Greenbrier Companies, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended February 28, 2017 (fiscal Q2 2017). Comparisons are with the periods ended February 29, 2016. Dollar amounts are in millions unless stated otherwise.
Business context
Greenbrier manufactures railcars and marine vessels, provides wheel and parts services, leases railcars and manages railcar fleets, and holds an equity-method investment in the GBW repair joint venture. At quarter-end, its manufacturing backlog was approximately 22,600 railcar units valued at $2.44 billion, down from 34,100 units and $3.96 billion a year earlier. Marine backlog was $86 million, versus $18 million. Backlog is not assured to convert to revenue on a particular schedule.
Financial results and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $566.3 | $669.1 | $1,118.6 | $1,471.5 |
| Operating earnings | $81.5 | $92.4 | $154.2 | $240.9 |
| Operating margin | 14.4% | 13.8% | 13.8% | 16.4% |
| Net earnings attributable to Greenbrier | $34.5 | $44.9 | $59.5 | $114.3 |
| Diluted EPS | $1.09 | $1.41 | $1.88 | $3.55 |
| Consolidated net cash from operating activities | Not provided for quarter | Not provided for quarter | $81.9 | $149.3 |
Overall gross margin was 21.0% for Q2, compared with 17.9%; for the six-month period it was 20.7% in both years. Q2 dividends declared were $0.21 per share; six-month dividends were $0.42 per share.
At February 28, 2017, cash and cash equivalents were $545.8, restricted cash $8.7, total assets $2,156.0, and total equity $1,100.0. Notes payable, net, were $532.6, compared with $301.9 at August 31, 2016. The increase primarily reflects issuance of $275 million of 2.875% convertible senior notes due 2024. The notes are convertible at an initial price of approximately $60.16 per share; conversion was excluded from reported diluted EPS as anti-dilutive for the period.
Cash increased $323.1 during the six months, including $227.8 of net financing cash inflow. Capital expenditures were $21.2. The company reported $371.8 of availability across committed credit facilities, no borrowings under its senior secured credit facilities, and $79.2 of outstanding letters of credit. It said it was in compliance with debt covenants.
Changes versus prior period
- Q2 revenue fell 15.4%; six-month revenue fell 24.0%. Manufacturing deliveries declined 13.3% in Q2 and 31.3% for six months, reducing manufacturing revenue, though Q2 manufacturing margin improved with product mix.
- Leasing & Services revenue decreased 69.3% in Q2 and 55.3% for six months, largely because fewer third-party railcars were purchased and resold. Segment operating profit also declined, despite higher segment margin percentages.
- Wheels & Parts revenue and operating profit declined as lower demand reduced wheel-set and component volumes; six-month segment margin decreased to 7.8% from 8.7%.
- GBW joint-venture revenue declined 34.3% in Q2 and 30.6% for six months as repair volumes fell. Lower-volume operating inefficiencies contributed to negative margins, and Greenbrier recorded a six-month equity-method loss of $4.6 versus earnings of $1.4 a year earlier.
- Six-month Greenbrier-attributable earnings fell 47.9%. Lower railcar deliveries, lower equipment-disposition gains, and losses from unconsolidated affiliates contributed. Q2 interest and foreign-exchange expense increased, mainly because a Mexican-peso-related foreign-exchange gain in the prior-year quarter became a loss.
Outlook, risks and unusual items
- Management projected an approximately 30% annual tax rate. It expected 2017 capital expenditures of about $45 million for Manufacturing, $15 million for Leasing & Services and corporate, and $5 million for Wheels & Parts; expected proceeds from leased-railcar sales and insurance were $30 million. No specific revenue or earnings guidance was provided in the supplied filing text.
- Management stated existing funds, operating cash generation, and financing sources were expected to cover debt repayments, planned investments and transactions, working capital, capital expenditures, and dividends over the next 12 months.
- In March 2017, Greenbrier announced plans to invest $20 million to raise its ownership in Brazilian railcar manufacturer Greenbrier-Maxion from 19.5% to 60%, and $3.25 million to raise its interest in a related castings company to 24.5%. Closing was expected in Q3, subject to conditions.
- In April 2017, the company announced a memorandum of understanding with Mitsubishi UFJ Lease & Finance for a proposed transaction valued at more than $1 billion, including a commitment to purchase 6,000 new railcars through 2020 and exclusive sourcing of new railcars through 2023. Definitive agreements and remaining terms were still pending.
- The proposed Greenbrier-Astra European combination remained subject to conditions, including antitrust approval. Greenbrier expected to hold approximately 75% and make payments of €30 million at closing and €30 million one year later.
- The Portland Harbor Superfund remedy was estimated by the EPA at $1.7 billion for the site overall, with 13 years of active remediation and 30 years of monitoring. The filing says the company’s potential responsibility cannot yet be determined or reasonably estimated; Greenbrier believes it did not materially contribute to the contamination. Additional remediation, natural-resource damages, dredging restrictions, or related costs could adversely affect the business.
- A foreign commercial-litigation judgment of approximately $15 million received in the prior quarter was reversed on appeal and remanded. The ultimate outcome remained uncertain. Warranty accruals rose to $14.6 million from $12.2 million a year earlier.
- Principal risks include cyclical rail demand, lower backlog and deliveries, customer order changes, railcar utilization and residual values, market and commodity-price shifts, foreign-exchange movements, debt and refinancing needs, regulation, joint-venture performance, and environmental contingencies.
Important facts for investors to verify
- Whether railcar backlog converts to orders, deliveries, and revenue on expected terms, especially the 3,800 energy-related covered hoppers and the units scheduled for later production.
- Whether lower railcar and repair volumes stabilize, and whether GBW can restore positive margins.
- Final terms, approvals, financing, and execution of the Astra, Brazil, and Mitsubishi-related transactions; the Mitsubishi MOU was not yet a completed definitive agreement.
- Future cash generation, debt maturities and refinancing, facility availability, covenant headroom, and potential dilution from convertible notes.
- Developments in the Portland Harbor cleanup process, allocation of costs among potentially responsible parties, and whether Greenbrier’s exposure becomes estimable.
- Whether reported margin and earnings trends persist when equipment-disposition gains and railcar resale activity vary.