Investments in and Loans to Joint Ventures

As of June 30, 2013, the Company was party to the following 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 33.3% 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 accounts 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. From time to time, the Company also makes loans to its joint ventures that are included in the investment account. The investment balance related to all three joint ventures is recorded within our manufacturing segment. The carrying amount of investments in and loans to joint ventures, which also represents ARI’s maximum exposure to loss with these joint ventures, are as follows:



	June 30, 2013		December 31, 2012
	(in thousands)
Carrying amount of investments in and loans to joint ventures
Ohio Castings	$	6,909	$	7,022
Axis	25,146		27,181
Amtek Railcar	9,479		10,333
Total investments in and loans to joint ventures	$	41,534	$	44,536

See Note 17 for information regarding financial transactions with ARI's joint ventures.

Ohio Castings

Ohio Castings produces railcar parts that are sold to one of the joint venture partners. The joint venture partner sells these parts to outside third parties at current market prices and sells them to the Company and the other joint venture partner at cost plus a licensing fee. The Company has been involved with this joint venture since 2003.

The Company accounts for its investment in Ohio Castings using the equity method. The Company has determined that, although the joint venture is a variable interest entity (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, all major and strategic decisions are decided between the partners, and the risk of loss to Castings and the Company is limited to the Company’s investment through Castings.

Summary financial results for Ohio Castings, the investee company, in total, are as follows:



	Three Months Ended June 30,					Six Months Ended June 30,
	2013			2012		2013			2012
	(in thousands)
Results of operations
Revenues	$	12,794		$	23,399	$	27,282		$	46,685
Gross profit	$	515		$	2,278	$	905		$	4,556
Net income (loss)	$	(116	)	$	2,428	$	(349	)	$	4,948

The new railcar castings market is directly related to the new railcar market, which has declined for all railcar types, except tank railcars. Thus, Ohio Castings has seen a recent decline in demand. The Company will continue to monitor its investment in Ohio Castings for impairment.

Axis

ARI, through a wholly-owned subsidiary, owns a portion of a joint venture, Axis, to manufacture and sell railcar axles. ARI owns 41.9% of Axis, while a minority partner owns less than 10%, with the other significant partner owning the remainder.

Under the terms of the joint venture agreement, ARI and the other significant partner are required, and the minority partner is entitled, to contribute additional capital to the joint venture, on a pro rata basis, of any amounts approved by the joint venture’s 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 significant 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.

Under the amended Axis credit agreement (Axis Credit Agreement), which is held by ARI and the other significant partner, principal and interest payments are due each fiscal quarter, with the last payment due on December 31, 2019. Subject to certain limitations, at the election of Axis, the interest rate for the loans under the Axis Credit Agreement 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 amended agreement, during 2010 and 2011, Axis satisfied interest on the 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 ceased in the third quarter of 2011.

The balance outstanding on these loans, including interest, due to ARI Component, was $34.4 million as of June 30, 2013 and was $35.7 million as of December 31, 2012. During the six months ended June 30, 2013, $1.3 million of principal payments were received from Axis.

ARI currently intends to fund the cash needs of Axis through loans and capital contributions through at least March 31, 2014. 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, 2014.

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 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.

Summary financial results for Axis, the investee company, in total, are as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in thousands)
Results of operations
Revenues	$	12,134		$	16,931		$	23,076		$	34,118
Gross profit	$	1,302		$	1,467		$	1,459		$	2,891
Income before interest	$	1,056		$	1,254		$	981		$	2,413
Net loss	$	(300	)	$	(206	)	$	(1,743	)	$	(529	)

The new railcar axle market is directly related to the new railcar market, which has declined for all railcar types, except tank railcars. Thus, Axis has seen a recent decline in demand.

As of June 30, 2013, the investment in Axis was comprised entirely of ARI’s term loan, revolver and related accrued interest from Axis. The Company has evaluated this loan to be fully recoverable. The Company will continue to monitor its investment in Axis for impairment.

Amtek Railcar

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 in India constructed by the joint venture. ARI’s ownership in this joint venture is 50.0%.

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 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.

In the second quarter of 2013, Amtek began production, resulting in higher interest expense compared to prior periods as a result of the joint venture ceasing capitalization of interest. Summary financial results for Amtek Railcar, the investee company, are as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in thousands)
Financial Results
Revenues	$	95		$	—		$	95		$	—
Gross profit (loss)	$	(17	)	$	—		$	(17	)	$	—
Loss before interest and taxes	$	(238	)	$	(435	)	$	(762	)	$	(934	)
Net loss	$	(1,375	)	$	(435	)	$	(1,942	)	$	(952	)

The Company will continue to monitor its investment in Amtek for impairment.