UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended June 30, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from                      to                     

AMERICAN RAILCAR INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Delaware (State of Incorporation)		43-1481791 (I.R.S. Employer Identification No.)
100 Clark Street, St. Charles, Missouri (Address of principal executive offices)		63301 (Zip Code)

(636) 940-6000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.. (Check one):

Large accelerated filer o           Accelerated filero           Non–accelerated filerþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yeso Noþ

The number of shares of the registrant’s common stock, without par value, outstanding on August 10, 2006 was 21,207,773 shares.

 

 

AMERICAN RAILCAR INDUSTRIES, INC.

INDEX TO FORM 10Q

Item Number				Page Number
		PART I — FINANCIAL INFORMATION
1.		Financial Statements:
		Condensed Consolidated Balance Sheets (Unaudited) as of December 31, 2005 and June 30, 2006		1
		Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended June 30, 2005 and 2006		3
		Condensed Consolidated Statements of Operations (Unaudited) for the Six Months Ended June 30, 2005 and 2006		4
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2005 and 2006		5
		Notes to Condensed Consolidated Financial Statements (Unaudited)		6
2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
3.		Quantitative and Qualitative Disclosures About Market Risk		46
4.		Controls and Procedures		46
		PART II — OTHER INFORMATION
1.		Legal Proceedings		47
1A.		Risk Factors		47
2.		Unregistered Sales of Equity Securities and Use of Proceeds		47
4.		Submission of Matters to a Vote of Security Holders		48
6.		Exhibits		49
		Signatures		50
Certification
Certification
Section 906 Certification

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts, unaudited)

		December 31,				June 30,
		2005				2006
Assets
Current assets:
Cash and cash equivalents		$	28,692			$	27,609
Accounts receivable, net			38,273				35,538
Accounts receivable, due from affiliates			5,110				2,678
Insurance claim receivable, net			—				8,000
Inventories, net			88,001				111,877
Prepaid expenses			2,523				4,001
Deferred tax asset			1,967				1,746
Total current assets			164,566				191,449
Property, plant and equipment
Buildings			84,255				87,676
Machinery and equipment			68,187				80,189
			152,442				167,865
Less accumulated depreciation			65,398				69,834
Net property, plant and equipment			87,044				98,031
Construction in process			3,759				12,553
Land			2,182				2,593
Total property, plant and equipment			92,985				113,177
Debt issuance costs			565				207
Deferred offering costs			4,860				—
Goodwill			—				7,230
Other assets			26				37
Investment in joint venture			5,578				5,600
Total assets		$	268,580			$	317,700

See notes to the Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED

(In thousands, except per share amounts, unaudited)

		December 31,				June 30,
		2005				2006
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt		$	33,294			$	85
Accounts payable			55,793				47,008
Accounts payable, due to affiliates			4,457				933
Accrued expenses and taxes			7,675				7,774
Insurance advance			—				2,881
Accrued compensation			7,243				9,360
Accrued dividends			11,336				636
Note payable to affiliate – current			19,000				—
Total current liabilities			138,798				68,677
Long-term debt, net of current portion			7,076				53
Deferred tax liability			5,364				6,512
Pension and post-retirement liabilities			10,522				10,261
Other amounts due to affiliates			—				4
Other liabilities			59				58
Mandatory redeemable preferred stock, stated value $1,000, 99,000 shares authorized, 1 share issued and outstanding at December 31, 2005, none outstanding at June 30, 2006			1				—
Total liabilities			161,820				85,565
Commitments and contingencies			—				—
Stockholders’ equity:
New Preferred Stock, $.01 par value per share, stated value $1,000 per share, 500,000 shares authorized, 82,055 shares issued and outstanding at December 31, 2005, none outstanding at June 30, 2006, respectively			82,055				—
Common stock, $.01 par value, 50,000,000 shares authorized, 11,147,059 and 21,207,773 shares issued and outstanding at December 31, 2005 and June 30, 2006, respectively			111				212
Additional paid-in capital			41,667				232,716
Retained earnings accumulated (deficit)			(15,442	)			801
Accumulated other comprehensive loss			(1,631	)			(1,594	)
Total stockholders’ equity			106,760				232,135
Total liabilities and stockholders’ equity		$	268,580			$	317,700

See notes to the Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)

		For the Three Months Ended,
		June 30,				June 30,
		2005				2006
Revenues:
Manufacturing operations (including revenues from affiliates of $17,050 and $5,182 for the three months ended June 30, 2005 and 2006, respectively)		$	149,284			$	138,816
Railcar services (including revenues from affiliates of $5,509 and $4,531 for the three months ended June 30, 2005 and 2006, respectively)			11,437				12,734
Total revenues			160,721				151,550
Cost of goods sold:
Manufacturing operations (including costs related to affiliates of $15,475 and $4,800 for the three months ended June 30, 2005 and 2006, respectively)			135,399				123,618
Railcar services (including costs related to affiliates of $5,312 and $3,544 for the three months ended June 30, 2005 and 2006, respectively)			10,323				9,947
Total cost of goods sold			145,722				133,565
Gross profit			14,999				17,985
Income related to insurance recoveries, net			—				4,983
Selling, administrative and other			3,229				4,608
Stock based compensation expense			—				1,419
Earnings from operations			11,770				16,941
Interest income			109				429
Interest expense (including interest expense to affiliates of $346 and $0 for the three months ended June 30, 2005 and 2006, respectively)			1,296				103
Earnings (loss) from joint venture			180				(138	)
Earnings before income tax expense			10,763				17,129
Income tax expense			4,264				6,308
Net earnings		$	6,499			$	10,821
Less preferred dividends			(4,570	)			—
Earnings available to common shareholders		$	1,929			$	10,821
Net earnings per common share — basic		$	0.17			$	0.51
Net earnings per common share — diluted		$	0.17			$	0.51
Weighted average common shares outstanding — basic			11,147				21,208
Weighted average common shares outstanding — diluted			11,147				21,289
Dividends declared per common share		$	—			$	0.03

See notes to the Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)

		For the Six Months Ended,
		June 30,				June 30,
		2005				2006
Revenues:
Manufacturing operations (including revenues from affiliates of $28,148 and $20,209 for the six months ended June 30, 2005 and 2006, respectively)		$	269,978			$	305,306
Railcar services (including revenues from affiliates of $11,280 and $10,513 for the six months ended June 30, 2005 and 2006, respectively)			21,665				24,973
Total revenues			291,643				330,279
Cost of goods sold:
Manufacturing operations (including costs related to affiliates of $25,943 and $18,868 for the six months ended June 30, 2005 and 2006, respectively)			250,916				271,874
Railcar services (including costs related to affiliates of $9,106 and $8,115 for the six months ended June 30, 2005 and 2006, respectively)			18,575				20,160
Total cost of goods sold			269,491				292,034
Gross profit			22,152				38,245
Income related to insurance recoveries, net			—				4,983
Selling, administrative and other			6,628				9,753
Stock based compensation expense			—				4,969
Earnings from operations			15,524				28,506
Interest income (including interest income from affiliates of $823 and $0 for the six months ended June 30, 2005 and 2006, respectively)			977				915
Interest expense (including interest expense to affiliates of $1,174 and $98 for the six months ended June 30, 2005 and 2006, respectively)			2,382				1,133
Earnings from joint venture			924				337
Earnings before income tax expense			15,043				28,625
Income tax expense			6,006				10,543
Net earnings		$	9,037			$	18,082
Less preferred dividends			(9,090	)			(568	)
Earnings (loss) available to common shareholders		$	(53	)		$	17,514
Net earnings (loss) per common share — basic		$	(0.00	)		$	0.87
Net earnings (loss) per common share — diluted		$	(0.00	)		$	0.87
Weighted average common shares outstanding — basic			11,147				20,116
Weighted average common shares outstanding — diluted			11,147				20,220
Dividends declared per common share		$	—			$	0.06

See notes to the Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

		For the Six Months Ended
		June 30,				June 30,
		2005				2006
Operating activities:
Net earnings		$	9,037			$	18,082
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization			3,229				4,915
Loss on the write-off of property, plant and equipment			—				3,867
Write-off of deferred financing costs			—				566
Stock based compensation			—				5,064
Change in joint venture investment as a result of earnings			(924	)			(337	)
Expense relating to pre-recapitalization liabilities			530				—
Provision for deferred income taxes			4,619				(221	)
Provision for losses on accounts receivable			39				263
Changes in operating assets and liabilities:
Accounts receivable, net			(4,897	)			2,479
Accounts receivable, due from affiliate			—				2,423
Insurance claim receivable			—				(8,000	)
Inventories			(4,067	)			(20,039	)
Prepaid expenses			(4,399	)			(1,465	)
Accounts payable			27,543				(8,785	)
Accounts payable, due to affiliate			—				(2,048	)
Accrued expenses and taxes			5,301				(2,546	)
Other			(169	)			(239	)
Net cash provided by (used in) operating activities			35,842				(6,021	)
Investing activities:
Purchases of property, plant and equipment			(9,392	)			(21,036	)
Property insurance advance on Marmaduke tornado damage			—				7,500
Repayment of note receivable from affiliate (Ohio Castings LLC)			—				315
Acquisitions			—				(17,220	)
Net cash used in investing activities			(9,392	)			(30,441	)
Financing activities:
Proceeds from sale of common stock			—				205,275
Offering costs			—				(14,605	)
Preferred stock redemption			—				(82,056	)
Preferred stock dividends			—				(11,904	)
Common stock dividends			—				(636	)
Decrease in amounts due to affiliates			(35,233	)			(20,473	)
Majority shareholder capital contribution			—				275
Finance fees related to new credit facility			—				(265	)
Proceeds from debt issuance			30,770				—
Repayment of debt			(1,126	)			(40,232	)
Net cash (used in) provided by financing activities			(5,589	)			35,379
Increase (decrease) in cash and cash equivalents			20,861				(1,083	)
Cash and cash equivalents at beginning of period			6,943				28,692
Cash and cash equivalents at end of period		$	27,804			$	27,609

See notes to the Condensed Consolidated Financial Statements.

American Railcar Industries, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Six Months ended June 30, 2005 and 2006

The condensed consolidated financial statements included herein have been prepared by American Railcar Industries, Inc. and subsidiaries (collectively the “Company” or “ARI”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The Condensed Balance Sheet as of December 31, 2005 has been derived from the audited consolidated balance sheets as of that date. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest annual report attached on Form 10-K for the year ended December 31, 2005. In the opinion of management, the information contained herein reflects all adjustments necessary to make the results of operations for the interim periods a fair statement of such operations. The results of operations of any interim period are not necessarily indicative of the results that may be expected for a fiscal year.

Note 1—Description of the Business

The condensed consolidated financial statements of the Company include the accounts of American Railcar Industries, Inc. and its wholly owned subsidiaries. Through its subsidiary Castings, LLC (“Castings”), the Company has a one-third ownership interest in Ohio Castings Company, LLC (“Ohio Castings”), a limited liability company formed to produce steel railcar parts, such as sideframes, bolsters, couplers and yokes, for use or sale by the ownership group. All significant intercompany transactions and balances have been eliminated.

ARI manufactures railcars, custom designed railcar parts for industrial companies, railroads, and other industrial products, primarily aluminum and special alloy steel castings, for non-rail customers. ARI also provides railcar maintenance services for railcar fleets, including that of its affiliate, American Railcar Leasing, LLC (“ARL”). In addition, ARI provides fleet management and maintenance services for railcars owned by selected customers. Such services include inspecting and supervising the maintenance and repair of such railcars. The Company’s operations are located in the United States and Canada. The Company operates a small railcar repair facility in Sarnia, Ontario Canada. Canadian revenues were 0.3% and 0.4%, respectively, of total company revenues for the three and six months ended June 30, 2005. Canadian revenues were 0.3% of total company revenues for both the three and six months ended June 30, 2006. Canadian assets were 0.4% of total company assets as of December 31, 2005 and June 30, 2006.

In 2003, ACF Industries Holding Corp. (“ACF Holding”), an affiliate of ARI, formed a wholly owned subsidiary, Castings. Castings has a one-third ownership interest in Ohio Castings. In June 2005, ARI purchased Castings from ACF Holding. The transaction was consummated on January 1, 2005. The cost of the acquisition was $12.0 million, represented by a demand note that the Company paid in January 2006. However, as Castings was owned by an entity with ownership common to ARI, the investment in subsidiary is recorded at the date of the inception of Castings, June 2003, at book value. The purchase price was recorded at full value as a payable to affiliate and the excess of fair value over cost, totaling $5.6 million, is presented as a distribution from equity.

On July 20, 2004, the Company formed ARL, a wholly owned subsidiary. ARL’s primary business is the leasing of railcars. The subsidiary was capitalized through the issuance of common and preferred stock. The Company’s investment in ARL was $151.7 million at June 30, 2005. Preferred stock of ARL was issued to affiliated companies in exchange for contributions of cash or railcars totaling $102.7 million. In January 2005, ARI obtained an additional $35.0 million of ARL common stock resulting in a carrying value of $151.7 million.

On June 30, 2005, in anticipation of the initial public offering (see Note 3), the Company sold its common interest in ARL for $125.0 million to affiliated companies in return for the preferred stock investment, valued at $116.1 million, plus accrued dividends of $8.9 million that those affiliates held in the Company. At December 31, 2004, the Company’s investment in ARL was $116.7 million. This investment was eliminated as of December 31, 2004 in order to present the Company on a stand alone basis. New preferred stock of $86.5 million plus accrued dividends of $3.5 million were eliminated from ARI’s equity and a charge of $26.7 million was recorded to additional paid in

American Railcar Industries, Inc. and Subsidiaries

capital to reflect the difference between the final transfer price of $125.0 million and the ultimate carrying value of the Company’s investment in ARL of $151.7 million. The 2005 financial statements reflect a reduction of New Preferred Stock of $29.6 million plus accrued dividends of $5.4 million to eliminate the additional investment of $35.0 million made in that period. ARI retained no liabilities or other interests in ARL as a result of this sale. The presentation of the Company’s operations has been prepared on a standalone basis excluding ARL’s operations for all periods. Any differences related to the amounts originally capitalized and the amount paid for ARL in the sale have been recorded through adjustments to shareholders’ equity, including certain tax benefits that the Company received as a result of utilizing the Company’s previously incurred tax losses. The Company recorded a deferred tax asset of $12.5 million and $2.0 million in 2004 and 2005, respectively, for those net operating loss carry forwards, as the Company has the legal right to utilize them for tax purposes.

The following table discloses the preferred stock transactions and the effect on additional paid-in-capital reflecting the elimination of the Company’s investment in ARL for the years ended December 31, 2004 and 2005, and the six months ended June 30, 2006.

		New preferred				Additional paid in
		stock				capital
		(in thousands)
January 1, 2004		$	—			$	11,484
New preferred stock issued in exchange for mandatorily redeemable preferred stock			95,517				—
Capital contribution			102,654				42,482
Exchange of common interest in ARL for new preferred stock			(86,486	)			(26,670	)
ARL deferred tax assets			—				12,522
Other			—				1,431
December 31, 2004		$	111,685			$	41,249
Exchange of common interest in ARL for new preferred stock		$	(29,630	)			—
Tax benefit of ARL NOL			—				(2,023	)
Other			—				2,441
December 31, 2005		$	82,055			$	41,667
Redemption of Preferred Stock through proceeds of initial public offering		$	(82,055	)		$	—
Restricted stock grant			—				(2,100	)
Stock option expense			—				1,164
Initial public offering			—				191,985
June 30, 2006		$	—			$	232,716

Acquisition

On March 31, 2006, the Company acquired all of the common stock of Custom Steel, Inc., (“Custom Steel”) a subsidiary of Steel Technologies, Inc. Custom Steel operates a facility located adjacent to our component manufacturing facility in Kennett, Missouri, which produces value-added fabricated parts that primarily support our railcar manufacturing operations. Prior to the acquisition, ARI was Custom Steel’s primary customer. The purchase price was $17.2 million, which resulted in goodwill of $7.2 million.

The fair value of the assets and acquired liabilities that resulted in goodwill for the acquisition were $3.8 million of inventory, $8.0 million of property, plant and equipment, and $1.8 million of a deferred tax liability.

During the 2^nd quarter of 2006, additional charges of $0.1 million related to legal fees were incurred and were recorded to goodwill as a result of the acquisition. Additionally, the fair market value of the property, plant and equipment was adjusted by $0.1 million during the second quarter with an offsetting increase to goodwill.

American Railcar Industries, Inc. and Subsidiaries

The acquisition was accounted for under the purchase method of accounting, with the purchase price being allocated to the assets acquired based on relative fair values. Accordingly, the related results of operations of Custom Steel have been included in the condensed consolidated statement of operations after March 31, 2006.

Note 2—Summary of Significant Accounting Policies

Significant accounting policies are described below.

Cash and cash equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Revenue recognition

Revenues from railcar sales are recognized following completion of manufacturing, inspection, customer acceptance and shipment, which is when title and risk for any damage or loss with respect to the railcars passes to the customer. In some cases, paint and lining work may be outsourced and, as a result, the sale will not be recorded until the railcars are shipped from the independent contractor and accepted by the customer. Revenues from railcar and industrial parts and components are recorded at the time of product shipment, in accordance with the contractual terms. Revenue for railcar maintenance services is recognized upon completion and shipment of railcars from the Company’s plants. The Company does not bundle railcar service contracts with new railcar sales. Revenue for fleet management services is recognized as performed.

The Company records amounts billed to customers for shipping and handling as part of sales in accordance with EITF 00-10, Accounting for Shipping and Handling Fees and Costs, and records related costs in cost of sales.

Accounts receivable

The Company carries its accounts receivable at their face amount, less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its account receivable and establishes an allowance for doubtful accounts, based on a history of past write-offs and collections and current credit conditions. Accounts are placed for collection on a limited basis once all other methods of collection have been exhausted. Once it has been determined that the customer is no longer in business and/or refuses to pay, the accounts are written off.

Inventories

Inventories are stated at the lower of average cost or market on a first-in, first-out basis, and include the cost of materials, direct labor and manufacturing overhead.

Property, plant and equipment

Land, buildings, machinery and equipment are carried at cost. Maintenance and repair costs are charged directly to earnings. Tooling is generally capitalized and amortized over a period of two to five years.

Buildings are depreciated over estimated useful lives that range from 14 to 50 years. The estimated useful lives of other depreciable assets, including machinery and equipment, vary from 3 to 25 years. Depreciation is calculated on the straight-line method for financial reporting purposes and on accelerated methods for tax purposes.

Debt issuance costs

Debt issuance costs were incurred in connection with the issuance of long-term debt in 2005 and the Amended and Restated Revolving Credit Agreement in 2006, and are amortized over the term of the related debt, utilizing the interest method.

American Railcar Industries, Inc. and Subsidiaries

Ohio Castings joint venture

The Company uses the equity method to account for its investment in Ohio Castings. Under the equity method, the Company recognizes its share of the earnings and losses of the joint venture as they accrue instead of when they are realized. Advances and distributions are charged and credited directly to the investment account. 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 to the Company and the other joint venture partner in Ohio Castings at cost plus a licensing fee. Ohio Castings closed its Chicago Castings facility effective June 30, 2006, in connection with a consolidation of its operations. Ohio Castings is responsible for the exit liabilities of this closure. The Company does not believe that this closing will have a material financial impact on the Company.

The Company has determined that, although the joint venture is a variable interest entity (“VIE”), the Company is not the primary beneficiary and the joint venture should not be consolidated in the Company’s financial statements. The risk of loss to Castings and the Company is limited to its investment in the VIE and its one third share of Ohio Castings’ debt, which the Company has guaranteed. The one third share of Ohio Castings debt was $5.1 million and $4.6 million as of December 31, 2005 and June 30, 2006, respectively. The fair market value of the guarantee was approximately $0.1 million at December 31, 2005 and June 30, 2006.

The carrying amount of the investment in Ohio Castings by Castings was $5.6 million at December 31, 2005 and June 30, 2006.

For the three and six months ended June 30, 2006, the cost of railcar manufacturing included $12.0 million and $23.9 million, respectively, in products produced by Ohio Castings. For the three and six months ended June 30, 2005, the cost of railcar manufacturing included $8.4 million and $14.0 million, respectively, in products produced by Ohio Castings.

Summary combined financial information for Ohio Castings, the investee company, as of December 31, 2005 and June 30, 2006 follows:

		December 31, 2005				June 30, 2006
		(in thousands)
Financial position
Current assets		$	18,302			$	14,771
Property, plant, and equipment, net			15,380				15,381
Total assets			33,682				30,152
Current liabilities			14,540				12,203
Long-term debt			11,663				9,460
Total liabilities			26,203				21,663
Member’s equity			7,479				8,489
Total liabilities and member’s equity		$	33,682			$	30,152

American Railcar Industries, Inc. and Subsidiaries

Summary combined results of operations for Ohio Castings for the three and six months ended June 30, 2005 and 2006:

		June 30, 2005				June 30, 2006
Three months ended		(in thousands)
Results of operations
Sales		$	29,539			$	28,898
Earnings (loss) from operations			655				(552	)
Net earnings (loss)		$	693			$	(414	)

		June 30, 2005				June 30, 2006
Six months ended		(in thousands)
Results of operations
Sales		$	58,279			$	66,237
Earnings from operations			2,860				774
Net earnings		$	2,904			$	1,010

Long-lived assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. The criteria for determining impairment for such long-lived assets to be held and used is determined by comparing the carrying value of these long- lived assets to be held and used to management’s best estimate of future undiscounted cash flows expected to result from the use of the assets. If the assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

The Company reduced the carrying value of equipment purchased under a lease agreement from an unrelated third party by $0.4 million in the first quarter of 2006, for its manufacturing plants which is reflected in the consolidated statement of operations under costs of manufacturing operations. No impairment losses were recorded in the second quarter of 2006. No impairment losses were recorded for the six month period ended June 30, 2005.

Income taxes

ARI accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting basis and the tax basis of ARI’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are recovered or settled.

The FASB recently issued FASB Interpretation No. 48 — Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently reviewing FIN 48 and evaluating its potential impact on its Consolidated Financial Statements.

Pension plans and other postretirement benefits

Certain ARI employees participate in noncontributory, defined benefit pension plans and a supplemental executive retirement plan. Benefits for the salaried employees are based on salary and years of service, while those for hourly employees are based on negotiated rates and years of service. Benefit costs are accrued during the years employees render service based on actuarial calculations of cost based on the stated factors.

ARI employees can elect to also participate in defined contribution retirement plans, health care and life insurance plans. Benefit costs are accrued during the years employees render service.

American Railcar Industries, Inc. and Subsidiaries

Fair value of financial instruments

The carrying amounts of cash and cash equivalents, accounts receivable, amounts due to/from affiliates and accounts payable approximate fair values because of the short-term maturity of these instruments. The fair value of long-term debt is discussed in Note 8. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision.

Foreign currency translation

Balance sheet amounts from the Company’s Canadian operation are translated at the exchange rates in effect at quarter-end or year-end, and operations statement amounts are translated at the average rates of exchange prevailing during the quarter or year. Currency translation adjustments are included in Stockholders’ Equity as part of Accumulated other comprehensive loss.

Comprehensive income (loss)

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) consists of net earnings (loss), foreign currency translation adjustment and the Company’s minimum pension liability adjustment, which is shown net of tax.

Retained earnings

ARI was recapitalized on October 1, 1994, when ACF Industries LLC (ACF), the former holder of ARI’s common stock, transferred to ARI the old common stock of ARI along with the assets and liabilities of ACF’s railcar maintenance and railcar parts manufacturing businesses (the “1994 ACF asset transfer”). In exchange, ACF received 57,306 shares of ARI’s newly issued mandatorily redeemable preferred stock. New shares of ARI’s common stock were issued to Carl C. Icahn, Chairman of the Board of ACF, in exchange for cash of $6.4 million. In October 1998, ARI redeemed 57,305 shares of the preferred stock and the remaining share of preferred stock was transferred to Mr. Icahn. As ARI and ACF were entities under common control, accounting principles generally accepted in the United States of America required that ARI’s initial carrying value of assets transferred to it from ACF and the purchase of Castings be equal to ACF’s historical net book value at the time of transfer. The excess of the fair value paid over the net book value of assets and liabilities transferred to ARI was reflected as a distribution of retained earnings and had the effect of reducing shareholders’ equity by $24.8 million as of December 31, 2005 and June 30, 2006. Of that amount, $19.2 million was recorded at the formation of ARI, and $5.6 million was recorded in 2003 from the acquisition of Castings.

Earnings per share

Basic earnings (loss) per share are calculated as net earnings (loss) attributable to common shareholders divided by the weighted-average number of common shares outstanding during the respective period. Diluted earnings (loss) per share are calculated by dividing net earnings (loss) attributable to common shareholders by the weighted-average number of shares outstanding plus dilutive potential common shares outstanding during the year.

Use of estimates

Management of ARI has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Significant items subject to estimates and assumptions include deferred taxes, workers compensation accrual, valuation allowances for accounts receivable and inventory obsolescence, valuation of property, plant and equipment, and the reserve for warranty claims. Actual results could differ from those estimates.

American Railcar Industries, Inc. and Subsidiaries

Stock-based compensation

The Company applies the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R) (“123R”), Share-Based Payments, to stock option awards issued. The compensation cost recorded for these awards will be based on their grant-date fair value required by Statement 123(R).

Goodwill

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142, Goodwill and Other Intangible Assets. This standard requires that goodwill and other intangible assets with indefinite useful lives shall not be amortized but shall be tested for impairment at least annually by comparing the fair value of the asset to its carrying value. The Company adopted this standard upon the acquisition of Custom Steel, which resulted in goodwill of $7.2 million, as described in Note 1. The Company plans to perform the goodwill impairment test required by SFAS No. 142 as of March 1 of each year.

Recent accounting pronouncements

In November 2004, the FASB issued SFAS 151, Inventory Costs – An Amendment of ARB No. 43, Chapter 4, which requires the recognition of costs of idle facilities, excessive spoilage, double freight, and rehandling costs as a component of current-period expenses. The Company adopted SFAS 151 on January 1, 2006, as required by the statement, and this has not materially impacted the financial operations of the Company.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of this standard on its Consolidated Financial Statements.

Note 3—Initial Public Offering

On January 24, 2006, the Company completed the sale of 9,775,000 shares of common stock to the public pursuant to an effective registration statement at a price of $21.00 per share. The offering resulted in gross proceeds to the Company of $205.3 million. Expenses related to the offering were $13.3 million for underwriting discounts and commissions. The Company received net proceeds of $192.0 million in the offering.

As of June 30, 2006, the net proceeds from the offering were applied as follows (in millions):

Redemption of all outstanding shares of preferred stock		$	94.0
Repayment of notes due to affiliates			20.5
Repayment of all industrial revenue bonds			8.6
Repayment of amounts outstanding under revolving credit facility			32.3
Acquisition of Custom Steel			17.2
Payment of payables in connection with acquisition			5.3
Investment in plant, property and equipment			12.7
Offering costs paid during the first quarter			1.4
Total uses		$	192.0

American Railcar Industries, Inc. and Subsidiaries

Note 4—Marmaduke Storm Damage Insurance Claim (Gain related to insurance recoveries)

On April 2, 2006, a tornado struck the Marmaduke, Arkansas area. This tornado resulted in damage to the company’s tank railcar manufacturing facility in Marmaduke, Arkansas. While the majority of the Marmaduke tank railcar facility suffered only minor damage, the portion of the factory that processed inbound material, equipment associated with material handling, plate steel blasting and sheet rolling as well as some inventory was destroyed by the storm. The tornado also destroyed an empty building that was nearing completion to receive inbound material and store inventory. The manufacturing facility was closed from April 2, 2006 through August 6, 2006 due to the storm. The Company recommenced operations at the manufacturing facility on August 7, 2006 when the repairs related to the tornado damage were substantially complete.

The Company has property insurance covering wind and rain damage to its property, incremental costs and operating expenses it incurs due to damage caused by the tornado. In addition, the Company has business insurance for business interruption as a direct result of the insured damage. The Company has deductibles on these policies of $100,000 for property insurance and a five-day equivalent time element business interruption deductible, which the Company estimates to be at least $600,000. This deductible is being ratably recognized over the course of the five-month period during which the Company estimates the business interruption will occur.

The Company has received an advance of $7.5 million from the insurance carrier related to the property damage. This $7.5 million has been designated as cash received for investing activities as the advance is to be used for replacement of property, plant and equipment. During June 2006, the Company and the insurance carrier reached a minimum settlement amount of $8.6 million ($8.0 million after application of the deductible) to cover continuing expenses, employee wages and estimated lost profits for the months of April, May and June 2006, which was received in July 2006.

During the quarter ended June 30, 2006, the Company had assets with a net book value of $3.5 million damaged or destroyed by the tornado. Other costs incurred related to the tornado damage included clean up for the temporary shut-down of the facility. The write off of assets and associated cleanup costs have been netted against the insurance advance pending settlement of the property damage claim. The final property damage claim will be settled after operations have begun again and all machinery and equipment have been repaired and are operational.

The amounts recorded in the statement of operations relating to our insurance recoveries is set forth as follows:

		(in thousands)
Business interruption insurance claim		$	8,600
Business interruption claim deductible			(600	)
Business interruption insurance settlement, net			8,000
Continuing expenses			(3,257	)
Unrecognized deductible			240
Income related to insurance recoveries, net		$	4,983

American Railcar Industries, Inc. and Subsidiaries

The current liability amount included in the balance sheet relating to our insurance recoveries is set forth as follows:

		(in thousands)
Property insurance advance		$	7,500
Assets Damaged and clean up costs			(4,379	)
Remaining property insurance advance			3,121
Unrecognized deductible			(240	)
Total insurance advance		$	2,881

The final lost profit settlement related to the business interruption insurance claim will be recognized when agreed to with the insurance carrier and will be reflected as insurance recoveries for the period when the agreement is finalized.

Note 5—Comprehensive Income

The components of comprehensive income, net of related tax, are as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2006				2005				2006
						(in thousands)
Net earnings		$	6,499			$	10,821			$	9,037			$	18,082
Foreign currency translation adjustment			(4	)			37				(3	)			37
Comprehensive income		$	6,495			$	10,858			$	9,034			$	18,119

Note 6—Accounts Receivable

The allowance for doubtful accounts had the following activity for the three and six months ended June 30, 2005 and 2006:

		Three Months Ended
		June 30,
		2005				2006
		(in thousands)
Beginning balance		$	531			$	888
Bad debt expense			19				224
Accounts written off			(9	)			(19	)
Recoveries			13				—
Ending balance		$	554			$	1,093

American Railcar Industries, Inc. and Subsidiaries

		Six Months Ended
		June 30,				June 30,
		2005				2006
		(in thousands)
Beginning balance		$	510			$	849
Bad debt expense			39				263
Accounts written off			(10	)			(22	)
Recoveries			15				3
Ending balance		$	554			$	1,093

Note 7—Inventories

Inventories consist of the following:

		December 31,				June 30,
		2005				2006
		(in thousands)
Raw materials		$	49,246			$	64,912
Work-in-process			26,301				36,255
Finished products			14,772				13,318
Total inventories			90,319				114,485
Less reserves			2,318				2,608
Total inventories, net		$	88,001			$	111,877

Inventory reserves had the following activity for the year ended December 31, 2005 and the six months ended June 30, 2006:

		Twelve Months Ended				Six Months Ended
		December 31,				June 30,
		2005				2006
		(in thousands)
Beginning balance		$	2,679			$	2,318
Provision			273				333
Writeoff			(634	)			(43	)
Ending balance		$	2,318			$	2,608

American Railcar Industries, Inc. and Subsidiaries

Note 8—Long-Term Debt

Long-term debt consists of the following:

		December 31, 2005				June 30, 2006
		(in thousands)
Revolving line of credit		$	31,852			$	—
Industrial revenue bonds secured by certain buildings and manufacturing equipment and guaranteed by ACF and ACF Holding with effective interest rates ranging from 6.75% to 8.5%, principal amounts due through the year 2011			8,340				—
Other			178				138
Total long-term debt, including current portion		$	40,370			$	138
Less current portion of debt			33,294				85
Total long-term debt, net of current portion		$	7,076			$	53

Concurrent with the completion of the initial public offering, the Company entered into an Amended and Restated Credit Agreement (the “revolving credit agreement”) providing for the terms of the Company’s revolving credit facility (the “revolving credit facility”) with North Fork Business Capital Corporation, as administrative agent for various lenders. The revolving credit facility has a total commitment of the lesser of (i) $75.0 million or (ii) an amount equal to a percentage of eligible accounts receivable plus a percentage of eligible raw materials and finished goods inventory. In addition, the revolving credit facility includes a $15.0 million capital expenditure sub-facility that is based on a percentage of the costs related to capital projects the Company may undertake. The revolving credit facility has a three-year term. Borrowings under the revolving credit facility are collateralized by substantially all of the assets of the Company. The revolving credit facility has both affirmative and negative covenants, including, without limitation, a maximum senior debt leverage ratio, a maximum total debt leverage ratio, a minimum interest coverage ratio, a minimum tangible net worth and limitations on capital expenditures and dividends. At June 30, 2006 we had $64.1 million of availability under the revolving credit facility and no borrowings outstanding. As of June 30, 2006, the Company was in compliance with all of its covenants under this Agreement.

The fair value of long-term debt was approximately $40.4 million and $0.1 million at December 31, 2005 and June 30, 2006, respectively, as calculated by discounting cash flows through maturity using ARI’s current rate of borrowing for similar liabilities.

Note 9—Warranties

The Company records a liability for an estimate of costs that it expects to incur under its basic limited warranty, which is typically a range from one year for parts and services to five years on new railcars, when manufacturing revenue is recognized. Factors affecting the Company’s warranty liability include the number of units sold and historical and anticipated rates of claims and costs per claim. The Company assesses the adequacy of its warranty liability based on changes in these factors.

The change in the Company’s warranty reserve, which is reflected on the balance sheet in accrued expenses, is as follows for the three and six month periods ended June 30, 2005 and 2006:

American Railcar Industries, Inc. and Subsidiaries

		Three Months Ended
		June 30,				June 30,
		2005				2006
		(in thousands)
Liability, beginning of period		$	1,517			$	1,234
Expense for new warranties issued			163				1,025
Warranty claims			(258	)			(223	)
Liability, end of period		$	1,422			$	2,036

		Six Months Ended
		June 30,				June 30,
		2005				2006
		(in thousands)
Liability, beginning of period		$	1,630			$	1,237
Expense for new warranties issued			225				1,500
Warranty claims			(433	)			(701	)
Liability, end of period		$	1,422			$	2,036

The increase in warranty liability during the three and six months ended June 30, 2006 is related to two warranty claims on covered hopper cars. These claims were submitted during the warranty period of each of the railcars. As a result, the Company recorded additional warranty expense of $0.7 million during the six months ended June 30, 2006. This expense of $0.7 million was included in the total expense of $1.0 and $1.5 million for the three and six months ended June 30, 2006, respectively.

Note 10—Earnings per Share

The shares used in the computation of the Company’s basic and diluted earnings per common share are reconciled as follows:

		Three Months Ended June 30,
		2005				2006
Weighted average basic common shares outstanding			11,147,059				21,207,773
Dilutive effect of employee stock options (1)			—				81,296
Weighted average diluted common shares outstanding			11,147,059				21,289,069

		Six Months Ended June 30,
		2005				2006
Weighted average basic common shares outstanding			11,147,059				20,116,455
Dilutive effect of employee stock options (1)			—				103,708
Weighted average diluted common shares outstanding			11,147,059				20,220,163

American Railcar Industries, Inc. and Subsidiaries

Note 11—Stock based Compensation

In December 2004, the FASB issued SFAS 123R, which establishes the accounting for transactions in which an entity exchanges its equity instruments or certain liabilities based upon the entity’s equity instruments for goods or services. The revision to SFAS No. 123 generally requires that publicly traded companies measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award, which is usually the vesting period.

In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) 107, Share-Based Payment, to provide additional guidance to public companies in applying the provisions of Statement 123R. During 2005, the FASB issued three FASB Staff Positions (“FSP”): FSP FAS 123R-1, “Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R),” FSP FAS 123R-2, “Practical Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123R,” and FSP FAS 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” The Company has adopted the provisions of SAB 107 in conjunction with the adoption of Statement 123R and also considers the guidance provided in the FSPs. The revised provisions of SFAS No. 123 became effective for the Company on January 19, 2006 in connection with the initial public offering and stock option plan created in 2005 (discussed below).

Net income for the three and six months ended June 30, 2006 includes $1.5 million and $5.1 million, respectively, of compensation expense related to our stock based compensation arrangements. No stock based compensation expenses were recognized in 2005. Approximately $0.1 million is classified as cost of sales for both the three and six months ended June 30, 2006. The remaining amounts of $1.4 million and $5.0 million, respectively, are classified as selling, administrative and other expense for the three and six months ended June 30, 2006. Net income for the three and six months ended June 30, 2006 includes zero and $2.2 million, respectively of income tax benefits related to our stock-based compensation arrangements.

Stock Options

Concurrent with the initial public offering, the Company granted options to purchase a total of 484,876 shares of common stock under the 2005 equity incentive plan (the “2005 Plan”). These options were granted at an exercise price equal to the initial public offering price of $21.00 per share. The options have a term of five years and vest in equal annual installments over a three-year period. The Company determined that the stock option expense for these options will total approximately $3.5 million over the next three years using a Black-Scholes calculation based on the following assumptions: stock volatility of 35%; 5-year term; interest rate of 4.35%; and dividend yield of 1%. The Company accounts for the 2005 Plan under the recognition and measurement principles of SFAS No. 123R, Share-Based Payment, and its related provisions. As there was no history with the stock prices of the Company, the stock volatility rate was determined using volatility rates for several other similar companies within the railcar industry. The 5 year term represents the expiration of each option. The interest rate used was the 5 year government T – Bill rate on the date of grant. Dividend yield was determined from an average of other companies in the industry as the Company did not have a history of dividend rates.

During the three months ended June 30, 2006, the Company issued options to purchase a total of 75,000 shares of common stock under the 2005 Plan. These options were granted at an exercise price of $35.69 per share. The Company determined the stock option expense for these options will total approximately $1.0 million over the next three years using the same assumptions and methodology to determine the value of these options as was used for the options issued in connection with the Company’s initial public offering.

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 1.0 million shares of our common stock. Awards covering no more than 300,000 shares may be granted to any person during any fiscal year. Options are subject to certain vesting provisions as designated by the board of directors and generally have an expiration that ranges from 5 to 10 years. Options 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

American Railcar Industries, Inc. and Subsidiaries

directors or a committee of the board. Options granted pursuant to the requirements of SFAS No. 123R are expensed on a graded vesting method over the vesting period of the option.

The Company recognized $0.6 million and $1.2 million, respectively, of compensation expense during the three and six months ended June 30, 2006 related to stock option grants made under the 2005 plan. The Company recognized no income tax benefits related to stock options during the three or six months ended June 30, 2006.

The following is a summary of option activity under the 2005 plan as of June 30, 2006, and changes during each quarter of fiscal year 2006 through June 30, 2006:

										Weighted
						Weighted				Average				Grant-date				Aggregate
						Average				Remaining				Fair Value				Intrinsic
						Exercise				Contractual				of Options				Value
		Shares				Price				Life				Granted				($000)
Outstanding at the beginning of period, January 1, 2006			—			$	—
Granted			484,876			$	21.00							$	7.28
Outstanding at the end of period, March 31, 2006			484,876			$	21.00			58 months				$	7.28			$	6,823
Granted			75,000			$	35.69							$	13.08
Outstanding at the end of period, June 30, 2006			559,876			$	22.97			55 months				$	8.05			$	5,678
Exercisable at end of period, June 30, 2006			—

Restricted Stock Award

On the date of the initial public offering, the Company issued 285,714 restricted shares of the Company’s common stock to Mr. Unger, its Chief Executive Officer. These restricted shares were granted with an issuance price of $21.00 per share, resulting in a fair value of $6.0 million on the date of grant. This restricted stock grant vested 40% on the date of the grant with the remaining 60% vesting one year after issuance. The Company recorded compensation expense of $2.4 million on the date of the grant for this restricted stock. The remaining expense will be recognized over the one-year vesting period. 114,286 of these shares became transferable without contractual restrictions by Mr. Unger six months after issuance. An additional 85,714 of these shares will be transferable without contractual restrictions by Mr. Unger twelve months after issuance. The remaining 85,714 shares will be transferable without contractual restrictions by Mr. Unger eighteen months after issuance.

The Company recognized $0.9 million and $3.9 million, respectively of compensation expense during the three and six months ended June 30, 2006 for this restricted stock grant. The Company recognized zero and $2.2 million of income tax benefits in the three and six months ended June 30, 2006, respectively for this restricted stock grant.

American Railcar Industries, Inc. and Subsidiaries

The following is a summary of the status of non-vested shares as of June 30, 2006, and changes during each quarter of fiscal year 2006 through June 30, 2006:

						Weighted
		Non-vested				Average Grant
		Stock Awards				Date Fair Value
Non-vested at January 1, 2006			—			$	—
Granted			285,714				21.00
Vested			(114,286	)			21.00
Non-vested at the end of period, March 31, 2006			171,428			$	21.00
Non-vested at the end of period, June 30, 2006			171,428			$	21.00

Future stock compensation expense and shares available

As of June 30, 2006, unrecognized compensation costs related to the unvested portion of share-based compensation arrangements was approximately $5.4 million and is expected to be recognized over a weighted-average period of approximately 2 years.

As of June 30, 2006, an aggregate of 440,124 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.

Note 12—Related Party Transactions

In connection with the 1994 ACF asset transfer, described in Note 2, the Company entered into the following administrative and operating agreements with ACF, effective as of October 1, 1994:

Manufacturing services agreement

Under the manufacturing services agreement, ACF agreed to manufacture and distribute, at the Company’s instruction, various products using certain assets that the Company acquired pursuant to the 1994 ACF asset transfer agreement. In consideration for these services, the Company agreed to pay ACF based on agreed upon rates. Components supplied to ARI by ACF include tank railcar heads, wheel sets and various structural components. In the three and six months ended June 30, 2006, ARI purchased inventory of $17.5 million and $39.5 million, respectively, of components from ACF. In the three and six months ended June 30, 2005, ARI purchased inventory of $18.5 million and $35.4 million, respectively, of components from ACF. The agreement automatically renews unless written notice is provided by the Company.

Administration Agreement

Under this agreement, ACF agreed to provide the Company with office facilities and administrative services, primarily information technology services. In exchange for the facilities and services, the Company agreed to pay ACF based on agreed upon rates. Management believes that these allocation methods are reasonable for the relevant costs. Total amounts incurred under this agreement were zero and $0.4 million for the three and six months ended June 30, 2005. The agreement was terminated on April 1, 2005.

American Railcar Industries, Inc. and Subsidiaries

Railcar Servicing Agreement

Under this agreement, the Company agreed to provide ACF with railcar repair and maintenance services, fleet management services and consulting services on safety and environmental matters for railcars owned or managed by ACF. ACF agreed to compensate the Company based on agreed upon rates. The agreement was terminated on April 1, 2005. No amounts were recorded for the three and six months ended June 30, 2005.

Supply Agreement

Under this agreement, the Company agreed to manufacture and sell to ACF specified components at cost plus mark-up or on terms not less favorable than the terms on which the Company sold the same products to third parties. Revenue recorded under this arrangement totaled $0.1 million and $0.2 million for the three and six months ended June 30, 2005 and is included under revenue from affiliates on the statement of operations. Revenue recorded under this arrangement totaled $0.3 million and $0.4 million for the three and six months ended June 30, 2006 and is included under revenue from affiliates on the accompanying condensed consolidated statement of operations.

     In 2004, the Company entered into the following agreements with ACF and ARL:

Railcar Management Agreements

Under this agreement, the Company provided ARI First and ARI Third, subsidiaries of ARL, with marketing, leasing, administration, maintenance, record keeping and insurance services for railcars owned by ARI First and ARI Third. In exchange for these services, ARI First and ARI Third paid the Company a management fee, which totaled $0.5 million and $1.1 million, respectively, for the three and six months ended June 30, 2005, which is included under revenue from affiliates on the statement of operations. This arrangement was terminated on July 1, 2005, when ARI assigned its management agreements for ARI First LLC and ARI Third LLC to ARL.

ACF Administration Agreement

The ACF Administration agreement was entered into with ACF and ARL. Under the agreement, ACF agreed to provide certain management services that were required under the railcar management agreement with ARI First and ARI Third described above. Fees paid to ACF under this agreement were equal to the fees the Company charged to ARI First and Third under the railcar management agreement and totaled zero and $0.6 million, respectively, for the three and six months ended June 30, 2005, which is included under cost related to affiliates on the statement of operations. This arrangement was terminated on April 1, 2005.

     The Company currently has the following agreements with ARL and its subsidiaries:

ARL Railcar Services Agreement

Under this agreement, which began on April 1, 2005, ARL provided the Company with railcar services, which the Company was required to provide to ARI First and ARI Third under the railcar management agreement. The Company paid ARL an amount equal to the amounts paid to the Company by ARI First and ARI Third under the railcar management agreement, which totaled $0.5 million for both the three and six months ended June 30, 2005 and is included under cost of goods sold on the statement of earnings. This agreement was terminated on July 1, 2005.

ARL Railcar Servicing Agreement

Under this agreement, the Company agreed to provide ARL with railcar repair and maintenance services, fleet management services and consulting services on safety and environmental matters for railcars owned or managed by ARL and leased or held for lease by ARL. ARL agreed to compensate the Company based on agreed upon rates. Revenue of $5.5 million and $11.3 million, respectively, for the three and six months ended June 30, 2005, included under revenue from affiliates on the statement of operations, was recorded under this arrangement. Revenue of $4.5 million and $10.5 million, respectively for the three and six months ended June 30, 2006, were

American Railcar Industries, Inc. and Subsidiaries

recorded under this arrangement, which is included under revenue from affiliates on the statement of operations. The agreement extends through June 30, 2007 and automatically renews for one-year periods unless either party provides at least six months prior notice of termination. Termination by the Company would result in a fee payable to ARL of $0.5 million.

ARL Services Agreement

Under this agreement, ARL agreed to provide the Company certain information technology services, rent and building services and limited administrative services. The rent and building services includes the use of certain facilities owned by Mr. Unger, which is further described in Note 14. Under the agreement, the Company agreed to provide purchasing and engineering services to ARL. Consideration exchanged between the companies is based on an agreed upon a fixed annual fee. Total fees paid to ARL were $0.5 million for the three and six months ended June 30, 2005. Total fees paid to ARL were $0.5 million and $1.0 million, respectively, for the three and six months ended June 30, 2006. Amounts billed to ARL totaled $0.03 million and $0.06 million, respectively, for the three and six months ended June 30, 2005. No amounts were billed to ARL during the three and six months ended June 30, 2006. These balances are included in revenues and costs related to affiliates on the statement of operations. Either party may terminate any of these services, and the associated costs for these services, on at least six months prior notice at any time prior to the termination of the agreement on December 31, 2007.

Trademark License Agreement

Under this agreement, which is effective as of June 30, 2005, ARI granted a nonexclusive, perpetual, worldwide license to ARL to use ARI’s common law trademarks “American Railcar” and the “diamond shape” logo. ARL may only use the licensed trademarks in connection with the railcar leasing business. ARI receives annual fees of $1,000 in exchange for this license.

ARL Sales Contracts

On March 31, 2006, the Company entered into an agreement with ARL for the Company to manufacture and ARL to purchase 1,000 tank railcars in 2007. The Company has in the past manufactured and sold railcars to ARL on a purchase order basis. When the Company entered into this agreement, it planned to produce these tank railcars with new manufacturing capacity that the Company expected to have available beginning in January 2007. The agreement also includes options for ARL to purchase up to 300 covered hopper railcars in 2007, should additional capacity become available, and 1,000 tank railcars and 400 covered hopper railcars in 2008. Similar to other customers, the recent storm damage at Marmaduke and resulting temporary plant shutdown will impact the timing of delivery of the railcars that ARL has ordered.

Additional Agreements with ACF

As part of ARI’s recapitalization, ACF retained the liabilities for unfunded pension and other postretirement liabilities and workers compensation liabilities as of October 1, 1994 for employees who transferred from ACF to ARI at that date and for environmental liabilities as of that date. Expenses paid by ACF, relating to pre-recapitalization liabilities, were recorded as capital contributions by ARI and included in additional paid-in capital.

ARI recorded total expenses relating to benefits and environmental liabilities of $1.0 million and $1.8 million, respectively, in the three and six months ended June 30, 2005. Included in the total expenses incurred were amounts related to pre-capitalization liabilities retained by ACF, which were reflected as additional paid-in capital, totaling $0.2 million and $0.5 million, respectively, in the three and six months ended June 30, 2005. Effective December 1, 2005, the Company separated pension and post retirement obligations from ACF. As such, pre-recapitalization expenses related to pension and post retirement benefits are no longer paid by ACF on ARI’s behalf.

ARI entered into a note payable with ACF Holding, an affiliate, for $12.0 million effective January 1, 2005 in connection with the purchase of Castings (Note 1). This note was paid off in full in connection with the initial public offering, as discussed in Note 3.

American Railcar Industries, Inc. and Subsidiaries

Agreements with Affiliated Parties

During 2004, ARI advanced $165.0 million to Mr. Icahn under a secured note due in 2007 and bearing interest at prime plus 1.75%. Interest income on the note was zero and $0.8 million, respectively, for the three and six months ended June 30, 2005. On January 26, 2005, the ARL operating agreement was amended and an assignment and assumption agreement was executed whereby ARI transferred its interest in the $165.0 million secured note receivable from Mr. Icahn to ARL in exchange for 35,000 A Units of ARL and in satisfaction of the $130.0 million note issued to ARL, as discussed below.

During 2004, ARL advanced $130.0 million to ARI under a note due in 2007 and bearing interest at prime plus 1.5%. Interest expense on the note was zero and $0.6 million, respectively, for the three and six months ended June 30, 2005. As discussed above, this note was fully satisfied on January 26, 2005.

On December 17, 2004, ARI borrowed $7.0 million under a note payable to Arnos Corp., an affiliate. The note bears interest at prime plus 1.75% and was payable on demand. Interest expense on the note was $0.1 million and $0.2 million, respectively, for the three and six months ended June 30, 2005. Interest expense on the note was zero and $0.1 million, respectively, for the three and six months ended June 30, 2006. This note was paid off in full in connection with the initial public offering, as discussed in Note 3.

As of December 31, 2005, amounts due from affiliates represented $5.1 million in receivables from ACF, Ohio Castings and ARL. Included in amounts due from affiliates at June 30, 2006 were $2.7 million in accounts receivable from ACF, Ohio Castings and ARL.

As of December 31, 2005, amounts due to affiliates represented $23.5 million in accounts and notes payable to ACF and its affiliates. As of June 30, 2006, amounts due to affiliates included $0.9 million in accounts payable to ACF.

In April 2005, the Company entered into a consulting agreement with ACF in which both parties agreed to provide labor litigation, labor relations support and consultation, and labor contract interpretation and negotiation services to one another. In addition, the Company has agreed to provide ACF with engineering and consulting advice. Fees paid to one another are based on agreed upon rates. No services were rendered and no amounts were paid during the three and six months ended June 30, 2005 and 2006.

Cost of railcar manufacturing for the three and six months ended June 30, 2005 includes $8.4 million and $14.0 million, respectively, in railcar products produced by Ohio Castings, which is partially owned by Castings, as described in Note 1. Cost of railcar manufacturing for the three and six months ended June 30, 2006 included $12.0 million and $23.9 million, respectively, of railcar products produced by Ohio Castings. Inventory at December 31, 2005 and June 30, 2006 includes approximately $3.0 million and $5.2 million, respectively, of purchases from Ohio Castings.

In September 2003, Castings loaned Ohio Castings $3.0 million under a promissory note, which was due January 2004. The note was renegotiated in 2005 with a new principal amount of $2.2 million and bears interest at 4.0%. Payments of principal and interest are due quarterly with the last payment due in November 2008. This note receivable is included in investment in joint venture on the accompanying balance sheet. Total amounts due from Ohio Castings under this note were $1.8 million at December 31, 2005 and $1.7 million at June 30, 2006.

During April 2006, the Company’s Chairman and majority stockholder, Carl C. Icahn, contributed $0.3 million as a capital contribution to pay the weekly payroll and fringe benefits of the Marmaduke manufacturing facility. This was done to help bridge the gap until the Company received funds from its insurance policies to continue to pay full wages and benefits to all employees working for the tank railcar operations at Marmaduke, Arkansas.

American Railcar Industries, Inc. and Subsidiaries

Note 13—Employee Benefit Plans

The Company is the sponsor of two defined benefit plans that cover certain executives and employees at certain of its manufacturing facilities and a supplemental executive retirement plan (SERP). The Company uses a measurement date of October 1 for all pension plans, except for the Shipper’s Car Line Pension Plan, which has a measurement date of December 1, which is the date the Company became the sponsoring employer of that plan. The plan’s assets are held by independent trustees and consist primarily of equity and fixed income securities.

The Company also provides certain postretirement health care benefits for certain of its salaried and hourly retired employees. The measurement date for the post-retirement plan is December 1, which is the date the Company assumed the sponsorship of the plan. Employees may become eligible for health care benefits if they retire after attaining specified age and service requirements. These benefits are subject to deductibles, co-payment provisions and other limitations.

The Company recorded total expenses relating to these plans of $0.2 million and $0.3 million, respectively, in the three and six months ended June 30, 2006. The Company recorded total expense of $0.1 million and $0.2 million, respectively, in the three and six months ended June 30, 2005.

The components of net periodic benefit cost for the three and six months ended June 30, 2005 and 2006 are as follows:

		Postretirement Benefits								Postretirement Benefits
		Three Months Ended								Six Months Ended June
		June 30,								30,
		2005				2006				2005				2006
		(in thousands)								(in thousands)
Service cost		$	—			$	3			$	—			$	5
Interest cost			—				52				—				104
Net periodic benefit cost recognized		$	—			$	55			$	—			$	109

		Pension Benefits								Pension Benefits
		Three Months Ended								Six Months Ended June
		June 30,								30,
		2005				2006				2005				2006
		(in thousands)								(in thousands)
Service cost		$	41			$	58			$	82			$	103
Interest cost			80				253				159				453
Expected return on plan assets			(83	)			(236	)			(166	)			(418	)
Recognized gains and losses			38				48				76				95
Prior service cost recognized			6				—				13				(1	)
Net periodic benefit cost recognized		$	82			$	123			$	164			$	232

The Company’s policy with respect to funding the qualified plans is to fund at least the minimum required by the Employee Retirement Income Security Act of 1974, as amended, and not more than the maximum amount deductible for tax purposes. ARI does not currently have minimum funding requirements, as set forth in employee benefit and tax laws. All contributions made to the funded pension plans for 2005 and 2006 were voluntary and were made with cash generated from operations.

American Railcar Industries, Inc. and Subsidiaries

The Company also maintains qualified defined contribution plans, which provide benefits to their employees based on employee contributions, years of service, and employee earnings with discretionary contributions allowed. Expenses related to these plans were $0.2 million and $0.3 million, respectively, for the three and six months ended June 30, 2005. Expenses for these plans were $0.2 million and $0.4 million, respectively, for the three and six months ended June 30, 2006. Prior to April 1, 2005, selected ARI salaried employees participated in the ACF Industries, Inc. Savings and Investment Plan, and the cost is included in the six months ended June 30, 2005 expense.

Note 14 — Commitments and Contingencies

The Company leases certain facilities from an entity owned by its Chief Executive Officer, certain affiliates of ARI and third parties. Total rent expense on these leases was approximately $2.1 million and $4.1 million, respectively, for the three and six months ended June 30, 2005. Total rent expense on the leases was approximately $0.7 million and $2.0 million, respectively, for the three and six months ended June 30, 2006. Expenses to related parties included in the amounts above were $0.4 million and $0.6 million, respectively, for the three and six months ended June 30, 2005. Expenses to related parties included in the amounts above were $0.2 million and $0.4 million, respectively, for the three and six months ended June 30, 2006.

The Company is subject to comprehensive federal, state, local and international environmental laws and regulations relating to the release or discharge of materials into the environment, the management, use, processing, handling, storage, transport or disposal of hazardous materials and wastes, or otherwise relating to the protection of human health and the environment. These laws and regulations not only expose ARI to liability for the environmental condition of its current or formerly owned or operated facilities, and its own negligent acts, but also may expose ARI to liability for the conduct of others or for ARI’s actions that were in compliance with all applicable laws at the time these actions were taken. In addition, these laws may require significant expenditures to achieve compliance, and are frequently modified or revised to impose new obligations. Civil and criminal fines and penalties and other sanctions may be imposed for non-compliance with these environmental laws and regulations. ARI’s operations that involve hazardous materials also raise potential risks of liability under common law. ARI is involved in investigation and remediation activities at properties that it now owns or leases to address historical contamination and potential contamination by third parties. The Company is also involved with state agencies in the cleanup of two sites under these laws. These investigations are at a preliminary stage, and it is impossible to estimate, with any certainty, the timing and extent of remedial actions that may be required, and the costs that would be involved in such remediation. Substantially all of the issues identified relate to the use of the properties prior to their transfer to ARI in 1994 by ACF and for which ACF has retained liability for environmental contamination that may have existed at the time of transfer to ARI. ACF has also agreed to indemnify ARI for any cost that might be incurred with those existing issues. However, if ACF fails to honor its obligations to ARI, ARI would be responsible for the cost of such remediation. The Company believes that its operations and facilities are in substantial compliance with applicable laws and regulations and that any noncompliance is not likely to have a material adverse effect on its operations or financial condition.

When it is possible to make a reasonable estimate of the liability with respect to such a matter, a provision will be made as appropriate. Actual cost to be incurred in future periods may vary from these estimates. Based on facts presently known, ARI does not believe that the outcome of these proceedings will have a material adverse effect on its future liquidity, results of operations or financial position.

ARI is a party to collective bargaining agreements with labor unions at its Longview, Texas and North Kansas City, Missouri repair facilities and at its Longview, Texas steel foundry and components manufacturing facility. These agreements expire in January 2007, September 2007, and April 2008, respectively. ARI is also party to a collective bargaining agreement at our Milton, Pennsylvania repair facility, which expired on June 19, 2005. The contract provisions under the agreement provide that the contract would remain in effect under the old terms until terminated by either party with 60 days notice. At the present time, there are no workers at Milton, as the site is idled.

The Company was named a party to a suit in which the plaintiff alleges the Company was responsible for the malfunction of a valve which was remanufactured in 2004 by a third party. The Company believes it has no responsibility for this malfunction and has meritorious defense against any liability in this case. In any event, it is

American Railcar Industries, Inc. and Subsidiaries

not possible to estimate the expected settlement, if any, that any party might be held accountable for at this time as the case is in its early stages.

The Company has been named as the defendant in a lawsuit in which the plaintiff claims that the Company is responsible for the damage caused by allegedly defective railcars that were manufactured by the Company. The plaintiffs allege that failures in certain components caused the contents transported by these railcars to spill out of the railcars causing property damage, clean-up costs, monitoring costs, testing costs and other costs and damages. The Company believes that it is not responsible for the spills and has meritorious defenses against liability.

Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against ARI. In the opinion of management, all such claims, suits, and complaints arising in the ordinary course of business are without merit or would not have a significant effect on the future liquidity, results of operations or financial position of ARI if disposed of unfavorably.

The Company entered into two vendor supply contracts with minimum volume commitments in October 2005 with suppliers of materials used at our railcar production facilities. The agreements have terms of two and three years respectively. The Company has agreed to purchase a combined total of $67.6 million from these two suppliers over three years. In 2006, 2007 and 2008 we expect to purchase $16.0 million, $27.1 million and $24.5 million respectively under these agreements. For the current year, the Company has spent approximately $6.7 million through June 30, 2006.

ARI entered into supply agreements on January 28, 2005 and on June 8, 2005 with a supplier for two types of steel plates. The agreement is for five years and is cancelable by either party, with proper notice after two years. The agreement commits ARI to buy 75% of its production needs from this supplier at prices that fluctuate with market.

Note 15—Common Stock, Mandatorily Redeemable Preferred Stock, and New Preferred Stock

On January 24, 2006, the Company completed the sale of 9,775,000 shares of common stock to the public pursuant to an effective registration statement at a price of $21.00 per share. In connection with the offering, the Company redeemed all mandatorily redeemable preferred stock and new preferred stock, including accrued dividends of $11.9 million, for a total of $94.0 million.

In February 2006, the Board of Directors of the Company declared a cash dividend of $0.03 per share of common stock of the Company to shareholders of record at the close of business on March 22, 2006. These dividends were paid on April 6, 2006.

In June 2006, the Board of Directors of the Company declared a cash dividend of $0.03 per share of common stock of the Company to shareholders of record at the close of business on June 29, 2006. Dividends of $0.6 million were accrued as of June 30, 2006. These dividends were paid on July 14, 2006.

Note 16—Operating Segment and Sales/Credit Concentrations

ARI operates in two reportable segments; manufacturing operations and railcar services. The accounting policies of the segments are the same as those described in Note 2. Performance is evaluated based on revenue and operating profit. Intersegment sales and transfers are accounted for as if sales or transfers were to third parties.

The information in the following tables is derived from the segments’ internal financial reports used for corporate management purposes:

American Railcar Industries, Inc. and Subsidiaries

For the three months ended June		Manufacturing				Railcar				Corporate
30, 2005		Operations				Services				& all other				Eliminations				Totals
		(in thousands)
Revenues from external customers		$	149,284			$	11,437			$	—			$	—			$	160,721
Intersegment revenues			252				1,093				—				(1,345	)			—
Cost of goods sold — external customers			135,399				10,323				—				—				145,722
Cost of intersegment sales			228				852				—				(1,080	)			—
Gross profit			13,909				1,355				—				(265	)			14,999
Gain related to insurance recoveries			—				—				—				—				—
Selling, administration and other			2,052				727				450				—				3,229
Stock based compensation expense			—				—				—				—				—
Earnings (loss) from operations		$	11,857			$	628			$	(450	)		$	(265	)		$	11,770
Capital expenditures			4,490				81				88				—				4,659
Depreciation and amortization			1,214				485				5				—				1,704

For the three months ended June		Manufacturing				Railcar				Corporate
30, 2006		Operations				Services				& all other				Eliminations				Totals
		(in thousands)
Revenues from external customers		$	138,816			$	12,734			$	—			$	—			$	151,550
Intersegment revenues			581				37				—				(618	)			—
Cost of goods sold — external customers			123,618				9,947								—				133,565
Cost of intersegment sales			405				31				—				(436	)			—
Gross profit			15,374				2,793				—				(182	)			17,985
Gain related to insurance recoveries			4,983				—				—				—				4,983
Selling, administration and other			1,299				505				2,804				—				4,608
Stock based compensation expense			—				—				1,419				—				1,419
Earnings (loss) from operations		$	19,058			$	2,288			$	(4,223	)		$	(182	)		$	16,941
Capital expenditures			10,752				369				—				—				11,121
Depreciation and amortization			2,094				497				34				—				2,625

		Manufacturing				Railcar				Corporate
For the six months ended June 30, 2005		Operations				Services				& all other				Eliminations				Totals
		(in thousands)
Revenues from external customers		$	269,978			$	21,665			$	—			$	—			$	291,643
Intersegment revenues			490				1,865				—				(2,355	)			—
Cost of goods sold — external customers			250,916				18,575								—				269,491
Cost of intersegment sales			440				1,442				—				(1,882	)			—
Gross profit			19,112				3,513				—				(473	)			22,152
Gain related to insurance recoveries			—				—				—				—				—
Selling, administration and other			2,763				959				2,906				—				6,628
Stock based compensation expense			—				—				—				—				—
Earnings (loss) from operations		$	16,349			$	2,554			$	(2,906	)		$	(473	)		$	15,524
Capital expenditures			9,021				277				94				—				9,392
Depreciation and amortization			2,254				964				11				—				3,229

American Railcar Industries, Inc. and Subsidiaries

		Manufacturing				Railcar				Corporate
For the six months ended June 30, 2006		Operations				Services				& all other				Eliminations				Totals
		(in thousands)
Revenues from external customers		$	305,306			$	24,973			$	—			$	—			$	330,279
Intersegment revenues			1,482				215				—				(1,697	)			—
Cost of goods sold — external customers			271,874				20,160				—				—				292,034
Cost of intersegment sales			1,338				169				—				(1,507	)			—
Gross profit			33,576				4,859				—				(190	)			38,245
Gain related to insurance recoveries			4,983				—				—				—				4,983
Selling, administration and other			2,771				998				5,984				—				9,753
Stock based compensation expense			—				—				4,969				—				4,969
Earnings (loss) from operations		$	35,788			$	3,861			$	(10,953	)		$	(190	)		$	28,506
Capital expenditures and acquisitions			20,667				369				—				—				21,036
Depreciation and amortization			3,854				992				69				—				4,915
		Manufacturing				Railcar				Corporate
As of		Operations				Services				& all other				Eliminations				Totals
December 31, 2005		(in thousands)
Total assets		$	185,652			$	34,171			$	48,757			$	—			$	268,580
June 30, 2006
Total assets			245,517				37,683				34,500				—				317,700

Manufacturing Operations

Revenues from affiliates were 10.6% and 9.7% of total consolidated revenues for the three and six months ended June 30, 2005, respectively. Revenues from affiliates were 3.4% and 6.1% of total consolidated revenues for the three and six months ended June 30, 2006.

Revenues from one significant customer totaled 30.0% and 26.0% of total consolidated revenues for the three and six months ended June 30, 2005, respectively. Revenues from one significant customer totaled 29.3% and 30.4% of total consolidated revenues for the three and six months ended June 30, 2006.

Revenues from two significant customers were 55.0% and 47.0% of total consolidated revenues for the three and six months ended June 30, 2005, respectively. Revenues from two significant customers were 45.1% and 43.9% of total consolidated revenues for the three and six months ended June 30, 2006, respectively.

Receivables from one significant customer were 21.0% and 14.7% of total consolidated accounts receivable at December 31, 2005 and June 30, 2006, respectively. Receivables from two significant customers were 21.0% and 25.0% of total consolidated accounts receivable at December 31, 2005 and June 30, 2006, respectively.

Railcar services

Revenues from affiliates were 3.4% and 3.9% of total consolidated revenues for the three and six months ended June 30, 2005, respectively. Revenues from affiliates were 3.0% and 3.2% of total consolidated revenues for the three and six months ended June 30, 2006, respectively. No single services customer accounted for more than 10.0% of total consolidated revenue for the three and six months ended June 30, 2005 and 2006. No single services customer accounted for more than 10.0% of total consolidated accounts receivable as of December 31, 2005 and June 30, 2006.

American Railcar Industries, Inc. and Subsidiaries

Note 17—Supplemental Cash Flow Information

ARI received interest income of $1.0 million and $0.9 million for the six months ended June 30, 2005 and 2006, respectively.

ARI paid interest expense of $2.4 million and $1.1 million for the six months ended June 30, 2005 and 2006, respectively.

ARI paid taxes of $0.3 million and $10.7 million for the six months ended June 30, 2005 and 2006, respectively.

Approximately $12.5 million representing certain tax benefits that ARI received as a result of utilizing ARL’s previously incurred tax losses was recorded through additional paid-in-capital as ARI received the benefit of these tax losses during 2005.

In January 2005, ARI exchanged the $165.0 million secured note with Mr. Icahn to ARL in satisfaction of the $130.0 million note owed to ARL plus $35.0 million of common interest in ARL.

In the six months ended June 30, 2006, the Company incurred stock based compensation expense of $3.9 million in connection with the initial public offering for the issuance of restricted shares of common stock to the Company’s Chief Executive Officer. The Company’s stock option expense for the six months ended June 30, 2006 was $1.2 million.

In January 2006, in connection with the initial public offering, the Company incurred compensation expense of $0.5 million related to a bonus for one of our senior officers that is payable in 2007.

In February 2006, the Board of Directors of the Company declared a common stock dividend of $0.03 per share to shareholders that was paid on April 6, 2006 to shareholders of record as of March 22, 2006.

In June 2006, the board of Directors of the Company declared a common stock dividend of $0.03 per share to shareholders that was paid on July 14, 2006 to shareholders of record as of June 29, 2006.

•

risks associated with the planned construction of our new flexible railcar manufacturing plant, including without limitation:

	°		construction delays;
	°		unexpected costs;
	°		our planned dependence on the new plant to produce railcars for which we have already accepted orders; and
	°		other risks typically associated with the construction of new manufacturing facilities;

	•		the cyclical nature of our business;
	•		adverse economic and market conditions;
	•		fluctuating costs of raw materials, including steel and railcar components, and delays in the delivery of such raw materials and components;
	•		our ability to maintain relationships with our suppliers of railcar components and raw materials;
	•		fluctuations in the supply of components and raw materials we use in railcar manufacturing;
	•		the highly competitive nature of our industry;
	•		the risk of damage to our primary railcar manufacturing facilities or equipment in Paragould or Marmaduke, Arkansas;
	•		our reliance upon a small number of customers that represent a large percentage of our revenues;
	•		the variable purchase patterns of our railcar customers and the timing of completion, delivery and acceptance of customer orders;
	•		our dependence on our key personnel;
	•		the risks of a labor shortage in light of our recent growth;
	•		risks associated with the conversion of our railcar backlog into revenues;
	•		the difficulties of integrating acquired businesses with our own;

American Railcar Industries, Inc. and Subsidiaries

	•		the risk of lack of acceptance of our new railcar offerings by our customers;
	•		the cost of complying with environmental laws and regulations;
	•		the costs associated with being a public company;
	•		our relationship with Carl C. Icahn, our principal beneficial stockholder and the chairman of our board of directors, and his affiliates as a purchaser of our products, supplier of components and services to us and as a provider of significant capital, financial and managerial support;
	•		potential failure by ACF Industries LLC, an affiliate of Carl Icahn our principal beneficial stockholder and the chairman of our board of directors to honor its indemnification obligations to us;
	•		potential risk of increased unionization of our workforce;
	•		our ability to manage our pension costs;
	•		potential significant warranty claims; and
	•		covenants in our amended and restated revolving credit facility governing our indebtedness that limit our management’s discretion in the operation of our businesses.

Our actual results could be different from the results described in or anticipated by our forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections and may be better or worse than anticipated. Given these uncertainties, you should not rely on forward-looking statements. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We expressly disclaim any duty to provide updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this report, in order to reflect changes in circumstances or expectations or the occurrence of unanticipated events except to the extent required by applicable securities laws. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed above under “Risk factors” in our Annual Report on Form 10-K filed on March 28, 2006 (the “Annual Report”) and in Part II- Item 1A of this report, as well as the risks and uncertainties discussed elsewhere in the Annual Report and this report. We caution you that these risks may not be exhaustive. We operate in a continually changing business environment and new risks emerge from time to time.

OVERVIEW

We are a leading North American manufacturer of covered hopper and tank railcars. We also repair and refurbish railcars, provide fleet management services and design and manufacture certain railcar and industrial components used in the production of our railcars as well as railcars and non-railcar industrial products produced by others. We provide our railcar customers with integrated solutions through a comprehensive set of high quality products and related services.

We operate in two segments: manufacturing operations and railcar services. Manufacturing operations consists of railcar manufacturing and railcar and industrial component manufacturing. Railcar services consist of railcar repair and refurbishment services and fleet management services.

RECENT DEVELOPMENTS

On April 2, 2006, our Marmaduke, Arkansas tank railcar manufacturing facility was damaged by a tornado. While the majority of the facility suffered only minor damage, the portion of the factory that processed inbound material, equipment associated with material handling, plate steel blasting and sheet rolling as well as some inventory were destroyed by the storm. The tornado also destroyed the steel plate storage facility that was under construction and nearly completed. As of early August, we received most of the major equipment items that required replacement and

American Railcar Industries, Inc. and Subsidiaries

the facility resumed tank railcar production on August 7, 2006. Through the date of this filing, none of our customers has canceled any contracts for the manufacture of tank railcars. We have received written confirmation from our insurance carrier that our insurance provides coverage for the wind and rain damage to our property and for business interruption as a direct result of the insured damage. Subject to the deductibles for our insurance, we believe that substantially all of our damage from the storm will be covered and within the coverage limits of our policies. The insurance carrier made an initial payment of $7.5 million to us on our property claim and we have reached a preliminary minimum settlement amount of $8.0 million (after application of the deductible) to cover continuing expenses, employee wages and estimated lost profits for the months of April, May and June 2006. We are continuing to work with our carrier to further assess the amount of the damage and the insurable loss. Certain risks associated with this storm damage are set forth in “Part II—Item 1A — Risk Factors.”

Our revenues and manufacturing gross profits have been adversely affected by the temporary shut-down of our Marmaduke facility. However, as set forth above, and subject to our deductibles and the risks and uncertainties set forth in this report, we expect that the profit impact of these adverse affects will be substantially offset by proceeds from our business interruption insurance. In the three months ended June 30, 2006, we recognized a gain of $5.0 million associated with the minimum settlement of our business interruption insurance recoveries for that period. We also expect to recognize a gain on the repair and replacement of our facility and equipment that is funded from insurance proceeds, where the cost of repair or replacement is greater than the book value of the underlying property or equipment that is being replaced. This gain will be recorded when the final settlement has been reached on the property damage claim.

In August 2006, our Board of Directors approved the construction of a new flexible railcar manufacturing plant to be built adjacent to our tank railcar manufacturing plant in Marmaduke, Arkansas. We anticipate that the new plant would be capable of producing tank, covered hopper, and intermodal railcars. We expect the plant would have an initial capacity to produce 2,500 tank railcars annually, with railcar production expected to begin in early 2008. This new plant would be in addition to the tank railcar expansion currently underway at Marmaduke to increase capacity by 1,000 tank railcars annually. Construction on the new plant is expected to begin in the third quarter of 2006. Certain risks associated with this new plant are set forth in “Part II–Item 1A — Risk Factors.”

In August 2006, we signed agreements with two customers to purchase a total of 2,000 railcars per year from us in each of 2008 and 2009. One of these customers has options to purchase up to an additional 2,000 railcars. We currently anticipate that the railcars for these new orders would be produced at our new plant. These orders are not included in our backlog of 12,790 railcars as of June 30, 2006.