e10vq
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 June 30, 2006
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
(State of Incorporation)
|
|
43-1481791
(I.R.S. Employer Identification No.) |
|
|
|
100 Clark Street, St. Charles, Missouri
(Address of principal executive offices)
|
|
63301
(Zip Code) |
(636) 940-6000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ Noo
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 filero Nonaccelerated filerþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act)
Yeso Noþ
The number of shares of the registrants common stock, without par value, outstanding on August 10,
2006 was 21,207,773 shares.
AMERICAN RAILCAR INDUSTRIES, INC.
INDEX TO FORM 10Q
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts, unaudited)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
June 30, |
|
|
2005 |
|
2006 |
|
Assets |
|
|
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
28,692 |
|
|
$ |
27,609 |
|
Accounts receivable, net |
|
|
38,273 |
|
|
|
35,538 |
|
Accounts receivable, due from affiliates |
|
|
5,110 |
|
|
|
2,678 |
|
Insurance claim receivable, net |
|
|
|
|
|
|
8,000 |
|
Inventories, net |
|
|
88,001 |
|
|
|
111,877 |
|
Prepaid expenses |
|
|
2,523 |
|
|
|
4,001 |
|
Deferred tax asset |
|
|
1,967 |
|
|
|
1,746 |
|
|
|
|
Total current assets |
|
|
164,566 |
|
|
|
191,449 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
|
|
|
|
|
|
Buildings |
|
|
84,255 |
|
|
|
87,676 |
|
Machinery and equipment |
|
|
68,187 |
|
|
|
80,189 |
|
|
|
|
|
|
|
152,442 |
|
|
|
167,865 |
|
Less accumulated depreciation |
|
|
65,398 |
|
|
|
69,834 |
|
|
|
|
Net property, plant and equipment |
|
|
87,044 |
|
|
|
98,031 |
|
Construction in process |
|
|
3,759 |
|
|
|
12,553 |
|
Land |
|
|
2,182 |
|
|
|
2,593 |
|
|
|
|
Total property, plant and equipment |
|
|
92,985 |
|
|
|
113,177 |
|
|
|
|
|
|
|
|
|
|
Debt issuance costs |
|
|
565 |
|
|
|
207 |
|
Deferred offering costs |
|
|
4,860 |
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
7,230 |
|
Other assets |
|
|
26 |
|
|
|
37 |
|
Investment in joint venture |
|
|
5,578 |
|
|
|
5,600 |
|
|
|
|
Total assets |
|
$ |
268,580 |
|
|
$ |
317,700 |
|
|
|
|
See notes to the Condensed Consolidated Financial Statements.
1
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(In thousands, except per share amounts, unaudited)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
June 30, |
|
|
2005 |
|
2006 |
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
33,294 |
|
|
$ |
85 |
|
Accounts payable |
|
|
55,793 |
|
|
|
47,008 |
|
Accounts payable, due to affiliates |
|
|
4,457 |
|
|
|
933 |
|
Accrued expenses and taxes |
|
|
7,675 |
|
|
|
7,774 |
|
Insurance advance |
|
|
|
|
|
|
2,881 |
|
Accrued compensation |
|
|
7,243 |
|
|
|
9,360 |
|
Accrued dividends |
|
|
11,336 |
|
|
|
636 |
|
Note payable
to affiliate current |
|
|
19,000 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
138,798 |
|
|
|
68,677 |
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion |
|
|
7,076 |
|
|
|
53 |
|
Deferred tax liability |
|
|
5,364 |
|
|
|
6,512 |
|
Pension and post-retirement liabilities |
|
|
10,522 |
|
|
|
10,261 |
|
Other amounts due to affiliates |
|
|
|
|
|
|
4 |
|
Other liabilities |
|
|
59 |
|
|
|
58 |
|
Mandatory redeemable preferred stock, stated value $1,000,
99,000 shares authorized, 1 share issued and outstanding at
December 31, 2005, none outstanding at June 30, 2006 |
|
|
1 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
161,820 |
|
|
|
85,565 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
New Preferred Stock, $.01 par value per share, stated value
$1,000 per share, 500,000 shares authorized, 82,055 shares
issued and outstanding at December 31, 2005, none
outstanding at June 30, 2006, respectively |
|
|
82,055 |
|
|
|
|
|
Common stock, $.01 par value, 50,000,000 shares authorized,
11,147,059 and 21,207,773 shares issued and outstanding at
December 31, 2005 and June 30, 2006, respectively |
|
|
111 |
|
|
|
212 |
|
Additional paid-in capital |
|
|
41,667 |
|
|
|
232,716 |
|
Retained earnings accumulated (deficit) |
|
|
(15,442 |
) |
|
|
801 |
|
Accumulated other comprehensive loss |
|
|
(1,631 |
) |
|
|
(1,594 |
) |
|
|
|
Total stockholders equity |
|
|
106,760 |
|
|
|
232,135 |
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
268,580 |
|
|
$ |
317,700 |
|
|
|
|
See notes to the Condensed Consolidated Financial Statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended, |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2006 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Manufacturing operations (including revenues from affiliates
of $17,050 and $5,182 for the three months ended June 30,
2005 and 2006, respectively) |
|
$ |
149,284 |
|
|
$ |
138,816 |
|
|
|
|
|
|
|
|
|
|
Railcar services (including revenues from affiliates of
$5,509 and $4,531 for the three months ended June 30, 2005
and 2006, respectively) |
|
|
11,437 |
|
|
|
12,734 |
|
|
|
|
Total revenues |
|
|
160,721 |
|
|
|
151,550 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold: |
|
|
|
|
|
|
|
|
Manufacturing operations (including costs related to
affiliates of $15,475 and $4,800 for the three months ended
June 30, 2005 and 2006, respectively) |
|
|
135,399 |
|
|
|
123,618 |
|
|
|
|
|
|
|
|
|
|
Railcar services (including costs related to affiliates of
$5,312 and $3,544 for the three months ended June 30, 2005
and 2006, respectively) |
|
|
10,323 |
|
|
|
9,947 |
|
|
|
|
Total cost of goods sold |
|
|
145,722 |
|
|
|
133,565 |
|
Gross profit |
|
|
14,999 |
|
|
|
17,985 |
|
|
|
|
|
|
|
|
|
|
Income related to insurance recoveries, net |
|
|
|
|
|
|
4,983 |
|
Selling, administrative and other |
|
|
3,229 |
|
|
|
4,608 |
|
Stock based compensation expense |
|
|
|
|
|
|
1,419 |
|
|
|
|
Earnings from operations |
|
|
11,770 |
|
|
|
16,941 |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
109 |
|
|
|
429 |
|
Interest expense (including interest expense to affiliates
of $346 and $0 for the three months ended June 30, 2005 and
2006, respectively) |
|
|
1,296 |
|
|
|
103 |
|
Earnings (loss) from joint venture |
|
|
180 |
|
|
|
(138 |
) |
|
|
|
Earnings before income tax expense |
|
|
10,763 |
|
|
|
17,129 |
|
Income tax expense |
|
|
4,264 |
|
|
|
6,308 |
|
|
|
|
Net earnings |
|
$ |
6,499 |
|
|
$ |
10,821 |
|
|
|
|
Less preferred dividends |
|
|
(4,570 |
) |
|
|
|
|
|
|
|
Earnings available to common shareholders |
|
$ |
1,929 |
|
|
$ |
10,821 |
|
|
|
|
|
|
|
|
|
|
Net earnings per common share basic |
|
$ |
0.17 |
|
|
$ |
0.51 |
|
Net earnings per common share diluted |
|
$ |
0.17 |
|
|
$ |
0.51 |
|
Weighted average common shares outstanding basic |
|
|
11,147 |
|
|
|
21,208 |
|
Weighted average common shares outstanding diluted |
|
|
11,147 |
|
|
|
21,289 |
|
|
|
|
|
Dividends declared per common share |
|
$ |
|
|
|
$ |
0.03 |
|
See notes to the Condensed Consolidated Financial Statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended, |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2006 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Manufacturing operations (including revenues from affiliates
of $28,148 and $20,209 for the six months ended June 30,
2005 and 2006, respectively) |
|
$ |
269,978 |
|
|
$ |
305,306 |
|
|
|
|
|
|
|
|
|
|
Railcar services (including revenues from affiliates of
$11,280 and $10,513 for the six months ended June 30, 2005
and 2006, respectively) |
|
|
21,665 |
|
|
|
24,973 |
|
|
|
|
Total revenues |
|
|
291,643 |
|
|
|
330,279 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold: |
|
|
|
|
|
|
|
|
Manufacturing operations (including costs related to
affiliates of $25,943 and $18,868 for the six months ended
June 30, 2005 and 2006, respectively) |
|
|
250,916 |
|
|
|
271,874 |
|
|
|
|
|
|
|
|
|
|
Railcar services (including costs related to affiliates of
$9,106 and $8,115 for the six months ended June 30, 2005 and
2006, respectively) |
|
|
18,575 |
|
|
|
20,160 |
|
|
|
|
Total cost of goods sold |
|
|
269,491 |
|
|
|
292,034 |
|
Gross profit |
|
|
22,152 |
|
|
|
38,245 |
|
|
|
|
|
|
|
|
|
|
Income related to insurance recoveries, net |
|
|
|
|
|
|
4,983 |
|
Selling, administrative and other |
|
|
6,628 |
|
|
|
9,753 |
|
Stock based compensation expense |
|
|
|
|
|
|
4,969 |
|
|
|
|
Earnings from operations |
|
|
15,524 |
|
|
|
28,506 |
|
|
|
|
|
|
|
|
|
|
Interest income (including interest income from affiliates
of $823 and $0 for the six months ended June 30, 2005 and
2006, respectively) |
|
|
977 |
|
|
|
915 |
|
|
|
|
|
|
|
|
|
|
Interest expense (including interest expense to affiliates
of $1,174 and $98 for the six months ended June 30, 2005 and
2006, respectively) |
|
|
2,382 |
|
|
|
1,133 |
|
Earnings from joint venture |
|
|
924 |
|
|
|
337 |
|
|
|
|
Earnings before income tax expense |
|
|
15,043 |
|
|
|
28,625 |
|
Income tax expense |
|
|
6,006 |
|
|
|
10,543 |
|
|
|
|
Net earnings |
|
$ |
9,037 |
|
|
$ |
18,082 |
|
|
|
|
Less preferred dividends |
|
|
(9,090 |
) |
|
|
(568 |
) |
|
|
|
Earnings (loss) available to common shareholders |
|
$ |
(53 |
) |
|
$ |
17,514 |
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per common share basic |
|
$ |
(0.00 |
) |
|
$ |
0.87 |
|
Net earnings (loss) per common share diluted |
|
$ |
(0.00 |
) |
|
$ |
0.87 |
|
Weighted average common shares outstanding basic |
|
|
11,147 |
|
|
|
20,116 |
|
Weighted average common shares outstanding diluted |
|
|
11,147 |
|
|
|
20,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
|
|
|
$ |
0.06 |
|
See notes to the Condensed Consolidated Financial Statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2006 |
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
9,037 |
|
|
$ |
18,082 |
|
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,229 |
|
|
|
4,915 |
|
Loss on the write-off of property, plant and equipment |
|
|
|
|
|
|
3,867 |
|
Write-off of deferred financing costs |
|
|
|
|
|
|
566 |
|
Stock based compensation |
|
|
|
|
|
|
5,064 |
|
Change in joint venture investment as a result of earnings |
|
|
(924 |
) |
|
|
(337 |
) |
Expense relating to pre-recapitalization liabilities |
|
|
530 |
|
|
|
|
|
Provision for deferred income taxes |
|
|
4,619 |
|
|
|
(221 |
) |
Provision for losses on accounts receivable |
|
|
39 |
|
|
|
263 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(4,897 |
) |
|
|
2,479 |
|
Accounts receivable, due from affiliate |
|
|
|
|
|
|
2,423 |
|
Insurance claim receivable |
|
|
|
|
|
|
(8,000 |
) |
Inventories |
|
|
(4,067 |
) |
|
|
(20,039 |
) |
Prepaid expenses |
|
|
(4,399 |
) |
|
|
(1,465 |
) |
Accounts payable |
|
|
27,543 |
|
|
|
(8,785 |
) |
Accounts payable, due to affiliate |
|
|
|
|
|
|
(2,048 |
) |
Accrued expenses and taxes |
|
|
5,301 |
|
|
|
(2,546 |
) |
Other |
|
|
(169 |
) |
|
|
(239 |
) |
|
|
|
Net cash provided by (used in) operating activities |
|
|
35,842 |
|
|
|
(6,021 |
) |
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(9,392 |
) |
|
|
(21,036 |
) |
Property insurance advance on Marmaduke tornado damage |
|
|
|
|
|
|
7,500 |
|
Repayment of note receivable from affiliate (Ohio Castings LLC) |
|
|
|
|
|
|
315 |
|
Acquisitions |
|
|
|
|
|
|
(17,220 |
) |
|
|
|
Net cash used in investing activities |
|
|
(9,392 |
) |
|
|
(30,441 |
) |
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale of common stock |
|
|
|
|
|
|
205,275 |
|
Offering costs |
|
|
|
|
|
|
(14,605 |
) |
Preferred stock redemption |
|
|
|
|
|
|
(82,056 |
) |
Preferred stock dividends |
|
|
|
|
|
|
(11,904 |
) |
Common stock dividends |
|
|
|
|
|
|
(636 |
) |
Decrease in amounts due to affiliates |
|
|
(35,233 |
) |
|
|
(20,473 |
) |
Majority shareholder capital contribution |
|
|
|
|
|
|
275 |
|
Finance fees related to new credit facility |
|
|
|
|
|
|
(265 |
) |
Proceeds from debt issuance |
|
|
30,770 |
|
|
|
|
|
Repayment of debt |
|
|
(1,126 |
) |
|
|
(40,232 |
) |
|
|
|
Net cash (used in) provided by financing activities |
|
|
(5,589 |
) |
|
|
35,379 |
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
20,861 |
|
|
|
(1,083 |
) |
Cash and cash equivalents at beginning of period |
|
|
6,943 |
|
|
|
28,692 |
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
27,804 |
|
|
$ |
27,609 |
|
|
|
|
See notes to the Condensed Consolidated Financial Statements.
5
American Railcar Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months ended June 30, 2005 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, 2005 has been derived from the audited consolidated balance sheets as of that date.
These condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the Companys latest annual
report attached on Form 10-K for the year ended December 31, 2005. 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 1Description 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 significant intercompany
transactions and balances have been eliminated.
ARI manufactures railcars, custom designed railcar parts for industrial companies, railroads, and
other industrial products, primarily aluminum and special alloy steel castings, for non-rail
customers. ARI also provides railcar maintenance services for railcar fleets, including that of its
affiliate, American Railcar Leasing, LLC (ARL). In addition, ARI provides fleet management and
maintenance services for railcars owned by selected customers. Such services include inspecting and
supervising the maintenance and repair of such railcars. The Companys operations are located in
the United States and Canada. The Company operates a small railcar repair facility in Sarnia,
Ontario Canada. Canadian revenues were 0.3% and 0.4%, respectively, of total company revenues for
the three and six months ended June 30, 2005. Canadian revenues were 0.3% of total company revenues
for both the three and six months ended June 30, 2006. Canadian assets were 0.4% of total company
assets as of December 31, 2005 and June 30, 2006.
In 2003, ACF Industries Holding Corp. (ACF Holding), an affiliate of ARI, formed a wholly owned
subsidiary, Castings. Castings has a one-third ownership interest in Ohio Castings. In June 2005,
ARI purchased Castings from ACF Holding. The transaction was consummated on January 1, 2005. The
cost of the acquisition was $12.0 million, represented by a demand note that the Company paid in
January 2006. However, as Castings was owned by an entity with ownership common to ARI, the
investment in subsidiary is recorded at the date of the inception of Castings, June 2003, at book
value. The purchase price was recorded at full value as a payable to affiliate and the excess of
fair value over cost, totaling $5.6 million, is presented as a distribution from equity.
On July 20, 2004, the Company formed ARL, a wholly owned subsidiary. ARLs primary business is the
leasing of railcars. The subsidiary was capitalized through the issuance of common and preferred
stock. The Companys investment in ARL was $151.7 million at June 30, 2005. Preferred stock of ARL
was issued to affiliated companies in exchange for contributions of cash or railcars totaling
$102.7 million. In January 2005, ARI obtained an additional $35.0 million of ARL common stock
resulting in a carrying value of $151.7 million.
On June 30, 2005, in anticipation of the initial public offering (see Note 3), the Company sold its
common interest in ARL for $125.0 million to affiliated companies in return for the preferred stock
investment, valued at $116.1 million, plus accrued dividends of $8.9 million that those affiliates
held in the Company. At December 31, 2004, the Companys investment in ARL was $116.7 million. This
investment was eliminated as of December 31, 2004 in order to present the Company on a stand alone
basis. New preferred stock of $86.5 million plus accrued dividends of $3.5 million were eliminated
from ARIs equity and a charge of $26.7 million was recorded to additional paid in
6
American Railcar Industries, Inc. and Subsidiaries
capital to
reflect the difference between the final transfer price of $125.0 million and the ultimate carrying
value of the Companys investment in ARL of $151.7 million. The 2005 financial statements reflect a
reduction of New Preferred Stock of $29.6 million plus accrued dividends of $5.4 million to
eliminate the additional investment of $35.0 million made in that period. ARI retained no
liabilities or other interests in ARL as a result of this sale. The presentation of the Companys
operations has been prepared on a standalone basis excluding ARLs operations for all periods. Any
differences related to the amounts originally capitalized and the amount paid for ARL in the sale
have been recorded through adjustments to shareholders equity, including certain tax benefits that
the Company received as a result of utilizing the Companys previously incurred tax losses. The
Company recorded a deferred tax asset of $12.5 million and $2.0 million in 2004 and 2005,
respectively, for those net operating loss carry forwards, as the Company has the legal right to
utilize them for tax purposes.
The following table discloses the preferred stock transactions and the effect on additional
paid-in-capital reflecting the elimination of the Companys investment in ARL for the years ended
December 31, 2004 and 2005, and the six months ended June 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
New preferred |
|
|
Additional paid in |
|
|
|
stock |
|
|
capital |
|
|
|
(in thousands) |
|
January 1, 2004 |
|
$ |
|
|
|
$ |
11,484 |
|
New preferred stock issued in exchange for mandatorily
redeemable preferred stock |
|
|
95,517 |
|
|
|
|
|
Capital contribution |
|
|
102,654 |
|
|
|
42,482 |
|
Exchange of common interest in ARL for new preferred stock |
|
|
(86,486 |
) |
|
|
(26,670 |
) |
ARL deferred tax assets |
|
|
|
|
|
|
12,522 |
|
Other |
|
|
|
|
|
|
1,431 |
|
|
|
|
|
|
|
|
December 31, 2004 |
|
$ |
111,685 |
|
|
$ |
41,249 |
|
|
|
|
|
|
|
|
Exchange of common interest in ARL for new preferred stock |
|
$ |
(29,630 |
) |
|
|
|
|
Tax benefit of ARL NOL |
|
|
|
|
|
|
(2,023 |
) |
Other |
|
|
|
|
|
|
2,441 |
|
|
|
|
|
|
|
|
December 31, 2005 |
|
$ |
82,055 |
|
|
$ |
41,667 |
|
|
|
|
|
|
|
|
Redemption of Preferred Stock through proceeds of initial
public offering |
|
$ |
(82,055 |
) |
|
$ |
|
|
Restricted stock grant |
|
|
|
|
|
|
(2,100 |
) |
Stock option expense |
|
|
|
|
|
|
1,164 |
|
Initial public offering |
|
|
|
|
|
|
191,985 |
|
|
|
|
|
|
|
|
June 30, 2006 |
|
$ |
|
|
|
$ |
232,716 |
|
|
|
|
|
|
|
|
Acquisition
On March 31, 2006, the Company acquired all of the common stock of Custom Steel, Inc., (Custom
Steel) a subsidiary of Steel Technologies, Inc. Custom Steel operates a facility located adjacent
to our component manufacturing facility in Kennett, Missouri, which produces value-added fabricated
parts that primarily support our railcar manufacturing operations. Prior to the acquisition, ARI
was Custom Steels primary customer. The purchase price was $17.2 million, which resulted in
goodwill of $7.2 million.
The fair value of the assets and acquired liabilities that resulted in goodwill for the acquisition
were $3.8 million of inventory, $8.0 million of property, plant and equipment, and $1.8 million of
a deferred tax liability.
During the 2nd quarter of 2006, additional charges of $0.1 million related to legal fees
were incurred and were recorded to goodwill as a result of the acquisition. Additionally, the fair
market value of the property, plant and equipment was adjusted by $0.1 million during the second
quarter with an offsetting increase to goodwill.
7
American Railcar Industries, Inc. and Subsidiaries
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 2Summary of Significant Accounting Policies
Significant accounting policies are described below.
Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity of three months or
less to be cash equivalents.
Revenue recognition
Revenues from railcar sales are recognized following completion of manufacturing, inspection,
customer acceptance and shipment, which is when title and risk for any damage or loss with respect
to the railcars passes to the customer. In some cases, paint and lining work may be outsourced and,
as a result, the sale will not be recorded until the railcars are shipped from the independent
contractor and accepted by the customer. Revenues from railcar and industrial parts and components
are recorded at the time of product shipment, in accordance with the contractual terms. Revenue for
railcar maintenance services is recognized upon completion and shipment of railcars from the
Companys plants. The Company does not bundle railcar service contracts with new railcar sales.
Revenue for fleet management services is recognized as performed.
The Company records amounts billed to customers for shipping and handling as part of sales in
accordance with EITF 00-10, Accounting for Shipping and Handling Fees and Costs, and records
related costs in cost of sales.
Accounts receivable
The Company carries its accounts receivable at their face amount, less an allowance for doubtful
accounts. On a periodic basis, the Company evaluates its account receivable and establishes an
allowance for doubtful accounts, based on a history of past write-offs and collections and current
credit conditions. Accounts are placed for collection on a limited basis once all other methods of
collection have been exhausted. Once it has been determined that the customer is no longer in
business and/or refuses to pay, the accounts are written off.
Inventories
Inventories are stated at the lower of average cost or market on a first-in, first-out basis, and
include the cost of materials, direct labor and manufacturing overhead.
Property, plant and equipment
Land, buildings, machinery and equipment are carried at cost. Maintenance and repair costs are
charged directly to earnings. Tooling is generally capitalized and amortized over a period of two
to five years.
Buildings are depreciated over estimated useful lives that range from 14 to 50 years. The estimated
useful lives of other depreciable assets, including machinery and equipment, vary from 3 to 25
years. Depreciation is calculated on the straight-line method for financial reporting purposes and
on accelerated methods for tax purposes.
Debt issuance costs
Debt issuance costs were incurred in connection with the issuance of long-term debt in 2005 and the
Amended and Restated Revolving Credit Agreement in 2006, and are amortized over the term of the
related debt, utilizing the interest method.
8
American Railcar Industries, Inc. and Subsidiaries
Ohio Castings joint venture
The Company uses the equity method to account for its investment in Ohio Castings. Under the equity
method, the Company recognizes its share of the earnings and losses of the joint venture as they
accrue instead of when they are realized. Advances and distributions are charged and credited
directly to the investment account. Ohio Castings produces railcar parts that are sold to one of
the joint venture partners. The joint venture partner sells these parts to outside third parties at
current market prices and to the Company and the other joint venture partner in Ohio Castings at
cost plus a licensing fee. Ohio Castings closed its Chicago Castings facility effective June 30,
2006, in connection with a consolidation of its operations. Ohio Castings is responsible for the
exit liabilities of this closure. The Company does not believe that this closing will 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 its one third share of Ohio Castings debt, which the Company has
guaranteed. The one third share of Ohio Castings debt was $5.1 million and $4.6 million as of
December 31, 2005 and June 30, 2006, respectively. The fair market value of the guarantee was
approximately $0.1 million at December 31, 2005 and June 30, 2006.
The carrying amount of the investment in Ohio Castings by Castings was $5.6 million at December 31,
2005 and June 30, 2006.
For the three and six months ended June 30, 2006, the cost of railcar manufacturing included $12.0
million and $23.9 million, respectively, in products produced by Ohio Castings. For the three and
six months ended June 30, 2005, the cost of railcar manufacturing included $8.4 million and $14.0
million, respectively, in products produced by Ohio Castings.
Summary combined financial information for Ohio Castings, the investee company, as of December 31,
2005 and June 30, 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
June 30, 2006 |
|
|
|
(in thousands) |
|
Financial position |
|
|
|
|
|
|
|
|
Current assets |
|
$ |
18,302 |
|
|
$ |
14,771 |
|
Property, plant, and equipment, net |
|
|
15,380 |
|
|
|
15,381 |
|
|
|
|
|
|
|
|
Total assets |
|
|
33,682 |
|
|
|
30,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
14,540 |
|
|
|
12,203 |
|
Long-term debt |
|
|
11,663 |
|
|
|
9,460 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
26,203 |
|
|
|
21,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity |
|
|
7,479 |
|
|
|
8,489 |
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
33,682 |
|
|
$ |
30,152 |
|
|
|
|
|
|
|
|
9
American Railcar Industries, Inc. and Subsidiaries
Summary combined results of operations for Ohio Castings for the three and six months ended June
30, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
|
June 30, 2006 |
|
Three months ended |
|
(in thousands) |
|
Results of operations |
|
|
|
|
|
|
|
|
Sales |
|
$ |
29,539 |
|
|
$ |
28,898 |
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
|
655 |
|
|
|
(552 |
) |
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
693 |
|
|
$ |
(414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
|
June 30, 2006 |
|
Six months ended |
|
(in thousands) |
|
Results of operations
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
58,279 |
|
|
$ |
66,237 |
|
|
|
|
|
|
|
|
Earnings from operations |
|
|
2,860 |
|
|
|
774 |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
2,904 |
|
|
$ |
1,010 |
|
|
|
|
|
|
|
|
Long-lived assets
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.
The Company reduced the carrying value of equipment purchased under a lease agreement from an
unrelated third party by $0.4 million in the first quarter of 2006, for its manufacturing plants
which is reflected in the consolidated statement of operations under costs of manufacturing
operations. No impairment losses were recorded in the second quarter of 2006. No impairment losses
were recorded for the six month period ended June 30, 2005.
Income taxes
ARI accounts for income taxes under the asset and liability method. Under this method, deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial reporting basis and the tax basis of ARIs assets and liabilities at enacted
tax rates expected to be in effect when such amounts are recovered or settled.
The FASB recently issued FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company
is currently reviewing FIN 48 and evaluating its potential impact on
its Consolidated Financial Statements.
Pension plans and other postretirement benefits
Certain ARI employees participate in noncontributory, defined benefit pension plans and a
supplemental executive retirement plan. Benefits for the salaried employees are based on salary and
years of service, while those for hourly employees are based on negotiated rates and years of
service. Benefit costs are accrued during the years employees render service based on actuarial
calculations of cost based on the stated factors.
ARI employees can elect to also participate in defined contribution retirement plans, health care
and life insurance plans. Benefit costs are accrued during the years employees render service.
10
American Railcar Industries, Inc. and Subsidiaries
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable, amounts due to/from
affiliates and accounts payable approximate fair values because of the short-term maturity of these
instruments. The fair value of long-term debt is discussed in Note 8. Fair value estimates are made
at a specific point in time, based on relevant market information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision.
Foreign currency translation
Balance sheet amounts from the Companys Canadian operation are translated at the exchange rates in
effect at quarter-end or year-end, and operations statement amounts are translated at the average
rates of exchange prevailing during the quarter or year. Currency translation adjustments are
included in Stockholders Equity as part of Accumulated other comprehensive loss.
Comprehensive income (loss)
Comprehensive income (loss) is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner sources. Comprehensive
income (loss) consists of net earnings (loss), foreign currency translation adjustment and the
Companys minimum pension liability adjustment, which is shown net of tax.
Retained earnings
ARI was recapitalized on October 1, 1994, when ACF Industries LLC (ACF), the former holder of ARIs
common stock, transferred to ARI the old common stock of ARI along with the assets and liabilities
of ACFs railcar maintenance and railcar parts manufacturing businesses (the 1994 ACF asset
transfer). In exchange, ACF received 57,306 shares of ARIs newly issued mandatorily redeemable
preferred stock. New shares of ARIs common stock were issued to Carl C. Icahn, Chairman of the
Board of ACF, in exchange for cash of $6.4 million. In October 1998, ARI redeemed 57,305 shares of
the preferred stock and the remaining share of preferred stock was transferred to Mr. Icahn. As ARI
and ACF were entities under common control, accounting principles generally accepted in the United
States of America required that ARIs initial carrying value of assets transferred to it from ACF
and the purchase of Castings be equal to ACFs historical net book value at the time of transfer.
The excess of the fair value paid over the net book value of assets and liabilities transferred to
ARI was reflected as a distribution of retained earnings and had the effect of reducing
shareholders equity by $24.8 million as of December 31, 2005 and June 30, 2006. Of that amount,
$19.2 million was recorded at the formation of ARI, and $5.6 million was recorded in 2003 from the
acquisition of Castings.
Earnings per share
Basic earnings (loss) per share are calculated as net earnings (loss) attributable to common
shareholders divided by the weighted-average number of common shares outstanding during the
respective period. Diluted earnings (loss) per share are calculated by dividing net earnings (loss)
attributable to common shareholders by the weighted-average number of shares outstanding plus
dilutive potential common shares outstanding during the year.
Use of estimates
Management of ARI has made a number of estimates and assumptions relating to the reporting of
assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities
to prepare these financial statements in conformity with accounting principles generally accepted
in the United States of America. Significant items subject to estimates and assumptions include
deferred taxes, workers compensation accrual, valuation allowances for accounts receivable and
inventory obsolescence, valuation of property, plant and equipment, and the reserve for warranty
claims. Actual results could differ from those estimates.
11
American Railcar Industries, Inc. and Subsidiaries
Stock-based compensation
The Company applies the provisions of Statement of Financial Accounting Standards (SFAS) No.
123(R) (123R), Share-Based Payments, to stock option awards issued. The compensation cost
recorded for these awards will be based on their grant-date fair value required by Statement
123(R).
Goodwill
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and
Other Intangible Assets. This standard requires that goodwill and other intangible assets with
indefinite useful lives shall not be amortized but shall be tested for impairment at least annually
by comparing the fair value of the asset to its carrying value. The Company adopted this standard
upon the acquisition of Custom Steel, which resulted in goodwill of $7.2 million, as described in
Note 1. The Company plans to perform the goodwill impairment test required by SFAS No. 142 as of
March 1 of each year.
Recent accounting pronouncements
In November 2004, the FASB issued SFAS 151, Inventory Costs An Amendment of ARB No. 43, Chapter
4, which requires the recognition of costs of idle facilities, excessive spoilage, double freight,
and rehandling costs as a component of current-period expenses. The Company adopted SFAS 151 on
January 1, 2006, as required by the statement, and this has not materially impacted the financial
operations of the Company.
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN
48), Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty
in income taxes recognized in the financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company is currently evaluating the impact of this standard on its Consolidated Financial
Statements.
Note 3Initial 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.
As of June 30, 2006, 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 |
|
|
|
|
|
12
American Railcar Industries, Inc. and Subsidiaries
Note 4Marmaduke Storm Damage Insurance Claim (Gain related to insurance recoveries)
On April 2, 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 has 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 has
business insurance for business interruption as a direct result of the insured damage. The Company
has deductibles on these policies of $100,000 for property insurance and a five-day equivalent time
element business interruption deductible, which the Company estimates to be at least $600,000. This
deductible is being ratably recognized over the course of the five-month period during which the
Company estimates the business interruption will occur.
The Company has received an advance of $7.5 million from the insurance carrier related to the
property damage. This $7.5 million has been designated as cash received for investing activities as
the advance is to be used for replacement of property, plant and equipment. During June 2006, the
Company and the insurance carrier reached a minimum settlement amount of $8.6 million ($8.0 million
after application of the deductible) to cover continuing expenses, employee wages and estimated
lost profits for the months of April, May and June 2006, which was received in July 2006.
During the quarter ended June 30, 2006, the Company had assets with a net book value of $3.5
million damaged or destroyed by the tornado. Other costs incurred related to the tornado damage
included clean up for the temporary shut-down of the facility. The write off of assets and
associated cleanup costs have been netted against the insurance advance pending settlement of the
property damage claim. The final property damage claim will be settled after operations have begun
again and all machinery and equipment have been repaired and are operational.
The amounts recorded in the statement of operations relating to our insurance recoveries is set
forth as follows:
|
|
|
|
|
|
|
(in thousands) |
|
Business interruption insurance claim |
|
$ |
8,600 |
|
Business interruption claim deductible |
|
|
(600 |
) |
|
|
|
|
Business interruption insurance settlement, net |
|
|
8,000 |
|
|
|
|
|
|
Continuing expenses |
|
|
(3,257 |
) |
Unrecognized deductible |
|
|
240 |
|
|
|
|
|
Income related to insurance recoveries, net |
|
$ |
4,983 |
|
|
|
|
|
13
American Railcar Industries, Inc. and Subsidiaries
The current liability amount included in the balance sheet relating to our insurance recoveries is
set forth as follows:
|
|
|
|
|
|
|
(in thousands) |
|
Property insurance advance |
|
$ |
7,500 |
|
Assets Damaged and clean up costs |
|
|
(4,379 |
) |
|
|
|
|
Remaining property insurance advance |
|
|
3,121 |
|
Unrecognized deductible |
|
|
(240 |
) |
|
|
|
|
Total insurance advance |
|
$ |
2,881 |
|
|
|
|
|
The final lost profit settlement related to the business interruption insurance claim will be
recognized when agreed to with the insurance carrier and will be reflected as insurance recoveries
for the period when the agreement is finalized.
Note 5Comprehensive Income
The components of comprehensive income, net of related tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Net earnings |
|
$ |
6,499 |
|
|
$ |
10,821 |
|
|
$ |
9,037 |
|
|
$ |
18,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(4 |
) |
|
|
37 |
|
|
|
(3 |
) |
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
6,495 |
|
|
$ |
10,858 |
|
|
$ |
9,034 |
|
|
$ |
18,119 |
|
|
|
|
|
|
Note 6Accounts Receivable
The allowance for doubtful accounts had the following activity for the three and six months ended
June 30, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, |
|
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands) |
|
Beginning balance |
|
$ |
531 |
|
|
$ |
888 |
|
Bad debt expense |
|
|
19 |
|
|
|
224 |
|
Accounts written off |
|
|
(9 |
) |
|
|
(19 |
) |
Recoveries |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
554 |
|
|
$ |
1,093 |
|
|
|
|
|
|
|
|
14
American Railcar Industries, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands) |
|
Beginning balance |
|
$ |
510 |
|
|
$ |
849 |
|
Bad debt expense |
|
|
39 |
|
|
|
263 |
|
Accounts written off |
|
|
(10 |
) |
|
|
(22 |
) |
Recoveries |
|
|
15 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
554 |
|
|
$ |
1,093 |
|
|
|
|
|
|
|
|
Note 7Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands) |
|
Raw materials |
|
$ |
49,246 |
|
|
$ |
64,912 |
|
Work-in-process |
|
|
26,301 |
|
|
|
36,255 |
|
Finished products |
|
|
14,772 |
|
|
|
13,318 |
|
|
|
|
|
|
|
|
Total inventories |
|
|
90,319 |
|
|
|
114,485 |
|
Less reserves |
|
|
2,318 |
|
|
|
2,608 |
|
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
88,001 |
|
|
$ |
111,877 |
|
|
|
|
|
|
|
|
Inventory reserves had the following activity for the year ended December 31, 2005 and the six
months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended |
|
|
Six Months Ended |
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands) |
|
Beginning balance |
|
$ |
2,679 |
|
|
$ |
2,318 |
|
Provision |
|
|
273 |
|
|
|
333 |
|
Writeoff |
|
|
(634 |
) |
|
|
(43 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
2,318 |
|
|
$ |
2,608 |
|
|
|
|
|
|
|
|
15
American Railcar Industries, Inc. and Subsidiaries
Note 8Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
June 30, 2006 |
|
|
|
(in thousands) |
|
Revolving line of credit |
|
$ |
31,852 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Industrial revenue bonds secured by certain
buildings and manufacturing equipment and
guaranteed by ACF and ACF Holding with
effective interest rates ranging from 6.75% to
8.5%, principal amounts due through the year
2011 |
|
|
8,340 |
|
|
|
|
|
Other |
|
|
178 |
|
|
|
138 |
|
|
|
|
|
|
|
|
Total long-term debt, including current portion |
|
$ |
40,370 |
|
|
$ |
138 |
|
Less current portion of debt |
|
|
33,294 |
|
|
|
85 |
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion |
|
$ |
7,076 |
|
|
$ |
53 |
|
|
|
|
|
|
|
|
Concurrent with the completion of the initial public offering, the Company entered into an Amended
and Restated Credit Agreement (the revolving credit agreement) providing for the terms of the
Companys revolving credit facility (the revolving credit facility) with North Fork Business
Capital Corporation, as administrative agent for various lenders. The revolving credit facility
has 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 includes a $15.0 million capital expenditure
sub-facility that is based on a percentage of the costs related to capital projects the Company may
undertake. The revolving credit facility has a three-year term. Borrowings under the revolving
credit facility are collateralized by substantially all of the assets of the Company. The
revolving credit facility has both affirmative and negative covenants, including, without
limitation, a maximum senior debt leverage ratio, a maximum total debt leverage ratio, a minimum
interest coverage ratio, a minimum tangible net worth and limitations on capital expenditures and
dividends. At June 30, 2006 we had $64.1 million of availability under the revolving credit
facility and no borrowings outstanding. As of June 30, 2006, the Company was in compliance with all
of its covenants under this Agreement.
The fair value of long-term debt was approximately $40.4 million and $0.1 million at December 31,
2005 and June 30, 2006, respectively, as calculated by discounting cash flows through maturity
using ARIs current rate of borrowing for similar liabilities.
Note 9Warranties
The Company records a liability for an estimate of costs that it expects to incur under its basic
limited warranty, which is typically a range from one year for parts and services to five years on
new railcars, when manufacturing revenue is recognized. Factors affecting the Companys warranty
liability include the number of units sold and historical and anticipated rates of claims and costs
per claim. The Company assesses the adequacy of its warranty liability based on changes in these
factors.
The change in the Companys warranty reserve, which is reflected on the balance sheet in accrued
expenses, is as follows for the three and six month periods ended June 30, 2005 and 2006:
16
American Railcar Industries, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands) |
|
Liability, beginning of period |
|
$ |
1,517 |
|
|
$ |
1,234 |
|
Expense for new warranties issued |
|
|
163 |
|
|
|
1,025 |
|
Warranty claims |
|
|
(258 |
) |
|
|
(223 |
) |
|
|
|
|
|
|
|
Liability, end of period |
|
$ |
1,422 |
|
|
$ |
2,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands) |
|
Liability, beginning of period |
|
$ |
1,630 |
|
|
$ |
1,237 |
|
Expense for new warranties issued |
|
|
225 |
|
|
|
1,500 |
|
Warranty claims |
|
|
(433 |
) |
|
|
(701 |
) |
|
|
|
|
|
|
|
Liability, end of period |
|
$ |
1,422 |
|
|
$ |
2,036 |
|
|
|
|
|
|
|
|
The increase in warranty liability during the three and six months ended June 30, 2006 is related
to two warranty claims on covered hopper cars. These claims were submitted during the warranty
period of each of the railcars. As a result, the Company recorded additional warranty expense of
$0.7 million during the six months ended June 30, 2006. This expense of $0.7 million was included
in the total expense of $1.0 and $1.5 million for the three and six months ended June 30, 2006,
respectively.
Note 10Earnings 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 June 30, |
|
|
|
2005 |
|
|
2006 |
|
Weighted average basic common shares outstanding |
|
|
11,147,059 |
|
|
|
21,207,773 |
|
Dilutive effect of employee stock options (1) |
|
|
|
|
|
|
81,296 |
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding |
|
|
11,147,059 |
|
|
|
21,289,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2005 |
|
|
2006 |
|
Weighted average basic common shares outstanding |
|
|
11,147,059 |
|
|
|
20,116,455 |
|
Dilutive effect of employee stock options (1) |
|
|
|
|
|
|
103,708 |
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding |
|
|
11,147,059 |
|
|
|
20,220,163 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock options to purchase 75,000 shares granted during the second quarter of 2006 were not
included in the calculation for diluted earnings per share for both the three months and the six
months ended June 30, 2006. These
options would have resulted in an antidilutive effect to the earnings per share calculation. There
were no stock options granted prior to or during 2005. |
17
American Railcar Industries, Inc. and Subsidiaries
Note 11Stock based Compensation
In December 2004, the FASB issued SFAS 123R, which establishes the accounting for transactions in
which an entity exchanges its equity instruments or certain liabilities based upon the entitys
equity instruments for goods or services. The revision to SFAS No. 123 generally requires that
publicly traded companies measure the cost of employee services received in exchange for an award
of equity instruments based on the fair value of the award on the grant date. That cost will be
recognized over the period during which an employee is required to provide service in exchange for
the award, which is usually the vesting period.
In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 107,
Share-Based Payment, to provide additional guidance to public companies in applying the provisions
of Statement 123R. During 2005, the FASB issued three FASB Staff Positions (FSP): FSP FAS
123R-1, Classification and Measurement of Freestanding Financial Instruments Originally Issued in
Exchange for Employee Services under FASB Statement No. 123(R), FSP FAS 123R-2, Practical
Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123R, and FSP FAS
123R-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards. The Company has adopted the provisions of SAB 107 in conjunction with the adoption of
Statement 123R and also considers the guidance provided in the FSPs. The revised provisions of
SFAS No. 123 became effective for the Company on January 19, 2006 in connection with the initial
public offering and stock option plan created in 2005 (discussed below).
Net income for the three and six months ended June 30, 2006 includes $1.5 million and $5.1 million,
respectively, of compensation expense related to our stock based compensation arrangements. No
stock based compensation expenses were recognized in 2005. Approximately $0.1 million is classified
as cost of sales for both the three and six months ended June 30, 2006. The remaining amounts of
$1.4 million and $5.0 million, respectively, are classified as selling, administrative and other
expense for the three and six months ended June 30, 2006. Net income for the three and six months
ended June 30, 2006 includes zero and $2.2 million, respectively of income tax benefits related to
our stock-based compensation arrangements.
Stock Options
Concurrent with the initial public offering, the Company granted options to purchase a total of
484,876 shares of common stock under the 2005 equity incentive plan (the 2005 Plan). These
options were granted at an exercise price equal to the initial public offering price of $21.00 per
share. The options have a term of five years and vest in equal annual installments over a
three-year period. The Company determined that the stock option expense for these options will
total approximately $3.5 million over the next three years using a Black-Scholes calculation based
on the following assumptions: stock volatility of 35%; 5-year term; interest rate of 4.35%; and
dividend yield of 1%. The Company accounts for the 2005 Plan under the recognition and measurement
principles of SFAS No. 123R, Share-Based Payment, and its related provisions. As there was no
history with the stock prices of the Company, the stock volatility rate was determined using
volatility rates for several other similar companies within the railcar industry. The 5 year term
represents the expiration of each option. The interest rate used was the 5 year government T Bill
rate on the date of grant. Dividend yield was determined from an average of other companies in the
industry as the Company did not have a history of dividend rates.
During the three months ended June 30, 2006, the Company issued options to purchase a total of
75,000 shares of common stock under the 2005 Plan. These options were granted at an exercise price
of $35.69 per share. The Company determined the stock option expense for these options will total
approximately $1.0 million over the next three years using the same assumptions and methodology to
determine the value of these options as was used for the options issued in connection with the
Companys initial public offering.
The 2005 Plan permits the Company to issue stock and grant stock options, restricted stock, stock
units and other equity interests to purchase or acquire up to 1.0 million shares of our common
stock. Awards covering no more than 300,000 shares may be granted to any person during any fiscal
year. Options are subject to certain vesting provisions as designated by the board of directors and
generally have an expiration that ranges from 5 to 10 years. Options
granted under the 2005 Plan must have an exercise price at or above the fair market value on the
date of grant. If any award expires, or is terminated, surrendered or forfeited, then shares of
common stock covered by the award will again be available for grant under the 2005 Plan. The 2005
Plan is administered by the Companys board of
18
American Railcar Industries, Inc. and Subsidiaries
directors or a committee of the board. Options
granted pursuant to the requirements of SFAS No. 123R are expensed on a graded vesting method over
the vesting period of the option.
The Company recognized $0.6 million and $1.2 million, respectively, of compensation expense during
the three and six months ended June 30, 2006 related to stock option grants made under the 2005
plan. The Company recognized no income tax benefits related to stock options during the three or
six months ended June 30, 2006.
The following is a summary of option activity under the 2005 plan as of June 30, 2006, and changes
during each quarter of fiscal year 2006 through June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
Grant-date |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Fair Value |
|
|
Intrinsic |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
of Options |
|
|
Value |
|
|
|
Shares |
|
|
Price |
|
|
Life |
|
|
Granted |
|
|
($000) |
|
|
|
|
Outstanding at the
beginning of
period, January 1,
2006 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
484,876 |
|
|
$ |
21.00 |
|
|
|
|
|
|
$ |
7.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the
end of period,
March 31, 2006 |
|
|
484,876 |
|
|
$ |
21.00 |
|
|
58 months |
|
$ |
7.28 |
|
|
$ |
6,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
75,000 |
|
|
$ |
35.69 |
|
|
|
|
|
|
$ |
13.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the
end of period, June
30, 2006 |
|
|
559,876 |
|
|
$ |
22.97 |
|
|
55 months |
|
$ |
8.05 |
|
|
$ |
5,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end
of period, June 30,
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Award
On the date of the initial public offering, the Company issued 285,714 restricted shares of the
Companys common stock to Mr. Unger, its Chief Executive Officer. These restricted shares were
granted with an issuance price of $21.00 per share, resulting in a fair value of $6.0 million on
the date of grant. This restricted stock grant vested 40% on the date of the grant with the
remaining 60% vesting one year after issuance. The Company recorded compensation expense of $2.4
million on the date of the grant for this restricted stock. The remaining expense will be
recognized over the one-year vesting period. 114,286 of these shares became transferable without
contractual restrictions by Mr. Unger six months after issuance. An additional 85,714 of these
shares will be transferable without contractual restrictions by Mr. Unger twelve months after
issuance. The remaining 85,714 shares will be transferable without contractual restrictions by Mr.
Unger eighteen months after issuance.
The Company recognized $0.9 million and $3.9 million, respectively of compensation expense during
the three and six months ended June 30, 2006 for this restricted stock grant. The Company
recognized zero and $2.2 million of income tax benefits in the three and six months ended June 30,
2006, respectively for this restricted stock grant.
19
American Railcar Industries, Inc. and Subsidiaries
The following is a summary of the status of non-vested shares as of June 30, 2006, and changes
during each quarter of fiscal year 2006 through June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Non-vested |
|
|
Average Grant |
|
|
|
Stock Awards |
|
|
Date Fair Value |
|
|
|
|
Non-vested at January 1, 2006 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
285,714 |
|
|
|
21.00 |
|
Vested |
|
|
(114,286 |
) |
|
|
21.00 |
|
|
|
|
Non-vested at the end of period, March 31, 2006 |
|
|
171,428 |
|
|
$ |
21.00 |
|
|
|
|
|
|
|
|
|
|
Non-vested at the end of period, June 30, 2006 |
|
|
171,428 |
|
|
$ |
21.00 |
|
|
|
|
|
|
|
|
|
Future stock compensation expense and shares available
As of June 30, 2006, unrecognized compensation costs related to the unvested portion of share-based
compensation arrangements was approximately $5.4 million and is expected to be recognized over a
weighted-average period of approximately 2 years.
As of June 30, 2006, 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.
Note 12Related Party Transactions
In connection with the 1994 ACF asset transfer, described in Note 2, the Company entered into the
following administrative and operating agreements with ACF, effective as of October 1, 1994:
Manufacturing services agreement
Under the manufacturing services agreement, ACF agreed to manufacture and distribute, at the
Companys instruction, various products using certain assets that the Company acquired pursuant
to the 1994 ACF asset transfer agreement. In consideration for these services, the Company agreed
to pay ACF based on agreed upon rates. Components supplied to ARI by ACF include tank railcar
heads, wheel sets and various structural components. In the three and six months ended June 30,
2006, ARI purchased inventory of $17.5 million and $39.5 million, respectively, of components
from ACF. In the three and six months ended June 30, 2005, ARI purchased inventory of $18.5
million and $35.4 million, respectively, of components from ACF. The agreement automatically
renews unless written notice is provided by the Company.
Administration Agreement
Under this agreement, ACF agreed to provide the Company with office facilities and administrative
services, primarily information technology services. In exchange for the facilities and services,
the Company agreed to pay ACF based on agreed upon rates. Management believes that these
allocation methods are reasonable for the relevant costs. Total amounts incurred under this
agreement were zero and $0.4 million for the three and six months ended June 30, 2005. The
agreement was terminated on April 1, 2005.
20
American Railcar Industries, Inc. and Subsidiaries
Railcar Servicing Agreement
Under this agreement, the Company agreed to provide ACF with railcar repair and maintenance
services, fleet management services and consulting services on safety and environmental matters
for railcars owned or managed by ACF. ACF agreed to compensate the Company based on agreed upon
rates. The agreement was terminated on April 1, 2005. No amounts were recorded for the three and
six months ended June 30, 2005.
Supply Agreement
Under this agreement, the Company agreed to manufacture and sell to ACF specified components at
cost plus mark-up or on terms not less favorable than the terms on which the Company sold the
same products to third parties. Revenue recorded under this arrangement totaled $0.1 million and
$0.2 million for the three and six months ended June 30, 2005 and is included under revenue from
affiliates on the statement of operations. Revenue recorded under this arrangement totaled $0.3
million and $0.4 million for the three and six months ended June 30, 2006 and is included under
revenue from affiliates on the accompanying condensed consolidated statement of operations.
In 2004, the Company entered into the following agreements with ACF and ARL:
Railcar Management Agreements
Under this agreement, the Company provided ARI First and ARI Third, subsidiaries of ARL, with
marketing, leasing, administration, maintenance, record keeping and insurance services for
railcars owned by ARI First and ARI Third. In exchange for these services, ARI First and ARI
Third paid the Company a management fee, which totaled $0.5 million and $1.1 million,
respectively, for the three and six months ended June 30, 2005, which is included under revenue
from affiliates on the statement of operations. This arrangement was terminated on July 1, 2005,
when ARI assigned its management agreements for ARI First LLC and ARI Third LLC to ARL.
ACF Administration Agreement
The ACF Administration agreement was entered into with ACF and ARL. Under the agreement, ACF
agreed to provide certain management services that were required under the railcar management
agreement with ARI First and ARI Third described above. Fees paid to ACF under this agreement
were equal to the fees the Company charged to ARI First and Third under the railcar management
agreement and totaled zero and $0.6 million, respectively, for the three and six months ended
June 30, 2005, which is included under cost related to affiliates on the statement of
operations. This arrangement was terminated on April 1, 2005.
The Company currently has the following agreements with ARL and its subsidiaries:
ARL Railcar Services Agreement
Under this agreement, which began on April 1, 2005, ARL provided the Company with railcar
services, which the Company was required to provide to ARI First and ARI Third under the railcar
management agreement. The Company paid ARL an amount equal to the amounts paid to the Company by
ARI First and ARI Third under the railcar management agreement, which totaled $0.5 million for
both the three and six months ended June 30, 2005 and is included under cost of goods sold on the
statement of earnings. This agreement was terminated on July 1, 2005.
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 $5.5 million and $11.3 million,
respectively, for the three and six months ended June 30, 2005, included under revenue from
affiliates on the statement of operations, was recorded under this arrangement. Revenue of $4.5
million and $10.5 million, respectively for the three and six months ended June 30, 2006, were
21
American Railcar Industries, Inc. and Subsidiaries
recorded under this arrangement, which is included under revenue from affiliates on the statement
of operations. The agreement extends through June 30, 2007 and automatically renews for one-year
periods unless either party provides at least six months prior notice of termination. Termination
by the Company would result in a fee payable to ARL of $0.5 million.
ARL Services Agreement
Under this agreement, ARL agreed to provide the Company certain information technology services,
rent and building services and limited administrative services. The rent and building services
includes the use of certain facilities owned by Mr. Unger, which is further described in Note 14.
Under the 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 $0.5 million for the three and six months ended June 30, 2005. Total
fees paid to ARL were $0.5 million and $1.0 million, respectively, for the three and six months
ended June 30, 2006. Amounts billed to ARL totaled $0.03 million and $0.06 million, respectively,
for the three and six months ended June 30, 2005. No amounts were billed to ARL during the three
and six months ended June 30, 2006. These balances are included in revenues and 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.
Trademark License Agreement
Under
this agreement, which is effective as of June 30, 2005, ARI granted a nonexclusive,
perpetual, worldwide license to ARL to use ARIs common law trademarks American Railcar and the
diamond shape logo. ARL may only use the licensed trademarks in connection with the railcar
leasing business. ARI receives annual fees of $1,000 in exchange for this license.
ARL Sales Contracts
On March 31, 2006, the Company entered into an agreement with ARL for the Company to manufacture
and ARL to purchase 1,000 tank railcars in 2007. The Company has in the past manufactured and
sold railcars to ARL on a purchase order basis. When the Company entered into this agreement, it
planned to produce these tank railcars with new manufacturing capacity that the Company expected
to have available beginning in January 2007. The agreement also includes options for ARL to
purchase up to 300 covered hopper railcars in 2007, should additional capacity become available,
and 1,000 tank railcars and 400 covered hopper railcars in 2008. Similar to other customers, the
recent storm damage at Marmaduke and resulting temporary plant shutdown will impact the timing of
delivery of the railcars that ARL has ordered.
Additional Agreements with ACF
As part of ARIs recapitalization, ACF retained the liabilities for unfunded pension and other
postretirement liabilities and workers compensation liabilities as of October 1, 1994 for employees
who transferred from ACF to ARI at that date and for environmental liabilities as of that date.
Expenses paid by ACF, relating to pre-recapitalization liabilities, were recorded as capital
contributions by ARI and included in additional paid-in capital.
ARI recorded total expenses relating to benefits and environmental liabilities of $1.0 million and
$1.8 million, respectively, in the three and six months ended June 30, 2005. Included in the total
expenses incurred were amounts related to pre-capitalization liabilities retained by ACF, which
were reflected as additional paid-in capital, totaling $0.2 million and $0.5 million, respectively,
in the three and six months ended June 30, 2005. Effective December 1, 2005, the Company separated
pension and post retirement obligations from ACF. As such, pre-recapitalization expenses related to
pension and post retirement benefits are no longer paid by ACF on ARIs behalf.
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). This note was paid off in full in
connection with the initial public offering, as discussed in Note 3.
22
American Railcar Industries, Inc. and Subsidiaries
Agreements with Affiliated Parties
During 2004, ARI advanced $165.0 million to Mr. Icahn under a secured note due in 2007 and bearing
interest at prime plus 1.75%. Interest income on the note was zero and $0.8 million, respectively,
for the three and six months ended June 30, 2005. On January 26, 2005, the ARL operating agreement
was amended and an assignment and assumption agreement was executed whereby ARI transferred its
interest in the $165.0 million secured note receivable from Mr. Icahn to ARL in exchange for 35,000
A Units of ARL and in satisfaction of the $130.0 million note issued to ARL, as discussed below.
During 2004, ARL advanced $130.0 million to ARI under a note due in 2007 and bearing interest at
prime plus 1.5%. Interest expense on the note was zero and $0.6 million, respectively, for the
three and six months ended June 30, 2005. As discussed above, this note was fully satisfied on
January 26, 2005.
On December 17, 2004, ARI borrowed $7.0 million under a note payable to Arnos Corp., an affiliate.
The note bears interest at prime plus 1.75% and was payable on demand. Interest expense on the note
was $0.1 million and $0.2 million, respectively, for the three and six months ended June 30, 2005.
Interest expense on the note was zero and $0.1 million, respectively, for the three and six months
ended June 30, 2006. This note was paid off in full in connection with the initial public offering,
as discussed in Note 3.
As of December 31, 2005, amounts due from affiliates represented $5.1 million in receivables from
ACF, Ohio Castings and ARL. Included in amounts due from affiliates at June 30, 2006 were $2.7
million in accounts receivable from ACF, Ohio Castings and ARL.
As of December 31, 2005, amounts due to affiliates represented $23.5 million in accounts and notes
payable to ACF and its affiliates. As of June 30, 2006, amounts due to affiliates included $0.9
million in accounts payable to ACF.
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 six months
ended June 30, 2005 and 2006.
Cost of railcar manufacturing for the three and six months ended June 30, 2005 includes $8.4
million and $14.0 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 three
and six months ended June 30, 2006 included $12.0 million and $23.9 million, respectively, of
railcar products produced by Ohio Castings. Inventory at December 31, 2005 and June 30, 2006
includes approximately $3.0 million and $5.2 million, respectively, of purchases from Ohio
Castings.
In September 2003, Castings loaned Ohio Castings $3.0 million under a promissory note, which was
due 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 $1.8 million
at December 31, 2005 and $1.7 million at June 30, 2006.
During April 2006, the Companys Chairman and majority stockholder, Carl C. Icahn, contributed $0.3
million as a capital contribution to pay the weekly payroll and fringe benefits of the Marmaduke
manufacturing facility. This was done to help bridge the gap until the Company received funds from
its insurance policies to continue to pay full wages and benefits to all employees working for the
tank railcar operations at Marmaduke, Arkansas.
23
American Railcar Industries, Inc. and Subsidiaries
Note 13Employee Benefit Plans
The Company is the sponsor of two defined benefit plans that cover certain executives and employees
at certain of its manufacturing facilities and a supplemental executive retirement plan (SERP). The
Company uses a measurement date of October 1 for all pension plans, except for the Shippers Car
Line Pension Plan, which has a measurement date of December 1, which is the date the Company became
the sponsoring employer of that plan. The plans assets are held by independent trustees and
consist primarily of equity and fixed income securities.
The Company also provides certain postretirement health care benefits for certain of its salaried
and hourly retired employees. The measurement date for the post-retirement plan is December 1,
which is the date the Company assumed the sponsorship of the plan. Employees may become eligible
for health care benefits if they retire after attaining specified age and service requirements.
These benefits are subject to deductibles, co-payment provisions and other limitations.
The Company recorded total expenses relating to these plans of $0.2 million and $0.3 million,
respectively, in the three and six months ended June 30, 2006. The Company recorded total expense
of $0.1 million and $0.2 million, respectively, in the three and six months ended June 30, 2005.
The components of net periodic benefit cost for the three and six months ended June 30, 2005 and
2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits |
|
Postretirement Benefits |
|
|
Three Months Ended |
|
Six Months Ended June |
|
|
June 30, |
|
30, |
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
|
(in thousands) |
|
(in thousands) |
Service cost |
|
$ |
|
|
|
$ |
3 |
|
|
$ |
|
|
|
$ |
5 |
|
Interest cost |
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
104 |
|
|
|
|
|
|
Net periodic benefit cost recognized |
|
$ |
|
|
|
$ |
55 |
|
|
$ |
|
|
|
$ |
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Pension Benefits |
|
|
Three Months Ended |
|
Six Months Ended June |
|
|
June 30, |
|
30, |
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
|
(in thousands) |
|
(in thousands) |
Service cost |
|
$ |
41 |
|
|
$ |
58 |
|
|
$ |
82 |
|
|
$ |
103 |
|
Interest cost |
|
|
80 |
|
|
|
253 |
|
|
|
159 |
|
|
|
453 |
|
Expected return on plan assets |
|
|
(83 |
) |
|
|
(236 |
) |
|
|
(166 |
) |
|
|
(418 |
) |
Recognized gains and losses |
|
|
38 |
|
|
|
48 |
|
|
|
76 |
|
|
|
95 |
|
Prior service cost recognized |
|
|
6 |
|
|
|
|
|
|
|
13 |
|
|
|
(1 |
) |
|
|
|
|
|
Net periodic benefit cost recognized |
|
$ |
82 |
|
|
$ |
123 |
|
|
$ |
164 |
|
|
$ |
232 |
|
|
|
|
|
|
The Companys policy with respect to funding the qualified plans is to fund at least the minimum
required by the Employee Retirement Income Security Act of 1974, as amended, and not more than the
maximum amount deductible for tax purposes. ARI does not currently have minimum funding
requirements, as set forth in employee benefit and tax laws. All contributions made to the funded
pension plans for 2005 and 2006 were voluntary and were made with cash generated from operations.
24
American Railcar Industries, Inc. and Subsidiaries
The Company also maintains qualified defined contribution plans, which provide benefits to their
employees based on employee contributions, years of service, and employee earnings with
discretionary contributions allowed. Expenses related to these plans were $0.2 million and $0.3
million, respectively, for the three and six months ended June 30, 2005. Expenses for these plans
were $0.2 million and $0.4 million, respectively, for the three and six months ended June 30, 2006.
Prior to April 1, 2005, selected ARI salaried employees participated in the ACF Industries, Inc.
Savings and Investment Plan, and the cost is included in the six months ended June 30, 2005
expense.
Note 14 Commitments and Contingencies
The Company leases certain facilities from an entity owned by its Chief Executive Officer, certain
affiliates of ARI and third parties. Total rent expense on these leases was approximately $2.1
million and $4.1 million, respectively, for the three and six months ended June 30, 2005. Total
rent expense on the leases was approximately $0.7 million and $2.0 million, respectively, for the
three and six months ended June 30, 2006. Expenses to related parties included in the amounts above
were $0.4 million and $0.6 million, respectively, for the three and six months ended June 30, 2005.
Expenses to related parties included in the amounts above were $0.2 million and $0.4 million,
respectively, for the three and six months ended June 30, 2006.
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 at a
preliminary stage, and it is impossible to estimate, with any certainty, 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 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 and
North Kansas City, Missouri repair facilities and at its Longview, Texas steel foundry and
components manufacturing facility. These agreements expire in January 2007, September 2007, and
April 2008, respectively. ARI is also party to a collective bargaining agreement at our Milton,
Pennsylvania repair facility, which expired on June 19, 2005. The contract provisions under the
agreement provide that the contract would remain in effect under the old terms until terminated by
either party with 60 days notice. At the present time, there are no workers at Milton, as the site
is idled.
The Company was named a party to a suit in which the plaintiff alleges the Company was responsible
for the malfunction of a valve which was remanufactured in 2004 by a third party. The Company
believes it has no responsibility for this malfunction and has meritorious defense against any
liability in this case. In any event, it is
25
American Railcar Industries, Inc. and Subsidiaries
not possible to estimate the expected settlement, if any, that any party might be held accountable
for at this time as the case is in its early stages.
The Company has been named as the defendant in a lawsuit in which the plaintiff claims that the
Company is responsible for the damage caused by allegedly defective railcars that were manufactured
by the Company. The plaintiffs allege that failures in certain components caused the contents
transported by these railcars to spill out of the railcars causing property damage, clean-up costs,
monitoring costs, testing costs and other costs and damages. The Company believes that it is not
responsible for the spills and has meritorious defenses against liability.
Certain claims, suits and complaints arising in the ordinary course of business have been filed or
are pending against ARI. In the opinion of management, all such claims, suits, and complaints
arising in the ordinary course of business are without merit or would not have a significant effect
on the future liquidity, results of operations or financial position of ARI if disposed of
unfavorably.
The Company entered into two vendor supply contracts with minimum volume commitments in October
2005 with suppliers of materials used at our railcar production facilities. The agreements have
terms of two and three years respectively. The Company has agreed to purchase a combined total of
$67.6 million from these two suppliers over three years. In 2006, 2007 and 2008 we expect to
purchase $16.0 million, $27.1 million and $24.5 million respectively under these agreements. For
the current year, the Company has spent approximately $6.7 million through June 30, 2006.
ARI entered into supply agreements on January 28, 2005 and on June 8, 2005 with a supplier for two
types of steel plates. 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.
Note 15Common 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.
In February 2006, the Board of Directors of the Company declared a cash dividend of $0.03 per share
of common stock of the Company to shareholders of record at the close of business on March 22,
2006. These dividends were paid on April 6, 2006.
In June 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 at the close of business on June 29, 2006.
Dividends of $0.6 million were accrued as of June 30, 2006. These dividends were paid on July 14,
2006.
Note 16Operating Segment and Sales/Credit Concentrations
ARI operates in two reportable segments; manufacturing operations and railcar services. The
accounting policies of the segments are the same as those described in Note 2. 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:
26
American Railcar Industries, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June |
|
Manufacturing |
|
|
Railcar |
|
|
Corporate |
|
|
|
|
|
|
|
30, 2005 |
|
Operations |
|
|
Services |
|
|
& all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(in thousands) |
|
Revenues from external customers |
|
$ |
149,284 |
|
|
$ |
11,437 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
160,721 |
|
Intersegment revenues |
|
|
252 |
|
|
|
1,093 |
|
|
|
|
|
|
|
(1,345 |
) |
|
|
|
|
Cost of goods sold external customers |
|
|
135,399 |
|
|
|
10,323 |
|
|
|
|
|
|
|
|
|
|
|
145,722 |
|
Cost of intersegment sales |
|
|
228 |
|
|
|
852 |
|
|
|
|
|
|
|
(1,080 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
13,909 |
|
|
|
1,355 |
|
|
|
|
|
|
|
(265 |
) |
|
|
14,999 |
|
Gain related to insurance recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, administration and other |
|
|
2,052 |
|
|
|
727 |
|
|
|
450 |
|
|
|
|
|
|
|
3,229 |
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
11,857 |
|
|
$ |
628 |
|
|
$ |
(450 |
) |
|
$ |
(265 |
) |
|
$ |
11,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
4,490 |
|
|
|
81 |
|
|
|
88 |
|
|
|
|
|
|
|
4,659 |
|
Depreciation and amortization |
|
|
1,214 |
|
|
|
485 |
|
|
|
5 |
|
|
|
|
|
|
|
1,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June |
|
Manufacturing |
|
|
Railcar |
|
|
Corporate |
|
|
|
|
|
|
|
30, 2006 |
|
Operations |
|
|
Services |
|
|
& all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(in thousands) |
|
Revenues from external customers |
|
$ |
138,816 |
|
|
$ |
12,734 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
151,550 |
|
Intersegment revenues |
|
|
581 |
|
|
|
37 |
|
|
|
|
|
|
|
(618 |
) |
|
|
|
|
Cost of goods sold external customers |
|
|
123,618 |
|
|
|
9,947 |
|
|
|
|
|
|
|
|
|
|
|
133,565 |
|
Cost of intersegment sales |
|
|
405 |
|
|
|
31 |
|
|
|
|
|
|
|
(436 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
15,374 |
|
|
|
2,793 |
|
|
|
|
|
|
|
(182 |
) |
|
|
17,985 |
|
Gain related to insurance recoveries |
|
|
4,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,983 |
|
Selling, administration and other |
|
|
1,299 |
|
|
|
505 |
|
|
|
2,804 |
|
|
|
|
|
|
|
4,608 |
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
1,419 |
|
|
|
|
|
|
|
1,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
19,058 |
|
|
$ |
2,288 |
|
|
$ |
(4,223 |
) |
|
$ |
(182 |
) |
|
$ |
16,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
10,752 |
|
|
|
369 |
|
|
|
|
|
|
|
|
|
|
|
11,121 |
|
Depreciation and amortization |
|
|
2,094 |
|
|
|
497 |
|
|
|
34 |
|
|
|
|
|
|
|
2,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing |
|
|
Railcar |
|
|
Corporate |
|
|
|
|
|
|
|
For the six months ended June 30, 2005 |
|
Operations |
|
|
Services |
|
|
& all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(in thousands) |
|
Revenues from external customers |
|
$ |
269,978 |
|
|
$ |
21,665 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
291,643 |
|
Intersegment revenues |
|
|
490 |
|
|
|
1,865 |
|
|
|
|
|
|
|
(2,355 |
) |
|
|
|
|
Cost of goods sold external customers |
|
|
250,916 |
|
|
|
18,575 |
|
|
|
|
|
|
|
|
|
|
|
269,491 |
|
Cost of intersegment sales |
|
|
440 |
|
|
|
1,442 |
|
|
|
|
|
|
|
(1,882 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
19,112 |
|
|
|
3,513 |
|
|
|
|
|
|
|
(473 |
) |
|
|
22,152 |
|
Gain related to insurance recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, administration and other |
|
|
2,763 |
|
|
|
959 |
|
|
|
2,906 |
|
|
|
|
|
|
|
6,628 |
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
16,349 |
|
|
$ |
2,554 |
|
|
$ |
(2,906 |
) |
|
$ |
(473 |
) |
|
$ |
15,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
9,021 |
|
|
|
277 |
|
|
|
94 |
|
|
|
|
|
|
|
9,392 |
|
Depreciation and amortization |
|
|
2,254 |
|
|
|
964 |
|
|
|
11 |
|
|
|
|
|
|
|
3,229 |
|
27
American Railcar Industries, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing |
|
|
Railcar |
|
|
Corporate |
|
|
|
|
|
|
|
For the six months ended June 30, 2006 |
|
Operations |
|
|
Services |
|
|
& all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(in thousands) |
|
Revenues from external customers |
|
$ |
305,306 |
|
|
$ |
24,973 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
330,279 |
|
Intersegment revenues |
|
|
1,482 |
|
|
|
215 |
|
|
|
|
|
|
|
(1,697 |
) |
|
|
|
|
Cost of goods sold external customers |
|
|
271,874 |
|
|
|
20,160 |
|
|
|
|
|
|
|
|
|
|
|
292,034 |
|
Cost of intersegment sales |
|
|
1,338 |
|
|
|
169 |
|
|
|
|
|
|
|
(1,507 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
33,576 |
|
|
|
4,859 |
|
|
|
|
|
|
|
(190 |
) |
|
|
38,245 |
|
Gain related to insurance recoveries |
|
|
4,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,983 |
|
Selling, administration and other |
|
|
2,771 |
|
|
|
998 |
|
|
|
5,984 |
|
|
|
|
|
|
|
9,753 |
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
4,969 |
|
|
|
|
|
|
|
4,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
35,788 |
|
|
$ |
3,861 |
|
|
$ |
(10,953 |
) |
|
$ |
(190 |
) |
|
$ |
28,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures and acquisitions |
|
|
20,667 |
|
|
|
369 |
|
|
|
|
|
|
|
|
|
|
|
21,036 |
|
Depreciation and amortization |
|
|
3,854 |
|
|
|
992 |
|
|
|
69 |
|
|
|
|
|
|
|
4,915 |
|
|
|
|
Manufacturing |
|
Railcar |
|
Corporate |
|
|
|
|
As of |
|
Operations |
|
Services |
|
& all other |
|
Eliminations |
|
Totals |
December 31,
2005 |
|
(in thousands) |
Total assets |
|
$ |
185,652 |
|
|
$ |
34,171 |
|
|
$ |
48,757 |
|
|
$ |
|
|
|
$ |
268,580 |
|
June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
245,517 |
|
|
|
37,683 |
|
|
|
34,500 |
|
|
|
|
|
|
|
317,700 |
|
Manufacturing Operations
Revenues from affiliates were 10.6% and 9.7% of total consolidated revenues for the three and six
months ended June 30, 2005, respectively. Revenues from affiliates were 3.4% and 6.1% of total
consolidated revenues for the three and six months ended June 30, 2006.
Revenues from one significant customer totaled 30.0% and 26.0% of total consolidated revenues for
the three and six months ended June 30, 2005, respectively. Revenues from one significant customer
totaled 29.3% and 30.4% of total consolidated revenues for the three and six months ended June 30,
2006.
Revenues from two significant customers were 55.0% and 47.0% of total consolidated revenues for the
three and six months ended June 30, 2005, respectively. Revenues from two significant customers
were 45.1% and 43.9% of total consolidated revenues for the three and six months ended June 30,
2006, respectively.
Receivables from one significant customer were 21.0% and 14.7% of total consolidated accounts
receivable at December 31, 2005 and June 30, 2006, respectively. Receivables from two significant
customers were 21.0% and 25.0% of total consolidated accounts receivable at December 31, 2005 and
June 30, 2006, respectively.
Railcar services
Revenues from affiliates were 3.4% and 3.9% of total consolidated revenues for the three and six
months ended June 30, 2005, respectively. Revenues from affiliates were 3.0% and 3.2% of total
consolidated revenues for the three and six months ended June 30, 2006, respectively. No single
services customer accounted for more than 10.0% of total consolidated revenue for the three and six
months ended June 30, 2005 and 2006. No single services customer accounted for more than 10.0% of
total consolidated accounts receivable as of December 31, 2005 and June 30, 2006.
28
American Railcar Industries, Inc. and Subsidiaries
Note 17Supplemental Cash Flow Information
ARI received interest income of $1.0 million and $0.9 million for the six months ended June 30,
2005 and 2006, respectively.
ARI paid interest expense of $2.4 million and $1.1 million for the six months ended June 30, 2005
and 2006, respectively.
ARI paid taxes of $0.3 million and $10.7 million for the six months ended June 30, 2005 and 2006,
respectively.
Approximately $12.5 million representing certain tax benefits that ARI received as a result of
utilizing ARLs previously incurred tax losses was recorded through additional paid-in-capital as
ARI received the benefit of these tax losses during 2005.
In January 2005, ARI exchanged the $165.0 million secured note with Mr. Icahn to ARL in
satisfaction of the $130.0 million note owed to ARL plus $35.0 million of common interest in ARL.
In the six months ended June 30, 2006, the Company incurred stock based compensation expense of
$3.9 million in connection with the initial public offering for the issuance of restricted shares
of common stock to the Companys Chief Executive Officer. The Companys stock option expense for
the six months ended June 30, 2006 was $1.2 million.
In January 2006, in connection with the initial public offering, the Company incurred compensation
expense of $0.5 million related to a bonus for one of our senior officers that is payable in 2007.
In February 2006, the Board of Directors of the Company declared a common stock dividend of $0.03
per share to shareholders that was paid on April 6, 2006 to shareholders of record as of March 22,
2006.
In June 2006, the board of Directors of the Company declared a common stock dividend of $0.03 per
share to shareholders that was paid on July 14, 2006 to shareholders of record as of June 29, 2006.
29
American Railcar Industries, Inc. and Subsidiaries
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:
|
|
|
risks associated with the storm damage and related business interruption
suffered by our Marmaduke manufacturing facility, including without limitation: |
|
° |
|
the determination of the scope, amount and deductibles under our
insurance coverage for that damage and business interruption; |
|
|
° |
|
the timing of insurance payments; |
|
|
° |
|
the risk that our rebuilding efforts, plant shut down or associated
delivery delays will result in unanticipated costs that may not be covered by
insurance; |
|
|
° |
|
our ability to retain tank railcar customers or orders; and |
|
|
° |
|
our ability to retain our employees for that facility; |
|
|
|
risks associated with the planned construction of our new
flexible railcar manufacturing plant, including without limitation: |
|
° |
|
construction delays; |
|
|
° |
|
unexpected costs; |
|
|
° |
|
our planned dependence on the new plant to produce railcars
for which we have already accepted orders; and |
|
|
° |
|
other risks typically associated with the construction of new
manufacturing facilities; |
|
|
|
|
the cyclical nature of our business; |
|
|
|
|
adverse economic and market conditions; |
|
|
|
|
fluctuating costs of raw materials, including steel and railcar components, and
delays in the delivery of such raw materials and components; |
|
|
|
|
our ability to maintain relationships with our suppliers of railcar components and raw materials; |
|
|
|
|
fluctuations in the supply of components and raw materials we use in railcar manufacturing; |
|
|
|
|
the highly competitive nature of our industry; |
|
|
|
|
the risk of damage to our primary railcar manufacturing facilities or equipment in
Paragould or Marmaduke, Arkansas; |
|
|
|
|
our reliance upon a small number of customers that represent a large percentage of
our revenues; |
|
|
|
|
the variable purchase patterns of our railcar customers and the timing of
completion, delivery and acceptance of customer orders; |
|
|
|
|
our dependence on our key personnel; |
|
|
|
|
the risks of a labor shortage in light of our recent growth; |
|
|
|
|
risks associated with the conversion of our railcar backlog into revenues; |
|
|
|
|
the difficulties of integrating acquired businesses with our own; |
30
American Railcar Industries, Inc. and Subsidiaries
|
|
|
the risk of lack of acceptance of our new railcar offerings by our customers; |
|
|
|
|
the cost of complying with environmental 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 capital,
financial and managerial support; |
|
|
|
|
potential failure by ACF Industries LLC, an affiliate of Carl Icahn our principal
beneficial stockholder and the chairman of our board of directors to honor its
indemnification obligations to us; |
|
|
|
|
potential risk of increased unionization of our workforce; |
|
|
|
|
our ability to manage our pension costs; |
|
|
|
|
potential significant warranty claims; and |
|
|
|
|
covenants in our amended and restated
revolving credit facility governing our indebtedness that limit our managements
discretion in the operation of our businesses. |
Our actual results could be different from the results described in or anticipated by our
forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections
and may be better or worse than anticipated. Given these uncertainties, you should not rely on
forward-looking statements. Forward-looking statements represent our estimates and assumptions only
as of the date that they were made. We expressly disclaim any duty to provide updates to
forward-looking statements, and the estimates and assumptions associated with them, after the date
of this report, in order to reflect changes in circumstances or expectations or the occurrence of
unanticipated events except to the extent required by applicable securities laws. All of the
forward-looking statements are qualified in their entirety by reference to the factors discussed
above under Risk factors in our Annual Report on Form 10-K filed on March 28, 2006 (the Annual
Report) and in Part II- Item 1A of this report, as well as the risks and uncertainties discussed
elsewhere in the Annual Report and this report. We caution you that these risks may not be
exhaustive. We operate in a continually changing business environment and new risks emerge from
time to time.
OVERVIEW
We are a leading North American manufacturer of covered hopper and tank railcars. We also repair
and refurbish railcars, provide fleet management services and design and manufacture certain
railcar and industrial components used in the production of our railcars as well as railcars and
non-railcar industrial products produced by others. We provide our railcar customers with
integrated solutions through a comprehensive set of high quality products and related services.
We operate in two segments: manufacturing operations and railcar services. Manufacturing operations
consists of railcar manufacturing and railcar and industrial component manufacturing. Railcar
services consist of railcar repair and refurbishment services and fleet management services.
RECENT DEVELOPMENTS
On April 2, 2006, our Marmaduke, Arkansas tank railcar manufacturing facility was damaged by a
tornado. While the majority of the 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 were destroyed by the storm. The tornado also destroyed
the steel plate storage facility that was under construction and nearly completed. As of early
August, we received most of the major equipment items that required replacement and
31
American Railcar Industries, Inc. and Subsidiaries
the facility resumed tank railcar production on August 7, 2006. Through the date of this filing,
none of our customers has canceled any contracts for the manufacture of tank railcars. We have
received written confirmation from our insurance carrier that our insurance provides coverage for
the wind and rain damage to our property and for business interruption as a direct result of the
insured damage. Subject to the deductibles for our insurance, we believe that substantially all of
our damage from the storm will be covered and within the coverage limits of our policies. The
insurance carrier made an initial payment of $7.5 million to us on our property claim and we have
reached a preliminary minimum settlement amount of $8.0 million (after application of the
deductible) to cover continuing expenses, employee wages and estimated lost profits for the months
of April, May and June 2006. We are continuing to work with our carrier to further assess the
amount of the damage and the insurable loss. Certain risks associated with this storm damage are
set forth in Part IIItem 1A Risk Factors.
Our revenues and manufacturing gross profits have been adversely affected by the temporary
shut-down of our Marmaduke facility. However, as set forth above, and subject to our deductibles
and the risks and uncertainties set forth in this report, we expect that the profit impact of these
adverse affects will be substantially offset by proceeds from our business interruption insurance.
In the three months ended June 30, 2006, we recognized a gain of $5.0 million associated with the
minimum settlement of our business interruption insurance recoveries for that period. We also
expect to recognize a gain on the repair and replacement of our facility and equipment that is
funded from insurance proceeds, where the cost of repair or replacement is greater than the book
value of the underlying property or equipment that is being replaced. This gain will be recorded
when the final settlement has been reached on the property damage claim.
In August 2006, our Board of Directors approved the construction of a new flexible railcar
manufacturing plant to be built adjacent to our tank railcar manufacturing plant in Marmaduke,
Arkansas. We anticipate that the new plant would be capable of producing tank, covered hopper, and intermodal
railcars. We expect the plant would have an initial capacity to produce 2,500 tank railcars
annually, with railcar production expected to begin in early 2008. This new plant would be in
addition to the tank railcar expansion currently underway at Marmaduke to increase capacity by
1,000 tank railcars annually. Construction on the new plant is expected to begin in the third
quarter of 2006. Certain risks associated with this new plant are set
forth in Part IIItem 1A Risk Factors.
In August 2006, we signed agreements with two customers to purchase a total of 2,000 railcars
per year from us in each of 2008 and 2009. One of these customers has options to purchase up to an
additional 2,000 railcars. We currently anticipate that the railcars for these new orders would
be produced at our new plant. These orders are not included in our
backlog of 12,790 railcars as of June 30, 2006.
32
American Railcar Industries, Inc. and Subsidiaries
RESULTS OF OPERATIONS
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, |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2006 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Manufacturing Operations |
|
|
93 |
% |
|
|
92 |
% |
Railcar services |
|
|
7 |
% |
|
|
8 |
% |
|
|
|
Total revenues |
|
|
100 |
% |
|
|
100 |
% |
Cost of goods sold: |
|
|
|
|
|
|
|
|
Cost of manufacturing |
|
|
84 |
% |
|
|
82 |
% |
Cost of railcar services |
|
|
6 |
% |
|
|
6 |
% |
|
|
|
Total cost of goods sold |
|
|
90 |
% |
|
|
88 |
% |
Gross profit |
|
|
10 |
% |
|
|
12 |
% |
Income related to insurance recoveries, net |
|
|
0 |
% |
|
|
3 |
% |
Selling, administrative and other |
|
|
2 |
% |
|
|
3 |
% |
Stock based compensation expense |
|
|
0 |
% |
|
|
1 |
% |
|
|
|
Earnings from operations |
|
|
8 |
% |
|
|
11 |
% |
Interest income |
|
|
0 |
% |
|
|
0 |
% |
Interest expense |
|
|
1 |
% |
|
|
0 |
% |
Earnings (loss) from joint venture |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
Earnings before income tax expense |
|
|
7 |
% |
|
|
11 |
% |
Income tax expense |
|
|
3 |
% |
|
|
4 |
% |
|
|
|
Net earnings |
|
|
4 |
% |
|
|
7 |
% |
|
|
|
Three Months ended June 30, 2006 compared to Three Months ended June 30, 2005
Our earnings available to common shareholders for the three months ended June 30, 2006 were $10.8
million, compared to $1.9 million for the three months ended June 30, 2005, representing an
increase of $8.9 million. In the three months ended June 30, 2006, we sold 1,734 railcars, which is
129 less than the 1,863 railcars we sold in the same period in 2005. The primary factors for the
increase in earnings relates to an overall increase in earnings from operations due to increased
profits and a gain of $5.0 million related to insurance proceeds from our insurance company on the
Marmaduke tornado damage offset by an increase in stock based compensation expense and an increase
in selling, administrative and other expenses. Also, the Company paid preferred dividends during
the second quarter 2005 amounting to $4.6 million. As a result of the initial public offering, the
Company paid off all preferred stock in January 2006.
Revenues
Our revenues for the three months ended June 30, 2006 decreased 5.7% to $151.6 million from $160.7
million in the three months ended June 30, 2005. This decrease was primarily attributable to a
decrease in our revenues from manufacturing operations as a result of the temporary shutdown of the
Marmaduke tank railcar manufacturing facility as a result of the tornado damage to that facility.
Our manufacturing operations revenues for the three months ended June 30, 2006 decreased 7% to
$138.8 million from $149.3 million for the three months ended June 30, 2005. This decrease was
primarily attributable to the delivery of 129 less railcars in the second quarter of 2006 versus
the comparable period of 2005 as a result of the Marmaduke facility shutdown. Our revenues from
sales of railcars decreased $8.6 million to $123.2 million in the three months ended June 30, 2006
from $131.8 million in the three months ended June 30, 2005. In the three months ended June 30,
2006, we shipped 85 tank railcars compared to 475 tank railcars shipped in the comparable quarter
of
33
American Railcar Industries, Inc. and Subsidiaries
2005. Prior to the storm damage, we had planned to produce and ship 569 tank railcars in the second
quarter of 2006. The decrease in tank railcar shipments was partially offset by an increase in
shipments of hopper railcars from our Paragould facility. In the second quarter of 2006, we shipped
1,649 covered hopper railcars compared to 1,034 covered hopper railcars shipped in the second
quarter of 2005. We were able to increase Paragould production due to increased capacity at that
facility supported by the continued strong backlog of orders for our covered hopper railcars. Our
increased number of covered hopper railcar shipments in the second quarter of 2006, as compared to
the second quarter of 2005, also reflects the conversion of our Paragould facility back to covered
hopper railcar production. Until September 2005, we produced centerbeam railcars at our Paragould
facility, and we shipped a total of 354 centerbeam railcars in the second quarter of 2005. Our
reduced revenues from decreased unit sales of railcars was partially offset by increased prices
resulting from our ability to pass through most of our increased raw material and component costs
and increase in the base unit price for some of our railcars. For the three months ended June 30,
2006, our manufacturing operations included $5.2 million, or 3.4% of our total consolidated
revenues, from transactions with affiliates, compared to $17.1 million, or 10.6% of our total
consolidated revenues in the three months ended June 30, 2005. These revenues were attributable to
sales of railcars to companies controlled by Mr. Icahn.
Our railcar services revenues increased by $1.3 million to $12.7 million in the three months ended
June 30, 2006, from $11.4 million in the three months ended June 30, 2005. This increase was
primarily attributable to strong railcar repair demand. For the second quarter of 2006, our railcar
services revenues included $4.5 million, or 3% of our total consolidated revenues, from
transactions with affiliates, compared to $5.5 million, or 3.4% of our total revenues, in the
second quarter of 2005.
We had a strong second quarter during 2006 at our Paragould covered hopper railcar manufacturing
facility. As the summer months progress and more hot weather is experienced, we expect a slowdown
of production at this facility and an associated modest decrease in revenues as compared to our
most recently completed quarter.
Gross Profit
Our gross profit increased to $17.9 million in the three months ended June 30, 2006 from $15.0
million in the three months ended June 30, 2005. Our gross profit margin increased to 11.8% in the
second quarter of 2006 from 9.3% in the second quarter of 2005, primarily reflecting improved
margins in our manufacturing operations.
Our gross profit margin for our manufacturing operations increased to 10.9% in the three months
ended June 30, 2006 from 9.3% in the three months ended June 30, 2005. This increase was primarily
attributable to our ability to pass through increased raw material and component costs through
variable pricing contracts, a shift in railcar mix, and improved efficiencies. In the second
quarter of 2006, we were able to pass through most of our increased raw material and component
costs. In the second quarter of 2005, we were unable to pass through $1.2 million of $5.2 million
of increased raw material and component costs. All of our current railcar manufacturing contracts
have variable cost provisions that adjust the delivery price for changes in certain raw material
and component costs. As a result, changes in steel prices and other raw material and component
prices should have little impact on our gross profits for the remainder of the year.
During the second quarter 2005, we also incurred start up costs after the completion of the new
third production line at our Paragould facility. These costs mainly related to the initial training
of employees and the various supplies for the new production line. Additionally, as additional
painting and lining capabilities for this production line were not completed until November 2005,
we had outsourced the railcar painting and lining functions for these railcars. The new painting
and lining ability has allowed us to improve margins in 2006 as we reduced outsourcing cost related
to this process.
Income Related to Insurance Recoveries, Net
We have property insurance covering wind and rain damage to our property, incremental costs and
operating expenses we incurred due to the tornado damage at our Marmaduke facility. In addition, we
have insurance for business interruption as a direct result of the insured damage. Our deductibles
on these policies are $100,000 for property insurance and a five-day equivalent time element
business interruption deductible, which we currently estimate to be at least $600,000. This
deductible is being ratably recognized over the course of the five-month period during which the
Company estimates the business interruption will occur.
34
American Railcar Industries, Inc. and Subsidiaries
During the three months ended June 30, 2006, the Company had assets with net book value of $3.5
million that were damaged or destroyed by the tornado. The charge for these asset write-offs has
been netted against the insurance advance pending final settlement of the property damage insurance
claim.
The tornado related insurance settlements have included $7.5 million of cash advances received in
April 2006, primarily related to property damage to provide funds to repair the plant in Marmaduke.
This cash was classified as cash provided for investing activities as it was received as part of
the property insurance claim that was filed for all the property, plant and equipment that was
damaged by the tornado. As our insurance carriers and we agree on additional amounts of insurance
settlements, we intend to record the actual loss attributable to the storm as well as an
anticipated net gain from the replacement of the property with new property and equipment. This
gain will be recorded as additional income related to insurance recoveries, net.
Our business interruption insurance policy provides coverage for continuing expenses, employee
wages and the loss of profits resulting from the temporary Marmaduke plant shut-down caused by the
storms. During June 2006, our insurance carrier and we reached a preliminary minimum settlement
amount of $8.0 million, after application of the deductible, to cover continuing expenses, employee
wages and estimated lost profits for the months of April, May and June 2006. We received this $8.0
million minimum settlement amount in July 2006. We anticipate further recoveries in the month of
July and August.
In the second quarter of 2006, we recognized income related to insurance recoveries of $5.0 million
attributable to our business interruption insurance computed as follows:
|
|
|
|
|
|
|
(in thousands) |
|
Business interruption insurance claim |
|
$ |
8,600 |
|
Business interruption claim deductible |
|
|
(600 |
) |
|
|
|
|
Business
interruption insurance settlement, net |
|
|
8,000 |
|
|
|
|
|
|
Continuing expenses |
|
|
(3,257 |
) |
Unrecognized deductible |
|
|
240 |
|
|
|
|
|
Income related to insurance recoveries, net |
|
$ |
4,983 |
|
|
|
|
|
Selling, Administrative and Other Expenses
Our selling, administrative and other expenses increased by $1.3 million in the second quarter of
2006, to $4.5 million from $3.2 million in the second quarter of 2005. These selling,
administrative and other expenses, which exclude stock based compensation, were 3.0% of total
revenues in the three months ended June 30, 2006 as compared to 2.0% of total revenues in the three
months ended June 30, 2005. Our increase in selling, administrative and other expenses was
primarily attributable to increased expenses associated with being a public company and increased
expenses to support our growing business.
Stock Based Compensation Expense
Our stock based compensation expense for the three months ended June 30, 2006 was $1.5 million.
This expense is attributable to restricted stock and stock options we granted in 2006. For the
remainder of 2006, we expect to incur additional stock based compensation expense of $0.3 million
per month through January 2007 in connection with a restricted stock grant issued at the time of
our initial public offering. Furthermore, for the remainder of 2006, we expect to incur stock based
compensation expense of $0.2 million per month based on stock options previously issued under the
2005 Equity Incentive Plan. We did not incur any stock based compensation expense during the second
quarter of 2005.
35
American Railcar Industries, Inc. and Subsidiaries
Interest Expense and Income
Our interest expense for the three months ended June 30, 2006 was $0.1 million as compared to $1.3
million for the three months ended June 30, 2005, representing a decrease of $1.2 million. In
January 2006, we repaid substantially all of our outstanding debt with a portion of the net
proceeds of our initial public offering. Our interest income in the three months ended June 30,
2006 was $0.4 million as compared to $0.1 million for the three months ended June 30, 2005,
representing an increase of $0.3 million. The increase was primarily attributable to our increased
funds following our public offering.
Income Taxes
Our income tax expense for the three months ended June 30, 2006 was $6.3 million, or 36.8% of our
earnings before income taxes, as compared to $4.3 million for the three months ended June 30, 2005,
or 39.6% of our earnings before income taxes. Our 2006 effective tax rate was lower than the 2005
rate due to expenses included in pre-tax earnings, for which we did not receive a deduction for tax
purposes in 2005. These expenses result from liabilities and obligations retained by our affiliate
ACF Industries, LLC, a company controlled by Carl C. Icahn, as part of its transfer of assets to us
in 1994. Although ACF is responsible for any costs associated with these liabilities, we are
required to recognize these costs as expenses in order to reflect the full cost of doing business.
The entire amount of such permanently nondeductible expenses is treated as contribution of capital
resulting in an increase to our effective tax rate. That portion of expenses associated with
employee benefit plans ended on December 1, 2005, when our retirement plans were separated from the
ACF plans. The expenses included in pre-tax income were $0.2 million for the three months ended
June 30, 2005. Furthermore, the 2006 rate is reduced by the Domestic Production Activities
Deduction, which allows companies to deduct 3% of their income for domestic activities. This
deduction was created as part of the American Jobs Creation Act of 2004. It provides a tax savings
against income attributable to domestic production activities. This deduction became available to
us during 2006.
Six Months ended June 30, 2006 compared to Six Months ended June 30, 2005
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 Six Months Ended, |
|
|
June 30, |
|
June 30, |
|
|
2005 |
|
2006 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Manufacturing Operations |
|
|
93 |
% |
|
|
92 |
% |
Railcar Services |
|
|
7 |
% |
|
|
8 |
% |
|
|
|
Total revenues |
|
|
100 |
% |
|
|
100 |
% |
Cost of goods sold: |
|
|
|
|
|
|
|
|
Cost of manufacturing |
|
|
86 |
% |
|
|
82 |
% |
Cost of railcar services |
|
|
6 |
% |
|
|
6 |
% |
|
|
|
Total cost of goods sold |
|
|
92 |
% |
|
|
88 |
% |
Gross profit |
|
|
8 |
% |
|
|
12 |
% |
Income related to insurance recoveries, net |
|
|
0 |
% |
|
|
2 |
% |
Selling, administrative and other |
|
|
2 |
% |
|
|
3 |
% |
Stock based compensation expense |
|
|
0 |
% |
|
|
2 |
% |
|
|
|
Earnings from operations |
|
|
6 |
% |
|
|
9 |
% |
Interest income |
|
|
0 |
% |
|
|
0 |
% |
Interest expense |
|
|
1 |
% |
|
|
0 |
% |
Earnings from joint venture |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
Earnings before income tax expense |
|
|
5 |
% |
|
|
9 |
% |
Income tax expense |
|
|
2 |
% |
|
|
3 |
% |
|
|
|
Net earnings |
|
|
3 |
% |
|
|
6 |
% |
|
|
|
36
American Railcar Industries, Inc. and Subsidiaries
Our earnings available to common shareholders for the six months ended June 30, 2006 were $17.5
million, compared to a loss of $0.1 million for the six months ended June 30, 2005, representing an
increase of $17.6 million. In the first six months of 2006, we sold 3,714 railcars, which is 369
more than the 3,345 railcars we sold in the first six months of 2005. Most of our revenues, and all
of our revenues for the sale of railcars, for the first six months of 2006 included sales under
contracts that allowed us to adjust our sale prices to pass on to our customers the impact of
increases in the costs of certain raw materials, particularly steel, and components.
Revenues
Our revenues for the six months ended June 30, 2006 increased 13.3% to $330.3 million from $291.6
million in the six months ended June 30, 2005. This increase was primarily attributable to an
increase in our revenues from manufacturing operations.
Our manufacturing operations revenues increased 13.1% to $305.3 million in the first six months of
2006 from $270.0 million in the first six months of 2005. This increase was primarily attributable
to the delivery of an additional 369 railcars in the first six months of 2006 versus the comparable
period of 2005, increased prices resulting from our ability to pass through our increased raw
material and component costs and increases in the base unit price for some of our railcars. Our
revenues from sales of railcars increased $37.8 million to $273.0 million in the first six months
of 2006 from $235.2 million in the first six months of 2005. The additional deliveries of railcars
in the first six months of 2006 reflected increased sales of covered hopper railcars. In the six
months ended June 30, 2006, we shipped 3,176 covered hopper railcars compared to 1,652 in the six
months ended June 30, 2005. The increased sales reflected our increased capacity at our Paragould
facility supported by the continued strong backlog of orders for our railcars. Our increased number
of covered hopper railcar shipments in the six months ended June 30, 2006, as compared to the six
months ended June 30, 2005, also reflects the conversion of our Paragould facility back to covered
hopper railcar production. Until September 2005, we produced centerbeam railcars at our Paragould
facility, and we shipped a total of 785 centerbeam railcars in the six months ended June 30, 2005.
This increase was offset by a decrease of tank railcar production due to the tornado damage and
related shutdown of Marmaduke. During the second quarter of 2006, we had planned to produce and
ship 569 tank railcars but only shipped 85 tank railcars. In the six months ended June 30, 2006,
we shipped 538 tanks railcars compared to 908 in the six months ended June 30, 2005. For the first
six months of 2006, our manufacturing operations included $20.2 million, or 6.1% of our total
consolidated revenues, from transactions with affiliates, compared to $28.1 million, or 9.7% of our
total consolidated revenues, in the first six months of 2005. These revenues were attributable to
sales of railcars to companies controlled by Mr. Icahn.
Our railcar services revenues increased by $3.3 million to $25.0 million in the first six months of
2006, from $21.7 million in the first six months of 2005. This increase was primarily attributable
to strong railcar repair demand. For the first six months of 2006, our railcar services revenues
included $10.5 million, or 3.2% of our total consolidated revenues, from transactions with
affiliates, compared to $11.3 million, or 3.9% of our total consolidated revenues, in the first six
months of 2005.
Gross Profit
Our gross profit increased to $38.2 million in the first six months of 2006 from $22.2 million in
the first six months of 2005. Our gross profit margin increased to 11.6% in the first six months of
2006 from 7.6% in the first six months of 2005, primarily reflecting improved margins in our
manufacturing operations.
Our gross profit margin for our manufacturing operations increased to 10.9% in the first six months
of 2006 from 7.1% in the first six months of 2005. This increase was primarily attributable to our
ability to pass through increased raw material and component costs through variable pricing
contracts, the shift in railcar mix, and improved efficiencies. In the first six months of 2006, we
were able to pass through most of our increased raw material and component costs. In the first six
months of 2005, we were unable to pass through $2.4 million of $13.8 million of increased raw
material and component costs. All of our current railcar manufacturing contracts have variable cost
provisions that adjust the delivery price for changes in certain raw material and component costs.
As a result, changes in steel prices and other raw material and component prices should have little
impact on our gross profits for the remainder of the year.
37
American Railcar Industries, Inc. and Subsidiaries
During the first six months of 2005, we also incurred start up costs after the completion of the
new third production line at our Paragould facility. These costs mainly related to the initial
training of employees and the various supplies for the new production line. Additionally, as
additional painting and lining capabilities for this production line were not completed until
November 2005, we had outsourced the railcar painting and lining functions for these railcars. The
new painting and lining ability has allowed us to improve margins in 2006 as we reduced outsourcing
of this process.
Income Related to Insurance Recoveries, Net
We have property insurance covering wind and rain damage to our property, incremental costs and
operating expenses we incurred due to the tornado damage at our Marmaduke facility. In addition, we
have insurance for business interruption as a direct result of the insured damage. Our deductibles
on these policies are $100,000 for property insurance and a five-day equivalent time element
business interruption deductible, which we currently estimate to be at least $600,000. This
deductible is being ratably recognized over the course of the five-month period during which the
Company estimates the business interruption will occur.
During the six months ended June 30, 2006, the Company had assets with net book value of $3.5
million that were damaged or destroyed by the tornado. The charge for these asset write-offs has
been netted against the insurance advance pending final settlement of the property damage insurance
claim.
The tornado related insurance settlements have included $7.5 million of cash advances received in
April 2006, primarily related to property damage to provide funds to repair the plant in Marmaduke.
This cash was classified as cash provided for investing activities as it was received as part of
the property insurance claim that was filed for all the property, plant and equipment that was
damaged by the tornado. As our insurance carriers and we agree on additional amounts of insurance
settlements, we intend to record the actual loss attributable to the storm as well as an
anticipated net gain from the replacement of the property with new property and equipment. This
gain will be recorded as additional income related to insurance recoveries, net.
Our business interruption insurance policy provides coverage for continuing expenses, employee
wages and the loss of profits resulting from the temporary Marmaduke plant shut-down caused by the
storms. During June 2006, our insurance carrier and we reached a preliminary minimum settlement
amount of $8.0 million, after application of the deductible, to cover continuing expenses, employee
wages and estimated lost profits for the months of April, May and June 2006. We received this $8.0
minimum settlement amount in July 2006. We anticipate further recoveries in the month of July and
August.
In the second quarter of 2006, we recognized income related to insurance recoveries of $5.0 million
attributable to our business interruption insurance computed as follows:
|
|
|
|
|
|
|
(in thousands) |
|
Business interruption insurance claim |
|
$ |
8,600 |
|
Business interruption claim deductible |
|
|
(600 |
) |
|
|
|
|
Business interruption nsurance settlement, net |
|
|
8,000 |
|
|
|
|
|
|
Continuing expenses |
|
|
(3,257 |
) |
Unrecognized deductible |
|
|
240 |
|
|
|
|
|
Income related to insurance recoveries, net |
|
$ |
4,983 |
|
|
|
|
|
Selling, Administrative and Other Expenses
Our selling, administrative and other expenses increased by $3.1 million in the first six months of
2006, to $9.7 million from $6.6 million in the first six months of 2005. These selling,
administrative and other expenses, which exclude stock based compensation, were 2.9% of total
revenues in the first six months of 2006 as compared to 2.3% of total revenues in the first six
months of 2005. The selling, administrative and other expenses for the first six
38
American Railcar Industries, Inc. and Subsidiaries
months of 2006 include a $0.5 million bonus to one of our senior officers in connection with the
initial public offering, payable in April 2007. Our increase in selling, administrative and other
expenses was primarily attributable to expenses incurred in connection with our initial public
offering, increased expenses associated with being a public company and increased expenses to
support our growing business.
Stock Based Compensation Expense
Our stock based compensation expense for the six months ended June 30, 2006 was $5.0 million
included as part of selling, administrative and other expenses and $0.1 million included in cost of
sales. This expense is attributable to restricted stock and stock options we granted in 2006. We
expect to incur additional stock based compensation expense of $0.3 million per month through
January 2007 in connection with restricted stock issued as part of our initial public offering. For
the remainder of 2006, the Company expects to incur stock based compensation expense of $0.2
million per month based on the stock options previously issued in connection with and subsequent to
the initial public offering. We did not incur any stock based compensation expense during the first
six months of 2005.
Interest Expense and Income
Our interest expense for the six months ended June 30, 2006 was $1.1 million as compared to $2.4
million for the six months ended June 30, 2005, representing a decrease of $1.3 million. In the six
months ended June 30, 2006, we repaid substantially all of our outstanding debt with a portion of
the net proceeds of our initial public offering. Our interest expense in the six months ended June
30, 2006 included the write off of approximately $0.6 million of deferred financing costs that we
incurred in connection with the repayment of our industrial revenue bond and credit facility
financings. Our interest income in the six months ended June 30, 2006 was $0.9 million as compared
to $1.0 million for the six months ended June 30, 2005, representing a decrease of $0.1 million.
Income Taxes
Our income tax expense for the six months ended June 30, 2006 was $10.5 million, or 36.8% of our
earnings before income taxes, as compared to $6.0 million for the six months ended June 30, 2005,
or 39.9% of our earnings before income taxes. Our 2006 effective tax rate was lower than the 2005
rate due to expenses included in pre-tax earnings, for which we did not receive a deduction for tax
purposes in 2005. These expenses result from liabilities and obligations retained by our affiliate
ACF Industries LLC, a company controlled by Carl C. Icahn, as part of its transfer of assets to us
in 1994. Although ACF is responsible for any costs associated with these liabilities, we are
required to recognize these costs as expenses in order to reflect the full cost of doing business.
The entire amount of such permanently nondeductible expenses is treated as contribution of capital
resulting in an increase to our effective tax rate. These expenses associated with employee benefit
plans ended on December 1, 2005, when our retirement plans were separated from the ACF plans. The
expenses included in pre-tax income were $0.5 million for the six months ended June 30, 2005.
Furthermore, the 2006 rate is reduced by the Domestic Production Activities Deduction, which allows
companies to deduct 3% of their income for domestic activities.
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. Although we generally have one to three year contracts with most of our fleet
management customers, neither orders for our railcar repair and refurbishment services business nor
our fleet management business are included in our backlog because we generally deliver our services
in the same period in which orders are received. Similarly, orders for our component manufacturing
business are not included in our backlog because we generally deliver components to our customers
in the same period in which orders for the components are received. Due to the large size of
railcar orders and variations in the number and mix of railcars ordered in any given period, the
size of our reported backlog at the end of any such period may fluctuate significantly.
Our total backlog as of December 31, 2005 was $1.07 billion and as of June 30, 2006 was $0.99
billion. We estimate that approximately 46% of our June 30, 2006 backlog will be converted to
revenues by the end of 2006.
39
American Railcar Industries, Inc. and Subsidiaries
On July 29, 2005, we entered into a multi-year purchase and sale agreement with CIT to manufacture
and sell to CIT covered hopper and tank railcars. Under this agreement, CIT has agreed to buy a
minimum of 3,000 railcars from us in each of 2006, 2007 and 2008 and we have agreed to offer to
sell to CIT up to 1,000 additional railcars in each of those years. CIT may choose to satisfy its
purchase obligations from among a variety of covered hopper and tank railcars described in the
agreement. CIT may reduce its future purchase obligations or cancel pending purchase orders, upon
prior written notice to us, under certain conditions, including a reduction of the then current
American Railway Car Institutes most recently reported quarterly backlog below specified levels.
As of June 30, 2006, the American Railway Car Institute reported a quarterly backlog of in excess
of 85,692 railcars. If during the term of the agreement, the levels of quarterly backlog reported
by American Railway Car Institute fall below 45,000 railcars but remains above 35,000 railcars, CIT
has the right, on 6 months prior written notice, to cancel pending purchase orders or reduce
subsequent purchase obligations for the then current agreement year, in either case such that
actual purchases by CIT would not fall below 50% of that agreement years original minimum purchase
requirements. If the American Railway Car Institutes reported quarterly backlog falls below 35,000
railcars, CIT has the right to cancel or suspend all, or any, pending purchase orders or remaining
purchase obligations under the Agreement upon at least 180 days prior written notice. If CIT elects
to cancel any pending purchase order under these provisions within at least 120 days of the
delivery date of the order, we may require that CIT purchase from us, at our cost, all material
which we had purchased and identified to such cancelled purchase order. CIT also has the right to
reduce its railcar orders from us if market prices for the railcars subject to our agreement are
reduced significantly below our quoted prices and we fail to meet such price reductions. Under the
agreement, purchase prices for railcars are subject to steel surcharges and certain other material
cost increases applicable at the time of production.
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 June 2006 reported backlog
includes 8,077 railcars relating to CITs minimum purchase obligations under its agreement with us
based upon an assumed product mix consistent with CITs orders for railcars. Changes in product mix
from that assumed would affect the dollar amount of our backlog from CIT.
|
|
|
|
|
|
|
2006 |
|
Railcar backlog at start of period (1/1/2006) |
|
|
14,510 |
|
New railcars delivered |
|
|
3,714 |
|
New railcar orders |
|
|
1,994 |
|
|
|
|
|
Railcar backlog at end of period (6/30/2006) |
|
|
12,790 |
|
|
|
|
|
|
Estimated railcar backlog value at end of period (in thousands) |
|
$ |
986,161 |
|
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.
Estimate 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.
Included in the railcar backlog is $196.5 million of railcars to be sold to our affiliate, American
Railcar Leasing.
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 assure
that our reported backlog will convert to revenues in any particular period, if at all, that the
actual revenues from these orders will equal our reported backlog estimates or that our future
revenue collection efforts will be successful. 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.
We rely on supplies from third-party providers and our Ohio Castings joint venture for steel, heavy
castings, wheels and other components for our railcars. In the event that our suppliers were to
stop or reduce their supply of steel,
heavy castings, wheels or the other railcar components that we depend upon, our business would be
disrupted and the actual sales from our customer contracts may fall significantly short of our
reported backlog.
40
American Railcar Industries, Inc. and Subsidiaries
In August 2006, we signed agreements with two customers to purchase a total of 2,000 railcars per
year from us in each of 2008 and 2009. One of these customers has
options to purchase up to an
additional 2,000 railcars. We currently anticipate that the railcars for these new orders will be
produced at our new plant. These orders
are not included in our backlog of 12,790 railcars as of June 30, 2006.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity for the six months ended June 30, 2006 were proceeds from our
initial public offering and cash generated from operations.
We completed our initial public offering on January 24, 2006 and issued 9.8 million shares at an
offering price of $21.00 per share. Net proceeds from the offering were used, among other things,
to repay most of our long-term debt, to redeem all of our outstanding redeemable preferred stock
and to repay all amounts outstanding under our revolving credit facility. The remaining net
proceeds were used for the purchase of a strategic supplier and other property plant and equipment.
In January 2006, concurrent with the completion of the initial public offering, we entered into an
Amended and Restated Credit Agreement with North Fork Business Capital Corporation, as
administrative agent for various lenders. The revolving credit facility has a total commitment of
the lesser of (i) $75 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 amended and restated revolving credit facility includes a $15.0 million capital expenditure
sub-facility that is based on a percentage of the costs related to capital projects we may
undertake. The revolving credit facility has a three-year term. Borrowings under the revolving
credit facility are collateralized by substantially all of our assets. The revolving credit
facility has both affirmative and negative covenants, including, without limitation, a maximum
senior debt leverage ratio, a maximum total debt leverage ratio, a minimum interest coverage ratio,
a minimum tangible net worth and limitations on capital expenditures and dividends. As of June 30,
2006 we had $64.1 million of availability under the revolving credit facility and no borrowings
outstanding.
Cash Flows
The following tables summarizes our net cash provided by or used in operating activities, investing
activities and financing activities for the six months ended June 30:
|
|
|
|
|
|
|
2006 |
|
|
|
(in thousands) |
|
Net cash provided by (used in): |
|
|
|
|
Operating activities |
|
$ |
(6,021 |
) |
Investing activities |
|
|
(30,441 |
) |
Financing activities |
|
|
35,379 |
|
|
|
|
|
Total |
|
$ |
(1,083 |
) |
|
|
|
|
Net Cash Used in 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 used in operating activities for the six months ended June 30, 2006 was $6.0 million.
Net earnings reconciled to $32.2 million cash provided by earnings after adjusting for depreciation
and amortization, stock-based compensation, the write-off of deferred financing costs, among other
smaller adjustments. Cash provided by
41
American Railcar Industries, Inc. and Subsidiaries
operating activities attributable to changes in our current assets and liabilities included a
decrease in accounts receivable, net of $2.5 million and a decrease in accounts receivable from
affiliate of $2.4 million. These sources of cash were offset by an recording of the business
interruption insurance claim receivable of $8.0 million, an increase in inventories of $20.0
million, an increase in prepaid expenses of $1.5 million, a decrease in accounts payable of $8.8
million, a decrease in accounts payable due to affiliate of $2.0 million and a decrease in accrued
expenses and taxes of $2.5 million.
The decrease in accounts receivable from affiliate is due to receipt of payment from ARL. The
increase in accounts receivable was primarily attributable to the increased volume of sales
attributed to railcars manufactured at our Paragould facility. The increase in inventories was
primarily attributable to the increase in cost of steel and increased production levels.
Additionally, inventory increased due to the impact of Marmaduke raw material purchases that were
in process when the plant was shut down by the storm. Also, although operations were shut down at
Marmaduke, we still were required under certain supply contracts to purchase raw material inventory
from certain vendors. This caused a further increase in inventory due to the plan shut down.
Furthermore, inventory also increased due to an increase of inventory levels at Paragould to
facilitate increased capacity and production. The increase in prepaid expenses was primarily
attributable to payments for workers compensation and general insurance coverages that benefit
future periods. The decrease in accounts payable is due to timing of payments made to various
vendors. The decrease in accrued expenses and taxes is due to payment of 2005 bonuses partially
offset by the liability booked for the insurance advance related to the tornado damage at
Marmaduke.
Net Cash Used In Investing Activities
Net cash used in investing activities was $30.4 million for the six months ended June 30, 2006.
Purchases of property, plant and equipment amounted to approximately $21.0 million in the six
months ended June 30, 2006. This was for the purchases of equipment at multiple locations to
increase capacity and operating efficiencies. These purchases are described in further detail below
under Capital Expenditures. The other reason for the high level of cash used in investing
activities during 2006 is related to the acquisition of Custom Steel in 2006, which amounted to
$17.2 million. These cash outflows were partially offset by a receipt of $7.5 million related to
the property insurance claim for the property damage incurred at Marmaduke from the tornado.
Net Cash Provided by (Used In) Financing Activities
Net cash provided by financing activities was $35.4 million for the six months ended June 30, 2006.
The main reason for the large cash inflow is due to $205.3 million in proceeds from the initial
public offering, offset by offering cost of $14.6 million, the redemption of preferred stock of
$82.1 million, the payment of preferred dividends of $11.9 million, the reduction of amounts due to
affiliates of $20.5 million, and the repayment of debt of $40.2 million.
Capital Expenditures
We continuously evaluate facility requirements based on our strategic plans, production
requirements and market demand and may elect to make capital investments at higher or lower levels
in the future. These investments are all based on an analysis of the potential for these additions
to improve profitability and future rates of return. 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 our production capacity. From time to time, we may expand
our business by acquiring other businesses or pursuing other strategic growth opportunities.
Capital expenditures for the six months ended June 30, 2006 were $21.0 million. Of these expenses,
approximately $6.9 million were for expansion purposes. Approximately $0.2 million was for cost
reduction purposes. Approximately $13.9 million of capital expenditures were for necessary
replacement of capital assets.
The Company completed the acquisition of the stock of Custom Steel Inc. from Steel Technologies,
Inc., with the transaction effective March 31, 2006. The total amount invested in the acquisition
was approximately $17.2 million.
We expect to continue to invest in projects, including possible strategic acquisitions, to reduce
manufacturing costs, improve production efficiencies and to otherwise complement and expand our
business.
42
American Railcar Industries, Inc. and Subsidiaries
On April 2, 2006, our Marmaduke, Arkansas tank railcar manufacturing facility was damaged by a
tornado. Various costs have been incurred for capital expenditures in repairing the damage to the
facility. As of June 30, 2006, we have spent approximately $4.4 million to bring the facility and
the related equipment back to working order. The insurance carrier made an initial payment of $7.5
million to us on our claim during April 2006, and we are continuing to work with our carrier to
further assess the amount of the damage and the insurable loss related to the plant, property, and
equipment. Certain risks associated with this storm damage are set forth in Part IIItem 1A Risk
Factors.
In August 2006, our Board of Directors approved the construction of a new flexible railcar
manufacturing plant to be built adjacent to our tank railcar manufacturing plant in Marmaduke,
Arkansas. We anticipate that the new plant would be capable of producing tank, covered hopper and
intermodal railcars. Construction on the new plant is expected to begin in the third quarter of
2006. Certain risks associated with construction of this new plant are set forth in Part IIItem
1A Risk Factors.
We anticipate that any ongoing repair and replacement of our Marmaduke facility and equipment, the
new railcar plant and any other future expansion of our business will
be financed through recoveries from our insurance carrier, cash flow
from operations, our revolving credit facility, term debt associated directly with that
expenditure or other new financing. We believe that these sources of
funds will provide sufficient liquidity to meet our expected operating requirements over the next
twelve months. We cannot guarantee that we will be able to obtain term
debt or other new financing on favorable terms, if at all.
Our long-term liquidity is contingent upon future operating performance and our ability to continue
to meet financial covenants under our 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
On February 28, 2006, our Board of Directors declared a regular cash dividend of $0.03 per share of
our common stock. The dividend was paid on April 6, 2006, to shareholders of record at the close of
business on March 22, 2006. Our Board of Directors declared another dividend in June 2006. This
cash dividend of $0.03 per share of common stock was paid on July 14, 2006 to shareholders of
record at the close of business on June 29, 2006.
We intend to pay cash dividends on our common stock in the future. However, our revolving credit
facility contains provisions that trigger a demand right if we pay dividends on our common stock
unless the payment does not cause the adjusted fixed charge coverage ratio (fixed charges, pursuant
to the revolving credit facility, include any dividends paid or payable on our common stock) to be
less than 1.2 to 1.0 or the adjusted ratio of our indebtedness to earnings before interest, taxes,
depreciation and amortization, after giving effect to any debt incurred to pay any such dividend to
be greater than 4.0 to 1.0, each on a quarterly and/or annual basis. In addition, under Delaware
law, our board of directors may declare dividends only to the extent of our surplus (which is
defined as total assets at fair market value minus total liabilities, minus statutory capital), or
if there is no surplus, out of our net profits for the then-current and/or immediately preceding
fiscal years. Moreover, our declaration and payment of dividends will be at the discretion of our
board of directors and will depend upon our operating results, strategic plans, capital
requirements, financial condition, covenants under our borrowing arrangement and other factors our
board of directors considers relevant. Accordingly, we may not pay dividends in any given amount in
the future, or at all.
In addition, dividends of $0.6 million on our preferred stock were paid in the first quarter of
2006. All of our outstanding shares of preferred stock were redeemed in January 2006 in connection
with our initial public offering.
Contractual Obligations
In the first six months of 2006, we applied the net proceeds of our initial public offering to
repay substantially all of our long-term debt obligations in the amount of $40.4 million and our
notes due to affiliates in the amount of $19.0
43
American Railcar Industries, Inc. and Subsidiaries
million. A long-term note in the amount of $0.1 million, payable through February 1, 2008, and
which may not be prepaid without the consent of the holder, remains outstanding.
We entered into two vendor supply contracts with minimum volume commitments in October 2005 with
suppliers of materials used at our railcar production facilities. The agreements have terms of two
and three years, respectively. We have agreed to purchase a combined
total of $67.6 million from these two
suppliers over three years. In 2006, 2007 and 2008, we expect to purchase $16.0 million, $27.1
million, and $24.5 million respectively under these agreements. For the current year, we have spent
approximately $6.7 million through June 30, 2006.
We entered into two supply agreements, in January 2005 and June 2005, with a steel supplier for the
purchase of regular and normalized steel plate. The agreements each have terms of five years and
may be terminated by either party at any time after two years, upon twelve months prior notice.
Each agreement requires us to purchase the lesser of a fixed volume or 75% of our requirements for
the steel covered by that agreement at prices that fluctuate with the market. We have no commitment
under these arrangements to buy a minimum amount of steel, other than the minimum percentages, if
our overall steel purchases decline.
We have entered into supply agreements with one of the Ohio Castings joint venture partners, to
purchase up to 25% and 33% of car sets, consisting of sideframes and bolsters, produced at the
foundry being operated by Ohio Castings. Our purchase commitments under these supply agreements are
dependent upon the number of car sets manufactured by these foundries, which are jointly controlled
by us and the other two members of Ohio Castings.
We are subject to comprehensive federal, state, local and international environmental laws and
regulations relating to the release or discharge of materials into the environment, the management,
use, processing, handling, storage, transport or disposal of hazardous materials and wastes, or
otherwise relating to the protection of human health and the environment. These laws and
regulations not only expose us to liability for the environmental condition of our current or
formerly owned or operated facilities, and our own negligent acts, but also may expose us to
liability for the conduct of others or for our actions that were in compliance with all applicable
laws at the time these actions were taken. In addition, these laws may require significant
expenditures to achieve compliance, and are frequently modified or revised to impose new
obligations. Civil and criminal fines and penalties and other sanctions may be imposed for
non-compliance with these environmental laws and regulations. Our operations that involve hazardous
materials also raise potential risks of liability under common law. We are involved in
investigation and remediation activities at properties that we now own or lease to address
historical contamination and potential contamination by third parties. We are also involved with
state agencies in the cleanup of two sites under these laws. These investigations are at a
preliminary stage, and it is impossible to estimate, with any certainty, the timing and extent of
remedial actions that may be required, and the costs that would be involved in such remediation.
Substantially all of the issues identified relate to the use of the properties prior to their
transfer to us in 1994 by ACF and for which ACF has retained liability for environmental
contamination that may have existed at the time of transfer to us. ACF has also agreed to indemnify
us for any cost that might be incurred with those existing issues. However, if ACF fails to honor
its obligations to us, we would be responsible for the cost of such remediation. We have been
advised that, ACF estimates that it will spend approximately $0.2 million on environmental
investigation in each of 2006 and 2007, relating to contamination that existed at properties prior
to their transfer to us and for which ACF has retained liability and agreed to indemnify us. We
believe that our operations and facilities are in substantial compliance with applicable laws and
regulations and that any noncompliance is not likely to have a material adverse effect on our
operations or financial condition.
Future events, such as new environmental regulations or changes in or modified interpretations of
existing laws and regulations or enforcement policies, or further investigation or evaluation of
the potential health hazards of products or business activities, may give rise to additional
compliance and other costs that could have a material adverse effect on our financial conditions
and operations. In addition, ACF has in the past conducted investigation and remediation activities
at properties that we now own to address historic contamination. Although we believe that ACF has
satisfactorily addressed all known material contamination, there can be no assurance that ACF has
addressed all historical contamination. The discovery of historical contamination or the release of
hazardous substances into the environment at our current or formerly owned or operated facilities
could require ACF or us in the future to incur investigative or remedial costs or other liabilities
that could be material or that could interfere with the operation of our business.
44
American Railcar Industries, Inc. and Subsidiaries
We have been named a party to a suit in which the plaintiff alleges we were responsible for the
malfunction of a valve which we manufactured, and that was negligently remanufactured in 2004 by a
third party. We believe we have no responsibility for this malfunction and have meritorious
defenses against any liability. It is not possible to estimate the expected settlement, if any, at
this time as the case is in its early stages.
We have been named the defendant in a lawsuit in which the plaintiff claims we were responsible for
the damage caused by allegedly defective railcars that were manufactured by us. The lawsuit was
filed on September 19, 2005 in the United States District Court, Eastern District of Missouri. The
plaintiff seeks unspecified damages in excess of $75,000. The plaintiffs allege that the failures
in certain components caused the contents transported by these railcars to spill out of the
railcars causing property damage, clean-up costs, monitoring costs, testing costs and other costs
and damages. We believe that we are not responsible for the damage and have meritorious defenses
against liability.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are based upon our
interim consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the U.S. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions. Any differences may have a material impact on our financial condition
and results of operation.
The critical accounting 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 for the fiscal year ended December
31, 2005. Except as set forth below, there have been no material changes to the critical accounting
policies.
Stock Based Compensation
On January 19, 2006, we adopted SFAS No. 123R, Share-Based Payment, or SFAS 123R, which is a
revision of SFAS No. 123 Accounting for Stock-Based Compensation, or SFAS 123, and supersedes APB
No. 25, Accounting for Stock Issues to Employees, or APB 25. SFAS 123R requires the measurement
and recognition of compensation expense for all share-based payment awards made to our employees
and directors based on the estimated fair values of the awards on their grant dates. Our
share-based awards include stock options and restricted stock awards.
We use the Black-Scholes model to estimate the fair value of our option awards and employee stock
purchase rights issued under the 2005 Equity Incentive Plan. The Black-Scholes model requires
estimates of the expected term of the option, future volatility, dividend yield, and the risk-free
interest rate.
As of June 30, 2006, unrecognized compensation cost related to the unvested portion of share-based
compensation arrangements was approximately $5.4 million and is expected to be recognized over a
weighted-average period of approximately 2 years. This includes $2.1 million related to a
restricted stock grant and $3.3 million related to stock options.
Business Combination
On March 31, 2006, we adopted SFAS No. 141, Business Combinations, or SFAS 141, in conjunction with
the acquisition of Custom Steel. SFAS 141 addresses financial accounting and reporting for business
combinations and supersedes APB No. 16, Business Combinations (APB 16), and SFAS No. 38, Accounting
for Preacquisition Contingencies of Purchased Enterprises (SFAS 38). SFAS 141 requires that
business combinations be accounted for
45
American Railcar Industries, Inc. and Subsidiaries
under the purchase method of accounting, which requires management to estimate the fair value of
the assets acquired and liabilities assumed. The allocation of the purchase price is based on the
estimated fair value of assets and liabilities acquired and may be subject to adjustments during
the year following the date of acquisition related to a change in the fair value of the assets and
liabilities assumed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have a $75.0 million revolving credit facility that provides for financing of our working
capital requirements. As of June 30, 2006, there were no borrowings under the revolving credit
facility. We are exposed to interest rate risk on the borrowings under our revolving credit
facility. However, we do not plan to enter into swaps or other hedging arrangements to manage this
risk because we do not believe the risk is significant. On an annual basis, a 1% change in the
interest rate in our revolving credit facility will increase or decrease our interest expense by
$10,000 for every $1.0 million of outstanding borrowings.
We are exposed to price risks associated with the purchase of raw materials, especially steel and
heavy castings. The cost of steel, heavy castings and all other materials used in the production of
our railcars represent approximately 80-85% of our direct manufacturing costs. Given the
significant increases in the price of raw materials since November 2003, this exposure can affect
our costs of production. We believe that the risk to our margins and profitability has been greatly
reduced by the variable pricing contracts we now have in place. We have negotiated all of our
current railcar manufacturing contracts with our customers to adjust the purchase prices of our
railcars to reflect increases or decreases in the cost of certain raw materials and components and,
as a result, we are able to pass on to our customers most of the increased raw material and
component costs with respect to the railcars that we will produce and deliver after the first nine
months of 2005. We believe that we currently have excellent supplier relationships and do not
anticipate that material constraints will limit our production capacity. Such constraints may exist
if railcar production was to increase beyond current levels, or other economic changes occur that
affect the availability of our raw materials.
We are not exposed to any significant foreign currency exchange risks.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, our management evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of
the end of the period covered by this quarterly report on Form 10-Q (the Evaluation Date). Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of
the Evaluation Date, our disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commissions rules and forms.
There has been no change in our internal control over financial reporting during the most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
46
American Railcar Industries, Inc. and Subsidiaries
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, 2005.
ITEM 1A. RISK FACTORS
In addition to the risk factors set forth in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 2006, we are subject to the following additional
risks relating to the tornado damage and associated plant shut down at our Marmaduke facility and
our new railcar orders and planned new railcar manufacturing plant:
We cannot guarantee that our insurance coverage, subject to applicable deductibles, will be
adequate to cover damage at our Marmaduke facility. Nor can we guarantee that our business
interruption insurance will be adequate to cover our losses resulting from the business
interruption. Our insurance carrier could also contest the scope of our coverage or the amount of
our coverage or deductibles. Even if our preliminary assessment of our insurance coverage is
correct, delays in receiving payments from, or disputes with, our insurance carrier, could
adversely affect our business and results of operations. Although the plant rebuilding is
substantially complete, we cannot guarantee the timing of achieving full production rates at our
Marmaduke facility, or whether our rebuilding efforts, plant shut down or associated delivery
delays will result in unanticipated costs that may not be covered by insurance. We cannot assure
that we will be able to retain our tank railcar customers or orders. Our tank railcar orders may be
subject to cancellation in connection with our plant shutdown or otherwise, or we may incur
disputes with those customers over rescheduling deliveries. We also cannot guarantee that we will
be able to retain our employees, several of whom may have been displaced from their homes.
Construction
of the new railcar manufacturing plant and our ability to timely
fulfill our new
railcar orders are subject to risks, including without limitation, delays, unexpected costs and
other risks typically associated with such construction, which could impair or prevent our ability
to satisfy such orders on a timely basis, it at all, and may result in cancellations, customer
requests for delays or other costs that could adversely impact the amount of revenue we may
generate from the new railcar orders or potential future orders.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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. We received net proceeds of $192.0
million in the offering.
Since the closing of the offering and through June 30, 2006, we have applied the net proceeds from
the offering 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 |
|
|
|
|
|
47
American Railcar Industries, Inc. and Subsidiaries
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held June 8, 2006, stockholders elected seven incumbent
directors for a one-year term. The vote tabulation follows:
|
|
|
|
|
|
|
|
|
Nominee |
|
For |
|
Withheld |
Carl C. Icahn |
|
|
17,961,401 |
|
|
|
2,438,103 |
|
James J. Unger |
|
|
17,968,505 |
|
|
|
2,430,999 |
|
Vincent J. Intrieri |
|
|
17,412,907 |
|
|
|
2,986,597 |
|
Jon F. Weber |
|
|
17,711,333 |
|
|
|
2,688,171 |
|
Keith Meister |
|
|
18,216,868 |
|
|
|
2,182,636 |
|
James C. Pontious |
|
|
19,671,101 |
|
|
|
728,403 |
|
James M. Laisure |
|
|
19,673,187 |
|
|
|
726,317 |
|
48
American Railcar Industries, Inc. and Subsidiaries
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 |
49
American Railcar Industries, Inc. and Subsidiaries
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: August 11, 2006 |
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 |
|
50
American Railcar Industries, Inc. and Subsidiaries
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 |
51