Greenbrier Companies, Inc. — Q2 FY2014 Form 10-Q
Reporting period: Three and six months ended February 28, 2014. Dollar amounts below are in millions unless stated otherwise. Greenbrier manufactures railcars and marine vessels, supplies wheels, repair and parts, and provides railcar leasing and management services.
Financial performance
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Revenue | $502.2 | $423.2 | $992.6 | $838.5 |
| Gross margin dollars | $57.9 | $48.3 | $119.4 | $96.1 |
| Operating earnings | $34.6 | $26.4 | $72.8 | $49.5 |
| Net earnings attributable to Greenbrier | $15.6 | $13.8 | $31.0 | $24.3 |
| Diluted EPS | $0.50 | $0.45 | $0.98 | $0.80 |
- Revenue increased 18.7% in Q2 and 18.4% year to date. Manufacturing was the main growth driver, supported by higher railcar deliveries: approximately 3,400 units in Q2 versus 2,700, and 7,100 year to date versus 5,600.
- Gross margin was 11.5% of revenue in Q2 versus 11.4%; year-to-date margin was 12.0% versus 11.5%. Operating margin rose to 6.9% in Q2 from 6.2% and to 7.3% year to date from 5.9%.
- Manufacturing benefited from higher volumes, favorable product mix and better production efficiency. Q2 segment margin was 11.8% versus 10.7%; six-month margin was 12.6% versus 10.1%.
- Wheels, Repair & Parts revenue grew, but margins weakened. Its Q2 margin was 6.3% versus 7.9%; six-month margin was 5.6% versus 8.7%, reflecting repair-facility inefficiencies, restructuring, product mix and other costs.
- Leasing & Services revenue was nearly flat. Six-month margin declined to 45.7% from 52.3%, partly reflecting a prior-year maintenance-accrual reduction and lower average rent-producing cars for syndication.
Cash, debt and liquidity
- At February 28, cash and cash equivalents were $143.9 million, up from $97.4 million at August 31, 2013. Operating cash flow for the six months was $66.8 million, compared with $33.6 million a year earlier; management attributed much of the increase to working-capital timing.
- Investing activities provided $10.7 million, versus $19.8 million used in the prior-year period. Capital expenditures were $16.5 million, while asset-sale proceeds were $28.7 million. Financing activities used $33.9 million, including $8.9 million of cash share repurchases.
- Revolving notes were $26.7 million and notes payable were $371.4 million at period-end. Senior secured facilities totaled $360.2 million, with $327.2 million reported available to draw. The filing does not present a classified current-liability total or a current ratio.
- In March 2014, Greenbrier refinanced approximately $125 million of existing term debt with a new six-year, $200 million facility at LIBOR plus 1.75%; half the initial balance was swapped to a 3.7375% fixed rate. The new facility includes a $160 million balloon due at maturity.
- Management said cash, operating cash generation and financing sources were expected to cover working capital, planned capital spending and debt repayments over the next 12 months. FY2014 capital-spending estimates: approximately $80 million Manufacturing, $10 million Wheels, Repair & Parts, and $10 million Leasing & Services; expected leased-railcar sale proceeds were approximately $60 million.
Business developments, outlook and risks
- Railcar manufacturing backlog was approximately 15,200 units valued at $1.54 billion, versus 11,700 units and $1.30 billion a year earlier. Subsequent to quarter-end, the company received orders for 3,100 railcars valued at approximately $265 million, subject to customary documentation and final terms. Marine backlog was approximately $70 million versus $9 million.
- Greenbrier expected all railcar backlog to be sold to third parties, not placed in its owned lease fleet. Management cautioned that backlog is not necessarily indicative of future results and that assumed product mix may affect its stated value. The filing provides no company-wide earnings or revenue guidance.
- The Wheels, Repair & Parts restructuring is expected to be completed during 2014. Charges were $1.4 million for the six months; up to an additional $1.0 million of pretax cash charges was estimated for 2014, excluding undetermined noncash facility-related gains or losses.
- A Sahagun, Mexico leased manufacturing facility’s lease expires in November 2014. Greenbrier was arranging replacement capacity and expansion, particularly for tank cars, and had agreed with its joint-venture partner, subject to final documentation, to extend the Mexican manufacturing joint venture through 2029.
- Net gains on equipment dispositions were $5.4 million in Q2 and $9.1 million for six months, including gains on leased railcar sales. These gains supported reported operating earnings; the company sells lease-fleet assets in the ordinary course to manage market exposure and liquidity.
- Environmental exposure remains uncertain at the Portland Harbor Superfund site. Draft cleanup alternatives estimated $9 million to $163 million for the area adjacent to Greenbrier’s property; the company said it could not determine its liability or estimate a potential loss. It believes it did not materially contribute to the damage and notes that other responsible parties may share costs.
- A newly highlighted risk concerns the Lac-Mégantic crude-oil train derailment class action, in which Greenbrier is a defendant. The filing says potential damages could be very large, though the company was not aware of circumstances indicating likely liability. Potential regulation of DOT 111 tank cars could also affect its fleet; 312 such leased cars had a net book value of approximately $26.8 million.
- Other material risks include customer demand and order cancellations, raw-material costs and availability, production and labor disruptions, financing and covenant compliance, lease-fleet utilization and residual values, warranties, and currency and interest-rate movements. Greenbrier had guaranteed approximately $20.2 million of Mexican joint-venture debt.
Most important facts for investors to verify
- Whether the backlog and post-quarter orders convert to deliveries on schedule and at the assumed product mix and margins.
- Whether manufacturing margin gains persist and Wheels, Repair & Parts operations recover from lower margins and restructuring-related disruption.
- Cash conversion and working-capital trends, planned capital spending, and progress against the stated liquidity outlook.
- Terms, covenants, amortization and maturity exposure of the March 2014 refinancing, including the $160 million balloon payment.
- Developments in the Portland Harbor environmental process and the Lac-Mégantic litigation and tank-car regulatory proposals.
- Share-repurchase pace and remaining authorization: the company repurchased about $10.3 million of shares through February 28 and a further $11.1 million through April 1, 2014.