UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-13146

THE GREENBRIER COMPANIES, INC.

One Centerpointe Drive, Suite 200, Lake Oswego, OR 97035

(503) 684-7000
(Registrant’s telephone number, including area code)

     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.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

     The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding on April 7, 2004 was 14,615,522 shares.

THE GREENBRIER COMPANIES, INC.

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets
(In thousands, except per share amounts, unaudited)

The accompanying notes are an integral part of these financial statements.

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THE GREENBRIER COMPANIES, INC.

Consolidated Statements of Operations
(In thousands, except per share amounts, unaudited)

The accompanying notes are an integral part of these financial statements.

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THE GREENBRIER COMPANIES, INC.

Consolidated Statements of Cash Flows
(In thousands, unaudited)

The accompanying notes are an integral part of these financial statements.

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Notes to Consolidated Financial Statements
(Unaudited)

Note 1 – Interim Financial Statements

     The Consolidated Financial Statements of The Greenbrier Companies, Inc. and Subsidiaries (Greenbrier or the Company) as of February 29, 2004 and for the three and six months ended February 29, 2004 and February 28, 2003 have been prepared without audit and reflect all adjustments (consisting of normal recurring accruals, except for the special charges discussed in Note 3) which, in the opinion of management, are necessary for a fair presentation of the financial position and operating results for the periods indicated. The results of operations for the three and six months ended February 29, 2004 and February 28, 2003 are not necessarily indicative of the results to be expected for the entire year ending August 31, 2004. Certain reclassifications have been made to the prior year’s Consolidated Financial Statements to conform to the 2004 presentation.

     Certain notes and other information have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Consolidated Financial Statements contained in the Company’s 2003 Annual Report on Form 10-K.

     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, including evaluating the remaining life and recoverability of long-lived assets. These estimates may affect the amount of assets, liabilities, revenue and expenses reported in the financial statements and accompanying notes. Estimates and assumptions are periodically evaluated and may be adjusted in future periods. Actual results could differ from those estimates.

     Initial Adoption of Accounting Policies – The Company adopted Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity as of September 1, 2003. The statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and generally requires an entity to classify a financial instrument that falls within its scope as a liability. Other than the change in description of a preferred stock interest in a subsidiary that had been previously described as “Minority interest” to “Subsidiary shares subject to mandatory redemption,” the adoption of SFAS No. 150 had no effect on the Company’s Consolidated Financial Statements as of February 29, 2004, August 31, 2003 or the six months ended February 29, 2004 and February 28, 2003.

     Prospective Accounting Changes – In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) 46, Consolidation of Variable Interest Entities. This interpretation requires consolidation where there is a controlling financial interest in a variable interest entity, previously referred to as a special purpose entity. In December 2003, the FASB issued FIN 46R, Consolidation of Variable Interest Entities, which addresses how an issuer should evaluate whether it has a controlling financial interest in an entity through means other than voting rights. The implementation of FIN 46R will be effective for the Company during the third quarter of 2004. Management is currently evaluating the impact of this interpretation on the Company’s Consolidated Financial Statements, which could affect the presentation of the joint ventures in the unconsolidated subsidiaries and other consolidated subsidiaries and believes the adoption of FIN 46R will not have a material effect on the Company’s Results of Operations.

Note 2 – Discontinued Operations Subsequently Retained

     In August 2002, the Company’s Board of Directors committed to a plan to recapitalize operations in Europe, which consist of a railcar manufacturing plant in Swidnica, Poland and a railcar sales, design and engineering operation in Siegen, Germany. Accordingly, the Company classified its European operations as discontinued operations in accordance with SFAS No. 144, Accounting for the Disposal of Long-Lived Assets, for 2002, 2003 and the first quarter of 2004.

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     Following discussions with various potential investors, the Company signed a letter of intent, in September 2003, with a private equity group to recapitalize the European operations. The letter of intent, which was updated in December 2003, was subject to certain contingencies and final negotiations. During the second quarter, Greenbrier discontinued discussions with the group as the final negotiations proved unsatisfactory. As a result, Greenbrier will retain the European operations and financial results have been reclassified from discontinued operations to continuing operations for all periods presented.

     Reclassified discontinued operations contain restricted cash that consists of cash assigned as collateral on European performance guarantees.

Note 3 – Special Charges

     Operations for the three months ended February 29, 2004 include special charges totaling $1.2 million which consist of a $7.5 million write-off of the remaining European designs and patents offset by a $6.3 million reduction of purchase price liabilities associated with the settlement of arbitration on the acquisition of the European designs and patents.

     The decision to retain the European operations caused management to reassess the value of the European intangible designs and patents 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 amount of the assets exceeded their fair market value. Accordingly, a $7.5 million pre-tax impairment write-off of the remaining European intangible designs and patents was recorded during the quarter ended February 29, 2004.

     During 2003, Greenbrier’s European subsidiary, Greenbrier Germany GmbH, invoked the arbitration provisions of the purchase agreement by which the Freight Wagon Division of Daimler Chrysler Rail Systems GmbH (Adtranz) was acquired. Arbitration was sought by Greenbrier to resolve various claims arising out of the Adtranz purchase agreement and actions of Adtranz personnel. A settlement was agreed upon during the second quarter, under which Greenbrier released its arbitration claims in return for a reduction of $6.3 million in its purchase price liability associated with the acquisition of European designs and patents. A Settlement Agreement and Mutual Release was signed on March 1, 2004.

Note 4 – Inventories

(In thousands)

Note 5 – Warranty Accruals

     Warranty costs are estimated and charged to operations to cover a defined warranty period. 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. The warranty accrual is periodically reviewed and updated based on warranty trends.

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Warranty accrual activity:

(In thousands)

Note 6 – Comprehensive Income (Loss)

The following is a reconciliation of net earnings (loss) to comprehensive income (loss):

(In thousands)

Accumulated other comprehensive loss, net of tax effect, consisted of the following:

(In thousands)

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THE GREENBRIER COMPANIES, INC.

Note 7– Earnings Per Share

     The shares used in the computation of the basic and diluted earnings (loss) per common share are as follows:

(In thousands)

     Weighted average diluted common shares outstanding includes the incremental shares that would be issued upon the assumed exercise of stock options. Stock options for 0.7 million shares for the three and six months ended February 28, 2003, were excluded from the calculation of diluted earnings per share as these options were anti-dilutive. No options were anti-dilutive for the three and six months ended February 29, 2004.

Note 8 – Stock Based Compensation

     Greenbrier does not recognize compensation expense relating to employee stock options because it only grants options with an exercise price equal to the fair value of the 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 (loss) and earnings (loss) per share would have been as follows:

(In thousands, except per share amounts)

⁽¹⁾ Compensation expense was determined based on the Black-Scholes option pricing model which was developed to estimate the value of publicly traded options. Greenbrier’s options are not publicly traded.

Note 9– Derivative Instruments

     Foreign operations give rise to market risks from changes in foreign currency exchange rates. Foreign currency forward exchange contracts with established financial institutions are utilized to hedge a portion of that risk. Interest rate swap agreements are utilized to reduce the impact of changes in interest rates on certain debt. The Company’s foreign currency forward exchanges and interest rate swaps are designated as cash flow hedges, and therefore the unrealized gains and losses are recorded in other comprehensive income (loss).

     At February 29, 2004 exchange rates, forward exchange contracts for the sale of United States dollars aggregated $66.5 million and contracts for the sale of Euro aggregated $9.1 million. Adjusting these contracts to the fair value of

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these cash flow hedges at February 29, 2004 resulted in an unrealized pre-tax gain of $3.6 million that was recorded, net of tax, as a $2.2 million gain in other comprehensive income. As these contracts mature at various dates through December 2004, any such gain remaining will be recognized in manufacturing revenue along with the related transactions. In the event that the underlying sales transaction does not occur, the amount classified in other comprehensive income would be reclassified to the current year’s results of operations.

     At February 29, 2004 exchange rates, interest rate swap agreements had a notional amount of $69.2 million and mature between August 2006 and March 2013. The fair value of these cash flow hedges at February 29, 2004 resulted in an unrealized loss of $4.9 million, net of tax. The loss, net of tax, is included in other comprehensive income (loss) and the fair value of the contracts is included in accounts payable and accrued liabilities. As interest expense on the underlying debt is recognized, amounts corresponding to the interest rate swaps are reclassified from other comprehensive income (loss) and charged or credited to interest expense. At February 29, 2004 interest rates, approximately $2.7 million would be reclassified to interest expense in the next 12 months.

Note 10– Segment Information

     Greenbrier operates in two reportable segments: manufacturing and leasing & services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Consolidated Financial Statements contained in the Company’s 2003 Annual Report on Form 10-K. Performance is evaluated based on margin, which is presented in the Consolidated Statements of Operations. Intersegment sales and transfers are accounted for as if the sales or transfers were to third parties.

     During the second quarter, management decided to retain European operations which had been classified as discontinued operations on the Company’s 2003 Annual Report on Form 10-K. For segment reporting purposes, assets from discontinued operations included on Form 10-K are reclassified to manufacturing assets and reported geographically as European assets.

     The information in the following table is derived directly from the segments’ internal financial reports used for corporate management purposes.

(In thousands)

Note 11 – Commitments and Contingencies

     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:

     Litigation was initiated in 1998 in Ontario Court of Justice in Toronto, Ontario by former shareholders of Interamerican Logistics, Inc. (Interamerican), which was acquired in the fall of 1996. The plaintiffs allege that Greenbrier violated the agreements pursuant to which it acquired ownership of Interamerican and seek damages aggregating $4.5 million Canadian ($3.3 million U.S. at February 29, 2004 exchange rates). A trial is set for October 25, 2004.

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     Litigation was initiated in November 2001 in the Superior Court of British Columbia in Vancouver, British Columbia by a customer, BC Rail Partnership, alleging breach of contract and negligent manufacture and design of railcars which were involved in a derailment. Greenbrier objected to the jurisdiction of the British Columbia Superior Court and its motion to that effect was heard on October 24, 2002. The motion was dismissed on January 28, 2003 and Greenbrier appealed. The Court of Appeal rendered its opinion on November 7, 2003. The appeal by Greenbrier was granted and the court dismissed the proceedings. It is not known whether BC Rail will re-institute the proceedings in the proper jurisdiction, Nova Scotia, Canada.

     Litigation was initiated in August 2002 in the United States District Court for the District of Delaware by National Steel Car, Ltd. (NSC), a competitor, alleging that a drop-deck center partition railcar being marketed and sold by Greenbrier infringed upon an NSC patent. Trial is currently scheduled for September 2004. Related litigation was also brought at the same time in the United States District Court for the Eastern District of Pennsylvania against a Greenbrier customer, Canadian Pacific Railway. Greenbrier has assumed the defense on that action. In the Pennsylvania case, NSC obtained a preliminary injunction on January 6, 2003 which enjoined the Canadian Pacific Railway from making, using, offering to sell or importing into the United States the subject cars. Canadian Pacific Railway appealed the decision of the District Court to the United States Court of Appeals for the Federal Circuit on February 5, 2003. On January 29, 2004, the appellate court reversed the lower court and vacated the preliminary injunction. Further proceedings in both cases have been delayed pending the outcome of ongoing settlement talks among the parties. Production and delivery of approximately 500 drop-deck center partition railcars, included in the Company’s backlog, have been delayed pending resolution of these talks.

     Management contends all the above claims are without merit and intends to vigorously defend its position. Accordingly, management believes that any ultimate liability resulting from the above litigation will not materially affect the financial position, results of operations or cash flows of the Company.

     During 2003, Greenbrier’s European subsidiary, Greenbrier Germany GmbH, invoked the arbitration provisions of the purchase agreement by which the Freight Wagon Division of Daimler Chrysler Rail Systems GmbH (Adtranz) was acquired. Arbitration was sought by Greenbrier to resolve various claims arising out of the Adtranz purchase agreement and actions of Adtranz personnel. On October 24, 2003, Greenbrier submitted its formal claim before the International Court of Arbitration of the International Chamber of Commerce. A Settlement was agreed upon during the second quarter, under which Greenbrier released its arbitration claims in return for a reduction of $6.3 million in its purchase price liability associated with the acquisition of European designs and patents. The Settlement Agreement and Mutual Release was signed on March 1, 2004.

     Environmental studies have been conducted of owned and leased properties that indicate additional investigation and some remediation may be necessary. The Portland, Oregon manufacturing facility is located on the Willamette River. The United States Environmental Protection Agency (EPA) has classified portions of the river bed, including the portion fronting the facility, as a federal “national priority list” or “superfund” site due to sediment contamination. The Company and more than 60 other parties have received a “General Notice” of potential liability from the EPA. There is no indication that the Company has contributed to contamination of the Willamette River bed, although uses by prior owners of the property may have contributed. Nevertheless, this classification of the Willamette River may have an impact on the value of the Company’s investment in the property and has resulted in the Company initially bearing a portion of the cost of an EPA mandated remedial investigation and incurring costs mandated by the State of Oregon to control groundwater discharges to the Willamette River. Neither the cost of the investigation nor the groundwater control effort is currently determinable. However, a portion of this outlay related to the State of Oregon mandated costs has been reimbursed by an unaffiliated party, and further outlays may also be recoverable. The Company may be required to perform periodic maintenance dredging in order to continue to launch vessels from its launch ways on the river, and classification as a superfund site could result in some limitations on future dredging and launch activity. The outcome of such actions cannot be estimated. Management believes that the Company’s operations adhere to sound environmental practices, applicable laws and regulations.

     The Company has entered into contingent rental assistance agreements, aggregating $17.1 million, on certain railcars subject to leases that have been sold to third parties. These agreements guarantee the purchasers a minimum lease rental, subject to a maximum defined rental assistance amount, over periods that range from one to eight years.

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A liability is established and revenue is reduced in the period during which a determination can be made that it is probable that a rental shortfall will occur and the amount can be estimated. For the three and six months ended February 29, 2004, accruals made to cover estimated obligations were minimal. For the three and six months ended February 28, 2003, $0.1 million and $0.8 million was accrued to cover estimated obligations. The remaining liability at February 29, 2004 is $0.3 million.

     A portion of leasing & services revenue is derived from utilization leases, under which “car hire” is earned. Car hire is a fee that a railroad pays for the use of railcars owned by other railroads or third parties. Car hire earned by a railcar is usually made up of hourly and mileage components. Until 1992, the Interstate Commerce Commission directly regulated car hire rates by prescribing a formula for calculating these rates. Government regulation of car hire rates continues, but the system of prescribed rates has been superseded by a system known as deprescription. January 1, 2003 ended a ten-year period used to phase in this new system. Deprescription is a system 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 arbitration either the owner’s or user’s rate is selected and that rate becomes effective for a one-year period. Car hire rates could be negotiated or arbitrated to lower levels in the future. This could reduce future car hire revenue for Greenbrier. Car hire revenue amounted to $6.6 million and $12.8 million for the three and six months ended February 29, 2004 and $6.2 million and $12.2 million for the three and six months ended February 28, 2003.

     Substantially all employees at the Company’s Canadian manufacturing facility were covered by collective bargaining agreements that expired in October 2003. Labor negotiations were completed in February 2004 with the ratification of a new three-year contract that expires in October 2006.

     In accordance with customary business practices in Europe, the Company has guaranteed $15.4 million in bank and third party performance, advance payment and warranty guarantee facilities, of which $14.4 million has been utilized as of February 29, 2004. To date no amounts have been drawn under these performance, advance payment and warranty guarantees.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     Greenbrier currently operates in two primary business segments: manufacturing and leasing & services. The two 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, marine vessels and forged steel products and performs railcar repair, refurbishment and maintenance activities. In North America, the leasing & services segment owns approximately 12,000 railcars and provides management services for approximately 113,000 railcars for railroads, shippers, carriers and other leasing and transportation companies.

     In August 2002, the Company’s Board of Directors committed to a plan to recapitalize European operations