Greenbrier Companies, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Three months ended February 28, 2022, with year-to-date comparisons for the six months ended February 28, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Greenbrier manufactures railcars and marine vessels, provides railcar maintenance services, and leases and manages railcars. Its reportable segments are Manufacturing, Maintenance Services, and Leasing & Management Services. Management said the freight rail equipment market was beginning to recover, while inflation, supply constraints, labor shortages, logistics delays, and geopolitical uncertainty presented challenges.
Financial and operating metrics
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $682.8 | $295.6 | $1,233.5 | $698.6 |
| Margin | $54.8 | $17.6 | $102.4 | $58.3 |
| Margin as % of revenue | 8.0% | 6.0% | 8.3% | 8.3% |
| Operating earnings (loss) | $25.2 | $(25.7) | $37.0 | $(27.8) |
| Net earnings (loss) attributable to Greenbrier | $12.8 | $(9.1) | $23.6 | $(19.1) |
| Diluted earnings (loss) per share | $0.38 | $(0.28) | $0.70 | $(0.58) |
- Segment trends: Q2 Manufacturing revenue rose 175.8% to $555.7, supported by 4,400 railcar deliveries versus 1,700 a year earlier. Maintenance Services revenue increased 20.9% to $86.6, but higher material and labor costs pressured its margin. Leasing & Management Services revenue increased 80.0% to $40.5, primarily from higher syndication and leasing activity.
- Cash flow: First-half operating cash use was $220.3, compared with $94.8 used a year earlier. Investing activities used $52.4; financing activities provided $204.8. Cash and restricted cash declined $68.9 from fiscal year-end to $602.5.
- Liquidity and debt: At February 28, cash and cash equivalents were $586.8, restricted cash was $15.7, and available committed credit was $216.8. Revolving notes were $292.2 and notes payable, net, were $1,209.2. The filing reports compliance with debt covenants.
- Investment and distributions: First-half capital expenditures were $198.0, including $183.6 for Leasing & Management Services; asset sale proceeds were $148.6. The company declared a $0.27-per-share quarterly dividend on March 29, 2022.
Material changes versus the prior comparable period
- Quarterly revenue more than doubled, up 131.0%; first-half revenue rose 76.6%. Management attributed much of the growth to higher railcar deliveries and increased manufacturing activity.
- Greenbrier returned to operating and net profitability. Higher volumes improved Manufacturing results, while Leasing & Management Services benefited from syndication and fleet activity.
- Net gains on disposition of equipment were $25.1 in Q2 and $33.6 for the first half, versus $0.1 and $1.0, respectively, in the prior-year periods. These gains were a significant contributor to improved results.
- Manufacturing input costs, including steel, increased. Contract price-escalation provisions partly offset cost increases, but the company noted that such pass-throughs can increase reported revenue and costs without improving margin dollars.
- Inventory rose to $728.5 from $573.6 at August 31, 2021, and first-half operating cash use increased, reflecting working-capital needs associated with higher production and input costs.
- Notes payable, net, increased from $826.5 at fiscal year-end, while revolving notes declined from $372.2. In February, Greenbrier issued $323.3 of asset-backed notes for its leasing business and used the proceeds to repay its warehouse credit facility.
Outlook, risks, contingencies, and unusual items
- Orders and backlog: Greenbrier reported 14,800 new railcar orders valued at approximately $1.6 billion in the first half. Railcar backlog was 32,100 units, estimated at $3.6 billion, its highest stated value in approximately six years; marine backlog was $48 million. Railcar deliveries were scheduled into 2024 and marine deliveries into 2023. Backlog is not a guarantee of future results and may be changed or canceled.
- Capital spending outlook: For FY2022, management expected capital expenditures of approximately $275 for Leasing & Management Services, $55 for Manufacturing, and $10 for Maintenance Services, and asset sale proceeds of approximately $150. These are expectations, not guarantees.
- Liquidity outlook: Management expected cash, operating cash generation, and financing sources to fund debt repayments, working capital, planned capital spending, affiliate investments, and dividends over the next 12 months.
- Key risks: Inflation and volatile steel and other input prices, supply-chain and transportation disruption, skilled-labor shortages, interest-rate and currency movements, and the Russia-Ukraine conflict could raise costs or delay production and customer orders. COVID-19-related disruptions also remained a risk.
- Environmental contingency: Greenbrier is among potentially responsible parties for the Portland Harbor Superfund site. The EPA’s estimated cleanup cost for the entire site is $1.7 billion, but the company said its own potential liability cannot currently be determined or reasonably estimated. The company disputes that it materially contributed to the contamination. Related claims and investigations remain ongoing.
- Other notable items: Adoption of convertible-instrument accounting guidance increased the reported convertible-notes balance and reduced additional paid-in capital; management said the adoption did not affect liquidity or cash flows. The Astra Rail partner’s put-option exercise period was extended through June 1, 2026. Lorie L. Tekorius became CEO effective March 1, 2022.
Important facts for investors to verify
- Whether the $3.6 billion backlog converts to scheduled deliveries and revenue as expected, including the effect of cancellations, product mix, and lease-versus-sale decisions.
- How much of earnings depends on equipment-disposition gains and syndication activity, and whether these sources remain sustainable.
- Whether working-capital investment, especially inventory growth, moderates as production and deliveries increase, given the substantial first-half operating cash outflow.
- The composition, repayment profile, interest-rate exposure, and covenant headroom of debt, including the asset-backed notes’ anticipated repayment date and the company’s available borrowing capacity.
- Developments in the Portland Harbor and onsite environmental matters that could clarify Greenbrier’s potential remediation or natural-resource-damage exposure.