American Railcar Industries, Inc.
American Railcar Industries, Inc. (Form: 10-Q, Received: 07/30/2015 17:58:26)
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 June 30, 2015
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 July 30, 2015 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 June 30, 2015 (Unaudited) and December 31, 2014
 
 
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents




AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
June 30,
2015
 
December 31,
2014
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
236,276

 
$
88,109

Restricted cash
17,054

 
7,178

Accounts receivable, net
31,446

 
33,618

Accounts receivable, due from related parties
17,565

 
33,027

Income taxes receivable
12,091

 
33,879

Inventories, net
117,342

 
117,007

Deferred tax assets
6,968

 
7,688

Prepaid expenses and other current assets
6,148

 
5,353

Total current assets
444,890

 
325,859

Property, plant and equipment, net
166,376

 
160,787

Railcars on leases, net
784,083

 
663,315

Deferred debt issuance costs, net
5,190

 
2,148

Goodwill
7,169

 
7,169

Investments in and loans to joint ventures
30,565

 
29,168

Other assets
7,544

 
3,963

Total assets
$
1,445,817

 
$
1,192,409

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
59,664

 
$
68,789

Accounts payable, due to related parties
3,766

 
2,793

Accrued expenses and taxes
20,099

 
5,208

Accrued compensation
13,524

 
15,046

Deferred revenue
40

 
16,723

Short-term debt, including current portion of long-term debt
25,781

 
110,612

Total current liabilities
122,874

 
219,171

Long-term debt, net of current portion
588,783

 
298,342

Deferred tax liability
177,898

 
168,349

Pension and post-retirement liabilities
8,026

 
8,544

Other liabilities
2,538

 
2,587

Total liabilities
900,119

 
696,993

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 50,000,000 shares authorized, 21,352,297 shares issued and outstanding as of June 30, 2015 and December 31, 2014
213

 
213

Additional paid-in capital
239,609

 
239,609

Retained earnings
311,807

 
260,943

Accumulated other comprehensive loss
(5,931
)
 
(5,349
)
Total stockholders’ equity
545,698

 
495,416

Total liabilities and stockholders’ equity
$
1,445,817

 
$
1,192,409

See Notes to the Condensed Consolidated Financial Statements.

3

Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Manufacturing (including revenues from affiliates of $61,743 and $182,939 for the three and six months ended June 30, 2015, respectively, and $91,135 and $132,370 for the same periods in 2014)
$
144,481

 
$
206,364

 
$
366,292

 
$
360,327

Railcar leasing
28,216

 
13,885

 
52,801

 
25,631

Railcar services (including revenues from affiliates of $6,406 and $12,786 for the three and six months ended June 30, 2015, respectively, and $4,699 and $8,662 for the same periods in 2014)
19,301

 
17,260

 
36,681

 
33,666

Total revenues
191,998

 
237,509

 
455,774

 
419,624

Cost of revenues:
 
 
 
 
 
 
 
Manufacturing
(107,714
)
 
(160,033
)
 
(282,248
)
 
(278,398
)
Railcar leasing
(8,993
)
 
(5,382
)
 
(16,694
)
 
(9,873
)
Railcar services
(14,737
)
 
(13,424
)
 
(28,582
)
 
(26,789
)
Total cost of revenues
(131,444
)
 
(178,839
)
 
(327,524
)
 
(315,060
)
Gross profit
60,554

 
58,670

 
128,250

 
104,564

Selling, general and administrative
(5,315
)
 
(6,820
)
 
(12,996
)
 
(16,207
)
Net gains on disposition of leased railcars
25

 

 
25

 

Earnings from operations
55,264

 
51,850

 
115,279

 
88,357

Interest income (including income from related parties of $538 and $1,095 for the three and six months ended June 30, 2015, respectively, and $613 and $1,240 for the same periods in 2014)
550

 
619

 
1,113

 
1,260

Interest expense
(5,694
)
 
(1,843
)
 
(10,432
)
 
(3,515
)
Loss on debt extinguishment

 

 
(2,126
)
 
(1,896
)
Other Income
5

 
27

 
11

 
32

Earnings (Loss) from joint ventures
2,141

 
335

 
3,938

 
(266
)
Earnings before income taxes
52,266

 
50,988

 
107,783

 
83,972

Income tax expense
(19,297
)
 
(18,772
)
 
(39,838
)
 
(30,986
)
Net earnings
$
32,969

 
$
32,216

 
$
67,945

 
$
52,986

Net earnings per common share—basic and diluted
$
1.54

 
$
1.51

 
$
3.18

 
$
2.48

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

 
21,352

 
21,352

 
21,352

Cash dividends declared per common share
$
0.40

 
$
0.40

 
$
0.80

 
$
0.80

See Notes to the Condensed Consolidated Financial Statements.


4

Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Net earnings
$
32,969

 
$
32,216

 
$
67,945

 
$
52,986

Currency translation
171

 
417

 
(814
)
 
(42
)
Postretirement plans
189

 
55

 
378

 
110

Comprehensive income
$
33,329

 
$
32,688

 
$
67,509

 
$
53,054

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)  
 
Six Months Ended
 
June 30,
 
2015
 
2014
Operating activities:
 
 
 
Net earnings
$
67,945

 
$
52,986

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
20,971

 
15,672

Amortization of deferred costs
228

 
236

Loss (Gain) on disposal of property, plant, equipment and leased railcars
2

 
(3
)
(Earnings) Losses from joint ventures
(3,938
)
 
266

Provision for deferred income taxes
10,129

 
7,034

Provision for allowance for doubtful accounts receivable
(20
)
 
(16
)
Items related to financing activities:
 
 
 
Loss on debt extinguishment
2,126

 
1,896

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
2,164

 
(4,990
)
Accounts receivable, due from related parties
15,426

 
(5,105
)
Income taxes receivable
21,867

 

Inventories, net
(431
)
 
(2,171
)
Prepaid expenses and other current assets
(881
)
 
(2,942
)
Accounts payable
(9,107
)
 
3,861

Accounts payable, due to related parties
973

 
512

Accrued expenses and taxes
(3,297
)
 
(12,543
)
Other
(3,848
)
 
2,900

Net cash provided by operating activities
120,309

 
57,593

Investing activities:
 
 
 
Purchases of property, plant and equipment
(15,354
)
 
(7,482
)
Capital expenditures - leased railcars
(132,578
)
 
(86,521
)
Proceeds from the sale of property, plant, equipment and leased railcars
113

 
243

Proceeds from repayments of loans by joint ventures
2,500

 
2,000

Net cash used in investing activities
(145,319
)
 
(91,760
)
Financing activities:
 
 
 
Repayments of long-term debt
(419,698
)
 
(199,180
)
Proceeds from long-term debt
625,306

 
318,682

Change in interest reserve related to long-term debt
(9,876
)
 
(47
)
Payment of common stock dividends
(17,082
)
 
(17,082
)
Debt issuance costs
(5,271
)
 
(2,425
)
Net cash provided by financing activities
173,379

 
99,948

Effect of exchange rate changes on cash and cash equivalents
(202
)
 
22

Increase in cash and cash equivalents
148,167

 
65,803

Cash and cash equivalents at beginning of period
88,109

 
97,252

Cash and cash equivalents at end of period
$
236,276

 
$
163,055


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, 2014 has been derived from the audited consolidated balance sheet as of that date. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2014 . 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., Longtrain Leasing I, LLC (LLI), Longtrain Leasing II, LLC (LLII) and Longtrain Leasing III, LLC (LLIII). All intercompany transactions and balances have been eliminated.
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.
In February 2015, the FASB issued ASU No. 2015-02, which amends FASB ASU Topic 810, Consolidations . This ASU amends the current consolidation guidance, including introducing a separate consolidation analysis specific to limited partnerships and other similar entities. This ASU requires that limited partnerships and similar legal entities provide partners with either substantive kick-out rights or substantive participating rights over the general partner in order to be considered a voting interest entity. The specialized consolidation model and guidance for limited partnerships and similar legal entities have been eliminated. There is no longer a presumption that a general partner should consolidate a limited partnership. For limited partnerships and similar legal entities that qualify as voting interest entities, a limited partner with a controlling financial interest should consolidate a limited partnership. A controlling financial interest may be achieved through holding a limited partner interest that provides substantive kick-out rights. The standard is effective for annual periods beginning after December 15, 2015. The Company is currently evaluating the standard, but does not, at this time, anticipate a material impact to the financial statements and footnote disclosures once implemented.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs , which amends FASB ASU Subtopic 835-30, Interest - Imputation of Interest . The new standard requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. The standard is effective for interim and annual periods beginning after December 31, 2015 and is required to be applied on a retrospective basis. Early adoption is permitted. The Company expects that the adoption of this new guidance will result in a reclassification of debt issuance costs on its consolidated balance sheets.
Note 3 — Accounts Receivable, net
Accounts receivable, net, consists of the following:  

7


 
June 30,
2015
 
December 31,
2014
 
(in thousands)
Accounts receivable, gross
$
32,597

 
$
34,790

Less allowance for doubtful accounts
(1,151
)
 
(1,172
)
Total accounts receivable, net
$
31,446

 
$
33,618


Note 4 — Inventories
Inventories consist of the following:  
 
June 30,
2015
 
December 31,
2014
 
(in thousands)
Raw materials
$
82,981

 
$
78,924

Work-in-process
24,855

 
16,195

Finished products
12,238

 
24,441

Total inventories
120,074

 
119,560

Less reserves
(2,732
)
 
(2,553
)
Total inventories, net
$
117,342

 
$
117,007

Note 5 — Property, Plant, Equipment and Railcars on Leases, net
The following table summarizes the components of property, plant, equipment and railcars on leases, net:  
 
June 30,
2015
 
December 31,
2014
 
(in thousands)
Operations / Corporate:
 
 
 
Buildings
$
163,650

 
$
164,087

Machinery and equipment
200,199

 
196,768

Land
3,537

 
3,537

Construction in process
21,608

 
11,612

 
388,994

 
376,004

Less accumulated depreciation
(222,618
)
 
(215,217
)
Property, plant and equipment, net
$
166,376

 
$
160,787

Railcar Leasing:
 
 
 
Railcars on leases
$
827,831

 
$
695,226

Less accumulated depreciation
(43,748
)
 
(31,911
)
Railcars on leases, net
$
784,083

 
$
663,315

Railcars on 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.

8


As of June 30, 2015 , 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 6 months of 2015
$
59,053

2016
116,459

2017
101,491

2018
88,082

2019
70,380

2020 and thereafter
70,128

Total
$
505,593

Depreciation expense
The following table summarizes depreciation expense:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Total depreciation expense
$
10,910

 
$
7,989

 
$
20,971

 
$
15,672

Depreciation expense on leased railcars
$
6,353

 
$
3,659

 
$
11,844

 
$
6,990

Note 6 — Goodwill
As of June 30, 2015 , 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.
The Company performed a qualitative assessment as of March 1, 2015 by considering the following relevant factors to determine whether it was more likely than not that the fair value of the reporting unit was greater than its carrying amount.
The North American railcar market has been, and ARI expects it to continue to be, highly cyclical. The railcar industry has experienced high levels of demand with the December 31, 2014 backlog at its highest point in history. Based upon third party forecasts for the industry over the next several years, the Company expects demand to remain at healthy levels.
ARI is subject to various laws and regulations. No significant assessments have been made by the various regulatory agencies against ARI.
The railcar manufacturing industry has historically been extremely competitive.
ARI experienced three strong years of railcar order activity in 2012, 2013 and 2014. As the railcar industry was at a record backlog level at December, 31, 2014, orders have slowed in 2015. However, the Company expects demand to remain at healthy levels in line with industry forecasts, as mentioned above.
The primary long-lived assets at the reporting unit are machines with uses in various applications for numerous markets and industries. As such, management does not believe that there has been a significant decrease in the market value of the reporting unit’s long-lived assets.
The reporting unit has a history of positive operating cash flows that is expected to continue.
No part of the reporting unit’s net income is comprised of significant non-operating or non-recurring gains or losses, and no significant changes in balance sheet accruals were noted.
In addition, during 2014 there were no significant changes in the following with regard to the reporting unit that the Company expects to impact future results:
Key personnel;
Business strategy;
Buyer or supplier bargaining power; and
Legal factors.
After assessing the above factors, the Company determined that it was more likely than not that the fair value of the reporting unit was greater than its carrying amount, and therefore no further testing was necessary. Additionally, no impairment was recognized in any prior periods and there were no indicators of impairment since the annual assessment date.

9


Note 7 — Investments in and Loans to Joint Ventures
As of June 30, 2015 , the Company was party to two joint ventures: Ohio Castings Company LLC (Ohio Castings) and Axis LLC (Axis). Through its wholly-owned subsidiary, Castings, the Company has a 33.3% ownership interest in Ohio Castings, a limited liability company formed to produce various steel railcar parts for use or sale by the ownership group. Through its wholly-owned subsidiary, ARI Component, the Company has a 41.9% ownership interest in Axis, a limited liability company formed to produce railcar axles for use or sale by the ownership group.
The Company accounts for these joint ventures using the equity method. Under this method, the Company recognizes its share of the earnings and losses of the joint ventures as they accrue. Advances and distributions are charged and credited directly to the investment accounts. From time to time, the Company also makes loans to its joint ventures that are included in the investment account. The investment balance for these joint ventures is recorded within the Company’s manufacturing segment. The carrying amount of investments in and loans to joint ventures, which also represents ARI’s maximum exposure to loss with respect to the joint ventures, are as follows:  
 
June 30,
2015
 
December 31,
2014
 
(in thousands)
Carrying amount of investments in and loans to joint ventures
 
 
 
Ohio Castings
$
10,073

 
$
9,194

Axis
20,492

 
19,974

Total investments in and loans to joint ventures
$
30,565

 
$
29,168

See Note 15, Related Party Transactions, 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 the Company and Castings is limited to its investment in Ohio Castings.
Summary financial results for Ohio Castings, the investee company, in total, are as follows:  
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
20,507

 
$
22,255

 
$
43,895

 
$
36,264

Gross profit
$
2,314

 
$
2,788

 
$
4,362

 
$
2,935

Net earnings
$
1,397

 
$
1,896

 
$
2,529

 
$
1,327


Axis
ARI, through ARI Component, 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% and the other significant partner owns 48.4% .
Under the terms of the joint venture agreement, ARI and the other significant partner are required, and the minority partner is entitled, to contribute additional capital to the joint venture, on a pro rata basis, of any amounts approved by the joint venture’s executive committee, as and when called by the executive committee. Further, until June 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.

10


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 2014 and 2015, 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, due to ARI Component, was $26.6 million and $29.1 million as of June 30, 2015 and December 31, 2014 , respectively.
The Company has determined that, although the joint venture is a VIE, accounting for its activity under the equity method is appropriate given that the Company is not the primary beneficiary, does not have a controlling financial interest and does not have the ability to individually direct the activities of Axis that most significantly impact its economic performance. The significant factors in this determination were that neither ARI Component nor the Company has rights to the majority of returns, losses or votes, the executive committee and board of directors of the joint venture are comprised of one representative from each significant partner with equal voting rights and the risk of loss to the Company and ARI Component is limited to its investment in Axis and the loans due to the Company under the Axis Credit Agreement.
Summary financial results for Axis, the investee company, in total, are as follows:  
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
19,077

 
$
18,225

 
$
39,417

 
$
33,076

Gross profit
$
5,214

 
$
1,202

 
$
10,277

 
$
1,514

Earnings before interest
$
4,975

 
$
951

 
$
9,764

 
$
1,023

Net earnings (loss)
$
3,886

 
$
(281
)
 
$
7,550

 
$
(1,472
)
As of June 30, 2015 , 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.
Note 8 — Warranties
The overall change in the Company’s warranty reserve is reflected on the condensed consolidated balance sheets in accrued expenses and taxes and is detailed as follows:  
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Liability, beginning of period
$
1,340

 
$
1,498

 
$
953

 
$
1,385

Provision for warranties issued during the year, net of adjustments
286

 
307

 
894

 
596

Adjustments to warranties issued during previous years
(4
)
 
14

 
(8
)
 
(23
)
Warranty claims
(244
)
 
(165
)
 
(461
)
 
(304
)
Liability, end of period
$
1,378

 
$
1,654

 
$
1,378

 
$
1,654

Note 9 — Debt
Lease fleet financings
From time to time, the Company, through its wholly-owned subsidiaries LLI, LLII and LLIII, has entered into lease fleet financings in order to, among other things, support and grow its railcar leasing business. The lease fleet financings are obligations of the respective wholly-owned subsidiary, are generally non-recourse to ARI, and are secured by a first lien on the subject assets of the respective subsidiary, consisting of railcars, railcar leases, receivables and related assets, subject to limited exceptions. ARI has, however, entered into agreements containing certain representations, undertakings, and indemnities customary for asset sellers and parent companies in transactions of this type, and ARI is obligated to make any selections of transfers of railcars, railcar leases, receivables and related assets to be transferred to LLI, LLII and LLIII without any adverse selection, to cause American Railcar Leasing LLC (ARL), as the manager, to maintain, lease, and re-lease LLI, LLII and

11


LLIII's equipment no less favorably than similar portfolios serviced by ARL, and to repurchase or replace certain railcars under certain conditions set forth in the respective loan documents. See Note 15, Related Party Transactions, for further discussion regarding these agreements with ARL.
As of June 30, 2015 and December 31, 2014 , the net book value of the railcars that were pledged as part of the Lease Fleet Financings was $490.2 million and $277.0 million , respectively.
January 2014 lease fleet refinancing
On January 15, 2014, LLI refinanced its senior secured delayed draw term loan facility (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, LLI 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 December 31, 2014 , the outstanding principal balance on the Refinanced Term Loan, including the current portion, was $309.0 million .
The Refinanced Term Loan accrued interest at a rate per annum equal to the 1-month LIBOR rate plus 2.0% , for a rate of 2.2% as of December 31, 2014 . Pursuant to the terms of the Amended and Restated Credit Agreement, the Company was required to maintain deposits in an interest reserve bank account equal to seven months of interest payments. As of December 31, 2014 , the interest reserve amount was $3.9 million , and included within 'Restricted cash' on the consolidated balance sheet.
October 2014 bridge financing
On October 16, 2014, the Company, through its wholly-owned subsidiary, LLII, entered into a lease fleet financing facility for $100.0 million under a term loan agreement (LLII Term Loan) in order to support the growth of its railcar leasing business. The LLII Term Loan was scheduled to mature in April 2015. As of December 31, 2014 , the outstanding principal balance on the LLII Term Loan was $100.0 million and was classified in the consolidated balance sheet as 'Short-term debt, including current portion of long-term debt'.
Subject to the provisions of the LLII Term Loan, the principal borrowed thereunder accrued interest at a rate determined by reference to an index or, subject to certain circumstances, at a base rate. The Applicable Margin was equal to a rate per annum of 1.45% , for a rate of 1.7% as of December 31, 2014 .
The fair value of the Company's borrowings under its lease fleet financing facilities was $409.0 million as of December 31, 2014 and was 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.
January 2015 private placement notes
On January 29, 2015, the Company refinanced its lease fleet financing facilities to, among other things, increase the aggregate borrowings thereunder. In connection with the refinancing, LLIII completed a private placement of $625.5 million in aggregate principal amount of notes consisting of $250.0 million in aggregate principal amount of its 2.98% Fixed Rate Secured Railcar Equipment Notes, Class A-1 (Class A-1 Notes) and $375.5 million in aggregate principal amount of its 4.06% Fixed Rate Secured Railcar Equipment Notes, Class A-2 (Class A-2 Notes, and collectively with the Class A-1 Notes, the Notes). Of the aggregate principal amount, $408.5 million was used to refinance the LLI and LLII lease fleet financing facilities, resulting in net proceeds of $211.6 million . In conjunction with the refinancing, the Company incurred a $2.1 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 LLI and LLII lease fleet financings. As of June 30, 2015 , the outstanding principal balance on the Notes, including the current portion, was $614.7 million . The Notes have a legal final maturity date of January 17, 2045 and an expected principal repayment date of January 15, 2025.
The Notes were issued pursuant to an Indenture, dated January 29, 2015 between LLIII and U.S. Bank National Association, as indenture trustee (Indenture Trustee). The Class A-1 Notes bear interest at a fixed rate of 2.98% per annum, and the Class A-2 Notes bear interest at a fixed rate of 4.06% per annum. Interest on the Notes is payable monthly on the 15th calendar day of each month in accordance with the flow of funds provisions described in the Indenture. While the legal final maturity date of the Notes is January 17, 2045, cash flows from LLIII's assets will be applied, pursuant to the flow of funds provisions of the Indenture, so as to achieve monthly targeted principal balances. Also, under the flow of funds provisions of the Indenture, early amortization of the Notes may be required in certain circumstances. If the Notes are not repaid by the expected principal

12


repayment date on January 15, 2025, additional interest shall accrue at a rate of 5.0% per annum and be payable monthly according to the flow of funds. Pursuant to the terms of the Indenture, the Company is required to maintain deposits in a liquidity reserve bank account equal to nine months of interest payments. As of June 30, 2015 , the liquidity reserve amount was $16.8 million , and included within 'Restricted cash' on the condensed consolidated balance sheets.
LLIII can prepay or redeem the Class A-1 Notes, in whole or in part, on any payment date and the Class A-2 Notes, in whole or in part, on any payment date occurring on or after January 16, 2018.
The Indenture contains covenants which limit, among other things, LLIII's ability to incur additional indebtedness or encumbrances on its assets, pay dividends or make distributions, make certain investments, perform its business other than specified activities, enter into certain types of transactions with its affiliates, and sell assets or consolidate or merge with or into other companies. These covenants are subject to a number of exceptions and qualifications. The Company was in compliance with all of these covenants as of June 30, 2015 .
The Indenture also contains certain customary events of default, including among others, failure to pay amounts when due after applicable grace periods, failure to comply with certain covenants and agreements, and certain events of bankruptcy or insolvency. Certain events of default under the Indenture will make the outstanding principal balance and accrued interest on the Notes, together with all amounts then due and owing to the noteholders, immediately due and payable without further action. For other events of default, the Indenture Trustee, acting at the direction of a majority of the noteholders, may declare the principal of and accrued interest on all Notes then outstanding to be due and payable immediately.
The fair value of the Notes was $621.4 million as of June 30, 2015 and is calculated by taking the net present value of future principal and interest payments using a discount rate that is based on the Company's most recent fixed debt transaction. The inputs used in the calculation are classified within Level 2 of the fair value hierarchy.
The future contractual minimum rental revenues related to the railcars pledged as of June 30, 2015 are as follows (in thousands):  
Remaining 6 months of 2015
$
35,989

2016
70,331

2017
55,389

2018
42,397

2019
28,524

2020 and thereafter
31,401

Total
$
264,031

The remaining principal payments under the Notes as of June 30, 2015 are as follows (in thousands):  
Remaining 6 months of 2015
$
12,947

2016
25,783

2017
25,588

2018
25,590

2019
25,507

2020 and thereafter
499,328

Total
$
614,743

Note 10 — Income Taxes
The Company’s federal income tax returns for tax years 2011 and beyond remain subject to examination, with the latest statute of limitations expiring in September 2018. Certain of the Company's 2008 through 2010 state income tax returns and all of the Company's state income tax returns for 2011 and beyond remain open and subject to examination, with the latest statute of limitations expiring in December 2018. The Company’s foreign income tax returns for 2011 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.

13


Note 11 — 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 components of net periodic benefit cost for the pension and postretirement plans are as follows:  
 
Pension Benefits
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Service cost
$
44

 
$
57

 
$
88

 
$
114

Interest cost
237

 
242

 
474

 
485

Expected return on plan assets
(321
)
 
(313
)
 
(641
)
 
(626
)
Amortization of net actuarial loss/prior service cost
201

 
70

 
403

 
139

Net periodic cost recognized
$
161

 
$
56

 
$
324

 
$
112

 
 
Postretirement Benefits
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Service cost
$

 
$

 
$

 
$

Interest cost

 
1

 
1

 
2

Amortization of net actuarial gain/prior service credit
(13
)
 
(15
)
 
(25
)
 
(29
)
Net periodic benefit recognized
$
(13
)
 
$
(14
)
 
$
(24
)
 
$
(27
)
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 for each of the three months ended June 30, 2015 and 2014 and $0.5 million for each of the six months ended June 30, 2015 and 2014 .
Note 12 — Commitments and Contingencies
The Company is subject to comprehensive federal, state, local and international environmental laws and regulations relating to the release or discharge of materials into the environment, the management, use, processing, handling, storage, transport or disposal of hazardous materials and wastes, and other laws and regulations relating to the protection of human health and the environment. These laws and regulations not only expose ARI to liability for the environmental condition of its current or formerly owned or operated facilities, and its own negligent acts, but also may expose ARI to liability for the conduct of others or for ARI’s actions that were in compliance with all applicable laws at the time such actions were taken. In addition, these laws may require significant expenditures to achieve compliance and are frequently modified or revised to impose new obligations. Civil and criminal fines and penalties and other sanctions may be imposed for non-compliance with these environmental laws and regulations. ARI’s operations that involve hazardous materials also raise potential risks of liability under common law.
Certain real property ARI acquired from ACF 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

14


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 15, Related Party Transactions, 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.
On October 24, 2014, the Company filed a complaint in United States District Court for the Southern District of New York against Gyansys, Inc. (Gyansys). The complaint asserts a claim against Gyansys for breaching its contract with ARI to implement an enterprise resource planning system. The Company seeks to recover monetary damages in an amount still to be determined, but which ARI alleged exceeds $25 million . Gyansys filed a response to the suit denying its responsibility. It also counterclaimed against ARI for a breach of contract and wrongful termination, seeking damages in excess of $10 million and equitable relief. At this time, the Company does not have sufficient information to reasonably form an estimate of the potential outcome (gain or loss) of this litigation. However, ARI believes that Gyansys' counterclaims lack merit, and ARI has filed a motion to dismiss Gyansys' counterclaims in part.
Note 13 — 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 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Share-based compensation expense (income)
 
 
 
 
 
 
 
Cost of revenues: Manufacturing
$
6

 
$
(93
)
 
$
54

 
$
763

Cost of revenues: Railcar services
3

 
(40
)
 
3

 
238

Selling, general and administrative
175

 
99

 
234

 
2,971

Total share-based compensation expense
$
184

 
$
(34
)
 
$
291

 
$
3,972

As of June 30, 2015 , unrecognized compensation costs related to the unvested portion of SARs were estimated to be $1.6 million and were expected to be recognized over a weighted average period of 30 months .

15


Note 14 — Accumulated Other Comprehensive Income (Loss)
The following table presents the balances of related after-tax components of accumulated other comprehensive income (loss).  
 
Accumulated
Currency
Translation
 
Accumulated
Postretirement
Transactions
 
Accumulated
Other
Comprehensive
Income (Loss)
 
(in thousands)
Balance December 31, 2013
$
760

 
$
(2,254
)
 
$
(1,494
)
Currency translation
(42
)
 

 
(42
)
Reclassifications related to pension and postretirement plans, net of tax effect of $42 (1)

 
67

 
67

Balance June 30, 2014
$
718

 
$
(2,187
)
 
$
(1,469
)
 
 
 
 
 
 
Balance December 31, 2014
$
(275
)
 
$
(5,074
)
 
$
(5,349
)
Currency translation
(814
)
 

 
(814
)
Reclassifications related to pension and postretirement plans, net of tax effect of $146 (1)

 
232

 
232

Balance June 30, 2015
$
(1,089
)
 
$
(4,842
)
 
$
(5,931
)
 
(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 11 for further details and pre-tax amounts.
Note 15 — Related Party Transactions
Agreements with ACF
The Company has the following agreements with ACF, a company controlled by Mr. Carl Icahn, the Company’s principal beneficial stockholder through IELP:
Component purchases
The Company has from time to time purchased components from ACF under a long-term agreement, as well as on a purchase order basis. Under the manufacturing services agreement entered into in 1994 and amended in 2005, ACF agreed to manufacture and distribute, at the Company’s instruction, various railcar components. In consideration for these services, the Company agreed to pay ACF based on agreed upon rates. The agreement automatically renews unless written notice is provided by the Company.
Also in April 2015, ARI entered into a parts purchasing and sale agreement with ACF. The agreement was unanimously approved by the independent directors of ARI’s audit committee. Under this agreement, ARI and ACF may, from time to time, purchase and sell to each other certain parts for railcars (Parts). ARI also provides a non-exclusive and non-assignable license of certain intellectual property to ACF related to the manufacture and sale of Parts to ARI. The buyer under the agreement must pay the market price of the parts as determined in the agreement or as stated on a public website for all ARI buyers. ARI may provide designs, engineering and purchasing support, including all materials and components to ACF. Subject to certain early termination events, the agreement terminates on December 31, 2020.
ARI purchased $6.8 million and $9.3 million of components from ACF during the three and six months ended June 30, 2015 , respectively, and $0.7 million and $0.9 million during the comparable periods in 2014.
Purchasing and engineering services agreement
In January 2013, ARI entered into a purchasing and engineering services agreement and license with ACF. The agreement was unanimously approved by the independent directors of ARI’s audit committee. Under this agreement, ARI provides purchasing support and engineering services to ACF in connection with ACF’s manufacture and sale of tank railcars at its facility in Milton, Pennsylvania. Additionally, ARI has granted ACF a non-exclusive, non-assignable license to certain of ARI’s intellectual property, including certain designs, specifications, processes and manufacturing know-how required to manufacture and sell tank railcars during the term of the agreement. In August 2014, ARI and ACF amended this agreement to, among other provisions, extend the termination date to December 31, 2015 from December 31, 2014, subject to certain early termination events.

16


In consideration of the services and license provided by ARI to ACF in conjunction with the agreement, ACF pays ARI a royalty and, if any, a share of the net profits (Profits) earned on each railcar manufactured and sold by ACF under the agreement, in an aggregate amount equal to 30% of such Profits, as calculated under the agreement. Profits are net of certain of ACF’s start-up and shutdown expenses and certain maintenance capital expenditures. If no Profits are realized on a railcar manufactured and sold by ACF pursuant to the agreement, ARI will still be entitled to the royalty for such railcar and will not share in any losses incurred by ACF in connection therewith. In addition, any railcar components supplied by ARI to ACF for the manufacture of these railcars are provided at fair market value.
Under the agreement, 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 tank railcars for any new orders scheduled for delivery after that date and through termination of the agreement. ARI also has the right to assign any sales opportunity to ACF, and ACF has the right, but not the obligation, to accept such sales opportunity. Any sales opportunity accepted by ACF will not be reflected in ARI’s orders or backlog.
Revenues of $3.6 million and $5.8 million for the three and six months ended June 30, 2015 , respectively, compared to $6.1 million and $11.7 million for the same periods in 2014 were recorded under this agreement for sales of railcar components to ACF and for royalties and profits on railcars sold by ACF and are included under manufacturing revenues from affiliates on the condensed consolidated statements of operations.
Repair services and support agreement
In April 2015, ARI entered into a repair services and support agreement with ACF. The agreement was unanimously approved by the independent directors of ARI’s audit committee. Under this agreement, ARI provides certain sales and administrative and technical services, materials and purchasing support and engineering services to ACF to provide repair and retrofit services (Repair Services). Additionally, ARI provides a non-exclusive and non-assignable license of certain intellectual property related to the Repair Services for railcars. ARI receives 30% of the net profits (as defined in the agreement) for Repair Services related to all railcars not owned by ARL or its subsidiaries and 20% of the net profits for Repair Services related to all railcars owned by ARL or its subsidiaries, if any, but does not absorb any losses incurred by ACF.
Under the agreement, ARI has the exclusive right to sales opportunities related to Repair Services, except for any sales opportunity related to Repair Services presented to ACF by ARL with respect to ARL-owned railcars. ARI also has the right to assign any sales opportunities related to Repair Services to ACF, and ACF has the right, but not the obligation, to accept such sales opportunity. Subject to certain early termination events, the agreement terminates on December 31, 2020.
No revenues have been recorded under this agreement in 2015.
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 $6.4 million and $12.8 million for the three and six months ended June 30, 2015 , respectively, compared to $4.7 million and $8.7 million for the same periods in 2014 , respectively, were recorded under the Railcar Services Agreement. These revenues are included under railcar services revenues from affiliates on the condensed consolidated statements of operations. The Railcar Services Agreement was unanimously approved by the independent directors of the Company’s audit committee.
Railcar management agreements
From time to time, the Company and its wholly-owned subsidiaries have entered into railcar management agreements with ARL, pursuant to which the Company and its respective wholly-owned subsidiaries engaged ARL to manage, sell, operate, market, store, lease, re-lease, sublease and service ARI's railcars, subject to the terms and conditions of the agreement. These agreements provide that ARL will manage the leased railcars (as identified in the respective agreement) including arranging for services, such as repairs or maintenance, as deemed necessary. Subject to the terms and conditions of each agreement, ARL

17


receives, in respect of leased railcars, a management fee based on the lease revenues. Each of these agreements were unanimously approved by the independent directors of the Company's audit committee.
On February 29, 2012, the Company entered into a railcar management agreement with ARL (the ARI railcar management 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, LLI entered into a similar agreement with ARL (the LLI railcar management agreement). In January 2014, LLI and ARL amended the LLI railcar management agreement to, among other provisions, extend the termination date to January 15, 2020. On October 16, 2014, LLII entered into a railcar management agreement with ARL (the LLII railcar management agreement). Under the ARI and LLI railcar management agreements, in addition to the management fee, ARL receives a fee consisting of a lease origination fee, and, in respect of railcars sold by ARL, sales commissions.
In January 2015, in connection with the Company's refinancing of its lease fleet financings, the LLI and LLII railcar management agreements were terminated and LLIII entered into a similar railcar management agreement with ARL. This agreement extends through the Notes' final maturity date of January 17, 2045, unless terminated earlier pursuant to its terms (together with the railcar management agreements discussed above, collectively the Railcar Management Agreements).
Total lease origination and management fees incurred under the Railcar Management Agreements were $1.9 million and $3.4 million for the three and six months ended June 30, 2015 , respectively, compared to $1.0 million and $1.8 million for the same periods in 2014 . These fees are included in cost of revenues for railcar leasing on the condensed consolidated statements of operations. Sales commissions of $0.1 million and $0.4 million were incurred for each of the three and six months ended June 30, 2015 , respectively, compared to $0.1 million and $0.2 million for the same periods in 2014 . These costs are included in selling, general and administrative costs on the condensed consolidated statements of operations.
Railcar orders
The Company has from time to time manufactured and sold railcars to the IELP Entities under long-term agreements as well as on a purchase order basis. Revenues from railcars sold to the IELP Entities were $58.1 million and $177.1 million for the three and six months ended June 30, 2015 , respectively, compared to $85.0 million and $120.6 million for the same periods in 2014 . These revenues are included in manufacturing revenues from affiliates on the condensed consolidated statements of operations. 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 $26.6 million and $29.1 million as of June 30, 2015 and December 31, 2014 , respectively. See Note 7, Investments in and Loans to Joint Ventures, 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, ARI sells and MWR purchases scrap metal from several ARI plant locations. This agreement has an initial term through November 2015 then shall continue until terminated by either party, in accordance with the provisions of the agreement. MWR collected scrap material totaling $1.2 million and $2.7 million for the three and six months ended June 30, 2015 , respectively, compared to $2.1 million and $4.3 million for the same periods in 2014 . This agreement was approved by the independent directors of the Company’s audit committee.
Insight Portfolio Group LLC (Insight Portfolio Group) is an entity formed and controlled by Mr. Carl Icahn in order to maximize the potential buying power of a group of entities with which Mr. Carl Icahn has a relationship in negotiating with a wide range of suppliers of goods, services and tangible and intangible property at negotiated rates. ARI, and a number of other entities with which Mr. Carl Icahn has a relationship, have minority ownership interests in, and pay fees as part of being a member of Insight Portfolio Group. Fees incurred as a member of the Insight Portfolio Group were less than $0.1 million during the three months ended June 30, 2015 and 2014 and were $0.1 million for the six months ended June 30, 2015 and 2014 . These charges are included in selling, general and administrative costs on the condensed consolidated statements of operations.
Financial information for transactions with related parties
Cost of revenues for manufacturing included $37.9 million and $79.4 million for the three and six months ended June 30, 2015 , respectively, compared to $33.5 million and $60.4 million for the same periods in 2014 for railcar components purchased from joint ventures.

18


Inventory as of June 30, 2015 and December 31, 2014 , included $10.4 million and $6.6 million , respectively, of railcar components purchased from joint ventures and all profit for this inventory still on hand was eliminated.
Note 16 — Operating Segments and Sales and Credit Concentrations
ARI operates in three reportable segments: manufacturing, railcar leasing and railcar services. These reportable segments are organized based upon a combination of the products and services offered and performance is evaluated based on revenues and segment earnings (loss) from operations. Intersegment revenues are accounted for as if sales were to third parties.
Manufacturing
Manufacturing consists of railcar manufacturing, and railcar and industrial component manufacturing. 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 railcar leasing segment are not recognized in consolidated revenues as railcar sales, but rather lease revenues are recognized over the term of the lease. Earnings from operations for manufacturing include an allocation of selling, general and administrative costs, as well as profit for railcars manufactured for the Company’s railcar leasing segment based on revenue determined as described above.
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 repair shops and mobile repair units, offering a range of services from full to light repair. Earnings from operations for railcar services include an allocation of selling, general and administrative costs.

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.  


19


 
Revenues
 
Earnings (Loss) from Operations
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
(in thousands)
Three Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
144,481

 
$
123,693

 
$
268,174

 
$
34,719

 
$
35,222

 
$
69,941

Railcar leasing
28,216

 

 
28,216

 
16,954

 
22

 
16,976

Railcar services
19,301

 
94

 
19,395

 
3,901

 
(21
)
 
3,880

Corporate/Eliminations

 
(123,787
)
 
(123,787
)
 
(310
)
 
(35,223
)
 
(35,533
)
Total Consolidated
$
191,998

 
$

 
$
191,998

 
$
55,264

 
$

 
$
55,264

Three Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
206,364

 
$
61,305

 
$
267,669

 
$
44,597

 
$
19,627

 
$
64,224

Railcar leasing
13,885

 

 
13,885

 
7,399

 
(64
)
 
7,335

Railcar services
17,260

 
52

 
17,312

 
3,116

 
10

 
3,126

Corporate/Eliminations

 
(61,357
)
 
(61,357
)
 
(3,262
)
 
(19,573
)
 
(22,835
)
Total Consolidated
$
237,509

 
$

 
$
237,509

 
$
51,850

 
$

 
$
51,850

Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
366,292

 
$
207,424

 
$
573,716

 
$
79,512

 
$
60,867

 
$
140,379

Railcar Leasing
52,801

 

 
52,801

 
31,740

 

 
31,740

Railcar Services
36,681

 
196

 
36,877

 
6,741

 
6

 
6,747

Corporate/Eliminations

 
(207,620
)
 
(207,620
)
 
(2,714
)
 
(60,873
)
 
(63,587
)
Total Consolidated
$
455,774

 
$

 
$
455,774

 
$
115,279

 
$

 
$
115,279

Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
360,327

 
$
125,334

 
$
485,661

 
$
78,252

 
$
39,357

 
$
117,609

Railcar Leasing
25,631

 

 
25,631

 
13,629

 
(33
)
 
13,596

Railcar Services
33,666

 
184

 
33,850

 
5,297

 
48

 
5,345

Corporate/Eliminations

 
(125,518
)
 
(125,518
)
 
(8,821
)
 
(39,372
)
 
(48,193
)
Total Consolidated
$
419,624

 
$

 
$
419,624

 
$
88,357

 
$

 
$
88,357

 
Total Assets
June 30,
2015
 
December 31,
2014
 
(in thousands)
Manufacturing
$
341,461

 
$
356,720

Railcar leasing
1,097,821

 
908,010

Railcar services
55,545

 
52,639

Corporate/Eliminations
(49,010
)
 
(124,960
)
Total Consolidated
$
1,445,817

 
$
1,192,409

Sales to Related Parties
As discussed in Note 15, Related Party Transactions, 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.

20


 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Manufacturing
32.2
%
 
38.4
%
 
40.1
%
 
31.5
%
Railcar leasing
%
 
%
 
%
 
%
Railcar services
3.3
%
 
2.0
%
 
2.8
%
 
2.1
%
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 six months ended June 30, 2015 and 2014 .
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Manufacturing revenues from significant customers
56.8
%
 
63.1
%
 
50.3
%
 
47.5
%
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 June 30, 2015 and December 31, 2014 .
 
June 30,
2015
 
December 31,
2014
Manufacturing receivables from significant customers
31.2
%
 
60.5
%
Note 17 — Subsequent Events
On July 28, 2015 , 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 September 16, 2015 that will be paid on September 30, 2015 .
Also on July 28, 2015 , the Company's board of directors authorized a stock repurchase program (the “Stock Repurchase Program”) pursuant to which the Company may, from time to time, repurchase up to $250 million of its common stock. As part of the Stock Repurchase Program, shares may be purchased in open market transactions including through block purchases, through privately negotiated transactions, pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934 (the “Exchange Act”), through tender offers or otherwise in accordance with applicable federal securities laws, including Rule 10b-18 of the Exchange Act on terms to be determined from time to time.
The Stock Repurchase Program will end upon the earlier of the date on which it is terminated by the Board or when all authorized repurchases are completed. The Stock Repurchase Program does not obligate the Company to purchase any particular amount of common stock at any particular price or at all. The Stock Repurchase Program may be suspended, modified, or terminated by the Company's Board of Directors at any time for any reason.


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, the potential impact of regulatory developments, anticipated customer demand for our products, trends relating to our shipments, leasing business, 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, our Stock Repurchase Program 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:
risks relating to our compliance with, and the overall railcar industry's implementation of, United States and Canadian regulations related to the transportation of flammable liquids by rail released on May 1, 2015;
our prospects in light of the cyclical nature of our business;
the health of and prospects for the overall railcar industry;
fluctuations in commodity prices, including oil and gas;
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 impact of an economic downturn, adverse market conditions and restricted credit markets;
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;
the 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 and ongoing management of our new enterprise resource planning system; and
the risks related to our and our subsidiaries' indebtedness and compliance with covenants contained in our and our subsidiaries' financing arrangements.



22

Table of Contents

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. Our actual results could be different from the results described in or anticipated by our forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections and may be materially better or worse than anticipated. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements represent our estimates and assumptions only as of the date of this report. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this report, in order to reflect changes in circumstances or expectations or the occurrence of unanticipated events except to the extent required by applicable securities laws. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed above and under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 (Annual Report), as well as the risks and uncertainties discussed elsewhere in this report and the Annual Report. We qualify all of our forward-looking statements by these cautionary statements. We caution you that these risks are not exhaustive. We operate in a continually changing business environment and new risks emerge from time to time.
EXECUTIVE SUMMARY
We are a leading North American designer and manufacturer of hopper and tank railcars, which are currently the two largest markets within the railcar industry. We provide our railcar customers with integrated solutions through a comprehensive set of high quality products and related services offered by our three reportable segments: manufacturing, railcar leasing and railcar services. Manufacturing consists of railcar manufacturing and railcar and industrial component manufacturing. Railcar leasing consists of railcars manufactured by us and leased to third parties under operating leases. Railcar services consist of railcar repair, engineering and field services.
Our manufacturing facilities efficiently produce high quality hopper and tank railcars and have shown the ability to meet high levels of demand for our railcars. During the second quarter of 2015 , we shipped 2,397 railcars, which is 12.0% higher than that of the same period in 2014 . Railcars built for our lease fleet represented 42.5% of our total railcar shipments during the second quarter of 2015 compared to 22.0% for the same period in 2014 . This continued growth brought our lease fleet to 9,399 railcars as of June 30, 2015. We continue to be strategic in our selection of orders for railcars that will be added to our lease fleet versus 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.
The North American railcar market has been, and we expect it to continue to be, highly cyclical. We continue to see inquiries for pressure and general service tank railcars, as well as inquiries for hopper railcars servicing various commodities in the non-energy-related markets. In contrast, demand for railcars servicing the energy markets, including tank railcars for crude service and hopper railcars for sand service, remains uncertain given the recent volatility in oil prices, as well as the release of new regulations related to tank railcars in the U.S. and Canada. However, consistent with industry expectations, we believe demand for tank and hopper railcars will be at healthy levels for the next several quarters.
We continue to believe our efforts to increase flexibility at our plants while focusing on our core business of tank and hopper railcar manufacturing will position us to meet any increase in demand for new railcars, as well as retrofit and maintenance work to existing railcars that may result from the new regulations for tank railcars. We cannot assure you of the impact of this regulatory change affecting the North American railcar industry or our business. Similarly, we cannot assure you that hopper or tank railcar demand will continue at healthy levels, that demand for any railcar types or railcar services will improve, or that our railcar backlog, orders or shipments will track industry-wide trends.
To further diversify our business, we are investing capital and are evaluating opportunities to further expand our manufacturing flexibility and repair capacity to address the anticipated needs of the industry. We are in the process of expanding our tank railcar manufacturing facility to equip it to perform retrofit and repair work in addition to the manufacturing work already performed there and we expect this expansion will be completed in the second half of 2015. Current expansion projects at three of our existing repair plants are progressing and we expect these projects will be completed in the second half of 2015, thus further expanding our capacity for repair projects. We cannot assure you that any increased manufacturing flexibility or repair capacity will be sufficient to meet the demands of the industry.
As of June 30, 2015 , we had a backlog of 8,454 railcars, including 1,454 railcars for lease customers. In response to changes in customer demand, we continue to adjust production rates as needed at our railcar manufacturing facilities. We currently expect that, beginning in the second half of 2015 and continuing on for the next several quarters, our production will shift to more specialized tank and hopper railcars with higher material and labor content, but at slightly lower production rates.



23

Table of Contents

RESULTS OF OPERATIONS
Three and six months ended June 30, 2015 compared to three and six months ended June 30, 2014
Consolidated Results
 
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
$
 
%
 
June 30,
 
$
 
%
 
2015
 
2014
 
Change
 
Change
 
2015
 
2014
 
Change
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
144,481

 
$
206,364

 
$
(61,883
)
 
(30.0
)
 
$
366,292

 
$
360,327

 
$
5,965

 
1.7

Railcar leasing
28,216

 
13,885

 
14,331

 
103.2

 
52,801

 
25,631

 
27,170

 
106.0

Railcar services
19,301

 
17,260

 
2,041

 
11.8

 
36,681

 
33,666

 
3,015

 
9.0

Total revenues
$
191,998

 
$
237,509

 
$
(45,511
)
 
(19.2
)
 
$
455,774

 
$
419,624

 
$
36,150

 
8.6

Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
(107,714
)
 
$
(160,033
)
 
$
52,319

 
32.7

 
$
(282,248
)
 
$
(278,398
)
 
$
(3,850
)
 
(1.4
)
Railcar leasing
(8,993
)
 
(5,382
)
 
(3,611
)
 
(67.1
)
 
(16,694
)
 
(9,873
)
 
$
(6,821
)
 
(69.1
)
Railcar services
(14,737
)
 
(13,424
)
 
(1,313
)
 
(9.8
)
 
(28,582
)
 
(26,789
)
 
$
(1,793
)
 
(6.7
)
Total cost of revenues
$
(131,444
)
 
$
(178,839
)
 
$
47,395

 
26.5

 
$
(327,524
)
 
$
(315,060
)
 
$
(12,464
)
 
(4.0
)
Selling, general and administrative
(5,315
)
 
(6,820
)
 
1,505

 
22.1

 
(12,996
)
 
(16,207
)
 
3,211

 
19.8

Net gains on disposition of leased railcars
25

 

 
25

 
*

 
25

 

 
25

 
*

Earnings from operations
$
55,264

 
$
51,850

 
$
3,414

 
6.6

 
$
115,279

 
$
88,357

 
$
26,922

 
30.5

* - Not Meaningful
Revenues
Our total consolidated revenues for the three months ended June 30, 2015 decreased by 19.2% compared to the same period in 2014 . This decrease was due to decreased revenues in our manufacturing segment, partially offset by increased revenues in our railcar leasing and railcar services segments. During the three months ended June 30, 2015 , we shipped 1,378 direct sale railcars, which excludes 1,019 railcars ( 42.5% of total shipments) built for our lease fleet, compared to 1,670 direct sale railcars for the same period of 2014 , which excludes 470 railcars ( 22.0% of total shipments) built for our lease fleet.
Our total consolidated revenues for the six months ended June 30, 2015 increased by 8.6% compared to the same period in 2014 . This increase was due to increased revenues across all three of our segments, with the largest dollar increase in our railcar leasing segment. During the six months ended June 30, 2015 , we shipped 3,395 direct sale railcars, which excludes 1,670 railcars ( 33.0% of total shipments) built for our lease fleet, compared to 2,800 direct sale railcars for the same period of 2014 , which excludes 950 railcars ( 25.3% of total shipments) built for our lease fleet.
Manufacturing revenues decreased by 30.0% during the three month period ended June 30, 2015 compared to the same period in 2014 . As discussed above, we shipped 292 fewer direct sale railcars during the quarter compared to the same period of 2014 . The decrease in shipments of direct sale railcars accounted for 29.1% of the total decrease in manufacturing revenues for the three month period ended June 30, 2015 . While total railcar shipments continue at strong levels, a higher percentage of these railcars were for our lease fleet during the second quarter of 2015 compared to the same period of 2014 , with the related revenues being eliminated in consolidation, as discussed below. In addition, there was a higher mix of hopper railcars shipped for direct sale and for our lease fleet, which generally sell at lower prices than tank railcars due to less material and labor content. Lower revenues from certain material cost changes that we generally pass through to customers, as discussed below, accounted for 0.9% of the total decrease in manufacturing revenues.
Manufacturing revenues increased by 1.7% during the six month period ended June 30, 2015 compared to the same period in 2014 . The change in manufacturing revenues during the first six months of the year was due to a 3.9% increase resulting from higher volumes of railcar shipments for direct sale, as discussed above. This increase was partially offset by a decrease of 2.2% related to lower revenues from certain material cost changes that we generally pass through to customers, as discussed below.

24

Table of Contents

Railcar leasing revenues increased by 103.2% and 106.0% during the three and six months ended June 30, 2015 , respectively, compared to the same periods in 2014 due to an increase in the number of railcars in our lease fleet and higher average lease rates. The lease fleet grew to 9,399 railcars at June 30, 2015 from 5,390 railcars at June 30, 2014 .

Railcar services revenues increased by 11.8% and 9.0% during the three and six months ended June 30, 2015 , respectively, compared to the same periods in 2014 due to an increase in demand and a favorable change in the mix of work at our repair facilities and the additional capacity resulting from our Brookhaven repair facility that became operational during the third quarter of 2014.
Cost of revenues
Our total consolidated cost of revenues decreased by 26.5% for the three months ended June 30, 2015 compared to the same period in 2014 . This decrease was due to decreased cost of revenues in our manufacturing segment, partially offset by increased cost of revenues in our railcar leasing and railcar services segments.
Our total consolidated cost of revenues increased by 4.0% for the six months ended June 30, 2015 compared to the same period in 2014 . This increase was due to increased cost of revenues across all three of our segments, with the largest dollar increase in our railcar leasing segment.
Cost of revenues decreased for our manufacturing segment by 32.7% for the three months ended June 30, 2015 compared to the same period in 2014 . This change was primarily a result of fewer direct sale railcar shipments causing a 31.5% decrease in manufacturing cost of revenues, as discussed above, and a decrease of 1.2% resulting from lower material costs for key components and steel. The decrease in costs for key components and steel is also reflected as a decrease in selling prices as our sales contracts generally include provisions to adjust prices for increases and decreases in the cost of most raw materials and components.
Cost of revenues increased for our manufacturing segment by 1.4% for the six months ended June 30, 2015 compared to the same period in 2014 . This change was due to an increase of 4.3% due to higher volumes of railcar shipments for direct sale, discussed above, partially offset by a decrease of 2.9% resulting from lower material costs for key components and steel.
Cost of revenues for our railcar leasing segment increased by 67.1% and 69.1% for the three and six months ended June 30, 2015 , respectively, compared to the same periods in 2014 primarily as a result of an increase in our lease fleet, as discussed above.
Cost of revenues for our railcar services segment increased by 9.8% and 6.7% for the three and six months ended June 30, 2015 , respectively, compared to the same periods in 2014 , primarily due to an increase in volume of work and a favorable change in the mix of work at our repair facilities resulting in increased material and labor content and the additional capacity resulting from our Brookhaven repair facility, as discussed above.
Selling, general and administrative expenses
Our selling, general and administrative expenses were $5.3 million for the second quarter of 2015 compared to $6.8 million for the same period in 2014 . This $1.5 million decrease, or 22.1% , was primarily due to lower consulting costs and other corporate expenses.
Our total consolidated selling, general and administrative costs were $13.0 million for the six months ended June 30, 2015 compared to $16.2 million for the same period in 2014 . This $3.2 million decrease, or 19.8% , was primarily attributable to a decrease of $2.7 million in share-based compensation expense driven by the decrease in our stock price of $3 per share during the first six months of 2015 compared to an increase of $22 per share during the same period of 2014. The remainder of the decrease was due to lower consulting costs and other corporate expenses.
Interest expense
Our total consolidated interest expense increased by 209.0% and 196.8% for the three and six months ended June 30, 2015 , respectively, compared to the same periods in 2014 . In January 2015, our wholly-owned subsidiary completed a $625.5 million private placement of two classes of fixed rate secured railcar equipment notes bearing interest at a rate of 2.98% and 4.06% per annum, respectively, as discussed further in the liquidity and capital resources section below, resulting in a higher average debt balance during the first six months of 2015 compared to the same period in 2014 . In addition, our weighted average interest rate increased to 3.4% during the first six months of 2015 compared to 2.2% during the same period in 2014.
Loss on debt extinguishment

25

Table of Contents

During the six months ended June 30, 2015 , we refinanced our lease fleet financing facilities, resulting in net proceeds of $211.6 million under a private placement of secured railcar equipment notes. This refinancing resulted in a $2.1 million non-cash charge related to the accelerated write-off of the remainder of deferred debt issuance costs incurred in connection with the 2014 lease fleet financing facilities. During the same period in 2014, we refinanced our original lease fleet financing facility, resulting 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.
Earnings (Loss) from Joint Ventures
The breakdown of our earnings (loss) from joint ventures during the three and six months ended June 30, 2015 and 2014 was as follows:
 
 
Three Months Ended 
 June 30,
 
 
 
Six Months Ended 
 June 30,
 
 
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Ohio Castings
$
417

 
$
520

 
$
(103
)
 
$
879

 
$
330

 
$
549

Axis
1,724

 
(185
)
 
1,909

 
3,059

 
(596
)
 
3,655

Total Earnings (Loss) from Joint Ventures
$
2,141

 
$
335

 
$
1,806

 
$
3,938

 
$
(266
)
 
$
4,204

Our joint venture earnings were $2.1 million and $3.9 million for the three and six months ended June 30, 2015 , respectively, compared to earnings of $0.3 million and losses of $0.3 million for the same periods in 2014. These increases were a result of increased sales and production levels due to strong railcar industry demand, which has generated improved efficiencies at our Axis joint venture.
Income Tax Expense
Our income tax expense was $19.3 million , or 36.9% of our earnings before income taxes, and $39.8 million , or 37.0% of our earnings before income taxes for the three and six months ended June 30, 2015 , respectively, compared to $18.8 million , or 36.8% of our earnings before income taxes, and $31.0 million , or 36.9% for the same periods in 2014 .
The Company's current tax provision is based upon currently enacted tax laws. If the federal government enacts a tax extension for the use of bonus depreciation for 2015, our effective tax rate would likely increase. This potential increase in our effective tax rate would likely occur because the increase in depreciation would decrease and/or eliminate our qualified income related to the domestic production activities deduction.
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.  

26

Table of Contents

 
Three Months Ended June 30,
 
 
 
2015
 
2014
 
 
 
(in thousands)
 
 
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
144,481

 
$
123,693

 
$
268,174

 
$
206,364

 
$
61,305

 
$
267,669

 
$
505

Railcar Leasing
28,216

 

 
28,216

 
13,885

 

 
13,885

 
14,331

Railcar Services
19,301

 
94

 
19,395

 
17,260

 
52

 
17,312

 
2,083

Eliminations

 
(123,787
)
 
(123,787
)
 

 
(61,357
)
 
(61,357
)
 
(62,430
)
Total Consolidated
$
191,998

 
$

 
$
191,998

 
$
237,509

 
$

 
$
237,509

 
$
(45,511
)
Earnings (Loss) from Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
34,719

 
$
35,222

 
$
69,941

 
$
44,597

 
$
19,627

 
$
64,224

 
$
5,717

Railcar Leasing
16,954

 
22

 
16,976

 
7,399

 
(64
)
 
7,335

 
9,641

Railcar Services
3,901

 
(21
)
 
3,880

 
3,116

 
10

 
3,126

 
754

Corporate/Eliminations
(310
)
 
(35,223
)
 
(35,533
)
 
(3,262
)
 
(19,573
)
 
(22,835
)
 
(12,698
)
Total Consolidated
$
55,264

 
$

 
$
55,264

 
$
51,850

 
$

 
$
51,850

 
$
3,414

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
2015
 
2014
 
 
 
(in thousands)
 
 
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
366,292

 
$
207,424

 
$
573,716

 
$
360,327

 
$
125,334

 
$
485,661

 
$
88,055

Railcar leasing
52,801

 

 
52,801

 
25,631

 

 
25,631

 
27,170

Railcar services
36,681

 
196

 
36,877

 
33,666

 
184

 
33,850

 
3,027

Eliminations

 
(207,620
)
 
(207,620
)