10-K 1 d404502d10k.htm FORM 10-K Form 10-K
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549-1004

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended August 31, 2012

or

¨ Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

for the transition period from             to             

Commission File No. 1-13146

THE GREENBRIER COMPANIES, INC.

(Exact name of Registrant as specified in its charter)

 

Oregon   93-0816972
(State of Incorporation)   (I.R.S. Employer Identification No.)

One Centerpointe Drive, Suite 200, Lake Oswego, OR 97035

(Address of principal executive offices)

(503) 684-7000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

(Title of Each Class)       (Name of Each Exchange on Which Registered)
Common Stock without par value       New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes          No  X 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Act.    Yes          No  X 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  X    No       

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  X     No       

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [    ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer             Accelerated filer  X        Non-accelerated filer             Smaller reporting company      

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes          No  X 

Aggregate market value of the Registrant’s Common Stock held by non-affiliates as of February 29, 2012 (based on the closing price of such shares on such date) was $609,194,356.

The number of shares outstanding of the Registrant’s Common Stock on October 24, 2012 was 27,142,911, without par value.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant’s definitive Proxy Statement prepared in connection with the Annual Meeting of Stockholders to be held on January 9, 2013 are incorporated by reference into Parts II and III of this Report.


Table of Contents

THE GREENBRIER COMPANIES, INC.

FORM 10-K

TABLE OF CONTENTS

 

     
        

PAGE

 
 

FORWARD-LOOKING STATEMENTS

     1   

PART I

  

Item 1.

 

BUSINESS

     3   

Item 1A.

 

RISK FACTORS

     9   

Item 1B.

 

UNRESOLVED STAFF COMMENTS

     19   

Item 2.

 

PROPERTIES

     20   

Item 3.

 

LEGAL PROCEEDINGS

     20   

Item 4.

 

MINE SAFTEY DISCLOSURES

     20   

PART II

  

Item 5.

  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES      21   

Item 6.

  SELECTED FINANCIAL DATA      23   

Item 7.

  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      24   

Item 7A.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      34   

Item 8.

  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA      35   

Item 9.

  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE      76   

Item 9A.

  CONTROLS AND PROCEDURES      76   

Item 9B.

  OTHER INFORMATION      79   

PART III

  

Item 10.

  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE      79   

Item 11.

  EXECUTIVE COMPENSATION      79   

Item 12.

  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS      79   

Item 13.

  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE      79   

Item 14.

  PRINCIPAL ACCOUNTING FEES AND SERVICES      79   

PART IV

  

Item 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     80   
 

SIGNATURES

     85   
 

CERTIFICATIONS

     86   

 

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Forward-Looking Statements

From time to time, The Greenbrier Companies, Inc. and its subsidiaries (Greenbrier or the Company) or their representatives have made or may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements as to expectations, beliefs and strategies regarding the future. Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer or in various filings made by us with the Securities and Exchange Commission, including this filing on Form 10-K and in the Company’s President’s letter to stockholders that is typically distributed to the stockholders in conjunction with this Form 10-K and the Company’s Proxy Statement. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These forward-looking statements rely on a number of assumptions concerning future events and include statements relating to:

 

availability of financing sources and borrowing base for working capital, other business development activities, capital spending and leased railcars for syndication (sale of railcars with lease attached);

 

ability to renew, maintain or obtain sufficient credit facilities and financial guarantees on acceptable terms;

 

ability to utilize beneficial tax strategies;

 

ability to grow our businesses;

 

ability to obtain lease and sales contracts which provide adequate protection against changes in interest rates and increased costs of materials and components;

 

ability to obtain adequate insurance coverage at acceptable rates;

 

ability to obtain adequate certification and licensing of products; and

 

short-term and long-term revenue and earnings effects of the above items.

The following factors, among others, could cause actual results or outcomes to differ materially from the forward-looking statements:

 

fluctuations in demand for newly manufactured railcars or marine barges;

 

fluctuations in demand for wheel services, refurbishment and parts;

 

delays in receipt of orders, risks that contracts may be canceled during their term or not renewed and that customers may not purchase the amount of products or services under the contracts as anticipated;

 

ability to maintain sufficient availability of credit facilities and to maintain compliance with or to obtain appropriate amendments to covenants under various credit agreements;

 

domestic and global economic conditions including such matters as embargoes or quotas;

 

U.S., Mexican and other global political or security conditions including such matters as terrorism, war, civil disruption and crime;

 

growth or reduction in the surface transportation industry;

 

ability to maintain good relationships with third party labor providers or collective bargaining units;

 

steel and specialty component price fluctuations and availability, scrap surcharges, steel scrap prices and other commodity price fluctuations and availability and their impact on product demand and margin;

 

delay or failure of acquired businesses, assets, start-up operations, or new products or services to compete successfully;

 

changes in product mix and the mix of revenue levels among reporting segments;

 

labor disputes, energy shortages or operating difficulties that might disrupt operations or the flow of cargo;

 

production difficulties and product delivery delays as a result of, among other matters, inefficiencies associated with the start-up of production lines or increased production rates, changing technologies or non-performance of alliance partners, subcontractors or suppliers;

 

ability to renew or replace expiring customer contracts on satisfactory terms;

 

ability to obtain and execute suitable contracts for leased railcars for syndication;

 

lower than anticipated lease renewal rates, earnings on utilization based leases or residual values for leased equipment;

 

discovery of defects in railcars resulting in increased warranty costs or litigation;

 

resolution or outcome of pending or future litigation and investigations;

 

natural disasters or severe weather patterns that may affect either us, our suppliers or our customers;

 

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loss of business from, or a decline in the financial condition of, any of the principal customers that represent a significant portion of our total revenues;

 

competitive factors, including introduction of competitive products, new entrants into certain of our markets, price pressures, limited customer base, and competitiveness of our manufacturing facilities and products;

 

industry overcapacity and our manufacturing capacity utilization;

 

decreases or write-downs in carrying value of inventory, goodwill, intangibles or other assets due to impairment;

 

severance or other costs or charges associated with lay-offs, shutdowns, or reducing the size and scope of operations;

 

changes in future maintenance or warranty requirements;

 

ability to adjust to the cyclical nature of the industries in which we operate;

 

changes in interest rates and financial impacts from interest rates;

 

ability and cost to maintain and renew operating permits;

 

actions by various regulatory agencies including potential environmental remediation obligations;

 

changes in fuel and/or energy prices;

 

risks associated with our intellectual property rights or those of third parties, including infringement, maintenance, protection, validity, enforcement and continued use of such rights;

 

expansion of warranty and product support terms beyond those which have traditionally prevailed in the rail supply industry;

 

availability of a trained work force and availability and/or price of essential raw materials, specialties or components, including steel castings, to permit manufacture of units on order;

 

failure to successfully integrate acquired businesses;

 

discovery of previously unknown liabilities associated with acquired businesses;

 

failure of or delay in implementing and using new software or other technologies;

 

ability to replace maturing lease and management services revenue and earnings with revenue and earnings from new commercial transactions, including new railcar leases, additions to the lease fleet and new management services contracts;

 

credit limitations upon our ability to maintain effective hedging programs; and

 

financial impacts from currency fluctuations and currency hedging activities in our worldwide operations.

Any forward-looking statements should be considered in light of these factors. Words such as “anticipates,” “believes,” “forecast,” “potential,” “goal,” “contemplates,” “expects,” “intends,” “plans,” “projects,” “hopes,” “seeks,” “estimates,” “could,” “would,” “will,” “may,” “can,” “designed to,” “foreseeable future” and similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. Many of the important factors that will determine these results and values are beyond our ability to control or predict. You are cautioned not to put undue reliance on any forward-looking statements. Except as otherwise required by law, we do not assume any obligation to update any forward-looking statements.

In assessing forward-looking statements contained herein, readers are urged to read carefully all cautionary statements contained in this Form 10-K, including, without limitation, those contained under the heading, “Risk Factors,” contained in Part I, Item 1A of this Form 10-K.

All references to years refer to the fiscal years ended August 31st unless otherwise noted.

The Greenbrier Companies is a registered trademark of The Greenbrier Companies, Inc. Gunderson, Maxi-Stack, Auto-Max and YSD are registered trademarks of Gunderson LLC.

 

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PART I

 

Item 1. BUSINESS

Introduction

We are one of the leading designers, manufacturers and marketers of railroad freight car equipment in North America and Europe, a manufacturer and marketer of ocean-going marine barges in North America and a leading provider of wheel services, railcar refurbishment and parts, leasing and other services to the railroad and related transportation industries in North America.

We operate an integrated business model in North America that combines freight car manufacturing, wheel services, repair and refurbishment, component parts reconditioning, leasing and fleet management services. Our model is designed to provide customers with a comprehensive set of freight car solutions utilizing our substantial engineering, mechanical and technical capabilities as well as our experienced commercial personnel. This model allows us to develop cross-selling opportunities and synergies among our various business segments and to enhance our margins. We believe our integrated model is difficult to duplicate and provides greater value for our customers.

We operate in three primary business segments: Manufacturing; Wheel Services, Refurbishment & Parts; and Leasing & Services. Financial information about our business segments for the years ended August 31, 2012, 2011 and 2010 is located in Note 20 Segment Information to our Consolidated Financial Statements.

The Greenbrier Companies, Inc., which was incorporated in Delaware in 1981, consummated a merger on February 28, 2006 with its affiliate, Greenbrier Oregon, Inc., an Oregon corporation, for the sole purpose of changing its state of incorporation from Delaware to Oregon. Greenbrier Oregon survived the merger and assumed the name, The Greenbrier Companies, Inc. Our principal executive offices are located at One Centerpointe Drive, Suite 200, Lake Oswego, Oregon 97035, our telephone number is (503) 684-7000 and our Internet web site is located at http://www.gbrx.com.

Products and Services

Manufacturing

North American Railcar Manufacturing - We manufacture a broad array of railcar types in North America which includes most railcar types other than coal cars. We have demonstrated an ability to capture high market shares in many of the car types we produce. The primary products we produce for the North American market are:

Intermodal Railcars - We manufacture a comprehensive range of intermodal railcars. Our most important intermodal product is our articulated double-stack railcar. The double-stack railcar is designed to transport containers stacked two-high on a single platform. An articulated double-stack railcar is comprised of up to five platforms each of which is linked by a common set of wheels and axles. Our comprehensive line of articulated and non-articulated double-stack intermodal railcars offers varying load capacities and configurations. The double-stack railcar provides significant operating and capital savings over other types of intermodal railcars.

Conventional Railcars - We produce a wide range of boxcars, which are used in the transport of forest products, automotive, perishables, general merchandise and commodities. We also produce a variety of covered hopper cars for the grain, energy, sand and cement industries as well as gondolas for the steel and metals markets and various other conventional railcar types, including our proprietary Auto-Max car. Our flat car products include center partition cars for the forest products industry, bulkhead flat cars, flat cars for automotive transportation and solid waste service flat cars.

Tank Cars - We produce a variety of tank cars that are designed for the transportation of products such as caustic soda, urea ammonium nitrate, vegetable oils, bio-diesel, ethanol and various other products for the North American market. We continue to expand our product line and capacity.

 

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European Railcar Manufacturing - Our European manufacturing operation produces a variety of railcar (wagon) types, including a comprehensive line of pressurized tank cars for liquid petroleum gas and ammonia and non-pressurized tank cars for light oil, chemicals and other products. In addition, we produce flat cars, coil cars for the steel and metals market, coal cars for both the continental European and United Kingdom markets, gondolas, sliding wall cars and automobile transporter cars. Although no formal statistics are available for the European market, we believe we are one of the leading new freight car manufacturers.

Marine Vessel Fabrication - Our Portland, Oregon manufacturing facility, located on a deep-water port on the Willamette River, includes marine vessel fabrication capabilities. The marine facilities also increase utilization of steel plate burning and fabrication capacity providing flexibility for railcar production. United States (U.S.) coastwise law, commonly referred to as the Jones Act, requires all commercial vessels transporting merchandise between ports in the U.S. to be built, owned, operated and manned by U.S. citizens and to be registered under the U.S. flag. We manufacture a broad range of Jones Act ocean-going and river barges for transporting merchandise between ports within the U.S. including conventional deck barges, double-hull tank barges, railcar/deck barges, barges for aggregates and other heavy industrial products and dump barges. Our primary focus is on the larger ocean-going vessels and coal carrying river barges although the facility has the capability to compete in other marine related products.

Wheel Services, Refurbishment & Parts

Wheel Services, Railcar Repair, Refurbishment and Component Parts Manufacturing - We believe we operate the largest independent wheel services, repair, refurbishment and component parts networks in North America, operating in 39 locations. Our wheel shops, operating in 12 locations, provide complete wheel services including reconditioning of wheels, axles and roller bearings in addition to new axle machining and finishing and axle downsizing. Our network of railcar repair and refurbishment shops, operating in 23 locations, performs heavy railcar repair and refurbishment, as well as routine railcar maintenance. We are actively engaged in the repair and refurbishment of railcars for third parties, as well as of our own leased and managed fleet. Our component parts facilities, operating in 4 locations, recondition railcar cushioning units, couplers, yokes, side frames, bolsters and various other parts. We also produce roofs, doors and associated parts for boxcars.

Leasing & Services

Leasing - Our relationships with financial institutions, combined with our ownership of a lease fleet of approximately 11,000 railcars, enables us to offer flexible financing programs including operating leases and “by the mile” leases to our customers. As an equipment owner, we participate principally in the operating lease segment of the market. The majority of our leases are “full service” leases whereby we are responsible for maintenance and administration. Maintenance of the fleet is provided, in part, through our own facilities and engineering and technical staff. Assets from our owned lease fleet are periodically sold to take advantage of market conditions, manage risk and maintain liquidity.

 

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Management Services - Our management services business offers a broad array of software and services that include railcar maintenance management, railcar accounting services (such as billing and revenue collection, car hire receivable and payable administration), total fleet management (including railcar tracking using proprietary software), administration and railcar remarketing. Frequently, we originate leases of railcars, which are either newly built or refurbished by us, with railroads or shippers, and sell the railcars and attached leases to financial institutions and subsequently provide management services under multi-year agreements. We currently own or provide management services for a fleet of approximately 230,000 railcars for railroads, shippers, carriers, institutional investors and other leasing and transportation companies in North America.

 

     Fleet Profile(1)
As of August 31, 2012
 
     

Owned

Units(2)

    

Managed

Units

    

Total

Units

 

Customer Profile:

        

Class I Railroads

     3,369         91,027         94,396   

Leasing Companies

     153         94,064         94,217   

Non-Class I Railroads

     1,474         18,067         19,541   

Shipping Companies

     3,787         15,862         16,649   

Off-lease

     707                 707   

En route to Customer Location

     1,351                 1,351   

 

 

Total Units

     10,841         219,020         229,861   

 

 
(1) 

Each platform of a railcar is treated as a separate unit.

(2) 

Percent of owned units on lease is 93.5% with an average remaining lease term of 2.2 years. The average age of owned units is 15 years.

Backlog

The following table depicts our reported third party railcar backlog in number of railcars and estimated future revenue value attributable to such backlog, at the dates shown:

 

     August 31,  
      2012      2011      2010  

New railcar backlog units(1)

     10,700         15,400         5,300   

Estimated future revenue value (in millions)(2)

   $ 1,200       $ 1,230       $ 420   
(1) 

Each platform of a railcar is treated as a separate unit.

(2) 

Subject to change based on finalization of product mix.

Customer orders may be subject to cancellations or modifications and contain terms and conditions customary in the industry. In most cases, little variation has been experienced between the quantity ordered and the quantity actually delivered. Our railcar and marine backlogs are not necessarily indicative of future results of operations.

Multi-year supply agreements are a part of rail industry practice. Our total manufacturing backlog of railcars as of August 31, 2012 was approximately 10,700 units with an estimated value of $1.20 billion, compared to 15,400 units valued at $1.23 billion as of August 31, 2011. Based on current production plans, approximately 7,300 units in the August 31, 2012 backlog are scheduled for delivery in 2013. The balance of the production is scheduled for delivery through 2014. A portion of the orders included in backlog reflects an assumed product mix. Under terms of the orders, the exact mix will be determined in the future which may impact the dollar amount of backlog.

Marine backlog as of August 31, 2012 was approximately $25 million compared to no backlog as of August 31, 2011. In addition, we were awarded a letter of intent for 15 barges valued at $60 million subject to significant permitting and other conditions.

 

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Customers

Our customers include railroads, leasing companies, shippers, carriers and transportation companies. We have strong, long-term relationships with many of our customers. We believe that our customers’ preference for high quality products, our technological leadership in developing innovative products and competitive pricing of our railcars have helped us maintain our long-standing relationships with our customers.

In 2012, revenue from three customers together, TTX Company (TTX), Union Pacific Railroad (UP) and BNSF Railway Company (BNSF) accounted for approximately 53% of total revenue, 15% of Leasing & Services revenue, 48% of Wheel Services, Refurbishment & Parts revenue and 57% of Manufacturing revenue. No other customers accounted for more than 10% of total revenue.

Raw Materials and Components

Our products require a supply of materials including steel and specialty components such as brakes, wheels and axles. Specialty components purchased from third parties represent a significant amount of the cost of most freight cars. Our customers often specify particular components and suppliers of such components. Although the number of alternative suppliers of certain specialty components has declined in recent years, there are at least two suppliers for most such components.

Certain materials and components are periodically in short supply which could potentially impact production at our new railcar and refurbishment facilities. In an effort to mitigate shortages and reduce supply chain costs, we have entered into strategic alliances and multi-year arrangements for the global sourcing of certain components, increased our replacement parts business and continue to pursue strategic opportunities to protect and enhance our supply chain.

We periodically make advance purchases to avoid possible shortages of material due to capacity limitations of component suppliers and possible price increases. We do not typically enter into binding long-term contracts with suppliers because we rely on established relationships with major suppliers to ensure the availability of raw materials. We do have certain long-term agreements for specialty items to insure their availability.

In 2012, the top ten suppliers for all inventory purchases accounted for approximately 43% of total purchases. Amsted Rail Company, Inc. accounted for 20% of total inventory purchases in 2012. No other suppliers accounted for more than 10% of total inventory purchases. The Company believes it maintains good relationships with its suppliers.

Competition

There are currently six major railcar manufacturers competing in North America. We compete on the basis of quality, price, reliability of delivery, reputation and customer service and support.

Competition in the marine industry is dependent on the type of product produced. There are two principal competitors, located in the Gulf States, which build product types similar to ours. We compete on the basis of experienced labor, launch ways capacity, quality, price and reliability of delivery.

We believe that we are among the top five European railcar manufacturers, which maintain a combined market share of approximately 80%. European freight car manufacturers are largely located in central and eastern Europe where labor rates are lower and work rules are more flexible.

Competition in the wheel services, refurbishment and parts business is dependent on the type of product or service provided. There are many competitors in the railcar repair and refurbishment business and an increasing number of competitors in the wheel services and other parts businesses. We believe we are one of the largest non-railroad providers of wheel services and refurbishment services. We compete primarily on the basis of quality, timeliness of delivery, customer service, price and engineering expertise.

 

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There are at least twenty institutions that provide railcar leasing and services similar to ours. Many of them are also customers that buy new railcars from our manufacturing facilities and used railcars from our lease fleet, as well as utilize our management services. More than half of these institutions have greater resources than we do. We compete primarily on the basis of quality, price, delivery, reputation, service offerings and deal structuring ability. We believe our strong servicing capability and our ability to sell railcars with a lease attached (syndicate railcars), integrated with our manufacturing, repair shops, railcar specialization and expertise in particular lease structures provide a strong competitive position.

Marketing and Product Development

In North America, we utilize an integrated marketing and sales effort to coordinate relationships in our various segments. We provide our customers with a diverse range of equipment and financing alternatives designed to satisfy each customer’s unique needs, whether the customer is buying new equipment, refurbishing existing equipment or seeking to outsource the maintenance or management of equipment. These custom programs may involve a combination of railcar products, leasing, refurbishing and remarketing services. In addition, we provide customized maintenance management, equipment management, accounting services and proprietary software solutions.

In Europe, we maintain relationships with customers through a network of country-specific sales representatives. Our engineering and technical staff works closely with their customer counterparts on the design and certification of railcars. Many European railroads are state-owned and are subject to European Union regulations covering the tender of government contracts.

Through our customer relationships, insights are derived into the potential need for new products and services. Marketing and engineering personnel collaborate to evaluate opportunities and identify and develop new products. For example, we continue to expand our tank car and covered hopper product offerings in North America. Research and development costs incurred during the years ended August 31, 2012, 2011 and 2010 were $2.0 million, $3.0 million and $2.6 million.

Patents and Trademarks

We have a number of U.S. and non-U.S. patents of varying duration, and pending patent applications, registered trademarks, copyrights and trade names that are important to our products and product development efforts. The protection of our intellectual property is important to our business and we have a proactive program aimed at protecting our intellectual property and the results from our research and development.

Environmental Matters

We are subject to national, state and local environmental laws and regulations concerning, among other matters, air emissions, wastewater discharge, solid and hazardous waste disposal and employee health and safety. Prior to acquiring facilities, we usually conduct investigations to evaluate the environmental condition of subject properties and may negotiate contractual terms for allocation of environmental exposure arising from prior uses. We operate our facilities in a manner designed to maintain compliance with applicable environmental laws and regulations. Environmental studies have been conducted on certain of our owned and leased properties that indicate additional investigation and some remediation on certain properties may be necessary.

Our Portland, Oregon manufacturing facility is located adjacent to the Willamette River. We have entered into a Voluntary Clean-Up Agreement with the Oregon Department of Environmental Quality in which we agreed to conduct an investigation of whether, and to what extent, past or present operations at the Portland property may have released hazardous substances to the environment. We are also conducting groundwater remediation relating to a historical spill on the property which precedes our ownership.

Portland Harbor Site

The U.S. Environmental Protection Agency (EPA) has classified portions of the river bed of the Portland Harbor, including the portion fronting our manufacturing facility, as a federal “National Priority List” or “Superfund” site due to sediment contamination (the “Portland Harbor Site”). We, along with more than 140 other parties, have

 

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received a “General Notice” of potential liability from the EPA relating to the Portland Harbor Site. The letter advised us that we may be liable for the costs of investigation and remediation (which liability may be joint and several with other potentially responsible parties) as well as for natural resource damages resulting from releases of hazardous substances to the site. At this time, ten private and public entities, including us (the “Lower Willamette Group” or “LWG”), have signed an Administrative Order on Consent (AOC) to perform a remedial investigation/feasibility study (“RI/FS”) of the Portland Harbor Site under EPA oversight, and several additional entities have not signed such consent, but are nevertheless contributing money to the effort. The EPA-mandated RI/FS is being conducted by the LWG and has cost over $90 million over an 11-year period. We have agreed to initially bear a percentage of the total costs incurred by the LWG in connection with the investigation. Our aggregate expenditure has not been material over the 11-year period. Some or all of any such outlay may be recoverable from other responsible parties. The investigation is expected to continue for at least two more years and additional costs are expected to be incurred. We cannot estimate the amount of such investigation costs at this time.

Eighty-three parties, including the State of Oregon and the federal government, have entered into a non-judicial mediation process to try to allocate costs associated with the Portland Harbor site. Approximately 110 additional parties have signed tolling agreements related to such allocations. On April 23, 2009, we and the other AOC signatories filed suit against 69 other parties due to a possible limitations period for some such claims; Arkema Inc. et al v. A & C Foundry Products, Inc.et al, US District Court, District of Oregon, Case #3:09-cv-453-PK. All but 12 of these parties elected to sign tolling agreements and be dismissed without prejudice, and the case has now been stayed by the court, pending completion of the RI/FS. Although, as described below, the draft feasibility study has been submitted, the RI/FS will not be complete until the EPA approves it, which is not likely to occur until at least 2014.

A draft of the remedial investigation study was submitted to the EPA on October 27, 2009. The draft feasibility study was submitted to the EPA on March 30, 2012. The draft feasibility study evaluates several alternative cleanup approaches. The approaches submitted would take from 2 to 28 years with costs ranging from $169 million to $1.8 billion for cleanup of the entire Portland Harbor Site, depending primarily on the selected remedial action levels. The draft feasibility study suggests costs ranging from $9 million to $163 million for cleanup of the area of the Willamette River adjacent to our Portland, Oregon manufacturing facility, depending primarily on the selected remedial action level.

The draft feasibility study does not address responsibility for the costs of clean-up or allocate such costs among the potentially responsible parties, or define precise boundaries for the cleanup. Responsibility for funding and implementing the EPA’s selected cleanup will be determined after the issuance of the Record of Decision. Based on the investigation to date, we believe that we did not contribute in any material way to the damage of natural resources in the Portland Harbor Site and that the damage in the area of the Portland Harbor Site adjacent to our property precedes our ownership of the Portland, Oregon manufacturing facility. Because these environmental investigations are still underway, sufficient information is currently not available to determine our liability, if any, for the cost of any required remediation of the Portland Harbor Site or to estimate a range of potential loss. Based on the results of the pending investigations and future assessments of natural resource damages, we may be required to incur costs associated with additional phases of investigation or remedial action, and may be liable for damages to natural resources. In addition, we may be required to perform periodic maintenance dredging in order to continue to launch vessels from our launch ways in Portland, Oregon, on the Willamette River, and the river’s classification as a Superfund site could result in some limitations on future dredging and launch activities. Any of these matters could adversely affect our business and Consolidated Financial Statements, or the value of our Portland property.

Regulation

The Federal Railroad Administration in the U.S. and Transport Canada in Canada administer and enforce laws and regulations relating to railroad safety. These regulations govern equipment and safety appliance standards for freight cars and other rail equipment used in interstate commerce. The Association of American Railroads (AAR) promulgates a wide variety of rules and regulations governing the safety and design of equipment, relationships among railroads and other railcar owners with respect to railcars in interchange, and other matters. The AAR also

 

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certifies railcar builders and component manufacturers that provide equipment for use on North American railroads. These regulations require us to maintain our certifications with the AAR as a railcar builder and component manufacturer, and products sold and leased by us in North America must meet AAR, Transport Canada, and Federal Railroad Administration standards.

The primary regulatory and industry authorities involved in the regulation of the ocean-going barge industry are the U.S. Coast Guard, the Maritime Administration of the U.S. Department of Transportation, and private industry organizations such as the American Bureau of Shipping.

The regulatory environment in Europe consists of a combination of European Union (EU) regulations and country specific regulations, including a harmonized set of Technical Standards for Interoperability of freight wagons throughout the EU.

Employees

As of August 31, 2012, we had 7,396 full-time employees, consisting of 5,515 employees in Manufacturing, 1,724 in Wheel Services, Refurbishment & Parts and 157 employees in Leasing & Services and corporate. In Poland, 383 employees are represented by unions. At our Frontera, Mexico joint venture manufacturing facility, 1,629 employees are represented by a union. At our Sahagun, Mexico facility, 746 employees are represented by a union. In addition to our own employees, 1,117 union employees work at our Sahagun, Mexico railcar manufacturing facility under our services agreement with Bombardier Transportation, Inc. At our Wheel Services, Refurbishment & Parts locations, 61 employees, in Mexico, are represented by unions. We believe that our relations with our employees are generally good.

Additional Information

We are a reporting company and file annual, quarterly, current and special reports, proxy statements and other information with the Securities and Exchange Committee (SEC). Through a link on the Investor Relations section of our website, http://www.gbrx.com, we make available the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings are available free of charge. Copies of our Audit Committee Charter, Compensation Committee Charter, Nominating/Corporate Governance Committee Charter and the Company’s Corporate Governance Guidelines are also available on our web site at http://www.gbrx.com. In addition, each of the reports and documents listed above are available free of charge by contacting our Investor Relations Department at The Greenbrier Companies, Inc., One Centerpointe Drive, Suite 200, Lake Oswego, Oregon 97035.

 

Item 1A. RISK FACTORS

In addition to the risks outlined in this annual report under the heading “Forward-Looking Statements,” as well as other comments included herein regarding risks and uncertainties, the following risk factors should be carefully considered when evaluating our company. Our business, financial condition or financial results could be materially and adversely affected by any of these risks.

The ongoing uncertainty and volatility in the financial markets related to the U.S. budget deficit, the European sovereign debt crisis and the state of the worldwide economic recovery may adversely affect our operating results.

Global financial markets continue to experience disruptions, including increased volatility, and diminished liquidity and credit availability. In particular, developments in Europe have created uncertainty with respect to the ability of certain European countries to continue to service their sovereign debt obligations. This debt crisis and related European financial restructuring efforts may cause the value of the Euro to deteriorate, reducing the purchasing power of our European customers and reducing the translated amounts of U.S. dollar revenues. In

 

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addition, the European crisis is contributing to instability in global credit markets. If global economic and market conditions, or economic conditions in Europe, the U.S. or other key markets, remain uncertain, persist, or deteriorate further, our customers may respond by suspending, delaying or reducing their capital expenditures and equipment maintenance budgets, which may adversely affect our cash flows and results of operations. We could also be adversely affected by the negative impact on economic growth resulting from the combination of federal income tax increases and government spending restrictions potentially occurring at the end of calendar year 2012 in the U.S. (commonly referred to as the “fiscal cliff”).

During economic downturns or a rising interest rate environment, the cyclical nature of our business results in lower demand for our products and services and reduced revenue.

Our business is cyclical. Overall economic conditions and the purchasing practices of buyers have a significant effect upon our railcar repair, refurbishment and component parts, marine manufacturing, railcar manufacturing and leasing and fleet management services businesses due to the impact on demand for new, refurbished, used and leased products and services. As a result, during downturns, we could operate with a lower level of backlog and may temporarily slow down or halt production at some or all of our facilities. Economic conditions that result in higher interest rates increase the cost of new leasing arrangements, which could cause some of our leasing customers to lease fewer of our railcars or demand shorter lease terms. An economic downturn or increase in interest rates may reduce demand for our products and services, resulting in lower sales volumes, lower prices, lower lease utilization rates and decreased profits.

We face aggressive competition by a concentrated group of competitors and a number of factors may influence our performance and if we are unable to compete successfully, our market share, margin and results of operations may be adversely affected.

We face aggressive competition by a concentrated group of competitors in all geographic markets and in each area of our business. The railcar manufacturing and repair industry is intensely competitive and we expect it to remain so in the foreseeable future. Competitive factors, including introduction of competitive products, new entrants into certain of our markets, price pressures, limited customer base and the relative competitiveness of our manufacturing facilities and products affect our ability to compete effectively. In addition, new technologies or the introduction of new railcars or other product offerings by our competitors could render our products obsolete or less competitive. If we do not compete successfully, our market share, margin and results of operation may be adversely affected.

A number of factors may influence our performance, including without limitation: fluctuations in the demand for newly manufactured railcars or marine barges; fluctuations in demand for wheel services, refurbishment and parts; our ability to adjust to the cyclical nature of the industries in which we operate; delays in receipt of orders, risks that contracts may be canceled during their term or not renewed and that customers may not purchase the amount of products or services under the contracts as anticipated; our customers may be financially unable to pay for products and services already provided; domestic and global economic conditions including such matters as embargoes or quotas; growth or reduction in the surface transportation industry; steel and specialty component price fluctuations and availability, scrap surcharges, steel scrap prices and other commodity price fluctuations and their impact on product demand and margin; loss of business from, or a decline in the financial condition of, any of the principal customers that represent a significant portion of our total revenues; industry overcapacity and our manufacturing capacity utilization; and other risks, uncertainties and factors. If we are unfavorably affected by any of these factors, our market share, margin and results of operation may be adversely affected.

A change in our product mix due to shifts in demand could have an adverse effect on our profitability.

We manufacture and repair a variety of railcars. The demand for specific types of these railcars and mix of refurbishment work varies from time to time. These shifts in demand could affect our margins and could have an adverse effect on our profitability. Currently a portion of our backlog and railcar demand includes a concentrated product mix of covered hoppers and tank cars used in energy related transportation. A sudden change in this

 

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market could have an adverse effect on our profitability. For example, a change in environmental regulations, competitive pricing, pipeline capacity and other factors could reduce demand for railcars in the energy transportation industry.

A failure to design or manufacture products or technologies or to achieve timely certification or market acceptance of new products or technologies could have an adverse effect on our profitability.

We continue to introduce new railcar products and technologies, and we periodically accept orders prior to receipt of railcar certification or proof of ability to manufacture a quality product that meets customer standards. We could be unable to successfully design or manufacture these new railcar products and technologies. Our inability to develop and manufacture such new products and technologies in a timely fashion and profitable manner, obtain timely certification, or achieve market acceptance, or the existence of quality problems in our new products, could have a material adverse effect on our revenue and results of operations and subject us to penalties, cancellation of orders and/or other damages.

A prolonged decline in performance of the rail freight industry would have an adverse effect on our financial condition and results of operations.

Our future success depends in part upon the performance of the rail freight industry, which in turn depends on the health of the economy. If railcar loadings, railcar and railcar components replacement rates or refurbishment rates or industry demand for our railcar products weaken or otherwise do not materialize, our financial condition and results of operations would be adversely affected.

Our backlog is not necessarily indicative of the level of our future revenues.

Our manufacturing backlog represents future production for which we have written orders from our customers in various periods, and estimated potential revenue attributable to those orders. Some of this backlog is subject to our fulfillment of certain competitive conditions. Our reported backlog may not be converted to revenue in any particular period and some of our contracts permit cancellations without financial penalties or with limited compensation that would not replace lost revenue or margins. Actual revenue from such contracts may not equal our anticipated revenues based on our backlog, and therefore, our backlog is not necessarily indicative of the level of our future revenues.

We have a significant amount of indebtedness, which could have negative consequences to us.

We are significantly leveraged. As of August 31, 2012, our total debt was approximately $488.8 million, consisting of borrowings under our credit facilities, term loans, notes and capital lease obligations. Our significant indebtedness could have negative consequences to us, and could place us at a competitive disadvantage compared to our less leveraged competitors. It may be difficult for us to satisfy our repayment and other obligations with respect to such indebtedness, and we may not be able to refinance our existing indebtedness as it matures. Significant indebtedness may also increase our vulnerability to adverse general economic, industry or competitive developments or conditions and limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate. We may be limited in our ability to raise additional capital or obtain additional financing to fund our operations, capital expenditures or other growth initiatives, and other general corporate requirements and may be required to dedicate a significant portion of our cash flow from operations to interest and principal payments on our indebtedness. We are more exposed to the risk of increased interest rates as certain of our borrowings are at variable rates of interest. As a consequence of our level of indebtedness, a significant portion of our cash flow from operations may be dedicated to debt service requirements. In addition, the terms of our revolving credit facility limit our ability to incur additional indebtedness. If we fail to comply with these covenants, a default may occur, in which case the lender could accelerate the debt. We cannot assure you that we would be able to renegotiate, refinance, restructure or otherwise obtain the necessary funds to satisfy the indebtedness or these obligations.

 

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We derive a significant amount of our revenue from a limited number of customers, the loss of or reduction of business from one or more of which could have an adverse effect on our business.

A significant portion of our revenue and backlog is generated from a few major customers such as TTX, BNSF and UP. Although we have some long-term contractual relationships with our major customers, we cannot be assured that our customers will continue to use our products or services or that they will continue to do so at historical levels. A reduction in the purchase or leasing of our products or a termination of our services by one or more of our major customers could have an adverse effect on our business and operating results.

Fluctuations in the availability and price of energy, steel and other raw materials, and our fixed price contracts could have an adverse effect on our ability to manufacture and sell our products on a cost-effective basis and could adversely affect our margins and revenue of our manufacturing and wheel services, refurbishment and parts businesses.

A significant portion of our business depends upon the adequate supply of steel, components and other raw materials at competitive prices and a small number of suppliers provide a substantial amount of our requirements. The cost of steel and all other materials used in the production of our railcars represents more than half of our direct manufacturing costs per railcar and in the production of our marine barges represents more than 30% of our direct manufacturing costs per marine barge.

Our businesses also depend upon the adequate supply of energy at competitive prices. When the price of energy increases, it adversely impacts our operating costs and could have an adverse effect upon our ability to conduct our businesses on a cost-effective basis. We cannot be assured that we will continue to have access to supplies of energy or necessary components for manufacturing railcars and marine barges. Our ability to meet demand for our products could be adversely affected by the loss of access to any of these supplies, the inability to arrange alternative access to any materials, or suppliers limiting allocation of materials to us.

In some instances, we have fixed price contracts which anticipate material price increases and surcharges, or contracts that contain actual or formulaic pass-through of material price increases and surcharges. However, if the price of steel or other raw materials were to fluctuate in excess of anticipated increases on which we have based our fixed price contracts, or if we were unable to adjust our selling prices or have adequate protection in our contracts against changes in material prices, or if we are unable to reduce operating costs to offset any price increases, our margins would be adversely affected. The loss of suppliers or their inability to meet our price, quality, quantity and delivery requirements could have an adverse effect on our ability to manufacture and sell our products on a cost-effective basis.

Decreases in the price of scrap adversely impact our Wheel Services, Refurbishment & Parts margin and revenue. A portion of our Wheel Services, Refurbishment & Parts business involves scrapping steel parts and the resulting revenue from such scrap steel increases our margins and revenues. When the price of scrap steel declines, our margins and revenues in such business therefore decrease.

We rely on limited suppliers for certain components needed in our production. If we are not able to procure specialty components on commercially reasonable terms or on a timely basis, our business, financial condition and results of operations would be adversely affected.

Our manufacturing operations depend in part on our ability to obtain timely deliveries of materials and components in acceptable quantities and quality from our suppliers. In 2012, the top ten suppliers for all inventory purchases accounted for approximately 43% of total purchases. Amsted Rail Company, Inc. accounted for 20% of total inventory purchases in 2012. No other suppliers accounted for more than 10% of total inventory purchases. Certain components of our products, particularly specialized components like castings, bolsters and trucks, are currently available from only a limited number of suppliers. Increases in the number of railcars manufactured have increased the demand for such components and strong demand may cause industry-wide shortages if suppliers are in the process of ramping up production or reach capacity production. Our dependence on a limited number of suppliers involves risks, including limited control over pricing, availability and delivery

 

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schedules. If any one or more of our suppliers cease to provide us with sufficient quantities of our components in a timely manner or on terms acceptable to us, or cease to manufacture components of acceptable quality, we could incur disruptions or be limited in our production of our products and we could have to seek alternative sources for these components. We could also incur delays while we attempt to locate and engage alternative qualified suppliers and we might be unable to engage acceptable alternative suppliers on favorable terms, if at all. Any such disruption in our supply of specialized components or increased costs of those components could harm our business and adversely affect our results of operations.

Changes in the credit markets and the financial services industry could negatively impact our business, results of operations, financial condition or liquidity.

The credit markets and the financial services industry continue to experience volatility which may result in tighter availability of credit on more restrictive terms. This could have a negative impact on our liquidity and financial condition if our ability to borrow money to finance operations, obtain credit from trade creditors, offer leasing products to our customers or sell railcar assets to other lessors were to be impaired. In addition, it could also adversely affect our customers’ ability to purchase or pay for products from us or our suppliers’ ability to provide us with product, either of which could negatively affect our business and results of operations.

Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our financial condition and profitability.

We are subject to income taxes in both the United States and foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. Changes in estimates of projected future operating results, loss of deductibility of items, recapture of prior deductions (including related to interest on convertible notes), or changes in assumptions regarding our ability to generate future taxable income could result in significant increases to our tax expense and liabilities that could adversely affect our financial condition and profitability.

If we or our joint ventures fail to complete capital expenditure projects on time and within budget, or if these projects, once completed, fail to operate as anticipated, such failure could adversely affect our business, financial condition and results of operations.

From time-to-time, we, or our joint ventures, undertake strategic capital projects in order to enhance, expand and/or upgrade facilities and operational capabilities. We are currently in the process of adding new production lines and enhancing existing lines at our manufacturing facilities in Mexico to increase our production capacity. Our ability, and our joint ventures’ ability, to complete these projects on time and within budget, and for us to realize the anticipated increased revenues or otherwise realize acceptable returns on these investments or other strategic capital projects that may be undertaken is subject to a number of risks. Many of these risks are beyond our control, including a variety of market, operational, permitting, and labor related factors. In addition, the cost to implement any given strategic capital project ultimately may prove to be greater than originally anticipated. If we, or our joint ventures, are not able to achieve the anticipated results from the implementation of any of these strategic capital projects, or if unanticipated implementation costs are incurred, our business, financial condition and results of operations may be adversely affected.

The timing of our asset sales and related revenue recognition could cause significant differences in our quarterly results and liquidity.

We may build railcars or marine barges in anticipation of a customer order, or that are leased to a customer and ultimately planned to be sold to a third party. The difference in timing of production and the ultimate sale is subject to risk. In addition, we periodically sell railcars from our own lease fleet and the timing and volume of such sales is difficult to predict. As a result, comparisons of our manufacturing revenue, deliveries, quarterly gain

 

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on disposition of equipment, income and liquidity between quarterly periods within one year and between comparable periods in different years may not be meaningful and should not be relied upon as indicators of our future performance.

We could be unable to remarket leased railcars on favorable terms upon lease termination or realize the expected residual values, which could reduce our revenue and decrease our overall return.

We re-lease or sell railcars we own upon the expiration of existing lease terms. The total rental payments we receive under our operating leases do not fully amortize the acquisition costs of the leased equipment, which exposes us to risks associated with remarketing the railcars. Our ability to remarket leased railcars profitably is dependent upon several factors, including, but not limited to, market and industry conditions, cost of and demand for newer models, costs associated with the refurbishment of the railcars and interest rates. Our inability to re-lease or sell leased railcars on favorable terms could result in reduced revenues and margins or gain on disposition of equipment and decrease our overall returns.

Risks related to our operations outside of the U.S. could adversely affect our operating results.

Our operations outside of the U.S. are subject to the risks associated with cross-border business transactions and activities. Political, legal, trade, financial market or economic changes or instability could limit or curtail our foreign business activities and operations. Some foreign countries in which we operate have regulatory authorities that regulate railroad safety, railcar design and railcar component part design, performance and manufacturing. If we fail to obtain and maintain certifications of our railcars and railcar parts within the various foreign countries where we operate, we may be unable to market and sell our railcars in those countries. In addition, unexpected changes in regulatory requirements, tariffs and other trade barriers, more stringent rules relating to labor or the environment, adverse tax consequences, currency and price exchange controls could limit operations and make the manufacture and distribution of our products difficult. The uncertainty of the legal environment or geo-political risks in these and other areas could limit our ability to enforce our rights effectively. Because we have operations outside the U.S., we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws. We operate in parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. The failure to comply with laws governing international business practices may result in substantial penalties and fines. Any international expansion or acquisition that we undertake could amplify these risks related to operating outside of the U.S.

We depend on our senior management team and other key employees, and significant attrition within our management team or unsuccessful succession planning could adversely affect our business.

Our success depends in part on our ability to attract, retain and motivate senior management and other key employees. Achieving this objective may be difficult due to many factors, including fluctuations in global economic and industry conditions, competitors’ hiring practices, cost reduction activities, and the effectiveness of our compensation programs. Competition for qualified personnel can be very intense. We must continue to recruit, retain and motivate senior management and other key employees sufficient to maintain our current business and support our future projects. We are vulnerable to attrition among our current senior management team and other key employees. A loss of any such personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations. In addition, several key members of our senior management team are at or nearing retirement age. If we are unsuccessful in our succession planning efforts, the continuity of our business and results of operations could be adversely affected.

 

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Some of our employees belong to labor unions and strikes or work stoppages could adversely affect our operations.

We are a party to collective bargaining agreements with various labor unions at some of our operations. Disputes with regard to the terms of these agreements or our potential inability to negotiate acceptable contracts with these unions in the future could result in, among other things, strikes, work stoppages or other slowdowns by the affected workers. We cannot be assured that our relations with our workforce will remain positive or that union organizers will not be successful in future attempts to organize at some of our other facilities. If our workers were to engage in a strike, work stoppage or other slowdown, or other employees were to become unionized or the terms and conditions in future labor agreements were renegotiated, we could experience a significant disruption of our operations and higher ongoing labor costs. In addition, we could face higher labor costs in the future as a result of severance or other charges associated with lay-offs, shutdowns or reductions in the size and scope of our operations or due to the difficulties of restarting our operations that have been temporarily shuttered.

Shortages of skilled labor could adversely affect our operations.

We depend on skilled labor in the manufacture of railcars and marine barges, repair and refurbishment of railcars and provision of wheel services and supply of parts. Some of our facilities are located in areas where demand for skilled laborers often exceeds supply. Shortages of some types of skilled laborers such as welders could restrict our ability to maintain or increase production rates and could increase our labor costs.

Our operations in Mexico are dependent on a number of factors, including factors outside of our control. If we experience an interruption of our manufacturing operations in Mexico, our results of operations may be adversely affected.

In Sahagun, Mexico, we depend on a third party to provide us with most of the labor services for our operations under a services agreement. All of the labor provided by the third party is subject to collective bargaining agreements, over which we have no control. If the third party fails to provide us with the services required by our agreement for any reason, including labor stoppages or strikes or a sale of facilities owned by the third party, our operations could be adversely effected. Additionally, we could incur substantial expense and interruption if we are unable to renew our Sahagun, Mexico manufacturing facility’s lease on acceptable terms, or at all, or if such lease was terminated early. The current lease agreement expires in November 2014. Any interruption of our manufacturing operations in Mexico could adversely affect our results of operations.

Our relationships with our joint venture and alliance partners could be unsuccessful, which could adversely affect our business.

We have entered into several joint venture agreements and other alliances with other companies to increase our sourcing alternatives, reduce costs, and to produce new railcars for the North American marketplace. We may seek to expand our relationships or enter into new agreements with other companies. If our joint venture alliance partners are unable to fulfill their contractual obligations or if these relationships are otherwise not successful in the future, our manufacturing costs could increase, we could encounter production disruptions, growth opportunities could fail to materialize, or we could be required to fund such joint venture alliances in amounts significantly greater than initially anticipated, any of which could adversely affect our business.

Our product and repair service warranties could expose us to potentially significant claims.

We offer our customers limited warranties for many of our products and services. Accordingly, we may be subject to significant warranty claims in the future, such as multiple claims based on one defect repeated throughout our production or servicing process or claims for which the cost of repairing the defective part is highly disproportionate to the original cost of the part. These types of warranty claims could result in costly product recalls, customers seeking monetary damages, significant repair costs and damage to our reputation.

 

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If warranty claims attributable to actions of third party component manufacturers are not recoverable from such parties due to their poor financial condition or other reasons, we could be liable for warranty claims and other risks for using these materials on our products.

Our financial performance and market value could cause future write-downs of goodwill or intangibles in future periods.

We are required to perform an annual impairment review of goodwill and indefinite lived assets which could result in an impairment charge if it is determined that the carrying value of the asset is in excess of the fair value. We perform a goodwill impairment test annually during our third fiscal quarter. Goodwill is also tested more frequently if changes in circumstances or the occurrence of events indicates that a potential impairment exists. When changes in circumstances, such as a decline in the market price of our common stock, changes in demand or in the numerous variables associated with the judgments, assumptions and estimates made in assessing the appropriate valuation of goodwill indicate the carrying amount of certain indefinite lived assets may not be recoverable, the assets are evaluated for impairment. Among other things, our assumptions used in the valuation of goodwill, which relate to our Wheel Services, Refurbishment & Parts segment, include growth of revenue and margins and increased cash flows over time. If actual operating results were to differ from these assumptions, it may result in an impairment of our goodwill. As of August 31, 2012, we had $137.1 million of goodwill in our Wheel Services, Refurbishment & Parts segment. Future write-downs of goodwill and intangibles could affect certain of the financial covenants under debt instruments and could restrict our financial flexibility. In the event of goodwill impairment, we may have to test other intangible assets for impairment. Impairment charges to our goodwill or our indefinite lived assets would impact our results of operations.

A prolonged decline in demand for our barge products would have an adverse effect on our financial condition and results of operations.

In the marine market, current economic conditions may continue to have an adverse effect on our results of operations by reducing demand for our marine barges. This could reduce our revenues and margins, limit our ability to grow, increase pricing pressure on our products, and otherwise adversely affect our financial results. We have signed a letter of intent for certain marine manufacturing business subject to significant permitting and other conditions, but cannot be certain whether such conditions will be met.

Fluctuations in foreign currency exchange rates could lead to increased costs and lower profitability.

Outside of the U.S., we operate in Mexico, Germany and Poland, and our non-U.S. businesses conduct their operations in local currencies and other regional currencies. We also source materials worldwide. Fluctuations in exchange rates may affect demand for our products in foreign markets or our cost competitiveness and may adversely affect our profitability. Although we attempt to mitigate a portion of our exposure to changes in currency rates through currency rate hedge contracts and other activities, these efforts cannot fully eliminate the risks associated with the foreign currencies. In addition, some of our borrowings are in foreign currency, giving rise to risk from fluctuations in exchange rates. A material or adverse change in exchange rates could result in significant deterioration of profits or in losses for us.

We have potential exposure to environmental liabilities, which could increase costs or have an adverse effect on results of operations.

We are subject to extensive national, state, provincial and local environmental laws and regulations concerning, among other things, air emissions, water discharge, solid waste and hazardous substances handling and disposal and employee health and safety. These laws and regulations are complex and frequently change. We could incur unexpected costs, penalties and other civil and criminal liability if we fail to comply with environmental laws or permits issued to us pursuant to those laws. We also could incur costs or liabilities related to off-site waste disposal or remediating soil or groundwater contamination at our properties, including these set forth below and in the “Environmental Matters” section of this Report. In addition, future environmental laws and regulations may require significant capital expenditures or changes to our operations.

 

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In addition to environmental, health and safety laws, the transportation of commodities by railcar raises potential risks in the event of a derailment or other accident. Generally, liability under existing law in the U.S. for accidents such as derailments depends on the negligence of the party. However, for certain hazardous commodities being shipped, strict liability concepts may apply.

Our Portland, Oregon manufacturing facility is located adjacent to the Willamette River. The U.S. Environmental Protection Agency (EPA) has classified portions of the river bed of the Portland Harbor, including the portion fronting the Company’s manufacturing facility, as a federal “National Priority List” or “Superfund” site due to sediment contamination (the “Portland Harbor Site”). We, along with more than 140 other parties, have received a “General Notice” of potential liability from the EPA relating to the Portland Harbor Site. The letter advised us that we may be liable for the costs of investigation and remediation (which liability may be joint and several with other potentially responsible parties) as well as for natural resource damages resulting from releases of hazardous substances to the site. We are part of a group that signed an Administrative Order on Consent (AOC) to perform a remedial investigation/feasibility study (“RI/FS”) of the Portland Harbor Site under EPA oversight, and several additional entities have not signed such consent, but are nevertheless contributing money to the effort. We have agreed to initially bear a percentage of the total costs incurred in connection with the investigation. The investigation is expected to continue for at least two more years and additional costs are expected to be incurred. We cannot estimate the amount of such investigation costs at this time, or assure that any such costs will be recoverable from third parties.

A draft of the remedial investigation study was submitted to the EPA on October 27, 2009. The draft feasibility study was submitted to the EPA on March 30, 2012. The draft feasibility study evaluates several alternative cleanup approaches. The approaches submitted would take from 2 to 28 years with costs ranging from $9 million to $163 million for cleanup of the area of the Willamette River adjacent to our Portland, Oregon manufacturing facility, depending primarily on the selected remedial action level. The draft feasibility study does not address responsibility for the costs of clean-up or allocate such costs among potentially responsible parties, or define precise boundaries for the cleanup. Responsibility for funding and implementing the EPA’s selected cleanup will be determined after the issuance of the Record of Decision.

Because these environmental investigations are still underway, sufficient information is currently not available to determine our liability, if any, for the cost of any required remediation of the Portland Harbor Site or to estimate a range of potential loss. Based on the results of the pending investigations and future assessments of natural resource damages, we may be required to incur costs associated with additional phases of investigation or remedial action, and may be liable for damages to natural resources. In addition, we may be required to perform periodic maintenance dredging in order to continue to launch vessels from its launch ways in Portland, Oregon, on the Willamette River, and the river’s classification as a Superfund site could result in some limitations on future dredging and launch activities. Any of these matters could adversely affect our business and Consolidated Financial Statements, or the value of our Portland property.

Our implementation of new enterprise resource planning (ERP) systems could result in problems that could negatively impact our business.

We continue to work on the design and implementation of ERP and related systems that support substantially all of our operating and financial functions. We could experience problems in connection with such implementations, including compatibility issues, training requirements, higher than expected implementation costs and other integration challenges and delays. A significant implementation problem, if encountered, could negatively impact our business by disrupting our operations. Additionally, a significant problem with the implementation, integration with other systems or ongoing management of ERP and related systems could have an adverse effect on our ability to generate and interpret accurate management and financial reports and other information on a timely basis, which could have a material adverse effect on our financial reporting system and internal controls and adversely affect our ability to manage our business.

 

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We could have difficulty integrating the operations of any companies that we acquire, which could adversely affect our results of operations.

The success of our acquisition strategy depends upon our ability to successfully complete acquisitions and integrate any businesses that we acquire into our existing business. The integration of acquired business operations could disrupt our business by causing unforeseen operating difficulties, diverting management’s attention from day-to-day operations and requiring significant financial resources that would otherwise be used for the ongoing development of our business. The difficulties of integration could be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. In addition, we could be unable to retain key employees or customers of the combined businesses. We could face integration issues pertaining to the internal controls and operational functions of the acquired companies and we also could fail to realize cost efficiencies or synergies that we anticipated when selecting our acquisition candidates. Any of these items could adversely affect our results of operations.

An adverse outcome in any pending or future litigation could negatively impact our business and results of operations.

We are a defendant in several pending cases in various jurisdictions. If we are unsuccessful in resolving these claims, our business and results of operations could be adversely affected. In addition, future claims that may arise relating to any pending or new matters, whether brought against us or initiated by us against third parties, could distract management’s attention from business operations and increase our legal and related costs, which could also negatively impact our business and results of operations.

We could be liable for physical damage or product liability claims that exceed our insurance coverage.

The nature of our business subjects us to physical damage and product liability claims, especially in connection with the repair and manufacture of products that carry hazardous or volatile materials. Although we maintain liability insurance coverage at commercially reasonable levels compared to similarly-sized heavy equipment manufacturers, an unusually large physical damage or product liability claim or a series of claims based on a failure repeated throughout our production process could exceed our insurance coverage or result in damage to our reputation.

We could be unable to procure adequate insurance on a cost-effective basis in the future.

The ability to insure our businesses, facilities and rail assets is an important aspect of our ability to manage risk. As there are only limited providers of this insurance to the railcar industry, there is no guarantee that such insurance will be available on a cost-effective basis in the future. In addition, we cannot assure that our insurance carriers will be able to pay current or future claims.

Any failure by us to comply with regulations imposed by federal and foreign agencies could negatively affect our financial results.

Our operations and the industry we serve, including our customers, are subject to extensive regulation by governmental, regulatory and industry authorities and by federal and foreign agencies. These organizations establish rules and regulations for the railcar industry, including construction specifications and standards for the design and manufacture of railcars; mechanical, maintenance and related standards; and railroad safety. New regulatory rulings and regulations from these entities could impact our financial results, demand for our products and the economic value of our assets. In addition, if we fail to comply with the requirements and regulations of these entities, we could face sanctions and penalties that could negatively affect our financial results.

 

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Changes in accounting standards, including accounting for leases, or inaccurate estimates or assumptions in the application of accounting policies, could adversely affect our financial results.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Some of these policies require use of estimates and assumptions that may affect the reported value of our assets or liabilities and financial results and are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain. Accounting standard setters and those who interpret the accounting standards (such as the Financial Accounting Standards Board, the SEC, and our independent registered public accounting firm) may amend or even reverse their previous interpretations or positions on how these standards should be applied. In some cases, we could be required to apply a new or revised standard retrospectively, resulting in the restatement of prior period financial statements. In addition, the SEC may soon decide that issuers in the U.S. should be required to prepare financial statements in accordance with International Financial Reporting Standards, a comprehensive set of accounting standards promulgated by the International Accounting Standards Board, instead of U.S. Generally Accepted Accounting Principles and current proposals could potentially require us to report under the new standards beginning as early as 2015 or 2016. Changes in accounting standards can be hard to predict and can materially impact how we record and report our financial condition and results of operations.

From time to time we may take tax positions that the Internal Revenue Service may contest.

We have in the past and may in the future take tax positions that the Internal Revenue Service (IRS) may contest. Effective with fiscal year 2011, we are required by a new IRS regulation to disclose particular tax positions, taken after the effective date, to the IRS as part of our tax returns for that year and future years. If the IRS successfully contests a tax position that we take, we may be required to pay additional taxes or fines that may adversely affect our results of operation and financial position.

Natural disasters or severe weather conditions could disrupt our business and result in loss of revenue or higher expenses.

Any serious disruption at any of our facilities due to hurricane, earthquake, flood, or any other natural disaster could impair our ability to use our facilities and have a material adverse impact on our revenues and increase our costs and expenses. If there is a natural disaster or other serious disruption at any of our facilities, particularly any of our Mexican facilities, it could impair our ability to adequately supply our customers, cause a significant disruption to our operations, cause us to incur significant costs to relocate or reestablish these functions and negatively impact our operating results. While we insure against certain business interruption risks, such insurance may not adequately compensate us for any losses incurred as a result of natural or other disasters.

 

Item 1B. UNRESOLVED STAFF COMMENTS

None.

 

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Item 2. PROPERTIES

We operate at the following primary facilities as of August 31, 2012:

 

Description    Location    Status

Manufacturing Segment

     

Railcar manufacturing:

   Portland, Oregon    Owned
   2 locations in Sahagun, Mexico   

Leased — 1 location

Owned — 1 location

   Frontera, Mexico    Leased
   2 locations in Poland    Owned

Marine manufacturing:

   Portland, Oregon    Owned

Wheel Services, Refurbishment & Parts Segment

Railcar repair:

   20 locations in the U.S.   

Owned — 6 locations

Leased — 9 locations

Customer premises — 5 locations

   1 location in Mexico    Leased
   2 locations in Canada    Customer premises

Wheel reconditioning:

   10 locations in the U.S.   

Owned — 5 locations

     

Leased — 5 locations

   2 locations in Mexico   

Leased — 2 locations

Parts fabrication and reconditioning:

   4 locations in the U.S.   

Leased — 2 locations

Owned — 2 locations

Administrative offices:

   2 locations in the U.S.   

Leased

Leasing & Services Segment

     

Corporate offices, railcar marketing and leasing activities:

   Lake Oswego, Oregon   

Leased

We believe that our facilities are in good condition and that the facilities, together with anticipated capital improvements and additions, are adequate to meet our operating needs for the foreseeable future. We continually evaluate the need for expansion and upgrading of our Manufacturing and Wheel Services, Refurbishment & Parts facilities in order to remain competitive and to take advantage of market opportunities.

 

Item 3. LEGAL PROCEEDINGS

There is hereby incorporated by reference the information disclosed in Note 23 to Consolidated Financial Statements, Part II, Item 8 of this Form 10-K.

 

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock has been traded on the New York Stock Exchange under the symbol GBX since July 14, 1994. There were approximately 447 holders of record of common stock as of October 24, 2012. The following table shows the reported high and low sales prices of our common stock on the New York Stock Exchange for the fiscal periods indicated.

 

      High      Low  

2012

     

Fourth quarter

   $ 17.60       $ 13.15   

Third quarter

   $ 26.04       $ 13.10   

Second quarter

   $ 26.66       $ 20.11   

First quarter

   $ 23.79       $ 10.38   

2011

     

Fourth quarter

   $ 26.16       $ 11.78   

Third quarter

   $ 30.38       $ 23.15   

Second quarter

   $ 26.48       $ 18.96   

First quarter

   $ 20.18       $ 11.72   

Payment of future dividends is at the discretion of the Board of Directors. Factors that may be considered in determining whether to declare a dividend may include, but are not limited to, our results of operations and financial condition and our expected future capital expenditures and investments. The Board of Directors presently intends to continue its policy of retaining earnings for reinvestment in the operations and paying down debt of the Company.

 

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Performance Graph

The following graph demonstrates a comparison of cumulative total returns for the Company’s Common Stock, the Dow Jones US Industrial Transportation Index and the Standard & Poor’s (S&P) 500 Index. The graph assumes an investment of $100 on August 31, 2007 in each of the Company’s Common Stock and the stocks comprising the indices. Each of the indices assumes that all dividends were reinvested and that the investment was maintained to and including August 31, 2012, the end of the Company’s 2012 fiscal year.

The comparisons in this table are required by the SEC, and therefore, are not intended to forecast or be indicative of possible future performance of our Common Stock.

 

LOGO

Equity Compensation Plan Information

Equity Compensation Plan Information is hereby incorporated by reference to the “Equity Compensation Plan Information” table in Registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant’s year ended August 31, 2012.

 

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Item 6. SELECTED FINANCIAL DATA

YEARS ENDED AUGUST 31,

 

(In thousands, except unit and per share data)   2012     2011     2010     2009     2008  

Statement of Operations Data

         

Revenue:

         

Manufacturing

  $ 1,253,964      $ 721,102      $ 295,566      $ 462,496      $ 665,093   

Wheel Services, Refurbishment & Parts

    481,865        452,865        388,434        475,397        527,466   

Leasing & Services

    71,887        69,323        72,280        78,298        89,510   

 

 
  $ 1,807,716      $ 1,243,290      $ 756,280 (1)    $ 1,016,191 (1)    $ 1,282,069 (1) 

 

 

Earnings (loss) from operations

  $ 118,788      $ 67,574      $ 52,107      $ (28,303 )     $ 74,808   

 

 

Net earnings (loss) attributable to Greenbrier

  $ 58,708      $ 6,466 (3)    $ 4,277 (2)(3)    $ (56,391 )(2)(3)    $ 17,383 (2) 

 

 

Basic earnings (loss) per common share attributable to Greenbrier:

  $ 2.21      $ 0.27      $ 0.23      $ (3.35   $ 1.06   

Diluted earnings (loss) per common share attributable to Greenbrier:

  $ 1.91      $ 0.24      $ 0.21      $ (3.35   $ 1.06   

Weighted average common shares outstanding:

         

Basic

    26,572        24,100        18,585        16,815        16,395   

Diluted

    33,718        26,501        20,213        16,815        16,417   

Cash dividends paid per share

  $ .00      $ .00      $ .00      $ .12      $ .32   

Balance Sheet Data

         

Total assets

  $ 1,384,544      $ 1,301,655      $ 1,072,888      $ 1,048,291      $ 1,256,960   

Revolving notes and notes payable

  $ 488,834      $ 519,479      $ 501,330      $ 541,190      $ 580,954   

Total equity

  $ 453,645      $ 375,901      $ 297,407      $ 232,450      $ 281,838   

Other Operating Data

         

New railcar units delivered

    15,000        9,400        2,500        3,700        7,300   

New railcar backlog (units)

    10,700        15,400        5,300        13,400 (4)      16,200 (4) 

New railcar backlog (value in millions)

  $ 1,200      $ 1,230      $ 420      $ 1,160      $ 1,440   

Lease fleet:

         

Units managed

    219,020        215,843        225,223        217,403        137,697   

Units owned

    10,841        8,684        8,156        8,713        8,631   

Cash Flow Data

         

Capital expenditures:

         

Manufacturing

  $ 33,313      $ 20,016      $ 8,715      $ 9,109      $ 24,113   

Wheel Services, Refurbishment & Parts

    11,248        20,087        12,215        6,599        7,651   

Leasing & Services

    73,324        44,199        18,059        23,139        45,880   

 

 
  $ 117,885      $ 84,302      $ 38,989      $ 38,847      $ 77,644   

 

 

Proceeds from sale of equipment

  $ 33,560      $ 18,730      $ 22,978      $ 15,555      $ 14,598   

 

 

Depreciation and amortization:

         

Manufacturing

  $ 11,754      $ 9,853      $ 11,061      $ 11,471      $ 11,267   

Wheel Services, Refurbishment & Parts

    13,265        11,853        11,435        11,885        10,338   

Leasing & Services

    17,352        16,587        15,015        14,313        13,481   

 

 
  $ 42,371      $ 38,293      $ 37,511      $ 37,669      $ 35,086   

 

 

 

(1) 

Historically, the Company has reported Gain on disposition of leased equipment as a net amount in Revenue. The Company has changed its financial statement presentation to now report these amounts as a separate line item captioned “Gain on disposition of equipment”, which is a component of operating income below margin. This change in presentation resulted in a decrease in Revenue and corresponding increase in Gain on disposition of equipment of $8.2 million, $1.9 million and $8.0 million for 2010, 2009 and 2008. Such change in presentation did not result in any change to Net earnings (loss) attributable to Greenbrier.

(2) 

2010 includes income of $11.9 million net of tax for a special item related to the release of the liability associated with the 2008 de-consolidation of our former Canadian subsidiary. 2009 includes goodwill impairment of $51.0 million net of tax. 2008 includes special items of $2.3 million net of tax related to the closure of our Canadian subsidiary.

(3) 

2011 includes a loss on extinguishment of debt of $9.4 million net of tax for the write-off of unamortized debt issuance costs, prepayment premiums, debt discount and other costs associated with the repayment of senior unsecured notes and certain term loans. 2010 includes a gain on extinguishment of debt of $1.3 million net of tax for the gain associated with the early retirement of a portion of the convertible senior notes, partially offset by the write-off of loan fees and debt discount. 2009 includes a loss on extinguishment of debt of $0.8 million net of tax for the interest rate swap breakage fees associated with the voluntary prepayment of certain term loans and the acceleration of loan fees associated with the reduction in size of the North American credit facility.

(4) 

2009 and 2008 backlog both include 8,500 units subject to fulfillment of certain competitive and contractual conditions and 400 units subject to certain cancellation provisions.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Summary

We operate in three primary business segments: Manufacturing; Wheel Services, Refurbishment & Parts; and Leasing & Services. These three business segments are operationally integrated. The Manufacturing segment, operating from facilities in the United States, Mexico and Poland, produces double-stack intermodal railcars, conventional railcars, tank cars and marine vessels. The Wheel Services, Refurbishment & Parts segment performs wheel, axle and bearing servicing; railcar repair, refurbishment and maintenance activities; as well as production and reconditioning of a variety of parts for the railroad industry in North America. The Leasing & Services segment owns approximately 11,000 railcars and provides management services for approximately 219,000 railcars for railroads, shippers, carriers, institutional investors and other leasing and transportation companies in North America. We also produce rail castings through an unconsolidated joint venture. Management evaluates segment performance based on margins.

Multi-year supply agreements are a part of rail industry practice. Customer orders may be subject to cancellations or modifications and contain terms and conditions customary in the industry. In most cases, little variation has been experienced between the quantity ordered and the quantity actually delivered.

Our total manufacturing backlog of railcars as of August 31, 2012 was approximately 10,700 units with an estimated value of $1.20 billion compared to 15,400 units with an estimated value of $1.23 billion as of August 31, 2011. Based on current production plans, approximately 7,300 units in the August 31, 2012 backlog are scheduled for delivery in 2013. The balance of the production is scheduled for delivery through 2014. A portion of the orders included in backlog reflects an assumed product mix. Under terms of the orders, the exact mix will be determined in the future which may impact the dollar amount of backlog. Our railcar and marine backlogs are not necessarily indicative of future results of operations.

Marine backlog as of August 31, 2012 was approximately $25 million compared to no backlog as of August 31, 2011. In addition, we signed a letter of intent for 15 barges valued at $60 million subject to significant permitting and other conditions.

The continued global strengthening of the freight car markets may at times limit the availability of certain components of our products that we source from external suppliers, particularly specialized components such as castings, bolsters and trucks, and this may cause an interruption in production. Prices for steel, a primary component of railcars and barges, and related surcharges have fluctuated significantly and remain volatile. In addition, the price of certain railcar components, which are a product of steel, are affected by steel price fluctuations. New railcar and marine backlog generally either includes fixed price contracts which anticipate material price increases and surcharges, or contracts that contain actual or formulaic pass through of material price increases and surcharges. We are aggressively working to mitigate these exposures. The Company’s integrated business model has helped offset some of the effects of fluctuating steel and scrap steel prices, as a portion of our business segments currently benefit from rising steel scrap prices while other segments benefit from lower steel and scrap steel prices through enhanced margins.

Results of Operations

The accounting policies of the three segments in which we operate are the same as those described in the summary of significant accounting policies. Segment performance is evaluated based on margin. The Company’s integrated business model results in selling and administrative costs being intertwined among the segments. Currently, Greenbrier’s management does not allocate these costs for either external or internal reporting purposes.

 

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Overview

 

(In thousands)    2012     2011     2010  

Revenue:

      

Manufacturing

   $ 1,253,964      $ 721,102      $ 295,566   

Wheel Services, Refurbishment & Parts

     481,865        452,865        388,434   

Leasing & Services

     71,887        69,323        72,280   

 

 
     1,807,716        1,243,290        756,280   

Margin:

      

Manufacturing

     131,580        59,975        27,171   

Wheel Services, Refurbishment & Parts

     48,324        47,416        43,912   

Leasing & Services

     34,516        32,140        30,915   

 

 

Segment margin total

     214,420        139,531        101,998   

Less unallocated items:

      

Selling and administrative

     104,596        80,326        69,931   

Gain on disposition of equipment

     (8,964     (8,369     (8,170

Special items

                   (11,870

Interest and foreign exchange

     24,809        36,992        45,204   

Loss (gain) on extinguishment of debt

            15,657        (2,070

 

 

Earnings before income tax and loss from unconsolidated affiliates

     93,979        14,925        8,973   

Income tax benefit (expense)

     (32,393     (3,564     959   

 

 

Earnings before loss from unconsolidated affiliates

     61,586        11,361        9,932   

Loss from unconsolidated affiliates

     (416     (2,974     (1,601

 

 

Net earnings

     61,170        8,387        8,331   

Net earnings attributable to noncontrolling interest

     (2,462     (1,921     (4,054

 

 

Net earnings attributable to Greenbrier

   $ 58,708      $ 6,466      $ 4,277   

Diluted earnings per common share

   $ 1.91      $ 0.24      $ 0.21   

 

 

The increase in revenue for the years ended August 31, 2012 and 2011 was primarily the result of higher levels of activity associated with the economic recovery in the freight car market including higher railcar deliveries as a result of increased demand.

The increase in net earnings for the year ended August 31, 2012 compared to the year ended August 31, 2011 was primarily attributable to an increase in manufacturing margin in 2012 and loss on extinguishment of debt recognized in 2011. These factors were partially offset by higher selling and administrative costs associated with operating at higher production levels in 2012. The increase in net earnings for the year ended August 31, 2011 compared to the year ended August 31, 2010 was primarily attributable to an increase in manufacturing margin partially offset by loss on extinguishment of debt in 2011 and gain on extinguishment of debt and special items recognized in 2010.

Manufacturing Segment

Manufacturing revenue was $1.254 billion, $721.1 million and $295.6 million for the years ended August 31, 2012, 2011 and 2010. Railcar deliveries, which are the primary source of manufacturing revenue, were 15,000 units in 2012 compared to 9,400 units in 2011 and 2,500 units in 2010. Manufacturing revenue increased $532.9 million, or 73.9%, in 2012 compared to 2011 primarily due to higher railcar deliveries as a result of increased demand and a higher per unit average selling price principally due to a change in product mix. Manufacturing revenue increased $425.5 million, or 144.0%, in 2011 compared to 2010 primarily due to higher railcar deliveries partially offset by a decline in marine barge activity and a change in railcar product mix with lower per unit sales prices.

Manufacturing margin as a percentage of revenue was 10.5% in 2012, 8.3% in 2011 and 9.2% in 2010. The increase in the current year was primarily the result of efficiencies from operating at higher production rates in

 

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the current year, a more favorable pricing environment and inefficiencies in the prior year as we ramped up production at our facilities that were idle. The decrease in 2011 was primarily the result of a less favorable product mix and learning curve costs associated with start-up of railcar production lines, partially offset by operating at higher production rates. 2010 was positively impacted by the recognition of deferred revenue associated with a certain contract entered into in 2009.

Wheel Services, Refurbishment & Parts Segment

Wheel Services, Refurbishment & Parts revenue was $481.9 million, $452.9 million and $388.4 million for the years ended August 31, 2012, 2011 and 2010. The $29.0 million increase in revenue in 2012 from 2011 was primarily the result of higher sales volumes in the refurbishment and parts components of this segment due to higher demand. The $64.5 million increase in revenue in 2011 from 2010 was primarily the result of higher sales volumes in wheels and repair and metal scrapping programs that were in effect for only a portion of 2010.

Wheel Services, Refurbishment & Parts margin as a percentage of revenue was 10.0% for 2012, 10.5% for 2011 and 11.3% for 2010. The decrease in margin as a percentage of revenue in the current period was primarily the result of a change in sales mix, operating inefficiencies in repair and refurbishment as we train new employees and an increase in warranty and related costs which primarily include amounts associated with replacing a number of wheel sets produced at our Mexico City wheel shop which do not conform to American Association of Railroads (“AAR”) mounting standards as further discussed below. The decrease in 2011 compared to 2010 margins was primarily due to a change in product mix which generates higher revenues with no corresponding increase in margin dollars, an increasingly competitive market place and higher freight costs. These decreases were partially offset by higher scrap metal prices, improved efficiencies for repair due to higher activity levels and metal scrapping programs that were in effect for only a portion of 2010.

During the third quarter of 2012, we discovered that our Mexico City wheel shop shipped a number of wheel sets which do not conform to AAR mounting standards. The non-conforming wheel sets were used principally at our Mexico City repair shop and on some new railcars manufactured at our Gunderson-GIMSA facility. We conducted a review of our other wheel shops and found no indication of non-conformance in those shops.

We have identified a total of approximately 700 non-conforming wheel sets at our Mexico City wheel shop which could represent a risk of failure. We are working with the AAR and our customers to remove and replace these wheel sets as soon as possible and, through the end of October 2012, approximately 400 wheel sets have been replaced or released. We currently believe the costs associated with removing and replacing these approximately 700 wheel sets are not likely to exceed approximately $0.9 million which was expensed in 2012.

We have also identified approximately an additional 9,500 wheel sets at our Mexico City wheel shop that vary from AAR mounting standards, but which we believe do not compromise the safe operation of the railcar or require immediate removal and replacement. While the potential costs associated with these wheel sets cannot presently be determined, we do not anticipate that these costs will be material to our results of operations.

Leasing & Services Segment

Leasing & Services revenue was $71.9 million, $69.3 million and $72.3 million for the years ended August 31, 2012, 2011 and 2010. The $2.6 million increase in revenue in 2012 compared to 2011 was primarily the result of an increase in the size of the owned leased fleet and higher rents earned on increased volumes of leased railcars for syndication, partially offset by the expiration of a certain management services contract in 2011. The $3.0 million decrease in revenue in 2011 compared to 2010 was primarily the result of the expiration of a certain management services contract which was partially offset by higher rents earned on leased railcars for syndication and improved lease rates and increased utilization.

Leasing & Services margin as a percentage of revenue was 48.0% in 2012 compared to 46.4% in 2011 and 42.8% in 2010. The increase in 2012 compared to 2011 was primarily the result of more favorable lease rates and higher rents earned on increased volumes of leased railcars for syndication which was partially offset by the expiration of a certain management services contract in the second quarter of 2011. The increase in 2011 compared to 2010 was primarily the result of higher rents earned on increased volumes of leased railcars for syndication, higher lease rates, increased lease fleet utilization and lower operating costs on railcars in the lease fleet.

 

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The percentage of owned units on lease as of August 31, 2012 was 93.5% compared to 95.7% at August 31, 2011 and 94.4% at August 31, 2010. The decline in fleet utilization of 2.2% or approximately 240 railcars as of August 31, 2012 compared to August 31, 2011 primarily relates to coal cars that came off lease during the year.

Selling and Administrative

Selling and administrative expense was $104.6 million, or 5.8% of revenue, $80.3 million, or 6.5% of revenue and $69.9 million, or 9.2% of revenue, for the years ended August 31, 2012, 2011 and 2010. The $24.3 million increase in 2012 compared to 2011 is primarily due to higher employee related costs including incentive compensation associated with increased levels of activity and profitability. In addition, the revenue based administrative fees paid to our joint venture partner in Mexico increased due to higher activity levels. The $10.4 million increase in 2011 compared to 2010 is primarily due to higher employee related costs including incentive compensation associated with increased levels of activity and profitability, increased consulting expense, higher depreciation expense associated with our on-going ERP implementation and increased revenue based administrative fees paid to our joint venture partner in Mexico.

Gain on Disposition of Equipment

Gain on disposition of equipment was $9.0 million, $8.4 million and $8.2 million for the years ended August 31, 2012, 2011 and 2010. Assets from Greenbrier’s lease fleet are periodically sold in the normal course of business in order to take advantage of market conditions and manage risk and liquidity. All of the current year’s gain was realized on the disposition of leased assets. The year ended August 31, 2011 included a $5.1 million gain realized on the disposition of leased assets and a $3.3 million gain on insurance proceeds related to the January 2009 fire at one of our Wheel Services, Refurbishment & Parts facilities. The year ended August 31, 2010 included a $6.5 million gain realized on the disposition of leased assets and a $1.7 million gain on insurance proceeds related to the January 2009 fire.

Special Items

In April 2007, our board of directors approved the permanent closure of our then Canadian railcar manufacturing subsidiary, TrentonWorks Ltd (Trenton Works). In March 2008, TrentonWorks filed for bankruptcy. In the fourth quarter of 2010, the bankruptcy was resolved upon liquidation of substantially all remaining assets. The resolution of the bankruptcy resulted in income of $11.9 million which was recorded in Special items for the year ended August 31, 2010.

Other Costs

Interest and foreign exchange expense was comprised of the following:

 

(In thousands)    Years ended August 31,     

Increase

(decrease)

 
       2012             2011         

Interest and foreign exchange:

       

Interest and other expense

   $ 22,474      $ 30,155       $ (7,681

Accretion of term loan debt discount

            3,564         (3,564

Accretion of convertible debt discount

     3,259        3,021         238   

Foreign exchange (gain) loss

     (924     252         (1,176

 

 
   $ 24,809      $ 36,992       $ (12,183

 

 

Interest and other expense decreased in 2012 from 2011 primarily due to lower interest rates from refinancing of certain indebtedness. During the third quarter of 2011, we repaid $235.0 million of 8.375% senior unsecured loans and replaced it with $230.0 million of 3.5% convertible debt. The change in the accretion of term loan debt discount was due to the expensing of debt discount associated with the early repayment of $71.8 million of term debt in June 2011.

 

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Interest and foreign exchange expense was comprised of the following:

 

(In thousands)    Years ended August 31,     

Increase

(decrease)

 
       2011              2010         

Interest and foreign exchange:

        

Interest and other expense

   $ 30,155       $ 36,214       $ (6,059

Accretion of term loan debt discount

     3,564         4,377         (813

Accretion of convertible debt discount

     3,021         3,771         (750

Foreign exchange loss

     252         842         (590

 

 
   $ 36,992       $ 45,204       $ (8,212

 

 

Interest and other expense decreased in 2011 from 2010 primarily due to lower average debt levels and lower interest rates. The decrease in the accretion of term loan debt discount was due to the expensing of debt discount associated with the early repayment of $71.8 million of term debt in June 2011. The decrease in the accretion of the convertible debt discount was due to the proportionate write-off of the debt discount in the previous year associated with partial early retirement of the convertible senior notes.

Loss (gain) on extinguishment of debt was a loss of $15.7 million and a gain of $2.1 million for the years ended August 31, 2011 and 2010. The year ended August 31, 2011 included a $10.1 million loss on extinguishment of debt associated with the write-off of unamortized debt issuance costs of $2.9 million and prepayment premiums and other costs of $7.2 million due to the full retirement of the $235.0 million senior unsecured notes. In addition, we recorded a loss on extinguishment of debt of $5.6 million consisting of the write-off of unamortized loan fees of $1.7 million and debt discount of $3.9 million due to the full retirement of $71.8 million in term debt. The year ended August 31, 2010 included a $3.2 million gain associated with the early retirement of $32.3 million of convertible senior notes (due 2026), which was offset by $1.1 million for the proportionate write-off of loan fees and debt discount due to early repayments on the convertible note and certain term loans.

Income Tax

In 2012 our tax expense was $32.4 million on $94.0 million of pre-tax earnings with an effective tax rate of 34.5%. The fluctuation from the U.S. federal statutory tax rate of 35% was due to the geographical mix of pre-tax earnings and losses, the change in the recognition of deferred tax assets in certain foreign jurisdictions and the impact of a restructuring of a foreign subsidiary for tax purposes. In addition, an income tax liability was not recorded on the noncontrolling interest earnings of $1.1 million from a consolidated subsidiary that is a “flow through entity” for tax purposes. Earnings from flow through entities are only taxed at the owner’s level. The increase in the effective tax rate in 2012 from 2011 was primarily due to the change in geographical mix of pre-tax earnings.

In 2011 our tax expense was $3.6 million on $14.9 million of pre-tax earnings with an effective tax rate of 23.9%. The fluctuation from the U.S. federal statutory tax rate of 35% was due to the geographical mix of pre-tax earnings and losses, minimum tax requirements in certain local jurisdictions and operating results for certain operations with no related tax effect. In addition, an income tax liability was not recorded on the noncontrolling interest earnings of $1.9 million from a consolidated subsidiary that is a “flow through entity” for tax purposes. Earnings from flow through entities are only taxed at the owner’s level.

In 2010 we recorded a tax benefit of $1.0 million on $9.0 million of pre-tax earnings for the year. 2010 included income of $11.9 million from a Special item associated with the resolution of the bankruptcy of our former Canadian railcar manufacturing subsidiary, TrentonWorks, which was not taxable. In addition, an income tax liability was not recorded on the noncontrolling interest earnings of $4.1 million from a consolidated subsidiary that is a “flow through entity” for tax purposes. Earnings from flow through entities are only taxed at the owner’s level. Excluding these items the effective tax rate would have been 13.8%.

 

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Loss from Unconsolidated Affiliates

Loss from unconsolidated affiliates was $0.4 million, $3.0 million and $1.6 million for the years ended August 31, 2012, 2011 and 2010 and primarily includes the results of operations from our castings joint venture and from WLR-Greenbrier Rail Inc. (WLR-GBX). The improved financial results in 2012 compared to 2011 are due to a full year of operations of our castings joint venture that was idle for most of 2011 during the economic downturn. WLR-GBX was formed during the third quarter of 2010.

Net Earnings Attributable to Noncontrolling Interest

The years ended August 31, 2012, 2011 and 2010 include net earnings attributable to non-controlling interest of $2.5 million, $1.9 million and $4.1 million which primarily represents our joint venture partner’s share in the results of operations of our Mexican railcar manufacturing joint venture, adjusted for intercompany sales. The fluctuation from year to year is primarily a result of changes in mix and volume of intercompany activity.

Liquidity and Capital Resources

 

     Years Ended August 31,  
(In thousands)    2012     2011     2010  

Net cash provided by (used in) operating activities

   $ 116,056      $ (34,252   $ 42,561   

Net cash used in investing activities

     (88,947     (69,264     (24,170

Net cash provided by (used in) financing activities

     (28,794     57,991        4,576   

Effect of exchange rate changes

     5,034        (3,117     (290

 

 

Net increase (decrease) in cash and cash equivalents

   $ 3,349      $ (48,642   $ 22,677   

 

 

We have been financed through cash generated from operations, borrowings and issuance of stock. At August 31, 2012 cash and cash equivalents was $53.6 million, an increase of $3.4 million from $50.2 million at the prior year end.

Cash provided by operating activities was $116.1 million for the year ended August 31, 2012 compared to cash used in operating activities of $34.3 million for the year ended August 31, 2011 and cash provided by operating activities of $42.6 million for the year ended August 31, 2010. The increase in 2012 was primarily due to increased profitability and a change in the timing of working capital needs as a result of working capital management initiatives and build up of working capital in 2011 to prepare for operating at higher production levels in 2012. These factors were partially offset by an increase in leased railcars for syndication which are expected to be sold in 2013. The decrease in 2011 was primarily due to an increase in working capital needs as we ramped up to operate at higher production levels.

Cash used in investing activities for the year ended August 31, 2012 was $88.9 million compared to $69.3 million in 2011 and $24.2 million in 2010. Cash utilization in all periods presented primarily related to capital expenditures.

Capital expenditures totaled $117.9 million, $84.3 million and $39.0 million for the years ended August 31, 2012, 2011 and 2010. Of these capital expenditures, approximately $73.3 million, $44.2 million and $18.1 million for the years ended August 31, 2012, 2011 and 2010 were attributable to Leasing & Services operations. Leasing & Services capital expenditures for 2013, net of proceeds from sales of equipment, are expected to be approximately $42.0 million. During the year ended August 31, 2012, we transferred $9.0 million from Leased railcars for syndication to Equipment on operating leases, net. We regularly sell assets from our lease fleet. Proceeds from the sale of equipment were approximately $33.6 million, $18.7 million and $23.0 million for the years ended August 31, 2012, 2011 and 2010.

Approximately $33.3 million, $20.0 million and $8.7 million of capital expenditures for the years ended August 31, 2012, 2011 and 2010 were attributable to Manufacturing operations. Capital expenditures for Manufacturing are expected to be approximately $28.0 million in 2013 and primarily relate to enhancements to existing manufacturing facilities and the addition of new production lines.

 

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Wheel Services, Refurbishment & Parts capital expenditures for the years ended August 31, 2012, 2011 and 2010 were $11.2 million, $20.1 million and $12.2 million and are expected to be approximately $15.0 million in 2013 for maintenance and improvement of existing facilities and some growth.

Cash used in financing activities was $28.8 million for the year ended August 31, 2012, compared to cash provided by financing activities of $58.0 million and $4.6 million for the years ended August 31, 2011 and 2010. During 2012, $31.8 million was utilized in net activity of debt. During 2011, we received $62.8 million in net proceeds from an equity offering and utilized $4.8 million in net activity of debt. During 2010, we received $52.7 million in net proceeds from an equity offering and utilized $48.2 million in net activity of debt.

Senior secured credit facilities, consisting of three components, aggregated to $365.8 million as of August 31, 2012.

Available borrowings under our credit facilities are generally limited by defined levels of inventory, receivables, property, plant and equipment and leased equipment, as well as total debt to consolidated capitalization and interest coverage ratios. We had an aggregate of $299.5 million available to draw down under the committed credit facilities as of August 31, 2012. This amount consists of $284.5 million available on the North American credit facility, $10.0 million on the European credit facilities and $5.0 million on the Mexican joint venture credit facilities as of August 31, 2012.

As of August 31, 2012 a $290.0 million revolving line of credit secured by substantially all of our assets in the U.S. not otherwise pledged as security for term loans, maturing June 2016, was available to provide working capital and interim financing of equipment, principally for the U.S. and Mexican operations. Advances under this facility bear interest at LIBOR plus 2.5% and Prime plus 1.5% depending on the type of borrowing. Available borrowings under the credit facility are generally based on defined levels of inventory, receivables, property, plant and equipment and leased equipment, as well as total debt to consolidated capitalization and fixed charges coverage ratios.

As of August 31, 2012, lines of credit totaling $25.8 million secured by certain of our European assets, with various variable rates that range from Warsaw Interbank Offered Rate (WIBOR) plus 1.2% to WIBOR plus 1.7%, were available for working capital needs of the European manufacturing operation. European credit facilities are continually being renewed. Currently these European credit facilities have maturities that range from December 2012 through June 2013.

As of August 31, 2012 our Mexican joint venture had two lines of credit totaling $50.0 million. The first line of credit provides up to $20.0 million and is secured by certain of the joint venture’s accounts receivable and inventory. Advances under this facility bear interest at LIBOR plus 2.5%. The Mexican joint venture was able to draw against this facility through October 2012 and full repayment is not due until March 2013. The renewal process is underway and is expected to be completed in November 2012. The second line of credit provides up to $30.0 million and is fully guaranteed by each of the joint venture partners, including our Company. Advances under this facility bear interest at LIBOR plus 2.0%. The Mexican joint venture will be able to draw against this facility through February 2015.

As of August 31, 2012 outstanding borrowings under the senior secured credit facilities consisted of $5.6 million in letters of credit, $15.8 million outstanding under the European credit facilities and $45.0 million outstanding under the Mexican joint venture credit facilities. As of August 31, 2012 there were no borrowings outstanding under the North American credit facility.

The revolving and operating lines of credit, along with notes payable, contain covenants with respect to us and our various subsidiaries, the most restrictive of which, among other things, limit our ability to: incur additional indebtedness or guarantees; pay dividends or repurchase stock; enter into sale leaseback transactions; create liens; sell assets; engage in transactions with affiliates, including joint ventures and non U.S. subsidiaries, including but not limited to loans, advances, equity investments and guarantees; enter into mergers, consolidations or sales of substantially all our assets; and enter into new lines of business. The covenants also require certain maximum ratios of debt to total capitalization and minimum levels of fixed charges (interest plus rent) coverage.

 

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We may from time to time seek to repurchase or otherwise retire or exchange securities, including outstanding borrowings and equity securities, and take other steps to reduce our debt or otherwise improve our balance sheet. These actions may include open market repurchases, unsolicited or solicited privately negotiated transactions or other retirements, repurchases or exchanges. Such repurchases or exchanges, if any, will depend on a number of factors, including, but not limited to, prevailing market conditions, trading levels of our debt, our liquidity requirements and contractual restrictions, if applicable.

On November 14, 2011, affiliates of WL Ross & Co. LLC (WL Ross) sold 1,482,341 shares of our common stock. The shares sold were acquired by the cashless net exercise of warrants for purchase of our common stock. WL Ross and its investment funds continue to own warrants to purchase 1,154,672 shares of our common stock. The warrants were issued in 2009 in connection with a term loan to Greenbrier that was repaid in June 2011.

We have operations in Mexico and Poland that conduct business in their local currencies as well as other regional currencies. To mitigate the exposure to transactions denominated in currencies other than the functional currency, we enter into foreign currency forward exchange contracts to protect the margin on a portion of forecast foreign currency sales primarily in Euro.

Foreign operations give rise to risks from changes in foreign currency exchange rates. We utilize foreign currency forward exchange contracts with established financial institutions to hedge a portion of that risk. No provision has been made for credit loss due to counterparty non-performance.

As of August 31, 2012, the Mexican joint venture had $45.6 million of third party debt, of which we have guaranteed approximately $37.8 million. In addition, we, along with our joint venture partner, have committed to contributing $10.0 million to fund the capital expenditures to expand production capacity, of which we will contribute 50%. These amounts will be contributed at various intervals from May 31, 2012 to October 31, 2013. As of August 31, 2012, we and our joint venture partner have each contributed $1.4 million.

In accordance with customary business practices in Europe, we have $2.3 million in bank and third party warranty and performance guarantee facilities as of August 31, 2012. To date no amounts have been drawn under these guarantee facilities.

In 2012, cash paid for income taxes was 12% of pre-tax earnings. We expect the rate in 2013 to increase primarily due to net operating loss carryforwards utilized in 2012 and reversals of certain tax deferrals.

We expect existing funds and cash generated from operations, together with proceeds from financing activities including borrowings under existing credit facilities and long-term financings, to be sufficient to fund working capital needs, planned capital expenditures and expected debt repayments for the next twelve months.

The following table shows our estimated future contractual cash obligations as of August 31, 2012:

 

     Years Ending August 31,  
(In thousands)    Total      2013      2014      2015      2016      2017      Thereafter  

Notes payable

   $ 430,534       $ 73,469       $ 84,710       $ 42,183       $ 172       $       $ 230,000   

Interest

     56,392         13,580         10,219         8,377         8,072         8,072         8,072   

Revolving notes

     60,754         60,754                                           

Purchase commitments

     2,766         2,766                                           

Operating leases

     17,878         6,723         5,447         3,110         1,752         693         153   

Railcar leases

     18,450         6,632         5,495         4,805         1,001         517           

Other

     962         505         345         69         42         1           

 

 
   $ 587,736       $ 164,429       $ 106,216       $ 58,544       $ 11,039       $ 9,283       $ 238,225   

 

 

Due to uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at August 31, 2012, we are unable to estimate the period of cash settlement with the respective taxing authority. Therefore, approximately $3.7 million in uncertain tax positions have been excluded from the contractual table above. See Note 19 to the Consolidated Financial Statements for a discussion on income taxes.

 

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Off Balance Sheet Arrangements

We do not currently have off balance sheet arrangements that have or are likely to have a material current or future effect on our Consolidated Financial Statements.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires judgment on the part of management to arrive at estimates and assumptions on matters that are inherently uncertain. These estimates may affect the amount of assets, liabilities, revenue and expenses reported in the financial statements and accompanying notes and disclosure of contingent assets and liabilities within the financial statements. Estimates and assumptions are periodically evaluated and may be adjusted in future periods. Actual results could differ from those estimates.

Income taxes - For financial reporting purposes, income tax expense is estimated based on planned tax return filings. The amounts anticipated to be reported in those filings may change between the time the financial statements are prepared and the time the tax returns are filed. Further, because tax filings are subject to review by taxing authorities, there is also the risk that a position taken in preparation of a tax return may be challenged by a taxing authority. If the taxing authority is successful in asserting a position different than that taken by us, differences in tax expense or between current and deferred tax items may arise in future periods. Such differences, which could have a material impact on our financial statements, would be reflected in the financial statements when management considers them probable of occurring and the amount reasonably estimable. Valuation allowances reduce deferred tax assets to an amount that will more likely than not be realized. Our estimates of the realization of deferred tax assets is based on the information available at the time the financial statements are prepared and may include estimates of future income and other assumptions that are inherently uncertain.

Maintenance obligations - We are responsible for maintenance on a portion of the managed and owned lease fleet under the terms of maintenance obligations defined in the underlying lease or management agreement. The estimated maintenance liability is based on maintenance histories for each type and age of railcar. These estimates involve judgment as to the future costs of repairs and the types and timing of repairs required over the lease term. As we cannot predict with certainty the prices, timing and volume of maintenance needed in the future on railcars under long-term leases, this estimate is uncertain and could be materially different from maintenance requirements. The liability is periodically reviewed and updated based on maintenance trends and known future repair or refurbishment requirements. These adjustments could be material due to the inherent uncertainty in predicting future maintenance requirements.

Warranty accruals - Warranty costs to cover a defined warranty period are estimated and charged to operations. The estimated warranty cost is based on historical warranty claims for each particular product type. For new product types without a warranty history, preliminary estimates are based on historical information for similar product types.

These estimates are inherently uncertain as they are based on historical data for existing products and judgment for new products. If warranty claims are made in the current period for issues that have not historically been the subject of warranty claims and were not taken into consideration in establishing the accrual or if claims for issues already considered in establishing the accrual exceed expectations, warranty expense may exceed the accrual for that particular product. Conversely, there is the possibility that claims may be lower than estimates. The warranty accrual is periodically reviewed and updated based on warranty trends. However, as we cannot predict future claims, the potential exists for the difference in any one reporting period to be material.

Environmental costs - At times we may be involved in various proceedings related to environmental matters. We estimate future costs for known environmental remediation requirements and accrue for them when it is probable that we have incurred a liability and the related costs can be reasonably estimated based on currently available information. If further developments or resolution of an environmental matter result in facts and circumstances that are significantly different than the assumptions used to develop these reserves, the accrual for environmental

 

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remediation could be materially understated or overstated. Adjustments to these liabilities are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or when expenditures for which reserves are established are made. Due to the uncertain nature of estimating potential environmental matters, there can be no assurance that we will not become involved in future litigation or other proceedings or, if we were found to be responsible or liable in any litigation or proceeding, that such costs would not be material to us.

Revenue recognition - Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured.

Railcars are generally manufactured, repaired or refurbished and wheel services and parts produced under firm orders from third parties. Revenue is recognized when these products or services are completed, accepted by an unaffiliated customer and contractual contingencies removed. Certain leases are operated under car hire arrangements whereby revenue is earned based on utilization, car hire rates and terms specified in the lease agreement. Car hire revenue is reported from a third party source two months in arrears; however, such revenue is accrued in the month earned based on estimates of use from historical activity and is adjusted to actual as reported. These estimates are inherently uncertain as they involve judgment as to the estimated use of each railcar. Adjustments to actual have historically not been significant. Revenues from construction of marine barges are either recognized on the percentage of completion method during the construction period or on the completed contract method based on the terms of the contract. Under the percentage of completion method, judgment is used to determine a definitive threshold against which progress towards completion can be measured to determine timing of revenue recognition.

We will periodically sell railcars with leases attached to financial investors. In addition we will often perform management or maintenance services at market rates for these railcars. Pursuant to the guidance in ASC 840-20-40, we evaluate the terms of any remarketing agreements and any contractual provisions that represent retained risk and the level of retained risk based on those provisions. We apply a 10% threshold to determine whether the level of retained risk exceeds 10% of the individual fair value of the rail cars delivered. For any contracts with multiple elements (i.e. railcars, maintenance, management services, etc) we allocate revenue among the deliverables primarily based upon objective and reliable evidence of the fair value of each element in the arrangement. If objective and reliable evidence of fair value of any element is not available, we will use its estimated selling price for purposes of allocating the total arrangement consideration among the elements.

Impairment of long-lived assets - When changes in circumstances indicate the carrying amount of certain long-lived assets may not be recoverable, the assets are evaluated for impairment. If the forecast undiscounted future cash flows are less than the carrying amount of the assets, an impairment charge to reduce the carrying value of the assets to fair value is recognized in the current period. These estimates are based on the best information available at the time of the impairment and could be materially different if circumstances change. If the forecast undiscounted future cash flows exceeded the carrying amount of the assets it would indicate that the assets were not impaired.

Goodwill and acquired intangible assets - The Company periodically acquires businesses in purchase transactions in which the allocation of the purchase price may result in the recognition of goodwill and other intangible assets. The determination of the value of such intangible assets requires management to make estimates and assumptions. These estimates affect the amount of future period amortization and possible impairment charges.

Goodwill and indefinite-lived intangible assets are tested for impairment annually during the third quarter. Goodwill is also tested more frequently if changes in circumstances or the occurrence of events indicates that a potential impairment exists. When changes in circumstances, such as a decline in the market price of our common stock, changes in demand or in the numerous variables associated with the judgments, assumptions and estimates made in assessing the appropriate valuation of goodwill indicate the carrying amount of certain indefinite lived assets may not be recoverable, the assets are evaluated for impairment. Among other things, our assumptions used in the valuation of goodwill include growth of revenue and margins and increased cash flows over time. If actual operating results were to differ from these assumptions, it may result in an impairment of our goodwill.

 

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The provisions of Accounting Standards Codification (ASC) 350, Intangibles - Goodwill and Other, require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit with its carrying value. We determine the fair value of our reporting units based on a weighting of income and market approaches. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, we estimate the fair value based on observed market multiples for comparable businesses. The second step of the goodwill impairment test is required only in situations where the carrying value of the reporting unit exceeds its fair value as determined in the first step. In the second step we would compare the implied fair value of goodwill to its carrying value. The implied fair value of goodwill is determined by allocating the fair value of a reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recorded to the extent that the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill. The goodwill balance as of August 31, 2012 of $137.1 million relates to the Wheel Services, Refurbishment & Parts segment. Goodwill was tested during the third quarter and the Company concluded that goodwill was not impaired.

New Accounting Pronouncements

See Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

 

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk

We have operations in Mexico and Poland that conduct business in their local currencies as well as other regional currencies. To mitigate the exposure to transactions denominated in currencies other than the functional currency of each entity, we enter into foreign currency forward exchange contracts to protect the margin on a portion of forecast foreign currency sales. At August 31, 2012, $87.5 million of forecast sales in Europe were hedged by foreign exchange contracts. Because of the variety of currencies in which purchases and sales are transacted and the interaction between currency rates, it is not possible to predict the impact a movement in a single foreign currency exchange rate would have on future operating results.

In addition to exposure to transaction gains or losses, we are also exposed to foreign currency exchange risk related to the net asset position of our foreign subsidiaries. At August 31, 2012, net assets of foreign subsidiaries aggregated $38.5 million and a 10% strengthening of the U.S. dollar relative to the foreign currencies would result in a decrease in equity of $3.9 million, or 0.9% of Total equity Greenbrier. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar.

Interest Rate Risk

We have managed a portion of our variable rate debt with interest rate swap agreements, effectively converting $42.9 million of variable rate debt to fixed rate debt. As a result, we are exposed to interest rate risk relating to our revolving debt and a portion of term debt, which are at variable rates. At August 31, 2012, 69% of our outstanding debt has fixed rates and 31% has variable rates. At August 31, 2012, a uniform 10% increase in interest rates would result in approximately $0.4 million of additional annual interest expense.

 

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Balance Sheets

AS OF AUGUST 31,

 

(In thousands)    2012     2011  

Assets

    

Cash and cash equivalents

   $ 53,571      $ 50,222   

Restricted cash

     6,277        2,113   

Accounts receivable, net

     146,326        188,443   

Inventories

     316,741        323,512   

Leased railcars for syndication

     97,798        30,690   

Equipment on operating leases, net

     362,968        321,141   

Property, plant and equipment, net

     182,429        161,200   

Goodwill

     137,066        137,066   

Intangibles and other assets, net

     81,368        87,268   

 

 
   $ 1,384,544      $ 1,301,655   

 

 

Liabilities and Equity

    

Revolving notes

   $ 60,755      $ 90,339   

Accounts payable and accrued liabilities

     329,508        316,536   

Deferred income taxes

     95,363        83,839   

Deferred revenue

     17,194        5,900   

Notes payable

     428,079        429,140   

Commitments and contingencies (Notes 22 & 23)

    

Equity:

Greenbrier

    

Preferred stock - without par value; 25,000 shares authorized; none outstanding

              

Common stock - without par value; 50,000 shares authorized; 27,143 and 25,186 outstanding at August 31, 2012 and 2011

              

Additional paid-in capital

     252,256        242,286   

Retained earnings

     185,890        127,182   

Accumulated other comprehensive loss

     (6,369     (7,895

 

 

Total equity Greenbrier

     431,777        361,573   

Noncontrolling interest

     21,868        14,328   

 

 

Total equity

     453,645        375,901   

 

 
   $ 1,384,544      $ 1,301,655   

 

 

The accompanying notes are an integral part of these financial statements.

 

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Consolidated Statements of Income

YEARS ENDED AUGUST 31,

 

(In thousands, except per share amounts)    2012     2011     2010  

Revenue

      

Manufacturing

   $ 1,253,964      $ 721,102      $ 295,566   

Wheel Services, Refurbishment & Parts

     481,865        452,865        388,434   

Leasing & Services

     71,887        69,323        72,280   

 

 
     1,807,716        1,243,290        756,280   

Cost of revenue

      

Manufacturing

     1,122,384        661,127        268,395   

Wheel Services, Refurbishment & Parts

     433,541        405,449        344,522   

Leasing & Services

     37,371        37,183        41,365   

 

 
     1,593,296        1,103,759        654,282   

Margin

     214,420        139,531        101,998   

Selling and administrative

     104,596        80,326        69,931   

Gain on disposition of equipment

     (8,964     (8,369     (8,170

Special items

                   (11,870

 

 

Earnings from operations

     118,788        67,574        52,107   

Other costs

      

Interest and foreign exchange

     24,809        36,992        45,204   

Loss (gain) on extinguishment of debt

            15,657        (2,070

 

 

Earnings before income tax and loss from unconsolidated affiliates

     93,979        14,925        8,973   

Income tax benefit (expense)

     (32,393     (3,564     959   

 

 

Earnings before loss from unconsolidated affiliates

     61,586        11,361        9,932   

Loss from unconsolidated affiliates

     (416     (2,974     (1,601

 

 

Net earnings

     61,170        8,387        8,331   

Net earnings attributable to noncontrolling interest

     (2,462     (1,921     (4,054

 

 

Net earnings attributable to Greenbrier

   $ 58,708      $ 6,466      $ 4,277   

 

 

Basic earnings per common share:

   $ 2.21      $ 0.27      $ 0.23   

 

 

Diluted earnings per common share:

   $ 1.91      $ 0.24      $ 0.21   

 

 

Weighted average common shares:

      

Basic

     26,572        24,100        18,585   

Diluted

     33,718        26,501        20,213   

The accompanying notes are an integral part of these financial statements.

 

36    The Greenbrier Companies 2012 Annual Report   


Table of Contents

Consolidated Statements of Equity

and Comprehensive Income

 

    Attributable to Greenbrier           Total
Equity
 
(In thousands, except for per share amounts)  

Common

Stock

Shares

   

Additional

Paid-in

Capital

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Total

Attributable

to Greenbrier

    Attributable to
Noncontrolling
Interest
   

Balance September 1, 2009

    17,094      $ 117,077      $ 116,439      $ (9,790   $ 223,726      $ 8,724      $ 232,450   

Net earnings

                  4,277               4,277        4,054        8,331   

Translation adjustment (net of tax effect)

                         (3,831     (3,831            (3,831

Pension adjustment (net of tax effect)

               6,810        6,810               6,810   

Reclassification of derivative financial instruments recognized in net earnings (net of tax effect)

                         (878     (878            (878

Unrealized gain on derivative financial instruments (net of tax effect)

                         485        485               485   
         

 

 

   

 

 

   

 

 

 

Comprehensive income

            6,863        4,054        10,917   

Noncontrolling interest adjustments

                                       (1,309     (1,309

ASC 470-20 adjustment for partial convertible note retirement (net of tax)

           (2,535                   (2,535            (2,535

Net proceeds from equity offering

    4,500        52,708                      52,708               52,708   

Restricted stock awards (net of cancellations)

    274        3,210                      3,210               3,210   

Unamortized restricted stock

           (3,210                   (3,210            (3,210

Restricted stock amortization

           5,825                      5,825               5,825   

Stock options exercised

    7        29                      29               29   

Excess tax expense of stock options exercised

           (678                   (678            (678

 

 

Balance August 31, 2010

    21,875        172,426        120,716        (7,204     285,938        11,469        297,407   

Net earnings

                  6,466               6,466        1,921        8,387   

Translation adjustment

                         2,205        2,205               2,205   

Pension adjustment (net of tax effect)

               (6     (6            (6

Reclassification of derivative financial instruments recognized in net earnings (net of tax effect)

                         (1,029     (1,029            (1,029

Unrealized loss on derivative financial instruments (net of tax effect)

                         (1,861     (1,861            (1,861
         

 

 

   

 

 

   

 

 

 

Comprehensive income

            5,775        1,921        7,696   

Noncontrolling interest adjustments

                                       938        938   

Net proceeds from equity offering

    3,000        62,760                      62,760               62,760   

Restricted stock awards (net of cancellations)

    306        7,197                      7,197               7,197   

Unamortized restricted stock

           (7,197                   (7,197            (7,197

Restricted stock amortization

           7,073                      7,073               7,073   

Stock options exercised

    5        27                      27               27   

 

 

Balance August 31, 2011

    25,186        242,286        127,182        (7,895     361,573        14,328        375,901   

Net earnings

                  58,708               58,708        2,462        61,170   

Translation adjustment

                         (4,040     (4,040     (128     (4,168

Reclassification of derivative financial instruments recognized in net earnings (net of tax effect of $1.3 million)

                         4,988        4,988               4,988   

Pension adjustment (net of tax effect)

          (130     (130            (130

Unrealized gain on derivative financial instruments (net of tax effect of $0.3 million)

                         708        708               708   
         

 

 

   

 

 

   

 

 

 

Comprehensive income

                                60,234        2,334        62,568   

Investment by joint venture partner

                                       1,362        3,844   

Noncontrolling interest adjustments

                                       3,844        1,362   

Restricted stock awards (net of cancellations)

    461        9,392                      9,392               9,392   

Unamortized restricted stock

           (9,392                   (9,392            (9,392

Restricted stock amortization

           8,343                      8,343               8,343   

Warrants exercised

    1,496                                             

Excess tax benefit from restricted stock awards

           1,627                      1,627               1,627   

 

 

Balance August 31, 2012

    27,143      $ 252,256      $ 185,890      $ (6,369   $ 431,777      $ 21,868      $ 453,645   

 

 

The accompanying notes are an integral part of these financial statements.

 

   The Greenbrier Companies 2012 Annual Report      37   


Table of Contents

Consolidated Statements of Cash Flows

YEARS ENDED AUGUST 31,

 

(In thousands)    2012     2011     2010  

Cash flows from operating activities:

      

Net earnings

   $ 61,170      $ 8,387      $ 8,331   

Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:

      

Deferred income taxes

     11,617        2,399        15,052   

Depreciation and amortization

     42,371        38,293        37,511   

Gain on sales of leased equipment

     (8,964     (5,121     (6,543

Accretion of debt discount

     3,259        6,583        8,149   

Special items

                   (11,870

Loss (gain) on extinguishment of debt (non-cash portion)

            8,453        (2,070

Other

     13,662        6,762        4,237   

Decrease (increase) in assets:

      

Accounts receivable

     37,763        (96,552     22,430   

Inventories

     3,709        (116,866     (45,212

Leased railcars for syndication

     (76,071     (20,839     759   

Other

            8,863        6,455   

Increase (decrease) in liabilities:

      

Accounts payable and accrued liabilities

     16,236        130,673        12,777   

Deferred revenue

     11,304        (5,287     (7,445

 

 

Net cash (used in) provided by operating activities

     116,056        (34,252     42,561   

 

 

Cash flows from investing activities:

      

Proceeds from sales of equipment

     33,560        18,730        22,978   

Investment in and advances to unconsolidated affiliates

     (506     (2,330     (927

Contract placement fee

                   (6,050

Decrease (increase) in restricted cash

     (4,164     412        (1,442

Capital expenditures

     (117,885     (84,302     (38,989

Other

     48        (1,774     260   

 

 

Net cash used in investing activities

     (88,947     (69,264     (24,170

 

 

Cash flows from financing activities:

      

Net changes in revolving notes with maturities of 90 days or less

     (57,302     71,625        (11,934

Proceeds from revolving notes with maturities longer than 90 days

     63,773        25,159        5,698   

Repayments of revolving notes with maturities longer than 90 days

     (33,934     (10,000     (5,698

Proceeds from issuance of notes payable

     2,750        231,250        2,149   

Debt issuance costs

            (11,469     (109

Repayments of notes payable

     (7,070     (311,360     (38,267

Proceeds from equity offering

            63,180        56,250   

Expenses from equity offering

            (420     (3,542

Excess tax benefit from restricted stock awards

     1,627                 

Investment by joint venture partner

     1,362                 

Other

            26        29   

 

 

Net cash provided by (used in) financing activities

     (28,794     57,991        4,576   

 

 

Effect of exchange rate changes

     5,034        (3,117     (290

Increase (decrease) in cash and cash equivalents

     3,349        (48,642     22,677   

Cash and cash equivalents

      

Beginning of period

     50,222        98,864        76,187   

 

 

End of period

   $ 53,571      $ 50,222      $ 98,864   

 

 

Cash paid during the period for:

      

Interest

   $ 12,737      $ 27,872      $ 29,409   

Income taxes, net

   $ 8,601      $ 677      $ (14,953

Non-cash activity

      

Transfer of leased railcars for syndication to equipment on operating leases

   $ 8,963      $      $   

Transfer of other assets to property, plant and equipment

   $      $      $ 708   

The accompanying notes are an integral part of these financial statements.

 

38    The Greenbrier Companies 2012 Annual Report   


Table of Contents

Notes to Consolidated Financial Statements

Note 1 - Nature of Operations

The Greenbrier Companies, Inc. and its subsidiaries (Greenbrier or the Company) currently operate in three primary business segments: Manufacturing; Wheel Services, Refurbishment & Parts; and Leasing & Services. The three business segments are operationally integrated. With operations in the United States (U.S.), Mexico and Poland, the Manufacturing segment produces double-stack intermodal railcars, conventional railcars, tank cars and marine vessels. The Wheel Services, Refurbishment & Parts segment performs railcar repair, refurbishment and maintenance activities in North America as well as wheel and axle servicing and production of a variety of parts for the railroad industry. The Leasing & Services segment owns approximately 11,000 railcars and provides management services for approximately 219,000 railcars for railroads, shippers, carriers, institutional investors and other leasing and transportation companies in North America. Greenbrier also produces railcar castings through an unconsolidated joint venture.

Note 2 - Summary of Significant Accounting Policies

Principles of consolidation - The financial statements include the accounts of the Company and its subsidiaries in which it has a controlling interest. All intercompany transactions and balances are eliminated upon consolidation.

Unclassified Balance Sheet - The balance sheets of the Company are presented in an unclassified format as a result of significant leasing activities for which the current or non-current distinction is not relevant. In addition, the activities of the Manufacturing; Wheel Services, Refurbishment & Parts and Leasing & Services segments are so intertwined that in the opinion of management, any attempt to separate the respective balance sheet categories would not be meaningful and may lead to the development of misleading conclusions by the reader.

Foreign currency translation - Certain operations outside the U.S., primarily in Poland and Germany, prepare financial statements in currencies other than the U.S. dollar. Revenues and expenses are translated at average exchange rates for the year, while assets and liabilities are translated at year-end exchange rates. Translation adjustments are accumulated as a separate component of equity in other comprehensive income (loss). The foreign currency translation adjustment balances were $6.0 million, $1.9 million and $4.1 million as of August 31, 2012, 2011 and 2010.

Cash and cash equivalents - Cash is temporarily invested primarily in money market funds. All highly-liquid investments with a maturity of three months or less at the date of acquisition are considered cash equivalents.

Restricted cash - Restricted cash relates to amounts held in restricted accounts to support a target minimum rate of return as part of an agreement further described in Note 15 – Variable Interest Entities and a pass through account for activity related to management services provided for certain third party customers.

Accounts receivable - Accounts receivable are stated net of allowance for doubtful accounts of $3.5 million and $3.9 million as of August 31, 2012 and 2011.

 

     Years ended August 31,  
(In thousands)    2012     2011     2010  

Allowance for doubtful accounts

      

Balance at beginning of period

   $ 3,913      $ 3,931      $ 5,612   

Additions, net of reversals

     641        351        (385

Usage

     (663     (673     (991

Currency translation effect

     (366     304        (305

 

 

Balance at end of period

   $ 3,525      $ 3,913      $ 3,931   

 

 

Inventories - Inventories are valued at the lower of cost or market primarily using the first-in first-out method. Work-in-process includes material, labor and overhead.

Leased railcars for syndication - Leased railcars for syndication consist of newly-built railcars, manufactured at one of the Company’s facilities, which have been placed on lease to a customer and which the Company intends to sell to an investor with the lease attached. These railcars are not depreciated and are anticipated to be sold within six

 

   The Greenbrier Companies 2012 Annual Report      39   


Table of Contents

months of delivery of the last railcar on the underlying lease. The Company does not believe any economic value of a railcar is lost in the first six months; therefore the Company does not depreciate these assets. In the event the railcars are not sold, the railcars are transferred to Equipment on operating leases and depreciated.

Equipment on operating leases, net - Equipment on operating leases is stated net of accumulated depreciation. Depreciation to estimated salvage value is provided on the straight-line method over the estimated useful lives of up to thirty-five years. Management periodically reviews salvage value estimates based on current scrap prices and what the Company expects to receive upon disposal.

Property, plant and equipment - Property, plant and equipment is stated at cost net of accumulated depreciation. Depreciation is provided on the straight-line method over estimated useful lives which are as follows:

 

     Depreciable Life  

Buildings and improvements

     10 – 25 years   

Machinery and equipment

     3 – 15 years   

Other

     3 – 7 years   

Goodwill - Goodwill is recorded when the purchase price of an acquisition exceeds the fair market value of the net assets acquired. Goodwill is not amortized and is tested for impairment at least annually and more frequently if material changes in events or circumstances arise. This testing compares carrying values to fair values and if the carrying value of these assets is in excess of fair value, the carrying value is reduced to fair value.

Intangible and other assets, net - Intangible assets are recorded when a portion of the purchase price of an acquisition is allocated to assets such as customer contracts and relationships, trade names, certifications and backlog. Intangible assets with finite lives are amortized using the straight line method over their estimated useful lives and include the following: trade names, 5 years; and long-term customer agreements, 5 to 20 years. Other assets include loan fees and debt acquisition costs which are capitalized and amortized as interest expense over the life of the related borrowings.

Impairment of long-lived assets - When changes in circumstances indicate the carrying amount of certain long-lived assets may not be recoverable, the assets are evaluated for impairment. If the forecast undiscounted future cash flows are less than the carrying amount of the assets, an impairment charge to reduce the carrying value of the assets to estimated realizable value is recognized in the current period. No impairment was recorded in the years ended August 31, 2012, 2011 and 2010.

Maintenance obligations - The Company is responsible for maintenance on a portion of the managed and owned lease fleet under the terms of maintenance obligations defined in the underlying lease or management agreement. The estimated liability is based on maintenance histories for each type and age of railcar. The liability, included in Accounts payable and accrued liabilities, is reviewed periodically and updated based on maintenance trends and known future repair or refurbishment requirements.

Warranty accruals - Warranty costs are estimated and charged to operations to cover a defined warranty period. The estimated warranty cost is based on history of warranty claims for each particular product type. For new product types without a warranty history, preliminary estimates are based on historical information for similar product types. The warranty accruals, included in Accounts payable and accrued liabilities, are reviewed periodically and updated based on warranty trends.

Income taxes - The liability method is used to account for income taxes. Deferred income taxes are provided for the temporary effects of differences between assets and liabilities recognized for financial statement and income tax reporting purposes. Valuation allowances reduce deferred tax assets to an amount that will more likely than not be realized. As a result, we recognize liabilities for uncertain tax positions based on whether evidence indicates that it is more likely than not that the position will be sustained on audit. It is inherently difficult and subjective to estimate such amounts, as this requires us to estimate the probability of various possible outcomes. The Company reevaluates these uncertain tax positions on a quarterly basis. Changes in assumptions may result in the recognition of a tax benefit or an additional charge to the tax provision.

 

40    The Greenbrier Companies 2012 Annual Report   


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Noncontrolling interest - In October 2006, the Company formed a joint venture with Grupo Industrial Monclova, S.A. (GIMSA) to manufacture new railroad freight cars for the North American marketplace at GIMSA’s existing manufacturing facility located in Frontera, Mexico. Each party owns a 50% interest in the joint venture. Production began late in the Company’s third quarter of 2007. The financial results of this operation are consolidated for financial reporting purposes as the Company maintains a controlling interest as evidenced by the right to appoint the majority of the board of directors, control over accounting, financing, marketing and engineering, and approval and design of products. The noncontrolling interest reflected in the Company’s consolidated financial statements primarily represents the joint venture partner’s equity in this venture.

Accumulated other comprehensive income (loss) - Accumulated other comprehensive income (loss), net of tax as appropriate, consisted of the following:

 

(In thousands)    Unrealized
Gain (Loss)
on Derivative
Financial
Instruments
    Pension
Adjustment
    Foreign
Currency
Translation
Adjustment
    Accumulated
Other
Comprehensive
Income (Loss)
 

Balance August 31, 2011

   $ (5,789   $ (195   $ (1,911   $ (7,895

2012 activity

     5,696        (130     (4,040     1,526   

 

 

Balance, August 31, 2012

   $ (93   $ (325   $ (5,951   $ (6,369

 

 

Revenue recognition - Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured.

Railcars are generally manufactured, repaired or refurbished under firm orders from third parties. Revenue is recognized when new, refurbished or repaired railcars are completed, accepted by an unaffiliated customer and contractual contingencies removed. Marine revenues are either recognized on the percentage of completion method during the construction period or on the completed contract method based on the terms of the contract. Cash payments received prior to meeting revenue recognition criteria are accounted for in Deferred revenue. Operating lease revenue is recognized as earned under the lease terms. Certain leases are operated under car hire arrangements whereby revenue is earned based on utilization, car hire rates and terms specified in the lease agreement.

The Company will periodically sell railcars with leases attached to financial investors. In addition the Company will often perform management or maintenance services at market rates for these railcars. Pursuant to the guidance in ASC 840-20-40, the Company evaluates the terms of any remarketing agreements and any contractual provisions that represent retained risk and the level of retained risk based on those provisions. The Company applies a 10% threshold to determine whether the level of retained risk exceeds 10% of the individual fair value of the rail cars delivered. For any contracts with multiple elements (i.e. railcars, maintenance, management services, etc) the Company allocates revenue among the deliverables primarily based upon objective and reliable evidence of the fair value of each element in the arrangement. If objective and reliable evidence of fair value of any element is not available, the company will use its estimated selling price for purposes of allocating the total arrangement consideration among the elements.

Interest and foreign exchange - Includes foreign exchange gains and losses, amortization of loan fee expense, accretion of debt discounts and external interest expense.

 

     Years ended August 31,  
(In thousands)    2012     2011      2010  

Interest and foreign exchange:

       

Interest and other expense

   $ 22,474      $ 30,155       $ 36,214   

Accretion of term loan debt discount

            3,564         4,377   

Accretion of convertible debt discount

     3,259        3,021         3,771   

Foreign exchange (gain) loss

     (924     252         842   

 

 
   $ 24,809      $ 36,992       $ 45,204   

 

 

 

   The Greenbrier Companies 2012 Annual Report      41   


Table of Contents

Research and development - Research and development costs are expensed as incurred. Research and development costs incurred for new product development during the years ended August 31, 2012, 2011 and 2010 were $2.0 million, $3.0 million and $2.6 million.

Forward exchange contracts - Foreign operations give rise to risks from changes in foreign currency exchange rates. Forward exchange contracts with established financial institutions are utilized to hedge a portion of such risk. Realized and unrealized gains and losses are deferred in other comprehensive income (loss) and recognized in earnings concurrent with the hedged transaction or when the occurrence of the hedged transaction is no longer considered probable. Ineffectiveness is measured and any gain or loss is recognized in foreign exchange gain or loss. Even though forward exchange contracts are entered into to mitigate the impact of currency fluctuations, certain exposure remains, which may affect operating results. In addition, there is risk for counterparty non-performance.

Interest rate instruments - Interest rate swap agreements are utilized to reduce the impact of changes in interest rates on certain debt. The net cash amounts paid or received under the agreements are accrued and recognized as an adjustment to interest expense.

Net earnings per share - Basic earnings per common share (EPS) excludes the potential dilution that would occur if additional shares were issued upon exercise of outstanding warrants or conversion of bonds. Restricted stock grants are treated as outstanding when issued and are included in weighted average basic common shares outstanding when the Company is in a net earnings position. Diluted EPS is calculated using the more dilutive of two approaches.

The first approach includes the dilutive effect of outstanding warrants and shares underlying the 2026 Convertible notes in the share count using the treasury stock method. The second approach supplements the first by including the “if converted” effect of the 2018 Convertible notes. Under the “if converted method” debt issuance and interest costs, both net of tax, associated with the convertible notes are added back to net earnings and the share count is increased by the shares underlying the convertible notes. The 2026 Convertible notes would only be included in the calculation of both approaches if the current stock price is greater than the initial conversion price using the treasury stock method.

Stock-based compensation - The value, at the date of grant, of stock awarded under restricted stock grants is amortized as compensation expense over the lesser of the vesting period of one to five years or to the recipients eligible retirement date. Compensation expense recognized related to restricted stock for the years ended August 31, 2012, 2011 and 2010 was $8.8 million, $7.1 million and $5.8 million and was recorded in Selling and administrative on the Consolidated Statements of Income.

Management estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires judgment on the part of management to arrive at estimates and assumptions on matters that are inherently uncertain. These estimates may affect the amount of assets, liabilities, revenue and expenses reported in the financial statements and accompanying notes and disclosure of contingent assets and liabilities within the financial statements. Estimates and assumptions are periodically evaluated and may be adjusted in future periods. Actual results could differ from those estimates.

Prospective Accounting Changes - In June 2011, an accounting standard update was issued regarding the presentation of other comprehensive income in the financial statements. The standard eliminated the option of presenting other comprehensive income as part of the statement of changes in equity and instead requires the Company to present other comprehensive income as either a single statement of comprehensive income combined with net income or as two separate but continuous statements. This amendment will be effective for the Company as of September 1, 2012. The Company currently reports other comprehensive income in the Consolidated Statement of Equity and Comprehensive Income and will be required to change the presentation of comprehensive income to be in compliance with the new standard.

In September 2011, an accounting standard update was issued regarding the annual goodwill impairment testing. This amendment is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a qualitative assessment to determine whether further impairment testing

 

42    The Greenbrier Companies 2012 Annual Report   


Table of Contents

is necessary. This amendment will be effective for the Company as of September 1, 2012. However, early adoption is permitted if an entity’s financial statements for the most recent annual or interim period have not yet been issued. This amendment impacts testing steps only, and therefore adoption will not have an effect on the Company’s Consolidated Financial Statements.

In July 2012, an accounting standard update was issued regarding the testing of indefinite-lived intangible assets for impairment. This amendment is intended to reduce the cost and complexity of testing indefinite-lived intangible assets for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary. This amendment will be effective for the Company as of September 1, 2013. However, early adoption is permitted if an entity’s financial statements for the most recent annual or interim period have not yet been issued. This amendment impacts testing steps only, and therefore adoption will not have an effect on the Company’s Consolidated Financial Statements.

Note 3 - Special Items

In 2007, the Company’s board of directors approved the permanent closure of the Company’s then Canadian railcar manufacturing subsidiary, TrentonWorks Ltd. (TrentonWorks). In March 2008, Trenton Works filed for bankruptcy. Under generally accepted accounting principles, consolidation is generally required for investments of more than 50% ownership, except when control is not held by the majority owner. Under these principles, bankruptcy represents a condition which may preclude consolidation. As a result, the Company discontinued consolidating TrentonWorks’ financial statements beginning in 2008 and reported its investment in TrentonWorks using the cost method. De-consolidation resulted in a negative investment in the subsidiary of $15.3 million which was included as a liability on the Company’s Consolidated Balance Sheet. In addition, a $3.4 million loss was included in Accumulated other comprehensive loss. In 2010, the bankruptcy was resolved upon liquidation of substantially all remaining assets of TrentonWorks by the bankruptcy trustee. The resolution of the bankruptcy and associated release of obligations resulted in the recognition of $11.9 million of income in 2010, consisting of the reversal of the $15.3 million liability, net of the $3.4 million other comprehensive loss. This income was recorded in Special items on the Consolidated Statement of Income for the year ended August 31, 2010.

Note 4 - Loss (Gain) on Extinguishment of Debt

The results of operations for the year ended August 31, 2011 include a loss on extinguishment of debt of $15.7 million. During the third quarter of 2011 the Company recorded a $10.1 million loss on extinguishment of debt associated with the write-off of unamortized debt issuance costs of $2.9 million and prepayment premiums and other costs of $7.2 million due to the full retirement of the $235.0 million senior unsecured notes. During the fourth quarter of 2011 the Company recorded a loss on extinguishment of debt of $5.6 million consisting of the write-off of unamortized loan fees of $1.7 million and a debt discount of $3.9 million due to the full retirement of a $71.8 million term loan.

The results of operations for the year ended August 31, 2010 include a gain on extinguishment of debt of $2.1 million. This includes a $3.2 million gain associated with the early retirement of $32.3 million of convertible senior notes, partially offset by $1.1 million for the proportionate write-off of loan fees and debt discount related to the early repayments on the convertible note and a certain term loan.

Note 5 - Inventories

 

     Years ended August 31,  
(In thousands)    2012     2011  

Manufacturing supplies and raw materials

   $ 228,092      $ 231,798   

Work-in-process

     71,210        78,709   

Finished goods

     22,571        17,455   

Excess and obsolete adjustment

     (5,132     (4,450

 

 
   $ 316,741      $ 323,512   

 

 

 

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     Years ended August 31,  
(In thousands)    2012     2011     2010  

Excess and obsolete adjustment

      

Balance at beginning of period

   $ 4,450      $ 4,096      $ 4,882   

Charge to cost of revenue

     3,042        1,202        1,698   

Disposition of inventory

     (2,210     (995     (2,249

Currency translation effect

     (150     147        (235

 

 

Balance at end of period

   $ 5,132      $ 4,450      $ 4,096   

 

 

Note 6 - Leased Railcars for Syndication

Leased railcars for syndication consist of newly-built railcars, manufactured at one of the Company’s facilities, which have been placed on lease to a customer and which the Company intends to sell to an investor with the lease attached. These railcars are not depreciated and are anticipated to be sold within six months of delivery of the last railcar on the underlying lease. The Company does not believe any economic value of a railcar is lost in the first six months; therefore the Company does not depreciate these assets. In the event the railcars are not sold, the railcars are transferred to Equipment on operating leases and depreciated. As of August 31, 2012 Leased railcars for syndication were $97.8 million compared to $30.7 million as of August 31, 2011.

Note 7 - Equipment on Operating Leases, net

Equipment on operating leases is reported net of accumulated depreciation of $100.2 million and $94.8 million as of August 31, 2012 and 2011. Depreciation expense was $13.6 million, $12.9 million and $12.4 million as of August 31, 2012, 2011 and 2010. In addition, certain railcar equipment leased-in by the Company on operating leases (see Note 22 Lease Commitments) is subleased to customers under non-cancelable operating leases. Aggregate minimum future amounts receivable under all non-cancelable operating leases and subleases are as follows:

 

(In thousands)        

Year ending August 31,

  

2013

   $ 28,540   

2014

     23,507   

2015

     19,303   

2016

     12,975   

2017

     11,640   

Thereafter

     15,986   

 

 
   $ 111,951   

 

 

Certain equipment is also operated under daily, monthly or car hire utilization arrangements. Associated revenue amounted to $23.4 million, $18.7 million and $18.4 million for the years ended August 31, 2012, 2011 and 2010.

Note 8 - Property, Plant and Equipment, net

 

     Years ended August 31,  
(In thousands)    2012     2011  

Land and improvements

   $ 34,214      $ 31,682   

Machinery and equipment

     198,141        181,161   

Buildings and improvements

     94,514        82,668   

Other

     63,541        59,136   

 

 
     390,410        354,647   

Accumulated depreciation

     (207,981     (193,447

 

 
   $ 182,429      $ 161,200   

 

 

 

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Depreciation expense was $23.3 million, $20.7 million and $20.5 million as of August 31, 2012, 2011 and 2010.

Note 9 - Goodwill

The Company performs a goodwill impairment test annually during the third quarter. Goodwill is also tested more frequently if changes in circumstances or the occurrence of events indicates that a potential impairment exists. The provisions of ASC 350, Intangibles – Goodwill and Other, require the Company to perform a two-step impairment test on goodwill. In the first step, the Company compares the fair value of each reporting unit with its carrying value. The Company determines the fair value of the reporting units based on a weighting of income and market approaches. Under the income approach, the Company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, the Company estimates the fair value based on observed market multiples for comparable businesses. The second step of the goodwill impairment test is required only in situations where the carrying value of the reporting unit exceeds its fair value as determined in the first step. In the second step the Company would compare the implied fair value of goodwill to its carrying value. The implied fair value of goodwill is determined by allocating the fair value of a reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recorded to the extent that the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill. The goodwill balance, net of cumulative write-downs of $55.7 million, as of August 31, 2012 and 2011 was $137.1 million and relates to the Wheel Services, Refurbishment & Parts segment. Goodwill was tested during the third quarter of 2012 and the Company concluded that goodwill was not impaired.

Note 10 - Intangibles and Other Assets, net

Intangible assets that are determined to have finite lives are amortized over their useful lives. Intangible assets with indefinite useful lives are not amortized and are periodically evaluated for impairment.

The following table summarizes the Company’s identifiable intangible and other assets balance:

 

     Years ended August 31,  
(In thousands)        2012             2011      

Intangible assets subject to amortization:

    

Customer relationships

   $ 66,825      $ 66,825   

Accumulated amortization

     (22,995     (17,854

Other intangibles

     4,906        5,185   

Accumulated amortization

     (3,779     (3,475

 

 
     44,957        50,681   

 

 

Intangible assets not subject to amortization

     912        912   

Prepaid and other assets

     10,272        8,692   

Debt issuance costs

     10,194        12,516   

Nonqualified savings plan investments

     6,667        6,326   

Investment in unconsolidated affiliates

     8,301        5,769   

Contract placement fee

            2,259   

Investment in direct finance leases

     65        113   

 

 
   $ 81,368      $ 87,268   

 

 

Amortization expense for the years ended August 31, 2012, 2011 and 2010 was $5.6 million, $4.7 million and $4.8 million. Amortization expense for the years ending August 31, 2013, 2014, 2015, 2016 and 2017 is expected to be $4.2 million, $4.1 million, $4.1 million, $4.1 million and $3.9 million.

 

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Note 11 - Revolving Notes

Senior secured credit facilities, consisting of three components, aggregated to $365.8 million as of August 31, 2012.

As of August 31, 2012, a $290.0 million revolving line of credit secured by substantially all the Company’s assets in the U.S. not otherwise pledged as security for term loans, maturing June 2016, was available to provide working capital and interim financing of equipment, principally for the U.S. and Mexican operations. Advances under this facility bear interest at LIBOR plus 2.5% and Prime plus 1.5% depending on the type of borrowing. Available borrowings under the credit facility are generally based on defined levels of inventory, receivables, property, plant and equipment and leased equipment, as well as total debt to consolidated capitalization and fixed charges coverage ratios.

As of August 31, 2012, lines of credit totaling $25.8 million secured by certain of the Company’s European assets, with various variable rates that range from Warsaw Interbank Offered Rate (WIBOR) plus 1.2% to WIBOR plus 1.7%, were available for working capital needs of the European manufacturing operation. European credit facilities are continually being renewed. Currently these European credit facilities have maturities that range from December 2012 through June 2013.

As of August 31, 2012, the Company’s Mexican joint venture had two lines of credit totaling $50.0 million. The first line of credit provides up to $20.0 million and is secured by certain of the joint venture’s accounts receivable and inventory. Advances under this facility bear interest at LIBOR plus 2.5%. The Mexican joint venture was able to draw against this facility through October 2012 and full repayment is not due until March 2013. The second line of credit provides up to $30.0 million and is fully guaranteed by each of the joint venture partners, including the Company. Advances under this facility bear interest at LIBOR plus 2.0%. The Mexican joint venture will be able to draw against this facility through February 2015.

As of August 31, 2012, outstanding borrowings under the senior secured credit facilities consisted of $5.6 million in letters of credit, $15.8 million outstanding under the European credit facilities and $45.0 million outstanding under the Mexican joint venture credit facilities. As of August 31, 2012 there were no borrowings outstanding under the North American credit facility.

As of August 31, 2011, outstanding borrowings under senior secured credit facilities consisted of $4.3 million in letters of credit and $60.0 million in revolving notes outstanding under the North American credit facility, $15.2 million outstanding under the European credit facilities and $15.1 million outstanding under the Mexican joint venture credit facility.

Note 12 - Accounts Payable and Accrued Liabilities

 

     Years ended August 31,  
(In thousands)        2012              2011      

Trade payables and other accrued liabilities

   $ 258,316       $ 267,683   

Accrued payroll and related liabilities

     37,915         26,757   

Accrued maintenance

     11,475         10,865   

Accrued warranty

     9,221         8,645   

Income taxes payable

     9,625           

Other

     2,956         2,586   

 

 
   $ 329,508       $ 316,536   

 

 

 

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Note 13 - Maintenance and Warranty Accruals

 

     Years ended August 31,  
(In thousands)    2012     2011     2010  

Accrued maintenance

      

Balance at beginning of period

   $ 10,865      $ 12,460      $ 16,206   

Charged to cost of revenue

     10,750        12,034        13,581   

Payments

     (10,140     (13,629     (17,327

 

 

Balance at end of period

   $ 11,475      $ 10,865      $ 12,460   

 

 

Accrued warranty

      

Balance at beginning of period

   $ 8,645      $ 6,304      $ 8,184   

Charged to cost of revenue

     2,496        3,856        425   

Payments

     (1,746     (1,547     (2,252

Currency translation effect

     (174     32        (53

 

 

Balance at end of period

   $ 9,221      $ 8,645      $ 6,304   

 

 

Note 14 - Notes Payable

 

     Years ended August 31,  
(In thousands)        2012             2011      

Convertible senior notes, due 2018

   $ 230,000      $ 230,000   

Convertible senior notes, due 2026

     67,724        67,724   

Term loans

     132,553        137,040   

Other notes payable

     257        90   

 

 
     430,534        434,854   

Debt discount on convertible senior notes due 2026, net of accretion

     (2,455     (5,714

 

 
   $ 428,079      $ 429,140   

 

 

Convertible senior notes, due 2018, bear interest at a fixed rate of 3.5%, paid semi-annually in arrears on April 1st and October 1st. The convertible notes will mature on April 1, 2018, unless earlier repurchased by Greenbrier or converted in accordance with their terms. The convertible notes are senior unsecured obligations and rank equally with other senior unsecured debt. The convertible notes are convertible into shares of the Company’s common stock, at an initial conversion rate of 26.2838 shares per $1,000 principal amount of the notes (which is equal to an initial conversion price of $38.05 per share). The initial conversion rate and conversion price are subject to adjustment upon the occurrence of certain events, such as distributions, dividends or stock splits. There were $7.9 million in original debt issuance costs, included in Intangibles and other assets on the Consolidated Balance Sheets, which will be amortized using the effective interest method. The amortization expense is being included in Interest and foreign exchange on the Consolidated Statements of Operations.

Convertible senior notes, due 2026, bear interest at a fixed rate of 2.375%, paid semi-annually in arrears on May 15th and November 15th. The Company will also pay contingent interest of 0.375% on the notes in certain circumstances commencing with the six-month period beginning May 15, 2013. On or after May 15, 2013, Greenbrier may redeem all or a portion of the notes at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. On May 15, 2013, May 15, 2016 and May 15, 2021 or in the event of certain fundamental changes, holders can require the Company to repurchase all or a portion of their notes at a price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. Payment on the convertible notes is guaranteed by substantially all of the Company’s material domestic subsidiaries. The convertible senior notes are convertible upon the occurrence of specified events into cash and shares, if any, of Greenbrier’s common stock at an initial conversion rate of 20.8125 shares per $1,000 principal amount of the notes (which is equal to an initial conversion price of $48.05 per share). The initial conversion rate is subject to adjustment upon the occurrence of certain events, as defined. The value of the equity component was $14.9 million as of August 31, 2012 and 2011.

 

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The debt discount associated with the convertible senior notes is being accreted using the effective interest rate method through May 2013 and the accretion expense is being included in Interest and foreign exchange on the Consolidated Statements of Operations. The pre-tax accretion of the debt discount was $3.2 million, $3.0 million and $3.8 million for the years ended August 31, 2012, 2011 and 2010. The accretion is expected to be approximately $2.5 million for the year ending August 31, 2013.

Term loans are primarily comprised of:

 

A senior term note with an initial balance of $100.0 million, secured by a pool of leased railcars, maturing in March 2014. The note bears a floating interest rate of LIBOR plus 1% with principal of $0.7 million paid quarterly in arrears and a balloon payment of $81.8 million due at maturity. The principal balance as of August 31, 2012 was $85.8 million. An interest rate swap agreement was entered into, on fifty percent of the initial balance, to swap the floating interest rate of LIBOR plus 1% to a fixed rate of 5.24%. At August 31, 2012, the notional amount of the agreement was $42.9 million and matures in March 2014.

 

A senior term note with an initial balance of $50.0 million, secured by a pool of leased railcars, maturing in May 2015. The note bears a floating interest rate of LIBOR plus 1% with principal of $0.3 million paid quarterly in arrears and a balloon payment of $41.2 million due at maturity. The principal balance as of August 31, 2012 was $44.6 million.

 

Other term loans consist of:

   

A term loan with an initial balance of $1.8 million maturing in October 2013. The note bears a floating interest rate of LIBOR plus 2.5% with principal of $0.2 million paid semi-annually in arrears. The balance as of August 31, 2012 was $0.6 million.

   

A term loan with an initial balance of $1.2 million maturing in December 2012. The note bears a floating interest rate of LIBOR plus 4% with a balloon payment due at maturity. The balance as of August 31, 2012 was $1.2 million.

   

A term loan with an initial balance of $0.3 million maturing in November 2015. The note is interest free with principal of $3 thousand paid monthly in arrears and a balloon payment of $0.2 million. The balance as of August 31, 2012 was $0.3 million.

The notes payable, along with the revolving and operating lines of credit, contain certain covenants with respect to the Company and various subsidiaries, the most restrictive of which, among other things, limit the ability to: incur additional indebtedness or guarantees; pay dividends or repurchase stock; enter into sale leaseback transactions; create liens; sell assets; engage in transactions with affiliates, including joint ventures and non U.S. subsidiaries, including but not limited to loans, advances, equity investments and guarantees; enter into mergers, consolidations or sales of substantially all the Company’s assets; and enter into new lines of business. The covenants also require certain maximum ratios of debt to total capitalization and minimum levels of fixed charges (interest and rent) coverage.

Principal payments on the notes payable are expected as follows:

 

(In thousands)        

Year ending August 31,

  

2013(1)

   $ 73,469   

2014

     84,710   

2015

     42,183   

2016

     172   

2017

       

Thereafter

     230,000   
   
   $ 430,534   
   
(1) 

The repayment of the $67.7 million of Convertible senior notes due 2026 is assumed to occur in 2013, which is the first date holders can require the Company to repurchase all or a portion of the notes.

Note 15 - Derivative Instruments

Foreign operations give rise to market risks from changes in foreign currency exchange rates. Foreign currency forward exchange contracts with established financial institutions are utilized to hedge a portion of that risk in Euro. Interest rate swap agreements are utilized to reduce the impact of changes in interest rates on certain debt.

 

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The Company’s foreign currency forward exchange contracts and interest rate swap agreements are designated as cash flow hedges, and therefore the effective portion of unrealized gains and losses are recorded in accumulated other comprehensive loss.

At August 31, 2012 exchange rates, forward exchange contracts for the purchase of Polish Zloty and the sale of Euro aggregated to $87.5 million. Adjusting the foreign currency exchange contracts to the fair value of the cash flow hedges at August 31, 2012 resulted in an unrealized pre-tax gain of $2.1 million that was recorded in accumulated other comprehensive loss. The fair value of the contracts is included in Accounts payable and accrued liabilities when there is a loss, or Accounts receivable, net when there is a gain, on the Consolidated Balance Sheets. As the contracts mature at various dates through December 2013, any such gain or loss remaining will be recognized in manufacturing revenue along with the related transactions when they occur. In the event that the underlying sales transaction does not occur or does not occur in the period designated at the inception of the hedge, the amount classified in accumulated other comprehensive loss would be reclassified to the current year’s results of operations in Interest and foreign exchange.

At August 31, 2012, an interest rate swap agreement had a notional amount of $42.9 million and matures March 2014. The fair value of this cash flow hedge at August 31, 2012 resulted in an unrealized pre-tax loss of $2.9 million. The loss is included in Accumulated other comprehensive loss and the fair value of the contract is included in Accounts payable and accrued liabilities on the Consolidated Balance Sheet. As interest expense on the underlying debt is recognized, amounts corresponding to the interest rate swap are reclassified from accumulated other comprehensive loss and charged or credited to interest expense. At August 31, 2012 interest rates, approximately $1.6 million would be reclassified to interest expense in the next 12 months.

Fair Values of Derivative Instruments

 

     Asset Derivatives      Liability Derivatives  
           August 31,            August 31,  
          2012      2011           2012      2011  
(In thousands)   

Balance sheet

location

   Fair
Value
     Fair
Value
    

Balance sheet

location

   Fair
Value
     Fair
Value
 

Derivatives designated as hedging instruments

  

           

Foreign forward exchange contracts

   Accounts receivable    $ 2,703       $     –      

Accounts payable

and accrued liabilities

   $ 182       $ 2,848   

Interest rate swap
contracts

   Other assets                   

Accounts payable

and accrued liabilities

     2,861         4,386   

 

 
      $ 2,703       $          $ 3,043       $ 7,234   

 

 

Derivatives not designated as hedging instruments

  

           

Foreign forward exchange contracts

   Accounts receivable    $ 141       $      

Accounts payable

and accrued liabilities

   $ 102       $ 525   

The Effect of Derivative Instruments on the Statement of Income

 

Derivatives in cash

flow hedging relationships

  

Location of gain (loss) recognized in

income on derivative

   Gain (loss) recognized in
income on derivative
Twelve months  ended
August 31,
 
              2012              2011      

Foreign forward exchange contract

   Interest and foreign exchange    $ 371       $ (626

 

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Derivatives in

cash flow

hedging

relationships

  

Gain (loss)
recognized in OCI on
derivatives (effective
portion)

Twelve months
ended August 31,

   

Location of

gain (loss)
reclassified

from

accumulated

OCI into

income

  

Gain (loss)

reclassified from
accumulated OCI into
income (effective
portion)

Twelve months

ended August 31,

   

Location of loss

in income on
derivative

(ineffective

portion and

amount

excluded from
effectiveness

testing)

  

Gain (loss)
recognized on
derivative
(ineffective
portion and
amount

excluded from
effectiveness
testing)

Twelve months
ended

August 31,

 
      2012     2011           2012     2011           2012      2011  

Foreign forward exchange contracts

   $ 136      $ (3,302  

Revenue

   $ (4,615   $ 71      Interest and foreign exchange    $ 1,403       $ 860   

Interest rate swap contracts

     (153     (2,563   Interest and foreign exchange      (1,678     (1,808   Interest and foreign exchange                

 

 
   $ (17   $ (5,865      $ (6,293   $ (1,737      $ 1,403       $ 860   

 

 

Note 16 - Equity

On December 16, 2010, the Company issued 3,000,000 shares of its common stock in an underwritten at-the-market public offering at $21.06 per share, less expenses resulting in net proceeds of $62.8 million.

On May 12, 2010, the Company issued 4,000,000 shares of its common stock at a price of $12.50 per share, less underwriting commissions, discounts and expenses. On May 19, 2010, an additional 500,000 shares were issued pursuant to the 30-day over-allotment option exercised by the underwriters. The combined issuance resulted in net proceeds of $52.7 million.

In January 2011, the stockholders approved the 2010 Amended and Restated Stock Incentive Plan (formerly known as the 2005 Stock Incentive Plan as amended). The plan provides for the grant of incentive stock options, non-statutory stock options, restricted shares, stock units and stock appreciation rights. The maximum aggregate number of the Company’s common shares authorized for issuance is 2,825,000. During the years ended August 31, 2012, 2011 and 2010, the Company awarded restricted stock grants totaling 466,680, 309,380 and 302,326 shares.

The following table summarizes restricted stock grant transactions for shares, both vested and unvested, under the 2010 Amended and Restated Stock Incentive Plan:

 

      Shares  

Balance at September 1, 2009

     1,525,147   

Granted

     302,326   

Forfeited

     (27,900

 

 

Balance at August 31, 2010

     1,799,573   

Granted

     309,380   

Forfeited

     (4,000

 

 

Balance at August 31, 2011

     2,104,953   

Granted

     466,680   

Forfeited

     (6,283

 

 

Balance at August 31, 2012

     2,565,350   

 

 

The unvested restricted stock grants were 903,554 and 1,230,739 as of August 31, 2012 and 2011.

The fair value of awards granted was $9.5 million for 2012, $7.2 million for 2011 and $3.5 million for 2010.

 

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The following table summarizes stock option transactions for shares under option and the related weighted average option price:

 

      Shares    

Weighted
Average

Option
Price

 

Balance at September 1, 2009

     12,160      $ 4.59   

Exercised

     (6,660   $ 4.47   

 

 

Balance at August 31, 2010

     5,500      $ 4.74   

Exercised

     (5,500   $ 4.74   

 

 

Balance at August 31, 2011

          $   

Exercised

          $   

 

 

Balance at August 31, 2012

          $   

 

 

At August 31, 2012 there were no options outstanding. On August 31, 2012 there were 259,650 shares available for grant compared to 720,047 and 25,427 shares available for grant as of the years ended August 31, 2011 and 2010. Restricted stock grants are considered outstanding shares of common stock at the time they are issued. The holders of the unvested restricted stock grants are entitled to voting rights and participation in dividends. The dividends are not forfeitable if the awards are later forfeited prior to vesting. Approximately 362,250 additional shares may be granted if performance based restricted stock awards vest at stretch levels of performance associated with restricted stock awards granted during the years ended August 31, 2012 and 2011.

The value, at the date of grant, of stock awarded under restricted stock grants is amortized as compensation expense over the lesser of the vesting period of one to five years or to the recipients eligible retirement date. Compensation expense recognized related to restricted stock for the years ended August 31, 2012, 2011 and 2010 was $8.8 million, $7.1 million and $5.8 million and was recorded in Selling and administrative on the Consolidated Statements of Income. 2012 compensation expense includes $0.4 million of restricted stock expected to be granted if performance based awards vest at stretch levels of performance. Unamortized compensation cost related to restricted stock grants were $10.3 million as of August 31, 2012.

Note 17 - Earnings per Share

The shares used in the computation of the Company’s basic and diluted earnings per common share are reconciled as follows:

 

     Years ended August 31,  
(In thousands)    2012      2011      2010  

Weighted average basic common shares outstanding(1)

     26,572         24,100         18,585   

Dilutive effect of employee stock options

                     6   

Dilutive effect of warrants

     1,101         2,401         1,622   

Dilutive effect of convertible notes(2)

     6,045                   

 

 

Weighted average diluted common shares outstanding

     33,718         26,501         20,213   

 

 
(1) 

Restricted stock grants are treated as outstanding when issued and are included in weighted average basic common shares outstanding when the Company is in a net earnings position.

(2) 

In 2012, the dilutive effect of the 2018 Convertible notes are included as they were considered dilutive under the “if converted” method. In 2011, the dilutive effect of the 2.5 million weighted average shares underlying the 2018 Convertible Notes was excluded from the share calculation as it was the less dilutive of two approaches. See Note 2 – Summary of Significant Accounting Policies for a description of the Company’s net earnings per share calculations. The dilutive effect of the 2026 Convertible notes was excluded from the share calculations as the stock price for each year presented was less than the initial conversion price of $48.05 and therefore considered anti-dilutive.

Weighted average diluted common shares outstanding include the incremental shares that would be issued upon the assumed exercise of stock options and warrants. No options or warrants were anti-dilutive for the years ended August 31, 2012, 2011 and 2010.

 

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Dilutive EPS was calculated using the more dilutive of two approaches. The first approach includes the dilutive effect of outstanding warrants and shares underlying the 2026 Convertible notes in the share count using the treasury stock method. The second approach supplements the first by including the “if converted” effect of the 2018 Convertible notes issued in March 2011. Under the “if converted method” debt issuance and interest costs, both net of tax, associated with the convertible notes are added back to net earnings and the share count is increased by shares underlying the convertible notes. The 2026 Convertible notes would only be included in the calculation of both approaches if the current stock price is greater than the initial conversion price of $48.05 using the treasury stock method.

 

      Year Ended August 31, 2012  

Net earnings attributable to Greenbrier

   $ 58,708   

Add back:

  

Interest and debt issuance costs on the 2018 Convertible notes, net of tax

     5,677   
   

Earnings before interest and debt issuance costs on convertible notes

   $ 64,385   
   

Weighted average diluted common shares outstanding

     33,718   

Diluted earnings per share

   $ 1.91 (1) 
(1)

Diluted earnings per share was calculated as follows:

Earnings before interest and debt issuance costs on convertible notes

          Weighted average diluted common shares outstanding

Note 18 - Related Party Transactions

On June 10, 2009, the Company entered into a transaction with affiliates of WL Ross & Co., LLC (WL Ross) which provided for a $75.0 million secured term loan, which has subsequently been repaid. In connection with the loan, the Company also entered into a warrant agreement pursuant to which the Company issued warrants to WL Ross and its affiliates to purchase a current total of 3,401,095 shares of the Company’s Common Stock with a current exercise price of $5.96 per share. The warrants have a five-year term which expires June 2014. In connection with Victoria McManus’ 3% participation in the WL Ross transaction, WL Ross and its affiliates transferred the right to purchase 101,337 shares of Common Stock under the warrant agreement to Ms. McManus, a director of the Company.

Wilbur L. Ross, Jr., founder, Chairman and Chief Executive Officer at WL Ross, and Wendy Teramoto, Senior Vice President at WL Ross, are directors of the Company.

In April 2010, WLR – Greenbrier Rail Inc. (WLR-GBX) was formed and acquired a lease fleet of nearly 4,000 railcars valued at approximately $256.0 million. WLR-GBX is wholly owned by affiliates of WL Ross. The Company paid a $6.1 million contract placement fee to WLR-GBX for the right to perform certain management and advisory services and in exchange will receive management and other fee income and incentive compensation tied to the performance of WLR-GBX. The Company has also paid certain incidental fees and agreed to indemnify WLR-GBX and its affiliates against certain liabilities in connection with such advisory services. Under the management agreement the Company has received $0.9 million and $0.8 million in fees for the years ended August 31, 2012 and 2011. The contract placement fee is accounted for under the equity method and is recorded in Intangibles and other assets on the Consolidated Balance Sheet. As a result of losses experienced by WLR-GBX the carrying value of the investment is zero as of August 31, 2012. The Company also leases approximately 400 railcars from the WLR-GBX lease fleet. The Company has paid $3.1 million in lease expense for the year ended August 31, 2012 and has future lease commitments totaling $9.4 million.

William Furman, Director, President and Chief Executive Officer of the Company, also serves as director of Schnitzer Steel Industries, Inc. (Schnitzer). In the normal course of business, the Company sells scrap metal to Schnitzer. During the year ended August 31, 2012, the Company sold scrap metal to Schnitzer totaling $9.2 million.

Mr. Furman is the owner of private aircraft managed by a private independent management company. From time to time, the Company’s business requires charter use of privately-owned aircraft. In such instances, it is possible that charters may be placed with the company that manages Mr. Furman’s aircraft. During 2012, the Company placed charters with the company that manages Mr. Furman’s aircraft aggregating $0.2 million.

 

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Note 19 - Income Taxes

Components of income tax expense (benefit) of continuing operations are as follows:

 

     Years ended August 31,  
(In thousands)    2012     2011     2010  

Current

      

Federal

   $ 10,750      $ (683   $ (9,471

State

     2,783        620        (2,191

Foreign

     8,548        333        712   

 

 
     22,081        270        (10,950

Deferred

      

Federal

     19,426        2,956        10,059   

State

     (3,399     351        1,745   

Foreign

     (6     239        (933

 

 
     16,021        3,546        10,871   

 

 

Change in valuation allowance

     (5,710     (252     (880

 

 
   $ 32,392      $ 3,564      $ (959

 

 

Income tax expense is computed at rates different than statutory rates. The reconciliation between effective and statutory tax rates on continuing operations is as follows:

 

     Years ended August 31,  
      2012     2011     2010  

Federal statutory rate

     35.0     35.0     35.0

State income taxes, net of federal benefit

     (1.9     4.1        10.7   

Impact of foreign operations

     (2.1     (2.1     (0.1

Release of obligations in the bankruptcy of the de-consolidated subsidiary

                   (51.8

Change in valuation allowance related to deferred tax asset

     (6.1     (1.7     (9.8

Change in income tax reserve for uncertain tax positions

     (0.1     (0.8     4.1   

Reversal of net deferred tax assets related to foreign restructuring

     1.9                 

Noncontrolling interest in flow through entity

     (0.4     (5.1     (17.7

Permanent differences

     5.4        (7.1     9.4   

Other

     2.8        1.6        9.5   

 

 
     34.5     23.9     (10.7 )% 

 

 

 

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The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows:

 

     Years ended August 31,  
(In thousands)    2012      2011  

Deferred tax assets:

     

Contract placement

   $ 2,145       $ 1,407   

Maintenance and warranty accruals

     7,127         6,885   

Accrued payroll and related liabilities

     13,193         10,342   

Deferred revenue

     3,702         4,104   

Inventories and other

     8,449         7,075   

Derivative instruments and translation adjustment

     1,132         1,702   

Investment and asset tax credits

     337         794   

Net operating loss

     8,409         24,516   

 

 
     44,494         56,825   

Deferred tax liabilities:

     

Fixed assets

     111,915         107,591   

Original issue discount

     12,064         11,410   

Intangibles

     9,977         9,927   

Deferred gain on redemption of debt

     4,430         4,532   

Other

     36         161   

 

 
     138,422         133,621   

 

 

Valuation allowance

     1,435         7,043   

 

 

Net deferred tax liability

   $ 95,363       $ 83,839   

 

 

As of August 31, 2012 the Company has federal and state net operating loss (NOL) carryforwards of $16.8 million and $32.0 million, respectively. The net operating losses will begin to expire in 2031 and 2014, respectively. NOL carryforwards created in fiscal year 2011 by excess tax benefits of $1.7 million generated from vested restricted stock grants are not recorded as deferred tax assets. To the extent they are utilized, the Company will increase stockholders’ equity. The Company uses tax law ordering for purposes of determining when excess tax benefits have been realized.

The Company has federal and state credit carryforwards of $0.3 million and $0.1 million, respectively. The credit carryforwards will begin to expire in 2029 and 2016, respectively.

The Company also has foreign net operating loss carryforwards of approximately $4.6 million that, if not used, will begin to expire in 2013.

The net decrease in the valuation allowance for the year ended August 31, 2012 was approximately $5.6 million. The decrease in the valuation allowance is primarily due to the recognition of deferred tax assets in Mexico and Poland as a result of cumulative earnings in recent years and future years’ earnings projections.

No provision has been made for U.S. income taxes on approximately $24.0 million of cumulative undistributed earnings of certain foreign subsidiaries as Greenbrier plans to reinvest these earnings indefinitely in operations outside the U.S. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in foreign subsidiaries.

 

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The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the years presented:

 

(In thousands)    2012     2011     2010  

Unrecognized Tax Benefit – Opening Balance

   $ 3,053      $ 3,526      $ 2,959   

Gross increases – tax positions in prior period

     878               200   

Gross decreases – tax positions in prior period

     (211     (233       

Gross increases – tax positions in current period

                     

Settlements

            (193       

Restoration of statute of limitations due to 5 year NOL carry back

              1,809   

Lapse of statute of limitations

            (47     (1,442

 

 

Unrecognized Tax Benefit – Ending Balance

   $ 3,720      $ 3,053      $ 3,526   

 

 

The Company is subject to taxation in the U.S., various states and foreign jurisdictions. The Company’s tax returns for 2004 through 2011 are subject to examination by the tax authorities. The Company is no longer subject to U.S. Federal, State, Local or Foreign examinations for tax years before 2004. Included in the balance of unrecognized tax benefits at August 31, 2012 and 2011 are $2.7 million and $2.1 million, respectively, of tax benefits which, if recognized, would affect the effective tax rate.

The Company recorded interest expense of $0.1 million and interest benefit of $0.3 million relating to reserves for uncertain tax provisions during the years ended August 31, 2012 and 2011, respectively. As of August 31, 2012 and 2011 the Company had accrued $1.0 million and $0.9 million of interest related to uncertain tax positions. The Company has not accrued for any penalties as of August 31, 2012 and 2011. Interest and penalties related to income taxes are not classified as a component of income tax expense. When unrecognized tax benefits are realized, the benefit related to deductible differences attributable to ordinary operations will be recognized as a reduction of income tax expense. Within the next 12 months, the Company anticipates a significant decrease in the reserves for uncertain tax positions of approximately $2.6 million due to the settlement of the federal audit for tax years 2004 to 2010.

 

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Note 20 - Segment Information

Greenbrier operates in three reportable segments: Manufacturing; Wheel Services, Refurbishment & Parts and Leasing & Services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Performance is evaluated based on margin. The Company’s integrated business model results in selling and administrative costs being intertwined among the segments. Currently, Greenbrier’s management does not allocate these costs for either external or internal reporting purposes. Intersegment sales and transfers are valued as if the sales or transfers were to third parties. Related revenue and margin is eliminated in consolidation and therefore are not included in consolidated results in the Company’s Consolidated Financial Statements.

The information in the following table is derived directly from the segments’ internal financial reports used for corporate management purposes.

 

     Years ended August 31,  
(In thousands)    2012     2011     2010  

Revenue:

      

Manufacturing

   $ 1,370,900      $ 770,596      $ 305,333   

Wheel Services, Refurbishment & Parts

     498,336        492,355        402,694   

Leasing & Services

     90,538        70,498        73,190   

Intersegment eliminations

     (152,058     (90,159     (24,937

 

 
   $ 1,807,716      $ 1,243,290      $ 756,280   

 

 

Margin:

      

Manufacturing

   $ 131,580      $ 59,975      $ 27,171   

Wheel Services, Refurbishment & Parts

     48,324        47,416        43,912   

Leasing & Services

     34,516        32,140        30,915   

 

 
   $ 214,420      $ 139,531      $ 101,998   

 

 

Assets:

      

Manufacturing

   $ 402,976      $ 423,295      $ 205,863   

Wheel services, Refurbishment & Parts

     413,013        400,643        387,356   

Leasing & Services

     508,539        424,839        377,761   

Unallocated

     60,016        52,878        101,908   

 

 
   $ 1,384,544      $ 1,301,655      $ 1,072,888   

 

 

Depreciation and amortization:

      

Manufacturing

   $ 11,754      $ 9,853      $ 11,061   

Wheel Services, Refurbishment & Parts

     13,265        11,853        11,435   

Leasing & Services

     17,352        16,587        15,015   

 

 
   $ 42,371      $ 38,293      $ 37,511   

 

 

Capital expenditures:

      

Manufacturing

   $ 33,313      $ 20,016      $ 8,715   

Wheel Services, Refurbishment & Parts

     11,248        20,087