American Railcar Industries, Inc.
American Railcar Industries, Inc. (Form: 10-Q, Received: 10/28/2016 17:30:22)
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, 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 October 26, 2016 was 19,361,832 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)
 
September 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
198,049

 
$
298,064

Restricted cash
16,758

 
16,917

Short-term investments—available for sale securities
9,076

 

Accounts receivable, net
25,050

 
29,018

Accounts receivable, due from related parties
5,923

 
9,401

Income taxes receivable
2,199

 
3,058

Inventories, net
84,788

 
96,965

Prepaid expenses and other current assets
5,391

 
4,058

Total current assets
347,234

 
457,481

Property, plant and equipment, net
175,858

 
176,311

Railcars on leases, net
894,967

 
848,717

Goodwill
7,169

 
7,169

Investments in and loans to joint ventures
27,464

 
27,397

Other assets
5,457

 
7,999

Total assets
$
1,458,149

 
$
1,525,074

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
37,291

 
$
36,080

Accounts payable, due to related parties
1,895

 
4,477

Accrued expenses and taxes, including loss contingency of $16,973 and $0 at September 30, 2016 and December 31, 2015, respectively
32,832

 
6,344

Accrued compensation
8,554

 
11,459

Short-term debt, including current portion of long-term debt
25,596

 
125,784

Total current liabilities
106,168

 
184,144

Long-term debt, net of unamortized debt issuance costs of $4,918 and $5,081 as of September 30, 2016 and December 31, 2015, respectively
551,823

 
570,756

Deferred tax liability
242,024

 
222,338

Pension and post-retirement liabilities
8,444

 
8,484

Other liabilities
2,650

 
3,055

Total liabilities
911,109

 
988,777

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 50,000,000 shares authorized, 19,386,971 and 19,844,531 shares outstanding as of September 30, 2016 and December 31, 2015, respectively
213

 
213

Additional paid-in capital
239,609

 
239,609

Treasury Stock
(74,825
)
 
(57,423
)
Retained earnings
388,157

 
361,153

Accumulated other comprehensive loss
(6,114
)
 
(7,255
)
Total stockholders’ equity
547,040

 
536,297

Total liabilities and stockholders’ equity
$
1,458,149

 
$
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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Manufacturing (including revenues from affiliates of $40 and $816 for the three and nine months ended September 30, 2016, respectively, and $34,510 and $217,449 for the same periods in 2015)
$
93,546

 
$
123,318

 
$
314,886

 
$
489,610

Railcar leasing
32,798

 
31,174

 
98,775

 
83,975

Railcar services (including revenues from affiliates of $5,933 and $21,176 for the three and nine months ended September 30, 2016, respectively, and $5,402 and $18,188 for the same periods in 2015)
18,618

 
18,175

 
57,965

 
54,856

Total revenues
144,962

 
172,667

 
471,626

 
628,441

Cost of revenues:
 
 
 
 
 
 
 
Manufacturing
(79,671
)
 
(91,132
)
 
(263,389
)
 
(373,380
)
Other operating loss (refer to Note 11, Commitments and Contingencies)
(16,973
)
 

 
(16,973
)
 

Railcar leasing
(10,577
)
 
(9,714
)
 
(31,108
)
 
(26,408
)
Railcar services
(15,131
)
 
(14,269
)
 
(45,788
)
 
(42,851
)
Total cost of revenues
(122,352
)
 
(115,115
)
 
(357,258
)
 
(442,639
)
Gross profit
22,610

 
57,552

 
114,368

 
185,802

Selling, general and administrative
(6,583
)
 
(7,768
)
 
(21,837
)
 
(20,764
)
Net gains on disposition of leased railcars
58

 

 
225

 
25

Earnings from operations
16,085

 
49,784

 
92,756

 
165,063

Interest income (including income from related parties of $404 and $1,288 for the three and nine months ended September 30, 2016, respectively, and $520 and $1,615 for the same periods in 2015)
429

 
542

 
1,360

 
1,655

Interest expense
(5,632
)
 
(5,645
)
 
(17,216
)
 
(16,077
)
Loss on debt extinguishment

 

 

 
(2,126
)
Other income
57

 
3

 
58

 
14

Earnings from joint ventures
1,614

 
1,402

 
4,558

 
5,340

Earnings before income taxes
12,553

 
46,086

 
81,516

 
153,869

Income tax expense
(4,864
)
 
(16,729
)
 
(31,139
)
 
(56,567
)
Net earnings
$
7,689

 
$
29,357

 
$
50,377

 
$
97,302

Net earnings per common share—basic and diluted
$
0.40

 
$
1.39

 
$
2.58

 
$
4.58

Weighted average common shares outstanding—basic and diluted
19,397

 
21,054

 
19,524

 
21,252

Cash dividends declared per common share
$
0.40

 
$
0.40

 
$
1.20

 
$
1.20

See Notes to the Condensed Consolidated Financial Statements.


4

Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net earnings
$
7,689

 
$
29,357

 
$
50,377

 
$
97,302

Currency translation
(113
)
 
(715
)
 
570

 
(1,529
)
Postretirement plans (1)
120

 
115

 
359

 
347

Short-term investments (2)
212

 

 
212

 

Comprehensive income
$
7,908

 
$
28,757

 
$
51,518

 
$
96,120


(1)
Net of tax effect of $0.1 million and less than $0.1 million for the three months ended September 30, 2016 and 2015 , respectively, and $0.2 million and $0.2 million for the nine months ended September 30, 2016 and 2015 .

(2)
Net of tax effect of $0.1 million for the three and nine months ended September 30, 2016.
See Notes to the Condensed Consolidated Financial Statements.


5

Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)  
 
Nine Months Ended
 
September 30,
 
2016
 
2015
Operating activities:
 
 
 
Net earnings
$
50,377

 
$
97,302

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
38,729

 
33,185

Amortization of deferred costs
379

 
305

(Gain) loss on disposal of property, plant, equipment and leased railcars
(16
)
 
45

Earnings from joint ventures
(4,558
)
 
(5,340
)
Provision for deferred income taxes
19,342

 
21,892

Provision for allowance for doubtful accounts receivable
(963
)
 
65

Dividends received from short-term investments
(50
)
 

Items related to financing activities:
 
 
 
Loss on debt extinguishment

 
2,126

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
5,377

 
(5,970
)
Accounts receivable, due from related parties
3,520

 
18,856

Income taxes receivable
1,055

 
21,867

Inventories, net
12,248

 
(8,960
)
Prepaid expenses and other current assets
(1,327
)
 
(848
)
Accounts payable
1,208

 
(5,890
)
Accounts payable, due to related parties
(2,582
)
 
55

Accrued expenses and taxes
23,572

 
2,471

Other
2,389

 
(3,757
)
Net cash provided by operating activities
148,700

 
167,404

Investing activities:
 
 
 
Purchases of property, plant and equipment
(16,021
)
 
(26,376
)
Grant Proceeds
75

 

Capital expenditures - leased railcars
(69,387
)
 
(215,096
)
Proceeds from the sale of property, plant, equipment and leased railcars
879

 
118

Purchase of short-term investments - available for sale securities
(8,750
)
 

Proceeds from repayments of loans and distributions from joint ventures
4,430

 
5,750

Net cash used in investing activities
(88,774
)
 
(235,604
)
Financing activities:
 
 
 
Repayments of long-term debt
(119,288
)
 
(426,150
)
Proceeds from long-term debt

 
625,306

Change in interest reserve related to long-term debt
159

 
(9,843
)
Stock repurchases
(17,402
)
 
(49,441
)
Payment of common stock dividends
(23,373
)
 
(25,304
)
Debt issuance costs
(13
)
 
(5,271
)
Net cash (used in) provided by financing activities
(159,917
)
 
109,297

Effect of exchange rate changes on cash and cash equivalents
(24
)
 
(223
)
(Decrease) Increase in cash and cash equivalents
(100,015
)
 
40,874

Cash and cash equivalents at beginning of period
298,064

 
88,109

Cash and cash equivalents at end of period
$
198,049

 
$
128,983


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 September 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 currently intends to adopt this new guidance on January 1, 2018 using the modified retrospective application method and continues to evaluate 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,
2016
 
December 31,
2015
 
(in thousands)
Accounts receivable, gross
$
25,492

 
$
30,422

Less allowance for doubtful accounts
(442
)
 
(1,404
)
Total accounts receivable, net
$
25,050

 
$
29,018


Note 4 — Inventories
Inventories consist of the following:  
 
September 30,
2016
 
December 31,
2015
 
(in thousands)
Raw materials
$
47,729

 
$
65,575

Work-in-process
35,168

 
31,184

Finished products
5,328

 
3,393

Total inventories
88,225

 
100,152

Less reserves
(3,437
)
 
(3,187
)
Total inventories, net
$
84,788

 
$
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:  
 
September 30,
2016
 
December 31,
2015
 
(in thousands)
Operations / Corporate:
 
 
 
Buildings
$
179,530

 
$
167,537

Machinery and equipment
227,639

 
219,488

Land
4,313

 
3,687

Construction in process
4,208

 
16,784

 
415,690

 
407,496

Less accumulated depreciation
(239,832
)
 
(231,185
)
Property, plant and equipment, net
$
175,858

 
$
176,311

Railcar Leasing:
 
 
 
Railcars on leases
$
975,476

 
$
906,786

Less accumulated depreciation
(80,509
)
 
(58,069
)
Railcars on leases, net
$
894,967

 
$
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 September 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 3 months of 2016
$
32,992

2017
119,000

2018
106,074

2019
87,622

2020
52,333

2021 and thereafter
78,606

Total
$
476,627

Depreciation expense
The following table summarizes depreciation expense:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Total depreciation expense
$
13,113

 
$
12,214

 
$
38,729

 
$
33,185

Depreciation expense on leased railcars
$
7,614

 
$
7,050

 
$
22,493

 
$
18,894

Note 6 — Investments in and Loans to Joint Ventures
As of September 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:  
 
September 30,
2016
 
December 31,
2015
 
(in thousands)
Carrying amount of investments in and loans to joint ventures
 
 
 
Ohio Castings
$
7,660

 
$
7,776

Axis
19,804

 
19,621

Total investments in and loans to joint ventures
$
27,464

 
$
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
12,497

 
$
16,728

 
$
39,834

 
$
60,623

Gross profit
$
866

 
$
699

 
$
2,080

 
$
5,061

Net earnings (loss)
$
63

 
$
(205
)
 
$
(317
)
 
$
2,324


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 nine 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 $19.2 million and $23.6 million as of September 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
17,442

 
$
17,812

 
$
49,939

 
$
57,229

Gross profit
$
4,584

 
$
4,571

 
$
14,444

 
$
14,848

Earnings before interest
$
4,330

 
$
4,333

 
$
13,665

 
$
14,097

Net earnings
$
3,521

 
$
3,341

 
$
11,085

 
$
10,891

As of September 30, 2016 , the investment in Axis was comprised entirely of ARI’s term loan. The Company has evaluated this loan to be fully recoverable.

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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Liability, beginning of period
$
1,584

 
$
1,378

 
$
1,415

 
$
953

Provision for warranties issued during the period, net of adjustments
(14
)
 
341

 
430

 
1,235

Adjustments to warranties issued during previous periods
(7
)
 
(4
)
 
(18
)
 
(12
)
Warranty claims
(41
)
 
(163
)
 
(305
)
 
(624
)
Liability, end of period
$
1,522

 
$
1,552

 
$
1,522

 
$
1,552

Note 8 — Debt
Subsidiary 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.
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 September 30, 2016 , there were $207.0 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 September 30, 2016 and December 31, 2015 , the liquidity reserve amount was $16.1 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, subject to the payment of a make-whole amount with respect to certain prepayments or redemptions made on or prior to the payment date occurring in January 2018. LLIII can prepay or redeem the Class A-2 Notes, in whole or in part, on any payment date occurring on or after January 16, 2018, subject to the payment of a make-whole amount with respect to certain prepayments or redemptions made on or prior to the payment date occurring in January 2022. The Company was in compliance with all of its covenants under the Indenture as of September 30, 2016 .
The fair value of the Notes was $588.9 million and $608.4 million as of September 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

11


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.
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 September 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 September 30, 2016 .
As of September 30, 2016 and December 31, 2015 , the net book value of the railcars that were pledged as part of the Company's and its subsidiaries' Lease Fleet Financings was $549.0 million and $563.7 million , respectively.
The future contractual minimum rental revenues related to the railcars pledged as of September 30, 2016 are as follows (in thousands):  
Remaining 3 months of 2016
$
20,515

2017
69,128

2018
56,341

2019
40,929

2020
21,941

2021 and thereafter
22,989

Total
$
231,843

The remaining principal payments under the Notes as of September 30, 2016 are as follows (in thousands):  
Remaining 3 months of 2016
$
6,495

2017
25,588

2018
25,590

2019
25,507

2020
26,354

2021 and thereafter
472,974

Total
$
582,508

Note 9 — Income Taxes
The Company’s federal income tax returns for tax years 2013 and beyond remain subject to examination, with the latest statute of limitations expiring in September 2019. Certain of the Company's 2008 through 2012 state income tax returns and all of the

12


Company's state income tax returns for 2013 and beyond remain open and subject to examination, with the latest statute of 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 began its implementation of 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 then completed its implementation efforts with the filing of its 2015 tax return, without any material impact.
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Service cost
$
52

 
$
44

 
$
156

 
$
132

Interest cost
246

 
236

 
738

 
710

Expected return on plan assets
(284
)
 
(320
)
 
(851
)
 
(961
)
Amortization of net actuarial loss/prior service cost
206

 
202

 
618

 
605

Net periodic cost recognized
$
220

 
$
162

 
$
661

 
$
486


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 party to a collective bargaining agreement with a labor union at a parts manufacturing facility that will expire in April 2017, unless extended or modified. ARI is also party to collective bargaining agreements with labor unions at two repair facilities that will expire in January and September 2021, respectively, unless extended or modified.

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, based on information currently available, 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. However, resolution of certain claims or suits by settlement or otherwise, could impact the operating results of the reporting period in which such resolution occurs .
Gyansys
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.
FRA Directive
On September 30, 2016, the Federal Railroad Administration (FRA) released Railworthiness Directive Number 2016-01 (the FRA Directive). The FRA Directive addressed certain welding practices in one weld area in specified DOT 111 tank railcars manufactured between 2009 and 2015 by ARI and ACF Industries LLC (ACF). ACF is an affiliate of Mr. Carl Icahn, the Company's principal beneficial stockholder through IELP. The FRA became involved as a result of one tank railcar manufactured by ARI having a leak identified in 2014. The FRA Directive indicated that approximately 14,800 general purpose tank railcars could be subject to the FRA Directive.
The FRA Directive requires owners of all subject railcars to identify tank railcars in their respective fleets covered by the FRA Directive by October 30, 2016 and to ensure appropriate inspection, testing and repairs, if needed, during a period that ranges from 12 to 24 months from September 30, 2016, depending on the commodity service of the railcar. Owners, including the Company as a railcar lessor, and lessees of the subject railcars will likely incur future costs associated with compliance with this requirement, including but not limited to, freight costs for transporting these railcars to and from repair facilities, inspection, cleaning and repair, if necessary. Lessors of subject railcars, including the Company in its capacity as a lessor, may also experience loss of revenue during periods of rent abatement, if applicable, as a result of railcars being out of service due to compliance with the FRA Directive. The incurrence of such costs and/or any such loss of revenue may be subject to the terms of any applicable warranty coverage and the terms of any applicable lease. The Company's contractual obligations under its operating leases for railcars in its lease fleet may vary from lease to lease.
The Company has evaluated its potential exposure related to the FRA Directive and has established a loss contingency of $17.0 million to cover its probable and estimable liabilities, as of September 30, 2016, with respect to the Company's remedial response to the FRA Directive, taking into account currently available information and the Company's contractual obligations in its capacity as both a manufacturer and lessor of railcars subject to the FRA Directive. This amount is included in accrued expenses and taxes on the condensed consolidated balance sheet and will continue to be evaluated as ARI's and its customers' compliance with the FRA Directive progresses and the Company's understanding of the impact the FRA Directive may have on its business, including results of operations and cash flows, evolves. Actual results could differ from this estimate. Legal fees incurred with respect to this matter will be expensed in the period in which they occur, in accordance with the Company's accounting policy.
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:  

14


 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Share-based compensation expense (income)
 
 
 
 
 
 
 
Cost of revenues: Manufacturing
$
28

 
$
(147
)
 
$
(145
)
 
$
(93
)
Cost of revenues: Railcar services
5

 
(21
)
 
(12
)
 
(18
)
Selling, general and administrative
362

 
(594
)
 
265

 
(360
)
Total share-based compensation expense (income)
$
395

 
$
(762
)
 
$
108

 
$
(471
)
As of September 30, 2016 , unrecognized compensation costs related to the unvested portion of SARs were estimated to be $1.0 million and were expected to be recognized over a weighted average period of 27 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 Short-term Investment Transactions
 
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

 
570

 

 
570

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

 

 
359

 
359

Unrealized gain on available for sale securities, net of tax effect of $114 (2)
212

 

 

 
212

Balance September 30, 2016
$
212

 
$
(1,660
)
 
$
(4,666
)
 
$
(6,114
)
 
(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.
(2)—
The unrealized gain on available for sale securities, net of tax represents the change in fair value estimates that are based on quoted prices with an active trading market (Level 1).
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 authorized repurchases are completed. Under the Stock Repurchase program, 12,784 and 457,560 shares were repurchased, during the three and nine months ended September 30, 2016 , respectively, at a cost of $0.5 million and $17.4 million , respectively.
See Note 17, Subsequent Events, for discussion of the Company's stock repurchase activity subsequent to September 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

15


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 $1.5 million and $4.4 million of components from ACF during the three and nine months ended September 30, 2016 , respectively, and $3.7 million and $13.0 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 zero and $0.7 million for the three and nine months ended September 30, 2016 , respectively, compared to $2.7 million and $8.6 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.
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 nine months ended September 30, 2016 revenues of less than $0.1 million were recorded under this agreement. No revenues were recorded under this agreement for the nine months ended September 30, 2015.

16


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 $5.9 million and $21.2 million for the three and nine months ended September 30, 2016 , respectively, compared to $5.4 million and $18.2 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 or either party chooses to terminate the agreement after a change in control (as defined therein) of the other party. In December 2012, LLI entered into a railcar management 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 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 $1.7 million and $5.0 million for the three and nine months ended September 30, 2016 , respectively, compared to $2.0 million and $5.5 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 $0.1 million and $0.7 million were incurred for each of the three and nine months ended September 30, 2016 , respectively, compared to $0.2 million and $0.6 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 nine months ended September 30, 2016 there were no revenues from railcars sold to the IELP Entities compared to $31.8 million and $208.9 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.

17


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 $19.2 million and $23.6 million as of September 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 and was renewed in September 2016, with an effective date in December 2015, to among other things, extend through May 2019, after which the agreement continues until terminated by either party, in accordance with the provisions of the agreement. MWR collected scrap material totaling $0.8 million and $1.6 million for the three and nine months ended September 30, 2016 , respectively, compared to $1.1 million and $3.8 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 September 30, 2016 and 2015 and were $0.1 million for the nine months ended September 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 $19.2 million and $54.0 million for the three and nine months ended September 30, 2016 , respectively, compared to $34.4 million and $113.8 million for the same periods in 2015 for railcar components purchased from joint ventures.
Inventory as of September 30, 2016 and December 31, 2015 , included $5.9 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.
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.

18



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


19


 
Three Months Ended September 30, 2016
 
Revenues
 
 
 
External
 
Intersegment
 
Total
 
Earnings (Loss) from Operations
 
(in thousands)
Manufacturing
$
93,546

 
$
31,283

 
$
124,829

 
$
(2,773
)
Railcar leasing
32,798

 

 
32,798

 
19,320

Railcar services
18,618

 
167

 
18,785

 
2,797

Corporate

 

 

 
(2,649
)
Eliminations

 
(31,450
)
 
(31,450
)
 
(610
)
Total Consolidated
$
144,962

 
$

 
$
144,962

 
$
16,085

 
 
 
 
 
 
 
 
 
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

 

 
31,174

 
18,603

Railcar services
18,175

 
642

 
18,817

 
3,457

Corporate

 

 

 
(5,095
)
Eliminations

 
(107,183
)
 
(107,183
)
 
(22,165
)
Total Consolidated
$
172,667

 
$

 
$
172,667

 
$
49,784

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
Revenues
 
 
 
External
 
Intersegment
 
Total
 
Earnings (Loss) from Operations
 
(in thousands)
Manufacturing
$
314,886

 
$
64,180

 
$
379,066

 
$
35,451

Railcar leasing
98,775

 

 
98,775

 
59,232

Railcar services
57,965

 
1,735

 
59,700

 
9,364

Corporate

 

 

 
(11,598
)
Eliminations

 
(65,915
)
 
(65,915
)
 
307

Total Consolidated
$
471,626

 
$

 
$
471,626

 
$
92,756

 
 
 
 
 
 
 
 
 
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

 

 
83,975

 
50,343

Railcar services
54,856

 
838

 
55,694

 
10,204

Corporate

 

 

 
(11,944
)
Eliminations

 
(314,803
)
 
(314,803
)
 
(78,903
)
Total Consolidated
$
628,441

 
$

 
$
628,441

 
$
165,063

 

20


Total Assets
September 30,
2016
 
December 31,
2015
 
(in thousands)
Manufacturing
$
250,529

 
$
272,721

Railcar leasing
1,234,932

 
1,190,180

Railcar services
62,134

 
56,880

Corporate/Eliminations
(89,446
)
 
5,293

Total Consolidated
$
1,458,149

 
$
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Manufacturing
%
 
20.0
%
 
0.2
%
 
34.6
%
Railcar leasing
%
 
%
 
%
 
%
Railcar services
4.1
%
 
3.1
%
 
4.5
%
 
2.9
%
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, 2016 and 2015 .
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Manufacturing revenues from significant customers
38.9
%
 
46.7
%
 
29.7
%
 
44.9
%
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, 2016 and December 31, 2015 .
 
September 30,
2016
 
December 31,
2015
Manufacturing receivables from significant customers
23.0
%
 
20.9
%
Note 17 — Subsequent Events
On October 26, 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 December 9, 2016 that will be paid on December 22, 2016 .
The Company repurchased 25,139 shares under the Stock Repurchase Program subsequent to September 30, 2016 and through October 26, 2016 , at a cost of $0.9 million , resulting in 19,361,832 shares outstanding as of such date.



21


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act), including statements regarding our plans, objectives, expectations and intentions. Such statements include, without limitation, statements regarding various estimates we have made in preparing our financial statements, statements regarding our plans, and the industry's ability, to address the Federal Railroad Administration (FRA) directive (FRA Directive) released September 30, 2016, expected future trends relating to our industry, products and markets, the potential impact of regulatory developments, including developments related to, and any clarification regarding, the FRA Directive, 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 the FRA directive and any costs or loss of revenue related thereto, including risks that the FRA may not provide any further clarification regarding the FRA Directive or, if it does, what those clarifications may entail;
the impact, costs and expenses of any claims and/or litigation we may be subject to now or in the future;
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 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 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;

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the risks and impact associated with potential joint ventures, acquisitions, strategic opportunities 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.
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. Our business model combines manufacturing, railcar leasing and railcar services and is designed to support the industry with complete railcar solutions over the railcar life cycle.
The tank railcar market continues to soften at a faster pace than most other railcar markets as demand has shifted to more specialized railcars for non-energy related service as a result of the over saturation of that market in recent years. As the industry is facing lower railcar loadings and increased rail speeds along with volatility in oil prices, more railcars are being placed into storage, resulting in lower fleet utilization for much of the industry. As a result of these macro-economic factors, we are also seeing reduced inquiry activity for hopper railcars, indicating the softening of that market as well. We expect our backlog of 5,085 railcars, 1,904 of which will go to our lease fleet, will help us maintain a steady level of production through the early part of 2017.
Our earnings contributed to cash flow from operations in the first nine months of 2016 of $148.7 million . Our current liquidity of $398.0 million , including $200.0 million available under our revolving credit facility provides us with the ability to further grow our lease fleet, as demand may dictate. Our consolidated operating margin was 11.1% for the three months ended September 30, 2016 and was largely supported by the growth of our railcar leasing segment with a lease fleet of 10,961 railcars at September 30, 2016, partially offset by the loss contingency of $17.0 million recorded during the third quarter of 2016 as a result of the FRA Directive discussed below. Railcars built for our lease fleet represented 27.4% of our total railcar shipments during the third quarter of 2016 compared to 48.1% 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. Since 2011, we have strategically grown our lease fleet to include a mix of tank and hopper railcars for varying types of service. Although the industry is experiencing declining lease rates as a result of the softness in the overall market, the expiration dates of our operating leases for railcars in our lease fleet are spread over the next several years, which helps mitigate the risks of renewing leases at lower rates or any inability we may experience in renewing or re-leasing these railcars. Adding railcars to our lease fleet remains a priority to us, as we strategically target key customers and key railcar types to meet the needs of our customers.
Our railcar services business continues to support the industry, offering repair services over the railcar life cycle. We have expanded this business to add flexibility and capacity and we expect another expansion project in our repair network to be completed during the fourth quarter of 2016. Our existing repair network stands ready to respond to additional demand opportunities that may arise, including our tank railcar manufacturing facility that provides us the flexibility to not only produce railcars but also to perform traditional repair and retrofit services in a production line set-up.

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The flexibility of our workforce and the direction of our knowledgeable management team provides us with the ability to effectively adjust our production rates in an effort to align them with industry trends. Even at lower production levels, we continue to efficiently produce high quality hopper and tank railcars. During the third quarter of 2016 , we shipped 1,177 railcars, which is 38.3% lower than that of the same period in 2015 . We cannot assure you that hopper or tank railcar demand will maintain its current pace, that demand for any railcar types or railcar services will improve, or that our railcar backlog, orders or shipments will track industry-wide trends.
FRA Directive
On September 30, 2016, the Federal Railroad Administration (FRA) released Railworthiness Directive Number 2016-01 (FRA Directive or Directive), as discussed in Note 11, Commitments and Contingencies, to the condensed consolidated financial statements located in Part I, Item 1 of this report. The FRA Directive addressed certain welding practices in one weld area in specified DOT 111 tank railcars manufactured between 2009 and 2015 by ARI and ACF Industries LLC (ACF). ACF is an affiliate of Mr. Carl Icahn, the Company's principal beneficial stockholder through IELP. The FRA Directive requires owners of subject railcars to identify tank railcars in their respective fleets covered by the FRA Directive by October 30, 2016 and to ensure appropriate inspection, testing and repairs, if needed, during a period that ranges from 12 to 24 months from September 30, 2016, depending on the commodity service of the railcar. The FRA became involved as a result of one tank railcar manufactured by ARI having a leak identified in 2014. The Directive indicated that approximately 14,800 general purpose tank railcars could be subject to its requirements. The Directive reported that approximately 15% of railcar inspections reviewed by the FRA had weld conditions and the FRA has suggested that, over time, those conditions could develop cracks and lead to leaks. In collaboration with the FRA, ARI and other parties selected for inspection a representative sample of the total population of subject railcars, which was approved by the FRA.
We met with the FRA in October 2016, to express our concerns with the Directive and its impact on ARI, as well as the industry as a whole. We understand the FRA is reviewing our concerns. We are working with the FRA, our customers and industry groups to determine next steps to comply with the Directive. We cannot assure that the FRA will formally provide any clarifications of the Directive in a timely manner, if at all, or that any such clarifications would reduce our or other owners' obligations under the FRA Directive.
We have evaluated our potential exposure related to the FRA Directive and have established a loss contingency of $17.0 million to cover our probable and estimable liabilities, as of September 30, 2016, with respect to our remedial response to the FRA Directive, taking into account currently available information and our contractual obligations in our capacity as both a manufacturer and lessor of railcars subject to the FRA Directive. This amount is included in accrued expenses and taxes on the condensed consolidated balance sheet and will continue to be evaluated as our and our customers' compliance with the FRA Directive progresses and our understanding of the impact the FRA Directive may have on our business, including results of operations and cash flows, evolves. We cannot assure you that the amount we have established as a loss contingency is adequate to cover actual costs or losses we may experience.

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RESULTS OF OPERATIONS
Three and nine months ended September 30, 2016 compared to three and nine months ended September 30, 2015
Consolidated Results
 
 
Three Months Ended
 
 
 
 
 
Nine Months Ended
 
 
 
 
 
September 30,
 
$
 
%
 
September 30,
 
$
 
%
 
2016
 
2015
 
Change
 
Change
 
2016
 
2015
 
Change
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
93,546

 
$
123,318

 
$
(29,772
)
 
(24.1
)
 
$
314,886

 
$
489,610

 
$
(174,724
)
 
(35.7
)
Railcar leasing
32,798

 
31,174

 
1,624

 
5.2

 
98,775

 
83,975

 
14,800

 
17.6

Railcar services
18,618

 
18,175

 
443

 
2.4

 
57,965

 
54,856

 
3,109

 
5.7

Total revenues
$
144,962

 
$
172,667

 
$
(27,705
)
 
(16.0
)
 
$
471,626

 
$
628,441

 
$
(156,815
)
 
(25.0
)
Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
(79,671
)
 
$
(91,132
)
 
$
11,461

 
12.6

 
$
(263,389
)
 
$
(373,380
)
 
$
109,991

 
29.5

Other operating loss
(16,973
)
 

 
(16,973
)
 
*

 
(16,973
)
 

 
(16,973
)
 
*

Railcar leasing
(10,577
)
 
(9,714
)
 
(863
)
 
(8.9
)
 
(31,108
)
 
(26,408
)
 
(4,700
)
 
(17.8
)
Railcar services
(15,131
)
 
(14,269
)
 
(862
)
 
(6.0
)
 
(45,788
)
 
(42,851
)
 
(2,937
)
 
(6.9
)
Total cost of revenues
$
(122,352
)
 
$
(115,115
)
 
$
(7,237
)
 
(6.3
)
 
$
(357,258
)
 
$
(442,639
)
 
$
85,381

 
19.3

Selling, general and administrative
(6,583
)
 
(7,768
)
 
1,185

 
15.3

 
(21,837
)
 
(20,764
)
 
(1,073
)
 
(5.2
)
Net gains on disposition of leased railcars
58

 

 
58

 
*

 
225

 
25

 
200

 
*

Earnings from operations
$
16,085

 
$
49,784

 
$
(33,699
)
 
(67.7
)
 
$
92,756

 
$
165,063

 
$
(72,307
)
 
(43.8
)
* - Not Meaningful
Revenues
Our total consolidated revenues for the three and nine months ended September 30, 2016 decreased by 16.0% and 25.0% , 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 September 30, 2016 , we shipped 855 direct sale railcars, which excludes 322 railcars ( 27.4% of total shipments) built for our lease fleet, compared to 990 direct sale railcars for the same period of 2015 , which excludes 918 railcars ( 48.1% of total shipments) built for our lease fleet.
During the nine months ended September 30, 2016 , we shipped 2,917 direct sale railcars, which excludes 607 railcars ( 17.2% of total shipments) built for our lease fleet, compared to 4,385 direct sale railcars for the same period of 2015 , which excludes 2,588 railcars ( 37.1% of total shipments) built for our lease fleet.
Manufacturing revenues decreased by 24.1% during the three month period ended September 30, 2016 compared to the same period in 2015 . Given the decrease in tank railcar demand and a shift in production to a larger mix of specialty railcars, tank railcar shipments have decreased. Hopper railcar production has also shifted to a larger mix of specialty railcars and demand for that market is beginning to soften, resulting in fewer overall shipments, although hopper railcar shipments for direct sale have increased with a lower percentage going to our lease fleet compared to the same period in 2015. The decrease in manufacturing revenues was due to a decrease of 20.2% driven by 135 fewer overall 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. The remaining decrease of 3.9% was due to lower revenues from material cost changes that we generally pass through to customers, as discussed below.
Manufacturing revenues decreased by 35.7% during the nine month period ended September 30, 2016 compared to the same period of 2015 . This change was due to a decrease of 34.1% 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

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Table of Contents

shipped 1,468 fewer direct sale railcars during the nine month period ended September 30, 2016 compared to the same period in 2015 . The remaining decrease of 1.6% was due to lower revenues from material cost changes that we generally pass through to customers, as discussed below.
Railcar leasing revenues increased by 5.2% and 17.6% during the three and nine months ended September 30, 2016 , respectively, compared to the same periods in 2015 due primarily to an increase in the number of railcars in our lease fleet, partially offset by a slight decline in weighted average lease rates. The lease fleet grew to 10,961 railcars at September 30, 2016 from 10,317 railcars at September 30, 2015 .

Railcar services revenues increased by 2.4% and 5.7% during the three and nine months ended September 30, 2016 , respectively, compared to the same periods in 2015 due to the additional capacity resulting from our expansion projects that continue to ramp up in 2016.
Cost of revenues
Our total consolidated cost of revenues increased by 6.3% for the three months ended September 30, 2016 compared to the same period in 2015 due to increased cost of revenues across all three of our segments, with the manufacturing segment being negatively impacted by the loss contingency recognized during the third quarter of 2016 related to the FRA Directive, as discussed further below.
Our total consolidated cost of revenues decreased by 19.3% for the nine months ended September 30, 2016 compared to the same period in 2015 due to decreased cost of revenues in our manufacturing segment that were partially offset by the loss contingency recognized during the third quarter of 2016 related to the FRA Directive. The overall decrease from the manufacturing segment was partially offset by an increase in our railcar leasing and railcar services segments.
Cost of revenues (excluding the other operating loss attributable to the manufacturing segment, as discussed below) decreased for our manufacturing segment by 12.6% and 29.5% for the three and nine months ended September 30, 2016 , respectively, compared to the same periods in 2015 due to a decrease of 7.3% and 27.4% , respectively, driven by lower overall railcar shipments for direct sale partially offset by increased costs associated with the production of more specialized hopper railcars, as discussed above, and a decrease of 5.3% and 2.1% , 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 changes in these costs through to the customer.
Also included as a component of manufacturing cost of revenues was the other operating loss of $17.0 million , which represents a loss contingency recognized during the third quarter of 2016 to cover our probable and estimable liabilities, as of September 30, 2016, with respect to our remedial response to the FRA Directive, taking into account currently available information and our contractual obligations in our capacity as both a manufacturer and lessor of railcars subject to the FRA Directive. For further discussion, refer to the Executive Summary above and Note 11, Commitments and Contingencies, to the condensed consolidated financial statements located in Part I, Item 1 of this report.
Cost of revenues for our railcar leasing segment increased by 8.9% and 17.8% for the three and nine months ended September 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 6.0% and 6.9% for the three and nine months ended September 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 $6.6 million for the three months ended September 30, 2016 compared to $7.8 million for the same period in 2015 . This decrease was primarily due to a decrease in compensation expense and lower consulting expenses, partially offset by an increase in share-based compensation expense and other corporate expenses. The increase in share based compensation expense was driven by the increase in our stock price of $2 per share during the third quarter of 2016 compared to a decrease of $12 per share during the same period in 2015.
Our total consolidated selling, general and administrative expenses were $21.8 million for the nine months ended September 30, 2016 compared to $20.8 million for the same period in 2015 . This increase was primarily due to lower consulting expenses and lower share-based compensation expense in the first nine months of 2015 as well as higher

26

Table of Contents

depreciation related to our new enterprise resource planning system in 2016, partially offset by a decrease in compensation expense.
Interest expense
Our total consolidated interest expense remained flat when comparing the third quarter of 2016 to the same period in 2015. Our total consolidated interest expense increased by $1.1 million for the nine months ended September 30, 2016 compared to the same period in 2015 . This increase was primarily driven by a higher average debt balance during the first nine 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.
Earnings (Loss) from Joint Ventures
The breakdown of our earnings (loss) from joint ventures during the three and nine months ended September 30, 2016 and 2015 was as follows:
 
 
Three Months Ended 
 September 30,
 
 
 
Nine Months Ended 
 September 30,
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Ohio Castings
$
49

 
$
68

 
$
(19
)
 
$
(116
)
 
$
947

 
$
(1,063
)
Axis
1,565

 
1,334

 
231

 
4,674

 
4,393

 
281

Total Earnings from Joint Ventures
$
1,614

 
$
1,402

 
$
212

 
$
4,558

 
$
5,340

 
$
(782
)
Our joint venture earnings were $1.6 million and $4.6 million for the three and nine months ended September 30, 2016 , respectively, compared to earnings of $1.4 million and $5.3 million for the same periods in 2015 . Our Ohio Castings joint venture has experienced decreased sales in 2016 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, which is in line with expected industry demand. Our Axis joint venture has also ramped down production in 2016 in line with expected industry demand, but even with lower production levels earnings remain strong for Axis, reflecting improved efficiencies and better profitability.
Income Tax Expense
Our income tax expense was $4.9 million , or 38.7% of our earnings before income taxes, and $31.1 million , or 38.2% of our earnings before income taxes for the three and nine months ended September 30, 2016 , respectively, compared to $16.7 million , or 36.3% of our earnings before income taxes, and $56.6 million , or 36.8% for the same periods in 2015 . The increase in our effective tax rate is primarily due to a decrease in our 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.  

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Three Months Ended September 30,
 
 
 
2016
 
2015
 
 
 
(in thousands)
 
 
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
93,546

 
$
31,283

 
$
124,829

 
$
123,318

 
$
106,541

 
$
229,859

 
$
(105,030
)
Railcar leasing
32,798

 

 
32,798

 
31,174

 

 
31,174

 
1,624

Railcar services
18,618

 
167

 
18,785

 
18,175

 
642

 
18,817

 
(32
)
Eliminations

 
(31,450
)
 
(31,450
)
 

 
(107,183
)
 
(107,183
)
 
75,733

Total Consolidated
$
144,962

 
$

 
$
144,962

 
$
172,667

 
$

 
$
172,667

 
$
(27,705
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
2016
 
2015
 
 
 
(in thousands)
 
 
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
314,886

 
$
64,180

 
$
379,066

 
$
489,610

 
$
313,965

 
$
803,575

 
$
(424,509
)
Railcar leasing
98,775

 

 
98,775

 
83,975

 

 
83,975

 
14,800

Railcar services
57,965

 
1,735

 
59,700

 
54,856

 
838

 
55,694

 
4,006

Eliminations

 
(65,915
)
 
(65,915
)
 

 
(314,803
)
 
(314,803
)
 
248,888

Total Consolidated
$
471,626

 
$

 
$
471,626

 
$
628,441

 
$

 
$
628,441

 
$
(156,815
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
 
 
(in thousands)
 
 
 
(in thousands)
 
 
 
 
Earnings (Loss) from Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
(2,773
)
 
$
54,984

 
$
(57,757
)
 
$
35,451

 
$
195,363

 
$
(159,912
)
 
 
Railcar leasing
19,320

 
18,603

 
717

 
59,232

 
50,343

 
8,889

 
 
Railcar services
2,797

 
3,457

 
(660
)
 
9,364

 
10,204

 
(840
)
 
 
Corporate
(2,649
)
 
(5,095
)
 
2,446

 
(11,598
)
 
(11,944
)
 
346

 
 
Eliminations
(610
)
  <