Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
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)
|
|
|
Delaware
|
|
43-1481791 |
(State of Incorporation)
|
|
(I.R.S. Employer Identification No.) |
|
|
|
100 Clark Street, St. Charles, Missouri
|
|
63301 |
(Address of principal executive offices)
|
|
(Zip Code) |
(636) 940-6000
(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 o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer 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 May 6,
2009 was 21,302,296 shares.
AMERICAN RAILCAR INDUSTRIES, INC.
INDEX TO FORM 10-Q
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
261,091 |
|
|
$ |
291,788 |
|
Short-term investments available-for-sale securities |
|
|
31,642 |
|
|
|
2,565 |
|
Accounts receivable, net |
|
|
29,188 |
|
|
|
39,725 |
|
Accounts receivable, due from affiliates |
|
|
15,114 |
|
|
|
10,283 |
|
Inventories, net |
|
|
81,366 |
|
|
|
97,245 |
|
Prepaid expenses and other current assets |
|
|
5,569 |
|
|
|
5,314 |
|
Deferred tax assets |
|
|
1,729 |
|
|
|
2,297 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
425,699 |
|
|
|
449,217 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
206,087 |
|
|
|
206,936 |
|
Deferred debt issuance costs |
|
|
3,073 |
|
|
|
3,204 |
|
Goodwill |
|
|
7,169 |
|
|
|
7,169 |
|
Other assets |
|
|
37 |
|
|
|
37 |
|
Investments in joint ventures |
|
|
13,533 |
|
|
|
13,091 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
655,598 |
|
|
$ |
679,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
32,758 |
|
|
$ |
42,201 |
|
Accounts payable, due to affiliates |
|
|
3,730 |
|
|
|
5,193 |
|
Accrued expenses and taxes |
|
|
5,571 |
|
|
|
7,758 |
|
Accrued compensation |
|
|
10,365 |
|
|
|
10,413 |
|
Accrued interest expense |
|
|
1,751 |
|
|
|
6,907 |
|
Accrued dividends |
|
|
639 |
|
|
|
639 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
54,814 |
|
|
|
73,111 |
|
|
|
|
|
|
|
|
|
|
Senior unsecured notes |
|
|
275,000 |
|
|
|
275,000 |
|
Deferred tax liability |
|
|
2,125 |
|
|
|
4,683 |
|
Pension and post-retirement liabilities |
|
|
8,967 |
|
|
|
9,024 |
|
Other liabilities |
|
|
3,046 |
|
|
|
3,111 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
343,952 |
|
|
|
364,929 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 50,000,000 shares
authorized, 21,302,296 shares issued and outstanding at
March 31, 2009 and December 31, 2008 |
|
|
213 |
|
|
|
213 |
|
Additional paid-in capital |
|
|
239,617 |
|
|
|
239,617 |
|
Retained earnings |
|
|
82,122 |
|
|
|
80,035 |
|
Accumulated other comprehensive loss |
|
|
(10,306 |
) |
|
|
(5,140 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
311,646 |
|
|
|
314,725 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
655,598 |
|
|
$ |
679,654 |
|
|
|
|
|
|
|
|
See notes to the Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Manufacturing operations (including revenues from
affiliates of $48,405 and $34,689 for the three
months ended March 31, 2009 and 2008, respectively) |
|
$ |
144,670 |
|
|
$ |
170,784 |
|
|
|
|
|
|
|
|
|
|
Railcar services (including revenues from
affiliates of $3,533 and $4,053 for the three
months ended March 31, 2009 and 2008, respectively) |
|
|
12,277 |
|
|
|
13,265 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
156,947 |
|
|
|
184,049 |
|
|
|
|
|
|
|
|
|
|
Cost of revenue: |
|
|
|
|
|
|
|
|
Manufacturing operations |
|
|
(130,098 |
) |
|
|
(150,890 |
) |
Railcar services |
|
|
(10,472 |
) |
|
|
(10,867 |
) |
|
|
|
|
|
|
|
Total cost of revenue |
|
|
(140,570 |
) |
|
|
(161,757 |
) |
Gross profit |
|
|
16,377 |
|
|
|
22,292 |
|
|
|
|
|
|
|
|
|
|
Selling, administrative and other (including costs
related to affiliates of $151 both for the three
months ended March 31, 2009 and 2008) |
|
|
(7,013 |
) |
|
|
(6,841 |
) |
|
|
|
|
|
|
|
Earnings from operations |
|
|
9,364 |
|
|
|
15,451 |
|
|
|
|
|
|
|
|
|
|
Interest income (including income related to
affiliates of $5 and $11 for the three months ended
March 31, 2009 and 2008, respectively) |
|
|
1,183 |
|
|
|
2,557 |
|
Interest expense |
|
|
(5,140 |
) |
|
|
(5,043 |
) |
Other (loss) income |
|
|
(96 |
) |
|
|
3,199 |
|
(Loss) earnings from joint ventures |
|
|
(842 |
) |
|
|
304 |
|
|
|
|
|
|
|
|
Earnings before income tax expense |
|
|
4,469 |
|
|
|
16,468 |
|
Income tax expense |
|
|
(1,743 |
) |
|
|
(6,340 |
) |
|
|
|
|
|
|
|
Net earnings available to common shareholders |
|
$ |
2,726 |
|
|
$ |
10,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share basic |
|
$ |
0.13 |
|
|
$ |
0.48 |
|
Net earnings per common share diluted |
|
$ |
0.13 |
|
|
$ |
0.48 |
|
Weighted average common shares outstanding basic |
|
|
21,302 |
|
|
|
21,302 |
|
Weighted average common shares outstanding diluted |
|
|
21,302 |
|
|
|
21,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
0.03 |
|
|
$ |
0.03 |
|
See notes to the Condensed Consolidated Financial Statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
2,726 |
|
|
$ |
10,128 |
|
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
5,644 |
|
|
|
4,652 |
|
Amortization of deferred costs |
|
|
171 |
|
|
|
203 |
|
Loss on disposal of property, plant and equipment |
|
|
71 |
|
|
|
1 |
|
Stock based compensation |
|
|
(35 |
) |
|
|
293 |
|
Change in investments in joint ventures as a result of loss (earnings) |
|
|
842 |
|
|
|
(304 |
) |
Unrealized loss (gain) on derivatives |
|
|
91 |
|
|
|
(3,135 |
) |
Provision for deferred income taxes |
|
|
712 |
|
|
|
1,571 |
|
(Benefit) provision for doubtful accounts receivable |
|
|
(37 |
) |
|
|
11 |
|
Investing activities reclassified from operating activities: |
|
|
|
|
|
|
|
|
Interest income on short-term investments available-for-sale securities |
|
|
(647 |
) |
|
|
|
|
Realized loss on derivatives |
|
|
20 |
|
|
|
|
|
Dividends received from short-term investments available-for-sale securities |
|
|
(15 |
) |
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
10,574 |
|
|
|
(14,851 |
) |
Accounts receivable, due from affiliate |
|
|
(4,831 |
) |
|
|
13,215 |
|
Inventories, net |
|
|
15,879 |
|
|
|
(4,268 |
) |
Prepaid expenses |
|
|
(344 |
) |
|
|
284 |
|
Accounts payable |
|
|
(9,443 |
) |
|
|
11,099 |
|
Accounts payable, due to affiliate |
|
|
(1,464 |
) |
|
|
(617 |
) |
Accrued expenses and taxes |
|
|
(7,368 |
) |
|
|
(3,272 |
) |
Other |
|
|
(92 |
) |
|
|
(138 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
12,454 |
|
|
|
14,872 |
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(4,949 |
) |
|
|
(14,766 |
) |
Purchases of short-term investments available-for-sale securities |
|
|
(36,841 |
) |
|
|
(27,857 |
) |
Interest income on short-term investments available-for-sale securities |
|
|
647 |
|
|
|
|
|
Realized loss on derivatives |
|
|
(20 |
) |
|
|
|
|
Dividends received from short-term investments available-for-sale securities |
|
|
15 |
|
|
|
|
|
Proceeds from repayment of note receivable from affiliate |
|
|
|
|
|
|
165 |
|
Investments in joint ventures |
|
|
(1,324 |
) |
|
|
(356 |
) |
Sale of investment in joint venture |
|
|
|
|
|
|
1,875 |
|
Restricted cash |
|
|
|
|
|
|
(1,186 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(42,472 |
) |
|
|
(42,125 |
) |
Financing activities: |
|
|
|
|
|
|
|
|
Common stock dividends |
|
|
(639 |
) |
|
|
(639 |
) |
Finance fees related to new credit facility |
|
|
(40 |
) |
|
|
(40 |
) |
Repayment of debt |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(679 |
) |
|
|
(687 |
) |
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(30,697 |
) |
|
|
(27,940 |
) |
Cash and cash equivalents at beginning of period |
|
|
291,788 |
|
|
|
303,882 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
261,091 |
|
|
$ |
275,942 |
|
|
|
|
|
|
|
|
See notes to the Condensed Consolidated Financial Statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The condensed consolidated financial statements included herein have been prepared by American
Railcar Industries, Inc. 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, 2008 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 attached on Form 10-K for the year ended December 31, 2008. 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.
Note 1 Description of the Business
The condensed consolidated financial statements of the Company include the accounts of American
Railcar Industries, Inc. and its wholly owned subsidiaries. Through its subsidiary, Castings, LLC
(Castings), the Company has a one-third ownership interest in Ohio Castings Company, LLC (Ohio
Castings), a limited liability company formed to produce various steel railcar parts for use or
sale by the ownership group. Through its subsidiary, ARI Component Venture, LLC, the Company has a
37.5% ownership interest in Axis, LLC (Axis), a limited liability company formed to produce railcar
axles, for use or sale by the ownership group. Through its subsidiaries, American Railcar Mauritius
I and American Railcar Mauritius II, the Company has a 50.0% ownership interest in Amtek Railcar
Industries Private Limited (ARIPL or India), a joint venture company in India, which was formed to
produce railcars and railcar components in India for sale by the joint venture. Through its wholly
owned subsidiary, ARI Longtrain, Inc. (Longtrain), the Company makes investments from time to time.
All intercompany transactions and balances have been eliminated.
ARI manufactures railcars, custom designed railcar parts for industrial companies and railroads,
and other industrial products, primarily aluminum and special alloy steel castings, for non-rail
customers. ARI also provides railcar maintenance services for railcar fleets, including that of its
affiliate, American Railcar Leasing LLC (ARL). 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 Companys operations are located in
the United States and Canada. The Company operates a small railcar repair facility in Sarnia,
Ontario Canada. Canadian revenues were 0.5% and 0.5%, respectively, of total consolidated revenues
for the three months ended March 31, 2009 and 2008. Canadian assets were 1.0% and 0.6%,
respectively, of total consolidated assets as of March 31, 2009 and December 31, 2008.
Note 2 Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 141(R), Business Combinations (SFAS No. 141R), to create greater
consistency in the accounting and financial reporting of business combinations. SFAS No. 141R
establishes principles and requirements for how the acquirer in a business combination (i)
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest, (ii) recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase, and (iii) determines what
information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS No. 141R applies to fiscal years beginning
after December 15, 2008. The adoption of this pronouncement did not have a material impact on the
Companys consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of
a subsidiary. The guidance became effective as of the beginning of the Companys fiscal year on
January 1, 2009. The adoption of this
pronouncement did not have a material impact on the Companys consolidated financial statements.
6
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133 (SFAS No. 161). SFAS No, 161 expands quarterly
disclosure requirements in SFAS No. 133, Accounting for Derivative Instruments and Hedging
activities (SFAS No. 133), about an entitys derivative instruments and hedging activities. SFAS
No. 161 is effective for fiscal years beginning after November 15, 2008. The adoption of this
pronouncement did not have a material impact on the Companys consolidated financial statements.
Note 3 Short-term Investments Available-for-Sale Securities
During January 2008, Longtrain purchased 1,530,000 shares of common stock of The Greenbrier
Companies, Inc. (Greenbrier) in the open market. This investment was made with the intention to
enter into discussions regarding a possible business combination of the Company and Greenbrier. In
June 2008, it was disclosed that the parties were not at that time pursuing further discussions
regarding a business combination. Subsequently, Longtrain sold 1,156,659 shares of Greenbrier. This
investment is classified as a short-term investment available-for-sale security in accordance with
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115), as
the Company does not intend on holding this investment long-term.
As of March 31, 2009 and December 31, 2008, the market price of the common stock of Greenbrier was
$3.66 and $6.87 per share, respectively, which resulted in the investment values of $1.3 million
and $2.6 million, respectively, as of those dates on the remaining 373,341 shares of Greenbrier
that the Company owns. The resulting unrealized losses of $5.6 million and $4.3 million were
recognized as accumulated other comprehensive loss within stockholders equity, net of deferred
taxes as of March 31, 2009 and December 31, 2008, respectively.
During the first quarter of 2009, Longtrain purchased corporate bonds that mature in 2015 for a
total of $36.8 million. This investment is classified as a short-term investment available-for-sale
security in accordance with SFAS No. 115 as the Company does not intend on holding this investment
long-term. As of March 31, 2009, the investment value of these bonds was $30.3 million resulting in
an unrealized loss of $6.5 million that was recognized as accumulated other comprehensive loss
within stockholders equity, net of deferred taxes.
Note 4 Derivatives
The Company has entered into derivative contracts. As required, the Company accounts for these
derivatives under SFAS No. 133, which was amended by SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities (SFAS No. 138). The pronouncements
established accounting and reporting standards for derivative instruments and for hedging
activities, which generally require recognition of all derivatives as either assets or liabilities
in the balance sheet at their fair value. The accounting for changes in fair value depends on the
intended use of the derivative and its resulting designation. The Company did not use hedge
accounting and accordingly, all unrealized gains and losses were reflected in our condensed
consolidated statements of operations.
Total return swaps
During January 2008, Longtrain entered into total return swap agreements referenced to the fair
value of 400,000 shares of common stock of Greenbrier. The total notional amount of these swap
agreements was approximately $7.4 million, representing the fair market value of the referenced
shares at the time Longtrain entered into the agreements. The Company accounted for these swap
agreements as derivatives with any resulting unrealized gain included in other income with a
derivative asset on the balance sheet or any resulting unrealized loss accounted for as other loss
with a derivative liability on the balance sheet. For the quarter ended March 31, 2008, the
Companys other income included $3.1 million of unrealized gain relating to these swap agreements.
These swap agreements were fully settled in the third quarter of 2008.
These swap agreements required that Longtrain maintain a cash deposit with the counterparty based
upon a percentage of the swap contracts notional value at the time of inception, which was
adjusted to reflect any associated unrealized gain. As of March 31, 2008, Longtrain had $1.2
million of such deposits, reported as restricted cash to meet this requirement. As these agreements
were settled during 2008, there were no restricted cash deposits
as of March 31, 2009.
7
Foreign currency option
The Company entered into a foreign currency option in October 2008, to purchase Canadian Dollars
(CAD) for $5.3 million U.S. Dollars (USD) from October 2008 through April 2009, with fixed exchange
rates and exchange limits each month. This option was entered into to hedge our exposure to foreign
currency exchange risk related to capital expenditures for the expansion of the Companys Canadian
repair operations. In 2009, the Company expended $3.0 million USD to purchase CAD under this option
resulting in a realized loss of less than $0.1 million based on the exchange spot rate on the
various exercise dates.
The Company did not use hedge accounting for this option thus any resulting unrealized gain has
been included in other income with a derivative asset on the balance sheet and any unrealized loss
has been recorded in other loss with a derivative liability on the balance sheet. As of March 31,
2009, an unrealized loss and derivative liability have been recorded for less than $0.1 million. As
of December 31, 2008, an unrealized gain and derivative asset were recorded for $0.1 million.
Note 5 Fair Value Measurements
The Company adopted SFAS No. 157, Fair Value Measurements (SFAS No. 157), on January 1, 2008,
which, among other things, requires enhanced disclosures about investments that are measured and
reported at fair value. SFAS No. 157 establishes a hierarchal disclosure framework that prioritizes
and ranks the level of market price observability used in measuring investments 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. 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.
As of January 1, 2009, the Company adopted the non-recurring nonfinancial assets and nonfinancial
liabilities provisions of SFAS No. 157, including those measured at fair value in goodwill
impairment testing.
Investments measured and reported at fair value are classified and disclosed in one of the
following categories:
|
|
|
Level 1 Quoted prices are available in active markets for identical investments
as of the reporting date. The type of investments included in Level I include listed
equities and listed derivatives. As required by SFAS No. 157, the Company does not
adjust the quoted price for these investments, even in situations where they hold a
large position and a sale could reasonably impact the quoted price. |
|
|
|
Level 2 Pricing inputs are other than quoted prices in active markets, which are
either directly or indirectly observable as of the reporting date, and fair value is
determined through the use of models or other valuation methodologies. Investments that
are generally included in this category include corporate bonds and loans, less liquid
and restricted equity securities and certain over-the-counter derivatives. |
|
|
|
Level 3 Pricing inputs are unobservable for the investment and include situations
where there is little, if any, market activity for the investment. The inputs into the
determination of fair value require significant management judgment or estimation. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, an investments 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 investment.
8
The following table summarizes the valuation of our investments by the above SFAS No. 157 fair
value hierarchy levels as of March 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments available-for-sale
securities |
|
$ |
31,642 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
31,642 |
|
Derivative liability foreign currency option |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
31,642 |
|
|
$ |
(3 |
) |
|
$ |
|
|
|
$ |
31,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the valuation of our investments by the above SFAS 157 fair value
hierarchy levels as of December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments
available-for-sale securities |
|
$ |
2,565 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,565 |
|
Derivative asset foreign currency option |
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,565 |
|
|
$ |
88 |
|
|
$ |
|
|
|
$ |
2,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the valuation of financial instruments measured at fair value on a
non-recurring basis in the statement of financial position at March 31, 2009 and December 31, 2008
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
|
|
|
$ |
|
|
|
$ |
7,169 |
|
|
$ |
7,169 |
|
In accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No.
142), goodwill with a carrying amount of $7.2 million was evaluated as of March 1, 2009 and
December 31, 2008 and no impairment was noted. Refer to Note 8 for further discussion of the
goodwill fair value measurement and impairment tests.
Note 6 Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Raw materials |
|
$ |
49,594 |
|
|
$ |
59,457 |
|
Work-in-process |
|
|
16,223 |
|
|
|
22,137 |
|
Finished products |
|
|
18,549 |
|
|
|
18,300 |
|
|
|
|
|
|
|
|
Total inventories |
|
|
84,366 |
|
|
|
99,894 |
|
Less reserves |
|
|
(3,000 |
) |
|
|
(2,649 |
) |
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
81,366 |
|
|
$ |
97,245 |
|
|
|
|
|
|
|
|
9
Note 7 Property, Plant and Equipment
The following table summarizes the components of property, plant and equipment.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Property, plant and equipment |
|
|
|
|
|
|
|
|
Buildings |
|
$ |
131,593 |
|
|
$ |
130,054 |
|
Machinery and equipment |
|
|
167,799 |
|
|
|
167,586 |
|
|
|
|
|
|
|
|
|
|
|
299,392 |
|
|
|
297,640 |
|
Less accumulated depreciation |
|
|
(110,161 |
) |
|
|
(105,938 |
) |
|
|
|
|
|
|
|
Net property, plant and
equipment |
|
|
189,231 |
|
|
|
191,702 |
|
Land |
|
|
3,306 |
|
|
|
3,306 |
|
Construction in process |
|
|
13,550 |
|
|
|
11,928 |
|
|
|
|
|
|
|
|
Total property, plant and equipment |
|
$ |
206,087 |
|
|
$ |
206,936 |
|
|
|
|
|
|
|
|
Depreciation Expense
Depreciation expense for the three months ended March 31, 2009 and 2008 was $5.6 million and $4.7
million, respectively.
Capitalized Interest
In conjunction with the Senior Unsecured Fixed Rate Notes offering described in Note 11, the
Company began recording capitalized interest on certain property, plant and equipment capital
projects. The amount of interest capitalized for the three months ended March 31, 2009 and 2008 was
$0.2 million and $0.4 million, respectively.
Lease agreements
During 2008, the Company entered into two agreements to lease a fixed number of railcars to third
parties for multiple years. One of the leases includes a provision that allows the lessee to
purchase any portion of the leased railcars at any time during the lease term for a stated market
price, which approximates fair value. These agreements have been classified as operating leases in
accordance with SFAS No. 13, Accounting for Leases (SFAS No. 13). As a result of applying the rules
from SFAS No. 13 the leased railcars have been included in machinery and equipment and will be
depreciated in accordance with the Companys depreciation policy.
Note 8 Goodwill
In June 2001, the FASB issued SFAS No. 142, which requires that goodwill and other intangible
assets with indefinite useful lives shall not be amortized but shall be tested for impairment at
least annually by comparing the fair value of the asset to its carrying value. The Company adopted
this standard upon the acquisition of Custom Steel in 2006, which resulted in goodwill of $7.2
million.
The Company performs the goodwill impairment test required by SFAS No. 142 as of March 1 of each
year. The valuation uses a combination of methods to determine the fair value of the reporting unit
including prices of comparable businesses, a present value technique and recent transactions
involving businesses similar to the Company. There was no adjustment required based on the 2009
annual impairment tests related to the goodwill generated from the Custom Steel acquisition.
In addition to the annual impairment test requirement, SFAS No. 142 also requires goodwill to be
tested for impairment when a triggering event occurs. During the fourth quarter of 2008, there were
severe disruptions in the credit markets and reductions in global economic activity, which had
significant adverse impacts on stock markets
that contributed to a significant decline in the Companys stock price and corresponding market
capitalization. For most of the fourth quarter, the Companys market capitalization value was
significantly below the recorded net book value of the Companys balance sheet, including goodwill.
Based on these overriding factors, as required under SFAS No. 142, indicators existed that the
Company had experienced a significant adverse change in the business climate that the Company
determined to be a triggering event requiring it to review for impairment the fair value of the
reporting unit associated with the Companys goodwill. The results of the evaluation determined
that no impairment existed at December 31, 2008.
10
Note 9 Investments in Joint Ventures
The Company is party to three joint ventures; Ohio Castings, Axis and India. The equity method is
used to account for the investments in Ohio Castings and Axis. Under the equity 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. As of March 31, 2009,
there have been no equity contributions to the India joint venture since its inception.
The carrying amount of investments in joint ventures is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Carrying amount of investments in joint ventures |
|
|
|
|
|
|
|
|
Ohio Castings |
|
$ |
6,871 |
|
|
$ |
7,000 |
|
Axis |
|
|
6,662 |
|
|
|
6,091 |
|
India |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in joint ventures |
|
$ |
13,533 |
|
|
$ |
13,091 |
|
|
|
|
|
|
|
|
Ohio Castings
Ohio Castings produces railcar parts that are sold to one of the joint venture partners. The joint
venture partner sells these parts to outside third parties at current market prices and sells them
to the Company and the other joint venture partner at cost plus a licensing fee. The Company has
been involved with this joint venture since 2003.
The Company has determined that, although the joint venture is a variable interest entity (VIE),
the Company is not the primary beneficiary. The significant factor in this determination was that
no partner, including the Company and Castings, has rights to the majority of returns, losses or
votes. Additionally, the risk of loss to Castings and the Company is limited to its investment in
the VIE and Ohio Castings debt, which the Company has guaranteed. The two other partners of Ohio
Castings have made the same guarantees of these obligations.
The Company, along with the other members of Ohio Castings, has guaranteed bonds payable and a
state loan issued to one of Ohio Castings subsidiaries by the State of Ohio, as further discussed
in Note 14. The value of the guarantee was less than $0.1 million at both March 31, 2009 and
December 31, 2008, and has been recorded by the Company in accordance with FASB Interpretation No.
45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45).
See Note 19 for information regarding financial transactions among the Company, Ohio Castings and
Castings.
11
Summary combined results of operations for Ohio Castings, the investee company are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Results of operations |
|
|
|
|
|
|
|
|
Sales |
|
$ |
8,302 |
|
|
$ |
22,380 |
|
|
|
|
|
|
|
|
Operating (loss) earnings |
|
|
(801 |
) |
|
|
1,521 |
|
|
|
|
|
|
|
|
Net (loss) earnings |
|
$ |
(768 |
) |
|
$ |
1,542 |
|
|
|
|
|
|
|
|
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 at a facility to be
constructed by the joint venture. The Company expects the plant to begin production in the second
half of 2009. As production has not begun for Axis and it is in the startup and construction
phases, the joint venture is considered a development stage enterprise. The joint venture is
incurring startup costs related to training and testing, in addition to interest expense on the
funds borrowed under its credit agreement. The joint venture is also in the process of obtaining
certification from the Association of American Railroads, which is expected in the second quarter
of 2009.
ARI and another partner initially owned the joint venture equally until February 2008, when they
sold equal equity interests in Axis to two new partners. ARI and the other initial partner each
have an ownership interest of 37.5%, after giving effect to the new partners. The executive
committee of the joint venture is comprised of one representative from each initial partner. Each
representative has equal voting rights and equal decision-making rights for operational and
strategic decisions of the joint venture. During March 2009, the Company made an equity
contribution totaling $1.2 million, along with comparable contributions from the other three
partners based on their percentage of ownership. The Company currently plans to contribute an
additional $1.3 million in the third quarter of 2009 and $1.9 million in the fourth quarter of
2009, with comparable contributions in each quarter from the other three partners based on their
percentage ownership. The capital contributions will be utilized to help fund operations.
The Company has determined that, although the joint venture is a variable interest entity (VIE),
the Company is not the primary beneficiary. The significant factor in this determination was that
no partner, including the Company and its wholly-owned subsidiary, has rights to the majority of
returns, losses or votes. Additionally, the risk of loss to the Company and subsidiary is limited
to its investment in the VIE and one-half of Axis debt, which the Company has guaranteed, as
further discussed in Note 14. The other 37.5% partner has guaranteed the other half of Axis debt.
The value of the Companys portion of the guarantee, which was $0.9 million at both March 31, 2009
and December 31, 2008, has been recorded by the Company in accordance with FIN 45.
See Note 19 for information regarding financial transactions among the Company, the Companys
wholly-owned subsidiary and Axis.
12
Summary combined financial results for Axis, the investee company, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Financial results |
|
|
|
|
|
|
|
|
Sales |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Loss before interest expense |
|
|
(1,639 |
) |
|
|
(150 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,910 |
) |
|
$ |
(296 |
) |
|
|
|
|
|
|
|
India
In June 2008, the Company, through a wholly owned subsidiary, 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. The joint venture is owned 50.0% by both partners and each partner
has agreed to make limited, equal capital contributions to the joint venture. As of March 31, 2009,
no equity investment had been made since the inception of the joint venture.
Note 10 Warranties
The Company provides limited warranties on certain products for periods ranging from one year for
parts and services to five years on new railcars. Factors affecting the Companys warranty
liability include the number of units sold and historical and anticipated rates of claims and costs
per claim. The Company assesses the adequacy of its warranty liability based on changes in these
factors.
As a result of experiencing lower claims than expected, ARI reduced its estimated warranty
liability, as an offset to the provision, for its railcar manufacturing facilities during the first
quarter of 2008. The overall change in the Companys warranty reserve, including the aforementioned
reduction, is reflected on the condensed consolidated balance sheet in accrued expenses and taxes
and is detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Liability, beginning of period |
|
$ |
2,595 |
|
|
$ |
2,503 |
|
Provision for new warranties issued, net
of adjustments |
|
|
125 |
|
|
|
(343 |
) |
Warranty claims |
|
|
(757 |
) |
|
|
(109 |
) |
|
|
|
|
|
|
|
Liability, end of period |
|
$ |
1,963 |
|
|
$ |
2,051 |
|
|
|
|
|
|
|
|
Note 11 Long-term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Revolving line of credit |
|
$ |
|
|
|
$ |
|
|
Senior unsecured notes |
|
|
275,000 |
|
|
|
275,000 |
|
|
|
|
|
|
|
|
Total long-term debt, including current
portion |
|
$ |
275,000 |
|
|
$ |
275,000 |
|
Less current portion of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion |
|
$ |
275,000 |
|
|
$ |
275,000 |
|
|
|
|
|
|
|
|
13
Revolving line of credit
The Company has an Amended and Restated Credit Agreement in place, providing for the terms of the
Companys revolving credit facility with Capital One Leverage Finance Corporation, as
administrative agent for various lenders. The Company had no borrowings outstanding as of March 31,
2009 and has had no borrowings outstanding under this revolving credit facility since its inception
in January 2006. The note bears interest at various rates based on LIBOR or prime. As of March 31,
2009, the interest rate on the revolving credit facility was 3.25% based on the U.S. prime rate at
that time.
The revolving credit facility has both affirmative and negative covenants as defined in the
agreement, including, without limitation, an adjusted fixed charge coverage ratio (coverage ratio),
a maximum total debt leverage ratio (leverage ratio) and limitations on capital expenditures and
dividends. These negative covenants include certain limitations on, among other things, the
Companys ability to incur or maintain indebtedness, sell or dispose of collateral, grant credit
and declare or pay dividends or make distributions on common stock or other equity securities. The
revolving credit facility has a total commitment of the lesser of (i) $100.0 million or (ii) an
amount equal to a percentage of eligible accounts receivable plus a percentage of eligible raw
materials, work in process and finished goods inventory. In addition, the revolving credit facility
includes a capital expenditure sub-facility of $30.0 million based on the percentage of the costs
related to equipment the Company may acquire. The revolving credit facility expires on October 5,
2009, and provided commercially favorable terms are available, the Company currently plans on
entering into a new agreement upon expiration. Borrowings under the revolving credit facility are
collateralized by accounts receivable, contracts, leases, instruments, chattel paper, inventory,
pledged accounts, certain other assets and equipment purchased with proceeds of the capital
expenditure sub-facility.
Compliance with the coverage and leverage ratios is not required unless the Companys excess
availability under the revolving credit facility is less than $30.0 million (or has been less than
$30.0 million at any time during the prior 90 days). Under this circumstance, the Companys
coverage ratio must not be less than 1.2 to 1.0 on a quarterly and annual basis. Under this
circumstance and if the Company has incurred debt during the quarter, the leverage ratio must not
be greater than 4.0 to 1.0 on a quarterly and annual basis. At March 31, 2009, the Company had
$64.6 million of availability under the revolving credit facility.
As of March 31, 2009, the Company was not required to test the coverage and leverage ratios. The
Company has declared quarterly dividends of $0.03 per common share since its initial public
offering in January 2006 through the first quarter of 2009, and none of those declarations has
breached any covenants in the revolving credit agreement.
Senior unsecured fixed rate notes
In February 2007, the Company completed the offering of $275.0 million senior unsecured fixed rate
notes, which were subsequently exchanged for registered notes in March 2007. The fair value of
these notes was approximately $197.7 million at March 31, 2009 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 5.
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
shareholders and affiliates. These covenants become more restrictive if the
Companys fixed charge coverage ratio, as defined, is less than 2.0 to 1.0. The Company was in
compliance with all of its covenants under the notes as of March 31, 2009.
ARI may redeem up to 35.0% of the Notes, prior to or on March 1, 2010, at a redemption price of
107.5% of their principal amount, plus accrued and unpaid interest with money that the Company
raises from one or more qualified equity offerings. Prior to March 1, 2011, the notes may be
redeemed in whole or in part using cash from operations at a redemption price equal to 100.0% of
the applicable principal amount, plus an applicable premium as defined in the notes agreement.
Commencing on March 1, 2011, the redemption price is set at 103.8% of the principal amount of the
Notes plus accrued and unpaid interest, and declines annually until it is reduced to 100.0% of the
principal amount of the Notes plus accrued and unpaid interest from and after March 1, 2013.
14
Note 12 Income Taxes
Unrecognized tax benefits for the Company are $2.1 million as of March 31, 2009. There is a
reasonable possibility that amounts of unrecognized tax benefits totaling $1.7 million,
attributable to accounting methods and state tax positions, could significantly decrease over the
next twelve months due to a lapse in statutes for assessing tax and/or a change in uncertain tax
positions. Such a change is estimated to be in the range of $1.0 million to $1.5 million.
The Companys tax years 2005 through 2008 remain open to examination by various authorities with
the latest expiration of statute in 2012.
Note 13 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 active and benefits continue to accrue thereunder. 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 employees are participants. The SERP is
frozen and no additional benefits are accruing thereunder.
The Company also provides postretirement healthcare benefits for certain of its salaried and hourly
retired employees. Employees may become eligible for healthcare benefits if they retire after
attaining specified age and service requirements. These benefits are subject to deductibles,
co-payment provisions and other limitations.
As required under SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132(R)) (SFAS No. 158)
the Companys measurement date is December 31. ARI chose to use the valuation performed as of
October 1, 2007 and apply it over the fifteen months from October 2007 through December 2008 as
permitted under SFAS No. 158. The net periodic benefit cost for both the pension plans and the
postretirement plan was recognized by allocating three months of the cost to retained earnings and
recognizing the remaining twelve months of expense over the course of 2008. During the first
quarter of 2008, the Company recognized a $0.1 million decrease to retained earnings as a result of
implementing the measurement date provisions under SFAS No. 158.
The components of net periodic benefit cost for the pension and postretirement plans are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Service cost |
|
$ |
59 |
|
|
$ |
74 |
|
Interest cost |
|
|
258 |
|
|
|
254 |
|
Expected return on plan assets |
|
|
(189 |
) |
|
|
(272 |
) |
Amortization of unrecognized net gain |
|
|
92 |
|
|
|
43 |
|
Amortization of unrecognized prior service cost |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
Net periodic benefit cost recognized |
|
$ |
224 |
|
|
$ |
103 |
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Service cost |
|
$ |
12 |
|
|
$ |
15 |
|
Interest cost |
|
|
38 |
|
|
|
58 |
|
Amortization of prior service cost |
|
|
21 |
|
|
|
5 |
|
Amortization of loss |
|
|
23 |
|
|
|
(12 |
) |
|
|
|
|
|
|
|
Net periodic benefit cost recognized |
|
$ |
94 |
|
|
$ |
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Pension |
|
$ |
224 |
|
|
$ |
103 |
|
Postretirement |
|
|
94 |
|
|
|
66 |
|
|
|
|
|
|
|
|
Total net periodic benefit cost recognized for
both plans |
|
$ |
318 |
|
|
$ |
169 |
|
|
|
|
|
|
|
|
The Company also maintains a qualified defined contribution plan, which provides benefits to its
employees based on employee contributions, years of service, and employee earnings with
discretionary contributions allowed. Expenses related to these plans were $0.2 million for the
three months ended March 31, 2009 and 2008, respectively.
Note 14 Commitments and Contingencies
In connection with the Companys investment in Ohio Castings, ARI has guaranteed bonds amounting to
$10.0 million issued by the State of Ohio to Ohio Castings, of which $2.7 million was outstanding
as of March 31, 2009. ARI also has guaranteed a $2.0 million state loan that provides for purchases
of capital equipment, of which $0.8 million was outstanding as of March 31, 2009. The two other
partners of Ohio Castings have made identical guarantees of these obligations.
The Companys Axis joint venture entered into a credit agreement in December 2007. In connection
with this event, the Company agreed to a 50.0% guaranty of Axis obligation under its credit
agreement during the construction and start-up phases of the facility. Subject to its terms and
conditions, the guaranty will terminate on the first to occur of (i) the repayment in full of the
guaranteed obligations or (ii) after the facility has been in continuous production at a level
sufficient to meet the facilitys projected financial performance and in any event not less than
365 consecutive days from the certified completion of the facilitys construction. As of March 31,
2009, Axis had approximately $61.5 million outstanding under the credit agreement of which the
Companys exposure is 50.0%. The Companys guaranty has a maximum exposure related to it of $35.0
million, exclusive of any capitalized interest, fees, costs and expenses. The Companys initial
partner in the joint venture has made an identical guarantee relating to this credit agreement.
16
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 affect
on the Company. ARI is involved in investigation and remediation activities at properties that it
now owns or leases to address historical contamination and potential contamination by third
parties. The Company is also involved with state agencies in the cleanup of two sites under these
laws. These investigations are in process but it is too early to be able to make a reasonable
estimate, with any certainty, of the timing and extent of remedial actions that may be required,
and the costs that would be involved in such remediation. Substantially all of the issues
identified relate to the use of the properties prior to their transfer to ARI in 1994 by ACF
Industries LLC (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. However, if ACF fails to honor its obligations
to ARI, ARI would 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.
When it is possible to make a reasonable estimate of the liability with respect to such a matter, a
provision will be made as appropriate. Actual cost to be incurred in future periods may vary from
these estimates. Based on facts presently known, ARI does not believe that the outcome of these
proceedings will have a material adverse effect on its future liquidity, results of operations or
financial position.
ARI is a party to collective bargaining agreements with labor unions at its Longview, Texas repair
facility, its North Kansas City, Missouri repair facility and at its Longview, Texas steel foundry
and components manufacturing facility. These agreements expire in January 2010, September 2010, and
April 2011, respectively. ARI was also party to a collective bargaining agreement at its idled
Milton, Pennsylvania repair facility, which expired on June 19, 2005. The contract provisions under
the agreement provided that the contract would remain in effect under the old terms until
terminated by either party with 60 days notice. However, a consent award was agreed upon and paid
in the first quarter of 2009 resulting in termination of the agreement. The Companys total payment
under the consent award was less than $0.1 million.
ARI has been named the defendant in a lawsuit, OCI Chemical Corporation v. American Railcar
Industries, Inc., in which the plaintiff, OCI Chemical Company (OCI), claims the Company was
responsible for the damage caused by allegedly defective railcars that were manufactured by ARI.
The lawsuit was filed on September 19, 2005, in the United States District Court, Eastern District
of Missouri. Mediation on November 24, 2008, was not successful. Another unsuccessful mediation
took place on March 9, 2009 and trial was scheduled for April 20, 2009, at which time this case was
settled at a loss that was accrued for as of March 31, 2009.
ARI has been named the defendant in a wrongful death lawsuit, Jennifer Nicole Lerma v. American
Railcar Industries, Inc. The lawsuit was filed on August 17, 2007, in the Circuit Court of Greene
County, Arkansas Civil Division. Mediation on January 6, 2009, was not successful and trial is
scheduled for August 4, 2009. The Company believes that it is not responsible and has meritorious
defenses against such liability. While it is reasonably possible that this case could result in a
loss, there is not sufficient information to estimate the amount of such loss, if any, resulting
from the lawsuit.
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.
The Company entered into two vendor supply contracts with minimum volume commitments in October
2005 with suppliers of materials used at its railcar production facilities. The agreements have a
minimum purchase volume requirement over the life of the contracts totaling $65.0 million. In 2006,
2007 and 2008 combined, ARI purchased $61.6 million under these two contracts. For the three months
ended March 31, 2009, ARI purchased $1.9 million under these agreements and expects to purchase an
additional $1.5 million in the second quarter of 2009, at which time all commitments will be met.
17
In 2005, ARI entered into supply agreements with a supplier for two types of steel plate. The
agreements are for five years and are cancelable by either party, with proper notice after two
years. The agreement commits ARI to buy a percentage of its production needs from this supplier at
prices that fluctuate with market conditions.
In 2006, ARI entered into an agreement with two parties, including one of the members of the Ohio
Castings joint venture and an affiliate of one of the members of the Ohio Castings joint venture,
to purchase a minimum of 60.0% of certain of our railcar component requirements for the years 2007,
2008 and 2009.
In July 2007, ARI entered into an agreement with its joint venture, Axis, to purchase all of its
requirements of new railcar axles from the joint venture. The joint venture is expected to begin
production in the second half of 2009.
During 2008, the Company entered into contracts to purchase a fixed volume of natural gas for a
period of twelve months from October 2008 through September 2009. A portion of the volume was
agreed to at a fixed price. The objective of entering into this contract was to fix the price of a
portion of the Companys purchases of this commodity it uses in the manufacturing process. The
Companys remaining commitment under these contracts is $0.4 million and will be fully satisfied by
the third quarter of 2009.
In October 2008, the Company entered into a foreign currency option to purchase CAD for $5.3
million USD from October 2008 through April 2009, with fixed exchange rates and exchange limits
each month. In 2009, the Company purchased CAD for $3.0 million USD. As of March 31, 2009, the
Company has a remaining commitment to purchase an additional CAD for $0.3 million USD in 2009.
Note 15 Comprehensive (Loss) Income
The components of comprehensive (loss) income, net of related tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Net earnings |
|
$ |
2,726 |
|
|
$ |
10,128 |
|
Unrealized (loss) gain on available for sale
securities |
|
|
(5,046 |
) |
|
|
7,962 |
|
Foreign currency translation adjustment |
|
|
(120 |
) |
|
|
(76 |
) |
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
$ |
(2,440 |
) |
|
$ |
18,014 |
|
|
|
|
|
|
|
|
18
Note 16 Earnings per Share
The shares used in the computation of the Companys basic and diluted earnings per common share are
reconciled as follows:
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Weighted average basic common shares outstanding |
|
|
21,302,296 |
|
|
|
21,302,296 |
|
Dilutive effect of employee stock options |
|
|
|
(1) |
|
|
|
(1)(2) |
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding |
|
|
21,302,296 |
|
|
|
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 three months ended March 31, 2009 and
2008. These options would have resulted in an antidilutive effect to the earnings per share
calculation. |
|
(2) |
|
Stock options to purchase 75,000 shares of common stock were not included in the
calculation for diluted earnings per share for the three months ended March 31, 2008. These
options would have resulted in an antidilutive effect to the earnings per share
calculation. During the second and third quarters of 2008, these stock options were
forfeited/canceled without exercise. |
Note 17 Stock-Based Compensation
The Company accounts for stock-based compensation granted under the 2005 equity incentive plan, as
amended (the 2005 Plan) under the recognition and measurement principles of SFAS No. 123(R),
Stock-based Compensation (SFAS 123R), and its related provisions. Stock-based compensation is
expensed using a graded vesting method over the vesting period of the instrument.
The following table presents the amounts for stock-based compensation expense incurred by ARI and
the corresponding line items on the statement of operations that they are classified within:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
($ in thousands) |
|
Stock-based compensation (income) expense: |
|
|
|
|
|
|
|
|
Cost of revenue: manufacturing operations |
|
$ |
(3 |
) |
|
$ |
37 |
|
Cost of revenue: railcar services |
|
|
(1 |
) |
|
|
5 |
|
Selling, administrative and other |
|
|
(31 |
) |
|
|
251 |
|
|
|
|
|
|
|
|
Total stock-based compensation (income) expense |
|
$ |
(35 |
) |
|
$ |
293 |
|
|
|
|
|
|
|
|
Stock Options
No options were exercised in 2008 or 2009. All stock options fully vested in January 2009. As such,
the Company did not recognize any compensation expense during the three months ended March 31,
2009. During the three months ended March 31, 2008 the Company recognized $0.2 million of expense
related to stock option grants made during 2006 under the 2005 Plan. The Company recognized income
tax benefits related to stock options of $0.1 million during the three months ended March 31, 2008.
The following is a summary of option activity under the 2005 Plan for January 1, 2009 through March
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
2009 |
|
|
390,353 |
|
|
$ |
21.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and
exercisable at the
end of the period,
March 31, 2009 |
|
|
390,353 |
|
|
$ |
21.00 |
|
|
21 months |
|
$ |
7.28 |
|
|
$ |
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Options to purchase 390,353 shares of the Companys common stock have exercise prices
that are above market price, based on the closing market price of $7.63 per share of the
Companys common stock on the last business day of the period ended March 31, 2009. |
19
As of March 31, 2009, an aggregate of 515,124 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 and March 2009.
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. 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.
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 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
2009 Grant |
|
2008 Grants |
|
2007 Grant |
Grant date |
|
3/3/2009 |
|
4/28/2008 & 9/12/2008 |
|
4/4/2007 |
# SARs
outstanding at March 31, 2009 |
|
306,100 |
|
248,428 |
|
253,400 |
Weighted Avg Exercise price |
|
$6.71 |
|
$20.88 |
|
$29.49 |
Contractual term |
|
7 years |
|
7 years |
|
7 years |
|
|
|
|
|
|
|
March 31, 2009 SARs Black
Scholes Valuation Components: |
|
|
|
|
|
|
Stock volatility range |
|
43.8% 48.1% |
|
45.1% 54.2% |
|
50.2% 56.0% |
Expected life range |
|
3.9 5.4 years |
|
3.0 4.9 years |
|
2.5 3.5 years |
Risk free interest rate range |
|
1.2% 1.72% |
|
1.2% 1.72% |
|
1.20% |
Dividend yield |
|
0.4% |
|
0.4% |
|
0.4% |
Forfeiture rate |
|
2.0% |
|
9.0% |
|
2.0% |
The exercise prices represent the closing price of the Companys common stock on the date of grant.
The SARs have a term of seven years. As there was not adequate history for the stock prices of the
Company at the time of valuation, the stock volatility rate was determined using historical
volatility rates for several other similar companies within the railcar industry. The expected life
ranges represent the use of the simplified method prescribed by the SEC in Staff Accounting
Bulletin (SAB) No. 107 and SAB No. 110, which uses the average of the vesting period and expiration
period of each group of SARs that vest equally over a four-year period. The interest rates used
were the government Treasury Bill rate on the date of valuation. Dividend yield was determined
using the historical dividend rate of the Company. The forfeiture rate used was based on a Company
estimate of expected forfeitures over the contractual life of each grant of SARs for each period.
20
The Company recognized less than $0.1 million of compensation income and $0.1 million of
compensation expense during the three months ended March 31, 2009 and 2008, respectively, related
to SARs granted under the 2005 Plan.
The following is a summary of SARs activity under the 2005 Plan for January 1, 2009 through March
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Stock |
|
|
Weighted |
|
|
Average |
|
|
Weighted |
|
|
Aggregate |
|
|
|
Appreciation |
|
|
Average |
|
|
Remaining |
|
|
Average |
|
|
Intrinsic |
|
|
|
Rights |
|
|
Exercise |
|
|
Contractual |
|
|
Fair Value of |
|
|
Value |
|
|
|
(SARs) |
|
|
Price |
|
|
Life |
|
|
SARs |
|
|
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the
beginning of the
period, January 1,
2009 |
|
|
504,526 |
|
|
$ |
25.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled / Forfeited |
|
|
(2,698 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
306,100 |
|
|
$ |
6.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the
end of the period,
March 31, 2009 |
|
|
807,928 |
|
|
$ |
18.17 |
|
|
73 months |
|
$ |
1.59 |
|
|
$ |
281,612 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the
end of the period,
March 31, 2009 |
|
|
63,350 |
|
|
$ |
29.49 |
|
|
60 |
|
$ |
0.39 |
|
|
$ |
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
306,100 unvested and unexercisable SARs have exercise prices that are below the closing
market price of $7.63 for a share of the Companys common stock as of the last business day
of the quarter ended March 31, 2009 while the remaining 501,828 SARs, of which 63,350 are
vested and exercisable, have exercise prices that are above the closing market price. |
As of March 31, 2009, unrecognized compensation costs related to the unvested portion of stock
appreciation rights were estimated to be $1.1 million and were expected to be recognized over a
period of 46 months.
Note 18 Common Stock and Dividends on Common Stock
During each quarter since its initial public offering in January 2006, the board of directors of
the Company declared and paid cash dividends of $0.03 per share of common stock of the Company to
shareholders of record as of a given date.
Note 19 Related Party Transactions
Agreements with ACF
The Company has the following agreements with ACF, a company controlled by Mr. Carl C. Icahn, the
Companys principal beneficial stockholder and the 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 the
three months ended March 31, 2009 and 2008, ARI purchased inventory of $8.0 million and $4.7
million, respectively, of components from ACF. The agreement automatically renews unless written
notice is provided by the Company.
21
Supply Agreement
Under a supply agreement entered into in 1994, the Company agreed to manufacture and sell to ACF
specified components at cost plus mark-up or on terms not less favorable than the terms on which
the Company sold the same products to third parties. Revenue recorded under this arrangement was
less than $0.1 million for both the three months ended March 31, 2009 and 2008. Such amounts are
included under manufacturing operations revenue from affiliates on the condensed consolidated
statement of operations. Profit margins on sales to related parties approximate the margins on
sales to other large customers.
Inventory Storage Agreements
In 2006, ARI entered into two inventory storage agreements with ACF to store designated inventory
that ARI had purchased under its manufacturing services agreement with ACF at ACFs facility. Under
this agreement, ACF holds the inventory at its facility in segregated locations until such time
that the inventory is shipped to ARI.
Wheel Set Agreements
In 2006, ARI entered into an agreement that provided for ARI to procure, purchase and own the raw
material components for wheel sets. These wheel set components are those that are being used in the
assembly of wheel sets for ARI under the ARI/ACF manufacturing services agreement. Under the
manufacturing services agreement with ACF, which remains unchanged, ARI will continue to pay ACF
for its services, specifically labor and overhead, in assembling the wheel sets.
Railcar Manufacturing Agreement
In May 2007, the Company entered into a manufacturing agreement with ACF, pursuant to which the
Company agreed to purchase 1,388 tank railcars from ACF, supported by a new customer order received
at the same time. The profit realized by ARI upon sale of the tank railcars to ARI customers was
first paid to ACF to reimburse it for the start-up costs involved in implementing the manufacturing
arrangements evidenced by the agreement and thereafter, the profit was split evenly between ARI and
ACF. Prior to its termination by ACF as described below, the term of the agreement was for five
years. Either party had the right to terminate the agreement before its fifth anniversary upon six
months prior written notice, with certain exceptions.
In the three months ended March 31, 2009 and 2008, ARI incurred costs under this agreement of $4.4
million and $3.8 million, respectively, in connection with railcars that were manufactured and
delivered to customers during that period, which includes payments made to ACF for its share of the
profits along with ARI costs and such amount is included under cost of revenue on the statement of
operations. The Company recognized revenue of $19.0 million and $18.9 million related to railcars
shipped under this agreement for the three months ended March 31, 2009 and 2008, respectively.
On September 23, 2008, a termination letter was received from ACF regarding this agreement
effective the later of the completion of 1,388 tank railcars or March 23, 2009. The commitment
under this agreement was satisfied in March 2009 and the agreement terminated at that time. ARI has
accrued $0.4 million in severance expense as of March 31, 2009 related to terminating this
agreement.
Other Agreements
In April 2005, the Company entered into a consulting agreement with ACF in which both parties
agreed to provide labor, litigation, labor relations support and consultation, and labor contract
interpretation and negotiation services to one another. In addition, the Company has agreed to
provide ACF with engineering and consulting advice. Fees paid to one another are based on agreed
upon rates. No services were rendered and no amounts were paid during the three months ended March
31, 2009 and 2008.
22
Agreements with ARL
The Company has or had the following agreements with ARL, a company controlled by Mr. Carl C.
Icahn, the
Companys principal beneficial stockholder and the chairman of the Companys board of directors:
Railcar Servicing Agreement and Fleet Services Agreement
Effective as of January 1, 2008, the Company entered into a fleet services agreement with ARL,
which replaced a 2005 railcar servicing agreement between the parties. The new agreement reflects a
reduced level of fleet management services, relating primarily to logistics management services,
for which ARL now pays a fixed monthly fee. Additionally, under the new agreement, the Company
continues to provide railcar repair and maintenance services to ARL for a charge of labor,
components and materials. The Company currently provides such repair and maintenance services for
approximately 26,100 railcars for ARL. The new agreement extends through December 31, 2010, and is
automatically renewed for additional one year periods unless either party gives at least sixty
days prior notice of termination. There is no termination fee if the Company elects to terminate
the new agreement. For the three months ended March 31, 2009 and 2008, revenues of $3.5 million and
$4.1 million were recorded under this agreement, respectively. Such amounts are included under
railcar services revenue from affiliates on the condensed consolidated statement of operations.
Profit margins on sales to related parties approximate the margins on sales to other large
customers.
Services Agreement, Separation Agreement and Rent and Building Services Extension Agreement
Under the Companys services agreement with ARL, ARL agreed to provide the Company certain
information technology services, rent and building services and limited administrative services.
The rent and building services includes the use of certain facilities owned by the Companys former
chief executive officer and current vice chairman of the board of directors, which is further
described later in this footnote. Under this agreement, the Company agreed to provide purchasing
and engineering services to ARL. Consideration exchanged between the companies is based upon an
agreed fixed annual fee.
On March 30, 2007, ARI and ARL agreed, pursuant to a separation agreement, to terminate, effective
December 31, 2006, all services provided to ARL by the Company under the services agreement.
Additionally, the separation agreement provided that all services provided to the Company by ARL
under the services agreement would be terminated except for rent and building services. Under the
separation agreement, ARL agreed to waive the six month notice requirement for termination required
by the services agreement.
In February 2008, ARI and ARL agreed, pursuant to an extension agreement, that effective December
31, 2007, all rent and building services would continue unless otherwise terminated by either party
upon six months prior notice or by mutual agreement between the parties.
Total fees paid to ARL under these agreements were $0.2 million for both the three months ended
March 31, 2009 and 2008. The fees paid to ARL are included in selling, administrative and other
costs related to affiliates on the condensed consolidated statement of operations.
Trademark License Agreement
Under this agreement, which is effective as of June 30, 2005, ARI granted a nonexclusive,
perpetual, worldwide license to ARL to use ARIs common law trademarks American Railcar and the
diamond shape logo. ARL may only use the licensed trademarks in connection with the railcar
leasing business. ARI is entitled to annual fees of $1,000 in exchange for this license.
Sales Contracts
In March 2006, the Company entered into an agreement with ARL for the Company to manufacture and
ARL to purchase 1,000 railcars in 2007. The Company, prior to this agreement, had manufactured and
sold railcars to ARL on a purchase order basis. The agreement also included an option for ARL to
purchase up to an additional 300 railcars in 2007 and an additional 1,400 railcars in 2008. ARL
exercised the option to purchase 71 additional railcars in 2007 and exercised the option to
purchase 1,400 additional railcars in 2008. Revenue for these railcars sold to ARL is included
under manufacturing operations revenue from affiliates on the accompanying condensed consolidated
statement of operations. Profit margins on sales to related parties approximate the margins on
sales to
other large customers.
23
In September 2006, the Company entered into an agreement with ARL for the Company to manufacture
and ARL to purchase 500 railcars in both 2008 and 2009.
Agreements with other affiliated 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
and bears interest at 4.0%. Payments of principal and interest are due quarterly with the last
payment due in August 2009. This note receivable is included in investment in joint venture on the
accompanying balance sheet. Total amounts due from Ohio Castings under this note were $0.4 million
and $0.5 million, respectively, at March 31, 2009 and December 31, 2008.
In connection with the Companys investment in Ohio Castings, ARI has a guarantee on bonds
amounting to $10.0 million issued by the State of Ohio to Ohio Castings, of which $2.7 million was
outstanding as of March 31, 2009. ARI also has a guarantee of a $2.0 million state loan that
provides for purchases of capital equipment, of which $0.8 million was outstanding as of March 31,
2009. The two other partners of Ohio Castings have made identical guarantees of these obligations.
One of the Companys joint ventures, Axis, entered into a credit agreement in December 2007. In
connection with this event, the Company agreed to a 50.0% guaranty of Axis obligation under its
credit agreement during the construction and start-up phases of the facility. Subject to its terms
and conditions, the guaranty will terminate on the first to occur of (i) the repayment in full of
the guaranteed obligations or (ii) after the facility has been in continuous production at a level
sufficient to meet the facilitys projected financial performance and in any event not less than
365 consecutive days from the certified completion of the facilitys construction. As of March 31,
2009, Axis had approximately $61.5 million outstanding under the credit agreement of which the
Companys exposure is 50.0%. The Companys guaranty has a maximum exposure related to it of $35.0
million, exclusive of any capitalized interest, fees, costs and expenses. The Companys initial
partner in the joint venture has made an identical guarantee relating to this credit agreement.
The Company leases certain facilities from an entity owned by its former chief executive officer
and current vice chairman of the board of directors. Expenses paid to related parties for these
facilities were $0.2 million for both the three months ended March 31, 2009 and 2008.
In July 2007, ARI entered into an agreement with its joint venture, Axis, to purchase all of its
requirements of new railcar axles from the joint venture. The joint venture is expected to begin
production in the second half of 2009.
Effective January 1, 2009, ARI entered into a services agreement with a term of one year to provide
Axis accounting, tax, human resources and information technology assistance for an annual fee of
$0.2 million.
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 will receive an annual consulting fee of $135,000 and an
annual director fee of $65,000 that are both payable quarterly, in advance, and the Company will
continue to provide Mr. Unger with an automobile allowance. In his role as consultant, Mr. Unger
will report to and serve at the discretion of the Companys Board.
Financial information for transactions with affiliates
As of March 31, 2009, amounts due from affiliates were $15.1 million in accounts receivable from
ACF and ARL. As of December 31, 2008, amounts due from affiliates represented $10.3 million in
receivables from ACF and ARL and Axis.
As of March 31, 2009 and December 31, 2008, amounts due to affiliates included $3.7 million and
$5.2 million, respectively, in accounts payable to ACF and ARL.
24
Cost of revenue for manufacturing operations for the three months ended March 31, 2009 and 2008
included $13.5 million and $33.1 million, respectively, in railcar products produced by Ohio
Castings.
Inventory at March 31, 2009 and December 31, 2008 includes $4.4 million and $4.9 million,
respectively, of purchases from Ohio Castings. At March 31, 2009 and December 31, 2008, all profit
from a related party for inventory still on hand was eliminated.
Note 20 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 |
|
|
|
|
|
|
Corporate & |
|
|
|
|
|
|
|
March 31, 2009 |
|
Operations |
|
|
Railcar Services |
|
|
all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(in thousands) |
|
Revenues from external customers |
|
$ |
144,670 |
|
|
$ |
12,277 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
156,947 |
|
Intersegment revenues |
|
|
415 |
|
|
|
21 |
|
|
|
|
|
|
|
(436 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue external customers |
|
|
(130,098 |
) |
|
|
(10,472 |
) |
|
|
|
|
|
|
|
|
|
|
(140,570 |
) |
Cost of intersegment revenue |
|
|
(371 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
14,616 |
|
|
|
1,806 |
|
|
|
|
|
|
|
(45 |
) |
|
|
16,377 |
|
Selling, administrative and other |
|
|
(2,746 |
) |
|
|
(516 |
) |
|
|
(3,751 |
) |
|
|
|
|
|
|
(7,013 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
11,870 |
|
|
$ |
1,290 |
|
|
$ |
(3,751 |
) |
|
$ |
(45 |
) |
|
$ |
9,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
Manufacturing |
|
|
Railcar |
|
|
Corporate & |
|
|
|
|
|
|
|
March 31, 2008 |
|
Operations |
|
|
Services |
|
|
all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(in thousands) |
|
Revenues from external customers |
|
$ |
170,784 |
|
|
$ |
13,265 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
184,049 |
|
Intersegment revenues |
|
|
152 |
|
|
|
38 |
|
|
|
|
|
|
|
(190 |
) |
|
|
|
|
|
Cost of revenue external
customers |
|
|
(150,890 |
) |
|
|
(10,867 |
) |
|
|
|
|
|
|
|
|
|
|
(161,757 |
) |
Cost of intersegment revenue |
|
|
(121 |
) |
|
|
(31 |
) |
|
|
|
|
|
|
152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
19,925 |
|
|
|
2,405 |
|
|
|
|
|
|
|
(38 |
) |
|
|
22,292 |
|
Selling, administrative and other |
|
|
(1,963 |
) |
|
|
(494 |
) |
|
|
(4,384 |
) |
|
|
|
|
|
|
(6,841 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
17,962 |
|
|
$ |
1,911 |
|
|
$ |
(4,384 |
) |
|
$ |
(38 |
) |
|
$ |
15,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing |
|
|
Railcar |
|
|
Corporate & |
|
|
|
|
|
|
|
As of |
|
Operations |
|
|
Services |
|
|
all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(in thousands) |
|
March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
325,674 |
|
|
$ |
43,988 |
|
|
$ |
285,936 |
|
|
$ |
|
|
|
$ |
655,598 |
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
351,037 |
|
|
$ |
40,246 |
|
|
$ |
288,371 |
|
|
$ |
|
|
|
$ |
679,654 |
|
Manufacturing operations
Manufacturing revenues from affiliates were 30.8% and 18.8% of total consolidated revenues for the
three months ended March 31, 2009 and 2008, respectively.
Manufacturing revenues from one significant customer totaled 43.8% and 41.1% of total consolidated
revenues for the three months ended March 31, 2009 and 2008, respectively.
Manufacturing revenues from two significant customers were 74.7% and 59.9% of total consolidated
revenues for the three months ended March 31, 2009 and 2008, respectively.
25
Manufacturing receivables from one affiliated significant customer were 31.2% and 22.9% of total
consolidated accounts receivable at March 31, 2009 and December 31, 2008, respectively.
Manufacturing receivables from two significant customers were 51.5% and 62.9% of total consolidated
accounts receivable at March 31, 2009 and December 31, 2008, respectively.
Railcar services
Railcar services revenues from affiliates were 2.3% and 2.2% of total consolidated revenues for the
three months ended March 31, 2009 and 2008, respectively.
No single railcar services customer accounted for more than 10.0% of total consolidated revenue for
the three months ended March 31, 2009 and 2008. No single railcar services customer accounted for
more than 10.0% of total consolidated accounts receivable as of March 31, 2009 and December 31,
2008.
Note 21 Supplemental Cash Flow Information
ARI received interest income of $0.4 million and $2.6 million for the three months ended March 31,
2009 and 2008, respectively.
ARI paid interest expense of $10.4 million for both the three months ended March 31, 2009 and 2008,
respectively.
ARI paid taxes of less than $0.1 million and $1.6 million for the three months ended March 31, 2009
and 2008, respectively.
In March 2009, the board of directors of the Company declared a cash dividend of $0.03 per share of
common stock of the Company to shareholders of record as of March 20, 2009 that was paid on April
2, 2009.
In February 2008, the board of directors of the Company declared a cash dividend of $0.03 per share
of common stock of the Company to shareholders of record as of March 21, 2008 that was paid on
April 4, 2008.
During the three months ended March 31, 2009, the Company recorded an unrealized loss on its
short-term investments of $7.8 million and an unrealized gain of $12.7 million as of March 31,
2008, which were recorded to accumulated other comprehensive loss within stockholders equity, net
of taxes.
Note 22 Subsequent Events
In May 2009, the board of directors of the Company declared a cash dividend of $0.03 per share of
common stock of the Company to shareholders of record as of June 26, 2009 that will be paid on July
10, 2009.
On April 3, 2009, the compensation committee of ARIs board of directors approved a modification of
Mr. James Ungers SARs awards. As a result of the modification, Mr. Ungers SARs will continue to
vest in accordance with the original agreement subject to his continued service as a consultant to
the Company.
On April 4, 2009, Ohio Castings issued a notice that its production facility will be idled during
the second quarter given the weak railcar market. As of March 31, 2009, no impairment was recorded
by Ohio Castings. However, the Companys investment in Ohio Castings will be continually monitored.
On May 8, 2009, the Company and Mr. James Cowan, the Companys President and Chief Executive
Officer, entered into an employment agreement with a term ending May 1, 2012, unless earlier
terminated in accordance with the terms of the agreement. The agreement provides for an annual
base salary of $350,000 and an the opportunity to earn a bonus of up to 60.0% of the base salary,
subject to achievement of objective performance targets by the Company.
26
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). These statements involve known and unknown risks, uncertainties and other factors,
which may cause our or our industrys actual results, performance, or achievements to be materially
different from any future results, performance or achievements expressed or implied by the
forward-looking statements. Forward-looking statements include, but are not limited to, statements
regarding:
|
|
|
the impact of the current economic downturn and restricted credit markets, and the
impact of the continuation of these conditions; |
|
|
|
the health of and prospects for the overall railcar industry; |
|
|
|
our prospects in light of the cyclical nature of our business and the current economic
environment; |
|
|
|
anticipated trends relating to our shipments, revenues, financial condition or results
of operations; |
|
|
|
the sufficiency of our liquidity and capital resources; |
|
|
|
the conversion of our railcar backlog into revenues; |
|
|
|
anticipated production schedules for our products and the anticipated construction and
production schedules of our joint ventures; |
|
|
|
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; |
|
|
|
compliance with covenants contained in our senior unsecured notes and in our revolving
credit facility; and |
|
|
|
the ongoing benefits and risks related to our relationship with Mr. Carl C. Icahn, our
principal beneficial stockholder and the chairman of our board of directors, 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 6, 2009
(the Annual 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
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 reportable segments: manufacturing operations and railcar services. Manufacturing
operations consist of railcar manufacturing and railcar and industrial component manufacturing.
Railcar services consist of railcar repair, refurbishment and fleet management services. Financial
information about our business segments for the three months ended March 31, 2009 is set forth in
Note 20 of our Consolidated Financial Statements.
27
As a result of the current market conditions, we have reduced production rates and workforce at our
railcar manufacturing facilities and continue to evaluate our capacity and production schedules. We
continue to monitor expenses in an effort to reduce overhead costs at all of our locations. The
impact on railcar demand from the weak economy will require us to slow new railcar shipments. We
have and will continue to competitively quote railcar orders including coal railcars for which we
have two prototypes that were placed in service.
RESULTS OF OPERATIONS
Three Months ended March 31, 2009 compared to Three Months ended March 31, 2008
The following table summarizes our historical operations as a percentage of revenues for the
periods shown. Our historical results are not necessarily indicative of operating results that may
be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended, |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Revenues: |
|
|
|
|
|
|
|
|
Manufacturing Operations |
|
|
92.2 |
% |
|
|
92.8 |
% |
Railcar services |
|
|
7.8 |
% |
|
|
7.2 |
% |
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenue: |
|
|
|
|
|
|
|
|
Cost of manufacturing |
|
|
(82.9 |
%) |
|
|
(82.0 |
%) |
Cost of railcar services |
|
|
(6.7 |
%) |
|
|
(5.9 |
%) |
|
|
|
|
|
|
|
Total cost of revenues |
|
|
(89.6 |
%) |
|
|
(87.9 |
%) |
Gross profit |
|
|
10.4 |
% |
|
|
12.1 |
% |
Selling, administrative and other |
|
|
(4.5 |
%) |
|
|
(3.7 |
%) |
|
|
|
|
|
|
|
Earnings from operations |
|
|
5.9 |
% |
|
|
8.4 |
% |
Interest income |
|
|
0.8 |
% |
|
|
1.4 |
% |
Interest expense |
|
|
(3.3 |
%) |
|
|
(2.8 |
%) |
Other (loss) income |
|
|
(0.1 |
%) |
|
|
1.7 |
% |
(Loss) earnings from joint venture |
|
|
(0.5 |
) |
|
|
0.2 |
% |
|
|
|
|
|
|
|
Earnings before income tax expense |
|
|
2.8 |
% |
|
|
8.9 |
% |
Income tax expense |
|
|
(1.1 |
%) |
|
|
(3.4 |
%) |
|
|
|
|
|
|
|
Net earnings |
|
|
1.7 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
|
Revenues
Our revenues for the three months ended March 31, 2009 decreased 14.7% to $156.9 million from
$184.0 million in the three months ended March 31, 2008. This decrease was primarily due to
decreased revenues from our manufacturing operations.
Our manufacturing operations revenues for the three months ended March 31, 2009 decreased 15.3% to
$144.7 million from $170.8 million for the three months ended March 31, 2008. The primary reasons
for the decrease in revenue were a decrease in railcar shipments, partially offset by increased
overall average selling prices on all railcars due to a change in product mix, and a decrease in
surcharges that we pass on to our customers. We have decreased our workforce and production rates
at our railcar manufacturing plants due to reduced demand resulting in lower shipments. During the
three months ended March 31, 2009, we shipped a total of 1,491 railcars compared to 1,902 railcars
in the same period of 2008.
For the three months ended March 31, 2009, our manufacturing operations included $48.4 million, or
30.8% of our total consolidated revenues, from transactions with affiliates, compared to $34.7
million, or 18.8% of our total
consolidated revenues in the three months ended March 31, 2008. These revenues were attributable to
sales of railcars and railcar parts to companies controlled by Mr. Carl Icahn.
28
Our railcar services revenues in the three months ended March 31, 2009 decreased to $12.3 million
compared to $13.3 million for the three months ended March 31, 2008. In the first quarter of 2009,
we experienced lower average billings on railcars needing repair. For the first quarter of 2009,
our railcar services revenues included $3.5 million, or 2.3% of our total consolidated revenues,
from transactions with affiliates, compared to $4.1 million, or 2.2% of our total revenues, in the
first quarter of 2008.
Gross Profit
Our gross profit decreased to $16.4 million in the three months ended March 31, 2009 from $22.3
million in the three months ended March 31, 2008. Our gross profit margin decreased to 10.4% in the
first quarter of 2009 from 12.1% in the first quarter of 2008, driven primarily by a decrease in
our gross profit margins from our manufacturing operations.
Gross profit from our manufacturing operations decreased $5.3 million for the three months ended
March 31, 2009 compared to the three months ended March 31, 2008. Gross profit margin for our
manufacturing operations was 10.1% in the three months ended March 31, 2009, a decrease from 11.6%
in the three months ended March 31, 2008. This decrease is primarily attributable to decreased
railcar shipments, competitive pricing and fixed overhead costs that exist regardless of production
output, partially offset by strong labor efficiencies at most of our manufacturing locations.
Gross profit for our railcar services operations decreased $0.6 million for the three months ended
March 31, 2009 compared to the three months ended March 31, 2008 due to a decrease in revenue, as
mentioned above. Gross profit margin for our railcar services operations decreased to 14.7% in the
three months ended March 31, 2009 from 18.1% in the three months ended March 31, 2008. The decrease
is primarily attributable to the factors mentioned above. Lower work content on each railcar
negatively impacts efficiency at our plants. These inefficiencies are being addressed through
expansion projects expected to be completed in the second quarter of 2009.
Selling, Administrative and Other Expenses
Our total selling, administrative and other expenses increased to $7.0 million for the first
quarter of 2009, compared to $6.8 million for the first quarter of 2008. These selling,
administrative and other expenses were 4.5% of total consolidated revenues in the three months
ended March 31, 2009 as compared to 3.7% of total consolidated revenues in the three months ended
March 31, 2008. Selling, administrative and other expenses increased primarily due to increased
research and development costs and a legal settlement partially offset by a decrease in stock-based
compensation and cost monitoring.
In the first quarter of 2009, we recognized income related to stock-based compensation of less than
$0.1 million, attributable to stock options we granted in 2006 and to stock appreciation rights
(SARs), which settle in cash, granted in 2009, 2008 and 2007. This is compared to stock-based
compensation expense of $0.3 million for the three months ended March 31, 2008, which was
attributable to stock options we granted in 2006 and to stock appreciation rights (SARs), which
settle in cash, granted in 2007. The decrease in expense is primarily attributable to decreased
SARs expense driven by the Companys decreased stock price.
Interest Expense and Income
Net interest expense for the three months ended March 31, 2009 was $4.0 million, representing $5.1
million of interest expense and $1.1 million of interest income, as compared to $2.5 million of net
interest expense for the three months ended March 31, 2008, representing $5.0 million of interest
expense and $2.5 million of interest income.
Our interest expense in the first quarter of 2009 is comparable to the first quarter of 2008. Our
interest income decreased $1.4 million in the first quarter of 2009 compared to the first quarter
of 2008. The decrease in interest income was primarily attributable to lower interest rates in the
three months ended March 31, 2009 compared to the three months ended March 31, 2008.
29
Other (Loss) Income
Other income for the three months ended March 31, 2008 decreased $3.3 million when compared to the
three months ended March 31, 2009. Other loss of $0.1 million recognized in the first quarter of
2009 related to the realized and unrealized losses on foreign currency option. The other income of
$3.2 million recognized in the first quarter of 2008 related to realized gains on total return
swaps.
(Loss)
Earnings from Joint Venture
Earnings from joint venture decreased to a loss of $0.8 million for the three months ended March
31, 2009 from earnings of $0.3 million for the three months ended March 31, 2008. This was
partially attributable to our share of Ohio Castings profits and losses decreasing approximately
$0.5 million for the three months ended March 31, 2009 as compared to the three months ended March
31, 2008. The decrease was also attributable to our share of Axis losses increasing approximately
$0.6 million for the three months ended March 31, 2009 as compared to the three months ended March
31, 2008.
On April 4, 2009, Ohio Castings issued a notice that its production facility will be idled during
the second quarter given the weak railcar market. As of March 31, 2009, no impairment was recorded
by Ohio Castings. However, our investment in Ohio Castings will be continually monitored.
Income Taxes
Our
income tax expense for the three months ended March 31, 2009 was
$1.7 million or 39.0% of our
earnings before income taxes, as compared to $6.3 million for the three months ended March 31,
2008, or 38.5% of our earnings before income taxes. The quarterly rate increased because the 2009
rate does not reflect any benefits from the Domestic Production Activities deduction.
BACKLOG
We define backlog as the number and sales value of railcars that our customers have committed in
writing to purchase from us that have not been recognized as revenues. Our total backlog as of
March 31, 2009 and December 31, 2008 was $243.3 million and $373.1 million, respectively. We
estimate that approximately 98.4% of our March 31, 2009, backlog will be converted to revenues by
the end of 2009. Included in the railcar backlog at March 31, 2009 was $85.8 million of railcars to
be sold to our affiliate, ARL. 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
backlog from being converted into revenues.
The following table shows our reported railcar backlog, and estimated future revenue value
attributable to such backlog, at the end of the period shown. The reported backlog includes
railcars relating to purchase obligations based upon an assumed product mix consistent with past
orders. Changes in product mix from what is assumed would affect the dollar amount of our backlog.
|
|
|
|
|
Railcar backlog at January 1, 2009 |
|
|
4,243 |
|
New railcars delivered |
|
|
(1,491 |
) |
|
|
|
|
Railcar backlog at March 31, 2009 |
|
|
2,752 |
|
|
|
|
|
|
Estimated railcar backlog value at end of period (in thousands)
1 |
|
$ |
243,268 |
|
|
|
|
(1) |
|
Estimated backlog value reflects the total revenues expected to be attributable to the
backlog reported at the end of the particular period as if such backlog were converted to
actual revenues. Estimated backlog reflects known
price 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. |
30
Historically, we have experienced little variation between the number of railcars ordered and the
number of railcars actually delivered, however, our backlog is not necessarily indicative of our
future results of operations. Our backlog includes commitments under multi-year purchase and sale
agreements. Under these agreements, the customers have agreed to buy a minimum number of railcars
from us in each of the contract years, and typically may choose to satisfy their purchase
obligations from among a variety of railcars described in the agreements. 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, nor can we guarantee that the actual revenue from
these orders will equal our reported backlog estimates or that our future revenue efforts will be
successful.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity for the three months ended March 31, 2009 was cash generated from
operations and cash we have on hand from the senior unsecured notes we sold in February 2007,
offset by cash used for capital expenditures and cash used to purchase our short-term investments.
As of March 31, 2009, we had working capital of $370.9 million, including $261.1 million of cash
and cash equivalents. We also have a $100.0 million revolving credit facility. This facility is
described in further detail in Note 11 of our condensed consolidated financial statement, and
provides for relief from certain financial covenants described in that Note so long as we maintain
excess availability of at least $30.0 million. At March 31, 2009, we had no borrowings outstanding
under this facility and $64.6 million of availability based upon the amount of our eligible
accounts receivable and inventory (and without regard to any financial covenants). The revolving
credit facility expires on October 5, 2009, and provided commercially favorable terms are
available, we plan on entering into a new agreement upon expiration.
In February 2007, we issued $275.0 million of senior unsecured notes that are due in 2014. The
offering resulted in net proceeds to us of $270.7 million. The terms of the notes contain
restrictive covenants, including limitations on our ability to incur additional debt, issue
disqualified or preferred stock, make certain restricted payments and enter into certain
significant transactions with shareholders and affiliates. These limitations become more
restrictive if our fixed charge coverage ratio, as defined, is less than 2.0 to 1.0. As of March
31, 2009, we were in compliance with all of our covenants under the notes.
As of March 31, 2009, the market price of the common stock of Greenbrier was $3.66 per share, which
resulted in the investment value of $1.3 million as of that date on the remaining 373,341 shares of
Greenbrier that we own. The resulting unrealized loss as of March 31, 2009 of $5.6 million was
recognized as accumulated other comprehensive loss within stockholders equity, net of deferred
taxes.
During the first quarter of 2009, Longtrain purchased corporate bonds that mature in 2015 for a
total of $36.8 million. This investment is classified as a short-term investment available-for-sale
security in accordance with SFAS No. 115 as we do not intend to hold this investment long-term. As of
March 31, 2009, the investment value of $30.3 million resulted in an unrealized loss of $6.5
million that was recognized as accumulated other comprehensive loss within stockholders equity,
net of deferred taxes. The investment in corporate bonds is high risk. These bonds return a high
yield in exchange for a higher risk.
We entered into a foreign currency option in October 2008, to purchase Canadian Dollars for $5.3
million U.S. Dollars from October 2008 through April 2009, with fixed exchange rates and exchange
limits each month. This option was entered into to hedge our exposure to foreign currency exchange
risk related to capital expenditures for the expansion of our Canadian repair operations. In 2009,
we expended $3.0 million USD resulting in a realized loss of less than $0.1 million based on the
exchange spot rate on the various exercise dates.
31
Cash Flows
The following table summarizes our net cash provided by or used in operating activities, investing
activities and financing activities for the three months ended March 31:
|
|
|
|
|
|
|
2009 |
|
|
|
(in thousands) |
|
Net cash provided by (used in): |
|
|
|
|
Operating activities |
|
$ |
12,454 |
|
Investing activities |
|
|
(42,472 |
) |
Financing activities |
|
|
(679 |
) |
|
|
|
|
Decrease in cash and cash equivalents |
|
$ |
(30,697 |
) |
|
|
|
|
Net Cash Provided by Operating Activities
Cash flows from operating activities are affected by several factors, including fluctuations in
business volume, contract terms for billings and collections, the timing of collections on our
accounts receivables, processing of payroll and associated taxes and payments to our suppliers. We
do not frequently experience business credit losses, although a payment may be delayed pending
completion of closing documentation, and a typical order of railcars may not yield cash proceeds
until after the end of a reporting period.
Our net cash provided by operating activities for the three months ended March 31, 2009 was $12.5
million. Net earnings of $2.7 million were impacted by non-cash items including but not limited to:
depreciation expense of $5.6 million, joint venture loss of $0.8 million and other smaller
adjustments. Cash provided by operating activities attributable to changes in our current assets
and current liabilities included a decrease in total accounts receivable, including from affiliates
of $5.7 million and a decrease in inventory of $15.9 million. Cash used in operating activities
attributable to changes in our current assets and liabilities included a decrease in total accounts
payable, including to affiliates of $10.9 million and a decrease in accrued expenses and taxes of
$7.4 million.
The decrease in total accounts receivable and inventory was primarily due to the decrease of sales.
The decrease in total accounts payable relates to decreased inventory levels as well as timing of
payments made.
Net Cash Used In Investing Activities
Net cash used in investing activities was $42.5 million for the three months ended March 31, 2009,
including $4.9 million of capital expenditures for the purchase of property, plant and equipment,
$36.8 million of purchases of short-term investments of available-for-sale securities and $1.3
million equity contribution to one of our joint ventures. The capital expenditures were for the
purchase of equipment at multiple locations to increase capacity and operating efficiencies. Some
of these purchases are described in further detail below under Capital Expenditures. The
short-term investments purchased were corporate bonds that we classified as available-for-sale.
Net Cash Used In Financing Activities
Net cash used in financing activities was $0.7 million for the three months ended March 31, 2009.
This was primarily the dividend payments made by us in the first quarter of 2009.
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 rates of return and impact on our
profitability. We are pursuing 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. We expect to continue to invest in projects, including possible
strategic
acquisitions, to reduce manufacturing costs, improve production efficiencies, maintain our
equipment and to otherwise complement and expand our business.
32
Capital expenditures for the three months ended March 31, 2009 were $4.9 million, including costs
that were capitalized related to refurbishment of existing assets and facilities, improvements for
cost reduction purposes and for expansion activities. Our expansion activities included adding
capacity at our railcar repair facilities.
For 2009, our current capital expenditure plans include approximately $38.0 million of projects and
investments that we expect will maintain equipment, expand capacity, improve efficiencies or reduce
costs, as well as fund investments in joint ventures. These capital expenditure plans include
expenditures to further integrate our supply chain, ongoing maintenance capital expenses and
various capital expenditures related to 2008 projects that have carried over into 2009. The amount
set forth above is an estimate only. We cannot assure that we will be able to complete any of our
projects on a timely basis or within budget, if at all.
We anticipate that any future expansion of our business will be financed through existing
resources, cash flow from operations, term debt associated directly with that expenditure or other
new financing. We believe that these sources of funds will provide sufficient liquidity to meet our
expected operating requirements over the next twelve months. We cannot guarantee that we will be
able to obtain term debt or other new financing on favorable terms, if at all.
Our long-term liquidity is contingent upon future operating performance and our ability to continue
to meet financial covenants under our indenture and our revolving credit facility, as amended, and
any other indebtedness. We may also require additional capital in the future to fund capital
expenditures, acquisitions or other investments. Our current revolving credit facility expires in
October 2009. These capital requirements could be substantial. Certain risks, trends and
uncertainties may adversely affect our long-term liquidity.
Dividends
During each quarter since our initial public offering in January 2006, our board of directors has
declared and paid cash dividends of $0.03 per share of our common stock.
We intend to pay cash dividends on our common stock in the future. However, our debt covenants
contain limitations and restrictions on our ability to declare and pay dividends. Moreover, our
declaration and payment of dividends will be at the discretion of our board of directors and will
depend upon our operating results, strategic plans, capital requirements, financial condition and
other factors our board of directors considers relevant. Accordingly, we may not pay dividends in
any given amount in the future, or at all.
Contingencies and Contractual Obligations
Refer to the updated status of contingencies in Note 14 to the condensed consolidated financial
statements. Except for the OCI settlement and normal operating changes, our contingencies and
contractual obligations did not materially change from the information disclosed in our Annual
Report.
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 for the fiscal year ended December 31, 2008.
There have been no material changes to the critical accounting policies or estimates during the
three months ended March 31, 2009.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except for the following, there has been no material change in our market risks since December 31,
2008.
We hold available-for-sale investments that are reported at fair value as of the reporting date on
our condensed
consolidated balance sheets. The carrying values of available-for-sale investments subject to price
risks are based on quoted market prices of the equity security or bond as of the balance sheet
date. Market prices are subject to fluctuation and, consequently, the amount realized in the
settlement of an investment may significantly differ from the reported market value. Fluctuation in
the market price of an equity security or bond may result from perceived changes in the economic
characteristics of the issuer of the security or bond, the relative price of alternative
investments and general market conditions.
33
Based on the balance as of March 31, 2009, we estimate that in the event of a 10% decline in fair
value of the Greenbrier common stock, the fair value of our investment would decrease by $0.1
million.
Our investment in corporate bonds is high risk. These bonds return a high yield in exchange for a
higher risk. Based on the balance as of March 31, 2009, we estimate that in the event of a 10%
decline in fair value of the corporate bonds, the fair value of our investment would decrease by
$3.0 million.
The selected hypothetical changes do not reflect what may be considered the best or worst case
scenarios. Indeed, results could differ materially due to the nature of equity markets.
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
ARI has been named the defendant in a lawsuit, OCI Chemical Corporation v. American Railcar
Industries, Inc., in which the plaintiff, OCI Chemical Company (OCI), claims the Company was
responsible for the damage caused by allegedly defective railcars that were manufactured by ARI.
The lawsuit was filed on September 19, 2005, in the United States District Court, Eastern District
of Missouri. Mediation on November 24, 2008, was not successful. Another unsuccessful mediation
took place on March 9, 2009 and trial was scheduled for April 20, 2009, at which time this case was
settled at a loss that was accrued for as of March 31, 2009.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in Item 1A of our
Annual Report.
ITEM 5. OTHER INFORMATION
On
May 8, 2009, the Company entered into an employment agreement with Mr. James Cowan, the
Companys President and Chief Executive Officer (the Agreement). The term of Mr. Cowans Agreement
began on May 1, 2009, and will continue through May 1, 2012, unless earlier terminated.
Under the terms of the Agreement, Mr. Cowan receives a base salary at an annual rate of $350,000.
Mr. Cowan is also entitled to an annual bonus for each calendar year of employment ending on or
after December 31, 2009 of up to 60.0% of his then applicable base salary, provided certain
objective performance targets for the Company, to be established by the Board of Directors of the
Company for each such year, are achieved.
34
Mr. Cowan is entitled to receive healthcare, group term life insurance, group long-term disability
insurance, 401(k) participation, twenty business days paid vacation per year, and other similar
employee benefits to the extent the Company generally provides such benefits to its senior
employees. In addition, he will be reimbursed for the reasonable use of an automobile and for the
payment of reasonable country club dues on terms consistent with other senior employees of the
Company.
The Agreement shall terminate upon Mr. Cowans death or disability, if the Company discharges Mr.
Cowan with or without cause (as defined in the Agreement), which the Company may do so at anytime,
or if Mr. Cowan resigns.
If Mr. Cowans employment is terminated due to death or disability, he is entitled to receive (i)
earned and accrued base salary, unreimbursed business expenses and amounts payable for accrued
vacation, in each case due and unpaid as of the date of his termination, (ii) bonus compensation
earned and due with respect to a completed calendar year but not paid as of the date of
termination, and (iii) a pro-rated portion of his bonus compensation payable for any incomplete
calendar year.
If Mr. Cowan is terminated without cause (as defined in the Agreement), he is entitled to receive
(i) earned and accrued base salary: unreimbursed business expenses and amounts payable for accrued
vacation, in each case due and unpaid as of the date of his termination, (ii) bonus compensation
earned and due with respect to a completed calendar year but not paid as of the date of
termination, (iii) a pro-rated portion of his bonus compensation payable for any incomplete
calendar year and (iv) a continuation of the payment of the base salary he would have earned
through the Expiration Date had he continued to be employed by the Company through such date. The
Company shall be entitled to an offset of the continuation payments under clause (iv) above on
account of any remuneration or other benefit attributable to any subsequent employment that Mr.
Cowan may obtain.
Mr. Cowans employment agreement contains non-competition and non-solicitation provisions that
prohibit him from directly or indirectly competing with the Company during the term of his
employment and generally for the longer of a one-year period thereafter or as long as the Company
pays Mr. Cowan his base salary following termination.
A copy of the Agreement is filed as Exhibit 10.59 to this Form 10-Q and is incorporated by
reference into this Item 5. The description of the Agreement herein is qualified in its entirety by
reference to the text of the Agreement.
35
ITEM 6. EXHIBITS
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
|
10.57 |
|
|
Letter Agreement (Amendment to SARs) (incorporated by reference to
Exhibit 10.57 to ARIs Current Report on Form 8-K, filed with the SEC
on April 10, 2009) |
|
|
|
|
|
|
10.58 |
|
|
Form of 2009 Stock Appreciation Rights Agreement |
|
|
|
|
|
|
10.59 |
|
|
Employment Agreement between American Railcar Industries, Inc. and
James Cowan, dated as of May 8, 2009 |
|
|
|
|
|
|
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 |
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
AMERICAN RAILCAR INDUSTRIES, INC.
|
|
Date: May 8, 2009 |
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 |
|
37
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
|
10.57 |
|
|
Letter Agreement (Amendment to SARs) (incorporated by reference to
Exhibit 10.57 to ARIs Current Report on Form 8-K, filed with the SEC
on April 10, 2009) |
|
|
|
|
|
|
10.58 |
|
|
Form of 2009 Stock Appreciation Rights Agreement |
|
|
|
|
|
|
10.59 |
|
|
Employment Agreement between American Railcar Industries, Inc. and
James Cowan dated as of May 8, 2009 |
|
|
|
|
|
|
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 |
38