Greenbrier Companies, Inc. — Form 10-Q Summary
Reporting period: Quarter ended May 31, 2020 (fiscal third quarter), with year-to-date results for the nine months ended May 31, 2020. Unless noted otherwise, amounts below are in U.S. dollars and rounded to millions.
Business context and reporting period
Greenbrier manufactures railcars and marine vessels, provides wheel, repair and parts services, and leases railcars and provides related services. The filing includes the acquired American Railcar Industries (ARI) manufacturing business, acquired in July 2019; ARI contributed $338.7 million of revenue and $6.7 million of net earnings in the nine-month period. The company reported approximately 26,700 railcars in manufacturing backlog, valued at $2.67 billion, and $37 million of marine backlog at May 31, 2020. Backlog is not a guarantee of future revenue.
Financial performance and liquidity
| Metric | Quarter ended May 31, 2020 | Prior-year quarter | Nine months ended May 31, 2020 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $762.6 million | $856.2 million | $2,155.8 million | $2,119.3 million |
| Gross margin dollars | $107.5 million | $106.6 million | $286.1 million | $232.9 million |
| Gross margin percentage | 14.1% | 12.4% | 13.3% | 11.0% |
| Operating earnings | $66.8 million | $53.2 million | $147.0 million | $107.7 million |
| Net earnings attributable to Greenbrier | $27.8 million | $15.2 million | $49.1 million | $36.0 million |
| Diluted earnings per share | $0.83 | $0.46 | $1.47 | $1.08 |
- Cash flow: Nine-month operating cash flow was $89.0 million, compared with cash used of $94.1 million a year earlier. Investing activities provided $33.0 million versus $58.6 million used; financing activities provided $301.2 million versus $2.8 million used. The filing attributes the substantial cash increase in part to borrowing in response to uncertainty.
- Cash and liquidity: Cash and cash equivalents were $735.3 million at May 31, 2020, plus $8.7 million of restricted cash. The company reported $136.8 million available under committed credit facilities and compliance with debt covenants.
- Debt: Balance-sheet revolving notes were $416.5 million and notes payable, net, were $806.9 million. These carrying amounts total approximately $1.223 billion. The company separately reported $705.1 million of aggregate senior secured credit facilities; this is facility capacity, not total debt.
- Dividends and investment: Dividends declared were $0.27 per share for the quarter and $0.79 per share for the nine months. Capital expenditures were $55.3 million year to date, down from $149.9 million. Management expected fiscal 2020 capital expenditures of approximately $85 million and proceeds from leased-railcar asset sales of approximately $90 million.
Material changes versus the prior comparable period
- Quarterly revenue decreased 10.9%, primarily reflecting lower Wheels, Repair & Parts activity, fewer railcar deliveries and lower Leasing & Services railcar resale revenue. Manufacturing deliveries declined 16.9% to 5,400; reported manufacturing revenue also included ARI.
- Quarterly gross margin percentage improved to 14.1% from 12.4%. Greenbrier attributed improvement mainly to manufacturing product mix and higher-margin railcar sales with leases attached. Net earnings attributable to Greenbrier rose 82.1%, helped by the prior-year $10.0 million goodwill impairment charge; the current-quarter effective tax rate was higher.
- For the nine months, revenue increased 1.7% and attributable earnings increased 36.4%. Manufacturing revenue rose 10.5%, principally including ARI, while Wheels, Repair & Parts revenue fell 27.6% and Leasing & Services revenue fell 27.1%.
- Nine-month manufacturing margin benefited from product mix and a $12.9 million customer-order contract modification fee received in the second quarter. Net gains on equipment dispositions declined to $19.4 million from $37.5 million, weighing on year-to-date results.
Outlook, management commentary, risks and unusual items
- Management said COVID-19 had not materially affected consolidated financial condition or results in the quarter, and facilities continued operating with enhanced safety protocols. It said the pre-existing cyclical freight-rail downturn had intensified, and warned that the pandemic and economic decline could materially harm operations, liquidity, results, stock price and backlog conversion. The magnitude and timing were uncertain.
- Management expected existing funds, operating cash flow and financing availability to cover anticipated debt repayments, working capital, planned capital expenditures, affiliate investments and dividends over the next 12 months. It cautioned that this outlook depends on uncertain conditions.
- Approximately $2.292 billion of railcar-sale performance obligations remained unsatisfied; about $0.4 billion was expected to be recognized in the final three months of fiscal 2020, with the rest expected through 2024. These estimates depend on production and delivery schedules. Railcars intended for syndication may instead be retained in the fleet.
- COVID-19 risks identified include facility closures, customer order delays or cancellations, supplier disruption, increased borrowing needs, constrained financing, dividend pressure and possible goodwill impairment. Other key exposures include rail-market cyclicality, customer concentration, variable interest rates, foreign exchange, warranty claims and integration of acquired operations.
- Environmental contingency: The EPA estimates the Portland Harbor cleanup will cost $1.7 billion in total, but has not allocated costs among responsible parties. Greenbrier said it cannot estimate its potential liability or a loss range; it believes it did not materially contribute to the contamination. The company also disclosed a separate Oregon DEQ investigation and possible remediation costs.
- Other items to monitor: The annual 2020 goodwill test found no impairment, but estimated fair value exceeded carrying value by only about 5% for Europe Manufacturing and 9% for Wheels & Parts. The warranty accrual was $47.7 million, versus $24.0 million a year earlier. Greenbrier also assumed potential legacy railcar liabilities in the ARI acquisition; the filing says their material impact cannot currently be determined.
- The company declared a $0.27-per-share quarterly dividend on July 8, 2020. No shares were repurchased during the quarter; the repurchase authorization had $100 million remaining and was scheduled to expire March 31, 2021.
Important facts for investors to verify
- Whether railcar backlog converts on expected schedules and pricing, and whether deliveries, customer modifications or cancellations change the outlook.
- How borrowing, cash balances and available credit evolve as pandemic and freight-market conditions affect working capital and operations.
- Whether the $12.9 million contract modification fee, product mix and asset-sale gains are repeatable, and how segment profitability develops—particularly in Wheels, Repair & Parts and Leasing & Services.
- Potential company exposure and future costs from Portland Harbor, DEQ matters, ARI legacy obligations and warranty claims, for which the filing does not provide a clear company-specific loss estimate.
- Whether goodwill valuation headroom narrows, and whether the dividend and planned capital spending remain sustainable under weaker conditions.