THE GREENBRIER COMPANIES, INC. Executive Summary
We operate in three reportable segments: Manufacturing; Wheels, Repair & Parts; and Leasing & Services. Our segments are operationally integrated. The Manufacturing segment, which currently operates from facilities in theU.S. ,Mexico ,Poland ,Romania andTurkey , produces double-stack intermodal railcars, tank cars, conventional railcars, automotive railcar products and marine vessels. The Wheels, Repair & Parts segment performs wheel and axle servicing; railcar repair, refurbishment and maintenance; as well as production of a variety of parts for the rail industry inNorth America . The Leasing & Services segment owns approximately 8,400 railcars and provides management services for approximately 407,000 railcars for railroads, shippers, carriers, institutional investors and other leasing and transportation companies inNorth America as ofNovember 30, 2020 . Through unconsolidated affiliates we produce rail and industrial components and have an ownership stake in a railcar manufacturer inBrazil . The financial results for the three months endedNovember 30, 2020 are representative of the challenges of the current market conditions. The decrease in operating profits compared to the same period in the prior year is primarily attributable to the cyclical decrease in economic activity in the freight rail equipment market which began prior to the emergence of COVID-19 ("Cyclical Downturn"). The Cyclical Downturn has intensified due to the COVID-19 Events. Despite the challenging environment, our continued focus on liquidity has helped to sustain high levels of cash and liquidity. We continue to take measures to strengthen our financial position through increasing our borrowing capacity and strategic spending reductions which included reducing our selling and administrative expense by$10.7 million during the quarter compared to the prior comparable period. Even though we incurred a net loss during the three months endedNovember 30, 2020 , we generated positive cash flow from operations. In addition, our backlog remains strong which includes railcar orders with deliveries into 2024 and marine orders with deliveries into 2022. Our total manufacturing backlog of railcar units as ofNovember 30, 2020 was approximately 23,900 with an estimated value of$2.35 billion . Approximately 11% of backlog units and 8% of estimated backlog value as ofNovember 30, 2020 was associated with our Brazilian manufacturing operations which is accounted for under the equity method. Backlog units for lease may be syndicated to third parties or held in our own fleet depending on a variety of factors. Multi-year supply agreements are a part of rail industry practice. A portion of the orders included in backlog reflects an assumed product mix. Under terms of the orders, the exact mix and pricing will be determined in the future, which may impact backlog. Marine backlog as ofNovember 30, 2020 was$66 million . Our backlog of railcar units and marine vessels is not necessarily indicative of future results of operations. Certain orders in backlog are subject to customary documentation and completion of terms. Customers may attempt to cancel or modify orders in backlog. Historically, little variation has been experienced between the quantity ordered and the quantity actually delivered, though the timing of deliveries may be modified from time to time.
COVID-19 and the Downturn in Global Economic Activity
We continue to actively monitor and manage the impacts on our business of the COVID-19 coronavirus pandemic, the significant decline in global economic activity and governmental reactions to these historic events ("COVID-19 Events").
Our manufacturing and service facilities continue regular operations. We function as an essential infrastructure business under guidance issued by theDepartment of Homeland Security . Similar guidelines and authorities exist in other nations where we operate. Since the emergence of COVID-19, our facilities inthe United States have been permitted to continue to operate subject to enhanced safety protocols, both voluntary and government mandated, that aim to protect the health of our workforce and the residents of the communities in which our facilities are located. The situation is similar in our facilities inMexico ,Europe ,Brazil andTurkey which also have been permitted by applicable governmental authorities to operate subject to enhanced health and safety protocols.
As described in Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q, COVID-19 Events may have a material negative impact on our business, liquidity, results of operations, and stock price. Beyond these general observations, we are unable to predict when, how, or with what magnitude COVID-19 Events, in combination with the Cyclical Downturn, will negatively impact our business.
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Three Months Ended
Overview
Revenue, cost of revenue, margin and Earnings (loss) from operations (operating profit or loss) presented below, include amounts from external parties and exclude intersegment activity that is eliminated in consolidation.
Three Months Ended
November 30,
(In thousands, except per share amounts) 2020 2019
Revenue:
Manufacturing $ 308,722 $ 657,367
Wheels, Repair & Parts 65,556 86,608
Leasing & Services 28,711 25,384
402,989 769,359
Cost of revenue:
Manufacturing 280,890 581,912
Wheels, Repair & Parts 62,984 81,892
Leasing & Services 18,444 13,366
362,318 677,170
Margin:
Manufacturing 27,832 75,455
Wheels, Repair & Parts 2,572 4,716
Leasing & Services 10,267 12,018
40,671 92,189
Selling and administrative 43,707 54,364
Net gain on disposition of equipment (922 ) (3,959 )
Earnings (loss) from operations (2,114 ) 41,784
Interest and foreign exchange 11,103
12,852
Earnings (loss) before income taxes and earnings
(loss) from unconsolidated affiliates (13,217 )
28,932
Income tax benefit (expense) 7,332 (5,994 ) Earnings (loss) before earnings (loss) from unconsolidated affiliates (5,885 )
22,938
Earnings (loss) from unconsolidated affiliates (744 )
1,073
Net earnings (loss) (6,629 )
24,011
Net earnings attributable to noncontrolling interest (3,343 ) (16,342 ) Net earnings (loss) attributable to Greenbrier$ (9,972 ) $ 7,669 Diluted earnings (loss) per common share$ (0.30 ) $ 0.23 Performance for our segments is evaluated based on operating profit or loss. Corporate includes selling and administrative costs not directly related to goods and services and certain costs that are intertwined among segments due to our integrated business model. Management does not allocate Interest and foreign exchange or Income tax expense for either external or internal reporting purposes. Three Months Ended November 30, (In thousands) 2020 2019 Operating profit (loss): Manufacturing$ 9,686 $ 53,143 Wheels, Repair & Parts (200 ) 1,114 Leasing & Services 5,890 9,777 Corporate (17,490 ) (22,250 )$ (2,114 ) $ 41,784 22
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Consolidated Results
Three Months Ended
November 30, Increase %
(In thousands) 2020 2019 (Decrease) Change
Revenue $ 402,989 $ 769,359 $ (366,370 ) (47.6 %)
Cost of revenue $ 362,318 $ 677,170 $ (314,852 ) (46.5 %)
Margin (%) 10.1 % 12.0 % (1.9 %) *
Net earnings (loss) attributable to
Greenbrier $ (9,972 ) $ 7,669 $ (17,641 ) (230.0 %)
* Not meaningful
Through our integrated business model, we provide a broad range of custom products and services in each of our segments, which have various average selling prices and margins. The demand for and mix of products and services delivered changes from period to period, which causes fluctuations in our results of operations.
The 47.6% decrease in revenue for the three months endedNovember 30, 2020 as compared to the three months endedNovember 30, 2019 was primarily due to a 53.0% decrease in Manufacturing revenue. The decrease in Manufacturing revenue was primarily attributed to a 54.2% decrease in railcar deliveries. The decrease in revenue was also due to a 24.3% decrease in Wheels, Repair & Parts revenue primarily due to lower wheelset, component and parts volumes due to lower demand. The 46.5% decrease in cost of revenue for the three months endedNovember 30, 2020 as compared to the three months endedNovember 30, 2019 was primarily due to a 51.7% decrease in Manufacturing cost of revenue. The decrease in Manufacturing cost of revenue was primarily attributed to a 54.2% decrease in railcar deliveries. The decrease in cost of revenue was also due to a 23.1% decrease in Wheels, Repair & Parts cost of revenue primarily due to lower costs associated with a reduction in wheelset, component and parts volumes. Margin as a percentage of revenue was 10.1% and 12.0% for the three months endedNovember 30, 2020 and 2019, respectively. The overall margin as a percentage of revenue was negatively impacted by a decrease in Manufacturing margin to 9.0% from 11.5% primarily attributed to operating at lower volumes and increased costs associated with operating our manufacturing facilities in the COVID-19 pandemic during the three months endedNovember 30, 2020 . Net earnings (loss) attributable to Greenbrier is impacted by our operating activities and noncontrolling interest associated with our 50% joint ventures at certain of our Mexican railcar manufacturing facilities and our 75% interest in Greenbrier-Astra Rail , both of which we consolidate for financial reporting purposes. The$17.6 million decrease in net earnings attributable to Greenbrier for the three months endedNovember 30, 2020 as compared to the three months endedNovember 30, 2019 was primarily attributable to a decrease in the after-tax margin due to a reduction in railcar deliveries. This was partially offset by a decrease in Selling and administrative expense and a decrease in Net earnings attributable to noncontrolling interest, which is deducted from net earnings. Net earnings attributable to noncontrolling interest represents our joint venture partner's share in the results of operations of our Mexican railcar manufacturing joint ventures, adjusted for intercompany sales, and our European partner's share of the results of our European operations. Manufacturing Segment Three Months Ended November 30, Increase % (In thousands, except railcar deliveries) 2020 2019 (Decrease) Change Revenue$ 308,722 $ 657,367 $ (348,645 ) (53.0 %) Cost of revenue$ 280,890 $ 581,912 $ (301,022 ) (51.7 %) Margin (%) 9.0 % 11.5 % (2.5 %) * Operating profit ($)$ 9,686 $ 53,143 $ (43,457 ) (81.8 %) Operating profit (%) 3.1 % 8.1 % (5.0 %) * Deliveries 2,700 5,900 (3,200 ) (54.2 %) * Not meaningful 23
-------------------------------------------------------------------------------- Manufacturing revenue decreased$348.6 million or 53.0% for the three months endedNovember 30, 2020 compared to the three months endedNovember 30, 2019 . The decrease in revenue was primarily attributed to a 54.2% decrease in railcar deliveries. Manufacturing cost of revenue decreased$301.0 million or 51.7% for the three months endedNovember 30, 2020 compared to the three months endedNovember 30, 2019 . The decrease in cost of revenue was primarily attributed to a 54.2% decrease in the volume of railcar deliveries. Manufacturing margin as a percentage of revenue decreased 2.5% for the three months endedNovember 30, 2020 compared to the three months endedNovember 30, 2019 . The decrease in margin percentage was primarily attributed to operating at lower volumes and increased costs associated with operating our manufacturing facilities in the COVID-19 pandemic during the three months endedNovember 30, 2020 . Manufacturing operating profit decreased$43.5 million or 81.8% for the three months endedNovember 30, 2020 compared to the three months endedNovember 30, 2019 . The decrease in operating profit was primarily attributed to a decrease in railcar deliveries and increased costs associated with operating our manufacturing facilities during the COVID-19 pandemic during the three months endedNovember 30, 2020 .
Wheels, Repair & Parts Segment
Three Months Ended
November 30, Increase %
(In thousands) 2020 2019 (Decrease) Change
Revenue $ 65,556 $ 86,608 $ (21,052 ) (24.3 %)
Cost of revenue $ 62,984 $ 81,892 $ (18,908 ) (23.1 %)
Margin (%) 3.9 % 5.4 % (1.5 %) *
Operating profit (loss) ($) $ (200 ) $ 1,114 $ (1,314 ) *
Operating profit (loss) (%) (0.3 %) 1.3 % (1.6 %) *
* Not meaningful
Wheels, Repair & Parts revenue decreased $21.1 million or 24.3% for the three
months ended November 30, 2020 compared to the three months ended November 30,
2019 . The decrease was primarily due to lower wheelset, component and parts
volumes due to lower demand. This was partially offset by an increase in scrap
metal pricing.
Wheels, Repair & Parts cost of revenue decreased $18.9 million or 23.1% for the
three months ended November 30, 2020 compared to the three months ended November
30, 2019 . The decrease was primarily due to lower costs associated with a
reduction in wheelset, component and parts volumes.
Wheels, Repair & Parts margin as a percentage of revenue decreased 1.5% for the
three months ended November 30, 2020 compared to the three months ended November
30, 2019 . The decrease in margin percentage was primarily attributed to
operating at lower volumes and increased costs associated with operating our
facilities during the COVID-19 pandemic during the three months ended November
30, 2020 . This was partially offset by an increase in scrap metal pricing.
Wheels, Repair & Parts had an operating loss during the three months ended
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Leasing & Services Segment
Three Months Ended
November 30, Increase %
(In thousands) 2020 2019 (Decrease) Change
Revenue $ 28,711 $ 25,384 $ 3,327 13.1 %
Cost of revenue $ 18,444 $ 13,366 $ 5,078 38.0 %
Margin (%) 35.8 % 47.3 % (11.5 %) *
Operating profit ($) $ 5,890 $ 9,777 $ (3,887 ) (39.8 %)
Operating profit (%) 20.5 % 38.5 % (18.0 %) *
* Not meaningful
The Leasing & Services segment generates revenue from leasing railcars from its
lease fleet, providing various management services, interim rent on leased
railcars for syndication, and the sale of railcars purchased from third parties
with the intent to resell. The gross proceeds from the sale of these railcars
are recorded in revenue and the costs of purchasing these railcars are recorded
in cost of revenue.
Leasing & Services revenue increased $3.3 million or 13.1% for the three months
ended November 30, 2020 compared to the three months ended November 30, 2019 .
The increase was primarily attributed to an increase in the sale of railcars
which we had purchased from third parties with the intent to resell. This was
partially offset by lower interim rent on leased railcars for syndication during
the three months ended November 30, 2020 .
Leasing & Services cost of revenue increased $5.1 million or 38.0% for the three
months ended November 30, 2020 compared to the three months ended November 30,
2019 . The increase was primarily due to an increase in the volume of railcars
sold that we purchased from third parties partially offset by lower
transportation costs.
Leasing & Services margin as a percentage of revenue decreased 11.5% for the
three months ended November 30, 2020 compared to the three months ended November
30, 2019 . Margin as a percentage of revenue for the three months ended November
30, 2020 was negatively impacted by higher sales of railcars that we purchased
from third parties which have lower margin percentages. The decrease in margin
as a percentage of revenue was also due to lower interim rent on leased railcars
for syndication.
Leasing & Services operating profit decreased $3.9 million or 39.8% for the
three months ended November 30, 2020 compared to the three months ended November
30, 2019 . The decrease was primarily attributed to a $3.0 million reduction in
net gain on disposition of equipment and lower interim rent on leased railcars
for syndication.
Selling and Administrative Expense
Three Months Ended
November 30,
Increase %
(In thousands) 2020 2019
(Decrease) Change
Selling and administrative expense
Selling and administrative expense was$43.7 million or 10.8% of revenue for the three months endedNovember 30, 2020 compared to$54.4 million or 7.1% of revenue for the prior comparable period. The$10.7 million decrease was primarily attributed to a decline in employee related costs resulting from headcount reductions and a decrease in other controllable spending categories as part of our strategic cost control and liquidity initiatives.
Net gain on disposition of equipment was
Net gain on disposition of equipment primarily includes the sale of assets from
our lease fleet (Equipment on operating leases, net) that are periodically sold
in the normal course of business in order to accommodate customer demand and to
manage risk and liquidity; and disposition of property, plant and equipment.
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--------------------------------------------------------------------------------Other Costs
Interest and foreign exchange expense was composed of the following:
Three Months Ended
November 30,
Increase
(In thousands) 2020 2019 (Decrease)
Interest and foreign exchange:
Interest and other expense $ 10,500 $ 10,239 $ 261
Foreign exchange loss 603 2,613 (2,010 )
$ 11,103 $ 12,852 $ (1,749 ) The
Income Tax
For the three months endedNovember 30, 2020 , we had an income tax benefit of$7.3 million on a pre-tax loss of$13.2 million . The tax benefit for the three months endedNovember 30, 2020 included net favorable discrete tax benefits related to changes in foreign currency exchange rates for ourU.S. Dollar denominated foreign operations. For the three months endedNovember 30, 2019 , we had an income tax expense of$6.0 million on a pre-tax income of$28.9 million for an effective tax rate of 20.7%. The tax rate for the three months endedNovember 30, 2019 included net favorable discrete tax benefits. The effective tax rate can fluctuate year-to-year due to discrete items and changes in the mix of foreign and domestic pre-tax earnings or losses. It can also fluctuate with changes in the proportion of pre-tax earnings or losses attributable to our Mexican railcar manufacturing joint venture. The joint venture is treated as a partnership for tax purposes and, as a result, the partnership's entire pre-tax earnings or losses are included in Earnings (loss) before income taxes and earnings (loss) from unconsolidated affiliates, whereas only our 50% share of the tax is included in Income tax benefit (expense).
Earnings (Loss) From Unconsolidated Affiliates
Through unconsolidated affiliates we produce rail and industrial components and
have an ownership stake in a railcar manufacturer in
Loss from unconsolidated affiliates was$0.7 million for the three months endedNovember 30, 2020 compared to earnings from unconsolidated affiliates of$1.1 million for the three months endedNovember 30, 2019 . The decrease in earnings from unconsolidated affiliates was primarily related to a loss at ourBrazil operations and a decrease in earnings from our investment in Axis, a joint venture that manufactures and sells axles to its joint venture partners.
Noncontrolling Interest
Net earnings attributable to noncontrolling interest was$3.3 million for the three months endedNovember 30, 2020 compared to$16.3 million in the prior comparable period, which primarily represents our joint venture partner's share in the results of operations of our Mexican railcar manufacturing joint ventures, adjusted for intercompany sales, and our European partner's share of the results of our European operations. 26 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Three Months Ended
November 30,
(In thousands) 2020 2019
Net cash provided by (used in) operating activities
(24,899 ) 7,199
Net cash used in financing activities (97,973 ) (14,098 ) Effect of exchange rate changes 5,208
981
Decrease in cash and cash equivalents and restricted cash
We have been financed through cash generated from operations and borrowings. AtNovember 30, 2020 , cash and cash equivalents and restricted cash were$733.1 million , a decrease of$109.0 million from$842.1 million atAugust 31, 2020 . The change in cash provided by (used in) operating activities for the three months endedNovember 30, 2020 compared to the three months endedNovember 30, 2019 was primarily due to a favorable net change in working capital partially offset by a net loss during the current quarter due to lower volumes of operating activities. Cash provided by (used in) investing activities primarily related to capital expenditures net of proceeds from the sale of assets and investment activity with our unconsolidated affiliates. The change in cash provided by (used in) investing activities for the three months endedNovember 30, 2020 compared to the three months endedNovember 30, 2019 was primarily attributable to an increase in capital expenditures and a reduction in proceeds from the sale of assets. Capital expenditures totaled$38.6 million and$23.2 million for the three months endedNovember 30, 2020 and 2019, respectively. Capital expenditures for 2021 primarily relate to opportunistic additions to our lease fleet and continued investments into the safety and productivity of our facilities. Leasing & Services and corporate capital expenditures were approximately$32.0 million and$2.9 million for the three months endedNovember 30, 2020 and 2019, respectively. Manufacturing capital expenditures were approximately$5.5 million and$18.8 million for the three months endedNovember 30, 2020 and 2019, respectively. Wheels, Repair & Parts capital expenditures were approximately$1.1 million and$1.5 million for the three months endedNovember 30, 2020 and 2019, respectively. Proceeds from the sale of assets, which primarily related to sales of railcars from our lease fleet within Leasing & Services, were approximately$8.7 million and$27.5 million for the three months endedNovember 30, 2020 andNovember 30, 2019 , respectively. Assets from our lease fleet are periodically sold in the normal course of business to accommodate customer demand and to manage risk and liquidity.
The change in cash used in financing activities for the three months ended
A quarterly dividend of
The Board of Directors has authorized our company to repurchase shares of our common stock. InJanuary 2021 , the expiration date of this share repurchase program was extended fromMarch 31, 2021 toJanuary 31, 2023 . The amount remaining for repurchase is$100 million as ofNovember 30, 2020 . Under the share repurchase program, shares of common stock may be purchased on the open market or through privately negotiated transactions from time to time. The timing and amount of purchases will be based upon market conditions, securities law limitations and other factors. The program may be modified, suspended or discontinued at any time without prior notice. The share repurchase program does not obligate us to acquire any specific number of shares in any period. There were no shares repurchased under the share repurchase program during the three months endedNovember 30, 2020 and 2019. Senior secured credit facilities, consisting of four components, aggregated to$738.2 million as ofNovember 30, 2020 . We had an aggregate of$85.3 million available to draw down under committed credit facilities as ofNovember 30, 2020 . This amount consists of$13.3 million available on the North American credit facility,$32.0 million on the European credit facilities,$35.0 million on the Mexican railcar manufacturing joint venture credit facilities and$5.0 million available on the Mexican railcar manufacturing operations credit facility. 27 -------------------------------------------------------------------------------- As ofNovember 30, 2020 , a$600.0 million revolving line of credit, maturingJune 2024 , secured by substantially all of our assets in theU.S. not otherwise pledged as security for term loans, was available to provide working capital and interim financing of equipment, principally for theU.S. and Mexican operations. Advances under this facility bear interest at LIBOR plus 1.50% or Prime plus 0.50% depending on the type of borrowing. Available borrowings under the credit facility are generally based on defined levels of eligible inventory, receivables, property, plant and equipment and leased equipment, as well as total debt to consolidated capitalization and fixed charges coverage ratios. As ofNovember 30, 2020 , lines of credit totaling$68.2 million secured by certain of our European assets, with variable rates that range fromWarsaw Interbank Offered Rate (WIBOR) plus 1.2% to WIBOR plus 1.5% and Euro Interbank Offered Rate (EURIBOR) plus 1.1%, were available for working capital needs of our European manufacturing operations. The European lines of credit include$28.0 million of facilities which are guaranteed by us. European credit facilities are regularly renewed. Currently, these European credit facilities have maturities that range fromJune 2021 throughSeptember 2022 . As ofNovember 30, 2020 , our Mexican railcar manufacturing operations had three lines of credit totaling$70.0 million . The first line of credit provides up to$30.0 million and matures inJune 2024 . Advances under this facility bear interest at LIBOR plus 3.75% to 4.25%. The second line of credit provides up to$35.0 million , of which we and our joint venture partner have each guaranteed 50%. Advances under this facility bear interest at LIBOR plus 3.75%. The Mexican railcar manufacturing joint venture will be able to draw amounts available under this facility throughJune 2021 . The third line of credit provides up to$5.0 million and matures inSeptember 2022 . Advances under this facility bear interest at LIBOR plus 2.95% and are to be used for working capital needs. As ofNovember 30, 2020 , outstanding commitments under the senior secured credit facilities consisted of$28.4 million in letters of credit and$210.0 million in borrowings under the North American credit facility,$36.2 million outstanding under the European credit facilities and$30.0 million outstanding under the Mexican credit facilities. The revolving and operating lines of credit, along with notes payable, contain covenants with respect to us and our various subsidiaries, the most restrictive of which, among other things, limit our ability to: incur additional indebtedness or guarantees; pay dividends or repurchase stock; enter into financing leases; create liens; sell assets; engage in transactions with affiliates, including joint ventures and nonU.S. subsidiaries, including but not limited to loans, advances, equity investments and guarantees; enter into mergers, consolidations or sales of substantially all our assets; and enter into new lines of business. The covenants also require certain maximum ratios of debt to total capitalization and minimum levels of fixed charges (interest plus rent) coverage. As ofNovember 30, 2020 , we were in compliance with all such restrictive covenants. From time to time, we may seek to repurchase or otherwise retire or exchange securities, including outstanding notes, borrowings and equity securities, and take other steps to reduce our debt or otherwise improve our balance sheet. These actions may include open market repurchases, unsolicited or solicited privately negotiated transactions or other retirements, repurchases or exchanges. Such retirements, repurchases or exchanges, if any, will depend on a number of factors, including, but not limited to, prevailing market conditions, trading levels of our debt, our liquidity requirements and contractual restrictions, if applicable. The amounts involved in any such transactions may, individually or in the aggregate, be material and may involve all or a portion of a particular series of notes or other indebtedness which may reduce the float and impact the trading market of notes or other indebtedness which remain outstanding. We have global operations that conduct business in their local currencies as well as other currencies. To mitigate the exposure to transactions denominated in currencies other than the functional currency, we enter into foreign currency forward exchange contracts with established financial institutions to protect the margin on a portion of foreign currency sales in firm backlog. Given the strong credit standing of the counterparties, no provision has been made for credit loss due to counterparty non-performance. As ofNovember 30, 2020 , we had a$3.9 million note receivable from Greenbrier-Maxion, our unconsolidated Brazilian railcar manufacturer. This note receivable is included on the Consolidated Balance Sheet in Accounts receivable, net. In the future, we may make loans to or provide guarantees for Greenbrier-Maxion or Amsted-Maxion Cruzeiro, our unconsolidated Brazilian castings and components manufacturer. 28 --------------------------------------------------------------------------------
We expect existing funds and cash generated from operations, together with proceeds from financing activities including borrowings under existing credit facilities and long-term financings, to be sufficient to fund expected debt repayments, working capital needs, planned capital expenditures, additional investments in our unconsolidated affiliates and dividends during the next twelve months.
Off-Balance Sheet Arrangements
We do not currently have off balance sheet arrangements that have or are likely to have a material current or future effect on our Consolidated Financial Statements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in theU.S. requires judgment on the part of management to arrive at estimates and assumptions on matters that are inherently uncertain. These estimates may affect the amount of assets, liabilities, revenue and expenses reported in the financial statements and accompanying notes and disclosure of contingent assets and liabilities within the financial statements. Estimates and assumptions are periodically evaluated and may be adjusted in future periods. Actual results could differ from those estimates. Income taxes - The asset and liability method is used to account for income taxes. We are required to estimate the timing of the recognition of deferred tax assets and liabilities, make assumptions about the future deductibility of deferred tax assets and assess deferred tax liabilities based on enacted law and tax rates for each tax jurisdiction to determine the amount of deferred tax assets and liabilities. Deferred income taxes are provided for the temporary effects of differences between assets and liabilities recognized for financial statement and income tax reporting purposes. Valuation allowances reduce deferred tax assets to an amount that will more likely than not be realized. We recognize liabilities for uncertain tax positions based on whether evidence indicates that it is more likely than not that the position will be sustained on audit. It is inherently difficult and subjective to estimate such amounts, as this requires us to estimate the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis. Changes in tax law or court interpretations may result in the recognition of a tax benefit or an additional charge to the tax provision. Warranty accruals - Warranty costs to cover a defined warranty period are estimated and charged to operations. The estimated warranty cost is based on historical warranty claims for each particular product type. For new product types without a warranty history, preliminary estimates are based on historical information for similar product types. These estimates are inherently uncertain as they are based on historical data for existing products and judgment for new products. If warranty claims are made in the current period for issues that have not historically been the subject of warranty claims and were not taken into consideration in establishing the accrual or if claims for issues already considered in establishing the accrual exceed expectations, warranty expense may exceed the accrual for that particular product. Conversely, there is the possibility that claims may be lower than estimates. The warranty accrual is periodically reviewed and updated based on warranty trends. However, as we cannot predict future claims, the potential exists for the difference in any one reporting period to be material. Environmental costs - At times we may be involved in various proceedings related to environmental matters. We estimate future costs for known environmental remediation requirements and accrue for them when it is probable that we have incurred a liability and the related costs can be reasonably estimated based on currently available information. If further developments in or resolution of an environmental matter result in facts and circumstances that are significantly different than the assumptions used to develop these reserves, the accrual for environmental remediation could be materially understated or overstated. Adjustments to these liabilities are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or when expenditures for which reserves are established are made. Due to the uncertain nature of environmental matters, there can be no assurance that we will not become involved in future litigation or other proceedings or, if we were found to be responsible or liable in any litigation or proceeding, that such costs would not be material to us. Revenue recognition - We measure revenue at the amounts that reflect the consideration to which we expect to be entitled in exchange for transferring control of goods and services to customers. We recognize revenue either at the point in time or over the period of time that performance obligations to customers are satisfied. Payment terms vary by segment and product type and are generally due within normal commercial terms. Our contracts with customers 29 -------------------------------------------------------------------------------- may include multiple performance obligations (e.g. railcars, maintenance, management services, etc.). For such arrangements, we allocate revenues to each performance obligation based on its relative standalone selling price. We have disaggregated revenue from contracts with customers into categories which describe the principal activities from which we generate our revenues.
Manufacturing
Railcars are manufactured in accordance with contracts with customers. We recognize revenue upon our customers' acceptance of the completed railcars at a specified delivery point. From time to time, we enter into multi-year supply agreements. Each railcar delivery is considered a distinct performance obligation, such that the amounts that are recognized as revenue following railcar delivery are generally not subject to change. We typically recognize marine vessel manufacturing revenue over time using the cost input method, based on progress toward contract completion measured by actual costs incurred to date in relation to the estimate of total expected costs. This method best depicts our performance in completing the construction of the marine vessel for the customer and is consistent with the percentage of completion method used prior to the adoption of Topic 606: Contracts with Customers (Topic 606).
Wheels, Repair & Parts
We operate a network of wheel, repair and parts shops in
Wheels revenue is recognized when wheelsets are shipped to the customer or when consumed by customers in the case of consignment arrangements. Parts revenue is recognized upon shipment of the parts to the customers. Repair revenue is typically recognized over time using the cost input method, based on progress toward contract completion measured by actual costs incurred to date in relation to the estimate of total expected costs. This method best depicts our performance in repairing the railcars for the customer. Repair services are typically completed in less than 90 days.
Leasing & Services
We own a fleet of new and used railcars which are leased to third-party customers. Lease revenue is recognized over the lease-term in the period in which it is earned.
Syndication transactions represent new and used railcars which have been placed on lease to a customer and which we intend to sell to an investor with the lease attached. At the time of such sale, revenue and cost of revenue associated with railcars that we have manufactured are recognized in the Manufacturing segment; while revenue and cost of revenue associated with railcars which were obtained from a third-party with the intent to resell and subsequently sold, are recognized in the Leasing & Services segment.
We enter into multi-year contracts to provide management and maintenance services to customers for which revenue is generally recognized on a straight-line basis over the contract term as a stand-ready obligation. Costs to fulfill these contracts are recognized as incurred.
Goodwill and acquired intangible assets - We periodically acquire businesses in purchase transactions in which the allocation of the purchase price may result in the recognition of goodwill and other intangible assets. The determination of the value of such intangible assets requires management to make estimates and assumptions. These estimates affect the amount of future period amortization and possible impairment charges.Goodwill and indefinite-lived intangible assets are tested for impairment annually during the third quarter. The provisions of ASC 350 Intangibles -Goodwill and Other, require that we perform this test by comparing the fair value of each reporting unit with its carrying value. We determine the fair value of our reporting units based on a weighting of income and market approaches. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows which incorporates forecasted revenues, long-term growth rate, gross margin percentages, operating expenses, short-term net working capital changes, other cash flows and the use of discount rates. Under the market approach, we estimate the fair value based on observed market multiples for 30
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comparable businesses. An impairment loss is recorded to the extent that the reporting unit's carrying amount exceeds the reporting unit's fair value. An impairment loss cannot exceed the total amount of goodwill allocated to the reporting unit.Goodwill and indefinite-lived intangible assets are also tested more frequently if changes in circumstances or the occurrence of events indicates that a potential impairment exists. When changes in circumstances, such as a decline in the market price of our common stock, changes in demand or in the numerous variables associated with the judgments, assumptions and estimates made in assessing the appropriate valuation of goodwill indicate the carrying amount of certain indefinite lived assets may not be recoverable, the assets are evaluated for impairment. We performed our annual goodwill impairment test during the third quarter of 2020 and we concluded that goodwill was not impaired. The estimated fair value of goodwill in both the Europe Manufacturing and Wheels & Parts reporting units exceeded its carrying value by approximately 5% and 9%, respectively. Since the estimated fair values were not substantially in excess of their carrying values, we may be at risk for an impairment loss in the future if expected profitability trends assumed in the fair value calculation are not realized. As ofNovember 30, 2020 , our goodwill balance was$130.3 million of which$87.0 million related to our Manufacturing segment and$43.3 million related to our Wheels, Repair & Parts segment. Our Manufacturing segment includes the North America Manufacturing reporting unit with a goodwill balance of$56.6 million ; and the Europe Manufacturing reporting unit with a goodwill balance of$30.4 million .
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