GREENBRIER COMPANIES INC annual report, FY2017

Greenbrier Companies, Inc. — FY2017 Form 10-K

Reporting period: Fiscal year ended August 31, 2017. The filing is an annual report; it also reports fourth-quarter results. Greenbrier designs and manufactures freight railcars and marine barges, provides wheel, parts, leasing and fleet-management services, and holds an equity-method interest in the GBW railcar repair joint venture.

Financial performance and liquidity

Metric	FY2017	FY2016
Revenue	$2.169 billion	$2.680 billion
Gross margin	$421.3 million; 19.4% of revenue	$551.4 million; 20.6% of revenue
Operating earnings	$260.4 million	$408.6 million
Net earnings attributable to Greenbrier	$116.1 million	$183.2 million
Diluted EPS	$3.65	$5.73
Cash from operations	$280.4 million	$331.7 million
Capital expenditures	$86.1 million	$139.0 million

• Revenue fell 19.0% and attributable net earnings fell 36.6%. Railcar deliveries declined 22.7%, to 15,700 units. Manufacturing revenue decreased 17.7%; Wheels & Parts revenue decreased 3.0%; Leasing & Services revenue decreased 49.7%.
• Manufacturing margin declined to 20.4% from 22.2%, reflecting lower deliveries and product mix. Wheels & Parts margin fell to 7.8% from 8.9% on lower wheel-set and component volumes. Leasing & Services margin rose to 34.8% from 21.9%, partly because fewer lower-margin third-party railcar resales were recorded.
• Cash and cash equivalents were $611.5 million at year-end, up from $222.7 million. Operating cash flow remained positive but declined year over year. Cash used in investing was $113.7 million; financing provided $209.6 million, including proceeds from the new convertible notes.
• Gross debt was approximately $597.6 million before $39.4 million of debt discount and issuance costs; balance-sheet notes payable, net, were $558.2 million. Greenbrier reported $338.9 million of availability across committed credit facilities and compliance with debt covenants. It also reported $77.6 million of letters of credit under its North American facility.
• Total assets were $2.398 billion and total equity was $1.179 billion. The filing does not present a single current ratio or a consolidated net-debt measure.
• Fourth-quarter revenue was $611.4 million, operating earnings were $57.8 million, net earnings attributable to Greenbrier were $23.7 million, and diluted EPS was $0.75.

Material changes and significant developments

• Railcar backlog at August 31, 2017 was 28,600 units, estimated at $2.80 billion, versus 27,500 units and $3.19 billion a year earlier. About 16,000 units were scheduled for delivery in fiscal 2018. Marine backlog was $42 million, down from $114 million.
• In June 2017, Greenbrier combined its European operations with Astra Rail, taking an approximately 75% controlling interest and consolidating the business. Consideration includes €30 million paid at closing and another €30 million due in June 2018. The acquired operations contributed $23.9 million of revenue and a $3.0 million operating loss from acquisition through year-end.
• Greenbrier increased its interest in Brazilian railcar maker Greenbrier-Maxion to 60% and in component maker Amsted-Maxion Cruzeiro to 24.5%; both remain equity-method investments. Greenbrier reported increased losses from its Brazil operations in 2017.
• Greenbrier issued $275 million of 2.875% convertible senior notes due 2024. The existing $119.1 million of 3.5% convertible notes was due in April 2018; the contractual-obligations table assumes settlement in stock at maturity.
• TTX Company represented approximately 20% of FY2017 revenue. No other customer exceeded 10%. The top ten suppliers represented about 53% of inventory purchases, with Amsted Rail accounting for 22%.
• GBW revenue decreased 32.2% to $253.4 million, and its margin was negative 1.6%. It recorded an $11.2 million pretax goodwill impairment; Greenbrier’s 50% share of the impairment was $3.5 million after tax. Greenbrier recorded a total $11.8 million loss from unconsolidated affiliates.

Outlook, risks and unusual items

• Management expected existing funds, operating cash generation and financing availability to cover anticipated debt repayments, working capital, planned capital expenditures, dividends, affiliate investments and the €30 million Astra payment over the following 12 months. Fiscal 2018 capital-expenditure estimates were approximately $70 million for Manufacturing, $5 million for Wheels & Parts, and $90 million for Leasing & Services and corporate. Expected proceeds from leased-railcar sales were $150 million.
• A strategic agreement with Mitsubishi UFJ Lease & Finance includes an order for 6,000 new railcars, with deliveries beginning in late 2017 and continuing through calendar 2020, and exclusive sourcing of its new railcars from Greenbrier through calendar 2023. A $40 million upfront management-services fee was recorded as deferred revenue and is to be recognized as services are performed.
• Key business risks include cyclical railcar demand, lower industry volumes or overcapacity, changes in commodity prices and product mix, customer and supplier concentration, competition, interest rates, foreign exchange and international trade policy. Backlog may be modified or canceled and is not a guarantee of future revenue.
• The Portland Harbor Superfund cleanup is estimated by the EPA to cost $1.7 billion overall, but responsibility has not been allocated. Greenbrier stated that information was insufficient to determine its potential liability or estimate a loss range. A separate Yakama Nation natural-resource-damages suit was pending, and the company had moved to dismiss it.
• A foreign commercial-litigation judgment of approximately $10 million was affirmed on appeal; Greenbrier was evaluating its options. The company said it believed resolution of pending litigation would not materially adversely affect its consolidated financial statements.
• Net gain on equipment dispositions was $9.7 million, including $5.2 million of insurance proceeds above the book value of assets destroyed in fires. The GBW impairment and lower railcar deliveries were significant drags on FY2017 results.
• KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The internal-control assessment excluded the acquired Astra subsidiaries; management expected to implement and evaluate controls there during fiscal 2018.

Important facts for investors to verify

• Whether the 28,600-unit railcar backlog converts to deliveries, revenue and margins on the expected schedule, and whether the 6,000-unit MUL order proceeds as planned.
• Whether manufacturing volumes and segment margins stabilize, and whether GBW’s repair volumes and profitability recover after its impairment.
• Cash availability and covenant headroom after the 2018 convertible-note maturity, the €30 million Astra payment, and planned fiscal 2018 capital expenditures.
• Greenbrier’s eventual share, if any, of Portland Harbor remediation or natural-resource-damage costs, and the outcome of the separate affirmed $10 million judgment.
• Integration and control implementation at Astra, and the performance and funding needs of the Brazilian affiliates.