GE Railcar Services and The Greenbrier Companies have ended their dispute over a 2007 railcar delivery contract and agreed to a modified deal that reduces by half the total number of railcars to be built and stretches out their delivery dates.
Under terms of the original 2007 contract, Greenbrier was to manufacture 11,900 new tank cars and hopper cars for GE Railcar over an eight-year period, with the last 8,500 units to be delivered subject to Greenbrier's fulfillment of certain contractual conditions. Deliveries to GE began in December 2008 and to date about 600 railcars have been delivered and accepted under the original contract.
Under the modified contract announced on Dec. 15, the parties agreed to reduce the contract quantities to up to 6,000 railcars and Greenbrier will build the first 3,800 tank cars and hopper cars by July 2013. The delivery and purchase price of these units is agreed upon, with the purchase price subject to adjustments for changes in the company's material costs. The blended purchase price on these 3,800 units represents a price increase from the original contract, and delivery of these units has been extended by 27 months from the original contract. The remaining 2,200 tank and hopper cars are subject to fulfillment of certain contractual conditions by both parties and would occur over the next five-year period. In addition, Greenbrier has retained the right of first refusal to manufacture all new railcar builds for GE through December 2018.
The modified deal also calls for Greenbrier to become a preferred railcar maintenance provider for GE's fleet of railcars and to perform railcar maintenance and refurbishment work for GE under a new five-year agreement with a minimum contract value of $25 million. Under this contract, Greenbrier will, in the first calendar quarter of 2010, begin to cut-down 485 double-stack intermodal platforms from 48' in length to 40' in length at its Gunderson facility in Portland, Oregon. Greenbrier has also obtained a right of first refusal, subject to certain qualifications, to perform railcar refurbishment and program work through March 7, 2015.
As a result of the modified contract, Greenbrier's total new railcar manufacturing backlog as of November 30, 2009 is 4,900 units valued at approximately $430 million. This backlog figure excludes the contingent production of 2,200 units for GE.
Based on current production plans, including those for GE under the revised agreement, approximately 2,000 units in backlog are scheduled for delivery in Greenbrier's fiscal year ending August 31, 2010. The company delivered approximately 350 new railcar units during its first fiscal quarter ended November 30, 2009.
William A. Furman, president and CEO of Greenbrier, said he was pleased with the new agreement, which came after nearly a year of negotiations.
"By stretching out new railcar production schedules, we have stabilized our production at current levels or higher for at least the next two years. The excellent quality of our new railcar work and broad geographic reach of our repair and refurbishment network were key factors that gave us the ability to successfully conclude this contract modification with GE Railcar," he said.
In a conference call with analysts and press, Greenbrier executives noted that the modified terms of the contract do not materially change the company's business outlook for the 2010 fiscal year. "It resolves significant uncertainty within our manufacturing segment and improves the outlook and visibility of our refurbishment & parts segment," Furman said. "With the contract modification, we estimate Greenbrier currently possesses about 40 percent of the total new railcar industry backlog in North America."
Joe Lattanzio, president and CEO of GE Railcar Services, added that the modified contract, "which recognizes the harsh realities of the economic environment, delivers tangible benefits for both companies, enabling us to continue to meet our customers' needs. We are pleased that today's agreements allow us to look forward and build on our long-standing business relationship with Greenbrier."