Greenbrier Companies, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended February 28, 2023; fiscal year ends August 31. Dollar amounts are in millions unless noted.
Business context and reporting period
Greenbrier manufactures railcars and marine vessels, provides railcar maintenance, and owns and manages railcars. It reports Manufacturing, Maintenance Services, and Leasing & Management Services. At quarter-end, it owned approximately 12,300 railcars and managed approximately 408,000 for customers and other owners.
Key financial metrics
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Revenue | $1,122.0 | $682.8 | $1,888.5 | $1,233.5 |
| Margin; margin as % of revenue | $116.8; 10.4% | $54.8; 8.0% | $186.3; 9.9% | $102.4; 8.3% |
| Earnings from operations | $67.4 | $25.2 | $62.6 | $37.0 |
| Net earnings attributable to Greenbrier | $33.1 | $12.8 | $16.4 | $23.6 |
| Diluted EPS | $0.97 | $0.38 | $0.49 | $0.70 |
| Interest and foreign exchange expense | $21.6 | $11.8 | $41.2 | $24.4 |
- Cash flow: For the six months, operating cash flow was negative $96.4 (versus negative $220.3 a year earlier); investing cash flow was negative $105.2 (versus negative $52.4); financing cash flow was positive $23.7 (versus positive $204.8). Cash and restricted cash fell $159.5 to $399.6.
- Cash, debt and liquidity: February 28 cash and cash equivalents were $379.9, with restricted cash of $19.7. Revolving notes were $310.3 and notes payable, net, were $1,327.0, or approximately $1,637.3 of these reported borrowings combined. The company reported $436.0 of additional committed borrowing availability. It was in compliance with debt covenants.
- Balance sheet: Total assets were $3,952.5; total equity was $1,421.9. Inventories were $910.6, up from $815.3 at August 31, 2022. Equipment on operating leases, net, rose to $891.8 from $770.9.
- Capital returns and investment: The company repurchased 575,000 shares for $17.4 during the six months; $85.9 remained under its repurchase authorization, extended through January 31, 2025. A quarterly dividend of $0.27 per share was declared April 3, 2023. Six-month capital expenditures were $169.7 and asset-sale proceeds were $62.1.
Material changes versus the prior comparable period
- Q2 revenue increased 64.3%, primarily as Manufacturing revenue rose 74.3% and railcar deliveries increased 63.6% to 7,200. Six-month revenue increased 53.1%; railcar deliveries rose 44.4% to 11,700.
- Q2 margin percentage increased to 10.4% from 8.0%, with higher manufacturing volumes and increased syndication activity contributing. Q2 Greenbrier-attributable earnings rose to $33.1 from $12.8.
- For the six-month period, revenue and margin improved, but Greenbrier-attributable earnings declined to $16.4 from $23.6. Factors included a $24.2 Gunderson impairment, lower gains on equipment dispositions, higher interest expense and higher selling and administrative expense. These were partly offset by higher margin.
- Interest and foreign exchange expense increased, primarily due to higher borrowings and interest rates. Six-month income tax expense was $8.1, with a 37.8% effective tax rate, versus $1.8 and 14.3% in the prior year; management cited earnings mix and unfavorable discrete items.
Outlook, management commentary, risks and unusual items
- Management reported sustained optimism based on strong market demand, while noting inflation, higher interest rates, supply-chain challenges and rail-service congestion. It also cited supply disruptions as a drag on first-half manufacturing margins.
- Backlog at February 28 was 25,900 railcars valued at an estimated $3.1 billion, plus approximately $43 million of marine backlog. The filing says backlog includes assumptions about product mix and pricing, may be modified or canceled, and is not necessarily indicative of future results. Approximately $1.3 billion of contracted railcar sales were expected to be recognized in the remaining six months of FY2023; remaining railcar backlog was expected into calendar 2024.
- New railcar orders totaled 10,100 units valued at approximately $1.3 billion during the six months. Greenbrier acquired the minority interest in GBX Leasing and reported that it now wholly owns its lease fleet.
- Management expected FY2023 capital expenditures of approximately $290 for Leasing & Management Services, $80 for Manufacturing and $15 for Maintenance Services; expected asset-sale proceeds were approximately $70. It stated that cash, operating cash generation and financing were expected to cover the next 12 months of obligations and planned uses. No full-year revenue or earnings guidance is provided in the supplied filing text.
- Greenbrier decided to permanently cease rail production at its Gunderson facility during 2023 and explore alternatives to exit marine barge production in early calendar 2024. It recorded a $24.2 impairment; potential exit costs and termination benefits were not estimable.
- Environmental and legal contingencies: Potential liability relating to the Portland Harbor Superfund site and state environmental investigation remains unresolved; the company said available information was insufficient to estimate its liability or a potential loss range. It noted possible remediation, natural-resource damages and limits on future dredging or launch operations. Other pending litigation was not expected by management to have a material adverse effect.
- Control weakness: Disclosure controls were deemed ineffective because of a previously reported material weakness in internal control over financial reporting. Remediation was underway; management expected completion before FY2023 year-end, subject to testing.
- Other stated risks include economic slowdown, input-price and labor inflation, supply and logistics disruptions, customer concentration, cyclical demand, production constraints, foreign operations, and the ability to lease cars at satisfactory rates and realize residual values. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the large railcar backlog converts to deliveries on schedule and at expected product mix, pricing and margins.
- Whether manufacturing supply constraints, outsourcing costs, inflation and interest rates continue to pressure margins and cash generation.
- How the Gunderson production shutdown affects future costs, marine operations and any exit or termination charges.
- Liquidity and debt-service capacity in light of negative six-month operating cash flow, planned fleet investment and borrowing costs.
- Progress and effectiveness of remediation of the material weakness in internal controls.
- Developments in Portland Harbor and Oregon DEQ proceedings that could clarify potential environmental obligations.
- Actual FY2023 capital expenditures and asset-sale proceeds compared with management’s estimates.