Document
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, 2018
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 every Interactive Data File required to be submitted 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 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 26, 2018 was 19,083,878 shares.
 


Table of Contents

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

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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
September 30,
2018
 
December 31,
2017
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
74,459

 
$
100,244

Restricted cash
16,565

 
16,640

Accounts receivable, net
40,408

 
43,804

Accounts receivable, due from related parties
2,956

 
778

Income taxes receivable
18,690

 
19,115

Inventories, net
79,655

 
54,147

Prepaid expenses and other current assets
5,808

 
6,464

Total current assets
238,541

 
241,192

Property, plant and equipment, net
153,130

 
162,535

Railcars on lease, net
1,077,768

 
1,036,414

Goodwill
7,169

 
7,169

Investments in and loans to joint ventures
20,326

 
22,571

Other assets
902

 
3,545

Total assets
$
1,497,836

 
$
1,473,426

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
33,189

 
$
21,275

Accounts payable, due to related parties
52

 
41

Accrued expenses, including loss contingency of $6,408 and $6,548 at September 30, 2018 and December 31, 2017, respectively
18,213

 
12,787

Accrued compensation
14,679

 
12,874

Short-term debt, including current portion of long-term debt
25,404

 
25,590

Total current liabilities
91,537

 
72,567

Long-term debt, net of unamortized debt issuance costs of $4,485 and $4,647 at September 30, 2018 and December 31, 2017, respectively
501,213

 
520,024

Deferred tax liability
206,772

 
194,084

Pension and post-retirement liabilities
7,683

 
8,099

Other liabilities, including loss contingency of $2,228 and $2,283 at September 30, 2018 and December 31, 2017, respectively
14,554

 
15,118

Total liabilities
821,759

 
809,892

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 50,000,000 shares authorized, 19,083,878 shares outstanding as of both September 30, 2018 and December 31, 2017
213

 
213

Additional paid-in capital
239,609

 
239,609

Retained Earnings
527,476

 
514,453

Accumulated other comprehensive loss
(5,190
)
 
(4,710
)
Treasury Stock
(86,031
)
 
(86,031
)
Total stockholders’ equity
676,077

 
663,534

Total liabilities and stockholders’ equity
$
1,497,836

 
$
1,473,426

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,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Manufacturing (including revenues from affiliates of $2,564 for both the three and nine months ended September 30, 2018 and $188 and $325 for the same periods in 2017)
$
40,766

 
$
68,442

 
$
194,347

 
$
184,255

Railcar leasing (including revenues from affiliates of $404 and $1,219 for the three and nine months ended September 30, 2018, respectively, and $231 and $678 for the same periods in 2017)
32,427

 
33,440

 
101,352

 
100,992

Railcar services (including revenues from affiliates of zero and $17 for the three and nine months ended September 30, 2018, respectively, and $1,156 and $11,729 for the same periods in 2017)
26,791

 
18,864

 
67,051

 
59,200

Total revenues
99,984

 
120,746

 
362,750

 
344,447

Cost of revenues:
 
 
 
 
 
 
 
Manufacturing
(42,117
)
 
(64,235
)
 
(184,507
)
 
(169,915
)
Other operating income (loss)
(15
)
 
(924
)
 
29

 
140

Railcar leasing
(12,491
)
 
(10,856
)
 
(38,871
)
 
(34,532
)
Railcar services
(22,892
)
 
(16,023
)
 
(56,897
)
 
(49,559
)
Total cost of revenues
(77,515
)
 
(92,038
)
 
(280,246
)
 
(253,866
)
Gross profit
22,469

 
28,708

 
82,504

 
90,581

Selling, general and administrative
(10,993
)
 
(9,263
)
 
(29,349
)
 
(27,084
)
Net gains on disposition of leased railcars
272

 
102

 
549

 
115

Loss on asset impairment

 

 
(3,554
)
 

Gain on early lease termination
10,146

 

 
10,146

 

Earnings from operations
21,894

 
19,547

 
60,296

 
63,612

Interest income (including income from related parties of $166 and $578 for the three and nine months ended September 30, 2018, respectively, and $280 and $922 for the same periods in 2017)
470

 
405

 
1,385

 
1,146

Interest expense
(5,250
)
 
(5,441
)
 
(15,886
)
 
(16,460
)
Other income

 
393

 
1

 
2,314

Earnings from joint ventures
368

 
232

 
2,246

 
1,578

Earnings before income taxes
17,482

 
15,136

 
48,042

 
52,190

Income tax expense
(4,409
)
 
(6,278
)
 
(12,786
)
 
(21,865
)
Net earnings
$
13,073

 
$
8,858

 
$
35,256

 
$
30,325

Net earnings per common share—basic and diluted
$
0.69

 
$
0.46

 
$
1.85

 
$
1.59

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

 
19,084

 
19,084

 
19,084

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,
 
2018
 
2017
 
2018
 
2017
Net earnings
$
13,073

 
$
8,858

 
$
35,256

 
$
30,325

Currency translation
309

 
689

 
(564
)
 
1,270

Pension plans (1)
32

 
107

 
84

 
323

Short-term investments (2)

 
(248
)
 

 
(415
)
Comprehensive income
$
13,414

 
$
9,406

 
$
34,776

 
$
31,503


(1)
Net of tax effect of less than $0.1 million for both the three and nine months ended September 30, 2018 and $0.1 million and $0.2 million for the same periods in 2017.

(2)
Net of tax effect of zero for both the three and nine months ended September 30, 2018 and $(0.1) million and $(0.2) million for the same periods in 2017.

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,
 
2018
 
2017
Operating activities:
 
 
 
Net earnings
$
35,256

 
$
30,325

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
46,333

 
42,746

Amortization of deferred costs
377

 
377

Net gain on disposal of property, plant, equipment and leased railcars
(519
)
 
(113
)
Non-cash impairment on leased railcars
3,554

 

Earnings from joint ventures
(2,246
)
 
(1,578
)
Provision for deferred income taxes
12,443

 
34,862

Items related to investing activities:
 
 
 
Realized gain on short-term investments - available for sale securities

 
(2,216
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
7,056

 
5,741

Accounts receivable, due from related parties
(2,196
)
 
3,542

Income taxes receivable
419

 
(14,194
)
Inventories, net
(28,358
)
 
2,444

Prepaid expenses and other current assets
(28
)
 
519

Accounts payable
11,925

 
(3,933
)
Accounts payable, due to related parties
11

 
(3,233
)
Accrued expenses and taxes
7,238

 
(7,432
)
Other
(368
)
 
3,239

Net cash provided by operating activities
90,897

 
91,096

Investing activities:
 
 
 
Purchases of property, plant and equipment
(7,386
)
 
(4,812
)
Capital expenditures - leased railcars
(73,682
)
 
(132,388
)
Proceeds from the disposal of property, plant, equipment and leased railcars
2,030

 
417

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
(74,608
)
 
(121,818
)
Financing activities:
 
 
 
Repayments of debt
(19,162
)
 
(19,101
)
Payment of common stock dividends
(22,901
)
 
(22,901
)
Net cash used in financing activities
(42,063
)
 
(42,002
)
Effect of exchange rate changes on cash
(86
)
 
156

Net decrease in cash, cash equivalents, and restricted cash
(25,860
)
 
(72,568
)
Cash, cash equivalents, and restricted cash at beginning of period
116,884

 
195,285

Cash, cash equivalents, and restricted cash at end of period
$
91,024

 
$
122,717

 
 
 
 
Balance Sheet Reconciliation:
 
 
 
Cash and cash equivalents
$
74,459

 
$
106,176

Restricted cash, refer to Note 9 for discussion of the nature of this balance
16,565

 
16,541

Total cash, cash equivalents and restricted cash as presented above
$
91,024

 
$
122,717


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, 2017 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, 2017. 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.
The condensed consolidated financial statements of the Company include the accounts of ARI and its material 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 Leasing), ARI Railcar Services LLC and Southwest Steel Casting Company, LLC. All intercompany transactions and balances have been eliminated.
Note 2 — Recent Accounting Pronouncements

In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which amends ASC Topic 220, Income Statement - Reporting Comprehensive Income.  This ASU allows for stranded tax effects in accumulated other comprehensive income resulting from the 2017 Tax Cuts and Jobs Act to be reclassified as retained earnings. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations, comprehensive income, cash flows and disclosures.
In May 2017, the FASB issued 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 adopted this guidance during the first quarter of 2018, and there was no impact to 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. The Company adopted this ASU during the first quarter of 2018 and applied its provisions retrospectively. As a result of this adoption, we no longer show the changes in restricted cash balances as a component of cash flows from financing activities but instead include the balances of restricted cash together with cash and cash equivalents for the beginning and end of the periods presented. The adoption of ASU 2016-18 did not have a material impact on the Company's balance sheet, statement of operations, or statement of comprehensive income, but did result in revisions to the Company's statement of cash flows.
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's adoption of this guidance during the first quarter of 2018 caused no impact on our consolidated statement of cash flows.

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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 as lessees will need to recognize a right-of-use asset and a lease liability for virtually all leases with a term longer than twelve months. 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, and the Company expects to adopt the standard on January 1, 2019. The Company plans to elect the optional transition method that applies the new lease requirements through a cumulative-effect adjustment in the period of adoption. The most significant impact is expected to relate to the recognition of right-of-use assets and lease liabilities on the Company's condensed consolidated balance sheets for long-term operating leases, and the Company expects this right-of-use asset and lease liability to be approximately $5.0 million to $10.0 million. The Company's assessment and implementation plan will be ongoing during the remainder of 2018 and will include evaluating the impact of this standard on the consolidated financial statements and footnotes.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASC 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 ASC 606, which include implementation guidance to principal versus agent considerations, guidance to identifying performance obligations and licensing guidance and other narrow scope improvements. The Company adopted 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 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. The Company identified only slight modifications to accounting for repair work in progress, resulting in immaterial changes to business processes and systems.  Specifically, the Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings of $0.7 million. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis.
The following table summarizes the cumulative effect of the changes to our condensed consolidated balance sheet as of January 1, 2018 from the adoption of ASC 606 (in thousands):
 
December 31, 2017
 
Adjustments due to ASC 606
 
January 1, 2018
Assets
 
 
 
 
 
Accounts receivable, net
$
43,804

 
$
3,717

 
$
47,521

Inventories
54,147

 
(2,821
)
 
$
51,326

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Deferred tax liability, net
194,084

 
(226
)
 
193,858

 
 
 
 
 
 
Equity
 
 
 
 
 
Retained earnings
514,453

 
669

 
515,122

Accumulated other comprehensive loss
(4,710
)
 
(3
)
 
(4,713
)


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In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our condensed consolidated statement of operations and condensed consolidated balance sheet as of and for the periods ended September 30, 2018 was as follows (in thousands):

 
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change
Higher / (Lower)
 
As of September 30, 2018
Balance Sheet
 
 
 
 
 
Assets
 
 
 
 
 
Accounts receivable, net
$
40,408

 
$
33,496

 
$
6,912

Inventories
79,655

 
85,007

 
(5,352
)

 
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change
Higher / (Lower)
 
As Reported
 
Balances Without Adoption of ASC 606
 
Effect of Change
Higher / (Lower)
 
For the three months ended
September 30, 2018
 
For the nine months ended
September 30, 2018
Statement of Operations
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
Railcar services
$
26,791

 
$
26,369

 
$
422

 
$
67,051

 
$
63,839

 
$
3,212

Total revenues
99,984

 
99,562

 
422

 
362,750

 
359,538

 
3,212

 
 
 
 
 
 
 
 
 
 
 
 
Cost of Revenues
 
 
 
 
 
 
 
 
 
 
 
Railcar services
(22,892
)
 
(22,526
)
 
(366
)
 
(56,897
)
 
(54,105
)
 
(2,792
)
Total cost of revenues
(77,515
)
 
(77,149
)
 
(366
)
 
(280,246
)
 
(277,454
)
 
(2,792
)
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
22,469

 
22,413

 
56

 
82,504

 
82,084

 
420

Earnings from operations
21,894

 
21,838

 
56

 
60,296

 
59,876

 
420

Earnings before income taxes
17,482

 
17,426

 
56

 
48,042

 
47,622

 
420

Income tax expense
(4,409
)
 
(4,395
)
 
(14
)
 
(12,786
)
 
(12,678
)
 
(108
)
Net earnings
13,073

 
13,031

 
42

 
35,256

 
34,944

 
312

Note 3 — Revenue Recognition
From time to time, ARI enters into contracts with customers for the production of railcars and for the production of railcar and industrial components. ARI’s railcar manufacturing contracts are generally structured as an order for any number of railcars that are generally identical in terms of design, technology and function. Each railcar in an order is priced individually but similar railcars are generally sold at the same price. Certain contracts may be structured to cover the production of multiple types of railcars or railcar and industrial components, and the transaction price for such contracts is allocated to products based upon their standalone selling price. ARI assesses these contracts individually to, among other things, identify individual performance obligations. Generally, the only distinct performance obligations identified are the individual products explicitly stated in the contract. As performance obligations related to manufacturing contracts are satisfied at a point in time and railcars manufactured by ARI have an alternative use for the Company, manufacturing revenue is recognized at the point in time at which shipment occurs. A related receivable is recognized as the explicitly stated products are transferred to the customer and the customer obtains control, which is typically at the time of shipment and represents ARI’s unconditional right to consideration.
ARI also enters into contracts with customers for railcar services. Revenues generated from the Railcar Services segment are invoiced to the customer when all agreed-upon services have been provided and the railcar on which the services were performed is shipped from the repair facility or the work has been performed by the Company’s repair mobile unit. However, as the customer controls the railcar while ARI’s repair services are performed under the contract, ARI satisfies its performance obligations as services are rendered, and revenues are recognized over time. As a result, at any given time, a contract asset

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exists related to railcar services that have been performed but not yet billed. The Company utilizes the input method and performs a calculation at the end of each accounting period whereby it analyzes all work-in-process for the Railcar Services segment, representing the cost of services performed on railcars that have not yet been shipped. The Company then estimates a corresponding amount of revenue based on an average profit margin for the Railcar Services segment. Therefore, the revenue recorded at each period-end reflects the estimated revenue recognition for Railcar Services over time. This method was selected because the costs incurred are proportionate to ARI’s progress in satisfying the performance obligation, and therefore it faithfully depicts ARI’s performance on the contract.
Revenue from contracts with customers is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Sales, use, value added, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.
As discussed further in Note 8, ARI’s standard warranty is up to one year for parts and services and five years for new railcars. These warranties provide customers with quality assurance that the delivered product is as specified in the contract. In accordance with ASC 606, ARI accounts for all warranty obligations as a cost accrual.
Payment terms for ARI’s products and services do not typically exceed normal payment terms used by the industry, and ARI does not have significant financing components or material collectability concerns in relation to its current contracts. Bill-and-hold arrangements are infrequent, and no bill-and-hold arrangements were in place during the nine months ended September 30, 2018.
Railcar manufacturing contracts generally include a base price per railcar as well as a provision that allows the Company to pass on to the customer material cost escalations and surcharges incurred to produce the railcar, should they occur. The escalations and surcharges included as part of the contract with the customer are considered to be variable consideration that is constrained and allocable to a specific performance obligation. While the amounts of the escalations and surcharges are not known at the time at which the contract begins, these costs are known by the time the railcar is shipped, which is the point at which it is invoiced and revenue is recorded. Therefore, while escalations and surcharges are variable in nature, the amounts that are included in the customer invoice and recorded as revenue generally are not subject to change after revenue has been recognized on the transaction.
Revenue Disaggregation
The following table further illustrates the nature of the Company’s revenues reported on a consolidated basis arising from contracts with customers. The Railcar Leasing segment has been included in the tables below to reconcile to ARI’s total consolidated revenues; however, revenues generated by the Railcar Leasing segment are recognized in accordance with lease accounting guidance rather than ASC 606.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
 
(in thousands)
Revenues from contracts with customers (manufacturing and railcar services)
$
67,557

 
$
87,306

 
$
261,398

 
$
243,455

Railcar leasing segment revenues
32,427

 
33,440

 
101,352

 
100,992

Total revenue (consolidated)
$
99,984

 
$
120,746

 
$
362,750

 
$
344,447


The following table presents our revenue disaggregated by type of product or service:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
 
(in thousands)
Railcar manufacturing
$
28,857

 
$
61,165

 
$
164,291

 
$
162,808

Railcar and industrial components manufacturing
11,909

 
7,277

 
30,056

 
21,447

Total manufacturing (1)
40,766

 
68,442

 
194,347

 
184,255

 
 
 
 
 
 
 
 
Railcar leasing (2)
32,427

 
33,440

 
101,352

 
100,992

Railcar services (3)
26,791

 
18,864

 
67,051

 
59,200

Total revenue (consolidated)
$
99,984

 
$
120,746

 
$
362,750

 
$
344,447


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(1)—
Revenue recognized at a point in time
(2)—
Revenue recognition not in scope of ASC 606
(3)—
Revenue recognized over time
Contract Balances
In considering the distinction between a contract asset and a receivable, as defined in ASC 606, ARI reviewed its practices as follows. ARI bills its customers once services have been rendered or products have been delivered and the Company has an unconditional right to consideration as only the passage of time is required before payment of that consideration is due. The contract assets that ARI maintains are related to unbilled revenues recognized on repair services that have been performed but the entire project has not yet been completed, and the railcar has not yet been shipped to the customer. These contract assets are included within 'accounts receivable' on the condensed consolidated balance sheets. The contract liabilities that ARI maintains represent deferred revenue related to its manufacturing and repair services segments. The short-term contract liabilities are included within 'accrued expenses' and the long-term contract liabilities are included within 'other liabilities' on the condensed consolidated balance sheets.
The allowance for doubtful accounts reflects ARI’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on the history of past write-offs and collections and current credit conditions of its customers. Refer to Note 4 for the balance of the allowance for doubtful accounts for each period presented.
The opening and closing balances of the Company's contract balances are presented below (in thousands):
 
2018
 
 
 
January 1
 
September 30
 
$ Change
Contract assets
$
3,717

 
$
6,912

 
$
3,195

Contract liabilities
1,600

 
1,500

 
(100
)
The increase in contract assets from January 1, 2018 to September 30, 2018 was due to ramp up of activity at certain repair shops within the Company’s repair network leading to certain work that ARI expects will be completed and billed to customers in the coming months. The decrease in contract liabilities during the nine months ended September 30, 2018, was due to revenue being recognized on a completed contract in the current reporting period that was in the contract liability balance at the end of the prior period. Additionally, there were no impairments related to contract assets, including bad debt expense, during the nine months ended September 30, 2018.
Contract Costs
ARI has deemed its costs to obtain a contract as described in ASC Topic 340, Other Assets and Deferred Costs (ASC 340) to be immaterial. Further, in accordance with Topic 340, an entity may elect a practical expedient that allows the entity to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. ARI has determined that its costs to obtain a contract would be amortized over one year or less and has elected this practical expedient. Therefore, the Company does not recognize assets from the costs to obtain a contract with a customer.
ARI incurs costs in the fulfillment of its contracts such as engineering hours and other salaries and wages. These costs incurred in fulfilling a contract with a customer are within the scope of ASC 330, Inventory. Therefore, in accordance with ASC 340, ARI accounts for these production costs, or costs to fulfill a contract, in accordance with ASC 330, Inventory.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of firm contractual commitments from customers for which work is partially completed.  As of September 30, 2018, the estimated revenue expected to be recognized in the future related to remaining performance obligations was $963.2 million. Of this total, we expect to recognize $184.2 million into revenue during the next twelve months and $779.0 million thereafter.
Note 4 — Accounts Receivable, net
Accounts receivable, net, consists of the following: 

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September 30,
2018
 
December 31,
2017
 
(in thousands)
Accounts receivable, gross
$
41,742

 
$
45,041

Less allowance for doubtful accounts
(1,334
)
 
(1,237
)
Total accounts receivable, net
$
40,408

 
$
43,804


Note 5 — Inventories, net
Inventories consist of the following: 
 
September 30,
2018
 
December 31,
2017
 
(in thousands)
Raw materials
$
57,306

 
$
33,498

Work-in-process
23,691

 
22,040

Finished products
1,956

 
1,813

Total inventories
82,953

 
57,351

Less reserves
(3,298
)
 
(3,204
)
Total inventories, net
$
79,655

 
$
54,147

Note 6 — 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,
2018
 
December 31,
2017
 
(in thousands)
Operations / Corporate:
 
 
 
Buildings
$
189,009

 
$
186,664

Machinery and equipment
231,849

 
233,025

Land
5,372

 
5,285

Construction in process
3,437

 
1,818

 
429,667

 
426,792

Less accumulated depreciation
(276,537
)
 
(264,257
)
Property, plant and equipment, net
$
153,130

 
$
162,535

Railcar Leasing:
 
 
 
Railcars on lease
$
1,231,158

 
$
1,159,868

Less accumulated depreciation
(153,390
)
 
(123,454
)
Railcars on lease, net
$
1,077,768

 
$
1,036,414

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, 2018, future contractual minimum rental revenues required under non-cancellable operating leases for railcars with terms longer than one year are as follows (in thousands):

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Remaining 3 months of 2018
$
31,994

2019
113,586

2020
79,997

2021
61,449

2022
41,729

2023 and thereafter
95,799

Total
424,554

The future contractual minimum rental revenues shown above include total rental revenues from affiliates of $7.0 million. See Note 15, Related Party Transactions for further discussion regarding lease agreements with IELP Entities.
Depreciation expense
The following table summarizes depreciation expense:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Total depreciation expense
$
15,760

 
$
14,572

 
$
46,333

 
$
42,746

Depreciation expense on leased railcars
$
10,377

 
$
8,964

 
$
29,966

 
$
25,859

Asset Impairments
We review our operating assets whenever indicators of impairment may be present.

In 2015, the Pipeline and Hazardous Materials Safety Administration of the US Department of Transportation (“PHMSA”) and Transport Canada ("TC") each issued rules that established new design standards for tank railcars used in flammable liquids service in North America. In addition to setting standards for newly built tank railcars, the regulations established guidelines for modifying existing tank railcars used in certain flammable liquids service and deadlines for modifying or removing those railcars from service. The deadlines ranged from November 2016 to May 2029, depending on the type of railcar and the nature of commodity carried. The PHMSA rule was subsequently modified by legislation adopted by Congress, and in August 2016, PHMSA amended its earlier rule to incorporate the legislative mandates into the final rule, which included expanded retrofit requirements and a shorter phase out period for the older tank railcars.

During the second quarter of 2018, ARI began negotiating an agreement to sell to a customer certain used tank railcars in ARI’s lease fleet. In a strategic effort to evaluate its lease fleet composition and meet the customer's needs, ARI offered to sell a quantity of railcars from its lease fleet to the customer at a price that was below ARI’s carrying value for those railcars. These railcars are subject to the requirements noted above and will require extensive retrofits in order to continue carrying certain flammable liquids. As of June 30, 2018, ARI deemed it more likely than not that this transaction would occur. Accordingly, ARI determined that an indicator of impairment was present and performed a full impairment analysis on these railcars by calculating their fair value in accordance with ASC 820, Fair Value Measurements and Disclosures. The result of this impairment analysis, which used Level 3 inputs and the market approach for calculating the fair value, was that an impairment loss should be recognized in the amount of $3.6 million, reflected in the results of the Railcar Leasing segment. In addition, at June 30, 2018, which remained applicable at September 30, 2018, all of the criteria for these railcars to be classified as held for sale were not met.

Once ARI had an expectation that, more likely than not, these railcars would be sold for an amount less than their carrying values, ARI believed that an indicator of impairment was now present for other similar railcars within its lease fleet, and as such, ARI reviewed these assets for impairment. For purposes of these analyses, multiple scenarios of net cash flows were modeled using a range of estimates and assumptions, and recoverability tests were performed on all the railcars of this type in the Company's lease fleet. These recoverability tests, performed on an undiscounted cash flows basis in accordance with ASC 360, Property, Plant and Equipment, concluded that the carrying values of the assets were recoverable, and no impairment should be recorded.

The assumptions relied upon for purposes of this impairment analysis were based on management's judgments and estimates of current and future market conditions. Actual results could differ from these estimates, and the Company may incur future impairment losses with respect to this railcar group, particularly if railcars are sold or scrapped sooner than anticipated.


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As of September 30, 2018, while the contract with the customer is not yet finalized, ARI still believes it is more likely than not that an agreement to sell these railcars to the customer at a price in line with the assumptions used in the above impairment analysis will occur. Thus, no adjustments to the impairment loss recorded during the second quarter or the asset values were considered necessary.
Note 7 — Investments in and Loans to Joint Ventures
As of September 30, 2018, 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. 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,
2018
 
December 31,
2017
 
(in thousands)
Carrying amount of investments in and loans to joint ventures
 
 
 
Ohio Castings
$
5,680

 
$
6,202

Axis
14,646

 
16,369

Total investments in and loans to joint ventures
$
20,326

 
$
22,571

See Note 15, 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.

Based on expected decline in industry demand, Ohio Castings was idled in January 2017 and continues to remain idle. The Company expects that Ohio Castings will remain idle through 2018 and most, if not all, of 2019, and Ohio Castings' status for 2019 and beyond will be evaluated based on changes in future demand expectations. Ohio Castings performed an analysis of long-lived assets as of August 31, 2018, in accordance with ASC 360, Property, Plant and Equipment. 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 in accordance with ASC 323, Investments - Equity Method and Joint Ventures and determined there was no impairment. As of September 30, 2018, 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: 

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Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$

 
$
15

 
$

 
$
4,469

Gross loss
$
(387
)
 
$
(396
)
 
$
(1,299
)
 
$
(2,795
)
Net loss
$
(618
)
 
$
(712
)
 
$
(1,569
)
 
$
(3,179
)

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.
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 2018 and the full year of 2017, 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 $7.4 million and $11.8 million as of September 30, 2018 and December 31, 2017, 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,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
13,391

 
$
10,432

 
$
39,532

 
$
35,887

Gross profit
$
1,928

 
$
1,448

 
$
8,082

 
$
8,644

Net earnings
$
1,369

 
$
688

 
$
6,274

 
$
6,180

Note 8 — Warranties
The Company's standard warranty is up to one year for parts and services and five years for new railcars. Factors affecting the Company's warranty liability include the number of units sold, historical and anticipated warranty claim rates and costs per claim. Fluctuations in the Company's warranty provision and experience of warranty claims are the result of variations in these factors. The Company assesses the adequacy of its warranty liability based on changes in these factors.
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: 

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Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Liability, beginning of period
$
8,388

 
$
3,006

 
$
8,838

 
$
2,439

Provision for warranties issued during the period, net of adjustments
506

 
120

 
869

 
354

Adjustments to warranties issued during previous periods
91

 
658

 
(332
)
 
1,578

Warranty claims
(63
)
 
(113
)
 
(453
)
 
(700
)
Liability, end of period
$
8,922

 
$
3,671

 
$
8,922

 
$
3,671

Note 9 — 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 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 is obligated to make any selections 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 fleet financings. Between June 1, 2017 and April 17, 2018, ARI subcontracted with ARL to provide services to ARL covering the day-to-day management of the LLIII railcars and the leases associated therewith. As of April 17, 2018, ARI became the manager under the LLIII lease fleet financing. See below and Note 15, 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 an unaffiliated third party (Buyer).
January 2015 private placement notes
In January 2015, LLIII issued $625.5 million in aggregate principal amount of notes pursuant to an indenture, as amended (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 previous lease fleet financing facilities, resulting in net proceeds of $211.6 million. As of September 30, 2018, there were $155.8 million and $375.5 million of Class A-1 and Class A-2 notes outstanding, respectively, compared to $174.9 million and $375.5 million of Class A-1 and Class A-2 notes outstanding, respectively, as of December 31, 2017. 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 $16.6 million as of both September 30, 2018 and December 31, 2017 and is included within 'Restricted cash' on the condensed consolidated balance sheets.
LLIII can now prepay or redeem the Class A-1 Notes, in whole or in part, on any payment date. LLIII can now prepay or redeem the Class A-2 Notes, in whole or in part, on any payment date, 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 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, 2018.

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The fair value of the Notes was $537.2 million and $556.6 million as of September 30, 2018 and December 31, 2017, 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. See the 'Liquidity and Capital Resources' section for further discussion regarding the Longtrain Indenture.
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, as amended (the 2015 Credit Agreement). See the 'Liquidity and Capital Resources' section for further discussion regarding the 2015 Credit Agreement. As of September 30, 2018, 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 ARI 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.
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, 2018.
As of September 30, 2018 and December 31, 2017, the net book value of the railcars that were pledged as part of the Company's and its subsidiaries' lease fleet financings was $512.2 million and $524.1 million, respectively.
The future contractual minimum rental revenues related to the railcars pledged as of September 30, 2018 are as follows (in thousands):
Remaining 3 months of 2018
$
15,403

2019
50,783

2020
30,607

2021
20,037

2022
11,384

2023 and thereafter
10,852

Total
$
139,066

The remaining principal payments under the Notes as of September 30, 2018 are as follows (in thousands): 
Remaining 3 months of 2018
$
6,427

2019
25,507

2020
26,355

2021
26,358

2022
25,852

2023 and thereafter
420,764

Total
$
531,263

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

17

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principal beneficial stockholder through Icahn Enterprises L.P. (IELP), and Buyer and 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. Effective as of the ARL Closing Date, ARI manages the ARI Railcars and markets them for sale or lease.
Pursuant to a Railcar Management Agreement, dated January 29, 2015, between LLIII and ARL (the Longtrain RMA), ARL, as manager, marketed Longtrain Railcars for lease, and 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 served as administrator of the accounts used to service the debt under the Longtrain Indenture.
As provided in the RMTA, following the ARL Closing, the Longtrain RMA continued in effect, with ARL remaining as manager of the Longtrain Railcars under the Longtrain RMA and the Longtrain Indenture, until ARI obtained the Noteholder Consent and became the manager of the Longtrain Railcars. The Noteholder Consent was obtained on April 10, 2018 and on April 17, 2018, ARI became the manager of the Longtrain Railcars and the Longtrain RMA was terminated.
ARL Subcontractor Agreement
Further, as contemplated by the RMTA, effective as of the ARL Closing Date, ARI entered into a subcontract 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, remained in control of the accounts used to service the debt under the Longtrain Indenture until the Noteholder Consent was obtained and ARI and its subsidiary became manager and administrator, respectively. During the term of the Subcontractor Agreement, management fees and expenses paid to ARL in respect of management duties subcontracted to ARI were paid by ARL to ARI. The Subcontractor Agreement terminated automatically on April 17, 2018, when ARI became the manager of the Longtrain Railcars following receipt of the Noteholder Consent.
Note 10 — Income Taxes
The Tax Cuts and Jobs Act enacted on December 22, 2017 resulted in substantial changes to the U.S. tax code, effective for 2018. These changes included, but were not limited to, (i) reducing the federal corporate income tax rate from 35% to 21% and (ii) requiring companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. Also, on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when the taxpayer does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete all the accounting for certain income tax effects of the Tax Reform Act. In accordance with SAB 118 guidance, at December 31, 2017, the Company recorded provisional estimates to re-measure its deferred taxes using the new, 21% statutory rate resulting in a tax benefit of $107.9 million and recorded an estimated transition tax expense of $0.6 million.
During the nine months ended September 30, 2018, the Company recorded the income tax effects of the Tax Cuts and Jobs Act with regard to its federal income taxes. The Company filed its U.S. federal tax return for 2017 during the third quarter of 2018 and recognized as a one-time discrete item an increase of $0.1 million to its provisional transition tax amount of $0.6 million that was initially recorded at December 31, 2017, which resulted in no effect on the annual effective tax rate. The Company considers the federal tax effects from the deemed repatriation dividend to be complete. The Company still considers any state impacts associated with the repatriation dividend and the remeasurement of its deferred tax assets to be provisional until all such state income tax returns are filed for 2017, which should be completed during the fourth quarter of 2018.
The Company’s federal income tax returns for tax years 2015 and beyond remain subject to examination, with the latest statute of limitations expiring in September 2021. Certain of the Company's 2013 state income tax returns and a majority of the Company's state income tax returns for 2014 and beyond remain open and subject to examination, with the latest statute of limitations expiring in December 2022 upon filing of the Company's 2017 state tax returns. The Company’s foreign subsidiary's income tax returns for 2014 and beyond remain open to examination by foreign tax authorities.
Note 11 — Pension Plans

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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,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Service cost
$
85

 
$
88

 
$
254

 
$
265

Interest cost
210

 
235

 
631

 
706

Expected return on plan assets
(281
)
 
(283
)
 
(843
)
 
(848
)
Amortization of net actuarial loss/prior service cost
46

 
184

 
137

 
552

Net periodic cost recognized
$
60

 
$
224

 
$
179

 
$
675

Note 12 — 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 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 are, from time to time, the subject of 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 to date 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 ARI might incur with respect to those existing issues. If ACF fails to honor its obligations to ARI, ARI could be responsible for the cost of any investigation or remediation that may be required. Under applicable environmental laws, ARI would be responsible for the cost of any investigation or remediation relating to these properties that may have occurred after their transfer from ACF to ARI. Any of these costs could be material.
ARI is 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 15, 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 United States District Court for the Southern District of New York against GyanSys. The complaint asserted a claim against GyanSys for breaching its contract with ARI to implement an

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enterprise resource planning system. GyanSys denied responsibility and alleged a counterclaim against ARI for breach of contract and wrongful termination, seeking damages of more than $9 million. After a trial completed in August 2017, the court ruled in favor of ARI and against GyanSys, awarding ARI damages, interest and costs of approximately $1.8 million. However, as the amount of this judgment has not been realized, no such recovery has been recorded as of September 30, 2018. ARI has filed a motion to recover its attorneys’ fees and that motion is currently pending. Both parties have filed notices of appeal, and briefing for the appeals has been completed. As of the date of this report, no date has been set for oral argument.
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 required owners to identify their subject tank railcars and then from that population identify the 15% of subject tank railcars then in hazardous materials service with the highest mileage in each tank railcar owner’s fleet. Visual inspection of each of the subject tank railcars is required by the railcar operator prior to putting any railcar into service. Owners were required to 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. The FRA also reserved the right to seek civil penalties or to take any other appropriate enforcement action for violations of the Federal Hazardous Materials Regulations that have occurred.
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, extended 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 settlement 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 inspected, tested, and if necessary, repaired all of its 15% identified railcars as required pursuant to the settlement agreement prior to December 31, 2017.
The American Association of Railroads (AAR) issued a Circular Letter and Maintenance Advisory in May 2018 that requires railcar owners to inspect and test the remaining 85% of their subject tank railcars at tank railcar facilities in accordance with the process outlined in the Revised Directive no later than their next qualification, not to exceed 10 years. The tank railcars may continue in service pending inspection by a certified tank facility.
ARI has evaluated its potential exposure related to the Revised Directive and has a loss contingency reserve remaining of $8.6 million to cover its probable and estimable liabilities, as of September 30, 2018, with respect to the Company's response to the Revised Directive. This loss contingency reserve takes into account information available as of September 30, 2018 and ARI's contractual obligations in its capacity as both a manufacturer and owner of railcars subject to the Revised Directive. This reserve is separated into $6.4 million included in accrued expenses and $2.2 million included in other liabilities on the condensed consolidated balance sheet. This amount will continue to be evaluated as the Company’s and its customers’ compliance with the Revised Directive and the AAR Circular Letter and Maintenance Advisory, and the Company's compliance with the settlement agreement, progresses. Actual results could differ from this estimate.

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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 $8.6 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 13 — 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,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Share-based compensation expense (income)
 
 
 
 
 
 
 
Cost of revenues: Manufacturing
$
165

 
$
23

 
$
168

 
$
(12
)
Cost of revenues: Railcar services

 

 

 
(3
)
Selling, general and administrative
1,298

 
223

 
1,249

 
(211
)
Total share-based compensation expense (income)
$
1,463

 
$
246

 
$
1,417

 
$
(226
)
As of September 30, 2018, unrecognized compensation costs related to the unvested portion of SARs were estimated to be $2.5 million and were expected to be recognized over a weighted average period of 27 months.
Note 14 — Accumulated Other Comprehensive Income (Loss)
The following table presents the balances of related after-tax components of accumulated other comprehensive income (loss). 
 
Accumulated
Currency
Translation
 
Accumulated
Postretirement
Transactions
 
Accumulated
Other
Comprehensive
Income (Loss)
 
(in thousands)
Balance December 31, 2017
$
(838
)
 
$
(3,872
)
 
$
(4,710
)
Currency translation
(564
)
 

 
(564
)
Reclassifications related to pension plans, net of tax effect of $28 (1)

 
84

 
84

Balance September 30, 2018
$
(1,402
)
 
$
(3,788
)
 
$
(5,190
)
 
(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 11 for further details and pre-tax amounts.
Note 15 — 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 on an annual basis unless written notice of termination 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

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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 $0.7 million and $2.4 million of components from ACF during the three and nine months ended September 30, 2018, respectively, and $0.8 million and $4.3 million during the same periods in 2017.
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. Effective December 31, 2017, ARI and ACF amended this agreement to, among other provisions, extend the termination date to December 31, 2018 from December 31, 2017, 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.
Zero revenue was recorded under this agreement for both the nine months ended September 30, 2018 and 2017 for sales of railcar components to ACF or for royalties and profits on railcars sold by ACF.
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.
Pursuant to the terms and conditions of the agreement, ARI has the right to assign any sales opportunity 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 Repair Services Agreement terminates on December 31, 2020. Effective December 31, 2017, ARI and ACF amended this agreement to, among other provisions, remove any specific rights to sales opportunities by ACF and any difference in net profits provided to ARI related to Repair Services for railcars owned by ARL, a former affiliate of ARI’s that was sold to an unaffiliated third party effective June 1, 2017. After giving effect to the Repair Services Amendment, ARI has the exclusive right to sales opportunities related to all Repair Services and ARI will receive 30% of the net profits (as defined in the Repair Services Agreement) for Repair Services related to all railcars, if any, but in any case, does not absorb any losses incurred by ACF.
For both the three and nine months ended September 30, 2018 revenues of less than $0.1 million were recorded under this agreement, compared to $0.1 million and $0.2 million for comparable periods of 2017. This revenue related to profits on repair work performed by ACF and is included under railcar services revenues from affiliates on the condensed consolidated statements of operations.

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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.
Railcar purchase and sale agreement
On June 28, 2018, ARI Leasing entered into a Railcar Purchase and Sale Agreement (Railcar Purchase and Sale Agreement) with ACF. The Railcar Purchase and Sale Agreement was unanimously approved by the independent directors of the Company's Audit Committee.
Subject to the terms and conditions of the Railcar Purchase and Sale Agreement, ARI Leasing has agreed to purchase from ACF certain tank railcars (ACF Tank Railcars) to be manufactured at ACF’s Milton, Pennsylvania facility. The purchase price for the ACF Tank Railcars will be calculated based on ACF’s manufacturing costs with respect to the ACF Tank Railcars plus a certain margin and is subject to certain adjustments, as provided in the Railcar Purchase and Sale Agreement. ACF’s manufacturing costs include ACF’s standard costs for materials, parts, labor, and overhead. Certain of ACF’s start-up expenses related to the manufacture of the ACF Tank Railcars will also be included in the purchase price for the ACF Tank Railcars.
The Railcar Purchase and Sale Agreement prohibits ACF from engaging in the manufacturing or assembly of any railcars other than the ACF Tank Railcars or any other activity that may affect the timely delivery of the ACF Tank Railcars under the Railcar Purchase and Sale Agreement.
ARI Leasing has also agreed to provide ACF with certain designs, engineering, related rights and licenses to use such designs and engineering, and purchasing support necessary to manufacture the ACF Tank Railcars, including with respect to the sourcing of certain materials and components to be incorporated into the ACF Tank Railcars (Materials). ACF may purchase Materials directly from ARI Leasing or ARI Leasing may purchase Materials from third parties on ACF’s behalf.
The Agreement also requires ACF to make commercially reasonable efforts to obtain all appropriate certifications required by the AAR for the manufacturing and sale of the ACF Tank Railcars (AAR Certification) as of such date that ACF commences production of the ACF Tank Railcars and to have obtained the AAR Certification as of the date that the ACF Tank Railcars are delivered to ARI Leasing. ACF may terminate the Railcar Purchase and Sale Agreement upon ten (10) days’ written notice to ARI Leasing should ACF fail to obtain AAR Certification after using its commercially reasonable efforts to do so.
No ACF Tank Railcars were purchased by ARI under the Railcar Purchase and Sale Agreement during the three or nine months ended September 30, 2018 or 2017. ARI sourced and sold to ACF $2.6 million of components and raw materials during both the three and nine months ended September 30, 2018, compared to zero for the same periods in 2017.
Agreements with ARL
The Company has or 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 for both the three and nine months ended September 30, 2018, compared to zero and $10.1 million for the same periods in 2017 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, ARI and its wholly-owned subsidiaries have entered into railcar management agreements with ARL, pursuant to which ARI 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

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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, ARI 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 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, marketed Longtrain Railcars for lease, and arranged for the operation, storage, re-lease, sublease, service, repair, overhaul, replacement and maintenance of the Longtrain Railcars. In addition, a subsidiary of ARL served as administrator of the accounts used to service the debt under the Longtrain Indenture.
As provided in the RMTA, following the ARL Closing, the Longtrain RMA continued in effect, with ARL remaining as manager of the Longtrain Railcars under the Longtrain RMA and the Longtrain Indenture, until ARI obtained the Noteholder Consent on April 10, 2018 and became the manager of the Longtrain Railcars on April 17, 2018. Pursuant to the terms of the RMTA, the Longtrain RMA was terminated as of April 17, 2018.
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, remained in control of the accounts used to service the debt under the Longtrain Indenture until the Noteholder Consent was obtained and ARI and its subsidiary became manager and administrator, respectively. During the term of the Subcontractor Agreement, management fees and expenses paid to ARL in respect of management duties subcontracted to ARI were paid by ARL to ARI. The Subcontractor Agreement terminated automatically on April 17, 2018, when ARI became the manager of the Longtrain Railcars following receipt of the Noteholder Consent.
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 for both the three and nine months ended September 30, 2018, compared to zero and $2.8 million for the same periods in 2017. These fees are included in cost of revenues for railcar leasing on the condensed consolidated statements of operations. Sales commissions of zero were incurred for both the three and nine months ended September 30, 2018 compared to zero and $0.3 million for the same periods in 2017. 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 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. 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.

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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 zero as of September 30, 2018 and $0.4 million as of December 31, 2017.
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.
Agreements with other related parties
Railcar leases
Beginning in 2016, the Company has leased railcars to companies controlled by Mr. Carl Icahn, our principal beneficial stockholder through IELP, including, but not limited to, ARL, prior to its sale to an unaffiliated third party effective as of June 1, 2017 (collectively, the IELP Entities), under operating lease arrangements. Revenues from railcars leased to certain of the IELP Entities were $0.4 million and $1.2 million for the three and nine months ended September 30, 2018, respectively, compared to $0.2 million and $0.7 million for the same periods in 2017. These revenues are included in railcar leasing revenues from affiliates on the condensed 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. No revenue was recorded related to railcar services performed on these railcars for both the three and nine months ended September 30, 2018 compared to $1.1 million and $1.2 million for the three and nine months ended September 30, 2017, respectively. These revenues are included under railcar services revenues from affiliates on the condensed consolidated statements of operations.
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 $0.7 million and $1.1 million for the three and nine months ended September 30, 2018, respectively, compared to $0.6 million and $2.1 million for the same periods in 2017. 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 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 both the three months ended September 30, 2018 and 2017 and were $0.1 million for both the nine months ended September 30, 2018 and

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2017. 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 debt from the lending party thereto, with each party acquiring a 50.0% interest. The balance outstanding on the debt, due to ARI Component, was $7.4 million and $11.8 million as of September 30, 2018 and December 31, 2017, respectively. See Note 7, Investments in and Loans to Joint Ventures, to the condensed consolidated financial statements, for further information regarding this transaction and the terms of the underlying debt.
Railcar component purchases from joint ventures
ARI purchased railcar components from its joint ventures amounting to $3.4 million and $10.5 million for the three and nine months ended September 30, 2018, respectively, compared to $3.4 million and $14.0 million for the same periods in 2017.
Other agreements with joint ventures
Effective January 1, 2010, ARI entered into a services agreement to provide Axis various administrative services such as accounting, tax, human resources and purchasing assistance for an annual fee of $0.3 million, payable in equal monthly installments. This agreement had an initial term of one year and automatically renews for additional one-year periods unless written notice is received from either party.
Note 16 — 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 represented a percentage of the revenues from the lease over its initial term and were paid up front.
Railcar services
Railcar services consists of railcar repair services provided through the Company's various full service facilities or mini shops and mobile units. 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 services.

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, 2018
 
Revenues
 
 
 
External
 
Intersegment
 
Total
 
Earnings (Loss) from Operations
 
(in thousands)
Manufacturing
$
40,766

 
$
39,783

 
$
80,549

 
$
(1,894
)
Railcar leasing (1)
32,427

 

 
32,427

 
26,640

Railcar services
26,791

 
852

 
27,643

 
2,731

Corporate

 

 

 
(5,705
)
Eliminations

 
(40,635
)
 
(40,635
)
 
122

Total Consolidated
$
99,984

 
$

 
$
99,984

 
$
21,894

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

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
Revenues
 
 
 
External
 
Intersegment
 
Total
 
Earnings (Loss) from Operations
 
(in thousands)
Manufacturing
$
194,347

 
$
62,837

 
$
257,184

 
$
4,784

Railcar leasing (1)
101,352

 

 
101,352

 
58,054

Railcar services
67,051

 
5,063

 
72,114

 
7,412

Corporate

 

 

 
(14,016
)
Eliminations

 
(67,900
)
 
(67,900
)
 
4,062

Total Consolidated
$
362,750

 
$

 
$
362,750

 
$
60,296

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


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(1)—
The earnings from operations for the leasing segment include the impact of a gain recorded for a customer's early lease termination payment. The impact of this gain on the leasing segment operating earnings was $10.1 million for the three and nine months ended September 30, 2018, respectively, and zero for the same periods in 2017.

The earnings from operations for the leasing segment also include the impact of an impairment loss recognized on certain railcars within the Company's lease fleet. The impact of the impairment loss was zero and $(3.6) million, net of an intercompany elimination of $8.0 million, for the three and nine months ended September 30, 2018, respectively, and zero for the same periods in 2017.

Total Assets
September 30,
2018
 
December 31,
2017
 
(in thousands)
Manufacturing
$
223,949

 
$
212,508

Railcar leasing
1,415,264

 
1,375,315

Railcar services
69,032

 
59,814

Corporate/Eliminations
(210,409
)
 
(174,211
)
Total Consolidated
$
1,497,836

 
$
1,473,426

Sales to Related Parties
As discussed in Note 15, 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,
 
2018
 
2017
 
2018
 
2017
Manufacturing
2.6
%
 
0.2
%
 
0.7
%
 
0.1
%
Railcar leasing
0.4
%
 
0.2
%
 
0.3
%
 
0.2
%
Railcar services
%
 
1.0
%
 
%
 
3.4
%
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 both the three and nine months ended September 30, 2018 and 2017.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Manufacturing revenues from significant customers
%
 
34.7
%
 
26.9
%
 
13.9
%
Note 17 — Subsequent Events
On October 26, 2018, 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 17, 2018 that will be paid on December 27, 2018, but only if the transactions consummated by the merger have not closed by that time.
Agreement and Plan of Merger
On October 22, 2018 , American Railcar Industries, Inc. (the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with STL Parent Corp., a Delaware corporation (the “Parent”), pursuant to which a newly formed North Dakota corporation that is a wholly-owned subsidiary of Parent (“Merger Sub”), will be merged with and into the Company, with the Company continuing as the surviving corporation in the merger (the “Merger”). On October 26, 2018, Merger Sub executed a joinder agreement with the Company and Parent pursuant to which Merger Sub became a party to the Merger Agreement. Following the consummation of the Merger, the Company will be a wholly-owned subsidiary of Parent.
Pursuant to the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock, par value $0.01 per share, of the Company issued and outstanding immediately prior to the Effective Time

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(each, a “Share”), will be canceled and each such Share (other than (i) Shares owned by Parent, Merger Sub or any of their respective subsidiaries or affiliates (other than the Company), (ii) Shares owned by the Company or the Company’s subsidiaries, or (iii) Shares owned by holders who have properly exercised appraisal rights under North Dakota law) will be converted into the right to receive $70.00 per Share in cash, without interest (the “Merger Consideration”). The Merger Consideration may be increased in the event that interest is determined to be payable as a result of Parent’s failure to timely deposit funds into escrow.
Under certain circumstances, a termination of the Merger Agreement may result in a termination fee in the amount of $65 million payable by the Company to Parent, or a reverse termination fee of $130 million payable by the Parent to the Company (the “Parent Termination Fee”). Upon termination of the Merger Agreement the parties will also be entitled to seek (A) specific performance and (B) damages incurred or suffered as a result of a material breach of any representations, warranties, covenants or other agreements set forth in the Merger Agreement prior to such termination, in each case to the extent expressly permitted by the Merger Agreement. The Company may also seek to enforce its rights as a third party beneficiary under the Equity Commitment Letter (as defined below), as further described below.
The closing of the transactions contemplated by the Merger Agreement are subject to customary conditions, including, among other things, (i) receiving the required approval of the Company’s stockholders, which approval was effected through the written consent (the “Written Consent”) of IEH ARI Holdings LLC (“IEH ARI Holdings”) that was delivered in connection with the Voting Agreement (as defined below), (ii) twenty days having elapsed since the mailing to the Company’s stockholders of a definitive information statement with respect to adoption of the Merger Agreement by IEH ARI Holdings pursuant to the Written Consent, and (iii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). The transactions contemplated by the Merger Agreement are expected to close in the fourth quarter of 2018. The Company cannot assure you that the transactions will be consummated in a timely manner, if at all.
Equity Commitment Letter
On October 22, 2018, Parent obtained certain equity financing commitments pursuant to an equity commitment letter (the “Equity Commitment Letter”) for the purpose of financing the transactions contemplated by the Merger Agreement and paying related fees and expenses. Subject to the terms and conditions of the Equity Commitment Letter, ITE Rail Fund L.P. (the “Sponsor”) committed to contribute to Parent (including through release of funds from escrow), an equity contribution equal to $440 million (the “Contribution”) prior to or at the closing. The Sponsor’s obligation to make the Contribution is subject to (i) the Marketing Period (as defined in the Merger Agreement) ending and Parent satisfying or waiving all conditions precedent to the consummation of the transactions contemplated by the Merger Agreement by Parent and Merger Sub (other than those conditions that by their nature are to be satisfied at the closing), (ii) the Debt Financing (as defined in the Merger Agreement), or any Alternative Financing (as defined in the Merger Agreement), having been funded in accordance with the terms of the Merger Agreement (or will be funded substantially contemporaneously with the Contribution), and (iii) (a) the substantially contemporaneous consummation of the Merger in accordance with the terms of the Merger Agreement or (b) the Company shall have obtained an award of specific performance by a court of competent jurisdiction requiring Parent to effect the closing of the Merger, and the Company has irrevocably confirmed in writing to Parent that if the Contribution is funded, then the closing will occur.
The Company is an express third party beneficiary and has the express right to specific performance of the equity financing. Subject to the terms and conditions of the Equity Commitment Letter and the Merger Agreement, the Company may specifically enforce the Sponsor’s obligations under the Equity Commitment Letter upon the occurrence of certain conditions, including the failure of Parent and Merger Sub to effect closing.
Limited Guarantee
On October 22, 2018, the Sponsor and the Company executed a limited guarantee (the “Limited Guarantee”) in favor of the Company. Pursuant to the terms and conditions of the Limited Guarantee and Merger Agreement, the Sponsor has guaranteed the due and punctual payment of (i) Parent’s and/or Merger Sub’s obligation to pay the Parent Termination Fee to the Company and (ii) any amounts that are owed by Parent and/or Merger Sub with respect to monetary damages relating to any material breach of the Merger Agreement by Parent or Merger Sub (in each case, only after a valid termination of the Merger Agreement by the Company and subject to the terms and limitations of the Merger Agreement) (together, the “Guaranteed Obligations”). The maximum aggregate liability of Sponsor under the Limited Guarantee will not exceed $130,250,000, less the amount of Guaranteed Obligations actually satisfied by Parent or Merger Sub.
Voting Agreement
In connection with the execution of the Merger Agreement, Parent, IEH ARI Holdings and certain of IEH ARI Holdings’ affiliates entered into a voting agreement (the “Voting Agreement”). Subject to the terms and conditions set forth in the Voting

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Agreement, IEH ARI Holdings and such affiliates have approved the transactions contemplated by the Merger Agreement, including the Merger, through a written consent that was delivered to the Company on October 22, 2018. This consent does not become effective and shall be deemed null and void if, at any time prior to November 26, 2018 (subject to extension as provided in the Merger Agreement), the Merger Agreement has been terminated in accordance with its terms.
Stock Repurchase Program
In connection with the transactions contemplated by the Merger Agreement, on October 21, 2018, the Board terminated the Company’s stock repurchase program, effective immediately.
Stock Appreciation Rights
Pursuant to the Merger Agreement, at the Effective Time, any outstanding vested SARs will be canceled in exchange for the right to receive a lump sum cash payment calculated pursuant to the terms of the Merger Agreement. In addition, any SAR that has an exercise or base price per share of common stock that is greater than or equal to the per share Merger Consideration and any unvested SARs will be canceled at closing. The Company estimates that this will increase its expected liability related to vested and outstanding SARs to approximately $5.2 million compared to $3.4 million recorded for all outstanding SARs as of September 30, 2018.
The Company has evaluated subsequent events through October 30, 2018.

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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 the Company’s recently announced merger with Parent, the anticipated timing thereof and the agreements relating thereto, statements regarding various estimates we have made in preparing our financial statements, 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, the impact of the Tax Cuts and Jobs Act of 2017 (the 2017 Tax Act) on our business and financial statements, 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, 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, our 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.
Risks and uncertainties that could adversely affect our business and prospects include without limitation:
risks relating to our recently announced merger including, but not limited to, risks related to the satisfaction of the conditions to closing the transaction (including the expiration of the waiting period under the HSR Act) in the anticipated timeframe or at all; the ability to realize the anticipated benefits of the transaction; potential negative effects of this announcement on the market price of our common stock; the outcome of any regulatory actions or legal proceedings that may be instituted against the Company or others related to the proposed transaction; and the ability to retain certain key employees of the Company;
the health of and prospects for the overall railcar industry;
our prospects in light of the cyclical nature of our business;
our ability to recruit, retain and train qualified personnel;
the risk of being unable to market or re-market 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;
the risks associated with ongoing compliance with transportation, environmental, health, safety, and regulatory laws and regulations, which may be subject to change;
the impact, costs and expenses of any warranty claims to which we may be subject now or in the future;
risks relating to our compliance with, and any developments related to, the FRA Directive and the settlement agreement related thereto;
the impact of policies and priorities of certain governments, or other issues, that may cause trade and market conditions that result in fluctuations in the supply and costs of raw materials, including steel and railcar components, or delays in the delivery of such raw materials and components, and their impact on customer demand, our ability to deliver products and services, and our margin;
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 manage overhead and variations in production rates;
our reliance upon a small number of customers that represent a large percentage of our revenues and backlog;
the conversion of our railcar backlog into revenues equal to our reported estimated backlog value;
fluctuations in commodity prices, including oil and gas;
the risks associated with our current operations and joint ventures, including anticipated capital needs and production capabilities;

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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;
risks relating to the transition of the management of our railcar leasing business from ARL to in-house following the ARL Sale;
risks related to the loss of executive officers;
the sufficiency of our liquidity and capital resources, including long-term capital needs to support the growth of our lease fleet and the conversion of our backlog into shipments;
the risks related to our and our subsidiaries' indebtedness and compliance with covenants contained in our and our subsidiaries' financing arrangements;
uncertainties regarding the 2017 Tax Act or other changes in our tax provisions or positions;
the integration with other systems and ongoing management of our enterprise resource planning system
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, 2017 (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.
RECENT DEVELOPMENTS
Agreement and Plan of Merger
As further described in the Company’s Current Report on Form 8-K filed on October 22, 2018, on October 22, 2018 , American Railcar Industries, Inc. (the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with STL Parent Corp., a Delaware corporation (the “Parent”), pursuant to which a newly formed North Dakota corporation that is a wholly-owned subsidiary of Parent (“Merger Sub”), will be merged with and into the Company, with the Company continuing as the surviving corporation in the merger (the “Merger”). October 26, 2018, Merger Sub executed a joinder agreement with the Company and Parent pursuant to which Merger Sub became a party to the Merger Agreement. Following the consummation of the Merger, the Company will be a wholly-owned subsidiary of Parent.
Pursuant to the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock, par value $0.01 per share, of the Company issued and outstanding immediately prior to the Effective Time (each, a “Share”), will be canceled and each such Share (other than (i) Shares owned by Parent, Merger Sub or any of their respective subsidiaries or affiliates (other than the Company), (ii) Shares owned by the Company or the Company’s subsidiaries, or (iii) Shares owned by holders who have properly exercised appraisal rights under North Dakota law) will be converted into the right to receive $70.00 per Share in cash, without interest (the “Merger Consideration”). The Merger Consideration may be increased in the event that interest is determined to be payable as a result of Parent’s failure to timely deposit funds into escrow.
Under certain circumstances, a termination of the Merger Agreement may result in a termination fee in the amount of $65 million payable by the Company to Parent, or a reverse termination fee of $130 million payable by the Parent to the Company (the “Parent Termination Fee”). Upon termination of the Merger Agreement the parties will also be entitled to seek (A) specific performance and (B) damages incurred or suffered as a result of a material breach of any representations, warranties, covenants or other agreements set forth in the Merger Agreement prior to such termination, in each case to the extent expressly permitted by the Merger Agreement. The Company may also seek to enforce its rights as a third party beneficiary under the Equity Commitment Letter (as defined below), as further described below.
The closing of the transactions contemplated by the Merger Agreement are subject to customary conditions, including, among other things, (i) receiving the required approval of the Company’s stockholders, which approval was effected through the written consent (the “Written Consent”) of IEH ARI Holdings LLC (“IEH ARI Holdings”) that was delivered in connection

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with the Voting Agreement (as defined below), (ii) twenty days having elapsed since the mailing to the Company’s stockholders of a definitive information statement with respect to adoption of the Merger Agreement by IEH ARI Holdings pursuant to the Written Consent, and (iii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). The transactions contemplated by the Merger Agreement are expected to close in the fourth quarter of 2018. The Company cannot assure you that the transactions will be consummated in a timely manner, if at all.
Equity Commitment Letter
On October 22, 2018, Parent obtained certain equity financing commitments pursuant to an equity commitment letter (the “Equity Commitment Letter”) for the purpose of financing the transactions contemplated by the Merger Agreement and paying related fees and expenses. Subject to the terms and conditions of the Equity Commitment Letter, ITE Rail Fund L.P. (the “Sponsor”) committed to contribute to Parent (including through release of funds from escrow), an equity contribution equal to $440 million (the “Contribution”) prior to or at the closing. The Sponsor’s obligation to make the Contribution is subject to (i) the Marketing Period (as defined in the Merger Agreement) ending and Parent satisfying or waiving all conditions precedent to the consummation of the transactions contemplated by the Merger Agreement by Parent and Merger Sub (other than those conditions that by their nature are to be satisfied at the closing), (ii) the Debt Financing (as defined in the Merger Agreement), or any Alternative Financing (as defined in the Merger Agreement), having been funded in accordance with the terms of the Merger Agreement (or will be funded substantially contemporaneously with the Contribution), and (iii) (a) the substantially contemporaneous consummation of the Merger in accordance with the terms of the Merger Agreement or (b) the Company shall have obtained an award of specific performance by a court of competent jurisdiction requiring Parent to effect the closing of the Merger, and the Company has irrevocably confirmed in writing to Parent that if the Contribution is funded, then the closing will occur.
The Company is an express third party beneficiary and has the express right to specific performance of the equity financing. Subject to the terms and conditions of the Equity Commitment Letter and the Merger Agreement, the Company may specifically enforce the Sponsor’s obligations under the Equity Commitment Letter upon the occurrence of certain conditions, including the failure of Parent and Merger Sub to effect closing.
Limited Guarantee
On October 22, 2018, the Sponsor and the Company executed a limited guarantee (the “Limited Guarantee”) in favor of the Company. Pursuant to the terms and conditions of the Limited Guarantee and Merger Agreement, the Sponsor has guaranteed the due and punctual payment of (i) Parent’s and/or Merger Sub’s obligation to pay the Parent Termination Fee to the Company and (ii) any amounts that are owed by Parent and/or Merger Sub with respect to monetary damages relating to any material breach of the Merger Agreement by Parent or Merger Sub (in each case, only after a valid termination of the Merger Agreement by the Company and subject to the terms and limitations of the Merger Agreement) (together, the “Guaranteed Obligations”). The maximum aggregate liability of Sponsor under the Limited Guarantee will not exceed $130,250,000, less the amount of Guaranteed Obligations actually satisfied by Parent or Merger Sub.
Voting Agreement
In connection with the execution of the Merger Agreement, Parent, IEH ARI Holdings and certain of IEH ARI Holdings’ affiliates entered into a voting agreement (the “Voting Agreement”). Subject to the terms and conditions set forth in the Voting Agreement, IEH ARI Holdings and such affiliates have approved the transactions contemplated by the Merger Agreement, including the Merger, through a written consent that was delivered to the Company on October 22, 2018. This consent does not become effective and shall be deemed null and void if, at any time prior to November 26, 2018 (subject to extension as provided in the Merger Agreement), the Merger Agreement has been terminated in accordance with its terms.
Stock Repurchase Program
In connection with the transactions contemplated by the Merger Agreement, on October 21, 2018, the Board terminated the Company’s stock repurchase program, effective immediately.
Stock Appreciation Rights
Pursuant to the Merger Agreement, at the Effective Time, any outstanding vested SARs will be canceled in exchange for the right to receive a lump sum cash payment calculated pursuant to the terms of the Merger Agreement. In addition, any SAR that has an exercise or base price per share of common stock that is greater than or equal to the per share Merger Consideration and any unvested SARs will be canceled at closing. The Company estimates that this will increase its expected liability related to vested and outstanding SARs to approximately $5.2 million compared to $3.4 million recorded for all outstanding SARs as of September 30, 2018.

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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 or our affiliates that we lease 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 2018, we experienced an increased level of inquiries for a variety of types of hopper and tank railcars compared to the third quarter of 2017. We believe this increase was driven, in part, by a slight improvement in underlying demand. We continue to expect that our total 2018 shipments will not reach the level of total shipments achieved in 2017. Railcar loadings for the nine months ended September 30, 2018 as reported by the AAR have increased slightly over the prior year, and the number of railcars industry-wide in storage continued to decrease as of September 30, 2018 and reached its lowest month-end total since the middle of 2016.
We received orders for 8,482 railcars during the third quarter of 2018, including 7,650 railcars ordered through the long-term supply agreement with GATX. These orders increased our backlog to 11,215 railcars at September 30, 2018.
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. However, we are operating in an environment with very low unemployment levels and we continue to focus our efforts to attract, train and retain skilled workers to meet current demand, which has increased costs. 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 be comparable to our historical results or track industry-wide trends.
Our consolidated operating margin was 16.6% for the nine months ended September 30, 2018, a decrease from 18.5% for the same period in 2017, which reflected the competitive pricing environment currently prevalent in the railcar industry and lower production levels at our railcar manufacturing facilities, as well as an impairment loss on certain railcars in our lease fleet, all partially offset by an early lease termination payment, which is discussed further below. Excluding the impact of the impairment and the early lease termination payment, our consolidated operating margin would have been 14.8% for the nine months ended September 30, 2018. Our year-to-date 2018 operating margin also reflects certain inefficiencies experienced in our railcar production facilities, including the impact of our hiring, training and retention efforts to meet current demand for both hopper and tank railcars.
Our earnings for the nine months ended September 30, 2018 were supported by our railcar leasing segment, with a lease fleet of 13,721 railcars at September 30, 2018. Total railcar shipments were 654 during the third quarter of 2018, a decrease of 31.6% compared to the same period in 2017. These shipments included 387 railcars built for our lease fleet, representing 59.2% of our total railcar shipments compared to 35.4% for the same period in 2017. To the extent we add orders for railcars to our lease fleet, those orders not only help us to maintain a steady level of production during the manufacturing period, but also help provide future cash flows while the lease fleet continues to maintain a strong utilization rate. Because revenues and earnings related to leased railcars are recognized over the life of a lease, our quarterly and annual results may vary depending on the mix of lease versus direct sale railcars that we ship during a given period. Additionally, during the third quarter of 2018, we reached an agreement with one of our lessees to terminate a lease prior to the lease expiration date. This early termination resulted in a gain, net of the impact of related expenses, of approximately $10.1 million, and was recorded as other operating income during the third quarter of 2018.
Since 2011, we have strategically grown our lease fleet to include a mix of tank and hopper railcars for varying service types. The expiration dates of our operating leases for railcars in our lease fleet are spread over the next several years, with no more than 20% of the lease fleet expiring in any single year, which helps mitigate the risks of renewing leases at lower rates or any inability we may experience in renewing leases or re-leasing these railcars. Our backlog of 11,215 railcars includes 1,486 railcars we currently expect to build for our lease fleet. With our current liquidity of $274.5 million, including $200.0 million available under our revolving credit facility, and additional unencumbered railcars available to borrow against, we have the ability to grow our lease fleet further as demand dictates.
Our railcar services business continues to support the industry, offering repair services over the railcar life cycle. Our tank railcar manufacturing facility provides us additional flexibility not only to produce railcars, but also to perform traditional

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repair and retrofit services in a production line set-up. We have ramped up activity on retrofit projects for third parties during 2018 that will continue for the balance of the year.
As discussed in Note 12, Commitments and Contingencies, in connection with the Federal Railroad Administration’s (FRA) Railworthiness (RWD) Directive No. 2016-01 [Revised] (the Revised Directive) and our settlement agreement with the FRA related thereto, a loss contingency reserve remained of $8.6 million as of September 30, 2018 related to our probable and estimable liabilities with respect to our compliance with the Revised Directive and related settlement agreement. We continue to monitor this contingency and refine our estimates as necessary. In addition to the requirements of the Revised Directive and the related settlement agreement, we are subject to regulation by governmental, regulatory, and industry authorities and by federal, state, local, and foreign agencies. Despite our intention to comply with these laws and regulations in an efficient manner, our compliance efforts may prove to require more resources than we currently anticipate. We may also be subject to increased regulatory scrutiny, whether due to our ongoing compliance with the Revised Directive and the related settlement agreement, or otherwise.
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, which we will leverage as we continue to grow our business as demand dictates. We are confident that this business model, which offers our customers opportunities to purchase or lease railcars from us, provides us with numerous advantages, including increased flexibility and lower costs relative to other lessors in the industry.
RESULTS OF OPERATIONS
Three and nine months ended September 30, 2018 compared to three and nine months ended September 30, 2017
Consolidated Results
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
$
 
%
 
September 30,
 
$
 
%
 
2018
 
2017
 
Change
 
Change
 
2018
 
2017
 
Change
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
40,766

 
$
68,442

 
$
(27,676
)
 
(40.4
)
 
$
194,347

 
$
184,255

 
$
10,092

 
5.5

Railcar leasing
32,427

 
33,440

 
(1,013
)
 
(3.0
)
 
101,352

 
100,992

 
360

 
0.4

Railcar services
26,791

 
18,864

 
7,927

 
42.0

 
67,051

 
59,200

 
7,851

 
13.3

Total revenues
$
99,984

 
$
120,746

 
$
(20,762
)
 
(17.2
)
 
$
362,750

 
$
344,447

 
$
18,303

 
5.3

Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
(42,117
)
 
$
(64,235
)
 
$
22,118

 
(34.4
)
 
$
(184,507
)
 
$
(169,915
)
 
$
(14,592
)
 
8.6

Other operating income (loss)
(15
)
 
(924
)
 
909

 
*

 
29

 
140

 
(111
)
 
*

Railcar leasing
(12,491
)
 
(10,856
)
 
(1,635
)
 
15.1

 
(38,871
)
 
(34,532
)
 
(4,339
)
 
12.6

Railcar services
(22,892
)
 
(16,023
)
 
(6,869
)
 
42.9

 
(56,897
)
 
(49,559
)
 
(7,338
)
 
14.8

Total cost of revenues
$
(77,515
)
 
$
(92,038
)
 
$
14,523

 
(15.8
)
 
$
(280,246
)
 
$
(253,866
)
 
$
(26,380
)
 
10.4

Selling, general and administrative
(10,993
)
 
(9,263
)
 
(1,730
)
 
18.7

 
(29,349
)
 
(27,084
)
 
(2,265
)
 
8.4

Net gains on disposition of leased railcars
272

 
102

 
170

 
*

 
549

 
115

 
434

 
*

Loss on asset impairment

 

 

 
*

 
(3,554
)
 

 
(3,554
)
 
*

Gain on early lease termination
$
10,146

 
$

 
10,146

 
*

 
$
10,146

 
$

 
10,146

 
*

Earnings from operations
$
21,894

 
$
19,547

 
$
2,347

 
12.0

 
$
60,296

 
$
63,612

 
$
(3,316
)
 
(5.2
)

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* - Not Meaningful
Revenues
Our total consolidated revenues for the three months ended September 30, 2018 decreased by 17.2% compared to the same period in 2017. This decrease was primarily due to decreased revenues in our manufacturing segment, partially offset by increased revenues in our railcar services segment. Our total consolidated revenues for the nine months ended September 30, 2018 increased 5.3% compared to the same period 2017. This increase was primarily due to increased revenues in our manufacturing and railcar services segments.
During the three months ended September 30, 2018, we shipped 267 direct sale railcars, which excludes 387 railcars (59.2% of total shipments) built for our lease fleet, compared to 618 direct sale railcars for the same period of 2017, which excludes 338 railcars (35.4% of total shipments) built for our lease fleet.
During the nine months ended September 30, 2018, we shipped 1,797 direct sale railcars, which excludes 601 railcars (25.1% of total shipments) built for our lease fleet, compared to 1,698 direct sale railcars for the same period of 2017, which excludes 1,485 railcars (46.7% of total shipments) built for our lease fleet.
Manufacturing revenues decreased by 40.4% during the three month period ended September 30, 2018 compared to the same period in 2017. This change included a 56.4% decrease due primarily to decreased railcar shipments for direct sale. In total, we shipped 351 fewer direct sale railcars during the three months ended September 30, 2018 compared to the same period in 2017. This decrease was partially offset by a 16.0% increase resulting from higher selling prices due to the mix of railcars shipped during the third quarter of 2018 compared to the third quarter of 2017 and, to a lesser extent, higher revenues from material cost changes that we generally pass through to customers.
Manufacturing revenues increased by 5.5% during the nine month period ended September 30, 2018 compared to the same period in 2017. This change included a 11.1% increase due primarily to increased railcar shipments for direct sale and higher revenues from material cost changes that we generally pass through to customers. In total, we shipped 99 more direct sale railcars during the nine month period ended September 30, 2018 compared to the same period in 2017. These increases were partially offset by a 5.6% decrease resulting from lower selling prices due to the mix of types of hopper and tank railcars shipped during the nine months ended September 30, 2018 compared to the same period in 2017 and more competitive pricing across the North American railcar market.
Railcar leasing revenues decreased by 3.0% during the three months ended September 30, 2018 compared to the same period in 2017. This decrease was primarily due to a decline in weighted average lease rates and increased time off lease for reassignments, partially offset by an increase in the number of railcars on lease. Railcar leasing revenues increased 0.4% during the nine months ended September 30, 2018 compared to the same period in 2017 due primarily to an increase in the number of railcars in our lease fleet, partially offset by a decline in weighted average lease rates and increased time off lease for reassignments. The lease fleet grew to 13,721 railcars at September 30, 2018 from 12,749 railcars at September 30, 2017.

Railcar services revenues increased by 42.0% for the three months ended September 30, 2018 compared to the same period in 2017, primarily due to increased revenue generated from retrofit projects, partially offset by lower demand for traditional repair services. Railcar services revenues increased by 13.3% for the nine months ended September 30, 2018 compared to the same period in 2017, primarily due to increased revenue generated from retrofit projects, partially offset by decreased demand for traditional repair services, including from our mobile repair operations, and the use of some repair capacity for reassignment work for our lease fleet, which results in intercompany revenue that is eliminated in consolidation. 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.
Cost of revenues
Our total consolidated cost of revenues decreased by 15.8% for the three months ended September 30, 2018 compared to the same period in 2017 due primarily to decreased cost of revenues in our manufacturing segment, partially offset by increases in our railcar leasing and railcar services segments. Our total consolidated cost of revenues increased by 10.4% for the nine months ended September 30, 2018 compared to the same period in 2017 due to increased cost of revenues in our manufacturing, railcar leasing, and railcar services segments.

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Cost of revenues decreased for our manufacturing segment by 34.4% for the three months ended September 30, 2018 compared to the same period in 2017. This decrease was primarily driven by a decrease of 56.5% related to decreased railcar shipments for direct sale, partially offset by a 22.1% increase due to higher material costs for key components and steel. These higher material costs are also reflected as an increase in selling prices as our practice is to generally pass changes in these costs through to customers. The increased cost of revenues is also partially driven by the impact of certain inefficiencies encountered in our railcar production environment, including the impact of our efforts to hire, train, and retain skilled workers to meet current demand for both hopper and tank railcars, including direct and indirect costs of training new hires and additional training for current personnel, along with higher fixed costs incurred based on lower production levels. Cost of revenues increased for our manufacturing segment by 8.6% for the nine months ended September 30, 2018 compared to the same period in 2017, including an increase of 11.6% driven primarily by higher railcar shipments for direct sale and increased materials costs that are passed through to customers. These increases to cost of revenues were partially offset by a decrease of 3.0% due to the mix of railcars shipped during these periods.
Cost of revenues for our railcar leasing segment increased by 15.1% and 12.6% for the three and nine months ended September 30, 2018, respectively, compared to the same periods in 2017, primarily as a result of an increase in the number of railcars in our lease fleet, including increased depreciation expense, and increased maintenance costs associated with both our growing lease fleet and railcars being reassigned to other lessees.
Cost of revenues for our railcar services segment increased by 42.9% and 14.8% for the three and nine months ended September 30, 2018, respectively, compared to the same periods in 2017, primarily due to increased demand for retrofit projects and an unfavorable mix of repair work causing inefficiencies at certain repair facilities during 2018, partially offset by a decline in traditional repair work, including at our mobile repair operations.
Other operating income (loss)
During the second quarter of 2018, we recorded an impairment loss of $3.6 million on certain railcars within our lease fleet. See Note 6 - "Property, Plant, Equipment and Railcars on Leases, net" for further details of the facts and circumstances surrounding this impairment and the analysis performed.
During the third quarter of 2018, we reached an agreement with one of our lessees to terminate a lease prior to the lease expiration date. This early termination resulted in a gain, net of the impact of related expenses, of approximately $10.1 million, which was recorded as other operating income during the third quarter of 2018. The railcars that were subject to the terminated lease have since been reassigned to a new lessee.
Selling, general and administrative expenses
Our total consolidated selling, general and administrative expenses were $11.0 million and $29.3 million for the three and nine