Greenbrier Companies, Inc. — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended February 28, 2013; fiscal year ends August 31. Financial statements are unaudited. Unless otherwise stated, amounts below are in millions of dollars.
Business context
Greenbrier manufactures railcars and marine vessels, provides wheel services, refurbishment and parts, and owns and manages railcars. It also participates in a rail-castings joint venture. The company reported approximately 11,700 railcars in manufacturing backlog valued at $1.30 billion at quarter-end, versus 12,500 units valued at $1.1 billion a year earlier. After quarter-end, it received orders for 3,700 railcars valued at approximately $435 million, subject to customary documentation and final terms. Marine backlog was about $9 million; a letter of intent for 15 barges valued at $60 million remained subject to significant permitting and other conditions.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Revenue | $423.2 | $458.2 | $838.5 | $856.4 |
| Operating earnings | $26.4 | $29.2 | $49.5 | $56.0 |
| Net earnings attributable to Greenbrier | $13.8 | $17.7 | $24.3 | $32.2 |
| Diluted earnings per share | $0.45 | $0.57 | $0.80 | $1.04 |
| Operating cash flow | Not stated separately | Not stated separately | $33.6 | ($7.9) |
Q2 revenue declined 7.6% year over year; six-month revenue declined 2.1%. Attributable earnings fell about 22% in Q2 and 25% for the six-month period. Consolidated revenue less cost of revenue was $48.3 million in Q2 and $96.1 million for six months; these equate to margins of approximately 11.4% and 11.5%, respectively, compared with 11.2% and 11.4% in the prior periods. Operating margin was approximately 6.2% in Q2 and 5.9% for six months, versus 6.4% and 6.5%.
- Manufacturing: Q2 revenue was $294.0 million, down from $320.2 million; deliveries were about 2,700 railcars versus 3,700. Segment margin rose to $31.4 million from $29.4 million, with margin rate improving to 10.7% from 9.2%, attributed to product mix, pricing and a completed-contract barge delivery.
- Wheel Services, Refurbishment & Parts: Q2 revenue was $112.0 million versus $119.9 million and segment margin was $8.8 million versus $13.3 million. Lower wheel-set demand, weaker scrap prices, lower-volume inefficiencies and some higher operating costs weighed on results.
- Leasing & Services: Q2 revenue was $17.2 million versus $18.1 million and segment margin was $8.1 million versus $8.8 million. The company said owned railcars were 97.5% on lease, compared with 97.3% a year earlier.
Cash and cash equivalents were $55.6 million at February 28, 2013, up from $53.6 million at August 31, 2012; restricted cash was $8.9 million. Six-month capital expenditures were $35.5 million, exceeding operating cash flow by approximately $1.9 million. Investing cash outflow was $19.8 million and financing cash outflow was $11.7 million. Operating cash flow improved from the prior-year use of cash, which management attributed primarily to timing of working-capital needs. Inventory increased to $359.3 million from $316.7 million at fiscal year-end.
Balance-sheet revolving notes were $50.1 million and notes payable were $427.6 million, for approximately $477.6 million of reported borrowings. The filing reported $305.2 million available under committed North American and European facilities, subject to borrowing-base and covenant limits. The Mexican joint venture had $50.0 million outstanding on credit facilities; Greenbrier separately disclosed a guarantee of approximately $40.2 million of its $50.4 million third-party debt.
Material changes, outlook and risks
- Manufacturing deliveries and Q2 revenue were lower year over year, while improved manufacturing margin partly offset weaker results in wheel services and leasing. For the six-month period, wheel-services margin deterioration and higher selling and administrative expense contributed to lower earnings.
- Management expected existing funds, operating cash generation and financing sources to cover working capital, planned capital spending and expected debt repayments for the next 12 months. It forecast approximately $42 million of FY2013 Leasing & Services capital expenditures net of leased-railcar sale proceeds, $39 million for Manufacturing (including a $5 million joint-venture partner contribution), and $15 million for Wheel Services, Refurbishment & Parts. No specific earnings or revenue guidance was provided.
- In May 2013, holders of $67.7 million of 2026 convertible senior notes could require repurchase; the company anticipated that this would occur. The filing does not state a specific repurchase funding plan in the supplied text.
- A roughly $40 million railcar sale to one customer was recorded in the current quarter. About $17.8 million of the cars had previously been classified as operating-lease equipment and were transferred to inventory before sale. The quarter’s disposition results also included a $1.3 million loss related to a planned sale of the Elizabethtown roller-bearing operations. Greenbrier expected that sale to close before May 31, 2013, alongside a long-term bearing supply agreement.
- Environmental exposure remains uncertain: the company is among parties involved in the Portland Harbor Superfund investigation and cannot estimate its potential remediation liability. A draft study estimated cleanup costs of $9 million to $163 million for the river area adjacent to the company’s property; this is not an estimate of Greenbrier’s assigned share.
- Other risks include unresolved customer railcar warranty disputes involving SEB and Okombi, warranty and maintenance estimates, cyclical demand, steel and scrap prices, customer order changes, financing and covenant availability, currency and interest-rate movements, and possible environmental obligations. Management stated its current estimate for SEB repairs did not exceed accrued amounts and believed the cited litigation would not materially adversely affect the financial statements.
Important facts for investors to verify
- Whether the post-quarter railcar orders are finalized and delivered as expected, and how backlog mix affects its stated value and future margins.
- The timing, proceeds and ongoing supply-agreement economics of the planned Elizabethtown asset sale.
- The ability to refinance or fund the anticipated May 2013 repurchase of the 2026 convertible notes, while maintaining credit-facility covenant compliance.
- Cash conversion and working-capital trends, particularly inventory growth and the extent to which operating cash flow depends on railcar syndication and asset sales.
- Developments in Portland Harbor remediation and the SEB and Okombi disputes, including any change in the company’s ability to estimate or accrue potential costs.