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| GBX > SEC Filings for GBX > Form 10-Q on 8-Jul-2009 | All Recent SEC Filings |
8-Jul-2009
Quarterly Report
THE GREENBRIER COMPANIES, INC.
accept for delivery despite the fact they have inspected and approved the
railcars as conforming to the specifications. GE has also advised us of their
intention to continue to unilaterally reduce the number of monthly deliveries of
railcars they will accept under the agreement and have unilaterally sought to
impose hyper-technical quality inspection practices. GE's recently proposed
modifications to the agreed upon monthly delivery schedules are substantially
lower than the amount necessary to permit us to manufacture and deliver the
contractually required total of 2,400 tank cars and 1,000 covered hopper cars by
the end of the ramp up period of the agreement in April 2011. GE's proposed
modifications to the railcar order quantities also do not allow for efficient
operation of our manufacturing facilities as required by the agreement. We have
not agreed to GE's requested reductions in deliveries, and do not believe the
contract permits GE to unilaterally reduce the number of railcar deliveries from
what was previously agreed upon. Currently, we continue to produce, and intend
to deliver, the number of tank cars and covered hopper cars ordered by GE under
the agreement even though such amount is at a rate which exceeds the number of
railcars GE has told us they are willing to accept for delivery.
Through June 30, 2009 GE has accepted, and we have delivered, only 101 tank cars
and 10 covered hopper cars. In addition, we have manufactured, and have sent for
delivery to GE, an additional 16 tank cars and 13 covered hopper cars beyond the
amount GE has indicated it will accept for delivery for the month ended June 30,
2009. These railcars have been inspected and approved by GE as conforming to the
specifications.
During the period through June 30, 2009, GE unilaterally reduced the number of
railcars it would accept for delivery, notwithstanding the requirements of the
contract. GE has also advised us of their intention to continue to unilaterally
reduce the number of deliveries of railcars they will accept through
September 30, 2009, from a contractually agreed upon cumulative total of 432
tank cars (capacity 30,000 gallons and 16,500 gallons) and 200 covered hopper
cars to only a cumulative total of 178 tank cars (capacity 30,000 gallons and
16,500 gallons) and 40 covered hopper cars. Through September 30, 2009, the
difference between what GE has said it will accept for delivery from what they
are required to accept for delivery under the contract is 414 cars, with an
approximate value of $35.0 million.
GE asserts unilaterally that in subsequent periods they will accept for delivery
an even smaller number of railcars. The seriousness of this problem to us
accelerates during each fiscal quarter of 2010 and 2011 fiscal years. We have
not agreed upon firm delivery schedules beyond September 30, 2009, but GE has
further advised us that they intend to accept for delivery no more than 25 tank
cars (capacity 30,000 gallons and 16,500 gallons) and 10 covered hopper cars per
month from October 2009 to June 2010. Based on the production schedule
originally proposed by both parties for the ramp up period, this is 95 fewer
tank cars per month and 105 fewer covered hopper cars per month than what would
be required during this period to allow us to produce railcars at an efficient
rate and for both parties to fulfill their obligations under the agreement.
Reducing railcar production to the levels currently proposed by GE would make it
impossible for us to produce the numbers of railcars GE is required to purchase
and we are required to deliver during the ramp up period.
We are continuing to discuss delivery schedules with GE. If GE unilaterally
continues to decline to accept delivery of railcars in amounts previously agreed
upon, or we are not able to agree on mutually acceptable delivery schedules for
the remainder of the ramp up period, we may have to either substantially slow or
halt production of these railcars, or else store completed cars pending
resolution of these issues. We are unable to quantify at this time the potential
financial effects of GE's breach of the agreement, continuing delays in
accepting delivery of railcars or other failures by GE to perform the GE
contract. We believe the contract contains adequate protection in that it
defines the rights and obligations of the parties with respect to railcar
purchase and sale requirements and inspection standards and that both the
contract and law provide effective legal and equitable remedies.
Marine backlog was approximately $145.0 million as of May 31, 2009, of which
approximately $20.0 million is scheduled for delivery in the remainder of fiscal
year 2009 and the balance through 2012.
Prices for steel, a primary component of railcars and barges, and related
surcharges have fluctuated significantly and remain volatile. In addition, the
price of certain railcar components, which are a product of steel, are affected
by steel price fluctuations. Subsequent to 2008, prices for steel, railcar
components and scrap steel have declined but remain volatile. New railcar and
marine backlog generally either includes fixed price contracts which anticipate
material price increases and surcharges, or contracts that contain actual pass
through of material price increases and
THE GREENBRIER COMPANIES, INC.
surcharges. On certain fixed price railcar contracts actual material cost
increases and surcharges have caused the total manufacturing cost of the railcar
to exceed the amounts originally anticipated, and in some cases, the actual
contractual sale price of the railcar. When the anticipated loss on production
of railcars in backlog is both probable and estimable, we accrue a loss
contingency. Accrued loss contingencies for production in backlog totaled
$0.6 million as of May 31, 2009. We are aggressively working to mitigate these
exposures. The Company's integrated business model has helped offset some of the
effects of fluctuating steel and scrap steel prices, as a portion of our
business segments benefit from rising steel scrap prices while other segments
benefit from lower steel and scrap steel prices through enhanced margins.
As part of an order to deliver 500 railcar units, we have an obligation to
guarantee the purchaser minimum earnings. The obligation runs from the date of
the railcar delivery through December 31, 2011. The maximum potential obligation
totals $13.2 million and in certain defined instances the obligation may be
reduced due to early termination. The purchaser has agreed to utilize the
railcars on a preferential basis, and we are entitled to re-market the railcar
units when they are not being utilized by the purchaser during the obligation
period. Any earnings generated from the railcar units will offset the obligation
and be recognized as revenue and margin in future periods. We believe our actual
obligation will be less than the $13.2 million. We delivered 444 railcar units
under this contract through May 31, 2009. The balance of the deliveries is
currently expected to occur by the end of this fiscal year. Upon delivery of the
railcar units, the entire purchase price is recorded as revenue and due in full.
The minimum earnings due to the purchaser are considered a reduction of revenue
and are recorded as deferred revenue. As of May 31, 2009 we recorded
$12.0 million of the potential obligation as deferred revenue and $1.2 million
was included in the calculation of the loss contingency for production in
backlog.
We are currently implementing measures to reduce our selling and administrative
and overhead costs, including reductions in headcount. As a result, during the
nine months ended May 31, 2009 $2.1 million was expensed for severance costs, of
which $0.8 million was recorded in Cost of revenue and $1.3 million in Selling
and administrative cost.
We test goodwill annually during the third quarter using a testing date of
February 28th. In accordance with the provision of SFAS 142, Goodwill and Other
Intangible Assets, the Company performed Step One of the SFAS 142 analysis as of
February 28, 2009. This analysis included an equity test whereby the fair value
of each reporting unit's total equity is compared to the carrying value of
equity and an asset test whereby the fair value of each reporting unit's total
assets was estimated and compared to the carrying value of assets. Greenbrier's
reporting units for this test are the same as its segments. The fair value of
our reporting units was determined based on a weighting of income and market
approaches. Under the income approach, the fair value of a reporting unit is
based on the present value of estimated future cash flows. Under the market
approach, the fair value is based on observed market multiples for comparable
businesses and guideline transactions. We also considered the premium of the
implied value of its reporting units over the current market value of its stock.
Results of the Step One analysis indicated that the carrying amounts of all
reporting units were in excess of their fair value indicating that an impairment
was probable. Accordingly, we were required to perform Step Two of the SFAS 142
impairment analysis to determine the amount, if any, of goodwill impairment to
be recorded.
Under Step Two of the SFAS 142 analysis, the implied fair value of goodwill
requires valuation of a reporting unit's tangible and intangible assets and
liabilities in a manner similar to the allocation of purchase price in a
business combination. If the carrying value of a reporting unit's goodwill
exceeds its implied fair value, goodwill is deemed impaired and is written down
to the extent of the difference. The Step Two analysis was completed during the
third quarter and we concluded that a portion of our goodwill was impaired. As a
result, a pre-tax non-cash impairment charge of $55.7 million was recorded which
consists of $1.3 million in the Manufacturing segment, $3.1 million in the
Leasing & Services segment and $51.3 million in the Refurbishment & Parts
segment. After goodwill impairment charges, a balance of $137.1 million remained
in goodwill related to the Refurbishment & Parts segment.
In conjunction with our annual test of goodwill, certain long lived assets were
tested for impairment during the quarter ended May 31, 2009. Forecasted
undiscounted future cash flows exceeded the carrying amount of the assets
indicating that the assets were not impaired.
THE GREENBRIER COMPANIES, INC.
Effective February 27, 2009 we entered into an agreement with our Mexican joint
venture partner, Grupo Industrial Monclova (GIMSA), whereby Greenbrier converted
working capital advances to our Mexican joint venture of $27.0 million to a
secured, interest bearing loan. Greenbrier may from time to time provide
additional loans to the joint venture. In addition, Greenbrier has acquired an
option from our joint venture partner to increase our current fifty percent
ownership to sixty six and two-thirds percent.
On January 31, 2009, the wheel facility in Washington, Illinois was extensively
damaged by fire. Substantially all the work scheduled to be completed at this
facility has been shifted to other wheel facilities in the Refurbishment & Parts
network and we have not experienced significant disruptions in service to our
customers. We believe we are adequately covered by insurance for any such loss
associated with this fire. A portion of the insurance proceeds were received
subsequent to quarter end and it is likely that we will recover additional
amounts under our insurance coverage, a portion of which may be recorded as a
gain in future periods. We are currently unable to determine the amount or
timing of the collection of the remaining proceeds or these potential gains.
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). This FSP specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will
reflect the entity's nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. This FSP is effective for us beginning
September 1, 2009 with respect to $100.0 million of outstanding convertible
debt. This FSP cannot be early adopted and requires retrospective adjustments
for all periods we had the convertible debt outstanding. On September 1, 2009 we
expect to record, on our Consolidated Balance Sheet, a debt discount of $17.0
million, a deferred tax liability of $6.7 million and a $10.3 million increase
to equity. The debt discount is expected to be amortized using the effective
interest rate method through May 2013 and the amortization expense will be
included in Interest and foreign exchange on the Consolidated Statements of
Operations. The pre-tax amortization is expected to be approximately
$4.1 million in fiscal year 2010, $4.5 million in fiscal year 2011, $4.8 million
in fiscal year 2012 and $3.6 million in fiscal year 2013.
On June 10, 2009, we obtained a $75.0 million secured term loan from affiliates
of WL Ross & Co. LLC (WLR). Amortization of fees and expenses associated with
these financings are expected to be approximately $2.8 million per year over the
next three years. In connection with the $75.0 million secured term loan, we
issued warrants to purchase an aggregate of 3.378 million shares of Greenbrier
common stock at $6.00 per share, subject to certain adjustments. The warrants
are exercisable for five years. As required by SFAS No. 123, a valuation of the
warrants is in process and will be completed in the fourth quarter of 2009. The
value of the warrants will be amortized over the next three years. The
outstanding warrants will have an effect on the calculation of the number of
diluted shares outstanding using the treasury stock method, if our average
market price per share during a quarter is greater than the warrant strike
price.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires judgment on the part of
management to arrive at estimates and assumptions on matters that are inherently
uncertain. These estimates may affect the amount of assets, liabilities, revenue
and expenses reported in the financial statements and accompanying notes and
disclosure of contingent assets and liabilities within the financial statements.
Estimates and assumptions are periodically evaluated and may be adjusted in
future periods. Actual results could differ from those estimates.
Income taxes - For financial reporting purposes, income tax expense is estimated
based on planned tax return filings. The amounts anticipated to be reported in
those filings may change between the time the financial statements are prepared
and the time the tax returns are filed. Further, because tax filings are subject
to review by taxing authorities, there is also the risk that a position taken in
preparation of a tax return may be challenged by a taxing authority. If the
taxing authority is successful in asserting a position different than that taken
by us, differences in tax expense or between current and deferred tax items may
arise in future periods. Such differences, which could have a material impact on
our financial statements, would be reflected in the financial statements when
management considers them probable of occurring and the amount reasonably
estimable. Valuation allowances reduce deferred tax assets to an amount that
will more likely than not be realized. Our estimates of the realization of
deferred tax
THE GREENBRIER COMPANIES, INC.
assets is based on the information available at the time the financial
statements are prepared and may include estimates of future income and other
assumptions that are inherently uncertain.
Maintenance obligations - We are responsible for maintenance on a portion of the
managed and owned lease fleet under the terms of maintenance obligations defined
in the underlying lease or management agreement. The estimated maintenance
liability is based on maintenance histories for each type and age of railcar.
These estimates involve judgment as to the future costs of repairs and the types
and timing of repairs required over the lease term. As we cannot predict with
certainty the prices, timing and volume of maintenance needed in the future on
railcars under long-term leases, this estimate is uncertain and could be
materially different from maintenance requirements. The liability is
periodically reviewed and updated based on maintenance trends and known future
repair or refurbishment requirements. These adjustments could be material due to
the inherent uncertainty in predicting future maintenance requirements.
Warranty accruals - Warranty costs to cover a defined warranty period are
estimated and charged to 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.
Revenue recognition - Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price is fixed or determinable and collectibility is reasonably assured.
Railcars are generally manufactured, repaired or refurbished under firm orders
from third parties. Revenue is recognized when railcars are completed, accepted
by an unaffiliated customer and contractual contingencies removed. Direct
finance lease revenue is recognized over the lease term in a manner that
produces a constant rate of return on the net investment in the lease. Operating
lease revenue is recognized as earned under the lease terms. Certain leases are
operated under car hire arrangements whereby revenue is earned based on
utilization, car hire rates and terms specified in the lease agreement. Car hire
revenue is reported from a third party source two months in arrears; however,
such revenue is accrued in the month earned based on estimates of use from
historical activity and is adjusted to actual as reported. These estimates are
inherently uncertain as they involve judgment as to the estimated use of each
railcar. Adjustments to actual have historically not been significant. Revenues
from construction of marine barges are either recognized on the percentage of
completion method during the construction period or on the completed contract
method based on the terms of the contract. Under the percentage of completion
method, judgment is used to determine a definitive threshold against which
progress towards completion can be measured to determine timing of revenue
recognition.
Impairment of long-lived assets - When changes in circumstances indicate the
carrying amount of certain long-lived assets may not be recoverable, the assets
are evaluated for impairment. If the forecast undiscounted future cash flows are
less than the carrying amount of the assets, an impairment charge to reduce the
carrying value of the assets to fair value is recognized in the current period.
These estimates are based on the best information available at the time of the
impairment and could be materially different if circumstances change.
Goodwill and acquired intangible assets - The Company periodically acquires
businesses in purchase transactions in which the allocation of the purchase
price may result in the recognition of goodwill and other intangible assets. The
determination of the value of such intangible assets requires management to make
estimates and assumptions. These estimates affect the amount of future period
amortization and possible impairment charges.
We perform a goodwill impairment test annually during the third quarter.
Goodwill is also tested more frequently if changes in circumstances or the
occurrence of events indicates that a potential impairment exists. The
provisions of
THE GREENBRIER COMPANIES, INC.
SFAS 142, Goodwill and Other Intangible Assets, require that we perform a
two-step impairment test on goodwill. In the first step, we compare the fair
value of each reporting unit with its carrying value. We determine the fair
value of our reporting units based on a weighting of income and market
approaches. Under the income approach, we calculate the fair value of a
reporting unit based on the present value of estimated future cash flows. Under
the market approach, we estimate the fair value based on observed market
multiples for comparable businesses. The second step of the goodwill impairment
test is required only in situations where the carrying value of the reporting
unit exceeds its fair value as determined in the first step. In the second step
we would compare the implied fair value of goodwill to its carrying value. The
implied fair value of goodwill is determined by allocating the fair value of a
reporting unit to all of the assets and liabilities of that unit as if the
reporting unit had been acquired in a business combination and the fair value of
the reporting unit was the price paid to acquire the reporting unit. The excess
of the fair value of a reporting unit over the amounts assigned to its assets
and liabilities is the implied fair value of goodwill. An impairment loss is
recorded to the extent that the carrying amount of the reporting unit goodwill
exceeds the implied fair value of that goodwill.
Loss contingencies - On certain railcar contracts the total cost to produce the
railcar may exceed the actual fixed or determinable contractual sale price of
the railcar. When the anticipated loss on production of railcars in backlog is
both probable and estimable the Company will accrue a loss contingency. These
estimates are based on the best information available at the time of the accrual
and may be adjusted at a later date to reflect actual costs.
Results of Operations
Three Months Ended May 31, 2009 Compared to Three Months Ended May 31, 2008
Overview
Total revenues for the three months ended May 31, 2009 were $244.4 million, a
decrease of $137.7 million from revenues of $382.1 million in the prior
comparable period. Net losses were $50.5 million for the three months ended
May 31, 2009 compared to net earnings of $8.1 million for the three months ended
May 31, 2008.
Manufacturing Segment
Manufacturing revenue includes results from new railcar and marine production.
. . .
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