10-K 1 d759252d10k.htm 10-K 10-K
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549-1004

FORM 10-K

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended August 31, 2019

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   Trading Symbol(s)   Name of Each Exchange on Which Registered
Common Stock without par value   GBX   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  X    No            

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  X       No       

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

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

Aggregate market value of the registrant’s Common Stock held by non-affiliates as of February 28, 2019 (based on the closing price of such shares on such date) was $1,311,532,035.

The number of shares outstanding of the registrant’s Common Stock on October 22, 2019 was 32,487,615 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 8, 2020 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

     2  

Item 1A.

  

RISK FACTORS

     10  

Item 1B.

  

UNRESOLVED STAFF COMMENTS

     29  

Item 2.

  

PROPERTIES

     29  

Item 3.

  

LEGAL PROCEEDINGS

     29  

Item 4.

  

MINE SAFETY DISCLOSURES

     29  
  

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

     30  

PART II

  

Item 5.

   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES      31  

Item 6.

   SELECTED FINANCIAL DATA      33  

Item 7.

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      34  

Item 7A.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      47  

Item 8.

   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA      51  

Item 9.

   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE      90  

Item 9A.

   CONTROLS AND PROCEDURES      90  

Item 9B.

   OTHER INFORMATION      94  

PART III

  

Item 10.

   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE      94  

Item 11.

   EXECUTIVE COMPENSATION      94  

Item 12.

   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS      94  

Item 13.

   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE      94  

Item 14.

   PRINCIPAL ACCOUNTING FEES AND SERVICES      94  

PART IV

  

Item 15.

   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES      95  

Item 16.

  

FORM 10-K SUMMARY

     98  
   SIGNATURES      99  
  

CERTIFICATIONS

           

 

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Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. Investors should not place undue reliance on forward-looking statements, which speak only as of the date they are made and are not guarantees of future performance.

Forward-looking statements rely on a number of assumptions concerning future events and include statements relating to our:

 

ability to grow our businesses;

 

ability to obtain lease and sales contracts which provide adequate protection against attempted modifications or cancellations;

 

changes in interest rates and increased costs of materials and components;

 

ability to convert backlog of railcar orders and obtain and execute lease syndication commitments;

 

ability to recruit, train and retain adequate numbers of qualified employees;

 

ability to obtain adequate certification and licensing of products on a timely basis;

 

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

 

ability to utilize beneficial tax strategies;

 

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

 

ability to obtain adequate insurance coverage at acceptable rates;

 

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

 

other statements regarding our future operations, financial condition and prospects.

Words such as “affirms,” “anticipates,” “believes,” “forecast,” “potential,” “goal,” “contemplates,” “expects,” “intends,” “plans,” “projects,” “hopes,” “seeks,” “estimates,” “strategy,” “could,” “would,” “should,” “likely,” “will,” “may,” “can,” “designed to,” “future,” “foreseeable future” and similar expressions can also identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to factors 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. Factors that might cause such differences include, but are not limited to, those described in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” each of which are incorporated herein by reference. You are cautioned not to place undue reliance on any forward-looking statements, which reflect management’s opinions only as of the date hereof. Except as otherwise required by law, we do not assume any obligation to update any forward-looking statements.

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 and Auto-Max 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, Europe, the Gulf Cooperation Council (GCC) and South America. We also are a manufacturer and marketer of marine barges in North America. We are a leading provider of freight railcar wheel services, parts, repair and refurbishment in North America through our wheels, repair & parts business. We also offer railcar management, regulatory compliance services and leasing services to railroads and related transportation industries in North America. Through unconsolidated affiliates we produce rail and industrial components, hold an ownership stake in a railcar manufacturer in Brazil and hold an ownership stake in a lease financing warehouse.

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

We operate in three reportable segments: Manufacturing; Wheels, Repair & Parts; and Leasing & Services. Financial information about our business segments as well as geographic information is located in Note 20 — Segment Information to our Consolidated Financial Statements.

The Greenbrier Companies, Inc., is incorporated in Oregon. 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 website is located at http://www.gbrx.com.

Products and Services

Manufacturing Segment

North American Railcar Manufacturing - We manufacture most freight railcar types currently in use in the North American market (other than coal cars) and we continue to expand our product offerings. 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:

Conventional Railcars - We produce a variety of covered hopper cars for industrial and food grade starches, grain, fertilizer, sand, cement, heavy ore minerals and petrochemicals as well as gondolas and open top hoppers for steel, metals and aggregates. We also produce a wide range of boxcars, which are used in the transport of paper products, perishables and general merchandise. Our flat car products include center partition cars for the forest products industry, and heavy-duty flat cars.

Tank Cars - We produce a variety of tank cars, including general service, pressurized, coiled, lined, insulated carbon steel and stainless steel tank cars. These are designed for the transportation of petroleum products, ethanol, liquefied petroleum gas (LPG), caustic soda, chlorine, fertilizers, vegetable oils, bio-diesel and various other products.

Intermodal Railcars - We manufacture a comprehensive range of intermodal railcars. Our most important intermodal product is our double-stack railcar. The double-stack railcar is designed to transport containers stacked two-high on a single platform and provides significant operating and capital savings over other types of intermodal railcars.

 

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Automotive - We manufacture a full line of railcar equipment specifically designed for the transportation of light vehicles. Our automotive offerings include the Auto-Max II and Multi-Max products, which are designed to carry automobiles, SUVs and trucks efficiently.

On July 26, 2019 we completed our acquisition of the manufacturing business of American Rail Industries, Inc. (American Railcar Industries or ARI). In connection with the acquisition, we acquired two railcar manufacturing facilities in Arkansas that primarily produce two types of railcars, covered hoppers and tank cars, but have the ability to produce additional railcar types. As part of the acquisition we also acquired other facilities which produce a range of railcar components and parts and create enhanced vertical integration for our manufacturing operations. These railcar components and parts include outlets for hopper railcars, tank car components and valves, tank heads, manway covers, wheel pair sets, underframes and running boards. Employees at these facilities as well as manufacturing and administrative employees in Missouri became Greenbrier employees upon closing of the acquisition.

European Railcar Manufacturing - Our European manufacturing operations produce a variety of tank, automotive and conventional freight railcar types, including a comprehensive line of pressurized tank cars for liquid petroleum gas, chlorine and ammonia and non-pressurized tank cars for light oil, chemicals and other products. In addition, we produce flat cars, coil cars for steel and metals, gondolas, sliding wall cars and automobile transport cars.

Marine Vessel Fabrication - 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 although we have the capability to compete in other marine-related products. Our Portland, Oregon manufacturing facility, located on a deep-water port on the Willamette River, includes marine vessel fabrication capabilities. The marine facilities increase utilization of steel plate burning and fabrication capacity providing flexibility for railcar production.

Wheels, Repair & Parts Segment

Wheel Services - We operate a large wheel services network in North America. Our wheel shops, provide complete wheel services including reconditioning of wheels and axles in addition to new axle machining, finishing and downsizing. Through a joint venture partnership we also provide axle machining, finishing and downsizing.

Railcar Repair, Refurbishment and Maintenance - We operate a railcar repair, refurbishment and maintenance network in North America including repair shops certified by the Association of American Railroads (AAR). Our repair shops perform heavy railcar repair, refurbishment and routine railcar maintenance for third parties and for our leased and managed railcar fleet.

Component Parts Manufacturing - Our component parts facilities recondition and manufacture railcar cushioning units, couplers, yokes, side frames, bolsters and various other parts. We also produce roofs, doors and associated parts for boxcars.

Leasing & Services Segment

Leasing - We operate a railcar leasing business in North America. Our relationships with financial institutions combined with our ownership of a lease fleet of approximately 9,400 railcars enables us to offer flexible financing programs to our customers including operating leases of varied intervals and “by the mile” leases. In addition to leasing our own railcars, we originate leases of railcars, which are either newly built or refurbished by us, or bought in the secondary market, and sell the railcars and attached leases to financial institutions typically with multi-year management services agreements. As an equipment owner and an originator of leases, we participate principally in the operating lease segment of the market. Under the majority of our leases, we are responsible for maintenance and administration of the leased cars. 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 North American 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 re-marketing. We currently provide management services for a fleet of approximately 380,000 railcars for railroads, shippers, carriers, institutional investors and other leasing and transportation companies in North America. In addition, we have a Regulatory Services Group which offers regulatory, engineering, process consulting and advocacy support to the tank car and petrochemical rail shipper community, among other services.

Customer Profile

 

     

Fleet Profile (1)

As of August 31, 2019

 

Managed Units:

  

Class I Railroads

     173,270  

Leasing Companies

     108,248  

Shipping Companies

     79,660  

Non-Class I Railroads

     17,584  

Off-lease

     1,576  
   

Total Managed Units

     380,338  

Total Owned Units (2)

     9,427  
   

Total Owned & Managed Units

     389,765  
   
(1) 

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

(2)

The percentage of owned units on lease was 93.3% at August 31, 2019 with an average remaining lease term of 2.9 years. The average age of owned units is 9 years.

Unconsolidated Affiliates

Brazilian Railcar Manufacturing - We have a 60% ownership interest in Greenbrier-Maxion Equipamentos e Serviços Ferroviários S.A. (Greenbrier-Maxion), the leading railcar manufacturer in South America, located near São Paulo, Brazil. Greenbrier-Maxion also assembles bogies and offers a range of aftermarket services including railcar overhaul and refurbishment.

Brazilian Castings and Component Parts Manufacturing - We have a 24.5% ownership interest in Amsted-Maxion Fundição e Equipamentos Ferroviários S.A. (Amsted-Maxion) based in Cruzeiro, Brazil. Amsted-Maxion is a manufacturer of various castings and components for railcars and other heavy industrial equipment. Amsted-Maxion has a 40% ownership position in Greenbrier-Maxion and is integrated with the operations of our Brazilian railcar manufacturer.

Lease Financing Warehouse - We have a 40% interest in the common equity of an entity that buys and sells railcar assets that are leased to third parties. The railcars sold to this leasing warehouse are principally built by us. We also provide administrative and remarketing services to this entity and we earn management fees for these services.

Other Unconsolidated Affiliates - We have other unconsolidated affiliates which primarily include joint ventures that produce rail and industrial components.

Backlog

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

 

     August 31,  
      2019      2018      2017  

New railcar backlog units (1)

     30,300        27,400        28,600  

Estimated future revenue value (in millions) (2)

   $ 3,280      $ 2,740      $ 2,800  
(1) 

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

(2) 

Subject to change based on finalization of product mix.

 

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Our total manufacturing backlog of railcar units was approximately 30,300 units with an estimated value of $3.28 billion as of August 31, 2019 and 27,400 units with an estimated value of $2.74 billion as of August 31, 2018. Approximately 3% of backlog units and 2% of estimated backlog value as of August 31, 2019 and 2018 was associated with our Brazilian manufacturing operations which are accounted for under the equity method. Backlog as of August 31, 2019 reflects the transfer of 10,600 units from ARI and the removal of 3,500 small cube covered hoppers for sand service for which we realized negotiated economic benefits. Remaining backlog does not include any other orders for the sand market.

Based on current production schedules, approximately 20,000 units in the August 31, 2019 backlog are scheduled for delivery in 2020. The balance of the production is scheduled for delivery in 2021 and beyond. Multi-year supply agreements are common in the rail industry. Backlog units for lease may be syndicated to third parties or held in our own fleet depending on a variety of factors. A portion of the orders included in backlog reflects an assumed product mix. Under terms of the orders, the exact mix and pricing will be determined in the future as customers select railcar specifications, which may impact the dollar amount of backlog. Marine backlog was $100 million and $61 million as of August 31, 2019 and 2018, respectively.

Our backlog of railcar units and marine vessels is not necessarily indicative of future results of operations. Certain orders in backlog are subject to customary documentation and completion of terms. Customers may attempt to cancel or modify orders in backlog. Historically, little variation has been experienced between the quantity ordered and the quantity actually delivered, though the timing of deliveries may be modified from time to time. We cannot guarantee that our reported backlog will convert to revenue in any particular period, if at all.

Customers

Our customers include railroads, leasing companies, financial institutions, 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, our focus on being highly responsive to our customer’s needs and competitive pricing of our railcars have helped us maintain our long-standing relationships with our customers.

In 2019, revenue from one customer, TTX Company (TTX) accounted for approximately 26% of total revenue, 28% of Manufacturing revenue and 24% of Wheels, Repair & Parts revenue. No other customers accounted for greater 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 available suppliers for these 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 materials and components, we operate a replacement parts business which aids in our vertical integration and we 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, shipping and transportation delays and possible price increases.

In 2019, the top ten suppliers for all inventory purchases accounted for approximately 52% of total purchases. The top two suppliers accounted for 28% of total inventory purchases in 2019. No other suppliers accounted for more than 10% of total inventory purchases. We believe we maintain good relationships with our suppliers.

Competition

We are currently one of the two largest railcar manufacturers of the five major railcar manufacturers competing in North America. There are also a handful of specialty builders who focus on niche markets. We believe that in

 

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Europe we are in the top tier of railcar manufacturers. European freight car manufacturers are largely located in central and eastern Europe where labor rates are lower and work rules are more flexible. We are the leading railcar manufacturer in South America. The railcar manufacturing industry is becoming more global as customers are purchasing railcars from manufacturers outside of their geographic region. In all railcar markets that we serve or participate in, we compete on the basis of quality, price, reliability of delivery, product design and innovation, reputation and customer service and support.

Competition in the marine industry is dependent on the type of product produced. There are few competitors that build product types similar to ours. We compete on the basis of price, quality, reliability of delivery, launching capacity and experience with certain product types.

Competition in the wheels, repair & parts businesses is dependent on the type of product or service provided. There are many competitors in these businesses. We compete primarily on the basis of quality, timeliness of delivery, customer service, location of shops, price and engineering expertise.

There are at least twenty institutions in North America 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. Many of these institutions have greater financial resources than we do. We compete primarily on the basis of quality, price, delivery, reputation, service offerings and deal structuring and syndication 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 leverage 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 and compliance services and proprietary software solutions.

In Europe and South America, we maintain relationships with customers through market-specific sales personnel. 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 (EU) regulations covering the tender of government contracts.

Through our research and customer relationships, insights are derived into the potential need for new products and services. Marketing and engineering personnel collaborate to evaluate opportunities and develop new products and features. Recent product launches include a newly designed covered hopper specifically made for grain. Research and development costs incurred during the years ended August 31, 2019, 2018 and 2017 were $5.4 million, $6.0 million and $4.2 million, respectively.

Patents and Trademarks

We believe that manufacturing expertise, the improvement of existing technology and the development of new products may be more important than patent protection in establishing and maintaining a competitive advantage in our market. Nevertheless, we have obtained a number of U.S. and non-U.S. patents of varying duration, and pending patent applications, registered trademarks, copyrights and trade names. 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

 

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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.

Portland Harbor Superfund Site

Our Portland, Oregon manufacturing facility is located adjacent to the Willamette River. In December 2000, the U.S. Environmental Protection Agency (EPA) classified portions of the Willamette River bed known as 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). Our company and 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. Ten private and public entities, including us (the Lower Willamette Group or LWG), 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 did not sign such consent, but nevertheless contributed money to the effort. The EPA-mandated RI/FS was produced by the LWG and cost over $110 million during a 17-year period. We bore a percentage of the total costs incurred by the LWG in connection with the investigation. Our aggregate expenditure during the 17-year period was not material. Some or all of any such outlay may be recoverable from other responsible parties. The EPA issued its Record of Decision (ROD) for the Portland Harbor Site on January 6, 2017 and accordingly on October 26, 2017, the AOC was terminated.

Separate from the process described above, which focused on the type of remediation to be performed at the Portland Harbor Site and the schedule for such remediation, 83 parties, including the State of Oregon and the federal government, entered into a non-judicial mediation process to try to allocate costs associated with remediation of the Portland Harbor site. Approximately 110 additional parties 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, U.S. 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 been stayed by the court until January 16, 2020. The allocation process is continuing in parallel with the process to define the remediation steps.

The EPA’s January 6, 2017 ROD identifies a clean-up remedy that the EPA estimates will take 13 years of active remediation, followed by 30 years of monitoring with an estimated undiscounted cost of $1.7 billion. The EPA typically expects its cost estimates to be accurate within a range of -30% to +50%, but this ROD states that changes in costs are likely to occur as a result of new data it wanted to collect over a 2-year period prior to final remedy design. The ROD identifies 13 Sediment Decision Units (SDUs). One of the units, RM9W, includes the nearshore area of the river sediments offshore of our Portland, Oregon manufacturing facility as well as upstream and downstream of the facility. It also includes a portion of our riverbank. The ROD does not break down total remediation costs by SDU. The EPA’s ROD concluded that more data was needed to better define clean-up scope and cost. On December 8, 2017, the EPA announced that Portland Harbor is one of 21 Superfund sites targeted for greater attention. On December 19, 2017, the EPA announced that it had entered a new AOC with a group of four potentially responsible parties to conduct additional sampling during 2018 and 2019 to provide more certainty about clean-up costs and aid the mediation process to allocate those costs. The parties to the mediation, including us, agreed to help fund the additional sampling. The sampling is completed and the EPA is evaluating possible resulting changes to remediation cost estimates.

The ROD does not address responsibility for the costs of clean-up, nor does it allocate such costs among the potentially responsible parties. Responsibility for funding and implementing the EPA’s selected cleanup remedy will be determined at an unspecified later date. Based on the investigation to date, we believe that we did not contribute in any material way to contamination in the river sediments or 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

 

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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 or restoration 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, remedial design, 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.

On January 30, 2017 the Confederated Tribes and Bands of Yakama Nation sued 33 parties including us as well as the United States and the State of Oregon for costs it incurred in assessing alleged natural resource damages to the Columbia River from contaminants deposited in Portland Harbor. Confederated Tribes and Bands of the Yakama Nation v. Air Liquide America Corp., et al., United States Court for the District of Oregon Case No. 3i17-CV-00164-SB The complaint does not specify the amount of damages the Plaintiff will seek. The case has been stayed until January 16, 2020.

Oregon Department of Environmental Quality (DEQ) Regulation of Portland Manufacturing Operations

We have entered into a Voluntary Cleanup Agreement with the DEQ in which we agreed to conduct an investigation of whether, and to what extent, past or present operations at our Portland property may have released hazardous substances into the environment. We have also signed an Order on Consent with the DEQ to finalize the investigation of potential onsite sources of contamination that may have a release pathway to the Willamette River. Interim precautionary measures are also required in the order and we are discussing with the DEQ potential remedial actions which may be required. Our aggregate expenditure has not been material, however we could incur significant expenses for remediation. Some or all of any such outlay may be recoverable from other responsible parties.

Regulation

We must comply with the rules of the U.S. Department of Transportation (USDOT) and the administrative agencies it oversees including the Federal Railroad Administration in the U.S. and Transport Canada in Canada who 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 and international commerce throughout North America. The AAR promulgates 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 certifies railcar builders and component manufacturers that provide equipment for use on North American railroads. These regulations require maintaining certifications with the AAR as a railcar builder, repair and service provider 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 USDOT, and private industry organizations such as the American Bureau of Shipping.

The regulatory environment in Europe consists of a combination of EU regulations and country specific regulations, including a harmonized set of Technical Standards for Interoperability of freight wagons throughout the EU. The EU approval regime has recently been modified to replace country specific approvals with a single, harmonized EU process. The switch could result in short term delays in wagon certification, but over time is expected to streamline the process. The regulatory environment in Brazil consists of oversight from the Ministry of Transportation, the National Agency of Ground Transportation and the National Association of Railroad Transporters. In all other countries, we conform to country specific regulations where applicable.

 

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Employees

As of August 31, 2019, we had approximately 17,100 full-time employees at our consolidated entities, consisting of 15,900 employees in Manufacturing, 900 in Wheels, Repair & Parts and 300 employees in Leasing & Services and corporate. In Manufacturing, 8,900 employees are represented by unions. At our Wheels, Repair & Parts locations, 40 employees are represented by a union. 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 SEC. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. 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 and 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.

 

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Item 1A.

RISK FACTORS

The following risk factors, as well as other comments included herein regarding risks and uncertainties, 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 or other risks unknown to us. In addition, new risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect us.

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

Our business is cyclical. Overall economic conditions (domestically and globally) and the purchasing practices of buyers have a significant effect upon our business due to the impact on demand for our products and services. As a result, during downturns, we could operate with a lower level of backlog and may slow down or halt production at some or all of our facilities. We may fail to respond to such downturns in an efficient manner. 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.

Interest rates remain at relatively low levels. Higher interest rates could increase the cost of, or potentially deter, new leasing arrangements with our customers, reduce our ability to syndicate railcars under lease to financial institutions, or impact the sales price we may receive on such syndications, any of which could materially adversely affect our business, financial condition and results of operations.

A change in our product mix due to shifts in demand or fluctuations in commodity and energy prices could have an adverse effect on our profitability.

We manufacture, lease and repair a variety of railcars. The demand for specific types of these railcars and mix of repair and refurbishment work varies from time to time. Instability and changes in the global economy, volatility in the industries that our products serve or adverse changes in the financial condition of our customers could adversely impact the demand for our railcars. In addition, fluctuations in commodity and energy prices, including crude oil and gas prices, could negatively impact the activities of our customers resulting in a corresponding adverse effect on the demand for our products and services. These shifts in demand could affect our results of operations and could have an adverse effect on our profitability. Demand for railcars that are used to transport crude oil and other energy related products is dependent on the demand for these commodities. Prices for oil and gas are subject to large fluctuations in response to relatively minor changes in the supply of, and demand for, oil and gas, market uncertainty and a variety of other economic factors that are beyond our control.

A decline in performance or demand, oversupply, or increase in efficiency, 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 large part depends on the health of the United States and global economy. If railcar loadings decrease or industry demand for our railcar products or services weakens or otherwise does not materialize, or if railcar freight transportation becomes more efficient from, for example, an increase in train velocity or Precision Scheduled Railroading (PSR), a decrease in dwell times, or due to technological advances, our financial condition and results of operations would be adversely affected. In addition, the rail freight industry could become oversupplied, which could have a significant impact on the pricing, lease rates or demand for new railcars.

The use of railcars may decline in favor of other modes of transportation. Our operations may be adversely impacted by changes in the preferred method used by customers to ship their products, changes in demand for

 

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particular products, or government policies favoring other types of surface transportation. The industries in which our customers operate are driven by dynamic market forces and trends, which are in turn influenced by economic, regulatory, and political factors. Features and functionality specific to certain railcar types could result in those railcars becoming obsolete as customer requirements for freight delivery change.

We could have difficulty integrating the operations of businesses that we have acquired and will acquire or joint ventures we enter into, which could adversely affect our results of operations.

The success of our acquisition and joint venture strategies depends upon our ability to integrate any businesses that we acquire into our existing business, including the manufacturing business of ARI. 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, or discovering previously unknown liabilities. Each of these circumstances could be more likely to occur or be more severe in consequence in the case of an acquisition or joint venture involving a business that is outside of our core areas of expertise. In addition, we could be unable to retain key employees or customers of the combined businesses. We could face integration issues including those related to operations, internal controls, information systems 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 and joint ventures or these acquisitions or joint ventures could fail to complete successfully. Any of these items could adversely affect our results of operations.

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 certain conditions, including potential adjustment to prices due to changes in prevailing market prices, or due to lower prices for new orders accepted by us from other customers for similar cars on similar terms and conditions during relevant time periods. Our reported backlog may not be converted to revenue in any particular period and some of our contracts permit cancellations with limited compensation that would not replace lost revenue or margins. In addition, some customers may attempt to delay orders, cancel or modify a contract even if the contract does not allow for such cancellation or modification, and we may not be able to recover all revenue or earnings lost due to a breach of contract or a contract may be found to be unenforceable. The likelihood of attempted cancellations or modifications of contracts generally increases during periods of market weakness. 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.

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

We face risks arising from our business activities outside of the U.S. and with non-U.S. customers and suppliers. Instability in the macroeconomic, political, legal, trade, financial, labor or market conditions in the countries where we, or our customers or suppliers, operate could negatively impact our business activities and operations. Some foreign countries in which we operate or may operate have authorities that regulate railroad safety, and rail equipment design and manufacturing. If we do not have appropriate certifications, we could be unable to market and sell our rail equipment. Adverse changes in foreign or cross-border regulations applicable to us or customers, such as labor, environment, trade, tax, currency and price regulations could limit our operations, make the manufacture and distribution of our products difficult, and delay or limit our ability to repatriate our money.

Among the political risks we face outside the U.S. are governments nationalizing our business or assets, or repudiating, or renegotiating contracts with us, our customers or suppliers. In our cross-border business activities, we could experience longer customer payment cycles, difficulty in collecting accounts receivable or an inability

 

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to protect our intellectual property. We operate in countries reported to have significant corruption. We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws. Strict compliance with anti-corruption laws is made more challenging because such laws may conflict with local business customs. The failure to comply with laws governing international business may result in substantial penalties and fines. Transactions with non-U.S. entities expose us to business practices, local customs, and legal processes with which we may not be familiar, as well as difficulty enforcing contracts and international political and trade tensions. Any expansion of our activities outside of the U.S. could increase our risk profile. If we are unable to successfully manage the risks associated with our foreign and cross-border business activities, our results of operations, financial condition, liquidity and cash flows could be negatively impacted.

Changes impacting international trade and corporate tax provisions related to the production and sales of our products may have an adverse effect on our financial condition and results of operations.

We own, lease, operate or have invested in joint ventures or entities which have manufacturing facilities in Mexico, Brazil and Europe. Our business benefits from free trade agreements such as the North American Free Trade Agreement (NAFTA) and we also rely on various U.S. corporate tax provisions related to international commerce as we build, market and sell our products internationally. NAFTA and future import taxes have been under scrutiny by the U.S. administration. On September 30, 2018 the President of the U.S. and the U.S. Trade Representative announced a new trade pact with the governments of Canada and Mexico called the United States-Mexico-Canada Agreement (USMCA). We believe the benefits we currently receive under NAFTA will continue under the USMCA. To take effect, the USMCA must be enacted by the U.S. Congress under laws governing Trade Promotion Authority. It is expected NAFTA will remain effective until this occurs. Any changes in policies by the U.S. government or other governments with respect to trade treaties, corporate tax, import taxes and foreign relations as well as embargoes, quotas or tariffs could adversely and significantly affect our financial condition and results of operations.

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 is generated from a few major customers. Although we have some long-term contractual relationships with our major customers, we cannot be assured that we will continue to have good relations with our customers, or that our customers will continue to purchase or lease our products or services, that they will continue to do so at historical levels or will renew their existing contracts with us. A reduction in the purchasing or leasing of our products, a termination of our services by one or more of our major customers, a decline in the financial condition of a major customer, or our failure to replace expiring customer contracts with new customer contracts on satisfactory terms could result in a loss of business and have an adverse effect on our business and operating results.

We could be unable to lease railcars at satisfactory rates, remarket leased railcars on favorable terms upon lease termination, or realize the expected residual values for end of life railcars due to changes in scrap prices each of which could reduce our revenue and decrease our overall return or affect our ability to sell leased assets in the future.

The profitability of our railcar leasing business depends on our ability to lease railcars at satisfactory rates, sell railcars with sufficiently profitable leases to investors, and to remarket, sell or scrap railcars we own or manage upon the expiration of leases. The rent we receive during the initial railcar lease term does not fully recover acquisition costs of such railcars and thus exposes us to a shortfall if we do not recover the residual value of railcars coming off of lease. Our ability to lease or remarket leased railcars profitably is dependent on several factors, including, but not limited to, market and industry conditions, cost of, and demand for, competing used or newer models, costs associated with the refurbishment of the railcars, the market demand or governmental mandates for refurbishment, as well as market perceptions of residual values and interest rates. A downturn in the industries in which our lessees operate and decreased demand for railcars could also increase our exposure to

 

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remarketing risks because lessees may demand shorter lease terms, requiring us to remarket leased railcars more frequently. Furthermore, the resale market for previously leased railcars has a limited number of potential buyers. Our inability to lease, remarket or sell leased railcars on favorable terms could result in an adverse impact to our consolidated financial statements or affect our ability to sell leased railcars to investors in the future.

Shortages of skilled labor, increased labor costs, or failure to maintain good relations with our workforce could adversely affect our operations.

We depend on skilled labor in the manufacture of railcars and marine barges, repair, refurbishment and maintenance of railcars and provision of wheel services and supply of parts. Some of our facilities are located in areas where demand for skilled labor often exceeds supply. Shortages of some types of skilled labor such as welders and machine operators could restrict our ability to maintain or increase production rates, lead to production inefficiencies and increase our labor costs. Due to the competitive nature of the labor markets in which we operate and the cyclical nature of the railcar industry, the resulting employment cycle increases our risk of not being able to recruit, train and retain the employees we require at efficient costs and on reasonable terms, particularly when the economy expands, production rates are high or competition for such skilled labor increases. Additionally, we may develop an adverse relationship with our workforce or third party labor providers. Our costs to recruit, train and retain necessary, qualified employees may exceed our expectations. If we are unable to recruit, train and retain adequate numbers of qualified employees and third party labor providers on a timely basis or at a reasonable cost or on reasonable terms, our business and results of operations could be adversely affected.

Equipment failures, technological failures, costs and inefficiencies associated with changing of production lines, or transfer of production between facilities, could lead to production, delivery, or service curtailments or shutdowns, loss of revenue or higher expenses.

We operate a substantial amount of equipment at our production facilities. An interruption in production capabilities or maintenance and repair capabilities at our facilities, as a result of equipment or technology failure, acts of nature, costs and inefficiencies associated with changing of production lines or transfer of production between facilities, could reduce or prevent our production, delivery, service, or repair of our products and increase our costs and expenses. A halt of production at any of our manufacturing facilities could severely affect delivery times to our customers. Any significant delay in deliveries not otherwise contractually mitigated could result in cancellation of all or a portion of our orders, cause us to lose future sales, and negatively affect our reputation and our results of operations.

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

We face aggressive competition in all geographic markets in which we participate and in each segment of our business, and we face the prospect of new competitors entering those markets in which we compete. Some of our competitors are owned or financially supported by foreign governments or sovereign wealth funds, and may potentially sell products and services below cost, or otherwise compete unfairly, in order to gain market share. The markets in which we participate are intensely competitive and we expect them to remain intensely competitive into the foreseeable future. The relative competitiveness of our manufacturing facilities and products affects our performance. A number of competitive factors challenge or affect our ability to compete successfully including the introduction of competitive products and new entrants into our markets, a limited customer base and price pressures such as unfair competition and increases in raw materials and labor costs. In addition, new technologies, new railcars or other new product offerings introduced to market by our competitors could render our products obsolete or less competitive. If we do not compete successfully, our market share, margin and results of operations may be adversely affected.

 

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We pursue strategic opportunities which rely upon the identification of new joint ventures, acquisitions and new business endeavors which involve inherent risks, any of which may prevent us from growing our business and realizing anticipated benefits and could adversely affect our results of operations.

We may not be able to successfully identify suitable joint venture, acquisition and new business endeavors to invest in or complete potential transactions on acceptable terms. Our identification of suitable joint venture opportunities, acquisition candidates and new business endeavors involve risks inherent in assessing the values, strengths, weaknesses, risks and profitability of these opportunities. Our failure to identify suitable joint ventures, acquisition opportunities and new business endeavors may restrict our ability to grow our business. If we are successful in pursuing such opportunities, we may be required to expend significant funds or incur additional debt, which could materially adversely affect our results of operations and limit our ability to obtain financing for working capital or other purposes and we may be more vulnerable to economic downturns and competitive pressures.

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, or fail to improve the efficiencies of our operations, or to generate additional revenue 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. Our ability, and our joint ventures’ respective abilities, 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 are 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.

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 product innovations and technologies. We occasionally accept orders prior to receiving railcar certification or prior to proving our ability to manufacture a quality product that meets customer standards. We could be unable to successfully design or manufacture new railcar product innovations or technologies.

Our inability to develop and manufacture new product innovations or technologies in a timely and profitable manner, or to obtain timely certification, or to achieve market acceptance, or to avoid 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.

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

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

 

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If any of our joint ventures generate significant losses, including future potential intangible asset or goodwill impairment charges, our results of operations could be adversely affected or our investments could be impaired.

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

We are subject to extensive national, state, foreign, 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, or in certain circumstances others, fail to comply with environmental laws or permits issued 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 as set forth below. In addition, future environmental laws and regulations may require significant capital expenditures or changes to our operations, or may impose liability on us in the future for actions that complied with then applicable laws and regulations when the action was taken.

Portland Harbor Superfund Site

Our Portland, Oregon manufacturing facility is located adjacent to the Willamette River. In December 2000, the U.S. Environmental Protection Agency (EPA) classified portions of the Willamette River bed known as 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). Our company and 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. Ten private and public entities, including us (the Lower Willamette Group or LWG), 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 did not sign such consent, but nevertheless contributed money to the effort. The EPA-mandated RI/FS was produced by the LWG and cost over $110 million during a 17-year period. We bore a percentage of the total costs incurred by the LWG in connection with the investigation. Our aggregate expenditure during the 17-year period was not material. Some or all of any such outlay may be recoverable from other responsible parties. The EPA issued its Record of Decision (ROD) for the Portland Harbor Site on January 6, 2017 and accordingly on October 26, 2017, the AOC was terminated.

Separate from the process described above, which focused on the type of remediation to be performed at the Portland Harbor Site and the schedule for such remediation, 83 parties, including the State of Oregon and the federal government, entered into a non-judicial mediation process to try to allocate costs associated with remediation of the Portland Harbor site. Approximately 110 additional parties 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, U.S. 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 been stayed by the court until January 16, 2020. The allocation process is continuing in parallel with the process to define the remediation steps.

The EPA’s January 6, 2017 ROD identifies a clean-up remedy that the EPA estimates will take 13 years of active remediation, followed by 30 years of monitoring with an estimated undiscounted cost of $1.7 billion. The EPA typically expects its cost estimates to be accurate within a range of -30% to +50%, but this ROD states that changes in costs are likely to occur as a result of new data it wanted to collect over a 2-year period prior to final remedy design. The ROD identifies 13 Sediment Decision Units (SDUs). One of the units, RM9W, includes the nearshore area of the river sediments offshore of our Portland, Oregon manufacturing facility as well as upstream and downstream of the facility. It also includes a portion of our riverbank. The ROD does not break down total remediation costs by SDU. The EPA’s ROD concluded that more data was needed to better define clean-up scope and cost. On December 8, 2017, the EPA announced that Portland Harbor is one of 21 Superfund sites targeted

for greater attention. On December 19, 2017, the EPA announced that it had entered a new AOC with a group of

 

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four potentially responsible parties to conduct additional sampling during 2018 and 2019 to provide more certainty about clean-up costs and aid the mediation process to allocate those costs. The parties to the mediation, including us, agreed to help fund the additional sampling. The sampling is completed and the EPA is evaluating possible resulting changes to remediation cost estimates.

The ROD does not address responsibility for the costs of clean-up, nor does it allocate such costs among the potentially responsible parties. Responsibility for funding and implementing the EPA’s selected cleanup remedy will be determined at an unspecified later date. Based on the investigation to date, we believe that we did not contribute in any material way to contamination in the river sediments or 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 or restoration 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, remedial design, 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.

On January 30, 2017 the Confederated Tribes and Bands of Yakama Nation sued 33 parties including us as well as the United States and the State of Oregon for costs it incurred in assessing alleged natural resource damages to the Columbia River from contaminants deposited in Portland Harbor. Confederated Tribes and Bands of the Yakama Nation v. Air Liquide America Corp., et al., United States Court for the District of Oregon Case No. 3i17-CV-00164-SB The complaint does not specify the amount of damages the Plaintiff will seek. The case has been stayed until January 16, 2020.

Oregon Department of Environmental Quality (DEQ) Regulation of Portland Manufacturing Operations

We have entered into a Voluntary Cleanup Agreement with the DEQ in which we agreed to conduct an investigation of whether, and to what extent, past or present operations at our Portland property may have released hazardous substances into the environment. We have also signed an Order on Consent with the DEQ to finalize the investigation of potential onsite sources of contamination that may have a release pathway to the Willamette River. Interim precautionary measures are also required in the order and we are discussing with the DEQ potential remedial actions which may be required. Our aggregate expenditure has not been material, however we could incur significant expenses for remediation. Some or all of any such outlay may be recoverable from other responsible parties.

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 lease railcars to a customer with the aim of selling such railcars on lease to a third party. In each case, the timing lag between production and the ultimate sale subjects us to operational and market risks. In addition, we periodically sell railcars from our own lease fleet and the timing and volume of such sales are difficult to predict. As a result, comparisons of our manufacturing revenue, deliveries, quarterly net gain 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.

 

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We depend on our senior management team and other key employees, and significant attrition within our management team or unsuccessful succession planning for members of our senior management team and other key employees who are at or nearing retirement age, 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 and growth objectives. 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.

Many members of our senior management team and other key employees 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.

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 may experience volatility which can result in tighter availability of credit on more restrictive terms and limit our ability to sell railcar assets. Our liquidity, financial condition and results of operations could be negatively impacted if our ability to borrow money to finance operations, obtain credit from trade creditors, obtain credit to maintain our hedging programs, offer leasing products to our customers or sell railcar assets were to be impaired. In addition, scarcity of capital could also adversely affect our customers’ ability to purchase, lease, or pay for products from us or adversely affect our suppliers’ ability to provide us with product, either of which could negatively affect our business and results of operations.

Volatility in the global financial markets may adversely affect our business, financial condition and results of operations.

During periods of volatility in the global financial markets, certain of our customers could delay or otherwise reduce their purchases of railcars and other products and services. If volatile conditions in the global credit markets impact our customers’ access to credit, product order volumes may decrease or customers may default on payments owed to us.

Likewise, if our suppliers face challenges obtaining credit, or otherwise operating their businesses, the supply of materials we purchase from them to manufacture our products may be interrupted. Any of these conditions or events could result in reductions in our revenues, increased price competition, or increased operating costs, which could adversely affect our business, financial condition and results of operations.

Our actual results may differ significantly from our announced expectations.

From time to time, we have released, and may continue to release guidance estimates in our quarterly and annual earnings releases, quarterly and annual earnings conference calls, or otherwise, regarding our future performance that represent our management’s estimates as of the date of release. Although we believe that any such guidance or estimates would provide investors and analysts with a better understanding of management’s expectations for the future and could be useful to our shareholders and potential shareholders, such guidance or estimates would consist of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements. Guidance and estimates are necessarily speculative in nature, and

 

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some or all of the assumptions underlying the guidance or estimates may not materialize or may vary significantly from actual results. Our actual results may not always be in line with or exceed any guidance or estimates we may provide, especially in times of economic uncertainty. If our financial results for a particular period do not meet our guidance or estimates or the expectations of investors or research analysts, or if we reduce our guidance or estimates for future period, the trading volume or market price of our common stock may decline. In light of the foregoing, investors are urged not to unduly rely upon any guidance or estimates in making an investment decision regarding our common stock.

Fluctuations in the availability and price of energy, freight transportation, steel and other raw materials, in combination with our fixed price contracts could have an adverse effect on our ability to manufacture and sell our products profitably and could adversely affect our margins and revenue.

A significant portion of our business depends upon the adequate supply of steel and other raw materials at competitive prices and a small number of suppliers fulfill 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 cost of acquiring steel, components and other raw materials to manufacture our railcars and marine barges are impacted by tariffs. If we are not able to purchase these materials at competitive prices, our ability to produce and sell our products on a cost effective basis could be adversely impacted which, in turn, could adversely affect our revenue and profitability.

Our businesses also depend upon an adequate supply of energy. Increases in the price of energy to us adversely impacts our operating costs and could have an adverse effect on our ability to conduct our businesses on a cost-effective basis. We cannot be assured that we will continue to have access to energy or supplies of 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 that 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 Wheels, Repair & Parts margins and revenue and the residual value and future depreciation of our leased assets. A portion of our Wheels, Repair & Parts businesses involve scrapping steel parts and the resulting revenue from such scrap steel increases our margins and revenues. When the price of scrap steel declines, our revenues and margins in such businesses would decrease.

We rely on limited suppliers for certain components and services needed in our production. If we are not able to procure specialty components or services 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, components and services in acceptable quantities and quality from our suppliers and our ability to retain good relations with our suppliers. In 2019, the top ten suppliers for all inventory purchases accounted for approximately 52% of total purchases. The top two suppliers accounted for 28% of total inventory purchases in 2019. No other suppliers accounted for more than 10% of total inventory purchases. Certain components of our products, particularly specialized components like castings, bolsters, trucks, wheels and axels, and certain services, such as lining capabilities, are currently only available from a limited number of suppliers. Increases in the number of railcars

 

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manufactured could increase the demand for such components and services 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 schedules. If any one or more of our suppliers cease to provide us with sufficient quantities of our components or services in a timely manner or on terms acceptable to us, or cease to provide services or 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 or services. 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. In addition, we are increasing the number of components and services we manufacture or provide ourselves, directly or through joint ventures. If we are not successful at manufacturing such components or providing such services or have production problems after transitioning to self-produced supplies, we may not be able to replace such components or services from third party suppliers in a timely manner. Any such disruption in our supply of specialized components and services or increased costs of those components or services could harm our business and adversely affect our results of operations.

We have indebtedness, which could have negative consequences to our business or results of operations.

As of August 31, 2019, our total consolidated indebtedness was approximately $860.5 million (excluding $27.1 million of debt discount and $10.6 million of debt issuance costs). As of August 31, 2019, approximately $521.5 million (excluding $5.2 million of debt issuance costs) of our consolidated indebtedness was secured. Our indebtedness consists of convertible notes, a senior secured revolving credit facility and term loans. Our level of indebtedness could have a material adverse effect on our business and make it more difficult for us to satisfy our obligations under our outstanding indebtedness and the notes. As a result of our debt and debt service obligations, we face increased risks regarding, among other things, the following:

 

our ability to borrow additional amounts or refinance existing indebtedness in the future for working capital, capital expenditures, acquisitions, debt service requirements, investments, stock repurchases, execution of our growth strategy, or other purposes may be limited or such financing may be more costly;

 

our availability of cash flow to fund working capital requirements, capital expenditures, investments, acquisitions or other strategic initiatives and other general corporate purposes because a portion of our cash flow is needed to pay principal and interest on our debt;

 

our vulnerability to competitive pressures and to general adverse economic or industry conditions, including fluctuations in market interest rates or a downturn in our business;

 

our being at a competitive disadvantage relative to our competitors that have greater financial resources than us or more flexible capital structures than us;

 

our ability to satisfy our financial obligations related to our consolidated indebtedness;

 

our additional exposure to the risk of increased interest rates as certain of our borrowings are at variable rates of interest, which could result in higher interest expense in the event of an increase in interest rates;

 

our restrictions under the restrictive covenants in our North American senior secured credit facility, our secured term loan, our other credit agreements, and any of the agreements governing our future indebtedness adversely restricting our financial and operating flexibility and subjecting us to other risks; and

 

the possibility we may suffer a material adverse effect on our business and financial condition if we are unable to service our debt or obtain additional financing, as needed.

Despite our current indebtedness levels and the restrictive covenants set forth in the agreements governing our indebtedness, if we, our subsidiaries and our joint ventures are in compliance with the covenants, we, our subsidiaries and our joint ventures may be able to incur substantially more indebtedness, including secured indebtedness, and other obligations and liabilities that do not constitute indebtedness. This could increase the risks associated with our indebtedness. As of August 31, 2019, after giving effect to issued but undrawn letters of credit, we had approximately $233.2 million of availability under our North American senior secured credit facility (based on our borrowing base as of such date) and approximately $78.3 million of availability under our European and Mexican joint venture senior secured credit facilities.

Some of our credit facilities and existing indebtedness use the London Interbank Offered Rates (LIBOR) as a benchmark for establishing interest rates. LIBOR is the subject of recent proposals for reform. These reforms

 

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may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments with respect to LIBOR cannot be entirely predicted at this time, but could result in an increase in the cost of our variable rate debt.

Train derailments or other accidents or claims could subject us to legal claims that adversely impact our business, financial condition and our results of operations.

We provide a number of services which include the manufacture and supply of new railcars, wheels, components and parts and the lease and repair of railcars for our customers that transport a variety of commodities, including tank railcars that transport hazardous materials such as crude oil, ethanol and other products. In addition, we have a Regulatory Services Group which offers regulatory, engineering, process consulting and advocacy support to the tank car and petrochemical rail shipper community, among other services. We could be subject to various legal claims, including claims of negligence, personal injury, physical damage and product or service liability, or in some cases strict liability, as well as potential penalties and liability under environmental laws and regulations, in the event of a derailment or other accident involving railcars, including tank railcars. Additionally, the severity of injury or property damage arising from an incident may influence the causation responsibility analysis exposing us to potentially greater liability. If we become subject to any such claims and are unable successfully to resolve them or maintain inadequate insurance for such claims, our business, financial condition and results of operations could be materially adversely affected.

Changes in or failure to comply with legal and regulatory requirements applicable to the industries in which we operate may adversely impact our business, financial condition and results of operations.

Our operations and the industry we serve, including our customers, and our suppliers are subject to extensive regulation by governmental, regulatory and industry authorities and by federal, state, local and foreign agencies. These organizations establish, interpret, and enforce rules and regulations for the railcar industry, including construction specifications and standards for the design and manufacture of railcars; the certification of manufacturing facilities, mechanical, maintenance and related standards; and railroad safety. New rules and regulations, new legislation and new interpretations of the foregoing; actions or failures to act by regulatory agencies (including changing tank car or other rail car regulations); our inability and cost to maintain and renew operating permits, as well as enforcement actions by regulators could increase our operating costs and the operating costs of our customers and impact our financial results, demand for our products and the economic value of our assets. In addition, if we or our suppliers fail to comply with the requirements and regulations of these entities, we could face sanctions and penalties that could negatively affect our financial results.

The risks of substantial costs and liabilities related to compliance with these laws and regulations are an inherent part of our business. Despite our intention to comply with these laws and regulations, we cannot guarantee that we or our suppliers will be able to do so at all times and compliance may prove to be more costly and limiting than we currently anticipate and compliance requirements could increase in future years. These laws and regulations are complex, change frequently, are subject to evolving interpretations, and may become more stringent over time, which could impact our business, financial condition and results of operations.

In North America, regulatory changes, along with prevailing market conditions, could materially affect new tank railcar manufacturing and retrofitting activities industry-wide, including negative impacts to customer demand for our products and services. In North America additional laws and regulations have been proposed or adopted that will potentially have a significant impact on railroad operations, including the implementation of “positive train control” (PTC) requirements. PTC is a collision avoidance technology intended to override engineer controlled locomotives and stop certain types of train accidents. While certain of these legal and regulatory changes could result in increased levels of railcar repair or refurbishment work and/or new tank car manufacturing activity, if we are unable to manage to adapt our business successfully to changing regulations, our business and results of operations could be adversely affected.

In Europe, changes to the process for obtaining regulatory approval for the operation of new or modified railcars may make it more difficult for us to deliver products to our customers in a timely manner. The EU approval

 

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regime has recently been modified to replace country specific approvals with a single, harmonized EU process. While the changes are expected to streamline the process over time, the switch could result in short term delays in wagon certification, when compared to the current system, which may have an adverse effect on our business and results of operations.

An adverse outcome in any pending or future litigation or investigation 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.

In connection with the acquisition of the manufacturing business of ARI, we agreed to assume potential legacy liabilities (known and unknown) related to railcars manufactured by ARI. Among these potential liabilities are certain retrofit and repair obligations arising from regulatory actions by the Federal Railroad Administration and the Association of American Railroads. In some cases, ARI shares with us the costs of these retrofit and repair obligations. We currently are not able to determine if any of these liabilities will have a material adverse impact on our results of operations.

Risks related to potential misconduct by employees may adversely impact us.

Our employees may engage in misconduct, fraud or other improper activities, including noncompliance with our policies or regulatory standards and requirements, which could subject us to regulatory sanctions and reputational damage and materially harm our business. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks or losses, including risks associated with harassment, as well as whistleblower complaints and litigation. There can be no assurance that we will succeed in preventing misconduct by employees in the future. In addition, the investigation of alleged misconduct disrupts our operations and may harm the public’s perception of our company, which may be costly. Any such events in the future may have a material adverse impact on our financial condition or results of operations.

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 and conditions 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. Union organizers are actively working to organize employees 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, or if union representation is implemented at such sites and we are unable to agree with the union on reasonable employment terms, including wages, benefits, and work rules, we could experience a significant disruption of our operations and incur 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 suspended.

Our stock price has been volatile and may continue to experience large fluctuations.

The price of our common stock has experienced rapid and significant price fluctuations. Our stock price ranged from a low of $21.30 per share to a high of $64.87 per share for the year ended August 31, 2019 and a low of

 

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$41.95 per share to a high of $60.90 per share for the year ended August 31, 2018. The price for our common stock is likely to continue to be volatile and subject to price and volume fluctuations in response to market and other factors, including the factors discussed elsewhere in these risk factors and the following:

 

quarter-to-quarter variations in our operating results;

 

the depth and liquidity of the market for our common stock;

 

shortfalls in revenue or earnings from levels expected by securities analysts and investors, including the level of our backlog and number of orders received during the period;

 

changes in securities analysts’ estimates of our future performance;

 

shareholder activism;

 

dissemination of false or misleading statements through the use of social and other media to discredit us, disparage our products or to harm our reputation;

 

any developments that materially impact investors’ or customers’ perceptions of our business prospects;

 

dilution resulting from our sale of additional shares of common stock or from the conversion of convertible notes;

 

changes in governmental regulation;

 

significant railcar industry announcements or developments;

 

the introduction of new products or technologies by us or our competitors;

 

actual or anticipated variations in our or our competitors’ quarterly or annual financial results;

 

the general health and outlook of our industry;

 

general financial and other market conditions; and

 

domestic and international economic conditions.

In addition, public stock markets have experienced, and may in the future experience, extreme price and trading volume volatility. This volatility has significantly affected the market prices of securities of many companies for reasons frequently unrelated to, or that disproportionately impact, the operating performance of these companies and may adversely affect the price of our common stock. These broad market fluctuations may adversely affect the market price of our common stock in the future.

A material decline in the price of our common stock may result in the assertion of certain claims against us, and/or the commencement of inquiries and/or investigations against us. A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock, a reduction in our ability to raise capital, and the inability of investors to obtain a favorable selling price for their shares. Any reduction in our ability to raise equity capital in the future may force us to reallocate funds from other planned uses and could have a significant negative effect on our business plans and operations.

Following periods of volatility in the market price of their stock, historically many companies have been the subject of securities class action litigation. If we became involved in securities class action litigation in the future, it could result in substantial costs and diversion of our management’s attention and our resources and could harm our stock price, business, prospects, financial condition and results of operations.

Our product and 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 processes, claims for which the cost of repairing the defective part is highly disproportionate to the original cost of the part or defects in railcars or services which we discover in the future resulting in increased warranty costs or litigation. Additionally, warranty and product support terms may expand beyond those which have traditionally prevailed in the rail supply industry. These types of warranty claims could result in costly product recalls, customers seeking monetary damages, significant repair costs and damage to our reputation.

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 in our products.

 

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Many of our products are sold to third parties who may misuse, improperly install or improperly or inadequately maintain or repair such products thereby potentially exposing us to claims that could increase our costs and weaken our financial condition.

The products we manufacture are designed to work optimally when properly operated, installed, repaired, maintained and used to transport the intended cargo. When this does not occur, we may be subjected to claims or litigation associated with product damage, injuries or property damage that could increase our costs and weaken our financial condition.

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 quarter. Goodwill is also tested more frequently if changes in circumstances or the occurrence of events indicates that a potential impairment exists.

When we have continued underperforming operations or 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 goodwill. As of August 31, 2019, we had $86.6 million of goodwill in our Manufacturing segment and $43.3 million in our Wheels, Repair & Parts segment. Impairment charges to our goodwill or our indefinite lived assets would impact our results of operations. 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 assets for impairment.

The conversion of our outstanding convertible notes could result in substantial dilution to our current stockholders.

We have the option to settle outstanding convertible notes in cash, although if we opt not to or do not have the ability to settle outstanding convertible notes in cash, the conversion of some or all of our convertible notes may dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon the conversion of the notes could adversely affect prevailing market prices of our common stock. In addition, the existence of the notes may encourage short selling by market participants, because the conversion of the notes could depress the price of our common stock.

We are a holding company with no independent operations. Our ability to meet our obligations depends upon the performance of our subsidiaries and our joint ventures and their ability to make distributions to us.

As a holding company, we are dependent on the earnings and cash flows of, and dividends, distributions, loans or advances from, our subsidiaries and joint ventures to generate the funds necessary to meet certain of our obligations including the payment of principal, of premium, if any, and interest on debt obligations. Any payment of dividends, distributions, loans or advances to us by our subsidiaries could be subject to statutory restrictions on dividends or repatriation of earnings under applicable local law and monetary transfer restrictions in the jurisdictions in which our subsidiaries operate. In addition, many of our subsidiaries and our joint ventures are parties to credit facilities that contain restrictions on the timing and amount of any payment of dividends, distributions, loans or advances that our subsidiaries may make to us. Under certain circumstances, some or all of our subsidiaries may be prohibited from making any such payments.

 

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Our governing documents, the terms of our 2.875% Convertible Notes, 2.25% Convertible Notes and Oregon law contain certain provisions that could prevent or make more difficult an attempt to acquire us.

Our Articles of Incorporation and Bylaws, as currently in effect, contain certain provisions that may have anti-takeover effects, including:

 

a classified Board of Directors, with each class containing as nearly as possible one-third of the total number of members of the Board of Directors and the members of each class serving for staggered three-year terms;

 

a vote of at least 55% of our voting securities to amend, repeal or adopt an inconsistent provision of certain provisions of our Articles of Incorporation;

 

no less than 120 days’ advance notice with respect to nominations of directors or other matters to be voted on by stockholders other than by or at the direction of the Board of Directors;

 

removal of directors only for cause;

 

the calling of special meetings of stockholders only by the president, a majority of the Board of Directors or the holders of not less than 25% of all votes entitled to be cast on the matters to be considered at such meeting;

 

the issuance of preferred stock by our board without further action by the shareholders; and

 

the availability under the Articles of Series A participating preferred stock that may be issuable.

The provisions discussed above could have anti-takeover effects because they may delay, defer or prevent an unsolicited acquisition proposal that some, or a majority, of our stockholders might believe to be in their best interests or in which stockholders might receive a premium for their common stock over the then-prevailing market price.

The Oregon Control Share Act and business combination law could limit parties who acquire a significant amount of voting shares from exercising control over us for specific periods of time. These acts could lengthen the period for a proxy contest or for a stockholder to vote their shares to elect the majority of our Board and change management. Additionally, the terms of our 2.875% Convertible Notes provide for the acceleration, at the lenders option, of all outstanding principal and interest owed on the notes upon a change of control of our company. The rights afforded to our creditors under this indenture could increase the cost of any potential acquisition of our company and have a resulting chilling effect on interest in acquiring our company.

These restrictions and provisions could have the effect of dissuading other stockholders or third parties from contesting director elections or attempting certain transactions with us, including, without limitation, acquisitions, which could cause investors to view our securities as less attractive investments and reduce the market price of our common stock and the notes.

Payments of cash dividends on our common stock may be made only at the discretion of our Board of Directors and may be restricted by Oregon law.

Any decision to pay dividends will be at the discretion of our Board of Directors and will depend upon our operating results, strategic plans, capital requirements, financial condition, provisions of our borrowing arrangements and other factors our Board of Directors considers relevant. Furthermore, Oregon law imposes restrictions on our ability to pay dividends. Accordingly, we may not be able to continue to pay dividends in any given amount in the future, or at all.

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

Outside of the U.S., we primarily conduct business in Mexico and Europe 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.

 

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We may need to raise additional capital to operate our business and achieve our business objectives, which could result in dilution to investors.

We require substantial working capital to fund our business. If additional funds are raised through the issuance of equity securities, the percentage ownership held by our stockholders would be reduced and these equity securities may have rights, preferences or privileges senior to those of our common stock. We evaluate opportunities to access the capital markets taking into account our financial condition and other relevant considerations. Additional financing may not be available when needed, on terms favorable to us or at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to develop or enhance our business, take advantage of future opportunities or respond to competitive pressures, which would harm our business, financial condition and results of operations.

Our business and operations could be negatively affected if we become subject to shareholder activism, which could cause us to incur significant expense, hinder execution of our business strategy and impact our stock price.

Shareholder activism, which could take many forms and arise in a variety of situations, has been increasing in publicly traded companies recently. Shareholder activism, including potential proxy contests, could result in substantial costs and divert management’s and our Board of Directors’ attention and resources from our business. Additionally, such shareholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with service providers and make it more difficult to attract and retain qualified personnel. Also, we may be required to incur significant legal fees and other expenses related to activist shareholder matters. Our stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any shareholder activism.

We are subject to cybersecurity risks and may incur increasing costs in an effort to minimize those risks.

Our business employs systems and websites that allow for the storage and transmission of proprietary or confidential information regarding our customers, employees, job applicants and other parties, including financial information, intellectual property and personal identification information. Security breaches and other disruptions could compromise our information, expose us to liability and harm our reputation and business. The steps we take to deter and mitigate these risks may not be successful. We may not have the resources or technical sophistication to anticipate or prevent current or rapidly evolving types of cyber-attacks. Attacks may be targeted at us, our customers, or others who have entrusted us with information. Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts or consultants. Advances in computer capabilities, or other technological developments may result in the technology and security measures used by us to protect transaction or other data being breached or compromised. In addition, data and security breaches can also occur as a result of non-technical issues, including intentional or inadvertent breach by our employees or by persons with whom we have commercial relationships. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, legal and financial exposure, negative impacts on our customers’ willingness to transact business with us and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation.

Updates or changes to our information technology systems may result in problems that could negatively impact our business.

We have information technology systems, comprising hardware, network, software, people, processes and other infrastructure that are important to the operation of our businesses. We continue to evaluate and implement upgrades and changes to information technology 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

 

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challenges and delays. A significant problem with an implementation, integration with other systems or ongoing management and operation of our systems could negatively impact our business by disrupting operations. Such a problem could also 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.

If we are unable to protect our intellectual property and prevent its improper use by third parties or if third parties assert that our products or services infringe their intellectual property rights, our ability to compete in the market may be harmed, and our business and financial condition may be adversely affected.

The protection of our intellectual property is important to our business. We rely on a combination of trademarks, copyrights, patents and trade secrets to protect our intellectual property. However, these protections might be inadequate. Our pending or future trademark, copyright and patent applications might not be approved or, if allowed, might not be sufficiently broad. If our intellectual property rights are not adequately protected we may not be able to commercialize our technologies, products or services and our competitors could commercialize our technologies, which could result in a decrease in our sales and market share and could materially adversely affect our business, financial condition and results of operations. Conversely, third parties might assert that our products, services, or other business activities infringe their patents or other intellectual property rights. Infringement and other intellectual property claims and proceedings brought against us, whether successful or not, could result in substantial costs and harm our reputation. Such claims and proceedings can also distract and divert our management and key personnel from other tasks important to the success of our business. In addition, intellectual property litigation or claims could force us to cease selling or using products that incorporate the asserted intellectual property, which would adversely affect our revenues, or cause us to pay substantial damages for past use of the asserted intellectual property or to pay substantial fees to obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all. In the event of an adverse determination in an intellectual property suit or proceeding, or our failure to license essential technology or redesign our products so as not to infringe third party intellectual property rights, our sales could be harmed and our costs could increase, which could materially adversely affect our business, financial condition and results of operations.

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

The nature of our business subjects us to physical damage, business interruption 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, business interruption 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, which could materially adversely impact our financial condition and results of operations.

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.

Changes in accounting standards 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

 

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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 revision of prior period financial statements. 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.

Fires, natural disasters, severe weather conditions or public health crises could disrupt our business and result in loss of revenue or higher expenses.

Any serious disruption at any of our facilities due to fire, hurricane, earthquake, flood, other severe weather events or any other natural disaster, or an epidemic or other public health crisis, or a panic reaction to a perceived health risk, 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 at any of our Mexican or Arkansas 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.

Unusual weather conditions may reduce demand for our wheel-related parts and repair services.

Performing railcar wheel repair and replacing railcar wheels represents a portion of our business. Seasonal fluctuations in weather conditions may lead to greater variation in our quarterly operating results as unusually mild weather conditions will generally lead to lower demand for our wheel-related products and services. In addition, unusually mild weather conditions throughout the year may reduce overall demand for our wheel-related products and repair services. If occurring for prolonged periods, such weather could have an adverse effect on our business, results of operations and financial condition.

Business, regulatory, and legal developments regarding climate change may affect the demand for our products or the ability of our critical suppliers to meet our needs.

Scientific studies have suggested that emissions of certain gases, commonly referred to as greenhouse gases (GHGs) including carbon dioxide and methane, may be contributing to warming of the Earth’s atmosphere and other climate changes. Legislation and new rules to regulate emission of GHGs have been introduced in numerous state legislatures, the U.S. Congress, and by the EPA. Some of these proposals would require industries to meet stringent new standards that may require substantial reporting of GHGs and other carbon intensive activities in addition to potentially mandating reductions in our carbon emissions. While we cannot assess the direct impact of these or other potential regulations, we recognize that new climate change reporting or compliance protocols could affect our operating costs, the demand for our products and/or affect the price of materials, input factors and manufactured components which could impact our margins. Potential opportunities could include greater demand for certain types of railcars, while potential challenges could include decreased demand for certain types of railcars or other products and higher energy costs. Other adverse consequences of climate change could include an increased frequency of severe weather events and rising sea levels that could affect operations at our manufacturing facilities, the price of insuring company assets, or other unforeseen disruptions of our operations, systems, property or equipment.

Repercussions from terrorist activities or armed conflict could harm our business.

Terrorist activities, anti-terrorist efforts, civil unrest, crime and other armed conflict involving the U.S. or its interests abroad may adversely affect the U.S. and global economies, potentially preventing us from meeting our

 

   The Greenbrier Companies 2019 Annual Report      27  


Table of Contents

financial and other obligations. In particular, the negative impacts of these events may affect the industries in which we operate. This could result in delays in or cancellations of the purchase of our products or shortages in raw materials, parts, or components. Any of these occurrences could have a material adverse impact on our financial results.

Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our financial condition and profitability and we may take tax positions that the Internal Revenue Service or other tax authorities may contest.

We are subject to income taxes in both the United States and foreign jurisdictions. Significant judgments and estimates are required to be made 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), limitations on our ability to utilize tax net operating losses in the future 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.

We have in the past and may in the future take tax positions that the Internal Revenue Service (IRS) or other tax authorities may contest. We are required by an IRS regulation to disclose particular tax positions to the IRS as part of our tax returns for that year and future years. If the IRS or other tax authorities successfully contests a tax position that we take, we may be required to pay additional taxes, interest or fines that may adversely affect our results of operations and financial position.

Some of our customers place orders for our products in reliance on their ability to utilize tax benefits or tax credits any of which benefits or credits could be discontinued thereby reducing incentives for our customers to purchase our rail products.

There is no assurance that tax authorities will reauthorize, modify, or prevent the expiration of tax benefits, tax credits, or other policies aimed to incentivize the purchase of our products. If such incentives are discontinued or diminished, the demand for our products could decrease, thereby creating the potential for a material adverse effect on our financial condition or results of operations.

Our share repurchase program is intended to enhance long-term shareholder value although we cannot guarantee this will occur and this program may be suspended or terminated at any time.

The Board of Directors has authorized our company to repurchase our common stock through a share repurchase program. Our share repurchase program may be modified, suspended or discontinued at any time without prior notice. Although the share repurchase program is intended to enhance long-term shareholder value, we cannot provide assurance that this will occur.

 

28    The Greenbrier Companies 2019 Annual Report   


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Item 1B.

UNRESOLVED STAFF COMMENTS

None.

 

Item 2.

PROPERTIES

We operate at the following primary facilities as of August 31, 2019:

 

Description    Location    Status

Manufacturing Segment

     

Operating facilities:

   6 locations in the United States    Owned
   3 locations in Mexico   

Owned – 2 locations

Leased – 1 location

   3 locations in Poland    Owned
   3 locations in Romania    Owned
   1 location in Turkey    Owned

Administrative offices:

   2 locations in the United States    Leased

Wheels, Repair & Parts Segment

  

Operating facilities:

   21 locations in the United States   

Leased – 11 locations

Owned – 9 locations

Customer premises – 1 location

Administrative offices:

   Birmingham, Alabama    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 our 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 – Commitments and Contingencies to Consolidated Financial Statements, Part II, Item 8 of this Form 10-K.

 

Item 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

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Information about our Executive Officers

Current information regarding our executive officers is presented below.

William A. Furman, 75, is Chief Executive Officer and Chairman of the Board of Directors. Mr. Furman has served as Chief Executive Officer since 1994, and as Chairman of the Board of Directors since January 2014. Mr. Furman was Vice President of the Company, or its predecessor company, from 1974 to 1994 and President of the Company from 1994 to 2019.

Martin R. Baker, 63, is Senior Vice President, General Counsel and Chief Compliance Officer, a position he has held since joining the Company in May 2008. Prior to joining the Company, Mr. Baker was Corporate Vice President, General Counsel and Secretary of Lattice Semiconductor Corporation.

Alejandro Centurion, 63, is Executive Vice President of the Company and President of Greenbrier Manufacturing Operations, a position he has held since January 2015. Mr. Centurion has served in various management positions for the Company since 2005, most recently as President of North American Manufacturing Operations.

Brian J. Comstock, 57, is Executive Vice President, Sales and Marketing, a position he has held since April 2018. Mr. Comstock has served in various management positions for the Company since 1998, most recently as Senior Vice President and General Manager of Commercial, Americas.

Adrian J. Downes, 56, is Senior Vice President, Chief Financial Officer and Chief Accounting Officer. Mr. Downes has served as Senior Vice President and Chief Accounting Officer since joining the Company in March 2013. Mr. Downes was promoted to Acting Chief Financial Officer in August 2018 and was promoted to Chief Financial Officer in May 2019.

Anne T. Manning, 56, is Vice President and Corporate Controller, a position she has held since November 2007. Ms. Manning has served in various financial management positions for the Company since 1995.

Mark J. Rittenbaum, 62, is Executive Vice President, Chief Commercial and Leasing Officer, a position he has held since February 2016. Mr. Rittenbaum has served in various management positions for the Company since 1990, most recently as Executive Vice President and Chief Financial Officer.

Lorie L. Tekorius, 52, is President and Chief Operating Officer. Ms. Tekorius has served as Chief Operating Officer since August 2018 and was promoted to President in August 2019. Ms. Tekorius has served in various management positions for the Company since 1995, most recently as Executive Vice President and Chief Operating Officer and prior to that, as Executive Vice President and Chief Financial Officer.

Executive officers are designated by the Board of Directors. There are no family relationships among any of the executive officers of the Company.

 

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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 533 holders of record of common stock as of October 22, 2019.

Issuer Purchases of Equity Securities

The Board of Directors has authorized the Company to repurchase shares of the Company’s common stock. The share repurchase program has an expiration date of March 31, 2021 and the amount remaining for repurchase is $100 million. Under the share repurchase program, shares of common stock may be purchased on the open market or through privately negotiated transactions from time to time. The timing and amount of purchases will be based upon market conditions, securities law limitations and other factors. The program may be modified, suspended or discontinued at any time without prior notice. The share repurchase program does not obligate the Company to acquire any specific number of shares in any period.

There were no shares repurchased under the share repurchase program during the quarter ended August 31, 2019.

 

Period   

Total Number of

Shares Purchased

    

Average Price

Paid Per Share

(Including
Commissions)

    

Total Number of

Shares Purchased

as Part of Publically

Announced Plans

or Programs

    

Approximate

Dollar Value of

Shares that May

Yet Be Purchased

Under the Plans

or Programs

 

June 1, 2019 – June 30, 2019

                        $ 100,000,000  

July 1, 2019 – July 31, 2019

                        $ 100,000,000  

August 1, 2019 – August 31, 2019

                        $ 100,000,000  

 

 
                   

 

 

 

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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 U.S. Industrial Transportation Index and the Standard & Poor’s (S&P) 500 Index. The graph assumes an investment of $100 on August 31, 2014 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, 2019, the end of the Company’s 2019 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.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among The Greenbrier Companies, Inc., the S&P 500 Index

and the Dow Jones US Industrial Transportation Index

 

 

LOGO

*$100 invested on 8/31/14 in stock or index, including reinvestment of dividends.

Fiscal year ending August 31.

Copyright© 2019 Standard & Poor’s, a division of S&P Global. All rights reserved.

Copyright© 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

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, 2019.

 

32    The Greenbrier Companies 2019 Annual Report   


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Item 6.

SELECTED FINANCIAL DATA

 

    YEARS ENDED AUGUST 31,  
(In thousands, except unit and per share data)   2019     2018     2017     2016     2015  

Statement of Operations Data

         

Revenue:

         

Manufacturing

  $ 2,431,499     $ 2,044,586     $ 1,725,188     $ 2,096,331     $ 2,136,051  

Wheels, Repair & Parts

    444,502       347,023       312,679       322,395       371,237  

Leasing & Services

    157,590       127,855       131,297       260,798       97,990  
   
  $ 3,033,591     $ 2,519,464     $ 2,169,164     $ 2,679,524     $ 2,605,278  
   

Earnings from operations

  $ 184,116     $ 252,985     $ 260,432     $ 408,552     $ 386,892  
   

Net earnings attributable to Greenbrier

  $ 71,076 (1)    $ 151,781 (2)    $ 116,067 (2)    $ 183,213     $ 192,832  
   

Basic earnings per common share
attributable to Greenbrier:

  $ 2.18     $ 4.92     $ 3.97     $ 6.28     $ 6.85  

Diluted earnings per common share
attributable to Greenbrier:

  $ 2.14     $ 4.68     $ 3.65     $ 5.73     $ 5.93  

Weighted average common shares outstanding:

         

Basic

    32,615       30,857       29,225       29,156       28,151  

Diluted

    33,165       32,835       32,562       32,468       33,328  

Cash dividends paid per share

  $ 1.00     $ 0.96     $ 0.86     $ 0.81     $ 0.60  

Balance Sheet Data

         

Total assets

  $ 2,990,637     $ 2,465,464     $ 2,397,705     $ 1,835,774     $ 1,787,452  

Revolving notes and notes payable, net

  $ 850,000     $ 463,930     $ 562,552     $ 301,853     $ 374,258  

Total equity

  $ 1,441,697     $ 1,384,215     $ 1,178,893     $ 1,016,827     $ 863,489  

Other Operating Data

         

New railcar units delivered

    22,500       19,000       15,700       20,300       21,100  

New railcar backlog (units)

    30,300       27,400       28,600       27,500       41,300  

New railcar backlog

  $ 3,280,000     $ 2,740,000     $ 2,800,000     $ 3,190,000     $ 4,710,000  

Lease fleet:

         

Units managed

    380,000       357,000       336,000       264,000       260,000  

Units owned

    9,400       8,100       8,300       8,900       9,300  

Cash Flow Data

         

Capital expenditures:

         

Manufacturing

  $ 85,155     $ 59,707     $ 54,973     $ 51,294     $ 84,354  

Wheels, Repair & Parts

    13,291       5,204       3,129       10,190       9,381  

Leasing & Services

    99,787       111,937       27,963       77,529       12,254  
   
  $ 198,233     $ 176,848     $ 86,065     $ 139,013     $ 105,989  
   

Proceeds from sale of assets

  $ 125,427     $ 153,224     $ 24,149     $ 103,715     $ 5,295  
   

Depreciation and amortization:

         

Manufacturing

  $ 49,240     $ 44,225     $ 33,807     $ 27,137     $ 20,668  

Wheels, Repair & Parts

    13,024       10,771       11,143       11,971       11,748  

Leasing & Services

    21,467       19,360       20,179       24,237       12,740  
   
  $ 83,731     $ 74,356     $ 65,129     $ 63,345     $ 45,156  
   

 

(1) 

2019 includes a non-cash goodwill impairment charge of $10.0 million related to the Company’s repair operations.

(2)

2018 and 2017 includes the Company’s portion of non-cash goodwill impairment charges taken by GBW. As the Company accounted for GBW under the equity method of accounting, its 50% share of the non-cash goodwill impairment losses recognized by GBW was $9.5 million after-tax in 2018 and $3.5 million after-tax in 2017.

 

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Item 7.

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

Executive Summary

We operate in three reportable segments: Manufacturing; Wheels, Repair & Parts; and Leasing & Services. Our segments are operationally integrated. The Manufacturing segment, which currently operates from facilities in the U.S., Mexico, Poland, Romania and Turkey, produces double-stack intermodal railcars, tank cars, conventional railcars, automotive railcar products and marine vessels. The Wheels, Repair & Parts segment performs wheel and axle servicing; railcar repair, refurbishment and maintenance; as well as production of a variety of parts for the rail industry in North America. The Leasing & Services segment owns approximately 9,400 railcars and provides management services for approximately 380,000 railcars for railroads, shippers, carriers, institutional investors and other leasing and transportation companies in North America as of August 31, 2019. Through unconsolidated affiliates we produce rail and industrial components and have an ownership stake in a railcar manufacturer in Brazil and a lease financing warehouse.

Our total manufacturing backlog of railcar units as of August 31, 2019 was approximately 30,300 units with an estimated value of $3.28 billion. Approximately 3% of backlog units and 2% of estimated backlog value as of August 31, 2019 was associated with our Brazilian manufacturing operations which is accounted for under the equity method. Backlog as of August 31, 2019 reflects the transfer of 10,600 units from ARI and the removal of 3,500 small cube covered hoppers for sand service for which we realized negotiated economic benefits. Remaining backlog does not include any other orders for the sand market. Backlog units for lease may be syndicated to third parties or held in our own fleet depending on a variety of factors. Multi-year supply agreements are a part of rail industry practice. A portion of the orders included in backlog reflects an assumed product mix. Under terms of the orders, the exact mix and pricing will be determined in the future, which may impact backlog. Marine backlog as of August 31, 2019 was $100 million.

Our backlog of railcar units and marine vessels is not necessarily indicative of future results of operations. Certain orders in backlog are subject to customary documentation and completion of terms. Customers may attempt to cancel or modify orders in backlog. Historically, little variation has been experienced between the quantity ordered and the quantity actually delivered, though the timing of deliveries may be modified from time to time. We cannot guarantee that our reported backlog will convert to revenue in any particular period, if at all.

On July 26, 2019 we completed our acquisition of the manufacturing business of ARI. In connection with the acquisition, we acquired two railcar manufacturing facilities in Arkansas, as well as manufacturing and administrative employees in Missouri. We also acquired other facilities which produce a range of railcar components and parts, creating enhanced vertical integration for our manufacturing operations.

 

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Overview

Revenue, Cost of revenue, Margin and Earnings from operations presented below, include amounts from external parties and exclude intersegment activity that is eliminated in consolidation.

 

     Years ended August 31,  
(In thousands)    2019     2018     2017  

Revenue:

      

Manufacturing

   $ 2,431,499     $ 2,044,586     $ 1,725,188  

Wheels, Repair & Parts

     444,502       347,023       312,679  

Leasing & Services

     157,590       127,855       131,297  
   
     3,033,591       2,519,464       2,169,164  

Cost of revenue:

      

Manufacturing

     2,137,625       1,727,407       1,373,967  

Wheels, Repair & Parts

     420,890       318,330       288,336  

Leasing & Services

     108,590       64,672       85,562  
   
     2,667,105       2,110,409       1,747,865  

Margin:

      

Manufacturing

     293,874       317,179       351,221  

Wheels, Repair & Parts

     23,612       28,693       24,343  

Leasing & Services

     49,000       63,183       45,735  
   
     366,486       409,055       421,299  

Selling and administrative

     213,308       200,439       170,607  

Net gain on disposition of equipment

     (40,963     (44,369     (9,740

Goodwill impairment

     10,025              
   

Earnings from operations

     184,116       252,985       260,432  

Interest and foreign exchange

     30,912       29,368       24,192  
   

Earnings before income tax and loss from unconsolidated affiliates

     153,204       223,617       236,240  

Income tax expense

     (41,588     (32,893     (64,014
   

Earnings before loss from unconsolidated affiliates

     111,616       190,724       172,226  

Loss from unconsolidated affiliates

     (5,805     (18,661     (11,764
   

Net earnings

     105,811       172,063       160,462  

Net earnings attributable to noncontrolling interest

     (34,735     (20,282     (44,395
   

Net earnings attributable to Greenbrier

   $ 71,076     $ 151,781     $ 116,067  
   

Diluted earnings per common share

   $ 2.14     $ 4.68     $ 3.65  
   

Performance for our segments is evaluated based on Earnings from operations (operating profit). Corporate includes selling and administrative costs not directly related to goods and services and certain costs that are intertwined among segments due to our integrated business model. Management does not allocate Interest and foreign exchange or Income tax expense for either external or internal reporting purposes.

 

     Years ended August 31,  
(In thousands)    2019     2018     2017  

Operating profit (loss):

      

Manufacturing

   $ 217,583     $ 240,901     $ 295,334  

Wheels, Repair & Parts

     (2,941     16,731       14,984  

Leasing & Services

     64,763       88,481       31,904  

Corporate

     (95,289     (93,128     (81,790
   
   $ 184,116     $ 252,985     $ 260,432  
   

 

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Consolidated Results

 

     Years ended August 31,      2019 vs 2018     2018 vs 2017  
(In thousands)    2019      2018      2017     

Increase

(Decrease)

   

%

Change

   

Increase

(Decrease)

    

%

Change

 

Revenue

   $ 3,033,591      $ 2,519,464      $ 2,169,164      $ 514,127       20.4   $ 350,300        16.1%  

Cost of revenue

   $ 2,667,105      $ 2,110,409      $ 1,747,865      $ 556,696       26.4   $ 362,544        20.7%  

Margin (%)

     12.1%        16.2%        19.4%        (4.1%)       *       (3.2%)        *     

Net earnings attributable to Greenbrier

   $ 71,076      $ 151,781      $ 116,067      $ (80,705     (53.2%)     $ 35,714        30.8%  
*

Not meaningful

Through our integrated business model, we provide a broad range of custom products and services in each of our segments, which have various average selling prices and margins. The demand for and mix of products and services delivered changes from period to period, which causes fluctuations in our results of operations.

The 20.4% increase in revenue in 2019 compared to 2018 was primarily due to an 18.9% increase in Manufacturing revenue. The increase in Manufacturing revenue was primarily attributed to an 18.4% increase in the volume of railcar deliveries and a change in product mix. The increase in revenue was also due to a 28.1% increase in Wheels, Repair & Parts revenue primarily due to 2019 including $87.5 million in revenue associated with the repair shops returned to us after discontinuing the GBW joint venture in August 2018. The 16.1% increase in 2018 as compared to 2017 was primarily due to an 18.5% increase in Manufacturing revenue. The increase in Manufacturing revenue was primarily due to a 21.0% increase in the volume of railcar deliveries and a change in product mix. The increase was also attributed to an 11.0% increase in Wheels, Repair & Parts revenue primarily as a result of higher wheel set and component volumes due to an increase in demand and an increase in scrap metal pricing.

The 26.4% increase in cost of revenue in 2019 compared to 2018 was primarily due to a 23.7% increase in Manufacturing cost of revenue. The increase in Manufacturing cost of revenue was primarily attributed to an 18.4% increase in the volume of railcar deliveries and operating inefficiencies at some of our manufacturing facilities. The increase in cost of revenue was also due to a 32.2% increase in Wheels, Repair & Parts cost of revenue primarily due to 2019 including $97.3 million in costs associated with the repair shops returned to us after discontinuing the GBW joint venture in August 2018. The 20.7% increase in cost of revenue for 2018 as compared to 2017 was primarily due to a 25.7% increase in Manufacturing cost of revenue. The increase in Manufacturing cost of revenue was primarily due to a 21.0% increase in the volume of railcar deliveries and a change in product mix. The increase was also attributed to a 10.4% increase in Wheels, Repair & Parts cost of revenue primarily due to higher wheel set and component costs associated with increased volumes.

Margin as a percentage of revenue was 12.1% in 2019 and 16.2% in 2018. The overall margin as a percentage of revenue was negatively impacted by a decrease in Manufacturing margin to 12.1% from 15.5% primarily attributed to a change in product mix and operating inefficiencies at some of our manufacturing facilities. The decrease was also due to a decrease in Leasing & Services margin to 31.1% from 49.4%. Margin for 2019 was negatively impacted from higher sales of railcars that we purchased from third parties which have lower margin percentages. Overall margin as a percentage of revenue was 16.2% for 2018 and 19.4% for 2017. The overall margin as a percentage of revenue was negatively impacted by a decrease in Manufacturing margin to 15.5% from 20.4% primarily attributed to a change in product mix. This was partially offset by an increase in Leasing & Services margin to 49.4% from 34.8%. Leasing & Services margin percentage in 2018 benefited from fewer sales of railcars that we purchased from third parties which have lower margin percentages, lower maintenance costs, a higher average volume of rent-producing leased railcars for syndication and lower transportation costs.

The $80.7 million decrease in net earnings attributable to Greenbrier in 2019 compared to 2018 was primarily attributable to a decrease in margin, costs associated with the acquisition of the manufacturing business of ARI and a $10.0 million goodwill impairment charge for which there was no tax benefit related to our repair operations. The $35.7 million increase in net earnings attributable to Greenbrier in 2018 compared to 2017 was primarily attributable to a higher Net gain on disposition of equipment and a reduction in the tax rate due to the Tax Cuts and Jobs Act (Tax Act).

 

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Manufacturing Segment

 

     Years ended August 31,      2019 vs 2018     2018 vs 2017  
(In thousands)    2019      2018      2017     

Increase

(Decrease)

   

%

Change

   

Increase

(Decrease)

   

%

Change

 

Revenue

   $ 2,431,499      $ 2,044,586      $ 1,725,188      $ 386,913       18.9%     $ 319,398       18.5%  

Cost of revenue

   $ 2,137,625      $ 1,727,407      $ 1,373,967      $ 410,218       23.7%     $ 353,440       25.7%  

Margin (%)

     12.1%        15.5%        20.4%        (3.4%)       *          (4.9%)       *     

Operating profit ($)

   $ 217,583      $ 240,901      $ 295,334      $ (23,318     (9.7%   $ (54,433     (18.4%

Operating profit (%)

     8.9%        11.8%        17.1%        (2.9%)       *          (5.3%)       *     

Deliveries

     22,500        19,000        15,700        3,500       18.4%       3,300       21.0%  
*

Not meaningful

As of July 26, 2019, the Manufacturing segment included the results of the manufacturing business of ARI which is consolidated for financial reporting purposes. This partially contributed to the increase in Manufacturing revenue and cost of revenue in 2019 compared to 2018.

Manufacturing revenue increased $386.9 million or 18.9% in 2019 compared to 2018, of which $43 million related to the addition of the manufacturing business of ARI. The increase in revenue was primarily attributed to an 18.4% increase in the volume of railcar deliveries and a change in product mix. Manufacturing revenue increased $319.4 million or 18.5% in 2018 compared to 2017. The increase in revenue was primarily attributed to a 21.0% increase in the volume of railcar deliveries and a change in product mix.

Manufacturing cost of revenue increased $410.2 million or 23.7% in 2019 compared to 2018. The increase in cost of revenue was primarily attributed to an 18.4% increase in the volume of railcar deliveries and operating inefficiencies at some of our manufacturing facilities. Operating inefficiencies include poor manufacturing execution at some of our manufacturing facilities and supplier delivery failures at our European operations. Manufacturing cost of revenue increased $353.4 million or 25.7% in 2018 compared to 2017. The increase in cost of revenue was primarily attributed to a 21.0% increase in the volume of railcar deliveries and a change in product mix.

Manufacturing margin as a percentage of revenue decreased 3.4% in 2019 compared to 2018. The decrease was primarily attributed to a change in product mix and operating inefficiencies at some of our manufacturing facilities. Operating inefficiencies include poor manufacturing execution at some of our manufacturing facilities and supplier delivery failures at our European operations. These were partially offset by higher volumes of new railcar sales with leases attached which typically result in enhanced sales prices and margins. Manufacturing margin as a percentage of revenue decreased 4.9% in 2018 compared to 2017 primarily due to a change in product mix.

Manufacturing operating profit decreased $23.3 million or 9.7% in 2019 compared to 2018. The decrease was primarily attributed to a lower margin percentage from a change in product mix and operating inefficiencies at some of our manufacturing facilities. Manufacturing operating profit decreased $54.4 million or 18.4% in 2018 compared to 2017 primarily attributed to a lower margin percentage from a change in product mix and increased costs associated with expanded international operations. This was partially offset by an increase in the volume of railcar deliveries.

Wheels, Repair & Parts Segment

 

     Years ended August 31,      2019 vs 2018     2018 vs 2017  
(In thousands)    2019     2018      2017     

Increase

(Decrease)

   

%

Change

   

Increase

(Decrease)

    

%

Change

 

Revenue

   $ 444,502     $ 347,023      $ 312,679      $ 97,479       28.1   $ 34,344        11.0%  

Cost of revenue

   $ 420,890     $ 318,330      $ 288,336      $ 102,560       32.2   $ 29,994        10.4%  

Margin (%)

     5.3%       8.3%        7.8%        (3.0%)       *       0.5%        *     

Operating profit ($)

   $ (2,941   $ 16,731      $ 14,984      $ (19,672     (117.6 %)    $ 1,747        11.7%  

Operating profit (%)

     (0.7%)       4.8%        4.8%        (5.5%)       *       0.0%        *     
*

Not meaningful

 

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On August 20, 2018, 12 repair shops were returned to us as a result of discontinuing our GBW railcar repair joint venture, of which four shops were closed during 2019. Beginning on August 20, 2018, the results of operations from these repair shops were included in the Wheels, Repair & Parts segment as they are now consolidated for financial reporting purposes. The addition of these repair shops contributed to the increase in Wheels, Repair & Parts revenue and cost of revenue during 2019 compared to 2018.

Wheels, Repair & Parts revenue increased $97.5 million or 28.1% in 2019 compared to 2018. The increase was primarily due to 2019 including $87.5 million in revenue associated with the repair shops returned to us after discontinuing the GBW joint venture in August 2018. The increase was also due to higher parts revenue due to an increase in demand. Wheels, Repair & Parts revenue increased $34.3 million or 11.0% in 2018 compared to 2017 primarily as a result of higher wheel set and component volumes due to an increase in demand and an increase in scrap metal pricing.

Wheels, Repair & Parts cost of revenue increased $102.6 million or 32.2% in 2019 compared to 2018. The increase was primarily due to 2019 including $97.3 million in cost of revenue associated with the repair shops returned to us after discontinuing the GBW joint venture in August 2018. The increase was also due to increased parts volumes and costs associated with closing sites in our repair network. Wheels, Repair & Parts cost of revenue increased $30.0 million or 10.4% in 2018 compared to 2017 primarily due to higher wheel set and component costs associated with increased volumes.

Wheels, Repair & Parts margin as a percentage of revenue decreased 3.0% in 2019 compared to 2018. The decrease was primarily attributed to inefficiencies at our repair operations and costs associated with closing sites in our repair network. This was partially offset by a favorable parts product mix. Wheels, Repair & Parts margin as a percentage of revenue increased 0.5% in 2018 compared to 2017 due to efficiencies from operating at higher wheel set and component volumes and an increase in scrap metal pricing. This was partially offset by a less favorable parts product mix.

Wheels, Repair & Parts operating profit decreased $19.7 million in 2019 compared to 2018. The decrease was primarily attributed to a $10.0 million goodwill impairment charge recognized in 2019 due to challenges at our repair operations and costs associated with closing sites in our repair network. This was partially offset by higher parts revenue and a more favorable parts product mix. Wheels, Repair & Parts operating profit increased $1.7 million or 11.7% in 2018 compared to 2017 primarily attributable to higher margins due to an increase in wheelset and component volumes and an increase in efficiencies.

Leasing & Services Segment

 

     Years ended August 31,      2019 vs 2018      2018 vs 2017  
(In thousands)    2019      2018      2017     

Increase

(Decrease)

   

%

Change

    

Increase

(Decrease)

   

%

Change

 

Revenue

   $ 157,590      $ 127,855      $ 131,297      $ 29,735       23.3%      $ (3,442     (2.6%)  

Cost of revenue

   $ 108,590      $ 64,672      $ 85,562      $ 43,918       67.9%      $ (20,890     (24.4%)  

Margin (%)

     31.1%        49.4%        34.8%        (18.3%)       *           14.6%       *     

Operating profit ($)

   $ 64,763      $ 88,481      $ 31,904      $ (23,718     (26.8%)      $ 56,577       177.3%  

Operating profit (%)

     41.1%        69.2%        24.3%        (28.1%)       *           44.9%       *     
*

Not meaningful

The Leasing & Services segment generates revenue from leasing railcars from its lease fleet, providing various management services, interim rent on leased railcars for syndication, and the sale of railcars purchased from third parties with the intent to resell them. The gross proceeds from the sale of these railcars are recorded in revenue and the costs of purchasing these railcars are recorded in cost of revenue.

Leasing & Services revenue increased $29.7 million or 23.3% in 2019 compared to 2018. The increase was primarily attributed to an increase in the sale of railcars which we had purchased from third parties with the intent to resell them. This was partially offset by a lower average volume of rent-producing leased railcars for syndication. Leasing & Services revenue decreased $3.4 million or 2.6% in 2018 compared to 2017. The change

 

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in revenue was primarily attributed to a decrease in the sale of railcars which we had purchased from third parties with the intent to resell them and a decline in leasing revenue due to fewer railcars on operating leases as we were rebalancing our lease portfolio. This was partially offset by higher management services revenue from new service agreements and a higher average volume of rent-producing leased railcars for syndication.

Leasing & Services cost of revenue increased $43.9 million or 67.9% in 2019 compared to 2018. The increase was primarily due to an increase in the volume of railcars sold that we purchased from third parties and higher transportation costs. Leasing & Services cost of revenue decreased $20.9 million or 24.4% in 2018 compared to 2017 primarily due to a decline in the volume of railcars sold that we purchased from third parties, lower maintenance and transportation costs and fewer railcars on operating leases as we rebalance our lease portfolio.

Leasing & Services margin as a percentage of revenue decreased 18.3% in 2019 compared to 2018. Margin for 2019 was negatively impacted from higher sales of railcars that we purchased from third parties which have lower margin percentages. The decrease in margin was also due to higher transportation costs. Leasing & Services margin as a percentage of revenue increased 14.6% in 2018 compared to 2017. Margin percentage for 2018 benefited from fewer sales of railcars that we purchased from third parties which have lower margin percentages. The increase in margin was also due to lower maintenance costs, a higher average volume of rent-producing leased railcars for syndication and lower transportation costs.

Leasing & Services operating profit decreased $23.7 million or 26.8% in 2019 compared to 2018. The decrease was attributed to a $14.2 million decrease in margin primarily due to higher transportation costs and a lower average volume of rent-producing leased railcars for syndication. The decrease was also attributed to a $6.8 million decrease in net gain on disposition of equipment. Leasing & Services operating profit increased $56.6 million or 177.3% in 2018 compared to 2017 primarily attributed to a $40.8 million increase in net gain on disposition of equipment and an $17.4 million increase in margin. The net gain on disposition of equipment for 2018 related to higher volumes of equipment sales as we were rebalancing our lease portfolio.

The percentage of owned units on lease was 93.3% at August 31, 2019, 94.4% at August 31, 2018 and 92.1% at August 31, 2017.

Selling and Administrative

 

     Years ended August 31,      2019 vs 2018     2018 vs 2017  
(In thousands)    2019      2018      2017     

Increase

(Decrease)

    

%

Change

   

Increase

(Decrease)

    

%

Change

 

Selling and Administrative

   $ 213,308      $ 200,439      $ 170,607      $ 12,869        6.4   $ 29,832        17.5

Selling and administrative expense was $213.3 million or 7.0% of revenue for the year ended August 31, 2019, $200.4 million or 8.0% of revenue for the year ended August 31, 2018 and $170.6 million or 7.9% of revenue for the year ended August 31, 2017.

The $12.9 million increase in 2019 compared to 2018 was primarily attributed to $18.7 million in costs associated with the acquisition of the manufacturing business of ARI and the addition of the selling and administrative costs from the repair shops returned to us after discontinuing the GBW joint venture and the manufacturing business of ARI. These increases in selling and administrative costs were partially offset by a $7.6 million decrease in employee costs primarily related to a decrease in incentive compensation.

The $29.8 million increase in 2018 compared to 2017 was primarily attributed to a $10.1 million increase in professional fees, consulting and related costs associated with strategic business development, litigation and IT initiatives, $8.8 million from the addition of Astra Rail’s selling and administrative costs and a $6.0 million increase in employee costs.

Net Gain on Disposition of Equipment

Net gain on disposition of equipment was $41.0 million, $44.4 million and $9.7 million for the years ended August 31, 2019, 2018 and 2017, respectively. Net gain on disposition of equipment primarily includes the sale

 

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of assets from our lease fleet (Equipment on operating leases, net) that are periodically sold in the normal course of business in order to take advantage of market conditions and to manage risk and liquidity; disposition of property, plant and equipment; and insurance proceeds received for business interruption and assets destroyed in a fire.

Goodwill Impairment

Based on the results of our annual impairment test, a non-cash impairment charge of $10.0 million was recorded during 2019 related to our repair operations.

Interest and Foreign Exchange

Interest and foreign exchange expense was composed of the following:

 

     Years ended August 31,      Increase (decrease)  
(In thousands)    2019     2018     2017      2019 vs 2018      2018 vs 2017  

Interest and foreign exchange:

            

Interest and other expense

   $ 32,260     $ 30,946     $ 23,519      $ 1,314      $ 7,427  

Foreign exchange (gain) loss

     (1,348     (1,578     673        230        (2,251
   
   $ 30,912     $ 29,368     $ 24,192      $ 1,544      $ 5,176  
   

Interest and foreign exchange increased $1.5 million in 2019 from 2018 primarily due to interest expense associated with our $225 million senior term debt issued in September 2018. Interest and foreign exchange increased $5.2 million in 2018 from 2017 primarily due to interest expense associated with our $275 million convertible senior notes issued in February 2017. This was partially offset by a foreign exchange gain in 2018. The change in foreign exchange (gain) loss was primarily attributed to the change in the Mexican Peso relative to the U.S. Dollar and the change in the Polish Zloty exchange rates relative to the Euro.

Income Tax

In 2019 our income tax expense was $41.6 million on $153.2 million of pre-tax earnings for an effective tax rate of 27.1%. The 2019 tax rate was impacted by a goodwill impairment charge for which there was no tax benefit. Excluding the impact of the goodwill impairment charge, the tax rate for 2019 was 25.5%. In 2018 our income tax expense was $32.9 million on $223.6 million of pre-tax earnings for an effective tax rate of 14.7%. In 2017 our income tax expense was $64.0 million on $236.2 million of pre-tax earnings for an effective tax rate of 27.1%.

The reduction in the 2018 tax rate was primarily due to the enactment of the Tax Act on December 22, 2017. The Tax Act made significant changes to U.S. federal income tax laws, including, but not limited to, a reduction of the corporate tax rate from 35% to 21% and a transition tax on foreign earnings not previously subject to U.S. taxation. As a result, deferred income taxes were remeasured as a result of the new statutory rate which resulted in a one-time tax benefit of $33.6 million offset, in part, by the accrual of the transition tax of $8.9 million.

The effective tax rate can fluctuate year-to-year due to changes in the mix of foreign and domestic pre-tax earnings. It can also fluctuate with changes in the proportion of pre-tax earnings attributable to our Mexican railcar manufacturing joint venture. The joint venture is treated as a partnership for tax purposes and, as a result, the partnership’s entire pre-tax earnings are included in Earnings before income taxes and earnings from unconsolidated affiliates, whereas only our 50% share of the tax is included in Income tax expense.

Loss From Unconsolidated Affiliates

Through unconsolidated affiliates we produce rail and industrial components and have an ownership stake in a railcar manufacturer in Brazil and a lease financing warehouse. In addition, in 2017 and 2018 we had an investment in the GBW joint venture. We record the after-tax results from these unconsolidated affiliates.

 

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Loss from unconsolidated affiliates was $5.8 million for the year ended August 31, 2019 and primarily related to losses at our operations in Brazil. Loss from unconsolidated affiliates was $18.7 million and $11.8 million for the years ended August 31, 2018 and 2017, respectively and primarily related to the results of the GBW joint venture. In addition in 2018, a pre-tax goodwill impairment loss of $26.4 million was recognized related to GBW. As we accounted for GBW under the equity method of accounting, our 50% share of the non-cash goodwill impairment loss recognized by GBW was $9.5 million after-tax in 2018, which were included as part of Loss from unconsolidated affiliates on our Consolidated Statement of Income.

Net Earnings Attributable to Noncontrolling Interest

Net earnings attributable to noncontrolling interest was $34.7 million, $20.3 million and $44.4 million for the years ended August 31, 2019, 2018 and 2017, respectively, 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, and our European partner’s share of the results of our European operations.

Liquidity and Capital Resources

 

     Years Ended August 31,  
(In thousands)    2019     2018     2017  

Net cash provided by (used in) operating activities

   $ (21,241   $ 103,341     $ 285,604  

Net cash used in investing activities

     (443,981     (80,292     (129,125

Net cash provided by (used in) financing activities

     276,901       (89,267     204,422  

Effect of exchange rate changes

     (12,666     (14,666     12,499  
   

Net increase (decrease) in cash and cash equivalents

   $ (200,987   $ (80,884   $ 373,400  
   

We have been financed through cash generated from operations and borrowings. At August 31, 2019 cash and cash equivalents and restricted cash were $338.5 million, a decrease of $201.0 million from $539.5 million at the prior year end.

The change in cash provided by (used in) operating activities in 2019 compared to 2018 was primarily due to lower earnings and a net change in working capital due to an increase in production. The change in cash provided by operating activities in 2018 compared to 2017 was primarily due to a net change in working capital, a change in cash flows associated with leased railcars for syndication, a change in deferred revenue, an increase in net gain on disposition of equipment and a change in deferred income taxes as a result of the Tax Act.

The change in cash used in investing activities in 2019 compared to 2018 was primarily attributable to the acquisition of the manufacturing business of ARI. The change in cash used in investing activities in 2018 compared to 2017 was primarily attributable to higher proceeds from the sale of assets partially offset by an increase in capital expenditures.

Capital expenditures totaled $198.2 million, $176.8 million and $86.1 million for the years ended August 31, 2019, 2018 and 2017, respectively. Manufacturing capital expenditures were approximately $85.1 million, $59.7 million and $55.0 million for the years ended August 31, 2019, 2018 and 2017, respectively. Capital expenditures for Manufacturing are expected to be approximately $95 million in 2020 and primarily relate to enhancements of our existing manufacturing facilities. Wheels, Repair & Parts capital expenditures were approximately $13.3 million, $5.2 million and $3.1 million for the years ended August 31, 2019, 2018 and 2017, respectively. Capital expenditures for Wheels, Repair & Parts are expected to be approximately $15 million in 2020 for enhancements of our existing facilities. Leasing & Services and corporate capital expenditures were approximately $99.8 million, $111.9 million and $28.0 million for the years ended August 31, 2019, 2018 and 2017, respectively. Leasing & Services and corporate capital expenditures for 2020 are expected to be approximately $30 million. Proceeds from sales of leased railcar equipment are expected to be approximately $95 million for 2020. Assets from our lease fleet are periodically sold in the normal course of business in order to take advantage of market conditions and to manage risk and liquidity.

 

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Proceeds from the sale of assets, which primarily related to sales of railcars from our lease fleet within Leasing & Services, were approximately $125.4 million, $153.2 million and $24.1 million for the years ended August 31, 2019, 2018 and 2017, respectively. These proceeds included approximately $7.7 million of equipment sold pursuant to sale leaseback transactions for the year ended August 31, 2017. The gain resulting from the sale leaseback transaction was deferred and is being recognized over the lease term in Net gain on disposition of equipment. In addition, proceeds from the sale of assets for the years ended August 31, 2017 included $6.2 million of insurance proceeds associated with our Manufacturing segment in 2017.

The change in cash provided by (used in) financing activities in 2019 compared to 2018 was primarily attributed to proceeds from the issuance of notes payable and a change in the net activities with joint venture partners. The change in cash provided by (used in) financing activities in 2018 compared to 2017 was primarily attributed to a decrease in the proceeds of debt, net of repayments and a change in the net activities with joint venture partners.

A quarterly dividend of $0.25 per share was declared on October 23, 2019.

The Board of Directors has authorized our company to repurchase shares of our common stock. In January 2019, the expiration date of this share repurchase program was extended from March 31, 2019 to March 31, 2021 and the amount remaining for repurchase was increased from $88 million to $100 million. Under the share repurchase program, shares of common stock may be purchased on the open market or through privately negotiated transactions from time to time. The timing and amount of purchases will be based upon market conditions, securities law limitations and other factors. The program may be modified, suspended or discontinued at any time without prior notice. The share repurchase program does not obligate us to acquire any specific number of shares in any period.

In July 2019, as part of the acquisition of the manufacturing business of ARI, we entered into new $300 million senior term debt. The maturity date is June 2024 unless the 2.875% Convertible senior notes due July 2024 are outstanding as of November 1, 2023, in which case the debt matures on that date. The debt bears a floating interest rate of LIBOR plus 1.5% with principal of $3.75 million paid quarterly in arrears and a balloon payment of $232.5 million due at maturity. An interest rate swap agreement was entered into on 50% of the initial balance to swap the floating interest rate of LIBOR plus 1.5% to a fixed rate of 3.19%.

In July 2019, as part of the acquisition of the manufacturing business of ARI, we issued $50 million in convertible senior notes, due 2024. The convertible senior note bears interest at a fixed rate of 2.25%, paid semi-annually in arrears on February 1st and August 1st. The convertible notes mature on July 26, 2024, unless earlier repurchased by us or converted in accordance with their terms. Upon the satisfaction of certain conditions, holders may convert at their option at any time prior to the business day immediately preceding the stated maturity date.

In September 2018, we refinanced approximately $170 million of existing senior term debt, due in March 2020, secured by a pool of leased railcars with new 5-year $225 million senior term debt also secured by a pool of leased railcars. The new debt bears a floating interest rate of LIBOR plus 1.50% or Prime plus 0.50%. The term loan is to be repaid in equal quarterly installments of $1.97 million with the remaining outstanding amounts, plus accrued interest, to be paid on the maturity date in September 2023. An interest rate swap agreement was entered into on 50% of the initial balance to swap the floating interest rate to a fixed rate of 4.49%.

Our 3.5% convertible senior notes due 2018 matured on April 1, 2018. The conversion of these notes resulted in the issuance of an additional 3.4 million shares of our common stock. These additional shares have historically been included in the calculation of diluted earnings per share.

In February 2017, we issued $275 million of convertible senior notes due 2024. The notes are senior unsecured obligations and rank equally with other senior unsecured debt. The notes bear interest at an annual rate of 2.875% payable semiannually in arrears on February 1 and August 1 of each year, commencing August 1, 2017. The notes will mature on February 1, 2024, unless earlier repurchased or converted in accordance with their terms.

Senior secured credit facilities, consisting of three components, aggregated to $705.4 million as of August 31, 2019. We had an aggregate of $311.5 million available to draw down under committed credit facilities as of

 

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August 31, 2019. This amount consists of $233.2 million available on the North American credit facility, $28.3 million on the European credit facilities and $50.0 million on the Mexican railcar manufacturing joint venture credit facilities.

As of August 31, 2019, a $600.0 million revolving line of credit, maturing June 2024, secured by substantially all our assets in the U.S. not otherwise pledged as security for term loans, was available to provide working capital and interim financing of equipment, principally for our U.S. and Mexican operations. Advances under this facility bear interest at LIBOR plus 1.50% or Prime plus 0.50% 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, 2019, lines of credit totaling $55.4 million secured by certain of our European assets, with variable rates that range from Warsaw Interbank Offered Rate (WIBOR) plus 1.1% to WIBOR plus 1.5% and Euro Interbank Offered Rate (EURIBOR) plus 1.1% to EURIBOR plus 1.5%, were available for working capital needs of the European manufacturing operations. European credit facilities are continually being renewed. Currently, these European credit facilities have maturities that range from December 2019 through November 2021.

As of August 31, 2019, our Mexican railcar manufacturing joint venture has two lines of credit totaling $50.0 million. The first line of credit provides up to $30.0 million. Advances under this facility bear interest at LIBOR plus 2.0%. The Mexican railcar manufacturing joint venture will be able to draw against this facility through March 2024. The second line of credit provides up to $20.0 million, of which the Company and its joint venture partner have each guaranteed 50%. Advances under this facility bear interest at LIBOR plus 2.0%. The Mexican railcar manufacturing joint venture will be able to draw amounts available under this facility through June 2021.

As of August 31, 2019, outstanding commitments under the senior secured credit facilities consisted of $24.4 million in letters of credit under the North American credit facility and $27.1 million outstanding under the European credit facilities.

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 capital leases; 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. As of August 31, 2019, we were in compliance with all such restrictive covenants.

From time to time, we may seek to repurchase or otherwise retire or exchange securities, including outstanding notes, 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 retirements, 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. The amounts involved in any such transactions may, individually or in the aggregate, be material and may involve all or a portion of a particular series of notes or other indebtedness which may reduce the float and impact the trading market of notes or other indebtedness which remain outstanding.

We have global operations that conduct business in their local currencies as well as other currencies. To mitigate the exposure to transactions denominated in currencies other than the functional currency, we enter into foreign currency forward exchange contracts with established financial institutions to protect the margin on a portion of foreign currency sales in firm backlog. Given the strong credit standing of the counterparties, no provision has been made for credit loss due to counterparty non-performance.

 

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As of August 31, 2019, we had a $10.0 million note receivable from Amsted-Maxion, our unconsolidated Brazilian castings and components manufacturer and an $18.4 million note receivable balance from Greenbrier-Maxion, our unconsolidated Brazilian railcar manufacturer. These note receivables are included on the Consolidated Balance Sheet in Accounts receivable, net. In the future, we may make loans to or provide guarantees for Amsted-Maxion Cruzeiro or Greenbrier-Maxion.

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 expected debt repayments, working capital needs, planned capital expenditures, additional investments in our unconsolidated affiliates and dividends during the next twelve months.

The following table shows our estimated future contractual cash obligations as of August 31, 2019:

 

     Years Ending August 31,  
(In thousands)    Total      2020      2021      2022      2023      2024      Thereafter  

Notes payable

   $ 860,545      $ 29,084      $ 30,921      $ 23,258      $ 22,907      $ 754,375      $  

Interest (1)

     127,545        30,287        28,035        26,941        26,054        16,228         

Railcar leases

     14,478        6,200        2,965        1,762        1,762        1,413        376  

Operating leases

     33,170        8,099        5,781        3,965        3,395        2,109        9,821  

Revolving notes

     27,115        27,115                                     

Other

     177        133        44                              
   
   $ 1,063,030      $ 100,918      $ 67,746      $ 55,926      $ 54,118      $ 774,125      $ 10,197  
   
(1) 

A portion of the estimated future cash obligation relates to interest on variable rate borrowings.

Due to uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at August 31, 2019, we are unable to estimate the period of cash settlement with the respective taxing authority. Therefore, approximately $2.2 million in uncertain tax positions, including interest, have been excluded from the contractual table above. See Note 19 to the Consolidated Financial Statements for a discussion on income taxes.

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 - The asset and liability method is used to account for income taxes. We are required to estimate the timing of the recognition of deferred tax assets and liabilities, make assumptions about the future deductibility of deferred tax assets and assess deferred tax liabilities based on enacted law and tax rates for each tax jurisdiction to determine the amount of deferred tax assets and liabilities. 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. 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. We reevaluate these uncertain tax positions on a quarterly basis. Changes in tax law or court interpretations may result in the recognition of a tax benefit or an additional charge to the tax provision.

 

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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 in 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 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 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 - We measure revenue at the amounts that reflect the consideration to which we expect to be entitled in exchange for transferring control of goods and services to customers. We recognize revenue either at the point in time or over the period of time that performance obligations to customers are satisfied. Payment terms vary by segment and product type and are generally due within normal commercial terms. Our contracts with customers may include multiple performance obligations (e.g. railcars, maintenance, management services, etc.). For such arrangements, we allocate revenues to each performance obligation based on its relative standalone selling price. We have disaggregated revenue from contracts with customers into categories which describe the principal activities from which we generate our revenues.

Manufacturing

Railcars are manufactured in accordance with contracts with customers. We recognize revenue upon our customers’ acceptance of the completed railcars at a specified delivery point. From time to time, we enter into multi-year supply agreements. Each railcar delivery is considered a distinct performance obligation, such that the amounts that are recognized as revenue following railcar delivery are generally not subject to change.

We typically recognize marine vessel manufacturing revenue over time using the cost input method, based on progress toward contract completion measured by actual costs incurred to date in relation to the estimate of total expected costs. This method best depicts our performance in completing the construction of the marine vessel for the customer and is consistent with the percentage of completion method used prior to the adoption of the new revenue standard.

Wheels, Repair & Parts

We operate a network of wheel, repair and parts shops in North America that provide complete wheelset reconditioning and railcar repair services.

Wheels revenue is recognized when wheelsets are shipped to the customer or when consumed by customers in the case of consignment arrangements. Parts revenue is recognized upon shipment of the parts to the customers.

Repair revenue is typically recognized over time using the cost input method, based on progress toward contract completion measured by actual costs incurred to date in relation to the estimate of total expected costs. This

 

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method best depicts our performance in repairing the railcars for the customer. Repair services are typically completed in less than 90 days.

Leasing & Services

We own a fleet of new and used cars which are leased to third-party customers. Lease revenue is recognized over the lease-term in the period in which it is earned in accordance with ASC 840 Leases.

Syndication transactions represent new and used railcars which have been placed on lease to a customer and which we intend to sell to an investor with the lease attached. At the time of such sale, revenue and cost of revenue associated with railcars that we have manufactured are recognized in the Manufacturing segment; while revenue and cost of revenue associated with railcars which were obtained from a third-party with the intent to resell them and subsequently sold, are recognized in the Leasing & Services segment in accordance with ASC 840 Leases.

We enter into multi-year contracts to provide management and maintenance services to customers for which revenue is generally recognized on a straight-line basis over the contract term as a stand-ready obligation. Costs to fulfill these contracts are recognized as incurred.

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 of 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 would be 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 of undiscounted future cash flows exceeds the carrying amount of the assets it would indicate that the assets were not impaired.

Goodwill and acquired intangible assets - We periodically acquire 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. The provisions of ASC 350 Intangibles – Goodwill and Other, require that we perform this test by comparing 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 which incorporates expected revenue and margins and the use of discount rates. Under the market approach, we estimate the fair value based on observed market multiples for comparable businesses. An impairment loss is recorded to the extent that the reporting unit’s carrying amount exceeds the reporting unit’s fair value. An impairment loss cannot exceed the total amount of goodwill allocated to the reporting unit. Goodwill and indefinite-lived intangible assets are 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. If actual operating results were to differ from these assumptions, it may result in an impairment of our goodwill.

Based on the results of our annual impairment test, a non-cash impairment charge of $10.0 million was recorded during the third quarter of 2019 related to our repair operations. As of August 31, 2019 our goodwill balance was $129.9 million of which $86.6 million related to our Manufacturing segment and $43.3 million related to our Wheels, Repair & Parts segment.

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.

 

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Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk

We have global operations that conduct business in their local currencies as well as other 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 revenue or margin on a portion of forecast foreign currency sales and expenses. At August 31, 2019 exchange rates, forward exchange contracts for the purchase of Polish Zlotys and the sale of Euros and Pound Sterling aggregated to $71.6 million. 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, 2019, net assets of foreign subsidiaries aggregated $163.9 million and a 10% strengthening of the U.S. Dollar relative to the foreign currencies would result in a decrease in equity of $16.4 million, or 1.3% 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 $259.5 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, 2019, 64% of our outstanding debt had fixed rates and 36% had variable rates. At August 31, 2019, a uniform 10% increase in variable interest rates would result in approximately $0.8 million of additional annual interest expense.

 

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

The Greenbrier Companies, Inc. and subsidiaries:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of The Greenbrier Companies, Inc. and subsidiaries (the Company) as of August 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended August 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended August 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of August 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated October 29, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue recognition as of September 1, 2018, due to the adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers, and related amendments.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

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Assessment of the fair value of the European Manufacturing reporting unit and Greenbrier-Astra Rail

As discussed in Notes 2 and 9 to the consolidated financial statements, the Company performs goodwill impairment testing on an annual basis, or more frequently if an event occurs or circumstances change that would indicate a potential impairment exists. The goodwill balance as of August 31, 2019 was $129.9 million, or 4.3% of total assets. Of this amount, $29.9 million was allocated to the European Manufacturing reporting unit. The European Manufacturing goodwill represents 34% of the goodwill for the manufacturing segment. As discussed in Note 4 to the consolidated financial statements, the Company established Greenbrier-Astra Rail (GAR) in June 2017 through a transaction with Astra Holding GmbH (Astra). In connection with that transaction, the Company provided Astra an option to put its entire non-controlling interest in GAR, which is a subset of the European Manufacturing reporting unit, to the Company at an exercise price equal to the higher of fair value or a stated formula measured on the exercise date. The Company recorded this contingently redeemable non-controlling interest of $31.6 million as of August 31, 2019 in the mezzanine section of the consolidated balance sheet. The fair value of GAR, which was determined as part of the Step 1 goodwill impairment evaluation of the European Manufacturing reporting unit, is considered in the measurement of the contingently redeemable non-controlling interest amount at the balance sheet date.

We identified the assessment of the fair value of the European Manufacturing reporting unit and GAR as a critical audit matter. The discounted cash flow model used to calculate the fair value of the European Manufacturing reporting unit and GAR was challenging to test due to the sensitivity of the fair value determinations to changes to certain assumptions. Specifically, changes to the following assumptions had a significant effect on the Company’s assessment of the carrying value of the goodwill and contingently redeemable non-controlling interest:

 

 

Forecasted revenues, terminal growth rates, and gross margin percentages; and

 

The discount rates applied to the forecasted cash flows.

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process to determine the fair value of the European Manufacturing reporting unit and GAR, including controls over the development of the forecasted revenues, terminal growth rates, and gross margin percentages and selection of discount rates used. We evaluated the Company’s forecasted revenues and gross margin percentages by comparing them to the Company’s historical results, as well as external market and industry data. We performed sensitivity analyses over the above key assumptions to assess their impact on the Company’s determination of the fair value of the European Manufacturing reporting unit and GAR. In addition, we involved a valuation professional with specialized skills and knowledge, who assisted in:

 

 

Evaluating each of the discount rates used by comparing it against an independently developed range using publically available market data;

 

Developing an estimate of the fair value of the European Manufacturing reporting unit and GAR, using the Company’s cash flow forecast for the reporting unit and GAR, respectively, and independently developed discount rates; and

 

Evaluating the terminal growth rates by comparing them against publicly available relevant geographic market data.

Evaluation of the sufficiency of audit evidence obtained over the preliminary allocation of the purchase price to the tangible assets acquired and liabilities assumed associated with the acquisition of the manufacturing business of American Railcar Industries, Inc.

As discussed in Note 4 to the consolidated financial statements, the Company acquired the manufacturing business of American Railcar Industries, Inc. (ARI) on July 26, 2019, for consideration of $418.3 million. Based on the preliminary allocation of the purchase price, the acquisition resulted in the recognition of $93.6 million of intangible assets, including goodwill, and $324.7 million related to tangible assets, net of liabilities assumed. The purchase price allocation to the assets acquired and liabilities assumed, including the residual amount allocated to goodwill, is based on preliminary information. This preliminary information is subject to change as additional facts are obtained by the Company related to the assets acquired and liabilities assumed. The information that was available to the Company to allocate consideration to the tangible assets acquired and liabilities assumed was

 

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affected by the proximity of the acquisition date to the Company’s fiscal year-end date of August 31, 2019. In addition, the Company did not acquire 100% of ARI, and therefore there is increased complexity around the determination of the specific tangible assets that were acquired and liabilities that were assumed by the Company, versus those retained by the previous owner. During the measurement period, the Company will adjust the values attributed to the tangible assets acquired and liabilities assumed if new information is obtained about facts and circumstances that existed as of the acquisition date.

We identified the evaluation of the sufficiency of audit evidence obtained over the preliminary allocation of the purchase price to the tangible assets acquired and liabilities assumed associated with the acquisition of the manufacturing business of ARI as a critical audit matter. Complex auditor judgment was required to evaluate which tangible assets were acquired and which liabilities were assumed, based on the information available as of the end of the reporting period.

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s purchase price allocation process, including controls over the identification of the tangible assets acquired and liabilities assumed, as well as the determination of the preliminary allocation of the purchase price. We tested the Company’s identification of the tangible assets acquired and liabilities assumed by reading the acquisition agreement, and comparing the categories of such tangible assets and liabilities which were recorded in the preliminary purchase price allocation to the acquisition agreement. Additionally, to determine the ownership of the tangible asset or obligation of the liability, we selected a sample from the Company’s detailed listing of the tangible assets acquired and liabilities assumed, and agreed the items selected to underlying source documentation. We also inspected a sample of payments made by the Company subsequent to the acquisition date, to assess if the payment related to a tangible asset or liability that should have been recorded as of the acquisition date.

/s/ KPMG LLP

We have served as the Company’s auditor since 2011.

Portland, Oregon

October 29, 2019

 

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Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Balance Sheets

AS OF AUGUST 31,

 

(In thousands)    2019     2018  

Assets

    

Cash and cash equivalents

   $ 329,684     $ 530,655  

Restricted cash

     8,803       8,819  

Accounts receivable, net

     373,383       348,406  

Inventories

     664,693       432,314  

Leased railcars for syndication

     182,269       130,926  

Equipment on operating leases, net

     366,688       322,855  

Property, plant and equipment, net

     717,973       457,196  

Investment in unconsolidated affiliates

     91,818       61,414  

Intangibles and other assets, net

     125,379       94,668  

Goodwill

     129,947       78,211  
   
   $ 2,990,637     $ 2,465,464  
   

Liabilities and Equity

    

Revolving notes

   $ 27,115     $ 27,725  

Accounts payable and accrued liabilities

     568,360       449,857  

Deferred income taxes

     13,946       31,740  

Deferred revenue

     85,070       105,954  

Notes payable, net

     822,885       436,205  

Commitments and contingencies (Notes 22 & 23)

    

Contingently redeemable noncontrolling interest

     31,564       29,768  

Equity:

    

Greenbrier

    

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

            

Common stock – without par value; 50,000 shares authorized; 32,488 and 32,191 outstanding at August 31, 2019 and 2018

            

Additional paid-in capital

     453,943       442,569  

Retained earnings

     867,602       830,898  

Accumulated other comprehensive loss

     (44,815     (23,366
   

Total equity – Greenbrier

     1,276,730       1,250,101  

Noncontrolling interest

     164,967       134,114  
   

Total equity

     1,441,697       1,384,215  
   
   $ 2,990,637     $ 2,465,464  
   

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)    2019     2018     2017  

Revenue

      

Manufacturing

   $ 2,431,499     $ 2,044,586     $ 1,725,188  

Wheels, Repair & Parts

     444,502       347,023       312,679  

Leasing & Services

     157,590       127,855       131,297  
   
     3,033,591       2,519,464       2,169,164  

Cost of revenue

      

Manufacturing

     2,137,625       1,727,407       1,373,967  

Wheels, Repair & Parts

     420,890       318,330       288,336  

Leasing & Services

     108,590       64,672       85,562  
   
     2,667,105       2,110,409       1,747,865  

Margin

     366,486       409,055       421,299  

Selling and administrative

     213,308       200,439       170,607  

Net gain on disposition of equipment

     (40,963     (44,369     (9,740

Goodwill impairment

     10,025              
   

Earnings from operations

     184,116       252,985       260,432  

Other costs

      

Interest and foreign exchange

     30,912       29,368       24,192  
   

Earnings before income tax and loss from unconsolidated affiliates

     153,204       223,617       236,240  

Income tax expense

     (41,588     (32,893     (64,014
   

Earnings before loss from unconsolidated affiliates

     111,616       190,724       172,226  

Loss from unconsolidated affiliates

     (5,805     (18,661     (11,764
   

Net earnings

     105,811       172,063       160,462  

Net earnings attributable to noncontrolling interest

     (34,735     (20,282     (44,395
   

Net earnings attributable to Greenbrier

   $ 71,076     $ 151,781     $ 116,067  
   

Basic earnings per common share

   $ 2.18     $ 4.92     $ 3.97  
   

Diluted earnings per common share

   $ 2.14     $ 4.68     $ 3.65  
   

Weighted average common shares:

      

Basic

     32,615       30,857       29,225  

Diluted

     33,165       32,835       32,562  

Dividends declared per common share

   $ 1.00     $ 0.96     $ 0.86  

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

 

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Consolidated Statements of Comprehensive Income

YEARS ENDED AUGUST 31,

 

(In thousands)    2019     2018     2017  

Net earnings

   $ 105,811     $ 172,063     $ 160,462  

Other comprehensive income (loss)

      

Translation adjustment

     (12,725     (16,159     15,488  

Reclassification of derivative financial instruments recognized in net earnings 1

     1,854       (415     3,729  

Unrealized gain (loss) on derivative financial instruments 2

     (10,264     (197     1,944  

Other (net of tax effect)

     (351     (335     (665
   
     (21,486     (17,106     20,496  
   

Comprehensive income

     84,325       154,957       180,958  

Comprehensive income attributable to noncontrolling interest

     (34,698     (20,263     (44,417
   

Comprehensive income attributable to Greenbrier

   $ 49,627     $ 134,694     $ 136,541  
   
1 

Net of tax effect of $0.5 million, $nil and $1.0 million for the years ended August 31, 2019, 2018 and 2017

2 

Net of tax effect of ($2.9 million), ($0.1 million) and $0.8 million for the years ended August 31, 2019, 2018 and 2017

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

 

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Consolidated Statements of Equity

 

    Attributable to Greenbrier                    
(In thousands)  

Common

Stock

Shares

   

Additional

Paid-in

Capital

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Loss

   

Total

Equity -

Greenbrier

   

Noncontrolling

Interest

    Total
Equity
   

Contingently

Redeemable

Noncontrolling

Interest

 

Balance August 31, 2016

    28,205     $ 282,886     $ 618,178     $ (26,753   $ 874,311     $ 142,516     $ 1,016,827     $  

Net earnings

                116,067             116,067       46,535       162,602       (2,140

Other comprehensive income, net

                      20,474       20,474       22       20,496        

Noncontrolling interest adjustments

                                  (677     (677      

Joint venture partner distribution declared

                                  (28,027     (28,027      

Noncontrolling interest acquired

                                  394       394        

Contingently redeemable noncontrolling interest

                                              38,288  

Restricted stock awards (net of cancellations)

    298       5,520                   5,520             5,520        

Unamortized restricted stock

          (10,734                 (10,734           (10,734      

Restricted stock amortization

          19,826                   19,826             19,826        

Tax deficiency from restricted stock awards

          (2,339                 (2,339           (2,339      

Cash dividends ($0.86 per share)

                (25,142           (25,142           (25,142      

2.875% Convertible Senior Notes, due 2024 – equity component, net of tax

          20,818                   20,818             20,818        

2.875% Convertible Senior Notes, due 2024, issuance costs – equity component, net of tax

          (671                 (671           (671      
                                                                 

Balance August 31, 2017

    28,503     $ 315,306     $ 709,103     $ (6,279   $ 1,018,130     $ 160,763     $ 1,178,893     $ 36,148  

Net earnings

                151,781             151,781       26,662       178,443       (6,380

Other comprehensive loss, net

                      (17,087     (17,087     (19     (17,106      

Noncontrolling interest adjustments

                                  2,864       2,864        

Joint venture partner distribution declared

                                  (62,649     (62,649      

Investment by joint venture partner

                                  6,500       6,500        

Noncontrolling interest acquired

                                  (7     (7      

Restricted stock awards (net of cancellations)

    336       7,334                   7,334             7,334        

Unamortized restricted stock

          (15,058                 (15,058           (15,058      

Restricted stock amortization

          16,100                   16,100             16,100        

Cash dividends ($0.96 per share)

                (29,986           (29,986           (29,986      

Conversion of 3.5% 2018 Convertible Senior Notes

    3,352       118,887                   118,887             118,887        
                                                                 

Balance August 31, 2018

    32,191     $ 442,569     $ 830,898     $ (23,366   $ 1,250,101     $ 134,114     $ 1,384,215     $ 29,768  
                                                                 

Cumulative effect adjustment due to adoption of ASU 2014-09 (See Note 2)

                5,461             5,461             5,461        

Net earnings

                71,076             71,076       39,598       110,674       (4,863

Other comprehensive loss, net

                      (21,449     (21,449     (37     (21,486      

Noncontrolling interest adjustments

                (6,659           (6,659     7,402       743       6,659  

Joint venture partner distribution declared

                                  (18,025     (18,025      

Noncontrolling interest acquired

                                  1,915       1,915        

Restricted stock awards (net of cancellations)

    297       12,077                   12,077             12,077        

Unamortized restricted stock

          (16,801                 (16,801           (16,801      

Restricted stock amortization

          12,321                   12,321             12,321        

Cash dividends ($1.00 per share)

                (33,174           (33,174           (33,174      

2.25% Convertible Senior Notes, due 2024 – equity component, net of tax

          3,777                   3,777             3,777        
                                                                 

Balance August 31, 2019

    32,488     $ 453,943     $ 867,602     $ (44,815   $ 1,276,730     $ 164,967     $ 1,441,697     $ 31,564  
                                                                 

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

 

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Consolidated Statements of Cash Flows

YEARS ENDED AUGUST 31,

 

(In thousands)    2019     2018     2017  

Cash flows from operating activities:

      

Net earnings

   $ 105,811     $ 172,063     $ 160,462  

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

      

Deferred income taxes

     (20,225     (40,496     4,377  

Depreciation and amortization

     83,731       74,356       65,129  

Net gain on disposition of equipment

     (40,963     (44,369     (9,740

Stock based compensation expense

     11,153       29,314       26,427  

Accretion of debt discount

     4,458       4,171       2,340  

Noncontrolling interest adjustments

     7,402       2,864       (677

Goodwill impairment

     10,025              

Other

     145       1,688       (845

Decrease (increase) in assets:

      

Accounts receivable, net

     13,022       (83,551     (25,272

Inventories

     (143,168     (26,592     (2,787

Leased railcars for syndication

     (96,110     (54,023     41,015  

Other

     6,843       34,115       17,558  

Increase (decrease) in liabilities:

      

Accounts payable and accrued liabilities

     55,910       54,032       (25,422

Deferred revenue

     (19,275     (20,231     33,039  
   

Net cash provided by (used in) operating activities

     (21,241     103,341       285,604  
   

Cash flows from investing activities:

      

Acquisitions, net of cash acquired

     (361,878     (34,874     (27,127

Proceeds from sales of assets

     125,427       153,224       24,149  

Capital expenditures

     (198,233     (176,848     (86,065

Investment in and advances to unconsolidated affiliates

     (11,393     (26,455     (40,632

Cash distribution from joint ventures

     2,096       4,661       550  
   

Net cash used in investing activities

     (443,981     (80,292     (129,125
   

Cash flows from financing activities:

      

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

     (105     23,401       4,324  

Proceeds from issuance of notes payable

     525,000       13,771       276,093  

Repayments of notes payable

     (182,971     (22,269     (8,297

Debt issuance costs

     (8,630           (9,082

Dividends

     (33,193     (29,914     (24,890

Cash distribution to joint venture partner

     (16,879     (73,033     (28,511

Investment by joint venture partner

           6,500        

Tax payments for net share settlement of restricted stock

     (6,321     (7,723     (5,215
   

Net cash provided by (used in) financing activities

     276,901       (89,267     204,422  
   

Effect of exchange rate changes

     (12,666     (14,666     12,499  

Increase (decrease) in cash and cash equivalents and restricted cash

     (200,987     (80,884     373,400  

Cash and cash equivalents and restricted cash

      

Beginning of period

     539,474       620,358       246,958  
   

End of period

   $ 338,487     $ 539,474     $ 620,358  
   

Balance Sheet Reconciliation:

      

Cash and cash equivalents

   $ 329,684     $ 530,655     $ 611,466  

Restricted Cash

     8,803     $ 8,819     $ 8,892  
   

Total cash and cash equivalents and restricted cash as presented above

   $ 338,487     $ 539,474     $ 620,358  
   

Cash paid during the period for:

      

Interest

   $ 18,330     $ 18,878     $ 13,962  

Income taxes, net

   $ 62,084     $ 66,423     $ 45,280  

Non-cash activity

      

Issuance of 2.25% Convertible notes in connection with the acquisition of the manufacturing business of ARI

   $ 50,000     $     $  

Transfer from Leased railcars for syndication and Inventories to Equipment on operating leases, net

   $ 43,845     $ 20,945     $ 8,668  

Capital expenditures accrued in Accounts payable and accrued liabilities

   $ 19,385     $ 13,534     $ 16,145  

Change in Accounts payable and accrued liabilities associated with dividends declared

   $ 19     $ (72   $ (252

Change in Accounts payable and accrued liabilities associated with cash distributions to joint venture partner

   $ (1,146   $ 14     $ 484  

Conversion of 3.5% Convertible notes

   $     $ 118,887     $  

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

 

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Notes to Consolidated Financial Statements

Note 1 - Nature of Operations

The Company operates in three reportable segments: Manufacturing; Wheels, Repair & Parts; and Leasing & Services. The segments are operationally integrated. The Manufacturing segment, which currently operates from facilities in the U.S., Mexico, Poland, Romania and Turkey, produces double-stack intermodal railcars, tank cars, conventional railcars, automotive railcar products and marine vessels. The Wheels, Repair & Parts segment performs wheel and axle servicing; railcar repair, refurbishment and maintenance; as well as production of a variety of parts for the rail industry in North America. The Leasing & Services segment owns approximately 9,400 railcars and provides management services for approximately 380,000 railcars for railroads, shippers, carriers, institutional investors and other leasing and transportation companies in North America as of August 31, 2019. Through unconsolidated affiliates the Company produces rail and industrial components and has an ownership stake in a railcar manufacturer in Brazil and a lease financing warehouse.

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; Wheels, Repair & 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 Europe, prepare financial statements in currencies other than the U.S. Dollar. Revenues and expenses are translated at monthly average exchange rates during 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 net foreign currency translation adjustment balances were $34.2 million, $21.5 million and $5.4 million as of August 31, 2019, 2018 and 2017, respectively.

Cash and cash equivalents - Cash may temporarily be 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 primarily relates to amounts held to support a target minimum rate of return on certain agreements and a pass through account for activity related to management services provided for certain third party customers.

Accounts receivable - Accounts receivable includes receivables from related parties (see Note 18 – Related Party Transactions) and is stated net of allowance for doubtful accounts of $2.2 million and $2.7 million as of August 31, 2019 and 2018, respectively.

 

     As of August 31,  
(In thousands)    2019     2018     2017  

Allowance for doubtful accounts

      

Balance at beginning of period

   $ 2,701     $ 1,768     $ 2,215  

Additions, net of reversals

     773       938       370  

Usage

     (1,311     (54     (891

Currency translation effect

     13       49       74  

Balance at end of period

   $ 2,176     $ 2,701     $ 1,768  

 

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Inventories - Inventories are valued at the lower of cost or net realizable value using the first-in first-out method. Work-in-process includes material, labor and overhead. Finished goods includes completed wheels, parts and railcars not on lease or in transit.

Leased railcars for syndication - Leased railcars for syndication consist of newly-built railcars manufactured at one of the Company’s facilities or railcars purchased from third parties, 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 generally anticipated to be sold within six months of delivery of the last railcar in a group or six months from when the Company acquires the railcar from a third party and are typically not depreciated during that period as the Company does not believe any economic value of a railcar is lost in the first six months. In the event the railcars are not sold in the first six months, the railcars are either held in Leased railcars for syndication and are depreciated or are transferred to Equipment on operating leases and are depreciated. As of August 31, 2019, Leased railcars for syndication was $182.3 million compared to $130.9 million as of August 31, 2018.

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.

Investment in unconsolidated affiliates - Investment in unconsolidated affiliates includes the Company’s interests which are accounted for under the equity method of accounting. See Note 8 – Investments In Unconsolidated Affiliates for additional information.

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 primarily are as follows:

 

     Depreciable Life  

Buildings and improvements

     10 – 30 years  

Machinery and equipment

     3 – 20 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. The provisions of ASC 350 Intangibles – Goodwill and Other, require the Company to perform an annual impairment test on goodwill. The Company reviews goodwill for impairment annually using either a qualitative assessment or a quantitative goodwill impairment test. If the qualitative assessment is selected and determines that fair value of each reporting unit more likely than not exceeds its carrying value, no further assessment is necessary. For reporting units where we perform the quantitative goodwill impairment test an impairment loss is recorded to the extent that the reporting unit’s carrying amount exceeds the reporting unit’s fair value. An impairment loss cannot exceed the total amount of goodwill allocated to the reporting unit. See Note 9 – Goodwill for additional information.

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 and trade names. Intangible assets with finite lives are amortized using the straight line method over their estimated useful lives which are up to 20 years. Other assets include revolving note fees 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 forecasted 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 of long-lived assets was recorded in the years ended August 31, 2019, 2018 and 2017.

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

 

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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 asset and 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. The Company recognizes 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. The Company reevaluates these uncertain tax positions on a quarterly basis. Changes in tax law or court interpretations may result in the recognition of a tax benefit or an additional charge to the tax provision.

Deferred revenue - Cash payments received prior to meeting revenue recognition criteria are recorded in Deferred revenue. Amounts are reclassified out of Deferred revenue once the revenue recognition criteria have been met. Deferred revenue primarily consists of customer prepayments and the unrecognized portion of the $40 million upfront fee from MUL. The Company also has a 40% interest in the common equity of an entity that buys and sells railcar assets that are leased to third parties. Deferred revenue includes 40% of the revenue and margin of railcars sold to this entity until the railcars are ultimately sold to a third party.

Noncontrolling interest and Contingently redeemable noncontrolling interest - The Company has a joint venture with Grupo Industrial Monclova, S.A. (GIMSA) that manufactures 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. 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 related to the partner’s 50% interest in the joint venture is included in Noncontrolling interest in the equity section of the Company’s Consolidated Balance Sheet.

Greenbrier-Astra Rail was formed in 2017 between the Company’s existing European operations headquartered in Swidnica, Poland and Astra Rail, based in Arad, Romania. Greenbrier-Astra Rail is controlled by the Company with an approximate 75% interest. The Company consolidates Greenbrier-Astra Rail for financial reporting purposes and includes the noncontrolling interest in the mezzanine section of the Consolidated Balance Sheet in Contingently redeemable noncontrolling interest (see Note 4 – Acquisitions).

In August 2018, Greenbrier-Astra Rail entered into an agreement to take an approximately 68% ownership stake in Rayvag, a railcar manufacturing company based in Adana, Turkey. Rayvag is controlled by the Company. The Company consolidates Rayvag for financial reporting purposes. The noncontrolling interest related to the partner’s interest is included in Noncontrolling interest in the equity section of the Company’s Consolidated Balance Sheet.

The Company has a joint venture with Summit Railroad Products, Inc. to provide axle services. Each party owns a 50% interest in the joint venture. The financial results of this operation are consolidated for financial reporting purposes as the Company has the power to direct the activities which most significantly impact the economic performance of the entity. The noncontrolling interest related to the partner’s 50% interest in the joint venture is included in Noncontrolling interest in the equity section of the Company’s Consolidated Balance Sheet.

Net earnings attributable to noncontrolling interest on the Company’s Consolidated Statement of Income represents the Company’s partners’ share of results from operations.

 

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

 

(In thousands)   

Unrealized

Gain (Loss)

on Derivative

Financial

Instruments

   

Foreign

Currency

Translation

Adjustment

    Other    

Accumulated

Other

Comprehensive

Loss

 

Balance, August 31, 2018

   $ (431   $ (21,506   $ (1,429   $ (23,366

Other comprehensive loss before reclassifications

     (10,264     (12,688     (351   $ (23,303

Amounts reclassified from accumulated other comprehensive loss

     1,854                 $ 1,854  

Balance, August 31, 2019

   $ (8,841   $ (34,194   $ (1,780   $ (44,815

The amounts reclassified out of Accumulated other comprehensive loss into the Consolidated Statements of Income, with the financial statement caption, were as follows:

 

     Year Ended August 31,    

Financial Statement

Caption

(In thousands)        2019             2018      

(Gain) loss on derivative financial instruments:

      

Foreign exchange contracts

   $ 1,794     $ (716   Revenue and Cost of revenue

Interest rate swap contracts

     545       298     Interest and foreign exchange
     2,339       (418   Total before tax
       (485     3     Tax benefit (expense)
     $ 1,854     $ (415   Net of tax

Revenue recognition - The Company measures revenue at the amounts that reflect the consideration to which it expects to be entitled in exchange for transferring control of goods and services to customers. The Company recognizes revenue either at the point in time or over the period of time that performance obligations to customers are satisfied. Payment terms vary by segment and product type and are generally due within normal commercial terms. The Company’s contracts with customers may include multiple performance obligations (e.g. railcars, maintenance, management services, etc.). For such arrangements, the Company allocates revenues to each performance obligation based on its relative standalone selling price. The Company has disaggregated revenue from contracts with customers into categories which describe the principal activities from which it generates revenues.

Manufacturing

Railcars are manufactured in accordance with contracts with customers. The Company recognizes revenue upon its customers’ acceptance of the completed railcars at a specified delivery point. From time to time, the Company enters into multi-year supply agreements. Each railcar delivery is considered a distinct performance obligation, such that the amounts that are recognized as revenue following railcar delivery are generally not subject to change.

The Company typically recognizes marine vessel manufacturing revenue over time using the cost input method, based on progress toward contract completion measured by actual costs incurred to date in relation to the estimate of total expected costs. This method best depicts the Company’s performance in completing the construction of the marine vessel for the customer and is consistent with the percentage of completion method used prior to the adoption of the new revenue standard.

Wheels, Repair & Parts

The Company operates a network of wheel, repair and parts shops in North America that provide complete wheelset reconditioning and railcar repair services.

 

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Wheels revenue is recognized when wheelsets are shipped to the customer or when consumed by customers in the case of consignment arrangements. Parts revenue is recognized upon shipment of the parts to the customers.

Repair revenue is typically recognized over time using the cost input method, based on progress toward contract completion measured by actual costs incurred to date in relation to the estimate of total expected costs. This method best depicts the Company’s performance in repairing the railcars for the customer. Repair services are typically completed in less than 90 days.

Leasing & Services

The Company owns a fleet of new and used cars which are leased to third-party customers. Lease revenue is recognized over the lease-term in the period in which it is earned in accordance with ASC 840 Leases.

Syndication transactions represent new and used railcars which have been placed on lease to a customer and which the Company intends to sell to an investor with the lease attached. At the time of such sale, revenue and cost of revenue associated with railcars that the Company has manufactured are recognized in the Manufacturing segment; while revenue and cost of revenue associated with railcars which were obtained from a third-party with the intent to resell them and subsequently sold, are recognized in Leasing & Services. In addition the Company will often perform management or maintenance services at market rates for these railcars. 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. If retained risk exceeded 10%, the transaction would not be recognized as a sale until such time as the retained risk declined to 10% or less.

The Company enters into multi-year contracts to provide management and maintenance services to customers for which revenue is generally recognized on a straight-line basis over the contract term as a stand-ready obligation. Costs to fulfill these contracts are recognized as incurred.

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

 

(In thousands)    Years ended August 31,  
   2019     2018     2017  

Interest and foreign exchange:

      

Interest and other expense

   $ 32,260     $ 30,946     $ 23,519  

Foreign exchange (gain) loss

     (1,348     (1,578     673  
     $ 30,912     $ 29,368     $ 24,192  

Forward exchange contracts - Foreign operations give rise to risks from changes in foreign currency exchange rates. Forward exchange contracts with established financial institutions are used to hedge a portion of such risk. Realized and unrealized gains and losses on effective hedges 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) 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 used to reduce the impact of changes in interest rates on certain debt. The net cash amounts paid or received under the agreements are recognized as an adjustment to interest expense.

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, 2019, 2018 and 2017 were $5.4 million, $6.0 million and $4.2 million, respectively, included in Selling and administrative expenses.

 

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Net earnings per share - Basic earnings per common share (EPS) includes restricted stock grants and restricted stock units that are considered participating securities, including some grants subject to certain performance criteria, in weighted average basic common shares outstanding when calculating EPS 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, using the treasury stock method, associated with shares underlying the 2.875% Convertible notes, 2.25% Convertible notes, restricted stock units that are not considered participating securities and performance-based restricted stock units subject to performance criteria, for which actual levels of performance above target have been achieved. The second approach supplements the first by including the “if converted” effect of the 3.5% Convertible notes during the periods in which they were outstanding. 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 3.5% Convertible notes are included in the calculation of both approaches using the treasury stock method when the average stock price is greater than the applicable conversion price.

Stock-based compensation - The value of stock based compensation awards is amortized as compensation expense from the date of grant through the earlier of the vesting period or in some instances the recipient’s eligible retirement date. Stock based compensation expense consists of restricted stock units, restricted stock and phantom stock units awards. Stock based compensation expense for the years ended August 31, 2019, 2018 and 2017 was $11.2 million, $29.3 million and $26.4 million, respectively and was recorded in Selling and administrative on the Consolidated Statements of Income.

Restricted stock units and restricted stock awards are accounted for as equity based awards (see Note 16 – Equity). Phantom stock units are accounted for as liability based awards.

Phantom Stock Units

The Company began granting phantom stock units during the year ended August 31, 2016. Every phantom stock unit entitles the participant to receive a cash payment equal to the value of a single share of the Company’s common stock upon vesting. The holders of unvested phantom stock units are entitled to participate in dividend equivalents.

There were no phantom stock units awarded during the years ended August 31, 2019 and 2018. During the year ended August 31, 2017, the Company awarded 151,634 phantom stock units which include performance-based grants. As of August 31, 2019, there were a total of 72,144 phantom stock units associated with unvested performance-based grants. The actual number of phantom stock units that will vest associated with performance-based phantom stock units will vary depending on the Company’s performance. An additional 72,144 phantom stock units, associated with awards granted in 2017, may be granted if performance-based phantom stock units vest at stretch levels of performance. The grant date fair value of phantom stock awards was $6.7 million for the year ended August 31, 2017.

Our phantom stock unit grants are considered liability based awards and therefore are re-measured at the end of each reporting period. Compensation expense is recognized through the earlier of the vesting period or the recipient’s eligible retirement date. Time-based awards to employees are expensed upon grant when the recipient’s eligible retirement date precedes the grant date or during the vesting period if the grantee becomes retirement eligible before the vesting period is complete. Compensation expense related to phantom stock unit grants is recorded in Selling and administrative expense and Cost of revenue on the Company’s Consolidated Statements of Income. For the year ended August 31, 2019, a $1.2 million benefit was recognized in compensation expense for the re-measurement of phantom stock units due to a lower stock price. Compensation expense recognized related to phantom stock units for the years ended August 31, 2018 and 2017 was $12.1 million and $6.2 million, respectively. Unamortized compensation cost related to phantom stock unit grants was $0.3 million, $5.9 million and $10.9 million as of August 31, 2019, 2018 and 2017, respectively.

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

 

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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.

Reclassifications - Certain immaterial reclassifications have been made to the accompanying prior year Consolidated Financial Statements to conform to the current year presentation.

Initial Adoption of Accounting Policies

Revenue Recognition

In the first quarter of 2019, the Company adopted Accounting Standard Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09). This standard was issued to provide a common revenue recognition model for entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. The new standard also requires additional disclosures to sufficiently describe the nature, amount, timing, and uncertainty of revenue and cash flow arising from contracts with customers. As a result of adopting the new standard, the majority of the Company’s revenue recognition timing remained unchanged, while certain minor changes have occurred related to maintenance and repair services. Costs incurred while fulfilling maintenance contracts are now recognized as incurred while the related revenue continues to be recognized over time. Additionally, repair and rail retrofit service revenue, while previously recognized upon completion of an order, is now recognized as costs are incurred. This standard was adopted using a modified retrospective approach through a cumulative effect adjustment, which increased retained earnings by $5.5 million at September 1, 2018. Other adjustments recorded to the September 1, 2018 opening balance sheet were not material. The adoption of the new revenue standard did not have a material effect on the Condensed Consolidated Balance Sheet or Statement of Income.

Restricted Cash

In the first quarter of 2019, the Company adopted Accounting Standard Update 2016-18, Restricted Cash (ASU 2016-18). This update requires additional disclosure and that the Statement of Cash Flow explain the change during the period in the total cash, cash equivalents and amounts generally described as restricted cash. Therefore, amounts generally described as restricted cash should be included with cash & cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. The guidance requires retrospective presentation to each period presented. The adoption of ASU 2016-18 did not have an impact on the Condensed Consolidated Balance Sheet and Statement of Income, but did result in revisions to the Condensed Consolidated Statement of Cash Flows as well as other revised disclosures.

Prospective Accounting Changes

Lease Accounting

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (ASU 2016-02). The new guidance supersedes existing guidance on accounting for leases in Topic 840 and is intended to increase the transparency and comparability of accounting for lease transactions. ASU 2016-02 requires most leases to be recognized on the balance sheet by recording a right-of-use asset and a lease liability. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting remains similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. The ASU will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and the Company plans to adopt this standard on September 1, 2019. ASU 2016-02 initially required entities to adopt the standard using a modified retrospective transition method. In July 2018, the FASB issued certain updates including ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provide optional transition practical expedients allowing companies to adopt the new standard with a cumulative effect adjustment as of the beginning of the year of adoption with prior year comparative financial information and disclosures remaining as previously reported. The Company plans to elect this optional practical expedient.

 

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The Company evaluated the transition and presentation approaches available as well as the impact of the new guidance on its consolidated financial statements and related disclosures, including the increase in the assets and liabilities on its balance sheet, and the impact on its current lease portfolio from both a lessor and lessee perspective. To facilitate this, the Company utilized a comprehensive approach to review its lease portfolio, as well as assessed system requirements and control implications. The new guidance provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients,” which allows it not to reassess under the new guidance their prior conclusions about lease identification and initial direct costs. The Company did not elect the use-of-hindsight practical expedient. In addition, the new guidance provides practical expedients for an entity’s ongoing lessee accounting. The Company elected to not separate lease and non-lease components for the majority of its asset classes. The Company elected the short-term lease recognition exemption for all leases that qualify which means it will not recognize right-of-use assets or lease liabilities for these leases.

The most significant effects of adoption relate to the recognition of a right-of-use asset and lease liability on the Company’s balance sheet for operating leases and providing new disclosures about its leasing activities. The Company currently expect the right-of-use asset and lease liability as of September 1, 2019 will be between $40 and $45 million. The adoption of this new standard also requires the Company to eliminate deferred gains associated with certain sale-leaseback transactions and upon implementation the Company will record an increase to retained earnings of approximately $5 million. In addition, the Company will derecognize approximately $9 million of existing assets and approximately $13 million of deferred revenue for railcar transactions previously not qualifying as sales due to continuing involvement, that now qualify for sale accounting under the new guidance upon adoption. The gain associated with this change in accounting, will be offset by the recognition of a new guarantee liability, resulting in an immaterial net adjustment to retained earnings as of September 1, 2019. The Company does not expect the new guidance to have a material impact on its results of operations.

Derivatives and Hedging

In August 2017, the FASB issued Accounting Standards Update 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). This update improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance. The guidance expands the ability to qualify for hedge accounting for non-financial and financial risk components, reduces complexity in fair value hedges of interest rate risk and eliminates the requirement to separately measure and report hedge ineffectiveness, as well as eases certain hedge effectiveness assessment requirements. The new guidance is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company plans to adopt this guidance beginning September 1, 2019. We do not expect the new guidance to have a material impact on our results of operations.

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued Accounting Standard Update 2016-13, Financial Instruments – Credit Losses (ASU 2016-13). This update introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new guidance will apply to loans, accounts receivable, trade receivables, other financial assets measured at amortized cost, loan commitments and other off-balance sheet credit exposures. The new guidance will also apply to debt securities and other financial assets measured at fair value through other comprehensive income. The new guidance is effective for reporting periods beginning after December 15, 2019, with early adoption permitted. The Company plans to adopt this guidance beginning September 1, 2020. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.

Note 3 - Revenue Recognition

Contract balances

Contract assets primarily consist of unbilled receivables related to marine vessel construction and repair services, for which the respective contracts do not yet permit billing at the reporting date. Contract liabilities primarily

 

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consist of customer prepayments for manufacturing, maintenance, and other management-type services, for which the Company has not yet satisfied the related performance obligations.

The opening and closing balances of the Company’s contract balances are as follows:

 

(in thousands)   

Balance sheet

classification

  

September 1,

2018

    

August 31,

2019

     $ change  

Contract assets

   Inventories    $ 7,228      $ 10,196      $ 2,968  

Contract liabilities 1

   Deferred revenue    $ 41,250      $ 39,203      $ (2,047
1

Contract liabilities balance includes deferred revenue within the scope of the new revenue standard.

For the year ended August 31, 2019, the Company recognized $11.3 million of revenue that was included in Contract liabilities as of September 1, 2018.

Performance obligations

As of August 31, 2019, the Company has entered into contracts with customers for which revenue has not yet been recognized. The following table outlines estimated revenue related to performance obligations wholly or partially unsatisfied, that the Company anticipates will be recognized in future periods.

 

(in millions)   

August 31,

2019

 

Revenue type:

  

Manufacturing – Railcar sales

   $ 2,897.9  

Manufacturing – Marine

   $ 100.2  

Services

   $ 153.0  

Other

   $ 42.1  

Manufacturing – Railcars intended for syndication 1

   $ 317.2  
1 

Not a performance obligation as defined in the new revenue standard and therefore not subject to audit

Based on current production and delivery schedules and existing contracts, approximately $1.9 billion of the Railcar Sales amount is expected to be recognized in 2020 while the remaining amount is expected in future periods. The table above excludes estimated revenue to be recognized at the Company’s Brazilian manufacturing operation, as they are accounted for under the equity method.

Revenue amounts reflected in Railcars intended for syndication may be syndicated to third parties or held in the Company’s fleet depending on a variety of factors.

Marine revenue is expected to be recognized through 2021 as vessel construction is completed.

Services includes management and maintenance services of which approximately 51% are expected to be performed through 2024 and the remaining amount ratably through 2037.

Note 4 - Acquisitions

Manufacturing business of American Railcar Industries, Inc. (ARI)

On July 26, 2019, the Company completed its acquisition of the manufacturing business of ARI for a purchase price of approximately $418.3 million. In connection with the acquisition, the Company acquired two railcar manufacturing facilities in Arkansas, as well as other facilities which produce a range of railcar components and parts and create enhanced vertical integration for our manufacturing operations. The purchase price includes approximately $8.0 million for capital expenditures on railcar lining operations and other facility improvements. Included in the acquisition were equity interests in two railcar component manufacturing businesses which Greenbrier will account for under the equity method of accounting and recognize at their respective fair value as investments in unconsolidated affiliates.

 

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The purchase price was funded by, and consisted of, a combination of cash on hand, the proceeds of a $300 million secured term loan, the issuance to the seller of a $50 million senior convertible note and a payable to the seller for a working capital true-up amount (See Note 14 – Notes Payable, net).

For the year ended August 31, 2019, the operations contributed by ARI’s manufacturing business generated revenues of $43.0 million and a loss from operations of $1.6 million, which are reported in the Company’s consolidated financial statements as part of the Manufacturing segment.

The preliminary purchase price of the net assets acquired from ARI was allocated as follows:

 

(in thousands)        

Accounts receivable, net

   $ 28,257  

Inventories

     98,227  

Property, plant and equipment, net

     225,045  

Investments in unconsolidated affiliates

     40,314  

Intangibles and other assets, net

     36,785  

Goodwill

     56,816  
   

Total assets acquired

     485,444  
   

Total liabilities assumed

     67,174  
   

Net assets acquired

   $ 418,270  
   

The above purchase price allocation, including the residual amount allocated to goodwill, are based on preliminary information and is subject to change as additional information is obtained related to the amounts allocated to the assets acquired and liabilities assumed. As a result of the proximity of the acquisition date to August 31, 2019 and as we did not acquire 100% of ARI, the amounts of all assets acquired and liabilities assumed are preliminary. During the measurement period, which may extend up to 12 months after the date of acquisition, the Company will adjust these assets and liabilities if new information is obtained about the facts and circumstances that existed as of the acquisition date and revised amounts will be recorded as of that date. The effect of measurement period adjustments to the estimated amounts will be reflected on a prospective basis.

The identified intangible assets assumed in the acquisition were recognized as follows:

 

(In thousands)    Fair value      Weighted average
estimated useful life
(in years)
 

Trademarks and patents

   $ 19,500        9  

Customer and supplier relationships

     16,071        7  
   

Identified intangible assets subject to amortization

     35,571     

Other identified intangible assets not subject to amortization

     860     
   

Total identified intangible assets

   $ 36,431     
   

 

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In accordance with ASC 805, the following unaudited pro forma financial information summarizes the combined operating results of Greenbrier and ARI’s manufacturing business as if the acquisition of ARI’s manufacturing business occurred on September 1, 2017. In addition, this pro forma financial information includes acquisition-related adjustments including depreciation expense to reflect the increased fair value of property, plant and equipment, amortization expense related to identified intangible assets, interest expense on the $50 million convertible senior note and $300 million senior term debt issued, and the related income tax effects. This pro forma financial information is presented for informational purposes only and does not include adjustments relating to the Company’s expected cost-savings and other synergies, and as such, is not indicative of the results of operations that would have been achieved if the acquisition had occurred on September 1, 2017 or of results that may occur in the future.

 

     As of August 31,  
(In thousands, except per share amounts)    2019      2018  

Revenue

   $ 3,462,255      $ 2,893,400  

Net earnings attributable to Greenbrier

   $ 57,284      $ 137,399  

Basic earnings per common share

   $ 1.76      $ 4.45  

Diluted earnings per common share

   $ 1.73      $ 4.25  

GBW

On August 20, 2018, the Company entered into a dissolution agreement with Watco Companies, LLC, its previous joint venture partner, to discontinue their GBW Railcar Services railcar repair joint venture. Pursuant to the dissolution agreement, previously operated Greenbrier repair shops and associated employees returned to the Company. Additionally, the dissolution agreement provides that certain agreements entered into in connection with the original creation of GBW in 2014 were terminated as of the transaction date, including the leases of real and personal property, service agreements, and certain employment-related agreements.

As the assets received and liabilities assumed from GBW meet the definition of a business, the Company has accounted for this transaction as a business combination. The total net assets acquired were approximately $57.6 million. Additionally, the Company removed the book value of its remaining equity method investment in, and note receivable due from, the joint venture.

For the year ended August 31, 2019, the Repair operations generated consolidated revenues of $87.5 million and a loss from operations of $24.9 million, which are reported in the Company’s consolidated financial statements as part of the Wheels, Repair & Parts segment. This loss from operations includes $10.0 million of non-cash impairment loss from goodwill. See Note 9 – Goodwill.

Greenbrier Astra Rail

On June 1, 2017, Greenbrier and Astra Holding GmbH (Astra) contributed its European operations to a newly formed company, Greenbrier-Astra Rail (GAR), a Europe-based freight railcar manufacturing, engineering and repair business. As consideration for an approximate 75% controlling interest, Greenbrier agreed to pay Astra €30 million at closing, an additional €30 million which was paid on June 1, 2018 and issue an approximate 25% noncontrolling interest in the new company. The total net assets acquired of $115.8 million includes $38.3 million representing the fair value of the noncontrolling interest at the acquisition date.

Astra also received a put option to sell its entire noncontrolling interest to Greenbrier at an exercise price equal to the higher of fair value or a defined EBITDA multiple as measured on the exercise date. The option is exercisable 30 days prior to and up until June 1, 2022. Due to Astra’s redemption right under the put option, the noncontrolling interest has been classified as a Contingently redeemable noncontrolling interest in the mezzanine section of the Consolidated Balance Sheets. The carrying value of the noncontrolling interest cannot be less than the maximum redemption amount, which is the amount Greenbrier will settle the put option for if exercised. Adjustments to reconcile the carrying value to the maximum redemption amount are recorded to retained earnings.

 

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For the year ended August 31, 2019 and 2018, the European operations contributed by Astra generated revenues of $150.3 million and $136.8 million, respectively, and a loss from operations of $19.4 million and $11.5 million, respectively, which are reported in the Company’s consolidated financial statements as part of the Manufacturing segment.

The purchase price of the net assets acquired from Astra was allocated as follows:

 

(in thousands)        

Cash and cash equivalents

   $ 6,562  

Accounts receivable, net

     10,984  

Inventories

     30,454  

Property, plant and equipment, net

     75,296  

Intangibles and other assets, net

     17,300  

Goodwill

     25,746  
          

Total assets acquired

     166,342  

Accounts payable and accrued liabilities

     17,879  

Deferred income taxes

     7,292  

Deferred revenue

     964  

Notes payable, net

     24,382  
          

Total liabilities assumed

     50,517  

Net assets acquired

   $ 115,825  
          

On August 2, 2018, GAR entered in to an agreement with Rayvag Vagon Sanavi ve Ticaret A.S. (Rayvag) to take an approximately 68% ownership stake in Rayvag. Rayvag is a railcar manufacturer and provider of railcar repair and parts services based in Adana, Turkey. The amount paid to acquire the 68% ownership stake in Rayvag was not material to the Company’s consolidated financial statements.

Note 5 - Inventories

 

         As of August 31,      
(In thousands)        2019             2018      

Manufacturing supplies and raw materials

   $ 387,015     $ 274,938  

Work-in-process

     156,614       105,021  

Finished goods

     130,576       57,969  

Excess and obsolete adjustment

     (9,512     (5,614
                  
   $ 664,693     $ 432,314  
                  

 

     As of August 31,  
(In thousands)    2019     2018     2017  

Excess and obsolete adjustment

      

Balance at beginning of period

   $ 5,614     $ 4,136     $ 3,257  

Charge to cost of revenue

     9,734       4,023       2,781  

Disposition of inventory

     (5,651     (2,455     (2,003

Currency translation effect

     (185     (90     101  
                          

Balance at end of period

   $ 9,512     $ 5,614     $ 4,136  
                          

Note 6 - Equipment on Operating Leases, net

Equipment on operating leases is reported net of accumulated depreciation of $44.2 million and $64.9 million as of August 31, 2019 and 2018, respectively. Depreciation expense was $13.3 million, $11.2 million and $12.1 million as of August 31, 2019, 2018 and 2017, respectively. In addition, certain railcar equipment leased-in by the Company on operating leases (see Note 22 – Lease Commitments) is subleased to customers under

 

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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,

  

2020

   $ 23,490  

2021

     20,076  

2022

     17,949  

2023

     13,717  

2024

     9,450  

Thereafter

     5,583  
          
   $ 90,265  
          

Certain equipment is also operated under daily, monthly or car hire utilization arrangements. Associated revenue amounted to $14.0 million, $12.8 million and $13.0 million for the years ended August 31, 2019, 2018 and 2017, respectively.

Note 7 - Property, Plant and Equipment, net

 

     As of August 31,  
(In thousands)    2019     2018  

Land and improvements

   $ 87,872     $ 84,432  

Machinery and equipment

     539,952       414,865  

Buildings and improvements

     338,639       202,973  

Construction in progress

     66,744       48,406  

Other

     90,822       68,452  
                  
     1,124,029       819,128  

Accumulated depreciation

     (406,056     (361,932
                  
   $ 717,973     $ 457,196  
                  

Depreciation expense was $62.3 million, $54.5 million and $45.5 million for the years ended August 31, 2019, 2018 and 2017, respectively.

Note 8 - Investments In Unconsolidated Affiliates

GBW

The Company had a 50% ownership interest in GBW which performed railcar repair, refurbishment and maintenance until August 20, 2018, on which date the Company entered into a dissolution agreement (See Note 4 – Acquisitions). The Company accounted for its interest in GBW under the equity method of accounting.

The assets and liabilities shown below as of August 31, 2019 primarily represent remaining cash and a payable to its owners, while the summarized income statement for the year ended August 31, 2019 is for GBW’s full year of activity.

Summarized financial data for GBW is as follows:

 

         As of August 31,      
(In thousands)        2019              2018      

Current assets

   $ 1,248      $ 8,531  

Total assets

   $ 1,248      $ 8,531  

Current liabilities

   $ 1,248      $ 23,283  

Total liabilities

   $ 1,248      $ 23,283  

 

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     Years ended August 31,  
(In thousands)    2019     2018     2017  

Revenue

   $ 879     $ 238,033     $ 253,436  

Margin

   $ (1,126   $ (6,047   $ (4,058

Net loss (1)

   $ (4,104   $ (51,679   $ (36,947
(1)

In 2018 and 2017, GBW recorded a pre-tax goodwill impairment loss of $26.4 million and $11.2 million, respectively.

Greenbrier-Maxion

The Company has a 60% ownership interest in Greenbrier-Maxion, a railcar manufacturer in Brazil. Greenbrier-Maxion also assembles bogies and offers a range of aftermarket services including railcar overhaul and refurbishment. The Company does not consolidate Greenbrier-Maxion for financial reporting purposes and accounts for its interest under the equity method of accounting as the entity’s governance provisions require that all significant decisions of Greenbrier-Maxion are subject to shared consent of its shareholders.

Summarized financial data for Greenbrier-Maxion is as follows:

 

         As of August 31,      
(In thousands)        2019              2018      

Current assets

   $ 39,768      $ 41,619  

Total assets

   $ 85,167      $ 61,034  

Current liabilities

   $ 62,541      $ 38,027  

Total liabilities

   $ 74,261      $ 41,539  

 

     Years ended August 31,  
(In thousands)    2019     2018     2017  

Revenue

   $ 99,547     $ 187,664     $ 228,510  

Margin

   $ 2,017     $ 10,086     $ 24,372  

Net income (loss)

   $ (9,144   $ (3,006   $ 1,378  

Amsted-Maxion

The Company has a 24.5% ownership interest in Amsted-Maxion, a manufacturer of castings and components for railcars and other heavy equipment. The Company retains an option to increase its ownership to 29.5% subject to certain conditions. Amsted-Maxion has a 40% ownership position in Greenbrier-Maxion. The Company accounts for its interest in Amsted-Maxion under the equity method of accounting.

Summarized financial data for Amsted-Maxion is as follows:

 

         As of August 31,      
(In thousands)        2019              2018      

Current assets

   $ 25,220      $ 21,463  

Total assets

   $ 107,451      $ 111,589  

Current liabilities

   $ 54,445      $ 27,981  

Total liabilities

   $ 88,016      $ 83,407  

 

     Years ended August 31,  
(In thousands)    2019     2018     2017  

Revenue

   $ 86,421     $ 96,490     $ 90,114  

Margin

   $ 4,949     $ 8,001     $ 5,983  

Net loss

   $ (9,268   $ (9,590   $ (20,114

 

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Other Unconsolidated Affiliates

The Company has nine other unconsolidated affiliates which are accounted for under the equity method of accounting. For the year ended August 31, 2019, the Company recognized net earnings of $3.7 million from these other unconsolidated affiliates.

Summarized financial information, shown as 100% of these other unconsolidated affiliates in aggregate are as follows:

 

         As of August 31,      
(In thousands)        2019              2018      

Current assets

   $ 45,287      $ 32,168  

Total assets

   $ 255,549      $ 239,535  

Current liabilities

   $ 9,836      $ 3,647  

Total liabilities

   $ 49,747      $ 52,852  

 

     Years ended August 31,  
(In thousands)    2019      2018      2017  

Revenue

   $ 50,423      $ 25,549      $ 39,161  

Margin

   $ 19,877      $ 11,360      $ 8,015  

Net income

   $ 12,751      $ 6,988      $ 5,202  

Note 9 - Goodwill

Changes in the carrying value of goodwill are as follows:

 

(In thousands)    Manufacturing    

Wheels,

Repair & Parts

   

Leasing

& Services

     Total  

Balance August 31, 2018

   $ 27,083     $ 51,128     $      $ 78,211  

Additions (1)

     61,408       2,162              63,570  

Translation

     (1,809                  (1,809

Goodwill Impairment

           (10,025             –        (10,025
                                   

Balance August 31, 2019

   $ 86,682     $ 43,265     $      $ 129,947  
                                   
(1)

Additions to goodwill relate to purchase price adjustments for the GBW repair shop transaction (Wheels, Repair & Parts) and the Rayvag acquisition (Manufacturing) and the acquisition of ARI (Manufacturing). See Note 4 – Acquisitions.

 

(In thousands)    Goodwill  

Gross goodwill balance before accumulated goodwill impairment losses and other reductions

   $ 292,497  

Accumulated goodwill impairment losses

     (138,234

Accumulated other reductions

     (24,316
          

Balance August 31, 2019

   $ 129,947  
          

The Company performed its annual goodwill impairment test during the third quarter. The Company utilized both the qualitative assessment and the quantitative goodwill impairment test as part of its annual goodwill impairment test. For reporting units requiring a quantitative goodwill impairment test, the Company determined the fair value of the reporting units while considering both the 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, when appropriate.

Based on the results of the Company’s annual impairment test, the fair values of its reporting units exceeded their carrying values except for the repair reporting unit. The Company initially recorded the repair goodwill following the GBW repair shop transaction in 2018. As a result of near-term operational challenges and updated estimated future cash flows, a non-cash impairment charge of $10.0 million was recorded during the year ended August 31, 2019.

 

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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:

 

         As of August 31,      
(In thousands)        2019             2018      

Intangible assets subject to amortization:

    

Customer and supplier relationships

   $ 89,722     $ 73,601  

Accumulated amortization

     (48,850     (44,656

Other intangibles

     34,031       15,219  

Accumulated amortization

     (6,908     (5,319
                  
     67,995       38,845  
                  

Intangible assets not subject to amortization

     5,450       5,115  

Prepaid and other assets

     15,749       18,935  

Nonqualified savings plan investments

     27,967       26,299  

Debt issuance costs, net

     4,568       1,824  

Assets held for sale

     3,650       3,650  
                  
   $ 125,379     $ 94,668  
                  

Amortization expense for the years ended August 31, 2019, 2018 and 2017 was $6.3 million, $5.3 million and $4.8 million, respectively. Amortization expense for the years ending August 31, 2020, 2021, 2022, 2023 and 2024 is expected to be $10.9 million, $10.9 million, $7.6 million, $6.3 million and $6.3 million, respectively.

Note 11 - Revolving Notes

Senior secured credit facilities, consisting of three components, aggregated to $705.4 million as of August 31, 2019.

As of August 31, 2019, a $600.0 million revolving line of credit, maturing June 2024, secured by substantially all the Company’s assets in the U.S. not otherwise pledged as security for term loans, 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 1.50% or Prime plus 0.50% 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, 2019, lines of credit totaling $55.4 million secured by certain of the Company’s European assets, with variable rates that range from Warsaw Interbank Offered Rate (WIBOR) plus 1.1% to WIBOR plus 1.5% and Euro Interbank Offered Rate (EURIBOR) plus 1.1% to EURIBOR plus 1.5%, were available for working capital needs of the European manufacturing operations. European credit facilities are continually being renewed. Currently, these European credit facilities have maturities that range from December 2019 through November 2021.

As of August 31, 2019, the Company’s Mexican railcar manufacturing joint venture has two lines of credit totaling $50.0 million. The first line of credit provides up to $30.0 million. Advances under this facility bear interest at LIBOR plus 2.0%. The Mexican railcar manufacturing joint venture will be able to draw against this facility through March 2024. The second line of credit provides up to $20.0 million, of which the Company and its joint venture partner have each guaranteed 50%. Advances under this facility bear interest at LIBOR plus 2.0%. The Mexican railcar manufacturing joint venture will be able to draw amounts available under this facility through June 2021.

 

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As of August 31, 2019, outstanding commitments under the senior secured credit facilities consisted of $24.4 million in letters of credit under the North American credit facility and $27.1 million outstanding under the European credit facilities.

As of August 31, 2018, outstanding commitments under the senior secured credit facilities consisted of $72.2 million in letters of credit under the North American credit facility and $27.7 million outstanding under the European credit facilities.

Note 12 - Accounts Payable and Accrued Liabilities

 

     As of August 31,  
(In thousands)    2019      2018  

Trade payables

   $ 302,009      $ 226,405  

Other accrued liabilities

     108,939        86,175  

Accrued payroll and related liabilities

     106,669        105,111  

Accrued warranty

     46,678        27,395  

Income taxes payable

     4,065        4,771  
                   
   $ 568,360      $ 449,857  
                   

Note 13 - Warranty Accrual

 

     As of August 31,  
(In thousands)    2019     2018     2017  

Balance at beginning of period

   $ 27,395     $ 20,737     $ 12,159  

Charged to cost of revenue

     5,014       12,323       6,872  

Acquisition

     23,895             3,526  

Payments

     (8,594     (5,217     (2,649

Currency translation effect

     (1,032     (448     829  
                          

Balance at end of period

   $ 46,678     $ 27,395     $ 20,737  
                          

Note 14 - Notes Payable, net

 

     As of August 31,  
(In thousands)    2019     2018  

Term loans

   $ 521,544     $ 179,923  

2.875% Convertible senior notes, due 2024

     275,000       275,000  

2.25% Convertible senior notes, due 2024

     50,000        

Other notes payable

     14,001       14,798  
                  
   $ 860,545     $ 469,721  

Debt discount and issuance costs

     (37,660     (33,516
                  
   $ 822,885     $ 436,205  
                  

Term loans are primarily composed of:

 

$300 million of senior term debt, with a maturity date of June 2024 unless the Convertible senior notes due July 2024 are outstanding as of November 1, 2023, in which case the debt matures on that date. The debt bears a floating interest rate of LIBOR plus 1.5% with principal of $3.75 million paid quarterly in arrears and a balloon payment of $232.5 million due at maturity. An interest rate swap agreement was entered into on 50% of the initial balance to swap the floating interest rate of LIBOR plus 1.5% to a fixed rate of 3.19%. The principal balance as of August 31, 2019 was $300.0 million.

 

$225 million of senior term debt, with a maturity date of September 2023, which is secured by a pool of leased railcars. The debt bears a floating interest rate of LIBOR plus 1.5% with principal of $1.97 million paid quarterly in arrears and a balloon payment of $185.6 million due at maturity. An interest rate swap

 

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agreement was entered into on 50% of the initial balance to swap the floating interest rate of LIBOR plus 1.5% to a fixed rate of 4.49%. The principal balance as of August 31, 2019 was $217.1 million.

 

Other term loans with an aggregate balance of $4.4 million as of August 31, 2019 and maturity dates ranging from April 2020 to September 2022.

Convertible senior notes, due 2024, bear interest at a fixed rate of 2.875%, paid semi-annually in arrears on February 1st and August 1st. The convertible notes mature on February 1, 2024, unless earlier repurchased by the Company or converted in accordance with their terms. Upon the satisfaction of certain conditions, holders may convert at their option at any time prior to the business day immediately preceding the stated maturity date. 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 16.6234 shares per $1,000 principal amount of the notes (which is equal to an initial conversion price of $60.16 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 $33.1 million of initial debt discount and $8.0 million of original debt issuance costs included in Notes Payable, net on the Company’s Consolidated Balance Sheet. The debt discount represents the difference between the debt principal and the value of a similar debt instrument that does not have a conversion feature at issuance. The debt discount is being amortized using the effective interest rate method through February 2024 and the amortization expense is included in Interest and Foreign exchange on the Company’s Consolidated Statement of Income. In accordance with ASC 470-20, the Company separately accounts for the liability component (debt principal net of debt discount) and equity component. The liability component is recognized as the fair value of a similar instrument that does not have a conversion feature at issuance. To determine the fair value of the liability component, the Company assumed an interest rate of approximately 5% which resulted in a fair value of $241.9 million. The equity component, which is the conversion feature at issuance, is recognized as the difference between the proceeds from the issuance of the notes ($275 million) and the fair value of the liability component ($241.9 million). As of August 31, 2019 and 2018, the equity component was $33.1 million which was recorded on the Company’s Consolidated Balance Sheet in Additional paid-in capital, net of tax of $12.3 million. As of August 31, 2019, the Company has reserved approximately 6.3 million shares for issuance upon conversion of these notes.

Convertible senior notes, due 2024, bear interest at a fixed rate of 2.25%, paid semi-annually in arrears on February 1st and August 1st. The convertible notes mature on July 26, 2024, unless earlier repurchased by the Company or converted in accordance with their terms. Upon the satisfaction of certain conditions, holders may convert at their option at any time prior to the business day immediately preceding the stated maturity date. 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 22.1910 shares per $1,000 principal amount of the notes (which is equal to an initial conversion price of $45.06 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 was $4.9 million of initial debt discount included in Notes Payable, net on the Company’s Consolidated Balance Sheet. The debt discount represents the difference between the debt principal and the value of a similar debt instrument that does not have a conversion feature at issuance. The debt discount is being amortized using the effective interest rate method through July 2024 and the amortization expense is included in Interest and Foreign exchange on the Company’s Consolidated Statement of Income. In accordance with ASC 470-20, the Company separately accounts for the liability component (debt principal net of debt discount) and equity component. The liability component is recognized as the fair value of a similar instrument that does not have a conversion feature at issuance. To determine the fair value of the liability component, the Company assumed an interest rate of approximately 5% which resulted in a fair value of $45.1 million. The equity component, which is the conversion feature at issuance, is recognized as the difference between the proceeds from the issuance of the notes (fair value of $50 million) and the fair value of the liability component ($45.1 million). As of August 31, 2019, the equity component was $4.9 million which was recorded on the Company’s Consolidated Balance Sheet in Additional paid-in capital, net of tax of $1.2 million. As of August 31, 2019, the Company has reserved approximately 1.5 million shares for issuance upon conversion of these notes.

Other notes payable includes $14.0 million of unsecured debt with maturity dates of November 2019 and September 2020.

 

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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 capital leases; 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.

As of August 31, 2019 principal payments on the notes payable are expected as follows:

 

(In thousands)        

Year ending August 31,

  

2020

   $ 29,084  

2021

     30,921  

2022

     23,258  

2023

     22,907  

2024 (1)

     754,375  

Thereafter

      
          
   $ 860,545  
          
(1)

The repayment of the $275.0 million of Convertible senior notes due February 2024 and the $50.0 million of Convertible senior notes due July 2024 is assumed to occur at the scheduled maturity in 2024 instead of assuming an earlier conversion by the holders.

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. Interest rate swap agreements are used to reduce the impact of changes in interest rates on certain debt. 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 is recorded in accumulated other comprehensive income or loss.

At August 31, 2019 exchange rates, notional amounts of forward exchange contracts for the purchase of Polish Zlotys and the sale of Euros and Pound Sterling aggregated to $71.6 million. The fair value of the contracts is included on the Consolidated Balance Sheets as Accounts payable and accrued liabilities when there is a loss, or as Accounts receivable, net when there is a gain. As the contracts mature at various dates through May 2022, any such gain or loss remaining will be recognized in manufacturing revenue along with the related transactions. In the event that the underlying 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 results of operations in Interest and foreign exchange at the time of occurrence. At August 31, 2019 exchange rates, approximately $0.9 million would be reclassified to revenue or cost of revenue in the next year.

At August 31, 2019, an interest rate swap agreement maturing in September 2023 had a notional amount of $109.5 million and an interest rate swap agreement maturing in June 2024 had a notional amount of $150.0 million. The fair value of the contracts are included on the Consolidated Balance Sheets in Accounts payable and accrued liabilities when there is a loss, or in Accounts receivable, net when there is a gain. 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, 2019 interest rates, approximately $0.2 million would be reclassified to interest expense in the next year.

 

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Fair Values of Derivative Instruments

 

     Asset Derivatives      Liability Derivatives  
           August 31,            August 31,  
          2019      2018           2019      2018  
(In thousands)   

Balance sheet

caption

  

Fair

Value

    

Fair

Value

    

Balance sheet

caption

  

Fair

Value

    

Fair

Value

 

Derivatives designated as hedging instruments

 

           

Foreign forward exchange contracts

   Accounts receivable, net    $ 64      $ 700      Accounts payable and accrued liabilities    $ 437      $ 1,211  

Interest rate swap contracts

   Intangibles and other assets, net             781      Accounts payable and accrued liabilities      10,255        1  
   
      $ 64      $ 1,481         $ 10,692      $ 1,212  
   

Derivatives not designated as hedging instruments

 

           

Foreign forward exchange contracts

   Accounts receivable, net    $      $ 76      Accounts payable and accrued liabilities    $ 587      $ 354  

The Effect of Derivative Instruments on the Consolidated Statements of Income

 

Derivatives in

cash flow

hedging

relationships

  

Financial statement caption of gain recognized in

income on derivative

  

Gain (loss) recognized in

income on derivatives
Years ended

August 31,

 
              2019              2018      

Foreign forward exchange contract

   Interest and foreign exchange    $ 213      $ 1,052  

Interest rate swap contracts

   Interest and foreign exchange             (1
   
      $ 213      $ 1,051  
   

 

Derivatives in

cash flow hedging

relationships

 

Gain (loss)

recognized in OCI on

derivatives (effective

portion)

Years

ended August 31,

   

Financial

statement

caption of

gain (loss)

reclassified

from

accumulated

OCI into

income

 

Gain (loss)

reclassified from

accumulated OCI
into

income (effective
portion)

Years

ended August 31,

   

Financial

statement

caption of gain

(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)

Years

ended August 31,

 
     2019     2018          2019     2018          2019     2018  

Foreign forward exchange contracts

  $ (1,261   $ (658  

Revenue

  $ (764   $ 1,145     Revenue   $ 1,346     $ 854  

Foreign forward exchange contracts

    (421     (1,093   Cost of revenue     (1,030     (429   Cost of revenue     935       306  

Interest rate swap contracts

    (11,582     1,632     Interest and foreign exchange     (545     (298   Interest and foreign exchange     (587      
   
  $ (13,264   $ (119     $ (2,339   $ 418       $ 1,694     $ 1,160  
   

Note 16 - Equity

Stock Incentive Plan

The 2014 Amended and Restated Stock Incentive Plan was amended and restated as the 2017 Amended and Restated Stock Incentive Plan on October 24, 2017 and approved by stockholders on January 5, 2018. The stockholders also approved an increase in the total number of shares reserved for issuance by 1,100,000 shares.

 

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As a result, the maximum aggregate number of the Company’s common shares authorized for issuance is 5,425,000. The 2017 Amended and Restated Stock Incentive Plan provides for the grant of incentive stock options, non-statutory stock options, restricted shares, restricted stock units and stock appreciation rights.

On August 31, 2019 there were 849,522 shares available for grant compared to 1,050,675 and 233,271 shares available for grant as of the years ended August 31, 2018 and 2017, respectively. There are no stock options or stock appreciation rights outstanding as of August 31, 2019. The Company currently grants restricted shares and restricted stock units. Restricted share grants are considered outstanding shares of common stock at the time they are issued. The holders of unvested restricted shares are entitled to voting rights and participation in dividends. Shares associated with restricted stock unit awards are not considered legally outstanding shares of common stock until vested. Restricted stock unit awards, including performance-based awards, are entitled to participate in dividends and these awards are considered participating securities and are considered outstanding for earnings per share purposes when the effect is dilutive.

During the years ended August 31, 2019, 2018 and 2017, the Company awarded restricted share and restricted stock unit grants totaling 313,540, 317,036, and 269,705 shares, respectively, which include performance-based grants. As of August 31, 2019, there were a total of 397,260 shares associated with unvested performance-based grants. The actual number of shares that will vest associated with performance-based grants will vary depending on the Company’s performance. Approximately 397,260 additional shares may be granted if performance-based restricted stock unit awards vest at stretch levels of performance. These additional shares are associated with restricted stock unit awards granted during the years ended August 31, 2019, 2018 and 2017. The fair value of awards granted was $17.4 million, $15.2 million, and $11.3 million for the years ended August 31, 2019, 2018 and 2017, respectively.

The value, at the date of grant, of stock awarded under restricted share grants and restricted stock unit grants is amortized as compensation expense over the lesser of the vesting period of one to three years or to the recipients eligible retirement date. Compensation expense recognized related to restricted share grants and restricted stock unit grants for the years ended August 31, 2019, 2018 and 2017 was $12.4 million, $17.2 million, and $20.2 million, respectively, and was recorded in Selling and administrative and Cost of revenue on the Consolidated Statements of Income. Unamortized compensation cost related to restricted stock grants was $15.0 million as of August 31, 2019.

Total unvested restricted share and restricted stock unit grants were 697,949 and 788,744 as of August 31, 2019 and 2018. The following table summarizes restricted share and restricted stock unit grant transactions for shares, both vested and unvested, under the 2017 Amended and Restated Stock Incentive Plan:

 

      Shares  

Balance at August 31, 2016 (1)

     3,848,230  

Granted

     269,705  

Forfeited

     (26,206
   

Balance at August 31, 2017 (1)

     4,091,729  

Granted

     317,036  

Forfeited

     (34,440
   

Balance at August 31, 2018 (1)

     4,374,325  

Granted

     313,540  

Forfeited

     (112,387
   

Balance at August 31, 2019 (1)

     4,575,478  
   
(1) 

Balance represents cumulative grants net of forfeitures.

Share Repurchase Program

The Board of Directors has authorized the Company to repurchase shares of the Company’s common stock. The share repurchase program has an expiration date of March 31, 2021 and the amount remaining for repurchase is $100 million. Under the share repurchase program, shares of common stock may be purchased on the open

 

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market or through privately negotiated transactions from time to time. The timing and amount of purchases will be based upon market conditions, securities law limitations and other factors. The program may be modified, suspended or discontinued at any time without prior notice. The share repurchase program does not obligate the Company to acquire any specific number of shares in any period.

There were no shares repurchased during the years ended August 31, 2019 and 2018. As of August 31, 2019 the Company had cumulatively repurchased 3,206,226 shares for approximately $137.0 million.

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)   2019      2018      2017  

Weighted average basic common shares outstanding (1)

    32,615        30,857        29,225  

Dilutive effect of 3.5% Convertible notes (2)

    n/a        1,821        3,295  

Dilutive effect of 2.875% Convertible notes (3)

                   

Dilutive effect of 2.25% Convertible notes (4)

           n/a        n/a  

Dilutive effect of restricted stock units (5)

    550        157        42  
   

Weighted average diluted common shares outstanding

    33,165        32,835        32,562  
   
(1)

Restricted stock grants and restricted stock units that are considered participating securities, including some grants subject to certain performance criteria, are included in weighted average basic common shares outstanding when the Company is in a net earnings position. No restricted stock and restricted stock units were anti-dilutive for the years ended August 31, 2019, 2018 and 2017.

(2)

The dilutive effect of the 3.5% Convertible notes was included as they were considered dilutive under the “if converted” method as further discussed below for the years ended August 31, 2018 and 2017. The 3.5% Convertible notes matured on April 1, 2018.

(3)

The 2.875% Convertible notes were issued in February 2017. The dilutive effect of the 2.875% Convertible notes was excluded for the years ended August 31, 2019, 2018 and 2017 as the average stock price was less than the applicable conversion price and therefore was considered anti-dilutive.

(4)

The 2.25% Convertible notes were issued in July 2019. The dilutive effect of the 2.25% Convertible notes was excluded for the year ended August 31, 2019 as the average stock price was less than the applicable conversion price and therefore was considered anti-dilutive.

(5)

Restricted stock units that are not considered participating securities and restricted stock units subject to performance criteria, for which actual levels of performance above target have been achieved, are included in weighted average diluted common shares outstanding when the Company is in a net earnings position.

 

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Diluted EPS is calculated using the more dilutive of two approaches. The first approach includes the dilutive effect, using the treasury stock method, associated with shares underlying the 2.875% Convertible notes, 2.25% Convertible notes, restricted stock units that are not considered participating securities and performance based restricted stock units subject to performance criteria, for which actual levels of performance above target have been achieved. The second approach supplements the first by including the “if converted” effect of the 3.5% Convertible notes during the periods in which they were outstanding. 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 3.5% Convertible notes were included in the calculation of both approaches using the treasury stock method when the average stock price is greater than the applicable conversion price.

 

     Years ended August 31,