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.
The COVID-19 coronavirus pandemic, governmental reaction to the pandemic, and related economic disruptions could negatively impact on our business, liquidity and financial position, results of operations, stock price, and ability to convert backlog to revenue.
The COVID-19 coronavirus outbreak continues to present risks to our business. While in some geographies economic activity has increased and the rate of human morbidity and mortality have decreased in recent months, the pandemic has not yet been contained and the number of its victims and the extent of negative impact on the global economy cannot be foreseen. Several of the countries in which we operate continue to be significantly negatively impacted by COVID-19.
We are unable to predict when, how, or with what magnitude COVID-19 and related events will negatively impact our business. We currently identify the following factors as the most significant risks to our business due to COVID-19, governmental actions, and economic conditions.
• The market price of our common stock may drop or remain volatile.
The longer the pandemic continues, the more likely that more of the foregoing risks will be realized and that other negative impacts on our business will occur, some of which we cannot now foresee.
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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, repair 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. These shiftsin demandcouldaffectour resultsof operationsand couldhave an adverseeffecton our revenue and our profitability. 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.
Cyclicaleconomic downturns in our industry usually result in decreased demand forour productsand servicesand reducedrevenue.
The industry in which we operate is subject to periodic economic cycles. Our industry currently is in an economic downturn with reduced demand. Thepurchasingtrendsof customers in our industry have a significantimpacton demandforour productsand services.As a result, during downturns,the rate at which we convert backlog to revenue usually decreases and we mayslow down or halt productionatsome of our facilities. We anticipate that the current economicdownturn in our industry will reducedemandforour productsand services, and will resultin one or more of the following: lowersalesvolumes,lowerprices,lowerleaseutilizationratesand decreased revenues and profits.
Equipment failures, technological failures, costs and inefficiencies associated with changing of production lines, or transfer of production between facilities, could lead to production, delivery, or service curtailments or shutdowns, loss of revenue or higher expenses.
We operate a substantial amount of equipment at our production facilities. An interruption in production capabilities or maintenance and repair capabilities at our facilities, as a result of equipment or technology failure, acts of nature, 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, cause us to lose future sales, and negatively affect our reputation and our results of operations.
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 industriesin which our customersoperatearedrivenby dynamicmarketforcesand trends,whicharein turninfluencedby economic, regulatory,and politicalfactors.Featuresand functionalityspecificto certainrailcartypescouldresultin thoserailcarsbecoming obsoleteas customerrequirementsforfreightdeliverychange.
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 including the recent acquisition of the ARI manufacturing business. We may in the future acquire other businesses or invest in or enter into joint ventures with other companies. Our failureto identifyfutureacquisition or joint venture opportunities, or to complete potential acquisitions or joint ventures on favorable terms,could hinder our abilityto grow our business. These transactions create risks such as:
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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. In addition, valuations supporting our acquisitions and investments could change rapidly. We could determine that such valuations have experienced impairments or other-than-temporary declines in fair value, which could adversely impact our financial results.
Our backlogisnot necessarilyindicativeof the levelof our futurerevenues.
Our manufacturing backlog represents future production for our customers in various periods, and estimated potential revenue attributable to such production. Our backlog of railcar units and marine vessels is not necessarily indicative of future results of operations. Certain orders in backlog are subject to customary documentation and completion of terms which may not occur. Customers may attempt to cancel or modify orders in backlog or refuse to accept and pay for products. Some backlog is subject to certain conditions, including potential adjustment to prices due to changes in prevailing market prices, or due to lower prices for new orders accepted by us from other customers for similar cars on similar terms and conditions during relevant time periods. Our reported backlog may not be converted to revenue in any particular period and some of our contracts permit cancellations with limited compensation that would not replace lost revenue or margins. In addition, some customers may attempt to delay orders, cancel or modify a contract even if the contract does not allow for such cancellation or modification, and we may not be able to recover all revenue or earnings lost due to a breach of contract or a contract may be found to be unenforceable. The likelihood of cancellations, modifications, rejection and non-payment for our products generally increases during periods of market
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weakness. The timing of converting backlog to revenue is also materially impacted by our decision whether to lease railcars, sell railcars, or syndicate railcars with a lease attached to an investor. We cannot guarantee that our reported backlog will convert to revenue in any particular period, if at all. Actual revenue may not equal our anticipated revenues based on our backlog, and therefore, our backlog is not necessarily indicative of the level of our future revenues.
Risks relatedto our operationsoutsideof the U.S.could adverselyaffectour operatingresults.
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, legal,trade, financial, labor or marketconditions in the countries where we,or our customers or suppliers, operate couldnegatively impactour businessactivitiesand operations.Some foreigncountriesin which we operateor mayoperatehave authoritiesthatregulate railroadsafetyand rail equipment designand manufacturing.Ifwe do not have appropriate certifications,we couldbe unableto marketand sellour rail equipment in those markets. Adverse changesin foreign regulations applicable to us or our customers, such as labor, environment,trade,tax, currencyand priceregulations, couldlimit our operations, makethemanufactureand distributionof our productsdifficult, and delay or limit our ability to repatriate income derived from foreign markets.
Our business benefits from free trade agreements between the United States 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, or repudiating or renegotiating contracts with us, our customers or our suppliers. 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 couldbe adverselyaffectedby violationsof theU.S.Foreign CorruptPracticesAct and similarworldwideanti-corruptionlaws, which mayconflictwith local business customs in certain jurisdictions.The failureto complywith laws governing internationalbusinessmayresultin substantialpenaltiesand 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. Ifwe areunableto successfully manage the risks associated with our foreign and cross-border business activities, our results of operations, financial condition, liquidityand cashflowscouldbe negativelyimpacted.
Fluctuationsin foreigncurrencyexchange ratescould leadto increasedcostsand lower profitability.
Outsideof theU.S.,we primarilyconductbusinessin Mexico, Europe and Braziland our non-U.S. businessesconducttheiroperationsin localcurrencies.We alsosourcematerialsworldwide.Fluctuationsin exchangeratesmayaffectdemandforour productsin foreignmarketsor our costcompetitivenessand mayadverselyaffectour profitability.Although we attemptto mitigatea portionof our exposureto changesin currencyratesthroughcurrencyratehedge contracts and otheractivities,theseeffortscannotfullyeliminatetherisksassociatedwith theforeigncurrencies.In addition,someof our borrowingsarein foreigncurrency,givingriseto riskfromfluctuationsin exchangerates. A materialor adversechangein exchangeratescouldresultin significantdeteriorationof profitsor in lossesfor us.
We derivea significantamount of our revenuefroma limitednumber of customers,the lossof or reductionof businessfromone or moreof which could have an adverseeffecton our business.
A significantportionof our revenueisgeneratedfroma few majorcustomers.Although we have some long-termcontractualrelationshipswith our majorcustomers,we cannotbe assuredthat we will continue to have good relations with our customers, or that our customerswill continueto purchase or lease our productsor services, or willcontinueto do so athistoricallevels, or will renew their existing contracts with us.A reductionin the purchasing or leasingof our products, a terminationof our servicesby one or moreof our majorcustomers, a decline in the financial condition of a major customer, or our failure to replace expiring customer contracts with new customer contracts on satisfactory termscould result in a loss of business and have an adverseeffecton our businessand operatingresults.
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We relyon limitedsuppliersforcertaincomponentsand servicesneeded in our production.Ifwe are not able to procurespecialtycomponentsor serviceson commerciallyreasonabletermsor on a timelybasis,our business,financialconditionand resultsof operationswould be adverselyaffected.
Our manufacturingoperationsdepend in parton our abilityto obtaintimelydeliveriesof materials, componentsand servicesin acceptablequantitiesand qualityfromour suppliers.In 2020, the top ten suppliers for all inventory purchases accounted for approximately 47% of total purchases. The top supplier accounted for 17% of total inventory purchases in 2020. No other suppliers accounted for more than 10% of total inventory purchases. Certaincomponentsof our products,particularlyspecialized componentslikecastings,bolsters,trucks,wheelsand axels,and certainservices,such as liningcapabilities,are currentlyonly availablefroma limitednumberof suppliers.Ifany one or moreof our suppliersceaseto provideus with sufficientquantitiesof our componentsor servicesin a timelymanneror on termsacceptableto us, or ceaseto provideservicesor manufacturecomponents of acceptablequality, or go out of business, we couldincurdisruptionsor be limitedin our productionof our productsand we couldhave to seekalternativesourcesforthesecomponentsor services.
In addition,we areincreasingthenumberof componentsand serviceswe manufactureor provideourselves,directlyor throughjointventures.Ifwe arenot successfulatmanufacturing such componentsor providingsuch servicesor have productionproblemsaftertransitioningto self-produced supplies,we maynot be ableto replacesuch componentsor servicesfromthirdpartysuppliersin a timely manner.Any such disruptionin our supplyof specializedcomponentsand servicesor increasedcostsof those componentsor servicescouldharmour businessand adverselyaffectour resultsof operations.
We face risks related to cybersecurity threats and incidents that increase our costs and could disrupt our business and operations.
We regularly face attempts by others to gain unauthorized access through the Internet, or to introduce malicious software, to our information technology systems. Additionally, malicious hackers, state-sponsored organizations, terrorists, employees and third-party service providers, or intruders into our physical facilities may attempt to gain unauthorized access and corrupt the processes used to operate our businesses and to design and manufacture our products. We are also a target of malicious attackers who attempt to gain access to our network or those of our customers; steal proprietary information related to our business, products, employees, and customers; or interrupt our systems and services or those of our customers. Such attempts are increasing in number and in technical sophistication, and if successful, expose us and the affected parties to risk of loss or misuse of proprietary or confidential information or disruptions of 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 as working remotely increases among our employees.
Addressing 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, 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.
The theft, loss, or misuse of third party data collected, used, stored, or transferred by us to run our business could result in significantly increased business and security costs or costs related to defending legal claims. 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.
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Updates or changes to our informationtechnologysystemsmayresultin problemsthatcould negatively impactour business.
Wehaveinformationtechnologysystems,comprisinghardware,network,software,people,processesand otherinfrastructurethatareimportanttotheoperationofourbusinesses.Wecontinuetoevaluateandimplement upgradesandchangestoinformationtechnologysystemsthatsupportsubstantiallyallofouroperatingandfinancial functions.Wecouldexperienceproblemsinconnectionwithsuchimplementations,includingcompatibilityissues, trainingrequirements,higherthanexpectedimplementationcostsandotherintegrationchallengesanddelays.A significantproblemwithanimplementation,integrationwithothersystemsorongoingmanagementandoperationofoursystemscouldnegativelyimpactourbusinessbydisruptingoperations.Suchaproblemcouldalsohavean adverseeffectonourabilitytogenerateandinterpretaccuratemanagementandfinancialreportsandother informationonatimelybasis,whichcouldhaveamaterialadverseeffectonourfinancialreportingsystemand internalcontrolsandadverselyaffectourabilitytomanageourbusiness.
We could be unable to leaserailcarsat satisfactoryrates,remarketleasedrailcarson favorabletermsupon leasetermination,or realizethe expectedresidualvalues for end of life railcars due to changes in scrap prices, each of which could reduceour revenueand decreaseour overallreturnor affectour abilityto sellleasedassetsin the future.
The profitabilityof our railcarleasingbusinessdependson our abilityto leaserailcarsatsatisfactoryrates, sell railcars with sufficiently profitable leases to investors, and to remarket,sell or scrap railcarswe own or manageupon theexpirationof leases.The rentwe receiveduring 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 abilityto lease or remarketleasedrailcarsprofitablyisdependenton severalfactors,including,but not limitedto, marketand industryconditions,costof, and demandfor,competingused or newer models, availability of credit and the credit-worthiness of potential customers, costsassociatedwith the refurbishmentof therailcars, the marketdemandor governmentalmandatesforrefurbishment, customers not defaulting on their leases, as well as market perceptions of residual values and interestrates.A downturn in theindustriesin which our lesseesoperateand decreaseddemandforrailcarscouldalsoincreaseour exposureto remarketingrisksbecauselesseesmaydemandshorterleaseterms,requiringus to remarketleased railcarsmorefrequently.Furthermore,theresalemarketforpreviouslyleasedrailcarshas a limitednumberof potentialbuyers.Our inabilityto lease,remarketor sellleasedrailcarson favorabletermscouldresultin an adverse impact to our consolidated financial statements or affectour abilityto sell leasedrailcarsto investors in the future.
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.
A failureto designor manufactureproductsor technologiesor to achieve timelycertificationor market acceptanceof new productsor technologiescould have an adverseeffecton our profitability.
We continueto introducenew railcarproduct innovations and technologies. We occasionallyacceptordersprior to receivingrailcarcertificationor proving our abilityto manufacturea qualityproductthatmeetscustomer standards.We couldbe unableto successfullydesignor manufacturenew railcarproduct innovations ortechnologies. Our inabilityto developand manufacturenew product innovations or technologiesin a timelyand profitablemanner, or to obtaintimelycertification,or to achievemarketacceptance,or to avoid quality problemsin our new products,couldhave a materialadverseeffecton our revenueand resultsof operationsand subjectus to losses including penalties,cancellationof orders, rejection of railcars by a customerand/orotherlosses.
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We depend on our seniormanagementteamand otherkey employees,and significantattritionwithin our managementteamor unsuccessfulsuccessionplanning formembersof our seniormanagementteamand otherkey employeeswhoare at or nearing retirementage, could adverselyaffectour business.
Our successdependsin parton our abilityto attract,retainand motivateseniormanagementand other key employees.Achievingthisobjectivemaybe difficultdue to manyfactors,includingfluctuationsin global economicand industryconditions,competitors’hiringpractices,costreductionactivities,and theeffectivenessof our compensationprograms.Competitionforqualifiedpersonnelcan be veryintense.We mustcontinueto recruit, retainand motivateseniormanagementand otherkey employeessufficientto maintainour currentbusinessand supportour futureprojects and growth objectives.We arevulnerableto attritionamongour currentseniormanagementteamand other key employees.Many membersof our seniormanagementteamand otherkey employeesareator nearingretirement age. Ifwe areunsuccessfulin our successionplanningefforts,thecontinuityof our businessand resultsof operationscouldbe adverselyaffected. A lossof any such personnel,or theinabilityto recruitand retainqualifiedpersonnelin thefuture,couldhave an adverseeffecton our business,financialconditionand resultsof operations.
Shortagesof skilledlabor, increased labor costs, or failure to maintain good relations with our workforce could adverselyaffectour operations.
We depend on skilledlaborin themanufactureof railcarsand marinebarges,repair,refurbishmentand maintenanceof railcarsand provisionof wheel servicesand supplyof parts.Some of ourfacilitiesarelocatedin areaswhere demandforskilledlaboroftenexceedssupply.Shortagesof sometypesof skilledlaborsuch as weldersand machineoperatorscouldrestrictour abilityto maintainor increase productionrates,leadto productioninefficienciesand increaseour laborcosts. Due to the competitive nature of the labor markets in which we operate and the cyclical nature of the railcar industry, the resulting employment cycle increases our risk of not being able to recruit, train and retain the employees we require at efficient costs and on reasonable terms, particularly when the economy expands, production rates are high or competition for such skilled labor increases. Additionally, we may develop an adverse relationship with our workforce or third party labor providers. We are a party to collective bargaining agreements with various labor unions at some of our operations. Disputes with regard to the terms and conditions of these agreements or our potential inability to negotiate acceptable contracts with these unions in the future could result in, among other things, strikes, work stoppages or other slowdowns by the affected workers. We cannot be assured that our relations with our workforce will remain positive. If our workers were to engage in a strike, work stoppage or other slowdown, or other employees were to become unionized or the terms and conditions in future labor agreements were renegotiated, or if union representation is implemented at such sites and we are unable to agree with the union on reasonable employment terms, including wages, benefits, and work rules, we could experience a significant disruption of our operations and incur higher ongoing labor costs. Our costs to recruit, train and retain necessary, qualified employees may exceed our expectations. If we are unable to recruit, train and retain adequate numbers of qualified employees and third party labor providers on a timely basis or at a reasonable cost or on reasonable terms, our business and results of operations could be adversely affected.
Risks relatedto potentialmisconductby employeesmayadverselyimpactus.
Our employeesmayengagein misconduct, fraudor otherimproperactivities,includingnoncompliancewith our policiesor regulatorystandardsand requirements,which couldsubjectus to regulatorysanctions and reputational damage and materiallyharmour business.Itisnot alwayspossibleto deteremployeemisconduct,and theprecautionswetaketo preventand detectthisactivitymaynot be effectivein controllingunknown or unmanagedrisksor losses, includingrisksassociatedwith harassment, as well as whistleblowercomplaintsand litigation.Therecan be no assurancethatwe will succeedin preventingmisconductby employeesin thefuture.In addition,theinvestigationof allegedmisconductdisruptsour operationsand may harm the public’s perception of our company, which maybe costly.Any such eventsin thefuturemayhave a materialadverse impacton our financialconditionor resultsof operations.
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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 areintenselycompetitiveand we expectthemto remainintensely competitive into theforeseeablefuture. 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 competitivefactors challenge or affectour abilityto competesuccessfully including the introductionof competitiveproducts and new entrantsintoour markets, a limitedcustomerbaseand pricepressures such as unfair competition and increases in raw materials and labor costs. If we do not competesuccessfully,our marketshare,marginand resultsof operationsmaybe adverselyaffected.
We have potentialexposureto environmentalliabilities,which could increase our operating costsor have an adverseeffect on our resultsof operations.
We aresubjectto extensivenational,state, foreign, provincialand localenvironmentallaws and regulations concerning,amongotherthings,airemissions,waterdischarge,solidwasteand hazardoussubstanceshandling and disposaland employeehealthand safety.These laws and regulationsarecomplexand frequentlychange.We couldincurunexpectedcosts,penaltiesand otherciviland criminalliabilityifwe, or in certain circumstances others, failto complywith environmentallaws or permitsissuedpursuantto thoselaws. We alsocouldincurcostsor liabilitiesrelated to off-sitewastedisposalor remediatingsoilor groundwatercontaminationatour properties,includingas set forth in Item 3, “Legal Proceedings.” In addition,futureenvironmentallaws and regulationsmayrequiresignificantcapitalexpendituresor changesto 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.
Fires,naturaldisasters, pandemics, terrorism, or severe or unusual weather conditionscould disruptour businessand result in lossof revenueor higher expenses or decreased demand for wheel services.
Any seriousdisruptionatany of our facilitiesdue to pandemic, terrorism, fire,hurricane,earthquake,flood, other severe weather eventsor any other naturaldisastercould impairour abilityto use our facilitiesand have a materialadverseimpacton our revenuesand increaseour costs and expenses.Ifthereisa naturaldisasteror otherseriousdisruptionatany of our facilities,particularly at any of our Mexican or Arkansas facilities,itcouldimpairour abilityto adequatelysupplyour customers,causea significant disruptionto our operations,causeus to incursignificantcoststo relocateor reestablishthesefunctionsand negativelyimpactour operatingresults.Whilewe insureagainstcertainbusinessinterruptionrisks,such insurancemaynot adequatelycompensateus forany lossesincurredas a resultof naturalor otherdisasters.
Additionally, seasonalfluctuationsin weatherconditionsmayleadto greatervariationin our quarterlyoperatingresultsas unusuallymildweatherconditionswillgenerallyleadto lowerdemandforour wheel-relatedproductsand services.Unusuallymildweatherconditionsthroughouttheyearmayreduceoveralldemandforour wheel-relatedproductsand repairservices.Ifoccurringforprolongedperiods,such weathercouldhave an adverseeffecton our business,resultsof operationsand financialcondition.
Business, regulatory,and legaldevelopmentsregardingclimatechange mayaffectthe demand forour productsor the abilityof our criticalsuppliersto meetour needs.
Scientific studies have suggested that emissions of certain gases, commonly referred to as greenhouse gases (GHGs) including carbon dioxide and methane, may be contributing to warming of the Earth’s atmosphere and other climate changes. Legislation and new rules to regulate emission of GHGs have been introduced in numerous state legislatures, the U.S. Congress, and by the EPA. Some of these proposals would require industries to meet stringent new standards that may require substantial reporting of GHGs and other carbon intensive activities in addition to potentially mandating reductions in our carbon emissions. While we cannot assess the direct impact of these or other potential regulations, we recognize that new climate change reporting or compliance protocols could affect our operating costs, the demand for our products and/or affect the price of materials, input factors and manufactured components which could impact our margins. Other adverse consequences of climate change could include an increased frequency of
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severe weather events and rising sea levels that could affect operations at our manufacturing facilities, the price of insuring company assets, or other unforeseen disruptions of our operations, systems, property or equipment.
Fluctuationsin the availabilityand priceof inputs could have an adverseeffecton our abilityto manufactureand sellour productsprofitablyand could adverselyaffectour marginsand revenue.
A significantportionof our businessdependsupon theadequatesupplyof steel, other raw materials, and energyatcompetitiveprices. A smallnumberof suppliersfulfilla substantialamountof our requirements.The costof steeland allothermaterialsused in theproductionof our railcarsrepresentsmorethan halfof our directmanufacturingcostsperrailcarand in theproductionof our marinebargesrepresentsmore than 30% of our directmanufacturingcostspermarinebarge. Our cost of acquiring steel, components, and other raw materials, to manufacture our railcars and marine barges are impacted by tariffs. The lossof suppliersor theirinabilityto meetour price,quality,quantityand deliveryrequirementscouldhave an adverseeffecton our abilityto manufactureand sellour productson a cost-effectivebasis.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. Our fixed-pricecontracts generally anticipatematerialpriceincreasesand surcharges. If we are unableto adjustour sellingpricesor have adequate protectionin our contractsagainstchangesin materialprices,our marginscould be adverselyaffected. Additionally, a portionof our Wheels, Repair& Parts businessesinvolvescrappingsteelpartsand theresultingrevenuefromsuch scrapsteelincreasesour marginsand revenues.When thepriceof scrapsteeldeclines,our revenuesand marginsin such businesses decrease.
Our debt could have negative consequences to our business or results of operations.
We face several risks due to our debtand debtservice obligationsincluding our potential inability to satisfy our financial obligations related to our consolidated indebtedness; potential breach of the covenants in our credit agreements; 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 vulnerable to competitive pressures and to general adverse economic or industry conditions, including fluctuations in market interest rates or a downturn in our business; we may be at a competitive 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 subjecting us to other risks; 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 mayincur additional indebtedness, including secured indebtedness, and other obligations and liabilities that do not constitute indebtedness.This could increasethe risksassociated with our debt. Some of our credit facilities and existing indebtednessuse the London Interbank Offered Rates (LIBOR) as a benchmark for establishing interest rates. LIBOR is the subject of recent proposals for reform. The consequences of these developments with respect to LIBOR cannot be entirely predicted at this time, but could result in an increase in the cost of our variable rate debt.
Our productand servicewarrantiescould exposeus to significantclaims.
We offerour customerslimitedwarrantiesformanyof our productsand services.Accordingly,we may be subjectto significantwarrantyclaimsin thefuture,such as multipleclaimsbasedon one defectrepeated throughoutour productionor servicingprocesses, claimsforwhich thecostof repairingthedefectivepartis highlydisproportionateto theoriginalcostof thepart 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 typesof warrantyclaimscouldresultin costly productrecalls,customersseekingmonetarydamages,significantrepaircostsand damageto our reputation. Ifwarrantyclaimsattributableto actionsof thirdpartycomponentmanufacturersarenot recoverable fromsuch partiesdue to theirpoor financialconditionor otherreasons,we couldbe liableforwarrantyclaims and otherrisksforusingthesematerials in our products.
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Train derailmentsor otheraccidentsor claimscould subjectus to legalclaimsthatadverselyimpactour business,financialconditionand our resultsof operations.
We providea numberof serviceswhich includethemanufactureand supplyof new railcars, wheels,componentsand parts and the lease and repair of railcarsforour customersthattransporta varietyof commodities,includingtankrailcarsthat transporthazardousmaterialssuch as crudeoil,ethanoland otherproducts. In addition, we have a Regulatory Services Group which offers regulatory, engineering, process consulting and advocacy support to the tank car and petrochemical rail shipper community, among other services. We couldbe subjectto variouslegal claims,includingclaimsofnegligence,personalinjury,physicaldamageand productor serviceliability,or in somecasesstrictliability,as wellas potentialpenaltiesand liabilityunderenvironmentallaws and regulations,in theeventof a derailmentor otheraccidentinvolvingrailcars,includingtankrailcars whether resulting from natural disasters, human error, terrorism, or other causes.Ifwe becomesubjectto any such claimsand areunablesuccessfullyto resolve themor maintain inadequateinsuranceforsuch claims,our business,financialconditionand resultsof operations couldbe materiallyadverselyaffected.
Our products may be sold to thirdpartieswhomaymisuse,improperlyinstallor improperlyor inadequatelymaintainor repairsuch productstherebypotentiallyexposingus to claimsthatcould increase our costsand weaken our financialcondition.The productswe manufacturearedesignedto work optimallywhen properlyoperated,installed, repaired,maintained and used to transport the intended cargo.When thisdoes not occur,we maybe subjectedto claimsor litigationassociatedwith product damage, injuriesor propertydamagethatcouldincreaseour costsand weaken our financialcondition.
Changes in, or failure to comply with, applicable regulations mayadversely impactour business,financialconditionand resultsof 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 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 and 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.
The timingof our assetsalesand relatedrevenuerecognitioncould cause significantdifferencesin our quarterlyresultsand liquidity.
We maybuildproductsin anticipationof a customerorder,or lease railcars to a customerwith the aim of selling such railcars on lease to a thirdparty. In such cases, the lag between productionand saleresults 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 periodicallysellrailcarsfromour own leasefleetand thetiming and volumeof such salesaredifficultto predict.As a result,comparisonsof our manufacturingrevenue, deliveries,quarterlynetgainon dispositionof equipment,incomeand liquiditybetweenquarterlyperiodswithinone yearand betweencomparableperiodsin differentyearsmaynot be meaningfuland shouldnot be reliedupon as indicatorsof our futureperformance.
Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our financial condition and profitability and we may take tax positions that the Internal Revenue Service or other tax authorities may contest.
We are subject to income taxes in both the United States and foreign jurisdictions. Significant judgments and estimates are required to be made in determining our worldwide provision for income taxes. Changes in estimates of projected
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future operating results, loss of deductibility of items, recapture of prior deductions (including related to interest on convertible notes), limitations on our ability to utilize tax net operating losses in the future or changes in assumptions regarding our ability to generate future taxable income could result in significant increases to our tax expense and liabilities that could adversely affect our financial condition and profitability.
We have in the past and may in the future take tax positions that the Internal Revenue Service (IRS) or other tax authorities may contest. We are required by an IRS regulation to disclose particular tax positions to the IRS as part of our tax returns for that year and future years. If the IRS or other tax authorities successfully contests a tax position that we take, we may be required to pay additional taxes, interest or fines that may adversely affect our results of operations and financial position.
Changes in the creditmarketsand the financialservicesindustrycould negativelyimpactour business,results of operations,financialconditionor liquidity.
The creditmarketsand thefinancialservicesindustrymayexperiencevolatilitywhich can resultin tighteravailabilityof crediton morerestrictivetermsand limitour abilityto sellrailcarassets or to syndicate railcars to investors with leases attached.Our liquidity, financialconditionand resultsof operationscouldbe negativelyimpactedifour abilityto borrow moneyto financeoperations,obtaincreditfromtradecreditors, obtain credit to maintain our hedging programs, offerleasingproductsto our customersor sellrailcarassets were to be impaired.In addition,scarcityof capitalcouldalsoadverselyaffectour customers’abilityto purchase, lease, or pay forproductsfromus or adversely affect our suppliers’abilityto provideus with product. Any of these conditionsor eventscouldresultin reductionsin our revenues,increasedpricecompetition,or increased operatingcosts,which couldadverselyaffectour business,financialconditionand resultsof operations.
Our stockpricehas been volatileand maycontinueto experiencelargefluctuations.
Thepriceof our commonstockhas experiencedrapidand significantpricefluctuations. The priceforour commonstockislikelyto continueto be volatileand subjectto priceand volumefluctuationsin responseto marketand otherfactors,includingthefactorsdiscussedelsewherein theseriskfactors.A materialdeclinein thepriceof our commonstockmayresultin theassertionof certainclaimsagainst us, and/orthecommencementof inquiriesand/orinvestigationsagainstus. A prolongeddeclinein thepriceof our commonstockcouldresultin a reductionin theliquidityof our commonstock,a reductionin our abilityto raisecapital,and theinability ofinvestors to obtaina favorablesellingpricefor their shares.Followingperiodsof volatilityin themarketpriceof theirstock, historically many companieshave been thesubjectof securitiesclassactionlitigation.Ifwe becameinvolvedin securitiesclass actionlitigationin thefuture,itcouldresultin substantialcostsand diversionof our management’sattentionand our resourcesand couldharmour stockprice,business,prospects,financialconditionand resultsof operations.
Changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies could adversely affect our financial results.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Some of these policies require use of estimates and assumptions that may affect the 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, but are not limited to, income taxes, warranty accruals, environmental costs, revenue recognition, depreciation and amortization, impairment of long-lived assets, litigation, and accrued liabilities, among other estimates. 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 our independent registered public accounting firm) may amend or even reverse their previous interpretations or positions on how these standards should be applied. In some cases, we could be required to apply a new or revised standard retrospectively, resulting in the revision of prior period financial statements. Changes in accounting standards can be hard to predict and can materially impact how we record and report our financial condition and results of operations
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Our financial performance and market value could cause future write-downs of goodwill or intangibles or other long-lived assets in future periods.
We are required to perform an annual impairment review of goodwill and indefinite lived assets which could result in an impairment charge if it is determined that the carrying value of the asset is in excess of the fair value. We perform a goodwill impairment test annually during our third quarter. Goodwill is also tested more frequently if changes in circumstances or the occurrence of events indicates that a potential impairment exists.
When we have continued underperforming operations or changes in circumstances, such as a decline in the market price of our common stock, changes in demand or in the numerous variables associated with the judgments, assumptions and estimates made in assessing the appropriate valuation of goodwill indicate the carrying amount of certain indefinite lived assets may not be recoverable, the assets are evaluated for impairment. Among other things, our assumptions used in the valuation of goodwill include growth of revenue and margins and increased cash flows over time. If actual operating results were to differ from these assumptions, it may result in an impairment of goodwill. As of August 31, 2020, we had $87.0 million of goodwill in our Manufacturing segment and $43.3 million in our Wheels, Repair & Parts segment. Impairment charges to our goodwill or our indefinite lived assets would impact our results of operations. Future write-downs of goodwill and intangibles could affect certain of the financial covenants under debt instruments and could restrict our financial flexibility. In the event of goodwill impairment, we may have to test other assets for impairment.
Our current shareholders could experience dilution.
We requiresubstantialworking capitalto fund our business.Ifadditionalfundsareraisedthroughthe issuanceof equitysecurities or convertible securities,thepercentageownershipheldby our shareholders wouldbe reducedand theequity securities we issue mayhave rights,preferencesor privilegesseniorto thoseof our commonstock.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 conversionof someor allof our convertible notes maydilutethe ownershipinterestsof existingshareholders.Any salesin thepublicmarketof thecommonstockissuableupon theconversionof thenotescould adverselyaffectprevailingmarketpricesof our commonstock.In addition,theexistenceof thenotesmayencourageshortsellingby marketparticipants,becausetheconversionof thenotescoulddepressthepriceof our commonstock.
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 stockholders to replace or remove members of our board of directors and may adversely affect the market price of our common stock.
Our Articlesof Incorporationand Bylaws, Oregon law, and contracts and debt instruments to which we are a party,containcertainprovisionsthatcoulddelay,deferorpreventan acquisitionproposalthatsome,or a majority,of our shareholdersmightbelieveto be in theirbestinterestsor in which shareholdersmightreceivea premiumfortheircommonstockoverthethen-prevailingmarketprice. These provisionscould also dissuadeshareholdersor thirdparties fromcontestingdirectorelections and couldcauseinvestorsto view our securitiesas lessattractiveinvestmentsand reducethe marketpriceof our commonstock. These provisions are described in further detail in “Description of the Registrant’s Securities Under Section 12 of the Securities Exchange Act of 1934” annexed as Exhibit 4.3 to this Annual Report.
Paymentsof cash dividendson our commonstockmaybe madeonly at the discretionof our Board of Directors and maybe restrictedby Oregon law.
Any decisionto pay dividendswillbe atthediscretionof our Board of Directorsand willdepend upon our operatingresults,strategicplans,capitalrequirements,financialcondition,provisionsof our borrowing arrangementsand otherfactorsour Board of Directorsconsidersrelevant.Furthermore,Oregon law imposes restrictionson our abilityto pay dividends.Accordingly,we maynot be ableto continueto pay dividendsin any givenamountin thefuture,or atall.
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Our business and operations could be negatively affected if we become subject to shareholder activism, which could cause us to incur significant expense, hinder execution of our business strategy and impact our stock price.
Shareholder activism which could take many forms, including potential proxy contests and public information campaigns continues to increase. 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.
Ifwe are unable to protectour intellectualpropertyor ifthird partiesassertthatour productsor servicesinfringetheirintellectualpropertyrights,our abilityto competein the marketmaybe harmed,and our businessand financialconditionmaybe adverselyaffected.
Ifour intellectualpropertyrightsarenot adequatelyprotected,we maynot be ableto commercializeour technologies,productsor servicesand our competitorscould commercializeour technologies,which couldresultin a decreasein our salesand marketshareand could materiallyadverselyaffectour business,financialconditionand resultsof operations.Conversely,thirdparties mightassertthatour products,services,or otherbusinessactivitiesinfringetheirpatentsor otherintellectual propertyrights.Infringementand otherintellectualpropertyclaimsand proceedingsbroughtagainstus, whether successfulor not, couldresultin substantial litigation and judgment costsand harmour reputation.
Insurance coverage could be costly, unavailable or inadequate.
The abilityto insureour businesses,facilitiesand railassetsisan importantaspectof our abilityto managerisk.As thereareonly limitedprovidersof thisinsuranceto therailcarindustry,thereisno guarantee thatsuch insurancewillbe availableon a cost-effectivebasisin thefuture.In addition,we cannot assure thatour insurancecarrierswillbe ableto pay currentor futureclaims. Additionally, the natureof our businesssubjectsus to physicaldamage,businessinterruptionand productliability claims,especiallyin connectionwith therepairand manufactureof productsthatcarryhazardousor volatile materials.Although we maintainliabilityinsurancecoverageatcommerciallyreasonablelevelscomparedto similarly sizedheavy equipmentmanufacturers,an unusuallylargephysicaldamage,businessinterruptionor productliabilityclaimor a seriesof claimsbasedon a failurerepeatedthroughoutour productionprocesscould exceedour insurancecoverageor resultin damageto our reputation, which could materially adversely impact our financial condition and results of operations.
Some of our customersplaceordersforour productsin relianceon theirabilityto utilizetax benefitsor tax credits any of which benefits or credits could be discontinued thereby reducing incentives for our customers to purchase our rail products.
Thereisno assurancethattaxauthoritieswillreauthorize,modify,or preventtheexpiration of taxbenefits,taxcredits,or other policies aimed to incentivize the purchase of our products. If such incentives are discontinued or diminished, the demandforour productscoulddecrease,therebycreatingthepotentialfora materialadverseeffecton our financialconditionor resultsof operations.
Our share repurchaseprogramisintendedto enhance long-termshareholdervaluealthough we cannot guaranteethiswilloccur and thisprogrammaybe suspended or terminatedat any time.
The Board of Directorshas authorizedour companyto repurchaseour commonstockthrougha share repurchaseprogram.Our sharerepurchaseprogrammaybe modified,suspendedor discontinuedatany time withoutpriornotice.Although thesharerepurchaseprogramisintendedto enhancelong-termshareholdervalue, we cannotprovideassurancethatthiswilloccur.
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Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
We operate at the following primary facilities as of August 31, 2020:
Description Location Status
Manufacturing Segment
Operating facilities: 6 locations in the United States Owned
3 locations in Mexico Owned – 2 locations Leased – 1 location
3 locations in Poland Owned
3 locations in Romania Owned
1 location in Turkey Owned
Administrative offices: 2 locations in the United States Leased
Wheels, Repair & Parts Segment
Administrative offices: Birmingham, Alabama Leased
Leasing & 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 Consolidated Financial Statements, Part II, Item 8 of this Form 10-K.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
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Information about our Executive Officers
Current information regarding our executive officers is presented below.
William A. Furman, 76, is Chief Executive Officer and Chairman of the Board of Directors. Mr. Furman has served as Chief Executive Officer since 1994, and as Chairman of the Board of Directors since January 2014. Mr. Furman was Vice President of the Company, or its predecessor company, from 1974 to 1994 and President of the Company from 1994 to 2019.
Martin R. Baker, 64, is Senior Vice President, General Counsel and Chief Compliance Officer, a position he has held since joining the Company in May 2008. Prior to joining the Company, Mr. Baker was Corporate Vice President, General Counsel and Secretary of Lattice Semiconductor Corporation.
Alejandro Centurion, 64, is Executive Vice President of the Company and President of Greenbrier Manufacturing Operations, a position he has held since January 2015. Mr. Centurion has served in various management positions for the Company since 2005, most recently as President of North American Manufacturing Operations.
Brian J. Comstock, 58, is Executive Vice President, Sales and Marketing, a position he has held since April 2018. Mr. Comstock has served in various management positions for the Company since 1998, most recently as Senior Vice President and General Manager of Commercial, Americas.
Adrian J. Downes, 57, is Senior Vice President, Chief Financial Officer and Chief Accounting Officer. Mr. Downes has served as Senior Vice President and Chief Accounting Officer since joining the Company in March 2013. Mr. Downes was promoted to Acting Chief Financial Officer in August 2018 and was promoted to Chief Financial Officer in May 2019.
Mark J. Rittenbaum, 63, is Executive Vice President, Chief Commercial and Leasing Officer, a position he has held since February 2016. Mr. Rittenbaum has served in various management positions for the Company since 1990, most recently as Executive Vice President and Chief Financial Officer.
Lorie L. Tekorius, 53, is President and Chief Operating Officer. Ms. Tekorius has served as Chief Operating Officer since August 2018 and was promoted to President in August 2019. Ms. Tekorius has served in various management positions for the Company since 1995, most recently as Executive Vice President and Chief Operating Officer and prior to that, as Executive Vice President and Chief Financial Officer.
Executive officers are designated by the Board of Directors. 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
Our common stock has been traded on the New York Stock Exchange under the symbol GBX since July 14, 1994. There were approximately 550 holders of record of common stock as of October 27, 2020.
Issuer Purchases of Equity Securities
The Board of Directors has authorized the Company to repurchase shares of the Company’s common stock. The share repurchase program has an expiration date of March 31, 2021 and the amount remaining for repurchase is $100 million as of August 31, 2020. There were no shares repurchased under the share repurchase program during the year ended August 31, 2020.
Performance Graph
The following graph demonstrates a comparison of cumulative total returns for the Company's Common Stock, the Dow Jones U.S. Industrial Transportation Index and the Standard & Poor’s (S&P) 500 Index. The graph assumes an investment of $100 on August 31, 2015 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, 2020, the end of the Company’s 2020 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.
Equity Compensation Plan Information
Equity Compensation Plan Information is hereby incorporated by reference to the “Equity Compensation Plan Information” table in Registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant’s year ended August 31, 2020.
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Item 6. SELECTED FINANCIAL DATA
YEARS ENDED AUGUST 31,
Statement of Operations Data
Revenue:
Weighted average common shares outstanding:
Balance Sheet Data
Other Operating Data
Lease fleet:
Cash Flow Data
Capital expenditures:
Depreciation and amortization:
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Executive Summary
We achieved solid financial performance in 2020, successfully weathering and responding to the challenges of a rail freight recession and the COVID-19 pandemic. Management quickly executed on three key priorities:
As a result of these and other actions, we delivered diluted earnings per share of $1.46 in 2020 and achieved a gross margin of 12.6% compared to 12.1% in 2019, despite an 8% reduction in revenues. In addition, we achieved synergies of $15 million related to the ARI acquisition, meeting our stated goal, despite the headwinds of lower volumes and travel restrictions which impacted our ability to fully identify and implement best practices.
These actions have put us in a strong position to navigate the current economic and pandemic challenges while being poised to quickly respond to improving demand as the economy and the rail freight industry recovers, as a leaner and more efficient company.
Our total manufacturing backlog of railcar units as of August 31, 2020 was approximately 24,600 with an estimated value of $2.42 billion. Approximately 9% of backlog units and 6% of estimated backlog value as of August 31, 2020 was associated with our Brazilian manufacturing operations which is accounted for under the equity method. Backlog units for lease may be syndicated to third parties or held in our own fleet depending on a variety of factors. Multi-year supply agreements are a part of rail industry practice. A portion of the orders included in backlog reflects an assumed product mix. Under terms of the orders, the exact mix and pricing will be determined in the future, which may impact backlog. Marine backlog as of August 31, 2020 was $51 million.
Our backlog of railcar units and marine vessels is not necessarily indicative of future results of operations. Certain orders in backlog are subject to customary documentation and completion of terms. Customers may attempt to cancel or modify orders in backlog. Historically, little variation has been experienced between the quantity ordered and the quantity actually delivered, though the timing of deliveries may be modified from time to time.
COVID-19 and the Downturn in Global Economic Activity
We are closely monitoring and managing the impacts on our business of the COVID-19 coronavirus pandemic, the significant decline in global economic activity, and governmental reactions to these historic events (“COVID-19 Events”).
Our manufacturing and service facilities continue regular operations. We function as an essential infrastructure business under guidance issued by the Department of Homeland Security. Similar guidelines and authorities exist in other nations where we operate. Since the emergence of COVID-19, our facilities in the United States have been permitted to continue to operate subject to enhanced safety protocols, both voluntary and government mandated, that aim to protect the health of our workforce and the residents of the communities in which our facilities are located. The
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situation is similar in our facilities in Mexico, Europe, Brazil and Turkey which also have been permitted by applicable governmental authorities to operate subject to enhanced health and safety protocols.
Certain of our businesses recorded a decrease in operating profits compared against the year ended August 31, 2019 which we attribute primarily to the cyclical decrease in economic activity in the freight rail equipment market which began prior to the emergence of COVID-19 (“Cyclical Downturn”). The Cyclical Downturn has intensified as a result of the COVID-19 Events. Our liquidity position strengthened during the year ended August 31, 2020 due to cash flow from operations, spending reductions and increased borrowing capacity.
As described in Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K, COVID-19 Events may have a material negative impact on our business, liquidity, results of operations, and stock price. Beyond these general observations, we are unable to predict when, how, or with what magnitude COVID-19 Events, in combination with the Cyclical Downturn, will negatively impact our business due to numerous uncertainties, including the duration of the COVID-19 pandemic, the duration of the global decline in economic activity, the impact of those events to our customers, suppliers and employees, and actions that may be taken by governmental authorities, including potentially preventing or curtailing the operations of our plants and/or shops, and other consequences.
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Overview
Revenue, Cost of revenue, Margin and Earnings from operations presented below, include amounts from external parties and exclude intersegment activity that is eliminated in consolidation.
Years ended August 31,
Revenue:
Cost of revenue:
Margin:
Goodwill impairment — 10,025 —
Earnings (loss) from unconsolidated affiliates 2,960 (5,805 ) (18,661 )
Diluted earnings per common share $ 1.46 $ 2.14 $ 4.68
Performance for our segments is evaluated based on Earnings from operations (operating profit). Corporate includes selling and administrative costs not directly related to goods and services and certain costs that are intertwined among segments due to our integrated business model. Management does not allocate Interest and foreign exchange or Income tax expense for either external or internal reporting purposes.
Years ended August 31,
Operating profit (loss):
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Consolidated Results
* Not meaningful
Beginning July 26, 2019, the consolidated results included the results of the manufacturing business of ARI which were additive to revenue and cost of revenue for the year ended August 31, 2020.
Through our integrated business model, we provide a broad range of custom products and services in each of our segments, which have various average selling prices and margins. The demand for and mix of products and services delivered changes from period to period, which causes fluctuations in our results of operations.
The 8.0% decrease in revenue in 2020 compared to 2019 was primarily due to a 27.0% decrease in Wheels, Repair & Parts revenue. The decrease in Wheels, Repair & Parts revenue was primarily a result of lower wheelset, component and parts volumes due to lower demand, lower repair revenue from five fewer shops in 2020 and a decrease in scrap metal pricing. The decrease in 2020 revenue was also due to a 3.4% decrease in Manufacturing revenue from an 11.6% decrease in the volume of railcar deliveries. The 20.4% increase in revenue in 2019 compared to 2018 was primarily due to an 18.9% increase in Manufacturing revenue. The increase in Manufacturing revenue was primarily attributed to an 18.4% increase in the volume of railcar deliveries and a change in product mix. The increase in revenue was also due to a 28.1% increase in Wheels, Repair & Parts revenue primarily due to 2019 including $87.5 million in revenue associated with the repair shops returned to us after discontinuing the GBW joint venture in August 2018.
The 8.6% decrease in cost of revenue in 2020 compared to 2019 was primarily due to a 28.2% decrease in Wheels, Repair & Parts cost of revenue. The decrease in Wheels, Repair & Parts cost of revenue was primarily a result of lower costs associated with a reduction in wheelset, component and parts volumes and five fewer repair shops in 2020. The decrease in 2020 cost of revenue was also due to a 3.4% decrease in Manufacturing cost of revenue from an 11.6% decrease in the volume of railcar deliveries. The 26.4% increase in cost of revenue in 2019 compared to 2018 was primarily due to a 23.7% increase in Manufacturing cost of revenue. The increase in Manufacturing cost of revenue was primarily attributed to an 18.4% increase in the volume of railcar deliveries and operating inefficiencies at some of our manufacturing facilities. The increase in cost of revenue was also due to a 32.2% increase in Wheels, Repair & Parts cost of revenue primarily due to 2019 including $97.3 million in costs associated with the repair shops returned to us after discontinuing the GBW joint venture in August 2018.
Margin as a percentage of revenue was 12.6% in 2020 compared to 12.1% in 2019. The overall margin as a percentage of revenue was positively impacted in 2020 by an increase in Leasing & Services margin from 31.1% to 39.0% as a result of fewer sales of railcars that we purchased from third parties which have lower margin percentages and higher interim rent on leased railcars for syndication. Margin as a percentage of revenue was 12.1% in 2019 compared to 16.2% in 2018. The overall margin as a percentage of revenue was negatively impacted in 2019 by a decrease in Manufacturing margin to 12.1% from 15.5% primarily attributed to a change in product mix and operating inefficiencies at some of our manufacturing facilities. The decrease was also due to a decrease in Leasing & Services margin to 31.1% from 49.4%. Margin for 2019 was negatively impacted as a result of higher sales of railcars that we purchased from third parties which have lower margin percentages.
The $22.1 million decrease in net earnings attributable to Greenbrier in 2020 compared to 2019 was primarily attributable to a reduction in Net gain on disposition of equipment, a decrease in margin, ARI integration costs and higher interest and foreign exchange. These were partially offset by synergies resulting from the integration of the manufacturing business of ARI and a reduction in selling and administrative expense in 2020 and a goodwill impairment in 2019 related to our repair operations.The $80.7 million decrease in net earnings attributable to Greenbrier in 2019 compared to 2018 was primarily attributable to a decrease in margin, costs associated with the acquisition of the manufacturing business of ARI and a $10.0 million goodwill impairment charge for which there was no tax benefit related to our repair operations.
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Manufacturing Segment
2020 2019 2018 Increase (Decrease) % Change Increase (Decrease) % Change
Operating profit (%) 8.4 % 8.9 % 11.8 % (0.5 )% * (2.9 )% *
* Not meaningful
Beginning July 26, 2019, the Manufacturing segment included the results of the manufacturing business of ARI which were additive to Manufacturing revenue and cost of revenue for the year ended August 31, 2020.
Manufacturing revenue decreased $81.5 million or 3.4% in 2020 compared to 2019 primarily attributed to an 11.6% decrease in the volume of railcar deliveries. The decrease in revenue was partially offset by a change in product mix and the additional revenue in 2020 associated with the acquired manufacturing business of ARI. Manufacturing revenue increased $386.9 million or 18.9% in 2019 compared to 2018, of which $43.5 million related to the addition of the manufacturing business of ARI. The increase in revenue was primarily attributed to an 18.4% increase in the volume of railcar deliveries and a change in product mix.
Manufacturing cost of revenue decreased $72.5 million or 3.4% in 2020 compared to 2019 primarily attributed to an 11.6% decrease in the volume of railcar deliveries. The decrease in cost of revenue was partially offset by the additional cost of revenue in 2020 associated with the acquired manufacturing business of ARI and a change in product mix. Manufacturing cost of revenue increased $410.2 million or 23.7% in 2019 compared to 2018. The increase in cost of revenue was primarily attributed to an 18.4% increase in the volume of railcar deliveries and operating inefficiencies at some of our manufacturing facilities.
Manufacturing margin as a percentage of revenue was 12.1% for both 2020 and 2019. Manufacturing margin was positively impacted by synergies in 2020 resulting from the integration of the manufacturing business of ARI. This was partially offset by an increase in severance expense, ARI integration costs and increased costs associated with operating our manufacturing facilities during the COVID-19 pandemic in 2020. Manufacturing margin as a percentage of revenue decreased 3.4% in 2019 compared to 2018. The decrease was primarily attributed to a change in product mix and operating inefficiencies at some of our manufacturing facilities. These were partially offset by higher volumes of new railcar sales with leases attached which typically result in enhanced sales prices and margins.
Manufacturing operating profit decreased $20.2 million or 9.3% in 2020 compared to 2019. The decrease was primarily attributed to a reduction in the volume of railcar deliveries, severance expense, ARI integration costs and increased costs associated with operating our manufacturing facilities during the COVID-19 pandemic in 2020. This was partially offset by synergies in 2020 resulting from the integration of the manufacturing business of ARI. Manufacturing operating profit decreased $23.3 million or 9.7% in 2019 compared to 2018. The decrease was primarily attributed to a lower margin percentage from a change in product mix and operating inefficiencies at some of our manufacturing facilities.
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Wheels, Repair & Parts Segment
Operating profit (%) 2.8 % (0.7 )% 4.8 % 3.5 % * (5.5 )% *
* Not meaningful
On August 20, 2018, 12 repair shops were returned to us as a result of discontinuing our GBW railcar repair joint venture. Beginning on August 20, 2018, the results of operations from these repair shops were included in the Wheels, Repair & Parts segment as they are now consolidated for financial reporting purposes.
Wheels, Repair & Parts revenue decreased $119.8 million or 27.0% in 2020 compared to 2019. The decrease was primarily due to lower wheelset, component and parts volumes due to lower demand, a decrease in scrap metal pricing and lower repair revenue primarily from five fewer shops in 2020. Wheels, Repair & Parts revenue increased $97.5 million or 28.1% in 2019 compared to 2018. The increase was primarily due to 2019 including $87.5 million in revenue associated with the repair shops returned to us after discontinuing the GBW joint venture in August 2018. The increase was also due to higher parts revenue due to an increase in demand.
Wheels, Repair & Parts cost of revenue decreased $118.7 million or 28.2% in 2020 compared to 2019. The decrease was primarily due to lower costs associated with a reduction in wheelset, component and parts volumes and five fewer repair shops in 2020. Wheels, Repair & Parts cost of revenue increased $102.6 million or 32.2% in 2019 compared to 2018. The increase was primarily due to 2019 including $97.3 million in cost of revenue associated with the repair shops returned to us after discontinuing the GBW joint venture in August 2018. The increase was also due to increased parts volumes and costs associated with closing sites in our repair network.
Wheels, Repair & Parts margin as a percentage of revenue increased 1.6% in 2020 compared to 2019. The increase was primarily attributed to efficiencies at our repair shops in 2020. In addition, 2019 was negatively impacted by costs associated with closing sites in our repair network. These factors which had a positive impact to Wheels, Repair & Parts margin as a percentage of revenue in 2020 compared to 2019, were partially offset by a decrease in scrap metal pricing and increased costs associated with operating our facilities during the COVID-19 pandemic in 2020. Wheels, Repair & Parts margin as a percentage of revenue decreased 3.0% in 2019 compared to 2018. The decrease was primarily attributed to inefficiencies at our repair operations and costs associated with closing sites in our repair network in 2019. This was partially offset by a favorable parts product mix.
Wheels, Repair & Parts operating profit increased $12.0 million in 2020 compared to 2019. The increase was due to 2019 being negatively impacted by a $10.0 million goodwill impairment and costs associated with closing sites in our repair network. Wheels, Repair & Parts operating profit decreased $19.7 million in 2019 compared to 2018. The decrease was primarily attributed to a $10.0 million goodwill impairment charge recognized in 2019 due to challenges at our repair operations and costs associated with closing sites in our repair network. This was partially offset by higher parts revenue and a more favorable parts product mix.
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Leasing & Services Segment
2020 2019 2018 Increase (Decrease) % Change Increase (Decrease) % Change
* Not meaningful
The Leasing & Services segment generates revenue from leasing railcars from its lease fleet, providing various management services, interim rent on leased railcars for syndication, and the sale of railcars purchased from third parties with the intent to resell. The gross proceeds from the sale of these railcars are recorded in revenue and the costs of purchasing these railcars are recorded in cost of revenue.
Leasing & Services revenue decreased $40.0 million or 25.4% in 2020 compared to 2019. The decrease was primarily attributed to a decrease in the sale of railcars which we had purchased from third parties with the intent to resell. This was partially offset by higher interim rent on leased railcars for syndication. Leasing & Services revenue increased $29.7 million or 23.3% in 2019 compared to 2018. The increase was primarily attributed to an increase in the sale of railcars which we had purchased from third parties with the intent to resell. This was partially offset by lower interim rent on leased railcars for syndication.
Leasing & Services cost of revenue decreased $36.9 million or 34.0% in 2020 compared to 2019. The decrease was primarily due to a decrease in the volume of railcars sold that we purchased from third parties partially offset by higher storage costs. Leasing & Services cost of revenue increased $43.9 million or 67.9% in 2019 compared to 2018. The increase was primarily due to an increase in the volume of railcars sold that we purchased from third parties and higher transportation costs.
Leasing & Services margin as a percentage of revenue increased 7.9% in 2020 compared to 2019. Margin as a percentage of revenue for 2020 benefited from fewer sales of railcars that we purchased from third parties which have lower margin percentages. The increase in margin in 2020 as a percentage of revenue was also due to higher interim rent on leased railcars for syndication. Leasing & Services margin as a percentage of revenue decreased 18.3% in 2019 compared to 2018. Margin for 2019 was negatively impacted from higher sales of railcars that we purchased from third parties which have lower margin percentages. The decrease in margin was also due to higher transportation costs.
Leasing & Services operating profit decreased $23.8 million or 36.8% in 2020 compared to 2019. The decrease was primarily attributed to an $18.4 million decrease in net gain on disposition of equipment. Leasing & Services operating profit decreased $23.7 million or 26.8% in 2019 compared to 2018. The decrease was attributed to a $14.2 million decrease in margin primarily due to higher transportation costs and lower interim rent on leased railcars for syndication. The decrease was also attributed to a $6.8 million decrease in net gain on disposition of equipment.
The percentage of owned units on lease was 90.4%, 93.3% and 94.4% at August 31, 2020, 2019 and 2018, respectively.
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Selling and Administrative
2020 2019 2018 Increase (Decrease) % Change Increase (Decrease) % Change
Selling and administrative expense was $204.7 million or 7.3% of revenue for the year ended August 31, 2020, $213.3 million or 7.0% of revenue for the year ended August 31, 2019 and $200.4 million or 8.0% of revenue for the year ended August 31, 2018.
The $8.6 million decrease in 2020 compared to 2019 was primarily attributed to $18.7 million in costs incurred in 2019 associated with the acquisition of the manufacturing business of ARI. This was partially offset by $9.6 million from the addition of the manufacturing business of ARI selling and administrative costs in 2020.
The $12.9 million increase in 2019 compared to 2018 was primarily attributed to $18.7 million in costs associated with the acquisition of the manufacturing business of ARI and the addition of the selling and administrative costs from the repair shops returned to us after discontinuing the GBW joint venture and the manufacturing business of ARI. These increases in selling and administrative costs were partially offset by a $7.6 million decrease in employee costs primarily related to a decrease in incentive compensation.
Net Gain on Disposition of Equipment
Net gain on disposition of equipment was $20.0 million, $41.0 million and $44.4 million for the years ended August 31, 2020, 2019 and 2018, respectively. Net gain on disposition of equipment primarily includes the sale of assets from our lease fleet (Equipment on operating leases, net) that are periodically sold in the normal course of business in order to accommodate customer demand and to manage risk and liquidity; disposition of property, plant and equipment; and insurance proceeds received for business interruption and assets destroyed in a fire.
Goodwill Impairment
Based on the results of our annual impairment test, a non-cash impairment charge of $10.0 million was recorded during 2019 related to our repair operations. There was no goodwill impairment charge recorded during 2020 or 2018.
Interest and Foreign Exchange
Interest and foreign exchange expense was composed of the following:
(In thousands) Years ended August 31, Increase (decrease)
Interest and foreign exchange:
Interest and foreign exchange increased $12.7 million in 2020 from 2019 primarily due to interest expense associated with our $300 million of senior term debt issued in July 2019 and an increase in revolving notes borrowings. The increase in borrowings was a proactive response to uncertainties from the COVID-19 coronavirus pandemic and the decline in global economic activity.
Interest and foreign exchange increased $1.5 million in 2019 from 2018 primarily due to interest expense associated with our $225 million senior term debt issued in September 2018.
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Income Tax
In 2020 our income tax expense was $40.2 million on $124.8 million of pre-tax earnings for an effective tax rate of 32.2%. The increase in the effective rate from 2019 was primarily attributable to higher net unfavorable discrete items primarily related to changes in foreign currency exchange rates for our U.S. Dollar denominated foreign operations for the year ended August 31, 2020. Excluding the impact of discrete items in both periods, the effective tax rate was 24.2% for the year ended August 31, 2020 compared to 27.1% for the year ended August 31, 2019, which decreased primarily due to the geographic mix of earnings.
In 2019 our income tax expense was $41.6 million on $153.2 million of pre-tax earnings for an effective tax rate of 27.1%. The 2019 tax rate was impacted by a goodwill impairment charge for which there was no tax benefit. Excluding the impact of the goodwill impairment charge, the tax rate for 2019 was 25.5%. In 2018 our income tax expense was $32.9 million on $223.6 million of pre-tax earnings for an effective tax rate of 14.7%.
The reduction in the 2018 tax rate was primarily due to the enactment of the Tax Act on December 22, 2017. The Tax Act made significant changes to U.S. federal income tax laws, including, but not limited to, a reduction of the corporate tax rate from 35% to 21% and a transition tax on foreign earnings not previously subject to U.S. taxation. As a result, deferred income taxes were remeasured as a result of the new statutory rate which resulted in a one-time tax benefit of $33.6 million offset, in part, by the accrual of the transition tax of $8.9 million.
The effective tax rate can fluctuate year-to-year due to 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.
Earnings (Loss) From Unconsolidated Affiliates
Through unconsolidated affiliates we produce rail and industrial components and have an ownership stake in a railcar manufacturer in Brazil. In addition, in 2018 we had an investment in the GBW joint venture. We record the after-tax results from these unconsolidated affiliates.
Earnings from unconsolidated affiliates was $3.0 million for the year ended August 31, 2020 and primarily related to our rail component manufacturing operations. Loss from unconsolidated affiliates was $5.8 million for the year ended August 31, 2019 and primarily related to losses at our operations in Brazil. Loss from unconsolidated affiliates was $18.7 million for the year ended August 31, 2018 and primarily related to the results of the GBW joint venture. In addition in 2018, a pre-tax goodwill impairment loss of $26.4 million was recognized related to GBW. As we accounted for GBW under the equity method of accounting, our 50% share of the non-cash goodwill impairment loss recognized by GBW was $9.5 million after-tax in 2018, which was included as part of Earnings (loss) from unconsolidated affiliates on our Consolidated Statement of Income.
Net Earnings Attributable to Noncontrolling Interest
Net earnings attributable to noncontrolling interest was $38.6 million, $34.7 million and $20.3 million for the years ended August 31, 2020, 2019 and 2018, respectively, which primarily represents our joint venture partner's share in the results of operations of our Mexican railcar manufacturing joint ventures, adjusted for intercompany sales, and our European partner’s share of the results of our European operations.
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Liquidity and Capital Resources
Years Ended August 31,
We have been financed through cash generated from operations and borrowings. At August 31, 2020 cash and cash equivalents and restricted cash were $842.1 million, an increase of $503.6 million from $338.5 million at the prior year end. The increase in cash and cash equivalents included proactively drawing on available credit facilities in response to uncertainties from the COVID-19 coronavirus pandemic and the decline in global economic activity.
The change in cash provided by (used in) operating activities in 2020 compared to 2019 was primarily due to a net change in working capital. The change in cash provided by (used in) operating activities in 2019 compared to 2018 was primarily due to lower earnings and a net change in working capital due to an increase in production.
The change in cash provided by (used in) investing activities in 2020 compared to 2019 was primarily attributable to the acquisition of the manufacturing business of ARI in 2019 and a decrease in capital expenditures in 2020 partially offset by a decrease in the proceeds from the sales of assets. The change in cash provided by (used in) investing activities in 2019 compared to 2018 was primarily attributable to the acquisition of the manufacturing business of ARI in 2019.
Capital expenditures totaled $66.9 million, $198.2 million and $176.8 million for the years ended August 31, 2020, 2019 and 2018, respectively. Manufacturing capital expenditures were approximately $48.2 million, $85.1 million and $59.7 million for the years ended August 31, 2020, 2019 and 2018, respectively. Wheels, Repair & Parts capital expenditures were approximately $11.7 million, $13.3 million and $5.2 million for the years ended August 31, 2020, 2019 and 2018, respectively. Leasing & Services and corporate capital expenditures were approximately $7.0 million, $99.8 million and $111.9 million for the years ended August 31, 2020, 2019 and 2018, respectively. Capital expenditures for 2021 primarily relate to continued investments into the safety and productivity of our facilities and opportunistic additions to our lease fleet.
Proceeds from the sale of assets, which primarily related to sales of railcars from our lease fleet within Leasing & Services, were approximately $83.5 million, $125.4 million and $153.2 million for the years ended August 31, 2020, 2019 and 2018, respectively. Assets from our lease fleet are periodically sold in the normal course of business in order to accommodate customer demand and to manage risk and liquidity.
The change in cash provided by (used in) financing activities in 2020 compared to 2019 was primarily attributed to a decrease in the proceeds of debt, net of repayments and a change in the net activities with joint venture partners. The change in cash provided by (used in) financing activities in 2019 compared to 2018 was primarily attributed to proceeds from the issuance of notes payable and a change in the net activities with joint venture partners.
A quarterly dividend of $0.27 per share was declared on October 21, 2020.
The Board of Directors has authorized our company to repurchase shares of our common stock. In January 2019, the expiration date of this share repurchase program was extended from March 31, 2019 to March 31, 2021 and the amount remaining for repurchase was increased from $88 million to $100 million. Under the share repurchase program, shares of common stock may be purchased on the open market or through privately negotiated transactions from time to time. The timing and amount of purchases will be based upon market conditions, securities law limitations and other factors. The program may be modified, suspended or discontinued at any time without prior notice. The share repurchase program does not obligate us to acquire any specific number of shares in any period. There were no shares repurchased under the share repurchase program in 2020, 2019 or 2018.
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In July 2019, as part of the acquisition of the manufacturing business of ARI, we entered into new $300 million senior term debt. The maturity date is June 2024 unless the 2.875% Convertible senior notes due July 2024 are outstanding as of November 1, 2023, in which case the debt matures on that date. The debt bears a floating interest rate of LIBOR plus 1.5% with principal of $3.75 million paid quarterly in arrears and a balloon payment of $232.5 million due at maturity. An interest rate swap agreement was entered into on 50% of the initial balance to swap the floating interest rate of LIBOR plus 1.5% to a fixed rate of 3.19%.
In July 2019, as part of the acquisition of the manufacturing business of ARI, we issued $50 million in convertible senior notes, due 2024. The convertible senior note bears interest at a fixed rate of 2.25%, paid semi-annually in arrears on February 1st and August 1st. The convertible notes mature on July 26, 2024, unless earlier repurchased by us or converted in accordance with their terms. Upon the satisfaction of certain conditions, holders may convert at their option at any time prior to the business day immediately preceding the stated maturity date.
In September 2018, we refinanced approximately $170 million of existing senior term debt, due in March 2020, secured by a pool of leased railcars with new 5-year $225 million senior term debt also secured by a pool of leased railcars. The new debt bears a floating interest rate of LIBOR plus 1.50% or Prime plus 0.50%. The term loan is to be repaid in equal quarterly installments of $1.97 million with the remaining outstanding amounts, plus accrued interest, to be paid on the maturity date in September 2023. An interest rate swap agreement was entered into on 50% of the initial balance to swap the floating interest rate to a fixed rate of 4.49%.
Our 3.5% convertible senior notes due 2018 matured on April 1, 2018. The conversion of these notes resulted in the issuance of an additional 3.4 million shares of our common stock. These additional shares have historically been included in the calculation of diluted earnings per share.
Senior secured credit facilities, consisting of three components, aggregated to $733.2 million as of August 31, 2020. We had an aggregate of $85.9 million available to draw down under committed credit facilities as of August 31, 2020. This amount consists of $29.2 million available on the North American credit facility, $21.7 million on the European credit facilities and $35.0 million on the Mexican railcar manufacturing joint venture credit facilities.
As of August 31, 2020, a $600.0 million revolving line of credit, maturing June 2024, secured by substantially all of our assets in the U.S. not otherwise pledged as security for term loans, existed to provide working capital and interim financing of equipment, principally for the U.S. and Mexican operations. Advances under this North American credit facility bear interest at LIBOR plus 1.50% or Prime plus 0.50% depending on the type of borrowing. Available borrowings under the credit facility are generally based on defined levels of eligible inventory, receivables, property, plant and equipment and leased equipment, as well as total debt to consolidated capitalization and fixed charges coverage ratios.
As of August 31, 2020, lines of credit totaling $68.2 million secured by certain of our European assets, with variable rates that range from Warsaw Interbank Offered Rate (WIBOR) plus 1.1% to WIBOR plus 1.5% and Euro Interbank Offered Rate (EURIBOR) plus 1.1%, were available for working capital needs of our European manufacturing operations. The European lines of credit include a $16.4 million facility which is guaranteed by us. European credit facilities are regularly renewed. Currently, these European credit facilities have maturities that range from December 2020 through September 2022.
As of August 31, 2020, our Mexican railcar manufacturing joint venture had two lines of credit totaling $65.0 million. The first line of credit provides up to $30.0 million and matures in June 2024. Advances under this facility bear interest at LIBOR plus 3.75% to 4.25%. The second line of credit provides up to $35.0 million, of which we and our joint venture partner have each guaranteed 50%. Advances under this facility bear interest at LIBOR plus 3.75%. The Mexican railcar manufacturing joint venture will be able to draw amounts available under this facility through June 2021.
As of August 31, 2020, outstanding commitments under the senior secured credit facilities consisted of $28.7 million in letters of credit and $275.0 million in borrowings under the North American credit facility, $46.5 million outstanding under the European credit facilities and $30.0 million outstanding under the Mexican credit facilities.
The revolving and operating lines of credit, along with notes payable, contain covenants with respect to us and our various subsidiaries, the most restrictive of which, among other things, limit our ability to: incur additional
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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, 2020, we were in compliance with all such restrictive covenants.
From time to time, we may seek to repurchase or otherwise retire or exchange securities, including outstanding notes, borrowings and equity securities, and take other steps to reduce our debt or otherwise improve our balance sheet. These actions may include open market repurchases, unsolicited or solicited privately negotiated transactions or other retirements, repurchases or exchanges. Such retirements, repurchases or exchanges, if any, will depend on a number of factors, including, but not limited to, prevailing market conditions, trading levels of our debt, our liquidity requirements and contractual restrictions, if applicable. The amounts involved in any such transactions may, individually or in the aggregate, be material and may involve all or a portion of a particular series of notes or other indebtedness which may reduce the float and impact the trading market of notes or other indebtedness which remain outstanding.
We have global operations that conduct business in their local currencies as well as other currencies. To mitigate the exposure to transactions denominated in currencies other than the functional currency, we enter into foreign currency forward exchange contracts with established financial institutions to protect the margin on a portion of foreign currency sales in firm backlog. Given the strong credit standing of the counterparties, no provision has been made for credit loss due to counterparty non-performance.
As of August 31, 2020, we had a $4.5 million note receivable from Amsted-Maxion Cruzeiro, our unconsolidated Brazilian castings and components manufacturer and a $3.8 million note receivable balance from Greenbrier-Maxion, our unconsolidated Brazilian railcar manufacturer. These note receivables are included on the Consolidated Balance Sheet in Accounts receivable, net. In the future, we may make loans to or provide guarantees for Amsted-Maxion Cruzeiro or Greenbrier-Maxion.
We expect existing funds and cash generated from operations, together with proceeds from financing activities including borrowings under existing credit facilities and long-term financings, to be sufficient to fund expected debt repayments, working capital needs, planned capital expenditures, additional investments in our unconsolidated affiliates and dividends during the next twelve months.
The following table shows our estimated future contractual cash obligations as of August 31, 2020:
Years Ending August 31,
Due to uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at August 31, 2020, we are unable to estimate the period of cash settlement with the respective taxing authority. Therefore, approximately $6.6 million in uncertain tax positions, including interest, have been excluded from the contractual table above. See Note 17 to the Consolidated Financial Statements for a discussion on income taxes.
Off Balance Sheet Arrangements
We do not currently have off balance sheet arrangements that have or are likely to have a material current or future effect on our Consolidated Financial Statements.
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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires judgment on the part of management to arrive at estimates and assumptions on matters that are inherently uncertain. These estimates may affect the amount of assets, liabilities, revenue and expenses reported in the financial statements and accompanying notes and disclosure of contingent assets and liabilities within the financial statements. Estimates and assumptions are periodically evaluated and may be adjusted in future periods. Actual results could differ from those estimates.
Income taxes- The asset and liability method is used to account for income taxes. We are required to estimate the timing of the recognition of deferred tax assets and liabilities, make assumptions about the future deductibility of deferred tax assets and assess deferred tax liabilities based on enacted law and tax rates for each tax jurisdiction to determine the amount of deferred tax assets and liabilities. Deferred income taxes are provided for the temporary effects of differences between assets and liabilities recognized for financial statement and income tax reporting purposes. Valuation allowances reduce deferred tax assets to an amount that will more likely than not be realized. We recognize liabilities for uncertain tax positions based on whether evidence indicates that it is more likely than not that the position will be sustained on audit. It is inherently difficult and subjective to estimate such amounts, as this requires us to estimate the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis. Changes in tax law or court interpretations may result in the recognition of a tax benefit or an additional charge to the tax provision.
Warranty accruals - Warranty costs to cover a defined warranty period are estimated and charged to operations. The estimated warranty cost is based on historical warranty claims for each particular product type. For new product types without a warranty history, preliminary estimates are based on historical information for similar product types. These estimates are inherently uncertain as they are based on historical data for existing products and judgment for new products. If warranty claims are made in the current period for issues that have not historically been the subject of warranty claims and were not taken into consideration in establishing the accrual or if claims for issues already considered in establishing the accrual exceed expectations, warranty expense may exceed the accrual for that particular product. Conversely, there is the possibility that claims may be lower than estimates. The warranty accrual is periodically reviewed and updated based on warranty trends. However, as we cannot predict future claims, the potential exists for the difference in any one reporting period to be material.
Environmental costs - At times we may be involved in various proceedings related to environmental matters. We estimate future costs for known environmental remediation requirements and accrue for them when it is probable that we have incurred a liability and the related costs can be reasonably estimated based on currently available information. If further developments in or resolution of an environmental matter result in facts and circumstances that are significantly different than the assumptions used to develop these reserves, the accrual for environmental remediation could be materially understated or overstated. Adjustments to these liabilities are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or when expenditures for which reserves are established are made. Due to the uncertain nature of environmental matters, there can be no assurance that we will not become involved in future litigation or other proceedings or, if we were found to be responsible or liable in any litigation or proceeding, that such costs would not be material to us.
Revenue recognition - We measure revenue at the amounts that reflect the consideration to which we expect to be entitled in exchange for transferring control of goods and services to customers. We recognize revenue either at the point in time or over the period of time that performance obligations to customers are satisfied. Payment terms vary by segment and product type and are generally due within normal commercial terms. Our contracts with customers may include multiple performance obligations (e.g. railcars, maintenance, management services, etc.). For such arrangements, we allocate revenues to each performance obligation based on its relative standalone selling price. We have disaggregated revenue from contracts with customers into categories which describe the principal activities from which we generate our revenues.
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Manufacturing
Railcars are manufactured in accordance with contracts with customers. We recognize revenue upon our customers’ acceptance of the completed railcars at a specified delivery point. From time to time, we enter into multi-year supply agreements. Each railcar delivery is considered a distinct performance obligation, such that the amounts that are recognized as revenue following railcar delivery are generally not subject to change.
We typically recognize marine vessel manufacturing revenue over time using the cost input method, based on progress toward contract completion measured by actual costs incurred to date in relation to the estimate of total expected costs. This method best depicts our performance in completing the construction of the marine vessel for the customer and is consistent with the percentage of completion method used prior to the adoption of Topic 606: Contracts with Customers (Topic 606).
Wheels, Repair & Parts
We operate a network of wheel, repair and parts shops in North America that provide complete wheelset reconditioning and railcar repair services.
Wheels revenue is recognized when wheelsets are shipped to the customer or when consumed by customers in the case of consignment arrangements. Parts revenue is recognized upon shipment of the parts to the customers.
Repair revenue is typically recognized over time using the cost input method, based on progress toward contract completion measured by actual costs incurred to date in relation to the estimate of total expected costs. This method best depicts our performance in repairing the railcars for the customer. Repair services are typically completed in less than 90 days.
Leasing & Services
We own a fleet of new and used railcars which are leased to third-party customers. Lease revenue is recognized over the lease-term in the period in which it is earned.
Syndication transactions represent new and used railcars which have been placed on lease to a customer and which we intend to sell to an investor with the lease attached. At the time of such sale, revenue and cost of revenue associated with railcars that we have manufactured are recognized in the Manufacturing segment; while revenue and cost of revenue associated with railcars which were obtained from a third-party with the intent to resell and subsequently sold, are recognized in the Leasing & Services segment.
We enter into multi-year contracts to provide management and maintenance services to customers for which revenue is generally recognized on a straight-line basis over the contract term as a stand-ready obligation. Costs to fulfill these contracts are recognized as incurred.
Goodwill and acquired intangible assets - We periodically acquire businesses in purchase transactions in which the allocation of the purchase price may result in the recognition of goodwill and other intangible assets. The determination of the value of such intangible assets requires management to make estimates and assumptions. These estimates affect the amount of future period amortization and possible impairment charges.
Goodwill and indefinite-lived intangible assets are tested for impairment annually during the third quarter. The provisions of ASC 350 Intangibles – Goodwill and Other, require that we perform this test by comparing the fair value of each reporting unit with its carrying value. We determine the fair value of our reporting units based on a weighting of income and market approaches. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows which incorporates forecasted revenues, long-term growth rate, gross margin percentages, operating expenses, short-term net working capital changes, other cash flows and the use of discount rates. Under the market approach, we estimate the fair value based on observed market multiples for comparable businesses. An impairment loss is recorded to the extent that the reporting unit’s carrying amount exceeds the reporting unit’s fair value. An impairment loss cannot exceed the total amount of goodwill allocated to the reporting unit. Goodwill and indefinite-lived intangible assets are also tested more frequently if changes in circumstances or the occurrence of events indicates that a potential impairment exists. When changes in circumstances,
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such as a decline in the market price of our common stock, changes in demand or in the numerous variables associated with the judgments, assumptions and estimates made in assessing the appropriate valuation of goodwill indicate the carrying amount of certain indefinite lived assets may not be recoverable, the assets are evaluated for impairment.
We performed our annual goodwill impairment test during the third quarter of 2020 and we concluded that goodwill was not impaired. The estimated fair value of goodwill in both the Europe Manufacturing and Wheels & Parts reporting units exceeded its carrying value by approximately 5% and 9%, respectively. Since the estimated fair values were not substantially in excess of their carrying values, we may be at risk for an impairment loss in the future if expected profitability trends assumed in the fair value calculation are not realized.
As of August 31, 2020, our goodwill balance was $130.3 million of which $87.0 million related to our Manufacturing segment and $43.3 million related to our Wheels, Repair & Parts segment. Our Manufacturing segment includes the North America Manufacturing reporting unit with a goodwill balance of $56.6 million; and the Europe Manufacturing reporting unit with a goodwill balance of $30.4 million.
New Accounting Pronouncements
See Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
We have global operations that conduct business in their local currencies as well as other currencies. To mitigate the exposure to transactions denominated in currencies other than the functional currency of each entity, we enter into foreign currency forward exchange contracts to protect revenue or margin on a portion of forecasted foreign currency sales and expenses. At August 31, 2020 exchange rates, notional amounts of forward exchange contracts for the purchase of Polish Zlotys and the sale of Euros aggregated to $48.5 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, 2020, net assets of foreign subsidiaries aggregated $158.3 million and a 10% strengthening of the U.S. Dollar relative to the foreign currencies would result in a decrease in equity of $15.8 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 $250.0 million of variable rate debt to fixed rate debt. As a result, we are exposed to interest rate risk relating to our revolving debt and a portion of term debt, which are at variable rates. At August 31, 2020, 51% of our outstanding debt had fixed rates and 49% had variable rates. At August 31, 2020, a uniform 10% increase in variable interest rates would result in approximately $1.0 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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended August 31, 2020, 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, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated October 28, 2020, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of September 1, 2019, due to the adoption of Accounting Standards Update 2016-02, Leases, and related amendments. Also, as discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue recognition as of September 1, 2018, due to the adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers, and related amendments.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Assessment of the fair value of the European Manufacturing reporting unit and Greenbrier-Astra Rail
As discussed in Notes 2 and 7 to the consolidated financial statements, the Company performs goodwill impairment testing on an annual basis, or more frequently if an event occurs or circumstances change that would indicate a potential impairment exists. The goodwill balance as of August 31, 2020 was $130.3 million. Of this amount, $30.4 million was allocated to the European Manufacturing reporting unit. The Company established Greenbrier-Astra Rail (GAR) in June 2017 through a transaction with Astra Holding GmbH (Astra). In connection with that transaction, the Company provided Astra an option to put its entire non-controlling interest in GAR, which comprises all operating activity of the European Manufacturing reporting unit to the Company, at an exercise price equal to the higher of fair value or a stated formula measured on the exercise date. The Company recorded this contingently redeemable non-controlling interest of $31.1 million as of August 31, 2020 in the mezzanine section of the consolidated balance sheet. The fair value of GAR, which was determined as part of the goodwill impairment evaluation of the European Manufacturing reporting unit fair value, was used in the measurement of the contingently redeemable non-controlling interest amount at the balance sheet date.
We identified the assessment of the fair value of the European Manufacturing reporting unit and GAR as a critical audit matter. The discounted cash flow model used to calculate the fair value of the European Manufacturing reporting unit and GAR was challenging to test due to the subjectivity of certain assumptions, as the fair value determination is sensitive to possible changes in those assumptions. Specifically, changes to the following assumptions could have a significant effect on the Company’s assessment of the carrying value of the goodwill and contingently redeemable non-controlling interest:
- The discount rate applied to the forecasted cash flows.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to determine the fair value of the European Manufacturing reporting unit and GAR. This included controls related to the development of the forecasted revenues, long-term growth rate, gross margin percentages, operating expenses, short-term net working capital changes, the sale of specific assets and selection of the discount rate used. We evaluated the Company’s forecasted revenues, gross margin percentages, operating expenses, and short-term net working capital changes, by comparing them to the Company’s historical results, external market and industry data, as well as operating results subsequent to the date of the fair value determination, but prior to audit report issuance. We evaluated the sale of specific assets by comparing to the Company’s historical external transactions, as well as external market data.
In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
/s/ KPMG LLP
We have served as the Company’s auditor since 2011.
Portland, Oregon
October 28, 2020
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
As of August 31,
Assets
Investment in unconsolidated affiliates 72,354 91,818
Liabilities and Equity
Commitments and contingencies (Notes 20 & 21)
Contingently redeemable noncontrolling interest 31,117 31,564
Equity:
Greenbrier
Accumulated other comprehensive loss (52,817 ) (44,815 )
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
Goodwill impairment — 10,025 —
Other costs
Earnings (loss) from unconsolidated affiliates 2,960 (5,805 ) (18,661 )
Basic earnings per common share $ 1.50 $ 2.18 $ 4.92
Diluted earnings per common share $ 1.46 $ 2.14 $ 4.68
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 loss on derivative financial instruments 2 (7,304 ) (10,264 ) (197 )
The accompanying notes are an integral part of these financial statements.
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Consolidated Statements of Equity
Attributable to Greenbrier
Noncontrolling interest adjustments — — — — — 2,864 2,864 —
Joint venture partner distribution declared — — — — — (62,649 ) (62,649 ) —
Investment by joint venture partner — — — — — 6,500 6,500 —
Noncontrolling interest acquired — — — — — (7 ) (7 ) —
Restricted stock awards (net of cancellations) 336 7,334 — — 7,334 — 7,334 —
Joint venture partner distribution declared — — — — — (18,025 ) (18,025 ) —
Noncontrolling interest acquired — — — — — 1,915 1,915 —
Other comprehensive income (loss), net — — — (8,002 ) (8,002 ) 20 (7,982 ) —
Noncontrolling interest adjustments — — — — — 1,436 1,436 —
Joint venture partner distribution declared — — — — — (37,552 ) (37,552 ) —
Noncontrolling interest acquired — — — — — 12,075 12,075 —
Restricted stock awards (net of cancellations) 213 2,691 — — 2,691 — 2,691 —
Unamortized restricted stock — (4,957 ) — — (4,957 ) — (4,957 ) —
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:
Goodwill impairment — 10,025 —
Decrease (increase) in assets:
Increase (decrease) in liabilities:
Cash flows from investing activities:
Acquisitions, net of cash acquired — (361,878 ) (34,874 )
Cash distribution from unconsolidated affiliates and other 12,693 2,096 4,661
Cash flows from financing activities:
Proceeds from revolving notes with maturities longer than 90 days 176,500 — —
Proceeds from issuance of notes payable — 525,000 13,771
Debt issuance costs — (8,630 ) —
Investment by joint venture partner — — 6,500
Cash and cash equivalents and restricted cash
Balance Sheet Reconciliation:
Cash paid during the period for:
Non-cash activity
Conversion of 3.5% Convertible notes $ — $ — $ 118,887
The accompanying notes are an integral part of these financial statements.
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Notes to Consolidated Financial Statements
Note 1 — Nature of Operations
The Company operates in three reportable segments: Manufacturing; Wheels, Repair & Parts; and Leasing & Services. The segments are operationally integrated. The Manufacturing segment, which currently operates from facilities in the U.S., Mexico, Poland, Romania and Turkey, produces double-stack intermodal railcars, tank cars, conventional railcars, automotive railcar products and marine vessels. The Wheels, Repair & Parts segment performs wheel and axle servicing; railcar repair, refurbishment and maintenance; as well as production of a variety of parts for the rail industry in North America. The Leasing & Services segment owns approximately 8,300 railcars and provides management services for approximately 393,000 railcars for railroads, shippers, carriers, institutional investors and other leasing and transportation companies in North America as of August 31, 2020. Through unconsolidated affiliates the Company produces rail and industrial components and has an ownership stake in a railcar manufacturer in Brazil.
Note 2 — Summary of Significant Accounting Policies
Principles of consolidation- The financial statements include the accounts of the Company and its subsidiaries in which it has a controlling interest. All intercompany transactions and balances are eliminated upon consolidation.
Unclassified balance sheet-The balance sheets of the Company are presented in an unclassified format as a result of significant leasing activities for which the current or non-current distinction is not relevant. In addition, the activities of the Manufacturing; Wheels, Repair & Parts;and Leasing & Services segments are so intertwined that in the opinion of management, any attempt to separate the respective balance sheet categories would not be meaningful and may lead to the development of misleading conclusions by the reader.
Foreign currency translation - Certain operations outside the U.S. prepare financial statements in currencies other than the U.S. Dollar. Revenues and expenses are translated at monthly average exchange rates during the year, while assets and liabilities are translated at year-end exchange rates. Translation adjustments are accumulated as a separate component of equity in other comprehensive income (loss). The net foreign currency translation adjustment balances were $39.8 million, $34.2 million and $21.5 million as of August 31, 2020, 2019 and 2018, respectively.
Cash and cash equivalents- Cash may temporarily be invested primarily in money market funds. All highly-liquid investments with a maturity of three months or less at the date of acquisition are considered cash equivalents.
Restricted cash- Restricted cash primarily relates to amounts held to support a target minimum rate of return on certain agreements and a pass through account for activity related to management services provided for certain third party customers.
Accounts receivable - Accounts receivable consists of receivables from customers and receivables from related parties (see Note 16 - Related Party Transactions) and is stated net of allowance for doubtful accounts of $2.7 million and $2.2 million as of August 31, 2020 and 2019, respectively.
As of August 31,
Allowance for doubtful accounts
Currency translation effect 124 13 49
Inventories- Inventories are valued at the lower of cost or net realizable value using the first-in first-out method. Work-in-process includes material, labor and overhead. Finished goods includes completed wheels, parts and railcars not on lease or in transit.
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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. As of August 31, 2020, Leased railcars for syndication was $107.7 million compared to $182.3 million as of August 31, 2019.
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 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, 2020, selected investments in unconsolidated affiliates include the Company’s 60% interest in Greenbrier-Maxion, 29.5% interest in Amsted-Maxion Cruzeiro (which owns 40% of Greenbrier-Maxion), 40% interest in Greenbrier Railcar Funding I LLC and 41.9% interest in Axis, LLC.
Property, plant and equipment- Property, plant and equipment is stated at cost, net of accumulated depreciation. Depreciation is provided on the straight-line method over estimated useful lives which primarily are as follows:
Depreciable Life
Buildings and improvements 10 - 30 years
Machinery and equipment 3 - 20 years
Other 3 - 7 years
Intangible and other assets, net- Intangible assets are recorded when a portion of the purchase price of an acquisition is allocated to assets such as customer contracts and relationships and trade names. Intangible assets with finite lives are amortized using the straight line method over their estimated useful lives which are up to 20 years. Other assets include revolving note fees which are capitalized and amortized as interest expense over the life of the related borrowings.
Impairment of long-lived assets- When changes in circumstances indicate the carrying amount of certain long-lived assets may not be recoverable, the assets are evaluated for impairment. If the forecasted undiscounted future cash flows are less than the carrying amount of the assets, an impairment charge to reduce the carrying value of the assets to estimated realizable value is recognized in the current period. No impairment of long-lived assets was recorded in the years ended August 31, 2020, 2019 and 2018.
Goodwill- Goodwill is recorded when the purchase price of an acquisition exceeds the fair market value of the net assets acquired. Goodwill is not amortized and is tested for impairment at least annually and more frequently if indicators of impairment arise. The Company reviews goodwill for impairment annually using either a qualitative assessment or a quantitative goodwill impairment test. If the qualitative assessment is selected and the Company determines that fair value of each reporting unit more likely than not exceeds its carrying value, no further assessment is necessary. For reporting units where the Company performs the quantitative goodwill impairment test an impairment loss is recorded to the extent that the reporting unit’s carrying amount exceeds the reporting unit’s fair value. An impairment loss cannot exceed the total amount of goodwill allocated to the reporting unit. See Note 7 – Goodwill for additional information.
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Warranty accruals -Warranty costs are estimated and charged to operations to cover a defined warranty period. The estimated warranty cost is based on history of warranty claims for each particular product type. For new product types without a warranty history, preliminary estimates are based on historical information for similar product types. The warranty accruals, included in Accounts payable and accrued liabilities, are reviewed periodically and updated based on warranty trends.
Income taxes- The asset and liability method is used to account for income taxes. Deferred income taxes are provided for the temporary effects of differences between assets and liabilities recognized for financial statement and income tax reporting purposes. Valuation allowances reduce deferred tax assets to an amount that will more likely than not be realized. The Company recognizes liabilities for uncertain tax positions based on whether evidence indicates that it is more likely than not that the position will be sustained on audit. The Company reevaluates these uncertain tax positions on a quarterly basis. Changes in tax law or court interpretations may result in the recognition of a tax benefit or an additional charge to the tax provision.
Deferred revenue - Cash payments received prior to meeting revenue recognition criteria are recorded in Deferred revenue. Amounts are reclassified out of Deferred revenue once the revenue recognition criteria have been met.
Noncontrolling interest and Contingently redeemable noncontrolling interest - The Company has a joint venture with Grupo Industrial Monclova, S.A. (GIMSA) that manufactures new railroad freight cars for the North American marketplace at GIMSA’s existing manufacturing facility located in Frontera, Mexico. Each party owns a 50% interest in the joint venture. The financial results of this operation are consolidated for financial reporting purposes as the Company maintains a controlling interest as evidenced by the right to appoint the majority of the Board of Directors, control over accounting, financing, marketing and engineering and approval and design of products. The noncontrolling interest related to the partner’s 50% interest in the joint venture is included in Noncontrolling interest in the equity section of the Company’s Consolidated Balance Sheet.
Greenbrier-Astra Rail was formed in 2017 between the Company’s existing European operations headquartered in Swidnica, Poland and Astra Rail, based in Arad, Romania. Greenbrier-Astra Rail is controlled by the Company with an approximate 75% interest. Astra Rail also received a put option to sell its entire noncontrolling interest to Greenbrier at an exercise price equal to the higher of fair value or a defined EBITDA multiple as measured on the exercise date. The option is exercisable 30 days prior to and up until June 1, 2022. The Company consolidates Greenbrier-Astra Rail for financial reporting purposes and includes the noncontrolling interest in the mezzanine section of the Consolidated Balance Sheet in Contingently redeemable noncontrolling interest. The carrying value of the noncontrolling interest cannot be less than the maximum redemption amount, which is the amount Greenbrier will settle the put option for if exercised. Adjustments to reconcile the carrying value to the maximum redemption amount are recorded to retained earnings.
In August 2018, Greenbrier-Astra Rail entered into an agreement to take an approximately 68% ownership stake in Rayvag, a railcar manufacturing company based in Adana, Turkey. Rayvag is controlled by the Company. The Company consolidates Rayvag for financial reporting purposes. The noncontrolling interest related to the partner’s interest is included in Noncontrolling interest in the equity section of the Company’s Consolidated Balance Sheet.
Net earnings attributable to noncontrolling interest on the Company’s Consolidated Statement of Income represents the Company’s partners’ share of results from operations.
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Accumulated other comprehensive loss – Accumulated other comprehensive loss, net of tax as appropriate, consisted of the following:
Amounts reclassified from accumulated other comprehensive loss 4,175 — — $ 4,175
The amounts reclassified out of Accumulated other comprehensive loss into the Consolidated Statements of Income, with the financial statement caption, were as follows:
Year Ended August 31,
(In thousands) 2020 2019 Financial Statement Caption
(Gain) loss on derivative financial instruments:
Foreign exchange contracts $ 2,984 $ 1,794 Revenue and Cost of revenue
Interest rate swap contracts 2,657 545 Interest and foreign exchange
Revenue recognition– The Company measures revenue at the amounts that reflect the consideration to which it expects to be entitled in exchange for transferring control of goods and services to customers. The Company recognizes revenue either at the point in time or over the period of time that performance obligations to customers are satisfied. Payment terms vary by segment and product type and are generally due within normal commercial terms. The Company’s contracts with customers may include multiple performance obligations (e.g. railcars, maintenance, management services, etc.). For such arrangements, the Company allocates revenues to each performance obligation based on its relative standalone selling price. The Company has disaggregated revenue from contracts with customers into categories which describe the principal activities from which it generates revenues.
Manufacturing
Railcars are manufactured in accordance with contracts with customers. The Company recognizes revenue upon its customers’ acceptance of the completed railcars at a specified delivery point. From time to time, the Company enters into multi-year supply agreements. Each railcar delivery is considered a distinct performance obligation, such that the amounts that are recognized as revenue following railcar delivery are generally not subject to change.
The Company typically recognizes marine vessel manufacturing revenue over time using the cost input method, based on progress toward contract completion measured by actual costs incurred to date in relation to the estimate of total expected costs. This method best depicts the Company’s performance in completing the construction of the marine vessel for the customer and is consistent with the percentage of completion method used prior to the adoption of Topic 606.
Wheels, Repair & Parts
The Company operates a network of wheel, repair and parts shops in North America that provide complete wheelset reconditioning and railcar repair services.
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Wheels revenue is recognized when wheelsets are shipped to the customer or when consumed by customers in the case of consignment arrangements. Parts revenue is recognized upon shipment of the parts to the customers.
Repair revenue is typically recognized over time using the cost input method, based on progress toward contract completion measured by actual costs incurred to date in relation to the estimate of total expected costs. This method best depicts the Company’s performance in repairing the railcars for the customer. Repair services are typically completed in less than 90 days.
Leasing & Services
The Company owns a fleet of new and used cars which are leased to third-party customers. Lease revenue is recognized over the lease-term in the period in which it is earned.
Syndication transactions represent new and used railcars which have been placed on lease to a customer and which the Company intends to sell to an investor with the lease attached. At the time of such sale, revenue and cost of revenue associated with railcars that the Company has manufactured are recognized in the Manufacturing segment; while revenue and cost of revenue associated with railcars which were obtained from a third-party with the intent to resell them and subsequently sold, are recognized in Leasing & Services.
The Company enters into multi-year contracts to provide management and maintenance services to customers for which revenue is generally recognized on a straight-line basis over the contract term as a stand-ready obligation. Costs to fulfill these contracts are recognized as incurred.
Interest and foreign exchange - Interest and foreign exchange includes foreign exchange transaction gains and losses, amortization of loan fee expense, accretion of debt discounts and external interest expense.
Years ended August 31,
Interest and foreign exchange:
Forward exchange contracts- Foreign operations give rise to risks from fluctuations in foreign currency exchange rates. Forward exchange contracts with established financial institutions are used to hedge a portion of such risk. Realized and unrealized gains and losses on effective hedges are deferred in other comprehensive income (loss) and recognized in earnings concurrent with the hedged transaction or when the occurrence of the hedged transaction is no longer considered probable. Ineffectiveness is measured and any gain or loss is recognized in foreign exchange (gain) loss. Even though forward exchange contracts are entered into to mitigate the impact of currency fluctuations, certain exposure remains, which may affect operating results. In addition, there is risk for counterparty non-performance.
Interest rate instruments- Interest rate swap agreements are used to reduce the impact of changes in interest rates on certain debt. The net cash amounts paid or received under the agreements are recognized as an adjustment to interest expense.
Research and development - Research and development costs are expensed as incurred. Research and development costs incurred for new product development during the years ended August 31, 2020, 2019 and 2018 were $5.8 million, $5.4 million and $6.0 million, respectively, included in Selling and administrative expenses.
Net earnings per share- Basic earnings per common share (EPS) includes restricted stock grants and restricted stock units that are considered participating securities, including some grants subject to certain performance criteria, in weighted average basic common shares outstanding when calculating EPS when the Company is in a net earnings position.
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Diluted EPS is calculated using the more dilutive of two approaches. The first approach includes the dilutive effect, using the treasury stock method, associated with shares underlying the 2.875% Convertible notes, 2.25% Convertible notes, restricted stock units that are not considered participating securities and performance-based restricted stock units subject to performance criteria, for which actual levels of performance above target have been achieved. The second approach supplements the first by including the “if converted” effect of the 3.5% Convertible notes during the periods in which they were outstanding. Under the “if converted” method, debt issuance and interest costs, both net of tax, associated with the convertible notes are added back to net earnings and the share count is increased by the shares underlying the convertible notes. The 3.5% Convertible notes are included in the calculation of both approaches using the treasury stock method when the average stock price is greater than the applicable conversion price.
Stock-based compensation – The value of stock based compensation awards is amortized as compensation expense from the date of grant through the earlier of the vesting period or in some instances the recipient’s eligible retirement date. Stock based compensation expense consists of restricted stock units, restricted stock and phantom stock units awards. Stock based compensation expense for the years ended August 31, 2020, 2019 and 2018 was $9.0 million, $11.2 million and $29.3 million, respectively and was recorded in Selling and administrative and Cost of revenue on the Consolidated Statements of Income.
Restricted stock units and restricted stock awards are accounted for as equity based awards (see Note 14 - Equity). Phantom stock units are accounted for as liability based awards.
Phantom Stock Units
As of August 31, 2020, there were no phantom stock units outstanding. Compensation expense related to phantom stock unit grants were recorded in Selling and administrative expense and Cost of revenue on the Company’s Consolidated Statements of Income. Compensation expense recognized related to phantom stock units for the year ended August 31, 2020 was $0.3 million. For the year ended August 31, 2019, a $1.2 million benefit was recognized in compensation expense for the re-measurement of phantom stock units due to a lower stock price. Compensation expense recognized related to phantom stock units for the year ended August 31, 2018 was $12.1 million.
Management estimates -The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires judgment on the part of management to arrive at estimates and assumptions on matters that are inherently uncertain. These estimates may affect the amount of assets, liabilities, revenues and expenses reported in the financial statements and accompanying notes and disclosure of contingent assets and liabilities within the financial statements. Estimates and assumptions are periodically evaluated and may be adjusted in future periods. Actual results could differ from those estimates.
Reclassifications - Certain immaterial reclassifications have been made to the accompanying prior year Consolidated Financial Statements to conform to the current year presentation.
Initial Adoption of Accounting Policies
Revenue Recognition
In the first quarter of 2019, the Company adopted Accounting Standard Update 2014-09, Revenue from Contracts with Customers and related amendments (Topic 606). This standard was issued to provide a common revenue recognition model for entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. The new standard also requires additional disclosures to sufficiently describe the nature, amount, timing, and uncertainty of revenue and cash flow arising from contracts with customers. As a result of adopting the new standard, the majority of the Company’s revenue recognition timing remained unchanged, while certain minor changes have occurred related to maintenance and repair services. Costs incurred while fulfilling maintenance contracts are now recognized as incurred while the related revenue continues to be recognized over time. Additionally, repair and rail retrofit service revenue, while previously recognized upon completion of an order, is now recognized as costs are incurred. This standard was adopted using a modified retrospective approach through a cumulative effect adjustment, which increased retained earnings by $5.5 million at September 1, 2018. Other adjustments recorded to the September 1, 2018 opening balance sheet were not material. The adoption of the new revenue standard did not have a material effect on the Condensed Consolidated Balance Sheet or Statement of Income.
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Lease accounting
On September 1, 2019, the Company adopted Accounting Standards Update 2016-02, Leases and related amendments (Topic 842). The new guidance supersedes existing guidance on accounting for leases in Topic 840 and is intended to increase the transparency and comparability of accounting for lease transactions. Topic 842 requires most leases to be recognized on the balance sheet by recording a right-of-use (ROU) asset and a lease liability. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting remains similar to the prior model, but updated to align with certain changes to the lessee model and Topic 606.
The Company adopted the provisions of the new standard using the modified retrospective adoption method, utilizing the simplified transition option which allows entities to continue to apply the legacy guidance in Topic 840 in the comparative periods presented in the year of adoption. The Company elected the “package of practical expedients,” which allows it to not reassess under the new guidance prior conclusions about lease identification, lease classification, and initial direct costs. The Company did not elect the use-of-hindsight practical expedient. The Company elected to not separate lease and non-lease components. The Company elected the short-term lease recognition exemption for all leases that qualify, which means it will not recognize ROU assets or lease liabilities for leases with lease terms of less than twelve months. Following the adoption of Topic 842, the Company will utilize both Topic 842 and Topic 606 when evaluating retained risk of services and other performance obligations in conjunction with selling railcars with a lease attached as part of the syndication model.
As a result of adoption, the Company recognized operating lease ROU assets and lease liabilities of $40.4 and $41.6 million, respectively, as of September 1, 2019. The Company also recognized an immaterial finance lease asset and corresponding lease liability. Additionally, the Company derecognized certain existing property, plant and equipment and deferred revenue for railcar transactions previously not qualifying as sales due to continuing involvement, that now qualify as sales under the new guidance. The gain associated with this change in accounting, was mostly offset by the recognition of a new guarantee liability. The adoption of this new standard also required the Company to eliminate deferred gains associated with certain sale-leaseback transactions. A cumulative-effect adjustment of $4.4 million was recorded as an increase to retained earnings as of September 1, 2019.
Derivatives and Hedging
In August 2017, the FASB issued Accounting Standards Update 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). This update improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance. The guidance expands the ability to qualify for hedge accounting for non-financial and financial risk components, reduces complexity in fair value hedges of interest rate risk and eliminates the requirement to separately measure and report hedge ineffectiveness, as well as eases certain hedge effectiveness assessment requirements. The Company adopted this guidance effective September 1, 2019 and it did not have a material impact on our consolidated financial statements.
Prospective Accounting Changes
Measurement of Credit Losses on Financial Instruments