American Railcar Industries, Inc.
American Railcar Industries, Inc. (Form: 10-Q, Received: 11/03/2015 16:48:33)
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, 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 November 2, 2015 was 19,844,531 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, 2015 (Unaudited) and December 31, 2014
 
 
Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2015 and 2014
 
 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
September 30,
2015
 
December 31,
2014
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
128,983

 
$
88,109

Restricted cash
17,021

 
7,178

Accounts receivable, net
39,440

 
33,618

Accounts receivable, due from related parties
14,074

 
33,027

Income taxes receivable
12,091

 
33,879

Inventories, net
125,773

 
117,007

Deferred tax assets
7,551

 
7,688

Prepaid expenses and other current assets
6,113

 
5,353

Total current assets
351,046

 
325,859

Property, plant and equipment, net
171,636

 
160,787

Railcars on leases, net
859,550

 
663,315

Deferred debt issuance costs, net
5,135

 
2,148

Goodwill
7,169

 
7,169

Investments in and loans to joint ventures
28,696

 
29,168

Other assets
7,509

 
3,963

Total assets
$
1,430,741

 
$
1,192,409

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
64,688

 
$
68,789

Accounts payable, due to related parties
2,848

 
2,793

Accrued expenses and taxes
25,245

 
21,931

Accrued compensation
14,156

 
15,046

Short-term debt, including current portion of long-term debt
25,783

 
110,612

Total current liabilities
132,720

 
219,171

Long-term debt, net of current portion
582,331

 
298,342

Deferred tax liability
190,374

 
168,349

Pension and post-retirement liabilities
7,909

 
8,544

Other liabilities
2,460

 
2,587

Total liabilities
915,794

 
696,993

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 50,000,000 shares authorized, 20,011,501 shares issued and outstanding as of September 30, 2015 and 21,352,297 shares issued and outstanding as of December 31, 2014
213

 
213

Additional paid-in capital
239,609

 
239,609

Treasury Stock
(51,285
)
 

Retained earnings
332,941

 
260,943

Accumulated other comprehensive loss
(6,531
)
 
(5,349
)
Total stockholders’ equity
514,947

 
495,416

Total liabilities and stockholders’ equity
$
1,430,741

 
$
1,192,409

See Notes to the Condensed Consolidated Financial Statements.

2

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,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Manufacturing (including revenues from affiliates of $34,510 and $217,449 for the three and nine months ended September 30, 2015, respectively, and $62,698 and $195,068 for the same periods in 2014)
$
123,318

 
$
128,270

 
$
489,610

 
$
488,597

Railcar leasing
31,174

 
17,219

 
83,975

 
42,850

Railcar services (including revenues from affiliates of $5,402 and $18,188 for the three and nine months ended September 30, 2015, respectively, and $4,912 and $13,574 for the same periods in 2014)
18,175

 
17,353

 
54,856

 
51,019

Total revenues
172,667

 
162,842

 
628,441

 
582,466

Cost of revenues:
 
 
 
 
 
 
 
Manufacturing
(91,132
)
 
(95,609
)
 
(373,380
)
 
(374,007
)
Railcar leasing
(9,714
)
 
(6,319
)
 
(26,408
)
 
(16,192
)
Railcar services
(14,269
)
 
(14,065
)
 
(42,851
)
 
(40,854
)
Total cost of revenues
(115,115
)
 
(115,993
)
 
(442,639
)
 
(431,053
)
Gross profit
57,552

 
46,849

 
185,802

 
151,413

Selling, general and administrative
(7,768
)
 
(7,570
)
 
(20,764
)
 
(23,777
)
Net gains on disposition of leased railcars

 

 
25

 

Earnings from operations
49,784

 
39,279

 
165,063

 
127,636

Interest income (including income from related parties of $520 and $1,615 for the three and nine months ended September 30, 2015, respectively, and $603 and $1,843 for the same periods in 2014)
542

 
608

 
1,655

 
1,868

Interest expense
(5,645
)
 
(1,849
)
 
(16,077
)
 
(5,364
)
Loss on debt extinguishment

 

 
(2,126
)
 
(1,896
)
Other Income
3

 
63

 
14

 
95

Earnings (Loss) from joint ventures
1,402

 
3

 
5,340

 
(263
)
Earnings before income taxes
46,086

 
38,104

 
153,869

 
122,076

Income tax expense
(16,729
)
 
(14,280
)
 
(56,567
)
 
(45,266
)
Net earnings
$
29,357

 
$
23,824

 
$
97,302

 
$
76,810

Net earnings per common share—basic and diluted
$
1.39

 
$
1.12

 
$
4.58

 
$
3.60

Weighted average common shares outstanding—basic and diluted
21,054

 
21,352

 
21,252

 
21,352

Cash dividends declared per common share
$
0.40

 
$
0.40

 
$
1.20

 
$
1.20

See Notes to the Condensed Consolidated Financial Statements.


3

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,
 
2015
 
2014
 
2015
 
2014
Net earnings
$
29,357

 
$
23,824

 
$
97,302

 
$
76,810

Currency translation
(715
)
 
(590
)
 
(1,529
)
 
(632
)
Postretirement plans (1)
115

 
34

 
347

 
101

Comprehensive income
$
28,757

 
$
23,268

 
$
96,120

 
$
76,279


(1)
Net of tax effect of $0.1 million and less than $0.1 million for the three months ended September 30, 2015 and 2014, respectively, and $0.2 million and $0.1 million for the nine months ended September 30, 2015 and 2014.
See Notes to the Condensed Consolidated Financial Statements.


4

Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)  
 
Nine Months Ended
 
September 30,
 
2015
 
2014
Operating activities:
 
 
 
Net earnings
$
97,302

 
$
76,810

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
33,185

 
24,423

Amortization of deferred costs
305

 
363

Loss (Gain) on disposal of property, plant, equipment and leased railcars
45

 
(72
)
(Earnings) Losses from joint ventures
(5,340
)
 
263

Provision for deferred income taxes
21,892

 
11,182

Provision for allowance for doubtful accounts receivable
65

 
905

Items related to financing activities:
 
 
 
Loss on debt extinguishment
2,126

 
1,896

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(5,970
)
 
(7,987
)
Accounts receivable, due from related parties
18,856

 
(8,764
)
Income taxes receivable
21,867

 

Inventories, net
(8,960
)
 
(15,235
)
Prepaid expenses and other current assets
(848
)
 
(1,734
)
Accounts payable
(5,890
)
 
20,634

Accounts payable, due to related parties
55

 
1,538

Accrued expenses and taxes
2,471

 
4,432

Other
(3,757
)
 
3,007

Net cash provided by operating activities
167,404

 
111,661

Investing activities:
 
 
 
Purchases of property, plant and equipment
(26,376
)
 
(13,701
)
Capital expenditures - leased railcars
(215,096
)
 
(187,861
)
Proceeds from the sale of property, plant, equipment and leased railcars
118

 
575

Proceeds from repayments of loans and dividends by joint ventures
5,750

 
2,875

Net cash used in investing activities
(235,604
)
 
(198,112
)
Financing activities:
 
 
 
Repayments of long-term debt
(426,150
)
 
(201,833
)
Proceeds from long-term debt
625,306

 
318,682

Change in interest reserve related to long-term debt
(9,843
)
 
(26
)
Stock repurchases
(49,441
)
 

Payment of common stock dividends
(25,304
)
 
(25,623
)
Debt issuance costs
(5,271
)
 
(2,425
)
Net cash provided by financing activities
109,297

 
88,775

Effect of exchange rate changes on cash and cash equivalents
(223
)
 
(123
)
Increase in cash and cash equivalents
40,874

 
2,201

Cash and cash equivalents at beginning of period
88,109

 
97,252

Cash and cash equivalents at end of period
$
128,983

 
$
99,453


See Notes to the Condensed Consolidated Financial Statements.

5

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. Certain prior-period amounts in the notes to the consolidated financial statements have been reclassified to conform to current-period presentation. These reclassifications had no effect on the reported results of operations.
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 July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11, Simplifying the Measurement of Inventory , which amends Accounting Standards Codification (ASC) Topic 330, Inventory . This ASU simplifies the accounting for inventory by requiring inventory to be measured at the lower of cost and net realizable value and eliminates options that currently exist for measuring inventory at market value. Market value was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. If the net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss during the period in which it occurs. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and should be applied on a prospective basis. The Company presents inventory at the lower of cost or market and when applicable records reserves intended to reduce the carrying value of its inventory to its net realizable value. The Company does not expect a material impact to the financial statements 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.
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 May 2014, the FASB issued 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

6


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, 2017, 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 — Accounts Receivable, net
Accounts receivable, net, consists of the following:  
 
September 30,
2015
 
December 31,
2014
 
(in thousands)
Accounts receivable, gross
$
40,675

 
$
34,790

Less allowance for doubtful accounts
(1,235
)
 
(1,172
)
Total accounts receivable, net
$
39,440

 
$
33,618


Note 4 — Inventories
Inventories consist of the following:  
 
September 30,
2015
 
December 31,
2014
 
(in thousands)
Raw materials
$
52,125

 
$
67,773

Work-in-process
62,315

 
33,643

Finished products
14,297

 
18,144

Total inventories
128,737

 
119,560

Less reserves
(2,964
)
 
(2,553
)
Total inventories, net
$
125,773

 
$
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:  
 
September 30,
2015
 
December 31,
2014
 
(in thousands)
Operations / Corporate:
 
 
 
Buildings
$
163,876

 
$
164,087

Machinery and equipment
216,803

 
196,768

Land
3,687

 
3,537

Construction in process
14,701

 
11,612

 
399,067

 
376,004

Less accumulated depreciation
(227,431
)
 
(215,217
)
Property, plant and equipment, net
$
171,636

 
$
160,787

Railcar Leasing:
 
 
 
Railcars on leases
$
910,350

 
$
695,226

Less accumulated depreciation
(50,800
)
 
(31,911
)
Railcars on leases, net
$
859,550

 
$
663,315


7


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.
As of September 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 3 months of 2015
$
31,936

2016
124,829

2017
110,032

2018
98,552

2019
80,850

2020 and thereafter
104,134

Total
$
550,333

Depreciation expense
The following table summarizes depreciation expense:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Total depreciation expense
$
12,214

 
$
8,751

 
$
33,185

 
$
24,423

Depreciation expense on leased railcars
$
7,050

 
$
4,295

 
$
18,894

 
$
11,285

Note 6 — Goodwill
As of September 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 stay above historical average 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 and continues to be 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 stay above historical average 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;

8


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.
Note 7 — Investments in and Loans to Joint Ventures
As of September 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:  
 
September 30,
2015
 
December 31,
2014
 
(in thousands)
Carrying amount of investments in and loans to joint ventures
 
 
 
Ohio Castings
$
8,141

 
$
9,194

Axis
20,555

 
19,974

Total investments in and loans to joint ventures
$
28,696

 
$
29,168

See Note 16, 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
16,728

 
$
24,717

 
$
60,623

 
$
60,981

Gross profit
$
699

 
$
2,961

 
$
5,061

 
$
5,896

Net (loss) earnings
$
(205
)
 
$
3,085

 
$
2,324

 
$
4,288


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% .

9


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.
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 $25.3 million and $29.1 million as of September 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
17,812

 
$
16,614

 
$
57,229

 
$
49,690

Gross profit
$
4,571

 
$
(610
)
 
$
14,848

 
$
904

Earnings (loss) before interest
$
4,333

 
$
(843
)
 
$
14,097

 
$
180

Net earnings (loss)
$
3,341

 
$
(2,051
)
 
$
10,891

 
$
(3,523
)
As of September 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Liability, beginning of period
$
1,378

 
$
1,654

 
$
953

 
$
1,385

Provision for warranties issued during the period, net of adjustments
341

 
335

 
1,235

 
931

Adjustments to warranties issued during previous periods
(4
)
 
(97
)
 
(12
)
 
(120
)
Warranty claims
(163
)
 
(248
)
 
(624
)
 
(552
)
Liability, end of period
$
1,552

 
$
1,644

 
$
1,552

 
$
1,644


10


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 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 16, Related Party Transactions, for further discussion regarding these agreements with ARL.
As of September 30, 2015 and December 31, 2014 , the net book value of the railcars that were pledged as part of the Lease Fleet Financings was $485.9 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

11


accelerated write-off of deferred debt issuance costs incurred in connection with the LLI and LLII lease fleet financings. As of September 30, 2015 , the outstanding principal balance on the Notes, including the current portion, was $608.1 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 repayment date on January 15, 2025, additional interest will 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 September 30, 2015 , the liquidity reserve amount was $17.0 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 September 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 $614.9 million as of September 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 September 30, 2015 are as follows (in thousands):  
Remaining 3 months of 2015
$
17,783

2016
68,219

2017
53,453

2018
42,397

2019
28,524

2020 and thereafter
31,401

Total
$
241,777

The remaining principal payments under the Notes as of September 30, 2015 are as follows (in thousands):  
Remaining 3 months of 2015
$
6,495

2016
25,783

2017
25,588

2018
25,590

2019
25,507

2020 and thereafter
499,328

Total
$
608,291


12


Note 10 — Income Taxes
The Company’s federal income tax returns for tax years 2012 and beyond remain subject to examination, with the latest statute of limitations expiring in September 2018. Certain of the Company's 2008 through 2011 state income tax returns and all of the Company's state income tax returns for 2012 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 implemented the recent regulations concerning amounts paid to acquire, produce, or improve tangible property and recovery of basis upon disposition with the filing of its 2014 tax return during the third quarter of 2015 without a material impact to its financial condition or results of operations. The Company is further evaluating whether any additional future deductions may be deemed appropriate under the regulations. Presently, the Company does not anticipate a material impact to its financial condition or results of operations.
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Service cost
$
44

 
$
56

 
$
132

 
$
170

Interest cost
236

 
243

 
710

 
728

Expected return on plan assets
(320
)
 
(313
)
 
(961
)
 
(939
)
Amortization of net actuarial loss/prior service cost
202

 
69

 
605

 
208

Net periodic cost recognized
$
162

 
$
55

 
$
486

 
$
167

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

 
$

 
$

 
$

Interest cost
1

 

 
2

 
2

Amortization of net actuarial gain/prior service credit
(12
)
 
(14
)
 
(37
)
 
(43
)
Net periodic benefit recognized
$
(11
)
 
$
(14
)
 
$
(35
)
 
$
(41
)
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.

13


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, 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. On September 9, 2015, the court denied ARI's motion to dismiss the wrongful termination counterclaim.  However, the Company continues to believe that Gyansys' counterclaims lack merit and will continue to vigorously defend against these counterclaims.
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
Share-based compensation (income) expense
 
 
 
 
 
 
 
Cost of revenues: Manufacturing
$
(147
)
 
$
239

 
$
(93
)
 
$
1,002

Cost of revenues: Railcar services
(21
)
 
13

 
(18
)
 
251

Selling, general and administrative
(594
)
 
288

 
(360
)
 
3,259

Total share-based compensation (income) expense
$
(762
)
 
$
540

 
$
(471
)
 
$
4,512

As of September 30, 2015 , unrecognized compensation costs related to the unvested portion of SARs were estimated to be $0.6 million and were expected to be recognized over a weighted average period of 27 months .

14


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, 2014
$
(275
)
 
$
(5,074
)
 
$
(5,349
)
Currency translation
(1,529
)
 

 
(1,529
)
Reclassifications related to pension and postretirement plans, net of tax effect of $220 (1)

 
347

 
347

Balance September 30, 2015
$
(1,804
)
 
$
(4,727
)
 
$
(6,531
)
 
(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 — Stock Repurchase Program
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 $250.0 million of its common stock. 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. Under the Stock Repurchase program, 1,340,796 shares were repurchased, during the three and nine months ended September 30, 2015 , at a cost of $51.3 million . Certain shares of stock repurchased during September 2015, totaling $1.8 million , were cash settled in October 2015 in accordance with normal settlement practices.
See Note 18, Subsequent Events, for discussion of the Company's stock repurchase activity subsequent to September 30, 2015 .
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:
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 $3.7 million and $13.0 million of components from ACF during the three and nine months ended September 30, 2015 , respectively, and $1.3 million and $2.2 million during the comparable periods in 2014.

15


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.
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 $2.7 million and $8.6 million for the three and nine months ended September 30, 2015 , respectively, compared to $4.3 million and $16.1 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.

16


Revenues of $5.4 million and $18.2 million for the three and nine months ended September 30, 2015 , respectively, compared to $4.9 million and $13.6 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 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 $2.0 million and $5.5 million for the three and nine months ended September 30, 2015 , respectively, compared to $1.6 million and $3.4 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 $0.2 million and $0.6 million were incurred for each of the three and nine months ended September 30, 2015 , respectively, compared to $0.2 million and $0.4 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 $31.8 million and $208.9 million for the three and nine months ended September 30, 2015 , respectively, compared to $58.4 million and $179.0 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 $25.3 million and $29.1 million as of September 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 continues until terminated by either party, in accordance with the provisions of the agreement. MWR collected scrap material totaling $1.1 million and $3.8 million for the three and nine months ended September 30, 2015 , respectively, compared to $2.4 million and $6.7 million for the same periods in 2014 . This agreement was approved by the independent directors of the Company’s audit committee.

17


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 September 30, 2015 and 2014 and were $0.2 million for the nine months ended September 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 $34.4 million and $113.8 million for the three and nine months ended September 30, 2015 , respectively, compared to $33.5 million and $93.9 million for the same periods in 2014 for railcar components purchased from joint ventures.
Inventory as of September 30, 2015 and December 31, 2014 , included $11.8 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 17 — 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.  


18


 
Three Months Ended September 30, 2015
 
Revenues
 
 
 
External
 
Intersegment
 
Total
 
Earnings (Loss) from Operations
 
(in thousands)
Manufacturing
$
123,318

 
$
106,541

 
$
229,859

 
$
54,984

Railcar leasing
31,174

 
(153
)
 
31,021

 
18,450

Railcar services
18,175

 
642

 
18,817

 
3,457

Corporate

 

 

 
(5,095
)
Eliminations

 
(107,030
)
 
(107,030
)
 
(22,012
)
Total Consolidated
$
172,667

 
$

 
$
172,667

 
$
49,784

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

 
$
143,706

 
$
271,976

 
$
74,713

Railcar leasing
17,219

 

 
17,219

 
9,466

Railcar services
17,353

 
38

 
17,391

 
2,684

Corporate

 

 

 
(4,925
)
Eliminations

 
(143,744
)
 
(143,744
)
 
(42,659
)
Total Consolidated
$
162,842

 
$

 
$
162,842

 
$
39,279

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
Revenues
 
 
 
External
 
Intersegment
 
Total
 
Earnings (Loss) from Operations
 
(in thousands)
Manufacturing
$
489,610

 
$
313,965

 
$
803,575

 
$
195,363

Railcar leasing
83,975

 
(153
)
 
83,822

 
50,190

Railcar services
54,856

 
838

 
55,694

 
10,204

Corporate

 

 

 
(11,944
)
Eliminations

 
(314,650
)
 
(314,650
)
 
(78,750
)
Total Consolidated
$
628,441

 
$

 
$
628,441

 
$
165,063

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
Revenues
 
 
 
External
 
Intersegment
 
Total
 
Earnings (Loss) from Operations
 
(in thousands)
Manufacturing
$
488,597

 
$
269,040

 
$
757,637

 
$
192,322

Railcar leasing
42,850

 

 
42,850

 
23,062

Railcar services
51,019

 
222

 
51,241

 
8,029

Corporate

 

 

 
(15,702
)
Eliminations

 
(269,262
)
 
(269,262
)
 
(80,075
)
Total Consolidated
$
582,466

 
$

 
$
582,466

 
$
127,636

 

19


Total Assets
September 30,
2015
 
December 31,
2014
 
(in thousands)
Manufacturing
$
312,895

 
$
318,157

Railcar leasing
1,200,392

 
908,010

Railcar services
57,746

 
52,639

Corporate/Eliminations
(140,292
)
 
(86,397
)
Total Consolidated
$
1,430,741

 
$
1,192,409

Sales to Related Parties
As discussed in Note 16, 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.
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Manufacturing
20.0
%
 
38.5
%
 
34.6
%
 
33.5
%
Railcar leasing
%
 
%
 
%
 
%
Railcar services
3.1
%
 
3.0
%
 
2.9
%
 
2.3
%
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, 2015 and 2014 .
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Manufacturing revenues from significant customers
46.7
%
 
63.1
%
 
44.9
%
 
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 September 30, 2015 and December 31, 2014 .
 
September 30,
2015
 
December 31,
2014
Manufacturing receivables from significant customers
28.7
%
 
60.5
%
Note 18 — Subsequent Events
On October 27, 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 December 16, 2015 that will be paid on December 30, 2015 .
The Company repurchased 166,970 shares under the Stock Repurchase Program subsequent to September 30, 2015, at a cost of $6.1 million , resulting in 19,844,531 shares outstanding as of November 2, 2015 .



20


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, products and markets, 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 projects to expand our manufacturing flexibility and repair capacity, statements regarding our capital expenditure plans, short- and long-term liquidity needs and financing plans, our Stock Repurchase Program, anticipated benefits regarding the growth of our leasing business, statements regarding the mix of railcars in our lease fleet and our lease fleet financings, anticipated production schedules for our products and the anticipated production schedules of our joint ventures, our 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 health of and prospects for the overall railcar industry;
the risk of being unable to market or remarket railcars for sale or lease at favorable prices or on favorable terms or at all;
risks 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;
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 sufficiency of our liquidity and capital resources, including long-term capital needs to further support the growth of our lease fleet;
the impact of repurchases pursuant to our Stock Repurchase Program on our current liquidity and the ownership percentage of our principal beneficial stockholder through IELP, Mr. Carl Icahn;
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.

21

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 consolidated operating margins have continued to increase throughout 2015, reaching 28.8% and 26.3% for the three and nine months ended September 30, 2015. Our earnings continue to benefit from the growth of our railcar leasing segment with a lease fleet of 10,317 railcars at September 30, 2015. In addition, our manufacturing facilities efficiently produce high quality hopper and tank railcars to meet the demands of the North American railcar market which has been, and we expect it to continue to be, highly cyclical. Inquiries for hopper railcars servicing various commodities in the non-energy-related markets are steady and we continue to see inquiries for pressure and general service tank railcars. 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 May 2015 release of regulations related to tank railcars in the U.S. and Canada. However, consistent with industry expectations, we believe demand for tank and hopper railcars servicing the non-energy-related markets will stay above historical average levels for the next several quarters.
Given the cyclical nature of the North American railcar market and to address the anticipated needs of the industry, we are investing capital and evaluating opportunities to further expand our manufacturing flexibility and repair capacity. During the third quarter of 2015, we completed two of our expansion projects at our existing repair plants and we expect a third project will be completed in the fourth quarter of 2015, thus further expanding our capacity for repair projects. We expect our expansion project at our tank railcar manufacturing facility will also be completed in the fourth quarter of 2015, enabling us to perform retrofit and repair work in addition to the manufacturing work already performed there. We cannot assure you that any increased manufacturing flexibility or repair capacity will be sufficient or necessary to meet the demands of the industry.
We continue to maintain our focus on the core of our business - tank and hopper railcar manufacturing. We believe efforts to increase flexibility at our plants 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 recently released regulations for tank railcars. We cannot assure you of the impact of this regulatory change affecting the North American railcar industry or our business.
During the third quarter of 2015 , we shipped 1,908 railcars, which is 11.3% lower than that of the same period in 2014 . In response to changes in customer demand, we continue to adjust production rates as needed at our railcar manufacturing facilities, which has resulted in a shift to more specialized tank railcars with higher material and labor content, but at slightly lower production rates. Meanwhile, hopper railcar shipments remain strong. We expect these tank and hopper railcar trends will continue for the next several quarters. We cannot assure you that hopper or tank railcar demand will continue to stay above historical average 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.
Railcars built for our lease fleet represented 48.1% of our total railcar shipments during the third quarter of 2015 compared to 51.9% for the same period in 2014 . 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. As of September 30, 2015 , we had a backlog of 7,936 railcars, including 821 railcars for lease customers.

22

Table of Contents

RESULTS OF OPERATIONS
Three and nine months ended September 30, 2015 compared to three and nine months ended September 30, 2014
Consolidated Results
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
$
 
%
 
September 30,
 
$
 
%
 
2015
 
2014
 
Change
 
Change
 
2015
 
2014
 
Change
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
123,318

 
$
128,270

 
$
(4,952
)
 
(3.9
)
 
$
489,610

 
$
488,597

 
$
1,013

 
0.2

Railcar leasing
31,174

 
17,219

 
13,955

 
81.0

 
83,975

 
42,850

 
41,125

 
96.0

Railcar services
18,175

 
17,353

 
822

 
4.7

 
54,856

 
51,019

 
3,837

 
7.5

Total revenues
$
172,667

 
$
162,842

 
$
9,825

 
6.0

 
$
628,441

 
$
582,466

 
$
45,975

 
7.9

Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
(91,132
)
 
$
(95,609
)
 
$
4,477

 
4.7

 
$
(373,380
)
 
$
(374,007
)
 
$
627

 
0.2

Railcar leasing
(9,714
)
 
(6,319
)
 
(3,395
)
 
(53.7
)
 
(26,408
)
 
(16,192
)
 
$
(10,216
)
 
(63.1
)
Railcar services
(14,269
)
 
(14,065
)
 
(204
)
 
(1.5
)
 
(42,851
)
 
(40,854
)
 
$
(1,997
)
 
(4.9
)
Total cost of revenues
$
(115,115
)
 
$
(115,993
)
 
$
878

 
0.8

 
$
(442,639
)
 
$
(431,053
)
 
$
(11,586
)
 
(2.7
)
Selling, general and administrative
(7,768
)
 
(7,570
)
 
(198
)
 
(2.6
)
 
(20,764
)
 
(23,777
)
 
3,013

 
12.7

Net gains on disposition of leased railcars

 

 

 
*

 
25

 

 
25

 
*

Earnings from operations
$
49,784

 
$
39,279

 
$
10,505

 
26.7

 
$
165,063

 
$
127,636

 
$
37,427

 
29.3

* - Not Meaningful
Revenues
Our total consolidated revenues for the three months ended September 30, 2015 increased by 6.0% compared to the same period in 2014 . This increase was due to increased revenues in our railcar leasing and railcar services segments, partially offset by decreased revenues in our manufacturing segment. During the three months ended September 30, 2015 , we shipped 990 direct sale railcars, which excludes 918 railcars ( 48.1% of total shipments) built for our lease fleet, compared to 1,034 direct sale railcars for the same period of 2014 , which excludes 1,117 railcars ( 51.9% of total shipments) built for our lease fleet.
Our total consolidated revenues for the nine months ended September 30, 2015 increased by 7.9% 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 nine months ended September 30, 2015 , we shipped 4,385 direct sale railcars, which excludes 2,588 railcars ( 37.1% of total shipments) built for our lease fleet, compared to 3,834 direct sale railcars for the same period of 2014 , which excludes 2,067 railcars ( 35.0% of total shipments) built for our lease fleet.
Manufacturing revenues decreased by 3.9% during the three month period ended September 30, 2015 compared to the same period in 2014 with 4.5% of the decrease related to lower revenues from certain material cost changes that we generally pass through to customers, as discussed below. Hopper railcar shipments for direct sale decreased during the three month period ended September 30, 2015 compared to the same period of 2014 as a higher percentage of hopper railcars were built for our lease fleet during the third quarter of 2015 compared to the same period of 2014. Tank railcar shipments for direct sale also decreased as production has shifted to a larger mix of specialty tank railcars which have higher average selling prices due to the complexity of the design. These higher average selling prices partially offset the decrease in direct sale shipments, accounting for an increase of 0.6% .
Manufacturing revenues increased by 0.2% during the nine month period ended September 30, 2015 compared to the same period of 2014 . Hopper railcar shipments for direct sale increased during the nine months ended September 30, 2015 compared to the same period of 2014 as that market has strengthened. This was partially offset by tank railcar shipments for direct sale decreasing compared to the same period of 2014 given the shift in production to more specialty tank railcars, as discussed above. In total, we shipped 551 more direct sale railcars during the nine month period ended September 30, 2015 compared to

23

Table of Contents

the same period in 2014. This increase in volume was partially offset by the shift in mix to more hopper railcars, which generally sell at lower prices than tank railcars due to less material and labor content, as discussed above.
Railcar leasing revenues increased by 81.0% and 96.0% during the three and nine months ended September 30, 2015 , respectively, compared to the same periods in 2014 due to an increase in the number of railcars in our lease fleet. The lease fleet grew to 10,317 railcars at September 30, 2015 from 6,508 railcars at September 30, 2014 .

Railcar services revenues increased by 4.7% and 7.5% during the three and nine months ended September 30, 2015 , respectively, compared to the same periods in 2014 due to an increase in demand, 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 0.8% for the three months ended September 30, 2015 compared to the same period in 2014 due to decreased cost of revenues in our manufacturing segment, partially offset by an increase in our railcar leasing and railcar services segments.
Our total consolidated cost of revenues increased by 2.7% for the nine months ended September 30, 2015 compared to the same period in 2014 due to increased cost of revenues in our railcar leasing and railcar services segments, partially offset by a decrease in our manufacturing segment.
Cost of revenues decreased for our manufacturing segment by 4.7% for the three months ended September 30, 2015 compared to the same period in 2014 . This decrease was primarily driven by a decrease of 6.0% 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 changes in the cost of most raw materials and components. In addition, although we shipped 44 fewer railcars for direct sale during the three months ended September 30, 2015 compared to the same period of 2014, the decrease in volume was offset by higher material costs and labor content on the production of more specialty tank railcars, accounting for a 1.3% increase in manufacturing cost of revenues, which offset the decrease discussed above.
Cost of revenues decreased for our manufacturing segment by 0.2% for the nine months ended September 30, 2015 compared to the same period in 2014 . Although overall direct sale railcar shipments have increased during the nine months ended September 30, 2015 compared to the same period of 2014, direct sale shipments of hopper railcars, which generally cost less than tank railcars due to less material and labor content, increased during this time. As a result, the increase in volume of direct sale railcars shipped during the nine month period ended September 30, 2015 as compared to the same period of 2014, was offset by the shift in mix to more hopper railcars, as discussed above.
Cost of revenues for our railcar leasing segment increased by 53.7% and 63.1% for the three and nine months ended September 30, 2015 , respectively, compared to the same periods in 2014 primarily as a result of an increase in the number of railcars in our lease fleet, as discussed above.
Cost of revenues for our railcar services segment increased by 1.5% and 4.9% for the three and nine months ended September 30, 2015 , respectively, compared to the same periods in 2014 , primarily due to an increase in volume of work, 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 $7.8 million for the third quarter of 2015 compared to $7.6 million for the same period in 2014 . This $0.2 million increase, or 2.6% , was primarily due to an increase in consulting and legal fees, as well as higher depreciation related to our new enterprise resource planning system, partially offset by lower share-based compensation expense. In addition, during the third quarter of 2014, we incurred bad debt expense of $0.9 million.
Our total consolidated selling, general and administrative expenses were $20.8 million for the nine months ended September 30, 2015 compared to $23.8 million for the same period in 2014 . This $3.0 million decrease, or 12.7% , was primarily attributable to a decrease of $3.6 million in share-based compensation expense driven by the decrease in our stock price of $15 per share during the first nine months of 2015 compared to an increase of $28 per share during the same period of 2014, partially offset by changes in other corporate expenses. In addition, during the third quarter of 2014, we incurred bad debt expense of $0.9 million.

24

Table of Contents

Interest expense
Our total consolidated interest expense increased by $3.8 million and $10.7 million for the three and nine months ended September 30, 2015 , respectively, compared to the same periods in 2014 . In January 2015, our wholly-owned subsidiary, Longtrain Leasing III, LLC (LLIII), 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 nine months of 2015 compared to the same period in 2014 . In addition, our weighted average interest rate increased to 3.5% during the first nine months of 2015 compared to 2.2% during the same period in 2014 as a result of refinancing our prior variable rate debt obligations with fixed rate debt, thereby minimizing the effect of any rise in interest rates.
Loss on debt extinguishment
During the nine months ended September 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 nine months ended September 30, 2015 and 2014 was as follows:
 
 
Three Months Ended 
 September 30,
 
 
 
Nine Months Ended 
 September 30,
 
 
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Ohio Castings
$
68

 
$
842

 
$
(774
)
 
$
947

 
$
1,172

 
$
(225
)
Axis
1,334

 
(839
)
 
2,173

 
4,393

 
(1,435
)
 
5,828

Total Earnings (Loss) from Joint Ventures
$
1,402

 
$
3

 
$
1,399

 
$
5,340

 
$
(263
)
 
$
5,603

Our joint venture earnings were $1.4 million and $5.3 million for the three and nine months ended September 30, 2015 , respectively, compared to earnings of less than $0.1 million and losses of $0.3 million for the same periods in 2014. These increases were a result of increased sales and production levels at our Axis joint venture due to strong railcar industry demand, which has generated improved efficiencies and better profitability, partially offset by decreased sales at our Ohio Castings joint venture due to a ramp down of production to more historical levels.
Income Tax Expense
Our income tax expense was $16.7 million , or 36.3% of our earnings before income taxes, and $56.6 million , or 36.8% of our earnings before income taxes for the three and nine months ended September 30, 2015 , respectively, compared to $14.3 million , or 37.5% of our earnings before income taxes, and $45.3 million , or 37.1% 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.  

25

Table of Contents

 
Three Months Ended September 30,
 
 
 
2015
 
2014
 
 
 
(in thousands)
 
 
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
123,318

 
$
106,541

 
$
229,859

 
$
128,270

 
$
143,706

 
$
271,976

 
$
(42,117
)
Railcar Leasing
31,174

 
(153
)
 
31,021

 
17,219

 

 
17,219

 
13,802

Railcar Services
18,175

 
642

 
18,817

 
17,353

 
38

 
17,391

 
1,426

Eliminations

 
(107,030
)
 
(107,030
)
 

 
(143,744
)
 
(143,744
)
 
36,714

Total Consolidated
$
172,667

 
$

 
$
172,667

 
$
162,842

 
$

 
$
162,842

 
$
9,825

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
2015
 
2014
 
 
 
(in thousands)
 
 
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
489,610

 
$
313,965

 
$
803,575

 
$
488,597

 
$
269,040

 
$
757,637

 
$
45,938

Railcar leasing
83,975

 
(153
)
 
83,822

 
42,850

 

 
42,850

 
40,972

Railcar services
54,856

 
838

 
55,694

 
51,019

 
222

 
51,241

 
4,453

Eliminations

 
(314,650
)
 
(314,650
)
 

 
(269,262
)
 
(269,262
)
 
(45,388
)
Total Consolidated
$
628,441

 
$

 
$
628,441

 
$
582,466

 
$

 
$
582,466

 
$
45,975

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
 
 
(in thousands)
 
 
 
(in thousands)
 
 
 
 
Earnings (Loss) from Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
54,984

 
$
74,713

 
$
(19,729
)
 
$
195,363

 
$
192,322

 
$
3,041

 
 
Railcar leasing
18,450

 
9,466

 
8,984

 
50,190

 
23,062

 
27,128

 
 
Railcar services
3,457

 
2,684

 
773

 
10,204

 
8,029

 
2,175

 
 
Corporate
(5,095
)
 
(4,925
)
 
(170
)
 
(11,944
)
 
(15,702
)
 
3,758

 
 
Eliminations
(22,012
)
 
(42,659
)
 
20,647

 
(78,750
)
 
(80,075