Form 10-Q
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 March 31, 2011
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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North Dakota
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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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Nonaccelerated filer o
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Smaller Reporting Company o |
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 April 29,
2011 was 21,352,297 shares.
AMERICAN RAILCAR INDUSTRIES, INC.
INDEX TO FORM 10-Q
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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As of |
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March 31, |
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December 31, |
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2011 |
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2010 |
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(unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
314,225 |
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$ |
318,758 |
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Accounts receivable, net |
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19,603 |
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21,002 |
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Accounts receivable, due from related parties |
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2,539 |
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4,981 |
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Income taxes receivable |
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14,806 |
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14,939 |
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Inventories, net |
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59,069 |
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50,033 |
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Deferred tax assets |
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2,599 |
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3,029 |
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Prepaid expenses and other current assets |
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3,751 |
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2,654 |
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Total current assets |
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416,592 |
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415,396 |
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Property, plant and equipment, net |
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176,379 |
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181,255 |
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Deferred debt issuance costs |
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1,797 |
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1,951 |
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Interest receivable, due from related parties |
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228 |
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187 |
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Goodwill |
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7,169 |
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7,169 |
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Investments in and loans to joint ventures |
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46,545 |
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48,169 |
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Other assets |
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282 |
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240 |
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Total assets |
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$ |
648,992 |
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$ |
654,367 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
32,560 |
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$ |
29,334 |
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Accounts payable, due to related parties |
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883 |
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275 |
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Accrued expenses and taxes |
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6,063 |
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5,095 |
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Accrued compensation |
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14,554 |
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11,054 |
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Accrued interest expense |
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1,719 |
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6,875 |
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Total current liabilities |
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55,779 |
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52,633 |
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Senior unsecured notes |
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275,000 |
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275,000 |
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Deferred tax liability |
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4,287 |
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7,938 |
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Pension and post-retirement liabilities |
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6,370 |
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6,707 |
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Other liabilities |
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4,277 |
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4,313 |
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Total liabilities |
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345,713 |
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346,591 |
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Commitments and contingencies |
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Stockholders equity: |
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Common stock, $.01 par value, 50,000,000
shares authorized, 21,352,297 shares issued
and outstanding at March 31, 2011 and
21,316,296 shares issued and outstanding at
December 31, 2010 |
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214 |
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213 |
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Additional paid-in capital |
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239,608 |
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238,947 |
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Retained earnings |
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61,880 |
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67,209 |
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Accumulated other comprehensive income |
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1,577 |
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1,407 |
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Total stockholders equity |
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303,279 |
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307,776 |
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Total liabilities and stockholders equity |
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$ |
648,992 |
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$ |
654,367 |
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See Notes to the Condensed Consolidated Financial Statements.
3
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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March 31, |
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2011 |
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2010 |
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Revenues: |
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Manufacturing operations (including revenues from affiliates of $1,221 and $12,575 for the three months ended March 31, 2011 and 2010,
respectively) |
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$ |
68,696 |
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$ |
35,635 |
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Railcar services (including revenues from affiliates of $5,537 and $2,841 for the three months ended March 31, 2011 and 2010, respectively) |
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16,147 |
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16,676 |
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Total revenues |
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84,843 |
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52,311 |
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Cost of revenues: |
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Manufacturing operations |
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(66,581 |
) |
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(37,387 |
) |
Railcar services |
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(13,318 |
) |
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(13,968 |
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Total cost of revenues |
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(79,899 |
) |
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(51,355 |
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Gross profit |
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4,944 |
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956 |
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Selling, administrative and other (including costs to a related party of $145 and $154 for the three months ended March 31, 2011 and 2010,
respectively) |
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(6,882 |
) |
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(6,087 |
) |
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Loss from operations |
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(1,938 |
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(5,131 |
) |
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Interest income (including income from related parties of $679 and $607 for the three months ended March 31, 2011 and 2010, respectively) |
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916 |
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730 |
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Interest expense |
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(5,335 |
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(5,321 |
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Other income (including income from a related party of $4 for both the three months ended March 31, 2011 and 2010) |
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4 |
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85 |
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Loss from joint ventures |
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(2,242 |
) |
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(1,782 |
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Loss before income taxes |
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(8,595 |
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(11,419 |
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Income tax benefit |
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3,266 |
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4,396 |
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Net loss |
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$ |
(5,329 |
) |
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$ |
(7,023 |
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Net loss per common share basic and diluted |
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$ |
(0.25 |
) |
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$ |
(0.33 |
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Weighted average common shares outstanding basic and diluted |
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21,349 |
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21,302 |
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Dividends declared per common share |
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$ |
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$ |
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See Notes to the Condensed Consolidated Financial Statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
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For the Three Months Ended |
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March 31, |
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2011 |
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2010 |
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Operating activities: |
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Net loss |
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$ |
(5,329 |
) |
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$ |
(7,023 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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5,766 |
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5,915 |
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Amortization of deferred costs |
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175 |
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175 |
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Loss on disposal of property, plant and equipment |
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63 |
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Stock based compensation |
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2,148 |
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|
700 |
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Change in interest receivable, due from related parties |
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(41 |
) |
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(608 |
) |
Change in investments in joint ventures as a result of loss |
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2,242 |
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1,782 |
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Realized gain on short-term investments available-for-sale securities |
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(81 |
) |
Deferred income taxes benefit |
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(3,224 |
) |
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(4,423 |
) |
Recovery for doubtful accounts receivable |
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(46 |
) |
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(26 |
) |
Changes in operating assets and liabilities: |
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Accounts receivable, net |
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1,455 |
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|
(1,442 |
) |
Accounts receivable, due from related parties |
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2,446 |
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(2,746 |
) |
Income taxes receivable |
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133 |
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|
304 |
|
Inventories, net |
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(9,014 |
) |
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|
(1,617 |
) |
Prepaid expenses |
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(1,095 |
) |
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(54 |
) |
Accounts payable |
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3,221 |
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|
1,259 |
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Accounts payable, due to related parties |
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609 |
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(119 |
) |
Accrued expenses and taxes |
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(2,877 |
) |
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(4,960 |
) |
Other |
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(559 |
) |
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(744 |
) |
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Net cash used in operating activities |
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(3,927 |
) |
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(13,708 |
) |
Investing activities: |
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Purchases of property, plant and equipment |
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(729 |
) |
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(1,491 |
) |
Sale of short-term investments available-for-sale securities |
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1,832 |
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Investments in and loans to joint ventures |
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(639 |
) |
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(10,205 |
) |
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Net cash used in investing activities |
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(1,368 |
) |
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(9,864 |
) |
Financing activities: |
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Proceeds from stock option exercises |
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756 |
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Net cash provided by financing activities |
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756 |
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Effect of exchange rate changes on cash and cash equivalents |
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6 |
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5 |
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Decrease in cash and cash equivalents |
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(4,533 |
) |
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(23,567 |
) |
Cash and cash equivalents at beginning of period |
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|
318,758 |
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|
347,290 |
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Cash and cash equivalents at end of period |
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$ |
314,225 |
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$ |
323,723 |
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|
See Notes to the Condensed Consolidated Financial Statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 Description of the Business
The condensed consolidated financial statements included herein have been prepared by American
Railcar Industries, Inc. (a North Dakota corporation) and subsidiaries (collectively the Company or
ARI), without audit, pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote disclosure normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United
States of America have been omitted pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the information presented not misleading. The
condensed consolidated balance sheet as of December 31, 2010 has been derived from the audited
consolidated balance sheets as of that date. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the notes thereto
included in the Companys latest annual report on Form 10-K for the year ended December 31, 2010.
In the opinion of management, the information contained herein reflects all adjustments necessary
to make the results of operations for the interim periods fairly stated. The results of operations
of any interim period are not necessarily indicative of the results that may be expected for a
fiscal year.
ARI manufactures railcars, which are offered for sale or lease, custom designed railcar parts and
other industrial products, primarily aluminum and special alloy steel castings. These products are
sold to various types of companies including leasing companies, railroads, industrial companies and
other non-rail companies. ARI provides railcar repair and maintenance services for railcar fleets.
In addition, ARI provides fleet management and maintenance services for railcars owned by certain
customers. Such services include inspecting and supervising the maintenance and repair of such
railcars.
The condensed consolidated financial statements of the Company include the accounts of ARI and its
wholly-owned subsidiaries; Castings, LLC (Castings), ARI Component Venture, LLC (ARI Component),
American Railcar Mauritius I (ARM I), American Railcar Mauritius II (ARM II) and ARI Longtrain,
Inc. (Longtrain). From time to time, the Company makes investments through Longtrain. For further
information on the Companys other wholly-owned subsidiaries, refer to Note 8. All intercompany
transactions and balances have been eliminated.
The Companys operations are located in the United States and Canada. The Company operates a
railcar repair facility in Sarnia, Ontario Canada. Canadian revenues were 1.9% and 2.5% of total
consolidated revenues for the three months ended March 31, 2011 and 2010, respectively. Canadian
assets were 1.9% and 1.7% of total consolidated assets as of March 31, 2011 and December 31, 2010,
respectively. In addition, the Companys subsidiaries ARM I and ARM II are located in Mauritius.
Assets held by ARM I and ARM II were 1.4% and 1.5% of total consolidated assets as of March 31,
2011 and December 31, 2010, respectively.
Note 2 Summary of Accounting Policies
Reclassifications
Certain reclassifications of prior year presentations that are of a normal recurring nature have
been made to conform to the 2011 presentation.
Note 3 Short-term Investments Available-for-Sale Securities
During January 2008, Longtrain purchased approximately 1.5 million shares of common stock of The
Greenbrier Companies, Inc. (GBX) in the open market for $27.9 million. Subsequently, Longtrain sold
a majority of the GBX shares it owned. This investment was classified as a short-term investment
available-for-sale security as the Company did not intend on holding the investment long-term.
During the three months ended March 31, 2010, approximately 0.2 million shares of GBX common stock
were sold for proceeds of $1.8 million and a realized gain of $0.1 million. The cost basis of the
shares sold was determined through specific identification. The remaining shares were sold during
2010.
6
Note 4 Fair Value Measurements
The fair value hierarchal disclosure framework prioritizes and ranks the level of market price
observability used in measuring investments and non-recurring nonfinancial assets and nonfinancial
liabilities at fair value. Market price observability is impacted by a number of factors, including
the type of investment and the characteristics specific to the investment or nonfinancial assets
and liabilities. Investments with readily available active quoted prices or for which fair value
can be measured from actively quoted prices generally will have a higher degree of market price
observability and a lesser degree of judgment used in measuring fair value.
Financial assets and liabilities are measured and reported at fair value are classified and
disclosed in one of the following categories:
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Level 1 Quoted prices are available in active markets for identical investments
as of the reporting date. The type of investments included in Level 1 include listed
equities and listed derivatives. The Company does not adjust the quoted price for these
investments, even in situations where they hold a large position and a sale could
reasonably impact the quoted price. |
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Level 2 Pricing inputs are other than quoted prices in active markets, which are
either directly or indirectly observable as of the reporting date, and fair value is
determined through the use of models or other valuation methodologies. Investments that
are generally included in this category include corporate bonds and loans, less liquid
and restricted equity securities and certain over-the-counter derivatives. |
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|
Level 3 Pricing inputs are unobservable for the investment and include situations
where there is little, if any, market activity for the investment. The inputs into the
determination of fair value require significant management judgment or estimation. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair
value hierarchy. In such cases, an investments level within the fair value hierarchy is based on
the lowest level of input that is significant to the fair value measurement. ARIs assessment of
the significance of a particular input to the fair value measurement in its entirety requires
judgment and considers factors specific to the investment.
The Company has no financial assets or liabilities that were accounted for at fair value as of
March 31, 2011 and December 31, 2010.
Note 5 Inventories
Inventories consist of the following:
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March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Raw materials |
|
$ |
30,303 |
|
|
$ |
30,676 |
|
Work-in-process |
|
|
15,649 |
|
|
|
14,270 |
|
Finished products |
|
|
15,426 |
|
|
|
7,183 |
|
|
|
|
|
|
|
|
Total inventories |
|
|
61,378 |
|
|
|
52,129 |
|
Less reserves |
|
|
(2,309 |
) |
|
|
(2,096 |
) |
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
59,069 |
|
|
$ |
50,033 |
|
|
|
|
|
|
|
|
7
Note 6 Property, Plant and Equipment
The following table summarizes the components of property, plant and equipment.
|
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|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Property, plant and equipment |
|
|
|
|
|
|
|
|
Buildings |
|
$ |
149,401 |
|
|
$ |
149,021 |
|
Machinery and equipment |
|
|
178,024 |
|
|
|
177,217 |
|
|
|
|
|
|
|
|
|
|
|
327,425 |
|
|
|
326,238 |
|
Less accumulated depreciation |
|
|
(154,917 |
) |
|
|
(149,304 |
) |
|
|
|
|
|
|
|
Net property, plant and equipment |
|
|
172,508 |
|
|
|
176,934 |
|
Land |
|
|
3,335 |
|
|
|
3,335 |
|
Construction in process |
|
|
536 |
|
|
|
986 |
|
|
|
|
|
|
|
|
Total property, plant and equipment |
|
$ |
176,379 |
|
|
$ |
181,255 |
|
|
|
|
|
|
|
|
Depreciation expense
Depreciation expense for the three months ended March 31, 2011 and 2010 was $5.8 million and $5.9
million, respectively.
Capitalized interest
In conjunction with the interest costs incurred related to the Unsecured Senior Fixed Rate Notes
offering described in Note 11, the Company has been recording capitalized interest on certain
property, plant and equipment capital projects. ARI also capitalized interest related to the
investment in Axis during its developmental stage. The amount of interest capitalized for both the
three months ended March 31, 2011 and 2010 was less than $0.1 million.
Lease agreements
The Company leases railcars to third parties under multiple year agreements. One of the leases
includes a provision that allows the lessee to purchase any portion of the leased railcars at any
time during the lease term for a stated market price, which approximates fair value. These
agreements have been classified as operating leases and the leased railcars have been included in
machinery and equipment and are depreciated in accordance with the Companys depreciation policy.
Note 7 Goodwill
Goodwill is not amortized but it is tested for impairment at least annually by comparing the fair
value of the reporting unit to its carrying value. The Company has $7.2 million of goodwill related
to the acquisition of Custom Steel in 2006. The results of Custom Steel are included in the
manufacturing operations segment.
The Company performs an annual goodwill impairment test as of March 1 of each year utilizing the
market and income approaches and significant assumptions discussed below:
Market Approach
The market approach produces indications of value by applying multiples of enterprise value to
revenue as well as enterprise value to earnings before depreciation, amortization, interest and
taxes. The multiples indicate what investors are willing to pay for comparable publicly held
companies. When adjusted for the risk level and growth potential of the subject company relative to
the guideline companies, these multiples are a reasonable indication of the value an investor would
attribute to the subject company.
8
Income Approach
The income approach considers the subject companys future sales and earnings growth potential as
the primary source of future cash flow. ARI prepared a five year financial projection for the
reporting unit and used a discounted net cash flow method to determine the fair value. Net cash
flow consists of after-tax operating income, plus depreciation, less capital expenditures and
working capital needs. The discounted cash flow method considers a five-year projection of net cash
flow and adds to those cash flows a residual value at the end of the projection period.
Significant estimates and assumptions used in the evaluation were forecasted revenues and profits,
the weighted average cost of capital and tax rates. Forecasted revenues of reporting unit were
estimated based on historical trends of the ARI plants that the reporting unit supplies parts to,
which are driven by the railcar market forecast. Forecasted margins were based on historical
experience. The reporting unit does not have a selling, administrative or executive staff,
therefore, an estimate of salaries and benefits for key employees was added to selling,
administrative and other costs. The weighted average cost of capital was calculated using ARIs
estimated cost of equity and debt.
All of the above estimates and assumptions were determined by management to be reasonable based on
the knowledge and information at the time of the evaluation. As such, this carries a risk of
uncertainty. There could be significant fluctuations in the cost of raw materials, unionization of
the Companys workforce or other factors that might significantly affect the reporting units cost
structure and negatively impact the projection of financial performance. If the railcar industry
forecasts or ARIs market share were to change significantly, the fair value of the reporting unit
would be materially adversely impacted. Other events that might occur that could have a negative
effect would be a natural disaster that would render the facility unusable, a significant
litigation settlement, a significant workers compensation claim or other event that would result
in a production shut down or significant expense to the reporting unit.
The March 1, 2011 evaluation equally weighted the values derived from each approach to arrive at
the fair value of the reporting unit. The resulting fair value exceeded the carrying value by over
60% resulting in no impairment.
Note 8 Investments in and Loans to Joint Ventures
As of March 31, 2011, the Company was party to three joint ventures; Ohio Castings LLC (Ohio
Castings), Axis LLC (Axis) and Amtek Railcar Industries Private Limited (Amtek Railcar). Through
its wholly-owned subsidiary, Castings, the Company has a one-third ownership interest in Ohio
Castings, a limited liability company formed to produce various steel railcar parts for use or sale
by the ownership group. Through its wholly-owned subsidiary, ARI Component, the Company has a 41.9%
ownership interest in Axis, a limited liability company formed to produce railcar axles, for use or
sale by the ownership group. The Company has a wholly-owned subsidiary, ARM I that wholly-owns ARM
II. Through ARM II, the Company has a 50.0% ownership interest in Amtek Railcar, a joint venture
that was formed to produce railcars and railcar components in India for sale by the joint venture.
The Company accounted for these joint ventures using the equity method. Under this method, the
Company recognizes its share of the earnings and losses of the joint ventures as they accrue.
Advances and distributions are charged and credited directly to the investment accounts.
The carrying amount of investments in and loans to joint ventures are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Carrying amount of investments in and loans to joint ventures |
|
|
|
|
|
|
|
|
Ohio Castings |
|
$ |
5,030 |
|
|
$ |
5,232 |
|
Axis |
|
|
32,338 |
|
|
|
33,436 |
|
Amtek Railcar |
|
|
9,177 |
|
|
|
9,501 |
|
|
|
|
|
|
|
|
Total investments in and loans to joint ventures |
|
$ |
46,545 |
|
|
$ |
48,169 |
|
|
|
|
|
|
|
|
9
The maximum exposure to loss as a result of investments in and loans to joint ventures are as
follows:
|
|
|
|
|
|
|
March 31, |
|
|
|
2011 |
|
|
|
(in thousands) |
|
Maximum exposure to loss by joint venture |
|
|
|
|
Ohio Castings |
|
|
|
|
Investment |
|
$ |
4,536 |
|
Loan guarantee 1 |
|
|
91 |
|
Note and accrued interest receivable 2 |
|
|
535 |
|
|
|
|
|
Total Ohio Castings exposure |
|
|
5,162 |
|
Axis |
|
|
|
|
Investment |
|
|
|
|
Loans, accrued interest receivable and accrued unused
line fee 2 |
|
|
36,145 |
|
|
|
|
|
Total Axis exposure |
|
|
36,145 |
|
|
|
|
|
Amtek Railcar exposure |
|
|
9,177 |
|
|
|
|
|
Total exposure to loss due to joint ventures |
|
$ |
50,484 |
|
|
|
|
|
|
|
|
1 |
|
The Company is subject to exposure for the full amount of the loan guaranteed but only
the value of the guarantee is included in investments in and loans to joint ventures on the
consolidated balance sheet. |
|
2 |
|
Accrued interest receivable is included in interest receivable, due from related
parties and accrued unused line fee is included in accounts receivable, due from related parties,
not investments in and loans to joint ventures on the consolidated balance sheet. |
Ohio Castings
In June 2009, Ohio Castings temporarily idled its manufacturing facility due to the decline in the
railcar industry. Due to the facility remaining temporarily idle, as of August 31, 2010, Ohio
Castings evaluated its analysis of its long-lived assets and concluded that no impairment exists.
ARI updated its evaluation of its investment in Ohio Castings and determined that the decrease in
value was temporary and there was no impairment as of September 30, 2010.
Ohio Castings first reported a loss in the first quarter of 2009 and has continued to report losses
due to its temporary idled state. ARI obtained Ohio Castings long-lived asset impairment analysis
and reviewed it for reasonableness. The assumptions used in the impairment analysis are consistent
with the market data reported by an independent third party analyst and historical financial
results. The decline in earnings capacity is consistent with industry forecasts, as reported by an
independent third party analyst, and is considered temporary. The Company and Ohio Castings will
continue to monitor for impairment. During April 2011, ARI and the other joint venture partners
agreed to restart production at Ohio Castings and expect to begin shipping product in the third
quarter of 2011.
Ohio Castings has notes payable to ARI and the other two partners, with a current balance of $0.5
million, each, that are due February 2012. Interest will continue to accrue but interest payments
have been deferred until August 2011. Accrued interest for this note as of March 31, 2011 and
December 31, 2010 was less than $0.1 million. Ohio Castings and the joint venture partners are
discussing possible renegotiation of these terms.
The Company, along with the other members of Ohio Castings, has guaranteed a state loan issued to
Ohio Castings by the state of Ohio, as further discussed in Note 13. The value of the guarantee was
less than $0.1 million at both March 31, 2011 and December 31, 2010. The state loan is scheduled to
be fully paid off in June 2011. It is anticipated that Ohio Castings will continue to make
principal and interest payments through equity contributions made by ARI and the other partners. In
2010, ARI made capital contributions to Ohio Castings totaling $0.6 million to fund expenses
including debt payments during the temporary plant idling. The other two partners made matching
contributions. During 2010, Ohio Castings paid off the state bonds that were guaranteed by ARI and
the other joint venture partners. In conjunction with Ohio Castings paying off the state bonds, ARI
was released from its guarantee of the state bonds while the guarantee of the state loan remains.
10
The Company accounts for its investment in Ohio Castings using the equity method. The Company
has determined that, although the joint venture is a VIE, this method is appropriate given that the
Company is not the primary beneficiary, does not have a controlling financial interest and does not
have the ability to individually direct the activities of Ohio Castings that most significantly
impact its economic performance. The significant factors in this determination were that neither
the Company nor Castings, has rights to the majority of returns, losses or votes, Ohio Castings
operations were temporarily idled and the risk of loss to Castings and the Company is limited to
the Companys investment through Castings, the note and related accrued interest due to ARI and
Ohio Castings subsidiarys debt with the State of Ohio, which the Company has guaranteed.
See Note 17 for information regarding financial transactions among the Company, Ohio Castings and
Castings.
Summary financial results for Ohio Castings, the investee company are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Financial results |
|
|
|
|
|
|
|
|
Sales |
|
$ |
32 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
|
|
|
|
(261 |
) |
|
|
|
|
|
|
|
Loss before interest |
|
|
(590 |
) |
|
|
(507 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(605 |
) |
|
$ |
(538 |
) |
|
|
|
|
|
|
|
Axis
In June 2007, ARI, through a wholly-owned subsidiary, entered into an agreement with another
partner to form a joint venture, Axis, to manufacture and sell railcar axles. In February 2008, the
two original partners sold equal equity interests in Axis to two new minority partners. During
2010, one of the minority partners sold its interest to the other initial partner. Although the
other initial partners interest in Axis is greater than ARIs as a result of the sale, the sale
did not result in the other initial partner gaining a controlling interest in Axis.
Under the terms of the joint venture agreement, ARI and the other initial partner are required, and
the other member is entitled, to contribute additional capital to the joint venture, on a pro rata
basis, of any amounts approved by the joint ventures executive committee, as and when called by
the executive committee. Further, until 2016, the seventh anniversary of completion of the axle
manufacturing facility, and subject to other terms, conditions and limitations of the joint venture
agreement, ARI and the other initial partner are also required, in the event production at the
facility has been curtailed, to contribute capital to the joint venture, on a pro rata basis, in
order to maintain adequate working capital.
During 2010, the executive committee of Axis issued a capital call. The minority partner(s) elected
not to participate in the capital call and ARI and the other initial partner equally contributed
the necessary capital, which amounted to $0.5 million each for 2010. The capital contributions were
utilized for working capital. The partners ownership percentages have been adjusted accordingly.
As of March 31, 2011, ARIs ownership interest was 41.9%.
Effective August 5, 2009, ARI Component and a wholly-owned subsidiary of the other initial partner
acquired a loan to Axis (Axis Credit Agreement), with each party acquiring a 50.0% interest in the
loan. Under the Axis Credit Agreement, the original lenders made financing available to Axis in an
aggregate amount of up to $70.0 million, consisting of up to $60.0 million in term loans and up to
$10.0 million in revolving loans. The purchase price paid by the Company for its 50.0% interest was
approximately $29.5 million, which equaled the then outstanding principal amount of the portion of
the loan acquired by the Company.
The Axis Credit Agreement was amended on March 31, 2011. Under the amendment, the commitment to
make term loans expires on December 31, 2011. The first payment on the term loans will become due
and payable on March 31, 2012. Thereafter payments are due each fiscal quarter in equal
installments, with the last payment due on December 31, 2016.
11
The commitment to make revolving loans under the Axis Credit Agreement will expire and the
revolving loans will become due and payable on December 28, 2012. Axis may borrow revolving loans
up to $10.0 million, subject to borrowing base availability.
Subject to certain limitations, at the election of Axis, the interest rate for the loans under the
Axis Credit Agreement, as amended, is based on LIBOR or the prime rate. For LIBOR-based loans, the
interest rate is equal to the greater of 7.75% or adjusted LIBOR plus 4.75%. For prime-based loans,
the interest rate is equal to the greater of 7.75% or the prime rate plus 2.5%. Interest on
LIBOR-based loans is due and payable, at the election of Axis, every one, two, three or six months,
and interest on prime-based loans is due and payable monthly. In accordance with the terms of the
agreement as amended, Axis has satisfied interest on the term loan by increasing the outstanding
principal by the amount of interest that was otherwise due and payable in cash. Axis ability to
satisfy the term loan interest by increasing the principal balance will cease on September 30,
2011. The first interest payment is due and payable October 31, 2011.
ARI currently intends to fund the cash needs of Axis through loans and capital contributions
through at least March 31, 2012. The other initial joint venture partner has indicated its intent
to also fund the cash needs of Axis through loans and capital contributions through at least March
31, 2012.
The balance outstanding on these loans, due to ARI Component, was $31.9 million in principal and
$4.2 million of accrued interest as of March 31, 2011 and $31.9 million in principal and $3.6
million of accrued interest as of December 31, 2010. ARI Component is responsible for funding 50.0%
of the loan commitments. ARI Components share of the remaining commitment on these loans, term and
revolving, was $3.1 million as of March 31, 2011.
The Company accounts for its investment in Axis using the equity method. The Company has determined
that, although the joint venture is a VIE, this method is appropriate given that the Company is not
the primary beneficiary, does not have a controlling financial interest and does not have the
ability to individually direct the activities of Axis that most significantly impact its economic
performance. The significant factors in this determination were that the Company and its
wholly-owned subsidiary do not have the rights to the majority of votes or the rights to the
majority of returns or losses, the executive committee and board of directors of the joint venture
are comprised of one representative from each initial partner with equal voting rights and the risk
of loss to the Company and subsidiary is limited to its investment in Axis and the loans, related
accrued interest and related accrued unused line fees due to the Company under the Axis Credit
Agreement. The Company also considered the factors that most significantly impact Axis economic
performance and determined that ARI does not have the power to individually direct the majority of
those activities
See Note 17 for information regarding financial transactions among the Company, ARI Component and
Axis.
Summary financial results for Axis, the investee company, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Financial Results |
|
|
|
|
|
|
|
|
Sales |
|
$ |
7,935 |
|
|
$ |
2,706 |
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
(2,510 |
) |
|
|
(2,437 |
) |
|
|
|
|
|
|
|
Operating loss |
|
|
(2,732 |
) |
|
|
(2,620 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,093 |
) |
|
$ |
(3,836 |
) |
|
|
|
|
|
|
|
12
Axis has been operating for under two years and has operated at low levels due to weak demand for
railcar axles. As a result, Axis has incurred losses since starting production in 2009. The new
railcar axle market is directly related to the new railcar market and the weakness in the railcar
market has caused axle volumes to remain low. The recent downturn is expected to improve consistent
with industry forecasts, as reported by an independent third party analyst, and is considered
temporary. As such, Axis has not performed a long-lived asset impairment analysis.
Axis volumes have steadily increased resulting in improved financial results. As of March 31,
2011, the investment in Axis was comprised entirely of ARIs term loan, revolver, related accrued
interest and related accrued unused line fees due from Axis. Based on the discussion above, this
loan has been evaluated to currently be fully recoverable. The Company will continue to monitor
Axis for impairment.
Amtek Railcar
In June 2008, the Company, through ARM I and ARM II, entered into an agreement with a partner in
India to form a joint venture company to manufacture, sell and supply freight railcars and their
components in India and other countries to be agreed upon at a facility to be constructed in India
by the joint venture. In March 2010, the Company made a $9.8 million equity contribution to Amtek
Railcar. ARIs ownership in this joint venture is 50.0%. Amtek Railcar is considered a development
stage enterprise as it has not completed construction of its manufacturing facility nor started
production.
The Company accounts for its investment in Amtek Railcar using the equity method. The Company has
determined that, although the joint venture is a VIE, this method is appropriate given that the
Company is not the primary beneficiary, does not have a controlling financial interest and does not
have the ability to individually direct the activities of Amtek Railcar that most significantly
impact its economic performance. The significant factors in this determination were that Amtek
Railcar is a development stage enterprise, the Company and its wholly-owned subsidiaries do not
have the rights to the majority of returns, losses or votes and the risk of loss to the Company and
subsidiaries is limited to its investment in Amtek Railcar.
Summary financial results for Amtek Railcar, the investee company, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Financial Results |
|
|
|
|
|
|
|
|
Sales |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before interest |
|
|
(574 |
) |
|
|
(97 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(402 |
) |
|
$ |
(116 |
) |
|
|
|
|
|
|
|
USRC
In February 2010, ARI, through its wholly-owned subsidiary, ARI DMU LLC, formed USRC, a joint
venture with two other partners that the Company expected would design, manufacture and sell diesel
multiple units (DMUs) to public transit authorities and communities upon order. DMUs are
self-propelled passenger railcars in both single- and bi-level configurations. During the fourth
quarter of 2010, ARI dissolved USRC due to market conditions. The Company made equity contributions
totaling $0.3 million throughout 2010 and those contributions were fully offset by losses.
13
Note 9 Warranties
The Companys standard warranty is up to one year for parts and services and five years for new
railcars. Factors affecting the Companys warranty liability include the number of units sold,
historical and anticipated rates of claims and historical and anticipated costs per claim.
Fluctuations in the Companys warranty provision and experience of warranty claims are the result
of variations in these factors. The Company assesses the adequacy of its warranty liability based
on changes in these factors.
The overall change in the Companys warranty reserve is reflected on the condensed consolidated
balance sheet in accrued expenses and taxes and is detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Liability, beginning of period |
|
$ |
1,151 |
|
|
$ |
1,094 |
|
Provision for warranties issued during the year, net of adjustments |
|
|
219 |
|
|
|
264 |
|
Provision for warranties issued during the previous years, net of adjustments |
|
|
118 |
|
|
|
(51 |
) |
Warranty claims |
|
|
(191 |
) |
|
|
(246 |
) |
|
|
|
|
|
|
|
Liability, end of period |
|
$ |
1,297 |
|
|
$ |
1,061 |
|
|
|
|
|
|
|
|
Note 10 Long-term Debt
In February 2007, the Company issued $275.0 million unsecured senior fixed rate notes that were
subsequently exchanged for registered notes in March 2007 (Notes). The fair value of these Notes
was approximately $277.2 million at March 31, 2011, based on the closing market price as of that
date, which is a Level 1 input. For definition and discussion of a Level 1 input for fair value
measurement, refer to Note 4.
The Notes bear a fixed interest rate that is set at 7.5% and are due in 2014. Interest on the Notes
is payable semi-annually in arrears on March 1 and September 1. The terms of the Notes contain
restrictive covenants that limit the Companys ability to, among other things, incur additional
debt, make certain restricted payments and enter into certain significant transactions with
stockholders and affiliates. As of March 31, 2011, based on the Companys fixed charge coverage
ratio, as defined and as measured on a rolling four-quarter basis, certain of these covenants,
including the Companys ability to incur additional debt, have become further restricted. The
Company was in compliance with all of its covenants under the Notes as of March 31, 2011.
As of March 1, 2011, the Company may redeem the Notes in whole or in part at a redemption price
equal to 103.75% of the principal amount of the Notes plus accrued and unpaid interest. The
redemption price declines annually until it is reduced to 100.0% of the principal amount of the
Notes plus accrued and unpaid interest from and after March 1, 2013. The Notes are due in full plus
accrued unpaid interest on March 1, 2014.
Note 11 Income Taxes
For Federal purposes, the Companys tax years 2007 to 2010 remain open to examination. For state
purposes, the Companys tax years 2006 to 2010 remain open to examination by various taxing
jurisdictions with the latest statute of limitations expiring in 2013. The Companys foreign tax
returns for years 2007 to 2010 remain open to examination.
Note 12 Employee Benefit Plans
The Company is the sponsor of two defined benefit pension plans that cover certain employees at
designated repair facilities. One plan, which covers certain salaried and hourly employees, is
frozen and no additional benefits are accruing thereunder. The second plan, which covers only
certain of the Companys union employees, is currently active and benefits will continue to accrue
thereunder until January 1, 2012, when the plan will be frozen. The assets of all funded plans are
held by independent trustees and consist primarily of equity and fixed income securities. The
Company is also the sponsor of an unfunded, non-qualified supplemental executive retirement plan
(SERP) in which several of its current and former employees are participants. The SERP is frozen
and no additional benefits are accruing thereunder.
14
The Company also provides postretirement healthcare benefits for certain of its retired
employees and life insurance benefits for certain of its union employees. Employees may become
eligible for healthcare benefits and union employees may become eligible for life insurance
benefits, only if they retire after attaining specified age and service requirements. These
benefits are subject to deductibles, co-payment provisions and other limitations. During 2009,
postretirement healthcare premium rates for retirees were increased. This change resulted in a
decrease to the postretirement benefit liability of $2.8 million that was recorded to accumulated
other comprehensive income as of December 31, 2009. This adjustment is being recognized over the
remaining weighted-average service period of active plan participants.
The components of net periodic benefit cost for the pension and postretirement plans are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Service cost |
|
$ |
79 |
|
|
$ |
67 |
|
Interest cost |
|
|
254 |
|
|
|
256 |
|
Expected return on plan assets |
|
|
(249 |
) |
|
|
(221 |
) |
Amortization of unrecognized net loss |
|
|
94 |
|
|
|
86 |
|
Amortization of unrecognized prior service cost |
|
|
2 |
|
|
|
2 |
|
Adjustment to benefits |
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
Net periodic benefit cost recognized |
|
$ |
180 |
|
|
$ |
204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement |
|
|
|
Benefits |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Service cost |
|
$ |
|
|
|
$ |
1 |
|
Interest cost |
|
|
1 |
|
|
|
1 |
|
Recognition of prior service credit |
|
|
(98 |
) |
|
|
(98 |
) |
Recognition of gain |
|
|
(22 |
) |
|
|
(25 |
) |
|
|
|
|
|
|
|
Net periodic income recognized |
|
$ |
(119 |
) |
|
$ |
(121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Pension |
|
$ |
180 |
|
|
$ |
204 |
|
Postretirement |
|
|
(119 |
) |
|
|
(121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic benefit cost recognized for all plans |
|
$ |
61 |
|
|
$ |
83 |
|
|
|
|
|
|
|
|
The Company also maintains qualified defined contribution plans, which provide benefits to ARIs
employees based on employee contributions, years of service, and employee earnings with
discretionary contributions allowed. Expenses related to these plans were $0.1 million and $0.2
million for the three months ended March 31, 2011 and 2010, respectively.
15
Note 13 Commitments and Contingencies
In connection with the Companys investment in Ohio Castings, ARI has guaranteed a $2.0 million
state loan that was provided for purchases of capital equipment, of which less than $0.1 million
was outstanding as of March 31, 2011. The two other partners of Ohio Castings have made identical
guarantees of this obligation. It is anticipated that Ohio Castings will continue to make principal
and interest payments through equity contributions made by ARI and the other partners. The state
loan is scheduled to be paid off in June 2011.
The Companys Axis joint venture entered into a credit agreement in December 2007. Effective August
5, 2009, the Company and the other initial partner acquired this loan from the lenders party
thereto, with each party acquiring a 50.0% interest in the loan. The total commitment under the
term loan is $60.0 million with an additional $10.0 million commitment under the revolving loan.
ARI Component is responsible to fund 50.0% of the loan commitments. The balance outstanding on
these loans, due to ARI Component, was $31.9 million of principal and $4.2 million of accrued
interest, both as of March 31, 2011. ARI Components share of the remaining commitment on these
loans was $3.1 million as of March 31, 2011. See Note 8 for further information regarding this
transaction and the terms of the underlying loan.
The Company is subject to comprehensive federal, state, local and international environmental laws
and regulations relating to the release or discharge of materials into the environment, the
management, use, processing, handling, storage, transport or disposal of hazardous materials and
wastes, or otherwise relating to the protection of human health and the environment. These laws and
regulations not only expose ARI to liability for the environmental condition of its current or
formerly owned or operated facilities, and its own negligent acts, but also may expose ARI to
liability for the conduct of others or for ARIs actions that were in compliance with all
applicable laws at the time these actions were taken. In addition, these laws may require
significant expenditures to achieve compliance and are frequently modified or revised to impose new
obligations. Civil and criminal fines and penalties and other sanctions may be imposed for
non-compliance with these environmental laws and regulations. ARIs operations that involve
hazardous materials also raise potential risks of liability under common law. Management believes
that there are no current environmental issues identified that would have a material adverse effect
on the Company. Certain real property ARI acquired from ACF Industries LLC (ACF) in 1994 has been
involved in investigation and remediation activities to address contamination. ACF is an affiliate
of Mr. Carl Icahn, the chairman of ARIs board of directors and, through IELP, its principal
beneficial stockholder. Substantially all of the issues identified relate to the use of this
property prior to its transfer to ARI by ACF and for which ACF has retained liability for
environmental contamination that may have existed at the time of transfer to ARI. ACF has also
agreed to indemnify ARI for any cost that might be incurred with those existing issues. As of the
date of this report, ARI does not believe it will incur material costs in connection with any
investigation or remediation activities relating to these properties, but it cannot assure that
this will be the case. If ACF fails to honor its obligations to ARI, ARI could be responsible for
the cost of such remediation. The Company believes that its operations and facilities are in
substantial compliance with applicable laws and regulations and that any noncompliance is not
likely to have a material adverse effect on its operations or financial condition.
ARI is a party to collective bargaining agreements with labor unions at two repair facilities that
expire beginning January 2013 through September 2013. ARI is also party to a collective bargaining
agreement with a labor union at a parts manufacturing facility that expired during April 2011. A
new collective bargaining agreement was entered into effective May 1, 2011 and will expire on April
30, 2014.
In March 2011, the Company entered into an agreement to purchase certain railcar parts during 2011
for current railcar orders with a minimum purchase commitment of $26.1 million.
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.
16
Note 14 Comprehensive Loss
The components of comprehensive loss, net of related tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Net loss |
|
$ |
(5,329 |
) |
|
$ |
(7,023 |
) |
|
|
|
|
|
|
|
|
|
Unrealized gain on available-for-sale securities |
|
|
|
|
|
|
125 |
|
Income tax expense of unrealized gain on available-for-sale securities |
|
|
|
|
|
|
(44 |
) |
Foreign currency translation adjustment |
|
|
247 |
|
|
|
321 |
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(5,082 |
) |
|
$ |
(6,621 |
) |
|
|
|
|
|
|
|
Note 15 Loss per Share
The shares used in the computation of the Companys basic and diluted loss per common share are
reconciled as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Weighted average basic common shares outstanding |
|
|
21,349,350 |
|
|
|
21,302,296 |
|
Dilutive effect of employee stock options |
|
|
|
|
|
|
|
(1) |
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding |
|
|
21,349,350 |
|
|
|
21,302,296 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Stock options to purchase 390,353 shares of common stock were not
included in the calculation for diluted loss per share for the three
months ended March 31, 2010. These options were excluded as the
exercise price exceeded the average market price and because ARI
reported a net loss for the first quarter of 2010. Refer to Note 16
for further discussion of these stock options. |
Note 16 Stock Based Compensation
The Company accounts for stock based compensation granted under the 2005 Equity Incentive Plan, as
amended (the 2005 Plan) based on the fair values calculated using the Black-Scholes-Merton
option-pricing formula. Stock based compensation is expensed using a graded vesting method over the
vesting period of the instrument.
The following table presents the amounts for stock based compensation expense incurred by ARI and
the corresponding line items on the condensed consolidated statement of operations that they are
classified within:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
($ in thousands) |
|
Stock-based compensation expense: |
|
|
|
|
|
|
|
|
Cost of revenue: manufacturing
operations |
|
$ |
470 |
|
|
$ |
162 |
|
Cost of revenue: railcar services |
|
|
85 |
|
|
|
28 |
|
Selling, administrative and other |
|
|
1,593 |
|
|
|
510 |
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
2,148 |
|
|
$ |
700 |
|
|
|
|
|
|
|
|
17
Stock options
Options to purchase 36,001 shares of the Companys common stock were exercised during the three
months ended March 31, 2011. The total intrinsic value of options exercised during the three months
ended March 31, 2011, was less than $0.1 million. No stock options were exercised during the three
months ended March 31, 2010. All stock options fully vested in January 2009 and expired in January
2011. As such, the Company did not recognize any compensation expense related to stock options
during the three months ended March 31, 2011 and 2010.
The following is a summary of option activity under the 2005 Plan for January 1, 2011 through March
31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
Grant-date |
|
|
Aggregate |
|
|
|
Shares |
|
|
Average |
|
|
Remaining |
|
|
Fair Value |
|
|
Intrinsic |
|
|
|
Covered by |
|
|
Exercise |
|
|
Contractual |
|
|
of Options |
|
|
Value |
|
|
|
Options |
|
|
Price |
|
|
Life |
|
|
Granted |
|
|
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the beginning of the period, January 1, 2011 |
|
|
376,353 |
|
|
$ |
21.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(36,001 |
) |
|
$ |
21.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
(340,352 |
) |
|
$ |
21.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at the end of the period,
March 31, 2011 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011, an aggregate of 855,476 shares were available for issuance in connection
with future grants under the Companys 2005 Plan. Shares issued under the 2005 Plan may consist in
whole or in part of authorized but unissued shares or treasury shares.
Stock appreciation rights
The compensation committee of the board of directors of the Company granted awards of stock
appreciation rights (SARs) to certain employees pursuant to the 2005 Plan during April 2007, April
2008, September 2008, March 2009 and March 2010. On May 14, 2010, ARI completed an exchange offer
and exchanged 190,200 eligible SARs granted on April 4, 2007 at an exercise price per SAR of $29.49
for 95,100 SARs granted on May 14, 2010 at an exercise price per SAR of $14.12.
All of the SARs granted in 2007, 196,900 of the SARs granted in 2008 and 212,850 of the SARs
granted in 2009 vest in 25.0% increments on the first, second, third and fourth anniversaries of
the grant date. The SARs granted in March and May 2010 vest in three equal increments on the first,
second and third anniversaries of the grant date. Each holder must remain employed by the Company
through each such date in order to vest in the corresponding number of SARs.
Additionally, 77,500 of the SARs granted in 2008 and 93,250 of the SARs granted in 2009 similarly
vest in 25.0% increments on the first, second, third and fourth anniversaries of the grant date,
but only if the closing price of the Companys common stock achieves a specified price target
during the applicable twelve month period for twenty trading days during any sixty day trading day
period. If the Companys common stock does not achieve the specified price target during the
applicable twelve-month period, the related portion of these performance-based SARs will not vest.
Each holder must further remain employed by the Company through each anniversary of the grant date
in order to vest in the corresponding number of SARs.
The SARs have exercise prices that represent the closing price of the Companys common stock on the
date of grant. Upon the exercise of any SAR, the Company shall pay the holder, in cash, an amount
equal to the excess of (A) the aggregate fair market value (as defined in the 2005 Plan) in respect
of which the SARs are being exercised, over (B) the aggregate exercise price of the SARs being
exercised, in accordance with the terms of the Stock Appreciation Rights Agreement (the SAR
Agreement). The SARs are subject in all respects to the terms and conditions of the 2005 Plan and
the SAR Agreement, which contain non-solicitation, non-competition and confidentiality provisions.
18
The following table provides an analysis of SARs granted in 2010, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Grants |
|
|
2009 Grant |
|
|
2008 Grants |
|
|
2007 Grant |
|
Grant date |
|
|
3/31/2010 & 5/14/2010 |
|
|
|
3/3/2009 |
|
|
|
4/28/2008 & 9/12/2008 |
|
|
|
4/4/2007 |
|
# of SARs granted |
|
|
236,750 |
|
|
|
306,100 |
|
|
|
274,400 |
|
|
|
275,300 |
|
# SARs outstanding at March
31, 2011 |
|
|
236,750 |
|
|
|
278,950 |
|
|
|
176,328 |
|
|
|
11,100 |
|
Weighted Avg Exercise price |
|
|
$12.95 |
|
|
|
$6.71 |
|
|
|
$20.80 |
|
|
|
$29.49 |
|
Contractual term |
|
7 years |
|
|
7 years |
|
|
7 years |
|
|
7 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 SARs Black Scholes Valuation Components: |
Stock volatility range |
|
|
70.8% 73.4% |
|
|
|
73.0% 76.9% |
|
|
|
61.3% 76.9% |
|
|
|
63.4% |
|
Expected life range |
|
3.0 4.1 years |
|
|
2.5 3.4 years |
|
|
2.0 2.9 years |
|
|
1.5 years |
|
Risk free interest rate range |
|
|
1.3% 2.2% |
|
|
|
0.8% 1.3% |
|
|
|
0.8% 1.3% |
|
|
|
0.8% |
|
Dividend yield |
|
|
0.0% |
|
|
|
0.0% |
|
|
|
0.0% |
|
|
|
0.0% |
|
Forfeiture rate |
|
|
2.0% |
|
|
|
2.0% |
|
|
|
2.0% |
|
|
|
2.0% |
|
The stock volatility rate was determined using the historical volatility rates of the
Companys common stock. The expected life ranges represent the use of the simplified method
prescribed by the SEC, which uses the average of the vesting period and expiration period of each
group of SARs that vest equally over a three or four-year period. The interest rates used were the
government Treasury bill rate on the date of valuation. Dividend yield was based on the indefinite
suspension of dividends by the Company. The forfeiture rate was based on a Company estimate of
expected forfeitures over the contractual life of each grant of SARs for each period.
The Company recognized compensation expense of $2.1 million and $0.7 million for the three months
ended March 31, 2011 and 2010, respectively, related to SARs granted under the 2005 Plan. Included
in stock compensation expense was $0.1 million of expense related to SARs exercises during the
three months ended March 31, 2011. No SARs were exercised during the three months ended March 31,
2010.
19
The following is a summary of SARs activity under the 2005 Plan for January 1, 2011 through March
31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Stock |
|
|
Weighted |
|
|
Average |
|
|
Weighted |
|
|
Aggregate |
|
|
|
Appreciation |
|
|
Average |
|
|
Remaining |
|
|
Average |
|
|
Intrinsic |
|
|
|
Rights |
|
|
Exercise |
|
|
Contractual |
|
|
Fair Value |
|
|
Value |
|
|
|
(SARs) |
|
|
Price |
|
|
Life |
|
|
of SARs |
|
|
($000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the beginning of the period, January 1, 2011 |
|
|
711,353 |
|
|
$ |
12.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled / Forfeited |
|
|
(1,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(7,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the period, March 31, 2011 |
|
|
703,128 |
|
|
$ |
12.71 |
|
|
57 months |
|
$ |
15.91 |
|
|
$ |
8,667 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at the end of the period, March 31, 2011 |
|
|
264,109 |
|
|
$ |
12.76 |
|
|
55 months |
|
$ |
15.69 |
|
|
$ |
3,259 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on the closing market price of $24.96 for a share of the Companys common stock
on March 31, 2011, SARs granted in 2007 have no intrinsic value and the SARs granted in
2008, 2009 and 2010 have a total intrinsic value of $8.7 million, of which $3.3 million
relates to SARs that are exercisable. |
As of March 31, 2011, unrecognized compensation costs related to the unvested portion of stock
appreciation rights were estimated to be $2.6 million and were expected to be recognized over a
weighted average period of 23 months.
Note 17 Related Party Transactions
Agreements with ACF
The Company has or had the following agreements with ACF, a company controlled by Mr. Carl Icahn,
the Companys principal beneficial stockholder (through Icahn Enterprises L.P. (IELP)) and chairman
of the Companys board of directors:
Manufacturing Services Agreement
Under the manufacturing services agreement entered into in 1994 and amended in 2005, ACF agreed to
manufacture and distribute, at the Companys instruction, various railcar components. In
consideration for these services, the Company agreed to pay ACF based on agreed upon rates. In the
three months ended March 31, 2011 and 2010, ARI purchased inventory of less than $0.1 million and
$1.1 million, respectively, of components from ACF. The agreement automatically renews unless
written notice is provided by the Company.
Asset Purchase Agreement
On January 29, 2010, ARI entered into an agreement to purchase certain assets from ACF for
approximately $0.9 million that will allow the Company to manufacture railcar components previously
purchased from ACF.
The purchase price of approximately $0.9 million was determined using various factors, including
but not limited to, independent appraisals that assessed fair market value for the purchased
assets, each assets remaining useful life and the replacement cost of each asset. Given that ACF
and ARI have the same majority stockholder, the assets purchased were recorded at ACFs net book
value and the remaining portion of the purchase price will be a reduction to stockholders equity.
As of December 31, 2010, all of the assets had been received and paid for in accordance with the
agreement.
20
Agreements with ARL
The Company has or had the following agreements with American Railcar Leasing LLC (ARL), a company
controlled by Mr. Carl Icahn, the Companys principal beneficial stockholder (through IELP) and
chairman of the Companys board of directors:
Railcar Servicing Agreement and Fleet Services Agreement
Effective as of January 1, 2008, the Company entered into a fleet services agreement with ARL.
Under the agreement, ARI provided ARL fleet management services for a fixed monthly fee and railcar
repair and maintenance services for a charge of labor, components and materials. For the three
months ended March 31, 2011 and 2010, revenues of $5.5 million and $2.8 million were recorded under
this agreement, respectively. Such amounts are included under railcar services revenue from
affiliates on the condensed consolidated statement of operations. Profit margins on sales to
related parties approximate the margins on sales to other large customers. This agreement was
replaced by a new agreement, which was effective April 16, 2011. See Note 20 for further
information regarding this new agreement.
Rent and Building Services Extension Agreement
Pursuant to a rent and building services extension agreement effective December 31, 2007, ARL
subleased to ARI the headquarters space owned by the Companys vice chairman of the board of
directors. This agreement terminated on December 31, 2010 by mutual agreement. Total fees paid to
ARL under this agreement were $0.2 million for the three months ended March 31, 2010. The fees paid
to ARL are included in selling, administrative and other costs on the condensed consolidated
statement of operations.
Railcar Orders
The Company from time to time manufactures and sells railcars to ARL under long-term agreements as
well as on a purchase order basis. Revenue for railcars sold to ARL was $1.2 million and $12.5
million for the three months ended March 31, 2011 and 2010, respectively. Revenue for railcars sold
to ARL is included under manufacturing revenue from affiliates on the accompanying condensed
consolidated statements of operations. Profit margins on sales to related parties approximate the
margins on sales to other large customers. ARL also has acted as an agent for the Company to source
railcar leasing customers. In connection therewith, ARL has assigned orders to ARI for railcars to
be manufactured and leased by ARI. The Company is currently negotiating the terms of its agency
relationship with ARL. Any such agreement, including payments that ARI may agree to make to ARL for
these services, will be on an arms length basis and subject to the approval of the Companys audit
committee.
Agreements with other related parties
In September 2003, Castings loaned Ohio Castings $3.0 million under a promissory note, which was
due in January 2004. The note was renegotiated resulting in a new principal amount of $2.2 million,
bearing interest at a rate of 4.0% with a maturity date of August 2009. Due to the temporary idling
of the facility, Ohio Castings advised the partners that it was unable to pay the notes when due.
The notes were renegotiated and are now due February 2012. Interest will continue to accrue but
interest payments have been deferred until August 2011. Total amounts due from Ohio Castings under
this note were $0.5 million at both March 31, 2011 and December 31, 2010. Accrued interest on this
note as of March 31, 2011 and December 31, 2010, was less than $0.1 million. The other partners in
the joint venture have made identical loans to Ohio Castings.
In connection with the Companys investment in Ohio Castings, ARI has guaranteed a $2.0 million
state loan that was provided for purchases of capital equipment, of which less than $0.1 million
was outstanding as of March 31, 2011. The two other partners of Ohio Castings have made identical
guarantees of this obligation. It is anticipated that Ohio Castings will continue to make principal
and interest payments through equity contributions made by ARI and the other partners. The state
loan is scheduled to be paid off in June 2011.
21
The Companys Axis joint venture entered into a credit agreement in December 2007. Effective August
5, 2009, the Company and the other initial partner acquired this loan from the lenders party
thereto, with each party acquiring a
50.0% interest in the loan. The total commitment under the term loan is $60.0 million with an
additional $10.0 million commitment under the revolving loan. ARI Component is responsible to fund
50.0% of the loan commitments. The balance outstanding on these loans, due to ARI Component, was
$31.9 million of principal and $4.2 million of accrued interest, both as of March 31, 2011. ARI
Components share of the remaining commitment on these loans was $3.1 million as of March 31, 2011.
See Note 8 for further information regarding this transaction and the terms of the underlying loan.
The Company purchases railcar parts from its joint ventures under long-term contracts. During the
three months ended March 31, 2011 and 2010, the Company purchased $2.6 million and $1.3 million of
railcar parts from its joint ventures, respectively.
During 2010, ARI provided Axis various administrative services for an annual fee of $0.3 million,
payable in equal monthly installments. During 2011, ARI has and will continue to provide Axis the
same services for an annual fee of $0.3 million, payable in equal monthly installments.
Effective April 1, 2009, Mr. James J. Unger, the Companys former chief executive officer, assumed
the role of vice chairman of the board of directors and became a consultant to the Company. In
exchange for these services, Mr. Unger received an annual consulting fee of $135,000 and an annual
director fee of $65,000 that were both payable quarterly, in advance. The Company also agreed to
provide Mr. Unger with an automobile related to his role as vice chairman. Mr. Ungers consulting
agreement terminated in accordance with its terms as of April 1, 2010. In his role as consultant,
Mr. Unger reported to and served at the discretion of the Companys Board. Mr. Unger continues in
his role as vice chairman in connection with which he is provided an annual director fee of $65,000
and an automobile allowance.
The Company leases one of its parts manufacturing facilities from an entity owned by its vice
chairman of the board of directors. Expenses paid for this facility were $0.1 million for both the
three months ended March 31, 2011 and 2010, respectively. These costs are included in manufacturing
operations cost of revenue.
On October 29, 2010, ARI entered into a lease agreement with a term of eleven years with an entity
owned by the vice chairman of the Companys board of directors. The lease is for ARIs headquarters
location in St. Charles, Missouri. The term under this lease agreement commenced January 1, 2011.
The Company is required to pay monthly rent and a portion of all tax increases assessed or levied
upon the property and increases to the cost of the utilities and other services it used. The
expense recorded for this facility was $0.1 million for the three months ended March 31, 2011.
These fees are included in selling, administrative and other costs on the condensed consolidated
statement of operations.
Financial information for transactions with related parties
As of March 31, 2011 and December 31, 2010, accounts receivable of $2.5 million and $5.0 million,
respectively, were due from ACF, ARL, Ohio Castings and Axis.
As of March 31, 2011 and December 31, 2010, interest receivable of $0.2 million, respectively, was
due from Ohio Castings and Axis.
As of March 31, 2011 and December 31, 2010, accounts payable of $0.9 million and $0.3 million,
respectively, were due to ACF, ARL and Axis.
Cost of railcar manufacturing for the three months ended March 31, 2011 and 2010 included $2.2
million and $1.0 million, respectively, in railcar products produced by joint ventures.
Inventory at March 31, 2011, included purchases of $0.8 million from joint ventures. Inventory at
December 31, 2010, included purchases of $0.4 million from joint ventures. At March 31, 2011 and
December 31, 2010, all profit from related parties for inventory still on hand was eliminated.
22
Note 18 Operating Segment and Sales/Credit Concentrations
ARI operates in two reportable segments: manufacturing operations and railcar services. Performance
is evaluated based on revenue and operating profit. Intersegment sales and transfers are accounted
for as if sales or transfers were to third parties. The information in the following tables is
derived from the segments internal financial reports used for corporate management purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
Manufacturing |
|
|
Railcar |
|
|
Corporate & |
|
|
|
|
|
|
|
March 31, 2011 |
|
Operations |
|
|
Services |
|
|
all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(in thousands) |
|
Revenues from external customers |
|
$ |
68,696 |
|
|
$ |
16,147 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
84,843 |
|
Intersegment revenues |
|
|
223 |
|
|
|
119 |
|
|
|
|
|
|
|
(342 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue external customers |
|
|
(66,581 |
) |
|
|
(13,318 |
) |
|
|
|
|
|
|
|
|
|
|
(79,899 |
) |
Cost of intersegment revenue |
|
|
(146 |
) |
|
|
(123 |
) |
|
|
|
|
|
|
269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
2,192 |
|
|
|
2,825 |
|
|
|
|
|
|
|
(73 |
) |
|
|
4,944 |
|
Selling, administrative and other |
|
|
(1,386 |
) |
|
|
(476 |
) |
|
|
(5,020 |
) |
|
|
|
|
|
|
(6,882 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
806 |
|
|
$ |
2,349 |
|
|
$ |
(5,020 |
) |
|
$ |
(73 |
) |
|
$ |
(1,938 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
Manufacturing |
|
|
Railcar |
|
|
Corporate & |
|
|
|
|
|
|
|
March 31, 2010 |
|
Operations |
|
|
Services |
|
|
all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(in thousands) |
|
Revenues from external customers |
|
$ |
35,635 |
|
|
$ |
16,676 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
52,311 |
|
Intersegment revenues |
|
|
192 |
|
|
|
127 |
|
|
|
|
|
|
|
(319 |
) |
|
|
|
|
|
|
|
Cost of revenue external customers |
|
|
(37,387 |
) |
|
|
(13,968 |
) |
|
|
|
|
|
|
|
|
|
|
(51,355 |
) |
Cost of intersegment revenue |
|
|
(150 |
) |
|
|
(111 |
) |
|
|
|
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
(1,710 |
) |
|
|
2,724 |
|
|
|
|
|
|
|
(58 |
) |
|
|
956 |
|
Selling, administrative and other |
|
|
(1,434 |
) |
|
|
(566 |
) |
|
|
(4,087 |
) |
|
|
|
|
|
|
(6,087 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations |
|
$ |
(3,144 |
) |
|
$ |
2,158 |
|
|
$ |
(4,087 |
) |
|
$ |
(58 |
) |
|
$ |
(5,131 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing |
|
|
Railcar |
|
|
Corporate & |
|
|
|
|
|
|
|
As of |
|
Operations |
|
|
Services |
|
|
all other |
|
|
Eliminations |
|
|
Totals |
|
|
|
(in thousands) |
|
March 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
282,578 |
|
|
$ |
48,305 |
|
|
$ |
318,109 |
|
|
$ |
|
|
|
$ |
648,992 |
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
281,779 |
|
|
$ |
49,133 |
|
|
$ |
323,455 |
|
|
$ |
|
|
|
$ |
654,367 |
|
Manufacturing operations
Manufacturing revenues from affiliates were 1.4% and 24.0% of total consolidated revenues for the
three months ended March 31, 2011 and 2010, respectively.
Manufacturing revenues from the most significant customer totaled 17.3% and 30.6% of total
consolidated revenues for the three months ended March 31, 2011 and 2010, respectively.
Manufacturing revenues from the two most significant customers were 32.4% of total consolidated
revenues for the three months ended March 31, 2011. Manufacturing revenues from the two most
significant customers (including an affiliated customer) were 54.6% of total consolidated revenues
for the three months ended March 31, 2010.
Manufacturing receivables from the most significant customer were 14.5% of total consolidated
accounts receivable including due from related parties at March 31, 2011. Manufacturing receivables
from the most significant customer, an affiliate, were 12.0% of total consolidated accounts
receivable including due from related parties at December 31, 2010. No other customer accounted for
more than 10.0% of total consolidated accounts receivable as of March 31, 2011 and December 31,
2010.
23
Railcar services
Railcar services revenues from affiliates were 6.5% and 5.4% of total consolidated revenues for the
three months ended March 31, 2011 and 2010, respectively.
No single railcar services customer accounted for more than 10.0% of total consolidated revenues
for the three months ended March 31, 2011 and 2010. No single railcar services customer accounted
for more than 10.0% of total consolidated accounts receivable as of March 31, 2011 and December 31,
2010.
Note 19 Supplemental Cash Flow Information
ARI received interest income of $0.9 million and $0.1 million for the three months ended March 31,
2011 and 2010, respectively.
ARI paid interest expense, net of capitalized interest, of $10.3 million for both the three months
ended March 31, 2011 and 2010, respectively.
ARI received a net tax refund of less than $0.1 million and paid net taxes of less than $0.1
million for the three months ended March 31, 2011 and 2010, respectively.
Note 20 Subsequent Events
On April 8, 2011, ARI advanced $0.3 million to Axis pursuant to ARIs revolving loan commitments
under the Axis Credit Agreement. The other initial joint venture partner made a similar advance to
Axis.
During April 2011, the Company entered into an agreement to purchase certain railcar parts during
2011 for current railcar orders with a minimum purchase commitment of $15.1 million.
On April 15, 2011, ARI entered into an agreement with ARL to provide railcar repair, engineering,
administrative and other services, on an as needed basis, for ARLs lease fleet at mutually agreed
upon prices (the Railcar Services Agreement). The Railcar Services Agreement is effective April 16,
2011 with a term of three years and will automatically renew for additional one year periods unless
either party provides at least sixty days written prior notice of termination. There is no
termination fee if the Company elects to terminate the agreement prior to the end of the term. The
Railcar Services Agreement replaces the fleet services agreement previously in effect between ARI
and ARL.
Effective May 1, 2011, ARI entered into a collective bargaining agreement for the workforce at a
parts manufacturing facility. This agreement replaced an agreement that expired on April 30, 2011.
The new agreement will expire on April 30, 2014.
24
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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
(Exchange Act), including statements regarding our plans, objectives, expectations and intentions.
Such statements include, without limitation, statements regarding various estimates we have made in
preparing our financial statements, statements regarding expected future trends relating to our
industry, our results of operations and the sufficiency of our capital resources and statements
regarding anticipated production schedules for our products and the anticipated construction and
production schedules of our joint ventures. These forward-looking statements are subject to known
and unknown risks and uncertainties that could cause actual results to differ materially from those
anticipated.
Risks and uncertainties that could adversely affect our business and prospects include without
limitation:
|
|
|
any financial or other information included herein based upon or otherwise incorporating judgments
or estimates based upon future performance or events; |
|
|
|
|
the impact of the recent economic downturn, adverse market conditions and restricted credit markets
and the impact of the continuation of these conditions; |
|
|
|
|
our reliance upon a small number of customers that represent a large percentage of our revenues and
backlog; |
|
|
|
|
the health of and prospects for the overall railcar industry; |
|
|
|
|
our prospects in light of the cyclical nature of our business; |
|
|
|
|
anticipated trends relating to our shipments, revenues, financial condition or results of operations; |
|
|
|
|
our ability to manage overhead and variations in production rates; |
|
|
|
|
the highly competitive nature of the railcar manufacturing industry; |
|
|
|
|
fluctuations in the costs of raw materials, including steel and railcar components, and delays in
the delivery of such raw materials and components; |
|
|
|
|
fluctuations in the supply of components and raw materials we use in railcar manufacturing; |
|
|
|
|
anticipated production schedules for our products and the anticipated financing needs, construction
and production schedules of our joint ventures; |
|
|
|
|
the risks associated with potential joint ventures, acquisitions or new business endeavors; |
|
|
|
|
the risks associated with international operations and joint ventures; |
|
|
|
|
the risk of the lack of acceptance of new railcar offerings by our customers and the risk of initial
production costs for our new railcar offerings being significantly higher than expected; |
|
|
|
|
the risk of the lack of customers entering into new railcar leases; |
|
|
|
|
the sufficiency of our liquidity and capital resources; |
|
|
|
|
the conversion of our railcar backlog into revenues; |
|
|
|
|
compliance with covenants contained in our unsecured senior notes; |
|
|
|
|
the impact and anticipated benefits of any acquisitions we may complete; |
|
|
|
|
the impact and costs and expenses of any litigation we may be subject to now or in the future; and |
|
|
|
|
the ongoing benefits and risks related to our relationship with Mr. Carl Icahn (the chairman of our
board of directors and, through Icahn Enterprises L.P. (IELP), our principal beneficial stockholder)
and certain of his affiliates. |
25
In some cases, you can identify forward-looking statements by terms such as may, will,
should, could, would, expects, plans, anticipates, believes, estimates, projects,
predicts, potential and similar expressions intended to identify forward-looking statements.
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 place undue
reliance on these forward-looking statements. Forward-looking statements represent our estimates
and assumptions only as of the date of this report. 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 and under Risk Factors in our Annual Report on Form 10-K filed on March 1, 2011
(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 in this report. We qualify all of our
forward-looking statements by these cautionary statements. We caution you that these risks are not
exhaustive. We operate in a continually changing business environment and new risks emerge from
time to time.
OVERVIEW
We are a leading North American designer and manufacturer of hopper and tank railcars. We also
lease, repair and refurbish railcars, provide fleet management services and design and manufacture
certain railcar and industrial components. We provide our railcar customers with integrated
solutions through a comprehensive set of high quality products and related services.
We operate in two segments: manufacturing operations and railcar services. Manufacturing operations
consist of railcar manufacturing, railcar leasing and railcar and industrial component
manufacturing. Railcar services consist of railcar repair and refurbishment services and fleet
management services.
The North American railcar market has been, and we expect it to continue to be, highly cyclical.
The recent economic downturn had a negative effect on the railcar manufacturing market in which we
compete, resulting in increased competition and significant pricing pressures in the past couple of
years.
We have seen improvement in the railcar manufacturing market with an increase in our backlog from
approximately 1,050 railcars at December 31, 2010 to approximately 5,630 railcars at March 31,
2011, including 280 railcars that we will lease. In response to increased customer demand, we are
increasing production rates at our railcar manufacturing facilities.
Railcar loadings have continued to increase and the number of railcars in storage has continued to
decrease, as reported by an independent third party industry analyst. We believe that these
improvements, which may or may not continue, indicate that the railcar market has begun and may
continue to improve. During the first quarter of 2011, our railcar shipments and manufacturing
revenues increased as compared to the same period in the prior year and the gross profit margin at
both of our segments increased. Based in part on these factors, we currently expect our railcar
shipments to increase in 2011, as compared to 2010. We cannot assure you that the railcar market
will continue to improve or that our railcar orders and shipments will increase.
Our railcar services segment continued to report strong results due to strong volumes and railcar
repair projects completed at our railcar manufacturing facilities.
26
RESULTS OF OPERATIONS
Three Months ended March 31, 2011 compared to Three Months ended March 31, 2010
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, |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
Revenues: |
|
|
|
|
|
|
|
|
Manufacturing Operations |
|
|
81.0 |
% |
|
|
68.1 |
% |
Railcar services |
|
|
19.0 |
% |
|
|
31.9 |
% |
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of revenue: |
|
|
|
|
|
|
|
|
Cost of manufacturing operations |
|
|
(78.5 |
%) |
|
|
(71.5 |
%) |
Cost of railcar services |
|
|
(15.7 |
%) |
|
|
(26.7 |
%) |
|
|
|
|
|
|
|
Total cost of revenues |
|
|
(94.2 |
%) |
|
|
(98.2 |
%) |
Gross profit |
|
|
5.8 |
% |
|
|
1.8 |
% |
Selling, administrative and other |
|
|
(8.1 |
%) |
|
|
(11.6 |
%) |
|
|
|
|
|
|
|
Loss from operations |
|
|
(2.3 |
%) |
|
|
(9.8 |
%) |
Interest income |
|
|
1.1 |
% |
|
|
1.4 |
% |
Interest expense |
|
|
(6.3 |
%) |
|
|
(10.1 |
%) |
Other income |
|
|
0.0 |
% |
|
|
0.1 |
% |
Loss from joint venture |
|
|
(2.6 |
%) |
|
|
(3.4 |
%) |
|
|
|
|
|
|
|
Loss before income tax expense |
|
|
(10.1 |
%) |
|
|
(21.8 |
%) |
Income tax benefit |
|
|
3.8 |
% |
|
|
8.4 |
% |
|
|
|
|
|
|
|
Net loss |
|
|
(6.3 |
%) |
|
|
(13.4 |
%) |
|
|
|
|
|
|
|
Revenues
Our revenues for the three months ended March 31, 2011 increased 62.2% to $84.8 million from $52.3
million in the three months ended March 31, 2010. This increase was primarily due to increased
revenues from our manufacturing operations, partially offset by decreased revenues from our railcar
services segment.
Our manufacturing operations revenues for the three months ended March 31, 2011 increased 92.8% to
$68.7 million from $35.6 million for the three months ended March 31, 2010. The primary reason for
the increase in revenues was the increase in our railcar shipments. During the three months ended
March 31, 2011, we shipped approximately 670 railcars compared to approximately 340 railcars in the
same period of 2010.
For the three months ended March 31, 2011, our manufacturing operations included $1.2 million, or
1.4%, of our total consolidated revenues, from transactions with American Railcar Leasing LLC
(ARL), compared to $12.6 million, or 24.0% of our total consolidated revenues from transactions
with ARL, for the three months ended March 31, 2010. ARL is an affiliated company controlled by Mr.
Carl Icahn.
Our railcar services revenues in the three months ended March 31, 2011 decreased slightly to $16.1
million compared to $16.7 million for the three months ended March 31, 2010. The decrease was
primarily attributable to lower railcar repair revenues at our railcar manufacturing facilities.
For the first quarter of 2011, our railcar services revenues included $5.5 million, or 6.5% of our
total consolidated revenues, from transactions with ARL, compared to $2.8 million, or 5.4% of our
total consolidated revenues, in the first quarter of 2010.
Gross Profit
Our gross profit increased to $4.9 million in the three months ended March 31, 2011 from $1.0
million in the three months ended March 31, 2010. Our gross profit margin increased to 5.8% in the
first quarter of 2011 from 1.8% in the first quarter of 2010, driven primarily by an increase in
our gross profit margins from our manufacturing operations.
27
Gross profit from our manufacturing operations increased $3.9 million for the three months ended
March 31, 2011
as compared to the three months ended March 31, 2010, due primarily to a significant increase in
our railcar shipments. Gross profit margin, for our manufacturing operations, increased to a profit
of 3.1% for the three months ended March 31, 2011 compared to a loss of 4.9% for the three months
ended March 31, 2010. This increase is primarily attributable to increased shipments.
Gross profit for our railcar services operations increased $0.1 million for the three months ended
March 31, 2011 compared to the three months ended March 31, 2010 primarily due to efficiencies from
maintaining strong volumes and a good mix of work. Gross profit margin for our railcar services
operations increased to 17.5% in the three months ended March 31, 2011 from 16.2% in the three
months ended March 31, 2010. The increase is primarily attributable to efficiencies created by
strong volumes along with repair projects performed at our railcar manufacturing facilities.
Selling, Administrative and Other Expenses
Our total selling, administrative and other expenses increased to $6.9 million for the first
quarter of 2011, compared to $6.1 million for the first quarter of 2010. The increase of $0.8
million was primarily attributable to an increase of $1.1 million in stock based compensation, as
described below, partially offset by a decrease in incentive compensation.
Stock based compensation increased due to the increase in our stock price in the first quarter of
2011 as compared to the same period in 2010 and the SARs granted during 2010. In the first quarter
of 2011, we recognized expense related to stock based compensation of $1.6 million, attributable to
stock appreciation rights (SARs), as compared to $0.5 million for the three months ended March 31,
2010.
Interest Expense and Income
Net interest expense for the three months ended March 31, 2011 was $4.4 million, representing $5.3
million of interest expense and $0.9 million of interest income, compared to $4.6 million of net
interest expense for the three months ended March 31, 2010, representing $5.3 million of interest
expense and $0.7 million of interest income. Interest expense was consistent and interest income
increased due to an increase in return on investments and loans.
Other Income
Other income of less than $0.1 million recognized in the first quarter of 2011 related to the
unused line fee earned on the revolving loan with Axis. Other income of $0.1 million recognized in
the first quarter of 2010 related to realized gains on the sale of a portion of our investment in
The Greenbrier Companies, Inc. common stock.
Loss from Joint Ventures
Our joint venture losses increased $0.4 million in the three months ended March 31, 2011 compared
to the three months ended March 31, 2010. This was primarily attributable to our share of Axis
LLCs losses, which increased by $0.1 million for the three months ended March 31, 2011 as compared
to the three months ended March 31, 2010, and our share of Amtek Railcar Industries Private
Limiteds losses of $0.3 million for the three months ended March 31, 2011 as compared to none for
the three months ended March 31, 2010. Our share of joint venture losses from Ohio Castings
Company, LLC remained consistent for the three months ended March 31, 2011 as compared to the three
months ended March 31, 2010.
Income Taxes Benefit
Our income tax benefit for the three months ended March 31, 2011 was $3.3 million or 38.0% of our
losses before income taxes, as compared to $4.4 million for the three months ended March 31, 2010,
or 38.5% of our losses before income taxes.
28
BACKLOG
We define backlog as the number and value of railcars that our customers have committed in writing
to purchase or
lease from us that have not been shipped. As of March 31, 2011, our total backlog was approximately
5,630 railcars, of which approximately 5,350 railcars with an estimated value of $417.0 million
were to be sold and approximately 280 railcars with an estimated market value of $18.3 million are
orders for railcars that will be subject to lease. As of December 31, 2010, our total backlog was
approximately 1,050 railcars with an estimated value of $87.6 million, all of which were to be
sold.
Railcars for Sale. We estimate that, as of March 31, 2011, approximately 64% of the total number of
railcars in our backlog will be sold by the end of 2011, with the remainder in 2012. Estimated
backlog value for railcars to be sold reflects the total revenues expected as if such backlog were
converted to actual revenues at the end of the particular period. We cannot guarantee that the
actual revenue from these orders will equal our reported sales backlog value estimates or that our
future revenue efforts will be successful.
Railcars for Lease. We estimate that, as of March 31, 2011, approximately 5% of the total number of
railcars in our backlog will be leased by the end of 2011, with the remainder in 2012. The
estimated backlog value of railcars that will be subject to lease reflects the estimated market
value of each railcar. Actual revenues for railcars subject to lease are recognized over the life
of the lease and are not based on the estimated backlog value. We have firm orders to manufacture
the railcars in our backlog at March 31, 2011 that will be subject to lease.
Customer orders may be subject to requests for delays in deliveries, inspection rights and other
customary industry terms and conditions, which could prevent or delay railcars in our backlog from
being shipped. Historically, we have experienced little variation between the number of railcars
ordered and the number of railcars actually delivered. As delivery dates could be extended on
certain orders, we cannot guarantee that our reported railcar backlog will convert to revenue in
any particular period, if at all.
The reported backlog includes railcars relating to purchase or lease obligations based upon an
assumed product mix. Changes in product mix from what is assumed would affect the estimated value
of our backlog and the total estimated revenues attributable to backlog. Estimated backlog value
reflects known adjustments for material cost changes but does not reflect a projection of any
future material price adjustments that are provided for in certain customer contracts.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity for the three months ended March 31, 2011 and for the foreseeable
future is cash on hand from the unsecured senior notes we sold in February 2007, partially offset
by capital expenditures and investments in and loans to our joint ventures. As of March 31, 2011,
we had working capital of $360.8 million, including $314.2 million of cash and cash equivalents.
In February 2007, we issued $275.0 million of unsecured senior notes that are due in 2014 (Notes).
The offering resulted in net proceeds to us of $270.7 million. The terms of the Notes contain
restrictive covenants that limit our ability to, among other things, incur additional debt, make
certain restricted payments and enter into certain significant transactions with stockholders and
affiliates. As of March 31, 2011, based on our fixed charge coverage ratio, as defined and as
measured on a rolling four-quarter basis, certain of these covenants, including our ability to
incur additional debt, have become further restricted. We were in compliance with all of our
covenants under the Notes as of March 31, 2011.
During the first quarter of 2011, we did not make any contributions to our joint ventures. We
anticipate making capital contributions and loans to our joint ventures in 2011.
We anticipate that any future expansion of our business will be financed through existing cash
resources. We believe that these sources of funds will provide sufficient liquidity to meet our
expected operating requirements over the next twelve months.
Our long-term liquidity is contingent upon future operating performance. We may require additional
capital in the future to fund capital expenditures, acquisitions or other investments. These
capital requirements could be substantial. Certain risks, trends and uncertainties may adversely
affect our long-term liquidity.
29
Cash Flows
The following table summarizes our net cash provided by or used in operating activities, investing
activities and financing activities for the three months ended March 31:
|
|
|
|
|
|
|
2011 |
|
|
|
(in thousands) |
|
Net cash (used in) provided by: |
|
|
|
|
Operating activities |
|
$ |
(3,927 |
) |
Investing activities |
|
|
(1,368 |
) |
Financing activities |
|
|
756 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
6 |
|
|
|
|
|
Decrease in cash and cash equivalents |
|
$ |
(4,533 |
) |
|
|
|
|
Net Cash Used In Operating Activities
Our net cash used in operating activities for the three months ended March 31, 2011 was $3.9
million. Our net loss of $5.3 million was impacted by non-cash items, including but not limited to,
depreciation expense of $5.8 million, joint venture losses of $2.2 million, stock based
compensation of $2.1 million, deferred income tax benefit of $3.2 million and other smaller
adjustments. Cash provided by operating activities attributable to changes in our current assets
and current liabilities included a decrease in total accounts receivable, including accounts
receivable from related parties, of $3.9 million and an increase in total accounts payable,
including accounts payable to related parties, of $3.8 million. Cash used in operating activities
attributable to changes in our current assets and liabilities included an increase in inventory of
$9.0 million, an increase in prepaid expenses and other current assets of $1.1 million and a
decrease in accrued expenses and taxes of $2.9 million.
The decrease in total accounts receivable, including from related parties, was primarily due to the
timing of customer payments. The increase in total accounts payable, included accounts payable to
related parties, and was related to increased inventory purchases. The increase in inventory was
primarily attributable to railcars awaiting shipment at March 31, 2011. The increase in prepaid
expenses and other current assets was primarily attributable to the payment of annual corporate
insurance policies during the first quarter of 2011. Accrued expenses and taxes decreased primarily
due to an interest payment made on our Notes during the quarter.
Net Cash Used In Investing Activities
Net cash used in investing activities was $1.4 million for the three months ended March 31, 2011,
including $0.7 million of capital expenditures for the purchase of property, plant and equipment
and $0.6 million of interest on Axis term loans that was added to the principal balance.
Capital Expenditures
We continuously evaluate facility requirements based on our strategic plans, production
requirements and market demand and may elect to change our level of capital investments in the
future. These investments are all based on an analysis of the estimated rates of return and impact
on our profitability. We continue to pursue opportunities to reduce our costs through continued
vertical integration of component parts. From time to time, we may expand our business,
domestically or abroad, by acquiring other businesses or pursuing other strategic growth
opportunities including, without limitation, joint ventures.
Capital expenditures for the three months ended March 31, 2011 were $0.7 million and our current
capital expenditure plans for 2011 include projects that maintain equipment, improve efficiencies
and reduce costs. We cannot assure that we will be able to complete any of our projects on a timely
basis or within budget, if at all.
30
Contingencies and Contractual Obligations
Refer to the updated status of contingencies in Note 13 to the condensed consolidated financial
statements. Except
as discussed below, our contingencies and contractual obligations did not materially change from
the information disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31,
2010. In March 2011, the Company entered into an agreement to purchase certain railcar parts during
2011 for current railcar orders with a minimum purchase commitment of $26.1 million. During April
2011, the Company entered into an agreement to purchase certain railcar parts during 2011 for
current railcar orders with a minimum purchase commitment of $15.1 million.
CRITICAL ACCOUNTING POLICIES
The critical accounting policies and estimates used in the preparation of our financial statements
that we believe affect our more significant judgments and estimates used in the preparation of our
consolidated financial statements presented in this report are described in Managements Discussion
and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated
Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2010.
There have been no material changes to the critical accounting policies or estimates during the
three months ended March 31, 2011.
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in our market risks since December 31, 2010.
|
|
|
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.
PART II OTHER INFORMATION
|
|
|
ITEM 1. |
|
LEGAL PROCEEDINGS |
There have been no material changes with respect to risk factors as previously disclosed in our
2010 Annual Report on Form 10-K.
There have been no material changes from the risk factors previously disclosed in Item 1A of our
Annual Report.
|
|
|
ITEM 5. |
|
OTHER INFORMATION |
The Axis Credit Agreement was amended on March 31, 2011. Under the amendment, our and the other
lending partys commitment to make term loans was extended to December 31, 2011 from December 31,
2010 and the date when the first payment on the term loans become due and payable was extended to
March 31, 2012. Thereafter payments are due each fiscal quarter in equal installments, with the
last payment due on December 31, 2016. Furthermore, the credit agreement was amended to extend the
period during which Axis can satisfy the term loan interest by increasing the principal balance to
September 30, 2011. The first interest payment is due and payable October 31, 2011.
31
This description of the amendment to the credit agreement is a summary only and is qualified in its
entirety by the Fifth Amendment to the Axis Credit Agreement, a copy of which is attached hereto as
Exhibit 10.64 and incorporated herein by reference.
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
|
|
|
|
|
|
10.64 |
|
|
Fifth Amendment to the Axis Credit Agreement dated as of March 31, 2011. |
|
|
|
|
|
|
10.65 |
|
|
Railcar Services Agreement dates as of April 15, 2011 between American
Railcar Industries, Inc. and American Railcar Leasing 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. |
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
AMERICAN RAILCAR INDUSTRIES, INC.
|
|
Date: May 3, 2011 |
By: |
/s/ James Cowan
|
|
|
|
James Cowan, President and Chief Executive Officer |
|
|
|
|
|
By: |
/s/ Dale C. Davies
|
|
|
|
Dale C. Davies, Senior Vice President, |
|
|
|
Chief Financial Officer and Treasurer |
|
33
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
|
|
|
|
|
|
10.64 |
|
|
Fifth Amendment to the Axis Credit Agreement dated as of March 31, 2011. |
|
|
|
|
|
|
10.65 |
|
|
Railcar Services Agreement dates as of April 15, 2011 between American
Railcar Industries, Inc. and American Railcar Leasing 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. |
34