Greenbrier Companies, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended February 28, 2015. Financial statements are unaudited; amounts below are in U.S. dollars. The company manufactures railcars and marine vessels, produces wheels and parts, and provides railcar leasing and services.
Financial performance
| Metric | Three months ended Feb. 28, 2015 | Prior-year quarter | Six months ended Feb. 28, 2015 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $630.1 million | $502.2 million | $1,125.2 million | $992.6 million |
| Margin / revenue | $125.3 million / 19.9% | $57.9 million / 11.5% | $213.4 million / 19.0% | $119.4 million / 12.0% |
| Operating earnings | $92.5 million | $34.6 million | $147.0 million | $72.8 million |
| Net earnings attributable to Greenbrier | $50.4 million | $15.6 million | $83.1 million | $31.0 million |
| Diluted earnings per share | $1.57 | $0.50 | $2.57 | $0.98 |
| Operating cash flow | Not presented by quarter | $(7.8) million | $66.8 million |
- Quarterly revenue rose 25.5% and attributable earnings rose 223.0%; six-month revenue rose 13.4% and attributable earnings rose 168.4% year over year.
- Manufacturing drove growth: quarterly revenue increased 45.3% to $505.2 million, with 5,200 railcar deliveries versus 3,400. Six-month manufacturing revenue increased 25.2% to $885.2 million, with 9,200 deliveries versus 7,100.
- Manufacturing margin improved to 20.2% for the quarter from 11.8%, and to 18.7% for six months from 12.6%. Management cited product mix and pricing, production efficiencies, favorable exchange rates, and sales of railcars with leases attached.
- Wheels & Parts revenue declined 24.8% for the quarter and 24.3% for six months, mainly because repair operations were contributed to the GBW joint venture in July 2014 and are no longer consolidated. Segment margins improved year over year.
- Leasing & Services revenue increased 24.3% for the quarter and 43.4% for six months. Drivers included more rent-producing railcars held for syndication, new management-service agreements, and railcars purchased from a third party and resold with leases attached.
- Management reported the six-month effective tax rate at 32.0%, versus 31.9% in the prior period. Interest and foreign-exchange expense fell to $5.1 million from $8.8 million for six months, primarily because of favorable currency movements, partly offset by higher interest expense.
Balance sheet, liquidity and capital allocation
- At February 28, 2015, cash and cash equivalents were $145.5 million, down from $184.9 million at August 31, 2014; restricted cash was $8.7 million.
- Revolving notes were $90.6 million and notes payable were $441.3 million, for total reported borrowings of $531.9 million, compared with $458.2 million at fiscal year-end. Cash less these borrowings was approximately $386.4 million of net debt.
- Management reported $242.9 million available under committed credit facilities. The facilities totaled $356.5 million and include North American, European and Mexican joint-venture facilities. The principal U.S. revolving line, with $290.0 million capacity, matures in June 2016. A Mexican joint-venture facility of up to $20.0 million was available through April 2015, with renewal in process.
- Operating cash flow was negative $7.8 million for six months, versus positive $66.8 million a year earlier. Management attributed the decline mainly to increased working capital and higher railcar production and syndication activity. Inventories increased to $418.6 million from $305.7 million; leased railcars for syndication increased to $198.0 million from $125.9 million.
- Investing cash outflow was $55.7 million, including $53.9 million of capital expenditures. Management expected 2015 capital expenditures of approximately $95 million for Manufacturing, $35 million for Leasing & Services and corporate, and $10 million for Wheels & Parts. Planned manufacturing investment includes Mexican capacity expansion and replacement of certain leased capacity.
- Financing cash flow was positive $29.2 million, including net borrowing activity, $46.9 million of share repurchases and $8.0 million of dividends. The board had authorized a $75 million repurchase program; $43.6 million remained available at February 28. A $0.15-per-share quarterly dividend was declared April 1, 2015.
Material developments, outlook and risks
- Railcar manufacturing backlog was approximately 46,000 units valued at $4.78 billion at February 28, 2015, versus 15,200 units and $1.54 billion a year earlier. Marine backlog was $80 million versus $70 million. Management said the railcar backlog was expected to be sold to third parties, but cautioned that backlog is not necessarily indicative of future results and some orders remain subject to documentation and final terms.
- Greenbrier owns approximately 8,300 railcars, including 6,400 on operating leases and 1,900 held for syndication; 99.5% of owned units were on lease at quarter-end. The filing provides no explicit full-year earnings or revenue guidance. Management said available funds, operating cash flow and financing sources were expected to cover dividends, working capital, GBW investment, planned capital expenditures and debt repayments over the next 12 months.
- GBW, a 50/50 repair-services joint venture with Watco, generated revenue of $83.3 million in the quarter and $165.9 million in six months. Greenbrier recorded a $0.3 million quarterly loss and $0.1 million six-month earnings from GBW. Greenbrier had provided $3.2 million in cash contributions and $2.5 million in loans during the first half and expected to lend up to an additional $12 million during the remainder of 2015; further support may be required.
- Greenbrier agreed to acquire a 19.5% interest in South American railcar maker Amsted-Maxion Hortolândia for approximately $15 million, subject to closing conditions and currency adjustments; closing was expected in the second calendar quarter of 2015. The agreement includes an option to acquire an additional 40.5% by September 30, 2017.
- Environmental exposure remains uncertain at the Portland Harbor Superfund site. The filing cites draft cleanup estimates of $9 million to $163 million for the area adjacent to Greenbrier’s facility, but says responsibility has not been allocated and the company cannot estimate its potential liability. Greenbrier also noted possible onsite remediation costs and potential effects on dredging and launch activity.
- An independent investigation into alleged misconduct at the Concarril facility in Mexico found procurement conflicts of interest and inappropriate personal use of company resources. The employee left the company; management said it found no evidence of material financial impact or involvement of other operations or senior management. The company voluntarily informed the SEC and Department of Justice of the investigation.
- Credit agreements include financial and operating covenants, including limits on additional debt, dividends and repurchases. Other disclosed risks include demand and backlog conversion, production and supply constraints, commodity and foreign-exchange movements, customer concentration, warranty claims, litigation and environmental liabilities. Management reported no material changes to the risk factors in its 2014 Form 10-K and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the large manufacturing backlog converts to deliveries, revenue and margin on expected timing and terms, and how product mix affects profitability.
- Whether working-capital requirements and railcars held for syndication continue to pressure operating cash flow, and whether planned capital spending remains within management’s estimates.
- Availability and renewal of credit facilities, covenant headroom, borrowing costs and the company’s ability to fund dividends, repurchases and investment commitments.
- GBW’s profitability, cash needs and future funding requirements, together with Greenbrier’s exposure through loans, receivables, guarantees and its equity-method investment.
- Developments in the Portland Harbor investigation and any eventual allocation of cleanup or natural-resource-damage costs to Greenbrier.
- Completion and cost of the proposed Amsted-Maxion investment, as well as subsequent share repurchases and dividend payments.