Business Context and Reporting Period
Company: The Greenbrier Companies, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 28, 2009 (Six months ended February 28, 2009)
Business Overview: Greenbrier operates in three segments: Manufacturing (railcars and marine vessels), Refurbishment & Parts (repair and maintenance), and Leasing & Services (fleet ownership and management). The company is facing a softening of demand in North American and European freight car markets due to a weaker economy, market saturation, and tight capital markets.
Key Financial Metrics
| Metric | Six Months Ended Feb 28, 2009 | Six Months Ended Feb 29, 2008 |
|---|---|---|
| Total Revenue | $543.3 million | $546.0 million |
| Net Earnings (Loss) | $(10.2) million | $4.1 million |
| Earnings (Loss) Per Share (Diluted) | $(0.61) | $0.25 |
| Operating Cash Flow | $55.8 million | $(70.9) million |
| Cash and Cash Equivalents (End of Period) | $41.1 million | $6.4 million |
| Total Debt (Notes Payable + Revolving Notes) | $589.5 million | $601.8 million |
| Manufacturing Margin % | -4.3% | 4.9% |
| Refurbishment & Parts Margin % | 10.7% | 15.8% |
| Leasing & Services Margin % | 42.8% | 48.4% |
Material Changes vs. Prior Period
- Profitability Decline: The company reported a net loss of $10.2 million for the six months ended February 28, 2009, compared to net earnings of $4.1 million in the prior year. This shift was driven by lower manufacturing margins and reduced gains on asset dispositions.
- Manufacturing Segment: Revenue decreased $34.3 million year-over-year due to lower deliveries in the North American market (2,100 units vs. 3,200 units) and a $9.9 million obligation for guaranteed minimum earnings on a specific contract. The segment posted a negative margin of -4.3% compared to 4.9% previously.
- Refurbishment & Parts Segment: Revenue increased $37.5 million, primarily due to the acquisition of American Allied Railway Equipment Company (AARE). However, margins declined to 10.7% from 15.8% due to lower scrap pricing and a less favorable mix of repair work.
- Leasing & Services Segment: Revenue decreased $5.9 million, attributed to lower car hire earnings and a $1.6 million decrease in gains from the disposition of leased assets.
- Cost Reductions: Selling and administrative expenses decreased $9.0 million year-over-year due to lower employee costs and the reversal of accruals, partially offset by $0.8 million in severance costs.
Guidance, Outlook, Risks, and Unusual Items
- Goodwill Impairment Risk: The company performed Step 1 of the goodwill impairment test as of February 28, 2009. Results indicated that the carrying amounts of all reporting units exceeded their fair value, making impairment probable. Step 2 analysis is ongoing, and the company currently cannot estimate the range of the possible impairment charge, which will be reflected in the third quarter.
- Contract Cancellation Risk: General Electric Railcar Services Corporation (GE) has advised Greenbrier of a desire to substantially reduce, delay, or cancel deliveries under an $1.0 billion, eight-year contract for 11,900 tank cars and covered hoppers. Greenbrier believes the contract contains adequate protection against cancellation.
- Facility Fire: On January 31, 2009, the wheel facility in Washington, Illinois, was extensively damaged by fire. Work has been shifted to other facilities with no significant service disruption, and the company believes it is adequately insured.
- Dividend Suspension: The quarterly dividend was decreased to $0.04 per share in the second quarter of 2009 and suspended in the third quarter of 2009.
- Loss Contingencies: A reserve balance of $2.5 million was recorded as of February 28, 2009, for anticipated losses on production in backlog due to material cost increases exceeding fixed contract prices.
- Debt Covenants: The company received a waiver for an interest coverage ratio covenant on $6.5 million of debt effective February 28, 2009, and intends to seek amendments to other covenants in the third quarter.
Investor Verification Checklist
- Goodwill Impairment Amount: Verify the final Step 2 goodwill impairment charge expected in the third quarter, as the current filing states the range is indeterminable.
- GE Contract Status: Monitor the outcome of negotiations with General Electric regarding the potential cancellation or reduction of the $1.0 billion railcar contract.
- Manufacturing Backlog: Review the composition of the $1.31 billion backlog, specifically the 8,500 units under the GE contract and the 400 units subject to cancellation provisions.
- European Credit Facilities: Confirm the renewal status of European credit facilities, which face potential reduction from $25.0 million to $15.0 million by August 31, 2009.
- Environmental Liabilities: Assess the potential financial impact of the Portland Harbor Site Superfund investigation and remediation costs.