The Greenbrier Companies
Annual Report 2010

Plain-text annual report

O n e C e n t e r p o i n t e D r i v e , S u i t e 2 0 0 | L a k e O s w e g o , O re g o n 9 7 0 3 5 | w w w. G B R X . c o m 2010 ANNUAL REPORT BOS57129wo5_10K_Cvr.indd 1 BOS57129wo5_10K_Cvr.indd 1 11/9/2010 11:03:28 AM 11/9/2010 11:03:28 AM To our Shareholders, Customers, Employees and Suppliers: The Greenbrier Companies Locations William A. Furman President and Chief Executive Offi cer Economic forces continued to impede our profi t and EBITDA goals in fi scal 2010. Notwithstanding these forces, we achieved all four of our other key objectives identifi ed at the beginning of the year. First, we obtained a satisfactory modifi cation of the GE new railcar contract during the second quarter. Second, we improved the operational effi ciency of our facilities, while maintaining the fl exibility to respond to market demand. One example of this fl exibility occurred in the fourth quarter when we shifted 175 workers from marine barge construction to new railcar production in support of new railcar orders and to address softness in the marine market. Third, we produced positive operating cash fl ow, reduced net debt by $76 million, and strengthened our balance sheet through a $52.7 million common stock offering. Finally, our fourth objective was to further leverage our integrated business model. The competitive advantages of this model were demonstrated with receipt of recent new railcar and railcar refurbishment orders which utilized our strengths in engineering and leasing to quickly secure transactions. Looking Ahead We continue to see positive signs of a recovery in the North American freight supply industry. Railcar loadings continue to improve, railcars continue to come out of storage, and new railcar orders in the third calendar quarter of 2010 were at their highest levels since the second quarter of 2008. The outlook for our new railcar manufacturing operations in North America continues to improve signifi cantly. We now have fi ve production lines dedicated to new railcar manufacturing, compared to two lines less than six months ago. Greenbrier is well-positioned for the upturn, as rail traffi c continues to improve and the economy continues to recover. In the very near term, we anticipate that reduced demand for wheel services and marine vessels will partially dampen the impact of positive railcar manufacturing trends. Our recent orders for double stack equipment represent the early signs of restoration in demand for this railcar type. Greenbrier has built over 60% of all double stack platforms ever built in North America. Similarly, there is a rebound in demand for covered hopper cars, where we also have a high market share. We believe our superior designs and engineering provide more reliable and safer transportation for the North American market. Greenbrier’s new railcar manufacturing backlog as of August 31, 2010 was 5,300 units with an estimated value of $420 million, compared to 4,400 units valued at $370 million at May 31, 2010. In September and October, additional orders for 3,200 units with an aggregate value of $200 million were received. Our share of total North American industry backlog stands at 40% as of September 30, 2010, which is disproportionately large, based on our share of industry capacity. We already have 7,000 units in our backlog scheduled to be built in fi scal 2011, and have capacity to accept additional orders for delivery in 2011. Much of our backlog is of similar railcar types, which will allow us to realize effi ciencies of longer production runs. In fi scal 2010, we delivered only 2,700 new railcar units. So, we expect this business will be up signifi cantly in fi scal 2011. Front Cover: Tony Veditz, Gunderson, LLC Conversely, we are seeing an industry-wide slowdown in demand for marine barges. In response, we have slowed marine production rates and have reassigned many of our marine workers to new railcar manufacturing. We expect this part of our manufacturing segment to recover later in 2011, as the effects of economic uncertainty surrounding the Gulf oil spill and off-shore drilling are abated.  Offices  Parts (cid:141) Repair Lake Oswego, OR (Headquarters) Birmingham, AL Boulder, CO Beavercreek, OH Fort Worth, TX Leipzig, Germany (cid:74) Freight Car Manufacturing Frontera, Mexico (joint Venture) Portland, Oregon Swidnica, Poland Sahagun, Mexico Alliance, OH (joint venture) Peoria, IL Portland, OR Red Oak, IA Youngstown, OH Wheels Chicago Heights, IL Concarril - Sahagun, MX Corsicana, TX Elizabethtown, KY Kansas City, KS Lewistown, PA Macon, GA Mexico City, MX Pine Bluff, AR Portland, OR San Bernardino, CA Tacoma, WA Atchison, KS Beckmann - San Antonio, TX Chehalis, WA Cleburne, TX Dothan, AL Finley - Kennewick, WA Golden, CO Hodge, LA Kansas City, MO Mexico City, MX Modesto, CA Omaha, NE Osawatomie, KS Philadelphia, PA San Antonio, TX SoSan - Von Ormy, TX Springfi eld, OR Tierra Blanca, MX Toronto, ON, CN Topeka, KS Tucson, AZ Woodland, CA BOS57129wo17_10K_Cvr.indd 2 BOS57129wo17_10K_Cvr.indd 2 11/18/2010 1:25:34 PM 11/18/2010 1:25:34 PM Repair demand continues to improve; however, the current mix is largely light repair and maintenance rather than higher margin heavy refurbishment. We anticipate an increase in demand in both refurbishment and repair activity, as cars are removed from storage and placed in service. This increase in demand should result in more normalized effi ciencies and margins from repair and refurbishment. Wheel volumes remain surprisingly soft given the increase in rail traffi c, as wheel usage lags the recovery, just as it lagged the recession. Given that wheel replacement is subject to regulation which requires replacement after a certain level of wear, we believe this business will improve as rail loadings and revenue ton miles continue to improve. We have been awarded an extension of two important wheel contracts which will protect our base business. Lease fl eet utilization has improved sequentially on our owned fl eet. As the economy improves, we have upside in our utilization leases and intend to seek higher rates on renewals of our short term leases. We continue to grow our managed fl eet and are pleased with the addition of major new customers this year. We now, for the fi rst time, have over 225,000 railcars under management. In 2011, lease underwriting and syndication activities will be important factors in meeting our fi nancial goals. The margins we generate from these transactions along with the rent we earn before the sale have, in the past, been very profi table, exceeding margins on a straight sale to a customer. We are extremely liquid today and these transactions provide good temporary investments. The WL Ross leasing relationship gives us another potential syndication outlet, beyond our traditional sources. We are determined to build on our competitive advantages. Greenbrier has a fl exible workforce that provides the capability to adjust resources quickly across multiple disciplines. We will continue to emphasize quality products and services, while remaining focused on enhancing operating effi ciency and cost containment, with the goal of improving gross margins and returning to meaningful sustained profi tability. I would like to close by thanking our employees and members of our Board of Directors for their invaluable contributions through a challenging year. We are grateful to our customers, suppliers, fi nanciers and shareholders for their continued support. Sincerely, William A. Furman President and Chief Executive Offi cer UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549-1004 Form 10-K ¥ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended August 31, 2010 or n 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 (State of Incorporation) 93-0816972 (I.R.S. Employer Identification No.) One Centerpointe Drive, Suite 200, Lake Oswego, OR 97035 (Address of principal executive offices) (503) 684-7000 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: (Title of Each Class) Common Stock without par value (Name of Each Exchange on Which Registered) New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No X Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Act. Yes No X Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ≤ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer X Non-accelerated filer Smaller reporting company (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X Aggregate market value of the Registrant’s Common Stock held by non-affiliates as of February 28, 2010 (based on the closing price of such shares on such date) was $157,475,796. The number of shares outstanding of the Registrant’s Common Stock on October 31, 2010 was 21,880,820, without par value. DOCUMENTS INCORPORATED BY REFERENCE Parts of Registrant’s Proxy Statement dated November 22, 2010 prepared in connection with the Annual Meeting of Stockholders to be held on January 7, 2011 are incorporated by reference into Parts II and III of this Report. The Greenbrier Companies, Inc. Form 10-K TABLE OF CONTENTS FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 PART I PAGE BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1. Item 1a. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1b. UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 3. REMOVED AND RESERVED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4. PART II Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES . . . . . . . . . . . . . . SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6. Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING Item 9. AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9a. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9b. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . . . . . . Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 11 18 19 19 21 20 22 23 32 33 71 72 73 74 74 74 74 74 75 79 80 2 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Forward-Looking Statements From time to time, The Greenbrier Companies, Inc. and its subsidiaries (Greenbrier or the Company) or their representatives have made or may make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements as to expectations, beliefs and strategies regarding the future. Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer or in various filings made by us with the Securities and Exchange Commission, including this filing on Form 10-K and in the Company’s President’s letter to stockholders that is typically distributed to the stockholders in conjunction with this Form 10-K and the Company’s Proxy Statement. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These forward-looking statements rely on a number of assumptions concerning future events and include statements relating to: (cid:129) availability of financing sources and borrowing base for working capital, other business development activities, capital spending and railcar and marine warehousing activities; ability to renew, maintain or obtain sufficient lines of credit and performance guarantees on acceptable terms; ability to utilize beneficial tax strategies; ability to grow our wheel services, refurbishment and parts, and lease fleet and management services businesses; ability to obtain sales contracts which provide adequate protection against increased costs of materials and components; ability to obtain adequate insurance coverage at acceptable rates; ability to obtain adequate certification and licensing of products; and short- and long-term revenue and earnings effects of the above items. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) The following factors, among others, could cause actual results or outcomes to differ materially from the forward- looking statements: (cid:129) (cid:129) (cid:129) fluctuations in demand for newly manufactured railcars or marine barges; fluctuations in demand for wheel services, refurbishment and parts; delays in receipt of orders, risks that contracts may be canceled during their term or not renewed and that customers may not purchase the amount of products or services under the contracts as anticipated; ability to maintain sufficient availability of credit facilities and to maintain compliance with or to obtain appropriate amendments to covenants under various credit agreements; domestic and global economic conditions including such matters as embargoes or quotas; (cid:129) (cid:129) U.S., Mexican and other global political or security conditions including such matters as terrorism, war, civil (cid:129) disruption and crime; growth or reduction in the surface transportation industry; ability to maintain good relationships with our workforce, including third party labor providers and collective bargaining units; steel and specialty component price fluctuations, scrap surcharges, steel scrap prices and other commodity price fluctuations and their impact on product demand and margin; a delay or failure of acquired businesses, start-up operations, or new products or services to compete successfully; changes in product mix and the mix of revenue levels among reporting segments; labor disputes, energy shortages or operating difficulties that might disrupt operations or the flow of cargo; production difficulties and product delivery delays as a result of, among other matters, changing technologies or non-performance of alliance partners, subcontractors or suppliers; ability to renew or replace expiring customer contracts on satisfactory terms; ability to obtain and execute suitable contracts for railcars held for sale; lower than anticipated lease renewal rates, earnings on utilization based leases or residual values for leased equipment; discovery of defects in railcars resulting in increased warranty costs or litigation; (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 3 (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) resolution or outcome of pending or future litigation and investigations; loss of business from, or a decline in the financial condition of, any of the principal customers that represent a significant portion of our total revenues; competitive factors, including introduction of competitive products, new entrants into certain of our markets, price pressures, limited customer base and competitiveness of our manufacturing facilities and products; industry overcapacity and our manufacturing capacity utilization; decreases in carrying value of inventory, goodwill or other assets due to impairment; severance or other costs or charges associated with lay-offs, shutdowns, or reducing the size and scope of operations; changes in future maintenance or warranty requirements; ability to adjust to the cyclical nature of the industries in which we operate; changes in interest rates and financial impacts from interest rates; ability and cost to maintain and renew operating permits; actions by various regulatory agencies; changes in fuel and/or energy prices; risks associated with our intellectual property rights or those of third parties, including infringement, maintenance, protection, validity, enforcement and continued use of such rights; expansion of warranty and product support terms beyond those which have traditionally prevailed in the rail supply industry; availability of a trained work force and availability and/or price of essential raw materials, specialties or components, including steel castings, to permit manufacture of units on order; failure to successfully integrate acquired businesses; discovery of previously unknown liabilities associated with acquired businesses; failure of or delay in implementing and using new software or other technologies; ability to replace maturing lease and management services revenue and earnings with revenue and earnings from new commercial transactions, including new railcar leases, additions to the lease fleet and new management services contracts; credit limitations upon our ability to maintain effective hedging programs; and financial impacts from currency fluctuations and currency hedging activities in our worldwide operations. Any forward-looking statements should be considered in light of these factors. Words such as “anticipates,” “believes,” “forecast,” “potential,” “contemplates,” “expects,” “intends,” “plans,” “seeks,” “estimates,” “could,” “would,” “will,” “may,” “can,” and similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. Many of the important factors that will determine these results and values are beyond our ability to control or predict. You are cautioned not to put undue reliance on any forward-looking statements. Except as otherwise required by law, we do not assume any obligation to update any forward-looking statements. All references to years refer to the fiscal years ended August 31st unless otherwise noted. The Greenbrier Companies is a registered trademark of The Greenbrier Companies, Inc. Gunderson, Maxi-Stack, Auto-Max and YSD are registered trademarks of Gunderson LLC. 4 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t PART I Item 1. BUSINESS Introduction We are one of the leading designers, manufacturers and marketers of railroad freight car equipment in North America and Europe, a manufacturer and marketer of ocean-going marine barges in North America and a leading provider of wheel services, railcar refurbishment and parts, leasing and other services to the railroad and related transportation industries in North America. We operate an integrated business model in North America that combines wheel services, repair and refurbishment, component parts reconditioning, freight car manufacturing, leasing and fleet management services. Our model is designed to provide customers with a comprehensive set of freight car solutions utilizing our substantial engineering, mechanical and technical capabilities as well as our experienced commercial personnel. This model allows us to develop cross-selling opportunities and synergies among our various business segments and to enhance our margins. We believe our integrated model is difficult to duplicate and provides greater value for our customers. We operate in three primary business segments: Manufacturing; Wheel Services, Refurbishment & Parts and Leasing & Services. Financial information about our business segments for the years ended August 31, 2010, 2009 and 2008 is located in Note 23 Segment Information to our Consolidated Financial Statements. We are a corporation formed in 1981. Our principal executive offices are located at One Centerpointe Drive, Suite 200, Lake Oswego, Oregon 97035, our telephone number is (503) 684-7000 and our Internet web site is located at http://www.gbrx.com. Products and Services Manufacturing North American Railcar Manufacturing - We manufacture a broad array of railcar types in North America and have demonstrated an ability to capture high market shares in many of the car types we produce. We are the leading North American manufacturer of intermodal railcars with an average market share of approximately 60% over the last five years. In addition to our strength in intermodal railcars, we have commanded an average market share of approximately 60% in boxcars, 35% in flat cars and 10% in covered hoppers over the last five years and we have recently entered the tank car market. The primary products we produce for the North American market are: Intermodal Railcars - We manufacture a comprehensive range of intermodal railcars. Our most important intermodal product is our articulated double-stack railcar. The double-stack railcar is designed to transport containers stacked two-high on a single platform. An articulated double-stack railcar is comprised of up to five platforms each of which is linked by a common set of wheels and axles. Our comprehensive line of articulated and non-articulated double-stack intermodal railcars offers varying load capacities and configurations. The double- stack railcar provides significant operating and capital savings over other types of intermodal railcars. Conventional Railcars - We produce a wide range of boxcars, which are used in forest products, automotive, perishables, general merchandise applications and the transport of commodities. We also produce a variety of covered hopper cars for the grain and cement industries as well as gondolas for the steel and metals markets and various other conventional railcar types, including our proprietary Auto-Max car. Our flat car products include center partition cars for the forest products industry, bulkhead flat cars, flat cars for automotive transportation and solid waste service flat cars. Tank Cars - We produce a line of tank car products for the North American market. We produce 30,000-gallon non- coiled, non-insulated tank cars, which are used to transport ethanol, methanol and more than 60 other commodities. We also produce 16,500 gallon coiled, insulated tank cars for use in caustic soda service, and 25,500 gallon and/or 23,500 gallon coiled, insulated tank cars for use to transport a variety of commodities such as vegetable oils and bio- diesel. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 5 European Railcar Manufacturing - Our European manufacturing operation produces a variety of railcar (wagon) types, including a comprehensive line of pressurized tank cars for liquid petroleum gas and ammonia and non- pressurized tank cars for light oil, chemicals and other products. In addition, we produce flat cars, coil cars for the steel and metals market, coal cars for both the continental European and United Kingdom markets, gondolas, sliding wall cars and automobile transporter cars. Although no formal statistics are available for the European market, we believe we are one of the largest new freight car manufacturers with an estimated market share of 10-15%. Marine Vessel Fabrication - Our Portland, Oregon manufacturing facility, located on a deep-water port on the Willamette River, includes marine vessel fabrication capabilities. The marine facilities also increase utilization of steel plate burning and fabrication capacity providing flexibility for railcar production. We manufacture a broad range of ocean-going barges including conventional deck barges, double-hull tank barges, railcar/deck barges, barges for aggregates and other heavy industrial products and dump barges. Our primary focus is on the larger ocean-going vessels although the facility has the capability to compete in other marine related products. Wheel Services, Refurbishment & Parts Wheel Services, Railcar Repair, Refurbishment and Component Parts Manufacturing - We believe we operate the largest independent wheel services, repair, refurbishment and component parts networks in North America, operating in 38 locations. Our wheel shops, operating in 12 locations, provide complete wheel services including reconditioning of wheels, axles and roller bearings in addition to new axle machining and finishing and axle downsizing. Our network of railcar repair and refurbishment shops, operating in 22 locations, performs heavy railcar repair and refurbishment, as well as routine railcar maintenance. We are actively engaged in the repair and refurbishment of railcars for third parties, as well as of our own leased and managed fleet. Our component parts facilities, operating in 4 locations, recondition railcar cushioning units, couplers, yokes, side frames, bolsters and various other parts. We also produce roofs, doors and associated parts for boxcars. Leasing & Services Leasing - Our relationships with financial institutions, combined with our ownership of a lease fleet of approximately 8,000 railcars, enables us to offer flexible financing programs including traditional direct finance leases, operating leases and “by the mile” leases to our customers. As an equipment owner, we participate principally in the operating lease segment of the market. The majority of our leases are “full service” leases whereby we are responsible for maintenance and administration. Maintenance of the fleet is provided, in part, through our own facilities and engineering and technical staff. Assets from our owned lease fleet are periodically sold to take advantage of market conditions, manage risk and maintain liquidity. Management Services - Our management services business offers a broad array of software and services that include railcar maintenance management, railcar accounting services such as billing and revenue collection, car hire receivable and payable administration, total fleet management including railcar tracking using proprietary software, administration and railcar remarketing. Frequently, we originate leases of railcars with railroads or shippers, and sell the railcars and attached leases to financial institutions and subsequently provide management services under multi-year agreements. We currently own or provide management services for a fleet of approximately 233,000 railcars in North America for railroads, shippers, carriers, institutional investors and other leasing and transportation companies. 6 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Fleet Profile(1) As of August 31, 2010 Managed Units Total Units Owned Units(2) Customer Profile: Class I Railroads Leasing Companies Non-Class I Railroads Shipping Companies Off-lease En route to Customer Location Total Units 3,053 50 1,326 3,171 458 98 8,156 100,505 97,393 17,330 9,969 — 26 103,558 97,443 18,656 13,140 458 124 225,223 233,379 (1) Each platform of a railcar is treated as a separate unit. (2) Percent of owned units on lease is 94.4% with an average remaining lease term of 2.5 years. The average age of owned units is 17 years. Backlog The following table depicts our reported railcar backlog in number of railcars and estimated future revenue value attributable to such backlog, at the dates shown: New railcar backlog units(1) Estimated future revenue value (in millions)(2) (1) Each platform of a railcar is treated as a separate unit. (2) Subject to change based on finalization of product mix. August 31, 2010 2009 2008 5,300 $ 420 13,400 $ 1,160 16,200 $ 1,440 The rail and marine industries are cyclical in nature. Customer orders may be subject to cancellations and contain terms and conditions customary in the industry. Until recently, little variation has been experienced between the quantity ordered and the quantity actually delivered. Economic conditions have caused some customers to seek to renegotiate, delay or cancel orders. Our railcar and marine backlogs are not necessarily indicative of future results of operations. Multi-year supply agreements are a part of rail industry practice. Our total manufacturing backlog of railcars as of August 31, 2010 was approximately 5,300 units with an estimated value of $420 million, compared to 13,400 units valued at $1.16 billion as of August 31, 2009. The August 31, 2010 backlog did not include approximately 300 units valued at $20 million scheduled for production in 2011. These 300 units are contractually committed to third party lessees and are expected to be placed into our lease fleet. Based on current production plans, approximately 4,100 units in the August 31, 2010 backlog are scheduled for delivery in fiscal year 2011. The balance of the production is scheduled for delivery through fiscal year 2013. A portion of the orders included in backlog reflects an assumed product mix. Under terms of the orders, the exact mix will be determined in the future which may impact the dollar amount of backlog. Subsequent to year end we received new railcar orders for 3,200 units with an aggregate value of approximately $200 million. These units are scheduled for delivery in fiscal year 2011. Marine backlog was approximately $10 million as of August 31, 2010 with production scheduled into 2011. During the quarter ended August 31, 2010, we removed approximately $60 million of marine vessels from backlog due to the current likelihood that these vessels will not be produced and sold as a result of current economic conditions. Marine backlog was approximately $126 million as of August 31, 2009. Customers Our railcar customers in North America include Class I railroads, regional and short-line railroads, leasing companies, shippers, carriers and transportation companies. We have strong, long-term relationships with many of T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 7 our customers. We believe that our customers’ preference for high quality products, our technological leadership in developing innovative products and competitive pricing of our railcars have helped us maintain our long-standing relationships with our customers. In 2010, revenue from three customers together, BNSF Railway Company (BNSF), Union Pacific Railroad (UP) and General Electric Railcar Services Corporation (GE) accounted for approximately 42% of total revenue, 28% of Leasing & Services revenue, 40% of Wheel Services, Refurbishment & Parts revenue and 48% of Manufacturing revenue. No other customers accounted for more than 10% of total revenue. Raw Materials and Components Our products require a supply of materials including steel and specialty components such as brakes, wheels and axles. Specialty components purchased from third parties represent a significant amount of the cost of most freight cars. Our customers often specify particular components and suppliers of such components. Although the number of alternative suppliers of certain specialty components has declined in recent years, there are at least two suppliers for most such components and we are not reliant on any one supplier for any component. Certain materials and components are periodically in short supply which could potentially impact production at our new railcar and refurbishment facilities. In an effort to mitigate shortages and reduce supply chain costs, we have entered into strategic alliances for the global sourcing of certain components, increased our replacement parts business and continue to pursue strategic opportunities to protect and enhance our supply chain. We periodically make advance purchases to avoid possible shortages of material due to capacity limitations of component suppliers and possible price increases. We do not typically enter into binding long-term contracts with suppliers because we rely on established relationships with major suppliers to ensure the availability of raw materials and specialty items. Competition There are currently six major railcar manufacturers competing in North America. One of these builds railcars principally for its own fleet and the others compete with us principally in the general railcar market. We compete on the basis of quality, price, reliability of delivery, reputation and customer service and support. Competition in the marine industry is dependent on the type of product produced. There are two principal competitors, located in the Gulf States, which build product types similar to ours. We compete on the basis of experienced labor, launch ways capacity, quality, price and reliability of delivery. United States (U.S.) coastwise law, commonly referred to as the Jones Act, requires all commercial vessels transporting merchandise between ports in the U.S. to be built, owned, operated and manned by U.S. citizens and to be registered under the U.S. flag. We believe that we are among the top five European railcar manufacturers, which maintain a combined market share of over 80%. European freight car manufacturers are largely located in central and eastern Europe where labor rates are lower and work rules are more flexible. Competition in the wheel services, refurbishment and parts business is dependent on the type of product or service provided. There are many competitors in the railcar repair and refurbishment business and fewer competitors in the wheel services and other parts businesses; recently there have been new entrants in this business segment. We are one of the largest competitors in each business. We compete primarily on the basis of quality, timeliness of delivery, customer service, single source solutions and engineering expertise. There are at least twenty institutions that provide railcar leasing and services similar to ours. Many of them are also customers that buy new railcars from our manufacturing facilities and used cars from our lease fleet, as well as utilize our management services. More than half of these institutions have greater resources than we do. We compete primarily on the basis of quality, price, delivery, reputation, service offerings and deal structuring ability. We believe our strong servicing capability, integrated with our manufacturing, repair shops, railcar specialization and expertise in particular lease structures provide a strong competitive position. 8 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Marketing and Product Development In North America, we utilize an integrated marketing and sales effort to coordinate relationships in our various segments. We provide our customers with a diverse range of equipment and financing alternatives designed to satisfy each customer’s unique needs, whether the customer is buying new equipment, refurbishing existing equipment or seeking to outsource the maintenance or management of equipment. These custom programs may involve a combination of railcar products, leasing, refurbishing and remarketing services. In addition, we provide customized maintenance management, equipment management, accounting services and proprietary software solutions. In Europe, we maintain relationships with customers through a network of country-specific sales representatives. Our engineering and technical staff works closely with their customer counterparts on the design and certification of railcars. Many European railroads are state-owned and are subject to European Union regulations covering the tender of government contracts. Through our customer relationships, insights are derived into the potential need for new products and services. Marketing and engineering personnel collaborate to evaluate opportunities and identify and develop new products. Research and development costs incurred for new product development during the years ended August 31, 2010, 2009 and 2008 were $2.6 million, $1.7 million and $2.9 million. Patents and Trademarks We have a number of U.S. and non-U.S. patents of varying duration, and pending patent applications, registered trademarks, copyrights and trade names that are important to our products and product development efforts. The protection of our intellectual property is important to our business and we have a proactive program aimed at protecting our intellectual property and the results from our research and development. Environmental Matters We are subject to national, state and local environmental laws and regulations concerning, among other matters, air emissions, wastewater discharge, solid and hazardous waste disposal and employee health and safety. Prior to acquiring facilities, we usually conduct investigations to evaluate the environmental condition of subject properties and may negotiate contractual terms for allocation of environmental exposure arising from prior uses. We operate our facilities in a manner designed to maintain compliance with applicable environmental laws and regulations. Environmental studies have been conducted of the Company’s owned and leased properties that indicate additional investigation and some remediation on certain properties may be necessary. The Company’s Portland, Oregon manufacturing facility is located adjacent to the Willamette River. The United States Environmental Protection Agency (EPA) has classified portions of the river bed, including the portion fronting Greenbrier’s facility, as a federal “National Priority List” or “Superfund” site due to sediment contamination (the Portland Harbor Site). Greenbrier and more than 130 other parties have received a “General Notice” of potential liability from the EPA relating to the Portland Harbor Site. The letter advised the Company that it may be liable for the costs of investigation and remediation (which liability may be joint and several with other potentially responsible parties) as well as for natural resource damages resulting from releases of hazardous substances to the site. At this time, ten private and public entities, including the Company, have signed an Administrative Order on Consent (AOC) to perform a remedial investigation/feasibility study (RI/FS) of the Portland Harbor Site under EPA oversight, and several additional entities have not signed such consent, but are nevertheless contributing money to the effort. A draft of the RI study was submitted on October 27, 2009. The Feasibility Study is being developed and is expected to be submitted in the third calendar quarter of 2011. Eighty-two parties have entered into a non-judicial mediation process to try to allocate costs associated with the Portland Harbor site. Approximately 110 additional parties have signed tolling agreements related to such allocations. On April 23, 2009, the Company and the other AOC signatories filed suit against 69 other parties due to a possible limitations period for some such claims; Arkema Inc. et al v. A & C Foundry Products, Inc.et al, US District Court, District of Oregon, Case #3:09-cv-453-PK. All but 12 of these parties elected to sign tolling agreements and be dismissed without prejudice, and the case has now been stayed by the court, pending completion of the RI/FS. In addition, the Company has entered into a Voluntary Clean-Up Agreement with the Oregon Department of Environmental Quality in which the Company agreed to T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 9 conduct an investigation of whether, and to what extent, past or present operations at the Portland property may have released hazardous substances to the environment. The Company is also conducting groundwater remediation relating to a historical spill on the property which antedates its ownership. Because these environmental investigations are still underway, the Company is unable to determine the amount of ultimate liability relating to these matters. Based on the results of the pending investigations and future assessments of natural resource damages, Greenbrier may be required to incur costs associated with additional phases of investigation or remedial action, and may be liable for damages to natural resources. In addition, the Company may be required to perform periodic maintenance dredging in order to continue to launch vessels from its launch ways on the Willamette River, in Portland, Oregon, 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 results of operations, or the value of its Portland property. Regulation The Federal Railroad Administration in the United States and Transport Canada in Canada administer and enforce laws and regulations relating to railroad safety. These regulations govern equipment and safety appliance standards for freight cars and other rail equipment used in interstate commerce. The Association of American Railroads (AAR) promulgates a wide variety of rules and regulations governing the safety and design of equipment, relationships among railroads and other railcar owners with respect to railcars in interchange, and other matters. The AAR also certifies railcar builders and component manufacturers that provide equipment for use on North American railroads. These regulations require us to maintain our certifications with the AAR as a railcar builder and component manufacturer, and products sold and leased by us in North America must meet AAR, Transport Canada, and Federal Railroad Administration standards. The primary regulatory and industry authorities involved in the regulation of the ocean-going barge industry are the U.S. Coast Guard, the Maritime Administration of the U.S. Department of Transportation, and private industry organizations such as the American Bureau of Shipping. The regulatory environment in Europe consists of a combination of European Union (EU) regulations and country specific regulations, including a harmonized set of Technical Standards for Interoperability of freight wagons throughout the EU. Employees As of August 31, 2010, we had 4,194 full-time employees, consisting of 2,665 employees in Manufacturing, 1,358 in Wheel Services, Refurbishment & Parts and 171 employees in Leasing & Services and corporate. At the manufacturing facility in Swidnica, Poland, 312 employees are represented by unions. At our Frontera, Mexico joint venture manufacturing facility, 587 employees are represented by a union. At our Sahagun, Mexico facility, 206 employees are represented by a union. In addition to our own employees, 244 union employees work at our Sahagun, Mexico railcar manufacturing facility under our services agreement with Bombardier Transportation. At our Wheel Services, Refurbishment & Parts locations, 59 employees, in Mexico, are represented by unions. We believe that our relations with our employees are generally good. Additional Information We are a reporting company and file annual, quarterly, and special reports, proxy statements and other information with the Securities and Exchange Committee (SEC). You may read and copy these materials at the Public Reference Room maintained by the SEC at Room 1580, 100 F Street N.E., Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for more information on the operation of the public reference room. The SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Copies of our annual, quarterly and special reports, Audit Committee Charter, Compensation Committee Charter, Nominating/Corporate Governance Committee Charter and the Company’s Corporate Governance Guidelines are available on our web site at http://www.gbrx.com or free of charge by contacting our Investor Relations Department at The Greenbrier Companies, Inc., One Centerpointe Drive, Suite 200, Lake Oswego, Oregon 97035. 10 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Item 1a. RISK FACTORS During economic downturns or a rising interest rate environment, the cyclical nature of our business results in lower demand for our products and reduced revenue. Our business is cyclical. Overall economic conditions and the purchasing practices of buyers have a significant effect upon our railcar repair, refurbishment and component parts, marine manufacturing, railcar manufacturing and leasing and fleet management services businesses due to the impact on demand for new, refurbished, used and leased products. As a result, during downturns, we could operate with a lower level of backlog and may temporarily slow down or halt production at some or all of our facilities. Economic conditions that result in higher interest rates increase the cost of new leasing arrangements, which could cause some of our leasing customers to lease fewer of our railcars or demand shorter lease terms. An economic downturn or increase in interest rates may reduce demand for our products, resulting in lower sales volumes, lower prices, lower lease utilization rates and decreased profits. A prolonged decline in performance of the rail freight industry would have an adverse effect on our financial condition and results of operations. Our future success depends in part upon the performance of the rail freight industry, which in turn depends on the health of the economy. If railcar loadings, railcar and railcar components replacement rates or refurbishment rates or industry demand for our railcar products remain weak or otherwise do not materialize, our financial condition and results of operations would be adversely affected. A prolonged decline in demand for our barge products would have an adverse effect on our financial condition and results of operations. The April 2010 catastrophic explosion of the Deepwater Horizon oil drilling platform and the related oil spill in the U.S. Gulf of Mexico coupled with currently weak economic conditions may continue to have an adverse effect on our results of operations by reducing demand for our marine barges. These could reduce our revenues and margins, limit our ability to grow, increase pricing pressure on our products, and otherwise adversely affect our financial results. Our level of indebtedness and terms of our indebtedness could adversely affect our business, financial condition and liquidity. We have a high level of indebtedness, a portion of which has variable interest rates. Although we intend to refinance our debt on or before maturity, there can be no assurance that we will be successful, or if refinanced, that it will be at favorable rates and terms. If we are unable to successfully refinance our debt, we could have inadequate liquidity to fund our ongoing cash needs. In addition, our high level of indebtedness and our financial covenants limit our ability to borrow additional amounts of money for working capital, capital expenditures or other purposes. We must dedicate a substantial portion of these funds to service debt, limiting our ability to use operating cash flow in other areas of our business. The limitations of our financial covenants, among other things, limit our ability to incur additional indebtedness or guarantees, pay dividends or repurchase stock, enter into sale leaseback transactions, create liens, sell assets, engage in transactions with affiliates, joint ventures and foreign subsidiaries, and engage in other transactions, including but not limited to loans, advances, equity investments and guarantees, enter into mergers, consolidations or sales of substantially all of our assets, and enter into new lines of business. The high amount of debt increases our vulnerability to general adverse economic and industry conditions and could limit our ability to take advantage of business opportunities and to react to competitive pressures. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 11 We compete in a highly competitive and concentrated industry which may adversely impact our financial results. We face aggressive competition by a concentrated group of competitors in all geographic markets and each industry sector in which we operate. Some of these companies have significantly greater resources or may operate more efficiently than we do. The effect of this competition could reduce our revenues and margins, limit our ability to grow, increase pricing pressure on our products, and otherwise affect our financial results. In addition, because of the concentrated nature of our competitors, customers and suppliers, we face a heightened risk that further consolidation of our competitors, customers and suppliers could adversely affect our revenues, cost of revenues and profitability. Changes in the credit markets and the financial services industry could negatively impact our business, results of operations, financial condition or liquidity. During 2008 and 2009, the credit markets and the financial services industry experienced a period of unprecedented turmoil, resulting in tighter availability of credit on more restrictive terms. Such factors could have a negative impact on our liquidity and financial condition if our ability to borrow money to finance operations, obtain credit from trade creditors, offer leasing products to our customers or sell railcar assets to other lessors were to be impaired. In addition, if economic conditions remain depressed it could also adversely impact our customers’ ability to purchase or pay for products from us or our suppliers’ ability to provide us with product, either of which could negatively impact our business and results of operations. We derive a significant amount of our revenue from a limited number of customers, the loss of or reduction of business from one or more of which could have an adverse effect on our business. A significant portion of our revenue and backlog is generated from a few major customers such as BNSF Railway Company, General Electric Railcar Services Corporation and Union Pacific Railroad. Although we have some long- term contractual relationships with our major customers, we cannot be assured that our customers will continue to use our products or services or that they will continue to do so at historical levels. A reduction in the purchase or leasing of our products or a termination of our services by one or more of our major customers could have an adverse effect on our business and operating results. Fluctuations in the availability and price of steel and other raw materials could have an adverse effect on our ability to manufacture and sell our products on a cost-effective basis and could adversely affect our margins and revenue of our wheel services, refurbishment and parts business. A significant portion of our business depends upon the adequate supply of steel at competitive prices and a small number of suppliers provide a substantial amount of our requirements. The cost of steel and all other materials used in the production of our railcars represents more than half of our direct manufacturing costs per railcar and in the production of our marine barges represents more than 30% of our direct manufacturing costs per marine barge. Our businesses depend upon the adequate supply of other materials, including castings and specialty components, at competitive prices. We cannot be assured that we will continue to have access to supplies of necessary components for manufacturing railcars and marine barges. Our ability to meet demand for our products could be adversely affected by the loss of access to any of these supplies, the inability to arrange alternative access to any materials, or suppliers limiting allocation of materials to us. If the price of steel or other raw materials were to fluctuate and we were unable to adjust our selling prices or have adequate protection in our contracts against changes in material prices or reduce operating costs to offset any price increases, our margins would be adversely affected. The loss of suppliers or their inability to meet our price, quality, quantity and delivery requirements could have an adverse effect on our ability to manufacture and sell our products on a cost-effective basis. 12 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t When the price of scrap steel decreases it adversely impacts our Wheel Services, Refurbishment & Parts margin and revenue. Part of our Wheel Services, Refurbishment & Parts business involves scrapping steel parts and the resulting revenue from such scrap steel increases our margins and revenues. When the price of scrap steel declines, our margins and revenues in such business therefore decrease. Our backlog is not necessarily indicative of the level of our future revenues. Our manufacturing backlog is future production for which we have written orders from our customers in various periods, and estimated potential revenue attributable to those orders. Some of this backlog is subject to our fulfillment of certain competitive conditions. Our reported backlog may not be converted to revenue in any particular period and some of our contracts permit cancellations without financial penalties or with limited compensation that would not replace lost revenue or margins. Actual revenue from such contracts may not equal our backlog revenues, and therefore, our backlog is not necessarily indicative of the level of our future revenues. Our financial performance and market value could cause future write-downs of goodwill in future periods. We are required to perform an annual impairment review which could result in impairment write-downs to goodwill. If the carrying value of the asset is in excess of the fair value, the carrying value will be adjusted to fair value through an impairment charge. As of August 31, 2010, we had $137.1 million of goodwill in our Wheel Services, Refurbishment & Parts segment. Our stock price can impact the results of the impairment review of goodwill. Future write-downs of goodwill could affect certain of the financial covenants under our credit agreements and could restrict our financial flexibility. In the event of goodwill impairment, we may have to test other intangible assets for impairment. The timing of our asset sales and related revenue recognition could cause significant differences in our quarterly results and liquidity. We may build railcars or marine barges in anticipation of a customer order, or that are leased to a customer and ultimately planned to be sold to a third-party. The difference in timing of production and the ultimate sale is subject to risk and could cause a fluctuation in our quarterly results and liquidity. In addition, we periodically sell railcars from our own lease fleet and the timing and volume of such sales is difficult to predict. As a result, comparisons of our quarterly revenues, income and liquidity between quarterly periods within one year and between comparable periods in different years may not be meaningful and should not be relied upon as indicators of our future performance. We could be unable to remarket leased railcars on favorable terms upon lease termination or realize the expected residual values, which could reduce our revenue and decrease our overall return. We re-lease or sell railcars we own upon the expiration of existing lease terms. The total rental payments we receive under our operating leases do not fully amortize the acquisition costs of the leased equipment, which exposes us to risks associated with remarketing the railcars. Our ability to remarket leased railcars profitably is dependent upon several factors, including, but not limited to, market and industry conditions, cost of and demand for newer models, costs associated with the refurbishment of the railcars and interest rates. Our inability to re-lease or sell leased railcars on favorable terms could result in reduced revenues and margins and decrease our overall returns. Risks related to our operations outside of the United States could adversely impact our operating results. Our operations outside of the United States are subject to the risks associated with cross-border business transactions and activities. Political, legal, trade or economic changes or instability could limit or curtail our foreign business activities and operations. Some foreign countries in which we operate have regulatory authorities that regulate railroad safety, railcar design and railcar component part design, performance and manufacturing. If T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 13 we fail to obtain and maintain certifications of our railcars and railcar parts within the various foreign countries where we operate, we may be unable to market and sell our railcars in those countries. In addition, unexpected changes in regulatory requirements, tariffs and other trade barriers, more stringent rules relating to labor or the environment, adverse tax consequences, currency and price exchange controls could limit operations and make the manufacture and distribution of our products difficult. The uncertainty of the legal environment or geo-political risks in these and other areas could limit our ability to enforce our rights effectively. Any international expansion or acquisition that we undertake could amplify these risks related to operating outside of the United States. Some of our employees belong to labor unions and strikes or work stoppages could adversely affect our operations. We are a party to collective bargaining agreements with various labor unions at some of our operations. Disputes with regard to the terms of these agreements or our potential inability to negotiate acceptable contracts with these unions in the future could result in, among other things, strikes, work stoppages or other slowdowns by the affected workers. We cannot be assured that our relations with our workforce will remain positive or that union organizers will not be successful in future attempts to organize at some of our other facilities. If our workers were to engage in a strike, work stoppage or other slowdown, or other employees were to become unionized or the terms and conditions in future labor agreements were renegotiated, we could experience a significant disruption of our operations and higher ongoing labor costs. In addition, we could face higher labor costs in the future as a result of severance or other charges associated with lay-offs, shutdowns or reductions in the size and scope of our operations or due to the difficulties of restarting our operations that have been temporarily shuttered. Shortages of skilled labor could adversely impact our operations. We depend on skilled labor in the manufacture of railcars and marine barges, and repair and refurbishment of railcars. Some of our facilities are located in areas where demand for skilled laborers often exceeds supply. Shortages of some types of skilled laborers such as welders could restrict our ability to maintain or increase production rates and could increase our labor costs. We depend on our senior management team and other key employees, and significant attrition within our management team could adversely affect our business. Our success depends in part on our ability to attract, retain and motivate senior management and other key employees. Achieving this objective may be difficult due to many factors, including fluctuations in global economic and industry conditions, competitors’ hiring practices, cost reduction activities, and the effectiveness of our compensation programs. Competition for qualified personnel can be very intense. We must continue to recruit, retain and motivate senior management and other key employees sufficient to maintain our current business and support our future projects. Cost-cutting measures that have reduced compensation make us vulnerable to attrition among our current senior management team and other key employees, and may make it difficult for us to hire additional senior managers and other key employees. A loss of any such personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations. We depend on a third party to provide most of the labor services for our operations in Sahagun, Mexico and if such third party fails to provide the labor, it could adversely affect our operations. In Sahagun, Mexico, we depend on a third party to provide us with most of the labor services for our operations under a services agreement. This agreement has a term of three years expiring on November 30, 2011, with one three-year option to renew. All of the labor provided by the third party is subject to collective bargaining agreements, over which we have no control. If the third party fails to provide us with the services required by our agreement for any reason, including labor stoppages or strikes or a sale of facilities owned by the third party, our operations could be adversely effected. 14 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t We could experience interruption of our manufacturing operations in Mexico which would adversely affect our results of operations. In Sahagun, Mexico, we lease our manufacturing facility from a third party. The lease agreement has a term of three years expiring on November 30, 2011, with one three-year option to renew. We could incur substantial expense and interruption of our manufacturing production if we were to relocate to a different location. Fluctuations in foreign currency exchange rates could lead to increased costs and lower profitability. Outside of the United States, we operate in Mexico, Germany and Poland, and our non-U.S. businesses conduct their operations in local currencies and other regional currencies. We also source materials worldwide. Fluctuations in exchange rates may affect demand for our products in foreign markets or our cost competitiveness and may adversely affect our profitability. Although we attempt to mitigate a portion of our exposure to changes in currency rates through currency rate hedge contracts and other activities, these efforts cannot fully eliminate the risks associated with the foreign currencies. In addition, some of our borrowings are in foreign currency, giving rise to risk from fluctuations in exchange rates. A material or adverse change in exchange rates could result in significant deterioration of profits or in losses for us. We have potential exposure to environmental liabilities, which could increase costs or have an adverse effect on results of operations. We are subject to extensive national, state, provincial and local environmental laws and regulations concerning, among other things, air emissions, water discharge, solid waste and hazardous substances handling and disposal and employee health and safety. These laws and regulations are complex and frequently change. We could incur unexpected costs, penalties and other civil and criminal liability if we fail to comply with environmental laws. We also could incur costs or liabilities related to off-site waste disposal or remediating soil or groundwater contamination at our properties. In addition, future environmental laws and regulations may require significant capital expenditures or changes to our operations. indicate additional Environmental studies have been conducted on our owned and leased properties that investigation and some remediation on certain properties may be necessary. Our Portland, Oregon manufacturing facility is located adjacent to the Willamette River. The United States Environmental Protection Agency (EPA) has classified portions of the river bed, including the portion fronting our Portland, Oregon facility, as a federal “National Priority List” or “Superfund” site due to sediment contamination (the Portland Harbor Site). We and more than 130 other parties have received a “General Notice” of potential liability from the EPA relating to the Portland Harbor Site. The letter advised that we may be liable for the costs of investigation and remediation (which liability may be joint and several with other potentially responsible parties) as well as for natural resource damages resulting from releases of hazardous substances to the site. At this time, ten private and public entities, including us, have signed an Administrative Order on Consent (AOC) to perform a remedial investigation/feasibility study (RI/FS) of the Portland Harbor Site under EPA oversight, and several additional entities have not signed such consent, but are nevertheless contributing money to the effort. A draft of the RI study was submitted on October 27, 2009. The Feasibility Study is being developed and is expected to be submitted in the third calendar quarter of 2011. Eighty-two parties have entered into a non-judicial mediation process to try to allocate costs associated with the Portland Harbor site. Approximately 110 additional parties have signed tolling agreements related to such allocations. On April 23, 2009, we and the other AOC signatories filed suit against 69 other parties due to a possible limitations period for some such claims; Arkema Inc. et al v. A & C Foundry Products, Inc.et al, US District Court, District of Oregon, Case #3:09-cv-453-PK. All but 12 of these parties elected to sign tolling agreements and be dismissed without prejudice, and the case has now been stayed by the court, pending completion of the RI/FS. In addition, we have entered into a Voluntary Clean-Up Agreement with the Oregon Department of Environmental Quality in which we agreed to conduct an investigation of whether, and to what extent, past or present operations at the Portland property may have released hazardous substances to the environment. We are also conducting groundwater remediation relating to a historical spill on the property which antedates its ownership. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 15 Because these environmental investigations are still underway, we are unable to determine the amount of ultimate liability relating to these matters. Based on the results of the pending investigations and future assessments of natural resource damages, we may be required to incur costs associated with additional phases of investigation or remedial action, and may be liable for damages to natural resources. In addition, we may be required to perform periodic maintenance dredging in order to continue to launch vessels from our launch ways on the Willamette River, in Portland, Oregon, and the river’s classification as a Superfund site could result in some limitations on future dredging and launch activities. Any of these matters could adversely affect our business and results of operations, or the value of our Portland property. Our implementation of new enterprise resource planning (ERP) systems could result in problems that could negatively impact our business. We continue to work on the design and implementation of ERP and related systems that support substantially all of our operating and financial functions. We could experience problems in connection with such implementations, including compatibility issues, training requirements, higher than expected implementation costs and other integration challenges and delays. A significant implementation problem, if encountered, could negatively impact our business by disrupting our operations. Additionally, a significant problem with the implementation, integration with other systems or ongoing management of ERP and related systems could have an adverse effect on our ability to generate and interpret accurate management and financial reports and other information on a timely basis, which could have a material adverse effect on our financial reporting system and internal controls and adversely affect our ability to manage our business. A change in our product mix, a failure to design or manufacture products or technologies or achieve certification or market acceptance of new products or technologies or introduction of products by our competitors could have an adverse effect on our profitability and competitive position. We manufacture and repair a variety of railcars. The demand for specific types of these railcars and mix of refurbishment work varies from time to time. These shifts in demand could affect our margins and could have an adverse effect on our profitability. We continue to introduce new railcar products and technologies and periodically accept orders prior to receipt of railcar certification or proof of ability to manufacture a quality product that meets customer standards. We could be unable to successfully design or manufacture these new railcar products and technologies. Our inability to develop and manufacture such new products and technologies in a timely and profitable manner, to obtain certification, and achieve market acceptance or the existence of quality problems in our new products could have a material adverse effect on our revenue and results of operations and subject us to penalties, cancellation of orders and/or other damages. In addition, new technologies, changes in product mix or the introduction of new railcars and product offerings by our competitors could render our products obsolete or less competitive. As a result, our ability to compete effectively could be harmed. Our relationships with our joint venture and alliance partners could be unsuccessful, which could adversely affect our business. In recent years, we have entered into several joint venture agreements and other alliances with other companies to increase our sourcing alternatives, reduce costs, and to produce new railcars for the North American marketplace. We may seek to expand our relationships or enter into new agreements with other companies. If our joint venture alliance partners are unable to fulfill their contractual obligations or if these relationships are otherwise not successful in the future, our manufacturing costs could increase, we could encounter production disruptions, growth opportunities could fail to materialize, or we could be required to fund such joint venture alliances in amounts significantly greater than initially anticipated, any of which could adversely affect our business. 16 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t We could have difficulty integrating the operations of any companies that we acquire, which could adversely affect our results of operations. The success of our acquisition strategy depends upon our ability to successfully complete acquisitions and integrate any businesses that we acquire into our existing business. The integration of acquired business operations could disrupt our business by causing unforeseen operating difficulties, diverting management’s attention from day-to-day operations and requiring significant financial resources that would otherwise be used for the ongoing development of our business. The difficulties of integration could be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. In addition, we could be unable to retain key employees or customers of the combined businesses. We could face integration issues pertaining to the internal controls and operational functions of the acquired companies and we also could fail to realize cost efficiencies or synergies that we anticipated when selecting our acquisition candidates. Any of these items could adversely affect our results of operations. If we are not successful in succession planning for our senior management team our business could be adversely impacted. Several key members of our senior management team are at or nearing retirement age. If we are unsuccessful in our succession planning efforts, the continuity of our business and results of operations could be adversely impacted. An adverse outcome in any pending or future litigation could negatively impact our business and results of operations. We are a defendant in several pending cases in various jurisdictions. If we are unsuccessful in resolving these claims, our business and results of operations could be adversely affected. In addition, future claims that may arise relating to any pending or new matters, whether brought against us or initiated by us against third parties, could distract management’s attention from business operations and increase our legal and related costs, which could also negatively impact our business and results of operations. We could be liable for physical damage or product liability claims that exceed our insurance coverage. The nature of our business subjects us to physical damage and product liability claims, especially in connection with the repair and manufacture of products that carry hazardous or volatile materials. We maintain liability insurance coverage at commercially reasonable levels compared to similarly-sized heavy equipment manufacturers. However, an unusually large physical damage or product liability claim or a series of claims based on a failure repeated throughout our production process could exceed our insurance coverage or result in damage to our reputation. We could be unable to procure adequate insurance on a cost-effective basis in the future. The ability to insure our businesses, facilities and rail assets is an important aspect of our ability to manage risk. As there are only limited providers of this insurance to the railcar industry, there is no guarantee that such insurance will be available on a cost-effective basis in the future. In addition, due to recent extraordinary economic events that have significantly weakened many major insurance underwriters, we cannot assure that our insurance carriers will be able to pay current or future claims. Any failure by us to comply with regulations imposed by federal and foreign agencies could negatively affect our financial results. Our manufacturing operations are subject to extensive regulation by governmental, regulatory and industry authorities and by federal and foreign agencies. These organizations establish rules and regulations for the T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 17 railcar industry, including construction specifications and standards for the design and manufacture of railcars; mechanical, maintenance and related standards; and railroad safety. New regulatory rulings and regulations from these entities could impact our financial results and the economic value of our assets. In addition, if we fail to comply with the requirements and regulations of these entities, we could face sanctions and penalties that could negatively affect our financial results. Our product and repair service warranties could expose us to potentially significant claims. We offer our customers limited warranties for many of our products and services. Accordingly, we may be subject to significant warranty claims in the future, such as multiple claims based on one defect repeated throughout our production or servicing process or claims for which the cost of repairing the defective part is highly disproportionate to the original cost of the part. These types of warranty claims could result in costly product recalls, customers seeking monetary damages, significant repair costs and damage to our reputation. If warranty claims attributable to actions of third party component manufacturers are not recoverable from such parties due to their poor financial condition or other reasons, we could be liable for warranty claims and other risks for using these materials on our products. From time to time we may take tax positions that the Internal Revenue Service may contest. We have in the past and may in the future take tax positions that the Internal Revenue Service (IRS) may contest. Effective with fiscal year 2011, we are required by a new IRS regulation to disclose particular tax positions, taken after the effective date, to the IRS as part of our tax returns for that year and future years. Item 1b. UNRESOLVED STAFF COMMENTS None. 18 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Item 2. PROPERTIES We operate at the following primary facilities as of October 31, 2010: Description Location Status Portland, Oregon 2 locations in Sahagun, Mexico Frontera, Mexico Swidnica, Poland Portland, Oregon Owned Leased — 1 location Owned — 1 location Leased Owned Owned Manufacturing Segment Railcar manufacturing: Marine manufacturing: Wheel Services, Refurbishment & Parts Segment Railcar repair: Wheel reconditioning: Parts fabrication and reconditioning: 19 locations in the United States, 2 locations in Mexico and 1 location in Canada 10 locations in the United States and 2 locations in Mexico 4 locations in the United States Leased — 10 locations Owned — 6 locations Customer premises — 6 locations Leased — 7 locations Owned — 5 locations Leased — 2 locations Owned — 2 locations Leased Administrative offices: 2 locations in the United States Leasing & Services Segment Corporate offices, railcar marketing and leasing activities: Lake Oswego, Oregon Leased We believe that our facilities are in good condition and that the facilities, together with anticipated capital improvements and additions, are adequate to meet our operating needs for the foreseeable future. We continually evaluate the need for expansion and upgrading of our Manufacturing and Wheel Services, Refurbishment & Parts facilities in order to remain competitive and to take advantage of market opportunities. Item 3. LEGAL PROCEEDINGS From time to time, Greenbrier is involved as a defendant in litigation in the ordinary course of business, the outcome of which cannot be predicted with certainty. The most significant litigation is as follows: Greenbrier’s customer, SEB Finans AB (SEB), has raised performance concerns related to a component that the Company installed on 372 railcar units with an aggregate sales value of approximately $20.0 million produced under a contract with SEB. On December 9, 2005, SEB filed a Statement of Claim in an arbitration proceeding in Stockholm, Sweden, against Greenbrier alleging that the cars were defective and could not be used for their intended purpose. A settlement agreement was entered into effective February 28, 2007 pursuant to which the railcar units previously delivered were to be repaired and the remaining units completed and delivered to SEB. Greenbrier is proceeding with repairs of the railcars in accordance with terms of the settlement agreement, though SEB has recently made additional warranty claims, including claims with respect to cars that have been repaired pursuant to the agreement. Greenbrier is evaluating SEB’s new warranty claim. Current estimates of potential costs of such repairs do not exceed amounts accrued. When the Company acquired the assets of the Freight Wagon Division of DaimlerChrysler in January 2000, it acquired a contract to build 201 freight cars for Okombi GmbH, a subsidiary of Rail Cargo Austria AG. Subsequently, Okombi made breach of warranty and late delivery claims against the Company which grew out of design and certification problems. All of these issues were settled as of March 2004. Additional allegations have been made, the most serious of which involve cracks to the structure of the cars. Okombi has been required to T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 19 remove all 201 freight cars from service, and a formal claim has been made against the Company. Legal, technical and commercial evaluations are on-going to determine what obligations the Company might have, if any, to remedy the alleged defects. Management intends to vigorously defend its position in each of the open foregoing cases and believes that any ultimate liability resulting from the above litigation will not materially affect the Company’s Consolidated Financial Statements. The Company is involved as a defendant in other litigation initiated in the ordinary course of business. While the ultimate outcome of such legal proceedings cannot be determined at this time, management believes that the resolution of these actions will not have a material adverse effect on the Company’s Consolidated Financial Statements. Item 4. REMOVED AND RESERVED PART II Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock has been traded on the New York Stock Exchange under the symbol GBX since July 14, 1994. There were approximately 489 holders of record of common stock as of October 31, 2010. The following table shows the reported high and low sales prices of our common stock on the New York Stock Exchange for the fiscal periods indicated. 2010 Fourth quarter Third quarter Second quarter First quarter 2009 Fourth quarter Third quarter Second quarter First quarter High Low $15.45 $18.00 $12.32 $14.05 $14.67 $ 9.54 $ 8.55 $22.45 $9.10 $9.23 $7.42 $8.51 $5.40 $1.86 $3.76 $4.58 Quarterly dividends were suspended as of the third quarter 2009. A quarterly dividend of $.04 per share was declared during the second quarter of 2009. Quarterly dividends of $.08 per share were declared each quarter from the fourth quarter of 2005 through the first quarter of 2009. There is no assurance as to the payment of future dividends as they are dependent upon future earnings, capital requirements and our financial condition. 20 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Performance Graph The following graph demonstrates a comparison of cumulative total returns for the Company’s Common Stock, the Dow Jones US Industrial Transportation Index and the Standard & Poor’s (S&P) 500 Index. The graph assumes an investment of $100 on August 31, 2005 in each of the Company’s Common Stock and the stocks comprising the indices. Each of the indices assumes that all dividends were reinvested and that the investment was maintained to and including August 31, 2010, the end of the Company’s 2010 year. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among The Greenbrier Companies, Inc., The S&P 500 Index And The Dow Jones US Industrial Transportation Index $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 8/05 8/06 8/07 8/08 8/09 8/10 The Greenbrier Companies, Inc. S&P 500 Dow Jones US Industrial Transportation * $100 invested on 8/31/05 in stock or index, including reinvestment of dividends. Fiscal year ending August 31. Copyright· 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved. Copyright· 2010 Dow Jones & Co. All rights reserved. Equity Compensation Plan Information is hereby incorporated by reference to the “Equity Compensation Plan Information” table in Registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant’s year ended August 31, 2010. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 21 Item 6. SELECTED FINANCIAL DATA(1) YEARS ENDED AUGUST 31, (In thousands, except per share data) 2010 2009 2008 2007 2006 Statement of Operations Data Revenue: Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services Earnings (loss) from continuing operations Earnings from discontinued operations Net earnings (loss) attributable to Greenbrier Basic earnings (loss) per common share attributable to Greenbrier: Continuing operations Net earnings (loss) Diluted earnings (loss) per common share attributable to Greenbrier: Continuing operations Net earnings (loss) Weighted average common shares outstanding: Basic Diluted Cash dividends paid per share Balance Sheet Data Total assets Revolving notes and notes payable Total equity Other Operating Data New railcar units delivered New railcar units backlog Lease fleet: Units managed Units owned Cash Flow Data Capital expenditures: Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services Proceeds from sale of equipment Depreciation and amortization: Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services $ 295,566 390,061 78,823 $ 764,450 $ 462,496 476,164 79,465 $1,018,125 $ 665,093 527,466 97,520 $1,290,079 $ 738,424 381,670 103,734 $1,223,828 $748,818 102,471 102,534 $953,823 $ $ $ $ $ $ $ 4,277 — $ (56,391) — $ 4,277(2) $ (56,391)(2) $ $ 17,383 — 17,383(2) $ 20,007 — $ 38,976 62(3) 20,007(2) $ 39,038 0.23 0.23 0.21 0.21 18,585 20,213 .00 $ $ $ $ $ (3.35) (3.35) (3.35) (3.35) 16,815 16,815 .12 $ $ $ $ $ 1.06 1.06 1.06 1.06 16,395 16,417 .32 $ $ $ $ $ 1.25 1.25 1.24 1.24 16,056 16,094 .32 $ $ $ $ $ 2.48 2.48 2.45 2.45 15,751 15,937 .32 $1,072,888 $ 501,330 $ 297,407 $1,048,291 $ 541,190 $ 232,450 $1,256,960 $ 580,954 $ 281,838 $1,072,749 $ 476,071 $ 263,588 $877,314 $357,040 $236,136 2,500 5,300 3,700 13,400(4) 7,300 16,200(4) 8,600 12,100(4) 11,400 14,700(4) 225,223 8,156 217,403 8,713 137,697 8,631 136,558 8,663 135,320 9,311 $ $ $ $ $ 8,715 12,215 18,059 38,989 22,978 11,061 11,435 15,015 37,511 $ $ $ $ $ 9,109 6,599 23,139 38,847 15,555 11,471 11,885 14,313 37,669 $ $ $ $ $ 24,113 7,651 45,880 77,644 $ 20,361 5,009 111,924 $ 15,121 2,906 122,542 $ 137,294 $140,569 14,598 $ 119,695 $ 28,863 11,267 10,338 13,481 35,086 $ $ 10,762 9,042 13,022 32,826 $ 10,258 2,360 12,635 $ 25,253 (1) All years retrospectively adjusted for the effects of Accounting Standards Codification (ASC) 470 — 20 Debt — Debt with Conversion and Other Options. See Note 2 in the Consolidated Financial Statements. (2) 2010 includes income of $11.9 million net of tax for a special item related to the release of the liability associated with the 2008 de- consolidation of our former Canadian subsidiary. 2009 includes special charges net of tax of $51.0 million in goodwill impairment. 2008 includes special charges net of tax of $2.3 million related to the closure of our Canadian subsidiary. 2007 includes special charges net of tax of $13.7 million related to the impairment and closure of our Canadian subsidiary. (3) Consists of a reduction in loss contingency associated with the settlement of litigation relating to the logistics business that was discontinued in 1998. (4) 2009, 2008, 2007 and 2006 backlog include 8,500 units, 8,500 units, 3,500 units and 7,250 units subject to fulfillment of certain competitive and contractual conditions. 2006 through 2009 backlog all include 400 units subject to certain cancellation provisions. 22 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Executive Summary We currently operate in three primary business segments: Manufacturing; Wheel Services, Refurbishment & Parts and Leasing & Services. These three business segments are operationally integrated. The Manufacturing segment, operating from four facilities in the United States, Mexico and Poland, produces double-stack intermodal railcars, conventional railcars, tank cars and marine vessels. The Wheel Services, Refurbishment & Parts segment performs railcar repair, refurbishment and maintenance activities in the 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 8,000 railcars and provides management services for approximately 225,000 railcars for railroads, shippers, carriers, institutional investors and other leasing and transportation companies in North America. Management evaluates segment performance based on margins. We also produce rail castings through an unconsolidated joint venture. The rail and marine industries are cyclical in nature. We are starting to see signs of a recovery in the freight car markets in which we operate. Demand for our marine barge products remains soft. Customer orders may be subject to cancellations and contain terms and conditions customary in the industry. Until recently, little variation has been experienced between the quantity ordered and the quantity actually delivered. Economic conditions have caused some customers to seek to renegotiate, delay or cancel orders. Our railcar and marine backlogs are not necessarily indicative of future results of operations. In December 2009 we modified our long-term new railcar contract with General Electric Railcar Services Corporation (GE). Under the terms of the modified contract, we will deliver up to 6,000 railcars with the first 3,800 tank cars and hopper cars expected to be built by July 2013. The purchase price is subject to adjustments for changes in the material costs. The remaining 2,200 tank and hopper cars are subject to fulfillment of certain contractual conditions by both parties in their sole discretion and would occur over the five-year period following the completion of the 3,800 units. In addition, we have retained the right of first refusal, subject to certain qualifications, to manufacture all new railcar builds for GE through December 2018. We have agreed to share in an equitable manner with Greenbrier-GIMSA LLC, of which we own 50%, the benefits (net of any expenses) received from GE as a result of the amended agreement. Multi-year supply agreements are a part of rail industry practice. Our total manufacturing backlog of railcars as of August 31, 2010 was approximately 5,300 units with an estimated value of $420 million compared to 13,400 units valued at $1.16 billion as of August 31, 2009. The August 31, 2010 backlog did not include approximately 300 units valued at $20 million scheduled for production in 2011. These 300 units are contractually committed to third party lessees and are expected to be placed into our lease fleet. Based on current production plans, approximately 4,100 units in the August 31, 2010 backlog are scheduled for delivery in fiscal year 2011. The balance of the production is scheduled for delivery through fiscal year 2013. The August 31, 2010 backlog does not include the contingent production of 2,200 units for GE. 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. Subsequent to year end we received new railcar orders for 3,200 units with an aggregate value of approximately $200 million. These units are scheduled for delivery in fiscal year 2011. Marine backlog was approximately $10 million as of August 31, 2010 with production scheduled through fiscal year 2011. During the quarter ended August 31, 2010, we removed approximately $60 million of marine vessels from backlog, due to the current likelihood that these vessels will not be produced and sold as a result of current economic conditions. Marine backlog was approximately $126 million as of August 31, 2009. Prices for steel, a primary component of railcars and barges, and related surcharges have fluctuated significantly and remain volatile. In addition, the price of certain railcar components, which are a product of steel, are affected by steel price fluctuations. New railcar and marine backlog generally either includes fixed price contracts which anticipate material price increases and surcharges, or contracts that contain actual or formulaic pass through of material price increases and surcharges. We are aggressively working to mitigate these exposures. The Company’s integrated business model has helped offset some of the effects of fluctuating steel and scrap steel prices, as a T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 23 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. In April 2010, we filed a registration statement on Form S-3 with the SEC, using a “shelf ” registration process. The registration statement was declared effective on April 14, 2010 and pursuant to the prospectus filed as part of the registration statement, we may sell from time to time any combination of securities in one or more offerings up to an aggregate amount of $300.0 million. The securities described in the prospectus include common stock, preferred stock, debt securities, guarantees, rights, and units. We may also offer common stock or preferred stock upon conversion of debt securities, common stock upon conversion of preferred stock, or common stock, preferred stock or debt securities upon the exercise of warrants or rights. Each time we sell securities under the “shelf,” we will provide a prospectus supplement that will contain specific information about the terms of the securities being offered and of the offering. Proceeds from the sale of these securities may be used for general corporate purposes including, among other things, working capital, financings, possible acquisitions, the repayment of obligations that have matured, and reducing or refinancing indebtedness that may be outstanding at the time of any offering. On May 12, 2010, we issued 4,000,000 shares of our common stock under the “shelf ” registration statement at a price of $12.50 per share, less underwriting commissions, discounts and expenses. On May 19, 2010, an additional 500,000 shares were issued under the “shelf ” registration statement pursuant to the 30-day over-allotment option exercised by the underwriters. Management has broad discretion to allocate the net proceeds of $52.7 million from the offering for such purposes as working capital, capital expenditures, repayment or repurchase of a portion of our indebtedness or acquisitions of, or investment in, complementary businesses and products. On March 13, 2008, our then subsidiary TrentonWorks Ltd. (TrentonWorks) filed for bankruptcy with the Office of the Superintendent of Bankruptcy Canada whereby the assets of TrentonWorks were administered and liquidated by an appointed trustee. In the fourth quarter of fiscal 2010, the bankruptcy was resolved upon liquidation of substantially all remaining assets of TrentonWorks by the bankruptcy trustee. The resolution of the bankruptcy and associated release of obligations resulted in the recognition of $11.9 million in income in 2010, consisting of the reversal of the $15.3 million liability, net of a $3.4 million other comprehensive loss. This income was recorded in Special items on the Consolidated Statement of Operations. In April 2010, WLR — Greenbrier Rail Inc. (WLR-GBX) was formed and acquired a lease fleet of nearly 4,000 railcars valued at approximately $230.0 million. WLR-GBX is wholly owned by affiliates of WL Ross & Co., LLC. We paid a $6.1 million contract placement fee to WLR-GBX for the right to perform certain management and advisory services and in exchange will receive management and other fee income and incentive compensation tied to the performance of WLR-GBX. The contract placement fee is accounted for under the equity method and is recorded in Intangibles and other assets on the Consolidated Balance Sheet. A $3.2 million gain on extinguishment of debt was recorded on the early retirement of $32.3 million of convertible senior notes in fiscal 2010. This gain was partially offset by $0.5 million for the proportionate write-off of associated loan fees. We delivered 500 railcar units during fiscal year 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. As a result of re- marketing the railcars, we recorded revenue of $2.8 million for the year ended August 31, 2010. 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, 2010, $9.1 million of the potential obligation remained in deferred revenue. 24 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Results of Operations Overview Total revenue was $0.8 billion, $1.0 billion and $1.3 billion for the years ended August 31, 2010, 2009 and 2008. Net earnings attributable to Greenbrier for the year ended August 31, 2010 were $4.3 million or $0.21 per diluted common share which included income of $11.9 million in special items net of tax or $0.59 per diluted common share. Net loss attributable to Greenbrier for the year ended August 31, 2009 was $56.4 million or $3.35 per diluted common share which included $51.0 million of special charges net of tax or $3.03 per diluted common share. Net earnings attributable to Greenbrier for the year ended August 31, 2008 were $17.4 million or $1.06 per diluted common share which included $2.3 million of special charges net of tax or $.14 per diluted common share. Manufacturing Segment Manufacturing revenue includes new railcar and marine production. New railcar delivery and backlog information disclosed herein includes all facilities. Manufacturing revenue was $295.6 million, $462.5 million and $665.1 million for the years ended August 31, 2010, 2009 and 2008. Railcar deliveries, which are the primary source of manufacturing revenue, were approximately 2,500 units in 2010 compared to 3,700 units in 2009 and 7,300 units in 2008. Manufacturing revenue decreased $166.9 million, or 36.1%, from 2009 to 2010 primarily due to a decline in marine barge production, lower railcar deliveries and a change in railcar product mix with lower per unit sales prices. 2009 revenue was reduced by an $11.6 million obligation of guaranteed minimum earnings under a certain contract. Manufacturing revenue decreased $202.6 million, or 30.0%, from 2008 to 2009 primarily due to lower railcar deliveries and the $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 margin as a percentage of revenue was 9.2% in 2010 compared to 0.8% in 2009. The increase was primarily the result of a more favorable product mix and improved production efficiencies at our Mexican joint venture. The current year was positively impacted by the re-marketing of railcars that were subject to guaranteed minimum earnings under a certain contract in the prior year. 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. Wheel Services, Refurbishment & Parts Segment Wheel Services, Refurbishment & Parts revenue was $390.1 million, $476.2 million and $527.5 million for the years ended August 31, 2010, 2009 and 2008. The $86.1 million decrease in revenue from 2009 to 2010 was primarily due to lower sales volumes of wheels and reduced volumes of railcar repair and refurbishment work. This was offset slightly by improvement in the price for scrap metal. 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. Wheel Services, Refurbishment & Parts margin as a percentage of revenue was 11.7% for both 2010 and 2009, and 19.2% for 2008. The decrease in fiscal 2009 margins was primarily due to lower net scrap pricing and less favorable mix of repair and refurbishment work. Leasing & Services Segment Leasing & Services revenue was $78.8 million, $79.5 million and $97.5 million for the years ended August 31, 2010, 2009 and 2008. The $0.7 million decrease in revenue from 2009 to 2010 was primarily the result of lower rent generated from the lease fleet principally offset by higher gains on sale of assets from the lease fleet. The $18.0 million decrease in revenue from 2008 to 2009 was primarily the result of a $6.8 million decrease in gains on T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 25 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. During 2010, we realized $6.5 million in gains on sale for the disposition of leased equipment compared to $1.2 million in 2009 and $8.0 million in 2008. 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 47.5% in 2010 compared to 42.2% in 2009 and 51.0% in 2008. The increase in 2010 was primarily the result of increased gains on sale of assets from the lease fleet which has no associated cost of revenue. The decrease from 2008 to 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 percentage of owned units on lease as of August 31, 2010 was 94.4% compared to 88.3% at August 31, 2009. Other costs Selling and administrative expense was $69.9 million, $65.7 million and $85.1 million for the years ended August 31, 2010, 2009 and 2008. The $4.2 million increase from 2009 to 2010 is primarily due to higher depreciation expense associated with our on-going ERP improvement projects, higher consulting and travel expenses and increased costs at our Mexican joint venture due to higher activity levels. These were partially offset by lower employee costs. The $19.4 million decrease from 2008 to 2009 is primarily due to lower employee related costs, including cost reduction efforts 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. Interest and foreign exchange expense was $43.1 million and $45.9 million for the years ended August 31, 2010 and 2009. (In thousands) Interest and foreign exchange: Interest and other expense Accretion of term loan debt discount Accretion of convertible debt discount Gain on debt extinguishment Write-off of fees and debt discount on debt prepayment Foreign exchange loss Years Ended August 31, 2010 2009 Increase (Decrease) $36,214 4,377 3,771 (3,218) 1,148 842 $43,134 $35,669 1,117 3,831 – 1,300 3,995 $45,912 $ 545 3,260 (60) (3,218) (152) (3,153) $(2,778) The increase in term loan debt discount accretion, associated with the term loan issued in June 2009, was due to a full year of accretion in 2010 compared to only a partial year in 2009. 26 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Interest and foreign exchange expense was $45.9 million and $44.3 million for the years ended August 31, 2009 and 2008. (In thousands) Interest and foreign exchange: Interest and other expense Accretion of term loan debt discount Accretion of convertible debt discount Write-off of fees and debt discount on debt prepayment Foreign exchange loss Years Ended August 31, 2009 2008 Increase (Decrease) $35,669 1,117 3,831 1,300 3,995 $45,912 $38,612 – 3,550 – 2,158 $44,320 $(2,943) 1,117 281 1,300 1,837 $ 1,592 Interest and other expense decreased primarily due to favorable interest rates on our variable rate debt and lower debt levels. The debt discount accretion expense was $1.1 million associated with the term loan issued in June 2009. In April 2007, the Company’s board of directors approved the permanent closure of the Company’s then Canadian railcar manufacturing subsidiary, TrentonWorks. As a result of the facility closure decision charges of $2.3 million were recorded as special items during 2008. In March 2008, TrentonWorks filed for bankruptcy. In the fourth quarter of 2010, the bankruptcy was resolved upon liquidation of substantially all remaining assets. The resolution of the bankruptcy resulted in income of $11.9 million which was recorded in Special items. Charges of $55.7 million were recorded to Special items in May 2009 associated with the impairment of goodwill. These charges consist of $1.3 million related to the Manufacturing segment, $3.1 million related to the Leasing & Services segment and $51.3 million related to the Wheel Services, Refurbishment & Parts segment. Income Tax In 2010 we recorded a tax benefit of $1.0 million on $9.0 million of earnings for the year. The current year included income of $11.9 million from a Special item associated with the resolution of the bankruptcy of our then Canadian railcar manufacturing subsidiary, TrentonWorks which was not taxable. In addition, an income tax liability was not recorded on the noncontrolling interest earnings of $4.1 million from a consolidated subsidiary that is a flow through entity for tax purposes. Earnings from flow through entities are only taxed at the owner’s level. Excluding these items the effective tax rate would have been 13.8%. Our effective tax rate was 22.8% and 56.3% for the years ended August 31, 2009 and 2008. In 2009 a goodwill impairment charge for which a tax benefit was recorded at 8%, as a portion of the impairment charge was not deductible for tax purposes. In addition, 2009 included a reversal of $1.4 million of liabilities for uncertain tax positions for which we are no longer subject to examination by the tax authorities, a tax benefit of $2.5 million related to the deemed liquidation of our German operation for U.S. tax purposes and a tax benefit of $4.3 million related to the reversal of a deferred tax liability associated with a foreign subsidiary. Excluding these items the effective tax rate would have been 21.5%. Tax expense for 2008 included a $3.9 million charge associated with deferred tax assets and operating losses without tax benefit incurred by our then Canadian subsidiary during its closure process. 2008 also 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. Excluding these items the effective tax rate would have been 54.3%. 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. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 27 Earnings (Loss) from Unconsolidated Affiliates Earnings (loss) from unconsolidated affiliates were a loss of $1.6 million in 2010, a loss of $0.6 million in 2009 and earnings of $0.9 million in 2008. 2010 includes losses from our castings joint venture and from WLR-GBX. The WLR-GBX loss was primarily the result of a mark to market on an interest rate swap, which should no longer have a significant impact on future results. 2009 and 2008 consist entirely of results from our castings joint venture. Noncontrolling Interest Noncontrolling interest includes earnings of $4.1 million, loss of $1.5 million and loss of $3.2 million for the years ended August 31, 2010, 2009 and 2008 and primarily represents our joint venture partner’s share in the earnings (losses) of our Mexican railcar manufacturing joint venture that began production in 2007. Liquidity and Capital Resources We have been financed through cash generated from operations, borrowings and stock issuance. At August 31, 2010 cash and cash equivalents was $98.9 million, an increase of $22.7 million from $76.2 million at the prior year end. Cash provided by operating activities for the years ended August 31, 2010, 2009 and 2008 was $42.6 million, $120.5 million and $32.1 million. The decrease in 2010 was primarily due to change in working capital needs based on current activity levels. The change from 2008 to 2009 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, 2010 was $24.2 million compared to $23.0 million in 2009 and $152.2 million in 2008. 2010 and 2009 cash utilization was primarily due to capital expenditures during the year. Cash utilization in 2008 was primarily due to acquisitions in the Wheel Services, Refurbishment & Parts segment and capital expenditures for the year. Capital expenditures totaled $39.0 million, $38.8 million and $77.6 million for the years ended August 31, 2010, 2009 and 2008. Of these capital expenditures, approximately $18.1 million, $23.1 million and $45.9 million for the years ended August 31, 2010, 2009 and 2008 were attributable to Leasing & Services operations. Leasing & Services capital expenditures for 2011, net of proceeds from sales of equipment, are expected to be approximately $40.0 million. We regularly sell assets from our lease fleet, some of which may have been purchased within the current year and included in capital expenditures. Proceeds from the sale of equipment were approximately $23.0 million, $15.6 million and $14.6 million for the years ended August 31, 2010, 2009 and 2008. Approximately $8.7 million, $9.1 million and $24.1 million of capital expenditures for the years ended August 31, 2010, 2009 and 2008 were attributable to Manufacturing operations. Capital expenditures for Manufacturing are expected to be approximately $16.0 million in 2011 and primarily relate to enhancements to existing manufacturing facilities and ERP implementation. Wheel Services, Refurbishment & Parts capital expenditures for the years ended August 31, 2010, 2009 and 2008 were $12.2 million, $6.6 million and $7.6 million and are expected to be approximately $28.0 million in 2011 for the opening of a new wheel services facility to replace one previously destroyed by fire, maintenance and improvement of existing facilities and ERP implementation. Cash provided by financing activities was $4.6 million for the year ended August 31, 2010 compared to cash used in financing activities of $24.5 million for the year ended August 31 2009 and cash provided by financing activities of $103.5 million in 2008. During 2010, we received $52.7 million in net proceeds from an equity offering and $2.0 million in net proceeds from term loan borrowings. We repaid $11.9 million in net revolving credit lines and $38.3 million in term loans and convertible notes. During 2009, we repaid $81.3 million in net revolving credit lines and $16.4 million in term debt and paid dividends of $2.0 million. We received $69.8 million in net proceeds from term loan borrowings. 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. 28 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t All amounts originating in foreign currency have been translated at the August 31, 2010 exchange rate for the following discussion. As of August 31, 2010 senior secured credit facilities, consisting of two components, aggregated $111.1 million. A $100.0 million revolving line of credit, maturing November 2011, is secured by substantially all of our assets in the United States not otherwise pledged as security for term loans. The facility is 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 $11.1 million secured by substantially all of our European assets, with various variable rates, are available for working capital needs of the European manufacturing operation. European credit facilities are continually being renewed. Currently these European credit facilities have maturities that range from April 2011 through June 2011. In September 2010, our Mexican joint venture renewed its line of credit for up to $10.0 million secured by certain of the joint venture’s accounts receivable and inventory. Advances under this facility bear interest at LIBOR plus 2.5% and are due 180 days after the date of borrowing. Currently the Mexican joint venture can borrow on this facility through August 2011. As of August 31, 2010 outstanding borrowings under our facilities consists of $3.6 million in letters of credit outstanding under the North American credit facility and $2.6 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 plus rent) coverage. Available borrowings under our credit facilities are generally based on defined levels of inventory, receivables, property, plant and equipment and leased equipment, as well as total debt to consolidated capitalization and interest coverage ratios which, as of August 31, 2010 would allow for maximum additional borrowing of $106.2 million. The Company has an aggregate of $104.9 million available to draw down under the committed credit facilities as of August 31, 2010. This amount consists of $96.4 million available on the North American credit facility and $8.5 million on the European credit facilities. We may from time to time seek to repurchase or otherwise retire or exchange securities, including outstanding borrowings and equity securities, and take other steps to reduce our debt or otherwise improve our balance sheet. These actions may include open market repurchases, unsolicited or solicited privately negotiated transactions or other retirements, repurchases or exchanges. Such repurchases or exchanges, if any, will depend on a number of factors, including, but not limited to, prevailing market conditions, trading levels of our debt, our liquidity requirements and contractual restrictions, if applicable. We have operations in Mexico and Poland that conduct business in their local currencies as well as other regional 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 the margin on a portion of forecast foreign currency sales. Foreign operations give rise to risks from changes in foreign currency exchange rates. We utilize foreign currency forward exchange contracts with established financial institutions to hedge a portion of that risk. No provision has been made for credit loss due to counterparty non-performance. In addition to the third party financing, Greenbrier has provided financing for a portion of the working capital needs of our Mexican joint venture through a secured, interest bearing loan. The balance of the loan was $19.0 million as of August 31, 2010. In accordance with customary business practices in Europe, we have $9.1 million in bank and third party performance and warranty guarantee facilities, all of which have been utilized as of August 31, 2010. To date no amounts have been drawn under these performance and warranty guarantees. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 29 Quarterly dividends were suspended as of the third quarter 2009. A quarterly dividend of $.04 per share was declared during the second quarter of 2009. Quarterly dividends of $.08 per share were declared each quarter from the fourth quarter of 2005 through the first quarter of 2009. We have $0.5 million in long-term advances to an unconsolidated affiliate which are secured by accounts receivable and inventory. As of August 31, 2010, this same unconsolidated affiliate had $0.7 million in third party debt for which we have guaranteed 33% or approximately $0.2 million. The facility has been idled and expects to restart production when demand returns. We, along with our partners, have made additional equity investments during fiscal year 2010, our share of which was $0.9 million. We made an additional investment of $0.2 million during the first quarter of 2011. Additional investments may be required. 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 working capital needs, planned capital expenditures and expected debt repayments for the foreseeable future. The following table shows our estimated future contractual cash obligations as of August 31, 2010: (In thousands) Notes payable Interest Revolving notes Purchase commitments Operating leases Railcar leases Other Total $514,919 122,017 2,630 106,030 17,062 10,419 1,402 2015 2012 2011 Years Ending August 31, 2013 2014 $ 4,565 $ 76,320 $ 72,219 $ 84,710 $276,933 20,004 24,732 27,840 – – 2,630 16,135 16,135 20,745 1,318 2,205 6,781 – – 6,711 2 343 574 21,835 – 16,135 1,488 – 203 27,606 – 20,745 3,679 3,708 276 Thereafter 172 $ – – 16,135 1,591 – 4 $774,479 $69,846 $132,334 $115,634 $124,371 $314,392 $17,902 Due to uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at August 31, 2010, we are unable to estimate the period of cash settlement with the respective taxing authority. Therefore, approximately $3.5 million in uncertain tax positions have been excluded from the contractual table above. See Note 22 to the Consolidated Financial Statements for a discussion on income taxes. 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 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 30 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t management considers them probable of occurring and the amount reasonably estimable. Valuation allowances reduce deferred tax assets to an amount that will more likely than not be realized. Our estimates of the realization of deferred tax assets is based on the information available at the time the financial statements are prepared and may include estimates of future income and other assumptions that are inherently uncertain. Maintenance obligations - We are responsible for maintenance on a portion of the managed and owned lease fleet under the terms of maintenance obligations defined in the underlying lease or management agreement. The estimated maintenance liability is based on maintenance histories for each type and age of railcar. These estimates involve judgment as to the future costs of repairs and the types and timing of repairs required over the lease term. As we cannot predict with certainty the prices, timing and volume of maintenance needed in the future on railcars under long-term leases, this estimate is uncertain and could be materially different from maintenance requirements. The liability is periodically reviewed and updated based on maintenance trends and known future repair or refurbishment requirements. These adjustments could be material due to the inherent uncertainty in predicting future maintenance requirements. Warranty accruals - Warranty costs to cover a defined warranty period are estimated and charged to 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. Certain long lived assets were tested for impairment during the quarter ended May 31, 2010. Forecasted undiscounted future cash flows exceeded the carrying amount of the assets indicating that the assets were not impaired. Goodwill and acquired intangible assets - The Company periodically acquires businesses in purchase transactions in which the allocation of the purchase price may result in the recognition of goodwill and other intangible assets. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 31 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 ASC 350, Intangibles — Goodwill and Other, require that we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of each reporting unit with its carrying value. We determine the fair value of our reporting units based on a weighting of income and market approaches. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, we estimate the fair value based on observed market multiples for comparable businesses. The second step of the goodwill impairment test is required only in situations where the carrying value of the reporting unit exceeds its fair value as determined in the first step. In the second step we would compare the implied fair value of goodwill to its carrying value. The implied fair value of goodwill is determined by allocating the fair value of a reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recorded to the extent that the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill. 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. New Accounting Pronouncements See Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency Exchange Risk We have operations in Mexico, Germany and Poland that conduct business in their local currencies as well as other regional 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 the margin on a portion of forecast foreign currency sales. At August 31, 2010, $37.8 million of forecast sales in Europe were hedged by foreign exchange contracts. 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. We believe the exposure to foreign exchange risk is not material. 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 August 31, 2010, net assets of foreign subsidiaries aggregated $25.1 million and a 10% strengthening of the United States dollar relative to the foreign currencies would result in a decrease in equity of $2.5 million, 0.9% of total equity Greenbrier. This calculation assumes that each exchange rate would change in the same direction relative to the United States dollar. Interest Rate Risk We have managed a portion of our variable rate debt with interest rate swap agreements, effectively converting $45.6 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 August 31, 2010, 66% of our outstanding debt has fixed rates and 34% has variable rates. At August 31, 2010, a uniform 10% increase in interest rates would result in approximately $0.5 million of additional annual interest expense. 32 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Balance Sheets YEARS ENDED AUGUST 31, (In thousands) Assets Cash and cash equivalents Restricted cash Accounts receivable Inventories Assets held for sale Equipment on operating leases, net Investment in direct finance leases Property, plant and equipment, net Goodwill Intangibles and other assets Liabilities and Equity Revolving notes Accounts payable and accrued liabilities Losses in excess of investment in de-consolidated subsidiary Deferred income taxes Deferred revenue Notes payable Commitments and contingencies (Notes 25 & 26) Equity: Greenbrier Preferred stock - without par value; 25,000 shares authorized; none outstanding Common stock - without par value; 50,000 shares authorized; 21,875 and 17,094 outstanding at August 31, 2010 and 2009 Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total equity Greenbrier Noncontrolling interest Total equity 2010 2009(1) $ 98,864 2,525 89,252 185,604 31,826 302,663 1,795 132,614 137,066 90,679 $ 1,072,888 $ 2,630 181,638 – 81,136 11,377 498,700 $ 76,187 1,083 113,371 142,824 31,711 313,183 7,990 127,974 137,066 96,902 $ 1,048,291 $ 16,041 170,889 15,313 69,199 19,250 525,149 – – 22 172,404 120,716 (7,204) 285,938 11,469 297,407 $ 1,072,888 17 117,060 116,439 (9,790) 223,726 8,724 232,450 $ 1,048,291 (1) 2009 was adjusted for the effects of Accounting Standards Codification (ASC) 470 — 20 Debt — Debt with Conversion and Other Options. See Note 2 to the Consolidated Financial Statements. An adjustment to the presentation was also made to conform to the adoption of ASC 810-10-65 Consolidation — Transition related to SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. The accompanying notes are an integral part of these financial statements. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 33 Consolidated Statements of Operations YEARS ENDED AUGUST 31, (In thousands, except per share amounts) 2010 2009(1) 2008(1) Revenue Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services Cost of revenue Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services Margin Other costs Selling and administrative Interest and foreign exchange Special items Earnings (loss) before income tax and earnings (loss) from unconsolidated affiliates Income tax benefit (expense) Earnings (loss) before earnings (loss) from unconsolidated affiliates Earnings (loss) from unconsolidated affiliates Net earnings (loss) Net (earnings) loss attributable to noncontrolling interest Net earnings (loss) attributable to Greenbrier Basic earnings (loss) per common share: Diluted earnings (loss) per common share: Weighted average common shares: Basic Diluted $ 295,566 390,061 78,823 764,450 $ 462,496 476,164 79,465 1,018,125 $ 665,093 527,466 97,520 1,290,079 268,395 344,522 41,365 654,282 110,168 69,931 43,134 (11,870) 101,195 8,973 959 9,932 (1,601) 8,331 (4,054) 4,277 0.23 0.21 18,585 20,213 $ $ $ $ $ $ 458,733 420,294 45,991 925,018 93,107 65,743 45,912 55,667 167,322 (74,215) 16,917 (57,298) (565) (57,863) 1,472 (56,391) (3.35) (3.35) 16,815 16,815 653,879 426,183 47,774 1,127,836 162,243 85,133 44,320 2,302 131,755 30,488 (17,159) 13,329 872 14,201 3,182 17,383 1.06 1.06 16,395 16,417 $ $ $ (1) 2009 and 2008 were adjusted for the effects of Accounting Standards Codification (ASC) 470 — 20 Debt — Debt with Conversion and Other Options. See Note 2 to the Consolidated Financial Statements. An adjustment to the presentation was also made to conform to the adoption of ASC 810-10-65 Consolidation — Transition related to SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. The accompanying notes are an integral part of these financial statements. 34 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Consolidated Statements of Equity and Comprehensive Income (Loss) (In thousands, except for per share amounts) Balance September 1, 2007(1) Net earnings (loss) Translation adjustment (net of tax effect) Pension plan adjustment Reclassification of derivative financial instruments recognized in net earnings (net of tax effect) Unrealized gain on derivative financial instruments (net of tax effect) Comprehensive income Investment by joint venture partner Noncontrolling interest adjustments Pension adjustment (net of tax effect) Cash dividends ($0.32 per share) Uncertain tax position adjustment Restricted stock awards (net of cancellations) Unamortized restricted stock Restricted stock amortization Stock options exercised Excess tax expense of stock options exercised Balance August 31, 2008(1) Net loss Translation adjustment (net of tax effect) Reclassification of derivative financial instruments recognized in net loss (net of tax effect) Unrealized loss on derivative financial instruments (net of tax effect) Comprehensive loss Investment by joint venture partner Noncontrolling interest adjustments Pension adjustment (net of tax effect) Cash dividends ($0.12 per share) Warrants Restricted stock awards (net of cancellations) Unamortized restricted stock Restricted stock amortization Stock options exercised Excess tax expense of stock options exercised Balance August 31, 2009(1) Net earnings Translation adjustment (net of tax effect) Pension adjustment (net of tax effect) Reclassification of derivative financial instruments recognized in net earnings (net of tax effect) Unrealized gain on derivative financial instruments (net of tax effect) Comprehensive income Noncontrolling interest adjustments ASC 470-20 adjustment for partial convertible note retirement (net of tax) Net proceeds from equity offering Restricted stock awards (net of cancellations) Unamortized restricted stock Restricted stock amortization Stock options exercised Excess tax expense of stock options exercised Balance August 31, 2010 Attributable to Greenbrier Common Stock Shares Amount 16,169 – – – $16 – – – Additional Paid-in Capital $ 95,747 – – – Retained Earnings $162,845 17,383 – – – – – – – – – 432 – – 5 – 16,606 – – – – – – – – – 485 – – 3 – 17,094 – – – – – – – 4,500 274 – – 7 – 21,875 – – – – – – – 1 – – – – 17 – – – – – – – – – – – – – – 17 – – – – – – – – – – – – – 9,473 (9,442) 3,932 43 (76) 99,677 – – – – – – – 13,410 1,252 (1,252) 5,062 23 (1,112) 117,060 – – – – – – – – – – (5,261) (136) – – – – – 174,831 (56,391) – – – – – (2,001) – – – – – – 116,439 4,277 – – – – – 5 – – – – – $22 (2,535) 52,703 3,210 (3,210) 5,825 29 (678) $172,404 – – – – – – – $120,716 Accumulated Other Comprehensive Income (Loss) Attributable to Noncontrolling Interest $ (166) – 4,852 (6,873) (94) 905 – – 71 – – – – – – – (1,305) – (5,527) (612) (2,465) – – 119 – – – – – – – (9,790) – (3,831) 6,810 (878) 485 – – – – – – – – $(7,204) $ 5,146 (3,182) – – – – 6,600 54 – – – – – – – – 8,618 (1,472) – – – 1,400 178 – – – – – – – – 8,724 4,054 – – – – (1,309) – – – – – – – $11,469 Total Equity 263,588 14,201 4,852 (6,873) (94) 905 12,991 6,600 54 71 (5,261) (136) 9,474 (9,442) 3,932 43 (76) 281,838 (57,863) (5,527) (612) (2,465) (66,467) 1,400 178 119 (2,001) 13,410 1,252 (1,252) 5,062 23 (1,112) 232,450 8,331 (3,831) 6,810 (878) 485 10,917 (1,309) (2,535) 52,708 3,210 (3,210) 5,825 29 (678) $297,407 (1) 2009 and 2008 were adjusted for the effects of Accounting Standards Codification (ASC) 470 — 20 Debt — Debt with Conversion and Other Options. See Note 2 to the Consolidated Financial Statements. An adjustment to the presentation was also made to conform to the adoption of ASC 810-10-65 Consolidation — Transition related to SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. The accompanying notes are an integral part of these financial statements. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 35 Consolidated Statements of Cash Flows YEARS ENDED AUGUST 31, (In thousands) Cash flows from operating activities: Net earnings (loss) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Deferred income taxes Depreciation and amortization Gain on sales of equipment Special items Accretion of debt discount Gain on extinguishment of debt Other Decrease (increase) in assets excluding acquisitions: Accounts receivable Inventories Assets held for sale Other Increase (decrease) in liabilities excluding acquisitions: Accounts payable and accrued liabilities Deferred revenue Net cash provided by operating activities Cash flows from investing activities: Principal payments received under direct finance leases Proceeds from sales of equipment Investment in and advances (to) from unconsolidated affiliates Contract placement fee Acquisitions, net of cash acquired De-consolidation of subsidiary Decrease (increase) in restricted cash Capital expenditures Other Net cash used in investing activities Cash flows from financing activities: Net changes in revolving notes with maturities of 90 days or less Proceeds from revolving notes with maturities longer than 90 days Repayments of revolving notes with maturities longer than 90 days Net proceeds from issuance of notes payable Repayments of notes payable Net proceeds from equity offering Investment by joint venture partner Dividends paid Other Net cash provided by (used in) financing activities Effect of exchange rate changes Increase (decrease) in cash and cash equivalents Cash and cash equivalents Beginning of period End of period Cash paid during the period for: Interest Income taxes paid (refunded) Non-cash activity Transfer of assets held for sale to equipment on operating leases Transfer of other assets to property, plant and equipment Adjustment to tax reserve Warrant valuation Supplemental disclosure of non-cash activity: Assumption of acquisition capital lease obligation Seller receivable netted against acquisition note De-consolidation of subsidiary (see note 4) Supplemental disclosure of subsidiary acquired Assets acquired Liabilities assumed Acquisitions, net of cash acquired 2010 2009(1) 2008(1) $ 8,331 $ (57,863) $ 14,201 15,052 37,511 (6,543) (11,870) 8,581 (3,218) 4,237 22,430 (44,276) (177) 7,171 12,777 (7,445) 42,561 390 22,978 (927) (6,050) – – (1,442) (38,989) (130) (24,170) (11,934) 5,698 (5,698) 2,040 (38,267) 52,708 – – 29 4,576 (290) 22,677 (13,299) 37,669 (1,167) 55,667 4,948 – 3,583 58,521 98,751 21,841 1,157 (86,514) (2,829) 120,465 429 15,555 – – – – (109) (38,847) – (22,972) (81,251) – – 69,768 (16,436) – 1,400 (2,001) 3,973 (24,547) (2,716) 70,230 11,528 35,086 (8,010) 2,302 3,550 – 390 (7,621) (29,692) (10,621) (2,700) 21,801 1,904 32,118 375 14,598 858 – (91,166) (1,217) 2,046 (77,644) – (152,150) 55,514 – – 49,613 (6,919) – 6,600 (5,261) 3,931 103,478 1,703 (14,851) 76,187 $ 98,864 5,957 $ 76,187 20,808 5,957 $ $ 29,409 $(14,953) $ 31,967 592 $ $ 35,274 4,246 $ $ $ $ $ – 708 – – – – – – – – $ $ $ $ 4,830 – 7,415 13,410 – – – – – – $ $ 6,441 – – – 498 503 15,313 $ (96,782) 5,616 $ (91,166) (1) 2009 and 2008 were adjusted for the effects of Accounting Standards Codification (ASC) 470 — 20 Debt — Debt with Conversion and Other Options. See Note 2 to the Consolidated Financial Statements. An adjustment to the presentation was also made to conform to the adoption of ASC 810-10-65 Consolidation — Transition related to SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. The accompanying notes are an integral part of these financial statements. 36 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Notes to Consolidated Financial Statements Note 1 - Nature of Operations The Greenbrier Companies, Inc. and its subsidiaries (Greenbrier or the Company) currently operate in three primary business segments: Manufacturing, Wheel Services, Refurbishment & Parts and Leasing & Services. The three business segments are operationally integrated. With operations in the United States, Mexico and Poland, the Manufacturing segment produces double-stack intermodal railcars, conventional railcars, tank cars and marine vessels. The Wheel Services, Refurbishment & Parts segment performs railcar repair, refurbishment and maintenance activities in the United States and Mexico as well as wheel and axle servicing and production of a variety of parts for the railroad industry. The Leasing & Services segment owns approximately 8,000 railcars and provides management services for approximately 225,000 railcars for railroads, shippers, carriers, institutional investors and other leasing and transportation companies in North America. Greenbrier also produces railcar castings through an unconsolidated joint venture. Note 2 - Summary of Significant Accounting Policies Principles of consolidation - The financial statements include the accounts of the Company and its subsidiaries in which it has a controlling interest. All intercompany transactions and balances are eliminated upon consolidation. Unclassified Balance Sheet - The balance sheets of the Company are presented in an unclassified format as a result of significant leasing activities for which the current or non-current distinction is not relevant. In addition, the activities of the Manufacturing; Wheel Services, Refurbishment & Parts and Leasing & Services segments are so intertwined that in the opinion of management, any attempt to separate the respective balance sheet categories would not be meaningful and may lead to the development of misleading conclusions by the reader. Foreign currency translation - Operations outside the United States prepare financial statements in currencies other than the United States dollar. Revenues and expenses are translated at average exchange rates for the year, while assets and liabilities are translated at year-end exchange rates. Translation adjustments are accumulated as a separate component of equity in other comprehensive income (loss). Cash and cash equivalents - Cash is temporarily invested primarily in money market funds. All highly-liquid investments with a maturity of three months or less at the date of acquisition are considered cash equivalents. Restricted cash - Restricted cash is a pass through account for activity related to car hire auditing and processing for certain third party customers. Accounts receivable - Accounts receivable are stated net of allowance for doubtful accounts of $3.9 million and $5.6 million as of August 31, 2010 and 2009. (In thousands) Allowance for doubtful accounts Balance at beginning of period Additions, net of reversals Usage Currency translation effect Balance at end of period Years Ended August 31, 2009 2008 2010 $ 5,612 (385) (991) (305) $ 5,557 641 (560) (26) $ 3,916 3,184 (1,598) 55 $ 3,931 $ 5,612 $ 5,557 Inventories - Inventories are valued at the lower of cost (first-in, first-out) or market. Work-in-process includes material, labor and overhead. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 37 Assets held for sale - Assets held for sale consist of new railcars in transit to delivery point, railcars on lease with the intent to sell, used railcars that will either be sold or refurbished or placed on lease and then sold, finished goods and completed wheel sets. Equipment on operating leases, net - Equipment on operating leases is stated net of accumulated depreciation. Depreciation to estimated salvage value is provided on the straight-line method over the estimated useful lives of up to thirty-five years. Property, plant and equipment - Property, plant and equipment is stated net of accumulated depreciation. Depreciation is provided on the straight-line method over estimated useful lives which are as follows: Buildings and improvements Machinery and equipment Other Depreciable Life 10-25 years 3-15 years 3-7 years Goodwill - Goodwill is recorded when the purchase price of an acquisition exceeds the fair market value of the net assets acquired. Goodwill is not amortized and is tested for impairment at least annually and more frequently if material changes in events or circumstances arise. This testing compares carrying values to fair values and if the carrying value of these assets is in excess of fair value, the carrying value is reduced to fair value. The Company performs a goodwill impairment test annually during the third quarter. Intangible and other assets - Intangible assets are recorded when a portion of the purchase price of an acquisition is allocated to assets such as customer contracts and relationships, trade names, certifications and backlog. Intangible assets with finite lives are amortized using the straight line method over their estimated useful lives and include the following: proprietary technology, 10 years; trade names, 5 years; patents, 11 years; and long-term customer agreements, 5 to 20 years. Other assets include loan fees and debt acquisition costs which are capitalized and amortized as interest expense over the life of the related borrowings. 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 estimated realizable value is recognized in the current period. No impairment was recorded in the current fiscal year. Maintenance obligations - The Company is 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 liability is based on maintenance histories for each type and age of railcar. The liability, included in accounts payable and accrued liabilities, is reviewed periodically and updated based on maintenance trends and known future repair or refurbishment requirements. Warranty accruals - Warranty costs are estimated and charged to operations to cover a defined warranty period. The estimated warranty cost is based on 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, are reviewed periodically and updated based on warranty trends. Contingent rental assistance - The Company has entered into contingent rental assistance agreements on certain railcars, subject to leases, that have been sold to third parties. These agreements guarantee the purchasers a minimum lease rental, subject to a maximum defined rental assistance amount, over remaining periods of up to five years. A liability is established when management believes that it is probable that a rental shortfall will occur and the amount can be estimated. Income taxes - The liability method is used to account for income taxes. 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 38 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t realized. As a result, 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 determine the probability of various possible outcomes. The Company reevaluates these uncertain tax positions on a quarterly basis. Changes in assumptions may result in the recognition of a tax benefit or an additional charge to the tax provision. Noncontrolling interest - In October 2006, the Company formed a joint venture with Grupo Industrial Monclova, S.A. (GIMSA) to manufacture new railroad freight cars for the North American marketplace at GIMSA’s existing manufacturing facility located in Frontera, Mexico. Each party owns a 50% interest in the joint venture. Production began late in the Company’s third quarter of 2007. The financial results of this operation are consolidated for financial reporting purposes as the Company maintains a controlling interest as evidenced by the right to appoint the majority of the board of directors, control over accounting, financing, marketing and engineering, and approval and design of products. The noncontrolling interest reflected in the Company’s consolidated financial statements represents the joint venture partner’s equity in this venture. Accumulated other comprehensive income (loss) - Accumulated other comprehensive income (loss) represents net earnings (loss) plus all other changes in net assets from non-owner sources. 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 new or refurbished railcars are completed, accepted by an unaffiliated customer and contractual contingencies removed. Marine revenues 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. Cash payments received in advance prior to meeting revenue recognition criteria are accounted for in deferred revenue. 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. Such adjustments historically have not differed significantly from the estimate. Interest and foreign exchange - Includes foreign exchange gains and losses, amortization of loan fee expense, accretion of debt discounts, gains from extinguishment of debt and external interest expense. (In thousands) Interest and foreign exchange: Interest and other expense Accretion of term loan debt discount Accretion of convertible debt discount Gain on debt extinguishment Write-off of fees and debt discount on debt prepayment Foreign exchange loss Years Ended August 31, 2009 2010 2008 $ 36,214 4,377 3,771 (3,218) 1,148 842 $ 35,669 1,117 3,831 – 1,300 3,995 $ 38,612 – 3,550 – – 2,158 $ 43,134 $ 45,912 $ 44,320 Research and development - Research and development costs are expensed as incurred. Research and development costs incurred for new product development during the years ended August 31, 2010, 2009 and 2008 were $2.6 million, $1.7 million and $2.9 million. Forward exchange contracts - Foreign operations give rise to risks from changes in foreign currency exchange rates. Forward exchange contracts with established financial institutions are utilized to hedge a portion of such risk. Realized and unrealized gains and losses are deferred in other comprehensive income (loss) and recognized in T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 39 earnings concurrent with the hedged transaction or when the occurrence of the hedged transaction is no longer considered probable. Ineffectiveness is measured and any gain or loss is recognized in foreign exchange gain or loss. Even though forward exchange contracts are entered into to mitigate the impact of currency fluctuations, certain exposure remains, which may affect operating results. In addition, there is risk for counterparty non-performance. Interest rate instruments - Interest rate swap agreements are utilized to reduce the impact of changes in interest rates on certain debt. The net cash amounts paid or received under the agreements are accrued and recognized as an adjustment to interest expense. Net earnings per share - Basic earnings per common share (EPS) excludes the potential dilution that would occur if additional shares were issued upon exercise of outstanding stock options and warrants, while diluted EPS takes this potential dilution into account using the treasury stock method. Stock-based compensation - All stock options were vested prior to September 1, 2005 and accordingly no compensation expense was recognized for stock options for the years ended August 31, 2010, 2009 and 2008. The value, at the date of grant, of stock awarded under restricted stock grants is amortized as compensation expense over the vesting period of three to five years. Compensation expense recognized related to restricted stock grants for the years ended August 31, 2010, 2009 and 2008 was $5.8 million, $5.1 million and $3.9 million. Management estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires judgment on the part of management to arrive at estimates and assumptions on matters that are inherently uncertain. These estimates may affect the amount of assets, liabilities, revenue and expenses reported in the financial statements and accompanying notes and disclosure of contingent assets and liabilities within the financial statements. Estimates and assumptions are periodically evaluated and may be adjusted in future periods. Actual results could differ from those estimates. Initial Adoption of Accounting Policies - In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141R, Business Combinations. This statement, which has been codified within Accounting Standards Codification (ASC) 805, Business Combinations, establishes the principles and requirements for how an acquirer recognizes and measures the assets acquired, liabilities assumed, and noncontrolling interest; recognizes and measures goodwill; and identifies disclosures. This statement was effective for the Company for business combinations entered into on or after September 1, 2009. In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51. This statement, which has been codified within ASC 810, Consolidations, establishes reporting standards for noncontrolling interests in subsidiaries. This statement changed the presentation of noncontrolling interests in subsidiaries in the financial statements for the Company beginning September 1, 2009 and the presentation and disclosure has been retrospectively applied for all periods presented. In May 2008, the FASB issued FSPAPB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). This guidance 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 guidance, which has been codified within ASC 470, Debt, was effective for the Company beginning September 1, 2009 with respect to its outstanding convertible debt. This guidance required retrospective adjustments for all periods the Company had the convertible debt outstanding. 40 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t The retrospective application of this guidance adjusted Interest and foreign exchange and Net earnings (loss) attributable to Greenbrier and earnings (loss) per share for 2009 and 2008 as indicated in the following tables (in thousands, except per share amounts): Previously reported Adjustment Revised Year Ended August 31, 2009 Interest and Foreign Exchange $ 42,081 3,831 $ 45,912 Net loss Attributable to Greenbrier $ (54,060) (2,331) $ (56,391) Basic Loss per Common Share Diluted Loss per Common Share $ (3.21) (0.14) $ (3.35) $ (3.21) (0.14) $ (3.35) Interest and Foreign Exchange Year Ended August 31, 2008 Net Earnings Attributable to Greenbrier Basic Earnings per Common Share Diluted Earnings per Common Share Previously reported Adjustment Revised $ 40,770 3,550 $ 44,320 $ 19,542 (2,159) $ 17,383 $ 1.19 (0.13) $ 1.06 $ 1.19 (0.13) $ 1.06 The retrospective application of this guidance adjusted the Consolidated Balance Sheet as of August 31, 2009 as follows (in thousands): Previously reported Adjustment Revised August 31, 2009 Deferred Income Taxes Notes Payable Additional Paid- in Capital Retained Earnings $ 62,530 6,669 $ 69,199 $ 542,180 (17,031) $ 525,149 $ 99,645 17,415 $117,060 $ 123,492 (7,053) $ 116,439 Prospective Accounting Changes - In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) which provides guidance with respect to consolidation of variable interest entities. This statement retains the scope of Interpretation 46(R) with the addition of entities previously considered qualifying special-purpose entities, as the concept of these entities was eliminated in SFAS No. 166, Accounting for Transfers of Financial Assets. This statement replaces the quantitative-based risks and rewards calculation for determining the primary beneficiary of a variable interest entity. The approach focuses on identifying which enterprise has the power to direct activities that most significantly impact the entity’s economic performance and the obligation to absorb the losses or receive the benefits from the entity. It is possible that application of this revised guidance will change an enterprise’s assessment of involvement with variable interest entities. This statement, which has been codified within ASC 810, Consolidations, was effective for the Company as of September 1, 2010. The initial adoption did not have an effect on the Company’s Consolidated Financial Statements. Note 3 - Special Items In April 2007, the Company’s board of directors approved the permanent closure of the Company’s then Canadian railcar manufacturing subsidiary, TrentonWorks Ltd. (TrentonWorks). As a result of the facility closure decision, charges of $2.3 million were recorded in Special items during 2008 consisting of severance costs and professional and other expenses. In March 2008, Trenton Works filed for bankruptcy. During the fourth quarter of 2010, the bankruptcy was resolved and the Company recorded income of $11.9 million in Special items. See Note 4 — De-consolidation of Subsidiary. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 41 In May 2009, the Company recorded charges of $55.7 million in Special items associated with the impairment of goodwill. These charges consist of $1.3 million in the Manufacturing segment, $3.1 million in the Leasing & Services segment and $51.3 million in the Wheel Services, Refurbishment & Parts segment. Note 4 - De-consolidation of Subsidiary On March 13, 2008 TrentonWorks filed for bankruptcy with the Office of the Superintendent of Bankruptcy Canada whereby the assets of TrentonWorks were administered and liquidated by an appointed trustee. Under generally accepted accounting principles, consolidation is generally required for investments of more than 50% ownership, except when control is not held by the majority owner. Under these principles, bankruptcy represents a condition which may preclude consolidation in instances where control rests with the bankruptcy court and trustee, rather than the majority owner. As a result, the Company discontinued consolidating TrentonWorks’ financial statements beginning on March 13, 2008 and reported its investment in TrentonWorks using the cost method. Under the cost method, the investment was reflected as a single amount on the Company’s Consolidated Balance Sheet. De-consolidation resulted in a negative investment in the subsidiary of $15.3 million which was included as a liability on the Company’s Consolidated Balance Sheet titled Losses in excess of investment in de-consolidated subsidiary. In addition, a $3.4 million loss was included in Accumulated other comprehensive loss. In the fourth quarter of fiscal 2010, the bankruptcy was resolved upon liquidation of substantially all remaining assets of TrentonWorks by the bankruptcy trustee. The resolution of the bankruptcy and associated release of obligations resulted in the recognition of $11.9 million of income in 2010, consisting of the reversal of the $15.3 million liability, net of the $3.4 million other comprehensive loss. This income was recorded in Special items on the Consolidated Statement of Operations. Note 5 - Inventories (In thousands) Manufacturing supplies and raw materials Work-in-process Lower of cost or market adjustment (In thousands) Lower of cost or market adjustment Balance at beginning of period Charge to cost of revenue Disposition of inventory Currency translation effect Balance at end of period Note 6 - Assets Held for Sale (In thousands) Railcars held for sale Railcars in transit to customer Finished goods – parts Years Ended August 31, 2010 2009 $ 119,306 70,394 (4,096) $ 113,935 33,771 (4,882) $ 185,604 $ 142,824 Years Ended August 31, 2009 2010 2008 $ 4,882 1,698 (2,249) (235) $ 4,999 2,340 (1,896) (561) $ 3,807 4,567 (3,636) 261 $ 4,096 $ 4,882 $ 4,999 Years Ended August 31, 2010 2009 $ 12,804 2,451 16,571 $ 13,625 192 17,894 $ 31,826 $ 31,711 42 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Note 7 - Investment in Direct Finance Leases (In thousands) Future minimum receipts on lease contracts Maintenance, insurance, and taxes Net minimum lease receipts Estimated residual values Unearned finance charges Future minimum receipts on the direct finance lease contracts are as follows: (In thousands) Year ending August 31, 2011 2012 2013 2014 2015 Thereafter Years Ended August 31, 2010 2009 $ 2,647 (4) $ 13,913 (319) 2,643 234 (1,082) 13,594 1,399 (7,003) $ 1,795 $ 7,990 $ 397 396 309 309 309 927 $ 2,647 Note 8 - Equipment on Operating Leases, net Equipment on operating leases is reported net of accumulated depreciation of $85.0 million and $79.8 million as of August 31, 2010 and 2009. In addition, certain railcar equipment leased-in by the Company (see Note 25 Lease Commitments) is subleased to customers under non-cancelable operating leases. Aggregate minimum future amounts receivable under all non-cancelable operating leases and subleases are as follows: (In thousands) Year ending August 31, 2011 2012 2013 2014 2015 Thereafter $ 27,145 19,686 11,035 9,305 6,634 17,037 $ 90,842 Certain equipment is also operated under daily, monthly or car hire arrangements. Associated revenue amounted to $18.4 million, $22.8 million and $28.4 million for the years ended August 31, 2010, 2009 and 2008. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 43 Note 9 - Property, Plant and Equipment, net (In thousands) Land and improvements Machinery and equipment Buildings and improvements Other Accumulated depreciation Note 10 - Goodwill Years Ended August 31, $ 2010 25,539 163,351 72,727 42,893 $ 2009 20,324 163,444 76,970 23,927 304,510 (171,896) 284,665 (156,691) $ 132,614 $ 127,974 The Company performs 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 ASC 350, Intangibles — Goodwill and Other, require the Company to perform a two-step impairment test on goodwill. In the first step, the Company compares the fair value of each reporting unit with its carrying value. The Company determines the fair value of our reporting units based on a weighting of income and market approaches. Under the income approach, the Company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, the Company estimates 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 the Company would compare the implied fair value of goodwill to its carrying value. The implied fair value of goodwill is determined by allocating the fair value of a reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment loss is recorded to the extent that the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill. The goodwill balance, net of cumulative write-downs of $55.7 million, as of August 31, 2010 and 2009 was $137.1 million. The remaining balance relates to the Wheel Services, Refurbishment & Parts segment. Goodwill was tested as of February 28, 2010 and the Company concluded that goodwill was not impaired. Note 11 - Intangibles and Other Assets 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 assets balance: (In thousands) Intangible assets subject to amortization: Customer relationships Accumulated amortization Other intangibles Accumulated amortization Intangible assets not subject to amortization Prepaid and other assets Years Ended August 31, 2010 2009 $ 66,825 (13,701) 5,003 (2,845) $ 66,825 (9,549) 5,187 (2,289) 55,282 912 34,485 60,174 912 35,816 $ 90,679 $ 96,902 44 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Intangible assets with finite lives are amortized using the straight line method over their estimated useful lives and include the following: proprietary technology, 10 years; trade names, 5 years; patents, 11 years; and long-term customer agreements and relationships, 5 to 20 years. Amortization expense for the years ended August 31, 2010, 2009 and 2008 was $4.8 million, $4.8 million and $3.7 million. Amortization expense for the years ending August 31, 2011, 2012, 2013, 2014 and 2015 is expected to be $4.7 million, $4.5 million, $4.4 million, $4.3 million and $4.3 million. Note 12 - Investment in Unconsolidated Affiliates In April 2010, WLR - Greenbrier Rail Inc. (WLR-GBX) was formed and acquired a lease fleet of nearly 4,000 railcars valued at approximately $230.0 million. WLR-GBX is wholly owned by affiliates of WL Ross. The Company paid a $6.1 million contract placement fee to WLR-GBX for the right to perform certain management and advisory services and in exchange will receive management and other fee income and incentive compensation tied to the performance of WLR-GBX. The contract placement fee is accounted for under the equity method and is recorded in Intangibles and other assets on the Consolidated Balance Sheet. WLR-GBX qualifies as a variable interest entity under ASC 810, Consolidations. While the Company acts as asset manager to WLR-GBX, it is not the primary beneficiary. The Company has no authority to make decisions regarding key business activities that most significantly impact the entity’s economic performance, such as asset re- marketing and disposition activities, which requires the approval of affiliates of WL Ross. In June 2003, the Company acquired a 33% minority ownership interest in a joint venture which produces castings for freight cars. This joint venture is accounted for under the equity method and the investment is included in Intangibles and other assets on the Consolidated Balance Sheets. The facility has been idled and expects to restart production when demand returns. The Company, along with the other partners, has made additional investments during fiscal year 2010, the Company’s share of which was $0.9 million. Additional investments may be required. Note 13 - Revolving Notes All amounts originating in foreign currency have been translated at the August 31, 2010 exchange rate for the following discussion. As of August 31, 2010 senior secured credit facilities, consisting of two components, aggregated $111.1 million. As of August 31, 2010 a $100.0 million revolving line of credit secured by substantially all the Company’s assets in the United States not otherwise pledged as security for term loans, maturing November 2011, was available to provide working capital and interim financing of equipment, principally for the United States and Mexican operations. Advances under this facility bear interest at variable rates that depend on the type of borrowing and the defined ratio of debt to total capitalization. Available borrowings under the credit facility are generally based on defined levels of inventory, receivables, property, plant and equipment and leased equipment, as well as total debt to consolidated capitalization and interest coverage ratios. In addition, as of August 31, 2010, lines of credit totaling $11.1 million secured by substantially all of the Company’s European assets, with various variable rates, were available for working capital needs of the European manufacturing operation. European credit facilities are continually being renewed. Currently these European credit facilities have maturities that range from April 2011 through June 2011. Subsequent to year end, the Company’s Mexican joint venture renewed its line of credit of up to $10.0 million secured by certain of the joint venture’s accounts receivable and inventory. Advances under this facility bear interest at LIBOR plus 2.5% and are due 180 days after the date of borrowing. Currently the joint venture will be able to draw against the facility through August 2011. As of August 31, 2010 outstanding borrowings under these facilities consists of $3.6 million in letters of credit outstanding under the North American credit facility and $2.6 million in revolving notes outstanding under the European credit facilities. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 45 Note 14 - Accounts Payable and Accrued Liabilities (In thousands) Trade payables Accrued payroll and related liabilities Accrued maintenance Accrued warranty Other Note 15 - Maintenance and Warranty Accruals Years Ended August 31, 2010 2009 $ 141,767 19,025 12,460 6,304 2,082 $ 128,807 16,332 16,206 8,184 1,360 $ 181,638 $ 170,889 (In thousands) Accrued maintenance Balance at beginning of period Charged to cost of revenue Payments Balance at end of period Accrued warranty Balance at beginning of period Charged to cost of revenue Payments Currency translation effect De-consolidation effect Balance at end of period Note 16 - Notes Payable (In thousands) Senior unsecured notes Convertible senior notes Term loans Other notes payable Debt discount net of accretion Years Ended August 31, 2009 2010 2008 $ 16,206 13,581 (17,327) $ 17,067 17,005 (17,866) $ 20,498 17,720 (21,151) $ 12,460 $ 16,206 $ 17,067 $ 8,184 425 (2,252) (53) – $ 11,873 32 (3,193) (528) – $ 15,911 2,808 (5,655) 956 (2,147) $ 6,304 $ 8,184 $ 11,873 Years Ended August 31, 2010 2009 $ 235,000 67,724 212,019 176 $ 235,000 100,000 219,075 398 514,919 (16,219) 554,473 (29,324) $ 498,700 $ 525,149 Senior unsecured notes, due 2015, bear interest at a fixed rate of 83⁄8%, paid semi-annually in arrears on May 15th and November 15th of each year. Payment on the notes is guaranteed by substantially all of the Company’s domestic subsidiaries. Convertible senior notes, due 2026, bear interest at a fixed rate of 23⁄8%, paid semi-annually in arrears on May 15th and November 15th. The Company will also pay contingent interest of 3⁄8% on the notes in certain circumstances commencing with the six-month period beginning May 15, 2013. Payment on the convertible notes is guaranteed by substantially all of the Company’s domestic subsidiaries. The convertible senior notes will be convertible upon the occurrence of specified events into cash and shares, if any, of Greenbrier’s common stock at an initial conversion 46 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t rate of 20.8125 shares per $1,000 principal amount of the notes (which is equal to an initial conversion price of $48.05 per share). The initial conversion rate is subject to adjustment upon the occurrence of certain events, as defined. On or after May 15, 2013, Greenbrier may redeem all or a portion of the notes at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. On May 15, 2013, May 15, 2016 and May 15, 2021 and in the event of certain fundamental changes, holders may require the Company to repurchase all or a portion of their notes at a price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. During fiscal 2010, the Company retired $32.3 million of the convertible notes early and realized a gain of $3.2 million which was recorded as Interest and foreign exchange in the Consolidated Statement of Operations. The debt discount associated with the convertible senior notes is being accreted using the effective interest rate method through May 2013 and the accretion expense is included in Interest and foreign exchange on the Consolidated Statements of Operations. The pre-tax accretion is expected to be approximately $3.0 million in the year ending August 31, 2011, $3.3 million in the year ending August 31, 2012 and $2.5 million in the year ending August 31, 2013. On March 30, 2007, the Company issued a $100.0 million senior term note secured by a pool of leased railcars. The note bears a floating interest rate of LIBOR plus 1% with principal of $0.7 million paid quarterly in arrears and a balloon payment of $81.8 million due at the end of the seven-year loan term. On May 9, 2008, the Company issued an additional $50.0 million senior term note secured by a pool of leased railcars. The note bears a floating interest rate of LIBOR plus 1% with principal of $0.3 million paid quarterly in arrears and a balloon payment of $41.2 million due at the end of the seven-year loan term. An interest rate swap agreement was entered into to swap the floating interest rate of LIBOR plus 1% to a fixed rate of 4.24%. At August 31, 2010, the notional amount of the agreement was $45.6 million and matures in March 2014. On June 10, 2009, the Company issued a $75.0 million term loan, maturing in June 2012, which is principally secured by certain assets including all of a subsidiary’s assets. The loan contains no financial covenants, is non-amortizing and requires mandatory prepayments under certain circumstances. The balance as of August 31, 2010 was $71.8 million and has a variable interest rate of LIBOR plus 3.5% paid quarterly in arrears with a balloon payment due at the end of the three-year loan term. In connection with the loan, the Company issued warrants to purchase 3.378 million shares of its common stock at $6 per share, both subject to adjustment in certain circumstances. The warrants have a five-year term. The warrants were valued at $13.4 million, and recorded as a debt discount (reducing Notes payable) and Additional paid-in capital (increasing Stockholders’ equity Greenbrier) on the Consolidated Balance Sheet. This debt discount will be accreted and recorded as Interest and foreign exchange in the Statements of Operations over the life of the loan. The accretion of the debt discount was $4.8 million and $1.1 million for the years ended August 31, 2010 and 2009. Accretion is expected to be $4.3 million for the year ending August 31, 2011 and $3.2 million for the year ending August 31, 2012. 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. Principal payments on the notes payable are expected as follows: (In thousands) Year ending August 31, 2011 2012 2013 2014 2015 Thereafter $ 4,565 76,320 72,219 84,710 276,933 172 $ 514,919 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 47 Note 17 - 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 in Pound Sterling and Euro. Interest rate swap agreements are utilized 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 unrealized gains and losses are recorded in accumulated other comprehensive loss. At August 31, 2010 exchange rates, forward exchange contracts for the purchase of Polish Zloty and the sale of Euro aggregated $37.8 million. Adjusting the foreign currency exchange contracts to the fair value of the cash flow hedges at August 31, 2010 resulted in an unrealized pre-tax gain of $0.2 million that was recorded in accumulated other comprehensive loss. The fair value of the contracts is included in accounts payable and accrued liabilities when there is a loss, or accounts receivable when there is a gain, on the Consolidated Balance Sheets. As the contracts mature at various dates through December 2011, any such gain or loss remaining will be recognized in manufacturing revenue along with the related transactions. In the event that the underlying sales 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 current year’s results of operations in Interest and foreign exchange. At August 31, 2010, an interest rate swap agreement had a notional amount of $45.6 million and matures March 2014. The fair value of this cash flow hedge at August 31, 2010 resulted in an unrealized pre-tax loss of $5.1 million. The loss is included in accumulated other comprehensive loss and the fair value of the contract is included in accounts payable and accrued liabilities on the Consolidated Balance Sheet. 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 August 31, 2010 interest rates, approximately $1.2 million would be reclassified to interest expense in the next 12 months. Fair Values of Derivative Instruments Asset Derivatives Liability Derivatives Balance Sheet Location August 31, 2010 Fair Value 2009 Fair Value Balance Sheet Location August 31, 2010 Fair Value 2009 Fair Value (In thousands) Derivatives designated as hedging instruments Foreign forward exchange contracts Accounts receivable $573 $1,004 Interest rate swap contracts Other assets – – $573 $1,004 Derivatives not designated as hedging instruments Foreign forward exchange contracts Accounts receivable $111 $ 279 Accounts payable and accrued liabilities Accounts payable and accrued liabilities $ 215 $1,650 5,141 $5,356 3,617 $5,267 Accounts payable and accrued liabilities $ 14 $ 590 48 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t The Effect of Derivative Instruments on the Statement of Operations Derivatives in Cash Flow Hedging Relationships Location of Loss Recognized in Income on Derivative Loss Recognized in Income on Derivative Twelve Months Ended August 31, 2010 2009 Foreign forward exchange contract Interest and foreign exchange $(354) $(8,243) Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) Twelve Months Ended August 31, 2010 2009 Location of Gain (Loss) Reclassified From Accumulated OCI Into Income Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) Twelve Months Ended August 31, 2010 2009 $ 736 $ (7,709) Revenue $ 231 $(6,777) (1,523) (3,295) $ (797) $(11,004) Interest and foreign exchange (1,829) (1,345) $(1,598) $(8,122) Location of Loss in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) Interest and foreign exchange Interest and foreign exchange Loss Recognized on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) Twelve Months Ended August 31, 2010 2009 $ $ – – – $ $ – – – Derivatives in Cash Flow Hedging Relationships Foreign forward exchange contracts Interest rate swap contracts Note 18 - Equity On May 12, 2010, the Company issued 4,000,000 shares of its common stock at a price of $12.50 per share, less underwriting commissions, discounts and expenses. On May 19, 2010, an additional 500,000 shares were issued pursuant to the 30-day over-allotment option exercised by the underwriters. Greenbrier’s management has broad discretion to allocate the net proceeds of $52.7 million from the offering for such purposes as working capital, capital expenditures, repayment or repurchase of a portion of the Company’s indebtedness or acquisitions of, or investment in, complementary businesses and products. In January 2005, the stockholders approved the 2005 Stock Incentive Plan. The plan provides for the grant of incentive stock options, non-statutory stock options, restricted shares, stock units and stock appreciation rights. The maximum aggregate number of the Company’s common shares available for issuance under the plan is 1,300,000. In January 2009, the stockholders approved an amendment to the 2005 Stock Incentive Plan that increased by 525,000 the maximum number of shares of the Company’s common stock that may be issued under the plan. During the years ended August 31, 2010, 2009 and 2008, the Company awarded restricted stock grants totaling 302,326, 696,134 and 443,387 shares under the 2005 Stock Incentive Plan. During the year ended August 31, 2009, the Company accepted voluntarily cancellation and surrender of performance based stock awards covering 205,250 shares. The following table summarizes restricted stock award transactions for shares under the 2005 Stock Incentive Plan: Balance at September 1, 2007 Granted Forfeited Balance at August 31, 2008 Granted Forfeited Balance at August 31, 2009 Granted Forfeited Balance at August 31, 2010 Shares 607,276 443,387 (11,000) 1,039,663 696,134 (210,650) 1,525,147 302,326 (27,900) 1,799,573 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 49 The following table summarizes stock option transactions for shares under option and the related weighted average option price: Balance at September 1, 2007 Exercised Balance at August 31, 2008 Exercised Forfeited Balance at August 31, 2009 Exercised Balance at August 31, 2010 Weighted Average Option Price $ 7.60 $ 8.69 $ 7.42 $ 9.19 $ 9.19 $ 4.59 $ 4.47 $ 4.74 Shares 36,660 (5,000) 31,660 (2,500) (17,000) 12,160 (6,660) 5,500 At August 31, 2010 options outstanding have exercise prices ranging from $4.36 to $6.44 per share, have a remaining average contractual life of .12 years and options to purchase 5,500 shares were exercisable. On August 31, 2010, 2009 and 2008, 25,427, 299,853 and 262,837 shares were available for grant. The value, at the date of grant, of stock awarded under restricted stock grants is amortized as compensation expense over the vesting period of two to five years. Compensation expense recognized related to restricted stock grants for the years ended August 31, 2010, 2009 and 2008 was $5.8 million, $5.1 million and $3.9 million. Note 19 - Earnings per Share The shares used in the computation of the Company’s basic and diluted earnings per common share are reconciled as follows: (In thousands) Weighted average basic common shares outstanding Dilutive effect of employee stock options(1) Dilutive effect of warrants(1) Weighted average diluted common shares outstanding Years Ended August 31, 2010 2008 2009 18,585 6 1,622 16,815 – – 16,395 22 – 20,213 16,815 16,417 (1) Dilutive effect of common stock equivalents is excluded from per share calculations for the year ended August 31, 2009 due to net loss. The dilutive effect of warrants, issued in 2009, equivalent to 0.3 million shares were excluded from the calculation of diluted earnings (loss) per common share attributable to Greenbrier for the year ended August 31, 2009 as these warrants were anti-dilutive due to net loss. Weighted average diluted common shares outstanding include the incremental shares that would be issued upon the assumed exercise of stock options and warrants. No options were anti-dilutive for the years ended August 31, 2010 and 2008 and no warrants were anti-dilutive for the year ended August 31, 2010. Note 20 - Related Party Transactions The Company follows a policy that all proposed transactions with directors, officers, five percent shareholders and their affiliates will be entered into only if such transactions are on terms no less favorable to the Company than could be obtained from unaffiliated parties, are reasonably expected to benefit the Company and are approved by a majority of the disinterested, independent members of the Board of Directors. Aircraft Usage Policy. William Furman, Director, President and Chief Executive Officer of the Company, is a part owner of private aircraft managed by a private independent management company. From time to time, the Company’s business requires charter use of privately-owned aircraft. In such instances, it is possible that charters 50 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t may be placed with the company that manages Mr. Furman’s aircraft. In such event, any such use will be subject to the Company’s travel and entertainment policy and the fees paid to the management company will be no less favorable than would have been available to the Company for similar services provided by unrelated parties. On June 10, 2009, the Company entered into a transaction with affiliates of WL Ross & Co., LLC (WL Ross) which provides for a $75.0 million secured term loan. In connection with the loan, the Company also entered into a warrant to which the Company issued warrants to WL Ross and its affiliates to purchase agreement pursuant 3,377,903 shares of the Company’s Common Stock with an initial exercise price of $6.00 per share. In connection with Victoria McManus’ 3% participation in the WL Ross transaction, WL Ross and its affiliates transferred the right to purchase 101,337 shares of Common Stock under the warrant agreement to Ms. McManus, a director of the Company. Wilbur L. Ross, Jr., founder, Chairman and Chief Executive Officer at WL Ross, and Wendy Teramoto, Senior Vice President at WL Ross, are directors of the Company. In April 2010, WLR - Greenbrier Rail Inc. (WLR-GBX) was formed and acquired a lease fleet of nearly 4,000 railcars valued at approximately $230.0 million. WLR-GBX is wholly owned by affiliates of WL Ross. The Company paid a $6.1 million contract placement fee to WLR-GBX for the right to perform certain management and advisory services and in exchange will receive management and other fee income and incentive compensation tied to the performance of WLR-GBX. The Company has also paid certain incidental fees and agreed to indemnify WLR-GBX and its affiliates against certain liabilities in connection with such advisory services. Under the management agreement the Company has received $0.2 million in fees for the year ended August 31, 2010. The contract placement fee is accounted for under the equity method and is recorded in Intangibles and other assets on the Consolidated Balance Sheet. Note 21 - Employee Benefit Plans A defined contribution plan is available to substantially all United States employees. Contributions are based on a percentage of employee contributions and amounted to $2.0 million, $1.6 million and $1.8 million for the years ended August 31, 2010, 2009 and 2008. Nonqualified deferred benefit plans exist for certain employees. Expenses resulting from contributions to the plans were insignificant for the years ended August 31, 2010 and 2009, and $1.6 million for the year ended August 31, 2008. In accordance with Mexican labor law, under certain circumstances, the Company provides seniority premium benefits to its employees. These benefits consist of a one-time payment equivalent to 12 days wages for each year of service (at the employee’s most recent salary, but not to exceed twice the legal minimum wage), payable to all employees with 15 or more years of service, as well as to certain employees terminated involuntarily prior to the vesting of their seniority premium benefit. Mexican labor law also requires the Company to provide statutorily mandated severance benefits to Mexican employees terminated under certain circumstances. Such benefits consist of a one-time payment of three months wages plus 20 days wages for each year of service payable upon involuntary termination without just cause. Costs associated with these benefits are provided for based on actuarial computations using the projected unit credit method. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 51 Note 22 - Income Taxes Components of income tax expense (benefit) of continuing operations are as follows: (In thousands) Current Federal State Foreign Deferred Federal State Foreign Change in valuation allowance Years Ended August 31, 2009 2010 2008 $ $ (9,471) (2,191) 712 (10,950) $ (4,555) 470 532 (3,553) 10,059 1,745 (933) 10,871 (11,016) (1,024) 723 (11,317) 359 860 4,154 5,373 11,517 1,369 7,345 20,231 (880) (2,047) (8,445) $ (959) $ (16,917) $ 17,159 Income tax expense is computed at rates different than statutory rates. The reconciliation between effective and statutory tax rates on continuing operations is as follows: (In thousands) Federal statutory rate State income taxes, net of federal benefit Impact of foreign operations Release of obligations in the bankruptcy of the de-consolidated subsidiary Change in valuation allowance related to deferred tax asset Reversal of Canadian subsidiary’s deferred tax asset Loss of benefit from the closing of TrentonWorks Change in income tax reserve for uncertain tax positions Reversal of net deferred tax liability on the basis difference in a foreign subsidiary Noncontrolling interest in flow through entity Non-deductible goodwill write-off Permanent differences Other Years Ended August 31, 2010 2008 2009 35.0% 35.0% 35.0% 3.5 10.7 0.4 (0.1) – (51.8) 2.8 (9.8) – – – – 1.8 4.1 2.4 – – (17.7) (23.1) – 2.1 9.4 (2.1) 9.5 7.0 1.5 – (27.7) 31.7 12.9 – – – – 2.8 (6.9) (10.7)% 22.8% 56.3% 52 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows: (In thousands) Deferred tax assets: Contract placement Maintenance and warranty accruals Accrued payroll and related liabilities Deferred revenue Inventories and other Derivative instruments and translation adjustment Investment and asset tax credits Net operating loss Deferred tax liabilities: Fixed assets Original issue discount Intangibles Debt conversion option Deferred gain on redemption of debt Other Valuation allowance Net deferred tax liability Years Ended August 31, 2010 2009 $ (526) (6,352) (7,062) (6,712) (3,878) (2,068) (884) (10,460) (37,942) 89,341 8,707 9,954 – 4,512 156 $ – (7,337) (5,829) (9,676) (6,102) (257) (671) (15,888) (45,760) 83,002 – 9,983 6,669 – 8,017 112,670 107,671 6,408 7,288 $ 81,136 $ 69,199 For the year ended August 31, 2010, the Company generated a net operating loss (NOL) of approximately $17.8 million for U.S. federal income tax purposes, $9.7 million of which will be carried back to 2008. The remaining NOL of $8.1 million will be carried forward. On September 27, 2010, legislation was adopted that provides an additional year of bonus depreciation which will increase the Company’s NOL from $17.8 million to $20.5 million. The Company also had NOL carryforwards of approximately $21.2 million for foreign income tax purposes. The ultimate realization of the deferred tax assets resulting from NOL’s is dependent upon the generation of future taxable income before these carryforwards expire. Net operating losses in Poland of $9.2 million expire between 2012 and 2013. Net operating losses in Mexico of $12.0 million expire between 2017 and 2020. The cumulative net decrease in the valuation allowance for the year ended August 31, 2010 was approximately $0.9 million. The decrease in the valuation allowance is mainly due to a decrease in the Polish subsidiary’s overall deferred tax assets for which a full valuation allowance is provided. As a result of certain realization requirements of ASC Topic 718, the table of deferred tax assets and liabilities shown above does not include certain deferred tax liabilities at August 31, 2010 and 2009 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. The Company uses tax law ordering for purposes of determining when excess tax benefits have been realized. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 53 The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the year. (In thousands) Unrecognized Tax Benefit – Opening Balance Gross increases – tax positions in prior period Gross decreases – tax positions in prior period Gross increases – tax positions in current period Settlements Restoration of statute of limitations due to 5 year NOL carry back Lapse of statute of limitations Unrecognized Tax Benefit – Ending Balance 2010 2009 2008 $ 2,959 200 – – – 1,809 (1,442) $ 12,832 533 – – – – (10,406) $ 11,839 993 – – – – – $ 3,526 $ 2,959 $ 12,832 The Company is subject to taxation in the U.S., various states and foreign jurisdictions. The Companies tax returns for 2004 through 2010 are subject to examination by the tax authorities. The Company is no longer subject to U.S. Federal, State, Local or Foreign examinations by tax authorities for years before 2004. Included in the balance of unrecognized tax benefits at August 31, 2010 and 2009 are $2.3 million and $2.0 million, respectively, of tax benefits, which if recognized would affect the effective tax rate. The Company recorded additional interest expense of $0.2 million and $0.3 million relating to reserves for uncertain tax provisions during the years ended August 31, 2010 and 2009. As of August 31, 2010 and 2009 the Company had accrued $1.2 million and $1.0 million of interest related to uncertain tax positions. The Company has accrued no penalties as of August 31, 2010 and 2009. The Company restored $1.3 million of reserves and $0.5 million of related accrued interest for uncertain tax provisions during the tax years for which the statue of limitations previously expired. These were restored due to the Company’s election to carry back prior year’s net operating loss for five years for U.S. tax purposes. The Company reversed $1.4 million of reserves and related accrued interest for the items that were no longer subject to examination by the tax authorities. The $1.4 million reversal resulted in an income tax benefit of $0.9 million and a reduction of interest expense of $0.5 million. Interest and penalties related to income taxes are not classified as a component of income tax expense. When unrecognized tax benefits are realized, the benefit related to deductible differences attributable to ordinary operations will be recognized as a reduction of income tax expense. The benefit related to the deductible difference attributable to purchase accounting will also be recognized as a reduction of income tax expense and will not go to goodwill. Within the next 12 months the Company does not expect any significant changes in the reserves for uncertain tax positions but expects an increase in interest expense of $0.3 million. U.S. income taxes have not been provided for approximately $5.9 million of cumulative undistributed earnings of certain foreign subsidiaries as Greenbrier plans to reinvest these earnings indefinitely in operations outside the U.S. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in foreign subsidiaries. Note 23 - Segment Information Greenbrier currently operates in three reportable segments: Manufacturing, Wheel Services, Refurbishment & Parts and Leasing & Services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Performance is evaluated based on margin. Intersegment sales and transfers are accounted for as if the sales or transfers were to third parties. While intercompany transactions are treated the same as third-party transactions to evaluate segment performance, the revenues and related expenses are eliminated in consolidation and therefore do not impact consolidated results. 54 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t The information in the following tables is derived directly from the segments’ internal financial reports used for corporate management purposes. Unallocated assets primarily consist of cash and short-term investments. (In thousands) Revenue: Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services Intersegment eliminations Margin: Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services Assets: Manufacturing Wheel services, Refurbishment & Parts Leasing & Services Unallocated Depreciation and amortization: Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services Capital expenditures: Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services Years Ended August 31, 2010 2009 2008 $ $ $ $ 305,333 404,321 79,733 (24,937) 764,450 $ 470,834 480,425 79,684 (12,818) $ 1,018,125 $ 724,072 535,031 98,041 (67,065) $ 1,290,079 27,171 45,539 37,458 110,168 $ $ 3,763 55,870 33,474 93,107 $ $ 11,214 101,283 49,746 162,243 $ 205,863 387,356 377,761 101,908 $ 1,072,888 $ 197,603 386,260 386,659 77,769 $ 1,048,291 $ 325,632 519,575 403,889 7,864 $ 1,256,960 $ $ $ $ 11,061 11,435 15,015 37,511 8,715 12,215 18,059 38,989 $ $ $ $ 11,471 11,885 14,313 37,669 9,109 6,599 23,139 38,847 $ $ $ $ 11,267 10,338 13,481 35,086 24,113 7,651 45,880 77,644 The following table summarizes selected geographic information. (In thousands) Revenue: United States Foreign Identifiable assets: United States Mexico Europe Years Ended August 31, 2009 2010 2008 $ $ $ 667,867 96,583 $ 851,450 166,675 $ 1,058,418 231,661 764,450 $ 1,018,125 $ 1,290,079 918,553 115,721 38,614 $ 897,111 95,149 56,031 $ 1,012,585 130,295 114,080 $ 1,072,888 $ 1,048,291 $ 1,256,960 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 55 Reconciliation of segment margin to earnings before income tax, noncontrolling interest and earnings (loss) from unconsolidated affiliates: (In thousands) Segment margin Less unallocated expenses: Selling and administrative Interest and foreign exchange Special items Years Ended August 31, 2009 2010 2008 $ 110,168 $ 93,107 $ 162,243 69,931 43,134 (11,870) 65,743 45,912 55,667 85,133 44,320 2,302 Earnings (loss) before income tax and earnings (loss) from unconsolidated affiliates $ 8,973 $ (74,215) $ 30,488 Note 24 - Customer Concentration In 2010, one customer represented 16% of total revenue, a second customer represented 15% of total revenue and a third customer represented 11% of total revenue. Revenue from two customers each represented 14% of total revenue for the year ending August 31, 2009 and revenue from two customers was 26% and 11% of total revenue for the year ended August 31, 2008. No other customers accounted for more than 10% of total revenues for the years ended August 31, 2010, 2009, or 2008. Only one customer had a balance that equaled or exceeded 10% of accounts receivable and in total represented 12% of the consolidated accounts receivable balance at August 31, 2010. Note 25 - Lease Commitments Lease expense for railcar equipment leased-in under non-cancelable leases was $8.2 million, $10.3 million and $11.6 million for the years ended August 31, 2010, 2009 and 2008. Aggregate minimum future amounts payable under these non-cancelable railcar equipment leases are as follows: (In thousands) Year ending August 31, 2011 2012 Thereafter $ 6,711 3,708 – $ 10,419 Operating leases for domestic railcar repair facilities, office space and certain manufacturing and office equipment expire at various dates through November 2016. Rental expense for facilities, office space and equipment was $12.4 million, $12.5 million and $12.3 million for the years ended August 31, 2010, 2009 and 2008. Aggregate minimum future amounts payable under these non-cancelable operating leases are as follows: (In thousands) Year ending August 31, 2011 2012 2013 2014 2015 Thereafter $ 6,781 3,679 2,205 1,488 1,318 1,591 $ 17,062 56 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Note 26 - Commitments and Contingencies Environmental studies have been conducted of the Company’s owned and leased properties that indicate additional investigation and some remediation on certain properties may be necessary. The Company’s Portland, Oregon manufacturing facility is located adjacent to the Willamette River. The United States Environmental Protection Agency (EPA) has classified portions of the river bed, including the portion fronting Greenbrier’s facility, as a federal “National Priority List” or “Superfund” site due to sediment contamination (the Portland Harbor Site). Greenbrier and more than 130 other parties have received a “General Notice” of potential liability from the EPA relating to the Portland Harbor Site. The letter advised the Company that it may be liable for the costs of investigation and remediation (which liability may be joint and several with other potentially responsible parties) as well as for natural resource damages resulting from releases of hazardous substances to the site. At this time, ten private and public entities, including the Company, have signed an Administrative Order on Consent (AOC) to perform a remedial investigation/feasibility study (RI/FS) of the Portland Harbor Site under EPA oversight, and several additional entities have not signed such consent, but are nevertheless contributing money to the effort. A draft of the RI study was submitted on October 27, 2009. The Feasibility Study is being developed and is expected to be submitted in the third calendar quarter of 2011. Eighty-two parties have entered into a non-judicial mediation process to try to allocate costs associated with the Portland Harbor site. Approximately 110 additional parties have signed tolling agreements related to such allocations. On April 23, 2009, the Company and the other AOC signatories filed suit against 69 other parties due to a possible limitations period for some such claims; Arkema Inc. et al v. A & C Foundry Products, Inc.et al, US District Court, District of Oregon, Case #3:09-cv-453-PK. All but 12 of these parties elected to sign tolling agreements and be dismissed without prejudice, and the case has now been stayed by the court, pending completion of the RI/FS. In addition, the Company has entered into a Voluntary Clean-Up Agreement with the Oregon Department of Environmental Quality in which the Company agreed to conduct an investigation of whether, and to what extent, past or present operations at the Portland property may have released hazardous substances to the environment. The Company is also conducting groundwater remediation relating to a historical spill on the property which antedates its ownership. Because these environmental investigations are still underway, the Company is unable to determine the amount of ultimate liability relating to these matters. Based on the results of the pending investigations and future assessments of natural resource damages, Greenbrier may be required to incur costs associated with additional phases of investigation or remedial action, and may be liable for damages to natural resources. In addition, the Company may be required to perform periodic maintenance dredging in order to continue to launch vessels from its launch ways in Portland, Oregon, on the Willamette River, and the river’s classification as a Superfund site could result in some limitations on future dredging and launch activities. Any of these matters could adversely affect the Company’s business and results of operations, or the value of its Portland property. From time to time, Greenbrier is involved as a defendant in litigation in the ordinary course of business, the outcome of which cannot be predicted with certainty. The most significant litigation is as follows: Greenbrier’s customer, SEB Finans AB (SEB), has raised performance concerns related to a component that the Company installed on 372 railcar units with an aggregate sales value of approximately $20.0 million produced under a contract with SEB. On December 9, 2005, SEB filed a Statement of Claim in an arbitration proceeding in Stockholm, Sweden, against Greenbrier alleging that the cars were defective and could not be used for their intended purpose. A settlement agreement was entered into effective February 28, 2007 pursuant to which the railcar units previously delivered were to be repaired and the remaining units completed and delivered to SEB. Greenbrier is proceeding with repairs of the railcars in accordance with terms of the settlement agreement, though SEB has recently made additional warranty claims, including claims with respect to cars that have been repaired pursuant to the agreement. Greenbrier is evaluating SEB’s new warranty claim. Current estimates of potential costs of such repairs do not exceed amounts accrued. When the Company acquired the assets of the Freight Wagon Division of DaimlerChrysler in January 2000, it acquired a contract to build 201 freight cars for Okombi GmbH, a subsidiary of Rail Cargo Austria AG. Subsequently, Okombi made breach of warranty and late delivery claims against the Company which grew out of design and certification problems. All of these issues were settled as of March 2004. Additional allegations have been made, the most serious of which involve cracks to the structure of the cars. Okombi has been required to remove all 201 freight cars from service, and a formal claim has been made against the Company. Legal, technical T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 57 and commercial evaluations are on-going to determine what obligations the Company might have, if any, to remedy the alleged defects. Management intends to vigorously defend its position in each of the open foregoing cases. While the ultimate outcome of such legal proceedings cannot be determined at this time, management believes that the resolution of these actions will not have a material adverse effect on the Company’s Consolidated Financial Statements. The Company is involved as a defendant in other litigation initiated in the ordinary course of business. While the ultimate outcome of such legal proceedings cannot be determined at this time, management believes that the resolution of these actions will not have a material adverse effect on the Company’s Consolidated Financial Statements. The Company delivered 500 railcar units during fiscal year 2009 for which the Company has an obligation to guarantee the purchaser minimum earnings. The obligation expires December 31, 2011. The maximum potential obligation totaled $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 the Company is 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. 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 were considered a reduction of revenue and were recorded as deferred revenue. As of August 31, 2010, the Company has $9.1 million of the potential obligation remaining in deferred revenue. The Company has entered into contingent rental assistance agreements, aggregating $5.9 million, on certain railcars subject to leases that have been sold to third parties. These agreements guarantee the purchasers a minimum lease rental, subject to a maximum defined rental assistance amount, over remaining periods of up to two years. A liability is established and revenue is reduced in the period during which a determination can be made that it is probable that a rental shortfall will occur and the amount can be estimated. For the years ended August 31, 2010 and 2008 an accrual of $0.2 million and $1.2 million was recorded to cover future obligations. For the year ended August 31, 2009 no accrual was made to cover estimated obligations as management determined no additional rental shortfall was probable. The remaining balance of the accrued liability was $30 thousand as of August 31, 2010. All of these agreements were entered into prior to December 31, 2002 and have not been modified since. In accordance with customary business practices in Europe, the Company has $9.1 million in bank and third party performance and warranty guarantee facilities, all of which have been utilized as of August 31, 2010. To date no amounts have been drawn under these performance and warranty guarantee facilities. At August 31, 2010, an unconsolidated affiliate had $0.7 million of third party debt, for which the Company has guaranteed 33% or approximately $0.2 million. In the event that there is a change in control or insolvency by any of the three 33% investors that have guaranteed the debt, the remaining investors’ share of the guarantee will increase proportionately. As of August 31, 2010 the Company had outstanding letters of credit aggregating $3.6 million associated with facility leases and payroll. Note 27 - Fair Value of Financial Instruments The estimated fair values of financial instruments and the methods and assumptions used to estimate such fair values are as follows: (In thousands) Notes payable as of August 31, 2010 Notes payable as of August 31, 2009 Carrying Amount Estimated Fair Value $ 498,700 $ 525,149 $ 482,589 $ 508,372 58 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t The carrying amount of cash and cash equivalents, accounts and notes receivable, revolving notes, accounts payable and accrued liabilities, foreign currency forward contracts and interest rate swaps is a reasonable estimate of fair value of these financial instruments. Estimated rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of notes payable. Note 28 - 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 which prioritizes the inputs used in measuring a 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 August 31, 2010 are: (In thousands) Assets: Derivative financial instruments Nonqualified savings plan Money market investments Liabilities: Total Level 1 Level 2(1) Level 3 $ 684 6,489 57,300 $ – 6,489 57,300 $ 684 – – $64,473 $63,789 $ 684 $ $ $ – – – – – Derivative financial instruments $ 5,370 $ – $5,370 (1) Level 2 assets include derivative financial instruments which are valued based on significant observable inputs. See note 17 Derivative Instruments for further discussion. Assets or liabilities measured at fair value on a nonrecurring basis as of August 31, 2010 are: (In thousands) Assets: Goodwill Liabilities: Warrants Total Level 1 Level 2 Level 3 $137,066 $ 7,484 $ $ – – $ $ – – $137,066 $ 7,484 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 59 Note 29 - Guarantor/Non Guarantor The combined senior unsecured notes (the Notes) issued on May 11, 2005 and November 21, 2005 and convertible senior notes issued on May 22, 2006 are fully and unconditionally and jointly and severally guaranteed by substantially all of Greenbrier’s material 100% owned United States subsidiaries: Autostack Company LLC, Greenbrier-Concarril, LLC, Greenbrier Leasing Company LLC, Greenbrier Leasing Limited Partner, LLC, Greenbrier Management Services, LLC, Greenbrier Leasing, L.P., Greenbrier Railcar LLC, Gunderson LLC, Gunderson Marine LLC, Gunderson Rail Services LLC, Meridian Rail Holding Corp., Meridian Rail Acquisition Corp., Meridian Rail Mexico City Corp., Brandon Railroad LLC, Gunderson Specialty Products, LLC and Greenbrier Railcar Leasing, Inc. No other subsidiaries guarantee the Notes including Greenbrier Leasing Limited, Greenbrier Europe B.V., Greenbrier Germany GmbH, WagonySwidnica S.A., Gunderson-Concarril, S.A. de C.V., Mexico Meridian Rail Services, S.A. de C.V., Greenbrier Railcar Services — Tierra Blanca S.A. de C.V., YSD Doors, S.A. de C.V., Greenbrier-Gimsa, LLC and Gunderson-Gimsa S de RL de C.V. The following represents the supplemental consolidating condensed financial information of Greenbrier and its guarantor and non guarantor subsidiaries, as of August 31, 2010 and 2009 and for the years ended August 31, 2010, 2009 and 2008. The information is presented on the basis of Greenbrier accounting for its ownership of its wholly owned subsidiaries using the equity method of accounting. The equity method investment for each subsidiary is recorded by the parent in intangibles and other assets. Intercompany transactions of goods and services between the guarantor and non guarantor subsidiaries are presented as if the sales or transfers were at fair value to third parties and eliminated in consolidation. Certain reclassifications between Combined Non Guarantor Subsidiaries and Eliminations have been made to prior year’s condensed consolidating statements to conform to the current year presentation. 60 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t The Greenbrier Companies, Inc. Condensed Consolidating Balance Sheet For the year ended August 31, 2010 (In thousands) Assets Combined Guarantor Subsidiaries Combined Non- Guarantor Subsidiaries Eliminations Consolidated Parent Cash and cash equivalents Restricted cash Accounts receivable Inventories Assets held for sale Investment in direct finance leases Equipment on operating leases, net Property, plant and equipment, net Goodwill Intangibles and other assets $ 91,472 – 33,001 – – $ 859 2,525 45,154 121,557 28,357 $ 6,533 – 11,094 64,047 3,469 $ – – 1,795 304,872 – – $ – – 3 – – – 98,864 2,525 89,252 185,604 31,826 1,795 (2,209) 302,663 6,710 – 525,539 $ 656,722 89,246 137,066 96,680 $ 828,111 36,658 – 2,384 $ 124,185 – – (533,924) 132,614 137,066 90,679 $ (536,130) $ 1,072,888 Liabilities and Equity Revolving notes Accounts payable and accrued liabilities Deferred income taxes Deferred revenue Notes payable Total equity Greenbrier Noncontrolling interest Total equity $ – $ – $ 2,630 $ – $ 2,630 11,180 728 621 358,255 285,938 – 285,938 $ 656,722 112,454 87,582 9,693 139,029 479,353 – 479,353 $ 828,111 58,001 (6,685) 1,063 1,416 56,291 11,469 67,760 $ 124,185 3 (489) – – (535,644) – (535,644) 181,638 81,136 11,377 498,700 285,938 11,469 297,407 $ (536,130) $ 1,072,888 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 61 The Greenbrier Companies, Inc. Condensed Consolidating Statement of Operations For the year ended August 31, 2010 (In thousands) Revenue Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services Cost of revenue Manufacturing Wheels Services, Refurbishment & Parts Leasing & Services Margin Other costs Selling and administrative Interest and foreign exchange Special items Earnings (loss) before income taxes and earnings (loss) from unconsolidated affiliates Income tax (expense) benefit Earnings (loss) from unconsolidated affiliates Net earnings (loss) Net loss (earnings) attributable to noncontrolling interest Net earnings (loss) attributable to Greenbrier Combined Guarantor Subsidiaries Combined Non- Guarantor Subsidiaries Eliminations Consolidated Parent $ – $ 74,526 $242,771 $(21,731) $295,566 – 1,803 1,803 396,680 78,556 549,762 1,584 – 244,355 (8,203) (1,536) (31,470) 390,061 78,823 764,450 – 69,872 218,890 (20,367) 268,395 – – – 1,803 351,565 41,438 462,875 86,887 1,160 – 220,050 24,305 (8,203) (73) (28,643) (2,827) 344,522 41,365 654,282 110,168 33,441 21,263 15,227 – 69,931 36,796 (11,870) 58,367 4,191 – 25,454 (56,564) 24,143 (32,421) 36,698 4,277 61,433 (25,144) 36,289 (6,179) 30,110 3,687 – 18,914 5,391 1,710 7,101 – 7,101 (1,540) – (1,540) 43,134 (11,870) 101,195 (1,287) 250 (1,037) (32,120) (33,157) 8,973 959 9,932 (1,601) 8,331 – – (4,734) 680 (4,054) $ 4,277 $ 30,110 $ 2,367 $(32,477) $ 4,277 62 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t The Greenbrier Companies, Inc. Condensed Consolidating Statement of Cash Flows For the year ended August 31, 2010 (In thousands) Cash flows from operating activities: Net earnings (loss) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Deferred income taxes Depreciation and amortization Gain on sales of equipment Special items Accretion of debt discount Gain on extinguishment of debt Other Decrease (increase) in assets: Accounts receivable Inventories Assets held for sale Other Increase (decrease) in liabilities: Accounts payable and accrued liabilities Deferred revenue Net cash provided by (used in) operating activities Cash flows from investing activities: Principal payments received under direct finance leases Proceeds from sales of equipment Investment in and net advances to unconsolidated affiliates Intercompany advances Contract placement fee Decrease (increase) in restricted cash Capital expenditures Other Combined Guarantor Subsidiaries Combined Non- Guarantor Subsidiaries Parent Eliminations Consolidated $ 4,277 $ 30,110 $ 7,101 $ (33,157) $ 8,331 5,898 2,063 – (11,870) 8,581 (3,218) 5,175 (9,292) – – 1,364 3,143 (155) 5,966 – – (36,697) 7,866 – – (3,645) – 10,045 28,241 (6,543) – – – 354 17,743 (20,457) 3,100 6,773 (9,134) (8,353) 51,879 390 22,978 3,650 – (6,050) (1,442) (30,430) (130) 427 7,280 – – – – (1,972) 12,914 (23,819) (3,277) (966) 18,765 1,063 17,516 – – – – – – (5,594) (1,318) (73) – – – – 680 1,065 – – – 3 – (32,800) – – 32,120 (7,866) – – 680 Net cash provided by (used in) investing activities (32,476) (11,034) (5,594) 24,934 Cash flows from financing activities: Net changes in revolving notes with maturities of 90 days or less Proceeds from revolving notes with maturities longer than 90 days Repayment of revolving notes with maturities longer than 90 days Intercompany advances Net proceeds from issuance of notes payable Repayments of notes payable Net proceeds from equity offering Other Net cash provided by (used in) financing activities Effect of exchange rate changes Increase (decrease) in cash and cash equivalents Cash and cash equivalents Beginning of period – – – 33,850 – (32,090) 52,708 29 54,497 – 27,987 63,485 End of period $ 91,472 $ – – – (34,061) 328 (5,772) – – (39,505) (902) 438 421 859 (11,934) 5,698 (5,698) (7,655) 1,712 (405) – – (18,282) 612 (5,748) 12,281 $ 6,533 $ – – – 7,866 – – – – 7,866 – – – – 15,052 37,511 (6,543) (11,870) 8,581 (3,218) 4,237 22,430 (44,276) (177) 7,171 12,777 (7,445) 42,561 390 22,978 (927) – (6,050) (1,442) (38,989) (130) (24,170) (11,934) 5,698 (5,698) – 2,040 (38,267) 52,708 29 4,576 (290) 22,677 76,187 $ 98,864 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 63 The Greenbrier Companies, Inc. Condensed Consolidating Balance Sheet For the year ended August 31, 2009 (In thousands) Assets Cash and cash equivalents Restricted cash Accounts receivable Inventories Assets held for sale Investment in direct finance leases Equipment on operating leases, net Property, plant and equipment, net Goodwill Intangibles and other assets Parent $ 63,485 – 65,425 – – – – 5,157 – 492,406 $ 626,473 Combined Guarantor Subsidiaries Combined Non- Guarantor Subsidiaries Eliminations Consolidated $ 421 1,083 28,213 101,100 31,519 7,990 314,785 83,907 137,066 106,121 $ 812,205 $ 12,281 – 18,665 41,724 192 – – 38,910 – 2,380 $ 114,152 $ – $ – 1,068 – – – (1,602) – – (504,005) 76,187 1,083 113,371 142,824 31,711 7,990 313,183 127,974 137,066 96,902 $ (504,539) $ 1,048,291 Liabilities and Equity Revolving notes Accounts payable and accrued liabilities Losses in excess of investment in de-consolidated subsidiary Deferred income taxes Deferred revenue Notes payable Total equity Greenbrier Noncontrolling interest Total equity $ – $ – $ 16,041 $ – $ 16,041 8,037 121,578 41,274 – 170,889 15,313 (2,055) 776 380,676 223,726 – 223,726 $ 626,473 – 77,537 18,474 144,473 450,143 – 450,143 $ 812,205 – (7,112) – – 55,225 8,724 63,949 $ 114,152 – 829 – – (505,368) – (505,368) 15,313 69,199 19,250 525,149 223,726 8,724 232,450 $ (504,539) $ 1,048,291 64 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t The Greenbrier Companies, Inc. Condensed Consolidating Statement of Operations For the year ended August 31, 2009 (In thousands) Revenue Manufacturing Wheels Service, Refurbishment & Parts Leasing & Services Cost of revenue Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services Margin Other costs Selling and administrative Interest and foreign exchange Special charges Loss before income taxes and earnings (loss) from unconsolidated affiliates Income tax (expense) benefit Net earnings (loss) Net loss attributable to noncontrolling interest Net earnings (loss) attributable to Greenbrier Combined Guarantor Subsidiaries Combined Non- Guarantor Subsidiaries Parent Eliminations Consolidated $ 547 $227,404 $336,399 $(101,854) $ 462,496 – 1,314 1,861 476,133 78,899 782,436 31 – – (748) 476,164 79,465 336,430 (102,602) 1,018,125 124 230,848 328,761 (101,000) 458,733 – – 124 1,737 420,261 46,056 697,165 85,271 33 – – (65) 328,794 7,636 (101,065) (1,537) 420,294 45,991 925,018 93,107 31,169 24,729 9,845 – 65,743 34,013 – 65,182 5,316 55,531 85,576 (63,445) 29,821 (305) (16,573) (33,624) (16,878) 8,156 – 18,001 (10,365) 2,606 (7,759) (1,573) 136 (1,437) (100) 1,063 963 29,352 30,315 45,912 55,667 167,322 (74,215) 16,917 (57,298) (565) (57,863) – – 2,202 (730) 1,472 $(56,391) $ (24,028) $ (5,557) $ 29,585 $ (56,391) Earnings (loss) from unconsolidated affiliates (22,767) (7,150) – (56,391) (24,028) (7,759) T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 65 The Greenbrier Companies, Inc. Condensed Consolidating Statement of Cash Flows For the year ended August 31, 2009 (In thousands) Cash flows from operating activities: Net earnings (loss) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Deferred income taxes Depreciation and amortization Gain on sales of equipment Special items Accretion of debt discount Other Decrease (increase) in assets: Accounts receivable Inventories Assets held for sale Other Increase (decrease) in liabilities: Accounts payable and accrued liabilities Deferred revenue Combined Guarantor Subsidiaries Combined Non- Guarantor Subsidiaries Eliminations Consolidated Parent $ (56,391) $ (24,028) $ (7,759) $ 30,315 $ (57,863) (16,609) 1,544 – – 4,948 – (6,940) – – (277) 5,820 28,797 (692) 55,531 – 3,402 75,691 42,456 14,875 1,614 (2,800) 7,393 – – – 2,111 (9,163) 56,295 6,966 6,028 290 (65) (475) 136 – (1,930) (1,067) – – (6,208) (13,299) 37,669 (1,167) 55,667 4,948 3,583 58,521 98,751 21,841 1,157 15,522 (155) (58,533) 1,202 (44,199) (3,876) 696 – (86,514) (2,829) Net cash provided by (used in) operating activities (58,358) 146,135 10,996 21,692 120,465 Cash flows from investing activities: Principal payments received under direct finance leases Proceeds from sales of equipment Investment in and net advances to unconsolidated affiliates Intercompany advances Decrease (increase) in restricted cash Capital expenditures – – 15,359 (26,958) – (2,699) 429 15,555 6,585 – (1,083) (30,642) Net cash provided by (used in) investing activities (14,298) (9,156) Cash flows from financing activities: Net changes in revolving notes with maturities of 90 days or less Intercompany advances Net proceeds from issuance of notes payable Repayments of notes payable Investment by joint venture partner Dividends paid Other (65,000) 133,592 69,768 (4,339) – (2,001) 3,973 – (126,496) – (8,183) – – – Net cash provided by (used in) financing activities 135,993 (134,679) Effect of exchange rate changes Increase (decrease) in cash and cash equivalents Cash and cash equivalents Beginning of period 148 63,485 (3,472) (1,172) – 1,593 4,364 End of period $ 63,485 $ 421 $ 12,281 $ – – – – 974 (5,758) (4,784) (16,251) 19,862 – (3,914) 1,400 – – 1,097 608 7,917 – – (21,944) 26,958 – 252 429 15,555 – – (109) (38,847) 5,266 (22,972) – (26,958) – – – – – (81,251) – 69,768 (16,436) 1,400 (2,001) 3,973 (26,958) (24,547) – – – – (2,716) 70,230 5,957 $ 76,187 66 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t The Greenbrier Companies, Inc. Condensed Consolidating Statement of Operations For the year ended August 31, 2008 (In thousands) Revenue Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services Cost of revenue Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services Margin Other costs Selling and administrative Interest and foreign exchange Special items Earnings (loss) before income taxes and earnings (loss) from unconsolidated affiliates Income tax (expense) benefit Earnings (loss) from unconsolidated affiliates Net earnings (loss) Net loss attributable to noncontrolling interest Net earnings (loss) attributable to Greenbrier Combined Guarantor Subsidiaries Combined Non- Guarantor Subsidiaries Eliminations Consolidated Parent $ 1,869 $368,285 $543,526 $(248,587) $ 665,093 – 1,162 3,031 527,413 96,854 992,552 53 – 543,579 – (496) (249,083) 527,466 97,520 1,290,079 600 371,940 529,743 (248,404) 653,879 – – 600 2,431 32,927 31,593 – 64,520 426,138 47,836 845,914 146,638 35,601 5,946 – 41,547 (62,089) 27,018 (35,071) 105,091 (42,194) 62,897 52,454 17,383 4,359 67,256 45 – 529,788 13,791 16,606 7,280 2,302 26,188 (12,397) (3,146) (15,543) – (15,543) – (62) (248,466) (617) 426,183 47,774 1,127,836 162,243 (1) (499) – (500) (117) 1,163 1,046 (55,941) (54,895) 85,133 44,320 2,302 131,755 30,488 (17,159) 13,329 872 14,201 – – 4,245 (1,063) 3,182 $ 17,383 $ 67,256 $ (11,298) $ (55,958) $ 17,383 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 67 The Greenbrier Companies, Inc. Condensed Consolidating Statement of Cash Flows For the year ended August 31, 2008 (In thousands) Cash flows from operating activities: Net earnings (loss) Adjustments to reconcile net earnings (loss) to net cash provided by Combined Guarantor Subsidiaries Combined Non- Guarantor Subsidiaries Eliminations Consolidated Parent $ 17,383 $ 67,256 $(15,543) $(54,895) $ 14,201 (used in) operating activities: Deferred income taxes Depreciation and amortization Gain on sales of equipment Special items Accretion of debt discount Other Decrease (increase) in assets: Accounts receivable Inventories Assets held for sale Other Increase (decrease) in liabilities: Accounts payable and accrued liabilities Deferred revenue Net cash provided by (used in) operating activities Cash flows from investing activities: Principal payments received under direct finance leases Proceeds from sales of equipment Investment in and net advances to unconsolidated affiliates Acquisitions, net of cash acquired De-consolidation of subsidiary Decrease in restricted cash Capital expenditures 37 668 – – 3,550 (136) 4 – – 1,086 20,108 (155) 42,545 – – (71,735) – – – (2,379) 12,165 27,501 (8,007) – – 428 (6,538) (25,099) (17,525) (3,638) 3,375 9,257 59,175 375 14,598 (2,629) (91,166) – – (55,922) (1,352) 6,979 – 2,302 – 1,150 (1,084) (4,593) 6,904 19,123 (987) (7,198) 5,701 – – – – (1,217) 2,046 (19,434) Net cash provided by (used in) investing activities (74,114) (134,744) (18,605) Cash flows from financing activities: Net changes in revolving notes with maturities of 90 days or less Intercompany advances Proceeds from issuance of notes payable Repayments of notes payable Investment by joint venture partner Dividends paid Other Net cash provided by financing activities Effect of exchange rate changes Increase (decrease) in cash and cash equivalents Cash and cash equivalents Beginning of period End of period 65,000 (42,735) – (1,349) – (5,261) 3,931 19,586 (3,439) (15,422) – 31,576 49,613 (4,278) – – – 76,911 251 1,593 (9,486) 11,159 – (1,292) 6,600 – – 6,981 4,901 (1,022) 15,422 – 5,386 $ – $ 1,593 $ 4,364 $ – – 20,808 $ 5,957 678 (62) (3) – – (1,052) (3) – – (19,271) (695) – (75,303) – – 75,222 – – – 91 75,313 – – – – – – – – (10) – 11,528 35,086 (8,010) 2,302 3,550 390 (7,621) (29,692) (10,621) (2,700) 21,801 1,904 32,118 375 14,598 858 (91,166) (1,217) 2,046 (77,644) (152,150) 55,514 – 49,613 (6,919) 6,600 (5,261) 3.931 103,478 1,703 (14,851) 68 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Quarterly Results of Operations (Unaudited) Operating results by quarter for 2010 are as follows: (In thousands, except per share amount) First Second Third Fourth Total 2010 Revenue Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services $ 60,078 92,983 18,632 171,693 $ 88,065 94,329 17,556 199,950 $ 77,877 $ 69,546 $295,566 390,061 112,186 78,823 21,392 764,450 211,455 90,563 21,243 181,352 Cost of revenue Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services Margin Other costs Selling and administrative Interest and foreign exchange Special items Earnings (loss) before income tax and loss from unconsolidated affiliates Income tax benefit (expense) Loss from unconsolidated affiliates Net earnings (loss) Net loss (earnings) attributable to noncontrolling interest Net earnings (loss) attributable to Greenbrier 55,847 83,286 10,918 150,051 21,642 81,608 83,387 10,789 175,784 24,166 68,931 96,725 9,931 175,587 35,868 62,009 81,124 9,727 152,860 28,492 268,395 344,522 41,365 654,282 110,168 16,208 11,112 – 27,320 (5,678) 2,500 (183) (3,361) 16,958 12,406 – 29,364 (5,198) 944 (131) (4,385) 17,519 9,536 – 27,055 8,813 (2,418) (318) 6,077 117 (367) $ (3,244) $ (4,752) $ 4,563 $ (1,514) 19,246 10,080 (11,870) 17,456 69,931 43,134 (11,870)(1) 101,195 11,036 (67) (969) 10,000 8,973 959 (1,601) 8,331 (2,290) 7,710 $ (4,054) 4,277 Basic earnings (loss) per common share: Diluted earnings (loss) per common share: $ $ (0.19) $ (0.19) $ (0.28) $ (0.28) $ 0.25 $ 0.23 $ 0.35 $ 0.33 $ 0.23 0.21(2) (1) 2010 includes income of $11.9 million net of tax for a special item related to the release of the liability associated with the 2008 de-consolidation of our former Canadian subsidiary. (2) Quarterly amounts do not total the year to date amount as each period is calculated discretely. The dilutive effect of common stock equivalents is excluded from per share calculations for the first and second quarters due to a net loss for those periods. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 69 Quarterly Results of Operations (Unaudited) Operating results by quarter for 2009 are as follows: (In thousands, except per share amount) First Second Third Fourth Total 2009 Revenue Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services $102,717 132,279 21,133 256,129 $145,574 121,681 19,877 287,132 $105,986 120,190 18,272 244,448 $108,219 102,014 20,183 230,416 $ 462,496 476,164 79,465 1,018,125 Cost of revenue Manufacturing Wheel Services, Refurbishment & Parts Leasing & Services Margin Other costs Selling and administrative Interest and foreign exchange Special items Earnings (loss) before income tax and earnings (loss) from unconsolidated affiliates Income tax benefit Earnings (loss) in earnings (loss) from unconsolidated affiliates Net earnings (loss) Net loss (earnings) attributable to noncontrolling interest Net earnings (loss) attributable to Greenbrier 106,923 119,326 11,929 238,178 17,951 152,003 107,427 11,547 270,977 16,155 100,847 104,859 12,049 217,755 26,693 98,960 88,682 10,466 198,108 32,308 15,980 11,771 – 27,751 16,265 9,146 – 25,411 15,886 11,710 55,667 83,263 17,612 13,285 – 30,897 458,733 420,294 45,991 925,018 93,107 65,743 45,912 55,667 167,322 (9,800) 4,906 434 (4,460) (9,256) 1,698 (56,570) 5,217 (251) (7,809) (457) (51,810) 568 351 $ (3,892) $ (7,458) $ (51,123) $ 687 1,411 5,096 (291) 6,216 (74,215) 16,917 (565) (57,863) (134) 1,472 6,082 $ (56,391) Basic earnings (loss) per common share: Diluted earnings (loss) per common share: $ $ (0.23) $ (0.23) $ (0.45) $ (0.45) $ (3.04) $ (3.04) $ 0.36 $ 0.33 $ (3.35) (3.35)(1) (1) Quarterly amounts do not total the year to date amount as each period is calculated discretely. The dilutive effect of common stock equivalents is excluded from per share calculations for the first three quarters and the year ended August 31, 2009 due to a net loss for those periods. 70 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders The Greenbrier Companies, Inc. We have audited the accompanying consolidated balance sheets of The Greenbrier Companies, Inc. and subsidiaries (the “Company”) as of August 31, 2010 and 2009, and the related consolidated statements of operations, equity and comprehensive income (loss), and cash flows for each of the three years in the period ended August 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Greenbrier Companies, Inc. and subsidiaries as of August 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2010, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of August 31, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 10, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting. Portland, Oregon November 10, 2010 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 71 Item 9a. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management has evaluated, under the supervision and with the participation of our President and Chief Executive Officer and Chief Financial 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 President and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Controls There have been no material changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management’s Report on Internal Control over Financial Reporting Management of The Greenbrier Companies, Inc. together with its consolidated subsidiaries (the Company), is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. As of the end of the Company’s 2010 fiscal year, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of August 31, 2010 is effective. Our independent registered public accounting firm, Deloitte & Touche LLP, independently assessed the effectiveness of the Company’s internal control over financial reporting, as stated in their attestation report, which is included at the end of Part II, Item 9A of this Form 10-K. Inherent Limitations on Effectiveness of Controls The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. 72 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders The Greenbrier Companies, Inc. We have audited the internal control over financial reporting of The Greenbrier Companies, Inc. and subsidiaries (the “Company”) as of August 31, 2010 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended August 31, 2010 of the Company and our report dated November 10, 2010 expressed an unqualified opinion on those financial statements. Portland, Oregon November 10, 2010 Item 9b. OTHER INFORMATION None T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 73 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE There is hereby incorporated by reference the information under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” and “Executive Officers of the Company” in the Company’s definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days after the end of Registrant’s year ended August 31, 2010. Item 11. EXECUTIVE COMPENSATION There is hereby incorporated by reference the information under the caption “Executive Compensation” in Registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days after the end of Registrant’s year ended August 31, 2010. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS There is hereby incorporated by reference the information under the captions “Voting” and “Security Ownership of Certain Beneficial Owners and Management” in Registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days after the end of Registrant’s year ended August 31, 2010. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE There is hereby incorporated by reference the information under the caption “Certain Relationships and Related Party Transactions” in Registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days after the end of Registrant’s year ended August 31, 2010. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES There is hereby incorporated by reference the information under the caption “Ratification of Appointment of Auditors” in Registrant’s definitive Proxy Statement to be filed pursuant to Regulation 14A, which Proxy Statement is anticipated to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant’s year ended August 31, 2010. 74 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (1) Financial Statements See Consolidated Financial Statements in Item 8 (a) (2) Financial Statements Schedule* * All other schedules have been omitted because they are inapplicable, not required or because the information is given in the Consolidated Financial Statements or notes thereto. This supplemental schedule should be read in conjunction with the Consolidated Financial Statements and notes thereto included in this report. (a) (3) The following exhibits are filed herewith and this list is intended to constitute the exhibit index: 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 4.1 4.2 4.3 4.4 4.5 4.6 Registrant’s Articles of Incorporation are incorporated herein by reference by Exhibit 3.1 to the Registrant’s Form 10-Q filed April 5, 2006. Articles of Merger amending the Registrant’s Articles of Incorporation, is incorporated herein by reference to Exhibit 3.2 to the Registrant’s Form 10-Q filed April 5, 2006. Registrant’s Bylaws, as amended January 11, 2006, are incorporated herein by reference to Exhibit 3.3 to the Registrant’s Form 10-Q filed April 5, 2006. Amendment to the Registrant’s Bylaws dated October 31, 2006, is incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed November 6, 2006. Amendment to the Registrant’s Bylaws dated January 8, 2008, is incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed November 8, 2007. Amendment to the Registrant’s Bylaws dated April 8, 2008, is incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed April 11, 2008. Amendment to the Registrant’s Bylaws dated April 7, 2009, is incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed April 13, 2009. Amendment to the Registrant’s Bylaws dated June 8, 2009, is incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed June 10, 2009. Amendment to the Registrant’s Bylaws dated June 10, 2009, is incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed June 12, 2009. Specimen Common Stock Certificate of Registrant is incorporated herein by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-3 filed April 7, 2010 (SEC File Number 333-165924). Indenture between the Registrant, AutoStack Corporation, Greenbrier-Concarril, LLC, Greenbrier Leasing Corporation, Greenbrier Leasing Limited Partner, LLC, Greenbrier Management Services, LLC, Greenbrier Leasing, L.P., Greenbrier Railcar, Inc., Gunderson, Inc., Gunderson Marine, Inc., Gunderson Rail Services, Inc., Gunderson Specialty Products, LLC and U.S. Bank National Association as Trustee dated May 11, 2005, is incorporated herein by reference to Exhibit 4.1 to the Registrant’s Form 8-K filed May 13, 2005. Indenture between the Registrant, the Guarantors named therein and U.S. Bank National Association as Trustee dated May 22, 2006, is incorporated herein by reference to Exhibit 4.1 to the Registrant’s Form 8-K filed May 25, 2006. Rights Agreement, dated as of July 13, 2004, between the Registrant and EquiServe Trust Company, N.A., as Rights Agent, is incorporated herein by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form 8-A filed September 16, 2004. Amendment No. 1, dated November 9, 2004, to the Rights Agreement, dated as of July 13, 2004, is incorporated herein by reference to Exhibit 4.2 to the Registrant’s Form 8-K filed November 15, 2004. Amendment No. 2, dated February 5, 2005, to the Rights Agreement, dated as of July 13, 2004, is incorporated herein by reference to Exhibit 4.3 to the Registrant’s Form 8-K filed February 9, 2005. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 75 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (continued) 4.7 4.8 4.9 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 Inc., dated November 21, 2005, Amendment No. 3, dated June 10, 2009, to the Rights Agreement, dated as of July 13, 2004, is incorporated herein by reference to Exhibit 4.1 to the Registrant’s Form 8-K filed June 12, 2009. Warrant Agreement, dated June 10, 2009, among the Registrant, WLR Recovery Fund IV, L.P., WLR IV Parallel ESC, L.P. and each other holder from time to time party thereto, is incorporated herein by reference to Exhibit 4.2 to the Registrant’s Form 8-K filed June 12, 2009. Investor Rights and Restrictions Agreement, dated June 10, 2009, among the Registrant, WLR Recovery Fund IV, L.P., WLR IV Parallel ESC, L.P., WL Ross & Co. LLC and the other holders from time to time party thereto, is incorporated herein by reference to Exhibit 4.3 to the Registrant’s Form 8-K filed June 12, 2009. Registration Rights Agreement among the Registrant and Banc of America Securities LLC and Bear, Stearns & Co. Inc., dated May 11, 2005, is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed May 13, 2005. Registration Rights Agreement among the Registrant and Banc of America LLC and Bear, Stearns & Co. is incorporated herein by reference to Exhibit 10.2 to the Registrant’s Form 8-K filed December 1, 2005. the Guarantors named therein, Bear, Registration Rights Agreement among the Registrant, Stearns & Co. Inc. and Banc of America Securities LLC, dated May 22, 2006, is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed May 25, 2006. Purchase Agreement among the Registrant, the Guarantors named therein, Bear, Stearns & Co. Inc., and Banc of America Securities LLC, as initial purchasers, and the guaranteeing subsidiaries named therein, dated May 17, 2006, is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed May 18, 2006. Purchase Agreement among the Registrant and Banc of America Securities LLC and Bear, Stearns & Co. Inc., as initial purchasers, dated November 16, 2005, is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed December 1, 2005. Amended and Restated Credit Agreement dated November 7, 2006 among the Registrant, TrentonWorks Limited, a Nova Scotia company, Bank of America, N.A. as U.S. Administrative Agent, Bank of America, N.A. through its Canada branch as Canadian Administrative Agent, U.S. Bank National Association as Documentation Agent, Banc of America Securities LLC as Sole Lead Arranger and Sole Book Manager, and the other lenders party thereto, is incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed November 13, 2006. First Amendment, dated January 8, 2008, to the Amended and Restated Credit Agreement, dated as of November 7, 2006, is incorporated herein by reference to Exhibit 10.3 to the Registrant’s Form 10-Q filed April 9, 2009. Second Amendment, dated May 8, 2008, to the Amended and Restated Credit Agreement, dated as of November 7, 2006, is incorporated herein by reference to Exhibit 10.4 to the Registrant’s Form 10-Q filed April 9, 2009. Third Amendment, dated September 26, 2008, to the Amended and Restated Credit Agreement, dated as of November 7, 2006, is incorporated herein by reference to Exhibit 10.2 to the Registrant’s Form 8-K filed June 12, 2009 Fourth Amendment, dated June 10, 2009, to the Amended and Restated Credit Agreement, dated as of November 7, 2006, is incorporated herein by reference to Exhibit 10.4 to the Registrant’s Form 8-K filed June 12, 2009. Fifth Amendment, dated July 20, 2010, to the Amended and Restated Credit Agreement, dated as of November 7, 2006. Sixth Amendment, dated September 8, 2010, to the Amended and Restated Credit Agreement, dated as of November 7, 2006. 76 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (continued) 10.13 Credit Agreement dated June 10, 2009 among the Registrant, WLR Recovery Fund IV, L.P. and WLR IV Parallel ESC, L.P. as holders, the other holders party thereto, and WL Ross and Co. LLC, as administrative agent, is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed June 12, 2009. 10.14* Employment Agreement dated April 7, 2006 between Mr. Mark Rittenbaum and Registrant, is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed April 13, 2006. 10.15* Amendment dated June 24, 2008 to Employment Agreement dated April 7, 2006 between Mark Rittenbaum and Registrant, is incorporated herein by reference to Exhibit 10.7 to the Registrant’s Form 10-K filed November 10, 2008. 10.16* Employment Agreement dated April 20, 2005 between the Registrant and Mr. William A. Furman, is incorporated herein by reference herein to Exhibit 10.1 to the Registrant’s Form 8-K filed April 20, 2005. 10.17* Amendment dated May 11, 2006 to Employment Agreement between Mr. William A. Furman and Registrant dated April 20, 2005, is incorporated by reference herein to Exhibit 10.1 to the Registrant’s Form 8-K filed May 12, 2006. 10.18* Amendment dated November 1, 2006 to Employment Agreement between the Registrant and Mr. William A. Furman dated April 20, 2005 is incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed November 6, 2006. 10.19* Amendment dated June 5, 2008 to Employment Agreement between the Registrant and William A. Furman, is incorporated herein by reference to Exhibit 10.11 to the Registrant’s Form 10-K filed November 10, 2008. 10.20* Amendment dated April 6, 2009 to Employment Agreement between the Registrant and William A. Furman, is incorporated herein by reference to Exhibit 10.5 to the Registrant’s Form 10-Q filed April 9, 2009. 10.23* 10.21* Employment Agreement dated May 11, 2006 between Robin Bisson and Registrant, is incorporated herein by reference to Exhibit 10.2 to the Registrant’s Form 8-K filed May 12, 2006. 10.22* Employment Agreement dated June 26, 2007 between Timothy A. Stuckey and Registrant, is incorporated herein by reference to Exhibit 10.13 to the Registrant’s Form 10-K filed November 10, 2008. 2007 Restated Greenbrier Leasing Corporation’s Manager Owned Target Benefit Plan, is incorporated herein by reference to Exhibit 10.14 to the Registrant’s Form 10-K filed November 10, 2008. Form of Agreement concerning Indemnification and Related Matters (Directors) between Registrant and its directors, is incorporated herein by reference to Exhibit 10.15 to the Registrant’s Form 10-K filed November 10, 2008. Form of Agreement concerning Indemnification and Related Matters (Officers) between Registrant and its officers, is incorporated herein by reference to Exhibit 10.16 to the Registrant’s Form 10-K filed November 10, 2008. 10.24 10.25 10.26* Stock Incentive Plan — 2000, dated as of April 6, 1999 is incorporated herein by reference to Exhibit 10.23 to the Registrant’s Annual Report on Form 10-K filed November 24, 1999. 10.27* Amendment No. 1 to the Stock Incentive Plan — 2000, is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 10-Q filed April 11, 2001. 10.28* Amendment No. 2 to the Stock Incentive Plan — 2000, is incorporated herein by reference to Exhibit 10.2 to the Registrant’s Form 10-Q filed April 11, 2001. 10.29* Amendment No 3 to the Stock Incentive Plan — 2000, is incorporated herein by reference to Exhibit 10.25 to the Registrant’s Form 10-K filed November 27, 2002. 10.30* Employment Agreement dated April 7, 2008 between James T. Sharp and Registrant, is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed April 11, 2008. 10.31* Amendment dated June 26, 2008 to Employment Agreement dated April 7, 2008 between James T. Sharp and Registrant, is incorporated herein by reference to Exhibit 10.23 to the Registrant’s Form 10-K filed November 10, 2008. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 77 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (continued) 10.32* Employment Agreement dated April 6, 2009 between Alejandro Centurion and Registrant, is incorporated herein by reference to Exhibit 10.6 to the Registrant’s Form 10-Q dated April 9, 2009. 10.33* Form of Employee Restricted Share Agreement (5 year vesting) related to the 2005 Stock Incentive Plan, is incorporated herein by reference to Exhibit 10.24 to the Registrant’s Form 10-K filed November 10, 2008. 10.34* Form of Employee Restricted Share Agreement (time and performance vesting) related to the 2005 Stock Incentive Plan, is incorporated herein by reference to Exhibit 10.25 to the Registrant’s Form 10-K filed November 10, 2008. 10.35* Form of Change of Control Agreement for Senior Managers, is incorporated herein by reference to Exhibit 10.26 to the Registrant’s Form 10-K filed November 10, 2008. 10.36* Form of Amendment dated as of March 1, 2009 to Employment Agreements between Registrant and certain of Registrant’s Executive Officers, is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Form 10-Q filed April 9, 2009. 2009 Employee Stock Purchase Plan, is incorporated herein by reference to Appendix B to the Registrant’s Proxy Statement on Schedule 14A filed November 25, 2008. 10.37* 10.38* First Amendment to 2009 Employee Stock Purchase Plan dated April 5, 2010, is incorporated herein 10.39* by reference to Exhibit 10.1 to the Registrant’s Form 10-Q filed July 7, 2010. 2005 Stock Incentive Plan is incorporated herein by reference to Appendix C to the Registrant’s Proxy Statement on Schedule 14A filed November 24, 2004. 10.40* Amendment No. 1 dated June 30, 2005 to the 2005 Stock Incentive Plan, is incorporated herein by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K filed November 4, 2005. 10.41* Amendment No. 2 dated April 3, 2007 to the 2005 Stock Incentive Plan, is incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 10-Q filed July 10, 2007. 10.43 10.45 10.46 10.44 10.42* Amendment No. 3 dated November 6, 2008 to the 2005 Stock Incentive Plan, is incorporated herein by reference to Appendix C to the Registrant’s Proxy Statement on Schedule 14A filed November 25, 2008. Stock purchase agreement among Gunderson Rail Services LLC and Meridian Rail Holdings Corp. dated October 15, 2006 and incorporated herein by reference to Exhibit 10.34 of the Registrant’s Annual Report on Form 10-K filed November 2, 2006. Asset Purchase Agreement among Gunderson Rail Services LLC, American Allied Railway Equipment Co., Inc., and American Allied Freight Car Co., Inc. dated January 24, 2008, is incorporated herein by reference to Exhibit 2.1 of the Registrant’s Form 8-K filed April 3, 2008. Railcar Remarketing and Management Agreement among Greenbrier Management Services, LLC and WL Ross-Greenbrier Rail I LLC dated as of April 29, 2010, is incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed May 3, 2010.** Advisory Services Agreement between Greenbrier Leasing Company LLC and WLR-Greenbrier Rail Inc. dated as of April 29, 2010, is incorporated herein by reference to Exhibit 10.2 of the Registrant’s Form 8-K filed May 3, 2010.** Contract Placement Agreement between Greenbrier Leasing Company LLC and WLR-Greenbrier Rail Inc. dated as of April 29, 2010, is incorporated herein by reference to Exhibit 10.3 of the Registrant’s Form 8-K filed May 3, 2010.** Syndication Agreement between Greenbrier Leasing Company LLC and WLR-Greenbrier Rail Inc. dated as of April 29, 2010, is incorporated herein by reference to Exhibit 10.4 of the Registrant’s Form 8-K filed May 3, 2010.** Amendment to Syndication Agreement between Greenbrier Leasing Company LLC and WLR- Greenbrier Rail Inc., dated as of August 18, 2010, is incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed August 20, 2010. Line of Credit Participation Letter Agreement between Greenbrier Leasing Company LLC and WLR-Greenbrier Rail Inc. dated as of April 29, 2010, is incorporated herein by reference to Exhibit 10.5 of the Registrant’s Form 8-K filed May 3, 2010.** 10.47 10.48 10.50 10.49 78 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (continued) 10.51 10.52 14.1 21.1 23.1 31.1 31.2 32.1 32.2 Guaranty of Greenbrier Leasing Company LLC dated as of April 29, 2010, is incorporated herein by reference to Exhibit 10.6 of the Registrant’s Form 8-K filed May 3, 2010.** Guaranty of the Greenbrier Companies, Inc., dated as of August 18, 2010, is incorporated herein by reference to Exhibit 10.2 of the Registrant’s Form 8-K filed August 20, 2010. Code of Business Conduct and Ethics, is incorporated herein by reference to Exhibit 14.1 of the Registrant’s Form 8-K filed January 13, 2010. List of the subsidiaries of the Registrant Consent of Deloitte & Touche LLP, independent auditors Certification pursuant to Rule 13(a) — 14(a) Certification pursuant to Rule 13(a) — 14(a) Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Management contract or compensatory plan or arrangement ** Certain confidential information contained in these Exhibits was omitted by means of redacting a portion of the text and replacing it with brackets and asterisks ([***]). These Exhibits have been filed separately with the SEC without the redaction and have been granted confidential treatment by the Securities and Exchange Commission pursuant to a Confidential Treatment Request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Note: For all exhibits incorporated by reference, unless otherwise noted above, the SEC file number is 001-13146. CERTIFICATIONS The Company filed the required 303A.12(a) New York Stock Exchange Certification of its Chief Financial Officer with the New York Stock Exchange with no qualifications following the 2010 Annual Meeting of Shareholders and the Company filed as an exhibit to its Annual Report on Form 10-K for the year ended August 31, 2009, as filed with the Securities and Exchange Commission, a Certification of the Chief Executive Officer and a Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t 79 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE GREENBRIER COMPANIES, INC. Dated: November 10, 2010 By: /s/ William A. Furman William A. Furman President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature /s/ Benjamin R. Whiteley Benjamin R. Whiteley, Chairman of the Board /s/ William A. Furman William A. Furman, President and Chief Executive Officer, Director /s/ Graeme Jack Graeme Jack, Director /s/ Duane C. McDougall Duane McDougall, Director /s/ Victoria McManus Victoria McManus, Director /s/ A. Daniel O’Neal A. Daniel O’Neal, Director /s/ Wilbur L. Ross Wilbur L. Ross, Jr., Director /s/ Charles J. Swindells Charles J. Swindells, Director /s/ Wendy L. Teramoto Wendy L. Teramoto, Director /s/ C. Bruce Ward C. Bruce Ward, Director /s/ Donald A. Washburn Donald A. Washburn, Director /s/ Mark J. Rittenbaum Mark J. Rittenbaum, Executive Vice President And Chief Financial Officer (Principal Financial Officer) James W. Cruckshank /s/ James W. Cruckshank, Senior Vice President And Chief Accounting Officer (Principal Accounting Officer) Date November 10, 2010 November 10, 2010 November 10, 2010 November 10, 2010 November 10, 2010 November 10, 2010 November 10, 2010 November 10, 2010 November 10, 2010 November 10, 2010 November 10, 2010. November 10, 2010 November 10, 2010 80 T h e G r e e n b r i e r C o m p a n i e s 2 0 1 0 A n n u a l R e p o r t Investor Information Corporate Offi ces: The Greenbrier Companies, Inc. One Centerpointe Drive, Suite 200 Lake Oswego, Oregon 97035 503.684.7000 www.gbrx.com Annual Stockholders’ Meeting: Friday, January 7, 2011, 2:00 p.m. Benson Hotel 309 SW Broadway Portland, Oregon Financial Information: Requests for copies of this annual report and other fi nancial information should be made to: Investor Relations The Greenbrier Companies, Inc. One Centerpointe Drive, Suite 200 Lake Oswego, Oregon 97035 E-mail: investor.relations@gbrx.com 503.684.7000 Legal Counsel: Tonkon Torp LLP Portland, Oregon Independent Auditors: Deloitte & Touche LLP Portland, Oregon Transfer Agent: Computershare Trust Company, N.A. PO Box 43078 Providence, Rhode Island 02940-3078 Greenbrier’s Transfer Agent maintains stockholder records, issues stock certifi cates and distributes dividends. Requests concerning these matters should be directed to Computershare Trust Company, N.A. Directors Offi cers Benjamin R. Whiteley(1)(2)(3) Chairman of the Board Independent Director William A. Furman Director Graeme A. Jack(1)(2) Independent Director Duane C. McDougall(1)(2)(3) Independent Director Victoria McManus(3) Independent Director A. Daniel O’Neal, Jr. Director Wilbur L. Ross, Jr. Director Charles J. Swindells(1)(2)(3) Independent Director Wendy L. Teramoto Director C. Bruce Ward Director Donald A. Washburn (1) (2)(3) Independent Director Victor G. Atiyeh Director Emeritus (1) Member of Audit Committee (2) Member of Compensation Committee (3) Member of Nominating and Corporate Governance Committee William A. Furman President Chief Executive Offi cer Martin R. Baker Senior Vice President Chief Compliance Offi cer and General Counsel Alejandro Centurion President Greenbrier North American Manufacturing Operations Sherrill A. Corbett Corporate Secretary James W. Cruckshank Senior Vice President Chief Accounting Offi cer William G. Glenn Senior Vice President Chief Commercial Offi cer and Strategic Planning Lorie L. Leeson Vice President Corporate Finance and Treasurer Maren J. Malik Vice President Administration Anne T. Manning Vice President Corporate Controller Mark J. Rittenbaum Executive Vice President Chief Financial Offi cer James T. Sharp President Greenbrier Leasing Company Timothy A. Stuckey President Greenbrier Rail Services To our Shareholders, Customers, Employees and Suppliers: The Greenbrier Companies Locations William A. Furman President and Chief Executive Offi cer Economic forces continued to impede our profi t and EBITDA goals in fi scal 2010. Notwithstanding these forces, we achieved all four of our other key objectives identifi ed at the beginning of the year. First, we obtained a satisfactory modifi cation of the GE new railcar contract during the second quarter. Second, we improved the operational effi ciency of our facilities, while maintaining the fl exibility to respond to market demand. One example of this fl exibility occurred in the fourth quarter when we shifted 175 workers from marine barge construction to new railcar production in support of new railcar orders and to address softness in the marine market. Third, we produced positive operating cash fl ow, reduced net debt by $76 million, and strengthened our balance sheet through a $52.7 million common stock offering. Finally, our fourth objective was to further leverage our integrated business model. The competitive advantages of this model were demonstrated with receipt of recent new railcar and railcar refurbishment orders which utilized our strengths in engineering and leasing to quickly secure transactions. Looking Ahead We continue to see positive signs of a recovery in the North American freight supply industry. Railcar loadings continue to improve, railcars continue to come out of storage, and new railcar orders in the third calendar quarter of 2010 were at their highest levels since the second quarter of 2008. The outlook for our new railcar manufacturing operations in North America continues to improve signifi cantly. We now have fi ve production lines dedicated to new railcar manufacturing, compared to two lines less than six months ago. Greenbrier is well-positioned for the upturn, as rail traffi c continues to improve and the economy continues to recover. In the very near term, we anticipate that reduced demand for wheel services and marine vessels will partially dampen the impact of positive railcar manufacturing trends. Our recent orders for double stack equipment represent the early signs of restoration in demand for this railcar type. Greenbrier has built over 60% of all double stack platforms ever built in North America. Similarly, there is a rebound in demand for covered hopper cars, where we also have a high market share. We believe our superior designs and engineering provide more reliable and safer transportation for the North American market. Greenbrier’s new railcar manufacturing backlog as of August 31, 2010 was 5,300 units with an estimated value of $420 million, compared to 4,400 units valued at $370 million at May 31, 2010. In September and October, additional orders for 3,200 units with an aggregate value of $200 million were received. Our share of total North American industry backlog stands at 40% as of September 30, 2010, which is disproportionately large, based on our share of industry capacity. We already have 7,000 units in our backlog scheduled to be built in fi scal 2011, and have capacity to accept additional orders for delivery in 2011. Much of our backlog is of similar railcar types, which will allow us to realize effi ciencies of longer production runs. In fi scal 2010, we delivered only 2,700 new railcar units. So, we expect this business will be up signifi cantly in fi scal 2011. Front Cover: Tony Veditz, Gunderson, LLC Conversely, we are seeing an industry-wide slowdown in demand for marine barges. In response, we have slowed marine production rates and have reassigned many of our marine workers to new railcar manufacturing. We expect this part of our manufacturing segment to recover later in 2011, as the effects of economic uncertainty surrounding the Gulf oil spill and off-shore drilling are abated.  Offices  Parts (cid:141) Repair Lake Oswego, OR (Headquarters) Birmingham, AL Boulder, CO Beavercreek, OH Fort Worth, TX Leipzig, Germany (cid:74) Freight Car Manufacturing Frontera, Mexico (joint Venture) Portland, Oregon Swidnica, Poland Sahagun, Mexico Alliance, OH (joint venture) Peoria, IL Portland, OR Red Oak, IA Youngstown, OH Wheels Chicago Heights, IL Concarril - Sahagun, MX Corsicana, TX Elizabethtown, KY Kansas City, KS Lewistown, PA Macon, GA Mexico City, MX Pine Bluff, AR Portland, OR San Bernardino, CA Tacoma, WA Atchison, KS Beckmann - San Antonio, TX Chehalis, WA Cleburne, TX Dothan, AL Finley - Kennewick, WA Golden, CO Hodge, LA Kansas City, MO Mexico City, MX Modesto, CA Omaha, NE Osawatomie, KS Philadelphia, PA San Antonio, TX SoSan - Von Ormy, TX Springfi eld, OR Tierra Blanca, MX Toronto, ON, CN Topeka, KS Tucson, AZ Woodland, CA BOS57129wo17_10K_Cvr.indd 2 BOS57129wo17_10K_Cvr.indd 2 11/18/2010 1:25:34 PM 11/18/2010 1:25:34 PM O n e C e n t e r p o i n t e D r i v e , S u i t e 2 0 0 | L a k e O s w e g o , O re g o n 9 7 0 3 5 | w w w. G B R X . c o m 2010 ANNUAL REPORT BOS57129wo5_10K_Cvr.indd 1 BOS57129wo5_10K_Cvr.indd 1 11/9/2010 11:03:28 AM 11/9/2010 11:03:28 AM 

Continue reading text version or see original annual report in PDF format above