Greenbrier Companies, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2019, ended May 31, 2019. Comparative periods ended May 31, 2018. Dollar amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and reporting period
Greenbrier manufactures railcars and marine vessels, provides wheel, repair and parts services, and leases railcars and provides related services. At quarter-end, it owned approximately 8,900 railcars and managed approximately 374,000. Its manufacturing backlog was approximately 26,100 railcars valued at $2.74 billion; marine backlog was $82 million. Backlog is not a guarantee of future revenue and may be affected by order changes, product mix and delivery timing.
Financial performance and liquidity
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $856.2 | $641.4 | $2,119.3 | $1,830.3 |
| Gross margin dollars | $106.6 | $108.5 | $232.9 | $303.2 |
| Gross margin percentage | 12.4% | 16.9% | 11.0% | 16.6% |
| Operating earnings | $53.2 | $71.5 | $107.7 | $193.9 |
| Net earnings attributable to Greenbrier | $15.2 | $33.0 | $36.0 | $120.8 |
| Diluted EPS | $0.46 | $1.01 | $1.08 | $3.75 |
| Operating cash flow | Not separately provided | Not separately provided | $(94.1) | $79.6 |
- Revenue growth: Q3 revenue rose 33.5%; nine-month revenue rose 15.8%. Manufacturing, Wheels, Repair & Parts, and Leasing & Services all contributed to growth.
- Profitability: Despite higher sales, cost of revenue grew faster, reducing gross margin dollars and rates. Nine-month earnings attributable to Greenbrier fell 70.2%.
- Cash and working capital: Cash and cash equivalents were $359.6 at May 31, 2019, with restricted cash of $21.5. Combined cash and restricted cash declined $158.4 from August 31, 2018. Management attributed negative operating cash flow mainly to lower earnings and inventory buildup during production ramp-up. Inventory increased to $592.1 from $432.3 at fiscal year-end.
- Debt and facilities: Balance-sheet revolving notes were $26.0 and notes payable, net, were $483.9. Senior secured facilities totaled $692.7; the $600.0 North American revolver matured in September 2023 at the reporting date. Greenbrier reported compliance with its restrictive covenants. A June 3, 2019 amendment extended the facility maturity to June 2024, subject to an earlier maturity provision tied to outstanding convertible notes.
- Investment and distributions: Capital expenditures were $149.9 in the first nine months, versus $118.7 a year earlier. Dividends declared were $0.25 per share in Q3 and $0.75 per share year to date. No shares were repurchased in the quarter; $100.0 remained available under the repurchase program.
Material changes versus prior comparable periods
- Manufacturing: Q3 deliveries increased 27.5% to 6,500 railcars; nine-month deliveries increased 13.4% to 15,200. However, manufacturing margin fell to 13.3% in Q3 from 16.1%, and to 10.9% year to date from 16.0%. Management cited product mix, facility inefficiencies, European supplier delivery failures and $6.5 of contract loss accruals for the nine-month period.
- Wheels, Repair & Parts: Results include 12 repair shops returned after the GBW joint venture was discontinued in August 2018. The segment recorded an operating loss of $8.8 in Q3 and $2.8 year to date, compared with operating profits in both prior-year periods. Repair inefficiencies, lower scrap pricing, mix and shop-closure costs weighed on margins.
- Leasing & Services: Revenue increased, partly from sales of third-party railcars intended for resale, but those sales carry lower margins and raised costs. Q3 operating profit declined 42.6%; nine-month operating profit declined 24.1%. The percentage of owned units on lease was 97.3%, versus 90.4% a year earlier.
- Unusual items and ownership effects: Greenbrier recorded a $10.0 non-cash goodwill impairment related to its repair reporting unit, following more shop closures than expected and operational challenges. It also reported higher earnings attributable to noncontrolling interests, reducing the share of consolidated earnings attributable to Greenbrier.
Outlook, management commentary, risks and contingencies
- Management said it was addressing manufacturing execution and supplier issues and expected manufacturing gross margins to improve; the filing gives no specific earnings or margin guidance.
- For fiscal 2019, capital expenditures were expected to be approximately $90 for Manufacturing, $15 for Wheels, Repair & Parts, and $100 for Leasing & Services and corporate. Proceeds from leased railcar sales were expected to be $125. Management said existing funds, operating cash flows and financing sources were expected to cover the planned ARI acquisition, debt repayments, working capital, capital spending, affiliate investments and dividends over the next 12 months.
- On April 17, 2019, Greenbrier agreed to acquire American Railcar Industries’ manufacturing business for $400 after specified net tax benefits, with a $430 gross purchase price that includes $30 for facility improvements and a $50 senior unsecured convertible promissory note. Closing remained subject to regulatory approvals and customary conditions. Greenbrier disclosed $5.8 of acquisition-related costs in selling and administrative expense for the nine-month period.
- On June 3, 2019, the revolving-credit amendment permitted up to $300 of term borrowing to fund part of the ARI purchase price. The acquisition remained conditional at the filing date.
- Environmental exposure: Greenbrier is among parties potentially liable for remediation and natural-resource damages at the Portland Harbor Superfund site. The EPA estimated total site cleanup costs of $1.7 billion, but the company’s share is undetermined; Greenbrier said it could not estimate its potential liability or a loss range. Separate Oregon DEQ investigations may also lead to remediation costs. Related litigation was stayed until January 16, 2020.
- Other risks: The filing highlights railcar demand and backlog conversion, order cancellations, labor and supplier availability, production inefficiencies, commodity prices, lease fleet utilization and residual values, financing and covenant flexibility, foreign exchange and interest rates, and integration and completion risks for acquisitions. Management stated there were no material changes to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- Whether manufacturing execution and European supplier issues improve, and whether the expected margin recovery materializes.
- Whether inventory converts to sales and operating cash flow returns to positive territory after the production ramp-up.
- ARI acquisition approvals, closing conditions, final purchase-price adjustments, funding and integration costs.
- Repair-segment recovery following the goodwill impairment and repair-shop closures.
- The ultimate scope, allocation and potential cost of Portland Harbor and Oregon DEQ environmental obligations, which the filing says cannot currently be estimated.
- Backlog conversion, delivery schedules and product mix, including railcars intended for syndication that may instead be retained in Greenbrier’s fleet.