Greenbrier Companies, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended November 30, 2017. Comparisons are with the three months ended November 30, 2016 unless otherwise stated. Amounts are in U.S. dollars.
Business context and operating results
Greenbrier manufactures railcars and marine vessels, supplies wheels and parts, and provides railcar leasing and services. It also owns interests in joint ventures, including GBW, a railcar repair business. Its manufacturing backlog was approximately 26,500 railcar units valued at an estimated $2.56 billion, plus $25 million of marine backlog. Management cautions that backlog is not a guarantee of future revenue or delivery timing.
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $559.5 million | $552.3 million | +1.3% |
| Gross margin dollars | $89.3 million | $112.8 million | −20.8% |
| Gross margin as % of revenue | 16.0% | 20.4% | −4.4 percentage points |
| Operating earnings | $61.4 million | $72.7 million | −15.4% |
| Net earnings | $33.4 million | $48.0 million | −30.4% |
| Net earnings attributable to Greenbrier | $26.3 million | $25.0 million | +5.2% |
| Diluted earnings per share | $0.83 | $0.79 | +$0.04 |
Revenue rose modestly, but cost of revenue increased 7.0%, outpacing sales. Manufacturing revenue was nearly flat at $451.5 million, while manufacturing margin declined to 15.6% from 21.5% and operating profit fell 36.4% to $53.0 million. Wheels & Parts revenue grew 12.0% to $78.0 million; operating profit decreased 16.4% to $2.4 million, partly reflecting a disposition loss. Leasing & Services revenue increased 4.9% to $30.0 million and operating profit rose to $28.2 million from $7.4 million, including the benefit of higher equipment-sale gains. The segment’s reported operating profit includes disposition gains and should not be read as recurring margin.
The $19.2 million net gain on disposition of equipment, versus $1.1 million a year earlier, primarily reflected higher lease-fleet sales as Greenbrier rebalanced its portfolio. The owned-unit lease rate was 91.8%, compared with 94.2% one year earlier. GBW’s revenue fell 17.5% to $58.0 million and it reported an operating loss of $5.7 million; Greenbrier recorded a $1.6 million share of GBW’s loss.
Cash flow, balance sheet and liquidity
- Operating cash flow: Use of $39.7 million, versus $31.8 million provided in the prior-year quarter. Management cited working-capital movements, lower earnings and the larger equipment-disposition gain.
- Investing cash flow: Provided $45.2 million, including $75.1 million of asset-sale proceeds, partly offset by $29.9 million of capital expenditures. Capital expenditures were $12.6 million in the prior-year quarter.
- Financing and cash: Financing used $23.9 million. Cash and cash equivalents decreased $20.1 million during the quarter to $591.4 million at November 30, 2017.
- Debt and facilities: The balance sheet reported $559.0 million of notes payable, net, and $6.9 million of revolving notes. Greenbrier reported $358.8 million available to draw under committed facilities. It was in compliance with its debt covenants at quarter-end. Credit facilities have borrowing-base, covenant and maturity conditions; European facility maturities ranged from February 2018 to June 2019.
- Other balance-sheet items: Total assets were $2.41 billion and total equity was $1.18 billion. Inventories were $411.4 million; leased railcars for syndication were $131.0 million.
- Shareholder distributions: The quarterly dividend was $0.23 per share, compared with $0.21 a year earlier. No shares were repurchased in the quarter; $88.0 million remained available under the repurchase authorization.
Material changes, outlook and management commentary
- Manufacturing profitability weakened amid more competitive pricing, a less favorable product mix with higher labor and material content, lower volumes of higher-margin railcars sold with leases attached, and increased costs associated with expanded international operations. The prior-year comparison also benefited from a customer renegotiation fee.
- Wheels & Parts growth reflected higher wheel-set and component volumes and scrap-metal pricing. Leasing & Services benefited from lower maintenance and transportation costs, new management-service agreements, railcar resale activity and fleet dispositions.
- For fiscal 2018, management expected approximately $70 million of Manufacturing capital expenditures, $5 million for Wheels & Parts, and $120 million for Leasing & Services and corporate. It expected $150 million of proceeds from leased-railcar sales. Management said existing funds, operating cash flow and financing sources were expected to cover debt repayments, working capital, planned capital expenditures, dividends, further affiliate investment and a €30 million Greenbrier-Astra payment due in June 2018. These are expectations, not guarantees.
- Greenbrier reported that the Tax Cuts and Jobs Act was signed into law on December 22, 2017 and that it was evaluating the financial-statement impact. The filing does not provide a quantified impact.
- Contingencies: Greenbrier is among parties potentially responsible for the Portland Harbor Superfund site. The EPA estimated total site remediation costs of $1.7 billion, but the filing states that Greenbrier’s potential liability cannot yet be determined or reasonably estimated; the site estimate is not Greenbrier’s allocated liability. A separate natural-resource-damages lawsuit did not specify damages sought. The company also reported an approximately $10 million foreign commercial judgment affirmed on appeal and an agreement in principle to settle, subject to final documentation and court approval.
- Key risks: Demand, order cancellations or delays, railcar pricing and product mix, steel and component costs, production execution, labor availability, customer concentration, lease utilization and residual values, foreign exchange and interest rates, covenant and refinancing flexibility, warranty claims, and environmental or litigation outcomes. Management reported no material change to the risk factors in its latest Form 10-K.
Important facts for investors to verify
- Whether the $2.56 billion railcar backlog converts to orders delivered and revenue on the expected schedule, given mix, pricing and cancellation qualifications.
- Whether manufacturing margins stabilize after the quarter’s pricing, mix and cost pressures, and how much earnings depend on equipment-sale gains.
- Whether the lower lease utilization rate and planned fleet purchases and sales support sustainable Leasing & Services earnings and cash generation.
- Whether operating cash flow recovers from the quarterly outflow and planned capital spending and the €30 million Greenbrier-Astra payment are funded without reducing liquidity or covenant flexibility.
- Developments in Portland Harbor remediation, allocation of costs, the natural-resource-damages case and the foreign litigation settlement; the filing does not quantify Greenbrier’s potential environmental exposure.
- The eventual effects of the tax-law change and the outcome of Greenbrier’s evaluation of the new revenue-recognition and lease-accounting standards.