Description
Greenbrier Cos. Director C BRUCE WARD bought 17300 shares on 4-12-2012 at $ 17.88
BUSINESS OVERVIEW
Introduction
We are one of the leading designers, manufacturers and marketers of railroad freight car equipment in North America and Europe, a manufacturer and marketer of ocean-going marine barges in North America and a leading provider of wheel services, railcar refurbishment and parts, leasing and other services to the railroad and related transportation industries in North America.
We operate an integrated business model in North America that combines wheel services, repair and refurbishment, component parts reconditioning, freight car manufacturing, leasing and fleet management services. Our model is designed to provide customers with a comprehensive set of freight car solutions utilizing our substantial engineering, mechanical and technical capabilities as well as our experienced commercial personnel. This model allows us to develop cross-selling opportunities and synergies among our various business segments and to enhance our margins. We believe our integrated model is difficult to duplicate and provides greater value for our customers.
We operate in three primary business segments: Manufacturing; Wheel Services, Refurbishment & Parts; and Leasing & Services. Financial information about our business segments for the years ended August 31, 2011, 2010 and 2009 is located in Note 22 Segment Information to our Consolidated Financial Statements.
The Greenbrier Companies, Inc., which was incorporated in Delaware in 1981, consummated a merger on February 28, 2006 with its affiliate, Greenbrier Oregon, Inc., an Oregon corporation, for the sole purpose of changing its state of incorporation from Delaware to Oregon. Greenbrier Oregon survived the merger and assumed the name, The Greenbrier Companies, Inc. Our principal executive offices are located at One Centerpointe Drive, Suite 200, Lake Oswego, Oregon 97035, our telephone number is (503) 684-7000 and our Internet web site is located at http://www.gbrx.com .
Products and Services
Manufacturing
North American Railcar Manufacturing - We manufacture a broad array of railcar types in North America and have demonstrated an ability to capture high market shares in many of the car types we produce. We are the leading North American manufacturer of intermodal railcars with an average market share of approximately 64% over the last five years. In addition to our strength in intermodal railcars, we have commanded an average market share of approximately 56% in boxcars, 30% in flat cars and 18% in covered hoppers over the last five years. We delivered our first tank car in 2009 and achieved an 11% market share during the last year. The primary products we produce for the North American market are:
Intermodal Railcars - We manufacture a comprehensive range of intermodal railcars. Our most important intermodal product is our articulated double-stack railcar. The double-stack railcar is designed to transport containers stacked two-high on a single platform. An articulated double-stack railcar is comprised of up to five platforms each of which is linked by a common set of wheels and axles. Our comprehensive line of articulated and non-articulated double-stack intermodal railcars offers varying load capacities and configurations. The double-stack railcar provides significant operating and capital savings over other types of intermodal railcars.
Conventional Railcars - We produce a wide range of boxcars, which are used in forest products, automotive, perishables, general merchandise applications and the transport of commodities. We also produce a variety of covered hopper cars for the grain and cement industries as well as gondolas for the steel and metals markets and various other conventional railcar types, including our proprietary Auto-Max car. Our flat car products include center partition cars for the forest products industry, bulkhead flat cars, flat cars for automotive transportation and solid waste service flat cars.
Tank Cars - We produce a line of tank car products for the North American market. We produce 30,000-gallon non-coiled, non-insulated tank cars, which are used to transport ethanol, methanol and more than 60 other commodities. We also produce 16,500 gallon coiled, insulated tank cars for use in caustic soda service, and 25,500 gallon and/or 23,500 gallon coiled, insulated tank cars for use to transport a variety of commodities such as vegetable oils and bio-diesel.
European Railcar Manufacturing - Our European manufacturing operation produces a variety of railcar (wagon) types, including a comprehensive line of pressurized tank cars for liquid petroleum gas and ammonia and non-pressurized tank cars for light oil, chemicals and other products. In addition, we produce flat cars, coil cars for the steel and metals market, coal cars for both the continental European and United Kingdom markets, gondolas, sliding wall cars and automobile transporter cars. Although no formal statistics are available for the European market, we believe we are one of the leading new freight car manufacturers with an estimated market share of 10-15%.
Marine Vessel Fabrication - Our Portland, Oregon manufacturing facility, located on a deep-water port on the Willamette River, includes marine vessel fabrication capabilities. The marine facilities also increase utilization of steel plate burning and fabrication capacity providing flexibility for railcar production. We manufacture a broad range of ocean-going barges including conventional deck barges, double-hull tank barges, railcar/deck barges, barges for aggregates and other heavy industrial products and dump barges. Our primary focus is on the larger ocean-going vessels although the facility has the capability to compete in other marine related products.
Wheel Services, Refurbishment & Parts
Wheel Services, Railcar Repair, Refurbishment and Component Parts Manufacturing - We believe we operate the largest independent wheel services, repair, refurbishment and component parts networks in North America, operating in 38 locations. Our wheel shops, operating in 12 locations, provide complete wheel services including reconditioning of wheels, axles and roller bearings in addition to new axle machining and finishing and axle downsizing. Our network of railcar repair and refurbishment shops, operating in 22 locations, performs heavy railcar repair and refurbishment, as well as routine railcar maintenance. We are actively engaged in the repair and refurbishment of railcars for third parties, as well as of our own leased and managed fleet. Our component parts facilities, operating in 4 locations, recondition railcar cushioning units, couplers, yokes, side frames, bolsters and various other parts. We also produce roofs, doors and associated parts for boxcars.
Leasing & Services
Leasing - Our relationships with financial institutions, combined with our ownership of a lease fleet of approximately 9,000 railcars, enables us to offer flexible financing programs including traditional direct finance leases, operating leases and “by the mile” leases to our customers. As an equipment owner, we participate principally in the operating lease segment of the market. The majority of our leases are “full service” leases whereby we are responsible for maintenance and administration. Maintenance of the fleet is provided, in part, through our own facilities and engineering and technical staff. Assets from our owned lease fleet are periodically sold to take advantage of market conditions, manage risk and maintain liquidity.
Customers
Our railcar customers in North America include Class I railroads, regional and short-line railroads, leasing companies, shippers, carriers and transportation companies. We have strong, long-term relationships with many of our customers. We believe that our customers’ preference for high quality products, our technological leadership in developing innovative products and competitive pricing of our railcars have helped us maintain our long-standing relationships with our customers.
In 2011, revenue from four customers together, TTX Company (TTX), Union Pacific Railroad (UP), BNSF Railway Company (BNSF), and General Electric Railcar Services Corporation (GE) accounted for approximately 56% of total revenue, 18% of Leasing & Services revenue, 52% of Wheel Services, Refurbishment & Parts revenue and 62% of Manufacturing revenue. No other customers accounted for more than 10% of total revenue.
Raw Materials and Components
Our products require a supply of materials including steel and specialty components such as brakes, wheels and axles. Specialty components purchased from third parties represent a significant amount of the cost of most freight cars. Our customers often specify particular components and suppliers of such components. Although the number of alternative suppliers of certain specialty components has declined in recent years, there are at least two suppliers for most such components.
Certain materials and components are periodically in short supply which could potentially impact production at our new railcar and refurbishment facilities. In an effort to mitigate shortages and reduce supply chain costs, we have entered into strategic alliances for the global sourcing of certain components, increased our replacement parts business and continue to pursue strategic opportunities to protect and enhance our supply chain.
We periodically make advance purchases to avoid possible shortages of material due to capacity limitations of component suppliers and possible price increases. We do not typically enter into binding long-term contracts with suppliers because we rely on established relationships with major suppliers to ensure the availability of raw materials. We do have certain long-term agreements for specialty items to insure their availability.
Competition
There are currently six major railcar manufacturers competing in North America. One of these builds railcars principally for its own fleet and the others compete with us principally in the general railcar market. We compete on the basis of quality, price, reliability of delivery, reputation and customer service and support.
Competition in the marine industry is dependent on the type of product produced. There are two principal competitors, located in the Gulf States, which build product types similar to ours. We compete on the basis of experienced labor, launch ways capacity, quality, price and reliability of delivery. United States (U.S.) coastwise law, commonly referred to as the Jones Act, requires all commercial vessels transporting merchandise between ports in the U.S. to be built, owned, operated and manned by U.S. citizens and to be registered under the U.S. flag.
We believe that we are among the top five European railcar manufacturers, which maintain a combined market share of over 80%. European freight car manufacturers are largely located in central and eastern Europe where labor rates are lower and work rules are more flexible.
Competition in the wheel services, refurbishment and parts business is dependent on the type of product or service provided. There are many competitors in the railcar repair and refurbishment business and fewer competitors in the wheel services and other parts businesses; recently there have been new entrants in the wheel services business. We believe we are the largest non-railroad provider of wheel services and refurbishment services. We compete primarily on the basis of quality, timeliness of delivery, customer service, price and engineering expertise.
There are at least twenty institutions that provide railcar leasing and services similar to ours. Many of them are also customers that buy new railcars from our manufacturing facilities and used railcars from our lease fleet, as well as utilize our management services. More than half of these institutions have greater resources than we do. We compete primarily on the basis of quality, price, delivery, reputation, service offerings and deal structuring ability. We believe our strong servicing capability and our ability to sell railcars with a lease attached (syndicate railcars), integrated with our manufacturing, repair shops, railcar specialization and expertise in particular lease structures provide a strong competitive position.
Marketing and Product Development
In North America, we utilize an integrated marketing and sales effort to coordinate relationships in our various segments. We provide our customers with a diverse range of equipment and financing alternatives designed to satisfy each customer’s unique needs, whether the customer is buying new equipment, refurbishing existing equipment or seeking to outsource the maintenance or management of equipment. These custom programs may involve a combination of railcar products, leasing, refurbishing and remarketing services. In addition, we provide customized maintenance management, equipment management, accounting services and proprietary software solutions.
In Europe, we maintain relationships with customers through a network of country-specific sales representatives. Our engineering and technical staff works closely with their customer counterparts on the design and certification of railcars. Many European railroads are state-owned and are subject to European Union regulations covering the tender of government contracts.
Through our customer relationships, insights are derived into the potential need for new products and services. Marketing and engineering personnel collaborate to evaluate opportunities and identify and develop new products. Research and development costs incurred for new product development during the years ended August 31, 2011, 2010 and 2009 were $3.0 million, $2.6 million and $1.7 million.
Patents and Trademarks
We have a number of U.S. and non-U.S. patents of varying duration, and pending patent applications, registered trademarks, copyrights and trade names that are important to our products and product development efforts. The protection of our intellectual property is important to our business and we have a proactive program aimed at protecting our intellectual property and the results from our research and development.
Environmental Matters
We are subject to national, state and local environmental laws and regulations concerning, among other matters, air emissions, wastewater discharge, solid and hazardous waste disposal and employee health and safety. Prior to acquiring facilities, we usually conduct investigations to evaluate the environmental condition of subject properties and may negotiate contractual terms for allocation of environmental exposure arising from prior uses. We operate our facilities in a manner designed to maintain compliance with applicable environmental laws and regulations.
Environmental studies have been conducted on certain of the Company’s owned and leased properties that indicate additional investigation and some remediation on certain properties may be necessary. The Company’s Portland, Oregon manufacturing facility is located adjacent to the Willamette River. The U.S. Environmental Protection Agency (EPA) has classified portions of the river bed, including the portion fronting Greenbrier’s facility, as a federal “National Priority List” or “Superfund” site due to sediment contamination (the Portland Harbor Site). Greenbrier and more than 140 other parties have received a “General Notice” of potential liability from the EPA relating to the Portland Harbor Site. The letter advised the Company that it may be liable for the costs of investigation and remediation (which liability may be joint and several with other potentially responsible parties) as well as for natural resource damages resulting from releases of hazardous substances to the site. At this time, ten private and public entities, including the Company, have signed an Administrative Order on Consent (AOC) to perform a remedial investigation/feasibility study (RI/FS) of the Portland Harbor Site under EPA oversight, and several additional entities have not signed such consent, but are nevertheless contributing money to the effort. A draft of the RI study was submitted on October 27, 2009. The Feasibility Study is being developed and is expected to be submitted in the first calendar quarter of 2012. Eighty-three parties, including the State of Oregon and the federal government, have entered into a non-judicial mediation process to try to allocate costs associated with the Portland Harbor site. Approximately 110 additional parties have signed tolling agreements related to such allocations. On April 23, 2009, the Company and the other AOC signatories filed suit against 69 other parties due to a possible limitations period for some such claims; Arkema Inc. et al v. A & C Foundry Products, Inc.et al, US District Court, District of Oregon, Case #3:09-cv-453-PK. All but 12 of these parties elected to sign tolling agreements and be dismissed without prejudice, and the case has now been stayed by the court, pending completion of the RI/FS. In addition, the Company has entered into a Voluntary Clean-Up Agreement with the Oregon Department of Environmental Quality in which the Company agreed to conduct an investigation of whether, and to what extent, past or present operations at the Portland property may have released hazardous substances to the environment. The Company is also conducting groundwater remediation relating to a historical spill on the property which antedates its ownership.
Because these environmental investigations are still underway, the Company is unable to determine the amount of ultimate liability relating to these matters. Based on the results of the pending investigations and future assessments of natural resource damages, Greenbrier may be required to incur costs associated with additional phases of investigation or remedial action, and may be liable for damages to natural resources. In addition, the Company may be required to perform periodic maintenance dredging in order to continue to launch vessels from its launch ways in Portland, Oregon, on the Willamette River, and the river’s classification as a Superfund site could result in some limitations on future dredging and launch activities. Any of these matters could adversely affect the Company’s business and Consolidated Financial Statements, or the value of its Portland property.
Regulation
The Federal Railroad Administration in the U.S. and Transport Canada in Canada administer and enforce laws and regulations relating to railroad safety. These regulations govern equipment and safety appliance standards for freight cars and other rail equipment used in interstate commerce. The Association of American Railroads (AAR) promulgates a wide variety of rules and regulations governing the safety and design of equipment, relationships among railroads and other railcar owners with respect to railcars in interchange, and other matters. The AAR also certifies railcar builders and component manufacturers that provide equipment for use on North American railroads. These regulations require us to maintain our certifications with the AAR as a railcar builder and component manufacturer, and products sold and leased by us in North America must meet AAR, Transport Canada, and Federal Railroad Administration standards.
The primary regulatory and industry authorities involved in the regulation of the ocean-going barge industry are the U.S. Coast Guard, the Maritime Administration of the U.S. Department of Transportation, and private industry organizations such as the American Bureau of Shipping.
The regulatory environment in Europe consists of a combination of European Union (EU) regulations and country specific regulations, including a harmonized set of Technical Standards for Interoperability of freight wagons throughout the EU.
Employees
As of August 31, 2011, we had 6,032 full-time employees, consisting of 4,462 employees in Manufacturing, 1,424 in Wheel Services, Refurbishment & Parts and 146 employees in Leasing & Services and corporate. In Poland, 372 employees are represented by unions. At our Frontera, Mexico joint venture manufacturing facility, 1,076 employees are represented by a union. At our Sahagun, Mexico facility, 587 employees are represented by a union. In addition to our own employees, 1,163 union employees work at our Sahagun, Mexico railcar manufacturing facility under our services agreement with Bombardier Transportation. At our Wheel Services, Refurbishment & Parts locations, 72 employees, in Mexico, are represented by unions. We believe that our relations with our employees are generally good.
CEO BACKGROUND
William A. Furman, President, Chief Executive Officer and Director . Mr. Furman has served as a member of the Board and as the Company’s President and Chief Executive Officer since 1994. Mr. Furman has been associated with the Company and its predecessor companies since 1974. Prior to 1974, Mr. Furman was Group Vice President for the Leasing Group of TransPacific Financial Corporation. Earlier he was General Manager of the Finance Division of FMC Corporation. Mr. Furman serves as a Director of Schnitzer Steel Industries, Inc., a steel recycling and manufacturing company. As a founder of the Company’s predecessor, Mr. Furman brings executive management and railcar industry experience to the Board as well as historical perspective on the Company’s origins and evolution.
The Board of Directors has determined that it is in the best interests of the Company and its shareholders for Mr. Furman to continue to serve as a director of the Board, subject to shareholder approval at the Annual Meeting.
Graeme A. Jack, Director . Mr. Jack has served as a member of the Board since October 2006. Mr. Jack is a retired partner of PricewaterhouseCoopers in Hong Kong. Mr. Jack is also an independent non-executive director of Hutchison Port Holdings Management Pte. Limited, the trustee manager of Singapore Stock Exchange listed Hutchison Port Holdings Trust. He also serves as an independent trustee for Hutchison Provident Fund and Hutchison Provident and Retirement Plan, two retirement plans established for employees of Hong Kong Stock Exchange listed Hutchison Whampoa Limited. Mr. Jack brings accounting and financial reporting expertise to the Board as well as extensive experience in international business transactions in Asia generally and in China in particular.
The Board of Directors has determined that it is in the best interests of the Company and its shareholders for Mr. Jack to continue to serve as a director of the Board.
Duane C. McDougall, Director . Mr. McDougall has served as a member of the Board since 2003. Mr. McDougall served as Chairman and Chief Executive Officer of Boise Cascade, LLC, a privately held manufacturer of wood products, from December 2008 to August 2009. He was President and Chief Executive Officer of Willamette Industries, Inc., an international forest products company, from 1998 to 2002. Prior to becoming President and Chief Executive Officer, he served as Chief Accounting Officer during his 23-year tenure with Willamette Industries, Inc. He also serves as Chairman of the Board of Boise Cascade and as a Director of StanCorp Financial and Cascade Corporation. Mr. McDougall has also served as a Director of West Coast Bancorp, a position from which he resigned effective December 31, 2011, and as a Director of several non-profit organizations. Mr. McDougall brings executive leadership and accounting and financial reporting expertise to the Board.
The Board of Directors has determined that it is in the best interests of the Company and its shareholders for Mr. McDougall to continue to serve as a director of the Board.
Victoria McManus, Director . Ms. McManus has served as a member of the Board since July 2009. From September 2008 to the present, Ms. McManus has worked independently and has made investments in real estate and mid-cap companies. From August 2004 until July 2008, Ms. McManus served as President of Babcock & Brown Rail Management, LLC and President of Babcock & Brown Freight Management LLC. Ms. McManus was a partner with Babcock & Brown LP (“B&B”), an international financial advisory and asset management firm known for its expertise in transportation and infrastructure assets. At B&B, Ms. McManus was a senior member of the U.S. Management team and the head of the North American Rail Group. Prior to joining B&B, Ms. McManus was an executive with The CIT Group for ten years; her last position as President of their Rail Division. Ms. McManus brings railcar leasing and executive leadership expertise to the Board.
The Board of Directors has determined that it is in the best interests of the Company and its shareholders for Ms. McManus to continue to serve as a director of the Board.
A. Daniel O’Neal, Jr., Director . Mr. O’Neal has served as a member of the Board since 1994. He also served as a Director of Gunderson from 1985 to 2005. Mr. O’Neal serves as an advisor to the Company regarding strategic relationships within railroad and supplier industries and with the federal government, a position he held from 1997 until January of 2011 as an employee of the Company and as a consultant to the Company thereafter. Mr. O’Neal served as a Commissioner of the Interstate Commerce Commission from 1973 until 1980 and, from 1977 until 1980, served as its Chairman. Since 1985, he has served in various executive positions with the Company, including as Chairman of Greenbrier Intermodal from 1984 to 1994, Chairman of Autostack from 1989 to 1996 and Chairman of Greenbrier Logistics from 1996 to 1997. Prior to joining the Company in 1985, he was a partner in a business law firm. From 1989 until 1996 he was Chief Executive Officer and owner of a freight transportation services company. He was Chairman of Washington State’s Freight Mobility Board from its inception in 1998 until July 2005. Mr. O’Neal is a member of the Washington State Transportation Commission. In 2007 the Governor of Washington appointed him to the newly formed Puget Sound Partnership Leadership Board. He is on the board of various non-profit organizations. Mr. O’Neal brings transportation industry, governmental relations and regulatory affairs expertise to the Board.
The Board of Directors has determined that it is in the best interests of the Company and its shareholders for Mr. O’Neal to continue to serve as a director of the Board.
Wilbur L. Ross, Jr., Director . Mr. Ross has served as a member of the Board since June 2009. Mr. Ross is the Chairman and Chief Executive Officer of WL Ross & Co. LLC, a private equity firm, a position he has held since April 2000. Mr. Ross is also the managing member of the general partner of WL Ross Group, L.P., which in turn is the managing member of the general partner of WLR Recovery Fund L.P., WLR Recovery Fund II L.P., WLR Recovery Fund III L.P., WLR Recovery Fund IV L.P., Asia Recovery Fund L.P., Asia Recovery Co-Investment Fund L.P., Absolute Recovery Hedge Fund L.P., India Asset Recovery Fund and Japan Real Estate Recovery Fund, a member of the Investment Committee of the Taiyo Funds (Taiyo Fund, Taiyo Cypress Fund and Taiyo Pearl Fund) and the Chairman of Invesco Private Capital. Mr. Ross is also Chairman of International Textile Group, Inc., a global, diversified textile provider that produces automotive safety, apparel, government uniform, technical and specialty textiles; Nano-Tex, Inc., a fabric innovations company located in the United States; International Automotive Components Group S.A., a global manufacturer of automotive interiors; ArcelorMittal N.V., a global steel manufacturer; Assured Guaranty Ltd., a provider of financial guaranty and credit enhancement products; Bank United, Inc.; Compagnie Européenne de Wagons SARL in Luxembourg; DSS Holdings GP Limited, a global shipping company, Insuratex, Ltd., an insurance company in Bermuda; Plascar Participacoes SA; International Automotive Components Group Brazil LLC; International Automotive Components Group North America LLC; Air Lease Corporation; First Michigan Bank; OCM Limited; Ohizumi Manufacturing Company Limited; and Sun Bancorp. Until June 2011, Mr. Ross was the Non-Executive Chairman of the board of directors of International Coal Group, Inc. Previously, Mr. Ross served as the Executive Managing Director at Rothschild Inc., an investment banking firm, from October 1974 to March 2000. Mr. Ross was previously a director of Mittal Steel Co. N.V. from April 2005 to June 2006, a director of International Steel Group Inc. from February 2002 to April 2005, a director of Montpelier RE Holdings Ltd. from 2006 to March 2010, and a director of Syms Corp. from 2000 through 2007. Mr. Ross was also formerly Chairman of the Smithsonian Institution National Board and currently is a board member of the Japan Society, British American Business Council, Committee on Capital Markets Regulations, U.S. – India Business Council, the Yale University School of Management, the Harvard Business School Club of New York, the Palm Beach Civic Association, the Palm Beach Preservation Foundation, Palm Beach Firefighters Retirement Board, the Partnership for New York City and the Briarcliffe Condominium Apartment Building. He holds an A.B. from Yale University and an M.B.A., with distinction, from Harvard University. Mr. Ross brings financial services and heavy industry expertise to the Board and is one of the world’s most respected investors.
The Board of Directors has determined that it is in the best interests of the Company and its shareholders for Mr. Ross to continue to serve as a director of the Board.
Wendy L. Teramoto, Director . Ms. Teramoto has served as a member of the Board since June 2009. Ms. Teramoto is a Managing Director at WL Ross & Co. LLC. Until June 2011, Ms. Teramoto was a director of International Coal Group, Inc. Ms. Teramoto is also a director of DSS Holdings GP Limited, a global shipping company. Prior to joining WL Ross & Co. LLC, Ms. Teramoto worked at Rothschild Inc., an investment banking firm. Ms. Teramoto brings expertise in analyzing financial issues and experience with manufacturing and other heavy industry companies to the Board.
The Board of Directors has determined that it is in the best interests of the Company and its shareholders for Ms. Teramato to continue to serve as a director of the Board.
Charles J. Swindells, Director . Mr. Swindells has served as a member of the Board since September 2005. Mr. Swindells is employed as a Senior Advisor to Bessemer Trust Company. Mr. Swindells served as the Vice Chairman, Western Region of U.S. Trust, Bank of America, Private Wealth Management from August 2005 to January 2009. Mr. Swindells served as United States Ambassador to New Zealand and Samoa from 2001 to 2005. Before becoming Ambassador, Mr. Swindells was Vice Chairman of US Trust Company, N.A.; Chairman and Chief Executive Officer of Capital Trust Management Corporation; and Managing Director/Founder of Capital Trust Company. He also served as Chairman of World Wide Value Fund, a closed-end investment company listed on the New York Stock Exchange. Mr. Swindells was one of five members on the Oregon Investment Council overseeing the $20 billion Public Employee Retirement Fund Investment Portfolio and was a member of numerous non-profit boards of trustees, including serving as Chairman of the Board for Lewis & Clark College in Portland, Oregon. Mr. Swindells serves as a Director of Swift Energy Company, a NYSE listed oil and natural gas company. Mr. Swindells brings financial and global business expertise to the Board.
The Board of Directors has determined that it is in the best interests of the Company and its shareholders for Mr. Swindells to continue to serve as a director of the Board, subject to shareholder approval at the Annual Meeting.
C. Bruce Ward, Director . Mr. Ward has served as a member of the Board since 1994. He has also served as a consultant to the Company since 2005. Mr. Ward served as Chairman of Gunderson LLC, a manufacturing subsidiary, from 1990 to 2005 and was its President and Chief Executive Officer from 1985 to 1989. Mr. Ward is a former director of Stimson Lumber Company, a privately-held forest products company. Mr. Ward brings operational and railcar manufacturing expertise to the Board.
The Board of Directors has determined that it is in the best interests of the Company and its shareholders for Mr. Ward to continue to serve as a director of the Board, subject to shareholder approval at the Annual Meeting.
Donald A. Washburn, Director . Mr. Washburn has served as a member of the Board since August 2004. Mr. Washburn is a private investor. Mr. Washburn served as Executive Vice President of Operations of Northwest Airlines, Inc., an international airline, from 1995 to 1998. Mr. Washburn also served as Chairman and President of Northwest Cargo from 1997 to 1998. Prior to becoming Executive Vice President, he served as Senior Vice President for Northwest Airlines, Inc. from 1990 to 1995. Mr. Washburn served in several positions from 1980 to 1990 for Marriott Corporation, an international hospitality company, most recently as Executive Vice President. He also serves as a trustee of LaSalle Hotel Properties, and a director of Key Technology, Inc. and Amedisys, Inc., as well as privately held companies and non-profit corporations. Mr. Washburn received his BBA, cum laude, from Loyola University of Chicago, an MBA from Northwestern University’s Kellogg School of Management and a J.D., cum laude, from Northwestern University’s School of Law. He has continued his professional education in business and law attending Harvard Business School, Stanford Law School, Kellogg School of Management, Wharton Business School at the University of Pennsylvania and industry seminars, including the Boardroom Summit and Stanford Director’s College. Mr. Washburn brings executive management and operational expertise to the Board.
The Board of Directors has determined that it is in the best interests of the Company and its shareholders for Mr. Washburn to continue to serve as a director of the Board.
Benjamin R. Whiteley, Chairman of the Board of Directors . Mr. Whiteley has served as a member of the Board since 1994 and was elected Chairman of the Board of Directors in October 2004. He is the retired Chairman and Chief Executive Officer of Standard Insurance Company, an Oregon based life insurance company, where he served in a number of capacities over 44 years ending in 2000. Mr. Whiteley has served as a director of several other publicly held companies and has chaired the boards of a number of non-profit organizations. Mr. Whiteley brings executive management and public company director expertise to the Board.
The Board of Directors has determined that it is in the best interests of the Company and its shareholders for Mr. Whiteley to continue to serve as a director of the Board.
Victor G. Atiyeh, Emeritus Director . Mr. Atiyeh served as a member of the Board from 1994 until the completion of his term in January 2008. Mr. Atiyeh has agreed to continue his counsel to the Board as an Emeritus Director. Mr. Atiyeh has been President of Victor Atiyeh & Co., international trade consultants, since 1987. He served eight years as Governor of the State of Oregon from January 1979 to January 1987. Prior to being elected Governor, Mr. Atiyeh was President of Atiyeh Brothers, a family retail company.
MANAGEMENT DISCUSSION FROM LATEST 10K
Executive Summary
We operate in three primary business segments: Manufacturing; Wheel Services, Refurbishment & Parts; and Leasing & Services. These three business segments are operationally integrated. The Manufacturing segment, operating from facilities in the United States (U.S.), Mexico and Poland, produces double-stack intermodal railcars, conventional railcars, tank cars and marine vessels. The Wheel Services, Refurbishment & Parts segment performs railcar repair, refurbishment and maintenance activities in the U.S., Mexico and Canada as well as wheel, axle and bearing servicing, and production and reconditioning of a variety of parts for the railroad industry. The Leasing & Services segment owns approximately 9,000 railcars and provides management services for approximately 216,000 railcars for railroads, shippers, carriers, institutional investors and other leasing and transportation companies in North America. Management evaluates segment performance based on margins. We also produce rail castings through an unconsolidated joint venture.
The rail and marine industries are cyclical in nature. We are continuing to see recovery in the freight car markets in which we operate. Demand for our marine barge products remains soft. Customer orders may be subject to cancellations and contain terms and conditions customary in the industry. Historically, little variation has been experienced between the quantity ordered and the quantity actually delivered. Our railcar and marine backlogs are not necessarily indicative of future results of operations.
Multi-year supply agreements are a part of rail industry practice. Our total manufacturing backlog of railcars as of August 31, 2011 was approximately 15,400 units with an estimated value of $1.23 billion compared to 5,300 units with an estimated value of $420 million as of August 31, 2010. Based on current production plans, approximately 14,500 units in the August 31, 2011 backlog are scheduled for delivery in 2012. The balance of the production is scheduled for delivery through 2013. A portion of the orders included in backlog reflects an assumed product mix. Under terms of the orders, the exact mix will be determined in the future which may impact the dollar amount of backlog.
We currently have no marine backlog compared to approximately $10 million as of August 31, 2010. As a result of current softness in the marine market, we continue to shift marine workers to support new railcar production.
The recent global strengthening of freight car markets may at times limit the availability of certain components of our products that we source from external suppliers, particularly specialized components such as castings, bolsters and trucks, and this may cause an interruption in production. Prices for steel, a primary component of railcars and barges, and related surcharges have fluctuated significantly and remain volatile. In addition, the price of certain railcar components, which are a product of steel, are affected by steel price fluctuations. New railcar and marine backlog generally either includes fixed price contracts which anticipate material price increases and surcharges, or contracts that contain actual or formulaic pass through of material price increases and surcharges. We are aggressively working to mitigate these exposures. The Company’s integrated business model has helped offset some of the effects of fluctuating steel and scrap steel prices, as a portion of our business segments benefit from rising steel scrap prices while other segments benefit from lower steel and scrap steel prices through enhanced margins.
On June 30, 2011, we entered into a five-year $245 million revolving line of credit, maturing June 30, 2016. On November 2, 2011 the revolving line of credit was increased by $15 million to a total of $260 million under the existing provisions of the credit agreement. The Amended Credit Facility is secured by substantially all of the assets of Greenbrier and its material U.S. subsidiaries, excluding the stock and assets of certain foreign subsidiaries and assets pledged as security for existing term loans. This new facility replaces a $100 million revolving line of credit that would have matured in November 2011. In connection with the entry into this facility, on June 30, 2011 we repaid all obligations outstanding under the term loan due June 2012, among us, and affiliates of WL Ross & Co. LLC (the WLR Term Loan). Immediately prior to its repayment and termination, there were outstanding borrowings of $71.8 million under the WLR Term Loan. There was a one-time charge recorded in Loss on extinguishment of debt in association with the early repayment of the WLR Term Loan of $5.6 million for the write-off of unamortized debt acquisition costs and the debt discount. The line of credit is available to provide working capital and interim financing of equipment, principally for the U.S. and Mexican operations. Advances under this revolving credit facility bear interest at variable rates that depend on the type of borrowing and the defined ratio of debt to total capitalization. The new facility contains customary representations, warranties, and covenants, including specified restrictions on indebtedness, dispositions, restricted payments, transactions with affiliates, liens, fundamental changes, sale and leaseback transactions and other restrictions.
On March 30, 2011, we entered into a purchase agreement (the Purchase Agreement) with Merrill Lynch, Pierce, Fenner & Smith, Incorporated and Goldman, Sachs & Co. (the Initial Purchasers). Pursuant to the Purchase Agreement, we sold to the Initial Purchasers $230 million aggregate principal amount of our 3.5% Senior Convertible Notes due 2018 (the Convertible Notes), which included $15 million principal amount of Convertible Notes subject to the over-allotment option granted to the Initial Purchasers. The over-allotment option was exercised in full and the sale of $230 million aggregate principal amount of the Convertible Notes closed on April 5, 2011. In connection with the closing, on April 5, 2011, we entered into the indenture (the Convertible Notes Indenture) governing the Convertible Notes. The Convertible Notes Indenture contains terms, conditions and events of default customary for transactions of this nature.
The Convertible Notes bear interest at an annual rate of 3.5%, payable in cash semiannually in arrears on April 1 and October 1 of each year, beginning on October 1, 2011. The Convertible Notes will mature on April 1, 2018, unless earlier repurchased by us or converted in accordance with their terms prior to such date. The Convertible Notes are senior unsecured obligations and rank equally with our other senior unsecured debt. The Convertible Notes are convertible into shares of our common stock at an initial conversion rate of 26.2838 shares per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $38.05 per share. The initial conversion rate and conversion price are subject to adjustment upon the occurrence of certain events, such as distributions, dividends or stock splits.
The net proceeds from the sale of the Convertible Notes, together with additional cash on hand, were used to repurchase any and all of our outstanding $235 million aggregate principal amount of 8 3 / 8 % senior notes due 2015 (the 2015 Notes). There was a one-time charge recorded in Loss on extinguishment of debt in association with the early retirement of the 2015 Notes of $10.1 million for the write-off of unamortized debt acquisition costs, prepayment premiums and other costs.
In April 2010, we filed a registration statement on Form S-3 with the SEC, using a “shelf” registration process. The registration statement was declared effective on April 14, 2010 and pursuant to the prospectus filed as part of the registration statement, we may sell from time to time any combination of securities in one or more offerings up to an aggregate amount of $300.0 million. The securities described in the prospectus include common stock, preferred stock, debt securities, guarantees, rights, and units. We may also offer common stock or preferred stock upon conversion of debt securities, common stock upon conversion of preferred stock, or common stock, preferred stock or debt securities upon the exercise of warrants or rights. Each time we sell securities under the “shelf,” we will provide a prospectus supplement that will contain specific information about the terms of the securities being offered and of the offering. Proceeds from the sale of these securities may be used for general corporate purposes including, among other things, working capital, financings, possible acquisitions, the repayment of obligations that have matured, and reducing or refinancing indebtedness that may be outstanding at the time of any offering. In May 2010, we issued 4,500,000 shares of our common stock resulting in net proceeds of $52.7 million. In December 2010, we issued 3,000,000 shares of our common stock resulting in net proceeds of $62.8 million.
In December 2010, we agreed with our joint venture partner to modify, with retroactive effect to September 1, 2010, various agreements concerning the Greenbrier-GIMSA LLC (GIMSA) joint venture. We agreed to increase revenue based fees to each of the partners for services provided to GIMSA, and to extend the initial term of the joint venture to 2019 (after which the agreement is automatically renewed for successive three year terms unless a party elects not to renew). We also agreed to forego our option to increase our ownership percentage of GIMSA from fifty percent to sixty-six & two thirds percent, and GIMSA agreed to forego the right to share, in an equitable manner, the net benefits received from the modification of the long-term new railcar contract with General Electric Railcar Services Corporation.
Overview
Total revenue was $1.2 billion, $0.8 billion and $1.0 billion for the years ended August 31, 2011, 2010 and 2009. Net earnings attributable to Greenbrier for the year ended August 31, 2011 were $6.5 million or $0.24 per diluted common share which included $9.4 million in loss on extinguishment of debt, net of tax or $0.35 per diluted common share. Net earnings attributable to Greenbrier for the year ended August 31, 2010 were $4.3 million or $0.21 per diluted common share which included income of $13.1 million in special items and gain on extinguishment of debt, net of tax or $0.65 per diluted common share. Net loss attributable to Greenbrier for the year ended August 31, 2009 was $56.4 million or $3.35 per diluted common share which included goodwill impairment and loss on extinguishment of debt aggregating $51.8 million, net of tax or $3.08 per diluted common share.
Manufacturing Segment
Manufacturing revenue includes new railcar and marine production. New railcar delivery and backlog information discussed below includes all facilities.
Manufacturing revenue was $721.1 million, $295.6 million and $462.5 million for the years ended August 31, 2011, 2010 and 2009. Railcar deliveries, which are the primary source of manufacturing revenue, were 9,400 units in 2011 compared to 2,500 units in 2010 and 3,700 units in 2009. Manufacturing revenue increased $425.5 million, or 144.0%, in 2011 compared to 2010 primarily due to higher railcar deliveries partially offset by a decline in marine barge activity and a change in railcar product mix with lower per unit sales prices. Manufacturing revenue decreased $166.9 million, or 36.1%, in 2010 compared to 2009 primarily due to a decline in marine barge production, lower railcar deliveries and a change in railcar product mix with lower per unit sales prices. 2009 revenue was reduced by an $11.6 million obligation of guaranteed minimum earnings under a certain contract.
Manufacturing margin as a percentage of revenue was 8.3% in 2011, 9.2% in 2010 and 0.8% in 2009. The decrease in the current period was primarily the result of a less favorable product mix and learning curve costs associated with start-up of railcar production lines, partially offset by operating at higher production rates. Manufacturing margin as a percentage of revenue was 9.2% in 2010 compared to 0.8% in 2009. The increase was primarily the result of a more favorable product mix and improved production efficiencies at our Mexican joint venture. 2010 was positively impacted by the re-marketing of railcars that were subject to guaranteed minimum earnings under a certain contract in the prior year. 2009 margin was reduced by an $11.6 million obligation of guaranteed minimum earnings under a certain contract.
Wheel Services, Refurbishment & Parts Segment
Wheel Services, Refurbishment & Parts revenue was $452.9 million, $388.4 million and $475.4 million for the years ended August 31, 2011, 2010 and 2009. The $64.5 million increase in revenue from 2010 to 2011 was primarily the result of higher sales volumes in wheels and repair and metal scrapping programs that were in effect for only a portion of the prior comparable year. The $87.0 million decrease in revenue from 2009 to 2010 was primarily due to lower sales volumes of wheels and reduced volumes of railcar repair and refurbishment work. This was offset slightly by improvement in the price for scrap metal.
Wheel Services, Refurbishment & Parts margin as a percentage of revenue was 10.5% for 2011, 11.3% for 2010 and 11.6% for 2009. The decrease in the current period was primarily the result of a change in product mix which generates higher revenues with no corresponding increase in margin dollars, an increasingly competitive market place and higher freight costs. These decreases were partially offset by higher scrap metal prices, improved efficiencies for repair due to higher activity levels and metal scrapping programs that were in effect for only a portion of the prior year. The decrease in 2010 compared to 2009 margins was primarily due to less favorable mix of repair and refurbishment work partially offset by higher scrap metal prices.
Leasing & Services Segment
Leasing & Services revenue was $69.3 million, $72.3 million and $78.3 million for the years ended August 31, 2011, 2010 and 2009. The $3.0 million decrease in revenue in 2011 compared to 2010 was primarily the result of discontinuation of a certain management services contract which was partially offset by higher rents earned on leased railcars for syndication and improved lease rates and increased utilization. The $6.0 million decrease in revenue from 2010 compared to 2009 was primarily the result of lower rent generated from the lease fleet due to lower lease rates and utilization.
Leasing & Services margin as a percentage of revenue was 46.4% in 2011 compared to 42.8% in 2010 and 41.3% in 2009. The increase in 2011 compared to 2010 was primarily the result of increased rents earned on leased railcars for syndication, improved margins due to higher lease rates and increased lease fleet utilization and lower operating costs on railcars in the lease fleet. The increase in 2010 compared to 2009 was primarily the result of increased lease fleet utilization and improved margins from management services mainly due to lower maintenance expense.
The percentage of owned units on lease as of August 31, 2011 was 95.7% compared to 94.4% at August 31, 2010 and 88.3% at August 31, 2009.
Selling and Administrative
Selling and administrative expense was $80.3 million, or 6.5% of revenue, $69.9 million, or 9.2% of revenue, and $65.7 million, or 6.5% of revenue, for the years ended August 31, 2011, 2010 and 2009. The $10.4 million increase in 2011 compared to 2010 is primarily due to increased employee related costs including restoration of salary reductions taken during the down turn and increases in incentive compensation, increased consulting expense, higher depreciation expense associated with our on-going ERP implementation and increased revenue based administrative fees paid to our joint venture partner in Mexico. The $4.2 million increase from 2009 to 2010 is primarily due to higher depreciation expense associated with our on-going ERP improvement projects, higher consulting and travel expenses and increased costs at our Mexican joint venture due to higher activity levels. These were partially offset by lower employee costs.
Gain on Disposition of Equipment
Gain on disposition of equipment was $8.4 million, $8.2 million and $1.9 million for the years ended August 31, 2011, 2010 and 2009. The current year included a $5.1 million gain that was realized on the disposition of leased assets and a gain of $3.3 million of insurance proceeds related to the January 2009 fire at one of our Wheel Services, Refurbishment & Parts facilities. The year ended August 31, 2010 included a $6.5 million gain that was realized on the disposition of leased assets and a gain of $1.7 million of insurance proceeds related to the January 2009 fire. The year ended August 31, 2009 included a $1.2 million gain that was realized on the disposition of leased assets and a gain of $0.7 million of insurance proceeds related to the January 2009 fire. Assets from Greenbrier’s lease fleet are periodically sold in the normal course of business in order to take advantage of market conditions, manage risk and maintain liquidity.
Goodwill Impairment
Charges of $55.7 million were recorded in May 2009 associated with the impairment of goodwill. These charges consist of $1.3 million in the Manufacturing segment, $3.1 million in the Leasing & Services segment and $51.3 million in the Wheel Services, Refurbishment & Parts segment.
Special Items
In April 2007, our board of directors approved the permanent closure of our then Canadian railcar manufacturing subsidiary, TrentonWorks Ltd (Trenton Works). In March 2008, TrentonWorks filed for bankruptcy. In the fourth quarter of 2010, the bankruptcy was resolved upon liquidation of substantially all remaining assets. The resolution of the bankruptcy resulted in income of $11.9 million which was recorded in Special items.
Income Tax
In 2011 we recorded tax expense of $3.6 million on $14.9 million of earnings with an effective tax rate of 23.9%. The fluctuation from the statutory tax rate was due to the geographical mix of pre-tax earnings and losses, minimum tax requirements in certain local jurisdictions and operating results for certain operations with no related tax effect. In addition, an income tax liability was not recorded on the noncontrolling interest earnings of $1.9 million from a consolidated subsidiary that is a “flow through entity” for tax purposes. Earnings from flow through entities are only taxed at the owner’s level.
In 2010 we recorded a tax benefit of $1.0 million on $9.0 million of earnings for the year. 2010 included income of $11.9 million from a Special item associated with the resolution of the bankruptcy of our then Canadian railcar manufacturing subsidiary, TrentonWorks, which was not taxable. In addition, an income tax liability was not recorded on the noncontrolling interest earnings of $4.1 million from a consolidated subsidiary that is a “flow through entity” for tax purposes. Earnings from flow through entities are only taxed at the owner’s level. Excluding these items the effective tax rate would have been 13.8%.
Our effective tax rate was 22.8% for the year ended August 31, 2009. In 2009 a goodwill impairment charge for which a tax benefit was recorded at 8%, as a portion of the impairment charge was not deductible for tax purposes. In addition, 2009 included a reversal of $1.4 million of liabilities for uncertain tax positions for which we are no longer subject to examination by the tax authorities, a tax benefit of $2.5 million related to the deemed liquidation of our German operation for U.S. tax purposes and a tax benefit of $4.3 million related to the reversal of a deferred tax liability associated with a foreign subsidiary. Excluding these items the effective tax rate would have been 21.5%.
Loss from Unconsolidated Affiliates
Losses from unconsolidated affiliates were $3.0 million in 2011, $1.6 million in 2010 and $0.6 million in 2009. 2011 includes losses from our castings joint venture due to the temporary idling of the operation during the economic downturn and losses from WLR–Greenbrier Rail Inc. (WLR-GBX) as the result of the acquisition of railcar assets on a highly leveraged basis. 2010 includes losses from our castings joint venture and from WLR-GBX. The WLR-GBX loss in 2010 was primarily the result of a mark to market on an interest rate swap. Losses from unconsolidated affiliates in 2009 consist entirely of results from our castings joint venture.
Noncontrolling Interest
Noncontrolling interest includes earnings of $1.9 million, $4.1 million and loss of $1.5 million for the years ended August 31, 2011, 2010 and 2009 and primarily represents our joint venture partner’s share in the earnings (losses) of our Mexican railcar manufacturing joint venture that began production in 2007.
Liquidity and Capital Resources
We have been financed through cash generated from operations, borrowings and stock issuance. At August 31, 2011 cash and cash equivalents was $50.2 million, a decrease of $48.7 million from $98.9 million at the prior year end.
Cash used in operations was $34.3 million for the year ended August 31, 2011 compared to cash provided by operating activities for the years ended August 31, 2010 and 2009 of $42.6 million and $120.5 million. The decrease was primarily due to a change in working capital needs as we ramp up production levels and an increase in leased railcars for syndication due to higher activity levels. The decrease in 2010 was primarily due to change in working capital needs based on operating activity levels.
Cash used in investing activities for the year ended August 31, 2011 was $69.3 million compared to $24.2 million in 2010 and $23.0 million in 2009. 2011, 2010 and 2009 cash utilization was primarily due to capital expenditures.
Capital expenditures totaled $84.3 million, $39.0 million and $38.8 million for the years ended August 31, 2011, 2010 and 2009. Of these capital expenditures, approximately $44.2 million, $18.1 million and $23.1 million for the years ended August 31, 2011, 2010 and 2009 were attributable to Leasing & Services operations. Leasing & Services capital expenditures for 2012, net of proceeds from sales of equipment, are expected to be approximately $40.0 million. We regularly sell assets from our lease fleet, some of which may have been purchased within the current year and included in capital expenditures. Proceeds from the sale of equipment were approximately $18.7 million, $23.0 million and $15.6 million for the years ended August 31, 2011, 2010 and 2009.
Approximately $20.0 million, $8.7 million and $9.1 million of capital expenditures for the years ended August 31, 2011, 2010 and 2009 were attributable to Manufacturing operations. Capital expenditures for Manufacturing are expected to be approximately $25.0 million in 2012 and primarily relate to enhancements to existing manufacturing facilities and a production line at our Sahagun, Mexico facility and potential future expansion.
Wheel Services, Refurbishment & Parts capital expenditures for the years ended August 31, 2011, 2010 and 2009 were $20.1 million, $12.2 million and $6.6 million and are expected to be approximately $17.0 million in 2012 for maintenance and improvement of existing facilities and some growth.
Cash provided by financing activities was $58.0 million and $4.6 million for the years ended August 31, 2011 and 2010 compared to cash used in financing activities of $24.5 million for the year ended August 31 2009. During 2011, we received net proceeds of $219.8 million from convertible notes and term loans, $86.8 million in net revolving notes and $62.8 million in net proceeds from an equity offering. We repaid $311.4 million in senior notes and term debt. During 2010, we received $52.7 million in net proceeds from an equity offering and $2.0 million in net proceeds from term loan borrowings. We repaid $11.9 million in net revolving credit lines and $38.3 million in term loans and convertible notes. During 2009, we repaid $81.3 million in net revolving credit lines and $16.4 million in term debt and paid dividends of $2.0 million. We received $69.8 million in net proceeds from term loan borrowings.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Executive Summary
We operate in three primary business segments: Manufacturing; Wheel Services, Refurbishment & Parts; and Leasing & Services. These three business segments are operationally integrated. The Manufacturing segment, operating from facilities in the United States (U.S.), Mexico and Poland, produces double-stack intermodal railcars, conventional railcars, tank cars and marine vessels. The Wheel Services, Refurbishment & Parts segment performs railcar repair, refurbishment and maintenance activities in the U.S., Mexico and Canada as well as wheel, axle and bearing servicing, and production and reconditioning of a variety of parts for the railroad industry. The Leasing & Services segment owns approximately 9,100 railcars and provides management services for approximately 216,000 railcars for railroads, shippers, carriers, institutional investors and other leasing and transportation companies in North America. Management evaluates segment performance based on margins. We also produce rail castings through an unconsolidated joint venture.
The rail and marine industries are cyclical in nature. We are continuing to see a recovery in the freight car markets in which we operate. Demand for our marine barge products remains soft.
Multi-year supply agreements are a part of rail industry practice. Customer orders may be subject to cancellations or modifications and contain terms and conditions customary in the industry. In most cases, little variation has been experienced between the quantity ordered and the quantity actually delivered.
Our total manufacturing backlog of railcars as of February 29, 2012 was approximately 12,500 units with an estimated value of $1.1 billion compared to 9,500 units with an estimated value of $720 million as of February 28, 2011. A portion of the orders included in backlog reflects an assumed product mix. Under terms of the orders, the exact mix will be determined in the future which may impact the dollar amount of backlog. Our railcar and marine backlogs are not necessarily indicative of future results of operations. Subsequent to quarter end we received new railcar orders for 2,300 units valued at approximately $270 million.
Marine backlog as of February 29, 2012 was approximately $2 million compared to approximately $3 million as of February 28, 2011.
The continued global strengthening of the freight car markets may at times limit the availability of certain components of our products that we source from external suppliers, particularly specialized components such as castings, bolsters and trucks, and this may cause an interruption in production. Prices for steel, a primary component of railcars and barges, and related surcharges have fluctuated significantly and remain volatile. In addition, the price of certain railcar components, which are a product of steel, are affected by steel price fluctuations. New railcar and marine backlog generally either includes fixed price contracts which anticipate material price increases and surcharges, or contracts that contain actual or formulaic pass through of material price increases and surcharges. We are aggressively working to mitigate these exposures. The Company’s integrated business model has helped offset some of the effects of fluctuating steel and scrap steel prices, as a portion of our business segments benefit from rising steel scrap prices while other segments benefit from lower steel and scrap steel prices through enhanced margins.
On November 14, 2011, affiliates of WL Ross & Co. LLC (WL Ross) sold 1,482,341 shares of our common stock. The shares sold were acquired by the cashless net exercise of warrants for purchase of our common stock. WL Ross and its investment funds continue to own warrants to purchase 1,154,672 shares of our common stock. The warrants were issued in 2009 in connection with a term loan to Greenbrier that was repaid in June 2011.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires judgment on the part of management to arrive at estimates and assumptions on matters that are inherently uncertain. These estimates may affect the amount of assets, liabilities, revenue and expenses reported in the financial statements and accompanying notes and disclosure of contingent assets and liabilities within the financial statements. Estimates and assumptions are periodically evaluated and may be adjusted in future periods. Actual results could differ from those estimates.
Income taxes - For financial reporting purposes, income tax expense is estimated based on planned tax return filings. The amounts anticipated to be reported in those filings may change between the time the financial statements are prepared and the time the tax returns are filed. Further, because tax filings are subject to review by taxing authorities, there is also the risk that a position taken in preparation of a tax return may be challenged by a taxing authority. If the taxing authority is successful in asserting a position different than that taken by us, differences in tax expense or between current and deferred tax items may arise in future periods. Such differences, which could have a material impact on our financial statements, would be reflected in the financial statements when management considers them probable of occurring and the amount reasonably estimable. Valuation allowances reduce deferred tax assets to an amount that will more likely than not be realized. Our estimates of the realization of deferred tax assets is based on the information available at the time the financial statements are prepared and may include estimates of future income and other assumptions that are inherently uncertain.
Maintenance obligations - We are responsible for maintenance on a portion of the managed and owned lease fleet under the terms of maintenance obligations defined in the underlying lease or management agreement. The estimated maintenance liability is based on maintenance histories for each type and age of railcar. These estimates involve judgment as to the future costs of repairs and the types and timing of repairs required over the lease term. As we cannot predict with certainty the prices, timing and volume of maintenance needed in the future on railcars under long-term leases, this estimate is uncertain and could be materially different from maintenance requirements. The liability is periodically reviewed and updated based on maintenance trends and known future repair or refurbishment requirements. These adjustments could be material due to the inherent uncertainty in predicting future maintenance requirements.
Warranty accruals - Warranty costs to cover a defined warranty period are estimated and charged to cost of revenue. 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.
Revenue recognition - Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectibility is reasonably assured.
Railcars are generally manufactured, repaired or refurbished and wheel services and parts produced under firm orders from third parties. Revenue is recognized when these products or services are completed, accepted by an unaffiliated customer and contractual contingencies removed. Certain leases are operated under car hire arrangements whereby revenue is earned based on utilization, car hire rates and terms specified in the lease agreement. Car hire revenue is reported from a third party source two months in arrears; however, such revenue is accrued in the month earned based on estimates of use from historical activity and is adjusted to actual as reported. These estimates are inherently uncertain as they involve judgment as to the estimated use of each railcar. Adjustments to actual have historically not been significant. Revenues from construction of marine barges are either recognized on the percentage of completion method during the construction period or on the completed contract method based on the terms of the contract. Under the percentage of completion method, judgment is used to determine a definitive threshold against which progress towards completion can be measured to determine timing of revenue recognition.
Impairment of long-lived assets - When changes in circumstances indicate the carrying amount of certain long-lived assets may not be recoverable, the assets are evaluated for impairment. If the forecast undiscounted future cash flows are less than the carrying amount of the assets, an impairment charge to reduce the carrying value of the assets to fair value is recognized in the current period. These estimates are based on the best information available at the time of the impairment and could be materially different if circumstances change. If the forecast undiscounted future cash flows exceeded the carrying amount of the assets it would indicate that the assets were not impaired.
Goodwill and acquired intangible assets - The Company periodically acquires businesses in purchase transactions in which the allocation of the purchase price may result in the recognition of goodwill and other intangible assets. The determination of the value of such intangible assets requires management to make estimates and assumptions. These estimates affect the amount of future period amortization and possible impairment charges.
Goodwill and indefinite-lived intangible assets are tested for impairment annually during the third quarter. Goodwill is also tested more frequently if changes in circumstances or the occurrence of events indicates that a potential impairment exists. The provisions of Accounting Standards Codification (ASC) 350, Intangibles - Goodwill and Other , require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit with its carrying value. We determine the fair value of our reporting units based on a weighting of income and market approaches. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, we estimate the fair value based on observed market multiples for comparable businesses. The second step of the goodwill impairment test is required only in situations where the carrying value of the reporting unit exceeds its fair value as determined in the first step. In the second step we would compare the implied fair value of goodwill to its carrying value. The implied fair value of goodwill is determined by allocating the fair value of a reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recorded to the extent that the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill. The goodwill balance as of February 29, 2012 of $137.1 million relates to the Wheel Services, Refurbishment & Parts segment.
Overview
Total revenue for the three months ended February 29, 2012 was $458.2 million, an increase of $173.9 million from revenues of $284.3 million in the prior comparable period. The increase was a result of higher revenue in all three segments of our business. The manufacturing segment accounted for $163.6 million of the increase due to higher railcar deliveries as a result of increased demand, more favorable pricing and change in product mix.
Manufacturing Segment
Manufacturing revenue includes new railcar and marine production. New railcar delivery discussed below includes all manufacturing facilities.
Manufacturing revenue for the three months ended February 29, 2012 was $320.2 million compared to $156.6 million for the three months ended February 28, 2011, an increase of $163.6 million. Railcar deliveries, which are the primary source of manufacturing revenue, were approximately 3,700 units in the current period compared to approximately 2,200 units in the prior comparable period. The increase in revenue was primarily due to higher railcar deliveries as a result of increased demand, more favorable pricing and change in product mix. We operated at increased production rates on existing production lines and increased capacity with additional lines as compared to the corresponding period in the prior year.
Manufacturing margin as a percentage of revenue for the three months ended February 29, 2012 was 9.2% compared to a margin of 5.8% for the three months ended February 28, 2011. The increase in margin as a percentage of revenue was primarily attributable to efficiencies gained by operating at higher production rates in the current year, inefficiencies in the prior year associated with the ramping up of production at some of our facilities that were idle in previous years and more favorable pricing as compared to the prior year.
Wheel Services, Refurbishment & Parts Segment
Wheel Services, Refurbishment & Parts revenue was $119.9 million for the three months ended February 29, 2012 compared to $112.0 million in the comparable period of the prior year. The increase of $7.9 million was primarily attributable to higher sales volumes in all three components of this segment due to higher demand and an increase in scrap metal pricing, partially offset by a decline in scrap metal volumes.
Wheel Services, Refurbishment & Parts margin as a percentage of revenue was 11.1% for the three months ended February 29, 2012 compared to 9.5% for the three months ended February 28, 2011. The increase in margin as a percentage of revenue was primarily the result of efficiencies of operating at higher volumes and an increase in scrap metal pricing.
Leasing & Services Segment
Leasing & Services revenue was $18.1 million for the three months ended February 29, 2012 compared to $15.7 million for the comparable period of the prior year. The increase of $2.4 million was primarily a result of higher lease revenues resulting from an increase in lease fleet utilization and higher rents earned on increased volumes of leased railcars for syndication.
Leasing & Services margin as a percentage of revenue was 48.6% for the three months ended February 29, 2012 and 44.4% for the three months ended February 28, 2011. The increase in margin as a percentage of revenue was primarily a result of increased utilization, an increase in lease and management rates and higher rents earned on leased railcars for syndication.
The percentage of owned units on lease as of February 29, 2012 was 97.3% compared to 95.9% at February 28, 2011.
Selling and Administrative
Selling and administrative expense was $25.0 million or 5.5% of revenue for the three months ended February 29, 2012 compared to $17.7 million or 6.2% of revenue for the prior comparable prior period, an increase of $7.3 million. The increase was primarily related to higher employee related costs which included an increase in incentive compensation, restoration of salary reductions taken during the down turn, merit increases and other employee related costs. In addition, the increase resulted from the revenue based fees paid to our joint venture partner in Mexico due to higher activity levels.
Income Tax
The tax rate for the three months ended February 29, 2012 was 23.7% as compared to 26.2% in the prior comparable period. The tax rate for the three months ended February 29, 2012 includes the benefit related to a release of valuation allowances previously placed on net deferred tax assets in foreign jurisdictions. Management believes it is more likely than not that the deferred tax assets will be realized and has recorded the benefit of those deferred tax assets in the current quarter. The provision for income taxes is based on projected consolidated results of operations and geographical mix of earnings for the entire year which results in an estimated 32.6% annual effective tax rate on pre-tax results for 2012. The effective tax rate fluctuates from period to period due to the geographical mix of pre-tax earnings and losses, minimum tax requirements in certain local jurisdictions and operating results for certain operations with no related tax effect.
Earnings (Loss) from Unconsolidated Affiliates
Earnings from unconsolidated affiliates were $0.1 million for the three months ended February 29, 2012 and a loss of $0.6 million for the three months ended February 28, 2011. Earnings (loss) for the three months ended February 29, 2012 and for the prior comparable period include our share of the results from operations from our castings joint venture and from WLR – Greenbrier Rail Inc. The increase in earnings for the three months ended February 29, 2012 as compared to the prior comparable period relates to our castings joint venture being idle in the previous year, but resumed operations during the third quarter of 2011.
Noncontrolling Interest
Noncontrolling interest includes a loss of $0.4 million for the three months ended February 29, 2012 and earnings of $0.3 million for the three months ended February 28, 2011 and primarily represents our joint venture partner’s share in the results of operations of our Mexican railcar manufacturing joint venture, adjusted for intercompany sales.
CONF CALL
Mark Rittenbaum
Good morning and welcome to Greenbriar’s fiscal second quarter 2010 conference call. On today’s call, I’m joined by Bill Furman our CEO and also sitting in on our call is one of our new directors, Victoria McManus who is based out of New York and joined the Board in May of last year.
On today’s call, we’ll discuss results and make a few remarks about the quarter that ended and then we’ll update our outlook for 2010, and after that, we’ll open it up for questions.
But first, as always, matters discussed in this conference call include forward-looking statements and I’d like to remind you that these statements are within the meaning of the Private Securities and Litigation Reform Act of 1995. Throughout our discussion today, we’ll describe some of the important factors that could cause our actual results in 2010 and beyond to differ materially from those expressed in any of our forward-looking statements and I invite you to look at the statements and risks factors as they appear in our SEC filings.
With that behind us, today we did report our results for the second quarter. I’d like to remind investors that when you look at our statement of operations, that the accounting world has decided to change a convention that has been in place since the beginning on mankind and net earnings and losses are now referred to as net earnings attributable to controlling interest, but it really is comparing apples to apples to what used to be know net income or net loss or the bottom line.
So we reported a net loss attributable to controlling interests for the quarter of $4.8 million or a loss of $.28 per share on revenues of $200 million. The results for the quarter include a noncash charge of $1.3 million net of tax or $0.08 a share related to amortization expense and amortization of convertible debt discount.
These charges are included in interest expense in our income statement, and excluding these charges, our loss per share would have been $0.20. These non-cash charges will continue to appear through the third quarter of our fiscal 2013.
As anticipated, the results for the quarter were weaker than our first quarter. We expect it to be our weakest quarter of the year, and in fact the second half of the year will be significantly stronger than the first half. And for the year as a whole, our outlook and guidance has not changed from the prior quarter where we do expect we will have modestly EBITDA before special charges for the year on lower revenues that in our fiscal 2009.
Now let me address some highlights for the quarter. To supplement the year over year comparisons you’ll find in the financial tables in the press release, I’ll add color on a sequential basis, that is related to comparing the second quarter of this year to the first quarter of this year.
In our refurbishing and parts segment on a sequential basis, compared to Q1, revenue increased modestly primarily due to improving business trends and higher scrap metal prices, both of which are consistent with improved macro economic trends.
Gross margin for this segment was 11.6% of revenue, essentially flat with Q2 of last year but up sequentially from Q1 of this year, again due to the same reasons I just mentioned, improving economic macro climate and higher scrap prices.
While we would prefer mix of business more weighted towards refurbishment rather than repairs, our shops are becoming increasingly full as cars are pulled out of storage and in need of repair as the economy recovers.
We are also bringing back workers as a result to address the increased activity levels. We expect that over time, as the recovery is sustained, the mix of work load will become more favorable and weighted towards refurbishment. As well, well volume should increase.
Now turning to our manufacturing segments, results improved from last quarter and we are pleased with the performance of this segment throughout; that is both with the performance of new rail car in North America and Europe and with our marine manufacturing business.
New rail car deliveries of 800 units were more than double the 350 units in Q1 and year to date new rail car deliveries are 1,150 units and we anticipate delivering 2,600 units for the entire fiscal year.
Overall, our gross margin for the second quarter was 7.3% of revenue, up a bit from the 7% of revenue we experienced in Q1 and our ability to ability to maintain the margins in the 7% to 8% range for the balance of the year will partly depend on maintaining marine production rates at current levels and Bill will speak to this a bit more in his comments.
We currently anticipate restarting new rail car production at our Mexico facility in our Concarril facility in the fourth quarter as a result of an increase in new rail car demand and orders received after the quarter end.
Turning now to leasing and services, our lease fleet utilization was up sequentially to 92.4% compared to 91.3% in our Q1, and for the quarter, our margin was 38.5% of revenue, which is down from 41.4% of revenue in Q1. The sequential decline is really due to two reasons; one is lower gains on sales of equipment, which flows directly to the margin line. Gains for the quarter were minimal at $.1 million compared to $.9 million last quarter.
As well, we took a rate adjustment, an annual rate adjustment for truing up rates that we charge at one of our management contracts, and that also impacted the quarter.
During the downturn, our strategy has been to focus on short term leases, so as to be able to benefit from the upturn and the strategy is paying off as evidenced both by increases in utilization rates and increased lease rates, and a stabilization of lease rates as compared to what we had been experiencing over the prior several quarter.
Selling and administrative costs for the quarter were $17 million an increase from the $16. 3 million for the same quarter of last year and the increase in G&A is principally due to higher activity levels at our GIMSA manufacturing joint venture.
Interest and foreign exchange was $12.4 million for the quarter compared to $11.1 million in Q1. The increase from last quarter was due to increase in foreign exchange losses of $.5 million and of $.6 million accrual of interest associated with the recording of certain tax reserves. On a more normalized basis, this line item should run about $11 million to $11.5 million a quarter.
We anticipate our net CapEx for the year to run about $30 million and our depreciation and amortization will run about $40 million for this year. We continue to manage the company with a view towards cash flow and liquidity, and ended the quarter with $68 million of cash and $103 million of unused additional borrowing capacity virtually unchanged from our prior and subsequent to quarter end; we received a $14 million tax refund.
Finally, one last thing before I wrap it up and turn it over to Bill, some of you may have noticed that we filed a $300 million universal shelf registration statement last night with the SEC. I wanted to address that. The shelf is of course still subject to review by the SEC and has not been declared effective.
It does cover a wide variety of securities including debt, warrants and convertible issues and equity. And we really put this in place as a part of our overall capital structure management strategy. I put in it in the category of just prudent management and good financial housekeeping. We don’t have any current plans to draw on the shelf and will continue to evaluate that as we go forward
Those are my comments. I’ll turn it over to Bill and then we’ll open it up for questions.
William Furman
Thank you Mark. I’ll comment briefly this morning on our results for the quarter and then turn the rest of my comments to the operations and the industry market conditions.
During the quarter, we had stronger than expected results from manufacturing both rail and marine, and this was partly offset by weaker than anticipated performance from our refurbishment and parts business.
Also as expected, our lower tax rate for the quarter gave us a little protection from a pre-tax loss of $5.2 million, converting this pre-tax loss to a net loss of $4.8 million. However, our EBITDA of $16 million compared very favorably to the $9 million of the previous quarter, same quarter last year.
Our goal for the balance of 2010 is to return to profitability and this plan remains sensitive as Mark indicated to actual marine backlog and run rates as well as expected improvements in our refurbishment parts business segment.
Turning to the market place and general market conditions, all of our core markets remained weak in the quarter, and visibility is still limited. However, in the last six weeks, one month following the end of the quarter and the last few weeks of the quarter, there’s been evidence of strengthening in all of our markets with early signs of increased activity and demand across all lines of business.
These improved conditions have been reflected in improved new order conditions both for rail cars and marine in our manufacturing and for wheels, repair and refurbishment in our refurbishment parts segment. In addition, lease rates are beginning to firm up on leased equipment and utilization statistics are increasing on our leased fleet.
Improvements in rail loadings and declines in storage statistics are helping fuel this increased demand. In the first 12 weeks of 2010 ending March 27, North American rail car loadings were up 4.8% from the same period in 2009. Most commodity groups showed increases except for coal, which was down 6.4%.
For example, grain was up 10%, metallic ores 33%, chemicals 33%, automotive 38% and inner modal containers 12%. Metals and products were also up 38%. Car storage has declined in the two western railroads and in at least one of the eastern railroads in significant amounts.
During the quarter, Greenbriar placed an order for a sponsored barge in our order for additional marine barges received from a third party customer, allowing or marine business to continue to operate at present rates of production.
In recent weeks, two separate orders were received in North America for a total of 300 new covered hopper cars. Some of these cars will be placed at our Concarril facility, which will be reopened on a limited facility in light of renewed demand. Our European unit received orders for 130 freight car wagons. The total of all this new business was about $40 million.
On a consolidated basis, Europe reported a small pre-tax profit exceeding its goal of breakeven during a difficult year in that market place. We reduced the breakeven rate level of that facility over the past 12 months so that we can breakeven at a run rate of only 600 to 700 cars per year.
This remains our goal for 2010 and we’re hopeful for improvement in that marketplace. Longer term, we hope to diversify our business base in Europe and we’re actively recruiting for additional senior management talent there.
Our relationship with GE Rail continues to be constructive, and GIMSA has settled into the agreed production schedules on this contract. Ancillary benefits are being realized as expected with repair work for our Gunderson facility in Portland, Oregon and other agreed work flowing from the GE settlement.
So at the close of our quarter we received orders for program and bad order work on almost 1,000 units of equipment for our refurbishment and parts segment valued at about $15 million as well as a number of other smaller awards. With this, and an increase in car loadings, we expect refurbishment and parts performance to improve during the second half of this year and into 2011. We were disappointed in the results for the first half.
The outlook at our major locations for repair as Mark has indicated, has improved considerably since the close of the quarter. We’re quickly moving from having considerable excess capacity in that unit to filling up most of our locations to the limit of present manpower and we are hiring in multiple locations.
We expect pricing and yields to improve as cars move out of industry storage and into service with many needing repair or rehabilitation after being placed in storage in bad order condition.
Our wheel business similarly had suffered during the six months as volumes declined. However, with higher scrap pricing and more volume expected, this is good news for our entire refurbishment parts segments and we expect wheels to also be a part of that.
During the quarter, we were successful in being awarded two important two important wheel renewal contracts. These will have the effect of protecting our base loaded business in that part of this segment. In our parts business, we also received important long term awards for bearings and cushioning units.
Turning to our leasing business, our lease fleet utilization continued to improve on our own fleet of approximately 9,000 cars increasing to0 92.5% from 91% at the end of Q1 as compared to 88% at the end of our August 31 fiscal year. We have remained as Mark said, short term on most of our renewals. As the economy improves, we have significant upside in lease maturities and therefore, will be seeking higher rates on renewals.
We continue to grow our managed fleet. We’re pleased with the assimilation of new business from the addition of major new customers in the past year.
Overall, we continue to manage for cash flow, and our immediate goals are to return to profitable operations in 2010. Our new shelf registration demonstrates our continued interest in our balance sheet. We will be ready for improved conditions for raising capital in the future as our operations improve and as the economy stabilized.
We will also continue our drive for increased operational efficiency during the balance of this year. Again, as Mark has indicated, we believe that our second half of the year will be an improvement over the first half and we’re cautiously optimistic about the near term upside in each of our business segments.
Back to you Mark.
Mark Rittenbaum
Thank you Bill, and operator, we’ll go ahead and open up for questions now.
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Fund Letters
