Related Party Transactions

6 Months Ended

Jun. 30, 2011

Related Party Transactions [Abstract]

Related Party Transactions

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 Company’s principal beneficial stockholder (through IELP) and chairman of the Company’s 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 Company’s instruction, various railcar components. In consideration for these services, the Company agreed to pay ACF based on agreed upon rates. In both the three months ended June 30, 2011 and 2010, ARI purchased inventory of less than $0.1 million of components from ACF. In the six months ended June 30, 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 asset’s 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 ACF’s net book value and the remaining portion of the purchase price will be a reduction to stockholder’s equity. As of June 30, 2010, all of the assets had been received and paid for in accordance with the agreement.

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 Company’s principal beneficial stockholder (through IELP) and chairman of the Company’s board of directors:

Railcar Services Agreement and Fleet Services Agreement

Effective 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. This agreement was replaced by a new agreement, the Railcar Services Agreement, which was effective April 16, 2011. Under the Railcar Services Agreement, ARI will provide ARL railcar repair, engineering, administrative and other services, on an as needed basis, for ARL’s lease fleet at mutually agreed upon prices (the Railcar Services Agreement). The Railcar Services Agreement has 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.

For the three months ended June 30, 2011 and 2010, revenues of $6.6 million and $3.2 million were recorded under these agreements, respectively. For the six months ended June 30, 2011 and 2010, revenues of $12.1 million and $6.0 million were recorded under these agreements, respectively. Such amounts are included under railcar services revenue from affiliates on the condensed consolidated statement of operations. The terms and pricing on services provided to related parties are not less favorable to ARI than the terms and pricing on services provided to unaffiliated third parties.

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 an entity owned by the Company’s 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 $0.1 million and $0.3 million for the three and six months ended June 30, 2010, respectively. 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. ARI did not sell any railcars to ARL during the three months ended June 30, 2011. Revenue for railcars sold to ARL was $33.6 million for the three months ended June 30, 2010. Revenue for railcars sold to ARL was $1.2 million and $46.1 million for the six months ended June 30, 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. The terms and pricing on sales to related parties are not less favorable to ARI than the terms and pricing on sales to unaffiliated third parties. 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 arm’s length basis and subject to the approval of the Company’s 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 June 30, 2011 and December 31, 2010. Accrued interest on this note as of June 30, 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. Ohio Castings and the joint venture partners are discussing possible renegotiation of these terms.

The Company, along with the other members of Ohio Castings, guaranteed a state loan issued to Ohio Castings by the state of Ohio. The state loan was paid off in June 2011 and ARI was released from its guarantee.

The Company’s 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 $32.2 million of principal and $4.9 million of accrued interest, both as of June 30, 2011. ARI Component’s share of the remaining commitment on these loans was $2.8 million as of June 30, 2011. See Note 8 for further information regarding this transaction and the terms of the underlying loan.

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 Company’s 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. Unger’s 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 Company’s 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 June 30, 2011 and 2010, respectively. Expenses paid for this facility were $0.2 million for both the six months ended June 30, 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 its vice chairman of the board of directors. The lease is for ARI’s 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 uses. The expenses recorded for this facility were $0.2 million and $0.3 million for the three and six months ended June 30, 2011, respectively. These fees are included in selling, administrative and other costs on the condensed consolidated statement of operations.

In June 2011, ARI entered into a scrap agreement with M. W. Recycling (MWR), a company controlled by Mr. Carl Icahn, the Company’s principal beneficial stockholder (through IELP) and chairman of the Company’s board of directors. Under the agreement, ARI will sell and MWR will purchase scrap metal from several plant locations, beginning in the third quarter of 2011. This agreement was entered into at arm’s-length and was approved by the Company’s audit committee.

Financial information for transactions with related parties

As of June 30, 2011 and December 31, 2010, accounts receivable of $2.6 million and $5.0 million, respectively, were due from related parties.

As of June 30, 2011 and December 31, 2010, interest receivable of $0.3 million and $0.2 million, respectively, were due from related parties.

As of June 30, 2011 and December 31, 2010, accounts payable of $0.1 million and $0.3 million, respectively, were due to related parties.

Cost of railcar manufacturing for the three months ended June 30, 2011 and 2010 included $1.4 million and $2.2 million, respectively, in railcar products produced by joint ventures. Cost of railcar manufacturing for the six months ended June 30, 2011 and 2010 included $3.7 million and $4.2 million, respectively, in railcar products produced by joint ventures.

Inventory at June 30, 2011, included $2.0 million of materials produced by joint ventures. Inventory at December 31, 2010, included $0.4 million of materials produced by joint ventures. At June 30, 2011 and December 31, 2010, all profit from related parties for inventory still on hand was eliminated.