Business context and reporting period
The Greenbrier Companies, Inc. filed this Form 10-K for the fiscal year ended August 31, 2013. Greenbrier designs and manufactures railcars and marine barges, provides wheel, repair and parts services, and owns railcars and manages third-party fleets. Its three segments are Manufacturing; Wheels, Repair & Parts; and Leasing & Services.
The filing is an annual report, not a standalone fourth-quarter filing. Fourth-quarter figures below are included where provided; financial amounts are in U.S. dollars.
Financial performance and position
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $1.756 billion | $1.808 billion |
| Segment margin | $206.4 million (11.7% of revenue) | $214.4 million (11.9%) |
| Operating earnings | $41.7 million | $118.8 million |
| Net earnings (loss) attributable to Greenbrier | $(11.0) million | $58.7 million |
| Diluted earnings (loss) per share | $(0.41) | $1.91 |
| Cash provided by operating activities | $104.6 million | $116.1 million |
| Capital expenditures | $60.8 million | $117.9 million |
| Cash and cash equivalents at year end | $97.4 million | $53.6 million |
| Total debt, including revolving notes | $422.1 million | $488.8 million |
| Total equity | $456.8 million | $453.6 million |
FY2013 operating margin was approximately 2.4%, versus 6.6% in FY2012. Operating cash flow less capital expenditures was approximately $43.8 million; this is a simple calculation, not a company-reported free-cash-flow measure. Investing activities provided $6.2 million, principally reflecting $75.3 million in asset-sale proceeds against $60.8 million of capital expenditures. The balance sheet is presented in an unclassified format, so the filing does not provide a conventional current ratio.
At August 31, 2013, cash included $8.8 million of restricted cash. The company reported $373.9 million of notes payable and $48.2 million of revolving notes. It stated that $303.9 million was available under committed credit facilities. Debt covenants restrict, among other things, additional borrowing, dividends and share repurchases.
Segment results
- Manufacturing: Revenue was $1.216 billion, down from $1.254 billion; deliveries fell to 11,600 railcar units from 15,000. Segment margin was $132.8 million, or 10.9% of revenue, compared with $131.6 million, or 10.5%. Higher average selling prices and marine revenue helped offset lower deliveries and tank-car production ramp-up inefficiencies.
- Wheels, Repair & Parts: Revenue was $469.2 million, down from $481.9 million. Margin fell to $37.7 million (8.0% of revenue) from $48.3 million (10.0%), reflecting lower wheel volumes, facility inefficiencies and lower scrap pricing. FY2013 cost of revenue also included a $1.9 million correction related to prior-year activity at the Mexico City facility.
- Leasing & Services: Revenue was $71.5 million, near FY2012’s $71.9 million; margin increased to $35.8 million (50.1%) from $34.5 million (48.0%). The filing cites a lower maintenance accrual on terminated agreements and a lease-termination settlement among the contributors. Owned fleet utilization was 97.4%, and the average remaining lease term was 1.3 years.
Fourth quarter
FY2013 fourth-quarter revenue was $484.2 million, operating earnings were $39.2 million, and net earnings attributable to Greenbrier were $20.7 million, or $0.74 per diluted share. In the third quarter, Greenbrier recorded the $76.9 million goodwill impairment, resulting in a quarterly attributable loss of $56.0 million.
Material changes versus the prior comparable period
- Revenue declined 2.8%, mainly because manufacturing deliveries were lower. Railcar backlog, however, increased to 14,400 units valued at an estimated $1.52 billion from 10,700 units valued at $1.20 billion.
- Greenbrier moved from attributable net income of $58.7 million to a loss of $11.0 million. The principal driver was a non-cash goodwill impairment of $76.9 million pre-tax ($71.8 million after tax) in Wheels, Repair & Parts; the company cited weaker-than-expected results, revised forecasts and lower market multiples. Goodwill in that segment stood at $57.4 million after the charge.
- Operating earnings declined despite higher Manufacturing and Leasing & Services margins, as Wheels, Repair & Parts margin weakened and the impairment and restructuring charges affected consolidated results. Net gains on equipment dispositions rose to $18.1 million from $9.0 million.
- Debt fell by approximately $66.7 million year over year. Greenbrier retired $52.9 million of its 2026 convertible notes in May 2013.
- Cash increased by $43.9 million. Capital expenditures were substantially lower than in FY2012, while proceeds from asset sales were higher.
Outlook, risks and unusual items
- Backlog and demand: About 10,000 railcars in the August 2013 backlog were scheduled for FY2014 delivery, with the balance planned through 2015. After year end, Greenbrier received orders for 1,700 railcars valued at about $140 million, subject to customary documentation and final terms. Management cautions that backlog can change, may be canceled or modified, and is not necessarily indicative of future results. Marine backlog was approximately $10 million, compared with $25 million a year earlier; a separate 15-barge letter of intent worth $60 million remained subject to significant permitting and other conditions.
- Spending and asset sales: For FY2014, the company expected capital expenditures of approximately $35 million for Manufacturing, $10 million for Wheels, Repair & Parts and $10 million for Leasing & Services. It expected about $60 million of proceeds from leased-railcar sales. These are estimates, not earnings guidance.
- Restructuring: Greenbrier began selling or closing certain Wheels, Repair & Parts facilities to improve margins and capital efficiency. FY2013 charges were $2.7 million pre-tax; management anticipated a further $2–$3 million of pre-tax cash charges over the next two quarters.
- Near-term debt and liquidity: Contractual notes-payable principal due in FY2014 was $85.1 million, including an $81.8 million balloon payment on a railcar-secured term note due in March 2014. The Mexican joint venture’s $20 million credit line expired in December 2013; management anticipated renewal on normal terms. Greenbrier said cash, operating cash generation and financing sources should fund working capital, planned capital expenditures and expected debt repayments for the next 12 months.
- Facility transition: In September 2013, the landlord notified Greenbrier that it did not intend to renew the lease on one Sahagun, Mexico manufacturing facility, which expires in November 2014. Greenbrier was considering an extension and alternatives, including expanding other facilities; a disruptive or costly transfer could harm operations.
- Environmental contingency: Greenbrier is among more than 140 parties notified of potential liability for the Portland Harbor Superfund site. A draft study estimated cleanup costs of $9–$163 million for the area near its facility, but did not allocate responsibility. The company said it could not determine its liability or estimate a loss range; its investigation expenditures to date had not been material.
- Product and market risks: Following the July 2013 Lac-Mégantic derailment involving a DOT-111 crude-oil tank car, Greenbrier noted potential product-liability claims and possible regulatory restrictions on DOT-111 cars. Other key risks include cyclical rail demand, commodity and specialty-component availability and pricing, customer concentration, labor relations, foreign exchange, interest rates and warranty claims. Two customers represented approximately 27% of total FY2013 revenue.
- Capital return: In October 2013, the board authorized repurchases of up to $50 million of common stock through April 30, 2015. The program does not require purchases and may be modified or discontinued; credit agreements contain restrictions relevant to repurchases.
- Audit and controls: KPMG issued an unqualified opinion on the financial statements and internal controls over financial reporting; management also concluded that disclosure controls were effective.
Important facts for investors to verify
- Whether railcar backlog converts to deliveries and revenue on schedule, and whether subsequent orders are finalized and retained.
- Whether Wheels, Repair & Parts margins recover following the restructuring, and whether further impairment or restructuring charges arise.
- How Greenbrier addresses the March 2014 term-note balloon and Mexican credit-line renewal, while meeting covenants and planned capital needs.
- The outcome, timing and potential cost allocation of the Portland Harbor investigation and any related remediation or dredging requirements.
- Whether the Sahagun facility lease is extended or replacement capacity is established without material production disruption.
- Whether tank-car regulatory changes, customer concentration, component supply constraints or warranty costs materially affect demand, production, margins or cash flow.