UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended May 31, 2020
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ______ to ______
Commission File No. 1-13146
THE GREENBRIER COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Oregon
93-0816972
(State of Incorporation)
(I.R.S. Employer Identification No.)
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock without par value
GBX
New York Stock Exchange
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares of the registrant’s common stock, without par value, outstanding on July 6, 2020 was 32,700,933 shares.
FORM 10-Q
Table of Contents
Page
Forward-Looking Statements
1
PART I.
FINANCIAL INFORMATION
4
Item 1.
Condensed Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Income
5
Condensed Consolidated Statements of Comprehensive Income
6
Condensed Consolidated Statements of Equity
7
Condensed Consolidated Statements of Cash Flows
9
Notes to Condensed Consolidated Financial Statements
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
49
Item 4.
Controls and Procedures
50
PART II.
OTHER INFORMATION
51
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
53
Item 6.
Exhibits
54
Signatures
55
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events and include any statement that does not relate to any historical or current fact. We use words such as “anticipates,” “believes,” “forecast,” “potential,” “contemplates,” “expects,” “intends,” “plans,” “projects,” “seeks,” “estimates,” “could,” “would,” “should,” “likely,” “will,” “may,” “can,” “future,” “preliminary” and similar expressions to identify forward-looking statements. In addition, any statements that refer to the costs or revenue related to the completion of contracts, timing of recognition of revenue, the estimated and anticipated impact of the ARI acquisition (including working capital true up, and purchase price allocation, among other factors), estimated warranty costs, contingencies, fair value estimates, and any statements that explicitly or implicitly draw trends in our performance or the markets in which we operate, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements are not guarantees of future performance.
Forward-looking statements are based on currently available operating, financial and market information and are subject to various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to:
•
the COVID-19 coronavirus pandemic, the governmental reaction to COVID-19 and the related significant global decline in general economic activity having a materially negative impact on our business, liquidity and financial position, results of operations, stock price, and our ability to convert backlog to revenue as more fully described in Part II Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q;
the cyclical nature of our business, economic downturns and a rising interest rate environment;
changes in our product mix or decline in revenue due to shifts in demand or fluctuations in commodity and energy prices caused by a number of factors including, among others, COVID-19 and related governmental action;
a decline in performance or demand of the rail freight industry;
an oversupply or increase in efficiency in the rail freight industry;
difficulty integrating acquired businesses or joint ventures;
our inability to convert backlog to future revenues;
risks related to our operations outside of the U.S., including anti-bribery violations;
governmental policy changes impacting international trade and corporate tax;
the loss of or reduction of business from one or more of our limited number of customers;
inability to lease railcars at satisfactory rates, or realize expected residual values on sale of railcars at the end of a lease;
shortages of skilled labor, increased labor costs, or failure to maintain good relations with our workforce;
equipment failures, technological failures, costs and inefficiencies associated with changing of production lines, or transfer of production between facilities;
inability to compete successfully;
suitable joint ventures, acquisition opportunities and new business endeavors may not be identified or concluded;
inability to complete capital expenditure projects efficiently or to cause capital expenditure projects to operate as anticipated;
inability to design or manufacture products or technologies or to achieve timely certification or market acceptance of new products or technologies;
unsuccessful relationships with our joint venture partners;
environmental liabilities, including the Portland Harbor Superfund Site;
the timing of our asset sales and related revenue recognition may result in comparisons between fiscal periods not being accurate indicators of future performance;
attrition within our management team or unsuccessful succession planning for members of our senior management team and other key employees who are at or nearing retirement age;
changes in the credit markets and the financial services industry;
volatility in the global financial markets;
our actual results differing from our announced expectations;
fluctuations in the availability and price of energy, freight transportation, steel and other raw materials;
inability to procure specialty components or services on commercially reasonable terms or on a timely basis from a limited number of suppliers;
existing indebtedness may limit our ability to borrow additional amounts in the future, may expose us to increasing interest rates, and may expose us to a material adverse effect on our business if we are unable to service our debt or obtain additional financing;
train derailments or other accidents or claims;
changes in or failure to comply with legal and regulatory requirements;
an adverse outcome in any pending or future litigation or investigation;
potential misconduct by employees;
labor strikes or work stoppages;
the volatility of our stock price;
dilution to investors resulting from raising additional capital or due to other reasons;
product and service warranty claims;
misuse of our products by third parties;
write-downs of goodwill or intangibles in future periods;
conversion at our option of our outstanding convertible notes resulting in dilution to our then-current stockholders;
as a holding company with no operations, our reliance on our subsidiaries and joint ventures and their ability to make distributions to us;
2
governing documents, the terms of our convertible notes, and Oregon law could make a change of control or acquisition of our business by a third party difficult;
the discretion of our Board of Directors to pay or not pay dividends on our common stock;
fluctuations in foreign currency exchange rates;
inability to raise additional capital to operate our business and achieve our business objectives;
shareholder activism could cause us to incur significance expense, impact our stock price, and hinder execution of our business strategy;
cybersecurity risks;
updates or changes to our information technology systems resulting in problems;
inability to protect our intellectual property and prevent its improper use by third parties;
claims by third parties that our products or services infringe their intellectual property rights;
liability for physical damage, business interruption or product liability claims that exceed our insurance coverage;
inability to procure adequate insurance on a cost-effective basis;
changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies;
fires, natural disasters, severe weather conditions or public health crises;
unusual weather conditions which reduce demand for our wheel-related parts and repair services;
business, regulatory, and legal developments regarding climate change which may affect the demand for our products or the ability of our critical suppliers to meet our needs;
repercussions from terrorist activities or armed conflict;
unanticipated changes in our tax provisions or exposure to additional income tax liabilities;
the inability of certain of our customers to utilize tax benefits or tax credits; and
suspension or termination of our share repurchase program.
The foregoing risks are described in more detail in Part I Item 1A “Risk Factors” in our most recent Annual Report on Form 10-K and our subsequent Quarterly Reports on Form 10-Q, which are incorporated herein by reference. You are cautioned not to place undue reliance on any forward-looking statements, which reflect management’s opinions only as of the date hereof. 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.
3
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
(In thousands, unaudited)
May 31,
2020
August 31,
2019
Assets
Cash and cash equivalents
$
735,258
329,684
Restricted cash
8,704
8,803
Accounts receivable, net
261,629
373,383
Inventories
675,442
664,693
Leased railcars for syndication
136,144
182,269
Equipment on operating leases, net
355,841
366,688
Property, plant and equipment, net
719,155
717,973
Investment in unconsolidated affiliates
75,508
91,818
Intangibles and other assets, net
181,315
125,379
Goodwill
130,035
129,947
3,279,031
2,990,637
Liabilities and Equity
Revolving notes
416,535
27,115
Accounts payable and accrued liabilities
488,969
568,360
Deferred income taxes
4,354
13,946
Deferred revenue
63,536
85,070
Notes payable, net
806,919
822,885
Commitments and contingencies (Note 15)
Contingently redeemable noncontrolling interest
30,611
31,564
Equity:
Greenbrier
Preferred stock - without par value; 25,000 shares
authorized; none outstanding
—
Common stock - without par value; 50,000 shares
authorized; 32,701 and 32,488 shares outstanding at
May 31, 2020 and August 31, 2019
Additional paid-in capital
459,668
453,943
Retained earnings
894,619
867,602
Accumulated other comprehensive loss
(63,066
)
(44,815
Total equity – Greenbrier
1,291,221
1,276,730
Noncontrolling interest
176,886
164,967
Total equity
1,468,107
1,441,697
The accompanying notes are an integral part of these financial statements
(In thousands, except per share amounts, unaudited)
Three Months Ended
Nine Months Ended
Revenue
Manufacturing
653,007
681,588
1,800,317
1,629,396
Wheels, Repair & Parts
82,024
124,980
259,857
358,801
Leasing & Services
27,526
49,584
95,590
131,149
762,557
856,152
2,155,764
2,119,346
Cost of revenue
562,793
590,788
1,567,014
1,451,589
75,001
119,821
241,266
339,254
17,232
38,971
61,428
95,554
655,026
749,580
1,869,708
1,886,397
Margin
107,531
106,572
286,056
232,949
Selling and administrative expense
49,494
54,377
158,455
152,701
Net gain on disposition of equipment
(8,775
(11,019
(19,431
(37,474
Goodwill impairment
10,025
Earnings from operations
66,812
53,189
147,032
107,697
Other costs
Interest and foreign exchange
7,562
9,770
33,023
23,411
Earnings before income taxes and earnings (loss) from
unconsolidated affiliates
59,250
43,419
114,009
84,286
Income tax expense
(24,421
(13,008
(37,878
(24,391
Earnings before earnings (loss) from unconsolidated
affiliates
34,829
30,411
76,131
59,895
Earnings (loss) from unconsolidated affiliates
1,040
(4,564
3,764
(4,883
Net earnings
35,869
25,847
79,895
55,012
Net earnings attributable to noncontrolling interest
(8,097
(10,599
(30,825
(19,043
Net earnings attributable to Greenbrier
27,772
15,248
49,070
35,969
Basic earnings per common share
0.85
0.47
1.50
1.10
Diluted earnings per common share
0.83
0.46
1.47
1.08
Weighted average common shares:
Basic
32,690
32,603
32,660
32,623
Diluted
33,478
33,183
33,414
33,161
Dividends declared per common share
0.27
0.25
0.79
0.75
Other comprehensive income (loss)
Translation adjustment
(11,029
(5,083
(13,315
(7,269
Reclassification of derivative financial
instruments recognized in net earnings 1
1,845
306
2,322
1,476
Unrealized loss on derivative financial
instruments 2
(5,643
(1,729
(7,127
(5,066
Other (net of tax effect)
81
(1
(140
75
(14,746
(6,507
(18,260
(10,784
Comprehensive income
21,123
19,340
61,635
44,228
Comprehensive income attributable to noncontrolling
interest
(8,096
(10,590
(30,816
(19,013
Comprehensive income attributable to Greenbrier
13,027
8,750
30,819
25,215
Net of tax effect of ($0.6 million) and ($0.1 million) for the three months ended May 31, 2020 and 2019 and ($0.8 million) and ($0.5 million) for the nine months ended May 31, 2020 and 2019.
Net of tax effect of $2.1 million and $0.5 million for the three months ended May 31, 2020 and 2019 and $2.8 million and $1.6 million for the nine months ended May 31, 2020 and 2019.
Attributable to Greenbrier
Common
Stock
Shares
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Equity -
Noncontrolling
Interest
Equity
Contingently
Redeemable
Balance August 31, 2019
32,488
Cumulative effect adjustment
due to adoption of ASU
2016-02 (See Note 1)
4,393
31,778
80,848
(953
Other comprehensive loss, net
(18,251
(9
adjustments
2,826
Joint venture partner
distribution declared
(34,751
Noncontrolling interest acquired
12,075
Restricted stock awards (net of
cancellations)
213
6,797
Unamortized restricted stock
(9,063
Restricted stock amortization
7,991
Cash dividends ($0.79 per
share)
(26,446
Balance May 31, 2020
32,701
Balance February 29, 2020
32,642
458,908
875,885
(48,321
1,286,472
201,410
1,487,882
30,782
8,268
36,040
(171
(14,745
(6,212
(26,579
59
(4,317
3,945
1,132
Cash dividends ($0.27 per
(9,038
Balance August 31, 2018
32,191
442,569
830,898
(23,366
1,250,101
134,114
1,384,215
29,768
Cumulative effect adjustment due
to adoption of Topic 606
5,461
24,089
60,058
(5,046
(10,754
(30
7,322
Joint venture partner distribution
declared
(12,494
1,915
293
12,721
(17,445
11,157
Cash dividends ($0.75 per share)
(24,895
Balance May 31, 2019
32,484
449,002
847,433
(34,120
1,262,315
154,916
1,417,231
24,722
Balance February 28, 2019
32,379
444,962
840,478
(27,622
1,257,818
145,459
1,403,277
25,637
11,514
26,762
(915
(6,498
2,016
(4,064
105
38
4,002
Cash dividends ($0.25 per share)
(8,293
8
Nine Months
Cash flows from operating activities
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
(11,450
(20,478
Depreciation and amortization
82,452
60,833
Accretion of debt discount
4,102
3,268
Stock based compensation expense
8,265
10,792
Noncontrolling interest adjustments
568
1,916
Decrease (increase) in assets:
110,431
27,926
12,555
(169,813
(38,826
(43,796
Other assets
(59,212
(2,525
Increase (decrease) in liabilities:
(77,243
30,581
(5,900
(27,712
Net cash provided by (used in) operating activities
89,032
(94,123
Cash flows from investing activities
Proceeds from sales of assets
78,521
100,730
Capital expenditures
(55,326
(149,945
Investment in and advances to unconsolidated affiliates
(1,500
(11,393
Cash distribution from unconsolidated affiliates and other
11,273
1,986
Net cash provided by (used in) investing activities
32,968
(58,622
Cash flows from financing activities
Net change in revolving notes with maturities of 90 days or less
214,932
(1,882
Proceeds from revolving notes with maturities longer than 90 days
175,000
Proceeds from issuance of notes payable
225,000
Repayments of notes payable
(24,002
(179,803
Debt issuance costs
(2,974
Dividends
(26,344
(25,072
Cash distribution to joint venture partner
(36,152
(11,715
Tax payments for net share settlement of restricted stock
(2,266
(6,321
Net cash provided by (used in) financing activities
301,168
(2,767
Effect of exchange rate changes
(17,693
(2,866
Increase (decrease) in cash and cash equivalents and restricted cash
405,475
(158,378
Cash and cash equivalents and restricted cash
Beginning of period
338,487
539,474
End of period
743,962
381,096
Balance sheet reconciliation
359,625
21,471
Total cash and cash equivalents and restricted cash as presented above
Cash paid during the period for
16,757
11,350
Income taxes, net
36,393
45,904
Non-cash activity
Transfer from Leased railcars for syndication to Equipment on operating leases, net
55,739
42,802
Capital expenditures accrued in Accounts payable and accrued liabilities
2,769
14,455
Change in Accounts payable and accrued liabilities associated with dividends declared
(102
177
Conversion of unconsolidated affiliate note receivable to Investment in unconsolidated affiliates
4,760
Change in Accounts payable and accrued liabilities associated with cash
distributions to joint venture partner
1,401
(779
(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, 2020 and for the three and nine months ended May 31, 2020 and 2019 have been prepared to 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, 2020 are not necessarily indicative of the results to be expected for the entire year ending August 31, 2020.
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 unaudited financial statements should be read in conjunction with the Consolidated Financial Statements contained in the Company’s 2019 Annual Report on Form 10-K.
Management Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires judgment on the part of management to arrive at estimates and assumptions on matters that are inherently uncertain. These estimates may affect the amount of assets, liabilities, 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.
Initial Adoption of Accounting Standards
Lease accounting
On September 1, 2019, the Company adopted Accounting Standards Update 2016-02, Leases (Topic 842). The new guidance supersedes existing guidance on accounting for leases in Topic 840 and is intended to increase the transparency and comparability of accounting for lease transactions. Topic 842 requires most leases to be recognized on the balance sheet by recording a right-of-use (ROU) asset and a lease liability. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting remains similar to the prior model, but updated to align with certain changes to the lessee model and ASC 606: Revenue from Contracts with Customers (Topic 606).
The Company adopted the provisions of the new standard using the modified retrospective adoption method, utilizing the simplified transition option which allows entities to continue to apply the legacy guidance in Topic 840 in the comparative periods presented in the year of adoption. The Company elected the “package of practical expedients,” which allows it to not reassess under the new guidance prior conclusions about lease identification, lease classification, and initial direct costs. The Company did not elect the use-of-hindsight practical expedient. The Company elected to not separate lease and non-lease components. The Company elected the short-term lease recognition exemption for all leases that qualify, which means it will not recognize ROU assets or lease liabilities for leases with lease terms of less than twelve months. Following the adoption of Topic 842, the Company will utilize both Topic 842 and Topic 606 when evaluating retained risk of services and other performance obligations in conjunction with selling railcars with a lease attached as part of the syndication model.
As a result of adoption, the Company recognized operating lease ROU assets and lease liabilities of $40.4 and $41.6 million, respectively, as of September 1, 2019. The Company also recognized an immaterial finance lease asset and corresponding lease liability. Additionally, the Company derecognized certain existing property, plant and equipment and deferred revenue for railcar transactions previously not qualifying as sales due to continuing involvement, that now qualify as sales under the new guidance. The gain associated with this change in accounting, was mostly offset by the recognition of a new guarantee liability. The adoption of this new standard also required the Company to eliminate deferred gains associated with certain sale-leaseback transactions. A cumulative-effect adjustment of $4.4 million was recorded as an increase to retained earnings as of September 1, 2019.
Derivatives and Hedging
In August 2017, the FASB issued Accounting Standards Update 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). This update improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance. The guidance expands the ability to qualify for hedge accounting for non-financial and financial risk components, reduces complexity in fair value hedges of interest rate risk and eliminates the requirement to separately measure and report hedge ineffectiveness, as well as eases certain hedge effectiveness assessment requirements. The Company adopted this guidance effective September 1, 2019 and it did not have a material impact on our consolidated financial statements.
Prospective Accounting Changes
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued Accounting Standard Update 2016-13, Financial Instruments – Credit Losses (ASU 2016-13). This update introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new guidance will apply to loans, accounts receivable, trade receivables, other financial assets measured at amortized cost, loan commitments and other off-balance sheet credit exposures. The new guidance will also apply to debt securities and other financial assets measured at fair value through other comprehensive income. The new guidance is effective for annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company plans to adopt this guidance beginning September 1, 2020. The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures.
Note 2 – Revenue Recognition
Contract balances
Contract assets primarily consist of unbilled receivables related to marine vessel construction and railcar repair services, for which the respective contracts do not yet permit billing at the reporting date. Contract liabilities primarily consist of customer prepayments for manufacturing, maintenance, and other management-type services, for which the Company has not yet satisfied the related performance obligations.
The contract balances are as follows:
(in thousands)
Balance sheet classification
change
Contract assets
7,471
10,196
(2,725
Contract liabilities 1
47,648
52,118
(4,470
Contract liabilities balance includes deferred revenue within the scope of Topic 606.
For the three and nine months ended May 31, 2020, the Company recognized $2.7 million and $27.2 million of revenue that was included in Contract liabilities as of August 31, 2019.
11
Performance obligations
As of May 31, 2020, the Company has entered into contracts with customers for which revenue has not yet been recognized. The following table outlines estimated revenue related to performance obligations wholly or partially unsatisfied, that the Company anticipates will be recognized in future periods.
(in millions)
Revenue type:
Manufacturing – Railcar sales
2,292.1
Manufacturing – Marine
36.8
Services
134.8
132.3
Manufacturing – Railcars intended for syndication 1
239.1
Not a performance obligation as defined in Topic 606
Based on current production and delivery schedules and existing contracts, approximately $0.4 billion of the Railcar sales amount is expected to be recognized in the final three months of 2020 while the remaining amount is expected to be recognized through 2024. The table above excludes estimated revenue to be recognized at the Company’s Brazilian manufacturing operations, as they are accounted for under the equity method.
Revenue amounts reflected in Railcars intended for syndication may be syndicated to third parties or held in the Company’s fleet depending on a variety of factors.
Marine revenue is expected to be recognized through 2021 as vessel construction is completed.
Services includes management and maintenance services of which approximately 45% are expected to be performed through 2024 and the remaining amount through 2037.
Note 3 – Acquisitions
Manufacturing business of American Railcar Industries, Inc. (ARI)
On July 26, 2019, the Company completed its acquisition of the manufacturing business of ARI for a purchase price of approximately $417.2 million. In connection with the acquisition, the Company acquired two railcar manufacturing facilities in Arkansas, as well as other facilities which produce a range of railcar components and parts and create enhanced vertical integration for our manufacturing operations. The purchase price included approximately $8.5 million for capital expenditures on railcar lining operations and other facility improvements. Included in the acquisition were equity interests in two railcar component manufacturing businesses which Greenbrier accounts for under the equity method of accounting and recognized at their respective fair value as investments in unconsolidated affiliates.
The purchase price was funded by, and consisted of, a combination of cash on hand, the proceeds of a $300 million secured term loan and the issuance to the seller of a $50 million senior convertible note.
For the nine months ended May 31, 2020, the operations contributed by ARI’s manufacturing business generated revenues of $338.7 million and net earnings of $6.7 million, which are reported in the Company’s consolidated financial statements as part of the Manufacturing segment.
12
The preliminary purchase price of the net assets acquired from ARI was allocated as follows:
27,659
98,053
225,045
Investments in unconsolidated affiliates
40,314
36,785
56,514
Total assets acquired
484,370
Total liabilities assumed
67,174
Net assets acquired
417,196
The above purchase price allocation, including the residual amount allocated to goodwill, is based on preliminary information and is subject to change as additional information is obtained related to the amounts allocated to the assets acquired and liabilities assumed. During the measurement period, which may extend up to 12 months after the date of acquisition, the Company will adjust these assets and liabilities if new information is obtained about the facts and circumstances that existed as of the acquisition date and revised amounts will be recorded as of that date. The effect of measurement period adjustments to the estimated amounts will be reflected on a prospective basis and were not material during the nine months ended May 31, 2020.
The identified intangible assets assumed in the acquisition were recognized as follows:
Fair value
Weighted
average
estimated
useful life
(in years)
Trademarks and patents
19,500
Customer and supplier relationships
16,071
Identified intangible assets subject to amortization
35,571
Other identified intangible assets not subject to
amortization
860
Total identified intangible assets
36,431
Note 4 – Inventories
Inventories are valued at the lower of cost or net realizable value using the first-in first-out method. Work-in-process includes material, labor and overhead. Finished goods includes completed wheels, parts and railcars not on lease or in transit. The following table summarizes the Company’s inventory balance:
(In thousands)
Manufacturing supplies and raw materials
326,686
387,015
Work-in-process
148,342
156,614
Finished goods
219,050
130,576
Excess and obsolete adjustment
(18,636
(9,512
13
Note 5 – 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
89,722
Accumulated amortization
(54,600
(48,850
Other intangibles
36,748
34,031
(9,274
(6,908
62,596
67,995
Intangible assets not subject to amortization
2,513
5,450
Prepaid and other assets
19,646
15,749
Operating lease ROU assets
56,886
Nonqualified savings plan investments
32,165
27,967
Revolving notes issuance costs, net
3,859
4,568
Assets held for sale
3,650
Total Intangible and other assets, net
Amortization expense was $2.7 million and $8.2 million for the three and nine months ended May 31, 2020 and $1.3 million and $4.6 million for the three and nine months ended May 31, 2019. Amortization expense for the years ending August 31, 2020, 2021, 2022, 2023 and 2024 is expected to be $10.4 million, $10.4 million, $7.0 million, $5.8 million and $5.8 million, respectively.
Note 6 – Revolving Notes
Senior secured credit facilities, consisting of three components, aggregated to $705.1 million as of May 31, 2020.
As of May 31, 2020, a $600.0 million revolving line of credit, maturing June 2024, 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 1.50% or Prime plus 0.50% depending on the type of borrowing. Available borrowings under the credit facility are generally based on defined levels of eligible inventory, receivables, property, plant and equipment and leased equipment, as well as total debt to consolidated capitalization and fixed charges coverage ratios.
As of May 31, 2020, lines of credit totaling $55.1 million secured by certain of the Company’s European assets, with variable rates that range from Warsaw Interbank Offered Rate (WIBOR) plus 1.1% to WIBOR plus 1.5% and Euro Interbank Offered Rate (EURIBOR) plus 1.1%, were available for working capital needs of the European manufacturing operations. The European lines of credit include $13.9 million of facilities which are guaranteed by the Company. European credit facilities are regularly renewed. Currently, these European credit facilities have maturities that range from August 2020 through July 2021.
As of May 31, 2020, the Company’s 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. Advances under this facility bear interest at LIBOR plus 3.75% to 4.25%. The Mexican railcar manufacturing joint venture will be able to draw against this facility through March 2024. 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 3.75%. The Mexican railcar manufacturing joint venture will be able to draw amounts available under this facility through June 2021.
14
As of May 31, 2020, outstanding commitments under the senior secured credit facilities consisted of $28.7 million in letters of credit and $350.0 million in borrowings under the North American credit facility, $46.5 million outstanding under the European credit facilities and $20.0 million outstanding under the Mexican credit facilities. As of May 31, 2020, the Company had an aggregate of $136.8 million available to draw down under committed credit facilities.
As of August 31, 2019, outstanding commitments under the senior secured credit facilities consisted of $24.4 million in letters of credit under the North American credit facility and $27.1 million outstanding under the European credit facilities.
Note 7 – Accounts Payable and Accrued Liabilities
Trade payables
161,900
302,009
Other accrued liabilities
106,200
108,939
Operating lease liabilities
58,158
Accrued payroll and related liabilities
100,152
106,669
Accrued warranty
47,743
46,678
Income taxes payable
14,816
4,065
Note 8 – 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
46,850
24,994
27,395
Charged to cost of revenue, net
2,600
1,235
5,862
4,088
Payments
(1,518
(2,004
(4,653
(6,801
Currency translation effect
(189
(260
(144
(717
Balance at end of period
23,965
15
Note 9 – Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, net of tax effect as appropriate, consisted of the following:
Unrealized
Gain (Loss)
on Derivative
Financial
Instruments
Foreign
Currency
Translation
Adjustment
Balance, August 31, 2019
(8,841
(34,194
(1,780
Other comprehensive loss before
reclassifications
(13,306
(20,573
Amounts reclassified from Accumulated
other comprehensive loss
Balance, May 31, 2020
(13,646
(47,500
(1,920
The amounts reclassified out of Accumulated other comprehensive loss into the Consolidated Statements of Income, with financial statement caption, were as follows:
Financial Statement Caption
(Gain) loss on derivative financial
instruments:
Foreign exchange contracts
1,711
249
Revenue and Cost of
revenue
Interest rate swap contracts
783
142
Interest and foreign
exchange
2,494
391
Total before tax
(649
(85
Income tax benefit
Net of tax
Financial Statement Location
1,812
1,506
Revenue and cost of
1,319
438
3,131
1,944
(809
(468
16
Note 10 – Earnings Per Share
The shares used in the computation of basic and diluted earnings per common share are reconciled as follows:
Weighted average basic common shares
outstanding (1)
Dilutive effect of 2.875% Convertible notes (2)
Dilutive effect of 2.25% Convertible notes (3)
n/a
Dilutive effect of restricted stock units (4)
788
580
754
538
Weighted average diluted common shares
outstanding
(1)
Restricted stock grants and restricted stock units that are considered participating securities, including some grants subject to certain performance criteria, are included in weighted average basic common shares outstanding when the Company is in a net earnings position.
(2)
The dilutive effect of the 2.875% Convertible notes was excluded for the three and nine months ended May 31, 2020 and 2019 as the average stock price was less than the applicable conversion price and therefore was considered anti-dilutive.
(3)
The 2.25% Convertible notes were issued in July 2019. The dilutive effect of the 2.25% Convertible notes was excluded for the three and nine months ended May 31, 2020 as the average stock price was less than the applicable conversion price and therefore was considered anti-dilutive.
(4)
Restricted stock units that are not considered participating securities and restricted stock units subject to performance criteria, for which actual levels of performance above target have been achieved, are included in weighted average diluted common shares outstanding when the Company is in a net earnings position.
Diluted EPS is calculated using the treasury stock method associated with shares underlying the 2.875% Convertible notes, 2.25% Convertible notes, restricted stock units that are not considered participating securities and performance based restricted stock units subject to performance criteria, for which actual levels of performance above target have been achieved.
Diluted earnings per share
17
Note 11 – Stock Based Compensation
The value of stock based compensation awards is amortized as compensation expense from the date of grant through the earlier of the vesting period or in some instances the recipient’s eligible retirement date. Stock based compensation expense consists of restricted stock unit, restricted stock and phantom stock unit awards.
Stock based compensation expense was $1.0 million and $8.3 million for the three and nine months ended May 31, 2020, respectively and $3.5 million and $10.8 million for the three and nine months ended May 31, 2019, respectively. Compensation expense is recorded in Selling and administrative expense and Cost of revenue on the Consolidated Statements of Income.
Note 12 – 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, 2020 exchange rates, notional amounts of forward exchange contracts for the purchase of Polish Zlotys and the sale of Euros and Pound Sterling; and the purchase of Mexican Pesos and the sale of U.S. Dollars aggregated to $37.3 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 May 2022, 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, 2020 exchange rates, approximately $1.1 million would be reclassified to revenue or cost of revenue in the next year.
At May 31, 2020, an interest rate swap agreement maturing in September 2023 had a notional amount of $106.6 million and an interest rate swap agreement maturing June 2024 had a notional amount of $146.3 million. The fair value of the contracts are included on the Consolidated Balance Sheets in Accounts payable and accrued liabilities when there is a loss, or in Accounts receivable, net when there is a gain. 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, 2020 interest rates, approximately $5.0 million would be reclassified to interest expense in the next year.
Fair Values of Derivative Instruments
Asset Derivatives
Liability Derivatives
Balance sheet location
Fair Value
Derivatives designated
as hedging
instruments
Foreign forward
exchange contracts
Accounts receivable,
net
147
64
Accounts payable and
accrued liabilities
768
437
Interest rate swap
contracts
16,876
10,255
17,644
10,692
Derivatives not
designated as
hedging instruments
587
18
The Effect of Derivative Instruments on the Statements of Income
Three Months Ended May 31, 2020 and 2019
Derivatives in cash flow hedging relationships
Location of gain (loss)
recognized in income
on derivatives
Gain (loss) recognized in income on
derivatives three months ended
Foreign forward exchange contract
154
Derivatives in
cash flow hedging
relationships
Gain (loss) recognized
in OCI on derivatives
three months ended,
Location of gain
(loss) reclassified
from accumulated
OCI into income
Gain (loss) reclassified
from accumulated OCI
into income three months
ended
(loss) on derivative
(amount
excluded from
effectiveness
testing)
on derivative
(amount excluded from
effectiveness testing)
three months ended
(599
330
(485
(68
138
264
(2,015
102
(1,226
(181
130
179
(5,155
(2,704
Interest and
foreign exchange
(783
(143
281
(163
(7,769
(2,272
(2,494
(392
549
280
The following table presents the amounts in the Consolidated Statements of Income in which the effects of the cash flow hedges are recorded and the effects of the cash flow hedge activity on these line items for the three months ended May 31, 2020 and 2019:
For The Three Months Ended
May 31, 2020
May 31, 2019
Amount of gain
(loss) on cash
flow hedge
activity
Nine Months Ended May 31, 2020 and 2019
derivatives nine months ended
60
495
nine months ended
into income nine months ended
amount
164
(16
(584
(735
781
1,164
(2,198
(293
(1,228
(771
474
857
(7,939
(6,393
(1,319
(438
(185
(9,973
(6,702
(3,131
(1,944
1,255
1,836
19
For the Nine Months Ended
Note 13 – Segment Information
The Company operates in three reportable segments: Manufacturing; Wheels, Repair & Parts; and Leasing & Services.
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 2019 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.
For the three months ended May 31, 2020:
Earnings (loss) from operations
External
Intersegment
1,151
654,158
68,445
95
68,540
1,527
83,551
3,785
(393
3,392
14,841
42,367
11,837
14,454
26,291
Eliminations
(17,519
(14,156
Corporate
(17,255
For the nine months ended May 31, 2020:
1,269
1,801,586
167,693
73
167,766
12,511
272,368
8,219
(903
7,316
31,830
127,420
34,407
30,127
64,534
(45,610
(29,297
(63,287
20
For the three months ended May 31, 2019:
29,201
710,789
72,110
2,000
74,110
11,601
136,581
(8,820
808
(8,012
5,848
55,432
15,337
4,913
20,250
(46,650
(7,721
(25,438
For the nine months ended May 31, 2019:
82,257
1,711,653
122,955
4,791
127,746
36,440
395,241
(2,750
262
(2,488
14,758
145,907
53,880
12,466
66,346
(133,455
(66,388
Total assets
1,441,052
1,606,571
296,888
306,725
777,523
708,799
Unallocated
763,568
368,542
Reconciliation of Earnings from operations to Earnings before income tax and earnings (loss) from unconsolidated affiliates:
Earnings before income tax and earnings (loss)
from unconsolidated affiliates
21
Note 14 – Leases
Lessor
Equipment on operating leases is reported net of accumulated depreciation of $31.1 million and $44.2 million as of May 31, 2020 and August 31, 2019, respectively. Depreciation expense was $2.6 million and $9.2 million for the three and nine months ended May 31, 2020. In addition, certain railcar equipment leased-in by the Company on operating leases is subleased to customers under non-cancelable operating leases with lease terms ranging from one to nine years. Operating lease rental revenues included in the Company’s Statement of Income for the three and nine months ended May 31, 2020 was $9.0 million and $30.2 million, which included $2.8 million and $9.3 million, respectively, of revenue as a result of daily, monthly or car hire utilization arrangements.
Aggregate minimum future amounts receivable under all non-cancelable operating leases and subleases at May 31, 2020, will mature as follows:
Remaining three months of 2020
7,579
2021
28,249
2022
26,044
2023
20,567
2024
16,984
Thereafter
24,203
123,626
Lessee
The Company leases railcars, real estate, and certain equipment under operating and, to a lesser extent, finance lease arrangements. As of and for the three and nine months ended May 31, 2020, finance leases were not a material component of the Company's lease portfolio. The Company’s real estate and equipment leases have remaining lease terms ranging from less than one year to 78 years, with some including options to extend up to 15 years. The Company recognizes a lease liability and corresponding right-of-use (ROU) asset based on the present value of lease payments. To determine the present value of lease payments, as most of its leases do not provide a readily determinable implicit rate, the Company’s incremental borrowing rate is used to discount the lease payments based on information available at lease commencement date. The Company gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when estimating its incremental borrowing rate.
The components of operating lease costs were as follows:
Three months ended
Nine months ended
Operating lease expense
4,388
11,238
Short-term lease expense
1,707
6,437
6,095
17,675
22
Aggregate minimum future amounts payable under operating leases having initial or remaining non-cancelable terms at May 31, 2020 will mature as follows:
3,935
13,977
10,722
10,231
8,754
18,640
Total lease payments
66,259
Less: Imputed interest
(8,101
Total lease obligations
The table below presents additional information related to the Company’s leases:
Weighted average remaining lease term
Operating leases
11.6 years
Weighted average discount rate
3.4
%
Supplemental cash flow information related to leases were as follows:
Cash paid for amounts included in the measurement
of lease liabilities
Operating cash flows from operating leases
12,121
ROU assets obtained in exchange for new operating
lease liabilities
26,372
23
Note 15 – Commitments and Contingencies
Portland Harbor Superfund Site
The Company's Portland, Oregon manufacturing facility is located adjacent to the Willamette River. 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. Ten private and public entities, including the Company (the Lower Willamette Group or LWG), 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 nevertheless contributed money to the effort. The EPA-mandated RI/FS was produced by the LWG and cost over $110 million during a 17-year period. The Company bore a percentage of the total costs incurred by the LWG in connection with the investigation. The Company's aggregate expenditure during the 17-year period was not material. Some or all of any such outlay may be recoverable from other responsible parties. The EPA issued its Record of Decision (ROD) for the Portland Harbor Site on January 6, 2017 and accordingly on October 26, 2017, the AOC was terminated.
Separate from the process described above, which focused on the type of remediation to be performed at the Portland Harbor Site and the schedule for such remediation, 83 parties, including the State of Oregon and the federal government, entered into a non-judicial mediation process to try to allocate costs associated with remediation of the Portland Harbor site. Approximately 110 additional parties 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 been stayed by the court until January 14, 2022.
The EPA's January 6, 2017 ROD identifies a clean-up remedy that the EPA estimates will take 13 years of active remediation, followed by 30 years of monitoring with an estimated undiscounted cost of $1.7 billion. The EPA typically expects its cost estimates to be accurate within a range of -30% to +50%, but this ROD states that changes in costs are likely to occur as a result of new data it wants to collect over a 2-year period prior to final remedy design. The ROD identifies 13 Sediment Decision Units. One of the units, RM9W, includes the nearshore area of the river sediments offshore of the Company's Portland, Oregon manufacturing facility as well as upstream and downstream of the facility. It also includes a portion of the Company's riverbank. The ROD does not break down total remediation costs by Sediment Decision Unit. The EPA's ROD concluded that more data was needed to better define clean-up scope and cost. On December 8, 2017, the EPA announced that Portland Harbor is one of 21 Superfund sites targeted for greater attention. On December 19, 2017, the EPA announced that it had entered a new AOC with a group of four potentially responsible parties to conduct additional sampling during 2018 and 2019 to provide more certainty about clean-up costs and aid the mediation process to allocate those costs. The parties to the mediation, including the Company, agreed to help fund the additional sampling, which is now complete. The EPA requested that potentially responsible parties enter AOCs during 2019 agreeing to conduct remedial design studies. Some parties have signed AOCs, including one party with respect to RM9W which includes the area offshore of the Company’s manufacturing facility. The Company has not signed an AOC in connection with remedial design, but will potentially be directly or indirectly responsible for conducting or funding a portion of such RM9W remedial design. The allocation process is continuing in parallel with the process to define the remedial design.
The ROD does not address responsibility for the costs of clean-up, nor does it allocate such costs among the potentially responsible parties. Responsibility for funding and implementing the EPA's selected cleanup remedy will be determined at an unspecified later date. 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, including the collection of new pre-remedial design sampling data by EPA, sufficient information is currently not available to determine the Company's liability, if any, for the cost of any required remediation or
24
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 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.
On January 30, 2017 the Confederated Tribes and Bands of Yakama Nation sued 33 parties including the Company as well as the United States and the State of Oregon for costs it incurred in assessing alleged natural resource damages to the Columbia River from contaminants deposited in Portland Harbor. Confederated Tribes and Bands of the Yakama Nation v. Air Liquide America Corp., et al., United States Court for the District of Oregon Case No. 3i17-CV-00164-SB. The complaint does not specify the amount of damages the plaintiff will seek. The case has been stayed until January 14, 2022.
Oregon Department of Environmental Quality (DEQ) Regulation of Portland Manufacturing Operations
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. 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 discussing with the DEQ potential remedial actions which may be required. The Company's 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.
Other Litigation, Commitments and Contingencies
In connection with the acquisition of the manufacturing business of ARI, the Company agreed to assume potential legacy liabilities (known and unknown) related to railcars manufactured by ARI. Among these potential liabilities are certain retrofit and repair obligations arising from regulatory actions by the Federal Railroad Administration and the Association of American Railroads. In some cases, the seller shares with the Company the costs of these retrofit and repair obligations. The Company currently is not able to determine if any of these liabilities will have a material adverse impact on the Company’s results of operations.
From time to time, Greenbrier is involved as a defendant in litigation in the ordinary course of business, the outcomes of which cannot be predicted with certainty. While the ultimate outcome of such legal proceedings cannot be determined at this time, the Company believes that the resolution of pending litigation will not have a material adverse effect on the Company's Consolidated Financial Statements.
As of May 31, 2020, the Company had outstanding letters of credit aggregating to $28.7 million associated with performance guarantees, facility leases and workers compensation insurance.
As of May 31, 2020, the Company had a $4.5 million note receivable from Amsted-Maxion Cruzeiro, its unconsolidated Brazilian castings and components manufacturer and a $3.9 million note receivable from Greenbrier-Maxion, its unconsolidated Brazilian railcar manufacturer. These note receivables are included on the Consolidated Balance Sheet in Accounts receivable, net. In the future, the Company may make loans to or provide guarantees for Amsted-Maxion Cruzeiro or Greenbrier-Maxion, its unconsolidated Brazilian railcar manufacturer.
25
Note 16 – 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:
Level 1 - observable inputs such as unadjusted quoted prices in active markets for identical instruments;
Level 2 - inputs, other than the quoted market prices in active markets for similar instruments, which are observable, either directly or indirectly; and
Level 3 - unobservable inputs for which there is little or no market data available, which require the reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value on a recurring basis as of May 31, 2020 were:
Level 1
Level 2 (1)
Level 3
Assets:
Derivative financial instruments
Cash equivalents
203,301
235,613
235,466
Liabilities:
17,646
Level 2 assets and liabilities include derivative financial instruments that are valued based on observable inputs. See Note 12 - Derivative Instruments for further discussion.
Assets and liabilities measured at fair value on a recurring basis as of August 31, 2019 were:
Level 2
68,100
96,131
96,067
11,279
26
Note 17 – Related Party Transactions
In June 2017, the Company purchased a 40% interest in the common equity of an entity that buys and sells railcar assets that are leased to third parties. The railcars sold to this leasing warehouse are principally built by Greenbrier. The Company accounts for this leasing warehouse investment under the equity method of accounting. As of May 31, 2020, the carrying amount of the investment was $4.7 million which is classified in Investment in unconsolidated affiliates in the Consolidated Balance Sheet. Upon sale of railcars to this entity from Greenbrier, 60% of the related revenue and margin is recognized and 40% is deferred until the railcars are ultimately sold by the entity. There were no sales to or from this entity during the three and nine months ended May 31, 2020. The Company recognized $18.2 million in revenue associated with railcars sold into the leasing warehouse during the nine months ended May 31, 2019. The Company also recognized $5.6 million in revenue associated with railcars sold out of the leasing warehouse during the nine months ended May 31, 2019. The Company also provides administrative and remarketing services to this entity and earns management fees for these services which were immaterial for the nine months ended May 31, 2020 and May 31, 2019.
The Company has a 41.9% interest in Axis, LLC (Axis), a joint venture. The Company obtained its ownership interest in Axis as part of the acquisition of the manufacturing business of ARI on July 26, 2019. For the three and nine months ended May 31, 2020, the Company purchased $4.3 million and $11.5 million of railcar components from Axis.
In November 2019, the Company increased its ownership interest in Amsted-Maxion Cruzeiro from 24.5% to 29.5%. This transaction included a conversion to equity of $4.8 million from a note receivable, including accrued interest, and a re-payment to the Company of $1.5 million which was used to acquire the additional 5% ownership interest. As of May 31, 2020, the Company had a remaining $4.5 million note receivable due from Amsted-Maxion Cruzeiro, its unconsolidated Brazilian castings and components manufacturer and a $3.9 million note receivable from Greenbrier-Maxion, its unconsolidated Brazilian railcar manufacturer. These note receivables are included on the Consolidated Balance Sheet in Accounts receivable, net.
In May 2020, the Company and its manufacturing partner Grupo Industrial Monclova, S.A. (GIMSA) amended its joint venture agreement for its joint ventures in Monclova, Mexico. In addition to certain temporary changes to the existing fee arrangements, the joint ventures also paid dividends of $22.5 million to each of the joint venture partners during the three months ended May 31, 2020.
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
We operate in three reportable segments: Manufacturing; Wheels, Repair & Parts; and Leasing & Services. Our segments are operationally integrated. The Manufacturing segment, which currently operates from facilities in the U.S., Mexico, Poland, Romania and Turkey, produces double-stack intermodal railcars, tank cars, conventional railcars, automotive railcar products and marine vessels. The Wheels, Repair & Parts segment performs wheel and axle servicing; railcar repair, refurbishment and maintenance; as well as production of a variety of parts for the rail industry in North America. The Leasing & Services segment owns approximately 8,800 railcars and provides management services for approximately 391,000 railcars for railroads, shippers, carriers, institutional investors and other leasing and transportation companies in North America as of May 31, 2020. Through unconsolidated affiliates we produce rail and industrial components and have an ownership stake in a railcar manufacturer in Brazil and a lease financing warehouse.
Our total manufacturing backlog of railcar units, for direct sale or lease to a third party, as of May 31, 2020 was approximately 26,700 units with an estimated value of $2.67 billion. Approximately 8% of backlog units and 5% of estimated backlog value as of May 31, 2020 were associated with our Brazilian manufacturing operations which are accounted for under the equity method. Backlog units for lease may be syndicated to third parties or held in our own fleet depending on a variety of factors. Multi-year supply agreements are common in the rail industry. A portion of the orders included in backlog reflects an assumed product mix. Under the terms of such orders, the exact mix and pricing will be determined in the future, which may impact backlog. Marine backlog as of May 31, 2020 was $37 million.
Our backlog of railcar units and marine vessels is not necessarily indicative of future results of operations. Certain orders in backlog are subject to customary documentation and completion of terms. Customers may attempt to cancel or modify orders in backlog. Historically, little variation has been experienced between the quantity ordered and the quantity actually delivered, though the timing of deliveries may be modified from time to time. We cannot guarantee that our reported backlog will convert to revenue in any particular period, if at all.
COVID-19 and the Downturn in Global Economic Activity
We are closely monitoring and managing the impacts on our business of the COVID-19 coronavirus pandemic, the significant decline in global economic activity, and governmental reactions to these historic events (“COVID-19 Events”).
All of our manufacturing and service facilities continue regular operations. We function as an essential infrastructure business under guidance issued by the Department of Homeland Security. Similar guidelines and authorities exist in other nations where we operate. Since the emergence of COVID-19, our manufacturing plants, repair shops, and wheel shops in the United States have been permitted to continue to operate subject to enhanced safety protocols, both voluntary and government mandated, that aim to protect the health of our workforce and the residents of the communities in which our facilities are located. The situation is similar in our manufacturing plants and shops in Mexico, Europe, Brazil and Turkey which also have been permitted by applicable governmental authorities to operate subject to enhanced health and safety protocols.
During the quarter ended May 31, 2020, our consolidated financial condition and results of operations were not materially impacted by COVID-19 Events. Certain of our businesses recorded a decrease in operating profits compared against the fiscal quarter ended May 31, 2019 which we attribute primarily to the cyclical decrease in economic activity in the freight rail equipment market which began prior to the emergence of COVID-19 (“Cyclical Downturn”). The Cyclical Downturn has intensified as a result of the COVID-19 Events. Our liquidity position strengthened in the quarter ended May 31, 2020 due to cash flow from operations, spending reductions and increased borrowing capacity.
As described in Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q, COVID-19 Events may have a material negative impact on our business, liquidity, results of operations, and stock price. Beyond these general observations, we are unable to predict when, how, or with what magnitude COVID-19 Events, in combination with the Cyclical Downturn, will negatively impact our business due to numerous uncertainties, including the duration of the COVID-19 pandemic, the duration of the global decline in economic activity, the impact of those events to our customers, suppliers and employees, and actions that may be taken by governmental authorities, including potentially preventing or curtailing the operations of our plants and/or shops, and other consequences.
29
Three Months Ended May 31, 2020 Compared to the Three Months Ended May 31, 2019
Overview
Revenue, cost of revenue, margin and Earnings from operations (operating profit) presented below, include amounts from external parties and exclude intersegment activity that is eliminated in consolidation.
Revenue:
Cost of revenue:
Margin:
90,214
90,800
7,023
5,159
10,294
10,613
Selling and administrative
Earnings before income taxes and earnings (loss)
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):
30
Consolidated Results
Increase
(Decrease)
Change
(93,595
(10.9
%)
(94,554
(12.6
Margin (%)
14.1
12.4
1.7
*
12,524
82.1
Not meaningful
Beginning July 26, 2019, the consolidated results included the results of the manufacturing business of ARI which were additive to revenue and cost of revenue for the three months ended May 31, 2020.
Through our integrated business model, we provide a broad range of custom products and services in each of our segments, which have various average selling prices and margins. The demand for and mix of products and services delivered changes from period to period, which causes fluctuations in our results of operations.
The 10.9% decrease in revenue for the three months ended May 31, 2020 as compared to the three months ended May 31, 2019 was primarily due to a 34.4% decrease in Wheels, Repair & Parts revenue from lower wheelset, component and parts volumes due to lower demand, lower repair revenue primarily from four fewer shops in the current period and a decrease in scrap metal pricing and volume. The decrease in revenue was also due to a 4.2% decrease in Manufacturing revenue primarily attributed to a 16.9% decrease in railcar deliveries and a 44.5% decrease in Leasing & Services revenue primarily attributed to a decrease in the sale of railcars which we had purchased from third parties with the intent to resell.
The 12.6% decrease in cost of revenue for the three months ended May 31, 2020 as compared to the three months ended May 31, 2019 was primarily due to a 37.4% decrease in Wheels, Repair & Parts cost of revenue from lower costs associated with a reduction in wheelset, component and parts volumes and four fewer repair shops in the current period. The decrease in cost of revenue was also due to a 4.7% decrease in Manufacturing cost of revenue primarily attributed to a 16.9% decrease in the volume of railcar deliveries and a 55.8% decrease in Leasing & Services cost of revenue from a decrease in the volume of railcars sold that we purchased from third parties.
Margin as a percentage of revenue was 14.1% and 12.4% for the three months ended May 31, 2020 and 2019, respectively. The overall margin as a percentage of revenue was positively impacted by an increase in Manufacturing margin to 13.8% from 13.3% primarily attributed to higher volumes of new railcar sales with leases attached which typically result in enhanced sales prices and margins and a change in product mix.
The $12.5 million increase in Net earnings attributable to Greenbrier for the three months ended May 31, 2020 as compared to the three months ended May 31, 2019 was primarily attributable to a $10.0 million goodwill impairment charge recognized during the three months ended May 31, 2019. This was partially offset by a higher effective tax rate for the three months ended May 31, 2020 compared to the three months ended May 31, 2019 primarily attributable to net unfavorable discrete items related to changes in foreign currency exchange rates for our U.S. Dollar denominated foreign operations in the current quarter.
Manufacturing Segment
(28,581
(4.2
(27,995
(4.7
13.8
13.3
0.5
Operating profit ($)
(3,665
(5.1
Operating profit (%)
10.5
10.6
(0.1
Deliveries
5,400
6,500
(1,100
(16.9
31
Beginning July 26, 2019, the Manufacturing segment included the results of the manufacturing business of ARI which were additive to Manufacturing revenue and cost of revenue for the three months ended May 31, 2020.
Manufacturing revenue decreased $28.6 million or 4.2% for the three months ended May 31, 2020 compared to the three months ended May 31, 2019. The decrease in revenue was primarily attributed to a 16.9% decrease in railcar deliveries partially offset by $128.0 million in additional revenue for the three months ended May 31, 2020 associated with the acquired manufacturing business of ARI and a change in product mix.
Manufacturing cost of revenue decreased $28.0 million or 4.7% for the three months ended May 31, 2020 compared to the three months ended May 31, 2019. The decrease in cost of revenue was primarily attributed to a 16.9% decrease in the volume of railcar deliveries partially offset by $115.7 million in additional cost of revenue for the three months ended May 31, 2020 associated with the acquired manufacturing business of ARI and a change in product mix.
Manufacturing margin as a percentage of revenue increased 0.5% for the three months ended May 31, 2020 compared to the three months ended May 31, 2019. The increase was primarily attributed to higher volumes of new railcar sales with leases attached which typically result in enhanced sales prices and margins and a change in product mix. These were partially offset by $4.5 million in severance expense and increased costs associated with operating our manufacturing facilities during the COVID-19 pandemic during the three months ended May 31, 2020.
Manufacturing operating profit decreased $3.7 million or 5.1% for the three months ended May 31, 2020 compared to the three months ended May 31, 2019. The decrease in operating profit was primarily attributed to a decrease in railcar deliveries, severance expense and increased costs associated with operating our manufacturing facilities during the COVID-19 pandemic during the three months ended May 31, 2020.
32
Wheels, Repair & Parts Segment
(42,956
(34.4
(44,820
(37.4
8.6
4.1
4.5
12,605
4.6
(7.1
11.7
Wheels, Repair & Parts revenue decreased $43.0 million or 34.4% for the three months ended May 31, 2020 compared to the three months ended May 31, 2019. The decrease was primarily due to lower wheelset, component and parts volumes due to lower demand, lower repair revenue primarily from four fewer shops in the current period and a decrease in scrap metal pricing and volume.
Wheels, Repair & Parts cost of revenue decreased $44.8 million or 37.4% for the three months ended May 31, 2020 compared to the three months ended May 31, 2019. The decrease was primarily due to lower costs associated with a reduction in wheelset, component and parts volumes and four fewer repair shops in the current period.
Wheels, Repair & Parts margin as a percentage of revenue increased 4.5% for the three months ended May 31, 2020 compared to the three months ended May 31, 2019. The increase was primarily attributed to efficiencies at our repair shops in the current period. In addition, the three months ended May 31, 2019 was negatively impacted by costs associated with closing sites in our repair network. These factors which had a positive impact to Wheels, Repair & Parts margin as a percentage of revenue compared to the prior year, were partially offset by a decrease in scrap metal pricing and increased costs associated with operating our facilities during the COVID-19 pandemic during the three months ended May 31, 2020.
Wheels, Repair & Parts operating profit increased $12.6 million for the three months ended May 31, 2020 compared to the prior comparable period. The three months ended May 31, 2019 was negatively impacted by a $10.0 million goodwill impairment and costs associated with closing sites in our repair network.
33
Leasing & Services Segment
(22,058
(44.5
(21,739
(55.8
37.4
21.4
16.0
(3,500
(22.8
43.0
30.9
12.1
The Leasing & Services segment generates revenue from leasing railcars from its lease fleet, providing various management services, interim rent on leased railcars for syndication, and the sale of railcars purchased from third parties with the intent to resell. The gross proceeds from the sale of these railcars are recorded in revenue and the costs of purchasing these railcars are recorded in cost of revenue.
Leasing & Services revenue decreased $22.1 million or 44.5% for the three months ended May 31, 2020 compared to the three months ended May 31, 2019. The decrease was primarily attributed to a decrease in the sale of railcars which we had purchased from third parties with the intent to resell. This was partially offset by higher average volume of rent-producing leased railcars for syndication.
Leasing & Services cost of revenue decreased $21.7 million or 55.8% for the three months ended May 31, 2020 compared to the three months ended May 31, 2019. The decrease was primarily due to a decrease in the volume of railcars sold that we purchased from third parties partially offset by higher storage costs.
Leasing & Services margin as a percentage of revenue increased 16.0% for the three months ended May 31, 2020 compared to the three months ended May 31, 2019. Margin as a percentage of revenue for the three months ended May 31, 2020 benefited from fewer sales of railcars that we purchased from third parties which have lower margin percentages. The increase in margin as a percentage of revenue was also due to a higher average volume of rent-producing leased railcars for syndication. These were partially offset by $4.3 million in negative impacts during the three months ended May 31, 2020 related to disruptions and restructurings in the North American sand car market.
Leasing & Services operating profit decreased $3.5 million or 22.8% for the three months ended May 31, 2020 compared to the three months ended May 31, 2019. The decrease was primarily attributed to $4.3 million in negative impacts during the three months ended May 31, 2020 related to disruptions and restructurings in the North American sand car market and a $2.4 million decrease in net gain on disposition of equipment.
34
Selling and Administrative Expense
(9.0
Selling and administrative expense was $49.5 million or 6.5% of revenue for the three months ended May 31, 2020 compared to $54.4 million or 6.4% of revenue for the prior comparable period. The $4.9 million decrease was primarily attributed to $5.8 million in transaction related costs incurred during the three months ended May 31, 2019. The decrease was also attributed to a $3.2 million reduction in employee related costs in the current year partially offset by $2.8 million from the addition of the manufacturing business of ARI selling and administrative costs during the three months ended May 31, 2020.
Net Gain on Disposition of Equipment
Net gain on disposition of equipment was $8.8 million for the three months ended May 31, 2020 compared to $11.0 million for the prior comparable period. Net gain on disposition of equipment primarily includes the sale of assets from our lease fleet (Equipment on operating leases, net) that are periodically sold in the normal course of business in order to take advantage of market conditions and to manage risk and liquidity; and disposition of property, plant and equipment.
Goodwill Impairment
We performed our annual goodwill impairment test during the third quarter of 2020 and we concluded that goodwill was not impaired. Based on the results of our annual impairment test during the third quarter of 2019, a non-cash impairment charge of $10.0 million was recorded during the three months ended May 31, 2019 related to our Wheels, Repair & Parts segment.
Other Costs
Interest and foreign exchange expense was composed of the following:
Interest and foreign exchange:
Interest and other expense
10,698
8,243
2,455
Foreign exchange (gain) loss
(3,136
(4,663
(2,208
35
The $2.2 million decrease in interest and foreign exchange expense from the prior comparable period was primarily attributed to the change in the Mexican Peso relative to the U.S. Dollar. This was partially offset by interest expense associated with our $300 million of senior term debt issued in July 2019 and an increase in revolving notes borrowings.
Income Tax
The effective tax rate for the three months ended May 31, 2020 was 41.2% compared to 30.0% for the three months ended May 31, 2019. The increase in the effective rate from the prior year was primarily attributable to net unfavorable discrete items related to changes in foreign currency exchange rates for our U.S. Dollar denominated foreign operations in the current quarter compared to net favorable discrete items in the prior comparable period. Early indications are that the effective tax rate may be lower during the fourth quarter of 2020 based on currency exchange rates. As a result, the year to date effective tax rate of 33.2% may be lower based on less volatile currency exchange rates in the fourth quarter of 2020. Excluding the impact of discrete items in both periods, the effective tax rate was 23.6% for the three months ended May 31, 2020 compared to 24.3% in the prior comparable period. The decrease from the 24.3% to the 23.6% tax rate was primarily due to the geographic mix of earnings.
The effective tax rate can fluctuate year-to-year due to changes in the mix of foreign and domestic pre-tax earnings. It can also fluctuate with changes in the proportion of pre-tax earnings attributable to our Mexican railcar manufacturing joint venture. The joint venture is treated as a partnership for tax purposes and, as a result, the partnership’s entire pre-tax earnings are included in Earnings before income taxes and earnings from unconsolidated affiliates, whereas only our 50% share of the tax is included in Income tax expense.
Earnings (Loss) From Unconsolidated Affiliates
Through unconsolidated affiliates we produce rail and industrial components and have an ownership stake in a railcar manufacturer in Brazil and a lease financing warehouse.
Earnings from unconsolidated affiliates was $1.0 million for the three months ended May 31, 2020 compared to a loss from unconsolidated affiliates of $4.6 million for the three months ended May 31, 2019. The increase in earnings from unconsolidated affiliates was primarily related to an increase in earnings at our Brazil operations and earnings from our investment in Axis, a joint venture that manufactures and sells axles to its joint venture partners. We obtained our ownership interest in Axis as part of the acquisition of the manufacturing business of ARI on July 26, 2019.
Noncontrolling Interest
Net earnings attributable to noncontrolling interest was $8.1 million for the three months ended May 31, 2020 compared to $10.6 million in the prior comparable period, which primarily represents our joint venture partner's share in the results of operations of our Mexican railcar manufacturing joint venture, adjusted for intercompany sales, and our European partner’s share of the results of our European operations.
36
Nine Months Ended May 31, 2020 Compared to the Nine Months Ended May 31, 2019
233,303
177,807
18,591
19,547
34,162
35,595
Earnings before earnings (loss) from
37
36,418
(16,689
(0.9
11.0
2.3
13,101
36.4
Beginning July 26, 2019, the consolidated results included the results of the manufacturing business of ARI which were additive to revenue and cost of revenue for the nine months ended May 31, 2020.
The 1.7% increase in revenue for the nine months ended May 31, 2020 as compared to the nine months ended May 31, 2019 was primarily due to a 10.5% increase in Manufacturing revenue from the additional revenue associated with the acquired manufacturing business of ARI and a change in product mix. This was partially offset by a 27.6% decrease in Wheels, Repair & Parts revenue primarily due to lower wheelset, component and parts volumes due to lower demand, lower repair revenue primarily from four fewer shops in the current year and a decrease in scrap metal pricing and volume.
The 0.9% decrease in cost of revenue for the nine months ended May 31, 2020 as compared to the nine months ended May 31, 2019 was primarily due to a 28.9% decrease in Wheels, Repair & Parts cost of revenue primarily due to lower costs associated with a reduction in wheelset, component and parts volumes and four fewer repair shops in the current year. The decrease was also due to a 35.7% decrease in Leasing & Services cost of revenue primarily due to a decrease in the volume of railcars sold that we purchased from third parties. These were partially offset by an 8.0% increase in Manufacturing cost of revenue primarily attributed to the additional cost of revenue associated with the acquired manufacturing business of ARI and a change in product mix.
Margin as a percentage of revenue was 13.3% and 11.0% for the nine months ended May 31, 2020 and 2019, respectively. The overall margin as a percentage of revenue was positively impacted by an increase in Manufacturing margin to 13.0% from 10.9% primarily attributed to a change in product mix.
The $13.1 million increase in Net earnings attributable to Greenbrier for the nine months ended May 31, 2020 as compared to the prior comparable period was primarily attributable to an increase in margin, net of tax, due to a change in Manufacturing product mix. This was partially offset by a reduction in Net gain on disposition of equipment in the current year.
170,921
115,425
8.0
13.0
10.9
2.1
44,738
9.3
7.5
1.8
15,000
15,200
(200
(1.3
Beginning July 26, 2019, the Manufacturing segment included the results of the manufacturing business of ARI which were additive to Manufacturing revenue and cost of revenue for the nine months ended May 31, 2020.
Manufacturing revenue increased $170.9 million or 10.5% for the nine months ended May 31, 2020 compared to the nine months ended May 31, 2019. The increase in revenue was primarily attributed to $337.2 million in additional revenue for the nine months ended May 31, 2020 associated with the acquired manufacturing business of ARI and a change in product mix partially offset by a 1.3% decrease in railcar deliveries.
Manufacturing cost of revenue increased $115.4 million or 8.0% for the nine months ended May 31, 2020 compared to the nine months ended May 31, 2019. The increase in cost of revenue was primarily attributed to $326.8 million in additional cost of revenue for the nine months ended May 31, 2020 associated with the acquired manufacturing business of ARI and a change in product mix partially offset by a 1.3% decrease in the volume of railcar deliveries.
Manufacturing margin as a percentage of revenue increased 2.1% for the nine months ended May 31, 2020 compared to the nine months ended May 31, 2019. The increase was primarily attributed to a change in product mix and a $12.9 million customer order contract modification fee received during the second quarter of 2020. These were partially offset by $4.5 million in severance expense and increased costs associated with operating our manufacturing facilities during the COVID-19 pandemic during the nine months ended May 31, 2020.
Manufacturing operating profit increased $44.7 million or 36.4% for the nine months ended May 31, 2020 compared to the nine months ended May 31, 2019. The increase was primarily attributed to a change in product mix and a customer order contract modification fee received during the second quarter of, 2020. These were partially offset by severance expense and increased costs associated with operating our manufacturing facilities during the COVID-19 pandemic during the nine months ended May 31, 2020.
39
(98,944
(27.6
(97,988
(28.9
7.2
5.4
10,969
3.2
(0.8
4.0
Wheels, Repair & Parts revenue decreased $98.9 million or 27.6% for the nine months ended May 31, 2020 compared to the nine months ended May 31, 2019. The decrease was primarily due to lower wheelset, component and parts volumes due to lower demand, lower repair revenue primarily from four fewer shops in the current year and a decrease in scrap metal pricing and volume.
Wheels, Repair & Parts cost of revenue decreased $98.0 million or 28.9% for the nine months ended May 31, 2020 compared to the nine months ended May 31, 2019. The decrease was primarily due to lower costs associated with a reduction in wheelset, component and parts volumes and four fewer repair shops in the current year.
Wheels, Repair & Parts margin as a percentage of revenue increased 1.8% for the nine months ended May 31, 2020 compared to the nine months ended May 31, 2019. The increase was primarily attributed to efficiencies at our repair shops in the current year. In addition, the nine months ended May 31, 2019 was negatively impacted by costs associated with closing sites in our repair network. These factors which had a positive impact to Wheels, Repair & Parts margin as a percentage of revenue compared to the prior year, were partially offset by a decrease in scrap metal pricing and increased costs associated with operating our facilities during the COVID-19 pandemic during the nine months ended May 31, 2020.
Wheels, Repair & Parts operating profit increased $11.0 million for the nine months ended May 31, 2020 compared to the prior comparable period. The nine months ended May 31, 2019 was negatively impacted by a $10.0 million goodwill impairment and costs associated with closing sites in our repair network.
40
(35,559
(27.1
(34,126
(35.7
35.7
27.1
(19,473
(36.1
36.0
41.1
Leasing & Services revenue decreased $35.6 million or 27.1% for the nine months ended May 31, 2020 compared to the nine months ended May 31, 2019. The decrease was primarily attributed to a decrease in the sale of railcars which we had purchased from third parties with the intent to resell. This was partially offset by higher average volume of rent-producing leased railcars for syndication.
Leasing & Services cost of revenue decreased $34.1 million or 35.7% for the nine months ended May 31, 2020 compared to the nine months ended May 31, 2019. The decrease was primarily due to a decrease in the volume of railcars sold that we purchased from third parties partially offset by higher storage costs.
Leasing & Services margin as a percentage of revenue increased 8.6% for the nine months ended May 31, 2020 compared to the nine months ended May 31, 2019. Margin as a percentage of revenue for the nine months ended May 31, 2020 benefited from fewer sales of railcars that we purchased from third parties which have lower margin percentages. The increase in margin as a percentage of revenue was also due to a higher average volume of rent-producing leased railcars for syndication. These were partially offset by $4.3 million in negative impacts during the nine months ended May 31, 2020 related to disruptions and restructurings in the North American sand car market.
Leasing & Services operating profit decreased $19.5 million or 36.1% for the nine months ended May 31, 2020 compared to the nine months ended May 31, 2019. The decrease was primarily attributed to a $15.3 million decrease in net gain on disposition of equipment and $4.3 million in negative impacts during the nine months ended May 31, 2020 related to disruptions and restructurings in the North American sand car market.
41
5,754
3.8
Selling and administrative expense was $158.5 million or 7.4% of revenue for the nine months ended May 31, 2020 compared to $152.7 million or 7.2% of revenue for the prior comparable period. The $5.8 million increase was primarily attributed to $8.7 million from the addition of the manufacturing business of ARI selling and administrative costs and a $3.1 million increase in employee related costs. These were partially offset by $5.8 million in transaction related costs incurred during nine months ended May 31, 2019.
Net gain on disposition of equipment was $19.4 million for the nine months ended May 31, 2020 compared to $37.5 million for the prior comparable period. Net gain on disposition of equipment primarily includes the sale of assets from our lease fleet (Equipment on operating leases, net) that are periodically sold in the normal course of business in order to take advantage of market conditions and to manage risk and liquidity; and disposition of property, plant and equipment.
We performed our annual goodwill impairment test during the third quarter of 2020 and we concluded that goodwill was not impaired. Based on the results of our annual impairment test during the third quarter of 2019, a non-cash impairment charge of $10.0 million was recorded during the nine months ended May 31, 2019 related to our Wheels, Repair & Parts segment.
31,266
23,025
8,241
Foreign exchange loss
1,757
386
1,371
9,612
The $9.6 million increase in interest and foreign exchange expense from the prior comparable period was primarily attributed to interest expense associated with our $300 million of senior term debt issued in July 2019 and an increase in revolving notes borrowings.
The effective tax rate for the nine months ended May 31, 2020 was 33.2% compared to 28.9% for the nine months ended May 31, 2019. The increase in the effective rate from the prior year was primarily attributable to higher net unfavorable discrete items related to changes in foreign currency exchange rates for our U.S. Dollar denominated foreign operations for the nine months ended May 31, 2020 compared to a lower amount of net unfavorable discrete items in the prior comparable period. Excluding the impact of discrete items in both periods, the effective tax rate was 24.1% for the nine months ended May 31, 2020 compared to 28.7% in the prior comparable period which decreased primarily due to the geographic mix of earnings.
42
Earnings from unconsolidated affiliates was $3.8 million for the nine months ended May 31, 2020 compared to a loss from unconsolidated affiliates of $4.9 million for the nine months ended May 31, 2019. The increase in earnings from unconsolidated affiliates was primarily related to an increase in earnings at our Brazil operations and earnings from our investment in Axis, a joint venture that manufactures and sells axles to its joint venture partners. We obtained our ownership interest in Axis as part of the acquisition of the manufacturing business of ARI on July 26, 2019.
Net earnings attributable to noncontrolling interest was $30.8 million for the nine months ended May 31, 2020 compared to $19.0 million in the prior comparable period, which primarily represents our joint venture partner's share in the results of operations of our Mexican railcar manufacturing joint venture, adjusted for intercompany sales, and our European partner’s share of the results of our European operations.
43
Liquidity and Capital Resources
We have been financed through cash generated from operations and borrowings. At May 31, 2020, cash and cash equivalents and restricted cash were $744.0 million, an increase of $405.5 million from $338.5 million at August 31, 2019. The increase in cash and cash equivalents included drawing on available credit facilities in response to uncertainties from the COVID-19 coronavirus pandemic and the decline in global economic activity.
The change in cash provided by (used in) operating activities for the nine months ended May 31, 2020 compared to the nine months ended May 31, 2019 was primarily due to an increase in net earnings and a net change in working capital.
Cash provided by (used in) investing activities primarily related to capital expenditures net of proceeds from the sale of assets and investment activity with our unconsolidated affiliates. The change in cash provided by (used in) investing activities for the nine months ended May 31, 2020 compared to the nine months ended May 31, 2019 was primarily attributable to a decrease in capital expenditures.
Capital expenditures totaled $55.3 million and $149.9 million for the nine months ended May 31, 2020 and 2019, respectively. As part of our focus on liquidity in response to the COVID-19 coronavirus pandemic and the decline in global economic activity, capital expenditures have been reduced to only essential safety and other necessary projects. Manufacturing capital expenditures were approximately $40.3 million and $60.8 million for the nine months ended May 31, 2020 and 2019, respectively. Capital expenditures for Manufacturing are expected to be approximately $50 million in 2020 and primarily relate to enhancements of our existing manufacturing facilities. Wheels, Repair & Parts capital expenditures were approximately $8.4 million and $5.1 million for the nine months ended May 31, 2020 and 2019, respectively. Capital expenditures for Wheels, Repair & Parts are expected to be approximately $10 million in 2020 for enhancements of our existing facilities. Leasing & Services and corporate capital expenditures were approximately $6.6 million and $84.0 million for the nine months ended May 31, 2020 and 2019, respectively. Leasing & Services and corporate capital expenditures for 2020 are expected to be approximately $25 million. Proceeds from sales of leased railcar equipment are expected to be $90 million for 2020. 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.
Proceeds from the sale of assets, which primarily related to sales of railcars from our lease fleet within Leasing & Services, were approximately $78.5 million and $100.7 million for the nine months ended May 31, 2020 and May 31, 2019, respectively.
The change in cash provided by (used in) financing activities for the nine months ended May 31, 2020 compared to the nine months ended May 31, 2019 was primarily attributed to an increase in the proceeds of debt, net of repayments and a change in the net activities with joint venture partners.
A quarterly dividend of $0.27 per share was declared on July 8, 2020.
The Board of Directors has authorized our company to repurchase shares of our common stock. In January 2019, the expiration date of this share repurchase program was extended from March 31, 2019 to March 31, 2021 and the amount remaining for repurchase was increased from $88 million to $100 million. Under the share repurchase program, shares of common stock may be purchased on the open market or through privately negotiated transactions from time to time. The timing and amount of purchases will be based upon market conditions, securities law limitations and other factors. The program may be modified, suspended or discontinued at any time without prior notice. The share repurchase program does not obligate us to acquire any specific number of shares in any
44
period. There were no shares repurchased under the share repurchase program during the nine months ended May 31, 2020 and 2019.
Senior secured credit facilities, consisting of three components, aggregated to $705.1 million as of May 31, 2020. We had an aggregate of $136.8 million available to draw down under committed credit facilities as of May 31, 2020. This amount consists of $98.2 million available on the North American credit facility, $8.7 million on the European credit facilities and $29.9 million on the Mexican railcar manufacturing joint venture credit facilities.
As of May 31, 2020, a $600.0 million revolving line of credit, maturing June 2024, secured by substantially all of our assets in the U.S. not otherwise pledged as security for term loans, 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 1.50% or Prime plus 0.50% depending on the type of borrowing. Available borrowings under the credit facility are generally based on defined levels of eligible inventory, receivables, property, plant and equipment and leased equipment, as well as total debt to consolidated capitalization and fixed charges coverage ratios.
As of May 31, 2020, lines of credit totaling $55.1 million secured by certain of our European assets, with variable rates that range from Warsaw Interbank Offered Rate (WIBOR) plus 1.1% to WIBOR plus 1.5% and Euro Interbank Offered Rate (EURIBOR) plus 1.1%, were available for working capital needs of our European manufacturing operations. The European lines of credit include a $13.9 million facility which is guaranteed by us. European credit facilities are regularly renewed. Currently, these European credit facilities have maturities that range from August 2020 through July 2021.
As of May 31, 2020, 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. Advances under this facility bear interest at LIBOR plus 3.75% to 4.25%. The Mexican railcar manufacturing joint venture will be able to draw against this facility through March 2024. 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 3.75%. The Mexican railcar manufacturing joint venture will be able to draw amounts available under this facility through June 2021.
The revolving and operating lines of credit, along with notes payable, contain covenants with respect to us and our various subsidiaries, the most restrictive of which, among other things, limit our ability to: incur additional indebtedness or guarantees; pay dividends or repurchase stock; enter into financing leases; create liens; sell assets; engage in transactions with affiliates, including joint ventures and non U.S. subsidiaries, including but not limited to loans, advances, equity investments and guarantees; enter into mergers, consolidations or sales of substantially all our assets; and enter into new lines of business. The covenants also require certain maximum ratios of debt to total capitalization and minimum levels of fixed charges (interest plus rent) coverage. As of May 31, 2020, we were in compliance with all such restrictive covenants.
From time to time, we may seek to repurchase or otherwise retire or exchange securities, including outstanding notes, borrowings and equity securities, and take other steps to reduce our debt or otherwise improve our balance sheet. These actions may include open market repurchases, unsolicited or solicited privately negotiated transactions or other retirements, repurchases or exchanges. Such retirements, repurchases or exchanges, if any, will depend on a number of factors, including, but not limited to, prevailing market conditions, trading levels of our debt, our liquidity requirements and contractual restrictions, if applicable. The amounts involved in any such transactions may, individually or in the aggregate, be material and may involve all or a portion of a particular series of notes or other indebtedness which may reduce the float and impact the trading market of notes or other indebtedness which remain outstanding.
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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, 2020, we had a $4.5 million note receivable from Amsted-Maxion Cruzeiro, our unconsolidated Brazilian castings and components manufacturer and a $3.9 million note receivable from Greenbrier-Maxion, our unconsolidated Brazilian railcar manufacturer. These note receivables are included on our Consolidated Balance Sheet in Accounts receivable, net. In the future, we may make loans to or provide guarantees for Amsted-Maxion Cruzeiro or Greenbrier-Maxion, our unconsolidated Brazilian railcar manufacturer.
We expect existing funds and cash generated from operations, together with proceeds from financing activities including borrowings under existing credit facilities and long-term financings, to be sufficient to fund expected debt repayments, working capital needs, planned capital expenditures, additional investments in our unconsolidated affiliates and dividends during the next twelve months.
Off-Balance Sheet Arrangements
We do not currently have off balance sheet arrangements that have or are likely to have a material current or future effect on our Consolidated Financial Statements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires judgment on the part of management to arrive at estimates and assumptions on matters that are inherently uncertain. These estimates may affect the amount of assets, liabilities, revenue and expenses reported in the financial statements and accompanying notes and disclosure of contingent assets and liabilities within the financial statements. Estimates and assumptions are periodically evaluated and may be adjusted in future periods. Actual results could differ from those estimates.
Income taxes - The asset and liability method is used to account for income taxes. We are required to estimate the timing of the recognition of deferred tax assets and liabilities, make assumptions about the future deductibility of deferred tax assets and assess deferred tax liabilities based on enacted law and tax rates for each tax jurisdiction to determine the amount of deferred tax assets and liabilities. Deferred income taxes are provided for the temporary effects of differences between assets and liabilities recognized for financial statement and income tax reporting purposes. Valuation allowances reduce deferred tax assets to an amount that will more likely than not be realized. We recognize liabilities for uncertain tax positions based on whether evidence indicates that it is more likely than not that the position will be sustained on audit. It is inherently difficult and subjective to estimate such amounts, as this requires us to estimate the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis. Changes in tax law or court interpretations may result in the recognition of a tax benefit or an additional charge to the tax provision.
Warranty accruals - Warranty costs to cover a defined warranty period are estimated and charged to operations. The estimated warranty cost is based on historical warranty claims for each particular product type. For new product types without a warranty history, preliminary estimates are based on historical information for similar product types. These estimates are inherently uncertain as they are based on historical data for existing products and judgment for new products. If warranty claims are made in the current period for issues that have not historically been the subject of warranty claims and were not taken into consideration in establishing the accrual or if claims for issues already considered in establishing the accrual exceed expectations, warranty expense may exceed the accrual for that particular product. Conversely, there is the possibility that claims may be lower than estimates. The warranty accrual is periodically reviewed and updated based on warranty trends. However, as we cannot predict future claims, the potential exists for the difference in any one reporting period to be material.
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Environmental costs - At times we may be involved in various proceedings related to environmental matters. We estimate future costs for known environmental remediation requirements and accrue for them when it is probable that we have incurred a liability and the related costs can be reasonably estimated based on currently available information. If further developments in or resolution of an environmental matter result in facts and circumstances that are significantly different than the assumptions used to develop these reserves, the accrual for environmental remediation could be materially understated or overstated. Adjustments to these liabilities are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or when expenditures for which reserves are established are made. Due to the uncertain nature of environmental matters, there can be no assurance that we will not become involved in future litigation or other proceedings or, if we were found to be responsible or liable in any litigation or proceeding, that such costs would not be material to us.
Revenue recognition - We measure revenue at the amounts that reflect the consideration to which we expect to be entitled in exchange for transferring control of goods and services to customers. We recognize revenue either at the point in time or over the period of time that performance obligations to customers are satisfied. Payment terms vary by segment and product type and are generally due within normal commercial terms. Our contracts with customers may include multiple performance obligations (e.g. railcars, maintenance, management services, etc.). For such arrangements, we allocate revenues to each performance obligation based on its relative standalone selling price. We have disaggregated revenue from contracts with customers into categories which describe the principal activities from which we generate our revenues.
Railcars are manufactured in accordance with contracts with customers. We recognize revenue upon our customers’ acceptance of the completed railcars at a specified delivery point. From time to time, we enter into multi-year supply agreements. Each railcar delivery is considered a distinct performance obligation, such that the amounts that are recognized as revenue following railcar delivery are generally not subject to change.
We typically recognize marine vessel manufacturing revenue over time using the cost input method, based on progress toward contract completion measured by actual costs incurred to date in relation to the estimate of total expected costs. This method best depicts our performance in completing the construction of the marine vessel for the customer and is consistent with the percentage of completion method used prior to the adoption of Topic 606.
We operate a network of wheel, repair and parts shops in North America that provide complete wheelset reconditioning and railcar repair services.
Wheels revenue is recognized when wheelsets are shipped to the customer or when consumed by customers in the case of consignment arrangements. Parts revenue is recognized upon shipment of the parts to the customers.
Repair revenue is typically recognized over time using the cost input method, based on progress toward contract completion measured by actual costs incurred to date in relation to the estimate of total expected costs. This method best depicts our performance in repairing the railcars for the customer. Repair services are typically completed in less than 90 days.
We own a fleet of new and used railcars which are leased to third-party customers. Lease revenue is recognized over the lease-term in the period in which it is earned.
Syndication transactions represent new and used railcars which have been placed on lease to a customer and which we intend to sell to an investor with the lease attached. At the time of such sale, revenue and cost of revenue associated with railcars that we have manufactured are recognized in the Manufacturing segment; while revenue and cost of revenue associated with railcars which were obtained from a third-party with the intent to resell and subsequently sold, are recognized in the Leasing & Services segment.
We enter into multi-year contracts to provide management and maintenance services to customers for which revenue is generally recognized on a straight-line basis over the contract term as a stand-ready obligation. Costs to fulfill these contracts are recognized as incurred.
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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 of 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 would be 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 of undiscounted future cash flows exceeds 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. The provisions of ASC 350 Intangibles – Goodwill and Other, require that we perform this test by comparing the fair value of each reporting unit with its carrying value. We determine the fair value of our reporting units based on a weighting of income and market approaches. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows which incorporates expected revenue and margins and the use of discount rates. Under the market approach, we estimate the fair value based on observed market multiples for comparable businesses. An impairment loss is recorded to the extent that the reporting unit’s carrying amount exceeds the reporting unit’s fair value. An impairment loss cannot exceed the total amount of goodwill allocated to the reporting unit. Goodwill and indefinite-lived intangible assets are also tested more frequently if changes in circumstances or the occurrence of events indicates that a potential impairment exists. When changes in circumstances, such as a decline in the market price of our common stock, changes in demand or in the numerous variables associated with the judgments, assumptions and estimates made in assessing the appropriate valuation of goodwill indicate the carrying amount of certain indefinite lived assets may not be recoverable, the assets are evaluated for impairment.
We performed our annual goodwill impairment test during the third quarter of 2020 and we concluded that goodwill was not impaired. The estimated fair value of goodwill in both the Europe Manufacturing and Wheels & Parts reporting units exceeded its carrying value by approximately 5% and 9%, respectively. Since the estimated fair values were not substantially in excess of their carrying values, we may be at risk for an impairment loss in the future if expected profitability trends assumed in the fair value calculation are not realized.
Our goodwill balance was $130.0 million as of May 31, 2020 of which $86.7 million related to our Manufacturing segment and $43.3 million related to our Wheels, Repair & Parts segment.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Risk
We have global operations that conduct business in their local currencies as well as other currencies. To mitigate the exposure to transactions denominated in currencies other than the functional currency of each entity, we enter into foreign currency forward exchange contracts to protect revenue or margin on a portion of forecast foreign currency sales and expenses. At May 31, 2020 exchange rates, notional amounts of forward exchange contracts for the purchase of Polish Zlotys and the sale of Euros and Pound Sterling; and the purchase of Mexican Pesos and the sale of U.S. Dollars aggregated to $37.3 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, 2020, net assets of foreign subsidiaries aggregated $150.6 million and a 10% strengthening of the U.S. Dollar relative to the foreign currencies would result in a decrease in equity of $15.1 million, or 1.2% of Total equity - Greenbrier. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. Dollar.
Interest Rate Risk
We have managed a portion of our variable rate debt with interest rate swap agreements, effectively converting $252.8 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, 2020, 46% of our outstanding debt had fixed rates and 54% had variable rates. At May 31, 2020, a uniform 10% increase in variable interest rates would result in approximately $1.3 million of additional annual interest expense.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Principal Executive Officer and Principal Financial and Accounting Officer, the effectiveness of our 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 Principal Executive Officer and Principal Financial and Accounting 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 Principal Executive Officer and Principal Financial and Accounting 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, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There is hereby incorporated by reference the information disclosed in Note 15 to Consolidated Financial Statements, Part I of this quarterly report.
Item 1A. Risk Factors
This Form 10-Q should be read in conjunction with Part I Item 1A “Risk Factors” in our most recent Annual Report on Form 10-K for the year ended August 31, 2019 and Part II, Item 1A “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended February 28, 2020 which are incorporated herein by reference. Except as set forth below, there have been no material changes in the Risk Factors described in our most recent Annual Report on Form 10-K, and our subsequent Quarterly Report on Form 10-Q.
The COVID-19 coronavirus pandemic, the governmental reaction to COVID-19, and the related significant global decline in general economic activity most likely will have a material negative impact on our business, liquidity and financial position, results of operations, stock price, and ability to convert backlog to revenue.
The COVID-19 coronavirus outbreak has been categorized as a global pandemic by the World Health Organization. As human mortality and morbidity increase in numbers and expand geographically, the negative impact on the global economy of the COVID-19 pandemic and related governmental responses have been wide ranging and multi-faceted including historically steep and rapid declines in consumer, industrial, and investing activity in the geographic markets where we operate, widespread national or local “stay-at-home” orders and travel restrictions that reduce or prevent businesses in most of the world’s large economies from operating, disruptions in global supply chains, steep downturns and price volatility in equities markets, and concern that credit markets will not remain liquid.
The COVID-19 pandemic and related events are unprecedented in living memory. We are unable to predict when, how, or with what magnitude COVID-19 and related events will negatively impact our business due to numerous uncertainties, including the duration of the COVID-19 pandemic, the duration of the global decline in economic activity, the impact of those events to our customers, suppliers and employees, and actions that may be taken by governmental authorities, including preventing or curtailing the operations of our plants and/or shops, and other consequences.
COVID-19, the global decline in economic activity and the related governmental reaction most likely will have a material negative impact on our business, liquidity, results of operations, and stock price due to the occurrence of some or all of the following events or circumstances, among others:
We may be prevented from operating our manufacturing facilities, repair shops, wheel shops or other worksites due to the illness of our employees, “stay-at-home” regulations, and employee reluctance to appear for work. Closure for more than a few days of one or more of our large facilities could have a material negative impact on our financial position and results of operations.
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We function as an essential infrastructure business under guidance issued by the Department of Homeland Security. Similar guidelines and authorities exist in other nations where we operate. If our current status was eliminated or curtailed, we may be required to temporarily close one or more of our manufacturing facilities, repair shops, wheel shops or other worksites for more than a few days.
To date, while a very limited number of our employees have contracted COVID-19, we have operated free from any outbreak of COVID-19 at any of our manufacturing facilities, repair shops, wheel shops or other worksites. If an outbreak of COVID-19 were to occur at one of our large facilities, we may need to close such facility for more than a few days, and, we may not have a workforce adequate to meet our operating needs.
The operations of our customers may be disrupted thereby increasing the likelihood that our customers may attempt to delay, defer or cancel orders, may reduce orders for our products and services in the future or may cease to operate as going concerns.
The operations of our suppliers may be disrupted and the markets for the inputs to our business may not operate effectively or efficiently thereby negatively impacting our ability to purchase inputs for our business at efficient prices and in sufficient amounts.
We may not be able to manage our business effectively or integrate recent acquisition including ARI due to key employees becoming ill, working from home inefficiently, being unable to travel to our facilities, or being prevented from otherwise engaging in the consortium necessary for effective management.
Higher interest rates or availability of financing could increase the cost of, or potentially deter, new leasing arrangements with our customers, reduce our ability to syndicate railcars under lease to financial institutions, or impact the sales price we may receive on such syndications, any of which could materially adversely affect our business, financial condition and results of operations.
Our indebtedness may increase due to our need to increase borrowing to fund operations during a period of reduced revenue.
We may not be able to raise capital efficiently or at all due to a reduction in the value of our assets or illiquidity in the global credit markets.
We may need to raise capital, and if we raise capital by issuing equity securities, our common stock may be diluted.
We may not be able to pay dividends.
The market price of our common stock may drop or remain volatile.
We may incur significant employee health care costs under our self-insurance programs.
The COVID-19 pandemic may cause events, such a sustained decline in our operating results, long term outlook or the market price of our common stock that may require the goodwill on our balance sheet to be adjusted downward.
The COVID-19 pandemic has not yet been contained and the number of its victims and the extent of negative impact on the global economy cannot be foreseen at this time. The longer the pandemic continues, the more likely that more of the foregoing risks will be realized and that other negative impacts on our business will occur some of which we cannot now foresee. Our business, liquidity, financial position, results of operations and stock price most likely would be adversely impacted.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The Company announced on October 26, 2018 that The Board of Directors had authorized the Company to repurchase shares of the Company’s common stock. The share repurchase program has an expiration date of March 31, 2021 and the amount remaining for repurchase is $100 million. Under the share repurchase program, shares of common stock may be purchased on the open market or through privately negotiated transactions from time to time. The timing and amount of purchases will be based upon market conditions, securities law limitations and other factors. The program may be modified, suspended or discontinued at any time without prior notice. The share repurchase program does not obligate 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, 2020.
Period
Number
of Shares
Purchased
Average
Price
Paid Per
Share
(Including
Commissions)
Number of
as Part of
Publically
Announced
Plans or
Programs
Approximate
Dollar Value of
Shares that
May Yet Be
Under the Plans
or Programs
March 1, 2020 – March 31, 2020
100,000,000
April 1, 2020 – April 30, 2020
May 1, 2020 – May 31, 2020
Item 6. Exhibits
(a)
List of Exhibits:
31.1
Certification pursuant to Rule 13a – 14 (a).
31.2
32.1
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
101.INS
Inline XBRL Instance Document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
Cover Page Interactive Data File (Formatted as inline XBRL and contained in Exhibit 101).
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.
Date:
July 10, 2020
By:
/s/ Adrian J. Downes
Adrian J. Downes
Senior Vice President,
Chief Financial Officer and Chief Accounting Officer
(Principal Financial Officer and Principal Accounting Officer)