Stock-Based Compensation

6 Months Ended

Jun. 30, 2011

Stock-Based Compensation [Abstract]

Stock-Based Compensation

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 incurred by ARI for stock based compensation and the corresponding line items on the condensed consolidated statement of operations that they are classified within:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2011			2010		2011		2010
	($ in thousands)					($ in thousands)
Stock-based compensation (income) expense
Cost of revenue: manufacturing operations	$	(91	)	$	11	$	379	$	173
Cost of revenue: railcar services		(82	)		1		3		29
Selling, administrative and other		(16	)		109		1,577		619
Total stock-based compensation (income) expense	$	(189	)	$	121	$	1,959	$	821

Stock options

No stock options were exercised during the three months ended June 30, 2011. Options to purchase 36,001 shares of the Company’s common stock were exercised during the six months ended June 30, 2011. The total intrinsic value of options exercised during the six months ended June 30, 2011, was less than $0.1 million. No stock options were exercised during the three or six months ended June 30, 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 and six months ended June 30, 2011 and 2010.

The following is a summary of option activity under the 2005 Plan from January 1, 2011 through June 30, 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, June 30, 2011		—		$	—		—	$	—	$	—

As of June 30, 2011, an aggregate of 855,476 shares were available for issuance in connection with future grants under the Company’s 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, March 2010 and May 2011. 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 Company’s 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 Company’s 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.

All of the SARs granted in 2011 vest in three equal increments on the first, second and third anniversaries of the grant date, but only if the Company achieves a specified adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) target for the fiscal year preceding the applicable anniversary date. Each holder must further remain employed by the Company through each such date in order to vest in the corresponding number of SARs. The Company concluded that the satisfaction of the first Adjusted EBITDA target is remote. Based on this conclusion, the Company did not record compensation expense related to the first one-third portion of these SARs.

The SARs have exercise prices that represent the closing price of the Company’s 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.

The following table provides an analysis of SARs granted in 2011, 2010, 2009, 2008 and 2007:

	2011 Grant	2010 Grants	2009 Grant	2008 Grants	2007 Grant
Grant date	5/9/2011	3/31/2010 & 5/14/2010	3/3/2009	4/28/2008 & 9/12/2008	4/4/2007
# SARs outstanding at June 30, 2011	241,175	225,664	230,365	157,078	11,100
Weighted average exercise price	$24.45	$12.95	$6.71	$20.80	$29.49
Contractual term	7 years	7 years	7 years	7 years	7 years
June 30, 2011 SARs Black-Scholes-Merton valuation components:
Stock volatility range	71.3% - 73.9%	71.3% - 73.9%	63.5% - 73.9%	61.0% - 63.5%	63.0%
Expected life range	2.9 - 3.8 years	2.9 - 3.8 years	2.3 - 3.2 years	1.9 - 2.7 years	1.4 years
Risk free interest rate range	0.8%	0.8%	0.5% - 0.8%	0.5% - 0.8%	0.2%
Dividend yield	0.0%	0.0%	0.0%	0.0%	0.0%
Forfeiture rate	2.0%	2.0%	2.0%	2.0%	2.0%

The stock volatility rate was determined using the historical volatility rates of the Company’s 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 income of $0.2 million and expense of $0.1 million during the three months ended June 30, 2011 and 2010, respectively, related to SARs granted under the 2005 Plan. The Company recognized compensation expense of $2.0 million and $0.8 million during the six months ended June 30, 2011 and 2010, respectively, related to SARs granted under the 2005 Plan.

The following is a summary of SARs activity under the 2005 Plan from January 1, 2011 through June 30, 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		(3,466	)
Granted		242,041		$	24.45
Exercised		(84,546	)
Outstanding at the end of the period, June 30, 2011		865,382		$	16.14	58 months	$	12.59	$	6,635	(1)
Exercisable at the end of the period, June 30, 2011		261,186		$	14.89	52 months	$	12.98	$	2,304	(1)

(1) Based on the closing market price of $23.45 for a share of the Company’s common stock on June 30, 2011, SARs granted in 2007 and 2011 have no intrinsic value and the SARs granted in 2008, 2009 and 2010 have a total intrinsic value of $6.6 million, of which $2.3 million relates to SARs that are exercisable.

As of June 30, 2011, unrecognized compensation costs related to the unvested portion of stock appreciation rights were estimated to be $3.7 million and were expected to be recognized over a weighted average period of 27 months.