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. The 2005 Plan is administered by the Company's board of directors or a committee of the board.

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. The Company has not granted options since January 2006, all of which have been exercised or expired unexercised prior to 2012. As a result, the Company did not recognize any compensation expense related to stock options during the years ended December 31, 2014, 2013 and 2012. As of December 31, 2014, an aggregate of 855,476 shares were available for issuance in connection with future equity instrument grants under the Company's 2005 Plan.

Stock appreciation rights

Beginning in 2007, the compensation committee of the Company's board of directors periodically issued stock appreciation rights (SARs) to certain employees under the 2005 Plan. SARs are subject to certain vesting provisions as stipulated for each individual grant and will have an expiration period that ranges from 5 to 10 years. SARs granted under the 2005 Plan must have an exercise price at or above the fair market value on the date of grant.

Share-based compensation is expensed using a graded vesting method over the vesting period of the instrument. Currently, ARI has SARs outstanding that are only settled in cash, as discussed below and thus, are treated as liability based awards. 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 5.

The following table presents the amounts incurred by ARI for share-based compensation, or stock appreciation rights (SARs) and the corresponding line items on the consolidated statements of operations that they are classified within:



	Years Ended December 31,
	2014		2013		2012
	(in thousands)
Share-based compensation expense:
Cost of revenues: Manufacturing	$	697	$	909	$	899
Cost of revenues: Railcar Services	186		234		171
Selling, general and administrative	2,309		3,986		3,598
Total share-based compensation expense	$	3,192	$	5,129	$	4,668

Income tax benefits related to share-based compensation arrangements were $2.1 million, $3.1 million and $2.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.

SARs with a four year vesting period vest in 25.0% increments on the first, second, third and fourth anniversaries of the grant date. SARs with a three year vesting period 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. Prior to 2014, various awards also had either market or performance conditions, and with the exception of the 2008 grants, those special conditions were achieved.

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 projected 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 all SARs outstanding and assumptions that were used as of December 31, 2014:



	Grant Year
	2014	2012	2011	2010	2009	2008
SARs outstanding	86,419	38,327	9,632	2,283	2,350	100
Vested & Exercisable	—	733	9,632	2,283	2,350	100
Vesting period	3 years	3 years	3 years	3 years	4 years	4 years
Expiration Year	2021	2019	2018	2017	2016	2015
Weighted average exercise price	$49.76	$29.31	$24.45	$12.80	$6.71	$20.88
Expected volatility range	44.2% - 52.8%	42.7%	42.5%	46.0%	46.3%	46.3%
Expected life range (in years)	3.1 - 4.5	2.0 - 2.1	1.7	1.1 - 1.2	0.6	0.2
Risk-free interest rate range	1.1% - 1.7%	0.7%	0.7%	0.2%	0.2%	0.2%
Expected Dividend yield	3.1%	3.1%	3.1%	3.1%	3.1%	3.1%
Forfeiture Rate on unvested SARs	4.0%	4.0%	N/A	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 Securities and Exchange Commission (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 SARs at the time of grant. The expected dividend yield was determined using the most recent quarter's dividend. During 2014, the Company updated its estimate of expected forfeitures over the contractual life of each grant for each period. As a result, the Company modified its forfeiture from 2% in 2013 to 4% in 2014. The impact of this change on net earnings was less than $0.1 million and the Company expects the impact to be equally immaterial in future periods.

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, 2012	805,910		$16.35
Granted	204,500		$29.31
Cancelled/Forfeited	(22,360	)
Exercised	(390,658	)
Outstanding at December 31, 2012	597,392		$21.54
Granted	—		$—
Cancelled/Forfeited	(41,114	)
Exercised	(349,044	)
Outstanding at December 31, 2013	207,234		$25.85
Granted	119,342		$49.31
Cancelled/Forfeited	(50,550	)
Exercised	(136,915	)
Outstanding at December 31, 2014	139,111		$41.02	63 months	$19.13	$1,575
Exercisable at December 31, 2014	15,098		$20.14	34 months	$30.01	$473

As of December 31, 2014, unrecognized compensation costs related to the unvested portion of SARs were estimated to be $0.7 million and were expected to be recognized over a weighted average period of 25 months.