e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period ended September 30, 2006
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
for the transition period from to
Commission File No. 000-51728
AMERICAN RAILCAR INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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43-1481791 |
(State of Incorporation)
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(I.R.S. Employer Identification No.) |
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100 Clark Street, St. Charles, Missouri
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63301 |
(Address of principal executive offices)
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(Zip Code) |
(636) 940-6000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.. (Check one):
Large accelerated filer o Accelerated filer o Nonaccelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act)
Yes o No þ
The number of shares of the registrants common stock, without par value, outstanding on November
8, 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)
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December 31, |
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September 30, |
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2005 |
|
2006 |
|
Assets |
|
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|
|
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|
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Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
28,692 |
|
|
$ |
11,102 |
|
Accounts receivable, net |
|
|
38,273 |
|
|
|
47,473 |
|
Accounts receivable, due from affiliates |
|
|
5,110 |
|
|
|
2,371 |
|
Insurance claim receivable, net |
|
|
|
|
|
|
5,936 |
|
Inventories, net |
|
|
88,001 |
|
|
|
112,392 |
|
Prepaid expenses |
|
|
2,523 |
|
|
|
4,163 |
|
Deferred tax asset |
|
|
1,967 |
|
|
|
2,075 |
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|
|
|
Total current assets |
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164,566 |
|
|
|
185,512 |
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|
|
|
|
|
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Property, plant and equipment
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|
|
|
|
|
|
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Buildings |
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84,255 |
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97,364 |
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Machinery and equipment |
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68,187 |
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|
87,347 |
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|
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152,442 |
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|
184,711 |
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Less accumulated depreciation |
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65,398 |
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72,323 |
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Net property, plant and equipment |
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|
87,044 |
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112,388 |
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Construction in process |
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3,759 |
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|
12,001 |
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Land |
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2,182 |
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2,865 |
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Total property, plant and equipment |
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92,985 |
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127,254 |
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|
|
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Debt issuance costs |
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|
565 |
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|
179 |
|
Deferred offering costs |
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|
4,860 |
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|
|
|
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Goodwill |
|
|
|
|
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|
7,230 |
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Other assets |
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|
26 |
|
|
|
37 |
|
Investment in joint venture |
|
|
5,578 |
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|
|
5,116 |
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|
|
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Total assets |
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$ |
268,580 |
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|
$ |
325,328 |
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|
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|
See notes to the Condensed Consolidated Financial Statements.
1
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(In thousands, except per share amounts, unaudited)
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|
|
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December 31, |
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September 30, |
|
|
2005 |
|
2006 |
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|
Liabilities and Stockholders Equity |
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|
|
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|
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Current liabilities: |
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|
|
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|
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Current portion of long-term debt |
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$ |
33,294 |
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$ |
86 |
|
Accounts payable |
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55,793 |
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|
46,255 |
|
Accounts payable, due to affiliates |
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4,457 |
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|
907 |
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Accrued expenses and taxes |
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7,675 |
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|
5,382 |
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Accrued compensation |
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7,243 |
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|
|
9,970 |
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Accrued dividends |
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|
11,336 |
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|
|
636 |
|
Note payable to affiliate-current |
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|
19,000 |
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|
|
|
|
|
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Total current liabilities |
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|
138,798 |
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|
|
63,236 |
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|
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|
|
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|
Long-term debt, net of current portion |
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|
7,076 |
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|
31 |
|
Deferred tax liability |
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5,364 |
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|
7,991 |
|
Pension and post-retirement liabilities |
|
|
10,522 |
|
|
|
9,986 |
|
Other liabilities |
|
|
59 |
|
|
|
53 |
|
Mandatory redeemable preferred stock, stated
value $1,000, 99,000 shares authorized, 1
share issued and outstanding at December 31,
2005, none outstanding at September 30, 2006 |
|
|
1 |
|
|
|
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|
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Total liabilities |
|
|
161,820 |
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|
81,297 |
|
|
|
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|
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Commitments and contingencies |
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Stockholders equity: |
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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 September 30, 2006,
respectively |
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|
82,055 |
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|
|
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|
Common stock, $.01 par value, 50,000,000
shares authorized, 11,147,059 and 21,207,773
shares issued and outstanding at December 31,
2005 and September 30, 2006, respectively |
|
|
111 |
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|
|
212 |
|
Additional paid-in capital |
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41,667 |
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234,242 |
|
Retained earnings accumulated (deficit) |
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|
(15,442 |
) |
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|
11,157 |
|
Accumulated other comprehensive loss |
|
|
(1,631 |
) |
|
|
(1,580 |
) |
|
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|
Total stockholders equity |
|
|
106,760 |
|
|
|
244,031 |
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|
|
|
Total liabilities and stockholders equity |
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$ |
268,580 |
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|
$ |
325,328 |
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|
|
|
See notes to the Condensed Consolidated Financial Statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
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For the Three Months Ended, |
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September 30, |
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September 30, |
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2005 |
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2006 |
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Revenues: |
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|
|
|
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Manufacturing operations (including revenues from
affiliates of $16,345 and $4,172 for the three
months ended September 30, 2005 and 2006,
respectively) |
|
$ |
139,230 |
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|
$ |
138,479 |
|
|
|
|
|
|
|
|
|
|
Railcar services (including revenues from
affiliates of $4,756 and $4,580 for the three
months ended September 30, 2005 and 2006,
respectively) |
|
|
11,275 |
|
|
|
11,975 |
|
|
|
|
Total revenues |
|
|
150,505 |
|
|
|
150,454 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold: |
|
|
|
|
|
|
|
|
Manufacturing operations (including costs related
to affiliates of $15,441 and $3,699 for the three
months ended September 30, 2005 and 2006,
respectively) |
|
|
126,265 |
|
|
|
125,809 |
|
|
|
|
|
|
|
|
|
|
Railcar services (including costs related to
affiliates of $3,622 and $3,634 for the three
months ended September 30, 2005 and 2006,
respectively) |
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|
8,963 |
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|
8,920 |
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|
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|
Total cost of goods sold |
|
|
135,228 |
|
|
|
134,729 |
|
Gross profit |
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|
15,277 |
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|
|
15,725 |
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|
|
|
|
|
|
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Income related to insurance recoveries, net |
|
|
|
|
|
|
4,963 |
|
Gain on asset conversion, net |
|
|
|
|
|
|
4,323 |
|
Selling, administrative and other |
|
|
4,789 |
|
|
|
5,529 |
|
Stock based compensation expense |
|
|
|
|
|
|
1,479 |
|
|
|
|
Earnings from operations |
|
|
10,488 |
|
|
|
18,003 |
|
|
|
|
|
|
|
|
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|
Interest income |
|
|
288 |
|
|
|
234 |
|
Interest expense (including interest expense to
affiliates of $509 and $0 for the three months
ended September 30, 2005 and 2006, respectively) |
|
|
1,195 |
|
|
|
103 |
|
Loss from joint venture |
|
|
(481 |
) |
|
|
(278 |
) |
|
|
|
Earnings before income tax expense |
|
|
9,100 |
|
|
|
17,856 |
|
Income tax expense |
|
|
3,605 |
|
|
|
6,862 |
|
|
|
|
Net earnings |
|
$ |
5,495 |
|
|
$ |
10,994 |
|
|
|
|
Less preferred dividends |
|
|
(2,081 |
) |
|
|
|
|
|
|
|
Earnings available to common shareholders |
|
$ |
3,414 |
|
|
$ |
10,994 |
|
|
|
|
|
|
|
|
|
|
Net earnings per common share basic |
|
$ |
0.31 |
|
|
$ |
0.52 |
|
Net earnings per common share diluted |
|
$ |
0.31 |
|
|
$ |
0.52 |
|
Weighted average common shares outstanding basic |
|
|
11,147 |
|
|
|
21,208 |
|
Weighted average common shares outstanding diluted |
|
|
11,147 |
|
|
|
21,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Nine Months Ended, |
|
|
September 30, |
|
September 30, |
|
|
2005 |
|
2006 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Manufacturing operations (including revenues from
affiliates of $44,493 and $24,380 for the nine
months ended September 30, 2005 and 2006,
respectively) |
|
$ |
409,208 |
|
|
$ |
443,785 |
|
|
|
|
|
|
|
|
|
|
Railcar services (including revenues from
affiliates of $16,036 and $15,093 for the nine
months ended September 30, 2005 and 2006,
respectively) |
|
|
32,940 |
|
|
|
36,948 |
|
|
|
|
Total revenues |
|
|
442,148 |
|
|
|
480,733 |
|
|
|
|
|
|
|
|
|
|
Cost of goods sold: |
|
|
|
|
|
|
|
|
Manufacturing operations (including costs related
to affiliates of $41,384 and $22,567 for the nine
months ended September 30, 2005 and 2006,
respectively) |
|
|
377,181 |
|
|
|
397,683 |
|
|
|
|
|
|
|
|
|
|
Railcar services (including costs related to
affiliates of $12,728 and $11,749 for the nine
months ended September 30, 2005 and 2006,
respectively) |
|
|
27,538 |
|
|
|
29,080 |
|
|
|
|
Total cost of goods sold |
|
|
404,719 |
|
|
|
426,763 |
|
Gross profit |
|
|
37,429 |
|
|
|
53,970 |
|
|
|
|
|
|
|
|
|
|
Income related to insurance recoveries, net |
|
|
|
|
|
|
9,946 |
|
Gain on asset conversion, net |
|
|
|
|
|
|
4,323 |
|
Selling, administrative and other |
|
|
11,417 |
|
|
|
15,282 |
|
Stock based compensation expense |
|
|
|
|
|
|
6,448 |
|
|
|
|
Earnings from operations |
|
|
26,012 |
|
|
|
46,509 |
|
|
|
|
|
|
|
|
|
|
Interest income (including interest income from
affiliates of $823 and $0 for the nine months ended
September 30, 2005 and 2006, respectively) |
|
|
1,265 |
|
|
|
1,149 |
|
Interest expense (including interest expense to
affiliates of $1,683 and $98 for the nine months
ended September 30, 2005 and 2006, respectively) |
|
|
3,577 |
|
|
|
1,236 |
|
Earnings from joint venture |
|
|
443 |
|
|
|
59 |
|
|
|
|
Earnings before income tax expense |
|
|
24,143 |
|
|
|
46,481 |
|
Income tax expense |
|
|
9,611 |
|
|
|
17,405 |
|
|
|
|
Net earnings |
|
$ |
14,532 |
|
|
$ |
29,076 |
|
|
|
|
Less preferred dividends |
|
|
(11,171 |
) |
|
|
(568 |
) |
|
|
|
Earnings available to common shareholders |
|
$ |
3,361 |
|
|
$ |
28,508 |
|
|
|
|
|
|
|
|
|
|
Net earnings per common share basic |
|
$ |
0.30 |
|
|
$ |
1.39 |
|
Net earnings per common share diluted |
|
$ |
0.30 |
|
|
$ |
1.39 |
|
Weighted average common shares outstanding basic |
|
|
11,147 |
|
|
|
20,484 |
|
Weighted average common shares outstanding diluted |
|
|
11,147 |
|
|
|
20,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
|
|
|
$ |
0.09 |
|
See notes to the Condensed Consolidated Financial Statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2005 |
|
2006 |
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
14,532 |
|
|
$ |
29,076 |
|
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
4,972 |
|
|
|
7,689 |
|
Loss on the write-off of property, plant and equipment |
|
|
|
|
|
|
4,705 |
|
Write-off of deferred financing costs |
|
|
|
|
|
|
566 |
|
Stock based compensation |
|
|
|
|
|
|
6,590 |
|
Change in joint venture investment as a result of earnings |
|
|
(443 |
) |
|
|
(59 |
) |
Expense relating to pre-recapitalization liabilities |
|
|
794 |
|
|
|
|
|
Provision for deferred income taxes |
|
|
8,721 |
|
|
|
807 |
|
Provision for losses on accounts receivable |
|
|
35 |
|
|
|
295 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(23,779 |
) |
|
|
(9,497 |
) |
Accounts receivable, due from affiliate |
|
|
|
|
|
|
2,739 |
|
Insurance claim receivable |
|
|
|
|
|
|
(5,936 |
) |
Inventories |
|
|
(7,939 |
) |
|
|
(20,554 |
) |
Prepaid expenses |
|
|
(8,309 |
) |
|
|
(1,626 |
) |
Accounts payable |
|
|
33,354 |
|
|
|
(9,538 |
) |
Accounts payable, due to affiliate |
|
|
|
|
|
|
(2,074 |
) |
Accrued expenses and taxes |
|
|
5,784 |
|
|
|
(9,591 |
) |
Other |
|
|
109 |
|
|
|
(479 |
) |
|
|
|
Net cash provided by (used in) operating activities |
|
|
27,831 |
|
|
|
(6,887 |
) |
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(16,356 |
) |
|
|
(38,695 |
) |
Property insurance advance on Marmaduke tornado damage |
|
|
|
|
|
|
10,000 |
|
Repayment of note receivable from affiliate (Ohio
Castings LLC) |
|
|
|
|
|
|
494 |
|
Acquisitions |
|
|
|
|
|
|
(17,220 |
) |
|
|
|
Net cash used in investing activities |
|
|
(16,356 |
) |
|
|
(45,421 |
) |
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
(1,273 |
) |
Decrease in amounts due to affiliates |
|
|
(22,246 |
) |
|
|
(20,476 |
) |
Majority shareholder capital contribution |
|
|
|
|
|
|
275 |
|
Finance fees related to new credit facility |
|
|
|
|
|
|
(265 |
) |
Repayment of note receivable from affiliate |
|
|
50 |
|
|
|
|
|
Proceeds from debt issuance |
|
|
31,294 |
|
|
|
|
|
Repayment of debt |
|
|
(1,315 |
) |
|
|
(40,253 |
) |
|
|
|
Net cash provided by financing activities |
|
|
7,783 |
|
|
|
34,718 |
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
19,258 |
|
|
|
(17,590 |
) |
Cash and cash equivalents at beginning of period |
|
|
6,943 |
|
|
|
28,692 |
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
26,201 |
|
|
$ |
11,102 |
|
|
|
|
See notes to the Condensed Consolidated Financial Statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months ended September 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 0.4% of total consolidated revenues for both the three and
nine months ended September 30, 2005. Canadian revenues were 0.3% of total consolidated revenues
for both the three and nine months ended September 30, 2006. Canadian assets were 0.4% of total
consolidated assets as of both December 31, 2005 and September 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
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 nine months ended September 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 |
|
|
|
|
|
|
(1,200 |
) |
Stock option expense |
|
|
|
|
|
|
1,790 |
|
Initial public offering |
|
|
|
|
|
|
191,985 |
|
|
|
|
|
|
|
|
September 30, 2006 |
|
$ |
|
|
|
$ |
234,242 |
|
|
|
|
|
|
|
|
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.
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.
7
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 for the railcar may be recorded after customer acceptance when it leaves the
manufacturing plant and the sale for the lining work may be separately recorded following
completion of that work by the independent contractor, customer acceptance and final shipment.
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 Emerging Issues Task Force (EITF) Abstract 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 routine 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 January 2006. These costs are amortized over the
term of the related debt, utilizing the interest method.
8
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. This closing did not have a material financial impact on the
Company.
The Company has determined that, although the joint venture is a variable interest entity (VIE),
the Company is not the primary beneficiary and the joint venture should not be consolidated in the
Companys financial statements. The risk of loss to Castings and the Company is limited to its
investment in the VIE and 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 $4.2 million as of
December 31, 2005 and September 30, 2006, respectively. The fair market value of the guarantee was
approximately $0.1 million at December 31, 2005 and September 30, 2006.
The carrying amount of the investment in Ohio Castings by Castings was $5.6 million and $5.1
million, respectively at December 31, 2005 and September 30, 2006.
For the three and nine months ended September 30, 2006, the cost of railcar manufacturing included
$9.0 million and $30.9 million, respectively, in products produced by Ohio Castings. For the three
and nine months ended September 30, 2005, the cost of railcar manufacturing included $5.0 million
and $19.0 million, respectively, in products produced by Ohio Castings.
Inventory at December 31, 2005 and September 30, 2006 includes approximately $3.0 million and $4.0
million, respectively, of purchases from Ohio Castings. Approximately $0.8 million of costs were
eliminated as it represented profit from a related party for inventory still on hand.
Summary combined financial information for Ohio Castings, the investee company, as of December 31,
2005 and September 30, 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
September 30, 2006 |
|
|
|
(in thousands) |
|
Financial position |
|
|
|
|
|
|
|
|
Current assets |
|
$ |
18,302 |
|
|
$ |
14,690 |
|
Property, plant, and equipment, net |
|
|
15,380 |
|
|
|
15,253 |
|
|
|
|
|
|
|
|
Total assets |
|
|
33,682 |
|
|
|
29,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
14,540 |
|
|
|
14,237 |
|
Long-term debt |
|
|
11,663 |
|
|
|
7,683 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
26,203 |
|
|
|
21,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members equity |
|
|
7,479 |
|
|
|
8,023 |
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
33,682 |
|
|
$ |
29,943 |
|
|
|
|
|
|
|
|
9
Summary combined results of operations for Ohio Castings for the three and nine months ended
September 30, 2005 and 2006:
|
|
|
|
|
|
|
|
|
Three months ended |
|
September 30, 2005 |
|
|
September 30, 2006 |
|
|
|
(in thousands) |
|
Results of operations |
|
|
|
|
|
|
|
|
Sales |
|
$ |
30,045 |
|
|
$ |
23,921 |
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
|
(1,745 |
) |
|
|
(654 |
) |
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(1,577 |
) |
|
$ |
(466 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
September 30, 2005 |
|
|
September 30, 2006 |
|
|
|
(in thousands) |
|
Results of operations |
|
|
|
|
|
|
|
|
Sales |
|
$ |
88,324 |
|
|
$ |
90,158 |
|
|
|
|
|
|
|
|
Earnings from operations |
|
|
1,115 |
|
|
|
120 |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
1,327 |
|
|
$ |
544 |
|
|
|
|
|
|
|
|
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 or third quarter of 2006. No
impairment losses were recorded for the nine month period ended September 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.
Pension plans and other postretirement benefits
The Company is the sponsor of two defined benefit plans that cover certain employees at designated
repair facilities. One defined benefit plan, which covers certain salaried and hourly employees,
is frozen and no additional benefits are accruing thereunder. The second defined benefit plan is
active and covers only certain of the Companys union employees. 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. The Company is also
the sponsor of an unfunded supplemental executive retirement plan (SERP) in which several of its
employees are participants. The participants benefits in the SERP vested prior to the SERP being
frozen on March 31, 2004. No additional benefits are accruing under the SERP.
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
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 September 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 per share are calculated as net earnings attributable to common shareholders divided
by the weighted-average number of common shares outstanding during the respective period. Diluted
earnings per share are calculated by dividing net earnings 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, depreciable lives of assets, and the reserve for warranty claims. Actual
results could differ from those estimates.
11
Stock-based compensation
The Company applies the provisions of Statement of Financial Accounting Standards (SFAS) No.
123(R), Share-Based Payments (123(R)), to stock option awards issued. The compensation cost
recorded for these awards will be based on their grant-date fair value required by SFAS 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 July 2006, the FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes (FIN 48), to create a
single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the
accounting for income taxes, by prescribing a minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. 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 will adopt FIN 48 as of January 1, 2007, as required. The Company is currently
evaluating the impact of this standard on its Consolidated Financial Statements.
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
(SAB 108), to address diversity in practice in quantifying financial statement misstatements. SAB
108 requires that the Company quantify misstatements based on their impact on each of its financial
statements and related disclosures. SAB 108 is to become effective for fiscal years ending after
November 15, 2006. The Company plans to adopt SAB 108 effective for its 10-K, which will be filed
for the year ending December 31, 2006. The Company does not
anticipate a material impact on its financial statements when it
initially applies the provisions of SAB 108.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (FAS 157), which defines
fair value, establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value measurements and, accordingly,
FAS 157 does not require any new fair value measurements. The Company is currently evaluating the
impact this standard will have on its operating income and statement of financial position. This
statement is effective for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company will adopt FAS 157 as of January 1, 2008, as required.
In September 2006, the FASB issued Staff Position (FSP) No. AUG AIR-1, Accounting for Planned Major
Maintenance Activities. This guidance eliminates one of the accounting methods used to plan for
major maintenance activities. This FSP should be applied to the first fiscal year beginning after
December 15, 2006. The Company plans to adopt this FSP on January 1, 2007. The Company does not
expect that the adoption of this FSP will have a significant impact on its financial position and
results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132(R)) (or
FAS 158). FAS 158 requires that the Company recognize the overfunded or underfunded status of its
defined benefit and retiree medical plans (the Plans) as an asset or liability in the 2006 year end
balance sheet, with changes in the funded status recognized through comprehensive income in the
year in which they occur. FAS 158 also requires the Company to measure the funded status of the
Plans as of the year end balance sheet date not later that December 31, 2008. The Company is
currently evaluating the impact this new standard will have on its statement of financial position
and results of operations.
12
Note 3 Initial Public Offering
On January 24, 2006, the Company completed the sale of 9,775,000 shares of common stock to the
public pursuant to an effective registration statement at a price of $21.00 per share. The
offering resulted in gross proceeds to the
Company of $205.3 million. Expenses related to the offering were $13.3 million for underwriting
discounts and commissions. The Company received net proceeds of $192.0 million in the offering.
The net proceeds from the offering were applied as follows (in millions):
|
|
|
|
|
Redemption of all outstanding shares of preferred stock |
|
$ |
94.0 |
|
Repayment of notes due to affiliates |
|
|
20.5 |
|
Repayment of all industrial revenue bonds |
|
|
8.6 |
|
Repayment of amounts outstanding under revolving credit facility |
|
|
32.3 |
|
Acquisition of Custom Steel |
|
|
17.2 |
|
Payment of payables in connection with acquisition |
|
|
5.3 |
|
Investment in plant, property and equipment |
|
|
12.7 |
|
Offering costs paid during the first quarter |
|
|
1.4 |
|
|
|
|
|
Total uses |
|
$ |
192.0 |
|
|
|
|
|
Note 4 Marmaduke Storm Damage Insurance Claim (Income 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, as well as
incremental costs and operating expenses it incurred due to damage caused by the tornado. In
addition, the Company has insurance for business interruption as a direct result of the insured
damage. The Company has deductibles on these policies of $0.1 million for property insurance and a
five-day equivalent time element business interruption deductible, which equated to $0.6 million.
This deductible was ratably recognized over the course of the five-month period during the period
of business interruption.
The Company has settled both the property damage claim and the business interruption insurance
claim. The final property damage claim amounted to $11.2 million (prior to the deductible) covering
clean up costs, repair costs and asset replacement costs. The final business interruption claim
amounted to $16.0 million (prior to the deductible) covering continuing expenses, employee wages
and estimated lost profits for April through August 2006.
The Company received varying payments in both the second and third quarters for the property damage
and business interruption claims and has received all remaining amounts due in the fourth quarter.
ARI received advances of $7.5 million and $2.5 million, respectively, during the second and third
quarters from the insurance carrier related to the property damage claim. This cash has been
classified as cash received for investing activities in the condensed consolidated statement of
cash flows. The Company has received the remaining $1.1 million during the fourth quarter 2006. ARI
received advances of $8.0 million and $2.5 million, respectively, during the second and third
quarters related to the business interruption claim. This cash has been classified as cash received
for operating activities as the advances were for ongoing normal business operations and lost
profits. The Company has received the remaining $4.9 million during the fourth quarter 2006.
The Company had assets with a net book value of $4.3 million damaged or destroyed by the tornado.
Other costs incurred related to the tornado damage included clean up for the temporary shut-down of
the facility. The write off
13
of assets and associated cleanup costs have been netted against the
insurance settlement of the property damage claim to arrive at the gain on asset conversion, net.
The Company incurred costs related to the storm damage that were unpaid as of September 30, 2006.
The Company identified these items and they were included in the property damage and the business
interruption insurance claim settlements. An accrued liability balance of $1.1 million remains at
September 30, 2006 for these remaining
amounts. The Company believes that no material additional future costs will be incurred relating to
the storm damage.
The amounts recorded in the statement of operations relating to business interruption insurance
recoveries is set forth as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second |
|
|
Third |
|
|
Year to |
|
|
|
Quarter |
|
|
Quarter |
|
|
Date |
|
|
|
(in thousands) |
|
Business interruption insurance claim |
|
$ |
8,600 |
|
|
$ |
7,368 |
|
|
|
|
|
Business interruption claim deductible |
|
|
(600 |
) |
|
|
(240 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business interruption insurance settlement, net |
|
|
8,000 |
|
|
|
7,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing expenses |
|
|
(3,257 |
) |
|
|
(2,173 |
) |
|
|
|
|
Deductible adjustment |
|
|
|
|
|
|
8 |
|
|
|
|
|
Unrecognized deductible |
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income related to insurance recoveries, net |
|
$ |
4,983 |
|
|
$ |
4,963 |
|
|
$ |
9,946 |
|
|
|
|
|
|
|
|
|
|
|
The amounts recorded in the statement of operations relating to our property damage insurance
recoveries is set forth as follows:
|
|
|
|
|
|
|
Third Quarter |
|
|
|
(in thousands) |
|
Property damage insurance claim |
|
$ |
11,160 |
|
Property damage claim deductible |
|
|
(100 |
) |
|
|
|
|
Property damage insurance settlement, net |
|
|
11,060 |
|
Assets damaged, clean up costs, repair costs |
|
|
(6,737 |
) |
|
|
|
|
Gain on asset conversion, net |
|
$ |
4,323 |
|
|
|
|
|
14
The current receivable amount included in the balance sheet relating to our insurance
recoveries is set forth as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Interruption |
|
|
Property Damage |
|
|
|
|
|
|
Insurance |
|
|
Insurance |
|
|
Total |
|
|
|
(in thousands) |
|
Total Claim |
|
$ |
15,968 |
|
|
$ |
11,160 |
|
|
|
|
|
Deductible |
|
|
592 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claim after deductible |
|
|
15,376 |
|
|
|
11,060 |
|
|
|
|
|
Advances |
|
|
10,500 |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Receivable
at September 30, 2006 |
|
$ |
4,876 |
|
|
$ |
1,060 |
|
|
$ |
5,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5
Comprehensive Income
The components of comprehensive income, net of related tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
|
(in thousands) |
Net earnings |
|
$ |
5,495 |
|
|
$ |
10,994 |
|
|
$ |
14,532 |
|
|
$ |
29,076 |
|
Foreign currency translation adjustment |
|
|
20 |
|
|
|
14 |
|
|
|
17 |
|
|
|
51 |
|
|
|
|
|
|
Comprehensive income |
|
$ |
5,515 |
|
|
$ |
11,008 |
|
|
$ |
14,549 |
|
|
$ |
29,127 |
|
|
|
|
|
|
Note 6Accounts Receivable
The allowance for doubtful accounts had the following activity for the three and nine months ended
September 30, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands) |
|
Beginning balance |
|
$ |
554 |
|
|
$ |
1,093 |
|
Bad debt expense |
|
|
|
|
|
|
32 |
|
Reduction in allowance |
|
|
(4 |
) |
|
|
|
|
Accounts written off |
|
|
(13 |
) |
|
|
(197 |
) |
Recoveries |
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
560 |
|
|
$ |
928 |
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands) |
|
Beginning balance |
|
$ |
510 |
|
|
$ |
849 |
|
Bad debt expense |
|
|
35 |
|
|
|
295 |
|
Accounts written off |
|
|
(23 |
) |
|
|
(219 |
) |
Recoveries |
|
|
38 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
560 |
|
|
$ |
928 |
|
|
|
|
|
|
|
|
Note 7Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
September 30, |
|
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands) |
|
Raw materials |
|
$ |
49,246 |
|
|
$ |
68,962 |
|
Work-in-process |
|
|
26,301 |
|
|
|
28,819 |
|
Finished products |
|
|
14,772 |
|
|
|
17,189 |
|
|
|
|
|
|
|
|
Total inventories |
|
|
90,319 |
|
|
|
114,970 |
|
Less reserves |
|
|
2,318 |
|
|
|
2,578 |
|
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
88,001 |
|
|
$ |
112,392 |
|
|
|
|
|
|
|
|
Inventory reserves had the following activity for the year ended December 31, 2005 and the nine
months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Twelve Months |
|
|
Nine Months |
|
|
|
Ended December |
|
|
Ended September |
|
|
|
31, 2005 |
|
|
30, 2006 |
|
|
|
(in thousands) |
|
Beginning balance |
|
$ |
2,679 |
|
|
$ |
2,318 |
|
Provision |
|
|
273 |
|
|
|
417 |
|
Writeoff |
|
|
(634 |
) |
|
|
(157 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
2,318 |
|
|
$ |
2,578 |
|
|
|
|
|
|
|
|
16
Note 8Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
September 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 |
|
|
|
117 |
|
|
|
|
|
|
|
|
Total long-term debt, including current portion |
|
$ |
40,370 |
|
|
$ |
117 |
|
Less current portion of debt |
|
|
33,294 |
|
|
|
86 |
|
|
|
|
|
|
|
|
Total long-term debt, net of current portion |
|
$ |
7,076 |
|
|
$ |
31 |
|
|
|
|
|
|
|
|
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. As of September 30, 2006, the
revolving credit facility had a total commitment of the lesser of (i) $75.0 million or (ii) an
amount equal to a percentage of eligible accounts receivable plus a percentage of eligible raw
materials and finished goods inventory. In addition, the revolving credit facility included a $15.0
million capital expenditure sub-facility based on a percentage of the costs related to capital
projects the Company may undertake. The revolving credit facility was initially for a three-year
term prior to being amended as discussed in Note 18Subsequent
Events. 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 September 30, 2006 we had $74.5 million of availability under the
revolving credit facility and no borrowings outstanding. As of September 30, 2006, the Company was
in compliance with all of its covenants under the revolving credit agreement.
The fair value of long-term debt was approximately $40.4 million and $0.1 million at December 31,
2005 and September 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 nine month periods ended September 30, 2005 and 2006:
17
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands) |
|
Liability, beginning of period |
|
$ |
1,422 |
|
|
$ |
2,036 |
|
Expense for new warranties issued |
|
|
53 |
|
|
|
307 |
|
Warranty claims |
|
|
(38 |
) |
|
|
(560 |
) |
|
|
|
|
|
|
|
Liability, end of period |
|
$ |
1,437 |
|
|
$ |
1,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands) |
|
Liability, beginning of period |
|
$ |
1,630 |
|
|
$ |
1,237 |
|
Expense for new warranties issued |
|
|
278 |
|
|
|
1,807 |
|
Warranty claims |
|
|
(471 |
) |
|
|
(1,261 |
) |
|
|
|
|
|
|
|
Liability, end of period |
|
$ |
1,437 |
|
|
$ |
1,783 |
|
|
|
|
|
|
|
|
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 September 30, |
|
|
|
2005 |
|
|
2006 |
|
Weighted average basic common shares outstanding |
|
|
11,147,059 |
|
|
|
21,207,773 |
|
Dilutive effect of employee stock options (1) |
|
|
|
|
|
|
52,814 |
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding |
|
|
11,147,059 |
|
|
|
21,260,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2005 |
|
|
2006 |
|
Weighted average basic common shares outstanding |
|
|
11,147,059 |
|
|
|
20,484,225 |
|
Dilutive effect of employee stock options (1) |
|
|
|
|
|
|
86,556 |
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding |
|
|
11,147,059 |
|
|
|
20,570,781 |
|
|
|
|
|
|
|
|
(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 nine
months ended September 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.
Note 11Stock based Compensation
In December 2004, the FASB issued SFAS 123(R), 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
18
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 123(R). During 2005, the FASB issued three FASB Staff Positions (FSP): FSP FAS
123(R)-1, Classification and Measurement of Freestanding Financial Instruments Originally Issued in
Exchange for Employee Services under FASB Statement No. 123(R), FSP FAS 123(R)-2, Practical
Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123(R), and FSP FAS
123(R)-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 123(R) 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 nine months ended September 30, 2006 includes $1.53 million and $6.59
million, respectively, of compensation expense related to our stock based compensation
arrangements. No stock based compensation expenses were recognized in 2005. Approximately $0.05
million and $0.14 million, respectively, is classified as cost of sales for the three and nine
months ended September 30, 2006. The remaining amounts of $1.48 million and $6.45 million,
respectively, are classified as selling, administrative and other expense for the three and nine
months ended September 30, 2006. Net income for the three and nine months ended September 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 three year vesting period 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. 123(R), 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 five year term
represents the expiration of each option. The interest rate used was the five year government T
Bill rate on the date of grant. Dividend yield was determined from an average of other companies in
the industry, as the Company did not have 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 four year vesting period 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 directors or a committee of the board. Options granted pursuant to the
requirements of SFAS No. 123(R) are expensed on a graded vesting method over the vesting period of
the option.
The Company recognized $0.6 million and $1.8 million, respectively, of compensation expense during
the three and nine months ended September 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 nine months ended September 30, 2006.
19
The following is a summary of option activity under the 2005 plan as of September 30, 2006, and
changes during each quarter of fiscal year 2006 through September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
Average |
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the
end of period,
September 30, 2006 |
|
|
559,876 |
|
|
$ |
22.97 |
|
|
52 months |
|
$ |
8.05 |
|
|
$ |
3,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end
of period,
September 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 $4.8 million, respectively of compensation expense during
the three and nine months ended September 30, 2006 for this restricted stock grant. The Company
recognized zero and $2.2 million of income tax benefits in the three and nine months ended
September 30, 2006, respectively for this restricted stock grant.
20
The following is a summary of the status of non-vested shares as of September 30, 2006, and changes
during each quarter of fiscal year 2006 through September 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at the end of period, September 30, 2006 |
|
|
171,428 |
|
|
$ |
21.00 |
|
|
|
|
|
|
|
|
|
Future stock compensation expense and shares available
As of September 30, 2006, unrecognized compensation costs related to the unvested portion of
restricted stock were approximately $1.2 million and are expected to be recognized over a period of
approximately four months. As of September 30, 2006, unrecognized compensation costs related to the
unvested portion of stock options were approximately $2.7 million and are expected to be recognized
over a period of approximately 31 months.
As of September 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. The 1,000,000 shares covered by the Plan were registered for issuance to the
public with the SEC on a Form S-8 on August 16, 2006. Within the same filing, we registered 114,286
shares of restricted stock that vested in January 2006.
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 nine months ended September
30, 2006, ARI purchased inventory of $19.0 million and $58.5 million, respectively, of components
from ACF. In the three and nine months ended September 30, 2005, ARI purchased inventory of $20.8
million and $56.2 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 nine
21
months ended September 30, 2005. The
agreement was terminated on April 1, 2005.
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
nine months ended September 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 zero and $0.1
million for the three and nine months ended September 30, 2005 and is included under revenue from
affiliates on the statement of operations. Revenue recorded under this arrangement totaled $0.1
million and $0.5 million for the three and nine months ended September 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 zero and $1.1 million, respectively, for
the three and nine months ended September 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 nine months ended
September 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 zero and $2.0
million, respectively for the three and nine months ended September 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 $4.8 million and $16.0 million,
respectively, for the three and nine months ended September
22
30, 2005, included under revenue from
affiliates on the statement of operations, was recorded under this arrangement. Revenue of $4.6
million and $15.1 million, respectively for the three and nine months ended September 30, 2006,
were 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 $0.6 million and $1.1 million, respectively, for the three and nine
months ended September 30, 2005. Total fees paid to ARL were $0.5 million and $1.5 million,
respectively, for the three and nine months ended September 30, 2006. Amounts billed to ARL
totaled $0.04 million and $0.1 million, respectively, for the three and nine months ended
September 30, 2005. No amounts were billed to ARL during the three and nine months ended
September 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 included options for ARL to
purchase up to 300 covered hopper railcars in 2007, should additional capacity become available
and not be called for by other rights of first refusal, and 1,000 tank railcars and 400 covered
hopper railcars in 2008. The options to purchase 1,000 tank railcars and 400 covered hopper
railcars in 2008 were exercised by ARL. 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.
On September 25, 2006, the Company entered into an agreement with ARL for the Company to
manufacture and ARL to purchase 500 tank railcars in both 2008 and 2009.
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 $1.3 million and
$3.1 million, respectively, in the three and nine months ended September 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 $0.3 million and $0.8 million,
respectively, in the three and nine months ended September 30, 2005.
23
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.
During the third quarter of 2006, ARI entered into an inventory storage agreement with ACF to store
designated inventory that ARI had purchased under its manufacturing services agreement with ACF at
ACFs Huntington facility. Under this agreement, ACF holds the inventory at its facility in
segregated locations until such time that the inventory is shipped to ARI.
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 nine months ended September 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 nine months ended September 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
of ARI. The note bears interest at prime plus 1.75% and was payable on demand. Interest expense on
the note was $0.2 million and $0.4 million, respectively, for the three and nine months ended
September 30, 2005. Interest expense on the note was zero and $0.1 million, respectively, for the
three and nine months ended September 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 September 30, 2006 were $2.4
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 September 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 nine months
ended September 30, 2005 and 2006.
Cost of railcar manufacturing for the three and nine months ended September 30, 2005 includes $5.0
million and $19.0 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 nine months ended September 30, 2006 included $9.0 million and $30.9 million, respectively, of
railcar products produced by Ohio Castings. Inventory at December 31, 2005 and September 30, 2006
includes approximately $3.0 million and $4.0 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
24
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 $1.5 million at September 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.
Note 13Employee Benefit Plans
The Company is the sponsor of two defined benefit plans that cover certain employees at designated
repair facilities. One defined benefit plan, which covers certain salaried and hourly employees,
is frozen and no additional benefits are accruing thereunder. The second defined benefit plan is
active and covers only certain of the Companys union employees. The Company is also the sponsor
of an unfunded supplemental executive retirement plan (SERP) in which several of its employees are
participants. The participants benefits in the SERP vested prior to the SERP being frozen on
March 31, 2004. No additional benefits are accruing under the 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 $0.5 million,
respectively, in the three and nine months ended September 30, 2006. The Company recorded total
expense of $0.1 million and $0.3 million, respectively, in the three and nine months ended
September 30, 2005.
The components of net periodic benefit cost for the three and nine months ended September 30, 2005
and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Benefits |
|
Postretirement Benefits |
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
|
(in thousands) |
|
(in thousands) |
Service cost |
|
$ |
|
|
|
$ |
3 |
|
|
$ |
|
|
|
$ |
8 |
|
Interest cost |
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
156 |
|
|
|
|
|
|
Net periodic benefit cost recognized |
|
$ |
|
|
|
$ |
55 |
|
|
$ |
|
|
|
$ |
164 |
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Pension Benefits |
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2005 |
|
2006 |
|
2005 |
|
2006 |
|
|
(in thousands) |
|
(in thousands) |
Service cost |
|
$ |
41 |
|
|
$ |
51 |
|
|
$ |
124 |
|
|
$ |
155 |
|
Interest cost |
|
|
80 |
|
|
|
226 |
|
|
|
239 |
|
|
|
679 |
|
Expected return on plan assets |
|
|
(83 |
) |
|
|
(209 |
) |
|
|
(250 |
) |
|
|
(628 |
) |
Recognized gains and losses |
|
|
38 |
|
|
|
48 |
|
|
|
114 |
|
|
|
143 |
|
Prior service cost recognized |
|
|
6 |
|
|
|
|
|
|
|
19 |
|
|
|
(1 |
) |
|
|
|
|
|
Net periodic benefit cost recognized |
|
$ |
82 |
|
|
$ |
116 |
|
|
$ |
246 |
|
|
$ |
348 |
|
|
|
|
|
|
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.
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 $0.5
million, respectively, for the three and nine months ended September 30, 2005. Expenses for these
plans were $0.2 million and $0.6 million, respectively, for the three and nine months ended
September 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 nine months ended
September 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 $2.0
million and $5.9 million, respectively, for the three and nine months ended September 30, 2005.
Expenses to related parties included in these amounts were $0.2 million and $0.6 million,
respectively, for the three and nine months ended September 30, 2005.
Total rent expense on all leases was approximately $0.9 million and $2.4 million, respectively, for
the three and nine months ended September 30, 2006. Expenses to related parties included in these
amounts were $0.2 million and $0.6 million, respectively, for the three and nine months ended
September 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 in
process but it is too early to be able to make a reasonable estimate, with any certainty, of the
timing and extent of remedial actions that may be required, and the costs that would be involved in
such remediation. Substantially all of the issues identified relate to the use of the properties
prior to their transfer to ARI in 1994 by ACF 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
26
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 ARI 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 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
$67.1 million from these two suppliers over three years. In 2006, 2007 and 2008 we expect to
purchase $15.5 million, $27.1 million and $24.5 million respectively under these agreements. For
the current year, the Company has spent approximately $11.3 million through September 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.
27
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.
In September 2006, the Board of Directors of the Company declared a cash dividend of $0.03 per
share of common stock of the Company to shareholders of record at the close of business on October
6, 2006. Dividends of $0.6 million were accrued as of September 30, 2006. These dividends were paid
on October 20, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing |
|
|
Railcar |
|
|
Corporate |
|
|
|
|
|
|
|
For the three months ended September 30, 2005 |
|
Operations |
|
|
Services |
|
|
& all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(in thousands) |
|
Revenues from external customers |
|
$ |
139,230 |
|
|
$ |
11,275 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
150,505 |
|
Intersegment revenues |
|
|
176 |
|
|
|
46 |
|
|
|
|
|
|
|
(222 |
) |
|
|
|
|
Cost of goods sold external
customers |
|
|
126,265 |
|
|
|
8,963 |
|
|
|
|
|
|
|
|
|
|
|
135,228 |
|
Cost of intersegment sales |
|
|
155 |
|
|
|
32 |
|
|
|
|
|
|
|
(187 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
12,986 |
|
|
|
2,326 |
|
|
|
|
|
|
|
(35 |
) |
|
|
15,277 |
|
Income related to insurance
recoveries, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on asset conversion, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, administrative and other |
|
|
1,314 |
|
|
|
483 |
|
|
|
2,992 |
|
|
|
|
|
|
|
4,789 |
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
11,672 |
|
|
$ |
1,843 |
|
|
$ |
(2,992 |
) |
|
$ |
(35 |
) |
|
$ |
10,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
6,574 |
|
|
|
291 |
|
|
|
99 |
|
|
|
|
|
|
|
6,964 |
|
Depreciation and amortization |
|
|
1,118 |
|
|
|
489 |
|
|
|
136 |
|
|
|
|
|
|
|
1,743 |
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing |
|
|
Railcar |
|
|
Corporate |
|
|
|
|
|
|
|
For the three months ended September 30, 2006 |
|
Operations |
|
|
Services |
|
|
& all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
138,479 |
|
|
$ |
11,975 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
150,454 |
|
Intersegment revenues |
|
|
179 |
|
|
|
1,106 |
|
|
|
|
|
|
|
(1,285 |
) |
|
|
|
|
Cost of goods sold external
customers |
|
|
125,809 |
|
|
|
8,920 |
|
|
|
|
|
|
|
|
|
|
|
134,729 |
|
Cost of intersegment sales |
|
|
156 |
|
|
|
857 |
|
|
|
|
|
|
|
(1,013 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
12,693 |
|
|
|
3,304 |
|
|
|
|
|
|
|
(272 |
) |
|
|
15,725 |
|
Income related to insurance
recoveries, net |
|
|
4,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,963 |
|
Gain on asset conversion, net |
|
|
4,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,323 |
|
Selling, administrative and other |
|
|
1,683 |
|
|
|
445 |
|
|
|
3,401 |
|
|
|
|
|
|
|
5,529 |
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
1,479 |
|
|
|
|
|
|
|
1,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
20,296 |
|
|
$ |
2,859 |
|
|
$ |
(4,880 |
) |
|
$ |
(272 |
) |
|
$ |
18,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
17,245 |
|
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
17,659 |
|
Depreciation and amortization |
|
|
2,284 |
|
|
|
456 |
|
|
|
34 |
|
|
|
|
|
|
|
2,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing |
|
|
Railcar |
|
|
Corporate |
|
|
|
|
|
|
|
For the nine months ended September 30, 2005 |
|
Operations |
|
|
Services |
|
|
& all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
409,208 |
|
|
$ |
32,940 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
442,148 |
|
Intersegment revenues |
|
|
666 |
|
|
|
1,911 |
|
|
|
|
|
|
|
(2,577 |
) |
|
|
|
|
Cost of goods sold external
customers |
|
|
377,181 |
|
|
|
27,538 |
|
|
|
|
|
|
|
|
|
|
|
404,719 |
|
Cost of intersegment sales |
|
|
595 |
|
|
|
1,474 |
|
|
|
|
|
|
|
(2,069 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
32,098 |
|
|
|
5,839 |
|
|
|
|
|
|
|
(508 |
) |
|
|
37,429 |
|
Income related to insurance
recoveries, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on asset conversion, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, administrative and other |
|
|
4,077 |
|
|
|
1,442 |
|
|
|
5,898 |
|
|
|
|
|
|
|
11,417 |
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
28,021 |
|
|
$ |
4,397 |
|
|
$ |
(5,898 |
) |
|
$ |
(508 |
) |
|
$ |
26,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
15,595 |
|
|
|
568 |
|
|
|
193 |
|
|
|
|
|
|
|
16,356 |
|
Depreciation and amortization |
|
|
3,372 |
|
|
|
1,453 |
|
|
|
147 |
|
|
|
|
|
|
|
4,972 |
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing |
|
|
Railcar |
|
|
Corporate |
|
|
|
|
|
|
|
For the nine months ended September 30, 2006 |
|
Operations |
|
|
Services |
|
|
& all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
443,785 |
|
|
$ |
36,948 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
480,733 |
|
Intersegment revenues |
|
|
1,661 |
|
|
|
1,321 |
|
|
|
|
|
|
|
(2,982 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold external customers |
|
|
397,683 |
|
|
|
29,080 |
|
|
|
|
|
|
|
|
|
|
|
426,763 |
|
Cost of intersegment sales |
|
|
1,494 |
|
|
|
1,026 |
|
|
|
|
|
|
|
(2,520 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
46,269 |
|
|
|
8,163 |
|
|
|
|
|
|
|
(462 |
) |
|
|
53,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income related to insurance
recoveries, net |
|
|
9,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,946 |
|
Gain on asset conversion, net |
|
|
4,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,323 |
|
Selling, administrative and other |
|
|
4,454 |
|
|
|
1,443 |
|
|
|
9,385 |
|
|
|
|
|
|
|
15,282 |
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
6,448 |
|
|
|
|
|
|
|
6,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
56,084 |
|
|
$ |
6,720 |
|
|
$ |
(15,833 |
) |
|
$ |
(462 |
) |
|
$ |
46,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures and acquisitions |
|
|
55,132 |
|
|
|
783 |
|
|
|
|
|
|
|
|
|
|
|
55,915 |
|
Depreciation and amortization |
|
|
6,138 |
|
|
|
1,448 |
|
|
|
103 |
|
|
|
|
|
|
|
7,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing |
|
Railcar |
|
Corporate |
|
|
|
|
As of |
|
Operations |
|
Services |
|
& all other |
|
Eliminations |
|
Totals |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
185,652 |
|
|
$ |
34,171 |
|
|
$ |
48,757 |
|
|
$ |
|
|
|
$ |
268,580 |
|
September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
274,625 |
|
|
|
32,072 |
|
|
|
18,631 |
|
|
|
|
|
|
|
325,328 |
|
Manufacturing Operations
Revenues from affiliates were 10.9% and 10.1% of total consolidated revenues for the three and nine
months ended September 30, 2005, respectively. Revenues from affiliates were 2.8% and 5.1% of total
consolidated revenues for the three and nine months ended September 30, 2006.
Revenues from one significant customer totaled 30.2% and 17.1% of total consolidated revenues for
the three and nine months ended September 30, 2005, respectively. Revenues from one significant
customer totaled 53.9% and 38.1% of total consolidated revenues for the three and nine months ended
September 30, 2006.
Revenues from two significant customers were 47.0% and 32.5% of total consolidated revenues for the
three and nine months ended September 30, 2005, respectively. Revenues from two significant
customers were 72.4% and 49.0% of total consolidated revenues for the three and nine months ended
September 30, 2006, respectively.
Receivables from one significant customer were 21.0% and 37.6% of total consolidated accounts
receivable at December 31, 2005 and September 30, 2006, respectively. Receivables from two
significant customers were 21.0% and 52.5% of total consolidated accounts receivable at December
31, 2005 and September 30, 2006, respectively.
Railcar services
Revenues from affiliates were 3.2% and 3.6% of total consolidated revenues for the three and nine
months ended September 30, 2005, respectively. Revenues from affiliates were 3.0% and 3.1% of total
consolidated revenues for the three and nine months ended September 30, 2006, respectively. No
single services customer accounted for more than 10.0% of total consolidated revenue for the three
and nine months ended September 30, 2005 and 2006. No single services customer accounted for more
than 10.0% of total consolidated accounts receivable as of December
30
31, 2005 and September 30,
2006.
Note 17Supplemental Cash Flow Information
ARI received interest income of $1.3 million and $1.2 million for the nine months ended September
30, 2005 and 2006, respectively.
ARI paid interest expense of $3.6 million and $3.7 million for the nine months ended September 30,
2005 and 2006, respectively.
ARI paid taxes of $0.3 million and $18.4 million for the nine months ended September 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 nine months ended September 30, 2006, the Company incurred stock based compensation expense
of $4.8 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 nine months ended September 30, 2006 was $1.8 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.
In September 2006, the Board of Directors of the Company declared a common stock dividend of $0.03
per share to shareholders that was paid on October 20, 2006 to shareholders of record as of October
6, 2006.
Note 18Subsequent Events
During October 2006, the Company entered into a First Amendment (first amendment) to its
revolving credit agreement. This first amendment provided that the revolving credit facility have a
total commitment of the lesser of (i) $100 million or (ii) an amount equal to a percentage of
eligible accounts receivable plus a percentage of eligible raw materials, work in process and
finished goods inventory. Furthermore, the first amendment increased the capital expenditure
sub-facility to $30 million based on the percentage of the costs related to equipment the Company
may acquire. As amended by the first amendment, the revolving credit facility expires on October 5,
2009.
During October 2006, ARI entered into an inventory storage agreement with ACF to store designated
inventory that ARI had purchased under its manufacturing services agreement with ACF at ACFs
Huntington facility. Under this agreement, ACF holds the inventory at its facility in segregated
locations until such time that the inventory is shipped to ARI.
During November 2006, ARI and ACF entered into an agreement that provided that ARI would procure,
purchase and own the raw material components for wheel sets. These wheel set components are those
that are being used in the assembly of wheel sets for ARI under the ARI/ACF manufacturing services
agreement. Under the manufacturing services agreement with ACF, which remains unchanged, ARI will
continue to pay ACF for its services, specifically labor and overhead, in assembling the wheel
sets.
31
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 planned construction of our new flexible railcar
manufacturing plant, including without limitation: |
|
o |
|
construction delays; |
|
|
o |
|
unexpected costs; |
|
|
o |
|
our planned dependence on the new plant to produce railcars for which
we have already accepted orders; and |
|
|
o |
|
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; |
32
|
|
|
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; |
|
|
|
|
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 revolving credit facility, as amended, 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.
33
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.
RESULTS OF OPERATIONS
Three Months ended September 30, 2006 compared to Three Months ended September 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 Three Months Ended, |
|
|
September 30, |
|
September 30, |
|
|
2005 |
|
2006 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Manufacturing Operations |
|
|
93 |
% |
|
|
92 |
% |
Railcar services |
|
|
7 |
% |
|
|
8 |
% |
|
|
|
Total revenues |
|
|
100 |
% |
|
|
100 |
% |
Cost of goods sold: |
|
|
|
|
|
|
|
|
Cost of manufacturing |
|
|
84 |
% |
|
|
84 |
% |
Cost of railcar services |
|
|
6 |
% |
|
|
6 |
% |
|
|
|
Total cost of goods sold |
|
|
90 |
% |
|
|
90 |
% |
Gross profit |
|
|
10 |
% |
|
|
10 |
% |
Income related to insurance recoveries, net |
|
|
0 |
% |
|
|
3 |
% |
Gain on asset conversion, net |
|
|
0 |
% |
|
|
3 |
% |
Selling, administrative and other |
|
|
3 |
% |
|
|
3 |
% |
Stock based compensation expense |
|
|
0 |
% |
|
|
1 |
% |
|
|
|
Earnings from operations |
|
|
7 |
% |
|
|
12 |
% |
Interest income |
|
|
0 |
% |
|
|
0 |
% |
Interest expense |
|
|
1 |
% |
|
|
0 |
% |
Earnings (loss) from joint venture |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
Earnings before income tax expense |
|
|
6 |
% |
|
|
12 |
% |
Income tax expense |
|
|
2 |
% |
|
|
5 |
% |
|
|
|
Net earnings |
|
|
4 |
% |
|
|
7 |
% |
|
|
|
Our earnings available to common shareholders for the three months ended September 30, 2006 were
$11.0 million, compared to $3.4 million for the three months ended September 30, 2005, representing
an increase of $7.6 million. In the three months ended September 30, 2006, we sold 1,546 railcars,
which is 89 less than the 1,635 railcars we sold in the same period in 2005. The 1,546 railcars
sold in the three months ended September 30, 2006 consisted of 236 tank railcars, 1,309 covered
hopper railcars and one intermodal railcar. The primary factors for the $7.6 million increase in
earnings in 2006 relates to a gain of $9.3 million related to insurance proceeds from our insurance
company on the Marmaduke tornado damage, partially offset by an increase in stock based
compensation expense. Also, the Company paid preferred dividends during the third quarter 2005
amounting to $2.1 million. As a result of the initial public offering, the Company redeemed all
preferred stock in January 2006.
Our earnings from operations increased as a percent of revenue to 12% in the three months ended
September 30, 2006 from 7% in the three months ended September 30, 2005, primarily due to $9.3
million received and recorded for business interruption and property damage insurance recoveries in
the third quarter. These recoveries did not impact our revenues and therefore, they increased
earnings as a percent of revenues. This phenomenon will not occur in future quarters.
34
Revenues
Our revenues for the three months ended September 30, 2006 stayed at $150.5 million, consistent
with the amount in the three months ended September 30, 2005. We had a decline in tank railcar
revenues in the three months ended September 30, 2006 as compared to the tank railcar revenues in
the three months ended September 30, 2005, as described below. This was offset by strong covered
hopper railcar revenues during the three months ended September 30, 2006. The decrease was
primarily attributable to a decrease in our tank railcar 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 September 30, 2006 decreased 1.0%
to $138.5 million from $139.2 million for the three months ended September 30, 2005. This decrease
was primarily attributable to the delivery of 89 less railcars in the third quarter of 2006 versus
the comparable period of 2005, partially offset by higher revenues per car as a result of the pass
through of increased material costs. Revenues were reduced due to the temporary shutdown of our
Marmaduke tank railcar manufacturing facility. In the three months ended September 30, 2006, we
shipped 236 tank railcars compared to 528 tank railcars shipped in the comparable quarter of 2005.
Prior to the storm damage, we had planned to produce and ship 567 tank railcars in the third
quarter of 2006. The decrease in tank railcar shipments was offset by an increase in shipments of
covered hopper railcars from our Paragould facility. In the third quarter of 2006, we shipped 1,309
covered hopper railcars compared to 1,107 covered hopper railcars shipped in the third 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. This increased
demand and increased capacity for covered hopper railcars was partially offset by a shift in
production mix to larger railcars with more complex paint and lining systems, as well as stainless
steel covered hopper railcars, a more labor intensive product. We also experienced some modest
decline in volume compared to the second quarter of 2006 as a result of very hot summer weather
affecting manufacturing conditions. For the three months ended September 30, 2006, our
manufacturing operations included $4.2 million, or 2.8% of our total consolidated revenues, from
transactions with affiliates, compared to $16.3 million, or 10.9% of our total consolidated
revenues in the three months ended September 30, 2005. These revenues were attributable to sales of
railcars to companies controlled by Mr. Icahn.
Our railcar services revenues increased by $0.7 million to $12.0 million in the three months ended
September 30, 2006, from $11.3 million in the three months ended September 30, 2005. This increase
was primarily attributable to increased railcar repair demand. For the third quarter of 2006, our
railcar services revenues included $4.6 million, or 3.0% of our total consolidated revenues, from
transactions with affiliates, compared to $4.8 million, or 3.2% of our total revenues, in the third
quarter of 2005.
Gross Profit
Our gross profit increased to $15.7 million in the three months ended September 30, 2006
(notwithstanding the negative impact of the tornado in the third quarter 2006) from $15.3 million
in the three months ended September 30, 2005. Our gross profit margin increased to 10.5% in the
third quarter of 2006 from 10.2% in the third quarter of 2005, primarily reflecting improved
margins in our railcar services segment offset by a decrease in margins for our manufacturing
operations segment.
Our gross profit margin for our manufacturing operations at 9.1% in the three months ended
September 30, 2006 was comparable to 9.3% in the three months ended September 30, 2005. The slight
decrease from 2005 to 2006 was primarily related to a more complicated railcar mix at our covered
hopper car plant, which decreased production rates and increased labor costs.
Our gross profit margin for our railcar services operations increased to 25.5% in the three months
ended September 30, 2006 from 20.5% in the three months ended September 30, 2005. This increase was
primarily attributable to increased volume with higher rates in the three months ended September
30, 2006. Furthermore, the increased gross profit margin was due to higher efficiency rates
experienced in the three months ended September 30, 2006.
Income Related to Insurance Recoveries, Net and Gain on Asset Conversion, 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
35
business interruption as a direct result of the insured damage. Our deductibles
on these policies are $0.1 million for property insurance and a five-day equivalent time element
business interruption deductible, which resulted in a deductible amount of $0.6 million. This
business interruption insurance deductible was ratably recognized over the course of the five-month
period during which the business interruption occurred.
We have settled both the property damage insurance claim and the business interruption insurance
claim with our insurance carrier and have recorded final gains in the income statement. The final
property damage claim settlement amounted to $11.2 million, prior to application of the deductible,
and the final business interruption insurance settlement amounted to $16.0 million, prior to
application of the deductible.
The Company identified assets with net book value of $4.3 million that were damaged or destroyed by
the tornado. The charge for these asset write-offs has been netted against the insurance settlement
of $11.2 million related to the property damage insurance claim to arrive at the gain on asset
conversion, net.
The tornado related insurance settlement for the property damage claim includes $10.0 million in
cash advances received through September 30, 2006, and $1.1 million in insurance receivable at
September 30, 2006, to provide funds to clean up and repair the plant in Marmaduke as well as order
replacement assets so the plant was operational in a timely manner. These cash advances are
classified as cash provided for investing activities as they were 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 we have agreed on a final settlement amount with our insurance carrier, we have written
off the assets and recorded the actual net gain attributable to the storm from the replacement of
the property with new property and equipment. In the third quarter of 2006, we recognized the gain
on the replacement of property damaged or destroyed of $4.3 million as gain on asset conversion in
the statement of operations computed as follows:
|
|
|
|
|
|
|
(in thousands) |
|
Property damage insurance claim |
|
$ |
11,160 |
|
Property damage claim deductible |
|
|
(100 |
) |
|
|
|
|
Property damage insurance settlement, net |
|
|
11,060 |
|
Assets damaged, clean up costs, repair costs |
|
|
(6,737 |
) |
|
|
|
|
Gain on asset conversion, net |
|
$ |
4,323 |
|
|
|
|
|
Our business interruption insurance policy and the final settlement provided coverage for
continuing expenses, employee wages and the loss of profits resulting from the temporary Marmaduke
plant shut-down caused by the storms. We have received advances amounting to $10.5 million through
September 30, 2006, with $4.9 million of insurance receivable at September 30, 2006, related to the
business interruption insurance claim.
In the third quarter of 2006, we recognized income related to insurance recoveries in the statement
of operations of $5.0 million attributable to our business interruption insurance computed as
follows:
|
|
|
|
|
|
|
(in thousands) |
|
Business interruption insurance claim |
|
$ |
7,368 |
|
Business interruption claim deductible |
|
|
(240 |
) |
|
|
|
|
Business interruption nsurance settlement, net |
|
|
7,128 |
|
|
|
|
|
|
Continuing expenses |
|
|
(2,173 |
) |
Deductible adjustment |
|
|
8 |
|
|
|
|
|
Income related to insurance recoveries, net |
|
$ |
4,963 |
|
|
|
|
|
36
Selling, Administrative and Other Expenses
Our selling, administrative and other expenses increased by $0.7 million in the third quarter of
2006, to $5.5 million from $4.8 million in the third quarter of 2005. These selling, administrative
and other expenses, which exclude stock based compensation, were 3.7% of total revenues in the
three months ended September 30, 2006 as compared to 3.2% of total revenues in the three months
ended September 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 September 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 third quarter of 2005.
Interest Expense and Income
Our interest expense for the three months ended September 30, 2006 was $0.1 million as compared to
$1.2 million for the three months ended September 30, 2005, representing a decrease of $1.1
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
September 30, 2006 was $0.24 million as compared to $0.29 million for the three months ended
September 30, 2005.
Income Taxes
Our income tax expense for the three months ended September 30, 2006 was $6.9 million, or 38.4% of
our earnings before income taxes, as compared to $3.6 million for the three months ended September
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 $0.3 million
for the three months ended September 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.
37
Nine Months ended September 30, 2006 compared to Nine Months ended September 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 Nine Months Ended, |
|
|
September 30, |
|
September 30, |
|
|
2005 |
|
2006 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Manufacturing Operations |
|
|
93 |
% |
|
|
92 |
% |
Railcar Services |
|
|
7 |
% |
|
|
8 |
% |
|
|
|
Total revenues |
|
|
100 |
% |
|
|
100 |
% |
Cost of goods sold: |
|
|
|
|
|
|
|
|
Cost of manufacturing |
|
|
85 |
% |
|
|
83 |
% |
Cost of railcar services |
|
|
6 |
% |
|
|
6 |
% |
|
|
|
Total cost of goods sold |
|
|
91 |
% |
|
|
89 |
% |
Gross profit |
|
|
9 |
% |
|
|
11 |
% |
Income related to insurance recoveries, net |
|
|
0 |
% |
|
|
2 |
% |
Gain on asset conversion, net |
|
|
0 |
% |
|
|
1 |
% |
Selling, administrative and other |
|
|
3 |
% |
|
|
3 |
% |
Stock based compensation expense |
|
|
0 |
% |
|
|
1 |
% |
|
|
|
Earnings from operations |
|
|
6 |
% |
|
|
10 |
% |
Interest income |
|
|
0 |
% |
|
|
0 |
% |
Interest expense |
|
|
1 |
% |
|
|
0 |
% |
Earnings from joint venture |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
Earnings before income tax expense |
|
|
5 |
% |
|
|
10 |
% |
Income tax expense |
|
|
2 |
% |
|
|
4 |
% |
|
|
|
Net earnings |
|
|
3 |
% |
|
|
6 |
% |
|
|
|
Our earnings available to common shareholders for the nine months ended September 30, 2006 were
$28.5 million, compared to $3.4 million for the nine months ended September 30, 2005, representing
an increase of $25.1 million. In the first nine months of 2006, we sold 5,260 railcars, which is
280 more than the 4,980 railcars we sold in the first nine months of 2005. The 5,260 railcars sold
in the nine months ended September 30, 2006, were made up of 4,485 covered hopper railcars, 774
tank railcars and one intermodal railcar. Most of our revenues, and all of our revenues for the
sale of railcars, for the first nine 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.
Our earnings from operations increased as a percent of revenue to 10% in the nine months ended
September 30, 2006 from 6% in the three months ended September 30, 2005 primarily due to the $14.3
million, which was received and recorded for business interruption and property damage insurance
recoveries in the nine months ended September 30, 2006. These recoveries did not impact our
revenues and therefore, they increased earnings as a percent of revenues. This phenomenon will not
occur in future periods.
Revenues
Our revenues for the nine months ended September 30, 2006 increased 8.7% to $480.7 million from
$442.1 million in the nine months ended September 30, 2005. This increase was primarily
attributable to an increase in our revenues from manufacturing operations.
Our manufacturing operations revenues increased 8.4% to $443.8 million in the first nine months of
2006 from $409.2 million in the first nine months of 2005. This increase was primarily attributable
to the delivery of an additional 280 railcars in the first nine months of 2006 versus the
comparable period of 2005, increased prices
38
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 $39.9 million to $396.4 million in the
first nine months of 2006 from $356.5 million in the first nine months of 2005. The additional
deliveries of railcars in the first nine months of 2006 reflected increased sales of covered hopper
railcars. In the nine months ended September 30, 2006, we shipped 4,485 covered hopper railcars
compared to 2,759 in the nine months ended September 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 nine months ended
September 30, 2006, as compared to the nine months ended September 30, 2005, also reflects the
conversion of our Paragould facility back to covered hopper railcar production. Until July 2005, we
produced centerbeam railcars at our Paragould facility, and we shipped a total of 785 centerbeam
railcars in the nine months ended September 30, 2005. This increase was partially offset by a
decrease of tank railcar production due to the tornado damage and related shutdown of Marmaduke.
During the second and third quarter of 2006, we had planned to produce and ship 569 and 567 tank
railcars, respectively, but only shipped 85 and 236 tank railcars, respectively, in the second and
third quarters of 2006. In the nine months ended September 30, 2006, we shipped 774 tanks railcars
compared to 1,436 in the nine months ended September 30, 2005. For the first nine months of 2006,
our manufacturing operations included $24.4 million, or 5.1% of our total consolidated revenues,
from transactions with affiliates, compared to $44.5 million, or 10.1% of our total consolidated
revenues, in the first nine months of 2005. These revenues were attributable to sales of railcars
to companies controlled by Mr. Icahn.
Our railcar services revenues increased by $4.0 million to $36.9 million in the first nine months
of 2006, from $32.9 million in the first nine months of 2005. This increase was primarily
attributable to strong railcar repair demand. For the first nine months of 2006, our railcar
services revenues included $15.1 million, or 3.1% of our total consolidated revenues, from
transactions with affiliates, compared to $16.0 million, or 3.6% of our total consolidated
revenues, in the first nine months of 2005.
Gross Profit
Our gross profit increased to $54.0 million in the first nine months of 2006 (notwithstanding the
negative impact of the tornado in the third quarter 2006) from $37.4 million in the first nine
months of 2005. Our gross profit margin increased to 11.2% in the first nine months of 2006 from
8.5% in the first nine months of 2005, primarily reflecting improved margins in our manufacturing
operations.
Our gross profit margin for our manufacturing operations increased to 10.4% in the first nine
months of 2006 from 7.8% in the first nine 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 nine months of 2006,
we were able to pass through most of our increased raw material and component costs. In the first
nine months of 2005, we were unable to pass through $1.5 million of $32.5 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 first nine 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 and Gain on Asset Conversion, 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 $0.1 million for property insurance and a five-day equivalent time element
business interruption deductible, which resulted in $0.6 million. The business interruption
insurance deductible was ratably recognized over the course of the five-month
39
period during which the
business interruption occurred.
We have settled both the property damage insurance claim and the business interruption insurance
claim with our insurance carrier and have recorded final gains in the income statement. The final
property damage claim settlement amounted to $11.2 million, prior to application of the deductible,
and the final business interruption insurance settlement amounted to $16.0 million, prior to
application of the deductible.
The Company identified assets with net book value of $4.3 million that were damaged or destroyed by
the tornado. The charge for these asset write-offs has been netted against the insurance settlement
of $11.2 million related to the property damage insurance claim to arrive at the gain on asset
conversion, net. Other costs amounting to $2.4 million were incurred related to clean up costs and
various miscellaneous repairs associated with the storm damage.
The tornado related insurance settlement for the property damage claim includes $10.0 million in
cash advances received through September 30, 2006, and $1.1 million in insurance receivable at
September 30, 2006, to provide funds to clean up and repair the plant in Marmaduke as well as order
replacement assets so the plant was operational in a timely manner. These cash advances are
classified as cash provided for investing activities as they were 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 we have agreed on a final settlement amount with our insurance carrier, we have written
off the assets and recorded the actual net gain attributable to the storm from the replacement of
the property with new property and equipment. We recognized the gain on the replacement of property
damaged or destroyed of $4.3 million as gain on asset conversion in the statement of operations
computed as follows:
|
|
|
|
|
|
|
(in thousands) |
|
Property damage insurance claim |
|
$ |
11,160 |
|
Property damage claim deductible |
|
|
(100 |
) |
|
|
|
|
Property damage insurance settlement, net |
|
|
11,060 |
|
Assets damaged, clean up costs, repair costs |
|
|
(6,737 |
) |
|
|
|
|
Gain on asset conversion, net |
|
$ |
4,323 |
|
|
|
|
|
Our business interruption insurance policy and the final settlement provided coverage for
continuing expenses, employee wages and the loss of profits resulting from the temporary Marmaduke
plant shut-down caused by the storms. We have received advances amounting to $10.5 million through
September 30, 2006, with $4.9 million of insurance receivable at September 30, 2006, related to the
business interruption insurance claim.
We have recognized income related to insurance recoveries in the statement of operations of $9.9
million attributable to our business interruption insurance computed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second |
|
|
Third |
|
|
Year to |
|
|
|
Quarter |
|
|
Quarter |
|
|
Date |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Business interruption insurance claim |
|
$ |
8,600 |
|
|
$ |
7,368 |
|
|
|
|
|
Business interruption claim deductible |
|
|
(600 |
) |
|
|
(240 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business interruption insurance settlement, net |
|
|
8,000 |
|
|
|
7,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing expenses |
|
|
(3,257 |
) |
|
|
(2,173 |
) |
|
|
|
|
Deductible adjustment |
|
|
|
|
|
|
8 |
|
|
|
|
|
Unrecognized deductible |
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income related to insurance recoveries, net |
|
$ |
4,983 |
|
|
$ |
4,963 |
|
|
$ |
9,946 |
|
|
|
|
|
|
|
|
|
|
|
40
Selling, Administrative and Other Expenses
Our selling, administrative and other expenses increased by $3.9 million in the nine months ended
September 30, 2006, to $15.3 million from $11.4 million in the first nine months of 2005. These
selling, administrative and other expenses, which exclude stock based compensation, were 3.2% of
total revenues in the first nine months of 2006 as compared to 2.6% of total revenues in the first
nine months of 2005. The selling, administrative and other expenses for the first nine 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 nine months ended September 30, 2006 was $6.6 million,
of which $6.5 million was 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 nine months of 2005.
Interest Expense and Income
Our interest expense for the nine months ended September 30, 2006 was $1.2 million as compared to
$3.6 million for the nine months ended September 30, 2005, representing a decrease of $2.4 million.
In the nine months ended September 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 nine
months ended September 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 nine months ended September 30, 2006 was
$1.2 million as compared to $1.3 million for the nine months ended September 30, 2005, representing
a decrease of $0.1 million.
Income Taxes
Our income tax expense for the nine months ended September 30, 2006 was $17.4 million, or 37.4% of
our earnings before income taxes, as compared to $9.6 million for the nine months ended September
30, 2005, or 39.8% 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 $0.8 million for the
nine months ended September 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
41
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. Certain
customers have market related conditions stipulated in their contracts that permit reduction of
future purchase obligations or cancellation of pending purchase orders upon prior written notice to
us.
Our total backlog as of December 31, 2005 was $1.07 billion and as of September 30, 2006 was $1.45
billion. We estimate that approximately 11.2% of our September 30, 2006 backlog will be converted
to revenues by the end of 2006.
The following table shows our reported railcar backlog, and estimated future revenue value
attributable to such backlog, at the end of the period shown. The reported backlog includes
railcars relating to purchase obligations based upon an assumed product mix consistent with past
orders. Changes in product mix from what is assumed would affect the dollar amount of our backlog.
|
|
|
|
|
|
|
2006 |
|
Railcar backlog at January 1, 2006 |
|
|
14,510 |
|
New railcars delivered |
|
|
5,260 |
|
New railcar orders |
|
|
8,894 |
|
|
|
|
|
Railcar backlog at September 30, 2006 |
|
|
18,144 |
|
Estimated railcar backlog value at end of period (in thousands) |
|
$ |
1,448,243 |
|
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 $405.2 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.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity for the nine months ended September 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.
42
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. As of September 30, 2006, the revolving credit facility
had 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 included a $15.0 million
capital expenditure sub-facility based on a percentage of the costs related to capital projects we
may undertake. The revolving credit facility was initially for 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 September 30, 2006 we had $74.5 million of availability under the revolving credit facility
and no borrowings outstanding.
During October 2006, we entered into a first amendment to the revolving credit agreement. This
first amendment provided that the revolving credit facility have a total commitment of the lesser
of (i) $100 million or (ii) an amount equal to a percentage of eligible accounts receivable plus a
percentage of eligible raw materials, work in process and finished
goods inventory. Furthermore,
the first amendment increased the capital expenditure sub-facility to $30 million based on the
percentage of the costs related to equipment we may acquire. As amended by the first amendment, the
revolving credit facility expires on October 5, 2009.
Cash Flows
The following tables summarizes our net cash provided by or used in operating activities, investing
activities and financing activities for the nine months ended September 30:
|
|
|
|
|
|
|
2006 |
|
|
|
(in thousands) |
|
Net cash provided by (used in): |
|
|
|
|
Operating activities |
|
$ |
(6,887 |
) |
Investing activities |
|
|
(45,421 |
) |
Financing activities |
|
|
34,718 |
|
|
|
|
|
Decrease in cash and cash equivalents |
|
$ |
(17,590 |
) |
|
|
|
|
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 nine months ended September 30, 2006 was $6.9
million. Net earnings reconciled to $49.7 million cash provided by earnings after adjusting for
depreciation and amortization, stock-based compensation, the loss on the write-off of property,
plant and equipment, among other smaller adjustments. Cash provided by operating activities
attributable to changes in our current assets and liabilities included a decrease in accounts
receivable from affiliate of $2.7 million. This was offset by an increase in accounts receivable of
$9.5 million, recording the insurance claim receivable of $5.9 million, an increase in inventories
of $20.6 million, an increase in prepaid expenses of $1.6 million, a decrease in accounts payable
of $9.5 million, a decrease in accounts payable due to affiliate of $2.1 million and a decrease in
accrued expenses and taxes of $9.6 million.
The decrease in accounts receivable from affiliate is due to timing of payments received from our
affiliate. The
43
increase in accounts receivable was primarily attributable to the increased volume
of sales attributed to railcars manufactured at our Paragould facility. The insurance receivable
represents receivables for settled insurance claim amounts that have been received subsequent to
September 30, 2006, from the insurance carrier relating to property damage and business
interruption incurred from the Marmaduke tornado.
The increase in inventories was primarily attributable to an increase in the cost of raw materials,
including steel, and increased production levels at our Paragould covered hopper manufacturing
facility during 2006. 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. Even though operations
were shut down at Marmaduke, we still were required under certain supply contracts to purchase raw
material inventory from certain vendors.
The increase in prepaid expenses was primarily attributable to payments during 2006 for wheel sets
to be shipped in the future. These payments are made under a supply agreement entered into with an
unaffiliated third party vendor effective January 1, 2006.
The decrease in accounts payable and accounts payable, due to affiliate is due to timing of
payments made to various vendors (external and affiliate) as well as the increase in inventory and
production levels during 2006.
The decrease in accrued expenses and taxes is due to payment of 2005 bonuses along with tax
payments for the 2005 and 2006 tax years. These were 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 $45.4 million for the nine months ended September 30,
2006. Purchases of property, plant and equipment amounted to approximately $38.7 million in the
nine months ended September 30, 2006. This was for the purchase of equipment at multiple locations
to increase capacity and operating efficiencies. Additionally, it was for assets purchased to
replace damaged or destroyed assets at our Marmaduke tank railcar manufacturing facility as a
result of the tornado. 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 $10.0 million related to the property insurance
claim for the property damage incurred at Marmaduke from the tornado.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $34.7 million for the nine months ended September 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 $40.3 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 nine months ended September 30, 2006 were $38.7 million. Of these
expenses, approximately $14.7 million were for expansion purposes. Approximately $0.5 million was
for cost reduction purposes. Approximately $23.5 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
44
transaction effective March 31, 2006. The total amount invested in the acquisition
was approximately $17.2 million.
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 September 30, 2006, we have spent approximately $8.7 million to bring the facility
and the related equipment back to working order. The insurance carrier and we have agreed on a
final settlement amount of $11.1 million (after application of the deductible), of which $10.0
million has been advanced to us as of September 30, 2006.
We have a number of capital projects currently underway or that we plan to commence in the near
future including the current tank railcar expansion underway at our Marmaduke, Arkansas plant to
increase capacity by 1,000 tank railcars annually, as well as our planned new flexible railcar
manufacturing plant to be built adjacent to our tank railcar manufacturing plant in Marmaduke. We
expect the current Marmaduke expansion to be completed by year end. Construction on the new
flexible railcar manufacturing plant, which we anticipate would be capable of producing tank,
covered hopper and intermodal railcars, began with site preparation in October 2006. Railcar
production at the new plant is currently expected to begin in early 2008. Certain risks associated
with construction of this new plant are set forth in Part IIItem 1A Risk Factors. 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. Our
current capital expenditure plans include approximately $45 million of projects that we expect will
improve efficiencies and reduce costs. These projects include the new flexible railcar
manufacturing plant at our Marmaduke site, the expansion of our existing Marmaduke tank railcar
manufacturing facility and a new wheel and axle assembly shop at our Paragould plant.
We anticipate that the new railcar plant and any other future expansion of our business will be
financed through 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. Our Board of Directors declared another dividend
in September 2006. This cash dividend of $0.03 per share of common stock was paid on October 20,
2006 to shareholders of record at the close of business on October 6, 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
45
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 January 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 $40.2 million and our notes due to
affiliates in the amount of $19.0 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 $67.1 million from
these two suppliers over three years. In 2006, 2007 and 2008, we expect to purchase $15.5 million,
$27.1 million, and $24.5 million respectively under these agreements. For the current year, we have
spent approximately $11.3 million through September 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 in process
but it is too early to be able to make a reasonable estimate, with any certainty, of the timing and
extent of remedial actions that may be required, and the costs that would be involved in such
remediation. Substantially all of the issues identified relate to the use of the properties prior
to their transfer to 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
46
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.
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. 123(R),
Share-Based Payment, or SFAS 123(R), 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 123(R) 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 September 30, 2006, unrecognized compensation cost related to the unvested portion of
share-based compensation arrangements was approximately $3.9 million and is expected to be
recognized over a weighted-average
47
period of approximately 2 years. This includes $1.2 million
related to a restricted stock grant and $2.7 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 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 $100.0 million revolving credit facility that provides for financing of our working
capital requirements. As of September 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 will be able to pass on to our customers most of the increased raw material and
component costs with respect to the railcars that we 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.
48
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 planned new railcar manufacturing plant and railcar orders dependent on the
new plant:
Construction of the new railcar manufacturing plant and our ability to timely fulfill the railcar
orders dependent on the new plant is 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 orders on a timely basis, if 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 5. OTHER INFORMATION
We are a party to a manufacturing services agreement with ACF Industries LLC (ACF), a company controlled by Carl C.
Icahn, our principal beneficial stockholder and the chairman of our board of directors, pursuant to
which ACF has been providing manufacturing services for us, including the assembly of wheel sets.
The manufacturing services agreement allows either us or ACF to purchase the components of the
wheel sets, which are critical components of our railcars. On November 13, 2006, we and ACF
entered into an agreement to provide that we would procure, purchase
and own the components for
the wheel sets assembled for us by ACF under the manufacturing services agreement. Previously, ACF had
purchased these wheel set components. Under the new agreement, we and ACF agreed that we would
purchase and own the components of the wheel sets and deliver the components to ACF for assembly,
and that ACF would segregate and separately identify our inventory. As part of the transition to
this new arrangement, we agreed to purchase from ACF, for approximately $7.8 million, wheel set components that ACF had
previously procured for assembly for us, which represented ACFs costs for those components. Under
our manufacturing services agreement with ACF, which remains unchanged, we will continue to pay ACF for its
services in assembling the wheel sets.
A copy of the agreement we entered into with ACF on November 13, 2006 is filed with this Quarterly
Report on Form 10-Q as Exhibit 10.42 and is incorporated by reference herein.
49
ITEM 6. EXHIBITS
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
10.41
|
|
Purchase and Sale Agreement dated as of September 19, 2006 between
American Railcar Industries, Inc. and American Railcar Leasing LLC |
|
|
|
10.42
|
|
Wheel Set Component and Finished Wheel Set Storage Agreement
dated as of November 13, 2006 between American Railcar Industries, Inc. and ACF Industries LLC |
|
|
|
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 |
|
|
|
|
|
Confidential treatment has been requested for the redacted portions
of this agreement. A complete copy of this agreement, including the
redacted portions, has been filed separately with the Securities and
Exchange Commission. |
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
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|
|
AMERICAN RAILCAR INDUSTRIES, INC.
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|
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|
|
|
Date: November 13, 2006
|
|
By: /s/ James J. Unger |
|
|
|
|
|
|
|
|
|
|
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James J. Unger, President and Chief Executive Officer |
|
|
|
|
|
|
|
|
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|
By: /s/ William P. Benac |
|
|
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|
|
|
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|
|
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William P. Benac, Senior Vice-President, Chief Financial |
|
|
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Officer and Treasurer |
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|
51
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
10.41
|
|
Purchase and Sale Agreement dated as of September 19, 2006 between
American Railcar Industries, Inc. and American Railcar Leasing LLC |
|
|
|
10.42
|
|
Wheel Set Component and Finished Wheel Set Storage Agreement
dated as of November 13, 2006 between American Railcar Industries, Inc. and ACF Industries LLC |
|
|
|
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 |
|
|
|
|
|
Confidential treatment has been requested for the redacted portions of
this agreement. A complete copy of this agreement, including the
redacted portions, has been filed separately with the Securities and
Exchange Commission. |
52