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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from                      to                     
Commission File No. 000-51728
 
  
AMERICAN RAILCAR INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
  
North Dakota
 
43-1481791
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
100 Clark Street, St. Charles, Missouri
 
63301
(Address of principal executive offices)
 
(Zip Code)
(636) 940-6000
(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.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
¨
Accelerated filer
x
 
 
 
 
Non-accelerated filer
¨
Smaller Reporting Company
¨
 
 
 
 
 
 
Emerging Growth Company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
The number of shares of the registrant’s common stock, $0.01 par value, outstanding on October 27, 2017 was 19,083,878 shares.
 


Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC.
INDEX TO FORM 10-Q
 
Item Number
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS









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AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
September 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
106,176

 
$
178,571

Restricted cash
16,541

 
16,714

Short-term investments—available for sale securities

 
8,958

Accounts receivable, net
34,091

 
39,727

Accounts receivable, due from related parties
1,263

 
4,790

Inventories, net
72,675

 
75,028

Prepaid expenses and other current assets
9,019

 
8,623

Total current assets
239,765

 
332,411

Property, plant and equipment, net
165,919

 
177,051

Railcars on lease, net
1,014,238

 
908,010

Income Tax Receivable
13,525

 
234

Goodwill
7,169

 
7,169

Investments in and loans to joint ventures
23,417

 
26,332

Other assets
3,725

 
5,043

Total assets
$
1,467,758

 
$
1,456,250

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
25,408

 
$
29,314

Accounts payable, due to related parties
18

 
3,252

Accrued expenses, including loss contingency of $7,359 and $10,127 at September 30, 2017 and December 31, 2016, respectively
15,480

 
15,411

Accrued income taxes payable

 
7,660

Accrued compensation
11,807

 
11,628

Short-term debt, including current portion of long-term debt
25,649

 
25,588

Total current liabilities
78,362

 
92,853

Long-term debt, net of unamortized debt issuance costs of $4,701 and $4,863 at September 30, 2017 and December 31, 2016, respectively
526,395

 
545,392

Deferred tax liability
287,788

 
252,943

Pension and post-retirement liabilities
8,652

 
8,648

Other liabilities, including loss contingency of $1,936 and $2,161 at September 30, 2017 and December 31, 2016, respectively
7,688

 
6,144

Total liabilities
908,885

 
905,980

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 50,000,000 shares authorized, 19,083,878 shares outstanding as of both September 30, 2017 and December 31, 2016
213

 
213

Additional paid-in capital
239,609

 
239,609

Retained Earnings
410,235

 
402,810

Accumulated other comprehensive loss
(5,153
)
 
(6,331
)
Treasury Stock
(86,031
)
 
(86,031
)
Total stockholders’ equity
558,873

 
550,270

Total liabilities and stockholders’ equity
$
1,467,758

 
$
1,456,250

See Notes to the Condensed Consolidated Financial Statements.

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AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Manufacturing (including revenues from affiliates of $188 and $325 for the three and nine months ended September 30, 2017, respectively, and $40 and $816 for the three and nine months ended September 30, 2016, respectively)
$
68,442

 
$
93,546

 
$
184,255

 
$
314,886

Railcar leasing (including revenues from affiliates of $231 and $678 for the three and nine months ended September 30, 2017, respectively, and $28 for both the three and nine months ended September 30, 2016)
33,440

 
32,798

 
100,992

 
98,775

Railcar services (including revenues from affiliates of $1,156 and $11,729 for the three and nine months ended September 30, 2017, respectively, and $5,933 and $21,176 for the three and nine months ended September 30, 2016, respectively)
18,864

 
18,618

 
59,200

 
57,965

Total revenues
120,746

 
144,962

 
344,447

 
471,626

Cost of revenues:
 
 
 
 
 
 
 
Manufacturing
(64,235
)
 
(79,671
)
 
(169,915
)
 
(263,389
)
Other operating (loss) income
(924
)
 
(16,973
)
 
140

 
(16,973
)
Railcar leasing
(10,856
)
 
(10,577
)
 
(34,532
)
 
(31,108
)
Railcar services
(16,023
)
 
(15,131
)
 
(49,559
)
 
(45,788
)
Total cost of revenues
(92,038
)
 
(122,352
)
 
(253,866
)
 
(357,258
)
Gross profit
28,708

 
22,610

 
90,581

 
114,368

Selling, general and administrative
(9,263
)
 
(6,583
)
 
(27,084
)
 
(21,837
)
Net gains on disposition of leased railcars
102

 
58

 
115

 
225

Earnings from operations
19,547

 
16,085

 
63,612

 
92,756

Interest income (including income from related parties of $280 and $922 for the three and nine months ended September 30, 2017, respectively, and $404 and $1,288 for the three and nine months ended September 30, 2016)
405

 
429

 
1,146

 
1,360

Interest expense
(5,441
)
 
(5,632
)
 
(16,460
)
 
(17,216
)
Other income
393

 
57

 
2,314

 
58

Earnings from joint ventures
232

 
1,614

 
1,578

 
4,558

Earnings before income taxes
15,136

 
12,553

 
52,190

 
81,516

Income tax expense
(6,278
)
 
(4,864
)
 
(21,865
)
 
(31,139
)
Net earnings
$
8,858

 
$
7,689

 
$
30,325

 
$
50,377

Net earnings per common share—basic and diluted
$
0.46

 
$
0.40

 
$
1.59

 
$
2.58

Weighted average common shares outstanding—basic and diluted
19,084

 
19,397

 
19,084

 
19,524

Cash dividends declared per common share
$
0.40

 
$
0.40

 
$
1.20

 
$
1.20

See Notes to the Condensed Consolidated Financial Statements.


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AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
Net earnings
$
8,858

 
$
7,689

 
$
30,325

 
$
50,377

Currency translation
689

 
(113
)
 
1,270

 
570

Pension plans (1)
107

 
120

 
323

 
359

Short-term investments (2)
(248
)
 
212

 
(415
)
 
212

Comprehensive income
$
9,406

 
$
7,908

 
$
31,503

 
$
51,518


(1)
Net of tax effect of $0.1 million and $0.1 million for the three months ended September 30, 2016 and September 30, 2017, respectively, and $0.2 million and $0.2 million for the nine months ended September 30, 2016 and September 30, 2017, respectively.

(2)
Net of tax effect of $(0.1) million and $(0.2) million for the three and nine months ended September 30, 2017, and $0.1 million for both the three and nine months ended September 30, 2016.
See Notes to the Condensed Consolidated Financial Statements.


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AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited) 
 
Nine Months Ended
 
September 30,
 
2017
 
2016
Operating activities:
 
 
 
Net earnings
$
30,325

 
$
50,377

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
42,746

 
38,729

Amortization of deferred costs
377

 
379

Gain on disposal of property, plant, equipment and leased railcars
(113
)
 
(16
)
Earnings from joint ventures
(1,578
)
 
(4,558
)
Provision for deferred income taxes
34,862

 
19,342

Items related to investing activities:
 
 
 
Realized gain on short-term investments - available for sale securities
(2,216
)
 

Dividends received from short-term investments

 
(50
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
5,741

 
4,414

Accounts receivable, due from related parties
3,542

 
3,520

Income taxes receivable
(14,194
)
 
1,055

Inventories, net
2,444

 
12,248

Prepaid expenses and other current assets
519

 
(1,327
)
Accounts payable
(3,933
)
 
1,208

Accounts payable, due to related parties
(3,233
)
 
(2,582
)
Accrued expenses and taxes
(7,432
)
 
23,572

Other
3,239

 
2,389

Net cash provided by operating activities
91,096

 
148,700

Investing activities:
 
 
 
Purchases of property, plant and equipment
(4,812
)
 
(16,021
)
Grant Proceeds

 
75

Capital expenditures - leased railcars
(132,388
)
 
(69,387
)
Proceeds from the disposal of property, plant, equipment and leased railcars
417

 
879

Purchase of short-term investments - available for sale securities

 
(8,750
)
Proceeds from sale of short-term investments - available for sale securities
10,535

 

Proceeds from repayments of loans by joint ventures
4,430

 
4,430

Net cash used in investing activities
(121,818
)
 
(88,774
)
Financing activities:
 
 
 
Repayments of debt
(19,101
)
 
(119,288
)
Change in restricted cash related to long-term debt
173

 
159

Stock repurchases

 
(17,402
)
Payment of common stock dividends
(22,901
)
 
(23,373
)
Debt issuance costs

 
(13
)
Net cash used in financing activities
(41,829
)
 
(159,917
)
Effect of exchange rate changes on cash and cash equivalents
156

 
(24
)
Decrease in cash and cash equivalents
(72,395
)
 
(100,015
)
Cash and cash equivalents at beginning of period
178,571

 
298,064

Cash and cash equivalents at end of period
$
106,176

 
$
198,049


See Notes to the Condensed Consolidated Financial Statements.

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AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 — Description of the Business
The condensed consolidated financial statements included herein have been prepared by American Railcar Industries, Inc. (a North Dakota corporation) and its subsidiaries (collectively the Company or ARI), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The consolidated balance sheet as of December 31, 2016 has been derived from the audited consolidated balance sheet as of that date. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of management, the information contained herein reflects all adjustments necessary to present fairly the Company's financial position, results of operations and cash flows for the interim periods reported. The results of operations of any interim period are not necessarily indicative of the results that may be expected for a fiscal year. Certain prior-period amounts in the notes to the consolidated financial statements have been reclassified to conform to current-period presentation. These reclassifications had no effect on the reported results of operations.
The condensed consolidated financial statements of the Company include the accounts of ARI and its direct and indirect wholly-owned subsidiaries: Castings, LLC (Castings), ARI Component Venture, LLC (ARI Component), ARI Fleet Services of Canada, Inc., ARI Longtrain, Inc. (Longtrain), Longtrain Leasing I, LLC (LLI), Longtrain Leasing II, LLC (LLII), Longtrain Leasing III, LLC (LLIII), ARI Leasing, LLC, ARI Railcar Services LLC and Southwest Steel Casting Company, LLC. All intercompany transactions and balances have been eliminated.
Note 2 — Recent Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-09, Compensation—Stock Compensation (Topic 718) – Scope of Modification Accounting. The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the impact of this guidance on our consolidated financial position, results of operations, comprehensive income, cash flows and disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which amends Accounting Standards Codification (ASC) Topic 230, Statement of Cash Flows. This ASU requires that the statement of cash flows explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on our consolidated financial position, results of operations, comprehensive income, cash flows and disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which amends ASC Topic 230, Statement of Cash Flows. This ASU seeks to reduce the diversity currently in practice by providing guidance on the presentation of eight specific cash flow issues in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact of this guidance on our consolidated statement of cash flows.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation - Stock Compensation. This ASU simplifies several aspects of the accounting for share-based payment award transactions, including (i) income tax consequences, (ii) classification of awards as either equity or liabilities, (iii) whether or not to estimate forfeitures or account for them when they occur and (iv) classification on the statement of cash flows. The standard is effective for interim and annual periods beginning after December 31, 2016. The adoption of this guidance during the first quarter of 2017 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases, which replaces or supersedes ASC Topic 840, Leases, and is intended to increase the transparency and comparability of accounting for lease transactions. This ASU requires most leases to be recognized on the balance sheet. Lessees will need to recognize a right-of-use asset and a lease liability for virtually all

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leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting remains similar to the current model. Targeted improvements were made to lessor accounting to align, where necessary, with certain changes to the lessee model and the new revenue recognition standard. The ASU will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Company is evaluating the impact of this standard on its consolidated financial statements and disclosures.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new revenue recognition standard also requires disclosures that sufficiently describe the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This ASU was amended by ASU No. 2015-14, issued in August 2015, which deferred the original effective date by one year; the effective date of this ASU is for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017, using one of two retrospective application methods. In addition, the FASB issued other amendments during 2016 to FASB ASC Topic 606, Revenue from Contracts with Customers, which include implementation guidance to principal versus agent considerations, guidance to identifying performance obligations and licensing guidance and other narrow scope improvements. The Company expects to adopt this new guidance on January 1, 2018 using the modified retrospective application method. As part of the Company's implementation plan for this new standard, the Company has assessed the impact of these new standards on its business processes, business and accounting systems, and consolidated financial statements and related disclosures by evaluating the terms and conditions of samples of both standard and non-standard contracts across the Company's in-scope business segments in light of the new standards.  At this time, the Company only expects slight modifications to accounting for repair work in progress, resulting in immaterial changes to business processes and systems.  To date, the Company has not identified any other material differences in its existing revenue recognition methods or contract costs that would require modification under the new standards.
Note 3 — Accounts Receivable, net
Accounts receivable, net, consists of the following: 
 
September 30,
2017
 
December 31,
2016
 
(in thousands)
Accounts receivable, gross
$
35,189

 
$
39,869

Less allowance for doubtful accounts
(1,098
)
 
(142
)
Total accounts receivable, net
$
34,091

 
$
39,727


Note 4 — Inventories, net
Inventories consist of the following: 
 
September 30,
2017
 
December 31,
2016
 
(in thousands)
Raw materials
$
39,810

 
$
46,789

Work-in-process
32,613

 
28,386

Finished products
3,440

 
3,332

Total inventories
75,863

 
78,507

Less reserves
(3,188
)
 
(3,479
)
Total inventories, net
$
72,675

 
$
75,028


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Note 5 — Property, Plant, Equipment and Railcars on Leases, net
The following table summarizes the components of property, plant, equipment and railcars on leases, net: 
 
September 30,
2017
 
December 31,
2016
 
(in thousands)
Operations / Corporate:
 
 
 
Buildings
$
186,272

 
$
182,970

Machinery and equipment
233,774

 
232,171

Land
5,037

 
4,328

Construction in process
1,363

 
1,966

 
426,446

 
421,435

Less accumulated depreciation
(260,527
)
 
(244,384
)
Property, plant and equipment, net
$
165,919

 
$
177,051

Railcar Leasing:
 
 
 
Railcars on lease
$
1,128,471

 
$
996,422

Less accumulated depreciation
(114,233
)
 
(88,412
)
Railcars on lease, net
$
1,014,238

 
$
908,010

Railcars on lease agreements
Revenues from railcar leasing are generated from operating leases that are priced as an integrated service that includes amounts related to executory costs, such as certain maintenance, insurance, and ad valorem taxes and are recognized on a straight-line basis per the terms of the underlying lease.
Capital expenditures for leased railcars represent cash outflows for the Company’s cost to produce railcars shipped or to be shipped for lease.
As of September 30, 2017, future contractual minimum rental revenues required under non-cancellable operating leases for railcars with terms longer than one year are as follows (in thousands): 
Remaining 3 months of 2017
$
33,110

2018
126,837

2019
107,394

2020
70,527

2021
53,354

2022 and thereafter
102,589

Total
493,811

Depreciation expense
The following table summarizes depreciation expense:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Total depreciation expense
$
14,572

 
$
13,113

 
$
42,746

 
$
38,729

Depreciation expense on leased railcars
$
8,964

 
$
7,614

 
$
25,859

 
$
22,493

Note 6 — Investments in and Loans to Joint Ventures
As of September 30, 2017, the Company was party to two joint ventures: Ohio Castings Company LLC (Ohio Castings) and Axis LLC (Axis). Through its wholly-owned subsidiary, Castings, the Company has a 33.3% ownership interest in Ohio Castings, a limited liability company formed to produce various steel railcar parts for use or sale by the ownership group.

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Through its wholly-owned subsidiary, ARI Component, the Company has a 41.9% ownership interest in Axis, a limited liability company formed to produce railcar axles for use or sale by the ownership group.
The Company accounts for these joint ventures using the equity method. Under this method, the Company recognizes its share of the earnings and losses of the joint ventures as they accrue. Advances and distributions are charged and credited directly to the investment accounts. From time to time, the Company also makes loans to its joint ventures that are included in the investment account. The investment balance for these joint ventures is recorded within the Company’s manufacturing segment. The carrying amount of investments in and loans to joint ventures, which also represents ARI’s maximum exposure to loss with respect to the joint ventures, is as follows: 
 
September 30,
2017
 
December 31,
2016
 
(in thousands)
Carrying amount of investments in and loans to joint ventures
 
 
 
Ohio Castings
$
6,417

 
$
7,477

Axis
17,000

 
18,855

Total investments in and loans to joint ventures
$
23,417

 
$
26,332

See Note 14, Related Party Transactions, for information regarding financial transactions with ARI's joint ventures.
Ohio Castings
When active, Ohio Castings produces railcar parts that are sold to one of the joint venture partners. This joint venture partner then sells these railcar parts to outside third parties at current market prices and sells them to the Company and the other joint venture partner at Ohio Castings' cost plus a licensing fee.
In January 2017, Ohio Castings' manufacturing facility was idled in response to an expected decline in industry demand. Based upon current market conditions, the Company expects that Ohio Castings will continue to remain idle through most of 2018, subject to re-evaluation based on changes in future demand expectations. Ohio Castings performed an analysis of long-lived assets in accordance with ASC 360, Property, Plant and Equipment as of December 31, 2016. Based on this analysis, Ohio Castings concluded that there was no impairment of its long-lived assets. In turn ARI evaluated its investment in Ohio Castings and determined there was no impairment. As of September 30, 2017, there were no changes in the assumptions used in this analysis or the conclusions reached. The Company and Ohio Castings will continue to monitor for impairment as necessary.
The Company has determined that, although the joint venture is a variable interest entity (VIE), accounting for its activity under the equity method is appropriate given that the Company is not the primary beneficiary, does not have a controlling financial interest and does not have the ability to individually direct the activities of Ohio Castings that most significantly impact its economic performance. The significant factors in this determination were that neither Castings nor the Company has rights to the majority of returns, losses or votes, all major and strategic decisions are decided between the partners, and the risk of loss to the Company and Castings is limited to its investment in Ohio Castings.
Summary financial results for Ohio Castings, the investee company, in total, are as follows: 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
15

 
$
12,497

 
$
4,469

 
$
39,834

Gross profit (loss)
$
(396
)
 
$
866

 
$
(2,795
)
 
$
2,080

Net income (loss)
$
(712
)
 
$
63

 
$
(3,179
)
 
$
(317
)

Axis
ARI, through ARI Component, owns a portion of a joint venture, Axis, to manufacture and sell railcar axles. ARI currently owns 41.9% of Axis, while a minority partner owns 9.7% and the other significant partner owns 48.4%.
Under the terms of the joint venture agreement, ARI and the other significant partner are required, and the minority partner is entitled, to contribute additional capital to the joint venture, on a pro rata basis, of any amounts approved by the joint venture’s executive committee, as and when called by the executive committee.

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Under the amended Axis credit agreement (Axis Credit Agreement), whereby ARI and the other significant partner are equal lenders, principal payments are due each fiscal quarter, with the last payment due on December 31, 2019. During the first nine months of 2017 and the full year of 2016, the applicable interest rate for the loans under the Axis Credit Agreement was 7.75%. Interest payments are due and payable monthly.
The balance outstanding on these loans, including interest, due to ARI Component, was $13.3 million and $17.7 million as of September 30, 2017 and December 31, 2016, respectively. The Company has evaluated this loan to be fully recoverable.
The Company has determined that, although the joint venture is a VIE, accounting for its activity under the equity method is appropriate given that the Company is not the primary beneficiary, does not have a controlling financial interest and does not have the ability to individually direct the activities of Axis that most significantly impact its economic performance. The significant factors in this determination were that neither ARI Component nor the Company has rights to the majority of returns, losses or votes, the executive committee and board of directors of the joint venture are comprised of one representative from each significant partner with equal voting rights and the risk of loss to the Company and ARI Component is limited to its investment in Axis and the loans due to the Company under the Axis Credit Agreement. The Company will continue to monitor its investment in Axis for impairment as necessary.
Summary financial results for Axis, the investee company, in total, are as follows: 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
10,432

 
$
17,442

 
$
35,887

 
$
49,939

Gross profit
$
1,448

 
$
4,584

 
$
8,644

 
$
14,444

Net earnings
$
688

 
$
3,521

 
$
6,180

 
$
11,085

Note 7 — Warranties
The overall change in the Company’s warranty reserve is reflected on the condensed consolidated balance sheets in accrued expenses and other liabilities and is detailed as follows: 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Liability, beginning of period
$
3,006

 
$
1,584

 
$
2,439

 
$
1,415

Provision for warranties issued during the period, net of adjustments
120

 
(14
)
 
354

 
430

Adjustments to warranties issued during previous periods
658

 
(7
)
 
1,578

 
(18
)
Warranty claims
(113
)
 
(41
)
 
(700
)
 
(305
)
Liability, end of period
$
3,671

 
$
1,522

 
$
3,671

 
$
1,522

Note 8 — Debt
Subsidiary Lease Fleet Financings
From time to time, the Company, through its wholly-owned subsidiaries LLI, LLII and LLIII, has entered into lease fleet financings in order to, among other things, support and grow its railcar leasing business. Currently, only the LLIII lease fleet financing remains outstanding. The lease fleet financings are obligations of the respective wholly-owned subsidiary, are generally non-recourse to ARI, and are secured by a first lien on the subject assets of the respective subsidiary, consisting of railcars, railcar leases, receivables and related assets, subject to limited exceptions. ARI has, however, entered into agreements containing certain representations, undertakings, and indemnities customary for asset sellers and parent companies in transactions of this type, and ARI generally is obligated to make any selections of transfers of railcars, railcar leases, receivables and related assets to be transferred to the respective subsidiary without any adverse selection, to cause the manager of the railcars and their related leases, to maintain, lease, and re-lease the respective subsidiary's equipment no less favorably than similar portfolios serviced by the manager, and to repurchase or replace certain railcars under certain conditions set forth in the respective loan documents. American Railcar Leasing LLC (ARL) historically has acted as the manager under these lease

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fleet financings. As of June 1, 2017, ARI has subcontracted with ARL to provide services to ARL covering the day-to-day management of the LLIII railcars and the leases associated therewith until the earlier of the date on which ARI becomes the manager of the LLIII railcars following receipt of the consent of noteholders, or the date that is thirty (30) months after the ARL Closing Date (as defined below), unless terminated earlier pursuant to its terms. See below and Note 14, Related Party Transactions, for further discussion regarding these agreements with ARL and the impact on the Company of the sale of ARL (the ARL Sale) to SMBC Rail Services LLC (Buyer).
January 2015 private placement notes
In January 2015, LLIII issued $625.5 million in aggregate principal amount of notes pursuant to an indenture (the Longtrain Indenture). The notes are fixed rate secured railcar equipment notes bearing interest at a rate of 2.98% per annum for the Class A-1 Notes and 4.06% per annum for the Class A-2 Notes (collectively, the Notes), each payable monthly. Of the aggregate principal amount, $408.5 million was used to refinance the LLI and LLII lease fleet financing facilities, resulting in net proceeds of $211.6 million. As of September 30, 2017, there were $181.4 million and $375.5 million of Class A-1 and Class A-2 notes outstanding, respectively, compared to $200.5 million and $375.5 million of Class A-1 and Class A-2 notes outstanding, respectively, as of December 31, 2016. The Notes have a legal final maturity date of January 17, 2045 and an expected principal repayment date of January 15, 2025.
While the legal final maturity date of the Notes is January 17, 2045, cash flows from LLIII's assets will be applied, pursuant to the flow of funds provisions of the Longtrain Indenture, so as to achieve monthly targeted principal balances. Also, under the flow of funds provisions of the Longtrain Indenture, early amortization of the Notes may be required in certain circumstances. Pursuant to the terms of the Longtrain Indenture, LLIII is required to maintain deposits in a liquidity reserve bank account equal to nine months of interest payments. The liquidity reserve amount was $16.5 million and $16.7 million as of September 30, 2017 and December 31, 2016, respectively, and is included within 'Restricted cash' on the condensed consolidated balance sheets.
LLIII can prepay or redeem the Class A-1 Notes, in whole or in part, subject to the payment of a make-whole amount with respect to certain prepayments or redemptions made on or prior to the payment date occurring in January 2018. LLIII can prepay or redeem the Class A-2 Notes, in whole or in part, on any payment date occurring on or after January 16, 2018, subject to the payment of a make-whole amount with respect to certain prepayments or redemptions made on or prior to the payment date occurring in January 2022.
The Longtrain Indenture contains covenants which limit, among other things, LLIII’s ability to incur additional indebtedness or encumbrances on its assets, pay dividends or make distributions, make certain investments, perform its business other than specified activities, enter into certain types of transactions with its affiliates, and sell assets or consolidate or merge with or into other companies. These covenants are subject to a number of exceptions and qualifications. LLIII was in compliance with these covenants as of September 30, 2017.
The fair value of the Notes was $563.1 million and $582.4 million as of September 30, 2017 and December 31, 2016, respectively, and is calculated by taking the net present value of future principal and interest payments using a discount rate that is based on the Company's most recent fixed debt transaction. The inputs used in the calculation are classified within Level 2 of the fair value hierarchy.
ARI Lease Fleet Financings
December 2015 revolving credit facility
In December 2015, the Company completed a financing of its railcar lease fleet with availability of up to $200.0 million (the amounts extended under this facility, the Revolving Loan) under a credit agreement (the 2015 Credit Agreement). See the 'Liquidity and Capital Resources' section for further discussion regarding the incremental borrowing provision under the 2015 Credit Agreement. The initial Revolving Loan obtained at closing amounted to approximately $99.5 million, net of fees and expenses. In February 2016, the Company repaid amounts outstanding under the Revolving Loan in full and as of September 30, 2017, the Company had borrowing availability of $200.0 million under this facility.
The Revolving Loan accrues interest at a rate per annum equal to Adjusted LIBOR (as defined in the 2015 Credit Agreement) for the applicable interest period, plus 1.45%. Interest is payable on the last day of each 1, 2, or 3-month interest period, the day of any mandatory prepayment, and the maturity date.
The Revolving Loan and the other obligations under the 2015 Credit Agreement are fully recourse to the Company and are secured by a first lien and security interest on certain specified railcars (together with specified replacement railcars), related leases, related receivables and related assets, subject to limited exceptions, a controlled bank account, and following an election

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by the Company (the Election), the applicable railcar management agreement with ARL. Due to the ARL Sale, the Company does not expect to make an Election under the 2015 Credit Agreement.
Subject to the provisions of the 2015 Credit Agreement, the Revolving Loan may be borrowed and reborrowed until the maturity date. The Revolving Loan may be prepaid at the Company’s option at any time without premium or penalty (other than customary LIBOR breakage fees and customary reimbursement of increased costs). The final scheduled maturity of the Revolving Loan is December 10, 2018, or such earlier date as provided in the 2015 Credit Agreement. The Company was in compliance with all of its covenants under the 2015 Credit Agreement as of September 30, 2017.
Prior to the ARL Sale, ARL acted as the manager of the railcars pledged as collateral under the 2015 Credit Agreement. Upon the consummation of the ARL Sale, ARI became the manager of those railcars; however the leases for those railcars remain pledged under a collateral agency agreement between U.S. Bank National Association as collateral agent, ARL as manager, and the pledgers party thereto, including the Company. The Company anticipates seeking an amendment to the 2015 Credit Agreement to allow the Company to transfer the pledged leases to a new collateral agency agreement under which the Company acts as manager, as well as other minor changes related to the transition of railcar management from ARL to ARI.
As of September 30, 2017 and December 31, 2016, the net book value of the railcars that were pledged as part of the Company's and its subsidiaries' lease fleet financings was $529.1 million and $544.1 million, respectively.
The future contractual minimum rental revenues related to the railcars pledged as of September 30, 2017 are as follows (in thousands): 
Remaining 3 months of 2017
$
17,047

2018
62,676

2019
47,781

2020
27,773

2021
17,887

2022 and thereafter
19,230

Total
$
192,394

The remaining principal payments under the Notes as of September 30, 2017 are as follows (in thousands): 
Remaining 3 months of 2017
$
6,487

2018
25,590

2019
25,507

2020
26,354

2021
26,358

2022 and thereafter
446,616

Total
$
556,912

ARL Sale and Railcar Management Transition Agreement
As previously disclosed, on December 16, 2016, ARI entered into a railcar management transition agreement (the RMTA) with ARL in anticipation of the ARL Sale. The RMTA, among other things, addresses the transition, from ARL to ARI following the ARL Sale, of the management of railcars owned by ARI (the ARI Railcars) and railcars owned by LLIII (the Longtrain Railcars). American Entertainment Properties Corporation (AEPC), a company controlled by Mr. Carl Icahn, the Company’s principal beneficial stockholder through Icahn Enterprises L.P. (IELP), and SMRSH LLC, an affiliate of Buyer, are also parties to the RMTA for the limited purposes previously disclosed. Immediately prior to the ARL Sale, ARL and its subsidiaries were controlled by Mr. Carl Icahn. Following the ARL Sale, ARL is controlled by Buyer. The ARL Sale was consummated (the ARL Closing) on June 1, 2017 (the ARL Closing Date). In connection with the ARL Closing, the RMTA was amended by a Joinder and Amendment to the RMTA, principally to join ACF Industries, LLC (ACF), a company controlled by Mr. Carl Icahn, as a party thereto, to address certain ACF books and records in the possession of ARL. The Railcar Management Agreement, dated February 29, 2012 (as amended), between ARI and ARL (the ARI RMA), pursuant to which ARL managed the ARI Railcars and marketed them for sale or lease was terminated pursuant to the terms of the RMTA as of the ARL Closing Date. And effective as of the ARL Closing Date, ARI now manages the ARI Railcars and markets them for sale or lease.

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Pursuant to a Railcar Management Agreement, dated January 29, 2015, between LLIII and ARL (the Longtrain RMA), ARL, as manager, has marketed Longtrain Railcars for lease, and has also arranged for the operation, storage, re-lease, sublease, service, repair, overhaul, replacement and maintenance of the Longtrain Railcars. In addition, a subsidiary of ARL serves as administrator of the accounts used to service the debt under the Longtrain Indenture. As previously disclosed, the RMTA, among other things, requires ARI to use commercially reasonable efforts to obtain the Noteholder Consent for ARI to replace ARL as manager of the Longtrain Railcars under the Longtrain Indenture and certain related documents. ARI has no obligation to pay any consent or similar fees in connection with obtaining the Noteholder Consent. ARI may be unable to obtain the Noteholder Consent for a variety of reasons.
As provided in the RMTA, following the ARL Closing, the Longtrain RMA will continue in effect, with ARL remaining as manager of the Longtrain Railcars under the Longtrain RMA and the Longtrain Indenture, unless and until ARI obtains the Noteholder Consent and becomes the manager of the Longtrain Railcars, or, alternatively, ARL is removed as the manager or the Longtrain RMA is terminated earlier, in each case pursuant to its terms.
ARL Subcontractor Agreement
Further, as contemplated by the RMTA, effective as of the ARL Closing Date, ARI entered into a sub-contract arrangement with ARL (the Subcontractor Agreement) to provide services to ARL covering the day-to-day management of the Longtrain Railcars and the leases associated therewith. Under this arrangement, ARL and its subsidiary, as manager and administrator, respectively, will remain in control of the accounts used to service the debt under the Longtrain Indenture. During the term of the Subcontractor Agreement, management fees and expenses paid to ARL in respect of management duties subcontracted to ARI will be paid by ARL to ARI. The Subcontractor Agreement will continue until the earlier of the date on which ARI becomes the manager of the Longtrain Railcars following receipt of the Noteholder Consent, or the date that is thirty (30) months after the ARL Closing Date, unless terminated earlier pursuant to its terms.
Note 9 — Income Taxes
The Company’s federal income tax returns for tax years 2013 and beyond remain subject to examination, with the latest statute of limitations expiring in October 2020. Certain of the Company's 2008 through 2012 state income tax returns and a majority of the Company's state income tax returns for 2013 and beyond remain open and subject to examination, with the latest statute of limitations expiring in December 2021, upon filing of the Company's 2016 state tax returns. The Company’s foreign subsidiary's income tax returns for 2013 and beyond remain open to examination by foreign tax authorities.
Note 10 — Pension Plans
The Company is the sponsor of three defined benefit plans that are frozen and no additional benefits are accruing thereunder. Two of the Company's defined benefit pension plans cover certain employees at designated repair facilities. The assets of these defined benefit pension plans are held by independent trustees and consist primarily of equity and fixed income securities. The Company also sponsors an unfunded, non-qualified supplemental executive retirement plan that covers several of the Company's current and former employees.
The components of net periodic benefit cost for the pension plans are as follows: 
 
Pension Benefits
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Service cost
$
88

 
$
52

 
$
265

 
$
156

Interest cost
235

 
246

 
706

 
738

Expected return on plan assets
(283
)
 
(284
)
 
(848
)
 
(851
)
Amortization of net actuarial loss/prior service cost
184

 
206

 
552

 
618

Net periodic cost recognized
$
224

 
$
220

 
$
675

 
$
661

Note 11 — Commitments and Contingencies
The Company is subject to comprehensive federal, state, local and international environmental laws and regulations relating to the release or discharge of materials into the environment, the management, use, processing, handling, storage, transport or disposal of hazardous materials and wastes, and other laws and regulations relating to the protection of human health and the

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environment. These laws and regulations not only expose ARI to liability for the environmental condition of its current or formerly owned or operated facilities, and its own negligent acts, but also may expose ARI to liability for the conduct of others or for ARI’s actions that were in compliance with all applicable laws at the time such actions were taken. In addition, these laws may require significant expenditures to achieve compliance and are frequently modified or revised to impose new obligations. Civil and criminal fines and penalties and other sanctions may be imposed for non-compliance with these environmental laws and regulations. ARI’s operations that involve hazardous materials also raise potential risks of liability under common law.
Certain real property ARI acquired from ACF in 1994 had been involved in investigation and remediation activities to address contamination both before and after their transfer to ARI. ACF is an affiliate of Mr. Carl Icahn, the Company’s principal beneficial stockholder through IELP. Substantially all of the issues identified with respect to these properties relate to the use of these properties prior to their transfer to ARI by ACF and for which ACF has retained liability for environmental contamination that may have existed at the time of transfer to ARI. ACF has also agreed to indemnify ARI for any cost that might be incurred with those existing issues. As of the date of this report, ARI does not believe it will incur material costs in connection with activities relating to these properties, but it cannot assure that this will be the case. If ACF fails to honor its obligations to ARI, ARI could be responsible for the cost of any additional investigation or remediation that may be required. The Company believes that its operations and facilities are in substantial compliance with applicable laws and regulations and that any noncompliance is not likely to have a material adverse effect on its financial condition or results of operations.
ARI is a party to collective bargaining agreements with labor unions at two repair facilities that will expire in January and September 2021, respectively, unless extended or modified. ARI is also party to a collective bargaining agreement with a labor union at a steel component manufacturing facility that will expire in April 2022, unless extended or modified.
The Company has various agreements with and commitments to related parties. See Note 14, Related Party Transactions, for further detail.
Certain claims, suits and complaints arising in the ordinary course of business, as well as the GyanSys, Inc. (GyanSys) litigation discussed below, have been filed or are pending against ARI. In the opinion of management, based on information currently available, all such claims, suits, and complaints are without merit or would not have a significant effect on the future liquidity, results of operations or financial position of ARI if disposed of unfavorably. However, resolution of certain claims or suits by settlement or otherwise, could impact the operating results of the reporting period in which such resolution occurs.
GyanSys
On October 24, 2014, the Company filed a complaint in the United States District Court for the Southern District of New York against GyanSys. The complaint asserts a claim against GyanSys for breaching its contract with ARI to implement an enterprise resource planning system. The Company alleges that it has suffered damages in excess of $20 million as a result of GyanSys' breach. GyanSys filed a response to the suit denying its responsibility. It also alleged a counterclaim against ARI for breach of contract and wrongful termination, seeking equitable relief and damages, which GyanSys alleges to be more than $7 million. The trial was completed in August 2017, and a decision is expected during the fourth quarter of 2017. ARI continues to believe that GyanSys' counterclaims lack merit. However, at this time, the Company does not have sufficient information to reasonably form an estimate of the potential outcome (gain or loss) of this litigation. As a result, no such accrual has been recorded. 
FRA Directive
On September 30, 2016, the Federal Railroad Administration (FRA) issued Railworthiness Directive (RWD) No. 2016-01 (the Original Directive). The Original Directive addressed, among other things, certain welding practices in one weld area in specified DOT 111 tank railcars manufactured between 2009 and 2015 by ARI and ACF. ACF is an affiliate of Mr. Carl Icahn, the Company's principal beneficial stockholder through IELP. The Company met and corresponded with the FRA following the issuance of the Original Directive to express the Company's concerns with the Original Directive and its impact on ARI, as well as the industry as a whole.
On November 18, 2016 (the Issuance Date), the FRA issued RWD No. 2016-01 [Revised] (the Revised Directive). The Revised Directive changed and superseded the Original Directive in several ways.
The Revised Directive requires owners to identify their subject tank railcars and then from that population identify the 15% of subject tank railcars currently in hazardous materials service with the highest mileage in each tank car owner’s fleet. Visual inspection of each of the subject tank railcars is required by the car operator prior to putting any railcar into service. Owners must ensure appropriate inspection, testing and repairs, if needed, within twelve months of the Issuance Date for the 15% of their subject tank railcars identified to be in hazardous materials service with the highest mileage. The FRA reserved the right to impose additional test and inspection requirements for the remaining tank railcars subject to the Revised Directive.

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Although the Revised Directive addressed some of the Company’s concerns and clarified certain requirements of the Original Directive, ARI identified significant issues with the Revised Directive. As a result, in December 2016, ARI sought judicial review of and relief from the Revised Directive by filing a petition for review against the FRA in the United States Court of Appeals for the District of Columbia Circuit.
On August 17, 2017, the Company entered into a settlement agreement with the FRA, which covered the subject railcars owned by ARI and certain of its affiliates. This settlement agreement, among other things, extends the deadline for ARI to complete the inspection, testing and repairs, if needed, for the 15% identified railcars to December 31, 2017.  Adding clarity regarding certain unknown requirements referenced in the Revised Directive, under the settlement agreement, ARI is required to inspect, test, and if necessary repair the remaining 85% subject tank railcars at the next tank railcar qualification, scheduled routine or regular maintenance, shopping or repair event, but no later than December, 31, 2025. However, the agreement permits ARI to: (i) if the FRA does not impose a similar requirement by July 31, 2018 on other owners’ railcars subject to the Revised Directive, suspend compliance with this requirement until such time as the FRA imposes requirements on all 85% railcars subject to the Revised Directive, and (ii) elect to be governed by any different requirements later imposed by the FRA on other owners’ railcars subject to the Revised Directive. In addition, the settlement agreement also provides that railcars owned by ARI are no longer required to have a surface inspection performed when the railcars are being inspected pursuant to the Revised Directive. Finally, as part of the settlement agreement, ARI dismissed its lawsuit against the FRA.
ARI has evaluated its potential exposure related to the Revised Directive and has a loss contingency reserve remaining of $9.3 million to cover its probable and estimable liabilities, as of September 30, 2017, with respect to the Company's response to the Revised Directive. This loss contingency amount takes into account information available as of September 30, 2017 and ARI's contractual obligations in its capacity as both a manufacturer and owner of railcars subject to the Revised Directive. This amount is included in accrued expenses and other liabilities on the consolidated balance sheet. This amount will continue to be evaluated as the Company’s and its customers’ compliance with the Revised Directive and the settlement agreement progresses. Actual results could differ from this estimate.
It is reasonably possible that a loss exists in excess of the amount accrued by the Company. However, the amount of potential costs and expenses expected to be incurred for compliance with the Revised Directive in excess of the loss contingency reserve of $9.3 million cannot be reasonably estimated at this time.
Legal fees incurred with respect to this matter are expensed in the period in which they occur, in accordance with ARI's accounting policy.
Note 12 — Share-based Compensation
The following table presents the amounts incurred by ARI for share-based compensation, related to stock appreciation rights (SARs), and the corresponding line items on the condensed consolidated statements of operations that they are classified within: 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Share-based compensation expense (income)
 
 
 
 
 
 
 
Cost of revenues: Manufacturing
$
23

 
$
28

 
$
(12
)
 
$
(145
)
Cost of revenues: Railcar services

 
5

 
(3
)
 
(12
)
Selling, general and administrative
223

 
362

 
(211
)
 
265

Total share-based compensation expense (income)
$
246

 
$
395

 
$
(226
)
 
$
108

As of September 30, 2017, unrecognized compensation costs related to the unvested portion of SARs were estimated to be $1.4 million and were expected to be recognized over a weighted average period of 27 months.





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Note 13 — Accumulated Other Comprehensive Income (Loss)
The following table presents the balances of related after-tax components of accumulated other comprehensive income (loss). 
 
Accumulated Short-term Investment Transactions
 
Accumulated
Currency
Translation
 
Accumulated
Postretirement
Transactions
 
Accumulated
Other
Comprehensive
Income (Loss)
 
(in thousands)
Balance December 31, 2016
$
415

 
$
(2,015
)
 
$
(4,731
)
 
$
(6,331
)
Currency translation

 
1,270

 

 
1,270

Reclassifications related to pension plans, net of tax effect of $198 (1)

 

 
323

 
323

Unrealized gain on available for sale securities, net of tax effect of $552 (2)
1,025

 

 

 
1,025

Reclassifications related to available for sale securities, net of tax effect of $776 (3)
(1,440
)
 

 

 
(1,440
)
Balance September 30, 2017
$

 
$
(745
)
 
$
(4,408
)
 
$
(5,153
)
 
(1)—
These accumulated other comprehensive income components relate to amortization of actuarial loss/(gain) and prior period service costs/(benefits) and are included in the computation of net periodic costs for our pension plans. See Note 10 for further details and pre-tax amounts.
(2)—
The realized gain on available for sale securities sold, net of tax represents the change in fair value estimates that are based on quoted prices with an active trading market (Level 1). The pre-tax realized gain was recorded in other income/(loss) on the condensed consolidated statements of operation.
(3)—
The unrealized gain on available for sale securities, net of tax represents the change in fair value estimates that are based on quoted prices with an active trading market (Level 1).
Note 14 — Related Party Transactions
Agreements with ACF
The Company has the following agreements with ACF, a company controlled by Mr. Carl Icahn, the Company’s principal beneficial stockholder through IELP.
Component purchases
The Company has from time to time purchased components from ACF under a long-term agreement, as well as on a purchase order basis. Under the manufacturing services agreement entered into in 1994 and amended in 2005, ACF agreed to manufacture and distribute, at the Company’s instruction, various railcar components. In consideration for these services, the Company agreed to pay ACF based on agreed upon rates. The agreement automatically renews unless written notice is provided by the Company.
In April 2015, ARI entered into a parts purchasing and sale agreement with ACF. The agreement was unanimously approved by the independent directors of ARI’s Audit Committee. Under this agreement, ARI and ACF may, from time to time, purchase and sell to each other certain parts for railcars (Parts). ARI also provides a non-exclusive and non-assignable license of certain intellectual property to ACF related to the manufacture and sale of Parts to ARI. The buyer under the agreement must pay the market price of the Parts as determined in the agreement or as stated on a public website for all ARI buyers. ARI may provide designs, engineering and purchasing support, including all materials and components to ACF. Subject to certain early termination events, the agreement terminates on December 31, 2020.
ARI purchased $0.8 million and $4.3 million of components from ACF during the three and nine months ended September 30, 2017, respectively, and $1.5 million and $4.4 million during the comparable periods in 2016.

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Purchasing and engineering services agreement
In January 2013, ARI entered into a purchasing and engineering services agreement and license with ACF. The agreement was unanimously approved by the independent directors of ARI's Audit Committee. Under this agreement, ARI provides purchasing support and engineering services to ACF in connection with ACF’s manufacture and sale of tank railcars at its facility in Milton, Pennsylvania. Additionally, ARI has granted ACF a non-exclusive, non-assignable license to certain of ARI’s intellectual property, including certain designs, specifications, processes and manufacturing know-how required to manufacture and sell tank railcars during the term of the agreement. In December 2016, ARI and ACF amended this agreement to, among other provisions, extend the termination date to December 31, 2017 from December 31, 2016, subject to certain early termination events.
In consideration of the services and license provided by ARI to ACF in conjunction with the agreement, ACF pays ARI a royalty and, if any, a share of the net profits (Profits) earned on each railcar manufactured and sold by ACF under the agreement, in an aggregate amount equal to 30% of such Profits, as calculated under the agreement. Profits are net of certain of ACF’s start-up and shutdown expenses and certain maintenance capital expenditures. If no Profits are realized on a railcar manufactured and sold by ACF pursuant to the agreement, ARI will still be entitled to the royalty for such railcar and will not share in any losses incurred by ACF in connection therewith. In addition, any railcar components supplied by ARI to ACF for the manufacture of these railcars are provided at fair market value.
Under the Agreement, ARI has the exclusive right to any sales opportunities for tank railcars for any new orders scheduled for delivery after January 31, 2014 and through termination of this agreement. ARI has the right to assign any sales opportunity to ACF, and ACF has the right, but not the obligation, to accept such sales opportunity. Any sales opportunity accepted by ACF will not be reflected in ARI’s orders or backlog.
Revenues of zero for the three and nine months ended September 30, 2017 compared to zero and $0.7 million for the same periods in 2016, respectively, were recorded under this agreement for sales of railcar components to ACF and for royalties and profits on railcars sold by ACF and are included under manufacturing revenues from affiliates on the condensed consolidated statements of operations.
Repair services and support agreement
In April 2015, ARI entered into a repair services and support agreement with ACF. The agreement was unanimously approved by the independent directors of ARI’s Audit Committee. Under this agreement, ARI provides certain sales and administrative and technical services, materials and purchasing support and engineering services to ACF to provide repair and retrofit services (Repair Services). Additionally, ARI provides a non-exclusive and non-assignable license of certain intellectual property related to the Repair Services for railcars. ARI receives 30% of the net profits (as defined in the agreement) for Repair Services related to all railcars not owned by ARL or its subsidiaries and 20% of the net profits for Repair Services related to all railcars owned by ARL or its subsidiaries, if any, but in any case does not absorb any losses incurred by ACF.
Under the agreement, ARI has the exclusive right to sales opportunities related to Repair Services, except for any sales opportunity related to Repair Services presented to ACF by ARL with respect to ARL-owned railcars. ARI also has the right to assign any sales opportunities related to Repair Services to ACF, and ACF has the right, but not the obligation, to accept such sales opportunity. Subject to certain early termination events, the agreement terminates on December 31, 2020.
For the three and nine months ended September 30, 2017, revenues of $0.1 million and $0.2 million, respectively, compared to less than $0.1 million for both the three and nine months ended September 30, 2016, were recorded under this agreement. This revenue related to sales of railcar components to ACF and profits on repair work performed by ACF and are included under manufacturing revenues from affiliates and railcar services revenues from affiliates on the condensed consolidated statements of operations.
Railcar management transition agreement
In connection with the ARL Closing, the RMTA was amended by a Joinder and Amendment to the RMTA, principally to join ACF as a party thereto, to address certain ACF books and records in the possession of ARL. The RMTA requires ARL to transfer to ACF certain books and records in the possession of ARL and has no other impact on ARI’s rights or obligations under the RMTA. The Joinder and Amendment to the RMTA was unanimously approved by the independent directors of the Company's Audit Committee.

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Agreements with ARL
Prior to the ARL Closing Date, the Company had the following agreements with ARL, a company that was controlled by Mr. Carl Icahn, the Company’s principal beneficial stockholder through IELP, prior to ARL’s sale to Buyer. ARL is no longer considered a related party to the Company.
Railcar services agreement
In April 2011, the Company entered into a railcar services agreement with ARL (the Railcar Services Agreement). Under the Railcar Services Agreement, ARI provided ARL railcar repair, engineering, administrative and other services, on an as needed basis, for ARL’s lease fleet at mutually agreed upon prices. The Railcar Services Agreement had an initial term of three years and automatically renewed for additional one year periods until the Railcar Services Agreement was terminated upon consummation of the ARL Sale, in accordance with the RMTA.
Revenues of zero and $10.1 million for the three and nine months ended September 30, 2017, respectively compared to $5.9 million and $21.2 million for the same periods in 2016 were recorded under the Railcar Services Agreement. These revenues are included under railcar services revenues from affiliates on the condensed consolidated statements of operations. The Railcar Services Agreement was unanimously approved by the independent directors of the Company's Audit Committee.
Railcar management agreements and subcontractor agreement
From time to time, the Company and its wholly-owned subsidiaries have entered into railcar management agreements with ARL, pursuant to which the Company and its respective wholly-owned subsidiaries engaged ARL to manage, sell, operate, market, store, lease, re-lease, sublease and service ARI's and its subsidiaries' railcars, subject to the terms and conditions of the applicable agreement. These agreements provided that ARL would manage the leased railcars (as identified in the respective agreement) including arranging for services, such as repairs or maintenance, as deemed necessary. Each of these railcar management agreements was unanimously approved by the independent directors of the Company's Audit Committee.
On February 29, 2012, the Company entered into the ARI RMA. The agreement, as amended, was effective January 1, 2011, and continued until the ARL Closing Date. Effective as of the ARL Closing Date, ARI now manages the ARI Railcars and markets them for sale or lease. In December 2012, LLI entered into a similar agreement with ARL (the LLI railcar management agreement). On October 16, 2014, LLII entered into a railcar management agreement with ARL (the LLII railcar management agreement).
In January 2015, in connection with the Company's refinancing of its lease fleet financings, the LLI and LLII railcar management agreements were terminated and LLIII entered into a similar railcar management agreement with ARL, the Longtrain RMA. Pursuant to the Longtrain RMA, ARL, as manager, has marketed Longtrain Railcars for lease, and has also arranged for the operation, storage, re-lease, sublease, service, repair, overhaul, replacement and maintenance of the Longtrain Railcars. In addition, a subsidiary of ARL serves as administrator of the accounts used to service the debt under the Longtrain Indenture. As previously disclosed, the RMTA, among other things, requires ARI to use commercially reasonable efforts to obtain the Noteholder Consent for ARI to replace ARL as manager of the Longtrain Railcars under the Longtrain Indenture and certain related documents. ARI has no obligation to pay any consent or similar fees in connection with obtaining the Noteholder Consent. ARI may be unable to obtain the Noteholder Consent for a variety of reasons.
As provided in the RMTA, following the ARL Closing, the Longtrain RMA will continue in effect, with ARL remaining as manager of the Longtrain Railcars under the Longtrain RMA and the Longtrain Indenture, unless and until ARI obtains the Noteholder Consent and becomes the manager of the Longtrain Railcars, or, alternatively, ARL is removed as the manager or the Longtrain RMA is terminated earlier, in each case pursuant to its terms. Further, as contemplated by the RMTA, effective as of the ARL Closing Date, ARI entered into the Subcontractor Agreement to provide services to ARL covering the day-to-day management of the Longtrain Railcars and the leases associated therewith. Under this arrangement, ARL and its subsidiary, as manager and administrator, respectively, will remain in control of the accounts used to service the debt under the Longtrain Indenture. During the term of the Subcontractor Agreement, management fees and expenses paid to ARL in respect of management duties subcontracted to ARI will be paid by ARL to ARI. The Subcontractor Agreement will continue until the earlier of the date on which ARI becomes the manager of the Longtrain Railcars following receipt of the Noteholder Consent, or the date that is thirty (30) months after the ARL Closing Date, unless terminated earlier pursuant to its terms.
Subject to the terms and conditions of each railcar management agreement, ARL received, in respect of leased railcars, a management fee based on the lease revenues. Under the ARI RMA, in addition to the management fee, ARL received a fee consisting of a lease origination fee, and, in respect of railcars sold by ARL, sales commissions.
Total lease origination and management fees incurred under the railcar management agreements were zero and $2.8 million for the three and nine months ended September 30, 2017, respectively, compared to $1.7 million and $5.0 million for the same periods in 2016. These fees are included in cost of revenues for railcar leasing on the condensed consolidated statements of

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operations. Sales commissions of zero and $0.3 million were incurred for the three and nine months ended September 30, 2017, respectively, compared to $0.1 million and $0.7 million for the same periods in 2016. These costs are included in selling, general and administrative costs on the condensed consolidated statements of operations.
Railcar management transition agreement
As previously disclosed, on December 16, 2016, ARI entered into the RMTA with ARL in anticipation of the ARL Sale. The RMTA, among other things, addresses the transition, from ARL to ARI following the ARL Sale, of the management of the ARI Railcars and the Longtrain Railcars. AEPC, a company controlled by Mr. Carl Icahn, the Company’s principal beneficial stockholder through IELP, and SMRSH LLC, an affiliate of Buyer, are also parties to the RMTA for the limited purposes previously disclosed. Immediately prior to the ARL Sale, ARL and its subsidiaries were controlled by Mr. Carl Icahn. Following the ARL Sale, ARL is controlled by Buyer. AEPC is controlled by Mr. Carl Icahn. In connection with the ARL Closing, the RMTA was amended by a Joinder and Amendment to the RMTA, principally to join ACF, a company controlled by Mr. Carl Icahn, as a party thereto, to address certain ACF books and records in the possession of ARL.
In addition to the provisions of the RMTA related to the railcar management agreements described above, the RMTA, among other things, requires ARL to transfer to ARI certain books and records and electronic data with respect to ARI's and LLIII's railcars and the Company’s and LLIII's leasing businesses and otherwise assist in the transfer of the management of the leasing businesses to ARI. Pursuant to the terms and conditions of the RMTA, ARL provides ARI an irrevocable, fully paid, non-transferable (except as set forth therein), royalty-free license to certain software and databases owned and used by ARL to manage its railcars and ARI’s and LLIII’s railcars. The RMTA also provides for the termination, as of the consummation of the ARL Sale, of the Trademark License Agreement, dated as of June 30, 2005, between ARI and ARL (the Trademark License), pursuant to which ARI granted to ARL a license to use ARI’s trademarks “American Railcar” and the “diamond shape” of its logo, and provides for the wind-down of ARL’s use of such trademarks.
Pursuant to the terms and conditions of the RMTA, ARI has agreed not to solicit or hire ARL employees until 24 months after the consummation of the ARL Sale, subject to certain exceptions.
The RMTA, subject to its terms, also provides for the termination of, and the discharge and release of obligations under, certain other agreements that ARI and its subsidiaries are party to on the one hand, and ARL is party to on the other hand, including (i) the ARI RMA, pursuant to which ARI engaged ARL to manage ARI’s railcars; (ii) subject to receiving Noteholder Consent (and the terms and conditions thereof), the Longtrain RMA, pursuant to which LLIII engaged ARL to manage LLIII's railcars; (iii) the Railcar Services Agreement, pursuant to which ARI provides ARL railcar repair, engineering, administrative and other services on an as needed basis; (iv) the Consulting Services Agreement, dated as of March 1, 2016, between ARI and ARL, pursuant to which ARI agreed to provide legal services to ARL; and (v) the Trademark License described above.
Pursuant to the terms and conditions of the RMTA, AEPC has agreed to (i) undertake certain payment and performance obligations of ARL to ARI and (ii) pay or reimburse, as applicable, certain costs and expenses of ARI incurred in connection with the ARL Sale and the RMTA. In addition, pursuant to the terms and conditions of the RMTA, Buyer and an affiliate of Buyer have agreed to undertake certain payment and performance obligations of ARL to ARI following the closing of the ARL Sale. The amount receivable from AEPC pursuant to the RMTA, which was recorded within accounts receivable, due from related parties on the condensed consolidated balance sheets was $0.1 million as of September 30, 2017 and $0.6 million as of December 31, 2016.
The independent directors of the Company’s Audit Committee reviewed the terms and conditions of the RMTA and received advice from independent legal counsel in connection therewith. The Audit Committee unanimously approved the terms and conditions of, and the Company’s entry into, the RMTA and the joinder and amendment thereto.

Consulting services agreement

On February 15, 2017, ARI entered into a Consulting Services Agreement with ARL (Consulting Services Agreement). The Consulting Services Agreement was unanimously approved by the independent directors of ARI’s Audit Committee.

Pursuant to the terms and conditions of the Consulting Services Agreement, ARI provided customer service and engineering services to ARL upon ARL’s request. In order to provide the services, ARI designated and caused one or more of its employees to provide the services to ARL as provided in the Consulting Services Agreement. In exchange for the services performed under the Consulting Services Agreement, ARL paid to ARI a total weekly fee calculated based on the hours worked multiplied by a mutually agreed upon price for each of the services performed. In addition, ARL reimbursed ARI for all reasonable and documented costs and expenses incurred in accordance with the Consulting Services Agreement.


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This agreement was terminable by ARI or ARL upon five business days’ prior written notice with respect to any or all of the services. This agreement terminated on the ARL Closing Date. Total fees billed to ARL under the Consulting Services Agreement were zero and less than $0.1 million, respectively, for the three and nine months ended September 30, 2017 and were included within selling, general, and administrative expenses on the condensed consolidated statements of operations.
Agreements with other related parties
Railcar leases
Beginning in the third quarter of 2016, the Company leased railcars to a company controlled by Mr. Carl Icahn, the Company's principal beneficial stockholder through IELP (the IELP Entity) under an operating lease arrangement. Revenues from railcars leased to the IELP Entity were $0.2 million and $0.7 million, respectively, for the three and nine months ended September 30, 2017 and less than $0.1 million for the three and nine months ended September 30, 2016, respectively. These revenues are included in railcar leasing revenues from affiliates on the consolidated statements of operations. Any related party railcar lease agreements have been, and will be, subject to the approval or review by the independent directors of the Company's Audit Committee.
Railcar services
In conjunction with the ARL Sale, each of AEPC RemainCo LLC (a wholly-owned subsidiary of AEPC) and AEP Rail RemainCo LLC (a wholly-owned subsidiary of AEP Rail Corp.) (each, a RemainCo and, collectively, the RemainCos) retained ownership of certain railcars that had previously been owned by ARL. Each RemainCo is controlled by Mr. Carl Icahn, ARI's principal beneficial stockholder, through IELP. During the three and nine months ended September 30, 2017, revenue of $1.1 million and $1.2 million, respectively, was recorded related to railcar services performed on these railcars. There were no revenues recorded for the same periods during 2016. These revenues are included under railcar services revenues from affiliates on the condensed consolidated statements of operations.
Revenues from the IELP Entity were zero and $0.2 million, respectively, for the three and nine months ended September 30, 2017 and zero for both the three and nine months ended September 30, 2016. These revenues are included under railcar services revenues from affiliates on the condensed consolidated statements of operations.
Consulting agreements
ARI entered into substantially identical consulting services agreements (each, a RemainCo Consulting Agreement and, collectively, the RemainCo Consulting Agreements) with each RemainCo. The RemainCos collectively own certain railcars that, pursuant to the terms and conditions of the purchase agreement governing the ARL Sale, may be sold to Buyer over a period of three years after the ARL Closing Date. Under the RemainCo Consulting Agreements, ARI has agreed to provide to each RemainCo, upon each RemainCo’s request, certain consulting services and facilitate communications among (i) each RemainCo, (ii) an unaffiliated, third party consultant engaged to assist each RemainCo to perform its duties regarding the inspection, testing and, if necessary, repair of railcars in accordance with the Revised Directive (the Directive Duties), (iii) ARL, as manager of each RemainCo’s railcars (other than in respect of the Directive Duties), and (iv) other parties (collectively referred to as Services). In exchange for the Services to be performed under the RemainCo Consulting Agreements, each RemainCo will pay to ARI a total weekly fee calculated based on employee hours worked multiplied by an agreed upon rate for the Services performed. In addition, each RemainCo will reimburse ARI for all reasonable and documented costs and expenses incurred in accordance with each RemainCo Consulting Agreement. Each RemainCo Consulting Agreement is terminable by ARI or the applicable RemainCo upon five business days’ prior written notice with respect to any or all of the Services. On July 31, 2017, ARI and each RemainCo amended and restated the RemainCo Consulting Agreements to provide ARI additional flexibility related to which employees may provide the Services. The Amended and Restated RemainCo Consulting Agreements are effective as of June 1, 2017. Consulting fees billed to the RemainCos were less than $0.1 million for both the three and nine months ended September 30, 2017. There was no consulting work performed for the RemainCos in 2016.
Other Agreements
ARI is party to a scrap agreement with M. W. Recycling (MWR), a company controlled by Mr. Carl Icahn, the Company’s principal beneficial stockholder through IELP. Under the agreement, ARI sells and MWR purchases scrap metal from several ARI plant locations. This agreement had an initial term through November 2015 and was renewed in September 2016, with an effective date in December 2015, to among other things, extend the term through May 2019, after which the agreement continues until terminated by either party, in accordance with the provisions of the agreement. MWR collected scrap material totaling $0.6 million and $2.1 million for the three and nine months ended September 30, 2017, respectively, compared to $0.8

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million and $1.6 million for the same periods in 2016. This agreement was unanimously approved by the independent directors of the Company’s Audit Committee.
Insight Portfolio Group LLC (Insight Portfolio Group) is an entity formed and controlled by Mr. Carl Icahn in order to maximize the potential buying power of a group of entities with which Mr. Carl Icahn has a relationship in negotiating with a wide range of suppliers of goods, services and tangible and intangible property at negotiated rates. ARI, and a number of other entities with which Mr. Carl Icahn has a relationship, have minority ownership interests in, and pay fees as part of being a member of Insight Portfolio Group. Fees incurred as a member of the Insight Portfolio Group were less than $0.1 million for the three months ended September 30, 2017 and 2016 and were $0.1 million for the nine months ended September 30, 2017 and 2016. These charges are included in selling, general and administrative costs on the condensed consolidated statements of operations.
Financial information for transactions with joint ventures
Loans to joint ventures
The Company’s Axis joint venture entered into a credit agreement in 2007. During 2009, the Company and the other significant partner acquired the loans from the lending party thereto, with each party acquiring a 50.0% interest in the loans. The balance outstanding on these loans, due to ARI Component, was $13.3 million and $17.7 million as of September 30, 2017 and December 31, 2016, respectively. See Note 6, Investments in and Loans to Joint Ventures, to our condensed consolidated financial statements, for further information regarding this transaction and the terms of the underlying loans.
Railcar component purchases from joint ventures
ARI purchased railcar components from its joint ventures amounting to $3.4 million and $14.0 million for the three and nine months ended September 30, 2017, respectively, compared to $9.0 million and $23.4 million for the same periods in 2016.
Note 15 — Operating Segments and Sales and Credit Concentrations
ARI operates in three reportable segments: manufacturing, railcar leasing and railcar services. These reportable segments are organized based upon a combination of the products and services offered and performance is evaluated based on revenues and segment earnings (loss) from operations. Intersegment revenues are accounted for as if sales were to third parties.
Manufacturing
Manufacturing consists of railcar manufacturing, and railcar and industrial component manufacturing. Revenues for railcars manufactured for the Company’s railcar leasing segment are not recognized in consolidated revenues as railcar sales, but rather lease revenues are recognized over the term of the lease. Earnings from operations for manufacturing include an allocation of selling, general and administrative costs, as well as profit for railcars manufactured for the Company’s railcar leasing segment based on revenue determined as described above. Intersegment revenues and profits are determined based on an estimated fair market value of the railcars manufactured for the Company’s railcar leasing segment, as if such railcars had been sold to a third party.
Railcar leasing
Railcar leasing consists of railcars manufactured by the Company and leased to third parties under operating leases. Earnings from operations for railcar leasing include an allocation of selling, general and administrative costs and also reflect origination fees paid to ARL associated with originating the lease to the Company’s leasing customers prior to the ARL Sale. The origination fees represent a percentage of the revenues from the lease over its initial term and are paid up front.
Railcar services
Railcar services consists of railcar repair services provided through the Company's various repair facilities, including mini repair shops and mobile repair units, offering a range of services from full to light repair. Earnings from operations for railcar services include an allocation of selling, general and administrative costs as well as certain operating costs related to this segment's use of a portion of the Company's tank railcar manufacturing facility to perform railcar repair work.

Segment financial results
The information in the following table is derived from the segments’ internal financial reports used by the Company’s management for purposes of assessing segment performance and for making decisions about allocation of resources. 

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Three Months Ended September 30, 2017
 
Revenues
 
 
 
External
 
Intersegment
 
Total
 
Earnings (Loss) from Operations
 
(in thousands)
Manufacturing (1)
$
68,442

 
$
33,625

 
$
102,067

 
$
3,733

Railcar leasing
33,440

 

 
33,440

 
19,029

Railcar services
18,864

 
976

 
19,840

 
1,941

Corporate

 

 

 
(4,603
)
Eliminations

 
(34,601
)
 
(34,601
)
 
(553
)
Total Consolidated
$
120,746

 
$

 
$
120,746

 
$
19,547

 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
Revenues
 
 
 
External
 
Intersegment
 
Total
 
Earnings (Loss) from Operations
 
(in thousands)
Manufacturing (1)
$
93,546

 
$
31,283

 
$
124,829

 
$
(2,773
)
Railcar leasing
32,798

 

 
32,798

 
19,320

Railcar services
18,618

 
167

 
18,785

 
2,797

Corporate

 

 

 
(2,649
)
Eliminations

 
(31,450
)
 
(31,450
)
 
(610
)
Total Consolidated
$
144,962

 
$

 
$
144,962

 
$
16,085

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
Revenues
 
 
 
External
 
Intersegment
 
Total
 
Earnings (Loss) from Operations
 
(in thousands)
Manufacturing (1)
$
184,255

 
$
149,171

 
$
333,426

 
$
20,183

Railcar leasing
100,992

 

 
100,992

 
56,529

Railcar services
59,200

 
3,191

 
62,391

 
6,986

Corporate

 

 

 
(13,828
)
Eliminations

 
(152,362
)
 
(152,362
)
 
(6,258
)
Total Consolidated
$
344,447

 
$

 
$
344,447

 
$
63,612

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
Revenues
 
 
 
External
 
Intersegment
 
Total
 
Earnings (Loss) from Operations
 
(in thousands)
Manufacturing (1)
$
314,886

 
$
64,180

 
$
379,066

 
$
35,451

Railcar leasing
98,775

 

 
98,775

 
59,232

Railcar services
57,965

 
1,735

 
59,700

 
9,364

Corporate

 

 

 
(11,598
)
Eliminations

 
(65,915
)
 
(65,915
)
 
307

Total Consolidated
$
471,626

 
$

 
$
471,626

 
$
92,756

(1)—
The earnings (loss) from operations for the manufacturing segment include the impact of the loss contingency reserve related to the FRA Revised Directive, which is recognized by the manufacturing segment. The impact of the loss contingency reserve was $(0.9) million and 0.1 million for the three and nine months ended September 30, 2017, respectively, and $(17.0) million for both the three and nine months ended September 30, 2016.

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Total Assets
September 30,
2017
 
December 31,
2016
 
(in thousands)
Manufacturing
$
225,157

 
$
256,622

Railcar leasing
1,357,891

 
1,254,824

Railcar services
61,361

 
57,061

Corporate/Eliminations
(176,651
)
 
(112,257
)
Total Consolidated
$
1,467,758

 
$
1,456,250

Sales to Related Parties
As discussed in Note 14, Related Party Transactions, ARI has numerous arrangements with related parties. Below is a summary of revenue from affiliates for each operating segment reflected as a percentage of total consolidated revenue.
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
 
2017
 
2016
Manufacturing
 
0.2
%
 
%
 
0.1
%
 
0.2
%
Railcar leasing
 
0.2
%
 
%
 
0.2
%
 
%
Railcar services
 
1.0
%
 
4.1
%
 
3.4
%
 
4.5
%
Sales Concentration
Manufacturing revenues from customers that accounted for more than 10% of total consolidated revenues are outlined in the table below. The railcar leasing and railcar services segments had no customers that accounted for more than 10% of the total consolidated revenues for the three and nine months ended September 30, 2017 and 2016.
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Manufacturing revenues from significant customers
34.7
%
 
38.9
%
 
13.9
%
 
29.7
%
Note 16 — Subsequent Events
On October 27, 2017, the board of directors of the Company declared a cash dividend of $0.40 per share of common stock of the Company to shareholders of record as of December 8, 2017 that will be paid on December 22, 2017.



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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act), including statements regarding our plans, objectives, expectations and intentions. Such statements include, without limitation, statements regarding: various estimates we have made in preparing our financial statements and our plans to address the Federal Railroad Administration (FRA) directive released September 30, 2016 and subsequently revised and superseded on November 18, 2016 (FRA Directive) and the settlement agreement related thereto, our plans to continue to transition the management of our lease fleet from ARL to in-house and terminate our contractual agreements with ARL, expected future trends relating to our industry, products and markets, the potential impact of regulatory developments, including developments related to the FRA Directive and the related settlement, anticipated customer demand for our products and services, trends relating to our shipments, leasing business, railcar services, revenues, profit margin, capacity, financial condition and results of operations; trends related to railcar shipments for direct sale versus lease, our backlog and any implication that our backlog may be indicative of our future revenues, our strategic objectives and long-term strategies, our results of operations, financial condition and the sufficiency of our capital resources, our capital expenditure plans, short- and long-term liquidity needs, ability to service our current debt obligations and future financing plans, our Stock Repurchase Program, anticipated benefits regarding the growth of our leasing business, the mix of railcars in our lease fleet and our lease fleet financings, anticipated production schedules for our products and the anticipated production schedules of our joint ventures, plans regarding future dividends and the anticipated performance and capital requirements of our joint ventures. These forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those anticipated. Investors should not place undue reliance on forward-looking statements, which speak only as of the date they are made and are not guarantees of future performance. We undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Risks and uncertainties that could adversely affect our business and prospects include without limitation:
our prospects in light of the cyclical nature of our business;
the health of and prospects for the overall railcar industry;
the risk of being unable to market or remarket railcars for sale or lease at favorable prices or on favorable terms or at all;
the highly competitive nature of the manufacturing, railcar leasing and railcar services industries;
risks relating to our compliance with the FRA Directive and the settlement agreement related thereto, any developments related to the FRA Directive and the settlement agreement related thereto or other regulatory actions and any costs or loss of revenue related thereto;
risks relating to the ongoing transition of the management of our railcar leasing business from ARL to in-house management following completion of the ARL Sale;
fluctuations in commodity prices, including oil and gas;
the impact, costs and expenses of any warranty claims to which we may be subject now or in the future;
the risks associated with ongoing compliance with transportation, environmental, health, safety, and regulatory laws and regulations, which may be subject to change;
the variable purchase patterns of our railcar customers and the timing of completion, customer acceptance and shipment of orders, as well as the mix of railcars for lease versus direct sale;
our ability to recruit, retain and train qualified personnel;
our ability to manage overhead and variations in production rates;
the impact of any economic downturn, adverse market conditions or restricted credit markets;
our reliance upon a small number of customers that represent a large percentage of our revenues and backlog;
fluctuations in the costs of raw materials, including steel and railcar components, and delays in the delivery of such raw materials and components;
fluctuations in the supply of components and raw materials we use in railcar manufacturing;
the ongoing risks related to our relationship with Mr. Carl Icahn, our principal beneficial stockholder through Icahn Enterprises L.P. (IELP), and certain of his affiliates;
the impact, costs and expenses of any litigation to which we may be subject now or in the future;
the risks associated with our current joint ventures and anticipated capital needs of, and production capabilities at our joint ventures;

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the sufficiency of our liquidity and capital resources, including long-term capital needs to support the growth of our lease fleet;
the impact of repurchases pursuant to our Stock Repurchase Program on our current liquidity and the ownership percentage of our principal beneficial stockholder through IELP, Mr. Carl Icahn;
the conversion of our railcar backlog into revenues equal to our reported estimated backlog value;
the risks and impact associated with any potential joint ventures, acquisitions, strategic opportunities, dispositions or new business endeavors;
the integration with other systems and ongoing management of our enterprise resource planning system; and
the risks related to our and our subsidiaries' indebtedness and compliance with covenants contained in our and our subsidiaries' financing arrangements.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. Our actual results could be different from the results described in or anticipated by our forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections and may be materially better or worse than anticipated. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements represent our estimates and assumptions only as of the date of this report. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this report, in order to reflect changes in circumstances or expectations or the occurrence of unanticipated events except to the extent required by applicable securities laws. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed above and under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 (Annual Report), as well as the risks and uncertainties discussed elsewhere in this report and the Annual Report. We qualify all of our forward-looking statements by these cautionary statements. We caution you that these risks are not exhaustive. We operate in a continually changing business environment and new risks emerge from time to time.
EXECUTIVE SUMMARY
We are a prominent North American designer and manufacturer of hopper and tank railcars, which are currently the two largest markets within the railcar industry. We provide our railcar customers with integrated solutions through a comprehensive set of high quality products and related services offered by our three reportable segments: manufacturing, railcar leasing and railcar services. Manufacturing consists of railcar manufacturing and railcar and industrial component manufacturing. We use certain of these components in our own railcar manufacturing and/or sell certain of these products to third parties. Railcar leasing consists of railcars manufactured by us and leased to third parties under operating leases. Railcar services consist of railcar repair, engineering and field services, for our fleet and for other railcar owners. Our business model combines manufacturing, railcar leasing and railcar services and is designed to support the industry with complete railcar solutions over the full life cycle of a railcar.
During the third quarter of 2017, we continued to experience a steady level of inquiries for a variety of types of covered hopper railcars while tank railcar inquiries picked up slightly in recent months. While inquiry activity is trending slightly more favorably than earlier this year, inquiries remain focused on specialty railcar types primarily for smaller order quantities. Railcar loadings for the nine months ended September 30, 2017 as reported by the AAR have increased compared to the prior year, but are not at high enough levels to increase demand for new railcars or bring more railcars out of storage. We received orders for 761 railcars during the third quarter of 2017, which is similar to orders for 798 railcars received during the second quarter of 2017. The orders we received in the third quarter of 2017 were for a variety of types of both hopper and tank railcars. These orders bring our year-to-date total for 2017 up to 2,433 railcars compared to 1,568 railcars ordered for the full year of 2016. However, our backlog continued to decline during the quarter as shipments exceeded orders. The flexibility of our workforce and the proximity of our railcar manufacturing facilities and vertically integrated component plants provide us with the ability to adjust our production rates as market demand may dictate. We cannot assure you that hopper or tank railcar demand will maintain its current pace, that demand for any railcar types or railcar services will improve, or that our railcar backlog, orders, shipments, pricing, lease utilization and/or lease rates will track our historical results or industry-wide trends.
Our consolidated operating margin was 18.5% for the nine months ended September 30, 2017 and was supported by our continued commitment to the growth of our railcar leasing segment, with a lease fleet of 12,749 railcars at September 30, 2017. Total railcar shipments were 956 during the third quarter of 2017, a decrease of 18.8% compared to the same period in 2016. Even at lower production levels, we continue to efficiently produce high quality hopper and tank railcars. These shipments included 338 railcars built for our lease fleet, representing 35.4% of the total railcar shipments compared to 27.4% for the same period in 2016. This quarterly rate is closer to our historical average compared to our shipments during the first half of 2017, but still may not be indicative of future quarterly rates. Shipments and orders for railcars on long-term leases not only help us to maintain a steady level of production during the manufacturing period, but also help provide a steady stream of future cash

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flows. Because revenues and earnings related to leased railcars are recognized over the life of the lease, our quarterly results may vary depending on the mix of lease versus direct sale railcars that we ship during a given period.
Since 2011, we have strategically grown our lease fleet to include a mix of tank and hopper railcars for varying service types. We have been transitioning the management of our railcar leasing business in-house for the past several months and have increased our sales force to sell and market our entire products and services line. Our existing sales and marketing staff have taken a leading role during this expansion and we expect to continue to grow our relationship with key customers. Although the industry is experiencing a period of softer lease rates as a result of the current competitive nature of the overall railcar market, we believe the expiration dates of our operating leases being spread over the next several years will help mitigate some of the risks of renewing leases at lower rates or any inability we may experience in renewing or re-leasing these railcars. As of September 30, 2017, our backlog was 2,683 railcars, of which 657 we currently expect to build for our lease fleet. With our current liquidity of $306.2 million, including $200.0 million available under our revolving credit facility, and additional unencumbered railcars available to borrow against, we have the ability to further grow our lease fleet as demand dictates.
Our railcar services business continues to support the industry, offering repair services over the railcar life cycle. Over the last quarter, in addition to regular repair and maintenance services, our repair network has been focused on inspecting railcars that we and our customers own that are subject to inspection, testing and, if necessary, repair, as part of the FRA Directive. Our tank railcar manufacturing facility provides us additional flexibility not only to produce railcars, but also to perform traditional repair and retrofit services in a production line set-up.
We believe our integrated business model of providing complete life cycle solutions for the railcar industry under the direction of our experienced management team provides a solid foundation of knowledge that we will leverage as we expect to continue to grow our internally-managed railcar leasing business as demand dictates. We believe our approach, which has been further enhanced with additions to our sales force and the addition of our lease fleet management team, will help us continue to be competitive in the North American railcar market, providing our customers opportunities to purchase or lease railcars from us. Our business continues to use synergies from our manufacturing, railcar leasing and railcar services segments. Our structure as a manufacturer, repair services provider and lessor provides us with numerous competitive advantages, including increased flexibility and lower costs, relative to other lessors in the industry.
FRA Directive
As previously disclosed, on September 30, 2016 the FRA issued Railworthiness Directive (RWD) No. 2016-01 (the Original Directive), as discussed in Note 11, Commitments and Contingencies, to the consolidated financial statements located in Part I of this report. The Original Directive addressed, among other things, certain welding practices in one weld area in specified DOT 111 tank railcars manufactured between 2009 and 2015 by ARI and ACF Industries, LLC (ACF). ACF is an affiliate of Mr. Carl Icahn, our principal beneficial stockholder through IELP. We met and corresponded with the FRA following the issuance of the Original Directive to express our concerns with the Original Directive and its impact on ARI, as well as the industry as a whole.
On November 18, 2016 (the Issuance Date), the FRA issued RWD No. 2016-01 [Revised] (the Revised Directive). The Revised Directive changed and superseded the Original Directive in several ways.
The Revised Directive requires owners to identify their subject tank railcars and then from that population identify the 15% of subject tank railcars currently in hazardous materials service with the highest mileage in each tank car owner’s fleet. Visual inspection of each of the subject tank railcars is required by the car operator prior to putting any railcar into service. Owners must ensure appropriate inspection, testing and repairs, if needed, within twelve months of the Issuance Date for the 15% of their subject tank railcars identified to be in hazardous materials service with the highest mileage. The FRA reserved the right to impose additional test and inspection requirements for the remaining tank railcars subject to the Revised Directive.
Although the Revised Directive addressed some of the Company’s concerns and clarified certain requirements of the Original Directive, ARI identified significant issues with the Revised Directive. As a result, in December 2016, ARI sought judicial review of and relief from the Revised Directive by filing a petition for review against the FRA in the United States Court of Appeals for the District of Columbia Circuit.
On August 17, 2017, the Company entered into a settlement agreement with the FRA, which covered the subject railcars owned by ARI and certain of its affiliates. This settlement agreement, among other things, extends the deadline for ARI to complete the inspection, testing and repairs, if needed, for the 15% identified railcars to December 31, 2017.  Adding clarity regarding certain unknown requirements referenced in the Revised Directive, under the settlement agreement, ARI is required to inspect, test, and if necessary repair the remaining 85% subject tank railcars at the next tank railcar qualification, scheduled routine or regular maintenance, shopping or repair event, but no later than December, 31, 2025. However, the agreement permits ARI to:

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(i) if the FRA does not impose a similar requirement by July 31, 2018 on other owners’ railcars subject to the Revised Directive, suspend compliance with this requirement until such time as the FRA imposes requirements on all 85% railcars subject to the Revised Directive, and (ii) elect to be governed by any different requirements later imposed by the FRA on other owners’ railcars subject to the Revised Directive. In addition, the settlement agreement also provides that railcars owned by ARI are no longer required to have a surface inspection performed when the railcars are being inspected pursuant to the Revised Directive. Finally, as part of the settlement agreement, ARI dismissed its lawsuit against the FRA.
In accordance with accounting principles generally accepted in the United States of America, as of September 30, 2017, our remaining loss contingency reserve of $9.3 million covers our probable and estimable liabilities with respect to our response to the Revised Directive, taking into account currently available information and our contractual obligations in our capacity as both a manufacturer and owner of railcars subject to the Revised Directive.
It is reasonably possible that a loss exists in excess of the amount accrued by the Company. However, the amount of potential costs and expenses expected to be incurred for compliance with the Revised Directive in excess of the remaining loss contingency reserve of $9.3 million cannot be reasonably estimated at this time.
RESULTS OF OPERATIONS
Three and nine months ended September 30, 2017 compared to three and nine months ended September 30, 2016
Consolidated Results
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
$
 
%
 
September 30,
 
$
 
%
 
2017
 
2016
 
Change
 
Change
 
2017
 
2016
 
Change
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
68,442

 
$
93,546

 
$
(25,104
)
 
(26.8
)
 
$
184,255

 
$
314,886

 
$
(130,631
)
 
(41.5
)
Railcar leasing
33,440

 
32,798

 
642

 
2.0

 
100,992

 
98,775

 
2,217

 
2.2

Railcar services
18,864

 
18,618

 
246

 
1.3

 
59,200

 
57,965

 
1,235

 
2.1

Total revenues
$
120,746

 
$
144,962

 
$
(24,216
)
 
(16.7
)
 
$
344,447

 
$
471,626

 
$
(127,179
)
 
(27.0
)
Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
(64,235
)
 
$
(79,671
)
 
$
15,436

 
(19.4
)
 
$
(169,915
)
 
$
(263,389
)
 
$
93,474

 
(35.5
)
Other operating income
(924
)
 
(16,973
)
 
16,049

 
*

 
140

 
(16,973
)
 
17,113

 
*

Railcar leasing
(10,856
)
 
(10,577
)
 
(279
)
 
2.6

 
(34,532
)
 
(31,108
)
 
(3,424
)
 
11.0

Railcar services
(16,023
)
 
(15,131
)
 
(892
)
 
5.9

 
(49,559
)
 
(45,788
)
 
(3,771
)
 
8.2

Total cost of revenues
$
(92,038
)
 
$
(122,352
)
 
$
30,314

 
(24.8
)
 
$
(253,866
)
 
$
(357,258
)
 
$
103,392

 
(28.9
)
Selling, general and administrative
(9,263
)
 
(6,583
)
 
(2,680
)
 
40.7

 
(27,084
)
 
(21,837
)
 
(5,247
)
 
24.0

Net gains on disposition of leased railcars
102

 
58

 
44

 
*

 
115

 
225

 
(110
)
 
*

Earnings from operations
$
19,547

 
$
16,085

 
$
3,462

 
21.5

 
$
63,612

 
$
92,756

 
$
(29,144
)
 
(31.4
)
* - Not Meaningful
Revenues
Our total consolidated revenues for the three and nine months ended September 30, 2017 decreased by 16.7% and 27.0%, respectively, compared to the same periods in 2016. These decreases were primarily due to decreased revenues in our manufacturing segment, partially offset by slight increases in revenues in our railcar leasing and railcar services segments.
During the three months ended September 30, 2017, we shipped 618 direct sale railcars, which excludes 338 railcars (35.4% of total shipments) built for our lease fleet, compared to 855 direct sale railcars for the same period of 2016, which excludes 322 railcars (27.4% of total shipments) built for our lease fleet.

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During the nine months ended September 30, 2017, we shipped 1,698 direct sale railcars, which excludes 1,485 railcars (46.7% of total shipments) built for our lease fleet, compared to 2,917 direct sale railcars for the same period of 2016, which excludes 607 railcars (17.2% of total shipments) built for our lease fleet.
Manufacturing revenues decreased by 26.8% during the three month period ended September 30, 2017 compared to the same period of 2016. This change included a 27.8% decrease driven by multiple factors, including fewer hopper and tank railcar shipments for direct sale, a higher percentage of railcar shipments going to our lease fleet, and more competitive pricing for both railcar types. In total, we shipped 237 fewer direct sale railcars during the three month period ended September 30, 2017 compared to the same period in 2016. The decrease in manufacturing revenues due to lower volumes and competitive pricing was partially offset by a 1.0% increase on higher revenues from material cost changes that we generally pass through to customers and the change in the mix of railcars shipped.
Manufacturing revenues decreased by 41.5% during the nine month period ended September 30, 2017 compared to the same period of 2016. This change included a 43.5% decrease driven by multiple factors, including fewer hopper and tank railcar shipments for direct sale, a higher percentage of railcar shipments going to our lease fleet, and more competitive pricing for both railcar types. In total, we shipped 1,219 fewer direct sale railcars during the nine month period ended September 30, 2017 compared to the same period in 2016. The decrease in manufacturing revenues due to lower volumes, competitive pricing, and product mix was partially offset by a 2.0% increase due to higher revenues from material cost changes that we generally pass through to customers.
Railcar leasing revenues increased by 2.0% and 2.2% during the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016 due primarily to an increase in the number of railcars in our lease fleet, partially offset by a decline in weighted average lease rates. The lease fleet grew to 12,749 railcars at September 30, 2017 from 10,961 railcars at September 30, 2016.

Railcar services revenues increased by 1.3% and 2.1% during the three and nine months ended September 30, 2017 compared to the same periods in 2016, primarily due to increased demand and additional capacity from our mobile repair operations, partially offset by decreased demand for tank railcar qualifications and tank railcar exterior paint and interior linings at certain shops. Our tank railcar manufacturing facility provides us the flexibility not only to produce railcars, but also to perform repair and retrofit services in a production line set-up offering another option for us to meet our customers' repair needs. This additional flexibility allowed us to complete certain repair projects at our tank railcar manufacturing facility during the three and nine months ended September 30, 2017 that were performed to a lesser extent during the comparable periods of 2016.
Cost of revenues
Our total consolidated cost of revenues decreased by 24.8% and 28.9% for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016 due to decreased cost of revenues in our manufacturing segment, which was partially offset by an increase in our railcar leasing and railcar services segments.
Cost of revenues (excluding the other operating income (loss) attributable to the manufacturing segment) decreased for our manufacturing segment by 19.4% and 35.5% for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016, including 27.9% and 43.7% decreases, respectively, driven primarily by lower overall railcar shipments for direct sale. These overall decreases were partially offset by 8.5% and 8.2% decreases, respectively, driven by lower material costs for key components and steel. These lower material costs are also reflected as a decrease in selling prices as our practice is to generally pass changes in these costs through to the customer.
Cost of revenues for our railcar leasing segment increased by 2.6% and 11.0% for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016, primarily as a result of an increase in the number of railcars in our lease fleet, as discussed above, and increased maintenance costs associated with both our growing lease fleet and certain railcars reassigned to other lessees.
Cost of revenues for our railcar services segment increased by 5.9% and 8.2% for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016, primarily due to an increase in demand for our mobile repair services and repair projects performed at our tank railcar manufacturing facility and an unfavorable mix of repair work causing inefficiencies at certain repair facilities during 2017.
Selling, general and administrative expenses
Our total consolidated selling, general and administrative expenses were $9.3 million and $27.1 million for the three and nine months ended September 30, 2017, respectively, compared to $6.6 million and $21.8 million for the same periods in 2016. The increase for the three months ended September 30, 2017 was primarily due to increased compensation costs relating to

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additional personnel hired in connection with the Company's ongoing transition of lease fleet management in-house and increasing our own sales and marketing team, higher legal expenses, and the impact of a reduction in incentive compensation expenses during the third quarter of 2016, all partially offset by decreased consulting expenses.
The increase for the nine months ended September 30, 2017 was primarily due to similar factors including increased compensation costs relating to additional personnel hired in connection with the Company's ongoing transition of lease fleet management in-house and increasing our own sales and marketing team, the impact of a reduction in incentive compensation expenses in the same period in 2016, higher legal expenses, and a prior year credit to bad debt expense, partially offset by decreased consulting costs compared to the same period in 2016, decreased commissions due to the sale of fewer railcars for direct sale and decreased stock-based compensation costs due to fluctuations in the Company’s stock price.
Interest expense
Our total consolidated interest expense decreased by $0.2 million and $0.8 million for the three and nine months ended September 30, 2017, respectively, compared to the same period in 2016. These decreases were primarily driven by lower average debt balances during these periods in 2017 compared to the same periods in 2016.
Earnings (Loss) from Joint Ventures
The breakdown of our earnings (loss) from joint ventures during the three and nine months ended September 30, 2017 and 2016 was as follows:
 
 
Three Months Ended 
 September 30,
 
 
 
Nine Months Ended 
 September 30,
 
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Ohio Castings
$
(237
)
 
$
49

 
$
(286
)
 
$
(1,059
)
 
$
(116
)
 
$
(943
)
Axis
469

 
1,565

 
(1,096
)
 
2,637

 
4,674

 
(2,037
)
Total Earnings from Joint Ventures
$
232

 
$
1,614

 
$
(1,382
)
 
$
1,578

 
$
4,558

 
$
(2,980
)
Our joint venture earnings were $0.2 million and $1.6 million for the three and nine months ended September 30, 2017, respectively, compared to earnings of $1.6 million and $4.6 million for the same periods in 2016, respectively. Our Ohio Castings joint venture experienced certain ramp down costs in connection with the idling of the facility in early 2017 and continues to run at a loss due to being idled. Earnings from our Axis joint venture declined during the three and nine months ended September 30, 2017 compared to the same periods of 2016 due to lower production levels in line with a decline in industry railcar volumes. Even with its lower production levels, Axis continues to produce positive results.
Income Tax Expense
Our income tax expense was $6.3 million, or 41.5% of our earnings before income taxes, and $21.9 million, or 41.9% of our earnings before income taxes for the three and nine months ended September 30, 2017, respectively, compared to $4.9 million or 38.7% of our earnings before income taxes, and $31.1 million, or 38.2% of our earnings before income taxes for the same periods in 2016. Our annual effective tax rate has increased in 2017 compared to 2016, as we do not anticipate any benefits from the domestic production activities deduction. Furthermore, based upon our accounting policy for the realization of deferred tax assets, our effective tax rate was impacted by the recognition of a valuation allowance in the second quarter of 2017 against our capital loss carryforward. This significant discrete item increased our tax rate by 1.9% for the nine months ended September 30, 2017.
Segment Results
The table below summarizes our historical revenues, earnings from operations and operating margin for the periods shown. Intersegment revenues are accounted for as if sales were to third parties. Operating margin is defined as total segment earnings from operations as a percentage of total segment revenues. Our historical results are not necessarily indicative of operating results that may be expected in the future. 

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Three Months Ended September 30,
 
 
 
2017
 
2016
 
 
 
(in thousands)
 
 
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
68,442

 
$
33,625

 
$
102,067

 
$
93,546

 
$
31,283

 
$
124,829

 
$
(22,762
)
Railcar leasing
33,440

 

 
33,440

 
32,798

 

 
32,798

 
642

Railcar services
18,864

 
976

 
19,840

 
18,618

 
167

 
18,785

 
1,055

Eliminations

 
(34,601
)
 
(34,601
)
 

 
(31,450
)
 
(31,450
)
 
(3,151
)
Total Consolidated
$
120,746

 
$

 
$
120,746

 
$
144,962

 
$

 
$
144,962

 
$
(24,216
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
2017
 
2016
 
 
 
(in thousands)
 
 
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
184,255

 
$
149,171

 
$
333,426

 
$
314,886

 
$
64,180

 
$
379,066

 
$
(45,640
)
Railcar leasing
100,992

 

 
100,992

 
98,775

 

 
98,775

 
2,217

Railcar services
59,200

 
3,191

 
62,391

 
57,965

 
1,735

 
59,700

 
2,691

Eliminations

 
(152,362
)
 
(152,362
)
 

 
(65,915
)
 
(65,915
)
 
(86,447
)
Total Consolidated
$
344,447

 
$

 
$
344,447

 
$
471,626

 
$

 
$
471,626

 
$
(127,179
)
 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Earnings (Loss) from Operations
 
 
 
 
 
 
 
 
 
 
 
Manufacturing (1)
$
3,733

 
$
(2,773
)
 
$
6,506

 
$
20,183

 
$
35,451

 
$
(15,268
)
Railcar leasing
19,029

 
19,320

 
(291
)
 
56,529

 
59,232

 
(2,703
)
Railcar services
1,941

 
2,797

 
(856
)
 
6,986

 
9,364

 
(2,378
)
Corporate
(4,603
)
 
(2,649
)
 
(1,954
)
 
(13,828
)
 
(11,598
)
 
(2,230
)
Eliminations
(553
)
 
(610
)
 
57

 
(6,258
)
 
307

 
(6,565
)
Total Consolidated
$
19,547

 
$
16,085

 
$
3,462

 
$
63,612

 
$
92,756

 
$
(29,144
)

(1)—
The earnings (loss) from operations for the manufacturing segment include the impact of the loss contingency reserve related to the FRA Revised Directive, which is recognized by the manufacturing segment. The impact of the loss contingency reserve was $(0.9) million and 0.1 million for the three and nine months ended September 30, 2017, respectively, and $(17.0) million for both the three and nine months ended September 30, 2016.
      



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Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Segment Operating Margins
 
 
 
 
 
 
 
Manufacturing (1)
3.7
%
 
(2.2
)%
 
6.1
%
 
9.4
%
Railcar leasing
56.9
%
 
58.9
 %
 
56.0
%
 
60.0
%
Railcar services
9.8
%
 
14.9
 %
 
11.2
%
 
15.7
%

(1)—
The manufacturing segment operating margins include the impact of the loss contingency reserve related to the FRA Revised Directive, which is recognized by the manufacturing segment. The impact of the loss contingency reserve on the manufacturing segment operating margins was (0.9)% and zero for the three and nine months ended September 30, 2017, respectively, and (13.6)% and (4.4)% for the three and nine months ended September 30, 2016, respectively.
Manufacturing
Our manufacturing segment revenues, including revenues for railcars built for our lease fleet, decreased by $22.8 million and $45.6 million for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. The decreases for these periods resulted primarily from a decrease in overall railcar shipments and a decrease in average selling prices due to more competitive pricing for both hopper and tank railcars.
During the third quarter of 2017, we shipped 956 railcars, including 338 railcars built for our lease fleet, compared to 1,177 railcars, including 322 railcars built for our lease fleet for the same period of 2016. During the first nine months of 2017, we shipped 3,183 railcars, including 1,485 railcars built for our lease fleet, compared to 3,524 railcars, including 607 railcars built for our lease fleet for the same period of 2016.
Manufacturing segment revenues for the three and nine months ended September 30, 2017 included revenues of $33.3 million and $147.2 million, respectively, relating to railcars built for our lease fleet compared to $31.3 million and $64.2 million for the same periods in 2016. These increases in revenues related to railcars built for our lease fleet were due to higher quantities of both tank and hopper railcars shipped for lease as we continue to focus on growing our lease fleet. Such revenues are based on an estimated fair market value of the leased railcars as if they had been sold to a third party and are eliminated in consolidation. Revenues from railcars manufactured for our railcar leasing segment are not recognized in consolidated revenues as railcar sales, but rather lease revenues are recognized over the term of the lease in accordance with the monthly lease revenues. Railcars built for the lease fleet represented 35.4% and 46.7% of our railcar shipments during the three and nine months ended September 30, 2017, respectively, compared to 27.4% and 17.2% of our railcar shipments during the same periods in 2016.
Earnings from operations for our manufacturing segment, which include an allocation of selling, general and administrative costs and profit for railcars manufactured for our railcar leasing segment, increased by $6.5 million for the three months ended September 30, 2017 compared to the same period in 2016. Profit on railcars built for our lease fleet, which is eliminated in consolidation, was $3.3 million for the three months ended September 30, 2017 compared to $3.2 million for the same period in 2016. The profit on railcars built for our lease fleet is based on an estimated fair market value of revenues as if the railcars had been sold to a third party, less the cost to manufacture.
Operating margin from our manufacturing segment increased to 3.7% for the three months ended September 30, 2017 compared to (2.2)% for the same period in 2016. The increases for both earnings from operations and operating margin were primarily due to the prior period impact of the loss contingency related to the FRA Directive recognized by the manufacturing segment of $17.0 million during the third quarter of 2016, which negatively impacted operating margins by 13.6% for the three months ended September 30, 2016, partially offset by higher costs associated with lower production volumes and more competitive pricing for both tank and hopper railcars.
Earnings from operations for our manufacturing segment decreased by $15.3 million for the nine months ended September 30, 2017 compared to the same period in 2016. Profit on railcars built for our lease fleet, which is eliminated in consolidation, was $14.2 million for the nine months ended September 30, 2017 compared to $7.7 million for the same period in 2016. Operating margin from our manufacturing segment decreased to 6.1% for the nine months ended September 30, 2017 compared to 9.4% for the same period in 2016. The decreases for both earnings from operations and operating margin were primarily due to higher costs associated with lower production volumes and more competitive pricing for both tank and hopper railcars, partially

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offset by the impact of the loss contingency reserve recorded during 2016, which negatively impacted operating margins by 4.4% for the nine months ended September 30, 2016.
Railcar Leasing
Our railcar leasing segment revenues for the three and nine months ended September 30, 2017 increased by $0.6 million and $2.2 million, respectively, compared to the same periods in 2016. The increases in revenues were driven by an increase in railcars on lease with third parties, partially offset by a decline in weighted average lease rates.
For the three months ended September 30, 2017, our railcar leasing segment revenues included transactions with affiliates, totaling $0.2 million, or 0.2% of our total consolidated revenues. For the nine months ended September 30, 2017, our railcar leasing segment revenues included transactions with affiliates, totaling $0.7 million, or 0.2% of our total consolidated revenues. For the three and nine months ended September 30, 2016, our railcar leasing segment revenues included transactions with affiliates of less than $0.1 million, or less than 0.1% of our total consolidated revenues.
Earnings from operations for our railcar leasing segment, which include an allocation of selling, general and administrative costs, decreased by $0.3 million and $2.7 million for the three and nine months ended September 30, 2017 compared to the same periods in 2016. Operating margin from our railcar leasing segment decreased to 56.9% and 56.0% for the three and nine months ended September 30, 2017 compared to 58.9% and 60.0% for the same periods in 2016. These decreases were due to increased maintenance costs and lower lease rates on certain renewals.
Railcar Services
Our railcar services segment revenues increased by $1.1 million and $2.7 million for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. These increases were primarily due to increased demand and additional capacity from our mobile repair operations, an increase in repair work performed at our tank railcar manufacturing facility, and intercompany revenue that is eliminated in consolidation, partially offset by decreased demand for tank railcar qualifications and tank railcar exterior paint and interior linings.
For the three and nine months ended September 30, 2017, our railcar services segment revenues included transactions with affiliates totaling $1.2 million