Business Context and Reporting Period
Company: The Greenbrier Companies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2011 (Nine months ended May 31, 2011)
Business Overview: Greenbrier operates in three integrated segments: Manufacturing (railcars and marine vessels), Wheel Services, Refurbishment & Parts, and Leasing & Services. The company is experiencing a recovery in freight car markets, with a manufacturing backlog of approximately 13,600 units valued at $1.05 billion as of May 31, 2011, compared to 4,400 units valued at $370 million in the prior year.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended May 31, 2011 | Nine Months Ended May 31, 2011 | Nine Months Ended May 31, 2010 |
|---|---|---|---|
| Total Revenue | $317,280 | $800,554 | $577,440 |
| Segment Margin | $38,150 | $88,455 | $76,018 |
| Net Earnings (Loss) Attributable to Greenbrier | $(3,314) | $(6,169) | $(3,433) |
| Diluted EPS | $(0.14) | $(0.27) | $(0.20) |
| Cash and Cash Equivalents (End of Period) | $34,302 | $34,302 | $116,595 |
| Total Debt (Notes Payable + Revolving) | $510,725 | $510,725 | $501,330 |
Note: Total Debt calculated as Notes Payable ($496,828) plus Revolving Notes ($13,897) as of May 31, 2011.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 52.5% year-over-year for the nine-month period ($800.6M vs. $577.4M), driven primarily by a 128% increase in Manufacturing revenue due to higher railcar deliveries (5,400 units vs. 1,800 units).
- Net Loss Expansion: Net loss attributable to Greenbrier widened to $6.2 million for the nine months ended May 31, 2011, compared to a $3.4 million loss in the prior year. This was primarily due to a $10.0 million pre-tax loss on the extinguishment of debt.
- Debt Restructuring: The company issued $230 million in 3.5% Senior Convertible Notes due 2018 and used the proceeds to retire $235 million of senior unsecured notes due 2015. This action resulted in the $10.0 million loss on extinguishment but reduced future interest costs.
- Cash Flow: Operating cash flow turned negative, using $77.3 million for the nine months ended May 31, 2011, compared to providing $36.2 million in the prior year. This shift was driven by increased working capital needs (inventory and receivables) to support higher production levels.
- Capital Expenditures: Capital expenditures increased to $59.7 million for the nine months ended May 31, 2011, from $28.3 million in the prior year, reflecting investments in manufacturing facilities and the lease fleet.
Guidance, Outlook, and Risks
- Outlook: Management expects existing funds and cash generated from operations, along with proceeds from financing activities, to be sufficient to fund working capital and planned capital expenditures for the next twelve months. Leasing & Services capital expenditures for 2011 are expected to be approximately $20.0 million, and Manufacturing capital expenditures are expected to be approximately $21.0 million.
- Subsequent Events: On June 30, 2011, the company entered into a new five-year, $245 million revolving line of credit maturing in 2016, replacing a $100 million facility. Concurrently, the company repaid a $71.8 million term loan.
- Key Risks:
- Commodity Prices: Volatility in steel and scrap prices impacts margins. While the integrated business model offers some offset, fixed-price contracts pose risks if material costs rise unexpectedly.
- Supply Chain: Shortages of specialized components (castings, bolsters, trucks) could interrupt production.
- Environmental Liability: Ongoing investigations regarding the Portland Harbor Superfund site could result in significant remediation costs and natural resource damages.
- Cyclical Demand: The rail and marine industries are cyclical; a decline in freight industry performance would adversely affect demand for new railcars and repair services.
Investor Verification Checklist
- Debt Refinancing Impact: Verify the long-term interest savings from replacing the 8.5% senior notes with 3.5% convertible notes against the immediate $10 million charge.
- Working Capital Efficiency: Monitor the trend in Accounts Receivable and Inventory, which increased significantly ($51.4M and $83.3M respectively in the nine-month cash flow statement), to ensure collection and production ramp-up align with revenue recognition.
- Convertible Note Terms: Review the conversion price ($38.05 per share) and potential dilution if the stock price rises above this threshold.
- Environmental Contingencies: Track the progress of the Portland Harbor Feasibility Study and any updates on cost allocation among the 140+ potentially responsible parties.
- Backlog Conversion: Assess the conversion rate of the $1.05 billion manufacturing backlog into actual revenue, noting that backlog values are estimates subject to product mix changes.