Share-based Compensation

The Company accounts for share-based compensation granted under the 2005 Equity Incentive Plan, as amended (the 2005 Plan) based on the fair values calculated using the Monte Carlo and Black-Scholes-Merton (Black-Scholes) option-pricing formulas. Share-based compensation is expensed using a graded vesting method over the vesting period of the instrument. The fair value of the liability associated with share-based compensation is based on the components used to calculate the Black-Scholes value, including the Company’s closing market price, as of that date and is considered a Level 2 input. For definition and discussion of a Level 2 input for fair value measurement, refer to Note 4.

The 2005 Plan permits the Company to issue stock and grant stock options, restricted stock, stock units and other equity interests to purchase or acquire up to 1,000,000 shares of the Company’s common stock. Awards covering no more than 300,000 shares may be granted to any person during any fiscal year. Options and SARs are subject to certain vesting provisions as designated by the board of directors and may have an expiration period that ranges from 5 to 10 years. Options and SARs granted under the 2005 Plan must have an exercise price at or above the fair market value on the date of grant. If any award expires, or is terminated, surrendered or forfeited, then shares of common stock covered by the award will again be available for grant under the 2005 Plan. The 2005 Plan is administered by the Company’s board of directors or a committee of the board.

The following table presents the amounts for share-based compensation expense incurred by ARI, all related to the Company’s SARs awards, and the corresponding line items on the consolidated statements of operations that they are recorded within:



	Years Ended December 31,
	2013		2012		2011
	(in thousands)
Share-based compensation expense:
Cost of revenues: manufacturing	$	909	$	899	$	697
Cost of revenues: railcar services	234		171		105
Selling, general and administrative	3,986		3,598		2,736
Total share-based compensation expense	$	5,129	$	4,668	$	3,538

Income tax benefits related to share-based compensation arrangements were $3.1 million, $2.3 million and $1.3 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Stock options

In January 2006, on the date of ARI's initial public offering, the Company granted options to purchase 484,876 shares of common stock under the 2005 Plan. In January 2011, 340,352 stock options expired unexercised.

No stock options were granted in 2013, 2012 or 2011. As of December 31, 2013, an aggregate of 855,476 shares were available for issuance in connection with future equity instrument 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. The 1,000,000 shares covered by the Plan were registered for issuance to the public with the Securities Exchange Commission (SEC) on a Form S-8 on August 16, 2006.

Options to purchase 36,001 shares of the Company’s common stock were exercised during the year ended December 31, 2011. The total intrinsic value of options exercised during the year ended December 31, 2011 was less than $0.1 million. All outstanding 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 years ended December 31, 2013, 2012 and 2011.

Stock appreciation rights

The compensation committee of the Company’s board of directors granted awards of SARs to certain employees pursuant to the 2005 Plan during April 2007, April 2008, September 2008, March 2009, March 2010, May 2011 and February 2012. 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. This exchange was accounted for as a modification of a liability award in accordance with U.S. GAAP. The SARs that were exchanged from the 2007 grant were treated as being cancelled with the grant on May 14, 2010 taking its place. This resulted in a net effect of $0.3 million of SARs compensation income in 2010.

All of the SARs granted in 2007 that were not exchanged, 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 and 89,600 of the SARs granted in 2012 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 market-based SARs will not vest. Further, each holder must 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 and 114,900 of the SARs granted in 2012 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 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 applicable Stock Appreciation Rights Agreement (the SARs Agreement). The SARs are subject in all respects to the terms and conditions of the 2005 Plan and the applicable SARs Agreement, which contain non-solicitation, non-competition and confidentiality provisions.

The fair value of all unexercised SARs is determined at each reporting period under the Monte Carlo and Black-Scholes option pricing methodologies based on the inputs in the table below, which project that the specific performance targets for applicable grants will be fully met. The fair value of the SARs is expensed on a graded vesting basis over the vesting period, which is in equal increments on the respective anniversaries of the grant date. Changes in the fair value of vested SARs are expensed in the period of change. The following table provides an analysis of SARs granted in 2012, 2011, 2010, 2009 and 2008 and assumptions that were used as of December 31, 2013 in the Black-Scholes option-pricing model:



	Grant Date
	2/24/2012	5/9/2011	3/31/2010 & 5/14/2010	3/3/2009	4/28/2008
SARs outstanding as of December 31, 2013	111,694	76,408	12,832	5,800	500
Vested & Exercisable	5,767	14,792	12,832	5,800	500
Vesting period	3 years	3 years	3 years	4 years	4 years
Expiration Dates	2/24/2019	5/9/2018	3/31/2017 & 5/14/2017	3/3/2016	4/28/2015
Weighted average exercise price	$29.31	$24.45	$12.95	$6.71	$20.88
Expected volatility range	52.0% - 52.5%	43.3% - 52.0%	42.5%	39.2%	34.3%
Expected life range (in years)	2.5 - 3.1	2.2 - 2.3	1.6 - 1.7	1.1	0.7
Risk-free interest rate range	0.8%	0.4%	0.4%	0.1%	0.1%
Expected Dividend yield	2.2%	2.2%	2.2%	2.2%	2.2%
Forfeiture Rate on unvested SARs	2.0%	2.0%	N/A	N/A	N/A

The stock volatility rate was determined using the volatility rates of the Company’s common stock over the same period as the expected life of each grant. The expected life ranges represent the use of the simplified method prescribed by the SEC due to inadequate exercise activity for the Company’s SARs. The simplified method 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 risk-free rate is based on the U.S. Treasury yield curve in effect for the expected term of the options at the time of grant. The expected dividend yield was determined using the most recent quarter’s dividend. The forfeiture rate was based on a Company estimate of expected forfeitures over the contractual life of each grant for each period.

The following is a summary of SARs activity under the 2005 Plan:



	Stock Appreciation Rights (SARs)		Weighted Average Exercise Price	Weighted Average Remaining Contractual Life	Weighted Average Fair Value of SARs	Aggregate Intrinsic Value ($000)
Outstanding at January 1, 2011	711,353		$12.68
Granted	242,041		$24.45
Cancelled/Forfeited (1)	(22,720	)
Exercised	(124,764	)
Outstanding at December 31, 2011	805,910		$16.35
Granted	204,500		$29.31
Cancelled/Forfeited	(22,360	)
Exercised	(390,658	)
Outstanding at December 31, 2012	597,392
Granted	—
Cancelled/Forfeited	(41,114	)
Exercised	(349,044	)
Outstanding at December 31, 2013	207,234		$25.85	56 months	$22.06	$4,123
Exercisable at December 31, 2013	39,691		$18.80	49 months	$27.04	$1,070


(1)	Of the SARs granted in 2008, 13,123 were canceled in 2011 due to the closing price of the Company’s common stock not achieving a specified price target for twenty trading days during any sixty day trading day period.

As of December 31, 2013, unrecognized compensation costs related to the unvested portion of SARs were $0.6 million and are expected to be recognized over a period of 11 months.