Greenbrier Companies, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended November 30, 2016; comparative period is the three months ended November 30, 2015. Greenbrier manufactures railcars and marine vessels, provides rail wheels, parts, leasing and services, and holds a 50% interest in the GBW railcar-repair joint venture.
Financial performance
| Metric | Q1 FY2017 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $552.3 million | $802.4 million | Down 31.2% |
| Gross margin dollars / percentage | $112.8 million / 20.4% | $184.8 million / 23.0% | Margin down 2.6 percentage points |
| Operating earnings | $72.7 million | $148.5 million | Down 51.1% |
| Net earnings attributable to Greenbrier | $25.0 million | $69.4 million | Down 64.0% |
| Diluted earnings per share | $0.79 | $2.15 | Down $1.36 |
| Operating cash flow | $29.0 million | $(63.5) million | Improved $92.5 million |
Manufacturing revenue fell 35.0%, mainly because railcar deliveries declined 42.0%, to 4,000 from 6,900. Manufacturing margin declined to 21.5% from 23.7%, reflecting product mix. Wheels & Parts revenue declined 11.6% amid weaker wheel-set and component demand. Leasing & Services revenue rose 14.6%, partly from third-party railcar sales, but its margin fell to 37.1% from 53.6%. GBW reported revenue of $70.3 million versus $96.0 million and an operating loss of $4.6 million versus operating earnings of $2.4 million; Greenbrier recorded a $1.4 million share of GBW’s loss.
Financial position and liquidity
- Cash and cash equivalents were $233.8 million at November 30, up from $222.7 million at August 31, 2016. Operating cash flow was positive, while investing activities provided $12.2 million and financing activities used $21.5 million.
- Notes payable, net, were $300.3 million. Greenbrier had no borrowings outstanding under its senior secured credit facilities; it reported $332.3 million available to draw across committed facilities and $81.3 million of letters of credit under the North American facility.
- Total assets were $1.817 billion and total equity was $1.032 billion. Inventories increased to $402.1 million from $365.8 million at August 31.
- The company said existing funds, operating cash generation and financing sources were expected to cover anticipated debt repayments, the Astra transaction, investments, working capital, planned capital expenditures and dividends over the next 12 months. It reported compliance with debt covenants.
Material changes, outlook and management commentary
- Railcar manufacturing backlog was approximately 25,800 units valued at $2.97 billion, down from 36,000 units and $4.14 billion a year earlier. Marine backlog increased to $103 million from $36 million. Management cautioned that backlog may change or fail to convert to revenue; 2,500 covered hoppers scheduled for 2018 were subject to customer negotiations to modify the order.
- For fiscal 2017, expected capital expenditures were approximately $45 million for Manufacturing, $13 million for Leasing & Services and corporate, and $5 million for Wheels & Parts. Leased-railcar sale proceeds were expected to be $25 million. These are management estimates, not guarantees.
- Greenbrier agreed to combine its European operations with Astra Rail in a proposed business in which Greenbrier would hold approximately 75%. Consideration includes €30 million at closing and €30 million 12 months later; closing is contingent on conditions including certain EU antitrust approvals.
- A quarterly dividend of $0.21 per share was declared January 6, 2017. No shares were repurchased in the quarter; approximately $88.0 million remained under the repurchase authorization, which expires January 1, 2018.
- Management attributed lower earnings principally to fewer railcar deliveries and weaker margins. Selling and administrative expense rose 12.8%, primarily from increased legal and consulting costs and employee costs.
Risks, contingencies and unusual items
- Portland Harbor environmental matter: Greenbrier is among parties potentially responsible for cleanup of the Superfund site. The EPA’s favored plan estimated total site remediation costs of $1.1–$1.2 billion, but the filing says responsibility has not been allocated and Greenbrier cannot estimate its potential liability. The company said its expenditures to date were not material and it believes it did not materially contribute to the contamination.
- Litigation: The company received an adverse judgment of approximately $15 million in foreign commercial litigation and intends to appeal. The ultimate outcome is uncertain.
- Related-party arrangement: Greenbrier paid WL Ross $4.5 million under a railcar-portfolio profit-sharing agreement during the quarter. It agreed to pay a further $3.6 million in Q2 FY2017 to buy out future participation.
- Business and market risks: Demand and pricing for railcars, manufacturing utilization, customer order changes or cancellations, commodity and component costs, foreign exchange and interest rates, and trade or tax-policy changes may affect results. Management specifically noted exposure to potential changes in trade agreements and international tax provisions.
- Foreign-currency forward contracts totaled $423.4 million in aggregate notional amount. The filing estimated that a 10% strengthening of the U.S. dollar against foreign currencies would reduce equity by $6.8 million; a 10% increase in variable interest rates would add about $0.2 million of annual interest expense.
Investor verification priorities
- Track railcar deliveries, manufacturing backlog conversion, and the status of the 2,500-car covered-hopper order under negotiation.
- Assess whether margins recover, particularly in Manufacturing, Leasing & Services, and GBW, as volumes and product mix change.
- Verify completion, purchase funding and integration progress for the Astra transaction, including the contingent antitrust approvals.
- Monitor the Portland Harbor cleanup process and the foreign litigation appeal; Greenbrier’s ultimate exposure is not quantified in this filing.
- Reconcile cash generation, inventory growth, planned capital spending and railcar sale proceeds against liquidity needs and the company’s stated 12-month funding outlook.