There is plenty of pain in the latest earnings report by railcar builder Greenbrier, reflecting the damage the sharp recession is inflicting on industry suppliers.
Sales for the Lake Oswego, Ore., company plunged 36 percent in its fiscal third quarter ending May 31, falling to $244 million from $382 million in the 2008 period.
Greenbrier also detailed tough negotiations it is in with its biggest customer, General Electric Railcar Services, as GE’s lease fleet unit tries to scale back a huge order. Greenbrier accuses the customer of breaching its contract. GE said it is honoring the terms and both are angling to limit their risks until equipment demand can pick up.
The car builder is expanding its cost cuts, retooling its credit terms and reducing its net debt by $19 million. It got a $75 million infusion from the WL Ross investment firm, which took two board seats plus warrants for 16.5 percent of Greenbrier’s common stock. Still, Greenbrier had to book a large goodwill impairment charge in the quarter that wiped out a hard-won operating profit of $600,000 and left it with a $50.5 million net loss.
Now, Greenbrier’s railcar Gunderson manufacturing center at Portland, Ore., is just doing car repairs and refits, next to some barge-building operations. Those two business lines are holding up much better and helping Greenbrier diversify.
The company also will stop building railcars at one of its two Mexico plants, and is laying off 550 workers there.
“In this environment,” President and CEO William A. Furman said, “we continue to scale our operations to reflect the current economic situation, control costs and expenditures, manage the company for cash flow and seek to pay down debt.”
Because Greenbrier’s quarters end one month before those of most other rail industry suppliers or carriers, its earnings provide an early glimpse into the latest trends.
The market Furman described lacks “green shoots” that might signal a rebound in demand. Instead, on July 7 he emphasized “year-to-date rail loadings (of freight) are down about 20 percent, and it is estimated that about 20 to 25 percent of the entire North American railcar fleet remains idle.”
Although Greenbrier officials say they have stabilized finances, they are hitting hard at GE. In late 2007, the two firms inked an eight-year deal for Greenbrier to supply the leasing giant with 11,900 units, a mix of tank cars and covered hoppers.
As of May 31, Greenbrier’s entire order backlog was 14,100 cars valued at $1.25 billion; it said GE alone accounted for 11,800 worth $1 billion. It delivered just 800 railcars to all customers in the March-May quarter, down from 2,200 a year before.
Now Greenbrier says GE does not want to take some cars the builder can already deliver. “We believe GE is in breach of its obligations under our contract,” the supplier said with the earnings report. It said GE would cut deliveries below the amount the builder needs “to produce railcars at an efficient rate and for both parties to fulfill their obligations.”
But GE spokesman Stephen White said the company is honoring the contract and taking delivery of railcars. “We have a disagreement with Greenbrier, which we are trying to resolve through ongoing commercial discussions, to explore mutually acceptable solutions that possibly include modifying delivery schedules as called for in the contract.”
But White said “the context is important,” because when they signed the deal, only 100,000 railcars were being stored across North America. “That number is north of 500,000 railcars today, and the economic landscape has gotten a lot more challenging.”
Greenbrier got help from 17 members of Congress who wrote GE’s CEO, Jeffrey Immelt, of their concern that canceling the railcar contract would wipe out more jobs.
White noted all cars for GE’s order are built in Mexico, but Furman insisted its impact is wider. The Greenbrier chief said he hoped to reach a deal with GE “without requiring further sacrifice from our partners in the North American supply industry, our work force or our shareholders.”
Contact John D. Boyd at email@example.com.