Greenbrier Companies, Inc. — Q3 FY2017 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2017; interim financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and period
Greenbrier manufactures railcars and marine vessels, supplies wheels and parts, and operates railcar leasing and services businesses. It also holds a 50% interest in the GBW railcar-repair joint venture, accounted for under the equity method. Manufacturing backlog at May 31 was approximately 31,000 railcars valued at $3.10 billion, versus 31,200 units and $3.62 billion a year earlier; marine backlog was $63 million versus $51 million. The company cautions that backlog may change and is not a guarantee of future revenue.
Financial results and liquidity
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Revenue | $439.2 | $612.9 | $1,557.8 | $2,084.3 |
| Gross margin dollars / percentage | $89.7 / 20.4% | $127.1 / 20.7% | $321.4 / 20.6% | $431.8 / 20.7% |
| Operating earnings | $48.5 | $84.1 | $202.7 | $325.0 |
| Net earnings attributable to Greenbrier | $32.8 | $35.4 | $92.3 | $149.7 |
| Diluted EPS | $1.03 | $1.12 | $2.91 | $4.67 |
- Q3 revenue fell 28.3%; attributable net earnings fell 7.2%. Nine-month revenue declined 25.3% and attributable net earnings declined 38.3% year over year.
- For the nine months, operating cash flow was $72.7, down from $194.7. Investing activities used $51.5, compared with $33.5 provided in the prior-year period; capital expenditures were $53.8. Financing activities provided $212.2, primarily reflecting the convertible-note issuance.
- Cash and cash equivalents were $465.4 at May 31, up from $222.7 at August 31, 2016. Notes payable, net, were $532.6, versus $301.9; the increase chiefly reflects the 2024 convertible notes. No borrowings were outstanding under senior secured credit facilities. Available committed credit facilities totaled $419.6; $79.2 of letters of credit were outstanding.
- The company declared a quarterly dividend of $0.22 per share in June. It reported compliance with debt covenants.
Material changes and management commentary
- The main earnings pressure was lower railcar deliveries: manufacturing deliveries declined 39.5% in Q3 and 33.1% for the nine-month period. Manufacturing revenue fell 30.8% in Q3 and 24.5% year to date; operating profit declined 37.5% and 30.3%, respectively.
- Wheels & Parts revenue rose 8.7% in Q3 but its margin fell to 8.5% from 11.0%, mainly due to product mix. For nine months, revenue decreased 4.0% and operating profit decreased 19.2%.
- Leasing & Services revenue decreased 51.5% in Q3 and 54.0% year to date, largely because fewer third-party railcars purchased for resale were sold. Margins improved as those lower-margin sales declined, but operating profit still fell 14.6% in Q3 and 42.9% year to date.
- GBW revenue fell 34.5% in Q3 and 31.9% year to date as repair volumes declined; lower-volume inefficiencies contributed to operating losses. Greenbrier recorded a $5.3 loss from unconsolidated affiliates for the nine months, versus $2.9 of earnings in the prior-year period.
- Interest and foreign-exchange expense increased, partly due to interest on $275 million of 2.875% convertible senior notes issued in February 2017, due 2024. The projected annual tax rate was approximately 29%.
Outlook, transactions, and risks
- No full-year earnings or revenue guidance is provided in the supplied filing text. Management expected 2017 capital expenditures of approximately $45 million for Manufacturing, $30 million for Leasing & Services and corporate, and $5 million for Wheels & Parts; expected proceeds from leased-railcar and insurance sales were $75 million. Management stated that available funds, operating cash flow, and financing sources were expected to cover near-term needs, including planned capital spending, dividends, debt repayments, and Greenbrier-Astra Rail payments.
- After quarter-end, Greenbrier completed Greenbrier-Astra Rail, with an approximately 75% controlling interest; it paid €30 million in June 2017 and expects to pay another €30 million in June 2018. The combined value of the Astra and Mitsubishi UFJ Lease & Finance arrangements exceeds $1 billion, according to management. MUL committed to purchase 6,000 new railcars, with deliveries scheduled from Q4 2017 through 2020, and agreed to source new railcars exclusively from Greenbrier through 2023. The companies also formed a 50/50 railcar-management venture.
- Greenbrier increased its Greenbrier-Maxion ownership to 60% for $20 million and its Amsted-Maxion Cruzeiro ownership to 24.5% for $3.25 million in May 2017. The company cited potential benefits from Brazilian growth and infrastructure development.
- The Portland Harbor Superfund cleanup remedy has an estimated total undiscounted cost of $1.7 billion, but the EPA has not allocated responsibility. Greenbrier said available information was insufficient to determine its liability or estimate a potential loss; it believes it did not materially contribute to the contamination. Potential remediation, natural-resource damages, dredging restrictions, and effects on the Portland facility remain risks.
- A foreign commercial-litigation judgment of approximately $10 million was issued against Greenbrier in June 2017; the company is appealing. GBW’s goodwill fair value exceeded carrying value by approximately 4%, leaving it potentially vulnerable to impairment if business trends or valuation multiples weaken.
- Other stated risks include railcar demand and order cancellations, production and labor constraints, steel and component costs, customer and supplier concentration, financing and covenant access, foreign exchange and interest rates, warranty claims, and environmental obligations. Management reported no material change in previously disclosed risk factors and said disclosure controls were effective.
Important facts for investors to verify
- Whether lower railcar deliveries and repair volumes persist, and how they affect segment margins, operating cash flow, and backlog conversion.
- Execution, delivery timing, and economics of the MUL commitments and Greenbrier-Astra Rail integration, including the scheduled €30 million payment in June 2018.
- Liquidity and debt changes after the $275 million convertible-note issuance, including facility availability, covenant compliance, and future cash needs.
- Developments in Portland Harbor cleanup allocation and the appeal of the approximately $10 million judgment; neither exposure is quantified as a probable company loss in the filing.
- GBW’s operating recovery and goodwill valuation, given the limited fair-value cushion disclosed.