NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 Description of the Business
The condensed consolidated financial statements included herein have been prepared by American Railcar Industries, Inc. (a North Dakota
corporation) and subsidiaries (collectively the Company or ARI), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosure normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the
information presented not misleading. The consolidated balance sheet as of December 31, 2011 has been derived from the audited consolidated balance sheets as of that date. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto included in the Companys latest Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2011. In the opinion of management, the
information contained herein reflects all adjustments necessary to present fairly our financial position, results of operations and cash flows for the interim periods reported. The results of operations of any interim period are not necessarily
indicative of the results that may be expected for a fiscal year.
ARI manufactures railcars, which are offered for sale or lease, custom
designed railcar parts and other industrial products, primarily aluminum and special alloy steel castings. These products are sold to various types of companies including leasing companies, railroads, industrial companies and other non-rail
companies. ARI leases railcars manufactured by the Company to certain markets. ARI provides railcar repair and maintenance services for railcar fleets. In addition, ARI provides fleet management, maintenance, engineering and field services for
railcars owned by certain customers. Such services include maintenance planning, project management, tracking and tracing, regulatory compliance, mileage audit, rolling stock taxes and online service access.
The condensed consolidated financial statements of the Company include the accounts of ARI and its direct and indirect wholly-owned subsidiaries:
Castings, LLC (Castings), ARI Component Venture, LLC (ARI Component), American Railcar Mauritius I (ARM I), American Railcar Mauritius II (ARM II) and ARI Longtrain, Inc. (Longtrain). From time to time, the Company makes investments through
Longtrain. All intercompany transactions and balances have been eliminated.
Note 2 Summary of Accounting Policies
Other than the accounting policies included below that were updated during the first quarter of 2012, there have been no material
changes to the accounting policies that were included in the Companys Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2011.
Revenue recognition
Revenues from railcar sales are recognized following completion of manufacturing, inspection, customer
acceptance and title transfer, which is when the risk for any damage or loss with respect to the railcars passes to the customer. Revenues from railcar leasing are recognized on a straight-line basis per terms of the lease. If railcars are sold
under an operating lease that is less than one year old, the proceeds from the railcars sold that were on lease will be shown on a gross basis in revenues and cost of revenues at the time of sale. Sales of railcars on operating leases that have been
on lease for more than one year are recognized as a net gain or loss from the disposal of the long-term asset as a component of earnings from operations. Revenues from railcar and industrial components are recorded at the time of product shipment,
in accordance with the Companys contractual terms. Revenues from railcar maintenance services are recognized upon completion and shipment of railcars from ARIs plants. The Company does not currently bundle railcar service contracts with
new railcar sales. Revenues from fleet management, engineering and field services are recognized as performed.
Revenues related to consulting
type contracts are accounted for under the proportional performance method. Profits expected to be realized on these contracts are based on the total contract revenues and costs based on the estimate of the percentage of project completion. Revenues
recognized in excess of amounts billed are recorded to unbilled revenues and included in other current assets on the consolidated balance sheets. Billings in excess of revenues recognized on in-progress contracts are recorded to unbilled costs and
included in other current liabilities on the consolidated balance sheets. These estimates are reviewed and revised periodically throughout the term of the contracts and any adjustments are recorded on a cumulative basis in the period the revisions
are made.
The Company records amounts billed to customers for shipping and handling as part of sales and records related costs in cost of
revenues.
8
ARI presents any sales tax assessed by a governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer on a net basis.
Goodwill
In September 2011, the Financial Accounting Standards Board (FASB) issued
authoritative guidance related to goodwill, which allows for companies to first consider qualitative factors as a basis for assessing impairment and determining the necessity of a detailed impairment test. The Company adopted the guidance in the
first quarter of 2012.
Goodwill is not amortized but is reviewed at least annually assessing qualitative factors to determine if any
potential impairment exists. If the qualitative factors indicate that an impairment is more likely than not, then the Company would perform an impairment test on the existing goodwill. For further discussion of ARIs goodwill refer to Note 7.
Reclassifications
Prior-period amounts for the new leasing segment and investing cash flows related to our joint ventures have been reclassified to conform to the current
year presentation. See Note 17 for further detail related to the segment reclassification. Other than these items, there have been no material reclassifications during the current period.
Note 3 Fair Value Measurements
The fair value hierarchal disclosure framework prioritizes and ranks the level of market price observability used in measuring assets
and liabilities at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the asset or liability. Assets or liabilities 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.
Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
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Level 1 Quoted prices are available in active markets for identical assets and/or liabilities as of the reporting date. The type of
assets and/or liabilities included in Level 1 include listed equities and listed derivatives. The Company does not adjust the quoted price for these assets and/or liabilities, even in situations where they hold a large position and a sale could
reasonably impact the quoted price.
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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. Assets and/or liabilities that are generally included in this category include corporate bonds and loans, less liquid and restricted equity
securities and certain over-the-counter derivatives.
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|
|
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Level 3 Pricing inputs are unobservable for the assets and/or liabilities and include situations where there is little, if any, market
activity for the assets and/or liabilities. The inputs into the determination of fair value require significant management judgment or estimation.
|
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset and/or liabilitys 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 carrying amount of cash and cash equivalents, accounts receivable, other current assets and accounts payable approximate
fair value due to their short-term nature. For the fair value of the Companys senior unsecured notes and stock-based compensation refer to Notes 10 and 15, respectively.
9
Note 4 Accounts Receivable, net
Accounts receivable, net, consists of the following:
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|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Accounts receivable, gross
|
|
$
|
36,186
|
|
|
$
|
34,272
|
|
Less allowance for doubtful accounts
|
|
|
(673
|
)
|
|
|
(646
|
)
|
|
|
|
|
|
|
|
|
|
Total accounts receivable, net
|
|
$
|
35,513
|
|
|
$
|
33,626
|
|
|
|
|
|
|
|
|
|
|
Note 5 Inventories
Inventories consist of the following:
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|
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|
|
|
|
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|
September 30,
|
|
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December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
84,187
|
|
|
$
|
62,141
|
|
Work-in-process
|
|
|
23,734
|
|
|
|
26,731
|
|
Finished products
|
|
|
26,581
|
|
|
|
8,967
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
134,502
|
|
|
|
97,839
|
|
Less reserves
|
|
|
(2,152
|
)
|
|
|
(2,012
|
)
|
|
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
132,350
|
|
|
$
|
95,827
|
|
|
|
|
|
|
|
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Note 6 Property, Plant and Equipment
The following table summarizes the components of property, plant and equipment.
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|
|
|
|
|
|
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September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Operations / Corporate:
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|
|
|
|
|
|
|
Buildings
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|
$
|
149,976
|
|
|
$
|
149,597
|
|
Machinery and equipment
|
|
|
171,429
|
|
|
|
167,393
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|
Land
|
|
|
3,335
|
|
|
|
3,335
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|
Construction in process
|
|
|
6,951
|
|
|
|
2,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
331,691
|
|
|
|
323,077
|
|
Less accumulated depreciation
|
|
|
(180,358
|
)
|
|
|
(167,434
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
151,333
|
|
|
|
155,643
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|
Railcar Leasing:
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|
|
|
|
|
|
|
|
Railcars on lease
|
|
|
183,175
|
|
|
|
39,851
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|
Less accumulated depreciation
|
|
|
(4,039
|
)
|
|
|
(1,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
179,136
|
|
|
|
38,599
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
$
|
330,469
|
|
|
$
|
194,242
|
|
|
|
|
|
|
|
|
|
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Depreciation expense
Total depreciation expense for the three months ended September 30, 2012 and 2011 was $6.2 million and $5.4 million, respectively. Total
depreciation expense for the nine months ended September 30, 2012 and 2011 was $17.5 million and $16.9 million, respectively.
Capitalized interest
In conjunction
with the interest costs incurred related to the Unsecured Senior Fixed Rate Notes offering described in Note 10, the Company has been recording capitalized interest on certain property, plant and equipment capital projects. ARI also capitalizes
interest related to the Unsecured Senior Fixed Rate Notes for investments made in equity method joint ventures but only for those investments made while the joint venture is in the development phase.
10
Lease agreements
The Company leases railcars to third parties under multiple year agreements. One of the leases includes a provision that allows the lessee to purchase any portion of the leased railcars at any time during
the lease term for a stated market price, which approximates fair value.
Capital expenditures for leased railcars represent cash outflows for
the Companys cost to produce railcars shipped or to be shipped for lease.
Railcars subject to lease agreements are classified as
operating leases and are depreciated in accordance with the Companys depreciation policy. Depreciation expense for leased railcars for the three months ended September 30, 2012 and 2011 was $1.4 million and $0.1 million,
respectively. Depreciation expense for leased railcars for the nine months ended September 30, 2012 and 2011 was $2.8 million and $0.3 million, respectively.
As of September 30, 2012, future contractual minimum rental revenues required under non-cancellable operating leases for railcars with terms longer than one year are as follows (in thousands):
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Remaining 2012
|
|
$
|
4,716
|
|
2013
|
|
|
18,711
|
|
2014
|
|
|
18,093
|
|
2015
|
|
|
17,750
|
|
2016
|
|
|
16,906
|
|
2017
|
|
|
9,619
|
|
2018 and thereafter
|
|
|
11,835
|
|
|
|
|
|
|
Total
|
|
$
|
97,631
|
|
|
|
|
|
|
Note 7 Goodwill
On March 31, 2006, the Company acquired all of the common stock of Custom Steel Inc. (Custom Steel), a subsidiary of Steel
Technologies, Inc. Custom Steel operated a facility located adjacent to the Companys component manufacturing facility in Kennett, Missouri, which produces value-added fabricated parts that primarily support the Companys railcar
manufacturing operations. Custom Steel and the adjacent facility in Kennett are considered the reporting unit. Prior to the acquisition, ARI was Custom Steels primary customer. The acquisition resulted in the goodwill shown on the balance
sheet. The results of the reporting unit are included in the manufacturing segment.
In September 2011, the FASB issued authoritative guidance
related to goodwill, which allows for companies to first consider qualitative factors as a basis for assessing impairment and determining the necessity of a detailed impairment test. The Company adopted the guidance in the first quarter of 2012.
The Company performed the annual qualitative assessment as of March 1, 2012 to determine whether it was more likely than not that the
fair value of the reporting unit was greater than its carrying amount. If ARI had determined that it was more likely than not that the fair value of the reporting unit was less than its carrying amount, then the Company would have performed the
first step of the two-step goodwill impairment test. In evaluating whether it was more likely than not that the fair value of the reporting unit was greater than its carrying amount, the Company considered the following relevant factors:
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The North American railcar market has been, and ARI expects it to continue to be highly cyclical. The railcar industry significantly improved in 2011,
remains strong in 2012 and is forecasted by third parties to improve through at least 2014.
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ARI is subject to regulation through various laws and regulations. No significant assessments have been made by the various regulators.
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|
The railcar manufacturing industry has historically been extremely competitive. There are several competitors who have expanded their capabilities into
new markets.
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|
ARI saw a significant increase in railcar order activity in 2011 compared to 2010.
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|
The primary long-lived assets at the reporting unit are machines with uses in various applications for numerous markets and industries. As such,
management does not believe that there has been a significant decrease in the market value of the reporting units long-lived assets.
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|
The reporting unit has a history of positive operating cash flows that is expected to continue.
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11
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|
|
No part of the reporting units net income is comprised of significant non-operating or non-recurring gains or losses, and no significant changes
in balance sheet accruals were noted.
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|
|
In addition, during 2011 there were no changes in the following with regard to the reporting unit:
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|
Business strategy or product mix; and
|
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|
|
Buyer or supplier bargaining power.
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|
|
|
There have been no significant changes in legal factors that would affect the carrying value of the reporting unit.
|
After assessing the above factors, the Company determined that it was more likely than not that the fair value of the reporting unit was greater than its
carrying amount, and therefore no further testing was necessary. There have been no indicators of impairment during the quarter.
Note 8 Investments in and Loans to Joint Ventures
As of September 30, 2012, the Company was party to three joint ventures: Ohio Castings LLC (Ohio Castings), Axis LLC (Axis) and
Amtek Railcar Industries Private Limited (Amtek Railcar). Through its wholly-owned subsidiary, Castings, the Company has a 33.3% ownership interest in Ohio Castings, a limited liability company formed to produce various steel railcar parts for use
or sale by the ownership group. Through its wholly-owned subsidiary, ARI Component, the Company has a 41.9% ownership interest in Axis, a limited liability company formed to produce railcar axles, for use or sale by the ownership group. The Company
has a wholly-owned subsidiary, ARM I that wholly-owns ARM II. Through ARM II, the Company has a 50.0% ownership interest in Amtek Railcar, a joint venture that was formed to produce railcars and railcar components in India for sale by the joint
venture.
The Company accounts for these joint ventures using the equity method. Under this method, the Company recognizes its share of the
earnings and losses of the joint ventures as they accrue. Advances and distributions are charged and credited directly to the investment accounts. From time to time, the Company also makes loans to its joint ventures that are included in the
investment account. The carrying amount of investments in and loans to joint ventures are as follows:
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|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Carrying amount of investments in and loans to joint ventures
|
|
|
|
|
|
|
|
|
Ohio Castings
|
|
$
|
7,378
|
|
|
$
|
6,236
|
|
Axis
|
|
|
27,360
|
|
|
|
29,362
|
|
Amtek RailcarIndia
|
|
|
10,412
|
|
|
|
9,524
|
|
|
|
|
|
|
|
|
|
|
Total investments in and loans to joint ventures
|
|
$
|
45,150
|
|
|
$
|
45,122
|
|
|
|
|
|
|
|
|
|
|
12
The maximum loss exposure resulting from investments in and loans to joint ventures are as follows:
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|
|
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Maximum exposure to loss by joint venture
|
|
|
|
|
Ohio Castings
|
|
|
|
|
Investment
|
|
$
|
7,378
|
|
Accrued interest receivable
1
|
|
|
1
|
|
|
|
|
|
|
Total Ohio Castings exposure
|
|
|
7,379
|
|
Axis
|
|
|
|
|
Investment
|
|
|
|
|
Loans, including accrued interest
|
|
|
27,360
|
|
|
|
|
|
|
Total Axis exposure
|
|
|
27,360
|
|
Amtek RailcarIndia investment exposure
|
|
|
10,412
|
|
|
|
|
|
|
Total maximum exposure to loss due to joint ventures
|
|
$
|
45,151
|
|
|
|
|
|
|
1
|
Accrued interest
receivable is included in prepaid expenses and other current assets on the condensed consolidated balance sheets.
|
Ohio
Castings
Ohio Castings produces railcar parts that are sold to one of the joint venture partners. The joint venture partner then sells
these parts to outside third parties at current market prices and sells them to the Company and the other joint venture partner at cost plus a licensing fee. The Company has been involved with this joint venture since 2003.
Ohio Castings has notes payable to ARI and the other two partners, with a current balance of $0.2 million, each, that are due November 2012. Following a
renegotiation of the terms of the Notes during the third quarter 2011, interest continued to accrue but interest payments were deferred until May 2012 at which time Ohio Castings resumed paying principal and interest. Accrued interest for this note
as of both September 30, 2012 and December 31, 2011 was less than $0.1 million.
The Company accounts for its investment in
Ohio Castings using the equity method. The Company has determined that, although the joint venture is a variable interest entity (VIE), this method is appropriate given that the Company is not the primary beneficiary, does not have a controlling
financial interest and does not have the ability to individually direct the activities of Ohio Castings that most significantly impact its economic performance. The significant factors in this determination were that neither the Company, nor
Castings, has rights to the majority of returns, losses or votes, all major and strategic decisions are decided between the partners, and the risk of loss to Castings and the Company is limited to the Companys investment through Castings, the
note and related accrued interest due to ARI.
See Note 16 for information regarding financial transactions among the Company, Ohio Castings
and Castings.
Summary financial results for Ohio Castings, the investee company, in total, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Results of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
15,880
|
|
|
$
|
11,516
|
|
|
$
|
62,565
|
|
|
$
|
11,548
|
|
Gross profit (loss)
|
|
$
|
1,325
|
|
|
$
|
(1,748
|
)
|
|
$
|
5,881
|
|
|
$
|
(1,748
|
)
|
Earnings (loss) before interest
|
|
$
|
(752
|
)
|
|
$
|
(1,707
|
)
|
|
$
|
4,224
|
|
|
$
|
(4,633
|
)
|
Net earnings (loss)
|
|
$
|
(760
|
)
|
|
$
|
(1,722
|
)
|
|
$
|
4,188
|
|
|
$
|
(4,661
|
)
|
In June 2009, Ohio Castings temporarily idled its manufacturing facility due to the decline in the railcar industry. During the
second quarter of 2011, ARI and the other joint venture partners agreed to restart production at Ohio Castings and Ohio Castings began shipping product in the third quarter of 2011.
13
Axis
In June 2007, ARI, through ARI Component, entered into an agreement with another partner to form a joint venture, Axis, to manufacture and sell railcar axles. In February 2008, the two original
partners sold equal equity interests in Axis to two new minority partners. During 2010, one of the minority partners sold its interest to the other initial partner. Although the other initial partners interest in Axis is greater than
ARIs as a result of the sale, the sale did not result in the other initial partner gaining majority ownership. As of September 30, 2012, ARIs ownership interest in Axis was 41.9%.
Under the terms of the joint venture agreement, ARI and the other initial partner are required, and the other member is entitled, to contribute
additional capital to the joint venture, on a pro rata basis, of any amounts approved by the joint ventures executive committee, as and when called by the executive committee. Further, until 2016, the seventh anniversary of completion of the
axle manufacturing facility, and subject to other terms, conditions and limitations of the joint venture agreement, ARI and the other initial partner are also required, in the event production at the facility has been curtailed, to contribute
capital to the joint venture, on a pro rata basis, in order to maintain adequate working capital.
Effective August 5, 2009, ARI
Component and the other initial partner acquired a loan to Axis from its initial lenders (the Axis Credit Agreement), with each party acquiring a one-half share in the loan. Under the Axis Credit Agreement, financing was available to Axis in an
aggregate amount of up to $70.0 million, consisting of up to $60.0 million in term loans and up to $10.0 million in revolving loans. The purchase price paid by the Company for its one-half share was $29.5 million, which equaled
the then outstanding principal amount of the portion of the loan acquired by the Company.
The Axis Credit Agreement was amended on
March 31, 2011. Under the amendment, the commitment to make term loans expired on December 31, 2011. Under the amendment, the commitment to make revolving loans under the Axis Credit Agreement would expire and the revolving loans would
become due and payable on December 28, 2012. Axis may borrow revolving loans up to $10.0 million, subject to borrowing base availability.
The Axis Credit Agreement was further amended on March 30, 2012. Under the amendment, the first payment on the term loans was due and payable on September 30, 2012. Thereafter payments are due
each fiscal quarter in equal installments, with the last payment due on June 30, 2019. Axis made the required payment in September 2012. The Company and the other initial joint venture partner are discussing renegotiation of the Axis Credit
Agreement.
Subject to certain limitations, at the election of Axis, the interest rate for the loans under the Axis Credit Agreement, as
amended, is based on LIBOR or the prime rate. For LIBOR-based loans, the interest rate is equal to the greater of 7.75% or adjusted LIBOR plus 4.75%. For prime-based loans, the interest rate is equal to the greater of 7.75% or the prime rate plus
2.5%. Interest on LIBOR-based loans is due and payable, at the election of Axis, every one, two, three or six months, and interest on prime-based loans is due and payable monthly. In accordance with the terms of the agreement as amended, Axis
satisfied interest on the term loan by increasing the outstanding principal by the amount of interest that was otherwise due and payable in cash. Axis ability to satisfy the term loan interest by increasing the principal balance ceased on
September 30, 2011.
The balance outstanding on these loans, including interest, due to ARI Component, was $35.8 million as of
September 30, 2012 and $37.1 million as of December 31, 2011.
ARI currently intends to fund the cash needs of Axis through
loans and capital contributions through at least March 31, 2013. The other initial joint venture partner has indicated its intent to also fund the cash needs of Axis through loans and capital contributions through at least March 31, 2013.
The Company accounts for its investment in Axis using the equity method. The Company has determined that, although the joint venture is a
VIE, this method is appropriate given that the Company is not the primary beneficiary, does not have a controlling financial interest and does not have the ability to individually direct the activities of Axis that most significantly impact its
economic performance. The significant factors in this determination were that the Company and its wholly-owned subsidiary do not have the rights to the majority of votes or the rights to the majority of returns or losses, the executive committee and
board of directors of the joint venture are comprised of one representative from each initial partner with equal voting rights and the risk of loss to the Company and subsidiary is limited to its investment in Axis and the loans and related accrued
interest due to the Company under the Axis Credit Agreement. The Company also considered the factors that most significantly impact Axis economic performance and determined that ARI does not have the power to individually direct the majority
of those activities.
See Note 16 for information regarding financial transactions among the Company, ARI Component and Axis.
14
Summary financial results for Axis, the investee company, in total, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Results of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
12,884
|
|
|
$
|
9,478
|
|
|
$
|
47,002
|
|
|
$
|
27,298
|
|
Gross profit (loss)
|
|
$
|
880
|
|
|
$
|
(1,176
|
)
|
|
$
|
3,771
|
|
|
$
|
(6,398
|
)
|
Earnings (loss) before interest
|
|
$
|
683
|
|
|
$
|
(1,391
|
)
|
|
$
|
3,096
|
|
|
$
|
(7,072
|
)
|
Net loss
|
|
$
|
(779
|
)
|
|
$
|
(2,800
|
)
|
|
$
|
(1,308
|
)
|
|
$
|
(11,252
|
)
|
Revenues and net loss for Axis have improved as production volumes have increased and inefficiencies from the ramp up of production
have decreased. The new railcar axle market closely follows the new railcar market, which has remained strong compared to prior year.
As of
September 30, 2012, the investment in Axis was comprised entirely of ARIs term loan, revolver and related accrued interest due from Axis. Based on the discussion above and Axis paying the required loan repayment in September 2012, the
Company believes the loan is fully recoverable. The Company will continue to monitor its investment in Axis for impairment.
Amtek Railcar
India
In June 2008, the Company, through ARM I and ARM II, entered into an agreement with a partner in India to form a joint
venture company to manufacture, sell and supply freight railcars and their components in India and other countries to be agreed upon at a facility to be constructed in India by the joint venture. In March 2010 and September 2012, respectively,
the Company made a $9.8 million and $1.1 million equity contribution to Amtek Railcar. The cash contribution in 2012, which was matched by the other equity partner, was made to provide Amtek Railcar a more favorable liquidity position to better
utilize its existing credit agreement. ARIs ownership in this joint venture is 50.0%. Amtek Railcar is considered a development stage enterprise as it has not completed construction of its manufacturing facility nor started production.
The Company accounts for its investment in Amtek Railcar using the equity method. The Company has determined that, although the joint venture
is a VIE, this method is appropriate given that the Company is not the primary beneficiary, does not have a controlling financial interest and does not have the ability to individually direct the activities of Amtek Railcar that most significantly
impact its economic performance. The significant factors in this determination were that Amtek Railcar is a development stage enterprise, the Company and its wholly-owned subsidiaries do not have the rights to the majority of returns, losses or
votes and the risk of loss to the Company and subsidiaries is limited to its investment in Amtek Railcar.
Summary financial results for Amtek
Railcar, the investee company, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Financial Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before interest and taxes
|
|
|
(568
|
)
|
|
|
(908
|
)
|
|
|
(1,502
|
)
|
|
|
(2,099
|
)
|
Net loss
|
|
|
(577
|
)
|
|
|
(842
|
)
|
|
|
(1,529
|
)
|
|
|
(1,692
|
)
|
Note 9 Warranties
The Companys standard warranty is up to one year for parts and services and five years for new railcars. Factors affecting the
Companys warranty liability include the number of units sold, historical and anticipated rates of claims and historical and anticipated costs per claim. Fluctuations in the Companys warranty provision and experience of warranty claims
are the result of variations in these factors. The Company assesses the adequacy of its warranty liability based on changes in these factors.
15
The overall change in the Companys warranty reserve is reflected on the condensed consolidated balance
sheets in accrued expenses and taxes and is detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Liability, beginning balance
|
|
$
|
1,286
|
|
|
$
|
1,160
|
|
|
$
|
930
|
|
|
$
|
1,151
|
|
Provision for warranties issued during the year, net of adjustments
|
|
|
315
|
|
|
|
278
|
|
|
|
974
|
|
|
|
756
|
|
Adjustments for warranties issued in prior years, net of adjustments
|
|
|
435
|
|
|
|
(39
|
)
|
|
|
469
|
|
|
|
(40
|
)
|
Warranty claims
|
|
|
(549
|
)
|
|
|
(230
|
)
|
|
|
(886
|
)
|
|
|
(698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability, ending balance
|
|
$
|
1,487
|
|
|
$
|
1,169
|
|
|
$
|
1,487
|
|
|
$
|
1,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10 Long-term Debt
In February 2007, the Company completed the offering of $275.0 million unsecured senior fixed rate notes, which were
subsequently exchanged for registered notes in March 2007 (Notes). The fair value of these Notes was $177.6 million as of September 30, 2012, based on the closing market price as of that date, which is a Level 1 input. For definition
and discussion of a Level 1 input for fair value measurement, refer to Note 3.
In September 2012, the Company redeemed $100.0 million of its
Notes utilizing available cash on hand. In conjunction with the redemption, the Company incurred a $2.3 million loss, which is shown as loss on debt extinguishment on the condensed consolidated statements of operations. This charge consists of $1.9
million related to the premium the Company paid on the redemption as well as $0.4 million related to the accelerated write-off of a portion of deferred debt issuance costs. As of September 30, 2012, the outstanding principal balance of the
Notes was $175.0 million.
The Notes bear a fixed interest rate of 7.5%, which is payable semi-annually in arrears on March 1 and
September 1 until their maturity in 2014. Until March 1, 2013, the Company can redeem the Notes in whole or in part at a redemption price equal to 101.875% of the principal amount of the Notes, plus any accrued and unpaid interest. After
that date, the Notes can be redeemed at par value plus any accrued and unpaid interest. The terms of the Notes contain restrictive covenants that limit the Companys ability to, among other things, incur additional debt, issue disqualified or
preferred stock, make certain restricted payments and enter into certain significant transactions with stockholders and affiliates. Certain covenants, including those that restrict the Companys ability to incur additional indebtedness and
issue disqualified or preferred stock, become more restrictive if the Companys fixed charge coverage ratio, as defined, is less than 2.0 to 1.0 as measured on a rolling four-quarter basis. The Company was in compliance with all of its
covenants under the Notes as of September 30, 2012.
Note 11 Income Taxes
For Federal purposes, the Companys tax years 2008 to 2011 remain open to examination. The Companys audit review for tax
years 2008 to 2010 related to a federal loss carry back claim has been closed without any impact. For state purposes, the Companys tax years 2007 to 2011 remain open to examination by various taxing jurisdictions with the latest statute of
limitations expiring in 2016. The Companys foreign tax returns for years 2008 to 2011 remain open to examination. The Company was notified that its Indian tax return for the year ending March 31, 2011 is being reviewed by the Indian
government.
Note 12 Employee Benefit Plans
The Company is the sponsor of 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 other plan, which covers only certain union employees of the Company, was frozen effective as of January 1, 2012 and no
additional benefits will accrue thereunder. The assets of the defined benefit pension plans are held by independent trustees and consist primarily of equity and fixed income securities. The Company is also the sponsor of an unfunded, non-qualified
supplemental executive retirement plan (SERP) in which several of its current and former employees are participants. The SERP is frozen and no additional benefits are accruing thereunder.
The Company also provides postretirement healthcare benefits for certain of its retired employees and life insurance benefits for certain of its union
employees. Employees may become eligible for healthcare benefits and union employees may become eligible for life insurance benefits, only if they retire after attaining specified age and service requirements. These benefits are subject to
deductibles, co-payment provisions and other limitations. During 2009, the premium rates for postretirement healthcare to be paid by retirees were raised and the portion of those rates to be paid by the Company was reduced to zero. This change
resulted in a decrease to the postretirement benefit liability of $2.8 million that was recorded to accumulated other comprehensive loss as of December 31, 2009. This adjustment is being recognized over the remaining weighted-average
service period of active plan participants.
16
The components of net periodic benefit cost for the pension and postretirement plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Service cost
|
|
$
|
47
|
|
|
$
|
79
|
|
|
$
|
143
|
|
|
$
|
237
|
|
Interest cost
|
|
|
233
|
|
|
|
254
|
|
|
|
701
|
|
|
|
762
|
|
Expected loss on plan assets
|
|
|
(251
|
)
|
|
|
(249
|
)
|
|
|
(757
|
)
|
|
|
(748
|
)
|
Amortization of actuarial net loss
|
|
|
176
|
|
|
|
94
|
|
|
|
528
|
|
|
|
283
|
|
Amortization of prior service costs
|
|
|
2
|
|
|
|
2
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost recognized
|
|
$
|
207
|
|
|
$
|
180
|
|
|
$
|
621
|
|
|
$
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
3
|
|
Amortization of actuarial net gain
|
|
|
(20
|
)
|
|
|
(22
|
)
|
|
|
(60
|
)
|
|
|
(67
|
)
|
Amortization of prior service credit
|
|
|
(98
|
)
|
|
|
(98
|
)
|
|
|
(294
|
)
|
|
|
(294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost recognized
|
|
$
|
(117
|
)
|
|
$
|
(119
|
)
|
|
$
|
(350
|
)
|
|
$
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Pension
|
|
$
|
207
|
|
|
$
|
180
|
|
|
$
|
621
|
|
|
$
|
540
|
|
Postretirement
|
|
|
(117
|
)
|
|
|
(119
|
)
|
|
|
(350
|
)
|
|
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net periodic benefit cost recognized for all plans
|
|
$
|
90
|
|
|
$
|
61
|
|
|
$
|
271
|
|
|
$
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company also maintains qualified defined contribution plans, which provide benefits to its eligible employees based on employee
contributions and employee earnings with discretionary contributions allowed. Expenses related to these plans were $0.3 million for both the three months ended September 30, 2012 and 2011. Expenses related to these plans were $0.7 million and
$0.6 million for the nine months ended September 30, 2012 and 2011, respectively.
Note 13 Commitments and Contingencies
The Companys Axis joint venture entered into a credit agreement in December 2007. During 2009, the Company and the other
initial partner acquired this loan from the lenders party thereto, with each party acquiring a 50.0% interest in the loan. The total commitment under the term loan is $60.0 million with an additional $10.0 million commitment under the
revolving loan. ARI Component is responsible to fund 50.0% of the loan commitments. In accordance with the amended credit agreement, the commitment to fund term loans expired December 31, 2011. The balance outstanding on the term and revolver
loans, including interest, due to ARI Component was $35.8 million as of September 30, 2012. ARI Components share of the remaining commitment on these loans was $3.3 million as of September 30, 2012. See Note 8 for further
information regarding this transaction and the terms of the underlying loan.
17
The Company is subject to comprehensive federal, state, local and international environmental laws and
regulations relating to the release or discharge of materials into the environment, the management, use, processing, handling, storage, transport or disposal of hazardous materials and wastes, or otherwise relating to the protection of human health
and the environment. These laws and regulations not only expose ARI to liability for the environmental condition of its current or formerly owned or operated facilities, and its own negligent acts, but also may expose ARI to liability for the
conduct of others or for ARIs actions that were in compliance with all applicable laws at the time these actions were taken. In addition, these laws may require significant expenditures to achieve compliance and are frequently modified or
revised to impose new obligations. Civil and criminal fines and penalties and other sanctions may be imposed for non-compliance with these environmental laws and regulations. ARIs operations that involve hazardous materials also raise
potential risks of liability under common law. Management believes that there are no current environmental issues identified that would have a material adverse effect on the Company. Certain real property ARI acquired from ACF Industries LLC
(ACF) in 1994 has been involved in investigation and remediation activities to address contamination. ACF is an affiliate of Mr. Carl Icahn, the chairman of the Companys board of directors and, through IELP, the Companys
principal beneficial stockholder. Substantially all of the issues identified relate to the use of this property prior to its transfer to ARI by ACF and for which ACF has retained liability for environmental contamination that may have existed at the
time of transfer to ARI. ACF has also agreed to indemnify ARI for any cost that might be incurred with those existing issues. As of the date of this report, ARI does not believe it will incur material costs in connection with any investigation or
remediation activities relating to these properties, but it cannot assure that this will be the case. If ACF fails to honor its obligations to ARI, ARI could be responsible for the cost of such remediation. The Company believes that its operations
and facilities are in substantial compliance with applicable laws and regulations and that any noncompliance is not likely to have a material adverse effect on its financial condition or results of operations.
ARI is a party to collective bargaining agreements with labor unions at two repair facilities that expire in January 2013 and September 2013.
ARI is also party to a collective bargaining agreement with a labor union at a parts manufacturing facility that expires in April 2014.
On September 2, 2009, a complaint was filed by George Tedder (the Plaintiff) against ARI in the U.S. District Court, Eastern District of Arkansas.
The Plaintiff alleged that the Company was liable for an injury that resulted during the Plaintiffs break on April 24, 2008. At trial on April 9, 2012, the jury ruled in favor of the Plaintiff, thus ARI recorded a related charge that
was recorded in the first quarter of 2012. The Company intends to appeal this decision.
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.
Note 14 Earnings (Loss) per Share
The shares used in the computation of the Companys basic and diluted earnings (loss) per common share are reconciled as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Weighted average common shares outstandingbasic
|
|
|
21,352,297
|
|
|
|
21,352,297
|
|
|
|
21,352,297
|
|
|
|
21,351,325
|
|
Dilutive effect of employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingdiluted
|
|
|
21,352,297
|
|
|
|
21,352,297
|
|
|
|
21,352,297
|
|
|
|
21,351,325
|
|
|
|
|
|
|
(1)
|
|
-
|
|
Stock options to purchase 390,353 shares of common stock were excluded from the diluted earning per share calculation for the nine months ended September 30, 2011 because ARI
reported a net loss for the period. Refer to Note 15 for further discussion of these stock options.
|
Note 15 Stock-Based Compensation
The Company accounts for stock-based compensation granted under the 2005 Equity Incentive Plan, as amended (the 2005 Plan), based on
the fair values calculated using the Monte Carlo and Black-Scholes-Merton (Black-Scholes) option-pricing formulas. Stock-based compensation is expensed using a graded vesting method over the vesting period of the instrument. The fair value of the
liability associated with stock-based compensation is based on the fair value components used to calculate the Black-Scholes value, including the Companys closing market price, as of that date and is considered a Level 2 input. For definition
and discussion of a Level 2 input for fair value measurement, refer to Note 3.
As of September 30, 2012, an aggregate of 855,476 shares
were available for issuance in connection with future grants under the Companys 2005 Plan. Shares issued under the 2005 Plan may consist in whole or in part of authorized but unissued shares or treasury shares.
18
Stock options
No stock options were exercised during the three months ended September 30, 2011. Stock options to purchase 36,001 shares of the Companys common stock were exercised during the nine months
ended September 30, 2011. The total intrinsic value of stock options exercised during the nine months ended September 30, 2011 was less than $0.1 million. All stock options fully vested in January 2009 and expired in
January 2011. As such, the Company did not recognize any compensation expense related to stock options during the three and nine months ended September 30, 2011 and 2012. Since the options expired in January 2011 and no other options have
been granted, there are no stock options currently outstanding.
Stock appreciation rights
The compensation committee of the Companys board of directors granted awards of stock appreciation rights (SARs) to certain employees pursuant to
the 2005 Plan during April 2007, April 2008, September 2008, March 2009, March 2010, May 2011 and February 2012.
A
total of 204,500 SARs were granted in 2012. Of those SARs, 89,600 vest in three equal increments on the first, second and third anniversaries of the grant date. The remaining 114,900 SARs vest in three equal increments on the first, second and third
anniversaries of the grant date, but only if the Company achieves specified targets of earnings before interest, taxes, depreciation and amortization adjusted to remove the expense or income related to stock-based compensation (Adjusted EBITDA) for
the fiscal year preceding the applicable anniversary date. Each holder must remain employed by the Company through each anniversary date in order to vest in the corresponding number of SARs. The following table presents the amounts incurred by ARI
for SARs and the corresponding line items on the condensed consolidated statements of operations that they are classified within:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Stock-based compensation expense (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: Manufacturing
|
|
$
|
176
|
|
|
$
|
(253
|
)
|
|
$
|
738
|
|
|
$
|
126
|
|
Cost of revenues: Railcar Services
|
|
|
25
|
|
|
|
(571
|
)
|
|
|
105
|
|
|
|
(568
|
)
|
Selling, general and administrative
|
|
|
796
|
|
|
|
(2,263
|
)
|
|
|
2,967
|
|
|
|
(686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense (income)
|
|
$
|
997
|
|
|
$
|
(3,087
|
)
|
|
$
|
3,810
|
|
|
$
|
(1,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has the following SARs outstanding as of September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
2/29/2012
|
|
|
5/9/2011
|
|
|
3/31/2010
&
5/14/2010
|
|
|
3/3/2009
|
|
|
4/28/2008
|
|
|
4/4/2007
|
|
SARs outstanding
|
|
|
197,900
|
|
|
|
197,169
|
|
|
|
105,384
|
|
|
|
88,025
|
|
|
|
18,962
|
|
|
|
6,000
|
|
Vested & exercisable
|
|
|
|
|
|
|
64,595
|
|
|
|
64,093
|
|
|
|
44,650
|
|
|
|
18,962
|
|
|
|
6,000
|
|
Weighted average exercise price
|
|
$
|
29.31
|
|
|
$
|
24.45
|
|
|
$
|
12.92
|
|
|
$
|
6.71
|
|
|
$
|
20.88
|
|
|
$
|
29.49
|
|
Vesting period
|
|
|
3 years
|
|
|
|
3 years
|
|
|
|
4 years
|
|
|
|
4 years
|
|
|
|
4 years
|
|
|
|
4 years
|
|
|
|
|
|
|
|
|
|
|
|
|
3/31/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
&
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration Dates
|
|
|
2/28/2019
|
|
|
|
5/9/2018
|
|
|
|
5/14/2017
|
|
|
|
3/3/2016
|
|
|
|
4/28/2015
|
|
|
|
4/4/2014
|
|
The SARs have exercise prices that represent the closing price of the Companys common stock on the date of grant. Upon the
exercise of any SAR, the Company shall pay the holder, in cash, an amount equal to the excess of (A) the aggregate fair market value (as defined in the 2005 Plan) in respect of which the SARs are being exercised, over (B) the aggregate
exercise price of the SARs being exercised, in accordance with the terms of the Stock Appreciation Rights Agreement (the SARs Agreement). Accordingly, the SARs have been treated as liability awards. The SARs are subject in all respects to the terms
and conditions of the 2005 Plan and the SARs Agreement, which contain non-solicitation, non-competition and confidentiality provisions.
The
fair value of all unexercised SARs is determined at each reporting period under the Monte Carlo and Black-Scholes option pricing methodologies based on the inputs in the table below, which project that the specific performance target will be fully
met. The fair value of the SARs is expensed on a graded vesting basis over the vesting period, which is in equal increments on the respective anniversaries of the grant date. Changes in the fair value of vested SARs are expensed in the period of
change. As of September 30, 2012, the following assumptions were used in the Black-Scholes option-pricing model:
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
|
2/29/2012
|
|
5/9/2011
|
|
3/31/2010
&
5/14/2010
|
|
3/3/2009
|
|
4/28/2008
|
|
4/4/2007
|
Risk-free interest rate
|
|
0.3 - 0.6%
|
|
0.3%
|
|
0.3%
|
|
0.3%
|
|
0.2%
|
|
0.2%
|
Expected SARs lives (in years)
|
|
3.3 - 4.3
|
|
2.8 - 3.6
|
|
2.3 - 2.6
|
|
1.7 - 1.9
|
|
1.3
|
|
0.8
|
Expected volatility for SARs
|
|
60.2 - 68.9%
|
|
60.2 - 61.1%
|
|
63.0%
|
|
57.8 - 58.8%
|
|
58.8%
|
|
51.8%
|
Expected dividend yield
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
Note 16 Related Party Transactions
Agreements with ACF
The Company has or had the following agreements with ACF, a company controlled by Mr. Carl Icahn, chairman of the Companys board of directors
and, through IELP, the Companys principal beneficial stockholder:
Manufacturing services agreement
Under the manufacturing services agreement entered into in 1994 and amended in 2005, ACF agreed to manufacture and distribute, at the Companys
instruction, various railcar components. In consideration for these services, the Company agreed to pay ACF based on agreed upon rates. For both the three and nine months ended September 30, 2012 and 2011, ARI purchased inventory of less than
$0.1 million from ACF. The agreement automatically renews unless written notice is provided by the Company.
Agreements with ARL
The Company has or had the following agreements with American Railcar Leasing LLC (ARL), a company controlled by Mr. Carl Icahn,
chairman of the Companys board of directors and, through IELP, the Companys principal beneficial stockholder:
Railcar
services agreement and fleet services agreement
Effective January 1, 2008, the Company entered into a fleet services agreement
with ARL, which replaced the 2005 railcar servicing agreement. Under the agreement, ARI provided ARL fleet management services for a fixed monthly fee and railcar repair and maintenance services for a charge of labor, components and materials. The
Company provided such repair and maintenance services for ARLs fleet of railcars. The agreement extended through December 31, 2010.
This agreement was replaced by a new agreement that was effective April 16, 2011 (the Railcar Services Agreement). Under the Railcar Services
Agreement, ARI provides ARL railcar repair, engineering, administrative and other services, on an as needed basis, for ARLs lease fleet at mutually agreed upon prices. The Railcar Services Agreement has a term of three years and will
automatically renew for additional one year periods unless either party provides at least sixty days prior written notice of termination. There is no termination fee if the Company elects to terminate the agreement prior to the end of the term.
For the three months ended September 30, 2012 and 2011, revenues of $5.9 million and $6.9 million, respectively, were recorded
under these agreements. For the nine months ended September 30, 2012 and 2011, revenues of $16.9 million and $19.0 million, respectively, were recorded under these agreements. Such amounts are included under railcar services revenues from
affiliates on the condensed consolidated statements of operations. The terms and pricing on services provided to related parties are not less favorable to ARI than the terms and pricing on services provided to unaffiliated third parties. The Railcar
Services Agreement was unanimously approved by the independent directors of the Companys audit committee on the basis that the terms were no less favorable than those terms that could have been obtained from an independent third party.
Railcar orders
The
Company has from time to time manufactured and sold railcars to ARL under long-term agreements as well as on a purchase order basis. Revenues for railcars sold to ARL were $34.2 million and zero for the three months ended September 30, 2012 and
2011, respectively. In the third quarter of 2012, all unfilled purchase orders previously placed by ARL were assigned to AEP Leasing LLC (AEP), a company controlled by Mr. Carl Icahn, chairman of the Companys board of directors and,
through IELP, the Companys principal beneficial stockholder. Revenues for railcars sold to ARL were $45.1 million and $1.2 million for the nine months ended September 30, 2012 and 2011, respectively. Revenues for railcars sold to ARL
are included in manufacturing revenues from affiliates on the condensed consolidated statements of operations. The terms and pricing on sales to related parties are not less favorable to ARI than the terms and pricing on sales to unaffiliated third
parties. Any related party sales of railcars under an agreement or purchase order, have been and will be subject to the approval or review by the Companys audit committee.
20
Railcar management agreement
On February 29, 2012, the Company entered into a Railcar Management Agreement (the Railcar Management Agreement) with ARL, pursuant to which the Company engaged ARL to sell or lease ARIs
railcars in certain markets, subject to the terms and conditions of the Railcar Management Agreement. The Railcar Management Agreement was effective as of January 1, 2011, will continue through December 31, 2015 and may be renewed upon
written agreement by both parties.
The Railcar Management Agreement also provides that ARL will manage the Companys leased railcars
including arranging for services, such as repairs or maintenance, as deemed necessary. Subject to the terms and conditions of the agreement, ARL will receive, in respect of leased railcars, a fee consisting of a lease origination fee and a
management fee based on the lease revenues, and, in respect of railcars sold by ARL, sales commissions. The Railcar Management Agreement was unanimously approved by the independent directors of the Company on the basis that the terms were no less
favorable than those terms that could have been obtained from an independent third party.
For the three months ended September 30, 2012
and 2011, total fees incurred were $0.3 million and less than $0.1 million, respectively. For the nine months ended September 30, 2012 and 2011, total fees incurred were $1.0 million and less than $0.1 million, respectively. Such amounts are
included in cost of revenues for railcar leasing on the condensed consolidated statements of operations.
Agreements with AEP
The Company has the following agreements with AEP, a company controlled by Mr. Carl Icahn, chairman of the Companys board of
directors and, through IELP, the Companys principal beneficial stockholder:
Railcar orders
As discussed above, in the third quarter 2012, the Company began manufacturing and selling railcars to AEP on a purchase order basis, following the
assignment to AEP all unfilled purchase orders previously placed by ARL. Revenues from railcars sold to AEP were $15.7 million for the three and nine months ended September 30, 2012. Revenues from railcars sold to AEP are included in
manufacturing revenues from affiliates on the condensed consolidated statements of operations. The terms and pricing on sales to related parties are no less favorable to ARI than the terms and pricing on sales to unaffiliated third parties. Any
related party sales of railcars under an agreement or purchase order have been and will be subject to the approval or review by the Companys audit committee.
Agreements with other related parties
In September 2003, Castings loaned Ohio
Castings $3.0 million under a promissory note, which was due in January 2004. The note was renegotiated resulting in a new principal amount of $2.2 million, bearing interest at a rate of 4.0% with a maturity date of August 2009.
During 2011, the joint venture partners and Ohio Castings renegotiated the terms of the notes and the notes are now due November 2012. Interest continued to accrue but interest payments were deferred until May 2012 at which time Ohio Castings began
again paying interest and principal. Total amounts due from Ohio Castings under this note were $0.2 million and $0.5 million as of September 30, 2012 and December 31, 2011, respectively. Accrued interest on this note as of both
September 30, 2012 and December 31, 2011 was less than $0.1 million. The other partners in the joint venture have made identical loans to Ohio Castings.
The Companys Axis joint venture entered into a credit agreement in December 2007. During 2009, the Company and the other initial partner acquired this loan from the lenders party thereto, with
each party acquiring a one-half interest in the loan. The total commitment under the term loan is $60.0 million with an additional $10.0 million commitment under the revolving loan. ARI Component is responsible to fund one-half of the loan
commitments. The balance outstanding on these loans, including interest, due to ARI Component was $35.8 million as of September 30, 2012 and $37.1 million as of December 31, 2011. ARI Components share of the remaining
commitment on these loans was $3.3 million as of September 30, 2012. See Note 8 for further information regarding this transaction and the terms of the underlying loan.
ARI provides Axis various administrative services for an annual fee of $0.3 million, payable in equal monthly installments.
Effective April 1, 2009, Mr. James J. Unger, the Companys former chief executive officer, assumed the role of vice chairman of the board of directors. In exchange for this service,
Mr. Unger receives an annual director fee of $65,000 that is payable quarterly, in advance.
21
The Company leases one of its parts manufacturing facilities from an entity owned by Mr. Unger with a
total base rent of $1.8 million. Expenses paid for this facility were $0.1 million for both the three months ended September 30, 2012 and 2011. Expenses paid for this facility were $0.3 million for both the nine months ended
September 30, 2012 and 2011. These costs are included in cost of revenues from manufacturing. The Company is required to pay all tax increases assessed or levied upon the property and the cost of the utilities, as well as repair and maintain
the facility. The lease was unanimously approved by the independent directors of the Companys audit committee on the basis that the terms of the lease were no less favorable than those terms that could have been obtained from an independent
third party.
On October 29, 2010, ARI entered into a lease agreement with a term of eleven years with an entity owned by Mr. Unger.
The lease is for ARIs headquarters location in St. Charles, Missouri that it previously leased through ARL under a services agreement with ARL, which expired December 31, 2010. The term under this lease agreement commenced January 1,
2011. The Company is required to pay monthly rent and a portion of all tax increases assessed or levied upon the property and increases to the cost of the utilities and other services it uses. The expenses recorded for this facility were
$0.1 million for both the three months ended September 30, 2012 and 2011. The expenses recorded for this facility were $0.4 million for both the nine months ended September 30, 2012 and 2011. These costs are included in selling,
general and administrative costs on the condensed consolidated statements of operations as costs to a related party. The lease was unanimously approved by the independent directors of the Companys audit committee on the basis that the terms of
the lease were no less favorable than those terms that could have been obtained from an independent third party.
In June 2011, ARI
entered into a scrap agreement with M. W. Recycling (MWR), a company controlled by Mr. Carl Icahn, chairman of the Companys board of directors and, through IELP, the Companys principal beneficial stockholder. Under the agreement,
ARI sells and MWR purchases scrap metal from several plant locations. This agreement was entered into at arms-length and was approved by the Companys audit committee on the basis that the terms of the agreement were no less favorable
than those terms that could have been obtained from an independent third party. For the three months ended September 30, 2012 and 2011, MWR collected scrap material totaling $1.2 million and $1.1 million, respectively. For the nine
months ended September 30, 2012 and 2011, MWR collected scrap material totaling $6.3 million and $1.1 million, respectively.
Icahn Sourcing, LLC (Icahn Sourcing) is an entity formed and controlled by Mr. Carl Icahn in order to maximize the potential buying power of a group
of entities with which Mr. Carl Icahn has a relationship in negotiating with a wide range of suppliers of goods, services and tangible and intangible property. The Company is a member of the buying group and, as such, is afforded the
opportunity to purchase goods, services and property from vendors with whom Icahn Sourcing has negotiated rates and terms. Icahn Sourcing does not guarantee that ARI will purchase any goods, services or property from any such vendors, and ARI is
under no obligation to do so. The Company does not pay Icahn Sourcing any fees or other amounts with respect to the buying group arrangement. The Company has purchased a variety of goods and services as members of the buying group at prices and on
terms that it believes are more favorable than those that would be achieved on a stand-alone basis.
Financial information for transactions
with related parties
Cost of revenues from manufacturing for the three months ended September 30, 2012 and 2011 included $17.3
million and $8.4 million, respectively, in railcar components purchased from joint ventures. Cost of revenues from manufacturing for the nine months ended September 30, 2012 and 2011 included $66.8 million and $12.0 million,
respectively, in railcar components purchased from joint ventures.
Inventory as of September 30, 2012 and December 31, 2011,
included $1.0 million and $1.7 million, respectively, of railcar components purchased from joint ventures and all profit for this inventory still on hand was eliminated.
Note 17 Operating Segment and Sales and Credit Concentrations
ARI operates in three reportable segments: manufacturing, railcar leasing and railcar services. Performance is evaluated based on
revenues and segment earnings (loss) from operations. Intersegment revenues are accounted for as if sales were to third parties. The information in the following table is derived from the segments internal financial reports used by the
Companys management for purposes of assessing segment performance and for making decisions about allocation of resources:
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Earnings (Loss) from Operations
|
|
|
|
External
|
|
|
Intersegment
|
|
|
Total
|
|
|
External
|
|
|
Intersegment
|
|
|
Total
|
|
|
|
(in thousands)
|
|
For the Three Months Ended September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$
|
147,212
|
|
|
$
|
38,178
|
|
|
$
|
185,390
|
|
|
$
|
29,206
|
|
|
$
|
5,012
|
|
|
$
|
34,218
|
|
Railcar Leasing
|
|
|
4,267
|
|
|
|
|
|
|
|
4,267
|
|
|
|
2,377
|
|
|
|
6
|
|
|
|
2,383
|
|
Railcar Services
|
|
|
16,751
|
|
|
|
221
|
|
|
|
16,972
|
|
|
|
2,955
|
|
|
|
(46
|
)
|
|
|
2,909
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,200
|
)
|
|
|
|
|
|
|
(4,200
|
)
|
Eliminations
|
|
|
|
|
|
|
(38,399
|
)
|
|
|
(38,399
|
)
|
|
|
|
|
|
|
(4,972
|
)
|
|
|
(4,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
168,230
|
|
|
$
|
|
|
|
$
|
168,230
|
|
|
$
|
30,338
|
|
|
$
|
|
|
|
$
|
30,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$
|
108,356
|
|
|
$
|
9,118
|
|
|
$
|
117,474
|
|
|
$
|
8,561
|
|
|
$
|
174
|
|
|
$
|
8,735
|
|
Railcar Leasing
|
|
|
259
|
|
|
|
|
|
|
|
259
|
|
|
|
62
|
|
|
|
|
|
|
|
62
|
|
Railcar Services
|
|
|
17,169
|
|
|
|
50
|
|
|
|
17,219
|
|
|
|
4,021
|
|
|
|
(9
|
)
|
|
|
4,012
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(623
|
)
|
|
|
|
|
|
|
(623
|
)
|
Eliminations
|
|
|
|
|
|
|
(9,168
|
)
|
|
|
(9,168
|
)
|
|
|
|
|
|
|
(165
|
)
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
125,784
|
|
|
$
|
|
|
|
$
|
125,784
|
|
|
$
|
12,021
|
|
|
$
|
|
|
|
$
|
12,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$
|
446,273
|
|
|
$
|
170,267
|
|
|
$
|
616,540
|
|
|
$
|
80,692
|
|
|
$
|
28,280
|
|
|
$
|
108,972
|
|
Railcar Leasing
|
|
|
8,315
|
|
|
|
|
|
|
|
8,315
|
|
|
|
3,994
|
|
|
|
19
|
|
|
|
4,013
|
|
Railcar Services
|
|
|
49,455
|
|
|
|
441
|
|
|
|
49,896
|
|
|
|
8,694
|
|
|
|
(96
|
)
|
|
|
8,598
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,277
|
)
|
|
|
|
|
|
|
(13,277
|
)
|
Eliminations
|
|
|
|
|
|
|
(170,708
|
)
|
|
|
(170,708
|
)
|
|
|
|
|
|
|
(28,203
|
)
|
|
|
(28,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
504,043
|
|
|
$
|
|
|
|
$
|
504,043
|
|
|
$
|
80,103
|
|
|
$
|
|
|
|
$
|
80,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$
|
271,260
|
|
|
$
|
9,617
|
|
|
$
|
280,877
|
|
|
$
|
16,255
|
|
|
$
|
227
|
|
|
$
|
16,482
|
|
Railcar Leasing
|
|
|
648
|
|
|
|
|
|
|
|
648
|
|
|
|
188
|
|
|
|
|
|
|
|
188
|
|
Railcar Services
|
|
|
50,632
|
|
|
|
217
|
|
|
|
50,849
|
|
|
|
10,635
|
|
|
|
(10
|
)
|
|
|
10,625
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,801
|
)
|
|
|
|
|
|
|
(8,801
|
)
|
Eliminations
|
|
|
|
|
|
|
(9,834
|
)
|
|
|
(9,834
|
)
|
|
|
|
|
|
|
(217
|
)
|
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
322,540
|
|
|
$
|
|
|
|
$
|
322,540
|
|
|
$
|
18,277
|
|
|
$
|
|
|
|
$
|
18,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$
|
353,143
|
|
|
$
|
311,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Railcar Leasing
|
|
|
213,275
|
|
|
|
46,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Railcar Services
|
|
|
50,875
|
|
|
|
47,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
88,285
|
|
|
|
303,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations
|
|
|
(33,103
|
)
|
|
|
(4,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consolidated
|
|
$
|
672,475
|
|
|
$
|
703,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Manufacturing
Manufacturing consists of railcar manufacturing, and railcar and industrial component manufacturing. Intersegment revenues are determined based on an estimated fair market value of the railcars
manufactured for the Companys railcar leasing segment, as if such railcars had been sold to a third party. Revenues for railcars manufactured for the Companys leasing segment are not recognized in consolidated revenues as railcar sales,
but rather lease revenues are recognized over the term of the lease. Earnings (loss) from operations for manufacturing include an allocation of selling, general and administrative costs, as well as profit for railcars manufactured for the
Companys leasing segment based on revenue determined as described above.
Manufacturing revenues from affiliates were 29.7% and zero
percent of total consolidated revenues for the three months ended September 30, 2012 and 2011, respectively. Manufacturing revenues from affiliates were 12.1% and 0.4% of total consolidated revenues for the nine months ended September 30,
2012 and 2011, respectively. Manufacturing revenues from customers that accounted for more than 10.0% of total consolidated revenues were 62.0% and 41.5% for the three months ended September 30, 2012 and 2011, respectively. Manufacturing
revenues from customers that accounted for more than 10.0% of total consolidated revenues were 51.3% and 21.7% for the nine months ended September 30, 2012 and 2011, respectively.
Manufacturing receivables from customers that accounted for more than 10.0% of total consolidated accounts receivable totaled 33.8% of total consolidated accounts receivable including due from related
parties as of September 30, 2012. Manufacturing receivables from customers that accounted for more than 10.0% of total consolidated accounts receivable were 31.0% of total consolidated accounts receivable including due from related parties as
of December 31, 2011.
Railcar Leasing
Railcar leasing consists of railcars manufactured by the Company and leased to third parties under operating leases. Although the Company began its railcar leasing activity during 2011, such activity was
not required to be reported as a separate segment until March 31, 2012, when it met the asset test as required by authoritative guidance. Earnings (loss) from operations for railcar leasing include an allocation of selling, general and
administrative costs and also reflect origination fees paid to ARL associated with originating the lease to the Companys leasing customers. The origination fees represent a percentage of the revenues from the lease over its initial term and
are paid up front.
There were no railcar leasing revenues from affiliates for the three and nine months ended September 30, 2012 and
2011. No single railcar leasing customer accounted for more than 10.0% of total consolidated revenues for the three and nine months ended September 30, 2012 and 2011. No single railcar leasing customer accounted for more than 10.0% of total
consolidated accounts receivable as of September 30, 2012 and December 31, 2011.
Railcar services
Railcar services consist of railcar repair services, engineering and field services, and fleet management services. Earnings (loss) from operations for
railcar services include an allocation of selling, general and administrative costs.
Railcar services revenues from affiliates were 3.5% and
5.5% of total consolidated revenues for the three months ended September 30, 2012 and 2011, respectively. Railcar services revenues from affiliates were 3.3% and 5.9% of total consolidated revenues for the nine months ended September 30,
2012 and 2011, respectively.
No single railcar services customer accounted for more than 10.0% of total consolidated revenues for the three
and nine months ended September 30, 2012 and 2011. No single railcar services customer accounted for more than 10.0% of total consolidated accounts receivable as of September 30, 2012 and December 31, 2011.
Note 18 Consulting Contracts
During the first quarter of 2011, the Company entered into a technology services consulting agreement with SDS-Altaiwagon, a Russian
railcar builder, to design a railcar for general service in Russia for a total contract price of $1.5 million. The technology services consulting agreement was completed during the first quarter of 2012.
During the second quarter of 2011, the Company entered into a consulting agreement with the Indian Railways Research Designs and Standards Organization
(RDSO) to design and develop certain railcars for service in India for a total contract price of $9.6 million. The consulting agreement is expected to continue through 2016.
For the three months ended September 30 2011, revenues of $1.5 million were recorded under these two consulting agreements. No revenue was recorded under these two consulting agreements during
the three months ended September 30, 2012. For the nine months ended September 30, 2012 and 2011, revenues of $1.2 million and $1.5 million, respectively, were recorded under these two consulting agreements. As of
September 30, 2012 and December 31, 2011, unbilled revenues of $2.5 million and 1.3 million, respectively, were due from the RDSO agreement.
24
Note 19 Supplemental Cash Flow Information
ARI received interest income of $2.6 million for both the nine months ended September 30, 2012 and 2011.
ARI paid interest expense, net of capitalized interest, of $20.0 million and $20.6 million for the nine months ended September 30, 2012 and
2011, respectively.
ARI paid taxes of $3.4 million and $0.4 million for the nine months ended September 30, 2012 and 2011, respectively.
ARI paid $5.6 million and $1.4 million to employees related to SARs exercises during the nine months ended September 30, 2012
and 2011, respectively.
25