-capital investment, notably a $154.4 million inventory increase and $76.4 million increase in railcars held for syndication. Investing cash use was $43.7 million, including $98.2 million of capital expenditures. Financing provided $13.1 million, including $225.0 million of new notes and $176.6 million of repayments.
Total assets were $2.53 billion and total equity was $1.40 billion at February 28, 2019. Declared dividends were $0.25 per share for the quarter and $0.50 per share for the six months.

Material changes and outlook

Despite higher revenue, six-month net earnings attributable to Greenbrier fell 76.4% year over year, mainly due to lower manufacturing margins from product mix, operating inefficiencies, and contract loss accruals. Cost of revenue rose faster than revenue.
Railcar deliveries were 4,500 for the quarter and 8,700 for the six months, up 4.7% and 4.8%, respectively. Manufacturing railcar backlog was approximately 26,000 units valued at $2.66 billion; marine backlog was $95 million. Management cautions that backlog is not a guarantee of future revenue, and timing, product mix, and pricing may change.
Of railcar-sales performance obligations, approximately $0.9 billion was expected to be recognized in the remainder of fiscal 2019 under current schedules and contracts. This is not a general earnings forecast. Management expected fiscal 2019 capital expenditures of approximately $195 million: $90 million Manufacturing, $15 million Wheels, Repair & Parts, and $90 million Leasing & Services and corporate. Proceeds from leased-railcar sales were expected to be $120 million for fiscal 2019.
Management stated that existing funds, operating cash generation, and financing sources were expected to cover debt repayments, working capital, planned capital expenditures, affiliate investments, and dividends over the next 12 months. The company was in compliance with its debt covenants at quarter-end. European credit facilities are continually renewed; their stated maturities ranged from June 2019 through February 2021.
In September 2018, Greenbrier refinanced approximately $170 million of senior term debt with $225 million of five-year debt, maturing in September 2023. The new borrowing has floating-rate terms; a swap fixed the rate on half the initial balance at 2.99%. The company reported 73% of outstanding debt at fixed rates and 27% at variable rates.
Greenbrier adopted the new revenue standard in fiscal Q1 2019; the cumulative adjustment increased retained earnings by $5.5 million, with no material effect on the balance sheet or income statement. Adoption principally changed the timing of recognizing certain repair-service revenue and costs. The company planned to adopt the new lease and hedge-accounting standards beginning September 1, 2019 and was evaluating their effects.
The share-repurchase program was extended through March 31, 2021, with $100 million available; no shares were repurchased in the quarter. A $0.25-per-share quarterly dividend was declared April 2, 2019.

Risks, contingencies, and unusual items

Environmental exposure: Greenbrier is among parties potentially responsible for the Portland Harbor Superfund site. The EPA’s estimated cleanup cost for the entire site is $1.7 billion, but the filing says costs are not allocated among parties and Greenbrier cannot determine its potential liability or estimate a loss range. The company believes it did not materially contribute to contamination. Separate Portland property investigations with Oregon DEQ could also lead to remediation costs.
A Yakama Nation lawsuit alleges natural-resource damages related to Portland Harbor; the amount sought was unspecified, and a stay was recommended through January 16, 2020. Other ordinary-course litigation was not expected by management to have a material adverse effect.
Other notable exposures include execution and supplier problems at manufacturing facilities, railcar contract losses, commodity and labor costs, cyclical rail demand, foreign exchange and variable interest rates, customer and order cancellations, and the ability to syndicate railcars and realize lease-fleet values. A 10% strengthening of the U.S. dollar against foreign currencies was estimated to reduce equity by $17.3 million; a uniform 10% increase in variable interest rates was estimated to add approximately $0.5 million of annual interest expense.
The quarter’s results included $12.1 million of net gains on equipment dispositions. The six-month Wheels, Repair & Parts results included operations from the returned repair shops, which generated $47.7 million of revenue and a $5.8 million operating loss. The filing reports no material changes to the risk factors in the 2018 Form 10-K.

Important facts for investors to verify

Whether manufacturing margins recover as management expects, and whether European supplier and production issues and contract loss accruals persist.
How much operating cash flow improves as inventory and railcars held for syndication convert to sales, leases, or cash.
Whether the $2.66 billion railcar backlog and stated fiscal 2019 delivery expectations convert on schedule and at planned pricing and margins.
The sustainability of gains from equipment sales and the economics of third-party railcar resales, which increased reported revenue but reduced margin percentages.
Potential funding, liability allocation, and remediation developments at Portland Harbor and the company’s Portland property; the filing does not provide a clear estimate of Greenbrier’s potential exposure.
Credit-facility availability and renewal terms. The liquidity discussion states $552.9 million was available but gives a February 28, 2018 date in that sentence, which is inconsistent with the surrounding February 28, 2019 discussion and should be checked against the filing’s underlying data.