10-Q
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 September 30, 2008
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
(State of Incorporation)
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43-1481791
(I.R.S. Employer Identification No.) |
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100 Clark Street, St. Charles, Missouri
(Address of principal executive offices)
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63301
(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, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The number of shares of the registrants common stock, without par value, outstanding on November
3, 2008 was 21,302,296 shares.
AMERICAN RAILCAR INDUSTRIES, INC.
INDEX TO FORM 10-Q
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Item Number |
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Page Number |
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PART I FINANCIAL INFORMATION |
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1. Financial Statements: |
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3 |
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4 |
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5 |
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6 |
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8 |
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30 |
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41 |
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42 |
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42 |
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42 |
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42 |
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43 |
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44 |
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EX-31.1 |
EX-31.2 |
EX-32 |
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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September 30, |
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December 31, |
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2008 |
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2007 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
283,582 |
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$ |
303,882 |
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Short term investments available-for-sale securities |
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7,284 |
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Accounts receivable, net |
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47,604 |
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33,523 |
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Accounts receivable, due from affiliates |
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8,898 |
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17,175 |
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Inventories, net |
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120,864 |
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93,475 |
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Prepaid expenses |
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3,955 |
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5,015 |
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Deferred tax assets |
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2,154 |
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1,610 |
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Total current assets |
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474,341 |
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454,680 |
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Property, plant and equipment, net |
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199,058 |
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175,166 |
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Deferred debt issuance costs |
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3,407 |
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3,977 |
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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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12,961 |
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13,355 |
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Total assets |
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$ |
696,973 |
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$ |
654,384 |
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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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$ |
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$ |
8 |
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Accounts payable |
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68,899 |
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47,903 |
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Accounts payable, due to affiliates |
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5,680 |
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2,867 |
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Accrued expenses and taxes |
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6,176 |
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5,729 |
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Accrued compensation |
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11,153 |
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10,379 |
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Accrued interest expense |
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1,750 |
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6,907 |
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Accrued dividends |
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639 |
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639 |
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Total current liabilities |
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94,297 |
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74,432 |
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Senior unsecured notes |
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275,000 |
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275,000 |
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Deferred tax liability |
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6,400 |
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5,690 |
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Pension and post-retirement liabilities |
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6,276 |
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6,572 |
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Other liabilities |
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2,197 |
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1,702 |
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Total liabilities |
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384,170 |
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363,396 |
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Commitments and contingencies |
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Stockholders equity: |
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Common stock, $.01 par value, 50,000,000 shares
authorized, 21,302,296 shares issued and outstanding |
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213 |
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213 |
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Additional paid-in capital |
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239,517 |
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239,621 |
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Retained earnings |
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73,098 |
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51,314 |
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Accumulated other comprehensive loss |
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(25 |
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(160 |
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Total stockholders equity |
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312,803 |
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290,988 |
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Total liabilities and stockholders equity |
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$ |
696,973 |
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$ |
654,384 |
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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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September 30, |
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September 30, |
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2008 |
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2007 |
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Revenues: |
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Manufacturing operations (including revenues from
affiliates of $47,689 and $47,634 for the three
months ended September 30, 2008 and 2007,
respectively) |
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$ |
205,107 |
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$ |
127,376 |
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Railcar services (including revenues from
affiliates of $3,392 and $4,289 for the three
months ended September 30, 2008 and 2007,
respectively) |
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12,141 |
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12,515 |
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Total revenues |
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217,248 |
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139,891 |
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Cost of revenue: |
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Manufacturing operations |
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(187,771 |
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(113,251 |
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Railcar services |
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(9,874 |
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(10,668 |
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Total cost of revenue |
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(197,645 |
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(123,919 |
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Gross profit |
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19,603 |
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15,972 |
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Selling, administrative and other (including costs
related to affiliates of $151 both for the three
months ended September 30, 2008 and 2007) |
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(6,602 |
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(6,835 |
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Earnings from operations |
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13,001 |
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9,137 |
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Interest income |
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1,693 |
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3,986 |
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Interest expense |
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(5,018 |
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(5,517 |
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Other income |
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1,750 |
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Earnings from joint venture |
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509 |
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115 |
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Earnings before income tax expense |
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11,935 |
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7,721 |
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Income tax expense |
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(4,488 |
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(2,861 |
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Net earnings available to common shareholders |
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$ |
7,447 |
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$ |
4,860 |
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Net earnings per common share basic |
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$ |
0.35 |
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$ |
0.23 |
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Net earnings per common share diluted |
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$ |
0.35 |
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$ |
0.23 |
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Weighted average common shares outstanding basic |
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21,302 |
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21,302 |
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Weighted average common shares outstanding diluted |
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21,302 |
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21,392 |
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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 OPERATIONS
(In thousands, except per share amounts, unaudited)
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For the Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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Revenues: |
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Manufacturing operations (including revenues from
affiliates of $136,134 and $93,558 for the nine
months ended September 30, 2008 and 2007,
respectively) |
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$ |
566,754 |
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$ |
498,217 |
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Railcar services (including revenues from
affiliates of $11,617 and $12,622 for the nine
months ended September 30, 2008 and 2007,
respectively) |
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39,025 |
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38,014 |
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Total revenues |
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605,779 |
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536,231 |
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Cost of revenue: |
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Manufacturing operations |
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(511,813 |
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(435,389 |
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Railcar services |
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(31,459 |
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(31,198 |
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Total cost of revenue |
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(543,272 |
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(466,587 |
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Gross profit |
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62,507 |
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69,644 |
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Selling, administrative and other (including costs
related to affiliates of $454 both for the nine
months ended September 30, 2008 and 2007) |
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(19,596 |
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(20,884 |
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Earnings from operations |
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42,911 |
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48,760 |
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Interest income |
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5,955 |
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10,046 |
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Interest expense |
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(15,109 |
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(12,835 |
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Other income |
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3,486 |
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Earnings from joint venture |
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909 |
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731 |
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Earnings before income tax expense |
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38,152 |
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46,702 |
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Income tax expense |
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(14,345 |
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(17,303 |
) |
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Net earnings available to common shareholders |
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$ |
23,807 |
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$ |
29,399 |
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Net earnings per common share basic |
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$ |
1.12 |
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$ |
1.38 |
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Net earnings per common share diluted |
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$ |
1.12 |
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$ |
1.38 |
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Weighted average common shares outstanding basic |
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21,302 |
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21,265 |
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Weighted average common shares outstanding diluted |
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21,302 |
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21,368 |
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Dividends declared per common share |
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$ |
0.09 |
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$ |
0.09 |
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See Notes to the Condensed Consolidated Financial Statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
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For the Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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Operating activities: |
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Net earnings |
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$ |
23,807 |
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$ |
29,399 |
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Adjustments to reconcile net earnings to net cash provided by
operating activities: |
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Depreciation |
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14,614 |
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10,266 |
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Amortization of deferred costs |
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609 |
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482 |
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Loss on disposal of property, plant and equipment |
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242 |
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233 |
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Realized gain on sale of short term investments |
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(2,589 |
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Realized gain on sale of total return swaps |
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(630 |
) |
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Dividends received from short term investments
available-for-sale securities |
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(267 |
) |
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Stock based compensation |
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590 |
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1,992 |
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Income related to reversal of stock based compensation for
stock options |
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(411 |
) |
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Excess tax benefits from stock option exercises |
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(241 |
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Change in joint venture investment as a result of earnings |
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(909 |
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(731 |
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Provision (benefit) for deferred income taxes |
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14 |
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(737 |
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Provision for losses on accounts receivable |
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156 |
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84 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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(14,237 |
) |
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255 |
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Accounts receivable, due from affiliate |
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8,277 |
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(3,921 |
) |
Inventories, net |
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(35,031 |
) |
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2,375 |
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Prepaid expenses |
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1,060 |
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|
1,924 |
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Accounts payable |
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20,996 |
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(14,416 |
) |
Accounts payable, due to affiliate |
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2,813 |
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|
1,005 |
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Accrued expenses and taxes |
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(4,061 |
) |
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4,344 |
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Other |
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(697 |
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(1,331 |
) |
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Net cash provided by operating activities |
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14,346 |
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30,982 |
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Investing activities: |
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Purchases of property, plant and equipment |
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(31,155 |
) |
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(36,495 |
) |
Purchases of short term investments available-for-sale
securities |
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(27,857 |
) |
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(100,596 |
) |
Sales of short term investments available-for-sale securities |
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23,631 |
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|
100,596 |
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Dividends
received from short term investments
available-for-sale securities |
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267 |
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Realized gain on sale of total return swaps |
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630 |
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Repayment of note receivable from affiliate (Ohio Castings
Company, LLC) |
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494 |
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|
165 |
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Investment in joint venture |
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(566 |
) |
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(8,840 |
) |
Sale of investment in joint venture |
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1,875 |
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Net cash used in investing activities |
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(32,681 |
) |
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(45,170 |
) |
See Notes to the Condensed Consolidated Financial Statements.
Continued
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
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For the Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
|
2007 |
|
|
|
Financing activities: |
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Common stock dividends |
|
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(1,917 |
) |
|
|
(1,912 |
) |
Proceeds from stock option exercises |
|
|
|
|
|
|
1,985 |
|
Excess tax benefits from stock option exercises |
|
|
|
|
|
|
241 |
|
Proceeds from issuance of senior unsecured notes, gross |
|
|
|
|
|
|
275,000 |
|
Offering costs senior unsecured notes issuance |
|
|
|
|
|
|
(4,314 |
) |
Finance fees related to credit facility |
|
|
(40 |
) |
|
|
(60 |
) |
Repayment of debt |
|
|
(8 |
) |
|
|
(65 |
) |
|
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|
Net cash provided by (used in) financing activities |
|
|
(1,965 |
) |
|
|
270,875 |
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(20,300 |
) |
|
|
256,687 |
|
Cash and cash equivalents at beginning of period |
|
|
303,882 |
|
|
|
40,922 |
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
283,582 |
|
|
$ |
297,609 |
|
|
|
|
See Notes to the Condensed Consolidated Financial Statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months ended September 30, 2008 and 2007
The condensed consolidated financial statements included herein have been prepared by American
Railcar Industries, Inc. and subsidiaries (collectively the Company or ARI), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosure normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
omitted pursuant to such rules and regulations, although the Company believes that the disclosures
are adequate to make the information presented not misleading. The Condensed Consolidated Balance
Sheet as of December 31, 2007 has been derived from the audited consolidated balance sheets as of
that date. These condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the Companys latest annual
report attached on Form 10-K for the year ended December 31, 2007. 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 various steel railcar parts for use or
sale by the ownership group. Through its subsidiary, ARI Component Venture, LLC, the Company has a
37.5% ownership interest in Axis, LLC (Axis), a limited liability company formed to produce railcar
axles, for use or sale by the ownership group. Through its subsidiaries, American Railcar Mauritius
I and American Railcar Mauritius II, the Company has a 50.0% ownership interest in a joint venture
company in India, which was formed to produce railcars and railcar components in India for sale by
the joint venture. Through its wholly owned subsidiary, ARI Longtrain, Inc. (Longtrain), the Company
makes investments from time to time. All intercompany transactions and balances have been
eliminated.
ARI manufactures railcars, custom designed railcar parts for industrial companies and railroads,
and other industrial products, primarily aluminum and special alloy steel castings, for non-rail
customers. ARI also provides railcar maintenance services for railcar fleets, including that of its
affiliate, American Railcar Leasing LLC (ARL). In addition, ARI provides fleet management and
maintenance services for railcars owned by 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 0.4%, respectively, of total consolidated revenues
for the three months ended September 30, 2008 and 2007. Canadian revenues were 0.4% and 0.3%,
respectively, of total consolidated revenues for the nine months ended September 30, 2008 and 2007.
Canadian assets were 0.3% and 0.2%, respectively, of total consolidated assets as of September 30,
2008 and December 31, 2007.
Note 2
Accounting Policies and Recent Accounting Pronouncements
Short term investments
The Companys investments in equity securities are classified as available-for-sale, based upon
whether we intend to hold the investment for the foreseeable future, in accordance with Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS 115). Available-for-sale securities are reported at fair value on our
balance sheet while unrealized holding gains and losses on available-for-sale securities are
excluded from earnings and reported as a separate component of stockholders equity and when sold
are reclassified out of stockholders equity to the consolidated statements of operations. For
purposes of determining gains and losses, the cost of securities is based on specific
identification.
8
Derivative assets
The Company has entered into derivative contracts, specifically total return swap contracts. As
required, the Company accounts for these derivatives under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133), which was amended by SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities (SFAS 138). The pronouncements
established accounting and reporting standards for derivative instruments and for hedging
activities, which generally require recognition of all derivatives as either assets or liabilities
in the balance sheet at their fair value. The accounting for changes in fair value depends on the
intended use of the derivative and its resulting designation. The Company did not use hedge
accounting and accordingly, all unrealized gains and losses were reflected in our condensed
consolidated statements of operations.
Recent accounting pronouncements
In September 2006, the Financial Accounting Standards Board (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 SFAS 158). SFAS 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. SFAS 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 adopted the other portion of this standard, related to the measurement of the
funded status at year end, during the first quarter of 2008 and recorded a $0.1 million decrease to
retained earnings.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141R), to create
greater consistency in the accounting and financial reporting of business combinations. SFAS 141R
establishes principles and requirements for how the acquirer in a business combination
(i) recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest, (ii) recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase, and (iii) determines what
information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS 141R applies to fiscal years beginning after
December 15, 2008. Management believes the adoption of this pronouncement will not have a material
impact on the Companys consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The guidance will become effective as of the beginning of the Companys fiscal year on
January 1, 2009. Management believes the adoption of this pronouncement will not have a material
impact on the Companys consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 expands quarterly
disclosure requirements in SFAS 133 about an entitys derivative instruments and hedging
activities. SFAS 161 is effective for fiscal years beginning after November 15, 2008. Management
believes the adoption of this pronouncement will not have a material impact on the Companys
consolidated financial statements.
Note 3 Short Term Investments Available-for-Sale Securities
During January 2008, Longtrain purchased 1,530,000 shares of common stock of The Greenbrier
Companies, Inc. (Greenbrier) in the open market. The Company believed that these shares represented
approximately 9.5% of the issued and outstanding common stock of Greenbrier at the time of their
purchase. This investment was made with the intention to enter into discussions regarding a
possible business combination of the Company and Greenbrier. This investment is classified as a
short term investment available-for-sale security in accordance with
SFAS 115 as the Company does not intend on holding this investment long term.
In June 2008, it was disclosed that the parties were not at that time pursuing further discussions
regarding a business
9
combination. Subsequently, during June 2008, Longtrain sold 240,553 shares of
Greenbrier at an average selling price of $22.00 per share. ARI recorded a realized gain of $0.9
million before tax on the sale of these shares.
During the third quarter of 2008, Longtrain sold another 916,106 shares of the common stock of
Greenbrier in the open market for aggregate proceeds of $18.3 million resulting in a realized gain
of $1.7 million before tax.
As of September 30, 2008, the market price of the common stock of Greenbrier was $19.51 per share,
which resulted in the investment value of $7.3 million as of that date on the remaining 373,341
shares of Greenbrier that the Company owns. The Company believes this investment represents less
than 5.0% of the issued and outstanding common stock of Greenbrier as of September 30, 2008. The
resulting unrealized gain of $0.5 million was recognized as accumulated other comprehensive income
within stockholders equity, net of deferred taxes.
Note 4 Realized Gain on Derivatives Total Return Swaps
During January 2008, Longtrain entered into total return swap agreements covering a total of
400,000 shares of common stock of Greenbrier. The total notional amount of these swap agreements
was approximately $7.4 million, which represents the fair market value of the referenced shares at
the time Longtrain entered into the agreements. During July and August 2008, all of the Companys
total return swap agreements were settled prior to their date of expiration in accordance with the
terms of the agreements.
These agreements provided that Longtrain was entitled to receive in cash an amount equal to the
increase in the value of the referenced shares, during the period from inception of the applicable
agreement to its early settlement. In addition, at the time of an agreements early settlement,
Longtrain is entitled to receive other payments based on dividend and other distributions made by
Greenbrier in respect of the referenced shares during the specified time frame.
The agreements provided for cash settlement, and Longtrain did not own or have any right to
acquire, vote, or direct the vote of, the shares referenced by the swap agreements. At the time of
an agreements early settlement, Longtrain was also required to pay to its counterparty a floating
rate equal to the product of the notional amount times the monthly London Interbank Offered Rate
(LIBOR) plus 0.3%. Longtrain paid no other amounts to enter into these agreements.
The Company accounted for these swap agreements as derivatives with any resulting unrealized gain
included in other income with a derivative asset on the balance sheet or any resulting unrealized
loss accounted for as other loss with a derivative liability on the balance sheet. The settlement
of the total return swap agreements resulted in a realized gain of $0.6 million for the nine months
ended September 30, 2008.
Note 5 Fair Value Measurements
The Company adopted SFAS No. 157, Fair Value Measurements (SFAS 157), on January 1, 2008, which,
among other things, requires enhanced disclosures about investments that are measured and reported
at fair value. SFAS 157 establishes a hierarchal disclosure framework that prioritizes and ranks
the level of market price observability used in measuring investments at fair value. Market price
observability is impacted by a number of factors, including the type of investment and the
characteristics specific to the investment. Investments with readily available active quoted prices
or for which fair value can be measured from actively quoted prices generally will have a higher
degree of market price observability and a lesser degree of judgment used in measuring fair value.
The Company adopted SFAS 157 as of January 1, 2008, with the exception of the application of the
statement to non-recurring nonfinancial assets and nonfinancial liabilities. Non-recurring
nonfinancial assets and nonfinancial liabilities for which we have not applied the provisions of
SFAS 157 include those measured at fair value in goodwill impairment testing.
Investments measured and reported at fair value are classified and disclosed in one of the
following categories:
10
|
|
|
Level 1 Quoted prices are available in active markets for identical investments as
of the reporting date. The type of investments included in Level I include listed
equities and listed derivatives. As required by SFAS 157, the Company does not adjust
the quoted price for these investments, even in situations where they hold a large
position and a sale could reasonably impact the quoted price. |
|
|
|
|
Level 2 Pricing inputs are other than quoted prices in active markets, which are
either directly or indirectly observable as of the reporting date, and fair value is
determined through the use of models or other valuation methodologies. Investments that
are generally included in this category include corporate bonds and loans, less liquid
and restricted equity securities and certain over-the-counter derivatives. |
|
|
|
|
Level 3 Pricing inputs are unobservable for the investment and include situations
where there is little, if any, market activity for the investment. The inputs into the
determination of fair value require significant management judgment or estimation. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, an investments level within the fair value hierarchy is based on
the lowest level of input that is significant to the fair value measurement. ARIs assessment of
the significance of a particular input to the fair value measurement in its entirety requires
judgment and considers factors specific to the investment.
The following table summarizes the valuation of our investments by the above SFAS 157 fair value
hierarchy levels as of September 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term investments -
available-for-sale
securities |
|
$ |
7,284 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,284 |
|
|
|
|
|
|
$ |
7,284 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,284 |
|
|
|
|
Note 6 Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Raw materials |
|
$ |
70,181 |
|
|
$ |
52,322 |
|
Work-in-process |
|
|
28,111 |
|
|
|
19,835 |
|
Finished products |
|
|
24,988 |
|
|
|
24,023 |
|
|
|
|
|
|
|
|
Total inventories |
|
|
123,280 |
|
|
|
96,180 |
|
Less reserves |
|
|
(2,416 |
) |
|
|
(2,705 |
) |
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
120,864 |
|
|
$ |
93,475 |
|
|
|
|
|
|
|
|
Note 7 Property, Plant and Equipment
The
following table summarizes the components of property, plant and equipment:
11
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
Buildings |
|
$ |
128,931 |
|
|
$ |
117,899 |
|
Machinery and equipment |
|
|
159,363 |
|
|
|
113,415 |
|
|
|
|
|
|
|
|
|
|
|
288,294 |
|
|
|
231,314 |
|
Less accumulated depreciation |
|
|
(100,680 |
) |
|
|
(86,907 |
) |
|
|
|
|
|
|
|
Net property, plant and equipment |
|
|
187,614 |
|
|
|
144,407 |
|
Land |
|
|
3,306 |
|
|
|
3,306 |
|
Construction in process |
|
|
8,138 |
|
|
|
27,453 |
|
|
|
|
|
|
|
|
Total
property, plant and equipment, net |
|
$ |
199,058 |
|
|
$ |
175,166 |
|
|
|
|
|
|
|
|
Depreciation Expense
Depreciation expense for the three months ended September 30, 2008 and 2007 was $5.0 million and
$3.5 million, respectively. Depreciation expense for the nine months ended September 30, 2008 and
2007 was $14.6 million and $10.3 million, respectively.
Capitalized Interest
In conjunction with the Senior Unsecured Fixed Rate Notes offering described in Note 13, the
Company began recording capitalized interest on certain property, plant and equipment capital
projects. The amount of interest capitalized as of September 30, 2008 and December 31, 2007 was
$2.7 million and $1.4 million, respectively.
Lease Agreement
In September 2008, the Company entered into an agreement to lease a fixed number of railcars to a
third party for multiple years. The lease included a provision that allows the lessee to purchase
any portion of the leased railcars at any time during the lease term for a stated market price,
which approximates fair value. The agreement has been classified as an operating lease in
accordance with SFAS No. 13, Accounting for Leases (SFAS 13). As a result of applying the rules
from SFAS 13 the leased railcars have been included in machinery and equipment and will be
depreciated in accordance with the Companys depreciation policy.
Note 8 Goodwill
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). 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 in 2006, which resulted in goodwill of $7.2 million.
As required, the Company performed the goodwill valuation impairment test as of March 1, 2008. 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 2008 annual
impairment tests related to the goodwill generated from the Custom Steel acquisition.
Note 9 Investment in Joint Venture Ohio Castings
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. Advances and distributions are charged and credited directly to the investment account. 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
12
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 $6.9 million and $5.8
million, respectively, at September 30, 2008 and December 31, 2007.
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 16. The value of our portion of the guarantee was immaterial at September 30, 2008, and has
been recorded by the Company in accordance with FASB Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
(FIN 45).
See Note 21 for information regarding financial transactions among the Company, Ohio Castings and
Castings.
Summary results of operations for Ohio Castings, the investee company, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Sales |
|
$ |
26,709 |
|
|
$ |
15,915 |
|
|
$ |
73,679 |
|
|
$ |
58,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss)
from operations |
|
|
2,456 |
|
|
|
(51 |
) |
|
|
4,889 |
|
|
|
1,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
2,554 |
|
|
$ |
35 |
|
|
$ |
5,099 |
|
|
$ |
2,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10 Investment in Joint Venture Axis, LLC
In June 2007, ARI, through a wholly owned subsidiary, entered into an agreement with another
partner to form a joint venture, Axis, to manufacture and sell railcar axles at a facility to be
constructed by the joint venture. The joint venture was initially owned 50.0% by both partners.
During February 2008, two new partners purchased equity interests in Axis from each of the initial
partners. ARIs interest in Axis, after giving effect to the new partners, is 37.5%. The executive
committee of the joint venture is comprised of one representative from each of the initial
partners. Each representative has equal voting rights and equal decision-making rights for
operational and strategic decisions of the joint venture.
Construction of the joint ventures manufacturing facility is progressing and the facility is
expected to be operational during the fourth quarter of 2008. As production has not begun for Axis,
the joint venture is considered to be in the startup and construction phases. The joint venture is
incurring startup costs related to design, training, staffing, and testing, in addition to interest
expense on the funds borrowed under its credit agreement. The carrying amount of the investment in
Axis was $6.1 million and $7.5 million at September 30, 2008 and December 31, 2007, respectively.
Summary results of operations for Axis are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
Nine months |
|
|
|
ended |
|
|
ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2008 |
|
|
|
(in thousands) |
|
Sales |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(708 |
) |
|
|
(1,183 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(657 |
) |
|
$ |
(1,655 |
) |
|
|
|
|
|
|
|
13
The Company uses the equity method to account for its investment in Axis. Under the equity method,
the Company recognizes its share of the earnings and losses of the joint venture as they accrue.
Advances and distributions are charged and credited directly to the investment account.
The Company, along with the other initial partner of Axis, has guaranteed a credit agreement
entered into by Axis during December 2007, as further discussed in Note 16. The value of our
portion of the guarantee, which was $0.5 million at September 30, 2008, has been recorded by the
Company in accordance with FIN 45.
The risk of loss to the Company is limited to its investment in Axis and the portion of Axis debt,
which the Company has guaranteed.
Note 11 Investment in Joint Venture India joint venture
In June 2008, the Company, through a wholly owned subsidiary, entered into an agreement with a
partner in India to form a joint venture company to manufacture, sell and supply freight railcars
and their components in India and other countries to be agreed upon at a facility to be constructed
in India by the joint venture. The joint venture is owned 50.0% by both partners. Each partner has
agreed to make limited, equal capital contributions to the joint venture. As of September 30, 2008,
no equity investment had been made.
Note 12 Warranties
The Company provides limited warranties on certain products for periods ranging from one year for
parts and services to five years on new railcars. Factors affecting the Companys warranty
liability include the number of units sold and historical and anticipated rates of claims and costs
per claim. The Company assesses the adequacy of its warranty liability based on changes in these
factors.
As a result of experiencing lower claims than expected in 2007, ARI reduced its estimated warranty
liability for its railcar manufacturing facilities during the first quarter of 2008. The overall
change in the Companys warranty reserve, including the aforementioned reduction, is reflected on
the condensed consolidated balance sheet in accrued expenses and taxes and is detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Liability, beginning of period |
|
$ |
2,300 |
|
|
$ |
2,204 |
|
|
$ |
2,503 |
|
|
$ |
1,753 |
|
Provision for new warranties issued |
|
|
347 |
|
|
|
697 |
|
|
|
1,322 |
|
|
|
1,732 |
|
Reduction of estimated warranty
liability |
|
|
|
|
|
|
|
|
|
|
(592 |
) |
|
|
|
|
Warranty claims |
|
|
(379 |
) |
|
|
(548 |
) |
|
|
(965 |
) |
|
|
(1,132 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability, end of period |
|
$ |
2,268 |
|
|
$ |
2,353 |
|
|
$ |
2,268 |
|
|
$ |
2,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13 Long Term Debt
Long term debt consists of the following:
14
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Revolving line of credit |
|
$ |
|
|
|
$ |
|
|
Senior unsecured notes |
|
|
275,000 |
|
|
|
275,000 |
|
Other |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
Total long-term debt, including current portion |
|
$ |
275,000 |
|
|
$ |
275,008 |
|
Less current portion of debt |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion |
|
$ |
275,000 |
|
|
$ |
275,000 |
|
|
|
|
|
|
|
|
Revolving Line of Credit
The Company has an Amended and Restated Credit Agreement in place, providing for the terms of the
Companys revolving credit facility with Capital One Leverage Finance Corporation, as
administrative agent for various lenders. The Company had no borrowings outstanding as of September
30, 2008 and has had no borrowings outstanding under this revolving credit facility since its
inception in January 2006. The note bears interest at various rates based on LIBOR or prime.
The revolving credit facility has both affirmative and negative covenants as defined in the
agreement, including, without limitation, an adjusted fixed charge coverage ratio (coverage ratio),
a maximum total debt leverage ratio (leverage ratio) and limitations on capital expenditures and
dividends. These negative covenants include certain limitations on, among other things, the
Companys ability to incur or maintain indebtedness, sell or dispose of collateral, grant credit
and declare or pay dividends or make distributions on common stock or other equity securities. The
revolving credit facility has a total commitment of the lesser of (i) $100.0 million or (ii) an
amount equal to a percentage of eligible accounts receivable plus a percentage of eligible raw
materials, work in process and finished goods inventory. In addition, the revolving credit facility
includes a capital expenditure sub-facility of $30.0 million based on the percentage of the costs
related to equipment the Company may acquire. The revolving credit facility expires on October 5,
2009. Borrowings under the revolving credit facility are collateralized by accounts receivable,
contracts, leases, instruments, chattel paper, inventory, pledged accounts, certain other assets
and equipment purchased with proceeds of the capital expenditure sub-facility.
Compliance with the coverage and leverage ratios is not required unless the Companys excess
availability under the revolving credit facility is less than $30.0 million (or has been less than
$30.0 million at any time during the prior 90 days). Under this circumstance, the Companys
coverage ratio must not be less than 1.2 to 1.0 on a quarterly and annual basis. Under this
circumstance and if the Company has incurred debt during the quarter, the leverage ratio must not
be greater than 4.0 to 1.0 on a quarterly and annual basis. At September 30, 2008, the Company had
$97.7 million of availability under the revolving credit facility.
As of September 30, 2008, the Company was not required to test the coverage and leverage ratios.
The Company has declared quarterly dividends of $0.03 per common share since its initial public
offering in January 2006 through the third quarter of 2008, and none of those declarations has
breached any covenants in the revolving credit agreement.
Mortgage Note
The Company had a mortgage note outstanding at December 31, 2007 that was paid off in January 2008.
Senior Unsecured Fixed Rate Notes
In February 2007, the Company completed the offering of $275.0 million senior unsecured fixed rate
notes, which were subsequently exchanged for registered notes in March 2007. The fair value of
these notes was approximately
$243.4 million at September 30, 2008.
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-
15
annually in arrears on March 1 and September 1. The terms of the notes contain
restrictive covenants that limit the Companys ability to, among other things, incur additional
debt, make certain restricted payments and enter into certain significant transactions with
shareholders and affiliates. These covenants become more restrictive if the Companys fixed charge
coverage ratio, as defined, is less than 2.0 to 1.0. The Company was in compliance with all of its
covenants under the notes as of September 30, 2008.
ARI may redeem up to 35.0% of the Notes, prior to or on March 1, 2010, at a redemption price of
107.5% of their principal amount, plus accrued and unpaid interest with money that the Company
raises from one or more qualified equity offerings. Prior to March 1, 2011, the notes may be
redeemed in whole or in part using cash from operations at a redemption price equal to 100.0% of
the applicable principal amount, plus an applicable premium as defined in the notes agreement.
Commencing on March 1, 2011, the redemption price is set at 103.8% of the principal amount of the
Notes plus accrued and unpaid interest, and declines annually until it is reduced to 100.0% of the
principal amount of the Notes plus accrued and unpaid interest from and after March 1, 2013.
Note 14 Income Taxes
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes (FIN 48) in 2007. As of
December 31, 2007, the Company had unrecognized tax benefits of $1.5 million, of which $1.4
million, if reversed, would impact the effective tax rate. As of September 30, 2008, the Companys
unrecognized tax benefits are $1.4 million.
During 2007, the Internal Revenue Service completed an examination of the Companys 2004 and 2005
Federal income tax returns. The adjustment related to this examination was an insignificant amount
and did not result in a material change to the results of operations or financial condition of the
Company.
It is possible that amounts for unrecognized tax benefits, attributable to accounting methods,
could change over the next year, due to statutes expiring and/or changes in uncertain tax
positions. Such a change is estimated to be in the range of $0.3 million to $1.0 million. The
statute of limitations on the Companys 2005, 2006 and 2007 Federal income tax returns will expire
on September 15, 2009, 2010 and 2011, respectively.
The Companys state income tax returns for the 2004 through 2007 tax years remain open to
examination by various state authorities with the latest closing period on November 15, 2011. The
Companys foreign subsidiarys income tax returns for the 2004 through 2007 tax years remain open
to examination by the Canadian tax authority.
Note 15 Employee Benefit Plans
The Company is the sponsor of two defined benefit pension plans that cover certain employees at
designated repair facilities. One plan, which covers certain salaried and hourly employees, is
frozen and no additional benefits are accruing thereunder. The second plan, which covers only
certain of the Companys union employees, is active and benefits continue to accrue thereunder. The
assets of all funded plans are held by independent trustees and consist primarily of equity and
fixed income securities. The Company is also the sponsor of an unfunded, non-qualified supplemental
executive retirement plan (SERP) in which several of its employees are participants. The SERP is
frozen and no additional benefits are accruing thereunder.
The Company also provides postretirement healthcare and life insurance benefits for certain of its
salaried and hourly retired employees. Employees may become eligible for healthcare benefits if
they retire after attaining specified age and service requirements. These benefits are subject to
deductibles, co-payment provisions and other limitations.
As required under SFAS 158, the Company has changed its measurement date from October 1 to December
31. For 2007, we used a valuation date of October 1. For 2008, the Company will change its
valuation date to December 31. ARI chose to use the valuation performed as of October 1, 2007 and
apply it over the fifteen months from October 2007 through December 2008 as permitted under SFAS
158. The net periodic benefit cost for both the pension plans
and the postretirement plan was recognized by allocating three months of the cost to retained
earnings and recognizing the remaining twelve months of expense over the course of 2008. Thus,
during the first quarter of 2008, the Company recognized a $0.1 million decrease to retained
earnings as a result of implementing the measurement
16
date provisions under SFAS 158.
The components of net periodic benefit cost for the pension and postretirement plans are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Pension Benefits |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Service cost |
|
$ |
74 |
|
|
$ |
60 |
|
|
$ |
222 |
|
|
$ |
181 |
|
Interest cost |
|
|
254 |
|
|
|
241 |
|
|
|
762 |
|
|
|
722 |
|
Expected return on plan assets |
|
|
(271 |
) |
|
|
(240 |
) |
|
|
(815 |
) |
|
|
(720 |
) |
Amortization of unrecognized net gain |
|
|
42 |
|
|
|
52 |
|
|
|
128 |
|
|
|
155 |
|
Amortization of unrecognized prior
service cost |
|
|
3 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
Prior service cost recognized |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost recognized |
|
$ |
102 |
|
|
$ |
112 |
|
|
$ |
308 |
|
|
$ |
337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement |
|
|
Postretirement |
|
|
|
Benefits |
|
|
Benefits |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Service cost |
|
$ |
16 |
|
|
$ |
32 |
|
|
$ |
47 |
|
|
$ |
97 |
|
Interest cost |
|
|
58 |
|
|
|
75 |
|
|
|
173 |
|
|
|
224 |
|
Amortization of prior service cost |
|
|
4 |
|
|
|
5 |
|
|
|
14 |
|
|
|
14 |
|
Amortization of loss |
|
|
(11 |
) |
|
|
13 |
|
|
|
(35 |
) |
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost recognized |
|
$ |
67 |
|
|
$ |
125 |
|
|
$ |
199 |
|
|
$ |
373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Pension |
|
$ |
102 |
|
|
$ |
112 |
|
|
$ |
308 |
|
|
$ |
337 |
|
Postretirement |
|
|
67 |
|
|
|
125 |
|
|
|
199 |
|
|
|
373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic
benefit cost
recognized for both
plans |
|
$ |
169 |
|
|
$ |
237 |
|
|
$ |
507 |
|
|
$ |
710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $0.3 million and $0.2
million for the three months ended September 30, 2008 and 2007. Expenses related to these plans
were $0.7 million for both the nine months ended September 30, 2008 and 2007.
Note 16 Commitments and Contingencies
In connection with the Companys investment in Ohio Castings, ARI has guaranteed bonds amounting to
$10.0 million issued by the State of Ohio to Ohio Castings, of which $3.7 million was outstanding
as of September 30, 2008. ARI also has guaranteed a $2.0 million state loan that provides for
purchases of capital equipment, of
17
which $1.0 million was outstanding as of September 30, 2008. The
two other partners of Ohio Castings have made identical guarantees of these obligations.
One of the Companys joint ventures, Axis, entered into a credit agreement in December 2007. In
connection with this event, the Company agreed to a 50.0% guaranty of Axis obligation under its
credit agreement during the construction and start-up phases of the facility. Subject to its terms
and conditions, the guaranty will terminate on the first to occur of (i) the repayment in full of
the guaranteed obligations or (ii) after the facility has been in continuous production at a level
sufficient to meet the facilitys projected financial performance and in any event not less than
365 consecutive days from the certified completion of the facilitys construction. As of September
30, 2008, Axis had approximately $25.8 million outstanding under the credit agreement of which our
exposure is 50.0%. The Companys guaranty has a maximum exposure related to it of $35.0 million,
exclusive of any capitalized interest, fees, costs and expenses. The Companys initial partner in
the joint venture has made an identical guarantee relating to this credit agreement.
The Company is subject to comprehensive Federal, state, local and international environmental laws
and regulations relating to the release or discharge of materials into the environment, the
management, use, processing, handling, storage, transport or disposal of hazardous materials and
wastes, or otherwise relating to the protection of human health and the environment. These laws and
regulations not only expose ARI to liability for the environmental condition of its current or
formerly owned or operated facilities, and its own negligent acts, but also may expose ARI to
liability for the conduct of others or for ARIs actions that were in compliance with all
applicable laws at the time these actions were taken. In addition, these laws may require
significant expenditures to achieve compliance, and are frequently modified or revised to impose
new obligations. Civil and criminal fines and penalties and other sanctions may be imposed for
non-compliance with these environmental laws and regulations. ARIs operations that involve
hazardous materials also raise potential risks of liability under common law. Management believes
that there are no current environmental issues identified that would have a material adverse affect
on the Company. ARI is involved in investigation and remediation activities at properties that it
now owns or leases to address historical contamination and potential contamination by third
parties. The Company is also involved with state agencies in the cleanup of two sites under these
laws. These investigations are in process but it is too early to be able to make a reasonable
estimate, with any certainty, of the timing and extent of remedial actions that may be required,
and the costs that would be involved in such remediation. Substantially all of the issues
identified relate to the use of the properties prior to their transfer to ARI in 1994 by ACF
Industries LLC (ACF), an affiliate of Mr. Carl 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 made as appropriate. Actual cost to be incurred in future periods may vary from
these estimates. Based on facts presently known, ARI does not believe that the outcome of these
proceedings will have a material adverse effect on its future liquidity, results of operations or
financial position.
ARI is a party to collective bargaining agreements with labor unions at its Longview, Texas repair
facility, its North Kansas City, Missouri repair facility and at its Longview, Texas steel foundry
and components manufacturing
facility. These agreements expire in January 2010, September 2010, and April 2011, respectively.
ARI is also party to a collective bargaining agreement at its idled Milton, Pennsylvania repair
facility, which expired on June 19, 2005. The contract provisions under the agreement provide that
the contract would remain in effect under the old terms until terminated by either party with
60 days notice.
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 plaintiff seeks unspecified damages in excess
of $75,000. 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.
18
Certain claims, suits and complaints arising in the ordinary course of business have been filed or
are pending against ARI. In the opinion of management, all such claims, suits, and complaints
arising in the ordinary course of business are without merit or would not have a significant effect
on the future liquidity, results of operations or financial position of ARI if disposed of
unfavorably.
The Company entered into two vendor supply contracts with minimum volume commitments in October
2005 with suppliers of materials used at its railcar production facilities. The agreements have a
minimum purchase volume requirement over the life of the contracts totaling $64.9 million. In 2006
and 2007 combined, ARI purchased $37.5 million under these two contracts. In 2008 and 2009, ARI
expects to purchase $25.5 million and $1.9 million, respectively, under these agreements.
In 2005, ARI entered into supply agreements with a supplier for two types of steel plate. The
agreements are for five years and are cancelable by either party, with proper notice after two
years. The agreement commits ARI to buy a percentage of its production needs from this supplier at
prices that fluctuate with market conditions.
In 2006, ARI entered into an agreement with two parties, including one of the members of the Ohio
Castings joint venture and an affiliate of one of the members of the Ohio Castings joint venture,
to purchase a minimum of 60.0% of certain of our railcar component requirements for the years 2007,
2008 and 2009.
During the third quarter of 2008, the Company entered into contracts to purchase a fixed volume of
natural gas for a period of twelve months, of which, a portion of the volume was agreed to at a
fixed price for a period of six months beginning in October 2008. The objective of entering into
this contract was to fix the price of a portion of the Companys purchases of this commodity it
uses in the manufacturing process.
Note 17 Comprehensive Income
The components of comprehensive income, net of related tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
(in thousands) |
|
(in thousands) |
Net earnings |
|
$ |
7,447 |
|
|
$ |
4,860 |
|
|
$ |
23,807 |
|
|
$ |
29,399 |
|
Adjustment for realized gains included
in net earnings |
|
|
(1,035 |
) |
|
|
|
|
|
|
(1,615 |
) |
|
|
|
|
Unrealized
gain (loss) on available-for-sale securities |
|
|
(1,350 |
) |
|
|
|
|
|
|
286 |
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(85 |
) |
|
|
84 |
|
|
|
(155 |
) |
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
4,977 |
|
|
$ |
4,944 |
|
|
$ |
22,323 |
|
|
$ |
29,589 |
|
|
|
|
|
|
Note 18 Earnings per Share
The shares used in the computation of the Companys basic and diluted earnings per common share are
reconciled as follows:
19
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
Weighted average basic common shares outstanding |
|
|
21,302,296 |
|
|
|
21,302,296 |
|
Dilutive effect of employee stock options |
|
|
|
(1) |
|
|
89,820 |
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding |
|
|
21,302,296 |
|
|
|
21,392,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
Weighted average basic common shares outstanding |
|
|
21,302,296 |
|
|
|
21,264,574 |
|
Dilutive effect of employee stock options |
|
|
|
(1)(2) |
|
|
103,532 |
(2) |
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding |
|
|
21,302,296 |
|
|
|
21,368,106 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock options to purchase 390,353 shares of common stock were not included in the
calculation for diluted earnings per share for the three and nine months ended September
30, 2008. These options would have resulted in an antidilutive effect to the earnings per
share calculation. |
|
(2) |
|
Stock options to purchase 75,000 shares of common stock were not included in the
calculation for diluted earnings per share for the three and nine months ended September
30, 2008, and the nine months ended September 30, 2007. These options would have resulted
in an antidilutive effect to the earnings per share calculation. During the second and
third quarters of 2008, these stock options were forfeited/cancelled without exercise. |
Note 19 Stock-Based Compensation
The Company accounts for stock-based compensation granted under the 2005 equity incentive plan, as
amended (the 2005 Plan) under the recognition and measurement principles of SFAS No. 123(R),
Stock-based Compensation, (SFAS 123 (R)) and its related provisions. Stock-based compensation is
expensed using a graded vesting method over the vesting period of the instrument.
The following table presents the amounts for stock-based compensation expense incurred by ARI and
the corresponding line items on the statement of operations that they are classified within:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
($ in thousands) |
|
Stock-based compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue: manufacturing operations |
|
$ |
27 |
|
|
$ |
83 |
|
|
$ |
58 |
|
|
$ |
188 |
|
Cost of revenue: railcar services |
|
|
3 |
|
|
|
11 |
|
|
|
6 |
|
|
|
21 |
|
Selling, administrative and other |
|
|
165 |
|
|
|
586 |
|
|
|
115 |
|
|
|
1,783 |
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
195 |
|
|
$ |
680 |
|
|
$ |
179 |
|
|
$ |
1,992 |
|
|
|
|
|
|
Stock Options
As a result of the June 2008 resignation of the Companys former Chief Financial Officer, William
Benac, 50,001 options to purchase common stock were cancelled. These options had an exercise price
of $35.69 per share. As a result of the cancellation of these options, the Company recognized
income of $0.4 million during the second quarter of 2008 as a result of reversing expense recorded
in accordance with SFAS 123 (R). Options to purchase 24,999 shares of common stock vested on April
3, 2008 and per the stock option agreement, expired on September 16, 2008 without exercise.
20
The Company recognized $0.1 million and $0.3 million, respectively, during the three months ended
September 30, 2008 and 2007 related to stock option grants made during 2006 under the 2005 Plan.
The Company recognized $0.4 million (exclusive of the income mentioned above) and $1.0 million,
respectively, of compensation expense during the nine months ended September 30, 2008 and 2007
related to stock option grants made during 2006 under the 2005 Plan.
The following is a summary of option activity under the 2005 Plan for January 1, 2008 through
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
Grant-date |
|
Aggregate |
|
|
Shares |
|
Average |
|
Remaining |
|
Fair Value |
|
Intrinsic |
|
|
Covered by |
|
Exercise |
|
Contractual |
|
of Options |
|
Value |
|
|
Options |
|
Price |
|
Life |
|
Granted |
|
($000) |
|
|
|
Outstanding at the
beginning of the
period, January 1,
2008 |
|
|
465,353 |
|
|
$ |
23.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled / Forfeited |
|
|
(75,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the
end of the period,
September 30, 2008 |
|
|
390,353 |
|
|
$ |
21.00 |
|
|
27 months |
|
$ |
7.28 |
|
|
$ |
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the
end of the period,
September 30, 2008 |
|
|
228,726 |
|
|
$ |
21.00 |
|
|
27 months |
|
$ |
7.28 |
|
|
$ |
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Options to purchase 390,353 shares, of which 228,726 are exercisable, of the Companys
common stock have exercise prices that are above market price, based on the closing market
price of $16.04 per share of the Companys common stock on the last business day of the
period ended September 30, 2008. |
No options have been exercised in 2008. Options to purchase 94,523 shares of the Companys common
stock were exercised during the nine months ended September 30, 2007. The Company realized a tax
benefit of $0.5 million related to these option exercises.
As of September 30, 2008, unrecognized compensation costs related to the unvested portion of stock
options were $0.1 million and are expected to be recognized over a period of three months.
As of September 30, 2008, an aggregate of 515,124 shares were available for issuance in connection
with future grants under the Companys 2005 Plan. Shares issued under the 2005 Plan may consist in
whole or in part of authorized but unissued shares or treasury shares.
Restricted Stock Award
During 2006, the Company issued 285,714 restricted shares of the Companys common stock to its
Chief Executive Officer. This restricted stock grant became fully vested in January 2007. All
shares under this grant are now transferable without contractual restrictions.
The Company recognized zero and $0.3 million, respectively, of compensation expense during the nine
months ended September 30, 2008 and 2007, for this restricted stock grant.
Stock Appreciation Rights
The compensation committee of the board of directors of the Company granted awards of stock
appreciation rights (SARs) to certain employees pursuant to the 2005 Plan during April 2007, April
2008, and September 2008.
21
All of the SARs granted in 2007 and 195,400 of the SARs granted in 2008 vest in 25.0% increments on
the first, second, third and fourth anniversaries of the grant date. Each holder must remain
employed by the Company through each such date in order to vest in the corresponding number of
SARs.
Additionally, 77,500 of the SARs granted in 2008 similarly vest in 25.0% increments on the first,
second, third and fourth anniversaries of the grant date, but only if the closing price of the
Companys common stock achieves a specified price target during the preceding calendar year for
twenty trading days during any sixty day trading day period. If the Companys common stock does not
achieve the specified price target during any such calendar year, the applicable portion of these
performance-based SARs will not vest. Each holder must further remain employed by the Company
through each anniversary of the grant date in order to vest in the corresponding number of SARs.
The SARs have exercise prices that represent the closing price of the Companys common stock on the
date of grant. Upon the exercise of any SAR, the Company shall pay the holder, in cash, an amount
equal to the excess of (A) the aggregate fair market value (as defined in the Plan) in respect of
which the SARs are being exercised, over (B) the aggregate exercise price of the SARs being
exercised, in accordance with the terms of the Stock Appreciation Rights Agreement (the SAR
Agreement). The SARs are subject in all respects to the terms and conditions of the Plan and the
SAR Agreement, which contain non-solicitation, non-competition and confidentiality provisions.
The following table provides an analysis of SARs granted in 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
2008 Grants |
|
2007 Grant |
Grant date |
|
|
4/28/2008 & 9/12/2008 |
|
|
|
4/4/2007 |
|
# SARs outstanding |
|
|
272,900 |
|
|
|
257,000 |
|
Weighted Avg Exercise price |
|
|
$20.81 |
|
|
|
$29.49 |
|
Contractual term |
|
|
7 years |
|
|
|
7 years |
|
|
|
|
|
|
|
|
|
|
September 30, 2008 SARs
Black Scholes Valuation
Components: |
|
|
|
|
|
|
|
|
Stock volatility range |
|
|
35.5% - 38.3% |
|
|
|
37.5% - 39.3% |
|
Expected life range |
|
|
3.6 - 5.5 years |
|
|
|
2.8 - 4.0 years |
|
Risk free interest rate range |
|
|
2.0% - 2.7% |
|
|
|
2.0% - 2.7% |
|
Dividend yield |
|
|
0.4% |
|
|
|
0.4% |
|
Forfeiture rate |
|
|
9.0% |
|
|
|
2.0% |
|
The exercise prices represent the closing price of the Companys common stock on the date of grant.
The SARs have a term of seven years. As there was not adequate history with the stock prices of the
Company at the time of the grant, the stock volatility rate was determined using historical
volatility rates for several other similar companies within the railcar industry. The expected life
ranges represent the use of the simplified method prescribed by the SEC in Staff Accounting
Bulletin (SAB) No. 107 and SAB No. 110, which uses the average of the vesting period and expiration
period of each group of SARs that vest equally over a four-year period. The interest rates used
were
the government Treasury Bill rate on the date of valuation. Dividend yield was determined using the
historical dividend rate of the Company. The forfeiture rate used was based on a Company estimate
of expected forfeitures over the contractual life of each grant of SARs for each period.
The Company recognized $0.1 million and $0.4 million of compensation expense during the three
months ended September 30, 2008 and 2007, respectively, related to SARs granted under the 2005
Plan.
The Company recognized $0.2 million and $0.7 million, respectively, of compensation expense during
the nine months ended September 30, 2008 and 2007 related to SARs granted under the 2005 Plan.
The following is a summary of SARs activity under the 2005 Plan for January 1, 2008 through
September 30, 2008:
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Stock |
|
Weighted |
|
Average |
|
Weighted |
|
Aggregate |
|
|
Appreciation |
|
Average |
|
Remaining |
|
Average |
|
Intrinsic |
|
|
Rights |
|
Exercise |
|
Contractual |
|
Fair Value |
|
Value |
|
|
(SARs) |
|
Price |
|
Life |
|
of SARs |
|
($000) |
|
|
|
Outstanding at the
beginning of the
period, January 1,
2008 |
|
|
273,800 |
|
|
$ |
29.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled / Forfeited |
|
|
(18,300 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
274,400 |
|
|
$ |
20.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the
end of the period,
September 30, 2008 |
|
|
529,900 |
|
|
$ |
25.02 |
|
|
73 months |
|
$ |
2.63 |
|
|
$ |
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the
end of the period,
September 30, 2008 |
|
|
68,000 |
|
|
$ |
29.49 |
|
|
66 months |
|
$ |
1.70 |
|
|
$ |
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
SARs that total 529,900 units, of which 68,000 are vested and exercisable, have
exercise prices that are above market price, based on the closing market price of $16.04
for a share of the Companys common stock on the last business day of the quarter ended
September 30, 2008. |
As of September 30, 2008, unrecognized compensation costs related to the unvested portion of stock
appreciation rights were estimated to be $0.9 million and were expected to be recognized over a
period of 41 months.
Note 20 Common Stock and Dividends on Common Stock
During each quarter since its initial public offering in January 2006, the board of directors of
the Company declared and paid cash dividends of $0.03 per share of common stock of the Company to
shareholders of record as of a given date.
Note 21 Related Party Transactions
The Company has the following agreements with ACF:
|
|
Pension Plan Assumption Agreement |
|
|
|
Effective December 1, 2005, ARI entered into an agreement with ACF which released ARI from all
employee benefit reimbursement obligations under the 1994 Asset Transfer Agreement in exchange
for ARI assuming sponsorship and all obligations of the Shippers Car Line Pension Plan,
including obligations related to ACF participants in the Plan. The Shippers Car Line Pension
Plan had an unfunded liability of $4.0 million at the time of the transfer, which became the
obligation of ARI. |
|
|
|
Manufacturing Services Agreement |
|
|
|
Under a manufacturing services agreement entered into in 1994 and amended in 2005, ACF agreed
to manufacture and distribute, at the Companys instruction, various railcar components. In
consideration for these services, the Company agreed to pay ACF based on agreed upon rates. In
the three months ended September 30, 2008 and 2007, ARI purchased inventory of $5.3 million and
$10.1 million, respectively, of components from ACF. In the nine months ended September 30,
2008 and 2007, ARI purchased inventory of $15.5 million and $35.2 million, respectively, of
components from ACF. Such amounts are included under manufacturing operations cost of revenues
on the condensed consolidated statement of operations. The agreement automatically renews
unless written notice is provided by the Company. |
23
|
|
Supply Agreement |
|
|
|
Under a supply agreement entered into in 1994, the Company agreed to manufacture and sell to
ACF specified components at cost plus mark-up or on terms not less favorable than the terms on
which the Company sold the same products to third parties. Revenue recorded under this
arrangement was immaterial for both the three months ended September 30, 2008 and 2007. Revenue
recorded under this arrangement was $0.1 million and immaterial, respectively, for the nine
months ended September 30, 2008 and 2007. Such amounts are included under manufacturing
operations revenue from affiliates on the condensed consolidated statement of operations.
Profit margins on sales to related parties approximate the margins on sales to other large
customers. |
|
|
|
Inventory Storage Agreements |
|
|
|
In 2006, ARI entered into two inventory storage agreements with ACF to store designated
inventory that ARI had purchased under its manufacturing services agreement with ACF at ACFs
facility. Under this agreement, ACF holds the inventory at its facility in segregated locations
until such time that the inventory is shipped to ARI. |
|
|
|
Wheel Set Agreements |
|
|
|
In 2006, ARI entered into an agreement that provided for ARI to procure, purchase and own the
raw material components for wheel sets. These wheel set components are those that are being
used in the assembly of wheel sets for ARI under the ARI/ACF manufacturing services agreement.
Under the manufacturing services agreement with ACF, which remains unchanged, ARI will continue
to pay ACF for its services, specifically labor and overhead, in assembling the wheel sets. |
|
|
|
Railcar Manufacturing Agreement |
|
|
|
In May 2007, the Company entered into a manufacturing agreement with ACF, pursuant to which the
Company agreed to purchase certain of its requirements for tank railcars from ACF. Under the
terms of the manufacturing agreement, ARI agreed to purchase at least 1,400 tank railcars from
ACF with delivery expected to be completed in early 2009. The profit realized by ARI upon sale
of the tank railcars to its customers was first paid to ACF to reimburse it for the start-up
costs involved in implementing the manufacturing arrangements evidenced by the agreement and
thereafter, ARI has and will continue to pay ACF half the profits realized. The term of the
agreement is for five years. Either party may terminate the agreement before its fifth
anniversary upon six months prior written notice, with certain exceptions. The agreement may
also be terminated immediately upon the happening of certain extraordinary events. |
|
|
|
On September 23, 2008, a termination letter was received from ACF regarding this agreement
effective the later of the completion of 1,400 tank railcars or March 23, 2009. No additional
fees or penalties will be incurred or received by the Company other than discussed above. |
|
|
|
In the three months ended September 30, 2008, ARI incurred costs under this agreement of $5.7
million in connection with railcars that were manufactured and delivered to customers during
that period, which includes payments made to ACF for its share of the profits along with ARI
costs. In the nine months ended September 30, 2008, ARI incurred costs under this agreement of
$14.6 million in connection with railcars that were
manufactured and delivered to customers during that period. In both the three and nine months
ended September 30, 2007, ARI incurred costs under this agreement of $0.6 million. The costs
incurred included start-up costs at the ACF facility along with the costs related to shipments
of a small number of railcars. Such amounts are included under manufacturing operations cost of
revenue on the condensed consolidated statement of operations. |
|
|
|
The Company recognized revenue of $31.7 million and $0.6 million, respectively, related to
railcars shipped under this agreement in the three months ended September 30, 2008 and 2007.
The Company recognized revenue of $73.2 million and $0.6 million, respectively, related to
railcars shipped under this agreement in the nine months ended September 30, 2008 and 2007.
Such amounts are included under manufacturing operations revenue on the condensed consolidated
statement of operations. |
24
The Company has the following agreements with ARL:
|
|
Railcar Servicing Agreement and Fleet Services Agreement |
|
|
|
Under a railcar servicing agreement entered into in 2005, 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. For the three
months ended September 30, 2007, revenue of $4.3 million was recorded under this arrangement.
For the nine months ended September 30, 2007, revenue of $12.6 million was recorded under this
arrangement. Such amounts are included under railcar services revenue from affiliates on the
condensed consolidated statement of operations. Profit margins on sales to related parties
approximate the margins on sales to other large customers. |
|
|
|
Effective as of January 1, 2008, the Company entered into a new fleet services agreement with
ARL, which replaced the 2005 railcar servicing agreement described above. The new agreement
reflects a reduced level of fleet management services, relating primarily to logistics
management services, for which ARL now pays a fixed monthly fee. Additionally, under the new
agreement, the Company continues to provide railcar repair and maintenance services to ARL for
a charge of labor, components and materials. The Company currently provides such repair and
maintenance services for approximately 23,400 railcars for ARL. The new agreement extends
through December 31, 2010, and is automatically renewed for additional one year periods unless
either party gives at least sixty days prior notice of termination. There is no termination
fee if the Company elects to terminate the new agreement. For the three months ended September
30, 2008, revenue of $3.4 million was recorded under this agreement. For the nine months ended
September 30, 2008, revenue of $11.6 million was recorded under this agreement. Such amounts
are included under railcar services revenue from affiliates on the condensed consolidated
statement of operations. Profit margins on sales to related parties approximate the margins on
sales to other large customers. |
|
|
|
Services Agreement, Separation Agreement and Rent and Building Services Extension Agreement |
|
|
|
Under the Companys services agreement with ARL, ARL agreed to provide the Company certain
information technology services, rent and building services and limited administrative
services. The rent and building services includes the use of certain facilities owned by our
Chief Executive Officer, which is further described later in this footnote. Under this
agreement, the Company agreed to provide purchasing and engineering services to ARL.
Consideration exchanged between the companies is based on an agreed upon fixed annual fee. |
|
|
|
On March 30, 2007, ARI and ARL agreed, pursuant to a separation agreement, to terminate,
effective December 31, 2006, all services provided to ARL by the Company under the services
agreement described above. Additionally, the separation agreement provided that all services
provided to the Company by ARL under the services agreement would be terminated except for rent
and building services. Under the separation agreement, ARL agreed to waive the six month notice
requirement for termination required by the services agreement. |
|
|
|
In February 2008, ARI and ARL agreed, pursuant to an extension agreement, that effective
December 31, 2007, all rent and building services would continue unless otherwise terminated by
either party upon six months prior notice or by mutual agreement between the parties. |
|
|
|
Total fees paid to ARL under these agreements were $0.2 million for both the three months ended
September 30, 2008 and 2007. Total fees paid to ARL under these agreements were $0.5 million
for both the nine months ended September 30, 2008 and 2007. The fees paid to ARL are included
in selling, administrative and other costs related to affiliates on the condensed consolidated
statement of operations. |
25
|
|
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 |
|
|
|
In March 2006, the Company entered into an agreement with ARL for the Company to manufacture
and ARL to purchase 1,000 railcars in 2007. The agreement also included an option for ARL to
purchase up to an additional 300 railcars in 2007 and an additional 1,400 railcars in 2008. ARL
exercised the option to purchase 71 additional railcars in 2007 and exercised the option to
purchase 1,400 additional railcars in 2008. Revenue for these railcars sold to ARL is included
under manufacturing operations revenue from affiliates on the accompanying condensed
consolidated statement of operations. Profit margins on sales to related parties approximate
the margins on sales to other large customers. |
|
|
|
In September 2006, the Company entered into an agreement with ARL for the Company to
manufacture and ARL to purchase 500 railcars in both 2008 and 2009. |
The Company has the following agreements with other affiliated parties:
|
|
Ohio Castings has a loan outstanding under a promissory note, which is due in November 2008.
The note 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 $0.7 million and $1.2 million, respectively, at September 30, 2008 and December 31, 2007. |
|
|
|
In connection with the Companys investment in Ohio Castings, ARI has a guarantee on bonds
amounting to $10.0 million issued by the State of Ohio to Ohio Castings, of which $3.7 million
was outstanding as of September 30, 2008. ARI also has a guarantee of a $2.0 million state loan
that provides for purchases of capital equipment, of which $1.0 million was outstanding as of
September 30, 2008. The two other partners of Ohio Castings have made identical guarantees of
these obligations. |
|
|
|
One of the Companys joint ventures, Axis, entered into a credit agreement in December 2007. In
connection with this event, the Company agreed to a 50.0% guaranty of Axis obligation under
its credit agreement during the construction and start-up phases of the facility. Subject to
its terms and conditions, the guaranty will terminate on the first to occur of (i) the
repayment in full of the guaranteed obligations or (ii) after the facility has been in
continuous production at a level sufficient to meet the facilitys projected financial
performance and in any event not less than 365 consecutive days from the certified completion
of the facilitys construction. As of September 30, 2008, Axis had approximately $25.8 million
outstanding under the credit agreement of which our exposure is 50.0%. The Companys guaranty
has a maximum exposure related to it of $35.0 million, exclusive of any capitalized interest,
fees, costs and expenses. The Companys initial partner in the joint venture has made an
identical guarantee relating to this credit agreement. |
|
|
|
The Company leases certain facilities from an entity owned by its Chief Executive Officer.
Expenses paid to related parties for these facilities were $0.2 million for both the three
months ended September 30, 2008 and 2007. Expenses paid to related parties for these facilities
were $0.7 million for both the nine months ended September 30, 2008 and 2007. |
|
|
|
In July 2007, ARI entered into an agreement with its joint venture, Axis, to purchase railcar
axles from a facility to be constructed by the joint venture. Production is not expected to
begin until the fourth quarter of 2008. |
26
Financial Information for Transactions with Affiliates
As of September 30, 2008, amounts due from affiliates were $8.9 million in accounts receivable from
ACF, Ohio Castings and ARL. As of December 31, 2007, amounts due from affiliates represented $17.2
million in receivables from ACF, Ohio Castings and ARL.
As of September 30, 2008 and December 31, 2007, amounts due to affiliates included $5.7 million and
$2.9 million, respectively, in accounts payable to ACF, Ohio Castings and ARL.
Cost of railcar manufacturing for the three months ended September 30, 2008 and 2007 included $23.3
million and $9.7 million, respectively, in railcar products produced by Ohio Castings. Cost of
railcar manufacturing for the nine months ended September 30, 2008 and 2007 included $60.7 million
and $39.5 million, respectively, in railcar products produced by Ohio Castings.
Inventory at September 30, 2008 and December 31, 2007 includes $7.5 million and $4.1 million,
respectively, of purchases from Ohio Castings. Approximately $0.7 million and $0.5 million of
costs, respectively, were eliminated at September 30, 2008 and December 31, 2007, as it represented
profit from a related party for inventory still on hand.
Note 22 Operating Segment and Sales/Credit Concentrations
ARI operates in two reportable segments: manufacturing operations and railcar services. Performance
is evaluated based on revenue and operating profit. Intersegment sales and transfers are accounted
for as if sales or transfers were to third parties. The information in the following tables is
derived from the segments internal financial reports used for corporate management purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
Manufacturing |
|
|
Railcar |
|
|
Corporate & |
|
|
|
|
|
|
|
September 30, 2008 |
|
Operations |
|
|
Services |
|
|
all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(in thousands) |
|
Revenues from external
customers |
|
$ |
205,107 |
|
|
$ |
12,141 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
217,248 |
|
Intersegment revenues |
|
|
177 |
|
|
|
47 |
|
|
|
|
|
|
|
(224 |
) |
|
|
|
|
Cost of revenue external
customers |
|
|
(187,771 |
) |
|
|
(9,874 |
) |
|
|
|
|
|
|
|
|
|
|
(197,645 |
) |
Cost of intersegment revenue |
|
|
(147 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
17,366 |
|
|
|
2,276 |
|
|
|
|
|
|
|
(39 |
) |
|
|
19,603 |
|
Selling, administrative and
other |
|
|
(1,639 |
) |
|
|
(470 |
) |
|
|
(4,493 |
) |
|
|
|
|
|
|
(6,602 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
15,727 |
|
|
$ |
1,806 |
|
|
$ |
(4,493 |
) |
|
$ |
(39 |
) |
|
$ |
13,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
Manufacturing |
|
|
Railcar |
|
|
Corporate & |
|
|
|
|
|
|
|
September 30, 2007 |
|
Operations |
|
|
Services |
|
|
all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(in thousands) |
|
Revenues from external
customers |
|
$ |
127,376 |
|
|
$ |
12,515 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
139,891 |
|
Intersegment revenues |
|
|
197 |
|
|
|
41 |
|
|
|
|
|
|
|
(238 |
) |
|
|
|
|
Cost of goods sold external
customers |
|
|
(113,251 |
) |
|
|
(10,668 |
) |
|
|
|
|
|
|
|
|
|
|
(123,919 |
) |
Cost of intersegment sales |
|
|
(92 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
14,230 |
|
|
|
1,852 |
|
|
|
|
|
|
|
(110 |
) |
|
|
15,972 |
|
Selling, administrative and
other |
|
|
(1,844 |
) |
|
|
(530 |
) |
|
|
(4,461 |
) |
|
|
|
|
|
|
(6,835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
12,386 |
|
|
$ |
1,322 |
|
|
$ |
(4,461 |
) |
|
$ |
(110 |
) |
|
$ |
9,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
Manufacturing |
|
|
Railcar |
|
|
Corporate & |
|
|
|
|
|
|
|
September 30, 2008 |
|
Operations |
|
|
Services |
|
|
all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(in thousands) |
|
Revenues from external
customers |
|
$ |
566,754 |
|
|
$ |
39,025 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
605,779 |
|
Intersegment revenues |
|
|
540 |
|
|
|
139 |
|
|
|
|
|
|
|
(679 |
) |
|
$ |
|
|
Cost of revenue external
customers |
|
|
(511,813 |
) |
|
|
(31,459 |
) |
|
|
|
|
|
|
|
|
|
$ |
(543,272 |
) |
Cost of intersegment revenue |
|
|
(433 |
) |
|
|
(114 |
) |
|
|
|
|
|
|
547 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
55,048 |
|
|
|
7,591 |
|
|
|
|
|
|
|
(132 |
) |
|
|
62,507 |
|
Selling, administrative and
other |
|
|
(5,594 |
) |
|
|
(1,515 |
) |
|
|
(12,487 |
) |
|
|
|
|
|
|
(19,596 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
49,454 |
|
|
$ |
6,076 |
|
|
$ |
(12,487 |
) |
|
$ |
(132 |
) |
|
$ |
42,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
Manufacturing |
|
|
Railcar |
|
|
Corporate & |
|
|
|
|
|
|
|
September 30, 2007 |
|
Operations |
|
|
Services |
|
|
all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(in thousands) |
|
Revenues from external
customers |
|
$ |
498,217 |
|
|
$ |
38,014 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
536,231 |
|
Intersegment revenues |
|
|
824 |
|
|
|
225 |
|
|
|
|
|
|
|
(1,049 |
) |
|
|
|
|
Cost of revenue external
customers |
|
|
(435,389 |
) |
|
|
(31,198 |
) |
|
|
|
|
|
|
|
|
|
|
(466,587 |
) |
Cost of intersegment revenue |
|
|
(692 |
) |
|
|
(211 |
) |
|
|
|
|
|
|
903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
62,960 |
|
|
|
6,830 |
|
|
|
|
|
|
|
(146 |
) |
|
|
69,644 |
|
Selling, administrative and
other |
|
|
(5,653 |
) |
|
|
(1,621 |
) |
|
|
(13,610 |
) |
|
|
|
|
|
|
(20,884 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
57,307 |
|
|
$ |
5,209 |
|
|
$ |
(13,610 |
) |
|
$ |
(146 |
) |
|
$ |
48,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing |
|
Railcar |
|
Corporate & |
|
|
|
|
As of |
|
Operations |
|
Services |
|
all other |
|
Eliminations |
|
Totals |
|
|
(in thousands) |
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
377,351 |
|
|
$ |
36,485 |
|
|
$ |
283,137 |
|
|
$ |
|
|
|
$ |
696,973 |
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
320,313 |
|
|
$ |
37,243 |
|
|
$ |
296,828 |
|
|
$ |
|
|
|
$ |
654,384 |
|
Manufacturing Operations
Manufacturing revenues from affiliates were 22.0% and 34.1% of total consolidated revenues for the
three months ended September 30, 2008 and 2007, respectively. Manufacturing revenues from
affiliates were 22.5% and 17.4% of total consolidated revenues for the nine months ended September
30, 2008 and 2007, respectively.
Manufacturing revenues from one significant customer totaled 52.0% and 34.1% of total consolidated
revenues for the three months ended September 30, 2008 and 2007, respectively. Manufacturing
revenues from one significant customer totaled 44.7% and 54.2% of total consolidated revenues for
the nine months ended September 30, 2008 and 2007, respectively.
Manufacturing revenues from two significant customers were 74.3% and 66.6% of total consolidated
revenues for the three months ended September 30, 2008 and 2007, respectively. Manufacturing
revenues from two significant customers were 67.3% and 71.7% of total consolidated revenues for the
nine months ended September 30, 2008 and 2007, respectively.
Manufacturing receivables from one significant affiliated customer were 13.7% and 31.3% of total
consolidated accounts receivable at September 30, 2008 and December 31, 2007, respectively.
Manufacturing receivables from two significant customers were 53.1% and 51.2% of total consolidated
accounts receivable at September 30, 2008
28
and December 31, 2007, respectively.
Railcar services
Railcar services revenues from affiliates were 1.6% and 3.1% of total consolidated revenues for the
three months ended September 30, 2008 and 2007, respectively. Railcar services revenues from
affiliates were 1.9% and 2.4% of total consolidated revenues for the nine months ended September
30, 2008 and 2007, respectively.
No single railcar services customer accounted for more than 10.0% of total consolidated revenue for
the three and the nine months ended September 30, 2008 and 2007. No single railcar services
customer accounted for more than 10.0% of total consolidated accounts receivable as of September
30, 2008 and December 31, 2007.
Note 23 Supplemental Cash Flow Information
ARI received interest income of $4.2 million and $10.1 million for the nine months ended September
30, 2008 and 2007, respectively.
ARI paid interest expense of $20.9 million and $10.6 million for the nine months ended September
30, 2008 and 2007, respectively.
ARI paid taxes of $14.6 million and $16.5 million for the nine months ended September 30, 2008 and
2007, respectively.
On January 1, 2007, ARI recorded a $1.6 million liability that was reclassed from a deferred tax
liability account related to our unrecognized tax liability in accordance with FIN 48.
In August 2008, the board of directors of the Company declared a cash dividend of $0.03 per share
of common stock of the Company to shareholders of record as of October 6, 2008 that was paid on
October 20, 2008.
In August 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 October 5, 2007 that was paid on
October 19, 2007.
During the nine months ended September 30, 2008, the Company recorded an unrealized gain on its
short term investments of $0.5 million, which was recorded to accumulated other comprehensive
income within stockholders equity, net of taxes.
Note 24 Subsequent Events
In October 2008, the board of directors of the Company declared a cash dividend of $0.03 per share
of common stock of the Company to shareholders of record as of January 9, 2008 that will be paid on
January 23, 2008.
On October 22, 2008, the Company entered into a forward option agreement to purchase a total of
$6.6 million Canadian Dollars for $5.3 million in pre-determined increments from October 27, 2008
to April 30, 2009, to be used for capital expenditures at its Canadian facility.
Ohio Castings has a promissory note, payable to Castings, of which $0.7 million was outstanding at
September 30, 2008. The promissory note was amended to allow for interest only payments upon
sufficient notification and the final installment date was adjusted from November 2008 to August
2009. No other changes were made to the agreement as described in Notes 9, 16, and 21.
29
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some of the statements contained in this report are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These statements involve known and unknown risks, uncertainties and other factors that may
cause our or our industrys 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. In some cases, you can identify forward-looking statements by terms
such as may, will, should, could, would, expects, plans, anticipates, believes,
estimates, projects, predicts, potential and similar expressions intended to identify
forward-looking statements. Our forward-looking statements are subject to risks and uncertainties,
including without limitation:
|
|
|
the cyclical nature of our business and adverse economic and market conditions; |
|
|
|
|
our reliance upon a small number of customers that represent a large percentage of
our revenues and the potential for any of those significant customers to become a
credit risk, which might be heightened by current credit market conditions; |
|
|
|
|
the highly competitive nature of our industry; |
|
|
|
|
risks associated with the conversion of our railcar backlog into revenues, including
pricing provisions in some contracts we have with our customers; |
|
|
|
|
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 risk of damage to our primary railcar manufacturing facilities or equipment in
Paragould or Marmaduke, Arkansas; |
|
|
|
|
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, and those of joint ventures
in which we are involved, including, without limitation: |
|
o |
|
construction delays; |
|
|
o |
|
unexpected costs; |
|
|
o |
|
other risks typically associated with the construction of new manufacturing facilities; |
|
|
|
our dependence on our key personnel and the risk that we may lose skilled, trained,
qualified production and management employees in relation to production slowdowns or
any other significant factor that could cause us to lose these employees; |
|
|
|
|
risks associated with our changing business including, without limitation: |
|
o |
|
potential for labor shortages |
|
|
o |
|
the need to implement improvements to our infrastructure to accommodate
growth or changing market conditions; and |
|
|
o |
|
risks and costs associated with those improvements; |
|
|
|
the difficulties of integrating any businesses we might acquire with our own; |
30
|
|
|
the uncertainty of acceptance of our new railcar offerings by our customers or that
our new offerings may not be initially profitable, if at all; |
|
|
|
|
the cost of complying with environmental and health and safety laws and regulations; |
|
|
|
|
the costs associated with complying with various regulations associated with being a
public company; |
|
|
|
|
our joint ventures, including Ohio Castings, Axis and our recent India joint
venture, and those that we may enter into with future joint venture partners, and our
relationships with our partners in those joint ventures may not be successful |
|
|
|
|
our relationship with Mr. Carl 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 to us and as a provider of significant managerial support; |
|
|
|
|
potential failure by ACF, an affiliate of Mr. Carl 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; |
|
|
|
|
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; |
|
|
|
|
substantial indebtedness resulting from our outstanding notes could adversely affect
our operations and financial results and prevent us from fulfilling our obligations; |
|
|
|
|
our ability to incur substantially more debt could further exacerbate the risks
associated with our substantial indebtedness; |
|
|
|
|
we may not be able to generate sufficient cash flow to service all of our
obligations, including our obligations relating to the unsecured senior notes; |
|
|
|
|
we may not be able to protect our intellectual property and prevent its improper use
by third parties; |
|
|
|
|
our products could infringe the intellectual property rights of others, which could
lead to litigation and potential significant damages; |
|
|
|
|
we may incur increased insurance claims and expenses, which could adversely affect
profitability; |
|
|
|
|
our failure to comply with agency regulations could adversely affect our financial
results; |
|
|
|
|
the railroad industry could consolidate further, which could adversely affect our
operations; |
|
|
|
|
we could experience a reduction in the availability of energy supplies or an
increase in energy costs; |
|
|
|
|
we may be required to reduce the value of our inventory, long-lived assets and/or
goodwill according to generally accepted accounting principles; |
|
|
|
|
our stock price is subject to volatility; |
31
|
|
|
our stock price could fluctuate as a result of sales by Mr. Carl Icahn or any other
significant stockholder; |
|
|
|
|
Mr. Carl Icahn exerts significant influence over us and his interest may conflict
with the interest of our other stockholders; |
|
|
|
|
we are not subject to all the NASDAQ corporate governance requirements due to our
controlled company status; and |
|
|
|
|
we could be limited in our ability to pay dividends. |
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 and under Risk factors in our Annual Report on Form 10-K filed on February 22, 2008 (the
Annual Report), as well as the risks and uncertainties discussed elsewhere in the Annual Report and
this report. We caution you that these risks are not exhaustive. We operate in a continually
changing business environment and new risks emerge from time to time. We qualify all of our
forward-looking statements by these cautionary statements.
OVERVIEW
We are a leading North American manufacturer of hopper and tank railcars. We also repair and
refurbish railcars, provide fleet management services and design and manufacture certain railcar
and industrial components. We provide our railcar customers with integrated solutions through a
comprehensive set of high quality products and related services.
We operate in two segments: manufacturing operations and railcar services. Manufacturing operations
consist of railcar manufacturing and railcar and industrial component manufacturing. Railcar
services consist of railcar repair and refurbishment services and fleet management services.
As a result of the current market conditions, we have slowed production in the fourth quarter at
our hopper railcar facility in Paragould, Arkansas and begun evaluating our capacity and production
schedules for 2009.
We continue to see favorable labor efficiencies and overhead cost control at most of our locations
including our tank railcar manufacturing complex that includes our flexible railcar manufacturing
plant. The additional manufacturing capacity provided by this new flexible plant along with our
manufacturing agreement with ACF have led to increased tank railcar shipments for us in 2008
compared to 2007. ACF is an affiliate of Mr. Carl Icahn, our principal beneficial stockholder and
the chairman of our board of directors. Our railcar services group has performed well thus far in
2008 due to a favorable mix of work.
RESULTS OF OPERATIONS
Three Months ended September 30, 2008 compared to Three Months ended September 30, 2007
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.
32
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended, |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Manufacturing Operations |
|
|
94.4 |
% |
|
|
91.1 |
% |
Railcar services |
|
|
5.6 |
% |
|
|
8.9 |
% |
|
|
|
Total revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenue: |
|
|
|
|
|
|
|
|
Cost of manufacturing |
|
|
(86.5 |
%) |
|
|
(81.0 |
%) |
Cost of railcar services |
|
|
(4.5 |
%) |
|
|
(7.6 |
%) |
|
|
|
Total cost of revenues |
|
|
(91.0 |
%) |
|
|
(88.6 |
%) |
Gross profit |
|
|
9.0 |
% |
|
|
11.4 |
% |
Selling, administrative and other |
|
|
(3.0 |
%) |
|
|
(4.9 |
%) |
|
|
|
Earnings from operations |
|
|
6.0 |
% |
|
|
6.5 |
% |
Interest income |
|
|
0.8 |
% |
|
|
2.8 |
% |
Interest expense |
|
|
(2.3 |
%) |
|
|
(3.9 |
%) |
Other income |
|
|
0.8 |
% |
|
|
0.0 |
% |
Earnings from joint venture |
|
|
0.2 |
% |
|
|
0.1 |
% |
|
|
|
Earnings before income tax expense |
|
|
5.5 |
% |
|
|
5.5 |
% |
Income tax expense |
|
|
(2.1 |
%) |
|
|
(2.0 |
%) |
|
|
|
Net earnings |
|
|
3.4 |
% |
|
|
3.5 |
% |
|
|
|
Revenues
Our revenues for the three months ended September 30, 2008 increased 55.3% to $217.2 million from
$139.9 million in the three months ended September 30, 2007. This increase was primarily due to
increased revenues from our manufacturing operations.
Our manufacturing operations revenues for the three months ended September 30, 2008 increased 61.0%
to $205.1 million from $127.4 million for the three months ended September 30, 2007. The primary
reasons for the increase in revenue were due to an increase in volume driven by tank railcar
shipments from the new flexible railcar manufacturing plant, additional tank railcars shipped under
our ACF manufacturing agreement, and the impact of low hopper railcar production levels in the
third quarter of 2007. Additionally, we saw an increase in average selling prices for most railcars
shipped in the third quarter of 2008 compared to the third quarter of 2007, driven by increased
material cost. For most of these shipments in the third quarter of 2008, we were able to recover
this increased material cost in the selling price of the railcars. These factors were partially
offset by competitive pricing for hopper railcars. During the three months ended September 30,
2008, we shipped a total of 2,116 railcars compared to 1,276 railcars in the same period of 2007.
For the three months ended September 30, 2008, our manufacturing operations included $47.7 million,
or 22.0% of our total consolidated revenues, from transactions with affiliates, compared to $47.6
million, or 34.1% of our total consolidated revenues in the three months ended September 30, 2007.
These revenues were attributable to sales of railcars and railcar parts to companies controlled by
Mr. Carl Icahn.
Our railcar services revenues in the three months ended September 30, 2008 decreased to $12.1
million compared to $12.5 million of revenue for the three months ended September 30, 2007. This
decrease was primarily attributable to our repair business in Texas being affected by Hurricane Ike
with significant power outages for several days during the quarter. For the third quarter of 2008,
our railcar services revenues included $3.4 million, or 1.6% of our total consolidated revenues,
from transactions with affiliates, compared to $4.3 million, or 3.1% of our total revenues, in the
third quarter of 2007.
Gross Profit
Our gross profit increased to $19.6 million in the three months ended September 30, 2008 from $16.0 million in the
33
three months ended September 30, 2007. Our gross profit margin decreased to 9.0% in
the third quarter of 2008 from 11.4% in the third quarter of 2007, driven primarily by a decrease
in our gross profit margins generated from our manufacturing operations.
Gross profit for our manufacturing operations increased $3.2 million for the three months ended
September 30, 2008 compared to the three months ended September 30, 2007 due to increased hopper
and tank railcar shipments partially offset by the decreased gross profit margin. Gross profit
margin for our manufacturing operations was 8.5% in the three months ended September 30, 2008, a
decrease from 11.1% in the three months ended September 30, 2007 primarily attributable to lower
margins on hopper railcars as a result of competitive pricing. Also driving this change were
increased material costs and surcharges on some hopper railcars that we could not recover through
higher selling prices. These increased material costs and surcharges that we were able to recover
through increased selling prices on most railcars had a negative effect on gross profit margin.
This change was partially offset by the higher volume of tank railcar shipments along with
favorable labor efficiencies and overhead cost control at our manufacturing facilities during the
third quarter of 2008.
Gross profit for our railcar services operations increased $0.5 million for the three months ended
September 30, 2008 compared to the three months ended September 30, 2007 due to increased labor
efficiencies, increased capacity, and favorable mix of work. Gross profit margin for our railcar
services operations increased to 18.7% in the three months ended September 30, 2008 from 14.8% in
the three months ended September 30, 2007 due to the factors mentioned above.
Selling, Administrative and Other Expenses
Our total selling, administrative and other expenses decreased to $6.6 million for the third
quarter of 2008, compared to $6.8 million for the third quarter of 2007. These selling,
administrative and other expenses were 3.0% of total consolidated revenues in the three months
ended September 30, 2008 as compared to 4.9% of total consolidated revenues in the three months
ended September 30, 2007. The decrease in the percentage is due to low revenue level in 2007 which
generated a higher percentage for 2007.
In the third quarter of 2008, we recognized expense related to stock-based compensation of $0.2
million, attributable to stock options we granted in 2006 and to stock appreciation rights (SARs),
which settle in cash, granted in 2008 and 2007. This is compared to stock-based compensation
expense of $0.7 million for the three months ended September 30, 2007, which was attributable to
stock options we granted in 2006 and to stock appreciation rights (SARs), which settle in cash,
granted in 2007. The decrease in expense of $0.5 million is primarily attributable to decreased
SARs expense driven by the Companys decreased stock price in 2008.
Interest Expense and Income
Net interest expense for the three months ended September 30, 2008 was $3.3 million, representing
$5.0 million of interest expense and $1.7 million of interest income, as compared to $1.5 million
of net interest expense for the three months ended September 30, 2007, representing $5.5 million of
interest expense and $4.0 million of interest income.
Our interest expense decreased $0.5 million in the third quarter of 2008 compared to the third
quarter of 2007. This was primarily related to a greater amount of interest costs being capitalized
as a result of higher capital spending during 2008 compared to 2007.
Our interest income decreased $2.3 million in the third quarter of 2008 compared to the third
quarter of 2007. The decrease in interest income was primarily attributable to a decrease in
interest rates and a decrease in average cash balances held by us in the three months ended
September 30, 2008 compared to the three months ended September 30, 2007 as well as cash we had
invested in available-for-sale securities in the third quarter of 2007 that generated a higher rate
of return.
Other Income
During January 2008, we entered into total return swap agreements referencing a total of 400,000
shares of common
stock of Greenbrier. During the third quarter of 2008, all of these total return swap agreements were settled early in
34
accordance with the terms of the agreements. We accounted for these swap
agreements as derivatives with any resulting unrealized gain accounted for as other income and any
resulting unrealized loss accounted for as other loss. Any resulting realized gain or loss upon
settlement was also recorded as other income or other loss. The settled total return swaps
generated a realized gain of $0.6 million during the third quarter of 2008. As we had recorded an
unrealized gain of $0.6 million for the six months ended June 30, 2008, the unrealized gain was
reversed during the third quarter and the realized gain of $0.6 million was recorded, resulting in
an immaterial impact on our financial results related to activity from our investment in total
return swaps.
Other income for the third quarter of 2008 also includes a realized gain of $1.7 million
attributable to 916,106 Greenbrier shares of common stock sold in the third quarter of 2008.
Income Taxes
Our income tax expense for the three months ended September 30, 2008 was $4.5 million or 37.6% of
our earnings before income taxes, as compared to $2.9 million for the three months ended September
30, 2007, or 37.0% of our earnings before income taxes. The increase in the quarterly rate is due
to an increase in our estimated effective tax rate for 2008.
Nine Months ended September 30, 2008 compared to Nine Months ended September 30, 2007
The following table summarizes our historical operations as a percentage of revenues for the
periods shown. Our historical results are not necessarily indicative of operating results that may
be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended, |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Manufacturing Operations |
|
|
93.6 |
% |
|
|
92.9 |
% |
Railcar services |
|
|
6.4 |
% |
|
|
7.1 |
% |
|
|
|
Total revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenue: |
|
|
|
|
|
|
|
|
Cost of manufacturing |
|
|
(84.5 |
%) |
|
|
(81.2 |
%) |
Cost of railcar services |
|
|
(5.2 |
%) |
|
|
(5.8 |
%) |
|
|
|
Total cost of revenues |
|
|
(89.7 |
%) |
|
|
(87.0 |
%) |
Gross profit |
|
|
10.3 |
% |
|
|
13.0 |
% |
Selling, administrative and other |
|
|
(3.2 |
%) |
|
|
(3.9 |
%) |
|
|
|
Earnings from operations |
|
|
7.1 |
% |
|
|
9.1 |
% |
Interest income |
|
|
1.0 |
% |
|
|
1.9 |
% |
Interest expense |
|
|
(2.5 |
%) |
|
|
(2.4 |
%) |
Other income |
|
|
0.6 |
% |
|
|
0.0 |
% |
Earnings from joint venture |
|
|
0.2 |
% |
|
|
0.1 |
% |
|
|
|
Earnings before income tax expense |
|
|
6.4 |
% |
|
|
8.7 |
% |
Income tax expense |
|
|
(2.4 |
%) |
|
|
(3.2 |
%) |
|
|
|
Net earnings |
|
|
4.0 |
% |
|
|
5.5 |
% |
|
|
|
Revenues
Our revenues for the nine months ended September 30, 2008 increased 13.0% to $605.8 million from
$536.2 million in the nine months ended September 30, 2007. This increase was primarily due to
increased revenues for our
manufacturing operations.
Our manufacturing operations revenues for the nine months ended September 30, 2008 increased 13.8%
to $566.8 million from $498.2 million for the nine months ended September 30, 2007. The primary
reason for the increase in revenue was due to a volume increase for tank railcars shipped in 2008
compared to 2007 due partially to the new
35
flexible railcar manufacturing plant along with tank
railcars shipped under our ACF manufacturing agreement. In addition, we saw an increase in average
selling prices for most railcars shipped in 2008 compared to 2007, driven by increased material
cost. For these shipments in 2008, we were able to recover this increased material cost in the
selling price of the railcars. These factors were partially offset by competitive pricing for
hopper railcars. During the nine months ended September 30, 2008, we shipped a total of 6,095
railcars compared to 5,465 railcars in the same period of 2007.
For the nine months ended September 30, 2008, our manufacturing operations included $136.1 million,
or 22.5% of our total consolidated revenues, from transactions with affiliates, compared to $93.6
million, or 17.4% of our total consolidated revenues in the nine months ended September 30, 2007.
These revenues were attributable to sales of railcars and railcar parts to companies controlled by
Mr. Carl Icahn.
Our railcar services revenues in the nine months ended September 30, 2008 increased to $39.0
million compared to the $38.0 million of revenue for the nine months ended September 30, 2007. This
increase was primarily driven by a change in work content at our repair facilities, increased labor
efficiencies, and an expansion at one of our repair facilities. For the nine months ended September
30, 2008, our railcar services revenues included $11.6 million, or 1.9% of our total consolidated
revenues, from transactions with affiliates, compared to $12.6 million, or 2.4% of our total
revenues, in the nine months ended September 30, 2007.
Gross Profit
Our gross profit decreased to $62.5 million in the nine months ended September 30, 2008 from $69.6
million in the nine months ended September 30, 2007. Our gross profit margin decreased to 10.3% in
the nine months ended September 30, 2008 from 13.0% in the nine months ended September 30, 2007,
primarily driven by a decrease in gross profit margins in our manufacturing operations.
Gross profit for our manufacturing operations decreased $7.9 million for the nine months ended
September 30, 2008 compared to the nine months ended September 30, 2007 due to the decreased gross
profit margin partially offset by increased shipments of tank railcars in 2008. Gross profit margin
for our manufacturing operations was 9.7% in the nine months ended September 30, 2008, a decrease
from 12.6% in the nine months ended September 30, 2007 primarily attributable to lower margins on
hopper railcars as a result of competitive pricing. Also driving this change were increased
material costs and surcharges on some hopper railcars that we could not recover through higher
selling prices. These increased material costs and surcharges that we were able to recover through
increased selling prices on most railcars had a negative effect on gross profit margin. Partially
offsetting this were the higher tank railcar shipments during 2008 compared to 2007 along with
favorable labor efficiencies and overhead cost control at our manufacturing facilities.
Gross profit for our railcar services operations increased $0.8 million for the nine months ended
September 30, 2008 compared to the nine months ended September 30, 2007 due to increased labor
efficiencies, increased capacity, and favorable mix of work. Gross profit margin for our railcar
services operations increased to 19.4% in the nine months ended September 30, 2008 from 17.9% in
the nine months ended September 30, 2007 due to the factors mentioned above.
Selling, Administrative and Other Expenses
Our selling, administrative and other expenses decreased by $1.3 million in the nine months ended
September 30, 2008, to $19.6 million from $20.9 million in the nine months ended September 30,
2007. These selling, administrative and other expenses were 3.2% of total consolidated revenues in
the nine months ended September 30, 2008 as compared to 3.9% of total consolidated revenues in the
nine months ended September 30, 2007. The decrease of $1.3 million was primarily attributable to a
decrease of $1.8 million of stock-based compensation expense offset by various increases.
During the nine months ended September 30, 2008, we recognized stock based compensation expense of
$0.2 million compared to $2.0 million in the nine months ended September 30, 2007. This decrease of
$1.8 million was primarily attributable to income recognized in 2008 from the reversal of
stock-based compensation expense for stock options forfeited by William P. Benac, our former chief
financial officer, who resigned in June 2008. Another
36
factor is the decreased expense recognized on
our SARs driven by our low stock price levels in 2008, which drove down the fair value of the SARs.
Interest Expense and Income
Net interest expense for the nine months ended September 30, 2008 was $9.1 million, representing
$15.1 million of interest expense and $6.0 million of interest income, as compared to $2.8 million
of net interest expense for the nine months ended September 30, 2007, representing $12.8 million of
interest expense and $10.0 million of interest income.
Our interest expense increased $2.3 million in the nine months ended September 30, 2008 compared to
the nine months ended September 30, 2007. This increase was attributable to higher interest cost
incurred in 2008 compared to 2007 on the $275.0 million of senior secured notes, which we issued on
February 28, 2007.
Our interest income decreased $4.0 million in the nine months ended September 30, 2008 compared to
the nine months ended September 30, 2007. The decrease in interest income was primarily
attributable to a decrease in interest rates and decrease in average cash balances we held during
the first nine months of 2008 compared to the first nine months of 2007 due to cash invested in
available-for-sale securities. The available-for-sale securities we held in 2007 generated a
greater return.
Other income
During January 2008, we entered into total return swap agreements referencing a total of 400,000
shares of common stock of Greenbrier. During July and August of 2008, all of these total return
swap agreements were settled. We accounted for these swap agreements as derivatives with any
resulting unrealized gain accounted for as other income with a derivative asset on the balance
sheet or any resulting unrealized loss accounted for as other loss with a derivative liability on
the balance sheet. Any resulting realized gain or loss upon settlement was also recorded as other
income or other loss. These total return swaps were settled at a realized gain of $0.6 million.
Other income for 2008 also includes $2.6 million of realized gain related to the approximately 1.2
million Greenbrier shares sold during 2008.
Income Taxes
Our income tax expense for the nine months ended September 30, 2008 was $14.4 million or 37.6% of
our earnings before income taxes, as compared to $17.3 million for the nine months ended September
30, 2007, or 37.0% of our earnings before income taxes. The increase in the year-to-date rate is
due to an increase in our estimated effective tax rate for 2008 compared to 2007. Our overall
effective tax rate increased due to decrease in certain favorable permanent differences and a
decrease in the Domestic Production Activities Deduction.
BACKLOG
We define backlog as the number and sales value of railcars that our customers have committed in
writing to purchase from us that have not been recognized as revenues. Our total backlog at
September 30, 2008, was 5,956 railcars compared to 11,929 railcars at December 31, 2007. Our total
backlog value as of September 30, 2008 and December 31, 2007 was $523.4 million and $966.5 million,
respectively. We estimate that approximately 37.2% of our September 30, 2008 backlog will be
converted to revenues by the end of 2008. Included in the railcar backlog at September 30, 2008 was
$150.7 million of railcars to be sold to our affiliate, ARL, which is controlled by Mr. Carl Icahn.
Customer railcar orders may be subject to requests for delays in deliveries, inspection rights and
other customary industry terms and conditions.
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. Estimated backlog value reflects the total revenues expected to be
attributable to the backlog reported at the end of the particular period as if such backlog were
converted to actual revenues. Estimated backlog reflects known price adjustments for material cost
changes but does not reflect a projection of any future material price adjustments that are
provided for in customer contracts.
37
Historically, we have experienced little variation between the number of railcars ordered and the
number of railcars actually delivered, however, our backlog is not necessarily indicative of our
future results of operations. Our backlog includes commitments under multi-year purchase and sale
agreements. Under these agreements, the customers have agreed to buy a minimum number of railcars
from us in each of the contract years, and typically may choose to satisfy their purchase
obligations from among a variety of railcars described in the agreements. As delivery dates could
be extended on certain orders, we cannot guarantee that our reported railcar backlog will convert
to revenue in any particular period, if at all, nor can we guarantee that the actual revenue from
these orders will equal our reported backlog estimates or that our future revenue efforts will be
successful.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity for the nine months ended September 30, 2008 was cash generated
from operations and cash we have from the senior unsecured notes we sold in February 2007 offset by
cash used for capital expenditures and cash used for our short term investments. As of September
30, 2008, we had working capital of $380.0 million, including $283.6 million of cash and cash
equivalents. We also have a $100.0 million revolving credit facility with Capital One Leverage
Finance Corporation, as administrative agent for various lenders. This facility is described in
further detail in Note 13 of our condensed consolidated financial statement, and provides for
relief from certain financial covenants described in that Note so long as we maintain excess
availability of at least $30.0 million. At September 30, 2008, we had no borrowings outstanding
under this facility and $97.7 million of availability based upon the amount of our eligible
accounts receivable and inventory (and without regard to any financial covenants).
In February 2007, we issued $275.0 million of senior unsecured notes that are due in 2014. The
offering resulted in net proceeds to us of $270.7 million. The terms of the notes contain
restrictive covenants, including limitations on our ability to incur additional debt, issue
disqualified or preferred stock, make certain restricted payments and enter into certain
significant transactions with shareholders and affiliates. These limitations become more
restrictive if our fixed charge coverage ratio, as defined, is less than 2.0 to 1.0. As of
September 30, 2008, we were in compliance with all of our covenants under the notes.
During January 2008, Longtrain purchased an aggregate of 1,530,000 shares of common stock of
Greenbrier in the open market for a total of $27.9 million. We believe these shares represented, at
the time of their purchase, approximately 9.45% of the issued and outstanding common stock of
Greenbrier. During the second and third quarters of 2008, Longtrain sold 1,156,659 shares of
Greenbrier at an average selling price of $20.43 per share. ARI recorded a realized gain of $2.6
million before tax on the sale of these shares.
As of September 30, 2008, the remaining 373,341 shares of Greenbrier were valued at $19.51 per
share, based on the closing price of such stock on the New York Stock Exchange on such date, which
made the aggregate fair value of our remaining investment $7.3 million as of such date. The
unrealized gain of $0.5 million has been included in accumulated other comprehensive income within
stockholders equity, net of deferred taxes.
Cash Flows
The following table summarizes our net cash provided by or used in operating activities, investing
activities and financing activities for the nine months ended September 30:
|
|
|
|
|
|
|
2008 |
|
|
|
(in thousands) |
|
Net cash provided by (used in): |
|
|
|
|
Operating activities |
|
$ |
14,346 |
|
Investing activities |
|
|
(32,681 |
) |
Financing activities |
|
|
(1,965 |
) |
|
|
|
|
Decrease in cash and cash equivalents |
|
$ |
(20,300 |
) |
|
|
|
|
38
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 nine months ended September 30, 2008 was
$14.3 million. Net earnings of $23.8 million were impacted by non-cash items including but not
limited to: depreciation expense of $14.6 million and other smaller adjustments. Cash provided by
operating activities attributable to changes in our current assets and current liabilities included
a decrease in prepaid expenses of $1.1 million and an increase in total accounts payable, including
to affiliates of $23.8 million. Cash used in operating activities attributable to changes in our
current assets and liabilities included an increase in total accounts receivable, including from
affiliates of $6.0 million, an increase in inventories of $35.0 million and a decrease in accrued
expenses and taxes of $4.1 million.
The increase in total accounts payable relates to increased inventory levels as well as timing of
payments made around December 31, 2007 and September 30, 2008. The increase in total accounts
receivable was primarily due to timing of sales and cash receipts around December 31, 2007 and
September 30, 2008. However, all significant customers continue to pay within their terms. The
increase in inventory levels was primarily driven by a rise in our raw material costs, including
steel, increased capacity from our new flexible railcar manufacturing plant and the startup of the
wheel and axle assembly shop and the tank head press facility in 2008. The decrease in accrued
expenses and taxes was primarily due to payments made during 2008, including bonus payments made
for 2007 performance, estimated tax payments and interest payments on our senior unsecured notes.
Net Cash Used In Investing Activities
Net cash used in investing activities was $32.7 million for the nine months ended September 30,
2008, including $31.2 million of capital expenditures for the purchase of property, plant and
equipment and $27.9 million of purchases of short term investments of available-for-sale
securities. These were offset by $23.6 million of cash proceeds received for the sale of 1,156,659
shares of Greenbrier during 2008 and $1.9 million of cash received for the sale of a portion of our
initial interest in our joint venture, Axis, in February 2008. The capital expenditures were for
the purchase of equipment at multiple locations to increase capacity and operating efficiencies.
Some of these purchases are described in further detail below under Capital Expenditures. The
purchases of short term investments relate to the initial purchase of the 1,530,000 shares of
Greenbrier common stock that we purchased in January 2008.
Net Cash Used In Financing Activities
Net cash used in financing activities was $2.0 million for the nine months ended September 30,
2008. This was primarily the dividend payments made by us in the first, second, and third quarters
of 2008.
Capital Expenditures
We continuously evaluate facility requirements based on our strategic plans, production
requirements and market demand and may elect to change our level of capital investments in the
future. These investments are all based on an analysis of the rates of return and impact on our
profitability. We are pursuing opportunities to reduce our costs through continued vertical
integration of component parts. From time to time, we may expand our business, domestically or
abroad, by acquiring other businesses or pursuing other strategic growth opportunities including,
without limitation, joint ventures.
Capital expenditures for the nine months ended September 30, 2008 were $31.2 million, including
costs that were capitalized related to maintenance and repair of existing assets and facilities,
improvements for cost reduction purposes and for expansion activities. Our expansion activities
included adding capacity at our railcar repair facilities.
39
We completed our wheel and axle assembly shop at our Paragould complex and it was in production
during the first quarter of 2008. Furthermore, our tank head press at our Marmaduke complex began
production in the third quarter of 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 2008, our current capital expenditure plans include approximately $60.0 million of projects and
investments that we expect will maintain equipment, expand capacity, improve efficiencies or reduce
costs, as well as fund investments in joint ventures. These capital expenditure plans include
expenditures to further integrate our supply chain along with ongoing maintenance capital expenses.
The amount set forth above is an estimate only. We cannot assure that we will be able to complete
any of our projects on a timely basis or within budget, if at all.
We anticipate that any future expansion of our business will be financed through existing
resources, cash flow from operations, term debt associated directly with that expenditure or other
new financing. We believe that these sources of funds will provide sufficient liquidity to meet our
expected operating requirements over the next twelve months. We cannot guarantee that we will be
able to obtain term debt or other new financing on favorable terms, if at all.
Our long term liquidity is contingent upon future operating performance and our ability to continue
to meet financial covenants under our indenture and our revolving credit facility, as amended, and
any other indebtedness. We may also require additional capital in the future to fund capital
expenditures, acquisitions or other investments. These capital requirements could be substantial.
Certain risks, trends and uncertainties may adversely affect our long term liquidity.
Dividends
During each quarter since our initial public offering in January 2006, our board of directors has
declared and paid cash dividends of $0.03 per share of our common stock.
We intend to pay cash dividends on our common stock in the future. However, our debt covenants
contain limitations and restrictions on our ability to declare and pay dividends. Moreover, our
declaration and payment of dividends will be at the discretion of our board of directors and will
depend upon our operating results, strategic plans, capital requirements, financial condition and
other factors our board of directors considers relevant. Accordingly, we may not pay dividends in
any given amount in the future, or at all.
Contingencies and Contractual Obligations
Refer to the status of contingencies in Note 16 to the condensed consolidated financial statements.
Our contractual obligations were basically unchanged from the information disclosed in our Annual
Report, except for normal operations since that time and the new agreement mentioned below.
During the third quarter of 2008, we entered into contracts to purchase a fixed volume of natural
gas for a period of twelve months, of which, a portion of the volume was agreed to at a fixed
price for a period of six months beginning in October 2008. The objective of entering into this
contract was to fix the price of a portion of our purchases of this commodity it uses in the
manufacturing process.
Employee Benefit Plans
The fair value of defined benefit pension plan assets described in Note 15 to the condensed
consolidated financial statements has declined due to the economic downturn.
CRITICAL ACCOUNTING POLICIES
The critical accounting policies and estimates used in the preparation of our financial statements
that we believe affect our more significant judgments and estimates used in the preparation of our
consolidated financial statements
40
presented in this report are described in Managements Discussion
and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated
Financial Statements included in our Annual Report, for the fiscal year ended December 31, 2007.
Except as set forth below, there have been no material changes to the critical accounting policies
or estimates during the nine months ended September 30, 2008.
Classification of Investments
We currently apply the regulations under SFAS 115. This was done in conjunction with the investment
in Greenbrier securities. SFAS 115 requires companies to classify their investment securities as
held to maturity, available-for-sale or trading. We have classified the Greenbrier securities that
we have invested in as available-for-sale as described in Note 3 in our condensed consolidated
financial statements.
Valuation of Investments
We adopted SFAS 157 (as defined below) as of January 1, 2008, which among other things, requires
enhanced disclosures about investments that are measured and reported at fair value. SFAS 157
establishes a hierarchal disclosure framework, which prioritizes and ranks the level of market
price observability used in measuring investments at fair value. Market price observability is
impacted by a number of factors, including the type of investment and the characteristics specific
to the investment. Investments with readily available active quoted prices or for which fair value
can be measured from actively quoted prices generally will have a higher degree of market price
observability and a lesser degree of judgment used in measuring fair value.
The fair value of our investments are based on observable market prices when available. Securities
we own that are listed on a securities exchange are valued at their last sales price on the primary
securities exchange on which such securities are traded on such date. Securities that are not
listed on any exchange but are traded over-the-counter are valued at the mean between the last
bid and ask price for such security on such date. Securities and other instruments for which
market quotes are not readily available are valued at fair value as determined in good faith by the
applicable general partner. For some investments little market activity may exist; managements
determination of fair value is then based on the best information available in the circumstances,
and may incorporate managements own assumptions and involves a significant degree of managements
judgment.
Investments measured and reported at fair value are classified and disclosed in one of the
following categories:
|
|
|
Level 1 Quoted prices are available in active markets for identical investments as of
the reporting date. The type of investments included in Level I include listed equities and
listed derivatives. As required by SFAS 157, we do not adjust the quoted price for these
investments, even in situations where we hold a large position and a sale could reasonably
impact the quoted price. |
|
|
|
|
Level 2 Pricing inputs are other than quoted prices in active markets, which are
either directly or indirectly observable as of the reporting date, and fair value is
determined through the use of models or other valuation methodologies. Investments, which
are generally included in this category, include corporate bonds and loans, less liquid and
restricted equity securities and certain over-the-counter derivatives. |
|
|
|
|
Level 3 Pricing inputs are unobservable for the investment and include situations
where there is little, if any, market activity for the investment. The inputs into the
determination of fair value require significant management judgment or estimation. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, an investments level within the fair value hierarchy is based on
the lowest level of input that is
significant to the fair value measurement. Our assessment of the significance of a particular input
to the fair value measurement in its entirety requires judgment and considers factors specific to
the investment.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except for the following, there has been no material change in our market risks since December 31,
2007.
41
We hold investments that are reported at fair value as of the reporting date, which include
Greenbrier securities we own, as reported on our condensed consolidated balance sheets. The
carrying values of investments subject to equity price risks are based on quoted market prices of
the security and referenced security as of the balance sheet date. Market prices are subject to
fluctuation and, consequently, the amount realized in the settlement of an investment may
significantly differ from the reported market value. Fluctuation in the market price of a security
may result from perceived changes in the economic characteristics of the issuer of the security,
the relative price of alternative investments and general market conditions.
Based on the balance as of September 30, 2008, we estimate that in the event of a 10% decline in
fair value of the Greenbrier common stock, the fair value of our investment would decrease by $0.7
million. The selected hypothetical change does not reflect what may be considered best or worst
case scenarios. Indeed, results could differ materially due to the nature of equity markets.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, our management evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of
the end of the period covered by this quarterly report on Form 10-Q (the Evaluation Date). Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of
the Evaluation Date, our disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commissions rules and forms.
There has been no change in our internal control over financial reporting during the most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments since the filing of our Annual Report.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in Item 1A of our
Annual Report.
ITEM 5. OTHER INFORMATION
In May 2007, we entered into a manufacturing agreement with ACF, pursuant to which we agreed to
purchase certain of our requirements for tank railcars from ACF. Under the terms of the
manufacturing agreement, we agreed to purchase at least 1,400 tank railcars from ACF. The term of
the agreement is for five years, provided that, subject to certain exceptions, either party may
terminate the agreement before its fifth anniversary upon six months prior to written notice. On
September 23, 2008, ACF notified us that it was terminating this agreement effective the later of
the completion of 1,400 tank railcars or March 23, 2009.
42
ITEM 6. EXHIBITS
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
|
|
|
|
31.1
|
|
Rule 13a-14(a), 15d-14(a) Certification of the Chief Executive Officer |
|
|
|
31.2
|
|
Rule 13a-14(a), 15d-14(a) Certification of the Chief Financial Officer |
|
|
|
32
|
|
Certification pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
43
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.
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AMERICAN RAILCAR INDUSTRIES, INC. |
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Date: November 7, 2008
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By:
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/s/ James J. Unger
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James J. Unger, President and Chief Executive Officer |
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By:
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/s/ Dale C. Davies
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Dale C. Davies, Senior Vice-President, Chief |
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Financial Officer and Treasurer |
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44
EXHIBIT INDEX
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Exhibit |
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No. |
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Description of Exhibit |
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31.1
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Rule 13a-14(a), 15d-14(a) Certification of the Chief Executive Officer |
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31.2
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Rule 13a-14(a), 15d-14(a) Certification of the Chief Financial Officer |
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32
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Certification pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
45