American Railcar Industries, Inc.
American Railcar Industries, Inc. (Form: 10-Q, Received: 07/29/2016 16:29:26)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from                      to                     
Commission File No. 000-51728
 
  
AMERICAN RAILCAR INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
  
North Dakota
 
43-1481791
(State of
Incorporation)
 
(I.R.S. Employer
Identification No.)
 
 
 
100 Clark Street, St. Charles, Missouri
 
63301
(Address of principal executive offices)
 
(Zip Code)
(636) 940-6000
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):  
Large accelerated filer
¨
Accelerated filer
x
 
 
 
 
Non-accelerated filer
¨
Smaller Reporting Company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
The number of shares of the registrant’s common stock, $0.01 par value, outstanding on July 27, 2016 was 19,399,253 shares.
 


Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC.
INDEX TO FORM 10-Q
 
Item Number
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
June 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
199,451

 
$
298,064

Restricted cash
16,655

 
16,917

Accounts receivable, net
40,899

 
29,018

Accounts receivable, due from related parties
6,114

 
9,401

Income taxes receivable
2,132

 
3,058

Inventories, net
76,881

 
96,965

Prepaid expenses and other current assets
6,704

 
4,058

Total current assets
348,836

 
457,481

Property, plant and equipment, net
176,649

 
176,311

Railcars on leases, net
866,808

 
848,717

Goodwill
7,169

 
7,169

Investments in and loans to joint ventures
27,347

 
27,397

Other assets
5,791

 
7,999

Total assets
$
1,432,600

 
$
1,525,074

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
24,712

 
$
36,080

Accounts payable, due to related parties
1,908

 
4,477

Accrued expenses and taxes
15,074

 
6,344

Accrued compensation
11,255

 
11,459

Short-term debt, including current portion of long-term debt
25,617

 
125,784

Total current liabilities
78,566

 
184,144

Long-term debt, net of unamortized debt issuance costs of $4,972 and $5,081 as of June 30, 2016 and December 31, 2015, respectively
558,199

 
570,756

Deferred tax liability
237,655

 
222,338

Pension and post-retirement liabilities
8,456

 
8,484

Other liabilities
2,347

 
3,055

Total liabilities
885,223

 
988,777

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 50,000,000 shares authorized, 19,399,755 and 19,844,531 shares outstanding as of June 30, 2016 and December 31, 2015, respectively
213

 
213

Additional paid-in capital
239,609

 
239,609

Treasury Stock
(74,340
)
 
(57,423
)
Retained earnings
388,228

 
361,153

Accumulated other comprehensive loss
(6,333
)
 
(7,255
)
Total stockholders’ equity
547,377

 
536,297

Total liabilities and stockholders’ equity
$
1,432,600

 
$
1,525,074

See Notes to the Condensed Consolidated Financial Statements.

3

Table of Contents


AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Manufacturing (including revenues from affiliates of $223 and $776 for the three and six months ended June 30, 2016, respectively, and $61,743 and $182,939 for the same periods in 2015)
$
97,548

 
$
144,481

 
$
221,340

 
$
366,292

Railcar leasing
33,209

 
28,216

 
65,977

 
52,801

Railcar services (including revenues from affiliates of $7,249 and $15,243 for the three and six months ended June 30, 2016, respectively, and $6,406 and $12,786 for the same periods in 2015)
19,727

 
19,301

 
39,347

 
36,681

Total revenues
150,484

 
191,998

 
326,664

 
455,774

Cost of revenues:
 
 
 
 
 
 
 
Manufacturing
(81,437
)
 
(107,714
)
 
(183,718
)
 
(282,248
)
Railcar leasing
(10,356
)
 
(8,993
)
 
(20,531
)
 
(16,694
)
Railcar services
(15,420
)
 
(14,737
)
 
(30,657
)
 
(28,582
)
Total cost of revenues
(107,213
)
 
(131,444
)
 
(234,906
)
 
(327,524
)
Gross profit
43,271

 
60,554

 
91,758

 
128,250

Selling, general and administrative
(7,297
)
 
(5,315
)
 
(15,254
)
 
(12,996
)
Net gains on disposition of leased railcars

 
25

 
167

 
25

Earnings from operations
35,974

 
55,264

 
76,671

 
115,279

Interest income (including income from related parties of $427 and $884 for the three and six months ended June 30, 2016, respectively, and $538 and $1,095 for the same periods in 2015)
453

 
550

 
931

 
1,113

Interest expense
(5,678
)
 
(5,694
)
 
(11,584
)
 
(10,432
)
Loss on debt extinguishment

 

 

 
(2,126
)
Other Income
1

 
5

 
1

 
11

Earnings from joint ventures
1,458

 
2,141

 
2,944

 
3,938

Earnings before income taxes
32,208

 
52,266

 
68,963

 
107,783

Income tax expense
(12,312
)
 
(19,297
)
 
(26,275
)
 
(39,838
)
Net earnings
$
19,896

 
$
32,969

 
$
42,688

 
$
67,945

Net earnings per common share—basic and diluted
$
1.02

 
$
1.54

 
$
2.18

 
$
3.18

Weighted average common shares outstanding—basic and diluted
19,511

 
21,352

 
19,588

 
21,352

Cash dividends declared per common share
$
0.40

 
$
0.40

 
$
0.80

 
$
0.80

See Notes to the Condensed Consolidated Financial Statements.


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Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net earnings
$
19,896

 
$
32,969

 
$
42,688

 
$
67,945

Currency translation
(38
)
 
171

 
683

 
(814
)
Postretirement plans (1)
119

 
118

 
239

 
232

Comprehensive income
$
19,977

 
$
33,258

 
$
43,610

 
$
67,363


(1)
Net of tax effect of $0.1 million and less than $0.1 million for the three months ended June 30, 2016 and 2015 , respectively, and $0.2 million and $0.1 million for the six months ended June 30, 2016 and 2015 .
See Notes to the Condensed Consolidated Financial Statements.


5

Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)  
 
Six Months Ended
 
June 30,
 
2016
 
2015
Operating activities:
 
 
 
Net earnings
$
42,688

 
$
67,945

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
25,616

 
20,971

Amortization of deferred costs
252

 
228

Loss on disposal of property, plant, equipment and leased railcars
18

 
2

Earnings from joint ventures
(2,944
)
 
(3,938
)
Provision for deferred income taxes
15,163

 
10,129

Provision for allowance for doubtful accounts receivable
(1,121
)
 
(20
)
Items related to financing activities:
 
 
 
Loss on debt extinguishment

 
2,126

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(10,300
)
 
2,164

Accounts receivable, due from related parties
3,322

 
15,426

Income taxes receivable
926

 
21,867

Inventories, net
20,167

 
(431
)
Prepaid expenses and other current assets
(2,643
)
 
(881
)
Accounts payable
(11,377
)
 
(9,107
)
Accounts payable, due to related parties
(2,569
)
 
973

Accrued expenses and taxes
8,514

 
(3,297
)
Other
1,772

 
(3,848
)
Net cash provided by operating activities
87,484

 
120,309

Investing activities:
 
 
 
Purchases of property, plant and equipment
(11,187
)
 
(15,354
)
Grant Proceeds
75

 

Capital expenditures - leased railcars
(33,444
)
 
(132,578
)
Proceeds from the sale of property, plant, equipment and leased railcars
640

 
113

Proceeds from repayments of loans by joint ventures
2,953

 
2,500

Net cash used in investing activities
(40,963
)
 
(145,319
)
Financing activities:
 
 
 
Repayments of long-term debt
(112,834
)
 
(419,698
)
Proceeds from long-term debt

 
625,306

Change in interest reserve related to long-term debt
263

 
(9,876
)
Stock repurchases
(16,917
)
 

Payment of common stock dividends
(15,613
)
 
(17,082
)
Debt issuance costs
(14
)
 
(5,271
)
Net cash (used in) provided by financing activities
(145,115
)
 
173,379

Effect of exchange rate changes on cash and cash equivalents
(19
)
 
(202
)
(Decrease) Increase in cash and cash equivalents
(98,613
)
 
148,167

Cash and cash equivalents at beginning of period
298,064

 
88,109

Cash and cash equivalents at end of period
$
199,451

 
$
236,276


See Notes to the Condensed Consolidated Financial Statements.

6

Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 — Description of the Business
The condensed consolidated financial statements included herein have been prepared by American Railcar Industries, Inc. (a North Dakota corporation) and subsidiaries (collectively the Company or ARI), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The consolidated balance sheet as of December 31, 2015 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, 2015 . 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), Longtrain Leasing III, LLC (LLIII), ARI Railcar Services LLC and Southwest Steel Casting Company, LLC. All intercompany transactions and balances have been eliminated.
Note 2 — Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Improvements to Employee Share-Based Payment Accounting , which amends Accounting Standards Codification (ASC) Topic 718, Compensation - Stock Compensation . This ASU simplifies several aspects of the accounting for share-based payment award transactions, including (i) income tax consequences, (ii) classification of awards as either equity or liabilities, (iii) whether or not to estimate forfeitures or account for them when they occur and (iv) classification on the statement of cash flows. The standard is effective for interim and annual periods beginning after December 31, 2016. Early adoption will be permitted with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company is evaluating the impact of this standard on its consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases , which amends ASC Topic 840, Leases , and is intended to increase the transparency and comparability of accounting for lease transactions. This ASU requires most leases to be recognized on the balance sheet. Lessees will need to recognize a right-of-use asset and a lease liability for virtually all leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting remains similar to the current model. Targeted improvements were made to lessor accounting to align, where necessary, with certain changes to the lessee model and the new revenue recognition standard. The ASU will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Company is evaluating the impact of this standard on its consolidated financial statements and disclosures.
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. The retrospective adoption of this guidance during the first quarter of 2016 resulted in a reclassification of debt issuance costs related to the Company's long-term debt on the Company's June 30, 2016 and December 31, 2015 balance sheets and did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
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 revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the

7


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. This ASU was amended by ASU No. 2015-14, issued in August 2015, which deferred the original effective date by one year; the effective date of this ASU is for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017, using one of two retrospective application methods. Early adoption is permitted only as of the annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. 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:  
 
June 30,
2016
 
December 31,
2015
 
(in thousands)
Accounts receivable, gross
$
41,182

 
$
30,422

Less allowance for doubtful accounts
(283
)
 
(1,404
)
Total accounts receivable, net
$
40,899

 
$
29,018


Note 4 — Inventories
Inventories consist of the following:  
 
June 30,
2016
 
December 31,
2015
 
(in thousands)
Raw materials
$
43,981

 
$
65,575

Work-in-process
25,736

 
31,184

Finished products
10,766

 
3,393

Total inventories
80,483

 
100,152

Less reserves
(3,602
)
 
(3,187
)
Total inventories, net
$
76,881

 
$
96,965

Note 5 — Property, Plant, Equipment and Railcars on Leases, net
The following table summarizes the components of property, plant, equipment and railcars on leases, net:  
 
June 30,
2016
 
December 31,
2015
 
(in thousands)
Operations / Corporate:
 
 
 
Buildings
$
178,622

 
$
167,537

Machinery and equipment
225,931

 
219,488

Land
3,809

 
3,687

Construction in process
6,393

 
16,784

 
414,755

 
407,496

Less accumulated depreciation
(238,106
)
 
(231,185
)
Property, plant and equipment, net
$
176,649

 
$
176,311

Railcar Leasing:
 
 
 
Railcars on leases
$
939,732

 
$
906,786

Less accumulated depreciation
(72,924
)
 
(58,069
)
Railcars on leases, net
$
866,808

 
$
848,717


8


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 June 30, 2016 , future contractual minimum rental revenues required under non-cancellable operating leases for railcars with terms longer than one year are as follows (in thousands):  
Remaining 6 months of 2016
$
64,605

2017
115,566

2018
102,210

2019
83,772

2020
48,846

2021 and thereafter
66,514

Total
$
481,513

Depreciation expense
The following table summarizes depreciation expense:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Total depreciation expense
$
12,961

 
$
10,910

 
$
25,616

 
$
20,971

Depreciation expense on leased railcars
$
7,504

 
$
6,353

 
$
14,879

 
$
11,844

Note 6 — Investments in and Loans to Joint Ventures
As of June 30, 2016 , the Company was party to two joint ventures: Ohio Castings Company LLC (Ohio Castings) and Axis LLC (Axis). Through its wholly-owned subsidiary, Castings, the Company has a 33.3% ownership interest in Ohio Castings, a limited liability company formed to produce various steel railcar parts for use or sale by the ownership group. Through its wholly-owned subsidiary, ARI Component, the Company has a 41.9% ownership interest in Axis, a limited liability company formed to produce railcar axles for use or sale by the ownership group.
The Company accounts for these joint ventures using the equity method. Under this method, the Company recognizes its share of the earnings and losses of the joint ventures as they accrue. Advances and distributions are charged and credited directly to the investment accounts. From time to time, the Company also makes loans to its joint ventures that are included in the investment account. The investment balance for these joint ventures is recorded within the Company’s manufacturing segment. The carrying amount of investments in and loans to joint ventures, which also represents ARI’s maximum exposure to loss with respect to the joint ventures, are as follows:  
 
June 30,
2016
 
December 31,
2015
 
(in thousands)
Carrying amount of investments in and loans to joint ventures
 
 
 
Ohio Castings
$
7,611

 
$
7,776

Axis
19,736

 
19,621

Total investments in and loans to joint ventures
$
27,347

 
$
27,397

See Note 15, Related Party Transactions, for information regarding financial transactions with ARI's joint ventures.
Ohio Castings
Ohio Castings produces railcar parts that are sold to one of the joint venture partners. This joint venture partner then sells these railcar parts to outside third parties at current market prices and sells them to the Company and the other joint venture partner at Ohio Castings' cost plus a licensing fee.

9


The Company has determined that, although the joint venture is a variable interest entity (VIE), accounting for its activity under the equity method is appropriate given that the Company is not the primary beneficiary, does not have a controlling financial interest and does not have the ability to individually direct the activities of Ohio Castings that most significantly impact its economic performance. The significant factors in this determination were that neither Castings nor the Company has rights to the majority of returns, losses or votes, all major and strategic decisions are decided between the partners, and the risk of loss to the Company and Castings is limited to its investment in Ohio Castings.
Summary financial results for Ohio Castings, the investee company, in total, are as follows:  
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
13,683

 
$
20,507

 
$
27,337

 
$
43,895

Gross profit
$
1,004

 
$
2,314

 
$
1,214

 
$
4,362

Net earnings (loss)
$
218

 
$
1,397

 
$
(380
)
 
$
2,529


Axis
ARI, through ARI Component, a wholly-owned subsidiary, owns a portion of a joint venture, Axis, to manufacture and sell railcar axles. ARI currently owns 41.9% of Axis, while a minority partner owns 9.7% and the other significant partner owns 48.4% .
Under the terms of the joint venture agreement, ARI and the other significant partner are required, and the minority partner is entitled, to contribute additional capital to the joint venture, on a pro rata basis, of any amounts approved by the joint venture’s executive committee, as and when called by the executive committee.
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 the first six months of 2016 and the full year of 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 $20.7 million and $23.6 million as of June 30, 2016 and December 31, 2015 , respectively.
The Company has determined that, although the joint venture is a VIE, accounting for its activity under the equity method is appropriate given that the Company is not the primary beneficiary, does not have a controlling financial interest and does not have the ability to individually direct the activities of Axis that most significantly impact its economic performance. The significant factors in this determination were that neither ARI Component nor the Company has rights to the majority of returns, losses or votes, the executive committee and board of directors of the joint venture are comprised of one representative from each significant partner with equal voting rights and the risk of loss to the Company and ARI Component is limited to its investment in Axis and the loans due to the Company under the Axis Credit Agreement.
Summary financial results for Axis, the investee company, in total, are as follows:  
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
16,086

 
$
19,077

 
$
32,497

 
$
39,417

Gross profit
$
4,818

 
$
5,214

 
$
9,860

 
$
10,277

Earnings before interest
$
4,567

 
$
4,975

 
$
9,335

 
$
9,764

Net earnings
$
3,710

 
$
3,886

 
$
7,564

 
$
7,550

As of June 30, 2016 , the investment in Axis was comprised entirely of ARI’s term loan. The Company has evaluated this loan to be fully recoverable. The Company will continue to monitor its investment in Axis for impairment.

10


Note 7 — Warranties
The overall change in the Company’s warranty reserve is reflected on the condensed consolidated balance sheets in accrued expenses and taxes and is detailed as follows:  
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Liability, beginning of period
$
1,713

 
$
1,340

 
$
1,415

 
$
953

Provision for warranties issued during the period, net of adjustments
29

 
286

 
444

 
894

Adjustments to warranties issued during previous periods
(16
)
 
(4
)
 
(11
)
 
(8
)
Warranty claims
(142
)
 
(244
)
 
(264
)
 
(461
)
Liability, end of period
$
1,584

 
$
1,378

 
$
1,584

 
$
1,378

Note 8 — Debt
LLI, LLII and LLIII 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 has been and 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's, LLII's 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 15, Related Party Transactions, for further discussion regarding these agreements with ARL.
As of June 30, 2016 and December 31, 2015 , the net book value of the railcars that were pledged as part of the Lease Fleet Financings was $554.0 million and $563.7 million , respectively.
January 2015 private placement notes
In January 2015, LLIII issued $625.5 million in aggregate principal amount of notes pursuant to an indenture (the Indenture). The notes are fixed rate secured railcar equipment notes bearing interest at a rate of 2.98% per annum for the Class A-1 Notes and 4.06% per annum for the Class A-2 Notes (collectively, the Notes), each payable monthly. Of the aggregate principal amount, $408.5 million was used to refinance the LLI and LLII lease fleet financing facilities, resulting in net proceeds of $211.6 million . In conjunction with the refinancing, the Company incurred a $2.1 million loss, which is shown as 'Loss on debt extinguishment' on the condensed consolidated statements of operations. This non-cash charge is related to the accelerated write-off of deferred debt issuance costs incurred in connection with the LLI and LLII lease fleet financings. As of June 30, 2016 , there were $213.5 million and $375.5 million of Class A-1 and Class A-2 notes outstanding, respectively. The Notes have a legal final maturity date of January 17, 2045 and an expected principal repayment date of January 15, 2025.
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. Pursuant to the terms of the Indenture, the Company is required to maintain deposits in a liquidity reserve bank account equal to nine months of interest payments. As of June 30, 2016 and December 31, 2015 , the liquidity reserve amount was $16.7 million and $16.9 million , respectively, 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 Company was in compliance with all of its covenants under the Indenture as of June 30, 2016 .

11


The fair value of the Notes was $595.4 million and $608.4 million as of June 30, 2016 and December 31, 2015, respectively, and is calculated by taking the net present value of future principal and interest payments using a discount rate that is based on the Company's most recent fixed debt transaction. The inputs used in the calculation are classified within Level 2 of the fair value hierarchy.
The future contractual minimum rental revenues related to the railcars pledged as of June 30, 2016 are as follows (in thousands):  
Remaining 6 months of 2016
$
40,959

2017
68,315

2018
55,097

2019
39,699

2020
21,073

2021 and thereafter
22,526

Total
$
247,669

The remaining principal payments under the Notes as of June 30, 2016 are as follows (in thousands):  
Remaining 6 months of 2016
$
12,949

2017
25,588

2018
25,590

2019
25,507

2020
26,354

2021 and thereafter
472,974

Total
$
588,962

ARI Lease Fleet Financings
December 2015 revolving credit facility
In December 2015, the Company completed a financing of its railcar lease fleet with availability of up to $200.0 million under a credit agreement (2015 Credit Agreement). See 'Liquidity and Capital Resources' section for further discussion regarding the incremental borrowing provision under the 2015 Credit Agreement. The initial amount obtained at closing was approximately $99.5 million , net of fees and expenses (the amounts extended under the 2015 Credit Agreement, inclusive of any amounts extended under the incremental facility, the Revolving Loan). In February 2016, the Company repaid amounts outstanding under the Revolving Loan in full and as of June 30, 2016 , the Company had borrowing availability of $200.0 million under this facility.
The Revolving Loan accrues interest at a rate per annum equal to Adjusted LIBOR (as defined in the 2015 Credit Agreement) for the applicable interest period, plus 1.45% , for a rate of 1.9% as of December 31, 2015. Interest is payable on the last day of each 1, 2, or 3-month interest period, the day of any mandatory prepayment, and the maturity date.
The Revolving Loan and the other obligations under the 2015 Credit Agreement are fully recourse to the Company and are secured by a first lien and security interest on certain specified railcars (together with specified replacement railcars), related leases, related receivables and related assets, subject to limited exceptions, a controlled bank account, and following an election by the Company (the Election), the applicable railcar management agreement with ARL. See Note 15, Related Party Transactions, for further discussion regarding this agreement with ARL.
Subject to the provisions of the 2015 Credit Agreement, the Revolving Loan may be borrowed and reborrowed until the maturity date. The Revolving Loan may be prepaid at the Company’s option at any time without premium or penalty (other than customary LIBOR breakage fees and customary reimbursement of increased costs). The final scheduled maturity of the Revolving Loan is December 10, 2018, or such earlier date as provided in the 2015 Credit Agreement. The Company was in compliance with all of its covenants under the 2015 Credit Agreement as of June 30, 2016 .
Note 9 — 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 2019. 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

12


limitations expiring in December 2020. The Company’s foreign income tax returns for 2012 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. 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 10 — Pension 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 components of net periodic benefit cost for the pension plans are as follows:  
 
Pension Benefits
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Service cost
$
52

 
$
44

 
$
104

 
$
88

Interest cost
246

 
237

 
492

 
474

Expected return on plan assets
(283
)
 
(321
)
 
(567
)
 
(641
)
Amortization of net actuarial loss/prior service cost
206

 
201

 
412

 
403

Net periodic cost recognized
$
221

 
$
161

 
$
441

 
$
324


Note 11 — Commitments and Contingencies
The Company is subject to comprehensive federal, state, local and international environmental laws and regulations relating to the release or discharge of materials into the environment, the management, use, processing, handling, storage, transport or disposal of hazardous materials and wastes, and other laws and regulations relating to the protection of human health and the environment. These laws and regulations not only expose ARI to liability for the environmental condition of its current or formerly owned or operated facilities, and its own negligent acts, but also may expose ARI to liability for the conduct of others or for ARI’s actions that were in compliance with all applicable laws at the time such actions were taken. In addition, these laws may require significant expenditures to achieve compliance and are frequently modified or revised to impose new obligations. Civil and criminal fines and penalties and other sanctions may be imposed for non-compliance with these environmental laws and regulations. ARI’s operations that involve hazardous materials also raise potential risks of liability under common law.
Certain real property ARI acquired from ACF Industries LLC (ACF) in 1994 had been involved in investigation and remediation activities to address contamination both before and after their transfer to ARI. ACF is an affiliate of Mr. Carl Icahn, the Company’s principal beneficial stockholder through Icahn Enterprises L.P. (IELP). Substantially all of the issues identified with respect to these properties relate to the use of these properties prior to their transfer to ARI by ACF and for which ACF has retained liability for environmental contamination that may have existed at the time of transfer to ARI. ACF has also agreed to indemnify ARI for any cost that might be incurred with those existing issues. As of the date of this report, ARI does not believe it will incur material costs in connection with activities relating to these properties, but it cannot assure that this will be the case. If ACF fails to honor its obligations to ARI, ARI could be responsible for the cost of any additional investigation or remediation that may be required. The Company believes that its operations and facilities are in substantial compliance with applicable laws and regulations and that any noncompliance is not likely to have a material adverse effect on its financial condition or results of operations.
ARI is a party to collective bargaining agreements with labor unions at two repair facilities that will expire in September 2016 and January 2021. ARI is also party to a collective bargaining agreement with a labor union at a parts manufacturing facility that will expire in April 2017.

13


The Company has various agreements with and commitments to related parties. See Note 15, Related Party Transactions, for further detail.
Certain claims, suits and complaints arising in the ordinary course of business, as well as the Gyansys, Inc. (Gyansys) litigation discussed below, have been filed or are pending against ARI. In the opinion of management, all such claims, suits, and complaints 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. 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.  A trial date has been tentatively scheduled for January 17, 2017. The Company continues to believe that Gyansys' counterclaims lack merit and will continue to vigorously defend against these counterclaims.
Note 12 — Share-based Compensation
The following table presents the amounts incurred by ARI for share-based compensation, or stock appreciation rights (SARs) and the corresponding line items on the condensed consolidated statements of operations that they are classified within:  
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Share-based compensation expense (income)
 
 
 
 
 
 
 
Cost of revenues: Manufacturing
$
(56
)
 
$
6

 
$
(173
)
 
$
54

Cost of revenues: Railcar services
(2
)
 
3

 
(17
)
 
3

Selling, general and administrative
82

 
175

 
(97
)
 
234

Total share-based compensation expense (income)
$
24

 
$
184

 
$
(287
)
 
$
291

As of June 30, 2016 , unrecognized compensation costs related to the unvested portion of SARs were estimated to be $1.2 million and were expected to be recognized over a weighted average period of 30 months .
Note 13 — 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, 2015
$
(2,230
)
 
$
(5,025
)
 
$
(7,255
)
Currency translation
683

 

 
683

Reclassifications related to pension and postretirement plans, net of tax effect of $150 (1)

 
239

 
239

Balance June 30, 2016
$
(1,547
)
 
$
(4,786
)
 
$
(6,333
)
 
(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 10 for further details and pre-tax amounts.
Note 14 — 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 of directors or when all

14


authorized repurchases are completed. Under the Stock Repurchase program, 161,456 and 444,776 shares were repurchased, during the three and six months ended June 30, 2016 , respectively, at a cost of $6.0 million and $16.9 million , respectively.
See Note 17, Subsequent Events, for discussion of the Company's stock repurchase activity subsequent to June 30, 2016 .
Note 15 — Related Party Transactions
Agreements with ACF
The Company has the following agreements with ACF, a company controlled by Mr. Carl Icahn, the Company’s principal beneficial stockholder through IELP. Each agreement described below has been unanimously approved by the independent directors of the Company's audit committee.
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. 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 $0.9 million and $2.9 million of components from ACF during the three and six months ended June 30, 2016 , respectively, and $6.8 million and $9.3 million during the comparable periods in 2015 .
Purchasing and engineering services agreement
In January 2013, ARI entered into a purchasing and engineering services agreement and license with ACF. 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 November 2015, ARI and ACF amended this agreement to, among other provisions, extend the termination date to December 31, 2016 from December 31, 2015, subject to certain early termination events.
In consideration of the services and license provided by ARI to ACF in conjunction with the agreement, ACF pays ARI a royalty and, if any, a share of the net profits (Profits) earned on each railcar manufactured and sold by ACF under the agreement, in an aggregate amount equal to 30% 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 $0.2 million and $0.7 million for the three and six months ended June 30, 2016, respectively, compared to $3.6 million and $5.8 million for the same periods in 2015 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.

15


Repair services and support agreement
In April 2015, ARI entered into a repair services and support agreement with ACF. 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.
For the three and six months ended June 30, 2016 revenues of less than $0.1 million were recorded under this agreement.
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). Each agreement described below has been unanimously approved by the independent directors of the Company's audit committee.
Railcar services agreement
In April 2011, the Company entered into a railcar services agreement with ARL (the Railcar Services Agreement). Under the Railcar Services Agreement, ARI provides ARL railcar repair, engineering, administrative and other services, on an as needed basis, for ARL’s lease fleet at mutually agreed upon prices. The Railcar Services Agreement had an initial term of three years and automatically renews for additional one year periods unless either party provides at least sixty days prior written notice of termination.
Revenues of $7.3 million and $15.3 million for the three and six months ended June 30, 2016 , respectively, compared to $6.4 million and $12.8 million for the same periods in 2015 , 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.
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.
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, 2018 and thereafter it automatically renews for additional one-year periods unless written notice is received from either party at least six months prior to the expected renewal. In December 2012, LLI entered into a similar agreement with ARL (as amended in January 2014, the LLI railcar management agreement). On October 16, 2014, LLII entered into a railcar management agreement with ARL (the LLII railcar management agreement). Under the ARI and LLI railcar management agreements, in addition to the management fee, ARL receives a fee consisting of a lease origination fee, and, in respect of railcars sold by ARL, sales commissions.
In January 2015, in connection with the Company's refinancing of its lease fleet financings, the LLI and LLII railcar management agreements were terminated and LLIII entered into a similar railcar management agreement with ARL. This agreement extends through the Notes' final maturity date of January 17, 2045, unless terminated earlier pursuant to its terms (together with the railcar management agreements discussed above, collectively the Railcar Management Agreements).
Total lease origination and management fees incurred under the Railcar Management Agreements were $1.6 million and $3.3 million for the three and six months ended June 30, 2016 , respectively, compared to $1.9 million and $3.4 million for the same periods in 2015 . These fees are included in cost of revenues for railcar leasing on the condensed consolidated statements of operations. Sales commissions of $0.3 million and $0.6 million were incurred for each of the three and six months ended

16


June 30, 2016 , respectively, compared to $0.1 million and $0.4 million for the same periods in 2015 . 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. During the three and six months ended June 30, 2016 there were no revenues from railcars sold to the IELP Entities compared to $58.1 million and $177.1 million for the same periods in 2015 . 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 $20.7 million and $23.6 million as of June 30, 2016 and December 31, 2015 , respectively. See Note 6, 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 had 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 $0.4 million and $0.8 million for the three and six months ended June 30, 2016 , respectively, compared to $1.2 million and $2.7 million for the same periods in 2015 . This agreement was unanimously approved by the independent directors of the Company’s audit committee.
Insight Portfolio Group LLC (Insight Portfolio Group) is an entity formed and controlled by Mr. Carl Icahn in order to maximize the potential buying power of a group of entities with which Mr. Carl Icahn has a relationship in negotiating with a wide range of suppliers of goods, services and tangible and intangible property at negotiated rates. ARI, and a number of other entities with which Mr. Carl Icahn has a relationship, have minority ownership interests in, and pay fees as part of being a member of Insight Portfolio Group. Fees incurred as a member of the Insight Portfolio Group were less than $0.1 million during the three months ended June 30, 2016 and 2015 and were $0.1 million for the six months ended June 30, 2016 and 2015 . 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 $16.0 million and $34.8 million for the three and six months ended June 30, 2016 , respectively, compared to $37.9 million and $79.4 million for the same periods in 2015 for railcar components purchased from joint ventures.
Inventory as of June 30, 2016 and December 31, 2015 , included $7.0 million and $7.9 million , respectively, of railcar components purchased from joint ventures and all profit for this inventory still on hand was eliminated.
Note 16 — Operating Segments and Sales and Credit Concentrations
ARI operates in three reportable segments: manufacturing, railcar leasing and railcar services. These reportable segments are organized based upon a combination of the products and services offered and performance is evaluated based on revenues and segment earnings (loss) from operations. Intersegment revenues are accounted for as if sales were to third parties.
Manufacturing
Manufacturing consists of railcar manufacturing, and railcar and industrial component manufacturing. Intersegment revenues are determined based on an estimated fair market value of the railcars manufactured for the Company’s railcar leasing segment, as if such railcars had been sold to a third party. Revenues for railcars manufactured for the Company’s railcar leasing segment are not recognized in consolidated revenues as railcar sales, but rather lease revenues are recognized over the term of the lease. Earnings from operations for manufacturing include an allocation of selling, general and administrative costs, as well as profit for railcars manufactured for the Company’s railcar leasing segment based on revenue determined as described above.

17


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 June 30, 2016
 
Revenues
 
 
 
External
 
Intersegment
 
Total
 
Earnings (Loss) from Operations
 
(in thousands)
Manufacturing
$
97,548

 
$
9,266

 
$
106,814

 
$
15,538

Railcar leasing
33,209

 

 
33,209

 
20,237

Railcar services
19,727

 
609

 
20,336

 
3,059

Corporate

 

 

 
(4,441
)
Eliminations

 
(9,875
)
 
(9,875
)
 
1,581

Total Consolidated
$
150,484

 
$

 
$
150,484

 
$
35,974

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

 
$
123,693

 
$
268,174

 
$
69,941

Railcar leasing
28,216

 

 
28,216

 
16,976

Railcar services
19,301

 
94

 
19,395

 
3,880

Corporate

 

 

 
(2,463
)
Eliminations

 
(123,787
)
 
(123,787
)
 
(33,070
)
Total Consolidated
$
191,998

 
$

 
$
191,998

 
$
55,264

 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2016
 
Revenues
 
 
 
External
 
Intersegment
 
Total
 
Earnings (Loss) from Operations
 
(in thousands)
Manufacturing
$
221,340

 
$
32,897

 
$
254,237

 
$
38,224

Railcar leasing
65,977

 

 
65,977

 
39,912

Railcar services
39,347

 
1,568

 
40,915

 
6,567

Corporate

 

 

 
(8,949
)
Eliminations

 
(34,465
)
 
(34,465
)
 
917

Total Consolidated
$
326,664

 
$

 
$
326,664

 
$
76,671

 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
Revenues
 
 
 
External
 
Intersegment
 
Total
 
Earnings (Loss) from Operations
 
(in thousands)
Manufacturing
$
366,292

 
$
207,424

 
$
573,716

 
$
140,379

Railcar leasing
52,801

 

 
52,801

 
31,740

Railcar services
36,681

 
196

 
36,877

 
6,747

Corporate

 

 

 
(6,813
)
Eliminations

 
(207,620
)
 
(207,620
)
 
(56,774
)
Total Consolidated
$
455,774

 
$

 
$
455,774

 
$
115,279

 

19


Total Assets
June 30,
2016
 
December 31,
2015
 
(in thousands)
Manufacturing
$
260,088

 
$
272,721

Railcar leasing
1,199,291

 
1,190,180

Railcar services
59,290

 
56,880

Corporate/Eliminations
(86,069
)
 
5,293

Total Consolidated
$
1,432,600

 
$
1,525,074

Sales to Related Parties
As discussed in Note 15, Related Party Transactions, ARI has numerous arrangements with related parties. As a result, from time to time, ARI offers its products and services to affiliates at terms and pricing no less favorable to ARI than the terms and pricing provided to unaffiliated third parties. Below is a summary of revenue from affiliates for each operating segment reflected as a percentage of total consolidated revenues.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Manufacturing
0.1
%
 
32.2
%
 
0.2
%
 
40.1
%
Railcar leasing
%
 
%
 
%
 
%
Railcar services
4.8
%
 
3.3
%
 
4.7
%
 
2.8
%
Sales and Credit Concentration
Manufacturing revenues from customers that accounted for more than 10% of total consolidated revenues are outlined in the table below. The railcar leasing and railcar services segments had no customers that accounted for more than 10% of the total consolidated revenues for the three and six months ended June 30, 2016 and 2015 .
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Manufacturing revenues from significant customers
46.1
%
 
56.8
%
 
33.9
%
 
50.3
%
Manufacturing accounts receivable from customers that accounted for more than 10% of consolidated receivables (including accounts receivable, net and accounts receivable, due from related parties) are outlined in the table below. The railcar leasing and railcar services segments had no customers that accounted for more than 10% of the consolidated receivables balance as of June 30, 2016 and December 31, 2015 .
 
June 30,
2016
 
December 31,
2015
Manufacturing receivables from significant customers
43.7
%
 
20.9
%
Note 17 — Subsequent Events
On July 27, 2016 , the board of directors of the Company declared a cash dividend of $0.40 per share of common stock of the Company to shareholders of record as of September 9, 2016 that will be paid on September 23, 2016 .
The Company repurchased 502 shares under the Stock Repurchase Program subsequent to June 30, 2016 , at a cost of less than $0.1 million , resulting in 19,399,253 shares outstanding as of July 27, 2016 .



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;
fluctuations in commodity prices, including oil and gas;
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;
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, as well as the mix of railcars for lease versus direct sale;
our ability to manage overhead and variations in production rates;
our ability to recruit, retain and train adequate numbers of qualified personnel;
the impact of an economic downturn, adverse market conditions and restricted credit markets;
our reliance upon a small number of customers that represent a large percentage of our revenues and backlog;
fluctuations in the costs of raw materials, including steel and railcar components, and delays in the delivery of such raw materials and components;
fluctuations in the supply of components and raw materials we use in railcar manufacturing;
the ongoing benefits and risks related to our relationship with Mr. Carl Icahn, our principal beneficial stockholder through Icahn Enterprises L.P. (IELP), and certain of his affiliates;
the 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 our current joint ventures and anticipated capital needs of, and production at our joint ventures;
the conversion of our railcar backlog into revenues equal to our reported estimated backlog value;
the risks associated with ongoing compliance with environmental, health, safety, and regulatory laws and regulations, which may be subject to change;
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, 2015 (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 one of the leading North American designers and manufacturers 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. We use certain of these components in our own railcar manufacturing and/or sell certain of these products to third parties. 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.
Although results are down compared to 2015, given the current market conditions for new railcar demand, our consolidated operating margins remain strong at 23.9% for the three months ended June 30, 2016 as we continue to benefit from the growth of our railcar leasing segment with a fully utilized lease fleet of 10,641 railcars at June 30, 2016. Railcars built for our lease fleet represented 8.4% of our total railcar shipments during the second quarter of 2016 compared to 42.5% for the same period in 2015 . 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 June 30, 2016 , we had a backlog of 5,601 railcars, including 1,556 railcars for lease customers.
After record high demand for railcars the last couple of years, the rail industry is experiencing headwinds resulting from lower railcar loadings, lower fleet utilization and increased rail speeds. Given the tank railcar market's record high deliveries in 2014 and 2015, coupled with volatility in oil prices, the tank railcar market is softening at a faster pace than other markets. These macro-economic factors have resulted in increasingly competitive tank and hopper railcar markets in relation to both prices and demand, which we believe will continue for the next several quarters. In response to softening customer demand coupled with the shift to more specialized hopper and tank railcars with higher material and labor content, we continue to evaluate our production rates to align with current industry trends. Even at lower production levels, we continue to efficiently produce high quality hopper and tank railcars. During the second quarter of 2016 , we shipped 1,017 railcars, which is 57.6% lower than that of the same period in 2015 . We cannot assure you that hopper or tank railcar demand will maintain its current pace or return to 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.
Our railcar services segment continues to produce strong results. With the completion of several capital projects in late 2015, our existing repair network stands ready to respond to additional demand opportunities that we expect to arise. Additional capacity at our tank railcar manufacturing facility is currently being used to meet the increased demand for traditional repair work. We also plan to use this facility to perform retrofit services in a production line set-up, which we believe will be one of the industry's most efficient, cost effective, and timely ways to retrofit tank railcars.
Our earnings contributed to cash flow from operations in the first six months of 2016 of $87.5 million . Our current liquidity of $399.5 million , including $200.0 million available under revolving credit facility provides us with the ability to further grow our lease fleet, as demand may dictate, as well as to continue to reinvest in our business model, which is designed to support the industry with complete railcar solutions over the railcar life cycle.

22

Table of Contents

RESULTS OF OPERATIONS
Three and six months ended June 30, 2016 compared to three and six months ended June 30, 2015
Consolidated Results
 
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
$
 
%
 
June 30,
 
$
 
%
 
2016
 
2015
 
Change
 
Change
 
2016
 
2015
 
Change
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
97,548

 
$
144,481

 
$
(46,933
)
 
(32.5
)
 
$
221,340

 
$
366,292

 
$
(144,952
)
 
(39.6
)
Railcar leasing
33,209

 
28,216

 
4,993

 
17.7

 
65,977

 
52,801

 
13,176

 
25.0

Railcar services
19,727

 
19,301

 
426

 
2.2

 
39,347

 
36,681

 
2,666

 
7.3

Total revenues
$
150,484

 
$
191,998

 
$
(41,514
)
 
(21.6
)
 
$
326,664

 
$
455,774

 
$
(129,110
)
 
(28.3
)
Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
(81,437
)
 
$
(107,714
)
 
$
26,277

 
24.4

 
$
(183,718
)
 
$
(282,248
)
 
$
98,530

 
34.9

Railcar leasing
(10,356
)
 
(8,993
)
 
(1,363
)
 
(15.2
)
 
(20,531
)
 
(16,694
)
 
(3,837
)
 
(23.0
)
Railcar services
(15,420
)
 
(14,737
)
 
(683
)
 
(4.6
)
 
(30,657
)
 
(28,582
)
 
(2,075
)
 
(7.3
)
Total cost of revenues
$
(107,213
)
 
$
(131,444
)
 
$
24,231

 
18.4

 
$
(234,906
)
 
$
(327,524
)
 
$
92,618

 
28.3

Selling, general and administrative
(7,297
)
 
(5,315
)
 
(1,982
)
 
(37.3
)
 
(15,254
)
 
(12,996
)
 
(2,258
)
 
(17.4
)
Net gains on disposition of leased railcars

 
25

 
(25
)
 
*

 
167

 
25

 
142

 
*

Earnings from operations
$
35,974

 
$
55,264

 
$
(19,290
)
 
(34.9
)
 
$
76,671

 
$
115,279

 
$
(38,608
)
 
(33.5
)
* - Not Meaningful
Revenues
Our total consolidated revenues for the three and six months ended June 30, 2016 decreased by 21.6% and 28.3% , respectively, compared to the same periods in 2015 . These decreases were due to decreased revenues in our manufacturing segment, partially offset by increased revenues in our railcar leasing and railcar services segments.
During the three months ended June 30, 2016 , we shipped 932 direct sale railcars, which excludes 85 railcars ( 8.4% of total shipments) built for our lease fleet, compared to 1,378 direct sale railcars for the same period of 2015 , which excludes 1,019 railcars ( 42.5% of total shipments) built for our lease fleet.
During the six months ended June 30, 2016 , we shipped 2,062 direct sale railcars, which excludes 285 railcars ( 12.1% of total shipments) built for our lease fleet, compared to 3,395 direct sale railcars for the same period of 2015 , which excludes 1,670 railcars ( 33.0% of total shipments) built for our lease fleet.
Manufacturing revenues decreased by 32.5% during the three month period ended June 30, 2016 compared to the same period in 2015 . This change was due to a decrease of 29.7% driven by 446 fewer railcar shipments for direct sale, a higher mix of hopper railcars sold, which generally have lower average selling prices than tank railcars due to less material and labor content, and more competitive pricing on both hopper and tank railcars. Given the decrease in tank railcar demand and a shift in production to a larger mix of specialty railcars, both hopper and tank railcar shipments have decreased. The remaining decrease of 2.8% was due to lower revenues from material cost changes that we generally pass through to customers, as discussed below.
Manufacturing revenues decreased by 39.6% during the six month period ended June 30, 2016 compared to the same period of 2015 . This change was due to a decrease of 37.2% driven by a decrease in both hopper and tank railcar shipments for direct sale, a higher mix of hopper railcars sold, and more competitive pricing on both hopper and tank railcars. In total, we shipped 1,333 fewer direct sale railcars during the six month period ended June 30, 2016 compared to the same period in 2015 . The remaining decrease of 2.4% was due to lower revenues from material cost changes that we generally pass through to customers, as discussed below.

23

Table of Contents

Railcar leasing revenues increased by 17.7% and 25.0% during the three and six months ended June 30, 2016 , respectively, compared to the same periods in 2015 due to an increase in the number of railcars in our lease fleet while lease rates remained relatively flat. The lease fleet grew to 10,641 railcars at June 30, 2016 from 9,399 railcars at June 30, 2015 .

Railcar services revenues increased by 2.2% and 7.3% during the three and six months ended June 30, 2016 , respectively, compared to the same periods in 2015 due to an increase in demand and the additional capacity resulting from our expansion projects that continue to ramp up in 2016.
Cost of revenues
Our total consolidated cost of revenues decreased by 18.4% and 28.3% for the three and six months ended June 30, 2016 , respectively, compared to the same periods in 2015 due to decreased cost of revenues in our manufacturing segment, partially offset by an increase in our railcar leasing and railcar services segments.
Cost of revenues decreased for our manufacturing segment by 24.4% and 34.9% for the three and six months ended June 30, 2016 , respectively, compared to the same periods in 2015 due to a decrease of 20.6% and 31.8% , respectively, driven by lower direct sale railcar shipments, as discussed above, and a decrease of 3.8% and 3.1% , respectively, driven by lower material costs for key components and steel, which is also reflected as a decrease in selling prices as our practice is to generally pass increases or decreases in these costs through to the customer.
Cost of revenues for our railcar leasing segment increased by 15.2% and 23.0% for the three and six months ended June 30, 2016 , respectively, compared to the same periods in 2015 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 4.6% and 7.3% for the three and six months ended June 30, 2016 , respectively, compared to the same periods in 2015 , primarily due to an increase in volume of work and costs associated with the ramp up of operations at our recently completed expansion projects, as discussed above, as well as higher depreciation expenses.
Selling, general and administrative expenses
Our total consolidated selling, general and administrative expenses were $7.3 million and $15.3 million for the three and six months ended June 30, 2016 , respectively, compared to $5.3 million and $13.0 million for the same periods in 2015 . These increases were primarily due to lower consulting expenses in the second quarter of 2015 as well as higher depreciation related to our new enterprise resource planning system in 2016.
Interest expense
Our total consolidated interest expense remained flat when comparing the second quarter of 2016 to the same period in 2015. Our total consolidated interest expense increased by $1.2 million for the six months ended June 30, 2016 compared to the same period in 2015 . This increase was primarily driven by a higher average debt balance during the first six months of 2016 compared to the same period in 2015.
Loss on debt extinguishment
In January 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.

24

Table of Contents

Earnings (Loss) from Joint Ventures
The breakdown of our earnings (loss) from joint ventures during the three and six months ended June 30, 2016 and 2015 was as follows:
 
 
Three Months Ended 
 June 30,
 
 
 
Six Months Ended 
 June 30,
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Ohio Castings
$
34

 
$
417

 
$
(383
)
 
$
(165
)
 
$
879

 
$
(1,044
)
Axis
1,424

 
1,724

 
(300
)
 
3,109

 
3,059

 
50

Total Earnings from Joint Ventures
$
1,458

 
$
2,141

 
$
(683
)
 
$
2,944

 
$
3,938

 
$
(994
)
Our joint venture earnings were $1.5 million and $2.9 million for the three and six months ended June 30, 2016 , respectively, compared to earnings of $2.1 million and $3.9 million for the same periods in 2015 . These decreases were a result of decreased sales at our Ohio Castings joint venture due to a ramp down of production from the high levels experienced in 2015 to more historical levels that align with the joint venture's expected production level and is in line with expected industry demand. The results from our Axis joint venture for the three months ended June 30, 2016 also reflect a ramp down of production in line with expected industry demand, although earnings remain strong for Axis. The loss from Ohio Castings for the six months ended June 30, 2016 was partially offset by strong earnings from our Axis joint venture reflective of improved efficiencies and better profitability in the six months ended June 30, 2016 than compared to the same period in 2015.
Income Tax Expense
Our income tax expense was $12.3 million , or 38.2% of our earnings before income taxes, and $26.3 million , or 38.1% of our earnings before income taxes for the three and six months ended June 30, 2016 , respectively, compared to $19.3 million , or 36.9% of our earnings before income taxes, and $39.8 million , or 37.0% for the same periods in 2015 . The increase in the effective tax rate is primarily due to the decrease in 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 June 30,
 
 
 
2016
 
2015
 
 
 
(in thousands)
 
 
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
97,548

 
$
9,266

 
$
106,814

 
$
144,481

 
$
123,693

 
$
268,174

 
$
(161,360
)
Railcar Leasing
33,209

 

 
33,209

 
28,216

 

 
28,216

 
4,993

Railcar Services
19,727

 
609

 
20,336

 
19,301

 
94

 
19,395

 
941

Eliminations

 
(9,875
)
 
(9,875
)
 

 
(123,787
)
 
(123,787
)
 
113,912

Total Consolidated
$
150,484

 
$

 
$
150,484

 
$
191,998

 
$

 
$
191,998

 
$
(41,514
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
2016
 
2015
 
 
 
(in thousands)
 
 
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
221,340

 
$
32,897

 
$
254,237

 
$
366,292

 
$
207,424

 
$
573,716

 
$
(319,479
)
Railcar leasing
65,977

 

 
65,977

 
52,801

 

 
52,801

 
13,176

Railcar services
39,347

 
1,568

 
40,915

 
36,681

 
196

 
36,877

 
4,038

Eliminations

 
(34,465
)
 
(34,465
)
 

 
(207,620
)
 
(207,620
)
 
173,155

Total Consolidated
$
326,664

 
$

 
$
326,664

 
$
455,774

 
$

 
$
455,774

 
$
(129,110
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
 
 
(in thousands)
 
 
 
(in thousands)
 
 
 
 
Earnings (Loss) from Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
15,538

 
$
69,941

 
$
(54,403
)
 
$
38,224

 
$
140,379

 
$
(102,155
)
 
 
Railcar leasing
20,237

 
16,976

 
3,261

 
39,912

 
31,740

 
8,172

 
 
Railcar services
3,059

 
3,880

 
(821
)
 
6,567

 
6,747

 
(180
)
 
 
Corporate
(4,441
)
 
(2,463
)
 
(1,978
)
 
(8,949
)
 
(6,813
)
 
(2,136
)
 
 
Eliminations
1,581

 
(33,070
)
 
34,651

 
917

 
(56,774
)
 
57,691

 
 
Total Consolidated
$
35,974

 
$
55,264

 
$
(19,290
)
 
$
76,671

 
$
115,279

 
$
(38,608
)
 
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
Segment Operating Margins
 
 
 
 
 
 
 
Manufacturing
14.5
%
 
26.1
%
 
15.0
%
 
24.5
%
Railcar leasing
60.9
%
 
60.2
%
 
60.5
%
 
60.1
%
Railcar services
15.0
%
 
20.0
%
 
16.1
%
 
18.3
%
Manufacturing
Our manufacturing segment revenues, including an estimate of revenues for railcars built for our lease fleet, decreased by $161.4 million and $319.5 million for the three and six months ended June 30, 2016 compared to the same periods in 2015 . These decreases resulted from a lower volume of shipments, as discussed below, an overall decrease in average selling prices with a higher mix of hopper railcars, which generally sell at lower prices than tank railcars due to less material and labor

26

Table of Contents

content, more competitive pricing on both hopper and tank railcars, and a decrease in revenue from material cost changes that we generally pass through to customers, as discussed in 'Consolidated Results' above.
During the second quarter of 2016 , we shipped 1,017 railcars, including 85 railcars built for our lease fleet, compared to 2,397 railcars for the same period of 2015 , including 1,019 railcars built for our lease fleet. During the first six months of 2016 , we shipped 2,347 railcars, including 285 railcars built for our lease fleet, compared to 5,065 railcars for the same period of 2015 , including 1,670 railcars built for our lease fleet.
Manufacturing segment revenues for the three and six months ended June 30, 2016 included estimated revenues of $9.3 million and $32.9 million relating to railcars built for our lease fleet compared to $123.7 million and $207.4 million for the same periods in 2015 . These decreases in estimated revenues related to railcars built for our lease fleet were due to lower quantities of both tank and hopper railcars shipped for lease. Such revenues are based on an estimated fair market value of the leased railcars as if they had been sold to a third party, and are eliminated in consolidation. Revenues from railcars manufactured for our railcar leasing segment are not recognized in consolidated revenues as railcar sales, but rather lease revenues are recognized over the term of the lease in accordance with the monthly lease revenues. Railcars built for the lease fleet represented 8.4% and 12.1% of our railcar shipments during the three and six months ended June 30, 2016 , respectively, compared to 42.5% and 33.0% of our railcar shipments during the same periods in 2015.
From time to time, we manufacture and sell railcars to companies controlled by Mr. Carl Icahn, our principal beneficial stockholder through IELP, including, but not limited to, American Railcar Leasing LLC (ARL) and ARL's wholly-owned subsidiary, AEP Leasing LLC (AEP) (collectively, the IELP Entities). Our manufacturing segment had no direct sales of railcars to the IELP Entities during the six months ended June 30, 2016, primarily due to increased demand for direct sale hopper railcars and our focus on growing our own lease fleet. During the three and six months ended June 30, 2015, we had $58.1 million and $177.1 million of direct sales of railcars to the IELP Entities. In addition, we recorded $0.2 million and $0.7 million of revenue from ACF Industries LLC (ACF) for royalties and profits on railcars sold by ACF and for sales of railcar components to ACF during the three and six months ended June 30, 2016 , respectively, compared to $3.6 million and $5.8 million for the same periods in 2015 . ACF is also affiliated with Mr. Carl Icahn. Total manufacturing segment revenues from our affiliates represent 0.1% and 0.2% of our total consolidated revenues for the three and six months ended June 30, 2016 , respectively, compared to 32.2% and 40.1% for the same periods in 2015 .
Earnings from operations for our manufacturing segment, which include an allocation of selling, general and administrative costs, as well as estimated profit for railcars manufactured for our railcar leasing segment, decreased by $54.4 million and $102.2 million for the three and six months ended June 30, 2016 compared to the same periods in 2015 . Estimated profit on railcars built for our lease fleet, which is eliminated in consolidation, was $1.1 million and $4.5 million for the three and six months ended June 30, 2016 , respectively, compared to $35.2 million and $60.9 million for the same periods in 2015 . The estimated profit on railcars built for our lease fleet is based on an estimated fair market value of revenues as if the railcars had been sold to a third party, less the cost to manufacture.
Operating margin from our manufacturing segment decreased to 14.5% and 15.0% for the three and six