UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September 30, 2007
or
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
for the transition period from
to
Commission File No. 000-51728
AMERICAN RAILCAR INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
43-1481791
|
(State of Incorporation)
|
|
(I.R.S. Employer Identification No.)
|
|
|
|
100 Clark Street, St. Charles, Missouri
|
|
63301
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(636) 940-6000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
o
Accelerated filer
o
Non-accelerated filer
þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
o
No
þ
The number of shares of the registrants common stock, without par value, outstanding on November
5, 2007 was 21,302,296 shares.
AMERICAN RAILCAR INDUSTRIES, INC.
INDEX TO FORM 10-Q
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts, unaudited)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
297,609
|
|
|
$
|
40,922
|
|
Accounts receivable, net
|
|
|
34,529
|
|
|
|
34,868
|
|
Accounts receivable, due from affiliates
|
|
|
13,553
|
|
|
|
9,632
|
|
Inventories, net
|
|
|
101,135
|
|
|
|
103,510
|
|
Prepaid expenses
|
|
|
3,929
|
|
|
|
5,853
|
|
Deferred tax assets
|
|
|
1,867
|
|
|
|
2,089
|
|
|
|
|
Total current assets
|
|
|
452,622
|
|
|
|
196,874
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
156,364
|
|
|
|
130,293
|
|
Deferred debt issuance costs
|
|
|
4,125
|
|
|
|
235
|
|
Goodwill
|
|
|
7,169
|
|
|
|
7,169
|
|
Other assets
|
|
|
37
|
|
|
|
37
|
|
Investment in joint venture
|
|
|
13,713
|
|
|
|
4,318
|
|
|
|
|
Total assets
|
|
$
|
634,030
|
|
|
$
|
338,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
31
|
|
|
$
|
88
|
|
Accounts payable
|
|
|
40,546
|
|
|
|
54,962
|
|
Accounts payable, due to affiliates
|
|
|
2,694
|
|
|
|
1,689
|
|
Accrued expenses and taxes
|
|
|
6,056
|
|
|
|
3,099
|
|
Accrued compensation
|
|
|
9,549
|
|
|
|
10,282
|
|
Accrued interest expense
|
|
|
1,750
|
|
|
|
32
|
|
Accrued dividends
|
|
|
639
|
|
|
|
636
|
|
|
|
|
Total current liabilities
|
|
|
61,265
|
|
|
|
70,788
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
|
|
|
|
8
|
|
Senior unsecured notes
|
|
|
275,000
|
|
|
|
|
|
Deferred tax liability
|
|
|
3,859
|
|
|
|
7,042
|
|
Pension and post-retirement liabilities
|
|
|
10,186
|
|
|
|
10,859
|
|
Other liabilities
|
|
|
2,390
|
|
|
|
49
|
|
|
|
|
Total liabilities
|
|
|
352,700
|
|
|
|
88,746
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 50,000,000 shares
authorized, 21,302,296 and 21,207,773 shares
issued and outstanding at September 30, 2007 and
December 31, 2006, respectively
|
|
|
213
|
|
|
|
212
|
|
Additional paid-in capital
|
|
|
239,288
|
|
|
|
235,768
|
|
Retained earnings
|
|
|
44,088
|
|
|
|
16,649
|
|
Accumulated other comprehensive loss
|
|
|
(2,259
|
)
|
|
|
(2,449
|
)
|
|
|
|
Total stockholders equity
|
|
|
281,330
|
|
|
|
250,180
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
634,030
|
|
|
$
|
338,926
|
|
|
|
|
See notes to the Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2006
|
Revenues:
|
|
|
|
|
|
|
|
|
Manufacturing operations (including revenues from
affiliates of $47,634 and $4,172 for the three
months ended September 30, 2007 and 2006,
respectively)
|
|
$
|
127,376
|
|
|
$
|
138,479
|
|
|
|
|
|
|
|
|
|
|
Railcar services (including revenues from
affiliates of $4,289 and $4,580 for the three
months ended September 30, 2007 and 2006,
respectively)
|
|
|
12,515
|
|
|
|
11,975
|
|
|
|
|
Total revenues
|
|
|
139,891
|
|
|
|
150,454
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold:
|
|
|
|
|
|
|
|
|
Manufacturing operations
|
|
|
(113,251
|
)
|
|
|
(125,809
|
)
|
|
|
|
|
|
|
|
|
|
Railcar services
|
|
|
(10,668
|
)
|
|
|
(8,920
|
)
|
|
|
|
Total cost of goods sold
|
|
|
(123,919
|
)
|
|
|
(134,729
|
)
|
Gross profit
|
|
|
15,972
|
|
|
|
15,725
|
|
|
|
|
|
|
|
|
|
|
Income related to insurance recoveries, net
|
|
|
|
|
|
|
4,963
|
|
Gain on asset conversion, net
|
|
|
|
|
|
|
4,323
|
|
Selling, administrative and other (including costs
related to affiliates of $151 and $508 for the
three months ended September 30, 2007 and 2006,
respectively)
|
|
|
(6,835
|
)
|
|
|
(7,008
|
)
|
|
|
|
Earnings from operations
|
|
|
9,137
|
|
|
|
18,003
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,986
|
|
|
|
234
|
|
Interest expense
|
|
|
(5,517
|
)
|
|
|
(103
|
)
|
Earnings (loss) from joint venture
|
|
|
115
|
|
|
|
(278
|
)
|
|
|
|
Earnings before income tax expense
|
|
|
7,721
|
|
|
|
17,856
|
|
Income tax expense
|
|
|
(2,861
|
)
|
|
|
(6,862
|
)
|
|
|
|
Net earnings available to common shareholders
|
|
$
|
4,860
|
|
|
$
|
10,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share basic
|
|
$
|
0.23
|
|
|
$
|
0.52
|
|
Net earnings per common share diluted
|
|
$
|
0.23
|
|
|
$
|
0.52
|
|
Weighted average common shares outstanding basic
|
|
|
21,302
|
|
|
|
21,208
|
|
Weighted average common shares outstanding diluted
|
|
|
21,392
|
|
|
|
21,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
See notes to the Condensed Consolidated Financial Statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2006
|
Revenues:
|
|
|
|
|
|
|
|
|
Manufacturing operations (including revenues from
affiliates of $93,558 and $24,380 for the nine
months ended September 30, 2007 and 2006,
respectively)
|
|
$
|
498,217
|
|
|
$
|
443,785
|
|
|
|
|
|
|
|
|
|
|
Railcar services (including revenues from
affiliates of $12,622 and $15,093 for the nine
months ended September 30, 2007 and 2006,
respectively)
|
|
|
38,014
|
|
|
|
36,948
|
|
|
|
|
Total revenues
|
|
|
536,231
|
|
|
|
480,733
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold:
|
|
|
|
|
|
|
|
|
Manufacturing operations
|
|
|
(435,389
|
)
|
|
|
(397,683
|
)
|
|
|
|
|
|
|
|
|
|
Railcar services
|
|
|
(31,198
|
)
|
|
|
(29,080
|
)
|
|
|
|
Total cost of goods sold
|
|
|
(466,587
|
)
|
|
|
(426,763
|
)
|
Gross profit
|
|
|
69,644
|
|
|
|
53,970
|
|
|
|
|
|
|
|
|
|
|
Income related to insurance recoveries, net
|
|
|
|
|
|
|
9,946
|
|
Gain on asset conversion, net
|
|
|
|
|
|
|
4,323
|
|
Selling, administrative and other (including costs
related to affiliates of $454 and $1,526 for the
nine months ended September 30, 2007 and 2006,
respectively)
|
|
|
(20,884
|
)
|
|
|
(21,730
|
)
|
|
|
|
Earnings from operations
|
|
|
48,760
|
|
|
|
46,509
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
10,046
|
|
|
|
1,149
|
|
Interest expense (including interest expense to
affiliates of $0 and $98 for the nine months ended
September 30, 2007 and 2006)
|
|
|
(12,835
|
)
|
|
|
(1,236
|
)
|
Earnings from joint venture
|
|
|
731
|
|
|
|
59
|
|
|
|
|
Earnings before income tax expense
|
|
|
46,702
|
|
|
|
46,481
|
|
Income tax expense
|
|
|
(17,303
|
)
|
|
|
(17,405
|
)
|
|
|
|
Net earnings
|
|
$
|
29,399
|
|
|
$
|
29,076
|
|
|
|
|
Less preferred dividends
|
|
|
|
|
|
|
(568
|
)
|
|
|
|
Earnings available to common shareholders
|
|
$
|
29,399
|
|
|
$
|
28,508
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share basic
|
|
$
|
1.38
|
|
|
$
|
1.39
|
|
Net earnings per common share diluted
|
|
$
|
1.38
|
|
|
$
|
1.39
|
|
Weighted average common shares outstanding basic
|
|
|
21,265
|
|
|
|
20,484
|
|
Weighted average common shares outstanding diluted
|
|
|
21,368
|
|
|
|
20,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
See notes to the Condensed Consolidated Financial Statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2006
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
29,399
|
|
|
$
|
29,076
|
|
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
10,266
|
|
|
|
7,602
|
|
Amortization of deferred costs
|
|
|
482
|
|
|
|
87
|
|
Loss on the write-off of property, plant and equipment
|
|
|
|
|
|
|
4,304
|
|
Long-lived asset impairment charges
|
|
|
|
|
|
|
401
|
|
Loss on disposal of property, plant and equipment
|
|
|
233
|
|
|
|
|
|
Write-off of deferred financing costs
|
|
|
|
|
|
|
566
|
|
Stock based compensation
|
|
|
1,992
|
|
|
|
6,590
|
|
Excess tax benefits from stock option exercises
|
|
|
(241
|
)
|
|
|
|
|
Change in joint venture investment as a result of earnings
|
|
|
(731
|
)
|
|
|
(59
|
)
|
Provision (benefit) for deferred income taxes
|
|
|
(737
|
)
|
|
|
807
|
|
Provision for losses on accounts receivable
|
|
|
84
|
|
|
|
295
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
255
|
|
|
|
(9,497
|
)
|
Accounts receivable, due from affiliate
|
|
|
(3,921
|
)
|
|
|
2,739
|
|
Insurance claim receivable
|
|
|
|
|
|
|
(5,936
|
)
|
Inventories
|
|
|
2,375
|
|
|
|
(20,554
|
)
|
Prepaid expenses
|
|
|
1,924
|
|
|
|
(1,626
|
)
|
Accounts payable
|
|
|
(14,416
|
)
|
|
|
(9,538
|
)
|
Accounts payable, due to affiliate
|
|
|
1,005
|
|
|
|
(2,074
|
)
|
Accrued expenses and taxes
|
|
|
4,344
|
|
|
|
(9,591
|
)
|
Other
|
|
|
(1,331
|
)
|
|
|
(479
|
)
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
30,982
|
|
|
|
(6,887
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(36,495
|
)
|
|
|
(38,695
|
)
|
Property insurance advance on Marmaduke tornado damage
|
|
|
|
|
|
|
10,000
|
|
Repayment of note receivable from affiliate (Ohio Castings
Company, LLC)
|
|
|
165
|
|
|
|
494
|
|
Investment in joint venture
|
|
|
(8,840
|
)
|
|
|
|
|
Acquisitions
|
|
|
|
|
|
|
(17,220
|
)
|
|
|
|
Net cash used in investing activities
|
|
|
(45,170
|
)
|
|
|
(45,421
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
|
|
|
|
205,275
|
|
Offering costs initial public offering
|
|
|
|
|
|
|
(14,605
|
)
|
Preferred stock redemption
|
|
|
|
|
|
|
(82,056
|
)
|
Preferred stock dividends
|
|
|
|
|
|
|
(11,904
|
)
|
Common stock dividends
|
|
|
(1,912
|
)
|
|
|
(1,273
|
)
|
Decrease in amounts due to affiliates
|
|
|
|
|
|
|
(20,476
|
)
|
Majority shareholder capital contribution
|
|
|
|
|
|
|
275
|
|
Proceeds from stock option exercises
|
|
|
1,985
|
|
|
|
|
|
Excess tax benefits from stock option exercises
|
|
|
241
|
|
|
|
|
|
Proceeds from issuance of senior unsecured notes, gross
|
|
|
275,000
|
|
|
|
|
|
Offering costs senior unsecured notes issuance
|
|
|
(4,314
|
)
|
|
|
|
|
Finance fees related to credit facility
|
|
|
(60
|
)
|
|
|
(265
|
)
|
Repayment of debt
|
|
|
(65
|
)
|
|
|
(40,253
|
)
|
|
|
|
Net cash provided by financing activities
|
|
|
270,875
|
|
|
|
34,718
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
256,687
|
|
|
|
(17,590
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
40,922
|
|
|
|
28,692
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
297,609
|
|
|
$
|
11,102
|
|
|
|
|
See notes to the Condensed Consolidated Financial Statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months ended September 30, 2007 and 2006
The condensed consolidated financial statements included herein have been prepared by American
Railcar Industries, Inc. and subsidiaries (collectively the Company or ARI), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC).
Certain information and footnote disclosure normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
omitted pursuant to such rules and regulations, although the Company believes that the disclosures
are adequate to make the information presented not misleading. The Condensed Balance Sheet as of
December 31, 2006 has been derived from the audited consolidated balance sheets as of that date.
These condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the Companys latest annual
report attached on Form 10-K, as amended, for the year ended December 31, 2006. In the opinion of
management, the information contained herein reflects all adjustments necessary to make the results
of operations for the interim periods a fair statement of such operations. The results of
operations of any interim period are not necessarily indicative of the results that may be expected
for a fiscal year.
Note 1 Description of the Business
The condensed consolidated financial statements of the Company include the accounts of American
Railcar Industries, Inc. and its wholly-owned subsidiaries. Through its subsidiary Castings, LLC
(Castings), the Company has a one-third ownership interest in Ohio Castings Company, LLC (Ohio
Castings), a limited liability company formed to produce steel railcar parts, such as sideframes,
bolsters, couplers and yokes, for use or sale by the ownership group. All intercompany transactions
and balances have been eliminated.
ARI manufactures railcars, custom designed railcar parts for industrial companies, railroads, and
other industrial products, primarily aluminum and special alloy steel castings, for non-rail
customers. ARI also provides railcar maintenance services for railcar fleets, including that of its
affiliate, American Railcar Leasing LLC (ARL). In addition, ARI provides fleet management and
maintenance services for railcars owned by selected customers. Such services include inspecting and
supervising the maintenance and repair of such railcars. The Companys operations are located in
the United States and Canada. The Company operates a small railcar repair facility in Sarnia,
Ontario Canada. Canadian revenues were 0.4% and 0.3%, respectively, of total consolidated revenues
for the three months ended September 30, 2007 and 2006. Canadian revenues were 0.3% and 0.3%,
respectively, of total consolidated revenues for the nine months ended September 30, 2007 and 2006.
Canadian assets were 0.2% and 0.4%, respectively, of total consolidated assets as of September 30,
2007 and December 31, 2006.
Acquisition
On March 31, 2006, the Company acquired all of the common stock of Custom Steel, Inc. (Custom
Steel), a subsidiary of Steel Technologies, Inc. Custom Steel operates a facility located adjacent
to the Companys component manufacturing facility in Kennett, Missouri, which produces value-added
fabricated parts that primarily support the Companys railcar manufacturing operations. Prior to
the acquisition, ARI was Custom Steels primary customer. The purchase price was $17.2 million,
which resulted in goodwill of $7.2 million.
The fair value of the assets and acquired liabilities that resulted in goodwill for the acquisition
consisted of $3.8 million of inventory, $8.0 million of property, plant and equipment, and $1.8
million of a deferred tax liability.
The acquisition was accounted for under the purchase method of accounting, with the purchase price
being allocated to the assets acquired based on relative fair values. Accordingly, the related
results of operations of Custom Steel have been included in the condensed consolidated statement of
operations after March 31, 2006.
Note 2 Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
Fair Value
Measurements
(FAS 157), which defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair value measurements.
This Statement applies
7
under other accounting pronouncements that require or permit fair value measurements and,
accordingly, FAS 157 does not require any new fair value measurements. This statement is effective
for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
The Company will adopt FAS 157 as of January 1, 2008, as required. The Company is currently
evaluating the impact this standard will have on its operating income and statement of financial
position.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132(R))
(or
FAS 158). FAS 158 requires that the Company recognize the overfunded or underfunded status of its
defined benefit and retiree medical plans (the Plans) as an asset or liability in the 2006 year end
balance sheet, with changes in the funded status recognized through comprehensive income in the
year in which they occur. FAS 158 also requires the Company to measure the funded status of the
Plans as of the year end balance sheet date not later than December 31, 2008. The Company adopted a
portion of this standard as required at December 31, 2006. The Company expects to adopt the other
portion of this standard, related to the measurement of the funded status at year end, during 2008
and is currently evaluating the impact that this will have on its statement of financial position
and results of operations.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and
Financial Liabilities (FAS 159). FAS 159 permits entities to choose to measure many financial
assets and financial liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. FAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact of FAS 159 on its
consolidated financial position and results of operations.
Note 3 Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
Raw materials
|
|
$
|
57,271
|
|
|
$
|
67,258
|
|
Work-in-process
|
|
|
23,521
|
|
|
|
23,623
|
|
Finished products
|
|
|
23,521
|
|
|
|
15,358
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
104,313
|
|
|
|
106,239
|
|
Less reserves
|
|
|
(3,178
|
)
|
|
|
(2,729
|
)
|
|
|
|
|
|
|
|
Total inventories, net
|
|
$
|
101,135
|
|
|
$
|
103,510
|
|
|
|
|
|
|
|
|
Note 4 Property, Plant and Equipment
The following table summarizes the components of property, plant and equipment as of September 30,
2007 and December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
103,299
|
|
|
$
|
102,737
|
|
Machinery and equipment
|
|
|
97,134
|
|
|
|
93,060
|
|
|
|
|
|
|
|
200,433
|
|
|
|
195,797
|
|
Less accumulated depreciation
|
|
|
(83,279
|
)
|
|
|
(75,204
|
)
|
|
|
|
Net property, plant and equipment
|
|
|
117,154
|
|
|
|
120,593
|
|
Land
|
|
|
3,364
|
|
|
|
2,865
|
|
Construction in process
|
|
|
35,846
|
|
|
|
6,835
|
|
|
|
|
Total property, plant and equipment
|
|
$
|
156,364
|
|
|
$
|
130,293
|
|
|
|
|
8
Depreciation Expense
Depreciation expense for the three months ended September 30, 2007 and 2006 was $3.5 million and
$2.7 million, respectively. Depreciation expense for the nine months ended September 30, 2007 and
2006 was $10.3 million and $7.6 million, respectively.
Capitalized Interest
In conjunction with the Senior Unsecured Fixed Rate Notes offering described in Note 10, the
Company began recording capitalized interest on certain property, plant and equipment capital
projects. The amount of interest capitalized as of September 30, 2007 was $0.09 million. No
interest was capitalized as of December 31, 2006.
Note 5 Long-Lived Asset Impairment Charges
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable. The criteria for determining impairment
for such long-lived assets to be held and used is determined by comparing the carrying value of
these long-lived assets to be held and used to managements best estimate of future undiscounted
cash flows expected to result from the use of the assets. If the assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets.
No impairment charges have been recognized during the nine months ended September 30, 2007. During
the nine months ended September 30, 2006, the Company reduced the carrying value of equipment
purchased under a lease agreement from an unrelated third party by $0.4 million for its
manufacturing plants, which is reflected in the consolidated statement of operations under costs of
manufacturing operations.
Note 6 Goodwill
The Company performs the goodwill impairment test required by SFAS No. 142 as of March 1 of each
year. The valuation uses a combination of methods to determine the fair value of the reporting unit
including prices of comparable businesses, a present value technique and recent transactions
involving businesses similar to the Company. There was no adjustment required based on the 2007
annual impairment test related to the goodwill generated from the Custom Steel acquisition.
Note 7 Investment in Joint Venture Ohio Castings
The Company uses the equity method to account for its investment in Ohio Castings. Under the equity
method, the Company recognizes its share of the earnings and losses of the joint venture as they
accrue. Advances and distributions are charged and credited directly to the investment account.
Ohio Castings produces railcar parts that are sold to one of the joint venture partners. The joint
venture partner sells these parts to outside third parties at current market prices and to the
Company and the other joint venture partner in Ohio Castings at cost plus a licensing fee.
Ohio Castings closed its Chicago Castings facility effective June 30, 2006, in connection with a
consolidation of its operations. Ohio Castings is responsible for the exit liabilities of this
closure. This closing did not have a material financial impact on the Company.
The Company has determined that, although the joint venture is a variable interest entity (VIE),
the Company is not the primary beneficiary and the joint venture should not be consolidated in the
Companys financial statements. The risk of loss to Castings and the Company is limited to its
investment in the VIE and a portion of Ohio Castings debt, which the Company has guaranteed. The
two other partners of Ohio Castings have made similar guarantees of these obligations.
The carrying amount of the investment in Ohio Castings by Castings was $5.8 million and $4.3
million, respectively
9
at September 30, 2007 and December 31, 2006. During May 2007, Castings made
an equity contribution to Ohio Castings amounting to $1.0 million.
The Company, along with the other members of Ohio Castings, has guaranteed bonds payable and a
state loan issued to one of Ohio Castings subsidiaries by the State of Ohio as further discussed
in Note 13. The value of the guarantee, which was $0.04 million at September 30, 2007, has been
recorded by the Company in accordance with FASB Interpretation No. 45
Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
.
See Note 19 for information regarding financial transactions among the Company, Ohio Castings and
Castings.
Summary combined results of operations for Ohio Castings, the investee company, for the three
months ended September 30, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
(in thousands)
|
|
Results of operations:
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
15,915
|
|
|
$
|
23,921
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(51
|
)
|
|
|
(654
|
)
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
35
|
|
|
$
|
(466
|
)
|
|
|
|
|
|
|
|
Summary combined results of operations for Ohio Castings, the investee company, for the nine months
ended September 30, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2006
|
|
|
|
(in thousands)
|
|
Results of operations:
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
58,219
|
|
|
$
|
90,158
|
|
|
|
|
|
|
|
|
Earnings from operations
|
|
|
1,808
|
|
|
|
120
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
2,053
|
|
|
$
|
544
|
|
|
|
|
|
|
|
|
Note 8 Investment in Joint Venture Axle Manufacturing
During June 2007, ARI, through a wholly-owned subsidiary, entered into an agreement with another
partner to form a joint venture, Axis, LLC, to manufacture and sell railcar axles at a facility to
be constructed by the joint venture. The joint venture will initially be owned 50% by both
partners. The executive committee of the joint venture is comprised of one representative from each
partner. Each representative has equal voting rights and equal decision-making rights for
operational and strategic decisions of the joint venture. It is currently anticipated that
construction of the axle plant would start during the fourth quarter of 2007 and that the plant
would be operational by the end of 2008.
The Company uses the equity method to account for its investment in Axis, LLC. Under the equity
method, the Company recognizes its share of the earnings and losses of the joint venture as they
accrue. Advances and distributions are charged and credited directly to the investment account.
Operations have not begun for Axis, LLC as the joint venture is in the capital construction and
development phase of the facility.
Note 9 Warranties
The Company records a liability for an estimate of costs that it expects to incur under its basic
limited warranty, which is typically a range from one year for parts and services to five years on
new railcars, when manufacturing
10
revenue is recognized. Factors affecting the Companys warranty
liability include the number of units sold and historical and anticipated rates of claims and costs
per claim. The Company assesses the adequacy of its warranty liability based on changes in these
factors.
The change in the Companys warranty reserve, which is reflected on the condensed consolidated
balance sheet in Accrued expenses and taxes, is as follows for the three and nine month periods
ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
Liability, beginning of period
|
|
$
|
2,204
|
|
|
$
|
2,036
|
|
Provision for new warranties
issued
|
|
|
697
|
|
|
|
307
|
|
Warranty claims
|
|
|
(548
|
)
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
Liability, end of period
|
|
$
|
2,353
|
|
|
$
|
1,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
Liability, beginning of period
|
|
$
|
1,753
|
|
|
$
|
1,237
|
|
Provision for new warranties
issued
|
|
|
1,732
|
|
|
|
1,807
|
|
Warranty claims
|
|
|
(1,132
|
)
|
|
|
(1,261
|
)
|
|
|
|
|
|
|
|
Liability, end of period
|
|
$
|
2,353
|
|
|
$
|
1,783
|
|
|
|
|
|
|
|
|
Note 10 Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
(in thousands)
|
|
Revolving line of credit
|
|
$
|
|
|
|
$
|
|
|
Senior unsecured notes
|
|
|
275,000
|
|
|
|
|
|
Other
|
|
|
31
|
|
|
|
96
|
|
|
|
|
|
|
|
|
Total long-term debt, including current portion
|
|
$
|
275,031
|
|
|
$
|
96
|
|
Less current portion of debt
|
|
|
31
|
|
|
|
88
|
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion
|
|
$
|
275,000
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
Revolving Line of Credit
In January 2006, the Company entered into an Amended and Restated Credit Agreement (the revolving
credit agreement) providing for the terms of the Companys revolving credit facility with North
Fork Business Capital Corporation, as administrative agent for various lenders. The note bears
interest at various rates based on LIBOR or prime. The revolving credit facility has both
affirmative and negative covenants, including, without limitation, an adjusted fixed charge
coverage ratio, a maximum total debt leverage ratio and limitations on capital expenditures and
dividends. Prior to the amendment in October 2006 described below, the revolving credit facility
had a total commitment of the lesser of (i) $75.0 million or (ii) an amount equal to a percentage
of eligible accounts receivable plus a percentage of eligible raw materials and finished goods
inventory. In addition, the revolving credit facility included a $15.0 million capital expenditure
sub-facility based on a percentage of the costs related to capital projects the Company may
undertake.
11
During October 2006, the Company entered into a first amendment to its revolving credit agreement.
This first amendment provided that the revolving credit facility have a total commitment of the
lesser of (i) $100.0 million or (ii) an amount equal to a percentage of eligible accounts
receivable plus a percentage of eligible raw materials, work in process and finished goods
inventory. Furthermore, the first amendment increased the capital expenditure sub-facility to $30.0
million based on the percentage of the costs related to equipment the Company may acquire. As
amended by the first amendment, the revolving credit facility expires on October 5, 2009.
During February 2007, the Company entered into a second amendment to its revolving credit
agreement. Effective March 2007, the Company entered into a third amendment to its revolving credit
agreement. The revolving credit facility, as amended by the second amendment and the third
amendment, requires that when excess availability under the revolving credit facility is less than
$30.0 million (or has been less than $30.0 million at any time during the prior 90 days), the
Company must meet an adjusted fixed charge coverage ratio of not less than 1.2 to 1.0 on a
quarterly and/or annual basis, and further requires that if any indebtedness has been incurred or
assumed during the applicable quarter (other than indebtedness for loans under the revolving credit
facility), or when excess availability under the revolving credit facility is less than $30.0
million (or has been less than $30.0 million at any time during the prior 90 days), the Company
must meet a leverage ratio calculated based on the outstanding amount of indebtedness to EBITDA
(Earnings Before Interest, Taxes, Depreciation and Amortization), as defined in the revolving
credit facility, as amended, of not greater than 4.0 to 1.0 on a quarterly and/or annual basis.
Borrowings under the revolving credit facility are collateralized by accounts receivable,
contracts, leases, instruments, chattel paper, inventory, pledged accounts, certain other assets and equipment
purchased with proceeds of the capital expenditure sub-facility.
The revolving credit facility, as amended, includes certain limitations on, among other things, the
Companys ability to incur or maintain indebtedness, modify the Companys current governing
documents, sell or dispose of collateral, grant credit and declare or pay dividends or make
distributions on common stock or other equity securities. The limitation on certain of the actions
addressed by the revolving credit facility is in the nature of a right in favor of the
administrative agent and the Companys lenders to accelerate all of the Companys obligations under
the revolving credit facility, a demand right that is triggered by certain actions, rather than in
the nature of a negative covenant by which the Company contractually agrees not to take such
actions.
At September 30, 2007 the Company had no borrowings outstanding and $76.3 million of availability
under the revolving credit facility based upon the amount of its eligible accounts receivable and
inventory (and without regard to any financial covenants), or $46.3 million of availability, if the
Company were to maintain excess availability of at least $30.0 million. The Company was not
required to calculate the leverage ratio or the adjusted fixed charge coverage ratio as of
September 30, 2007, as its excess availability was greater than $30.0 million and there were no
other circumstances that required either of these two ratios to be tested as of that date.
As of September 30, 2007, the interest rate on the borrowings under the revolving credit facility
was 7.25% and was based on the U.S. prime rate at that time.
The Company declared dividends of $0.03 per common share during the three months ended September
30, 2007, which did not breach any covenants in the revolving credit agreement.
Mortgage Note
The Company has a mortgage note outstanding with a liability of $0.03 million and $0.1 million,
respectively, as of September 30, 2007 and December 31, 2006. This mortgage matures in 2008.
Senior Unsecured Fixed Rate Notes
On February 28, 2007, the Company completed the offering of $275.0 million senior unsecured fixed
rate notes.
The notes bear a fixed interest rate that is set at 7.5% and are due in 2014. Interest on the notes
is payable semi-annually in arrears on March 1 and September 1, commencing on September 1, 2007.
The terms of the notes contain restrictive covenants that limit the Companys ability to, among
other things, incur additional debt, issue disqualified
12
or preferred stock, make certain restricted payments and enter into certain significant transactions with shareholders and affiliates. These
covenants become more restrictive if the Companys fixed charge coverage ratio, as defined, is less
than 2.0 to 1.0. The Company was in compliance with all of its covenants under the notes as of
September 30, 2007.
Prior to March 1, 2011, the notes may be redeemed in whole or in part at a redemption price equal
to 100% of the applicable principal amount, plus an applicable premium based upon a present value
calculation using an applicable treasury rate plus 0.50%, plus accrued and unpaid interest.
Commencing on March 1, 2011, the redemption price is set at 103.75% of the principal amount of the
Notes plus accrued and unpaid interest, and declines annually until it is reduced to 100% of the
principal amount of the Notes plus accrued and unpaid interest from and after March 1, 2013. In
addition, ARI may redeem up to 35% of the Notes, beginning on March 1, 2010, at an initial
redemption price of 107.50% of their principal amount, plus accrued and unpaid interest with money
that the Company raises from one or more qualified equity offerings.
In March 2007, the Company filed a registration statement to effect an exchange offer relating to
the notes, which became effective later that month. The terms of the exchange notes issued in the
exchange offer are substantially identical to the terms of the outstanding notes, except that the
exchange notes are freely tradable. In connection with the exchange offer, 100% of the original
notes were exchanged for freely tradable notes.
The fair value of theses notes was approximately $273.6 million at September 30, 2007.
Note 11 Income Taxes
The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of this adoption, the
Company recognized an increase to its unrecognized tax positions of $0.1 million, which was
recorded as a cumulative effect adjustment to retained earnings. As a result of implementing FIN
48, the Company had $2.2 million of unrecognized tax benefits, of which $0.5 million, if
recognized, would affect the Companys effective tax rate. There were no material changes in the
Companys policy of classifying interest and penalties since the policy was disclosed in the
Companys 10-Q for the period ended March 31, 2007. As of the adoption date, the Company has $0.2
million of accrued interest expense, net of taxes related to unrecognized tax benefits.
The Internal Revenue Service (IRS) completed an examination of the Companys 2004 and 2005
federal income tax returns during the third quarter of 2007. The Company is still awaiting its
final closing agreement.
No statutes have been extended on any of the Companys federal income tax filings. The statute of
limitations on the Companys 2003 federal income tax return expired on September 15, 2007. The
statute of limitations on the Companys 2004, 2005 and 2006 federal income tax returns will expire
on September 15, 2008, 2009 and 2010, respectively.
The Companys state income tax returns for the 2002 through 2006 tax years remain subject to
examination by various state authorities with the latest closing period on November 15, 2011. The
Company is currently not under examination by any state authority for income tax purposes and no
statutes of limitations for state income tax filings have been extended.
The Companys foreign subsidiarys income tax returns for the 2003 through 2006 tax years remain
subject to examination by the Canadian tax authority. The foreign subsidiary is currently not under
examination and no statutes of limitations have been extended.
Note 12 Employee Benefit Plans
The Company is the sponsor of two defined benefit plans that cover certain employees at designated
repair facilities. One defined benefit plan, which covers certain salaried and hourly employees,
is frozen and no additional benefits are accruing thereunder. The second defined benefit plan that
covers only certain of the Companys union employees is active and benefits continue to accrue
thereunder. The assets of all funded plans are held by independent trustees and consist primarily
of equity and fixed income securities. The Company is also the sponsor of an unfunded unqualified
supplemental executive retirement plan (SERP) in which several of its employees are
13
participants. The SERP is frozen and no additional benefits are accruing thereunder. The Company uses a
measurement date of October 1 for all pension plans.
The Company also provides postretirement healthcare and life insurance benefits for certain of its
salaried and hourly retired employees. The measurement date for the postretirement plan is October
1. Employees may become eligible for healthcare benefits if they retire after attaining specified
age and service requirements. These benefits are subject to deductibles, co-payment provisions and
other limitations.
At December 31, 2006, the Company adopted FAS 158, which required the recognition of the overfunded
or underfunded status of its defined benefit and retiree medical plans as an asset or liability,
with changes in the funded status recognized through comprehensive income in the year they occur.
The Company recognized the liability for the funded status in its balance sheet as shown in its
statement of financial position and related financial statement footnotes at December 31, 2006. At
the time of the adoption of FAS 158, the Company recorded the adjustment through other
comprehensive income instead of as an adjustment to the ending balance of accumulated other
comprehensive income. This will be corrected in the Companys 10-K for the year ended December 31,
2007.
The Company recorded total expenses relating to these plans of $0.2 million and $0.2 million,
respectively, in the three months ended September 30, 2007 and 2006. The Company recorded total
expenses relating to these plans of $0.7 million and $0.5 million in the nine months ended
September 30, 2007 and 2006.
The components of net periodic benefit cost for the three and nine months ended September 30, 2007
and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Pension Benefits
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Service cost
|
|
$
|
60
|
|
|
$
|
51
|
|
|
$
|
181
|
|
|
$
|
155
|
|
Interest cost
|
|
|
241
|
|
|
|
226
|
|
|
|
722
|
|
|
|
679
|
|
Expected return on plan assets
|
|
|
(240
|
)
|
|
|
(209
|
)
|
|
|
(720
|
)
|
|
|
(628
|
)
|
Amortization of unrecognized net gain
|
|
|
52
|
|
|
|
|
|
|
|
155
|
|
|
|
|
|
Prior service cost recognized
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Recognized gains
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost recognized
|
|
$
|
112
|
|
|
$
|
116
|
|
|
$
|
337
|
|
|
$
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
Postretirement
|
|
|
|
Benefits
|
|
|
Benefits
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Service cost
|
|
$
|
32
|
|
|
$
|
3
|
|
|
$
|
97
|
|
|
$
|
8
|
|
Interest cost
|
|
|
75
|
|
|
|
52
|
|
|
|
224
|
|
|
|
156
|
|
Amortization of prior service cost
|
|
|
5
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
Amortization of loss
|
|
|
13
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost recognized
|
|
$
|
125
|
|
|
$
|
55
|
|
|
$
|
373
|
|
|
$
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company also maintains a qualified defined contribution plan, which provides benefits to its
employees based on employee contributions, years of service, and employee earnings with
discretionary contributions allowed. Expenses related to these plans were $0.2 million for both the
three months ended September 30, 2007 and 2006,
14
respectively. Expenses related to these plans were $0.7 million and $0.6 million for the nine months ended September 30, 2007 and 2006, respectively.
Note 13 Commitments and Contingencies
In connection with the Companys acquisition in January 2005 of Castings LLC from ACF Industries
Holding Corp., a company beneficially owned and controlled by
Mr. Carl Icahn, the Company agreed to assume
certain, and indemnify all liabilities related to and arising from ACF Industries Holding Corp.s
investment in Castings LLC, including the guarantee of Castings LLCs obligations to Ohio Castings.
One guarantee represented the guarantee of bonds in the amount of $10.0 million issued by the State
of Ohio to one of Ohio Castings subsidiaries, of which $5.0 million was outstanding as of
September 30, 2007. Another guarantee was of a $2.0 million state loan that provides for purchases
of capital equipment, of which $1.3 million was outstanding as of September 30, 2007. The two other
partners of Ohio Castings have made similar guarantees of these obligations.
The Company is subject to comprehensive federal, state, local and international environmental laws
and regulations relating to the release or discharge of materials into the environment, the
management, use, processing, handling, storage, transport or disposal of hazardous materials and
wastes, or otherwise relating to the protection of human health and the environment. These laws and
regulations not only expose ARI to liability for the environmental condition of its current or
formerly owned or operated facilities, and its own negligent acts, but also may expose ARI to
liability for the conduct of others or for ARIs actions that were in compliance with all
applicable laws at the time these actions were taken. In addition, these laws may require
significant expenditures to achieve compliance, and are frequently modified or revised to impose
new obligations. Civil and criminal fines and penalties and other sanctions may be imposed for
non-compliance with these environmental laws and regulations. ARIs operations that involve
hazardous materials also raise potential risks of liability under common law. ARI is involved in
investigation and remediation activities at properties that it now owns or leases to address
historical contamination and potential contamination by third parties. The Company is also involved
with state agencies in the cleanup of two sites under these laws. These investigations are in
process but it is too early to be able to make a reasonable estimate, with any certainty, of the
timing and extent of remedial actions that may be required, and the costs that would be involved in
such remediation. Substantially all of the issues identified relate to the use of the properties
prior to their transfer to ARI in 1994 by ACF Industries LLC (ACF), an affiliate of Carl C.
Icahn, and for which ACF has retained liability for environmental contamination that may have
existed at the time of transfer to ARI. ACF has also agreed to indemnify ARI for any cost that
might be incurred with those existing issues. However, if ACF fails to honor its obligations to
ARI, ARI would be responsible for the cost of such remediation. The Company believes that its
operations and facilities are in substantial compliance with applicable laws and regulations and
that any noncompliance is not likely to have a material adverse effect on its operations or
financial condition.
When it is possible to make a reasonable estimate of the liability with respect to such a matter, a
provision will be made as appropriate. Actual cost to be incurred in future periods may vary from
these estimates. Based on facts presently known, ARI does not believe that the outcome of these
proceedings will have a material adverse effect on its future liquidity, results of operations or
financial position.
ARI is a party to collective bargaining agreements with labor unions at its Longview, Texas repair
facility, its North Kansas City, Missouri repair facility and at its Longview, Texas steel foundry
and components manufacturing facility. These agreements expire in January 2010, September 2010, and
April 2008, respectively. ARI is also party to a collective bargaining agreement at its Milton,
Pennsylvania repair facility, which expired on June 19, 2005. The contract provisions under the
agreement provide that the contract would remain in effect under the old terms until terminated by
either party with 60 days notice. At the present time, there are no workers at Milton, as the site
is idled.
The Company has been named as the defendant in a lawsuit in which the plaintiff, OCI Chemical
Company, claims that the Company is responsible for the damage caused by allegedly defective
railcars that were manufactured by the Company. The plaintiffs allege that failures in certain
components caused the contents transported by these railcars to spill out of the railcars causing
property damage, clean-up costs, monitoring costs, testing costs and other costs and damages. The
Company believes that it is not responsible for the spills and has meritorious defenses against
liability.
15
Certain claims, suits and complaints arising in the ordinary course of business have been filed or
are pending against ARI. In the opinion of management, all such claims, suits, and complaints
arising in the ordinary course of business are without merit or would not have a significant effect
on the future liquidity, results of operations or financial position of ARI if disposed of
unfavorably.
The Company entered into two vendor supply contracts with minimum volume commitments in October
2005 with suppliers of materials used at its railcar production facilities. The agreements have terms of two
and three years respectively with a minimum purchase volume requirement over the life of the
contract. The Company has agreed to purchase a combined total of $64.6 million over the life of
these two contracts. In 2007, 2008 and 2009, ARI expects to purchase $22.0 million, $25.2 million
and $1.9 million, respectively, under these agreements.
ARI entered into supply agreements on January 28, 2005 and on June 8, 2005 with a supplier for two
types of steel plate. The agreement is for five years and is cancelable by either party, with
proper notice after two years. The agreement commits ARI to buy 75% of its production needs from
this supplier at prices that fluctuate with market.
In January 2006, the Company entered into an agreement with a third party vendor for a specified
number of wheels and related parts, including axles and roller bearings. The Company was required
to prepay for a portion of the requirements under this agreement. The Company expects to purchase
$10.2 million and $1.5 million from this vendor in 2007 and 2008, respectively, under this
agreement.
Note 14 Initial Public Offering
On January 24, 2006, the Company completed the sale of 9,775,000 shares of common stock to the
public pursuant to an effective registration statement at a price of $21.00 per share. The
offering resulted in gross proceeds to the Company of $205.3 million. Expenses related to the
offering were $13.3 million for underwriting discounts and commissions. The Company received net
proceeds of $192.0 million in the offering.
The net proceeds from the offering were applied as follows (in millions):
|
|
|
|
|
Redemption of all outstanding shares of preferred stock
|
|
$
|
94.0
|
|
Repayment of notes due to affiliates
|
|
|
20.5
|
|
Repayment of all industrial revenue bonds
|
|
|
8.6
|
|
Repayment of amounts outstanding under revolving credit facility
|
|
|
32.3
|
|
Acquisition of Custom Steel
|
|
|
17.2
|
|
Payment of payables in connection with acquisition
|
|
|
5.3
|
|
Investment in plant, property and equipment
|
|
|
12.7
|
|
Offering costs paid during the first quarter
|
|
|
1.4
|
|
|
|
|
|
Total uses
|
|
$
|
192.0
|
|
|
|
|
|
Note 15 Comprehensive Income
The components of comprehensive income, net of related tax, are as follows:
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
|
(in thousands)
|
Net earnings
|
|
$
|
4,860
|
|
|
$
|
10,994
|
|
|
$
|
29,399
|
|
|
$
|
29,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation
adjustment
|
|
|
84
|
|
|
|
14
|
|
|
|
190
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
4,944
|
|
|
$
|
11,008
|
|
|
$
|
29,589
|
|
|
$
|
29,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16 Earnings per Share
The shares used in the computation of the Companys basic and diluted earnings per common share are
reconciled as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2007
|
|
2006
|
Weighted average basic common shares outstanding
|
|
|
21,302,296
|
|
|
|
21,207,773
|
|
Dilutive effect of employee stock options
|
|
|
89,820
|
|
|
|
52,814
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
21,392,116
|
|
|
|
21,260,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2007
|
|
2006
|
Weighted average basic common shares outstanding
|
|
|
21,264,574
|
|
|
|
20,484,225
|
|
Dilutive effect of employee stock options
|
|
|
103,532
|
|
|
|
59,996
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
21,368,106
|
|
|
|
20,544,221
|
|
|
|
|
|
|
|
|
|
|
(1) Stock options to purchase 75,000 shares of common stock granted during the second quarter of
2006 were not included in the calculation for diluted earnings per share for the nine months ended
September 30, 2007 and 2006 as well as the three months ended September 30, 2007 and 2006. These
options would have resulted in an antidilutive effect to the earnings per share calculation.
Note 17 Stock Based Compensation
The requirements of SFAS No. 123(R) and all related regulations became effective for the Company on
January 19, 2006 in connection with the initial public offering and the 2005 equity incentive plan,
as amended (the 2005 Plan).
The 2005 Plan permits the Company to issue stock and grant stock options, restricted stock, stock
units and other equity interests to purchase or acquire up to 1.0 million shares of the Companys
common stock. Awards covering no more than 300,000 shares may be granted to any person during any
fiscal year. Options are subject to certain vesting provisions as designated by the board of
directors and may have an expiration period that ranges from 5 to 10 years. Options granted under
the 2005 Plan must have an exercise price at or above the fair market value on the date of grant.
If any award expires, or is terminated, surrendered or forfeited, then shares of common stock
covered by the award will again be available for grant under the 2005 Plan. The 2005 Plan is
administered by the Companys board of directors or a committee of the board. Options granted
pursuant to the requirements of SFAS No. 123(R) are expensed on a graded vesting method over the
vesting period of the option. The Company accounts for equity instrument grants under the
recognition and measurement principles of SFAS No. 123(R), and its related provisions.
The following table presents the amounts for stock based compensation expense incurred by ARI for
each of the
17
three and nine months ended September 30, 2007 and 2006 and the corresponding line
items on the statement of operations that they are classified within:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
($ in thousands)
|
|
($ in thousands)
|
Stock based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold: manufacturing
operations
|
|
$
|
83
|
|
|
$
|
47
|
|
|
$
|
188
|
|
|
$
|
142
|
|
Cost of goods sold: railcar services
|
|
|
11
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
Selling, administrative and other
|
|
|
586
|
|
|
|
1,479
|
|
|
|
1,783
|
|
|
|
6,448
|
|
|
|
|
|
|
Total stock based compensation expense
|
|
$
|
680
|
|
|
$
|
1,526
|
|
|
$
|
1,992
|
|
|
$
|
6,590
|
|
|
|
|
|
|
Net income for the three months ended September 30, 2007 and 2006 includes $0.2 million and $0.5
million, respectively of income tax benefits related to the Companys stock-based compensation
arrangements. Net income for the nine months ended September 30, 2007 and 2006 includes $0.7
million and $2.4 million, respectively of income tax benefits related to the Companys stock-based
compensation arrangements.
Stock Options
During 2006, the Company granted options to purchase 559,876 shares of common stock under the 2005
Plan. No stock options were granted in 2007.
The Company recognized $0.3 million and $0.6 million, respectively, of compensation expense during
the three months ended September 30, 2007 and 2006 related to stock option grants made under the
2005 plan. The Company recognized income tax benefits related to stock options of $0.2 million and
$0.3 million, respectively, during the three months ended September 30, 2007 and 2006.
The Company recognized $1.0 million and $1.8 million, respectively, of compensation expense during
the nine months ended September 30, 2007 and 2006 related to stock option grants made under the
2005 plan. The Company recognized income tax benefits related to stock options of $0.4 million and
$0.7 million, respectively, during the nine months ended September 30, 2007 and 2006.
18
The following is a summary of option activity under the 2005 plan for January 1, 2007 through
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
Grant-date
|
|
Aggregate
|
|
|
Shares
|
|
Average
|
|
Remaining
|
|
Fair Value
|
|
Intrinsic
|
|
|
Covered by
|
|
Exercise
|
|
Contractual
|
|
of Options
|
|
Value
|
|
|
Options
|
|
Price
|
|
Life
|
|
Granted
|
|
($000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the
beginning of the
period, January 1,
2007
|
|
|
559,876
|
|
|
$
|
22.97
|
|
|
48 months
|
|
$
|
8.05
|
|
|
$
|
6,199
|
|
Exercised
|
|
|
(94,523
|
)
|
|
$
|
21.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the
end of the period,
September 30, 2007
|
|
|
465,353
|
|
|
$
|
23.37
|
|
|
40 months
|
|
$
|
8.21
|
|
|
$
|
398
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the
end of the period,
September 30, 2007
|
|
|
67,100
|
|
|
$
|
21.00
|
|
|
39 months
|
|
$
|
7.28
|
|
|
$
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Options to purchase 75,000 shares of the Companys common stock have exercise prices that
are above market price, based on the closing market price of $22.02 for a share of the Companys
common stock on the last business day of the quarter ended
September 30, 2007. Options to purchase 94,523 shares of the Companys common stock were exercised during the nine
months ended September 30, 2007. The total intrinsic value of options exercised during the nine
months ended September 30, 2007 was $1.3 million. The Company realized a tax benefit of $0.5
million related to these option exercises.
|
No options were exercised during 2006 as options first became exercisable in January 2007.
As of September 30, 2007, unrecognized compensation costs related to the unvested portion of stock
options were approximately $1.1 million and are expected to be recognized over a weighted average
period of approximately 20 months.
As of September 30, 2007, an aggregate of 440,124 shares were available for issuance in connection
with future grants under the Companys 2005 Plan.
Shares issued under the 2005 Plan may consist in whole or in part of authorized but unissued shares
or treasury shares. The 1,000,000 shares covered by the Plan were registered for issuance to the
public with the SEC on a Form S-8 on August 16, 2006.
Restricted Stock Award
During 2006, the Company issued 285,714 restricted shares of the Companys common stock to its
Chief Executive Officer. This restricted stock grant became fully vested in January 2007. All
shares under this grant are now transferable without contractual restrictions.
The Company recognized zero and $0.9 million, respectively, of compensation expense during the
three months ended September 30, 2007 and 2006, for this restricted stock grant. The Company
recognized zero and $0.4 million of income tax benefits in the three months ended September 30,
2007 and 2006, respectively, for this restricted stock grant.
The Company recognized $0.3 and $4.8 million, respectively, of compensation expense during the nine
months ended September 30, 2007 and 2006, for this restricted stock grant. The Company recognized $0.1 and $1.8 million of income tax benefits in the nine months ended September 30, 2007 and 2006,
respectively, for this restricted stock grant.
19
The following is a summary of the status and activity related to non-vested shares from January 1,
2007 through September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Non-vested
|
|
|
Average Grant
|
|
|
|
Stock Awards
|
|
|
Date Fair Value
|
|
|
|
|
|
Non-vested at January 1, 2007
|
|
|
171,428
|
|
|
$
|
21.00
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(171,428
|
)
|
|
|
21.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within the Form S-8 filed with the SEC on August 16, 2006, the Company registered for resale
114,286 shares of restricted stock that vested in January 2006.
Stock Appreciation Rights
On April 4, 2007, the Compensation Committee of the Board of Directors of the Company granted
awards of stock appreciation rights (SARs) to certain employees pursuant to the Companys 2005
Equity Incentive Plan, as amended. The Committee granted an aggregate of 277,100 SARs. The SARs
will be settled in cash and have an exercise price of $29.49, which was the closing price of the
Companys common stock on the date of grant. The SARs will vest in 25% increments on the first,
second, third and fourth anniversaries of the grant date. The SARs have a term of seven years.
The Company determined that the compensation expense for these SARs will total approximately $2.8
million over the four year vesting period using a Black-Scholes calculation based on the following
assumptions: stock volatility of 35%; an expected life ranging from 4 years to 5.5 years; interest
rate of 4.55%; and dividend yield of 1%. As there was not adequate history with the stock prices of
the Company at the time of the grant, the stock volatility rate was determined using volatility
rates for several other similar companies within the railcar industry. The expected life range of 4
years to 5.5 years represents the average of the vesting period and expiration period of each group
of SARs that vest equally over a four year period. The interest rate used was the five year
government T Bill rate on the date of grant. Dividend yield was determined from an average of
other companies in the industry, as the Company did not have an adequate history of dividend rates.
The Company recognized $0.4 million and $0.7 million, respectively, of compensation expense during
the three and nine months ended September 30, 2007 related to stock appreciation rights granted
under the 2005 plan. The Company recognized income tax benefits related to stock appreciation
rights of $0.2 million and $0.3 million, respectively, during the three and nine months ended
September 30, 2007.
The following is a summary of SARs activity under the 2005 plan for January 1, 2007 through
September 30, 2007:
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
Stock
|
|
|
|
|
|
Weighted Average
|
|
Grant-date Fair
|
|
Aggregate
|
|
|
Appreciation
|
|
Weighted Average
|
|
Remaining
|
|
Value of SARs
|
|
Intrinsic
|
|
|
Rights (SARs)
|
|
Exercise Price
|
|
Contractual Life
|
|
Granted
|
|
Value ($000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the
beginning of the
period, January 1,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
277,100
|
|
|
$
|
29.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(3,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the
end of the period,
September 30, 2007
|
|
|
273,800
|
|
|
$
|
29.49
|
|
|
78 months
|
|
$
|
10.05
|
|
|
$
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the
end of the period,
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Stock appreciation rights with an exercise price of $29.49 have no intrinsic value based on
the closing market price of $22.02 for a share of the Companys common stock on the last business
day of the quarter ended September 30, 2007.
|
As of September 30, 2007, unrecognized compensation costs related to the unvested portion of stock
appreciation rights were approximately $2.1 million and were expected to be recognized over a
period of 42 months.
Note 18 Common Stock, Mandatorily Redeemable Preferred Stock, and New Preferred Stock
On January 24, 2006, the Company completed the sale of 9,775,000 shares of common stock to the
public pursuant to an effective registration statement at a price of $21.00 per share. In
connection with the offering, the Company redeemed all mandatorily redeemable preferred stock and
new preferred stock, including accrued dividends of $11.9 million, for a total of $94.0 million.
During each quarter of 2006 and in the first, second and third quarters of 2007, the Board of
Directors of the Company declared and paid cash dividends of $0.03 per share of common stock of the
Company to shareholders of record as of a given date.
During the nine months ended September 30, 2007, the Company issued 94,523 shares of its common
stock as certain holders of stock options exercised options to purchase the Companys common stock.
Note 19 Related Party Transactions
The Company has the following agreements with ACF:
Manufacturing services agreement
Under the manufacturing services agreement, ACF agreed to manufacture and distribute, at the
Companys instruction, various railcar components using certain assets that the Company
acquired pursuant to the 1994 ACF asset transfer agreement. In consideration for these
services, the Company agreed to pay ACF based on agreed upon rates. In the three months ended September 30, 2007 and 2006, ARI purchased
inventory of $10.1 million and $19.0 million, respectively, of components from ACF. In the nine
months ended September 30, 2007 and 2006, ARI purchased inventory of $35.2 million and $58.5
million, respectively, of components from ACF. The agreement automatically renews unless
written notice is provided by the Company.
Supply Agreement
21
Under this agreement, the Company agreed to manufacture and sell to ACF specified components at
cost plus mark-up or on terms not less favorable than the terms on which the Company sold the
same products to third parties. Revenue recorded under this arrangement was $0.03 million and
$0.1 million, respectively, for the three months ended September 30, 2007 and 2006. Revenue
recorded under this arrangement was $0.03 million and $0.5 million, respectively, for the nine
months ended September 30, 2007 and 2006. Profit margins on sales to related parties
approximate the margins on sales to other large customers.
Additional Agreements with ACF
ARI entered into a note payable with ACF Holding, an affiliate, for $12.0 million effective
January 1, 2005, in connection with the purchase of Castings (Note 1). The note bears interest
at prime plus 0.5% and is due on demand. This note was paid off in full in connection with the
initial public offering in January 2006.
In April 2005, the Company entered into a consulting agreement with ACF in which both parties
agreed to provide labor, litigation, labor relations support and consultation, and labor
contract interpretation and negotiation services to one another. In addition, the Company has
agreed to provide ACF with engineering and consulting advice. Fees paid to one another are
based on agreed upon rates. No services were rendered and no amounts were paid during the three
and nine months ended September 30, 2007 and 2006.
During 2006, ARI entered into two inventory storage agreements with ACF to store designated
inventory that ARI had purchased under its manufacturing services agreement with ACF at ACFs
facility. Under this agreement, ACF holds the inventory at its facility in segregated locations
until such time that the inventory is shipped to ARI.
During 2006, ARI entered into an agreement that provided that ARI would procure, purchase and
own the raw material components for wheel sets. These wheel set components are those that are
being used in the assembly of wheel sets for ARI under the ARI/ACF manufacturing services
agreement. Under the manufacturing services agreement with ACF, which remains unchanged, ARI
will continue to pay ACF for its services, specifically labor and overhead, in assembling the
wheel sets.
On May 21, 2007, the Company entered into a manufacturing agreement with ACF, pursuant to
which, the Company agreed to purchase certain of its requirements for tank railcars from ACF.
Under the terms of the manufacturing agreement, ARI has agreed to purchase at least 1,400 tank
railcars from ACF with delivery expected to be completed by March 31, 2009. During the second
quarter of 2007, ARI received new customer orders for approximately 1,400 tank railcars to be
produced under the manufacturing agreement. The profit realized by ARI upon sale of the tank
railcars to ARI customers will first be paid to ACF to reimburse them for the start-up costs
involved in implementing the manufacturing arrangements evidenced by the agreement and
thereafter, ARI will pay ACF half the profits realized. The term of the agreement is for five
years. Either party may terminate the agreement before its fifth anniversary upon six months
prior written notice, with certain exceptions. The agreement may also be terminated immediately
upon the happening of certain extraordinary events. In the three and nine months ended
September 30, 2007, ARI incurred costs under this agreement of $0.2 million in connection with
railcars that were assembled and delivered by ACF during that period.
The Company has the following agreements with ARL:
ARL Railcar Servicing Agreement
Under this agreement, the Company agreed to provide ARL with railcar repair and maintenance
services, fleet management services and consulting services on safety and environmental matters
for railcars owned or managed by ARL and leased or held for lease by ARL. ARL agreed to compensate the Company based
on agreed upon rates. Revenue of $4.3 million and $4.6 million, respectively, for the three
months ended September 30, 2007 and 2006, was recorded under this arrangement. Revenue of $12.6
million and $15.1 million, respectively, for the nine months ended September 30, 2007 and 2006,
was recorded under this arrangement. These amounts are included under services revenue from
affiliates on the statement of operations. The agreement extends through June 30, 2008 and
automatically renews for one-year periods unless either party provides at least six months
prior notice of termination or if an agreement is reached to terminate the
22
contract.
Termination by the Company would result in a fee payable to ARL of $0.5 million. Profit margins
on sales to related parties approximate the margins on sales to other large customers.
The
Company has had a reduction in its scope of fleet management services revenue that it is providing
to ARL. Since ARL split from ARI in 2005, ARL has and continues to reduce these services. This
reduction has not affected the repair and maintenance services that ARI provides to ARL. The
Company does not anticipate this reduction to have a material impact on its railcar services
revenue.
ARL Services Agreement and ARI/ARL Separation Agreement
Under the Companys services agreement with ARL, ARL agreed to provide the Company certain
information technology services, rent and building services and limited administrative
services. The rent and building services includes the use of certain facilities owned by our
Chief Executive Officer, which is further described later in this footnote. Under this
agreement, the Company agreed to provide purchasing and engineering services to ARL.
Consideration exchanged between the companies is based on an agreed upon a fixed annual fee.
Total fees paid to ARL were $0.2 million and $0.5 million, respectively, for the three months
ended September 30, 2007 and 2006. Total fees paid to ARL were $0.5 million and $1.5 million,
respectively, for the nine months ended September 30, 2007 and 2006. The Company did not bill
ARL in either the three or nine months ended September 30, 2007 or 2006 as no services were
performed under this agreement for ARL. The fees paid to ARL are included in costs related to
affiliates on the statement of operations. Either party may terminate any of these services,
and the associated costs for these services, on at least six months prior notice at any time
prior to the termination of the agreement on December 31, 2007 or if an agreement is reached to
terminate the contract.
On March 30, 2007, ARI and ARL agreed, pursuant to a separation agreement, to terminate,
effective December 31, 2006, all services provided to ARL by the Company under the services
agreement. Additionally, the separation agreement provided that all services provided to the
Company by ARL under the services agreement would be terminated except for rent and building
services. Under the separation agreement, ARL agreed to waive the six month notice requirement
for termination required by the services agreement.
Trademark License Agreement
Under this agreement, which is effective as of June 30, 2005, ARI granted a nonexclusive,
perpetual, worldwide license to ARL to use ARIs common law trademarks American Railcar and
the diamond shape logo. ARL may only use the licensed trademarks in connection with the
railcar leasing business. ARI receives annual fees of $1,000 in exchange for this license.
ARL Sales Contracts
On March 31, 2006, the Company entered into an agreement with ARL for the Company to
manufacture and ARL to purchase 1,000 tank railcars in 2007. The Company has in the past
manufactured and sold railcars to ARL on a purchase order basis. The Company is using its
manufacturing capacity that became available beginning in January 2007 to produce these tank
railcars. The agreement also included options for ARL to purchase up to 300 covered hopper
railcars in 2007, should additional capacity become available and not be called for by other
rights of first refusal, and 1,000 tank railcars and 400 covered hopper railcars in 2008. The
options to purchase 1,000 tank railcars and 400 covered hopper railcars in 2008 were exercised
by ARL. ARL also exercised an option to purchase 70 covered hopper railcars in 2007. Similar to
other customers, the storm damage in April 2006 at Marmaduke and resulting temporary plant
shutdown has impacted and will continue to impact the timing of delivery of some railcars that
ARL has ordered. Revenue for these railcars sold to ARL is included under manufacturing revenue from affiliates on the accompanying condensed
consolidated statement of operations. Profit margins on sales to related parties approximate
the margins on sales to other large customers.
On September 25, 2006, the Company entered into an agreement with ARL for the Company to
manufacture and ARL to purchase 500 tank railcars in both 2008 and 2009.
23
Agreements with Other Affiliated Parties
On December 17, 2004, ARI borrowed $7.0 million under a note payable to Arnos Corp., an affiliate
of ARI. The note was interest bearing at prime plus 1.75% and was payable on demand. Interest
expense on the note was $0.1 million for the nine months ended September 30, 2006. This note was
paid off in full in connection with the initial public offering in January 2006.
In September 2003, Castings loaned Ohio Castings $3.0 million under a promissory note, which was
due in January 2004. The note was renegotiated in 2005 with a new principal amount of $2.2 million
and bears interest at 4.0%. Payments of principal and interest are due quarterly with the last
payment due in November 2008. This note receivable is included in Investment in joint venture on
the accompanying balance sheet. Total amounts due from Ohio Castings under this note were $1.3
million and $1.5 million, respectively, at September 30, 2007 and December 31, 2006. Ohio Castings
did not make its payments under this note from December 2006
through August 2007 until a payment
was made to ARI during September 2007. The payment made in September 2007 covered one principal
payment and all accrued interest to date on the note. Current expectations are that the note will
be amended to allow for interest only payments on a quarterly basis if full payments are not able
to be made by Ohio Castings.
During May 2007, Castings made an equity contribution to Ohio Castings amounting to $1.0 million.
During April 2006, the Companys Chairman and majority stockholder, Carl C. Icahn, contributed $0.3
million as a capital contribution to pay the weekly payroll and fringe benefits of the Marmaduke
manufacturing facility. This was done to help bridge the gap until the Company received funds from
its insurance policies to continue to pay full wages and benefits to all employees working for the
tank railcar operations at Marmaduke, Arkansas that were temporarily shutdown as a result of the
tornado that struck the facility as described in Note 21.
The Company leases certain facilities from an entity owned by its Chief Executive Officer. Expenses
paid to related parties for these facilities were $0.2 million and $0.2 million, respectively, for
the three months ended September 30, 2007 and 2006. Expenses paid to related parties for these
facilities were $0.7 million and $0.6 million, respectively, for the nine months ended September
30, 2007 and 2006.
During June 2007, ARI, through a wholly-owned subsidiary, entered into an agreement with another
partner to form a joint venture, Axis, LLC, to manufacture and sell railcar axles at a facility to
be constructed by the joint venture. Operations are not expected to begin until late in 2008.
Accordingly, no significant financial activity has occurred. See Note 8 for further information.
Financial
Information for Transactions with Affiliates
As of September 30, 2007, amounts due from affiliates were $13.6 million in accounts receivable
from ACF, Ohio Castings and ARL. As of December 31, 2006, amounts due from affiliates represented
$9.6 million in accounts receivable from ACF, Ohio Castings and ARL.
As of September 30, 2007 and December 31, 2006, amounts due to affiliates included $2.7 million and
$1.7 million, respectively, in accounts payable to ACF and Ohio Castings.
Cost of railcar manufacturing for the three months ended September 30, 2007 and 2006 included $9.7
million and $9.0 million, respectively, in railcar products produced by Ohio Castings, which is
partially owned by Castings, as described in Note 1.
Cost of railcar manufacturing for the nine months ended September 30, 2007 and 2006 included $39.5
million and $30.9 million, respectively, in railcar products produced by Ohio Castings. Expenses of
zero and $0.1 million paid to Castings under a supply agreement are included in the cost of railcar
manufacturing for the nine months ended September 30, 2007 and 2006, respectively.
Inventory at September 30, 2007 and December 31, 2006 includes $3.2 million and $4.1 million,
respectively, of purchases from Ohio Castings. Approximately $0.6 million and $0.1 million of
costs, respectively, were eliminated
24
at September 30, 2007 and December 31, 2006 as it represented
profit from a related party for inventory still on hand.
Note 20 Operating Segment and Sales/Credit Concentrations
ARI operates in two reportable segments: manufacturing operations and railcar services. Performance
is evaluated based on revenue and operating profit. Intersegment sales and transfers are accounted
for as if sales or transfers were to third parties. The information in the following tables is
derived from the segments internal financial reports used for corporate management purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
Manufacturing
|
|
|
|
|
|
|
Corporate & all
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Operations
|
|
|
Railcar Services
|
|
|
other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Revenues from external
customers
|
|
$
|
127,376
|
|
|
$
|
12,515
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
139,891
|
|
Intersegment revenues
|
|
|
197
|
|
|
|
41
|
|
|
|
|
|
|
|
(238
|
)
|
|
|
|
|
Cost of goods sold external
customers
|
|
|
(113,251
|
)
|
|
|
(10,668
|
)
|
|
|
|
|
|
|
|
|
|
|
(123,919
|
)
|
Cost of intersegment sales
|
|
|
(92
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
14,230
|
|
|
|
1,852
|
|
|
|
|
|
|
|
(110
|
)
|
|
|
15,972
|
|
Income related to insurance
recoveries, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on asset conversion, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, administrative and
other
|
|
|
(1,844
|
)
|
|
|
(530
|
)
|
|
|
(4,461
|
)
|
|
|
|
|
|
|
(6,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations
|
|
$
|
12,386
|
|
|
$
|
1,322
|
|
|
$
|
(4,461
|
)
|
|
$
|
(110
|
)
|
|
$
|
9,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
Manufacturing
|
|
|
|
|
|
|
Corporate & all
|
|
|
|
|
|
|
|
September 30, 2006
|
|
Operations
|
|
|
Railcar Services
|
|
|
other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Revenues from external
customers
|
|
$
|
138,479
|
|
|
$
|
11,975
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
150,454
|
|
Intersegment revenues
|
|
|
179
|
|
|
|
1,106
|
|
|
|
|
|
|
|
(1,285
|
)
|
|
|
|
|
Cost of goods sold external
customers
|
|
|
(125,809
|
)
|
|
|
(8,920
|
)
|
|
|
|
|
|
|
|
|
|
|
(134,729
|
)
|
Cost of intersegment sales
|
|
|
(156
|
)
|
|
|
(857
|
)
|
|
|
|
|
|
|
1,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,693
|
|
|
|
3,304
|
|
|
|
|
|
|
|
(272
|
)
|
|
|
15,725
|
|
Income related to insurance
recoveries, net
|
|
|
4,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,963
|
|
Gain on asset conversion, net
|
|
|
4,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,323
|
|
Selling, administrative and
other
|
|
|
(1,683
|
)
|
|
|
(445
|
)
|
|
|
(4,880
|
)
|
|
|
|
|
|
|
(7,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations
|
|
$
|
20,296
|
|
|
$
|
2,859
|
|
|
$
|
(4,880
|
)
|
|
$
|
(272
|
)
|
|
$
|
18,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
Manufacturing
|
|
|
|
|
|
|
Corporate & all
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Operations
|
|
|
Railcar Services
|
|
|
other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Revenues from external
customers
|
|
$
|
498,217
|
|
|
$
|
38,014
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
536,231
|
|
Intersegment revenues
|
|
|
824
|
|
|
|
225
|
|
|
|
|
|
|
|
(1,049
|
)
|
|
|
|
|
Cost of goods sold external
customers
|
|
|
(435,389
|
)
|
|
|
(31,198
|
)
|
|
|
|
|
|
|
|
|
|
|
(466,587
|
)
|
Cost of intersegment sales
|
|
|
(692
|
)
|
|
|
(211
|
)
|
|
|
|
|
|
|
903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
62,960
|
|
|
|
6,830
|
|
|
|
|
|
|
|
(146
|
)
|
|
|
69,644
|
|
Income related to insurance
recoveries, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on asset conversion, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, administrative and
other
|
|
|
(5,653
|
)
|
|
|
(1,621
|
)
|
|
|
(13,610
|
)
|
|
|
|
|
|
|
(20,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations
|
|
$
|
57,307
|
|
|
$
|
5,209
|
|
|
$
|
(13,610
|
)
|
|
$
|
(146
|
)
|
|
$
|
48,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
Manufacturing
|
|
|
|
|
|
|
Corporate & all
|
|
|
|
|
|
|
|
September 30, 2006
|
|
Operations
|
|
|
Railcar Services
|
|
|
other
|
|
|
Eliminations
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
443,785
|
|
|
$
|
36,948
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
480,733
|
|
Intersegment revenues
|
|
|
1,661
|
|
|
|
1,321
|
|
|
|
|
|
|
|
(2,982
|
)
|
|
|
|
|
Cost of goods sold external
customers
|
|
|
(397,683
|
)
|
|
|
(29,080
|
)
|
|
|
|
|
|
|
|
|
|
|
(426,763
|
)
|
Cost of intersegment sales
|
|
|
(1,494
|
)
|
|
|
(1,026
|
)
|
|
|
|
|
|
|
2,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
46,269
|
|
|
|
8,163
|
|
|
|
|
|
|
|
(462
|
)
|
|
|
53,970
|
|
Income related to insurance
recoveries, net
|
|
|
9,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,946
|
|
Gain on asset conversion, net
|
|
|
4,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,323
|
|
Selling, administrative and other
|
|
|
(4,454
|
)
|
|
|
(1,443
|
)
|
|
|
(15,833
|
)
|
|
|
|
|
|
|
(21,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations
|
|
$
|
56,084
|
|
|
$
|
6,720
|
|
|
$
|
(15,833
|
)
|
|
$
|
(462
|
)
|
|
$
|
46,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
Railcar
|
|
Corporate
|
|
|
|
|
As of
|
|
Operations
|
|
Services
|
|
& all other
|
|
Eliminations
|
|
Totals
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
301,885
|
|
|
$
|
33,471
|
|
|
$
|
298,674
|
|
|
$
|
|
|
|
$
|
634,030
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
255,169
|
|
|
$
|
33,764
|
|
|
$
|
49,993
|
|
|
$
|
|
|
|
$
|
338,926
|
|
Manufacturing Operations
Manufacturing revenues from affiliates were 34.1% and 2.8% of total consolidated revenues for the
three months ended September 30, 2007 and 2006, respectively. Manufacturing revenues from
affiliates were 17.4% and 5.1% of total consolidated revenues for the nine months ended September
30, 2007 and 2006, respectively.
Manufacturing revenues from one significant customer totaled 34.1% and 53.9% of total consolidated
revenues for the three months ended September 30, 2007 and 2006, respectively. Manufacturing
revenues from one significant customer totaled 54.2% and 38.1% of total consolidated revenues for
the nine months ended September 30, 2007 and 2006, respectively.
26
Manufacturing revenues from two significant customers were 66.6% and 72.4% of total consolidated
revenues for the three months ended September 30, 2007 and 2006, respectively. Manufacturing
revenues from two significant customers were 71.7% and 49.0% of total consolidated revenues for the
nine months ended September 30, 2007 and 2006, respectively.
Manufacturing receivables from one significant customer were 29.9% and 10.0% of total consolidated
accounts receivable (including accounts receivable from affiliate) at September 30, 2007 and
December 31, 2006, respectively. Manufacturing receivables from two significant customers were
39.5% and 18.7% of total consolidated accounts receivable (including accounts receivable from
affiliate) at September 30, 2007 and December 31, 2006, respectively.
Railcar services
Railcar Services revenues from affiliates were 3.1% and 3.0% of total consolidated revenues for the
three months ended September 30, 2007 and 2006, respectively. Railcar Services revenues from
affiliates were 2.4% and 3.1% of total consolidated revenues for the nine months ended September
30, 2007 and 2006, respectively. No single services customer accounted for more than 10% of total
consolidated revenue for the three and nine months ended September 30, 2007 and 2006. No single
services customer accounted for more than 10% of total consolidated accounts receivable as of
September 30, 2007 and December 31, 2006.
Note 21 Marmaduke Storm Damage Insurance Claim (Income related to insurance recoveries)
In April 2006, a tornado struck the Marmaduke, Arkansas area. This tornado resulted in damage to
the companys tank railcar manufacturing facility in Marmaduke, Arkansas. While the majority of the
Marmaduke tank railcar facility suffered only minor damage, the portion of the factory that
processed inbound material, equipment associated with material handling, plate steel blasting and
sheet rolling as well as some inventory was destroyed by the storm. The tornado also destroyed an
empty building that was nearing completion to receive inbound material and store inventory. The
manufacturing facility was closed from April 2, 2006 through August 6, 2006 due to the storm. The
Company recommenced operations at the manufacturing facility on August 7, 2006 when the repairs
related to the tornado damage were substantially complete.
The Company was covered with property insurance covering wind and rain damage to its property,
incremental costs and operating expenses it incurs due to damage caused by the tornado. In
addition, the Company was covered with business insurance for business interruption as a direct
result of the insured damage.
The final property damage claim amounted to $11.2 million (prior to the deductible) covering clean
up costs, repair costs and asset replacement costs. During 2006, the Company received advances
totaling $10.0 million from the insurance carrier related to the property damage. This $10.0
million was designated as cash received for investing activities as the advance was used for
replacement of property, plant and equipment.
The Company had assets with a net book value of $4.3 million damaged or destroyed by the tornado.
Other costs incurred related to the tornado damage included clean up for the temporary shutdown of
the facility. The write off of assets and associated cleanup costs have been netted against the
insurance settlement of the property damage claim to arrive at the gain on asset conversion, net.
The final business interruption claim amounted to $16.0 million (prior to the deductible) covering
continuing expenses, employee wages and estimated lost profits for April through August 2006. ARI
received advances totaling $10.5 million, during the second and third quarters related to the
business interruption claim. This cash was classified as cash received for operating activities as
the advances were for ongoing normal business operations and lost profits.
The Company recorded income related to insurance recoveries, net of $9.9 million in the nine months
ended September 30, 2006 related to the business interruption insurance recovery. The Company also
recorded a gain on asset conversion, net of $4.3 million in the nine months ended September 30,
2006 related to the property damage insurance recoveries.
27
Note 22 Supplemental Cash Flow Information
ARI received interest income of $10.1 million and $1.2 million for the nine months ended September
30, 2007 and 2006, respectively.
ARI paid interest expense of $10.6 million and $3.7 million for the nine months ended September 30,
2007 and 2006, respectively.
ARI paid taxes of $16.5 million and $18.4 million for the nine months ended September 30, 2007 and
2006, respectively.
On January 1, 2007, ARI recorded a $1.6 million liability that was reclassed from a deferred tax
liability account related to our unrecognized tax liability in accordance with FIN 48. See Note 11
for further discussion.
In September 2006, the Board of Directors of the Company declared a cash dividend of $0.03 per
share of common stock of the Company to shareholders of record as of October 6, 2006 that was paid
on October 20, 2006.
In August 2007, the Board of Directors of the Company declared a cash dividend of $0.03 per share
of common stock of the Company to shareholders of record as of October 5, 2007 that was paid on
October 19, 2007.
Note 23 Subsequent Events
In November 2007, the Board of Directors of the Company declared a cash dividend of $0.03 per share
of common stock of the Company to shareholders of record as of January 9, 2008 that will be paid on
January 18, 2008.
28
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. These statements involve known and unknown risks, uncertainties and other factors that may
cause our actual results, financial position or performance to be materially different from any
future results, financial position or performance expressed or implied by such forward-looking
statements. We have used the words may, will, expect, anticipate, believe, forecast,
estimate, plan, projected, intend and similar expressions in this report to identify
forward-looking statements. We have based these forward-looking statements on our current views
with respect to future events and financial performance. Our actual results or those of our
industry could differ materially from those projected in the forward-looking statements. Our
forward-looking statements are subject to risks and uncertainties, including:
|
|
|
the cyclical nature of our business and adverse economic and market conditions;
|
|
|
|
|
our reliance upon a small number of customers that represent a large percentage of
our revenues;
|
|
|
|
|
risks associated with the conversion of our railcar backlog into revenues, including
pricing and cancellation provisions in some contracts we have with our customers;
|
|
|
|
|
the highly competitive nature of our industry;
|
|
|
|
|
fluctuating costs of raw materials, including steel and railcar components, and
delays in the delivery of such raw materials and components;
|
|
|
|
|
fluctuations in the supply of components and raw materials we use in railcar
manufacturing and our ability to maintain relationships with our suppliers of railcar
components and raw materials;
|
|
|
|
|
the risk of damage to our primary railcar manufacturing facilities or equipment in
Paragould or Marmaduke, Arkansas;
|
|
|
|
|
the variable purchase patterns of our railcar customers and the timing of
completion, delivery and acceptance of customer orders;
|
|
|
|
|
risks associated with our capital expenditure projects, and those of joint ventures
in which we are involved, including, without limitation:
|
|
|
|
construction delays;
|
|
|
|
|
unexpected costs;
|
|
|
|
|
our planned dependence on our planned new flexible railcar
manufacturing plant to produce railcars for which we have already accepted orders;
and
|
|
|
|
|
other risks typically associated with the construction of new
manufacturing facilities;
|
|
|
|
our dependence on our key personnel and the risk that we may lose skilled, trained,
qualified production and management employees in relation to production slowdowns or
any other significant factor that could cause us to lose these employees;
|
|
|
|
|
risks associated with our recent and anticipated growth including, without
limitation:
|
|
|
|
potential for labor shortages
|
|
|
|
|
the need to implement improvement to our infrastructure to accommodate that growth; and
|
|
|
|
|
risks and costs associated with those improvements;
|
29
|
|
|
the difficulties of integrating acquired businesses with our own;
|
|
|
|
|
the risk of lack of acceptance by our customers of our new railcar offerings;
|
|
|
|
|
the cost of complying with environmental and health and safety laws and regulations;
|
|
|
|
|
the costs associated with being a public company;
|
|
|
|
|
our relationship with Carl C. Icahn (our principal beneficial stockholder and the
chairman of our board of directors) and his affiliates as a purchaser of our products,
supplier of components and services to us and as a provider of significant managerial
support;
|
|
|
|
|
potential failure by ACF Industries LLC (ACF), an affiliate of Carl C. Icahn, to
honor its indemnification obligations to us;
|
|
|
|
|
potential risk of increased unionization of our workforce;
|
|
|
|
|
our ability to manage our pension costs;
|
|
|
|
|
potential significant warranty claims;
|
|
|
|
|
covenants in our revolving credit facility, as amended, our unsecured senior notes
and other agreements as they presently exist, governing our indebtedness that limit our
managements discretion in the operation of our businesses;
|
|
|
|
|
substantial indebtedness resulting from the offering of our outstanding notes could
adversely affect our operations and financial results and prevent us from fulfilling
our obligations;
|
|
|
|
|
our ability to incur substantially more debt could further exacerbate the risks
associated with our substantial indebtedness; and
|
|
|
|
|
we may not be able to generate sufficient cash flow to service all of our
obligations, including our obligations relating to the unsecured senior notes.
|
Our actual results could be different from the results described in or anticipated by our
forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections
and may be better or worse than anticipated. Given these uncertainties, you should not rely on
forward-looking statements. Forward-looking statements represent our estimates and assumptions only
as of the date that they were made. We expressly disclaim any duty to provide updates to
forward-looking statements, and the estimates and assumptions associated with them, after the date
of this report, in order to reflect changes in circumstances or expectations or the occurrence of
unanticipated events except to the extent required by applicable securities laws. All of the
forward-looking statements are qualified in their entirety by reference to the factors discussed
above under Risk factors in our Annual Report on Form 10-K filed on February 13, 2007, as amended
by our Annual Report on Form 10-K/A filed on February 15, 2007 (the Annual Report) and in Part
II- Item 1A of this report, as well as the risks and uncertainties discussed elsewhere in the
Annual Report and this report. We caution you that these risks may not be exhaustive. We operate in
a continually changing business environment and new risks emerge from time to time.
OVERVIEW
We are a leading North American manufacturer of covered hopper and tank railcars. We also repair
and refurbish railcars, provide fleet management services and design and manufacture certain
railcar and industrial components used in the production of our railcars as well as railcars and
non-railcar industrial products produced by others. We provide our railcar customers with integrated solutions through a comprehensive set of high quality
products and related services.
30
We operate in two segments: manufacturing operations and railcar services. Manufacturing operations
consists of railcar manufacturing and railcar and industrial component manufacturing. Railcar
services consist of railcar repair and refurbishment services and fleet management services.
Our tank railcar business has recovered well from the tornado damage in 2006 that caused our tank
railcar manufacturing facility to be shutdown from April to early August 2006. We also added
capacity to this facility in January 2007 that is helping to increase revenue levels for tank
railcars. In addition, the first tank railcars under our agreement with ACF to manufacture railcars
for us were shipped in September 2007. ACF is an affiliate of Carl C. Icahn, our principal
beneficial stockholder and the chairman of our board of directors.
During 2007, we have experienced a decline in shipments of hopper railcars due to less demand and
increased competition for some of those products. This has caused us to slow down our production
schedule for hopper railcars and subsequently manage our fixed costs and reduce variable overhead
costs at our hopper railcar manufacturing facility.
RESULTS OF OPERATIONS
Three Months ended September 30, 2007 compared to Three Months ended September 30, 2006
The following table summarizes our historical operations as a percentage of revenues for the
periods shown. Our historical results are not necessarily indicative of operating results that may
be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended,
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Manufacturing Operations
|
|
|
91.1
|
%
|
|
|
92.0
|
%
|
Railcar services
|
|
|
8.9
|
%
|
|
|
8.0
|
%
|
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold:
|
|
|
|
|
|
|
|
|
Cost of manufacturing
|
|
|
(81.0
|
%)
|
|
|
(83.6
|
%)
|
Cost of railcar services
|
|
|
(7.6
|
%)
|
|
|
(5.9
|
%)
|
|
|
|
Total cost of goods sold
|
|
|
(88.6
|
%)
|
|
|
(89.5
|
%)
|
Gross profit
|
|
|
11.4
|
%
|
|
|
10.5
|
%
|
Income related to insurance recoveries,
net
|
|
|
0.0
|
%
|
|
|
3.3
|
%
|
Gain on asset conversion, net
|
|
|
0.0
|
%
|
|
|
2.9
|
%
|
Selling, administrative and other
|
|
|
(4.9
|
%)
|
|
|
(4.7
|
%)
|
|
|
|
Earnings from operations
|
|
|
6.5
|
%
|
|
|
12.0
|
%
|
Interest income
|
|
|
2.8
|
%
|
|
|
0.2
|
%
|
Interest expense
|
|
|
(3.9
|
%)
|
|
|
(0.1
|
%)
|
Earnings (loss) from joint venture
|
|
|
0.1
|
%
|
|
|
(0.2
|
%)
|
|
|
|
Earnings before income tax expense
|
|
|
5.5
|
%
|
|
|
11.9
|
%
|
Income tax expense
|
|
|
(2.0
|
%)
|
|
|
(4.6
|
%)
|
|
|
|
Net earnings
|
|
|
3.5
|
%
|
|
|
7.3
|
%
|
|
|
|
Our earnings available to common stockholders for the three months ended September 30, 2007 were
$4.9 million, compared to $11.0 million for the three months ended September 30, 2006, representing
a decrease of $6.1 million. The primary factors for the $6.1 million decrease in earnings were the
impact on third quarter 2006 earnings of the $9.3 million insurance recovery related to the tornado
we had in April 2006, and a $1.6 million increase in net interest expense. In the third quarter of
2006, we recognized income of $5.0 million associated with the final settlement of our business
interruption insurance recoveries and a gain of $4.3 million associated with the conversion of the
assets destroyed by the tornado at Marmaduke. In the third quarter of 2007, we experienced a
31
revenue increase from an increase in tank railcar shipments that was substantially offset by a
revenue decrease in hopper railcar shipments.
Revenues
Our revenues for the three months ended September 30, 2007 decreased 7.0% to $139.9 million from
$150.5 million in the three months ended September 30, 2006. This decrease was primarily due to
decreased revenues for our manufacturing operations.
Our manufacturing operations revenues for the three months ended September 30, 2007 decreased 8.0%
to $127.4 million from $138.5 million for the three months ended September 30, 2006. This decrease
was primarily due to low third quarter 2007 shipments of hopper railcars ordered for delivery in
2007. This decrease was partially offset by an increase in our third quarter 2007 tank railcar
shipments as compared to our third quarter 2006 tank railcar shipments. Our third quarter 2006 tank
railcar capacity was reduced by the Marmaduke facility shutdown for repair of tornado damage. We
reopened that facility in August 2006. During the three months ended September 30, 2007, we shipped
a total of 1,276 railcars compared to 1,546 railcars in the same period of 2006.
We experienced a decrease in hopper railcar shipments in the third quarter of 2007 compared to the
same period of 2006. This decrease was primarily due to less demand and increased competition for
some of our hopper railcar products. As a result, we have set our production schedule well below
capacity levels due to customer-defined delivery schedules through 2008. Our increase in tank
railcar shipments was due to the restart of our tank railcar production facility in the third
quarter of 2006 and an increase in capacity at our tank railcar production facility in January
2007.
We expect continued strong performance of tank railcars and production of hopper railcars to
continue at lower levels in the fourth quarter. Our tank railcar lines are fully booked into early
2009 and our hopper railcar lines have orders booked for all months of 2008, at levels well below
capacity. We cannot guarantee at this time how much of the available capacity will be utilized.
For the three months ended September 30, 2007, our manufacturing operations included $47.6 million,
or 34.1% of our total consolidated revenues, from transactions with affiliates, compared to $4.2
million, or 2.8% of our total consolidated revenues in the three months ended September 30, 2006.
These revenues were attributable to sales of railcars and railcar parts to companies controlled by
Mr. Carl C. Icahn. The significant increase in manufacturing sales to related parties is primarily
due to the timing of railcar deliveries to ARL, as provided for under various contracts we have
with ARL.
Our railcar services revenues in the three months ended September 30, 2007 increased slightly to
$12.5 million compared to the $12.0 million of revenue for the three months ended September 30,
2006. For the third quarter of 2007, our railcar services revenues included $4.3 million, or 3.1%
of our total consolidated revenues, from transactions with affiliates, compared to $4.6 million, or
3.0% of our total revenues, in the third quarter of 2006.
We have had a reduction in our scope of fleet management services revenue that we are providing to
ARL. Since ARL split from us in 2005, ARL has and continues to reduce these services. This
reduction has not affected the repair and maintenance services that we provide to ARL. We do not
anticipate this reduction to have a material impact on our services revenue.
Gross Profit
Our gross profit increased to $16.0 million in the three months ended September 30, 2007 from $15.7
million in the three months ended September 30, 2006. Our gross profit margin increased to 11.4% in the third
quarter of 2007 from 10.5% in the third quarter of 2006, primarily driven by the increase in the
gross profit margin for our manufacturing operations.
Our gross profit margin for our manufacturing operations was 11.1% in the three months ended
September 30, 2007, an increase from 9.1% in the three months ended September 30, 2006. This
increase was attributable to an increase in profit recognized at our tank railcar manufacturing
operations in Marmaduke, partially offset by a decrease in
32
gross profit at our hopper railcar manufacturing operations in Paragould.
The increase at our tank manufacturing plant was due to the tank railcar plant restart, a higher
volume of tank railcars due to capacity expansion and improved manufacturing efficiencies that were
experienced in the third quarter 2007 compared to the third quarter of 2006. Labor efficiencies
resulted from lean manufacturing initiatives and enhanced training initiatives at our railcar
manufacturing facilities. Our delivery schedules for hopper railcars caused us to slow down our
schedule in the third quarter of 2007, which led to lower margins than were experienced earlier in
the year, as a result of reduced production levels that continued to still absorb fixed costs.
Our gross profit margin for our railcar services operations decreased to 14.8% in the three months
ended September 30, 2007 from 25.5% in the three months ended September 30, 2006. This decrease was
primarily attributable to a change in work content and higher costs during the three months ended
September 30, 2007.
Income Related to Insurance Recoveries, Net
On April 2, 2006, our Marmaduke, Arkansas tank railcar manufacturing facility was damaged by a
tornado. Our revenues and manufacturing gross profits were adversely affected by the temporary
shutdown of our Marmaduke facility. However, the profit impact of these adverse affects was
substantially offset by proceeds from our business interruption insurance. In the three months
ended September 30, 2006, we recognized income of $5.0 million associated with the settlement of
our business interruption insurance recoveries for that period.
During the three months ended September 30, 2006, we recognized a gain on asset conversion of $4.3
million related to assets that were damaged or destroyed by the tornado.
Selling, Administrative and Other Expenses
Our selling, administrative and other expenses decreased by $0.2 million in the third quarter of
2007, to $6.8 million from $7.0 million in the third quarter of 2006. These selling, administrative
and other expenses, which include stock based compensation, were 4.9% of total consolidated
revenues in the three months ended September 30, 2007 as compared to 4.7% of total consolidated
revenues in the three months ended September 30, 2006.
The $0.2 million decrease was attributable to an increase of $0.6 million in various selling,
administrative and other expenses offset by a $0.8 million decrease in stock based compensation
expense. Our stock based compensation expense for the three months ended September 30, 2007 was
$0.7 million. This expense is attributable to stock options granted in 2006 and stock appreciation
rights (SARs) granted in 2007. This is compared to stock based compensation expense of $1.5 million
for the three months ended September 30, 2006, which consisted of stock options and restricted
stock granted in 2006.
Interest Expense and Income
Net interest expense for the three months ended September 30, 2007 was $1.5 million, representing
$4.0 million of interest income and $5.5 million of interest expense, as compared to $0.1 million
of net interest income for the three months ended September 30, 2006, representing $0.2 million of
interest income and $0.1 million of interest expense.
Our interest expense for the three months ended September 30, 2007 was $5.5 million as compared to
$0.1 million for the three months ended September 30, 2006, representing an increase of $5.4
million. In January 2006, we repaid substantially all of our outstanding debt with a portion of the
net proceeds of our initial public offering. On February 28, 2007, we sold $275.0 million of
unsecured senior notes due 2014, which added $5.2 million of interest expense in the third quarter
of 2007.
Our interest income in the three months ended September 30, 2007 was $4.0 million as compared to
$0.2 million for the three months ended September 30, 2006. The increase in interest income was
primarily attributable to the investment of the net proceeds we received in connection with our
sale of our unsecured senior notes and the investment of cash generated from operations.
33
Income Taxes
Our income tax expense for the three months ended September 30, 2007 was $2.9 million or 37.0% of
our earnings before income taxes, as compared to $6.9 million for the three months ended September
30, 2006, or 38.4% of our earnings before income taxes. The major reason for the change in the
quarterly rate is due to a change in our effective tax rate for calendar year 2006 at September 30,
2006. The rate went from 36.8% at June 30, 2006 to 37.4% at September 30, 2006.
Nine Months ended September 30, 2007 compared to Nine Months ended September 30, 2006
The following table summarizes our historical operations as a percentage of revenues for the
periods shown. Our historical results are not necessarily indicative of operating results that may
be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended,
|
|
|
September 30,
|
|
September 30,
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Manufacturing Operations
|
|
|
92.9
|
%
|
|
|
92.3
|
%
|
Railcar services
|
|
|
7.1
|
%
|
|
|
7.7
|
%
|
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold:
|
|
|
|
|
|
|
|
|
Cost of manufacturing
|
|
|
(81.2
|
%)
|
|
|
(82.7
|
%)
|
Cost of railcar services
|
|
|
(5.8
|
%)
|
|
|
(6.1
|
%)
|
|
|
|
Total cost of goods sold
|
|
|
(87.0
|
%)
|
|
|
(88.8
|
%)
|
Gross profit
|
|
|
13.0
|
%
|
|
|
11.2
|
%
|
Income related to insurance recoveries,
net
|
|
|
0.0
|
%
|
|
|
2.1
|
%
|
Gain on asset conversion, net
|
|
|
0.0
|
%
|
|
|
0.9
|
%
|
Selling, administrative and other
|
|
|
(3.9
|
%)
|
|
|
(4.5
|
%)
|
|
|
|
Earnings from operations
|
|
|
9.1
|
%
|
|
|
9.7
|
%
|
Interest income
|
|
|
1.9
|
%
|
|
|
0.2
|
%
|
Interest expense
|
|
|
(2.4
|
%)
|
|
|
(0.2
|
%)
|
Earnings from joint venture
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
|
Earnings before income tax expense
|
|
|
8.7
|
%
|
|
|
9.7
|
%
|
Income tax expense
|
|
|
(3.2
|
%)
|
|
|
(3.6
|
%)
|
|
|
|
Net earnings
|
|
|
5.5
|
%
|
|
|
6.1
|
%
|
|
|
|
Our earnings available to common stockholders for the nine months ended September 30, 2007 were
$29.4 million, compared to $28.5 million for the nine months ended September 30, 2006, representing
an increase of $0.9 million. The primary factors for the $0.9 million increase in earnings were a
$16.7 million increase in gross profit from our manufacturing operations offset by $14.3 million of
insurance recoveries in 2006 and a $2.7 million increase in net interest expense. In the nine
months ended September 30, 2006, we recognized $14.3 million of insurance recoveries, including
$10.0 million of business interruption insurance compensation for lost profits, along with a $4.3
million gain, related to the involuntary conversion of assets damaged by the tornado. In addition,
specifically related to the initial public offering, we incurred $5.3 million in compensation expense during the
nine months ended September 30, 2006 consisting of a special bonus of $0.5 million and $4.8 million
in compensation expense related to a restricted stock grant. This was offset by an increase in
other selling, administrative and other expenses of $3.8 million to support our growing business.
Revenues
Our revenues for the nine months ended September 30, 2007 increased 11.5% to $536.2 million from
$480.7 million in the nine months ended September 30, 2006. This increase was primarily due to
increased revenues for our manufacturing operations.
34
Our manufacturing operations revenues for the nine months ended September 30, 2007 increased 12.3%
to $498.2 million from $443.8 million for the nine months ended September 30, 2006. This increase
was primarily due to expanded tank railcar capacity in 2007 and low 2006 shipments. Our 2006 tank
railcar capacity was reduced by the tank railcar facility shutdown for repair of tornado damage. We
reopened that facility in August 2006. Increased tank railcar shipments were partially offset by
hopper railcar shipments in the nine months ended September 30, 2007 being down from the same
period of 2006, which reflected a reduction in the number of hopper railcars ordered for delivery
in 2007. During the nine months ended September 30, 2007, we shipped a total of 5,465 railcars
compared to 5,260 railcars in the same period of 2006.
Our increase in tank railcar shipments was due to the restart of our tank railcar production
facility in the third quarter of 2006 and an increase in capacity at our tank railcar production
complex as a result of our capacity expansion completed in January 2007. As a result of the
recovery from the 2006 storm damage and related shutdown of our tank railcar production facility,
we only shipped 774 tank railcars in the nine months ended September 30, 2006. We experienced a
decrease in hopper railcar shipments in 2007 compared to the same period of 2006. This decrease was
primarily due to less demand and increased competition for some of our hopper railcar products. As
a result, we have set our production schedule well below capacity levels due to customer-defined
delivery schedules through 2008.
For the nine months ended September 30, 2007, our manufacturing operations included $93.6 million,
or 17.4% of our total consolidated revenues, from transactions with affiliates, compared to $24.4
million, or 5.1% of our total consolidated revenues in the nine months ended September 30, 2006.
These revenues were attributable to sales of railcars and railcar parts to companies controlled by
Mr. Carl C. Icahn. The increase in manufacturing sales to related parties is primarily due to the
timing of railcar deliveries to ARL, as provided for under various contracts we have with ARL.
Our railcar services revenues in the nine months ended September 30, 2007 increased 2.9% to $38.0
million compared to the $36.9 million amount for the nine months ended September 30, 2006. For the
nine months ended September 30, 2007, our railcar services revenues included $12.6 million, or 2.4%
of our total consolidated revenues, from transactions with affiliates, compared to $15.1 million,
or 3.1% of our total revenues, in the nine months ended September 30, 2006.
Gross Profit
Our gross profit increased to $69.6 million in the nine months ended September 30, 2007 from $54.0
million in the nine months ended September 30, 2006. Our gross profit margin increased to 13.0% in
the nine months ended September 30, 2007 from 11.2% in the nine months ended September 30, 2006,
primarily reflecting improved margins in our manufacturing operations segment.
Our gross profit margin for our manufacturing operations was 12.6% in the nine months ended
September 30, 2007, a significant increase from 10.4% in the nine months ended September 30, 2006.
This increase was primarily attributable to railcar mix, including significantly more tank
railcars, and improved manufacturing efficiencies that we experienced in the nine months ended
September 30, 2007 compared to the nine months ended September 30, 2006. Labor efficiencies
resulted from lean manufacturing initiatives and enhanced training initiatives at our railcar
manufacturing facilities.
Our gross profit margin for our railcar services operations decreased to 17.9% in the nine months
ended September 30, 2007 in relation to a margin of 21.3% in the nine months ended September 30,
2006. This decrease was primarily attributable to work content and higher costs for railcar
services in the nine months ended September 30, 2007.
Income Related to Insurance Recoveries, Net
On April 2, 2006, our Marmaduke, Arkansas tank railcar manufacturing facility was damaged by a
tornado. Our revenues and manufacturing gross profits were adversely affected by the temporary
shutdown of our Marmaduke facility. However, the profit impact of these adverse affects was
substantially offset by proceeds from our business
35
interruption insurance. In the nine months ended
September 30, 2006, we recognized income of $9.9 million associated with the settlement of our
business interruption insurance claim for the period from April 2006 August 2006.
During the nine months ended September 30, 2006, we recognized a gain on asset conversion of $4.3
million related to assets that were damaged or destroyed by the tornado.
Selling, Administrative and Other Expenses
Our selling, administrative and other expenses decreased by $0.8 million in the nine months ended
September 30, 2007, to $20.9 million from $21.7 million in the nine months ended September 30,
2006. These selling, administrative and other expenses, which include stock based compensation,
were 3.9% of total revenues in the nine months ended September 30, 2007 as compared to 4.5% of
total revenues in the nine months ended September 30, 2006.
The decrease of $0.8 million was primarily attributable to a stock based compensation expense
decrease of $4.6 million (as described below), partially offset by an increase of $3.8 million of
selling, administrative and other costs to support our growing business.
Our stock based compensation expense for the nine months ended September 30, 2007 was $2.0 million.
This expense is attributable to restricted stock and stock options we granted in 2006 and to SARs
granted in 2007. This is compared to stock based compensation expense of $6.6 million for the nine
months ended September 30, 2006. We recognized $2.4 million of stock based compensation expense in
January 2006 due to the granting of restricted stock in conjunction with the initial public
offering.
Interest Expense and Income
Net interest expense for the nine months ended September 30, 2007 was $2.8 million, representing
$10.0 million of interest income and $12.8 million of interest expense, as compared to $0.1 million
of net interest expense for the nine months ended September 30, 2006, representing $1.1 million of
interest income and $1.2 million of interest expense.
Our interest expense for the nine months ended September 30, 2007 was $12.8 million as compared to
$1.2 million for the nine months ended September 30, 2006, representing an increase of $11.6
million. In January 2006, we repaid substantially all of our outstanding debt with a portion of the
net proceeds of our initial public offering. On February 28, 2007, we sold $275.0 million of
unsecured senior notes due 2014, which added $12.0 million of interest expense in the nine months
ended September 30, 2007.
Our interest income in the nine months ended September 30, 2007 was $10.0 million as compared to
$1.1 million for the nine months ended September 30, 2006. The increase in interest income was
primarily attributable to the investment of the net proceeds we received in connection with our
sale of our unsecured senior notes and the investment of cash received from operations.
Income Taxes
Our income tax expense for the nine months ended September 30, 2007 was $17.3 million or 37.0% of
our earnings before income taxes, as compared to $17.4 million for the nine months ended September 30, 2006, or
37.4% of our earnings before income taxes.
BACKLOG
Our backlog consists of orders for railcars. We define backlog as the number and sales value of
railcars that our customers have committed in writing to purchase from us that have not been
recognized as revenues. Customer orders, however, may be subject to cancellation, customer requests
for delays in railcar deliveries, inspection rights and other customary industry terms and
conditions.
36
Our total
backlog as of September 30, 2007 was $1,084.4 million and as of December 31, 2006 was
$1,318.0 million. We estimate that approximately 16.3% of our September 30, 2007 backlog will be
converted to revenues by the end of 2007. Included in the railcar backlog at September 30, 2007 was
$303.5 million of railcars to be sold to our affiliate, ARL, which is controlled by Carl C. Icahn.
The following table shows our reported railcar backlog, and estimated future revenue value
attributable to such backlog, at the end of the period shown. The reported backlog includes
railcars relating to purchase obligations based upon an assumed product mix consistent with past
orders. Changes in product mix from what is assumed would affect the dollar amount of our backlog.
Our ability to meet our backlog requirements as of September 30, 2007 is dependent upon our
completion of the new flexible railcar manufacturing facility in Marmaduke, Arkansas. We expect
railcar production to begin at the new flexible railcar manufacturing facility during November
2007.
|
|
|
|
|
|
|
2007
|
|
Railcar backlog at January 1, 2007
|
|
|
16,473
|
|
New railcars delivered
|
|
|
5,465
|
|
New railcar orders
|
|
|
2,376
|
|
|
|
|
|
Railcar backlog at September 30, 2007
|
|
|
13,384
|
|
|
|
|
|
|
Estimated railcar backlog value at end of period (in thousands)
|
|
$
|
1,084,352
|
|
Estimated backlog value reflects the total revenues expected to be attributable to the backlog
reported at the end of the particular period as if such backlog were converted to actual revenues.
Estimated backlog does not reflect potential price increases and decreases under customer contracts
that provide for variable pricing based on changes in cost of certain raw materials and railcar
components or the cancellation or delay of railcar orders that may occur pursuant to the terms of
some of our customer contracts.
Historically, we have experienced little variation between the number of railcars ordered and the
number of railcars actually delivered, however, our backlog is not necessarily indicative of our
future results of operations. As orders may be canceled or delivery dates extended, we cannot
guarantee that our reported railcar backlog will convert to revenue in any particular period, if at
all, nor can we guarantee that the actual revenue from these orders will equal our reported backlog
estimates or that our future revenue efforts will be successful.
Our backlog includes commitments under multi-year purchase and sale agreements. The longest
commitments under these agreements extend out into 2009. Under these agreements, the customers have
agreed to buy a minimum number of railcars from us in each of the contract years, and typically may
choose to satisfy its purchase obligations from among a variety of railcars described in the
agreement.
The agreements may also permit a customer to reduce its purchase commitments, or pricing for those
commitments, under certain circumstances, including, for certain contracts, market related
conditions, such as significant reductions in industry backlog or pricing, or most favored nations pricing clauses, which are
stipulated in the contracts. As a result of less demand and increased competition for some of our
hopper railcar products, these contractual conditions may be triggered, which could have a material
adverse effect on our railcar backlog and could significantly limit our ability to convert our
estimated railcar backlog value, as reported in the table above, to revenue. Under our multi-year
purchase agreements, purchase prices for railcars are subject to adjustment for changes in the cost
of certain raw materials such as steel and railcar components applicable at the time of production.
Due to the large size of railcar orders and variations in the number and mix of railcars ordered in
any given period, the size of our reported backlog at the end of any such period may fluctuate
significantly.
We currently have availability in our production schedule in the remainder of 2007 for the
production of hopper railcars. Our tank railcar lines are fully booked into early 2009 and our
hopper railcar lines have orders booked for all months of 2008, but not at capacity levels. We
cannot guarantee at this time how much of the available capacity will be utilized.
37
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity for the nine months ended September 30, 2007 were proceeds from
our senior unsecured notes offering and cash generated from operations. As of September 30, 2007,
we had working capital of $391.4 million, including $297.6 million of cash and cash equivalents. We
also have a $100.0 million revolving credit facility with North Fork Business Capital Corporation,
as administrative agent for various lenders. This facility is described in further detail in Note
10 of our condensed consolidated financial statements, and provides for relief from certain
financial covenants described in that Note so long as we maintain excess availability of at least
$30.0 million. At September 30, 2007, we had no borrowings outstanding under this facility and
$76.3 million of availability based upon the amount of our eligible accounts receivable and
inventory (and without regard to any financial covenants), or $46.3 million of availability, if we
were to maintain excess availability of at least $30.0 million.
On February 28, 2007, we issued $275.0 million of senior unsecured notes that are due in 2014. The
offering resulted in net proceeds to us of approximately $272.2 million. The terms of the notes
contain restrictive covenants, including limitations on our ability to incur additional debt, issue
disqualified or preferred stock, make certain restricted payments and enter into certain
significant transactions with shareholders and affiliates. These limitations become more
restrictive if our fixed charge coverage ratio, as defined, is less than 2.0 to 1.0. As of
September 30, 2007, we were in compliance with all of our covenants under the notes.
Cash Flows
The following tables summarizes our net cash provided by or used in operating activities, investing
activities and financing activities for the nine months ended September 30:
|
|
|
|
|
|
|
2007
|
|
|
|
(in thousands)
|
|
Net cash provided by (used in):
|
|
|
|
|
Operating activities
|
|
$
|
30,982
|
|
Investing activities
|
|
|
(45,170
|
)
|
Financing activities
|
|
|
270,875
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
$
|
256,687
|
|
|
|
|
|
Net Cash Provided by Operating Activities
Cash flows from operating activities are affected by several factors, including fluctuations in
business volume, contract terms for billings and collections, the timing of collections on our
accounts receivables, processing of payroll and associated taxes and payments to our suppliers. We
do not typically experience business credit losses, although a payment may be delayed pending
completion of closing documentation, and a typical order of railcars may not yield cash proceeds
until after the end of a reporting period.
Our net cash provided by operating activities for the nine months ended September 30, 2007 was
$31.0 million. Net earnings of $29.4 million were impacted by the non-cash items including but not
limited to: depreciation expense of $10.3 million, stock-based compensation expense of $2.0 million
and other smaller adjustments. Cash provided by operating activities attributable to changes in our
current assets and liabilities included a decrease in inventories of $2.4 million, a decrease in
prepaid expenses of $1.9 million, an increase in accounts payable to affiliates of $1.0 million and
an increase in accrued expenses and taxes of $4.3 million. Cash used in operating activities
included a $3.9 million increase in accounts receivable from affiliate, a decrease in accounts
payable of $14.4 million and a decrease in other of $1.5 million. One of our customers has asked us
to finance a portion of their railcar purchases for them. The financing has an annual interest rate
of 12%. The total of the financing is approximately $2.0 million and is expected to be paid in
January 2007.
The decrease in inventories was due to decreased raw materials due to a company wide effort to
reduce inventory levels along with lowering production levels at our hopper manufacturing facility
partially offset by an increase in
38
finished goods as a result of lower railcar shipments in the
third quarter of 2007. The decrease in prepaid expenses of $1.9 million was due to the use of
prepaid amounts for wheel sets at our Marmaduke tank railcar manufacturing facility and a decrease
in our prepaid insurance balances, which renew in December 2007. The increase in accounts payable
to affiliate of $1.0 million relates to an increase in amounts owed to ACF at September 30, 2007
compared to December 31, 2006, specifically related to tank railcar parts and amounts owed under
the ACF tank railcar manufacturing agreement. The increase in accrued expenses and taxes is
primarily due to accrued interest on our senior unsecured notes and other accrued expense increases
at September 30, 2007 compared to December 31, 2006. The increase in accounts receivable due from
affiliate is due to timing of cash receipts and sales toward the end of the period ending September
30, 2007 compared to the period ending December 31, 2006. The decrease in accounts payable is
primarily due to timing of payments and lower inventory levels experienced toward the end of the
period ending September 30, 2007 compared to the period ending December 31, 2006. The decrease in
other relates to changes in our deferred tax liabilities as a result of our settlement of the IRS
audit.
Net Cash Used In Investing Activities
Net cash used in investing activities was $45.2 million for the nine months ended September 30,
2007, consisting of $36.5 million of purchases of property, plant and equipment and an $8.8 million
contribution to our joint ventures. The capital expenditures were for the purchase of equipment at
multiple locations to increase capacity and operating efficiencies. Some of these purchases are
described in further detail below under Capital Expenditures. The $8.8 million of investment made
in our joint venture relates to both our investment in Ohio Castings joint venture and our
investment in the Axis, LLC joint venture.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $270.9 million for the nine months ended September
30, 2007. The main reason for the large cash inflow is due to $275.0 million in gross proceeds from
the senior unsecured notes offering, partially offset by offering costs of approximately $4.3
million.
Capital Expenditures
We continuously evaluate facility requirements based on our strategic plans, production
requirements and market demand and may elect to change the level of capital investments in the
future. These investments are all based on an analysis of the rates of return and impact on our
profitability. In response to the current demand for our railcars, we are pursuing opportunities to
increase our production capacity and reduce our costs through continued vertical integration of
component parts. From time to time, we may expand our business by acquiring other businesses or
pursuing other strategic growth opportunities.
Capital expenditures for the nine months ended September 30, 2007 were $36.5 million. Of these
expenses, $26.3 million were for expansion purposes, $2.8 million were for cost reduction purposes
and $7.4 million were for necessary replacement of assets.
Our tank railcar plant capacity expansion was completed at our Marmaduke, Arkansas plant in January
2007. We have a number of other significant capital projects that are currently underway including
our new flexible railcar manufacturing plant that is being constructed adjacent to our tank railcar
manufacturing plant in Marmaduke. Railcar production at the new flexible plant, which we anticipate
will have the capability of producing tank, hopper and intermodal railcars, is currently expected
to begin at the end of 2007. In June 2007, we entered into a joint venture agreement to produce and
sell axles with a joint venture partner. Under this agreement, the joint venture will construct an
axle manufacturing facility. We expect to continue to invest in projects, including possible
strategic acquisitions, to reduce manufacturing costs, improve production efficiencies, maintain
our equipment and to otherwise complement and expand our business. Our current capital expenditure
plans include projects that we expect will expand capacity, maintain equipment, improve
efficiencies or reduce costs, including the capital expenditures we have incurred to date. We
anticipate that our capital spending will accelerate in the fourth quarter of 2007 due to tank
railcar related projects and the initiation of the axle manufacturing plant project. We expect
spending for the year to be approximately $65.0 million, including funds spent to date. This amount
is an estimate. In addition to this amount, the new joint venture may include additional
commitments by us and our joint venture
39
partner. We cannot assure that we will be able to complete
any of our projects on a timely basis or within budget, if at all.
We anticipate that the new railcar plant, our contributions to the axle joint venture and any other
future expansion of our business will be financed through the proceeds from our issuance of senior
unsecured notes, cash flow from operations, our amended revolving credit facility, term debt
associated directly with a specific expenditure or other new financing. We believe that these
sources of funds will provide sufficient liquidity to meet our expected operating requirements over
the next twelve months. We cannot guarantee that we will be able to obtain term debt or other new
financing on favorable terms, if at all.
Our long-term liquidity is contingent upon future operating performance and our ability to continue
to meet financial covenants under our senior unsecured notes agreement, our revolving credit
facility and any other indebtedness. We may also require additional capital in the future to fund
capital expenditures, acquisitions, or incur from time to time other investments and these capital
requirements could be substantial. Our operating performance may also be affected by matters
discussed under Special Note Regarding Forward-Looking Statements, Risk Factors in the Annual
Report and this report and trends and uncertainties discussed in this discussion and analysis, as
well as elsewhere in the Annual Report and this report. These risks, trends and uncertainties may
also adversely affect our long-term liquidity
.
Dividends
Following our initial public offering, on a quarterly basis, our Board of Directors has declared a
regular cash dividend of $0.03 per share of our common stock.
We intend to pay cash dividends on our common stock in the future. However, as discussed in Note 10
to the condensed consolidated financial statements, the revolving credit facility, as amended,
contains limitations and restrictions on our ability to declare and pay dividends. Moreover, our
declaration and payment of dividends will be at the discretion of our board of directors and will
depend upon our operating results, strategic plans, capital requirements, financial condition,
covenants under our borrowing arrangement and other factors our board of directors considers
relevant. Accordingly, we may not pay dividends in any given amount in the future, or at all.
In addition, dividends of $0.6 million on our preferred stock were paid in January 2006. All of our
outstanding shares of preferred stock were redeemed in January 2006 in connection with our initial
public offering.
Contingencies and Contractual Obligations
Refer to the status of contingencies in Note 13 to the condensed consolidated financial statements.
All contractual obligations were basically unchanged from the information disclosed in our 10-Q for
the quarterly period ended March 31, 2007, except for normal operations since that time.
CRITICAL ACCOUNTING POLICIES
The critical accounting policies and estimates used in the preparation of our financial statements
that we believe affect our more significant judgments and estimates used in the preparation of our
consolidated financial statements presented in this report are described in Managements Discussion
and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated
Financial Statements included in our Annual Report on Form 10-K, as amended, for the fiscal year
ended December 31, 2006. There have been no material changes to the critical accounting policies or
estimates during the nine months ended September 30, 2007.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in our market risks since December 31, 2006.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, our
40
management evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of
the end of the period covered by this quarterly report on Form 10-Q (the Evaluation Date). Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of
the Evaluation Date, our disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commissions rules and forms.
There has been no change in our internal control over financial reporting during the most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments since the filing of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2006, as amended.
ITEM 1A. RISK FACTORS
Except as set forth below, there have been no material changes from the risk factors previously
disclosed in Item 1A of our 2006 annual report on Form 10-K, as amended.
The level of our reported railcar backlog may not necessarily indicate what our future revenues
will be and our actual revenues may fall short of the estimated revenue value attributed to our
railcar backlog, including pricing and cancellation provisions in some contracts we have with our
customers.
We define backlog as the number of railcars, and the revenue value in dollars attributed to these
railcars, to which our customers have committed in writing to purchase from us that have not yet
been recognized as revenues. Our competitors may not define railcar backlog in the same manner as
we do, which could make comparisons of our railcar backlog with theirs misleading. We have
disclosed our railcar backlog for various periods and the estimated revenue value in dollars that
would be attributed to this railcar backlog once the railcar backlog is converted to actual sales.
We consider railcar backlog to be an indicator of future revenues. However, our reported railcar
backlog may not be converted into revenues in any particular period, if at all, and the actual
revenues from such sales may not equal our reported estimates of railcar backlog value. In
addition, our railcar manufacturing business relies on third-party suppliers for heavy castings, wheels and other components and raw materials
and if these third parties were to stop or reduce their supply of components or raw materials, our
production could decline and our actual revenues could fall short of the estimated revenue value
attributed to our railcar backlog. Our ability to fulfill our entire backlog will also be affected
by our ability to complete timely the construction and start-up of our new flexible railcar
manufacturing plant being constructed at our Marmaduke complex.
Our current level of reported railcar backlog may not necessarily represent the level of revenues
that we may generate in any future period. Customer orders may be subject to cancellation,
inspection rights and other customary industry terms, all of which could affect our recognition of
revenue currently reflected in our September 30, 2007 backlog. If industry backlog for railcars
declines below certain levels, one of our significant customers,
which accounts for 48% of our
September 30, 2007 backlog, would be permitted to cancel its orders after at least 180 days written
notice, which could have a material adverse effect on our business, financial condition and results
of operations. Additionally, our railcar manufacturing contracts with certain of our customers
have cancellation provisions if we do not meet certain pricing requirements on railcars. As a
result of the less demand and increased competition for some of our hopper railcar products, these
contractual conditions may be triggered, which could have a material adverse effect on our railcar
backlog and could significantly limit our ability to convert our estimated railcar backlog value to
revenue. Furthermore, delivery dates may be subject to deferral, thereby delaying the date on which
we will deliver the associated railcars and realize revenues attributable to such railcar backlog.
Any contract included in our reported railcar backlog that actually generates revenues may not be
profitable.
41
Our efforts to manage overhead and manage production slow downs may result in the loss of key
employees.
As a result of less demand and increased competition for some of our hopper railcar products, we
have implemented production slow downs and are managing our overhead costs in order to improve our
manufacturing efficiencies. We may need to increase these efforts and such production slow downs
and decreases to overhead costs may result in the loss of key employees. As a result, we may lose
skilled, trained, qualified production and management employees upon which our business
substantially depends. If we do lose the services of such key employees due to production slow
downs or otherwise, we cannot assure that such personnel would remain available for re-employment,
or that suitable new employees would be available, if and when our production needs increased. Our
Paragould and Marmaduke complexes are located in sparsely populated communities and we have
experienced a high turnover rate at these locations among newly hired employees. Due to the
cyclical nature of the demand for our products, we have had to reduce and then rebuild our
workforce as our business has gone through downturns followed by upturns in business activity. Due
to the competitive nature of the labor markets in which we operate, this type of employment cycle
increases our risk of not being able to retain, recruit and train the personnel we require in our
railcar manufacturing and other businesses, particularly in periods of economic expansion.
On February 28, 2007, we completed our offering of unsecured senior notes due 2014. The following
risk factors relate to the additional indebtedness we incurred in connection with that offering.
Our substantial indebtedness following the offering of our outstanding notes could adversely affect
our operations and financial results and prevent us from fulfilling our obligations under the
notes.
We issued the outstanding notes on February 28, 2007 and by so doing agreed to pay back the holders
of the outstanding notes the aggregate principal amount of $275.0 million with interest.
Additionally, we currently have the ability to incur a significant amount of indebtedness under our
revolving credit facility, as amended, and otherwise. As of September 30, 2007, we had no
borrowings outstanding and $76.3 million of availability under the revolving credit facility based
upon the amount of its eligible accounts receivable and inventory (and without regard to any
financial covenants), or $46.3 million of availability, if we were to maintain excess availability
of at least $30.0 million.
Our substantial indebtedness could have important consequences to our investors. For example, it
could:
|
|
|
make it more difficult for us to satisfy our obligations with respect to the notes
and other indebtedness;
|
|
|
|
|
increase our vulnerability to general adverse economic and industry conditions;
|
|
|
|
|
require us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness, which would reduce the availability of our cash flow to
fund working capital, capital expenditures, expansion efforts and other general
corporate purposes;
|
|
|
|
|
limit our flexibility in planning for, or reacting to, changes in our business and
the industry in which we operate;
|
|
|
|
|
place us at a competitive disadvantage compared to our competitors that have less
debt; and
|
|
|
|
|
limit, along with the financial and other restrictive covenants in our revolving
credit facility, as amended, among other things, our ability to borrow additional funds
for working capital, capital expenditures, general corporate purposes or acquisitions.
Failure to comply with these covenants could result in an event of default, which, if
not cured or waived, could have a significant adverse effect on us.
|
Despite our substantial indebtedness following the offering of our outstanding notes, we and our
subsidiaries may still be able to incur substantially more debt, which could further exacerbate the
risks associated with our substantial indebtedness.
Under our revolving credit facility, as amended, we face restrictions on our ability to incur
additional indebtedness. Despite these restrictions, debt incurrence in compliance with these
restrictions could be substantial. In addition, subject to the covenants in the indenture governing
the notes, we may be able to incur future indebtedness, including secured indebtedness. Any
additional secured borrowings by us and any borrowings by our subsidiaries would be
42
senior to the notes. If new debt is added to our or our subsidiaries current debt levels, the related risks that
we or they now face could be magnified.
We may not be able to generate sufficient cash flow to service all of our obligations, including
our obligations relating to the notes.
Our ability to make payments on and to refinance our indebtedness, including the indebtedness
incurred under our revolving credit facility, as amended, and the notes, and to fund planned
capital expenditures, strategic transactions and expansion efforts will depend on our ability to
generate cash in the future. This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our control.
Our business may not be able to generate sufficient cash flow from operations, and there can be no
assurance that future borrowings will be available to us in amounts sufficient to enable us to pay
our indebtedness, including the notes, as such indebtedness matures and to fund our other liquidity
needs. If this is the case, we will need to refinance all or a portion of our indebtedness,
including the notes, on or before maturity, and cannot assure you that we will be able to refinance
any of our indebtedness, including our revolving credit facility, as amended, and the notes, on
commercially reasonable terms, or at all. We could have to adopt one or more alternatives, such as
reducing or delaying planned expenses and capital expenditures, selling assets, restructuring debt,
or obtaining additional equity or debt financing. These financing strategies may not be affected on
satisfactory terms, if at all. Our ability to refinance our indebtedness or obtain additional
financing and/or to do so on commercially reasonable terms will depend on, among other things: our
financial condition at the time; restrictions in agreements governing our indebtedness, and the
indenture governing the notes; and other factors, including the condition of the financial markets
and the railcar industry.
If we do not generate sufficient cash flow from operations, and additional borrowings, refinancings
or proceeds of asset sales are not available to us, we may not have sufficient cash to enable us to
meet all of our obligations, including payments on the exchange notes.
43
ITEM 6. EXHIBITS
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
|
|
31.1
|
|
Rule 13a-14(a), 15d-14(a) Certification of the Chief Executive Officer
|
|
|
|
31.2
|
|
Rule 13a-14(a), 15d-14(a) Certification of the Chief Financial Officer
|
|
|
|
32
|
|
Certification pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
AMERICAN RAILCAR INDUSTRIES, INC.
|
|
Date: November 8, 2007
|
By:
|
/s/ James J. Unger
|
|
|
|
James J. Unger, President and Chief Executive Officer
|
|
|
|
|
|
By:
|
/s/ William P. Benac
|
|
|
|
William P. Benac, Senior Vice-President, Chief
|
|
|
|
Financial Officer and Treasurer
|
|
45
EXHIBIT INDEX
|
|
|
Exhibit
|
|
|
No.
|
|
Description of Exhibit
|
|
|
|
|
31.1
|
|
Rule 13a-14(a), 15d-14(a) Certification of the Chief Executive Officer
|
|
|
|
31.2
|
|
Rule 13a-14(a), 15d-14(a) Certification of the Chief Financial Officer
|
|
|
|
32
|
|
Certification pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
46
American Railcar (NASDAQ:ARII)
Historical Stock Chart
From Aug 2024 to Sep 2024
American Railcar (NASDAQ:ARII)
Historical Stock Chart
From Sep 2023 to Sep 2024