Light 1Q revenue growth, but ARI sees railcar market moving

American Railcar Industries reported modest revenue gains but weaker earnings in the first quarter of 2018, but added the railcar market is showing signs of improvement.

Consolidated earnings from operations were $21 million for the first quarter of 2018, off 4% from $21.9 million for the same period in 2017. Net earnings were $13 million, or 68 cents per share, compared to $10.6 million, or 55 cents per share, in the same period in 2017.

The company credited tax reform legislation signed into law in December, which lowered ARI’s federal tax rate from 35% to 21%, as well as increased earnings from the Company’s joint ventures, partially offset by a decrease in earnings from operations.

Pre-tax earnings totaled $36.9 million, up from $36.1 million.

Total consolidated revenues were $116.2 million for the first quarter of 2018, an increase of 1% when compared to $114.7 million for the same period in 2017.

“The North American railcar market remains challenging,” said John O’Bryan, President and Chief Executive of ARI. “While the number of railcars in storage has continued to decrease, an oversupply remains in the marketplace of most railcar types, including covered hoppers and tanks, which continues to impact demand and suppress pricing.

“On a positive note, inquiry activity increased during the first quarter of 2018, and while customers are carefully making decisions based on economic trends, we are slowly seeing these higher inquiry levels turn into firm orders. As further evidence of this slight uptick, the industry reported quarterly orders of over 10,000 railcars for only the second time since the second quarter of 2015. To align with market conditions, we remain focused on our long-term view and our disciplined approaches to aligning production with industry demand, investing in our lease fleet, and managing costs.”

O’Bryan succeeded Jeff Hollister on an interim basis in January; he was confirmed to lead the company on a permanent basis in February,

The company, based in St. Charles, Mo., manages a lease fleet of 13,000 cars and also provides railcar services. ARI’s backlog as of March 31, 2018 was 3,144 railcars with an estimated market value of $279.9 million. It expects to place 259 railcars, or 8%, having an estimated market value of $25.3 million, into the lease fleet.

First-quarter revenue increases were driven primarily by increased revenues in the manufacturing segment and a slight increase in the railcar leasing segment, partially offset by decreased revenues in the railcar services segment.

Manufacturing revenues were $64.1 million, up 6% from $60.7 million in the year-ago quarter, on higher railcar shipments for direct sale for both hopper and tank railcars, partially offset by lower selling prices due to the mix of types of hopper and tank railcars shipped and more competitive pricing across the North American market.

The builder shipped 616 railcars for direct sale and 195 railcars for lease compared to 549 railcars for direct sale and 602 railcars for lease during the same period in 2017. Cars built for the lease fleet represented 24% of shipments during the first quarter of 2018 compared to 52% for the same period in 2017.

“Due to the prevalence of lower lease rates in today’s North American railcar market, the Company is maintaining a disciplined approach to investing in its lease fleet,” ARI said. “This approach, coupled with lower demand, led to a lower rate of lease fleet shipments during the first quarter of 2018 compared to the same period of 2017.

Manufacturing revenues for the first quarter of 2018, on a consolidated basis, exclude $20.5 million of revenues related to railcars built for ARI’s lease fleet compared to $60.1 million a year ago, due to lower quantities of both tank and hopper railcars shipped for lease. ARI said the revenues are based on an estimated fair market value of the leased railcars as if they had been sold to a third party, and are not recognized in consolidated revenues as railcar sales.

Leasing revenues were $34.1 million for the first quarter of 2018, an increase of 1% from $33.8 million on-year, on an increase in the number of railcars on lease, partially offset by a decline in weighted average lease rates for both new railcars for lease and lease renewals compared to the same period in 2017.

The company had 13,326 railcars in its lease fleet as of March 31, 2018 compared to 11,869 railcars a year ago.

Railcar services revenues totaled $18 million for the first quarter of 2018, off 11% from $20.1 million in 2017. “This decrease was primarily due to overall decreased demand and lower repair revenue at the Company’s tank railcar manufacturing facility as it is ramping up activity on retrofit projects,” ARI said. “These railcar services revenues excluded intercompany revenue for lease fleet reassignment work for the Company’s leased railcars that is eliminated in consolidation.”

Operating margins decreased to 18.1% for the first quarter of 2018 compared to 19.1% for the same period in 2017, on lower earnings from operations in the manufacturing and railcar leasing segments.

Manufacturing earnings from operations on a consolidated basis were $3 million, down 1% from the 2017 quarter, as pricing became more competitive and costs increased amid lower production volumes, both partially offset by an increase in railcar shipments for direct sale.

The builder’s lease fleet netted $1.4 million and $6.1 million for the first quarter of 2018 and 2017, respectively.

Railcar leasing earnings from operations on a consolidated basis were $20.5 million, down from $21.5 million  due to increased maintenance costs and lower lease rates on certain renewals and reassignments.

Railcar services earnings from operations on a consolidated basis were $1.3 million for the first quarter of 2018 compared to $1.7 million for the same period in 2017. This decrease was primarily due to lower demand as well as an increase in services performed on railcars in the Company’s lease fleet.

In a note to investors, Cowen and Company analyst Matt Elkott said, “ARII beat our and consensus estimates for operating income, operating margin, and EPS despite a relatively light top line. Consistent with our channel checks and commentary from other builders, ARII noted an increased level of inquiries in 1Q.

“Revenue grew 1% to $116.2 million, below our and Street forecasts of $123.3 million and $119.1 million, respectively. Despite this, the company reported operating income of $21 million, above our and the consensus estimate of $19.7 million. “ARII had a higher percentage of railcar shipments for direct sales (76% of total shipments) than we had modeled (66% of total shipments). The operating margin was 18.1%, 210 bps better than our estimate and 160 bps better than consensus. EPS came in at $0.68, above our and Street forecasts of $0.59 and $0.60, respectively. Relative to our model, EPS had a $0.01 favorable impact from higher gains on disposition of assets and a $0.01 negative impact from a slightly higher tax rate. Higher income from joint ventures also had a positive impact on EPS.

“It appears the company had net orders of 2,015 units, compared to our estimate of 2,150 units. ARII had previously noted that it received orders for roughly 2,000 railcars in the first quarter through February 23. As such, it appears the company received additional orders for just 15 units in the balance of the quarter or received orders for more than that but had some cancellations.

“Our estimates and price target are under review.”