Given the economic downturn, the railcar industry has weakened and we expect industry railcar shipments to decline in 2009 from 2008. We also expect our shipments and revenues to decrease in 2009 from 2008.
FACTORS AFFECTING OPERATING RESULTS
The following is a discussion of some of the key factors that have in the past and could in the future to affect our operating results. These factors include, but are not limited to, the cyclical nature of the North American railcar market, our reliance on a few customers for most of our revenues, our experience with customer order frequency and size, revenues from our affiliates representing a significant portion of our revenue and fluctuation in supplies and prices of raw materials and components used in railcar manufacturing. See "Risk Factors" for a more comprehensive list of factors that could affect our operating results.
Cyclicality of the railcar industry and effect of economic conditions Historically, the North American railcar market has been and we expect it to continue to be highly cyclical. For example, we have experienced a decrease in demand and an increase in pricing pressures in the tank and hopper railcar markets as well as downturns and decreased demand in all of the railcar manufacturing industry. In addition, there has been a global economic downturn, which has resulted and may continue to result in lower sales volumes, lower prices for railcars and a loss of profits for us, which could have a material adverse effect on our ability to convert our railcar backlog into revenues. Customer concentration
Railcars are typically sold pursuant to large, periodic orders, and a limited number of customers typically represent a significant percentage of our railcar sales in any given year. The loss of any significant portion of our sales to any major customer, the loss of a single major customer or a material adverse change in the financial condition of any one of our major customers could have a material adverse effect on our business and financial results. As of December 31, 2008, we fully reserved for all outstanding invoices due to us from one railcar services customer that filed bankruptcy on January 6, 2009, totaling $0.5 million. We continue to provide services to this customer with shortened payment terms. This customer represented 0.6% of total consolidated revenues for each of the years ended December 31, 2008, 2007 and 2006. Customer order size and frequency
Many of our customers place orders for railcars on an as-needed basis, sometimes only once every few years. As a result, the order levels for railcars, the mix of railcar types ordered and the railcars ordered by any particular customer have varied significantly from quarter to quarter in the past and may continue to vary significantly in the future. As railcar sales comprised 86.0%, 83.5% and 83.1%, respectively, of our total consolidated revenues in 2008, 2007 and 2006, our results of operations in any particular period may be significantly affected by the number of railcars and the product mix of railcars we deliver in that period.
Revenues from affiliates
In 2008, 2007 and 2006, our revenues from affiliates accounted for 24.5%, 22.4% and 10.7% of our total consolidated revenues, respectively. These affiliates consisted of entities beneficially owned and controlled by Mr. Carl C. Icahn, the chairman of our board of directors and our principal controlling stockholder. We believe that revenues from affiliates will continue to constitute an important portion of our business. A significant reduction in sales to affiliates could have a material adverse effect on our business and financial results.

Raw material costs
The price for steel, the primary raw material used in the manufacture of our railcars, has in the past and may in the future vary as a result of worldwide demand, limited availability of production inputs for steel, including scrap metal, industry consolidation and import trade barriers. These factors could also cause a corresponding increase or decrease in the cost and availability of castings and other railcar components constructed with steel. Costs for other railcar manufacturers could be similarly affected by the availability and pricing of steel and castings and other components. Component supply constraints
Our business depends on the adequate supply of numerous specialty components, such as railcar wheels, brakes, sideframes, axles, bearings, yokes, bolsters and other heavy castings as well as specialized raw materials, such as normalized steel plates used in the production of railcars. If our suppliers of railcar components and raw materials were to stop or reduce their production, go out of business, refuse to continue their business relationships with us, reduce the amounts they are willing to sell to us or become subject to work stoppages, our business would be disrupted. This could materially and adversely affect our operating results. Our ability to continue or increase our railcar production depends on our ability to obtain an adequate supply of these railcar components and raw materials.
RESULTS OF OPERATIONS
The following table summarizes our historical operations as a percentage of revenues for the periods shown. Our historical results are not necessarily indicative of operating results that may be expected in the future.

                                                       Years Ended December 31,
                                                    2008         2007         2006
     Revenues
     Manufacturing operations                         93.7 %       92.8 %       92.5 %
     Railcar services                                  6.3 %        7.2 %        7.5 %

     Total revenues                                  100.0 %      100.0 %      100.0 %
     Cost of revenue
     Manufacturing operations                        (84.4 %)     (81.4 %)     (83.2 %)
     Railcar services                                 (5.2 %)      (5.9 %)      (5.9 %)

     Total cost of revenue                           (89.6 %)     (87.3 %)     (89.1 %)

     Gross profit                                     10.4 %       12.7 %       10.9 %
     Income related to insurance recoveries, net       0.0 %        0.0 %        1.5 %
     Gain on asset conversion, net                     0.0 %        0.0 %        0.7 %
     Selling, administrative and other expenses       (3.3 %)      (3.9 %)      (4.4 %)

     Earnings from operations                          7.1 %        8.8 %        8.7 %
     Interest income                                   1.0 %        2.0 %        0.2 %
     Interest expense                                 (2.5 %)      (2.4 %)      (0.2 %)
     Other income                                      0.5 %        0.0 %        0.0 %
     Income (loss) from joint venture                  0.1 %        0.1 %       (0.1 %)

     Earnings before income tax expense                6.2 %        8.5 %        8.6 %
     Income tax expense                               (2.3 %)      (3.2 %)      (3.2 %)

     Net earnings                                      3.9 %        5.3 %        5.4 %

Year ended December 31, 2008 compared to year ended December 31, 2007 Revenues
Our revenues in 2008 increased 15.9% to $808.8 million from $698.1 million in 2007. This increase was attributable to an increase in revenues from both manufacturing operations and railcar services.

Our manufacturing operations revenues increased 16.9% to $757.5 million in 2008 from $648.1 million in 2007. This increase was partially attributable to the delivery of 910 more railcars in 2008 compared to 2007. The increase in shipments reflects the completion of our Marmaduke expansion efforts and additional tank railcars shipped under our ACF manufacturing contract, partially offset by the decline in hopper railcar shipments in 2008, due to less demand and increased competition for hopper railcar products. Manufacturing operations revenues also increased due to higher selling prices on most railcars caused by increases in raw materials prices that we were able to pass on to most of our customers. During 2008, we shipped 7,965 railcars compared to 7,055 railcars in 2007. For the year ended December 31, 2008, we recognized revenue of $100.3 million related to railcars that were manufactured under the ACF manufacturing agreement. This agreement will terminate on the later of the completion of 1,388 tank railcars or March 23, 2009.
In 2008, our manufacturing operations revenues included $182.8 million, or 22.6% of our total consolidated revenues, from transactions with affiliates, compared to $140.2 million, or 20.1% of our total consolidated revenues, in 2007. These revenues were attributable to sales of railcars and railcar parts to companies controlled by Mr. Carl C. Icahn.
Our railcar services revenues increased 2.6% to $51.3 million in 2008 from $50.0 million in 2007. This increase was primarily attributable to strong railcar repair demand. In 2008, our railcar services revenues included $15.3 million, or 1.9% of our total consolidated revenues, from transactions with affiliates, as compared to $16.0 million, or 2.3%, in 2007. ARI has had a reduction in its scope of fleet management services that it is providing to ARL. Since ARL split from ARI in 2005, ARL has and continues to reduce these services. This reduction has not affected the repair and maintenance services that ARI provides to ARL. The Company does not anticipate this reduction to have a material impact on its railcar services revenue. Gross profit
Our gross profit decreased to $84.4 million in 2008 from $89.1 million in 2007. Our gross profit margin decreased to 10.4% in 2008 from 12.7% in 2007. The decrease in overall gross profit margin was primarily driven by a decrease in gross profit margins in our manufacturing operations.
Our gross profit margin for our manufacturing operations decreased to 9.9% in 2008 from 12.4% in 2007. This decrease was primarily attributable to lower margins on hopper railcars as a result of competitive market conditions and increased material costs and surcharges on some hopper railcars that we could not recover through higher selling prices on fixed price contracts. The increased material costs and surcharges that we were able to recover through increased selling prices on most railcars had a negative effect on gross profit margin, because we did not realize additional profit from these recoveries. Partially offsetting these costs were higher tank railcar shipments in 2008 along with favorable labor efficiencies and overhead cost control at our manufacturing facilities.
Our gross profit margin for railcar services increased to 18.8% in 2008 from 17.9% in 2007. This increase was primarily attributable to labor efficiencies, increased capacity and a favorable mix of work. Selling, administrative and other expenses Our selling, administrative and other expenses decreased by $0.9 million in 2008 to $26.5 million from $27.4 million in 2007. These selling, administrative and other expenses, which include stock based compensation, were 3.3% of total consolidated revenues in 2008 as compared to 3.9% of total consolidated revenues in 2007.
The decrease of $0.9 million was primarily attributable to a decrease in stock based compensation expense of $1.9 million resulting from decreased stock appreciation rights (SARs) expense driven by our lower stock price levels in 2008, which negatively affected the fair value of the SARs. In addition, income was recognized in 2008 from the reversal of expense for forfeited stock options. The decrease in stock based compensation expense was partially offset by an increase in various other expenses in 2008 amounting to $1.0 million mainly driven by increases in travel and other costs related to our recently formed joint venture and depreciation expense related to recently completed projects.

Interest expense and interest income
Net interest expense for 2008 was $12.5 million, representing $7.8 million of interest income and $20.3 million of interest expense, as compared to $3.2 million of net interest expense for 2007, representing $13.8 million of interest income and $17.0 million of interest expense.
The $3.3 million increase in interest expense from 2007 to 2008 was due to interest expense on our unsecured senior notes which had an additional two months of interest costs in 2008 compared to 2007.
The $6.0 million decrease in interest income from 2007 to 2008 was primarily attributable to a decrease in interest rates and a decrease in average cash balances held in 2008 compared to 2007 due to cash invested in available for sale securities. Cash invested in 2007 generated a greater return than in 2008. Other Income
During 2008, we purchased shares of The Greenbrier Companies (GBX) common stock and subsequently sold a portion of that investment resulting in a realized gain of $2.6 million. We also entered into total return swap agreements referencing 400,000 shares of GBX common stock. During July and August of 2008, all of these total return swap agreements were settled for a realized gain of $0.6 million. We also experienced gains on an option to purchase Canadian Dollars which resulted in $0.1 million unrealized gain and $0.1 million realized gain at December 31, 2008.
Income from joint ventures
Income from joint ventures decreased from $0.9 million in 2007 to $0.7 million in 2008 due to fluctuations in Ohio Castings and Axis net income/loss. Axis reported a net loss in 2008, of which our share was $1.1 million and Ohio Castings reported net income, of which our share was $1.8 million. In 2007, Axis reported a net loss of less than $0.1 million and Ohio Castings reported net income, of which our share was $0.7 million. Income tax expense
Income tax expense for 2008 was $18.4 million, or 37.0% of our earnings before income taxes, as compared to $22.1 million for 2007, or 37.2% of our earnings before income taxes.
Year ended December 31, 2007 compared to the year ended December 31, 2006 Revenues
Our revenues in 2007 increased 8.1% to $698.1 million from $646.1 million in 2006. This increase was attributable to an increase in revenues from both manufacturing operations and railcar services.
Our manufacturing operations revenues increased 8.4% to $648.1 million in 2007 from $597.9 million in 2006. This increase was partially attributable to the delivery of 108 more railcars in 2007 compared to 2006, when shipments were reduced due to the shutdown from the tornado damage to the Marmaduke facility. The increase in shipments reflects the restart of our Marmaduke operations, the expansion of our Marmaduke complex and additional tank railcars shipped under our ACF manufacturing contract, partially offset by the decline in hopper railcar shipments ordered for delivery in 2007, due to less demand and increased competition for hopper railcar products during that period. During 2007, we shipped 7,055 railcars compared to 6,947 railcars in 2006. In the year ended December 31, 2007, we recognized revenue of $17.3 million related to railcars that were manufactured under the ACF manufacturing agreement.

In 2007, our manufacturing operations revenues included $140.2 million, or 20.1% of our total consolidated revenues, from transactions with affiliates, compared to $50.0 million, or 7.7% of our total consolidated revenues, in 2006. These revenues were attributable to sales of railcars and railcar parts to companies controlled by Mr. Carl C. Icahn.
Our railcar services revenues increased 3.9% to $50.0 million in 2007 from $48.2 million in 2006. This increase was primarily attributable to strong railcar repair demand. In 2007, our railcar services revenues included $16.0 million, or 2.3% of our total consolidated revenues, from transactions with affiliates, as compared to $18.9 million, or 2.9%, in 2006. Gross profit
Our gross profit increased to $89.1 million in 2007 from $70.7 million in 2006. Our 2006 gross profit was negatively impacted by the shutdown of our Marmaduke facility due to the tornado, for which we recovered $9.9 million for lost profits under our business interruption insurance policy. Our gross profit margin increased to 12.7% in 2007 from 10.9% in 2006. The increase in our gross profit margin was primarily attributable to an increase in our gross profit margin for our manufacturing operations.
Our gross profit margin for our manufacturing operations increased to 12.4% in 2007 from 10.1% in 2006. This increase was primarily attributable to railcar mix, including significantly more tank railcars, and improved manufacturing efficiencies that we experienced during 2007 compared to 2006. Labor efficiencies resulted from lean manufacturing initiatives and enhanced training initiatives at our railcar manufacturing facilities.
Our gross profit margin for railcar services decreased to 17.9% in 2007 from 21.0% in 2006. This decrease was primarily attributable to mix of work content at our repair plants and higher costs for various railcar services in 2007. Income Related to Insurance Recoveries, Net and Gain on Asset Conversion, Net On April 2, 2006, our Marmaduke, Arkansas tank railcar manufacturing complex was damaged by a tornado. We were covered by property insurance covering wind and rain damage to our property, incremental costs and operating expenses we incurred due to the tornado damage at our Marmaduke complex. In addition, we were covered by insurance for business interruption as a direct result of the insured damage.
Our deductibles on these policies are $0.1 million for property insurance and a five-day equivalent time element business interruption deductible, which resulted in $0.6 million. The final property damage claim settlement amounted to $11.2 million, prior to application of the deductible, and the final business interruption insurance settlement amounted to $16.0 million, prior to application of the deductible.
During 2006, we identified assets with net book value of $4.3 million that were damaged or destroyed by the tornado. The charge for these asset write-offs was netted against the net insurance settlement of $11.1 million related to the property damage insurance claim to arrive at the gain on asset conversion, net. Other costs amounting to $2.4 million were incurred related to clean up costs and various miscellaneous repairs associated with the storm damage.

The tornado related insurance settlement for the property damage claim includes $11.1 million in cash proceeds received during 2006 to provide funds to clean up and repair the plant in Marmaduke as well as order replacement assets so the plant was operational in a timely manner. These cash advances are classified as cash provided for investing activities and as cash provided by operating activities as they were received as part of the property insurance claim that was filed for all the property, plant and equipment as well as inventory that were damaged by the tornado. As we agreed on a final settlement amount with our insurance carrier, we wrote off the assets and recorded the actual net gain attributable to the storm from the replacement of the property with new property and equipment. We recognized the gain on the replacement of property damaged or destroyed of $4.3 million as gain on asset conversion in the statement of operations computed as follows:

                                                           Year Ended
                                                        December 31, 2006
                                                         (in thousands)

        Property damage insurance claim                $            11,160
        Property damage claim deductible                              (100 )

        Property damage insurance settlement, net                   11,060
        Assets damaged, clean up costs, repair costs                (6,737 )

        Gain on asset conversion, net                  $             4,323

Our business interruption insurance policy and the final settlement provided coverage for continuing expenses, employee wages and the loss of profits resulting from the temporary Marmaduke plant shut-down caused by the storm. We received cash proceeds amounting to $15.4 million during 2006 related to the business interruption insurance claim.
We recognized income related to insurance recoveries in the statement of operations of $9.9 million attributable to our business interruption insurance computed as follows:

                                                            Year Ended
                                                         December 31, 2006
                                                          (in thousands)

      Business interruption insurance claim             $            15,968
      Business interruption claim deductible                           (600 )

      Business interruption insurance settlement, net                15,368

      Continuing expenses                                            (5,430 )
      Deductible adjustment                                               8

      Income related to insurance recoveries, net       $             9,946

Selling, administrative and other expenses Our selling, administrative and other expenses decreased by $1.0 million in 2007 to $27.4 million from $28.4 million in 2006. These selling, administrative and other expenses, which include stock based compensation, were 3.9% of total consolidated revenues in 2007 as compared to 4.4% of total consolidated revenues in 2006.
The decrease of $1.0 million was primarily attributable to a stock based compensation expense decrease of $6.2 million (as described below), largely offset by an increase of $5.2 million of selling, administrative and other costs including legal costs, information technology costs and increased headcount to support our growing business.
Our stock based compensation expense for 2007 was $1.9 million. This expense is attributable to restricted stock and stock options we granted in 2006 and to stock appreciation rights (SARs), which settle in cash, granted in 2007. This is compared to stock based compensation expense of $8.1 million for 2006, which included $5.7 million in connection with the granting of restricted stock in conjunction with our initial public offering. Interest expense and interest income
Net interest expense for 2007 was $3.2 million, representing $13.8 million of interest income and $17.0 million of interest expense, as compared to $0.1 million of net interest income for 2006, representing $1.5 million of interest income and $1.4 million of interest expense.

The $15.6 million increase in interest expense from 2006 to 2007 was due to having minimal debt outstanding throughout most of 2006, due to the repayment in January 2006 of substantially all of our then outstanding debt with a portion of the net proceeds from our initial public offering in January 2006, combined with $16.0 million of interest expense in 2007 due to the sale of $275.0 million of unsecured senior notes due 2014 in February 2007.
The $12.3 million increase in interest income from 2006 to 2007 was primarily attributable to the investment of the net proceeds we received in connection with the issuance of our unsecured senior notes and the investment of cash generated through operations.
Income (loss) from joint venture
Income from joint venture for 2007 was $0.9 million compared to a loss from joint venture of $0.7 million for 2006, representing an improvement in earnings of $1.6 million. In 2006, Ohio Castings incurred a significant charge related to a reserve of $3.7 million ($1.2 million being ARI's share of that charge) related to defective castings that were produced by one of the Ohio Castings facilities over an identified time period. Income tax expense
Income tax expense for 2007 was $22.1 million, or 37.2% of our earnings before income taxes, as compared to $20.8 million for 2006, or 37.1% of our earnings before income taxes.