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, 2012
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 Company’s latest Annual Report on Form 10-K for the year ended
December 31, 2012
. 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), ARI Fleet Services of Canada, Inc., ARI Longtrain, Inc. (Longtrain), and Longtrain Leasing I, LLC (Longtrain Leasing). From time to time, the Company makes investments through Longtrain. All intercompany transactions and balances have been eliminated.
Note 2 — Recent accounting pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standard Updated (ASU) 2013-02
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
(ASU 2013-02). ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The ASU is effective for annual periods and interim periods within those periods beginning after December 15, 2012. Accordingly, the Company adopted the ASU effective January 1, 2013 and the required disclosures can be found in Note 16.
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:
|
|
•
|
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.
|
|
|
•
|
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.
|
|
|
•
|
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 investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. ARI’s 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.
For the fair value of the Company’s short-term investments, outstanding debt, and share-based compensation refer to Notes 4, 11, and 15, respectively.
Note 4 — Short-term Investments — Available for Sale Securities
As of December 31, 2012, Longtrain held approximately
0.8 million
shares of Greenbrier common stock that had been purchased in the open market. These shares were sold during the first quarter of 2013 for approximately
$12.7 million
, resulting in a realized gain of
$2.0 million
that was recorded in other income on the condensed consolidated statements of operation. The fair value of the shares of Greenbrier that were held by the Company as of December 31, 2012 was
$12.6 million
and such shares were classified as a Level 1 fair value measurement as defined by U.S. GAAP and the fair value hierarchy. See Note 16 for the amount of unrealized gain on the shares during the
six
months ended
June 30, 2013
.
Note 5 — Accounts Receivable, net
Accounts receivable, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
December 31,
2012
|
|
(in thousands)
|
Accounts receivable, gross
|
$
|
38,225
|
|
|
$
|
36,755
|
|
Less allowance for doubtful accounts
|
(61
|
)
|
|
(655
|
)
|
Total accounts receivable, net
|
$
|
38,164
|
|
|
$
|
36,100
|
|
Note 6 — Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
December 31,
2012
|
|
(in thousands)
|
Raw materials
|
$
|
62,233
|
|
|
$
|
72,244
|
|
Work-in-process
|
18,782
|
|
|
15,877
|
|
Finished products
|
14,012
|
|
|
24,364
|
|
Total inventories
|
95,027
|
|
|
112,485
|
|
Less reserves
|
(2,039
|
)
|
|
(2,410
|
)
|
Total inventories, net
|
$
|
92,988
|
|
|
$
|
110,075
|
|
Note 7 — Property, Plant and Equipment
The following table summarizes the components of property, plant and equipment.
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
December 31,
2012
|
|
(in thousands)
|
Operations / Corporate:
|
|
|
|
Buildings
|
$
|
155,308
|
|
|
$
|
151,545
|
|
Machinery and equipment
|
178,722
|
|
|
173,468
|
|
Land
|
3,335
|
|
|
3,335
|
|
Construction in process
|
12,773
|
|
|
12,156
|
|
|
350,138
|
|
|
340,504
|
|
Less accumulated depreciation
|
(192,810
|
)
|
|
(184,611
|
)
|
Property, plant and equipment, net
|
$
|
157,328
|
|
|
$
|
155,893
|
|
Railcar Leasing:
|
|
|
|
Railcars on lease
|
$
|
306,869
|
|
|
$
|
225,992
|
|
Less accumulated depreciation
|
(10,125
|
)
|
|
(5,710
|
)
|
Railcars on operating lease, net
|
$
|
296,744
|
|
|
$
|
220,282
|
|
Lease agreements
The Company leases railcars to third parties under multi-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. Railcars subject to lease agreements are classified as railcars on operating leases and are depreciated in accordance with the Company’s depreciation policy.
Capital expenditures for leased railcars represent cash outflows of the Company’s cost to produce railcars shipped or to be shipped for lease.
As of
June 30, 2013
, future contractual minimum rental revenues required under non-cancellable operating leases for railcars with terms longer than one year are as follows (in thousands):
|
|
|
|
|
Remaining 6 months of 2013
|
$
|
15,516
|
|
2014
|
29,409
|
|
2015
|
28,735
|
|
2016
|
27,946
|
|
2017
|
20,837
|
|
2018
|
12,579
|
|
2019 and thereafter
|
23,970
|
|
Total
|
$
|
158,992
|
|
Depreciation expense
The following table summarizes depreciation expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
(in thousands)
|
Total depreciation expense
|
$
|
6,860
|
|
|
$
|
5,884
|
|
|
$
|
13,395
|
|
|
$
|
11,286
|
|
Depreciation expense on leased railcars
|
$
|
2,300
|
|
|
$
|
945
|
|
|
$
|
4,415
|
|
|
$
|
1,422
|
|
Note 8 — Goodwill
On March 31, 2006, the Company acquired all of the common stock of Custom Steel, a subsidiary of Steel Technologies, Inc. Custom Steel produces value-added fabricated parts that primarily support the Company’s railcar manufacturing operations. The acquisition resulted in goodwill of
$7.2 million
. The results attributable to Custom Steel are included in the manufacturing segment.
The Company performed the annual qualitative assessment as of March 1, 2013 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:
|
|
•
|
The North American railcar market has been, and ARI expects it to continue to be highly cyclical. The railcar industry significantly improved in 2011 and 2012. Beginning in the middle of 2012, the mix of demand for railcars began to shift with a heavier emphasis on tank railcars.
|
|
|
•
|
ARI is subject to various laws and regulations. No significant assessments have been made by the various regulatory agencies.
|
|
|
•
|
The railcar manufacturing industry has historically been extremely competitive. There are several competitors who are expanding their capacities.
|
|
|
•
|
ARI experienced two strong years of railcar order activity in 2011 and 2012. Based upon third party forecast for the industry over the next several years, the Company expects order activity to remain at healthy levels.
|
|
|
•
|
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 unit’s long-lived assets.
|
|
|
•
|
The reporting unit has a history of positive operating cash flows that is expected to continue.
|
|
|
•
|
No part of the reporting unit’s net income is comprised of significant non-operating or non-recurring gains or losses, and no significant changes in balance sheet accruals were noted.
|
|
|
•
|
In addition, during 2012 there were no significant changes in the following with regard to the reporting unit that we expect to impact future results:
|
|
|
•
|
Buyer or supplier bargaining power; and
|
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. Additionally, no impairment was recognized in any prior periods and there were no indicators of impairment during the quarter.
Note 9 — Investments in and Loans to Joint Ventures
As of
June 30, 2013
, the Company was party to the following 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 investment balance related to all three joint ventures is recorded within our manufacturing segment. The carrying amount of investments in and loans to joint ventures, which also represents ARI’s maximum exposure to loss with these joint ventures, are as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
December 31,
2012
|
|
(in thousands)
|
Carrying amount of investments in and loans to joint ventures
|
|
|
|
Ohio Castings
|
$
|
6,909
|
|
|
$
|
7,022
|
|
Axis
|
25,146
|
|
|
27,181
|
|
Amtek Railcar
|
9,479
|
|
|
10,333
|
|
Total investments in and loans to joint ventures
|
$
|
41,534
|
|
|
$
|
44,536
|
|
See Note 17 for information regarding financial transactions with ARI's joint ventures.
Ohio Castings
Ohio Castings produces railcar parts that are sold to one of the joint venture partners. The joint venture partner sells these parts to outside third parties at current market prices and sells them to the Company and the other joint venture partner at cost plus a licensing fee. The Company has been involved with this joint venture since 2003.
The Company 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 Company’s investment through Castings.
Summary financial results for Ohio Castings, the investee company, in total, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
(in thousands)
|
Results of operations
|
|
|
|
|
|
|
|
Revenues
|
$
|
12,794
|
|
|
$
|
23,399
|
|
|
$
|
27,282
|
|
|
$
|
46,685
|
|
Gross profit
|
$
|
515
|
|
|
$
|
2,278
|
|
|
$
|
905
|
|
|
$
|
4,556
|
|
Net income (loss)
|
$
|
(116
|
)
|
|
$
|
2,428
|
|
|
$
|
(349
|
)
|
|
$
|
4,948
|
|
The new railcar castings market is directly related to the new railcar market, which has declined for all railcar types, except tank railcars. Thus, Ohio Castings has seen a recent decline in demand. The Company will continue to monitor its investment in Ohio Castings for impairment.
Axis
ARI, through a wholly-owned subsidiary, owns a portion of a joint venture, Axis, to manufacture and sell railcar axles. ARI owns
41.9%
of Axis, while a minority partner owns less than
10%
, with the other significant partner owning the remainder.
Under the terms of the joint venture agreement, ARI and the other significant partner are required, and the minority partner is entitled, to contribute additional capital to the joint venture, on a pro rata basis, of any amounts approved by the joint venture’s 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 significant 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.
Under the amended Axis credit agreement (Axis Credit Agreement), which is held by ARI and the other significant partner, principal and interest payments are due each fiscal quarter, with the last payment due on December 31, 2019. Subject to certain limitations, at the election of Axis, the interest rate for the loans under the Axis Credit Agreement 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 amended agreement, during 2010 and 2011, Axis satisfied interest on the 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 ceased in the third quarter of 2011.
The balance outstanding on these loans, including interest, due to ARI Component, was
$34.4 million
as of
June 30, 2013
and was
$35.7 million
as of
December 31, 2012
. During the
six
months ended
June 30, 2013
,
$1.3 million
of principal payments were received from Axis.
ARI currently intends to fund the cash needs of Axis through loans and capital contributions through at least March 31, 2014. 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, 2014.
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 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.
Summary financial results for Axis, the investee company, in total, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
(in thousands)
|
Results of operations
|
|
|
|
|
|
|
|
Revenues
|
$
|
12,134
|
|
|
$
|
16,931
|
|
|
$
|
23,076
|
|
|
$
|
34,118
|
|
Gross profit
|
$
|
1,302
|
|
|
$
|
1,467
|
|
|
$
|
1,459
|
|
|
$
|
2,891
|
|
Income before interest
|
$
|
1,056
|
|
|
$
|
1,254
|
|
|
$
|
981
|
|
|
$
|
2,413
|
|
Net loss
|
$
|
(300
|
)
|
|
$
|
(206
|
)
|
|
$
|
(1,743
|
)
|
|
$
|
(529
|
)
|
The new railcar axle market is directly related to the new railcar market, which has declined for all railcar types, except tank railcars. Thus, Axis has seen a recent decline in demand.
As of
June 30, 2013
, the investment in Axis was comprised entirely of ARI’s term loan, revolver and related accrued interest from Axis. The Company has evaluated this loan to be fully recoverable. The Company will continue to monitor its investment in Axis for impairment.
Amtek Railcar
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 in India constructed by the joint venture. ARI’s ownership in this joint venture is
50.0%
.
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 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.
In the second quarter of 2013, Amtek began production, resulting in higher interest expense compared to prior periods as a result of the joint venture ceasing capitalization of interest. Summary financial results for Amtek Railcar, the investee company, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
(in thousands)
|
Financial Results
|
|
|
|
|
|
|
|
Revenues
|
$
|
95
|
|
|
$
|
—
|
|
|
$
|
95
|
|
|
$
|
—
|
|
Gross profit (loss)
|
$
|
(17
|
)
|
|
$
|
—
|
|
|
$
|
(17
|
)
|
|
$
|
—
|
|
Loss before interest and taxes
|
$
|
(238
|
)
|
|
$
|
(435
|
)
|
|
$
|
(762
|
)
|
|
$
|
(934
|
)
|
Net loss
|
$
|
(1,375
|
)
|
|
$
|
(435
|
)
|
|
$
|
(1,942
|
)
|
|
$
|
(952
|
)
|
The Company will continue to monitor its investment in Amtek for impairment.
Note 10 — Warranties
The Company’s standard warranty is up to
one
year for parts and services and
five
years for new railcars. Factors affecting the Company’s warranty liability include the number of units sold, historical and anticipated rates of claims and historical and anticipated costs per claim. Fluctuations in the Company’s 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.
The overall change in the Company’s warranty reserve is reflected on the condensed consolidated balance sheet in accrued expenses and taxes and is detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
(in thousands)
|
Liability, beginning of period
|
$
|
1,220
|
|
|
$
|
1,051
|
|
|
$
|
1,374
|
|
|
$
|
930
|
|
Provision for warranties issued during the year, net of
adjustments
|
567
|
|
|
322
|
|
|
877
|
|
|
659
|
|
Adjustments to warranties issued during previous
years
|
(43
|
)
|
|
137
|
|
|
(396
|
)
|
|
34
|
|
Warranty claims
|
(225
|
)
|
|
(224
|
)
|
|
(336
|
)
|
|
(337
|
)
|
Liability, end of period
|
$
|
1,519
|
|
|
$
|
1,286
|
|
|
$
|
1,519
|
|
|
$
|
1,286
|
|
Note 11 — Long-term Debt
2007 Senior Unsecured 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 (Notes). On September 4, 2012, ARI completed a voluntary partial early redemption of
$100.0 million
of the Notes at a rate of
101.875%
of the principal amount, plus any accrued and unpaid interest. The Notes bore interest at a fixed interest rate of
7.5%
. At December 31, 2012, the fair value of these Notes was
$176.3 million
while the carrying value was
$175.0 million
. The fair value is based on the closing market price as of that date, which is a Level 1 input. For the definition and discussion of a Level 1 input for fair value measurement, refer to Note 3.
On March 1, 2013, ARI completed a voluntary redemption of the remaining
$175.0 million
of Notes outstanding at par, plus any accrued and unpaid interest. In conjunction with the redemption, the Company incurred a
$0.4 million
loss, which is shown as loss on debt extinguishment on the condensed consolidated statements of operations. This non-cash charge is related to the accelerated write-off of the remaining portion of deferred debt issuance costs incurred in connection with the Notes.
2012 Lease Fleet Financing
In December 2012, Longtrain Leasing entered into a senior secured delayed draw term loan facility (Term Loan) that is secured by a portfolio of railcars, railcar leases, the receivables associated with those railcars and leases, and certain other assets of Longtrain Leasing. The Term Loan provided for an initial draw at closing (Initial Draw) and allowed for up to
two
additional draws. Upon closing, the Initial Draw was
$98.4 million
, net of fees and expenses. As of December 31, 2012, the outstanding principal balance on the Term Loan, including the current portion, was
$100.0 million
.
During the first half of 2013, ARI made two additional draws amounting to
$99.8 million
in aggregate under the Term Loan, fully utilizing the capacity of the Term Loan. The additional draws during 2013 resulted in proceeds received of
$99.4 million
, net of fees and expenses. As of
June 30, 2013
, the outstanding principal balance on the Term Loan, including the current portion, was
$198.1 million
.
The fair value of the Term Loan was
$198.1 million
and
$100.0 million
as of
June 30, 2013
and
December 31, 2012
, respectively, and is based upon estimates by various banks determined by trading levels on the date of measurement using a Level 2 fair value measurement as defined by U.S. GAAP under the fair value hierarchy. For the definition and discussion of a Level 2 input for fair value measurement, refer to Note 3.
The Term Loan, which matures on February 27, 2018, bears interest at one-month LIBOR plus
2.5%
, for a rate of
2.7%
as of
June 30, 2013
, subject to an alternative fee as set forth in the credit agreement, and is payable on the 15th of each month (Payment Date). The interest rate increases by
2.0%
following certain events of default. The Company is required to pay principal at an annual rate of
3.33%
of the borrowed amount via monthly payments that are due on the Payment Date, which commenced on March 15, 2013, with any remaining balance payable on the final scheduled maturity date. The Term Loan may be prepaid at any time without premium or penalty, other than customary LIBOR breakage fees. Longtrain Leasing is required to maintain a loan to value ratio of at least
75%
of the Net Aggregate Equipment Value, as defined in the Term Loan. The Term Loan contains restrictive covenants that limit Longtrain Leasing’s ability to, among other things, incur additional debt, issue additional equity, sell certain assets, grant certain liens on its assets, make certain restricted payments, acquisitions and investments, and enter into certain significant transactions with stockholders and affiliates. Additionally, the Term Loan requires Longtrain Leasing to comply with a Debt Service Coverage Ratio, as defined in the credit agreement, of
1.05
to
1.0
, measured quarterly on a three-quarter trailing basis beginning on September 30, 2013, and subject to up to a
75
day cure period. Certain covenants, including those that restrict Longtrain Leasing’s ability to incur additional indebtedness and issue equity, become more restrictive if Longtrain Leasing’s debt service coverage ratio, as defined, is less than
1.2
to
1.0
on or after September 30, 2013.
The Term Loan also obligates Longtrain Leasing and ARI to maintain ARI’s separateness and to ensure that the collections from the railcar leases along with the railcars that secure the Term Loan are managed in accordance with the credit agreement. Additionally, ARI is obligated to make any selections of transfers of railcars, railcar leases, receivables and related assets to be conveyed to Longtrain Leasing in good faith and without any adverse selection, to cause American Railcar Leasing LLC (ARL), as the manager, to maintain, lease, and re-lease Longtrain Leasing’s equipment no less favorably than similar portfolios serviced by ARL, and to repurchase or replace railcars that are reported as Eligible Units (as defined in the credit agreement) when they are not Eligible Units, subject to limitations on liability set forth in the credit agreement. The Company was in compliance with all of its covenants under the Term Loan as of
June 30, 2013
.
The Term Loan is secured by a first lien on substantially all assets of Longtrain Leasing, consisting of railcars, railcar leases, receivables and related assets, subject to limited exceptions. As of
June 30, 2013
and
December 31, 2012
, the net book value of the railcars that were pledged as part of the Term Loan were
$223.8 million
and
$112.0 million
, respectively. The future contractual minimum rental revenues related to the railcars pledged as of
June 30, 2013
are as follows (in thousands):
|
|
|
|
|
Remaining 6 months of 2013
|
$
|
12,446
|
|
2014
|
24,892
|
|
2015
|
24,549
|
|
2016
|
23,761
|
|
2017
|
16,651
|
|
2018
|
9,023
|
|
2019 and thereafter
|
17,462
|
|
Total
|
$
|
128,784
|
|
The remaining principal payments under existing debt agreements as of
June 30, 2013
are as follows:
|
|
|
|
|
Remaining 6 months of 2013
|
$
|
3,300
|
|
2014
|
6,655
|
|
2015
|
6,655
|
|
2016
|
6,673
|
|
2017
|
6,655
|
|
2018
|
168,138
|
|
Total
|
$
|
198,076
|
|
Note 12 — Income Taxes
The statute of limitation on the Company’s 2008 federal income tax return expired on April 14, 2013. The Company’s federal income tax returns for tax years 2009 and beyond remain subject to examination, with the latest statute expiring in September 2016. The Company’s 2009 and 2011 returns are being reviewed by the IRS due to the carryback of a net operating loss from 2011.
The statute of limitations on certain state income tax returns for 2008 remain open and subject to examination, with the latest statute expiring on November 15, 2013, while all state income tax returns for 2009 and beyond remain open to examination by various state taxing authorities, with the latest statute of limitations expiring on November 15, 2017. The Company’s foreign subsidiary’s income tax returns for the 2008 and beyond remain open to examination by foreign tax authorities.
Note 13 — Employee Benefit Plans
The Company is the sponsor of
three
defined benefit plans that are frozen and no additional benefits are accruing thereunder.
Two
of the Company's defined benefit pension plans cover certain employees at designated repair facilities. The assets of these defined benefit pension plans are held by independent trustees and consist primarily of equity and fixed income securities. The Company also sponsors an unfunded, non-qualified supplemental executive retirement plan that covers several of the Company's current and former employees.
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.
The components of net periodic benefit cost for the pension and postretirement plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
(in thousands)
|
Service cost
|
$
|
50
|
|
|
$
|
48
|
|
|
$
|
99
|
|
|
$
|
96
|
|
Interest cost
|
220
|
|
|
234
|
|
|
441
|
|
|
468
|
|
Expected return on plan assets
|
(278
|
)
|
|
(253
|
)
|
|
(557
|
)
|
|
(506
|
)
|
Amortization of net actuarial loss/prior service cost
|
194
|
|
|
178
|
|
|
388
|
|
|
356
|
|
Net periodic cost recognized
|
$
|
186
|
|
|
$
|
207
|
|
|
$
|
371
|
|
|
$
|
414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
(in thousands)
|
Service cost
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Interest cost
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
Amortization of net actuarial gain/prior service credit
|
(117
|
)
|
|
(118
|
)
|
|
(234
|
)
|
|
(236
|
)
|
Net periodic benefit recognized
|
$
|
(115
|
)
|
|
$
|
(117
|
)
|
|
$
|
(231
|
)
|
|
$
|
(233
|
)
|
The Company also maintains qualified defined contribution plans, which provide benefits to its eligible 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
June 30, 2013
and
2012
, respectively, and
$0.5 million
and
$0.4 million
for the
six
months ended
June 30, 2013
and
2012
, respectively.
Note 14 — Commitments and Contingencies
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 ARI’s 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. ARI’s 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 Company’s board of directors and, through IELP, the Company’s principal beneficial stockholder. Substantially all of the issues identified relate to the use of these properties prior to their 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 September 2013 and January 2016. 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 Plaintiff’s break on April 24, 2008. At trial on April 9, 2012, the jury ruled in favor of the Plaintiff. After an initial appeal of this ruling, the judge reduced the amount awarded to the plaintiff, which was fully accrued as of
June 30, 2013
and December 31, 2012. In the first quarter of 2013, the Company filed an appeal of the revised ruling.
The Company has various agreements with and commitments to related parties. See Note 17 for further detail.
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 15 — Share-Based Compensation
The Company accounts for share-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) models. Share-based compensation is expensed using a graded vesting method over the vesting period of the instrument. The fair value of the liability associated with share-based compensation as of
June 30, 2013
is based on the fair value components used to calculate the Black-Scholes value, including the Company’s closing market price, as of that date and is considered a Level 2 input. For the definition and discussion of a Level 2 input for fair value measurement, refer to Note 3.
Stock appreciation rights
The compensation committee of the Company’s board of directors granted awards of stock appreciation rights (SARs) to certain employees pursuant to the 2005 Plan during April 2008, September 2008, March 2009, March 2010, May 2011, and February 2012. The following table presents the amounts incurred by ARI for share-based compensation and the corresponding line items on the condensed consolidated statements of operations that they are classified within:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
(in thousands)
|
Share-based compensation expense (income)
|
|
|
|
|
|
|
|
Cost of revenues: Manufacturing
|
$
|
(538
|
)
|
|
$
|
397
|
|
|
$
|
494
|
|
|
$
|
562
|
|
Cost of revenues: Railcar services
|
(253
|
)
|
|
86
|
|
|
32
|
|
|
80
|
|
Selling, general and administrative
|
(2,142
|
)
|
|
1,634
|
|
|
2,549
|
|
|
2,171
|
|
Total share-based compensation expense (income)
|
$
|
(2,933
|
)
|
|
$
|
2,117
|
|
|
$
|
3,075
|
|
|
$
|
2,813
|
|
The SARs have exercise prices that represent the closing price of the Company’s 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). 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 models based on the inputs in the table below, which project that the specific performance target for applicable grants 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. The following table provides an analysis of SARs granted in 2012, 2011, 2010, 2009, and 2008 and assumptions that were used as of
June 30, 2013
in the Black-Scholes model:
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date
|
|
2/24/2012
|
|
5/9/2011
|
|
3/31/2010
&
5/14/2010
|
|
3/3/2009
|
|
4/28/2008
|
SARs outstanding as of June 30, 2013
|
135,828
|
|
134,655
|
|
42,073
|
|
10,075
|
|
1,550
|
Vested & Exercisable
|
7,235
|
|
59,757
|
|
42,073
|
|
10,075
|
|
1,550
|
Vesting period
|
3 years
|
|
3 years
|
|
3 years
|
|
4 years
|
|
4 years
|
Expiration Dates
|
2/24/2019
|
|
5/9/2018
|
|
3/31/2017 & 5/14/2017
|
|
3/3/2016
|
|
4/28/2015
|
Weighted average exercise price
|
$29.31
|
|
$24.45
|
|
$13.24
|
|
$6.71
|
|
$20.88
|
Expected volatility range
|
57.3% - 58.8%
|
|
55.4% - 57.3%
|
|
55.5%
|
|
45.9%
|
|
46.1%
|
Expected life range (in years)
|
2.8 - 3.6
|
|
2.4 - 2.8
|
|
1.9
|
|
1.3
|
|
0.9
|
Risk-free interest rate
|
0.7%
|
|
0.4% - 0.7%
|
|
0.4%
|
|
0.2%
|
|
0.2%
|
Expected Dividend yield
|
3.0%
|
|
3.0%
|
|
3.0%
|
|
3.0%
|
|
3.0%
|
Forfeiture Rate on unvested SARs
|
2.0%
|
|
2.0%
|
|
N/A
|
|
N/A
|
|
N/A
|
The stock volatility rate was determined using the historical volatility rates of the Company’s common stock over the same period as the expected life of each grant. The expected life ranges represent the use of the simplified method prescribed by the SEC due to inadequate exercise activity for the Company’s SARs. The simplified method uses the average of the vesting period and expiration period of each group of SARs that vest equally over a
three
or
four
-year period. The risk-free rate is based on the U.S. Treasury yield curve in effect for the expected term of the options at the time of grant. The expected dividend yield was determined using the most recent quarter’s dividend. The forfeiture rate was based on a Company estimate of expected forfeitures over the vesting period of each grant for each period.
As of
June 30, 2013
, unrecognized compensation costs related to the unvested portion of SARs were estimated to be
$0.9 million
and were expected to be recognized over a weighted average period of
16 months
.
Note 16 — Accumulated Other Comprehensive Income (Loss)
The following table presents the balances of related after-tax components of accumulated other comprehensive income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Short-term
Investment
Transactions
|
|
Accumulated
Currency
Translation
|
|
Accumulated
Postretirement
Transactions
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
(In thousands)
|
Balance December 31, 2011
|
$
|
—
|
|
|
$
|
1,283
|
|
|
$
|
(2,481
|
)
|
|
$
|
(1,198
|
)
|
Currency translation
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Reclassifications related to pension and
postretirement plans, net of tax effect of $94 (1)
|
—
|
|
|
—
|
|
|
(152
|
)
|
|
(152
|
)
|
Balance June 30, 2012
|
$
|
—
|
|
|
$
|
1,281
|
|
|
$
|
(2,633
|
)
|
|
$
|
(1,352
|
)
|
|
|
|
|
|
|
|
|
Balance December 31, 2012
|
$
|
1,213
|
|
|
$
|
1,562
|
|
|
(3,162
|
)
|
|
$
|
(387
|
)
|
Currency translation
|
—
|
|
|
(658
|
)
|
|
—
|
|
|
(658
|
)
|
Unrealized gain on available for sale securities,
net of tax effect of $51
|
93
|
|
|
—
|
|
|
—
|
|
|
93
|
|
Reclassifications related to pension and
postretirement plans, net of tax effect of $60 (1)
|
—
|
|
|
—
|
|
|
94
|
|
|
94
|
|
Reclassifications related to available for sale
securities, net of tax effect of $702 (2)
|
(1,306
|
)
|
|
—
|
|
|
—
|
|
|
(1,306
|
)
|
Balance June 30, 2013
|
$
|
—
|
|
|
$
|
904
|
|
|
(3,068
|
)
|
|
$
|
(2,164
|
)
|
|
|
|
(1)—
|
These accumulated other comprehensive income components related to amortization of actuarial loss/(gain) and prior period service costs/(benefits) and are included in the computation of net periodic costs for our pension and postretirement plans. See Note 13 for further details and pre-tax amounts.
|
|
|
|
(2)—
|
This accumulated other comprehensive income component relates to realized gains on available for sale securities sold. See Note 4 for further details and pre-tax amounts.
|
Note 17 — 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 Company’s board of directors and, through IELP, the Company’s 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 Company’s 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 six
months ended
June 30, 2013
and
2012
, ARI purchased less than
$0.1 million
of components from ACF. The agreement automatically renews unless written notice is provided by the Company.
Purchasing and Engineering Services Agreement
In January 2013, ARI entered into a purchasing and engineering services agreement and license with ACF. The agreement was unanimously approved by the independent directors of ARI’s audit committee on the basis that the terms of the agreement were not materially less favorable to ARI than those that could have been obtained in a comparable transaction with an unrelated person. Under this agreement, ARI will provide purchasing support and engineering services to ACF in connection with ACF’s manufacture and sale of certain tank railcars at its facility in Milton, Pennsylvania. Additionally, ARI has granted ACF a non-exclusive, non-assignable license to certain of ARI’s intellectual property, including certain designs, specifications, processes and manufacturing know-how required to manufacture and sell such tank railcars during the term of the agreement. Subject to certain early termination events, the agreement shall terminate on December 31, 2014.
In consideration of the services and license provided by ARI to ACF in conjunction with the agreement, ACF shall pay ARI a royalty and, if any, a share of the net profits (Profits) earned on each railcar manufactured and sold by ACF under the agreement, in an aggregate amount equal to
30 percent
of such Profits, as calculated under the agreement. Profits are net of certain of ACF’s start-up and shutdown expenses and certain maintenance capital. If no Profits are realized on a railcar manufactured and sold by ACF pursuant to the agreement, ARI will still be entitled to the royalty for such railcar and will not share in any losses incurred by ACF in connection therewith. In addition, any railcar components supplied by ARI to ACF for the manufacture of these railcars shall be provided at fair market value.
Under the agreement, ACF will have the exclusive right to manufacture and sell subject tank railcars for any new orders scheduled for delivery to customers on or before January 31, 2014. ARI shall have the exclusive right to any sales opportunities for such tank railcars for any new orders scheduled for delivery after that date and through December 31, 2014. ARI also has the right to assign any sales opportunity to ACF, and ACF has the right, but not the obligation, to accept such sales opportunity. Any sales opportunity accepted by ACF will not be reflected in ARI’s orders or backlog.
Revenues of
$3.2 million
and
$3.4 million
for the
three and six
months ended
June 30, 2013
, respectively, were recorded under this agreement for sales of railcar components to ACF and for royalties on railcars sold by ACF and are included under manufacturing revenues from affiliates on the condensed consolidated statements of operations.
Agreements with ARL
The Company has or had the following agreements with ARL, a company controlled by Mr. Carl Icahn, chairman of the Company’s board of directors and, through IELP, the Company’s principal beneficial stockholder:
Railcar services agreement
In April 2011, the Company entered into a railcar services agreement with ARL (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 ARL’s 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.
Revenues of
$4.6 million
and
$5.8 million
for the three months ended
June 30, 2013
and
2012
, respectively, and
$9.2 million
and
$11.0 million
for the first
six
months during
2013
and
2012
, respectively, were recorded under the Railcar Services Agreement. These revenues 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 Company’s audit committee on the basis that the terms were no less favorable than those 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. 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 Company’s board of directors and, through IELP, the Company’s principal beneficial stockholder. Revenues for railcars sold to ARL were
$10.9 million
for both the three and six months ended
June 30, 2012
and 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 independent directors of the Company’s audit committee.
Railcar management agreement
On February 29, 2012, the Company entered into a Railcar Management Agreement with ARL, pursuant to which the Company engaged ARL to sell or lease ARI’s railcars in certain markets, subject to the terms and conditions of the agreement. The agreement was effective as of January 1, 2011, will continue through December 31, 2015 and may be renewed upon written agreement by both parties. In December 2012, Longtrain Leasing entered into a similar agreement with ARL that terminates in August 2018 (collectively the Railcar Management Agreements).
The Railcar Management Agreements also provide that ARL will manage the Company’s and Longtrain Leasing's 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 Agreements were unanimously approved by the independent directors of the Company’s special committee on the basis that the terms were no less favorable than those that could have been obtained from an independent third party.
Total lease origination and management fees incurred were
$0.5 million
and
$0.5 million
for the three months ended
June 30, 2013
and
2012
, respectively, and
$1.0 million
and
$0.7 million
for the first
six
months of
2013
and
2012
, respectively. These fees are included in cost of revenues for railcar leasing on the condensed consolidated statements of operations. Sales commissions of
zero
and
$0.2 million
were incurred for the
three and six
months ended
June 30, 2013
, respectively, compared to
zero
sales commissions for both of the same periods in
2012
. These costs are included in selling, general and administrative costs to affiliates on the condensed consolidated statements of operations. These costs are included in the earnings from operations of the manufacturing segment.
Agreements with AEP
The Company has the following agreements with AEP, a company controlled by Mr. Carl Icahn, chairman of the Company’s board of directors and, through IELP, the Company’s principal beneficial stockholder:
Railcar orders
As discussed above, in the third quarter 2012, ARL assigned all its unfilled purchase orders to AEP. At that time, the Company began manufacturing and selling railcars to AEP on a purchase order basis. Revenues from railcars sold to AEP were
$16.7 million
and
$79.5 million
for the
three and six
months ended
June 30, 2013
. 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 Company’s audit committee.
Agreements with other related parties
The Company’s 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 balance outstanding on these loans, due to ARI Component, was
$34.4 million
and
$35.7 million
as of
June 30, 2013
and
December 31, 2012
, respectively. See Note 9 for further information regarding this transaction and the terms of the underlying loan.
Effective January 1, 2010, ARI entered into a services agreement to provide Axis various administrative services such as accounting, tax, human resources and purchasing assistance for an annual fee of
$0.3 million
, payable in equal monthly installments. This agreement had an initial term of
one year
and automatically renews for a one-year period unless written notice is received from either party.
Effective April 1, 2009, Mr. James J. Unger, the Company’s 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.
The Company leases one of its parts manufacturing facilities from an entity owned by Mr. Unger. Expenses paid for this facility were
$0.1 million
for both the three months ended
June 30, 2013
and
2012
and
$0.2 million
for the first
six
months of
2013
and
2012
. These costs are included in cost of revenues from manufacturing on the consolidated statements of operations. 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, which extends through January 2016, was unanimously approved by the independent directors of the Company’s audit committee on the basis that the terms of the lease was no less favorable than those 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 ARI’s 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
June 30, 2013
and
2012
and
$0.3 million
for both the first
six
months of 2013 and 2012. These fees 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 Company’s audit committee on the basis that the terms of the lease was no less favorable than those that could have been obtained from an independent third party.
ARI is party to a scrap agreement with M. W. Recycling (MWR), a company controlled by Mr. Carl Icahn, chairman of the Company’s board of directors and, through IELP, the Company’s principal beneficial stockholder. Under the agreement, ARI sells and MWR purchases scrap metal from several ARI plant locations. MWR collected scrap material totaling
$1.6 million
and
$2.3 million
for the three months ended
June 30, 2013
and
2012
, respectively and
$3.3 million
and
$5.1 million
for the first
six
months of 2013 and 2012, respectively. This agreement was entered into at arm’s-length and was approved by the Company’s audit committee on the basis that the terms of the agreement were no less favorable than those that could have been obtained from an independent third party.
Icahn Sourcing, LLC (“Icahn Sourcing”), was an entity formed 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 at negotiated rates. The Company was a member of the buying group in 2012. The Company did not pay Icahn Sourcing any fees or other amounts with respect to the buying group arrangement in 2012.
Effective January 1, 2013 Icahn Sourcing restructured its ownership and changed its name to Insight Portfolio Group LLC (“Insight Portfolio Group”). In connection with the restructuring, ARI acquired a minority equity interest in Insight Portfolio Group and agreed to pay a portion of Insight Portfolio Group’s operating expenses in 2013. A number of other entities with which Carl Icahn has a relationship also acquired equity interests in Insight Portfolio Group and also agreed to pay certain of Insight Portfolio Group’s operating expenses in 2013. During both the
three and six
months ended
June 30, 2013
, less than
$0.1 million
of fees were incurred as a member of the Insight Portfolio Group. These charges were included in selling, general and administrative costs on the condensed consolidated statements of operations.
Financial information for transactions with related parties
Cost of revenues for manufacturing included
$21.7 million
and
$26.2 million
for the three months ended
June 30, 2013
and
2012
, respectively, and
$40.1 million
and
$49.5 million
for the first
six
months of
2013
and
2012
, respectively, in railcar components purchased from joint ventures.
Inventory as of
June 30, 2013
and
December 31, 2012
, included
$6.6 million
and
$3.3 million
, respectively, of railcar components purchased from joint ventures and all profit for this inventory still on hand was eliminated.
Note 18 — Operating Segment and Sales and Credit Concentrations
ARI operates in
three
reportable segments: manufacturing, railcar leasing and railcar services. These reportable segments are organized based upon a combination of the products and services offered and performance is evaluated based on revenues and segment earnings (loss) from operations.
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 Company’s railcar leasing segment, as if such railcars had been sold to a third party. Revenues for railcars manufactured for the Company’s 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 Company’s leasing segment based on revenue determined as described above.
Railcar Leasing
Railcar leasing consists of railcars manufactured by the Company and leased to third parties under operating leases. 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 Company’s leasing customers. The origination fees represent a percentage of the revenues from the lease over its initial term and are paid up front.
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.
Segment Financial Results
The information in the following table is derived from the segments’ internal financial reports used by the Company’s management for purposes of assessing segment performance and for making decisions about allocation of resources.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
Earnings (Loss) from Operations
|
|
External
|
|
Intersegment
|
|
Total
|
|
External
|
|
Intersegment
|
|
Total
|
|
(in thousands)
|
Three Months Ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
$
|
132,242
|
|
|
$
|
45,083
|
|
|
$
|
177,325
|
|
|
$
|
32,780
|
|
|
$
|
10,126
|
|
|
$
|
42,906
|
|
Railcar Leasing
|
7,527
|
|
|
—
|
|
|
7,527
|
|
|
3,645
|
|
|
8
|
|
|
3,653
|
|
Railcar Services
|
19,635
|
|
|
46
|
|
|
19,681
|
|
|
4,083
|
|
|
(41
|
)
|
|
4,042
|
|
Corporate/Eliminations
|
—
|
|
|
(45,129
|
)
|
|
(45,129
|
)
|
|
(639
|
)
|
|
(10,093
|
)
|
|
(10,732
|
)
|
Total Consolidated
|
$
|
159,404
|
|
|
$
|
—
|
|
|
$
|
159,404
|
|
|
$
|
39,869
|
|
|
$
|
—
|
|
|
$
|
39,869
|
|
Three Months Ended June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
$
|
134,748
|
|
|
$
|
84,540
|
|
|
$
|
219,288
|
|
|
$
|
26,334
|
|
|
$
|
14,346
|
|
|
$
|
40,680
|
|
Railcar Leasing
|
2,668
|
|
|
—
|
|
|
2,668
|
|
|
1,021
|
|
|
7
|
|
|
1,028
|
|
Railcar Services
|
16,798
|
|
|
191
|
|
|
16,989
|
|
|
3,396
|
|
|
(44
|
)
|
|
3,352
|
|
Corporate/Eliminations
|
—
|
|
|
(84,731
|
)
|
|
(84,731
|
)
|
|
(4,791
|
)
|
|
(14,309
|
)
|
|
(19,100
|
)
|
Total Consolidated
|
$
|
154,214
|
|
|
$
|
—
|
|
|
$
|
154,214
|
|
|
$
|
25,960
|
|
|
$
|
—
|
|
|
$
|
25,960
|
|
Six Months Ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
$
|
305,217
|
|
|
$
|
100,491
|
|
|
$
|
405,708
|
|
|
$
|
66,759
|
|
|
$
|
19,908
|
|
|
$
|
86,667
|
|
Railcar Leasing
|
14,070
|
|
|
—
|
|
|
14,070
|
|
|
5,808
|
|
|
12
|
|
|
5,820
|
|
Railcar Services
|
35,227
|
|
|
95
|
|
|
35,322
|
|
|
6,388
|
|
|
2
|
|
|
6,390
|
|
Corporate/Eliminations
|
—
|
|
|
(100,586
|
)
|
|
(100,586
|
)
|
|
(7,857
|
)
|
|
(19,922
|
)
|
|
(27,779
|
)
|
Total Consolidated
|
$
|
354,514
|
|
|
$
|
—
|
|
|
$
|
354,514
|
|
|
$
|
71,098
|
|
|
$
|
—
|
|
|
$
|
71,098
|
|
Six Months Ended June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
$
|
299,061
|
|
|
$
|
132,089
|
|
|
$
|
431,150
|
|
|
$
|
51,486
|
|
|
$
|
23,268
|
|
|
$
|
74,754
|
|
Railcar Leasing
|
4,048
|
|
|
—
|
|
|
4,048
|
|
|
1,617
|
|
|
13
|
|
|
1,630
|
|
Railcar Services
|
32,704
|
|
|
220
|
|
|
32,924
|
|
|
5,739
|
|
|
(50
|
)
|
|
5,689
|
|
Corporate/Eliminations
|
—
|
|
|
(132,309
|
)
|
|
(132,309
|
)
|
|
(9,077
|
)
|
|
(23,231
|
)
|
|
(32,308
|
)
|
Total Consolidated
|
$
|
335,813
|
|
|
$
|
—
|
|
|
$
|
335,813
|
|
|
$
|
49,765
|
|
|
$
|
—
|
|
|
$
|
49,765
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
June 30,
2013
|
|
December 31,
2012
|
|
(in thousands)
|
Manufacturing
|
$
|
318,352
|
|
|
$
|
329,346
|
|
Railcar Leasing
|
362,352
|
|
|
263,228
|
|
Railcar Services
|
46,163
|
|
|
49,060
|
|
Corporate/Eliminations
|
31,806
|
|
|
168,124
|
|
Total Consolidated
|
$
|
758,673
|
|
|
$
|
809,758
|
|
Sales to Related Parties
As discussed in Note 17, ARI has numerous arrangements with related parties. As a result, from time to time, ARI offers its products and services to affiliates at terms and pricing no less favorable to ARI than the terms and pricing provided to unaffiliated third parties. Below is a summary of revenue from affiliates for each operating segment reflected as a percentage of total consolidated revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Manufacturing
|
|
12.5
|
%
|
|
7.1
|
%
|
|
23.4
|
%
|
|
3.2
|
%
|
|
Railcar Leasing
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
Railcar Services
|
|
2.9
|
%
|
|
3.8
|
%
|
|
2.6
|
%
|
|
3.3
|
%
|
|
Sales and Credit Concentration
Manufacturing revenues from customers that accounted for more than
10.0%
of total consolidated revenues are outlined in the table below. The railcar leasing and railcar services segments had no customers that accounted for more than 10% of the consolidated revenues for the
three and six
months ended
June 30, 2013
and
2012
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Manufacturing revenues from significant customers
|
|
64.8
|
%
|
|
54.3
|
%
|
|
63.3
|
%
|
|
56.1
|
%
|
|
Manufacturing accounts receivable from customers that accounted for more than
10.0%
of consolidated receivables (including accounts receivable, net and accounts receivable, due from related parties) are outlined in the table below. The railcar leasing and railcar services segments also had no customers that accounted for more than 10% of the consolidated receivables balance as of
June 30, 2013
and
December 31, 2012
.
|
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
December 31,
2012
|
|
Manufacturing receivables from significant customers
|
|
40.9
|
%
|
|
35.1
|
%
|
|
Note 19 — 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
June 30, 2013
and
2012
, revenues of
$0.1 million
and
$0.8 million
, respectively, were recorded under these consulting agreements. For the
six
months ended
June 30, 2013
and
2012
, revenues of
$0.8 million
and
$1.2 million
, respectively, were recorded under these consulting agreements. As of
June 30, 2013
and
December 31, 2012
, unbilled revenues of
$2.9 million
and
$2.1 million
, respectively, were due from the RDSO agreement. As of each balance sheet date presented, approximately
$2.0 million
and
$1.4 million
of the unbilled revenue for
June 30, 2013
and
December 31, 2012
, respectively, has been recorded in prepaid expenses and other current assets with the remaining
$0.9 million
and
0.7 million
, respectively, being recorded in other assets on the condensed consolidated balance sheets.
Note 20 — Supplemental Cash Flow Information
ARI received interest income of
$1.4 million
and
$1.8 million
for the
six
months ended
June 30, 2013
and
2012
, respectively.
ARI paid interest expense, net of capitalized interest, of
$8.4 million
and
$10.0 million
for the
six
months ended
June 30, 2013
and
2012
, respectively.
ARI paid
$6.1 million
and
$1.6 million
of taxes, net of refunds for the
six
months ended
June 30, 2013
and
2012
, respectively.
ARI paid
$6.5 million
and
$2.1 million
to employees related to SARs exercises during the
six
months ended
June 30, 2013
and
2012
, respectively.
Note 21 — Subsequent Events
On
July 22, 2013
, the Board of Directors of the Company declared a cash dividend of
$0.25
per share of common stock of the Company to shareholders of record as of
September 20, 2013
that will be paid on
September 27, 2013
.