Greenbrier Companies, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the period ended May 31, 2016, Greenbrier’s fiscal third quarter. The company manufactures railcars and marine vessels, provides wheels and parts, and operates railcar leasing and services businesses. Its GBW repair-services joint venture is accounted for under the equity method.
Financial performance and liquidity
Amounts below are in millions, except per-share data and percentages. Income statement comparisons are with the corresponding 2015 period.
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $612.9, down 14.2% | $2,084.3, up 13.3% |
| Operating earnings | $84.1, versus $104.4 | $325.0, versus $251.4 |
| Consolidated net earnings | $59.5, versus $70.3 | $224.5, versus $167.4 |
| Net earnings attributable to Greenbrier | $35.4, versus $42.8 | $149.7, versus $125.9 |
| Diluted earnings per share | $1.12, versus $1.33 | $4.67, versus $3.91 |
| Consolidated margin | 20.7%, versus 20.9% | 20.7%, versus 19.7% |
- Segment trends: Manufacturing revenue fell 22.7% in the quarter as railcar deliveries declined 24.6%; nine-month manufacturing revenue rose 9.0% on 5.4% higher deliveries and a higher-average-price mix. Wheels & Parts revenue declined 19.5% in the quarter and 13.6% year to date. Leasing & Services revenue rose sharply, mainly from sales of acquired railcars, but its margin percentage was lower.
- Cash flow: For the nine months, operating activities provided $194.7 million, investing activities provided $33.5 million, and financing activities used $179.9 million. Capital expenditures were $51.7 million. Cash and cash equivalents rose to $214.4 million at May 31 from $172.9 million at August 31, 2015.
- Debt and liquidity: Notes payable were $306.8 million; revolving notes were zero at May 31. The company reported $354.2 million available under committed credit facilities, against $81.3 million of outstanding letters of credit. It reported compliance with its debt covenants. The filing says existing funds, operating cash flow, and financing sources are expected to cover needs over the next 12 months.
- Balance sheet and capital returns: Total assets were $1,785.9 million and total equity was $989.9 million. Greenbrier repurchased about $32.4 million of stock in the nine-month period and paid $17.4 million in dividends. A $0.21-per-share dividend was declared on June 29, 2016.
Material changes versus prior comparable periods
- Quarterly revenue and Greenbrier-attributable earnings decreased, chiefly because of lower railcar deliveries and lower Wheels & Parts demand. Manufacturing’s margin rate improved to 23.1% from 21.5%, while its operating profit declined with delivery volume.
- Nine-month revenue and Greenbrier-attributable earnings increased, supported by manufacturing deliveries and margins, higher Leasing & Services activity, and an $11.3 million net gain on equipment dispositions, compared with $0.9 million a year earlier.
- Revenue from acquired railcars materially increased Leasing & Services sales, but also increased related costs and reduced the segment’s margin percentage. The nine-month cash-flow improvement included higher earnings and changes in working capital and leased railcars held for syndication.
- Railcar backlog declined to approximately 31,200 units valued at $3.62 billion at May 31, 2016, from 45,100 units valued at $4.86 billion a year earlier. Marine backlog was $51 million, down from $70 million.
Outlook, commentary, risks, contingencies, and unusual items
- Management expected 2016 capital expenditures of approximately $55 million for Manufacturing, $30 million for Leasing & Services and corporate, and $9 million for Wheels & Parts. It expected approximately $90 million of proceeds from leased-railcar sales in 2016. The filing does not provide a specific earnings or revenue forecast.
- Backlog is not guaranteed to convert to revenue. Approximately 5,000 covered hopper cars related to energy-sand transportation were subject to customer attempts to cancel, settle, or modify orders; some customers were described as financially stressed.
- In September 2015, Greenbrier bought 3,885 railcars from a related-party portfolio for approximately $148 million plus a $1 million fee. It sold 3,159 cars with leases attached for $162 million during the nine months; the company recognized $154.2 million of revenue and deferred $7.8 million because of continuing involvement. It paid the related party $7.2 million under a profit-sharing agreement and accrued another $11.3 million.
- Greenbrier agreed to invest $10 million for a 19.5% interest in Amsted-Maxion Cruzeiro, subject to customary closing conditions, and described related options involving potential additional ownership interests in Brazilian railcar businesses.
- Environmental contingency: Greenbrier and more than 140 other parties received EPA notice of potential liability related to the Portland Harbor Superfund site. The EPA’s June 2016 proposed plan estimated total cleanup costs of $1.1–$1.2 billion, but did not allocate responsibility among parties or break costs down by site unit. Greenbrier said its liability could not be determined or reasonably estimated; its historical investigation expenditures had not been material. The matter could nevertheless result in significant costs or operational restrictions.
- Other disclosed exposures include warranty and maintenance estimates, foreign-exchange and interest-rate movements, customer order changes, and railcar demand and production risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the railcar backlog converts to deliveries and revenue, particularly the 5,000 covered hopper orders facing attempted changes or cancellations.
- How much of Leasing & Services earnings and cash flow depends on resales of the related-party railcar portfolio, including the remaining profit-sharing accrual.
- Any EPA Record of Decision, cost-allocation outcome, or new estimate of Greenbrier’s potential Portland Harbor liability.
- Whether available credit, covenant compliance, and cash generation remain adequate as facilities renew and debt is repaid.
- Actual 2016 capital spending and railcar-sale proceeds compared with management’s stated expectations, and subsequent performance in the lower-demand Wheels & Parts business.