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Greenbrier Companies 10-K 2007
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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
 
 
 
þ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended August 31, 2007
 
 
or
 
 
 
 
o 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
 
(Exact name of Registrant as specified in its charter)
 
 
     
Oregon
  93-0816972
(State of Incorporation)   (I.R.S. Employer Identification No.)
 
One Centerpointe Drive, Suite 200, Lake Oswego, OR 97035
(Address of principal executive offices)
 
(503) 684-7000
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
(Title of Each Class)
  (Name of Each Exchange on Which Registered)
Common Stock without par value
  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 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. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large accelerated filer        Accelerated filer  X      Non-accelerated filer   
 
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, 2007 (based on the closing price of such shares on such date) was $455,270,802.
 
The number of shares outstanding of the Registrant’s Common Stock on October 22, 2007 was 16,168,863, without par value.
 
 
 
Parts of Registrant’s Proxy Statement dated November 27, 2007 prepared in connection with the Annual Meeting of Stockholders to be held on January 8, 2008 are incorporated by reference into Parts II and III of this Report.


 

 
The Greenbrier Companies, Inc.
 
Form 10-K
 
 
             
        PAGE
 
   
             
      BUSINESS   3
      RISK FACTORS   10
      UNRESOLVED STAFF COMMENTS   16
      PROPERTIES   17
      LEGAL PROCEEDINGS   17
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS   18
             
   
             
      MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS   18
      SELECTED FINANCIAL DATA   20
      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   21
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   29
      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   30
      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   66
      CONTROLS AND PROCEDURES   67
             
   
             
      DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF REGISTRANT   69
      EXECUTIVE COMPENSATION   69
      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS   69
      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE   69
      PRINCIPAL ACCOUNTING FEES AND SERVICES   69
             
   
             
      EXHIBITS, FINANCIAL STATEMENT SCHEDULES   70
 
    SIGNATURES   74
        CERTIFICATIONS   75
 EXHIBIT 12.1
 EXHIBIT 21.1
 EXHIBIT 23.1
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2
 
 
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PART I
 
Item 1.  BUSINESS
 
 
We are one of the leading designers, manufacturers and marketers of railroad freight car equipment in North America and Europe and a leading provider of railcar refurbishment and parts, leasing and other services to the railroad and related transportation industries in North America.
 
In North America, we operate an integrated business model that combines freight car manufacturing, refurbishment, component parts reconditioning, leasing and fleet management services to provide customers with a comprehensive set of freight car solutions. This model allows us to develop synergies between our various business activities and to generate enhanced returns.
 
We operate in three primary business segments: manufacturing, refurbishment & parts and leasing & services. Financial information about our business segments for the years ended August 31, 2007, 2006 and 2005 is located in Note 23 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 website is located at http://www.gbrx.com.
 
 
Our Canadian railcar manufacturing facility had been incurring operating losses as a result of high labor costs, manufacturing inefficiencies, transportation costs associated with a remote location and a strong Canadian currency coupled with a weakening of the market for the primary railcars produced by this entity. These factors caused us to reassess the value of the assets of this facility in accordance with our policy on impairment of long-lived assets. Based on an analysis of future undiscounted cash flows associated with these assets, we determined that the carrying value of the assets exceeded their fair market value. Accordingly a $16.5 million impairment charge was recorded in February 2007 as a special charge on the Consolidated Statement of Operations. In April 2007, our board of directors approved the permanent closure of this facility. As a result of the asset impairment and subsequent facility closure, aggregate special charges of $21.9 million were recorded during 2007 consisting of $14.2 million of impairment of property, plant and equipment, $2.1 million of inventory impairment, $1.1 million impairment of goodwill and other, $3.9 million of severance costs and $0.6 million of professional and other fees associated with the closure. In addition, an $8.2 million tax benefit related to a write-off of our investment in our Canadian subsidiary for tax purposes was recorded. We are actively marketing the assets, and the disposition of the facility is expected to be completed by the end of 2008. Closure costs which include contractual obligations, professional fees and severance and other employee-related costs other than pension costs are estimated to be approximately $12.0 million of which $7.1 million has been incurred through August 31, 2007 consisting of $4.5 million in special charges and $2.6 million in general and administrative expense. There is no tax benefit associated with these closure costs.
 
In November 2006, we acquired all of the outstanding stock of Meridian Rail Holdings, Corp. for $237.9 million which includes the initial purchase price of $227.5 million plus working capital adjustments. Meridian is a leading supplier of wheel maintenance services to the North American freight car industry. Operating out of six facilities, Meridian supplies replacement wheel sets and axles to approximately 170 freight car maintenance locations where worn or damaged wheels, axles, or bearings are reconditioned or replaced. Meridian also performs coupler reconditioning and railcar repair at other facilities.
 
In October 2006, we formed a joint venture with Grupo Industrial Monclova (GIMSA) to manufacture new railroad freight cars for the North American marketplace at GIMSA’s existing manufacturing facility, located in Frontera, Mexico. Our initial investment was less than $10.0 million for one production line and each party owns a 50% interest in the joint venture. Production began late in our third quarter of 2007. The financial results of this operation are consolidated for financial reporting purposes under Financial Accounting Standards Board (FASB)
 
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Interpretation (FIN) 46R, Consolidation of Variable Interest Entities, 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 minority interest reflected in the Company’s consolidated financial statements represents the joint venture partner’s equity in this venture.
 
On September 11, 2006, we purchased substantially all of the operating assets of Rail Car America (RCA), its American Hydraulics division and the assets of its wholly owned subsidiary; Brandon Corp. RCA is a provider of intermodal and conventional railcar repair services in North America, operating from four repair facilities throughout the United States. RCA also reconditions and repairs end-of-railcar cushioning units through its American Hydraulics division and operates a switching line in Nebraska through Brandon Corp. The purchase price of the net assets was $29.1 million of cash and a $3.0 million promissory note due in September 2008.
 
The acquisitions of Meridian and RCA during 2007 resulted in the growth of the repair, refurbishment and parts portion of our business to a level that required a change in composition of our reportable segments. A new segment was added: refurbishment & parts, which includes activities that were formerly included as part of the manufacturing segment. All segment information for prior periods has been restated to conform to current period reporting.
 
Products and Services
 
North American Railcar Manufacturing - We are the leading North American manufacturer of intermodal railcars with an average market share of approximately 65% over the last five years. In addition to our strength in intermodal railcars, we manufacture a broad array of other railcar types in North America and have demonstrated an ability to capture high market shares in many of the car types we produce. We have commanded an average market share of approximately 40% in flat cars and 30% in boxcars over the last five years. The primary products produced for the North American market are:
 
Intermodal Railcars - We manufacture a comprehensive range of intermodal railcars. Our most important 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. These savings are the result of:
•   Increased train density (two containers are carried within the same longitudinal space conventionally used to carry one trailer or container);
•   Reduced railcar weight of up to 50% per container;
•   Improved terminal handling characteristics;
•   Reduced equipment costs of up to 40% less than the cost of providing the same carrying capacity with conventional equipment;
•   Reduced damage claims as a result of superior ride quality compared to conventional equipment; and
•   Increased fuel efficiency resulting from weight reduction and improved aerodynamics.
 
 
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Our current double-stack products include:
 
                                             
        Number of
  Well
  Cargo
      Unit sizes carried(1)
Product   Type   wells   size   type       20 ´   40 ´   45 ´   48 ´   53 ´   Trailer
 
 
Maxi-Stack I
  Articulated   5   40 ´   Container   Top       x   x   x   x    
                    Bottom   x   x                
                                             
Maxi-Stack IV
  Articulated   3   53 ´   Container   Top       x   x   x   x    
                    Bottom   x   x   x   x   x    
                                             
All Purpose
  Stand-alone or   1 or 3 unit   53 ´   Container   Top       x   x   x   x    
Husky Stack 53 ´
  Drawbar
connected
              Bottom   x   x   x   x   x    
                Trailers                           x
                                             
Husky Stack 53 ´
  Stand-alone or   1 or 3 unit   53 ´   Container   Top       x   x   x   x    
    Drawbar
connected
              Bottom   x   x   x   x   x    
 
(1) Carrying capability may be dependent on unit size being carried in the adjoining well.
 
Conventional Railcars - We produce a wide range of boxcars, which are used in forest products, automotive, perishables and general merchandise applications. We also produce a variety of covered hopper cars for the grain, cement and plastics industries as well as gondolas and coil cars for the steel and metals markets and various other conventional railcar types. 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 are developing a line of tank car products for the North American market. The initial product will be a 30,000-gallon non-coiled, non-insulated tank car, which will be used to transport ethanol, methanol and more than 60 other commodities. Delivery of this car type is expected to begin in the first quarter of 2009.
 
European Railcar Manufacturing - Our European manufacturing operation produces a variety of railcar 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 rolling highway 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 facilities with the largest side-launch ways on the West Coast. The marine facilities also enhance steel plate burning and fabrication capacity providing flexibility for railcar production. We manufacture ocean-going conventional deck barges, double-hull tank barges, railcar/deck barges, barges for aggregates and other heavy industrial products and ocean-going dump barges.
 
 
Railcar Repair, Refurbishment and Component Parts Manufacturing - We believe we operate the largest independent repair, refurbishment and component parts networks in North America, operating in 35 locations. Our network of railcar repair and refurbishment shops competes in heavy railcar repair and refurbishment and 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. We also perform wheel and axle servicing through our wheel shops in North America. In addition, we recondition railcar cushioning units, produce boxcar sliding door and roof products as well as couplers and yokes.
 
 
Leasing - Our relationships with financial institutions, combined with our ownership of a lease fleet of approximately 9,000 railcars, enables us to offer flexible financing programs including traditional direct finance leases, operating leases and “by the mile” leases to our customers. As equipment owner, we participate
 
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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.
 
                         
    Fleet Profile(1)
 
    As of August 31, 2007  
    Owned
    Managed
    Total
 
    Units(2)     Units     Units  
   
Customer Profile:
                       
Class I Railroads
    3,588       112,323       115,911  
Non-Class I Railroads
    1,193       11,544       12,737  
Shipping Companies
    3,261       5,293       8,554  
Leasing Companies
    282       7,086       7,368  
Enroute to Customer Location
    172       92       264  
Off-lease
    167       220       387  
 
 
Total Units
    8,663       136,558       145,221  
                         
 
(1) Each platform of a railcar is treated as a separate unit.
(2) Percent of owned units on lease is 98.1% with an average remaining lease term of 3.1 years. The average age of owned units is 17 years.
 
Management Services - Our management services business offers a broad range of services that include railcar maintenance management, railcar accounting services such as billing and revenue collection, car hire receivable and payable, total fleet management including railcar tracking and software development, 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 145,000 railcars in North America for railroads, shippers, carriers and other leasing and transportation companies.
 
 
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:
 
                         
    August 31,  
    2007     2006     2005  
   
 
                         
New railcar backlog units(1)
    12,100       14,700       9,600  
Estimated future revenue value (in millions)
  $ 830     $ 1,000     $ 550  
 
(1) Each platform of a railcar is treated as a separate unit.
 
Approximately 50% of backlog as of August 31, 2007 is expected to be produced during 2008. The backlog at August 31, 2007 includes 6,700 units that will be delivered to the customer over a multi-year period ending in calendar year 2010. Approximately 3,900 units under this contract are subject to our fulfillment of certain competitive conditions. Subsequent to August 31, 2007, an additional multi-year order was received for 11,900 units to be delivered over an eight-year period commencing in the first quarter of 2009. Approximately 8,500 units under this contract are subject to our fulfillment of certain competitive conditions.
 
The backlog is based on customer orders that we believe are firm and does not include production for our own lease fleet. Customer orders, however, may be subject to cancellation and other customary industry terms and conditions. Historically, little variation has been experienced between the number of railcars ordered and the number of railcars actually delivered. The backlog is not necessarily indicative of future results of operations.
 
 
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Our customers 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 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 2007, revenue from one customer, Burlington Northern and Santa Fe Railway Company (BNSF) accounted for approximately 21% of total revenue, 29% of leasing & services revenue and 25% of manufacturing revenue. Two customers, TTX Company and Union Pacific Railroad, together accounted for approximately 43% of refurbishment & parts revenue.
 
 
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 approximately half of the cost of an average freight car. 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.
 
 
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.
 
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 refurbishment & parts business is dependent on the type of product or service provided. There are many competitors in the railcar repair and refurbishment business and a fewer number of competitors in the wheel and other parts businesses of which we are one of the largest competitors in both segments. We compete primarily on the basis of quality, single source solutions and engineering expertise.
 
There are about twenty institutions that provide railcar leasing and services similar to ours. Many of them are also customers which buy leased railcars and new railcars from our manufacturing facilities. More than half of these institutions have greater resources than us. 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.
 
 
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
 
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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 and accounting services.
 
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 tendering 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 2007, 2006 and 2005 were $2.4 million, $2.2 million and $1.9 million.
 
 
We have a number of United States (U.S.) and non-U.S. patents of varying duration and pending 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.
 
 
We are subject to national, state, provincial 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 maintain compliance with applicable environmental laws and regulations.
 
Environmental studies have been conducted of our owned and leased properties that indicate additional 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 facility, as a federal “National Priority List” or “Superfund” site due to sediment contamination (the Portland Harbor Site). We, and more than 60 other parties, have received a “General Notice” of potential liability from the EPA relating to the Portland Harbor Site. The letter advised us that we may be liable for the costs of investigation and remediation (which liability may be joint and several with other potentially responsible parties) as well as for natural resource damages resulting from releases of hazardous substances to the site. At this time, ten private and public entities, including us, have signed an Administrative Order on Consent to perform a remedial investigation/feasibility study of the Portland Harbor Site under EPA oversight, and several additional entities have not signed such consent, but are nevertheless contributing money to the effort. The study is expected to be completed in 2010. The EPA has notified several additional entities, including other federal agencies, that it is prepared to issue unilateral orders compelling additional participation in the remedial investigation. 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 our Portland property may have released hazardous substances to the environment. Under this oversight, we also are conducting groundwater remediation relating to a historical spill on our property which occurred prior to our ownership.
 
Because these environmental investigations are still underway, we are unable to determine the amount of our 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 we may be liable for damages to natural resources. In addition, we may be required to perform periodic maintenance dredging in order to continue to launch vessels from our launch ways in Portland, Oregon, on the Willamette River, and the river’s classification as a Superfund site could result in some limitations on future
 
 
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dredging and launch activities. Any of these matters could adversely affect our business and results of operations, or the value of our Portland property.
 
 
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.
 
Harmonization of the European Union (EU) regulatory framework is an ongoing process. The regulatory environment in Europe consists of a combination of EU regulations and country specific regulations.
 
 
As of August 31, 2007, we had 4,239 full-time employees, consisting of 2,589 employees in manufacturing, 1,507 in refurbishment & parts and 143 employees in leasing & services and corporate. At the manufacturing facility in Swidnica, Poland, 365 employees are represented by unions. At our refurbishment & parts locations, 105 employees are represented by a union. At our Frontera, Mexico, joint venture manufacturing facility, 322 employees are represented by a union. In addition to our own employees, 1,164 union employees work at our Sahagun, Mexico, railcar manufacturing facility under our services agreement with Bombardier Transportation. We believe that our relations with our employees are generally good.
 
 
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.
 
 
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Item 1a. RISK FACTORS
 
Risks Related to Our Business
 
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.
 
The railcar business is cyclical. Overall economic conditions and the purchasing habits of railcar buyers have a significant effect upon our railcar manufacturing, refurbishment & parts and leasing & services businesses due to the impact on demand for new, refurbished, used and leased products. As a result, during downturns, we operate with a lower level of backlog and may temporarily slowdown 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 terms. An economic downturn or increase in interest rates may reduce demand for railcars, resulting in lower sales volumes, lower prices, lower lease utilization rates and decreased profits or losses.
 
The failure of the rail freight industry to perform as forecasted by industry analysts may have an adverse effect on our financial condition and results of operations.
 
Our future success depends in part upon continued performance of the rail freight industry. If railcar loadings do not materialize as forecasted by industry analysts, railcar replacement rates do not increase or industry demand for railcar products does not continue at current levels due to price increases or other reasons, our financial condition and results of operations could be adversely affected.
 
We compete in a highly competitive and concentrated industry, and this competition or industry consolidation 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 us. 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 in the industry among or between our competitors, customers and suppliers could adversely affect our revenues, cost of revenues and profitability.
 
We derive a significant amount of our revenue from a limited number of customers, the loss of one or more of which could have an adverse effect on our business.
 
A significant portion of our revenue is generated from a few major customers such as Burlington Northern Santa Fe Railroad, TTX Company and Union Pacific Railroad. Although we have some long-term contractual relationships with our major customers, we cannot assure you 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.
 
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 (including scrap metal) and all other materials used in the production of our railcars represents over two-thirds of our direct manufacturing costs per railcar.
 
Our businesses depend upon the adequate supply of other raw materials, including castings and specialty components, at competitive prices. Although we believe we have multiple sources for these raw materials, the number of suppliers has generally declined while global demand has increased. We cannot assure you that we will continue to have access to suppliers of necessary components for manufacturing railcars. Our ability to meet
 
 
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demand for our products could be adversely affected by the loss of access to any of these suppliers, 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 increase and we were unable to increase our selling prices or have adequate protection in our contracts to do so or reduce operating costs to offset the 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.
 
Our backlog may not be necessarily indicative of the level of our future revenues.
 
Our new railcar backlog is the number of railcars for which we have written orders from our customers in various periods and estimated potential revenue attributable to the backlog. Some of this backlog is subject to our fulfillment of certain competitive conditions. Although we believe backlog is an indicator of our future revenues, our reported backlog may not be converted to revenue in any particular period, and actual revenue from such contracts may not equal our backlog revenues. Therefore, our backlog may not necessarily be indicative of the level of our future revenues.
 
The timing of our lease remarketing and railcar sales may cause significant differences in our quarterly results and liquidity.
 
We may build railcars in anticipation of a customer order, or that are leased to a customer and ultimately sold to a third-party. The difference in timing of production of the railcars and the sale 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.
 
A change in our product mix, failure to design or manufacture products or technologies or achieve certification or market acceptance of new products or technologies and 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 varies from time to time. These shifts in demand may 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 may be unable to successfully design or manufacture these new railcar products and technologies. Our inability to develop and manufacture such new products in a timely and profitable manner, to obtain certification, achieve market acceptance or the existence of quality problems in our new products would have a material adverse effect on our revenue and results of operations and subject us to penalties, cancellation of the order and/or other damages. Subsequent to August 31, 2007, a multi-year order was received for tank cars which are scheduled for delivery beginning in the first quarter of 2009. We have not previously designed, certified or manufactured tank cars for the North American market.
 
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.
 
We may 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 decrease our overall return.
 
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A reduction in negotiated or arbitrated car hire rates could reduce future car hire revenue.
 
A significant portion of our leasing and services revenue is derived from “car hire,” which is a fee that a railroad pays for the use of railcars owned by other railroads or third parties. Until 1992, the Interstate Commerce Commission directly regulated car hire rates by prescribing a formula for calculating these rates. The system of government prescribed rates has been superseded by a system known as deprescription, whereby railcar owners and users have the right to negotiate car hire rates. If the railcar owner and railcar user cannot come to an agreement on a car hire rate, then either party has the right to call for arbitration, in which either the owner’s or user’s rate is selected by the arbitrator to be effective for a one-year period. Substantially all railcars in our fleet are subject to deprescription. There is a risk that car hire rates could be negotiated or arbitrated to lower levels in the future. A reduction in car hire rates could reduce future car hire revenue and adversely affect our financial results.
 
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 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 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 stoppage could adversely affect our operations.
 
We are a party to collective bargaining agreements with various labor unions in Mexico. 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 assure you 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.
 
Fluctuations in foreign currency exchange rates may lead to increased costs and lower profitability.
 
Outside of the United States, we operate in Mexico, Germany, Canada and Poland, and our non-U.S. businesses conduct their operations in local currencies and other regional currencies. We also source materials worldwide. Fluctuation 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 hedges, similar financial instruments 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 may 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 and hazardous substances handling and disposal and employee health and safety. These laws and regulations are complex and frequently change. We may incur unexpected costs, penalties and other civil and criminal liability if we fail to comply with environmental laws. We
 
 
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also may 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.
 
Our Portland facility is located adjacent to a portion of the Willamette River that has been designated as a federal “National Priority List” or “Superfund” site due to sediment contamination. We, and more than 60 other parties, have received a “General Notice” of potential liability related to the Portland facility. The letter advised that we may be liable for the cost of investigation and remediation (which liability may be joint and several with other potential responsible parties) as well as natural resource damages resulting from the release of hazardous substances to the site. 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 our Portland property may have released hazardous substances to the environment. Under this oversight, we also are conducting groundwater remediation relating to a historical spill on our property which occurred prior to our ownership. As a result of the above described matters, we have incurred, and expect to incur in the future, costs associated with an EPA-mandated remedial investigation and the State of Oregon’s mandate to control groundwater discharges. Because this work is still underway, we are unable to determine the amount of our ultimate liability relating to these matters. In addition, we may be required to perform periodic maintenance dredging in order to continue to launch vessels from our launch ways on the river, and the river’s classification as a Superfund site could result in some limitations on future dredging and launch activities. The outcome of these matters could have an adverse effect upon our business, results of operations and on our ability to realize value from a potential sale of the land.
 
Our manufacturer’s warranties expose us to potentially significant claims.
 
We offer our customers limited warranties for many of our products. Accordingly, we may be subject to significant warranty claims in the future, such as multiple claims based on one defect repeated throughout our production 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 are not recoverable from third-party component manufacturers due to their poor financial condition or other reasons, we may be subject to warranty claims and other risks for using these materials on our railcars.
 
We may 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 reserves and 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 may exceed our insurance coverage or result in damage to our reputation.
 
Shortages of skilled labor may adversely impact our operations.
 
We depend on skilled labor in the manufacture 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 may restrict our ability to increase production rates and increase our labor costs.
 
Our level of indebtedness and terms of our indebtedness could adversely affect our business, financial condition and liquidity.
 
The majority of our long term debt is non-amortizing with a balloon payment. Although we intend to refinance our debt, there can be no assurance that we will be able to refinance such debt upon maturity, or if refinanced, that it will be at favorable rates and terms. If we are not successful in refinancing our balloon debt, we could experience liquidity issues that would have a significant impact on our financial condition. If we are unable to successfully refinance our debt, we cannot assure you that we will have adequate liquidity to fund our ongoing cash needs. In addition, our high level of indebtedness and our financial covenants could limit our ability to borrow additional amounts of money for working capital, capital expenditures or other purposes. It could also limit our ability to use
 
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operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to service debt. The high amount of debt increases our vulnerability to general adverse economic and industry conditions and could limit our ability to capitalize on business opportunities and to react to competitive pressures.
 
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 effect 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 four years expiring on December 1, 2008, with two three-year options to renew. All of the labor provided is subject to collective bargaining agreements with the third party, 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. In addition, we do not have significant experience in hiring labor in Mexico and, if required to provide our own labor, could face significantly higher labor costs, which also could have an adverse effect on our operations.
 
We may 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 four years expiring on December 1, 2008, with two three-year options to renew. Upon our exercise of the first option, the landlord may relocate our production line to a different location in their facility which allows us to terminate the exercise of the option. If relocated by the landlord or if we decide to terminate the exercise of the option and find a different location for production, our operations could be adversely effected. We could incur substantial expense and interruption of our manufacturing production if we were to relocate within the facility or to a different location. In addition, there can be no assurance that we will be able to find a suitable alternative location or enter into a lease for a new location on favorable terms.
 
Our relationships with our alliance partners may not be successful, which could adversely affect our business.
 
In recent years, we have entered into several agreements with other companies to increase our sourcing alternatives, reduce costs, and pursue opportunities for growth through design improvements. We may seek to expand our relationships or enter into new agreements with other companies. If these relationships are not successful in the future, our manufacturing costs could increase, we could encounter production disruptions, or growth opportunities may not materialize, any of which could adversely affect our business.
 
We may have difficulty integrating the operations of any companies that we acquire, which may adversely affect our results of operations.
 
The success of our acquisition strategy will depend 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 may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. In addition, we may not be effective in retaining key employees or customers of the combined businesses. We may face integration issues pertaining to the internal controls and operational functions of the acquired companies and we also may not realize cost efficiencies or synergies that we anticipated when selecting our acquisition candidates. Any of these items could adversely affect our results of operations.
 
We may have difficulty with the start-up of our joint venture railcar manufacturing operation in Mexico which may adversely impact our results of operations and cash flow.
 
In October 2006 we entered into a joint venture with Grupo Industrial Monclova (GIMSA) to manufacture new railcars at GIMSA’s existing manufacturing facilities located in Frontera, Mexico. Production began in May 2007 at this facility and we are still in the start-up phase. The start-up of this facility may result in unforeseen operating difficulties and
 
 
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unanticipated costs. If this facility is not able to manufacture railcars as efficiently or as effectively as anticipated our results of operations may be negatively impacted.
 
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.
 
Issues may arise on the disposition of our Canadian operations which could increase our costs and negatively impact our results of operations.
 
In April 2007, a decision was made to permanently close our Canadian railcar manufacturing facility. Production ceased in May 2007 and disposal of the assets is in process. If issues arise that would increase our disposition costs, our results of operations may be negatively impacted.
 
We may not be able to procure insurance on a cost-effective basis in the future.
 
The ability to insure our businesses, facilities and rail assets are important aspects 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.
 
An adverse outcome in any pending or future litigation could negatively impact our business and results of operations.
 
We are a defendant of 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 could distract management’s attention from business operations and increase our legal and defense costs, which may also negatively impact our business and results of operations.
 
Our failure to comply with regulations imposed by federal and foreign agencies could negatively affect our financial results.
 
Our railcar 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 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 federal or foreign agencies may 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 agencies, we could face sanctions and penalties that could negatively affect our financial results.
 
Our implementation of new enterprise resource planning (ERP) systems may result in problems that could negatively impact our business.
 
We are in the process of the design and implementation of ERP and related systems that support substantially all of our operating and financial functions. We may 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.
 
Our governing documents contain some provisions that may prevent or make more difficult an attempt to acquire us.
 
Our Articles of Incorporation and Bylaws, as currently in effect, contain some provisions that may be deemed to have anti-takeover effects, including:
•   a classified board of directors, with each class containing as nearly as possible one-third of the total number of members of the board of directors and the members of each class serving for staggered three-year terms;
•   a vote of at least 55% of our voting securities to amend some provisions of our Articles of Incorporation;
 
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•   no less than 120 days advance notice with respect to nominations of directors or other matters to be voted on by shareholders other than by or at the direction of the board of directors;
•   removal of directors only with cause; and
•   the calling of special meetings of stockholders only by the president, a majority of the board of directors or the holders of not less than 25% of all votes entitled to be cast on the matters to be considered at such meeting.
 
We also maintain a stockholder rights plan pursuant to which each stockholder has received a dividend distribution of one preferred stock purchase right per share of common stock owned. The stockholder rights plan and the other provisions discussed above may have anti-takeover effects because they may delay, defer or prevent an unsolicited acquisition proposal that some, or a majority, of our stockholders might believe to be in their best interests or in which stockholders might receive a premium for their common stock over the then-prevailing market price.
 
The Oregon Control Share Act and business combination law may limit parties who acquire a significant amount of voting shares from exercising control over us for specific periods of time. These acts may lengthen the period for a proxy contest or for a shareholder to vote their shares to elect the majority of our Board and change management.
 
 
None
 
 
 
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We operate at the following primary facilities as of August 31, 2007:
 
         
Description   Location   Status
 
 
Manufacturing Segment        
         
Railcar manufacturing facilities:   Portland, Oregon
Sahagun, Mexico
Swidnica, Poland
Frontera, Mexico
  Owned
Leased
Owned
Leased
Marine manufacturing facility:   Portland, Oregon   Owned
         
Refurbishment & Parts Segment        
         
Railcar repair facilities:   19 locations in the United States and 2 locations in Mexico   Leased — 15 locations
Owned — 6 locations
Wheel reconditioning shops:   8 locations in the United States and 2 locations in Mexico   Leased — 6 locations
Owned — 4 locations
Parts fabrication and reconditioning facilities:   4 locations in the United States   Leased — 2 locations
Owned — 2 locations
         
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 railcar manufacturing and refurbishment facilities in order to remain competitive and to take advantage of market opportunities.
 
 
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:
 
On April 20, 2004, BC Rail Partnership initiated litigation against the Company in the Supreme Court of Nova Scotia, alleging breach of contract and negligent manufacture and design of railcars which were involved in a 1999 derailment. No trial date has been set.
 
On November 3, 2004, and November 4, 2004, in the District Court of Tarrant County, Texas, and in the District Court of Lancaster County, Nebraska, respectively, litigation was initiated against the Company by Burlington Northern Santa Fe Railway (BNSF), one of our largest customers. BNSF alleges the failure of a supplier-provided component part on a railcar manufactured by Greenbrier in 1988, resulted in a derailment and a chemical spill. On June 24, 2006, the District Court of Tarrant County, Texas, entered an order granting the Company’s motion for summary judgment as to all claims. BNSF appealed the district court’s decision to the Texas State Court of Appeals which affirmed the prior court’s decision as to all claims. BNSF has petitioned the Texas Supreme Court for review.
 
Greenbrier and a customer, SEB Finans AB (SEB), have 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 over the next few months. Current estimates of potential costs to Greenbrier do not exceed amounts accrued for warranty. Arbitration
 
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hearings have been rescheduled to March 2008 by mutual agreement pending successful implementation of the terms of the settlement agreement.
 
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.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.
 
PART II
 
 
Our common stock has been traded on the New York Stock Exchange under the symbol GBX since July 14, 1994. There were approximately 370 holders of record of common stock as of October 22, 2007. The following table shows the reported high and low sales price of our common stock on the New York Stock Exchange.
 
                 
    High     Low  
 
2007
               
Fourth quarter
  $  38.99     $  26.25  
Third quarter
  $ 32.15     $ 21.44  
Second quarter
  $ 37.75     $ 26.20  
First quarter
  $ 41.21     $ 26.05  
2006
               
Fourth quarter
  $ 34.90     $ 23.56  
Third quarter
  $ 46.63     $ 32.80  
Second quarter
  $ 40.00     $ 26.75  
First quarter
  $ 33.56     $ 24.67  
 
Quarterly dividends of $.08 per share have been declared since the fourth quarter of 2005. Quarterly dividends of $.06 per share were declared from the fourth quarter of 2004 through the third quarter of 2005. There is no assurance as to the payment of future dividends as they are dependent upon future earnings, capital requirements and our financial condition.
 
 
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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 & Poors (S&P) 500 Index. The graph assumes an investment of $100 on August 31, 2002 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, 2007, the end of the Company’s 2007 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
 
(GRAPH)
 
* $100 invested on 8/31/02 in stock or index-including reinvestment of dividends. Fiscal year ending August 31.
 
Copyright© 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm
 
 
The following table provides certain information as of August 31, 2007 with respect to our equity compensation plans under which our equity securities are authorized for issuance.
 
                         
    Number of securities
      Number of securities
    to be issued
  Weighted average
  remaining available
    upon exercise of
  exercise price of
  for future issuance
    outstanding options,
  outstanding options,
  under equity
Plan Category   warrants and rights   warrants, and rights   compensation plans
 
Equity compensation plans
approved by security holders(1)
    36,660       $7.60       695,224  
                         
Equity compensation plans not approved by security holders
    None       None       None  
 
(1)  Includes the Stock Incentive Plan — 2000 (The 2000 Plan) and the 2005 Stock Incentive Plan.
 
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Item 6.    SELECTED FINANCIAL DATA
                                         
YEARS ENDED AUGUST 31,
 
(In thousands, except per share data)   2007     2006     2005     2004     2003  
Statement of Operations Data                                        
Revenue:
                                       
Manufacturing
  $ 738,424     $ 748,818     $ 844,496     $ 576,638     $ 387,652  
Refurbishment & parts
    381,670       102,471       96,665       76,596       74,230  
Leasing & services
    103,734       102,534       83,061       76,217       70,443  
 
    $ 1,223,828     $ 953,823     $  1,024,222     $  729,451     $  532,325  
 
Earnings from continuing operations
  $ 22,010     $ 39,536     $ 29,822     $ 20,039     $ 4,317  
Earnings from discontinued operations
          62 (2)           739 (2)      
 
Net earnings
  $ 22,010 (1)   $ 39,598     $ 29,822     $ 20,778     $ 4,317  
 
Basic earnings per common share:
                                       
Continuing operations
  $ 1.37     $ 2.51     $ 1.99     $ 1.38     $ .31  
Net earnings
  $ 1.37     $ 2.51     $ 1.99     $ 1.43     $ .31  
Diluted earnings per common share:
                                       
Continuing operations
  $ 1.37     $ 2.48     $ 1.92     $ 1.32     $ .30  
Net earnings
  $ 1.37     $ 2.48     $ 1.92     $ 1.37     $ .30  
Weighted average common shares outstanding:
                                       
Basic
    16,056       15,751       15,000       14,569       14,138  
Diluted
    16,094       15,937       15,560       15,199       14,325  
Cash dividends paid per share
  $ .32     $ .32     $ .26     $ .06     $  
Balance Sheet Data
                                       
Total assets
  $  1,072,749     $  877,314     $ 671,207     $ 508,753     $ 538,948  
Notes payable
  $ 460,915     $ 362,314     $ 214,635     $ 97,513     $ 117,989  
Subordinated debt
  $     $ 2,091     $ 8,617     $ 14,942     $ 20,921  
Stockholders’ equity
  $ 243,590     $ 219,281     $ 176,059     $ 139,289     $ 11,142  
Other Operating Data
                                       
New railcar units delivered
    8,600       11,400       13,200       10,800       6,500  
New railcar units backlog
    12,100       14,700       9,600       13,100       10,700  
Lease fleet:
                                       
Units managed
    136,558       135,320       128,645       122,676       114,701  
Units owned
    8,663       9,311       9,958       10,683       12,015  
Cash Flow Data
                                       
Capital expenditures:
                                       
Manufacturing
  $ 20,361     $ 15,121     $ 11,759     $ 5,804     $ 5,957  
Refurbishment & parts
    5,009       2,906       4,559       1,357       1,433  
Leasing & services
    111,924       122,542       52,805       35,798       4,505  
 
    $ 137,294     $ 140,569     $ 69,123     $ 42,959     $ 11,895  
 
Proceeds from sale of equipment
  $ 119,695     $ 28,863     $ 32,528     $ 16,217     $ 23,954  
 
Depreciation and amortization:
                                       
Manufacturing
  $ 10,762     $ 10,258     $ 10,003     $ 7,347     $ 6,591  
Refurbishment & parts
    9,042       2,360       2,202       2,052       2,490  
Leasing & services
    13,022       12,635       10,734       11,441       9,630  
 
    $ 32,826     $ 25,253     $ 22,939     $ 20,840     $ 18,711  
 
Ratio of earnings to fixed charges(3)
    1.74       2.83       3.55       2.84       1.52  
(1)  Includes special charges of $21.9 million related to the impairment and closure of our Canadian operations. In addition, an $8.2 million tax benefit related to the write-off of our investment in our Canadian subsidiary for tax purposes was recorded.
(2)  Consists of a reduction in loss contingency associated with the settlement of litigation relating to the logistics business that was discontinued in 1998.
(3)  The ratio of earnings to fixed charges is computed by dividing earnings before fixed charges by fixed charges. Earnings before fixed charges consist of earnings (loss) before income tax, minority interest and equity in unconsolidated subsidiaries, plus fixed charges. Fixed charges consist of interest expense, amortization of debt issuance costs and the portion of rental expense that we believe is representative of the interest component of lease expense.
 
 
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Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
We currently operate in three primary business segments: manufacturing, refurbishment & parts and leasing & services. These three business segments are operationally integrated. The manufacturing segment, operating from four facilities in the United States, Mexico and Europe produces double-stack intermodal railcars, conventional railcars, tank cars and marine vessels. We may also manufacture new freight cars through the use of unaffiliated subcontractors. The 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 9,000 railcars and provides management services for approximately 136,000 railcars for railroads, shippers, carriers, and other leasing and transportation companies in North America. Segment performance is evaluated based on margins. We also produce rail castings through an unconsolidated joint venture.
 
Our manufacturing backlog of railcars for sale and lease as of August 31, 2007 was approximately 12,100 railcars with an estimated value of $830.0 million. This compares to 14,700 railcars valued at $1.0 billion as of August 31, 2006. Backlog includes approximately 3,900 units that are subject to our fulfillment of certain competitive conditions. Sales prices generally include an anticipated pass-through of vendor material price increases and surcharges, however, there is still risk that material prices could increase beyond amounts used to price our sale contracts which would adversely impact margins realized upon sale. Subsequent to August 31, 2007, an additional multi-year order was received for 11,900 units to be with delivered over an eight year period commencing in the first quarter of 2009. Approximately 8,500 units under this contract are subject to our fulfillment of certain competitive conditions.
 
Our Canadian railcar manufacturing facility had been incurring operating losses as a result of high labor costs, manufacturing inefficiencies, transportation costs associated with a remote location and a strong Canadian currency coupled with a weakening of the market for the primary railcars produced by this entity. These factors caused us to reassess the value of the assets of this facility in accordance with our policy on impairment of long-lived assets. Based on an analysis of future undiscounted cash flows associated with these assets, we determined that the carrying value of the assets exceeded their fair market value. Accordingly a $16.5 million impairment charge was recorded in February 2007 as a special charge on the Consolidated Statement of Operations. In April 2007, our board of directors approved the permanent closure of this facility. As a result of the asset impairment and subsequent facility closure, aggregate special charges of $21.9 million were recorded during 2007 consisting of $14.2 million of impairment of property, plant and equipment, $2.1 million of inventory impairment, $1.1 million impairment of goodwill and other, $3.9 million of severance costs and $0.6 million of professional and other fees associated with the closure. In addition, an $8.2 million tax benefit related to a write-off of our investment in our Canadian subsidiary for tax purposes was recorded. We are actively marketing the assets and the disposition of the facility is expected to be completed by the end of 2008. Closure costs which include contractual obligations, professional fees and severance and other employee-related costs other than pension costs are estimated to be approximately $12.0 million of which $7.1 million has been incurred through August 31, 2007 consisting of $4.5 million in special charges and $2.6 million in general and administrative expense. There is no tax benefit associated with these closure costs.
 
In November 2006, we acquired all of the outstanding stock of Meridian Rail Holdings, Corp. for $237.9 million which includes the initial purchase price of $227.5 million plus working capital adjustments. Meridian is a leading supplier of wheel maintenance services to the North American freight car industry. Operating out of six facilities, Meridian supplies replacement wheel sets and axles to approximately 170 freight car maintenance locations where worn or damaged wheels, axles, or bearings are reconditioned or replaced. Meridian also performs coupler reconditioning and railcar repair at other facilities.
 
In October 2006, we formed a joint venture with Grupo Industrial Monclova (GIMSA) to manufacture new railroad freight cars for the North American marketplace at GIMSA’s existing manufacturing facility, located in Frontera, Mexico. Our initial investment was less than $10.0 million for one production line and each party owns a 50% interest in the joint venture. Production began late in our third quarter of 2007. The financial results of this operation
 
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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 minority interest reflected in the Company’s consolidated financial statements represents the joint venture partner’s equity in this venture.
 
On September 11, 2006, we purchased substantially all of the operating assets of Rail Car America (RCA), its American Hydraulics division and the assets of its wholly owned subsidiary, Brandon Corp. RCA is a provider of intermodal and conventional railcar repair services in North America, operating from four repair facilities throughout the United States. RCA also reconditions and repairs end-of-railcar cushioning units through its American Hydraulics division and operates a switching line in Nebraska through Brandon Corp. The purchase price of the net assets was $29.1 million of cash and a $3.0 million promissory note due in September 2008.
 
Results of Operations
 
 
Total revenue was $1.2 billion, $953.8 million and $1.0 billion for the years ended August 31, 2007, 2006 and 2005. Net earnings for 2007, 2006 and 2005 were $22.0 million or $1.37 per diluted common share, $39.6 million or $2.48 per diluted common share and $29.8 million or $1.92 per diluted common share.
 
 
Manufacturing revenue includes new railcar and marine production. New railcar delivery and backlog information disclosed herein includes all facilities and orders that may be manufactured by unaffiliated subcontractors.
 
Manufacturing revenue was $738.4 million, $748.8 million and $844.5 million for the years 2007, 2006 and 2005. Railcar deliveries, which are the primary source of manufacturing revenue, were approximately 8,600 units in 2007 compared to 11,400 units in 2006 and 13,200 units in 2005. Manufacturing revenue decreased $10.4 million, or 1.4%, from 2006 to 2007 due to lower railcar deliveries offset somewhat by a change in product mix to railcar types with higher per unit sales prices. The delivery decline is the result of the impact of a slower North American railcar market for railcar types that we currently produce and the current year production of more complex railcar types requiring higher labor content. Manufacturing revenue decreased $95.7 million or 11.3% in 2006 as compared to 2005 primarily due to lower deliveries resulting from changes in production rates to meet customer delivery requirements, a slower European freight car market, an increase in internal production and subcontracted deliveries in the prior period.
 
Manufacturing margin as a percentage of revenue was 7.8% in 2007 compared to 11.0% in 2006. The decrease was primarily due to a less favorable product mix, $5.9 million in negative margins on our Canadian facility in the current year, start-up costs on our new railcar manufacturing joint venture in Mexico and production difficulties and inefficiencies realized on certain conventional railcar types. Manufacturing margin as a percentage of revenue was 11.0% in 2006 compared to 8.6% in 2005. Margin improvements were the result of lower costs on certain materials and operating efficiency improvements at certain of our facilities. In addition, 2005 was adversely impacted by production issues in Europe, surcharges and price increases on materials that could not be passed onto the customer, temporary production issues at one facility and inclement weather related closures.
 
 
Refurbishment & parts revenue was $381.7 million, $102.5 million and $96.7 million for the years 2007, 2006 and 2005. The $279.2 million increase in revenue from 2006 to 2007 was primarily due to acquisition related growth of approximately $249.2 million, increased volume of refurbishment and retrofitting work at repair and refurbishment facilities and favorable scrap pricing. Revenue increased $5.8 million, or 6.0%, from 2005 to 2006 primarily due to the addition of four repair and refurbishment facilities.
 
Refurbishment & parts margin as a percentage of revenue was 16.8%, 14.4% and 10.8% for 2007, 2006 and 2005. The acquisition of Meridian in 2007 has resulted in a greater mix of wheel reconditioning work which combined with increases in volume of railcar maintenance and refurbishment programs, retrofitting work and high scrap
 
 
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prices resulted in the margin increase as compared to 2006. The margin increase from 2005 to 2006 was the result of a more favorable product mix, increased volumes of wheelset sales and improvements in efficiency at certain facilities.
 
 
Leasing & services revenue was $103.7 million, $102.5 million and $83.1 million for the years 2007, 2006 and 2005. The $1.2 million increase in revenue from 2006 to 2007 was primarily the result of a $2.5 million increase in gains on sale of assets from the lease fleet partially offset by a $1.4 million decrease in interest income resulting from lower cash balances. The $19.4 million increase in revenue from 2005 to 2006 was primarily the result of increased revenue from new lease additions, a $4.1 million increase in gains on sale of assets from the lease fleet and increased interest income on higher cash balances.
 
During 2007, we realized $13.4 million in pre-tax earnings on the disposition of leased equipment compared to $10.9 million in 2006 and $6.8 million in 2005. 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 55.8% in 2007 compared to 59.0% in 2006 and 50.5% in 2005. The decrease from 2006 to 2007 was primarily a result of declines in interim rent and interest income, decreased utilization on mileage leases, increases in transportation and storage costs on assets held for sale and higher maintenance costs of the railcar fleet, partially offset by gains on dispositions from the lease fleet. The increase in 2006 was primarily a result of gains on sales from the lease fleet and interim rental on assets held for sale both of which have no associated cost of revenue; renewal of leases at higher lease rates and newer lease equipment with lower maintenance costs. These gains were partially offset by decreased utilization on railcars subject to management agreements.
 
 
Selling and administrative expense was $83.4 million, $70.9 million and $57.4 million in 2007, 2006 and 2005. The $12.5 million increase from 2006 to 2007 is primarily due to $5.0 million associated with operations of business acquired in the current year, $2.3 million in overhead costs associated with our Canadian manufacturing facility that was permanently closed during May 2007, professional services and consulting fees for strategic initiatives and integration of acquired companies, costs associated with improvements to our technology infrastructure and increases in compensation expense related to restricted stock grants. The $13.5 million increase from 2005 to 2006 is primarily the result of increases in employee costs which include new employees, transition costs associated with succession planning, compensation and benefit increases and incentive compensation; $2.8 million in amortization of the value of restricted stock grants; increases in professional fees associated with strategic initiatives; expenses associated with improvements to our technology infrastructure; increases in European research and development costs; partially offset by reduced legal fees as the prior period included $2.5 million in legal and professional expenses associated with litigation and responses related to actions by a former member of the board of directors, Alan James.
 
Interest and foreign exchange expense was $39.9 million, $25.4 million and $14.8 million in 2007, 2006 and 2005. Interest and foreign exchange expense increased $14.5 million from 2006 to 2007 due to higher debt levels and foreign exchange fluctuations. Foreign exchange losses of $1.2 million were recognized in 2007 compared to foreign exchange gains of $1.6 million in 2006. In addition, 2007 results include a $1.2 million write-off of loan origination costs on our prior revolving credit facility. Interest and foreign exchange expense increased $10.6 million from 2005 to 2006 due to higher outstanding debt levels, $0.8 million in interest on a settlement with the IRS in conjunction with the completion of an audit, $0.7 million in interest paid on the purchase of subsidiary shares subject to mandatory redemption, partially offset by foreign exchange fluctuations. Foreign exchange gains of $1.6 million were recognized in 2006 compared to foreign exchange losses of $0.8 million in 2005.
 
Our Canadian railcar manufacturing facility had been incurring operating losses as a result of high labor costs, manufacturing inefficiencies, transportation costs associated with a remote location and a strong Canadian currency coupled with a weakening of the market for the primary railcars produced by this entity. These factors caused us to
 
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reassess the value of the assets of this facility in accordance with our policy on impairment of long-lived assets. Based on an analysis of future undiscounted cash flows associated with these assets, we determined that the carrying value of the assets exceeded their fair market value. Accordingly a $16.5 million impairment charge was recorded in February 2007 as a special charge on the Consolidated Statement of Operations. In April 2007, our board of directors approved the permanent closure of this facility. As a result of the asset impairment and subsequent facility closure, aggregate special charges of $21.9 million recorded during 2007 consist of $14.2 million of impairment of property, plant and equipment, $2.1 million of inventory impairment, $1.1 million impairment of goodwill and other, $3.9 million of severance costs and $0.6 million of professional and other fees associated with the closure.
 
During 2005, we incurred special charges of $2.9 million consisting of debt prepayment penalties and costs associated with settlement of interest rate swap agreements on certain debt that was refinanced with senior unsecured notes.
 
 
Our effective tax rate was 39.9%, 35.5% and 39.8% for the years ended August 31, 2007, 2006 and 2005. The current period includes an $8.2 million tax benefit associated with the write-off of our investment in our Canadian subsidiary for tax purposes and no tax benefit associated with special charges related to the Canadian plant closure costs and losses incurred by the Canadian facility. The current period also includes tax benefits of approximately $1.0 million for Mexican asset based tax credits and amended state income tax provisions. Tax expense for 2006 includes $2.2 million associated with a settlement with the IRS in conjunction with completion of an audit of our tax returns for the years 1999-2002. In addition, 2006 includes a $3.7 million tax benefit for a reduction in a valuation allowance related to a deferred tax asset for net operating loss carryforwards at our Mexican subsidiary. This allowance was reversed based on financial projections that indicated we will more likely than not be able to fully utilize the net operating loss carryforwards.
 
The fluctuations in the effective tax rate are 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. Our tax rate in the United States for the years ended August 31, 2007, 2006 and 2005 represents a tax rate of 39.0%, 41.0% and 42.0%. All periods include varying tax rates on foreign operations.
 
 
The minority interest of $1.5 million for the year ended August 31, 2007 represents our joint venture partner’s share in the losses of our Mexican railcar manufacturing joint venture that began production during the year.
 
Liquidity and Capital Resources
 
We have been financed through cash generated from operations and borrowings. At August 31, 2007, cash decreased $122.1 million to $20.8 million from $142.9 million at the prior year end. Cash usage was primarily for the acquisitions of Meridian and RCA, partially offset by proceeds from borrowings.
 
Cash provided by operating activities for the year ended August 31, 2007 and 2006 was $46.3 million and $39.5 million. Cash used in operating activities was $16.7 million in 2005. The change is due primarily to timing of working capital needs including purchases and sales of railcars held for sale, timing of inventory purchases and varying customer payment terms.
 
Cash used in investing activities for the year ended August 31, 2007 of $286.6 million compared to $111.1 million in 2006 and $21.3 million in 2005. The increased cash utilization in 2007 was primarily due to the acquisitions of Meridian and RCA. Increases in capital expenditures for lease fleet equipment resulted in the increase in cash used in investing activities in 2006 as compared to 2005.
 
Capital expenditures totaled $137.3 million, $140.6 million and $69.1 million in 2007, 2006 and 2005. Of these capital expenditures, approximately $111.9 million, $122.6 million and $52.8 million in 2007, 2006 and 2005 were attributable to leasing & services operations. Our capital expenditures have increased as we replace the maturing direct finance leases and take advantage of investment opportunities in the railcar market. We regularly sell assets
 
 
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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 $120.0 million in 2007. Leasing & services capital expenditures for 2008 are expected to be approximately $75.0 million.
 
Approximately $20.4 million, $15.1 million and $11.8 million of capital expenditures for 2007, 2006 and 2005 were attributable to manufacturing operations. Capital expenditures for manufacturing are expected to be approximately $30.0 million in 2008 and primarily relate to increased efficiency and expansion of manufacturing capacity through our joint venture in Mexico.
 
Refurbishment & parts capital expenditures for 2007, 2006 and 2005 were $5.0 million, $2.9 million and $4.5 million and are expected to be approximately $15.0 million in 2008 for expansion of existing facilities.
 
Cash provided by financing activities of $115.8 million for the year ended August 31 2007 compared to cash provided by financing activities of $142.5 million in 2006 and $97.6 million in 2005. During 2007, we received $99.4 million in net proceeds from term loan borrowings, repaid $5.4 million in term debt and paid dividends of $5.1 million. During 2006, we received $154.6 million in net proceeds from a senior unsecured debt offering and a convertible debt offering, repaid $13.2 million in term debt and paid dividends of $5.0 million. During 2005, we received $169.8 million in net proceeds from a senior unsecured debt offering, repaid $67.7 million in term debt and paid dividends of $3.9 million.
 
All amounts originating in foreign currency have been translated at the August 31, 2007 exchange rate for the following discussion. Senior secured revolving credit facilities aggregated $341.9 million as of August 31, 2007, of which $39.6 million in revolving notes and $4.9 million in letters of credit are outstanding. Available borrowings are generally based on defined levels of inventory, receivables, and leased equipment, as well as total debt to consolidated capitalization and interest coverage ratios which at August 31, 2007 levels would provide for maximum additional borrowing of $225.0 million. A $290.0 million revolving line of credit is available through November 2011 to provide working capital and interim financing of equipment for the United States and Mexican operations. A $1.0 million line of credit is available through November 2011 for Canadian operations. Advances under the U.S. and Canadian facilities bear interest at variable rates that depend on the type of borrowing and the defined ratio of debt to total capitalization. At August 31, 2007, there was $3.9 million in letters of credit outstanding under the United States credit facility. A $1.0 million letter of credit was outstanding under the Canadian credit facility. Lines of credit totaling $50.9 million are available for working capital needs of the European manufacturing operation. These European credit facilities have maturities that range from December 31, 2007 through August 28, 2008. As of August 31, 2007, the European credit facilities had $39.6 million outstanding.
 
In accordance with customary business practices in Europe, we have $21.4 million in bank and third party performance, advance payment and warranty guarantee facilities, all of which has been utilized as of August 31, 2007. To date no amounts have been drawn under these performance, advance payment and warranty guarantees.
 
We have advanced $1.5 million in long-term advances to an unconsolidated subsidiary which are secured by accounts receivable and inventory. As of August 31, 2007, this same unconsolidated subsidiary had $6.5 million in third party debt for which we have guaranteed 33% or approximately $2.2 million.
 
We have outstanding letters of credit aggregating $4.9 million associated with facility leases and payroll.
 
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.
 
Dividends have been paid each quarter since the 4th quarter of 2004 when dividends of $.06 per share were reinstated. The dividend was increased to $.08 per share in the 4th quarter of 2005.
 
We expect existing funds and cash generated from operations, together with proceeds from financing activities including borrowings under existing credit facilities and long-term financing, to be sufficient to fund dividends, working capital needs, planned capital expenditures and expected debt repayments for the foreseeable future.
 
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The following table shows our estimated future contractual cash obligations as of August 31, 2007:
 
                                                         
    Year Ending  
(In thousands)   Total     2008     2009     2010     2011     2012     Thereafter  
Notes payable
  $ 460,915     $ 6,777     $ 9,978     $ 8,240     $ 6,119     $ 3,746     $ 426,055  
Interest
    246,304       30,028       29,407       28,901       28,384       27,967       101,617  
Revolving notes
    39,568       39,568                                
Operating leases
    20,757       7,384       5,381       3,293       2,222       1,364       1,113  
Participation
    5,201       3,879       546       356       272       72       76  
Railcar leases
    12,820       5,368       3,173       2,087       1,532       155       505  
 
    $ 785,565     $ 93,004     $ 48,485     $ 42,877     $ 38,529     $ 33,304     $ 529,366  
 
 
In 1990, we entered into an agreement for the purchase and refurbishment of over 10,000 used railcars between 1990 and 1997. The agreement provides that, under certain conditions, the seller will receive a percentage of defined earnings of a subsidiary, and further defines the period when such payments are to be made. Such amounts, referred to as participation, are accrued when earned, charged to leasing & services cost of revenue, and unpaid amounts are included as participation in the Consolidated Balance Sheets. Participation expense was $2.3 million, $1.7 million and $1.6 million in 2007, 2006 and 2005. Payment of participation was $9.4 million in 2007.
 
 
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.
 
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires judgment on the part of management to arrive at estimates and assumptions on matters that are inherently uncertain. These estimates may affect the amount of assets, liabilities, revenue and expenses reported in the financial statements and accompanying notes and disclosure of contingent assets and liabilities within the financial statements. Estimates and assumptions are periodically evaluated and may be adjusted in future periods. Actual results could differ from those estimates.
 
Income taxes - For financial reporting purposes, income tax expense is estimated based on planned tax return filings. The amounts anticipated to be reported in those filings may change between the time the financial statements are prepared and the time the tax returns are filed. Further, because tax filings are subject to review by taxing authorities, there is also the risk that a position taken in preparation of a tax return may be challenged by a taxing authority. If the taxing authority is successful in asserting a position different than that taken by us, differences in tax expense or between current and deferred tax items may arise in future periods. Such differences, which could have a material impact on our financial statements, would be reflected in the financial statements when management considers them probable of occurring and the amount reasonably estimable. Valuation allowances reduce deferred tax assets to an amount that will more likely than not be realized. Our estimates of the realization of deferred tax 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 inability to predict future maintenance requirements.
 
 
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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 will be evaluated for impairment. If the forecast undiscounted future cash flows is less than the carrying amount of the assets, an impairment charge to reduce the carrying value of the assets to fair value will be recognized in the current period. These estimates are based on the best information available at the time of the impairment and could be materially different if circumstances change.
 
Goodwill and acquired intangible assets - The Company periodically acquires businesses in purchase transactions in which the allocation of the purchase price may result in the recognition of goodwill and other intangible assets. The determination of the value of such intangible assets requires management to make estimates and assumptions. These estimates affect the amount of future period amortization and possible impairment charges.
 
Initial Adoption of Accounting Policies - In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, Accounting Changes and Error Corrections which replaces Accounting Principles Board (APB) opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. This statement requires retrospective application, unless impracticable, for changes in accounting principles in the absence of transition requirements specific to newly adopted accounting principles. This statement is effective for any accounting changes and corrections of errors made by us beginning September 1, 2006.
 
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R). This statement requires the recording of an asset of a defined benefit pension or postretirement plan’s overfunded status or a liability for a plan’s underfunded status in its statement of financial position, and to recognize changes in that funded status through other comprehensive income in the year in which the changes occur. This statement was effective for us for the fiscal year ending August 31, 2007. The statement applies to a termination benefit plan required for Mexican employees. The adoption of this statement did not have a material effect on our financial statements.
 
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Prospective Accounting Changes - In July 2006, the FASB issued FASB interpretation (FIN) No. 48, Accounting for Uncertainties in Income Tax — an Interpretation of FASB Statement No. 109. This interpretation clarifies the accounting for uncertainties in income taxes. It prescribes a recognition and measurement threshold for financial statement disclosure of tax positions taken or expected to be taken on a tax return. This interpretation is effective for us for the fiscal year beginning September 1, 2007. We do not expect the adoption of FIN 48 to have a material impact on its Consolidated Financial Statements.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements. The measurement and disclosure requirements are effective for us for the fiscal year beginning September 1, 2008. We are evaluating if there will be any impact on the Consolidated Financial Statements.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for the Company beginning September 1, 2008. The Company is currently evaluating the impact of the adoption of SFAS No. 159 on its Consolidated Financial Statements.
 
 
From time to time, Greenbrier or its representatives have made or may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, 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. These forward-looking statements rely on a number of assumptions concerning future events. You can identify these forward-looking statements by forward-looking words such as “expect,” “anticipate,” “believe,” “intend,” “plan,” “seek,” “forecast,” “estimate,” “continue,” “may,” “will,” “would,” “could,” “likely” and similar expressions. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond our control and could cause actual results to differ materially from those currently anticipated. Important factors that could cause actual results to differ materially from those currently anticipated or suggested by these forward-looking statements and that could adversely affect our future financial performance and stockholder value are identified in “Risk Factors” and may also include the following:
 
•   continued industry demand at current levels for railcar products;
•   industry overcapacity and our manufacturing capacity utilization;
•   ability to utilize beneficial tax strategies;
•   decreases in carrying value of assets due to impairment;
•   changes in future maintenance requirements;
•   effects of local statutory accounting conventions on compliance with covenants in certain loan agreements;
•   delays in receipt of orders, risks that contracts may be canceled during their term or not renewed and that customers may not purchase as much equipment under existing contracts as anticipated; and
•   ability to replace maturing lease revenue and earnings with revenue and earnings from additions to the lease fleet and management services.
 
Any forward-looking statement should be considered in light of these factors and reflects our belief only at the time the statement is made. We assume no obligation to update or revise any forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting the forward-looking statements.
 
 
 28 The Greenbrier Companies 2007 Annual Report


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We have operations in Mexico, Germany and Poland that conduct business in their local currencies as well as other regional currencies. To mitigate our 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, 2007, no forecast sales 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, 2007, net assets of foreign subsidiaries aggregated $13.4 million and a uniform 10% strengthening of the United States dollar relative to the foreign currencies would result in a decrease in stockholders’ equity of $1.3 million, 0.6% of total stockholders’ equity. This calculation assumes that each exchange rate would change in the same direction relative to the United States dollar.
 
 
We have managed our floating rate debt with interest rate swap agreements, effectively converting $10.6 million of variable rate debt to fixed rate debt. At August 31, 2007, the exposure to interest rate risk is reduced since 71% of our debt has fixed rates and 29% has floating rates. As a result, we are exposed to interest rate risk relating to our revolving debt and a portion of term debt. At August 31, 2007, a uniform 10% increase in interest rates would result in approximately $0.9 million of additional annual interest expense.
 
The Greenbrier Companies 2007 Annual Report 29 


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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                 
YEARS ENDED AUGUST 31,
 
(In thousands, except per share amounts)   2007     2006  
Assets
               
Cash and cash equivalents
  $ 20,808     $ 142,894  
Restricted cash
    2,693       2,056  
Accounts receivable
    157,038       115,565  
Inventories
    194,883       163,151  
Assets held for sale
    42,903       35,216  
Equipment on operating leases
    294,326       301,009  
Investment in direct finance leases
    9,040       6,511  
Property, plant and equipment
    112,813       80,034  
Goodwill
    168,987       2,896  
Intangibles and other assets
    69,258       27,982  
 
    $  1,072,749     $  877,314  
 
                 
Liabilities and Stockholders’ Equity
               
Revolving notes
  $ 39,568     $ 22,429  
Accounts payable and accrued liabilities
    239,713       204,793  
Participation
    4,355       11,453  
Deferred income taxes
    61,410       37,472  
Deferred revenue
    18,052       17,481  
Notes payable
    460,915       362,314  
                 
Subordinated debt
          2,091  
Minority interest
    5,146        
Commitments and contingencies (Notes 25 & 26)
               
                 
Stockholders’ equity:
               
Preferred stock - without par value; 25,000 shares
authorized; none outstanding
           
Common stock - without par value; 50,000 shares authorized; 16,169 and 15,954 outstanding at August 31, 2007 and 2006
    16       16  
Additional paid-in capital
    78,332       71,124  
Retained earnings
    165,408       148,542  
Accumulated other comprehensive loss
    (166 )     (401 )
 
      243,590       219,281  
 
    $ 1,072,749     $ 877,314  
 
The accompanying notes are an integral part of these financial statements.
 
 
 30 The Greenbrier Companies 2007 Annual Report


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Consolidated Statements of Operations
                         
YEARS ENDED AUGUST 31,
 
(In thousands, except per share amounts)   2007     2006     2005  
Revenue
                       
Manufacturing
  $ 738,424     $  748,818     $ 844,496  
Refurbishment & parts
    381,670       102,471       96,665  
Leasing & services
    103,734       102,534       83,061  
 
      1,223,828       953,823        1,024,222  
Cost of revenue
                       
Manufacturing
    680,908       666,731       771,743  
Refurbishment & parts
    317,669       87,690       86,207  
Leasing & services
    45,818       42,023       41,099  
 
       1,044,395       796,444       899,049  
Margin
    179,433       157,379       125,173  
Other costs
                       
Selling and administrative
    83,414       70,918       57,425  
Interest and foreign exchange
    39,915       25,396       14,835  
Special charges
    21,899             2,913  
 
      145,228       96,314       75,173  
Earnings before income tax, minority interest and equity in unconsolidated subsidiaries
    34,205       61,065       50,000  
Income tax expense
    (13,657 )     (21,698 )     (19,911 )
 
Earnings before minority interest and equity in unconsolidated subsidiaries
    20,548       39,367       30,089  
Minority interest
    1,504              
Equity in earnings (loss) of unconsolidated subsidiaries
    (42 )     169       (267 )
 
Earnings from continuing operations
    22,010       39,536       29,822  
Earnings from discontinued operations (net of tax)
          62        
 
Net earnings
  $ 22,010     $ 39,598     $ 29,822  
 
                         
Basic earnings per common share:
                       
Continuing operations
  $ 1.37     $ 2.51     $ 1.99  
Discontinued operations
                 
 
    $ 1.37     $ 2.51     $ 1.99  
 
                         
Diluted earnings per common share:
                       
Continuing operations
  $ 1.37     $ 2.48     $ 1.92  
Discontinued operations
                 
 
    $ 1.37     $ 2.48     $ 1.92  
 
Weighted average common shares:
                       
Basic
    16,056       15,751       15,000  
Diluted
    16,094       15,937       15,560  
The accompanying notes are an integral part of these financial statements.
 
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Consolidated Statements of Stockholders’ Equity
and Comprehensive Income (Loss)
 
                                                 
                            Accumulated
       
                Additional
          Other
    Total
 
    Common Stock     Paid-In
    Retained
    Comprehensive
    Stockholders’
 
(In thousands, except per share amounts)   Shares     Amount     Capital     Earnings     Income (loss)     Equity  
Balance September 1, 2004
    14,884     $ 15     $ 57,165     $ 88,054     $ (5,945 )   $ 139,289  
Net earnings
                      29,822             29,822  
Translation adjustment (net of tax effect)
                            2,653       2,653  
Reclassification of derivative financial instruments recognized in net earnings (net of tax effect)
                            (2,355 )     (2,355 )
Unrealized gain on derivative financial instruments (net of tax effect)
                            4,936       4,936  
                                                 
Comprehensive income
                                            35,056  
Net proceeds from equity offering
    5,175       5       127,457                   127,462  
Shares repurchased
    (5,342 )     (5 )     (127,533 )                 (127,538 )
Cash dividends ($0.26 per share)
                      (3,889 )           (3,889 )
Restricted stock awards
    353             10,221                   10,221  
Unamortized restricted stock
                (9,980 )                 (9,980 )
Stock options exercised
    409             3,045                   3,045  
Tax benefit of stock options exercised
                2,393                   2,393  
 
Balance August 31, 2005
    15,479       15       62,768       113,987       (711 )     176,059  
Net earnings
                      39,598             39,598  
Translation adjustment (net of tax effect)
                            1,570       1,570  
Reclassification of derivative financial instruments recognized in net earnings (net of tax effect)
                            (2,566 )     (2,566 )
Unrealized gain on derivative financial instruments (net of tax effect)
                            1,306       1,306  
                                                 
Comprehensive income
                                            39,908  
Cash dividends ($0.32 per share)
                      (5,043 )           (5,043 )
Restricted stock awards
    72             2,179                   2,179  
Unamortized restricted stock
                (1,914 )                 (1,914 )
Restricted stock amortization
                2,550                   2,550  
Stock options exercised
    403       1       2,941                   2,942  
Excess tax benefit of stock options exercised
                2,600                   2,600  
 
Balance August 31, 2006
    15,954       16       71,124       148,542       (401 )     219,281  
Net earnings
                      22,010             22,010  
Translation adjustment (net of tax effect)
                            771       771  
Reclassification of derivative financial instruments recognized in net earnings (net of tax effect)
                            (521 )     (521 )
Unrealized gain on derivative financial instruments (net of tax effect)
                            301       301  
                                                 
Comprehensive income
                                            22,561  
Adjustment to apply SFAS 158 (net of tax effect)
                            (316 )     (316 )
Cash dividends ($0.32 per share)
                      (5,144 )           (5,144 )
Restricted stock awards
    182             4,009                   4,009  
Unamortized restricted stock
                (4,009 )                 (4,009 )
Restricted stock amortization
                3,285                   3,285  
Stock options exercised
    33             204                   204  
Excess tax benefit of stock options exercised
                3,719                   3,719  
 
Balance August 31, 2007
    16,169     $ 16     $ 78,332     $ 165,408     $ (166 )   $ 243,590  
 
The accompanying notes are an integral part of these financial statements.
 
 
 32 The Greenbrier Companies 2007 Annual Report


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Consolidated Statements of Cash Flows
YEARS ENDED AUGUST 31,
                         
(In thousands)   2007     2006     2005  
Cash flows from operating activities:
                       
Net earnings
  $ 22,010     $ 39,598     $ 29,822  
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
                       
Earnings from discontinued operations
          (62 )      
Deferred income taxes
    10,643       5,893       5,807  
Tax benefit of stock options exercised
                2,393  
Depreciation and amortization
    32,826       25,253       22,939  
Gain on sales of equipment
    (13,400 )     (10,948 )     (6,797 )
Special charges
    21,899              
Other
    (1,399 )     278       651  
Decrease (increase) in assets excluding acquisitions:
                       
Accounts receivable
    (17,883 )     8,948       (32,328 )
Inventories
    14,260       (37,517 )     15,403  
Assets held for sale
    4,378       156       (38,495 )
Other
    (411 )     2,577       (5,167 )
Increase (decrease) in liabilities excluding acquisitions:
                       
Accounts payable and accrued liabilities
    (17,502 )     5,487       3  
Participation
    (7,098 )     (10,447 )     (15,207 )
Deferred revenue
    (1,996 )     10,326       4,285  
 
Net cash provided by (used in) operating activities
    46,327       39,542       (16,691 )
 
Cash flows from investing activities:
                       
Principal payments received under direct finance leases
    511       2,048       5,733  
Proceeds from sales of equipment
    119,695       28,863       32,528  
Investment in and net advances to unconsolidated subsidiaries
    (849 )     550       92  
Acquisitions, net of cash acquired
    (268,184 )            
Acquisition of joint venture interest
                8,435  
Decrease (increase) in restricted cash
    (454 )     (1,958 )     1,007  
Capital expenditures
    (137,294 )     (140,569 )     (69,123 )
 
Net cash used in investing activities
    (286,575 )     (111,066 )     (21,328 )
 
Cash flows from financing activities:
                       
Changes in revolving notes
    15,007       8,965       2,514  
Proceeds from issuance of notes payable
    99,441       154,567       169,752  
Repayments of notes payable
    (5,388 )     (13,191 )     (67,691 )
Repayment of subordinated debt
    (2,091 )     (6,526 )     (6,325 )
Investment by joint venture partner
    6,750              
Dividends paid
    (5,144 )     (5,042 )     (3,889 )
Net proceeds from equity offering
                127,462  
Repurchase and retirement of stock
                (127,538 )
Stock options and restricted stock awards exercised
    3,489       5,757       3,286  
Excess tax benefit of stock options exercised
    3,719       2,600        
Purchase of subsidiary’s shares subject to mandatory redemption
          (4,636 )      
 
Net cash provided by financing activities
    115,783       142,494       97,571  
 
Effect of exchange rate changes
    2,379       (1,280 )     1,542  
Increase (decrease) in cash and cash equivalents
    (122,086 )     69,690       61,094  
Cash and cash equivalents
                       
Beginning of period
    142,894       73,204       12,110  
 
End of period
  $ 20,808     $ 142,894     $ 73,204  
 
Cash paid during the period for:
                       
                         
Interest
  $ 33,714     $ 24,406     $ 10,187  
Income taxes
  $ 2,985     $ 21,256     $ 12,287  
Non-cash activity
                       
Transfer of railcars held for sale to equipment on operating leases
  $     $ 23,955     $  
Supplemental disclosure of non-cash activity:
                       
Assumption of Rail Car America capital lease obligation
  $ 229     $     $  
Supplemental disclosure of subsidiary acquired
                       
Assets acquired
  $ (330,459 )   $     $ (27,486 )
Liabilities assumed
    56,144             10,529  
Acquisition note payable
    3,000             9,000  
Cash acquired
    3,131             8,435  
Investment previously recorded for unconsolidated joint venture
                7,957  
 
Acquisitions, net of cash acquired
  $ (268,184 )   $     $ 8,435  
 
The accompanying notes are an integral part of these financial statements.
 
The Greenbrier Companies 2007 Annual Report 33 


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Notes to Consolidated Financial Statements
 
 
The Greenbrier Companies, Inc. and Subsidiaries (Greenbrier or the Company) currently operates in three primary business segments: manufacturing, refurbishment & parts and leasing & services. The three business segments are operationally integrated. With operations in the United States, Canada, Mexico and Europe, the manufacturing segment produces double-stack intermodal railcars, conventional railcars, tank cars and marine vessels. The Company may also manufacture new freight cars through the use of unaffiliated subcontractors. The 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 9,000 railcars and provides management services for approximately 136,000 railcars for railroads, shippers, carriers 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 significant 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, 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 stockholders’ equity in other comprehensive income (loss), net of tax.
 
Cash and cash equivalents - Cash is temporarily invested primarily in bankers’ acceptances, United States Treasury bills, commercial paper and 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 primarily cash assigned as collateral for European performance guarantees.
 
Accounts Receivable - Accounts receivable are stated net of allowance for doubtful accounts of $3.9 million and $3.1 million as of August 31, 2007 and 2006.
 
Inventories - Inventories are generally valued at the lower of cost (first-in, first-out) or market. Work-in-process includes material, labor and overhead.
 
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, placed on lease and then sold, finished goods and completed wheel sets.
 
Equipment on operating leases - Equipment on operating leases is stated at cost. Depreciation to estimated salvage value is provided on the straight-line method over the estimated useful lives of up to thirty-five years.
 
 
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Property, plant and equipment - Property, plant and equipment is stated at cost. Depreciation is provided on the straight-line method over estimated useful lives which are as follows:
 
         
    Depreciable Life  
 
Buildings and improvements
    10-25 years  
Machinery and equipment
    3-15 years  
Other
    3-7 years  
 
Goodwill - Goodwill is recorded when the purchase price of an acquisition exceeds the fair market value of the 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.
 
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, tradenames, certifications and backlog. Intangible assets with finite lives are amortized using the straight line method over their estimated useful lives. 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 will be 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 will be recognized in the current period.
 
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. All existing rental assistance agreements were entered into prior to December 31, 2002. Any future contracts would use the guidance required by Financial Accounting Standards Board (FASB) Interpretation (FIN) 45.
 
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 realized. The Company also provides for income tax contingencies when management considers them probable of occurring and reasonably estimable.
 
Minority interest - In October 2006, the Company formed a joint venture with Grupo Industrial Monclova (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% ownership. 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 minority
 
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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. 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 been significant from the estimate.
 
Research and development - Research and development costs are expensed as incurred. Research and development costs incurred for new product development during 2007, 2006 and 2005 were $2.4 million, $2.2 million and $1.9 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 earnings concurrent with the hedged transaction or when the occurrence of the hedged transaction is no longer considered probable. Even though forward exchange contracts are entered into to mitigate the impact of currency fluctuations, certain exposure remains, which may affect operating results.
 
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, while diluted EPS takes this potential dilution into account using the treasury stock method.
 
Stock-based compensation - Prior to the adoption of SFAS 123R on September 1, 2005, compensation expense for employee stock options was measured using the method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. In accordance with APB Opinion No. 25, Greenbrier did not recognize compensation expense for employee stock options because options were only granted with an exercise price equal to the fair value of the
 
 
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stock on the effective date of grant. If the Company had elected to recognize compensation expense using a fair value approach, the pro forma net earnings and earnings per share would have been as follows:
 
         
(In thousands, except per share amounts)   2005  
Net earnings, as reported
  $ 29,822  
Total stock-based employee compensation expense
determined under fair value based method for all awards, net of tax(1)
    (235 )
         
Net earnings, pro forma
  $ 29,587  
         
Basic earnings per share
As reported
  $ 1.99  
         
Pro forma
  $ 1.97  
         
Diluted earnings per share
As reported
  $ 1.92  
         
Pro forma
  $ 1.90  
         
(1) Compensation expense was determined using the Black-Scholes-Merton option-pricing model which was developed to estimate value of independently traded options. Greenbrier’s options are not independently traded.
 
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, 2007 and 2006.
 
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 2007, 2006 and 2005 was $3.1 million, $2.7 million and $0.2 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.
 
Reclassifications - Certain reclassifications have been made to prior years’ Consolidated Financial Statements to conform to the 2007 presentation. These reclassifications consist of the inclusion of a new reporting segment for the Statement of Operations and the break-out of goodwill to a separate line on the Balance Sheet.
 
Initial Adoption of Accounting Policies - In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, Accounting Changes and Error Corrections which replaces Accounting Principles Board (APB) opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. This statement requires retrospective application, unless impracticable, for changes in accounting principles in the absence of transition requirements specific to newly adopted accounting principles. This statement is effective for any accounting changes and corrections of errors made by the Company beginning September 1, 2006.
 
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R). This statement requires the recording of an asset of a defined benefit pension or postretirement plan’s overfunded status or a liability for a plan’s underfunded status in its statement of financial position, and to recognize changes in that funded status through other comprehensive income in the year in which the changes occur. This statement was effective for us for the fiscal year ending August 31, 2007. The statement applies to a termination benefit plan required for Mexican employees. The adoption of this statement did not have a material effect on our financial statements.
 
Prospective Accounting Changes - In July 2006, the FASB issued FASB interpretation (FIN) No. 48, Accounting for Uncertainties in Income Tax - an Interpretation of FASB Statement No. 109. This interpretation clarifies the accounting for uncertainties in income taxes. It prescribes a recognition and measurement threshold for financial
 
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statement disclosure of tax positions taken or expected to be taken on a tax return. This interpretation is effective for the Company for the fiscal year beginning September 1, 2007. The Company does not expect the adoption of FIN 48 to have a material impact on its Consolidated Financial Statements.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements. The measurement and disclosure requirements are effective for the Company for the fiscal year beginning September 1, 2008. Management is evaluating if there will be any impact on the Consolidated Financial Statements.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for the Company beginning September 1, 2008. The Company is currently evaluating the impact of the adoption of SFAS No. 159 on its Consolidated Financial Statements.
 
Note 3 - Acquisitions
 
Fiscal 2007
 
Rail Car America
 
On September 11, 2006, the Company purchased substantially all of the operating assets of Rail Car America (RCA), its American Hydraulics division and the assets of its wholly owned subsidiary, Brandon Corp. RCA, a provider of intermodal and conventional railcar repair services in North America, operates from four repair facilities in the United States. RCA also reconditions and repairs end-of-railcar cushioning units through its American Hydraulics division and operates a switching line in Nebraska through Brandon Corp. The purchase price of the net assets included $29.1 million of cash and a $3.0 million promissory note due in September 2008. The financial results of these operations since the acquisition are reported in the Company’s consolidated financial statements as part of the refurbishment & parts segment. The impact of this acquisition was not material to the Company’s consolidated results of operations; therefore, pro forma financial information has not been included.
 
The fair value of the net assets acquired from RCA was as follows:
 
         
(In thousands)      
Accounts receivable
  $ 628  
Inventories
    7,830  
Property, plant and equipment
    22,053  
Intangibles and other
    4,102  
         
Total assets acquired
    34,613  
         
Accounts payable and accrued liabilities
    2,235  
Notes Payable
    229  
         
Total liabilities assumed
    2,464  
         
Net assets acquired
  $  32,149  
         
 
Meridian Rail Holdings Corp.  
 
On November 6, 2006, the Company acquired 100% of the stock of Meridian Rail Holdings Corp. (Meridian) for $237.9 million in cash which includes the purchase price of $227.5 million plus working capital adjustments. Meridian is a leading supplier of wheel maintenance services to the North American freight car industry. Operating out of six facilities, Meridian supplies replacement wheel sets and axles to approximately 170 freight car maintenance locations where worn or damaged wheels, axles, or bearings are reconditioned or replaced. Meridian also performs coupler reconditioning and railcar repair at other facilities. The financial results since the acquisition are reported in the Company’s consolidated financial statements as part of the refurbishment & parts segment.
 
 
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The allocation of the purchase price among certain assets and liabilities is still in process. As a result, the information shown below is preliminary and subject to further refinement upon completion of analyses and valuations.
 
The preliminary fair value of the net assets acquired in the Meridian acquisition was as follows:
 
         
(In thousands)      
Cash and cash equivalents
  $ 3,053  
Accounts receivable
    20,221  
Inventories
    52,895  
Property, plant and equipment
    14,473  
Goodwill
    163,669  
Intangibles and other
    36,991  
 
Total assets acquired
    291,302  
 
Accounts payable and accrued liabilities
    40,013  
Deferred income taxes
    13,404  
 
Total liabilities assumed
    53,417  
 
Net assets acquired
  $  237,885  
 
 
As a result of the preliminary allocation of the purchase price among assets and liabilities, $163.7 million in goodwill was recorded in the consolidated financial statements.
 
The unaudited pro forma financial information presented below has been prepared to illustrate Greenbrier’s consolidated results had the acquisition of Meridian occurred at the beginning of each period presented:
 
                         
(In thousands, except per share amounts)   2007     2006     2005  
Revenue
  $  1,270,234     $  1,176,933     $  1,255,010  
Net earnings
  $ 28,108     $ 57,345     $ 37,714  
Basic earnings per share
  $ 1.75     $ 3.64     $ 2.51  
Diluted earnings per share
  $ 1.75     $ 3.60     $ 2.42  
 
This unaudited pro forma financial information is not necessarily indicative of what actual results would have been had the transaction occurred at the beginning of the fiscal year, and may not be indicative of the results of future operations of the Company.
 
Other Acquisitions
 
In April 2007, the Company acquired a leasing services operation for $4.3 million whose operations were not material to the Company’s consolidated results of operations; therefore, pro forma financial information has not been included. As a result of the preliminary allocation of purchase price among assets and liabilities, $3.1 million in goodwill was recorded. The allocation of the purchase price among certain assets and liabilities is still in process. As a result, the allocation is preliminary and subject to further refinement upon completion of analyses and valuations.
 
Fiscal 2005
 
Concarril
 
In September 1998, Greenbrier entered into a joint venture with Bombardier Transportation (Bombardier) to build railroad freight cars at a portion of Bombardier’s existing manufacturing facility in Sahagun, Mexico. Each party held a 50% non-controlling interest in the joint venture. In December 2004, Greenbrier acquired Bombardier’s interest for a purchase price of $9.0 million payable over five years. As a result of the allocation of the purchase price among assets and liabilities, $1.3 million in goodwill was recorded. Greenbrier leases a portion of the plant
 
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from Bombardier and has entered into a service agreement under which Bombardier provides labor and other services. These operations, previously accounted for under the equity method, were consolidated for financial reporting purposes beginning in December 2004.
 
The following unaudited pro forma financial information for the year ended August 31, 2005 was prepared as if the transaction to acquire Bombardier’s equity in the Mexican operations had occurred at the beginning of the period presented:
 
         
(In thousands, except per share amounts)   2005  
Revenue
  $  1,052,014  
Net earnings
  $ 28,633  
Basic earnings per share
  $ 1.91  
Diluted earnings per share
  $ 1.84  
 
The unaudited pro forma financial information is not necessarily indicative of what actual results would have been had the transaction occurred at the beginning of the period.
 
Note 4 - Discontinued Operations
 
In 2006, the Company recorded $0.1 million (net of tax) in income from discontinued operations resulting from the reversal of the remaining contingent liability associated with litigation settled in August 2004 on the transportation logistics segment that was disposed of in 1998.
 
 
The Company’s Canadian railcar manufacturing facility had been incurring operating losses as a result of high labor costs, manufacturing inefficiencies, transportation costs associated with a remote location and a strong Canadian currency coupled with a weakening of the market for the primary railcars produced by this entity. These factors caused management to reassess the value of the assets of this facility in accordance with the Company’s policy on impairment of long-lived assets. Based on an analysis of future undiscounted cash flows associated with these assets, management determined that the carrying value of the assets exceeded their fair market value. Accordingly a $16.5 million impairment charge was recorded in February 2007 as a special charge on the Consolidated Statement of Operations. In April 2007, the Company’s board of directors approved the permanent closure of this facility. As a result of the asset impairment and subsequent facility closure decision, aggregate special charges of $21.9 million were recorded during 2007 consisting of $14.2 million of impairment of property, plant and equipment, $2.1 million of inventory impairment, $1.1 million impairment of goodwill and other, $3.9 million of severance costs and $0.6 million of professional and other fees associated with the closure. We are actively marketing the assets and the disposition of the facility is expected to be completed by the end of 2008.
 
The results of operations for the year ended August 31, 2005 include special charges of $2.9 million for debt prepayments penalties and costs associated with settlement of interest rate swap agreements on $55.7 million in notes payable that were refinanced through a $175.0 million senior unsecured note offering.
 
 
                 
(In thousands)   2007     2006  
Manufacturing supplies and raw materials
  $  111,957     $ 49,631  
Work-in-process
    86,733       118,555  
Lower cost or market adjustment
    (3,807 )     (5,035 )
                 
    $ 194,883     $  163,151  
                 
 
 
 
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(In thousands)   2007     2006     2005  
Lower of cost or market adjustment
                       
Balance at beginning of period
  $ 5,035     $  3,592     $ 3,811  
Charge to cost of revenue
    5,092       1,976       1,398  
Disposition of inventory
     (6,667 )     (670 )      (2,055 )
Currency translation effect
    347       137       258  
Acquisition
                180  
                         
Balance at end of period
  $ 3,807     $ 5,035     $ 3,592  
                         
 
 
                 
(In thousands)   2007     2006  
Railcars held for sale
  $  12,922     $  31,001  
Railcars in transit to customer
    8,958       4,215  
Finished goods - parts
    21,023        
                 
    $ 42,903     $ 35,216  
                 
 
 
                 
(In thousands)   2007     2006  
Future minimum receipts on lease contracts
  $ 18,212     $  12,792  
Maintenance, insurance, and taxes
     (1,382 )     (709 )
                 
Net minimum lease receipts
    16,830       12,083  
Estimated residual values
    1,687       2,049  
Unearned finance charges
    (9,477 )     (7,621 )
                 
    $ 9,040     $ 6,511  
                 
 
Future minimum receipts on the direct finance lease contracts are as follows:
 
         
(In thousands)      
Year ending August 31,
       
2008
  $ 2,170  
2009
    2,067  
2010
    2,051  
2011
    2,051  
2012
    2,051  
Thereafter
    7,822  
         
    $  18,212  
         
 
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Equipment on operating leases is reported net of accumulated depreciation of $74.5 million and $75.3 million as of August 31, 2007 and 2006. In addition, certain railcar equipment leased-in by the Company (see Note 25) 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,
       
2008
  $ 31,497  
2009
    22,944  
2010
    20,237  
2011
    16,660  
2012
    11,861  
Thereafter
    25,076  
         
    $  128,275  
         
 
Certain equipment is also operated under daily, monthly or car hire arrangements. Associated revenue amounted to $25.9 million, $28.6 million and $28.0 million for the years ended August 31, 2007, 2006 and 2005.
 
 
                 
(In thousands)   2007     2006  
Land and improvements
  $ 19,118     $ 10,386  
Machinery and equipment
    148,578       120,918  
Buildings and improvements
    82,904       61,524  
Other
    25,055       14,642  
                 
      275,655       207,470  
Accumulated depreciation
     (162,842 )      (127,436 )
                 
    $ 112,813     $ 80,034  
                 
 
 
Changes in the carrying value of goodwill for the year ended August 31, 2007 are as follows:
 
                                 
          Refurbishment &
    Leasing &
       
(In thousands)   Manufacturing     Parts     Services     Total  
Balance beginning of period
  $  1,922     $ 974     $     $ 2,896  
Additions
           163,669        3,057        166,726  
Impairment
    (635 )                 (635 )
                                 
Balance August 31, 2007
  $ 1,287     $ 164,643     $ 3,057     $ 168,987  
                                 
 
During the year ended August 31, 2007, $166.7 million in goodwill was generated from acquisitions as discussed in Note 3. An impairment charge, recorded in February 2007, discussed in Note 5 included the write-off of $0.6 million in goodwill.
 
During the third quarter of fiscal 2007 the Company completed its annual review of goodwill and concluded that the remaining goodwill was not impaired.
 
 
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In June 2003, the Company acquired a 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 other assets on the Consolidated Balance Sheets.
 
Summarized financial data for the castings joint venture is as follows:
 
                 
(In thousands)   2007     2006  
Current assets
  $  10,869     $  14,198  
Total assets
  $ 27,060     $ 30,418  
Current liabilities
  $ 9,932     $ 13,983  
Equity
  $ 10,501     $ 7,719  
 
                         
(In thousands)   2007   2006   2005
Revenue
  $  80,101     $  123,086     $  109,801  
Net earnings (loss)
  $ (217 )   $ 857     $ 1,942  
 
In December 2004, Greenbrier acquired Bombardier’s interest in our Mexican railcar manufacturing joint venture in Sahagun, Mexico, previously accounted for under the equity method. Greenbrier’s share of the operating results through November 2004 is included as equity in loss of unconsolidated subsidiaries in the Consolidated Statements of Operations. Financial results of the Mexican operations are consolidated for financial reporting purposes beginning December 1, 2004.
 
Summarized financial data for this joint venture is as follows:
 
         
    Three Months Ended
(In thousands)   November 30, 2004
Revenue
  $  30,067  
Net Loss
  $  (1,576 )
 
Greenbrier has purchased railcars from the Sahagun, Mexico joint venture for subsequent sale or for its lease fleet for which the Company’s portion of margin was eliminated upon consolidation. In addition, the joint venture paid a management fee to each owner, of which 50% of the fee earned by Greenbrier was eliminated upon consolidation.
 
 
All amounts originating in foreign currency have been translated at the August 31, 2007 exchange rate for the following discussion. Senior secured revolving credit facilities aggregated $341.9 million as of August 31, 2007, of which $39.6 million in revolving notes and $4.9 million in letters of credit are outstanding. Available borrowings are generally based on defined levels of inventory, receivables, and leased equipment, as well as total debt to consolidated capitalization and interest coverage ratios which at August 31, 2007 levels would provide for maximum additional borrowing of $225.0 million. A $290.0 million revolving line of credit is available through November 2011 to provide working capital and interim financing of equipment for the United States and Mexican operations. A $1.0 million line of credit is available through November 2011 for Canadian operations. Advances under the U.S. and Canadian facilities bear interest at variable rates that depend on the type of borrowing and the defined ratio of debt to total capitalization. At August 31, 2007, there was $3.9 million in letters of credit outstanding under the United States credit facility and a $1.0 million letter of credit outstanding under the Canadian credit facility. Lines of credit totaling $50.9 million are available for working capital needs of the European manufacturing operation. These European credit facilities have maturities that range from December 31, 2007 through August 28, 2008. As of August 31, 2007, the European credit facilities had $39.6 million outstanding.
 
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(In thousands)   2007     2006  
Trade payables
  $  164,060     $  141,380  
Accrued maintenance
    20,498       22,985  
Accrued payroll and related liabilities
    31,034       24,525  
Accrued warranty
    15,911       14,201  
Other
    8,210       1,702  
                 
    $ 239,713     $ 204,793  
                 
 
 
                         
(In thousands)   2007     2006     2005  
Accrued maintenance
                       
Balance at beginning of period
  $ 22,985     $ 25,464     $ 21,264  
Charged to cost of revenue
    18,268       16,210       20,152  
Payments
     (20,755 )      (18,689 )      (15,952 )
                         
Balance at end of period
  $ 20,498     $ 22,985     $ 25,464  
                         
Accrued warranty
                       
Balance at beginning of period
  $ 14,201     $ 15,037     $ 12,691  
Charged to cost of revenue
    2,585       3,111       4,664  
Payments
     (3,545 )      (4,492 )      (3,297 )
Currency translation effect
    596       545       811  
Acquisition
    2,074             168  
                         
Balance at end of period
  $ 15,911     $ 14,201     $ 15,037  
                         
 
 
                 
(In thousands)   2007     2006  
Senior unsecured notes
  $  235,000     $  235,000  
Convertible senior notes
    100,000       100,000  
Term loans
    125,814       27,314  
Other notes payable
    101        
                 
    $ 460,915     $ 362,314  
                 
 
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 semiannually in arrears on May 15th and November 15th. The Company will also pay contingent interest 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 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
 
 
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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.
 
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. Other term loans are due in varying installments through August 2017 and are principally unsecured. As of August 31, 2007, the effective interest rates on the term loans ranged from 4.4% to 8.4%.
 
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; enter into sale leaseback transactions; create liens; sell assets; engage in transactions with affiliates; 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 minimum levels of tangible net worth, maximum ratios of debt to equity or total capitalization and minimum levels of interest coverage.
 
Interest rate swap agreements are utilized to reduce the impact of changes in interest rates on certain term loans. At August 31, 2007, such agreements had a notional amount of $10.6 million and mature in March 2011.
 
Principal payments on the notes payable are as follows:
 
         
(In thousands)      
Year ending August 31,
       
2008
  $ 6,777  
2009
    9,978  
2010
    8,240  
2011
    6,119  
2012
    3,746  
Thereafter
     426,055  
         
    $ 460,915  
         
 
 
Foreign operations give rise to market risks from changes in foreign currency exchange rates. Foreign currency forward exchange contracts with established financial institutions are utilized to hedge a portion of that risk. Interest rate swap agreements are 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 income (loss). As of August 31, 2007 there were no cash flow forward exchange contracts outstanding.
 
At August 31, 2007 exchange rates, interest rate swap agreements had a notional amount of $10.6 million and mature in March 2011. The fair value of these cash flow hedges at August 31, 2007 resulted in an unrealized pre-tax loss of $0.4 million. The loss is included in accumulated other comprehensive income (loss) and the fair value of the contracts 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 swaps are reclassified from accumulated other comprehensive income (loss) and charged or credited to interest expense. At August 31, 2007 interest rates; approximately $0.1 million would be reclassified to interest expense in the next 12 months.
 
 
On May 11, 2005, the Company issued 5,175,000 shares of its common stock at a price of $26.50 per share, less underwriting commissions, discounts and expenses. Proceeds were used to purchase 3,504,167 shares from the estate of Alan James, former member of the board of directors, and 1,837,500 shares from William Furman, President and Chief Executive Officer.
 
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On April 6, 1999, the Company adopted the Stock Incentive Plan — 2000 (the 2000 Plan), under which 1,000,000 shares of common stock were made available for issuance with respect to options granted to employees, non-employee directors and consultants of the Company. The 2000 Plan authorized the grant of incentive stock options, non-statutory stock options, and restricted stock awards, or any combination of the foregoing. Under the 2000 Plan, the exercise price for incentive stock options could not be less than the market value of the Company’s common stock at the time the option is granted. Grants for 2,500 shares remain available under this plan. In 2005, vesting was accelerated on all outstanding options on this plan in an effort to reduce administrative expenses associated with the implementation of FASB 123R as the remaining unvested portion of options was immaterial and no further options were expected to be issued. If the vesting of the options had not been accelerated, the impact to the Company’s Statement of Operations would be minimal in 2007 and an additional expense of $0.1 million in 2006 with an after-tax impact of $0.004 per share.
 
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. During 2007, 2006 and 2005, the Company awarded restricted stock grants totaling 207,592, 70,820 and 353,864 shares under the 2005 Stock Incentive Plan.
 
The following table summarizes stock option transactions for shares under option and the related weighted average option price:
 
                 
          Weighted
 
          Average
 
          Option
 
    Shares     Price  
Balance at September 1, 2004
    884,250     $  7.35  
Exercised
    (408,930 )     7.48  
Expired
    (2,500 )     8.75  
                 
Balance at August 31, 2005
    472,820       7.24  
Exercised
    (403,424 )     7.29  
                 
Balance at August 31, 2006
    69,396       6.96  
Exercised
    (32,736 )     6.24  
                 
Balance at August 31, 2007
    36,660     $ 7.60  
                 
 
At August 31, 2007 options outstanding have exercise prices ranging from $4.36 to $9.19 per share, have a remaining average contractual life of 1.8 years and options to purchase 36,660 shares were exercisable. On August 31, 2007, 2006 and 2005, 695,224, 877,816 and 948,636 shares were available for grant.
 
 
The shares used in the computation of the Company’s basic and diluted earnings per common share are reconciled as follows:
 
                         
(In thousands)   2007     2006     2005  
Weighted average basic common shares outstanding
    16,056       15,751       15,000  
Dilutive effect of employee stock options
    38       186       560  
                         
Weighted average diluted common shares outstanding
    16,094       15,937       15,560  
                         
 
Weighted average diluted common shares outstanding include the incremental shares that would be issued upon the assumed exercise of stock options. No options were anti-dilutive the years ended August 31, 2007, 2006 and 2005.
 
 
James-Furman & Company Partnership. Alan James, former member of the Board of Directors, and William Furman, Director, President and Chief Executive Officer of the Company were partners in a general partnership, James-Furman & Company (the Partnership), that, among other things, engaged in the ownership, leasing and
 
 
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marketing of railcars and programs for refurbishing and marketing of used railcars. As a result of Mr. James’s death, the Partnership was dissolved as of January 28, 2005. The Company entered into agreements with the Partnership pursuant to which the Company manages and maintains railcars owned by the Partnership in exchange for a fixed monthly fee that is no less favorable to the Company than the fee the Company could obtain for similar services rendered to unrelated parties. The maintenance and management fees paid to the Company under such agreements for 2007 were minimal and for the years ended August 31, 2006 and 2005 aggregated $0.1 million per year. In addition, the Partnership paid the Company fees of $0.1 million in each of the years ended August 31, 2006 and 2005 for administrative and other services. The disposition of the operating assets of the partnership was completed in 2007. Final distributions are expected to occur during fiscal 2008 at which time all agreements between the Company and the Partnership will be terminated.
 
Aircraft Usage Policy. William Furman, Director, President and Chief Executive Officer of the Company is a part owner of a fleet 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 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.
 
Indebtedness of Management. Since the beginning of our last fiscal year, none of our directors or executive officers has been indebted to us in excess of $60,000 except that L. Clark Wood, former President of the Company’s manufacturing operations was indebted to Greenbrier Leasing Company LLC, and had executed a promissory note. The promissory note was payable upon demand and secured by a mortgage on Mr. Wood’s residence. The note did not bear interest and had not been amended since its issuance in 1994. The largest aggregate amount outstanding during fiscal year 2007 under such promissory note was $100,000 and the note was paid in full during fiscal year 2007.
 
Policy. We follow a policy that all proposed transactions by us with directors, officers, five percent shareholders and their affiliates be entered into only if such transactions are on terms no less favorable to us than could be obtained from unaffiliated parties, are reasonably expected to benefit us and are approved by a majority of the disinterested, independent members of the Board of Directors.
 
Purchases from unconsolidated subsidiaries. The Company purchased railcars totaling $1.0 million for the three months ended November 30, 2004 from a 50%-owned joint venture for subsequent sale or for its own lease fleet. As a result of the acquisition of the Company’s joint venture partner’s interest, the financial results of the entity were consolidated beginning on December 1, 2004.
 
 
Defined contribution plans are available to substantially all United States employees. Contributions are based on a percentage of employee contributions and amounted to $1.6 million, $1.3 million and $1.2 million for the years ended August 31, 2007, 2006 and 2005.
 
Defined benefit pension plans are provided for Canadian employees covered by collective bargaining agreements. The plans provide pension benefits based on years of credited service. Contributions to the plan are actuarially determined and are intended to fund the net periodic pension cost. Expenses resulting from contributions to the plans were $2.4 million, $2.5 million and $2.1 million for the years ended August 31, 2007, 2006 and 2005. Due to the closure of the Canadian facility, the plan will be terminated.
 
Nonqualified deferred benefit plans exist for certain employees. Expenses resulting from contributions to the plans were $1.9 million, $1.8 million and $1.6 million for the years ended August 31, 2007, 2006 and 2005.
 
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.
 
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Mexican labor law also requires the Company 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.
 
Note 22 - Income Taxes
 
Components of income tax expense (benefit) of continuing operations are as follows:
 
                         
(In thousands)   2007     2006     2005  
Current
                       
Federal
  $ 4,025     $ 10,619     $ 15,587  
State
    459       1,175       1,213  
Foreign
    (1,986 )     3,904       328  
 
      2,498       15,698       17,128  
Deferred
                       
Federal
    6,970       9,291       (1,344 )
State
    825       2,193       2,084  
Foreign
    (6,214 )     (5,484 )     2,043  
 
      1,581       6,000       2,783  
 
Change in valuation allowance
    9,578              
 
    $ 13,657     $ 21,698     $ 19,911  
 
 
Income tax expense (benefit) is computed at rates different than statutory rates. The reconciliation between effective and statutory tax rates on continuing operations is as follows:
 
                         
(In thousands)   2007     2006     2005  
Federal statutory rate
    34.0 %     35.0 %     35.0 %
State income taxes, net of federal benefit
    7.7       3.6       4.3  
Impact of foreign operations
    (6.8 )     (8.0 )     (1.0 )
US tax benefit utilized upon write-off of investment in Canadian subsidiary
    (24.1 )            
Change in valuation allowance related to deferred tax asset
    28.0              
Income tax settlement
          4.1        
Other
    1.1       0.8       1.5  
 
      39.9 %     35.5 %     39.8 %
 
 
The Company’s income tax provision included a tax benefit in the amount of $8.2 million and a 24.1% reduction in the effective tax rate related to the permanent closure of the Canadian manufacturing facility. The tax basis of the investment charged to expense was approximately $21 million.
 
 
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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)   2007     2006  
Deferred tax assets:
               
Basis in controlled foreign corporation
  $ (2,518 )   $ (2,518 )
Deferred participation
    (2,265 )     (814 )
Maintenance and warranty accruals
    (8,549 )     (9,733 )
Accrued payroll and related liabilities
    (3,889 )     (4,210 )
Deferred revenue
    (5,450 )     (7,250 )
Inventories and other
    (5,895 )     (4,768 )
Investment and asset tax credits
    (1,018 )     (3,002 )
Net operating loss
    (11,756 )     (949 )
 
       (41,340 )      (33,244 )
Deferred tax liabilities:
               
Fixed assets
    62,707       59,064  
SFAS 133 and translation adjustment
    1,209       1,745  
Intangibles
    13,610        
Other
    7,443       1,705  
 
      84,969       62,514  
 
Valuation allowance
    17,780       8,202  
 
Net deferred tax liability
  $ 61,409     $ 37,472  
 
 
At August 31, 2007, the Company had net operating loss carryforwards of approximately $33.8 million for foreign income tax purposes. The ultimate realization of the deferred tax assets on net operating losses is dependent upon the generation of future taxable income before these carryforwards expire. Net operating losses in Poland expire between 2008 and 2012. Net operating losses in Mexico can be carried forward through 2017 and in Canada through 2027.
 
The cumulative increase in the valuation allowance for the year ended August 31, 2007 was an increase of approximately $9.6 million primarily due to a net operating loss generated in the permanent closure of TrentonWorks Limited. It is more likely than not that these net operating losses generated in the current year and carried forward will not be utilized in the future.
 
The cumulative increase in the deferred tax liability during the fiscal year 2007 includes an increase of approximately $13.4 million due to purchase accounting adjustments related to the purchase of Meridian Rail Holding Corp., an increase of approximately $1.6 million due to ordinary operations and a decrease of approximately $0.6 million due to other miscellaneous items.
 
United States income taxes have not been provided for approximately $9.7 million of cumulative undistributed earnings of certain foreign subsidiaries as Greenbrier plans to reinvest these earnings indefinitely in operations outside the United States.
 
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Note 23 - Segment Information
 
Greenbrier currently operates in three reportable segments: manufacturing, refurbishment & parts and leasing & services. The acquisitions of Meridian and RCA during the first quarter of 2007 resulted in growth of the repair, refurbishment and parts portion of our business to the point that it is reported as a separate segment: refurbishment & parts. The results of this segment were previously aggregated in the manufacturing segment. 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.
 
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)   2007     2006     2005  
Revenue:
                       
Manufacturing
  $ 776,471     $ 820,783     $ 872,965  
Refurbishment & parts
    389,242       106,228       111,496  
Leasing & services
    99,966       121,184       101,426  
Intersegment eliminations
    (41,851 )     (94,372 )     (61,665 )
 
    $  1,223,828     $  953,823     $  1,024,222  
 
Margin:
                       
Manufacturing
  $ 57,516     $ 82,087     $ 72,753  
Refurbishment & parts
    64,001       14,781       10,458  
Leasing & services
    57,916       60,511       41,962  
 
    $ 179,433     $ 157,379     $ 125,173  
 
Assets:
                       
Manufacturing
  $ 297,718     $ 293,754     $ 255,633  
Refurbishment & parts
    400,069       48,340       43,727  
Leasing & services
    349,942       390,270       296,318  
Unallocated
    25,020       144,950       75,529  
 
    $ 1,072,749     $ 877,314     $ 671,207  
 
Depreciation and amortization:
                       
Manufacturing
  $ 10,762     $ 10,258     $ 10,003  
Refurbishment & parts
    9,042       2,360       2,202  
Leasing & services
    13,022       12,635       10,734  
 
    $ 32,826     $ 25,253     $ 22,939  
 
Capital expenditures:
                       
Manufacturing
  $ 20,361     $ 15,121     $ 11,759  
Refurbishment & parts
    5,009       2,906       4,559  
Leasing & services
    111,924       122,542       52,805  
 
    $ 137,294     $ 140,569     $ 69,123  
 
 
 
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The following table summarizes selected geographic information.
 
                         
(In thousands)   2007     2006     2005  
Revenue:
                       
United States
  $  1,054,288     $  846,560     $  875,261  
Foreign
    169,540       107,263       148,961  
                         
    $ 1,223,828     $ 953,823     $ 1,024,222  
                         
Identifiable assets:
                       
United States
  $ 837,239     $ 679,742     $ 516,690  
Canada
    10,350       50,192       48,529  
Mexico
    122,154       80,447       48,291  
Europe
    103,006       66,933       57,697  
                         
    $ 1,072,749     $ 877,314     $ 671,207  
                         
 
Reconciliation of segment margin to earnings before income tax, minority interest and equity in unconsolidated subsidiary:
 
                         
(In thousands)   2007     2006     2005  
Segment margin
  $  179,433     $  157,379     $  125,173  
Less unallocated expenses:
                       
Selling and administrative
    83,414       70,918       57,425  
Interest and foreign exchange
    39,915       25,396       14,835  
Special charges
    21,899             2,913  
                         
Earnings before income tax expense, minority interest
and equity in unconsolidated subsidiary
  $ 34,205     $ 61,065     $ 50,000  
                         
 
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In 2007, revenue from one customer was 21% of total revenue. Revenue from two customers was 29% and 17% of total revenue for the year ended August 31, 2006 and revenue from one customer was 44% of total revenues for the year ended August 31, 2005. No other customers accounted for more than 10% of total revenues in 2007, 2006, or 2005. Two customers had balances that individually equaled or exceeded 10% of accounts receivable and in total represented 32% of the consolidated balance at August 31, 2007.
 
 
Lease expense for railcar equipment leased in under non-cancelable leases was $7.0 million, $6.7 million and $6.7 million for the years ended August 31, 2007, 2006 and 2005. Aggregate minimum future amounts payable under these non-cancelable railcar equipment leases are as follows:
 
         
(In thousands)      
Year ending August 31,
       
2008
  $ 5,368  
2009
    3,173  
2010
    2,087  
2011
    1,532  
2012
    155  
Thereafter
    505  
         
    $  12,820  
         
 
Operating leases for domestic railcar repair facilities, office space and certain manufacturing and office equipment expire at various dates through April 2015. Rental expense for facilities, office space and equipment was $8.7 million, $6.8 million and $4.0 million for the years ended August 31, 2007, 2006 and 2005. Aggregate minimum future amounts payable under these non-cancelable operating leases are as follows:
 
         
(In thousands)      
Year ending August 31,
       
2008
  $ 7,384  
2009
    5,381  
2010
    3,293  
2011
    2,222  
2012
    1,364  
Thereafter
    1,113  
         
    $  20,757  
         
 
 
In 1990, an agreement was entered into for the purchase and refurbishment of over 10,000 used railcars between 1990 and 1997. The agreement provides that, under certain conditions, the seller will receive a percentage of defined earnings of a subsidiary, and further defines the period when such payments are to be made. Such amounts are referred to as participation, are accrued when earned and charged to leasing & services cost of revenue. Unpaid amounts are included in participation in the Consolidated Balance Sheets. Participation expense was $2.3 million, $1.7 million and $1.6 million in 2007, 2006 and 2005. Payment of participation was $9.4 million in 2007 and is estimated to be $3.9 million in 2008, $0.5 million in 2009, $0.4 million in 2010, $0.3 million in 2011, $0.1 million in 2012 and $0.1 million thereafter.
 
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
 
 
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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 60 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 they 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 of Consent to perform a remedial investigation/feasibility study of the Portland Harbor Site under EPA oversight, and several additional entities have not signed such consent, but are nevertheless contributing money to the effort. The study is expected to be completed in 2010. In May 2006, the EPA notified several additional entities, including other federal agencies that it is prepared to issue unilateral orders compelling additional participation in the remedial investigation. 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:
 
On April 20, 2004, BC Rail Partnership initiated litigation against the Company in the Supreme Court of Nova Scotia, alleging breach of contract and negligent manufacture and design of railcars which were involved in a 1999 derailment. No trial date has been set.
 
On November 3, 2004, and November 4, 2004, in the District Court of Tarrant County, Texas, and in the District Court of Lancaster County, Nebraska, respectively, litigation was initiated against the Company by Burlington Northern Santa Fe Railway (BNSF), one of our largest customers. BNSF alleges the failure of a supplier-provided component part on a railcar manufactured by Greenbrier in 1988, resulted in a derailment and a chemical spill. On June 24, 2006, the District Court of Tarrant County, Texas, entered an order granting the Company’s motion for summary judgment as to all claims BNSF appealed the district court’s decision to the Texas State Court of Appeals which affirmed the prior court’s decision as to all claims. BNSF has petitioned the Texas Supreme Court for review.
 
Greenbrier and a customer, SEB Finans AB (SEB), have 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. Current estimates of potential costs to Greenbrier do not exceed amounts accrued for warranty. Arbitration hearings have been rescheduled to March 2008 by mutual agreement pending successful implementation of the terms of the s