Greenbrier Companies, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended November 30, 2015; comparisons are with the three months ended November 30, 2014 unless noted. Fiscal year ends August 31. Amounts below are in U.S. dollars.
Business context
Greenbrier manufactures railcars and marine vessels, provides wheel and parts services, and owns and manages railcars. Its four reportable segments are Manufacturing, Wheels & Parts, Leasing & Services, and the equity-method GBW joint venture. Manufacturing and Leasing & Services operations are integrated.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $802.4 million | $495.1 million | +62.1% |
| Gross margin | $184.8 million; 23.0% | $88.1 million; 17.8% | Margin +5.2 percentage points |
| Operating earnings | $148.5 million | $54.4 million | +172.8% |
| Net earnings attributable to Greenbrier | $69.4 million | $32.8 million | +111.8% |
| Diluted EPS | $2.15 | $1.01 | +$1.14 |
| Operating cash flow | $(63.5) million | $(53.8) million | Cash use increased |
Net earnings were $98.7 million, of which $29.3 million was attributable to noncontrolling interests, primarily the Mexican manufacturing joint venture. The effective tax rate was 31.3% in both periods. Interest and foreign-exchange expense was $5.4 million, compared with $3.1 million.
- Manufacturing: Revenue rose 83.9% to $698.7 million; deliveries increased 72.5% to 6,900 units. Segment operating profit increased to $153.7 million from $52.1 million, and margin rose to 23.7% from 16.8%, reflecting higher volume, favorable pricing and improved production efficiency.
- Wheels & Parts: Revenue fell 9.1% to $78.7 million and operating profit fell 57.1% to $3.4 million, as demand and scrap-metal pricing weakened.
- Leasing & Services: Revenue declined 12.2% to $25.0 million; operating profit fell 9.8% to $10.0 million. Owned railcar utilization was 89.0%, versus 98.1% a year earlier.
- GBW joint venture: Revenue was $96.0 million versus $82.5 million; operating earnings were $2.4 million versus $0.3 million. Greenbrier recorded $0.4 million of earnings from unconsolidated affiliates overall, compared with $0.8 million.
Balance sheet, liquidity and cash flow
- Cash and cash equivalents were $197.6 million at November 30, up from $172.9 million at August 31, 2015. Restricted cash was an additional $9.8 million.
- Revolving notes were $163.9 million and notes payable were $324.7 million, for reported debt of approximately $488.6 million. Greenbrier reported $289.7 million available under committed credit facilities; the senior secured facilities totaled $625.1 million. The main North American revolving facility is $550 million and matures in October 2020.
- Operating activities used $63.5 million, including cash uses from higher receivables, lower payables and accrued liabilities, and railcars held for syndication. Investing activities provided $23.6 million, including $41.4 million of asset-sale proceeds, while capital expenditures were $15.6 million. Financing activities provided $71.6 million, including a $113.0 million net increase in short-term revolving borrowings.
- Total assets were $1.894 billion and total equity was $914.5 million at November 30. The filing does not present a current ratio in the supplied text.
Material changes, outlook and notable items
- Railcar manufacturing backlog was approximately 36,000 units valued at $4.14 billion, versus 41,200 units valued at $4.20 billion a year earlier. It included 31,300 direct-sale units valued at $3.73 billion and 4,700 units valued at $0.41 billion intended for syndication with leases attached. No backlog orders were intended for Greenbrier’s owned lease fleet. Marine backlog declined to $36 million from $100 million.
- Management attributed the strong manufacturing results to freight-car demand, delivery volume, pricing and production efficiencies. It cautioned that backlog is not necessarily indicative of future results and that orders may be modified or canceled.
- Expected FY2016 capital expenditures: approximately $55 million for Manufacturing, $30 million for Leasing & Services and corporate, and $9 million for Wheels & Parts. Expected proceeds from sales of leased railcars were approximately $85 million. Management expected available funds, operating cash generation and financing to cover the next 12 months’ needs. The filing provides no full-year revenue or earnings guidance.
- Greenbrier repurchased 521,626 shares for approximately $19.1 million during the quarter and had $101.3 million remaining under its repurchase authorization. The Board declared a quarterly dividend of $0.20 per share on January 6, 2016.
- The company purchased 3,885 railcars with attached leases from a related party in September 2015, intending to sell them to third parties. A sale-and-leaseback transaction also contributed to asset-sale proceeds; $31.6 million of equipment was transferred from syndication inventory to operating-lease equipment.
- Environmental contingency: Greenbrier is among parties potentially responsible for cleanup of the Portland Harbor Superfund site and is investigating potential onsite contamination. The EPA’s August 2015 draft study estimated site-wide cleanup costs of $790 million to $2.4 billion, but liability allocation and the company’s potential share are undetermined; the filing says a loss range cannot currently be estimated. The company believes it did not materially contribute to river sediment contamination. Additional investigation or remediation costs could be significant.
- Other exposures include credit-facility covenants and renewals, variable interest rates, foreign-exchange movements, railcar demand and pricing, warranty and maintenance estimates, and the ability to convert backlog and lease-syndication commitments. Management reported no material change in the risk factors from its 2015 Form 10-K.
Important facts for investors to verify
- Whether the large manufacturing backlog converts to deliveries and cash on expected timing and terms, and how backlog composition affects margins.
- Whether operating cash flow improves as receivables, payables and railcars held for syndication change; assess reliance on revolving borrowings and remaining facility availability.
- Whether Wheels & Parts demand and margins stabilize, and whether Leasing & Services utilization recovers from 89.0%.
- Progress on Portland Harbor and onsite environmental investigations, including any EPA decisions, cost allocation or estimable exposure.
- GBW funding requirements, Greenbrier’s $32.7 million note receivable from the venture, and the effect of noncontrolling interests on earnings attributable to shareholders.