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ARII > SEC Filings for ARII > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for AMERICAN RAILCAR INDUSTRIES, INC.

Form 10-Q for AMERICAN RAILCAR INDUSTRIES, INC.


2-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S 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 business and industry, our results of operations and the sufficiency of our capital resources, statements regarding our capital expenditure plans and expansion of our business, statements regarding expansion of our railcar lease fleet 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 an economic downturn, adverse market conditions and restricted credit markets;

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, leasing, railcar services, revenues, financial condition or results of operations;

the sufficiency of our liquidity and capital resources in light of our partial debt redemption and planned expenditures for our leasing business;

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, impact and anticipated benefits 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 conversion of our railcar backlog into revenues;

compliance with covenants contained in our unsecured senior notes;

the implementation, integration with other systems or ongoing management of our new enterprise resource planning system;

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.


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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 materially 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, as amended by Form 10-K/A (the Annual 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.

EXECUTIVE SUMMARY

We are a leading North American designer and manufacturer of hopper and tank railcars. We operate in three reportable segments: manufacturing, railcar leasing and railcar services. Manufacturing consists of railcar manufacturing and railcar and industrial component manufacturing. Railcar leasing consists of railcars manufactured by us and leased to third parties under operating leases. Railcar services consist of railcar repair services, engineering and field services, and fleet management services. Although our railcar leasing activity began during 2011, it was not required to be reported as a separate segment until the first quarter of 2012.

The North American railcar market has been, and we expect it to continue to be, highly cyclical. We have seen significant improvements in the railcar manufacturing market over approximately the past two years. We cannot assure you that the railcar market will continue to improve or that our railcar orders and shipments will continue to increase.

For the third quarter of 2012, we achieved record earnings from operations and record earnings per share. Our shipments of approximately 1,460 railcars in the third quarter of 2012 were 9% higher than that of the third quarter of 2011 and we made significant progress in growing our fleet of leased railcars. Our earnings benefited from a favorable railcar production mix of more tank railcars and improved general market conditions that contributed to improved margins. Even though railcar volumes for the third quarter of 2012 were at lower levels than previous quarters of 2012, our production level remained relatively high by historical standards and provided operational leverage and efficiencies that contributed to our strong performance. The sequential decrease in volumes was driven predominately by softness in the covered hopper market. In addition to the covered hopper market, the industry is seeing softness with respect to other railcar types that the Company does not manufacture but impacts our domestic joint ventures. In addition, our earnings have benefited from vertical integration projects that were implemented over the past several years. During the third quarter of 2012, we received orders for approximately 2,290 railcars. As of September 30, 2012, we have a backlog of approximately 7,630 railcars including approximately 1,980 railcars for lease customers. In response to the changes in customer demand, we continue to adjust production rates as needed at our railcar manufacturing facilities.


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RESULTS OF OPERATIONS

Three Months Ended September 30, 2012 Compared to Three Months Ended
September 30, 2011

Consolidated Results



                                            For the Three Months Ended
                                                   September 30,                    $              %
                                              2012                2011           Change         Change
Revenues:
Manufacturing                             $     147,212        $  108,356       $  38,856          35.9
Railcar leasing                                   4,267               259           4,008             *
Railcar services                                 16,751            17,169            (418 )        (2.4 )

Total revenues                                  168,230           125,784          42,446          33.7

Cost of revenues:
Manufacturing                                  (116,497 )         (98,069 )       (18,428 )        18.8
Railcar leasing                                  (1,854 )            (142 )        (1,712 )           *
Railcar services                                (13,181 )         (12,618 )          (563 )         4.5

Total cost of revenues                         (131,532 )        (110,829 )       (20,703 )        18.7

Selling, general and administrative              (6,360 )          (2,934 )        (3,426 )       116.8

Earnings from operations                         30,338            12,021          18,317         152.4

* - Not meaningful

Revenues

Our total consolidated revenues for the three months ended September 30, 2012 increased to $168.2 million from $125.8 million for the three months ended September 30, 2011. This increase was due to increased revenues from manufacturing and railcar leasing, partially offset by lower railcar service revenue. During the three months ended September 30, 2012, we shipped approximately 1,150 railcars, which excludes approximately 310 railcars built for our lease fleet, compared to approximately 1,250 railcars for the same period of 2011, which excludes approximately 90 railcars built for our lease fleet.

Manufacturing revenues increased from prior year by 35.9%. This change was due to a 47.9% increase driven primarily by a higher mix of tank railcars, which generally sell at higher prices due to more material and labor content, and improved general market conditions. This increase was partially offset by a decrease of 7.3% due to lower volumes of railcar shipments for direct sale, and a decrease of 4.7% due to lower revenues from certain material cost changes that we pass through to customers, as discussed below.

Leasing revenues increased due to an increase in the number of railcars leased to customers as the lease fleet grew from 240 railcars at September 30, 2011 to 2,190 railcars at September 30, 2012.

The decrease in railcar services revenue for the three months ended September 30, 2012 compared to the same period in 2011 was primarily due to a reduction of paint and lining work performed at our repair facilities due to lower customer demand for those services.

Cost of Revenues

Our total consolidated cost of revenues for the three months ended September 30, 2012 increased to $131.5 million from $110.8 million for the same period in 2011. This increase was primarily due to increases experienced by our manufacturing segment, and to a lesser extent, increases in our railcar leasing and railcar services segments. Cost of revenues increased for our manufacturing segment by 18.8%. An increase of 31.2% in this segment was driven by a shift in production to a higher mix of tank railcars, which generally have more material and labor content. This increase was partially offset by a decrease of 7.2% due to a lower number of railcars shipped for direct sale, as discussed above, and a decrease of 5.2% driven by lower material costs for key components and steel. The decrease in costs for key components and steel is also reflected as a decrease to selling prices as our sales contracts include provisions to adjust prices for increases and decreases in the cost of most raw materials and components on a dollar for dollar basis.


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Our railcar leasing segment experienced increased costs driven by the increased number of railcars on lease, as discussed above.

The increase in railcar services cost of revenues for the three months ended September 30, 2012 compared to the same period in 2011 was primarily due to a shift in the mix of repair projects being performed.

Selling, General and Administrative Expenses

Our total selling, general and administrative costs increased to $6.4 million for the third quarter of 2012 compared to $2.9 million for the third quarter of 2011. The increase of $3.5 million was primarily attributable to increases in incentive compensation and stock-based compensation, which fluctuates with our stock price.

Earnings from Operations

Our total consolidated earnings from operations increased to a record $30.3 million for the three months ended September 30, 2012 from $12.0 million for the same period in 2011. Our operating margin increased to 18.0% for the three months ended September 30, 2012 from 9.6% for the same period in 2011. These increases were due primarily to an increase in earnings from operations for our manufacturing segment that is discussed below.

Loss on Debt Extinguishment

During the three months ended September 30, 2012, using available cash on hand, we redeemed $100.0 million of the aggregate principal amount of our 7.5% senior notes due 2014, resulting in a charge of $2.3 million. The charge was comprised of a premium of $1.9 million paid on the redemption of the debt and a non-cash charge of $0.4 million for the accelerated write-off of a portion of the deferred financing fees.

Earnings (loss) from Joint Ventures

Our earnings (loss) from joint ventures were as follows:



                                             Three Months Ended
                                                September 30,
                                             2012           2011        Change
          Ohio Castings                    $   (169 )     $   (574 )    $   405
          Axis                                 (392 )       (1,175 )        783
          Amtek Railcar-India                  (288 )         (421 )        133

          Total Loss from Joint Ventures   $   (849 )     $ (2,170 )    $ 1,321

Our joint venture loss decreased to $0.8 million for the three months ended September 30, 2012 compared to a loss of $2.2 million for the same period in 2011. The decrease was attributable to our share of Ohio Castings Company, LLC (Ohio Castings) losses decreasing by $0.4 million and Axis LLC's (Axis) losses decreasing by $0.8 million for the three months ended September 30, 2012 compared to the same period in 2011. Axis' and Ohio Castings' losses decreased as production levels increased on strong railcar demand compared to the prior year. Additionally, Ohio Castings benefited from the absence of initial costs incurred in conjunction with the resumption of production at the facility during the third quarter of 2011. Amtek Railcar's losses were comparable for both the three months ended September 30, 2012 and 2011.

Income Tax Expense

Our income tax expense for the three months ended September 30, 2012 was $9.6 million, or 40.6% of our earnings before income taxes, compared to $2.4 million for the three months ended September 30, 2011, or 36.9% of our earnings before income taxes. The estimated tax rate fluctuates on a quarterly basis depending on the mix of income or loss in the U.S. versus foreign countries.

Segment Information

The table below summarizes our historical revenues, earnings from operations and operating margin for the periods shown. Intersegment revenues are accounted for as if sales were to third parties. Operating margin is defined as total segment earnings from operations as a percentage of total segment revenues. Our historical results are not necessarily indicative of operating results that may be expected in the future. Prior-period amounts for the new leasing segment have been reclassified to conform to the current year presentation. Other than the new leasing segment presentation, there have been no material reclassifications during the current period related to segment data. Refer to Note 17 to the condensed consolidated financial statements for further discussions of our segments.


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                                                                    Three Months Ended September 30,
                                                         2012                                              2011
                                                                             (in thousands)
                                     External        Intersegment         Total        External        Intersegment         Total         Change
Revenues
Manufacturing                        $ 147,212      $       38,178      $ 185,390      $ 108,356      $        9,118      $ 117,474      $  67,916
Railcar Leasing                          4,267                  -           4,267            259                  -             259          4,008
Railcar Services                        16,751                 221         16,972         17,169                  50         17,219           (247 )
Eliminations                                -              (38,399 )      (38,399 )           -               (9,168 )       (9,168 )      (29,231 )

Total Consolidated                   $ 168,230      $           -       $ 168,230      $ 125,784      $           -       $ 125,784      $  42,446

Earnings (Loss) from Operations
Manufacturing                        $  29,206      $        5,012      $  34,218      $   8,561      $          174      $   8,735      $  25,483
Railcar Leasing                          2,377                   6          2,383             62                  -              62          2,321
Railcar Services                         2,955                 (46 )        2,909          4,021                  (9 )        4,012         (1,103 )
Corporate                               (4,200 )                -          (4,200 )         (623 )                -            (623 )       (3,577 )
Eliminations                                -               (4,972 )       (4,972 )           -                 (165 )         (165 )       (4,807 )

Total Consolidated                   $  30,338      $           -       $  30,338      $  12,021      $           -       $  12,021      $  18,317

                                           Three Months Ended
                                              September 30,
                                           2012            2011
                    Operating Margins
                    Manufacturing             18.5 %         7.4 %
                    Railcar Leasing           55.8 %        23.9 %
                    Railcar Services          17.1 %        23.3 %
                    Total Consolidated        18.0 %         9.6 %

Manufacturing

Our manufacturing revenues, including an estimate of revenues for railcars built for our lease fleet, increased to $185.4 million for the three months ended September 30, 2012 from $117.5 million for the three months ended September 30, 2011. During the three months ended September 30, 2012, we shipped approximately 1,460 railcars, including approximately 310 railcars built for our lease fleet, compared to approximately 1,340 railcars for the same period of 2011, including approximately 90 railcars built for our lease fleet. The primary reasons for the increase in revenues were a higher mix of tank railcars shipped, which generally sell at higher prices due to more material and labor content, and improved general market conditions and an increase in railcar shipments. These increases were partially offset by lower revenues from certain material cost changes that we pass through to customers, as discussed above. The increase in railcar shipments for the segment primarily reflected an increase in railcars shipped for our leasing business, which was driven by strong leasing customer demand, partially offset by a decline in direct sale shipments. Manufacturing revenues for the three months ended September 30, 2012 included estimated revenues of $38.2 million relating to railcars built for our lease fleet, compared to $9.1 million for the three months ended September 30, 2011. Such revenues are based on an estimated fair market value of the leased railcars as if they had been sold to a third party, and are eliminated in consolidation. Revenues from railcars manufactured for our leasing segment are not recognized in consolidated revenues as railcar sales, but rather lease revenues are recognized over the term of the lease in accordance with the monthly lease revenues. Railcars built for our lease fleet represented over 20% of our railcar shipments during the three months ended September 30, 2012 compared to 7% for the three months ended September 30, 2011.

For the three months ended September 30, 2012, manufacturing revenues included direct sales of railcars to American Railcar Leasing LLC (ARL) and AEP Leasing LLC (AEP) totaling $50.0 million, or 29.7% of our total consolidated revenues, compared to zero for the three months ended September 30, 2011. ARL and AEP are affiliates of Mr. Carl Icahn, the chairman of our board of directors and, through IELP, our principal beneficial stockholder. In the third quarter of 2012, we began manufacturing and selling railcars to AEP on a purchase order basis, following the assignment to AEP of all unfilled purchase orders previously placed by ARL.


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Earnings from operations for manufacturing, which include an allocation of selling, general and administrative costs, as well as estimated profit for railcars manufactured for our leasing segment, increased to $34.2 million for the three months ended September 30, 2012 compared to $8.7 million for the same period in 2011. Estimated profit on railcars built for our lease fleet, which is eliminated in consolidation, was $5.0 million for the three months ended September 30, 2012, and is based on an estimated fair market value of revenues as if the railcars had been sold to a third party, less the cost to manufacture. Operating margin from manufacturing increased to 18.5% for the three months ended September 30, 2012 from 7.4% for the same period in 2011. These increases were due primarily to improved sales mix, as discussed above, increased volumes, and operating leverage and efficiencies as a result of higher tank railcar production volumes, partially offset by softer hopper railcar volumes. We also continue to benefit from cost savings achieved by the vertical integration projects put in place during the past several years.

Railcar Leasing

Our railcar leasing revenues for the three months ended September 30, 2012 increased to $4.3 million from $0.3 million for the three months ended September 30, 2011. The increase in revenues was driven by an increase in railcars on lease with third parties, as discussed above.

Earnings from operations for railcar leasing, which include an allocation of selling, general and administrative costs, increased to $2.4 million for the three months ended September 30, 2012 compared to $0.1 million for the same period in 2011. Earnings from operations for railcar leasing includes one-time origination fees (Origination Fees) paid to ARL associated with originating the order for us to lease railcars to a customer. The Origination Fees represent a percentage of the revenues from the lease over its initial term and are paid up front. Operating margin from railcar leasing increased to 55.8% for the three months ended September 30, 2012 from 23.9% for the same period in 2011. These increases were due primarily to increased railcars on lease with third parties, as discussed above.

Railcar Services

Our railcar services revenues for the three months ended September 30, 2012 decreased to $16.8 million compared to $17.2 million for the three months ended September 30, 2011. The decrease was primarily attributable to a reduction of paint and lining work performed at our repair facilities.

For the three months ended September 30, 2012, our railcar services revenues included transactions with ARL totaling $5.9 million, or 3.5% of our total consolidated revenues, compared to $6.9 million, or 5.5% of our total consolidated revenues, for the three months ended September 30, 2011.

Earnings from operations for railcar services, which include an allocation of selling, general and administrative costs, were $2.9 million and $4.0 million for the three months ended September 30, 2012 and 2011, respectively. Operating margin from railcar services decreased to 17.1% for the three months ended September 30, 2012 from 23.3% for the three months ended September 30, 2011. These decreases were primarily attributable to lower demand for paint and lining work at our repair facilities.


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Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Consolidated Results



                                            For the Nine Months Ended
                                                  September 30,                    $               %
                                             2012                2011            Change         Change
Revenues:
Manufacturing                            $     446,273        $  271,260       $  175,013          64.5
Railcar leasing                                  8,315               648            7,667             *
Railcar services                                49,455            50,632           (1,177 )        (2.3 )

Total revenues                                 504,043           322,540          181,503          56.3
Cost of revenues:
Manufacturing                                 (360,507 )        (250,546 )       (109,961 )        43.9
Railcar leasing                                 (4,196 )            (346 )         (3,850 )           *
Railcar services                               (38,849 )         (38,493 )           (356 )         0.9

Total cost of revenues                        (403,552 )        (289,385 )       (114,167 )        39.5
Selling, general and administrative            (20,388 )         (14,878 )         (5,510 )        37.0

Earnings from operations                        80,103            18,277           61,826         338.3

* - Not meaningful

Revenues

Our total consolidated revenues for the nine months ended September 30, 2012 increased to $504.0 million from $322.5 million for the same period in 2011. This increase was primarily due to increased revenues from manufacturing and railcar leasing, partially offset by a decrease in revenues for railcar services. During the nine months ended September 30, 2012, we shipped approximately 4,180 direct sale railcars, which excludes approximately 1,690 railcars built for our lease fleet, compared to approximately 2,970 railcars for the same period of 2011, which excludes approximately 90 railcars built for our lease fleet.

Manufacturing revenues increased from prior year by 64.5%. This change was due to an increase of 39.0% driven by higher volumes of 1,210 railcar shipments for . . .

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