American Railcar Industries, Inc.
American Railcar Industries, Inc. (Form: 10-Q, Received: 08/02/2017 06:07:13)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from                      to                     
Commission File No. 000-51728
 
  
AMERICAN RAILCAR INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
  
North Dakota
 
43-1481791
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
100 Clark Street, St. Charles, Missouri
 
63301
(Address of principal executive offices)
 
(Zip Code)
(636) 940-6000
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
¨
Accelerated filer
x
 
 
 
 
Non-accelerated filer
¨
Smaller Reporting Company
¨
 
 
 
 
 
 
Emerging Growth Company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
The number of shares of the registrant’s common stock, $0.01 par value, outstanding on July 27, 2017 was 19,083,878 shares.
 


Table of Contents

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

PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

2


 
June 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
102,811

 
$
178,571

Restricted cash
16,684

 
16,714

Short-term investments—available for sale securities
1,815

 
8,958

Accounts receivable, net
44,780

 
39,727

Accounts receivable, due from related parties
2,453

 
4,790

Inventories, net
70,807

 
75,028

Prepaid expenses and other current assets
9,155

 
8,623

Total current assets
248,505

 
332,411

Property, plant and equipment, net
169,628

 
177,051

Railcars on lease, net
994,821

 
908,010

Income Tax Receivable
11,721

 
234

Goodwill
7,169

 
7,169

Investments in and loans to joint ventures
24,683

 
26,332

Other assets
3,831

 
5,043

Total assets
$
1,460,358

 
$
1,456,250

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
24,346

 
$
29,314

Accounts payable, due to related parties
186

 
3,252

Accrued expenses, including loss contingency of $8,104 and $10,127 at June 30, 2017 and December 31, 2016, respectively
15,509

 
15,411

Accrued income taxes payable

 
7,660

Accrued compensation
10,800

 
11,628

Short-term debt, including current portion of long-term debt
25,681

 
25,588

Total current liabilities
76,522

 
92,853

Long-term debt, net of unamortized debt issuance costs of $4,756 and $4,863 at June 30, 2017 and December 31, 2016, respectively
532,740

 
545,392

Deferred tax liability
279,709

 
252,943

Pension and post-retirement liabilities
8,672

 
8,648

Other liabilities, including loss contingency of $1,970 and $2,161 at June 30, 2017 and December 31, 2016, respectively
5,616

 
6,144

Total liabilities
903,259

 
905,980

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value, 50,000,000 shares authorized, 19,083,878 shares outstanding as of both June 30, 2017 and December 31, 2016
213

 
213

Additional paid-in capital
239,609

 
239,609

Retained Earnings
409,010

 
402,810

Accumulated other comprehensive loss
(5,702
)
 
(6,331
)
Treasury Stock
(86,031
)
 
(86,031
)
Total stockholders’ equity
557,099

 
550,270

Total liabilities and stockholders’ equity
$
1,460,358

 
$
1,456,250

See Notes to the Condensed Consolidated Financial Statements.

3

Table of Contents


AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Manufacturing (including revenues from affiliates of $137 for both the three and six months ended June 30, 2017 and $223 and $776 for the three and six months ended June 30 2016, respectively)
$
55,087

 
$
97,548

 
$
115,813

 
$
221,340

Railcar leasing (including revenues from affiliates of $223 and $447 for the three and six months ended June 30, 2017, respectively, and zero for the same periods in 2016)
33,717

 
33,209

 
67,552

 
65,977

Railcar services (including revenues from affiliates of $4,425 and $10,572 for the three and six months ended June 30, 2017, respectively, and $7,249 and $15,243 for the same periods in 2016)
20,216

 
19,727

 
40,336

 
39,347

Total revenues
109,020

 
150,484

 
223,701

 
326,664

Cost of revenues:
 
 
 
 
 
 
 
Manufacturing
(51,121
)
 
(81,437
)
 
(105,680
)
 
(183,718
)
Other operating income
1,033

 

 
1,064

 

Railcar leasing
(11,617
)
 
(10,356
)
 
(23,676
)
 
(20,531
)
Railcar services
(16,146
)
 
(15,420
)
 
(33,536
)
 
(30,657
)
Total cost of revenues
(77,851
)
 
(107,213
)
 
(161,828
)
 
(234,906
)
Gross profit
31,169

 
43,271

 
61,873

 
91,758

Selling, general and administrative
(9,019
)
 
(7,297
)
 
(17,821
)
 
(15,254
)
Net gains on disposition of leased railcars

 

 
13

 
167

Earnings from operations
22,150

 
35,974

 
44,065

 
76,671

Interest income (including income from related parties of $306 and $642 for the three and six months ended June 30, 2017, respectively, and $427 and $884 for the same periods in 2016)
368

 
453

 
741

 
931

Interest expense
(5,488
)
 
(5,678
)
 
(11,019
)
 
(11,584
)
Other income
1,867

 
1

 
1,921

 
1

Earnings from joint ventures
796

 
1,458

 
1,346

 
2,944

Earnings before income taxes
19,693

 
32,208

 
37,054

 
68,963

Income tax expense
(8,794
)
 
(12,312
)
 
(15,587
)
 
(26,275
)
Net earnings
$
10,899

 
$
19,896

 
$
21,467

 
$
42,688

Net earnings per common share—basic and diluted
$
0.57

 
$
1.02

 
$
1.12

 
$
2.18

Weighted average common shares outstanding—basic and diluted
19,084

 
19,511

 
19,084

 
19,588

Cash dividends declared per common share
$
0.40

 
$
0.40

 
$
0.80

 
$
0.80

See Notes to the Condensed Consolidated Financial Statements.


4

Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Net earnings
$
10,899

 
$
19,896

 
$
21,467

 
$
42,688

Currency translation
452

 
(38
)
 
581

 
683

Pension plans (1)
108

 
119

 
216

 
239

Short-term investments (2)
769

 

 
(167
)
 

Comprehensive income
$
12,228

 
$
19,977

 
$
22,097

 
$
43,610


(1)
Net of tax effect of $0.1 million and $0.1 million for the three months ended June 30, 2016 and June 30, 2017 , respectively, and $0.2 million and $0.2 million for the six months ended June 30, 2016 and June 30, 2017 , respectively.

(2)
Net of tax effect of $0.4 million and $(0.1) million for the three and six months ended June 30, 2017 .
See Notes to the Condensed Consolidated Financial Statements.


5

Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)  
 
Six Months Ended
 
June 30,
 
2017
 
2016
Operating activities:
 
 
 
Net earnings
$
21,467

 
$
42,688

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation
28,174

 
25,616

Amortization of deferred costs
250

 
252

(Gain) loss on disposal of property, plant, equipment and leased railcars
(12
)
 
18

Earnings from joint ventures
(1,346
)
 
(2,944
)
Provision for deferred income taxes
26,720

 
15,163

Items related to investing activities:
 
 
 
Realized gain on short-term investments - available for sale securities
(1,823
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(393
)
 
(11,421
)
Accounts receivable, due from related parties
2,357

 
3,322

Income taxes receivable
(12,248
)
 
926

Inventories, net
4,264

 
20,167

Prepaid expenses and other current assets
235

 
(2,643
)
Accounts payable
(4,983
)
 
(11,377
)
Accounts payable, due to related parties
(3,065
)
 
(2,569
)
Accrued expenses and taxes
(8,401
)
 
8,514

Other
956

 
1,772

Net cash provided by operating activities
52,152

 
87,484

Investing activities:
 
 
 
Purchases of property, plant and equipment
(3,422
)
 
(11,187
)
Grant Proceeds

 
75

Capital expenditures - leased railcars
(103,765
)
 
(33,444
)
Proceeds from the disposal of property, plant, equipment and leased railcars
73

 
640

Proceeds from sale of short-term investments - available for sale securities
4,086

 

Proceeds from repayments of loans by joint ventures
2,953

 
2,953

Net cash used in investing activities
(100,075
)
 
(40,963
)
Financing activities:
 
 
 
Repayments of debt
(12,669
)
 
(112,834
)
Change in restricted cash related to long-term debt
30

 
263

Stock repurchases

 
(16,917
)
Payment of common stock dividends
(15,267
)
 
(15,613
)
Debt issuance costs

 
(14
)
Net cash used in financing activities
(27,906
)
 
(145,115
)
Effect of exchange rate changes on cash and cash equivalents
69

 
(19
)
Decrease in cash and cash equivalents
(75,760
)
 
(98,613
)
Cash and cash equivalents at beginning of period
178,571

 
298,064

Cash and cash equivalents at end of period
$
102,811

 
$
199,451


See Notes to the Condensed Consolidated Financial Statements.

6

Table of Contents

AMERICAN RAILCAR INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 — Description of the Business
The condensed consolidated financial statements included herein have been prepared by American Railcar Industries, Inc. (a North Dakota corporation) and its subsidiaries (collectively the Company or ARI), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The consolidated balance sheet as of December 31, 2016 has been derived from the audited consolidated balance sheet as of that date. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K for the year ended December 31, 2016 . In the opinion of management, the information contained herein reflects all adjustments necessary to present fairly the Company's financial position, results of operations and cash flows for the interim periods reported. The results of operations of any interim period are not necessarily indicative of the results that may be expected for a fiscal year. Certain prior-period amounts in the notes to the consolidated financial statements have been reclassified to conform to current-period presentation. These reclassifications had no effect on the reported results of operations.
The condensed consolidated financial statements of the Company include the accounts of ARI and its direct and indirect wholly-owned subsidiaries: Castings, LLC (Castings), ARI Component Venture, LLC (ARI Component), ARI Fleet Services of Canada, Inc., ARI Longtrain, Inc. (Longtrain), Longtrain Leasing I, LLC (LLI), Longtrain Leasing II, LLC (LLII), Longtrain Leasing III, LLC (LLIII), ARI Leasing, LLC, ARI Railcar Services LLC and Southwest Steel Casting Company, LLC. All intercompany transactions and balances have been eliminated.
Note 2 — Recent Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-09, Compensation—Stock Compensation (Topic 718) – Scope of Modification Accounting . The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the impact of this guidance on our consolidated financial position, results of operations, comprehensive income, cash flows and disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash , which amends Accounting Standards Codification (ASC) Topic 230, Statement of Cash Flows . This ASU requires that the statement of cash flows explain the change during the period total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on our consolidated financial position, results of operations, comprehensive income, cash flows and disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments , which amends ASC Topic 230, Statement of Cash Flows . This ASU seeks to reduce the diversity currently in practice by providing guidance on the presentation of eight specific cash flow issues in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact of this guidance on our consolidated statement of cash flows.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting , which amends ASC Topic 718, Compensation - Stock Compensation . This ASU simplifies several aspects of the accounting for share-based payment award transactions, including (i) income tax consequences, (ii) classification of awards as either equity or liabilities, (iii) whether or not to estimate forfeitures or account for them when they occur and (iv) classification on the statement of cash flows. The standard is effective for interim and annual periods beginning after December 31, 2016. The adoption of this guidance during the first quarter of 2017 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases , which replaces or supersedes ASC Topic 840, Leases , and is intended to increase the transparency and comparability of accounting for lease transactions. This ASU requires most leases to be recognized on the balance sheet. Lessees will need to recognize a right-of-use asset and a lease liability for virtually all

7


leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting remains similar to the current model. Targeted improvements were made to lessor accounting to align, where necessary, with certain changes to the lessee model and the new revenue recognition standard. The ASU will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Company is evaluating the impact of this standard on its consolidated financial statements and disclosures.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) . ASU 2014-09 supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) , and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new revenue recognition standard also requires disclosures that sufficiently describe the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This ASU was amended by ASU No. 2015-14, issued in August 2015, which deferred the original effective date by one year; the effective date of this ASU is for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017, using one of two retrospective application methods. In addition, the FASB issued other amendments during 2016 to FASB ASC Topic 606, Revenue from Contracts with Customers , which include implementation guidance to principal versus agent considerations, guidance to identifying performance obligations and licensing guidance and other narrow scope improvements. The Company has developed an implementation plan to adopt this new guidance. As part of this plan, the Company is currently assessing the impact of these new standards on its business processes, business and accounting systems, and consolidated financial statements and related disclosures.  The Company currently expects to complete its analysis, including implementing any necessary changes to existing business processes and systems to accommodate these new standards, by the third quarter of 2017.  The Company expects to adopt this new guidance on January 1, 2018 using the modified retrospective application method. To date, the Company has not identified any material differences in its existing revenue recognition methods or contract costs that would require modification under the new standards.

Note 3 — Accounts Receivable, net
Accounts receivable, net, consists of the following:  
 
June 30,
2017
 
December 31,
2016
 
(in thousands)
Accounts receivable, gross (includes $4,623 of unsettled sales of short term investments)
$
45,894

 
$
39,869

Less allowance for doubtful accounts
(1,114
)
 
(142
)
Total accounts receivable, net
$
44,780

 
$
39,727


Note 4 — Inventories, net
Inventories consist of the following:  
 
June 30,
2017
 
December 31,
2016
 
(in thousands)
Raw materials
$
37,048

 
$
46,789

Work-in-process
30,114

 
28,386

Finished products
6,643

 
3,332

Total inventories
73,805

 
78,507

Less reserves
(2,998
)
 
(3,479
)
Total inventories, net
$
70,807

 
$
75,028


8


Note 5 — Property, Plant, Equipment and Railcars on Leases, net
The following table summarizes the components of property, plant, equipment and railcars on leases, net:  
 
June 30,
2017
 
December 31,
2016
 
(in thousands)
Operations / Corporate:
 
 
 
Buildings
$
185,594

 
$
182,970

Machinery and equipment
233,111

 
232,171

Land
4,813

 
4,328

Construction in process
1,135

 
1,966

 
424,653

 
421,435

Less accumulated depreciation
(255,025
)
 
(244,384
)
Property, plant and equipment, net
$
169,628

 
$
177,051

Railcar Leasing:
 
 
 
Railcars on lease
$
1,100,122

 
$
996,422

Less accumulated depreciation
(105,301
)
 
(88,412
)
Railcars on lease, net
$
994,821

 
$
908,010

Railcars on lease agreements
The Company leases railcars to third parties under multi-year agreements. Railcars subject to lease agreements are classified as operating leases and are depreciated in accordance with the Company’s depreciation policy.
Capital expenditures for leased railcars represent cash outflows for the Company’s cost to produce railcars shipped or to be shipped for lease.
As of June 30, 2017 , future contractual minimum rental revenues required under non-cancellable operating leases for railcars with terms longer than one year are as follows (in thousands):  
Remaining 6 months of 2017
$
65,036

2018
122,716

2019
103,354

2020
66,862

2021
49,915

2022 and thereafter
88,477

Total
496,360

Depreciation expense
The following table summarizes depreciation expense:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Total depreciation expense
$
14,301

 
$
12,961

 
$
28,174

 
$
25,616

Depreciation expense on leased railcars
$
8,658

 
$
7,504

 
$
16,894

 
$
14,879

Note 6 — Investments in and Loans to Joint Ventures
As of June 30, 2017 , the Company was party to two joint ventures: Ohio Castings Company LLC (Ohio Castings) and Axis LLC (Axis). Through its wholly-owned subsidiary, Castings, the Company has a 33.3% ownership interest in Ohio Castings, a limited liability company formed to produce various steel railcar parts for use or sale by the ownership group. Through its wholly-owned subsidiary, ARI Component, the Company has a 41.9% ownership interest in Axis, a limited liability company formed to produce railcar axles for use or sale by the ownership group.

9


The Company accounts for these joint ventures using the equity method. Under this method, the Company recognizes its share of the earnings and losses of the joint ventures as they accrue. Advances and distributions are charged and credited directly to the investment accounts. From time to time, the Company also makes loans to its joint ventures that are included in the investment account. The investment balance for these joint ventures is recorded within the Company’s manufacturing segment. The carrying amount of investments in and loans to joint ventures, which also represents ARI’s maximum exposure to loss with respect to the joint ventures, is as follows:  
 
June 30,
2017
 
December 31,
2016
 
(in thousands)
Carrying amount of investments in and loans to joint ventures
 
 
 
Ohio Castings
$
6,654

 
$
7,477

Axis
18,029

 
18,855

Total investments in and loans to joint ventures
$
24,683

 
$
26,332

See Note 14, Related Party Transactions, for information regarding financial transactions with ARI's joint ventures.
Ohio Castings
When active, Ohio Castings produces railcar parts that are sold to one of the joint venture partners. This joint venture partner then sells these railcar parts to outside third parties at current market prices and sells them to the Company and the other joint venture partner at Ohio Castings' cost plus a licensing fee.
In January 2017, Ohio Castings' manufacturing facility was idled in response to an expected decline in industry demand. The Company expects that Ohio Castings will remain idle through at least the end of 2017, subject to re-evaluation based on changes in future demand expectations. Ohio Castings performed an analysis of long-lived assets in accordance with ASC 360, Property, Plant and Equipment as of December 31, 2016. Based on this analysis, Ohio Castings concluded that there was no impairment of its long-lived assets. In turn ARI evaluated its investment in Ohio Castings and determined there was no impairment. The Company and Ohio Castings will continue to monitor for impairment as necessary.
The Company has determined that, although the joint venture is a variable interest entity (VIE), accounting for its activity under the equity method is appropriate given that the Company is not the primary beneficiary, does not have a controlling financial interest and does not have the ability to individually direct the activities of Ohio Castings that most significantly impact its economic performance. The significant factors in this determination were that neither Castings nor the Company has rights to the majority of returns, losses or votes, all major and strategic decisions are decided between the partners, and the risk of loss to the Company and Castings is limited to its investment in Ohio Castings.
Summary financial results for Ohio Castings, the investee company, in total, are as follows:  
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
5

 
$
13,683

 
$
4,454

 
$
27,337

Gross profit (loss)
$
(419
)
 
$
1,004

 
$
(2,399
)
 
$
1,214

Net income (loss)
$
(33
)
 
$
218

 
$
(2,467
)
 
$
(380
)

Axis
ARI, through ARI Component, owns a portion of a joint venture, Axis, to manufacture and sell railcar axles. ARI currently owns 41.9% of Axis, while a minority partner owns 9.7% and the other significant partner owns 48.4% .
Under the terms of the joint venture agreement, ARI and the other significant partner are required, and the minority partner is entitled, to contribute additional capital to the joint venture, on a pro rata basis, of any amounts approved by the joint venture’s executive committee, as and when called by the executive committee.

10


Under the amended Axis credit agreement (Axis Credit Agreement), whereby ARI and the other significant partner are equal lenders, principal payments are due each fiscal quarter, with the last payment due on December 31, 2019. During the first six months of 2017 and the full year of 2016 , the applicable interest rate for the loans under the Axis Credit Agreement was 7.75% . Interest payments are due and payable monthly.
The balance outstanding on these loans, including interest, due to ARI Component, was $14.8 million and $17.7 million as of June 30, 2017 and December 31, 2016 , respectively. The Company has evaluated this loan to be fully recoverable.
The Company has determined that, although the joint venture is a VIE, accounting for its activity under the equity method is appropriate given that the Company is not the primary beneficiary, does not have a controlling financial interest and does not have the ability to individually direct the activities of Axis that most significantly impact its economic performance. The significant factors in this determination were that neither ARI Component nor the Company has rights to the majority of returns, losses or votes, the executive committee and board of directors of the joint venture are comprised of one representative from each significant partner with equal voting rights and the risk of loss to the Company and ARI Component is limited to its investment in Axis and the loans due to the Company under the Axis Credit Agreement. The Company will continue to monitor its investment in Axis for impairment as necessary.
Summary financial results for Axis, the investee company, in total, are as follows:  
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Results of operations
 
 
 
 
 
 
 
Revenues
$
11,089

 
$
16,086

 
$
25,455

 
$
32,497

Gross profit
$
2,990

 
$
4,818

 
$
7,196

 
$
9,860

Net earnings
$
2,161

 
$
3,710

 
$
5,492

 
$
7,564

Note 7 — Warranties
The overall change in the Company’s warranty reserve is reflected on the condensed consolidated balance sheets in accrued expenses and taxes and other liabilities and is detailed as follows:  
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Liability, beginning of period
$
2,830

 
$
1,713

 
$
2,439

 
$
1,415

Provision for warranties issued during the period, net of adjustments
205

 
29

 
234

 
444

Adjustments to warranties issued during previous periods
388

 
(16
)
 
920

 
(11
)
Warranty claims
(417
)
 
(142
)
 
(587
)
 
(264
)
Liability, end of period
$
3,006

 
$
1,584

 
$
3,006

 
$
1,584

Note 8 — Debt
Subsidiary Lease Fleet Financings
From time to time, the Company, through its wholly-owned subsidiaries LLI, LLII and LLIII, has entered into lease fleet financings in order to, among other things, support and grow its railcar leasing business. Currently, only the LLIII lease fleet financing remains outstanding. The lease fleet financings are obligations of the respective wholly-owned subsidiary, are generally non-recourse to ARI, and are secured by a first lien on the subject assets of the respective subsidiary, consisting of railcars, railcar leases, receivables and related assets, subject to limited exceptions. ARI has, however, entered into agreements containing certain representations, undertakings, and indemnities customary for asset sellers and parent companies in transactions of this type, and ARI generally is obligated to make any selections of transfers of railcars, railcar leases, receivables and related assets to be transferred to the respective subsidiary without any adverse selection, to cause the manager of the railcars and their related leases, to maintain, lease, and re-lease the respective subsidiary's equipment no less favorably than similar portfolios serviced by the manager, and to repurchase or replace certain railcars under certain conditions set forth in the respective loan documents. American Railcar Leasing LLC (ARL) historically has acted as the manager under these lease

11


fleet financings. As of June 1, 2017, ARI has subcontracted with ARL to provide services to ARL covering the day-to-day management of the LLIII railcars and the leases associated therewith until the earlier of the date on which ARI becomes the manager of the LLIII railcars following receipt of the consent of noteholders, or the date that is thirty (30) months after the ARL Closing Date (as defined below), unless terminated earlier pursuant to its terms. See below and Note 14, Related Party Transactions, for further discussion regarding these agreements with ARL and the impact of the sale of ARL (the ARL Sale) to SMBC Rail Services LLC (Buyer).
January 2015 private placement notes
In January 2015, LLIII issued $625.5 million in aggregate principal amount of notes pursuant to an indenture (the Longtrain Indenture). The notes are fixed rate secured railcar equipment notes bearing interest at a rate of 2.98% per annum for the Class A-1 Notes and 4.06% per annum for the Class A-2 Notes (collectively, the Notes), each payable monthly. Of the aggregate principal amount, $408.5 million was used to refinance the LLI and LLII lease fleet financing facilities, resulting in net proceeds of $211.6 million . As of June 30, 2017 , there were $187.9 million and $375.5 million of Class A-1 and Class A-2 notes outstanding, respectively, compared to $200.5 million and $375.5 million of Class A-1 and Class A-2 notes outstanding, respectively, as of December 31, 2016 . The Notes have a legal final maturity date of January 17, 2045 and an expected principal repayment date of January 15, 2025.
While the legal final maturity date of the Notes is January 17, 2045, cash flows from LLIII's assets will be applied, pursuant to the flow of funds provisions of the Longtrain Indenture, so as to achieve monthly targeted principal balances. Also, under the flow of funds provisions of the Longtrain Indenture, early amortization of the Notes may be required in certain circumstances. Pursuant to the terms of the Longtrain Indenture, LLIII is required to maintain deposits in a liquidity reserve bank account equal to nine months of interest payments. As of June 30, 2017 and December 31, 2016 , the liquidity reserve amount was $16.7 million during both periods and is included within 'Restricted cash' on the condensed consolidated balance sheets.
LLIII can prepay or redeem the Class A-1 Notes, in whole or in part, subject to the payment of a make-whole amount with respect to certain prepayments or redemptions made on or prior to the payment date occurring in January 2018. LLIII can prepay or redeem the Class A-2 Notes, in whole or in part, on any payment date occurring on or after January 16, 2018, subject to the payment of a make-whole amount with respect to certain prepayments or redemptions made on or prior to the payment date occurring in January 2022.
The Longtrain Indenture contains covenants which limit, among other things, LLIII’s ability to incur additional indebtedness or encumbrances on its assets, pay dividends or make distributions, make certain investments, perform its business other than specified activities, enter into certain types of transactions with its affiliates, and sell assets or consolidate or merge with or into other companies. These covenants are subject to a number of exceptions and qualifications. LLIII was in compliance with these covenants as of June 30, 2017 .
The fair value of the Notes was $569.6 million and $582.4 million as of June 30, 2017 and December 31, 2016 , respectively, and is calculated by taking the net present value of future principal and interest payments using a discount rate that is based on the Company's most recent fixed debt transaction. The inputs used in the calculation are classified within Level 2 of the fair value hierarchy.
ARI Lease Fleet Financings
December 2015 revolving credit facility
In December 2015, the Company completed a financing of its railcar lease fleet with availability of up to $200.0 million (the amounts extended under this facility, the Revolving Loan) under a credit agreement (2015 Credit Agreement). See the 'Liquidity and Capital Resources' section for further discussion regarding the incremental borrowing provision under the 2015 Credit Agreement. The initial Revolving Loan obtained at closing amounted to approximately $99.5 million , net of fees and expenses. In February 2016, the Company repaid amounts outstanding under the Revolving Loan in full and as of June 30, 2017 , the Company had borrowing availability of $200.0 million under this facility.
The Revolving Loan accrues interest at a rate per annum equal to Adjusted LIBOR (as defined in the 2015 Credit Agreement) for the applicable interest period, plus 1.45% . Interest is payable on the last day of each 1, 2, or 3-month interest period, the day of any mandatory prepayment, and the maturity date.
The Revolving Loan and the other obligations under the 2015 Credit Agreement are fully recourse to the Company and are secured by a first lien and security interest on certain specified railcars (together with specified replacement railcars), related leases, related receivables and related assets, subject to limited exceptions, a controlled bank account, and following an election

12


by the Company (the Election), the applicable railcar management agreement with ARL. Due to the ARL Sale, the Company does not expect to make any Election under the 2015 Credit Agreement.
Subject to the provisions of the 2015 Credit Agreement, the Revolving Loan may be borrowed and reborrowed until the maturity date. The Revolving Loan may be prepaid at the Company’s option at any time without premium or penalty (other than customary LIBOR breakage fees and customary reimbursement of increased costs). The final scheduled maturity of the Revolving Loan is December 10, 2018, or such earlier date as provided in the 2015 Credit Agreement. The Company was in compliance with all of its covenants under the 2015 Credit Agreement as of June 30, 2017 .
Prior to the ARL Sale, ARL acted as the manager of the railcars pledged as collateral under the 2015 Credit Agreement. Upon the consummation of the ARL Sale, ARI became the manager of those railcars; however the leases for those railcars remain pledged under a collateral agency agreement between U.S. Bank National Association as collateral agent, ARL as manager, and the pledgers party thereto, including the Company. The Company anticipates seeking an amendment to the 2015 Credit Agreement to allow the Company to transfer the pledged leases to a new collateral agency agreement under which the Company acts as manager, as well as other minor changes related to the transition of railcar management from ARL to ARI.
As of June 30, 2017 and December 31, 2016 , the net book value of the railcars that were pledged as part of the Company's and its subsidiaries' Lease Fleet Financings was $534.2 million and $544.1 million , respectively.
The future contractual minimum rental revenues related to the railcars pledged as of June 30, 2017 are as follows (in thousands):  
Remaining 6 months of 2017
$
34,283

2018
61,315

2019
46,500

2020
26,812

2021
17,054

2022 and thereafter
16,971

Total
$
202,935

The remaining principal payments under the Notes as of June 30, 2017 are as follows (in thousands):  
Remaining 6 months of 2017
$
12,919

2018
25,590

2019
25,507

2020
26,354

2021
26,358

2022 and thereafter
446,616

Total
$
563,344

ARL Sale and Railcar Management Transition Agreement
As previously disclosed, on December 16, 2016, ARI entered into a railcar management transition agreement (the RMTA) with ARL in anticipation of the ARL Sale. The RMTA, among other things, addresses the transition, from ARL to ARI following the ARL Sale, of the management of railcars owned by ARI (the ARI Railcars) and railcars owned by LLIII (the Longtrain Railcars). American Entertainment Properties Corporation (AEPC) and SMRSH LLC, an affiliate of Buyer, are also parties to the RMTA for the limited purposes previously disclosed. Immediately prior to the ARL Sale, ARL and its subsidiaries were controlled by Mr. Carl Icahn, ARI’s principal beneficial stockholder, through Icahn Enterprises L.P. Following the ARL Sale, ARL is controlled by Buyer. AEPC is controlled by Mr. Icahn. The ARL Sale was consummated (the ARL Closing) on June 1, 2017 (the ARL Closing Date). In connection with the ARL Closing, the RMTA was amended by a Joinder and Amendment to the RMTA, principally to join ACF Industries, LLC, a company controlled by Mr. Icahn (ACF) as a party thereto, to address certain ACF books and records in the possession of ARL. The Railcar Management Agreement, dated February 29, 2012 (as amended), between ARI and ARL, pursuant to which ARL managed the ARI Railcars and marketed them for sale or lease was terminated pursuant to the terms of the RMTA as of the ARL Closing Date. And effective as of the ARL Closing Date, ARI now manages the ARI Railcars and markets them for sale or lease.

13


Pursuant to a Railcar Management Agreement, dated January 29, 2015, between Longtrain and ARL (the Longtrain RMA), ARL, as manager, has marketed Longtrain Railcars for lease, and has also arranged for the operation, storage, re-lease, sublease, service, repair, overhaul, replacement and maintenance of the Longtrain Railcars. In addition, a subsidiary of ARL serves as administrator of the accounts used to service the debt under the Longtrain Indenture. As previously disclosed, the RMTA, among other things, requires ARI to use commercially reasonable efforts to obtain the consent of noteholders (the Noteholder Consent) for ARI to replace ARL as manager of the Longtrain Railcars under the Longtrain Indenture and certain related documents. ARI has no obligation to pay any consent or similar fees in connection with obtaining the Noteholder Consent. ARI may be unable to obtain the Noteholder Consent for a variety of reasons.
As provided in the RMTA, following the ARL Closing the Longtrain RMA will continue in effect, with ARL remaining as manager of the Longtrain Railcars under the Longtrain RMA and the Longtrain Indenture, unless and until ARI obtains the Noteholder Consent and becomes the manager of the Longtrain Railcars.
ARL Subcontractor Agreement
Further, as contemplated by the RMTA, effective as of the ARL Closing Date, ARI entered into a sub-contract arrangement with ARL (the Subcontractor Agreement) to provide services to ARL covering the day-to-day management of the Longtrain Railcars and the leases associated therewith. Under this arrangement, ARL and its subsidiary, as manager and administrator, respectively, will remain in control of the accounts used to service the debt under the Longtrain Indenture. During the term of the Subcontractor Agreement, management fees and expenses paid to ARL in respect of management duties subcontracted to ARI will be paid by ARL to ARI. The Subcontractor Agreement will continue until the earlier of the date on which ARI becomes the manager of the Longtrain Railcars following receipt of the Noteholder Consent, or the date that is thirty (30) months after the ARL Closing Date, unless terminated earlier pursuant to its terms.
Note 9 — Income Taxes
The Company’s federal income tax returns for tax years 2013 and beyond remain subject to examination, with the latest statute of limitations expiring in October 2020. Certain of the Company's 2008 through 2012 state income tax returns and all of the Company's state income tax returns for 2013 and beyond remain open and subject to examination, with the latest statute of limitations expiring in December 2021, upon filing of the Company's 2016 state tax returns. The Company’s foreign subsidiary's income tax returns for 2013 and beyond remain open to examination by foreign tax authorities.
Note 10 — Pension Plans
The Company is the sponsor of three defined benefit plans that are frozen and no additional benefits are accruing thereunder. Two of the Company's defined benefit pension plans cover certain employees at designated repair facilities. The assets of these defined benefit pension plans are held by independent trustees and consist primarily of equity and fixed income securities. The Company also sponsors an unfunded, non-qualified supplemental executive retirement plan that covers several of the Company's current and former employees.
The components of net periodic benefit cost for the pension plans are as follows:  
 
Pension Benefits
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Service cost
$
89

 
$
52

 
$
177

 
$
104

Interest cost
236

 
246

 
471

 
492

Expected return on plan assets
(283
)
 
(283
)
 
(565
)
 
(567
)
Amortization of net actuarial loss/prior service cost
184

 
206

 
368

 
412

Net periodic cost recognized
$
226

 
$
221

 
$
451

 
$
441

Note 11 — Commitments and Contingencies
The Company is subject to comprehensive federal, state, local and international environmental laws and regulations relating to the release or discharge of materials into the environment, the management, use, processing, handling, storage, transport or disposal of hazardous materials and wastes, and other laws and regulations relating to the protection of human health and the environment. These laws and regulations not only expose ARI to liability for the environmental condition of its current or

14


formerly owned or operated facilities, and its own negligent acts, but also may expose ARI to liability for the conduct of others or for ARI’s actions that were in compliance with all applicable laws at the time such actions were taken. In addition, these laws may require significant expenditures to achieve compliance and are frequently modified or revised to impose new obligations. Civil and criminal fines and penalties and other sanctions may be imposed for non-compliance with these environmental laws and regulations. ARI’s operations that involve hazardous materials also raise potential risks of liability under common law.
Certain real property ARI acquired from ACF Industries LLC (ACF) in 1994 had been involved in investigation and remediation activities to address contamination both before and after their transfer to ARI. ACF is an affiliate of Mr. Carl Icahn, the Company’s principal beneficial stockholder through Icahn Enterprises L.P. (IELP). Substantially all of the issues identified with respect to these properties relate to the use of these properties prior to their transfer to ARI by ACF and for which ACF has retained liability for environmental contamination that may have existed at the time of transfer to ARI. ACF has also agreed to indemnify ARI for any cost that might be incurred with those existing issues. As of the date of this report, ARI does not believe it will incur material costs in connection with activities relating to these properties, but it cannot assure that this will be the case. If ACF fails to honor its obligations to ARI, ARI could be responsible for the cost of any additional investigation or remediation that may be required. The Company believes that its operations and facilities are in substantial compliance with applicable laws and regulations and that any noncompliance is not likely to have a material adverse effect on its financial condition or results of operations.
ARI is a party to collective bargaining agreements with labor unions at two repair facilities that will expire in January and September 2021, respectively, unless extended or modified. ARI is also party to a collective bargaining agreement with a labor union at a steel component manufacturing facility that was previously set to expire in April 2017. This collective bargaining agreement was extended and modified during the second quarter of 2017, so that it will now expire in April 2022, unless extended or modified.
The Company has various agreements with and commitments to related parties. See Note 14, Related Party Transactions, for further detail.
Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against ARI. In the opinion of management, all such claims, suits, and complaints arising in the ordinary course of business are without merit or would not have a significant effect on the future liquidity, results of operations or financial position of ARI if disposed of unfavorably.
Gyansys
On October 24, 2014, the Company filed a complaint in United States District Court for the Southern District of New York against GyanSys Inc. (GyanSys). The complaint asserts a claim against GyanSys for breaching its contract with ARI to implement an enterprise resource planning system. The Company's complaint alleges that it has suffered damages in excess of $25 million as a result of GyanSys' breach. GyanSys filed a response to the suit denying its responsibility. It also alleged a counterclaim against ARI for breach of contract and wrongful termination, seeking equitable relief and damages, which GyanSys alleges to be more than $10 million . At this time, the Company does not have sufficient information to reasonably form an estimate of the potential outcome (gain or loss) of this litigation. As a result, no such accrual has been recorded. On September 9, 2015, the court denied ARI's motion to dismiss the wrongful termination counterclaim. However, ARI continues to believe that GyanSys' counterclaims lack merit and will continue to vigorously defend against these counterclaims. The trial began in June 2017 and is ongoing, with a decision expected before year end.
FRA Directive
On September 30, 2016, the Federal Railroad Administration (FRA) issued Railworthiness Directive (RWD) No. 2016-01 (the Original Directive). The Original Directive addressed, among other things, certain welding practices in one weld area in specified DOT 111 tank railcars manufactured between 2009 and 2015 by ARI and ACF. ACF is an affiliate of Mr. Carl Icahn, the Company's principal beneficial stockholder through IELP. The Company met and corresponded with the FRA following the issuance of the Original Directive to express the Company's concerns with the Original Directive and its impact on ARI, as well as the industry as a whole.
On November 18, 2016 (the Issuance Date), the FRA issued RWD No. 2016-01 [Revised] (the Revised Directive). The Revised Directive changes and supersedes the Original Directive.
The Original Directive indicated that approximately 14,800 general purpose tank railcars could be affected. The Revised Directive requires owners to identify their subject tank railcars and then from that population identify the 15% of subject tank railcars currently in hazardous materials service with the highest mileage in each tank car owner’s fleet. Visual inspection of

15


each of the subject tank railcars is required by the car operator prior to putting any railcar into service. Owners must ensure appropriate inspection, testing and repairs, if needed, within twelve months of the Issuance Date for the 15% of their subject tank railcars identified to be in hazardous materials service with the highest mileage. The FRA will monitor and analyze the results of the 15% sample and has reserved the right to impose additional test and inspection requirements for the remaining fleet of tank railcars subject to the Revised Directive.
During 2016, the Company recorded a loss contingency of $12.3 million related to the Revised Directive to cover its probable and estimable liabilities taking into account available information and the Company's contractual obligations in its capacity as both a manufacturer and owner of railcars subject to the Revised Directive. During the three and six months ended June 30, 2017 , there were no material developments related to the Revised Directive. During the second quarter of 2017, certain tank railcars subject to the Revised Directive were inspected, tested, and, if necessary, repaired, all as mandated by the Revised Directive. As a result of these services and the Company's revised assumptions, the contingency reserve was decreased to $10.1 million as of June 30, 2017 . This contingency amount is included in accrued expenses and other liabilities on the condensed consolidated balance sheets and will continue to be evaluated as ARI's and its customers' compliance with the Revised Directive progresses and the Company evolves its understanding of the impact that the Revised Directive may have on its business, including results of operations and cash flows. Actual results could differ from this estimate.
It is reasonably possible that a loss exists in excess of the amount accrued by the Company. However, the amount of potential costs and expenses expected to be incurred for compliance with the Revised Directive in excess of the loss contingency of $10.1 million cannot be reasonably estimated at this time.
Although the Revised Directive addresses some of the Company’s concerns and clarifies certain requirements of the Original Directive, ARI has identified significant issues with the Revised Directive. As a result, in a letter to the FRA dated November 28, 2016, ARI has requested that the FRA immediately rescind or stay the Revised Directive without reinstating the Original Directive. In addition, ARI has sought judicial review of and relief from the Revised Directive. On December 13, 2016, ARI filed a petition for review in the United States Court of Appeals for the District of Columbia Circuit against the FRA. In the petition, the Company asserted that (i) the Revised Directive was unlawful and inconsistent with administrative law, (ii) the Revised Directive is arbitrary, capricious and inconsistent with law, (iii) the FRA exceeded its authority when it issued the Revised Directive and (iv) the Revised Directive was an improper adjudication under applicable laws. The petition requests that the court review, remand and vacate, defer enforcement of, and/or stay pending review, the Revised Directive. Briefs have been filed relating to this ongoing matter and a hearing date has been set by the court for September 22, 2017. The Company cannot assure you that this petition will be successful in reversing or modifying the Revised Directive or, if it is successful, whether it will be successful in a reasonable amount of time to benefit railcar owners with cars subject to the Revised Directive. Regardless of the petition, significant uncertainty exists in connection with the Revised Directive and its implementation. The Company's attempts to comply with the Revised Directive may fail if it is unable to get clarification from the FRA on a variety of questions and the Company or other railcar owners cannot meet the expectations of the FRA in complying with the Revised Directive.
Legal fees incurred with respect to this matter will be expensed in the period in which they occur, in accordance with the Company's accounting policy.
Note 12 — Share-based Compensation
The following table presents the amounts incurred by ARI for share-based compensation, related to stock appreciation rights (SARs), and the corresponding line items on the condensed consolidated statements of operations that they are classified within:  
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Share-based compensation (income) expense
 
 
 
 
 
 
 
Cost of revenues: Manufacturing
$
(17
)
 
$
(56
)
 
$
(35
)
 
$
(173
)
Cost of revenues: Railcar services
(1
)
 
(2
)
 
(3
)
 
(17
)
Selling, general and administrative
(207
)
 
82

 
(434
)
 
(97
)
Total share-based compensation (income) expense
$
(225
)
 
$
24

 
$
(472
)
 
$
(287
)
As of June 30, 2017 , unrecognized compensation costs related to the unvested portion of SARs were estimated to be $1.7 million and were expected to be recognized over a weighted average period of 31 months .

16


Note 13 — Accumulated Other Comprehensive Income (Loss)
The following table presents the balances of related after-tax components of accumulated other comprehensive income (loss).  
 
Accumulated Short-term Investment Transactions
 
Accumulated
Currency
Translation
 
Accumulated
Postretirement
Transactions
 
Accumulated
Other
Comprehensive
Income (Loss)
 
(in thousands)
Balance December 31, 2016
$
415

 
$
(2,015
)
 
$
(4,731
)
 
$
(6,331
)
Currency translation

 
581

 

 
581

Reclassifications related to pension plans, net of tax effect of $132 (1)

 

 
216

 
216

Unrealized gain on available for sale securities, net of tax effect of $548 (2)
1,018

 

 

 
1,018

Reclassifications related to available for sale securities, net of tax effect of $638 (3)
(1,186
)
 

 

 
(1,186
)
Balance June 30, 2017
$
247

 
$
(1,434
)
 
$
(4,515
)
 
$
(5,702
)
 
(1)—
These accumulated other comprehensive income components relate to amortization of actuarial loss/(gain) and prior period service costs/(benefits) and are included in the computation of net periodic costs for our pension plans. See Note 10 for further details and pre-tax amounts.
(2)—
The unrealized gain on available for sale securities, net of tax represents the change in fair value estimates that are based on quoted prices with an active trading market (Level 1).
(3)—
The realized gain on available for sale securities sold, net of tax represents the change in fair value estimates that are based on quoted prices with an active trading market (Level 1). The pre-tax realized gain was recorded in other income/(loss) on the condensed consolidated statements of operation.

Note 14 — Related Party Transactions
Agreements with ACF
The Company has the following agreements with ACF, a company controlled by Mr. Carl Icahn, the Company’s principal beneficial stockholder through IELP.
Component purchases
The Company has from time to time purchased components from ACF under a long-term agreement, as well as on a purchase order basis. Under the manufacturing services agreement entered into in 1994 and amended in 2005, ACF agreed to manufacture and distribute, at the Company’s instruction, various railcar components. In consideration for these services, the Company agreed to pay ACF based on agreed upon rates. The agreement automatically renews unless written notice is provided by the Company.
Also in April 2015, ARI entered into a parts purchasing and sale agreement with ACF. The agreement was unanimously approved by the independent directors of ARI’s audit committee. Under this agreement, ARI and ACF may, from time to time, purchase and sell to each other certain parts for railcars (Parts). ARI also provides a non-exclusive and non-assignable license of certain intellectual property to ACF related to the manufacture and sale of Parts to ARI. The buyer under the agreement must pay the market price of the parts as determined in the agreement or as stated on a public website for all ARI buyers. ARI may provide designs, engineering and purchasing support, including all materials and components to ACF. Subject to certain early termination events, the agreement terminates on December 31, 2020.
ARI purchased $1.7 million and $3.5 million of components from ACF during the three and six months ended June 30, 2017 , respectively, and $1.2 million and $2.8 million during the comparable periods in 2016 .

17


Purchasing and engineering services agreement
In January 2013, ARI entered into a purchasing and engineering services agreement and license with ACF. The agreement was unanimously approved by the independent directors of ARI's audit committee. Under this agreement, ARI provides purchasing support and engineering services to ACF in connection with ACF’s manufacture and sale of tank railcars at its facility in Milton, Pennsylvania. Additionally, ARI has granted ACF a non-exclusive, non-assignable license to certain of ARI’s intellectual property, including certain designs, specifications, processes and manufacturing know-how required to manufacture and sell tank railcars during the term of the agreement. In December 2016, ARI and ACF amended this agreement to, among other provisions, extend the termination date to December 31, 2017 from December 31, 2016, subject to certain early termination events.
In consideration of the services and license provided by ARI to ACF in conjunction with the agreement, ACF pays ARI a royalty and, if any, a share of the net profits (Profits) earned on each railcar manufactured and sold by ACF under the agreement, in an aggregate amount equal to 30% of such Profits, as calculated under the agreement. Profits are net of certain of ACF’s start-up and shutdown expenses and certain maintenance capital expenditures. If no Profits are realized on a railcar manufactured and sold by ACF pursuant to the agreement, ARI will still be entitled to the royalty for such railcar and will not share in any losses incurred by ACF in connection therewith. In addition, any railcar components supplied by ARI to ACF for the manufacture of these railcars are provided at fair market value.
Under the agreement, ACF had the exclusive right to manufacture and sell subject tank railcars for any new orders scheduled for delivery to customers on or before January 31, 2014. ARI has the exclusive right to any sales opportunities for tank railcars for any new orders scheduled for delivery after that date and through termination of the agreement. ARI also has the right to assign any sales opportunity to ACF, and ACF has the right, but not the obligation, to accept such sales opportunity. Any sales opportunity accepted by ACF will not be reflected in ARI’s orders or backlog.
Revenues of zero for the three and six months ended June 30, 2017 compared to $0.2 million and $0.7 million for the same periods in 2016 , respectively, were recorded under this agreement for sales of railcar components to ACF and for royalties and profits on railcars sold by ACF and are included under manufacturing revenues from affiliates on the condensed consolidated statements of operations.
Repair services and support agreement
In April 2015, ARI entered into a repair services and support agreement with ACF. The agreement was unanimously approved by the independent directors of ARI’s audit committee. Under this agreement, ARI provides certain sales and administrative and technical services, materials and purchasing support and engineering services to ACF to provide repair and retrofit services (Repair Services). Additionally, ARI provides a non-exclusive and non-assignable license of certain intellectual property related to the Repair Services for railcars. ARI receives 30% of the net profits (as defined in the agreement) for Repair Services related to all railcars not owned by ARL or its subsidiaries and 20% of the net profits for Repair Services related to all railcars owned by ARL or its subsidiaries, if any, but does not absorb any losses incurred by ACF.
Under the agreement, ARI has the exclusive right to sales opportunities related to Repair Services, except for any sales opportunity related to Repair Services presented to ACF by ARL with respect to ARL-owned railcars. ARI also has the right to assign any sales opportunities related to Repair Services to ACF, and ACF has the right, but not the obligation, to accept such sales opportunity. Subject to certain early termination events, the agreement terminates on December 31, 2020.
For the three and six months ended June 30, 2017 , revenues of $0.1 million and $0.2 million , respectively, compared to less than $0.1 million for both the three and six months ended June 30, 2016, were recorded under this agreement. This revenue related to sales of railcar components to ACF and profits on repair work performed by ACF and are included under manufacturing revenues from affiliates and railcar services revenues from affiliates on the condensed consolidated statements of operations.
Railcar management transition agreement
In connection with the ARL Closing, the RMTA was amended by a Joinder and Amendment to the RMTA, principally to join ACF as a party thereto, to address certain ACF books and records in the possession of ARL. The RMTA requires ARL to transfer to ACF certain books and records in the possession of ARL and has no other impact on ARI’s rights or obligations under the RMTA. The Joinder and Amendment to the RMTA was unanimously approved by the independent directors of the Company's audit committee.

18


Agreements with ARL
Prior to the ARL Closing Date, the Company had the following agreements with ARL, a company that was controlled by Mr. Carl Icahn, the Company’s principal beneficial stockholder through IELP, prior to ARL’s sale to Buyer. ARL is no longer considered a related party to the Company.
Railcar services agreement
In April 2011, the Company entered into a railcar services agreement with ARL (the Railcar Services Agreement). Under the Railcar Services Agreement, ARI provided ARL railcar repair, engineering, administrative and other services, on an as needed basis, for ARL’s lease fleet at mutually agreed upon prices. The Railcar Services Agreement had an initial term of three years and automatically renewed for additional one year periods until the Railcar Services Agreement was terminated upon consummation of the ARL Sale, in accordance with the RMTA.
Revenues of $4.2 million and $10.1 million for the three and six months ended June 30, 2017 , respectively compared to $7.3 million and $15.3 million for the same periods in 2016 were recorded under the Railcar Services Agreement. These revenues are included under railcar services revenues from affiliates on the condensed consolidated statements of operations. The Railcar Services Agreement was unanimously approved by the independent directors of the Company's audit committee.
Railcar management agreements and subcontractor agreement
From time to time, the Company and its wholly-owned subsidiaries have entered into railcar management agreements with ARL, pursuant to which the Company and its respective wholly-owned subsidiaries engaged ARL to manage, sell, operate, market, store, lease, re-lease, sublease and service ARI's railcars, subject to the terms and conditions of the agreement. These agreements provided that ARL would manage the leased railcars (as identified in the respective agreement) including arranging for services, such as repairs or maintenance, as deemed necessary. Each of these agreements was unanimously approved by the independent directors of the Company's audit committee.
On February 29, 2012, the Company entered into a railcar management agreement with ARL (the ARI railcar management agreement). The agreement, as amended, was effective January 1, 2011, and continued until the date of the ARL Sale. Effective as of the ARL Closing Date, ARI now manages the ARI Railcars and markets them for sale or lease. In December 2012, LLI entered into a similar agreement with ARL (the LLI railcar management agreement). On October 16, 2014, LLII entered into a railcar management agreement with ARL (the LLII railcar management agreement).
In January 2015, in connection with the Company's refinancing of its lease fleet financings, the LLI and LLII railcar management agreements were terminated and LLIII entered into a similar railcar management agreement with ARL. Pursuant to a Railcar Management Agreement, dated January 29, 2015, between Longtrain and ARL (the Longtrain RMA), ARL, as manager, has marketed Longtrain Railcars for lease, and has also arranged for the operation, storage, re-lease, sublease, service, repair, overhaul, replacement and maintenance of the Longtrain Railcars. In addition, a subsidiary of ARL serves as administrator of the accounts used to service the debt under the Longtrain Indenture. As previously disclosed, the RMTA, among other things, requires ARI to use commercially reasonable efforts to obtain the consent of noteholders (the Noteholder Consent) for ARI to replace ARL as manager of the Longtrain Railcars under the Longtrain Indenture and certain related documents. ARI has no obligation to pay any consent or similar fees in connection with obtaining the Noteholder Consent. ARI may be unable to obtain the Noteholder Consent for a variety of reasons.
As provided in the RMTA, following the ARL Closing the Longtrain RMA will continue in effect, with ARL remaining as manager of the Longtrain Railcars under the Longtrain RMA and the Longtrain Indenture, unless and until ARI obtains the Noteholder Consent and becomes the manager of the Longtrain Railcars. Further, as contemplated by the RMTA, effective as of the ARL Closing Date, ARI entered into a sub-contract arrangement with ARL (the Subcontractor Agreement) to provide services to ARL covering the day-to-day management of the Longtrain Railcars and the leases associated therewith. Under this arrangement, ARL and its subsidiary, as manager and administrator, respectively, will remain in control of the accounts used to service the debt under the Longtrain Indenture. During the term of the Subcontractor Agreement, management fees and expenses paid to ARL in respect of management duties subcontracted to ARI will be paid by ARL to ARI. The Subcontractor Agreement will continue until the earlier of the date on which ARI becomes the manager of the Longtrain Railcars following receipt of the Noteholder Consent, or the date that is thirty (30) months after the ARL Closing Date, unless terminated earlier pursuant to its terms.
Subject to the terms and conditions of each Railcar Management Agreement, ARL received, in respect of leased railcars, a management fee based on the lease revenues. Under the ARI railcar management agreement, in addition to the management fee, ARL received a fee consisting of a lease origination fee, and, in respect of railcars sold by ARL, sales commissions.
Total lease origination and management fees incurred under the Railcar Management Agreements were $1.0 million and $2.8 million for the three and six months ended June 30, 2017 , respectively, compared to $1.6 million and $3.3 million for the same

19


periods in 2016 . These fees are included in cost of revenues for railcar leasing on the condensed consolidated statements of operations. Sales commissions of $0.1 million and $0.3 million were incurred for the three and six months ended June 30, 2017 , respectively, compared to $0.3 million and $0.6 million for the same periods in 2016 . These costs are included in selling, general and administrative costs on the condensed consolidated statements of operations.
Railcar management transition agreement
As previously disclosed, on December 16, 2016, ARI entered into the RMTA with ARL in anticipation of the ARL Sale. The RMTA, among other things, addresses the transition, from ARL to ARI following the ARL Sale, of the management of the ARI Railcars and the Longtrain Railcars. AEPC and SMRSH LLC, an affiliate of Buyer, are also parties to the RMTA for the limited purposes previously disclosed. Immediately prior to the ARL Sale, ARL and its subsidiaries were controlled by Mr. Carl Icahn, ARI’s principal beneficial stockholder, through Icahn Enterprises L.P. Following the ARL Sale, ARL is controlled by Buyer. AEPC is controlled by Mr. Icahn. In connection with the ARL Closing, the RMTA was amended by a Joinder and Amendment to the RMTA, principally to join ACF, a company controlled by Mr. Icahn, as a party thereto, to address certain ACF books and records in the possession of ARL.
In addition to the provisions of the RMTA related to the Railcar Management Agreements described above, the RMTA, among other things, requires ARL to transfer to ARI certain books and records and electronic data with respect to the Leased Railcars and the Company’s and LLIII's leasing businesses and otherwise assist in the transfer of the management of the leasing businesses to ARI. Pursuant to the terms and conditions of the RMTA, ARL provides ARI an irrevocable, fully paid, non-transferable (except as set forth therein), royalty-free license to certain software and databases owned and used by ARL to manage its railcars and the Leased Railcars. The RMTA also provides for the termination, as of the consummation of the ARL Sale, of the Trademark License Agreement, dated as of June 30, 2005, between ARI and ARL (the Trademark License), pursuant to which ARI granted to ARL a license to use ARI’s trademarks “American Railcar” and the “diamond shape” of its logo, and provides for the wind-down of ARL’s use of such trademarks.
Pursuant to the terms and conditions of the RMTA, ARI has agreed not to solicit or hire ARL employees until 24 months after the consummation of the ARL Sale, subject to certain exceptions.
The RMTA, subject to its terms, also provides for the termination of, and the discharge and release of obligations under, certain other agreements that ARI and its subsidiaries are party to on the one hand, and ARL is party to on the other hand, including (i) the Railcar Management Agreement, dated February 29, 2012 (as amended), between ARI and ARL, pursuant to which ARI engaged ARL to manage ARI’s railcars; (ii) subject to receiving Noteholder Consent (and the terms and conditions thereof), the Railcar Management Agreement, dated January 29, 2015, between LLIII and ARL, pursuant to which LLIII engaged ARL to manage LLIII's railcars; (iii) the Railcar Services Agreement, dated April 15, 2011 (as amended), between ARI and ARL, pursuant to which ARI provides ARL railcar repair, engineering, administrative and other services on an as needed basis; (iv) the Consulting Services Agreement, dated as of March 1, 2016, between ARI and ARL, pursuant to which ARI agreed to provide legal services to ARL; and (v) the Trademark License described above.
Pursuant to the terms and conditions of the RMTA, AEPC has agreed to (i) undertake certain payment and performance obligations of ARL to ARI and (ii) pay or reimburse, as applicable, certain costs and expenses of ARI incurred in connection with the ARL Sale and the RMTA. In addition, pursuant to the terms and conditions of the RMTA, Buyer and an affiliate of Buyer have agreed to undertake certain payment and performance obligations of ARL to ARI following the closing of the ARL Sale. The amount receivable from AEPC pursuant to the RMTA, which was recorded within 'accounts receivable, due from related parties' on the condensed consolidated balance sheets was $2.0 million as of June 30, 2017 and $0.6 million as of December 31, 2016.
The independent directors of the Company’s Audit Committee reviewed the terms and conditions of the RMTA and received advice from independent legal counsel in connection therewith. The Audit Committee unanimously approved the terms and conditions of, and the Company’s entry into, the RMTA and the joinder and amendment thereto.

Consulting services agreement

On February 15, 2017, ARI entered into a Consulting Services Agreement with ARL (Consulting Services Agreement). The Consulting Services Agreement was unanimously approved by the independent directors of ARI’s audit committee.

Pursuant to the terms and conditions of the Consulting Services Agreement, ARI provided customer service and engineering services to ARL upon ARL’s request. In order to provide the services, ARI designated and caused one or more of its employees to provide the services to ARL as provided in the Consulting Services Agreement. In exchange for the services performed under the Consulting Services Agreement, ARL paid to ARI a total weekly fee calculated based on the hours worked multiplied by a

20


mutually agreed upon price for each of the services performed. In addition, ARL reimbursed ARI for all reasonable and documented costs and expenses incurred in accordance with the Consulting Services Agreement.

This agreement was terminable by ARI or ARL upon five business days’ prior written notice with respect to any or all of the services. This agreement terminated on the ARL Closing Date. Total fees billed to ARL under the Consulting Services Agreement were less than $0.1 million for the three and six months ended June 30, 2017 and were included within selling, general, and administrative expenses on the condensed consolidated statements of operations.
Agreements with other related parties
Railcar leases
Beginning in the third quarter of 2016, the Company leased railcars to a company controlled by Mr. Carl Icahn, the Company's principal beneficial stockholder through IELP (the IELP Entity) under an operating lease arrangement. Revenues from railcars leased to the IELP Entity were $0.2 million and $0.4 million , respectively, for the three and six months ended June 30, 2017. These revenues are included in railcar leasing revenues from affiliates on the consolidated statements of operations. There were no revenues from railcars leased to IELP entities for the same period during 2016. Any related party railcar lease agreements have been and will be subject to the approval or review by the independent directors of the Company's audit committee.
Railcar services
In conjunction with the ARL sale, each of AEPC RemainCo LLC (a wholly-owned subsidiary of AEPC) and AEP Rail RemainCo LLC (a wholly-owned subsidiary of AEP Rail) (each, a RemainCo and, collectively, the RemainCos) retained ownership of approximately 4,600 railcars that had previously been owned by ARL. Each RemainCo is controlled by Mr. Carl Icahn, ARI's principal beneficial stockholder, through IELP. During the three and six months ended June 30, 2017, revenue of $0.1 million was recorded related to railcar services performed on these railcars. There were no revenues recorded for the same periods during 2016. These revenues are included under railcar services revenues from affiliates on the condensed consolidated statements of operations.
Consulting agreements
ARI entered into substantially identical consulting services agreements (each, a RemainCo Consulting Agreement and, collectively, the RemainCo Consulting Agreements) with each RemainCo. The RemainCos collectively own approximately 4,600 railcars that, pursuant to the terms and conditions of the purchase agreement governing the ARL Sale, may be sold to Buyer over a period of three years after the ARL Closing Date. Under the RemainCo Consulting Agreements, ARI has agreed to provide to each RemainCo, upon each RemainCo’s request, certain consulting services and facilitate communications among (i) each RemainCo, (ii) an unaffiliated, third party consultant engaged to assist each RemainCo to perform its duties regarding the inspection, testing and, if necessary, repair of railcars in accordance with the Federal Railroad Administration directive released September 30, 2016 and subsequently revised and superseded on November 18, 2016 (the Directive Duties), (iii) ARL, as manager of each RemainCo’s railcars (other than in respect of the Directive Duties), and (iv) other parties (collectively referred to as Services). In exchange for the Services to be performed under the RemainCo Consulting Agreements, each RemainCo will pay to ARI a total weekly fee calculated based on employee hours worked multiplied by an agreed upon rate for the Services performed. In addition, each RemainCo will reimburse ARI for all reasonable and documented costs and expenses incurred in accordance with each RemainCo Consulting Agreement. Each RemainCo Consulting Agreement is terminable by ARI or the applicable RemainCo upon five business days’ prior written notice with respect to any or all of the Services. On July 31, 2017, ARI and each RemainCo amended and restated the RemainCo Consulting Agreements to provide ARI additional flexibility related to which employees may provide the Services. The Amended and Restated RemainCo Consulting Agreements are effective as of June 1, 2017. During the three and six months ended June 30, 2017, consulting fees billed to the RemainCos were less than $0.1 million . There was no consulting work performed for the RemainCos in 2016.
Other Agreements
ARI is party to a scrap agreement with M. W. Recycling (MWR), a company controlled by Mr. Carl Icahn, the Company’s principal beneficial stockholder through IELP. Under the agreement, ARI sells and MWR purchases scrap metal from several ARI plant locations. This agreement had an initial term through November 2015 and was renewed in September 2016, with an effective date in December 2015, to among other things, extend the term through May 2019, after which the agreement continues until terminated by either party, in accordance with the provisions of the agreement. MWR collected scrap material totaling $0.6 million and $1.5 million for the three and six months ended June 30, 2017 , respectively, compared to $0.4 million and $0.8 million for the same periods in 2016 . This agreement was unanimously approved by the independent directors of the Company’s audit committee.

21


Insight Portfolio Group LLC (Insight Portfolio Group) is an entity formed and controlled by Mr. Carl Icahn in order to maximize the potential buying power of a group of entities with which Mr. Carl Icahn has a relationship in negotiating with a wide range of suppliers of goods, services and tangible and intangible property at negotiated rates. ARI, and a number of other entities with which Mr. Carl Icahn has a relationship, have minority ownership interests in, and pay fees as part of being a member of Insight Portfolio Group. Fees incurred as a member of the Insight Portfolio Group were less than $0.1 million for the three months ended June 30, 2017 and 2016 and were $0.1 million for the six months ended June 30, 2017 and 2016 . These charges are included in selling, general and administrative costs on the condensed consolidated statements of operations.
Financial information for transactions with joint ventures
Loans to joint ventures
The Company’s Axis joint venture entered into a credit agreement in 2007. During 2009, the Company and the other significant partner acquired the loans from the lending party thereto, with each party acquiring a 50.0% interest in the loans. The balance outstanding on these loans, due to ARI Component, was $14.8 million and $17.7 million as of June 30, 2017 and December 31, 2016, respectively. See Note 6, Investments in and Loans to Joint Ventures, to our condensed consolidated financial statements, for further information regarding this transaction and the terms of the underlying loans.
Railcar component purchases from joint ventures
ARI purchased railcar components from its joint ventures amounting to $4.4 million and $10.6 million for the three and six months ended June 30, 2017 , respectively, compared to $9.7 million and $14.4 million for the same periods in 2016 .
Note 15 — Operating Segments and Sales and Credit Concentrations
ARI operates in three reportable segments: manufacturing, railcar leasing and railcar services. These reportable segments are organized based upon a combination of the products and services offered and performance is evaluated based on revenues and segment earnings (loss) from operations. Intersegment revenues are accounted for as if sales were to third parties.
Manufacturing
Manufacturing consists of railcar manufacturing, and railcar and industrial component manufacturing. Revenues for railcars manufactured for the Company’s railcar leasing segment are not recognized in consolidated revenues as railcar sales, but rather lease revenues are recognized over the term of the lease. Earnings from operations for manufacturing include an allocation of selling, general and administrative costs, as well as profit for railcars manufactured for the Company’s railcar leasing segment based on revenue determined as described above. Intersegment revenues and profits are determined based on an estimated fair market value of the railcars manufactured for the Company’s railcar leasing segment, as if such railcars had been sold to a third party.
Railcar leasing
Railcar leasing consists of railcars manufactured by the Company and leased to third parties under operating leases. Earnings from operations for railcar leasing include an allocation of selling, general and administrative costs and also reflect origination fees paid to ARL associated with originating the lease to the Company’s leasing customers prior to the ARL Sale. The origination fees represent a percentage of the revenues from the lease over its initial term and are paid up front.
Railcar services
Railcar services consists of railcar repair services provided through the Company's various repair facilities, including mini repair shops and mobile repair units, offering a range of services from full to light repair. Earnings from operations for railcar services include an allocation of selling, general and administrative costs as well as certain operating costs related to this segment's use of a portion of the Company's tank railcar manufacturing facility to perform railcar repair work.

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


22


 
Three Months Ended June 30, 2017
 
Revenues
 
 
 
External
 
Intersegment
 
Total
 
Earnings (Loss) from Operations
 
(in thousands)
Manufacturing
$
55,087

 
$
55,442

 
$
110,529

 
$
7,299

Railcar leasing
33,717

 

 
33,717

 
18,690

Railcar services
20,216

 
1,883

 
22,099

 
3,329

Corporate

 

 

 
(4,953
)
Eliminations

 
(57,325
)
 
(57,325
)
 
(2,215
)
Total Consolidated
$
109,020

 
$

 
$
109,020

 
$
22,150

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

 
$
9,266

 
$
106,814

 
$
15,538

Railcar leasing
33,209

 

 
33,209

 
20,237

Railcar services
19,727

 
609

 
20,336

 
3,059

Corporate

 

 

 
(4,441
)
Eliminations

 
(9,875
)
 
(9,875
)
 
1,581

Total Consolidated
$
150,484

 
$

 
$
150,484

 
$
35,974

 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
Revenues
 
 
 
External
 
Intersegment
 
Total
 
Earnings (Loss) from Operations
 
(in thousands)
Manufacturing
$
115,813

 
$
115,546

 
$
231,359

 
$
16,450

Railcar leasing
67,552

 

 
67,552

 
37,500

Railcar services
40,336

 
2,215

 
42,551

 
5,045

Corporate

 

 

 
(9,225
)
Eliminations

 
(117,761
)
 
(117,761
)
 
(5,705
)
Total Consolidated
$
223,701

 
$

 
$
223,701

 
$
44,065

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

 
$
32,897

 
$
254,237

 
$
38,224

Railcar leasing
65,977

 

 
65,977

 
39,912

Railcar services
39,347

 
1,568

 
40,915

 
6,567

Corporate

 

 

 
(8,949
)
Eliminations

 
(34,465
)
 
(34,465
)
 
917

Total Consolidated
$
326,664

 
$

 
$
326,664

 
$
76,671

 

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Total Assets
June 30,
2017
 
December 31,
2016
 
(in thousands)
Manufacturing
$
234,989

 
$
256,622

Railcar leasing
1,354,037

 
1,254,824

Railcar services
61,573

 
57,061

Corporate/Eliminations
(190,241
)
 
(112,257
)
Total Consolidated
$
1,460,358

 
$
1,456,250

Sales to Related Parties
As discussed in Note 14, Related Party Transactions, ARI has numerous arrangements with related parties. Below is a summary of revenue from affiliates for each operating segment reflected as a percentage of total consolidated revenue.
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2017
 
2016
 
2017
 
2016
Manufacturing
 
0.1
%
 
0.1
%
 
0.1
%
 
0.2
%
Railcar leasing
 
0.2
%
 
%
 
0.2
%
 
%
Railcar services
 
4.0
%
 
4.8
%
 
4.7
%
 
4.7
%
Sales and Credit Concentration
Manufacturing revenues from customers that accounted for more than 10% of total consolidated revenues are outlined in the table below. The railcar leasing and railcar services segments had no customers that accounted for more than 10% of the total consolidated revenues for the three and six months ended June 30, 2017 and 2016 .
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Manufacturing revenues from significant customers
34.3
%
 
46.1
%
 
32.5
%
 
33.9
%

Manufacturing accounts receivable from customers that accounted for more than 10% of consolidated receivables (including accounts receivable, net and accounts receivable, due from related parties) are outlined in the table below. The railcar leasing and railcar services segments had no customers that accounted for more than 10% of the consolidated receivables balance as of June 30, 2017 and December 31, 2016 .
 
June 30,
2017
 
December 31,
2016
Manufacturing receivables from significant customers
30.3
%
 
53.4
%
Note 16 — Subsequent Events
On July 27, 2017 , the board of directors of the Company declared a cash dividend of $0.40 per share of common stock of the Company to shareholders of record as of September 8, 2017 that will be paid on September 22, 2017 .

In July 2017, the Company sold short term investments with a value of $1.8 million at June 30, 2017 for a realized gain of $0.4 million .

See Note 14, Related Party Transactions, Agreements with other related parties, Consulting agreements, for a discussion of the RemainCo Consulting Agreements that were amended and restated on July 31, 2017 and effective as of June 1, 2017.

24


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act), including statements regarding our plans, objectives, expectations and intentions. Such statements include, without limitation, statements regarding various estimates we have made in preparing our financial statements, our plans, and the industry's ability, to address the Federal Railroad Administration (FRA) directive released September 30, 2016 and subsequently revised and superseded on November 18, 2016 (FRA Directive), our plans to continue to transition the management of our lease fleet from ARL to in-house and terminate our contractual agreements with ARL, expected future trends relating to our industry, products and markets, the potential impact of regulatory developments, including developments related to the FRA Directive, anticipated customer demand for our products and services, trends relating to our shipments, leasing business, railcar services, revenues, profit margin, capacity, financial condition and results of operations; trends related to railcar shipments for direct sale versus lease, our backlog and any implication that our backlog may be indicative of our future revenues, our strategic objectives and long-term strategies, our results of operations, financial condition and the sufficiency of our capital resources, 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, 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, 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. Investors should not place undue reliance on forward-looking statements, which speak only as of the date they are made and are not guarantees of future performance. We undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
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;
risks relating to our compliance with the FRA Directive, any developments related to the FRA Directive and any costs or loss of revenue related thereto;
the risk of being unable to market or remarket railcars for sale or lease at favorable prices or on favorable terms or at all;
risks relating to the ongoing transition of the management of our railcar leasing business from ARL to in-house management following completion of the ARL Sale;
fluctuations in commodity prices, including oil and gas;
the impact, costs and expenses of any warranty claims to which we may be subject now or in the future;
the highly competitive nature of the manufacturing, railcar leasing and railcar services industries;
the variable purchase patterns of our railcar customers and the timing of completion, customer acceptance and shipment of orders, as well as the mix of railcars for lease versus direct sale;
risks relating to our compliance with, and the overall railcar industry's implementation of, United States and Canadian regulations related to the transportation of flammable liquids by rail;
our ability to manage overhead and variations in production rates;
our ability to recruit, retain and train 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 risks associated with ongoing compliance with environmental, health, safety, and regulatory laws and regulations, which may be subject to change;
the impact, costs and expenses of any litigation to which we may be subject now or in the future;

25

Table of Contents

the risks associated with our current joint ventures and anticipated capital needs of, and production capabilities at our joint ventures;
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 conversion of our railcar backlog into revenues equal to our reported estimated backlog value;
the risks and impact associated with any potential joint ventures, acquisitions, strategic opportunities, dispositions or new business endeavors;
the integration with other systems and ongoing management of our new enterprise resource planning system; and
the risks related to our and our subsidiaries' indebtedness and compliance with covenants contained in our and our subsidiaries' financing arrangements.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. Our actual results could be different from the results described in or anticipated by our forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections and may be materially better or worse than anticipated. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Forward-looking statements represent our estimates and assumptions only as of the date of this report. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this report, in order to reflect changes in circumstances or expectations or the occurrence of unanticipated events except to the extent required by applicable securities laws. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed above and under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 (Annual Report), as well as the risks and uncertainties discussed elsewhere in this report and the Annual Report. We qualify all of our forward-looking statements by these cautionary statements. We caution you that these risks are not exhaustive. We operate in a continually changing business environment and new risks emerge from time to time.
EXECUTIVE SUMMARY
We are a prominent North American designer and manufacturer of hopper and tank railcars, which are currently the two largest markets within the railcar industry. We provide our railcar customers with integrated solutions through a comprehensive set of high quality products and related services offered by our three reportable segments: manufacturing, railcar leasing and railcar services. Manufacturing consists of railcar manufacturing and railcar and industrial component manufacturing. We use certain of these components in our own railcar manufacturing and/or sell certain of these products to third parties. Railcar leasing consists of railcars manufactured by us and leased to third parties under operating leases. Railcar services consist of railcar repair, engineering and field services, for our fleet, and for other railcar owners. Our business model combines manufacturing, railcar leasing and railcar services and is designed to support the industry with complete railcar solutions over the full life cycle of the railcar.
During the second quarter of 2017, we have continued to experience a steady level of inquiries for covered hopper railcars focusing on a variety of railcar types while tank railcar inquiries have been soft and focused on specialty tank railcars. Our backlog also continued to decline during the quarter as shipments exceeded orders; however, we received orders for 798 railcars during the second quarter of 2017, which brings our total orders for the first half of 2017 to 1,672. This total compares to orders for 1,568 railcars for the full year of 2016. Railcar loadings as reported by the AAR have remained at stable levels in recent months since a rise in early 2017, but are not at high enough levels to increase demand for new railcars or bring more railcars out of storage. We cannot assure you that hopper or tank railcar demand will maintain its current pace, that demand for any railcar types or railcar services will improve, or that our railcar backlog, orders, shipments, pricing, lease utilization and/or lease rates will track industry-wide trends.
Our consolidated operating margin was 19.7% for the six months ended June 30, 2017 and was supported by our continued commitment to the growth of our railcar leasing segment with a lease fleet of 12,414 railcars at June 30, 2017. Total railcar shipments were 1,076 during the second quarter of 2017, an increase of 5.8% compared to the same period in 2016. These shipments included 545 railcars built for our lease fleet, representing 50.7% of the total railcar shipments compared to 8.4% for the same period in 2016 . This quarterly rate is high relative to our historical average and thus may not be indicative of future quarterly rates, but it is consistent with our strategy to continue to invest in and grow our lease fleet. Shipments and orders for railcars on long-term leases not only help us to maintain a steady level of production during the manufacturing period, but also provide a steady stream of future cash flows. Because revenues and earnings related to leased railcars are recognized over the

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life of the lease, our quarterly results may vary depending on the mix of lease versus direct sale railcars that we ship during a given period.
Since 2011, we have strategically grown our lease fleet to include a mix of tank and hopper railcars for varying types of service, and this strategy is further emphasized as we have begun to manage our railcar leasing business in-house and increased our existing sales force during the quarter. Although the industry is experiencing a period of softer lease rates as a result of the current competitive nature of the overall market, we believe the expiration dates of our operating leases being spread over the next several years will help mitigate the risks of renewing leases at lower rates or any inability we may experience in renewing or re-leasing these railcars. As of June 30, 2017, our backlog was 2,878 railcars, of which 715 we currently expect to build for our lease fleet. With our current liquidity of $302.8 million, including $200.0 million available under our revolving credit facility, and additional unencumbered railcars available to borrow against, we have the ability to further grow our lease fleet as demand dictates.
Our railcar services business continues to support the industry, offering repair services over the railcar life cycle. Our existing repair network stands ready to respond to additional demand opportunities that may arise, including inspecting railcars that we and our customers own that are subject to inspection as part of the FRA Directive. Our tank railcar manufacturing facility provides us additional flexibility not only to produce railcars, but also to perform traditional repair and retrofit services in a production line set-up.
The direction of our knowledgeable management team, which was further enhanced with the addition of our lease fleet management team and additions to our sales force, along with the flexibility of our workforce provide us with the ability to effectively adjust our production rates in an effort to align them with industry trends. Even at lower production levels, we continue to efficiently produce high quality hopper and tank railcars.
We believe our integrated business model of providing complete life cycle solutions for the railcar industry provides a solid foundation of knowledge that we will continue to leverage as we expand our internally-managed railcar leasing business. We believe our approach will help us continue to be competitive in the North American railcar leasing market as we continue to utilize synergies from our manufacturing and railcar services operations. Our structure as both a manufacturer and lessor provides us with numerous competitive advantages, including increased flexibility and lower costs, relative to other lessors in the industry.
FRA Directive
As previously disclosed, on September 30, 2016 the FRA issued Railworthiness Directive (RWD) No. 2016-01 (the Original Directive), as discussed in Note 11, Commitments and Contingencies, to the consolidated financial statements located in Part I of this report. The Original Directive addressed, among other things, certain welding practices in one weld area in specified DOT 111 tank railcars manufactured between 2009 and 2015 by ARI and ACF Industries, LLC (ACF). ACF is an affiliate of Mr. Carl Icahn, our principal beneficial stockholder through IELP. We met and corresponded with the FRA following the issuance of the Original Directive to express our concerns with the Original Directive and its impact on ARI, as well as the industry as a whole.
On November 18, 2016 (the Issuance Date), the FRA issued RWD No. 2016-01 [Revised] (the Revised Directive). The Revised Directive changed and superseded the Original Directive in several ways.
The Original Directive indicated that approximately 14,800 general purpose tank railcars could be affected. The Revised Directive requires owners to identify their subject tank railcars and then from that population identify the 15% of subject tank railcars currently in hazardous materials service with the highest mileage in each tank car owner’s fleet. Visual inspection of each of the subject tank railcars is required by the car operator prior to putting any railcar into service. Owners must ensure appropriate inspection, testing and repairs, if needed, within 12 months of the Issuance Date for the 15% of their subject tank railcars identified to be in hazardous materials service with the highest mileage. The FRA will monitor and analyze the results of the 15% sample and has reserved the right to impose additional test and inspection requirements for the remaining fleet of tank railcars subject to the Revised Directive.
During 2016, we recorded a loss contingency of $12.3 million related to the Revised Directive to cover its probable and estimable liabilities taking into account available information and our contractual obligations in our capacity as both a manufacturer and owner of railcars subject to the Revised Directive. During the three and six months ended June 30, 2017 , there were no material developments related to the Revised Directive. During the second quarter of 2017, certain tank railcars subject to the Revised Directive were inspected, tested, and, if necessary, repaired, all as mandated by the Revised Directive. As a result of these services and our revised assumptions, the contingency reserve was decreased to $10.1 million as of June 30, 2017 . This contingency amount is included in accrued expenses and other liabilities on the condensed consolidated balance

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sheets and will continue to be evaluated as our and our customers' compliance with the Revised Directive progresses and we evolve our understanding of the impact that the Revised Directive may have on its business, including results of operations and cash flows. Actual results could differ from this estimate.
It is reasonably possible that a loss exists in excess of the amount accrued by us. However, the amount of potential costs and expenses expected to be incurred for compliance with the Revised Directive in excess of the loss contingency of $10.1 million cannot be reasonably estimated at this time.
Although the Revised Directive addressed some of our concerns and clarified certain requirements of the Original Directive, we have identified significant issues with the Revised Directive. As a result, in a letter to the FRA dated November 28, 2016, we requested that the FRA immediately rescind or stay the Revised Directive without reinstating the Original Directive. In addition, we have sought judicial review of and relief from the Revised Directive. On December 13, 2016, we filed a petition for review in the United States Court of Appeals for the District of Columbia Circuit against the FRA. We asserted that (i) the Revised Directive was unlawful and inconsistent with administrative law, (ii) the Revised Directive is arbitrary, capricious and inconsistent with law, (iii) the FRA exceeded its authority when it issued the Revised Directive and (iv) the Revised Directive was an improper adjudication under applicable laws. The petition requests that the court review, remand and vacate, defer enforcement of, and/or stay pending review, the Revised Directive. Briefs have been filed related to this ongoing matter and a hearing date has been set by the court for September 22, 2017. We cannot assure you that this petition will be successful in reversing or modifying the Revised Directive to benefit owners with railcars subject to the Revised Directive or, if it is successful, whether it will be successful in a reasonable amount of time. Regardless of the petition, significant uncertainty exists in connection with the Revised Directive and its implementation. Our attempts to comply with the Revised Directive may fail if we are unable to get clarification from the FRA on a variety of questions and we do not meet the expectations of the FRA in complying with the Revised Directive.
RESULTS OF OPERATIONS
Three and six months ended June 30, 2017 compared to three and six months ended June 30, 2016
Consolidated Results
 
 
Three Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
 
June 30,
 
$
 
%
 
June 30,
 
$
 
%
 
2017
 
2016
 
Change
 
Change
 
2017
 
2016
 
Change
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
55,087

 
$
97,548

 
$
(42,461
)
 
(43.5
)
 
$
115,813

 
$
221,340

 
$
(105,527
)
 
(47.7
)
Railcar leasing
33,717

 
33,209

 
508

 
1.5

 
67,552

 
65,977

 
1,575

 
2.4

Railcar services
20,216

 
19,727

 
489

 
2.5

 
40,336

 
39,347

 
989

 
2.5

Total revenues
$
109,020

 
$
150,484

 
$
(41,464
)
 
(27.6
)
 
$
223,701

 
$
326,664

 
$
(102,963
)
 
(31.5
)
Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
(51,121
)
 
$
(81,437
)
 
$
30,316

 
(37.2
)
 
$
(105,680
)
 
$
(183,718
)
 
$
78,038

 
(42.5
)
Other operating income
1,033

 

 
1,033

 
*

 
1,064

 

 
1,064

 
*

Railcar leasing
(11,617
)
 
(10,356
)
 
(1,261
)
 
12.2

 
(23,676
)
 
(20,531
)
 
(3,145
)
 
15.3

Railcar services
(16,146
)
 
(15,420
)
 
(726
)
 
4.7

 
(33,536
)
 
(30,657
)
 
(2,879
)
 
9.4

Total cost of revenues
$
(77,851
)
 
$
(107,213
)
 
$
29,362

 
(27.4
)
 
$
(161,828
)
 
$
(234,906
)
 
$
73,078

 
(31.1
)
Selling, general and administrative
(9,019
)
 
(7,297
)
 
(1,722
)
 
23.6

 
(17,821
)
 
(15,254
)
 
(2,567
)
 
16.8

Net gains on disposition of leased railcars

 

 

 
*

 
13

 
167

 
(154
)
 
*

Earnings from operations
$
22,150

 
$
35,974

 
$
(13,824
)
 
(38.4
)
 
$
44,065

 
$
76,671

 
$
(32,606
)
 
(42.5
)

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* - Not Meaningful
Revenues
Our total consolidated revenues for the three and six months ended June 30, 2017 decreased by 27.6% and 31.5% , respectively, compared to the same periods in 2016 . These decreases were primarily due to decreased revenues in our manufacturing segment, partially offset by slight increases in revenues in our railcar leasing and railcar services segments.
During the three months ended June 30, 2017 , we shipped 531 direct sale railcars, which excludes 545 railcars ( 50.7% of total shipments) built for our lease fleet, compared to 932 direct sale railcars for the same period of 2016 , which excludes 85 railcars ( 8.4% of total shipments) built for our lease fleet.
During the six months ended June 30, 2017 , we shipped 1,080 direct sale railcars, which excludes 1,147 railcars ( 51.5% of total shipments) built for our lease fleet, compared to 2,062 direct sale railcars for the same period of 2016 , which excludes 285 railcars ( 12.1% of total shipments) built for our lease fleet.
Manufacturing revenues decreased by 43.5% during the three month period ended June 30, 2017 compared to the same period of 2016 . This change included a 32.8% decrease driven by multiple factors, including fewer hopper and tank railcar shipments for direct sale and more competitive pricing for both railcar types. In total, we shipped 401 fewer direct sale railcars during the three month period ended June 30, 2017 compared to the same period in 2016 . Also contributing to the overall decrease was a 10.7% decrease due to lower revenues from material cost changes that we generally pass through to customers.
Manufacturing revenues decreased by 47.7% during the six month period ended June 30, 2017 compared to the same period of 2016 . This change included a 45.6% decrease driven by multiple factors, including fewer hopper and tank railcar shipments for direct sale, more competitive pricing for both railcar types, and a higher mix of hopper railcars sold, which generally sell at lower prices than tank railcars due to less material and labor content. In total, we shipped 982 fewer direct sale railcars during the six month period ended June 30, 2017 compared to the same period in 2016 . Also contributing to the overall decrease was a 2.1% decrease due to lower revenues from material cost changes that we generally pass through to customers, as discussed below.
Railcar leasing revenues increased by 1.5% and 2.4% during the three and six months ended June 30, 2017 , respectively, compared to the same periods in 2016 due primarily to an increase in the number of railcars in our lease fleet, partially offset by a decline in weighted average lease rates. The lease fleet grew to 12,414 railcars at June 30, 2017 from 10,641 railcars at June 30, 2016 .

Railcar services revenues increased by 2.5% during each of the three and six months ended June 30, 2017 compared to the same periods in 2016 , primarily due to increased demand and additional capacity from our mobile repair operations, partially offset by decreased demand for tank railcar qualifications and tank railcar exterior paint and interior linings at certain shops. Our tank railcar manufacturing facility provides us the flexibility not only to produce railcars, but also to perform repair and retrofit services in a production line set-up offering another option for us to meet our customers' repair needs. This additional flexibility allowed us to complete certain repair projects at our tank railcar manufacturing facility during the three and six months ended June 30, 2017 that were performed to a lesser extent during the comparable periods of 2016.
Cost of revenues
Our total consolidated cost of revenues decreased by 27.4% and 31.1% for the three and six months ended June 30, 2017 , respectively, compared to the same periods in 2016 due to decreased cost of revenues in our manufacturing segment, which was partially offset by an increase in our railcar leasing and railcar services segments.
Cost of revenues (excluding the other operating income attributable to the manufacturing segment) decreased for our manufacturing segment by 37.2% and 42.5% for the three and six months ended June 30, 2017 , respectively, compared to the same periods in 2016 , including 24.8% and 40.1% decreases, respectively, driven primarily by lower overall railcar shipments for direct sale. Also contributing to this overall decrease were 12.8% and 2.6% decreases, respectively, driven by lower material costs for key components and steel. These lower material costs are also reflected as a decrease in selling prices as our practice is to generally pass changes in these costs through to the customer.
Cost of revenues for our railcar leasing segment increased by 12.2% and 15.3% for the three and six months ended June 30, 2017 , respectively, compared to the same periods in 2016 primarily as a result of an increase in the number of railcars in our lease fleet, as discussed above, and increased maintenance costs associated with both our growing lease fleet and certain railcars reassigned to other lessees.

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Cost of revenues for our railcar services segment increased by 4.7% and 9.4% for the three and six months ended June 30, 2017 , respectively, compared to the same periods in 2016 , primarily due to an increase in demand for our mobile repair services and repair projects performed at our tank railcar manufacturing facility and an unfavorable mix of repair work causing inefficiencies at certain repair facilities during 2017, each as discussed above.
Selling, general and administrative expenses
Our total consolidated selling, general and administrative expenses were $9.0 million and $17.8 million for the three and six months ended June 30, 2017 , respectively, compared to $7.3 million and $15.3 million for the same periods in 2016 . These increases were primarily due to a prior year credit to bad debt expense, higher legal expenses and increased compensation costs primarily related to the increased workforce in sales and fleet management due to the ongoing transition of managing our lease fleet in-house, all partially offset by decreased commissions due to the sale of fewer railcars for direct sale and decreased stock-based compensation costs due to fluctuations in the Company’s stock price.
Interest expense
Our total consolidated interest expense decreased by $0.2 million and $0.6 million for the three and six months ended June 30, 2017 , respectively, compared to the same period in 2016 . These decreases were primarily driven by a lower average debt balances during these periods of 2017 compared to the same periods in 2016 .
Earnings (Loss) from Joint Ventures
The breakdown of our earnings (loss) from joint ventures during the three and six months ended June 30, 2017 and 2016 was as follows:
 
 
Three Months Ended 
 June 30,
 
 
 
Six Months Ended 
 June 30,
 
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Ohio Castings
$
(11
)
 
$
34

 
$
(45
)
 
$
(823
)
 
$
(165
)
 
$
(658
)
Axis
807

 
1,424

 
(617
)
 
2,169

 
3,109

 
(940
)
Total Earnings from Joint Ventures
$
796

 
$
1,458

 
$
(662
)
 
$
1,346

 
$
2,944

 
$
(1,598
)
Our joint venture earnings were $0.8 million and $1.3 million for the three and six months ended June 30, 2017 , respectively, compared to earnings of $1.5 million and $2.9 million for the same periods in 2016 , respectively. Our Ohio Castings joint venture experienced certain ramp down costs in connection with the idling of the facility in early 2017 and continues to run at a loss due to being idled. Earnings from our Axis joint venture declined in the first half of 2017 compared to the same period of 2016 due to lower production levels in line with expected industry demand. Even with its lower production levels, earnings remain strong for Axis, reflecting strong efficiencies.
Income Tax Expense
Our income tax expense was $8.8 million , or 44.7% of our earnings before income taxes, and $15.6 million , or 42.1% of our earnings before income taxes and for the three and six months ended June 30, 2017 , respectively, compared to $12.3 million or 38.2% of our earnings before income taxes, and $26.3 million , or 38.1% of our earnings before income taxes for the same periods in 2016 . Our annual effective tax rate has increased in 2017 compared to 2016 as we do not anticipate any benefits from the domestic production activities deduction. Furthermore, based upon our accounting policy for the realization of deferred tax assets, our effective tax rate was impacted by the recognition of a valuation allowance against our capital loss carryforward. This significant discrete item impacted our tax rate by $1.1 million or a 5.1% and 2.7% increase to the tax rate for the three and six months ended June 30, 2017, respectively.
Segment Results
The table below summarizes our historical revenues, earnings from operations and operating margin for the periods shown. Intersegment revenues are accounted for as if sales were to third parties. Operating margin is defined as total segment earnings from operations as a percentage of total segment revenues. Our historical results are not necessarily indicative of operating results that may be expected in the future.  

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Three Months Ended June 30,
 
 
 
2017
 
2016
 
 
 
(in thousands)
 
 
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
55,087

 
$
55,442

 
$
110,529

 
$
97,548

 
$
9,266

 
$
106,814

 
$
3,715

Railcar leasing
33,717

 

 
33,717

 
33,209

 

 
33,209

 
508

Railcar services
20,216

 
1,883

 
22,099

 
19,727

 
609

 
20,336

 
1,763

Eliminations

 
(57,325
)
 
(57,325
)
 

 
(9,875
)
 
(9,875
)
 
(47,450
)
Total Consolidated
$
109,020

 
$

 
$
109,020

 
$
150,484

 
$

 
$
150,484

 
$
(41,464
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
2017
 
2016
 
 
 
(in thousands)
 
 
 
External
 
Intersegment
 
Total
 
External
 
Intersegment
 
Total
 
Change
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
Manufacturing
$
115,813

 
$
115,546

 
$
231,359

 
$
221,340

 
$
32,897

 
$
254,237

 
$
(22,878
)
Railcar leasing
67,552

 

 
67,552

 
65,977

 

 
65,977

 
1,575

Railcar services
40,336

 
2,215

 
42,551

 
39,347

 
1,568

 
40,915

 
1,636

Eliminations

 
(117,761
)
 
(117,761
)
 

 
(34,465
)
 
(34,465
)
 
(83,296
)
Total Consolidated
$
223,701

 
$

 
$
223,701

 
$
326,664

 
$

 
$
326,664

 
$
(102,963
)
 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
2017
 
2016
 
Change
 
2017
 
2016
 
Change
 
(in thousands)
 
 
 
(in thousands)
 
 
Earnings (Loss) from Operations
 
 
 
 
 
 
 
 
 
 
 
Manufacturing