American Railcar Industries, Inc.
American Railcar Industries, Inc. (Form: 10-K, Received: 02/23/2016 16:27:15)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  ____________________________________ 
FORM 10-K
____________________________________ 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-51728
____________________________________ 
American Railcar Industries, Inc.
(Exact name of Registrant as Specified in its Charter)
 ____________________________________
North Dakota
 
43-1481791
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
100 Clark Street
St. Charles, Missouri 63301
(Address of principal executive offices, including zip code)
Telephone (636) 940-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
____________________________________ 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨     No   ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨     No   ý
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 a 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   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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   ý     No   ¨
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
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
ý
 
 
 
 
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   ý
The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of the last business day of the registrant's most recently completed second fiscal quarter was approximately $460 million, based on the closing sales price of $48.64 per share of such stock on The NASDAQ Global Select Market on June 30, 2015.
As of February 19, 2016 , as reported on the NASDAQ Global Select Market, there were 19,683,446 shares of common stock, par value $0.01 per share, of the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the registrant's 2016 annual meeting of stockholders to be filed within 120 days of the end of its fiscal year ended December 31, 2015 are incorporated into Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K where indicated.



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act), including statements regarding our plans, objectives, expectations and intentions. Such statements include, without limitation, statements regarding various estimates we have made in preparing our financial statements, statements regarding expected future trends relating to our industry and markets, our strategic objectives and long-term strategies, the potential impact of regulatory developments, anticipated customer demand for our products and services, trends relating to our revenues and shipments, expectations regarding the performance of our business segments, 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, ability to service our current debt obligations and future 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 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;
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 any economic downturn, adverse market conditions or 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 support the growth of our lease fleet;
the impact of repurchases pursuant to our Stock Repurchase Program on our current liquidity and the ownership percentage of our principal beneficial stockholder through IELP, Mr. Carl Icahn;
the impact, costs and expenses of any litigation we may be subject to now or in the future;
the risks associated with ongoing compliance with environmental, health, safety, and regulatory laws and regulations, which may be subject to change;
the conversion of our railcar backlog into revenues equal to our reported estimated backlog value;
the risks associated with our current joint ventures and anticipated capital needs of, and production at our joint ventures;
the risks and impact associated with any potential joint ventures, acquisitions, dispositions 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.



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In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. Our actual results could be different from the results described in or anticipated by our forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections and may be materially better or worse than anticipated. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements represent our estimates and assumptions only as of the date of this report. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this report, in order to reflect changes in circumstances or expectations or the occurrence of unanticipated events except to the extent required by applicable securities laws. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed above and under “Risk Factors” set forth in Part I Item 1A of this Annual Report on Form 10-K, as well as the risks and uncertainties discussed elsewhere in this Annual Report on Form 10-K. 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.




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AMERICAN RAILCAR INDUSTRIES, INC.
FORM 10-K
TABLE OF CONTENTS
 
 
 
PAGE
PART I
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
PART III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
PART IV
 
 
Item 15.
 
 
SIGNATURES



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AMERICAN RAILCAR INDUSTRIES, INC.
FORM 10-K
PART I
Item 1: Business
INTRODUCTION
American Railcar Industries, Inc. (ARI) is one of the leading North American designers and manufacturers of hopper and tank railcars. We provide our railcar customers with integrated solutions through a comprehensive set of high quality products and related services offered by our three reportable segments: manufacturing, railcar leasing and railcar services. Manufacturing consists of railcar manufacturing and railcar and industrial component manufacturing. Railcar leasing consists of railcars manufactured by us and leased to third parties under operating leases. Railcar services consist of railcar repair, engineering and field services. Financial information about our business segments for the years ended December 31, 2015 , 2014 and 2013 is set forth in Note 20 of our consolidated financial statements. Unless the context otherwise requires, references to “our company,” “the Company”, “we,” “us” and “our,” refer to us and our consolidated subsidiaries and our predecessors.
Our primary customers include shippers, leasing companies, industrial companies, and Class I railroads. In servicing this customer base, we believe our comprehensive railcar service offerings and our railcar components manufacturing business help us to further penetrate the general railcar manufacturing market. Additionally, we offer our customers the opportunity to lease railcars. This breadth of product and service offerings provides us with opportunities to partner with our customers to improve our products and services and enhance the value of our offerings.
We were founded and incorporated in Missouri in 1988, reincorporated in Delaware in 2006 and reincorporated again in North Dakota in 2009. Since our formation, we have grown our business from being a small provider of railcar components and railcar maintenance services to one of North America's leading integrated providers of railcars, railcar components and railcar maintenance services. Beginning in 2011, in addition to selling railcars, we began expanding our railcar leasing business.
Our operations include eight manufacturing plants that fabricate and assemble raw materials, mainly steel, into railcars, railcar components and industrial components; seven railcar repair plants; and thirteen mobile repair (mobile units) and mini repair shop (mini shop) locations. Our railcar services business includes railcar repair and maintenance, painting, lining, cleaning, inspections, engineering support and field services. In addition, we have used in the past, and plan to use in the future, our manufacturing facilities to perform certain repair projects. See Item 2 “ Properties ” for further discussion of our properties.
We are currently party to two joint ventures. Our Ohio Castings Company, LLC (Ohio Castings) joint venture manufactures various railcar parts for sale, through one of the joint venture partners, to third parties and the other joint venture partners. Our Axis, LLC (Axis) joint venture manufactures and sells axles to its joint venture partners for use and distribution both domestically and internationally.
PRODUCTS AND SERVICES
We design, manufacture and sell special, customized and general-purpose railcars and a wide range of components primarily for the North American railcar and industrial markets. In addition, we offer these same railcars for lease. We also support the railcar industry by offering a variety of comprehensive railcar repair services, ranging from full to light repair, engineering and on-site repairs and maintenance through our various repair facilities, including mobile units and mini shops. See Note 20 of our consolidated financial statements for financial information by segment.
Manufacturing
We primarily manufacture two types of railcars, hopper and tank railcars, but have the ability to produce additional railcar types. We offer our customers the option to buy or lease railcars. We also manufacture components for railcar and industrial markets.
Hopper railcars
We manufacture both general service and specialty hopper railcars at our Paragould plant. All of our hopper railcars may be equipped with varying combinations of hatches, discharge outlets and protective coatings to provide our customers with a railcar designed to perform in precise operating environments. The flexible nature of our hopper railcar design allows it to be quickly modified to suit changing customer needs. This flexibility can continue to provide value after the initial purchase or lease because our railcars may be converted for reassignment to other services.

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We have several different railcar types in our hopper family that target specific customers and specific commodities, including plastic pellets, grain, industrial and food grade starches and flours, cement, sand, clays, heavy ore minerals, and corrosive chemicals. Our hopper railcars are specifically designed for shipping a variety of dry bulk products, from light density products, such as plastic pellets, to high-density products, such as cement and sand. Depending upon customer requirements, they can operate in a gravity, positive pressure or vacuum pneumatic unloading environment. CenterFlow ® and other lines of hopper railcars provide protection for a wide range of dry bulk products and enhance the associated loading, unloading and cleaning processes. Improvements include enhanced designs of the shape of the railcars, underframes, outlet mounting frames, loading hatches, discharge outlets and rotary-dump, which enhance the cargo loading and unloading processes.
Tank railcars
We manufacture pressure and non-pressure tank railcars at our Marmaduke plant. Our tank railcars are designed to transport a variety of commodities including petroleum products, ethanol, asphalt, chemicals, vegetable oil, corn syrup and other food products. Our pressure tank railcars transport products that require a pressurized state due to their liquid, semi-gaseous or gaseous nature, including chlorine, anhydrous ammonia, liquid propane and butane. Our pressure tank railcars feature a thicker pressure retaining inner shell that is separated from a jacketed outer shell by layers of insulation, thermal protection or both. Our pressure tank railcars are made from specific grades of normalized steel that are selected for toughness and ease of welding. Most of our tank railcars feature a sloped bottom tank that provides improved drainage. Many of our tank railcars feature coils that can be steam-heated to decrease cargo viscosity, which speeds unloading. We can alter the design of our tank railcars to address specific customer or regulatory requirements and we can also apply linings to tank railcars.
Other railcar types
We have the ability to produce many other railcar types as demand may dictate.
Component manufacturing
In addition to manufacturing railcars, we also manufacture custom and standard railcar components. Our products include discharge outlets for hopper railcars, tank railcar components and valves, tank heads, manway covers, wheel pair sets, underframes, outlet components and running boards for industrial and railroad customers and hitches for the intermodal market. We use these components in our own railcar manufacturing and sell certain of these products to third parties.
We also manufacture aluminum and special alloy steel castings that we sell primarily to industrial customers. These products include castings for the trucking, construction, mining and oil and gas exploration markets, as well as finished, machined castings and other custom machined products.
Consulting and license agreements
In January 2013, we entered into a purchasing and engineering services agreement and license with ACF Industries, LLC (ACF), an affiliate of Mr. Carl Icahn, our principal beneficial stockholder through IELP. Under this agreement, we provide purchasing and engineering support to ACF in connection with ACF's manufacture and sale of certain tank railcars at its facility. Additionally, we provide certain intellectual property related to tank railcars required to manufacture and sell such tank railcars. In November 2015, ARI and ACF amended this agreement to, among other things, extend the termination date from December 31, 2015 to December 31, 2016, subject to certain early termination events.
Railcar Leasing
Customers may lease our hopper and tank railcars through various leasing options, including full service leases. Maintenance of leased railcars can be provided, in part, through our railcar repair and refurbishment facilities. The terms of our railcar leases generally range from 5 to 10 years and generally provide for fixed monthly rentals. As of December 31, 2015, we had 10,362 railcars in our lease fleet, all of which were under lease.
Railcar Services
Our railcar services segment focuses on railcar repair, engineering and field services. Our primary customers for services provided by this group are leasing companies and shippers of specialty hopper and tank railcars. Our railcar services segment provides us with insight into our customers' railcar needs, which we use to improve service and product offerings across all our business segments.

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Repair services
This component of our business includes both our full service repair and refurbishment plants and our light service repair plants, which are strategically located to serve our customers. Our full service repair plants have full cleaning, interior and exterior coating, repair / rebuilding, non-destructive testing and engineering capabilities for a variety of railcar types. Our light repair plants provide a focused offering to specific areas. We have the capacity to handle large reassignment projects, heavy wreck repair, and conversions to make, or keep, railcars compliant with regulations, as well as many other customer requirements.
Engineering and Field services
We offer a wide array of field services through our mobile units and mini shops. Working together with our field services network, our engineers are available to assist in quickly resolving railcar maintenance and regulatory compliance issues. Information learned in the field is used to educate other aspects of our business allowing us to recognize and address maintenance and compliance issues that affect our customers' fleets.
Consulting and license agreements
In April 2015, we entered into a repair services and support agreement with ACF. Under this agreement, we provide 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, we provide a non-exclusive and non-assignable license of certain intellectual property related to the Repair Services for railcars.
SALES AND MARKETING
We sell and market our products and services in North America. American Railcar Leasing, LLC (ARL) markets our railcars for sale or lease and acts as our manager to lease railcars on our behalf for a fee. ARL is an affiliate of Mr. Carl Icahn, our principal beneficial stockholder through IELP. We sell our component products and railcar services through ARI's sales and marketing staff, including sales representatives. Certain of our component products are sold directly to customers via catalogs and the Internet through which our customers have access to our railcar and industrial components. Our marketing activities include commodity and industry based market research and analyses, advertising via electronic and print publications, participation in trade shows and industry forums and distribution of sales literature and marketing materials.
From time to time, we manufacture and sell our products and services to companies controlled by Mr. Carl Icahn, our principal beneficial stockholder through IELP, including, but not limited to, ARL and ARL's wholly-owned subsidiary, AEP Leasing LLC (AEP) (collectively with ARL, the IELP Entities). In 2015 , our top three customers, the IELP Entities, Chevron Phillips Chemical Company, LLC, and Equistar Chemicals, LP, accounted for approximately 32.0%, 9.0% and 7.5% of our consolidated revenues, respectively. In 2015, sales to our top ten customers accounted for approximately 73.8% of our consolidated revenues.
See Note 20 of our consolidated financial statements for geographical information concerning the sales of our products and services, as well as other sales concentration information.
BACKLOG
We define backlog as the number and sales value of railcars that our customers have committed in writing to purchase or lease from us that have not been shipped. As of December 31, 2015 , our total backlog was 7,081 railcars, of which 5,629 railcars with an estimated value of $550.1 million were orders for direct sale and 1,452 railcars with an estimated market value of $144.7 million were orders for railcars that will be subject to lease. Approximately 70% of the railcars in our backlog are expected to be delivered during 2016 , of which 55% are for direct sale and 15% are for lease. All of our backlog as of December 31, 2015 related to railcars for non-affiliated customers. As of December 31, 2014 , our total backlog was 11,732 railcars, of which 8,888 railcars with an estimated value of $889.1 million were orders for direct sale and 2,844 railcars with an estimated market value of $334.1 million were orders for railcars that will be subject to lease.
Railcars for Sale. As of December 31, 2015 , approximately 79.5% of the total number of railcars in our backlog were railcars for direct sale. Estimated market value of railcars for direct sale reflects the total revenues expected as if such backlog were converted to actual revenues at the end of the particular period.
Railcars for Lease . As of December 31, 2015 , approximately 20.5% of the total number of railcars in our backlog were for lease, subject to firm orders. Estimated backlog value of railcars that will be subject to lease reflects the estimated market value of each railcar as if it had been sold to a third party. Actual revenues for railcars subject to lease are recognized per the terms of the lease and are not based on the estimated backlog value.

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The following table shows our reported railcar backlog and estimated future revenue value attributable to such backlog at the end of the periods shown. The reported backlog includes railcars relating to purchase or lease obligations based upon an assumed mix.  
 
2015
 
2014
Railcar backlog at January 1
11,732

 
8,560

New railcars delivered
(8,903
)
 
(8,018
)
New railcar orders
4,252

 
11,190

Railcar backlog at December 31
7,081

 
11,732

Estimated railcar backlog value at end of period (in thousands) (1)
$
694,878

 
$
1,223,133

 
(1)
Estimated backlog value reflects the total revenues expected to be attributable to the backlog reported at the end of the particular period as if such backlog were converted to actual revenues. Estimated backlog value reflects known price adjustments for material cost changes but does not reflect a projection of any future material price adjustments that are generally provided for in our customer contracts.
We cannot guarantee that the actual revenue from these orders will equal our reported estimated backlog value or that our future revenue efforts will be successful. Customer orders may be subject to requests for delays in deliveries, inspection rights and other customary industry terms and conditions, which could prevent or delay railcars in our backlog from being shipped and converted into revenue. Historically, we have experienced little variation between the number of railcars ordered and the number of railcars actually delivered. As delivery dates could be extended on certain orders, we cannot guarantee that our reported railcar backlog will convert to revenue in any particular period, if at all.
SUPPLIERS AND MATERIALS
Our business depends on the adequate supply of numerous railcar components, including railcar wheels, brakes, axles, bearings, yokes, tank railcar heads, sideframes, bolsters and other heavy castings, and raw materials, such as steel and normalized steel plate, used in the production and maintenance of railcars. Due to our vertical integration efforts, including our involvement in joint ventures, we are currently able to produce axles, castings and tank railcar heads and assemble wheel sets, along with numerous other railcar components.
The cost of raw materials and railcar components represents a significant amount of the direct manufacturing costs of our railcar product lines. Our railcar manufacturing contracts generally contain provisions for price adjustments that track fluctuations in the prices of certain raw materials and railcar components, including steel, so that increases in our manufacturing costs caused by increases in the prices of these raw materials and components are passed on to our customers. Conversely, if the price of those materials or components decreases, a discount is applied to reflect the decrease in cost.
In 2015 , our top three suppliers accounted for approximately 39.4% of the total materials that we purchased and our top ten suppliers accounted for approximately 65.6% of the total materials that we purchased.
U.S. and Canadian regulatory authorities released regulations related to tank railcar manufacturing and retrofitting standards on May 1, 2015. The regulations could materially impact the tank railcar manufacturing and retrofitting processes industry-wide, which could negatively affect the potential availability of certain critical components and raw materials including, in particular, steel.
Steel
We use hot rolled steel coils, as-rolled steel plate and normalized steel plate in our manufacturing operations. We can acquire hot rolled steel coils and standard as-rolled steel plate from several suppliers. However, there are a limited number of qualified domestic suppliers of the form and size of as-rolled and normalized steel plate that we need for manufacturing tank railcars, and these suppliers are our only source of this product. Normalized steel plate is a special form of heat-treated steel that is stronger and is more resistant to puncture than as-rolled steel plate. Normalized steel plate is required by federal regulations to be used in tank railcars carrying certain types of hazardous cargo.
Castings
Heavy castings that we use in our railcar manufacturing primarily include bolsters and sideframes that are components of truck assemblies, upon which railcars are mounted, as well as couplers and yokes. We obtain a significant portion of our castings requirements from our joint venture, Ohio Castings.

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Axles
Axles, at times, have been a capacity constrained critical component of manufacturing railcars. Our joint venture, Axis, produces railcar axles and is our primary supplier of such axles.
COMPETITION
The North American railcar manufacturing industry has historically been extremely competitive. We compete primarily with Trinity Industries, Inc. (Trinity), The Greenbrier Companies, Inc. (Greenbrier), National Steel Car Limited (National Steel Car), and Freight Car America, Inc. in the hopper railcar market and primarily with Trinity, Greenbrier, National Steel Car and Union Tank Car Company in the tank railcar market. Competitors have expanded and may continue to expand their capabilities into our core railcar markets.
We also experience intense competition in our railcar leasing business from railcar manufacturers, leasing companies, banks and other financial institutions. Some of this competition includes certain of our significant customers and affiliates, including ARL, though provisions in our railcar management contracts with ARL require ARL to treat our railcars consistent with generally accepted industry standards and to adhere to standards of conduct which are at least equal to the efforts used by ARL in its management of its own and other customers’ railcars. Some of our railcar manufacturing competitors also produce railcars for use in their own railcar leasing fleets, competing directly with our railcar leasing business and with other leasing companies.
Our competition for the sale of railcar components includes our competitors in the railcar manufacturing market, as well as a concentrated group of companies whose primary business focus is the production of one or more specialty components. We compete with numerous companies in our railcar services businesses, ranging from companies with greater resources than we have to small, local companies.
In addition to price, competition in all of our markets is based on quality, reputation, reliability of delivery, proximity to products and services, customer service and other factors.
INTELLECTUAL PROPERTY
We believe that manufacturing expertise, the improvement of existing technology and the development of new products may be more important than patent protection in establishing and maintaining a competitive advantage. Nevertheless, we have obtained several patents and will continue to make efforts to obtain patents, when available, in connection with our product development and design activities.
ARI ® , Pressureaide ® , CenterFlow ® and our railcar logo are our U.S. registered trademarks. Each trademark, trade name or service mark of any other company appearing in this report belongs to its respective holder.
EMPLOYEES
As of December 31, 2015 , we had 2,407 full-time employees in various locations throughout the United States and Canada, of which approximately 7.3% were party to domestic collective bargaining agreements at two of our repair facilities and at our Texas manufacturing facility.
REGULATION
The industries in which we operate are subject to extensive regulation by various governmental, regulatory and industry authorities and by federal, state, local and foreign authorities. The primary regulatory and industry authorities involved in the regulation of the railcar industry in the U.S. and Canada are the Federal Railroad Administration (FRA), the Association of American Railroads (AAR), U.S. Department of Transportation (USDOT) and Transport Canada (TC). The FRA administers and enforces U.S. Federal laws and regulations relating to railroad safety. These regulations govern equipment and safety compliance standards for railcars and other rail equipment used in interstate commerce. The AAR promulgates a wide variety of rules and regulations governing safety and design of equipment, relationships among railroads with respect to railcars in interchange and other matters. The AAR also certifies railcar manufacturers and component manufacturers that provide equipment for use on railroads in the U.S. New products must generally undergo AAR testing and approval processes. Because of these regulations, we must maintain certifications with the AAR as a railcar manufacturer, and products that we sell must meet AAR and FRA standards. We must comply with the rules of the USDOT and we are subject to oversight by TC that also requires compliance.

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ENVIRONMENTAL MATTERS
We are 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 expose us to liability for the environmental condition of our current or formerly owned or operated facilities and negligent acts, and also may expose us to liability for the conduct of others or for our actions that complied with all applicable laws at the time these 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. Our operations that involve hazardous materials also raise potential risks of liability under common law.
Environmental operating permits are, or may be, required for our operations under these laws and regulations. These operating permits are subject to modification, renewal and revocation. We regularly monitor and review our operations, procedures and policies for compliance with permits, laws and regulations. Despite these compliance efforts, risk of environmental liability is inherent in the operation of our businesses, as it is with other companies engaged in similar businesses.
Certain real property we acquired from ACF in 1994 has been involved in investigation and remediation activities to address contamination. ACF is an affiliate of Mr. Carl Icahn, our principal beneficial stockholder through IELP. Substantially all of the issues identified with respect to these properties relate to the use of these properties prior to their transfer to us by ACF and for which ACF has retained liability for environmental contamination that may have existed at the time of transfer to us. ACF has also agreed to indemnify us for any cost that might be incurred with those existing issues. As of the date of this report, we do not believe we will incur material costs in connection with any activities relating to these properties, but we cannot assure that this will be the case. If ACF fails to honor its obligations to us, we could be responsible for the cost of any additional investigation or remediation activities relating to these properties that may be required.
We believe that our 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 our financial condition or results of operations.
Future events, such as new environmental regulations or changes in or modified interpretations of existing laws and regulations or enforcement policies, or further investigation or evaluation of the potential health hazards of products or business activities, may give rise to additional compliance and other costs that could materially adversely affect our business, financial condition or results of operations. In addition, we have historically conducted investigation and remediation activities at properties that we own to address past contamination. To date, such costs have not been material. Although we believe we have satisfactorily addressed all known material contamination through our remediation activities, there can be no assurance that these activities have addressed all past contamination. The discovery of past contamination or the release of hazardous substances into the environment at our current or formerly owned or operated facilities could require us in the future to incur investigative or remedial costs or other liabilities that could be material or that could interfere with the operation of our businesses.
ADDITIONAL INFORMATION
Our principal executive offices are located at 100 Clark Street, St. Charles, Missouri, 63301, our telephone number is (636) 940–6000. We are a reporting company and file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (SEC). You may find a copy of these materials at the Public Reference Room maintained by the SEC at Room 1580, 100 F Street N.E., Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for more information on the operation of the public reference room. These materials may also be accessed through the SEC's website sec.gov . Copies of our annual, quarterly and current reports, Audit Committee Charter, Code of Business Conduct and Code of Ethics for Senior Financial Officers are available on our website americanrailcar.com or free of charge by contacting our Investor Relations Department at American Railcar Industries, Inc., 100 Clark Street, St. Charles, Missouri, 63301.
Item 1A: Risk Factors
The following risk factors should be considered carefully in addition to the other information contained in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements,” above. Our actual results could differ materially from those contained in the forward-looking statements. Factors that may cause such differences include, but are not limited to, those discussed below and those discussed elsewhere in this Annual Report on Form 10-K. Additional risks and uncertainties that management is not aware of or that are currently deemed immaterial may also adversely affect our business operations. If any of the following risks materialize, our business, financial condition and results of operations could be materially adversely affected.

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We undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
The highly cyclical nature of the railcar industry may result in lower revenues during economic downturns or due to other factors.
The North American railcar market has been, and we expect it to continue to be, highly cyclical resulting in volatility in demand for our products and services. Sales of our railcars and other products slowed in 2010 resulting in decreased production rates. New orders and shipments of railcars steadily increased beginning in 2011 and continuing through 2014 driven by increased demand for shipment of certain commodities, replacement of older railcars and federal tax benefits from the delivery of railcars in 2011 through 2014. The railcar industry reached a record backlog level at December, 31, 2014, and orders have since slowed in 2015. The cyclical nature of the railcar industry may result in lower revenues during economic or industry downturns due to decreased demand for both new and replacement railcars and railcar products and lower demand for railcars on lease. Decreased demand could result in lower lease volumes, increased downtime, reduced lease rates and decreased cash flow.
Regulatory changes related to tank railcars in North America may impact future new railcar production rates and orders from our customers, as well as retrofit and maintenance work to existing railcars. In response to current regulations, we continue to invest capital and evaluate opportunities to further expand our manufacturing flexibility and repair capacity to address the needs of the industry. We cannot assure you that any increased manufacturing flexibility or repair capacity will be sufficient to meet the demands of the industry. Nor can we assure you that hopper or tank railcar demand will continue at strong levels, that demand for any railcar types or railcar services will improve, or that our railcar backlog, orders and shipments will track industry-wide trends. Similarly, we cannot assure you of the impact of the regulatory changes affecting the North American railcar industry or our business.
Currently, we estimate that approximately 70% of our December 31, 2015 backlog will be shipped during 2016 . Our failure to obtain new orders could materially adversely affect our business, financial condition and results of operations. Downturns in part or all of the railcar manufacturing industry may occur in the future, resulting in decreased demand for our products and services. For example, a change in environmental regulations, oil prices, competitive pricing, pipeline capacity and other factors could trigger a cyclical shift and could reduce demand for railcars in the energy transportation industry. If we fail to manage our overhead costs and variations in production rates, our business could suffer.
Further, a change in our product mix due to cyclical shifts in demand could have an adverse effect on our profitability. We manufacture, lease and repair a variety of railcars. The demand for specific types of these railcars varies from time to time. These shifts in demand could affect our margins and could have an adverse effect on our profitability.
Exposure to fluctuations in commodity and energy prices may impact our results of operations.
Fluctuations in commodity or energy prices, including crude oil and gas prices, could negatively impact the activities of our customers resulting in a corresponding adverse effect on the demand for our products and services. These shifts in demand could affect our results of operations and could have an adverse effect on our profitability.
Prices for oil and gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of other economic factors that are beyond our control. Worldwide economic, political and military events, including war, terrorist activity, events in the Middle East and initiatives by the Organization of the Petroleum Exporting Countries (OPEC), have contributed, and are likely to continue to contribute, to price and volume volatility. Most recently, the increasing global supply of oil in conjunction with weakening demand from slowing economic growth in Europe and Asia has created downward pressure on crude oil prices. Changes in environmental or governmental regulations, pipeline capacity, the price of crude oil and gas and related products and other factors have reduced, and may continue to reduce demand for railcars in the energy transportation industry, including our primary railcar products, and have a material adverse effect on our financial condition and results of operations.
We may be unable to re-market railcars from expiring leases on favorable terms, which could adversely affect our business, financial condition and results of operations.
The failure to enter into commercially favorable railcar leases, re-lease or sell railcars upon lease expiration and successfully manage existing leases could have a material adverse effect on our business, financial condition and results of operations. Our ability to re-lease or sell leased railcars profitably is dependent upon several factors, including the cost of and demand for leases or ownership of newer or specific use models, the availability in the market of other used or new railcars, and changes in applicable regulations that may impact continued use of older railcars.

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A downturn in the industries in which our lessees operate and decreased demand for railcars could also increase our exposure to re-marketing risk because lessees may demand shorter lease terms, requiring us to re-market leased railcars more frequently. Furthermore, the resale market for previously leased railcars has a limited number of potential buyers. Our inability to re-lease or sell leased railcars on favorable terms could result in lower lease rates, lower lease utilization percentages and reduced revenues.
We operate in highly competitive industries and we may be unable to compete successfully, which could materially adversely affect our business, financial condition and results of operations.
We face intense competition in all geographic markets and in each area of our business. In our railcar manufacturing business we have five primary competitors. Any of these competitors may, from time to time, have greater resources than we do. Our current competitors have increased and may continue to increase their capacity in, or new competitors may enter into, the railcar markets in which we compete. Strong competition within the industry has led to pricing pressures and could limit our ability to maintain or increase prices or obtain better margins on our railcars for both direct sale and lease. If we produce any type of railcars other than what we currently produce, we will be competing with other manufacturers that may have more experience with that railcar type. Further, new competitors, or alliances among existing competitors, may emerge in the railcar or industrial components industries and rapidly gain market share. Customer selection of railcars for purchase or for lease may be driven by technological or price factors, and our competitors may provide or be able to provide more technologically advanced railcars or more attractive pricing and/or lease rates than we can provide. Such competitive factors may adversely affect our sales, utilization and/or lease rates, and consequently our revenues.
We also have intense competition in our railcar leasing business from railcar manufacturers, leasing companies, banks and other financial institutions. Some of this competition includes certain of our significant customers, including our affiliate, ARL. Some of our railcar manufacturing competitors also produce railcars for use in their own railcar leasing fleets, competing directly with our railcar leasing business and with leasing companies. In connection with the re-leasing of railcars, we may encounter competition from, among other things, other railcars managed by ARL and other competitor railcar leasing companies.
We compete with numerous companies in our railcar services business, ranging from companies with greater resources than we have to small, local companies. In addition, new competitors, or alliances among existing competitors, may emerge, thereby intensifying the existing competition for our railcar services business.
Technological innovation by any of our existing competitors, or new competitors entering any of the markets in which we do business, could put us at a competitive disadvantage and could cause us to lose market share. Increased competition for our manufacturing, railcar leasing or railcar services businesses could result in price reductions, reduced margins and loss of market share, which could materially adversely affect our prospects, business, financial condition and results of operations.
The variable needs of our railcar customers, the timing of completion, customer acceptance and shipment of orders, as well as the mix of railcars for lease versus direct sale, all may cause our revenues and income from operations to vary substantially each quarter, which could result in significant fluctuations in our quarterly and annual results.
Revenue from railcars for direct sale comprised approximately 73.6%, 73.7% and 79.5% of our total consolidated revenues in 2015, 2014 and 2013, respectively. Our results of operations in any particular quarterly period may be significantly affected by the number and type of railcars manufactured and shipped in that period, which is impacted by customer needs that may vary greatly quarter to quarter and year to year. In addition, because revenues and earnings related to leased railcars are recognized over the life of the lease, our quarterly results may vary depending on the mix of lease versus direct sale railcars that we ship during a given period. The customer acceptance and title transfer or customer acceptance and shipment of our railcars determines when we record the revenues associated with our railcar sales or leases. Given this, the timing of customer acceptance and title transfer or customer acceptance and shipment of our railcars could cause fluctuations in our quarterly and annual results. The railroads could potentially go on strike or have other service interruptions, which could ultimately create a bottleneck and potentially cause us to slow down or halt our shipment and production schedules, which could materially adversely affect our business, financial condition and results of operations.
As a result of these fluctuations, we believe that comparisons of our sales and operating results between quarterly periods within the same year and between quarterly periods within different years may not be meaningful and, as such, these comparisons should not be relied upon as indicators of our future performance.

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If we face labor shortages or increased labor costs, our growth and results of operations could be materially adversely affected.
We depend on skilled labor in our manufacturing and other businesses. Due to the competitive nature of the labor markets in which we operate and the cyclical nature of the railcar industry, the resulting employment cycle increases our risk of not being able to retain, recruit and train the personnel we require, particularly when the economy expands, production rates are high or competition for such skilled labor increases. Our inability to recruit, retain and train adequate numbers of qualified personnel on a timely basis could materially adversely affect our business, financial condition and results of operations.
Volatility in the global financial markets may adversely affect our business, financial condition and results of operation.
During periods of volatility in the global financial markets, certain of our customers could delay or otherwise reduce their purchases of railcars and other products and services. If volatile conditions in the global credit markets prevent our customers' access to credit, order volumes may decrease or customers may default on payments owed to us. Some of the end users of our railcars acquire them through leasing arrangements with our leasing company customers. Economic conditions that result in higher interest rates may result in stricter borrowing conditions that could increase the cost of, or potentially deter, new leasing arrangements. These factors may cause our customers to purchase or lease fewer railcars, which could materially adversely affect our business, financial condition and results of operations.
The railcars in our lease fleet consist of tank railcars and hopper railcars. The lessees of such types of railcars have historically been concentrated for use in certain industries and for certain products and our lessees generally reflect such industry and product concentrations. Consequently, any significant economic downturn in these industries or product markets could have a material adverse effect on the creditworthiness of the lessees and on the ability of such lessees to perform under the leases, which may impact our ability to re-lease railcars to those lessees or to other potential lessees with a need for railcars of the types we operate, reduce our revenue, divert management's attention or limit our ability to further attract financing to add liquidity in the future.
If our suppliers face challenges obtaining credit, selling their products, or otherwise operating their businesses, the supply of materials we purchase from them to manufacture our products may be interrupted. Any of these conditions or events could result in reductions in our revenues, increased price competition, or increased operating costs, which could adversely affect our business, financial conditions and results of operations.
We depend upon a small number of customers that represent a large percentage of our revenues. The loss of any single significant customer, a reduction in sales to any such significant customer or any such significant customer's inability to pay us in a timely manner could materially adversely affect our business, financial condition and results of operations.
Railcars are typically sold pursuant to large, periodic orders, and therefore, a limited number of customers typically represent a significant percentage of our revenue in any given year. For example, our top ten customers represented approximately 73.8%, 75.4% and 81.2% of our total consolidated revenues in 2015, 2014 and 2013, respectively. Moreover, our top three customers accounted for approximately 48.5%, 54.5% and 64.2% of our total consolidated revenues in 2015, 2014 and 2013, respectively. The loss of any significant portion of our sales to any major customer, the loss of a single major customer or a material adverse change in the financial condition of any one of our major customers could materially adversely affect our business, financial condition and results of operations. If one of our significant customers was unable to pay due to financial condition, it could materially adversely affect our business, financial condition and results of operations.
The cost of raw materials and components that we use in our manufacturing operations, particularly steel, is subject to escalation and surcharges and could increase. Any increase in these costs or delivery delays of these raw materials could materially adversely affect our business, financial condition and results of operations.
The cost of raw materials, including steel, and components used in the production of our railcars, represents a significant amount of our direct manufacturing costs per railcar. We generally include provisions in our railcar manufacturing contracts that allow us to adjust prices as a result of increases and decreases in the cost of certain raw materials and components. The number of customers to which we are not able to pass on price increases may increase in the future, which could adversely affect our operating margins and cash flows. If we are not able to pass on price increases to our customers, we may lose railcar orders or enter into contracts with less favorable contract terms, any of which could materially adversely affect our business, financial condition and results of operations. Any fluctuations in the price or availability of steel, or any other material or component used in the production of our railcars or our railcar or industrial components, could materially adversely affect our business, financial condition and results of operations. Such price increases could reduce demand for our railcars or component products. Deliveries of raw materials and components may also fluctuate depending on various factors including supply and demand for the raw material or component, or governmental regulation relating to the raw material or component, including regulation relating to importation.

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Fluctuations in the supply of components and raw materials we use in manufacturing railcars, which are often only available from a limited number of suppliers, could cause production delays or reductions in the number of railcars we manufacture, which could materially adversely affect our business, financial condition and results of operations.
Our railcar manufacturing business depends on the adequate supply of numerous railcar components, such as railcar wheels, axles, brakes, bearings, yokes, sideframes, bolsters and other heavy castings and raw materials, such as steel. Some of these components and raw materials are only available from a limited number of domestic suppliers. Strong demand can cause industry-wide shortages of many critical components and raw materials as reliable suppliers could reach capacity production levels. Supply constraints in our industry are exacerbated because, although multiple suppliers may produce certain components, railcar manufacturing regulations and the physical capabilities of manufacturing facilities restrict the types and sizes of components and raw materials that manufacturers may use.
In addition, we do not carry significant inventories of certain components and procure most of our components on an as needed basis. In the event that our suppliers of railcar components and raw materials were to stop or reduce the production of railcar components and raw materials that we use, or refuse to do business with us for any reason, our business would be disrupted. Our inability to obtain components and raw materials in required quantities or of acceptable quality could result in significant delays or reductions in railcar shipments and could materially adversely affect our business, financial condition and results of operations.
In 2015, our top three suppliers accounted for approximately 39.4% of the total materials that we purchased and our top ten suppliers accounted for approximately 65.6% of the total materials that we purchased. If any of our significant suppliers of raw materials and components were to shut down operations, our business and financial results could be materially adversely affected as we may incur substantial delays and significant expense in finding alternative sources. The quality and reliability of alternative sources may not be the same and these alternative sources may charge significantly higher prices.
Companies affiliated with Mr. Carl Icahn are important to our business.
We manufacture railcars and railcar components for and provide railcar services to companies affiliated with Mr. Carl Icahn, our principal beneficial stockholder through IELP. We are currently subject to agreements, and may enter into additional agreements, with certain of these affiliates that are important to our business. To the extent our relationships with affiliates of Mr. Carl Icahn change due to the sale of his interest in us, such affiliates or otherwise, our business, financial condition and results of operations could be materially adversely affected.
Affiliates of Mr. Carl Icahn accounted for approximately 33.1% , 36.1% and 35.7% of our consolidated revenues in 2015, 2014 and 2013, respectively. This revenue is primarily attributable to the sale of railcars to ARL and AEP, which currently purchase all of their railcars from us, but are not required to do so in the future. As of December 31, 2015, we did not have any orders in our backlog from ARL or AEP. This revenue is also attributable to railcar repairs and services provided to ARL, which are done on an ad hoc basis. However, ARI is not the only provider of railcar repairs and services to ARL. This revenue is also generated from a purchasing and engineering services agreement and license with ACF, under which we provide purchasing support and engineering services to ACF in connection with ACF's manufacture and sale of certain tank railcars at its facility. Additionally, we have entered into a repair services and support agreement and license with ACF, under which we provide certain sales and administrative and technical services, materials and purchasing support and engineering services to ACF to provide repair and retrofit services. We also have entered into a parts purchasing and sale agreement and license with ACF, under which we from time to time, purchase from and sell to ACF certain parts for railcars. To the extent our relationships with ARL, ACF or Mr. Carl Icahn change, our business, financial condition and results of operations could be materially adversely affected.
We operate our leasing business under lease management agreements with ARL through which ARL markets our railcars for sale or lease and acts as our manager to lease railcars on our behalf for a fee. ARL also leases railcars on behalf of itself, its subsidiaries and other third parties, and therefore markets our railcars and railcars owned by others to the same customer base. Our management agreements with ARL contain provisions that require ARL to treat railcars owned by us and our subsidiaries in the same manner as railcars owned by ARL or other third parties for which ARL serves as manager. However, ARL may provide a leasing customer with railcars owned by others, instead of our railcars, based on a number of factors, such as customers' timing or geographic needs or other specifications.
Mr. Carl Icahn exerts significant influence over us and his interests may conflict with the interests of our other stockholders.
Mr. Carl Icahn currently controls approximately 60% of the voting power of our common stock, through IELP, and is able to control or exert substantial influence over us, including controlling the election of our directors and most matters requiring board or stockholder approval, including business strategies, mergers, business combinations, acquisitions or dispositions of

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significant assets, issuances of common stock, incurrence of debt or other financing and the payment of dividends. The existence of a controlling stockholder may have the effect of making it difficult for, or may discourage or delay, a third party from seeking to acquire a majority of our outstanding common stock, or a significant amount of our assets, which could adversely affect the market price of our stock.
As disclosed by a Schedule 13D filed on August 14, 2015, Mr. Carl Icahn and the Reporting Persons listed therein do not intend to sell their respective shares pursuant to our Stock Repurchase Program and, accordingly, the percentage of our shares beneficially owned by the Reporting Persons has increased and may continue to increase during the Stock Repurchase Program, thus further increasing Mr. Carl Icahn's control and influence over us.
Mr. Carl Icahn owns, controls and has an interest in a wide array of companies, some of which, such as ARL, AEP and ACF as described above, may compete directly or indirectly with us. As a result, his interests may not always be consistent with our interests or the interests of our other stockholders. For example, ARL competes directly with us and with some of our customers in the railcar leasing business. ACF has also previously manufactured railcars for us and under a purchasing and engineering services agreement and license has been manufacturing and selling tank railcars with engineering, purchasing and design support from us. Mr. Carl Icahn and entities controlled by him may also pursue acquisitions or business opportunities that may be in competition with or complementary to our business. Our articles of incorporation allow Mr. Carl Icahn, entities controlled by him, and any director, officer, member, partner, stockholder or employee of Mr. Carl Icahn or entities controlled by him, to take advantage of such corporate opportunities without first presenting such opportunities to us, unless such opportunities are expressly offered to any such party solely in, and as a direct result of, his or her capacity as our director, officer or employee. As a result, corporate opportunities that may benefit us may not be available to us in a timely manner, or at all. To the extent that conflicts of interest may arise among us, Mr. Carl Icahn and his affiliates, those conflicts may be resolved in a manner adverse to us or you.
Our investment in our lease fleet may use significant amounts of cash, which may require us to secure additional capital and we may be unable to arrange capital on favorable terms, or at all.
We use existing cash and cash generated through lease fleet financings to manufacture railcars we lease to customers, while cash from lease revenues is received over the term of the applicable lease. Depending upon the number of railcars that we lease and the amount of cash used in other operations, our cash balances and our availability under any of our lease fleet financings could be depleted, requiring us to seek additional capital. Our inability to secure additional capital, on commercially reasonable terms, or at all, may limit our ability to support operations, maintain or expand our existing business, or take advantage of new business opportunities. We could also experience defaults on leases that could further constrain cash, impact our ability to re-lease railcars, reduce our revenues, divert management's attention or limit our ability to further attract financing to add liquidity in the future.
Changes in legal and regulatory requirements applicable to the industries in which we operate may adversely impact our business, financial condition and results of operations.
Recent derailments in North America of trains transporting crude oil have caused various U.S and Canadian regulatory agencies, industry organizations, as well as Class I Railroads and community governments, to focus attention on transportation by rail of flammable materials. On May 1, 2015, TC and the Pipeline and Hazardous Materials Safety Administration (PHMSA) of the U.S. Department of Transportation released rules related to rail transport of certain flammable liquids that, among other things, imposes a new tank car design standard, a phase out by as early as January 2018 for older DOT-111 cars that are not retrofitted, and a classification and testing program for unrefined petroleum based products, including crude oil. In addition, railroads and other organizations may impose requirements for railcars that are more stringent than, or in addition to, any governmental regulations that may be adopted. For example, additional laws and regulations have been proposed or adopted that may have a significant impact on railroad operations, including the implementation of “positive train control” (PTC) requirements. PTC is a collision avoidance technology intended to override engineer controlled locomotives and stop certain types of train accidents.
We are unable to predict what impact these or other regulatory changes may have, if any, on our business or the industry as a whole. These rules and the industry’s responsiveness in complying with these rules may materially impact the rail industry as a whole; railroad operations; older and newer railcars that meet or exceed currently mandated standards; future railcar specifications; and the capability of the North American railcar manufacturing, repair and maintenance infrastructure to implement mandated retrofit configurations or new construction. As a result of such regulations, certain of our railcars could be deemed unfit for further commercial use (which would diminish or eliminate future revenue generated from leased railcars) and/or require retrofits or modifications. The costs associated with any required retrofits or modifications could be substantial. While certain regulatory changes could result in increased demand for refurbishment and/or new railcar manufacturing activity, our business, financial condition and results of operations could be materially adversely affected if we are unable to adapt our business to changing regulations or railroad standards, source critical components and raw materials such as steel in a timely

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manner and at reasonable cost, or at all, and/or take advantage of any increase in demand for our products and services. We cannot assure that costs incurred to comply with any new standards and regulations, including those released by PHMSA and TC, will not be material to our business, financial condition or results of operations.
The May 2015 rules also include new operational requirements such as speed restrictions. The speed restrictions may have an adverse impact on demand for tank railcars or other types of freight railcars. While rail velocity is affected by many factors including general economic conditions, and has increased since the adoption of the regulations, in some circumstances the specific velocity restrictions imposed by the regulations may significantly reduce overall velocity on congested rail networks. This in turn could lead to an increase in the cost of rail freight transportation and impact availability, making rail less competitive compared to alternative modes of freight transportation. It could also lead to reduced demand for our products as railroads limit additional equipment on their lines.
Train derailments or other accidents involving our products could subject us to legal claims that may adversely impact our business, financial condition and results of operations.
We manufacture railcars for our customers to transport a variety of commodities, including railcars that transport hazardous materials such as crude oil and other petroleum products. We also manufacture railcar components, as well as industrial components for use in several markets, including the trucking, construction, mining and oil and gas exploration markets. We could be subject to various legal claims, including claims for negligence, personal injury, physical damage and product liability, as well as potential penalties and liability under environmental laws and regulations, in the event of a train derailment or other accident involving our products or services. If we become subject to any such claims and are unable successfully to resolve them, our business, financial condition and results of operations could be materially adversely affected.
Increasing insurance claims and expenses could lower profitability and increase business risk.
The nature of our business subjects us to product liability, property damage, and personal injury claims, especially in connection with the manufacture, repair or other servicing of products or components that are used in the transport or handling of hazardous, toxic, or volatile materials. We maintain reserves for reasonably estimable liability claims and liability insurance coverage at levels based upon commercial norms in the industries in which we operate and our historical claims experience. Over the last several years, insurance carriers have raised premiums for many companies operating in our industries. Increased insurance premiums may further increase our insurance expense as coverages expire or cause us to raise our self-insured retention. If the number or severity of claims within our self-insured retention increases, we could suffer costs in excess of our reserves. An unusually large liability claim or a series of claims based on a failure repeated throughout our mass production process may exceed our insurance coverage or result in direct damages if we were unable or elected not to insure against certain hazards because of high premiums or other reasons. In addition, the availability of, and our ability to collect on, insurance coverage is often subject to factors beyond our control. Moreover, any accident or incident involving us, even if we are fully insured or not held to be liable, could negatively affect our reputation among customers and the public, thereby making it more difficult for us to compete effectively, and could materially adversely affect the cost and availability of insurance in the future.
Litigation claims could increase our costs and weaken our financial condition.
We are currently, and may from time to time be, involved in various claims or legal proceedings arising out of our operations. In particular, railcars we manufacture and lease will be used in a variety of manners, which may include carrying hazardous, flammable, and/or corrosive materials. Such railcars, as well as our railcar and industrial components, will, therefore, be subject to risks of breakdowns, malfunctions, casualty and other negative events and it is possible that claims for personal injury, loss of life, property damage, business losses and other liability arising out of these or other types of incidents will be made against us. Additionally, in our normal course of business from time to time we enter into contracts with third parties that may lead to contractual disputes. Adverse outcomes in some or all of these matters could result in judgments against us for significant monetary damages that could increase our costs and weaken our financial condition. We seek contractual recourse and indemnification in the ordinary course of business, maintain reserves for reasonably estimable liabilities, and purchase liability insurance at coverage levels based upon commercial norms in our industries in an effort to mitigate our liability exposure. Nevertheless, our reserves may be inadequate to cover the uninsured portion of claims or judgments. Any such claims or judgments could materially adversely affect our business, financial condition and results of operations. The nature of our businesses and assets expose us to the potential for claims and litigation related to personal injury, property damage, environmental claims, regulatory claims, contractual disputes and various other matters.
The success of our railcar leasing business is dependent, in part, on our lessees performing their obligations.
The ability of each lessee to perform its obligations under a lease will depend primarily on such lessee's financial condition, as well as other various factors. The financial condition of a lessee may be affected by various factors beyond our control,

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including, but not limited to, competition, operating costs, general economic conditions and environmental and other governmental regulation of or affecting the lessee's industry. High default rates on leases could increase the portion of railcars that may need to be remarketed after they are repossessed from defaulting lessees, impact our ability to re-lease railcars to lessees, reduce our revenues, divert management's attention or limit our ability to further attract financing to add liquidity in the future. There can be no assurance that the historical default experience with respect to our lease fleet will continue in the future.
The level of our reported railcar backlog may not necessarily indicate what our future revenues will be and our actual revenues may fall short of the estimated revenue value attributed to our railcar backlog.
We define backlog as the number of railcars to which our customers have committed in writing to purchase or lease from us that have not been shipped. The estimated backlog value in dollars is the anticipated revenue on the railcars included in the backlog for purchase and the estimated fair market value of the railcars included in the backlog for lease, though actual revenues for these leases are recognized pursuant to the terms of each lease. Our competitors may not define railcar backlog in the same manner as we do, which could make comparisons of our railcar backlog with theirs misleading. Customer orders may be subject to requests for delays in deliveries, inspection rights and other customary industry terms and conditions, which could prevent or delay our railcar backlog from being converted into revenues. Our reported railcar backlog may not be converted into revenues in any particular period, if at all, and the actual revenues from such sales may not equal our reported estimates of railcar backlog value.
Our failure to comply with laws and regulations imposed by federal, state, local and foreign agencies could materially adversely affect our business, financial condition, results of operations and ability to access capital.
The industries in which we operate are subject to extensive regulation by governmental, regulatory and industry authorities and by federal, state, local and foreign agencies. The risks of substantial costs and liabilities related to compliance with these laws and regulations are an inherent part of our business. Despite our intention to comply with these laws and regulations, we cannot guarantee that we will be able to do so at all times and compliance may prove to be more costly and limiting than we currently anticipate and compliance requirements could increase in future years. These laws and regulations are complex, change frequently and may become more stringent over time, which could impact our business, financial condition, results of operations and ability to access capital. If we fail to comply with the requirements and regulations of these agencies that impact our manufacturing, other processes and reporting requirements, we may face sanctions and penalties that could materially adversely affect our business, financial condition, results of operations and ability to access capital.
Uncertainty surrounding acceptance of our new product offerings by our customers, and costs associated with those new offerings, could materially adversely affect our business.
Our strategy depends in part on our continued development and sale of new products, particularly new railcar designs, in order to expand or maintain our market share in our current and new markets. Any new or modified product design that we develop may not gain widespread acceptance in the marketplace and any such product may not be able to compete successfully with existing or new product designs that our competitors may have. Furthermore, we may experience significant initial costs of production of new products, particularly railcar products, related to training, labor and operating inefficiencies. To the extent that the total costs of production significantly exceed our anticipated costs of production, we may incur losses on the sale of any new products.
Equipment failures, delays in deliveries or extensive damage to our facilities, particularly our railcar manufacturing plants in Paragould or Marmaduke, Arkansas, could lead to production or service curtailments or shutdowns.
An interruption in manufacturing capabilities at our railcar plants in Paragould or Marmaduke or at any of our manufacturing facilities, whether as a result of equipment failure or any other reason, could reduce, prevent or delay production of our railcars or railcar and industrial components, which could alter the scheduled delivery dates to our customers and affect our production schedule. This could result in the termination of orders, the loss of future sales and a negative impact to our reputation with our customers and in the railcar industry, all of which could materially adversely affect our business, financial condition and results of operations.
All of our facilities and equipment are subject to the risk of catastrophic loss due to unanticipated events, such as fires, earthquakes, explosions, floods, tornados or weather conditions. If there is a natural disaster or other serious disruption at any of our facilities, we may experience plant shutdowns or periods of reduced production as a result of equipment failures, loss of power, delays in equipment deliveries, or extensive damage to any of our facilities, which could materially adversely affect our business, financial condition or results of operations.

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Our mobile units and mini shop facilities may expose us to additional risks that may materially adversely affect our business.
Our mobile units and mini shop repair facilities are available to assist customers in quickly resolving railcar maintenance issues and services may be performed on a customer's property, thereby increasing our susceptibility to liability. Additionally, the resources available to employees to assist in providing services out of these facilities are less than what is available at a full repair facility. The effects of these risks may, individually or in the aggregate, materially adversely affect our business, financial condition and results of operations.
Our failure to complete capital expenditure projects on time and within budget, or the failure of these projects to operate as anticipated could materially adversely affect our business, financial condition and results of operations.
Our capital expenditure projects are subject to a number of risks and contingencies over which we may have little control and that may adversely affect the cost and timing of the completion of those projects, or the capacity or efficiencies of those projects once completed. If these capital expenditure projects do not achieve the results anticipated, we may not be able to satisfy our operational goals on a timely basis, if at all. If we are unable to complete such capital expenditure projects on time or within budget, or if those projects do not achieve the capacity or efficiencies anticipated, our business, financial condition and results of operations could be materially adversely affected.
Our relationships with our joint ventures could be unsuccessful, which could materially adversely affect our business.
We have entered into joint venture agreements with other companies to increase our sourcing alternatives and reduce costs. We also may seek to expand our relationships or enter into new agreements with other companies. In addition, we may experience managerial or other conflicts with our joint venture partners. If our joint venture partners are unable to fulfill their contractual obligations or if these relationships are otherwise not successful in the future, our manufacturing costs could increase, we could encounter production disruptions, growth opportunities could fail to materialize, or we could be required to fund such joint ventures in amounts significantly greater than initially anticipated, any of which could materially adversely affect our business, financial condition and results of operations.
If any of our joint ventures generate significant losses, it could adversely affect our results of operations. For example, if our Axis joint venture is unable to operate as anticipated, incurs significant losses or otherwise is unable to honor its obligation to us under the Axis loan, our financial results or financial position could be materially adversely affected.
We may pursue strategic opportunities, including new joint ventures, acquisitions, new business endeavors or the sale of all or a portion of our business or assets, that involve inherent risks, any of which may cause us not to realize anticipated benefits and we may have difficulty integrating the operations of any joint ventures that we form, companies that we acquire or new business endeavors, which could materially adversely affect our results of operations.
We may not be able to successfully identify suitable joint venture, acquisition, new business endeavor or sale opportunities or complete any particular joint venture, acquisition, business combination, new business endeavor, sale, or other transaction on acceptable terms. Our identification of suitable joint venture opportunities, acquisition candidates, new business endeavors or buyers and the integration of new and acquired business operations involve risks inherent in assessing the values, strengths, weaknesses, risks and profitability of these opportunities. This includes their effects on our business, diversion of our management's attention and risks associated with unanticipated problems or unforeseen liabilities. These issues may require significant financial resources that could otherwise be used for the ongoing development of our current operations.
The difficulties of integration may be increased by the necessity of coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. These difficulties could be further increased to the extent we pursue opportunities internationally or in new markets where we do not have significant experience. In addition, we may not be effective in retaining key employees or customers of the combined businesses. We may face integration issues pertaining to the internal controls and operations functions of the acquired companies and we may not realize cost efficiencies or synergies that we anticipated when selecting our acquisition or sale candidates. Any of these items could adversely affect our results of operations.
Our failure to identify suitable joint ventures, acquisition opportunities, new business endeavors or sales may restrict our ability to grow our business. If we are successful in pursuing such opportunities, we may be required to expend significant funds, incur additional debt, issue additional securities or sell our business or assets, which could materially adversely affect our results of operations and be dilutive to our stockholders. If we spend significant funds, incur additional debt or dispense with assets or stock, our ability to obtain financing for working capital or other purposes could decline and we may be more vulnerable to economic downturns and competitive pressures.

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The price of our common stock is subject to volatility.
The market price for our common stock has varied between a high closing sales price of $82.22 per share and a low closing sales price of $33.56 per share in the past twenty-four months as of December 31, 2015. This volatility may affect the price at which our common stock could be sold. In addition, the broader stock market has experienced price and volume fluctuations. This volatility has affected the market prices of securities issued by many companies for reasons unrelated to their operating performance and may adversely affect the price of our common stock. The price for our common stock is likely to continue to be volatile and subject to price and volume fluctuations in response to market and other factors, including the other factors discussed in these risk factors.
In the past, following periods of volatility in the market price of their stock, many companies have been the subject of securities class action litigation. If we became involved in securities class action litigation in the future, it could result in substantial costs and diversion of our management's attention and resources and could harm our stock price, business, prospects, financial condition and results of operations.
Various other factors could cause the market price of our common stock to fluctuate substantially, including financial market and general economic changes, changes in governmental regulation, significant railcar industry announcements or developments, the introduction of new products or technologies by us or our competitors, our Stock Repurchase Program, and changes in other conditions or trends in our industry or in the markets of any of our significant customers.
Other factors that could cause our stock's price to fluctuate could be actual or anticipated variations in our or our competitors' quarterly or annual financial results or other significant press releases from our competitors, financial results failing to meet expectations of analysts or investors, including the level of our backlog and number of orders received during the period, changes in securities analysts' estimates of our future performance or of that of our competitors and the general health and outlook of our industry.
Our Stock Repurchase Program could affect the price of our common stock and increase volatility and may be suspended or terminated at any time, which may result in a decrease in the trading price of our common stock.
On July 28, 2015 our Board of Directors authorized the repurchase of up to $250 million of our outstanding common stock. The Stock Repurchase Program will end upon the earlier of the date on which it is terminated by the Board or when all authorized repurchases are completed. The timing and amount of stock repurchases, if any, will be determined based upon our evaluation of market conditions and other factors. The Stock Repurchase Program may be suspended, modified or discontinued at any time and we have no obligation to repurchase any amount of our common stock under the Stock Repurchase Program.
Repurchases pursuant to our Stock Repurchase Program could affect our stock price and increase the volatility of our common stock. The existence of a stock repurchase program could also cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. Although our Stock Repurchase Program is intended to enhance long-term stockholder value, we cannot assure this will occur. Further, short-term stock price fluctuations could reduce the program's effectiveness. Under the Stock Repurchase Program, 1,507,766 shares were repurchased during 2015, at a cost of $57.4 million . As of February 19, 2016 , we had 19,683,446 shares outstanding reflective of additional shares repurchased under our Stock Repurchase Program subsequent to December 31, 2015 .
Repurchases pursuant to our Stock Repurchase Program could also impact the relative percentage interests of our stockholders and could cause a stockholder to become subject to additional reporting requirements under SEC rules and regulations or allow a stockholder to exert additional control over us.
Risks related to our activities or potential activities outside of the U.S. and any potential expansion into new geographic markets could adversely affect our results of operations.
Conducting business outside the U.S. subjects us to various risks, including changing economic, legal and political conditions, work stoppages, exchange controls, currency fluctuations, terrorist activities directed at U.S. companies, armed conflicts and unexpected changes in the U.S. and the laws of other countries relating to tariffs, trade restrictions, transportation regulations, foreign investments and taxation. Some foreign countries in which we operate have regulatory authorities that regulate railroad safety, railcar design and railcar component part design, performance and manufacturing.
In addition, changes in regulatory requirements, tariffs and other trade barriers, more stringent rules relating to labor or the environment, adverse tax consequences and price exchange controls could make the manufacturing and distribution of our products internationally more difficult. The failure to comply with laws governing international business practices may result in

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substantial penalties and fines. Any international expansion or acquisition that we undertake could heighten these risks related to operating outside of the U.S.
We are subject to a variety of environmental, health and safety laws and regulations and the cost of complying, or our failure to comply, with such requirements could materially adversely affect our business, financial condition, results of operations.
We are subject to a variety of federal, state and local 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; or otherwise relating to the protection of public and employee health, safety and the environment. These laws and regulations expose us to liability for the environmental condition of our current or formerly owned or operated facilities, and may expose us to liability for the conduct of others or for our actions that complied with all applicable laws at the time these actions were taken. They may also expose us to liability for claims of personal injury or property damage related to alleged exposure to hazardous or toxic materials. Despite our intention to be in compliance, we cannot guarantee that we will at all times comply with such requirements. The cost of complying with these requirements may also increase substantially in future years. If we violate or fail to comply with these requirements, we could be fined or otherwise sanctioned by regulators. In addition, these requirements are complex, change frequently and may become more stringent over time, which could materially adversely affect our business, financial condition and results of operations.
Our failure to maintain and comply with environmental permits that we are required to maintain could result in fines, penalties or other sanctions and could materially adversely affect our business, financial condition and results of operations. Future events, such as new environmental regulations, changes in or modified interpretations of existing laws and regulations or enforcement policies, newly discovered information or further investigation or evaluation of the potential health hazards of products or business activities, may give rise to additional compliance and other costs that could materially adversely affect our business, financial condition and results of operations.
If we lose any of our executive officers or key employees, our operations and ability to manage the day-to-day aspects of our business could be materially adversely affected.
Our future performance will substantially depend on our ability to retain and motivate our executive officers and key employees, both individually and as a group. If we lose any of our executive officers or key employees, who have many years of experience with our company and within the railcar industry and other manufacturing industries, or are unable to recruit qualified personnel, our ability to manage the day-to-day aspects of our business could be materially adversely affected. The loss of the services of one or more of our executive officers or key employees, who also have strong personal ties with customers and suppliers, could materially adversely affect our business, financial condition and results of operations. We do not currently maintain “key person” life insurance. Further, we do not have employment contracts with all of our executive officers and key employees.
Our implementation of new enterprise resource planning (ERP) systems could negatively impact our business.
During the third quarter of 2015, we implemented an ERP system for our manufacturing, railcar leasing and corporate segments that supports substantially all of our operating and financial functions. We currently expect that our railcar services segment will implement this ERP system during 2016. We experienced delays with this project and have terminated and filed suit against a systems implementer we previously hired to implement this system. Although we hired a new systems implementer and the ERP system has been implemented for our manufacturing, railcar leasing and corporate segments, we could experience unforeseen issues during our implementation of this ERP system at our railcar services segment, including compatibility issues, training requirements, higher than expected implementation costs and other integration challenges and delays. A significant implementation problem with our railcar services segment, if encountered, could negatively impact our business by disrupting our operations and by extending the period of time during which we are relying on less robust systems. Additionally, a significant problem with the implementation, integration with other systems or ongoing management of an ERP system and related systems could have an adverse effect on our ability to generate and interpret accurate management and financial reports and other information on a timely basis, which could have a material adverse effect on our financial reporting system and internal controls and adversely affect our ability to manage our business or comply with various regulations.




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Some of our railcar services and component manufacturing employees belong to labor unions and strikes or work stoppages by them or unions formed by some or all of our other employees in the future could materially adversely affect our operations.
As of December 31, 2015, the employees at our sites that were party to collective bargaining agreements represent, in the aggregate, approximately 7.3% of our total workforce. Disputes with regard to the terms of these agreements or our potential inability to negotiate acceptable contracts with these unions in the future could result in, among other things, strikes, work stoppages or other slowdowns by the affected workers. We cannot guarantee that our relations with our union workforce will remain positive nor can we guarantee that union organizers will not be successful in future attempts to organize our railcar manufacturing employees or employees at our other facilities. If our workers were to engage in a strike, work stoppage or other slowdown, other employees were to become unionized or the terms and conditions in future labor agreements were renegotiated, we could experience a significant disruption of our operations and higher ongoing labor costs. In addition, we could face higher labor costs in the future as a result of severance or other charges associated with layoffs, shutdowns or reductions in the size and scope of our operations.
Our manufacturer's warranties expose us to potentially significant claims and our business could be harmed if our products contain undetected defects or do not meet applicable specifications.
We may be subject to significant warranty claims in the future relating to workmanship and materials involving our current or future railcar or component product designs. Such claims may include multiple claims based on one defect repeated throughout our mass production process or claims for which the cost of repairing the defective component is highly disproportionate to the original cost of the part. These types of warranty claims could result in costly product recalls, significant repair costs and damage to our reputation, which could materially adversely affect our business, financial condition and results of operations. Unresolved warranty claims could result in users of our products bringing legal actions against us.
Further, if our railcars or component products are defectively designed or manufactured, are subject to recall for performance or safety-related issues, contain defective components or are misused, we may become subject to costly litigation by our customers or others who may claim to be harmed by our products. Product liability claims could divert management's attention from our business, be expensive to defend and/or settle and result in sizable damage awards against us.
Our indebtedness could materially adversely affect our business, financial condition and results of operations and prevent us from fulfilling our indebtedness obligations.
As of December 31, 2015 and the date of this report, our total debt was $701.6 million and $601.8 million , respectively, consisting of borrowings under our lease fleet financings. In February 2016, we repaid amounts outstanding under our revolving loan in full and as of the date of this report, we have borrowing availability of $200.0 million under this facility.
Our indebtedness could materially adversely affect our business, financial condition and results of operations. For example, it could:
increase our vulnerability to general economic and industry conditions;
require us to dedicate a substantial portion of our cash flow from operations to payments of our indebtedness, which would reduce the availability of our cash flow to fund working capital, capital expenditures, expansion efforts and other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
place us at a competitive disadvantage compared to our competitors that have less debt; and
limit, among other things, our ability to borrow additional funds for working capital, capital expenditures, general corporate purposes or acquisitions.
Our inability to comply with covenants in place or our inability to make the required principal and interest payments may cause an event of default, which could have a substantial adverse impact to our business, financial condition and results of operation. In the event of a default on our lease fleet financings, the debtors may foreclose on all or a portion of the fleet of railcars and related leases used to secure the financing. Such foreclosure, if a significant number of railcars or related leases are affected, could result in the loss of a significant amount of our assets and adversely affect revenues.
Our wholly-owned subsidiary, Longtrain Leasing III, LLC's (LLIII), lease fleet financing is an obligation of LLIII, is generally non-recourse to ARI, and is secured by a first lien on the subject assets of LLIII consisting of railcars, railcar leases, receivables and related assets, subject to limited exceptions.

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Despite our indebtedness, we may still be able to incur substantially more debt, as may our subsidiaries, which could further exacerbate the risks associated with our indebtedness.
Despite our indebtedness, we may be able to incur future indebtedness, including secured indebtedness, and this debt could be substantial. If new debt is added to our or our subsidiaries' current debt levels, the related risks that we or they now face could be magnified.
We may not be able to generate sufficient cash flow to service our obligations and we may not be able to refinance our indebtedness on commercially reasonable terms, or at all.
Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures, strategic transactions, joint venture capital requirements or expansion efforts will depend on our ability to generate cash in the future. This, to a certain extent, is subject to economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
Our business may not be able to generate sufficient cash flow from operations and there can be no assurance that future borrowings will be available to us in amounts sufficient to enable us to pay our indebtedness as such indebtedness matures and to fund our other liquidity needs, or at all. If this is the case, we will need to refinance all or a portion of our indebtedness on or before maturity, and we cannot be certain that we will be able to refinance any of our indebtedness on commercially reasonable terms, or at all. We might have to adopt one or more alternatives, such as reducing or delaying planned expenses and capital expenditures, selling assets, restructuring debt, or obtaining additional equity or debt financing. These financing strategies may not be implemented on satisfactory terms, if at all. Our ability to refinance our indebtedness or obtain additional financing and to do so on commercially reasonable terms will depend on our financial condition at the time, restrictions in any agreements governing our indebtedness and other factors, including the condition of the financial markets and the railcar industry.
If we do not generate sufficient cash flow from operations and additional borrowings, refinancing or proceeds of asset sales are not available to us, we may not have sufficient cash to enable us to meet all of our obligations.
If ACF does not, or is unable to, honor its remedial or indemnity obligations to us regarding environmental matters, such environmental matters could materially adversely affect our business, financial condition and results of operations.
Certain real property we acquired from 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, our principal beneficial stockholder through IELP. Substantially all of the issues identified with respect to these properties relate to the use of these properties prior to their transfer to us by ACF and for which ACF has retained liability for environmental contamination that may have existed at the time of transfer to us. ACF has also agreed to indemnify us for any cost that might be incurred with those existing issues. As of the date of this report, we do not believe we will incur material costs in connection with activities relating to these properties, but we cannot assure that this will be the case. If ACF fails to honor its obligations to us, we could be responsible for the cost of any additional investigation or remediation activities relating to these properties that may be required. These additional costs could be material or could interfere with the operation of our business. Any environmental liabilities we may incur that are not covered by adequate insurance or indemnification will also increase our costs and have a negative impact on our profitability.
If we are unable to protect our intellectual property and prevent its improper use by third parties, our ability to compete in the market may be harmed.
Various patent, copyright, trade secret and trademark laws afford only limited protection and may not prevent our competitors from duplicating our products or gaining access to our proprietary information and technology. These means also may not permit us to gain or maintain a competitive advantage. To the extent we expand internationally, we become subject to the risk that foreign intellectual property laws will not protect our intellectual property rights to the same extent as intellectual property laws in the U.S.
Any of our patents may be challenged, invalidated, circumvented or rendered unenforceable. We cannot guarantee that we will be successful should one or more of our patents be challenged for any reason. If our patent claims are rendered invalid or unenforceable, or narrowed in scope, the patent coverage afforded our products could be impaired, which could significantly impede our ability to market our products, negatively affect our competitive position and could materially adversely affect our business, financial condition and results of operations.
Our pending or future patent applications may not result in an issued patent and, if patents are issued to us, such patents may not provide meaningful protection against competitors or against competitive technologies. The U.S. federal courts may invalidate our patents or find them unenforceable. Competitors may also be able to design around our patents. Other parties

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may develop and obtain patent protection for more effective technologies, designs or methods. If these developments were to occur, it could have an adverse effect on our sales. If our intellectual property rights are not adequately protected we may not be able to commercialize our technologies, products or services and our competitors could commercialize our technologies, which could result in a decrease in our sales and market share and could materially adversely affect our business, financial condition and results of operations.
Our products could infringe the intellectual property rights of others, which may lead to litigation that could itself be costly, result in the payment of substantial damages or royalties, and prevent us from using technology that is essential to our products.
We cannot guarantee that our products, manufacturing processes or other methods do not infringe the patents or other intellectual property rights of third parties. Infringement and other intellectual property claims and proceedings brought against us, whether successful or not, could result in substantial costs and harm our reputation. Such claims and proceedings can also distract and divert our management and key personnel from other tasks important to the success of our business. In addition, intellectual property litigation or claims could force us to do one or more of the following:
cease selling or using any of our products that incorporate the asserted intellectual property, which would adversely affect our revenues;
pay substantial damages for past use of the asserted intellectual property;
obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; and
redesign or rename, in the case of trademark claims, our products to avoid infringing the intellectual property rights of third parties, which may be costly and time-consuming, even if possible.
In the event of an adverse determination in an intellectual property suit or proceeding, or our failure to license essential technology, our sales could be harmed and our costs could increase, which could materially adversely affect our business, financial condition and results of operations.
Our investment activities are subject to risks that could materially adversely affect our results of operations, liquidity and financial condition.
From time to time, we may invest in marketable securities, or derivatives thereof, including higher risk equity securities and high yield debt instruments. These securities are subject to general credit, liquidity, market risks and interest rate fluctuations that have affected various sectors of the financial markets and in the past have caused overall tightening of the credit markets and declines in the stock markets. The market risks associated with any investments we may make could materially adversely affect our business, financial condition, results of operations and liquidity.
Our investments at any given time also may become highly concentrated within a particular company, industry, asset category, trading style or financial or economic market. In that event, our investment portfolio will be more susceptible to fluctuations in value resulting from adverse economic conditions affecting the performance of that particular company, industry, asset category, trading style or economic market than a less concentrated portfolio would be. As a result, our investment portfolio could become concentrated and its aggregate return may be volatile and may be affected substantially by the performance of only one or a few holdings. For reasons not necessarily attributable to any of the risks set forth in this report (for example, supply/demand imbalances or other market forces), the prices of the securities in which we invest may decline substantially.
Changes in assumptions or investment performance related to pension plans that we sponsor could materially adversely affect our financial condition and results of operations.
We are responsible for making funding contributions to two frozen pension plans and are liable for any unfunded liabilities that may exist should the plans be terminated. Our liability and resulting costs for these plans may increase or decrease based upon a number of factors, including actuarial assumptions used, the discount rate used in calculating the present value of future liabilities, and investment performance, which could materially adversely affect our financial condition and results of operations. There is no assurance that interest rates will remain constant or that our pension fund assets can earn the expected rate of return, and our actual experience may be significantly different. Our pension expenses and funding may also be greater than we currently anticipate if our assumptions regarding plan earnings and expenses turn out to be incorrect.
We may be required to reduce the value of our inventory, long-lived assets and/or goodwill, which could materially adversely affect our business, financial condition and results of operations.
We may be required to reduce inventory carrying values using the lower of cost or market approach in the future due to a decline in market conditions in the industries in which we operate, which could materially adversely affect our business,

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financial condition and results of operations. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with our acquired businesses is impaired. Any resulting impairment loss related to reductions in the value of our inventory, long-lived assets or our goodwill could materially adversely affect our business, financial condition and results of operations.
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived assets may not be recoverable. As discussed in Note 3 and Note 9 of our consolidated financial statements, no triggering events occurred in 2015 to cause concern that our long-lived assets or goodwill would be impaired and thus no goodwill impairment loss was noted in 2015. We perform an annual goodwill impairment test each year. Assumptions used in our impairment tests regarding future operating results of our reporting units could prove to be inaccurate. This could cause an adverse change in our valuation and thus any of our long-lived assets or goodwill impairment tests may have been flawed. Any future impairment tests are subject to the same risks.
The use of railcars as a significant mode of transporting freight could decline, become more efficient over time, experience a shift in types of modal transportation, and/or certain railcar types could become obsolete .
As the freight transportation markets we serve continue to evolve and become more efficient, the use of railcars may decline in favor of other more economic modes of transportation. Features and functionality specific to certain railcar types could result in those railcars becoming obsolete as customer requirements for freight delivery change. Our operations may be adversely impacted by changes in the preferred method used by customers to ship their products or changes in demand for particular products. The industries in which our customers operate are driven by dynamic market forces and trends, which are in turn influenced by economic and political factors in the U.S. and abroad. Demand for our railcars may be significantly affected by changes in the markets in which our customers operate. A significant reduction in customer demand for transportation or manufacture of a particular product or change in the preferred method of transportation used by customers to ship their products could result in the economic obsolescence of our railcars, including those leased by our customers.
Our stock price may decline due to sales of shares beneficially owned by Mr. Carl Icahn through IELP.
Sales of substantial amounts of our common stock, or the perception that these sales may occur, may materially adversely affect the price of our common stock and impede our ability to raise capital through the issuance of equity securities in the future. Of our outstanding shares of common stock, currently approximately 60% are beneficially owned by Mr. Carl Icahn, our principal beneficial stockholder through IELP.
Certain stockholders are contractually entitled, subject to certain exceptions, to exercise their demand registration rights to register their shares under the Securities Act of 1933. If this right is exercised, holders of any of our common stock subject to these agreements will be entitled to participate in such registration. By exercising their registration rights, and selling a large number of shares, these holders could cause the price of our common stock to decline. Approximately 11.6 million shares of common stock are covered by such registration rights.
Changes in accounting standards or inaccurate estimates or assumptions in the application of accounting policies could materially adversely affect our financial condition and results of operations.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Some of these policies require use of estimates and assumptions that may affect the reported value of our assets or liabilities and financial results and are critical because they require management to make difficult, subjective, and complex judgments about matters that are inherently uncertain. Accounting standard setters and those who interpret the accounting standards, such as the Financial Accounting Standards Board and SEC may amend or even reverse their previous interpretations or positions on how these standards should be applied. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
We are a “controlled company” within the meaning of the NASDAQ Global Select Market rules and therefore we are not subject to all of the NASDAQ Global Select Market corporate governance requirements.
As we are a “controlled company” within the meaning of the corporate governance standards of the NASDAQ Global Select Market, we have elected, as permitted by those rules, not to comply with certain corporate governance requirements. For example, our board of directors does not have a majority of independent directors and we do not have a nominating committee or compensation committee consisting of independent directors. As a result, our officers' compensation is not determined by our independent directors, and director nominees are not selected or recommended by a majority of independent directors.

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Payments of cash dividends on our common stock may be made only at the discretion of our board of directors and may be restricted by North Dakota law.
Any decision to pay dividends will be at the discretion of our board of directors and will depend upon our operating results, strategic plans, capital requirements, financial condition, provisions of our borrowing arrangements and other factors our board of directors considers relevant. Furthermore, North Dakota law imposes restrictions on our ability to pay dividends. Accordingly, we may not be able to continue to pay dividends in any given amount in the future, or at all.
We are governed by the North Dakota Publicly Traded Corporations Act. Interpretation and application of this act is scarce and such lack of predictability could be detrimental to our stockholders .
The North Dakota Publicly Traded Corporations Act, which we are governed by, was enacted in 2007 and, to our knowledge, no other companies are yet subject to its provisions and interpretations of its likely application are scarce. Although the North Dakota Publicly Traded Corporations Act specifically provides that its provisions must be liberally construed to protect and enhance the rights of stockholders in publicly traded corporations, this lack of predictability could be detrimental to our stockholders.
We are subject to cybersecurity risks and other cyber incidents resulting in disruption. 
Threats to information technology systems associated with cybersecurity risks and cyber incidents or attacks continue to grow. We depend on information technology systems.  In addition, we collect, process and retain sensitive and confidential customer information in the normal course of business. Despite the security measures we have in place and any additional measures we may implement in the future, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, human errors, acts of vandalism or other events. Any disruption of our systems or security breach or event resulting in the misappropriation, loss or other unauthorized disclosure of confidential information, whether by us directly or our third-party service providers, could damage our reputation, expose us to the risks of litigation and liability, disrupt our business or otherwise affect our results of operations.
Terrorist attacks could negatively impact our operations and profitability and may expose us to liability.
Terrorist attacks may negatively affect our operations. Such attacks in the past have caused uncertainty in the global financial markets and economic instability in the U.S. and elsewhere, and further acts of terrorism, violence or war could similarly affect global financial markets and trade, as well as the industries in which we and our customers operate. In addition, terrorist attacks or hostilities may directly impact our physical facilities or those of our suppliers or customers, which could adversely impact our operations. These uncertainties could also adversely affect our ability to obtain additional financing on terms acceptable to us, or at all.
It is also possible that our products, particularly railcars we produce, could be involved in a terrorist attack. Although the terms of our lease agreements require lessees to indemnify us and others against a broad spectrum of damages arising out of the use of the railcars, and we currently carry insurance to potentially offset losses in the event that customer indemnifications prove to be insufficient, we may not be fully protected from liability arising from a terrorist attack that involves our railcars. In addition, any terrorist attack involving any of our railcars may cause reputational damage, or other losses, which could materially and adversely affect our business.
Item 1B: Unresolved Staff Comments
None
Item 2: Properties
Our headquarters is located in St. Charles, Missouri. We lease this facility pursuant to a lease agreement that expires December 31, 2021.
The following table presents information about our major locations that manufacture our products as of December 31, 2015 :  

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Location
  
Leased or Owned
  
Lease Expiration Date
Paragould, Arkansas
  
Owned
  
N/A
 
 
 
 
Marmaduke, Arkansas
  
Owned
  
N/A
 
 
 
 
Jackson, Missouri
  
Owned
  
N/A
 
 
 
 
Kennett, Missouri
  
Owned
  
N/A
 
 
 
 
Longview, Texas
  
Owned
  
N/A
 
 
 
 
St. Charles, Missouri
  
Leased
  
8/31/2016
In addition, as of December 31, 2015 , we operate seven railcar services facilities and thirteen mobile units and mini shop facilities where we provide railcar repair and field services. Five of the railcar services facilities are owned and two are leased.
Item 3: Legal Proceedings
We are from time to time party to various legal proceedings arising out of our business. Such proceedings, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
On October 24, 2014, we filed a complaint in United States District Court for the Southern District of New York against Gyansys, Inc. (Gyansys). The complaint asserts a claim against Gyansys for breaching its contract with us to implement an ERP system. We seek to recover monetary damages in an amount still to be determined, but which we allege exceeds $25 million. Gyansys filed a response to the suit denying its responsibility. It also counterclaimed against us for a breach of contract and wrongful termination, seeking damages in excess of $10 million and equitable relief. At this time, we do 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 our motion to dismiss the wrongful termination counterclaim.  However, we continue to believe that Gyansys' counterclaims lack merit and will continue to vigorously defend against these counterclaims. We cannot guarantee that our efforts to defend against the counterclaims will be successful or that we will be able to recover any monetary damages in connection with this lawsuit.
As of the date of this report, we believe that there are no proceedings pending against us that, were the outcome to be unfavorable, would materially adversely affect our business, financial condition or results of operations.
Item 4: Mine Safety Disclosure
Not applicable.
PART II
Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock trades on the NASDAQ Global Select Market under the symbol ARII. There were approximately 13 holders of record of common stock as of February 19, 2016 .
The following table shows the high and low closing sales prices per share of our common stock by quarter for the period from January 1, 2014 through December 31, 2015 :
 
 
Prices
 
High
 
Low
Year Ended December 31, 2015
 
 
 
Quarter ended March 31, 2015
$
57.86

 
$
47.77

Quarter ended June 30, 2015
59.52

 
48.18

Quarter ended September 30, 2015
48.49

 
33.56

Quarter ended December 31, 2015
57.72

 
34.05

 

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Table of Contents

 
High
 
Low
Year Ended December 31, 2014
 
 
 
Quarter ended March 31, 2014
$
74.93

 
$
42.85

Quarter ended June 30, 2014
70.48

 
55.73

Quarter ended September 30, 2014
82.22

 
65.49

Quarter ended December 31, 2014
73.24

 
48.11

Dividends
During 2015 and 2014, we declared and paid cash dividends of $0.40 per share of our common stock each quarter, totaling $33.2 million and $34.2 million , respectively. Any future dividends will be at the discretion of our board of directors and will depend upon our operating results, strategic plans, capital requirements, financial condition, provisions of any of our borrowing arrangements, applicable law and other factors our board of directors considers relevant.
Stock Repurchase Program
On July 28, 2015, our Board of Directors authorized the repurchase of up to $250.0 million of our outstanding common stock (the Stock Repurchase Program). The Stock Repurchase Program will end upon the earlier of the date on which it is terminated by the Board or when all authorized repurchases are completed. The timing and amount of future stock repurchases, if any, will be determined based upon our evaluation of market conditions and other factors. The Stock Repurchase Program may be suspended, modified or discontinued at any time and we have no obligation to repurchase any amount of our common stock under the Stock Repurchase Program. Under the Stock Repurchase Program, 1,507,766 shares were repurchased during 2015 , at a cost of $57.4 million . We have repurchased 161,085 shares under our Stock Repurchase Program subsequent to December 31, 2015 , at a cost of $6.3 million , resulting in 19,683,446 shares outstanding as of February 19, 2016 .
This table provides information with respect to purchases by the Company of shares of its Common Stock on the open market as part of the Stock Repurchase Program during the quarter ended December 31, 2015 :
Period
 
Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs (1)
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan
October 1, 2015 through October 31, 2015
 
166,970

 
$
36.76

 
166,970

 
$
192,576,566

November 1, 2015 through November 30, 2015
 

 
$

 

 
$
192,576,566

December 1, 2015 through December 31, 2015
 

 
$

 

 
$
192,576,566

Total
 
166,970

 
 
 
166,970

 
 

(1)
On July 28, 2015, the Company's board of directors authorized the Stock Repurchase Program pursuant to which the Company may, from time to time, repurchase up to $250.0 million of its common stock. The Stock Repurchase Program will end upon the earlier of the date on which it is terminated by the Board or when all authorized repurchases are completed.
Stock Performance Graph
The following Stock Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934 (the Exchange Act), each as amended, except to the extent that we specifically incorporate it by reference into such filing.
The following graph illustrates the cumulative total stockholder return on our common stock during the five year period ended December 31, 2015 , and compares it with the cumulative total return on the NASDAQ Composite Index and DJ Transportation Index. The comparison assumes $100 was invested on December 31, 2010 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. The performance shown is not necessarily indicative of future performance.

27

Table of Contents

Item 6: Selected Consolidated Financial Data
The following table sets forth our selected consolidated financial data for the periods presented. The consolidated statements of operations and cash flow data for the years ended December 31, 2015 , 2014 and 2013 and the consolidated balance sheet data as of December 31, 2015 and 2014 are derived from our audited consolidated financial statements and related notes included elsewhere in this annual report. The consolidated statements of operations and cash flow data for the years ended December 31, 2012 and 2011 and the consolidated balance sheet data as of December 31, 2013 , 2012 and 2011 are derived from our historical consolidated financial statements not included in this filing. See “Index to Consolidated Financial Statements.”

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Table of Contents

 
Years ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(in thousands, except per share data)
Consolidated statement of operations data:
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
Manufacturing (1)
$
700,061

 
$
600,326

 
$
646,100

 
$
633,547

 
$
453,092

Railcar leasing
116,714

 
65,108

 
31,871

 
13,444

 
1,075

Railcar services (2)
72,561

 
67,572

 
72,621

 
64,732

 
65,218

Total revenues
889,336

 
733,006

 
750,592

 
711,723

 
519,385

Cost of revenues
 
 
 
 
 
 
 
 
 
Manufacturing
(539,136
)
 
(455,547
)
 
(503,178
)
 
(506,083
)
 
(410,308
)
Railcar leasing
(36,161
)
 
(23,733
)
 
(13,394
)
 
(5,906
)
 
(682
)
Railcar services
(56,492
)
 
(54,386
)
 
(55,408
)
 
(51,383
)
 
(50,599
)
Total cost of revenues
(631,789
)
 
(533,666
)
 
(571,980
)
 
(563,372
)
 
(461,589
)
Gross profit
257,547

 
199,340

 
178,612

 
148,351

 
57,796

Selling, general and administrative
(30,866
)
 
(29,420
)
 
(27,705
)
 
(26,931
)
 
(25,047
)
Net gains on disposition of leased railcars
25

 
138

 

 

 

Earnings from operations
226,706

 
170,058

 
150,907

 
121,420

 
32,749

Interest income (3)
2,164

 
2,517

 
2,716

 
3,003

 
3,654

Interest expense
(21,801
)
 
(7,622
)
 
(7,337
)
 
(17,765
)
 
(20,291
)
Loss on debt extinguishment
(2,126
)
 
(1,896
)
 
(392
)
 
(2,267
)
 

Other (loss) income
(11
)
 
(20
)
 
2,037

 
1,905

 
(10
)
Earnings (loss) from joint ventures
5,812

 
1,570

 
(8,595
)
 
(451
)
 
(7,900
)
Earnings before income taxes
210,744

 
164,607

 
139,336

 
105,845

 
8,202

Income tax expense
(77,291
)
 
(65,074
)
 
(52,440
)
 
(42,022
)
 
(3,866
)
Net earnings
$
133,453

 
$
99,533

 
$
86,896

 
$
63,823

 
$
4,336

Net earnings per common share—basic & diluted
$
6.39

 
$
4.66

 
$
4.07

 
$
2.99

 
$
0.20

Weighted average common shares outstanding—basic & diluted
20,883

 
21,352

 
21,352

 
21,352

 
21,352

Dividends declared per common share
$
1.60

 
$
1.60

 
$
1.00

 
$
0.25

 
$

Consolidated balance sheet data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
298,064

 
$
88,109

 
$
97,252

 
$
205,045

 
$
307,172

Net working capital
273,337

 
106,688

 
148,122

 
273,953

 
364,229

Property, plant and equipment, net
176,311

 
160,787

 
159,375

 
155,893

 
155,643

Railcars on leases, net
848,717

 
663,315

 
372,551

 
220,282

 
38,599

Total assets
1,530,155

 
1,192,409

 
825,609

 
809,758

 
703,770

Total liabilities
993,858

 
696,993

 
391,707

 
440,293

 
393,601

Total stockholders' equity
536,297

 
495,416

 
433,902

 
369,465

 
310,169

Consolidated cash flow data:
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
264,503

 
$
136,799

 
$
164,766

 
$
121,378

 
$
28,123

Net cash used in investing activities
(240,638
)
 
(323,200
)
 
(166,376
)
 
(214,397
)
 
(40,460
)
Net cash provided by (used in) financing activities
186,399

 
177,479

 
(106,045
)
 
(9,130
)
 
756

Effect of exchange rate changes on cash and cash equivalents
(309
)
 
(221
)
 
(138
)
 
22

 
(5
)

You should read this information together with “Management's Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report.

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Table of Contents

(1)
Includes revenues from affiliates of $269.6 million , $245.9 million, $250.5 million, $103.7 million and $1.2 million in 2015 , 2014 , 2013 , 2012 and 2011 , respectively.
(2)
Includes revenues from affiliates of $24.9 million , $19.3 million, $17.2 million, $21.4 million and $24.7 million in 2015 , 2014 , 2013 , 2012 and 2011 , respectively.
(3)
Includes income from related parties of $2.1 million , $2.4 million, $2.7 million, $2.9 million and $2.8 million in 2015 , 2014 , 2013 , 2012 and 2011 , respectively.
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with “Selected Consolidated Financial Data” and our consolidated financial statements and related notes included in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on management's current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements, including as a result of the factors we describe under “Risk Factors” and elsewhere in this annual report. See “Special Note Regarding Forward-Looking Statements” appearing at the beginning of this report and “Risk Factors” set forth in Item 1A of this report.
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. 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.
The year ended December 31, 2015 marks our fourth consecutive year of record earnings from operations and record earnings per share and the second consecutive year of record shipments. Additionally, 2015 was a new record for consolidated revenues, primarily driven by record shipments of hopper railcars and increased revenues from our railcar leasing segment. Our earnings continued to benefit from the growth of our railcar leasing segment, our manufacturing facilities' ability to efficiently produce high quality hopper and tank railcars, and additional capacity in our railcar services segment. Our lease fleet continues to be 100% utilized and has more than doubled in the past two years, increasing from 4,450 at December 31, 2013 to 10,362 at December 31, 2015 . Consolidated earnings from operations for 2015 increased 33.3% , to $226.7 million , compared to 2014 , and operating margins increased to 25.5% in 2015 , compared to 23.2% in 2014 .
The North American railcar market has been, and we expect it to continue to be, highly cyclical. The tank railcar market continues to soften, which we believe is driven by multiple factors, including record high deliveries of tank railcars in recent years. Additionally, the recent volatility in oil prices and uncertainty surrounding the May 2015 release of regulations related to tank railcars in the U.S. and Canada have led to reduced demand for railcars in the energy transportation industry. Customers continue to weigh the costs versus benefits of investing in new tank railcars or modifying their existing tank railcars for flammable service. The hopper railcar market peaked in 2015 in terms of volume as demand has shifted towards more specialty hopper railcar types. Consistent with third party forecasts, we expect that market will stay above historical average levels over the next several quarters. We cannot assure you that hopper or tank railcar demand will maintain its current pace or return to historical average levels, that demand for any railcar types or railcar services will improve, or that our railcar backlog, orders or shipments will track industry-wide trends.
We continue to invest capital and evaluate opportunities to further expand our manufacturing flexibility and repair capacity. During 2015 we completed three repair expansion projects and just recently in 2016 completed our expansion project at our tank railcar manufacturing facility, which enables us to perform retrofit and repair work in addition to the manufacturing work already performed there. Also during 2015, we fulfilled customer orders by producing our newly designed tank railcars that satisfy the May 2015 regulations. Our continuous commitment to quality and our efforts to increase flexibility at our tank railcar manufacturing facility allows us to build these designs efficiently and cost effectively. We cannot assure you any increased repair capacity or manufacturing flexibility will be sufficient or necessary to meet the demands of the industry.
Our record shipments of 8,903 railcars in 2015 were 11.0% higher than our previous record set in 2014. Railcars built for our lease fleet represented 29.6% of our total railcar shipments during 2015, compared to 41.0% in 2014. This resulted in a higher level of direct sale shipments during 2015 as compared to 2014. We continue to be strategic in our selection of orders for railcars that will be added to our lease fleet versus direct sale. Because revenues and earnings related to leased railcars are recognized over the life of the lease, our consolidated quarterly results may vary depending on the mix of lease versus direct sale railcars that we ship during a given period.

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Table of Contents

As of December 31, 2015 , we had a backlog of 7,081 railcars, including 1,452 railcars being manufactured for lease, all of which were related to orders from non-affiliated customers. Direct sales of railcars to the IELP Entities totaled $259.9 million or 29.2% of our total consolidated revenues in 2015. As of December 31, 2015, we did not have any orders in our backlog from the IELP Entities, which is primarily due to increased demand for direct sale hopper railcars and our focus on growing our own lease fleet. The IELP Entities remain a significant customer with respect to revenues for our railcar services segment. The year ended December 31, 2015 included railcar services transactions with ARL totaling $24.9 million , or 2.8% of our total consolidated revenues.
RESULTS OF OPERATIONS
Consolidated Results
The following table summarizes our historical operations for the years ended December 31, 2015 , 2014 and 2013. Our historical results are not necessarily indicative of operating results that may be expected in the future.  
 
2015
 
2014
 
2013
 
2015 vs 2014
 
2014 vs 2013
 
2015 vs 2014
 
2014 vs 2013
 
(in thousands)
 
(in %'s)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
700,061

 
$
600,326

 
$
646,100

 
$
99,735

 
$
(45,774
)
 
16.6
 
(7.1
)
Railcar leasing
116,714

 
65,108

 
31,871

 
51,606

 
33,237

 
79.3
 
104.3

Railcar services
72,561

 
67,572

 
72,621

 
4,989

 
(5,049
)
 
7.4
 
(7.0
)
Total revenues
889,336

 
733,006

 
750,592

 
156,330

 
(17,586
)
 
21.3
 
(2.3
)
Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
(539,136
)
 
(455,547
)
 
(503,178
)
 
(83,589
)
 
47,631

 
18.3
 
(9.5
)
Railcar leasing
(36,161
)
 
(23,733
)
 
(13,394
)
 
(12,428
)
 
(10,339
)
 
52.4
 
77.2

Railcar services
(56,492
)
 
(54,386
)
 
(55,408
)
 
(2,106
)
 
1,022

 
3.9
 
(1.8
)
Total cost of revenues
(631,789
)
 
(533,666
)
 
(571,980
)
 
(98,123
)
 
38,314

 
18.4
 
(6.7
)
Selling, general and administrative
(30,866
)
 
(29,420
)
 
(27,705
)
 
(1,446
)
 
(1,715
)
 
4.9
 
6.2

Net gains on disposition of leased railcars
25

 
138

 

 
(113
)
 
138

 
*
 
*

Earnings from operations
226,706

 
170,058

 
150,907

 
56,648

 
19,151

 
33.3
 
12.7

*-
Not meaningful
Revenues
2015 vs. 2014
Our total consolidated revenues for 2015 increased by 21.3%  compared to 2014. This increase was due to increased revenues across all three of our segments, with the largest dollar increase in our manufacturing segment. During 2015, we shipped 6,270 direct sale railcars, which excludes 2,633 railcars ( 29.6% of total shipments) built for our lease fleet, compared to 4,727 direct sale railcars during 2014, which excludes 3,291 railcars ( 41.0% of total shipments) built for our lease fleet.
Manufacturing revenues increased in 2015 by 16.6% compared to 2014. This change was due to an increase of 18.5% driven by 1,543 more railcar shipments for direct sale, partially offset by an overall decrease in average selling prices due to a change in product mix, and a decrease of 1.9% due to a decrease in revenue from certain material cost changes that we generally pass through to customers, as discussed below. Hopper railcar shipments for direct sale significantly increased during 2015 compared to 2014, as that market has peaked in terms of volume as demand shifts towards more specialty hopper railcar types. This increase resulted in a higher mix of hopper railcars sold, which generally have lower average selling prices than tank railcars due to less material and labor content. Tank railcar shipments for direct sale decreased as production has shifted to a larger mix of specialty tank railcars that have higher average selling prices due to the complexity of the design.
Railcar leasing revenues for 2015 increased by 79.3% compared to 2014. This increase was primarily due to an increase in the number of railcars on lease, as lease rates were relatively flat compared to 2014. The number of railcars in our lease fleet was 10,362 at the end of 2015, compared to 7,730 railcars at the end of 2014.

31


Railcar services revenues for 2015 increased by 7.4% compared to 2014. This increase was primarily due to an increase in demand, a favorable change in the mix of work at our repair facilities and the additional capacity resulting from our Brookhaven repair facility that became operational during the third quarter of 2014.
2014 vs. 2013
Our total consolidated revenues for 2014 decreased by 2.3% compared to 2013. This decrease was due to decreased revenues in our manufacturing and railcar services segments, partially offset by higher railcar leasing revenues. During 2014, we shipped 4,727 direct sale railcars, which excludes 3,291 railcars (41.0% of total shipments) built for our lease fleet, compared to 5,040 direct sale railcars during 2013, which excludes 1,860 railcars (27.0% of total shipments) built for our lease fleet.
Manufacturing revenues decreased in 2014 by 7.1% compared to 2013. This change was due to a decrease of 5.6% driven by 313 fewer railcar shipments for direct sale, and a decrease of 1.5% due to a decrease in revenue from certain material cost changes that we generally pass through to customers, as discussed below. While production of tank railcars continued at strong levels in 2014, a higher percentage of tank railcars were built for our lease fleet during 2014 compared to 2013, with the related revenues being eliminated in consolidation, as discussed below. In contrast, as the hopper railcar market had strengthened, hopper railcar shipments for direct sale increased in 2014 compared to 2013.
Railcar leasing revenues for 2014 increased by 104.3% compared to 2013. This increase was primarily due to an increase in the number of railcars on lease and an increase in the average lease rate. The number of railcars in our lease fleet was 7,730 at the end of 2014, compared to 4,450 railcars at the end of 2013.
Railcar services revenues for 2014 decreased by 7.0% compared to 2013. This decrease was primarily due to certain repair projects being performed at our hopper railcar manufacturing facility during 2013 that did not continue into 2014. In 2014, production of hopper railcars ramped up due to increased demand, thus these repair projects were no longer performed at our manufacturing facilities.
Cost of Revenues
2015 vs. 2014
Our total consolidated cost of revenues for 2015 increased by 18.4%  compared to 2014. This increase was due to increased cost of revenues across all three of our segments, with the largest dollar increase in our manufacturing segment.
Cost of revenues increased for our manufacturing operations by 18.3% , due to an increase of 20.8% driven by higher direct sale railcar shipments, as discussed above, partially offset by improved operational efficiencies and a decrease of 2.5% driven by lower material costs for key components and steel. The decrease in costs for key components and steel is also reflected as a decrease in selling prices as our railcar sales contracts generally include provisions to pass increases or decreases in the cost of raw materials and components through to the customer.
Cost of revenues for our railcar leasing segment increased for 2015 by 52.4% compared to 2014, primarily as a result of an increase in the number of railcars in our lease fleet, as discussed above.
Cost of revenues for our railcar services segment increased for 2015 by 3.9% compared to 2014, primarily due to an increase in volume of work, a favorable change in mix of work at our repair facilities resulting in increased material and labor content and the additional capacity resulting from our Brookhaven repair facility, as discussed above.
2014 vs. 2013
Our total consolidated cost of revenues for 2014 decreased by 6.7% compared to 2013. This decrease was primarily due to decreases in our manufacturing and railcar services segments, partially offset by an increase in our railcar leasing segment.
Cost of revenues decreased for our manufacturing operations by 9.5%, due to a decrease of 7.6% driven by operational efficiencies and fewer direct sale railcar shipments, as discussed above, and a decrease of 1.9% driven by lower material costs for key components and steel. The decrease in costs for key components and steel is also reflected as a decrease in selling prices as our railcar sales contracts generally include provisions to pass increases or decreases in the cost of most raw materials and components through to the customer.
Cost of revenues for our railcar leasing segment increased for 2014 by 77.2% compared to 2013, 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 decreased for 2014 by 1.8% compared to 2013, primarily due to no longer performing certain repair projects at our hopper railcar manufacturing plant, as discussed above.

32


Selling, general and administrative expenses
Our total selling, general and administrative costs increased by 4.9 % in 2015 compared to 2014 . This $1.4 million increase was primarily driven by higher depreciation related to our new enterprise resource planning system, increased legal and compliance costs, sales commissions and other corporate expenses, partially offset by lower share-based compensation expense. In addition, during 2015, we incurred bad debt expense of $0.2 million compared to $1.0 million in 2014.
Our total selling, general and administrative costs increased by 6.2% in 2014 compared to 2013. This $1.7 million increase was primarily driven by increases in salaries and benefits, bad debt expense and consulting costs, partially offset by lower incentive compensation (including share-based compensation).
Interest expense
Interest expense for 2015 was $21.8 million compared to $7.6 million  in 2014 . In January 2015, our wholly-owned subsidiary, Longtrain Leasing III, LLC (LLIII), completed a $625.5 million private placement of two classes of fixed rate secured railcar equipment notes bearing interest at a rate of 2.98% and 4.06% per annum, respectively, as discussed further in the 'Liquidity and Capital Resources' section below, resulting in a higher average debt balance during 2015 compared to 2014. In addition, in 2015 our weighted average interest rate increased to 3.5% compared to a weighted average interest rate of 2.2% during 2014 as a result of refinancing our prior variable rate debt obligations with fixed rate debt, thereby minimizing the effect of any rise in interest rates.
Interest expense for 2014 was $7.6 million compared to $7.3 million in 2013. The increase in interest expense resulted from a higher average debt balance as a result of increased borrowings under our lease fleet financings during 2014, partially offset by lower interest rates secured under the 2014 borrowings, discussed further in the 'Liquidity and Capital Resources' section below. In 2014, our average debt balance was $330.6 million with a weighted average interest rate of 2.2% compared to an average debt balance of $202.1 million with a weighted average interest rate of 3.4% during 2013.
Loss on debt extinguishment
During 2015 , we refinanced our lease fleet financing facilities, resulting in net proceeds of $211.6 million under a private placement of secured railcar equipment notes. This refinancing resulted in a $2.1 million non-cash charge related to the accelerated write-off of the remainder of deferred debt issuance costs incurred in connection with the 2014 lease fleet financing facilities.
During 2014, we refinanced our lease fleet financing facility, paying off $194.2 million of outstanding debt under our original 2012 lease fleet financing facility with borrowings under a new facility. This refinancing resulted in a $1.9 million non-cash charge related to the accelerated write-off of the remainder of deferred debt issuance costs incurred in connection with the original lease fleet financing facility.
During 2013, we redeemed $175.0 million of the aggregate principal amount of our then outstanding notes, resulting in a $0.4 million non-cash charge related to the accelerated write-off of the remainder of deferred debt issuance costs incurred in connection with the Notes.
Earnings (Loss) from joint ventures  
 
 
 
 
 
 
 
$ Increase (Decrease)
 
2015
 
2014
 
2013
 
2015 vs 2014
 
2014 vs 2013
 
(in thousands)
Ohio Castings
$
582

 
$
1,815

 
$
357

 
$
(1,233
)
 
$
1,458

Axis
5,230

 
(245
)
 
(247
)
 
$
5,475

 
$
2

Amtek Railcar—India

 

 
(8,705
)
 
$

 
$
8,705

Total Earnings (loss) from Joint Ventures
$
5,812

 
$
1,570

 
$
(8,595
)
 
$
4,242

 
$
10,165

Our joint venture earnings were $5.8 million in 2015 compared to $1.6 million in 2014. This increase was a result of increased sales and production levels at our Axis joint venture due to strong railcar industry demand, which has generated improved efficiencies and better profitability than 2014 when the joint venture experienced unanticipated interruptions and incurred additional costs in its efforts to meet customer demand. The increased earnings from Axis were partially offset by decreased sales at our Ohio Castings joint venture due to a ramp down of production to more historical levels that align with the joint venture's expected production level.

33


Results from our joint ventures were earnings of $1.6 million in 2014 compared to a loss of $8.6 million in 2013. This improvement was primarily due to losses incurred in 2013 at our India joint venture, Amtek Railcar Industries Private Limited (Amtek Railcar) and the loss on sale of our interest in this joint venture in December 2013. This sale resulted in a loss of $5.9 million, in addition to our $2.8 million share of the entity's operating losses for 2013. Additionally, our share of earnings from our Ohio Castings LLC (Ohio Castings) joint venture increased $1.5 million for 2014 compared to 2013 due to increased sales and production levels due to strong railcar industry demand. Our share of the losses of Axis LLC (Axis) for 2014 were comparable to 2013. Although Axis had also experienced increased demand during 2014, this joint venture experienced unanticipated interruptions and incurred additional costs in its efforts to meet customer demand, as mentioned above.
Income tax expense
Income tax expense in 2015 was $77.3 million , or 36.7% of our earnings before income taxes, compared to $65.1 million , or 39.5% , in 2014 . The decrease in the effective tax rate is primarily due to a decrease in our state effective tax rates due to a shift in the geographical mix of revenues, in addition to the impact of state tax credits. The effective tax rate for 2014 was also higher due to the loss of the domestic production activities deduction from prior years as mentioned below.
Income tax expense in 2014 was $65.1 million, or 39.5% of our earnings before income taxes, compared to $52.4 million, or 37.6%, in 2013. The increase in the effective tax rate is partly due to the loss of the domestic production activities deductions from prior years due to the current year net operating loss being carried back to prior years. Furthermore, the effective tax rate in 2013 was lower due to the benefit that was recorded on the sale of the India joint venture.
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. Refer to Note 20 of the consolidated financial statements for further discussions of our segments.
 
Revenues
 
External
 
Intersegment
 
Total
 
$ Change
 
% Change
 
(in thousands)
 
 
2015
 
 
 
 
 
 
 
 
 
Manufacturing
$
700,061

 
$
319,399

 
$
1,019,460

 
$
(161
)
 

Railcar leasing
116,714

 

 
116,714

 
51,606

 
79.3

Railcar services
72,561

 
1,936

 
74,497

 
6,655

 
9.8

Eliminations

 
(321,335
)
 
(321,335
)
 
98,230

 
(23.4
)
Total Consolidated
$
889,336

 
$

 
$
889,336

 
$
156,330

 
21.3

2014
 
 
 
 
 
 
 
 
 
Manufacturing
$
600,326

 
$
419,295

 
$
1,019,621

 
$
155,599

 
18.0

Railcar leasing
65,108

 

 
65,108

 
33,237

 
104.3

Railcar services
67,572

 
270

 
67,842

 
(5,012
)
 
(6.9
)
Eliminations

 
(419,565
)
 
(419,565
)
 
(201,410
)
 
92.3

Total Consolidated
$
733,006

 
$

 
$
733,006

 
$
(17,586
)
 
(2.3
)
2013
 
 
 
 
 
 
 
 
 
Manufacturing
$
646,100

 
$
217,922

 
$
864,022

 
 
 
 
Railcar leasing
31,871

 

 
31,871

 
 
 
 
Railcar services
72,621

 
233

 
72,854

 
 
 
 
Eliminations

 
(218,155
)
 
(218,155
)
 
 
 
 
Total Consolidated
$
750,592

 
$

 
$
750,592

 
 
 
 

34


 
Earnings (Loss) from Operations
 
 
 
 
2015
 
2014
 
2013
 
2015 vs 2014
 
2014 vs 2013
2015 vs 2014
 
2014 vs 2013
 
(in thousands)
(in %'s)
Manufacturing
$
240,891

 
$
262,937

 
$
190,075

 
$
(22,046
)
 
$
72,862

(8.4
)
 
38.3

Railcar leasing
70,319

 
36,090

 
14,876

 
34,229

 
21,214

94.8

 
142.6

Railcar services
13,898

 
10,366

 
14,325

 
3,532

 
(3,959
)
34.1

 
(27.6
)
Corporate
(18,779
)
 
(18,339
)
 
(17,085
)
 
(440
)
 
(1,254
)
2.4

 
7.3

Eliminations
(79,623
)
 
(120,996
)
 
(51,284
)
 
41,373

 
(69,712
)
(34.2
)
 
135.9

Total Consolidated
$
226,706

 
$
170,058

 
$
150,907

 
$
56,648

 
$
19,151

33.3

 
12.7

Operating Margin  
 
2015
 
2014
 
2013
Manufacturing
23.6
%
 
25.8
%
 
22.0
%
Railcar leasing
60.2
%
 
55.4
%
 
46.7
%
Railcar services
18.7
%
 
15.3
%
 
19.7
%
Total Consolidated
25.5
%
 
23.2
%
 
20.1
%
Manufacturing
2015 vs. 2014
Our manufacturing segment revenues for 2015, including an estimate of revenues for railcars built for our lease fleet, were flat compared to 2014. During 2015, we shipped 8,903 railcars, including 2,633 railcars built for our lease fleet, compared to 8,018 railcars, including 3,291 railcars built for our lease fleet during 2014. Although there was a higher volume of shipments in 2015 than compared to 2014, there was a higher mix of hopper railcars in 2015, which generally sell at lower prices than tank railcars due to less material and labor content combined with a decrease in revenue from certain material cost changes that we generally pass through to customers, as discussed in 'Consolidated Results' above.
Manufacturing segment revenues for 2015 included estimated revenues of $319.4 million relating to railcars built for our lease fleet, compared to $419.3 million for 2014. This decrease in estimated revenues related to railcars built for our lease fleet was due to a lower quantity of tank railcars shipped for lease, partially offset by a higher quantity of hopper railcars shipped for lease. Additionally, this change in product mix resulted in an overall decrease in average selling prices as hopper railcars generally have lower average selling prices than tank railcars due to less material and labor content. Such revenues are based on an estimated fair market value of the leased railcars as if they had been sold to a third party, and are eliminated in consolidation. Revenues from railcars manufactured for our railcar leasing segment are not recognized in consolidated revenues as railcar sales, but rather lease revenues are recognized over the term of the lease in accordance with the monthly lease revenues. Railcars built for the lease fleet represented 29.6% of our railcar shipments for 2015 compared to 41.0% for 2014.

Manufacturing segment revenues included direct sales of railcars to the IELP Entities totaling $259.9 million of our total consolidated revenues in 2015, compared to $226.9 million in 2014. In addition, we recorded $9.6 million of revenue from ACF for royalties and profits on railcars sold by ACF and for sales of railcar components to ACF in 2015, compared to $19.0 million in 2014. ACF is also affiliated with Mr. Carl Icahn, our principal beneficial stockholder through IELP. Total manufacturing segment revenues from our affiliates represent 30.3% of our total consolidated revenues in 2015, compared to 33.5% in 2014.
Earnings from operations for our manufacturing segment, which include an allocation of selling, general and administrative costs, as well as estimated profit for railcars manufactured for our railcar leasing segment, decreased by $22.0 million for 2015 compared to 2014. Estimated profit on railcars built for our lease fleet, which is eliminated in consolidation, was $87.7 million for 2015 compared to $126.0 million for 2014, and is based on an estimated fair market value of revenues as if the railcars had been sold to a third party, less the cost to manufacture. Operating margin from our manufacturing segment decreased to 23.6% in 2015 from 25.8% in 2014. These decreases were due to a higher mix of hopper railcars shipments, which generally sell at lower prices than tank railcars due to less material and labor content.

35


2014 vs. 2013
In 2014, our manufacturing segment revenues, including an estimate of revenues for railcars built for our lease fleet, increased by 18.0% compared to 2013. During 2014, we shipped 8,018 railcars, including 3,291 railcars built for our lease fleet, compared to 6,900 railcars, including 1,860 railcars built for our lease fleet during 2013. The primary reason for the increase in revenue was higher hopper railcar shipments and strong general market conditions for tank railcars.
Manufacturing segment revenues for 2014 included estimated revenues of $419.3 million relating to railcars built for our lease fleet, compared to $217.9 million for 2013. Revenues related to railcars built for our lease fleet increased due to a higher quantity of both tank and hopper railcars shipped for lease. Such revenues are based on an estimated fair market value of the leased railcars as if they had been sold to a third party, and are eliminated in consolidation. Revenues from railcars manufactured for our railcar leasing segment are not recognized in consolidated revenues as railcar sales, but rather lease revenues are recognized over the term of the lease in accordance with the monthly lease revenues. Railcars built for the lease fleet represented 41.0% of our railcar shipments for 2014 compared to 27.0% for 2013.

Manufacturing segment revenues included direct sales of railcars to the IELP Entities totaling $226.9 million of our total consolidated revenues in 2014, compared to $238.2 million in 2013. In addition, we recorded $19.0 million of revenue from ACF for royalties and profits on railcars sold by ACF and for sales of railcar components to ACF in 2014, compared to $12.3 million in 2013. ACF is also affiliated with Mr. Carl Icahn, our principal beneficial stockholder through IELP. Total manufacturing segment revenues from our affiliates represented 33.5% of our total consolidated revenues in 2014, compared to 33.4% in 2013.
Earnings from operations for our manufacturing segment, which include an allocation of selling, general and administrative costs, as well as estimated profit for railcars manufactured for our railcar leasing segment, increased by 38.3% for 2014 compared to 2013. Estimated profit on railcars built for our lease fleet, which is eliminated in consolidation, was $126.0 million for 2014 compared to $54.6 million for 2013, and is based on an estimated fair market value of revenues as if the railcars had been sold to a third party, less the cost to manufacture. Operating margin from our manufacturing segment increased to 25.8% in 2014 from 22.0% in 2013. These increases were due to ramped up production levels at our hopper railcar manufacturing facility that created operating efficiencies and leveraged overhead costs. This was in addition to efficiencies that we continue to generate at our tank railcar manufacturing facility due to continued high production volumes.
Railcar leasing
2015 vs. 2014
Our railcar leasing segment revenues for 2015 increased by $51.6 million compared to 2014. The primary reason for the increase in revenue was an increase in the number of railcars on lease with third parties. We had 10,362 railcars in our lease fleet at the end of 2015 compared to 7,730 at the end of 2014.
In 2015, earnings from operations for our railcar leasing segment, which include an allocation of selling, general and administrative costs, increased by $34.2 million compared to 2014. Operating margin from our railcar leasing segment increased to 60.2% for 2015 from 55.4% in 2014. These increases were driven by the growth in the number of railcars in our lease fleet.
2014 vs. 2013
Our railcar leasing segment revenues for 2014 increased by $33.2 million compared to 2013. The primary reason for the increase in revenue was an increase in the number of railcars on lease with third parties and an increase in the average lease rate. We had 7,730 railcars in our lease fleet at the end of 2014 compared to 4,450 at the end of 2013.
In 2014, earnings from operations for our railcar leasing segment, which include an allocation of selling, general and administrative costs, increased by $21.2 million compared to 2013. Operating margin from our railcar leasing segment increased to 55.4% for 2014 from 46.7% in 2013. These increases were driven by the growth in the number of railcars in our lease fleet and higher average lease rates.
Railcar services
2015 vs. 2014
Our railcar services segment revenues for 2015 increased 9.8% compared to 2014. The increase was primarily due to an increase in demand, a favorable change in the mix of work at our repair facilities and the additional capacity resulting from our Brookhaven repair facility, as discussed in 'Consolidated Results' above.

36


For 2015, our railcar services revenues included transactions with ARL totaling $24.9 million , or 2.8% of our total consolidated revenues, compared to $19.3 million , or 2.6% of our total consolidated revenues in 2014.
In 2015, earnings from operations for our railcar services segment, which include an allocation of selling, general and administrative costs, increased 34.1% compared to 2014. Operating margin from railcar services increased to 18.7% for 2015 from 15.3% in 2014. These increases are due to an increase in revenues, as discussed in 'Consolidated Results' above, coupled with improved efficiencies and a favorable mix of work.
2014 vs. 2013
Our railcar services segment revenues for 2014 decreased 6.9% compared to 2013. The decrease was primarily due to no longer performing certain repair projects at our hopper railcar manufacturing facility, as discussed in 'Consolidated Results' above.
For 2014, our railcar services revenues included transactions with ARL totaling $19.3 million, or 2.6% of our total consolidated revenues, compared to $17.2 million, or 2.3% of our total consolidated revenues in 2013.
In 2014, earnings from operations for our railcar services segment, which include an allocation of selling, general and administrative costs, decreased 27.6% compared to 2013. Operating margin from railcar services decreased to 15.3% for 2014 from 19.7% in 2013. These decreases were due to the termination of the Company's postretirement medical benefit plan in 2013 that resulted in a one-time gain of $1.7 million and a decrease in revenues.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2015 , we had net working capital of $273.3 million , including $298.1 million of cash and cash equivalents. As of December 31, 2015 , we had $701.6 million of debt outstanding under our lease fleet financing facilities. In December 2015, we completed a lease fleet financing with an aggregate principal amount of $200.0 million. The initial revolving loan obtained at closing amounted to approximately $99.5 million, net of fees and expense. In February 2016, we repaid the amounts outstanding under the revolving loan in full and as of the date of this report we have borrowing availability of $200.0 million under this facility. See below for a discussion on our outstanding and available debt, our cash flow activities and our future liquidity.
Outstanding and Available Debt
January 2015 private placement notes
In January 2015, we refinanced the Longtrain Leasing I, LLC (LLI) and Longtrain Leasing II, LLC (LLII) lease fleet financing facilities to, among other things, increase our borrowings. Our wholly-owned subsidiary, Longtrain Leasing III, LLC (LLIII) issued $625.5 million in aggregate principal amount of notes, pursuant to an 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 with the Class A-1 Notes, the Notes). As of December 31, 2015, there were $226.3 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.
Pursuant to the terms of the Indenture, LLIII is required to maintain deposits in a liquidity reserve bank account equal to nine months of interest payments. As of December 31, 2015, the liquidity reserve amount was $16.9 million , and included within 'Restricted cash' on the consolidated balance sheets.
While the legal final maturity date of the Notes is January 17, 2045, cash flows from LLIII's assets will be applied, pursuant to the flow of funds provisions of the Indenture, so as to achieve monthly targeted principal balances. Also, under the flow of funds provisions of the Indenture, early amortization of the Notes may be required in certain circumstances. If the Notes are not repaid by the expected principal repayment date on January 15, 2025, additional interest will accrue at a rate of 5.0% per annum and be payable monthly according to the flow of funds. LLIII can prepay or redeem the Class A-1 Notes, in whole or in part, on any payment date and the Class A-2 Notes, in whole or in part, on any payment date occurring on or after January 16, 2018.
The Indenture also contains certain customary events of default, including among others, failure to pay amounts when due after applicable grace periods, failure to comply with certain covenants and agreements, and certain events of bankruptcy or insolvency. Certain events of default under the Indenture will make the outstanding principal balance and accrued interest on the Notes, together with all amounts then due and owing to the noteholders, immediately due and payable without further action. For other events of default, the Indenture Trustee, acting at the direction of a majority of the noteholders, may declare the principal of and accrued interest on all Notes then outstanding to be due and payable immediately.

37


The Notes are obligations of LLIII, are generally non-recourse to ARI, and are secured by a first lien on the subject assets of LLIII consisting of railcars, railcar leases, receivables and related assets, subject to limited exceptions. ARI has, however, entered into agreements containing certain representations, undertakings, and indemnities customary for asset sellers and parent companies in transactions of this type, and ARI is obligated to make any selections of transfers of railcars, railcar leases, receivables and related assets to be transferred to LLIII without any adverse selection, to cause ARL, as the manager, to maintain, lease, and re-lease 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 financing documents.
December 2015 revolving credit facility
In December 2015, we completed a financing of our railcar lease fleet with availability of up to $200.0 million under a credit agreement (2015 Credit Agreement). The 2015 Credit Agreement contains an incremental borrowing provision under which ARI, as debtor and subject to the conditions set forth in the Credit Agreement, has the right but not the obligation to increase the amount of the facility in an aggregate amount of up to $100.0 million (the amounts extended under the 2015 Credit Agreement, inclusive of any amounts extended under the incremental facility, the Revolving Loans), to a maximum principal amount of $300.0 million. We may use the proceeds of the Revolving Loans to finance the manufacturing of railcars on an ongoing basis, to pay related transaction costs, fees and expenses in connection with the 2015 Credit Agreement, to finance ongoing working capital requirements and for other general corporate purposes. The initial Revolving Loan obtained at closing amounted to approximately $99.5 million , net of fees and expenses. In February 2016, we repaid amounts outstanding under the Revolving Loan in full and as of the date of this report we have borrowing availability of $200.0 million under this facility.
The Revolving Loans accrue 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%, subject to an alternative rate as set forth in the 2015 Credit Agreement. The interest rate increases by 2.0% following certain defaults or maturity.
The Revolving Loans 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 19, Related Party Transactions, for further discussion regarding this agreement with ARL.
Subject to the provisions of the 2015 Credit Agreement, the Revolving Loans may be borrowed and reborrowed until the maturity date. The Revolving Loans 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). See Note 12 to the consolidated financial statements for further discussion of the prepayment and final scheduled maturity of the Revolving Loans.
The Revolving Loans are also subject to acceleration upon and following specified events of default. The 2015 Credit Agreement contains certain representations, warranties, and affirmative and negative covenants applicable to us and, following the Election, ARL, which are customarily applicable to senior secured facilities. Key defaults and events of default include failure to repay principal, interest, fees and other amounts owing under the 2015 Credit Agreement; making misrepresentations; cross-defaults to certain other indebtedness of the Company; the rendering of certain judgments against the Company; impermissible transfers of equipment; occurrence of a Material Adverse Change (as defined in the 2015 Credit Agreement); and the Company’s bankruptcy or insolvency. Many defaults are subject to cure periods prior to such default giving rise to the right of the lenders and administrative agent to accelerate the Revolving Loans and to exercise remedies.
If a default occurs and is not cured within any applicable grace period or is not waived, the lenders and the administrative agent would be entitled to take various actions, including the acceleration of amounts due under the 2015 Credit Agreement. If the indebtedness under the 2015 Credit Agreement were accelerated, the Company may not have sufficient funds to pay such indebtedness. In that event, the lenders and the administrative agent would be entitled to enforce their security interests in the collateral securing such indebtedness.

38


Cash Flows
The following table summarizes our change in cash and cash equivalents:  
 
Year Ended
December 31,
 
2015
 
2014
 
2013
 
(in thousands)
Net cash provided by (used in):
 
 
 
 
 
Operating activities
264,503

 
136,799

 
164,766

Investing activities
(240,638
)
 
(323,200
)
 
(166,376
)
Financing activities
186,399

 
177,479

 
(106,045
)
Effect of exchange rate changes on cash and cash equivalents
(309
)
 
(221
)
 
(138
)
Increase (Decrease) in cash and cash equivalents
$
209,955

 
$
(9,143
)
 
$
(107,793
)
Net Cash Flows Provided by Operating Activities
Cash flows from operating activities are affected by several factors, including fluctuations in business volume, contract terms for billings and collections, the timing of collections on our accounts receivable, processing of payroll and associated taxes and payments to our suppliers.
2015 vs. 2014
Our net cash provided by operating activities for the year ended December 31, 2015 was $264.5 million compared to $136.8 million for the year ended December 31, 2014. The increase was primarily due to increased earnings, as described above, and changes in various operating assets and liabilities, including accounts receivable, inventories, and accounts payable, related to the timing of shipments and customer payments. Additionally, in 2015 we collected the income taxes receivable that was outstanding at December 31, 2014.
2014 vs. 2013
Our net cash provided by operating activities for the year ended December 31, 2014 was $136.8 million compared to $164.8 million for the year ended December 31, 2013. The decrease was primarily due to changes in various operating assets and liabilities, including accounts receivable, inventories, and accounts payable, related to the timing of shipments and customer payments. Additionally, our raw material inventory levels increased due to a ramp up of hopper railcar production rates during 2014. These increases were partially offset by increased earnings, as described above.
Net Cash Used In Investing Activities
2015 vs. 2014
Our net cash used in investing activities for the year ended December 31, 2015 was $240.6 million compared to $323.2 million for the year ended December 31, 2014 . The decrease was primarily a result of lower capital expenditures for our lease fleet in 2015 compared to 2014. Railcars built for the lease fleet represented 29.6% of our railcar shipments for 2015 compared to 41.0% for 2014.
2014 vs. 2013
Our net cash used in investing activities for the year ended December 31, 2014 was $323.2 million compared to $166.4 million for the year ended December 31, 2013. The increase was primarily a result of higher capital expenditures for our lease fleet in 2014 compared to 2013. In addition, net cash used in investing activities was lower in 2013 due to the sale of short term investments in 2013, resulting in proceeds of $12.7 million.
Capital expenditures
We continuously evaluate facility requirements based on our strategic plans, production requirements and market demand and may elect to change our level of capital investments in the future. These investments are all based on an analysis of the estimated rates of return and impact on our profitability. We continue to pursue opportunities to reduce our costs through continued vertical integration of component parts. From time to time, we may expand our business by acquiring other businesses or pursuing other strategic growth opportunities including, without limitation, joint ventures.

39


Capital expenditures for the year ended December 31, 2015 were $248.3 million , including $211.6 million related to manufacturing railcars for lease to others, as well as costs that were for capitalized projects that we expect will expand capabilities, maintain equipment, improve efficiencies and reduce costs. We cannot assure that we will be able to complete any of our projects on a timely basis or within budget, if at all.
Cash Flow from Financing Activities
2015 vs. 2014
Our net cash provided by financing activities for the year ended December 31, 2015 was $186.4 million compared to $177.5 million for the year ended December 31, 2014 . The cash provided by financing activities in 2015 was a result of the $211.6 million and $99.5 million in net proceeds that we received from the January 2015 lease fleet refinancing and the December 2015 revolving credit facility, respectively, as discussed above, partially offset by the related debt issuance costs of $5.9 million , an increase in the liquidity reserve of $9.8 million associated with the Notes, and repurchases of $57.4 million of shares of our common stock under the Stock Repurchase Program, as described above in Item 5. The cash provided by financing activities during 2014 was a result of the $122.0 million in net proceeds that we received from the 2014 lease fleet financing in January and the $100.0 million in proceeds received from the lease fleet financing facility completed by our wholly-owned subsidiary, Longtrain Leasing II, LLC in October 2014 (the LLII Term Loan), as discussed in Note 12 of the consolidated financial statements. Additionally, we paid quarterly dividends of $0.40 per share, totaling $33.2 million during 2015, compared to a total of $34.2 million in 2014. This change resulted from a reduction in the number of shares outstanding due to repurchases under our stock repurchase program. See discussion of dividends in Item 5.
2014 vs. 2013
Our net cash provided by financing activities for the year ended December 31, 2014 was $177.5 million compared to net cash used in financing activities of $106.0 million for the year ended December 31, 2013. The cash provided by financing activities in 2014 was a result of the $122.0 million in net proceeds that we received from the 2014 lease fleet financing in January and the $100.0 million in proceeds received from the LLII Term Loan, as discussed in Note 12 of the consolidated financial statements. The cash used in financing activities during 2013 was a result of the voluntary early redemption of the remaining $175.0 million of principal on our then outstanding notes in March 2013, partially offset by proceeds from the issuance of $99.8 million of debt under our original lease fleet financing facility. Additionally, we paid dividends totaling $34.2 million during 2014, compared to $21.4 million in 2013. See discussion of dividends in Item 5.
Future Liquidity
As of December 31, 2015, our liquidity consisted of our existing cash balance, anticipated cash flows from operations, and the remains of our net proceeds of $211.6 million and $99.5 million that we received from the January 2015 lease fleet refinancing and the December 2015 revolving credit facility, respectively. In February 2016, we repaid the initial amount drawn under the revolving credit facility. As of the date of this report, our liquidity consists of our existing cash balance, anticipated cash flows from operations and borrowing availability of $200.0 million under the revolving credit facility. We expect to require additional financing over and above our current liquidity position to continue to grow our leasing business.
Additionally, we expect our future cash flows from operations could be impacted by the state of the credit markets and the overall economy, the number of our railcar orders and shipments and our production rates. Our future liquidity may also be impacted by the number of new railcar orders leased versus sold.
Our operating performance may also be affected by other matters discussed under “Risk Factors,” and trends and uncertainties discussed in this discussion and analysis, as well as elsewhere in this annual report. These risks, trends and uncertainties may also materially adversely affect our long-term liquidity.
Our current capital expenditure plans for 2016 include projects that we expect will expand capabilities, maintain equipment, improve efficiencies and reduce costs. We also plan to increase our railcar lease fleet in 2016 to meet customer demand for leased railcars that have been ordered. Capital expenditures for 2016 are currently projected to be approximately $110 million, which includes expected additions to our lease fleet of approximately $80 million. However, this estimate may vary throughout the course of 2016. We cannot assure that we will be able to complete any of our projects on a timely basis or within budget, if at all.
Our long-term liquidity is contingent upon future operating performance, our and our wholly-owned leasing subsidiary's ability to continue to meet our respective financial covenants under our respective financing facilities and any other indebtedness we may enter into, and the ability to repay or refinance such indebtedness as it becomes due. We may also require additional capital in the future to fund capital expenditures, acquisitions or other investments, including additions to our lease fleet. These capital requirements could be substantial.

40


Other potential projects, including possible strategic transactions that could complement and expand our business units, will be evaluated to determine if the project or opportunity is right for us. We anticipate that any future expansion of our business will be financed through existing resources, cash flow from operations, term debt associated directly with that project or other new financing. We cannot guarantee that we will be able to meet existing financial covenants or obtain term debt or other new financing on favorable terms, if at all. Our liquidity will be impacted to the extent additional stock repurchases are made under our Stock Repurchase Program.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2015 , and the effect that these obligations and commitments are expected to have on our liquidity and cash flow in future periods.
 
 
Payments due by Period
Contractual Obligations
Total
 
1 year or
less
 
1-3 years
 
3-5 years
 
After 5
years
 
(in thousands)
Operating Lease Obligations 1
$
6,966

 
$
1,336

 
$
1,811

 
$
1,802

 
$
2,017

Revolving Loans
100,000

 
100,000

 

 

 

Interest Payments on Revolving Loans 2
1,892

 
1,892

 

 

 

Notes
601,796

 
25,783

 
51,178

 
51,861

 
472,974

Interest Payments on Notes 3
473,408

 
21,638

 
40,982

 
37,928

 
372,860

Pension and Postretirement Funding 4
4,591

 
112

 
1,165

 
2,062

 
1,252

Capital Project Related 5
7,352

 
7,352

 

 

 

Total
$
1,196,005

 
$
158,113

 
$
95,136

 
$
93,653

 
$
849,103

 
(1)
The operating lease commitment includes the future minimum rental payments required under non-cancelable operating leases for property and equipment leased by us.
(2)
The interest rate on the revolving credit facility was LIBOR plus 1.45% as of December 31, 2015 and is payable quarterly. At December 31, 2015 LIBOR was 0.43% and was used to project interest payments into the future.
(3)
The weighted average interest rate on the Notes is 3.6% and is payable monthly.
(4)
Our pension funding commitments include minimum funding contributions required by law for our two funded pension plans as well as expected benefit payments for our one unfunded pension plan.
(5)
Represents the costs for materials and for services provided by third parties related to various capital projects.
We have excluded from the contractual obligations table above, our gross amount of unrecognized tax benefits of $1.7 million. While it is uncertain as to the amount, if any, of these unrecognized tax benefits that will be settled by means of a cash payment, we estimate that a change to this balance of up to $1.0 million may occur within the current year.
We have an agreement with Axis to purchase new railcar axles. We do not have any minimum volume purchase requirements under this agreement.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Contingencies
We are 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, or otherwise relating to the protection of human health and the environment. These laws and regulations not only expose us to liability for the environmental condition of our current or formerly owned or operated facilities, and negligent acts, but also may expose us to liability for the conduct of others or for our actions that were in compliance with all applicable laws at the time these 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. Our operations that involve hazardous materials also raise potential risks of liability under common law. Certain real property we acquired from ACF in 1994 has been involved in investigation and remediation activities to address contamination. Substantially all of the issues identified with respect to these properties relate to the use of these properties prior to their

41


transfer to us by ACF and for which ACF has retained liability for environmental contamination that may have existed at the time of transfer to us. ACF has also agreed to indemnify us for any cost that might be incurred with those existing issues. As of the date of this report, we do not believe that we will incur material costs in connection with activities relating to these properties, but we cannot assure that this will be the case. If ACF fails to honor its obligations to us, we could be responsible for the cost of any additional investigation or remediation activities relating to these properties that may be required. We believe that our 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 our financial condition or results of operations.
We are from time to time party to various legal proceedings arising out of our business. Such proceedings, even if not meritorious, could result in the expenditure of significant financial and managerial resources. We believe that there are no proceedings pending against us that, were the outcome to be unfavorable, would materially adversely affect our business, financial condition and results of operations.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
We prepare our consolidated financial statements in accordance with U.S. GAAP (generally accepted accounting principles). The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of sales and expenses during the reporting period. Estimates and assumptions are periodically evaluated and may be adjusted in future periods. A summary of our significant accounting policies are described in Note 3 of our consolidated financial statements in this annual report. Some of these policies involve a high degree of judgment in their application. The critical accounting policies, in management's judgment, are those described below. If different assumptions or conditions prevail, or if our estimates and assumptions prove to be incorrect, actual results could be materially different from those reported.
Inventories
Inventories are stated at the lower of cost or market, on a first-in, first-out basis, and include the cost of materials, direct labor and manufacturing overhead. We allocate fixed production overheads to the costs of conversion based on the normal capacity of our production facilities. If any of our production facilities are not operating at normal capacity, unallocated production overheads are recognized as a current period charge. We evaluate our ability to realize the value of our inventory based on a combination of factors including historical usage rates, forecasted sales or usage, product end of life dates, estimated current and future market values and new product introductions. Assumptions used in determining our estimates of future product demand may prove to be incorrect; in which case, the provision required for excess and obsolete inventory would have to be adjusted in the future. When recorded, our reserves are intended to reduce the carrying value of our inventory to its net realizable value.
Impairment of Long-lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the long-lived assets may not be recoverable. During the year ended December 31, 2015 , no triggering events occurred. The criteria for determining impairment of such long-lived assets to be held and used is determined by comparing the carrying value of these long-lived assets to be held and used to management's best estimate of future undiscounted cash flows expected to result from the use of the long-lived assets. If the long-lived assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the long-lived assets exceeds the fair value of the long-lived assets. The estimated fair value of the long-lived assets is measured by estimating the present value of the future discounted cash flows to be generated.
The North American railcar market has been, and we expect it to continue to be highly cyclical, generally fluctuating in correlation with the U.S. economy. We continually monitor our long-lived assets for impairment in response to events or changes in circumstances.
Goodwill
As of December 31, 2015 , we had $7.2 million of goodwill recorded in conjunction with a past business acquisition, all allocated to a reporting unit that is part of our manufacturing segment. We evaluate goodwill for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Historically, ARI has performed the annual goodwill impairment test on March 1 of each year; however, the Company has elected to change this date to November 1 of each year, beginning in 2015. See Note 3 of the consolidated financial statements for further discussion regarding this change in the goodwill impairment testing date.

42


For purposes of goodwill impairment testing, our manufacturing segment is the only segment with allocated goodwill. The review for impairment is either a qualitative assessment or a two-step process. If we choose to perform a qualitative assessment and determine that the fair value of the reporting unit more likely than not exceeds the carrying value, no further evaluation is necessary. In evaluating whether it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, we consider various qualitative and quantitative factors, including macroeconomic conditions, railcar industry trends and the fact that the reporting unit has historical positive operating cash flows that we anticipate will continue.
For the two-step process, the first step is to compare the estimated fair value of the operating unit with the recorded net book value (including the goodwill). If the estimated fair value of the operating unit is higher than the recorded net book value, no impairment is deemed to exist and no further testing is required. If, however, the estimated fair value of the operating unit is below the recorded net book value, then a second step must be performed to determine if impairment of the goodwill is required. In this second step, the implied fair value of goodwill is calculated as the excess of the fair value of the operating unit over the fair value assigned to the operating unit's assets and liabilities. If the implied fair value of goodwill is less than the book value of the goodwill, the difference is recognized as an impairment loss.
The reporting unit fair value is based upon consideration of various valuation methodologies, including guideline transaction multiples, multiples of current earnings, and projected future cash flows discounted at rates commensurate with the risk involved (Discounted Cash Flow or DCF). Assumptions used in a DCF require the exercise of significant judgment, including judgment about appropriate discount rates and terminal values, growth rates, and the amount and timing of expected future cash flows.
We performed a qualitative assessment as of March 1, 2015 and November 1, 2015 and determined that the fair value of the reporting unit more likely than not exceeds the carrying value. See Notes 3 and 9 of the consolidated financial statements for further details.
Income Taxes
For financial reporting purposes, income tax expense or benefit is estimated based on planned tax return filings. The amounts anticipated to be reported in those filings may change between the time the financial statements are prepared and the time the tax returns are filed. Further, because tax filings are subject to review by taxing authorities, there is also the risk that a position on a tax return may be challenged by a taxing authority. If the taxing authority is successful in asserting a position different from that taken by us, differences in tax expense or between current and deferred tax items may arise in future periods. Any such differences, which could have a material impact on our consolidated financial statements, would be reflected in the consolidated financial statements when management considers them probable of occurring and the amount reasonably estimable.
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We regularly evaluate recoverability of our deferred tax assets and establish a valuation allowance, if necessary, based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of tax-planning strategies. We consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. It is possible that some or all of our deferred tax assets could ultimately expire unused.
U.S. GAAP provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if the position is “more-likely-than-not” to be sustained if the position were to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical merits of the position, without regard to the likelihood that the tax position may be challenged. If an uncertain tax position meets the “more-likely-than-not” threshold, the largest amount of tax benefit that is greater than 50% likely to be recognized upon ultimate settlement with the taxing authority is recorded. See Note 13 of the consolidated financial statements for additional information.
Pension Benefits
Pension costs and liabilities are dependent on assumptions used in calculating such amounts. The primary assumptions include factors such as discount rates, expected return on plan assets, and mortality and retirement rates, as discussed below:
Discount rates
The discount rate assumption used to determine the December 31, 2015 benefit obligations was 4.08% . The discount rate assumption used to determine the 2015 net periodic cost was 3.75% . We review these rates annually and adjust them to reflect current yields on long-term, high-quality corporate bonds. We deemed these rates appropriate based on the Citigroup Pension Discount curve analysis along with expected payments to retirees.

43


Expected return on plan assets
Our expected return on plan assets for our funded pension plans of 7.50% for 2015 is derived from detailed periodic studies, which include a review of asset allocation strategies, anticipated future long-term performance of individual asset classes, risks (standard deviations) and correlations of returns among the asset classes that comprise the plans' asset mix. While the studies give appropriate consideration to recent plan performance and historical returns, the assumptions are primarily long-term, prospective rates of return.
Mortality and retirement rates
Mortality and retirement rates are based on actual and anticipated plan experience.
In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our pension obligations and future expense.
The following information illustrates the sensitivity to a change in certain assumptions for our pension plans:
 
Change in Assumption
Effect on 2016 Pre-Tax
Pension Expense
 
Effect on December 31,
2015 Projected Benefit Obligation
 
(in thousands)
1% decrease in discount rate
$
192

 
$
2,913

1% increase in discount rate
$
(212
)
 
$
(2,639
)
1% decrease in expected return on assets
$
162

 
N/A

1% increase in expected return on assets
$
(162
)
 
N/A

This sensitivity analysis reflects the effects of changing one assumption. Various economic factors and conditions often affect multiple assumptions simultaneously and the effects of changes in key assumptions are not necessarily linear.
Environmental
Certain real property we acquired from ACF in 1994 has been involved in investigation and remediation activities to address contamination. Substantially all of the issues identified with respect to these properties relate to the use of these properties prior to their transfer to us by ACF and for which ACF has retained liability for environmental contamination that may have existed at the time of transfer to us. ACF has also agreed to indemnify us for any cost that might be incurred with those existing issues. As of the date of this report, we do not believe that we will incur material costs in connection with any activities relating to these properties, but we cannot assure that this will be the case. If ACF fails to honor its obligations to us, we could be responsible for the cost of any additional investigation or remediation activities relating to these properties that may be required. We cannot assure that we will not become involved in future litigation or other proceedings, or that we will be able to recover under our indemnity provisions if we were found to be responsible or liable in any litigation or proceeding, or that such costs would not be material to us.
Share-based Compensation
We use the Black-Scholes-Merton (Black-Scholes) and Monte Carlo models to estimate the fair value of our share-based awards issued under the Amended and Restated 2005 Equity Incentive Plan. The Black-Scholes model requires estimates of the expected term of the share-based award, future volatility, dividend yield, forfeiture rate and the risk-free interest rate. We estimate the expected term of stock appreciation rights (SARs) based on SEC Staff Accounting Bulletin Official Text Topic 14D2, which addressed the expected term aspect of the Black-Scholes model. It stated that companies that did not have adequate exercise history on equity instruments were allowed to use the “simplified method” prescribed by the SEC, which called for an average of the vesting period and the expiration period of grants with “plain vanilla” characteristics. These characteristics included service based vesting instruments granted at the money along with certain other requirements.
Our SARs have fair value estimates that are generated from the Black-Scholes calculation. This calculation requires inputs as mentioned above that may require some judgment or estimation. We use our best judgment at the time of valuation to estimate fair value on the SARs. All SARs granted are classified as liabilities on the consolidated balance sheets, given that they settle in cash, and thus, must be revalued every period. As such, the fair value estimates on the SARs we granted to our employees are subject to volatility inherent in the stock price since it is based on current market values at the end of every period. Share-based compensation on all equity awards is expensed using a graded vesting method over the vesting period of the instrument.

44


Item 7A: Quantitative and Qualitative Disclosures About Market Risk
We are exposed to price risks associated with the purchase of raw materials, especially steel and heavy castings. The cost of steel, heavy castings and all other materials used in the production of our railcars represents more than half of our direct manufacturing costs per railcar. Given the significant volatility in the price of raw materials, this exposure can affect our costs of production. We believe that the risk to our margins and profitability has been somewhat reduced by the variable pricing provisions we generally include in our railcar sales contracts. These provisions adjust the purchase prices of our railcars to reflect fluctuations in the cost of certain raw materials and components on a dollar for dollar basis and, as a result, we are generally able to pass on to our customers most increases in raw material and component costs with respect to the railcars we plan to produce and deliver to them. We believe that we currently have good supplier relationships and do not currently anticipate that material constraints will limit our production capacity. Such constraints may exist if railcar production were to increase beyond current levels, or regulatory, or other economic changes were to occur that affect the availability of our raw materials.
Our earnings could be affected by changes in interest rates due to the impact those changes have on our variable rate debt obligation (the Revolving Loans), which represented 14.2% of our total debt as of December 31, 2015 . We incurred $21.8 million of interest expense in 2015 primarily related to the fixed rate Notes as the Revolving Loans were not entered into until December 2015. Therefore, a one percentage point increase in the rate in fiscal year 2015 would have had less than a $0.1 million impact on our interest expense. However, because of the Revolving Loans, an increase in the interest rate in fiscal year 2016 would have a greater impact on our interest expense.



45

Table of Contents

Item 8: Financial Statements and Supplementary Data
American Railcar Industries, Inc.
Index to Consolidated Financial Statements
 
 
Page
Audited Consolidated Financial Statements of American Railcar Industries, Inc.
 

46

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Stockholders
American Railcar Industries, Inc.
We have audited the internal control over financial reporting of American Railcar Industries, Inc. (a North Dakota corporation) and subsidiaries (the “Company”) as of December 31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2015, and our report dated February 23, 2016 expressed an unqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP
St. Louis, Missouri
February 23, 2016


47


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Stockholders
American Railcar Industries, Inc.
We have audited the accompanying consolidated balance sheets of American Railcar Industries Inc. (a North Dakota corporation) and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Railcar Industries, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 23, 2016 expressed an unqualified opinion thereon.
As discussed in Note 2 of the consolidated financial statements, the Company has adopted new accounting guidance in 2015 related to the presentation of deferred income taxes. Our opinion is not modified with respect to this matter.

/s/ GRANT THORNTON LLP
St. Louis, Missouri
February 23, 2016


48


AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
As of December 31,
 
2015
 
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
298,064

 
$
88,109

Restricted cash
16,917

 
7,178

Accounts receivable, net
29,018

 
33,618

Accounts receivable, due from related parties
9,401

 
33,027

Income taxes receivable
3,058

 
33,879

Inventories, net
96,965

 
117,007

Deferred tax assets

 
7,688

Prepaid expenses and other current assets
4,058

 
5,353

Total current assets
457,481

 
325,859

Property, plant and equipment, net
176,311

 
160,787

Railcars on leases, net
848,717

 
663,315

Deferred debt issuance costs, net
5,656

 
2,148

Goodwill
7,169

 
7,169

Investment in and loans to joint ventures
27,397

 
29,168

Other assets
7,424

 
3,963

Total assets
$
1,530,155

 
$
1,192,409

Liabilities and Stockholders' Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
36,080

 
$
68,789

Accounts payable, due to related parties
4,477

 
2,793

Accrued expenses and taxes
6,344

 
21,931

Accrued compensation
11,459

 
15,046

Short-term debt, including current portion of long-term debt
125,784

 
110,612

Total current liabilities
184,144

 
219,171

Long-term debt, net of current portion
575,837

 
298,342

Deferred tax liability
222,338

 
168,349

Pension and post-retirement liabilities
8,484

 
8,544

Other liabilities
3,055

 
2,587

Total liabilities
993,858

 
696,993

Stockholders' equity:
 
 
 
Common stock, $0.01 par value, 50,000,000 shares authorized, 19,844,531 and 21,352,297 shares issued and outstanding at December 31, 2015 and 2014, respectively
213

 
213

Additional paid-in capital
239,609

 
239,609

Treasury stock
(57,423
)
 

Retained earnings
361,153

 
260,943

Accumulated other comprehensive loss
(7,255
)
 
(5,349
)
Total stockholders’ equity
536,297

 
495,416

Total liabilities and stockholders’ equity
$
1,530,155

 
$
1,192,409

See Notes to the Consolidated Financial Statements.

49

Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
 
 
For the Years Ended December 31,
 
2015
 
2014
 
2013
Revenues:
 
 
 
 
 
Manufacturing (including revenues from affiliates of $269,563, $245,891 and $250,455 in 2015, 2014 and 2013, respectively)
$
700,061

 
$
600,326

 
$
646,100

Railcar leasing
116,714

 
65,108

 
31,871

Railcar services (including revenues from affiliates of $24,880, $19,304 and $17,167 in 2015, 2014 and 2013, respectively)
72,561

 
67,572

 
72,621

Total revenues
889,336

 
733,006

 
750,592

Cost of revenues:
 
 
 
 
 
Manufacturing
(539,136
)
 
(455,547
)
 
(503,178
)
Railcar leasing
(36,161
)
 
(23,733
)
 
(13,394
)
Railcar services
(56,492
)
 
(54,386
)
 
(55,408
)
Total cost of revenues
(631,789
)
 
(533,666
)
 
(571,980
)
Gross profit
257,547

 
199,340

 
178,612

Selling, general and administrative
(30,866
)
 
(29,420
)
 
(27,705
)
Net gains on disposition of leased railcars
25

 
138

 

Earnings from operations
226,706

 
170,058

 
150,907

Interest income (including income from related parties of $2,105, $2,429 and $2,678 in 2015, 2014 and 2013, respectively)
2,164

 
2,517

 
2,716

Interest expense
(21,801
)
 
(7,622
)
 
(7,337
)
Loss on debt extinguishment
(2,126
)
 
(1,896
)
 
(392
)
Other (loss) income
(11
)
 
(20
)
 
2,037

Earnings (loss) from joint ventures
5,812

 
1,570

 
(8,595
)
Earnings before income taxes
210,744

 
164,607

 
139,336

Income tax expense
(77,291
)
 
(65,074
)
 
(52,440
)
Net earnings
$
133,453

 
$
99,533

 
$
86,896

Net earnings per common share—basic and diluted
$
6.39

 
$
4.66

 
$
4.07

Weighted average common shares outstanding—basic and diluted
20,883

 
21,352

 
21,352

Cash dividends declared per common share
$
1.60

 
$
1.60

 
$
1.00

See Notes to the Consolidated Financial Statements.


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Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
 
For the Years Ended December 31,
 
2015
 
2014
 
2013
Net earnings
$
133,453

 
$
99,533

 
$
86,896

Currency translation
(1,955
)
 
(1,035
)
 
(802
)
Postretirement plans (1)
49

 
(2,820
)
 
908

Short-term investments

 

 
(1,213
)
Comprehensive income
$
131,547

 
$
95,678

 
$
85,789


(1)
Net of tax effect of less than $0.1 million , $1.8 million and $2.1 million for 2015, 2014 and 2013, respectively.
See Notes to the Consolidated Financial Statements.


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Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
For the Years Ended December 31,
 
2015
 
2014
 
2013
Operating activities:
 
 
 
 
 
Net earnings
$
133,453

 
$
99,533

 
$
86,896

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
 
Depreciation
45,729

 
34,212

 
27,712