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EXCEL - IDEA: XBRL DOCUMENT - American Railcar Industries, Inc. | Financial_Report.xls |
EX-32 - EXHIBIT 32 - American Railcar Industries, Inc. | c23599exv32.htm |
EX-31.2 - EXHIBIT 31.2 - American Railcar Industries, Inc. | c23599exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - American Railcar Industries, Inc. | c23599exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 September 30, 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 (State of Incorporation) |
43-1481791 (I.R.S. Employer Identification No.) |
|
100 Clark Street, St. Charles, Missouri (Address of principal executive offices) |
63301 (Zip Code) |
(636) 940-6000
(Registrants telephone number, including area code)
(Registrants 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
þ 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 registrants common stock, without par value, outstanding on November
1, 2011 was 21,352,297 shares.
AMERICAN RAILCAR INDUSTRIES, INC.
INDEX TO FORM 10-Q
Item Number | Page Number |
|||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
28 | ||||||||
37 | ||||||||
37 | ||||||||
37 | ||||||||
37 | ||||||||
38 | ||||||||
39 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
2
Table of Contents
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
As of | ||||||||
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 284,099 | $ | 318,758 | ||||
Accounts receivable, net |
32,441 | 21,002 | ||||||
Accounts receivable, due from related parties |
3,473 | 4,981 | ||||||
Income taxes receivable |
14,878 | 14,939 | ||||||
Inventories, net |
114,628 | 50,033 | ||||||
Deferred tax assets |
3,632 | 3,029 | ||||||
Prepaid expenses and other current assets |
3,502 | 2,654 | ||||||
Total current assets |
456,653 | 415,396 | ||||||
Property, plant and equipment, net |
175,630 | 181,255 | ||||||
Deferred debt issuance costs |
1,489 | 1,951 | ||||||
Interest receivable, due from related parties |
308 | 187 | ||||||
Goodwill |
7,169 | 7,169 | ||||||
Investments in and loans to joint ventures |
45,319 | 48,169 | ||||||
Other assets |
862 | 240 | ||||||
Total assets |
$ | 687,430 | $ | 654,367 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 66,417 | $ | 29,334 | ||||
Accounts payable, due to related parties |
499 | 275 | ||||||
Accrued expenses and taxes |
8,909 | 5,095 | ||||||
Accrued compensation |
10,880 | 11,054 | ||||||
Accrued interest expense |
1,719 | 6,875 | ||||||
Total current liabilities |
88,424 | 52,633 | ||||||
Senior unsecured notes |
275,000 | 275,000 | ||||||
Deferred tax liability |
8,226 | 7,938 | ||||||
Pension and post-retirement liabilities |
6,132 | 6,707 | ||||||
Other liabilities |
2,700 | 4,313 | ||||||
Total liabilities |
380,482 | 346,591 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value, 50,000,000
shares authorized, 21,352,297
shares issued and outstanding at September
30, 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 |
66,475 | 67,209 | ||||||
Accumulated other comprehensive income |
651 | 1,407 | ||||||
Total stockholders equity |
306,948 | 307,776 | ||||||
Total liabilities and stockholders equity |
$ | 687,430 | $ | 654,367 | ||||
See Notes to the Condensed Consolidated Financial Statements.
3
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
For the Three Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
Manufacturing
operations (including revenues from affiliates of $0 and $19,274 for the
three months ended September 30, 2011 and 2010, respectively) |
$ | 108,615 | $ | 48,404 | ||||
Railcar services (including revenues from affiliates of $6,916 and $4,263 for the
three months ended September 30, 2011 and 2010, respectively) |
17,169 | 16,393 | ||||||
Total revenues |
125,784 | 64,797 | ||||||
Cost of revenues: |
||||||||
Manufacturing operations |
(98,211 | ) | (49,366 | ) | ||||
Railcar services |
(12,618 | ) | (13,141 | ) | ||||
Total cost of revenues |
(110,829 | ) | (62,507 | ) | ||||
Gross profit |
14,955 | 2,290 | ||||||
Selling, administrative and other (including costs to a related party of $145
and $154
for the three months ended September 30, 2011 and 2010, respectively) |
(2,934 | ) | (6,232 | ) | ||||
Earnings (loss) from operations |
12,021 | (3,942 | ) | |||||
Interest income (including income from related parties of $717 for both the three
months ended September 30, 2011 and 2010) |
1,005 | 1,058 | ||||||
Interest expense |
(4,478 | ) | (5,316 | ) | ||||
Other income (including income from a related party of $4 for both the
three months ended September 30, 2011 and 2010) |
5 | 4 | ||||||
Loss from joint ventures |
(2,170 | ) | (1,946 | ) | ||||
Earnings (loss) before income taxes |
6,383 | (10,142 | ) | |||||
Income tax (expense) benefit |
(2,357 | ) | 3,890 | |||||
Net earnings (loss) |
$ | 4,026 | $ | (6,252 | ) | |||
Net earnings (loss) per common share basic and diluted |
$ | 0.19 | $ | (0.29 | ) | |||
Weighted average common shares outstanding basic and diluted |
21,352 | 21,302 | ||||||
Dividends declared per common share |
$ | | $ | |
See Notes to the Condensed Consolidated Financial Statements.
4
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
Manufacturing operations (including revenues from affiliates of $1,221
and $65,401 for the nine months ended September 30, 2011 and 2010, respectively) |
$ | 271,908 | $ | 127,262 | ||||
Railcar services (including revenues from affiliates of $19,049 and $10,283
for the nine months ended September 30, 2011 and 2010, respectively) |
50,632 | 51,011 | ||||||
Total revenues |
322,540 | 178,273 | ||||||
Cost of revenues: |
||||||||
Manufacturing operations |
(250,892 | ) | (131,643 | ) | ||||
Railcar services |
(38,493 | ) | (40,814 | ) | ||||
Total cost of revenues |
(289,385 | ) | (172,457 | ) | ||||
Gross profit |
33,155 | 5,816 | ||||||
Selling, administrative and other (including costs to a related party of $436 and
$462 for the nine months ended September 30, 2011 and 2010, respectively) |
(14,878 | ) | (17,925 | ) | ||||
Earnings (loss) from operations |
18,277 | (12,109 | ) | |||||
Interest income (including income from related parties of $2,111 and $1,938 for
the
nine months ended September 30, 2011 and 2010, respectively) |
2,865 | 2,557 | ||||||
Interest expense |
(15,143 | ) | (15,956 | ) | ||||
Other income (including income from a related party of $11 and $12 for the
nine months ended September 30, 2011 and 2010, respectively) |
24 | 381 | ||||||
Loss from joint ventures |
(7,241 | ) | (5,999 | ) | ||||
Loss before income taxes |
(1,218 | ) | (31,126 | ) | ||||
Income tax benefit |
484 | 11,969 | ||||||
Net loss |
$ | (734 | ) | $ | (19,157 | ) | ||
Net loss per common share basic and diluted |
$ | (0.03 | ) | $ | (0.90 | ) | ||
Weighted average common shares outstanding basic and diluted |
21,351 | 21,302 | ||||||
Dividends declared per common share |
$ | | $ | |
See Notes to the Condensed Consolidated Financial Statements.
5
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Operating activities: |
||||||||
Net loss |
$ | (734 | ) | $ | (19,157 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation |
16,872 | 17,777 | ||||||
Amortization of deferred costs |
524 | 524 | ||||||
Loss on disposal of property, plant and equipment |
82 | 34 | ||||||
Stock based compensation |
(1,128 | ) | 2,353 | |||||
Change in interest receivable, due from related parties |
(120 | ) | 837 | |||||
Change in investments in joint ventures as a result of loss |
7,241 | 5,999 | ||||||
Realized gain on short-term investments available-for-sale securities |
| (379 | ) | |||||
Deferred income tax benefit |
(312 | ) | (12,320 | ) | ||||
(Recovery) provision for doubtful accounts receivable |
(26 | ) | 68 | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
(11,437 | ) | (7,663 | ) | ||||
Accounts receivable, due from related parties |
1,448 | (4,601 | ) | |||||
Income taxes receivable |
(12 | ) | 831 | |||||
Inventories, net |
(64,633 | ) | (18,049 | ) | ||||
Prepaid expenses and other current assets |
(848 | ) | 1,032 | |||||
Accounts payable |
37,091 | 15,462 | ||||||
Accounts payable, due to related parties |
224 | (196 | ) | |||||
Accrued expenses and taxes |
(1,989 | ) | (4,408 | ) | ||||
Other |
(1,463 | ) | 19 | |||||
Net cash used in operating activities |
(19,220 | ) | (21,837 | ) | ||||
Investing activities: |
||||||||
Purchases of property, plant and equipment |
(11,836 | ) | (4,852 | ) | ||||
Proceeds from the sale of property, plant and equipment |
117 | 104 | ||||||
Proceeds from the sale of short-term investments available-for-sale securities |
| 4,180 | ||||||
Investments in and loans to joint ventures |
(4,453 | ) | (14,298 | ) | ||||
Net cash used in investing activities |
(16,172 | ) | (14,866 | ) | ||||
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 |
(23 | ) | 1 | |||||
Decrease in cash and cash equivalents |
(34,659 | ) | (36,702 | ) | ||||
Cash and cash equivalents at beginning of period |
318,758 | 347,290 | ||||||
Cash and cash equivalents at end of period |
$ | 284,099 | $ | 310,588 | ||||
See Notes to the Condensed Consolidated Financial Statements.
6
Table of Contents
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 Companys 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
direct and indirect 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 Companys other wholly-owned subsidiaries, refer to Note
8. All intercompany transactions and balances have been eliminated.
The Companys operations are located in the United States and Canada. The Company operates a
railcar repair facility in Sarnia, Ontario Canada. Canadian revenues were 1.4% and 2.0% of total
consolidated revenues for the three months ended September 30, 2011 and 2010, respectively.
Canadian revenues were 1.5% and 2.3% of total consolidated revenues for the nine months ended
September 30, 2011 and 2010, respectively. Canadian assets were 1.7% of total consolidated assets
as of both September 30, 2011 and December 31, 2010. In addition, the Companys subsidiaries ARM I
and ARM II are located in Mauritius, through which the Company holds a 50% interest in an Indian
joint venture. Refer to Note 8 for further information. Assets held by ARM I and ARM II were 1.2%
and 1.5% of total consolidated assets as of September 30, 2011 and December 31, 2010, respectively.
Note 2 Summary of Accounting Policies
Other than the accounting policies included below that were updated during the third quarter of
2011, there have been no material changes to the other accounting policies that were included in
the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Revenue recognition
Revenues from railcar sales are recognized following completion of manufacturing, inspection,
customer acceptance and title transfer, which is when the risk for any damage or loss with respect
to the railcars passes to the customer. Paint and lining work may be outsourced and, as a result,
the sale for the railcar may be recorded after customer acceptance when it leaves the manufacturing
plant and the sale for the lining work may be separately recorded following completion of that work
by the independent contractor, customer acceptance and final shipment. Revenues from railcar
leasing are recognized on a straight-line basis over the life of the lease. Revenues from railcar
and industrial components are recorded at the time of product shipment, in accordance with the
Companys contractual terms. Revenue for railcar maintenance services is recognized upon completion
and shipment of railcars from ARIs plants. The Company does not currently bundle railcar service
contracts with new railcar sales. Revenue for fleet management services is recognized as performed.
7
Table of Contents
The Company records amounts billed to customers for shipping and handling as part of sales and
records related costs in cost of revenue.
ARI presents any sales tax assessed by a governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer on a net basis.
Revenues related to consulting type contracts are accounted for under the percentage-of-completion
method. Profits expected to be realized on these contracts are based on the total contract revenues
and costs based on the estimate of the percentage of project completion. Revenues recognized in
excess of amounts billed are recorded to unbilled revenues and included in other current assets on
the condensed consolidated balance sheets. Billings in excess of revenues recognized on in-progress
contracts are recorded to unbilled costs and included in other current liabilities on the condensed
consolidated balance sheets. These estimates are reviewed and revised periodically throughout the
term of the contracts and any adjustments are recorded on a cumulative basis in the period the
revisions are made.
Use of estimates
ARI has made a number of estimates and assumptions relating to the reporting of assets,
liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with accounting principles generally accepted in
the United States of America. Significant items subject to estimates and assumptions include, but
are not limited to, deferred taxes, workers compensation accrual, valuation allowances for accounts
receivable and inventory obsolescence, depreciable lives of assets, goodwill impairment, stock
based compensation fair values, the reserve for warranty claims and revenue recognized under the
percentage-of-completion method. Actual results could differ from those estimates.
Recent accounting pronouncements
In September 2011, the Financial Accounting Standards Board (FASB) issued authoritative guidance
related to intangibles goodwill and other, which allows for companies to first consider
qualitative factors as a basis for assessing impairment and determining the necessity of a detailed
impairment test. This guidance is effective for fiscal years beginning after December 15, 2011 with
early adoption permitted. The Company plans on adopting the guidance for the first quarter of 2012.
The adoption of the new guidance will not have an impact on the Companys consolidated financial
statements.
In June 2011, the FASB issued authoritative guidance to amend current comprehensive income
guidance. The new guidance eliminates the option to present the components of other comprehensive
income as part of the statement of shareholders equity. Instead, the Company must report
comprehensive income in either a single continuous statement of comprehensive income which contains
two sections, net income and other comprehensive income, or in two separate but consecutive
statements. This guidance is effective for the interim and annual periods beginning after December
15, 2011 with early adoption permitted. The Company plans on adopting the guidance for the first
quarter of 2012. The adoption of the new guidance will not have an impact on the Companys
consolidated financial statements as it only requires a change in the format of the current
presentation.
Note 3 Short-term Investments Available-for-Sale Securities
During January 2008, Longtrain purchased approximately 1.5 million shares of common stock in the
open market for $27.9 million. Subsequently, Longtrain sold a majority of the 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 nine months ended September 30, 2010, the remaining approximately 0.4 million shares of
common stock were sold for proceeds of $4.1 million and realized gains totaling $0.4 million. As
the shares were sold in the
first half of 2010, there was no effect on the three months ended September 30, 2010. The cost
basis of the shares sold was determined through specific identification.
8
Table of Contents
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 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 financial
assets and/or liabilities as of the reporting date. The type of financial assets and/or
liabilities included in Level 1 include listed equities and listed derivatives. The
Company does not adjust the quoted price for these financial assets and/or liabilities,
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. Financial assets
and/or liabilities 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 financial assets and/or
liabilities and include situations where there is little, if any, market activity for
the financial assets and/or liabilities. 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, financial assets and/or liabilities level within the fair value
hierarchy is based on the lowest level of input that is significant to the fair value measurement.
ARIs assessment of the significance of a particular input to the fair value measurement in its
entirety requires judgment and considers factors specific to the financial assets and/or
liabilities.
The carrying amount of cash and cash equivalents, accounts receivable, other current assets, and
accounts payable approximate fair value, due to their short-term nature.
Note 5 Inventories
Inventories consist of the following:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Raw materials |
$ | 75,035 | $ | 30,676 | ||||
Work-in-process |
32,766 | 14,270 | ||||||
Finished products |
8,948 | 7,183 | ||||||
Total inventories |
116,749 | 52,129 | ||||||
Less reserves |
(2,121 | ) | (2,096 | ) | ||||
Total inventories, net |
$ | 114,628 | $ | 50,033 | ||||
9
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Note 6 Property, Plant and Equipment
The following table summarizes the components of property, plant and equipment.
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Property, plant and equipment |
||||||||
Buildings |
$ | 149,077 | $ | 149,021 | ||||
Machinery and equipment |
185,873 | 177,217 | ||||||
334,950 | 326,238 | |||||||
Less accumulated depreciation |
(164,718 | ) | (149,304 | ) | ||||
Net property, plant and equipment |
170,232 | 176,934 | ||||||
Land |
3,335 | 3,335 | ||||||
Construction in process |
2,063 | 986 | ||||||
Total property, plant and equipment |
$ | 175,630 | $ | 181,255 | ||||
Depreciation expense
Depreciation expense for the three months ended September 30, 2011 and 2010 was $5.4 million and
$5.9 million, respectively. Depreciation expense for the nine months ended September 30, 2011 and
2010 was $16.9 million and $17.8 million, respectively.
Capitalized interest
In conjunction with the interest costs incurred related to the Unsecured Senior Fixed Rate Notes
offering described in Note 10, the Company has been recording capitalized interest on certain
property, plant and equipment capital projects. ARI also capitalizes interest related to the
Unsecured Senior Fixed Rate Notes for investments made in equity method joint ventures but only for
those investments made while the joint venture is in the development phase.
Lease agreements
The Company leases railcars to third parties under multiple year agreements. Certain leases include
provisions that allow the lessee to purchase the leased railcars for stated market prices, which
approximate 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
Companys 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 are 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.
Income Approach
The income approach considers the subject companys 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.
10
Table of Contents
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 ARIs 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 Companys workforce or other factors that might
significantly affect the reporting units cost structure and negatively impact the
projection of financial performance. If the railcar industry forecasts or ARIs 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 reporting unit with a goodwill balance
passed Step 1 of the March 1, 2011 goodwill impairment analysis. All Step 1 results had
fair values in excess of carrying values by at least 60%, resulting in no impairment of
goodwill.
Note 8 Investments in and Loans to Joint Ventures
As of September 30, 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 accounts for these joint ventures using the equity method. Under this method, the
Company recognizes its share of the earnings and losses of the joint ventures as they accrue.
Advances and distributions are charged and credited directly to the investment accounts.
11
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The carrying amount of investments in and loans to joint ventures are as follows:
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Carrying amount of investments in and loans to
joint ventures |
||||||||
Ohio Castings |
$ | 5,778 | $ | 5,232 | ||||
Axis |
30,156 | 33,436 | ||||||
Amtek Railcar |
9,385 | 9,501 | ||||||
Total investments in and loans to joint ventures |
$ | 45,319 | $ | 48,169 | ||||
The maximum exposure to loss as a result of investments in and loans to joint ventures are as
follows:
September 30, | ||||
2011 | ||||
(in thousands) | ||||
Maximum exposure to loss by joint venture |
||||
Ohio Castings |
||||
Investment |
$ | 5,284 | ||
Note and accrued interest receivable 1 |
545 | |||
Total Ohio Castings exposure |
5,829 | |||
Axis |
||||
Investment |
| |||
Loans, accrued interest receivable and accrued unused
line fee 1 |
30,450 | |||
Total Axis exposure |
30,450 | |||
Amtek Railcar exposure |
9,385 | |||
Total exposure to loss due to joint ventures |
$ | 45,664 | ||
1 | 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,
on the condensed 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 performed an analysis of its long-lived assets and concluded that no impairment existed.
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 continued to report losses due
to its temporarily 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 the second quarter of 2011, ARI and the other joint
venture partners agreed to restart production at Ohio Castings and Ohio Castings began 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 were due February 2012. Interest continued to accrue but interest payments had
been deferred until August 2011. Accrued interest for this note as of September 30, 2011 and
December 31, 2010 was less than $0.1 million. Ohio Castings and the joint venture partners
renegotiated the terms during the third quarter of 2011 and the notes are now due November 2012.
Interest will continue to accrue but interest payments have been deferred until May 2012.
During the nine months ended September 30, 2011, ARI made capital contributions totaling $2.1
million to Ohio Castings to fund the restart of production. The other two partners made matching
contributions. 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.
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The Company, along with the other members of Ohio Castings, guaranteed a state loan issued to Ohio
Castings by the state of Ohio and bonds payable to the state of Ohio. The state loan and bonds
payable were paid off in June 2011 and December 2010, respectively, and ARI was released from the
respective guarantees. The value of the guarantee of the state loan was less than $0.1 million as
of December 31, 2010.
The Company accounts for its investment in Ohio Castings using the equity method. The Company has
determined that, although the joint venture is a variable interest entity (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, all major and strategic decisions are decided between the partners, and the risk
of loss to Castings and the Company is limited to the Companys investment through Castings, the
note and related accrued interest due to ARI.
See Note 17 for information regarding financial transactions among the Company, Ohio Castings and
Castings.
Summary financial results for Ohio Castings, the investee company, in total, are as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Results of operations |
||||||||||||||||
Revenues |
$ | 11,516 | $ | | $ | 11,548 | $ | | ||||||||
Gross loss |
(1,748 | ) | | (1,748 | ) | | ||||||||||
Loss before
interest |
(1,707 | ) | (915 | ) | (4,633 | ) | (2,126 | ) | ||||||||
Net loss |
$ | (1,722 | ) | $ | (918 | ) | $ | (4,661 | ) | $ | (2,185 | ) | ||||
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 partners interest in Axis is greater than ARIs 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 ventures 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 September 30, 2011, ARIs 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.
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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.
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 ceased 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 also indicated its
intent to 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 $31.4 million in principal and
$5.7 million of accrued interest as of September 30, 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 Components share of the remaining commitment on these loans, term and
revolving, was $3.6 million as of September 30, 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, in total, are as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Financial Results |
||||||||||||||||
Revenues |
$ | 9,478 | $ | 5,681 | $ | 27,298 | $ | 11,849 | ||||||||
Gross loss |
(1,176 | ) | (1,723 | ) | $ | (6,398 | ) | (7,125 | ) | |||||||
Operating loss |
(1,391 | ) | (2,000 | ) | (7,072 | ) | (7,749 | ) | ||||||||
Net loss |
$ | (2,800 | ) | $ | (3,438 | ) | $ | (11,252 | ) | $ | (11,633 | ) | ||||
14
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Revenues for Axis have improved as production volumes have increased. However, Axis net loss
remains consistent due to inefficiencies from the ramp up of production. The recent downturn has
also begun to improve consistent with industry forecasts, as reported by an independent third party
analyst. As such, Axis has not performed a long-lived asset impairment analysis.
As of September 30, 2011, the investment in Axis was comprised entirely of ARIs 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 its investment in 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. ARIs 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 | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Financial Results |
||||||||||||||||
Revenues |
$ | | $ | | $ | | $ | | ||||||||
Gross profit |
| | | | ||||||||||||
Loss before
interest |
(908 | ) | (180 | ) | (2,099 | ) | (322 | ) | ||||||||
Net loss |
$ | (842 | ) | $ | (180 | ) | $ | (1,692 | ) | $ | (322 | ) | ||||
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.
Note 9 Warranties
The Companys standard warranty is up to one year for parts and services and five years for new
railcars. Factors affecting the Companys warranty liability include the number of units sold,
historical and anticipated rates of claims and historical and anticipated costs per claim.
Fluctuations in the Companys 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.
15
Table of Contents
The overall change in the Companys warranty reserve is reflected on the condensed consolidated
balance sheet in accrued expenses and taxes and is detailed as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Liability, beginning of period |
$ | 1,160 | $ | 1,060 | $ | 1,151 | $ | 1,094 | ||||||||
Provision for warranties issued during the year, net of adjustments |
278 | 303 | 756 | 758 | ||||||||||||
Provision for warranties issued during the previous years, net of
adjustments |
(39 | ) | (109 | ) | (40 | ) | (185 | ) | ||||||||
Warranty claims |
(230 | ) | (119 | ) | (698 | ) | (532 | ) | ||||||||
Liability, end of period |
$ | 1,169 | $ | 1,135 | $ | 1,169 | $ | 1,135 | ||||||||
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 $269.5 million as of September 30, 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 Companys ability to, among other things, incur additional
debt, make certain restricted payments and enter into certain significant transactions with
stockholders and affiliates. Based on certain financial ratios, certain of these covenants,
including the Companys ability to incur additional debt, have
been more restricted since the first quarter of 2010 and remain so
through September 30, 2011. The
Company was in compliance with all of its covenants under the Notes as of September 30, 2011.
Since March 1, 2011, the Company has been able to 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 beginning on 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 Companys tax years 2008 to 2010 remain open to examination. For state
purposes, the Companys tax years 2006 to 2010 remain open to examination by various taxing
jurisdictions with the latest statute of limitations expiring in 2014. The Companys foreign tax
returns for years 2008 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 Companys 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.
16
Table of Contents
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 | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Service cost |
$ | 79 | $ | 66 | $ | 237 | $ | 200 | ||||||||
Interest cost |
254 | 257 | 762 | 769 | ||||||||||||
Expected loss on plan assets |
(249 | ) | (222 | ) | (748 | ) | (664 | ) | ||||||||
Amortization of unrecognized net loss |
94 | 86 | 283 | 258 | ||||||||||||
Amortization of unrecognized prior
service cost |
2 | 2 | 6 | 6 | ||||||||||||
Adjustment to benefits |
| 15 | | 43 | ||||||||||||
Net periodic benefit cost recognized |
$ | 180 | $ | 204 | $ | 540 | $ | 612 | ||||||||
Postretirement Benefits | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Service cost |
$ | | $ | | $ | 1 | $ | 1 | ||||||||
Interest cost |
1 | 1 | 3 | 4 | ||||||||||||
Amortization of prior service
credit |
(98 | ) | (97 | ) | (294 | ) | (293 | ) | ||||||||
Amortization of gain (loss) |
(22 | ) | (25 | ) | (67 | ) | (75 | ) | ||||||||
Net periodic income recognized |
$ | (119 | ) | $ | (121 | ) | $ | (357 | ) | $ | (363 | ) | ||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Pension |
$ | 180 | $ | 204 | $ | 540 | $ | 612 | ||||||||
Postretirement |
(119 | ) | (121 | ) | (357 | ) | (363 | ) | ||||||||
Total net periodic
benefit cost
recognized for all
plans |
$ | 61 | $ | 83 | $ | 183 | $ | 249 | ||||||||
The Company also maintains qualified defined contribution plans, which provide benefits to
ARIs employees based on employee contributions, years of service, and employee earnings with
discretionary contributions allowed. Expenses related to these plans were $0.3 million and $0.2
million for the three months ended September 30, 2011 and 2010, respectively. Expenses related to
these plans were $0.6 million for both the nine months ended September 30, 2011 and 2010.
17
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Note 13 Commitments and Contingencies
The Companys 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 $31.4 million of principal and $5.7 million of accrued
interest, both as of September 30, 2011. ARI Components share of the remaining commitment on these
loans was $3.6 million as of September 30, 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 ARIs 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. ARIs 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 ARIs board of directors and, through Icahn Enterprises L.P.
(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 in January 2013 and September 2013. ARI is also party to a collective bargaining agreement
with a labor union at a parts manufacturing facility that expires in April 2014.
In the first half of 2011, the Company entered into agreements to purchase certain railcar parts
during 2011 for current railcar orders that contain minimum purchase commitments. The remaining
commitments under these agreements, in the aggregate, were approximately $20.6 million as of
September 30, 2011.
On December 16, 2010, a complaint was filed by Steve Garvin, Deloris Garvin, and Garvin Enterprise, Inc. (the
Plaintiffs) against the Companys subsidiaries Southwest Steel I, LLC, Southwest Steel II, LLC and Southwest Steel III,
LLC, d/b/a Southwest Steel Casting Co., in the District Court of Harris County, Texas, 295th Judicial District. On July
25, 2011, the complaint was amended to include ARI as a party to the litigation. The Plaintiffs allege that ARI
improperly used their former employees to source components from Chinese suppliers in contravention of contractual
relationships among the parties and in a manner that compromised the Plaintiffs relationships with the Chinese
suppliers. The Plaintiffs seek direct, consequential and other damages for breach of contract, tortious interference
with an existing contract, trade secret misappropriation, civil conspiracy, civil theft, conversion and unfair
competition. The Plaintiffs also seek declaratory judgment with respect to the parties rights under certain
agreements. The lawsuit is in the discovery stage and it is not currently possible to estimate the amount of the loss, if any, that could result from this case.
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 Income (Loss)
The components of comprehensive income (loss), net of related tax, are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Net earnings (loss) |
$ | 4,026 | $ | (6,252 | ) | $ | (734 | ) | $ | (19,157 | ) | |||||
Foreign currency
translation adjustment |
(864 | ) | 311 | (526 | ) | 145 | ||||||||||
Comprehensive income (loss) |
$ | 3,162 | $ | (5,941 | ) | $ | (1,260 | ) | $ | (19,012 | ) | |||||
Note 15 Earnings (Loss) per Share
The shares used in the computation of the Companys basic and diluted earnings (loss) per common
share for the three and nine months ended September 30, 2011 and 2010 are reconciled as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Weighted average basic common shares outstanding |
21,352,297 | 21,302,296 | 21,351,325 | 21,302,296 | ||||||||||||
Dilutive effect of employee stock options |
| | (1) | | (1) | | (1) | |||||||||
Weighted average diluted common shares
outstanding |
21,352,297 | 21,302,296 | 21,351,325 | 21,302,296 | ||||||||||||
1 | Stock options to purchase 390,353 shares of common stock were not included in
the calculation for diluted earnings per share for the nine months ended September 30, 2011 and
both the three and nine months ended September 30, 2010. These options were excluded as the
exercise price exceeded the average market price and because ARI reported a net loss for the
nine months ended September 30, 2011 and both the three and nine months ended September 30,
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 incurred by ARI for stock based compensation and the
corresponding line items on the condensed consolidated statement of operations that they are
classified within:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
($ in thousands) | ($ in thousands) | |||||||||||||||
Stock-based compensation (income) expense |
||||||||||||||||
Cost of revenues: manufacturing
operations |
$ | (253 | ) | $ | 350 | $ | 126 | $ | 523 | |||||||
Cost of revenues: railcar services |
(571 | ) | 59 | (568 | ) | 88 | ||||||||||
Selling, administrative and other |
(2,263 | ) | 1,123 | (686 | ) | 1,742 | ||||||||||
Total stock-based compensation (income) expense |
$ | (3,087 | ) | $ | 1,532 | $ | (1,128 | ) | $ | 2,353 | ||||||
Stock options
No stock options were exercised during the three months ended September 30, 2011. Options to
purchase 36,001 shares of the Companys common stock were exercised during the nine months ended
September 30, 2011. The total intrinsic value of options exercised during the nine months ended
September 30, 2011, was less than $0.1 million. No stock options were exercised during the three or
nine months ended September 30, 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 and nine months ended September 30, 2011 and 2010.
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The following is a summary of option activity under the 2005 Plan from January 1, 2011 through
September 30, 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, September 30, 2011 |
| $ | | | $ | | $ | | ||||||||||||
As of September 30, 2011, an aggregate of 855,476 shares were available for issuance in
connection with future grants under the Companys 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, March 2010 and May 2011. 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 Companys 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 Companys 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.
All of the SARs granted in 2011 vest in three equal increments on the first, second and third
anniversaries of the grant date, but only if the Company achieves a specified adjusted earnings
before interest, taxes, depreciation and amortization (Adjusted EBITDA) target for the fiscal year
preceding the applicable anniversary date. Each holder must further remain employed by the Company
through each such date in order to vest in the corresponding number of SARs. The Company concluded
that the satisfaction of the first Adjusted EBITDA target is remote. Based on this conclusion, the
Company did not record compensation expense related to the first one-third portion of these SARs.
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Table of Contents
The SARs have exercise prices that represent the closing price of the Companys 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.
The following table provides an analysis of SARs granted in 2011, 2010, 2009, 2008 and 2007:
2011 Grant | 2010 Grants | 2009 Grant | 2008 Grants | 2007 Grant | ||||||||||||||||
Grant date
|
5/9/2011 | 3/31/2010 & 5/14/2010 | 3/3/2009 | 4/28/2008 & 9/12/2008 | 4/4/2007 | |||||||||||||||
# SARs outstanding at September 30, 2011
|
238,837 | 223,731 | 227,190 | 157,078 | 11,100 | |||||||||||||||
Weighted average exercise price
|
$24.45 | $12.95 | $6.71 | $20.80 | $29.49 | |||||||||||||||
Contractual term
|
7 years | 7 years | 7 years | 7 years | 7 years | |||||||||||||||
September 30, 2011 SARs Black-Scholes-Merton valuation components: | ||||||||||||||||||||
Stock volatility range
|
70.7% 73.0% | 73.0% 75.8% | 63.3% 75.8% | 65.3% | 63.3% | |||||||||||||||
Expected life range
|
3.6 4.6 years | 2.8 3.6 years | 2.2 2.9 years | 1.8 2.4 years | 1.2 years | |||||||||||||||
Risk free interest rate range
|
0.4% 1.0% | 0.4% | 0.3% | 0.3% | 0.1% | |||||||||||||||
Dividend yield
|
0.0% | 0.0% | 0.0% | 0.0% | 0.0% | |||||||||||||||
Forfeiture rate
|
2.0% | 2.0% | 2.0% | 2.0% | 2.0% |
The stock volatility rate was determined using the historical volatility rates of the
Companys 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 income of $3.1 million and expense of $1.5 million during the
three months ended September 30, 2011 and 2010, respectively, related to SARs granted under the
2005 Plan. The Company recognized compensation income of $1.1 million and expense of $2.4 million
during the nine months ended September 30, 2011 and 2010, respectively, related to SARs granted
under the 2005 Plan.
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The following is a summary of SARs activity under the 2005 Plan from January 1, 2011 through
September 30, 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 |
(8,620 | ) | ||||||||||||||||||
Granted |
242,041 | $ | 24.45 | |||||||||||||||||
Exercised |
(86,838 | ) | ||||||||||||||||||
Outstanding at the end of the period, September 30, 2011 |
857,936 | $ | 16.16 | 62 months | $ | 6.78 | $ | 2,506( | 1) | |||||||||||
Exercisable at the end of the period, September 30, 2011 |
334,237 | $ | 13.10 | 52 months | $ | 7.43 | $ | 1,479( | 1) | |||||||||||
(1) | Based on the closing market price of $15.38 per share of the Companys common stock on
September 30, 2011, SARs granted in 2007, 2008 and 2011 have no intrinsic value and the SARs
granted in 2009 and 2010 have a total intrinsic value of $2.5 million, of which $1.5 million
relates to SARs that are exercisable. |
As of September 30, 2011, unrecognized compensation costs related to the unvested portion of stock
appreciation rights were estimated to be $1.7 million and were expected to be recognized over a
weighted average period of 24 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 Companys principal beneficial stockholder (through IELP) and chairman of the Companys 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 Companys instruction, various railcar
components. In consideration for these services, the Company agreed to pay ACF based on
agreed upon rates. In both the three months ended September 30, 2011 and 2010, ARI
purchased inventory of less than $0.1 million of components from ACF. In the nine months
ended September 30, 2011 and 2010, ARI purchased inventory of $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 assets 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 ACFs net book value and the remaining portion of the purchase price will be a
reduction to stockholders equity. As of September 30, 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 Companys principal beneficial stockholder (through IELP) and
chairman of the Companys board of directors:
Railcar Services Agreement and Fleet Services Agreement
Effective 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.
This agreement was replaced by a new agreement, the Railcar Services Agreement, which was
effective April 16, 2011. Under the Railcar Services Agreement, ARI will provide ARL
railcar repair, engineering, administrative and other services, on an as needed basis, for
ARLs lease fleet at mutually agreed upon prices (the Railcar Services Agreement). The
Railcar Services Agreement has 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.
For the three months ended September 30, 2011 and 2010, revenues of $6.9 million and $4.3
million were recorded under these agreements, respectively. For the nine months ended
September 30, 2011 and 2010, revenues of $19.0 million and $10.3 million were recorded
under these agreements, respectively. Such amounts are included under railcar services
revenue from affiliates on the condensed consolidated statement of operations. The terms
and pricing on services provided to related parties are not less favorable to ARI than the
terms and pricing on services provided to unaffiliated third parties.
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 an entity owned by the Companys 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 and $0.5
million for the three and nine months ended September 30, 2010, respectively. 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. ARI did not sell any railcars to ARL
during the three months ended September 30, 2011. Revenue for railcars sold to ARL was
$19.3 million for the three months ended September 30, 2010. Revenue for railcars sold to
ARL was $1.2 million and $65.4 million for the nine months ended September 30, 2011 and
2010, respectively. Revenue for railcars sold to ARL is included under manufacturing
operations revenue from affiliates on the accompanying condensed consolidated statements of
operations. The terms and pricing on sales to related parties are not less favorable to ARI
than the terms and pricing on sales to unaffiliated third parties.
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 arms length basis and subject to the approval of the
Companys audit committee.
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Table of Contents
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 as a result were due February 2012. Interest continued to accrue
but interest payments had been deferred until August 2011. Due to the continued need to use
existing funds to restart the facility, the joint venture partners and Ohio Castings renegotiated
the terms of the notes during the third quarter of 2011 and the notes are now due November 2012
with interest continuing to accrue and payments now deferred until May 2012. Total amounts due from
Ohio Castings under this note were $0.5 million as of both September 30, 2011 and December 31,
2010. Accrued interest on this note as of September 30, 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.
The Company, along with the other members of Ohio Castings, had guaranteed both a state loan issued
to Ohio Castings by the state of Ohio and bonds payable to the state of Ohio. The state loan and
bonds payable were paid off in June 2011 and December 2010, respectively, and ARI was released from
the respective guarantees. The value of the guarantee of the state loan was less than $0.1 million
as of December 31, 2010.
The Companys 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 $31.4 million of principal and $5.7 million of accrued
interest, both as of September 30, 2011. ARI Components share of the remaining commitment on these
loans was $3.6 million as of September 30, 2011. See Note 8 for further information regarding this
transaction and the terms of the underlying loan.
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 Companys 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. Ungers 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 Companys board of directors. 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 September 30, 2011 and 2010. Expenses paid for this facility were $0.3 million
for both the nine months ended September 30, 2011 and 2010. 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 its vice chairman of the board of directors. The lease is for ARIs 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 uses. The expenses
recorded for this facility were $0.1 million and $0.4 million for the three and nine
months ended September 30, 2011, respectively. These fees are included in selling, administrative
and other costs on the condensed consolidated statements of operations as costs to related parties.
In June 2011, ARI entered into a scrap agreement with M. W. Recycling (MWR), a company controlled
by Mr. Carl Icahn, the Companys principal beneficial stockholder (through IELP) and chairman of
the Companys board of directors. Under the agreement, ARI sells and MWR purchases scrap metal from
several plant locations. This agreement was entered into at arms-length and was approved by the
Companys audit committee. For both the three and nine months ended September 30, 2011, MWR
collected scrap material totaling $1.1 million. As of September 30, 2011, accounts receivable of
$0.6 million were due from MWR.
24
Table of Contents
Financial information for transactions with related parties
As of September 30, 2011 and December 31, 2010, accounts receivable of $3.7 million and $5.0
million, respectively, were due from related parties.
As of September 30, 2011 and December 31, 2010, interest receivable of $0.3 million and $0.2
million, respectively, were due from related parties.
As of September 30, 2011 and December 31, 2010, accounts payable of $0.5 million and $0.3 million,
respectively, were due to related parties.
Cost of
revenues for manufacturing operations for the three months ended September 30, 2011 and 2010 included $8.4
million and $5.0 million, respectively, in railcar products produced by joint ventures. Cost of
revenues for manufacturing operations for the nine months ended September 30, 2011 and 2010 included $12.0 million
and $9.2 million, respectively, in railcar products produced by joint ventures.
Inventory as of September 30, 2011, included $1.9 million of materials produced by joint ventures.
Inventory as of December 31, 2010, included $0.4 million of materials produced by joint ventures.
As of September 30, 2011 and December 31, 2010, all profit from related parties for inventory still
on hand was eliminated.
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 & | |||||||||||||||||
September 30, 2011 | Operations | Services | all other | Eliminations | Totals | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenues from external customers |
$ | 108,615 | $ | 17,169 | $ | | $ | | $ | 125,784 | ||||||||||
Intersegment revenues |
216 | 50 | | (266 | ) | | ||||||||||||||
Cost of revenues external customers |
(98,211 | ) | (12,618 | ) | | | (110,829 | ) | ||||||||||||
Cost of intersegment revenues |
(385 | ) | (109 | ) | | 494 | | |||||||||||||
Gross profit |
10,235 | 4,492 | | 228 | 14,955 | |||||||||||||||
Selling, administrative and other |
(1,748 | ) | (530 | ) | (656 | ) | | (2,934 | ) | |||||||||||
Earnings (loss) from operations |
$ | 8,487 | $ | 3,962 | $ | (656 | ) | $ | 228 | $ | 12,021 | |||||||||
For the Three Months Ended | Manufacturing | Railcar | Corporate & | |||||||||||||||||
September 30, 2010 | Operations | Services | all other | Eliminations | Totals | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenues from external customers |
$ | 48,404 | $ | 16,393 | $ | | $ | | $ | 64,797 | ||||||||||
Intersegment revenues |
449 | 56 | | (505 | ) | | ||||||||||||||
Cost of revenues external customers |
(49,366 | ) | (13,141 | ) | | | (62,507 | ) | ||||||||||||
Cost of intersegment revenues |
(353 | ) | (61 | ) | | 414 | | |||||||||||||
Gross profit (loss) |
(866 | ) | 3,247 | | (91 | ) | 2,290 | |||||||||||||
Selling, administrative and other |
(1,590 | ) | (638 | ) | (4,004 | ) | | (6,232 | ) | |||||||||||
(Loss) earnings from operations |
$ | (2,456 | ) | $ | 2,609 | $ | (4,004 | ) | $ | (91 | ) | $ | (3,942 | ) | ||||||
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Table of Contents
For the Nine Months Ended | Manufacturing | Railcar | Corporate & | |||||||||||||||||
September 30, 2011 | Operations | Services | all other | Eliminations | Totals | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenues from external customers |
$ | 271,908 | $ | 50,632 | $ | | $ | | $ | 322,540 | ||||||||||
Intersegment revenues |
715 | 217 | | (932 | ) | | ||||||||||||||
Cost of revenues external
customers |
(250,892 | ) | (38,493 | ) | | | (289,385 | ) | ||||||||||||
Cost of intersegment revenues |
(831 | ) | (227 | ) | | 1,058 | | |||||||||||||
Gross profit |
20,900 | 12,129 | | 126 | 33,155 | |||||||||||||||
Selling, administrative and other |
(4,473 | ) | (1,504 | ) | (8,901 | ) | | (14,878 | ) | |||||||||||
Earnings (loss) from operations |
$ | 16,427 | $ | 10,625 | $ | (8,901 | ) | $ | 126 | $ | 18,277 | |||||||||
For the Nine Months Ended | Manufacturing | Railcar | Corporate & | |||||||||||||||||
September 30, 2010 | Operations | Services | all other | Eliminations | Totals | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenues from external customers |
$ | 127,262 | $ | 51,011 | $ | | $ | | $ | 178,273 | ||||||||||
Intersegment revenues |
833 | 273 | | (1,106 | ) | | ||||||||||||||
Cost of revenues external
customers |
(131,643 | ) | (40,814 | ) | | | (172,457 | ) | ||||||||||||
Cost of intersegment revenues |
(637 | ) | (255 | ) | | 892 | | |||||||||||||
Gross profit (loss) |
(4,185 | ) | 10,215 | | (214 | ) | 5,816 | |||||||||||||
Selling, administrative and other |
(4,328 | ) | (1,722 | ) | (11,875 | ) | | (17,925 | ) | |||||||||||
(Loss) earnings from operations |
$ | (8,513 | ) | $ | 8,493 | $ | (11,875 | ) | $ | (214 | ) | $ | (12,109 | ) | ||||||
Manufacturing | Railcar | Corporate & | ||||||||||||||||||
As of | Operations | Services | all other | Eliminations | Totals | |||||||||||||||
(in thousands) | ||||||||||||||||||||
September 30, 2011 |
||||||||||||||||||||
Total assets |
$ | 350,627 | $ | 48,935 | $ | 287,868 | $ | | $ | 687,430 | ||||||||||
December 31, 2010 |
||||||||||||||||||||
Total assets |
$ | 281,779 | $ | 49,133 | $ | 323,455 | $ | | $ | 654,367 |
Manufacturing operations
Manufacturing revenues from affiliates were zero and 29.7% of total consolidated revenues for the
three months ended September 30, 2011 and 2010, respectively. Manufacturing revenues from
affiliates were 0.4% and 36.7% of total consolidated revenues for the nine months ended September
30, 2011 and 2010, respectively.
Manufacturing revenues from the most significant customer totaled 41.5% of total consolidated
revenues for the three months ended September 30, 2011. Manufacturing revenues from the most
significant customer, an affiliate, totaled 29.7% of total consolidated revenues for the three
months ended September 30, 2010. Manufacturing revenues from the most significant customer totaled
21.7% of total consolidated revenues for the nine months ended September 30, 2011. Manufacturing
revenues from the most significant customer, an affiliate, totaled 36.7% of total consolidated
revenues for the nine months ended September 30, 2010.
Manufacturing revenues from the two most significant customers were 57.2% of total consolidated
revenues for the three months ended September 30, 2011. Manufacturing revenues from the two most
significant customers (including an affiliate) were 58.3% of total consolidated revenues for the
three months ended September 30, 2010. Manufacturing revenues from the two most significant
customers were 37.7% of total consolidated revenues for the nine months ended September 30, 2011.
Manufacturing revenues from the two most significant customers (including an affiliate) were 47.1%
of total consolidated revenues for the nine months ended September 30, 2010.
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Manufacturing receivables from the most significant customer were 25.8% of total consolidated
accounts receivable including due from related parties as of September 30, 2011. Manufacturing
receivables from the most significant customer were 12.0% of total consolidated accounts receivable
including due from related parties as of December 31, 2010. No other customer accounted for more
than 10.0% of total consolidated accounts receivable as of September 30, 2011 and December 31,
2010.
Railcar services
Railcar services revenues from affiliates were 5.5% and 6.6% of total consolidated revenues for the
three months ended September 30, 2011 and 2010, respectively. Railcar services revenues from
affiliates were 5.9% and 5.8% of total consolidated revenues for the nine months ended September
30, 2011 and 2010, respectively.
No single railcar services customer accounted for more than 10.0% of total consolidated revenues
for the three and nine months ended September 30, 2011 and 2010. No single railcar services
customer accounted for more than 10.0% of total consolidated accounts receivable as of September
30, 2011 and December 31, 2010.
Note 19 Consulting Contracts
During the first quarter of 2011, the Company entered into a technology services consulting
agreement with SDS-Altaiwagon, a Russian railcar builder, to design a railcar for general service
in Russia for a total contract price of $1.5 million. The technology services consulting agreement
is expected to be completed during the fourth quarter of 2011.
During the second quarter of 2011, the Company entered into a consulting agreement with the Indian
Railways Research Designs and Standards Organization to design and develop certain railcars for
service in India for a total contract price of $9.6 million. The consulting agreement is expected
to continue through 2016.
For both the three and nine months ended September 30, 2011, revenues of $1.5 million were recorded
under these two consulting agreements. As of September 30, 2011, unbilled revenue of $0.8 million
was due from one of the consulting agreements and deferred revenue of $0.1 million was remaining
from the other consulting agreement.
Note 20 Supplemental Cash Flow Information
ARI received interest income of $2.7 million and $3.4 million for the nine months ended September
30, 2011 and 2010, respectively.
ARI paid interest expense, net of capitalized interest, of $20.6 million for both the nine months
ended September 30, 2011 and 2010.
ARI paid taxes of $0.4 million and $0.3 million for the nine months ended September 30, 2011 and
2010, respectively.
ARI paid $1.4 million and $0.1 million to employees related to SARs exercises during the nine
months ended September 30, 2011 and 2010, respectively.
Note 21 Subsequent Events
All subsequent events have been evaluated through the date these financial statements were
available to be issued, November 1, 2011.
In October 2011, ARI, and the other partner, each advanced $0.3 million to Axis from its revolving
line of credit.
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ITEM 2. | MANAGEMENTS 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, leasing, railcar services, 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; |
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| 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. |
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 during the past
couple of years.
As of September 30, 2011, we have a backlog of approximately 7,110 railcars, including
approximately 1,700 railcars that we will lease, up from a total backlog of approximately 1,050
railcars as of December 31, 2010. This is our largest backlog since June 2008. In response to
increased customer demand, we have and intend to continue to increase 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 nine months ended September 30, 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. Our railcar shipments for the first nine months of
2011 have surpassed our total 2010 shipments and we currently expect the upward trend to continue
for the remainder of 2011. However, we cannot assure you that the railcar market will continue to
improve or that our railcar orders and shipments will continue to increase.
Our railcar services segment has experienced increased volumes at railcar repair facilities and a
decrease in railcar repair projects performed at our railcar manufacturing facilities. As railcar
production increases at our railcar manufacturing facilities we expect repair projects performed at
these facilities to continue to decrease.
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RESULTS OF OPERATIONS
Three Months ended September 30, 2011 compared to Three Months ended September 30, 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, | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
Manufacturing operations |
86.4 | % | 74.7 | % | ||||
Railcar services |
13.6 | % | 25.3 | % | ||||
Total revenues |
100.0 | % | 100.0 | % | ||||
Cost of revenues: |
||||||||
Manufacturing operations |
(78.1 | %) | (76.2 | %) | ||||
Railcar services |
(10.0 | %) | (20.3 | %) | ||||
Total cost of revenues |
(88.1 | %) | (96.5 | %) | ||||
Gross profit |
11.9 | % | 3.5 | % | ||||
Selling, administrative and other |
(2.3 | %) | (9.6 | %) | ||||
Earnings (loss) from operations |
9.6 | % | (6.1 | %) | ||||
Interest income |
0.8 | % | 1.7 | % | ||||
Interest expense |
(3.6 | %) | (8.2 | %) | ||||
Other income |
0.0 | % | 0.0 | % | ||||
Loss from joint ventures |
(1.7 | %) | (3.0 | %) | ||||
Earnings (loss) before income tax expense |
5.1 | % | (15.6 | %) | ||||
Income tax (expense) benefit |
(1.9 | %) | 6.0 | % | ||||
Net earnings (loss) |
3.2 | % | (9.6 | %) | ||||
Revenues
Our revenues for the three months ended September 30, 2011 increased 94.1% to $125.8 million from
$64.8 million for the three months ended September 30, 2010. This increase was primarily due to
increased revenues from our manufacturing operations.
Our manufacturing operations revenues for the three months ended September 30, 2011 increased
124.4% to $108.6 million from $48.4 million for the three months ended September 30, 2010. The
primary reason for the increase in revenues was an increase in railcar shipments. During the three
months ended September 30, 2011, we shipped approximately 1,340 railcars compared to approximately
420 railcars for the same period of 2010.
For the three months ended September 30, 2011, our manufacturing operations did not include any
revenues from transactions with American Railcar Leasing LLC (ARL), compared to $19.3 million, or
29.7% of our total consolidated revenues for the three months ended September 30, 2010. ARL is an
affiliated company controlled by Mr. Carl Icahn.
Our railcar services revenues for the three months ended September 30, 2011 increased 4.7% to $17.2
million compared to $16.4 million for the three months ended September 30, 2010. The increase was
primarily attributable to the increased volumes at our railcar repair facilities, partially offset
by decreased railcar repair projects at the manufacturing facilities, as this capacity was returned
to new railcar manufacturing. For the third quarter of 2011, our railcar services revenues included
$6.9 million, or 5.5% of our total consolidated revenues, from transactions with ARL, compared to
$4.3 million, or 6.6% of our total consolidated revenues, for the third quarter of 2010.
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Gross Profit
Our gross profit increased to $15.0 million for the three months ended September 30, 2011 from $2.3
million for the three months ended September 30, 2010. Our gross profit margin increased to 11.9%
for the third quarter of 2011
from 3.5% for the third quarter of 2010, driven primarily by an increase in gross profit margins
from our manufacturing operations.
Gross profit from our manufacturing operations increased to $10.4 million for the three months
ended September 30, 2011 compared to a loss of $1.0 million for the three months ended September
30, 2010. Gross profit margin increased to 9.6% for the three months ended September 30, 2011
compared to a loss of 2.0% for the three months ended September 30, 2010. These increases were due
primarily to increased railcar shipments, improved pricing and leverage created by larger volumes.
Gross profit from our railcar services operations increased to $4.6 million for the three months
ended September 30, 2011 compared to $3.3 million for the three months ended September 30, 2010
primarily attributable to increased efficiencies due to a more favorable mix of work. Gross profit
margin for our railcar services operations increased to 26.5% for the three months ended September
30, 2011 from 19.8% for the three months ended September 30, 2010. The increase was primarily
attributable to an increase in volumes and efficiencies at our railcar repair facilities partially
offset by a decrease in railcar repair projects performed at our railcar manufacturing facilities.
Selling, Administrative and Other Expenses
Our total selling, administrative and other expenses decreased to $2.9 million for the third
quarter of 2011 compared to $6.2 million for the third quarter of 2010. The decrease of $3.3
million was primarily attributable to a decrease of $3.4 million in stock-based compensation, as
described below, partially offset by an increase in outside services.
Stock based compensation decreased due to fluctuations in our stock price in the third quarter of
2011 compared to the same period for 2010, partially offset by the SARs granted during 2011. For
the third quarter of 2011, we recognized income related to stock based compensation of $2.3 million
compared to stock based compensation expense of $1.1 million for the same period in 2010.
Interest Expense and Income
Net interest expense for the three months ended September 30, 2011 was $3.5 million, representing
$4.5 million of interest expense and $1.0 million of interest income, compared to $4.3 million of
net interest expense for the three months ended September 30, 2010, representing $5.3 million of
interest expense and $1.0 million of interest income. Interest expense decreased primarily due to
an increase in the amount of capitalized interest related to our Unsecured Senior Fixed Rate Notes
recorded for the investment in our joint venture for the three months ended September 30, 2011.
Other Income
Other income of less than $0.1 million was recognized for both the third quarter of 2011 and 2010.
Loss from Joint Ventures
Our joint venture losses increased to $2.2 million for the three months ended September 30, 2011
compared to a loss of $1.9 million for the three months ended September 30, 2010. This was
primarily attributable to our share of Ohio Castings Company, LLC (Ohio Castings) losses increasing
$0.3 million for the three months ended September 30, 2011 compared to the three months ended
September 30, 2010 due to the initial costs of resuming production. The remaining increase is due
to our share of Amtek Railcar Industries Private Limiteds (Amtek Railcar) losses increasing $0.3
million for the three months ended September 30, 2011 compared to the three months ended September
30, 2010. These increases were partially offset by a $0.3 million and $0.1 million decrease in Axis
LLCs (Axis) and US Railcar LLCs (USRC) losses, respectively, compared to the three months ended
September 30, 2010. Axis losses decreased as production levels continued to ramp up, decreasing
inefficiencies. USRCs losses decreased due to its dissolution in 2010.
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Income Tax (Expense) Benefit
Our income tax expense for the three months ended September 30, 2011 was $2.4 million, or 36.9% of
our earnings before income taxes, compared to an income tax benefit of $3.9 million for the three
months ended September 30,
2010, or 38.4% of our loss before income taxes. The change in our effective tax rate is primarily
due to foreign joint venture losses not being benefitted and projected federal tax credits.
According to the accounting rules, the tax rate could, and likely will, continue to fluctuate on a
quarterly basis depending on the mix of income or loss in the US versus foreign and any changes in
estimates.
Nine Months ended September 30, 2011 compared to Nine Months ended September 30, 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 Nine Months Ended, | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
Manufacturing operations |
84.3 | % | 71.4 | % | ||||
Railcar services |
15.7 | % | 28.6 | % | ||||
Total revenues |
100.0 | % | 100.0 | % | ||||
Cost of revenues: |
||||||||
Manufacturing operations |
(77.8 | %) | (73.8 | %) | ||||
Railcar services |
(11.9 | %) | (22.9 | %) | ||||
Total cost of revenues |
(89.7 | %) | (96.7 | %) | ||||
Gross profit |
10.3 | % | 3.3 | % | ||||
Selling, administrative and other |
(4.6 | %) | (10.1 | %) | ||||
Earnings loss from operations |
5.7 | % | (6.8 | %) | ||||
Interest income |
0.9 | % | 1.5 | % | ||||
Interest expense |
(4.7 | %) | (9.0 | %) | ||||
Other income |
0.0 | % | 0.2 | % | ||||
Loss from joint ventures |
(2.2 | %) | (3.3 | %) | ||||
Loss before income tax expense |
(0.3 | %) | (17.4 | %) | ||||
Income tax benefit |
0.2 | % | 6.7 | % | ||||
Net loss |
(0.1 | %) | (10.7 | %) | ||||
Revenues
Our revenues for the nine months ended September 30, 2011 increased 80.9% to $322.5 million from
$178.3 million for the nine months ended September 30, 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 nine months ended September 30, 2011 increased 113.7%
to $271.9 million from $127.3 million for the nine months ended September 30, 2010. The primary
reason for the increase in revenues was an increase in railcar shipments. During the nine months
ended September 30, 2011, we shipped approximately 3,060 railcars compared to approximately 1,130
railcars for the same period of 2010.
For the nine months ended September 30, 2011, our manufacturing operations included $1.2 million,
or 0.4%, of our total consolidated revenues, from transactions with ARL, compared to $65.4 million,
or 36.7% of our total consolidated revenues for the nine months ended September 30, 2010.
Our railcar services revenues for the nine months ended September 30, 2011 decreased to $50.6
million compared to $51.0 million for the nine months ended September 30, 2010. The decrease was
primarily attributable to the decreased railcar repair projects at the manufacturing facilities, as
this capacity was returned to new railcar manufacturing, partially offset by an increase in
revenues at our railcar repair facilities. For the nine months ended September 30, 2011, our
railcar services revenues included $19.0 million, or 5.9% of our total consolidated revenues, from
transactions with ARL, compared to $10.3 million, or 5.8% of our total consolidated revenues, from
transactions with affiliates, for the nine months ended September 30, 2010.
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Gross Profit
Our gross profit increased to $33.2 million for the nine months ended September 30, 2011 from $5.8
million for the nine months ended September 30, 2010. Our gross profit margin increased to 10.3%
for the nine months ended
September 30, 2011 from 3.3% for the nine months ended September 30, 2010, driven primarily by an
increase in our gross profit margins from our manufacturing operations.
Gross profit from our manufacturing operations increased to $21.0 million for the nine months ended
September 30, 2011 compared to a loss of $4.4 million for the nine months ended September 30, 2010.
Gross profit margin for our manufacturing operations increased to 7.7% for the nine months ended
September 30, 2011 compared to a loss of 3.4% for the nine months ended September 30, 2010. These
increases were primarily attributable to an increase in railcar shipments, improved pricing and
leverage created by larger volumes.
Gross profit from our railcar services operations increased to $12.1 million for the nine months
ended September 30, 2011 compared to $10.2 million for the nine months ended September 30, 2010
primarily due to increased efficiencies due to a more favorable mix of work. Gross profit margin
for our railcar services operations increased to 24.0% for the nine months ended September 30, 2011
from 20.0% for the nine months ended September 30, 2010. The increase was primarily attributable to
an increase in volumes and efficiencies at our railcar repair facilities and a decrease in railcar
repair projects performed at our railcar manufacturing facilities.
Selling, Administrative and Other Expenses
Our total selling, administrative and other expenses decreased to $14.9 million for the nine months
ended September 30, 2011 compared to $17.9 million for the nine months ended September 30, 2010.
The decrease of $3.0 million was primarily attributable to a decrease of $2.5 million in stock
based compensation, as described below, and a decrease in outside services.
Stock based compensation expense decreased due to fluctuations in our stock price for the nine
months ended September 30, 2011 compared to the same period for 2010, partially offset by the SARs
granted during 2011. During the nine months ended September 30, 2011, we recognized stock based
compensation income of $0.7 million compared to stock based compensation expense of $1.8 million
for the same period in 2010.
Interest Expense and Income
Net interest expense for the nine months ended September 30, 2011 was $12.2 million, representing
$15.1 million of interest expense and $2.9 million of interest income, compared to $13.4 million of
net interest expense for the nine months ended September 30, 2010, representing $16.0 million of
interest expense and $2.6 million of interest income. Interest expense decreased due to an increase
in the amount of capitalized interest related to our Unsecured Senior Fixed Rate Notes recorded for
the investment in our joint venture for the nine months ended September 30, 2011. Interest income
increased due to an increase in return on investments and loans.
Other Income
Other income of less than $0.1 million was recognized for the nine months ended September 30, 2011
as compared to $0.4 million for the nine months ended September 30, 2010 related to realized gains
on the sale of common stock.
Loss from Joint Ventures
Our joint venture losses increased to $7.2 million for the nine months ended September 30, 2011
compared to $6.0 million for the nine months ended September 30, 2010. This was primarily
attributable to our share of both Ohio Castings and Amtek Railcars losses increasing $0.8 million
for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010.
Ohio Castings losses increased due to the initial costs of resuming production and Amtek Railcars
losses increased due to the continued development of its business. These increases were partially
offset by our share of losses from Axis and USRC decreasing $0.1 million and $0.3 million,
respectively, for the nine months ended September 30, 2011 compared to the nine months ended
September 30, 2010. Axis losses decreased as production levels continued to ramp up, decreasing
inefficiencies. USRCs losses decreased due to its dissolution in 2010.
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Income Tax Benefit
Our income tax benefit for the nine months ended September 30, 2011 was $0.5 million, or 39.7% of
our loss before income taxes, compared to $12.0 million for the nine months ended September 30,
2010, or 38.5% of our losses before income taxes. The change in our effective tax rate is primarily
due to foreign joint venture losses not being benefitted and projected federal tax credits.
According to the accounting rules, the tax rate, could, and likely will, continue to fluctuate on a
quarterly basis depending on the mix of income or loss in the US versus foreign and any changes in
estimates.
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 September 30, 2011, our total
backlog was approximately 7,110 railcars, of which approximately 5,410 railcars with an estimated
value of $450.4 million were to be sold and approximately 1,700 railcars with an estimated market
value of $164.9 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 September 30, 2011, approximately 76% of the total
number of railcars in our backlog will be sold. Approximately 28% 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 September 30, 2011, approximately 24% of the total
number of railcars in our backlog will be leased. Approximately 3% 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 as of September 30, 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 nine months ended September 30, 2011 and for the
foreseeable future is cash on hand from the unsecured senior notes we sold in February 2007,
partially offset by cash used for operations, capital expenditures and investments in and loans to
our joint ventures. As of September 30, 2011, we had working capital of $368.2 million, including
$284.1 million of cash and cash equivalents.
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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. Based on certain financial ratios certain of these covenants, including our ability to
incur additional debt, have been more restricted since the first
quarter of 2010 and remain so through September 30, 2011. We were in compliance with all of our
covenants under the Notes as of September 30, 2011.
During the nine months ended September 30, 2011, we contributed $2.1 million to Ohio Castings. The
other partners contributed equal amounts during the nine months ended September 30, 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.
Cash Flows
The following table summarizes our net cash provided by or used in operating activities, investing
activities and financing activities for the nine months ended September 30:
2011 | ||||
(in thousands) | ||||
Net cash (used in) provided by: |
||||
Operating activities |
$ | (19,220 | ) | |
Investing activities |
(16,172 | ) | ||
Financing activities |
756 | |||
Effect of exchange rate changes on cash and cash equivalents |
(23 | ) | ||
Decrease in cash and cash equivalents |
$ | (34,659 | ) | |
Net Cash Used In Operating Activities
Our net cash used in operating activities for the nine months ended September 30, 2011 was $19.2
million. Our net loss of $0.7 million was impacted by items including but not limited to:
depreciation expense of $16.9 million, joint venture losses of $7.2 million, stock based
compensation of $1.1 million and other smaller adjustments. Cash used in operating activities
attributable to changes in our current assets and liabilities included an increase in total
accounts receivable, including from related parties, of $10.0 million and an increase in inventory
of $64.6 million. Cash provided by operating activities attributable to changes in our current
assets and current liabilities included an overall increase in total accounts payable, including to
related parties, of $37.3 million.
The increase in total accounts receivable, including from related parties, was primarily due to an
increase in railcar shipments and the timing of those shipments during the nine months ended
September 30, 2011. The increase in inventory was primarily attributable to more expensive raw
material purchases for specialty orders to be shipped in the fourth quarter of 2011 and an increase
in certain components in anticipation of shortages. The increase in total accounts payable,
including to related parties, was related to increased inventory purchases.
Net Cash Used In Investing Activities
Net cash used in investing activities was $16.2 million for the nine months ended September 30,
2011, including $11.8 million of capital expenditures for the purchase of property, plant and
equipment and railcars leased to others, and $4.5 million related to loan advances and capital
contributions to our joint ventures.
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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 nine months ended September 30, 2011 were $11.8 million and our
current capital expenditure plans for 2011 include projects that maintain equipment, improve
efficiencies, and reduce costs as well as expenditures related to manufacturing railcars for lease
to others. We cannot assure that we will be able to complete any of our projects on a timely basis
or within budget, if at all.
Contingencies and Contractual Obligations
Refer to the updated status of contingencies and contractual obligations in Note 13 to the condensed consolidated
financial statements. Except for the legal proceeding included 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.
On December 16, 2010, a complaint was filed by Steve Garvin, Deloris Garvin, and Garvin Enterprise, Inc. (the
Plaintiffs) against the Companys subsidiaries Southwest Steel I, LLC, Southwest Steel II, LLC and Southwest Steel III,
LLC, d/b/a Southwest Steel Casting Co., in the District Court of Harris County, Texas, 295th Judicial District. On July
25, 2011, the complaint was amended to include us as a party to the litigation. The Plaintiffs allege that we
improperly used their former employees to source components from Chinese suppliers in contravention of contractual
relationships among the parties and in a manner that compromised the Plaintiffs relationships with the Chinese
suppliers. The Plaintiffs seek direct, consequential and other damages for breach of contract, tortious interference
with an existing contract, trade secret misappropriation, civil conspiracy, civil theft, conversion and unfair
competition. The Plaintiffs also seek declaratory judgment with respect to the parties rights under certain
agreements. This lawsuit is in the discovery stage and it is not currently possible to estimate the amount of loss, if any, that could result from this case.
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 Managements 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.
Other
than the critical accounting policies included below that was updated in September 2011, there
have been no material changes to the other critical accounting policies or estimates that were
included in Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Revenue recognition
Revenues from railcar sales are recognized following completion of manufacturing, inspection,
customer acceptance and title transfer, which is when the risk for any damage or loss with respect
to the railcars passes to the customer. Paint and lining work may be outsourced and, as a result,
the sale for the railcar may be recorded after customer acceptance when it leaves the manufacturing
plant and the sale for the lining work may be separately recorded following completion of that work
by the independent contractor, customer acceptance and final shipment. Revenues from railcar
leasing are recognized on a straight-line basis over the life of the lease. Revenues from railcar
and industrial components are recorded at the time of product shipment, in accordance with our
contractual terms. Revenue for railcar maintenance services is recognized upon completion and
shipment of railcars from our plants. We do not currently bundle railcar service contracts with new
railcar sales. Revenue for fleet management services is recognized as performed.
We record amounts billed to customers for shipping and handling as part of sales and records
related costs in cost of revenue.
We present any sales tax assessed by a governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer on a net basis.
Revenues related to consulting type contracts are accounted for under the
percentage-of-completion method. Profits expected to be realized on these contracts are based on
the total contract revenues and costs based on the estimate of the percentage of project
completion. Revenues recognized in excess of amounts billed are recorded to unbilled revenues and
included in other current assets on the condensed consolidated balance sheets. Billings in excess
of revenues recognized on in-progress contracts are recorded to unbilled costs and included in
other current liabilities on the condensed consolidated balance sheets. These estimates are
reviewed and revised periodically throughout the term of the contracts and any adjustments are
recorded on a cumulative basis in the period the revisions are made. Currently, we have two
consulting contracts that are accounted for under the percentage-of-completion method.
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Use of estimates
ARI has made a number of estimates and assumptions relating to the reporting of assets,
liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with accounting principles generally accepted in
the United States of America. Significant items subject to estimates and assumptions include, but
are not limited to, deferred taxes, workers compensation accrual, valuation allowances for accounts
receivable and inventory obsolescence, depreciable lives of assets, goodwill impairment, stock
based compensation fair values, the reserve for warranty claims and revenue recognized under the
percentage-of-completion method. Actual results could differ from those estimates.
Recent accounting pronouncements
In September 2011, the Financial Accounting Standards Board (FASB) issued authoritative guidance
related to intangibles goodwill and other, which allows for companies to first consider
qualitative factors as a basis for assessing impairment and determining the necessity of a detailed
impairment test. This guidance is effective for fiscal years beginning after December 15, 2011 with
early adoption permitted. We will adopt the guidance for the first quarter of 2012. The adoption of
the new guidance will not have an impact on the consolidated financial statements.
In June 2011, the FASB issued authoritative guidance to amend current comprehensive income
guidance. The new guidance eliminates the option to present the components of other comprehensive
income as part of the statement of shareholders equity. Instead, comprehensive income must be
reported in either a single continuous statement of comprehensive income which contains two
sections, net income and other comprehensive income, or in two separate but consecutive statements.
This guidance is effective for the interim and annual periods beginning after December 15, 2011
with early adoption permitted. We plan on adopting the guidance for the first quarter of 2012. The
adoption of the new guidance will not have an impact on the consolidated financial statements as it
only requires a change in the format of the current presentation.
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 Commissions 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 |
Except for the legal proceeding included below, there have been no other material changes with respect to legal
proceedings as previously disclosed in our 2010 Annual Report on Form 10-K.
On December 16, 2010, a complaint was filed by Steve Garvin, Deloris Garvin, and Garvin Enterprise, Inc. (the
Plaintiffs) against the Companys subsidiaries Southwest Steel I, LLC, Southwest Steel II, LLC and Southwest Steel III,
LLC, d/b/a Southwest Steel Casting Co., in the District Court of Harris County, Texas, 295th Judicial District. On July
25, 2011, the complaint was amended to include us as a party to the litigation. The Plaintiffs allege that we
improperly used their former employees to source components from Chinese suppliers in contravention of contractual
relationships among the parties and in a manner that compromised the Plaintiffs relationships with the Chinese
suppliers. The Plaintiffs seek direct, consequential and other damages for breach of contract, tortious interference
with an existing contract, trade secret misappropriation, civil conspiracy, civil theft, conversion and unfair
competition. The Plaintiffs also seek declaratory judgment with respect to the parties rights under certain
agreements.
ITEM 1A. | RISK FACTORS |
There have been no material changes from the risk factors previously disclosed in Item 1A of our
Annual Report.
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ITEM 6. | EXHIBITS |
Exhibit | ||||
No. | Description of Exhibit | |||
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 |
|||
101.INS | XBRL Instance Document (filed electronically herewith)* |
|||
101.SCH | XBRL Taxonomy Extension Schema Document (filed electronically herewith)* |
|||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (filed electronically
herewith)* |
|||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document (filed electronically herewith)* |
|||
101.PRE | XBRL Taxonomy Presentation Linkbase Document (filed electronically herewith)* |
|||
* | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a
registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or
Section 18 of the Securities Exchange Act of 1934. |
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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: November 1, 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 | |||
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 |
|||
101.INS | XBRL Instance Document (filed electronically herewith)* |
|||
101.SCH | XBRL Taxonomy Extension Schema Document (filed electronically herewith)* |
|||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (filed electronically herewith)* |
|||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document (filed electronically herewith)* |
|||
101.PRE | XBRL Taxonomy Presentation Linkbase Document (filed electronically herewith)* |
|||
* | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement
or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of
1934. |
40