American Railcar Industries, Inc.
American Railcar Industries, Inc. (Form: 10-Q, Received: 05/03/2011 17:25:44)
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
Or
     
o   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 þ No o
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 o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non–accelerated filer o   Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares of the registrant’s common stock, without par value, outstanding on April 29, 2011 was 21,352,297 shares.
 
 

 

 


 

AMERICAN RAILCAR INDUSTRIES, INC.
INDEX TO FORM 10-Q
         
Item Number   Page Number  
 
       
       
 
       
       
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    25  
 
       
    31  
 
       
    31  
 
       
       
 
       
    31  
 
       
    31  
 
       
    31  
 
       
    32  
 
       
    33  
 
       
  Exhibit 10.64
  Exhibit 10.65
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32

 

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CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
                 
    As of  
    March 31,     December 31,  
    2011     2010  
    (unaudited)        
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 314,225     $ 318,758  
Accounts receivable, net
    19,603       21,002  
Accounts receivable, due from related parties
    2,539       4,981  
Income taxes receivable
    14,806       14,939  
Inventories, net
    59,069       50,033  
Deferred tax assets
    2,599       3,029  
Prepaid expenses and other current assets
    3,751       2,654  
 
           
Total current assets
    416,592       415,396  
 
               
Property, plant and equipment, net
    176,379       181,255  
Deferred debt issuance costs
    1,797       1,951  
Interest receivable, due from related parties
    228       187  
Goodwill
    7,169       7,169  
Investments in and loans to joint ventures
    46,545       48,169  
Other assets
    282       240  
 
           
Total assets
  $ 648,992     $ 654,367  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
  $ 32,560     $ 29,334  
Accounts payable, due to related parties
    883       275  
Accrued expenses and taxes
    6,063       5,095  
Accrued compensation
    14,554       11,054  
Accrued interest expense
    1,719       6,875  
 
           
Total current liabilities
    55,779       52,633  
 
               
Senior unsecured notes
    275,000       275,000  
Deferred tax liability
    4,287       7,938  
Pension and post-retirement liabilities
    6,370       6,707  
Other liabilities
    4,277       4,313  
 
           
Total liabilities
    345,713       346,591  
 
               
Commitments and contingencies
               
 
               
Stockholders’ equity:
               
 
               
Common stock, $.01 par value, 50,000,000 shares authorized, 21,352,297 shares issued and outstanding at March 31, 2011 and 21,316,296 shares issued and outstanding at December 31, 2010
    214       213  
Additional paid-in capital
    239,608       238,947  
Retained earnings
    61,880       67,209  
Accumulated other comprehensive income
    1,577       1,407  
 
           
Total stockholders’ equity
    303,279       307,776  
 
           
Total liabilities and stockholders’ equity
  $ 648,992     $ 654,367  
 
           
See Notes to the Condensed Consolidated Financial Statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
                 
    For the Three Months Ended  
    March 31,  
    2011     2010  
 
               
Revenues:
               
Manufacturing operations (including revenues from affiliates of $1,221 and $12,575 for the three months ended March 31, 2011 and 2010, respectively)
  $ 68,696     $ 35,635  
 
               
Railcar services (including revenues from affiliates of $5,537 and $2,841 for the three months ended March 31, 2011 and 2010, respectively)
    16,147       16,676  
 
           
Total revenues
    84,843       52,311  
 
               
Cost of revenues:
               
Manufacturing operations
    (66,581 )     (37,387 )
Railcar services
    (13,318 )     (13,968 )
 
           
Total cost of revenues
    (79,899 )     (51,355 )
Gross profit
    4,944       956  
 
               
Selling, administrative and other (including costs to a related party of $145 and $154 for the three months ended March 31, 2011 and 2010, respectively)
    (6,882 )     (6,087 )
 
           
Loss from operations
    (1,938 )     (5,131 )
 
               
Interest income (including income from related parties of $679 and $607 for the three months ended March 31, 2011 and 2010, respectively)
    916       730  
Interest expense
    (5,335 )     (5,321 )
 
               
Other income (including income from a related party of $4 for both the three months ended March 31, 2011 and 2010)
    4       85  
Loss from joint ventures
    (2,242 )     (1,782 )
 
           
Loss before income taxes
    (8,595 )     (11,419 )
Income tax benefit
    3,266       4,396  
 
           
Net loss
  $ (5,329 )   $ (7,023 )
 
           
 
               
Net loss per common share — basic and diluted
  $ (0.25 )   $ (0.33 )
Weighted average common shares outstanding — basic and diluted
    21,349       21,302  
 
               
Dividends declared per common share
  $     $  
See Notes to the Condensed Consolidated Financial Statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
                 
    For the Three Months Ended  
    March 31,  
    2011     2010  
 
               
Operating activities:
               
Net loss
  $ (5,329 )   $ (7,023 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation
    5,766       5,915  
Amortization of deferred costs
    175       175  
Loss on disposal of property, plant and equipment
    63        
Stock based compensation
    2,148       700  
Change in interest receivable, due from related parties
    (41 )     (608 )
Change in investments in joint ventures as a result of loss
    2,242       1,782  
Realized gain on short-term investments — available-for-sale securities
          (81 )
Deferred income taxes benefit
    (3,224 )     (4,423 )
Recovery for doubtful accounts receivable
    (46 )     (26 )
Changes in operating assets and liabilities:
               
Accounts receivable, net
    1,455       (1,442 )
Accounts receivable, due from related parties
    2,446       (2,746 )
Income taxes receivable
    133       304  
Inventories, net
    (9,014 )     (1,617 )
Prepaid expenses
    (1,095 )     (54 )
Accounts payable
    3,221       1,259  
Accounts payable, due to related parties
    609       (119 )
Accrued expenses and taxes
    (2,877 )     (4,960 )
Other
    (559 )     (744 )
 
           
Net cash used in operating activities
    (3,927 )     (13,708 )
Investing activities:
               
Purchases of property, plant and equipment
    (729 )     (1,491 )
Sale of short-term investments — available-for-sale securities
          1,832  
Investments in and loans to joint ventures
    (639 )     (10,205 )
 
           
Net cash used in investing activities
    (1,368 )     (9,864 )
Financing activities:
               
Proceeds from stock option exercises
    756        
 
           
Net cash provided by financing activities
    756        
 
           
Effect of exchange rate changes on cash and cash equivalents
    6       5  
 
           
Decrease in cash and cash equivalents
    (4,533 )     (23,567 )
Cash and cash equivalents at beginning of period
    318,758       347,290  
 
           
Cash and cash equivalents at end of period
  $ 314,225     $ 323,723  
 
           
See Notes to the Condensed Consolidated Financial Statements.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 — Description of the Business
The condensed consolidated financial statements included herein have been prepared by American Railcar Industries, Inc. (a North Dakota corporation) and subsidiaries (collectively the Company or ARI), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosure 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 condensed consolidated balance sheet as of December 31, 2010 has been derived from the audited consolidated balance sheets 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, 2010. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods fairly stated. The results of operations of any interim period are not necessarily indicative of the results that may be expected for a fiscal year.
ARI manufactures railcars, which are offered for sale or lease, custom designed railcar parts and other industrial products, primarily aluminum and special alloy steel castings. These products are sold to various types of companies including leasing companies, railroads, industrial companies and other non-rail companies. ARI provides railcar repair and maintenance services for railcar fleets. In addition, ARI provides fleet management and maintenance services for railcars owned by certain customers. Such services include inspecting and supervising the maintenance and repair of such railcars.
The condensed consolidated financial statements of the Company include the accounts of ARI and its wholly-owned subsidiaries; Castings, LLC (Castings), ARI Component Venture, LLC (ARI Component), American Railcar Mauritius I (ARM I), American Railcar Mauritius II (ARM II) and ARI Longtrain, Inc. (Longtrain). From time to time, the Company makes investments through Longtrain. For further information on the Company’s other wholly-owned subsidiaries, refer to Note 8. All intercompany transactions and balances have been eliminated.
The Company’s operations are located in the United States and Canada. The Company operates a railcar repair facility in Sarnia, Ontario Canada. Canadian revenues were 1.9% and 2.5% of total consolidated revenues for the three months ended March 31, 2011 and 2010, respectively. Canadian assets were 1.9% and 1.7% of total consolidated assets as of March 31, 2011 and December 31, 2010, respectively. In addition, the Company’s subsidiaries ARM I and ARM II are located in Mauritius. Assets held by ARM I and ARM II were 1.4% and 1.5% of total consolidated assets as of March 31, 2011 and December 31, 2010, respectively.
Note 2 — Summary of Accounting Policies
Reclassifications
Certain reclassifications of prior year presentations that are of a normal recurring nature have been made to conform to the 2011 presentation.
Note 3 — Short-term Investments — Available-for-Sale Securities
During January 2008, Longtrain purchased approximately 1.5 million shares of common stock of The Greenbrier Companies, Inc. (GBX) in the open market for $27.9 million. Subsequently, Longtrain sold a majority of the GBX shares it owned. This investment was classified as a short-term investment available-for-sale security as the Company did not intend on holding the investment long-term.
During the three months ended March 31, 2010, approximately 0.2 million shares of GBX common stock were sold for proceeds of $1.8 million and a realized gain of $0.1 million. The cost basis of the shares sold was determined through specific identification. The remaining shares were sold during 2010.

 

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Note 4 — Fair Value Measurements
The fair value hierarchal disclosure framework prioritizes and ranks the level of market price observability used in measuring investments and non-recurring nonfinancial assets and nonfinancial liabilities at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment or nonfinancial assets and liabilities. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Financial assets and liabilities are measured and reported at fair value are classified and disclosed in one of the following categories:
    Level 1 — Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level 1 include listed equities and listed derivatives. The Company does not adjust the quoted price for these investments, even in situations where they hold a large position and a sale could reasonably impact the quoted price.
    Level 2 — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Investments that are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities and certain over-the-counter derivatives.
    Level 3 — Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. ARI’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
The Company has no financial assets or liabilities that were accounted for at fair value as of March 31, 2011 and December 31, 2010.
Note 5 — Inventories
Inventories consist of the following:
                 
    March 31,     December 31,  
    2011     2010  
    (in thousands)  
Raw materials
  $ 30,303     $ 30,676  
Work-in-process
    15,649       14,270  
Finished products
    15,426       7,183  
 
           
Total inventories
    61,378       52,129  
Less reserves
    (2,309 )     (2,096 )
 
           
Total inventories, net
  $ 59,069     $ 50,033  
 
           

 

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Note 6 — Property, Plant and Equipment
The following table summarizes the components of property, plant and equipment.
                 
    March 31,     December 31,  
    2011     2010  
    (in thousands)  
Property, plant and equipment
               
Buildings
  $ 149,401     $ 149,021  
Machinery and equipment
    178,024       177,217  
 
           
 
    327,425       326,238  
Less accumulated depreciation
    (154,917 )     (149,304 )
 
           
Net property, plant and equipment
    172,508       176,934  
Land
    3,335       3,335  
Construction in process
    536       986  
 
           
Total property, plant and equipment
  $ 176,379     $ 181,255  
 
           
Depreciation expense
Depreciation expense for the three months ended March 31, 2011 and 2010 was $5.8 million and $5.9 million, respectively.
Capitalized interest
In conjunction with the interest costs incurred related to the Unsecured Senior Fixed Rate Notes offering described in Note 11, the Company has been recording capitalized interest on certain property, plant and equipment capital projects. ARI also capitalized interest related to the investment in Axis during its developmental stage. The amount of interest capitalized for both the three months ended March 31, 2011 and 2010 was less than $0.1 million.
Lease agreements
The Company leases railcars to third parties under multiple year agreements. One of the leases includes a provision that allows the lessee to purchase any portion of the leased railcars at any time during the lease term for a stated market price, which approximates fair value. These agreements have been classified as operating leases and the leased railcars have been included in machinery and equipment and are depreciated in accordance with the Company’s depreciation policy.
Note 7 — Goodwill
Goodwill is not amortized but it is tested for impairment at least annually by comparing the fair value of the reporting unit to its carrying value. The Company has $7.2 million of goodwill related to the acquisition of Custom Steel in 2006. The results of Custom Steel are included in the manufacturing operations segment.
The Company performs an annual goodwill impairment test as of March 1 of each year utilizing the market and income approaches and significant assumptions discussed below:
Market Approach
The market approach produces indications of value by applying multiples of enterprise value to revenue as well as enterprise value to earnings before depreciation, amortization, interest and taxes. The multiples indicate what investors are willing to pay for comparable publicly held companies. When adjusted for the risk level and growth potential of the subject company relative to the guideline companies, these multiples are a reasonable indication of the value an investor would attribute to the subject company.

 

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Income Approach
The income approach considers the subject company’s future sales and earnings growth potential as the primary source of future cash flow. ARI prepared a five year financial projection for the reporting unit and used a discounted net cash flow method to determine the fair value. Net cash flow consists of after-tax operating income, plus depreciation, less capital expenditures and working capital needs. The discounted cash flow method considers a five-year projection of net cash flow and adds to those cash flows a residual value at the end of the projection period.
Significant estimates and assumptions used in the evaluation were forecasted revenues and profits, the weighted average cost of capital and tax rates. Forecasted revenues of reporting unit were estimated based on historical trends of the ARI plants that the reporting unit supplies parts to, which are driven by the railcar market forecast. Forecasted margins were based on historical experience. The reporting unit does not have a selling, administrative or executive staff, therefore, an estimate of salaries and benefits for key employees was added to selling, administrative and other costs. The weighted average cost of capital was calculated using ARI’s estimated cost of equity and debt.
All of the above estimates and assumptions were determined by management to be reasonable based on the knowledge and information at the time of the evaluation. As such, this carries a risk of uncertainty. There could be significant fluctuations in the cost of raw materials, unionization of the Company’s workforce or other factors that might significantly affect the reporting unit’s cost structure and negatively impact the projection of financial performance. If the railcar industry forecasts or ARI’s market share were to change significantly, the fair value of the reporting unit would be materially adversely impacted. Other events that might occur that could have a negative effect would be a natural disaster that would render the facility unusable, a significant litigation settlement, a significant workers’ compensation claim or other event that would result in a production shut down or significant expense to the reporting unit.
The March 1, 2011 evaluation equally weighted the values derived from each approach to arrive at the fair value of the reporting unit. The resulting fair value exceeded the carrying value by over 60% resulting in no impairment.
Note 8 — Investments in and Loans to Joint Ventures
As of March 31, 2011, the Company was party to three joint ventures; Ohio Castings LLC (Ohio Castings), Axis LLC (Axis) and Amtek Railcar Industries Private Limited (Amtek Railcar). Through its wholly-owned subsidiary, Castings, the Company has a one-third ownership interest in Ohio Castings, a limited liability company formed to produce various steel railcar parts for use or sale by the ownership group. Through its wholly-owned subsidiary, ARI Component, the Company has a 41.9% ownership interest in Axis, a limited liability company formed to produce railcar axles, for use or sale by the ownership group. The Company has a wholly-owned subsidiary, ARM I that wholly-owns ARM II. Through ARM II, the Company has a 50.0% ownership interest in Amtek Railcar, a joint venture that was formed to produce railcars and railcar components in India for sale by the joint venture.
The Company accounted 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.
The carrying amount of investments in and loans to joint ventures are as follows:
                 
    March 31,     December 31,  
    2011     2010  
    (in thousands)  
Carrying amount of investments in and loans to joint ventures
               
Ohio Castings
  $ 5,030     $ 5,232  
Axis
    32,338       33,436  
Amtek Railcar
    9,177       9,501  
 
           
Total investments in and loans to joint ventures
  $ 46,545     $ 48,169  
 
           

 

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The maximum exposure to loss as a result of investments in and loans to joint ventures are as follows:
         
    March 31,  
    2011  
    (in thousands)  
Maximum exposure to loss by joint venture
       
Ohio Castings
       
Investment
  $ 4,536  
Loan guarantee 1
    91  
Note and accrued interest receivable 2
    535  
 
     
Total Ohio Castings exposure
    5,162  
Axis
       
Investment
     
Loans, accrued interest receivable and accrued unused line fee 2
    36,145  
 
     
Total Axis exposure
    36,145  
 
     
Amtek Railcar exposure
    9,177  
 
     
Total exposure to loss due to joint ventures
  $ 50,484  
 
     
     
1   The Company is subject to exposure for the full amount of the loan guaranteed but only the value of the guarantee is included in investments in and loans to joint ventures on the consolidated balance sheet.
 
2   Accrued interest receivable is included in interest receivable, due from related parties and accrued unused line fee is included in accounts receivable, due from related parties, not investments in and loans to joint ventures on the consolidated balance sheet.
Ohio Castings
In June 2009, Ohio Castings temporarily idled its manufacturing facility due to the decline in the railcar industry. Due to the facility remaining temporarily idle, as of August 31, 2010, Ohio Castings evaluated its analysis of its long-lived assets and concluded that no impairment exists. ARI updated its evaluation of its investment in Ohio Castings and determined that the decrease in value was temporary and there was no impairment as of September 30, 2010.
Ohio Castings first reported a loss in the first quarter of 2009 and has continued to report losses due to its temporary idled state. ARI obtained Ohio Castings’ long-lived asset impairment analysis and reviewed it for reasonableness. The assumptions used in the impairment analysis are consistent with the market data reported by an independent third party analyst and historical financial results. The decline in earnings capacity is consistent with industry forecasts, as reported by an independent third party analyst, and is considered temporary. The Company and Ohio Castings will continue to monitor for impairment. During April 2011, ARI and the other joint venture partners agreed to restart production at Ohio Castings and expect to begin shipping product in the third quarter of 2011.
Ohio Castings has notes payable to ARI and the other two partners, with a current balance of $0.5 million, each, that are due February 2012. Interest will continue to accrue but interest payments have been deferred until August 2011. Accrued interest for this note as of March 31, 2011 and December 31, 2010 was less than $0.1 million. Ohio Castings and the joint venture partners are discussing possible renegotiation of these terms.
The Company, along with the other members of Ohio Castings, has guaranteed a state loan issued to Ohio Castings by the state of Ohio, as further discussed in Note 13. The value of the guarantee was less than $0.1 million at both March 31, 2011 and December 31, 2010. The state loan is scheduled to be fully paid off in June 2011. It is anticipated that Ohio Castings will continue to make principal and interest payments through equity contributions made by ARI and the other partners. In 2010, ARI made capital contributions to Ohio Castings totaling $0.6 million to fund expenses including debt payments during the temporary plant idling. The other two partners made matching contributions. During 2010, Ohio Castings paid off the state bonds that were guaranteed by ARI and the other joint venture partners. In conjunction with Ohio Castings paying off the state bonds, ARI was released from its guarantee of the state bonds while the guarantee of the state loan remains.

 

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The Company accounts for its investment in Ohio Castings using the equity method. The Company has determined that, although the joint venture is a VIE, this 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 the Company nor Castings, has rights to the majority of returns, losses or votes, Ohio Castings’ operations were temporarily idled and the risk of loss to Castings and the Company is limited to the Company’s investment through Castings, the note and related accrued interest due to ARI and Ohio Castings’ subsidiary’s debt with the State of Ohio, which the Company has guaranteed.
See Note 17 for information regarding financial transactions among the Company, Ohio Castings and Castings.
Summary financial results for Ohio Castings, the investee company are as follows:
                 
    Three months ended  
    March 31,  
    2011     2010  
    (in thousands)  
Financial results
               
Sales
  $ 32     $  
 
           
Gross profit (loss)
          (261 )
 
           
Loss before interest
    (590 )     (507 )
 
           
Net loss
  $ (605 )   $ (538 )
 
           
Axis
In June 2007, ARI, through a wholly-owned subsidiary, entered into an agreement with another partner to form a joint venture, Axis, to manufacture and sell railcar axles. In February 2008, the two original partners sold equal equity interests in Axis to two new minority partners. During 2010, one of the minority partners sold its interest to the other initial partner. Although the other initial partner’s interest in Axis is greater than ARI’s as a result of the sale, the sale did not result in the other initial partner gaining a controlling interest in Axis.
Under the terms of the joint venture agreement, ARI and the other initial partner are required, and the other member is entitled, to contribute additional capital to the joint venture, on a pro rata basis, of any amounts approved by the joint venture’s executive committee, as and when called by the executive committee. Further, until 2016, the seventh anniversary of completion of the axle manufacturing facility, and subject to other terms, conditions and limitations of the joint venture agreement, ARI and the other initial partner are also required, in the event production at the facility has been curtailed, to contribute capital to the joint venture, on a pro rata basis, in order to maintain adequate working capital.
During 2010, the executive committee of Axis issued a capital call. The minority partner(s) elected not to participate in the capital call and ARI and the other initial partner equally contributed the necessary capital, which amounted to $0.5 million each for 2010. The capital contributions were utilized for working capital. The partners’ ownership percentages have been adjusted accordingly. As of March 31, 2011, ARI’s ownership interest was 41.9%.
Effective August 5, 2009, ARI Component and a wholly-owned subsidiary of the other initial partner acquired a loan to Axis (Axis Credit Agreement), with each party acquiring a 50.0% interest in the loan. Under the Axis Credit Agreement, the original lenders made financing available to Axis in an aggregate amount of up to $70.0 million, consisting of up to $60.0 million in term loans and up to $10.0 million in revolving loans. The purchase price paid by the Company for its 50.0% interest was approximately $29.5 million, which equaled the then outstanding principal amount of the portion of the loan acquired by the Company.
The Axis Credit Agreement was amended on March 31, 2011. Under the amendment, the commitment to make term loans expires on December 31, 2011. The first payment on the term loans will become due and payable on March 31, 2012. Thereafter payments are due each fiscal quarter in equal installments, with the last payment due on December 31, 2016.

 

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The commitment to make revolving loans under the Axis Credit Agreement will expire and the revolving loans will become due and payable on December 28, 2012. Axis may borrow revolving loans up to $10.0 million, subject to borrowing base availability.
Subject to certain limitations, at the election of Axis, the interest rate for the loans under the Axis Credit Agreement, as amended, is based on LIBOR or the prime rate. For LIBOR-based loans, the interest rate is equal to the greater of 7.75% or adjusted LIBOR plus 4.75%. For prime-based loans, the interest rate is equal to the greater of 7.75% or the prime rate plus 2.5%. Interest on LIBOR-based loans is due and payable, at the election of Axis, every one, two, three or six months, and interest on prime-based loans is due and payable monthly. In accordance with the terms of the agreement as amended, Axis has satisfied interest on the term loan by increasing the outstanding principal by the amount of interest that was otherwise due and payable in cash. Axis’ ability to satisfy the term loan interest by increasing the principal balance will cease on September 30, 2011. The first interest payment is due and payable October 31, 2011.
ARI currently intends to fund the cash needs of Axis through loans and capital contributions through at least March 31, 2012. The other initial joint venture partner has indicated its intent to also fund the cash needs of Axis through loans and capital contributions through at least March 31, 2012.
The balance outstanding on these loans, due to ARI Component, was $31.9 million in principal and $4.2 million of accrued interest as of March 31, 2011 and $31.9 million in principal and $3.6 million of accrued interest as of December 31, 2010. ARI Component is responsible for funding 50.0% of the loan commitments. ARI Component’s share of the remaining commitment on these loans, term and revolving, was $3.1 million as of March 31, 2011.
The Company accounts for its investment in Axis using the equity method. The Company has determined that, although the joint venture is a VIE, this 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 the Company and its wholly-owned subsidiary do not have the rights to the majority of votes or the rights to the majority of returns or losses, the executive committee and board of directors of the joint venture are comprised of one representative from each initial partner with equal voting rights and the risk of loss to the Company and subsidiary is limited to its investment in Axis and the loans, related accrued interest and related accrued unused line fees due to the Company under the Axis Credit Agreement. The Company also considered the factors that most significantly impact Axis’ economic performance and determined that ARI does not have the power to individually direct the majority of those activities
See Note 17 for information regarding financial transactions among the Company, ARI Component and Axis.
Summary financial results for Axis, the investee company, are as follows:
                 
    Three months ended  
    March 31,  
    2011     2010  
    (in thousands)  
Financial Results
               
Sales
  $ 7,935     $ 2,706  
 
           
Gross profit (loss)
    (2,510 )     (2,437 )
 
           
Operating loss
    (2,732 )     (2,620 )
 
           
Net loss
  $ (4,093 )   $ (3,836 )
 
           

 

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Axis has been operating for under two years and has operated at low levels due to weak demand for railcar axles. As a result, Axis has incurred losses since starting production in 2009. The new railcar axle market is directly related to the new railcar market and the weakness in the railcar market has caused axle volumes to remain low. The recent downturn is expected to improve consistent with industry forecasts, as reported by an independent third party analyst, and is considered temporary. As such, Axis has not performed a long-lived asset impairment analysis.
Axis’ volumes have steadily increased resulting in improved financial results. As of March 31, 2011, the investment in Axis was comprised entirely of ARI’s term loan, revolver, related accrued interest and related accrued unused line fees due from Axis. Based on the discussion above, this loan has been evaluated to currently be fully recoverable. The Company will continue to monitor Axis for impairment.
Amtek Railcar
In June 2008, the Company, through ARM I and ARM II, entered into an agreement with a partner in India to form a joint venture company to manufacture, sell and supply freight railcars and their components in India and other countries to be agreed upon at a facility to be constructed in India by the joint venture. In March 2010, the Company made a $9.8 million equity contribution to Amtek Railcar. ARI’s ownership in this joint venture is 50.0%. Amtek Railcar is considered a development stage enterprise as it has not completed construction of its manufacturing facility nor started production.
The Company accounts for its investment in Amtek Railcar using the equity method. The Company has determined that, although the joint venture is a VIE, this 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 Amtek Railcar that most significantly impact its economic performance. The significant factors in this determination were that Amtek Railcar is a development stage enterprise, the Company and its wholly-owned subsidiaries do not have the rights to the majority of returns, losses or votes and the risk of loss to the Company and subsidiaries is limited to its investment in Amtek Railcar.
Summary financial results for Amtek Railcar, the investee company, are as follows:
                 
    Three months ended  
    March 31,  
    2011     2010  
    (in thousands)  
Financial Results
               
Sales
  $     $  
 
           
Gross profit
           
 
           
Loss before interest
    (574 )     (97 )
 
           
Net loss
  $ (402 )   $ (116 )
 
           
USRC
In February 2010, ARI, through its wholly-owned subsidiary, ARI DMU LLC, formed USRC, a joint venture with two other partners that the Company expected would design, manufacture and sell diesel multiple units (DMUs) to public transit authorities and communities upon order. DMUs are self-propelled passenger railcars in both single- and bi-level configurations. During the fourth quarter of 2010, ARI dissolved USRC due to market conditions. The Company made equity contributions totaling $0.3 million throughout 2010 and those contributions were fully offset by losses.

 

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Note 9 — Warranties
The Company’s standard warranty is up to one year for parts and services and five years for new railcars. Factors affecting the Company’s warranty liability include the number of units sold, historical and anticipated rates of claims and historical and anticipated costs per claim. Fluctuations in the Company’s warranty provision and experience of warranty claims are the result of variations in these factors. The Company assesses the adequacy of its warranty liability based on changes in these factors.
The overall change in the Company’s warranty reserve is reflected on the condensed consolidated balance sheet in accrued expenses and taxes and is detailed as follows:
                 
    Three months ended  
    March 31,  
    2011     2010  
    (in thousands)  
Liability, beginning of period
  $ 1,151     $ 1,094  
Provision for warranties issued during the year, net of adjustments
    219       264  
Provision for warranties issued during the previous years, net of adjustments
    118       (51 )
Warranty claims
    (191 )     (246 )
 
           
Liability, end of period
  $ 1,297     $ 1,061  
 
           
Note 10 — Long-term Debt
In February 2007, the Company issued $275.0 million unsecured senior fixed rate notes that were subsequently exchanged for registered notes in March 2007 (Notes). The fair value of these Notes was approximately $277.2 million at March 31, 2011, based on the closing market price as of that date, which is a Level 1 input. For definition and discussion of a Level 1 input for fair value measurement, refer to Note 4.
The Notes bear a fixed interest rate that is set at 7.5% and are due in 2014. Interest on the Notes is payable semi-annually in arrears on March 1 and September 1. The terms of the Notes contain restrictive covenants that limit the Company’s ability to, among other things, incur additional debt, make certain restricted payments and enter into certain significant transactions with stockholders and affiliates. As of March 31, 2011, based on the Company’s fixed charge coverage ratio, as defined and as measured on a rolling four-quarter basis, certain of these covenants, including the Company’s ability to incur additional debt, have become further restricted. The Company was in compliance with all of its covenants under the Notes as of March 31, 2011.
As of March 1, 2011, the Company may redeem the Notes in whole or in part at a redemption price equal to 103.75% of the principal amount of the Notes plus accrued and unpaid interest. The redemption price declines annually until it is reduced to 100.0% of the principal amount of the Notes plus accrued and unpaid interest from and after March 1, 2013. The Notes are due in full plus accrued unpaid interest on March 1, 2014.
Note 11 — Income Taxes
For Federal purposes, the Company’s tax years 2007 to 2010 remain open to examination. For state purposes, the Company’s tax years 2006 to 2010 remain open to examination by various taxing jurisdictions with the latest statute of limitations expiring in 2013. The Company’s foreign tax returns for years 2007 to 2010 remain open to examination.
Note 12 — Employee Benefit Plans
The Company is the sponsor of two defined benefit pension plans that cover certain employees at designated repair facilities. One plan, which covers certain salaried and hourly employees, is frozen and no additional benefits are accruing thereunder. The second plan, which covers only certain of the Company’s union employees, is currently active and benefits will continue to accrue thereunder until January 1, 2012, when the plan will be frozen. The assets of all funded plans are held by independent trustees and consist primarily of equity and fixed income securities. The Company is also the sponsor of an unfunded, non-qualified supplemental executive retirement plan (SERP) in which several of its current and former employees are participants. The SERP is frozen and no additional benefits are accruing thereunder.

 

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The Company also provides postretirement healthcare benefits for certain of its retired employees and life insurance benefits for certain of its union employees. Employees may become eligible for healthcare benefits and union employees may become eligible for life insurance benefits, only if they retire after attaining specified age and service requirements. These benefits are subject to deductibles, co-payment provisions and other limitations. During 2009, postretirement healthcare premium rates for retirees were increased. This change resulted in a decrease to the postretirement benefit liability of $2.8 million that was recorded to accumulated other comprehensive income as of December 31, 2009. This adjustment is being recognized over the remaining weighted-average service period of active plan participants.
The components of net periodic benefit cost for the pension and postretirement plans are as follows:
                 
    Pension Benefits  
    Three Months Ended  
    March 31,  
    2011     2010  
    (in thousands)  
Service cost
  $ 79     $ 67  
Interest cost
    254       256  
Expected return on plan assets
    (249 )     (221 )
Amortization of unrecognized net loss
    94       86  
Amortization of unrecognized prior service cost
    2       2  
Adjustment to benefits
          14  
 
           
Net periodic benefit cost recognized
  $ 180     $ 204  
 
           
                 
    Postretirement  
    Benefits  
    Three Months Ended  
    March 31,  
    2011     2010  
    (in thousands)  
Service cost
  $     $ 1  
Interest cost
    1       1  
Recognition of prior service credit
    (98 )     (98 )
Recognition of gain
    (22 )     (25 )
 
           
Net periodic income recognized
  $ (119 )   $ (121 )
 
           
                 
    Three Months Ended  
    March 31,  
    2011     2010  
    (in thousands)  
Pension
  $ 180     $ 204  
Postretirement
    (119 )     (121 )
 
           
 
               
Total net periodic benefit cost recognized for all plans
  $ 61     $ 83  
 
           
The Company also maintains qualified defined contribution plans, which provide benefits to ARI’s employees based on employee contributions, years of service, and employee earnings with discretionary contributions allowed. Expenses related to these plans were $0.1 million and $0.2 million for the three months ended March 31, 2011 and 2010, respectively.

 

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Note 13 — Commitments and Contingencies
In connection with the Company’s investment in Ohio Castings, ARI has guaranteed a $2.0 million state loan that was provided for purchases of capital equipment, of which less than $0.1 million was outstanding as of March 31, 2011. The two other partners of Ohio Castings have made identical guarantees of this obligation. It is anticipated that Ohio Castings will continue to make principal and interest payments through equity contributions made by ARI and the other partners. The state loan is scheduled to be paid off in June 2011.
The Company’s Axis joint venture entered into a credit agreement in December 2007. Effective August 5, 2009, the Company and the other initial partner acquired this loan from the lenders party thereto, with each party acquiring a 50.0% interest in the loan. The total commitment under the term loan is $60.0 million with an additional $10.0 million commitment under the revolving loan. ARI Component is responsible to fund 50.0% of the loan commitments. The balance outstanding on these loans, due to ARI Component, was $31.9 million of principal and $4.2 million of accrued interest, both as of March 31, 2011. ARI Component’s share of the remaining commitment on these loans was $3.1 million as of March 31, 2011. See Note 8 for further information regarding this transaction and the terms of the underlying loan.
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, or otherwise relating to the protection of human health and the environment. These laws and regulations not only expose ARI to liability for the environmental condition of its current or formerly owned or operated facilities, and its own negligent acts, but also may expose ARI to liability for the conduct of others or for ARI’s actions that were in compliance with all applicable laws at the time these actions were taken. In addition, these laws may require significant expenditures to achieve compliance and are frequently modified or revised to impose new obligations. Civil and criminal fines and penalties and other sanctions may be imposed for non-compliance with these environmental laws and regulations. ARI’s operations that involve hazardous materials also raise potential risks of liability under common law. Management believes that there are no current environmental issues identified that would have a material adverse effect on the Company. Certain real property ARI acquired from ACF Industries LLC (ACF) in 1994 has been involved in investigation and remediation activities to address contamination. ACF is an affiliate of Mr. Carl Icahn, the chairman of ARI’s board of directors and, through IELP, its principal beneficial stockholder. Substantially all of the issues identified relate to the use of this property prior to its 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 any investigation or remediation 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 such remediation. 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 operations or financial condition.
ARI is a party to collective bargaining agreements with labor unions at two repair facilities that expire beginning January 2013 through September 2013. ARI is also party to a collective bargaining agreement with a labor union at a parts manufacturing facility that expired during April 2011. A new collective bargaining agreement was entered into effective May 1, 2011 and will expire on April 30, 2014.
In March 2011, the Company entered into an agreement to purchase certain railcar parts during 2011 for current railcar orders with a minimum purchase commitment of $26.1 million.
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.

 

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Note 14 — Comprehensive Loss
The components of comprehensive loss, net of related tax, are as follows:
                 
    Three Months Ended  
    March 31,  
    2011     2010  
    (in thousands)  
Net loss
  $ (5,329 )   $ (7,023 )
 
               
Unrealized gain on available-for-sale securities
          125  
Income tax expense of unrealized gain on available-for-sale securities
          (44 )
Foreign currency translation adjustment
    247       321  
 
           
Comprehensive loss
  $ (5,082 )   $ (6,621 )
 
           
Note 15 — Loss per Share
The shares used in the computation of the Company’s basic and diluted loss per common share are reconciled as follows:
                 
    Three Months Ended  
    March 31,  
    2011     2010  
Weighted average basic common shares outstanding
    21,349,350       21,302,296  
Dilutive effect of employee stock options
          (1)
 
           
Weighted average diluted common shares outstanding
    21,349,350       21,302,296  
 
           
(1)   Stock options to purchase 390,353 shares of common stock were not included in the calculation for diluted loss per share for the three months ended March 31, 2010. These options were excluded as the exercise price exceeded the average market price and because ARI reported a net loss for the first quarter of 2010. Refer to Note 16 for further discussion of these stock options.
Note 16 — Stock Based Compensation
The Company accounts for stock based compensation granted under the 2005 Equity Incentive Plan, as amended (the 2005 Plan) based on the fair values calculated using the Black-Scholes-Merton option-pricing formula. Stock based compensation is expensed using a graded vesting method over the vesting period of the instrument.
The following table presents the amounts for stock based compensation expense incurred by ARI and the corresponding line items on the condensed consolidated statement of operations that they are classified within:
                 
    Three Months Ended  
    March 31,  
    2011     2010  
    ($ in thousands)  
Stock-based compensation expense:
               
Cost of revenue: manufacturing operations
  $ 470     $ 162  
Cost of revenue: railcar services
    85       28  
Selling, administrative and other
    1,593       510  
 
           
Total stock-based compensation expense
  $ 2,148     $ 700  
 
           

 

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Stock options
Options to purchase 36,001 shares of the Company’s common stock were exercised during the three months ended March 31, 2011. The total intrinsic value of options exercised during the three months ended March 31, 2011, was less than $0.1 million. No stock options were exercised during the three months ended March 31, 2010. All stock options fully vested in January 2009 and expired in January 2011. As such, the Company did not recognize any compensation expense related to stock options during the three months ended March 31, 2011 and 2010.
The following is a summary of option activity under the 2005 Plan for January 1, 2011 through March 31, 2011:
                                         
                            Weighted        
                    Weighted     Average        
            Weighted     Average     Grant-date     Aggregate  
    Shares     Average     Remaining     Fair Value     Intrinsic  
    Covered by     Exercise     Contractual     of Options     Value  
    Options     Price     Life     Granted     ($000)  
 
                                       
Outstanding at the beginning of the period, January 1, 2011
    376,353     $ 21.00                          
Exercised
    (36,001 )   $ 21.00                          
Expired
    (340,352 )   $ 21.00                          
 
                                     
Outstanding and exercisable at the end of the period, March 31, 2011
        $           $     $  
 
                                     
As of March 31, 2011, an aggregate of 855,476 shares were available for issuance in connection with future grants under the Company’s 2005 Plan. Shares issued under the 2005 Plan may consist in whole or in part of authorized but unissued shares or treasury shares.
Stock appreciation rights
The compensation committee of the board of directors of the Company granted awards of stock appreciation rights (SARs) to certain employees pursuant to the 2005 Plan during April 2007, April 2008, September 2008, March 2009 and March 2010. On May 14, 2010, ARI completed an exchange offer and exchanged 190,200 eligible SARs granted on April 4, 2007 at an exercise price per SAR of $29.49 for 95,100 SARs granted on May 14, 2010 at an exercise price per SAR of $14.12.
All of the SARs granted in 2007, 196,900 of the SARs granted in 2008 and 212,850 of the SARs granted in 2009 vest in 25.0% increments on the first, second, third and fourth anniversaries of the grant date. The SARs granted in March and May 2010 vest in three equal increments on the first, second and third anniversaries of the grant date. Each holder must remain employed by the Company through each such date in order to vest in the corresponding number of SARs.
Additionally, 77,500 of the SARs granted in 2008 and 93,250 of the SARs granted in 2009 similarly vest in 25.0% increments on the first, second, third and fourth anniversaries of the grant date, but only if the closing price of the Company’s common stock achieves a specified price target during the applicable twelve month period for twenty trading days during any sixty day trading day period. If the Company’s common stock does not achieve the specified price target during the applicable twelve-month period, the related portion of these performance-based SARs will not vest. Each holder must further remain employed by the Company through each anniversary of the grant date in order to vest in the corresponding number of SARs.
The SARs have exercise prices that represent the closing price of the Company’s common stock on the date of grant. Upon the exercise of any SAR, the Company shall pay the holder, in cash, an amount equal to the excess of (A) the aggregate fair market value (as defined in the 2005 Plan) in respect of which the SARs are being exercised, over (B) the aggregate exercise price of the SARs being exercised, in accordance with the terms of the Stock Appreciation Rights Agreement (the SAR Agreement). The SARs are subject in all respects to the terms and conditions of the 2005 Plan and the SAR Agreement, which contain non-solicitation, non-competition and confidentiality provisions.

 

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The following table provides an analysis of SARs granted in 2010, 2009, 2008 and 2007:
                                 
    2010 Grants     2009 Grant     2008 Grants     2007 Grant  
Grant date
    3/31/2010 & 5/14/2010       3/3/2009       4/28/2008 & 9/12/2008       4/4/2007  
# of SARs granted
    236,750       306,100       274,400       275,300  
# SARs outstanding at March 31, 2011
    236,750       278,950       176,328       11,100  
Weighted Avg Exercise price
    $12.95       $6.71       $20.80       $29.49  
Contractual term
  7 years     7 years     7 years     7 years  
 
                               
March 31, 2011 SARs Black Scholes Valuation Components:
Stock volatility range
    70.8% – 73.4%       73.0% – 76.9%       61.3% – 76.9%       63.4%  
Expected life range
  3.0 – 4.1 years     2.5 – 3.4 years     2.0 – 2.9 years     1.5 years  
Risk free interest rate range
    1.3% – 2.2%       0.8% – 1.3%       0.8% – 1.3%       0.8%  
Dividend yield
    0.0%       0.0%       0.0%       0.0%  
Forfeiture rate
    2.0%       2.0%       2.0%       2.0%  
The stock volatility rate was determined using the historical volatility rates of the Company’s common stock. The expected life ranges represent the use of the simplified method prescribed by the SEC, which uses the average of the vesting period and expiration period of each group of SARs that vest equally over a three or four-year period. The interest rates used were the government Treasury bill rate on the date of valuation. Dividend yield was based on the indefinite suspension of dividends by the Company. The forfeiture rate was based on a Company estimate of expected forfeitures over the contractual life of each grant of SARs for each period.
The Company recognized compensation expense of $2.1 million and $0.7 million for the three months ended March 31, 2011 and 2010, respectively, related to SARs granted under the 2005 Plan. Included in stock compensation expense was $0.1 million of expense related to SARs exercises during the three months ended March 31, 2011. No SARs were exercised during the three months ended March 31, 2010.

 

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The following is a summary of SARs activity under the 2005 Plan for January 1, 2011 through March 31, 2011:
                                         
                    Weighted              
    Stock     Weighted     Average     Weighted     Aggregate  
    Appreciation     Average     Remaining     Average     Intrinsic  
    Rights     Exercise     Contractual     Fair Value     Value  
    (SARs)     Price     Life     of SARs     ($000)  
 
                                       
Outstanding at the beginning of the period, January 1, 2011
    711,353     $ 12.68                          
Cancelled / Forfeited
    (1,050 )                                
Exercised
    (7,175 )                                
Outstanding at the end of the period, March 31, 2011
    703,128     $ 12.71     57 months   $ 15.91     $ 8,667 (1)
 
                                     
 
                                       
Exercisable at the end of the period, March 31, 2011
    264,109     $ 12.76     55 months   $ 15.69     $ 3,259 (1)
 
                                     
(1)   Based on the closing market price of $24.96 for a share of the Company’s common stock on March 31, 2011, SARs granted in 2007 have no intrinsic value and the SARs granted in 2008, 2009 and 2010 have a total intrinsic value of $8.7 million, of which $3.3 million relates to SARs that are exercisable.
As of March 31, 2011, unrecognized compensation costs related to the unvested portion of stock appreciation rights were estimated to be $2.6 million and were expected to be recognized over a weighted average period of 23 months.
Note 17 — Related Party Transactions
Agreements with ACF
The Company has or had the following agreements with ACF, a company controlled by Mr. Carl Icahn, the Company’s principal beneficial stockholder (through Icahn Enterprises L.P. (IELP)) and chairman of the Company’s board of directors:
Manufacturing Services Agreement
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. In the three months ended March 31, 2011 and 2010, ARI purchased inventory of less than $0.1 million and $1.1 million, respectively, of components from ACF. The agreement automatically renews unless written notice is provided by the Company.
Asset Purchase Agreement
On January 29, 2010, ARI entered into an agreement to purchase certain assets from ACF for approximately $0.9 million that will allow the Company to manufacture railcar components previously purchased from ACF.
The purchase price of approximately $0.9 million was determined using various factors, including but not limited to, independent appraisals that assessed fair market value for the purchased assets, each asset’s remaining useful life and the replacement cost of each asset. Given that ACF and ARI have the same majority stockholder, the assets purchased were recorded at ACF’s net book value and the remaining portion of the purchase price will be a reduction to stockholder’s equity. As of December 31, 2010, all of the assets had been received and paid for in accordance with the agreement.

 

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Agreements with ARL
The Company has or had the following agreements with American Railcar Leasing LLC (ARL), a company controlled by Mr. Carl Icahn, the Company’s principal beneficial stockholder (through IELP) and chairman of the Company’s board of directors:
Railcar Servicing Agreement and Fleet Services Agreement
Effective as of January 1, 2008, the Company entered into a fleet services agreement with ARL. Under the agreement, ARI provided ARL fleet management services for a fixed monthly fee and railcar repair and maintenance services for a charge of labor, components and materials. For the three months ended March 31, 2011 and 2010, revenues of $5.5 million and $2.8 million were recorded under this agreement, respectively. Such amounts are included under railcar services revenue from affiliates on the condensed consolidated statement of operations. Profit margins on sales to related parties approximate the margins on sales to other large customers. This agreement was replaced by a new agreement, which was effective April 16, 2011. See Note 20 for further information regarding this new agreement.
Rent and Building Services Extension Agreement
Pursuant to a rent and building services extension agreement effective December 31, 2007, ARL subleased to ARI the headquarters space owned by the Company’s vice chairman of the board of directors. This agreement terminated on December 31, 2010 by mutual agreement. Total fees paid to ARL under this agreement were $0.2 million for the three months ended March 31, 2010. The fees paid to ARL are included in selling, administrative and other costs on the condensed consolidated statement of operations.
Railcar Orders
The Company from time to time manufactures and sells railcars to ARL under long-term agreements as well as on a purchase order basis. Revenue for railcars sold to ARL was $1.2 million and $12.5 million for the three months ended March 31, 2011 and 2010, respectively. Revenue for railcars sold to ARL is included under manufacturing revenue from affiliates on the accompanying condensed consolidated statements of operations. Profit margins on sales to related parties approximate the margins on sales to other large customers. ARL also has acted as an agent for the Company to source railcar leasing customers. In connection therewith, ARL has assigned orders to ARI for railcars to be manufactured and leased by ARI. The Company is currently negotiating the terms of its agency relationship with ARL. Any such agreement, including payments that ARI may agree to make to ARL for these services, will be on an arm’s length basis and subject to the approval of the Company’s audit committee.
Agreements with other related parties
In September 2003, Castings loaned Ohio Castings $3.0 million under a promissory note, which was due in January 2004. The note was renegotiated resulting in a new principal amount of $2.2 million, bearing interest at a rate of 4.0% with a maturity date of August 2009. Due to the temporary idling of the facility, Ohio Castings advised the partners that it was unable to pay the notes when due. The notes were renegotiated and are now due February 2012. Interest will continue to accrue but interest payments have been deferred until August 2011. Total amounts due from Ohio Castings under this note were $0.5 million at both March 31, 2011 and December 31, 2010. Accrued interest on this note as of March 31, 2011 and December 31, 2010, was less than $0.1 million. The other partners in the joint venture have made identical loans to Ohio Castings.
In connection with the Company’s investment in Ohio Castings, ARI has guaranteed a $2.0 million state loan that was provided for purchases of capital equipment, of which less than $0.1 million was outstanding as of March 31, 2011. The two other partners of Ohio Castings have made identical guarantees of this obligation. It is anticipated that Ohio Castings will continue to make principal and interest payments through equity contributions made by ARI and the other partners. The state loan is scheduled to be paid off in June 2011.

 

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The Company’s Axis joint venture entered into a credit agreement in December 2007. Effective August 5, 2009, the Company and the other initial partner acquired this loan from the lenders party thereto, with each party acquiring a 50.0% interest in the loan. The total commitment under the term loan is $60.0 million with an additional $10.0 million commitment under the revolving loan. ARI Component is responsible to fund 50.0% of the loan commitments. The balance outstanding on these loans, due to ARI Component, was $31.9 million of principal and $4.2 million of accrued interest, both as of March 31, 2011. ARI Component’s share of the remaining commitment on these loans was $3.1 million as of March 31, 2011. See Note 8 for further information regarding this transaction and the terms of the underlying loan.
The Company purchases railcar parts from its joint ventures under long-term contracts. During the three months ended March 31, 2011 and 2010, the Company purchased $2.6 million and $1.3 million of railcar parts from its joint ventures, respectively.
During 2010, ARI provided Axis various administrative services for an annual fee of $0.3 million, payable in equal monthly installments. During 2011, ARI has and will continue to provide Axis the same services for an annual fee of $0.3 million, payable in equal monthly installments.
Effective April 1, 2009, Mr. James J. Unger, the Company’s former chief executive officer, assumed the role of vice chairman of the board of directors and became a consultant to the Company. In exchange for these services, Mr. Unger received an annual consulting fee of $135,000 and an annual director fee of $65,000 that were both payable quarterly, in advance. The Company also agreed to provide Mr. Unger with an automobile related to his role as vice chairman. Mr. Unger’s consulting agreement terminated in accordance with its terms as of April 1, 2010. In his role as consultant, Mr. Unger reported to and served at the discretion of the Company’s Board. Mr. Unger continues in his role as vice chairman in connection with which he is provided an annual director fee of $65,000 and an automobile allowance.
The Company leases one of its parts manufacturing facilities from an entity owned by its vice chairman of the board of directors. Expenses paid for this facility were $0.1 million for both the three months ended March 31, 2011 and 2010, respectively. These costs are included in manufacturing operations cost of revenue.
On October 29, 2010, ARI entered into a lease agreement with a term of eleven years with an entity owned by the vice chairman of the Company’s board of directors. The lease is for ARI’s headquarters location in St. Charles, Missouri. The term under this lease agreement commenced January 1, 2011. The Company is required to pay monthly rent and a portion of all tax increases assessed or levied upon the property and increases to the cost of the utilities and other services it used. The expense recorded for this facility was $0.1 million for the three months ended March 31, 2011. These fees are included in selling, administrative and other costs on the condensed consolidated statement of operations.
Financial information for transactions with related parties
As of March 31, 2011 and December 31, 2010, accounts receivable of $2.5 million and $5.0 million, respectively, were due from ACF, ARL, Ohio Castings and Axis.
As of March 31, 2011 and December 31, 2010, interest receivable of $0.2 million, respectively, was due from Ohio Castings and Axis.
As of March 31, 2011 and December 31, 2010, accounts payable of $0.9 million and $0.3 million, respectively, were due to ACF, ARL and Axis.
Cost of railcar manufacturing for the three months ended March 31, 2011 and 2010 included $2.2 million and $1.0 million, respectively, in railcar products produced by joint ventures.
Inventory at March 31, 2011, included purchases of $0.8 million from joint ventures. Inventory at December 31, 2010, included purchases of $0.4 million from joint ventures. At March 31, 2011 and December 31, 2010, all profit from related parties for inventory still on hand was eliminated.

 

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Note 18 — Operating Segment and Sales/Credit Concentrations
ARI operates in two reportable segments: manufacturing operations and railcar services. Performance is evaluated based on revenue and operating profit. Intersegment sales and transfers are accounted for as if sales or transfers were to third parties. The information in the following tables is derived from the segments’ internal financial reports used for corporate management purposes:
                                         
For the Three Months Ended   Manufacturing     Railcar     Corporate &              
March 31, 2011   Operations     Services     all other     Eliminations     Totals  
    (in thousands)  
Revenues from external customers
  $ 68,696     $ 16,147     $     $     $ 84,843  
Intersegment revenues
    223       119             (342 )      
 
                                       
Cost of revenue — external customers
    (66,581 )     (13,318 )                 (79,899 )
Cost of intersegment revenue
    (146 )     (123 )           269        
 
                             
Gross profit (loss)
    2,192       2,825             (73 )     4,944  
Selling, administrative and other
    (1,386 )     (476 )     (5,020 )           (6,882 )
 
                             
Earnings (loss) from operations
  $ 806     $ 2,349     $ (5,020 )   $ (73 )   $ (1,938 )
 
                             
 
   
For the Three Months Ended   Manufacturing     Railcar     Corporate &              
March 31, 2010   Operations     Services     all other     Eliminations     Totals  
    (in thousands)  
Revenues from external customers
  $ 35,635     $ 16,676     $     $     $ 52,311  
Intersegment revenues
    192       127               (319 )      
 
   
Cost of revenue — external customers
    (37,387 )     (13,968 )                 (51,355 )
Cost of intersegment revenue
    (150 )     (111 )           261        
 
                             
Gross profit (loss)
    (1,710 )     2,724             (58 )     956  
Selling, administrative and other
    (1,434 )     (566 )     (4,087 )           (6,087 )
 
                             
Earnings (loss) from operations
  $ (3,144 )   $ 2,158     $ (4,087 )   $ (58 )   $ (5,131 )
 
                             
 
   
    Manufacturing     Railcar     Corporate &              
As of   Operations     Services     all other     Eliminations     Totals  
    (in thousands)  
March 31, 2011
                                       
Total assets
  $ 282,578     $ 48,305     $ 318,109     $     $ 648,992  
December 31, 2010
                                       
Total assets
  $ 281,779     $ 49,133     $ 323,455     $     $ 654,367  
Manufacturing operations
Manufacturing revenues from affiliates were 1.4% and 24.0% of total consolidated revenues for the three months ended March 31, 2011 and 2010, respectively.
Manufacturing revenues from the most significant customer totaled 17.3% and 30.6% of total consolidated revenues for the three months ended March 31, 2011 and 2010, respectively.
Manufacturing revenues from the two most significant customers were 32.4% of total consolidated revenues for the three months ended March 31, 2011. Manufacturing revenues from the two most significant customers (including an affiliated customer) were 54.6% of total consolidated revenues for the three months ended March 31, 2010.
Manufacturing receivables from the most significant customer were 14.5% of total consolidated accounts receivable including due from related parties at March 31, 2011. Manufacturing receivables from the most significant customer, an affiliate, were 12.0% of total consolidated accounts receivable including due from related parties at December 31, 2010. No other customer accounted for more than 10.0% of total consolidated accounts receivable as of March 31, 2011 and December 31, 2010.

 

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Railcar services
Railcar services revenues from affiliates were 6.5% and 5.4% of total consolidated revenues for the three months ended March 31, 2011 and 2010, respectively.
No single railcar services customer accounted for more than 10.0% of total consolidated revenues for the three months ended March 31, 2011 and 2010. No single railcar services customer accounted for more than 10.0% of total consolidated accounts receivable as of March 31, 2011 and December 31, 2010.
Note 19 — Supplemental Cash Flow Information
ARI received interest income of $0.9 million and $0.1 million for the three months ended March 31, 2011 and 2010, respectively.
ARI paid interest expense, net of capitalized interest, of $10.3 million for both the three months ended March 31, 2011 and 2010, respectively.
ARI received a net tax refund of less than $0.1 million and paid net taxes of less than $0.1 million for the three months ended March 31, 2011 and 2010, respectively.
Note 20 — Subsequent Events
On April 8, 2011, ARI advanced $0.3 million to Axis pursuant to ARI’s revolving loan commitments under the Axis Credit Agreement. The other initial joint venture partner made a similar advance to Axis.
During April 2011, the Company entered into an agreement to purchase certain railcar parts during 2011 for current railcar orders with a minimum purchase commitment of $15.1 million.
On April 15, 2011, ARI entered into an agreement with ARL to provide 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). The Railcar Services Agreement is effective April 16, 2011 with a term of three years and will automatically renew for additional one year periods unless either party provides at least sixty days’ written prior notice of termination. There is no termination fee if the Company elects to terminate the agreement prior to the end of the term. The Railcar Services Agreement replaces the fleet services agreement previously in effect between ARI and ARL.
Effective May 1, 2011, ARI entered into a collective bargaining agreement for the workforce at a parts manufacturing facility. This agreement replaced an agreement that expired on April 30, 2011. The new agreement will expire on April 30, 2014.

 

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act), including statements regarding our plans, objectives, expectations and intentions. Such statements include, without limitation, statements regarding various estimates we have made in preparing our financial statements, statements regarding expected future trends relating to our industry, our results of operations and the sufficiency of our capital resources and statements regarding anticipated production schedules for our products and the anticipated construction and production schedules of our joint ventures. These forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those anticipated.
Risks and uncertainties that could adversely affect our business and prospects include without limitation:
    any financial or other information included herein based upon or otherwise incorporating judgments or estimates based upon future performance or events;
 
    the impact of the recent economic downturn, adverse market conditions and restricted credit markets and the impact of the continuation of these conditions;
 
    our reliance upon a small number of customers that represent a large percentage of our revenues and backlog;
 
    the health of and prospects for the overall railcar industry;
 
    our prospects in light of the cyclical nature of our business;
 
    anticipated trends relating to our shipments, revenues, financial condition or results of operations;
 
    our ability to manage overhead and variations in production rates;
 
    the highly competitive nature of the railcar manufacturing industry;
 
    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;
 
    anticipated production schedules for our products and the anticipated financing needs, construction and production schedules of our joint ventures;
 
    the risks associated with potential joint ventures, acquisitions or new business endeavors;
 
    the risks associated with international operations and joint ventures;
 
    the risk of the lack of acceptance of new railcar offerings by our customers and the risk of initial production costs for our new railcar offerings being significantly higher than expected;
 
    the risk of the lack of customers entering into new railcar leases;
 
    the sufficiency of our liquidity and capital resources;
 
    the conversion of our railcar backlog into revenues;
 
    compliance with covenants contained in our unsecured senior notes;
 
    the impact and anticipated benefits of any acquisitions we may complete;
 
    the impact and costs and expenses of any litigation we may be subject to now or in the future; and
 
    the ongoing benefits and risks related to our relationship with Mr. Carl Icahn (the chairman of our board of directors and, through Icahn Enterprises L.P. (IELP), our principal beneficial stockholder) and certain of his affiliates.

 

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In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. Our actual results could be different from the results described in or anticipated by our forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections and may be 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 filed on March 1, 2011 (the Annual Report) and in Part II — Item 1A of this report, as well as the risks and uncertainties discussed elsewhere in the Annual Report and in this 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.
OVERVIEW
We are a leading North American designer and manufacturer of hopper and tank railcars. We also lease, repair and refurbish railcars, provide fleet management services and design and manufacture certain railcar and industrial components. We provide our railcar customers with integrated solutions through a comprehensive set of high quality products and related services.
We operate in two segments: manufacturing operations and railcar services. Manufacturing operations consist of railcar manufacturing, railcar leasing and railcar and industrial component manufacturing. Railcar services consist of railcar repair and refurbishment services and fleet management services.
The North American railcar market has been, and we expect it to continue to be, highly cyclical. The recent economic downturn had a negative effect on the railcar manufacturing market in which we compete, resulting in increased competition and significant pricing pressures in the past couple of years.
We have seen improvement in the railcar manufacturing market with an increase in our backlog from approximately 1,050 railcars at December 31, 2010 to approximately 5,630 railcars at March 31, 2011, including 280 railcars that we will lease. In response to increased customer demand, we are increasing production rates at our railcar manufacturing facilities.
Railcar loadings have continued to increase and the number of railcars in storage has continued to decrease, as reported by an independent third party industry analyst. We believe that these improvements, which may or may not continue, indicate that the railcar market has begun and may continue to improve. During the first quarter of 2011, our railcar shipments and manufacturing revenues increased as compared to the same period in the prior year and the gross profit margin at both of our segments increased. Based in part on these factors, we currently expect our railcar shipments to increase in 2011, as compared to 2010. We cannot assure you that the railcar market will continue to improve or that our railcar orders and shipments will increase.
Our railcar services segment continued to report strong results due to strong volumes and railcar repair projects completed at our railcar manufacturing facilities.

 

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RESULTS OF OPERATIONS
Three Months ended March 31, 2011 compared to Three Months ended March 31, 2010
The following table summarizes our historical operations as a percentage of revenues for the periods shown. Our historical results are not necessarily indicative of operating results that may be expected in the future.
                 
    For the Three Months Ended,  
    March 31,  
    2011     2010  
Revenues:
               
Manufacturing Operations
    81.0 %     68.1 %
Railcar services
    19.0 %     31.9 %
 
           
Total revenues
    100.0 %     100.0 %
Cost of revenue:
               
Cost of manufacturing operations
    (78.5 %)     (71.5 %)
Cost of railcar services
    (15.7 %)     (26.7 %)
 
           
Total cost of revenues
    (94.2 %)     (98.2 %)
Gross profit
    5.8 %     1.8 %
Selling, administrative and other
    (8.1 %)     (11.6 %)
 
           
Loss from operations
    (2.3 %)     (9.8 %)
Interest income
    1.1 %     1.4 %
Interest expense
    (6.3 %)     (10.1 %)
Other income
    0.0 %     0.1 %
Loss from joint venture
    (2.6 %)     (3.4 %)
 
           
Loss before income tax expense
    (10.1 %)     (21.8 %)
Income tax benefit
    3.8 %     8.4 %
 
           
Net loss
    (6.3 %)     (13.4 %)
 
           
Revenues
Our revenues for the three months ended March 31, 2011 increased 62.2% to $84.8 million from $52.3 million in the three months ended March 31, 2010. This increase was primarily due to increased revenues from our manufacturing operations, partially offset by decreased revenues from our railcar services segment.
Our manufacturing operations revenues for the three months ended March 31, 2011 increased 92.8% to $68.7 million from $35.6 million for the three months ended March 31, 2010. The primary reason for the increase in revenues was the increase in our railcar shipments. During the three months ended March 31, 2011, we shipped approximately 670 railcars compared to approximately 340 railcars in the same period of 2010.
For the three months ended March 31, 2011, our manufacturing operations included $1.2 million, or 1.4%, of our total consolidated revenues, from transactions with American Railcar Leasing LLC (ARL), compared to $12.6 million, or 24.0% of our total consolidated revenues from transactions with ARL, for the three months ended March 31, 2010. ARL is an affiliated company controlled by Mr. Carl Icahn.
Our railcar services revenues in the three months ended March 31, 2011 decreased slightly to $16.1 million compared to $16.7 million for the three months ended March 31, 2010. The decrease was primarily attributable to lower railcar repair revenues at our railcar manufacturing facilities. For the first quarter of 2011, our railcar services revenues included $5.5 million, or 6.5% of our total consolidated revenues, from transactions with ARL, compared to $2.8 million, or 5.4% of our total consolidated revenues, in the first quarter of 2010.
Gross Profit
Our gross profit increased to $4.9 million in the three months ended March 31, 2011 from $1.0 million in the three months ended March 31, 2010. Our gross profit margin increased to 5.8% in the first quarter of 2011 from 1.8% in the first quarter of 2010, driven primarily by an increase in our gross profit margins from our manufacturing operations.

 

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Gross profit from our manufacturing operations increased $3.9 million for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010, due primarily to a significant increase in our railcar shipments. Gross profit margin, for our manufacturing operations, increased to a profit of 3.1% for the three months ended March 31, 2011 compared to a loss of 4.9% for the three months ended March 31, 2010. This increase is primarily attributable to increased shipments.
Gross profit for our railcar services operations increased $0.1 million for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 primarily due to efficiencies from maintaining strong volumes and a good mix of work. Gross profit margin for our railcar services operations increased to 17.5% in the three months ended March 31, 2011 from 16.2% in the three months ended March 31, 2010. The increase is primarily attributable to efficiencies created by strong volumes along with repair projects performed at our railcar manufacturing facilities.
Selling, Administrative and Other Expenses
Our total selling, administrative and other expenses increased to $6.9 million for the first quarter of 2011, compared to $6.1 million for the first quarter of 2010. The increase of $0.8 million was primarily attributable to an increase of $1.1 million in stock based compensation, as described below, partially offset by a decrease in incentive compensation.
Stock based compensation increased due to the increase in our stock price in the first quarter of 2011 as compared to the same period in 2010 and the SARs granted during 2010. In the first quarter of 2011, we recognized expense related to stock based compensation of $1.6 million, attributable to stock appreciation rights (SARs), as compared to $0.5 million for the three months ended March 31, 2010.
Interest Expense and Income
Net interest expense for the three months ended March 31, 2011 was $4.4 million, representing $5.3 million of interest expense and $0.9 million of interest income, compared to $4.6 million of net interest expense for the three months ended March 31, 2010, representing $5.3 million of interest expense and $0.7 million of interest income. Interest expense was consistent and interest income increased due to an increase in return on investments and loans.
Other Income
Other income of less than $0.1 million recognized in the first quarter of 2011 related to the unused line fee earned on the revolving loan with Axis. Other income of $0.1 million recognized in the first quarter of 2010 related to realized gains on the sale of a portion of our investment in The Greenbrier Companies, Inc. common stock.
Loss from Joint Ventures
Our joint venture losses increased $0.4 million in the three months ended March 31, 2011 compared to the three months ended March 31, 2010. This was primarily attributable to our share of Axis LLC’s losses, which increased by $0.1 million for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010, and our share of Amtek Railcar Industries Private Limited’s losses of $0.3 million for the three months ended March 31, 2011 as compared to none for the three months ended March 31, 2010. Our share of joint venture losses from Ohio Castings Company, LLC remained consistent for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010.
Income Taxes Benefit
Our income tax benefit for the three months ended March 31, 2011 was $3.3 million or 38.0% of our losses before income taxes, as compared to $4.4 million for the three months ended March 31, 2010, or 38.5% of our losses before income taxes.

 

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BACKLOG
We define backlog as the number and value of railcars that our customers have committed in writing to purchase or lease from us that have not been shipped. As of March 31, 2011, our total backlog was approximately 5,630 railcars, of which approximately 5,350 railcars with an estimated value of $417.0 million were to be sold and approximately 280 railcars with an estimated market value of $18.3 million are orders for railcars that will be subject to lease. As of December 31, 2010, our total backlog was approximately 1,050 railcars with an estimated value of $87.6 million, all of which were to be sold.
Railcars for Sale. We estimate that, as of March 31, 2011, approximately 64% of the total number of railcars in our backlog will be sold by the end of 2011, with the remainder in 2012. Estimated backlog value for railcars to be sold reflects the total revenues expected as if such backlog were converted to actual revenues at the end of the particular period. We cannot guarantee that the actual revenue from these orders will equal our reported sales backlog value estimates or that our future revenue efforts will be successful.
Railcars for Lease . We estimate that, as of March 31, 2011, approximately 5% of the total number of railcars in our backlog will be leased by the end of 2011, with the remainder in 2012. The estimated backlog value of railcars that will be subject to lease reflects the estimated market value of each railcar. Actual revenues for railcars subject to lease are recognized over the life of the lease and are not based on the estimated backlog value. We have firm orders to manufacture the railcars in our backlog at March 31, 2011 that will be subject to lease.
Customer orders may be subject to requests for delays in deliveries, inspection rights and other customary industry terms and conditions, which could prevent or delay railcars in our backlog from being shipped. Historically, we have experienced little variation between the number of railcars ordered and the number of railcars actually delivered. As delivery dates could be extended on certain orders, we cannot guarantee that our reported railcar backlog will convert to revenue in any particular period, if at all.
The reported backlog includes railcars relating to purchase or lease obligations based upon an assumed product mix. Changes in product mix from what is assumed would affect the estimated value of our backlog and the total estimated revenues attributable to backlog. Estimated backlog value reflects known adjustments for material cost changes but does not reflect a projection of any future material price adjustments that are provided for in certain customer contracts.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity for the three months ended March 31, 2011 and for the foreseeable future is cash on hand from the unsecured senior notes we sold in February 2007, partially offset by capital expenditures and investments in and loans to our joint ventures. As of March 31, 2011, we had working capital of $360.8 million, including $314.2 million of cash and cash equivalents.
In February 2007, we issued $275.0 million of unsecured senior notes that are due in 2014 (Notes). The offering resulted in net proceeds to us of $270.7 million. The terms of the Notes contain restrictive covenants that limit our ability to, among other things, incur additional debt, make certain restricted payments and enter into certain significant transactions with stockholders and affiliates. As of March 31, 2011, based on our fixed charge coverage ratio, as defined and as measured on a rolling four-quarter basis, certain of these covenants, including our ability to incur additional debt, have become further restricted. We were in compliance with all of our covenants under the Notes as of March 31, 2011.
During the first quarter of 2011, we did not make any contributions to our joint ventures. We anticipate making capital contributions and loans to our joint ventures in 2011.
We anticipate that any future expansion of our business will be financed through existing cash resources. We believe that these sources of funds will provide sufficient liquidity to meet our expected operating requirements over the next twelve months.
Our long-term liquidity is contingent upon future operating performance. We may require additional capital in the future to fund capital expenditures, acquisitions or other investments. These capital requirements could be substantial. Certain risks, trends and uncertainties may adversely affect our long-term liquidity.

 

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Cash Flows
The following table summarizes our net cash provided by or used in operating activities, investing activities and financing activities for the three months ended March 31:
         
    2011  
    (in thousands)  
Net cash (used in) provided by:
       
Operating activities
  $ (3,927 )
Investing activities
    (1,368 )
Financing activities
    756  
Effect of exchange rate changes on cash and cash equivalents
    6  
 
     
Decrease in cash and cash equivalents
  $ (4,533 )
 
     
Net Cash Used In Operating Activities
Our net cash used in operating activities for the three months ended March 31, 2011 was $3.9 million. Our net loss of $5.3 million was impacted by non-cash items, including but not limited to, depreciation expense of $5.8 million, joint venture losses of $2.2 million, stock based compensation of $2.1 million, deferred income tax benefit of $3.2 million and other smaller adjustments. Cash provided by operating activities attributable to changes in our current assets and current liabilities included a decrease in total accounts receivable, including accounts receivable from related parties, of $3.9 million and an increase in total accounts payable, including accounts payable to related parties, of $3.8 million. Cash used in operating activities attributable to changes in our current assets and liabilities included an increase in inventory of $9.0 million, an increase in prepaid expenses and other current assets of $1.1 million and a decrease in accrued expenses and taxes of $2.9 million.
The decrease in total accounts receivable, including from related parties, was primarily due to the timing of customer payments. The increase in total accounts payable, included accounts payable to related parties, and was related to increased inventory purchases. The increase in inventory was primarily attributable to railcars awaiting shipment at March 31, 2011. The increase in prepaid expenses and other current assets was primarily attributable to the payment of annual corporate insurance policies during the first quarter of 2011. Accrued expenses and taxes decreased primarily due to an interest payment made on our Notes during the quarter.
Net Cash Used In Investing Activities
Net cash used in investing activities was $1.4 million for the three months ended March 31, 2011, including $0.7 million of capital expenditures for the purchase of property, plant and equipment and $0.6 million of interest on Axis’ term loans that was added to the principal balance.
Capital Expenditures
We continuously evaluate facility requirements based on our strategic plans, production requirements and market demand and may elect to change our level of capital investments in the future. These investments are all based on an analysis of the estimated rates of return and impact on our profitability. We continue to pursue opportunities to reduce our costs through continued vertical integration of component parts. From time to time, we may expand our business, domestically or abroad, by acquiring other businesses or pursuing other strategic growth opportunities including, without limitation, joint ventures.
Capital expenditures for the three months ended March 31, 2011 were $0.7 million and our current capital expenditure plans for 2011 include projects that maintain equipment, improve efficiencies and reduce costs. We cannot assure that we will be able to complete any of our projects on a timely basis or within budget, if at all.

 

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Contingencies and Contractual Obligations
Refer to the updated status of contingencies in Note 13 to the condensed consolidated financial statements. Except as discussed below, our contingencies and contractual obligations did not materially change from the information disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. In March 2011, the Company entered into an agreement to purchase certain railcar parts during 2011 for current railcar orders with a minimum purchase commitment of $26.1 million. During April 2011, the Company entered into an agreement to purchase certain railcar parts during 2011 for current railcar orders with a minimum purchase commitment of $15.1 million.
CRITICAL ACCOUNTING POLICIES
The critical accounting policies and estimates used in the preparation of our financial statements that we believe affect our more significant judgments and estimates used in the preparation of our consolidated financial statements presented in this report are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
There have been no material changes to the critical accounting policies or estimates during the three months ended March 31, 2011.
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risks since December 31, 2010.
ITEM 4.   CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report on Form 10-Q (the Evaluation Date). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1.   LEGAL PROCEEDINGS
There have been no material changes with respect to risk factors as previously disclosed in our 2010 Annual Report on Form 10-K.
ITEM 1A.   RISK FACTORS
There have been no material changes from the risk factors previously disclosed in Item 1A of our Annual Report.
ITEM 5.   OTHER INFORMATION
The Axis Credit Agreement was amended on March 31, 2011. Under the amendment, our and the other lending party’s commitment to make term loans was extended to December 31, 2011 from December 31, 2010 and the date when the first payment on the term loans become due and payable was extended to March 31, 2012. Thereafter payments are due each fiscal quarter in equal installments, with the last payment due on December 31, 2016. Furthermore, the credit agreement was amended to extend the period during which Axis can satisfy the term loan interest by increasing the principal balance to September 30, 2011. The first interest payment is due and payable October 31, 2011.

 

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This description of the amendment to the credit agreement is a summary only and is qualified in its entirety by the Fifth Amendment to the Axis Credit Agreement, a copy of which is attached hereto as Exhibit 10.64 and incorporated herein by reference.
ITEM 6.   EXHIBITS
         
Exhibit    
No.   Description of Exhibit
       
 
  10.64    
Fifth Amendment to the Axis Credit Agreement dated as of March 31, 2011.
       
 
  10.65    
Railcar Services Agreement dates as of April 15, 2011 between American Railcar Industries, Inc. and American Railcar Leasing LLC. *
       
 
  31.1    
Rule 13a-14(a), 15d-14(a) Certification of the Chief Executive Officer
       
 
  31.2    
Rule 13a-14(a), 15d-14(a) Certification of the Chief Financial Officer
       
 
  32    
Certification pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*   Confidential treatment has been requested for the redacted portions of this agreement. A complete copy of this agreement, including the redacted portions, has been filed separately with the Securities and Exchange Commission.

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  AMERICAN RAILCAR INDUSTRIES, INC.
 
 
Date: May 3, 2011  By:   /s/ James Cowan    
    James Cowan, President and Chief Executive Officer   
     
  By:   /s/ Dale C. Davies    
    Dale C. Davies, Senior Vice President,    
    Chief Financial Officer and Treasurer   

 

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EXHIBIT INDEX
         
Exhibit    
No.   Description of Exhibit
       
 
  10.64    
Fifth Amendment to the Axis Credit Agreement dated as of March 31, 2011.
       
 
  10.65    
Railcar Services Agreement dates as of April 15, 2011 between American Railcar Industries, Inc. and American Railcar Leasing LLC. *
       
 
  31.1    
Rule 13a-14(a), 15d-14(a) Certification of the Chief Executive Officer
       
 
  31.2    
Rule 13a-14(a), 15d-14(a) Certification of the Chief Financial Officer
       
 
  32    
Certification pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*   Confidential treatment has been requested for the redacted portions of this agreement. A complete copy of this agreement, including the redacted portions, has been filed separately with the Securities and Exchange Commission.

 

34

Exhibit 10.64
FIFTH AMENDMENT TO CREDIT AGREEMENT
This Fifth Amendment to Credit Agreement (this “Amendment”) is dated as of the 31 st day of March, 2011, and is by and among ARI Component Venture LLC, a Delaware limited liability company (in its capacity as Co-Administrative Agent for all Lenders, “ARI Co-Administrative Agent”), Amsted Rail Company, Inc., a Delaware corporation and successor to ASF-Keystone, Inc. (in its capacity as Co-Administrative Agent for all Lenders, “Amsted Co-Administrative Agent” and, together with ARI Co-Administrative Agent, collectively, the “Administrative Agent”), the undersigned Lenders and Axis Operating Company LLC, a Delaware limited liability company (“Borrower”).
WITNESSETH :
WHEREAS, immediately prior to giving effect to the transactions referenced in the next recital, Bank of America, N.A., a national banking association, successor by merger to LaSalle Bank National Association (in its capacity as Administrative Agent for the Prior Lenders, “Prior Administrative Agent”), the Prior Lenders referred to below and Borrower were parties to that certain Credit Agreement, dated as of December 28, 2007 (as amended, modified or supplemented from time to time, the “Credit Agreement”; unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Credit Agreement);
WHEREAS, on August 5, 2009, (i) Bank of America, N.A., The CIT Group/Equipment Financing, Inc. and First Bank (collectively, the “Prior Lenders”) assigned 100% of the Loans and their rights under the Loan Documents to the Lenders, (ii) the Prior Administrative Agent resigned as Administrative Agent under the Credit Agreement and the ARI Co-Administrative Agent and the Amsted Co-Administrative Agent were appointed, collectively, as Administrative Agent for the Lenders under the Credit Agreement and (iii) the Administrative Agent, the Lenders and the Borrower entered into the Fourth Amendment to Credit Agreement; and
WHEREAS, Borrower has requested that Administrative Agent and Lenders further amend the Credit Agreement in certain respects as provided herein;
NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
1.  Amendments to Credit Agreement . In reliance upon the representations and warranties of Borrower set forth in Section 4 below and subject to the conditions to effectiveness set forth in Section 3 below, the Credit Agreement is hereby amended as follows:
(a) Section 1.1 of the Credit Agreement is amended by amending and restating the following defined term:
Term Loan Maturity Date means the earlier of (a) December 31, 2010 or (b) such other date on which the Commitments terminate pursuant to Section 6 or Section 13 .

 

 


 

(b) The last sentence of Section 2.1.2 of the Credit Agreement is hereby amended and restated in its entirety as follows:
“The Commitments of the Lenders to make Term Loans shall expire on December 31, 2011.”
(c) Section 4.2 of the Credit Agreement hereby amended and restated in its entirety as follows:
“(a) Accrued interest on each Base Rate Loan shall be payable in arrears on the last day of each calendar month and at maturity. Accrued interest on each LIBOR Loan shall be payable on the last day of each Interest Period relating to such Loan (and, in the case of a LIBOR Loan with an Interest Period in excess of three months, on the three-month anniversary of the first day of such Interest Period), upon a prepayment of such Loan, and at maturity. After maturity, and at any time an Event of Default exists, accrued interest on all Loans shall be payable on demand.
(b) Notwithstanding any provision of this Agreement or the other Loan Documents, so long as no Event of Default is then in existence, during the period from the Closing Date to September 30, 2011 Borrower may elect, in its sole discretion, to satisfy any interest due and payable pursuant to this Section 4.2 by increasing the outstanding principal amount of the Term Loan by the amount of interest otherwise due and payable in cash during such period.”
(d) Section 6.4.2 of the Credit Agreement is hereby amended and restated in its entirety as follows:
“6.4.2. Term Loans . The Term Loan shall be paid in twenty (20) equal installments, based on the outstanding principal amount of the Term Loan on December 31, 2011, commencing on the last day of the first Fiscal Quarter thereafter and continuing on the last day of each Fiscal Quarter thereafter. Unless sooner paid in full, the outstanding principal balance of the Term Loan shall be paid in full on the Term Loan Maturity Date.”
(e) Annex A to the Credit Agreement is hereby amended and restated in its entirety as set forth on Annex A attached hereto.
2.  Conditions to Effectiveness . This Amendment shall be effective upon consummation of each of the following conditions:
(a) Administrative Agent shall have received a fully-executed copy of this Amendment, together with the Consent and Reaffirmation of the Guarantor attached hereto and such other documents, agreements and instruments as Administrative Agent may require, each in form and substance reasonably acceptable to Administrative Agent;
(b) Administrative Agent shall have received a fully-executed copy of the resolutions of the Executive Committee of the Guarantor and the Board of Directors of the Borrower in the form attached hereto as Exhibit B;

 

2


 

(c) All proceedings taken in connection with the transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto shall be reasonably satisfactory to Administrative Agent and its legal counsel; and
(d) No Event of Default or Unmatured Event of Default shall have occurred and be continuing or shall be caused by the transactions contemplated by this Amendment.
3.  Representations and Warranties . To induce Administrative Agent and Lenders to enter into this Amendment, Borrower hereby represents and warrants to Administrative Agent and Lenders that:
(a) The execution, delivery and performance by Borrower of this Amendment and each of the other agreements, instruments and documents contemplated hereby are within its limited liability company power, have been duly authorized by all necessary limited liability company action, have received all necessary governmental approvals (if any shall be required), and do not and will not contravene or conflict with any provision of law applicable to any Transaction Party, the certificate of formation and limited liability company agreement of any Transaction Party, any order, judgment or decree of any court or governmental agency, or any agreement, instrument or document binding upon any Transaction Party or any of their property;
(b) Each of the Credit Agreement and the other Loan Documents, as amended by this Amendment and the documents and agreements contemplated thereby, are the legal, valid and binding obligation of the Transactions Parties which are parties thereto, enforceable against such Transaction Party, in accordance with its terms;
(c) The representations and warranties contained in the Credit Agreement and the other Loan Documents are true and correct in all material respects as of the date hereof (except to the extent such representations and warranties relate to a specific earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date), shall be deemed fully incorporated herein by this reference, and shall have the same force and effect as if such had been made on and as of the date hereof.
(d) The Transaction Parties have performed all of their respective obligations under the Credit Agreement and the other Loan Documents to be performed by them on or before the date hereof and as of the date hereof, the Transaction Parties are in compliance with all applicable terms and provisions of the Credit Agreement and each of the other Loan Documents to be observed and performed by it and no Event of Default or Unmatured Event of Default has occurred and is continuing.
4.  Severability . Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable (other than with respect to a material provision or term of this Amendment) shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable.
5.  References . Administrative Agent, Lenders and Borrower hereby agree that all references to the Credit Agreement which are contained in any of the other Loan Documents shall refer to the Credit Agreement as amended by this Amendment.

 

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6.  Counterparts . This Amendment may be executed in any number of counterparts, in original, facsimile or other authenticated electronic transmission, and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Amendment.
7.  Continued Effectiveness . Except as specifically set forth herein, the Credit Agreement and each of the other Loan Documents shall continue in full force and effect according to its terms.
8.  Costs and Expenses . Borrower hereby agrees that all expenses incurred by Administrative Agent and Lenders in connection with the preparation, negotiation and closing of this Amendment and the transactions contemplated hereby, including without limitation reasonable attorneys’ fees and expenses, shall be part of the Obligations.
9.  Binding Agreement . This Amendment shall be binding upon Borrower, Administrative Agent and Lenders and their respective successors and assigns.
[signature page follows]

 

4


 

IN WITNESS WHEREOF, this Amendment has been executed as of, and is effective as of, the day and year first written above.
         
  AXIS OPERATING COMPANY, LLC, as Borrower
 
 
  By   /s/ James Cowan    
  Its James Cowan/Director   
 
  ARI COMPONENT VENTURE LLC, as co-Administrative Agent, as co-Issuing Lender and
as a Lender
 
 
  By   /s/ James Cowan    
  Its James Cowan/President and CEO   
 
  AMSTED RAIL COMPANY, INC., as co-Administrative Agent, as co-Issuing Lender and
as a Lender
 
 
  By   /s/ John Worries    
  Its President Amsted Rail   

 

 


 

CONSENT AND REAFFIRMATION
The undersigned hereby (a) acknowledges receipt of a copy of the foregoing Fifth Amendment to Credit Agreement (the “Amendment”); (b) consents to Borrower’s execution and delivery of the Amendment; (c) agrees to be bound by the Amendment; (d) affirms that nothing contained in the Amendment shall modify in any respect whatsoever any Loan Document to which it is a party; and (e) reaffirms that such Loan Documents shall continue to remain in full force and effect. Although the undersigned has been informed of the matters set forth herein and has acknowledged and agreed to same, the undersigned understands that Administrative Agent and Lenders have no obligation to inform the undersigned of such matters in the future or to seek the undersigned’s acknowledgment or agreement to future amendments, waivers or consents, and nothing herein shall create such a duty.
IN WITNESS WHEREOF, the undersigned has executed this Consent and Reaffirmation on and as of the date of the Amendment.
         
  AXIS, LLC
 
 
  By:   /s/ James Cowan    
  Title: Member of the Executive Committee   

 

 

Exhibit 10.65
CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been omitted pursuant to a request for confidential treatment and, where applicable, have been marked with an asterisk (“[*****]”) to denote where omissions have been made. The confidential material has been filed separately with the Securities and Exchange Commission.
RAILCAR SERVICES AGREEMENT
Date: April 15, 2011
Between
AMERICAN RAILCAR INDUSTRIES, INC.
And
AMERICAN RAILCAR LEASING, LLC

 

 


 

CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been omitted pursuant to a request for confidential treatment and, where applicable, have been marked with an asterisk (“[*****]”) to denote where omissions have been made. The confidential material has been filed separately with the Securities and Exchange Commission.
This agreement (“Agreement”) is to confirm and document our mutual understanding with respect to the terms and conditions under which American Railcar Industries, Inc. (hereinafter “ARI”) of 100 Clark Street, St. Charles, MO 63301, a North Dakota corporation, agrees to provide AMERICAN RAILCAR LEASING LLC (hereinafter “ARL “) of 100 Clark Street, Suite 201, St. Charles, MO 63301 a Delaware corporation, with certain services as hereinafter specified.
  1.  
SERVICES
  a.  
For the purposes hereof, the term “Services” shall include, without limitation, the following activities and services to be provided to ARL by ARI:
Repair Services as described by Exhibit A, “American Railcar Leasing, LLC Fleet Services”, which is attached hereto and incorporated herein. The rates and fees for the Services shall be as specified in Exhibit A. These rates and fees will be effective for all estimates submitted, or services provided, after April 16, 2011 and are firm for the first one year term of this agreement. After the initial one year term, the labor rate may be increased annually, not to exceed [*****] in any one year. Any changes resulting from such negotiation will take effect on the date mutually agreed-to by the parties.
  b.  
Fees for Tax, Engineering and Administrative Services are described by Exhibit B, which is attached hereto and incorporated herein.
  2.  
PAYMENT
An invoice shall be submitted at the beginning of each month. Such invoice shall identify the Services, and items, if any, that require payment for disbursements made by ARI on behalf of ARL. Such items shall include, but not be limited to railcar cleaning, maintenance, repairs, modifications, paint and lining, any ad hoc services specifically requested by ARL, and payment of ad valorem taxes. The invoice provided shall accurately reflect the appropriate charges and/or credits due ARL on a monthly basis.
All invoices are due and payable by ARL to ARI via wire transfer within 5 business days after the end of a month for which the invoices are due. Any disbursements made by ARI on behalf of ARL will be paid on ARL’s behalf in a timely manner and ARL will reimburse ARI upon notification for any such disbursements.
  3.  
TERM
  a.  
The term of this Agreement shall commence upon April 16, 2011 and shall continue for a period of three (3) years. Thereafter, this Agreement shall remain in effect from year to year unless a party, at least sixty (60) days prior to the end of the 3-year period or any subsequent annual period, notifies the other party in writing that this Agreement shall terminate at the end of the then current period.
  b.  
Notwithstanding any termination of this Agreement, ARI agrees to provide ARL, during the period prior to termination and/or for up to three months thereafter, at ARL’s option, such assistance as ARL may request to return to ARL, or to transfer to another provider, all of ARL’s data, inventory, and ARI’s related responsibilities for the Services provided under this Agreement. Compensation to the canceled party for such transfer assistance services shall be no greater than the compensation for Services provided in Exhibit D attached hereto and incorporated herein.

 

1


 

CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been omitted pursuant to a request for confidential treatment and, where applicable, have been marked with an asterisk (“[*****]”) to denote where omissions have been made. The confidential material has been filed separately with the Securities and Exchange Commission.
  4.  
INSURANCE
  a.  
ARI shall obtain, and shall at all times during the Term maintain in full force and effect, with financially sound and reputable insurers selected in accordance with sound commercial and industry practices such property, casualty, public liability and other insurance on its property, assets, and business in such amounts and against such risks as is consistent and in accordance with sound commercial and industry practice for activities similar to ARI’s obligations hereunder.
  b.  
Without limitation on the foregoing clause (a), ARI shall obtain, and shall at all times during the Term maintain in full force and effect, with respect to the Cars, policies of such insurance and against such risks as are maintained by ARI from time to time with respect to other railcars for which it performs maintenance and servicing, including casualty, public liability and pollution coverage for all losses related to cargo, including clean-up costs and legal defense costs, subject, in each case, to compliance with certain insurance-related provisions in the User Leases and other provisions of this Section 4.1. Such insurance shall be in addition to any insurance provided by a User pursuant to the terms of any lease to which such Car is then subject. All insurance obtained by ARI with respect to the Cars may (and shall to the extent reasonably practicable unless ARL objects) be maintained under policies of insurance that ARI obtains for itself and other railcars so long as ARL and any other Person designated by ARL are additional insured’s there under and loss payees, as their interests may appear, with respect to the Cars, and such insurance may be placed through insurers who are Affiliates of ARI so long as the prices and terms thereof are comparable to those that could be obtained from comparable unaffiliated insurers. Copies of policies and certificates of insurance with respect thereto shall be furnished promptly to ARL. If at any time the insurance maintained by ARI on the Cars shall lapse or have limits lower than as described therein for whatever reason, ARI, promptly upon receipt of notice of the lapse of or decrease in such insurance coverage, shall give notice to ARL of the same. ARI shall also notify ARL promptly with respect to any default in the payment of any premium or of any other act or omission of ARI or of any other Person of which ARI has knowledge that might invalidate, render unenforceable, result in a lapse of or reduce any insurance coverage on the Cars maintained by ARI pursuant to this Agreement. ARI shall collect any amounts due from the insurers under such policies and shall provide ARL with such reasonable assistance as ARL may request in any dealings that ARL may have with such insurers, including the pursuit of any claims under such policies. To the extent that ARI elects to self-insure against certain risks with respect to the Cars, then upon the occurrence of an applicable insurable event with respect to a Car, ARI shall remit to ARL the amount of such self-insured risk.

 

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CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been omitted pursuant to a request for confidential treatment and, where applicable, have been marked with an asterisk (“[*****]”) to denote where omissions have been made. The confidential material has been filed separately with the Securities and Exchange Commission.
  c.  
Each insurance policy maintained by ARI pursuant to the provisions of Section 4.1(b) shall (i) expressly provide that no cancellation or termination thereof material change therein shall be effective unless at least thirty (30) days’ prior written notice shall have been given to ARL, (ii) expressly provide that if such insurance shall be cancelled for any reason whatsoever, or if any substantial changes are made in the coverage that affect the interest of ARL or any other Person listed as an additional insured or loss payee, or if such insurance shall be allowed to lapse for nonpayment of premium, such cancellation, change or lapse shall not be effective as to ARL and any such other Person for thirty (30) days after receipt by ARL of written notice from such insurers of such cancellation, change or lapse, (iii) permit ARL or any such other Person to make payments to affect the continuation of such insurance coverage upon notice of cancellation due to nonpayment of premium, and (iv) expressly provide that if such insurance shall not be renewed for any reason whatsoever, such insurers shall provide written notice of such non-renewal to ARL at least thirty (30) days prior to the expiration date of the policy.
  d.  
ARI shall deliver or cause to be delivered to ARL (i) no later than the date hereof, certificates evidencing the insurance required pursuant to this section 4.1 and evidence satisfactory to ARL that the Cars have been properly included in a schedule to the insurance policies required pursuant to Section 4.1(b), and (ii) promptly after each renewal thereof, additional certificates evidencing the renewal of such insurance.
  e.  
In the event that any insurance coverage required by Section 4.1(b) or the limits deductible amounts, or requirements thereof are not reasonably available and commercially feasible in the available insurance market, ARL shall not unreasonably withhold its agreement to waive the requirement of such coverage, limits, deductible amounts, or requirements to the extent the maintenance thereof is not so available; provided, however, that (i) ARI shall have made a request for such waiver and shall have provided ARL with written reports prepared by an independent insurance advisor certifying that such coverage, limits, deductible amounts, or requirements are not reasonably available and commercially feasible in the available insurance market for railcars similar to the Cars and, where the required amount of coverage is not so available, certifying as maximum amount that is so available and (ii) any waiver granted pursuant to this clause shall be effective only during the period that the coverage, limits, deductible amounts, or requirements thereby waived are not reasonably available and commercially feasible in the available insurance market.
  5.  
INDEMNIFICATION
ARL shall defend, indemnify and hold ARI harmless from and against any and all claims, actions, damages, expenses, losses or liabilities incurred by or asserted against ARI to the extent caused by ARL’s negligence or breach of this Agreement. ARI shall defend, indemnify and hold ARL harmless from and against any and all claims, actions, damages, expenses, losses or liabilities incurred or asserted against ARL to the extent caused by ARI’s negligence or breach of this Agreement. Neither ARI nor ARL (nor its representatives) shall have liability to the other under this Agreement for any punitive, incidental or consequential damages, such as excess costs incurred, data loss or lost profits or revenue.

 

3


 

CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been omitted pursuant to a request for confidential treatment and, where applicable, have been marked with an asterisk (“[*****]”) to denote where omissions have been made. The confidential material has been filed separately with the Securities and Exchange Commission.
  6.  
REMEDIES.
It is mutually agreed that the time of performance of the Services hereunder and payment of charges is of the essence of this Agreement. If either party shall default in the performance or observance of any of the other agreements herein contained to be performed or observed and such default shall continue for ten (10) days after written notice from the non-defaulting party, or if there shall be filed by or against either party a petition in bankruptcy or for reorganization under the Bankruptcy Law or there shall be a receiver appointed for any part of such party’s property or such party shall make a general assignment for the benefit of creditors, then and in any of said events, the other party at its election, may immediately terminate this Agreement.
  7.  
CONFIDENTIALITY
ARI, its employees and agents shall treat and maintain as confidential all of ARL’s confidential and proprietary information, and agrees not to use or disclose any such information to others except as is necessary to perform Services hereunder. This information will include but not be limited to any technical information, experience or data regarding ARL’s products, plans, programs, plants, processes, costs, equipment, operations, or customers which may be disclosed to or come within the knowledge of ARI, its employees and agents in the performance of this Agreement. However, no confidential relationship will arise or exist as to any such disclosed subject matter which is in the public domain other than as a result of a breach of this agreement or other wrongful acts by ARI, its employees, or agents.
ARL, its employees and agents shall treat and maintain as confidential all of ARI’s confidential and proprietary information, and agrees not to use or disclose any such information to others except as is necessary to utilize and benefit from the Services hereunder. This information will include but not be limited to any technical information, experience or data regarding ARI’s products, plans, programs, plants, processes, costs, equipment, operations, or customers which may be disclosed to or come within the knowledge of ARL, its employees and agents in the performance of this Agreement. However, no confidential relationship will arise or exist as to any such disclosed subject matter which is in the public domain other than as a result of a breach of this agreement or other wrongful acts by ARL, its employees, or agents.
  8.  
NOTICES
Any notices, requests, demands, and determinations under this Agreement (other than routine operational communications), shall be in writing and shall be deemed duly given (i) when delivered by hand, (ii) one (1) business day after being given to a nationally recognized express courier with a reliable system for tracking delivery, or (iii) when sent confirmed facsimile or e-mail with a copy sent by registered or certified mail, return receipt requested, postage prepaid, and addressed as follows:
         
 
  If to ARL:   American Railcar Leasing LLC
 
      100 Clark St., Suite 201
 
      St. Charles, MO 63301
 
      Attn: Dave Maechling, Director — Leasing Services
 
       
 
  If to ARI   American Railcar Industries, Inc.
 
      100 Clark Street
 
      St. Charles, MO 63301
 
      Attn: John Smith — Sr. Director Fleet Services

 

4


 

CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been omitted pursuant to a request for confidential treatment and, where applicable, have been marked with an asterisk (“[*****]”) to denote where omissions have been made. The confidential material has been filed separately with the Securities and Exchange Commission.
Either party, by written notice to the other party, may change the person and/or address to which notice shall be given. Both parties agree to acknowledge in writing the receipt of any notice delivered in person.
  9.  
WAIVER
The failure of a party hereunder to assert the right to enforce an obligation of the other party shall not be deemed a waiver of such right or obligation and in no event shall any waiver by ARL or ARI of any default under this Agreement operate as a waiver of any further default, whether of a like or different character or a continuing waiver of subsequent defaults.
  10.  
MISCELLANEOUS
  a.  
This Agreement shall be governed by the laws of the State of New York. By signing this Agreement, the parties agree to submit to the jurisdiction of the courts of the State of New York. The confidentiality and indemnification obligations of the parties under this Agreement shall survive the termination or expiration of this Agreement.
  b.  
If any clause or provision of this Agreement shall be adjudged invalid or unenforceable by a court of competent jurisdiction or by operation of any applicable law, it shall not affect the validity or enforceability of any other clause or provision, which shall remain in full force and effect.
  c.  
Neither party will assign, transfer, encumber, or otherwise dispose of this Agreement without the written consent of the other party, where such consent shall not be unreasonably withheld. Any transfer cost will be borne by the party making the transfer.
  d.  
In no event shall either party be liable for any consequential, incidental, special, or punitive damages, including but not limited to any damages for lost profits, or business opportunities, or damage to reputation.
  e.  
This Agreement, along with its Exhibits and Riders, constitutes the entire Agreement with respect to ARI, ARL and the Services, and supersedes all prior negotiations, dealings, and agreements, whether verbal or written. This Agreement may not be modified unless done in writing and signed by authorized representatives of ARI and ARL.
  f.  
The headings of this Agreement are for reference only and are not to be construed as part of this Agreement.
  11.  
[*****]
  12.  
DEFINITIONS
“AAR” means the Association of American Railroads and any successor thereto.
“ARI” shall have the meaning set forth in the preamble hereof.

 

5


 

CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been omitted pursuant to a request for confidential treatment and, where applicable, have been marked with an asterisk (“[*****]”) to denote where omissions have been made. The confidential material has been filed separately with the Securities and Exchange Commission.
“ARL” shall have the meaning set forth in the preamble hereof.
“Cars” means at any time the hopper, tank and other railcars owned or managed by ARL or any of its Affiliates.
“Owner” means any Person that owns Cars.
“Person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization or other entity, or Governmental Authority.
“Regulatory Authorities” means the ICC, the DOT, the DOL, the AAR or any other governmental authority or industry agency or authority that has proper jurisdiction to regulate the ownership, leasing, operation, maintenance or use of the Cars.
“ICC” means the United States Interstate Commerce Commission.
“DOL” means the United States Department of Labor.
“DOT” means the United States Department of Transportation.
“User Lease” means any car service contract or other lease of one or more Cars or any separate schedule or rider to a master car service contract or other lease and which schedule or rider incorporates by reference all of the terms and conditions of such master contract or lease other than those in other schedules or riders thereto or as specifically identified in such schedule or rider.
“User” means any shipper, railroad or other Person not an Affiliate of ARL or any Owner who uses cars pursuant to a User Lease.
IN WITNESS WHEREOF, the parties have executed this Agreement:
             
American Railcar Industries, Inc .   American railcar leasing, llc
 
           
By:
  /s/ James Cowan   By:   /s/ Harry L. McKinstry
 
           
 
  Name: James Cowan       Name: Harry L. McKinstry
 
  Title: President / CEO       Title: Vice President — Finance & Controller
 
           
Date: April 15, 2011   Date: April 15, 2011

 

6


 

CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been omitted pursuant to a request for confidential treatment and, where applicable, have been marked with an asterisk (“[*****]”) to denote where omissions have been made. The confidential material has been filed separately with the Securities and Exchange Commission.
EXHIBIT A
AMERICAN RAILCAR LEASING, LLC
REPAIR SERVICES
1. REPAIR SERVICES
  a.  
ARI shall use reasonable commercial efforts to cause the Cars to be repaired in good operating order and condition. The standard for Repair services shall be the highest of (i) standard industry practice, (ii) any standard required or set forth for the Cars or railcars of a similar class by law or any Regulatory Authority, and (iii) with respect to the Cars or railcars of a similar class by law or any Regulatory Authority, and (iv) with respect to the Cars leased to each User, any standard set by such User, whether by terms of a User Lease or by other understanding or agreement between a User and ARL or an Owner; provided, however, that such standard shall never be lower than the standard for Repair services provided to any other customer of ARI to which ARI provides general maintenance services for a fleet of owned or leased railcars; and provided, further, that subject to Section 1(e), (1) expenditures for Repair services in excess of those expenditures shall not be made without the prior written consent of ARL unless such Repair services are required pursuant to applicable law or the rules and regulations of any Regulatory Authority and (2) unless required pursuant to applicable law or the rules and regulations of any Regulatory Authority or consented to in writing by ARL, no action shall be taken hereunder by ARI, regardless of cost, that reduces the value or utility of any Car. Repair services shall include, without limitation, all repairs, servicing, painting, alterations, modifications, improvements or additions to the Cars in order to meet any of the foregoing standards. (Repair services also shall include sales of railcar materials and parts requested by railroads, mobile units, mini-shops or ARL). Simultaneously with the execution and delivery of this Agreement, ARL shall provide ARI with guidelines with respect to certain Cars, which guidelines may be amended by ARL from time to time. In the event that Repair services are to be provided in respect of any Car covered by such guidelines, ARI shall notify ARL prior to the performance of such Repair services.
  b.  
Repair services may be performed by ARI or third Persons as may be designated by ARL from time-to-time. All other services to be provided by ARI under this Agreement shall be performed by ARI unless otherwise consented to in writing by ARL.
  c.  
If material supplied by ARI or work performed by it is found to be defective, ARL shall notify ARI and ARL shall have the right to require the prompt correction thereof by ARI and ARI’s expense and risk or, at ARL’s option, ARL may correct the work or have the same corrected, charging ARI for the cost of making such correction. Such correction shall not affect ARI’s warranty pursuant to Section 1(d). If correction of such work is impractical, in the opinion of ARL, ARI shall bear all risk after notice of rejection and ARI will, if requested in writing to do so by ARL, at ARI’s expense, promptly such work or parts, ARL may by contract or otherwise replace such work or such parts and charge ARI the excess cost occasioned to ARL thereby. In lieu of the foregoing, ARL may reject and/or return any defective work or materials and ARI shall refund to ARL any payment made therefore.

 

7


 

CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been omitted pursuant to a request for confidential treatment and, where applicable, have been marked with an asterisk (“[*****]”) to denote where omissions have been made. The confidential material has been filed separately with the Securities and Exchange Commission.
  d.  
ARI warrants to ARL that (i) all labor furnished to ARL hereunder shall be performed in a workmanlike manner, (ii) all parts furnished to ARL hereunder that are designed by ARI shall be free from all defects in design and materials, and (iii) all parts furnished by ARL hereunder that are designed by ARL and manufactured by ARI shall be free from all defects in materials. ARI agrees that this warranty shall survive acceptance of and payment for such Repair services. In the event that ARL requests that ARI obtain any parts from a third party, ARI shall assign to ARL any warranties obtained from such third party in respect of such parts or, if such third party warranties are not assignable, shall cooperate with ARL so as to afford ARL the benefit of such third party warranties.
  e.  
Compliance with Law. ARI shall comply in all respects with all applicable laws, rules and regulations of all Governmental Authorities in the operations of it business and in carrying out its obligations hereunder. ARI, at ARL’s expense, shall use reasonable commercial efforts to cause the Cars to comply, and ARL agrees that each User Lease entered into or renewed after the date hereof shall require the User there under to comply, in all respects with all applicable laws, rules and regulations of the Regulatory Authorities. In the event that such laws, rules or regulations require any alteration of a Car, or in the event that any equipment or appliance of a Car shall be required to be changed or replaced, or in the event that any additional or other equipment or appliance is required to be installed on a Car in order to comply with such laws, rules or regulations, ARI shall notify ARL that such Alteration is required and, ARL so instructs, at ARL’s expense, shall make such alteration, change, replacement or addition. In addition, promptly after ARI has notice that any laws, rules or regulations will or may require an Alteration, ARI shall notify ARL whether ARI believes, in the exercise of its good faith business judgment, that such law, rule or regulation should be contested.
1.1  
REPAIR SERVICE PAYMENTS. For Repair Services provided under this agreement by ARI, ARL will pay for:
  i)  
Materials and parts utilized in the performance of these services. A) [*****] such materials or parts including inbound freight, plus [*****] or B) if ARI manufactures such material or parts, actual cost will be [*****], including inbound freight, plus [*****], plus ii) labor costs at the, effective labor rate as adjusted by the parties pursuant to the terms of section 1(a). iii) AAR repair work to ARL’s cars will be billed at [*****].
  ii)  
Labor Rate effective April 16, 2011 is: [*****] per hour, and [*****].

 

8


 

CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been omitted pursuant to a request for confidential treatment and, where applicable, have been marked with an asterisk (“[*****]”) to denote where omissions have been made. The confidential material has been filed separately with the Securities and Exchange Commission.
EXHIBIT B
AMERICAN RAILCAR LEASING LLC
FEES FOR TAX, ENGINEERING AND ADMINISTRATIVE SERVICES
Ad Valorem Tax Services, as described in Exhibit C, are provided at an annual cost of [*****].
Separation of cost responsibility on all ARL’s BRC’s at the shop level [*****].
Electronic status reports of ARL cars in ARI shops on a daily basis [*****].
Continue current month end cost summary, and cycle time reports.
All other Engineering and Administrative Services provided to ARL by ARI will be quoted on a case-by-case basis as requested by ARL.

 

9


 

CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been omitted pursuant to a request for confidential treatment and, where applicable, have been marked with an asterisk (“[*****]”) to denote where omissions have been made. The confidential material has been filed separately with the Securities and Exchange Commission.
EXHIBIT C
AD VALOREM TAXES
Service to be provided for a fleet of approximately [*****] cars for a minimum period of 12 months. Fee is to be on a flat monthly amount, to include all normal operating expenses. The only additions would be for travel expense, and outsourced services, such as legal fees. These additional services require prior approval of ARL. If car numbers fluctuate significantly during the contract period, the annual fee, as established in Exhibit B for Tax Services, will be reviewed by the parties, and adjusted.

Services
   
Attend the regular meetings of the RSI, at your expense.
   
Participate in various legal and legislative matters in conjunction with the RSI and make recommendations to ARL that would be worthwhile to ARL to support financially. Any travel required as the result of the participation of ARL in specific efforts would be billed in addition to the monthly rent, after approval by ARL.
   
Present obsolescence information, compile and present movement studies, protest and correct assessor errors in order to assure that all tax amounts are fair and as small as legally possible. Contest such assessments with the appropriate taxing jurisdictions and appeal boards as necessary.
   
Prepare and file all tax returns, in accordance with due dates, or revised due dates.
   
Sign such tax returns, (with authorization given by ARL).
   
Provide electronic copies of all tax returns to ARL.
   
Review notice of assessed value in various states, request work papers if necessary and check values for accuracy and reasonableness. Correct errors if found, and discuss corrected values with assessors. If the assessed values are excessive, evaluate whether to negotiate and/or protest. Contest such assessments with the appropriate taxing jurisdictions and appeal boards as necessary.
   
All tax bills should be mailed directly to the Tax Service Supplier. All payments are to be processed and issued by the Tax Service Supplier in a timely manner. ARL will fund the Tax Service Supplier prior to the Tax Service Supplier paying the tax bills. The Tax Service Supplier will provide information in detail showing the payments made.

 

10


 

CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been omitted pursuant to a request for confidential treatment and, where applicable, have been marked with an asterisk (“[*****]”) to denote where omissions have been made. The confidential material has been filed separately with the Securities and Exchange Commission.
The Tax Service Supplier will provide ARL, on an annual basis, with electronic copies of all tax bills and cancelled checks.
Litigation
The Tax Service Supplier will represent ARL in any litigation of tax matters. Any such litigation of tax
matters be it for ARL or part of a class action, must be agreed to by ARL in advance.

 

11


 

CONFIDENTIAL TREATMENT REQUESTED: Certain portions of this document have been omitted pursuant to a request for confidential treatment and, where applicable, have been marked with an asterisk (“[*****]”) to denote where omissions have been made. The confidential material has been filed separately with the Securities and Exchange Commission.
EXHIBIT D
AMERICAN RAILCAR LEASING, LLC
As specified in Section 3 (b), TERM, the compensation due ARI for Services relating to the termination of this Agreement shall be as follows:
  a.  
[*****] per hour, based on an eight (8) hour day.
  b.  
All hours over eight (8) per day payable at the rate of [*****] per hour.
  c.  
If travel is involved, ARL shall pay all reasonable travel, food, and lodging expenses.
  d.  
For days involving travel only, a maximum of four (4) hours at the [*****] per hour rate is chargeable, plus reasonable travel expenses.
  e.  
Copies, facsimiles, magnetic media, and other office supplies will be charged at ARI’s prevailing rate at the time of Services, which shall be consistent with reasonable commercial rates.

 

12

Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James Cowan, President & CEO of American Railcar Industries, Inc., certify that:
1.  
I have reviewed this quarterly report on Form 10-Q of American Railcar Industries, Inc.;
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.  
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.  
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date: May 3, 2011  /s/ James Cowan    
  James Cowan, President and    
  Chief Executive Officer   

 

 

Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Dale C. Davies, Chief Financial Officer of American Railcar Industries, Inc., certify that:
1.  
I have reviewed this quarterly report on Form 10-Q of American Railcar Industries, Inc.;
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.  
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared.
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.  
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date: May 3, 2011  /s/ Dale C. Davies    
  Dale C. Davies, Senior Vice President,    
  Chief Financial Officer and Treasurer   

 

 

Exhibit 32
Certification
Pursuant to Rule 13a-14 (b) and Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350 (a) and (b))
I, James Cowan, President and Chief Executive Officer of American Railcar Industries, Inc. (the “Company”) certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that, to my knowledge:
  1.   the quarterly report on Form 10-Q of the Company for the three months ended March 31, 2011 (the “Quarterly Report”) fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and
  2.   the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
Date: May 3, 2011  /s/ James Cowan    
  James Cowan, President and Chief    
  Executive Officer   
I, Dale C. Davies, Senior Vice President, and Chief Financial Officer of American Railcar Industries, Inc. (the “Company”) certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that to my knowledge:
  1.   the quarterly report on Form 10-Q of the Company for the three months ended March 31, 2011 (the “Quarterly Report”) fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and
  2.   the information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
Date: May 3, 2011  /s/ Dale C. Davies    
  Dale C. Davies, Senior Vice President,    
  Chief Financial Officer and Treasurer