American Railcar Industries, Inc.
American Railcar Industries, Inc. (Form: 10-Q, Received: 10/31/2014 06:03:42)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 30, 2014 was 21,352,297 shares.
 


Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC.
INDEX TO FORM 10-Q
 
Item Number
Page
Number
 
 
 
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013
 
 
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2014 and 2013
 
 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2014 and 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibit 10.1
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 32.1
 
EX-101 INSTANCE DOCUMENT
 
EX-101 SCHEMA DOCUMENT
 
EX-101 CALCULATION LINKBASE DOCUMENT
 
EX-101 LABELS LINKBASE DOCUMENT
 
EX-101 PRESENTATION LINKBASE DOCUMENT
 
EX-101 DEFINITION LINKBASE DOCUMENT
 


2

Table of Contents




AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
September 30,
2014
 
December 31,
2013
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
99,453

 
$
97,252

Restricted cash
7,217

 
3,908

Accounts receivable, net
29,006

 
21,939

Accounts receivable, due from related parties
25,105

 
16,402

Inventories, net
105,352

 
90,185

Deferred tax assets
8,941

 
9,060

Prepaid expenses and other current assets
4,949

 
6,500

Total current assets
280,023

 
245,246

Property, plant and equipment, net
159,334

 
159,375

Railcars on operating leases, net
548,836

 
372,551

Deferred debt issuance costs, net
2,254

 
2,026

Goodwill
7,169

 
7,169

Investments in and loans to joint ventures
28,231

 
31,430

Other assets
4,077

 
7,812

Total assets
$
1,029,924

 
$
825,609

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
73,397

 
$
52,772

Accounts payable, due to related parties
2,948

 
1,410

Accrued expenses and taxes
24,780

 
20,216

Accrued compensation
15,737

 
16,071

Current portion of long-term debt
10,612

 
6,655

Total current liabilities
127,474

 
97,124

Long-term debt, net of current portion
300,995

 
188,103

Deferred tax liability
110,516

 
99,212

Pension and post-retirement liabilities
3,943

 
4,718

Other liabilities
2,437

 
2,550

Total liabilities
545,365

 
391,707

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 50,000,000 shares authorized, 21,352,297 shares issued and outstanding as of September 30, 2014 and December 31, 2013
213

 
213

Additional paid-in capital
239,609

 
239,609

Retained earnings
246,762

 
195,574

Accumulated other comprehensive loss
(2,025
)
 
(1,494
)
Total stockholders’ equity
484,559

 
433,902

Total liabilities and stockholders’ equity
$
1,029,924

 
$
825,609

See Notes to the Condensed Consolidated Financial Statements.

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Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Manufacturing (including revenues from affiliates of $62,698 and $195,068 for the three and nine months ended September 30, 2014, respectively, and $65,678 and $148,660 for the same periods in 2013)
$
128,270

 
$
170,943

 
$
488,597

 
$
476,160

Railcar Leasing
17,219

 
8,301

 
42,850

 
22,371

Railcar Services (including revenues from affiliates of $4,912 and $13,574 for the three and nine months ended September 30, 2014, respectively, and $4,307 and $13,461 for the same periods in 2013)
17,353

 
19,655

 
51,019

 
54,882

Total revenues
162,842

 
198,899

 
582,466

 
553,413

Cost of revenues:
 
 
 
 
 
 
 
Manufacturing
(95,609
)
 
(136,974
)
 
(374,007
)
 
(371,806
)
Railcar Leasing
(6,319
)
 
(3,524
)
 
(16,192
)
 
(9,729
)
Railcar Services
(14,065
)
 
(15,614
)
 
(40,854
)
 
(43,063
)
Total cost of revenues
(115,993
)
 
(156,112
)
 
(431,053
)
 
(424,598
)
Gross profit
46,849

 
42,787

 
151,413

 
128,815

Selling, general and administrative
(7,570
)
 
(7,161
)
 
(23,777
)
 
(22,091
)
Earnings from operations
39,279

 
35,626

 
127,636

 
106,724

Interest income (including income from related parties of $603 and $1,843 for the three and nine months ended September 30, 2014, respectively, and $669 and $2,026 for the same periods in 2013)
608

 
672

 
1,868

 
2,042

Interest expense
(1,849
)
 
(1,512
)
 
(5,364
)
 
(5,853
)
Loss on debt extinguishment

 

 
(1,896
)
 
(392
)
Other income
63

 
16

 
95

 
2,024

Earnings (Loss) from joint ventures
3

 
(505
)
 
(263
)
 
(2,282
)
Earnings before income taxes
38,104

 
34,297

 
122,076

 
102,263

Income tax expense
(14,280
)
 
(13,327
)
 
(45,266
)
 
(39,737
)
Net earnings
$
23,824

 
$
20,970

 
$
76,810

 
$
62,526

Net earnings per common share—basic and diluted
$
1.12

 
$
0.98

 
$
3.60

 
$
2.93

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

 
21,352

 
21,352

 
21,352

Cash dividends declared per common share
$
0.40

 
$
0.25

 
$
1.20

 
$
0.75

See Notes to the Condensed Consolidated Financial Statements.


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Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net earnings
$
23,824

 
$
20,970

 
$
76,810

 
$
62,526

Currency translation
(590
)
 
262

 
(632
)
 
(396
)
Postretirement plans
55

 
46

 
165

 
140

Short-term investments

 

 

 
(1,213
)
Comprehensive income
$
23,289

 
$
21,278

 
$
76,343

 
$
61,057

See Notes to the Condensed Consolidated Financial Statements.


5

Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)  
 
Nine Months Ended
 
September 30,
 
2014
 
2013
Operating activities:
 
 
 
Net earnings
$
76,810

 
$
62,526

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
24,423

 
20,433

Amortization of deferred costs
363

 
486

(Gain) loss on disposal of property, plant, equipment and leased railcars
(72
)
 
75

Loss from joint ventures
263

 
2,282

Provision for deferred income taxes
11,182

 
23,997

Provision for allowance for doubtful accounts receivable
905

 
14

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
(7,987
)
 
5,329

Accounts receivable, due from related parties
(8,764
)
 
(9,315
)
Inventories, net
(15,235
)
 
7,994

Prepaid expenses and other current assets
(1,734
)
 
(30
)
Accounts payable
20,634

 
(6,927
)
Accounts payable, due to related parties
1,538

 
(1,345
)
Accrued expenses and taxes
4,432

 
16,483

Other
3,007

 
(4,224
)
Net cash provided by operating activities
111,661

 
118,029

Investing activities:
 
 
 
Purchases of property, plant and equipment
(13,701
)
 
(15,343
)
Capital expenditures - leased railcars
(187,861
)
 
(108,314
)
Proceeds from the sale of property, plant, equipment and leased railcars
575

 
2

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

 
12,699

Proceeds from repayments of loans by joint ventures
2,875

 
2,100

Investments in and loans to joint ventures

 
(136
)
Net cash used in investing activities
(198,112
)
 
(108,992
)
Financing activities:
 
 
 
Repayments of long-term debt
(201,833
)
 
(178,424
)
Proceeds from long-term debt
318,682

 
99,841

Change in interest reserve related to long-term debt
(26
)
 
(3,965
)
Payment of common stock dividends
(25,623
)
 
(16,014
)
Debt issuance costs
(2,425
)
 
(432
)
Net cash provided by (used in) financing activities
88,775

 
(98,994
)
Effect of exchange rate changes on cash and cash equivalents
(123
)
 
(68
)
Increase (Decrease) in cash and cash equivalents
2,201

 
(90,025
)
Cash and cash equivalents at beginning of period
97,252

 
205,045

Cash and cash equivalents at end of period
$
99,453

 
$
115,020


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 disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The consolidated balance sheet as of December 31, 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.
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 I). 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. All intercompany transactions and balances have been eliminated. In addition, subsequent to the reporting period, the Company added Longtrain Leasing II, LLC (Longtrain Leasing II). See Note 18, Subsequent Events, for further discussion on the nature of this subsidiary.
Note 2 — Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) . ASU 2014-09 supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) , and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new revenue recognition standard also requires disclosures that sufficiently describe the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and is to be applied retrospectively, or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the new standard, but does not, at this time, anticipate a material impact to the financial statements once implemented.
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, which had been purchased in the open market, for approximately $12.7 million . This resulted 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 nine months ended September 30, 2013 .
Note 4 — Accounts Receivable, net
Accounts receivable, net, consist of the following:  
 
September 30,
2014
 
December 31,
2013
 
(in thousands)
Accounts receivable, gross
$
30,019

 
$
22,048

Less allowance for doubtful accounts
(1,013
)
 
(109
)
Total accounts receivable, net
$
29,006

 
$
21,939



7


Note 5 — Inventories
Inventories consist of the following:  
 
September 30,
2014
 
December 31,
2013
 
(in thousands)
Raw materials
$
73,385

 
$
63,319

Work-in-process
14,775

 
19,975

Finished products
19,843

 
9,205

Total inventories
108,003

 
92,499

Less reserves
(2,651
)
 
(2,314
)
Total inventories, net
$
105,352

 
$
90,185

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:  
 
September 30,
2014
 
December 31,
2013
 
(in thousands)
Operations / Corporate:
 
 
 
Buildings
$
162,106

 
$
155,937

Machinery and equipment
192,686

 
186,844

Land
3,537

 
3,335

Construction in process
12,895

 
14,487

 
371,224

 
360,603

Less accumulated depreciation
(211,890
)
 
(201,228
)
Property, plant and equipment, net
$
159,334

 
$
159,375

Railcar Leasing:
 
 
 
Railcars on operating leases
$
575,588

 
$
388,060

Less accumulated depreciation
(26,752
)
 
(15,509
)
Railcars on operating leases, net
$
548,836

 
$
372,551

Railcars on operating 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 September 30, 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 3 months of 2014
$
20,777

2015
59,243

2016
57,525

2017
43,376

2018
31,475

2019 and thereafter
47,670

Total
$
260,066


8


Depreciation expense
The following table summarizes depreciation expense:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Total depreciation expense
$
8,751

 
$
7,038

 
$
24,423

 
$
20,433

Depreciation expense on leased railcars
$
4,295

 
$
2,573

 
$
11,285

 
$
6,988

Note 7 — Goodwill
As of September 30, 2014, the Company had $7.2 million of goodwill related to the March 2006 acquisition of Custom Steel; a subsidiary of Steel Technologies, Inc. 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 an earlier 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.
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

9


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.
Note 8 — Investments in and Loans to Joint Ventures
As of September 30, 2014 , the Company was party to two joint ventures: Ohio Castings Company LLC (Ohio Castings) and Axis LLC (Axis). Through its wholly-owned subsidiary, Castings, the Company has a 33.3% ownership interest in Ohio Castings, a limited liability company formed to produce various steel railcar parts for use or sale by the ownership group. Through its wholly-owned subsidiary, ARI Component, the Company has a 41.9% ownership interest in Axis, a limited liability company formed to produce railcar axles for use or sale by the ownership group.
The Company 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 $2.0 million and $4.0 million for the three and nine months ended September 30, 2013 , respectively.
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:  
 
September 30,
2014
 
December 31,
2013
 
(in thousands)
Carrying amount of investments in and loans to joint ventures
 
 
 
Ohio Castings
$
8,551

 
$
7,378

Axis
19,680

 
24,052

Total investments in and loans to joint ventures
$
28,231

 
$
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 determined that, although the joint venture is a variable interest entity (VIE), accounting for its activity under the equity method is appropriate given that the Company is not the primary beneficiary, does not have a controlling financial interest and does not have the ability to individually direct the activities of Ohio Castings that most significantly impact its economic performance. The significant factors in this determination were that neither Castings nor the Company, has rights to the majority of returns, losses or votes, all major and strategic decisions are decided between the partners, and the risk of loss to Castings and the Company is limited to the Company’s investment through Castings.
Summary financial results for Ohio Castings, the investee company, in total, are as follows:  
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
24,717

 
$
15,199

 
$
60,981

 
$
42,481

Gross profit
$
2,961

 
$
1,334

 
$
5,896

 
$
2,239

Net earnings (loss)
$
3,085

 
$
1,445

 
$
4,412

 
$
1,096



10


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), whereby ARI and the other significant partner are equal lenders, principal payments are due each fiscal quarter, with the last payment due on December 31, 2019. During 2013 and 2014, the applicable interest rate for the loans under the Axis Credit Agreement was 7.75% . Interest payments are due and payable monthly.
The balance outstanding on these loans, including interest, due to ARI Component, was $30.0 million as of September 30, 2014 and $32.9 million as of December 31, 2013 .
The Company has determined that, although the joint venture is a VIE, accounting for its activity under the equity method is appropriate given that the Company is not the primary beneficiary, does not have a controlling financial interest and does not have the ability to individually direct the activities of Axis that most significantly impact its economic performance. The significant factors in this determination were that the Company and ARI Component 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 ARI Component is limited to its investment in Axis and the loans due to the Company under the Axis Credit Agreement. The Company also considered the factors that most significantly impact Axis’ economic performance and determined that ARI does not have the power to individually direct the majority of those activities.
Summary financial results for Axis, the investee company, in total, are as follows:  
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
16,614

 
$
15,309

 
$
49,690

 
$
38,385

Gross profit
$
(610
)
 
$
2,002

 
$
904

 
$
3,461

Earnings before interest
$
(843
)
 
$
1,789

 
$
180

 
$
2,770

Net earnings (loss)
$
(2,051
)
 
$
445

 
$
(3,523
)
 
$
(1,298
)
Axis has experienced increased demand during the three and nine months ended September 30, 2014; however, it has also experienced unanticipated interruptions and incurred additional costs in its efforts to meet customer demand.
As of September 30, 2014 , the investment in Axis was comprised entirely of ARI’s term loan and revolver. The Company has evaluated these loans to be fully recoverable. The Company will continue to monitor its investment in Axis for impairment.

11


Note 9 — Warranties
The overall change in the Company’s warranty reserve is reflected on the condensed consolidated balance sheet in accrued expenses and taxes and is detailed as follows:  
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Liability, beginning of period
$
1,654

 
$
1,519

 
$
1,385

 
$
1,374

Provision for warranties issued during the year, net of
     adjustments
335

 
226

 
931

 
1,103

Adjustments to warranties issued during previous
     years
(97
)
 
(314
)
 
(120
)
 
(710
)
Warranty claims
(248
)
 
(144
)
 
(552
)
 
(480
)
Liability, end of period
$
1,644

 
$
1,287

 
$
1,644

 
$
1,287

Note 10 — Long-term Debt
2012 Lease Fleet Financing
In December 2012, Longtrain Leasing I 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 I. 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 Original Term Loan, fully utilizing its capacity. 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 Original 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 .
January 2014 Lease Fleet Refinancing
On January 15, 2014 (Closing Date), Longtrain Leasing I 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 I 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. As of September 30, 2014 , the outstanding principal balance on the Refinanced Term Loan, including the current portion, was $311.6 million .
The fair value of the Company's borrowings under its lease fleet financing facility was $311.6 million and $194.8 million as of September 30, 2014 and December 31, 2013 , respectively, and is based upon estimates by various banks determined by trading levels on the date of measurement using a Level 2 fair value measurement as defined by U.S. GAAP under the fair value hierarchy.
The terms of the Amended and Restated Credit Agreement also provided Longtrain Leasing I with the right, but not the obligation, within the 90 day period ended on October 15, 2014, 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. Longtrain Leasing I did not exercise this right. However, the Company, through Longtrain Leasing II, entered into a lease fleet financing facility as further discussed in Note 18, Subsequent Events.
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 September 30, 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

12


payments. As of both September 30, 2014 and December 31, 2013 , the interest reserve amount was $3.9 million and included within 'Restricted cash' on the condensed consolidated balance sheet. The Refinanced Term Loan may be prepaid at Longtrain Leasing I’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 I 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 I, which are customarily applicable to senior secured facilities. Key covenants include limitations on Longtrain Leasing I’s indebtedness, liens, investments, acquisitions, asset sales, redemption payments, and affiliate and extraordinary transactions; full cash sweep; covenants relating to the maintenance of Longtrain Leasing I as a separate legal entity; financial and other reporting and periodic appraisals; maintenance of railcars, leases, and other assets; and Longtrain Leasing I’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 I 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 transferred to Longtrain Leasing I without any adverse selection, to cause American Railcar Leasing LLC (ARL), as the manager, to maintain, lease, and re-lease Longtrain Leasing I’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 September 30, 2014 .
The Refinanced Term Loan is secured by a first lien on substantially all assets of Longtrain Leasing I, consisting of railcars, railcar leases, receivables and related assets, subject to borrowing base calculations and limited exceptions. As of September 30, 2014 , the net book value of the railcars that were pledged as part of the Refinanced Term Loan was $306.4 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 September 30, 2014 are as follows (in thousands):  
Remaining 3 months of 2014
$
9,051

2015
35,862

2016
35,074

2017
26,433

2018
16,984

2019 and thereafter
31,649

Total
$
155,053

The remaining principal payments under the Amended and Restated Credit Agreement as of September 30, 2014 are as follows (in thousands):  
Remaining 3 months of 2014
$
2,653

2015
10,612

2016
10,612

2017
10,612

2018
13,703

2019 and thereafter
263,415

Total
$
311,607

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). The Notes bore interest at a fixed interest rate of 7.5% .

13


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.
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.
Note 11 — Income Taxes
The Company’s federal income tax returns for tax years 2010 and beyond remain subject to examination, with the latest statute of limitations 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 2010 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 condition or results of operations.
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, however, 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Service cost
$
56

 
$
49

 
$
170

 
$
148

Interest cost
243

 
221

 
728

 
662

Expected return on plan assets
(313
)
 
(279
)
 
(939
)
 
(836
)
Amortization of net actuarial loss/prior service cost
69

 
194

 
208

 
582

Net periodic cost recognized
$
55

 
$
185

 
$
167

 
$
556

 
 
Postretirement Benefits
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Service cost
$

 
$

 
$

 
$
1

Interest cost

 
1

 
2

 
3

Amortization of net actuarial gain/prior service credit
(14
)
 
(117
)
 
(43
)
 
(351
)
Net periodic benefit recognized
$
(14
)
 
$
(116
)
 
$
(41
)
 
$
(347
)
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 $0.3 million and $0.2 million for the three months ended September 30, 2014 and 2013 , respectively, and $0.7 million for each of the nine months ended September 30, 2014 and 2013 .

14


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 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 Company’s principal beneficial stockholder through Icahn Enterprises L.P. (IELP). Substantially all of the issues identified with respect to these properties relate to the use of these properties prior to their transfer to ARI by ACF and for which ACF has retained liability for environmental contamination that may have existed at the time of transfer to ARI. ACF has also agreed to indemnify ARI for any cost that might be incurred with those existing issues. As of the date of this report, 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 following table presents the amounts incurred by ARI for share-based compensation, or stock appreciation rights (SARs) and the corresponding line items on the condensed consolidated statements of operations that they are classified within:  
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Share-based compensation expense
 
 
 
 
 
 
 
Cost of revenues: Manufacturing
$
239

 
$
195

 
$
1,002

 
$
689

Cost of revenues: Railcar Services
13

 
70

 
251

 
102

Selling, general and administrative
288

 
900

 
3,259

 
3,449

Total share-based compensation expense
$
540

 
$
1,165

 
$
4,512

 
$
4,240

As of September 30, 2014 , unrecognized compensation costs related to the unvested portion of SARs were estimated to be $1.9 million and were expected to be recognized over a weighted average period of 26 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).  

15


 
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

 
(396
)
 

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

 

 

 
93

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

 

 
140

 
140

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

 

 
(1,306
)
Balance September 30, 2013
$

 
$
1,166

 
$
(3,022
)
 
$
(1,856
)
 
 
 
 
 
 
 
 
Balance December 31, 2013
$

 
$
760

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

 
(632
)
 

 
(632
)
Reclassifications related to pension and
     postretirement plans, net of tax effect of $64 (1)

 

 
101

 
101

Balance September 30, 2014
$

 
$
128

 
$
(2,153
)
 
$
(2,025
)
 
(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 the following agreements with ACF, a company controlled by Mr. Carl Icahn, the Company’s principal beneficial stockholder through IELP:
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. ARI purchased $1.3 million and $2.2 million of components from ACF during the three and nine months ended September 30, 2014 , respectively and less than $0.1 million during both comparable periods in 2013 . The agreement automatically renews unless written notice is provided by the Company.
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 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. In August 2014, ARI and ACF amended this agreement to, among other things, extend the termination date from December 31, 2014 to December 31, 2015, subject to certain early termination events.
In consideration of the services and license provided by ARI to ACF in conjunction with the agreement, ACF pays ARI a royalty and, if any, a share of the net profits (Profits) earned on each railcar manufactured and sold by ACF under the agreement, in an aggregate amount equal to 30 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

16


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, 2015. 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 $4.3 million and $16.1 million for the three and nine months ended September 30, 2014 , respectively, compared to $3.4 million and $6.6 million for the same periods in 2013 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 IELP Entities
The Company has or had the following agreements with companies controlled by Mr. Carl Icahn, the Company’s principal beneficial stockholder through IELP, including, but not limited to, ARL and/or ARL's wholly-owned subsidiary, AEP Leasing LLC (collectively, the IELP Entities):
Railcar services agreement
In April 2011, the Company entered into a railcar services agreement with ARL (the Railcar Services Agreement). Under the Railcar Services Agreement, ARI provides ARL railcar repair, engineering, administrative and other services, on an as needed basis, for ARL’s lease fleet at mutually agreed upon prices. The Railcar Services Agreement 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 $4.9 million and $13.6 million for the three and nine months ended September 30, 2014 , respectively, compared to $4.3 million and $13.5 million for the same periods in 2013 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 I entered into a similar agreement with ARL. In January 2014, Longtrain Leasing I 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 I'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 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 $1.6 million and $3.4 million for the three and nine months ended September 30, 2014 , respectively, compared to $0.6 million and $1.6 million for the same periods in 2013 . These fees are included in cost of revenues for railcar leasing on the condensed consolidated statements of operations. Sales commissions of $0.2 million and $0.4 million were incurred for each of the three and nine months ended September 30, 2014 , respectively, compared to $0.1 million and $0.3 million for the same periods in 2013. These costs are included in selling, general and administrative costs on the condensed consolidated statements of operations.

17


Railcar orders
The Company has from time to time manufactured and sold railcars to the IELP Entities under long-term agreements as well as on a purchase order basis. Revenues from railcars sold to the IELP Entities were $54.1 million and $179.0 million for the three and nine months ended September 30, 2014 , respectively, compared to $62.4 million and $142.0 million for the same periods in 2013 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 2007. During 2009, the Company and the other significant 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 $30.0 million and $32.9 million as of September 30, 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, the Company’s principal beneficial stockholder through IELP. 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 $2.4 million and $6.7 million for the three and nine months ended September 30, 2014 , respectively, compared to $1.5 million and $4.8 million for the same periods in 2013 . 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 and nine months ended September 30, 2014 and 2013, the Company incurred less than $0.1 million in fees as a member of Insight Portfolio Group. These charges are 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 Portfolio 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 $33.5 million and $93.9 million for the three and nine months ended September 30, 2014 , respectively, compared to $23.5 million and $63.6 million for the same periods in 2013 for railcar components purchased from joint ventures.
Inventory as of September 30, 2014 and December 31, 2013 , included $5.9 million and $6.2 million , respectively, of railcar components purchased from joint ventures and all profit for this inventory still on hand was eliminated.
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.

18


Earnings from operations for manufacturing include an allocation of selling, general and administrative costs, as well as profit for railcars manufactured for the Company’s railcar leasing segment based on revenue determined as described above.
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 consists of railcar repair services provided through the Company's various repair facilities, including mini-shops and mobile units, offering a range of services from full to light repair. Earnings from operations for railcar services include an allocation of selling, general and administrative costs.

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

 
Revenues
 
Earnings (Loss) from Operations
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
(in thousands)
Three Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
128,270

 
$
143,706

 
$
271,976

 
$
30,696

 
$
44,017

 
$
74,713

Railcar Leasing
17,219

 

 
17,219

 
9,473

 
(7
)
 
9,466

Railcar Services
17,353

 
38

 
17,391

 
2,674

 
10

 
2,684

Corporate/Eliminations

 
(143,744
)
 
(143,744
)
 
(3,564
)
 
(44,020
)
 
(47,584
)
Total Consolidated
$
162,842

 
$

 
$
162,842

 
$
39,279

 
$

 
$
39,279

Three Months Ended September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
170,943

 
$
34,824

 
$
205,767

 
$
32,075

 
$
9,633

 
$
41,708

Railcar Leasing
8,301

 

 
8,301

 
4,155

 
5

 
4,160

Railcar Services
19,655

 
31

 
19,686

 
3,292

 
(13
)
 
3,279

Corporate/Eliminations

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

 
$

 
$
198,899

 
$
35,626

 
$

 
$
35,626

Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
488,597

 
$
269,040

 
$
757,637

 
$
108,948

 
$
83,374

 
$
192,322

Railcar Leasing
42,850

 

 
42,850

 
23,102

 
(40
)
 
23,062

Railcar Services
51,019

 
222

 
51,241

 
7,971

 
58

 
8,029

Corporate/Eliminations

 
(269,262
)
 
(269,262
)
 
(12,385
)
 
(83,392
)
 
(95,777
)
Total Consolidated
$
582,466

 
$

 
$
582,466

 
$
127,636

 
$

 
$
127,636

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

 
$
135,315

 
$
611,475

 
$
98,834

 
$
29,541

 
$
128,375

Railcar Leasing
22,371

 

 
22,371

 
9,963

 
17

 
9,980

Railcar Services
54,882

 
126

 
55,008

 
9,680

 
(11
)
 
9,669

Corporate/Eliminations

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

 
$

 
$
553,413

 
$
106,724

 
$

 
$
106,724


19


 
Total Assets
September 30,
2014
 
December 31,
2013
 
(in thousands)
Manufacturing
$
327,816

 
$
298,951

Railcar Leasing
746,340

 
478,000

Railcar Services
53,739

 
52,150

Corporate/Eliminations
(97,971
)
 
(3,492
)
Total Consolidated
$
1,029,924

 
$
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Manufacturing
38.5
%
 
32.9
%
 
33.5
%
 
26.8
%
Railcar Leasing
%
 
%
 
%
 
%
Railcar Services
3.0
%
 
2.2
%
 
2.3
%
 
2.4
%
Sales and Credit Concentration
Manufacturing revenues from customers that accounted for more than 10% of total consolidated revenues are outlined in the table below. The railcar leasing and railcar services segments had no customers that accounted for more than 10% of the total consolidated revenues for the three and nine months ended September 30, 2014 and 2013 .
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Manufacturing revenues from significant customers
51.3
%
 
67.2
%
 
44.9
%
 
62.8
%
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 September 30, 2014 and December 31, 2013 .
 
September 30,
2014
 
December 31,
2013
Manufacturing receivables from significant customers
43.0
%
 
22.6
%
Note 18 — Subsequent Events
On October 16, 2014 (the Closing Date), the Company, through its wholly-owned subsidiary, Longtrain Leasing II, entered into a lease fleet financing facility for $100.0 million under a term loan agreement (Term Loan Facility), to support the growth of its leasing business. The Term Loan Facility matures in April 2015. The Term Loan Facility is the obligation of Longtrain Leasing II, is generally non-recourse to ARI, and is secured by a first lien on substantially all assets of Longtrain Leasing II, consisting of railcars, railcar leases, receivables and related assets, subject to limited exceptions.

20


Subject to the provisions of the Term Loan Facility, the principal borrowed thereunder (the Loan) accrues interest at a rate determined by reference to an index or, subject to certain circumstances, at a base rate. For the portion of the Loan accruing interest at a rate determined by reference to an index, (i) except during a period when the lender for such portion of the Loan is funding and maintaining such portion of the Loan through the issuance of or other financing arrangement in respect of commercial paper, the sum of LIBOR (as determined under the Term Loan Facility) for such period plus the Applicable Margin (described below), and (ii) during a period when the lender for such portion of the Loan is funding and maintaining such portion of the Loan through the issuance of or other financing arrangement in respect of commercial paper, the sum of the applicable commercial paper rate (the CP Rate as determined under the Term Loan Facility) plus the Applicable Margin (described below). From and including the Closing Date and through and including the date that is six months from the Closing Date, the Applicable Margin is equal to a rate per annum of 1.45% . Thereafter, the Applicable Margin increases to a rate per annum equal to 2.95% . The interest rate increases by 2.0% following certain defaults. For the portion of the Loan accruing interest at the base rate, the interest rate is the higher of the federal funds rate designated by the Term Loan Facility, plus 0.5% , or the prime rate designated by the Term Loan Facility. Principal and interest payments are due monthly, with any remaining balance payable on the scheduled maturity date.
On October 28, 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 December 12, 2014 that will be paid on December 19, 2014 .



21


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act), including statements regarding our plans, objectives, expectations and intentions. Such statements include, without limitation, statements regarding various estimates we have made in preparing our financial statements, statements regarding expected future trends relating to our industry, potential regulatory developments, 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, short- and long-term liquidity needs and financing 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 plans regarding future dividends and the anticipated performance and capital requirements of our joint ventures. These forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those anticipated.
Risks and uncertainties that could adversely affect our business and prospects include without limitation:
our prospects in light of the cyclical nature of our business;
the impact of an economic downturn, adverse market conditions and restricted credit markets;
the health of and prospects for the overall railcar industry;
the highly competitive nature of the manufacturing, railcar leasing and railcar services industries;
the variable purchase patterns of our railcar customers and the timing of completion, customer acceptance and shipment of orders;
our ability to manage overhead and variations in production rates;
our ability to recruit, retain and train adequate numbers of qualified personnel;
our reliance upon a small number of customers that represent a large percentage of our revenues and backlog;
fluctuations in the costs of raw materials, including steel and railcar components, and delays in the delivery of such raw materials and components;
fluctuations in the supply of components and raw materials we use in railcar manufacturing;
the ongoing benefits and risks related to our relationship with Mr. Carl Icahn, our principal beneficial stockholder through Icahn Enterprises L.P. (IELP), and certain of his affiliates;
the risk of being unable to market or remarket railcars for sale or lease at favorable prices or on favorable terms or at all;
the sufficiency of our liquidity and capital resources, including long-term capital needs to further support the growth of our lease fleet;
the impact, costs and expenses of any litigation we may be subject to now or in the future;
risks associated with ongoing compliance with environmental, health, safety, and regulatory laws and regulations, which may be subject to change;
the conversion of our railcar backlog into revenues;
the risks associated with our current joint ventures and anticipated capital needs of, and production at our joint ventures;
the risks, impact and anticipated benefits associated with potential joint ventures, acquisitions or new business endeavors;
the implementation, integration with other systems or ongoing management of our new enterprise resource planning system; and
risks related to our indebtedness and compliance with covenants contained in our financing arrangement.



22

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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 consists of railcar repair services provided through our various repair facilities, including mini-shops and mobile units, offering a range of services from full to light repair.
The North American railcar market has been, and we expect it to continue to be, highly cyclical. The railcar market continues to experience high levels of demand with industry backlog at its highest point in over two decades. Demand for hopper railcars continues to rise as the market has strengthened. Consistent with industry expectations, we believe strong demand for hopper railcars will continue for the next several quarters. Additionally, tank railcar deliveries continue at strong levels. Potential regulations related to tank railcars in the U.S. and Canada, if adopted, likely would impact future new railcar production rates and orders from our customers, as well as require retrofit and maintenance work to existing railcars, which we believe ARI is well-positioned to support. We cannot assure you that hopper or tank railcar demand will continue at strong levels, that demand for any railcar types will improve, or that our railcar backlog, orders or shipments will track industry-wide trends. Similarly, we cannot assure you of the scope, timing or impact of any potential regulatory change affecting the North American railcar industry.
In the third quarter of 2014, we experienced another quarter of increasing backlog. As of September 30, 2014 , our new railcar backlog reached its highest point since December 2007 at 11,418 railcars, including 2,654 railcars ( 23% ) for lease customers. In response to changes in customer demand, we continue to adjust production rates as needed at our railcar manufacturing facilities. Our ability to sustain high production volumes at our tank railcar facility, effectively ramp up production at our hopper railcar facility, and improve efficiencies at other facilities contributed to our strong results, with competitive consolidated operating margins of 24.1% and 21.9% for the three and nine months ended September 30, 2014 . We believe our production processes to be very efficient at producing high quality railcars, which has yielded increasing consolidated operating margins throughout 2014.
During the third quarter of 2014, we shipped 2,151 railcars, which is 31% higher than that of the same period in 2013. Railcars built for the Company's lease fleet represented 52% of ARI’s total railcar shipments during the third quarter of 2014 compared to 17% for the same period in 2013 . This resulted in a lower level of direct sale shipments as compared to recent quarters. We continue to be strategic in our selection of orders for railcars that will be added to our lease fleet versus direct sale. We currently expect that, during the fourth quarter of 2014, more of our railcar shipments will be for our lease fleet than for direct sale. Because revenues and earnings related to leased railcars are recognized over the life of the lease, our quarterly results may vary depending on the mix of lease versus direct sale railcars that we ship during a given period.
To further diversify our business, we remain committed to the growth of our lease fleet and are evaluating opportunities within our repair network to increase capacity or expand to new locations to meet increasing demand for retrofits, tank certifications, and railcar maintenance. During the third quarter of 2014, our Brookhaven, Mississippi repair plant became operational. In addition, we are currently expanding two of our existing repair plants. We expect these projects will be completed in 2015, thus further expanding our capacity for repair projects.

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RESULTS OF OPERATIONS
Three and nine months ended September 30, 2014 compared to three and nine months ended September 30, 2013
Consolidated Results
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
$
 
%
 
September 30,
 
$
 
%
 
2014
 
2013
 
Change
 
Change
 
2014
 
2013
 
Change
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
128,270

 
$
170,943

 
$
(42,673
)
 
(25.0
)
 
$
488,597

 
$
476,160

 
$
12,437

 
2.6

Railcar leasing
17,219

 
8,301

 
8,918

 
107.4

 
42,850

 
22,371

 
20,479

 
91.5

Railcar services
17,353

 
19,655

 
(2,302
)
 
(11.7
)
 
51,019

 
54,882

 
(3,863
)
 
(7.0
)
Total revenues
$
162,842

 
$
198,899

 
$
(36,057
)
 
(18.1
)
 
$
582,466

 
$
553,413

 
$
29,053

 
5.2

Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
(95,609
)
 
$
(136,974
)
 
$
41,365

 
30.2

 
$
(374,007
)
 
$
(371,806
)
 
$
(2,201
)
 
(0.6
)
Railcar leasing
(6,319
)
 
(3,524
)
 
(2,795
)
 
(79.3
)
 
(16,192
)
 
(9,729
)
 
$
(6,463
)
 
(66.4
)
Railcar services
(14,065
)
 
(15,614
)
 
1,549

 
9.9

 
(40,854
)
 
(43,063
)
 
$
2,209

 
5.1

Total cost of revenues
$
(115,993
)
 
$
(156,112
)
 
$
40,119

 
25.7

 
$
(431,053
)
 
$
(424,598
)
 
$
(6,455
)
 
(1.5
)
Selling, general and administrative
(7,570
)
 
(7,161
)
 
(409
)
 
(5.7
)
 
(23,777
)
 
(22,091
)
 
(1,686
)
 
(7.6
)
Earnings from operations
$
39,279

 
$
35,626

 
$
3,653

 
10.3

 
$
127,636

 
$
106,724

 
$
20,912

 
19.6

Revenues
Our total consolidated revenues for the three months ended September 30, 2014 decreased by 18.1% compared to the same period in 2013 . This decrease was due to decreased revenues in our manufacturing and railcar services segments, partially offset by higher railcar leasing revenues. During the three months ended September 30, 2014 , we shipped 1,034 direct sale railcars, which excludes 1,117 railcars ( 51.9% of total shipments) built for our lease fleet, compared to 1,360 direct sale railcars for the same period of 2013 , which excludes 280 railcars ( 17.1% of total shipments) built for our lease fleet.
Our total consolidated revenues for the nine months ended September 30, 2014 increased by 5.2% compared to the same period in 2013 . This increase was due to increased revenues in our manufacturing and railcar leasing segments, partially offset by lower railcar services revenues. During the nine months ended September 30, 2014 , we shipped 3,834 direct sale railcars, which excludes 2,067 railcars ( 35.0% of total shipments) built for our lease fleet, compared to 3,660 direct sale railcars for the same period of 2013 , which excludes 1,190 railcars ( 24.5% of total shipments) built for our lease fleet.
Manufacturing revenues decreased by 25.0% during the three month period ended September 30, 2014 compared to the same period in 2013. The change during the quarter was a result of multiple factors. As discussed above, during the third quarter of 2014 we shipped 326 fewer railcars for direct sale than during the same period in 2013, accounting for 26.1% of the total decrease in manufacturing revenues. This decrease was partially offset by an increase of 1.1% related to higher revenues from certain material cost changes that we generally pass through to customers, as discussed below. While production of tank railcars continues at strong levels, a higher percentage of tank railcars were built for our lease fleet during the third quarter of 2014 compared to the same period of 2013, with the related revenues being eliminated in consolidation, as discussed below. In contrast, as the hopper railcar market has strengthened, hopper railcar shipments for direct sale increased in the third quarter of 2014 compared to the same period in 2013. Hopper railcars generally sell at lower prices than tank railcars due to less material and labor content. Because revenues and earnings related to leased railcars are recognized over the life of the lease, our quarterly results may vary depending on the mix of lease versus direct sale railcars that we ship during a given period.
Manufacturing revenues increased by 2.6% during the nine month period ended September 30, 2014 compared to the same period in 2013. The change in manufacturing revenues during the first nine months of the year was due to a 0.2% increase resulting from higher volumes of railcar shipments for direct sale, as discussed above, and an increase of 2.4% due to higher revenues from certain material cost changes that we generally pass through to customers, as discussed below.

24

Table of Contents

Leasing revenues increased by 107.4% and 91.5% during the three and nine months ended September 30, 2014 , respectively, compared to the same periods 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 3,780 railcars at September 30, 2013 to 6,508 railcars at September 30, 2014 .

Railcar services revenues decreased by 11.7% and 7.0% during the three and nine months ended September 30, 2014 , respectively, compared to the same periods in 2013. Revenue decreased for the three and nine months ended September 30, 2014 compared to the same periods in 2013 due to certain repair projects being performed at our hopper railcar manufacturing facility during the third quarter of 2013 that did not continue into 2014. In 2014, production of hopper railcars has ramped up due to increased demand, thus these repair projects are no longer being performed at our manufacturing facilities.
Cost of revenues
Our total consolidated cost of revenues decreased by 25.7% for the three months ended September 30, 2014 compared to the same period in 2013 . The decrease was primarily due to a decrease in our manufacturing and railcar services segments, partially offset by an increase in the railcar leasing segment.
Our total consolidated cost of revenues increased by 1.5% for the nine months ended September 30, 2014 compared to the same period in 2013 . The increase was primarily due to an increase in our manufacturing and railcar leasing segments, partially offset by a decrease in the railcar services segment.
Cost of revenues decreased for our manufacturing segment by 30.2% for the three months ended September 30, 2014 compared to the same period in 2013 . This change was primarily a result of lower direct sale railcar shipments causing a 31.7% decrease in manufacturing cost of revenues, as discussed above, partially offset by an increase of 1.5% 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.
Cost of revenues increased for our manufacturing segment by 0.6% for the nine months ended September 30, 2014 compared to the same period in 2013 . This change was due to an increase of 3.1% resulting from higher material costs for key components and steel partially offset by a decrease of 2.5% due to a change in the mix of direct sale railcar shipments. Although overall direct sale railcar shipments have increased in 2014 compared to 2013, direct sale shipments of hopper railcars, which generally cost less than tank railcars due to less material and labor content, increased during this time.
Cost of revenues for our leasing segment increased by 79.3% and 66.4% for the three and nine months ended September 30, 2014 , respectively, compared to the same periods in 2013 primarily as a result of an increase in our lease fleet, as discussed above.
Cost of revenues for our railcar services segment decreased by 9.9% for the three months ended September 30, 2014 compared to the same period in 2013 , primarily due to no longer performing certain repair projects at our hopper railcar manufacturing plant, as discussed above.
Cost of revenues for our railcar services segment decreased by 5.1% for the nine months ended September 30, 2014 compared to the same period in 2013 , primarily due to no longer performing certain repair projects at our hopper railcar manufacturing plant, as discussed above, partially offset by higher costs associated with the increased paint and lining work at our repair facilities.
Selling, general and administrative expenses
Our selling, general and administrative expenses were $7.6 million for the third quarter of 2014 compared to $7.2 million for the same period in 2013 . This $0.4 million increase was primarily driven by increases of $0.9 million in bad debt expense and $0.8 million in salaries and benefits, partially offset by a decrease of $1.0 million in incentive compensation (including share-based compensation) as well as fluctuations in various other corporate expenses.
Our total consolidated selling, general and administrative costs increased by $1.7 million , or 7.6% , for the nine months ended September 30, 2014 compared to the same period in 2013 . This increase was primarily attributable to increases of $1.7 million in salaries and benefits, $0.9 million in bad debt expense, and $0.6 million in consulting costs, partially offset by a decrease of $1.0 million in incentive compensation (including share-based compensation) as well as fluctuations in various other corporate expenses.
Interest expense
Our total consolidated interest expense increased by 22.3% for the three months ended September 30, 2014 , compared to the same period in 2013 . This increase resulted from a higher average debt balance as a result of increased borrowings under our

25

Table of Contents

lease fleet financing during the first quarter of 2014, partially offset by a lower interest rate under the 2014 borrowing, as discussed below. Our weighted average interest rate during the third quarter of 2014 was 2.2% compared to a weighted average interest rate of 2.7% during the same period in 2013.
Our total consolidated interest expense decreased by 8.4% for the nine months ended September 30, 2014 , compared to the same period in 2013 . This decrease was driven by the lower weighted average interest rate of 2.2% during the first nine months of 2014 compared to a weighted average interest rate of 3.6% during the same period in 2013. The higher weighted average interest rate during the first nine months of 2013 was due to the 7.5% senior unsecured notes (Notes) that were redeemed on March 1, 2013. This decrease was partially offset by a higher average debt balance during the first nine months of 2014 compared to the same period in 2013.
Loss on debt extinguishment
During the nine months ended September 30, 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 decreased by $1.9 million for the nine months ended September 30, 2014 , compared to the same period in 2013. The Company has not made any short-term investments during the first nine months of 2014, compared to the same period in 2013 when other income of $2.0 million was recognized primarily due to realized gains on the sale of short-term investments.
Earnings (Loss) from Joint Ventures
The breakdown of our earnings (loss) from joint ventures during the three and nine months ended September 30, 2014 and 2013 was as follows:
 
 
Three Months Ended 
 September 30,
 
 
 
Nine Months Ended 
 September 30,
 
 
 
2014
 
2013
 
Change
 
2014
 
2013
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Ohio Castings
$
842

 
$
463

 
$
379

 
$
1,172

 
$
351

 
$
821

Axis
(839
)
 
53

 
(892
)
 
(1,435
)
 
(641
)
 
(794
)
Amtek Railcar - India

 
(1,021
)
 
1,021

 

 
(1,992
)
 
1,992

Total Earnings (Loss) from Joint Ventures
$
3

 
$
(505
)
 
$
508

 
$
(263
)
 
$
(2,282
)
 
$
2,019

Our joint venture earnings (loss) was earnings of less than $0.1 million and a loss of $0.3 million for the three and nine months ended September 30, 2014 , respectively, compared to losses of $0.5 million and $2.3 million for the same periods in 2013. The increases in both periods were primarily due to our share of losses incurred at our India joint venture, Amtek Railcar Industries Private Limited (Amtek), which was sold in December 2013. Additionally, our share of earnings from our Ohio Castings Company LLC (Ohio Castings) joint venture were $0.8 million and $1.2 million for the three and nine months ended September 30, 2014 , respectively, compared to earnings of $0.5 million and $0.4 million for the same periods in 2013. These increases were a result of increased sales and production levels due to strong railcar industry demand. Our Axis, LLC (Axis) joint venture has also experienced increased demand during the three and nine months ended September 30, 2014; however, it has also experienced unanticipated interruptions and incurred additional costs in its efforts to meet customer demand during the three and nine months ended September 30, 2014 compared to the same period in the prior year.
Income Tax Expense
Our income tax expense was $14.3 million , or 37.5% of our earnings before income taxes, and $45.3 million , or 37.1% of our earnings before income taxes for the three and nine months ended September 30, 2014 , respectively, compared to $13.3 million , or 38.9% of our earnings before income taxes, and $39.7 million , or 38.9% of our earnings before income taxes for the same periods in 2013 . The decrease in our effective tax rate was primarily due to an increased domestic production activities deduction during 2014 compared to 2013.

26

Table of Contents

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 September 30,
 
 
 
2014
 
2013
 
 
 
(in thousands)
 
 
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
128,270

 
$
143,706

 
$
271,976

 
$
170,943

 
$
34,824

 
$
205,767

 
$
66,209

Railcar Leasing
17,219

 

 
17,219

 
8,301

 

 
8,301

 
8,918

Railcar Services
17,353

 
38

 
17,391

 
19,655

 
31

 
19,686

 
(2,295
)
Eliminations

 
(143,744
)
 
(143,744
)
 

 
(34,855
)
 
(34,855
)
 
(108,889
)
Total Consolidated
$
162,842

 
$

 
$
162,842

 
$
198,899

 
$

 
$
198,899

 
$
(36,057
)
Earnings (Loss) from Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
30,696

 
$
44,017

 
$
74,713

 
$
32,075

 
$
9,633

 
$
41,708

 
$
33,005

Railcar Leasing
9,473

 
(7
)
 
9,466

 
4,155

 
5

 
4,160

 
5,306

Railcar Services
2,674

 
10

 
2,684

 
3,292

 
(13
)
 
3,279

 
(595
)
Corporate/Eliminations
(3,564
)
 
(44,020
)
 
(47,584
)
 
(3,896
)
 
(9,625
)
 
(13,521
)
 
(34,063
)
Total Consolidated
$
39,279

 
$

 
$
39,279

 
$
35,626

 
$

 
$
35,626

 
$
3,653

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
2014
 
2013
 
 
 
(in thousands)
 
 
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
488,597