GREENBRIER COMPANIES INC quarterly report, Q1 FY2020

Business context and reporting period

The Greenbrier Companies, Inc. filed this Form 10-Q for its fiscal first quarter ended November 30, 2019. The company manufactures railcars and marine vessels, provides wheel, repair and parts services, and leases railcars and provides railcar management services. Results include the manufacturing business acquired from American Railcar Industries (ARI) in July 2019.

Financial results and liquidity

Amounts below are in millions of dollars unless stated otherwise; comparisons are with the three months ended November 30, 2018.

Interest and foreign exchange expense was $12.9 million, up from $4.4 million. The company reported $4.0 million in net gains on equipment dispositions, down from $14.4 million. Capital expenditures were $23.2 million. Total assets were $2.95 billion and total equity was $1.47 billion at quarter-end.

Notes payable, net, were $817.8 million and revolving notes were $29.5 million, for approximately $847.3 million in these reported debt balances. Cash and cash equivalents were $253.6 million. The company reported $342.4 million available under committed credit facilities and compliance with its debt covenants. Operating lease liabilities of $38.4 million were recognized following adoption of the new lease standard.

Material changes versus the prior comparable period

• Revenue rose 27.3%, mainly because Manufacturing revenue increased 39.3%, with railcar deliveries up 40.5% to 5,900. The acquired ARI business contributed $103.5 million of revenue and reported a $2.5 million net loss.
• Manufacturing operating profit increased to $53.1 million from $36.9 million, while Wheels, Repair & Parts operating profit fell to $1.1 million from $3.2 million. The latter segment’s revenue declined 20.2%, and its margin fell to 5.4% from 7.0%.
• Leasing & Services operating profit declined to $9.8 million from $17.5 million, primarily reflecting a $7.5 million decrease in net gains on equipment dispositions.
• Although consolidated net earnings were broadly stable, earnings attributable to Greenbrier fell 57.3%, mainly because net earnings attributable to noncontrolling interests rose to $16.3 million from $5.4 million. Higher interest and foreign exchange expense also reduced parent-attributable earnings.
• Operating cash use improved by $26.8 million year over year but remained substantial; the company cited working-capital movements and cash flows related to railcars intended for syndication.

Outlook, commentary, risks and unusual items

• Management reported a railcar manufacturing backlog of approximately 28,500 units valued at $3.09 billion, plus $80 million of marine backlog. Backlog is not a guarantee of future revenue and may be modified or canceled. Subsequent to quarter-end, the company agreed in principle to remove 575 units from backlog for financial consideration.
• Expected FY2020 capital expenditures were approximately $140 million: $95 million for Manufacturing, $15 million for Wheels, Repair & Parts, and $30 million for Leasing & Services and corporate. Expected proceeds from leased railcar sales were $95 million. These are management estimates, not earnings guidance.
• Management expected existing funds, operating cash generation and financing sources to cover expected debt repayments, working capital, planned capital expenditures, affiliate investments and dividends for the next 12 months. The quarterly dividend declared January 7, 2020 increased to $0.27 per share from $0.25.
• ARI purchase-price allocation remained preliminary. The acquisition was funded partly with a $300 million secured term loan and a $50 million senior convertible note. Integration costs and operating inefficiencies affected the acquired facilities.
• The company adopted lease accounting Topic 842 on September 1, 2019, recognizing $40.4 million of operating lease right-of-use assets and $41.6 million of lease liabilities. A $4.4 million cumulative-effect adjustment increased retained earnings.
• The Portland Harbor Superfund cleanup remains a material uncertainty. The EPA estimated undiscounted site-wide cleanup costs of $1.7 billion, but Greenbrier stated that available information was insufficient to determine its liability or estimate a potential loss range. The company also noted possible costs related to Oregon DEQ investigations and assumed legacy ARI railcar retrofit and repair obligations.
• Other principal risks include rail-industry cyclicality and demand, backlog conversion, customer concentration, acquisition integration, raw-material and labor costs, foreign exchange and interest rates, warranty exposure, litigation and environmental liabilities. The filing reported no material change to previously disclosed risk factors.

Important facts for investors to verify

• Whether backlog converts to scheduled deliveries and revenue, particularly given the 575-unit removal agreement and the uncertain timing of orders.
• ARI integration progress, profitability, realized synergies and any changes to the preliminary purchase-price allocation or assumed liabilities.
• The drivers and sustainability of the sharp increase in noncontrolling-interest allocations, and the resulting gap between consolidated earnings and earnings attributable to Greenbrier.
• Working-capital needs, operating cash flow, planned capital spending and the company’s ability to maintain liquidity while servicing debt.
• Developments in Portland Harbor and other environmental matters, including whether Greenbrier’s potential responsibility becomes estimable.
• Actual performance against planned FY2020 capital expenditures and leased-railcar sale proceeds; the filing provides no full-year earnings guidance.