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| GBX > SEC Filings for GBX > Form 10-K on 12-Nov-2009 | All Recent SEC Filings |
12-Nov-2009
Annual Report
Executive Summary
We currently operate in three primary business segments: Manufacturing, Refurbishment & Parts and Leasing & Services. These three business segments are operationally integrated. The Manufacturing segment, operating from four facilities in the United States, Mexico and Poland, produces double-stack intermodal railcars, conventional railcars, tank cars and marine vessels. The Refurbishment & Parts segment performs railcar repair, refurbishment and maintenance activities in the United States and Mexico as well as wheel, axle and bearing servicing, and production and reconditioning of a variety of parts for the railroad industry. The Leasing & Services segment owns approximately 9,000 railcars and provides management services for approximately 217,000 railcars for railroads, shippers, carriers, institutional investors and other leasing and transportation companies in North America. Management evaluates segment performance based on margins. We also produce rail castings through an unconsolidated joint venture.
All segments of the North American and European freight car markets in which we operate are currently experiencing depressed demand in a weak economy, market saturation of certain freight car types and tight capital markets. All of the aforementioned contribute to increased caution on the part of our customers and intensified competitive circumstances. These market factors have led and may continue to lead to lower revenues and reduced margins for some of our operations. In response to these market conditions we are concentrating our North American railcar manufacturing at our Mexican joint venture facility in Frontera, temporarily shuttering production at our other Mexican facility in Sahagun and limiting new railcar production at our Portland, Oregon facility. These conditions may also lead to the temporary idling of some of our other facilities.
The rail industry is cyclical in nature and multi-year supply agreements are a part of industry practice. Customer orders may be subject to cancellations and contain terms and conditions customary in the industry. Historically, little variation has been experienced between the product ordered and the product actually delivered. Recent economic conditions have caused some customers to consider renegotiation, delay or cancellation of orders. The backlog is not necessarily indicative of future results of operations.
Our total manufacturing backlog of railcars for sale and lease as of August 31, 2009 was approximately 13,400 units with an estimated value of $1.16 billion, compared to 16,200 units valued at $1.44 billion as of August 31, 2008. Based on current production plans, approximately 2,400 units in backlog are scheduled for delivery in fiscal year 2010. There are currently 400 units in backlog that are subject to certain cancellation provisions. A portion of the orders included in backlog reflects an assumed product mix. Under terms of the orders, the exact mix will be determined in the future which may impact the dollar amount of backlog. In addition, a substantial portion of our backlog consists of orders for tank cars which are a new product type for us in North America.
In 2007 we entered into a long-term contract with General Electric Railcar Services Corporation (GE) to build 11,900 tank cars and covered hoppers over an eight-year period. Deliveries of the railcar units commenced in December 2008. Our railcar backlog as of August 31, 2009 includes approximately 11,500 units to be produced for GE with a current value of approximately $990 million. Under the GE contract, the first 2,400 tank cars and 1,000 covered hopper cars were to be delivered during a "ramp up period" ending April 2011, during which period our production of tank cars was to accelerate as our tank car manufacturing process becomes more efficient and in turn GE's order quantities of tank cars and covered hopper cars were to increase through such period. In October 2009, we and GE agreed to extend the end of the ramp up period from April 2011 to September 2011. The remaining 8,500 railcars under the agreement are to be delivered over the balance of the eight-year period and are subject to our fulfillment of certain contractual conditions.
In late calendar year 2008, GE advised us of their desire to substantially reduce, delay or otherwise cancel deliveries under the contract. We have not agreed to GE's requested reductions in deliveries, and believe that a unilateral reduction of the number of railcar deliveries from what was previously agreed upon is a breach of the agreement. Currently, we continue to produce and deliver, and GE continues to accept and pay for, tank cars and covered hopper cars. Through October 31, 2009 GE has accepted, and we have delivered, 328 tank cars and 200 covered hopper cars.
We believe that GE is in breach of the contract. We are continuing to discuss with GE potential modifications to the contract. If we are unable to agree on mutually acceptable modifications to the contract, 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 or 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 $126.0 million as of August 31, 2009, of which approximately $75.0 million is scheduled for delivery in fiscal year 2010. The balance of the production is scheduled into 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 surcharges. On certain fixed price railcar contracts actual material cost increases and surcharges caused the total manufacturing cost of the railcar to exceed the original expectation, and in some cases, the actual contractual price of the railcar. When an anticipated loss on production of railcars in backlog is both probable and estimable, we accrue a loss contingency. 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.
We delivered 500 railcar units during 2009 for which we have an obligation to guarantee the purchaser minimum earnings. The obligation expires December 31, 2011. The maximum potential obligation totals $13.1 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 $13.1 million. Upon delivery of the railcar units, the entire purchase price was recorded as revenue and paid in full. The minimum earnings due to the purchaser are considered a reduction of revenue and were recorded as deferred revenue. As of August 31, 2009 we have recorded $13.1 million of the potential obligation as deferred revenue.
In 2009 we implemented measures to reduce our selling and administrative and overhead costs, including reductions in headcount. As a result, during fiscal year 2009 $4.0 million was expensed for severance costs, of which $2.7 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. The annual test performed in 2009 indicated that goodwill was impaired. As a result, a pre-tax non-cash impairment charge of $55.7 million was recorded, in our third quarter, 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.
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. This facility has now been closed. We believe we are adequately covered by insurance for any such loss associated with this fire. A portion of the insurance proceeds were received during the fourth quarter 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.
Results of Operations
Overview
Total revenue was $1.0 billion, $1.3 billion and $1.2 billion for the years ended August 31, 2009, 2008 and 2007. Net loss for the year ended August 31, 2009 was $54.1 million or $3.21 per diluted common share which included $51.0 million of special charges net of tax. Net earnings for the year ended August 31, 2008 were $19.5 million or $1.19 per diluted common share which included $2.3 million of special charges net of tax. Net earnings for the year ended August 31, 2007 were $22.0 million or $1.37 per diluted common share which included $13.7 million of special charges net of tax.
Manufacturing Segment
Manufacturing revenue includes new railcar and marine production. New railcar delivery and backlog information disclosed herein includes all facilities.
Manufacturing revenue was $462.5 million, $665.1 million and $738.4 million for the years ended August 31, 2009, 2008 and 2007. Railcar deliveries, which are the primary source of manufacturing revenue, were approximately 3,700 units in 2009 compared to 7,300 units in 2008 and 8,600 units in 2007. Manufacturing revenue decreased $202.6 million, or 30.0%, from 2008 to 2009 primarily due to lower railcar deliveries and an $11.6 million obligation of guaranteed minimum earnings under a certain contract. The decrease was somewhat offset by a change in product mix with higher per unit sales prices and higher marine revenues. Manufacturing revenue decreased $73.3 million, or 10.0%, from 2007 to 2008 due to lower railcar deliveries primarily due to the current economic slowdown of the North American market.
Manufacturing margin as a percentage of revenue was 0.8% in 2009 compared to 1.7% in 2008. The decrease was primarily the result of the $11.6 million obligation of guaranteed minimum earnings under a certain contract, higher material costs and scrap surcharge expense, severance expense of $2.4 million and less absorption of overhead due to lower production levels and plant utilization. These were partially offset by improved marine margins as a result of labor efficiencies and a continuous run of similar barge types and a $2.2 million reduction of warranty accruals. Manufacturing margin as a percentage of revenue was 1.7% in 2008 compared to 7.8% in 2007. The decrease was primarily due to rising steel prices and surcharges, loss contingencies of $7.9 million accrued on certain future production, $0.5 million of severance, lower production levels and additional start up costs at our Mexican joint venture facility, partially offset by relief of certain contractual obligations.
Refurbishment & Parts Segment
Refurbishment & Parts revenue was $476.2 million, $527.5 million and $381.7 million for the years ended August 31, 2009, 2008 and 2007. The $51.3 million decrease in revenue from 2008 to 2009 was primarily due to lower wheel and parts volumes, reduced volumes of railcar repair and refurbishment work, a sharp decrease in scrap metal pricing and lower wheelset pricing. The $145.8 million increase in revenue from 2007 to 2008 was primarily due to a full year of revenue from the Meridian Rail acquisition which was completed in November 2006, $51.6 million of additional revenue related to American Allied Railway Equipment Company (AARE) and RBI acquisitions, strong wheelset volumes and higher scrap steel prices.
Refurbishment & Parts margin as a percentage of revenue was 11.7%, 19.2% and 16.8% for 2009, 2008 and 2007. The decrease in fiscal 2009 margins was primarily due to lower net scrap pricing, less favorable mix of repair and refurbishment work and $0.3 million in severance. Higher margins in 2008 were a result of the growth of our wheel business, which includes a full year of Meridian Rail and the acquisition of AARE which occurred early in the third quarter of fiscal 2008, higher margin wheel reconditioning work and the positive impact of higher scrap steel prices. This was partially offset by lower volumes of program work at the repair facilities.
Leasing & Services Segment
Leasing & Services revenue was $79.5 million, $97.5 million and $103.7 million for the years ended August 31, 2009, 2008 and 2007. The $18.0 million decrease in revenue was primarily the result of a $6.8 million decrease in gains on disposition of assets from the lease fleet, lower lease fleet utilization, downward pressures on lease renewal rates, lower earnings on certain car hire utilization leases and lower maintenance revenues. The $6.2 million decrease in revenue from 2007 to 2008 was primarily the result of a $5.4 million decrease in gains on sale of assets from the lease fleet, lower interim rents on assets held for sale and decreased interest income from lower cash balances. The decline was partially offset by higher car hire revenue from additions to the lease fleet and increased maintenance revenue.
During 2009, we realized $1.2 million in pre-tax earnings on the disposition of leased equipment compared to $8.0 million in 2008 and $13.4 million in 2007. Assets from our lease fleet are periodically sold in the normal course of business in order to take advantage of market conditions, manage risk and maintain liquidity.
Leasing & Services margin as a percentage of revenue was 42.2% in 2009 compared to 51.0% in 2008 and 55.8% in 2007. The decrease in 2009 was primarily the result of decreases in gains on disposition of assets from the fleet, which have no associated cost of revenue, lower lease fleet utilization, downward pressure on lease renewal rates and lower earnings on certain car hire utilization leases. The decrease from 2007 to 2008 was primarily a result of declines in gains on disposition of assets from the lease fleet, interest income and interim rents on assets held for sale, all of which have no associated cost of revenue.
The percent of owned units on lease as of August 31, 2009 was 88.3% compared to 95.2% at August 31, 2008.
Other costs
Selling and administrative expense was $65.7 million, $85.1 million and $83.4 million for the years ended August 31, 2009, 2008 and 2007. The $19.4 million decrease from 2008 to 2009 is primarily due to lower employee related costs, continued cost reduction efforts in the current economic environment and reversal of $2.3 million of certain accruals. The decrease was partially offset by severance costs of $1.3 million related to reductions in work force. The $1.7 million increase from 2007 to 2008 is primarily due to increased employee costs including severance of $1.5 million related to reductions in work force, integration costs of recent acquisitions and costs associated with our Mexican joint venture facility that commenced production in May 2007, partially offset by the closure of our Canadian facility.
Interest and foreign exchange expense was $42.1 million, $40.8 million and $39.9 million for the years ended August 31, 2009, 2008 and 2007. The $1.3 million increase from 2008 to 2009 is due to $1.1 million in warrant amortization expense, $0.9 million acceleration of loan fee amortization associated with the reduction in size of the North American credit facility, $0.4 million to break interest rate swaps associated with the voluntary prepayment of approximately $6.1 million of certain long term debt and $1.8 million increase in foreign exchange losses. These were partially offset by favorable interest rates on our variable rate debt and lower debt levels. The warrants, issued in conjunction with the $75.0 million secured term loan, were valued at $13.4 million and will be amortized through June 2012. The annual amortization is expected to be $4.5 million for the year ending August 31, 2010, $4.5 million for the year ending August 31, 2011 and $3.3 million for the year ending August 31, 2012. 2009 results include foreign exchange losses of $4.0 million compared to foreign exchange losses of $2.2 million in 2008 principally due to foreign currency exchange fluctuations. The $0.9 million increase from 2007 to 2008 was primarily due to foreign exchange fluctuations.
Special charges of $55.7 million were recorded in May 2009 associated with the impairment of goodwill. These charges consist of $1.3 million in the Manufacturing segment, $3.1 million in the Leasing & Services segment and $51.3 million in the Refurbishment & Parts segment.
In April 2007, the Company's board of directors approved the permanent closure of the Company's Canadian railcar manufacturing facility, TrentonWorks. As a result of the facility closure decision, special charges of $2.3 million were recorded during 2008 consisting of severance costs and professional and other fees.
Special charges of $21.9 million were recorded during 2007 associated with the impairment and subsequent closure of TrentonWorks. These charges consist of $14.2 million of impairment of property, plant and equipment, $2.1 million of inventory impairment, $1.1 million impairment of goodwill and other, $3.9 million of severance costs and $0.6 million of professional and other fees.
Income Tax
Our effective tax rate was 21.9%, 54.5% and 39.9% for the years ended August 31, 2009, 2008 and 2007. The lower tax rate in 2009 was primarily the result of a goodwill impairment charge for which a tax benefit was recorded at 8%, as a portion of the impairment charge was not deductible for tax purposes. In addition, 2009 included a reversal of $1.4 million of liabilities for uncertain tax positions for which we are no longer subject to examination by the tax authorities, a tax benefit of $2.5 million related to the deemed liquidation of our German operation for U.S. tax purposes and a tax benefit of $4.3 million related to the reversal of a deferred tax liability associated with a foreign subsidiary. Tax expense for 2008 included a $3.9 million charge associated with deferred tax assets and operating losses without tax benefit incurred by our Canadian subsidiary during its closure process. 2008 included a $1.3 million increase in valuation allowances related to net operating losses generated in Poland and Mexico. In addition, a $1.9 million tax benefit resulted from reversing income tax reserves associated with certain tax positions taken in prior years. Tax expense for 2007 included an $8.2 million tax benefit associated with the write-off of our investment in our Canadian subsidiary for tax purposes and no tax benefit associated with special charges related to the Canadian plant closure costs and losses incurred by the Canadian facility. 2007 also included tax benefits of approximately $1.0 million for Mexican asset based tax credits and amended state income tax provisions.
The fluctuations in the effective tax rate are also due to the geographical mix of pre-tax earnings and losses, minimum tax requirements in certain local jurisdictions and operating losses for certain operations with no related accrual of tax benefit.
Minority Interest
The minority interest of $1.5 million, $3.2 million and $1.5 million for the years ended August 31, 2009, 2008 and 2007 represents our joint venture partner's share in the losses of our Mexican railcar manufacturing joint venture that began production in 2007.
Liquidity and Capital Resources
We have been financed through cash generated from operations and borrowings. At August 31, 2009 cash was $76.2 million, an increase of $70.2 million from $6.0 million at the prior year end. Cash increases were primarily from decreased levels of operation which lead to lower working capital needs, additional focus on working capital management, proceeds from sales of equipment and $75.0 million in secured term loans, of which a portion of the proceeds were used to pay off certain notes payable and revolving notes.
Cash provided by operating activities for the years ended August 31, 2009, 2008 and 2007 was $120.5 million, $32.1 million and $46.3 million. The change was primarily due to lower working capital needs as a result of decreased levels of operation.
Cash used in investing activities for the year ended August 31, 2009 was $23.0 million compared to $152.2 million in 2008 and $286.6 million in 2007. 2009 cash utilization was primarily due to capital expenditures during the year. Cash utilization in 2008 was primarily due to the acquisitions of AARE and RBI and capital expenditures for the year. Increased cash utilization for 2007 was primarily due to the acquisitions of Meridian Rail Holdings Corp. (Meridian) and Rail Car America (RCA).
Capital expenditures totaled $38.8 million, $77.6 million and $137.3 million for the years ended August 31, 2009, 2008 and 2007. Of these capital expenditures, approximately $23.1 million, $45.9 million and $111.9 million for the years ended August 31, 2009, 2008 and 2007 were attributable to Leasing & Services operations. Our capital expenditures have decreased based on current market conditions and fleet management objectives. We regularly sell assets from our lease fleet, some of which may have been purchased within the current year and included in capital expenditures. Proceeds from the sale of equipment were approximately $15.6 million, $14.6 million and
$119.7 million for the years ended August 31, 2009, 2008 and 2007. Leasing & Services capital expenditures for 2010, net of proceeds from sales of equipment, are expected to be minimal.
Approximately $9.1 million, $24.1 million and $20.4 million of capital expenditures for the years ended August 31, 2009, 2008 and 2007 were attributable to Manufacturing operations. Capital expenditures for Manufacturing are expected to be approximately $7.0 million in 2010 and primarily relate to maintenance of existing equipment and ERP implementation.
Refurbishment & Parts capital expenditures for the years ended August 31, 2009, 2008 and 2007 were $6.6 million, $7.6 million and $5.0 million and are expected to be approximately $17.0 million in 2010 for maintenance of existing facilities, ERP implementation and some expansion.
Cash used in financing activities was $24.5 million for the year ended August 31 2009, compared to cash provided by financing activities of $103.5 million in 2008 and $115.8 million in 2007. During 2009, we repaid $81.3 million in net revolving credit lines and $16.4 million in term debt and paid dividends of $2.0 million. We received $69.8 million in net proceeds from term loan borrowings. During 2008, we received $49.6 million in net proceeds from term loan borrowings and $55.5 million in net proceeds under revolving credit lines. In 2008, we repaid $6.9 million in term debt and paid dividends of $5.3 million.
All amounts originating in foreign currency have been translated at the August 31, 2009 exchange rate for the following discussion. As of August 31, 2009 senior secured revolving credit facilities, consisting of two components, aggregated $125.3 million. As of August 31, 2009 a $100.0 million revolving line of credit was available to provide working capital and interim financing of equipment, principally for the United States and Mexican operations. Advances under this revolving credit facility bear interest at variable rates that depend on the type of borrowing and the defined ratio of debt to total capitalization. In addition, current lines of credit totaling $25.3 million, with various variable rates, are available for working capital needs of the European manufacturing operation. Currently these European credit facilities have maturities that range from April 2010 through June 2010. We regularly seek European credit facility renewals and expect the available credit facilities to be approximately $23.0 million through June 30, 2010.
As of August 31, 2009 outstanding borrowings under our facilities consists of $4.0 million in letters of credit outstanding under the North American credit facility and $16.0 million in revolving notes outstanding under the European credit facilities.
The revolving and operating lines of credit, along with notes payable, contain covenants with respect to the Company and various subsidiaries, the most restrictive of which, among other things, limit the ability to: incur additional indebtedness or guarantees; pay dividends or repurchase stock; enter into sale leaseback transactions; create liens; sell assets; engage in transactions with affiliates, including joint ventures and non U.S. subsidiaries, including but not limited to loans, advances, equity investments and guarantees; enter into mergers, consolidations or sales of substantially all the Company's 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 and rent) coverage.
On June 10, 2009, we received a $75.0 million secured term loan from affiliates of WL Ross & Co. LLC (WL Ross) maturing in June 2012. The loan contains no financial ratio covenants and has a variable interest rate of LIBOR plus 3.5%. In connection with the loan we issued warrants to purchase 3.378 million shares of our common stock at $6 per share. The warrants have a five-year term.
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