American Railcar Industries, Inc.
American Railcar Industries, Inc. (Form: 10-Q, Received: 11/05/2013 06:02:50)
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, 2013
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from                      to                     
Commission File No. 000-51728
 
  
AMERICAN RAILCAR INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
  
North Dakota
 
43-1481791
(State of
Incorporation)
 
(I.R.S. Employer
Identification No.)
 
 
 
100 Clark Street, St. Charles, Missouri
 
63301
(Address of principal executive offices)
 
(Zip Code)
(636) 940-6000
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):  
Large accelerated filer
¨
Accelerated filer
x
 
 
 
 
Non-accelerated filer
¨
Smaller Reporting Company
¨
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 November 4, 2013 was 21,352,297 shares.
 


Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC.
INDEX TO FORM 10-Q
 
Item Number
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32.1
 
EX-101 INSTANCE DOCUMENT
 
EX-101 SCHEMA DOCUMENT
 
EX-101 CALCULATION LINKBASE DOCUMENT
 
EX-101 LABELS LINKBASE DOCUMENT
 
EX-101 PRESENTATION LINKBASE DOCUMENT
 
EX-101 DEFINITION LINKBASE DOCUMENT
 


2

Table of Contents




AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
September 30,
2013
 
December 31,
2012
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
115,020

 
$
205,045

Short-term investments—available for sale securities

 
12,557

Accounts receivable, net
30,739

 
36,100

Accounts receivable, due from related parties
12,844

 
3,539

Inventories, net
102,051

 
110,075

Deferred tax assets
11,777

 
4,114

Prepaid expenses and other current assets
7,724

 
3,917

Total current assets
280,155

 
375,347

Property, plant and equipment, net
157,429

 
155,893

Railcars on operating leases, net
321,608

 
220,282

Deferred debt issuance costs
2,029

 
2,374

Goodwill
7,169

 
7,169

Investments in and loans to joint ventures
40,190

 
44,536

Other assets
8,028

 
4,157

Total assets
$
816,608

 
$
809,758

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
58,038

 
$
64,971

Accounts payable, due to related parties
1,486

 
2,831

Accrued taxes
7,252

 
2,693

Accrued expenses
23,123

 
5,739

Accrued compensation
16,639

 
17,940

Accrued interest expense
299

 
4,465

Short-term debt, including current portion of long-term debt
6,655

 
2,755

Total current liabilities
113,492

 
101,394

Long-term debt, net of current portion
189,762

 
272,245

Deferred tax liability
84,597

 
53,466

Pension and post-retirement liabilities
8,923

 
9,518

Other liabilities
5,326

 
3,670

Total liabilities
402,100

 
440,293

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 50,000,000 shares authorized, 21,352,297 shares issued and outstanding as of both September 30, 2013 and December 31, 2012
213

 
213

Additional paid-in capital
239,609

 
239,609

Retained earnings
176,541

 
130,030

Accumulated other comprehensive loss
(1,855
)
 
(387
)
Total stockholders’ equity
414,508

 
369,465

Total liabilities and stockholders’ equity
$
816,608

 
$
809,758

See Notes to the Condensed Consolidated Financial Statements.

3

Table of Contents

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,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Manufacturing (including revenues from affiliates of $65,678 and $148,660 for the three and nine months ended September 30, 2013, respectively, and $49,962 and $60,859 for the same periods in 2012)
$
170,943

 
$
147,212

 
$
476,160

 
$
446,273

Railcar leasing
8,301

 
4,267

 
22,371

 
8,315

Railcar services (including revenues from affiliates of $4,307 and $13,461 for the three and nine months ended September 30, 2013, respectively, and $5,855 and $16,858 for the same periods in 2012)
19,655

 
16,751

 
54,882

 
49,455

Total revenues
198,899

 
168,230

 
553,413

 
504,043

Cost of revenues:
 
 
 
 
 
 
 
Manufacturing
(136,974
)
 
(116,497
)
 
(371,806
)
 
(360,507
)
Railcar leasing
(3,524
)
 
(1,854
)
 
(9,729
)
 
(4,196
)
Railcar services
(15,614
)
 
(13,181
)
 
(43,063
)
 
(38,849
)
Total cost of revenues
(156,112
)
 
(131,532
)
 
(424,598
)
 
(403,552
)
Gross profit
42,787

 
36,698

 
128,815

 
100,491

Selling, general and administrative (including costs to a related party of $268 and $864 for the three and nine months ended September 30, 2013, respectively, and $146 and $441 for the same periods in 2012)
(7,161
)
 
(6,360
)
 
(22,091
)
 
(20,388
)
Earnings from operations
35,626

 
30,338

 
106,724

 
80,103

Interest income (including income from related parties of $669 and $2,026 for the three and nine months ended September 30, 2013, respectively, and $727 and $2,201 for the same periods in 2012)
672

 
750

 
2,042

 
2,297

Interest expense
(1,512
)
 
(4,414
)
 
(5,853
)
 
(14,630
)
Loss on debt extinguishment

 
(2,267
)
 
(392
)
 
(2,267
)
Other income (including income from a related party of $5 and $14 for the three and nine months ended September 30, 2013, respectively, and $4 and $10 for the same periods in 2012)
16

 
18

 
2,024

 
37

(Loss) earnings from joint ventures
(505
)
 
(849
)
 
(2,282
)
 
31

Earnings before income taxes
34,297

 
23,576

 
102,263

 
65,571

Income tax expense
(13,327
)
 
(9,566
)
 
(39,737
)
 
(26,196
)
Net earnings
$
20,970

 
$
14,010

 
$
62,526

 
$
39,375

Net earnings per common share—basic and diluted
$
0.98

 
$
0.66

 
$
2.93

 
$
1.84

Weighted average common shares outstanding—basic and diluted
21,352

 
21,352

 
21,352

 
21,352

Cash dividends declared per common share
$
0.25

 
$

 
$
0.75

 
$

See Notes to the Condensed Consolidated Financial Statements.


4

Table of Contents

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,
 
2013
 
2012
 
2013
 
2012
Net earnings
$
20,970

 
$
14,010

 
$
62,526

 
$
39,375

Currency translation
262

 
418

 
(396
)
 
416

Postretirement transactions
46

 
(77
)
 
140

 
(229
)
Short-term investment transactions

 

 
(1,213
)
 

Comprehensive income
$
21,278

 
$
14,351

 
$
61,057

 
$
39,562

See Notes to the Condensed Consolidated Financial Statements.


5

Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)  
 
Nine Months Ended
 
September 30,
 
2013
 
2012
Operating activities:
 
 
 
Net earnings
$
62,526

 
$
39,375

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
20,433

 
17,506

Amortization of deferred costs
486

 
487

Loss on disposal of property, plant and equipment
75

 

Share-based compensation
4,240

 
3,810

Change in interest receivable, due from related parties

 
292

Loss (earnings) from joint ventures
2,282

 
(31
)
Provision for deferred income taxes
23,997

 
24,703

Adjustment to provision for losses on accounts receivable
14

 
108

Items related to investing activities:
 
 
 
Realized gain on sale of short-term investments - available for sale securities
(2,008
)
 

Items related to financing activities:
 
 
 
Loss on debt extinguishment
392

 
2,267

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
5,329

 
(1,995
)
Accounts receivable, due from related parties
(9,315
)
 
(1,428
)
Income taxes receivable
(187
)
 
(282
)
Inventories, net
7,994

 
(36,486
)
Prepaid expenses and other current assets
157

 
(754
)
Accounts payable
(6,927
)
 
5,114

Accounts payable, due to affiliates
(1,345
)
 
150

Accrued expenses and taxes
11,665

 
(5,119
)
Other
(1,779
)
 
(364
)
Net cash provided by operating activities
118,029

 
47,353

Investing activities:
 
 
 
Purchases of property, plant and equipment
(15,343
)
 
(10,444
)
Capital expenditures - leased railcars
(108,314
)
 
(143,242
)
Proceeds from the sale of property, plant and equipment
2

 
254

Proceeds from the sale of short-term investments - available for sale securities
12,699

 

Proceeds from repayments of loans by joint ventures
2,100

 
1,592

Investments in and loans to joint ventures
(136
)
 
(1,652
)
Net cash used in investing activities
(108,992
)
 
(153,492
)
Financing activities:
 
 
 
Repayments of long-term debt
(178,424
)
 
(100,000
)
Premium on debt redemption

 
(1,875
)
Proceeds from long-term debt
99,841

 

Change in interest reserve related to long-term debt
(3,965
)
 

Payment of common stock dividends
(16,014
)
 

Debt issuance costs
(432
)
 

Net cash used in financing activities
(98,994
)
 
(101,875
)
Effect of exchange rate changes on cash and cash equivalents
(68
)
 
37

Decrease in cash and cash equivalents
(90,025
)
 
(207,977
)
Cash and cash equivalents at beginning of period
205,045

 
307,172

Cash and cash equivalents at end of period
$
115,020

 
$
99,195


See Notes to the Condensed Consolidated Financial Statements.

6

Table of Contents

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 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 disclosure 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, 2012 has been derived from the audited consolidated balance sheets 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, 2012 . In the opinion of management, the information contained herein reflects all adjustments necessary to present fairly our 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.
ARI manufactures railcars, which are offered for sale or lease, custom designed railcar parts and other industrial products, primarily aluminum and special alloy steel castings. These products are sold to various types of companies including leasing companies, railroads, industrial companies, and other non-rail companies. ARI leases railcars manufactured by the Company to certain markets under operating leases. ARI provides railcar services consisting of railcar repair services, engineering and field services and fleet management services. More specifically, such services include maintenance planning, project management, tracking and tracing, regulatory compliance, mileage audit, rolling stock taxes, and online service access.
The condensed consolidated financial statements of the Company include the accounts of ARI and its direct and indirect wholly-owned subsidiaries: Castings, LLC (Castings), ARI Component Venture, LLC (ARI Component), American Railcar Mauritius I (ARM I), American Railcar Mauritius II (ARM II), ARI Fleet Services of Canada, Inc., ARI Longtrain, Inc. (Longtrain), and Longtrain Leasing I, LLC (Longtrain Leasing). From time to time, the Company makes investments through Longtrain. All intercompany transactions and balances have been eliminated.
Note 2 — Recent accounting pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2013-11 Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). ASU 2013-11 requires an entity to present an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss or similar tax loss or tax credit carryforward within the same jurisdiction, unless the entity does not intend to utilize the unrecognized tax benefit for that purpose. Otherwise, the unrecognized tax benefit would be presented gross, as a liability (not a deferred tax liability). ASU 2013-11 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2013. The Company plans on adopting ASU 2013-11 for the first quarter of 2014. The Company does not anticipate that the adoption of ASU 2013-11 will have a material impact on the Company’s consolidated financial statements or disclosures.
Note 3 — Fair Value Measurements
The fair value hierarchal disclosure framework prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the asset or liability. Assets or liabilities with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

7



Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 — Quoted prices are available in active markets for identical assets and/or liabilities as of the reporting date. The type of assets and/or liabilities included in Level 1 include listed equities and listed derivatives. The Company does not adjust the quoted price for these assets and/or liabilities, even in situations where they hold a large position and a sale could reasonably impact the quoted price.
Level 2 — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Assets and/or liabilities that are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities and certain over-the-counter derivatives.
Level 3 — Pricing inputs are unobservable for the assets and/or liabilities and include situations where there is little, if any, market activity for the assets and/or liabilities. The inputs into the determination of fair value require significant management judgment or estimation.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. ARI’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
For the fair value of the Company’s short-term investments, outstanding debt, and share-based compensation refer to Notes 4, 11, and 15, respectively.
Note 4 — Short-term Investments — Available for Sale Securities
As of December 31, 2012, Longtrain held approximately 0.8 million shares of Greenbrier common stock that had been purchased in the open market. These shares were sold during the first quarter of 2013 for approximately $12.7 million , resulting in a realized gain of $2.0 million that was recorded in other income on the condensed consolidated statements of operation. The fair value of the shares of Greenbrier that were held by the Company as of December 31, 2012 was $12.6 million and such shares were classified as a Level 1 fair value measurement as defined by U.S. GAAP and the fair value hierarchy. See Note 16 for the amount of unrealized gain on the shares during the nine months ended September 30, 2013 .
Note 5 — Accounts Receivable, net
Accounts receivable, net, consist of the following:
 
 
September 30,
2013
 
December 31,
2012
 
(in thousands)
Accounts receivable, gross
$
30,823

 
$
36,755

Less allowance for doubtful accounts
(84
)
 
(655
)
Total accounts receivable, net
$
30,739

 
$
36,100

Note 6 — Inventories
Inventories consist of the following:
 
 
September 30,
2013
 
December 31,
2012
 
(in thousands)
Raw materials
$
63,610

 
$
72,244

Work-in-process
19,652

 
15,877

Finished products
20,865

 
24,364

Total inventories
104,127

 
112,485

Less reserves
(2,076
)
 
(2,410
)
Total inventories, net
$
102,051

 
$
110,075


8


Note 7 — Property, Plant and Equipment
The following table summarizes the components of property, plant and equipment:
 
 
September 30,
2013
 
December 31,
2012
 
(in thousands)
Operations / Corporate:
 
 
 
Buildings
$
156,022

 
$
151,545

Machinery and equipment
180,895

 
173,468

Land
3,335

 
3,335

Construction in process
14,244

 
12,156

 
354,496

 
340,504

Less accumulated depreciation
(197,067
)
 
(184,611
)
Property, plant and equipment, net
$
157,429

 
$
155,893

Railcar Leasing:
 
 
 
Railcars on lease
$
334,306

 
$
225,992

Less accumulated depreciation
(12,698
)
 
(5,710
)
Railcars on operating lease, net
$
321,608

 
$
220,282

Lease agreements
The Company leases railcars to third parties under multi-year agreements. Railcars subject to lease agreements are classified as railcars on operating leases and are depreciated in accordance with the Company’s depreciation policy.
Capital expenditures for leased railcars represent cash outflows of the Company’s cost to produce railcars shipped or to be shipped for lease.
As of September 30, 2013 , future contractual minimum rental revenues required under non-cancellable operating leases for railcars with terms longer than one year are as follows (in thousands):
 
Remaining 3 months of 2013
$
8,723

2014
33,560

2015
32,886

2016
31,944

2017
24,129

2018
14,938

2019 and thereafter
28,823

Total
$
175,003

Depreciation expense
The following table summarizes depreciation expense:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Total depreciation expense
$
7,038

 
$
6,220

 
$
20,433

 
$
17,506

Depreciation expense on leased railcars
$
2,573

 
$
1,345

 
$
6,988

 
$
2,767


9


Note 8 — Goodwill
On March 31, 2006, the Company acquired all of the common stock of Custom Steel, a subsidiary of Steel Technologies, Inc. Custom Steel produces value-added fabricated parts that primarily support the Company’s railcar manufacturing operations. The acquisition resulted in goodwill of $7.2 million . The results attributable to Custom Steel are included in the manufacturing segment.
The Company performed the annual qualitative assessment as of March 1, 2013 to determine whether it was more likely than not that the fair value of the reporting unit was greater than its carrying amount. If ARI had determined that it was more likely than not that the fair value of the reporting unit was less than its carrying amount, then the Company would have performed the first step of the two-step goodwill impairment test. In evaluating whether it was more likely than not that the fair value of the reporting unit was greater than its carrying amount, the Company considered the following relevant factors:
The North American railcar market has been, and ARI expects it to continue to be highly cyclical. The railcar industry significantly improved in 2011 and 2012. Beginning in the middle of 2012, the mix of demand for railcars began to shift with a heavier emphasis on tank railcars.
ARI is subject to various laws and regulations. No significant assessments have been made by the various regulatory agencies.
The railcar manufacturing industry has historically been extremely competitive.
ARI experienced two strong years of railcar order activity in 2011 and 2012. Based upon third party forecast for the industry over the next several years, the Company expects order activity to remain at healthy levels.
The primary long-lived assets at the reporting unit are machines with uses in various applications for numerous markets and industries. As such, management does not believe that there has been a significant decrease in the market value of the reporting unit’s long-lived assets.
The reporting unit has a history of positive operating cash flows that is expected to continue.
No part of the reporting unit’s net income is comprised of significant non-operating or non-recurring gains or losses, and no significant changes in balance sheet accruals were noted.
In addition, during 2012 there were no significant changes in the following with regard to the reporting unit that we expect to impact future results:
Key personnel;
Business strategy;
Buyer or supplier bargaining power; and
Legal factors.
After assessing the above factors, the Company determined that it was more likely than not that the fair value of the reporting unit was greater than its carrying amount, and therefore no further testing was necessary. Additionally, no impairment was recognized in any prior periods and there were no indicators of impairment since the annual qualitative assessment date.
Note 9 — Investments in and Loans to Joint Ventures
As of September 30, 2013 , the Company was party to the following joint ventures: Ohio Castings LLC (Ohio Castings), Axis LLC (Axis) and Amtek Railcar Industries Private Limited (Amtek Railcar). 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 has a wholly-owned subsidiary, ARM I that wholly-owns ARM II. Through ARM II, the Company has a 50.0% ownership interest in Amtek Railcar, a joint venture that was formed to produce railcars and railcar components in India for sale by the joint venture.

10



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 related to all three joint ventures is recorded within our manufacturing segment. The carrying amount of investments in and loans to joint ventures, which also represents ARI’s maximum exposure to loss with these joint ventures, are as follows:
 
 
September 30,
2013
 
December 31,
2012
 
(in thousands)
Carrying amount of investments in and loans to joint ventures
 
 
 
Ohio Castings
$
7,372

 
$
7,022

Axis
24,379

 
27,181

Amtek Railcar
8,439

 
10,333

Total investments in and loans to joint ventures
$
40,190

 
$
44,536

See Note 17 for information regarding financial transactions with ARI's joint ventures.
Ohio Castings
Ohio Castings produces railcar parts that are sold to one of the joint venture partners. The joint venture partner sells these parts to outside third parties at current market prices and sells them to the Company and the other joint venture partner at cost plus a licensing fee. The Company has been involved with this joint venture since 2003.
The Company accounts for its investment in Ohio Castings using the equity method. The Company has determined that, although the joint venture is a variable interest entity (VIE), this 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 the Company nor Castings, 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 Castings and the Company is limited to the Company’s investment through Castings.
Summary financial results for Ohio Castings, the investee company, in total, are as follows:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
15,199

 
$
15,880

 
$
42,481

 
$
62,565

Gross profit
$
1,334

 
$
1,325

 
$
2,239

 
$
5,881

Net income (loss)
$
1,445

 
$
(760
)
 
$
1,096

 
$
4,188

The new railcar castings market is directly related to the new railcar market, which remains strong for tank railcars, but has been weak for all other railcar types through the third quarter of the current year. Increased net income for the three months ended September 30, 2013 was driven by an increase in margins due to improved performance and a non-recurring rebate received during the quarter. The Company will continue to monitor its investment in Ohio Castings for impairment.

11


Axis
ARI, through a wholly-owned subsidiary, owns a portion of a joint venture, Axis, to manufacture and sell railcar axles. ARI owns 41.9% of Axis, while a minority partner owns 9.7% , with the other significant partner owning 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. Further, until 2016, the seventh anniversary of completion of the axle manufacturing facility, and subject to other terms, conditions and limitations of the joint venture agreement, ARI and the other significant partner are also required, in the event production at the facility has been curtailed, to contribute capital to the joint venture, on a pro rata basis, in order to maintain adequate working capital.
Under the amended Axis credit agreement (Axis Credit Agreement), which is held by ARI and the other significant partner, principal and interest payments are due each fiscal quarter, with the last payment due on December 31, 2019. Subject to certain limitations, at the election of Axis, the interest rate for the loans under the Axis Credit Agreement is based on LIBOR or the prime rate. For LIBOR-based loans, the interest rate is equal to the greater of 7.75% or adjusted LIBOR plus 4.75% . For prime-based loans, the interest rate is equal to the greater of 7.75% or the prime rate plus 2.5% . Interest on LIBOR-based loans is due and payable, at the election of Axis, every one, two, three or six months, and interest on prime-based loans is due and payable monthly. In accordance with the terms of the amended agreement, during 2010 and 2011, Axis satisfied interest on the loan by increasing the outstanding principal by the amount of interest that was otherwise due and payable in cash. Axis’ ability to satisfy the term loan interest by increasing the principal ceased in the third quarter of 2011.
The balance outstanding on these loans, including interest, due to ARI Component, was $33.6 million as of September 30, 2013 and $35.7 million as of December 31, 2012 . During the nine months ended September 30, 2013 , $2.1 million of principal payments were received from Axis.
The Company accounts for its investment in Axis using the equity method. The Company has determined that, although the joint venture is a VIE, this 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 the Company and its wholly-owned subsidiary do not have the rights to the majority of votes or the rights to the majority of returns or losses, the executive committee and board of directors of the joint venture are comprised of one representative from each initial partner with equal voting rights and the risk of loss to the Company and subsidiary is limited to its investment in Axis and the loans due to the Company under the Axis Credit Agreement. The Company also considered the factors that most significantly impact Axis’ economic performance and determined that ARI does not have the power to individually direct the majority of those activities.
Summary financial results for Axis, the investee company, in total, are as follows:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
15,309

 
$
12,884

 
$
38,385

 
$
47,002

Gross profit
$
2,002

 
$
880

 
$
3,461

 
$
3,771

Income before interest
$
1,789

 
$
683

 
$
2,770

 
$
3,096

Net income (loss)
$
445

 
$
(779
)
 
$
(1,298
)
 
$
(1,308
)
The new railcar axle market is directly related to the new railcar market, which remains strong for tank railcars, but has been weak for all other railcar types through the third quarter of the current year. Net income for the three months ended September 30, 2013 is due to an increase in North American sales as well as a small increase in international sales. Axis' losses were comparable for the nine months ended September 30, 2013 and 2012 as increases in efficiencies and margin were offset by a decline in volumes.
As of September 30, 2013 , the investment in Axis was comprised entirely of ARI’s term loan and revolver. The Company has evaluated this loan to be fully recoverable. The Company will continue to monitor its investment in Axis for impairment.

12


Amtek Railcar
The Company, through ARM I and ARM II, entered into an agreement with a partner in India to form a joint venture company to manufacture, sell and supply freight railcars and their components in India and other countries to be agreed upon at a facility in India constructed by the joint venture. ARI’s ownership in this joint venture is 50.0% .
The Company accounts for its investment in Amtek Railcar using the equity method. The Company has determined that, although the joint venture is a VIE, this 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 Amtek Railcar that most significantly impact its economic performance. The significant factors in this determination were that the Company and its wholly-owned subsidiaries do not have the rights to the majority of returns, losses or votes and the risk of loss to the Company and subsidiaries is limited to its investment in Amtek Railcar.
Summary financial results for Amtek Railcar, the investee company, are as follows:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Financial Results
 
 
 
 
 
 
 
Revenues
$
56

 
$

 
$
151

 
$

Gross profit (loss)
$
(768
)
 
$

 
$
(785
)
 
$

Loss before interest and taxes
$
(857
)
 
$
(568
)
 
$
(1,619
)
 
$
(1,502
)
Net loss
$
(2,042
)
 
$
(577
)
 
$
(3,984
)
 
$
(1,529
)

In the second quarter of 2013, Amtek Railcar began incurring higher interest expense and depreciation expense compared to prior periods due to completing construction of the manufacturing plant in India. The joint venture’s facility is in a ready state for production and is currently producing and selling railcar parts. Amtek Railcar has experienced delays in the initial start-up of the business, as well as delays in completing the rail connection from the joint venture’s plant to the mainline. The India Ministry of Railways (IR) issued a railcar tender in October 2013 for over 11,700 units, which was the first railcar tender issued since January 2012. While the Company expects the IR’s recent issuance of a tender will likely have a positive effect on the Indian railcar market as a whole, this tender stipulates that entities that have not previously delivered at least 500 railcars to the IR are limited to a maximum order of 500 railcars. This stipulation would apply to Amtek Railcar, and there can be no assurance that Amtek Railcar will be able to obtain any orders. The factors described above have contributed to Amtek Railcar delivering financial results weaker than originally anticipated.
As a result of the factors described above, Amtek Railcar is seeking additional funding to continue its operations and to satisfy its debt service obligations under its credit agreement, which is non-recourse to ARI. As of the date of this filing, the Company and the Company's joint venture partner are considering various strategic alternatives with respect to Amtek Railcar. If Amtek Railcar is unable to address its capital requirements adequately and in a timely fashion, the Company's investment in Amtek Railcar could be materially adversely impacted. The Company will continue to monitor its investment in Amtek Railcar for impairment.
Note 10 — Warranties
The Company’s standard warranty is 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 rates of claims and historical and anticipated 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.

13


The overall change in the Company’s warranty reserve is reflected on the condensed consolidated balance sheet in accrued expenses and is detailed as follows:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Liability, beginning of period
$
1,519

 
$
1,286

 
$
1,374

 
$
930

Provision for warranties issued during the year, net of
     adjustments
226

 
315

 
1,103

 
974

Adjustments to warranties issued during previous
     years
(314
)
 
435

 
(710
)
 
469

Warranty claims
(144
)
 
(549
)
 
(480
)
 
(886
)
Liability, end of period
$
1,287

 
$
1,487

 
$
1,287

 
$
1,487

Note 11 — Long-term Debt
2007 Senior Unsecured Notes
In February 2007, the Company completed the offering of $275.0 million senior unsecured fixed rate notes, which were subsequently exchanged for registered notes in March 2007 (Notes). On September 4, 2012, ARI completed a voluntary partial early redemption of $100.0 million of the Notes at a rate of 101.875% of the principal amount, plus any accrued and unpaid interest. The Notes bore interest at a fixed interest rate of 7.5% . In conjunction with the redemption, the Company incurred a $2.3 million loss, which is shown as loss on debt extinguishment on the condensed consolidated statements of operations. This charge consists of $1.9 million related to the premium the Company paid on the redemption as well as $0.4 million related to the accelerated write-off of a portion of deferred debt issuance costs. At December 31, 2012, the fair value of these Notes was $176.3 million while the carrying value was $175.0 million . The fair value is based on the closing market price as of that date, which is a Level 1 input. For the definition and discussion of a Level 1 input for fair value measurement, refer to Note 3.
On March 1, 2013, ARI completed a voluntary redemption of the remaining $175.0 million of Notes outstanding at par, plus any accrued and unpaid interest. In conjunction with the redemption, the Company incurred a $0.4 million loss, which is shown as loss on debt extinguishment on the condensed consolidated statements of operations. This non-cash charge is related to the accelerated write-off of the remaining portion of deferred debt issuance costs incurred in connection with the Notes.
2012 Lease Fleet Financing
In December 2012, Longtrain Leasing entered into a senior secured delayed draw term loan facility (Term Loan) that is secured by a portfolio of railcars, railcar leases, the receivables associated with those railcars and leases, and certain other assets of Longtrain Leasing. The Term Loan provided for an initial draw at closing (Initial Draw) and allowed for up to two additional draws. Upon closing, the Initial Draw was $98.4 million , net of fees and expenses. As of December 31, 2012, the outstanding principal balance on the Term Loan, including the current portion, was $100.0 million .
During the first half of 2013, ARI made two additional draws amounting to $99.8 million in aggregate under the Term Loan, fully utilizing the capacity of the Term Loan. The additional draws during 2013 resulted in proceeds received of $99.4 million , net of fees and expenses. As of September 30, 2013 , the outstanding principal balance on the Term Loan, including the current portion, was $196.4 million .
The fair value of the Term Loan was $196.4 million and $100.0 million as of September 30, 2013 and December 31, 2012 , respectively, and is based upon estimates by various banks determined by trading levels on the date of measurement using a Level 2 fair value measurement as defined by U.S. GAAP under the fair value hierarchy. For the definition and discussion of a Level 2 input for fair value measurement, refer to Note 3.
The Term Loan, which matures on February 27, 2018, bears interest at one-month LIBOR plus 2.5% , for a rate of 2.7% as of September 30, 2013 , subject to an alternative fee as set forth in the credit agreement, and is payable on the 15th of each month (Payment Date). The interest rate increases by 2.0% following certain events of default. The Company is required to maintain deposits in an interest reserve bank account equal to nine months of interest payments. As of September 30, 2013 , the interest reserve amount was $4.0 million and included within 'Prepaid expenses and other current assets' on the balance sheet. The Company is required to pay principal at an annual rate of 3.33% of the borrowed amount via monthly payments that are due on the Payment Date, which commenced on March 15, 2013, with any remaining balance payable on the final scheduled maturity date. The Term Loan may be prepaid at any time without premium or penalty, other than customary LIBOR breakage fees.

14


Longtrain Leasing is required to maintain a loan to value ratio of at least 75% of the Net Aggregate Equipment Value, as defined in the Term Loan. The Term Loan contains restrictive covenants that limit Longtrain Leasing’s ability to, among other things, incur additional debt, issue additional equity, sell certain assets, grant certain liens on its assets, make certain restricted payments, acquisitions and investments, and enter into certain significant transactions with stockholders and affiliates. Additionally, the Term Loan requires Longtrain Leasing to comply with a Debt Service Coverage Ratio, as defined in the credit agreement, of 1.05 to 1.0 , measured quarterly on a three-quarter trailing basis beginning on September 30, 2013, and subject to up to a 75 day cure period. Certain covenants, including those that restrict Longtrain Leasing’s ability to incur additional indebtedness and issue equity, become more restrictive if Longtrain Leasing’s debt service coverage ratio, as defined, is less than 1.2 to 1.0 on or after September 30, 2013.
The Term Loan also obligates Longtrain Leasing and ARI to maintain ARI’s separateness and to ensure that the collections from the railcar leases along with the railcars that secure the Term Loan are managed in accordance with the credit agreement. Additionally, ARI is obligated to make any selections of transfers of railcars, railcar leases, receivables and related assets to be conveyed to Longtrain Leasing in good faith and without any adverse selection, to cause American Railcar Leasing LLC (ARL), as the manager, to maintain, lease, and re-lease Longtrain Leasing’s equipment no less favorably than similar portfolios serviced by ARL, and to repurchase or replace railcars that are reported as Eligible Units (as defined in the credit agreement) when they are not Eligible Units, subject to limitations on liability set forth in the credit agreement. The Company was in compliance with all of its covenants under the Term Loan as of September 30, 2013 .
The Term Loan is secured by a first lien on substantially all assets of Longtrain Leasing, consisting of railcars, railcar leases, receivables and related assets, subject to limited exceptions. As of September 30, 2013 and December 31, 2012 , the net book value of the railcars that were pledged as part of the Term Loan were $221.9 million and $112.0 million , respectively. The future contractual minimum rental revenues related to the railcars pledged as of September 30, 2013 are as follows (in thousands):
 
Remaining 3 months of 2013
$
6,223

2014
24,892

2015
24,549

2016
23,761

2017
16,651

2018
9,023

2019 and thereafter
17,461

Total
$
122,560

The remaining principal payments under existing debt agreements as of September 30, 2013 are as follows:
 
Remaining 3 months of 2013
$
1,658

2014
6,655

2015
6,655

2016
6,673

2017
6,655

2018
168,121

Total
$
196,417

Note 12 — Income Taxes
The statute of limitation on the Company’s 2008 federal income tax return expired on April 14, 2013. The Company’s federal income tax returns for tax years 2009 and beyond remain subject to examination, with the latest statute expiring in September 2016. The Company’s audit review for tax years 2009 and 2011 related to a federal loss carry back claim has been closed without any impact.

15



Certain of the Company's 2008 state income tax returns remain open and subject to examination, with the latest statute of limitations expiring on November 15, 2013. All of the Company's state income tax returns for 2009 and beyond remain open to examination by various state taxing authorities, with the latest statute of limitations expiring on November 15, 2017. The Company’s foreign subsidiary’s income tax returns for 2009 and beyond remain open to examination by foreign tax authorities.
The Company is evaluating the impact of the regulations concerning amounts paid to acquire, produce, or improve tangible property and recovery of basis upon disposition.  Because the revenue procedures governing the tangible property regulations will not be issued until the fourth quarter, the Company is still determining whether or not any changes in an accounting method will be required and if so, whether they will result in a material impact to its financial statements.  At this time, the Company does not anticipate there being a material impact.
Note 13 — Employee Benefit Plans
The Company is the sponsor of three defined benefit plans that are frozen and no additional benefits are accruing thereunder. Two of the Company's defined benefit pension plans cover certain employees at designated repair facilities. The assets of these defined benefit pension plans are held by independent trustees and consist primarily of equity and fixed income securities. The Company also sponsors an unfunded, non-qualified supplemental executive retirement plan that covers several of the Company's current and former employees.
The Company provides postretirement life insurance benefits for certain of its union employees who retire after attaining specified age and service requirements. The Company is also the sponsor of a postretirement medical benefit plan providing access to healthcare for certain retired employees, which will be terminated effective December 31, 2013.
The components of net periodic benefit cost for the pension and postretirement plans are as follows:
 
 
Pension Benefits
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Service cost
$
49

 
$
47

 
$
148

 
$
143

Interest cost
221

 
233

 
662

 
701

Expected return on plan assets
(279
)
 
(251
)
 
(836
)
 
(757
)
Amortization of net actuarial loss/prior service cost
194

 
178

 
582

 
534

Net periodic cost recognized
$
185

 
$
207

 
$
556

 
$
621

 
 
Postretirement Benefits
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Service cost
$

 
$

 
$
1

 
$
1

Interest cost
1

 
1

 
3

 
3

Amortization of net actuarial gain/prior service credit
(117
)
 
(118
)
 
(351
)
 
(354
)
Net periodic benefit recognized
$
(116
)
 
$
(117
)
 
$
(347
)
 
$
(350
)
The Company also maintains qualified defined contribution plans, which provide benefits to its eligible employees based on employee contributions, years of service, and employee earnings with discretionary contributions allowed. Expenses related to these plans were $0.2 million and $0.3 million for the three months ended September 30, 2013 and 2012 , respectively, and $0.7 million and $0.7 million for the nine months ended September 30, 2013 and 2012 , respectively.



16


Note 14 — 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, or otherwise 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 these 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 Industries LLC (ACF) in 1994 had been involved in investigation and remediation activities to address contamination both before and after their transfer to ARI. As of the date of this report, it is the Company’s understanding that no further investigation or remediation is required at these properties. ACF is an affiliate of Mr. Carl Icahn, the chairman of the Company’s board of directors and, through IELP, the Company’s principal beneficial stockholder. Substantially all of the issues identified with these properties relate to the use of these properties prior to their transfer to ARI by ACF and for which ACF has retained liability for environmental contamination that may have existed at the time of transfer to ARI. ACF has also agreed to indemnify ARI for any cost that might be incurred with those existing issues. As of the date of this report, ARI does not believe it will incur material costs in connection with any investigation or remediation activities relating to these properties, but it cannot assure that this will be the case. If ACF fails to honor its obligations to ARI, ARI could be responsible for the cost of any additional investigation or remediation that may be required. The Company believes that its operations and facilities are in substantial compliance with applicable laws and regulations and that any noncompliance is not likely to have a material adverse effect on its financial condition or results of operations.
ARI is a party to collective bargaining agreements with labor unions at two repair facilities. One of these agreements will expire in January 2016. The other agreement expired in September 2013. A new agreement was negotiated and ratified by the labor union in October 2013. ARI currently expects that a final agreement will be executed in the fourth quarter, but cannot assure this will be the case. ARI is also party to a collective bargaining agreement with a labor union at a parts manufacturing facility that expires in April 2014.
On September 2, 2009, a complaint was filed by George Tedder (the Plaintiff) against ARI in the U.S. District Court, Eastern District of Arkansas. The Plaintiff alleged that the Company was liable for an injury that resulted during Plaintiff’s break on April 24, 2008. At trial on April 9, 2012, the jury ruled in favor of the Plaintiff. ARI's motion to reduce the jury award was granted and the judge reduced the amount awarded to the plaintiff, which was fully accrued as of September 30, 2013 and December 31, 2012. In the first quarter of 2013, the Company filed an appeal of the revised ruling.
The Company has various agreements with and commitments to related parties. See Note 17 for further detail.
Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against ARI. In the opinion of management, all such claims, suits, and complaints arising in the ordinary course of business 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.
Note 15 — Share-Based Compensation
The Company accounts for share-based compensation granted under the 2005 Equity Incentive Plan, as amended (the 2005 Plan), based on the fair values calculated using the Monte Carlo and Black-Scholes-Merton (Black-Scholes) models. Share-based compensation is expensed using a graded vesting method over the vesting period of the instrument. The fair value of the liability associated with share-based compensation as of September 30, 2013 is based on the fair value components used to calculate the Black-Scholes value, including the Company’s closing market price, as of that date and is considered a Level 2 input. For the definition and discussion of a Level 2 input for fair value measurement, refer to Note 3.

17


Stock appreciation rights
The compensation committee of the Company’s board of directors has granted awards of stock appreciation rights (SARs) to certain employees pursuant to the 2005 Plan. The following table presents the amounts incurred by ARI for share-based compensation 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,
 
2013
 
2012
 
2013
 
2012
 
(in thousands)
Share-based compensation expense (income)
 
 
 
 
 
 
 
Cost of revenues: Manufacturing
$
195

 
$
176

 
$
689

 
$
738

Cost of revenues: Railcar services
70

 
25

 
102

 
105

Selling, general and administrative
900

 
796

 
3,449

 
2,967

Total share-based compensation expense (income)
$
1,165

 
$
997

 
$
4,240

 
$
3,810

The SARs have exercise prices that represent the closing price of the Company’s common stock on the date of grant. Upon the exercise of any SAR, the Company shall pay the holder, in cash, an amount equal to the excess of (A) the aggregate fair market value (as defined in the 2005 Plan) in respect of which the SARs are being exercised, over (B) the aggregate exercise price of the SARs being exercised, in accordance with the terms of the Stock Appreciation Rights Agreement (the SARs Agreement). The SARs are subject in all respects to the terms and conditions of the 2005 Plan and the SARs Agreement, which contain non-solicitation, non-competition and confidentiality provisions.
The fair value of all unexercised SARs is determined at each reporting period under the Monte Carlo and Black-Scholes models based on the inputs in the table below, which project that the specific performance target for applicable grants will be fully met. The fair value of the SARs is expensed on a graded vesting basis over the vesting period, which is in equal increments on the respective anniversaries of the grant date. Changes in the fair value of vested SARs are expensed in the period of change. The following table provides an analysis of outstanding SARs and assumptions that were used as of September 30, 2013 in the Black-Scholes model:
 
 
Grant Date
 
2/24/2012
 
5/9/2011
 
3/31/2010
&
5/14/2010
 
3/3/2009
 
4/28/2008
SARs outstanding as of September 30, 2013
133,528
 
112,289
 
28,375
 
8,500
 
1,025
Vested & Exercisable
6,667
 
38,287
 
28,375
 
8,500
 
1,025
Vesting period
3 years
 
3 years
 
3 years
 
4 years
 
4 years
Expiration Dates
2/24/2019
 
5/9/2018
 
3/31/2017 & 5/14/2017
 
3/3/2016
 
4/28/2015
Weighted average exercise price
$29.31
 
$24.45
 
$13.13
 
$6.71
 
$20.88
Expected volatility range
53.3% - 58.2%
 
53.3%
 
47.8%
 
43.6%
 
43.6%
Expected life range (in years)
2.7 - 3.3
 
2.3 - 2.6
 
1.8
 
1.2
 
0.8
Risk-free interest rate
0.7%
 
0.3% - 0.7%
 
0.3%
 
0.1%
 
0.1%
Expected Dividend yield
2.5%
 
2.5%
 
2.5%
 
2.5%
 
2.5%
Forfeiture Rate on unvested SARs
2.0%
 
2.0%
 
N/A
 
N/A
 
N/A

18


The stock volatility rate was determined using the historical volatility rates of the Company’s common stock over the same period as the expected life of each grant. The expected life ranges represent the use of the simplified method prescribed by the SEC due to inadequate exercise activity for the Company’s SARs. The simplified method uses the average of the vesting period and expiration period of each group of SARs that vest equally over a three or four -year period. The risk-free rate is based on the U.S. Treasury yield curve in effect for the expected term of the options at the time of grant. The expected dividend yield was determined using the most recent quarter’s dividend. The forfeiture rate was based on a Company estimate of expected forfeitures over the vesting period of each grant for each period.
As of September 30, 2013 , unrecognized compensation costs related to the unvested portion of SARs were estimated to be $0.9 million and were expected to be recognized over a weighted average period of 13 months .
Note 16 — Accumulated Other Comprehensive Income (Loss)
The following table presents the balances of related after-tax components of accumulated other comprehensive income (loss).
 
 
Accumulated
Short-term
Investment
Transactions
 
Accumulated
Currency
Translation
 
Accumulated
Postretirement
Transactions
 
Accumulated
Other
Comprehensive
Income (Loss)
 
(In thousands)
Balance December 31, 2011
$

 
$
1,283

 
$
(2,481
)
 
$
(1,198
)
Currency translation

 
416

 

 
416

Reclassifications related to pension and
     postretirement plans, net of tax effect of $94 (1)

 

 
(229
)
 
(229
)
Balance September 30, 2012
$

 
$
1,699

 
$
(2,710
)
 
$
(1,011
)
 
 
 
 
 
 
 
 
Balance December 31, 2012
$
1,213

 
$
1,562

 
(3,162
)
 
$
(387
)
Currency translation

 
(396
)
 

 
(396
)
Unrealized gain on available for sale securities,
     net of tax effect of $51
93

 

 

 
93

Reclassifications related to pension and
     postretirement plans, net of tax effect of $60 (1)

 

 
140

 
140

Reclassifications related to available for sale
     securities, net of tax effect of $702 (2)
(1,306
)
 

 

 
(1,306
)
Balance September 30, 2013
$

 
$
1,166

 
(3,022
)
 
$
(1,856
)
 
(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 and postretirement plans. See Note 13 for further details and pre-tax amounts.
(2)—
This accumulated other comprehensive income component relates to realized gains on available for sale securities sold. See Note 4 for further details and pre-tax amounts.
Note 17 — Related Party Transactions
Agreements with ACF
The Company has or had the following agreements with ACF, a company controlled by Mr. Carl Icahn, chairman of the Company’s board of directors and, through IELP, the Company’s principal beneficial stockholder:
Manufacturing services agreement
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. For both the three and nine months ended September 30, 2013 and 2012 , ARI purchased less than $0.1 million of components from ACF. The agreement automatically renews unless written notice is provided by the Company.


19


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 on the basis that the terms of the agreement were not materially less favorable to ARI than those that could have been obtained in a comparable transaction with an unrelated person. Under this agreement, ARI will provide purchasing support and engineering services to ACF in connection with ACF’s manufacture and sale of certain 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 such tank railcars during the term of the agreement. Subject to certain early termination events, the agreement shall terminate on December 31, 2014.
In consideration of the services and license provided by ARI to ACF in conjunction with the agreement, ACF shall pay 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 percent 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 shall be provided at fair market value.
Under the agreement, ACF will have the exclusive right to manufacture and sell subject tank railcars for any new orders scheduled for delivery to customers on or before January 31, 2014. ARI shall have the exclusive right to any sales opportunities for such tank railcars for any new orders scheduled for delivery after that date and through December 31, 2014. ARI also has the right to assign any sales opportunity to ACF, and ACF has the right, but not the obligation, to accept such sales opportunity. Any sales opportunity accepted by ACF will not be reflected in ARI’s orders or backlog.
Revenues of $3.4 million and $6.6 million for the three and nine months ended September 30, 2013 , respectively, were recorded under this agreement for sales of railcar components to ACF and for royalties and profits on railcars sold by ACF and are included under manufacturing revenues from affiliates on the condensed consolidated statements of operations.
Agreements with ARL
The Company has or had the following agreements with ARL, a company controlled by Mr. Carl Icahn, chairman of the Company’s board of directors and, through IELP, the Company’s principal beneficial stockholder:
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 provides 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 has a term of three years and will automatically renew for additional one year periods unless either party provides at least sixty days prior written notice of termination.
Revenues of $4.3 million and $5.9 million for the three months ended September 30, 2013 and 2012 , respectively, and $13.5 million and $16.9 million for the first nine months of 2013 and 2012 , respectively, 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 terms and pricing on services provided to related parties are not less favorable to ARI than the terms and pricing on services provided to unaffiliated third parties. The Railcar Services Agreement was unanimously approved by the independent directors of the Company’s audit committee on the basis that the terms were no less favorable than those that could have been obtained from an independent third party.
Railcar management agreements
On February 29, 2012, the Company entered into a Railcar Management Agreement with ARL, pursuant to which the Company engaged ARL to sell or lease ARI’s railcars in certain markets, subject to the terms and conditions of the agreement. The agreement was effective as of January 1, 2011, will continue through December 31, 2015 and may be renewed upon written agreement by both parties. In December 2012, Longtrain Leasing entered into a similar agreement with ARL that terminates in August 2018 (collectively the Railcar Management Agreements).

20



The Railcar Management Agreements also provide that ARL will manage the Company’s and Longtrain Leasing's leased railcars including arranging for services, such as repairs or maintenance, as deemed necessary. Subject to the terms and conditions of the agreement, ARL will receive, in respect of leased railcars, a fee consisting of a lease origination fee and a management fee based on the lease revenues, and, in respect of railcars sold by ARL, sales commissions. The Railcar Management Agreements were unanimously approved by the independent directors of the Company’s special committee on the basis that the terms were no less favorable than those that could have been obtained from an independent third party.
Total lease origination and management fees incurred were $0.6 million and $0.3 million for the three months ended September 30, 2013 and 2012 , respectively, and $1.6 million and $1.0 million for the first nine months of 2013 and 2012 , respectively. These fees are included in cost of revenues for railcar leasing on the condensed consolidated statements of operations. Sales commissions of $0.1 million and $0.3 million were incurred for the three and nine months ended September 30, 2013 , respectively, compared to zero sales commissions for both of the same periods in 2012 . These costs are included in selling, general and administrative costs to a related party on the condensed consolidated statements of operations.
Railcar orders
The Company has from time to time manufactured and sold railcars to ARL under long-term agreements as well as on a purchase order basis. In the third quarter of 2012, all unfilled purchase orders previously placed by ARL were assigned to AEP Leasing LLC (AEP), a company controlled by Mr. Carl Icahn, chairman of the Company’s board of directors and, through IELP, the Company’s principal beneficial stockholder. Revenues for railcars sold to ARL were $34.2 million and $45.1 million for the three and nine months ended September 30, 2012 , respectively, and are included in manufacturing revenues from affiliates on the condensed consolidated statements of operations. The terms and pricing on sales to related parties are not less favorable to ARI than the terms and pricing on sales to unaffiliated third parties. Any related party sales of railcars under an agreement or purchase order have been and will be subject to the approval or review by the independent directors of the Company’s audit committee.
Agreements with AEP
The Company has the following agreements with AEP, a company controlled by Mr. Carl Icahn, chairman of the Company’s board of directors and, through IELP, the Company’s principal beneficial stockholder:
Railcar orders
As discussed above, in the third quarter 2012, ARL assigned all its unfilled purchase orders to AEP. At that time, the Company began manufacturing and selling railcars to AEP on a purchase order basis. Revenues from railcars sold to AEP were $62.4 million and $142.0 million for the three and nine months ended September 30, 2013 . Revenues from railcars sold to AEP were $15.7 million for the three and nine months ended September 30, 2012. Revenues from railcars sold to AEP are included in manufacturing revenues from affiliates on the condensed consolidated statements of operations. The terms and pricing on sales to related parties are no less favorable to ARI than the terms and pricing on sales to unaffiliated third parties. Any related party sales of railcars under an agreement or purchase order have been and will be subject to the approval or review by the Company’s audit committee.
Agreements with other related parties
The Company’s Axis joint venture entered into a credit agreement in December 2007. During 2009, the Company and the other initial partner acquired this loan from the lenders party thereto, with each party acquiring a 50.0% interest in the loan. The balance outstanding on these loans, due to ARI Component, was $33.6 million and $35.7 million as of September 30, 2013 and December 31, 2012 , respectively. See Note 9 for further information regarding this transaction and the terms of the underlying loan.
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 a one-year period unless written notice is received from either party.
Effective April 1, 2009, Mr. James J. Unger, the Company’s former chief executive officer, assumed the role of vice chairman of the board of directors and served in such role until his resignation, effective September 30, 2013. In exchange for his services as vice chairman, Mr. Unger received an annual director fee of $65,000 , payable quarterly, in advance.

21


The Company leases one of its parts manufacturing facilities from an entity owned by Mr. Unger. Expenses paid for this facility were $0.1 million for both the three months ended September 30, 2013 and 2012 and $0.3 million for the first nine months of 2013 and 2012 . These costs are included in cost of revenues from manufacturing on the consolidated statements of operations. The Company is required to pay all tax increases assessed or levied upon the property and the cost of the utilities, as well as repair and maintain the facility. The lease, which extends through January 2016, was unanimously approved by the independent directors of the Company’s audit committee on the basis that the terms of the lease were no less favorable than those that could have been obtained from an independent third party.
On October 29, 2010, ARI entered into a lease agreement with a term of eleven years with an entity owned by Mr. Unger. The lease is for ARI’s headquarters location in St. Charles, Missouri that it previously leased through ARL under a services agreement with ARL, which expired December 31, 2010. The term under this lease agreement commenced January 1, 2011. The Company is required to pay monthly rent and a portion of all tax increases assessed or levied upon the property and increases to the cost of the utilities and other services it uses. The expenses recorded for this facility were $0.1 million for both the three months ended September 30, 2013 and 2012 and $0.4 million for both the first nine months of 2013 and 2012. These fees are included in selling, general and administrative costs on the condensed consolidated statements of operations as costs to a related party. The lease was unanimously approved by the independent directors of the Company’s audit committee on the basis that the terms of the lease were no less favorable than those that could have been obtained from an independent third party.
ARI is party to a scrap agreement with M. W. Recycling (MWR), a company controlled by Mr. Carl Icahn, chairman of the Company’s board of directors and, through IELP, the Company’s principal beneficial stockholder. Under the agreement, ARI sells and MWR purchases scrap metal from several ARI plant locations. MWR collected scrap material totaling $1.5 million and $1.2 million for the three months ended September 30, 2013 and 2012 , respectively, and $4.8 million and $6.3 million for the first nine months of 2013 and 2012, respectively. This agreement was entered into at arm’s-length and was approved by the Company’s audit committee on the basis that the terms of the agreement were no less favorable than those that could have been obtained from an independent third party.
Icahn Sourcing, LLC (“Icahn Sourcing”), was an entity formed by Mr. Carl Icahn in order to maximize the potential buying power of a group of entities with which Mr. Carl Icahn has a relationship in negotiating with a wide range of suppliers of goods, services and tangible and intangible property at negotiated rates. The Company was a member of the buying group in 2012. The Company did not pay Icahn Sourcing any fees or other amounts with respect to the buying group arrangement in 2012.
Effective January 1, 2013 Icahn Sourcing restructured its ownership and changed its name to Insight Portfolio Group LLC (“Insight Portfolio Group”). In connection with the restructuring, ARI acquired a minority equity interest in Insight Portfolio Group and agreed to pay a portion of Insight Portfolio Group’s operating expenses in 2013. A number of other entities with which Carl Icahn has a relationship also acquired equity interests in Insight Portfolio Group and also agreed to pay certain of Insight Portfolio Group’s operating expenses in 2013. During both the three and nine months ended September 30, 2013 , less than $0.1 million of fees were incurred as a member of the Insight Portfolio Group. These charges were included in selling, general and administrative costs to a related party on the condensed consolidated statements of operations.
Financial information for transactions with related parties
Cost of revenues for manufacturing included $23.5 million and $17.3 million for the three months ended September 30, 2013 and 2012 , respectively, and $63.6 million and $66.8 million for the first nine months of 2013 and 2012 , respectively, in railcar components purchased from joint ventures.
Inventory as of September 30, 2013 and December 31, 2012 , included $6.9 million and $3.3 million , respectively, of railcar components purchased from joint ventures and all profit for this inventory still on hand was eliminated.
Note 18 — Operating Segment 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.

22


Manufacturing
Manufacturing consists of railcar manufacturing and railcar and industrial component manufacturing. Intersegment revenues 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. Revenues for railcars manufactured for the Company’s 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 leasing segment based on revenue determined as described above.
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. The origination fees represent a percentage of the revenues from the lease over its initial term and are paid up front.
Railcar Services
Railcar services consist of railcar repair services, engineering and field services, and fleet management services. Earnings (loss) from operations for railcar services include an allocation of selling, general and administrative costs.

23



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.
 
 
Revenues
 
Earnings (Loss) from Operations
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
(in thousands)
Three Months Ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
170,943

 
$
34,824

 
$
205,767

 
$
32,075

 
$
9,633

 
$
41,708

Railcar Leasing
8,301

 

 
8,301

 
4,155

 
5

 
4,160

Railcar Services
19,655

 
31

 
19,686

 
3,292

 
(13
)
 
3,279

Corporate/Eliminations

 
(34,855
)
 
(34,855
)
 
(3,896
)
 
(9,625
)
 
(13,521
)
Total Consolidated
$
198,899

 
$

 
$
198,899

 
$
35,626

 
$

 
$
35,626

Three Months Ended September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
147,212

 
$
38,178

 
$
185,390

 
$
29,206

 
$
5,012

 
$
34,218

Railcar Leasing
4,267

 

 
4,267

 
2,377

 
6

 
2,383

Railcar Services
16,751

 
221

 
16,972

 
2,955

 
(46
)
 
2,909

Corporate/Eliminations

 
(38,399
)
 
(38,399
)
 
(4,200
)
 
(4,972
)
 
(9,172
)
Total Consolidated
$
168,230

 
$

 
$
168,230

 
$
30,338

 
$

 
$
30,338

Nine Months Ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
476,160

 
$
135,315

 
$
611,475

 
$
98,834

 
$
29,541

 
$
128,375

Railcar Leasing
22,371

 

 
22,371

 
9,963

 
17

 
9,980

Railcar Services
54,882

 
126

 
55,008

 
9,680

 
(11
)
 
9,669

Corporate/Eliminations

 
(135,441
)
 
(135,441
)
 
(11,753
)
 
(29,547
)
 
(41,300
)
Total Consolidated
$
553,413

 
$

 
$
553,413

 
$
106,724

 
$

 
$
106,724

Nine Months Ended September 30, 2012
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
446,273

 
$
170,267

 
$
616,540

 
$
80,692

 
$
28,280

 
$
108,972

Railcar Leasing
8,315

 

 
8,315

 
3,994

 
19

 
4,013

Railcar Services
49,455

 
441

 
49,896

 
8,694

 
(96
)
 
8,598

Corporate/Eliminations

 
(170,708
)
 
(170,708
)
 
(13,277
)
 
(28,203
)
 
(41,480
)
Total Consolidated
$
504,043

 
$

 
$
504,043

 
$
80,103

 
$

 
$
80,103

 
Total Assets
September 30,
2013
 
December 31,
2012
 
(in thousands)
Manufacturing
$
322,177

 
$
329,346

Railcar Leasing
399,075

 
263,228

Railcar Services
49,497

 
49,060

Corporate/Eliminations
45,859

 
168,124

Total Consolidated
$
816,608

 
$
809,758


24


Sales to Related Parties
As discussed in Note 17, ARI has numerous arrangements with related parties. As a result, from time to time, ARI offers its products and services to affiliates at terms and pricing no less favorable to ARI than the terms and pricing provided to unaffiliated third parties. Below is a summary of revenue from affiliates for each operating segment reflected as a percentage of total consolidated revenues.
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Manufacturing
 
32.9
%
 
29.7
%
 
26.8
%
 
12.1
%
 
Railcar Leasing
 
%
 
%
 
%
 
%
 
Railcar Services
 
2.2
%
 
3.5
%
 
2.4
%
 
3.3
%
 
Sales and Credit Concentration
Manufacturing revenues from customers that accounted for more than 10.0% 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 consolidated revenues for the three and nine months ended September 30, 2013 and 2012 .
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Manufacturing revenues from significant customers
 
67.2
%
 
62.0
%
 
62.8
%
 
51.3
%
 
Manufacturing accounts receivable from customers that accounted for more than 10.0% of consolidated receivables (including accounts receivable, net and accounts receivable, due from related parties) are outlined in the table below. The railcar leasing and railcar services segments had no customers that accounted for more than 10% of the consolidated receivables balance as of September 30, 2013 and December 31, 2012 .
 
 
September 30,
2013
 
December 31,
2012
 
Manufacturing receivables from significant customers
 
25.3
%
 
35.1
%
 
Note 19 — Consulting Contracts
During the first quarter of 2011, the Company entered into a technology services consulting agreement with SDS-Altaiwagon, a Russian railcar builder, to design a railcar for general service in Russia for a total contract price of $1.5 million . The technology services consulting agreement was completed during the first quarter of 2012.
During the second quarter of 2011, the Company entered into a consulting agreement with the Indian Railways Research Designs and Standards Organization (RDSO) to design and develop certain railcars for service in India for a total contract price of $9.6 million . The consulting agreement is expected to continue through 2016.
For the three months ended September 30, 2013 and 2012 , revenues of $0.1 million and zero, respectively, were recorded under these consulting agreements. For the nine months ended September 30, 2013 and 2012 , revenues of $0.9 million and $1.2 million , respectively, were recorded under these consulting agreements. Billed and unbilled revenues due from the RDSO agreement were $ 1.4 million and $1.7 million , respectively, as of September 30, 2013 compared to zero and $2.1 million , respectively, as of December 31, 2012 . As of each balance sheet date presented, approximately $0.7 million and $1.4 million of the unbilled revenue for September 30, 2013 and December 31, 2012 , respectively, has been recorded in prepaid expenses and other current assets with the remaining $1.0 million and $ 0.7 million , respectively, being recorded in other assets on the condensed consolidated balance sheets.
Note 20 — Supplemental Cash Flow Information
ARI received interest income of $2.0 million and $2.6 million for the nine months ended September 30, 2013 and 2012 , respectively.

25


ARI paid interest expense, net of capitalized interest, of $9.8 million and $20.0 million for the nine months ended September 30, 2013 and 2012 , respectively.
ARI paid $13.2 million and $3.4 million of taxes, net of refunds for the nine months ended September 30, 2013 and 2012 , respectively.
ARI paid $7.1 million and $5.6 million to employees related to SARs exercises during the nine months ended September 30, 2013 and 2012 , respectively.
Note 21 — Subsequent Events
On October 29, 2013 , the Board of Directors of the Company declared a cash dividend of $0.25 per share of common stock of the Company to shareholders of record as of December 13, 2013 that will be paid on December 20, 2013 .



26


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act), including statements regarding our plans, objectives, expectations and intentions. Such statements include, without limitation, statements regarding various estimates we have made in preparing our financial statements, statements regarding expected future trends relating to our industry, our results of operations and the sufficiency of our capital resources, statements regarding our capital expenditure plans and expansion of our business, statements regarding expansion of our railcar lease fleet and potential lease fleet financing, statements regarding anticipated production schedules for our products and the anticipated construction and production schedules of our joint ventures, and statements regarding 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:
any financial or other information included herein based upon or otherwise incorporating judgments or estimates based upon future performance or events;
the impact of an economic downturn, adverse market conditions and restricted credit markets;
our reliance upon a small number of customers that represent a large percentage of our revenues and backlog;
the health of and prospects for the overall railcar industry;
our prospects in light of the cyclical nature of our business;
the highly competitive nature of the manufacturing, railcar leasing and railcar services industries;
the conversion of our railcar backlog into revenues;
anticipated trends relating to our shipments, leasing, railcar services, revenues, financial condition or results of operations;
anticipated production schedules for our products and the anticipated capital needs, construction and production schedules of our joint ventures;
the risks associated with international operations and joint ventures;
our ability to manage overhead and variations in production rates;
fluctuations in the costs of raw materials, including steel and railcar components, and delays in the delivery of such raw materials and components;
fluctuations in the supply of components and raw materials we use in railcar manufacturing;
the risk of being unable to market or remarket railcars for sale or lease at favorable prices or on favorable terms or at all;
the ongoing benefits and risks related to our relationship with Mr. Carl Icahn, the chairman of our board of directors and, through Icahn Enterprises L.P. (IELP), our principal beneficial stockholder, and certain of his affiliates.
the risks, impact and anticipated benefits associated with potential joint ventures, acquisitions or new business endeavors;
the implementation, integration with other systems or ongoing management of our new enterprise resource planning system;
the risk of the lack of acceptance of new railcar offerings by our customers and the risk of initial production costs for our new railcar offerings being significantly higher than expected;
the sufficiency of our liquidity and capital resources;
compliance with covenants contained in our financing arrangement; and
the impact and costs and expenses of any litigation we may be subject to now or in the future.


27

Table of Contents

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 (the Annual Report), as well as the risks and uncertainties discussed elsewhere in the Annual Report and in this report. We qualify all of our forward-looking statements by these cautionary statements. We caution you that these risks are not exhaustive. We operate in a continually changing business environment and new risks emerge from time to time.
EXECUTIVE SUMMARY
We are a leading North American designer and manufacturer of hopper and tank railcars. We operate in three reportable segments: manufacturing, railcar leasing and railcar services. Manufacturing consists of railcar manufacturing and railcar and industrial component manufacturing. Railcar leasing consists of railcars manufactured by us and leased to third parties under operating leases. Railcar services consist of railcar repair services, engineering and field services, and fleet management services.
The North American railcar market has been, and we expect it to continue to be, highly cyclical. Industry-wide demand for tank railcars remains strong and inquiry activity for covered hopper railcars is beginning to strengthen. During October 2013, we accepted a multi-year order for 2,750 plastic pellet hopper railcars for delivery from 2014 through 2016. Consistent with industry expectations, we anticipate demand for hopper railcars, specifically plastic pellet railcars, to begin strengthening for deliveries from 2014 through 2016. However, we cannot assure you that the tank railcar demand will continue at historically strong levels, that demand for hopper railcars, or any other railcar types, will improve, or that our railcar orders and shipments will track industry-wide trends.
In the third quarter of 2013, we experienced another strong quarter of earnings driven by the continued strength of tank railcar shipments and pricing along with a slight increase in hopper railcar shipments. Our earnings continue to benefit from vertical integration and expansion projects we have implemented over the past several years. During the third quarter of 2013, we shipped approximately 1,640 railcars, 12% more than in the same period in 2012. The increase in volumes was driven by improved volumes for both tank and hopper railcars. Our earnings continue to benefit from a favorable railcar production mix of more tank railcars, strong general market conditions for tank railcars and our growing fleet of leased railcars. On a consolidated basis, the gross profit margin generated by our manufacturing segment remains strong at 19.9% in the third quarter of 2013 compared to 20.9% in the same period of 2012. The decline in gross profit margin is driven by pricing competition in the hopper railcar market.
As of September 30, 2013 , we have a backlog of approximately 6,300 railcars including approximately 2,430 railcars for lease customers. In response to changes in customer demand, we continue to adjust production rates as needed at our railcar manufacturing facilities and we are utilizing some of our railcar manufacturing capacity for repair projects.
Effective as of October 9, 2013, our board of directors appointed Jeffrey S. Hollister as our President and Interim Chief Executive Officer following the resignation of James Cowan as President and Chief Executive Officer.

28

Table of Contents

RESULTS OF OPERATIONS
Three and nine months ended September 30, 2013 compared to three and nine months ended September 30, 2012
Consolidated Results
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
$
 
%
 
September 30,
 
$
 
%
 
2013
 
2012
 
Change
 
Change
 
2013
 
2012
 
Change
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
170,943

 
$
147,212

 
$
23,731

 
16.1

 
$
476,160

 
$
446,273

 
$
29,887

 
6.7

Railcar leasing
8,301

 
4,267

 
4,034

 
94.5

 
22,371

 
8,315

 
14,056

 
169.0

Railcar services
19,655

 
16,751

 
2,904

 
17.3

 
54,882

 
49,455

 
5,427

 
11.0

Total revenues
$
198,899

 
$
168,230

 
$
30,669

 
18.2

 
$
553,413

 
$
504,043

 
$
49,370

 
9.8

Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
(136,974
)
 
$
(116,497
)
 
$
(20,477
)
 
(17.6
)
 
$
(371,806
)
 
$
(360,507
)
 
$
(11,299
)
 
(3.1
)
Railcar leasing
(3,524
)
 
(1,854
)
 
(1,670
)
 
(90.1
)
 
(9,729
)
 
(4,196
)
 
(5,533
)
 
(131.9
)
Railcar services
(15,614
)
 
(13,181
)
 
(2,433
)
 
(18.5
)
 
(43,063
)
 
(38,849
)
 
(4,214
)
 
(10.8
)
Total cost of revenues
$
(156,112
)
 
$
(131,532
)
 
$
(24,580
)
 
(18.7
)
 
$
(424,598
)
 
$
(403,552
)
 
$
(21,046
)
 
(5.2
)
Selling, general and administrative
(7,161
)
 
(6,360
)
 
(801
)
 
(12.6
)
 
(22,091
)
 
(20,388
)
 
(1,703
)
 
(8.4
)
Earnings from operations
$
35,626

 
$
30,338

 
$
5,288

 
17.4

 
$
106,724

 
$
80,103

 
$
26,621

 
33.2

Revenues
Our total consolidated revenues for the three and nine months ended September 30, 2013 increased by 18.2% and 9.8% , respectively, compared to the same periods in 2012 . This increase for both periods was due to increased revenues across all three of our segments, with the largest dollar increase in our manufacturing segment. During the three months ended September 30, 2013 , we shipped approximately 1,360 railcars, which excludes approximately 280 railcars built for our lease fleet, compared to approximately 1,150 railcars for the same period of 2012 , which excludes approximately 310 railcars built for our lease fleet. During the first nine months of 2013 , we shipped approximately 3,660 railcars, which excludes approximately 1,190 railcars built for our lease fleet, compared to approximately 4,180 railcars for the same period of 2012 , which excludes approximately 1,690 railcars built for our lease fleet.
Manufacturing revenues increased by 16.1% and 6.7% , respectively during the three and nine month periods ended September 30, 2013 compared to the same periods in 2012. The change during the quarter was due to a 19.6% increase due to higher volumes of railcar shipments for direct sale as well as strong tank railcar market conditions. These increases were partially offset by a decrease of 3.5% due to lower revenues from certain material cost changes that we generally pass through to customers, as discussed below. The change during the first nine months of the year was due to a 23.9% increase driven primarily by a higher mix of tank railcars, which generally sell at higher prices due to more material and labor content, and strong market conditions for tank railcars. This increase was partially offset by a decrease of 11.9% due to lower volumes of railcar shipments for direct sale, and a decrease of 5.3% due to lower revenues from certain material cost changes that we generally pass through to customers, as discussed below. Railcar shipments during the three months ended September 30, 2013 were higher than the comparable period in 2012 due predominately to increased hopper railcar shipments. Railcar shipments during the nine months ended September 30, 2013 were lower than the comparable period in 2012 due to lower hopper railcar shipments, partially offset by increased tank railcar shipments.
Leasing revenues increased during the three and nine months ended September 30, 2013 compared to the same periods in 2012 due to an increase in the number of railcars leased to customers and an increase in the average lease rate. The lease fleet grew from 2,190 railcars at September 30, 2012 to 3,780 railcars at September 30, 2013 .

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The increase in railcar services revenue for the three and nine months ended September 30, 2013 compared to the same periods in 2012 was primarily due to an increase in certain repair projects performed at our hopper railcar manufacturing facility in 2013.
Cost of revenues
Our total consolidated cost of revenues increased by 18.7% and 5.2% for the three and nine months ended September 30, 2013 , respectively, compared to the same periods in 2012 . The increases in both periods were due to increases across all three of our segments, with the largest dollar increase in our manufacturing segment. Cost of revenues increased for our manufacturing segment by 17.6% and 3.1% for the three and nine months ended September 30, 2013 , respectively, compared to the same periods in 2012 . This change during the quarter was a result of an increase of 18.0% due to higher volumes of railcar shipments for direct sale, as discussed above, and an increase of 4.0% due to strong market conditions for tank railcars, which generally have more material and labor content. These increases were offset by a decrease of 4.4% resulting from lower material costs for key components and steel. The decrease in costs for key components and steel is also reflected as a decrease in selling prices as our sales contracts generally include provisions to adjust prices for increases and decreases in the cost of most raw materials and components on a dollar for dollar basis. The change in cost of revenues during the first nine months of the year was primarily driven by a 21.4% increase due to a higher mix of more tank railcars. This increase was partially offset by a decrease of 11.8% due to lower volumes of railcar shipments for direct sale, on a year-to-date basis, and a decrease of 6.5% resulting from lower material costs for key components and steel.
Costs of revenues for our leasing segment increased for the three and nine months ended September 30, 2013 compared to the same periods in 2012 primarily as a result of an increase in our lease fleet, as discussed above.
The increases in railcar services cost of revenues for the three and nine months ended September 30, 2013 compared to the same periods in 2012 were primarily due to the repair projects discussed above.
Selling, general and administrative expenses
Our total consolidated selling, general and administrative costs increased by 12.6% and 8.4% for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. These increases are primarily attributable to increases in our share-based compensation, which fluctuates with our stock price, and various other corporate expenses.
Interest expense
Our total consolidated interest expense decreased by 65.7% and 60.0% for the three and nine months ended September 30, 2013 , respectively, compared to the same periods in 2012 . These decreases were a result of a lower interest rate secured on the lease fleet financing, discussed further in the liquidity and capital resources section below, and a lower average debt balance due to the voluntary early redemption of our 7.5% senior unsecured notes (Notes). Our average debt balance in the third quarter of 2013 was $200.0 million with a weighted average interest rate of 2.7% compared to an average debt balance of $241.7 million with a weighted average interest rate of 7.5% during the same period in 2012. During the first nine months of 2013, our average debt balance was $202.8 million with a weighted average interest rate of 3.6% compared to an average debt balance of $263.9 million with a weighted average interest rate of 7.5% during the same period in 2012.
Loss on debt extinguishment
During the nine months ended September 30, 2013 , we redeemed $175.0 million of the aggregate principal amount of our Notes, resulting in a $0.4 million non-cash charge related to the accelerated write-off of the remainder of deferred debt issuance costs incurred in connection with the Notes. During the nine months ended September 30, 2012, we redeemed $100.0 million of our Notes, resulting in a charge of $2.3 million, comprised of a premium of $1.9 million paid on the redemption of the debt and a non-cash charge of $0.4 million for the accelerated write-off of a portion of the deferred financing fees.
Other income
Other income of $2.0 million was recognized in the first nine months of 2013 primarily due to realized gains on the sale of short-term investments.

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Earnings (loss) from Joint Ventures
Our earnings (loss) from joint ventures were as follows:
 
 
Three Months Ended 
 September 30,
 
 
 
Nine Months Ended 
 September 30,
 
 
 
2013
 
2012
 
Change
 
2013
 
2012
 
Change
Ohio Castings
$
463

 
$
(169
)
 
$
632

 
$
351

 
$
1,472

 
$
(1,121
)
Axis
53

 
(392
)
 
445

 
(641
)
 
(677
)
 
36

Amtek Railcar - India
(1,021
)
 
(288
)
 
(733
)
 
(1,992
)
 
(764
)
 
(1,228
)
Total Earnings (Loss) from Joint Ventures
$
(505
)
 
$
(849
)
 
$
344

 
$
(2,282
)
 
$
31

 
$
(2,313
)
Our joint venture loss was $0.5 million and $2.3 million for the three and nine months ended