American Railcar Industries, Inc.
American Railcar Industries, Inc. (Form: 10-Q, Received: 05/05/2014 17:08:08)
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 March 31, 2014
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 May 5, 2014 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)
 
March 31,
2014
 
December 31,
2013
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
154,488

 
$
97,252

Restricted cash
7,277

 
3,908

Accounts receivable, net
62,742

 
21,939

Accounts receivable, due from related parties
15,308

 
16,402

Inventories, net
106,012

 
90,185

Deferred tax assets
7,688

 
9,060

Prepaid expenses and other current assets
6,460

 
6,500

Total current assets
359,975

 
245,246

Property, plant and equipment, net
158,269

 
159,375

Railcars on operating leases, net
413,168

 
372,551

Deferred debt issuance costs
2,445

 
2,026

Goodwill
7,169

 
7,169

Investments in and loans to joint ventures
29,684

 
31,430

Other assets
4,064

 
7,812

Total assets
$
974,774

 
$
825,609

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
63,190

 
$
52,772

Accounts payable, due to related parties
1,917

 
1,410

Accrued expenses and taxes
22,358

 
20,216

Accrued compensation
16,592

 
16,071

Short-term debt, including current portion of long-term debt
10,612

 
6,655

Total current liabilities
114,669

 
97,124

Long-term debt, net of current portion
306,301

 
188,103

Deferred tax liability
101,749

 
99,212

Pension and post-retirement liabilities
4,343

 
4,718

Other liabilities
2,006

 
2,550

Total liabilities
529,068

 
391,707

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 50,000,000 shares authorized, 21,352,297 shares issued and outstanding as of both March 31, 2014 and December 31, 2013
213

 
213

Additional paid-in capital
239,609

 
239,609

Retained earnings
207,803

 
195,574

Accumulated other comprehensive loss
(1,919
)
 
(1,494
)
Total stockholders’ equity
445,706

 
433,902

Total liabilities and stockholders’ equity
$
974,774

 
$
825,609

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
 
March 31,
 
2014
 
2013
Revenues:
 
 
 
Manufacturing (including revenues from affiliates of $41,235 and $63,078 for the three months ended March 31, 2014 and 2013, respectively)
$
153,963

 
$
172,975

Railcar Leasing
11,746

 
6,543

Railcar Services (including revenues from affiliates of $3,963 and $4,608 for the three months ended March 31, 2014 and 2013, respectively)
16,406

 
15,592

Total revenues
182,115

 
195,110

Cost of revenues:
 
 
 
Manufacturing
(118,365
)
 
(137,123
)
Railcar Leasing
(4,491
)
 
(2,904
)
Railcar Services
(13,365
)
 
(12,589
)
Total cost of revenues
(136,221
)
 
(152,616
)
Gross profit
45,894

 
42,494

Selling, general and administrative
(9,387
)
 
(11,265
)
Earnings from operations
36,507

 
31,229

Interest income (including income from related parties of $627 and $681 for the three months ended March 31, 2014 and 2013, respectively)
641

 
691

Interest expense
(1,672
)
 
(3,000
)
Loss on debt extinguishment
(1,896
)
 
(392
)
Other income
5

 
1,996

Loss from joint ventures
(601
)
 
(973
)
Earnings before income taxes
32,984

 
29,551

Income tax expense
(12,214
)
 
(11,614
)
Net earnings
$
20,770

 
$
17,937

Net earnings per common share—basic and diluted
$
0.97

 
$
0.84

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

 
21,352

Cash dividends declared per common share
$
0.40

 
$
0.25

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
 
March 31,
 
2014
 
2013
Net earnings
$
20,770

 
$
17,937

Currency translation
(459
)
 
(248
)
Postretirement plans
55

 
47

Short-term investments

 
(1,213
)
Comprehensive income
$
20,366

 
$
16,523

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)  
 
Three Months Ended
 
March 31,
 
2014
 
2013
Operating activities:
 
 
 
Net earnings
$
20,770

 
$
17,937

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
 
 
 
Depreciation
7,683

 
6,535

Amortization of deferred costs
109

 
183

Loss on disposal of property, plant and equipment
45

 

Loss from joint ventures
601

 
973

Provision for deferred income taxes
3,892

 
10,287

Adjustment to allowance for doubtful accounts receivable
31

 
(12
)
Items related to investing activities:
 
 
 
Realized and unrealized gains on short-term investments - available for sale securities

 
(141
)
Items related to financing activities:
 
 
 
Loss on debt extinguishment
1,896

 
392

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(40,846
)
 
3,754

Accounts receivable, due from related parties
1,035

 
(10,128
)
Inventories, net
(15,874
)
 
23,793

Prepaid expenses and other current assets
(3,243
)
 
(2,877
)
Accounts payable
10,423

 
(20,441
)
Accounts payable, due to related parties
507

 
(2,061
)
Accrued expenses and taxes
2,679

 
(4,572
)
Other
2,883

 
(5,046
)
Net cash (used in) provided by operating activities
(7,409
)
 
18,576

Investing activities:
 
 
 
Purchases of property, plant and equipment
(3,585
)
 
(6,141
)
Capital expenditures - leased railcars
(43,947
)
 
(43,619
)
Proceeds from the sale of short-term investments - available for sale securities

 
12,699

Proceeds from repayments of loans by joint ventures
1,125

 
500

Investments in and loans to joint ventures

 
(136
)
Net cash used in investing activities
(46,407
)
 
(36,697
)
Financing activities:
 
 
 
Repayments of long-term debt
(196,527
)
 
(175,328
)
Proceeds from long-term debt
318,682

 
50,000

Change in interest reserve related to long-term debt
(87
)
 

Payment of common stock dividends
(8,541
)
 
(5,338
)
Debt issuance costs
(2,403
)
 
(212
)
Net cash provided by (used in) financing activities
111,124

 
(130,878
)
Effect of exchange rate changes on cash and cash equivalents
(72
)
 
(42
)
Increase (Decrease) in cash and cash equivalents
57,236

 
(149,041
)
Cash and cash equivalents at beginning of period
97,252

 
205,045

Cash and cash equivalents at end of period
$
154,488

 
$
56,004


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, 2013 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, 2013 . 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, industrial companies, shippers, and Class I railroads. ARI leases railcars manufactured by the Company to certain markets. 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), ARI Fleet Services of Canada, Inc., ARI Longtrain, Inc. (Longtrain), and Longtrain Leasing I, LLC (Longtrain Leasing). The accounts of American Railcar Mauritius I (ARM I) and American Railcar Mauritius II (ARM II) have also been included through December 27, 2013, the effective date of the sale of all of the Company's ownership interests in such entities. See Note 8, Investments in and Loans to Joint Ventures, for further discussion regarding this sale. From time to time, the Company makes investments through Longtrain. All intercompany transactions and balances have been eliminated.
Note 2 — 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.
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 categorized as Level 1 includes 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.

7


The following methods and assumptions were used by the Company in estimating fair values for other financial instruments:
Cash and cash equivalents, restricted cash, accounts receivable, amounts due to/from affiliates, accounts payable and accrued expenses approximate fair values because of the short maturity or the liquid nature of these instruments.
Available for sale securities fair value estimates are based on quoted prices with an active trading market (Level 1).
Term Loan fair value estimates are 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. The fair value of the Company's borrowings under its lease fleet financing facility was $316.9 million and $194.8 million as of March 31, 2014 and December 31, 2013 , respectively.
Note 3 — Short-term Investments — Available for Sale Securities
During the first quarter of 2013, Longtrain sold approximately 0.8 million shares of The Greenbrier Companies, Inc. common stock that had been purchased in the open market 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 operations. See Note 15 for the amount of unrealized gain on the shares during the three months ended March 31, 2013.
Note 4 — Accounts Receivable, net
Accounts receivable, net, consist of the following:  
 
March 31,
2014
 
December 31,
2013
 
(in thousands)
Accounts receivable, gross
$
62,882

 
$
22,048

Less allowance for doubtful accounts
(140
)
 
(109
)
Total accounts receivable, net
$
62,742

 
$
21,939

Note 5 — Inventories
Inventories consist of the following:  
 
March 31,
2014
 
December 31,
2013
 
(in thousands)
Raw materials
$
66,283

 
$
63,319

Work-in-process
25,784

 
19,975

Finished products
16,502

 
9,205

Total inventories
108,569

 
92,499

Less reserves
(2,557
)
 
(2,314
)
Total inventories, net
$
106,012

 
$
90,185


8


Note 6 — Property, Plant, Equipment and Railcars on Operating Leases, net
The following table summarizes the components of property, plant, equipment and railcars on operating leases, net:
 
 
March 31,
2014
 
December 31,
2013
 
(in thousands)
Operations / Corporate:
 
 
 
Buildings
$
155,611

 
$
155,937

Machinery and equipment
186,430

 
186,844

Land
3,335

 
3,335

Construction in process
17,073

 
14,487

 
362,449

 
360,603

Less accumulated depreciation
(204,180
)
 
(201,228
)
Property, plant and equipment, net
$
158,269

 
$
159,375

Railcar Leasing:
 
 
 
Railcars on operating leases
$
432,008

 
$
388,060

Less accumulated depreciation
(18,840
)
 
(15,509
)
Railcars on operating leases, net
$
413,168

 
$
372,551

Lease agreements
The Company leases railcars to third parties under multi-year agreements. Railcars subject to lease agreements are classified as operating leases and are depreciated in accordance with the Company’s depreciation policy.
Capital expenditures for leased railcars represent cash outflows for the Company’s cost to produce railcars shipped or to be shipped for lease.
As of March 31, 2014 , 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 9 months of 2014
$
38,219

2015
50,545

2016
48,779

2017
34,920

2018
23,559

2019 and thereafter
39,305

Total
$
235,327

Depreciation expense
The following table summarizes depreciation expense:
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(in thousands)
Total depreciation expense
$
7,683

 
$
6,535

Depreciation expense on leased railcars
$
3,331

 
$
2,055


9


Note 7 — Goodwill
On March 31, 2006, the Company acquired all of the common stock of Custom Steel; a subsidiary of Steel Technologies, Inc. Custom Steel produced 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.
Goodwill is not amortized, but is subject to an annual review unless conditions arise that require a more frequent evaluation. The review for impairment is either a qualitative assessment or a two-step process. If the Company chooses to perform a qualitative assessment and determines that the fair value of the reporting unit more likely than not exceeds the carrying value, no further evaluation is necessary. For the two-step process, the first step is to compare the estimated fair value of the operating unit with the recorded net book value (including the goodwill). If the estimated fair value of the operating unit is higher than the recorded net book value, no impairment is deemed to exist and no further testing is required. If, however, the estimated fair value of the operating unit is below the recorded net book value, then a second step must be performed to determine if impairment of the goodwill is required. In this second step, the implied fair value of goodwill is calculated as the excess of the fair value of the operating unit over the fair value assigned to the operating unit’s assets and liabilities. If the implied fair value of goodwill is less than the book value of the goodwill, the difference is recognized as an impairment loss.
There were no triggering events since the March 1, 2013 goodwill impairment test. The Company performed the two-step process as of March 1, 2014 utilizing the market and income approaches and significant assumptions discussed below. Upon completion of step one, the Company determined that the estimated fair value was higher than the recorded net book value and therefore no further testing was deemed necessary and no impairment of goodwill was recorded.
Market Approach
The market approach produces indications of value by applying multiples of enterprise value to revenue as well as enterprise value to earnings before depreciation, amortization, interest and taxes. The multiples indicate what investors are willing to pay for comparable publicly held companies. When adjusted for the risk level and growth potential of the subject company relative to the guideline companies, these multiples are a reasonable indication of the value an investor would attribute to the subject company.
Income Approach
The income approach considers the subject company’s future sales and earnings growth potential as the primary source of future cash flow. ARI prepared a five year financial projection for the reporting unit and used a discounted net cash flow method to determine the fair value. Net cash flow consists of after-tax operating income, plus depreciation, less capital expenditures and working capital needs. The discounted cash flow method considers a five-year projection of net cash flow and adds to those cash flows a residual value at the end of the projection period.
Significant estimates and assumptions used in the evaluation were forecasted revenues and profits, the weighted average cost of capital and tax rates. Forecasted revenues of the reporting unit were estimated based on historical trends of the ARI plants that the reporting unit supplies parts to, which are driven by the railcar market forecast. Forecasted margins were based on historical experience. The reporting unit does not have a selling, administrative or executive staff; therefore, an estimate of salaries and benefits for key employees was added to represent selling, general and administrative expenses. The weighted average cost of capital was calculated using an estimated cost of equity and debt.
All of the above estimates and assumptions were determined by management to be reasonable based on the knowledge and information at the time of the evaluation. As such, this carries a risk of uncertainty. There could be significant fluctuations in the cost of raw materials, unionization of the Company’s workforce or other factors that might significantly affect the reporting unit’s cost structure and negatively impact the projection of financial performance. If the railcar industry forecasts or ARI’s market share were to change significantly, the fair value of the reporting unit would be materially adversely impacted. Other events that might occur that could have a negative effect would be a natural disaster that would render the facility unusable, a significant litigation settlement, a significant workers’ compensation claim or other event that would result in a production shut down or significant expense to the reporting unit.

10


Note 8 — Investments in and Loans to Joint Ventures
As of March 31, 2014 , the Company was party to two joint ventures: Ohio Castings LLC (Ohio Castings) and Axis LLC (Axis). Through its wholly-owned subsidiary, Castings, the Company has a 33.3% ownership interest in Ohio Castings, a limited liability company formed to produce various steel railcar parts for use or sale by the ownership group. Through its wholly-owned subsidiary, ARI Component, the Company has a 41.9% ownership interest in Axis, a limited liability company formed to produce railcar axles for use or sale by the ownership group.
The Company also previously held, through its wholly-owned direct and indirect subsidiaries, ARM I and ARM II, a 50.0% ownership interest in Amtek Railcar Industries Private Limited (Amtek Railcar), a joint venture that was formed to produce railcars and railcar components in India for sale by the joint venture. The Company, sold its subsidiaries, ARM I and ARM II, thereby selling all of its ownership interest in Amtek Railcar to a third party pursuant to a purchase agreement entered into on December 27, 2013. As a result of the sale the Company no longer participates in Amtek Railcar. Amtek Railcar incurred a net loss of $0.6 million for the period ended March 31, 2013.
The Company accounts for these joint ventures using the equity method. Under this method, the Company recognizes its share of the earnings and losses of the joint ventures as they accrue. Advances and distributions are charged and credited directly to the investment accounts. From time to time, the Company also makes loans to its joint ventures that are included in the investment account. The investment balance for these joint ventures is recorded within the Company’s manufacturing segment. The carrying amount of investments in and loans to joint ventures, which also represents ARI’s maximum exposure to loss with respect to the joint ventures, are as follows:  
 
March 31,
2014
 
December 31,
2013
 
(in thousands)
Carrying amount of investments in and loans to joint ventures
 
 
 
Ohio Castings
$
7,188

 
$
7,378

Axis
22,496

 
24,052

Total investments in and loans to joint ventures
$
29,684

 
$
31,430

See Note 16 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. This joint venture partner then sells these railcar parts to outside third parties at current market prices and sells them to the Company and the other joint venture partner at Ohio Castings' cost plus a licensing fee. 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 
 March 31,
 
2014
 
2013
 
(in thousands)
Results of operations
 
 
 
Revenues
$
14,009

 
$
14,488

Gross profit
$
147

 
$
390

Net loss
$
(569
)
 
$
(233
)


11


Axis
ARI, through a wholly-owned subsidiary, owns a portion of a joint venture, Axis, to manufacture and sell railcar axles. ARI currently owns 41.9% of Axis, while a minority partner owns 9.7% , 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.
The balance outstanding on these loans, including interest, due to ARI Component, was $31.8 million as of March 31, 2014 and $32.9 million as of December 31, 2013 .
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 significant 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 
 March 31,
 
2014
 
2013
 
(in thousands)
Results of operations
 
 
 
Revenues
$
14,851

 
$
10,942

Gross profit
$
312

 
$
157

Income (loss) before interest
$
72

 
$
(75
)
Net loss
$
(1,191
)
 
$
(1,443
)
As of March 31, 2014 , 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.
Note 9 — Warranties
The Company’s standard warranty is up to one year for parts and services and five years for new railcars. Factors affecting the Company’s warranty liability include the number of units sold, historical and anticipated 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.

12


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 
 March 31,
 
2014
 
2013
 
(in thousands)
Liability, beginning of period
$
1,385

 
$
1,374

Provision for warranties issued during the year, net of
     adjustments
289

 
310

Adjustments to warranties issued during previous
     years
(37
)
 
(353
)
Warranty claims
(139
)
 
(111
)
Liability, end of period
$
1,498

 
$
1,220

Note 10 — Long-term Debt
2012 Lease Fleet Financing
In December 2012, Longtrain Leasing entered into a senior secured delayed draw term loan facility (Original Term Loan) secured by a portfolio of railcars, railcar leases, the receivables associated with those railcars and leases, and certain other assets of Longtrain Leasing. The Original 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.
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 December 31, 2013 , the outstanding principal balance on the Term Loan, including the current portion, was $194.8 million . The Original Term Loan, which had a maturity date of February 27, 2018, bore interest at one-month LIBOR plus 2.5% , for a rate of 2.7% as of December 31, 2013 .
2014 Lease Fleet Refinancing
On January 15, 2014 (Closing Date), Longtrain Leasing refinanced its Original Term Loan under an amended and restated credit agreement (Amended and Restated Credit Agreement) to, among other things, increase the aggregate borrowings available thereunder. In connection with the refinancing, Longtrain Leasing entered into a new senior secured term loan facility in an aggregate principal amount of $316.2 million , net of fees and expenses (Refinanced Term Loan). Of this amount, $194.2 million was used to refinance the Original Term Loan, resulting in net proceeds of $122.0 million . In conjunction with the refinancing, the Company incurred a $1.9 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 deferred debt issuance costs incurred in connection with the Original Term Loan.
The terms of the Amended and Restated Credit Agreement also provide Longtrain Leasing with the right, but not the obligation, to increase the amount of the Refinanced Term Loan in an aggregate additional amount not to exceed $100.0 million subject to the conditions set forth in the Amended and Restated Credit Agreement. The Refinanced Term Loan accrues interest at a rate per annum equal to the 1-month LIBOR rate plus 2.0% , for a rate of 2.2% as of March 31, 2014 , subject to an alternative rate as set forth in the Amended and Restated Credit Agreement. The interest rate increases by 2.0% following certain events of default.
Pursuant to the terms of the Original Term Loan and the Amended and Restated Credit Agreement, the Company has been required to maintain deposits in an interest reserve bank account equal to nine and seven months, respectively, of interest payments. As of March 31, 2014 and December 31, 2013 , the interest reserve amount was $4.0 million and $3.9 million , respectively, and included within 'Restricted cash' on the balance sheet. The Refinanced Term Loan may be prepaid at Longtrain Leasing’s option at any time without premium or penalty (other than customary LIBOR breakage fees) prior to the final scheduled maturity of the Refinanced Term Loan, which is January 15, 2020.
Longtrain Leasing is required to maintain a loan to value ratio of at least 80% of the Net Aggregate Equipment Value, as defined in the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement contains certain representations, warranties, and affirmative and negative covenants applicable to ARI and/or Longtrain Leasing, which are customarily applicable to senior secured facilities. Key covenants include limitations on Longtrain Leasing’s indebtedness, liens, investments, acquisitions, asset sales, redemption payments, and affiliate and extraordinary transactions; full cash sweep;

13


covenants relating to the maintenance of Longtrain Leasing as a separate legal entity; financial and other reporting and periodic appraisals; maintenance of railcars, leases, and other assets; and Longtrain Leasing’s compliance with a Debt Service Coverage Ratio (as defined in the Amended and Restated Credit Agreement) of 1.05 to 1.00, measured quarterly on a nine-month trailing basis, and subject to up to a 75 - 135 day cure period.
The Amended and Restated Credit Agreement 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 Refinanced Term Loan are managed in accordance with the Amended and Restated 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 Amended and Restated Credit Agreement) when they are not Eligible Units, subject to limitations on liability set forth in the Amended and Restated Credit Agreement. The Company was in compliance with all of its covenants under the Amended and Restated Credit Agreement as of March 31, 2014 .
The Refinanced 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 borrowing base calculations and limited exceptions. As of March 31, 2014 , the net book value of the railcars that were pledged as part of the Refinanced Term Loan was $312.0 million . As of December 31, 2013 , the net book value of the railcars that were pledged as part of the Original Term Loan was $216.7 million . The future contractual minimum rental revenues related to the railcars pledged as of March 31, 2014 are as follows (in thousands):
 
Remaining 9 months of 2014
$
27,178

2015
35,895

2016
35,107

2017
26,458

2018
17,009

2019 and thereafter
31,703

Total
$
173,350

The remaining principal payments under the Amended and Restated Credit Agreement as of March 31, 2014 are as follows:
 
Remaining 9 months of 2014
$
7,959

2015
10,612

2016
10,612

2017
10,612

2018
13,703

2019 and thereafter
263,415

Total
$
316,913

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% .
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.

14


Note 11 — Income Taxes
The Company’s federal income tax returns for tax years 2009 and beyond remain subject to examination, with the latest statute expiring in September 2017.
Certain of the Company's 2008 and 2009 state income tax returns and all of the Company's state income tax returns for 2010 and beyond remain open and subject to examination, with the latest statute of limitations expiring in December 2019. The Company’s foreign subsidiary’s income tax returns for 2009 and beyond remain open to examination by foreign tax authorities.
The Company is continuing to evaluate the impact of the recent regulations concerning amounts paid to acquire, produce, or improve tangible property and recovery of basis upon disposition. Presently, the Company does not anticipate a material impact to its financial statements.
Note 12 — 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 retired after attaining specified age and service requirements. The Company also previously sponsored a postretirement medical benefit plan that provided access to healthcare for certain retired employees. This plan was 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 
 March 31,
 
2014
 
2013
 
(in thousands)
Service cost
$
57

 
$
49

Interest cost
243

 
221

Expected return on plan assets
(313
)
 
(279
)
Amortization of net actuarial loss/prior service cost
69

 
194

Net periodic cost recognized
$
56

 
$
185

 
 
Postretirement Benefits
 
Three Months Ended 
 March 31,
 
2014
 
2013
 
(in thousands)
Service cost
$

 
$

Interest cost
1

 
1

Amortization of net actuarial gain/prior service credit
(14
)
 
(117
)
Net periodic benefit recognized
$
(13
)
 
$
(116
)
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 for each of the three months ended March 31, 2014 and 2013 .
Note 13 — Commitments and Contingencies
The Company is subject to comprehensive federal, state, local and international environmental laws and regulations relating to the release or discharge of materials into the environment, the management, use, processing, handling, storage, transport or disposal of hazardous materials and wastes, and other laws and regulations relating to the protection of human health and the environment. These laws and regulations not only expose ARI to liability for the environmental condition of its current or

15


formerly owned or operated facilities, and its own negligent acts, but also may expose ARI to liability for the conduct of others or for ARI’s actions that were in compliance with all applicable laws at the time such actions were taken. In addition, these laws may require significant expenditures to achieve compliance and are frequently modified or revised to impose new obligations. Civil and criminal fines and penalties and other sanctions may be imposed for non-compliance with these environmental laws and regulations. ARI’s operations that involve hazardous materials also raise potential risks of liability under common law.
Certain real property ARI acquired from ACF Industries LLC (ACF) in 1994 had been involved in investigation and remediation activities to address contamination both before and after their transfer to ARI. ACF is an affiliate of Mr. Carl Icahn, the chairman of the Company’s board of directors and, through IELP, the Company’s principal beneficial stockholder. Substantially all of the issues identified with respect to these properties relate to the use of these properties prior to their transfer to ARI by ACF and for which ACF has retained liability for environmental contamination that may have existed at the time of transfer to ARI. ACF has also agreed to indemnify ARI for any cost that might be incurred with those existing issues. As of the date of this report, it is the Company's understanding that no further investigation or remediation is required at these properties and ARI does not believe it will incur material costs in connection with such activities, but it cannot assure that this will be the case. If ACF fails to honor its obligations to ARI, ARI could be responsible for the cost of any additional investigation or remediation that may be required. The Company believes that its operations and facilities are in substantial compliance with applicable laws and regulations and that any noncompliance is not likely to have a material adverse effect on its financial condition or results of operations.
ARI is a party to collective bargaining agreements with labor unions at two repair facilities that will expire in January 2016 and September 2016. ARI is also party to a collective bargaining agreement with a labor union at a parts manufacturing facility that will expire in April 2017.
The Company has various agreements with and commitments to related parties. See Note 16 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 14 — 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) option-pricing formulas.
Stock appreciation rights
All of the Company's stock appreciation rights (SARs) (i) are approved by the compensation committee of the Company’s board of directors pursuant to the 2005 Plan, (ii) have exercise prices that represent the closing price of the Company’s common stock on the date of grant, (iii) have a seven year term, and (iv) settle in cash.
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 March 31, 2014 is based on the 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 2.
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 
 March 31,
 
2014
 
2013
 
(in thousands)
Share-based compensation expense
 
 
 
Cost of revenues: Manufacturing
$
856

 
$
1,032

Cost of revenues: Railcar services
278

 
285

Selling, general and administrative
2,872

 
4,691

Total share-based compensation expense
$
4,006

 
$
6,008


16


As of March 31, 2014 , unrecognized compensation costs related to the unvested portion of SARs were estimated to be $4.1 million and were expected to be recognized over a weighted average period of 30 months .
Note 15 — 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, 2012
$
1,213

 
$
1,562

 
$
(3,162
)
 
$
(387
)
Currency translation

 
(248
)
 

 
(248
)
Unrealized gain on available for sale securities, net of tax effect $51
93

 

 

 
93

Reclassifications related to pension and postretirement plans, net of tax effect of $30 (1)

 

 
47

 
47

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

 

 
$
(1,306
)
Balance March 31, 2013
$

 
$
1,314

 
$
(3,115
)
 
$
(1,801
)
 
 
 
 
 
 
 
 
Balance December 31, 2013
$

 
$
760

 
(2,254
)
 
$
(1,494
)
Currency translation

 
(459
)
 

 
(459
)
Reclassifications related to pension and
     postretirement plans, net of tax effect of $21 (1)

 

 
34

 
34

Balance March 31, 2014
$

 
$
301

 
(2,220
)
 
$
(1,919
)
 
(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 12 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 3 for further details and pre-tax amounts.
Note 16 — 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 the three months ended March 31, 2014 and 2013 , ARI purchased $0.2 million and less than $0.1 million , respectively, of components from ACF. The agreement automatically renews unless written notice is provided by the Company.

17


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 provides 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 pays ARI a royalty and, if any, a share of the net profits (Profits) earned on each railcar manufactured and sold by ACF under the agreement, in an aggregate amount equal to 30 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 had 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 has 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 $5.7 million and $0.2 million for the three months ended March 31, 2014 and 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 and AEP
The Company has or had the following agreements with ARL and/or its wholly owned subsidiary, AEP Leasing LLC (AEP, and together with ARL, the ARL Entities). The ARL Entities are companies 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 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 had an initial term of three years and automatically renews for additional one year periods unless either party provides at least sixty days prior written notice of termination.
Revenues of $4.0 million and $4.6 million for the first three months of 2014 and 2013 , 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. In January 2014, Longtrain Leasing and ARL amended this agreement to, among other things, extend the termination date to January 15, 2020 (collectively the Railcar Management Agreements).
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 each agreement, ARL will receive, in respect of leased railcars, a fee consisting of a lease origination fee and a

18


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 audit 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 under the Railcar Management Agreements were $0.8 million and $0.5 million for the first three months of 2014 and 2013 , 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 were incurred for each of the three months ended March 31, 2014 and 2013. These costs are included in selling, general and administrative costs on the condensed consolidated statements of operations.
Railcar orders
The Company has from time to time manufactured and sold railcars to the ARL Entities under long-term agreements as well as on a purchase order basis. Revenues from railcars sold to the ARL Entities were $35.6 million and $62.8 million for the three months ended March 31, 2014 and 2013, 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 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 the loans from the lenders party thereto, with each party acquiring a 50.0% interest in the loans. The balance outstanding on these loans, due to ARI Component, was $31.8 million and $32.9 million as of March 31, 2014 and December 31, 2013 , respectively. See Note 8 for further information regarding this transaction and the terms of the underlying loans.
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, which extends through November 2015, ARI sells and MWR purchases scrap metal from several ARI plant locations. MWR collected scrap material totaling $2.2 million and $1.7 million for the first three months of 2014 and 2013 , respectively. This agreement was entered into at arm’s-length and was approved by the independent directors of 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.
Insight Portfolio Group LLC (Insight Portfolio Group) is an entity formed and controlled by Mr. Carl Icahn in order to maximize the potential buying power of a group of entities with which Mr. Carl Icahn has a relationship in negotiating with a wide range of suppliers of goods, services and tangible and intangible property at negotiated rates. ARI, and a number of other entities with which Carl Icahn has a relationship, have minority ownership interests in, and pay fees as part of being a member of, Insight Portfolio Group. During both the three months ended March 31, 2014 and 2013, the Company incurred less than $0.1 million in fees as a member of the Insight Portfolio Group. These charges were included in selling, general and administrative costs on the condensed consolidated statements of operations.
In March 2014, the Company appointed Mr. Yevgeny Fundler as its senior vice president, general counsel, and secretary. In March 2014, Mr. Fundler also assumed the role of general counsel with ARL. In addition, since March 2010, he has consulted for Insight Portfolio Group as its general counsel. The independent directors of the Company’s audit committee considered Mr. Fundler’s provision of services to ARL and Insight Portfoli o Group in connection with their review and approval of Mr. Fundler’s employment by the Company.
Financial information for transactions with related parties
Cost of revenues for manufacturing included $27.0 million and $18.4 million for the first three months of 2014 and 2013 , respectively, for railcar components purchased from joint ventures.
Inventory as of March 31, 2014 and December 31, 2013 , included $5.1 million and $6.2 million , respectively, of railcar components purchased from joint ventures and all profit for this inventory still on hand was eliminated.

19


Note 17 — 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. Intersegment revenues are accounted for as if sales were to third parties.
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. More specifically, such services include maintenance and shop planning, project management, tracking and tracing, regulatory compliance, mileage audit, rolling stock taxes, and online service access. Earnings from operations for railcar services include an allocation of selling, general and administrative costs.

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 March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
153,963

 
$
64,029

 
$
217,992

 
$
33,655

 
$
19,730

 
$
53,385

Railcar Leasing
11,746

 

 
11,746

 
6,230

 
31

 
6,261

Railcar Services
16,406

 
132

 
16,538

 
2,181

 
38

 
2,219

Corporate/Eliminations

 
(64,161
)
 
(64,161
)
 
(5,559
)
 
(19,799
)
 
(25,358
)
Total Consolidated
$
182,115

 
$

 
$
182,115

 
$
36,507

 
$

 
$
36,507

Three Months Ended March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
172,975

 
$
55,408

 
$
228,383

 
$
33,979

 
$
9,782

 
$
43,761

Railcar Leasing
6,543

 

 
6,543

 
2,163

 
4

 
2,167

Railcar Services
15,592

 
49

 
15,641

 
2,305

 
43

 
2,348

Corporate/Eliminations

 
(55,457
)
 
(55,457
)
 
(7,218
)
 
(9,829
)
 
(17,047
)
Total Consolidated
$
195,110

 
$

 
$
195,110

 
$
31,229

 
$

 
$
31,229

 

20


Total Assets
March 31,
2014
 
December 31,
2013
 
(in thousands)
Manufacturing
$
347,530

 
$
298,951

Railcar Leasing
541,311

 
478,000

Railcar Services
56,636

 
52,150

Corporate/Eliminations
29,297

 
(3,492
)
Total Consolidated
$
974,774

 
$
825,609

Sales to Related Parties
As discussed in Note 16, 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 
 March 31,
 
2014
 
2013
Manufacturing
22.6
%
 
32.3
%
Railcar Leasing
%
 
%
Railcar Services
2.2
%
 
2.4
%
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 total consolidated revenues for the three months ended March 31, 2014 and 2013 .
 
Three Months Ended 
 March 31,
 
2014
 
2013
Manufacturing revenues from significant customers
41.4
%
 
73.7
%
Manufacturing accounts receivable from customers that accounted for more than 10% 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 March 31, 2014 and December 31, 2013 .
 
March 31,
2014
 
December 31,
2013
Manufacturing receivables from significant customers
20.6
%
 
35.1
%
Note 18 — Consulting Contracts
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 March 31, 2014 and 2013 , revenues of $0.1 million and $0.7 million , respectively, were recorded under this consulting agreement. Billed and unbilled revenues due from the RDSO agreement were $ 1.7 million and $2.0 million , respectively, as of March 31, 2014 compared to billed and unbilled revenues amounting to $1.7 million and $1.9 million , respectively, as of December 31, 2013 . As of each balance sheet date presented, approximately $1.5 million and $1.0 million of the unbilled revenue for March 31, 2014 and December 31, 2013 , respectively, has been recorded in prepaid

21


expenses and other current assets with the remaining $0.5 million and $ 0.9 million , respectively, being recorded in other assets on the condensed consolidated balance sheets.
Note 19 — Subsequent Events
On April 29, 2014 , the Board of Directors of the Company declared a cash dividend of $0.40 per share of common stock of the Company to shareholders of record as of June 17, 2014 that will be paid on July 1, 2014 .



22


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, anticipated customer demand for our products, trends relating to our shipments, leasing, railcar services and revenues, our strategic objectives and long-term strategies, trends related to shipments for direct sale versus lease, our results of operations, financial condition and the sufficiency of our capital resources, statements regarding our capital expenditure plans and expansion of our business, anticipated benefits regarding the growth of our leasing business, the mix of railcars in our lease fleet and lease fleet financings, anticipated production schedules for our products and the anticipated production schedules of our joint ventures, our backlog, our plan regarding future dividends and the anticipated performance and capital requirements of our joint ventures. These forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those anticipated.
Risks and uncertainties that could adversely affect our business and prospects include without limitation:
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 prospects in light of the cyclical nature of our business;
the health of and prospects for the overall railcar industry;
the highly competitive nature of the manufacturing, railcar leasing and railcar services industries;
our reliance upon a small number of customers that represent a large percentage of our revenues and backlog;
the conversion of our railcar backlog into revenues;
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 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;
anticipated production schedules for our products and the anticipated capital needs, and production schedules of our joint ventures;
the risks associated with our current joint ventures;
the risks, impact and anticipated benefits associated with potential joint ventures, acquisitions or new business endeavors;
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;
the risk of being unable to market or remarket railcars for sale or lease at favorable prices or on favorable terms or at all;
risks associated with ongoing compliance with environmental, health, safety, and regulatory laws and regulations, which may be subject to change;
the implementation, integration with other systems or ongoing management of our new enterprise resource planning system;
risks related to our indebtedness and 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.


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In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. Our actual results could be different from the results described in or anticipated by our forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections and may be materially better or worse than anticipated. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements represent our estimates and assumptions only as of the date of this report. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this report, in order to reflect changes in circumstances or expectations or the occurrence of unanticipated events except to the extent required by applicable securities laws. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed above and under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 (Annual Report), as well as the risks and uncertainties discussed elsewhere in this report and the Annual Report. We qualify all of our forward-looking statements by these cautionary statements. We caution you that these risks are not exhaustive. We operate in a continually changing business environment and new risks emerge from time to time.
EXECUTIVE SUMMARY
We are a leading North American designer and manufacturer of hopper and tank railcars, which are currently the two largest markets within the railcar industry. We provide our railcar customers with integrated solutions through a comprehensive set of high quality products and related services offered by our three reportable segments: manufacturing, railcar leasing and railcar services. Manufacturing consists of railcar manufacturing and railcar and industrial component manufacturing. 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. Increased North American crude oil production has contributed to the strong industry-wide demand for tank railcars, resulting in record industry levels for tank railcar shipments and backlog. Additionally, we believe inquiry activity for hopper railcars is growing, specifically for railcars servicing the sand and plastic pellet markets. Consistent with industry expectations, we believe demand for hopper railcars is strengthening for deliveries from 2015 through 2017. However, we cannot assure you that tank railcar demand will continue at 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 first quarter of 2014, we experienced another strong quarter of earnings driven by the continued strength of tank railcar shipments and pricing. We continue to be selective about the railcar orders that we accept. We also continue to focus on the growth of our lease fleet due to high demand and favorable lease rates. Because revenues and earnings related to leased railcars are recognized over the life of the lease, our quarterly results can vary depending on the mix of lease versus direct sale railcars that we ship during a given period. During the first quarter of 2014, we had a high mix of tank railcars added to our lease fleet at favorable lease rates.
During the first quarter of 2014, we shipped approximately 1,610 railcars, which is down from 1,900 during the same period in 2013. The decrease in volumes was driven by a decline in hopper railcar shipments, partially offset by a slight increase in tank railcar shipments. 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 increased to 23.1% in the first quarter of 2014 compared to 20.7% in the same period of 2013.
As of March 31, 2014 , we have a backlog of approximately 8,600 railcars including approximately 2,840 railcars for lease customers. In response to changes in customer demand, we continue to adjust production rates as needed at our railcar manufacturing facilities.

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RESULTS OF OPERATIONS
Three months ended March 31, 2014 compared to three months ended March 31, 2013
Consolidated Results
 
 
Three Months Ended
 
 
 
 
 
March 31,
 
$
 
%
 
2014
 
2013
 
Change
 
Change
 
(in thousands)
 
 
Revenues:
 
 
 
 
 
 
 
Manufacturing
$
153,963

 
$
172,975

 
$
(19,012
)
 
(11.0
)
Railcar leasing
11,746

 
6,543

 
5,203

 
79.5

Railcar services
16,406

 
15,592

 
814

 
5.2

Total revenues
$
182,115

 
$
195,110

 
$
(12,995
)
 
(6.7
)
Cost of revenues:
 
 
 
 
 
 
 
Manufacturing
$
(118,365
)
 
$
(137,123
)
 
$
(18,758
)
 
(13.7
)
Railcar leasing
(4,491
)
 
(2,904
)
 
$
1,587

 
54.6

Railcar services
(13,365
)
 
(12,589
)
 
$
776

 
6.2

Total cost of revenues
$
(136,221
)
 
$
(152,616
)
 
$
(16,395
)
 
(10.7
)
Selling, general and administrative
(9,387
)
 
(11,265
)
 
(1,878
)
 
(16.7
)
Earnings from operations
$
36,507

 
$
31,229

 
$
5,278

 
16.9

Revenues
Our total consolidated revenues for the three months ended March 31, 2014 decreased by 6.7% compared to the same period in 2013 . This decrease was due to decreased revenues in our manufacturing segment, partially offset by higher railcar leasing and railcar services revenues. During the three months ended March 31, 2014 , we shipped approximately 1,130 direct sale railcars, which excludes approximately 480 railcars built for our lease fleet, compared to approximately 1,370 direct sale railcars for the same period of 2013 , which excludes approximately 530 railcars built for our lease fleet.
Manufacturing revenues decreased by 11.0% during the three month period ended March 31, 2014 compared to the same period in 2013. The change during the quarter was primarily due to a decrease of 12.3% resulting from lower volumes of direct sale tank railcar shipments relative to tank railcars shipped for our lease fleet and the timing of certain hopper railcar shipments. This decrease was partially offset by strong market conditions for tank railcars and an increase of 1.3% due to higher revenue from certain material cost changes that we generally pass through to customers, as discussed below. Estimated revenues related to railcars built for our lease fleet are excluded from consolidated results, as discussed below.
Leasing revenues increased by 79.5% during the three months ended March 31, 2014 compared to the same period in 2013 due to an increase in the number of railcars in our lease fleet and higher average lease rates. The lease fleet grew from 3,120 railcars at March 31, 2013 to 4,930 railcars at March 31, 2014 .

Railcar services increased by 5.2% during the three months ended March 31, 2014 compared to the same period in 2013. The increase in railcar services revenue for the three months ended March 31, 2014 compared to the same period in 2013 was primarily due to higher demand for paint and lining work at our repair facilities.
Cost of revenues
Our total consolidated cost of revenues decreased by 10.7% for the three months ended March 31, 2014 compared to the same period in 2013 . The decrease was primarily due to a decrease in our manufacturing segment, partially offset by increases in the railcar leasing and railcar services segments. Cost of revenues decreased for our manufacturing segment by 13.7% for the three months ended March 31, 2014 compared to the same period in 2013 . This change during the quarter was primarily a result of a 17.0% decrease driven by fewer direct sale tank railcar shipments, as discussed above. This decrease was partially offset by an increase of 1.7% due to a shift in production to a higher mix of tank railcars with more material and labor content and an increase of 1.6% resulting from higher material costs for key components and steel. The increase in costs for key components and steel is also reflected as an increase 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.

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Table of Contents

Cost of revenues for our leasing segment increased by 54.6% for the three months ended March 31, 2014 compared to the same period in 2013 primarily as a result of an increase in our lease fleet, as discussed above.
Cost of revenues for our railcar services segment increased by 6.2% for the three months ended March 31, 2014 compared to the same period in 2013 , primarily due to costs associated with the increased paint and lining work at our repair facilities, discussed above, as well as inefficiencies caused by poor weather conditions.
Selling, general and administrative expenses
Our total consolidated selling, general and administrative costs decreased by 16.7% for the three months ended March 31, 2014 compared to the same period in 2013 . This decrease is primarily attributable to decreases in our share-based compensation expense. While the Company's share-based compensation expense fluctuates with the stock price, past exercises of stock appreciation rights (SARs) have resulted in fewer SARs outstanding, which has reduced the impact that changes in the stock price have on the Company's financial results.
Interest expense
Our total consolidated interest expense decreased by 44.3% for the three months ended March 31, 2014 compared to the same period in 2013 . This decrease was a result of a lower interest rate secured on our lease fleet financing and the voluntary early redemption of our 7.5% senior unsecured notes (Notes), discussed further in the liquidity and capital resources section below. This decrease was partially offset by an increase due to a higher average debt balance as a result of increased borrowings under our lease fleet financing during the first quarter of 2014, as discussed above. Our average debt balance in the first quarter of 2014 was $297.5 million with a weighted average interest rate of 2.2% compared to an average debt balance of $233.3 million with a weighted average interest rate of 5.1% during the same period in 2013.
Loss on debt extinguishment
During the three months ended March 31, 2014, we refinanced our lease fleet financing facility, paying off $194.2 million of outstanding debt under our original 2012 lease fleet financing facility with borrowings under a new facility. This refinancing resulted in a $1.9 million non-cash charge related to the accelerated write-off of the remainder of deferred debt issuance costs incurred in connection with the original lease fleet financing facility. During the same period in 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.
Other income
Other income of $2.0 million was recognized in the first three months of 2013 primarily due to realized gains on the sale of short-term investments. Subsequent to this sale, the Company has not made any other short-term investments, and other income for the same period in 2014 was less than $0.1 million.
Loss from Joint Ventures
The breakdown of our loss from joint ventures during the three months ended March 31, 2014 and 2013 was as follows:
 
 
Three Months Ended 
 March 31,
 
 
 
(in thousands)
 
 
 
2014
 
2013
 
Change
Ohio Castings
$
(190
)
 
$
(78
)
 
$
(112
)
Axis
(411
)
 
(612
)
 
201

Amtek Railcar - India

 
(283
)
 
283

Total Loss from Joint Ventures
$
(601
)
 
$
(973
)
 
$
372

Our joint venture loss was $0.6 million for the three months ended March 31, 2014 compared to $1.0 million for the same period in 2013. The decrease in the loss was primarily due to the sale, in December 2013, of our interest in our India joint venture, Amtek Railcar Industries Private Limited, which had generated a loss of $0.3 million during the three months ended March 31, 2013. Additionally, our share of the losses from our Axis, LLC (Axis) joint venture decreased by $0.2 million , compared to the same period in 2013, as a result of increased external sales and production levels due to strong tank railcar demand and increased efficiencies. These decreases were partially offset by the $0.1 million increase in our share of the losses

26

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of Ohio Castings LLC for 2014 compared to 2013 due primarily to production levels decreasing on weak demand for railcar types other than tank railcars.
Income Tax Expense
Our income tax expense was $12.2 million , or 37.0% of our earnings before income taxes for the three months ended March 31, 2014 , compared to $11.6 million , or 39.3% of our earnings before income taxes for the same period in 2013 . The decrease in our effective tax rate was primarily due to the domestic production activities deduction, which may cause our effective tax rate to fluctuate during the remainder of 2014.
Segment Results
The table below summarizes our historical revenues, earnings from operations and operating margin for the periods shown. Intersegment revenues are accounted for as if sales were to third parties. Operating margin is defined as total segment earnings from operations as a percentage of total segment revenues. Our historical results are not necessarily indicative of operating results that may be expected in the future.
 
 
Three Months Ended March 31,
 
 
 
2014
 
2013
 
 
 
(in thousands)
 
 
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
153,963

 
$
64,029

 
$
217,992

 
$
172,975

 
$
55,408

 
$
228,383

 
$
(10,391
)
Railcar Leasing
11,746

 

 
11,746

 
6,543

 

 
6,543

 
5,203

Railcar Services
16,406

 
132

 
16,538

 
15,592

 
49

 
15,641

 
897

Eliminations

 
(64,161
)
 
(64,161
)
 

 
(55,457
)
 
(55,457
)
 
(8,704
)
Total Consolidated
$
182,115

 
$

 
$
182,115

 
$
195,110

 
$

 
$
195,110

 
$
(12,995
)
Earnings (Loss) from Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
33,655

 
$
19,730

 
$
53,385

 
$
33,979

 
$
9,782

 
$
43,761

 
$
9,624

Railcar Leasing
6,230

 
31

 
6,261

 
2,163

 
4

 
2,167

 
4,094

Railcar Services
2,181

 
38

 
2,219

 
2,305

 
43

 
2,348

 
(129
)
Corporate/Eliminations
(5,559
)
 
(19,799
)
 
(25,358
)
 
(7,218
)
 
(9,829
)
 
(17,047
)
 
(8,311
)
Total Consolidated
$
36,507

 
$

 
$
36,507

 
$
31,229

 
$

 
$
31,229

 
$
5,278

 
 
Three Months Ended 
 March 31,
 
2014
 
2013
Operating Margins
 
 
 
Manufacturing
24.5
%
 
19.2
%
Railcar Leasing
53.3
%
 
33.1
%
Railcar Services
13.4
%
 
15.0
%
Total Consolidated
20.0
%
 
16.0
%
Manufacturing
Our manufacturing segment revenues, including an estimate of revenues for railcars built for our lease fleet, decreased by $10.4 million for the three months ended March 31, 2014 compared to the same period in 2013 . During the first quarter of 2014 , we shipped approximately 1,610 railcars, including approximately 480 railcars built for our lease fleet, compared to approximately 1,900 railcars for the same period of 2013 , including approximately 530 railcars built for our lease fleet. The primary reason for the decrease in revenues was lower hopper railcar shipments, partially offset by a higher mix of tank railcars shipped, which generally sell at higher prices due to more material and labor content, and strong general market conditions for tank railcars.

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Table of Contents

Manufacturing segment revenues for the three months ended March 31, 2014 included estimated revenues of $64.0 million , relating to railcars built for our lease fleet, compared to $55.4 million for the same period in 2013 . Revenues related to railcars built for our lease fleet increased due to a higher quantity of tank railcars shipped for lease, partially offset by a lower quantity of hopper railcars shipped for lease. Such revenues are based on an estimated fair market value of the leased railcars as if they had been sold to a third party, and are eliminated in consolidation. Revenues from railcars manufactured for our leasing segment are not recognized in consolidated revenues as railcar sales, but rather lease revenues are recognized over the term of the lease in accordance with the monthly lease revenues. Railcars built for the lease fleet represented 30% and 28% , respectively, of our railcar shipments during the three months ended March 31, 2014 and 2013.
We manufacture and sell railcars to American Railcar Leasing LLC (ARL) and its wholly-owned subsidiary, AEP Leasing LLC (AEP, and together with ARL, the ARL Entities) under long-term agreements as well as on a purchase order basis. Manufacturing segment revenues for the three months ended March 31, 2014 included direct sales of railcars to the ARL Entities totaling $35.6 million compared to $62.8 million of direct sales to the ARL Entities for the same period in 2013. In addition, we recorded $5.7 million of sales revenue from ACF Industries LLC (ACF) for sales of railcar components to ACF and for royalties and profits on railcars sold by ACF during the three months ended March 31, 2014 compared to $0.2 million for the same period in 2013 . Total manufacturing segment revenues from our affiliates represent 22.6% of our total consolidated revenues for the three months ended March 31, 2014 compared to 32.3% for the same periods in 2013. AEP, ARL and ACF are affiliated with Mr. Carl Icahn, the chairman of our board of directors and, through IELP, our principal beneficial stockholder.
Earnings from operations for our manufacturing segment, which include an allocation of selling, general and administrative costs, as well as estimated profit for railcars manufactured for our leasing segment, increased by $9.6 million for the three months ended March 31, 2014 compared to the same period in 2013 . Estimated profit on railcars built for our lease fleet, which is eliminated in consolidation, was $19.7 million for the three months ended March 31, 2014 compared to $9.8 million for the same period in 2013 . The estimated profit on railcars built for our lease fleet is based on an estimated fair market value of revenues as if the railcars had been sold to a third party, less the cost to manufacture. Operating margin from our manufacturing segment increased to 24.5% for the three months ended March 31, 2014 compared to 19.2% for the same period in 2013 . These increases were due primarily to improved sales mix, as discussed above, and operating leverage and efficiencies in connection with consistent high levels of tank railcar production volumes.
Railcar Leasing
Our railcar leasing segment revenues for the three months ended March 31, 2014 increased by $5.2 million compared to the same period in 2013 . The increase in revenues was driven by an increase in railcars on lease with third parties and an increase in the average lease rate, as discussed above.
Earnings from operations for our railcar leasing segment, which include an allocation of selling, general and administrative costs, increased by $4.1 million for the three months ended March 31, 2014 compared to the same period in 2013 . This increase is primarily due to the growth in the number of railcars in our lease fleet and higher average lease rates.
Railcar Services
Our railcar services segment revenues increased by $0.9 million for the three months ended March 31, 2014 , compared to the same period in 2013 . The increases were primarily due to increased demand for painting and lining work at our repair facilities.
For the three months ended March 31, 2014 , our railcar services segment revenues included transactions with ARL totaling $4.0 million , or 2.2% of our total consolidated revenues compared to $4.6 million , or 2.4% of our total consolidated revenues, for the same period in 2013 .
Earnings from operations and operating margins for our railcar services segment, which include an allocation of selling, general and administrative costs, were relatively flat for the three month period ended March 31, 2014 and 2013 .
BACKLOG
We define backlog as the number and estimated market value of railcars that our customers have committed in writing to purchase or lease from us that have not been shipped. As of March 31, 2014 , our total backlog was approximately 8,600 railcars, of which approximately 5,760 railcars with an estimated market value of $626.0 million were orders for direct sale and approximately 2,840 railcars with an estimated market value of $351.8 million were orders for railcars that will be subject to lease. As of March 31, 2014 , approximately 73% of the railcars in our backlog are expected to be delivered during 2014 , of which 41% are for direct sale and 32% are for lease. The remaining 27% of the railcars in our backlog are scheduled to be delivered in 2015 and beyond. As of December 31, 2013 , our total backlog was approximately 8,560 railcars, of which

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approximately 6,230 railcars with an estimated market value of $713.4 million were orders for direct sale and approximately 2,330 railcars with an estimated market value of $326.7 million were orders for railcars that will be subject to lease.
Railcars for Sale. As of March 31, 2014 , approximately 67% of the total number of railcars in our backlog were railcars for direct sale. Estimated backlog value of railcars for direct sale reflects the total revenues expected as if such backlog were converted to actual revenues at the end of the particular period. Railcars for direct sale to our affiliates, the ARL Entities, accounted for 18% of the total number of railcars in our backlog as of March 31, 2014 .
Railcars for Lease . As of March 31, 2014 , approximately 33% of the total number of railcars in our backlog were railcars for lease, subject to firm orders. Estimated backlog value of railcars that will be subject to lease reflects the estimated market value of each railcar. Actual revenues for railcars subject to lease are recognized per the terms of the lease and are not based on the estimated backlog value.
Customer orders may be subject to requests for delays in deliveries, inspection rights and other customary industry terms and conditions, which could prevent or delay railcars in our backlog from being shipped and converted into revenue. Historically, we have experienced little variation between the number of railcars ordered and the number of railcars actually delivered. As delivery dates could be extended on certain orders, we cannot guarantee that our reported railcar backlog will convert to revenue in any particular period, if at all, nor can we guarantee that the actual revenue from these orders will equal our reported estimated market value or that our future revenue efforts will be successful.
The reported backlog includes railcars relating to purchase or lease obligations based upon an assumed product mix consistent with past orders. Changes in product mix from what is assumed would affect the estimated market value of our backlog. Estimated market value reflects known price adjustments for material cost changes but does not reflect a projection of any future material price adjustments that are generally provided for in our customer contracts.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2014 , we had working capital of $245.3 million , including $154.5 million of cash and cash equivalents. As of March 31, 2014 , we had $316.9 million of debt outstanding under our lease fleet financing senior secured term loan facility.
Outstanding and Available Debt
Lease fleet financing
In January 2014, our wholly owned subsidiary, Longtrain Leasing I, LLC (Longtrain Leasing), refinanced its original 2012 lease fleet financing facility under an amended and restated credit agreement (Amended and Restated Credit Agreement) in order to, among other things, increase the borrowings available thereunder. In connection with the refinancing, Longtrain Leasing received borrowings of $316.2 million, net of fees and expenses. Of this amount, $194.2 million was used to refinance the original 2012 lease fleet financing facility, resulting in net proceeds to the Company of $122.0 million. The terms of the Amended and Restated Credit Agreement also provide Longtrain Leasing with the right, but not the obligation, to increase the amount of the senior secured term loan facility in an aggregate additional amount not to exceed $100.0 million subject to the conditions set forth in the Amended and Restated Credit Agreement.
The 2014 lease fleet financing facility accrues interest at a rate per annum equal to the 1-month LIBOR rate plus 2.0% and matures in January 2020. Principal and interest payments are due monthly, with any remaining balance payable on the scheduled maturity date. Pursuant to the terms of the original 2012 credit agreement and the Amended and Restated Credit Agreement, Longtrain Leasing has been required to maintain deposits in an interest reserve bank account equal to nine and seven months, respectively, of interest payments. As of March 31, 2014 and December 31, 2013 , the interest reserve amount was $4.0 million and $3.9 million , respectively.
This debt is an obligation of Longtrain Leasing that is generally non-recourse to ARI and 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 and any borrowings under the financing are solely the obligations of Longtrain Leasing. ARI has, however, entered into agreements containing certain representations, undertakings, and indemnities. 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 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 Amended and Restated Credit Agreement) when they are not Eligible Units, subject to limitations on liability set forth in the Amended and Restated Credit Agreement.

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Senior unsecured notes
In February 2007, we issued our senior unsecured 7.5% notes (the Notes) in an outstanding principal amount of $275.0 million. In September 2012, we 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. On March 1, 2013, we completed a voluntary early redemption of the remaining $175.0 million of Notes outstanding at a redemption rate of 100.0% of the principal amount of the Notes to be redeemed, plus any accrued and unpaid interest.
Cash Flows
The following table summarizes our change in cash and cash equivalents:
 
Three Months Ended 
 March 31,
 
 
 
2014
 
2013
 
Change
 
(in thousands)
 
 
Net cash (used in) provided by:
 
 
 
 
 
Operating activities
$
(7,409
)
 
$
18,576

 
$
(25,985
)
Investing activities
(46,407
)
 
(36,697
)
 
(9,710
)
Financing activities
111,124

 
(130,878
)
 
242,002

Effect of exchange rate changes on cash and cash equivalents
(72
)
 
(42
)
 
(30
)
(Increase) Decrease in cash and cash equivalents
$
57,236

 
$
(149,041
)
 
$
206,277


Net Cash (Used In) Provided By Operating Activities
Cash flows from operating activities are affected by several factors, including fluctuations in business volume, contract terms for billings and collections, the timing of collections on our accounts receivables, processing of payroll and associated taxes and payments to our suppliers.
Our net cash used in operating activities for the three months ended March 31, 2014 was $7.4 million compared to net cash provided by operating activities of $18.6 million for the same period in 2013 . This change was primarily due to changes in various operating assets and liabilities, including accounts receivable and inventories, due to the timing of shipments and customer payments, partially offset by higher earnings during the first three months of 2014 compared to the same period in 2013, as discussed above.
Net Cash Used In Investing Activities
Our net cash used in investing activities for the three months ended March 31, 2014 was $46.4 million compared to $36.7 million in the same period in 2013 . The increase was a result of the sale of short term investments during the first quarter of 2013 resulting in proceeds of $12.7 million, partially offset by lower spending on capital projects in 2014 compared to 2013.
Net Cash Provided By (Used In) Financing Activities
Our net cash provided by financing activities for the three months ended March 31, 2014 was $111.1 million compared to net cash used in financing activities of $130.9 million in the same period in 2013 . The cash provided by financing activities during the first three months of 2014 was a result of the $122.2 million in net proceeds that the Company received from the 2014 lease fleet refinancing in January, as discussed above. The cash used in financing activities during the first three months of 2013 was a result of the voluntary early redemption of the remaining $175.0 million of principal on our Notes in March 2013, partially offset by a draw of $100.0 million under our original lease fleet financing facility. Additionally, we paid dividends totaling $8.5 million during the three months ended March 31, 2014, compared to $5.3 million in the same period in 2013.
Capital Expenditures
We continuously evaluate facility requirements based on our strategic plans, production requirements and market demand and may elect to change our level of capital investments in the future. These investments are all based on an analysis of the estimated rates of return and impact on our profitability. We continue to pursue opportunities to reduce our costs through continued vertical integration of component parts. From time to time, we may expand our business by acquiring other businesses or pursuing other strategic growth opportunities including, without limitation, joint ventures.
Capital expenditures for the three months ended March 31, 2014 were $43.9 million for manufacturing railcars for lease to others and $3.6 million for capitalized projects that maintain equipment, improve efficiencies and reduce costs. Our current

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capital expenditure plans for the remainder of 2014 include projects that we expect will maintain equipment, improve efficiencies, reduce costs, expand our business, and add to our railcar lease fleet. We cannot assure that we will be able to complete any of our projects on a timely basis or within budget, if at all.
Future Liquidity
Our current liquidity consists of our existing cash balance, future cash from operations, and any additional borrowings we may be able to draw under our existing lease fleet financing facility. Given our strategic emphasis on growing our lease fleet and the capital required to manufacture railcars for lease for which we currently have firm orders, we expect that our longer term cash needs may require additional financing over and above our current liquidity position after considering any additional borrowings under our refinanced lease fleet financing facility, as discussed above. We expect our future cash flows from operations could be impacted by the state of the credit markets and the overall economy, the number of our railcar orders and shipments and our production rates. Our future liquidity may also be impacted by the number of new railcar orders leased versus sold.
Our long-term liquidity is contingent upon future operating performance, Longtrain Leasing's ability to continue to meet its financial covenants under the lease fleet financing and any other indebtedness we may enter into, and the ability to repay or refinance its indebtedness as it becomes due. We may also require additional capital in the future to fund capital expenditures, acquisitions or other investments, including additions to our lease fleet. These capital requirements could be substantial.
Other potential projects, including possible strategic transactions that could complement and expand our business units, will be evaluated to determine if the project or opportunity is right for us. We anticipate that any future expansion of our business will be financed through existing resources, cash flow from operations, term debt associated directly with that project or other new financing. We cannot guarantee that we will be able to meet existing financial covenants or obtain term debt or other new financing on favorable terms, if at all.
Contractual Obligations and Contingencies
As of March 31, 2014 , our outstanding debt under our lease fleet financing increased to $316.9 million from $194.8 million as of December 31, 2013, in connection with the refinancing of the original facility, as discussed above. Refer to the updated status of other contingencies and contractual obligations in Notes 10-13 to the condensed consolidated financial statements. Other than the increase in our borrowings under our lease fleet financing facility, our contractual obligations and contingencies did not materially change from the information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.
  Off-Balance Sheet Arrangements
Other than operating leases, we have no other off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
The critical accounting policies and estimates used in the preparation of our financial statements that we believe affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements presented in this report are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K, for the year ended December 31, 2013 .
There have been no material changes to the critical accounting policies or estimates that were included in our Annual Report on Form 10-K for the year ended December 31, 2013 .


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risks as previously disclosed in Item 7A of our Annual Report on Form 10-K, for the year ended December 31, 2013 .
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures
Under the supervision and with the participation of our Interim Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), our management evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q (the Evaluation Date). Based upon that evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes with respect to legal proceedings as previously disclosed in Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2013 .
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K, for the year ended December 31, 2013 .


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ITEM 6. EXHIBITS
Exhibit No.
  
Description of Exhibit
 
 
 
10.1
 
Form of 2014 Stock Appreciation Rights Agreement #
 
 
 
10.2
 
Offer Letter, dated February 26, 2014, between the Company and Yevgeny Fundler #
 
 
 
31.1
  
Rule 13a-14(a), 15d-14(a) Certification of the Interim Chief Executive Officer*
 
 
 
31.2
  
Rule 13a-14(a), 15d-14(a) Certification of the Chief Financial Officer*
 
 
 
32.1
  
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
 
 
 
101.INS
  
XBRL Instance Document*
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document*
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document*
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document*
 
 
 
101.PRE
  
XBRL Taxonomy Presentation Linkbase Document*
 
 
 
101.DEF
  
XBRL Taxonomy Definition Linkbase Document*
_______________________
*
Filed herewith
**
Furnished herewith
#
Indicates management contract or compensatory plan or arrangement


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
AMERICAN RAILCAR INDUSTRIES, INC.
 
 
 
 
 
Date:
May 5, 2014
By:
 
/s/ Jeffrey S. Hollister
 
 
 
 
Jeffrey S. Hollister, President and Interim Chief Executive Officer
 
 
 
 
 
 
 
By:
 
/s/ Dale C. Davies
 
 
 
 
Dale C. Davies, Senior Vice President,
Chief Financial Officer and Treasurer

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EXHIBIT INDEX
 
Exhibit No.
  
Description of Exhibit
 
 
 
10.1
 
Form of 2014 Stock Appreciation Rights Agreement #
 
 
 
10.2
 
Offer Letter, dated February 26, 2014, between the Company and Yevgeny Fundler #
 
 
 
 
 
 
31.1
  
Rule 13a-14(a), 15d-14(a) Certification of the Interim Chief Executive Officer*
 
 
 
31.2
  
Rule 13a-14(a), 15d-14(a) Certification of the Chief Financial Officer*
 
 
 
32.1
  
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
 
 
 
101.INS
  
XBRL Instance Document*
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document*
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document*
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document*
 
 
 
101.PRE
  
XBRL Taxonomy Presentation Linkbase Document*
 
 
 
101.DEF
  
XBRL Taxonomy Definition Linkbase Document*
_____________________
*
Filed herewith
**
Furnished herewith
#
Indicates management contract or compensatory plan or arrangement


36


Exhibit 10.1


FORM OF
AMERICAN RAILCAR INDUSTRIES, INC.
2005 EQUITY INCENTIVE PLAN
STOCK APPRECIATION RIGHTS AGREEMENT


Name of SARs Holder:
Grant Date:
Total Number of SARs:
Exercise Price Per SAR:
SAR Term/Expiration Date:
Pursuant to and in accordance with the American Railcar Industries, Inc. 2005 Equity Incentive Plan, as amended from time to time (the “Plan”), this Stock Appreciation Rights Agreement (the “Award Agreement” or “Agreement”) evidences the issuance to the person named above (the “SARs Holder”) by American Railcar Industries, Inc. (the “Company”), effective as of the date set forth above, of stock appreciation rights (the “SARs”). Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Plan.
1. Vesting Schedules .
Subject to the Plan and the other terms and conditions of this Agreement, the percentage of the Total Number of SARs (as it may be adjusted from time to time) shall vest on the respective dates if the SARs Holder is employed by the Company on the date(s) indicated below:
Vesting Date
# of Total
SARs Vested
% of Total Number of SARs Vested

 
 
33.3%
 
 
33.3%
 
 
33.3%


2. Exercise . The SARs issued to the SARs Holder shall be exercisable by delivery of an exercise notice in the form attached hereto as Exhibit A (the “Exercise Notice”), which shall state the election to exercise the SARs, the number of SARs being exercised (the “Exercised SARs”) and the SARs Holder’s agreement with respect to certain representations and agreements. The SARs shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice. The SARs may be exercised only in accordance with the Plan and the terms of this Agreement. Upon the exercise of any SARs, the SARs Holder shall be paid by the Company, in

1


cash, an amount equal to the excess, if any, of (A) the aggregate Fair Market Value in respect of which the SARs are exercised, determined as of the time of such exercise, by the average high and low stock price on the Exercise day, over (B) the aggregate Exercise Price Per SAR of the SARs being exercised. No payments shall be made pursuant to the exercise of any SARs unless the issuance and exercise of the SARs complies with applicable laws, the Plan and this Award Agreement. The timing of this payment will coincide with regular payroll cycles.
3. Adjustments . In accordance with Section 3(c) of the Plan, the total number of SARs and the Exercise Price per SAR shall be adjusted from time to time to reflect changes in the Company’s capitalization and for certain other events as expressly set forth in the Plan.
4. No Rights as Stockholder . Neither the issuance of SARs nor any action taken hereunder or thereunder or pursuant hereto or thereto shall be construed as (i) giving the SARs Holder any equity or interest of any kind in the Company or in any assets of the Company or any of its subsidiaries, or (ii) creating a trust of any kind or a fiduciary relationship of any kind between the SARs Holder and the Company or any of its subsidiaries. The SARs Holder shall not have, in respect of the SARs or otherwise, any right to acquire or receive shares of common stock or other securities of the Company or any of its subsidiaries pursuant to the Plan or this Award Agreement or otherwise, shall not have any right to any adjustment or change hereunder as a result of any issuance of stock or other securities by the Company or any of its subsidiaries, and he or she shall not be deemed for any purpose to be a shareholder of the Company or any of its subsidiaries.
5. Termination . Any vested SARs shall be exercisable for ninety (90) days after the SARs Holder’s employment with the Company (which for purposes of this Plan shall include employment with the Company and its direct and indirect consolidated subsidiaries) is terminated without Cause (as defined in the Plan); provided , however , if the employment is terminated by the Company for Cause, the SARs shall terminate immediately. Upon the SARs Holder’s death, any vested SARs may be exercised for a period of twelve (12) months from the date of death. Notwithstanding anything to the contrary in the foregoing, in no event may any SARs be exercised after Expiration Date set forth above or as otherwise provided in the Plan.
6. Non-Transferable by the SARs Holder . Except by will or the laws of descent, the SARs and all rights, title and interest therein granted hereunder are not transferable by the SARs Holder, directly or indirectly, by sale, assignment, pledge, hypothecation, transfer or otherwise (each a “Transfer”). Except as provided above, no Transfer of the SARs granted hereunder, whether voluntary or involuntary, by the operation of law or otherwise, shall vest in any person or entity, any direct or indirect title, interest or right therein whatsoever, but immediately upon any such attempted Transfer, all SARs granted hereunder shall cease to exist and be extinguished and be of no further force or effect.
7. No Guarantee of Continued Service . SARS HOLDER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SARS PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING IN THE RELATIONSHIP AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING ENGAGED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). SARS HOLDER FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED EMPLOYMENT

2


FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH SARS HOLDER'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE THE RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE.
8. Withholding . All amounts paid to the SARs Holder hereunder shall be subject to regular federal, state and, if applicable, local or foreign tax withholding and deductions imposed by any one or more federal, state, local and/or foreign governments, or pursuant to any foreign or domestic applicable law, rule or regulation.
9. Entire Agreement; Governing Law . The Plan is incorporated herein by reference. The Plan and this Award Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and SARs Holder with respect to the subject matter hereof, and may not be modified (except as provided herein and in the Plan) adversely to the SARs Holder's interest except by means of a writing signed by the Company and SARs Holder. This agreement is governed by the internal substantive laws but not the choice of law rules of the State of Delaware.
10. Confidentiality, Non-Compete and Non-Solicit . Pursuant to the terms and conditions of the Plan, SARs Holder has executed and delivered to the Company the Confidentiality, Non-Compete and Non-Solicit Agreement in form and substance acceptable to the Company.
11. SARs Holder Acknowledgement . Receipt of a copy of the Plan represents that SARs Holder is familiar with the terms and provisions thereof, and hereby accepts this Award Agreement subject to all of the terms and provisions thereof. SARs Holder has reviewed the Plan and this Award Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Award Agreement. SARs Holder hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Compensation Committee of the Board of Directors upon any questions arising under the Plan or this Award Agreement. SARs Holder further agrees to notify the Company upon any change in the residence address indicated below. A facsimile or photocopy of an executed counterpart of this Award Agreement shall be sufficient to bind the party or parties whose signature(s) appear thereon.

SARs Holder:

By: ________________________________

American Railcar Industries, Inc.:

By: ________________________________



3



EXHIBIT A
to
Stock Appreciation Rights Agreement

2005 EQUITY INCENTIVE PLAN
EXERCISE NOTICE
American Railcar Industries, Inc.
100 Clark St.
St. Charles, MO 63301
Attention: Treasury
1.
Exercise of SARs . Effective as of today, ______________, 20___, the undersigned (“Holder”) hereby elects to exercise _________ SARs under and pursuant to the 2005 Equity Incentive Plan (the “Plan”) and the Stock Appreciation Rights Agreement dated ____________, 20___ (the “Award Agreement”). Capitalized terms not otherwise defined herein shall have the meaning ascribed to them in the Plan.
2.
Representations of Holder . Holder acknowledges that Holder has received, read and understood the Plan and the Award Agreement and agrees to abide by and be bound by their terms and conditions.
3.
Tax Consultation . Holder understands that Holder may suffer adverse tax consequences as a result of Holder's exercise of the SARs. Holder represents that Holder has consulted with any tax consultants Holder deems advisable in connection with the purchase or disposition of the Shares and that Holder is not relying on the Company for any tax advice.

[Signatures appear on next page]


1


SAR Exercise Notice



Submitted by:        Accepted by:

SARS HOLDER        AMERICAN RAILCAR INDUSTRIES, INC.


 
 
Signature
 
By

 
 
 
Print Name
 
Title


Address :        

    

        
 
Date Received
        

2


Exhibit 10.2


February 26, 2014

Mr. Yevgeny Fundler
145 East 92nd Street
Apt 10-A
New York, NY 10128

Dear Yevgeny:

We are pleased to offer you the position of Senior Vice President & General Counsel with American Railcar Industries, Inc. (the “Company”) at a semi-monthly salary of $8,333.34 (annualized at $200,000), payable in accordance with the Company’s normal payroll practice. Your employment is expected to begin on or about March 3, 2014. In this position, you will report to me.

Beginning in 2015, you will be eligible to participate in the Company’s annual bonus plan, with an annual bonus target of 50% of base salary. Such bonus shall be deemed earned and payable only if the bonus is approved by the Company’s Compensation Committee of the Board of Directors (“Compensation Committee”) and will be subject to and paid in accordance with the terms and conditions of the annual bonus plan. You must be an active employee of the Company on the date the bonus is paid. For 2014, you are guaranteed to receive a bonus of 50% of your base salary, prorated for the number of completed months you are employed with the Company in 2014, which bonus will be paid no later than March 15, 2015, provided you are still actively employed with the Company on the date of payment.

Beginning in 2014, you will also be eligible to participate in the Company’s long-term incentive plan, with an initial grant of stock appreciation rights (SARs) based on the increased value (if any) attributable to $80,000 worth of the Company’s stock above the market value as of the close of the market on your first day of employment. Such grant shall be deemed earned and payable if the SARs are approved by the Company’s Compensation Committee and will be subject to and paid in accordance with the terms of the Company’s 2005 Equity Incentive Plan. Generally, SARs vest equally over three years on the first, second, and third anniversaries of the grant date.

Your salary and other compensation is subject to withholding for all applicable taxes required to be withheld by the Company as well as other authorized or required deductions.

You will be eligible to participate in the benefit programs made available to similarly-situated employees of the Company in accordance with the programs’ applicable terms and conditions. You also will be entitled to vacation, which will accrue and must be used in accordance with the Company’s vacation policy. Your prior continuous service with Icahn Enterprises LP and its affiliates will be counted towards eligibility for the Company’s benefits program (other than the Company’s 401(k) plan) and vacation. Provided you participate in the Company’s 401(k) plan when you first become eligible, the Company will make a payment to you of $6,000 representing missed employer contributions since you will not be eligible for an employer contribution until you have one year of service with the Company. The Company reserves the right to add, change, or terminate benefits at any time.


By July 31, 2014, you will establish and maintain a full-time permanent residency within 50 miles of the Company’s headquarters located at 100 Clark Street, St. Charles, MO 63301. Your relocation will be considered complete on the date on which you finally move you and your family into a residential property under a residential lease of not less than 365 days (the “New Lease”) (collectively, the “Completion Date”) within 50 miles of the Company’s headquarters. To assist you with expenses related to your relocation-including commutation on a weekly basis to and from New York City to St. Charles until such residency is established, the Company will on a weekly basis reimburse you for reasonable expenses incurred, including airfare and associated baggage fees, airport related taxi/car service fees, family moving expenses (with respect to the moving expenses, not to exceed the





amounts estimated by a flat rate moving service as estimated in your February 20, 2014 email to Keith Schaitkin and Patricia Agnello, as we deem reasonable), car rental, house rental/temporary living and meal expenses for up to four (4) months until permanent housing is established, broker’s commission on the rental of a permanent/temporary residence, and the like. The Company will also reimburse you approximately $3,000 in expenses your family already incurred by visiting the St. Louis area to look for permanent housing and to evaluate the school options for your children. Additionally, the Company will reimburse you for (i) up to two (2) months of rent under the New Lease solely to the extent it overlaps with your New York City rental lease (not to exceed in the aggregate $7,200), and (ii) 2014-2015 private school deposit for your two children, to the extent such deposit is not refunded.

During and after your employment, you shall not disclose to any third party any confidential or proprietary information of the Company, any of its affiliates or subsidiaries, or any of their respective owners, members, directors, managers or employees. You further agree that during and after your employment you will not disparage, verbally or in writing, the Company, any of its affiliates or subsidiaries, or any of their respective owners, members, directors, managers, or employees. All ideas, inventions, and intellectual property conceived, developed, or worked on by you (other than any of the foregoing that is unrelated to the Company’s business and conceived, developed, or worked on during your personal time) from the date your employment commences until the termination of such employment shall be the sole and exclusive property of the Company.

At the appropriate time, you will be expected to execute certain employment documents (such as confidentiality and insider trading policies).

This letter does not constitute a contract or employment agreement. You understand that your employment is “at will” and as such can be terminated at any time by either you or the Company, with or without cause and with or without prior notice. Nothing contained in this letter shall limit or otherwise alter such at will employment. Your employment will be subject to other policies, terms, and conditions that may be established by the Company from time to time.

We acknowledge that you will also be the General Counsel of American Railcar Leasing (“ARL”) as well as a consultant to Insight Portfolio Group LLC (“Insight”) and that you may provide ARL and Insight with the time needed to fulfill your responsibilities with respect to those positions.

As an employee of the Company, you will be covered under its malpractice insurance policy (which the Company agrees to maintain with respect to your legal responsibilities, including the coverage for any legal opinions you may give to any third-parties in connection with the Company’s business)and will be eligible to access PLI for continuing legal education. The Company will pay for your professional licensing and continuing legal education.

Please acknowledge the terms and conditions of this letter by signing where indicated below and return a signed original to me.

If you have any questions on this offer, please feel free to contact me. We look forward to your joining our team!

Very truly yours,


Jeff Hollister
President & Interim Chief Executive Officer


Acknowledged this ____ day of ____________, 2014



_________________________________
Yevgeny Fundler





Exhibit 31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Jeffrey S. Hollister, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of American Railcar Industries, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:
May 5, 2014
 
/s/ Jeffrey S. Hollister
 
 
 
Jeffrey S. Hollister, President and Interim Chief Executive Officer






Exhibit 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Dale C. Davies, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of American Railcar Industries, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:
May 5, 2014
 
/s/ Dale C. Davies
 
 
 
Dale C. Davies, Senior Vice President,
Chief Financial Officer and Treasurer





Exhibit 32.1
 
Certification Pursuant to Rule 13a-14 (b) of the Securities Exchange Act of 1934 and
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350 (a) and (b))

I, Jeffrey S. Hollister, President and Interim Chief Executive Officer of American Railcar Industries, Inc. (the “Company”) certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that, to my knowledge:
1.
the quarterly report on Form 10-Q of the Company for the three months ended March 31, 2014 (the “Quarterly Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
May 5, 2014
 
/s/ Jeffrey S. Hollister
 
 
 
Jeffrey S. Hollister, President and Interim Chief Executive Officer
I, Dale C. Davies, Senior Vice President, Chief Financial Officer, and Treasurer of American Railcar Industries, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that, to my knowledge:
1.
the quarterly report on Form 10-Q of the Company for the three months ended March 31, 2014 (the “Quarterly Report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
May 5, 2014
 
/s/ Dale C. Davies
 
 
 
Dale C. Davies, Senior Vice President,
Chief Financial Officer and Treasurer
A signed original of these written statements required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.