Greenbrier Companies, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended November 30, 2014; comparisons are with the three months ended November 30, 2013 unless noted. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Business context and period
Greenbrier manufactures railcars and marine vessels, supplies wheels and parts, and owns railcars and provides leasing and management services. In July 2014, Greenbrier and Watco contributed their repair operations to GBW, an unconsolidated 50/50 joint venture accounted for under the equity method. As a result, the current-period Wheels & Parts results exclude those repair operations, while the prior-period comparison includes them.
Financial results and liquidity
| Metric | Q1 FY2015 | Prior period |
|---|---|---|
| Revenue | $495.1 million | $490.4 million |
| Gross margin dollars / margin rate | $88.1 million / 17.8% | $61.6 million / 12.6% |
| Operating earnings / operating margin | $54.4 million / 11.0% | $38.2 million / 7.8% |
| Net earnings attributable to Greenbrier | $32.8 million | $15.4 million |
| Diluted EPS | $1.01 | $0.49 |
| Operating cash flow | $(53.8) million | $(13.5) million |
| Capital expenditures | $31.3 million | $6.5 million |
- Revenue increased about 1%, while Greenbrier-attributable earnings more than doubled. Management attributed the earnings improvement principally to higher margins, especially in Manufacturing. Basic EPS was $1.19 versus $0.54; diluted EPS reflects the dilutive effect of convertible notes.
- Manufacturing revenue was $379.9 million, with a 16.8% margin rate versus 13.4%; deliveries were approximately 4,000 railcars versus 3,700. Wheels & Parts revenue fell to $86.6 million from $113.4 million, largely because repair operations had moved to GBW; its margin rate rose to 11.3% from 4.8%. Leasing & Services revenue increased to $28.5 million from $17.5 million, and the owned fleet was 98.1% on lease versus 97.0% a year earlier.
- Cash and cash equivalents were $119.0 million at November 30, down from $184.9 million at August 31, 2014. Operating cash use reflected working-capital timing and railcars held for syndication; investing cash use was $31.8 million. Financing activities provided $21.7 million. Management expected existing funds, operating cash flows and financing availability to cover the next 12 months’ needs.
- At November 30, revolving notes were $46.5 million and notes payable were $443.3 million, or $489.8 million in combined reported borrowings, compared with $458.2 million at August 31. The filing reported $292.2 million available under committed credit facilities. Cash less reported borrowings was approximately $370.8 million of net debt. Credit agreements include financial and other restrictive covenants; some facilities mature or require renewal during 2015–2016.
Material changes, outlook and risks
- Manufacturing operating profit rose to $52.1 million from $38.3 million, supported by delivery volume, syndication of leased railcars, production efficiencies and overhead absorption. Corporate selling and administrative expense increased to $33.7 million from $26.1 million, including $1.9 million of legal, accounting and consulting costs related to the Concarril investigation.
- GBW generated $82.5 million of revenue in the quarter and Greenbrier recorded $0.4 million of related affiliate earnings. GBW’s reported margin rate was 6.0%, affected by integration and start-up costs. Greenbrier had contributed $15.0 million in cash to GBW through November and said further contributions or loans may be made; it also reported a $21.0 million receivable from GBW.
- Manufacturing railcar backlog was approximately 41,200 units valued at $4.20 billion, versus 13,500 units valued at $1.43 billion a year earlier. Marine backlog was approximately $100 million versus $5 million. Subsequent to quarter-end, Greenbrier received orders for 3,500 railcars valued at approximately $400 million, subject to customary documentation and completion of terms. The company cautioned that backlog is not necessarily indicative of future results and that product mix may affect its value.
- Management estimated 2015 capital expenditures of approximately $95 million for Manufacturing, $35 million for Leasing & Services and corporate, and $10 million for Wheels & Parts. It expected approximately $10 million in proceeds from leased railcar sales. No specific earnings or revenue guidance was provided.
- The company completed a $50 million share-repurchase authorization in October 2014 and began a new authorization, increased to $75 million in January 2015. It repurchased 378,695 shares for about $23.1 million during the quarter and reported further purchases of 408,460 shares for about $20.0 million through December 31. A quarterly dividend of $0.15 per share was declared in January.
- On January 7, 2015, Greenbrier announced an agreement to acquire a 19.5% interest in Brazilian railcar maker Amsted-Maxion Hortolândia for $15 million, with an option to acquire a further 40.5% by September 30, 2017. Closing was expected in Q2 2015, subject to customary conditions.
- Environmental exposure at the Portland Harbor Superfund site remains unresolved: remediation approaches in a draft study ranged from $9 million to $163 million for the area adjacent to Greenbrier’s facility. The company said it could not determine its liability or estimate a potential loss range. Greenbrier also disclosed an independent investigation into alleged procurement conflicts and personal use of company resources by a senior employee at its Concarril facility in Mexico. The employee left the company; the filing reported no identified material financial impact and said the SEC and DOJ had been informed.
- Other stated risks include railcar and marine demand, order cancellations, steel and component availability and prices, production execution, customer concentration, foreign exchange and interest rates, credit-facility access and covenant compliance, warranty claims, and the outcome of litigation or regulatory matters. The company reported no material change to its previously disclosed annual-report risk factors.
Investor facts to verify
- Whether the large railcar and marine backlogs convert to deliveries and revenue on the expected schedule, including the post-quarter railcar orders and assumed product mix.
- Whether margin improvement persists as production expands, and how GBW’s integration costs and performance develop.
- Working-capital requirements, railcars held for syndication, capital spending and cash generation relative to management’s liquidity assessment and facility availability.
- Debt maturities, facility renewals, covenant headroom, and the effect of share repurchases, dividends and potential GBW funding on liquidity.
- Developments in the Portland Harbor environmental matter and Concarril investigation, including any change in potential financial exposure.
- Completion and terms of the Amsted-Maxion investment, and any future exercise of the additional ownership option.