Item 1A. RISK FACTORS
The following risks could materially and adversely affect our business, financial condition, operating results, liquidity and cash flows, prospects, and stock price. These risks do not identify all risks that we face; other factors, events, or uncertainties currently unknown to us or that we currently do not consider to present significant risks to our business or that emerge in the future could affect us adversely.
Risks Related to Our Business
An economic downturn and economic uncertainty may adversely affect demand for our products and services.
Our customers are often able to delay replacing rail equipment during economic downturns. Factors affecting the level of customer spending for our products and services include general economic conditions, such as inflation, and other factors such as business confidence in future economic conditions, fears of recession, and the availability and cost of efficient capital, among other factors. Worldwide economic conditions remain uncertain. As global economic conditions continue to be volatile or economic uncertainty increases, trends in business spending may become increasingly unpredictable and subject to reductions and fluctuations. Unfavorable economic conditions may lead our customers to delay or reduce purchases of our products and services, result in lower sales volumes, lower prices, lower lease utilization rates, and decreased revenues and profits.
Shortages of skilled labor, increased labor costs, or failure to maintain good relations with our workforce could adversely affect our operations.
We depend on skilled labor in all areas of our business. Some of our facilities are located in areas where demand for skilled labor often exceeds supply. A shortage of some types of skilled labor such as welders and machine operators would restrict our ability to maintain or increase production rates, lead to production inefficiencies and increase our labor costs. Due to the competitive nature of the labor markets in which we operate and the cyclical nature of the railcar industry, the resulting employment cycle increases our risk of not being able to recruit, train and retain the employees we require at efficient costs and on reasonable terms, particularly when competition for such skilled labor increases. If we lose our reputation as a leader in safety among our industry peers, we may become less competitive in our efforts to attract such skilled labor. Further, we are party to collective bargaining agreements with labor unions at some of our operating sites. Disputes with labor unions, could result in, among other things, strikes, work stoppages or other slowdowns which could cause a significant disruption of our operations and increase our ongoing labor costs. We cannot be assured that our relations with our workforce will remain positive. If we are unable to recruit, train and retain adequate numbers of qualified employees and third-party labor providers on a timely basis or at a reasonable cost or on reasonable terms, our business and results of operations could be adversely affected.
Increases in the price of materials and components used in the production of ourproducts could negatively impact our profit margin on the sale of our products.
A significant portion of our business depends on the adequate supply of steel, other raw materials, and energy, as well as numerous specialty parts and components, such as brakes, wheels, side frames, bolsters, and bearings for the railcar business, at cost-effective prices. The cost of steel and all other materials used in the production of our railcars represents more than half of our direct manufacturing costs per railcar. If we are not able to purchase materials and energy at competitive prices, our ability to produce and sell our products on a cost-effective basis could be adversely impacted which, in turn, could adversely affect our revenue and profitability.
Disruptions in the supply of materials and components used in the production of ourproducts could negatively impact our business and results of operations.
Certain materials for our products are currently available from a limited number of suppliers and, as a result, we may have limited control over pricing, availability, and delivery schedules. Additionally, factors beyond our control, including adverse political conditions, trade embargoes, increased tariffs or import duties, inclement weather, natural disasters, pandemics, terrorism and labor disputes may adversely impact our supply chain, particularly if these conditions or disputes result in work slowdowns, lockouts, strikes, facility closures, or related disruptions. The inability to purchase a sufficient quantity of materials on a timely basis could create disruptions in our production and result in delays while we attempt to engage alternative suppliers. Any such disruption or conditions could harm our
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business and adversely impact our results of operations. The loss of suppliers or their inability to meet our price, quality, quantity and delivery requirements could have an adverse effect on our ability to manufacture and sell our products on a cost-effective basis.
If we or our joint ventures fail to complete capital expenditure projects on time and within budget, or if these projects, once completed, fail to operate as anticipated, or fail to improve the efficiencies of our operations, or to generate additional revenue as anticipated, such failure could adversely affect our business, financial condition and results of operations.
From time-to-time, we, or our joint ventures, undertake strategic capital projects in order to enhance, expand and/or upgrade facilities and operational capabilities including by insourcing production of certain components in our manufacturing operations. Our ability, and our joint ventures’ respective abilities, to complete these projects on time and within budget, and for us to realize the anticipated increased revenues or lower costs, as applicable, or otherwise realize acceptable returns on these investments or other strategic capital projects that may be undertaken are subject to a number of risks. Many of these risks are beyond our control, including a variety of market, operational, permitting, and labor related factors. In addition, the cost to implement any given strategic capital project ultimately may prove to be greater than originally anticipated. If we, or our joint ventures, are not able to achieve the anticipated results from the implementation of any of these strategic capital projects, or if unanticipated implementation costs are incurred, our business, financial condition and results of operations may be adversely affected. In addition, if we are unable to perform insourced functions better than, or at least as well as, our third-party providers, our business may be harmed.
Our business and financial results of operations could be materially and adversely impacted if we fail to adequately manage and respond to events that cause an interruption or interference in our business operations.
Business resiliency is important to our success. Natural and human-made events and circumstances may delay our ability to deliver products and services to our customers, increase our operating costs, decrease our margins, and adversely impact our results of operations. Such events include, but are not limited to, security breaches, disruptions or failures in our information-technology systems, physical damage to our facilities (including fires, structural failures, power outages or other events), the unavailability of labor, actions or non-action by governmental agencies that prevent or hinder us from operating our business, meeting our contractual obligations, and converting backlog to revenue. The impact of such disruptions to our business and results of operations may vary based on the length and severity of the disruption. Our failure to create and implement systems for monitoring, mitigating, managing, and recovering from such events could increase the length and severity of such disruptions, and could subject us to losses including penalties, cancellation of orders, and/or other losses.
We face risks related to cybersecurity threats and incidents that increase our costs and could disrupt our business and operations, damage our reputation, and result in material liabilities.
We face attempts by malicious hackers, state-sponsored organizations, intruders and potential terrorists, as well as by bad actor employees or third-party service providers, to gain unauthorized access into our physical facilities, or introduce malicious software to our network or those of our customers to, among other things: steal proprietary information related to our business, products, employees, and customers; interrupt our systems and services or those of our customers; corrupt the processes used to operate our businesses and to design and manufacture our products; or demand ransom to return control of such systems and services. Such attempts are increasing in number and in technical sophistication, and if successful, would expose us and the affected parties to risk of loss or misuse of proprietary or confidential information, and could significantly disrupt our business operations. Our information technology infrastructure also includes products and services provided by third parties, and these providers can experience breaches of their systems and products that affect the security of our systems and our proprietary or confidential information. Our reliance on information technology increases to the extent working remotely increases among our employees.
The theft, loss, or misuse of third-party data collected, used, stored, or transferred by us to run our business, and our attempts to address cybersecurity threats and incidents, whether or not successful, could result in our incurring significant costs related to, for example, disruptions in our operations, rebuilding internal systems, implementing additional threat protection measures, defending against litigation, responding to regulatory inquiries or actions, paying damages, or taking other remedial steps with respect to third parties, as well as reputational harm. In addition,
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these threats are constantly evolving, thereby increasing the difficulty of successfully defending against them or implementing adequate preventative measures. While we seek to detect and investigate unauthorized attempts and attacks against our network, products, and services, and to prevent their recurrence where practicable through changes to our internal processes and tools, we remain potentially vulnerable to additional known or unknown threats. In some instances, we, our customers, and the users of our products and services can be unaware of an incident or its magnitude and effects. These risks can be further complicated by new and evolving government regulations and requirements for cybersecurity incident reporting, which can result in greater scrutiny of and demands on our incident detection, analysis, mitigation and remediation processes and procedures.
In addition, global privacy legislation, enforcement, and policy activity in this area are rapidly expanding and creating a complex regulatory compliance environment. Costs to comply with and implement these privacy-related and data protection measures could be significant, and noncompliance could expose us to significant monetary penalties, damage to our reputation, and even criminal sanctions. Even our inadvertent failure to comply with federal, state, or international privacy-related or data-protection laws and regulations could result in audits, regulatory inquiries, or proceedings against us by governmental entities or other third parties.
A material disruption in the movement of rail traffic could impair our ability to deliver railcars and other products to our customers in a timely manner which could prevent us from meeting customer demand, reduce our sales, and negatively impact our results of operations.
Once a railcar or other product is manufactured in one of our plants, it must be moved by rail to a customer delivery point. In many cases, the manufacturing plant and the delivery point are in different countries. Many different and unrelated factors could cause a delay in our ability to move our goods in a timely manner from the manufacturing plant to the delivery point including physical disruptions such as armed conflict, natural disasters and power outages, strikes, pandemics, labor stoppages or shortages hindering the operation of railroads and related transportation infrastructure, regulatory and bureaucratic inefficiency and unresponsiveness, uncertainty due to inconsistent treatment from regulators, and other causes. In addition, our manufacturing facilities often purchase raw materials from different countries. The same factors affecting the movement of our completed railcars can disrupt the movement of these raw materials to our manufacturing facilities. A material disruption in the movement of our completed cars or raw materials, especially between countries and across borders, could negatively impact our business and results of operations.
Equipment failures, technological failures, costs and inefficiencies associated with changing of production lines, or transfer of production between facilities, could lead to production, delivery, or service curtailments or shutdowns, loss of revenue or higher expenses.
We operate a substantial amount of equipment at our production facilities. An interruption in production capabilities or maintenance and repair capabilities at our facilities, as a result of equipment or technology failure, natural disasters, pandemics, terrorism, costs and inefficiencies associated with changing of production lines or transfer of production between facilities, could reduce or prevent our production, delivery, service, or repair of our products and increase our costs and expenses. A halt of production at any of our manufacturing facilities could severely affect delivery times to our customers. Any significant delay in deliveries not otherwise contractually mitigated could result in cancellation of all or a portion of our orders, the loss of future sales, and negatively affect our reputation and our results of operations.
An inability to successfully manage, maintain, update, and secure our information systems, and utilize these systems to produce, disseminate, and store relevant and reliable data and information pertaining to our business, could adversely affect our business and competitive position in the market.
We rely on information technology infrastructure and architecture, including hardware, network, software, people, processes and other infrastructure to provide useful and confidential information to conduct our business. In the ordinary course of business, we collect and store sensitive data and information, including our proprietary and regulated business information, that of our customers, suppliers and business partners, and personally identifiable information about our employees, as well as internal communications and exchanges with customers, suppliers, legal counsel, governmental agencies, and consultants. We depend on our information systems to successfully manage our
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business. We have taken steps to maintain adequate data security by implementing security technologies, internal controls, and network and data center resiliency and recovery processes.
In addition, we continually evaluate and implement upgrades and changes to our information technology systems. We could experience problems in connection with such implementations, including compatibility issues, training requirements, higher than expected implementation costs and other integration challenges and delays. A significant problem with an implementation, integration with other systems or ongoing management and operation of our systems could negatively impact our business by disrupting operations. Such a problem could also have an adverse effect on our ability to generate and interpret accurate management and financial reports and other information on a timely basis, which could have a material adverse effect on our financial reporting system and internal controls and adversely affect our ability to manage our business.
Furthermore, despite our efforts, our information systems and processes, like those of other companies, are susceptible to damage or interruption due to natural disasters, power loss, telecommunications failures, viruses, breaches of security, system upgrades or new system implementations, as well as the inability of these systems or processes to fulfill their intended purpose within our business. Any operational failure or breach of security could lead to the loss or disclosure of both our and our customers’ financial, product and other confidential information, result in regulatory actions and legal proceedings, and/or have an adverse effect on our business and reputation.
Our backlog is not necessarily indicative of the level of our future revenues.
Our manufacturing backlog represents future production for our customers and estimated potential revenue attributable to such production. Our backlog of railcar units is not necessarily indicative of future results of operations. Some orders are subject to customary documentation, conditions, or completion of terms which may not occur. If a customer cancels an order, we may be unable to recover the entire amount we anticipated receiving from the order. The timing of converting backlog to revenue is also materially impacted by our decision whether to lease railcars, sell railcars, syndicate railcars with a lease attached to an investor, or contribute railcars to our lease fleet. Actual revenue may not equal our anticipated revenues based on our backlog.
We operate in highly competitive industries. We may not be able to sustain our market leadership positions, which may impact our financial results.
We face significant competition serving the markets and geographies our customers operate in. We face competition with respect to price, quality, timing, product performance, technological innovation, warranties, reliability of delivery, customer service, and other factors. The effects of this competition could reduce our revenues and operating profits, increase our expenses, limit our ability to grow, and otherwise affect our financial results.
We rely on limited suppliers for certain components and services needed in our production. If we are not able to procure specialty components or services on commercially reasonable terms or on a timely basis, our business, financial condition and results of operations would be adversely affected.
Our manufacturing operations depend in part on our ability to obtain timely deliveries of materials, components and services in acceptable quantities and quality from our suppliers. In 2024, the top ten suppliers for all inventory purchases accounted for approximately 44% of total purchases. The top supplier accounted for approximately 17% of total inventory purchases in 2024. No other suppliers accounted for more than 10% of total inventory purchases. Certain components of our products, particularly specialized components like castings, bolsters, trucks, wheels and axles, and certain services, such as lining capabilities, are currently only available from a limited number of suppliers. If any one or more of our suppliers cease to provide us with sufficient quantities of our components or services in a timely manner or on terms acceptable to us, or cease to provide services or manufacture components of acceptable quality, or go out of business, we could incur disruptions or be limited in our production of our products and may not be able to promptly identify alternative sources for these components or services.
In addition, we are increasing the number of components and services we manufacture or provide ourselves, directly or through joint ventures. If we are not successful at manufacturing such components or providing such services or have production problems after transitioning to self-produced supplies, we may not be able to replace such components or services from third-party suppliers in a timely manner. Any resulting disruption in our supply, or increase in the cost of specialized components and services, could harm our business and adversely affect our results of operations.
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The timing of our asset sales and related revenue recognition could cause significant differences in our quarterly results and liquidity.
We may build products in anticipation of a customer order, or lease railcars to a customer with the aim of selling such railcars on lease to a third-party. In such cases, the lag between production and sale results in uneven recognition of revenue and earnings over time. Our production during any given period may be concentrated in relatively few contracts, intensifying the amplitude and irregularity of our revenue streams. The timing of recognizing revenue on a railcar is also materially impacted by our decision whether to lease the railcar to a lessee, sell the railcar, or syndicate the railcar with a lease attached to an investor. In addition, we periodically sell railcars from our own lease fleet and the timing and volume of such sales are difficult to predict. As a result, comparisons of our Manufacturing or Leasing & Management Services revenue, deliveries, quarterly net gain on disposition of equipment, income and liquidity between quarterly periods within one year and between comparable periods in different years may not be meaningful and should not be relied upon as indicators of our future performance.
We depend on our senior management team and other key employees, and significant attrition within our management team or unsuccessful succession planning for members of our senior management team and other key employees, could adversely affect our business.
Our success depends in part on our ability to attract, retain and motivate senior management and other key employees. Achieving this objective may be difficult due to many factors, including fluctuations in global economic and industry conditions, competitors’ hiring practices, cost reduction activities, and the effectiveness of our compensation programs. Competition for qualified personnel can be very intense. We must continue to recruit, retain and motivate senior management and other key employees sufficient to maintain our current business and support our future projects and growth objectives. We are vulnerable to attrition among our current senior management team and other key employees. Some members of our senior management team and other key employees are at or nearing retirement age. If we are unsuccessful in our succession planning efforts, the continuity of our business and results of operations could be adversely affected. A loss of any such personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.
We derive a significant amount of our revenue from a limited number of customers, the loss of or reduction of business from one or more of which could have an adverse effect on our business.
A significant portion of our revenue is generated from a few major customers. In 2024, revenue from one customer accounted for approximately 10% of Consolidated Revenue. No other customers accounted for greater than 10% of Consolidated Revenue. Although we have some long-term contractual relationships with our major customers, we cannot be assured that we will continue to have good relations with our customers, or that our customers will continue to purchase or lease our products or services, or will continue to do so at historical levels, or will renew their existing contracts with us. A reduction in the purchasing or leasing of our products, a termination of our services by one or more of our major customers, a decline in the financial condition of a major customer, or our failure to replace expiring customer contracts with new customer contracts on satisfactory terms could result in a loss of business and have an adverse effect on our business and operating results.
Our business may be negatively impacted as a result of war in Ukraine, as well as civil unrest and armed conflict in other geographies.
In February 2022, the Russian Federation commenced a military invasion of Ukraine. We cannot predict the full impact of the ongoing war in Ukraine, the economic sanctions imposed on Russia, and the related economic and geopolitical instability, including instability in the manufacturing and freight rail markets. Some of our operations, particularly in Europe, have experienced higher energy costs, an increase in the price and decrease in the availability of steel and certain other materials and components, disruptions in transportation and supply chains, and higher manufacturing and borrowing costs. Not all of these costs are subject to escalation and related clauses which allow us to pass through costs to our customers, and there is a risk we will not be successful in renegotiating or managing the implementation of existing agreements to allow us to pass through these increased prices of manufacturing. These negative factors may continue to occur along with other risks to our business that may emerge which include, among others, prolonged heightened inflation, macroeconomic interventions in response to inflation, cyber disruptions or attacks, and disruptions in credit markets. These factors and others could disrupt our business directly and could disrupt the business of our customers thereby reducing or delaying orders of our goods and services. Prolonged civil unrest,
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political instability or uncertainty, military activities, or broad-based sanctions related to the war in Ukraine or civil unrest or armed conflict in other geographies could have an adverse effect on our operations and business outlook.
Our debt could have negative consequences to our business or results of operations.
We face several risks due to our debt and debt service obligations including: our potential inability to satisfy our financial obligations related to our consolidated indebtedness; potential breach of the covenants in our credit agreements (including our revolving credit facility, asset-backed facilities and other facilities); our ability to borrow additional amounts or refinance existing indebtedness in the future to fund operating needs may be limited or costly; our availability of cash flow may be inadequate because a portion of our cash flow is needed to pay principal and interest on our debt; we may be at a disadvantage relative to our competitors that have greater financial resources than us or more flexible capital structures than us; we face additional exposure to the risk of increased interest rates as certain of our borrowings are at variable rates of interest, which could result in higher interest expense in the event of an increase in interest rates; restrictions under debt agreements may adversely interfere with our financial and operating flexibility; and exposure to the possibility that we may suffer a material adverse effect on our business and financial condition if we are unable to service our debt or obtain additional financing, as needed.
We, our subsidiaries, and our joint ventures may incur additional indebtedness, including secured indebtedness, and other obligations and liabilities that do not constitute indebtedness. This could increase the risks associated with our debt. Some of our credit facilities and existing indebtedness use variable rates which may make the amount of interest we pay on such variable rate indebtedness difficult to predict.
A failure to design or manufacture products or technologies or to achieve timely certification or market acceptance of new products or technologies could have an adverse effect on our profitability.
We continue to introduce new railcar product innovations and technologies as well as develop and offer information-technology-based services. We occasionally accept orders prior to receiving railcar certification or proving our ability to manufacture a quality product that meets customer standards. We could be unable to successfully design or manufacture new railcar product innovations or technologies. Our software products and information-technology-based services may contain design defects, software errors, hardware failures or other computer system failures that are difficult to detect and correct. Our inability to develop and manufacture new products or technologies in a timely and profitable manner, or to obtain timely certification, or to achieve market acceptance, or to avoid quality problems in our new products, could have a material adverse effect on our revenue and results of operations and subject us to losses including penalties, cancellation of orders, rejection of railcars by a customer and/or other losses.
Our product and service warranties could expose us to significant claims.
We offer our customers limited warranties for many of our products and services. Accordingly, we may be subject to significant warranty claims in the future, such as multiple claims based on one defect repeated throughout our production or servicing processes, claims for which the cost of repairing the defective part is highly disproportionate to the original cost of the part, or defects in railcars or services which we discover in the future resulting in increased warranty costs or litigation. Warranty and product support terms may expand beyond those which have traditionally prevailed in the rail supply industry. These types of warranty claims could result in costly product recalls, customers seeking monetary damages, significant repair costs and damage to our reputation. If warranty claims attributable to actions of third-party component manufacturers are not recoverable from such parties due to their poor financial condition or other reasons, we could be liable for warranty claims and other risks for using these materials in our products.
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Insurance coverage could be costly, unavailable or inadequate.
The ability to insure our businesses, facilities and rail assets is an important aspect of our ability to manage risk. As there are only limited providers of this insurance to the railcar industry, there is no guarantee that such insurance will be available on a cost-effective basis in the future. In addition, we cannot be assured that our insurance carriers will be able to pay current or future claims. Additionally, the nature of our business subjects us to physical damage, business interruption and product liability claims, especially in connection with the repair and manufacture of products that carry hazardous or volatile materials. Although we maintain liability insurance coverage at commercially reasonable levels compared to similarly sized heavy equipment manufacturers, an unusually large physical damage, business interruption or product liability claim or a series of claims based on a failure repeated throughout our production process could exceed our insurance coverage and/or result in damage to our reputation, which could materially adversely impact our financial condition and results of operations.
If we are unable to protect our intellectual property or if third parties assert that our products or services infringe their intellectual property rights, our ability to compete in the market may be harmed, and our business and financial condition may be adversely affected.
If our intellectual property rights are not adequately protected, we may not be able to commercialize our technologies, products or services and our competitors could commercialize them, which could result in a decrease in our sales and market share and could materially adversely affect our business, financial condition and results of operations. Conversely, third parties might assert that our products, services, technologies or other business activities infringe their patents or other intellectual property rights. Infringement and other intellectual property claims and proceedings brought against us, whether successful or not, could result in substantial litigation and judgment costs and harm our reputation.
Our financial performance and market value could cause write-downs of goodwill or intangibles or other long-lived assets in future periods.
We are required to perform an annual impairment test of goodwill and other indefinite lived assets which could result in an impairment charge if it is determined that the carrying value of the asset exceeds its fair value. We perform a goodwill impairment test at the reporting unit level annually or whenever events or circumstances indicate that the carrying value of these assets may exceed their fair value. In addition, we periodically review our intangible and other long-lived assets for impairment when events or changes in circumstances, such as a divestiture, indicate the carrying value may not be recoverable.
If indicators suggest it is more likely than not that the fair value of a reporting unit is less than its carrying value or that the carrying amount of intangible or long-lived assets may not be recoverable, it may result in an impairment. Impairment charges impact our results of operations in the period in which they are identified. Further, write-downs of goodwill and other assets could affect certain of the financial covenants under debt instruments and could restrict our financial flexibility.
Our business will suffer if we are unsuccessful in making, integrating, and maintaining acquisitions, joint ventures and other strategic investments.
We have acquired businesses and invested in or entered into joint ventures in past periods. We may in the future acquire other businesses or invest in or enter into other joint ventures. Our failure to identify future acquisition or joint venture opportunities, to complete potential acquisitions or joint ventures on favorable terms, or to realize anticipated benefits from such acquisitions or joint ventures, could hinder our ability to grow our business. These transactions create risks to our ongoing business, including loss of management focus on existing operations, the time and effort required to integrate new or acquired businesses into our existing business, and the challenges of coordinating geographically dispersed organizations, as well as risks to the new or acquired business, such as the retention of key personnel and unanticipated expenses. In addition, we might need to issue additional equity securities, spend our cash, or incur debt, contingent liabilities, or amortization expenses related to intangible assets in connection with effecting an acquisition or joint venture, any of which could reduce our profitability and harm our business or only be available on unfavorable terms, if at all.
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Risks Related to Market and Economic Factors
Inflation as well as monetary and other policy interventions by governments and central banks in response to inflation, including the increase of interest rates, as well as uncertainly about governmental macroeconomic policies, could negatively impact our business and results of operations.
General inflation in the U.S., Europe and other geographies has risen to levels not experienced in recent decades. General inflation also negatively impacts our business by decreasing the capital our customers have to deploy to purchase our goods and services. Inflation may cause our customers to reduce or delay orders for our goods and services thereby causing a decrease in our sales. The United States Federal Reserve, the European Central Bank, and several other central banks increased benchmark interest rates during 2024. Rising interest rates increases our borrowing costs potentially decreasing our profitability. Additionally, increased borrowing costs faced by our customers could result in decreased demand for our products. Monetary interventions also risk a sustained decline in aggregate demand, either globally or within one or more geographic markets. A decline in demand for our products would have a negative impact on our business and results of operations.
The types of rail equipment we sell and the services we provide significantly impact our revenue and our margin and are dependent on broad economic trends over which we have little or no control.
We manufacture, lease, maintain and refurbish a broad range of railcars and related rail equipment. The demand for specific types of railcars and the mix of repair and refurbishment work varies over time. Changes in the global economy and the industries and geographies that we serve cause shifts in demand for specific products and services. Demand for specific types of railcars increases and decreases with the demand for goods such as grains, metals, construction aggregates, fertilizer, perishables and general merchandise, plastic pellets, oil and gas, bio-fuels, chemicals, and automobiles, among others, which is beyond our control. These shifts in demand could affect our results of operations and could have an adverse effect on our revenue and our profitability.
Cyclical economic downturns in our industry usually result in decreased demand for our products and services and reduced revenue.
The industry in which we operate is subject to periodic economic cycles, and the purchasing trends of customers in our industry have a significant impact on demand for our products and services. As a result, during downturns, the rate at which we convert backlog to revenue usually decreases and we may slow down or halt production at some of our facilities. An economic downturn in our industry would impact the demand for our products and services, and would result in one or more of the following: lower sales volumes, lower prices, lower lease utilization rates and decreased revenues and profits.
Demand for our railcar equipment and services is dependent on the future of rail transportation and the manner in which railroads operate.
Demand for our rail equipment and services may decrease if freight rail decreases as a mode of freight transportation used by customers to ship their products, or if governmental policies favor modes of freight transportation other than rail. If rail freight transportation becomes more efficient or dwell times decrease, demand for our rail equipment and services may decrease. If the rail freight industry becomes oversupplied, prices for our railcars, lease rates, and demand for our products and services may decrease. The industries in which our customers operate are driven by dynamic market forces and trends, which are in turn influenced by economic, regulatory, and political factors. Features and functionality specific to certain railcar types could result in those railcars becoming obsolete as customer requirements for freight delivery change.
Risks related to our operations outside of the U.S. could adversely affect our operating results.
We own, lease, operate or have invested in businesses that have manufacturing facilities in Mexico, Brazil and Europe, and have customers and suppliers located outside the United States. Instability in the macroeconomic, political, military, legal, regulatory, trade, financial, labor or market conditions in or relating to the countries where we, or our customers or suppliers, operate could negatively impact our business activities and operations. Some foreign countries in which we operate or may operate have authorities that regulate railroad safety and rail equipment design and manufacturing. If we do not have appropriate certifications, we could be unable to market and sell our rail equipment
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in those markets. Adverse changes in foreign regulations or enforcement practices applicable to us or our customers, such as labor, environment, trade, tax, currency and price regulations, could limit our operations, make the manufacture and distribution of our products difficult, and delay or limit our ability to repatriate income derived from foreign markets.
Our business benefits from free trade agreements between the U.S. and foreign governments, and from various U.S. corporate tax provisions related to international commerce. Any changes in trade or tax policies by the U.S. or foreign governments in jurisdictions in which we do business, as well as any embargoes, quotas or tariffs imposed on our products and services, could adversely and significantly affect our financial condition and results of operations.
Among the political risks we face outside the U.S. are governments nationalizing our business or assets, repudiating or renegotiating contracts with us, our customers or our suppliers, or revising their judicial or other governmental systems in a manner that decreases legal certainty. In our cross-border business activities, we could experience longer customer payment cycles, difficulty in collecting accounts receivable or an inability to protect our intellectual property. We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws, which may conflict with local business customs in certain jurisdictions. The failure to comply with laws governing international business may result in substantial penalties and fines and reputational harm. Transactions with non-U.S. entities expose us to business practices, local customs, and legal processes with which we may not be familiar, as well as difficulty enforcing contracts and international political and trade tensions. If we are unable to successfully manage the risks associated with our foreign and cross-border business activities, our results of operations, financial condition, liquidity and cash flows could be negatively impacted.
Fluctuations in foreign currency exchange rates could lead to increased costs and lower profitability.
Outside of the U.S., we primarily conduct business in Mexico, Europe and Brazil, and our non-U.S. businesses conduct their operations in local currencies. We also source materials worldwide. Fluctuations in exchange rates may affect demand for our products in foreign markets or our cost competitiveness and may adversely affect our profitability. Although we attempt to mitigate a portion of our exposure to changes in currency rates through currency rate hedge contracts and other activities, these efforts cannot fully eliminate the risks associated with foreign currencies. In addition, some of our borrowings are in foreign currencies, giving rise to risk from fluctuations in exchange rates. A material or adverse change in exchange rates could result in significant deterioration of profits or in losses for us.
The deterioration of conditions in the global capital markets, weakening of macroeconomic conditions and changes in the credit markets and the financial services industry could negatively impact our business, results of operations, financial condition or liquidity.
Our leasing subsidiaries' operations relies in large part upon banks and capital markets to fund their operations and contractual commitments and refinance existing debt. These markets can experience high levels of volatility and access to capital can be constrained for extended periods of time. In addition to conditions in the capital markets, a number of other factors could cause us to incur increased borrowing costs and have greater difficulty accessing public and private markets for both secured and unsecured debt. The credit markets and the financial services industry may experience volatility which can result in tighter availability of credit on more restrictive terms and limit our ability to sell railcar assets or to syndicate railcars to investors with leases attached. Our liquidity, financial condition and results of operations could be negatively impacted if our ability to borrow money to finance operations, obtain credit from trade creditors, obtain credit to maintain our hedging programs, offer leasing products to our customers or sell railcar assets were to be impaired. In addition, scarcity of capital could also adversely affect our customers’ ability to purchase, lease, or pay for products from us or adversely affect our suppliers’ ability to provide us with product. Any of these conditions or events could result in reductions in our revenues, increased price competition, or increased operating costs, which could adversely affect our business, financial condition and results of operations.
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We could be unable to lease railcars at satisfactory rates, remarket leased railcars on favorable terms upon lease termination, or realize the expected residual values for end of life railcars due to changes in scrap prices, each of which could reduce our revenue and decrease our overall return or affect our ability to sell leased assets in the future.
The profitability of our railcar leasing business depends on our ability to lease railcars at satisfactory rates, sell railcars with sufficiently profitable leases to investors, and to remarket, sell or scrap railcars we own or manage upon the expiration of leases. The rent we receive during the initial railcar lease term typically covers only a small portion of the railcar acquisition or production costs. Thus, we are exposed to a remarketing risk throughout the life of the railcar because we must obtain lease rates or a sale price sufficient to cover our acquisition or production costs related to the railcar. Our ability to lease or remarket leased railcars profitably is dependent on several factors, including, but not limited to, market and industry conditions, cost of, and demand for, competing used or newer models, availability of credit and the credit-worthiness of potential customers, costs associated with the refurbishment of the railcars, the market demand or governmental mandates for refurbishment, customers not defaulting on their leases, as well as market perceptions of residual values and interest rates. A downturn in the industries in which our lessees operate and decreased demand for railcars could also increase our exposure to remarketing risks because lessees may demand shorter lease terms, requiring us to remarket leased railcars more frequently. Furthermore, the resale market for previously leased railcars has a limited number of potential buyers. Our inability to lease, remarket or sell leased railcars on favorable terms could result in an adverse impact to our operating results or affect our ability to sell leased railcars to investors in the future. Additionally, when the price of scrap steel declines, our revenues and margins in such businesses decrease. Notwithstanding the terms of the leases we enter into, our lessees may misuse, abuse, improperly install components or improperly or inadequately maintain or repair the railcars we have leased to them. These actions could result in a diminution in the value of the railcars, as well as our potential exposure to claims that could increase our costs and weaken our financial condition.
A limited availability of financing or higher interest rates could increase the cost of, or potentially deter, new leasing arrangements with our customers, reduce our ability to syndicate railcars under lease to financial institutions, or impact the sales price we may receive on such syndications, any of which could materially adversely affect our business, financial condition and results of operations.
Some of our competitors are owned or financially supported by foreign governments and may sell products below cost or otherwise compete unfairly.
The markets in which we participate are intensely competitive and we expect them to remain intensely competitive into the foreseeable future. Some of our competitors are owned or financially supported by foreign governments or sovereign wealth funds, and may potentially sell products and services below cost, or otherwise compete unfairly, in order to gain market share. The relative competitiveness of our manufacturing facilities and products affects our performance. A number of competitive factors challenge or affect our ability to compete successfully including the introduction of competitive products and new entrants into our markets, a limited customer base and price pressures from unfair competition and increases in raw materials and labor costs. If we do not compete successfully, our market share, margin and results of operations may be adversely affected.
Fires, natural disasters, pandemics, terrorism, or severe or unusual weather conditions could disrupt our business and result in loss of revenue or higher expenses or decreased demand.
Any serious disruption at any of our facilities due to pandemics, terrorism, fire, hurricane, earthquake, flood, other severe weather events or any other natural disaster could impair our ability to use our facilities and have a material adverse impact on our revenues and increase our costs and expenses. Disruptions can arise from damage to our facilities and operations from such events or from government, regulator or customer actions taken to respond to or mitigate such events. For example, the COVID-19 pandemic negatively impacted businesses globally, including our business, due to changes in consumer behavior, pandemic fears and market downturns, and the extraordinary actions taken by governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world. Such events can also materially disrupt the operations of our customers and suppliers. If there is a natural disaster or other serious disruption at any of our facilities, particularly at any of our Mexican or Arkansas facilities, it could impair our ability to adequately supply our customers, cause a significant disruption to our operations, cause us to incur significant costs to relocate or reestablish these functions and negatively impact our operating results. While
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we insure against certain business interruption risks, such insurance may not adequately compensate us for any losses incurred as a result of natural or other disasters.
Additionally, seasonal fluctuations in weather conditions may lead to greater variation in our quarterly operating results as unusually mild weather conditions will generally lead to lower demand for our wheel-related products and services. If occurring for prolonged periods, such weather could have an adverse effect on our business, results of operations and financial condition. In addition, climate change could result in an increased frequency of severe weather events and/or greater variance in weather conditions, and rising sea levels that could affect operations at our manufacturing facilities, the price of insuring company assets, or other unforeseen disruptions of our operations, systems, property or equipment.
Risks Related to Legal, Compliance and Regulatory Matters
Train derailments or other accidents could subject us to legal claims that adversely impact our business, financial condition and our results of operations.
We provide a number of services which include the manufacture and supply of new railcars, wheels, new and refurbished axles, components and parts and the lease and maintenance of railcars for our customers that transport a variety of commodities, including tank railcars that transport hazardous materials such as crude oil, ethanol, chlorine, anhydrous ammonia and other products. In addition, we have a Regulatory Services Group that offers regulatory, engineering, and process consulting and advocacy support to the tank car and petrochemical rail shipper community, among other services. We could be subject to various legal claims, including claims of negligence, personal injury, physical damage and product or service liability, or in some cases strict liability, as well as potential penalties and liability under environmental laws and regulations, in the event of a derailment or other accident involving railcars, including tank railcars, whether resulting from natural disasters, human error, terrorism, or other causes. If we become subject to any such claims and are unable to successfully resolve them or maintain inadequate insurance for such claims, our business, financial condition and results of operations could be materially adversely affected, and may also harm our reputation.
The products we manufacture are designed to work optimally when properly operated, installed, repaired, maintained and used to transport the intended cargo. Our products may be sold to third parties who may misuse, improperly install or improperly or inadequately maintain or repair such products, which may result in us being subjected to claims or litigation associated with product damage, injuries or property damage that could increase our costs and weaken our financial condition.
Risks related to potential misconduct by employees may adversely impact us.
Our employees may engage in misconduct, fraud or other improper activities, including noncompliance with our policies or regulatory standards and requirements, which could subject us to regulatory sanctions and reputational damage and materially harm our business. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks or losses, including risks associated with harassment, as well as whistleblower complaints and litigation. There can be no assurance that we will succeed in preventing misconduct by employees in the future. In addition, the investigation of alleged misconduct disrupts our operations and may harm the public’s perception of our company, which may be costly. Any such events in the future may have a material adverse impact on our financial condition or results of operations.
Changes in, or failure to comply with, applicable regulations may adversely impact our business, financial condition and results of operations.
Our company and the other participants in our industry are subject to regulation by governmental agencies. These authorities establish, interpret, and enforce rules and regulations for the railcar industry. New rules and regulations and shifting enforcement priorities of regulators could increase our operating costs and the operating costs of our
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customers. Changes to the process for obtaining regulatory approval in Europe for the operation of new or modified railcars may make it more difficult for us to deliver products timely and to comply with our sales contracts.
We cannot guarantee that we or our suppliers will be in compliance at all times, compliance may prove to be more costly and limiting than we currently anticipate, and compliance requirements could increase in future years. If we or our suppliers fail to comply with applicable requirements and regulations, we could face sanctions and penalties that could negatively affect our financial results.
We have potential exposure to environmental liabilities, which could increase our operating costs or have an adverse effect on our results of operations.
We are subject to extensive governmental regulations concerning, among other things, air emissions, water discharge, solid waste and hazardous substances handling and disposal and employee health and safety. These laws and regulations are complex and frequently change. We could incur unexpected costs, penalties and other civil and criminal liabilities if we, or in certain circumstances others, fail to comply with environmental laws or permits issued pursuant to those laws. We also could incur costs or liabilities related to off-site waste disposal or remediating soil or groundwater contamination at our properties, including as set forth in Item 3, “Legal Proceedings.” In addition, future environmental laws and regulations may require significant capital expenditures or changes to our operations, or may impose liability on us in the future for actions that complied with then applicable laws and regulations when the action was taken.
Business, regulatory, and legal developments regarding climate change may increase our operating costs, and may negatively affect the demand for our products or the ability of our critical suppliers to meet our needs.
Legislation and new rules to regulate emission of greenhouse gases (GHGs) have been introduced in numerous state legislatures, the U.S. Congress, and by the EPA, as well as in Europe and other geographies in which we operate. Some of these proposals would require industries to meet stringent new standards that may require substantial reporting of GHGs and other carbon intensive activities in addition to potentially mandating reductions in carbon emissions. While we cannot assess the direct impact of these or other potential regulations, we recognize that new climate change reporting or compliance protocols could increase our operating costs, decrease demand for our products and/or increase the price or decrease the availability of materials, input factors and manufactured components which could reduce our margins.
Changes in accounting standards, the implementation of new accounting standards, or inaccurate estimates or assumptions in the application of accounting policies, could adversely affect our financial results.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Some of these policies require use of estimates and assumptions that may affect the reported value of our assets or liabilities and financial results and are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain. Estimates, judgments and assumptions underlying the accompanying Consolidated Financial Statements include impairment of long-lived assets, goodwill, income taxes and environmental costs, among others. If our accounting policies, methods, judgments, assumptions, estimates and allocations prove to be incorrect, or if circumstances change, our business, financial condition, results of operations, liquidity, ability to pay dividends or stock price may be materially adversely affected.
Accounting standard setters and those who interpret the accounting standards (such as the Financial Accounting Standards Board, the SEC, and independent registered public accounting firms) may amend or even reverse their previous interpretations or positions on how these standards should be applied. In some cases, we could be required to apply a new or revised standard retrospectively, resulting in the revision of prior period financial statements. Changes in accounting standards can be hard to predict and can materially impact how we record and report our financial condition and results of operations.
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Some of our customers place orders for our products in reliance on their ability to utilize tax benefits or tax credits, any of which benefits or credits could be discontinued thereby reducing incentives for our customers to purchase our rail products.
There is no assurance that tax authorities will reauthorize, modify, or prevent the expiration of tax benefits, tax credits, or other policies aimed to incentivize the purchase of our products. If such incentives are discontinued or diminished, the demand for our products could decrease, thereby creating the potential for a material adverse effect on our financial condition or results of operations.
Risks Related to our Common Stock
Our stock price has been volatile and may continue to experience large fluctuations.
The price of our common stock has experienced rapid and significant price fluctuations. The price for our common stock is likely to continue to be volatile and subject to price and volume fluctuations in response to market and other factors, including the factors discussed elsewhere in these risk factors. A material decline in the price of our common stock may result in the assertion of certain claims against us, and/or the commencement of inquiries and/or investigations against us. A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock, a reduction in our ability to raise capital, and the inability of investors to obtain a favorable selling price for their shares. Following periods of volatility in the market price of their stock, historically many companies have been the subject of securities class action litigation. If we became involved in securities class action litigation in the future, it could result in substantial costs and diversion of our management’s attention and our resources and could harm our stock price, business, prospects, financial condition and results of operations.
Our business and operations could be negatively affected if we become subject to shareholder activism, which could cause us to incur significant expense, hinder execution of our business strategy and impact our stock price.
In recent years, companies with a class of publicly-traded securities commonly face proxy contests, public information campaigns, and other forms of shareholder activism. Shareholder activism could result in substantial costs to the Company, give rise to perceived uncertainties as to our future, adversely affect our relationships with suppliers, customers, and regulators, make it more difficult to attract and retain qualified personnel, and adversely impact our stock price.
Our current shareholders could experience dilution.
We require substantial working capital to fund our business. If additional funds are raised through the issuance of equity securities or convertible securities, the percentage ownership held by our shareholders would be reduced and the equity securities we issue may have rights, preferences or privileges senior to those of our common stock. Additionally, we have the option to settle outstanding convertible notes in cash, although if we opt not to or do not have the ability to settle outstanding convertible notes in cash, the conversion of some or all of our convertible notes may dilute the ownership interests of existing shareholders. Any sales in the public market of the common stock issuable upon the conversion of the notes could adversely affect prevailing market prices of our common stock. In addition, the existence of the notes may encourage short selling by market participants because the conversion of the notes could depress the price of our common stock.
Certain provisions in our charter documents, Oregon law, and our debt instruments could make an acquisition of our company more difficult, limit attempts by our shareholders to replace or remove members of our Board of Directors and may adversely affect the market price of our common stock.
Our Articles of Incorporation and Bylaws, Oregon law, and contracts and debt instruments to which we are a party, contain certain provisions that could delay, defer or prevent an acquisition proposal that some, or a majority, of our shareholders might believe to be in their best interests or in which shareholders might receive a premium for their common stock over the then-prevailing market price. These provisions could also dissuade shareholders or third parties from contesting director elections and could cause investors to view our securities as less attractive investments and reduce the market price of our common stock. Certain relevant provisions of our Articles of Incorporation and Bylaws, as well as Oregon law, are described in further detail in “Description of the Registrant’s Securities Under Section 12 of the Securities Exchange Act of 1934” included as Exhibit 4.3 to this Form 10-K.
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Payments of cash dividends on our common stock may be made only at the discretion of our Board of Directors and may be restricted by Oregon law.
Any decision to pay dividends will be at the discretion of our Board of Directors and will depend upon our operating results, strategic plans, capital requirements, financial condition, provisions of our borrowing arrangements and other factors our Board of Directors considers relevant. Furthermore, Oregon law imposes restrictions on our ability to pay dividends. Accordingly, we may not be able to continue to pay dividends in any given amount in the future, or at all.
Although our share repurchase program is intended to enhance long-term shareholder value, we cannot provide assurance that this will occur, and this program may be suspended or terminated at any time.
The Board of Directors has authorized our company to repurchase our common stock through a share repurchase program. Our share repurchase program may be modified, suspended or discontinued at any time without prior notice. Although the share repurchase program is intended to enhance long-term shareholder value, we cannot provide assurance that this will occur.
General Risk Factors
Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our financial condition and profitability, and we may take tax positions that the Internal Revenue Service or other tax authorities may contest.
We are subject to income taxes in both the U.S. and foreign jurisdictions. Significant judgments and estimates are required to be made in determining our worldwide provision for income taxes. Changes in estimates of projected future operating results, loss of deductibility of items, recapture of prior deductions (including related to interest on convertible notes), limitations on our ability to utilize tax net operating losses in the future or changes in assumptions regarding our ability to generate future taxable income could result in significant increases to our tax expense and liabilities that could adversely affect our financial condition and profitability.
We have in the past and may in the future take tax positions that the Internal Revenue Service (IRS) or other U.S. or foreign tax authorities may contest. We are required by an IRS regulation to disclose particular tax positions to the IRS as part of our tax returns for that year and future years. If the IRS or other tax authorities successfully contests a tax position that we take, we may be required to pay additional taxes, interest or fines that may adversely affect our results of operations and financial position. We may face other legal or regulatory actions by U.S. or foreign tax authorities contesting our tax positions that may cause management distraction and require us to incur costs to respond regardless of their outcome.
The use of social and other digital media to disseminate false, misleading and/or unreliable or inaccurate data and information could create unwarranted volatility in our stock price and losses to our shareholders and could adversely affect our reputation, products, business, and operating results.
A substantial number of people are relying on social and other digital media to receive news, data, and information. Social and other digital media can be used by anyone to publish data and information without regard for factual accuracy. The use of social and other digital media to publish inaccurate, offensive, and disparaging data and information coupled with the frequent use of strong language and hostile expression, may influence the public’s inability to distinguish between what is true and what is false and could obstruct an effective and timely response to correct inaccuracies or falsifications. Such use of social and other digital media could result in unexpected and unsubstantiated claims concerning our business in general or our products, our leadership or our reputation among customers and the public at large, thereby making it more difficult for us to compete effectively, and potentially having a material adverse effect on our business, operations, or financial condition.
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Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 1C. CYBERSECURITY
Cybersecurity represents an important component of our overall approach to risk management. Our information security risk management (ISRM) policies, standards and practices are integrated into our overall enterprise risk management (ERM) approach, and cybersecurity risks are one of the business risks that are subject to oversight by our Board of Directors. Our ISRM policies, standards and practices follow industry trends, which align with frameworks established by the National Institute of Standards and Technology. We approach cybersecurity threats through a cross-functional approach which endeavors to: (i) identify, prevent and mitigate cybersecurity threats to us; (ii) preserve the confidentiality, security and availability of the information that we collect and store to use in our business; (iii) protect our intellectual property; (iv) maintain the confidence of our customers, clients and business partners; and (v) provide appropriate public disclosure of cybersecurity risks and incidents when required.
Risk Management and Strategy
Our cybersecurity program focuses on the following areas:
•
Vigilance – We maintain cybersecurity threat operations with the goal of proactively identifying, preventing and mitigating cybersecurity threats and responding to cybersecurity incidents in accordance with our established cybersecurity incident response procedure plan. We recognize that the sophistication of cyber-threats will continue to evolve as threat actors increase their use of artificial intelligence technologies.
•
Systems Safeguards – We implement layered systems safeguards to enable the protection of our information systems from cybersecurity threats. These safeguards include network security, vulnerability management, and threat detection.
•
Collaboration – We utilize collaboration mechanisms established with public and private entities, including intelligence and enforcement agencies, industry groups and third-party service providers, to identify, assess and respond to cybersecurity risks.
•
Third-Party Risk Management – We actively manage cybersecurity risks posed by third parties and their systems that could impact our operations. We monitor and assess the security posture of our third-party vendors. We require third-party service providers with access to sensitive information to maintain cybersecurity practices aligned with industry standards and applicable laws. In addition, we proactively monitor public information regarding our vendors for security incidents, investigate potential impacts, and take appropriate action to mitigate risk.
•
Training – We have implemented and maintain a comprehensive cybersecurity training program to educate personnel about evolving threats and reinforce security best practices. This program includes:
i.
Monthly phishing awareness campaigns with mandatory remedial training for those who fail.
ii.
Annual security and acceptable use awareness training.
iii.
Targeted training for high-risk groups such as finance and accounting, including phishing email response checks, to proactively mitigate threats like business email compromise.
•
Incident Response and Recovery Planning – We have established and maintain a cybersecurity incident response procedure plan that addresses our response to cybersecurity incidents and recovery from such incidents, and such plan is tested and evaluated periodically.
•
Communication, Coordination and Disclosure – We utilize a cross-functional approach to address the risk from cybersecurity threats, involving management personnel from our technology, operations, legal,
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risk management and other key business functions, as well as the members of the Audit Committee of the Board of Directors, in an ongoing dialogue regarding cybersecurity threats and incidents, while also implementing controls and procedures for the escalation of cybersecurity incidents pursuant to established thresholds so that decisions regarding the disclosure and reporting of such incidents can be made by management in a timely manner. We have established an Incident Response Committee to quickly organize and execute an effective, productive, timely and compliance-conscious response to cybersecurity threats and incidents, as well as coordinate among the cross-functional groups.
•
Governance – The Board of Directors' oversight of cybersecurity risk management is supported by the Audit Committee, which regularly interacts with our experienced Chief Information Security Officer (CISO), the Incident Response Committee, which is chaired by our SVP Administration, and other members of management.
We manage risks from cybersecurity threats through the assessment and testing of our processes and practices focused on evaluating the effectiveness of our cybersecurity measures. We engage third parties as appropriate to perform assessments of our cybersecurity measures. The results of such assessments and reviews are reported to the Audit Committee and the Board of Directors, and we adjust our cybersecurity policies, standards, processes and practices as necessary based on the information provided by the assessments, audits and reviews. We maintain cyber risk and related insurance policies as a measure of added protection.
Governance
The Board of Directors, in coordination with the Audit Committee, oversees the management of risks from cybersecurity threats, including the policies, standards, processes and practices that management implements to address risks from cybersecurity threats. The Audit Committee reviews cybersecurity on a quarterly basis. The Board of Directors and the Audit Committee each receive regular presentations and reports on cybersecurity risks, which address a wide range of topics including, for example, recent developments, evolving standards, vulnerability assessments, third-party reviews, the threat environment, technological trends and information security considerations arising with respect to our peers. The Board of Directors and the Audit Committee also receive prompt and timely information regarding any cybersecurity incident that meets established reporting thresholds, as well as ongoing updates regarding such incident until it has been addressed. On a regular basis, the Board of Directors and the Audit Committee discuss our approach to cybersecurity risk management with the CISO and other cyber team members, as well as senior leadership.
The CISO is principally responsible for overseeing our cybersecurity risk management program, in partnership with other business leaders across the Company. The CISO works in coordination with senior leadership, which includes our Chief Executive Officer, Chief Financial Officer, Chief Information Officer and Chief Legal & Compliance Officer. The CISO has decades of experience in the cybersecurity and information security fields, including experience with both private and public companies and the military, as well as experience in the transportation and rail industry. In addition, the CISO has ISO 27001 Certification and completed W2CCA Cyber Combat Academy.
The CISO, in coordination with senior leadership, works collaboratively across the Company to implement a program designed to protect our information systems from cybersecurity threats and to promptly respond to any cybersecurity incidents. To facilitate the success of this program, multidisciplinary teams throughout the Company are deployed to address cybersecurity threats and to respond to cybersecurity incidents in accordance with our cybersecurity incident response procedure plan. Through the ongoing communications from these teams, the CISO and senior leadership monitor the prevention, detection, mitigation and remediation of cybersecurity incidents in real time, and report such incidents to the Audit Committee when appropriate.
To date, we have not experienced any risks from cybersecurity threats or incidents that have materially affected us or are reasonably likely to materially affect us, our business strategy, results of operations, or financial condition.
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Item 2. PROPERTIES
We operate at the following primary facilities as of August 31, 2024:
Description Location Status
Manufacturing Segment
Operating facilities: 4 locations in the U.S. Owned
3 locations in Mexico Owned – 2 locationsLeased – 1 location
3 locations in Poland Owned
3 locations in Romania Owned
Administrative offices: 2 locations in the U.S. Leased
Maintenance Services Segment
Leasing & Management Services Segment
We believe that our facilities are in good condition and that the facilities, together with anticipated capital improvements and additions, are adequate to meet our operating needs for the foreseeable future. We continually evaluate our facilities in order to remain competitive and to take advantage of market opportunities.
Item 3. LEGAL PROCEEDINGS
There is hereby incorporated by reference the information disclosed in Note 21 - Commitments and Contingencies to the Consolidated Financial Statements.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
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Information About Our Executive Officers
Current information regarding our executive officers is presented below.
Lorie L. Tekorius, 57, is Chief Executive Officer and President and serves on the Board of Directors. Ms. Tekorius has served as President since August 2019 and was promoted to Chief Executive Officer in March 2022. Ms. Tekorius was elected to the Board of Directors in March 2022. Ms. Tekorius has served in various management positions for the Company since 1995, most recently as Executive Vice President and Chief Operating Officer and prior to that, as Executive Vice President and Chief Financial Officer.
Martin R. Baker, 68, is Senior Vice President, a position he has held since joining the Company in May 2008. From 2008 until January 2024, Mr. Baker also served as the Chief Legal & Compliance Officer. Prior to Greenbrier, Mr. Baker served as General Counsel to Lattice Semiconductor Corporation, Altera Corporation and Vitelic Corporation.
Brian J. Comstock, 62, is Executive Vice President and President, The Americas, a position he has held since January 2024. Prior to this role, Mr. Comstock served as Executive Vice President, Chief Commercial and Leasing Officer since January 2021. Mr. Comstock has served in various management positions for the Company since 1998, most recently as Executive Vice President, Sales and Marketing.
Michael J. Donfris, 61, is Senior Vice President, Chief Financial Officer, and joined the Company in June 2024. Prior to Greenbrier, Mr. Donfris served as Chief Financial Officer for R.J. Corman Railroad Group since November 2020, Vice President Global Finance for Flowserve from 2018 to 2020, Vice President of Finance and Chief Accounting Officer for TrinityRail from 2015 to 2016, and has over 30 years of experience in other finance leadership roles.
Laurie Dornan, 54, is Senior Vice President, Chief Human Resources Officer, a position she has held since November 2020. Ms. Dornan has served in various human resources leadership positions since joining the Company in 2014. Prior to Greenbrier, she served in various leadership roles with Lattice Semiconductor Corporation, Nautilus, Inc. and Electro Scientific Industries.
Rick Galvan, 52, is Senior Vice President, Operations, Maintenance Services, a position he has held since January 2024. Prior to this role, Mr. Galvan served as the Senior Vice President of Operations for Greenbrier Rail Services since January 2021. Mr. Galvan has over 30 years of experience in the railroad industry serving in various management functions including positions at Canadian National Railway, Kansas City Southern, and Burlington Northern Santa Fe.
William Glenn, 63, is Senior Vice President and President, Europe, a position he has held since January 2024. Prior to this role, Mr. Glenn served as the Chair of the Management Board of Greenbrier Europe, managing operations in Poland and Romania. Mr. Glenn returned to the company in 2019 after serving as Chief Commercial Officer for Wells Fargo Rail from 2016 to 2019. Earlier Mr. Glenn worked in a range of roles at Greenbrier including sales, marketing and customer support, beginning in 2001.
William Krueger, 59, is Senior Vice President and Chief Operations Officer, The Americas, a position he has held since January 2024. Prior to this role, Mr. Krueger was Senior Vice President, President Greenbrier Manufacturing Operations (GMO) since September 2022 and was Senior Vice President GMO when he joined the Company in 2020. Prior to Greenbrier, Mr. Krueger held a number of operations roles in the automotive industry including positions at General Motors, Toyota, and Nissan.
Christian M. Lucky, 57, is Senior Vice President, Chief Legal & Compliance Officer and Corporate Secretary, a position he has held since January 2024. Mr. Lucky has served in various legal and management positions in the Company since 2015.
Matthew J. Meyer, 43, is Senior Vice President, Finance and Chief Accounting Officer and joined the Company in February 2023. Prior to Greenbrier, Mr. Meyer was Chief Accounting Officer of Horizon Global Corporation from December 2019 to February 2023, and Corporate Controller from November 2018 to December 2019. Prior to that, Mr. Meyer has held various finance leadership roles.
Executive officers are designated by the Board of Directors. No director or executive officer has a family relationship with any other director or executive officer of the Company.
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PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock has been traded on the New York Stock Exchange under the symbol GBX since July 14, 1994. There were approximately 191 holders of record of common stock as of October 18, 2024.
Issuer Purchases of Equity Securities
The Board of Directors has authorized the Company to repurchase shares of the Company’s common stock. The share repurchase program has an expiration date of January 31, 2025. The amount remaining for purchase was $45.1 million as of August 31, 2024. There were no share repurchases under this program during the three months ended August 31, 2024.
Performance Graph
The following graph demonstrates a comparison of cumulative total returns for the Company's Common Stock, the Dow Jones U.S. Industrial Transportation Index, the Standard & Poor’s (S&P) 500 Index, and the S&P SmallCap 600 Index. The S&P SmallCap 600 is included as it is used in measuring the Company's relative total stockholder return for purposes of determining the performance of certain stock awards granted beginning in 2023. The graph assumes an investment of $100 on August 31, 2019 in each of the Company's Common Stock and the stocks comprising the indices. Each of the indices assumes that all dividends were reinvested and that the investment was maintained to and including August 31, 2024, the end of the Company’s 2024 fiscal year.
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The comparisons in this table are required by the SEC, and therefore, are not intended to forecast or be indicative of possible future performance of our Common Stock.
Item 6. RESERVED
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Summary
The financial results for 2024 reflect a successful year executing on our multi-year strategy outlined last year. The strategy has three basic tenets:
(1)
Maintain our manufacturing leadership position across geographies;
(2)
Optimize our industrial footprint for efficiency and margin enhancement while addressing the needs of our customers; and
(3)
Increase our recurring revenue to reduce the impact of manufacturing cyclicality.
Overall, demand in the marketplace remains steady for our products and services. We delivered strong results during the year, however, supply chain challenges, rail service congestion, inflation, high interest rates, labor shortages and foreign currency fluctuations continued to impact our business for the year ended August 31, 2024. Despite these challenges, we were able to deliver strong results and accomplish the following in 2024:
•
Achieved our second highest annual revenue in our company's history.
•
Expanded our Margin as a percentage of Revenue from 11.2% in 2023 to 15.8% in 2024.
•
Received new railcar orders for 21,700 units valued at approximately $2.8 billion.
•
Increased our owned lease fleet by 2,100, representing a 15.7% increase from the prior year.
•
Generated $330 million of Net cash provided by operating activities.
We believe these results demonstrate the benefit of our continued focus on our strategic plan, and we remain focused on increasing recurring revenue, expanding our aggregate gross margin and raising our return on invested capital. Recurring revenue is defined as Leasing & Management Services revenue excluding the impact of syndication transactions.
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Financial Highlights
Despite the challenging operating environment, we accomplished the following in 2024:
•
Margin as a percentage of Revenue improved by 4.6% to 15.8% for the year ended August 31, 2024. The increase from the prior year was driven by operating efficiencies and favorable product mix in our Manufacturing segment.
•
Earnings from operations increased by $148.1 million or 84.0% compared to the prior year. The increase was primarily attributed to an increase in Margin in our Manufacturing and Leasing & Management Services segments during the year ended August 31, 2024. The prior year also included $46.7 million in Asset impairment, disposal, and exit costs, net.
•
Diluted Earnings per common share (EPS) increased by 162% to $4.96 for the year ended August 31, 2024.
•
Net cash provided by operating activities increased $258.4 million compared to the prior year. The increase was primarily attributed to a change in Leased railcars for syndication and a $97.1 million increase in Net earnings for the year ended August 31, 2024.
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Manufacturing Backlog
Our backlog remains strong at August 31, 2024 and includes a diverse portfolio of railcar types, highlighted by the following:
•
Our railcar backlog was 26,700 units with an estimated value of $3.4 billion as of August 31, 2024 with expected deliveries reaching 2026 and beyond.
•
During 2024, we generated new railcar orders of 21,700 units valued at approximately $2.8 billion.
Our backlog includes approximately $590 million of railcars intended for syndication which are supported by lease agreements with external customers and may be syndicated to third parties or held in our lease fleet depending on a variety of factors. Approximately 3% of backlog units and estimated value as of August 31, 2024 was associated with our Brazilian manufacturing operation which is accounted for under the equity method.
Our backlog of railcar units 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 exclude intersegment activity that is eliminated in consolidation.
Year Ended August 31,
(In millions, except per share amounts) 2024 2023
Revenue:
Leasing & Management Services 232.3 179.9
Cost of revenue:
Leasing & Management Services 73.2 55.5
Margin:
Leasing & Management Services 159.1 124.4
Net gain on disposition of equipment (13.1 ) (17.3 )
Asset impairment, disposal, and exit costs, net — 46.7
Interest and foreign exchange 100.8 85.4
Income tax expense (62.0 ) (24.6 )
Earnings before earnings from unconsolidated affiliates 161.7 66.4
Earnings from unconsolidated affiliates 11.0 9.2
Net earnings attributable to noncontrolling interest (12.6 ) (13.1 )
Net earnings attributable to Greenbrier $ 160.1 $ 62.5
Diluted earnings per common share $ 4.96 $ 1.89
Performance for our reportable 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 for either external or internal reporting purposes.
Year Ended August 31,
Operating profit (loss):
Leasing & Management Services 139.0 103.3
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Consolidated Results
(In millions) 2024 2023 Increase(Decrease) % Change
* Not meaningful
Through our integrated business model, we provide a broad range of custom products and services in each of our reportable segments, which have various selling prices and margins. The demand for and mix of products and services delivered changes from period to period, which causes fluctuations in our financial results.
The 10.1% decrease in Revenue for the year ended August 31, 2024 as compared to the prior year was primarily due to a 10.2% decrease in Manufacturing Revenue. The decrease in Manufacturing Revenue was primarily attributed to a 10.4% decrease in deliveries.
The 14.8% decrease in Cost of revenue for the year ended August 31, 2024 as compared to the prior year was primarily due to a 14.1% decrease in Manufacturing Cost of revenue. The decrease in Manufacturing Cost of revenue was primarily attributed to a 10.4% decrease in deliveries during the year ended August 31, 2024.
Margin as a percentage of Revenue was 15.8% and 11.2% for the years ended August 31, 2024 and 2023, respectively. Margin as a percentage of Revenue was positively impacted by an increase in Manufacturing Margin percentage from 8.2% to 12.1% primarily attributed to operating efficiencies and favorable product mix during the year ended August 31, 2024.
The $97.6 million increase in Net earnings attributable to Greenbrier for the year ended August 31, 2024 as compared to the prior year was primarily due to the following:
•
$117.4 million increase in Margin for the year ended August 31, 2024 primarily due to operating efficiencies and a favorable product mix within our Manufacturing segment and an increase in rents associated with a larger lease fleet and improved lease rates in our Leasing & Management Services segment.
•
$46.7 million in Asset impairment, disposal and exit costs, net for the year ended August 31, 2023 primarily related to the sale and closure of our Gunderson Facility.
These were partially offset by the following:
•
$37.4 million increase in Income tax expense associated with higher pre-tax earnings during the year ended August 31, 2024.
•
$15.4 million increase in Interest and foreign exchange primarily attributed to an increase in interest expense from higher borrowings and interest rates for the year ended August 31, 2024.
•
$11.8 million increase in Selling and administrative expense was primarily attributed to an increase in employee related costs including higher long-term incentive compensation for the year ended August 31, 2024.
For discussion related to the results of operations and changes in financial condition for 2023 compared to 2022 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2023 Form 10-K, which was filed with the United States Securities and Exchange Commission on October 25, 2023.
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Manufacturing Segment
(In millions, except deliveries) 2024 2023 Increase(Decrease) % Change
Operating profit (%) 9.3 % 4.2 % 5.1 % *
* Not meaningful
Our Manufacturing segment primarily generates revenue from manufacturing a wide range of railcars and from the conversion of existing or in-service railcars through our facilities in North America and Europe.
Manufacturing Revenue decreased $344.1 million or 10.2% for the year ended August 31, 2024 compared to the prior year. The decrease in Revenue was primarily attributed to a 10.4% decrease in deliveries during the year ended August 31, 2024.
Manufacturing Cost of revenue decreased $434.5 million or 14.1% for the year ended August 31, 2024 compared to the prior year. The decrease in Cost of revenue was primarily attributed to a 10.4% decrease in the volume of deliveries and favorable product mix during the year ended August 31, 2024.
Manufacturing Margin as a percentage of Revenue increased 3.9% for the year ended August 31, 2024 compared to the prior year. The increase in Margin percentage was primarily attributed to operating efficiencies and favorable product mix during the year ended August 31, 2024.
Manufacturing Operating profit increased $140.7 million or 99.9% for the year ended August 31, 2024 compared to the prior year. The increase in Operating profit was primarily attributed to an increase in Margin during the year ended August 31, 2024 as well as the prior year including $46.7 million of charges related to the sale and closure of our Gunderson Facility during the year ended August 31, 2023.
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Maintenance Services Segment
(In millions) 2024 2023 Increase(Decrease) % Change
Operating profit (%) 9.1 % 9.1 % -- *
* Not meaningful
Our Maintenance Services segment primarily generates revenue from railcar component manufacturing and servicing, providing railcar maintenance services and scrapping wheels and other components.
Maintenance Services Revenue decreased $107.6 million or 26.5% for the year ended August 31, 2024 compared to the prior year. The decrease was primarily attributed to 11.6% lower volumes in our wheels business due to lower demand, a change in product mix and a $9.1 million decrease due to lower scrap metal volume and pricing.
Maintenance Services Cost of revenue decreased $99.9 million or 27.4% for the year ended August 31, 2024 compared to the prior year. The decrease was primarily due to operating at lower volumes and a change in product mix during the year ended August 31, 2024.
Maintenance Services Margin as a percentage of Revenue increased 1.2% for the year ended August 31, 2024 compared to the prior year. The increase in Margin percentage was primarily attributed to a favorable change in product mix during the year ended August 31, 2024. This was partially offset by a decrease in scrap metal pricing during the year ended August 31, 2024.
Maintenance Services Operating profit decreased $9.8 million or 26.6% for the year ended August 31, 2024 compared to the prior year. The decrease in Operating profit was primarily attributed to operating at lower volumes and a decrease in scrap metal pricing and volume during the year ended August 31, 2024.
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Leasing & Management Services Segment
(In millions) 2024 2023 Increase(Decrease) % Change
Operating profit (%) 59.8 % 57.4 % 2.4 % *
* Not meaningful
Our Leasing & Management Services segment generates revenue from leasing railcars from our lease fleet, providing various management services, syndication revenue associated with leases attached to new railcar sales, interim rent on leased railcars for syndication and the sale of railcars purchased from third parties with the intent to resell.
Leasing & Management Services Revenue increased $52.4 million or 29.1% for the year ended August 31, 2024 compared to the prior year. The increase was primarily attributed to an increase of $19.7 million in rents associated with a larger lease fleet and higher lease rates, an $8.9 million increase in the sale of railcars which were purchased from third parties with the intent to resell and a $9.7 million increase in interim rent on leased railcars for syndication during the year ended August 31, 2024.
Leasing & Management Services Cost of revenue increased $17.7 million or 31.9% for the year ended August 31, 2024 compared to the prior year. This was primarily due to higher costs from an increase in the volume of railcars sold that we purchased from third parties and a larger lease fleet during the year ended August 31, 2024.
Leasing & Management Services Margin as a percentage of Revenue decreased 0.6% for the year ended August 31, 2024 compared to the prior year. Margin as a percentage of Revenue for the year ended August 31, 2024 was negatively impacted by higher sales of railcars that were purchased from third parties which have lower margin percentages.
Leasing & Management Services Operating profit increased $35.7 million or 34.6% for the year ended August 31, 2024 compared to the prior year. The increase was primarily attributed to higher rents from a larger lease fleet and improved lease rates during the year ended August 31, 2024.
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Selling and Administrative
(In millions) 2024 2023 Increase(Decrease) % Change
Selling and administrative expense was $247.1 million or 7.0% of Revenue for the year ended August 31, 2024 and $235.3 million or 6.0% of Revenue for the year ended August 31, 2023.
The $11.8 million increase was primarily attributed to an increase in employee related costs including higher long-term incentive compensation during the year ended August 31, 2024.
Net Gain on Disposition of Equipment
Net gain on disposition of equipment typically 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 optimize our lease fleet and to manage risk and liquidity.
Net gain on disposition of equipment was $13.1 million and $17.3 million for the years ended August 31, 2024 and 2023, respectively. The decrease in Net gain on disposition of equipment was primarily attributed to fewer sales of assets from our lease fleet during the year ended August 31, 2024.
Asset Impairment, Disposal and Exit Costs, Net
Asset impairment, disposal, and exit costs, net was $46.7 million for the year ended August 31, 2023 related to charges associated with the Gunderson Facility and divestiture of Southwest Steel, partially offset by a gain on disposal of majority interest in the Rayvag joint venture.
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 $ 93.8 $ 79.2 $ 14.6
Foreign exchange loss, net 7.0 6.2 0.8
The $15.4 million increase in Interest and foreign exchange expense during the year ended August 31, 2024 compared to the prior year was primarily attributed to an increase in interest expense from higher borrowings and interest rates.
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Income Tax
In 2024 our Income tax expense was $62.0 million on $223.7 million of pre-tax earnings for an effective tax rate of 27.7%. The rate was higher than the U.S statutory tax rate primarily due to the geographic mix of earnings, nondeductible expenses, increased valuation allowance, and U.S. taxes on profits in foreign jurisdictions, offset by a benefit for additional U.S. foreign tax credits carried forward to future periods.
In 2023 our income tax expense was $24.6 million on $91.0 million of pre-tax earnings for an effective tax rate of 27.0%. The rate was higher than the U.S. statutory tax rate primarily due to the geographic mix of earnings and U.S. taxes on profits in foreign jurisdictions, offset by net favorable impacts related to changes in foreign currency exchange rates for our U.S. Dollar denominated foreign operations.
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 before income taxes and earnings from unconsolidated affiliates, whereas only our 50% share of the tax is included in Income tax expense.
The EU Member States have formally adopted the Pillar Two Directive, which generally provides for a minimum effective tax rate of 15%, as established by the Organisation for Economic Co-operation and Development (OECD) Pillar Two Framework. The OECD Pillar Two Framework must be adopted by each respective country into their tax laws, which are effective for us beginning on September 1, 2024. We continue to closely monitor additional guidance from the OECD and analyze potential impacts these law changes may have, however we do not expect a material change to our effective tax rate.
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 results from these unconsolidated affiliates on an after-tax basis.
Earnings from unconsolidated affiliates were $11.0 million and $9.2 million for the years ended August 31, 2024 and 2023, respectively. The increase was primarily related to $5.2 million in higher earnings at our Brazil operations during the year ended August 31, 2024. This was partially offset by $4.5 million in lower earnings related to a temporarily idle facility during the year ended August 31, 2024.
Net Earnings Attributable to Noncontrolling Interest
Net earnings attributable to noncontrolling interest were $12.6 million and $13.1 million for the years ended August 31, 2024 and 2023, respectively. Net earnings attributable to noncontrolling interest 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 provided by operating activities $ 329.6 $ 71.2
Net cash used in investing activities (320.4 ) (280.0 )
Net cash provided by (used in) financing activities 86.2 (76.2 )
Effect of exchange rate changes (29.5 ) 28.6
We continue to be financed through cash generated from operations and borrowings. At August 31, 2024 Cash and cash equivalents and Restricted cash were $368.6 million, an increase of $65.9 million from $302.7 million at the prior year end.
Cash Flows From Operating Activities
The $258.4 million increase in cash from operating activities for the year ended August 31, 2024 compared to the year ended August 31, 2023 was primarily due to a change in Leased railcars for syndication and a $97.1 million increase in Net earnings.
Cash Flows From Investing Activities
Cash used in investing activities primarily related to capital expenditures net of proceeds from the sale of assets and investment activity with our unconsolidated affiliates. The $40.4 million increase in cash used in investing activities for the year ended August 31, 2024 was primarily attributable to a $36.2 million increase in capital expenditures compared to the year ended August 31, 2023.
Year Ended August 31,
Capital expenditures:
Leasing & Management Services $ (277.0 ) $ (272.9 )
Maintenance Services (18.5 ) (17.3 )
Total capital expenditures (gross) $ (398.3 ) $ (362.1 )
Proceeds from sales of assets 75.0 78.8
Total capital expenditures (net of proceeds) $ (323.3 ) $ (283.3 )
Capital expenditures primarily relate to additions to our lease fleet and on-going investments in the safety, productivity and improvements 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. Proceeds from sales of assets are expected to be approximately $90 million for 2025.
Gross capital expenditures for 2025 are expected to be approximately $360 million for Leasing & Management Services, approximately $110 million for Manufacturing and approximately $10 million for Maintenance Services. Capital expenditures for 2025 primarily relate to additions to our lease fleet reflecting our leasing strategy and continued investments into the safety and productivity of our facilities.
Cash Flows From Financing Activities
The $162.4 million increase in cash flow from financing activities for the year ended August 31, 2024 compared to the year ended August 31, 2023 was primarily attributed to a $57.4 million increase in net proceeds from revolving notes, $52.8 million higher proceeds from the issuance of notes payable, net of repayments and a $55.6 million reduction in the repurchase of stock compared to the prior year.
During the year ended August 31, 2024 we issued $178.5 million of asset backed securities and used proceeds to pay down $139.9 million of our GBX Leasing warehouse facility. We also borrowed $196.6 million on the GBX Leasing
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warehouse facility to grow the lease fleet. In February 2024, we paid $47.7 million to retire our 2024 Convertible Notes.
Dividend & Share Repurchase Program
A quarterly dividend of $0.30 per share was declared on October 16, 2024.
The Board of Directors has authorized our company to repurchase in aggregate up to $100.0 million of our common stock. The program may be modified, suspended, or discontinued at any time without prior notice and currently has an expiration date of January 31, 2025. Under the share repurchase program, shares of common stock may be purchased from time to time on the open market or through privately negotiated transactions. The timing and amount of purchases is 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.
During the year ended August 31, 2024, we purchased a total of 38 thousand shares for $1.3 million. During the year ended August 31, 2023, we purchased a total of 1.9 million shares for $56.9 million, of which 1.8 million shares for $53.6 million were purchased under the current authorization of the share repurchase program. As of August 31, 2024, the amount remaining for repurchase under the share repurchase program was $45.1 million.
Cash, Borrowing Availability and Credit Facilities
Our current cash balance is part of our strategy to maintain strong liquidity to respond to current uncertainties. As of August 31, 2024, we had $351.8 million in Cash and cash equivalents and $345.9 million in available borrowings. The available balance to draw under committed credit facilities includes $258.3 million on the North American credit facility, $31.6 million on the European credit facilities and $56.0 million on the Mexican credit facilities.
Our senior secured credit facilities, consisting of four components, aggregated to $1.4 billion as of August 31, 2024.
Nonrecourse Credit Facilities
GBX Leasing –As of August 31, 2024, a $550.0 million nonrecourse warehouse credit facility existed to support the operations of GBX Leasing. Advances under the facility are secured by a pool of leased railcars and bear interest at the Secured Overnight Financing Rate (SOFR) plus 1.85% plus 0.11% as a SOFR adjustment. As of August 31, 2024, interest rate swap agreements cover 74% of the outstanding balance to swap the floating interest rate to a fixed rate. The warehouse credit facility was amended in September 2024 to reduce the size of the credit facility by $100.0 million to $450.0 million and to extend the maturity date from August 2027 to September 2029. The warehouse credit facility currently converts to a term loan in September 2027.
Other Credit Facilities
North America –As of August 31, 2024, a $600.0 million revolving line of credit existed to provide working capital and interim financing of equipment, principally for our U.S. and Mexican operations. The North America credit facility is secured by substantially all our U.S. assets not otherwise pledged as security for term loans, the warehouse credit facility or the railcar asset-backed securities. Available borrowings 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. Advances 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. The North America credit facility matures in August 2026.
Europe –As of August 31, 2024, lines of credit totaling $78.2 million, secured by certain of our European assets, were available for working capital needs of our European manufacturing operations. The European lines of credit include $33.1 million which are guaranteed by us. The European credit facilities have variable rates that range from Warsaw Interbank Offered Rate (WIBOR) plus 1.10% to WIBOR plus 1.45% and Euro Interbank Offered Rate (EURIBOR) plus 1.90%. The European credit facilities are regularly renewed and currently have maturities that range from October 2024 through September 2026.
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Mexico –As of August 31, 2024, our Mexican railcar manufacturing operations had lines of credit totaling $166.0 million for working capital needs, $66.0 million of which we and our joint venture partner have each guaranteed 50%. Advances under these facilities bear interest at variable rates that range from SOFR plus 2.22% to SOFR plus 4.25%. The Mexican credit facilities have maturities that range from February 2025 through January 2027.
As of August 31,
Nonrecourse credit facility balances:
Other credit facility balances:
North America — —
Outstanding commitments under the North American credit facility included letters of credit which totaled $5.9 million and $4.9 million as of August 31, 2024 and 2023, respectively.
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, 2024, 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 $653.1 million of variable rate debt to fixed rate debt as of August 31, 2024.
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.
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The following table shows our estimated future contractual cash obligations as of August 31, 2024:
Year Ended August 31,
1 The repayment of 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.
2 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, 2024.
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 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.
Impairment of long-lived assets- We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. When such events or changes in circumstances occur, a recoverability test is performed based upon estimated undiscounted cash flows expected to be realized over the remaining useful life of the asset group. If the carrying amount of an asset group exceeds the estimated undiscounted future cash flows, an impairment would be measured as the difference between the fair value of the asset group and the carrying amount of the asset group.
An asset group is generally established by identifying the lowest level of cash flows generated by a group of assets that are largely independent of the cash flows of other assets. Determining whether a long-lived asset is impaired requires various estimates and assumptions, including whether a triggering event has occurred, the identification of asset groups, and the determination of the fair value of real and personal property. Estimates of future cash flows are by nature highly uncertain and contemplate factors that may change over time. For further information, see Note 4 - Divestitures to the Consolidated Financial Statements.
Goodwill - We evaluate goodwill for possible impairment annually or more frequently if events or changes in circumstances indicate that the carrying amounts of our reporting units exceed their fair value. We test goodwill for impairment by either performing a qualitative or quantitative assessment. When we perform a qualitative assessment, we analyze macroeconomic and industry conditions, 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 carrying value of a reporting unit exceeds its respective fair value, a quantitative assessment is performed. We performed a qualitative assessment for our annual goodwill impairment test during the third quarter of 2024 and determined that it was more likely than not that the fair values of all reporting units with goodwill exceeded their carrying values; therefore, we concluded that goodwill was not impaired.
When we perform a quantitative assessment, we exercise judgment to develop estimates of the fair values of our reporting units based on a weighting of income and market approaches. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows which incorporates forecasted revenues, long-term growth rate, gross margin percentages, operating expenses, and the use of discount rates. Under
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the market approach, we estimate the fair value based on observed market multiples for comparable businesses. 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. In 2023, we performed a quantitative goodwill impairment test and determined that the estimated fair values of all reporting units with goodwill exceeded their carrying values.
We make certain estimates and assumptions to determine our reporting units and whether the fair value of each reporting unit is greater than its respective carrying 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, increases in pricing of materials and components, changes in demand, or potential macroeconomic events may cause future assessment conclusions to differ. For further information, see Note 7 - Goodwill to the Consolidated Financial Statements.
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 a tax benefit from uncertain tax positions in the financial statements only when it is more likely than not the position will be sustained upon examination by relevant tax authorities.
Our annual tax rate is based on our income, statutory tax rates, and tax planning opportunities available to us in the various jurisdictions in which we operate. Judgment is required in determining our tax expense and in evaluating our tax positions, as tax laws are complex and subject to different interpretations by taxpayers and government taxing authorities. Our income tax rate is affected by the tax rates that apply to our foreign earnings and could be adversely impacted by higher or lower earnings than anticipated in a particular jurisdiction. In addition to local country tax laws and regulations, our income tax rate depends on the extent that our foreign earnings are taxed by the U.S. through provisions such as the global intangible low-taxed income (GILTI) tax and base erosion and anti-abuse tax (BEAT). We review our deferred tax assets and tax positions quarterly and adjust the balances as new information becomes available. For further information regarding income taxes, see Note 17 - Income Taxes to 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 misstated. 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 - Commitments and Contingencies to the Consolidated Financial Statements.
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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, 2024 exchange rates, notional amounts of forward exchange contracts for the purchase of Polish Zlotys and the sale of Euros aggregated to $143.9 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, 2024, net assets of foreign subsidiaries aggregated to $164.7 million and a 10% strengthening of the U.S. Dollar relative to the foreign currencies would result in a decrease in equity of $16.5 million, or 1.2% 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 $653.1 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, 2024, 84% of our outstanding debt had fixed rates and 16% had variable rates. At August 31, 2024, 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, 2024 and August 31, 2023, 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, 2024, 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, 2024 and August 31, 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended August 31, 2024, 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, 2024, 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 24, 2024 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
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.
Sufficiency of audit evidence within the North American manufacturing businesses
As discussed in Item 9A. Controls and Procedures, a material weakness was identified as of August 31, 2023 that was remediated during fiscal year 2024. The description of the material weakness stated that the Company did not effectively design and maintain controls over information technology (IT) general controls in one IT environment in its primary North America manufacturing businesses that are relevant to the preparation of the Company’s consolidated financial statements. The Company did not (i) maintain change management controls to ensure
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configuration data changes affecting the IT application were appropriate (ii) design and maintain program development controls to ensure the data migration, program testing and approval of new software development is aligned with business and IT requirements and (iii) maintain user access controls to ensure segregation of duties in the Company’s financial application. The control deficiencies resulted from incomplete risk assessment, inadequate training of personnel and ineffective control activities related primarily to the implementation of a new ERP system in the Company’s primary North America manufacturing businesses. As a result, during the period of fiscal year 2024 in which the material weakness remained unremediated, process level automated controls that are dependent on the affected IT environment and manual controls that rely on system-generated data or reports from the affected IT environment were ineffective because they could have been adversely impacted.
We identified the evaluation of the sufficiency of audit evidence over the Company’s primary North American manufacturing businesses as a critical audit matter. Evaluating the sufficiency of audit evidence obtained required especially subjective auditor judgment because of the pervasiveness of the material weakness noted above.
The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over the Company’s primary North American manufacturing businesses including evaluating our scoping thresholds and control risk assessments considering the material weakness noted above. For relevant financial statement account balances at the North America manufacturing businesses, we:
•
increased the number of sample selections compared to what we would have otherwise made if the Company’s controls were designed and operating effectively for the full fiscal year
•
tested the underlying records of selected transaction data obtained from the impacted information technology system to support the use of the information in the conduct of the audit
•
inspected supporting documentation and evidence of authorization for a selection of manual and automated journal entries.
We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed, including the appropriateness of the nature and extent of such evidence.
/s/ KPMG LLP
We have served as the Company’s auditor since 2011.
Portland, Oregon
October 24, 2024
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
As of August 31,
Assets
Cash and cash equivalents $ 351.8 $ 281.7
Income tax receivable 45.1 42.2
Leased railcars for syndication 130.7 187.4
Property, plant and equipment, net 711.7 619.2
Investment in unconsolidated affiliates 87.3 88.7
Intangibles and other assets, net 244.4 255.8
Liabilities and Equity
Accounts payable and accrued liabilities 731.4 743.5
Commitments and contingencies (Notes 20 & 21)
Contingently redeemable noncontrolling interest 41.7 55.6
Equity
Greenbrier
Accumulated other comprehensive loss (34.0 ) (7.3 )
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 (13.1 ) (17.3 ) (37.2 )
Asset impairment, disposal, and exit costs, net — 46.7 —
Earnings before earnings from unconsolidated affiliates 161.7 66.4 42.5
Earnings from unconsolidated affiliates 11.0 9.2 11.3
Net earnings attributable to noncontrolling interest (12.6 ) (13.1 ) (6.9 )
Net earnings attributable to Greenbrier $ 160.1 $ 62.5 $ 46.9
Basic earnings per common share $ 5.15 $ 1.95 $ 1.44
Diluted earnings per common share $ 4.96 $ 1.89 $ 1.40
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)
Unrealized gain on derivative financial instruments 2 2.9 23.1 15.7
Other (net of tax effect) — (1.0 ) (0.7 )
Comprehensive income attributable to Greenbrier $ 133.4 $ 100.8 $ 45.0
1Net of tax effect of $4.0 million, $3.7 million and $(1.7) million for the years ended August 31, 2024, 2023 and 2022, respectively.
2Net of tax effect of $(0.5) million, $(8.8) million and $(6.2) million for the years ended August 31, 2024, 2023 and 2022, 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 — — — (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 ) —
Stock based compensation expense — 15.5 — — 15.5 — 15.5 —
Cash dividends ($1.08 per share) — — (35.8 ) — (35.8 ) — (35.8 ) —
Other comprehensive income, net — — — 38.3 38.3 — 38.3 —
Joint venture partner distribution declared — — — — — (10.9 ) (10.9 ) —
Restricted stock awards (net of cancellations) 0.2 8.8 — — 8.8 — 8.8 —
Unamortized restricted stock — (11.4 ) — — (11.4 ) — (11.4 ) —
Stock based compensation expense — 12.1 — — 12.1 — 12.1 —
Repurchase of stock (1.9 ) (57.4 ) — — (57.4 ) — (57.4 ) —
Cash dividends ($1.11 per share) — — (36.4 ) — (36.4 ) — (36.4 ) —
Other comprehensive loss, net — — — (26.7 ) (26.7 ) — (26.7 ) —
Joint venture partner distribution declared — — — — — (9.3 ) (9.3 ) —
Restricted stock awards (net of cancellations) 0.2 16.4 — — 16.4 — 16.4 —
Unamortized restricted stock — (21.5 ) — — (21.5 ) — (21.5 ) —
Stock based compensation expense — 17.1 — — 17.1 — 17.1 —
Repurchase of stock — (1.3 ) — — (1.3 ) — (1.3 ) —
Cash dividends ($1.20 per share) — — (38.8 ) — (38.8 ) — (38.8 ) —
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 (13.1 ) (17.3 ) (37.2 )
Stock based compensation expense 17.1 12.1 15.5
Asset impairment, disposal, and exit costs, net — 46.7 —
Noncontrolling interest adjustments 3.9 8.4 1.6
Decrease (increase) in assets:
Income tax receivable (2.9 ) (2.4 ) 72.3
Leased railcars for syndication (5.1 ) (123.7 ) (40.6 )
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (63.5 ) 16.3 165.3
Net cash provided by (used in) operating activities 329.6 71.2 (150.4 )
Cash flows from investing activities
Investment in and advances to unconsolidated affiliates — (3.5 ) (2.3 )
Cash distribution from unconsolidated affiliates and other 2.9 6.8 3.5
Net cash used in investing activities (320.4 ) (280.0 ) (224.0 )
Cash flows from financing activities
Proceeds from issuance of notes payable 180.6 75.0 398.3
Repayments of notes payable (89.6 ) (36.8 ) (23.4 )
Debt issuance costs (2.9 ) (0.6 ) (7.3 )
Repurchase of stock (1.3 ) (56.9 ) —
Cash distribution to joint venture partner (9.3 ) (13.0 ) (16.9 )
Tax payments for net share settlement of restricted stock (5.1 ) (2.6 ) (3.7 )
Net cash provided by (used in) financing activities 86.2 (76.2 ) 244.9
Effect of exchange rate changes (29.5 ) 28.6 17.2
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 support the Company's integrated business model. The Manufacturing segment, which currently operates from facilities in the U.S., Mexico, Poland and Romania, produces double-stack intermodal railcars, tank cars, freight railcars, and automotive railcar products. The Maintenance Services segment performs wheel and axle servicing, railcar maintenance services and produces a variety of component parts for the rail industry in North America. The Leasing & Management Services segment owns approximately 15,500 railcars as of August 31, 2024. The Company also provides management services for railroads, shippers, carriers, institutional investors and other leasing and transportation companies in North America. Through unconsolidated affiliates the Company produces rail and industrial components and has an ownership stake in a railcar manufacturer inBrazil.
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).
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.
Accounts receivable - Accounts receivable consists of receivables from customers and receivables from related parties (see Note 16 - Related Party Transactions to the Consolidated Financial Statements) and is stated net of allowance for doubtful accounts of $3.6 million and $2.8 million as of August 31, 2024 and 2023, respectively.
As of August 31,
Allowance for doubtful accounts
Balance at beginning of period $ 2.8 $ 2.3 $ 2.4
Additions, net of reversals 0.8 0.5 0.4
Currency translation effect 0.1 0.2 (0.2 )
Balance at end of period $ 3.6 $ 2.8 $ 2.3
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.
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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, 2024, 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) and 41.9% interest in Axis. The Company does not consolidate Greenbrier-Maxion for financial reporting purposes and accounts for its interest under the equity method of accounting as the entity's governance provisions require that all significant decisions of Greenbrier-Maxion are subject to shared consent of its shareholders.
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 15 - 25 years
Machinery and equipment 3 - 15 years
Other 3 - 10 years