GREENBRIER COMPANIES INC quarterly report, Q1 FY2019

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Greenbrier Companies, Inc. — Q1 FY2019 Form 10-Q

Reporting period: Three months ended November 30, 2018; fiscal year ends August 31. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.

Business context

Greenbrier manufactures railcars and marine vessels, provides wheel, repair and parts services, and leases and manages railcars. At quarter-end, it owned approximately 9,600 railcars and managed approximately 358,000 railcars. Manufacturing backlog was approximately 27,500 railcar units valued at $2.69 billion; marine backlog was $56 million. Backlog is not a guarantee of future revenue and may be affected by order changes, product mix and delivery timing.

Financial performance and position

  • Revenue: $604.5 million, up 8.0% year over year. Manufacturing contributed $471.8 million, Wheels, Repair & Parts $108.5 million, and Leasing & Services $24.2 million.
  • Margins and operating profit: Gross margin was $72.5 million, or 12.0% of revenue, versus $89.3 million, or 16.0%. Operating earnings were $36.5 million, down from $61.4 million.
  • Profit and EPS: Net earnings attributable to Greenbrier were $18.0 million, down 31.6% from $26.3 million. Diluted EPS was $0.54 versus $0.83. The company declared dividends of $0.25 per share, compared with $0.23 a year earlier.
  • Segment results: Manufacturing revenue rose 4.5%, but margin declined to 11.4% from 15.6% and operating profit fell 30.4% to $36.9 million. Wheels, Repair & Parts revenue increased 39.1% to $108.5 million, largely reflecting repair shops returned from the GBW joint venture; operating profit was $3.2 million. Leasing & Services revenue decreased 19.5% to $24.2 million and operating profit fell 37.9% to $17.5 million.
  • Cash flow: Operating activities used $97.1 million, versus $39.7 million used in the prior-year quarter. Investing activities used $3.8 million; financing activities provided $35.5 million. Cash, cash equivalents and restricted cash declined $67.8 million to $471.7 million. Operating cash use reflected working-capital movements and increased railcars held for syndication.
  • Liquidity: Cash and cash equivalents were $462.8 million and restricted cash was $8.9 million at November 30. The company reported $485.9 million available under committed credit facilities. Management expected existing funds, operating cash generation and financing sources to cover anticipated debt repayments, working capital, planned capital expenditures, affiliate investments and dividends over the next 12 months.
  • Debt: Balance-sheet revolving notes were $22.2 million and notes payable, net, were $487.8 million, totaling approximately $510.0 million. In September, Greenbrier refinanced approximately $170 million of term debt with a new $225 million five-year term loan due September 2023. The company reported compliance with debt covenants.
  • Other balance-sheet data: Total assets were $2.52 billion and total equity was $1.40 billion at November 30, 2018. Inventories rose to $492.6 million from $432.3 million at August 31; leased railcars for syndication rose to $233.4 million from $130.9 million.

Changes versus the prior comparable quarter

  • Revenue growth was outpaced by cost-of-revenue growth: costs increased 13.1% versus revenue growth of 8.0%, contributing to the margin decline.
  • Management attributed weaker Manufacturing margins mainly to product mix and also cited costs associated with expanded international operations. Railcar deliveries increased 5.0% to 4,200.
  • Wheels, Repair & Parts included $23.7 million of revenue from the repair shops returned after the GBW joint venture was discontinued. The segment’s margin percentage was broadly stable, with repair-operation inefficiencies offsetting some favorable parts mix and scrap pricing.
  • Leasing & Services had lower revenue and operating profit, mainly due to fewer sales of third-party-purchased railcars and lower gains on equipment dispositions. The percentage of owned units on lease increased to 94.9% from 91.8%.
  • Net gain on disposition of equipment declined to $14.4 million from $19.2 million. Interest and foreign-exchange expense decreased to $4.4 million from $7.0 million, including a higher foreign-exchange gain and lower interest expense after convertible notes matured.
  • The effective tax rate fell to 28.5% from 33.3%, principally following the U.S. corporate tax rate reduction under the Tax Act. Earnings from unconsolidated affiliates improved to $0.5 million from a $2.9 million loss.

Outlook, commentary and risks

  • Capital spending outlook: FY2019 capital expenditures were expected to be approximately $90 million for Manufacturing, $15 million for Wheels, Repair & Parts, and $90 million for Leasing & Services and corporate. Expected proceeds from leased-railcar sales were $120 million. These are management estimates, not earnings guidance.
  • Saudi Arabia initiative: Greenbrier announced an agreement with Saudi Railway Company to form a joint venture involving a stated total investment of 1 billion Saudi riyals, approximately $270 million, and freight-railcar supply. The initiative remained subject to due diligence, definitive documentation and required approvals.
  • GBW transaction: Greenbrier discontinued its GBW railcar repair joint venture and received 12 repair shops. The acquired operations contributed $23.9 million of revenue and a $1.4 million operating loss in the quarter. GBW was expected to complete cessation of activities during FY2019.
  • Accounting: Adoption of the new revenue standard increased opening retained earnings by $5.5 million; management reported no material effect on the balance sheet or income statement. Repair-service revenue is now generally recognized over time. The company planned to adopt the new lease standard in September 2019 and was assessing its impact.
  • Environmental and legal contingencies: Greenbrier is among potentially responsible parties at the Portland Harbor Superfund site. The EPA’s estimated $1.7 billion cleanup cost applies to the site as a whole, not to Greenbrier’s assessed liability. The company stated that available information was insufficient to determine any liability or estimate a potential loss range. The company also disclosed a Yakama Nation natural-resource-damages lawsuit and Oregon DEQ investigation; outcomes and potential costs were uncertain.
  • Other risks: The filing highlights cyclical demand, order cancellation or delay, product mix and manufacturing capacity, steel and component costs and availability, labor, lease utilization and residual values, foreign exchange and interest rates, covenant and refinancing access, warranty claims, and environmental remediation. Management reported no material changes to the risk factors in its FY2018 10-K.
  • Capital allocation: No shares were repurchased in the quarter. In January 2019, the board extended the repurchase program to March 2021 and increased remaining authorization from $88 million to $100 million. A $0.25-per-share quarterly dividend was declared January 8, 2019.

Key facts for investors to verify

  • Whether manufacturing product mix and margins recover, given the quarter’s margin compression and lower operating profit.
  • Conversion timing and profitability of the $2.69 billion railcar backlog, including orders intended for syndication and customer rights to modify or cancel orders.
  • Cash-flow effects of working capital and the substantial increase in railcars held for syndication.
  • Actual FY2019 capital spending, railcar-sale proceeds, and progress toward the conditional Saudi joint venture.
  • Updates on Portland Harbor and related environmental matters, particularly any allocation of cleanup costs or estimate of Greenbrier’s potential exposure.
  • Renewal of credit facilities approaching maturity, covenant capacity, and the effects of variable rates and foreign-exchange movements.