Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Summary
The financial results for 2022 reflect a year of transition and agility. We delivered strong results despite a volatile macroeconomic environment. We identify a few general trends impacting our business at present, all of which we believe are reflected in our results for the year ended August 31, 2022. First, we believe the North American freight rail equipment market continues to emerge from the cyclical decrease in economic activity which began prior to the emergence of COVID-19. Second, we believe global economic activity continues to recover from the historic decrease resulting from the COVID-19 pandemic. We were able to leverage these trends to accomplish the following:
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Significant increases in production throughout 2022;
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Growth in new order activity year over year; and
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Strong ending backlog value and units.
Despite these accomplishments, inflation, rising interest rates, price volatility, supply chain disruptions and geopolitical disquiet, demand concerted management focus for successful execution across the business. We believe we have the necessary management expertise and are well-positioned to navigate the immediate challenges. While we believe the current market and broader economic environment most likely will present many positive opportunities for our business, as we navigate the recovery, we face a number of challenges which include:
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Inflation and policy reactions thereto, currency volatility and rising interest rates;
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An increase in the price and the shortage of certain materials and components;
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Shipping and transportation delays;
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Shortages of skilled labor; and
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Adverse effects on the European market and the global economic markets, generally from the war in Ukraine.
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Business Highlights
Despite the challenging operating environment, we achieved the following accomplishments in 2022:
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We progressively increased our revenue during the year. The sequential growth in revenue was primarily driven by higher deliveries throughout the year.
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Our revenue increased by $1.2 billion and 70.4% compared to the prior year driven by a 65.5% increase in railcar deliveries.
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In February 2022, we completed our first offering of railcar asset-backed securities.
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In September 2021, we acquired more than 3,600 railcars in a successful portfolio acquisition. The railcar acquisition advanced our strategy to increase the scale of our lease fleet assets.
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We increased our global headcount by nearly 40% during a challenging labor market to support higher levels of business activity.
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Manufacturing Backlog
Our backlog remains strong at August 31, 2022 with an increase in backlog units and value highlighted by the following:
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Our railcar backlog was 29,500 units with an estimated value of $3.5 billion as of August 31, 2022 with deliveries that extend into 2024.
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We generated new railcar orders of 24,600 units valued at approximately $2.9 billion.
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We increased our backlog compared to the prior year by approximately 2,900 units and $670 million.
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In addition to our new railcar backlog, we had sustainable conversion orders at August 31, 2022 of approximately $180 million.
Backlog units for lease may be syndicated to third parties or held in our lease 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. Approximately 6% of backlog units and estimated backlog value as of August 31, 2022 was associated with our Brazilian manufacturing operations which is accounted for under the equity method. Marine backlog as of August 31, 2022 was $31 million with deliveries that extend into 2023.
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.
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Financial Overview
Revenue, Cost of revenue, Margin and Earnings from operations (operating profit) presented below, include amounts from external parties and exclude intersegment activity that is eliminated in consolidation.
Year Ended August 31,
(In millions, except per share amounts) 2022 2021
Revenue:
Leasing & Management Services 153.4 138.5
Cost of revenue:
Leasing & Management Services 48.8 46.7
Margin:
Leasing & Management Services 104.6 91.8
Net gain on disposition of equipment (37.2 ) (1.2 )
Interest and foreign exchange 57.4 43.3
Net loss on extinguishment of debt — 6.3
Income tax (expense) benefit (18.1 ) 40.2
Earnings before earnings from unconsolidated affiliates 42.5 31.6
Earnings from unconsolidated affiliates 11.3 3.5
Net earnings attributable to noncontrolling interest (6.9 ) (2.7 )
Net earnings attributable to Greenbrier $ 46.9 $ 32.4
Diluted earnings per common share $ 1.40 $ 0.96
Performance for our segments is evaluated based on 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) benefit for either external or internal reporting purposes.
Year Ended August 31,
Operating profit (loss):
Maintenance Services 21.7 6.5
Leasing & Management Services 108.3 68.9
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Consolidated Results
(In millions) 2022 2021 Increase(Decrease) % Change
Net earnings attributable to Greenbrier $ 46.9 $ 32.4 $ 14.5 44.8 %
* 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 70.4% increase in revenue for the year ended August 31, 2022 as compared to the prior year was primarily due to an 88.9% increase in Manufacturing revenue. The increase in Manufacturing revenue was primarily attributed to a 65.5% increase in railcar deliveries.
The 76.2% increase in cost of revenue for the year ended August 31, 2022 as compared to the prior year was primarily due to a 93.5% increase in Manufacturing cost of revenue. The increase in Manufacturing cost of revenue was primarily attributed to a 65.5% increase in railcar deliveries and higher steel and other input costs in the current year.
Margin as a percentage of revenue was 10.3% and 13.3% for the years ended August 31, 2022 and 2021, respectively. The overall margin as a percentage of revenue was negatively impacted by a decrease in Manufacturing margin from 9.3% to 7.1% was primarily attributed to higher costs and inefficiencies in our Manufacturing operations in part due to ramping up production. Many of our customer contracts include price escalation provisions. When certain of our manufacturing costs increase, we are able to increase the sales price to our customers. While this has no impact to our margin dollars, the increase in revenue and cost of sales has a negative impact to our margin as a percentage of revenue.
The $14.5 million increase in net earnings attributable to Greenbrier for the year ended August 31, 2022 as compared to the prior year was primarily due to the following:
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An increase in margin dollars primarily due to higher railcar deliveries and syndication revenue for the year ended August 31, 2022.
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An increase in Net gain on disposition of equipment for the year ended August 31, 2022.
These were partially offset by:
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The income tax benefit for the year ended August 31, 2021, which primarily related to accelerated depreciation and the impact of the CARES Act which allowed us to carry back tax losses to years when tax rates were higher, resulting in a tax benefit.
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An increase in Selling and administrative expense for the year ended August 31, 2022 primarily attributed to higher employee related costs as well as higher costs for legal, consulting and travel associated with increased business activity.
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Manufacturing Segment
(In millions, except railcar deliveries) 2022 2021 Increase(Decrease) % Change
Margin (%) 7.1 % 9.3 % (2.2 )% *
Operating profit (%) 3.9 % 3.7 % 0.2 % *
* Not meaningful
Our Manufacturing segment primarily generates revenue from manufacturing a wide range of freight railcars and from the conversion of existing or in-service railcars through our facilities in North America and Europe. We also manufacture a broad range of ocean-going and river barges for transporting merchandise between ports within the United States.
Manufacturing revenue increased $1.2 billion or 88.9% for the year ended August 31, 2022 compared to the prior year. The increase in revenue was primarily attributed to a 65.5% increase in railcar deliveries. The increase was also due to the additional revenue associated with an increase in steel and other input costs during the year ended August 31, 2022, as many of our customer contracts include price escalation provisions when certain of our manufacturing costs increase.
Manufacturing cost of revenue increased $1.1 billion or 93.5% for the year ended August 31, 2022 compared to the prior year. The increase in cost of revenue was primarily attributed to a 65.5% increase in the volume of railcar deliveries and higher steel and other input costs as well as inefficiencies in our Manufacturing operations in part due to ramping up production and supply chain issues during the year ended August 31, 2022.
Manufacturing margin as a percentage of revenue decreased 2.2% for the year ended August 31, 2022 compared to the prior year. The decrease in margin percentage for the year ended August 31, 2022 was primarily attributed to higher costs and inefficiencies in our Manufacturing operations in part due to ramping up production. Many of our customer contracts include price escalation provisions. When certain of our manufacturing costs increase, we are able to increase the sales price to our customers. While this has no impact to our margin dollars, the increase in revenue and cost of sales has a negative impact to our margin as a percentage of revenue. In addition, the margin percentage for year ended August 31, 2021 benefited from a $15.8 million favorable resolution of warranty and other loss contingencies associated with our international operations.
Manufacturing operating profit increased $48.9 million for the year ended August 31, 2022 compared to the prior year. The increase in operating profit was primarily attributed to an increase in railcar deliveries.
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Maintenance Services Segment
(In millions) 2022 2021 Increase(Decrease) % Change
Operating profit (%) 6.2 % 2.2 % 4.0 % *
* Not meaningful
Our Maintenance Services segment primarily generates revenue from railcar component manufacturing and servicing and from providing railcar maintenance services.
Maintenance Services revenue increased $49.4 million or 16.6% for the year ended August 31, 2022 compared to the prior year. The increase was primarily attributed to higher volumes due to increased demand and an increase in scrap metal pricing and volume as we scrap wheels and other components.
Maintenance Services cost of revenue increased $41.6 million or 14.8% for the year ended August 31, 2022 compared to the prior year. The increase was primarily due to higher costs associated with an increase in volumes and an increase in material and labor costs.
Maintenance Services margin as a percentage of revenue increased 1.4% for the year ended August 31, 2022 compared to the prior year. The increase in margin percentage was primarily attributed to an increase in volumes and scrap metal pricing. These were partially offset by higher material and labor costs during the year ended August 31, 2022.
Maintenance Services operating profit increased $15.2 million or 233.8% for the year ended August 31, 2022 compared to the prior year. The increase in operating profit was primarily attributed to higher volumes and an increase in scrap metal pricing and lower selling and administrative costs.
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Leasing & Management Services Segment
(In millions) 2022 2021 Increase(Decrease) % Change
* Not meaningful
Our Leasing & Management Services segment generates revenue from leasing railcars from our lease fleet which includes GBX Leasing, providing various management services, syndication revenue associated with new railcar sales with leases attached, interim rent on leased railcars for syndication and the sale of railcars purchased from third parties with the intent to resell. 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 & Management Services revenue increased $14.9 million or 10.8% for the year ended August 31, 2022 compared to the prior year. The increase was primarily attributed to higher syndication revenue from an increase in the volume of new railcar sales with leases attached as well as higher revenue from additions to our lease fleet. In addition, revenue for the year ended August 31, 2021 benefited from a lease modification and transfer fee.
Leasing & Management Services cost of revenue increased $2.1 million or 4.5% for the year ended August 31, 2022 compared to the prior year. The increase was primarily due to an increase in costs from the additions to our lease fleet, partially offset by lower costs associated with railcars we had purchased from third parties with the intent to resell.
Leasing & Management Services margin as a percentage of revenue increased 1.9% for the year ended August 31, 2022 compared to the prior year. The increase in margin percentage was primarily attributed to higher syndication activity. In addition, the margin percentage for the year ended August 31, 2021 was negatively impacted by higher sales of railcars that we purchased from third parties which have lower margin percentages.
Leasing & Management Services operating profit increased $39.4 million or 57.2% for the year ended August 31, 2022 compared to the prior year. The increase was primarily attributed to an increase of $32.5 million net gain on disposition of equipment and higher syndication activity.
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Selling and Administrative
(In millions) 2022 2021 Increase(Decrease) % Change
Selling and administrative expense was $225.2 million or 7.6% of revenue for the year ended August 31, 2022 and $191.8 million or 11.0% of revenue for the year ended August 31, 2021.
The $33.4 million increase was primarily attributed to higher employee related costs as well as higher costs for legal, consulting and travel associated with increased business activity.
Net Gain on Disposition of Equipment
Net gain on disposition of equipment primarily includes the sale of assets from our lease fleet (Equipment on operating leases, net) and disposition of property, plant and equipment. Assets are periodically sold in the normal course of business in order to accommodate customer demand and to manage risk and liquidity.
Net gain on disposition of equipment was $37.2 million and $1.2 million for the years ended August 31, 2022 and 2021, respectively. The increase in Net gain on disposition of equipment was primarily attributed to sales of assets from our lease fleet during the year ended August 31, 2022.
Interest and Foreign Exchange
Interest and foreign exchange expense was composed of the following:
Year Ended August 31, Increase (decrease)
Interest and foreign exchange:
Interest and other expense $ 55.7 $ 44.7 $ 11.0
Foreign exchange (gain) loss 1.7 (1.4 ) 3.1
The $14.1 million increase in interest and foreign exchange expense during the year ended August 31, 2022 compared to the prior year was primarily attributed to an increase in interest expense from higher levels of borrowings and interest rates.
Net Loss on Extinguishment of Debt
Net loss on extinguishment of debt was $6.3 million for the year ended August 31, 2021 relates to the retirement of $227.3 million of our 2.875% convertible notes due 2024 and $50.0 million of our 2.25% convertible notes due 2024.
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Income Tax
In 2022 our income tax expense was $18.1 million on $60.6 million of pre-tax earnings for an effective tax rate of 29.9%. The tax rate was primarily attributable to the geographic mix of earnings, partially offset by net favorable discrete items.
In 2021 our income tax benefit was $40.2 million on $8.6 million of pre-tax loss. The tax benefit was primarily attributable to accelerated depreciation and impact of the CARES Act which allowed us to carry back tax losses to years when tax rates were higher, resulting in a tax benefit. The tax benefit is primarily derived from the U.S. Federal tax rate differential between 2016 - 2017 tax rates of 35% and the current rate of 21%.
The effective tax rate can fluctuate year-to-year due to discrete items and 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 (loss) before income taxes and earnings from unconsolidated affiliates, whereas only our 50% share of the tax is included in Income tax (expense) benefit.
Earnings From Unconsolidated Affiliates
Through unconsolidated affiliates we produce rail and industrial components and have an ownership stake in a railcar manufacturer in Brazil. We record the after-tax results from these unconsolidated affiliates.
Earnings from unconsolidated affiliates was $11.3 million and $3.5 million for the years ended August 31, 2022 and 2021, respectively. The increase was primarily attributable to higher profitability at our Brazil operations.
Net Earnings Attributable to Noncontrolling Interest
Net earnings attributable to noncontrolling interest was $6.9 million and $2.7 million for the years ended August 31, 2022 and 2021, respectively, which primarily represents our joint venture partner's share in the results of operations of our Mexican railcar manufacturing joint ventures, adjusted for intercompany sales, and our European partner’s share of the results of our European operations.
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Liquidity and Capital Resources
Year Ended August 31,
Net cash used in operating activities $ (150.4 ) $ (40.5 )
Net cash used in investing activities (224.0 ) (117.8 )
Net cash provided by (used in) financing activities 244.9 (22.7 )
Effect of exchange rate changes 17.2 10.3
We have been financed through cash generated from operations and borrowings. At August 31, 2022 cash and cash equivalents and restricted cash were $559.1 million, a decrease of $112.3 million from $671.4 million at the prior year end.
Cash Flows From Operating Activities
The change in cash used in operating activities for 2022 compared to 2021 was primarily due to a net increase in working capital as we increased production rates and from higher steel and other input costs. Cash flows from operating activities benefited from a cash tax refund received in 2022.
Cash Flows From Investing Activities
Cash used in investing activities primarily relates to capital expenditures net of proceeds from the sale of assets and investment activity with our unconsolidated affiliates. The change in cash used in investing activities for 2022 compared to 2021 was primarily attributable to an increase in capital expenditures partially offset by an increase in proceeds from the sale of assets. The increase in capital expenditures in 2022 primarily relates to additions to our lease fleet as part of our leasing strategy.
Year Ended August 31,
Capital expenditures:
Leasing & Management Services $ (323.2 ) $ (103.8 )
Maintenance Services (9.2 ) (8.6 )
Total capital expenditures (gross) $ (380.7 ) $ (139.0 )
Proceeds from sale of equipment 155.5 15.9
Total capital expenditures (net of proceeds) $ (225.2 ) $ (123.1 )
Capital expenditures primarily relate to additions to our lease fleet and on-going investments into our facilities, including the safety and productivity of our facilities. Proceeds from the sale of assets primarily relate to sales of railcars from our lease fleet within Leasing & Management Services. Assets from our lease fleet are periodically sold in the normal course of business to accommodate customer demand and to manage risk and liquidity.
Capital expenditures for 2023 are expected to be approximately $240 million for Leasing & Management Services, approximately $80 million for Manufacturing and approximately $10 million for Maintenance Services. Capital expenditures for 2023 primarily relate to additions to our lease fleet reflecting our enhanced leasing strategy and continued investments into the safety and productivity of our facilities.
Cash Flows From Financing Activities
The change in cash provided by (used in) financing activities for 2022 compared to 2021 was primarily attributed to proceeds from the issuance of debt, net of repayments. During the year ended August 31, 2022 we issued asset backed securities of $323.3 million, and used proceeds to pay down our warehouse credit facility for GBX Leasing. We also amended our $200 million term facility to provide an additional $75 million in term debt, with another $75 million available as a delayed draw within the next six months.
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During 2021, we refinanced certain debt by issuing $373.8 million of new convertible notes due 2028 and retiring a total of $277.3 million of convertible notes due 2024. We also renewed and extended our $600.0 million domestic revolving facility, $291.9 million term loan to 2026 and $200.0 million term loan until August 2027. GBX Leasing entered into its initial $300.0 million non-recourse warehouse credit facility, which was increased to $350 million in 2022.
Dividend & Share Repurchase Program
A quarterly dividend of $0.27 per share was declared on October 18, 2022.
The Board of Directors has authorized our company to repurchase shares of our common stock. The share repurchase program has an expiration date of January 31, 2023. The amount remaining for repurchase was $100.0 million as of August 31, 2022. 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. There were no shares repurchased under the share repurchase program during 2022, 2021 or 2020.
Cash, Borrowing Availability and Credit Facilities
As of August 31, 2022, we had $543.0 million in Cash and cash equivalents and $147.9 million in available borrowings. Our current cash balance is part of our strategy to maintain strong liquidity to respond to current uncertainties.
Senior secured credit facilities, consisting of four components, aggregated to $1.14 billion as of August 31, 2022. We had an aggregate of $147.9 million available to draw down under committed credit facilities as of August 31, 2022. This amount consists of $97.3 million available on the North American credit facility, $15.6 million on the European credit facilities and $35.0 million on the Mexican credit facilities.
As of August 31, 2022, a $600.0 million revolving line of credit, maturing August 2026, secured by substantially all of our U.S. assets not otherwise pledged as security for term loans, the warehouse credit facility or the railcar asset-backed securities, was available to provide working capital and interim financing of equipment, principally for the Company’s U.S. and Mexican operations. Advances under this facility bear interest at SOFR plus 1.50% plus 0.10% as a SOFR adjustment or Prime plus 0.50% depending on the type of borrowing. Available borrowings under the credit facility are generally based on defined levels of eligible 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, 2022, a $350.0 million non-recourse warehouse credit facility existed to support the operations of GBX Leasing, a joint venture in which we own approximately 95%. Advances under this facility bear interest at SOFR plus 1.85% plus 0.11% as a SOFR adjustment. The warehouse credit facility converts to a term loan in August 2025 and matures in August 2027. As of August 31, 2022, there were no outstanding borrowings associated with this facility. We intend that GBX Leasing will aggregate leased railcars to obtain term or capital market financing, similar to the securitization in February 2022.
As of August 31, 2022, lines of credit totaling $67.2 million secured by certain of our European assets, with variable rates that range from Warsaw Interbank Offered Rate (WIBOR) plus 1.2% to WIBOR plus 1.6% and Euro Interbank Offered Rate (EURIBOR) plus 1.5%, were available for working capital needs of our European manufacturing operations. The European lines of credit include $40.8 million which are guaranteed by us. European credit facilities are regularly renewed. Currently, these European credit facilities have maturities that range from September 2022 through October 2023.
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As of August 31, 2022, our Mexican railcar manufacturing operations had four lines of credit totaling $120.0 million. The first line of credit provides up to $30.0 million, of which we and our joint venture partner have each guaranteed 50%. Advances under this facility bear interest at LIBOR plus 3.75% to 4.25%. The Mexican railcar manufacturing joint venture will be able to draw amounts available under this facility through June 2024. The second line of credit provides up to $35.0 million, of which we and our joint venture partner have each guaranteed 50%. Advances under this facility bear interest at LIBOR plus 3.75%. The Mexican railcar manufacturing joint venture will be able to draw amounts available under this facility through June 2023. The third line of credit provides up to $50.0 million and matures in October 2024. Advances under this facility bear interest at LIBOR plus 4.25%. The fourth line of credit provided up to $5.0 million and matured September 2022. Advances under this facility bear interest at LIBOR plus 2.95% and are to be used for working capital needs.
As of August 31,
Credit facility balances:
As of August 31, 2022, outstanding commitments under the North American credit facility included letters of credit which totaled $6.9 million.
Other Information
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 financing 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, 2022, 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 convertible notes, borrowings and equity securities, and take other steps to reduce our debt, extend the maturities of 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 of one note or security for another note or security (now or hereafter existing), 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 of each entity, we enter into foreign currency forward exchange contracts with established financial institutions to protect the revenue or margin on a portion of forecasted foreign currency sales and expenses. Given the strong credit standing of the counterparties, no provision has been made for credit loss due to counterparty non-performance.
To mitigate the exposure to changes in interest rates, we have managed a portion of our variable rate debt with interest rate swap agreements, effectively converting $478.7 million of variable rate debt to fixed rate debt as of August 31, 2022.
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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, 2022:
Year Ended August 31,
(1)
A portion of the estimated future cash obligation relates to interest on variable rate borrowings. Amounts are based on interest rates as of August 31, 2022.
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.
Goodwill - In accordance with Accounting Standards Codification (ASC) Topic 350, Intangibles–Goodwill and Other (ASC 350), the Company evaluates goodwill for possible impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company uses a two-step process to assess the realizability of goodwill. The first step is a qualitative assessment that analyzes macroeconomic considerations and industry indicators, financial performance and cost estimates associated with a particular reporting unit. This assessment requires subjectivity based on cumulative information available at the assessment date. If a qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company will proceed to the quantitative second step where the fair value of a reporting unit is calculated based on weighted income and market-based approaches.
If the fair value of a reporting unit is lower than its carrying value, an impairment to goodwill is recorded, not to exceed the carrying amount of goodwill in the reporting unit. We performed our annual goodwill impairment test during the third quarter of 2022 and concluded that goodwill for all reporting units was not impaired.
Pursuant to the authoritative guidance, we make certain estimates and assumptions to determine our reporting units and whether the fair value for each reporting unit is greater than its carry value. The above highlighted judgments contemplated estimates and effects of macroeconomic trends that are inherently uncertain. Changes in these estimates, which may include the effects of inflation and policy reactions thereto, continued increases in pricing of materials and components, or potential macroeconomic events may cause future assessment conclusions to differ.
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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 whether a valuation allowance or uncertain tax position is necessary. In making this assessment, management may analyze future taxable income, reversing temporary differences and/or ongoing tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income. Changes in tax law or court interpretations may result in the recognition of a tax benefit or an additional charge to the tax provision. For further information regarding income taxes, see Note 17 of the Consolidated Financial Statements.
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. For further information regarding the warranty accrual, see Note 11 of the Consolidated Financial Statements.
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. 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.
Judgments used in determining if a liability is estimable are subjective and based on known facts and our historic experience. If further developments in or resolution of an environmental matter result in facts and circumstances that differ from those assumptions used to develop these reserves, the accrual for environmental remediation could be materially understated or overstated. 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. For further information regarding our environmental costs, see Note 21 of the Consolidated Financial Statements.
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 forecasted foreign currency sales and expenses. At August 31, 2022 exchange rates, notional amounts of forward exchange contracts for the purchase of Polish Zlotys and the sale of Euros; and the purchase of Mexican Pesos and the sale of U.S. Dollars aggregated to $73.6 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 of 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, 2022, net assets of foreign subsidiaries aggregated to $146.1 million and a 10% strengthening of the U.S. Dollar relative to the foreign currencies would result in a decrease in equity of $14.6 million, or 1.1% 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 $478.7 million of variable rate debt to fixed rate debt. Notwithstanding these interest rate swap agreements, we are still exposed to interest rate risk relating to our revolving debt and a portion of term debt, which are at variable rates. At August 31, 2022, 79% of our outstanding debt had fixed rates and 21% had variable rates. At August 31, 2022, a uniform 10% increase in variable interest rates would result in approximately $1.4 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.:
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, 2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended August 31, 2022, 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, 2022, 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 28, 2022 expressed an adverse 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 convertible instruments and contracts in the Company’s own equity as of September 1, 2021 due to the adoption of Accounting Standards Update 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.
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 Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates 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 a critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Qualitative goodwill impairment assessment of the Europe Manufacturing and Wheels & Parts reporting units
As discussed in Note 7 to the consolidated financial statements, the goodwill balance as of August 31, 2022 was $127.3 million, of which $27.7 million related to the Europe Manufacturing reporting unit and $43.0 million related to the Wheels & Parts reporting unit. As discussed in Note 2, the Company performs goodwill impairment testing on an annual basis and whenever events or changes in circumstances indicate that the carrying value of a reporting unit likely exceeds its fair value using either a qualitative or a quantitative assessment. If the qualitative assessment is performed and the Company determines that fair value of each reporting unit more likely than not exceeds its carrying value, no further assessment is necessary. For the annual impairment test that occurred during 2022, the Company performed a qualitative assessment to test the goodwill related to its Europe Manufacturing and Wheels & Parts reporting units.
We identified the evaluation of the Company’s qualitative assessment that it was more likely than not the fair value of the Europe Manufacturing and Wheels & Parts reporting units exceeded their carrying values as a critical audit matter. There was subjective auditor judgement in evaluating the impact of (1) macroeconomic considerations, as well as industry and market indicators included in the Company’s goodwill impairment assessment, and (2) the entity-specific financial performance, including management’s current and prior year cost reduction initiatives on the reporting units’ actual financial results.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the goodwill impairment process. This included controls related to the evaluation of the qualitative factors used by the Company to assess the Europe Manufacturing and Wheels & Parts reporting units. We evaluated the Company’s assessment of the macroeconomic considerations, as well as industry and market indicators by comparing them to publicly available industry and market information. We evaluated the entity-specific financial performance, including management’s cost reduction initiatives, by:
•
comparing actual and projected performance to projected results of relevant prior periods, and
•
assessing cost savings resulting from current and prior year actions on the reporting units’ actual financial results.
/s/ KPMG LLP
We have served as the Company’s auditor since 2011.
Portland, Oregon
October 28, 2022
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
As of August 31,
Assets
Cash and cash equivalents $ 543.0 $ 646.8
Leased railcars for syndication 111.1 51.6
Equipment on operating leases, net 770.9 609.8
Property, plant and equipment, net 645.2 670.2
Investment in unconsolidated affiliates 92.5 79.9
Intangibles and other assets, net 189.1 183.6
Liabilities and Equity
Accounts payable and accrued liabilities 725.1 569.8
Deferred income taxes 68.6 73.3
Commitments and contingencies (Notes 20 & 21)
Contingently redeemable noncontrolling interest 27.7 29.7
Equity
Greenbrier
Accumulated other comprehensive loss (45.6 ) (43.7 )
The accompanying notes are an integral part of these financial statements.
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Consolidated Statements of Income
Years ended August 31,
Revenue
Cost of revenue
Net gain on disposition of equipment (37.2 ) (1.2 ) (20.0 )
Other costs
Net loss on extinguishment of debt — 6.3 —
Income tax (expense) benefit (18.1 ) 40.2 (40.2 )
Earnings before earnings from unconsolidated affiliates 42.5 31.6 84.6
Earnings from unconsolidated affiliates 11.3 3.5 3.0
Net earnings attributable to noncontrolling interest (6.9 ) (2.7 ) (38.6 )
Net earnings attributable to Greenbrier $ 46.9 $ 32.4 $ 49.0
Basic earnings per common share $ 1.44 $ 0.99 $ 1.50
Diluted earnings per common share $ 1.40 $ 0.96 $ 1.46
Weighted average common shares
The accompanying notes are an integral part of these financial statements.
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Consolidated Statements of Comprehensive Income
Years ended August 31,
Other comprehensive income (loss)
Translation adjustment (21.6 ) 4.0 (5.6 )
Unrealized gain (loss) on derivative financial instruments 2 15.7 (0.4 ) (7.3 )
Other (net of tax effect) (0.7 ) 0.5 0.7
Comprehensive income attributable to Greenbrier $ 45.0 $ 41.6 $ 41.0
1.
Net of tax effect of ($1.7 million), ($1.7 million) and ($1.5 million) for the years ended August 31, 2022, 2021 and 2020, respectively
2.
Net of tax effect of ($6.2 million), $1.0 million and $2.9 million for the years ended August 31, 2022, 2021 and 2020, respectively
The accompanying notes are an integral part of these financial statements.
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Consolidated Statements of Equity
Attributable to Greenbrier
Other comprehensive loss, net — — — (8.0) (8.0) — (8.0) —
Noncontrolling interest adjustments — — — — — 1.4 1.4 —
Joint venture partner distribution declared — — — — — (37.6) (37.6) —
Noncontrolling interest acquired — — — — — 12.1 12.1 —
Restricted stock awards (net of cancellations) 0.2 2.7 — — 2.7 — 2.7 —
Unamortized restricted stock — (4.9) — — (4.9) — (4.9) —
Restricted stock amortization — 8.7 — — 8.7 — 8.7 —
Cash dividends ($1.06 per share) — — (35.5) — (35.5) — (35.5) —
Other comprehensive income, net — — — 9.1 9.1 — 9.1 —
Noncontrolling interest adjustments — — — — — 2.2 2.2 —
Joint venture partner distribution declared — — — — — (24.6) (24.6) —
Investment by joint venture partner — — — — — 7.0 7.0 —
Restricted stock awards (net of cancellations) 0.2 13.5 — — 13.5 — 13.5 —
Unamortized restricted stock — (16.8) — — (16.8) — (16.8) —
Restricted stock amortization — 14.7 — — 14.7 — 14.7 —
Cash dividends ($1.08 per share) — — (35.7) — (35.7) — (35.7) —
Other comprehensive loss, net — — — (1.9) (1.9) — (1.9) —
Noncontrolling interest adjustments — 2.2 — — 2.2 (6.2) (4.0) —
Joint venture partner distribution declared — — — — — (19.2) (19.2) —
Restricted stock awards (net of cancellations) 0.2 11.3 — — 11.3 — 11.3 —
Unamortized restricted stock — (15.0) — — (15.0) — (15.0) —
Restricted stock amortization — 15.5 — — 15.5 — 15.5 —
Cash dividends ($1.08 per share) — — (35.8) — (35.8) — (35.8) —
The accompanying notes are an integral part of these financial statements.
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Consolidated Statements of Cash Flows
Years ended August 31,
Cash flows from operating activities
Net gain on disposition of equipment (37.2 ) (1.2 ) (20.0 )
Stock based compensation expense 15.5 14.7 9.0
Net loss on extinguishment of debt — 6.3 —
Accretion of debt discount — 7.1 5.5
Noncontrolling interest adjustments 1.6 2.3 1.4
Decrease (increase) in assets:
Leased railcars for syndication (40.6 ) (11.9 ) (12.9 )
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 165.3 109.9 (108.8 )
Net cash provided by (used in) operating activities (150.4 ) (40.5 ) 272.2
Cash flows from investing activities
Investment in and advances to unconsolidated affiliates (2.3 ) — (1.8 )
Cash distribution from unconsolidated affiliates and other 3.5 5.3 12.7
Net cash provided by (used in) investing activities (224.0 ) (117.8 ) 27.5
Cash flows from financing activities
Repayments of revolving notes with maturities longer than 90 days — (287.0 ) —
Proceeds from issuance of notes payable 398.3 391.9 —
Repayments of notes payable (23.4 ) (337.8 ) (30.2 )
Debt issuance costs (7.3 ) (22.0 ) —
Repurchase of stock — (20.0 ) —
Cash distribution to joint venture partner (16.9 ) (25.3 ) (38.9 )
Investment by joint venture partner — 7.0 —
Tax payments for net share settlement of restricted stock (3.7 ) (3.3 ) (2.2 )
Net cash provided by (used in) financing activities 244.9 (22.7 ) 216.5
Effect of exchange rate changes 17.2 10.3 (12.6 )
Cash and cash equivalents and restricted cash
Balance Sheet Reconciliation
Cash (received) paid during the period for
Non-cash activity
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; Maintenance Services; and Leasing & Management 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 Maintenance Services segment performs wheel and axle servicing, railcar maintenance and produces a variety of parts for the rail industry in North America. The Leasing & Management Services segment, which includes GBX Leasing, owns approximately 12,200 railcars as of August 31, 2022. The Company also provides management services for approximately 408,000 railcars for railroads, shippers, carriers, institutional investors and other leasing and transportation companies in North America as of August 31, 2022. Through unconsolidated affiliates the Company produces rail and industrial components and has an ownership stake in a railcar manufacturer inBrazil.
In 2022 the Company renamed two of its reportable segments to more prominently display the nature of the customer solutions it provides and markets in which it operates. The new names of its reportable segments are Manufacturing (unchanged), Maintenance Services (previously Wheels, Repair & Parts), and Leasing & Management Services (previously Leasing & Services). The name changes have no impact on the organization’s reporting structure nor on financial information previously reported. Separately, effective September 1, 2021, the Company changed its measurement basis for allocating syndication revenue between the Manufacturing and Leasing & Management Services reportable segments. This change in measurement reflects the information currently used by management to assess the Company's operating performance in accordance with its refined leasing strategy and has no impact to the Company’s total consolidated revenue. Segment results for the prior periods have been recast to conform to the current period presentation.
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; Maintenance Services;and Leasing & Management 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. 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 $57.4 million, $35.8 million and $39.8 million as of August 31, 2022, 2021 and 2020, 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 relates to amounts held to support a target minimum rate of return on certain agreements, terms of our credit agreement, and a pass through account for activity related to management services provided for certain third party customers.
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Accounts receivable - Accounts receivable consists of receivables from customers and receivables from related parties (see Note 16 - Related Party Transactions) and is stated net of allowance for doubtful accounts of $2.3 million and $2.4 million as of August 31, 2022 and 2021, respectively.
As of August 31,
Allowance for doubtful accounts
Balance at beginning of period $ 2.4 $ 2.7 $ 2.2
Additions, net of reversals 0.4 0.6 1.7
Currency translation effect (0.2 ) (0.1 ) 0.1
Balance at end of period $ 2.3 $ 2.4 $ 2.7
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 in transit or not on lease.
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.
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 forty years. Management periodically reviews useful lives and 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 in certain investees which are accounted for under the equity method of accounting as the Company has determined that the investment provides the Company with the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee of at least 20%. Several factors are considered in determining whether the equity method of accounting is appropriate including the relative ownership interests and governance rights of the joint venture partners.
As of August 31, 2022, selected investments in unconsolidated affiliates include the Company’s 60% interest in Greenbrier-Maxion, 29.5% interest in Amsted-Maxion Cruzeiro (which owns 40% of Greenbrier-Maxion), 40% interest in Greenbrier Railcar Funding I LLC and 41.9% interest in Axis, LLC.
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
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 nonqualified savings plan investments, and revolving note fees which are capitalized and amortized as interest expense over the life of the related borrowings.
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Impairment of long-lived assets- When changes in circumstances indicate the carrying amount of certain long-lived asset groups 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, 2022, 2021 and 2020.
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 indicators of impairment arise. 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 the Company 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 the Company performs 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 7 – Goodwill for additional information.
Warranty accruals -Warranty costs are estimated and charged to operations to cover a defined warranty period. The estimated warranty cost is based on history of warranty claims for each particular product type. For new product types without a warranty history, preliminary estimates are based on historical information for similar product types. The warranty accruals, included in Accounts payable and accrued liabilities, are reviewed periodically and updated based on warranty trends.
Income taxes- The 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.
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. Astra Rail 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. During 2022, the option was extended to be exercisable 30 business days prior to and up until June 1, 2026. 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. 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.
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.
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Net earnings attributable to noncontrolling interest on the Company’s Consolidated Statement of Income represents the Company’s partners’ share of results from operations.
Accumulated other comprehensive loss – Accumulated other comprehensive loss, net of tax as appropriate, consisted of the following:
Amounts reclassified from accumulated other comprehensive loss 4.7 — — $ 4.7
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,
(In millions) 2022 2021 Financial Statement Caption
(Gain) loss on derivative financial instruments:
Foreign exchange contracts $ 1.2 $ 1.4 Revenue and Cost of revenue
Interest rate swap contracts 4.9 5.3 Interest and foreign exchange
6.1 6.7 Total before tax
(1.4 ) (1.7 ) Tax expense
$ 4.7 $ 5.0 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. When estimates of total costs to be incurred on a contract exceed total revenue, the expected loss is recorded in the period in which the loss is determined.
Maintenance Services
The Company operates a network of facilities in North America that provide complete wheelset reconditioning and maintenance 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.
Maintenance 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 servicing the railcars for the customer. Maintenance services are typically completed in less than 90 days.
Leasing & Management Services
The Company owns a fleet of new and used railcars which are leased to third-party customers. Lease revenue is recognized over the lease-term in the period in which it is earned.
Syndication transactions represent new and used railcars which have been placed on lease to a customer and which the Company sells to an investor with the lease attached. At the time of such sale, revenue and cost of revenue is allocated between the Manufacturing segment and Leasing & Management Services segment based on the relative standalone selling price of the product and services provided. 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 & Management Services segment.
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 debt issuance costs, and external interest expense.
Year Ended August 31,
Interest and foreign exchange:
Interest and other expense $ 55.7 $ 44.7 $ 42.4
Foreign exchange (gain) loss 1.7 (1.4 ) 1.2
Forward exchange contracts- Foreign operations give rise to risks from fluctuations 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, 2022, 2021 and 2020 were $5.4 million, $6.3 million and $5.8 million, respectively, included in Selling and administrative expenses.
Net earnings per share- Basic earnings per common share (EPS) is calculated using weighted average basic common shares outstanding, which include restricted stock grants and restricted stock units that are considered participating securities when the Company is in a net earnings position.
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Diluted EPS is calculated using the if-converted method, associated with shares underlying the 2024 and 2028 2.875% Convertible notes, and the treasury stock method associated with restricted stock units that are not considered participating securities and performance based restricted stock units subject to performance criteria.
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 and restricted stock awards. The fair value of awards is measured using the number of shares granted multiplied by the closing share price on the grant date. Stock based compensation expense for the years ended August 31, 2022, 2021 and 2020 was $15.5 million, $14.7 million and $9.0 million, respectively and was recorded in Selling and administrative and Cost of revenue on the Consolidated Statements of Income.
Restricted stock units and restricted stock awards are accounted for as equity based awards (see Note 14 - Equity).
Management estimates -The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires judgment on the part of management to arrive at estimates and assumptions on matters that are inherently uncertain. These estimates may affect the amount of assets, liabilities, revenues 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
Lease accounting
On September 1, 2019, the Company adopted Accounting Standards Update 2016-02, Leases and related amendments (Topic 842). Upon adoption, the Company recorded a cumulative-effect adjustment of $4.4 million as an increase to retained earnings. Under the short term lease recognition exemption, the Company does not recognize ROU assets or lease liabilities for qualifying leases with terms of less than twelve months. The Company does not separate lease and non-lease components. The Company utilizes both Topic 842 and Accounting Standards Codification 606, Revenue from Contracts with Customers (Topic 606) when evaluating retained risk of services and other performance obligations in conjunction with selling railcars with a lease attached as part of the syndication model.
Derivatives and Hedging
In August 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). The Company adopted this guidance effective September 1, 2019 and it did not have a material impact on its consolidated financial statements.
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). The Company adopted this guidance using a modified retrospective approach through a cumulative effect adjustment, which decreased opening retained earnings by $0.5 million on September 1, 2020.
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Convertible Instruments and Contracts in an Entity’s Own Equity
In August 2020, the FASB issued Accounting Standard Update 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for certain convertible instruments, amends guidance on derivative scope exceptions for contracts in an entity’s own equity and modifies the guidance on diluted EPS calculations as a result of these changes. The Company adopted this guidance effective September 1, 2021 on a modified retrospective basis and recorded a cumulative effect adjustment to increase Retained earnings by $5 million. The impact of adoption also resulted in a reduction to Additional paid in capital of approximately $59 million related to amounts attributable to conversion options that had previously been recorded in equity and the associated derecognition of related deferred tax liabilities of $17 million. Additionally, the Company recorded an increase to its convertible notes balance by an aggregate amount of approximately $71 million as a result of derecognizing the debt discount. The adoption of this guidance also decreased the amount of non-cash interest expense to be recognized in future periods as a result of eliminating the discount associated with the equity component. The Company did not incur any impact to liquidity or cash flows. Beginning September 1, 2021, when calculating net earnings attributable to Greenbrier per share of common stock, the Company uses the if-converted method as required under ASU 2020-06 to determine the dilutive effect of its convertible notes.
Simplification of Accounting for Income Taxes
In December 2019, the FASB issued Accounting Standard Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 for: recognizing deferred taxes for investments, performing intra-period allocations and calculating taxes in interim periods. The ASU also improves consistent application of GAAP for other areas of Topic 740 by clarifying and amending existing guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The Company adopted this guidance September 1, 2021 with no impact to the Company's consolidated financial statements. The ongoing application of ASU 2019-12 is not expected to materially impact the Company's consolidated financial statements.
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of Effects of Reference Rate Reform on Financial Reporting, which provides practical expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The elective amendments provide expedients to contract modification, affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by this guidance apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued as a result of reference rate reform. This guidance is not applicable to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The guidance can be applied immediately through December 31, 2022. During the fourth quarter of fiscal year 2022, the Company adopted the optional relief guidance provided under this ASU after modifying certain debt to update the reference rate from LIBOR to SOFR. This caused a temporary mismatch in our interest rate swap and debt for a period of time. The application of this expedient preserves the presentation of the derivatives consistent with past presentation. The Company will continue to assess the impact of the guidance and may apply other elections as applicable going forward.
Note 3 – Asset Backed Securities
GBX Leasing 2022-1 LLC (GBXL I) was formed as a wholly owned special purpose entity (SPE) of GBX Leasing to securitize the leasing assets of GBX Leasing. On February 9, 2022, GBXL I (Issuer) issued $323.3 million of term notes secured by a portfolio of railcars and associated operating leases and other assets, acquired and owned by GBXL I. Greenbrier Management Services, LLC (GMS) entered into certain agreements relating to the management and servicing of the Issuer’s assets. The Company used the net proceeds received from the issuance of the term notes to pay down the GBX Leasing warehouse credit facility.
The Company evaluated the accounting for the transaction and concluded that, based on its equity investment in the Issuer combined with GMS’s capacity as servicer, the Company is the primary beneficiary of the SPE and will consolidate the SPE for financial reporting purposes.
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Issued debt includes $302.6 million of GBXL I Series 2022-1 Class A Secured Railcar Equipment Notes (Class A Notes) and $20.7 million of GBXL I Series 2022-1 Class B Secured Railcar Equipment Notes (Class B Notes), collectively the GBXL Series 2022-1 Notes (the GBXL Notes). The GBXL Notes bear interest at fixed rates of 2.87% and 3.45% for the Class A Notes and Class B Notes, respectively. The GBXL Notes are payable monthly and have a legal maturity date of February 20, 2052. The Company incurred $5.0 million in debt issuance costs, which will be amortized to interest expense through the expected repayment period. Both Class A and Class B Notes have an anticipated repayment date of January 20, 2029 and a legal maturity date. While the legal maturity date is in 2052, the cash flows generated from the railcar assets will pay down the GBXL Notes in line with the agreement, which based on expected cash flow payments, would result in repayment in advance of the legal maturity date. If the principal amount of the GBXL Notes has not been repaid in full by the anticipated repayment date, then the Issuer will also be required to pay additional interest to the holders at a rate equal to 4.00% per annum.
The GBXL Notes are obligations of the Issuer only and are nonrecourse to Greenbrier. The GBXL Notes are subject to a Master Indenture between the Issuer and U.S. Bank Trust Company, National Association, as trustee, as supplemented by a Series 2022-1 Supplement dated February 9, 2022. The GBXL Notes may be subject to acceleration upon the occurrence of certain events of default.
The following table summarizes the Issuer's net carrying amount of the assets transferred and the related debt.
As of August 31,
Assets
Restricted cash $ 6.9
Equipment on operating leases, net 401.8
Liabilities
Notes payable, net $ 312.8
Note 4 – Revenue Recognition
Contract balances
Contract assets primarily consist of unbilled receivables related to marine vessel construction and railcar maintenance services, for which the respective contracts do not yet permit billing at the reporting date. Contract liabilities primarily 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:
Contract assets Accounts receivable, net $ 13.0 $ 5.9 $ 7.1
Contract assets Inventories $ 6.0 $ 6.7 $ (0.7 )
Contract liabilities 1 Deferred revenue $ 30.5 $ 36.4 $ (5.9 )
1 Contract liabilities balance includes deferred revenue within the scope of Topic 606.
For the years ended August 31, 2022 and 2021 the Company recognized $16.4 million and $7.4 million of revenue, respectively, that was included in Contract liabilities as of August 31, 2021 and 2020.
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Performance obligations
As of August 31, 2022, 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.
Revenue type:
Manufacturing – Railcar sales $ 2,634.0
Manufacturing – Marine $ 30.9
Manufacturing – Conversions $ 183.6
Manufacturing – Railcars intended for syndication 1 $ 623.7
1 Not a performance obligation as defined in Topic 606
Based on current production and delivery schedules and existing contracts, approximately $2.1 billion of the Railcar sales amount is expected to be recognized in the next 12 months while the remaining amount is expected to be recognized through 2024. The table above excludes estimated revenue to be recognized at the Company’s Brazilian manufacturing operations, 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 2023 as vessel construction is completed.
Services includes management and maintenance services of which approximately 54% are expected to be performed through 2027 and the remaining amount through 2037.
Note 5 — Inventories
As of August 31,
Manufacturing supplies and raw materials $ 570.2 $ 352.8
Excess and obsolete adjustment (14.1 ) (19.9 )
As of August 31,
Excess and obsolete adjustment
Balance at beginning of period $ 19.9 $ 24.2 $ 9.5
Charge to cost of revenue 1.5 0.8 18.0
Disposition of inventory (6.9 ) (5.0 ) (3.6 )
Currency translation effect (0.4 ) (0.1 ) 0.3
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Note 6 — Property, Plant and Equipment, net
As of August 31,
Land and improvements $ 88.4 $ 94.6
Construction in progress 55.3 50.0
Accumulated depreciation (596.7 ) (556.1 )
Depreciation expense was $70.7 million, $75.3 million and $86.6 million for the years ended August 31, 2022, 2021 and 2020, respectively.
Note 7 — Goodwill
Changes in the carrying value of goodwill are as follows:
Translation and other adjustments (4.5 ) (0.3 ) — (4.8 )
(In millions) Goodwill
Accumulated goodwill impairment losses (138.2 )
Accumulated other reductions (24.6 )
The Company performed its annual goodwill impairment test during the third quarter. For the annual impairment test during the third quarter of 2022, the Company utilized the qualitative assessment allowable under ASC 350 Intangibles – Goodwill and Other to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic considerations and industry indicators, financial performance and cost estimates associated with a particular reporting unit. If based on a review of qualitative factors, it is more likely than not that the fair value of a reporting unit is less than its carrying value, a quantitative impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. Based on our review of the qualitative factors, the Company determined for all three of our reporting unit goodwill balances that a quantitative impairment analysis was not necessary, primarily as a result of positive market indicators and entity-specific financial performance during the assessment period.
As of August 31, 2022, our Manufacturing segment includes the North America Manufacturing reporting unit with a goodwill balance of $56.6 million and the Europe Manufacturing reporting unit with a goodwill balance of $27.7 million. The Maintenance Services segment had a goodwill balance of $43.0 million related to the Wheels & Parts reporting unit.
Based on the results of the Company’s annual impairment test, the Company concluded that goodwill was not impaired.
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Note 8 — 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,
Intangible assets subject to amortization:
Customer and supplier relationships $ 87.5 $ 89.8
Accumulated amortization (66.1 ) (64.1 )
Other intangible assets 42.4 40.3
Accumulated amortization (16.5 ) (13.0 )
Intangible assets not subject to amortization 2.4 2.4
Prepaid and other assets 32.4 26.7
Operating lease ROU assets 54.2 39.8
Nonqualified savings plan investments 40.3 47.7
Debt issuance costs, net 8.7 8.6
Assets held for sale 3.8 5.4
Amortization expense for the years ended August 31, 2022, 2021 and 2020 was $9.3 million, $11.6 million and $11.0 million, respectively. As of August 31, 2022, amortizable intangible assets had a weighted-average remaining useful life of 8 years. Amortization expense for the years ending August 31, 2023, 2024, 2025, 2026 and 2027 is expected to be $8.5 million, $7.6 million, $7.2 million, $6.0 million and $5.3 million, respectively.
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Note 9 — Revolving Notes
Senior secured credit facilities, consisting of four components, aggregated to $1.14 billion as of August 31, 2022.
As of August 31, 2022, a $600.0 million revolving line of credit, maturing August 2026, secured by substantially all the Company’s U.S. assets not otherwise pledged as security for term loans, the warehouse credit facility or the railcar asset-backed securities, existed to provide working capital and interim financing of equipment, principally for the Company’s U.S. and Mexican operations. Advances under this North American credit facility bear interest at SOFR plus 1.50% plus 0.10% as a SOFR adjustment or Prime plus 0.50% depending on the type of borrowing. Available borrowings under the credit facility are generally based on defined levels of eligible 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, 2022, a $350.0 million non-recourse warehouse credit facility existed to support the operations of GBX Leasing, a joint venture in which the Company owns approximately 95%. Advances under this facility bear interest at SOFR plus 1.85% plus 0.11% as a SOFR adjustment. The warehouse credit facility converts to a term loan in August 2025 which matures in August 2027.
As of August 31, 2022, lines of credit totaling $67.2 million secured by certain of the Company’s European assets, with variable rates that range from Warsaw Interbank Offered Rate (WIBOR) plus 1.2% to WIBOR plus 1.6% and Euro Interbank Offered Rate (EURIBOR) plus 1.5%, were available for working capital needs of the Company’s European manufacturing operations. The European lines of credit include $40.8 million which are guaranteed by the Company. European credit facilities are regularly renewed. Currently, these European credit facilities have maturities that range from February 2023 through October 2023.
As of August 31, 2022, the Company’s Mexican railcar manufacturing operations had four lines of credit totaling $120.0 million. The first line of credit provides up to $30.0 million, of which the Company and its joint venture partner have each guaranteed 50%. Advances under this facility bear interest at LIBOR plus 3.75% to 4.25%. The Mexican railcar manufacturing joint venture will be able to draw amounts available under this facility through June 2024. The second line of credit provides up to $35.0 million, of which the Company and its joint venture partner have each guaranteed 50%. Advances under this facility bear interest at LIBOR plus 3.75%. The Mexican railcar manufacturing joint venture will be able to draw amounts available under this facility through June 2023. The third line of credit provides up to $50.0 million and matures in October 2024. Advances under this facility bear interest at LIBOR plus 4.25%. The fourth line of credit provided up to $5.0 million and matured September 2022. The interest rate under this facility was LIBOR plus 2.95%.
As of August 31,
Credit facility balances:
In addition, outstanding commitments under the North American credit facility included letters of credit which totaled $6.9 million and $8.4 million as of August 31, 2022 and 2021, respectively.
As of August 31, 2022, the Company had an aggregate of $147.9 million available to draw down under committed credit facilities.
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Note 10 — Accounts Payable and Accrued Liabilities
As of August 31,
Operating lease liabilities 56.4 42.6
Accrued payroll and related liabilities 140.4 125.1
Note 11 — Warranty Accrual
As of August 31,
Balance at beginning of period $ 27.9 $ 45.2 $ 46.7
Charged to cost of revenue 5.0 (8.0 ) 4.0
Currency translation effect (1.0 ) (0.1 ) 0.7
Note 12 — Notes Payable, net
As of August 31,
Other notes payable 1.2 1.7
Debt discount and issuance costs (1) (21.1 ) (89.0 )
(1)
As described in Note 2 – Summary of Significant Accounting Policies, effective September 1, 2021, the debt discount associated with convertible senior notes was derecognized upon adoption of ASU 2020-06 using the modified retrospective approach. Financial results for 2021 were not adjusted. See discussion below for additional information.
Term loans are primarily composed of:
•
$291.9 million of senior term debt, with a maturity date of August 2026. The debt bears a floating interest rate of SOFR plus 1.5% plus 0.10% as a SOFR adjustment with principal of $3.65 million paid quarterly in arrears and a balloon payment of $222.6 million due at maturity. Interest rate swap agreements cover 75% of the principal balance to swap the floating interest rate to a fixed rate. The principal balance as of August 31, 2022 was $280.9 million.
•
$275.0million of senior term debt, with a maturity date of August 2027, which is secured by a pool of leased railcars. The original $200 million term debt agreement was amended on July 29, 2022 to provide for an incremental $75 million term loan and an additional $75 million available as a delayed draw until January 2023, subject to satisfaction of certain conditions. The debt bears a floating interest rate of SOFR plus 1.375% plus 0.10% as a SOFR adjustment, with principal of $2.4 million paid quarterly in arrears and a balloon payment of $219.9 million due at maturity. Interest rate swap agreements cover 100% of the principal balance to swap the floating interest rate to a fixed rate. The principal balance as of August 31, 2022 was $268.0 million.
•
$323.3 million of senior term debt, which is secured by a portfolio of railcars and associated operating leases and other assets, acquired, and owned by GBXL I. See Note 3 – Asset Backed Securities for additional information. The principal balance as of August 31, 2022 was $318.6 million.
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Convertible senior notes, due 2028 (2028 Convertible Notes), bear interest at a fixed rate of 2.875%, paid semiannually in arrears on April 15th and October 15th. Issuance costs are amortized using the effective interest rate method through 2028 and the amortization expense is included in Interest and Foreign exchange on the Company's Consolidated Statement of Income. As of August 31, 2022, the effective interest rate was 5.75%. The convertible notes mature on April 15, 2028, unless earlier repurchased, redeemed or converted in accordance with their terms prior to such date. The convertible notes are senior unsecured obligations and rank equally with other senior unsecured debt. The notes are convertible into shares of the Company’s common stock, at an initial conversion rate of 18.0317 shares of common stock per $1,000 principal amount which is equivalent to an initial conversion price of approximately $55.46 per share. The conversion rate and the resulting conversion price are subject to adjustment in certain events, such as distributions, dividends or stock splits. Conversion of the par value of the note will be settled in cash, with any premium convertible in cash or shares at the Company’s option. Upon a conversion of the notes, the Company may elect to pay or deliver, as the case may be, cash and, if applicable, shares of the Company’s common stock, as provided in the 2028 Notes Indenture (as defined below). As of August 31, 2022, the Company has reserved approximately 8.8 million shares for issuance upon conversion of these notes.
The 2028 Convertible Notes are subject to an indenture entered into on April 20, 2021 by the Company and Wells Fargo Bank, National Association, as trustee, as amended and restated by the first supplemental indenture dated June 1, 2021 (2028 Notes Indenture). The 2028 Convertible Notes are convertible at the option of the holders prior to January 15, 2028, under certain circumstances as described in the 2028 Notes Indenture. Additionally, the Company may elect to call the notes on or after April 15, 2025 and on or before the 40th trading day prior to April 15, 2028, at a cash redemption price described in the 2028 Notes Indenture if the stock price exceeds 130% of the conversion price during certain trading days as defined in the 2028 Notes Indenture. Calling any Convertible Note for redemption will constitute a make-whole fundamental change with respect to that Convertible Note, in which case the conversion rate applicable to the conversion of that Convertible Note will be increased in certain circumstances if it is converted after it is called for redemption.
Convertible senior notes, due 2024 (2024 Convertible Notes), bear interest at a fixed rate of 2.875%, paid semi-annually in arrears on February 1st and August 1st. Issuance costs are amortized using the effective interest rate method through 2024 and the amortization expense is included in Interest and Foreign exchange on the Company's Consolidated Statement of Income. As of August 31, 2022, the effective interest rate was 4.99%. 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. As of August 31, 2022 the Company has reserved approximately 1.1 million shares for issuance upon conversion of these notes.
As described in Note 2 – Summary of Significant Accounting Policies, effective September 1, 2021, the Company adopted ASU 2020-06 using the modified retrospective approach under which financial results reported in prior periods were not adjusted. Prior to the adoption of the standard, the convertible notes were separated into liability and equity components with an associated debt discount. The debt discount was amortized using the effective interest rate method over the term of the convertible notes until September 1, 2021, when the debt discount associated with these convertible notes was derecognized.
Other notes payable includes $1.2 million of unsecured debt with maturity dates ranging from February 2023 to February 2027.
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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, 2022, principal payments on the notes payable are expected as follows:
(In millions)
Year ending August 31,
(1)
The repayment of the $47.7 million of 2024 Convertible Notes due February 2024 and the $373.8 million of 2028 Convertible Notes due April 2028 is assumed to occur at the scheduled maturity instead of assuming an earlier conversion by the holders.
Note 13 — 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, 2022 exchange rates, notional amounts of forward exchange contracts for the purchase of Polish Zlotys and the sale of Euros; and the purchase of Mexican Pesos and the sale of U.S. Dollars aggregated to $73.6 million. The fair value of the contracts is included on the Consolidated Balance Sheets as Accounts payable and accrued liabilities when in a loss position, or as Accounts receivable, net when in a gain position. As the contracts mature at various dates through October 2023, any such gain or loss remaining will be recognized in manufacturing revenue or cost of 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, 2022 exchange rates, approximately $3.5 million loss would be reclassified to revenue or cost of revenue in the next year.
At August 31, 2022, interest rate swap agreements maturing from September 2023 through January 2032 had notional amounts that aggregated to $478.7 million. The fair value of the contracts are included on the Consolidated Balance Sheets in Accounts payable and accrued liabilities when in a loss position, or in Accounts receivable, net when in a gain position. 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, 2022 interest rates, approximately $6.4 million would be credited to interest expense in the next year.
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Fair Values of Derivative Instruments
Asset Derivatives Liability Derivatives
August 31, August 31,
Derivatives designated as hedging instruments
Derivatives not designated as hedging instruments
The Effect of Derivative Instruments on the Consolidated Statements of Income
The following table presents the amounts in the Consolidated Statements of Income in which the effects of the cash flow hedges are recorded and the effects of the cash flow hedge activity on these line items for the years ended August 31, 2022, 2021 and 2020:
For the Year Ended August 31,
Note 14 — Equity
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Stock Incentive Plan
The 2021 Stock Incentive Plan was approved by shareholders on January 6, 2021. The new plan replaced the 2014 Amended and Restated Stock Incentive Plan, which was amended and restated as the 2017 Amended and Restated Stock Incentive Plan on October 24, 2017 and approved by shareholders on January 5, 2018. The 2021 Stock Incentive Plan provides for the grant of incentive stock options, non-statutory stock options, restricted shares, restricted stock units and stock appreciation rights. In addition to the 1,500 thousand shares reserved for issuance under the 2021 Stock Incentive Plan, up to 466 thousand shares previously reserved for issuance, but not issued or subject to outstanding awards, are available for issuance under the 2021 Stock Incentive Plan, and up to 884 thousand shares that were subject to outstanding awards under the 2017 Amended and Restated Stock Incentive Plan as of the effective date of the 2021 Stock Incentive Plan will also become available for issuance under the 2021 Stock Incentive Plan to the extent such shares are not issued and cease to be subject to such awards following the effective date of the 2021 Stock Incentive Plan.
On August 31, 2022, there were 1,394 thousand shares available for grant compared to 1,618 thousand and 466 thousand shares available for grant as of the years ended August 31, 2021 and 2020, respectively. There are no stock options or stock appreciation rights outstanding as of August 31, 2022. The Company currently grants restricted stock units. Shares associated with restricted stock unit awards are not considered legally outstanding shares of common stock until they are issued following vesting. Restricted stock unit awards, including performance-based awards, some of which 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, 2022, 2021 and 2020, the Company awarded restricted share and restricted stock unit grants totaling 391 thousand, 538 thousand, and 470 thousand shares, respectively, which include performance-based grants and dividend equivalent rights. As of August 31, 2022, there were a total of 653 thousand 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 653 thousand additional shares may be granted if performance-based restricted stock unit awards vest at maximum levels of performance. These additional shares are associated with restricted stock unit awards granted during the years ended August 31, 2022, 2021 and 2020. The fair value of awards granted was $18.7 million, $18.0 million, and $14.5 million for the years ended August 31, 2022, 2021 and 2020, respectively. The fair value of awards granted is determined based on the market closing price of the underlying shares on the date of grant.
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, 2022, 2021 and 2020 was $15.5 million, $14.7 million, and $8.7 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 unit grants was $12.8 million as of August 31, 2022.
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Total unvested restricted share and restricted stock unit grants were 1,042 thousand and 1,024 thousand as of August 31, 2022 and 2021, respectively. During the year ended August 31, 2022, a total of 290 thousand restricted stock units vested, including shares that were withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements. The following table summarizes restricted share and restricted stock unit grant transactions for shares, both vested and unvested, under the 2021 Stock Incentive Plan and the 2017 Amended and Restated Stock Incentive Plan:
(In thousands) Shares