e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
or
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o |
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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 No. 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 of Incorporation)
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(I.R.S. Employer Identification No.) |
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100 Clark Street, St. Charles, Missouri
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63301 |
(Address of principal executive offices)
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(Zip Code) |
(636) 940-6000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Nonaccelerated 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
The number of shares of the registrants common stock, without par value, outstanding on April 26,
2007 was 21,242,329 shares.
AMERICAN RAILCAR INDUSTRIES, INC.
INDEX TO FORM 10-Q
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts, unaudited)
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March 31, |
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December 31, |
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2007 |
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2006 |
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Assets |
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Current assets: |
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|
|
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Cash |
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$ |
323,433 |
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$ |
40,922 |
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Accounts receivable, net |
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40,273 |
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34,868 |
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Accounts receivable, due from affiliates |
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9,982 |
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9,632 |
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Inventories, net |
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111,157 |
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103,510 |
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Prepaid expenses |
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5,152 |
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5,853 |
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Deferred tax assets |
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2,072 |
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2,089 |
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Total current assets |
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492,069 |
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196,874 |
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Property, plant and equipment, net |
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134,469 |
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130,293 |
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Deferred debt issuance costs |
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4,200 |
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|
235 |
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Goodwill |
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7,169 |
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7,169 |
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Other assets |
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37 |
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37 |
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Investment in joint venture |
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4,542 |
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4,318 |
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Total assets |
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$ |
642,486 |
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$ |
338,926 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
75 |
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$ |
88 |
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Accounts payable |
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59,687 |
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54,962 |
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Accounts payable, due to affiliates |
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1,727 |
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1,689 |
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Accrued expenses and taxes |
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13,460 |
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3,131 |
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Accrued compensation |
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9,969 |
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10,282 |
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Accrued dividends |
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637 |
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636 |
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Total current liabilities |
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85,555 |
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70,788 |
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Long-term debt, net of current portion |
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8 |
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Senior unsecured notes |
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275,000 |
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Deferred tax liability |
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5,035 |
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7,042 |
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Pension and post-retirement liabilities |
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10,465 |
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10,859 |
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Other liabilities |
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2,201 |
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49 |
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Total liabilities |
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378,256 |
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88,746 |
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Commitments and contingencies |
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Stockholders equity: |
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Common stock, $.01 par value, 50,000,000 shares authorized,
21,235,186 and 21,207,773 shares issued and outstanding at
March 31, 2007 and December 31, 2006, respectively |
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212 |
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212 |
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Additional paid-in capital |
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236,986 |
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235,768 |
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Retained earnings |
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29,474 |
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16,649 |
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Accumulated other comprehensive loss |
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(2,442 |
) |
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(2,449 |
) |
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Total stockholders equity |
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264,230 |
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250,180 |
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Total liabilities and stockholders equity |
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$ |
642,486 |
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$ |
338,926 |
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See notes to the Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
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For the Three Months Ended |
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March 31, |
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March 31, |
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2007 |
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2006 |
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Revenues: |
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Manufacturing operations (including revenues from affiliates of
$16,018 and $15,027 for the three months ended March 31, 2007 and
2006, respectively) |
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$ |
175,127 |
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$ |
166,490 |
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Railcar services (including revenues from affiliates of $3,934 and
$5,982 for the three months ended March 31, 2007 and 2006,
respectively) |
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12,216 |
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12,239 |
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Total revenues |
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187,343 |
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178,729 |
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Cost of goods sold: |
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Manufacturing operations (including costs related to affiliates of
$14,520 and $14,068 for the three months ended March 31, 2007 and
2006, respectively) |
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(149,439 |
) |
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(148,256 |
) |
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Railcar services (including costs related to affiliates of $3,093 and
$4,571 for the three months ended March 31, 2007 and 2006,
respectively) |
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(9,923 |
) |
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(10,213 |
) |
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Total cost of goods sold |
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(159,362 |
) |
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(158,469 |
) |
Gross profit |
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27,981 |
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20,260 |
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Selling, administrative and other |
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(6,703 |
) |
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(8,695 |
) |
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Earnings from operations |
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21,278 |
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11,565 |
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Interest income |
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1,881 |
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|
486 |
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Interest expense (including interest expense to affiliates of zero and
$98 for the three months ended March 31, 2007 and 2006,
respectively) |
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(1,938 |
) |
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(1,030 |
) |
Earnings from joint venture |
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227 |
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|
475 |
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Earnings before income tax expense |
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21,448 |
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11,496 |
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Income tax expense |
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(7,941 |
) |
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(4,235 |
) |
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Net earnings |
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$ |
13,507 |
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$ |
7,261 |
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Less preferred dividends |
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(568 |
) |
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Earnings available to common shareholders |
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$ |
13,507 |
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$ |
6,693 |
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Net earnings per common share basic |
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$ |
0.64 |
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$ |
0.35 |
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Net earnings per common share diluted |
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$ |
0.63 |
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$ |
0.35 |
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Weighted average common shares outstanding basic |
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21,220 |
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19,013 |
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Weighted average common shares outstanding diluted |
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21,310 |
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19,047 |
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Dividends declared per common share |
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$ |
0.03 |
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$ |
0.03 |
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See notes to the Condensed Consolidated Financial Statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
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For the Three Months Ended |
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March 31, |
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March 31, |
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2007 |
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2006 |
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Operating activities: |
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Net earnings |
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$ |
13,507 |
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$ |
7,261 |
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Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities: |
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Depreciation |
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3,364 |
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2,261 |
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Amortization of deferred costs |
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|
87 |
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29 |
|
Long-lived asset impairment charges |
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|
401 |
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Loss on disposal of property, plant and equipment |
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22 |
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Write-off of deferred financing costs |
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|
565 |
|
Stock based compensation |
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|
632 |
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|
3,550 |
|
Excess tax benefits from stock option exercises |
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|
(10 |
) |
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|
|
|
Change in joint venture investment as a result of earnings |
|
|
(227 |
) |
|
|
(475 |
) |
Provision for deferred income taxes |
|
|
(1,990 |
) |
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|
709 |
|
Provision for losses on accounts receivable |
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|
(79 |
) |
|
|
39 |
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Changes in operating assets and liabilities: |
|
|
|
|
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|
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Accounts receivable, net |
|
|
(5,326 |
) |
|
|
(5,779 |
) |
Accounts receivable, due from affiliate |
|
|
(350 |
) |
|
|
(8,078 |
) |
Inventories |
|
|
(7,647 |
) |
|
|
(6,626 |
) |
Prepaid expenses |
|
|
701 |
|
|
|
(2,443 |
) |
Accounts payable |
|
|
4,725 |
|
|
|
(4,293 |
) |
Accounts payable, due to affiliate |
|
|
38 |
|
|
|
240 |
|
Accrued expenses and taxes |
|
|
9,981 |
|
|
|
3,208 |
|
Other |
|
|
1,769 |
|
|
|
(181 |
) |
|
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|
Net cash provided by (used in) operating activities |
|
|
19,197 |
|
|
|
(9,612 |
) |
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|
|
|
|
|
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|
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Investing activities: |
|
|
|
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|
|
|
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Purchases of property, plant and equipment |
|
|
(7,558 |
) |
|
|
(9,915 |
) |
Repayment of note receivable from affiliate (Ohio
Castings LLC) |
|
|
|
|
|
|
146 |
|
Acquisitions |
|
|
|
|
|
|
(17,061 |
) |
|
|
|
Net cash used in investing activities |
|
|
(7,558 |
) |
|
|
(26,830 |
) |
|
|
|
|
|
|
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Financing activities: |
|
|
|
|
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Proceeds from sale of common stock |
|
|
|
|
|
|
205,275 |
|
Offering costs initial public offering |
|
|
|
|
|
|
(14,667 |
) |
Preferred stock redemption |
|
|
|
|
|
|
(82,056 |
) |
Preferred stock dividends |
|
|
|
|
|
|
(11,904 |
) |
Common stock dividends |
|
|
(636 |
) |
|
|
|
|
Decrease in amounts due to affiliates |
|
|
(4 |
) |
|
|
(20,482 |
) |
Proceeds from stock option exercises |
|
|
576 |
|
|
|
|
|
Excess tax benefits from stock option exercises |
|
|
10 |
|
|
|
|
|
Proceeds from issuance of senior unsecured notes, gross |
|
|
275,000 |
|
|
|
|
|
Offering costs senior unsecured notes issuance, gross |
|
|
(4,013 |
) |
|
|
|
|
Finance fees related to new credit facility |
|
|
(40 |
) |
|
|
(265 |
) |
Repayment of debt |
|
|
(21 |
) |
|
|
(40,213 |
) |
|
|
|
Net cash provided by financing activities |
|
|
270,872 |
|
|
|
35,688 |
|
|
|
|
Increase (decrease) in cash |
|
|
282,511 |
|
|
|
(754 |
) |
Cash at beginning of period |
|
|
40,922 |
|
|
|
28,692 |
|
|
|
|
Cash at end of period |
|
$ |
323,433 |
|
|
$ |
27,938 |
|
|
|
|
See notes to the Condensed Consolidated Financial Statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months ended March 31, 2007 and 2006
The condensed consolidated financial statements included herein have been prepared by American
Railcar Industries, Inc. and subsidiaries (collectively the Company or ARI), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC).
Certain information and footnote disclosure normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
omitted pursuant to such rules and regulations, although the Company believes that the disclosures
are adequate to make the information presented not misleading. The Condensed Balance Sheet as of
December 31, 2006 has been derived from the audited consolidated balance sheets as of that date.
These condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the Companys latest annual
report attached on Form 10-K, as amended, for the year ended December 31, 2006. In the opinion of
management, the information contained herein reflects all adjustments necessary to make the results
of operations for the interim periods a fair statement of such operations. The results of
operations of any interim period are not necessarily indicative of the results that may be expected
for a fiscal year.
Note 1 Description of the Business
The condensed consolidated financial statements of the Company include the accounts of American
Railcar Industries, Inc. and its wholly owned subsidiaries. Through its subsidiary Castings, LLC
(Castings), the Company has a one-third ownership interest in Ohio Castings Company, LLC (Ohio
Castings), a limited liability company formed to produce steel railcar parts, such as sideframes,
bolsters, couplers and yokes, for use or sale by the ownership group. All intercompany transactions
and balances 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 0.3% and 0.2%, respectively, of total consolidated revenues
for the three months ended March 31, 2007 and 2006. Canadian assets were 0.2% and 0.4%,
respectively, of total consolidated assets as of March 31, 2007 and December 31, 2006.
Acquisition
On March 31, 2006, the Company acquired all of the common stock of Custom Steel, Inc. (Custom
Steel), a subsidiary of Steel Technologies, Inc. Custom Steel operates a facility located adjacent
to our component manufacturing facility in Kennett, Missouri, which produces value-added fabricated
parts that primarily support our railcar manufacturing operations. Prior to the acquisition, ARI
was Custom Steels primary customer. The purchase price was $17.2 million, which resulted in
goodwill of $7.2 million.
The fair value of the assets and acquired liabilities that resulted in goodwill for the acquisition
consisted of $3.8 million of inventory, $8.0 million of property, plant and equipment, and $1.8
million of a deferred tax liability.
The acquisition was accounted for under the purchase method of accounting, with the purchase price
being allocated to the assets acquired based on relative fair values. Accordingly, the related
results of operations of Custom Steel have been included in the condensed consolidated statement of
operations after March 31, 2006.
Note 2 Recent accounting pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48
Accounting for Uncertainty in Income Taxes, an interpretation of Statement Financial Accounting
Standard (SFAS) No. 109, Accounting for Income Taxes (FIN 48), to create a single model to
address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income
taxes, by prescribing a minimum recognition threshold a tax
6
position is required to meet before being recognized in the financial statements. FIN 48 also
provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December
15, 2006. The Company has adopted FIN 48 as of January 1, 2007, as required. See Note 10 for
further discussion.
In September 2006, the FASB issued Staff Position (FSP) No. AUG AIR-1, Accounting for Planned Major
Maintenance Activities. This guidance eliminates one of the accounting methods used to plan for
major maintenance activities. This FSP should be applied to the first fiscal year beginning after
December 15, 2006. The Company adopted this FSP on January 1, 2007. This FSP did not have a
significant impact on its financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (FAS 157), which defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value measurements and, accordingly,
FAS 157 does not require any new fair value measurements. This statement is effective for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal years. The Company
will adopt FAS 157 as of January 1, 2008, as required. The Company is currently evaluating the
impact this standard will have on its operating income and statement of financial position.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132(R)) (or
FAS 158). FAS 158 requires that the Company recognize the overfunded or underfunded status of its
defined benefit and retiree medical plans (the Plans) as an asset or liability in the 2006 year end
balance sheet, with changes in the funded status recognized through comprehensive income in the
year in which they occur. FAS 158 also requires the Company to measure the funded status of the
Plans as of the year end balance sheet date not later than December 31, 2008. The Company adopted a
portion of this standard as required at December 31, 2006. The Company will adopt the other portion
of this standard during 2008 and is currently evaluating the impact that this will have on its
statement of financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and
Financial Liabilities (FAS 159). FAS 159 permits entities to choose to measure many financial
assets and financial liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. FAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact of FAS 159 on its
consolidated financial position and results of operations.
Note 3 Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Raw materials |
|
$ |
61,729 |
|
|
$ |
67,258 |
|
Work-in process |
|
|
22,986 |
|
|
|
23,623 |
|
Finished products |
|
|
29,236 |
|
|
|
15,358 |
|
|
|
|
|
|
|
|
Total inventories |
|
|
113,951 |
|
|
|
106,239 |
|
Less reserves |
|
|
(2,794 |
) |
|
|
(2,729 |
) |
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
111,157 |
|
|
$ |
103,510 |
|
|
|
|
|
|
|
|
7
Note 4 Property, Plant and Equipment
The following table summarizes the components of property, plant and equipment as of March 31, 2007
and December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
Buildings |
|
$ |
102,900 |
|
|
$ |
102.737 |
|
Machinery and equipment |
|
|
95,326 |
|
|
|
93,060 |
|
|
|
|
|
|
|
198,226 |
|
|
|
195,797 |
|
Less accumulated depreciation |
|
|
(78,224 |
) |
|
|
(75,204 |
) |
|
|
|
Net property, plant and equipment |
|
|
120,002 |
|
|
|
120,593 |
|
Construction in process |
|
|
11,602 |
|
|
|
6,835 |
|
Land |
|
|
2,865 |
|
|
|
2,865 |
|
|
|
|
Total property, plant and equipment |
|
$ |
134,469 |
|
|
$ |
130,293 |
|
|
|
|
Depreciation Expense
Depreciation expense for the three months ended March 31, 2007 and 2006 was $3.4 million and $2.3
million, respectively.
Capitalized Interest
In conjunction with the Senior Unsecured Fixed Rate Notes offering described in Note 9, the Company
began recording capitalized interest on certain property, plant and equipment capital projects. The
amount of interest capitalized as of March 31, 2007 was $0.02 million. No interest was capitalized
as of December 31, 2006.
Note 5 Long-Lived Asset Impairment Charges
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
for 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. During the three months ended March 31, 2006, the
Company reduced the carrying value of equipment purchased under a lease agreement from an unrelated
third party by $0.4 million for its manufacturing plants, which is reflected in the consolidated
statement of operations under costs of manufacturing operations.
Note 6 Goodwill
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and
Other Intangible Assets. This standard requires that goodwill and other intangible assets with
indefinite useful lives shall not be amortized but shall be tested for impairment at least annually
by comparing the fair value of the asset to its carrying value. The Company adopted this standard
upon the acquisition of Custom Steel, which resulted in goodwill of $7.2 million, as described in
Note 1.
The Company performs the goodwill impairment test required by SFAS No. 142 as of March 1 of each
year. The valuation uses a combination of methods to determine the fair value of the reporting unit
including prices of comparable businesses, a present value technique and recent transactions
involving businesses similar to the Company. There was no adjustment required based on the 2007
annual impairment tests related to the goodwill generated from the Custom Steel acquisition.
8
Note 7 Investment in joint venture
The Company uses the equity method to account for its investment in Ohio Castings. Under the equity
method, the Company recognizes its share of the earnings and losses of the joint venture as they
accrue instead of when they are realized. Advances and distributions are charged and credited
directly to the investment account. Ohio Castings produces railcar parts that are sold to one of
the joint venture partners. The joint venture partner sells these parts to outside third parties at
current market prices and to the Company and the other joint venture partner in Ohio Castings at
cost plus a licensing fee. Ohio Castings closed its Chicago Castings facility effective June 30,
2006, in connection with a consolidation of its operations. Ohio Castings is responsible for the
exit liabilities of this closure. This closing did not have a material financial impact on the
Company.
The Company has determined that, although the joint venture is a variable interest entity (VIE),
the Company is not the primary beneficiary and the joint venture should not be consolidated in the
Companys financial statements. The risk of loss to Castings and the Company is limited to its
investment in the VIE and a portion of Ohio Castings debt, which the Company has guaranteed. The
two other partners of Ohio Castings have made similar guarantees of these obligations.
The carrying amount of the investment in Ohio Castings by Castings was $4.5 million and $4.3
million, respectively at March 31, 2007 and December 31, 2006.
The Company, along with the other members of Ohio Castings, has guaranteed bonds payable and a
state loan issued to one of Ohio Castings subsidiaries by the State of Ohio as further discussed
in Note 12. The value of the guarantee, which was $0.05 million at March 31, 2007, has been
recorded by the Company in accordance with FASB Interpretation No. 45 Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.
For the three months ended March 31, 2007 and 2006, the cost of railcar manufacturing included
$14.0 million and $12.0 million, respectively, in products produced by Ohio Castings.
Inventory at both March 31, 2007 and December 31, 2006 includes $4.1 million of purchases from Ohio
Castings. Approximately $0.2 million and $0.1 million of costs, respectively, were eliminated at
March 31, 2007 and December 31, 2006 as it represented profit from a related party for inventory
still on hand.
Summary combined financial position information for Ohio Castings, the investee company, as of
March 31, 2007 and December 31, 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
December 31, 2006 |
|
|
|
(in thousands) |
|
Financial position: |
|
|
|
|
|
|
|
|
Current assets |
|
$ |
15,095 |
|
|
$ |
13,650 |
|
Property, plant, and equipment, net |
|
|
15,696 |
|
|
|
15,297 |
|
|
|
|
|
|
|
|
Total assets |
|
|
30,791 |
|
|
|
28,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
17,476 |
|
|
|
15,855 |
|
Long-term debt |
|
|
7,194 |
|
|
|
7,659 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
24,670 |
|
|
|
23,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity |
|
|
6,121 |
|
|
|
5,433 |
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
30,791 |
|
|
$ |
28,947 |
|
|
|
|
|
|
|
|
9
Summary combined results of operations for Ohio Castings, the investee company, for the three
months ended March 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
March 31, 2006 |
|
|
|
(in thousands) |
|
Results of operations: |
|
|
|
|
|
|
|
|
Sales |
|
$ |
21,880 |
|
|
$ |
37,339 |
|
|
|
|
|
|
|
|
Earnings from operations |
|
|
620 |
|
|
|
1,327 |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
688 |
|
|
$ |
1,424 |
|
|
|
|
|
|
|
|
Note 8 Warranties
The Company records a liability for an estimate of costs that it expects to incur under its basic
limited warranty, which is typically a range from one year for parts and services to five years on
new railcars, when manufacturing revenue is recognized. Factors affecting the Companys warranty
liability include the number of units sold and historical and anticipated rates of claims and costs
per claim. The Company assesses the adequacy of its warranty liability based on changes in these
factors.
The change in the Companys warranty reserve, which is reflected on the balance sheet in accrued
expenses, is as follows for the three month period ended March 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Liability, beginning of period |
|
$ |
1,753 |
|
|
$ |
1,237 |
|
Expense for new warranties issued |
|
|
546 |
|
|
|
466 |
|
Warranty claims |
|
|
(300 |
) |
|
|
(469 |
) |
|
|
|
|
|
|
|
Liability, end of period |
|
$ |
1,999 |
|
|
$ |
1,234 |
|
|
|
|
|
|
|
|
Note 9 Long-term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
December 31, 2006 |
|
|
|
(in thousands) |
|
Revolving line of credit |
|
$ |
|
|
|
$ |
|
|
Senior unsecured notes |
|
|
275,000 |
|
|
|
|
|
Other |
|
|
75 |
|
|
|
96 |
|
|
|
|
|
|
|
|
Total long-term debt, including current portion |
|
$ |
275,075 |
|
|
$ |
96 |
|
Less current portion of debt |
|
|
75 |
|
|
|
88 |
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion |
|
$ |
275,000 |
|
|
$ |
8 |
|
|
|
|
|
|
|
|
Revolving Line of Credit
Concurrent with the completion of the initial public offering in January 2006, the Company entered
into an Amended and Restated Credit Agreement (the revolving credit agreement) providing for the
terms of the Companys revolving credit facility with North Fork Business Capital Corporation, as
administrative agent for various lenders. The note bears interest at various rates based on LIBOR
or prime. The revolving credit facility originally provided that the payment of dividends triggers
a demand right in favor of ARIs lenders unless ARI
10
meets certain financial covenants and provides
advance notice of the dividend to its lenders. Prior to the amendment in October 2006, the revolving credit facility had a total commitment of the lesser of (i) $75.0
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 revolving credit facility
included a $15.0 million capital expenditure sub-facility based on a percentage of the costs
related to capital projects the Company may undertake. The revolving credit facility was initially
for a three-year term. Borrowings under the revolving credit facility are collateralized by
accounts receivable, contracts, leases, instruments, chattel paper, inventory, pledged accounts,
certain other assets and equipment purchased with proceeds of the capital expenditure sub-facility.
The revolving credit facility has both affirmative and negative covenants, including, without
limitation, a fixed charge coverage ratio, a maximum total debt leverage ratio and limitations on
capital expenditures and dividends.
During October 2006, the Company entered into a first amendment to its revolving credit agreement.
This first amendment provided that the revolving credit facility have a total commitment of the
lesser of (i) $100 million or (ii) an amount equal to a percentage of eligible accounts receivable
plus a percentage of eligible raw materials, work in process and finished goods inventory.
Furthermore, the first amendment increased the capital expenditure sub-facility to $30 million
based on the percentage of the costs related to equipment the Company may acquire. As amended by
the first amendment, the revolving credit facility expires on October 5, 2009.
During February 2007, the Company entered into a second amendment to its revolving credit
agreement. Effective March 2007, the Company entered into a third amendment to its revolving credit
agreement. The revolving credit facility, as amended by the second amendment and the third
amendment, requires that when excess availability under the revolving credit facility is less than
$30.0 million (or has been less than $30.0 million at any time during the prior 90 days), the
Company must meet an adjusted fixed charge coverage ratio of not less than 1.2 to 1.0 on a
quarterly and/or annual basis, and further requires that if any indebtedness has been incurred or
assumed during the applicable quarter (other than indebtedness for loans under the revolving credit
facility), or when excess availability under the revolving credit facility is less than $30.0
million (or has been less than $30.0 million at any time during the prior 90 days), the Company
must meet a leverage ratio calculated based on the outstanding amount of indebtedness to EBITDA
(Earnings Before Interest, Taxes, Depreciation and Amortization), as defined in the revolving
credit facility, as amended, of not greater than 4.0 to 1.0 on a quarterly and/or annual basis.
The revolving credit facility, as amended, includes certain limitations on, among other things, the
Companys ability to incur or maintain indebtedness, modify the Companys 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 revolving credit facility is in the nature of a right in favor of the
administrative agent and the Companys lenders to accelerate all of the Companys obligations under
the revolving credit facility, a demand right that is triggered by certain actions, rather than in
the nature of a negative covenant by which the Company contractually agrees not to take such
actions. Included among the actions that trigger a demand right are certain actions to modify the
Companys governing documents, sell or dispose of collateral, grant credit, incur or maintain
indebtedness, and make dividends and distributions. An incurrence or the maintenance of
indebtedness triggers a demand right if it causes a modified version of the adjusted ratio of the
Companys indebtedness (the modified version of this ratio does not include indebtedness for loans
under the revolving credit facility) to EBITDA, as defined in the 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,
when excess availability under the revolving credit facility is less than $30.0 million (or has
been less than $30.0 million at any time during the prior 90 days), 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 revolving
credit agreement, as amended.
At March 31, 2007 the Company had no borrowings outstanding and $88.4 million of availability under
the revolving credit facility based upon the amount of its eligible accounts receivable and
inventory (and without regard to any financial covenants), or $58.4 million of availability, if the
Company were to maintain excess availability of at least $30 million. The Company was not required
to calculate the leverage ratio or the adjusted fixed charge coverage ratio as of March 31, 2007,
as its excess availability was greater than $30.0 million and there were no other circumstances
that required these two ratios to be tested as of that date. As of March 31, 2007, the Company was
in compliance with each debt covenant that was rendered inapplicable as a result of the $30.0
million excess
11
availability requirement.
As of March 31, 2007, the interest rate on the borrowings under the revolving credit facility was
7.75% and was based on the U.S. prime rate at that time.
The Company declared dividends of $0.03 per common share during the three months ended March 31,
2007, which did not breach any covenants in the revolving credit agreement.
Mortgage Note
The Company has a mortgage note outstanding with a liability of $0.08 million and $0.10 million,
respectively, as of March 31, 2007 and December 31, 2006. This mortgage matures in 2008.
Senior Unsecured Fixed Rate Notes
On February 28, 2007, the Company completed the offering of $275.0 million of senior unsecured
fixed rate notes. The proceeds of the offering are anticipated to be utilized to fund identified
capital expenditure plans and general corporate purposes, including capital expenditures, strategic
transactions, working capital and expenses of the offering.
The notes bear a fixed interest rate that is set at 7.5% and are due in 2014. Interest on the notes
is payable semi-annually in arrears on March 1 and September 1, commencing on September 1, 2007.
The terms of the notes contain restrictive covenants that limit the Companys ability to, among
other things, incur additional debt, issue disqualified or preferred stock, make certain restricted
payments and enter into certain significant transactions with shareholders and affiliates. The
Company was in compliance with all of its covenants under the notes as of March 31, 2007.
The notes may be redeemed, up to 35%, beginning on March 1, 2010, at an initial redemption price of
107.50% of their principal amount, plus accrued and unpaid interest with money that the Company
raises from one or more qualified equity offerings. The redemption price declines to 100% beginning
March 1, 2011.
The Company filed a registration statement on March 21, 2007 to effect an exchange offer relating
to the notes. This registration statement became effective on March 30, 2007. The terms of the
exchange notes to be issued in the exchange offer are substantially identical to the terms of the
outstanding notes, except that the exchange notes will be freely tradable. The exchange offer
expires on May 4, 2007, unless the Company extends the offer.
The fair value of theses notes was approximately $282.9 million at March 31, 2007.
Note 10 Income Taxes
The Company adopted the provisions of FIN 48, on January 1, 2007. As a result of this adoption, the
Company recognized an increase to its unrecognized tax positions of $0.1 million, which was
recorded as a cumulative effect adjustment to retained earnings. As a result of implementing FIN
48, the Company had $2.2 million of unrecognized tax benefits, of which $0.5 million, if
recognized, would affect the Companys effective tax rate.
Upon adoption of FIN 48, the Company has elected a new accounting policy to classify interest and
penalties related to unrecognized tax benefits as a component of income tax expense. Interest was
computed on the difference between the tax position recognized in accordance with FIN 48 and the
amount previously taken or expected to be taken in the Companys tax returns. As of the adoption
date, the Company has $0.2 million of accrued interest expense, net of taxes related to
unrecognized tax benefits. Penalties, if incurred, would be accounted for as a component of tax
expense.
The Companys US federal income tax return for the 2003 tax year remains subject to examination by
the Internal Revenue Service (IRS). The IRS commenced an examination of the Companys 2004 and
2005 federal income tax returns during the fourth quarter of 2006. This examination is anticipated
to be completed by the end of 2007. While it may be possible that a reduction could occur with the
Companys unrecognized tax benefits as an outcome of the IRS examination, it is not quantifiable at
this time. However, management anticipates that any adjustments would
12
not result in a material
change to the results of operations or financial condition of the Company.
No statutes have been extended on any of the Companys federal income tax filings. The statute of
limitations on the Companys 2004 and 2005 federal income tax returns will expire on September 15,
2008 and 2009, respectively.
The Companys state income tax returns for the 2002 through 2006 tax years remain subject to
examination by various state authorities with the latest closing period on November 15, 2011. The
Company is currently not under examination by any state authority for income tax purposes and no
statutes for state income tax filings have been extended.
The Companys foreign subsidiarys income tax returns for the 2003 through 2006 tax years remain
subject to examination by Canada. The foreign subsidiary is currently not under examination and no
statutes have been extended.
Note 11 Employee Benefit Plans
The Company is the sponsor of two defined benefit plans that cover certain employees at designated
repair facilities. One defined benefit plan, which covers certain salaried and hourly employees,
is frozen and no additional benefits are accruing thereunder. The second defined benefit plan that
covers only certain of the Companys union employees is active and benefits continue to accrue
thereunder. The assets of all funded plans are held by independent trustees and consist primarily
of equity and fixed income securities. The Company is also the sponsor of an unfunded unqualified
supplemental executive retirement plan (SERP) in which several of its employees are participants.
The SERP is frozen and no additional benefits are accruing thereunder. The Company uses a
measurement date of October 1 for all pension plans.
The Company also provides postretirement health care and life insurance benefits for certain of its
salaried and hourly retired employees. The measurement date for the postretirement plan is October
1. Employees may become eligible for health care benefits if they retire after attaining specified
age and service requirements. These benefits are subject to deductibles, co-payment provisions and
other limitations.
The Company recorded total expenses relating to these plans of $0.2 million in the three months
ended March 31, 2007 and 2006.
The components of net periodic benefit cost for the three months ended March 31, 2007 and 2006 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Service cost |
|
$ |
60 |
|
|
$ |
45 |
|
Interest cost |
|
|
241 |
|
|
|
199 |
|
Expected return on plan assets |
|
|
(240 |
) |
|
|
(182 |
) |
Amortization of unrecognized net gain |
|
|
51 |
|
|
|
|
|
Recognized gains |
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
Net periodic benefit cost recognized |
|
$ |
112 |
|
|
$ |
110 |
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Service cost |
|
$ |
32 |
|
|
$ |
3 |
|
Interest cost |
|
|
75 |
|
|
|
52 |
|
Amortization of prior service cost |
|
|
5 |
|
|
|
|
|
Amortization of loss |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost recognized |
|
$ |
124 |
|
|
$ |
55 |
|
|
|
|
|
|
|
|
The Company also maintains a qualified defined contribution plan, which provides benefits to its
employees based on employee contributions, years of service, and employee earnings with
discretionary contributions allowed. Expenses related to these plans were $0.2 million for the
three months ended March 31, 2007 and 2006.
Note 12 Commitments and Contingencies
The Company leases certain facilities from an entity owned by its Chief Executive Officer, certain
affiliates of ARI and third parties. Total rent expense on all leases was approximately $0.9
million and $1.3 million, respectively, for the three months ended March 31, 2007 and 2006.
Expenses to related parties included in these amounts were $0.2 million for the three months ended
March 31, 2007 and 2006.
In connection with our acquisition in January 2005 of Castings LLC, which owns a one-third
ownership interest in Ohio Castings Company, LLC, from ACF Industries Holding Corp., a company
beneficially owned and controlled by Mr. Icahn, 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 $5.8 million was outstanding as of March 31, 2007, and the guarantee of a $2.0 million state
loan that provides for purchases of capital equipment, of which $1.5 million was outstanding as of
March 31, 2007. The two other partners of Ohio Castings have made similar guarantees of these
obligations.
The Company is subject to comprehensive federal, state, local and international environmental laws
and regulations relating to the release or discharge of materials into the environment, the
management, use, processing, handling, storage, transport or disposal of hazardous materials and
wastes, or otherwise relating to the protection of human health and the environment. These laws and
regulations not only expose ARI to liability for the environmental condition of its current or
formerly owned or operated facilities, and its own negligent acts, but also may expose ARI to
liability for the conduct of others or for ARIs actions that were in compliance with all
applicable laws at the time these actions were taken. In addition, these laws may require
significant expenditures to achieve compliance, and are frequently modified or revised to impose
new obligations. Civil and criminal fines and penalties and other sanctions may be imposed for
non-compliance with these environmental laws and regulations. ARIs operations that involve
hazardous materials also raise potential risks of liability under common law. ARI is involved in
investigation and remediation activities at properties that it now owns or leases to address
historical contamination and potential contamination by third parties. The Company is also involved
with state agencies in the cleanup of two sites under these laws. These investigations are in
process but it is too early to be able to make a reasonable estimate, with any certainty, of the
timing and extent of remedial actions that may be required, and the costs that would be involved in
such remediation. Substantially all of the issues identified relate to the use of the properties
prior to their transfer to ARI in 1994 by ACF Industries LLC (ACF), an affiliate of Carl C.
Icahn, and for which ACF has retained liability for environmental contamination that may have
existed at the time of transfer to ARI. ACF has also agreed to indemnify ARI for any cost that
might be incurred with those existing issues. However, if ACF fails to honor its obligations to
ARI, ARI would be responsible for the cost of such remediation. The Company believes that its
operations and facilities are in substantial compliance with applicable laws and regulations and
that any noncompliance is not likely to have a material adverse effect on its operations or
financial condition.
When it is possible to make a reasonable estimate of the liability with respect to such a matter, a
provision will be
14
made as appropriate. Actual cost to be incurred in future periods may vary from
these estimates. Based on facts presently known, ARI does not believe that the outcome of these
proceedings will have a material adverse effect on its future liquidity, results of operations or
financial position.
ARI is a party to collective bargaining agreements with labor unions at its Longview, Texas and
North Kansas City, Missouri repair facilities and at its Longview, Texas steel foundry and
components manufacturing facility. These agreements expire in January 2010, September 2007, and
April 2008, respectively. ARI is also party to a collective bargaining agreement at our Milton,
Pennsylvania repair facility, which expired on June 19, 2005. The contract provisions under the
agreement provide that the contract would remain in effect under the old terms until terminated by
either party with 60 days notice. At the present time, there are no workers at Milton, as the site
is idled.
The Company has been named as the defendant in a lawsuit in which the plaintiff, OCI Chemical
Company, claims that the Company is responsible for the damage caused by allegedly defective
railcars that were manufactured by the Company. The plaintiffs allege 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. The
Company believes that it is not responsible for the spills and has meritorious defenses against
liability.
Certain claims, suits and complaints arising in the ordinary course of business have been filed or
are pending against ARI. In the opinion of management, all such claims, suits, and complaints
arising in the ordinary course of business are without merit or would not have a significant effect
on the future liquidity, results of operations or financial position of ARI if disposed of
unfavorably.
The Company entered into two vendor supply contracts with minimum volume commitments in October
2005 with suppliers of materials used at our railcar production facilities. The agreements have
terms of two and three years respectively. The Company has agreed to purchase a combined total of
$65.7 million from these two suppliers over three years. In 2007 and 2008, ARI expects to purchase
$26.3 million and $24.0 million, respectively, under these agreements.
ARI entered into supply agreements on January 28, 2005 and on June 8, 2005 with a supplier for two
types of steel plate. The agreement is for five years and is cancelable by either party, with
proper notice after two years. The agreement commits ARI to buy 75% of its production needs from
this supplier at prices that fluctuate with market.
In January 2006, the Company entered into an agreement with a third party vendor for a specified
number of wheels and related parts, including axles and roller bearings. The Company was required
to prepay for a portion of the requirements under this agreement. The Company expects to purchase
$7.8 million from this vendor in 2007 under this agreement.
In 2006, the Company entered into agreements to purchase a minimum of 60% of our requirements of
selected draft and truck components for the years 2007, 2008 and 2009.
Note 13 Initial Public Offering
On January 24, 2006, the Company completed the sale of 9,775,000 shares of common stock to the
public pursuant to an effective registration statement at a price of $21.00 per share. The
offering resulted in gross proceeds to the Company of $205.3 million. Expenses related to the
offering were $13.3 million for underwriting discounts and commissions. The Company received net
proceeds of $192.0 million in the offering.
15
The net proceeds from the offering were applied as follows (in millions):
|
|
|
|
|
Redemption of all oustanding shares of preferred stock |
|
$ |
94.0 |
|
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 |
|
Acquisition of Custom Steel |
|
|
17.2 |
|
Payment of payables in connection with acquisition |
|
|
5.3 |
|
Investment in plant, property and equipment |
|
|
12.7 |
|
Offering costs paid during the first quarter |
|
|
1.4 |
|
|
|
|
|
Total uses |
|
$ |
192.0 |
|
|
|
|
|
Note 14 Comprehensive Income
The components of comprehensive income, net of related tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
|
2007 |
|
2006 |
|
|
|
(in thousands) |
|
Net earnings |
|
$ |
13,507 |
|
|
$ |
7,261 |
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
13,514 |
|
|
$ |
7,261 |
|
|
|
|
Note 15 Earnings per Share
The shares used in the computation of the Companys basic and diluted earnings per common share are
reconciled as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Weighted average basic common shares outstanding |
|
|
21,220,302 |
|
|
|
19,013,011 |
|
Dilutive effect of employee stock options (1) |
|
|
89,937 |
|
|
|
33,669 |
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding |
|
|
21,310,239 |
|
|
|
19,046,680 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock options to purchase 75,000 shares of common stock granted during the second quarter of
2006 were not included in the calculation for diluted earnings per share for the three months ended
March 31, 2007. These options would have resulted in an antidilutive effect to the earnings per
share calculation. |
Note 16 Stock based Compensation
In December 2004, the FASB issued SFAS 123(R), which establishes the accounting for transactions in
which an entity exchanges its equity instruments or certain liabilities based upon the entitys
equity instruments for goods or services. The revision to SFAS No. 123(R) generally requires that
publicly traded companies measure the cost of employee services received in exchange for an award
of equity instruments based on the fair value of the award on the grant date. That cost will be
recognized over the period during which an employee is required to provide service in exchange for
the award, which is usually the vesting period.
16
In March 2005, the Securities and Exchange Commission 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 has adopted the provisions of SAB 107 in conjunction with the adoption of
Statement 123(R) and also considers the guidance provided in the FSPs. The requirements of SFAS No.
123(R) became effective for the Company on January 19, 2006 in connection with the initial public
offering and the equity incentive plan created in 2005 (discussed below).
The following table presents the amounts for stock based compensation expense incurred by ARI for
each of the three months ended March 31, 2007 and 2006 and the corresponding line items on the
statement of operations that they are classified within:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
|
|
|
Stock based compensation expense: |
|
|
|
|
|
|
|
|
Cost of goods sold: manufacturing operations |
|
$ |
47 |
|
|
$ |
|
|
Selling, administrative and other |
|
|
585 |
|
|
|
3,550 |
|
|
|
|
Total stock based compensation expense |
|
$ |
632 |
|
|
$ |
3,550 |
|
|
|
|
Net income for the three months ended March 31, 2007 and 2006 includes $0.2 million and $1.3
million, respectively of income tax benefits related to our stock-based compensation arrangements.
Stock Options
Concurrent with the initial public offering, the Company granted options to purchase a total of
484,876 shares of common stock under the 2005 equity incentive plan (as amended, the 2005 Plan).
These options were granted at an exercise price equal to the initial public offering price of
$21.00 per share. The options have a term of five years and vest in equal annual installments over
a three-year period. The Company determined that the stock option expense for these options will
total approximately $3.5 million over the three year vesting period using 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%. The Company accounts for the 2005 Plan under the recognition
and measurement principles of SFAS No. 123(R), and its related provisions. As there was no history
with the stock prices of the Company, the stock volatility rate was determined using volatility
rates for several other similar companies within the railcar industry. The five year term
represents the expiration of each option. The interest rate used was the five year government T
Bill rate on the date of grant. Dividend yield was determined from an average of other companies in
the industry, as the Company did not have a history of dividend rates.
On April 3, 2006, the Company issued options to purchase a total of 75,000 shares of common stock
under the 2005 Plan. These options were granted at an exercise price of $35.69 per share. The
Company determined the stock option expense for these options will total approximately $1.0 million
over the four year vesting period using the same assumptions and methodology to determine the value
of these options as was used for the options issued in connection with the Companys initial public
offering.
The 2005 Plan permits the Company 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. Options are subject to certain vesting provisions as designated by the board of directors and
generally have an expiration that ranges from 5 to 10 years. Options granted under the 2005 Plan
must have an exercise price at or above the fair market value on the date of grant. 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 the
Companys board of
17
directors or a committee of the board. Options granted pursuant to the
requirements of SFAS No. 123(R) are expensed on a graded vesting method over the vesting period of the option.
The Company recognized $0.33 million and $0.55 million, respectively, of compensation expense
during the three months ended March 31, 2007 and 2006 related to stock option grants made under the
2005 plan. The Company recognized income tax benefits related to stock options of $0.1 million and
$0.2 million, respectively, during the three months ended March 31, 2007 and 2006.
The following is a summary of option activity under the 2005 plan for January 1, 2007 through March
31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
Grant-date |
|
|
Aggregate |
|
|
|
Shares |
|
|
Average |
|
|
Remaining |
|
|
Fair Value |
|
|
Intrinsic |
|
|
|
Covered by |
|
|
Exercise |
|
|
Contractual |
|
|
of Options |
|
|
Value |
|
|
|
Options |
|
|
Price |
|
|
Life |
|
|
Granted |
|
|
($000) |
|
|
|
|
Outstanding at the
beginning of
period, January 1,
2007 |
|
|
559,876 |
|
|
$ |
22.97 |
|
|
48 months |
|
$ |
8.05 |
|
|
$ |
6,199 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(27,413 |
) |
|
$ |
21.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the
end of period,
March 31, 2007 |
|
|
532,463 |
|
|
$ |
23.07 |
|
|
45 months |
|
$ |
8.09 |
|
|
$ |
3,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the
end of period,
March 31, 2007 |
|
|
134,210 |
|
|
$ |
21.00 |
|
|
45 months |
|
$ |
7.28 |
|
|
$ |
1,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 27,413 shares of the Companys common stock were exercised during the three
months ended March 31, 2007. The Company realized a tax benefit of $0.1 million related to these
option exercises. No options were exercised in the three months ended March 31, 2006 as no options
were exercisable during 2006.
Restricted Stock Award
On the date of the initial public offering, the Company issued 285,714 restricted shares of the
Companys common stock to Mr. Unger, its Chief Executive Officer. These restricted shares were
granted with an issuance price of $21.00 per share, resulting in a fair value of $6.0 million on
the date of grant. This restricted stock grant vested 40% on the date of the grant with the
remaining 60% vesting one year after issuance. The Company recorded compensation expense of $2.4
million on the date of the grant for this restricted stock. The remaining expense was recognized
over the one-year vesting period. 114,286 of these shares became transferable without contractual
restrictions by Mr. Unger six months after issuance. An additional 85,714 of these shares became
transferable without contractual restrictions by Mr. Unger twelve months after issuance. The
remaining 85,714 shares will be transferable without contractual restrictions by Mr. Unger eighteen
months after issuance.
The Company recognized $0.3 million and $3.0 million, respectively, of compensation expense during
the three months ended March 31, 2007 and 2006, for this restricted stock grant. The Company
recognized $0.1 million and $1.1 million of income tax benefits in the three months ended March 31,
2007 and 2006, respectively, for this restricted stock grant.
18
The following is a summary of the status and activity related to non-vested shares from
January 1, 2007 through March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Non-vested |
|
|
Average Grant |
|
|
|
Stock Awards |
|
|
Date Fair Value |
|
|
|
|
Non-vested at January 1, 2007 |
|
|
171,428 |
|
|
$ |
21.00 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(171,428) |
|
|
|
21.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future stock compensation expense and shares available
As of March 31, 2007, unrecognized compensation costs related to the unvested portion of stock
options were approximately $1.7 million and are expected to be recognized over a weighted average
period of approximately 26 months.
As of March 31, 2007, an aggregate of 440,124 shares were available for issuance in connection with
future grants under the Companys 2005 Plan.
Shares issued under the 2005 Plan may consist in whole or in part of authorized but unissued shares
or treasury shares. The 1,000,000 shares covered by the Plan were registered for issuance to the
public with the SEC on a Form S-8 on August 16, 2006. Within the same filing, we registered 114,286
shares of restricted stock that vested in January 2006.
Note 17Common Stock, Mandatorily Redeemable Preferred Stock, and New Preferred Stock
On January 24, 2006, the Company completed the sale of 9,775,000 shares of common stock to the
public pursuant to an effective registration statement at a price of $21.00 per share. In
connection with the offering, the Company redeemed all mandatorily redeemable preferred stock and
new preferred stock, including accrued dividends of $11.9 million, for a total of $94.0 million.
During each quarter of 2006 and in the first quarter of 2007, the Board of Directors of the Company
declared and paid cash dividends of $0.03 per share of common stock of the Company to shareholders
of record as of a given date.
During the first three months of 2007, the Company issued 27,413 shares of its common stock as
certain holders of stock options exercised some of their vested options.
Note 18Related Party Transactions
In connection with the 1994 ACF asset transfer, described in Note 1, the Company entered into the
following administrative and operating agreements with ACF, effective as of October 1, 1994:
Manufacturing services agreement
Under the manufacturing services agreement, ACF agreed to manufacture and distribute, at the
Companys instruction, various products using certain assets that the Company acquired pursuant
to the 1994 ACF asset transfer agreement. In consideration for these services, the Company agreed
to pay ACF based on agreed upon rates. Components supplied to ARI by ACF include tank railcar
heads, wheel sets and various structural components. In the three months ended March 31, 2007 and
2006, ARI purchased inventory of $13.4 million and $22.5 million, respectively, of components
from ACF. The agreement automatically renews unless written notice is provided by the Company.
19
Supply Agreement
Under this agreement, the Company agreed to manufacture and sell to ACF specified components at
cost plus mark-up or on terms not less favorable than the terms on which the Company sold the
same products to third parties. Revenue recorded under this arrangement totaled zero and $0.1
million for the three months ended March 31, 2007 and 2006 and is included under revenue from
affiliates on the accompanying condensed consolidated statement of operations.
The Company has the following agreements with ARL and its subsidiaries:
ARL Railcar Servicing Agreement
Under this agreement, the Company agreed to provide ARL with railcar repair and maintenance
services, fleet management services and consulting services on safety and environmental matters
for railcars owned or managed by ARL and leased or held for lease by ARL. ARL agreed to
compensate the Company based on agreed upon rates. Revenue of $3.9 million and $6.0 million,
respectively, for the three months ended March 31, 2007 and 2006, included under revenue from
affiliates on the statement of operations, was recorded under this arrangement. The agreement
extends through June 30, 2007 and automatically renews for one-year periods unless either party
provides at least six months prior notice of termination or if an agreement is reached to
terminate the contract. Termination by the Company would result in a fee payable to ARL of $0.5
million.
ARL Services Agreement and ARI/ARL Separation Agreement
Under the Companys services agreement with ARL, ARL agreed to provide the Company certain
information technology services, rent and building services and limited administrative services.
The rent and building services includes the use of certain facilities owned by Mr. Unger, which
is further described in Note 14. Under this agreement, the Company agreed to provide purchasing
and engineering services to ARL. Consideration exchanged between the companies is based on an
agreed upon a fixed annual fee. Total fees paid to ARL were $0.2 million and $0.5 million,
respectively, for the three months ended March 31, 2007 and 2006. The Company did not bill ARL in
either the three months ended March 31, 2007 or 2006 as no services were performed under this
agreement for ARL. The fees paid to ARL are included in costs related to affiliates on the
statement of operations. Either party may terminate any of these services, and the associated
costs for these services, on at least six months prior notice at any time prior to the
termination of the agreement on December 31, 2007 or if an agreement is reached to terminate the
contract.
On March 30, 2007, ARI and ARL agreed, pursuant to a separation agreement, to terminate,
effective December 31, 2006, all services provided to ARL by the Company under the services
agreement. Additionally, the separation agreement provided that all services provided to the
Company by ARL under the services agreement would be terminated except for rent and building
services. Under the separation agreement, ARL agreed to waive the six month notice requirement
for termination required by the services agreement.
Trademark License Agreement
Under this agreement, which is effective as of June 30, 2005, ARI granted a nonexclusive,
perpetual, worldwide license to ARL to use ARIs common law trademarks American Railcar and the
diamond shape logo. ARL may only use the licensed trademarks in connection with the railcar
leasing business. ARI receives annual fees of $1,000 in exchange for this license.
ARL Sales Contracts
On March 31, 2006, the Company entered into an agreement with ARL for the Company to manufacture
and ARL to purchase 1,000 tank railcars in 2007. The Company has in the past manufactured and
sold railcars to ARL on a purchase order basis. When the Company entered into this agreement, it
planned to produce these tank railcars with new manufacturing capacity that the Company expected
to have available beginning in January 2007. The agreement also included options for ARL to
purchase up to 300 covered hopper railcars in 2007,
20
should additional capacity become available
and not be called for by other rights of first refusal, and 1,000 tank
railcars and 400 covered hopper railcars in 2008. The options to purchase 1,000 tank railcars and
400 covered hopper railcars in 2008 were exercised by ARL. Similar to other customers, the storm
damage in April 2006 at Marmaduke and resulting temporary plant shutdown will impact the timing
of delivery of the railcars that ARL has ordered.
On September 25, 2006, the Company entered into an agreement with ARL for the Company to
manufacture and ARL to purchase 500 tank railcars in both 2008 and 2009.
Additional Agreements with ACF
ARI entered into a note payable with ACF Holding, an affiliate, for $12.0 million effective January
1, 2005, in connection with the purchase of Castings (Note 1). The note bears interest at prime
plus 0.5% and is due on demand. This note was paid off in full in connection with the initial
public offering, as discussed in Note 15.
In April 2005, the Company entered into a consulting agreement with ACF in which both parties
agreed to provide labor, litigation, labor relations support and consultation, and labor contract
interpretation and negotiation services to one another. In addition, the Company has agreed to
provide ACF with engineering and consulting advice. Fees paid to one another are based on agreed
upon rates. No services were rendered and no amounts were paid during the three months ended March
31, 2007 and 2006.
During 2006, ARI entered into two inventory storage agreements with ACF to store designated
inventory that ARI had purchased under its manufacturing services agreement with ACF at ACFs
Huntington facility. Under this agreement, ACF holds the inventory at its facility in segregated
locations until such time that the inventory is shipped to ARI.
During 2006, ARI entered into an agreement that provided that ARI would procure, purchase and own
the raw material components for wheel sets. These wheel set components are those that are being
used in the assembly of wheel sets for ARI under the ARI/ACF manufacturing services agreement.
Under the manufacturing services agreement with ACF, which remains unchanged, ARI will continue to
pay ACF for its services, specifically labor and overhead, in assembling the wheel sets.
Agreements with Affiliated Parties
On December 17, 2004, ARI borrowed $7.0 million under a note payable to Arnos Corp., an affiliate
of ARI. The note bears interest at prime plus 1.75% and was payable on demand. Interest expense on
the note was $0.1 million for the three months ended March 31, 2006. This note was paid off in full
in connection with the initial public offering, as discussed in Note 13.
In September 2003, Castings loaned Ohio Castings $3.0 million under a promissory note, which was
due in January 2004. The note was renegotiated in 2005 with a new principal amount of $2.2 million
and bears interest at 4.0%. Payments of principal and interest are due quarterly with the last
payment due in November 2008. This note receivable is included in Investment in joint venture on
the accompanying balance sheet. Total amounts due from Ohio Castings under this note were $1.5
million at March 31, 2007 and December 31, 2006.
During April 2006, the Companys Chairman and majority stockholder, Carl C. Icahn, contributed $0.3
million as a capital contribution to pay the weekly payroll and fringe benefits of the Marmaduke
manufacturing facility. This was done to help bridge the gap until the Company received funds from
its insurance policies to continue to pay full wages and benefits to all employees working for the
tank railcar operations at Marmaduke, Arkansas.
Financial Information for Transactions with Affiliates
As of March 31, 2007, amounts due from affiliates were $10.0 million in accounts receivable from
Ohio Castings and ARL. As of December 31, 2006, amounts due from affiliates represented $9.6
million in receivables from ACF, Ohio Castings and ARL.
21
As of March 31, 2007 and December 31, 2006, amounts due to affiliates included $1.7 million in
accounts payable to ACF.
Cost of railcar manufacturing for the three months ended March 31, 2007 and 2006 included $14.0
million and $12.0 million, respectively, in railcar products produced by Ohio Castings, which is
partially owned by Castings, as described in Note 1. Expenses of zero and $0.1 million paid to
Castings under a supply agreement are included in the cost of railcar manufacturing for the three
months ended March 31, 2007 and 2006, respectively. Inventory at both March 31, 2007 and December
31, 2006 includes $4.1 million of purchases from Ohio Castings.
Note 19Operating Segment and Sales/Credit Concentrations
ARI operates in two reportable segments; manufacturing operations and railcar services. Performance
is evaluated based on revenue and operating profit. Intersegment sales and transfers are accounted
for as if sales or transfers were to third parties. The information in the following tables is
derived from the segments internal financial reports used for corporate management purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
Manufacturing |
|
|
Railcar |
|
|
Corporate |
|
|
|
|
|
|
|
March 31, 2007 |
|
Operations |
|
|
Services |
|
|
& all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
|
(in thousands) |
|
Revenues from external customers |
|
$ |
175,127 |
|
|
$ |
12,216 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
187,343 |
|
Intersegment revenues |
|
|
269 |
|
|
|
125 |
|
|
|
|
|
|
|
(394 |
) |
|
|
|
|
Cost of goods sold external
customers |
|
|
(149,439 |
) |
|
|
(9,923 |
) |
|
|
|
|
|
|
|
|
|
|
(159,362 |
) |
Cost of intersegment sales |
|
|
(239 |
) |
|
|
(119 |
) |
|
|
|
|
|
|
358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
25,718 |
|
|
|
2,299 |
|
|
|
|
|
|
|
(36 |
) |
|
|
27,981 |
|
Selling, administrative and other |
|
|
(1,804 |
) |
|
|
(553 |
) |
|
|
(4,346 |
) |
|
|
|
|
|
|
(6,703 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
23,914 |
|
|
$ |
1,746 |
|
|
$ |
(4,346 |
) |
|
$ |
(36 |
) |
|
$ |
21,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
Manufacturing |
|
|
Railcar |
|
|
Corporate |
|
|
|
|
|
|
|
March 31, 2006 |
|
Operations |
|
|
Services |
|
|
& all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
|
(in thousands) |
|
Revenues from external customers |
|
$ |
166,490 |
|
|
$ |
12,239 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
178,729 |
|
Intersegment revenues |
|
|
901 |
|
|
|
178 |
|
|
|
|
|
|
|
(1,079 |
) |
|
|
|
|
Cost of goods sold external
customers |
|
|
(148,256 |
) |
|
|
(10,213 |
) |
|
|
|
|
|
|
|
|
|
|
(158,469 |
) |
Cost of intersegment sales |
|
|
(933 |
) |
|
|
(138 |
) |
|
|
|
|
|
|
1,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
18,202 |
|
|
|
2,066 |
|
|
|
|
|
|
|
(8 |
) |
|
|
20,260 |
|
Selling, administrative and other |
|
|
(1,472 |
) |
|
|
(493 |
) |
|
|
(6,730 |
) |
|
|
|
|
|
|
(8,695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
16,730 |
|
|
$ |
1,573 |
|
|
$ |
(6,730 |
) |
|
$ |
(8 |
) |
|
$ |
11,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing |
|
Railcar |
|
Corporate |
|
|
|
|
As of |
|
Operations |
|
Services |
|
& all other |
|
Eliminations |
|
Totals |
|
|
|
(in thousands) |
March 31, 2007 |
|
|
Total assets |
|
$ |
280,752 |
|
|
$ |
35,271 |
|
|
$ |
326,463 |
|
|
$ |
|
|
|
$ |
642,486 |
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
255,169 |
|
|
$ |
33,764 |
|
|
$ |
49,993 |
|
|
$ |
|
|
|
$ |
338,926 |
|
22
Manufacturing Operations
Revenues from affiliates were 8.6% and 8.4% of total consolidated revenues for the three months
ended March 31, 2007 and 2006, respectively.
Revenues from one significant customer totaled 57.2% and 31.5% of total consolidated revenues for
the three months ended March 31, 2007 and 2006, respectively.
Revenues from two significant customers were 65.8% and 46.1% of total consolidated revenues for the
three months ended March 31, 2007 and 2006, respectively.
Receivables from one significant customer were 33.1% and 10.0% of total consolidated accounts
receivable (including accounts receivable from affiliate) at March 31, 2007 and December 31, 2006,
respectively. Receivables from two significant customers were 50.1% and 18.7% of total consolidated
accounts receivable (including accounts receivable from affiliate) at March 31, 2007 and December
31, 2006, respectively.
Railcar services
Revenues from affiliates were 2.1% and 3.3% of total consolidated revenues for the three months
ended March 31, 2007 and 2006, respectively. No single services customer accounted for more than
10% of total consolidated revenue for the three months ended March 31, 2007 and 2006. No single
services customer accounted for more than 10% of total consolidated accounts receivable as of March
31, 2007 and December 31, 2006.
Note 20Supplemental Cash Flow Information
ARI received interest income of $1.9 million and $0.5 million for the three months ended March 31,
2007 and 2006, respectively.
ARI paid interest expense of $0.07 million and $1.0 million for the three months ended March 31,
2007 and 2006, respectively.
ARI paid taxes of $0.1 million and $1.4 million for the three months ended March 31, 2007 and 2006,
respectively.
In February 2006, the Board of Directors of the Company declared a cash dividend of $0.03 per share
of common stock of the Company to shareholders of record as of March 22, 2006 that was paid on
April 6, 2006.
In February 2007, the Board of Directors of the Company declared a cash dividend of $0.03 per share
of common stock of the Company to shareholders of record as of March 22, 2007 that was paid on
April 6, 2007.
Note 21Subsequent Events
On April 4, 2007, the Compensation Committee of the Board of Directors of the Company granted
awards of stock appreciation rights (SARs) to certain employees pursuant to the Companys 2005
Equity Incentive Plan, as amended. The Committee granted an aggregate of 277,100 SARs. The SARs
will be settled in cash and have an exercise price of $29.49, which was the closing price of the
Companys common stock on the date of grant. The SARs will vest in 25% increments on the first,
second, third and fourth anniversaries of the grant date. The SARs have a term of seven years.
Subsequent to the granting of these SARs, 3,300 SARs granted to two non-executive employees were
forfeited as these two employees resigned from the Company. None of these 3,300 SARs had vested as
of the employees applicable dates of resignation.
On April 20, 2007, the Company paid its Chief Financial Officer (CFO) a one-time special cash bonus
of $500,000 in accordance with the employment agreement currently in place with that officer, which
provided for the payment of the bonus if the Company successfully completed its initial public
offering.
On May 1, 2007, the Board of Directors of the Company declared a cash dividend of $0.03 per share
of common stock of the Company to shareholders of record at the close of business of June 28, 2007.
These dividends are
23
payable on July 13, 2007.
On
May 1, 2007 the Company entered into a third amendment, dated as
of March 31, 2007, to its
revolving credit facility, as amended. Among other things, as amended by the third amendment, the
revolving credit facility provides that, if any indebtedness has been incurred or assumed during
the applicable quarter (other than indebtedness for loans under the revolving credit facility), or
when excess availability under the revolving credit facility is less than $30.0 million (or has
been less than $30.0 million at any time during the prior 90 days), the Company must meet a
leverage ratio calculated based on the outstanding amount of indebtedness to EBITDA (Earnings
Before Interest, Taxes, Depreciation and Amortization), as defined in the revolving credit
facility, as amended, of not greater than 4.0 to 1.0 on a quarterly and/or annual basis. In
addition, as amended by the third amendment, an incurrence or the maintenance of indebtedness
triggers a demand right if it causes a modified version of the adjusted ratio of the Companys
indebtedness (the modified version of this ratio does not include indebtedness for loans under the
revolving credit facility) to EBITDA, as defined in the revolving credit facility, as amended, to
be greater than 4.0 to 1.0.
24
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements involve known and unknown risks, uncertainties and other factors that may
cause our actual results, financial position or performance to be materially different from any
future results, financial position or performance expressed or implied by such forward-looking
statements. We have used the words may, will, expect, anticipate, believe, forecast,
estimate, plan, projected, intend and similar expressions in this report to identify
forward-looking statements. We have based these forward-looking statements on our current views
with respect to future events and financial performance. Our actual results or those of our
industry could differ materially from those projected in the forward-looking statements. Our
forward-looking statements are subject to risks and uncertainties, including:
|
|
|
the cyclical nature of our business and 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; |
|
|
|
|
fluctuations in the supply of components and raw materials we use in railcar
manufacturing and our ability to maintain relationships with our suppliers of railcar
components and raw materials; |
|
|
|
|
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; |
|
|
|
|
risks associated with our capital expenditure projects, including without limitation: |
|
o |
|
construction delays; |
|
|
o |
|
unexpected costs; |
|
|
o |
|
our planned dependence on our planned new flexible railcar
manufacturing plant to produce railcars for which we have already accepted orders;
and |
|
|
o |
|
other risks typically associated with the construction of new manufacturing facilities; |
|
|
|
our dependence on our key personnel; |
|
|
|
|
risks associated with our recent and anticipated growth including, without limitation: |
|
o |
|
potential for labor shortages |
|
|
o |
|
the need to implement improvement to our infrastructure to accommodate that growth; and |
|
|
o |
|
risks and costs associated with those improvements; |
|
|
|
risks associated with the conversion of our railcar backlog into revenues; |
|
|
|
|
the difficulties of integrating acquired businesses with our own; |
|
|
|
|
the risk of lack of acceptance by our customers of our new railcar offerings; |
25
|
|
|
the cost of complying with environmental and health and safety 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 managerial
support; |
|
|
|
|
potential failure by ACF Industries LLC (ACF), an affiliate of Carl C. Icahn, to
honor its indemnification obligations to us; |
|
|
|
|
potential risk of increased unionization of our workforce; |
|
|
|
|
our ability to manage our pension costs; |
|
|
|
|
potential significant warranty claims; and |
|
|
|
|
covenants in our revolving credit facility, as amended, our unsecured senior notes
and other agreements as they presently exist, governing our indebtedness that limit our
managements discretion in the operation of our businesses. |
Our actual results could be different from the results described in or anticipated by our
forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections
and may be better or worse than anticipated. Given these uncertainties, you should not rely on
forward-looking statements. Forward-looking statements represent our estimates and assumptions only
as of the date that they were made. We expressly disclaim any duty to provide updates to
forward-looking statements, and the estimates and assumptions associated with them, after the date
of this report, in order to reflect changes in circumstances or expectations or the occurrence of
unanticipated events except to the extent required by applicable securities laws. All of the
forward-looking statements are qualified in their entirety by reference to the factors discussed
above under Risk factors in our Annual Report on Form 10-K filed on February 13, 2007, as amended
by our Annual Report on Form 10-K/A filed on February 15, 2007 (the Annual Report) and in Part
II- Item 1A of this report, as well as the risks and uncertainties discussed elsewhere in the
Annual Report and this report. We caution you that these risks may not be exhaustive. We operate in
a continually changing business environment and new risks emerge from time to time.
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 consist of railcar repair and refurbishment services and fleet management services.
RECENT DEVELOPMENTS
On February 28, 2007, we completed an institutional private placement of $275.0 million aggregate
principal amount of 7.5% senior notes due 2014 (the Notes). The institutional private placement
resulted in net proceeds to us of approximately $272.2 million. The Notes were sold within the
United States only to qualified institutional buyers in reliance on Rule 144A under the Securities
Act of 1933, as amended (the Securities Act), and outside the United States only to non-U.S.
persons in reliance on Regulation S under the Securities Act. We intend to use the net proceeds
from the offering of the Notes for identified capital expenditure plans and general corporate
purposes,
26
including capital expenditures, strategic transactions and working capital.
We filed a registration statement on Form S-4 with the SEC on March 21, 2007 to effect an exchange
offer relating to the notes. This registration statement became effective on March 30, 2007. The
terms of the exchange notes to be issued in the exchange offer are substantially identical to the
terms of the outstanding notes, except that the exchange notes will be freely tradable. The
exchange offer expires on May 4, 2007, unless we extend the offer. We do not currently intend to
extend the expiration date.
On April 4, 2007, the Compensation Committee of the Board of Directors granted awards of SARs to
certain employees pursuant to our 2005 Equity Incentive Plan, as amended. The Committee granted an
aggregate of 277,100 SARs. The SARs will be settled in cash and have an exercise price of $29.49,
which was the closing price of the Companys common stock on the date of grant. The SARs will vest
in 25% increments on the first, second, third and fourth anniversaries of the grant date. The SARs
have a term of seven years. Subsequent to the granting of these SARs, 3,300 SARs granted to two
non-executive employees were forfeited as these two employees resigned from the Company. None of
these 3,300 SARs had vested as of the employees applicable dates of resignation.
RESULTS OF OPERATIONS
Three Months ended March 31, 2007 compared to Three Months ended March 31, 2006
The following table summarizes our historical operations as a percentage of revenues for the
periods shown. Our historical results are not necessarily indicative of operating results that may
be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended, |
|
|
March 31, |
|
March 31, |
|
|
|
|
|
2007 |
|
2006 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Manufacturing Operations |
|
|
93.5 |
% |
|
|
93.2 |
% |
Railcar services |
|
|
6.5 |
% |
|
|
6.8 |
% |
|
|
|
Total revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold: |
|
|
|
|
|
|
|
|
Cost of manufacturing |
|
|
(79.8 |
%) |
|
|
(83.0 |
%) |
Cost of railcar services |
|
|
(5.3 |
%) |
|
|
(5.7 |
%) |
|
|
|
Total cost of goods sold |
|
|
(85.1 |
%) |
|
|
(88.7 |
%) |
Gross profit |
|
|
14.9 |
% |
|
|
11.3 |
% |
Selling, administrative and other |
|
|
(3.6 |
%) |
|
|
(4.8 |
%) |
|
|
|
Earnings from operations |
|
|
11.3 |
% |
|
|
6.5 |
% |
Interest income |
|
|
1.0 |
% |
|
|
0.3 |
% |
Interest expense |
|
|
(1.0 |
%) |
|
|
(0.6 |
%) |
Earnings from joint venture |
|
|
0.1 |
% |
|
|
0.2 |
% |
|
|
|
Earnings before income tax expense |
|
|
11.4 |
% |
|
|
6.4 |
% |
Income tax expense |
|
|
(4.2 |
%) |
|
|
(2.3 |
%) |
|
|
|
Net earnings |
|
|
7.2 |
% |
|
|
4.1 |
% |
|
|
|
Our earnings available to common stockholders for the three months ended March 31, 2007 were $13.5
million, compared to $6.7 million for the three months ended March 31, 2006, representing an
increase of $6.8 million. The primary factors for the $6.8 million increase in earnings in the
three months ended March 31, 2007 compared to March 31, 2006 are an increase in gross profit for
our manufacturing operations, a decrease in selling, administrative and other expenses and a
decrease in net interest expense. Also, the Company paid preferred dividends during the first
quarter of 2006 amounting to $0.6 million. As a result of the initial public offering, the Company
redeemed all preferred stock in January 2006. Furthermore, in relation to the initial public
offering, the Company incurred $3.5 million in compensation expense during the three months ended
March 31, 2006 consisting of a special bonus of
$0.5 million and $3.0 million in compensation
expense related to a restricted stock grant.
27
Revenues
Our revenues for the three months ended March 31, 2007 increased 4.8% to $187.3 million from $178.7
million in the three months ended March 31, 2006. This was due to increased revenues for our
manufacturing operations.
Our manufacturing operations revenues for the three months ended March 31, 2007 increased 5.2% to
$175.1 million from $166.5 million for the three months ended March 31, 2006. This increase was
primarily due to overall price increases for our railcars and a shift in mix toward more expensive
railcars. Furthermore, we experienced an increase of railcars shipped from our Marmaduke tank
railcar manufacturing complex, partially offset by a decrease in covered hopper railcar shipments.
In the three months ended March 31, 2007, we shipped 744 tank railcars and 1,177 covered hopper
railcars. In the three months ended March 31, 2006, we shipped 453 tank railcars and 1,527 covered
hopper railcars. On average during the first quarter of 2007, tank railcars we sold had a higher
selling price than covered hopper railcars. Thus, these factors combined to increase revenues for
the quarter. The increase in tank railcar shipments we experienced in the first quarter of 2007 was
primarily due to an increase in capacity at our tank railcar production complex as a result of the
recently completed expansion. We experienced a decrease in covered hopper railcar shipments in the
first quarter of 2007 due to an increase in finished goods inventory on firm customer orders in the
first quarter of 2007 that are expected to ship in the second quarter of 2007.
For the three months ended March 31, 2007, our manufacturing operations included $16.0 million, or
8.6% of our total consolidated revenues, from transactions with affiliates, compared to $15.0
million, or 8.4% of our total consolidated revenues in the three months ended March 31, 2006. These
revenues were attributable to sales of railcars and railcar parts to companies controlled by Mr.
Carl C. Icahn.
Our railcar services revenues in the three months ended March 31, 2007 was comparable at $12.2
million to the similar amount for the three months ended March 31, 2006. For the first quarter of
2007, our railcar services revenues included $3.9 million, or 2.1% of our total consolidated
revenues, from transactions with affiliates, compared to $6.0 million, or 3.3% of our total
revenues, in the first quarter of 2006.
Gross Profit
Our gross profit increased to $28.0 million in the three months ended March 31, 2007 from $20.3
million in the three months ended March 31, 2006. Our gross profit margin increased to 14.9% in the
first quarter of 2007 from 11.3% in the first quarter of 2006, primarily reflecting improved
margins in our manufacturing operations segment.
Our gross profit margin for our manufacturing operations was 14.7% in the three months ended March
31, 2007, a significant increase from 11.0% in the three months ended March 31, 2006. This increase
was attributable to a good railcar mix, including significantly more tank railcars, and
manufacturing efficiencies that were experienced in the first quarter 2007 compared to the first
quarter of 2006. Labor efficiencies resulted from lean manufacturing initiatives and enhanced
training initiatives at our railcar manufacturing facilities.
Our gross profit margin for our railcar services operations increased to 18.8% in the three months
ended March 31, 2007 from 16.6% in the three months ended March 31, 2006. This increase was
primarily attributable to efficiencies in labor during 2007. Furthermore, the type of work being
performed allowed for less handling costs on certain jobs.
Selling, Administrative and Other Expenses
Our selling, administrative and other expenses decreased by $2.0 million in the first quarter of
2007, to $6.7 million from $8.7 million in the first quarter of 2006. These selling, administrative
and other expenses, which include stock based compensation, were 3.6% of total revenues in the
three months ended March 31, 2007 as compared to 4.8% of total revenues in the three months ended
March 31, 2006. Stock based compensation expense decreased significantly, partially offset by other
selling, administrative and other cost increases to support our growing business.
Our stock based compensation expense for the three months ended March 31, 2007 was $0.6 million.
This expense is attributable to restricted stock and stock options we granted in 2006. This is
compared to stock based
28
compensation expense of $3.6 million for the three months ended March 31,
2006. The Company recognized $2.4
million in connection with the granting of restricted stock in January 2006 in connection with the
initial public offering. We expect our stock based compensation expense to be $0.7 million per
quarter throughout the remainder of 2007.
Interest Expense and Income
Our interest expense for the three months ended March 31, 2007 was $1.9 million as compared to $1.0
million for the three months ended March 31, 2006, representing an increase of $0.9 million. In
January 2006, we repaid substantially all of our outstanding debt with a portion of the net
proceeds of our initial public offering. On February 28, 2007, we sold $275.0 million of unsecured
senior notes due 2014, which added $1.8 million of interest expense in March 2007. We expect to
incur interest expense of $5.2 million per quarter throughout the remainder of 2007 under these
notes.
Our interest income in the three months ended March 31, 2007 was $1.9 million as compared to $0.5
million for the three months ended March 31, 2006. The increase in interest income was primarily
attributable to the investment of the net proceeds we received in connection with our sale of our
unsecured senior notes.
Income Taxes
Our income tax expense for the three months ended March 31, 2007 was $7.9 million or 37.0% of our
earnings before income taxes, as compared to $4.2 million for the three months ended March 31,
2006, or 36.8% of our earnings before income taxes. Our 2007 effective tax rate was comparable to
the 2006 rate.
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.
Our total backlog as of March 31, 2007 was $1,179.7 million and as of December 31, 2006 was
$1,318.0 million. We estimate that approximately 36.3% of our March 31, 2007 backlog will be
converted to revenues by the end of 2007. Included in the railcar backlog at March 31, 2007 was
$372.0 million of railcars to be sold to our affiliate, ARL, which is controlled by Carl C. Icahn.
The following table shows our reported railcar backlog, and estimated future revenue value
attributable to such backlog, at the end of the period shown. The reported backlog includes
railcars relating to purchase obligations based upon an assumed product mix consistent with past
orders. Changes in product mix from what is assumed would affect the dollar amount of our backlog.
Our ability to meet our backlog requirements as of March 31, 2007 is dependent upon our completion
of the new flexible railcar manufacturing facility in Marmaduke, Arkansas. We expect railcar
production to begin at the new flexible railcar manufacturing facility at the end of 2007.
|
|
|
|
|
|
|
2007 |
|
Railcar backlog at January 1, 2007 |
|
|
16,473 |
|
New railcars delivered |
|
|
1,921 |
|
New railcar orders |
|
|
71 |
|
|
|
|
|
Railcar backlog at March 31, 2007 |
|
|
14,623 |
|
|
|
|
|
|
Estimated railcar backlog value at end of period (in thousands) |
|
$ |
1,179,732 |
|
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 cost of certain raw materials and railcar
components or the cancellation or delay of railcar orders that may occur.
29
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.
Our backlog includes commitments under multi-year purchase and sale agreements. The longest
commitments under these agreements extend out into 2009. Under these agreements, the customers have
agreed to buy a minimum number of railcars from us in each of the contract years, and typically may
choose to satisfy its purchase obligations from among a variety of railcars described in the
agreement. The agreements may also permit a customer to reduce its purchase commitments under
certain limited circumstances, including, for certain contracts, market related conditions, such as
significant reductions in industry backlog or pricing, that are stipulated in the contracts. Under
our multi-year purchase agreements, purchase prices for railcars are subject to adjustment for
changes in the cost of certain raw materials such as steel and railcar components applicable at the
time of production.
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.
Our tank railcar lines are fully booked into early 2009, but we currently have some availability in
our production schedule beginning in the third quarter of 2007 for the production of covered hopper
railcars. We cannot guarantee at this time how much, if any, of the availability will be utilized.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity for the three months ended March 31, 2007 were proceeds from our
senior unsecured notes offering and cash generated from operations.
During February 2007, we entered into a second amendment to the revolving credit agreement.
Effective March 2007, we entered into a third amendment to our revolving credit agreement. The
revolving credit facility, as amended by the second amendment and the third amendment, requires
that when excess availability under the revolving credit facility is less than $30.0 million (or
has been less than $30.0 million at any time during the prior 90 days), the payment of dividends
triggers a demand right in favor of the administrative agent and the Companys lenders to
accelerate all of the Companys obligations under the revolving credit facility, as amended, 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 the
Companys common stock) to be less than 1.2 to 1.0 or the adjusted ratio of 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, as defined in the revolving credit facility, as amended.
On February 28, 2007, we issued $275.0 million of senior unsecured notes that are due in 2014. The
institutional private placement resulted in net proceeds to us of approximately $272.2 million. We
intend to use the net proceeds from the offering of the Notes for identified capital expenditure
plans and general corporate purposes, including capital expenditures, strategic transactions and
working capital.
30
Cash Flows
The following tables summarizes our net cash provided by or used in operating activities, investing
activities and financing activities for the three months ended March 31:
|
|
|
|
|
|
|
2007 |
|
|
|
(in thousands) |
|
Net cash provided by (used in): |
|
|
|
|
Operating activities |
|
$ |
19,197 |
|
Investing activities |
|
|
(7,558 |
) |
Financing activities |
|
|
270,872 |
|
|
|
|
|
Increase in cash |
|
$ |
282,511 |
|
|
|
|
|
Net Cash Provided by Operating Activities
Cash flows from operating activities are affected by several factors, including fluctuations in
business volume, contract terms for billings and collections, the timing of collections on our
accounts receivables, processing of payroll and associated taxes and payments to our suppliers. We
do not 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 for the three months ended March 31, 2007 was $19.2
million. Net earnings of $13.5 million were impacted by the non-cash items including but not
limited to: depreciation expense of $3.4 million, stock-based compensation expense of $0.6 million
and other smaller adjustments. Cash provided by operating activities attributable to changes in our
current assets and liabilities included an increase in accounts payable of $4.7 million and an
increase in accrued expenses and taxes of $10.0 million. Cash used in operating activities included
a $5.3 million increase in accounts receivable and a $7.6 million increase in inventories.
The increase in accounts payable is primarily due to timing of payments and receipt of goods and
services toward the end of the period ending March 31, 2007 compared to the period ending December
31, 2006. The increase in accrued expenses and taxes is primarily due to the timing of our first
quarter 2007 estimated tax payment made on April 15, 2007 and our fourth quarter 2006 estimated tax
payment made on December 15, 2006. The increase in accounts receivable is due to timing of cash
receipts and sales toward the end of the period ending March 31, 2007 compared to the period ending
December 31, 2006. The increase in inventories is primarily due to a portion of our first quarter
production for firm orders from our customers for railcars that will not ship until the second
quarter of 2007.
Net Cash Used In Investing Activities
Net cash used in investing activities was $7.6 million for the three months ended March 31, 2007,
consisting of purchases of property, plant and equipment. This was for the purchase of equipment at
multiple locations to increase capacity and operating efficiencies. Some of these purchases are
described in further detail below under Capital Expenditures.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $270.9 million for the three months ended March 31,
2007. The main reason for the large cash inflow is due to $275.0 million in gross proceeds from the
senior unsecured notes offering, offset by offering costs of $4.0 million.
Capital Expenditures
We continuously evaluate facility requirements based on our strategic plans, production
requirements and market demand and may elect to change the level of capital investments in the
future. These investments are all based on an
31
analysis of the rates of return and impact on our
profitability. 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 component parts. From time to time, we may expand our business by
acquiring other businesses or pursuing other strategic growth opportunities.
Capital expenditures for the three months ended March 31, 2007 were $7.6 million. Of these
expenses, $4.4 million were for expansion purposes, $1.1 million were for cost reduction purposes
and $2.1 million were for necessary replacement of assets.
Our tank railcar plant capacity expansion was completed at our Marmaduke, Arkansas plant in January
2007. We have a number of other significant capital projects that are currently underway including
our new flexible railcar manufacturing plant that is being constructed adjacent to our tank railcar
manufacturing plant in Marmaduke. Railcar production at the new flexible plant, which we anticipate
will have the capability of producing tank, covered hopper and intermodal railcars, is currently
expected to begin in early 2008. We expect to continue to invest in projects, including possible
strategic acquisitions, to reduce manufacturing costs, improve production efficiencies, maintain
our equipment and to otherwise complement and expand our business. For 2007, our current capital
expenditure plans include approximately $80.0 million of projects that we expect will maintain
equipment, improve efficiencies or reduce costs. This amount is an estimate only. We cannot assure
that we will be able to complete any of our projects on a timely basis or within budget, if at all.
We anticipate that the new railcar plant and any other future expansion of our business will be
financed through the proceeds from our issuance of senior unsecured notes, cash flow from
operations, our amended revolving credit facility, term debt associated directly with that
expenditure or other new financing. We believe that these sources of funds will provide sufficient
liquidity to meet our expected operating requirements over the next twelve months. We cannot
guarantee that we will be able to obtain term debt or other new financing on favorable terms, if at
all.
Our long-term liquidity is contingent upon future operating performance and our ability to continue
to meet financial covenants under our senior unsecured notes agreement, our 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 Special Note Regarding Forward-Looking Statements, Risk Factors in the Annual
Report and this report and trends and uncertainties discussed in this discussion and analysis, as
well as elsewhere in the Annual Report and this report. These risks, trends and uncertainties may
also adversely affect our long-term liquidity.
Dividends
Following our initial public offering, on a quarterly basis, our Board of Directors has declared a
regular cash dividend of $0.03 per share of our common stock. In both the first and second quarters
of 2007, the Board of Directors has declared a cash dividend of $0.03 per share of common stock.
We intend to pay cash dividends on our common stock in the future. However, our revolving credit
facility, as amended, contains provisions that trigger a demand right if, when excess availability
under the revolving credit facility is less than $30.0 million (or has been less than $30.0 million
at any time during the prior 90 days), we pay dividends on our common stock unless the payment does
not cause the adjusted fixed charge coverage ratio (fixed charges, pursuant to the 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, as defined in the revolving credit facility,
as amended. 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.
32
In addition, dividends of $0.6 million on our preferred stock were paid in the first quarter of
2006. All of our
outstanding shares of preferred stock were redeemed in January 2006 in connection with our initial
public offering.
Contractual Obligations
The following table summarizes our contractual obligations and commitments as of March 31, 2007,
and the effect that these obligations and commitments are expected to have on our liquidity and
cash flow in future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period |
|
|
|
|
|
|
April 2007 - |
|
January 2008 - |
|
January 2010 - |
|
January 2012 |
Contractual Obligations |
|
Total |
|
December 2007 |
|
December 2009 |
|
December 2011 |
|
and thereafter |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
Long-Term Debt Obligations 1 |
|
$ |
75 |
|
|
|
67 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
Operating Lease Obligations 2 |
|
$ |
7,526 |
|
|
|
1,425 |
|
|
|
1,116 |
|
|
|
730 |
|
|
|
4,255 |
|
Purchase Obligations |
|
$ |
44,132 |
|
|
|
20,113 |
|
|
|
24,019 |
|
|
|
|
|
|
|
|
|
|
Fees related to Revolving Credit Agreement |
|
$ |
1,050 |
|
|
|
314 |
|
|
|
736 |
|
|
|
|
|
|
|
|
|
Senior unsecured notes 3 |
|
$ |
275,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,000 |
|
|
Interest payments on senior unsecured notes 4 |
|
$ |
144,433 |
|
|
|
10,370 |
|
|
|
41,250 |
|
|
|
41,250 |
|
|
|
51,563 |
|
Capital Expenditures |
|
$ |
9,028 |
|
|
|
9,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN 48 obligations |
|
$ |
2,159 |
|
|
|
|
|
|
|
2,159 |
|
|
|
|
|
|
|
|
|
Pension Funding |
|
$ |
2,679 |
|
|
|
1,152 |
|
|
|
1,241 |
|
|
|
286 |
|
|
|
|
|
|
|
|
Total |
|
$ |
486,082 |
|
|
$ |
42,469 |
|
|
$ |
70,529 |
|
|
$ |
42,266 |
|
|
$ |
330,818 |
|
|
|
|
(1) |
|
Our revolving credit facility, as amended, permits us to borrow up to $100.0 million,
subject to compliance with borrowing base and other covenants and expires in less than
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. |
|
(3) |
|
On February 28, 2007, we issued $275.0 million of senior unsecured notes that are due
on March 1, 2014. |
|
(4) |
|
The interest rate on these notes is 7.5%. These notes have interest payments due
semiannually on September 1 and March 1 of every year. |
|
(5) |
|
See Footnote 10 in our Notes to Condensed Consolidated Financial Statements for a
description of our FIN 48 obligations. |
The senior unsecured notes have an early redemption option at premium rates beginning in 2011.
Contingencies
In connection with our acquisition in January 2005 of Castings LLC, which owns a one-third
ownership interest in Ohio Castings Company, LLC, from ACF Industries Holding Corp., a company
beneficially owned and controlled by Mr. Carl C. Icahn, 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 $5.8 million was outstanding as of March 31, 2007, and the guarantee of a $2.0 million
state loan that provides for purchases of capital equipment, of which $1.5 million was outstanding
as of March 31, 2007. The two other partners of Ohio Castings have made similar guarantees of these
obligations.
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
33
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 it now owns or leases to address historical contamination and
potential contamination by third parties. We are involved with state agencies in the cleanup of two
sites under these laws. These investigations are in process but it is too early to be able to make
a reasonable estimate, with any certainty, of the timing and extent of remedial actions that may be
required, and the costs that would be involved in such remediation. Substantially all of the issues
identified relate to the use of the properties prior to their transfer to 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 our obligations to us, we would be
responsible for the cost of such remediation. 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.
We have been named 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. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48
Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting for
Income Taxes (FIN 48), to create a single model to address accounting for uncertainty in tax
positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition
threshold a tax position is required to meet before being recognized in the financial statements.
FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting
in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. We adopted FIN 48 as of January 1, 2007, as required. The impact of
adopting FIN 48 resulted in a $0.1 million decrease to retained earnings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in our market risks since December 31, 2006.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, our management evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of
the end of the period covered by this quarterly report on Form 10-Q (the Evaluation Date). Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of
the Evaluation Date, our disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commissions rules and forms.
34
There has been no change in our internal control over financial reporting during the most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments since the filing of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2006, as amended.
ITEM 1A. RISK FACTORS
Except as set forth below, there have been no material changes from the risk factors previously
disclosed in Item 1A of our 2006 annual report on Form 10-K, as amended. On February 28, 2007, we
completed our offering of unsecured senior notes due 2014. The following risk factors relate to the
additional indebtedness we incurred in connection with that offering.
Our substantial indebtedness following the offering of our outstanding notes could adversely affect
our operations and financial results and prevent us from fulfilling our obligations under the
notes.
We issued the outstanding notes on February 28, 2007 and by so doing agreed to pay back the
holders of the outstanding notes the aggregate principal amount of $275 million with interest.
Additionally, we currently have the ability to incur a significant amount of indebtedness under our
revolving credit facility, as amended, and otherwise. As of March 31, 2007, we had no borrowings
outstanding and $88.4 million of availability under the revolving credit facility based upon the
amount of its eligible accounts receivable and inventory (and without regard to any financial
covenants), or $58.4 million of availability, if we were to maintain excess availability of at
least $30.0 million.
Our substantial indebtedness could have important consequences to you. For example, it could:
|
|
|
make it more difficult for us to satisfy our obligations with respect to the
notes and other indebtedness; |
|
|
|
|
increase our vulnerability to general adverse economic and industry
conditions; |
|
|
|
|
require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, which would reduce the availability
of our cash flow to fund working capital, capital expenditures, expansion
efforts and other general corporate purposes; |
|
|
|
|
limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate; |
|
|
|
|
place us at a competitive disadvantage compared to our competitors that have
less debt; and |
|
|
|
|
limit, along with the financial and other restrictive covenants in our
revolving credit facility, as amended, among other things, our ability to
borrow additional funds for working capital, capital expenditures, general
corporate purposes or acquisitions. Failure to comply with these covenants
could result in an event of default which, if not cured or waived, could have a
significant adverse effect on us. |
Despite our substantial indebtedness following the offering of our outstanding notes, we and our
subsidiaries may still be able to incur substantially more debt, which could further exacerbate the
risks associated with our substantial indebtedness.
Under our revolving credit facility, as amended, we face restrictions on our ability to incur
additional indebtedness. Despite these restrictions, debt incurrence in compliance with these
restrictions could be substantial. In addition, subject to the covenants in the indenture governing
the notes, we may be able to incur future indebtedness, including secured indebtedness. Any
additional secured borrowings by us and any borrowings by our
35
subsidiaries would be senior to the
notes. If new debt is added to our or our subsidiaries current debt levels, the related risks that
we or they now face could be magnified.
We may not be able to generate sufficient cash flow to service all of our obligations, including
our obligations relating to the notes.
Our ability to make payments on and to refinance our indebtedness, including the indebtedness
incurred under our revolving credit facility, as amended, and the notes, and to fund planned
capital expenditures, strategic transactions and expansion efforts will depend on our ability to
generate cash in the future. This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our control.
Our business may not be able to generate sufficient cash flow from operations, and there can
be no assurance that future borrowings will be available to us in amounts sufficient to enable us
to pay our indebtedness, including the notes, as such indebtedness matures and to fund our other
liquidity needs. If this is the case, we will need to refinance all or a portion of our
indebtedness, including the notes, on or before maturity, and cannot assure you that we will be
able to refinance any of our indebtedness, including our revolving credit facility, as amended, and
the notes, on commercially reasonable terms, or at all. We could have to adopt one or more
alternatives, such as reducing or delaying planned expenses and capital expenditures, selling
assets, restructuring debt, or obtaining additional equity or debt financing. These financing
strategies may not be affected on satisfactory terms, if at all. Our ability to refinance our
indebtedness or obtain additional financing and/or to do so on commercially reasonable terms will
depend on, among other things: our financial condition at the time; restrictions in agreements
governing our indebtedness, and the indenture governing the notes; and other factors, including the
condition of the financial markets and the railcar industry.
If we do not generate sufficient cash flow from operations, and additional borrowings, refinancings
or proceeds of asset sales are not available to us, we may not have sufficient cash to enable us to
meet all of our obligations, including payments on the exchange notes.
ITEM 5. OTHER INFORMATION
On
May 1, 2007 the Company entered into a third amendment, dated as
of March 31, 2007, to its
revolving credit facility, as amended. Among other things, as amended by the third amendment, the
revolving credit facility provides that, if any indebtedness has been incurred or assumed during
the applicable quarter (other than indebtedness for loans under the revolving credit facility), or
when excess availability under the revolving credit facility is less than $30.0 million (or has
been less than $30.0 million at any time during the prior 90 days), the Company must meet a
leverage ratio calculated based on the outstanding amount of indebtedness to EBITDA (Earnings
Before Interest, Taxes, Depreciation and Amortization), as defined in the revolving credit
facility, as amended, of not greater than 4.0 to 1.0 on a quarterly and/or annual basis. In
addition, as amended by the third amendment, an incurrence or the maintenance of indebtedness
triggers a demand right if it causes a modified version of the adjusted ratio of the Companys
indebtedness (the modified version of this ratio does not include indebtedness for loans under the
revolving credit facility) to EBITDA, as defined in the revolving credit facility, as amended, to
be greater than 4.0 to 1.0.
36
A copy of the third amendment to the Companys revolving credit facility, as amended, is filed as
Exhibit 10.47 to
this quarterly report on Form 10-Q and is incorporated by reference into this Item 5.
37
ITEM 6. EXHIBITS
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
|
10.47
|
|
Third Amendment to Amended and Restated Loan and Security Agreement
dated as of March 31, 2007. |
|
|
|
31.1
|
|
Rule 13a-14(a), 15d-14(a) Certification of the Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a-14(a), 15d-14(a) Certification of the Chief Financial Officer |
|
|
|
32
|
|
Certification pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
AMERICAN RAILCAR INDUSTRIES, INC. |
|
|
|
Date: May 4, 2007
|
|
By: /s/ James J. Unger |
|
|
|
|
|
|
|
|
|
|
|
James J. Unger, President and Chief Executive Officer |
|
|
|
|
|
By: /s/ William P. Benac |
|
|
|
|
|
|
|
|
|
|
|
William P. Benac, Senior Vice-President, Chief
Financial Officer and Treasurer |
39
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
|
10.47
|
|
Third Amendment to Amended and Restated Loan and Security Agreement
dated as of March 31, 2007. |
|
|
|
31.1
|
|
Rule 13a-14(a), 15d-14(a) Certification of the Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a-14(a), 15d-14(a) Certification of the Chief Financial Officer |
|
|
|
32
|
|
Certification pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
40