GREENBRIER COMPANIES INC (GBX) FY 2022 MD&A

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Summary

The financial results for 2022 reflect a year of transition and agility. We delivered strong results despite a volatile macroeconomic environment. We identify a few general trends impacting our business at present, all of which we believe are reflected in our results for the year ended August 31, 2022. First, we believe the North American freight rail equipment market continues to emerge from the cyclical decrease in economic activity which began prior to the emergence of COVID-19. Second, we believe global economic activity continues to recover from the historic decrease resulting from the COVID-19 pandemic. We were able to leverage these trends to accomplish the following:

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Significant increases in production throughout 2022;

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Growth in new order activity year over year; and

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Strong ending backlog value and units.

Despite these accomplishments, inflation, rising interest rates, price volatility, supply chain disruptions and geopolitical disquiet, demand concerted management focus for successful execution across the business. We believe we have the necessary management expertise and are well-positioned to navigate the immediate challenges. While we believe the current market and broader economic environment most likely will present many positive opportunities for our business, as we navigate the recovery, we face a number of challenges which include:

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Inflation and policy reactions thereto, currency volatility and rising interest rates;

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An increase in the price and the shortage of certain materials and components;

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Shipping and transportation delays;

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Shortages of skilled labor; and

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Adverse effects on the European market and the global economic markets, generally from the war in Ukraine.

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Business Highlights

Despite the challenging operating environment, we achieved the following accomplishments in 2022:

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We progressively increased our revenue during the year. The sequential growth in revenue was primarily driven by higher deliveries throughout the year.

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Our revenue increased by $1.2 billion and 70.4% compared to the prior year driven by a 65.5% increase in railcar deliveries.

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In February 2022, we completed our first offering of railcar asset-backed securities.

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In September 2021, we acquired more than 3,600 railcars in a successful portfolio acquisition. The railcar acquisition advanced our strategy to increase the scale of our lease fleet assets.

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We increased our global headcount by nearly 40% during a challenging labor market to support higher levels of business activity.

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Manufacturing Backlog

Our backlog remains strong at August 31, 2022 with an increase in backlog units and value highlighted by the following:

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Our railcar backlog was 29,500 units with an estimated value of $3.5 billion as of August 31, 2022 with deliveries that extend into 2024.

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We generated new railcar orders of 24,600 units valued at approximately $2.9 billion.

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We increased our backlog compared to the prior year by approximately 2,900 units and $670 million.

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In addition to our new railcar backlog, we had sustainable conversion orders at August 31, 2022 of approximately $180 million.

Backlog units for lease may be syndicated to third parties or held in our lease 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. Approximately 6% of backlog units and estimated backlog value as of August 31, 2022 was associated with our Brazilian manufacturing operations which is accounted for under the equity method. Marine backlog as of August 31, 2022 was $31 million with deliveries that extend into 2023.

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.

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Financial Overview

Revenue, Cost of revenue, Margin and Earnings from operations (operating profit) presented below, include amounts from external parties and exclude intersegment activity that is eliminated in consolidation.

Performance for our segments is evaluated based on operating profit. 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) benefit for either external or internal reporting purposes.

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Consolidated Results

* 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 70.4% increase in revenue for the year ended August 31, 2022 as compared to the prior year was primarily due to an 88.9% increase in Manufacturing revenue. The increase in Manufacturing revenue was primarily attributed to a 65.5% increase in railcar deliveries.

The 76.2% increase in cost of revenue for the year ended August 31, 2022 as compared to the prior year was primarily due to a 93.5% increase in Manufacturing cost of revenue. The increase in Manufacturing cost of revenue was primarily attributed to a 65.5% increase in railcar deliveries and higher steel and other input costs in the current year.

Margin as a percentage of revenue was 10.3% and 13.3% for the years ended August 31, 2022 and 2021, respectively. The overall margin as a percentage of revenue was negatively impacted by a decrease in Manufacturing margin from 9.3% to 7.1% was primarily attributed to higher costs and inefficiencies in our Manufacturing operations in part due to ramping up production. Many of our customer contracts include price escalation provisions. When certain of our manufacturing costs increase, we are able to increase the sales price to our customers. While this has no impact to our margin dollars, the increase in revenue and cost of sales has a negative impact to our margin as a percentage of revenue.

The $14.5 million increase in net earnings attributable to Greenbrier for the year ended August 31, 2022 as compared to the prior year was primarily due to the following:

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An increase in margin dollars primarily due to higher railcar deliveries and syndication revenue for the year ended August 31, 2022.

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An increase in Net gain on disposition of equipment for the year ended August 31, 2022.

These were partially offset by:

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The income tax benefit for the year ended August 31, 2021, which primarily related to accelerated depreciation and the impact of the CARES Act which allowed us to carry back tax losses to years when tax rates were higher, resulting in a tax benefit.

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An increase in Selling and administrative expense for the year ended August 31, 2022 primarily attributed to higher employee related costs as well as higher costs for legal, consulting and travel associated with increased business activity.

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Manufacturing Segment

* Not meaningful

Our Manufacturing segment primarily generates revenue from manufacturing a wide range of freight railcars and from the conversion of existing or in-service railcars through our facilities in North America and Europe. We also manufacture a broad range of ocean-going and river barges for transporting merchandise between ports within the United States.

Manufacturing revenue increased $1.2 billion or 88.9% for the year ended August 31, 2022 compared to the prior year. The increase in revenue was primarily attributed to a 65.5% increase in railcar deliveries. The increase was also due to the additional revenue associated with an increase in steel and other input costs during the year ended August 31, 2022, as many of our customer contracts include price escalation provisions when certain of our manufacturing costs increase.

Manufacturing cost of revenue increased $1.1 billion or 93.5% for the year ended August 31, 2022 compared to the prior year. The increase in cost of revenue was primarily attributed to a 65.5% increase in the volume of railcar deliveries and higher steel and other input costs as well as inefficiencies in our Manufacturing operations in part due to ramping up production and supply chain issues during the year ended August 31, 2022.

Manufacturing margin as a percentage of revenue decreased 2.2% for the year ended August 31, 2022 compared to the prior year. The decrease in margin percentage for the year ended August 31, 2022 was primarily attributed to higher costs and inefficiencies in our Manufacturing operations in part due to ramping up production. Many of our customer contracts include price escalation provisions. When certain of our manufacturing costs increase, we are able to increase the sales price to our customers. While this has no impact to our margin dollars, the increase in revenue and cost of sales has a negative impact to our margin as a percentage of revenue. In addition, the margin percentage for year ended August 31, 2021 benefited from a $15.8 million favorable resolution of warranty and other loss contingencies associated with our international operations.

Manufacturing operating profit increased $48.9 million for the year ended August 31, 2022 compared to the prior year. The increase in operating profit was primarily attributed to an increase in railcar deliveries.

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Maintenance Services Segment

* Not meaningful

Our Maintenance Services segment primarily generates revenue from railcar component manufacturing and servicing and from providing railcar maintenance services.

Maintenance Services revenue increased $49.4 million or 16.6% for the year ended August 31, 2022 compared to the prior year. The increase was primarily attributed to higher volumes due to increased demand and an increase in scrap metal pricing and volume as we scrap wheels and other components.

Maintenance Services cost of revenue increased $41.6 million or 14.8% for the year ended August 31, 2022 compared to the prior year. The increase was primarily due to higher costs associated with an increase in volumes and an increase in material and labor costs.

Maintenance Services margin as a percentage of revenue increased 1.4% for the year ended August 31, 2022 compared to the prior year. The increase in margin percentage was primarily attributed to an increase in volumes and scrap metal pricing. These were partially offset by higher material and labor costs during the year ended August 31, 2022.

Maintenance Services operating profit increased $15.2 million or 233.8% for the year ended August 31, 2022 compared to the prior year. The increase in operating profit was primarily attributed to higher volumes and an increase in scrap metal pricing and lower selling and administrative costs.

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Leasing & Management Services Segment

* Not meaningful

Our Leasing & Management Services segment generates revenue from leasing railcars from our lease fleet which includes GBX Leasing, providing various management services, syndication revenue associated with new railcar sales with leases attached, 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 & Management Services revenue increased $14.9 million or 10.8% for the year ended August 31, 2022 compared to the prior year. The increase was primarily attributed to higher syndication revenue from an increase in the volume of new railcar sales with leases attached as well as higher revenue from additions to our lease fleet. In addition, revenue for the year ended August 31, 2021 benefited from a lease modification and transfer fee.

Leasing & Management Services cost of revenue increased $2.1 million or 4.5% for the year ended August 31, 2022 compared to the prior year. The increase was primarily due to an increase in costs from the additions to our lease fleet, partially offset by lower costs associated with railcars we had purchased from third parties with the intent to resell.

Leasing & Management Services margin as a percentage of revenue increased 1.9% for the year ended August 31, 2022 compared to the prior year. The increase in margin percentage was primarily attributed to higher syndication activity. In addition, the margin percentage for the year ended August 31, 2021 was negatively impacted by higher sales of railcars that we purchased from third parties which have lower margin percentages.

Leasing & Management Services operating profit increased $39.4 million or 57.2% for the year ended August 31, 2022 compared to the prior year. The increase was primarily attributed to an increase of $32.5 million net gain on disposition of equipment and higher syndication activity.

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Selling and Administrative

Selling and administrative expense was $225.2 million or 7.6% of revenue for the year ended August 31, 2022 and $191.8 million or 11.0% of revenue for the year ended August 31, 2021.

The $33.4 million increase was primarily attributed to higher employee related costs as well as higher costs for legal, consulting and travel associated with increased business activity.

Net Gain on Disposition of Equipment

Net gain on disposition of equipment primarily includes the sale of assets from our lease fleet (Equipment on operating leases, net) and disposition of property, plant and equipment. Assets are periodically sold in the normal course of business in order to accommodate customer demand and to manage risk and liquidity.

Net gain on disposition of equipment was $37.2 million and $1.2 million for the years ended August 31, 2022 and 2021, respectively. The increase in Net gain on disposition of equipment was primarily attributed to sales of assets from our lease fleet during the year ended August 31, 2022.

Interest and Foreign Exchange

Interest and foreign exchange expense was composed of the following:

The $14.1 million increase in interest and foreign exchange expense during the year ended August 31, 2022 compared to the prior year was primarily attributed to an increase in interest expense from higher levels of borrowings and interest rates.

Net Loss on Extinguishment of Debt

Net loss on extinguishment of debt was $6.3 million for the year ended August 31, 2021 relates to the retirement of $227.3 million of our 2.875% convertible notes due 2024 and $50.0 million of our 2.25% convertible notes due 2024.

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Income Tax

In 2022 our income tax expense was $18.1 million on $60.6 million of pre-tax earnings for an effective tax rate of 29.9%. The tax rate was primarily attributable to the geographic mix of earnings, partially offset by net favorable discrete items.

In 2021 our income tax benefit was $40.2 million on $8.6 million of pre-tax loss. The tax benefit was primarily attributable to accelerated depreciation and impact of the CARES Act which allowed us to carry back tax losses to years when tax rates were higher, resulting in a tax benefit. The tax benefit is primarily derived from the U.S. Federal tax rate differential between 2016 - 2017 tax rates of 35% and the current rate of 21%.

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. It can also fluctuate with changes in the proportion of pre-tax earnings 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 are included in Earnings (loss) before income taxes and earnings from unconsolidated affiliates, whereas only our 50% share of the tax is included in Income tax (expense) benefit.

Earnings From Unconsolidated Affiliates

Through unconsolidated affiliates we produce rail and industrial components and have an ownership stake in a railcar manufacturer in Brazil. We record the after-tax results from these unconsolidated affiliates.

Earnings from unconsolidated affiliates was $11.3 million and $3.5 million for the years ended August 31, 2022 and 2021, respectively. The increase was primarily attributable to higher profitability at our Brazil operations.

Net Earnings Attributable to Noncontrolling Interest

Net earnings attributable to noncontrolling interest was $6.9 million and $2.7 million for the years ended August 31, 2022 and 2021, respectively, 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.

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Liquidity and Capital Resources

We have been financed through cash generated from operations and borrowings. At August 31, 2022 cash and cash equivalents and restricted cash were $559.1 million, a decrease of $112.3 million from $671.4 million at the prior year end.

Cash Flows From Operating Activities

The change in cash used in operating activities for 2022 compared to 2021 was primarily due to a net increase in working capital as we increased production rates and from higher steel and other input costs. Cash flows from operating activities benefited from a cash tax refund received in 2022.

Cash Flows From Investing Activities

Cash used in investing activities primarily relates to capital expenditures net of proceeds from the sale of assets and investment activity with our unconsolidated affiliates. The change in cash used in investing activities for 2022 compared to 2021 was primarily attributable to an increase in capital expenditures partially offset by an increase in proceeds from the sale of assets. The increase in capital expenditures in 2022 primarily relates to additions to our lease fleet as part of our leasing strategy.

Capital expenditures primarily relate to additions to our lease fleet and on-going investments into our facilities, including the safety and productivity of our facilities. Proceeds from the sale of assets primarily relate to sales of railcars from our lease fleet within Leasing & Management Services. Assets from our lease fleet are periodically sold in the normal course of business to accommodate customer demand and to manage risk and liquidity.

Capital expenditures for 2023 are expected to be approximately $240 million for Leasing & Management Services, approximately $80 million for Manufacturing and approximately $10 million for Maintenance Services. Capital expenditures for 2023 primarily relate to additions to our lease fleet reflecting our enhanced leasing strategy and continued investments into the safety and productivity of our facilities.

Cash Flows From Financing Activities

The change in cash provided by (used in) financing activities for 2022 compared to 2021 was primarily attributed to proceeds from the issuance of debt, net of repayments. During the year ended August 31, 2022 we issued asset backed securities of $323.3 million, and used proceeds to pay down our warehouse credit facility for GBX Leasing. We also amended our $200 million term facility to provide an additional $75 million in term debt, with another $75 million available as a delayed draw within the next six months.

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During 2021, we refinanced certain debt by issuing $373.8 million of new convertible notes due 2028 and retiring a total of $277.3 million of convertible notes due 2024. We also renewed and extended our $600.0 million domestic revolving facility, $291.9 million term loan to 2026 and $200.0 million term loan until August 2027. GBX Leasing entered into its initial $300.0 million non-recourse warehouse credit facility, which was increased to $350 million in 2022.

Dividend & Share Repurchase Program

A quarterly dividend of $0.27 per share was declared on October 18, 2022.

The Board of Directors has authorized our company to repurchase shares of our common stock. The share repurchase program has an expiration date of January 31, 2023. The amount remaining for repurchase was $100.0 million as of August 31, 2022. 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 2022, 2021 or 2020.

Cash, Borrowing Availability and Credit Facilities

As of August 31, 2022, we had $543.0 million in Cash and cash equivalents and $147.9 million in available borrowings. Our current cash balance is part of our strategy to maintain strong liquidity to respond to current uncertainties.

Senior secured credit facilities, consisting of four components, aggregated to $1.14 billion as of August 31, 2022. We had an aggregate of $147.9 million available to draw down under committed credit facilities as of August 31, 2022. This amount consists of $97.3 million available on the North American credit facility, $15.6 million on the European credit facilities and $35.0 million on the Mexican credit facilities.

As of August 31, 2022, a $600.0 million revolving line of credit, maturing August 2026, secured by substantially all of our U.S. assets not otherwise pledged as security for term loans, the warehouse credit facility or the railcar asset-backed securities, was available to provide working capital and interim financing of equipment, principally for the Company’s U.S. and Mexican operations. Advances under this facility bear interest at SOFR plus 1.50% plus 0.10% as a SOFR adjustment 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 of August 31, 2022, a $350.0 million non-recourse warehouse credit facility existed to support the operations of GBX Leasing, a joint venture in which we own approximately 95%. Advances under this facility bear interest at SOFR plus 1.85% plus 0.11% as a SOFR adjustment. The warehouse credit facility converts to a term loan in August 2025 and matures in August 2027. As of August 31, 2022, there were no outstanding borrowings associated with this facility. We intend that GBX Leasing will aggregate leased railcars to obtain term or capital market financing, similar to the securitization in February 2022.

As of August 31, 2022, lines of credit totaling $67.2 million secured by certain of our European assets, with variable rates that range from Warsaw Interbank Offered Rate (WIBOR) plus 1.2% to WIBOR plus 1.6% and Euro Interbank Offered Rate (EURIBOR) plus 1.5%, were available for working capital needs of our European manufacturing operations. The European lines of credit include $40.8 million which are guaranteed by us. European credit facilities are regularly renewed. Currently, these European credit facilities have maturities that range from September 2022 through October 2023.

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As of August 31, 2022, our Mexican railcar manufacturing operations had four lines of credit totaling $120.0 million. The first line of credit provides up to $30.0 million, of which we and our joint venture partner have each guaranteed 50%. Advances under this facility bear interest at LIBOR plus 3.75% to 4.25%. The Mexican railcar manufacturing joint venture will be able to draw amounts available under this facility through June 2024. 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 through June 2023. The third line of credit provides up to $50.0 million and matures in October 2024. Advances under this facility bear interest at LIBOR plus 4.25%. The fourth line of credit provided up to $5.0 million and matured September 2022. Advances under this facility bear interest at LIBOR plus 2.95% and are to be used for working capital needs.

As of August 31, 2022, outstanding commitments under the North American credit facility included letters of credit which totaled $6.9 million.

Other Information

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 non U.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 of August 31, 2022, 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 convertible notes, borrowings and equity securities, and take other steps to reduce our debt, extend the maturities of 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 of one note or security for another note or security (now or hereafter existing), 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 of each entity, we enter into foreign currency forward exchange contracts with established financial institutions to protect the revenue or margin on a portion of forecasted foreign currency sales and expenses. Given the strong credit standing of the counterparties, no provision has been made for credit loss due to counterparty non-performance.

To mitigate the exposure to changes in interest rates, we have managed a portion of our variable rate debt with interest rate swap agreements, effectively converting $478.7 million of variable rate debt to fixed rate debt as of August 31, 2022.

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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.

The following table shows our estimated future contractual cash obligations as of August 31, 2022:

(1)
A portion of the estimated future cash obligation relates to interest on variable rate borrowings. Amounts are based on interest rates as of August 31, 2022.

Off Balance Sheet Arrangements

We do not currently have off balance sheet arrangements that have or are likely to have a material current or future effect on our Consolidated Financial Statements.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.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.

Goodwill - In accordance with Accounting Standards Codification (ASC) Topic 350, Intangibles–Goodwill and Other (ASC 350), the Company evaluates goodwill for possible impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Company uses a two-step process to assess the realizability of goodwill. The first step is a qualitative assessment that analyzes macroeconomic considerations and industry indicators, financial performance and cost estimates associated with a particular reporting unit. This assessment requires subjectivity based on cumulative information available at the assessment date. If a qualitative assessment indicates it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company will proceed to the quantitative second step where the fair value of a reporting unit is calculated based on weighted income and market-based approaches.

If the fair value of a reporting unit is lower than its carrying value, an impairment to goodwill is recorded, not to exceed the carrying amount of goodwill in the reporting unit. We performed our annual goodwill impairment test during the third quarter of 2022 and concluded that goodwill for all reporting units was not impaired.

Pursuant to the authoritative guidance, we make certain estimates and assumptions to determine our reporting units and whether the fair value for each reporting unit is greater than its carry value. The above highlighted judgments contemplated estimates and effects of macroeconomic trends that are inherently uncertain. Changes in these estimates, which may include the effects of inflation and policy reactions thereto, continued increases in pricing of materials and components, or potential macroeconomic events may cause future assessment conclusions to differ.

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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 whether a valuation allowance or uncertain tax position is necessary. In making this assessment, management may analyze future taxable income, reversing temporary differences and/or ongoing tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would adjust related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income. Changes in tax law or court interpretations may result in the recognition of a tax benefit or an additional charge to the tax provision. For further information regarding income taxes, see Note 17 of the Consolidated Financial Statements.

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. For further information regarding the warranty accrual, see Note 11 of the Consolidated Financial Statements.

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. 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.

Judgments used in determining if a liability is estimable are subjective and based on known facts and our historic experience. If further developments in or resolution of an environmental matter result in facts and circumstances that differ from those assumptions used to develop these reserves, the accrual for environmental remediation could be materially understated or overstated. 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. For further information regarding our environmental costs, see Note 21 of the Consolidated Financial Statements.

New Accounting Pronouncements

See Note 2 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

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