UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
for the quarterly period ended May 31, 2016
for the transition period from to
Commission File No. 1-13146
THE GREENBRIER COMPANIES, INC.
(Exact name of registrant as specified in its charter)
One Centerpointe Drive, Suite 200, Lake Oswego, OR 97035
(Address of principal executive offices)(Zip Code)
(503) 684-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
The number of shares of the registrant’s common stock, without par value, outstanding on June 30, 2016 was 28,204,389 shares.
Forward-Looking Statements
From time to time, The Greenbrier Companies, Inc. and its subsidiaries (Greenbrier or the Company) or their representatives have made or may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements as to expectations, beliefs and strategies regarding the future. Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer or in various filings made by us with the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These forward-looking statements rely on a number of assumptions concerning future events and include statements relating to:
The following factors, among others, could cause actual results or outcomes to differ materially from the forward-looking statements:
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Any forward-looking statements should be considered in light of these factors. Words such as “anticipates,” “believes,” “forecast,” “potential,” “goal,” “contemplates,” “expects,” “intends,” “plans,” “projects,” “hopes,” “seeks,” “estimates,” “strategy,” “could,” “would,” “should,” “likely,” “will,” “may,” “can,” “designed to,” “future,” “foreseeable future” and similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. Many of the important factors that will determine these results and values are beyond our ability to control or predict. You are cautioned not to put undue reliance on any forward-looking statements. Except as otherwise required by law, we do not assume any obligation to update any forward-looking statements.
All references to years refer to the fiscal years ended August 31st unless otherwise noted.
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PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets
(In thousands, unaudited)
Assets
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Inventories
Leased railcars for syndication
Equipment on operating leases, net
Property, plant and equipment, net
Investment in unconsolidated affiliates
Intangibles and other assets, net
Goodwill
Liabilities and Equity
Revolving notes
Accounts payable and accrued liabilities
Deferred income taxes
Deferred revenue
Notes payable
Commitments and contingencies (Note 13)
Equity:
Greenbrier
Preferred stock - without par value; 25,000 shares authorized; none outstanding
Common stock - without par value; 50,000 shares authorized; 28,202 and 28,907 shares outstanding at May 31, 2016 and August 31, 2015
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total equity - Greenbrier
Noncontrolling interest
Total equity
The accompanying notes are an integral part of these financial statements
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Consolidated Statements of Income
(In thousands, except per share amounts, unaudited)
Revenue
Manufacturing
Wheels & Parts
Leasing & Services
Cost of revenue
Margin
Selling and administrative expense
Net gain on disposition of equipment
Earnings from operations
Other costs
Interest and foreign exchange
Earnings before income taxes and earnings from unconsolidated affiliates
Income tax expense
Earnings before earnings from unconsolidated affiliates
Earnings from unconsolidated affiliates
Net earnings
Net earnings attributable to noncontrolling interest
Net earnings attributable to Greenbrier
Basic earnings per common share
Diluted earnings per common share
Weighted average common shares:
Basic
Diluted
Dividends declared per common share
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Consolidated Statements of Comprehensive Income
Other comprehensive income
Translation adjustment
Reclassification of derivative financial instruments recognized in netearnings 1
Unrealized gain (loss) on derivative financial instruments 2
Other (net of tax effect)
Comprehensive income
Comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to Greenbrier
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Consolidated Statements of Equity
Balance September 1, 2015
Other comprehensive loss, net
Noncontrolling interest adjustments
Purchase of noncontrolling interest
Joint venture partner distribution declared
Investment by joint venture partner
Restricted stock awards (net of cancellations)
Unamortized restricted stock
Restricted stock amortization
Excess tax benefit from restricted stock awards
Cash dividends
Repurchase of stock
Balance May 31, 2016
Balance September 1, 2014
Conversion of convertible notes, net of debt issuance costs
Balance May 31, 2015
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Consolidated Statements of Cash Flows
Cash flows from operating activities
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
Stock based compensation expense
Other
(Increase) decrease in assets:
Increase (decrease) in liabilities:
Net cash provided by operating activities
Cash flows from investing activities
Proceeds from sales of assets
Capital expenditures
Decrease in restricted cash
Investment in and advances to unconsolidated affiliates
Cash distribution from unconsolidated affiliates
Net cash provided by (used in) investing activities
Cash flows from financing activities
Net change in revolving notes with maturities of 90 days or less
Proceeds from revolving notes with maturities longer than 90 days
Repayments of revolving notes with maturities longer than 90 days
Repayments of notes payable
Debt issuance costs
Dividends
Cash distribution to joint venture partner
Net cash provided by (used in) financing activities
Effect of exchange rate changes
Increase (decrease) in cash and cash equivalents
Beginning of period
End of period
Cash paid during the period for
Interest
Income taxes, net
Non-cash activity
Transfer from Leased railcars for syndication to Equipment on operating leases, net
Capital expenditures accrued in Accounts payable and accrued liabilities
Change in Accounts payable and accrued liabilities associated with repurchase of stock
Change in Accounts payable and accrued liabilities associated with cash distributions to joint venture partner
Change in Accounts payable and accrued liabilities associated with dividends declared
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Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Interim Financial Statements
The Condensed Consolidated Financial Statements of The Greenbrier Companies, Inc. and its subsidiaries (Greenbrier or the Company) as of May 31, 2016, for the three and nine months ended May 31, 2016 and 2015 have been prepared without audit and reflect all adjustments (consisting of normal recurring accruals) that, in the opinion of management, are necessary for a fair presentation of the financial position, operating results and cash flows for the periods indicated. The results of operations for the three and nine months ended May 31, 2016 are not necessarily indicative of the results to be expected for the entire year ending August 31, 2016.
Certain notes and other information have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Consolidated Financial Statements contained in the Company’s 2015 Annual Report on Form 10-K.
Management Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
Prospective Accounting Changes – In May 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) jointly issued a converged standard on the recognition of revenue from contracts with customers. The issued guidance converges the criteria for reporting revenue, and requires disclosures sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows arising from these contracts. Companies can transition to the standard either retrospectively or as a cumulative effect adjustment as of the date of adoption. The FASB issued a one year deferral and the new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company plans to adopt this guidance beginning September 1, 2018. The Company is evaluating the impact of this standard as well as its method of adoption on its consolidated financial statements and disclosures.
In April 2015, the FASB issued Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). The FASB issued this update to simplify the presentation of debt issuance costs related to a recognized debt liability to present the debt issuance costs as a direct deduction from the carrying value of the debt liability rather than showing the debt issuance costs as an asset. The guidance is limited to the presentation of debt issuance costs and does not impact its recognition and measurement. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015, with early adoption permitted, and is required to be applied on a retrospective basis. The Company plans to adopt this guidance beginning September 1, 2016. As the adoption of this new guidance will only amend presentation and disclosure requirements, the adoption will not affect the Company’s financial position, results of operations or cash flows.
In August 2015, the FASB issued Accounting Standards Update 2015-15, Interest-Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line of Credit Arrangements (ASU 2015-15). This update was released because the guidance within ASU 2015-03 for debt issuance costs does not address presentation or subsequent measurement of debt issuance costs related to line of credit arrangements. The SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015. The Company plans to adopt this guidance beginning September 1, 2016. Upon adoption, the Company plans to continue to present debt issuance costs related to line of credit arrangements as an asset. The adoption of this new guidance will not affect the Company’s financial position, results of operations or cash flows.
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In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (ASU 2016-02). The new guidance supersedes existing guidance on accounting for leases in Topic 840 and is intended to increase the transparency and comparability of accounting for lease transactions. ASU 2016-02 requires most leases to be recognized on the balance sheet. Lessees will need to recognize a right-of-use asset and a lease liability for virtually all leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting remains similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. The ASU will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Company plans to adopt this guidance beginning September 1, 2019. The Company is evaluating the impact of this standard on its consolidated financial statements and disclosures.
In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The new guidance will change how companies account for certain aspects of share-based payments to employees. Excess tax benefits related to vested awards, previously recognized in equity, will be required to be recognized in the income statement when the awards vest. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. The Company plans to adopt this guidance beginning September 1, 2017. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements and disclosures.
Share Repurchase Program – Since October 2013, the Board of Directors has authorized the Company to repurchase in aggregate up to $225 million of the Company’s common stock. The program may be modified, suspended or discontinued at any time without prior notice. Under the share repurchase program, shares of common stock may be purchased on the open market or through privately negotiated transactions from time-to-time. The timing and amount of purchases will be based upon market conditions, securities law limitations and other factors. The share repurchase program does not obligate the Company to acquire any specific number of shares in any period.
During the nine months ended May 31, 2016, the Company purchased a total of 1,054,687 shares for approximately $32.4 million. The Company did not repurchase any shares during the three months ended May 31, 2016. As of May 31, 2016 the Company had cumulatively repurchased 3,206,226 shares for approximately $137.0 million and had $88.0 million available under the share repurchase program with an expiration date of January 1, 2018.
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Note 2 – Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market. Work-in-process includes material, labor and overhead. The following table summarizes the Company’s inventory balance:
Manufacturing supplies and raw materials
Work-in-process
Finished goods
Excess and obsolete adjustment
Note 3 – Intangibles and Other Assets, net
Intangible assets that are determined to have finite lives are amortized over their useful lives. Intangible assets with indefinite useful lives are not amortized and are periodically evaluated for impairment.
The following table summarizes the Company’s identifiable intangible and other assets balance:
Intangible assets subject to amortization:
Customer relationships
Accumulated amortization
Other intangibles
Intangible assets not subject to amortization
Prepaid and other assets
Nonqualified savings plan investments
Debt issuance costs, net
Assets held for sale
Total Intangible and other assets, net
Amortization expense for the three and nine months ended May 31, 2016 was $1.5 million and $5.3 million and for the three and nine months ended May 31, 2015 was $0.9 million and $2.7 million. Amortization expense for the years ending August 31, 2016, 2017, 2018, 2019 and 2020 is expected to be $6.3 million, $3.6 million, $3.5 million, $3.4 million and $3.4 million.
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Note 4 – Revolving Notes
Senior secured credit facilities, consisting of three components, aggregated to $615.5 million as of May 31, 2016.
As of May 31, 2016, a $550.0 million revolving line of credit, maturing October 2020, secured by substantially all the Company’s assets in the U.S. not otherwise pledged as security for term loans, was available to provide working capital and interim financing of equipment, principally for the U.S. and Mexican operations. Advances under this facility bear interest at LIBOR plus 1.75% or Prime plus 0.75% depending on the type of borrowing. Available borrowings under the credit facility are generally based on defined levels of inventory, receivables, property, plant and equipment and leased equipment, as well as total debt to consolidated capitalization and fixed charges coverage ratios.
As of May 31, 2016, lines of credit totaling $15.5 million secured by certain of the Company’s European assets, with various variable rates that range from Warsaw Interbank Offered Rate (WIBOR) plus 1.2% to WIBOR plus 1.3%, were available for working capital needs of the European manufacturing operation. European credit facilities are continually being renewed. Currently these European credit facilities have maturities that range from February 2017 through June 2017.
The Company’s Mexican railcar manufacturing joint venture has two lines of credit totaling $50.0 million. The first line of credit provides up to $30.0 million and is fully guaranteed by the Company and its joint venture partner. Advances under this facility bear interest at LIBOR plus 2.0%. The Mexican railcar manufacturing joint venture will be able to draw against this facility through January 2019. The second line of credit provides up to $20.0 million, of which the Company and its joint venture partner have each guaranteed 50%. Advances under this facility bear interest at LIBOR plus 2.0%. The Mexican railcar manufacturing joint venture will be able to draw amounts available under this facility through August 2017.
As of May 31, 2016, outstanding commitments under the senior secured credit facilities consisted of $81.3 million in letters of credit under the North American credit facility.
As of August 31, 2015, outstanding commitments under the senior secured credit facilities consisted of $47.2 million in letters of credit and $49.0 million in revolving notes under the North American credit facility and $1.9 million outstanding in revolving notes under the Mexican railcar manufacturing joint venture credit facilities.
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Note 5 – Accounts Payable and Accrued Liabilities
Trade payables
Other accrued liabilities
Accrued payroll and related liabilities
Accrued maintenance
Accrued warranty
Income taxes payable
Note 6 – Warranty Accruals
Warranty costs are estimated and charged to operations to cover a defined warranty period. The estimated warranty cost is based on the history of warranty claims for each particular product type. For new product types without a warranty history, preliminary estimates are based on historical information for similar product types. The warranty accruals, included in Accounts payable and accrued liabilities on the Consolidated Balance Sheets, are reviewed periodically and updated based on warranty trends and expirations of warranty periods.
Warranty accrual activity:
Balance at beginning of period
Charged to cost of revenue, net
Payments
Currency translation effect
Balance at end of period
Note 7 – Notes Payable
The Company’s Notes payable balance was $306.8 million as of May 31, 2016 which includes Convertible senior notes, due 2026 (the 2026 Notes). On specified dates or in the event of certain fundamental changes, holders can require the Company to repurchase all or a portion of their 2026 Notes at a price equal to 100% of the principal amount of the 2026 Notes plus accrued and unpaid interest (the Put Option). During the three months ended May 31, 2016, the Company retired $14.0 million of its then $14.9 million outstanding 2026 Notes pursuant to a scheduled Put Option leaving $0.9 million outstanding in 2026 Notes as of May 31, 2016.
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Note 8 – Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, net of tax effect as appropriate, consisted of the following:
Balance, August 31, 2015
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive loss
Balance, May 31, 2016
The amounts reclassified out of Accumulated other comprehensive loss into the Consolidated Statements of Income, with presentation location, were as follows:
Financial Statement
Location
(In thousands)
(Gain) loss on derivative financial instruments:
Foreign exchange contracts
Interest rate swap contracts
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Note 9 – Earnings Per Share
The shares used in the computation of the Company’s basic and diluted earnings per common share are reconciled as follows:
Weighted average basic common shares outstanding(1)
Dilutive effect of 2018 Convertible notes (2)
Dilutive effect of 2026 Convertible notes(3)
Dilutive effect of performance based restricted stock units (4)
Weighted average diluted common shares outstanding
Dilutive EPS is calculated using the more dilutive of two approaches. The first approach includes the dilutive effect, using the treasury stock method, associated with shares underlying the 2026 Convertible notes and performance based restricted stock units that are subject to performance criteria, for which actual levels of performance above target have been achieved. The second approach supplements the first by including the “if converted” effect of the 2018 Convertible notes issued in March 2011. Under the “if converted” method, debt issuance and interest costs, both net of tax, associated with the convertible notes are added back to net earnings and the share count is increased by the shares underlying the convertible notes. The 2026 Convertible notes are included in the calculation of both approaches using the treasury stock method when the average stock price is greater than the applicable conversion price.
Add back:
Interest and debt issuance costs on the 2018 Convertible notes, net of tax
Earnings before interest and debt issuance costs on convertible notes
Diluted earnings per share(1)
Earnings before interest and debt issuance costs (net of tax) on convertible notes
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Note 10 – Stock Based Compensation
The value of stock based compensation awards is amortized as compensation expense from the date of grant through the earlier of the vesting period or the recipient’s eligible retirement date. Awards are expensed upon grant when the recipient’s eligible retirement date precedes the grant date.
Stock based compensation expense was $8.3 million and $19.1 million for the three and nine months ended May 31, 2016, respectively and $6.0 million and $13.2 million for the three and nine months ended May 31, 2015, respectively. Compensation expense is recorded in Selling and administrative expense and Cost of revenue on the Consolidated Statements of Income.
Note 11 – Derivative Instruments
Foreign operations give rise to market risks from changes in foreign currency exchange rates. Foreign currency forward exchange contracts with established financial institutions are utilized to hedge a portion of that risk. Interest rate swap agreements are used to reduce the impact of changes in interest rates on certain debt. The Company’s foreign currency forward exchange contracts and interest rate swap agreements are designated as cash flow hedges, and therefore the effective portion of unrealized gains and losses is recorded in accumulated other comprehensive income or loss.
At May 31, 2016 exchange rates, forward exchange contracts for the purchase of Polish Zlotys and the sale of Euros and U.S. Dollars; the purchase of Mexican Pesos and the sale of U.S. Dollars; and for the purchase of U.S. Dollars and the sale of Saudi Riyals aggregated to $429.7 million. The fair value of the contracts is included on the Consolidated Balance Sheets as Accounts payable and accrued liabilities when there is a loss, or as Accounts receivable, net when there is a gain. As the contracts mature at various dates through September 2018, any such gain or loss remaining will be recognized in manufacturing revenue or cost of revenue along with the related transactions. In the event that the underlying transaction does not occur or does not occur in the period designated at the inception of the hedge, the amount classified in accumulated other comprehensive loss would be reclassified to the results of operations in Interest and foreign exchange at the time of occurrence.
At May 31, 2016, an interest rate swap agreement maturing in March 2020 had a notional amount of $93.0 million. The fair value of the contract is included in Accounts payable and accrued liabilities on the Consolidated Balance Sheets. As interest expense on the underlying debt is recognized, amounts corresponding to the interest rate swap are reclassified from Accumulated other comprehensive loss and charged or credited to interest expense. At May 31, 2016 interest rates, approximately $1.4 million would be reclassified to interest expense in the next 12 months.
Fair Values of Derivative Instruments
Asset Derivatives
Liability Derivatives
Balance sheet location
Derivatives designated as hedging instruments
Foreign forward exchange contracts
Derivatives not designated as hedging instruments
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The Effect of Derivative Instruments on the Statements of Income
Derivatives in cash flow hedging relationships
Location of gain (loss) recognized in
income on derivatives
Foreign forward exchange contract
Derivatives in cash flowhedging relationships
Location of gain (loss)reclassified fromaccumulated OCIinto income
Location of gain onderivative (ineffectiveportion and amountexcluded fromeffectiveness testing)
Note 12 – Segment Information
Greenbrier operates in four reportable segments: Manufacturing; Wheels & Parts; Leasing & Services; and GBW Joint Venture. The results of GBW Joint Venture are included as part of Earnings from unconsolidated affiliates as the Company accounts for its interest in GBW Railcar Services LLC (GBW) under the equity method of accounting.
The accounting policies of the segments are described in the summary of significant accounting policies in the Consolidated Financial Statements contained in the Company’s 2015 Annual Report on Form 10-K. Performance is evaluated based on Earnings from operations. Corporate includes selling and administrative costs not directly related to goods and services and certain costs that are intertwined among segments due to our integrated business model. The Company does not allocate Interest and foreign exchange or Income tax expense for either external or internal reporting purposes. Intersegment sales and transfers are valued as if the sales or transfers were to third parties. Related revenue and margin are eliminated in consolidation and therefore are not included in consolidated results in the Company’s Consolidated Financial Statements.
The information in the following table is derived directly from the segments’ internal financial reports used for corporate management purposes. The results of operations for the GBW Joint Venture are not reflected in the tables below as the investment is accounted for under the equity method of accounting.
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For the three months ended May 31, 2016:
Eliminations
Corporate
For the nine months ended May 31, 2016:
For the three months ended May 31, 2015:
For the nine months ended May 31, 2015:
Unallocated
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Reconciliation of Earnings from operations to Earnings before income tax and earnings from unconsolidated affiliates:
Earnings before income tax and earnings from unconsolidated affiliates
The results of operations for the GBW Joint Venture are accounted for under the equity method of accounting. The GBW Joint Venture is the Company’s fourth reportable segment and information as of May 31, 2016 and August 31, 2015 and for the three and nine months ended May 31, 2016 and 2015 are included in the tables below.
Earnings (loss) from operations
GBW (1)
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Note 13 – Commitments and Contingencies
The Company’s Portland, Oregon manufacturing facility is located adjacent to the Willamette River. The Company has entered into a Voluntary Cleanup Agreement with the Oregon Department of Environmental Quality (DEQ) 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 into the environment.
In December 2000, the U.S. Environmental Protection Agency (EPA) classified portions of the Willamette River bed known as the Portland Harbor, including the portion fronting the Company’s manufacturing facility, as a federal “National Priority List” or “Superfund” site due to sediment contamination (the Portland Harbor Site). The Company and more than 140 other parties have received a “General Notice” of potential liability from the EPA relating to the Portland Harbor Site. The letter advised 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 (the Lower Willamette Group or LWG), 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. The EPA-mandated RI/FS is being produced by the LWG and has cost over $110 million during a 15-year period. The Company has agreed to initially bear a percentage of the total costs incurred by the LWG in connection with the investigation. The Company’s aggregate expenditure has not been material during the 15-year period. Some or all of any such outlay may be recoverable from other responsible parties.
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, U.S. District Court, District of Oregon, Case #3:09-cv-453-PK. All but 12 of these parties elected to sign tolling agreements and be dismissed without prejudice, and the case has now been stayed by the court, pending the EPA’s Record of Decision, currently scheduled by the EPA for December 31, 2016.
On June 8, 2016, the EPA issued its Feasibility Study (FS) and Proposed Plan for the Portland Harbor Site. The EPA is accepting comments from the public on its Proposed Plan through August 8, 2016. The EPA’s FS includes remediation alternatives that would take from 4 to 62 years of active remediation, with an undiscounted cost ranging from $642 million to $10.2 billion and a net present value assuming a 7% discount rate ranging between $451 million and $9.4 billion. The Proposed Plan identifies the alternative currently favored by the EPA, which it assigns an estimated undiscounted cost of between $1.1 and $1.2 billion and a net present value of between $746 and $811 million. The EPA expects its cost estimates to be accurate within a range of +50 to -30 percent. EPA estimates that the remedy in the Proposed Plan would take 7 years of active remediation followed by 30 years of monitoring. The EPA’s FS and its Proposed Plan identify 13 Sediment Decision Units. One of the units, RM9W, includes the nearshore area of the river sediments offshore of our Portland, Oregon manufacturing facility as well as upstream and downstream of the facility. It also includes a portion of our riverbank. Neither the FS nor the Proposed Plan breaks down total remediation costs by unit.
Neither the EPA’s FS nor its Proposed Plan addresses responsibility for the costs of clean-up, allocates such costs among the potentially responsible parties, or defines precise boundaries for the cleanup. Responsibility for funding and implementing the EPA’s selected cleanup option will be determined after the issuance of the Record of Decision, currently scheduled by the EPA for December 31, 2016. Based on the investigation to date, the Company believes that it did not contribute in any material way to contamination in the river sediments or the damage of natural resources in the Portland Harbor Site and that the damage in the area of the Portland Harbor Site adjacent to its property precedes its ownership of the Portland, Oregon manufacturing facility. Because these environmental investigations are still underway, sufficient information is currently not available to determine the Company’s liability, if any, for the cost of any required remediation or restoration of the Portland Harbor Site or to estimate a range of potential loss. Based on the results of the pending investigations and future assessments of natural resource damages, the Company may be required to incur costs associated with additional phases of investigation or remedial
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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.
The Company has also signed an Order on Consent with the DEQ to finalize the investigation of potential onsite sources of contamination that may have a release pathway to the Willamette River. Interim precautionary measures are also required in the order and the Company is currently discussing with the DEQ potential remedial actions which may be required. Our aggregate expenditure has not been material, however the Company could incur significant expenses for remediation. Some or all of any such outlay may be recoverable from other responsible parties.
From time to time, Greenbrier is involved as a defendant in litigation in the ordinary course of business, the outcome of which cannot be predicted with certainty. While the ultimate outcome of such legal proceedings cannot be determined at this time, management believes that the resolution of these actions will not have a material adverse effect on the Company’s Consolidated Financial Statements.
In accordance with customary business practices in Europe, the Company has $3.2 million in third party warranty guarantee facilities. To date no amounts have been drawn under these guarantee facilities.
As of May 31, 2016, the Mexican railcar manufacturing joint venture had $0.9 million of third party debt outstanding, for which the Company and its joint venture partner had each guaranteed approximately $0.4 million.
As of May 31, 2016, the Company had outstanding letters of credit aggregating $81.3 million associated with performance guarantees, facility leases and workers compensation insurance.
The Company made $5.3 million in cash contributions and $3.75 million in loans to GBW, an unconsolidated 50/50 joint venture, for the nine months ended May 31, 2016. The Company expects to loan additional amounts of approximately $1.25 million during 2016. The Company is likely to make additional capital contributions or loans to GBW in the future. As of May 31, 2016, the Company had a $35.2 million note receivable balance from GBW which is included on the Consolidated Balance Sheet in Accounts receivable, net.
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Note 14 – Fair Value Measures
Certain assets and liabilities are reported at fair value on either a recurring or nonrecurring basis. Fair value, for this disclosure, is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, under a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:
Assets and liabilities measured at fair value on a recurring basis as of May 31, 2016 were:
Assets:
Derivative financial instruments
Cash equivalents
Liabilities:
Assets and liabilities measured at fair value on a recurring basis as of August 31, 2015 were:
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Note 15 – Related Party Transactions
In April 2010, WLR–Greenbrier Rail Inc. (WLR-GBX) was formed and acquired a lease fleet of nearly 4,000 railcars valued at approximately $256.0 million. WLR-GBX is wholly owned by affiliates of WL Ross & Co, LLC (WL Ross) and a member of the Company’s board of directors, Wendy Teramoto, is also an affiliate of WL Ross. In September 2015, the Company purchased the entire remaining WLR-GBX lease fleet of 3,885 railcars for approximately $148.0 million plus a $1.0 million fee. The transaction was approved by the Company’s disinterested, independent directors. The Company intends to sell the railcars and underlying attached leases to third parties in the short-term and therefore has classified these railcars as Leased railcars for syndication on the Company’s Consolidated Balance Sheet. During the nine months ended May 31, 2016, the Company sold to third parties 3,159 of these railcars with the underlying leases attached for $162.0 million. The Company recognized revenue on 2,766 of these railcars for $154.2 million and deferred revenue recognition on 389 of these railcars for $7.8 million due to the Company’s continuing involvement.
The Company and WL Ross have agreed that the Company will receive a preferred return on the proceeds of the sale of the portfolio, after which it will share a portion of the profits with WL Ross up to certain defined levels. The Company is first entitled to recoup its total investment plus a rate of return of 25%. The Company and WL Ross will then share in the profits up to certain defined levels. Once those defined levels have been met, the Company is entitled to receive 100% of the remaining profits. During the nine months ended May 31, 2016, the Company paid a total of $7.2 million to WL Ross pursuant to this profit sharing agreement and as of May 31, 2016 has accrued an additional $11.3 million that it anticipates will be paid to WL Ross in the future.
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Note 16 – Guarantor/Non-Guarantor
The convertible senior notes due 2026 (the “Notes”) issued on May 22, 2006 are fully and unconditionally and jointly and severally guaranteed by substantially all of Greenbrier’s material 100% owned U.S. subsidiaries: Autostack Company LLC; Greenbrier-Concarril, LLC; Greenbrier Leasing Company LLC; Greenbrier Leasing Limited Partner, LLC; Greenbrier Management Services, LLC; Greenbrier Leasing, L.P.; Greenbrier Railcar LLC; Gunderson LLC; Gunderson Marine LLC; Gunderson Rail Services LLC; Meridian Rail Holding Corp.; Meridian Rail Acquisition Corp.; Meridian Rail Mexico City Corp.; Brandon Railroad LLC; Gunderson Specialty Products, LLC; Greenbrier Railcar Leasing, Inc. and Greenbrier Rail Services Holdings, LLC. No other subsidiaries guarantee the Notes including Greenbrier Union Holdings I LLC; Greenbrier MUL Holdings I LLC; Greenbrier Leasing Limited; Greenbrier Europe B.V.; Greenbrier Europe Holdings B.V.; Greenbrier International Holdings II, LLC; Greenbrier Germany GmbH; WagonySwidnica S.A.; Zaklad Naprawczy Taboru Kolejowego Olawa sp. z o.o.; Zaklad Transportu Kolejowego SIARKOPOL sp. z o.o.; Gunderson-Concarril, S.A. de C.V.; Mexico Meridianrail Services, S.A. de C.V.; Greenbrier Railcar Services – Tierra Blanca S.A. de C.V.; YSD Doors, S.A. de C.V.; Greenbrier do Brasil Participações Ltda; Greenbrier Tank Components, LLC; Gunderson-GIMSA S.A. de C.V.; Greenbrier; S.A. de C.V.; Greenbrier Industries, S.A. de C.V., GBSummit, LLC and Greenbrier-GIMSA, LLC.
The following represents the supplemental consolidating condensed financial information of Greenbrier and its guarantor and non-guarantor subsidiaries, as of May 31, 2016 and August 31, 2015 and for the three and nine months ended May 31, 2016 and 2015. The information is presented on the basis of Greenbrier accounting for its ownership of its wholly owned subsidiaries using the equity method of accounting. The equity method investment for each subsidiary is recorded by the parent in intangibles and other assets. Intercompany transactions of goods and services between the guarantor and non-guarantor subsidiaries are presented as if the sales or transfers were at fair value to third parties and eliminated in consolidation.
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The Greenbrier Companies, Inc.
Condensed Consolidating Balance Sheet
May 31, 2016
26
Condensed Consolidating Statement of Income
For the three months ended May 31, 2016
Net (gain) loss on disposition of equipment
Earnings (loss) before income taxes and earnings (loss) from unconsolidated affiliates
Income tax (expense) benefit
Earnings (loss) before earnings (loss) from unconsolidated affiliates
Earnings (loss) from unconsolidated affiliates
Net earnings (loss)
Net (earnings) loss attributable to noncontrolling interest
Net earnings (loss) attributable to Greenbrier
27
For the nine months ended May 31, 2016
28
Condensed Consolidating Statement of Comprehensive Income (Loss)
Other comprehensive income (loss)
Reclassification of derivative financial instruments recognized in net earnings (loss)
Unrealized gain on derivative financial instruments
Comprehensive income (loss)
Comprehensive (income) loss attributable to noncontrolling interest
Comprehensive income (loss) attributable to Greenbrier
29
Unrealized loss on derivative financial instruments
30
Condensed Consolidating Statement of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Noncontrolling interest adjustment
Decrease (increase) in assets:
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Decrease (increase) in restricted cash
Investment in and net advances to unconsolidated affiliates
Cash flows from financing activities:
Net changes in revolving notes with maturities of 90 days or less
Repayment of revolving notes with maturities longer than 90 days
Intercompany advances
Cash contribution to joint venture partner
31
August 31, 2015
Total equity Greenbrier
32
For the three months ended May 31, 2015
33
For the nine months ended May 31, 2015
34
Unrealized gain (loss) on derivative financial instruments
35
36
Net (gain)loss on disposition of equipment
Cash distributions to joint venture partner
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Executive Summary
We operate in four reportable segments: Manufacturing; Wheels & Parts; Leasing & Services; and GBW Joint Venture. Our segments are operationally integrated. The Manufacturing segment, operating from facilities in the United States, Mexico and Poland, produces double-stack intermodal railcars, tank cars, conventional railcars, automotive railcar products and marine vessels. The Wheels & Parts segment performs wheel and axle servicing, as well as production of a variety of parts for the railroad industry in North America. The Leasing & Services segment owns approximately 9,200 railcars (5,900 railcars held as equipment on operating leases, 2,400 held as leased railcars for syndication and 900 held as finished goods inventory) and provides management services for approximately 261,000 railcars for railroads, shippers, carriers, institutional investors and other leasing and transportation companies in North America. The GBW Joint Venture segment provides repair services at over 30 locations across North America, including more than 10 tank car repair and maintenance facilities certified by the Association of American Railroads (AAR). The results of these operations were included as part of Earnings (loss) from unconsolidated affiliates as we account for our interest in GBW under the equity method of accounting. We also produce rail castings and tank heads through unconsolidated joint ventures and have a 19.5% ownership stake in a railcar manufacturer in Brazil with an option to acquire an additional 40.5% ownership interest, which can be exercised no later than December 30, 2017.
Our total manufacturing backlog of railcar units as of May 31, 2016 was approximately 31,200 units with an estimated value of $3.62 billion, of which 27,000 units with a value of $3.23 billion are for direct sales and 4,200 units with a value of $0.39 billion are intended for syndications to third parties with a lease attached. Backlog as of May 31, 2015 was approximately 45,100 units with an estimated value of $4.86 billion. Currently, no orders in our May 31, 2016 backlog are intended to be placed into our owned lease fleet. Multi-year supply agreements are a part of rail industry practice. A portion of the orders included in backlog reflects an assumed product mix. Under terms of the orders, the exact mix will be determined in the future, which may impact the dollar amount of backlog. Marine backlog as of May 31, 2016 was $51 million compared to $70 million as of May 31, 2015.
Our backlog of railcar units and marine vessels is not necessarily indicative of future results of operations. Certain orders in backlog are subject to customary documentation and completion of terms. Customer orders contain terms and conditions customary in the industry. Customers may attempt to cancel or modify orders in backlog. Historically little variation has been experienced between the quantity ordered and the quantity actually delivered, though the timing of deliveries has been modified from time to time. Backlog as of May 31, 2016 includes an aggregate of 5,000 covered hopper railcars for use in energy related sand transportation that customers, certain of which are under financial stress, are attempting to cancel, settle or modify. We cannot guarantee that our reported railcar backlog will convert to revenue in any particular period, if at all.
In September 2015, we purchased a portfolio of 3,885 railcars from a related third party for approximately $148.0 million plus a $1.0 million fee. We intend to resell the railcars and underlying attached leases to third parties in the short-term and therefore have classified these railcars as Leased railcars for syndication on our Consolidated Balance Sheet. During the nine months ended May 31, 2016, we sold to third parties 3,159 of these railcars with the underlying leases attached for $162.0 million. We recognized revenue on 2,766 of these railcars for $154.2 million and deferred revenue recognition on 389 of these railcars for $7.8 million due to our continuing involvement. The gross proceeds from the sale of these railcars with leases attached were recorded as revenue and the cost of purchasing these railcars was recorded in cost of revenue within our Leasing & Services segment.
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In May 2016 we announced that we entered into an agreement to acquire a 19.5% ownership interest for $10 million in Amsted-Maxion Fundição e Equipamentos Ferroviários S.A (Amsted-Maxion Cruzeiro), a manufacturer of castings and components for railcars and other heavy equipment. The agreement is subject to customary closing conditions, including antitrust review and is expected to close in the fourth quarter of 2016. Amsted-Maxion Cruzeiro is also the co-owner with us of Amsted-Maxion Equipamentos E Serviços Ferroviários S.A. (Greenbrier-Maxion), a railcar manufacturer in Brazil. We own 19.5% of Greenbrier-Maxion while Amsted-Maxion Cruzeiro owns 80.5%. When we complete the investment in Amsted-Maxion Cruzeiro we will, directly and indirectly, own approximately 35% of Greenbrier-Maxion. As part of this investment, we have an option, subject to certain conditions, to acquire an additional 10% interest in Amsted-Maxion Cruzeiro. Our option expires on October 20, 2017. In 2015, as part of our initial investment in Greenbrier-Maxion, we secured an option to acquire an additional 40.5% direct ownership interest in Greenbrier-Maxion. The option is exercisable until December 30, 2017 and has been modified as part of this current transaction to allow us to purchase a direct ownership interest in Greenbrier-Maxion in an amount between 30.6% and 40.5%, with the option exercise price adjusted in proportion to the ownership interest obtained.
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Three Months Ended May 31, 2016 Compared to Three Months Ended May 31, 2015
Overview
Revenue, cost of revenue, margin and operating profit presented below, include amounts from external parties and exclude intersegment activity that is eliminated in consolidation.
Revenue:
Cost of revenue:
Margin:
Selling and administrative
Performance for our segments is evaluated based on operating profit. Corporate includes selling and administrative costs not directly related to goods and services and certain costs that are intertwined among segments due to our integrated business model. Management does not allocate Interest and foreign exchange or Income tax expense for either external or internal reporting purposes.
Operating profit (loss):
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Consolidated Results
Margin (%)
Through our integrated business model, we provide a broad range of custom products and services in each of our segments, which have various average selling prices and margins. The demand for and mix of products and services delivered changes from period to period which causes fluctuations in our results of operations.
The 14.2% decrease in revenue for the three months ended May 31, 2016 as compared to the three months ended May 31, 2015 was primarily due to a 22.7% decrease in Manufacturing revenue primarily due to a 24.6% decrease in the volume of railcar deliveries. In addition, the decrease in revenue was attributed to a 19.5% decrease in Wheels & Parts revenue as a result of lower wheel set, component and parts volumes due to a decrease in demand. These were partially offset by a 218.8% increase in Leasing & Services revenue which was primarily the result of the sale of railcars that we purchased from a related third party.
The 14.1% decrease in cost of revenue for the three months ended May 31, 2016 as compared to the three months ended May 31, 2015 was due to a 24.2% decrease in Manufacturing cost of revenue primarily due to a 24.6% decrease in the volume of railcar deliveries. In addition, the decrease in cost of revenue was attributed to a 22.1% decrease in Wheels & Parts cost of revenue due to lower wheel set, component and parts costs associated with decreased volumes. These were partially offset by a 530.7% increase in Leasing & Services cost of revenue which was the result of costs associated with the sale of railcars that we purchased from a related third party.
Margin as a percentage of revenue was 20.7% and 20.9% for the three months ended May 31, 2016 and 2015, respectively. The overall 0.2% decrease in margin percentage was due to a decrease in Leasing & Services margin. Leasing & Services margin decreased to 16.8% from 58.0% primarily as a result of a lower margin percentage on the syndication of railcars purchased from a related third party. This was partially offset by an increase in Manufacturing margin to 23.1% from 21.5% due to a change in product mix. In addition, the decrease in Leasing & Services margin was partially offset by an increase in Wheels & Parts margin to 11.0% from 8.0% primarily due to a more favorable parts product mix in the current year and the adverse effect of declines in scrap metal pricing on wheel margins in the prior year.
The $7.5 million decrease in net earnings for the three months ended May 31, 2016 as compared to the three months ended May 31, 2015 was primarily attributable to a decrease in margin due to lower railcar deliveries.
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Manufacturing Segment
Operating profit ($)
Operating profit (%)
Deliveries
Manufacturing revenue was $458.5 million and $593.4 million for the three months ended May 31, 2016 and 2015, respectively. Manufacturing revenue decreased $134.9 million or 22.7% primarily due to a 24.6% decrease in the volume of railcar deliveries. This was partially offset by a product mix in the current period which had a higher average selling price as compared to the prior comparable period.
Manufacturing cost of revenue was $352.8 million and $465.7 million for the three months ended May 31, 2016 and 2015, respectively. Cost of revenue decreased $112.9 million or 24.2% primarily due to a 24.6% decrease in the volume of railcar deliveries.
Manufacturing margin as a percentage of revenue for the three months ended May 31, 2016 was 23.1% compared to 21.5% for the three months ended May 31, 2015. The 1.6% increase in margin was primarily due to a change in product mix, partially offset by lower volumes of new railcar sales with leases attached which typically result in higher sales prices and margins.
Manufacturing operating profit was $92.7 million or 20.2% of revenue for the three months ended May 31, 2016 and $115.7 million or 19.5% of revenue for the three months ended May 31, 2015. The $23.0 million or 19.9% decrease in operating profit was primarily attributed to a decrease in margin due to lower railcar deliveries.
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Wheels & Parts Segment
Wheels & Parts revenue was $78.4 million and $97.4 million for the three months ended May 31, 2016 and 2015, respectively. The $19.0 million or 19.5% decrease in revenue was primarily a result of lower wheel set, component and parts volumes due to a decrease in demand.
Wheels & Parts cost of revenue was $69.8 million and $89.6 million for the three months ended May 31, 2016 and 2015, respectively. Cost of revenue decreased $19.8 million or 22.1% primarily due to lower wheel set, component and parts costs associated with decreased volumes.
Wheels & Parts margin as a percentage of revenue for the three months ended May 31, 2016 was 11.0% compared to 8.0% for the three months ended May 31, 2015. The increase in margin was primarily due to the adverse effect of declines in scrap metal pricing on wheel margins in the prior year and a more favorable parts product mix in the current year.
Wheels & Parts operating profit was $5.8 million or 7.4% of revenue for the three months ended May 31, 2016 and $5.1 million or 5.2% of revenue for the three months ended May 31, 2015. The $0.7 million or 14.4% increase in operating profit was primarily attributed to the adverse effect of declines in scrap metal pricing on wheel margins in the prior year.
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Leasing & Services Segment
Leasing & Services revenue was $76.0 million and $23.8 million for the three months ended May 31, 2016 and 2015, respectively. The $52.1 million or 218.8% increase in revenue was primarily the result of the sale of railcars for $53.9 million that we purchased from a related third party with the intent to resell them. The gross proceeds from the sale of these railcars with leases attached were recorded as revenue and the cost of purchasing these railcars was recorded in cost of revenue. The increase in revenue was partially offset by a lower average volume of rent-producing leased railcars for syndication, which are held short term and classified as Leased railcars for syndication on our Consolidated Balance Sheet.
Leasing & Services cost of revenue was $63.2 million and $10.0 million for the three months ended May 31, 2016 and 2015, respectively. Cost of revenue increased $53.2 million primarily due to costs associated with the sale of railcars that we purchased from a related third party.
Leasing & Services margin as a percentage of revenue for the three months ended May 31, 2016 was 16.8% compared to 58.0% for the three months ended May 31, 2015. The 41.2% decrease was primarily as a result of a lower margin percentage on the syndication of railcars purchased from a related third party and lower average volume of rent-producing leased railcars for syndication.
Leasing & Services operating profit was $8.3 million or 10.9% of revenue for the three months ended May 31, 2016 and $10.8 million or 45.4% of revenue for the three months ended May 31, 2015. The $2.5 million or 23.3% decrease in operating profit was primarily attributed to a lower average volume of rent-producing leased railcars for syndication partially offset by profit from the sale of railcars that we purchased from a related third party.
The percentage of owned units on lease excluding newly manufactured railcars not yet on lease and a recent railcar portfolio acquisition was 94.9% at May 31, 2016 compared to 98.6% at May 31, 2015.
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GBW Joint Venture Segment
GBW, an unconsolidated 50/50 joint venture, generated total revenue of $95.7 million and $88.8 million for the three months ended May 31, 2016 and 2015, respectively. The increase in revenue of $6.9 million was primarily due to a favorable change in mix and an increase in volume.
GBW margin as a percentage of revenue for the three months ended May 31, 2016 was 9.9% compared to 7.4% for the three months ended May 31, 2015. The increase was primarily attributed to an increase in labor efficiencies in the current year.
To reflect our 50% share of GBW’s net results, we recorded earnings of $1.2 million and $0.4 million in Earnings from unconsolidated affiliates for the three months ended May 31, 2016 and 2015, respectively.
Selling and Administrative Expense
Selling and administrative expense was $43.3 million or 7.1% of revenue for the three months ended May 31, 2016 compared to $45.6 million or 6.4% of revenue for the prior comparable period. The $2.3 million decrease was primarily attributed to costs incurred in the prior year which included $5.8 million in professional fees and other transaction costs in connection with a potential acquisition and $1.7 million in costs associated with our advocacy of new tank car regulations. These were partially offset by a $4.5 million increase in employee-related costs including long-term and short-term incentive compensation, additional headcount and costs associated with a separation and consultation agreement in the current year.
Net Gain on Disposition of Equipment
Net gain on disposition of equipment was $0.3 million for the three months ended May 31, 2016 compared to a net gain on disposition of equipment of $0.7 million for the prior comparable period.
Net gain on disposition of equipment includes the sale of assets from our lease fleet (Equipment on operating leases, net) that are periodically sold in the normal course of business in order to take advantage of market conditions and to manage risk and liquidity and disposition of property, plant and equipment.
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Other Costs
Interest and foreign exchange expense was composed of the following:
Interest and foreign exchange:
Interest and other expense
Foreign exchange gain
The $0.6 million decrease in interest and foreign exchange expense from the prior comparable period was primarily attributed to a $1.2 million decrease in interest expense as a result of lower average borrowings as compared to the prior year. This was partially offset by a $0.7 million decrease in foreign exchange gain as compared to the prior comparable period primarily attributed to the change in the Mexican Peso relative to the U.S. Dollar.
Income Tax
The tax rate for the three months ended May 31, 2016 was 27.9%, compared to 30.7% for the three months ended May 31, 2015. The decrease in the tax rate was primarily attributable to a change in the proportion of projected pre-tax earnings attributable to our Mexican railcar manufacturing joint venture.
The tax rate can fluctuate period-to-period due to changes in the projected mix of foreign and domestic pre-tax earnings and due to discrete tax items booked within the interim period. It can also fluctuate with changes in the proportion of projected pre-tax earnings attributable to our Mexican railcar manufacturing joint venture because the joint venture is predominantly treated as a partnership for tax purposes and, as a result, the partnership’s entire pre-tax earnings are included in Earnings before income taxes and earnings from unconsolidated affiliates, whereas only our 50% share of the tax is included in Income tax expense.
Earnings From Unconsolidated Affiliates
Earnings from unconsolidated affiliates was $1.6 million for the three months ended May 31, 2016 compared to $1.0 million for the three months ended May 31, 2015. Earnings from unconsolidated affiliates primarily included our share of after-tax results from our GBW Joint Venture including eliminations associated with GBW transactions with other Greenbrier entities and our share of after-tax results from our castings joint venture. In addition, the three months ended May 31, 2016 included our share of after-tax results from our tank head joint venture and our share of after-tax results from our 19.5% ownership stake in a railcar manufacturer in Brazil.
Noncontrolling Interest
Net earnings attributable to noncontrolling interest was $24.2 million for the three months ended May 31, 2016 compared to $27.5 million in the prior comparable period. These amounts primarily represent our joint venture partner’s share in the results of operations of our Mexican railcar manufacturing joint venture, adjusted for intercompany sales. The decrease of $3.3 million from the prior year is primarily a result of a decrease in the volume of railcar deliveries.
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Nine Months Ended May 31, 2016 Compared to Nine Months Ended May 31, 2015
47
The 13.3% increase in revenue for the nine months ended May 31, 2016 as compared to the nine months ended May 31, 2015 was primarily due to a 9.0% increase in Manufacturing revenue. The increase in Manufacturing revenue was primarily due to a 5.4% increase in the volume of railcar deliveries with a mix that had a higher average selling price. In addition, the increase in revenue was due a 201.8% increase in Leasing & Services revenue which was primarily the result of an increase in the sale of railcars that we purchased from a related third party. These were partially offset by a 13.6% decrease in Wheels & Parts revenue as a result of lower wheel set, component and parts volumes due to a decrease in demand and a decrease in scrap metal pricing.
The 11.9% increase in cost of revenue for the nine months ended May 31, 2016 as compared to the nine months ended May 31, 2015 was due to a 5.3% increase in Manufacturing cost of revenue. The increase in Manufacturing cost of revenue was due to an increase of 5.4% in the volume of railcar deliveries with a mix that had a higher average labor and material content. This was partially offset by improved production efficiencies. In addition, the increase in revenue was due a 448.7% increase in Leasing & Services cost of revenue which was primarily the result of an increase in the costs associated with the sale of railcars that we purchased from a related third party. These were partially offset by a 13.5% decrease in Wheels & Parts cost of revenue as a result of lower wheel set, component and parts costs associated with decreased volumes.
Margin as a percentage of revenue was 20.7% and 19.7% for the nine months ended May 31, 2016 and 2015, respectively. The overall 1.0% increase in margin percentage was due to an increase in Manufacturing margin which increased to 22.6% from 19.9% primarily due to a change in product mix and improved production efficiencies. This was partially offset by a decrease in Leasing & Services margin to 19.7% from 55.8% primarily as a result of a lower margin percentage on the syndication of railcars purchased from a related third party. In addition, the increase in Manufacturing margin was partially offset by a decrease in Wheels & Parts margin to 9.4% from 9.6% due to lower wheel set and component volumes and a decrease in scrap metal pricing.
The $23.7 million increase in net earnings for the nine months ended May 31, 2016 as compared to the nine months ended May 31, 2015 was primarily attributable to an increase in margin due to higher railcar deliveries.
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Manufacturing revenue was $1.6 billion and $1.5 billion for the nine months ended May 31, 2016 and 2015, respectively. Manufacturing revenue increased $133.1 million or 9.0% primarily due to a 5.4% increase in the volume of railcar deliveries with a product mix in the current period which had a higher average selling price as compared to the prior comparable period.
Manufacturing cost of revenue was $1.2 billion for both the nine months ended May 31, 2016 and 2015, respectively. Cost of revenue increased $62.7 million or 5.3% due to an increase of 5.4% in the volume of railcar deliveries with a mix which had a higher average labor and material content. This was partially offset by improved production efficiencies.
Manufacturing margin as a percentage of revenue for the nine months ended May 31, 2016 was 22.6% compared to 19.9% for the nine months ended May 31, 2015. The 2.7% increase in margin was primarily due to a change in product mix and improved production efficiencies. This was partially offset by lower volumes of new railcar sales with leases attached which typically result in higher sales prices and margins.
Manufacturing operating profit was $325.2 million or 20.2% of revenue for the nine months ended May 31, 2016 and $258.6 million or 17.5% of revenue for the nine months ended May 31, 2015. The $66.6 million or 25.8% increase in operating profit was primarily attributed to an increase in margin due to higher railcar deliveries.
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Wheels & Parts revenue was $247.6 million and $286.7 million for the nine months ended May 31, 2016 and 2015, respectively. The $39.1 million or 13.6% decrease in revenue was primarily a result of lower wheel set, component and parts volumes due to a decrease in demand and a decrease in scrap metal pricing.
Wheels & Parts cost of revenue was $224.2 million and $259.3 million for the nine months ended May 31, 2016 and 2015, respectively. Cost of revenue decreased $35.1 million or 13.5% primarily due to lower wheel set, component and parts costs associated with decreased volumes.
Wheels & Parts margin as a percentage of revenue for the nine months ended May 31, 2016 was 9.4% compared to 9.6% for the nine months ended May 31, 2015. The 0.2% decrease in margin was due to lower wheel set and component volumes and a decrease in scrap metal pricing. These were partially offset by a more favorable parts product mix.
Wheels & Parts operating profit was $15.7 million or 6.3% of revenue for the nine months ended May 31, 2016 and $21.0 million or 7.3% of revenue for the nine months ended May 31, 2015. The $5.3 million or 25.1% decrease in operating profit was primarily attributed to a decrease in margin due to a decrease in volumes.
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Leasing & Services revenue was $225.0 million and $74.6 million for the nine months ended May 31, 2016 and 2015, respectively. The $150.5 million or 201.8% increase in revenue was primarily the result of the sale of railcars for $154.2 million that we purchased from a related third party with the intent to resell them. The gross proceeds from the sale of these railcars with leases attached were recorded as revenue and the cost of purchasing these railcars was recorded in cost of revenue. The increase in revenue was also attributed to a higher average volume of rent-producing leased railcars for syndication, which are held short term and classified as Leased railcars for syndication on our Consolidated Balance Sheet.
Leasing & Services cost of revenue was $180.7 million and $32.9 million for the nine months ended May 31, 2016 and 2015, respectively. Cost of revenue increased $147.8 million or 448.7% primarily due to an increase in costs associated with the sale of railcars that we purchased from a related third party.
Leasing & Services margin as a percentage of revenue for the nine months ended May 31, 2016 was 19.7% compared to 55.8% for the nine months ended May 31, 2015. The 36.1% decrease was primarily as a result of a lower margin percentage on the syndication of railcars purchased from a related third party. This was partially offset by a higher average volume of rent-producing leased railcars for syndication.
Leasing & Services operating profit was $42.7 million or 19.0% of revenue for the nine months ended May 31, 2016 and $31.7 million or 42.5% of revenue for the nine months ended May 31, 2015. The $11.0 million or 34.7% increase in operating profit was primarily attributed to an increase in net gain on disposition of equipment and profit from the sale of railcars that we purchased from a related third party.
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GBW, an unconsolidated 50/50 joint venture, generated total revenue of $289.4 million and $254.7 million for the nine months ended May 31, 2016 and 2015, respectively. The increase in revenue of $34.7 million was primarily due an increase in volume and favorable pricing.
GBW margin as a percentage of revenue for the nine months ended May 31, 2016 was 9.8% compared to 6.0% for the nine months ended May 31, 2015. The increase was primarily attributed to an increase in labor efficiencies in the current year. In addition, the prior year included integration and startup costs.
To reflect our 50% share of GBW’s net results, we recorded earnings of $3.3 million and $0.4 million in Earnings from unconsolidated affiliates for the nine months ended May 31, 2016 and 2015, respectively.
Selling and administrative expense was $118.1 million or 5.7% of revenue for the nine months ended May 31, 2016 compared to $112.2 million or 6.1% of revenue for the prior comparable period. The $5.9 million increase was primarily attributed to a $13.5 million increase in employee-related costs including long-term and short-term incentive compensation, additional headcount and costs associated with a separation and consultation agreement. The increase was also attributed to a $3.0 million increase in consulting costs primarily associated with strategic business development and IT initiatives. These were partially offset by costs incurred in the prior year which included $5.8 million in professional fees and other transaction costs in connection with a potential acquisition, $2.4 million in costs associated with our advocacy of new tank car regulations and $1.9 million in legal, accounting and consulting costs associated with the previously disclosed investigation at our Concarril manufacturing facility.
Net gain on disposition of equipment was $11.3 million for the nine months ended May 31, 2016, compared to $0.9 million for the prior comparable period.
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The $1.2 million increase in interest and foreign exchange expense was primarily attributed to a $2.7 million decrease in foreign exchange gain as compared to the prior comparable period primarily attributed to the change in the Mexican Peso relative to the U.S. Dollar. This was partially offset by a $1.4 million decrease in interest expense as a result of lower average borrowings as compared to the prior year.
The tax rate for the nine months ended May 31, 2016 was 29.5%, compared to 31.5% for the nine months ended May 31, 2015. The decrease in the tax rate was primarily attributable to a change in the proportion of projected pre-tax earnings attributable to our Mexican railcar manufacturing joint venture.
Earnings from unconsolidated affiliates was $2.9 million and $1.6 million for the nine months ended May 31, 2016 and 2015, respectively. Earnings from unconsolidated affiliates primarily included our share of after-tax results from our GBW Joint Venture including eliminations associated with GBW transactions with other Greenbrier entities and our share of after-tax results from our castings joint venture. In addition, the nine months ended May 31, 2016 included our share of after-tax results from our tank head joint venture and our share of after-tax results from our 19.5% ownership stake in a railcar manufacturer in Brazil.
Net earnings attributable to noncontrolling interest was $74.8 million for the nine months ended May 31, 2016 compared to $41.4 million in the prior comparable period. These amounts primarily represent our joint venture partner’s share in the results of operations of our Mexican railcar manufacturing joint venture, adjusted for intercompany sales. The increase of $33.4 million from the prior year is primarily a result of the joint venture operating at higher production rates with higher margins and lower volumes of intercompany activity.
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Liquidity and Capital Resources
Net increase (decrease) in cash and cash equivalents
We have been financed through cash generated from operations and borrowings. At May 31, 2016, cash and cash equivalents were $214.4 million, an increase of $41.5 million from $172.9 million at August 31, 2015.
Cash provided by operating activities was $194.7 million for the nine months ended May 31, 2016 compared to $29.6 million for the nine months ended May 31, 2015. The change from the prior year was primarily due to higher earnings, a change in working capital needs and a change in leased railcars for syndication.
Cash provided by and used in investing activities primarily related to capital expenditures net of proceeds from the sale of assets. Cash provided by investing activities for the nine months ended May 31, 2016 was $33.5 million compared to cash used in investing activities of $100.2 million for the nine months ended May 31, 2015. The change was attributed to higher proceeds from the sale of assets and lower capital expenditures for the nine months ended May 31, 2016 compared to the prior year.
Capital expenditures totaled $51.7 million and $75.9 million for the nine months ended May 31, 2016 and 2015, respectively. Proceeds from the sale of assets, which primarily related to sales of railcars from our lease fleet within Leasing & Services, were approximately $88.7 million and $4.6 million for the nine months ended May 31, 2016 and 2015, respectively. Proceeds from the sale of assets for the nine months ended May 31, 2016 included approximately $37.6 million of equipment that was sold pursuant to a sale and leaseback.
Approximately $35.6 million and $60.6 million of capital expenditures for the nine months ended May 31, 2016 and 2015, respectively were attributable to Manufacturing operations. Capital expenditures for Manufacturing are expected to be approximately $55.0 million in 2016 and primarily relate to maintenance and enhancements of our existing manufacturing facilities.
Approximately $10.3 million and $10.2 million of capital expenditures for the nine months ended May 31, 2016 and 2015, respectively were attributable to Leasing & Services operations and corporate. Leasing & Services and corporate capital expenditures for 2016 are expected to be approximately $30.0 million. Proceeds from sales of leased railcar equipment are expected to be approximately $90.0 million for 2016. Assets from our lease fleet are periodically sold in the normal course of business in order to take advantage of market conditions and to manage risk and liquidity.
Approximately $5.8 million and $5.1 million of capital expenditures for the nine months ended May 31, 2016 and 2015, respectively were attributable to Wheels & Parts operations. Capital expenditures for Wheels & Parts are expected to be approximately $9.0 million in 2016 for maintenance and enhancements of our existing facilities.
Cash used in financing activities was $179.9 million for the nine months ended May 31, 2016 compared to cash provided by financing activities of $14.6 million for the nine months ended May 31, 2015. The change from the prior year was primarily attributed to a decrease in proceeds from debt, net of repayments and an increase in cash distributions to our joint venture partner.
A quarterly dividend of $0.21 per share was declared on June 29, 2016.
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Our Notes payable balance was $306.8 million as of May 31, 2016 which includes Convertible senior notes, due 2026 (the 2026 Notes). On specified dates or in the event of certain fundamental changes, holders can require us to repurchase all or a portion of our 2026 Notes at a price equal to 100% of the principal amount of the 2026 Notes plus accrued and unpaid interest (the Put Option). During the three months ended May 31, 2016, we retired $14.0 million of our then $14.9 million outstanding 2026 Notes pursuant to a scheduled Put Option leaving $0.9 million outstanding in 2026 Notes as of May 31, 2016.
Since October 2013, the Board of Directors has authorized our company to repurchase in aggregate up to $225 million of our common stock. During the nine months ended May 31, 2016, we purchased a total of 1,054,687 shares for approximately $32.4 million. As of May 31, 2016 we had cumulatively repurchased 3,206,226 shares for approximately $137.0 million and had $88.0 million available under the share repurchase program with an expiration date of January 1, 2018.
Senior secured credit facilities, consisting of three components, aggregated to $615.5 million as of May 31, 2016. We had an aggregate of $354.2 million available to draw down under committed credit facilities as of May 31, 2016. This amount consists of $288.7 million available on the North American credit facility, $15.5 million on the European credit facilities and $50.0 million on the Mexican railcar manufacturing joint venture credit facilities.
As of May 31, 2016, a $550.0 million revolving line of credit secured by substantially all of our assets in the U.S. not otherwise pledged as security for term loans, maturing October 2020, was available to provide working capital and interim financing of equipment, principally for the U.S. and Mexican operations. Advances under this facility bear interest at LIBOR plus 1.75% or Prime plus 0.75% depending on the type of borrowing. Available borrowings under the credit facility are generally based on defined levels of inventory, receivables, property, plant and equipment and leased equipment, as well as total debt to consolidated capitalization and fixed charges coverage ratios.
As of May 31, 2016, lines of credit totaling $15.5 million secured by certain of our European assets, with various variable rates that range from Warsaw Interbank Offered Rate (WIBOR) plus 1.2% to WIBOR plus 1.3%, were available for working capital needs of the European manufacturing operation. European credit facilities are continually being renewed. Currently these European credit facilities have maturities that range from February 2017 through June 2017.
Our Mexican railcar manufacturing joint venture had two lines of credit totaling $50.0 million. The first line of credit provides up to $30.0 million and is fully guaranteed by us and our joint venture partner. Advances under this facility bear interest at LIBOR plus 2.0%. The Mexican railcar manufacturing joint venture will be able to draw against this facility through January 2019. The second line of credit provides up to $20.0 million, of which we and our joint venture partner have each guaranteed 50%. Advances under this facility bear interest at LIBOR plus 2.0%. The Mexican railcar manufacturing joint venture will be able to draw amounts available under this facility through August 2017.
As of May 31, 2016, outstanding commitments under the senior secured credit facilities consisted of $81.3 million in letters of credit.
The revolving and operating lines of credit, along with notes payable, contain covenants with respect to us and our various subsidiaries, the most restrictive of which, among other things, limit our ability to: incur additional indebtedness or guarantees; pay dividends or repurchase stock; enter into sale leaseback transactions; create liens; sell assets; engage in transactions with affiliates, including joint ventures and non U.S. subsidiaries, including but not limited to loans, advances, equity investments and guarantees; enter into mergers, consolidations or sales of substantially all our assets; and enter into new lines of business. The covenants also require certain maximum ratios of debt to total capitalization and minimum levels of fixed charges (interest plus rent) coverage. As of May 31, 2016, we were in compliance with all such restrictive covenants.
We may from time to time seek to repurchase or otherwise retire or exchange securities, including outstanding borrowings and equity securities, and take other steps to reduce our debt or otherwise improve our balance sheet. These actions may include open market repurchases, unsolicited or solicited privately negotiated transactions or other retirements, repurchases or exchanges. Such repurchases or exchanges, if any, will depend on a number of factors, including, but not limited to, prevailing market conditions, trading levels of our debt, our liquidity requirements and contractual restrictions, if applicable.
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We have global operations that conduct business in their local currencies as well as other currencies. To mitigate the exposure to transactions denominated in currencies other than the functional currency, we enter into foreign currency forward exchange contracts with established financial institutions to protect the margin on a portion of foreign currency sales in firm backlog. Given the strong credit standing of the counterparties, no provision has been made for credit loss due to counterparty non-performance.
As of May 31, 2016, the Mexican railcar manufacturing joint venture had $0.9 million of third party debt, of which we and our joint venture partner have each guaranteed approximately $0.4 million.
In accordance with customary business practices in Europe, we have $3.2 million in third party warranty guarantee facilities as of May 31, 2016. To date no amounts have been drawn under these guarantee facilities.
We made $5.3 million in cash contributions and $3.75 million in loans to GBW, an unconsolidated 50/50 joint venture, for the nine months ended May 31, 2016. We expect to loan additional amounts of approximately $1.25 million during 2016. We are likely to make additional capital contributions or loans to GBW in the future. As of May 31, 2016, we had a $35.2 million note receivable balance from GBW which is included on the Consolidated Balance Sheet in Accounts receivable, net.
We expect existing funds and cash generated from operations, together with proceeds from financing activities including borrowings under existing credit facilities and long-term financings, to be sufficient to fund dividends, working capital needs, additional investments in GBW, planned capital expenditures and expected debt repayments during the next twelve months.
Off Balance Sheet Arrangements
We do not currently have off balance sheet arrangements that have or are likely to have a material current or future effect on our Consolidated Financial Statements.
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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires judgment on the part of management to arrive at estimates and assumptions on matters that are inherently uncertain. These estimates may affect the amount of assets, liabilities, revenue and expenses reported in the financial statements and accompanying notes and disclosure of contingent assets and liabilities within the financial statements. Estimates and assumptions are periodically evaluated and may be adjusted in future periods. Actual results could differ from those estimates.
Income taxes - For financial reporting purposes, income tax expense is estimated based on amounts anticipated to be reported on tax return filings. Those anticipated amounts may change from when the financial statements are prepared to when the tax returns are filed. Further, because tax filings are subject to review by taxing authorities, there is risk that a position taken in preparation of a tax return may be challenged by a taxing authority. If a challenge is successful, differences in tax expense or between current and deferred tax items may arise in future periods. Any material effect of such differences would be reflected in the financial statements when management considers the effect probable of occurring and the amount reasonably estimable. Valuation allowances reduce deferred tax assets to amounts more likely than not that will be realized based on information available when the financial statements are prepared. This information 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 operations. The estimated warranty cost is based on historical warranty claims for each particular product type. For new product types without a warranty history, preliminary estimates are based on historical information for similar product types. These estimates are inherently uncertain as they are based on historical data for existing products and judgment for new products. If warranty claims are made in the current period for issues that have not historically been the subject of warranty claims and were not taken into consideration in establishing the accrual or if claims for issues already considered in establishing the accrual exceed expectations, warranty expense may exceed the accrual for that particular product. Conversely, there is the possibility that claims may be lower than estimates. The warranty accrual is periodically reviewed and updated based on warranty trends. However, as we cannot predict future claims, the potential exists for the difference in any one reporting period to be material.
Environmental costs - At times we may be involved in various proceedings related to environmental matters. We estimate future costs for known environmental remediation requirements and accrue for them when it is probable that we have incurred a liability and the related costs can be reasonably estimated based on currently available information. If further developments in or resolution of an environmental matter result in facts and circumstances that are significantly different than the assumptions used to develop these reserves, the accrual for environmental remediation could be materially understated or overstated. Adjustments to these liabilities are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or when expenditures for which reserves are established are made. Due to the uncertain nature of environmental matters, there can be no assurance that we will not become involved in future litigation or other proceedings or, if we were found to be responsible or liable in any litigation or proceeding, that such costs would not be material to us.
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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 collectability is reasonably assured.
Railcars are generally manufactured, repaired or refurbished and wheels 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. Under the percentage of completion method, revenue is recognized based on the progress toward contract completion measured by actual costs incurred to date in relation to the estimate of total expected costs. Under the completed contract method, revenue is not recognized until the project has been fully completed.
We will periodically sell railcars with leases attached to financial investors. Revenue and cost of revenue associated with railcars that the Company has manufactured are recognized in Manufacturing once sold. Revenue and cost of revenue associated with railcars which were obtained from a third party with the intent to resell them and subsequently sold are recognized in Leasing & Services. In addition we will often perform management or maintenance services at market rates for these railcars. Pursuant to the guidance in Accounting Standards Codification (ASC) 840-20-40, we evaluate the terms of any remarketing agreements and any contractual provisions that represent retained risk and the level of retained risk based on those provisions. We determine whether the level of retained risk exceeds 10% of the individual fair value of the railcars with leases attached that are delivered. For any contracts with multiple elements (i.e. railcars, maintenance, management services, etc.) we allocate revenue among the deliverables primarily based upon objective and reliable evidence of the fair value of each element in the arrangement. If objective and reliable evidence of fair value of any element is not available, we will use the element’s estimated selling price for purposes of allocating the total arrangement consideration among the elements.
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 - We periodically acquire businesses in purchase transactions in which the allocation of the purchase price may result in the recognition of goodwill and other intangible assets. The determination of the value of such intangible assets requires management to make estimates and assumptions. These estimates affect the amount of future period amortization and possible impairment charges.
Goodwill and indefinite-lived intangible assets are tested for impairment annually during the third quarter. Goodwill and indefinite-lived intangible assets are also tested more frequently if changes in circumstances or the occurrence of events indicates that a potential impairment exists. When changes in circumstances, such as a decline in the market price of our common stock, changes in demand or in the numerous variables associated with the judgments, assumptions and estimates made in assessing the appropriate valuation of goodwill indicate the carrying amount of certain indefinite lived assets may not be recoverable, the assets are evaluated for impairment. Among other things, our assumptions used in the valuation of goodwill include growth of revenue and margins, market multiples, discount rates and increased cash flows over time. If actual operating results were to differ from these assumptions, it may result in an impairment of our goodwill.
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The provisions of 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 $43.3 million goodwill balance as of May 31, 2016 relates to the Wheels & Parts segment. Goodwill was tested during the third quarter of 2016 and we concluded that goodwill was not impaired.
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Foreign Currency Exchange Risk
We have global operations that conduct business in their local currencies as well as other currencies. To mitigate the exposure to transactions denominated in currencies other than the functional currency of each entity, we enter into foreign currency forward exchange contracts to protect revenue or margin on a portion of forecast foreign currency sales and expenses. At May 31, 2016 exchange rates, forward exchange contracts the purchase of Polish Zlotys and the sale of Euros and U.S. Dollars; the purchase of Mexican Pesos and the sale of U.S. Dollars; and for the purchase of U.S. Dollars and the sale of Saudi Riyals aggregated to $429.7 million. Because of the variety of currencies in which purchases and sales are transacted and the interaction between currency rates, it is not possible to predict the impact a movement in a single foreign currency exchange rate would have on future operating results.
In addition to exposure to transaction gains or losses, we are also exposed to foreign currency exchange risk related to the net asset position of our foreign subsidiaries. At May 31, 2016, net assets of foreign subsidiaries aggregated $56.5 million and a 10% strengthening of the U.S. Dollar relative to the foreign currencies would result in a decrease in equity of $5.7 million, or 0.7% of Total equity - Greenbrier. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. Dollar.
Interest Rate Risk
We have managed a portion of our variable rate debt with interest rate swap agreements, effectively converting $93.0 million of variable rate debt to fixed rate debt. As a result, we are exposed to interest rate risk relating to our revolving debt and a portion of term debt, which are at variable rates. At May 31, 2016, 69% of our outstanding debt had fixed rates and 31% had variable rates. At May 31, 2016, a uniform 10% increase in variable interest rates would result in approximately $0.2 million of additional annual interest expense.
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Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our President and Chief Executive Officer and our Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the Exchange Act). Based on that evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended May 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
There is hereby incorporated by reference the information disclosed in Note 13 to Consolidated Financial Statements, Part I of this quarterly report.
This Form 10-Q should be read in conjunction with the risk factors and information disclosed in our Annual Report on Form 10-K for the year ended August 31, 2015. There have been no material changes in the risk factors described in our Annual Report on Form 10-K for the year ended August 31, 2015, except for the risk factor below.
We have potential exposure to environmental liabilities, which could increase costs or have an adverse effect on results of operations.
We are subject to extensive national, state, provincial and local environmental laws and regulations concerning, among other things, air emissions, water discharge, solid waste and hazardous substances handling and disposal and employee health and safety. These laws and regulations are complex and frequently change. We could incur unexpected costs, penalties and other civil and criminal liability if we fail to comply with environmental laws or permits issued to us pursuant to those laws. We also could incur costs or liabilities related to off-site waste disposal or remediating soil or groundwater contamination at our properties, including these set forth below and in the “Environmental Matters” section of this Report. In addition, future environmental laws and regulations may require significant capital expenditures or changes to our operations.
In addition to environmental, health and safety laws, the transportation of commodities by railcar raises potential risks in the event of a derailment or other accident. Generally, liability under existing law in the U.S. and Canada for accidents such as derailments depends on the negligence of the party. However, for certain hazardous commodities being shipped, strict liability concepts may apply.
Our Portland, Oregon manufacturing facility is located adjacent to the Willamette River. We have entered into a Voluntary Cleanup Agreement with the Oregon Department of Environmental Quality (DEQ) in which we 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. We are also conducting groundwater remediation relating to a historical spill on the property which preceded our ownership.
The U.S. Environmental Protection Agency (EPA) has classified portions of the river bed of the Portland Harbor, including the portion fronting the Company’s manufacturing facility, as a federal “National Priority List” or “Superfund” site due to sediment contamination (the Portland Harbor Site). We, along with more than 140 other parties, have received a “General Notice” of potential liability from the EPA relating to the Portland Harbor Site. The letter advised us that we may be liable for the costs of investigation and remediation (which liability may be joint and several with other potentially responsible parties) as well as for natural resource damages resulting from releases of hazardous substances to the site. We are part of a group that 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. We have agreed to initially bear a percentage of the total costs incurred in connection with the investigation. We cannot provide assurance that any such costs will be recoverable from third parties.
On June 8, 2016, EPA issued its Feasibility Study (“FS”) and Proposed Plan for the Portland Harbor Site. EPA is accepting comments from the public on its Proposed Plan through August 8, 2016. EPA’s FS includes remediation alternatives that would take from 4 to 62 years of active remediation, with an undiscounted cost ranging from $642 million to $10.2 billion and a net present value assuming a 7% discount rate ranging between $451 million and $9.4 billion. The Proposed Plan identifies the alternative currently favored by EPA, which it assigns an estimated undiscounted cost of between $1.1 and $1.2 billion and a net present value of between $746 and $811 million. EPA expects its cost estimates to be accurate within a range of +50 to -30 percent. EPA estimates that the remedy in the Proposed Plan would take 7 years of active remediation followed by 30 years of monitoring. EPA’s FS and its
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Proposed Plan identify 13 Sediment Decision Units. One of the units, RM9W, includes the nearshore area of the river sediments offshore of our Portland, Oregon manufacturing facility as well as upstream and downstream of the facility. It also includes a portion of our riverbank. Neither the FS nor the Proposed Plan breaks down total remediation costs by unit. Neither the feasibility study nor the Proposed Plan addresses responsibility for the costs of clean-up or allocates such costs among potentially responsible parties. Responsibility for funding and implementing the EPA’s selected cleanup option will be determined after the issuance of the Record of Decision, which is scheduled for December 31, 2016.
We have also signed an Order on Consent with DEQ to finalize the investigation of potential onsite sources of contamination that may have a release pathway to the Willamette River. Interim precautionary measures are also required in the order and we are currently discussing with the DEQ potential remedial actions which may be required. Our aggregate expenditure has not been material during the 14-year period, however, we could incur significant expenses for remediation. Some or all of any such outlay may be recoverable from other responsible parties. However, we cannot assure that any such costs will be recoverable from third parties.
Because these environmental investigations are still underway, sufficient information is currently not available to determine our liability, if any, for the cost of any required remediation of the Portland Harbor Site on our adjacent land or to estimate a range of potential loss. Based on the results of the pending investigations and future assessments of natural resource damages, we may be required to incur costs associated with additional phases of investigation or remedial action, and may be liable for damages to natural resources. In addition, we may be required to perform periodic maintenance dredging in order to continue to launch vessels from our launch ways in Portland, Oregon, on the Willamette River, and the river’s classification as a Superfund site could result in some limitations on future dredging and launch activities. Any of these matters could adversely affect our business and Consolidated Financial Statements, or the value of our Portland property.
Since October 2013, the Board of Directors has authorized the Company to repurchase in aggregate up to $225 million of the Company’s common stock. The program may be modified, suspended or discontinued at any time without prior notice and currently has an expiration date of January 1, 2018. Under the share repurchase program, shares of common stock may be purchased on the open market or through privately negotiated transactions from time-to-time. The timing and amount of purchases will be based upon market conditions, securities law limitations and other factors. The share repurchase program does not obligate the Company to acquire any specific number of shares in any period.
There were no shares repurchased under the share repurchase program during the three months ended May 31, 2016.
Period
March 1, 2016 – March 31, 2016
April 1, 2016 – April 30, 2016
May 1, 2016 – May 31, 2016
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(a) List of Exhibits:
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
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