Greenbrier Companies, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended February 29, 2020; filed April 7, 2020. Greenbrier manufactures railcars and marine vessels, provides wheel, repair and parts services, and leases railcars and provides related services. The six-month results include the acquired ARI manufacturing business from July 26, 2019.
Financial performance
| Metric | Three months ended Feb. 29, 2020 | Six months ended Feb. 29, 2020 |
|---|---|---|
| Revenue | $623.8 million, down 5.3% year over year | $1,393.2 million, up 10.3% |
| Gross margin | $86.3 million; 13.8% of revenue, versus 8.2% | $178.5 million; 12.8% of revenue, versus 10.0% |
| Operating earnings | $38.4 million, versus $18.1 million | $80.2 million, versus $54.5 million |
| Net earnings attributable to Greenbrier | $13.6 million, versus $2.8 million | $21.3 million, versus $20.7 million |
| Diluted EPS | $0.41, versus $0.08 | $0.64, versus $0.63 |
| Operating cash flow | Cash used of $133.2 million for six months, versus $146.6 million used |
- Segment trends: Quarterly Manufacturing revenue rose 2.9% to $489.9 million and operating profit rose to $46.1 million. Wheels, Repair & Parts revenue declined 27.2% to $91.2 million, while operating profit edged up to $3.3 million. Leasing & Services revenue declined 25.6% to $42.7 million and operating profit fell 39.2% to $12.8 million.
- For the six-month period, Manufacturing revenue increased 21.0% to $1,147.3 million, supported by ARI and 10.3% more railcar deliveries. Wheels, Repair & Parts revenue declined 23.9%; Leasing & Services revenue declined 16.6%.
- Quarterly results benefited from a $12.9 million Manufacturing customer contract modification fee, improved product mix and the prior-year period’s railcar contract loss accruals. The fee is a notable contributor to the margin comparison.
Liquidity, debt and cash flows
- Cash and cash equivalents were $169.9 million at February 29, 2020; restricted cash was $8.6 million. Combined cash fell $160.0 million from August 31, 2019.
- Notes payable, net, were $811.9 million and revolving notes were $37.2 million, for approximately $849.1 million in these reported borrowings. The company reported $451.1 million available to draw under committed facilities, including Mexican joint-venture facilities; $27.5 million of letters of credit reduced North American availability. The filing states the company was in compliance with restrictive covenants.
- Operating cash use reflected working-capital movements and railcars held for syndication. Investing cash flow was positive $10.8 million, including $40.8 million of capital expenditures and $41.8 million of asset-sale proceeds. Financing cash use was $34.8 million, including dividends and debt repayments.
- Management expected existing funds, operating cash generation and financing sources to cover debt repayments, working capital, planned capital expenditures, affiliate investments and dividends over the next 12 months. Planned FY2020 capital expenditures were approximately $95 million across segments and corporate functions; expected proceeds from leased-railcar sales were $90 million.
Changes, outlook and risks
- The July 2019 ARI manufacturing acquisition contributed $210.7 million of revenue and a $1.5 million net loss in the six months ended February 29, 2020. The purchase-price allocation remained preliminary.
- Six-month earnings growth was modest despite higher revenue and operating profit: higher interest and foreign-exchange costs and a larger noncontrolling-interest allocation offset much of the improvement. Interest and foreign-exchange expense rose to $25.5 million from $13.6 million, including a $4.9 million foreign-exchange loss and interest on acquisition-related term debt.
- Railcar manufacturing backlog was approximately 30,800 units with an estimated value of $3.16 billion; marine backlog was $59 million. Backlog is not a guarantee of future revenue: timing, product mix, documentation and customer changes can affect conversion. Approximately $0.9 billion of contracted railcar sales revenue was expected to be recognized in the remainder of FY2020, based on then-current schedules.
- COVID-19 had not materially affected results through February 29, 2020, but management warned it most likely would materially harm business, liquidity, results, stock price and backlog conversion. Facilities were operating subject to health protocols when the report was filed; management could not forecast the extent or duration of effects and expected impacts to appear in the next quarterly report. Risks include plant or shop restrictions, customer order delays or cancellations, supplier disruption, increased borrowing needs and possible goodwill impairment.
- No quantified earnings or revenue guidance was provided. The filing also cites cyclical rail demand, low oil and commodity prices, customer concentration, integration challenges, foreign exchange and interest-rate exposure, and warranty and environmental liabilities.
- Contingencies: Potential Portland Harbor Superfund and Oregon DEQ remediation liabilities could not be reasonably estimated; the EPA’s estimated site-wide cleanup cost was $1.7 billion, not a company-specific estimate. Greenbrier also assumed potential legacy ARI railcar retrofit and repair obligations whose material impact could not be determined.
- The company declared a $0.27-per-share quarterly dividend on April 1, 2020. Its $100 million share-repurchase authorization remained in effect through March 31, 2021; no shares were repurchased during the quarter.
Investor verification points
- Assess how much reported Manufacturing margin and earnings depended on the $12.9 million contract modification fee and favorable product mix.
- Track COVID-19 effects on customer orders, backlog conversion, plant operations, working capital, liquidity and covenant headroom.
- Reconcile cash usage and railcars held for syndication with future deliveries, syndications and expected asset-sale proceeds.
- Review ARI integration performance, preliminary purchase accounting and assumed retrofit or repair liabilities.
- Monitor Portland Harbor and DEQ investigations, potential remediation exposure, and goodwill impairment indicators.
- Evaluate the sustainability of the dividend and capital spending against cash generation, debt service and available borrowing capacity.