Business context and reporting period
The Greenbrier Companies, Inc. filed this unaudited Form 10-Q for its fiscal first quarter ended November 30, 2012 (three months ended; fiscal year ends August 31). The company manufactures railcars and marine vessels, provides wheel, refurbishment and parts services, and leases railcars and provides fleet-management services. Its manufacturing backlog was approximately 9,700 railcars valued at $1.11 billion, compared with 13,300 units valued at $1.08 billion a year earlier. After quarter-end, Greenbrier received railcar orders for 2,800 units valued at approximately $294 million.
Financial performance and liquidity
Amounts below are in millions, except per-share data and where noted.
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $415.4 | $398.2 |
| Margin (revenue less cost of revenue) | $47.8; 11.5% of revenue | $46.5; 11.7% |
| Operating earnings | $23.1; 5.6% of revenue | $26.9; 6.8% |
| Net earnings attributable to Greenbrier | $10.4 | $14.5 |
| Diluted EPS | $0.35 | $0.48 |
| Operating cash flow | $(25.5) | $(9.0) |
- Revenue rose 4.3% year over year, while attributable net earnings fell 28.2%. The filing cites product mix, higher selling and administrative costs, and lower gains on equipment dispositions among the factors affecting results.
- Manufacturing revenue increased to $285.4 million despite deliveries declining to approximately 2,900 railcars from 3,300. Higher average selling prices from product mix lifted revenue, but manufacturing margin rate declined to 9.4% from 10.1%, partly due to mix and costs of additional Mexican production lines and production-rate adjustments.
- Wheel Services, Refurbishment & Parts revenue decreased to $112.1 million from $117.7 million; segment margin was $10.6 million, down from $11.9 million. Leasing & Services revenue was $17.9 million, roughly flat, while margin increased to $10.3 million from $8.1 million. The filing attributes the margin improvement partly to a reduced maintenance accrual on terminated management agreements. Owned railcars on lease were 95.2%, versus 97.1% a year earlier.
- Cash and cash equivalents were $41.3 million at November 30, down from $53.6 million at August 31. Restricted cash was $7.3 million. Operating cash use reflected working-capital movements, including a $41.5 million inventory cash use and a $48.0 million decrease in accounts payable and accrued liabilities; leased railcars for syndication provided $43.5 million.
- Investing cash use was $16.3 million, including $25.1 million of capital expenditures and $10.1 million of equipment-sale proceeds. Financing provided $28.4 million, largely from net borrowing activity.
- At quarter-end, revolving notes were $89.8 million and notes payable were $427.7 million, or approximately $517.5 million combined. Committed credit facilities had $260.7 million available to draw, subject to borrowing-base and covenant limits. Management expected existing funds, operating cash generation and financing sources to cover working capital, planned capital spending and debt repayments for the next 12 months.
- Total assets were $1.396 billion and total equity was $470.5 million. Inventories rose to $363.6 million from $316.7 million at August 31; finished goods increased to $51.2 million from $22.6 million.
Changes, outlook, risks and unusual items
- Selling and administrative expense increased to $26.1 million from $23.2 million, attributed mainly to compensation adjustments, increased headcount and healthcare costs. Equipment-disposition gains declined to $1.4 million from $3.7 million.
- The effective tax rate was 26.7%, versus 36.3% in the prior-year quarter. Management reported an estimated 33.7% annual effective tax rate before discrete items; current-quarter discrete items included releases of uncertain-tax-position reserves, partly offset by items associated with Mexican operations.
- Management estimated fiscal 2013 capital expenditures of approximately $42 million for Leasing & Services, $28 million for Manufacturing and $15 million for Wheel Services, Refurbishment & Parts. These are estimates, not earnings guidance. The filing cautions that quarterly results are not necessarily indicative of full-year results.
- Marine backlog was approximately $20 million, compared with $5 million a year earlier. A letter of intent for 15 barges valued at $60 million remained subject to significant permitting and other conditions.
- Greenbrier had a $37.8 million guarantee exposure related to its Mexican joint venture’s $45.7 million of third-party debt and had committed to contribute half of $10 million in expansion capital expenditures; each joint-venture partner had contributed $2.5 million by quarter-end. The company also reported $5.6 million in letters of credit.
- Portland Harbor Superfund-related investigation and potential remediation liabilities could not be estimated. A draft cleanup study described alternatives costing $9 million to $163 million for the area adjacent to Greenbrier’s property, but did not allocate liability among potentially responsible parties. The company said its investigation spending to date had not been material and believed it did not materially contribute to the damage; future costs or damages could nevertheless adversely affect the business or financial statements.
- Other disclosed legal matters included SEB warranty and repair claims, for which management said estimated repair costs did not exceed accrued amounts, and an unresolved Okombi claim concerning alleged freight-car defects. Management said it intended to defend its position and did not expect the open matters to have a material adverse effect, while noting outcomes were uncertain.
- Key risks identified include cyclical railcar demand, contract cancellations or delays, steel and component costs and availability, production execution, customer concentration, lease utilization and residual values, financing and covenant compliance, currency and interest-rate movements, warranty costs, and environmental and litigation outcomes. European credit facilities, which are continually renewed, had maturities from May through December 2013.
Important facts for investors to verify
- Whether the post-quarter 2,800-car orders convert to deliveries and revenue on expected terms, and how backlog mix affects value and margins.
- Whether inventory growth, negative operating cash flow and capital spending moderate in subsequent quarters.
- Availability under asset-based credit facilities, covenant compliance and renewal of European facilities maturing in 2013.
- Progress in ramping production lines and the resulting manufacturing margin, alongside wheel-services demand and lease-fleet utilization.
- Developments in Portland Harbor allocation and cleanup proceedings, SEB and Okombi claims, and the Mexican joint venture’s guaranteed debt and expansion funding.
- Whether management’s fiscal 2013 capital-expenditure estimates and liquidity expectations remain achievable; the filing provides no specific earnings forecast.