Greenbrier Companies, Inc. — Q3 FY2014 Form 10-Q
Reporting period: Third quarter and nine months ended May 31, 2014; fiscal year ends August 31. Financial statement amounts below are in millions of dollars unless noted. Greenbrier manufactures railcars and marine vessels and operates Wheels, Repair & Parts and Leasing & Services businesses.
Financial results
| Metric | Three months ended May 31, 2014 | Prior-year quarter | Nine months ended May 31, 2014 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $593.3 | $433.7 | $1,585.9 | $1,272.2 |
| Operating earnings (loss) | $67.5 | $(47.1) | $140.4 | $2.4 |
| Net earnings (loss) attributable to Greenbrier | $33.6 | $(56.0) | $64.6 | $(31.8) |
| Diluted EPS | $1.03 | $(2.10) | $2.01 | $(1.20) |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $81.7 | $19.2 |
- Quarterly revenue rose about 37%; nine-month revenue increased about 25%. Manufacturing drove most of the growth, with higher railcar deliveries.
- Consolidated gross margin was $96.8 million for the quarter and $216.2 million year to date, equivalent to approximately 16.3% and 13.6% of revenue, respectively.
- Quarterly segment revenue and operating earnings: Manufacturing $425.6 million and $61.1 million; Wheels, Repair & Parts $140.7 million and $5.5 million; Leasing & Services $27.0 million and $14.6 million. Manufacturing margin improved materially; Wheels’ reported year-earlier operating loss included a $76.9 million non-cash goodwill impairment.
- Nine-month segment operating earnings were $129.5 million in Manufacturing, $8.7 million in Wheels, Repair & Parts, and $32.9 million in Leasing & Services. Corporate costs were $30.8 million.
Balance sheet, debt and liquidity
- At May 31, cash and cash equivalents were $198.5 million, up from $97.4 million at August 31, 2013. Total assets were $1.451 billion and total equity was $528.2 million.
- Notes payable were $447.1 million and revolving notes were $18.1 million. In March, Greenbrier refinanced about $125 million of term debt with $200 million of new six-year secured term debt at LIBOR plus 1.75%; $160 million is due as a balloon at maturity. A swap fixes the rate on half of the initial balance at 3.7375%.
- Senior secured facilities totaled $360 million, with $331.5 million reported available to draw. European facilities mature from December 2014 to June 2015; Mexican joint-venture lines were drawable through January 2015. Borrowings are subject to asset-based availability and financial and other covenants.
- Nine-month capital expenditures were $34.5 million. Management estimated FY2014 capital expenditures of about $70 million for Manufacturing, $10 million for Wheels, Repair & Parts, and $10 million for Leasing & Services. Expected FY2014 proceeds from leased railcar sales were about $50 million.
Changes, outlook and management commentary
- Compared with the prior-year quarter, the company moved from a substantial operating and net loss to profitability, reflecting higher manufacturing volume and margins and the absence of the prior-year goodwill impairment. The impairment also makes year-over-year comparisons less directly comparable.
- Manufacturing delivered approximately 4,300 railcars in the quarter versus 2,500 a year earlier; nine-month deliveries were approximately 11,400 versus 8,100. Management attributed improved manufacturing margins to product mix, railcar syndications and production efficiency/overhead absorption.
- Wheels, Repair & Parts revenue rose, but nine-month margin percentage declined to 6.4% from 8.5%, reflecting repair-facility inefficiencies and less favorable product mix, partly offset by greater demand and pricing/volume effects. Restructuring to close or sell selected facilities generated $1.5 million of charges year to date.
- Manufacturing backlog was approximately 26,400 railcars valued at $2.75 billion, versus 14,200 units and $1.57 billion a year earlier. Subsequent to quarter end, Greenbrier received orders for 2,700 units valued at about $320 million, subject to customary documentation and final terms. Marine backlog was about $110 million. Management cautioned that backlog is not necessarily indicative of future results and some order product mix remains subject to determination.
- Management expected existing cash, operating cash flow and financing sources to fund dividends, working capital, planned capital expenditures and expected debt repayments over the next 12 months. It projected an approximately 29% FY2014 tax rate. In July 2014, the board reinstated the dividend and declared $0.15 per share quarterly.
- In June 2014, Greenbrier announced a potential railcar repair joint venture with Watco, expected to combine both companies’ repair, refurbishment and maintenance businesses. Closing remained subject to definitive documents, approvals and other conditions; management anticipated closing before fiscal year-end.
Risks, contingencies and unusual items
- The Portland Harbor Superfund investigation and cleanup allocation remain unresolved. Draft cleanup alternatives estimate $9 million to $163 million for the area adjacent to Greenbrier’s property, but the filing states that the company’s liability, if any, and a potential loss range cannot currently be estimated. The company disputes material contribution to the site damage; investigation and potential remediation, natural-resource damages, dredging restrictions or operational effects remain risks.
- Greenbrier guaranteed approximately $15.9 million of its Mexican joint venture’s $19.8 million third-party debt. It also had $6.9 million of letters of credit; European warranty and performance guarantee facilities of $4.0 million were fully utilized, with no amounts drawn to date.
- Other disclosed risks include demand and order cancellations, commodity and component availability/pricing, production and labor disruption, customer concentration, lease-fleet renewal and residual values, warranty exposure, regulatory changes, foreign exchange and interest rates, and joint-venture execution and integration. Ordinary-course litigation outcomes were described as unpredictable, though management did not expect a material adverse effect.
- Interest-rate sensitivity disclosure: 74% of debt was fixed-rate and 26% variable-rate; a uniform 10% increase in variable rates was estimated to add about $0.2 million of annual interest expense. A 10% strengthening of the U.S. dollar against foreign currencies was estimated to reduce equity by $6.2 million.
Investor verification checklist
- Confirm that railcar backlog converts to deliveries, revenue and margin on expected timing and terms, including the subsequent 2,700-unit orders and marine backlog.
- Track manufacturing margin sustainability and the operational efficiency and product mix at Wheels, Repair & Parts.
- Review debt maturities, covenant headroom, facility renewals and liquidity, particularly the near-term European and Mexican facility expirations and the $160 million term-debt balloon.
- Monitor cash generation and working-capital needs, planned capital spending, railcar sale proceeds, share repurchases and the reinstated dividend.
- Follow the Watco joint venture’s closing, integration and possible effects on segments or goodwill, and the unresolved Portland Harbor environmental exposure.