GREENBRIER COMPANIES INC quarterly report, Q2 FY2018

Business context and reporting period

Greenbrier Companies, Inc. filed this unaudited Form 10-Q for its fiscal second quarter and six months ended February 28, 2018. Its businesses include railcar manufacturing, wheels and parts, leasing and services, and a 50%-owned railcar repair joint venture accounted for under the equity method. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.

Financial results and liquidity

At February 28, cash and cash equivalents were $586.0 million; restricted cash was $8.9 million. Revolving notes were $8.0 million and notes payable, net, were $559.8 million. The company reported $392.9 million available under committed credit facilities and compliance with its debt covenants. Six-month capital expenditures were $53.5 million. Cash declined $25.5 million from August 31, 2017.

Material changes versus prior comparable periods

• Quarterly revenue rose 11.1% year over year, while gross margin rate fell to 16.7% from 21.0%. Six-month revenue rose 6.3%, but gross margin rate fell to 16.4% from 20.7%.
• Manufacturing revenue increased, but manufacturing margin rate declined to 16.2% for the quarter and 15.9% for six months (from 22.2% and 21.8%). Management cited product mix and costs associated with expanded international operations; deliveries increased 10.3% for the quarter and 5.1% for six months.
• Leasing & Services revenue declined 24.3% for the quarter and 11.8% for six months, reflecting fewer third-party railcar resales and fewer railcars on operating leases. Segment operating profit increased, aided by improved management-services margins and higher equipment disposition gains.
• Wheels & Parts revenue increased 7.2% for the quarter and 9.4% for six months, but operating profit decreased in both periods, in part because of higher employee costs.
• Net earnings attributable to Greenbrier rose 78.5% for the quarter and 47.7% for six months. Management attributed the increase primarily to the Tax Act’s effect on the tax rate, not stronger operating earnings: operating earnings declined in both comparisons.
• Six-month operating cash flow fell from $84.8 million to negative $7.7 million, reflecting working-capital movements, leased railcars held for syndication, deferred taxes and equipment-disposition gains. Proceeds from asset sales increased to $105.1 million from $19.9 million.

Outlook, commentary, risks and unusual items

• Backlog at February 28 was approximately 24,100 railcar units valued at $2.29 billion, including 20,700 direct-sale units and 3,400 units for lease to third parties; marine backlog was $9 million. The filing cautions that backlog may not convert to revenue as expected and orders may be modified or canceled.
• Management expected fiscal 2018 capital expenditures of approximately $70 million for Manufacturing, $5 million for Wheels & Parts, and $120 million for Leasing & Services and corporate. Expected proceeds from leased-railcar sales were $150 million. These are operating plans, not earnings guidance.
• The Tax Act resulted in a $34.3 million benefit from remeasuring deferred taxes and an $11.5 million transition-tax expense in the six-month period; these amounts were provisional. The reported six-month effective tax rate was 6.3%, versus 30.8% in the prior year.
• The $25.0 million six-month net gain on equipment dispositions (versus $3.2 million a year earlier) supported results and related largely to lease-fleet sales as Greenbrier rebalanced its portfolio. The company reported $24.7 million of cash-flow depreciation and amortization? Not stated as a combined cash-flow item; the filing reports $36.5 million.
• The $119.1 million balance of 3.5% convertible notes due 2018 matured March 30, 2018; conversion resulted in 3.4 million additional common shares. The company also expected a €30 million payment in June 2018 related to the Greenbrier-Astra Rail transaction.
• Environmental exposure at the Portland Harbor Superfund site remains unquantifiable: the EPA’s estimated site-wide cleanup cost is $1.7 billion, but the filing says responsibility is unallocated and Greenbrier cannot estimate its potential liability. A separate Yakama Nation natural-resource-damages suit is pending, with damages unspecified. Greenbrier says it believes it did not materially contribute to the river contamination.
• Warranty accruals increased to $27.0 million from $20.7 million at August 31, 2017; six-month warranty charges were $7.6 million, compared with $3.6 million. Other disclosed risks include railcar-demand cycles, steel and component availability and prices, customer cancellations, foreign exchange and interest rates, and joint-venture performance.
• The company said existing cash, operating cash generation and financing sources were expected to fund debt repayments, working capital, planned capital expenditures, the Astra payment, affiliate investments and dividends over the next 12 months. No broad revenue or earnings forecast was provided.

Important facts for investors to verify

• Whether manufacturing margins recover and backlog converts to deliveries at expected mix, pricing and timing.
• Whether the equipment-sale gains and improved Leasing & Services profit are repeatable, and how fleet rebalancing affects leasing revenue and utilization.
• Drivers of negative six-month operating cash flow and the working-capital and leased-railcar investment needed to sustain operations.
• Final Tax Act accounting and future tax rates, including the transition-tax payment schedule and the 2019 GILTI tax impact.
• Potential Greenbrier share of Portland Harbor remediation and natural-resource claims, which the filing says cannot currently be estimated.
• Post-conversion share count and dilution from the 3.4 million shares issued for the 2018 convertible notes, and the effect on per-share results.