e10vk
UNITES STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-51728
American Railcar Industries, Inc.
(Exact name of Registrant as Specified in its Charter)
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Delaware
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43-1481791 |
(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification Number) |
100 Clark Street
St. Charles, Missouri 63301
(Address of principal executive offices, including zip code)
Telephone (636) 940-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such a shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an 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 o Non-Accelerated Filer þ
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
As of June 30, 2005 there was no public market for the Registrants equity. As of March 16,
2006, as reported on the Nasdaq Global Market, there were 21,036,286 shares of common stock, par
value $0.01 per share, of the Registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following document are incorporated by reference in Part III of this Form 10-K
Report:
(1) Proxy Statement for the Registrants 2006 Annual Meeting of Shareholders Items 10, 11, 12,
13 and 14.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 (Exchange Act). 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 cyclical nature of our business;
adverse economic and market conditions;
fluctuating costs of raw materials, including steel and railcar components, and
delays in the delivery of such raw materials and components;
our ability to maintain relationships with our suppliers of railcar components and raw materials;
fluctuations in the supply of components and raw materials we use in railcar manufacturing;
the highly competitive nature of our industry;
the risk of damage to our primary railcar manufacturing facilities or equipment in
Paragould or Marmaduke, Arkansas;
our reliance upon a small number of customers that represent a large percentage of
our revenues;
the variable purchase patterns of our railcar customers and the timing of
completion, delivery and acceptance of customer orders;
our dependence on our key personnel;
the risks of a labor shortage in light of our recent growth;
risks associated with the conversion of our railcar backlog into revenues;
the risk of lack of acceptance of our new railcar offerings by our customers;
the cost of complying with environmental laws and regulations;
the costs associated with being a public company;
our relationship with Carl C. Icahn, our principal beneficial stockholder and the
chairman of our board of directors, and his affiliates as a purchaser of our products,
supplier of components and services to us and as a provider of significant capital,
financial and managerial support;
potential risk of increased unionization of our workforce;
our ability to manage our pension costs;
potential significant warranty claims; and
covenants in our amended and restated revolving credit facility and other agreements
as they presently exist and similar covenants that we expect in our amended and restated
revolving credit facility governing our indebtedness that limit our managements discretion
in the operation of our businesses.
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In some cases, you can identify forward-looking statements by terms such as may,
will, should, could, would, expects, plans, anticipates, believes, estimates,
projects, predicts, potential and similar expressions intended to identify forward-looking
statements. These statements are only predictions and involve known and unknown risks,
uncertainties, and other factors that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results, levels of
activity, performance, or achievements expressed or implied by such forward-looking statements.
Given these uncertainties, you should not place undue reliance on these forward-looking statements.
Also, these forward-looking statements represent our estimates and assumptions only as of the date
of this report. Except as otherwise required by law, we expressly disclaim any obligation or
undertaking to release publicly any updates or revisions to any forward-looking statement contained
in this report to reflect any change in our expectations or any change in events, conditions or
circumstances on which any of our forward-looking statements are based. Factors that could cause or
contribute to differences in our future financial results include those discussed in the Risk
Factors set forth in Part I.A (Risk Factors) below as well as those discussed elsewhere in this
report. We qualify all of our forward-looking statements by these cautionary statements.
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American Railcar Industries, Inc.
Form 10 K
TABLE OF CONTENTS
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AMERICAN
RAILCAR INDUSTRIES, INC
FORM 10-K
PART I
INTRODUCTION
We are a leading North American manufacturer of covered hopper and tank railcars. We also repair
and refurbish railcars, provide fleet management services and design and manufacture certain
railcar and industrial components used in the production of our railcars as well as railcars and
non-railcar industrial products produced by others. We provide our railcar customers with
integrated solutions through a comprehensive set of high quality products and related services.
Our primary customers include companies that purchase railcars for lease by third parties, or
leasing companies, industrial companies that use railcars for freight transport, or shippers, and
Class I railroads. Over the past five years, our largest leasing company customers included ACF
Industries LLC, American Railcar Leasing LLC, The CIT Group, Inc., GATX Rail Corporation, GE
Capital Corporation, The Greenbrier Companies and Union Tank Car Company and our largest shipper
customers included Solvay America, Inc., Dow Chemical Company, Engelhard Corporation, Exxon Mobil
Corporation and Lyondell Chemical Company. Our major railroad customers over the past five years
included TTX and Union Pacific. In servicing this customer base, we believe our integrated railcar
repair and refurbishment and fleet management services and our railcar components manufacturing
business help us further penetrate the general railcar manufacturing market. These products and
services provide us with significant cross-selling opportunities and insights into our customers
railcar needs that we use to improve our products and services and enhance our reputation for high
quality. Although we build, service and manage railcars through an integrated, complementary set of
products and services, we have chosen not to offer railcar leasing services so that we do not
compete with our leasing company customers, which represent a significant portion of our revenues.
We operate in two reportable segments: manufacturing and railcar services. Financial information
about our business segments for the years ended December 31, 2005, 2004 and 2003 is located in Note
14 of our Consolidated Financial Statements.
We were incorporated in Missouri in 1988 and reincorporated in Delaware in January 2006 by way of
merger. We merged with and into American Railcar Industries, Inc., a Missouri corporation and our
former parent corporation. As a part of the merger, our parent exchanged all of its shares of
common stock for shares of our common stock on a 9,328.083-for-1 basis. In addition, our parent
exchanged all of its new preferred stock for shares of our new preferred stock on a 1-for-1 basis,
which shares we redeemed in connection with the closing of our initial public offering. Unless the
context otherwise requires, references to our company, we, us and our, refer to us and our
consolidated subsidiaries and our predecessors.
ADDITIONAL INFORMATION
Our principal executive offices are located at 100 Clark Street, Saint Charles, Missouri 63301, our
telephone number is (636) 940 6000 and our internet website is located at
http://www.americanrailcar.com.
We are a reporting company and file annual, quarterly, and special reports, proxy statements and
other information with the Securities and Exchange Commission (SEC). You may read and copy these
materials at the Public Reference Room maintained by the SEC at Room 1580, 100 F Street N.E.,
Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for more information on the
operation of the public reference room. The SEC maintains an Internet site at http://www.sec.gov
that contains reports, proxy and information statements and other information regarding issuers
that file electronically with the SEC. Copies of our annual, quarterly and special reports, Audit
Committee Charter and our Corporate Governance Guidelines are available on our web site at
http://www.americanrailcar.com or free of charge by contacting our Investor Relations Department at
American Railcar Industries, Inc., 100 Clark Street, Saint Charles, Missouri, 63301.
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ARI®, Pressureaide®, Center Flow® and our railcar logo are our U.S. registered trademarks. Each
trademark, trade name or service mark of any other company appearing in this report belongs to its
respective holder .
RECENT DEVELOPMENTS
On January 24, 2006, we completed an initial public offering of shares of our common stock. In the
offering, we offered and sold 9,775,000 shares of our common stock (including 1,275,000 shares
following the exercise of the underwriters over-allotment option) at a price of $21.00 per share.
Our net proceeds from the initial public offering, after deducting underwriting discounts,
commissions and estimated offering-related expenses payable by us were approximately $192.0
million. We used a substantial portion of the net proceeds from the offering to redeem all of our
outstanding preferred stock all of which were held by affiliates, repay substantially all of our
existing indebtedness (including amounts outstanding under our revolving credit facility,
industrial revenue bonds and notes to affiliates) and pay related fees and expenses. See
Managements Discussion and Analysis of Financial Condition and Results of Operation Liquidity
and Capital Resources.
Concurrent with the completion of the initial public offering, we entered into an amended and
restated credit agreement with North Fork Business Capital Corporation, as administrative agent for
various lenders. The amended and restated revolving credit facility has a total commitment of the
lesser of (i) $75 million or (ii) an amount equal to a percentage of eligible accounts receivable
plus a percentage of eligible raw materials and finished goods inventory. In addition, the amended
and restated revolving credit facility includes a $15.0 million capital expenditure sub-facility
that is based on a percentage of the costs related to capital projects we may undertake. The
amended and restated revolving credit facility has a three-year term. Borrowings under the amended
and restated revolving credit facility are collateralized by substantially all of our assets. The
amended and restated revolving credit facility has both affirmative and negative covenants,
including, without limitation, a maximum senior debt leverage ratio, a maximum total debt leverage
ratio, a minimum interest coverage ratio, a minimum tangible net worth and limitations on capital
expenditures and dividends. See Managements Discussion and Analysis of Financial Condition and
Results of Operation Liquidity and Capital Resources.
Our Board of Directors declared a regular cash dividend of $0.03 per share of our common stock. The
dividend is payable on April 6, 2006, to shareholders of record at the close of business on March
22, 2006. See Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities Dividend Policies and Restrictions.
On March 24, 2006, we signed a definitive agreement with Steel Technologies Inc. to acquire all the
capital stock of its subsidiary, Custom Steel Inc., a corporation located in Kennett, Missouri
adjacent to our component manufacturing facility. The purchase price is approximately $13.0 million
plus a working capital adjustment that we estimate will be approximately an additional $5.0
million. Custom Steel produces value-added fabricated steel parts that primarily support our
railcar manufacturing operations. The transaction, which is subject to customary closing
conditions, is expected to be completed on or about April 1, 2006. We cannot assure that this
closing will occur when anticipated, if at all.
OUR HISTORY
Since our formation in 1988, we have grown our business from being a small provider of railcar
components and maintenance services to one of North Americas leading integrated providers of
railcars, railcar components, railcar maintenance services and fleet management services. In
October 1994, we acquired railcar components manufacturing and railcar maintenance assets from ACF
Industries Incorporated (now known as ACF Industries LLC), or ACF, a company controlled by Carl C.
Icahn, our principal beneficial stockholder and the chairman of our board of directors. Through
this acquisition, we also hired members of ACFs management, many of whom, including our president,
remain a significant part of our current management team. These executives brought with them
established relationships with important customers and suppliers and extensive industry knowledge,
as ACF and its predecessor companies have roots in the railcar manufacturing industry that trace
back to 1873. Led by this management team, we entered the railcar manufacturing business through
the construction of new manufacturing facilities.
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In October 1995, we produced our first railcar at our Paragould, Arkansas manufacturing facility.
We primarily manufacture covered hopper railcars at our Paragould facility, but we have the ability
to manufacture many other types of railcars at this facility. The Paragould facility initially had
two railcar manufacturing lines. We added painting and lining capabilities to this facility in 1999
and December 2005 and a third manufacturing line in December 2004. Our Paragould facility also
features component manufacturing capabilities. We manufactured 21,936 railcars at our Paragould
facility, mostly covered hopper railcars, through December 31, 2005. We can manufacture up to 30
railcars a working day at this facility.
In January 2000, we produced our first railcar at our Marmaduke, Arkansas manufacturing facility.
We manufacture tank railcars at this facility. The design of this facility enables us to
manufacture many different types of tank railcars at the same time. We manufactured 6,787 railcars
at our Marmaduke facility through December 31, 2005. We can manufacture up to 10 railcars a working
day at this facility.
Since 1994, we have significantly expanded our components manufacturing and railcar services
operations. Our operations now include three railcar assembly, sub-assembly and fabrication
facilities, three railcar and industrial component manufacturing facilities, six railcar repair
plants and four mobile repair units. Our services business has grown to include online access by
customers, remote fleet management, expanded painting, lining and cleaning offerings, regulatory
consulting and engineering support. Additionally, members of our management team helped found and
develop, and continue to operate, a joint venture, Ohio Castings Company, LLC, which we refer to as
Ohio Castings, in which we own a one-third interest and that manufactures and sells sideframes,
bolsters, couplers and yokes for distribution to third parties and to us. We believe that our
involvement in this joint venture helps us maintain our levels of production at competitive prices,
despite industry-wide shortages of these potentially capacity constraining components.
OUR PRODUCTS AND SERVICES
We design and manufacture special, customized and general purpose railcars and a wide range of
components primarily for the North American railcar and industrial markets. We also support the
railcar industry through a variety of integrated railcar services, including repair, maintenance,
consulting, engineering and fleet management services.
Manufacturing
We manufacture two primary types of railcars, covered hopper railcars and tank railcars. Our
revenues attributable to our railcar manufacturing operations were approximately $154.7 million,
$265.8 million and $495.6 million in 2003, 2004 and 2005, respectively. These revenues represented
71%, 75% and 81% of our total revenues in 2003, 2004 and 2005, respectively.
Covered hopper railcars. We believe we are a leading manufacturer of covered hopper railcars in
North America. We manufacture both general service and specialty covered hopper railcars. Our
general service covered hopper railcars have capacities ranging from 3,200 to 6,500 cubic feet and
primarily carry plastic pellets, cement, grain and other food products, soda ash and other dry
granular products. Our specialty covered hopper railcars, which include our Pressureaide® covered
hopper railcar, have capacities ranging from 3,300 to 5,750 cubic feet and use air pressure to
assist unloading. Our specialty covered hopper railcars primarily carry flour, clays, food and
industrial grade corn starches. Revenues attributable to sales of our covered hopper railcars were
approximately $82.2 million, $84.8 million and $293.8 million in 2003, 2004 and 2005, respectively.
These revenues represented 38%, 24% and 48% of our total revenues in 2003, 2004 and 2005,
respectively. We sold 1,343, 1,507 and 4,240 covered hopper railcars in 2003, 2004 and 2005,
respectively.
All of our covered hopper railcars may be equipped with varying combinations of hatches, discharge
outlets and protective coatings to provide our customers with a railcar designed to perform in
precise operating environments. The flexible nature of our covered hopper railcar design allows it
to be quickly modified to suit changing customer needs. This flexibility can continue to provide
value after the initial purchase because our railcars may be converted for reassignment to other
services or customers. We provide a range of coatings to protect the railcar and the shippers
product against corrosion and product contamination. We build carbon steel and stainless steel
covered hopper railcars.
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Our covered hopper railcars are specifically designed for shipping a variety of dry bulk products,
from light density products, such as plastic pellets, to high density products, such as cement.
Some of our covered hopper railcars have a three curve cross section. Depending upon the equipment
on the railcars, they can operate in either a gravity or vacuum pneumatic unloading environment.
Since its introduction, we have improved our Center Flow® line of covered hopper railcars to provide
protection for a wide range of dry bulk products and to enhance the associated loading, unloading
and cleaning processes. Examples of these improvements include new and better design of the shape
of the railcars, joint designs, outlet mounting frames and loading hatches and discharge outlets,
which enhance the cargo loading and unloading processes.
We have several versions of our covered hopper railcar that target specific customers and specific
loads, including:
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Plastic Pellet Railcars. These railcars are designed to transport, load and unload
plastic pellets under precise specifications to preserve the purity of the load. Slight
imperfections in the railcars transporting such goods or in the components that load and
unload them can ruin an entire load. If plastic pellets within a load become tainted, the
imperfection will likely persist during the conversion of the plastic pellets into
end-products. An example of such cargo would be food grade plastic pellets used in the
production of milk bottles and other food containers. |
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Cement Railcars. Cement loads are heavier than many other loads of comparable volume,
and therefore cement railcars are smaller in size to compensate for the weight. As a
consequence, we can build more cement covered hopper railcars per day than we can any other
railcar we manufacture. Our cement railcars typically have capacities of 3,250 cubic feet
and are built with two lading compartments, compared to, for example, our plastic pellet
railcars, which typically have capacities of up to 6,224 cubic feet and are built with four
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Pressureaide® Railcars. Our Pressureaide® railcar is targeted towards the bulk powder
markets. Pressureaide® railcars typically handle products such as clays, industrial and food
grade starches and flours. We build our Pressureaide® railcars in capacities ranging from
3,300 cubic feet to as large as 5,750 cubic feet. They operate with internal pressures up
to 14.5 pounds per square inch, which expedites unloading, and are equipped with several
safety devices, such as pressure relief valves, a rupture disc and a vacuum relief valve. |
Tank railcars. We manufacture non-pressure and high pressure tank railcars. Our non-pressure tank
railcars have capacities ranging from 14,000 to 30,000 gallons and are flexibly designed to enable
the handling of a variety of commodities including petroleum products, ethanol, asphalt, vegetable
oil, corn syrup and other food products. Our high pressure tank railcars have capacities ranging
from 13,500 to 33,600 gallons and transport products that require a pressurized state due to their
liquid, semi-gaseous or gaseous nature, including chlorine, anhydrous ammonia, liquid propane and
butane. Most of our pressure tank railcars feature a thicker pressure retaining inner shell that is
separated from a jacketed outer shell by layers of insulation, thermal protection or both. Our
pressure tank railcars are made from specific grades of normalized steel that are selected for
toughness and ease of welding. Most of our tank railcars feature a sloped bottom tank that improves
the flow rate of the shipped product and provides improved drainage. Many of our tank railcars
feature coils that are steam-heated to decrease cargo viscosity, which improves the transported
products flow rate and speeds unloading. We can alter the design of our tank railcars to address
specific customer requirements. Revenues attributable to sales of our tank railcars were
approximately $72.2 million, $111.3 million and $151.0 million in 2003, 2004 and 2005,
respectively. These revenues represented 33%, 31% and 25% of our total revenues in 2003, 2004 and
2005, respectively. We sold 1,209, 1,637 and 1,850 tank railcars in 2003, 2004 and 2005,
respectively.
Component manufacturing. We believe we are an industry leader in the design and manufacture of
custom and standard railcar components. We manufacture over 300 different components for the North
American railcar industry. Our products include hitches for the intermodal market, tank railcar
components and valves, discharge outlets for covered hopper railcars, manway covers and valve body
castings, and outlet components and running boards for industrial and railroad customers. We
manufacture a variety of outlet types for our covered hopper railcars that we also sell to other
railcar manufacturers. We use these components in our own railcar manufacturing and also sell them
to third parties, including our competitors. Sales of our railcar components to third parties were
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approximately $9.8 million, $15.0 million and $24.7 million in 2003, 2004 and 2005, respectively.
Revenues attributable to these sales represented 4% of our total revenues in 2003, 2004 and 2005.
We also manufacture aluminum and special alloy steel castings that we sell primarily to industrial
customers. These products include castings for the trucking, construction, mining and oil and gas
exploration markets, as well as finished, machined aluminum castings, other custom machined
products and commercial mixing bowls. Sales of our industrial components were approximately $23.7
million, $35.6 million and $41.3 million in 2003, 2004 and 2005, respectively. Revenues
attributable to these sales represented 11%, 10% and 7% of our total revenues in 2003, 2004 and
2005, respectively.
Railcar Services
Our primary railcar services are railcar repair and refurbishment and railcar fleet management
services. Our primary customers for these services are leasing companies and shippers. We can
service the entire railcar fleets of our customers, including railcars manufactured by other
companies. Some of our customers use both our railcar repair and refurbishment business and our
fleet management services. We often provide these preferred customers with expedited repair
services to strengthen our overall customer relationships. Our railcar services provide us insights
into our customers railcar needs that we can use to improve our products. These services create
new customer relationships and enhance relationships with our existing customers. Our revenues from
our railcar services operations were approximately $29.9 million, $38.6 million and $41.6 million
in 2003, 2004 and 2005, respectively. These revenues represented 14%, 11% and 7% of our total
revenues in 2003, 2004 and 2005, respectively.
Railcar repair and refurbishment. Our railcar repair and refurbishment services include light and
heavy railcar repairs, exterior painting, interior lining application and cleaning, tank and safety
valve testing, railcar inspections, wheel replacement and conversion or reassignment of railcars
from one purpose to another. We support our railcar repair and refurbishment services customers
through a combination of full service repair shops, mobile repair units and mini-shop locations.
Our repair shops, like our manufacturing facilities, are strategically located near major rail
lines used by our customers and suppliers and close to some of the major industries we serve.
Revenues attributable to our railcar repair and refurbishment service operations were approximately
$26.6 million, $33.6 million and $37.2 million in 2003, 2004 and 2005, respectively. These revenues
represented 12%, 10% and 6% of our total revenues in 2003, 2004 and 2005, respectively.
Railcar fleet management. As of December 31, 2005, we manage approximately 57,000 railcars for
various customers, including approximately 22,000 for ARL, a leasing company controlled by
affiliates of Carl C. Icahn. Revenues attributable to our fleet management services were
approximately $3.3 million, $5.0 million and $6.4 million in 2003, 2004 and 2005, respectively.
These revenues represented 2%, 1% and 1% of our total revenues in each of 2003, 2004 and 2005,
respectively. Some of the principal features of our railcar fleet management services business
include:
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Mileage accounting. Some customers elect to receive mileage payments to offset freight
charges. Mileage is paid for loaded miles moved and calculated based on published rates. We
collect and audit the railroads mileage calculations to ensure our customers receive the
funds they are due. |
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Rolling stock taxes. States and localities impose taxes on railcars calculated based
upon mileage reporting. We file the required tax forms with the state and local taxing
authorities. We audit the tax invoices received to determine whether the assessments are
accurate. |
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Regulatory compliance. Our regulatory compliance support services help customers
maintain their railcar fleets in compliance with applicable regulations. As regulations
change, we help our customers manage the associated requirements and costs. We analyze new
fleets for which we provide fleet management services to identify areas of noncompliance
with applicable U.S. rail regulations and determine corrective actions. |
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Engineering services. Our engineering support services help customers manage their
regulatory compliance and documentation. We provide procedures and consultation for railcar
repairs to address integrity and compliance. |
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Field engineering services. We provide on-site evaluation and implementation of
significant engineering design changes for our customers. |
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Online service access. Our web-based systems allow our customers to view information on
their railcar fleet online. The data we maintain includes mechanical and regulatory
information, historical costs and repair detail and the status of repairs. |
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Maintenance planning. We forecast our customers railcar maintenance needs and suggest
schedules for repair service and refurbishment. This helps to ensure better fleet
utilization and more effective maintenance cycles. |
MANUFACTURING
Our principal railcar manufacturing facilities are located in Paragould and Marmaduke, Arkansas. We
built these facilities in 1995 and 1999, respectively, on previously undeveloped sites. These
facilities employ non-unionized work forces and are strategically located in close proximity to our
major customers and suppliers, which decreases our freight costs and railcar delivery times. These
facilities provide us the flexibility to produce a variety of railcars and enable us to quickly
shift production from one railcar type to another railcar type. Through December 31, 2005, we have
manufactured 21,936 railcars at our Paragould facility and 6,787 railcars at our Marmaduke
facility.
We manufacture all of our covered hopper railcars at our Paragould facility. We successfully
launched a third manufacturing line at Paragould in December 2004. Based on our current backlog, we
plan to produce an average of approximately 24 railcars a working day at this facility. We
manufacture all of our tank railcars at our Marmaduke, Arkansas facility. Based on our current
backlog, we plan to produce an average of approximately 7.5 railcars a working day at this
facility. Our actual daily production at both of these facilities will depend on the mix of railcar
types being manufactured and the availability of raw materials and components. In 2005, we
manufactured 5,025 railcars at our Paragould facility and 1,850 railcars at our Marmaduke facility.
We also have the manufacturing ability to produce other types of railcars. For example, in the past
we have manufactured centerbeam platform railcars used to transport building products.
We believe that we sustain product quality throughout each railcar manufacturing facility by
employing uniform, quality tools and equipment. Our production lines are able to produce a variety
of railcars to satisfy changing customer preferences and our tooling and plant layouts were
constructed to enable quick changeover. We currently can manufacture up to three different types of
railcars simultaneously at our Paragould facilities and many different types of tank railcars
simultaneously at our Marmaduke facility. We believe our quality products and modern manufacturing
processes contribute to our low incidence of warranty claims. Our warranty claims for railcars
produced at our Paragould and Marmaduke facilities were approximately $0.4 million, $0.1 million
and $0.6 million in 2003, 2004 and 2005, respectively.
We designed our Paragould and Marmaduke facilities to provide manufacturing flexibility and allow
for the production of a variety of railcar sizes and types. Examples of our production flexibility
include:
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our ability to manufacture several types of railcars at our Paragould facility; for
example, the Paragould facility finished an order of centerbeam platform railcars, and
quickly converted to covered hopper railcar production upon completion of that order; |
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our two parallel, vertically-tiered manufacturing tracks at Paragould allow workers on
these two tracks to share tools and equipment and allow multiple components of the same
railcar to be produced simultaneously; |
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our welding machines, which are purposefully smaller than many other industrial welding
machines, allow our welders greater freedom of movement, which, in turn, we believe
increases production speed; |
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our automated painting lance helps ensure proper interior coating in a single
application and we believe is faster and produces greater consistency than manual coating; |
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our grit-blasting is conducted by automated, oscillating machinery, which we believe is
superior to and more efficient than alternative techniques, including static manual
blasting; |
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our ability to rotate railcars 360 degrees eases and speeds specific steps in the
production line, such as complicated welding steps that would otherwise need to be
performed from difficult and possibly dangerous angles; |
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our horizontal manufacturing lines at our Marmaduke facility allow individual tank
railcars to be taken in and out of the production line for additional attention, without
the need to stop the plants entire production process; |
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our proprietary outer-jacket coiling process allows us to insulate our tank railcars at
our facility; |
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our force curing technique helps eliminate impurities, smell and residue remaining in
railcars following the painting and lining steps, which we use primarily for railcars
designed to transport food products; |
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our tracked loading and unloading points decrease the indirect labor required to move
raw materials and components into our facilities and finished products out of our
facilities; and |
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our integrated painting, railcar truck assembly and fabrication shops eliminate downtime
in our production process. |
In addition, we believe our management and operation of these facilities help reduce our operating
costs, some examples of which include:
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our decentralized management, including a salaried-to-hourly employee ratio of one to
14; |
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our proactive safety program, which features weekly meetings of safety sub-committees on
which our hourly and salaried employees participate and voluntarily establish safety rules
that frequently exceed regulatory and industry minimum requirements; our safety program has
helped contribute to low incidences of accidents requiring lost production time at our
facilities; and |
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our flexible workforce allows our employees to frequently move both between locations on
production lines, such as welding and small components fabricating positions, and among our
different manufacturing facilities. |
CUSTOMERS
We have strong long-term relationships with many large purchasers of railcars. Long-term customers
are particularly important in the railcar industry, given the limited number of buyers and sellers
of railcars, and railcar manufacturers desire constantly to maintain adequate backlog and
manufacture at full capacity.
Our railcar customer base consists mostly of U.S. shippers, leasing companies and railroads. Over
the past five years, our largest leasing company customers included ACF Industries LLC, American
Railcar Leasing LLC, The CIT Group, Inc., GATX Rail Corporation, GE Capital Corporation, The
Greenbrier Companies and Union Tank Car Company and our largest shipper customers included Solvay
America, Inc., Dow Chemical Company, Engelhard Corporation, Exxon Mobil Corporation and Lyondell
Chemical Company. Our major railroad customers over the past five years included TTX and Union
Pacific. Over the last five years, our largest customers of railcar repair and refurbishment
services included ACF and American Railcar Leasing LLC, affiliates of Carl C. Icahn, The CIT Group,
Inc., Lyondell Chemical Company and PPG Industries, Inc. Over the last five years, our largest
fleet management services customers included ACF, American Railcar Leasing LLC and PLM
Transportation. Over the last five years, our largest customers for railcar components included
ACF, GE Capital Railcar, Olin Corporation, Trinity Industries, Inc. and TTX Company. Over the last
five years, our largest customers for industrial parts included ABB Vetco Gray, Dresser Industries,
Inc., KF Industries, Inc., McKissick Products and Stream Flo Industries, Ltd.
11
In 2005, The CIT Group, Inc. accounted for approximately 20% of our revenues, The Greenbrier
Companies accounted for approximately 12% of our revenues, and ACF and American Railcar Leasing LLC
collectively accounted for approximately 11% of our revenues. In 2005, sales to our top ten
customers accounted for approximately 85% of our revenues. Sales to The Greenbrier Companies,
another railcar manufacturer, were under a contract for centerbeam platform railcars that is now
complete. We do not anticipate significant sales to The Greenbrier Companies in the future. ARL and
ACF are affiliates of Carl C. Icahn, our principal beneficial stockholder and the chairman of our
board of directors.
While we maintain strong relationships with our customers, many customers do not purchase railcars
from us every year because railcar fleets are not necessarily replenished or augmented every year.
The size and frequency of railcar orders often results in a small number of customers representing
a significant portion of our sales in a given year. We depend upon a small number of customers that
represent a large percentage of our revenues. The loss of any single customer, or a reduction in
sales to any such customer, could have a material adverse effect on our business, financial
condition and results of operations.
SALES AND MARKETING
We utilize an integrated marketing and sales effort to coordinate relationships in our
manufacturing and services operations. We sell and market our products in North America through our
sales and marketing staff, including sales representatives who sell directly to customers, catalogs
through which our customers have access to our railcar components, and our web site, through which
customers can order specialty components. We have seven employees devoted to sales and marketing
efforts for our railcar manufacturing, components manufacturing and fleet management services who
operate from our corporate headquarters in St. Charles, Missouri and, for our railcar repair
business, from a service office located in Houston, Texas. In addition, ARL and ACF, affiliates of
Carl C. Icahn, in connection with their own leasing sales activities have, from time to time,
referred their customers and contacts to us that prefer to purchase, rather than lease, railcars.
At this time, there is no formal arrangement with, or compensation of, ARL and ACF for any
referrals that result in sales of railcars.
The sales process for our products and services is often multi-level, involving a team comprised of
individuals from sales, marketing, engineering, operations and senior management. Each significant
customer is assigned a team that engages the customer at different organizational levels to provide
planning and product customization and to assure open communications and support. Our marketing
activities also include participation in trade shows, publication of articles in trade journals,
participation in industry forums and distribution of sales literature.
There is significant overlap between our railcar manufacturing, railcar components and fleet
services customers. Our presence in each market increases our opportunities to gain market share in
each of the other markets. Our access to competitors railcars through our components and railcar
repair and maintenance businesses further increases our opportunities to identify and address
customer needs.
PRODUCT DEVELOPMENT
Our engineering, marketing, operations and management personnel have developed collaborative
relationships with many of their customer counterparts and have used these relationships to
identify market demands and target our product development to meet those demands. Our product
development costs are reflected in our general, selling and administrative expenses. From time to
time, we hire additional engineers or contract projects to outside firms to work on specific
product development projects. Our current product development efforts focus on the development of
railcars equipped with outlets specifically designed to target certain industries, including a
through sill general service covered hopper railcar designed for the sugar industry and the grain
and cement markets. We also have developed a bulkheadless covered hopper railcar to address the
needs of customers that are more focused on loading, rather than unloading, efficiency. We have
built prototypes of some of these railcars, which are currently being field tested by target
customers. With input from our customers, we continually monitor product performance following
delivery. Observation of our products and our competitors products at various stages of a
railcars lifecycle and feedback from our repair shops, has led to product innovations, including
proprietary bulkhead reinforcements and changes to our basic design platform. We cannot guarantee
that we will be able to develop new products effectively, to enhance our existing products, or to
respond effectively to technological changes or new industry standards or developments on a timely
basis if at all.
12
BACKLOG
Our total backlog as of December 31, 2004 was $494.1 million and as of December 31, 2005 was
$1,074.3 million. We estimate that approximately 53% of our December 31, 2005 backlog will be
converted to revenues in the year ending on December 31, 2006. Although we believe these orders to
be firm, customer orders may be subject to cancellation, customer requests for delays in railcar
delivery, inspection rights and other customary industry terms and conditions.
On July 29, 2005, we entered into a multi-year purchase and sale agreement with CIT to manufacture
and sell to CIT covered hopper and tank railcars. Under this agreement, CIT has agreed to buy a
minimum of 3,000 railcars from us in each of 2006, 2007 and 2008 and we have agreed to offer to
sell to CIT up to 1,000 additional railcars in each of those years. CIT may choose to satisfy its
purchase obligations from among a variety of covered hopper and tank railcars described in the
agreement. CIT may reduce its future purchase obligations or cancel pending purchase orders, upon
prior written notice to us, under certain conditions, including a reduction of the then current
American Railway Car Institutes most recently reported quarterly backlog below specified levels.
As of December 31, 2005, the American Railway Car Institute reported a quarterly backlog of in
excess of 69,408 railcars. If during the term of the agreement, the levels of quarterly backlog
reported by American Railway Car Institute fall below 45,000 railcars but remains above 35,000
railcars, CIT has the right, on 240 days prior written notice, to cancel pending purchase orders or
reduce subsequent purchase obligations for the then current agreement year, in either case such
that actual purchases by CIT would not fall below 50% of that agreement years original minimum
purchase requirements. If the American Railway Car Institutes reported quarterly backlog falls
below 35,000 railcars, CIT has the right to cancel or suspend all, or any, pending purchase orders
or remaining purchase obligations under the Agreement upon at least 180 days prior written notice.
If CIT elects to cancel any pending purchase order under these provisions within at least 120 days
of the delivery date of the order, we may require that CIT purchase from us, at our cost, all
material which we had purchased and identified to such cancelled purchase order. CIT also has the
right to reduce its railcar orders from us if market prices for the railcars subject to our
agreement are reduced significantly below our quoted prices and we fail to meet such price
reductions. Under the agreement, purchase prices for railcars are subject to steel surcharges and
certain other material cost increases applicable at the time of production.
Our backlog consists of orders for railcars. 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. Although we generally have one to three year contracts with most of our
fleet management customers, neither orders for our railcar repair and refurbishment services
business nor our fleet management business are included in our backlog because we generally deliver
our services in the same period in which orders are received. Similarly, orders for our component
manufacturing business are not included in our backlog because we generally deliver components to
our customers in the same period in which orders for the components
are received.
Due to the large size of railcar orders and variations in the number and mix of railcars ordered in
any given period, the size of our reported backlog at the end of any such period may fluctuate
significantly. See Risk FactorsRisks related to our businessThe variable purchase patterns of
our railcar customers and the timing of completion, delivery and acceptance of customer orders may
cause our revenues and income from operations to vary substantially each quarter, which could
result in significant fluctuations in our quarterly results.
The following table shows our reported railcar backlog, and estimated future revenue value
attributable to such backlog, at the end of the periods shown. The 2005 reported backlog includes
9,000 railcars relating to CITs minimum purchase obligations under its agreement with us based
upon an assumed product mix consistent with CITs orders for railcars. Changes in product mix from
that assumed would affect the dollar amount of our backlog from CIT.
13
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2003 |
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2004 |
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2005 |
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Railcar backlog at start of period |
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412 |
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2,287 |
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7,547 |
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New railcars delivered |
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(2,557 |
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(4,384 |
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(6,875 |
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New railcar orders |
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4,432 |
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9,644 |
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13,838 |
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Railcar backlog at end of period |
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2,287 |
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7,547 |
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14,510 |
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Estimated railcar backlog value
at end of period (in thousands)
1 |
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$ |
129,850 |
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$ |
494,107 |
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$ |
1,074,408 |
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(1) |
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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 does not reflect potential price increases and decreases
under customer contracts that provide for variable pricing based on changes in the cost of
certain raw materials and railcar components or the cancellation or delay of railcar orders
that may occur. |
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. As orders may be canceled or delivery dates extended, 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. See
Risk FactorsRisks related to
our businessThe level of our reported railcar backlog may not necessarily indicate what our future
revenues will be and our actual revenues may fall short of the estimated revenue value attributed
to our railcar backlog.
The backlog is based on customer purchase orders that we believe are firm. Customer orders,
however, may be subject to cancellation and other customary industry terms and conditions.
SUPPLIERS AND MATERIALS
We employ a just-in-time supply strategy for our manufacturing. We believe this strategy improves
working capital efficiency, reduces operating costs and improves our flexibility to adjust rapidly
to production capacity. Our business depends on the adequate supply of numerous railcar components,
such as railcar wheels, brakes, sideframes, axles, bearings, yokes, tank railcar heads, bolsters
and other heavy castings, and raw materials, such as steel and normalized steel plate, used in the
production of railcars. Over the last few years, many components and raw materials suppliers have
been acquired or ceased operations, which has caused the number of alternative suppliers of railcar
components and raw materials to decline. The combination of industry consolidation and high demand
has caused recent industry-wide shortages of many critical components and raw materials as reliable
suppliers are frequently at or near production capacity. In some cases, such as those described
below, as few as one significant supplier produces the type of component or raw material we use in
our railcars. See Risk FactorsRisks related to our businessFluctuations in the supply of
components and raw materials we use in manufacturing railcars could cause production delays or
reductions in the number of railcars we manufacture, which could materially adversely affect our
business and results of operations.
The cost of raw materials and railcar components represents approximately 80% to 85% of the direct
manufacturing costs of most of our railcar product lines. Prices for steel, the primary component
in railcars and railcar components, rose sharply in 2004 as a result of strong demand, limited
availability of scrap metal for steel processing, reduced capacity and import trade barriers. In
2005, steel pricing declined through the third quarter but increased, however, in the fourth
quarter and appear to have stabilized going into the first quarter of 2006. Domestic demand for
steel continues to be strong. Raw material supply, while still volatile, appears to be more stable
going into 2006. As of December 31, 2005, all of our railcar manufacturing contracts contain price
variability provisions that track fluctuations in the prices of certain raw materials and railcar
components, including steel, so that increases in our manufacturing costs caused by increases in
the prices of these raw materials and components are passed directly on to our customers.
Conversely, if the price of those materials or components decreases, a discount is applied to
reflect the decrease in cost. In our component manufacturing business, we add a surcharge to every
product to account for increases in steel costs. Though we do not have similar contractual
protections in connection with the aluminum we use in our manufacturing processes, we believe the
risks are much less significant primarily due to the overall lower
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amounts of aluminum we use in
our manufacturing, the relative price of aluminum to steel and the historical range of aluminum
prices.
Our customers often specify particular railcar components and the suppliers of such components. We
continually monitor inventory levels to ensure adequate support of production. We periodically make
advance purchases to avoid possible shortages of material due to capacity limitations of railcar
component suppliers and possible price
increases. We do not typically enter into binding long-term contracts with suppliers because we
rely on established relationships with major suppliers to ensure the availability of raw materials
and specialty items.
In 2005, no single supplier accounted for more than 13% of our total purchases and our top ten
suppliers accounted for 70% of our total purchases. See Risk FactorsRisks related to our
businessThe cost of the raw materials that we use to manufacture railcars, particularly steel, are
high and these costs are expected to increase. Any increase in these costs or delivery delays of
these raw materials may materially adversely affect our business, financial condition and results
of operations.
In October 2005, we entered into two vendor supply contracts with minimum volume commitments with
suppliers of materials used at our railcar manufacturing facilities. These agreements relate to
railcar components, and have terms of two and three years, respectively. We have agreed to purchase
a combined total of $67.6 million from these two suppliers over the next three years. In 2006, 2007
and 2008 we expect to purchase $16.0 million, $27.1 million and $24.5 million respectively under
these agreements.
Steel. We use both regular and normalized steel plate to manufacture railcars. Currently, there is
only one domestic supplier of the form and size of normalized steel plate that we need for our
manufacturing operations, and that supplier is our only source of this product. We believe we can
acquire regular steel from other suppliers. Normalized steel plate is a special form of heat
treated steel that is stronger and can withstand puncture better than regular steel. Normalized
steel plate is required by Federal regulations to be used in tank railcars carrying certain types
of hazardous cargo, including liquefied petroleum gas. We use normalized steel plate in the
production of many of our tank railcars.
In June 2005, we entered into an agreement with another supplier that is constructing a facility to
manufacture normalized steel plate, including normalized steel plate of the form and size we need
for our manufacturing operations to supply us with a portion of our normalized steel plate
requirements. We believe construction of this normalized steel production facility is scheduled for
completion by early 2006. Although our arrangements with this supplier will not satisfy all of our
normalized steel requirements, we expect this facility will provide us an alternative source of
normalized steel plate and decrease our reliance on the current sole supplier of this critical raw
material.
We also have entered into a supply agreement with this supplier for the purchase of regular steel
plate. Both agreements have a term of five years and may be terminated by either party at any time
after two years, upon twelve months prior notice. Each agreement requires us to purchase the lesser
of a fixed volume or 75% of our requirements for the steel plate covered by that agreement at
prices that fluctuate with the market.
Tank heads and floor sheet reinforcements. ACF supplies us with tank railcar heads, head blocks,
head pads, floor sheet reinforcements, wheel sets, mounting frames and sheared panels. ACF is our
sole supplier of tank railcar heads and floor sheet reinforcements. See Risk FactorsRisks related
to our businessCompanies affiliated with Carl C. Icahn are important suppliers and customers.
Castings. Heavy castings we use in our railcar manufacturing primarily include bolsters,
sideframes, couplers and yokes. These castings form part of the truck assemblies upon which
railcars must be placed. The companies that supply the railcar industry with heavy castings are
unable to meet current demands of all the railcar manufacturers and, as such, the production
capacity of many railcar manufacturers is limited by the restricted availability of these
components. In 2003, our management team helped found and develop, and continues to operate Ohio
Castings, a joint venture, in which we own a one-third interest. The joint venture leased a foundry
in Cicero, Illinois and acquired a foundry in Alliance, Ohio and produces sideframes, bolsters,
couplers and yokes. We also have entered into supply agreements with an affiliate of one of our
Ohio Castings joint venture partners to purchase up to 25% and 33%, respectively, of the car sets,
consisting of sideframes and bolsters, produced at each of these foundries.
15
Our purchase
commitments under these supply agreements are dependent upon the number of car sets manufactured by
these foundries, which are jointly controlled by us and the other two members of Ohio Castings. We
believe that our involvement in this joint venture helps us maintain our levels of production at
competitive prices, despite industry-wide shortages of these potentially capacity constraining
components. See Risk FactorsRisks related to our businessOur relationships with our partners in
our Ohio Castings joint venture may not be successful, which could materially adversely affect our
business.
Wheels and brakes. There also have been supply constraints and shortages of wheels and brakes used
in railcars. Currently, there are only two domestic suppliers of each of these components. For both
wheels and brakes, we primarily rely on one supplier. We also obtain limited quantities of
refurbished wheels from scrapped railcars. If necessary, we believe we can also obtain railcar
wheels from a Chinese supplier at a significantly higher cost.
COMPETITION
The railcar manufacturing business is extremely competitive. We compete primarily with Trinity
Industries, Inc. and National Steel Car Limited in the covered hopper railcar market and with
Trinity Industries and, to a lesser degree, Union Tank Car Company in the tank railcar market. Both
Trinity Industries, and Union Tank Car Company have substantially greater resources and produce
substantially more tank railcars than us. However, Union Tank primarily produces tank railcars for
its own leased fleet. Trinity Industries produces substantially more covered hopper railcars than
we do. For example, according to Trinity Industries, Inc.s annual report for the year ended
December 31, 2004 and 2005, Trinity delivered a total of approximately 15,100 and 22,934 railcars,
respectively, in North America. By comparison, for the year ended December 31, 2004 and 2005, we
delivered a total of approximately 4,384 and 6,875 railcars, respectively, in North America.
Some of our competitors have greater financial and technological resources than we do. They may
increase their participation in the railcar markets in which we compete and other railcar
manufacturers that currently do not manufacture covered hopper railcars or tank railcars may choose
to compete directly with us. Railcar purchasers sensitivity to price and strong price competition
within the industry have historically limited our ability to increase prices to obtain better
margins on our railcars.
We face intense competition in our other markets as well. Our competition for the sale of railcar
components includes our competitors in the railcar manufacturing market as well as a concentrated
group of companies whose primary business focus is the production of one or more specialty
components. In addition, new competitors, or alliances among existing competitors, may emerge and
rapidly gain market share. We compete with numerous companies in our railcar services and fleet
management businesses, ranging from companies with greater resources than we have to small, local
companies. Our principal competitors in these businesses include Rescar and Millennium Rail.
In addition to price, competition in all our markets is based on quality, reputation, reliability
of delivery, customer service and other factors. Any of these factors as well as technological
innovation by any of our existing competitors, or new competitors entering any of the markets in
which we do business, could put us at a competitive disadvantage. We may be unable to compete
successfully or retain our market share in our established markets. Increased competition for the
sales of our railcar products and services could result in price reductions, reduced margins and
loss of market share, which could negatively affect our prospects, business, financial condition
and results of operations.
INTELLECTUAL PROPERTY
We rely on a combination of investments, copyrights and patents to protect our intellectual
property. Due to the change that has historically characterized the railcar manufacturing industry,
we believe that the improvement of existing technology and the development of new products may be
more important than patent protection in establishing and maintaining a competitive advantage.
Nevertheless, we have obtained patents and will continue to make efforts to obtain patents, when
available, in connection with product developments and designs. We cannot guarantee that any patent
obtained will provide protection or be of commercial benefit to us, or that its validity will not
be challenged.
16
We have ten U.S. and two non-U.S. patents, two pending non-U.S. patent applications, seven
registered trademarks, and numerous unregistered copyrights and trade names. Our patents expire at
various times from 2006 to 2021.
EMPLOYEES
As of December 31, 2005, we had 2,425 full-time employees in various locations throughout the
United States and Canada, including 2,301 engaged in our manufacturing, railcar repair and railcar
fleet management operations and 123 in various corporate support functions. At our Longview, Texas
and North Kansas City, Missouri repair facilities, and at our Longview, Texas steel foundry and
components manufacturing facility, 49, 48 and 286 employees, respectively, are covered by
collective bargaining agreements. These agreements expire in January 2008, September 2007 and April
2008, respectively. We are also party to a collective bargaining agreement at our Milton,
Pennsylvania repair facility, which is currently idle. Employees at our other locations are not
covered by collective bargaining agreements. We believe that our relations with our employees are
generally good.
REGULATION
The Federal Railroad Administration, or FRA, administers and enforces U.S. federal laws and
regulations relating to railroad safety. These regulations govern equipment and safety compliance
standards for railcars and other rail equipment used in interstate commerce. The Association of
American Railroads, or AAR, promulgates a wide variety of rules and regulations governing safety
and design of equipment, relationships among railroads with respect to railcars in interchange and
other matters. The AAR also certifies railcar manufacturers and component manufacturers that
provide equipment for use on railroads in the United States. New products must generally undergo
AAR testing and approval processes. As a result of these regulations, we must maintain
certifications with the AAR as a railcar manufacturer, and products that we sell must meet AAR and
FRA standards. We must comply with the rules of the U.S. Department of Transportation, or DOT, and
we are also subject to oversight by Transport Canada. To the extent that we expand our business
internationally, we will increasingly be subject to the regulations of other non-U.S.
jurisdictions.
Due to the health and safety risks posed by several types of hazardous cargo transported by
pressure tank railcars, including liquefied petroleum gas, chlorine and anhydrous ammonia, pressure
tank railcars are subject to regulations to which many other types of railcars are not subject. For
example, in response to general safety and homeland security concerns, there are currently
proposals pending by governmental and non-governmental railcar authorities that address, among
other things, the impact resistance of the steel used in the manufacture of pressure tank railcars.
These proposals may result in additional regulation concerning the required use of normalized
steel, and the testing of its impact resistance, in pressure tank railcars. Prior to 1989,
normalized steel was not typically used in the manufacture of pressure tank railcars and, according
to AAR and DOT data, approximately 28,000 pressure tank railcars currently in the U.S. railcar
fleet were not manufactured with normalized steel. Because normalized steel is used to form
railcars shells, it is generally not feasible to retrofit railcars with normalized steel. We
believe we are well positioned to take advantage of any increased demand for new pressure tank
railcars that could result from regulations requiring the increased use of normalized steel in
pressure tank railcars or the removal of any pre-1989 pressure tank railcars from the U.S. railcar
fleet.
ENVIRONMENTAL MATTERS
We are subject to comprehensive federal, state, local and international environmental laws and
regulations relating to the release or discharge of materials into the environment, the management,
use, processing, handling, storage, transport or disposal of hazardous materials and wastes, or
otherwise relating to the protection of human health and the environment. These laws and
regulations expose us to liability for the environmental condition of our current or formerly owned
or operated facilities and our own negligent acts, and also may expose us to liability for the
conduct of others or for our actions that were in compliance with all applicable laws at the time
these actions were taken. In addition, these laws may require significant expenditures to achieve
compliance, and are frequently modified or revised to impose new obligations. Civil and criminal
fines and penalties and other sanctions may be imposed for non-compliance with these environmental
laws and regulations. Our operations that involve hazardous materials also raise potential risks of
liability under the common law.
17
Environmental operating permits are, or may be, required for our operations under these laws and
regulations. These operating permits are subject to modification, renewal and revocation. We
regularly monitor and review our operations, procedures and policies for compliance with permits,
laws and regulations. Despite these compliance efforts, risk of environmental liability is inherent
in the operation of our businesses, as it is with other companies engaged in similar businesses.
Many of our properties were transferred to us by ACF in 1994. We are involved in investigation and
remediation activities at properties that we now own or lease to address historic contamination and
potential contamination by third parties. We are also involved with state agencies in the cleanup
of two sites under these laws. These investigations are at a preliminary stage, and it is
impossible to estimate, with any certainty, 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 us in 1994 by ACF and for
which ACF has retained liability for environmental problems that may have existed at the time of
their transfer to us and ACF has also agreed to indemnify us for any cost that might be incurred
with those existing problems. However, if ACF fails to honor its obligations to us, we would be
responsible for the cost of such remediation.
In connection with its ongoing obligations, ACF, in consultation with us, is investigating and, as
appropriate, remediating those sites that it transferred to us. We have been advised that ACF
estimates that it in each of 2006 and 2007 will spend approximately $0.2 million on environmental
investigation, relating to contamination that existed at properties prior to their transfer to us
and for which ACF has retained liability and agreed to indemnify us. We believe that our operations
and facilities are in substantial compliance with applicable laws and regulations and that any
noncompliance is not likely to have a material adverse effect on our operations or financial
condition.
Future events, such as new environmental regulations or changes in or modified interpretations of
existing laws and regulations or enforcement policies, or further investigation or evaluation of
the potential health hazards of products or business activities, may give rise to additional
compliance and other costs that could have a material adverse effect on our financial conditions
and operations. In addition, we have in the past conducted investigation and remediation activities
at properties that we own to address historic contamination. To date such costs have not been
material. Although we believe we have satisfactorily addressed all known material contamination
through our remediation activities, there can be no assurance that these activities have addressed
all historic contamination. The discovery of historic contamination or the release of hazardous
substances into the environment at our current or formerly owned or operated facilities could
require us in the future to incur investigative or remedial costs or other liabilities that could
be material or that could interfere with the operation of our business.
In addition to environmental laws, the transportation of commodities by railcar raises potential
risks in the event of a derailment or other accident. Generally, liability under existing law in
the United States for a derailment or other accident depends on the negligence of the party, such
as the railroad, the shipper or the manufacturer of the railcar or its components. However, for
certain hazardous commodities being shipped, strict liability concepts may apply.
INSURANCE
We maintain insurance on terms typical of our industry. Our policies cover standard industry risks,
including general and products liability, workers compensation, automobile liability and other
casualty and property risks.
RISKS RELATED TO OUR BUSINESS
Due in part to the highly cyclical nature of the railcar industry, we have incurred substantial
operating losses in the past and may experience declines in revenue and substantial operating
losses in the future.
Historically, the North American railcar market has been highly cyclical and we expect it to
continue to be highly cyclical. During the most recent industry cycle, industry-wide railcar
deliveries declined from a peak of 75,704 in 1998 to a low of 17,714 railcars in 2002. During this
downturn, our revenues dropped from $238.8 million in 2000 to $168.8 million in 2002 and we
incurred losses of $1.6 million, $2.0 million and $3.9 million in 2000, 2001 and 2002,
respectively. We believe that downturns in the railcar manufacturing industry will occur in the
future and will result in decreased demand for our products and services. The cycles in our
industry result from many factors that
18
are beyond our control, including economic conditions in the
United States. Although railcar production has increased since 2002, industry professionals believe
that demand for railcars may have reached a peak and may not persist if favorable economic and
other conditions are not sustained. Even if a sustained economic recovery occurs in the United
States, demand for our railcars may not match or exceed expected levels. An economic downturn may
result in increased cancellations of railcar orders which could have a material adverse effect on
our ability to convert our railcar backlog into revenues. If industry backlog for railcars declines
below certain levels, CIT, one of our customers which accounts for 68% of our backlog as of December 31, 2005, will be permitted to
cancel some or, in certain circumstances, all its orders with at least 180 days written notice,
which could have a material adverse effect on our business, financial condition and results of
operations. In addition, an economic downturn in the United States could result in lower sales
volumes, lower prices for railcars and a loss of profits for us.
A substantial number of the end users of our railcars acquire railcars through leasing arrangements
with our leasing company customers. Economic conditions that result in higher interest rates would
increase the cost of new leasing arrangements, which could cause our leasing company customers to
purchase fewer railcars. A reduction in the number of railcars purchased by our leasing company
customers could have a material adverse effect on our business, financial condition and results of
operations.
The cost of the raw materials that we use to manufacture railcars, particularly steel, are high and
these costs are expected to increase. Any increase in these costs or delivery delays of these raw
materials may materially adversely affect our business, financial condition and results of
operations.
The production of railcars requires substantial amounts of steel. The cost of steel and all other
materials, including scrap metal, used in the production of our railcars represents approximately
80% to 85% of our manufacturing costs. Although we have negotiated variable pricing provisions in
all of our current railcar manufacturing contracts that pass certain increases or decreases in our
steel costs on to our customers, our business remains subject to risks related to price increases
and periodic delays in the delivery of steel and other raw materials, all of which are beyond our
control. The price for steel, the primary raw material component of our railcars, increased sharply
in 2004 as a result of strong worldwide demand and supply limitations caused, in part, by steel
industry consolidation and import trade barriers. Price levels for steel increased again in 2005
and we expect worldwide demand for steel to increase, supplies to be more limited and prices to
continue to increase in 2006. In addition, the price and availability of other railcar components
that are made of steel have been adversely affected by the increased cost and limited availability
of steel. Any fluctuations in the price or availability of steel, or any other material used in the
production of our railcars, may have a material adverse effect on our business, financial condition
and results of operations. In addition, if any of our raw material suppliers were unable to
continue its business or were to seek bankruptcy relief, the availability or price of the materials
we use could be adversely affected. Deliveries of our raw materials, and the components made from
those raw materials, may also fluctuate depending on supply and demand for the raw material or
governmental regulation relating to the raw material, including regulation relating to the
importation of the raw material.
We have entered into contracts with all of our current railcar customers that allow for variable
pricing to protect us against future increases in the cost of certain raw materials and components,
including steel. However, in 2004 and 2005, we were unable to pass on an estimated $7.9 million and
$1.7 million, respectively, in increases in raw material and components costs. As prices for steel,
other raw materials and components increase, we may not be able to pass on such price increases to
our customers in the future, which could adversely affect our operating margins and cash flows.
Even if we are able to increase prices, any such price increases may reduce demand for our
railcars. In addition, our customers may not be willing to accept contractual terms that provide
for variable pricing and our competitors, in an effort to gain market share or otherwise, have
agreed in the past, and may in the future agree, to railcar supply arrangements that provide for
fixed pricing. As a result, we may lose railcar orders or we may be required to agree to supply
railcars with fixed pricing provisions or be subject to less favorable contract terms, any of which
could have a material adverse effect on our business, financial condition and results of
operations.
Fluctuations in the supply of components and raw materials we use in manufacturing railcars could
cause production delays or reductions in the number of railcars we manufacture, which could
materially adversely affect our business, financial condition and results of operations.
19
Our railcar manufacturing business depends on the adequate supply of numerous components, such as
railcar wheels, brakes, tank railcar heads, sideframes, axles, bearings, yokes, bolsters and other
heavy castings, and raw materials, such as normalized steel plate. Over the last few years many
suppliers have been acquired or ceased operations, which has caused the number of alternative
suppliers of components and raw materials to decline. The combination of industry consolidation and
high demand has caused recent industry-wide shortages of many critical components as reliable
suppliers are frequently at or near production capacity. For example, with respect to railcar
wheels, there are only two significant suppliers that continue to produce the type of component we
use in our
products. We rely on one of these suppliers for most of our railcar wheels. Also, a small
percentage of the railcar wheels we use are refurbished and are obtained from scrapped railcars.
Supply of these refurbished railcar wheels is available in limited quantities and is unpredictable
because the supply of refurbished railcar wheels depends on the level and type of railcars being
scrapped in any given period. The supply of steel is similarly limited. While we receive regular
steel from three suppliers, we have entered into agreements this year requiring us to buy the
lesser of a fixed volume or 75% of our steel requirements from one supplier. In addition, there is
currently only one North American supplier of the types and sizes of normalized steel plate we use
in the production of many of our tank railcars.
Supply constraints are exacerbated in our industry because, although multiple suppliers may produce
certain components, railcar manufacturing regulations and the physical capabilities of
manufacturing facilities restrict the types and sizes of components and raw materials that
manufacturers may use. In addition, we do not carry significant inventories of components and
procure many of our components on a just-in-time basis. With the recent increased demand for
railcars, our remaining suppliers are facing significant challenges in providing components and
materials on a timely basis to all railcar manufacturers, including to us. In the event that our
suppliers of railcar components and raw materials were to stop or reduce the production of railcar
components and raw materials that we use, go out of business, refuse to continue their business
relationships with us or become subject to work stoppages, our business would be disrupted. Our
inability to obtain components and raw materials in required quantities or of acceptable quality
could result in significant delays or reductions in railcar shipments. Any of these events would
materially and adversely affect our operating results. Furthermore, our ability to increase our
railcar production to expand our business depends on our ability to obtain an increased supply of
these railcar components and raw materials.
While we believe that we may, in certain circumstances, secure alternative sources of these
components and materials, we may incur substantial delays and significant expense in doing so, the
quality and reliability of alternative sources may not be the same and our operating results may be
materially adversely affected. Alternative suppliers might charge significantly higher prices for
railcar components and materials than we currently pay. Even if alternative suppliers are available
to us, these suppliers may be unacceptable to our customers because our customers often specify the
components we may use in railcars manufactured for them. Under such circumstances, the disruption
to our business could have a material adverse impact on our customer relationships, business,
financial condition and results of operations.
We operate in a highly competitive industry and we may be unable to compete successfully, which
would materially adversely affect our results of operations.
We face intense competition in all of our markets. In each of our covered hopper and tank
railcar manufacturing businesses, we have two principal competitors. Both of our principal
competitors in the tank railcar market, Trinity Industries, Inc. and the Union Tank Car Company,
and one of our principal competitors in the covered hopper railcar market, Trinity Industries,
Inc., have substantially greater resources and produce substantially more railcars than we do. For
example, according to Trinity Industries, Inc.s annual report for the year ended December 31, 2004
and 2005, Trinity delivered a total of approximately 15,100 and 22,934 railcars, respectively in
North America. By comparison, for the years ended December 31, 2004 and 2005, we delivered a total
of approximately 4,384 and 6,875 railcars, respectively. In addition, some of these and other
railcar manufacturers produce railcars primarily for use in their own railcar leasing operations,
competing directly with leasing companies, some of which are our largest customers. Some of our
competitors have greater financial and technological resources than we have. Our competitors may
increase their participation in the railcar markets in which we compete and other railcar
manufacturers that currently do not manufacture covered hopper or tank railcars may choose to
compete directly with us. Railcar purchasers sensitivity to price and strong price competition
within the industry have historically limited our ability to increase prices to obtain better
margins on our railcars. Additionally, as we selectively seek to
20
manufacture different types of railcars we will be competing against railcar manufacturers
with significantly more experience than we have with regard to such railcar types. Our competition
for the sale of railcar components includes our competitors in the railcar manufacturing market as
well as a concentrated group of companies whose primary business focus is the production of one or
more specialty components. We compete with numerous companies in our railcar fleet management and
railcar repair services business, ranging from companies with greater resources than we have to
small, local companies.
In all our markets, in addition to price, competition is based on quality, reputation, reliability
of delivery, product performance, customer service and other factors. In particular, technological
innovation by any of our existing competitors, or new competitors entering any of the markets in
which we do business, could put us at a competitive disadvantage. We may be unable to compete
successfully or retain our market share in our established markets. Increased competition for the
sales of our railcars, our fleet management and repair services and our railcar components could
result in price reductions, reduced margins and loss of market share, which could materially
adversely affect our prospects, business, financial condition and results of operations.
Equipment failures, delays in deliveries or extensive damage to our facilities, particularly our
railcar manufacturing facilities in Paragould or Marmaduke, Arkansas, could lead to production or
service curtailments or shutdowns.
We manufacture our railcars at manufacturing facilities in Paragould and Marmaduke, Arkansas. An
interruption in manufacturing capabilities at either of these facilities, as a result of equipment
failure or other reasons, could reduce or prevent the production of our railcars. A halt of
production at either facility could severely delay scheduled railcar delivery dates to our
customers and affect our production schedule, which would delay future production. Any significant
delay in deliveries to our customers could result in the termination of orders, cause us to lose
future sales and negatively affect our reputation among our customers and in the railcar industry,
all of which would materially adversely affect our business and results of operations.
Additionally, production delays or interruptions at our Jackson, St. Charles or Kennett, Missouri
components manufacturing facilities or at our Ohio Castings joint venture, all of which provide key
components to our Paragould and Marmaduke railcar manufacturing facilities, could contribute to
delays of railcar deliveries and order cancellations. Interruptions at our repair, cleaning and
maintenance facilities, including our mobile repair units, may also have a material adverse effect
on our business. All of our manufacturing and service facilities are also subject to the risk of
catastrophic loss due to unanticipated events, such as fires, earthquakes, explosions, floods or
weather conditions. We may experience plant shutdowns or periods of reduced production as a result
of equipment failures, loss of power, gray outs, delays in deliveries or extensive damage to any of
our facilities, which could have a material adverse effect on our business, results of operations
or financial condition.
We depend upon a small number of customers that represent a large percentage of our revenues. The
loss of any single customer, or a reduction in sales to any such customer, could have a material
adverse effect on our business, financial condition and results of operations.
Railcars are typically sold pursuant to large, periodic orders and, therefore, a limited number of
customers typically represents a significant percentage of our railcar sales in any given year. Our
top ten customers based on revenues represented, in the aggregate, approximately 79%, 79% and 81%
in 2003, 2004 and 2005, respectively, of our total revenues. Moreover, our top three customers
based on revenues represented, in the aggregate, approximately 70%, 59% and 45% in 2003, 2004 and
2005, respectively, of our total revenues. In 2005, sales to our top three customers accounted for
approximately 20%, 13% and 12%, respectively, of our total revenues. The loss of any significant
portion of our sales to any major customer, the loss of a single major customer or a material
adverse change in the financial condition of any one of our major customers could have a material
adverse effect on our business, financial condition and financial results.
If we lose any of our executive officers or key employees, or Carl C. Icahn, the chairman of our
board of directors, our operations and ability to manage the day-to-day aspects of our business may
be materially adversely affected.
We believe our success depends to a significant degree upon the continued contributions of our
executive officers and key employees, both individually and as a group. Our future performance will
substantially depend on our
21
ability to retain and motivate them. If we lose any of our executive officers or key employees or
are unable to recruit qualified personnel, our ability to manage the day-to-day aspects of our
business may be materially adversely affected. It would be difficult to replace any of our
executive officers or key employees without materially adversely affecting our business operations
because our executive officers and key employees have many years of experience with our company and
within the railcar industry and other manufacturing industries and strong personal ties with many
of our important customers and suppliers. Additionally, Mr. Icahn and his affiliated entities have
been key resources for strategic and management advice, which we have obtained at no cost. We
believe the availability and access to these resources has provided us with a competitive
advantage. If Mr. Icahn were no longer the chairman of our board of directors we could lose access
to these resources. Furthermore, if Mr. Icahn were no longer the chairman of our board of
directors, certain other risks we face relating to our customer, supplier and service relationships
with, and competition between us and Mr. Icahn and affiliates of Mr. Icahn, described below, may be
exacerbated. The loss of the services of one or more of our executive officers or key employees or
the chairman of our board of directors could have a material adverse effect on our business,
financial condition and results of operations. We do not currently maintain key person life
insurance.
If we face labor shortages or increased labor costs our growth and results of operations could be
materially adversely affected.
Due to the cyclical nature of the demand for our products, we have had to reduce and then rebuild
our workforce as our business has gone through downturns followed by upturns in business activity.
Due to the competitive and rural nature of the labor markets in which we operate, this type of
employment cycle increases our risk of not being able to retain and recruit the personnel we
require in our railcar manufacturing and other businesses, particularly in periods of economic
expansion. Our Paragould and Marmaduke facilities are located in sparsely populated communities and
we have experienced a high turnover rate at these locations among newly-hired employees. In
November of 2005, we added additional painting and lining capabilities to our Paragould facility,
which has required additional employees to operate. Our inability to recruit, retain and train
adequate numbers of qualified personnel on a timely basis could materially adversely affect our
ability to operate our businesses, our financial condition and our results of operations.
The variable purchase patterns of our railcar customers and the timing of completion, delivery and
acceptance of customer orders may cause our revenues and income from operations to vary
substantially each quarter, which could result in significant fluctuations in our quarterly
results.
Most of our individual railcar customers do not make railcar purchases every year because they do
not need to replace or replenish their railcar fleets on a yearly basis. Many of our customers
place orders for railcars on an as-needed basis, sometimes only once every few years. As a result,
the order levels for railcars, the mix of railcar types ordered and the railcars ordered by any
particular customer have varied significantly from quarterly period to quarterly period in the past
and may continue to vary significantly in the future. Railcar sales comprised approximately 75% and
82% of our total revenue in 2004 and 2005, and our results of operations in any particular
quarterly period may be significantly affected by the number and type of railcars manufactured and
delivered in any given quarterly period. For example, our net income increased 156% from the first
quarter to the second quarter of 2005 while it decreased 207% from the third quarter to the fourth
quarter of fiscal year 2004. We record the sale of a railcar after completion of production of the
railcar, the railcar is accepted by the customer following inspection, the risk for any damage or
loss with respect to the railcar passes to the customer and title to the railcar transfers to the
customer. This revenue recognition policy determines when we record the revenues associated with
our railcar sales and, as a result, will cause fluctuations in our quarterly results. As a result
of these fluctuations, we believe that comparisons of our sales and operating results between
quarterly periods within the same fiscal year and between quarterly periods within different fiscal
years may not be meaningful and, as such, these comparisons should not be relied upon as indicators
of our future performance.
Our relationships with our partners in our Ohio Castings joint venture may not be successful, which
could materially adversely affect our business.
On January 1, 2005, we acquired from ACF Industries Holding Corp., an affiliate of Carl C. Icahn,
our principal beneficial stockholder and the chairman of our board of directors, its one-third
ownership interest in Ohio Castings, our joint venture with affiliates of Amsted Industries Inc., a
railcar components manufacturing company, and The
22
Greenbrier Companies, a railcar manufacturer and leasing company. We acquired this joint venture
interest in order to increase our supply alternatives for heavy castings, which are critical
components for the manufacture of railcars and the supply of which is constrained. The companies
that supply the railcar industry with heavy castings have been unable to meet the short-term or
long-term demand of railcar manufacturers and, as such, the production capacity of many railcar
manufacturers, including ours, is restricted by the limited availability of these components.
Although the allocation of castings that we receive from Ohio Castings does not provide us with all
of our castings requirements, the joint venture does provide us with a committed source for a
critical portion of the castings that we require for the successful operation of our business. If
Ohio Castings is unable to provide us with our allocation of castings on a timely basis or at all,
our manufacturing costs could increase and we may have to delay or cancel the production of ordered
railcars, all of which could materially adversely affect our business, financial condition and
results of operations.
The level of our reported railcar backlog may not necessarily indicate what our future revenues
will be and our actual revenues may fall short of the estimated revenue value attributed to our
railcar backlog.
We define backlog as the number of railcars, and the revenue value in dollars attributed to these
railcars, to which our customers have committed in writing to purchase from us that have not yet
been recognized as revenues. Our competitors may not define railcar backlog in the same manner as
we do, which could make comparisons of our railcar backlog with theirs misleading. In this annual
report, we have disclosed our railcar backlog for various periods and the estimated revenue value
in dollars that would be attributed to this railcar backlog once the railcar backlog is converted
to actual sales. We consider railcar backlog to be an indicator of future revenues. However, our
reported railcar backlog may not be converted into revenues in any particular period, if at all,
and the actual revenues from such sales may not equal our reported estimates of railcar backlog
value. For example, if the price for raw materials, such as steel, and other components used in the
production of our railcars decreases or increases and we have entered into applicable variable
pricing contracts with a customer or we are otherwise able to pass on these price changes to a
customer, our actual revenues will differ from the estimated revenue value attributed to our
railcar backlog. In addition, our railcar manufacturing business relies on third-party suppliers
for heavy castings, wheels and other components and raw materials and if these third parties were
to stop or reduce their supply of components or raw materials, our production would decline and our
actual revenues would fall short of the estimated revenue value attributed to our railcar backlog.
Customer orders may be subject to cancellation, inspection rights and other customary industry
terms, all of which could affect our recognition of revenue currently reflected in our December 31,
2005 backlog. If industry backlog for railcars declines below certain levels, CIT, one of our
customers which accounts for 68% of our December 31, 2005 backlog, will be permitted to cancel some
or, in certain circumstances, all its orders after at least 180 days written notice, which could
have a material adverse effect on our business, financial condition and results of operations.
Furthermore, delivery dates may be subject to deferral, thereby delaying the date on which we will
deliver the associated railcars and realize revenues attributable to such railcar backlog.
Therefore, our current level of reported railcar backlog may not necessarily represent the level of
revenues that we may generate in any future period. Furthermore, any contract included in our
reported railcar backlog that actually generates revenues may not be profitable.
As a public company we are required to comply with the reporting obligations of the Exchange Act
and will be required to comply with Section 404 of the Sarbanes-Oxley Act. If we fail to comply
with the reporting obligations of the Exchange Act and Section 404 of the Sarbanes-Oxley Act for
our fiscal year ending December 31, 2007, or if we fail to achieve and maintain adequate internal
controls over financial reporting, our business, results of operations and financial condition, and
investors confidence in us, could be materially adversely affected.
As a public company, we are required to comply with the periodic reporting obligations of the
Exchange Act, including preparing annual reports, quarterly reports and current reports. Our
failure to prepare and disclose this information in a timely manner could subject us to penalties
under federal securities laws, expose us to lawsuits and restrict our ability to access financing.
In addition, we are required under applicable law and regulations to integrate our systems of
internal controls over financial reporting. We plan to evaluate our existing internal controls with
respect to the standards adopted by the Public Company Accounting Oversight Board. During the
course of our evaluation, we may identify areas requiring improvement and may be required to design
enhanced processes and controls to address issues identified through this review. This could result
in significant delays and cost to us and require us to divert substantial resources, including
management time, from other activities.
23
In the fourth quarter of 2005 we dedicated significant management, financial and other resources in
connection with our compliance with Section 404 of the Sarbanes-Oxley Act. In October 2005, we
hired an organization to assist with a review of our existing internal control structure. We
cannot be certain at this time that we will be able to comply with all of our reporting obligations
and successfully complete the procedures, certification and attestation requirements of Section 404
of the Sarbanes-Oxley Act by the time that we are required to file our Annual Report on Form 10-K
for the year ended December 31, 2007. If we fail to achieve and maintain the adequacy of our
internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we
have effective internal controls over financial reporting in accordance with the Sarbanes-Oxley
Act. Moreover, effective internal controls are necessary for us to produce reliable financial
reports and are important to help prevent fraud. As a result, our failure to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act on a timely basis could result in the loss of
investor confidence in the reliability of our financial statements, which in turn could harm our
business and negatively impact the trading price of our common stock.
Rapid growth is straining our operations and requiring us to incur costs to upgrade our
infrastructure.
During the last six quarters, we have experienced rapid growth in our operations, number of our
employees and our product offerings. Our growth places a significant strain on our management,
operations and financial systems and also on our ability to retain employees. Our future operating
results will depend in part on our ability to continue to implement and improve our operating and
financial controls and management information systems. If we fail to manage our growth effectively,
our business, financial condition and results of operations could be materially adversely affected.
Companies affiliated with Carl C. Icahn are important suppliers and customers.
We manufacture railcars and railcar components and provide railcar services for companies
affiliated with Carl C. Icahn, our principal beneficial stockholder and the chairman of our board
of directors. To the extent our relationships with affiliates of Mr. Icahn change due to the sale
of his interest in us or otherwise, our business, results of operations and financial condition may
be materially adversely affected.
Affiliates of Mr. Icahn have accounted for approximately 45%, 34%, and 11% of our revenues in 2003,
2004, and 2005, respectively. This revenue is primarily attributable to our sale of railcars.
American Railcar Leasing LLC, or ARL, a railcar leasing company owned by affiliates of Mr. Icahn,
currently purchases all of its railcars from us. However, we have no long-term agreements with ARL
or any other affiliates of Mr. Icahn to purchase our railcars, and we cannot assure you that ARL or
other affiliates of Mr. Icahn will continue to do so. ARL could, in the future, purchase railcars
from our competitors. In addition, we have a railcar servicing agreement with ARL, under which we
provide fleet management services for the entire railcar fleet of ARL and its subsidiaries. These
railcars represented approximately 39% of the railcars for which we provided fleet management
services as of December 31, 2005. This agreement is terminable by either party at the end of any
contract year upon six months prior notice and ARL is not restricted from using the services of our
competitors for its existing fleet of railcars or any other railcars it may purchase. A significant
change in the nature of the business relationship with ARL and other affiliates of Mr. Icahn could
have a material adverse effect on our business, financial condition and results of operations.
We also purchase railcar and industrial components from ACF, another entity affiliated with Mr.
Icahn. ACF has been the supplier of approximately $19.0 million, $31.3 million and $76.4 million
of our inventory purchases in 2003, 2004 and 2005, respectively. Currently, ACF is our sole
supplier of tank railcar heads and one of a limited number of suppliers for other important railcar
components that we use in our manufacturing operations. These railcar components are manufactured
and sold to us under a supply agreement that is terminable by ACF at the end of any contract year
on six months prior notice. We cannot guarantee that we would be able to obtain alternative
supplies of these railcar components on a timely basis and on comparable terms if we were no longer
able to purchase these railcar components from ACF. A failure to obtain component supplies from ACF
could materially adversely affect our business, financial condition and results of operations.
Services being provided to us by ARL, an entity controlled by Carl C. Icahn, may not be sufficient
to meet our needs, which may require us to incur additional costs.
24
We use certain outsourced information technology and administrative services from ARL, an entity
controlled by Mr. Icahn. We also sublease our headquarters office space in St. Charles, Missouri
from ARL. We cannot assure you that these services will be provided at the same level as they are
currently being provided or that we will be able to maintain our sublease on the same terms as
currently in effect. These arrangements may be terminated by either ARL or us upon six months
notice and, if they were terminated, we would be required to find a third-party provider of these
services or begin to provide them for ourselves and relocate our office headquarters. As these
agreements were negotiated with ARL, an entity affiliated with us, the prices and rates charged to
us under these agreements may be lower than the prices and rates that may be charged by
unaffiliated third parties for similar services and an office sublease or for us to provide these
services on our own. We cannot assure you that, if these agreements are terminated, we will be able
to replace these services and the sublease in a timely manner or on terms and conditions, including
cost, as favorable as those we are currently receiving. Additional expenses incurred in replacing
these services and relocation of our office facilities or the failure to replace these services
could materially adversely affect our business, financial condition and results of operations.
As a public company, we may have reduced access to resources of, and benefits provided by, entities
affiliated with Carl C. Icahn.
We have in the past obtained access to significant financial and other resources from entities
affiliated with Carl C. Icahn. For example, prior to our initial public offering, most of our
capital needs were satisfied by entities affiliated with Mr. Icahn. In addition, we believe that
our relationship with entities affiliated with Mr. Icahn have, in many cases, provided us with a
competitive advantage in identifying opportunities for sales of our products and identifying and
attracting partners for critical supply arrangements. For example, we participate in product and
service purchasing arrangements with entities controlled by Mr. Icahn, which we believe may provide
us with favorable pricing as a result of larger aggregate purchases by the Icahn-affiliated buying
group. If we were unable to participate in these buying group arrangements our manufacturing costs
would increase and our results of operations and financial condition may be materially adversely
affected. Also, lease sales agents of ARL and ACF, in connection with their own leasing sales
activities have, from time to time, referred their customers or contacts to us if the customer or
contact prefers to purchase rather than lease railcars, which has, in some cases, led to us selling
railcars to these customers or contacts. ACF and ARL have in the past accepted orders to purchase
railcars for us on our behalf. ARL and ACF have discontinued accepting orders to sell railcars on
our behalf. At this time there is no formal arrangement under which referral services are provided
and we do not compensate ARL, ACF or any of their leasing sales agents for any railcar sales that
we may make as a result of these referrals. To the extent that ARL or ACF discontinue referring
potential customers to us, or require us to compensate them for these referrals, our business,
results of operations and financial condition may be adversely affected.
Lack of acceptance of our new railcar offerings by our customers could materially adversely affect
our business.
Our strategy depends in part on our continued development and sale of new railcar designs to expand
or maintain our market share in the railcar markets in which we currently compete. The investment
required by us in connection with the development of new railcar designs is considerable and we
usually make decisions to develop and market new railcars and railcars with modified designs
without firm indications of customer acceptance. New or modified railcar designs may require
customers to alter their existing business methods or displace existing equipment in which these
customers may have a substantial capital investment. Additionally, many railcar purchasers prefer
to maintain a standardized fleet of railcars and railcar purchasers with established railcar fleets
are generally resistant to railcar design changes. Therefore, any new or modified railcar designs
that we develop may not gain widespread acceptance in the marketplace and any such products may not
be able to compete successfully with existing railcar designs or new railcar designs that may be
introduced by our competitors.
Our production of new railcar product lines may not be initially profitable and may result in
financial losses.
Our strategy includes developing new railcars and selectively expanding beyond the covered hopper
and tank railcar markets. When we begin production of a new railcar product line, we usually
experience higher initial costs of production due to training and labor and operating
inefficiencies associated with new manufacturing processes. Due to pricing pressures in our
industry, the pricing for new railcars in customer contracts usually does not reflect the initial
additional costs, and our costs of production may exceed the anticipated revenues until we are able
to gain
25
labor efficiencies. For example, in 2004 and 2005, we used a portion of the railcar production
capacity at our Paragould facility, which we primarily use to manufacture covered hopper railcars,
to manufacture centerbeam platform railcars. This was the first time we manufactured centerbeam
platform railcars and primarily as a result of initial training and start-up costs, we incurred a
loss on this product. To the extent that the total costs of production significantly exceed our
anticipated costs of production, we may incur a loss on our sale of new railcar product lines.
We may pursue acquisitions or joint ventures that involve inherent risks, any of which may cause us
not to realize anticipated benefits.
Our business strategy includes the potential acquisition of businesses and entering into joint
ventures and other business combinations that we expect will complement and expand our business. We
may not be able to successfully identify suitable acquisition or joint venture opportunities or
complete any particular acquisition, combination, joint venture or other transaction on acceptable
terms. Our identification of suitable acquisition candidates and joint venture opportunities
involves risks inherent in assessing the values, strengths, weaknesses, risks and profitability of
these opportunities including their effects on our business, diversion of our managements
attention and risks associated with unanticipated problems or unforeseen liabilities. If we are
successful in pursuing future acquisitions or joint ventures, we may be required to expend
significant funds, incur additional debt or issue additional securities, which may materially
adversely affect our results of operations and be dilutive to our stockholders. If we spend
significant funds or incur additional debt, our ability to obtain financing for working capital or
other purposes could decline and we may be more vulnerable to economic downturns and competitive
pressures. In addition, we cannot guarantee that we will be able to finance additional acquisitions
or that we will realize any anticipated benefits from acquisitions or joint ventures that we
complete. Should we successfully acquire another business, the process of integrating acquired
operations into our existing operations may result in unforeseen operating difficulties and may
require significant financial resources that would otherwise be available for the ongoing
development or expansion of our existing business. Our failure to identify suitable acquisition or
joint venture opportunities may restrict our ability to grow our business. We have recently entered
into an agreement to acquire Custom Steel. See Item 1BusinessRecent Developments. We cannot
assure that the closing of this acquisition will occur when anticipated, if at all. If we do
consummate this acquisition, we cannot assure that we will be able to successfully integrate Custom
Steels business with ours.
If we are unable to protect our intellectual property and prevent its improper use by third
parties, our ability to compete in the market may be harmed.
We rely on patent protection and a combination of copyright, trade secret and trademark laws to
protect our proprietary technology and prevent others from duplicating our products. However, these
means afford only limited protection and may not prevent our competitors from duplicating our
products or gaining access to our proprietary information and technology. These means also may not
permit us to gain or maintain a competitive advantage.
Any of our patents may be challenged, invalidated, circumvented or rendered unenforceable. We
cannot guarantee that we will be successful should one or more of our patents be challenged for any
reason. If our patent claims are rendered invalid or unenforceable, or narrowed in scope, the
patent coverage afforded our products could be impaired, which could significantly impede our
ability to market our products, negatively affect our competitive position and materially adversely
affect our business and results of operations.
We cannot assure you that any pending or future patent applications held by us will result in an
issued patent, or that if patents are issued to us, that such patents will provide meaningful
protection against competitors or against competitive technologies. The issuance of a patent is not
conclusive as to its validity or its enforceability. The United States federal courts may
invalidate our patents or find them unenforceable. Competitors may also be able to design around
our patents. Our patents and patent applications cover particular aspects of our products. Other
parties may develop and obtain patent protection for more effective technologies, designs or
methods. If these developments were to occur, it could have an adverse effect on our sales. If our
intellectual property rights are not adequately protected, we may not be able to commercialize our
technologies, products or services and our competitors could commercialize our technologies, which
could result in a decrease in our sales and market share and could materially adversely affect our
business, financial condition and results of operations.
26
Our products could infringe the intellectual property rights of others, which may lead to
litigation that could itself be costly, could result in the payment of substantial damages or
royalties, and could prevent us from using technology that is essential to our products.
We cannot guarantee you that our products, manufacturing processes or other methods do not infringe
the patents or other intellectual property rights of third parties. Infringement and other
intellectual property claims and proceedings brought against us, whether successful or not, could
result in substantial costs and harm our reputation. Such claims and proceedings can also distract
and divert management and key personnel from other tasks important to the success of our business.
In addition, intellectual property litigation or claims could force us to do one or more of the
following:
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cease selling or using any of our products that incorporate the asserted intellectual
property, which would adversely affect our revenue; |
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pay substantial damages for past use of the asserted intellectual property; |
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obtain a license from the holder of the asserted intellectual property, which license
may not be available on reasonable terms, if at all; and |
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redesign or rename, in the case of trademark claims, our products to avoid infringing
the intellectual property rights of third parties, which may not be possible and could be
costly and time-consuming if it is possible to do. |
In the event of an adverse determination in an intellectual property suit or proceeding, or our
failure to license essential technology, our sales could be harmed and our costs could increase,
which could materially adversely affect our business, financial condition and results of
operations.
We are subject to a variety of environmental laws and regulations and the cost of complying, or our
failure to comply, with such requirements may have a material adverse effect on our business,
financial condition and results of operations.
We are subject to a variety of federal, state and local environmental laws and regulations relating
to the release or discharge of materials into the environment, the management, use, processing,
handling, storage, transport or disposal of hazardous materials, or otherwise relating to the
protection of human health and the environment. These laws and regulations expose us to liability
for the environmental condition of our current or formerly owned or operated facilities, and also
may expose us to liability for the conduct of others or for our actions that were in compliance
with all applicable laws at the time these actions were taken. Despite our intention to be in
compliance, we cannot guarantee that we will at all times be in compliance with all such
requirements. The cost of complying with environmental requirements may also increase substantially
in future years. If we violate or fail to comply with these regulations, we could be fined or
otherwise sanctioned by regulators. In addition, these requirements are complex, change frequently
and may become more stringent over time, which could have a material adverse effect on our
business. We are also required to maintain a variety of environmental permits. Our failure to
maintain and comply with these permits could result in fines or penalties or other sanctions and
have a material adverse effect on our operations or results. Future events, such as new
environmental regulations or changes in or modified interpretations of existing laws and
regulations or enforcement policies, or further investigation or evaluation of the potential health
hazards of products or business activities, may give rise to additional compliance and other costs
that could have a material adverse effect on our business, financial conditions and operations.
We are involved in investigation and remediation activities at properties that we now own or lease
to address historic contamination and potential contamination by third parties. We are also
involved with state agencies in the cleanup of two sites under these laws. These investigations are
at a preliminary stage, and it is impossible to estimate, with any certainty, 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 us in 1994 by ACF and for which ACF has retained liability and agreed to indemnify us.
However, if ACF fails to honor its obligations to us, we would be responsible for the cost of such
remediation. We have been advised that ACF estimates that in 2006 and 2007, respectively, it will
spend approximately $0.2 million on
27
environmental investigation, relating to contamination that existed at properties prior to their
transfer to us in 1994 and for which ACF has retained liability and agreed to indemnify us. We
expense all costs associated with environmental investigation and remediation relating to our
properties even if we receive indemnification from ACF. ACFs indemnification is not treated as an
offset to that expense, but rather as an additional capital contribution. The discovery of historic
contamination or the release of substances into the environment at our current or formerly owned or
operated facilities could require ACF or us in the future to incur investigative or remedial costs
or other liabilities that could be material or that could interfere with the operation of our
business. Any environmental liabilities that we may incur that are not covered by adequate
insurance or indemnification from a party other than ACF will also increase our costs and have a
negative impact on our profitability.
Changes in assumptions or investment performance of pension and other postretirement benefit plans
that we sponsor could materially adversely affect our financial condition and results of
operations.
We sponsor two defined benefit plans that cover certain executives and employees at certain of its
manufacturing facilities and a supplemental executive retirement plan (SERP) covering our Chief
Executive Officer, including one plan that was frozen effective April 1, 2004, and in which our
employees are therefore no longer accruing additional benefits. We will be responsible for making
funding contributions to the plans, including the frozen pension plan, and may be liable for any
unfunded liabilities that may exist at the time the plans are terminated. Our liability and
resulting costs for these plans may increase or decrease based upon a number of factors, including
actuarial assumptions used, the discount rate used in calculating the present value of future
liabilities, and investment performance. An adverse change or result in one or more of these
factors could have a material adverse effect on our financial condition and results of operations.
We also provide other postretirement health care and life insurance benefits to certain of our
employees and retirees. Our postretirement benefit obligations and related expense with respect to
these postretirement benefits also increase or decrease based on several factors, including changes
in health care cost trend rates, and could similarly be materially adversely affected by adverse
changes in these factors.
Our manufacturers warranties expose us to potentially significant claims.
We warrant the workmanship and materials of many of our products under express limited warranties.
Accordingly, we may be subject to significant warranty claims in the future such as multiple claims
based on one defect repeated throughout our mass production process or claims for which the cost of
repairing the defective component is highly disproportionate to the original cost of the part.
These types of warranty claims could result in costly product recalls, significant repair costs and
damage to our reputation, which could materially adversely affect our business, financial condition
and results of operations. Unresolved warranty claims could result in users of our products
bringing legal actions against us. For example, we have been named as the defendant in a lawsuit
in which the plaintiff, OCI Chemical Company, claims we were responsible for the damage caused by
allegedly defective railcars that were manufactured by us. OCI Chemical Company alleges that
failures in certain components caused the contents transported by these railcars to spill out of
the railcars causing property damage, clean-up costs, monitoring costs, testing costs and other
costs and damages.
Increasing insurance claims and expenses could lower profitability and increase business risk.
The nature of our business subjects us to product liability, property damage and personal injury
claims, especially in connection with our manufacture and repair of products that transport
hazardous or volatile materials, such as pressure tank railcars. We maintain reserves and liability
insurance coverage at levels based upon commercial norms in the industries in which we operate and
our historical claims experience. Over the last several years, insurance carriers have raised
premiums for many companies operating in our industry. Increased premiums may further increase our
insurance expense as coverages expire or cause us to raise our self-insured retention. If the
number or severity of claims within our self-insured retention increases, we could suffer costs in
excess of our reserves. An unusually large liability claim or a series of claims based on a failure
repeated throughout our mass production process may exceed our insurance coverage or result in
direct damages if we were unable or elected not to insure against certain hazards because of high
premiums or other reasons. In addition, the availability of, and our ability to collect on,
insurance coverage is often subject to factors beyond our control. Moreover, any accident or
incident involving us, even if we are fully insured or not held to be liable, could negatively
affect our reputation among
28
customers and the public, thereby making it more difficult for us to compete effectively, and could
materially adversely affect the cost and availability of insurance in the future.
Covenants in our amended and restated revolving credit facility restrict our discretion in
operating our business and provide for certain minimum financial requirements.
Our amended and restated revolving credit facility contains various covenants that, among other
things, require us to satisfy certain financial covenants and limit our managements discretion by
restricting our ability to:
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incur additional debt; |
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redeem our capital stock; |
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enter into certain transactions with affiliates; |
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pay dividends and make other distributions; |
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make investments and other restricted payments; and |
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create liens. |
Our failure to comply with any covenants under the amended and restated revolving credit facility
could lead to an event of default under the agreements governing our indebtedness that we may have
outstanding at the time, permitting our lenders to accelerate our borrowings and to foreclose on
any collateral.
Some of our railcar services and component manufacturing employees belong to labor unions and
strikes or work stoppages by them or unions formed by some or all of our other employees in the
future could adversely affect our operations.
We are a party to collective bargaining agreements with labor unions at our Longview, Texas, North
Kansas City, Missouri and our Milton, Pennsylvania repair facilities and at our Longview, Texas
steel foundry and components manufacturing facility. As of December 31, 2005, the covered employees
at these sites collectively represent approximately 16% of our total workforce. Disputes with
regard to the terms of these agreements or our potential inability to negotiate acceptable
contracts with these unions in the future could result in, among other things, strikes, work
stoppages or other slowdowns by the affected workers. We cannot guarantee that our relations with
our railcar services workforce will remain positive. We cannot guarantee that union organizers will
not be successful in future attempts to organize our railcar manufacturing employees or our other
employees at some of our other facilities. If our workers were to engage in a strike, work stoppage
or other slowdown, or other employees were to become unionized or the terms and conditions in
future labor agreements were renegotiated, we could experience a significant disruption of our
operations and higher ongoing labor costs. In addition, we could face higher labor costs in the
future as a result of severance or other charges associated with layoffs, shutdowns or reductions
in the size and scope of our operations.
Our failure to comply with regulations imposed by federal and foreign agencies could negatively
affect our financial results.
Our railcar operations are subject to extensive regulation by governmental regulatory and industry
authorities and by federal and foreign agencies. These organizations establish rules and
regulations for the railcar industry, including construction specifications and standards for the
design and manufacture of railcars; mechanical, maintenance and related standards; and railroad
safety. New regulatory rulings and regulations from these federal or foreign agencies may impact
our financial condition and results of operations. If we fail to comply with the requirements and
regulations of these agencies, we may face sanctions and penalties that could materially adversely
affect our results of operations.
Further consolidation of the railroad industry may materially adversely affect our business.
29
Over the past ten years, there has been a consolidation of railroad carriers operating in North
America. Railroad carriers are large purchasers of railcars and represent a significant portion of
our historical customer base. With fewer railroad carriers, each railroad carrier will have
proportionately greater buying power and operating efficiency. This may intensify competition among
railcar manufacturers to retain customer relationships with the consolidated railroad carriers and
cause our prices to decline. Future consolidation of railroad carriers may materially adversely
affect our sales and reduce our income from operations.
Reductions in the availability of energy supplies or an increase in energy costs may increase our
operating costs.
We use electricity and natural gas at our manufacturing facilities and to operate our equipment.
Over the past three years, prices for electricity and natural gas have fluctuated significantly. An
outbreak or escalation of hostilities between the United States and any foreign power and, in
particular, a prolonged armed conflict in the Middle East, or a natural disaster such as the recent
hurricane and related flooding in the oil producing region of the Gulf Coast of the United States,
could result in a real or perceived shortage of petroleum and/or natural gas, which could result in
an increase in the cost of electricity or energy generally. Future limitations on the availability
or consumption of petroleum products and/or an increase in energy costs, particularly electricity
for plant operations, could have a materially adverse effect upon our business and results of
operations.
We may be required to reduce our inventory carrying values, which could materially adversely affect
our financial condition and results of operations.
We are required to record our inventories at the lower of cost or market. In assessing the ultimate
realization of inventories, we are required to make judgments as to future demand requirements and
compare them with the current or committed inventory levels. We have recorded reductions in
inventory carrying values in recent periods due to the discontinuance of product lines and changes
in market conditions due to changes in demand requirements. We may be required to reduce inventory
carrying values in the future due to a decline in market conditions in the railcar business, which
could have a material adverse effect on our financial condition and results of operations.
We may be required to reduce the value of our long-lived assets, which could materially adversely
affect our financial condition and results of operations.
We periodically evaluate the carrying values of our long-lived assets for potential impairment. The
carrying value of a long-lived asset is considered impaired when the carrying value is not
recoverable through undiscounted future cash flows and the fair value of the asset is less than the
carrying value reduced by the estimated cost to dispose of the asset. Any resulting impairment loss
related to reductions in the value of our long-lived assets could materially adversely affect our
financial condition and results of operations.
The price of our common stock is subject to volatility.
Various factors, such as general economic changes in the financial markets, announcements or
significant developments with respect to the railcar industry, actual or anticipated variations in
our or our competitors quarterly or annual financial results, the introduction of new products or
technologies by us or our competitors, changes in other conditions or trends in our industry or in
the markets of any of our significant customers, changes in governmental regulation, our financial
results failing to meet expectations of analysts or investors, or changes in securities analysts
estimates of our future performance or of that of our competitors or our industry, could cause the
market price of our common stock to fluctuate substantially. In addition, our customers practice
of placing large, periodic orders for products on an as needed basis makes our quarterly sales and
operating results difficult to predict and could cause our operating results in some quarters to
vary from market expectations and also lead to volatility in our stock price .
Our stock price may decline due to sales of shares by Carl C. Icahn and other stockholders.
Sales of substantial amounts of our common stock, or the perception that these sales may occur, may
adversely affect the price of our common stock and impede our ability to raise capital through the
issuance of equity securities
30
in the future. Of our outstanding shares of common stock, approximately 53% are beneficially owned
by our principal beneficial stockholder and the chairman of our board of directors, Carl C. Icahn.
All of our other outstanding shares of common stock are subject to restrictions applicable to our
affiliates, as that term is defined in Rule 144 of the Securities Act of 1933 (Securities Act).
We and our executive officers, directors, and certain of our stockholders who purchased shares of
our common stock in our initial public offering through our directed share program have entered
into 180-day lock-up agreements with the underwriters of our initial public offering. The lock-up
agreements prohibit us, our executive officers, directors, and those of our stockholders who have
entered into lock-up agreements from selling or otherwise disposing of shares of our common stock,
except in limited circumstances. The terms of the lock-up agreements can be waived, at any time, by
UBS Securities LLC and Bear, Stearns & Co. Inc. in their sole discretion, without prior notice or
announcement, to allow us or our officers, directors, and those of our stockholder those of our
stockholders who have entered into lock-up agreements to sell shares of our common stock. If the
terms of the lock-up agreements are waived, shares of our common stock will be available for sale
in the public market, which could reduce the price of our common stock.
Following the expiration of the lock-up period, certain stockholders under our registration rights
agreement will be entitled, subject to certain exceptions, to exercise their demand registration
rights to register their shares under the Securities Act. If this right is exercised, holders of
any of our common stock subject to the registration rights agreement will be entitled to
participate in such registration. In addition, in our letter agreement with James J. Unger, our
president and chief executive officer, we have agreed to use commercially reasonable efforts to
file a registration statement on Form S-8 with the SEC to cover the registration of 114,286 shares
of our common stock. We have agreed to include the balance of Mr. Ungers shares in any
registration statement we file on behalf of Mr. Icahn with regard to the registration for sale of
our shares held by Mr. Icahn, provided the contractual restrictions and applicable lock-up period
of Mr. Ungers shares have lapsed. By exercising their registration rights, and selling a large
number of shares, these holders could cause the price of our common stock to decline. Approximately
11.4 million shares of common stock are subject to our registration rights agreement and Mr.
Ungers letter agreement.
Carl C. Icahn exerts significant influence over us.
Mr. Icahn controls approximately 53% of the voting power of our capital stock and is able to
control or exert substantial influence over us, including the election of our directors, and
controlling most matters requiring board or shareholder approval, including:
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any determination with respect to our business strategy and policies; |
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mergers or other business combinations involving us; |
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our acquisition or disposition of assets; |
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future issuances of common stock or other securities by us; |
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our incurrence of debt or obtaining other sources of financing; and |
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the payment of dividends on our common stock. |
In addition, the existence of a controlling stockholder may have the effect of making it difficult
for, or may discourage or delay, a third party from seeking to acquire, a majority of our
outstanding common stock, which may adversely affect the market price of the stock.
Mr. Icahns interests may conflict with the interest of our stockholders.
Mr. Icahn owns and controls and has an interest in a wide array of companies, some of which such as
ARL and ACF as described below, may compete directly or indirectly with us. As a result, his
interests may not always be consistent with our interests or the interests of our other
stockholders. For example, ARL, a railcar leasing company
31
owned by Mr. Icahn, competes directly with our other customers that are in the railcar leasing
business and ACF, which supplies us with critical components, also provides components to our
competitors. ACF has also previously manufactured railcars and may do so in the future. Mr. Icahn
and entities controlled by him may also pursue acquisitions or business opportunities that may be
complementary to our business. Our certificate of incorporation allows Mr. Icahn, entities
controlled by him, and any director, officer, member, partner, stockholder or employee of Mr. Icahn
or entities controlled by him, to take advantage of such corporate opportunities without first
presenting such opportunities to us, unless such opportunities are expressly offered to any such
party solely in, and as a direct result of, his or her capacity as our director, officer or
employee. As a result, corporate opportunities that may benefit us may not be available to us in a
timely manner, or at all. To the extent that conflicts of interest may arise between us and Mr.
Icahn and his affiliates, those conflicts may be resolved in a manner adverse to us or to you or
other holders of our securities.
We are a controlled company within the meaning of the Nasdaq Global Market rules and our
stockholders do not have the same protections afforded to shareholders of companies that are not
controlled companies and, therefore, are subject to all of the Nasdaq Global Market corporate
governance requirements.
Mr. Icahn controls approximately 53% of the voting power of our capital stock and we are a
controlled company within the meaning of the corporate governance standards of the Nasdaq Global
Market. Under these rules, a controlled company may elect, and we have elected, not to comply
with certain Nasdaq Global Market corporate governance requirements, including requirements that a
majority of the board of directors consist of independent directors; compensation of officers be
determined or recommended to the board of directors by a majority of its independent directors or
by a compensation committee that is composed entirely of independent directors; and director
nominees be selected or recommended for selection by a majority of the independent directors or by
a nominating committee composed solely of independent directors. As a result, we do not have a
majority of independent directors and we do not have a nominating committee nor do we have a
compensation committee consisting of independent members. Accordingly, our stockholders do not have
the same protections afforded to shareholders of other companies that are not controlled
companies and, therefore, are subject to all of the Nasdaq Global Market corporate governance
requirements.
Payments of cash dividends on our common stock may be made only at the discretion of our board of
directors and Delaware law may restrict, and the agreements governing our amended and restated
revolving credit facility contain provisions that limit, our ability to pay dividends.
Our board declared a cash dividends on our common stock of $0.03 per share of common stock payable
on April 6, 2006. Our board of directors may, in its discretion, refuse to declare further
dividends and any payment of further dividends will depend upon our operating results, strategic
plans, capital requirements, financial condition, provisions of our borrowing arrangements and
other factors our board of directors considers relevant. In addition, the agreements governing our
amended and restated revolving credit facility restrict our ability to declare and pay dividends on
our capital stock. Furthermore, Delaware law imposes restrictions on our ability to pay dividends.
For example, our board of directors may declare dividends only to the extent of our surplus
(which is defined as total assets at fair market value minus total liabilities, minus statutory
capital), or if there is no surplus, out of our net profits for the then current and/or immediately
preceding fiscal years. Accordingly, we may not be able to pay dividends in any given amount in the
future, or at all.
As a public company, we incur increased costs that may place a strain on our resources and our
managements attention may be diverted from other business concerns.
As a public company, we incur significant legal, accounting and other costs. In addition, the
Sarbanes-Oxley Act, as well as new rules subsequently implemented by the Securities and Exchange
Commission, or SEC, and the Nasdaq Global Market, have required changes in corporate governance
practices of public companies. We expect these rules and regulations to increase our legal and
financial compliance costs and to make some activities more time-consuming and costly. These
requirements may place a strain on our systems and resources. The Exchange Act requires that we
file annual, quarterly and current reports with respect to our business and financial condition.
The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and
internal controls over financial reporting. We currently do not have an internal audit group. We
will require significant resources and
32
management oversight to maintain and improve the effectiveness of our disclosure controls and
procedures and internal controls over financial reporting. This may divert managements attention
from other business concerns, which could have a material adverse effect on our business, financial
condition, results of operations and cash flows. In addition, we will need to hire or outsource
additional accounting and financial staff with appropriate public company experience and technical
accounting knowledge.
We also expect these new rules and regulations to make it more difficult and expensive for us to
obtain director and officer liability insurance, and we may be required to accept reduced policy
limits and coverage or incur substantially higher costs to obtain coverage. As a result, it may be
more difficult for us to attract and retain qualified persons to serve on our board of directors or
as executive officers. We are currently evaluating and monitoring developments with respect to
these new rules, and we cannot predict or estimate the amount of costs we may incur with respect to
them or the timing of such costs.
Item 1B: Unresolved Staff Comments
None
Item 2: Properties
Our headquarters are located in St. Charles, Missouri. ARL, an affiliate of Carl C. Icahn, leases
this facility and permits us to occupy it for a fee pursuant to a service agreement. Either party
may terminate this agreement on six months notice.
The following table presents information about our railcar manufacturing and components
manufacturing facilities as of December 31, 2005:
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Leased or |
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Lease |
Location |
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Use |
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Size |
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Owned |
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Expiration Date |
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Paragould, Arkansas
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Covered hopper
railcar
manufacturing
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546,680 square feet
on 82 acres
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Owned
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Marmaduke, Arkansas
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Tank railcar
manufacturing
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441,075 square feet
on 55 acres
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Owned
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St. Charles,
Missouri
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Aluminum foundry
and machining
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128,626 square feet
on 3 acres
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Leased
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February 28, 2011 |
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Jackson, Missouri
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Railcar components
manufacturing
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110,240 square feet
on 8 acres
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Owned
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Kennett, Missouri
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Covered hopper and
tank railcar
subassembly and
small components
manufacturing
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78,375 square feet
on 9 acres
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Owned
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Longview, Texas
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Steel foundry and
machining
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155,030 square feet
on 31 acres
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Owned
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We also provide railcar repair, cleaning, maintenance and other services at facilities we own in
Longview and Goodrich, Texas; North Kansas City, Missouri; and Tennille, Georgia; and at facilities
we lease in Gonzales, Louisiana; Green River, Wyoming; Deer Park, Texas; Bude, Mississippi; and
Sarnia, Ontario. We also own a repair facility in Milton, Pennsylvania that has been idle since
2003. Our facility located in Tennille, Georgia is secured by a $0.6 million mortgage due February
10, 2008. As of December 31, 2005, approximately $0.2 million remained outstanding on this
mortgage.
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Item 3: Legal Proceedings
We have been named the defendant in a law suit in which the plaintiff, OCI Chemical Company, claims
we were responsible for the damage caused by allegedly defective railcars that were manufactured by
us. The lawsuit was filed on September 19, 2005 in the United States District Court, Eastern
District of Missouri. The plaintiff seeks unspecified damages in excess of $75,000. The plaintiffs
allege that the failures in certain components caused the contents transported by these railcars to
spill out of the railcars causing property damage, clean-up costs, monitoring costs, testing costs
and other costs and damages. We believe that we are not responsible for the damage and have
meritorious defenses against liability.
We are from time to time party to various other legal proceedings arising out of our business. Such
proceedings, even if not meritorious, could result in the expenditure of significant financial and
managerial resources. We believe that there are no proceedings pending against us which, if
determined adversely, would have a material adverse effect on our business, financial condition and
results of operations.
Item 4: Submission of Matters to a Vote of Security Holders
On January 13, 2006, prior to the merger, our former parent company American Railcar Industries,
Inc., a Missouri corporation acted by unanimous written consent to approve our Bylaws and our
Equity Incentive Plan.
On January 18, 2006, the holders of all of the common stock of our former parent company acted by
unanimous written consent to approve the merger of our former parent company with and into our
company and to approve our Bylaws, Certificate of Incorporation and the Equity Incentive Plan. In
addition, the stockholders resolved that the members of our Board of Directors prior to the merger
continue as directors following the merger. At the time of the merger our directors were Carl C.
Icahn, James J. Unger, Vincent J. Intrieri, Jon F. Weber, Keith Meister, James C. Pontious and
James M. Laisure.
PART II
Item 5: Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Market Information
Our common stock has been traded on the Nasdaq Global Market under the symbol ARII since January
20, 2006. There were approximately 55 holders of record of common stock as of March 20, 2006
including multiple beneficial holders at depositories, banks and brokers listed as a single holder
of record in the street name of each respective depository, bank or broker.
Since our common stock has only been publicly traded since January 20, 2006, no high and low sale
prices for each quarter within the last two fiscal years are available.
Dividend Policy and Restrictions
Our Board of Directors declared cash dividends of $.03 per share in the first quarter of 2006.
Prior to this declaration, we did not pay any dividends on our common stock. We intend to continue
to pay cash dividends on our common stock in the future. However, any future 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, provisions of our
borrowing arrangement and other factors our board of directors considers relevant.
Our amended and restated revolving credit facility provides that the payment of dividends triggers
a demand right in favor of the administrative agent and our lenders to accelerate all of our
obligations under the amended and restated revolving credit facility, unless the payment would not
cause the adjusted fixed charge coverage ratio (fixed charges, pursuant to the amended and restated
revolving credit facility, include any dividends paid or payable on our common stock) to be less
than 1.2 to 1.0 or the adjusted ratio of indebtedness to earnings before interest, taxes,
34
depreciation and amortization, after giving effect to any debt incurred to pay any such dividend,
to be greater than 4.0 to 1.0, each on a quarterly and/or annual basis, as defined in the amended
and restated revolving credit facility. In addition, Delaware law imposes restrictions on our
ability to pay dividends. For example, our board of directors may declare dividends only to the
extent of our surplus (which is defined as total assets at fair market value minus total
liabilities, minus statutory capital), or if there is no surplus, out of our net profits for the
then-current and/or immediately preceding fiscal years. Accordingly, we may not be able to pay
dividends in any given amount in the future, or at all.
Securities Authorized for Issuance Under Equity Compensation Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
Number of |
|
|
|
|
|
|
remaining |
|
|
|
securities to |
|
|
|
|
|
|
available for |
|
|
|
be issued |
|
|
|
|
|
|
future issuance |
|
|
|
upon |
|
|
Weighted-average |
|
|
under equity |
|
|
|
exercise of |
|
|
exercise price of |
|
|
compensation |
|
|
|
outstanding |
|
|
outstanding |
|
|
plans (excluding |
|
|
|
options, warrants |
|
|
options, warrants |
|
|
securities reflected |
|
Plan Category |
|
and rights |
|
|
and rights |
|
|
in column (a)) |
|
|
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
Equity compensation
plans approved by
security holders |
|
|
|
|
|
|
|
|
|
|
1,000,000 |
|
Equity compensation
plans not approved
by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
1,000,000 |
|
|
2005 Equity Incentive Plan. We adopted our 2005 Equity Incentive Plan, which has been approved by
our stockholders, to provide long-term incentives and rewards to our employees, officers,
directors, consultants and advisors. Prior to this, we had not adopted any equity compensation
plans. The 2005 plan permits us to issue stock and grant stock options, restricted stock, stock
units and other equity interests to purchase or acquire up to 1.0 million shares of our common
stock. Awards covering no more than 300,000 shares may be granted to any person during any fiscal
year. If any award expires, or is terminated, surrendered or forfeited, then shares of common stock
covered by the award will again be available for grant under the 2005 plan. The 2005 plan is
administered by our board of directors or a committee of the board. The board or committee has
broad discretion to determine the terms of an award granted under the 2005 plan, including, to the
extent applicable, the vesting schedule, purchase or grant price, option exercise price, or the
term of the option or other award; provided that the exercise price of any options granted under
the 2005 plan may not be less than the fair market value of the common stock on the date of grant.
The board or committee also has discretion to implement an option exchange program, whereby
outstanding stock options are exchanged for stock options with a lower exercise price, substitute
another award of the same or different type for an outstanding award, and accelerate the vesting
of, including, as applicable, lapse of restrictions with respect to, stock options and other awards
at any time. The terms and conditions of stock options or other awards granted under the 2005 plan
will be set forth in a separate agreement between us and the recipient of the award. On January 19,
2006, we granted options to purchase a total of 484,876 shares of our common stock under our 2005
plan.
Individual Compensation Arrangement with James J. Unger. In November 2005 we entered into a letter
agreement with Mr. Unger, our Chief Executive Officer, pursuant to which he was issued 285,714
shares of our common stock upon the closing of our initial public offering. Of these shares, 40%
will be transferable without contractual restrictions by Mr. Unger after 180 days from the closing
of our initial public offering, 30% will be transferable without contractual restrictions by Mr.
Unger one year after the closing of our initial public offering and the remaining 30% will be
freely transferable 540 days after the closing of our initial public offering. If Mr. Unger is
terminated for cause (as defined in the letter agreement), or resigns without good reason (as
defined in the letter agreement) within one year from the closing date of our initial public
offering, Mr. Unger shall return to us 60% of the shares of our common stock we granted to him. We
have agreed to use commercially reasonable efforts to file a
35
registration statement on Form S-8 with the SEC to cover the registration of 40% of these shares.
We have agreed to include the balance of these shares in any registration statement we file on
behalf of Mr. Icahn with regard to the registration for sale of our shares held by Mr. Icahn,
provided the contractual restrictions and applicable lock-up period of these shares have lapsed.
Recent Sales of Unregistered Securities
The following information is furnished with regard to all securities issued by us since December
31, 2002 that were not registered under the Securities Act.
All of the securities issued in the following transactions were sold in reliance upon the
exemptions from registration set forth in Sections 3(a)(9) and 4(2) of the Securities Act relating
to sales by an issuer not involving any public offering. There were no underwriters employed in
connection with any of these transactions.
(1) |
|
In June 2003 Vegas Financial Corp., a company beneficially owned and controlled by Carl C.
Icahn, our principal beneficial stockholder and the chairman of our board of directors,
invested $10.0 million for 10,000 shares of our payment-in-kind preferred stock, which we
refer to as our PIK preferred stock. |
|
(2) |
|
During the period 31, 2002 to December 31, 2003, we issued to Vegas Financial Corp., the sole
owner of our PIK preferred stock, 19,438.44 shares of PIK preferred stock as dividend on the
PIK Preferred Stock. |
|
(3) |
|
In July 2004, Vegas Financial Corp. converted all of its PIK preferred stock, consisting of
95,517.04 shares of PIK preferred stock and representing all of the shares of PIK preferred
stock then outstanding and dividend accrued thereon, into 96,171 shares of our new preferred
stock. The PIK preferred stock was valued at the liquidation preference of 95.6 million plus
accrued and unpaid dividends of 0.7 million on such PIK preferred stock converted. At that
time Vegas Financial Corp. also invested $67.5 million for an additional 67,500 shares of our
new preferred stock. |
|
(4) |
|
In July 2004, Hopper Investments LLC, a company beneficially owned and controlled by Mr.
Icahn, invested $42.5 million for 1,818,976 shares of our common stock. |
|
(5) |
|
In July 2004, we issued ACF Industries, Incorporated 2,000 shares of our new preferred stock
in exchange for ACF Industries, Incorporated transferring certain assets to us. The assets
were valued at $2 million equaling the liquidation preference for the new preferred stock
issued. The assets so transferred to us were subsequently transferred to American Railcar
Leasing, LLC. |
|
(6) |
|
In December 2004, we issued 32,500 shares of our new preferred stock to Shippers Second LLC,
the assets were valued at $32.5 million equaling the liquidation preference for the new
preferred stock issued. The assets so transferred to us were subsequently transferred to
American Railcar Leasing LLC. |
|
(7) |
|
In July 2004, American Railcar Leasing LLC issued 40,000 B-units of American Railcar Leasing
LLC to ACF Industries, Incorporated and its subsidiaries in consideration of the transfer of
assets to American Railcar Leasing LLC. The B-units of American Railcar Leasing LLC were
convertible into shares of our new preferred stock. On June 30, 2005, the terms of the B-Units
were modified, among other things, to eliminate this conversion feature. We did not issue any
shares of our capital stock in connection with these transactions. |
In January 2006, we issued 285,714 shares of our common stock to our Chief Executive Officer, James
J. Unger as consideration for his past and continued services to us. The shares were issued
pursuant to a November 2005 letter agreement with Mr. Unger and in reliance on the exemption to
registration set forth in Rule 701 of the Securities Act.
Use of Proceeds from offering
On January 19, 2006, our registration statement on Form S-1 (Registration No. 333-130284) was
declared effective and, on that same date, we filed a registration statement on Form S-1 pursuant
to Rule 462(b) under the Securities Act (Registration No. 333-131162) (collectively, the
Registration Statement). The managing underwriters in the offering were UBS Investment Bank, Bear
Sterns & Co., BB&T Capital Markets, CIBC World Markets and Morgan
36
Keegan & Company, Inc. Pursuant to the Registration Statement, as amended, we registered 9,775,000
shares of common stock (8,500,000 shares offered by us and an additional 1,275,000 shares offered
by us pursuant to the exercise of the underwriters over-allotment option), par value $0.01 per
share, with an aggregate offering price of $205.3 million.
On January 24, 2006, we completed the sale of 9,775,000 shares of common stock to the public at a
price of $21.00 per share and the offering was completed. The stock offering resulted in gross
proceeds to us of $205.3 million. Expenses related to the offering were $13.3 million for
underwriting discounts and commissions. We received net proceeds of $192.0 million in the offering.
The net proceeds from the offering were applied as follows (in millions):
|
|
|
|
|
Redemption of all outstanding shares of preferred stock |
|
$ |
93.9 |
|
Repayment of notes due to affiliates |
|
|
20.5 |
|
Repayment of all industrial revenue bonds |
|
|
8.6 |
|
Repayment of amounts outstanding under revolving credit facility |
|
|
32.3 |
|
Professional fees |
|
|
1.0 |
|
Cash and temporary investment for working capital and general corporate purposes |
|
|
35.7 |
|
|
|
|
|
Total uses |
|
$ |
192.0 |
|
|
|
|
|
These payments included payments to our affiliates in the amount of $20.5 million for the repayment
of the notes and $93.9 million for the redemption of our outstanding shares of preferred stock.
In addition, our Chief Executive Officer and his wife held $0.4 million of the industrial revenue
bonds which we repaid and they received approximately $0.4 million of the $8.6 million used to
repay the industrial revenue bonds.
The remaining proceeds of $35.7 million were invested temporarily in a government repurchase
account and retained for working capital and general corporate purposes.
37
Item 6: Selected Financial Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
|
|
|
|
|
(in thousands, except per share amounts) |
|
Consolidated statement of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing operations (1) |
|
$ |
181,438 |
|
|
$ |
138,441 |
|
|
$ |
188,119 |
|
|
$ |
316,432 |
|
|
$ |
564,513 |
|
Railcar services (2) |
|
|
32,703 |
|
|
|
30,387 |
|
|
|
29,875 |
|
|
|
38,624 |
|
|
|
43,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
|
214,141 |
|
|
|
168,828 |
|
|
|
217,994 |
|
|
|
355,056 |
|
|
|
608,160 |
|
Cost of goods sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of manufacturing operations (3) |
|
|
169,952 |
|
|
|
134,363 |
|
|
|
174,629 |
|
|
|
306,283 |
|
|
|
518,063 |
|
Cost of railcar services (4) |
|
|
33,255 |
|
|
|
29,533 |
|
|
|
29,762 |
|
|
|
34,473 |
|
|
|
38,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
203,207 |
|
|
|
163,896 |
|
|
|
204,391 |
|
|
|
340,756 |
|
|
|
556,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
10,934 |
|
|
|
4,932 |
|
|
|
13,603 |
|
|
|
14,300 |
|
|
|
52,056 |
|
Selling, administrative and other (5) |
|
|
9,219 |
|
|
|
9,505 |
|
|
|
10,340 |
|
|
|
10,334 |
|
|
|
25,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
|
1,715 |
|
|
|
(4,573 |
) |
|
|
3,263 |
|
|
|
3,966 |
|
|
|
26,702 |
|
Interest income (6) |
|
|
4,770 |
|
|
|
3,619 |
|
|
|
3,161 |
|
|
|
4,422 |
|
|
|
1,658 |
|
Interest expense (7) |
|
|
(9,525 |
) |
|
|
(4,853 |
) |
|
|
(3,616 |
) |
|
|
(3,667 |
) |
|
|
(4,846 |
) |
Income (loss) from joint venture |
|
|
|
|
|
|
|
|
|
|
(604 |
) |
|
|
(609 |
) |
|
|
610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income tax
(benefit) expense |
|
|
(3,040 |
) |
|
|
(5,807 |
) |
|
|
2,204 |
|
|
|
4,112 |
|
|
|
24,124 |
|
Income tax (benefit) expense |
|
|
(1,074 |
) |
|
|
(1,894 |
) |
|
|
1,139 |
|
|
|
2,191 |
|
|
|
9,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(1,966 |
) |
|
$ |
(3,913 |
) |
|
$ |
1,065 |
|
|
$ |
1,921 |
|
|
$ |
14,768 |
|
Less preferred dividends |
|
|
(3,070 |
) |
|
|
(7,139 |
) |
|
|
(9,690 |
) |
|
|
(13,241 |
) |
|
|
(13,251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) available to common
shareholders |
|
$ |
(5,036 |
) |
|
$ |
(11,052 |
) |
|
$ |
(8,625 |
) |
|
$ |
(11,320 |
) |
|
$ |
1,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
and diluted (8) |
|
|
9,328 |
|
|
|
9,328 |
|
|
|
9,328 |
|
|
|
10,140 |
|
|
|
11,147 |
|
Net earnings (loss) per common share
basic and diluted (8) |
|
$ |
(0.54 |
) |
|
$ |
(1.18 |
) |
|
$ |
(0.92 |
) |
|
$ |
(1.12 |
) |
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated balance sheet data (at
period end): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,476 |
|
|
$ |
183 |
|
|
$ |
65 |
|
|
$ |
6,943 |
|
|
$ |
28,692 |
|
Net working capital |
|
|
35,172 |
|
|
|
16,065 |
|
|
|
15,084 |
|
|
|
46,565 |
|
|
|
25,768 |
|
Net property, plant and equipment |
|
|
81,090 |
|
|
|
75,746 |
|
|
|
71,230 |
|
|
|
76,951 |
|
|
|
92,985 |
|
Total assets |
|
|
191,229 |
|
|
|
187,590 |
|
|
|
196,508 |
|
|
|
356,840 |
|
|
|
268,580 |
|
Total liabilities |
|
|
113,596 |
|
|
|
98,463 |
|
|
|
190,704 |
|
|
|
221,817 |
|
|
|
161,820 |
|
Total shareholders equity |
|
$ |
77,633 |
|
|
$ |
89,127 |
|
|
$ |
5,804 |
|
|
$ |
135,023 |
|
|
$ |
106,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated cash flow data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities |
|
$ |
13,434 |
|
|
$ |
10,611 |
|
|
$ |
(1,639 |
) |
|
$ |
(17,082 |
) |
|
$ |
41,571 |
|
Net cash used in investing activities |
|
|
(2,189 |
) |
|
|
(535 |
) |
|
|
(2,251 |
) |
|
|
(11,037 |
) |
|
|
(22,580 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in ) financing
activities |
|
$ |
(12,111 |
) |
|
$ |
(11,369 |
) |
|
$ |
3,772 |
|
|
$ |
34,997 |
|
|
$ |
2,758 |
|
|
|
|
(1) |
|
Includes revenues from transactions with affiliates of $ $64.8 million, $63.6 million, $62.9
million, $64.4 million, and $47.2 million in 2001, 2002, 2003, 2004 and 2005, respectively. |
38
|
|
|
(2) |
|
Includes revenues from transactions with affiliates of $8.6 million, $12.8 million, $11.0
million, $19.4 million, and $20.6 million in 2001, 2002, 2003, 2004 and 2005, respectively. |
|
(3) |
|
Including costs from transactions with affiliates of $57.6 million, $55.7 million, $54.4
million, $59.1 million, and $44.1 million in 2001, 2002, 2003, 2004 and 2005, respectively. |
|
(4) |
|
Includes costs from transactions with affiliates of $7.2 million, $12.2 million, $10.1
million, $15.5 million, and $16.2 million in 2001, 2002, 2003, 2004 and 2005, respectively.
2005 also includes $2.0 million charge for pension settlement. |
|
(5) |
|
Includes $8.9 million charge for pension settlement. |
|
(6) |
|
Includes interest income from affiliates of $4.3 million, $3.4 million, $3.0 million, $3.9
million, and $1.0 million in 2001, 2002, 2003, 2004 and 2005, respectively. |
|
(7) |
|
Includes interest expense to affiliates of $0.2 million in 2001, $1.5 million in 2004 and
$2.1 million in 2005. |
|
(8) |
|
Share and per share data have been restated to give effect to the merger, as discussed in
Note 17 of the Companys Financial Statements. |
Item 7: Managements Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with Selected consolidated financial data
and our consolidated financial statements and related notes included in this annual report. This
discussion contains forward-looking statements that are based on managements current expectations,
estimates and projections about our business and operations. Our actual results may differ
materially from those currently anticipated and expressed in such forward-looking statements and as
a result of the factors we describe under Risk Factors and elsewhere in this annual report. See
Special note regarding forward-looking statements appearing at the beginning of this report and
Risk Factors set forth in Item 1A of this report.
OVERVIEW
We are a leading North American manufacturer of covered hopper and tank railcars. We also repair
and refurbish railcars, provide fleet management services and design and manufacture certain
railcar and industrial components used in the production of our railcars as well as railcars and
non-railcar industrial products produced by others. We provide our railcar customers with
integrated solutions through a comprehensive set of high quality products and related services.
We operate in two segments: manufacturing operations and railcar services. Manufacturing operations
consists of railcar manufacturing and railcar and industrial component manufacturing. Railcar
services consists of railcar repair and refurbishment services and fleet management services.
We have experienced significant growth in the last three years with revenues growing to $608.2
million in 2005, from $355.1 million in 2004 and $218.0 million in 2003. Our revenues in 2005
included $564.5 from manufacturing operations and $43.6 from the sale of railcar services. Our
revenues in 2004 included $316.5 million from manufacturing operations and $38.6 million from the
sale of railcar services.
Manufacturing operations
We manufacture all of our railcars in modern facilities located in Paragould and Marmaduke,
Arkansas, which were built in 1995 and 1999, respectively. We strategically located these
facilities in close proximity to our main shipper and railroad customers, as well as our main
suppliers of railcar components. As of March 22, 2006, none of our over 1,100 employees at our
Paragould and Marmaduke facilities are represented by a union. However, employees of three of our
repair facilities and one of our component manufacturing facilities, representing 16% of our total
workforce as of December 31, 2005, are represented by a union. We manufacture components in four
other manufacturing facilities.
Our Paragould facility was designed primarily to produce covered hopper railcars, but is also
capable of producing other railcar types. For example, in 2004 and the first nine months of 2005,
we produced centerbeam platform railcars at our Paragould facility. This facility originally
consisted of two production tracks with an initial production capacity of approximately six
railcars per day. Changes in plant design and manufacturing processes since 1995,
39
along with the addition of painting and lining capabilities in 1999, and a third production track in December
2004, increased our production capacity. Based on our current backlog, we plan to produce an
average of approximately 24 covered hopper railcars per working day, dependent upon product mix and
the availability of raw materials and components. The production lines at our Paragould facility
are designed to provide maximum flexibility for efficient and rapid changeover in product mix
between various types and sizes of railcars. We expanded our Paragould facility through the
construction of additional painting and lining capabilities, which was completed in November of
2005.
We delivered the following quantities and types of railcars in 2003, 2004 and 2005, manufactured at
our Paragould facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
2003 |
|
2004 |
|
2005 |
|
Covered hoppers |
|
|
1,343 |
|
|
|
1,507 |
|
|
|
4,240 |
|
Centerbeam platform |
|
|
5 |
|
|
|
1,240 |
|
|
|
785 |
|
|
|
|
Total Paragould railcar deliveries |
|
|
1,348 |
|
|
|
2,747 |
|
|
|
5,025 |
|
|
|
|
Our Marmaduke facility was built in 1999 to manufacture tank railcars. Based on our current
backlog, we plan to produce an average of approximately 7.5 tank railcars per working day at this
facility, dependent upon product mix of tank railcar types and the availability of raw materials
and components. The facility is designed to produce both pressure and non-pressure tank railcars.
We delivered the following quantities and types of tank railcars in 2003, 2004 and 2005,
manufactured at our Marmaduke facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
2003 |
|
2004 |
|
2005 |
|
Pressure tanks |
|
|
277 |
|
|
|
322 |
|
|
|
417 |
|
Non-pressure tanks |
|
|
932 |
|
|
|
1,315 |
|
|
|
1,433 |
|
|
|
|
Total Marmaduke railcar deliveries |
|
|
1,209 |
|
|
|
1,637 |
|
|
|
1,850 |
|
|
|
|
We provide components for our railcar manufacturing operations as well as for other railcar
manufacturers and other industries. Components manufactured by us include aluminum and steel
fabricated and machined parts and carbon steel, aluminum, high alloy and stainless steel castings,
primarily for the trucking and construction equipment and oil and gas exploration markets. Our revenues from the sales of components exclude the components
we manufacture for use in our railcar manufacturing business. In 2004, our revenues from sales of
components increased by 52% to $50.7 million from $33.4 million in 2003. In 2005, our revenues from
sales of components increased to $68.3 million from $50.7 million in 2004. We attribute the
increase in these revenues primarily to an overall increase in demand for commercial railcar
components as well as the demand for steel castings and machine components in the non-railcar
industrial sectors that we serve.
Railcar services
Our railcar services include railcar repair and refurbishment and fleet management and engineering
services. Our railcar repair and refurbishment services are provided through our network of six
full service maintenance and repair facilities and four mobile repair units. Our railcar service
facilities are located in strategic areas near major customers. We have established long-term
business relationships with a customer base that includes railcar leasing companies, shippers and
railroads. In 2005, our railcar services revenues increased by 13% to $43.6 million, from $38.6
million in 2004. In 2003, our railcar services revenues were $29.9 million. We believe the growth
in these revenues reflects the overall trend in the United States toward increased railcar
utilization, the increase in our customer base, the increase in our service offerings and the
increase in the number of railcars under fleet management by us. Our fleet management business
complements both our railcar repair and refurbishment and railcar manufacturing operations. As of
December 31, 2005, we managed approximately 57,000 railcars for various
40
customers, including approximately 22,000 railcars for ARL, an affiliate of
Carl C. Icahn, the chairman of our board of directors and our principal controlling stockholder.
ARL FORMATION AND EXCHANGE
We formed ARL, a company that buys and leases railcars, as our wholly owned subsidiary in June
2004. As part of the formation of ARL and its further capitalization, ACF and certain of its
subsidiaries transferred to us and ARL their railcars and related leases, as well as equity in
certain of ACFs subsidiaries that supported its leasing business, in exchange for shares of our
new preferred stock and preferred interests of ARL. We, in turn, contributed the assets we received
to ARL in return for common equity interests in ARL. ACF is a company beneficially owned and
controlled by Mr. Icahn. On June 30, 2005, we transferred all of our interest in ARL to the holders
of our new preferred stock, all of which are beneficially owned and controlled by Mr. Icahn, in
exchange for the redemption of 116,116 shares of our new preferred stock held by them plus
accumulated dividends. The description of our operations and the presentation of our financial
information and consolidated financial statements has been prepared on a standalone basis,
excluding ARLs operations for all periods, and all transactions giving effect to ARLs formation
and subsequent transfer have been eliminated from the financial statements, with the exception of
deferred tax assets retained by us. Any differences related to the amounts originally capitalized
and the amount paid for ARL or our subsequent transfer of ARL have been recorded through
adjustments to shareholders equity, including certain tax benefits that we received as a result of
using ARLs previously incurred tax losses. See Note 1 of our consolidated financial statements.
FACTORS AFFECTING OPERATING RESULTS
The following is a discussion of some of the key factors that have in the past and are likely in
the future to affect our operating results. These factors include, but are not limited to, the
cyclical nature of the North American railcar market, our reliance on a few customers for most of
our revenues, our historical reliance on revenues from our affiliates for a significant portion of
our revenue, our reliance on large orders, the variable purchasing patterns of our customers and
fluctuation in supplies and prices of raw materials and components used in railcar manufacturing.
See Risk Factors for a more comprehensive list of factors that could affect our operating
results.
Cyclicality of the railcar industry. Historically, the North American railcar market has been
highly cyclical and we expect it to continue to be highly cyclical. During the most recent industry
cycle, industry-wide railcar deliveries declined from a peak of 75,704 in 1998 to a low of 17,714
railcars in 2002. During this downturn, our revenues dropped from $238.8 million in 2000 to $168.8
million in 2002 and we incurred losses of $1.6 million, $2.0 million and $3.9 million in 2000, 2001
and 2002, respectively. We believe that downturns in the railcar manufacturing industry will occur
in the future and will result in decreased demand for our products and services. The cycles in our
industry result from many factors that are beyond our control, including economic conditions in the
United States. Although railcar production has increased since 2002, industry professionals believe
demand for railcars may have reached a peak and may not persist if favorable economic and other
conditions are not sustained. Even if a sustained economic recovery occurs in the United States,
demand for our railcars may not match or exceed expected levels. An economic downturn may result in
increased cancellations of railcar orders which could have a material adverse effect on our ability
to convert our railcar backlog into revenues. If industry backlog for railcars declines below
certain levels, CIT, one of our customers which accounts for 68% of our December 31, 2005 backlog,
will be permitted to cancel some or, in certain circumstances, all of its orders after 180 days
written notice, which could have a material adverse effect on our business, financial condition and
results of operations. In addition, an economic downturn in the United States could result in lower
sales volumes, lower prices for railcars and a loss of profits for us. Furthermore, a substantial
number of the end users of our railcars acquire railcars through leasing arrangements with our
leasing company customers. Economic conditions that result in higher interest rates would increase
the cost of new leasing arrangements, which could cause our leasing company customers to purchase
fewer railcars.
Customer concentration. Railcars are typically sold pursuant to large, periodic orders, and a
limited number of customers typically represent a significant percentage of our railcar sales in
any given year. In 2005, sales to our top three customers accounted for approximately 20%, 13% and
12%, respectively, of our total revenues. The loss of any significant portion of our sales to any
major customer, the loss of a single major customer or a material adverse
change in the financial condition of any one of our major customers could have a material adverse
effect on our
41
business and financial results. Most of our individual railcar customers do not make
railcar purchases every year because they do not need to replace or replenish their railcar fleets
on a yearly basis. Many of our customers place orders for railcars on an as-needed basis, sometimes
only once every few years. As a result, the order levels for railcars, the mix of railcar types
ordered and the railcars ordered by any particular customer have varied significantly from
quarterly period to quarterly period in the past and may continue to vary significantly in the
future. As railcar sales comprised 75% of our total revenue in 2004 and 82% of our total revenue in
2005, our results of operations in any particular quarterly period may be significantly affected by
the number of railcars and the product mix of railcars we deliver in any given quarterly period.
Additionally, because we record the sale of a railcar at the time we complete production, the
railcar is accepted by the customer following inspection, the risk for any damage or loss with
respect to the railcar passes to the customer and title to the railcar transfers to the customer,
and not when the order is taken, the timing of completion, delivery and acceptance of significant
customer orders will have a considerable effect on fluctuations in our quarterly results.
Revenues from affiliates. In 2003, 2004 and 2005, our revenues from affiliates accounted for 34%,
24%, and 11% of our total revenues, respectively. These affiliates consisted of entities
beneficially owned and controlled by Carl C. Icahn, the chairman of our board of directors and our
principal controlling stockholder. The decline in our percentage of revenues from affiliates is
primarily attributable to the growth in our revenues from third parties. We anticipate that our
percentage of revenues from affiliates will continue to decline if we are successful in growing our
business. Nevertheless, we believe that revenues from affiliates will continue to constitute an
important portion of our business. A significant reduction in sales to affiliates could have a
material adverse effect on our business and financial results.
Raw material costs. The price for steel, the primary raw material used in the manufacture of our
railcars, increased sharply in 2004 as a result of strong worldwide demand, limited availability of
production inputs for steel, including scrap metal, industry consolidation and import trade
barriers. These factors have caused a corresponding increase in the cost and decrease in the
availability of castings and other railcar components constructed with steel. Costs for other
railcar manufacturers have been similarly affected by the availability and pricing of steel and
castings and other components. The costs for raw steel, based on a Semi Finished Steel Mill Product
Index, have almost doubled during the period from October 2003 through December 2004. The
availability of scrap metal has been limited by exports of scrap metal to China and, as a result,
steel producers have charged steel and scrap metal surcharges in excess of agreed-upon prices. In
2005, steel pricing declined through the third quarter but increased, however, in the fourth
quarter and appear to have stabilized going into the first quarter of 2006. Domestic demand for
steel continues to be strong. Raw material supply, while still volatile, appears to be more stable
going into 2006.
In 2004, we were unable to pass on an estimated $7.9 million in increased raw material and
component costs to our customers under existing customer contracts. In 2005, we were unable to pass
through to our customers an estimated $1.7 million of such increased costs. In response to the
increasing cost of raw materials and railcar components, we began working with suppliers to reduce
surcharges that they charge us and started entering into variable pricing contracts with our
railcar customers that allow us to pass along changes in costs of certain raw materials and
components to our customers to protect us against future changes in these costs. By September 30,
2005, we completed all of the deliveries of railcars under contracts that did not allow us to pass
through these increased costs. All of our current deliveries and backlog for railcars include
variable pricing to protect us against further volatility in the price of certain raw materials and
railcar components.
Component supply constraints. Our business depends on the adequate supply of numerous specialty
components, such as railcar wheels, brakes, sideframes, axles, bearings, yokes, bolsters and other
heavy castings, and specialized raw materials, such as normalized steel plates used in the
production of railcars. Over the last few years many suppliers have been acquired or have ceased
operations, which has caused the number of alternative suppliers of specialty components and raw
materials to decline. The combination of industry consolidation and high demand has caused recent
railcar industry-wide shortages of many critical components as many reliable suppliers are
frequently at or near production capacity. In certain cases, such as for railcar wheels, only two
significant suppliers continue to produce the type of component we use in our railcars. With the
recent increased demand for railcars, our remaining suppliers are facing significant challenges in
providing components and materials on a timely basis to us and other railcar manufacturers. If our
suppliers of railcar components and raw materials were to stop or reduce the production of railcar
components and raw materials that we use, go out of business, refuse to continue their business
relationships with us, reduce the amounts they are willing to sell to us or become subject to work
stoppages, our
42
business would be disrupted. Our inability to obtain components and raw materials in
required quantities or of acceptable quality could result in significant delays or reductions in
railcar shipments. This would materially and adversely affect our operating results. Furthermore,
our ability to increase our railcar production to expand our business depends on our ability to
obtain an adequate supply of these railcar components and raw materials.
Our participation in the Ohio Castings joint venture has facilitated our ability to meet some of
our requirements for heavy castings such as bolsters and sideframes. In 2005, Ohio Castings
expanded its castings production and added couplers and yokes to its products. We believe that this
expanded production capability should help to reduce our risk of encountering supply shortages. In
2004 and 2005, we purchased $19.9 million and $30.9 million, respectively, of railcar components
produced by Ohio Castings.
Completion of our centerbeam platform railcar contract. In 2004 we entered into an agreement with
The Greenbrier Companies to manufacture centerbeam platform railcars at our Paragould manufacturing
facility. This was the first time we manufactured centerbeam platform railcars and, as a result of
start-up and increased production costs, we did not realize a profit on this contract. We completed
our deliveries of these centerbeam platform railcars in July 2005 and we do not anticipate
significant sales to Greenbrier in the future. Our revenues from our sales of centerbeam platform
railcars were $50.8 million in 2005 and $53.0 million in 2004. Upon completion of production of the
centerbeam platform railcars for Greenbrier, we converted the manufacturing line at our Paragould
facility that we used to manufacture those railcars to manufacture covered hopper railcars. This
manufacturing line, along with our two other covered hopper railcar manufacturing lines at our
Paragould manufacturing facility, have been operating at capacity since the conversion and, as a
result of our significant backlog for covered hopper cars, we expect those lines to continue,
subject to cancellations or adjustments in existing railcar orders in our backlog, to operate at or
close to capacity through at least 2007. We have generally been able to achieve higher profit
margins on our sale of covered hopper railcars than we were able to achieve on our sales of the
centerbeam platform railcars to Greenbrier. Therefore, we do not believe that the completion of our
centerbeam platform railcar contracts and the corresponding reduction of sales to Greenbrier will
have a material adverse affect on our business or results of operations.
OUTLOOK
We believe that demand for railcars has reached a peak and should continue at or near current
levels due to generally positive economic conditions, the current United States economic recovery,
strong industry-wide backlog for railcars, increased rail traffic, the projected replacement of
aging railcar fleets and an increasing demand for products that are hauled and stored in railcars.
We believe that we are strategically positioned to capitalize on the current strong demand for
railcars, and that we have growth opportunities across our broad array of product and service
offerings.
BACKLOG
Our backlog consists of orders for railcars. 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. Customer orders, however, may be subject to cancellation, customer requests
for delays in railcar deliveries, inspection rights and other customary industry terms and
conditions. Although we generally have one to three year contracts with most of our fleet
management customers, neither orders for our railcar repair and refurbishment services business nor
our fleet management business are included in our backlog because we generally deliver our services
in the same period in which orders are received. Similarly, orders for our component manufacturing
business are not included in our backlog because we generally deliver components to our customers
in the same period in which orders for the components are received. Due to the large size of
railcar orders and variations in the number and mix of railcars ordered in any given period, the
size of our reported backlog at the end of any such period may fluctuate significantly. See Risk
Factors Risks related to our business The variable purchase patterns of our customers and the
timing of completion, delivery and acceptance of customer orders may cause our revenues and income
from operations to vary substantially each quarter, which could result in significant fluctuations
in our quarterly results. Our backlog has increased from 412 railcars at the end of 2002 to 14,510 railcars at December 31,
2005. We believe this increase is due to the current strength of the economy, the replacement of
aging railcar fleets, increasing demand for consumer and industrial products, and an increasing
demand for covered hopper and tank railcars.
43
On July 29, 2005, we entered into a multi-year purchase and sale agreement with CIT to manufacture
and sell to CIT covered hopper and tank railcars. Under this agreement, CIT has agreed to buy a
minimum of 3,000 railcars from us in each of 2006, 2007 and 2008 and we have agreed to offer to
sell to CIT up to 1,000 additional railcars in each of those years. CIT may choose to satisfy its
purchase obligations from among a variety of covered hopper and tank railcars described in the
agreement. CIT may reduce its future purchase obligations or cancel pending purchase orders, upon
prior written notice to us, under certain conditions, including a reduction of the then current
American Railway Car Institutes most recently reported quarterly backlog below specified levels.
As of December 31, 2005, the American Railway Car Institute reported a quarterly backlog in excess
of 69,408 railcars. If during the term of the agreement, the levels of quarterly backlog reported
by American Railway Car Institute falls below 45,000 railcars but remains above 35,000 railcars,
CIT has the right, on 240 days prior written notice, to cancel pending purchase orders or reduce
subsequent purchase obligations for the then current agreement year, in either case such that
actual purchases by CIT would not fall below 50% of that agreement years original minimum purchase
requirements. If the American Railway Car Institutes reported quarterly backlog falls below 35,000
railcars, CIT has the right to cancel or suspend all, or any, pending purchase orders or remaining
purchase obligations under the Agreement upon 180 days prior written notice. If CIT elects to
cancel any pending purchase order under these provisions within 120 days of the delivery date of
the order, we may require that CIT purchase from us, at our cost, all material which we had
purchased and identified to such cancelled purchase order. CIT also has the right to reduce its
railcar orders from us if market prices for the railcars subject to our agreement are reduced
significantly below our quoted prices and we fail to meet such price reductions. Under the
agreement, purchase prices for railcars are subject to steel surcharges and certain other material
cost increases applicable at the time of production.
The following table shows our reported railcar backlog, in number of railcars and estimated future
value attributable to such backlog, for the periods shown. This reported backlog includes 9,000
railcars relating to CITs minimum purchase obligations under its agreement with us based upon an
assumed product mix consistent with CITs orders for railcars. Changes in product mix from that
assumed would affect the dollar amount of our backlog from CIT.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
Railcar backlog at start of period |
|
|
412 |
|
|
|
2,287 |
|
|
|
7,547 |
|
New railcars delivered |
|
|
(2,557 |
) |
|
|
(4,384 |
) |
|
|
(6,875 |
) |
New railcar orders |
|
|
4,432 |
|
|
|
9,644 |
|
|
|
13,838 |
|
|
|
|
|
|
|
|
|
|
|
Railcar backlog at end of period |
|
|
2,287 |
|
|
|
7,547 |
|
|
|
14,510 |
|
Estimated railcar backlog value
at end of period (in thousands) |
|
$ |
129,850 |
|
|
$ |
494,107 |
|
|
$ |
1,074,408 |
|
The 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 does not reflect potential price increases and decreases under customer contracts
that provide for variable pricing based on changes in the cost of certain raw materials and railcar
components, or the cancellation or delay of railcar orders that may occur.
We anticipate that approximately 53% of our reported backlog as of December 31, 2005 will be
converted to revenues by the end of 2006. 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 as orders may be canceled
or delivery dates extended. We cannot assure that our reported backlog will convert to revenues in
any particular period, if at all, that the actual revenues from these orders will equal our
reported backlog estimates or that our future revenue collection efforts will be successful. See
Risk FactorsRisks related to our businessThe level of our reported railcar backlog may not
necessarily indicate what our future revenues will be and our actual revenues may fall short of the
estimated revenue value attributed to our railcar backlog.
We rely on supplies from third-party providers and our Ohio Castings joint venture for steel, heavy
castings, wheels and other components for our railcars. In the event that our suppliers were to
stop or reduce their supply of steel, heavy castings, wheels or the other railcar components that
we depend upon, our business would be disrupted and
44
the actual sales from our customer contracts
may fall significantly short of our reported backlog. See Risk FactorsRisks related to our
businessFluctuations in the supply of components and raw materials we use in manufacturing
railcars could cause production delays or reductions in the number of railcars we manufacture,
which could adversely affect our business and operating results.
CHARGES AND COSTS ASSOCIATED WITH OUR PUBLIC OFFERING
We have and expect to incur significant additional selling, administrative and other fees and
expenses in connection with the completion of our public offering and becoming a public company.
In addition we have and expect to incur a number of charges in connection with transactions
contemplated in connection with the offering.
ACF employee benefit plans
In anticipation of our initial public offering, we entered into a retirement benefit separation
agreement, effective December 1, 2005, with ACF for allocating the assets and liabilities of the
pension benefit plans retained by ACF in the 1994 ACF asset transfer in which some of our employees
were participants, and which has relieved us of our further employee benefit reimbursement
obligations to ACF under the 1994 ACF asset transfer agreement. ACF is a company beneficially owned
and controlled by Mr. Icahn. The principal employee benefit plans affected by this arrangement are
two ACF sponsored pension plans, known as the ACF Employee Retirement Plan and the ACF Shippers Car
Line Pension Plan, and certain ACF sponsored retiree medical and retiree life insurance plans.
Under the arrangement, in exchange for our agreement to pay ACF approximately $9.2 million and to
become the sponsoring employer under the ACF Shippers Car Line Pension Plan, including the
assumption of all obligations for our and ACFs employees under that plan, we have ceased to be a
participating employer under the ACF Employee Retirement Plan and have been relieved of all further
reimbursement obligations, including for our employees, under that plan. We estimate that as of
December 1, 2005, the ACF Shippers Car Line Pension Plan had $4.0 million of unfunded liabilities
on an accounting basis that were assumed by us in connection with this arrangement. The payment of
approximately $9.2 million which was made by us to ACF represents our and ACFs estimate of the
payment required to be made by us to achieve an appropriate allocation of the assets and
liabilities of the benefit plans accrued after the 1994 ACF asset transfer, with respect to each of
our and ACFs employees in connection with the two plans. This allocation was determined in
accordance with actuarial calculations consistent with those that would be required to be used by
us and ACF in allocating plan assets and liabilities at such time as we cease to be a member of
ACFs controlled group.
As part of this arrangement, we also assumed sponsorship of a retiree medical and retiree life
insurance plan for active and identified former employees that were covered by the ACF sponsored
medical and retiree life insurance plans, and ACF was relieved of all further liability under those
plans with respect to those employees. We estimate that as of December 1, 2005, the post-retirement
liability related to this obligation was approximately $3.9 million. ACF paid us $2.9 million to
assume the pre-1994 portion of this liability.
The total amount of the obligations we assumed is estimated to be $14.2 million. We previously
accrued an estimated liability related to this settlement of $3.2 million. In December 2005, we
recorded an increase in the estimated liability of $10.9 million and a loss on the settlement of
the same amount, of which we recorded $2.0 million in cost of railcar services with the remaining
amount being shown on the statement of operations as pension settlement expense. See Note 10 of
our Consolidated Financial Statements.
Equity incentive awards
We also incurred a non-cash operating expense in connection with the issuance at the close of our
initial public offering to James Unger, our chief executive officer, of 285,714 shares of our
common stock. The expense we recognized in connection with this grant equals the value of the
shares granted to Mr. Unger as of the date of issuance, which was $6.0 million. We recognized $2.4
million of this expense in the first quarter of 2006 when 40% of these shares vested. We expect to
recognize the remaining $3.6 million of this expense in equal monthly amounts
over the twelve months from February 2006 through January 2007.. The balance of these shares will
vest in January 2007. See Note 18 of our Consolidated Financial Statements.
45
We also issued options to purchase 484,876 shares of common stock under our 2005 equity incentive
plan upon the pricing of our initial public offering. These options have been granted at an
exercise price equal to $21.00 per share. The options have a term of five years and vest in equal
annual installments over a three-year period. We estimate that our stock option expense for all
these options will total approximately $3.5 million over the next three years assuming a
Black-Scholes calculation based on the following assumptions: stock volatility of 35%; 5-year term;
interest rate of 4.35%; and dividend yield of 1%. See Note 18 of our Consolidated Financial
Statements.
The 2005 Equity Incentive Plan will be administered by the Board of Directors who is authorized to
grant incentive stock options, nonqualified stock options, stock appreciation rights (SARs),
performance shares, restricted stock, other forms of equity-based or equity-related awards, or
other cash awards.
Other additional expenses
We agreed to pay William Benac, our chief financial officer, a one-time special cash bonus of
$500,000. This bonus was contingent on us issuing common stock to the public in an offering
registered with the SEC prior to April 22, 2007 or Mr. Icahn selling his controlling interest in us
to a third party in a private transaction. This bonus will be paid on April 22, 2007. If at any
time on or before April 22, 2007, we terminate Mr. Benacs employment without cause, he resigns for
good reason, or a change in control occurs, he will be entitled to receive the special cash bonus
of $500,000 upon the occurrence of such event. Mr. Benacs right to the special cash bonus of
$500,000 and any severance immediately terminates if his employment is terminated for cause or he
resigns without good reason. As a result of this arrangement, we have accrued a $500,000 expense in
the first quarter of 2006. See Note 18 of our Consolidated Financial Statements.
Other additional expenses we incurred in connection with our public offering included the write-off
of the remaining $0.6 million of deferred financing costs that we incurred in connection with our
industrial revenue bond financings, which we repaid in full with a portion of the net proceeds of
our offering. We had previously been amortizing these expenses over the remaining terms of the
industrial revenue bonds.
RESULTS OF OPERATIONS
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.
46
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|
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing operations |
|
|
86.3 |
% |
|
|
89.1 |
% |
|
|
92.8 |
% |
Railcar services |
|
|
13.7 |
% |
|
|
10.9 |
% |
|
|
7.2 |
% |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of manufacturing |
|
|
80.1 |
% |
|
|
86.3 |
% |
|
|
85.2 |
% |
Cost of railcar services |
|
|
13.7 |
% |
|
|
9.7 |
% |
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
93.8 |
% |
|
|
96.0 |
% |
|
|
91.5 |
% |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
6.2 |
% |
|
|
4.0 |
% |
|
|
8.6 |
% |
Pension settlement expense |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
1.8 |
% |
Selling, administrative and other
expenses |
|
|
4.7 |
% |
|
|
2.9 |
% |
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
|
1.5 |
% |
|
|
1.1 |
% |
|
|
4.4 |
% |
Interest income |
|
|
1.5 |
% |
|
|
1.2 |
% |
|
|
0.3 |
% |
Interest expense |
|
|
(1.7 |
%) |
|
|
(1.0 |
%) |
|
|
(0.8 |
%) |
Income (loss) from joint venture |
|
|
(0.3 |
%) |
|
|
(0.2 |
%) |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
Earnings before income tax expense |
|
|
1.0 |
% |
|
|
1.1 |
% |
|
|
4.0 |
% |
Income tax expense |
|
|
0.5 |
% |
|
|
0.6 |
% |
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
0.5 |
% |
|
|
0.5 |
% |
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
Comparison of the year ended December 31, 2005 to the year ended December 31, 2004
Our net earnings for the year ended December 31, 2005 was $14.8 million as compared to $1.9 million
for the year ended December 31, 2004, representing an increase of $12.9 million. In 2005, we sold
6,875 railcars, 2,491 more than the 4,384 railcars we sold in 2004. Most of our revenues for 2005
included sales under contracts that allowed us to adjust our sale prices to pass on to our
customers the impact of increases in the costs of certain raw materials, particularly steel and
components. This improvement was partially offset by increased costs associated with outsourcing
our railcar painting and lining for our new production line at our Paragould facility and the
start-up costs for that new production line.
Revenues
Our revenues in 2005 increased 71% to $608.2 million from $355.1 million in 2004. This increase was
attributable to an increase in revenues from both manufacturing operations and railcar services.
Our manufacturing operations revenues increased 78% to $564.5 million in 2005 from $316.4 million
in 2004. This increase was primarily attributable to our delivery of an additional 2,491 railcars
in 2005 and increased prices resulting from our ability to pass through a portion of our increased
raw material and component costs and increases in the base unit price for some of our railcars. Our
revenues from sales of railcars increased $230.7 million to $496.2 million in 2005 from $265.8 in
2004. The additional deliveries of railcars in 2005 reflected increased sales of covered hopper and
tank railcars and a continuation of deliveries of centerbeam platform railcars ordered in 2004.
These increased sales reflected our increased capacity at our Paragould facility supported by the
continued strong backlog of orders for our railcars. Our manufacturing operations revenues
attributable to sales of railcar and industrial components increased $17.4 million in 2005 to $68.3
million from $50.9 million in 2004. This increase was primarily attributable to increased unit
sales reflecting increased railcar manufacturing and industrial activity. For 2005, our
manufacturing operations revenues included $47.2 million or 7.8% of our total revenues, from
transactions with affiliates, compared to $64.4 million or 18.1% of our total revenues, in 2004.
These revenues were primarily attributable to sales of railcars to companies controlled by Mr.
Icahn.
Our railcar services revenues increased 13% to $43.6 million in 2005 from $38.6 million in 2004.
This increase was primarily attributable to strong railcar demand and a $2.0 million increase in
leasing and other fleet management
47
service revenue from subsidiaries of our affiliate, ARL, a
company controlled by Mr. Icahn. The increase in railcar services revenues from ARL was fully
offset by $2.0 million of pass through costs paid to ACF, also a company controlled by Mr. Icahn,
that was included in our cost of railcar services. Our management agreements with the ARL
subsidiaries were terminated on June 30, 2005. However, we continue to provide repair, maintenance
and fleet management services for those fleets. In 2005, our railcar services revenues included
$20.6 million, or 3.4% of our total revenues, from transactions with affiliates, as compared to
$19.4 million, or 5.5%, in 2004.
Gross profit
Our gross profit increased to $52.1 million in 2005 from $14.3 million in 2004. Our gross profit
margin increased to 8.6% in 2005 from 4.0% in 2004, primarily reflecting improved margins in our
manufacturing operations.
Our gross profit margin for our manufacturing operations increased to 8.2% in 2005 from 3.2% in
2004. This increase was primarily attributable to the contribution from increased overhead
absorption on plant work volume and our ability to pass through a greater portion of increased raw
material and component costs through variable pricing contracts. In 2005, we were unable to pass
through $1.7 million of increased raw materials and component costs. In 2004, we were unable to
pass through approximately $7.9 million of increased raw material and component costs. All of our
railcar manufacturing contracts providing for deliveries after December 31, 2005 have variable cost
provisions that adjust the delivery price for changes in certain raw material and component costs.
However,increases in raw material and component costs would have an adverse effect on our gross profit
margin as a percentage of revenues, because we do not earn any additional net profit margin on our
price adjustments.
Our improvement in gross profit margin in 2005 was partially offset by a contract to manufacture
centerbeam platform railcars, a new product line for us in 2004. This was the first time we
manufactured centerbeam platform railcars and, as a result of start-up and increased production
costs, we did not realize a profit on this contract. Our centerbeam platform railcar contracts were
completed at our Paragould facility in July 2005 and we have since converted the manufacturing line
at that facility to manufacturing covered hopper railcars. In December 2005, we also incurred a
$2.0 million charge allocated to our cost of services associated with our pension settlement.
In the first six months of 2005, we also incurred additional costs in connection with the
completion of our new third production line at our Paragould facility, including costs associated
with outsourcing our railcar painting and lining for the increased railcar production from that new
production line and costs of the initial training and supplies for that production line. We
completed additional painting and lining capabilities at our Paragould facility in November of
2005. This new painting and lining capacity should allow us to improve margins as we reduce or
eliminate outsourcing of this function.
Our gross profit margin for railcar services increased to 14.7% in 2005 from 10.7% in 2004. This
increase was primarily attributable to our service facilities operating at a higher volume level,
which resulted in efficiencies in labor and overhead.
Pension Settlement Expense
As a result of the retirement benefit separation agreement we entered into with ACF, a company
controlled by Mr. Icahn, in December 2005, we recorded an aggregate expense of $10.9 million, of
which $8.9 million was allocated to pension settlement expense and $2.0 million was allocated to
cost of railcar services. As a result of this agreement we assumed sponsorship of a former ACF
pension plan and a retiree medical and retiree life insurance plan, and we have ceased to be a
participating employer under the ACF Employee Retirement Plan and have been relieved of all further
reimbursement obligations, including for our employees, under that plan. See Charges and costs
associated with our public offeringACF employee benefit plans.
Selling, administrative and other expenses
Our selling, administrative and other expenses increased in 2005 to $16.5 million from the $10.3
million expense in 2004. Selling, administrative and other expenses were 4.2% of sales in 2005 as
compared to 2.9% of sales in 2004. Our increase in the amount of our selling, administrative and
other expenses was primarily attributable to an increase in information technology costs, audit and
outside professional service fees.
48
Interest expense and interest income
Interest expense was $4.8 million and $3.7 million for years ended December 31, 2005 and 2004,
respectively. Our interest income decreased to $1.7 million in 2005 from $4.4 million in 2004. The
decrease in interest income was primarily attributable to a $57.2 million loan to an affiliate that
was repaid in 2004 that was partially offset by interest income we earned on an $165.0 million
secured loan to Mr. Icahn in October of 2004. In January of 2005, we transferred our entire
interest in this loan to ARL in exchange for additional common interests in ARL and in satisfaction
of our $130.0 million loan from ARL.
Income tax expense
Income tax expense for 2005 was $9.4 million, or 38.8% of our earnings before income taxes, as
compared to $2.2 million for 2004, or 53.3% of our earnings before income taxes. Our effective tax
rate is impacted by expenses included in pre-tax earnings for which we do not receive a deduction
for tax purposes. These expenses result from the liabilities and obligations retained by ACF as
part of its transfer of assets to us in 1994. Although ACF is responsible for any costs associated
with these liabilities, we are required to recognize these costs as expenses in order to reflect
the full cost of doing business. The entire amount of such permanently nondeductible expenses is
treated as contribution of capital resulting in an increase to our effective tax rate. These
expenses in pre-tax income were $1.4 million and $1.1 million for 2004 and 2005, respectively.
Comparison of the year ended December 31, 2004 to the year ended December 31, 2003
Our net earnings for the year ended December 31, 2004 was $1.9 million as compared to $1.1 million
for the year ended December 31, 2003, representing an increase of $0.8 million. In 2004, we sold
4,384 railcars, 1,827 more than the 2,557 railcars we sold in 2003. Despite the increase in railcar
deliveries in 2004, our net earnings for 2004 was negatively affected by dramatic increases in raw
materials, especially steel, and railcar component prices, particularly for components manufactured
from steel. Our railcar manufacturing contracts precluded us from passing most of these increased
costs on to our customers. Our gross margins in 2004 were also adversely affected by the losses we
incurred from our introduction and sale of centerbeam platform railcars manufactured at our
Paragould facility. Net earnings for 2003 reflected a $0.8 million write-down of the carrying value
of buildings and improvements, and equipment at our Milton, Pennsylvania railcar repair facility,
and a $0.4 million charge to adjust inventory to the lower of cost or market. We incurred no such
write-downs in 2004.
Revenues
Our revenues in 2004 increased 63% to $355.1 million from $218.0 million in 2003. This increase was
attributable to an increase in revenues from both manufacturing operations and railcar services.
Our manufacturing operations revenues increased 68% to $316.4 million in 2004 from $188.1 million
in 2003. This increase was primarily attributable to our delivery of an additional 1,827 railcars
in 2004 and, to a lesser extent, an increase in pricing based upon our ability to pass through some
of our increased costs as well as an increase in the base price of our railcars. Our revenues from
railcar sales increased $111.1 million to $265.8 million in 2004 from $154.7 million in 2003. The
additional deliveries of railcars in 2004 reflected increased sales of covered hopper and tank
railcars and sales of centerbeam platform railcars. We believe that the increases were primarily
attributable to the continuing recovery of the railcar industry which resulted in a strong backlog
of orders for delivery in 2004. In 2004, deliveries increased by 428 tank railcars and 164 covered
hopper railcars from 2003, and our centerbeam platform railcar deliveries totaled 1,240. We
delivered five centerbeam platform railcars in 2003. Our increase in manufacturing operations
revenues also reflected a $17.3 million increase in our sales of railcar and industrial components.
This increase was primarily attributable to an increase in demand for castings and components in
the oil refinery and transportation markets. In 2004, our manufacturing operations revenues
included $64.4 million, or 18.1% of our total revenues, from transactions with affiliates, compared
to $62.9 million, or 28.8% of our total revenues, in 2003. These revenues were primarily
attributable to sales of railcars to companies controlled by Mr. Icahn.
Our railcar services revenues increased 29% to $38.6 million in 2004 from $29.9 million in 2003.
This increase was attributable to increased sales, primarily related to repair and maintenance
services provided to affiliates, including
49
ACF and ARL and their subsidiaries. In 2004, our railcar
services revenues included $19.4 million, or 5.5% of our total revenues, from transactions with
affiliates, as compared to $11.0 million, or 5.1%, in 2003.
Gross profit
Our gross profit increased to $14.3 million in 2004 from $13.6 million in 2003. Our gross profit
margin decreased to 4.0% in 2004 from 6.2% in 2003. The decrease in our gross profit margin was
primarily attributable to a decrease in our gross profit margin for our manufacturing operations
that was partially offset by an increase in our gross profit margin for our railcar services.
Our gross profit margin for our manufacturing operations decreased to 3.2% in 2004 from 7.2% in
2003. This decrease was primarily attributable to an increase in the cost of raw materials and
components, consisting primarily of steel and steel-based components, that we were not able to pass
through to our customers due to fixed price contracts. Our cost of sales increased by approximately
$11.3 million in 2004 based upon these increased raw material and component costs. We estimate that
we were able to pass through $3.4 million of these costs to our customers. Our margins were also
adversely affected by the losses we incurred resulting from our introduction and sale of centerbeam
platform railcars in 2004. We completed deliveries under our centerbeam platform railcar contract
in July 2005 and have converted the manufacturing line we used to manufacture these railcars to
manufacture covered hopper railcars.
Our gross profit margin for railcar services increased to 10.7% in 2004 from 0.4% in 2003. This
increase was primarily attributable to increased sales that resulted in increased efficiencies of
labor and overhead. Our gross profit margin for railcar services in 2003 was adversely affected by
a $0.8 million write-down of the carrying value of buildings and improvements, and equipment at our
Milton, Pennsylvania railcar maintenance facility, which we idled during 2003, and a $0.4 million
charge to adjust inventory to the lower of cost or market.
Selling, administrative and other expenses
Our selling, administrative and other expenses did not increase in 2004 from the $10.3 million
expense in 2003. Selling, administrative and other expenses were 2.9% of sales in 2004 as compared
to 4.7% of sales in 2003. In 2004, we were able to use the infrastructure we put in place in 2003
to grow our revenues without increasing our selling, administrative and other expenses. Our
expenses in 2004 reflected an increase in engineering and purchasing personnel, but these expenses
were offset by reduced spending in insurance, retirement, legal fees and engineering consulting
services.
Interest expense and interest income
Interest expense was $3.7 million and $3.6 million for years ended December 31, 2004 and 2003,
respectively. Our interest income increased to $4.4 million in 2004 from $3.2 million in 2003. The
increase in interest income and interest expense was primarily attributable to our $165.0 million
secured loan to Mr. Icahn and our $130.0 million loan from ARL, respectively, both of which are no
longer outstanding.
Income tax expense
Income tax expense for 2004 was $2.2 million, or 53.3% of our earnings before income taxes, as
compared to $1.1 million for 2003, or 51.7% of our earnings before income taxes. Our income tax
rates were higher than the statutory rates in both periods because of the effect of expenses
included in pre-tax income for which we do not receive a deduction for tax purposes. These expenses
primarily relate to the liabilities and obligations retained by ACF as part of its transfer of
assets to us in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity have historically been the cash generated from our operations, the
sale of securities and funds generated from borrowings. Until our initial public offering,
completed in January 2006, most of our capital needs have been satisfied by entities affiliated
with Mr. Icahn and working capital loans from third party lenders.
50
We completed our initial public offering on January 24, 2006. In connection with that offering, we
issued 9,775,000 shares of our common stock at an offering price of $21.00 per share. Our net
proceeds from this offering were approximately $192.0 million. Net proceeds from the offering and
our available cash have been used, among other things, to redeem all shares of our outstanding
preferred stock, all of which were held by affiliates of Mr. Icahn, to repay notes due to our
affiliates, to redeem all of our industrial revenue bonds, and to repay the amounts outstanding
under our then existing revolving credit facility. The payoff amounts for the defeasance of our
industrial revenue bonds was made to the trustee into a trust account and, upon expiration of the
redemption notice period, on March 10, 2006, the trustee redeemed and repaid the bonds.
The net proceeds of the offering were used as follows (in millions):
|
|
|
|
|
Redemption of all outstanding shares of preferred stock |
|
$ |
93.9 |
|
Repayment of notes due to affiliates |
|
|
20.5 |
|
Repayment of all industrial revenue bonds |
|
|
8.6 |
|
Repayment of amounts outstanding under revolving credit facility |
|
|
32.3 |
|
Professional fees |
|
|
1.0 |
|
Cash and temporary investment for working capital and general corporate purposes |
|
|
35.7 |
|
|
|
|
|
Total uses |
|
$ |
192.0 |
|
|
|
|
|
Outstanding debt
Revolving credit facility. In January 2006, concurrent with the completion of the initial public
offering, we repaid all amounts outstanding under our then revolving credit facility and entered
into an amended and restated revolving credit facility with North Fork Business Capital
Corporation, as administrative agent for various lenders. The amended and restated revolving credit
facility replaced our former $50.0 million revolving credit facility with North Fork Business
Capital Corporation.
Terms of the amended and restated revolving credit facility are:
|
|
Maximum borrowing. Our amended and restated revolving credit facility provides for a maximum borrowing of the lesser of
(a) $75 million or (b) 85% of the eligible accounts receivables plus 65% of the eligible raw materials and finished goods
inventory. Eligible receivables include only accounts receivable to our customers in the United States or Canada arising
from sales in the ordinary course of business with non-affiliates. In addition, the amended and restated revolving credit
facility includes a $15.0 million capital expenditure sub-facility that is based on 80% of the costs related to capital
projects we may undertake; |
|
|
|
Term. The amended and restated revolving credit facility expires in January 2009; |
|
|
|
Interest rate and fees. Borrowings bear an interest rate of a base rate less 0.5%, where the base rate is the higher of
the highest prime, base or equivalent rate of interest published by the administrative agent, or the published annualized
rate for 90-day dealer commercial paper published in the Wall Street Journal. In addition, we are granted a 1 month, 2
month or 3 month LIBOR rate plus 1.5%. We are required to pay a closing fee of $0.2 million and an unused line fee of
0.375% per year on the unused portion of our amended and restated revolving credit facility; |
|
|
|
Collateral. Our receivables, inventory and a pledged deposit account, together with assets we purchase with the proceeds
from the capital expenditure sub-facility, serve as collateral under the amended and restated revolving credit facility and
the capital expenditure sub-facility. In addition, we are required to maintain one or more blocked accounts to which all
our collections would be remitted. Under the amended and restated revolving credit facility, the types of collections that
are subject to the blocked account consist of all collections including all cash, funds, checks, notes, instruments, any
other form of remittance tendered by account debtors in respect of payment of our receivables and any other payments
received by us with respect to any collateral. If the funds which we can draw under the amended and restated revolving
credit facility fall under $5 million, the proceeds |
51
|
|
in the blocked accounts are transferred to the administrative agent and
the administrative agent is required to apply all such proceeds to our loan account with the administrative agent,
conditional upon final collection, effecting a payment of any obligations that are outstanding at such time. The interest
that the administrative agent holds in such proceeds (until such time as they are applied to the obligations) is in the
nature of a collateral security interest. Upon termination of the administrative agents security interests in such
proceeds in accordance with applicable laws generally governing the termination of security interests and bank deposits,
the administrative agent returns to us any proceeds it holds after satisfaction of existing or contingent obligations owed
to the administrative agent and the other lenders. We may borrow, repay, and reborrow revolving credit loans in accordance
with the terms of the amended and restated revolving credit facility; |
|
|
|
Financial covenants. Our amended and restated revolving credit facility requires us to meet an adjusted fixed charge
coverage ratio of not less than 1.2 to 1.0 on a quarterly and/or annual basis and a leverage ratio calculated based on the
outstanding amount of indebtedness to EBITDA, as defined in the amended and restated revolving credit facility, of not
greater than 4.0 to 1.0 on a quarterly and/or annual basis; and |
|
|
|
Negative covenants. Our amended and restated revolving credit facility includes certain limitations on, among other
things, our ability to incur additional indebtedness, modify our current governing documents, sell or dispose of
collateral, grant credit and declare or pay dividends or make distributions on common stock or other equity securities. The
limitation on certain of the actions addressed by the amended and restated revolving credit facility is in the nature of a
right in favor of the administrative agent and our lenders to accelerate all of
our obligations under the amended and restated credit facility, a demand right, that is
triggered by certain actions, rather than in the nature of a negative covenant by which we
contractually agree not to take such actions. Included among the actions that trigger a demand
right are certain actions to modify governing documents, sell or dispose of collateral, grant
credit, incur indebtedness, and make dividends and distributions. An incurrence of indebtedness
triggers a demand right if it causes the adjusted ratio of our indebtedness to EBITDA, as
defined in the amended and restated revolving credit facility, to be greater than 4.0 to 1.0.
The direct or indirect payment of dividends or distributions, or purchase, redemption, or
retirement of capital stock, equity interests, options or rights to purchase capital stock or
equity interests, or payments to sinking or analogous funds, triggers a demand right if it
causes the adjusted fixed charge coverage ratio to be less than 1.2 to 1.0 or the ratio of
adjusted indebtedness to EBITDA to be greater than 4.0 to 1.0, each on a quarterly and/or annual
basis, as defined in the amended and restated revolving credit facility. |
Cash flows
The following table summarizes our net cash provided by or used in operating activities, investing
activities and financing activities and our capital expenditures for the periods presented (in
thousands):
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2005 |
|
|
Cash flows |
|
|
|
|
Net cash provided by (used in): |
|
|
|
|
Operating activities |
|
$ |
41,571 |
|
Investing activities |
|
|
(22,580 |
) |
Financing activities |
|
|
2,758 |
|
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 typically 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 was $41.6 million for the year ended December 31,
2005, which included net earnings of $14.8 million, increased by depreciation and amortization of
$6.8 million, a provision for deferred income taxes of $5.6 million, and $1.1 million of expenses
that we incurred relating to pre-capitalization
52
liabilities retained and payable by ACF. Payment of
these expenses by ACF is reflected as additional paid in capital. These increases were partially
offset by $0.6 million of earnings allocated to us as a result of our joint venture interest in
Ohio Castings. Cash provided by operating activities attributable to changes in our current assets
and liabilities included an increase in accounts payable of $33.0 million, an increase in accrued
pension expense of $8.3 and an increase in accrued expenses and taxes of $4.9 million. These
sources of cash were partially offset by an increase in inventories of $14.1 million, an increase
in accounts receivable of $13.4 million and an increase in prepaid expenses of $2.3 million. The
increase in inventories was primarily attributable to the build-up of inventory for our new third
production line at our Paragould facility. The increase in accounts payable and accrued expenses
was primarily due to this inventory buildup and a change in the processing and accounting of
accounts payable that had previously been processed through affiliates. The increase in accounts
receivable was primarily attributable to the increased volume of sales attributed to railcars
manufactured at our Paragould facility. The increase in prepaid expenses was primarily attributable
to payments for workers compensation and general insurance coverages that benefit future periods.
Investing activities. Net cash used in investing activities for the year ended December 31, 2005
was $22.6 million, including $12.1 million for construction of additional painting and lining
capabilities at our Paragould facility, $1.6 million for the thru sill equipment and tooling at
Paragould, $1.4 million for the fabrication shop extension at Paragould, and $2.8 million for the
purchase of manufacturing equipment and leasehold improvements that we had
previously been leasing from ACF at our St. Charles, Missouri manufacturing facility. The remaining
cash primarily used for investment in property, plant and equipment at multiple locations to
increase operating efficiencies.
Financing activities. Cash provided by financing activities was $2.8 million for the year ended
December 31, 2005, and included $31.3 million borrowed under our existing revolving credit facility
that we obtained in March 2005, offset by payments to affiliates of $17.8 million, an increase in
amount due from affiliate of $5.1 million, expenses in connection with the initial public offering
of $4.9 million and debt repayments of $1.3 million. The decrease in amounts due to affiliates was
primarily attributable to the change in our financing arrangement with ACF, which was terminated on
April 1, 2005. The accumulated amounts due to ACF under this intercompany arrangement were repaid
by us from the proceeds of our revolving credit facility that we obtained in March 2005.
Capital expenditures. We continuously evaluate facility requirements based on our strategic plans,
production requirements and market demand and may elect to make capital investments at higher or
lower levels in the future. These investments are all based on an analysis of the potential for
these additions to improve profitability and future rates of return. In response to the current
demand for our railcars, we are pursuing opportunities to increase our production capacity and
reduce our costs through continued vertical integration of our production capacity. From time to
time, we may expand our business by acquiring other businesses or pursuing other strategic growth
opportunities.
In November 2005, we substantially completed the construction of additional painting and lining
capabilities at our Paragould, Arkansas covered hopper manufacturing facility. This complements our
additional production line that was completed in November 2004. Our capital expenditures in
connection with the new painting and lining capabilities, was approximately $13.2 million.
We recently initiated a project that we estimate will cost approximately $7.0 million to construct
a new fabrication shop at our Paragould facility to produce covered hopper railcar components that
are currently supplied by an outside vendor, and a project that we estimate will cost approximately
$2.0 million for additional steel storage at our Marmaduke facility, which should result in
production efficiencies and contribute to a higher tank railcar output at our Marmaduke facility.
We also plan to invest approximately $10 million on two expansion projects at our Marmaduke plant
to increase the production of hazardous material tank cars and standard service tank cars. On
March 24, 2006, we signed a definitive agreement with Steel Technologies Inc. to acquire all the
capital stock of its subsidiary, Custom Steel Inc., a corporation located in Kennett, Missouri. The
purchase price is approximately $13.0 million plus a working capital adjustment that we estimate
will be approximately an additional $5.0 million. Custom Steel produces value-added fabricated
steel parts that primarily support our railcar manufacturing operations. The transaction, which is
subject to customary closing conditions, is expected to be completed on or about April 1, 2006. We
cannot assure that this closing will occur when anticipated, if at all. We expect to continue to
invest in projects, including possible strategic acquisitions, to reduce manufacturing costs,
improve production efficiencies and to
53
otherwise complement and expand our business. The payments
relating to these projects will be paid primarily in 2006.
As of January 1, 2005, we acquired from ACF Industries Holding Corp., a company beneficially-owned
and controlled by Mr. Icahn, its interest in Castings LLC for total consideration of $12.0 million,
represented by a promissory note bearing an interest rate equal to the prime rate plus 0.5%,
payable on demand. In January 2006, we repaid this note with a portion of the net proceeds of the
initial public offering. Castings LLC owns a one-third interest in Ohio Castings, which operates
two foundries that produce heavy castings. In connection with this transfer, we agreed to assume
certain, and indemnify all liabilities related to and arising from ACF Industries Holding Corp.s
investment in Castings LLC, including the guarantee of Castings LLCs obligations to Ohio Castings,
the guarantee of bonds in the amount of $10.0 million issued by the State of Ohio to one of Ohio
Castings subsidiaries, of which $8.0 million was outstanding as of December 31, 2005, and the
guarantee of a $2.0 million state loan that provides for purchases of capital equipment, of which
$0.8 million was outstanding as of December 31, 2005. The two other partners of Ohio Castings have
made similar guarantees of these obligations.
On January 31, 2006, we exercised an option to purchase all equipment under an equipment lease.
The lease allowed for the purchase of all the equipment at estimated fair value. We paid $5.8
million to purchase the lease equipment.
We anticipate that any future expansion of the business will be financed through cash flow from
operations, our amended and restated revolving credit facility or term debt associated directly
with that expansion. Moreover, we believe that these sources of funds will provide sufficient
liquidity to meet our expected operating requirements over the next twelve months.
Our long-term liquidity is contingent upon future operating performance and our ability to continue
to meet financial covenants under our amended and restated revolving credit facility and any other
indebtedness. We may also require additional capital in the future to fund capital expenditures,
acquisitions or incur from time to time other investments and these capital requirements could be
substantial. Our operating performance may also be affected by matters discussed under Risk
Factors, and trends and uncertainties discussed in this discussion and analysis, including those
factors discussed under Factors affecting operating results, as well as elsewhere in this annual
report. These risks, trends and uncertainties may also adversely affect our long-term liquidity.
Dividends. The Board of Directors declared a regular cash dividend of $0.03 per share of our
common stock payable on April 6, 2006, to shareholders of record at the close of business on March
22, 2006. We intend to pay cash dividends on our common stock in the future. Our amended and
restated revolving credit facility contains provisions that trigger a demand right if we pay
dividends on our common stock unless the payment does not cause the adjusted fixed charge coverage
ratio (fixed charges, pursuant to the amended and restated revolving credit facility, include any
dividends paid or payable on our common stock) to be less than 1.2 to 1.0 or the adjusted ratio of
our indebtedness to earnings before interest, taxes, depreciation and amortization, after giving
effect to any debt incurred to pay any such dividend to be greater than 4.0 to 1.0, each on a
quarterly and/or annual basis. In addition, under Delaware law, our board of directors may declare
dividends only to the extent of our surplus (which is defined as total assets at fair market
value minus total liabilities, minus statutory capital), or if there is no surplus, out of our net
profits for the then-current and/or immediately preceding fiscal years. 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, covenants under
our borrowing arrangement 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.
Contractual obligations
The following table summarizes our contractual obligations as of December 31, 2005, and the effect
that these obligations and commitments are expected to have on our liquidity and cash flow in
future periods, after taking into consideration that long-term debt obligations and notes payable
to affiliates will be paid in 2006 with the net proceeds of the initial public offering:
54
|
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|
|
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|
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|
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|
|
Payments due by Period |
|
Contractual Obligations |
|
Total |
|
|
1 year |
|
|
2-3 years |
|
|
4-5 years |
|
|
After 5 years |
|
|
|
(in thousands) |
|
|
Long-Term Debt Obligations 1 |
|
$ |
40,370 |
|
|
|
40,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to affiliates |
|
$ |
19,000 |
|
|
|
19,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations 2 |
|
$ |
4,970 |
|
|
|
2,804 |
|
|
|
1,940 |
|
|
|
226 |
|
|
|
|
|
Purchase Obligations |
|
$ |
67,629 |
|
|
|
16,000 |
|
|
|
51,629 |
|
|
|
|
|
|
|
|
|
Pension Funding |
|
$ |
4,936 |
|
|
|
1,510 |
|
|
|
3,036 |
|
|
|
390 |
|
|
|
|
|
|
|
|
Total |
|
$ |
131,969 |
|
|
$ |
78,174 |
|
|
$ |
53,569 |
|
|
$ |
226 |
|
|
$ |
|
|
|
|
|
(1) |
|
Our amended and restated revolving credit facility, permits us to borrow $75.0 million
and expires in three years. |
(2) |
|
The operating lease commitment includes the future minimum rental payments required
under non-cancelable operating leases for property and equipment leased by us. |
We entered into two vendor supply contracts with minimum volume commitments in October 2005 with
suppliers of materials used at our railcar production facilities. The agreements have terms of two
and three years respectively. We have agreed to purchase a combined total of $67.6 from these two suppliers over the next three
years. In 2006, 2007 and 2008 we expect to purchase $16.0 million, $27.1 million and $24.5 million
respectively under these agreements.
We entered into two supply agreements, in January 2005 and June 2005, with a steel supplier for the
purchase of regular and normalized steel plate. The agreements each have terms of five years and
may be terminated by either party at any time after two years, upon twelve months prior notice.
Each agreement requires us to purchase the lesser of a fixed volume or 75% of our requirements for
the steel covered by that agreement at prices that fluctuate with the market. We have no commitment
under these arrangements to buy a minimum amount of steel, other than the minimum percentages, if
our overall steel purchases decline.
We have entered into supply agreements with an affiliate of Amsted Industries, Inc., an affiliate
of one of our Ohio Castings joint venture partners, to purchase up to 25% and 33% of the car sets,
consisting of sideframes and bolsters, produced at each of two foundries, respectively, being
operated by subsidiaries of Ohio Castings. Our purchase commitments under these supply agreements
are dependent upon the number of car sets manufactured by these foundries, which are jointly
controlled by us and the other two members of Ohio Castings.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with U.S. GAAP. The preparation of
our financial statements requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of sales and expenses during the reporting
period. Our significant accounting policies are described in the notes to our consolidated
financial statements included elsewhere in this annual report. Some of these policies involve a
high degree of judgment in their application. The critical accounting policies, in managements
judgment, are those described below. If different assumptions or conditions prevail, or if our
estimates and assumptions prove to be incorrect, actual results could be materially different from
those reported.
Revenue recognition
Revenues from railcar sales are recognized following completion of manufacturing, inspection,
customer acceptance and shipment, which is when title and risk for any damage or loss with respect
to the railcars passes to the customer. In some cases, painting and lining work may be outsourced
to an independent contractor and, as a result, the sale will not be recorded until the railcars are
shipped from the independent contractors facilities to our customer. Revenues from railcar and
industrial components are recorded at the time of product shipment, in accordance with
55
our contractual terms. Revenue for railcar maintenance services are recognized upon completion and
shipment of railcars from our plants. Revenue for fleet management services are recognized as
performed.
We record amounts billed to customers for shipping and handling as part of sales in accordance with
Emerging Issues Task Force (EITF) 00-10, Accounting for Shipping and Handling Fees and Costs, and
we record related costs in our cost of sales.
Accounts receivable
We carry our accounts receivable at cost, less an allowance for doubtful accounts. On a quarterly
basis, we evaluate our accounts receivable and establish an allowance for doubtful accounts, based
on a history of past write-offs and collections and current credit conditions. Accounts are placed
for collection on a limited basis once all other methods of collection have been exhausted. Once it
has been determined that the customer is no longer in business and/or refuses to pay, the accounts
are written off. Our bad debt experience has been minimal. Write-offs could be materially different
than reserves if economic conditions change or actual results deviate from historical trends.
Product warranties
We record a liability for an estimate of costs that we expect to incur under our basic limited
warranty when manufacturing revenue is recognized. Warranty terms are based on the negotiated
railcar sales contracts and typically are for periods of up to five years. Factors affecting our
warranty liability include the number of units sold and historical and anticipated rates of claims
and costs per claim. We assess quarterly the adequacy of our warranty
liability based on changes in these factors. We have generally experienced low warranty claims. Our
warranty claims were $0.5 million in 2003 and $0.1 million in 2004. Actual results differing from
estimates could have a material effect on results from operations in the event that unforeseen
warranty issues were to occur.
Inventory
Inventories are stated at the lower of average cost or market, and include the cost of materials,
direct labor and manufacturing overhead. We evaluate our ability to realize the value of our
inventory based on a combination of factors including historical usage rates, forecasted sales or
usage, product end of life dates, estimated current and future market values and new product
introductions. Assumptions used in determining our estimates of future product demand may prove to
be incorrect, in which case the provision required for excess and obsolete inventory would have to
be adjusted in the future. If inventory is determined to be overvalued, we would be required to
recognize such costs as cost of goods sold at the time of such determination. Any significant
unanticipated changes in demand could have a significant negative impact on the value of our
inventory and our reported operating results. Additionally, purchasing requirements and alternative
usage avenues are explored within these processes to mitigate inventory exposure. When recorded,
our reserves are intended to reduce the carrying value of our inventory to its net realizable
value.
Long-lived assets
We evaluate long-lived assets, including property, plant and equipment, under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of. Long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of assets may not be recoverable. The criteria for determining impairment or such long-lived
assets to be held and used is determined by comparing the carrying value of these long-lived assets
to be held and used to managements best estimate of future undiscounted cash flows expected to
result from the use of the assets. If the assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair
value of the assets. The estimated fair value of the assets is measured by estimating the present
value of the future discounted cash flows to be generated. We incurred impairment losses in the
years ended December 31, 2002 and 2003, and reduced the carrying value of buildings and
improvements and equipment by $0.2 million and $0.8 million, respectively, at one of our railcar
maintenance facilities. Any future determination requiring write-off of a significant portion of
long-lived assets recorded on our balance sheet could have an adverse effect on our financial
condition and results of operations.
56
Income taxes
For financial reporting purposes, income tax expense is estimated based on planned tax return
filings. The amounts anticipated to be reported in those filings may change between the time the
financial statements are prepared and the time the tax returns are filed. Further, because tax
filings are subject to review by taxing authorities, there is also the risk that a position on a
tax return may be challenged by a taxing authority. If the taxing authority is successful in
asserting a position different than that taken by us, differences in a tax expense or between
current and deferred tax items may arise in future periods. Any such differences which could have a
material impact on our financial statements would be reflected in the financial statements when
management considers them probable of occurring and the amount reasonably estimable.
Valuation allowances reduce deferred tax assets to an amount that will more likely than not be
realized. Managements estimates of the realization of deferred tax assets is based on the
information available at the time the financial statements are prepared and may include estimates
of future income and other assumptions that are inherently uncertain. No valuation allowance is
currently recorded, as we expect to realize our deferred tax assets.
Accounting for expenses paid by affiliate
In October 1994, we acquired railcar components manufacturing, railcar maintenance and certain
other assets from ACF, a company beneficially owned and controlled by Carl C. Icahn, our principal
beneficial stockholder and the chairman of our board of directors. In connection with that
transaction, ACF retained, and agreed to indemnify and hold us harmless for, certain liabilities
and obligations relating to the conduct of business and ownership of the
assets prior to the transfer, including liabilities relating to employee benefit plans subject to
certain exceptions of the transferred employees, workers compensation, environmental contamination
and third-party litigation. In December 2005 we entered into a retirement benefit plan separation
agreement, releasing us and ACF from our respective employee benefit reimbursement obligations
under the 1994 ACF asset transfer agreement. At December 31, 2005, the total liability retained by
ACF under the 1994 ACF asset transfer agreement was $0.3 million, which primarily is related to
environmental liabilities. Although ACF is responsible for any costs associated with the retained
liabilities, we have continued to reflect the costs associated with those retained liabilities in
our financial statements as an expense in order to reflect the full cost of doing business, and the
payment by ACF of these expenses is reflected as additional paid-in capital, as required by Staff
Accounting Bulletin Topic 5T.
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable, amounts due to/from
affiliates and accounts payable approximate fair values because of the short-term maturity of these
instruments. The fair value of long-term debt is calculated by discounting cash flows through
maturity using our current rate of borrowing for similar liabilities. The fair value of the note
receivable from ACF, which was carried at face amount plus accrued interest, could not reasonably
be estimated due to the lack of market for similar instruments. Fair value estimates are made at a
specific point in time, based on relevant market information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision.
Contingencies and litigation
We periodically record the estimated impacts of various uncertain outcomes. These events are called
contingencies and our accounting for these events is prescribed by SFAS No. 5, Accounting for
Contingencies. SFAS No. 5 defines a contingency as an existing condition, situation, or set of
circumstances involving uncertainty as to possible gain or loss to an enterprise that will
ultimately be resolved when one or more future events occur or fail to occur. Contingent losses
must be accrued if:
|
|
|
available information indicates it is probable that the loss has been or will be
incurred, given the likelihood of the uncertain future events; and |
|
|
|
|
the amount of the loss can be reasonably estimated. |
57
The accrual of a contingency involves considerable judgment on the part of management. Legal
proceedings have elements of uncertainty, and in order to determine the amount of any reserves
required, we assess the likelihood of any adverse judgments or outcomes to pending and threatened
legal matters, as well as potential ranges of probable losses.
We are subject to comprehensive federal, state, local and international environmental laws and
regulations relating to the release or discharge of materials into the environment, the management,
use, processing, handling, storage, transport or disposal of hazardous materials and wastes, or
otherwise relating to the protection of human health and the environment. These laws and
regulations not only expose us to liability for the environmental condition of our current or
formerly owned or operated facilities, and our own negligent acts, but also may expose us to
liability for the conduct of others or for our actions that were in compliance with all applicable
laws at the time these actions were taken. In addition, these laws may require significant
expenditures to achieve compliance, and are frequently modified or revised to impose new
obligations. Civil and criminal fines and penalties and other sanctions may be imposed for
non-compliance with these environmental laws and regulations. Our operations that involve hazardous
materials also raise potential risks of liability under common law. We are involved in
investigation and remediation activities at properties that we now own or lease to address
historical contamination and potential contamination by third parties. We are also involved with
state agencies in the cleanup of two sites under these laws. These investigations are at a
preliminary stage, and it is impossible to estimate, with any certainty, 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 us in 1994 by ACF and for which ACF has retained liability for environmental
contamination that may have existed at the time of transfer to us. ACF has also agreed to indemnify
us for any cost that might be incurred with those existing issues. However, if ACF fails to
honor its obligations to us, we would be responsible for the cost of such remediation. We have been
advised that, ACF estimates that it will spend approximately $0.2 million on environmental
investigation in each of 2006 and 2007, relating to contamination that existed at properties prior
to their transfer to us and for which ACF has retained liability and agreed to indemnify us. We
believe that our operations and facilities are in substantial compliance with applicable laws and
regulations and that any noncompliance is not likely to have a material adverse effect on our
operations or financial condition.
Future events, such as new environmental regulations or changes in or modified interpretations of
existing laws and regulations or enforcement policies, or further investigation or evaluation of
the potential health hazards of products or business activities, may give rise to additional
compliance and other costs that could have a material adverse effect on our financial conditions
and operations. In addition, ACF has in the past conducted investigation and remediation activities
at properties that we now own to address historic contamination. Although we believe that ACF has
satisfactorily addressed all known material contamination, there can be no assurance that ACF has
addressed all historical contamination. The discovery of historical contamination or the release of
hazardous substances into the environment at our current or formerly owned or operated facilities
could require ACF or us in the future to incur investigative or remedial costs or other liabilities
that could be material or that could interfere with the operation of our business.
In connection with Trans World Airlines, Inc.s (TWA) 1992 bankruptcy proceedings under Chapter 11
of the Bankruptcy Code, the Pension Benefit Guarantee Corporation (PBGC) asserted that ACF as well
as the other entities in which Mr. Icahn had a controlling interest were obligated along with TWA
to satisfy any underfunding of TWA s defined benefit plan. Subsequently, and in response to a
petition of another member of the Icahn controlled group, the PBGC terminated the TWA pension plan and
obligated one of our affiliates, Highcrest Investors Corp (Highcrest) to make eight annual payments
of $30 million each commencing on July 1, 2002 and totaling $240 million (termination payments). As
of December 31, 2005, Highcrest had made termination payments totaling $157 million and still owed
$83 million on this obligation. The obligation to make termination payments is non-recourse except
to the common stock of ACF Holding (another member of the controlled group). In connection with our
initial public offering, we notified the PBGC that we are no longer
part of the Icahn controlled
group. We believe that this obligation will have no
adverse effect on our future liquidity, results of operations, or financial position.
We have been named a party to a suit in which the plaintiff alleges we were responsible for the
malfunction of a valve which we manufactured, and that was negligently remanufactured in 2004 by a
third party. We believe we
58
have no responsibility for this malfunction and have meritorious
defenses against any liability. It is not possible to estimate the expected settlement, if any, at
this time as the case is in its early stages.
We have been named the defendant in a law suit in which the plaintiff, OCI Chemical Company, claims
we were responsible for the damage caused by allegedly defective railcars that were manufactured by
us. The lawsuit was filed on September 19, 2005 in the United States District Court, Eastern
District of Missouri. The plaintiff seeks unspecified damages in excess of $75,000. The plaintiffs
allege that the failures in certain components caused the contents transported by these railcars to
spill out of the railcars causing property damage, clean-up costs, monitoring costs, testing costs
and other costs and damages. We believe that we are not responsible for the damage and have
meritorious defenses against liability.
OFF BALANCE SHEET ARRANGEMENTS
There were no off balance sheet arrangements in 2005.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (FAS) 151, Inventory Costs-An Amendment of ARB No. 43, Chapter 4, which
requires the recognition of costs of idle facilities, excessive spoilage, double freight, and
rehandling costs as a component of current-period expenses. The provisions of FAS 151 are effective
for inventory costs incurred during fiscal years beginning after June 15, 2005. Since we produce
railcars based upon specific customer orders, management does not expect the provisions of FAS 151
to have a material impact on our financial statements.
In December 2004, the FASB issued FAS 123 (revised 2004), Share-Based Payment (FAS 123(R)).
Statement 123(R) requires that the compensation cost relating to share-based payment transactions
be recognized in financial statements. The cost will be measured based on the fair value of the
instruments issued. FAS 123(R) covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards, share appreciation
rights and employee share purchase plans. FAS 123(R) replaces FAS 123, Accounting for Stock-Based
Compensation, and supersedes Opinion 25, Accounting for Stock Issued to Employees. As originally
issued in 1995, Statement 123 established as preferable the fair-value-based method of accounting
for share-based payment transactions with employees.
In March 2005, the SEC issued Staff Accounting Bulletin (SAB) 107, Share-Based Payment, to provide
additional guidance to public companies in applying the provisions of Statement 123(R). During
2005, the FASB issued three FASB Staff Positions (FSP): FSP FAS 123(R)-1, Classification and
Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee
Services under FASB Statement No. 123(R), FSP FAS 123(R)-2, Practical Accommodation to the
Application of Grant Date as Defined in FASB Statement No. 123(R), and FSP FAS 123(R)-3,
Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. The
Company will adopt the provisions of SAB 107 in conjunction with its adoption of FAS 123(R) and
also consider the guidance provided in the FSPs as it considers the effect that FAS 123(R) will
have on its results of operations, financial position and cash flows.
The Company adopted FAS 123(R) in January 2006, concurrent with the pricing of our initial public
offering. We issued options to purchase 484,876 shares of common stock under our 2005 equity
incentive plan upon the pricing of our initial public offering. The options have been granted at an
exercise price equal to $21.00 per share. The options have a term of five years and vest in equal
annual installments over a three-year period. We estimate that our stock option expense for these
options will total approximately $3.5 million over the next three years assuming a Black-Scholes
calculation based on the following assumptions: stock volatility of 35%; 5-year term; interest rate
of 4.35%; and dividend yield of 1%.
In March 2005, the FASB issued FASB Interpretation No. (FIN) 47 as an interpretation of FAS
143, Accounting for Asset Retirement Obligations (FAS 143). This interpretation clarifies that the
term conditional asset retirement obligation as used in FASB 143 and refers to a legal obligation
to perform an asset retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the entity. The
obligation to perform the asset retirement activity is unconditional even though uncertainty exists
about
59
the timing and/or method of settlement. Accordingly, an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. This interpretation also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset retirement obligation. The
company adopted FIN 47 at December 31, 2005. There was no change to operating results as a result
of this adoption.
On June 1, 2005, the FASB issued FAS 154, Accounting Changes and Error Corrections, a replacement
of APB Opinion No. 20 and FAS 3 (FAS 154). The Statement applies to all voluntary changes in
accounting principle, and changes the requirements for accounting for and reporting of a change in
accounting principle. This Statement is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. The Company adopted FAS 154 on January 1,
2006. There was no change to operating results as a result of this adoption.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to interest rate risk on the borrowings under our amended and restated revolving
credit facility. However, we do not plan to enter into swaps or other hedging arrangements to
manage this risk because we do not believe the risk is significant. On an annual basis, a 1% change
in the interest rate in our revolving credit facility will increase or decrease our interest
expense by $10,000 for every $1.0 million of outstanding borrowings.
We are exposed to price risks associated with the purchase of raw materials, especially steel and
heavy castings. The cost of steel, heavy castings and all other materials used in the production of
our railcars represent approximately 80-85% of our direct manufacturing costs. Given the
significant increases in the price of raw materials since November 2003, this exposure can affect
our costs of production. We believe that the risk to our margins and profitability has been greatly
reduced by the variable pricing contracts we now have in place. We have negotiated all of our
current railcar manufacturing contracts with our customers to adjust the purchase prices of our
railcars to reflect increases or decreases in the cost of certain raw materials and components and,
as a result, we are able to pass on to our customers substantially all of the increased raw
material and component costs with respect to the railcars that we will produce and deliver after
2005. We believe that we currently have excellent supplier relationships and do not anticipate that
material constraints will limit our production capacity. Such constraints may exist if railcar
production were to increase beyond current levels, or other economic changes occur that affect the
availability of our raw materials.
We are not exposed to any significant foreign currency exchange risks.
60
Item 8: Financial Statements and Supplementary Data
American Railcar Industries, Inc.
Index to Financial Statements
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Page |
|
Audited Consolidated Financial Statements of American Railcar Industries, Inc. |
|
|
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62 |
|
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63 |
|
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|
|
64 |
|
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|
66 |
|
|
|
|
67 |
|
|
|
|
68 |
|
|
|
|
69 |
|
|
Audited Consolidated Financial Statements of Ohio Castings Company, LLC |
|
|
|
|
|
|
|
94 |
|
|
|
|
95 |
|
|
|
|
96 |
|
|
|
|
97 |
|
|
|
|
98 |
|
|
|
|
99 |
|
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
American Railcar Industries, Inc.
We have audited the accompanying consolidated balance sheet of the manufacturing and railcar
services operations of American Railcar Industries, Inc. and subsidiaries (the Company) as of
December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders
equity and comprehensive income (loss), and cash flows for the period then ended. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the manufacturing and railcar services operations of American
Railcar Industries, Inc. and subsidiaries as of December 31, 2005 and 2004, and the consolidated
results of its operations and cash flows for the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Chicago, Illinois
March 10, 2006, except note 19,
as to which the date is March 24, 2006
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors
American Railcar Industries, Inc.
We have audited the accompanying consolidated statements of operations, shareholders equity and
comprehensive income (loss), and cash flows of American Railcar Industries,
Inc. for the year ended December 31, 2003. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the results of American Railcar Industries, Inc.s operations and their cash
flows for the year ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
April 23, 2004
63
CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2004 |
|
|
2005 |
|
|
Assets |
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
6,943 |
|
|
$ |
28,692 |
|
Accounts receivable, net |
|
|
25,183 |
|
|
|
38,273 |
|
Inventories, net |
|
|
73,925 |
|
|
|
88,001 |
|
Amounts due from affiliates current |
|
|
|
|
|
|
5,110 |
|
Prepaid expenses |
|
|
244 |
|
|
|
2,523 |
|
Deferred tax asset |
|
|
2,065 |
|
|
|
1,967 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
108,360 |
|
|
|
164,566 |
|
Property, plant and equipment |
|
|
|
|
|
|
|
|
Buildings |
|
|
66,350 |
|
|
|
84,255 |
|
Machinery and equipment |
|
|
58,816 |
|
|
|
68,187 |
|
|
|
|
|
|
|
|
|
|
|
125,166 |
|
|
|
152,442 |
|
Less accumulated depreciation |
|
|
58,878 |
|
|
|
65,398 |
|
|
|
|
|
|
|
|
|
|
|
66,288 |
|
|
|
87,044 |
|
Construction in process |
|
|
8,686 |
|
|
|
3,759 |
|
Land |
|
|
1,977 |
|
|
|
2,182 |
|
|
|
|
|
|
|
|
Net property, plant and equipment |
|
|
76,951 |
|
|
|
92,985 |
|
|
|
|
|
|
|
|
|
|
Notes receivable from affiliates |
|
|
165,000 |
|
|
|
|
|
Deferred tax asset |
|
|
663 |
|
|
|
|
|
Debt issuance costs and other assets |
|
|
615 |
|
|
|
591 |
|
Deferred offering costs |
|
|
|
|
|
|
4,860 |
|
Investment in joint venture |
|
|
5,251 |
|
|
|
5,578 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
356,840 |
|
|
$ |
268,580 |
|
|
|
|
|
|
|
|
64
CONSOLIDATED BALANCE SHEETS Continued
(In thousands, except for share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2004 |
|
|
2005 |
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
1,334 |
|
|
$ |
33,294 |
|
Accounts payable |
|
|
22,800 |
|
|
|
55,793 |
|
Accrued expenses and taxes |
|
|
4,415 |
|
|
|
7,675 |
|
Accrued compensation |
|
|
5,654 |
|
|
|
7,243 |
|
Accrued dividends |
|
|
3,455 |
|
|
|
11,336 |
|
Note payable to affiliate current |
|
|
19,000 |
|
|
|
19,000 |
|
Other amounts due to affiliates current |
|
|
5,137 |
|
|
|
4,457 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
61,795 |
|
|
|
138,798 |
|
|
|
|
|
|
|
|
|
|
Long term debt, net of current portion |
|
|
8,517 |
|
|
|
7,076 |
|
Note payable to affiliate noncurrent |
|
|
130,000 |
|
|
|
|
|
Other amounts due to affiliates noncurrent |
|
|
17,109 |
|
|
|
|
|
Deffered tax liability |
|
|
|
|
|
|
5,364 |
|
Pension and post-retirement liabilities |
|
|
1,602 |
|
|
|
10,522 |
|
Other liabilities |
|
|
2,793 |
|
|
|
59 |
|
Mandatory redeemable preferred stock, stated value $1,000, 99,000
shares authorized, 1 share issued and outstanding at December 31,
2004 and 2005, respectively |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
221,817 |
|
|
|
161,820 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
New Preferred Stock, $.01 par value per share, stated value $1,000
per share, 500,000 shares authorized, 111,685 and 82,055 shares
issued and outstanding at December 31, 2004 and 2005, respectively |
|
|
111,685 |
|
|
|
82,055 |
|
Common stock, $.01 par value, 50,000,000 shares authorized,
11,147,059 shares issued and outstanding at December 31, 2004 and
2005 |
|
|
111 |
|
|
|
111 |
|
Additional paid-in capital |
|
|
41,249 |
|
|
|
41,667 |
|
Accumulated deficit |
|
|
(16,959 |
) |
|
|
(15,442 |
) |
Accumulated other comprehensive loss |
|
|
(1,063 |
) |
|
|
(1,631 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
135,023 |
|
|
|
106,760 |
|
|
|
|
|
|
|
|
Total Liabilities and shareholders equity |
|
$ |
356,840 |
|
|
$ |
268,580 |
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements
65
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing operations (including revenues from affiliates of
$62,882, $64,372 and $47,195 in 2003, 2004 and 2005,
respectively) |
|
$ |
188,119 |
|
|
$ |
316,432 |
|
|
$ |
564,513 |
|
Railcar services (including revenues from affiliates of $11,012,
$19,429 and $20,645 in 2003, 2004 and 2005, respectively) |
|
|
29,875 |
|
|
|
38,624 |
|
|
|
43,647 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
217,994 |
|
|
|
355,056 |
|
|
|
608,160 |
|
Cost of goods sold: |
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing operations (including costs related to
affiliates of $54,394, $59,052 and $44,077 in 2003, 2004
and 2005, respectively) |
|
|
174,629 |
|
|
|
306,283 |
|
|
|
518,063 |
|
Railcar services (including costs relates to
affiliates of $10,136, $15,539 and $16,200 in 2003, 2004
and 2005, respectively) |
|
|
29,762 |
|
|
|
34,473 |
|
|
|
38,041 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
204,391 |
|
|
|
340,756 |
|
|
|
556,104 |
|
Gross profit |
|
|
13,603 |
|
|
|
14,300 |
|
|
|
52,056 |
|
Pension settlement expense |
|
|
|
|
|
|
|
|
|
|
8,878 |
|
Selling, administrative and other |
|
|
10,340 |
|
|
|
10,334 |
|
|
|
16,476 |
|
|
|
|
|
|
|
|
|
|
|
Earnings from operations |
|
|
3,263 |
|
|
|
3,966 |
|
|
|
26,702 |
|
Interest income (including interest income from affiliates of
$2,998, $3,885 and $1,008 in 2003, 2004 and 2005,
respectively) |
|
|
3,161 |
|
|
|
4,422 |
|
|
|
1,658 |
|
Interest expense including interest expense to affiliates of $0, $1,524
and $2,063 in 2003, 2004 and 2005, respectively |
|
|
3,616 |
|
|
|
3,667 |
|
|
|
4,846 |
|
(Loss) earnings from joint venture |
|
|
(604 |
) |
|
|
(609 |
) |
|
|
610 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income tax expense |
|
|
2,204 |
|
|
|
4,112 |
|
|
|
24,124 |
|
Income tax expense |
|
|
1,139 |
|
|
|
2,191 |
|
|
|
9,356 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
1,065 |
|
|
$ |
1,921 |
|
|
$ |
14,768 |
|
|
|
|
|
|
|
|
|
|
|
Less preferred dividends |
|
|
(9,690 |
) |
|
|
(13,241 |
) |
|
|
(13,251 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) available to common shareholders |
|
|
(8,625 |
) |
|
|
(11,320 |
) |
|
|
1,517 |
|
Weighted average common shares outstanding basic and
diluted |
|
|
9,328 |
|
|
|
10,140 |
|
|
|
11,147 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share basic and diluted |
|
$ |
(0.92 |
) |
|
$ |
(1.12 |
) |
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements
66
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
1,065 |
|
|
$ |
1,921 |
|
|
$ |
14,768 |
|
Adjustments to reconcile net earnings to net cash (used in) provided
by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
6,408 |
|
|
|
6,247 |
|
|
|
6,807 |
|
Change in joint venture investment as a result of loss (earnings) |
|
|
604 |
|
|
|
609 |
|
|
|
(610 |
) |
Expense relating to pre-recapitalization liabilities |
|
|
583 |
|
|
|
1,431 |
|
|
|
1,061 |
|
Curtailment gain |
|
|
|
|
|
|
(59 |
) |
|
|
|
|
Provision for deferred income taxes |
|
|
963 |
|
|
|
1,740 |
|
|
|
5,606 |
|
Provision for losses on accounts receivable |
|
|
254 |
|
|
|
209 |
|
|
|
323 |
|
Long-lived asset impairment and other charges |
|
|
801 |
|
|
|
|
|
|
|
|
|
Loss on the disposition of property, plant and equipment |
|
|
73 |
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(4,509 |
) |
|
|
(11,983 |
) |
|
|
(13,413 |
) |
Inventories |
|
|
(11,835 |
) |
|
|
(28,718 |
) |
|
|
(14,076 |
) |
Prepaid expenses |
|
|
88 |
|
|
|
(365 |
) |
|
|
(2,256 |
) |
Accounts payable |
|
|
3,999 |
|
|
|
12,048 |
|
|
|
32,993 |
|
Accrued pension expense |
|
|
|
|
|
|
|
|
|
|
8,335 |
|
Accrued expenses and taxes |
|
|
1,183 |
|
|
|
1,966 |
|
|
|
4,871 |
|
Other |
|
|
(1,316 |
) |
|
|
(2,128 |
) |
|
|
(2,838 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(1,639 |
) |
|
|
(17,082 |
) |
|
|
41,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(2,301 |
) |
|
|
(11,441 |
) |
|
|
(22,841 |
) |
Proceeds from note and interest receivable from affiliates |
|
|
50 |
|
|
|
404 |
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(2,251 |
) |
|
|
(11,037 |
) |
|
|
(22,580 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
|
|
|
|
42,500 |
|
|
|
|
|
Issuance of preferred stock |
|
|
10,000 |
|
|
|
67,500 |
|
|
|
|
|
Effect of ARL spin off |
|
|
|
|
|
|
(25,000 |
) |
|
|
|
|
Advance to affiliate under notes receivable |
|
|
|
|
|
|
(165,000 |
) |
|
|
|
|
Proceeds from (repayment on) issuance of notes payable from
affiliates |
|
|
|
|
|
|
137,000 |
|
|
|
|
|
Decrease (increase) in amount due from affiliate |
|
|
8,634 |
|
|
|
|
|
|
|
(5,110 |
) |
Increase (decrease) in amount due to affiliate |
|
|
4,028 |
|
|
|
18,219 |
|
|
|
(17,790 |
) |
Proceeds from debt issuance |
|
|
|
|
|
|
|
|
|
|
31,852 |
|
Deferred offering costs |
|
|
|
|
|
|
|
|
|
|
(4,860 |
) |
Repayment of debt |
|
|
(18,890 |
) |
|
|
(40,222 |
) |
|
|
(1,334 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
3,772 |
|
|
|
34,997 |
|
|
|
2,758 |
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(118 |
) |
|
|
6,878 |
|
|
|
21,749 |
|
Cash and cash equivalents at beginning of year |
|
|
183 |
|
|
|
65 |
|
|
|
6,943 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
65 |
|
|
$ |
6,943 |
|
|
$ |
28,692 |
|
|
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements
67
STATEMENT OF STOCKHOLDERS EQUITY & COMPREHENSIVE INCOME (LOSS)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
earnings |
|
|
|
|
|
|
New |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
other |
|
|
Total |
|
|
|
Comprehensive |
|
|
(accumulated |
|
|
New Preferred |
|
|
preferred |
|
|
Common |
|
|
Common |
|
|
paid-in |
|
|
comprehensive |
|
|
shareholders |
|
|
|
income (loss) |
|
|
deficit) |
|
|
Stock-Shares |
|
|
stock |
|
|
Stock-Shares |
|
|
stock |
|
|
capital |
|
|
loss |
|
|
equity |
|
|
January 1, 2003 |
|
|
|
|
|
|
8,610 |
|
|
|
|
|
|
$ |
|
|
|
|
9,328 |
|
|
$ |
93 |
|
|
$ |
10,901 |
|
|
$ |
(687 |
) |
|
$ |
18,917 |
|
Net earnings |
|
$ |
1,065 |
|
|
|
1,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,065 |
|
Currency translation adjustment |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
11 |
|
Minimum pension liability
adjustment, net of tax effect of $128 |
|
|
(208 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(208 |
) |
|
|
(208 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of purchase price over book value
related to transfer of Castings from ACF |
|
|
|
|
|
|
(4,874 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,874 |
) |
Dividends on mandatorily redeemable
payment-in-kind preferred stock |
|
|
|
|
|
|
(9,690 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,690 |
) |
Capital contributions for expenses
relating to precapitalization
liabilities retained by ACF |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
583 |
|
|
|
|
|
|
|
583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2003 |
|
|
|
|
|
|
(4,889 |
) |
|
|
|
|
|
|
|
|
|
|
9,328 |
|
|
|
93 |
|
|
|
11,484 |
|
|
|
(884 |
) |
|
|
5,804 |
|
Net earnings |
|
$ |
1,921 |
|
|
|
1,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,921 |
|
Currency translation adjustment |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
14 |
|
Minimum pension liability
adjustment, net of tax effect of $109 |
|
|
(193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(193 |
) |
|
|
(193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
1,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred stock |
|
|
|
|
|
|
(13,241 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,241 |
) |
Transfer mandatorily redeemable PIK
preferred to New Preferred Stock |
|
|
|
|
|
|
|
|
|
|
95,517 |
|
|
|
95,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,517 |
|
Conversion of PIK Preferred Dividends |
|
|
|
|
|
|
|
|
|
|
654 |
|
|
|
654 |
|
|
|
1,819 |
|
|
|
18 |
|
|
|
(18 |
) |
|
|
|
|
|
|
654 |
|
Capital contributions |
|
|
|
|
|
|
|
|
|
|
102,000 |
|
|
|
102,000 |
|
|
|
|
|
|
|
|
|
|
|
42,500 |
|
|
|
|
|
|
|
144,500 |
|
Net adjustments relating to spin
off of ARL (Note 1) |
|
|
|
|
|
|
|
|
|
|
(86,486 |
) |
|
|
(86,486 |
) |
|
|
|
|
|
|
|
|
|
|
(14,148 |
) |
|
|
|
|
|
|
(100,634 |
) |
Deemed distribution related to decrease
in Castings book value |
|
|
|
|
|
|
(750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(750 |
) |
Capital contributions for expenses
relating to precapitalization
liabilities retained by ACF |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,431 |
|
|
|
|
|
|
|
1,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004 |
|
|
|
|
|
$ |
(16,959 |
) |
|
|
111,685 |
|
|
$ |
111,685 |
|
|
|
11,147 |
|
|
$ |
111 |
|
|
$ |
41,249 |
|
|
$ |
(1,063 |
) |
|
$ |
135,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
14,768 |
|
|
|
14,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,768 |
|
Currency translation adjustment |
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
16 |
|
Minimum pension liability
adjustment, net of tax effect $362 |
|
|
(584 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(584 |
) |
|
|
(584 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
14,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred stock |
|
|
|
|
|
|
(13,251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,251 |
) |
Net adjustments relating to spin
off of ARL (Note 1) |
|
|
|
|
|
|
|
|
|
|
(29,630 |
) |
|
|
(29,630 |
) |
|
|
|
|
|
|
|
|
|
|
(2,023 |
) |
|
|
|
|
|
|
(31,653 |
) |
Capital contributions for expenses
relating to precapitalization
liabilities retained by ACF and other
related adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,441 |
|
|
|
|
|
|
|
2,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005 |
|
|
|
|
|
$ |
(15,442 |
) |
|
|
82,055 |
|
|
$ |
82,055 |
|
|
|
11,147 |
|
|
$ |
111 |
|
|
$ |
41,667 |
|
|
$ |
(1,631 |
) |
|
$ |
106,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to the consolidated financial statements.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2003, 2004 and 2005
Note 1Description of the Business
The accompanying consolidated financial statements include the manufacturing and railcar services
operations of American Railcar Industries, Inc. and its wholly owned subsidiaries (collectively the
Company or ARI). As further described below, the Company purchased Castings, LLC (or Castings) on
January 1, 2005. In accordance with accounting principles generally accepted in the United States
of America, assets and liabilities from an affiliate company transferred between entities under
common control are accounted for at historical cost in a manner similar to a pooling of interests,
and the financial statements of previously separate companies for periods prior to the acquisition
are presented as if the transfer occurred at the beginning of the year. The consolidated income
statement and statement of cash flows also include the activity of Castings for all periods after
its formation in June 2003 as if it were owned for these periods. All significant intercompany
balances and transactions have been eliminated.
ARI manufactures railcars, custom designed railcar parts for industrial companies, 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 selected 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%, 0.5% and 0.4% of total company revenues for 2003, 2004
and 2005, respectively. Canadian assets were 0.5%, 0.3% and 0.4% of total company assets for 2003,
2004 and 2005, respectively.
ARI was recapitalized on October 1, 1994 when ACF Industries LLC (ACF), the former holder of ARIs
common stock, transferred to ARI the old common stock of ARI along with the assets and liabilities
of ACFs railcar maintenance and railcar parts manufacturing businesses. In exchange, ACF received
57,306 shares of ARIs newly issued mandatorily redeemable preferred stock. New shares of ARIs
common stock were issued to Carl C. Icahn, Chairman of the Board of ACF, in exchange for cash of
$6.4 million. In October 1998, ARI redeemed 57,305 shares of the preferred stock and the remaining
share of preferred stock was transferred to Mr. Icahn.
In 2003, ACF Industries Holding Corp. (ACF Holding), an affiliate of ARI, formed a wholly-owned
subsidiary, Castings. Castings has a one-third ownership interest in Ohio Castings Company, LLC
(Ohio Castings), a limited liability company formed to run two foundries which cast railcar
sideframes and bolsters for use or sale by the ownership group. Starting in the third quarter of
2003, ARI has purchased bolsters and sideframes produced by Ohio Castings. In June 2005, ARI
purchased Castings from ACF Holding. The transaction was consummated on January 1, 2005. The cost
of the acquisition was $12.0 million represented by a demand note that the Company expects to pay
in 2006. However, as Castings was owned by an entity with ownership common to ARI, the investment
in subsidiary is recorded at the date of Castings inception, June, 2003 at book value. The purchase
price is recorded at full value as a payable to the affiliate and the excess of fair value over
cost, totaling $5.6 million, is presented as a distribution from equity. Interest is accrued on the
note payable to the affiliate as of January 1, 2005, as that is the date the purchase was
effective.
On July 20, 2004, ARI formed ARL, a wholly owned subsidiary. ARLs primary business is the leasing
of railcars. The subsidiary was capitalized through the issuance of common and preferred stock.
ARIs investment in ARL was $116.7 million and $151.7 million at December 31, 2004 and June 30,
2005, respectively. Preferred stock of ARL was issued to affiliated companies in exchange for
contributions of cash or railcars totaling $102.7 million. In January 2005, ARI obtained an
additional $35 million of ARL common stock resulting in a carrying value of $151.7 million.
On June 30, 2005, in anticipation of its public offering, ARI sold its common interest in ARL for
$125.0 million to affiliated companies in return for the preferred stock investment, valued at
$116.1 million, plus accrued dividends of $8.9 million that those affiliates held in ARI. At
December 31, 2004, ARIs investment in ARL was $116.7 million. This investment was eliminated as of
December 31, 2004 in order to present ARI on a stand alone basis. New
69