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EX-32.2 - EX-32.2 - RAILAMERICA INC /DE | g25006exv32w2.htm |
EX-31.1 - EX-31.1 - RAILAMERICA INC /DE | g25006exv31w1.htm |
EX-32.1 - EX-32.1 - RAILAMERICA INC /DE | g25006exv32w1.htm |
EX-31.2 - EX-31.2 - RAILAMERICA INC /DE | g25006exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 September 30, 2010,
or
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 001-32579
RAILAMERICA, INC.
Delaware | 65-0328006 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
7411 Fullerton Street, Suite 300, Jacksonville, Florida 32256
(Address of Principal Executive Offices) (Zip Code)
(800) 342-1131
(Registrants 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 No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated
filer þ
(Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act) Yes o No þ
As of
November 1, 2010 there were 54,861,304 shares of the registrants common stock outstanding.
RAILAMERICA, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2010
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Unaudited)
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(In thousands, except share data) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 113,898 | $ | 190,218 | ||||
Accounts and notes receivable, net of allowance of $5,427 and $4,557, respectively |
81,661 | 66,619 | ||||||
Current deferred tax assets |
12,697 | 12,697 | ||||||
Other current assets |
13,691 | 21,958 | ||||||
Total current assets |
221,947 | 291,492 | ||||||
Property, plant and equipment, net |
978,310 | 952,527 | ||||||
Intangible assets |
141,401 | 136,654 | ||||||
Goodwill |
212,258 | 200,769 | ||||||
Other assets |
13,971 | 17,187 | ||||||
Total assets |
$ | 1,567,887 | $ | 1,598,629 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current maturities of long-term debt |
$ | 466 | $ | 669 | ||||
Accounts payable |
56,002 | 53,948 | ||||||
Accrued expenses |
45,844 | 34,675 | ||||||
Total current liabilities |
102,312 | 89,292 | ||||||
Long-term debt, less current maturities |
2,759 | 3,013 | ||||||
Senior secured notes |
570,601 | 640,096 | ||||||
Deferred income taxes |
194,503 | 185,002 | ||||||
Other liabilities |
19,749 | 21,895 | ||||||
Total liabilities |
889,924 | 939,298 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value, 400,000,000 shares authorized; 54,877,105 shares
issued and outstanding at September 30, 2010; and 54,364,306 shares issued and
outstanding at December 31, 2009 |
549 | 544 | ||||||
Additional paid in capital and other |
634,836 | 630,653 | ||||||
Retained earnings |
47,619 | 46,386 | ||||||
Accumulated other comprehensive loss |
(5,041 | ) | (18,252 | ) | ||||
Total stockholders equity |
677,963 | 659,331 | ||||||
Total liabilities and stockholders equity |
$ | 1,567,887 | $ | 1,598,629 | ||||
The accompanying Notes are an integral part of the Consolidated Financial Statements.
3
Table of Contents
RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Operating revenue |
$ | 128,257 | $ | 110,137 | $ | 362,655 | $ | 316,620 | ||||||||
Operating expenses: |
||||||||||||||||
Transportation |
54,497 | 47,524 | 164,779 | 138,974 | ||||||||||||
Selling, general and administrative |
29,721 | 26,799 | 89,907 | 74,943 | ||||||||||||
Other |
5,675 | | 5,675 | | ||||||||||||
Net (gain) loss on sale of assets |
(1,708 | ) | (159 | ) | (1,717 | ) | 855 | |||||||||
Depreciation and amortization |
11,581 | 10,365 | 33,259 | 30,931 | ||||||||||||
Total operating expenses |
99,766 | 84,529 | 291,903 | 245,703 | ||||||||||||
Operating income |
28,491 | 25,608 | 70,752 | 70,917 | ||||||||||||
Interest expense (including amortization costs of $6,020,
$10,398, $20,194 and $18,990, respectively) |
(19,735 | ) | (27,507 | ) | (64,592 | ) | (62,770 | ) | ||||||||
Other income (loss) |
2,264 | 24 | (5,177 | ) | (1,396 | ) | ||||||||||
Income (loss) from continuing operations before income taxes |
11,020 | (1,875 | ) | 983 | 6,751 | |||||||||||
Provision for (benefit from) income taxes |
3,052 | (5,378 | ) | (250 | ) | (3,028 | ) | |||||||||
Income from continuing operations |
7,968 | 3,503 | 1,233 | 9,779 | ||||||||||||
Discontinued operations: |
||||||||||||||||
Gain (loss) on disposal of discontinued business (net of
income taxes (benefit) of $(11) and $12,005, respectively) |
| (20 | ) | | 12,931 | |||||||||||
Net income |
$ | 7,968 | $ | 3,483 | $ | 1,233 | $ | 22,710 | ||||||||
Dividends declared and paid per common share |
$ | | $ | | $ | | $ | 0.46 | ||||||||
Basic earnings per common share: |
||||||||||||||||
Continuing operations |
$ | 0.15 | $ | 0.08 | $ | 0.02 | $ | 0.23 | ||||||||
Discontinued operations |
0.00 | 0.00 | 0.00 | 0.30 | ||||||||||||
Net income |
$ | 0.15 | $ | 0.08 | $ | 0.02 | $ | 0.53 | ||||||||
Diluted earnings per common share: |
||||||||||||||||
Continuing operations |
$ | 0.15 | $ | 0.08 | $ | 0.02 | $ | 0.23 | ||||||||
Discontinued operations |
0.00 | 0.00 | 0.00 | 0.30 | ||||||||||||
Net income |
$ | 0.15 | $ | 0.08 | $ | 0.02 | $ | 0.53 | ||||||||
Weighted Average common shares outstanding: |
||||||||||||||||
Basic |
54,872 | 43,721 | 54,769 | 43,688 | ||||||||||||
Diluted |
54,872 | 43,721 | 54,769 | 43,688 |
The accompanying Notes are an integral part of the Consolidated Financial Statements.
4
Table of Contents
RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
(In thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 1,233 | $ | 22,710 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization, including amortization of debt issuance costs
classified in interest expense |
36,863 | 39,858 | ||||||
Amortization of swap termination costs |
16,582 | 10,026 | ||||||
Net gain on sale or disposal of properties |
(1,717 | ) | (70 | ) | ||||
Foreign exchange gain on debt |
| (1,160 | ) | |||||
Swap termination costs |
| (55,750 | ) | |||||
Loss on extinguishment of debt |
8,357 | 2,593 | ||||||
Equity compensation costs |
5,525 | 3,146 | ||||||
Deferred income taxes and other |
(3,770 | ) | 3,336 | |||||
Changes in operating assets and liabilities, net of acquisitions and dispositions: |
||||||||
Accounts receivable |
(9,565 | ) | 1,906 | |||||
Other current assets |
9,056 | 1,315 | ||||||
Accounts payable |
(2,808 | ) | (605 | ) | ||||
Accrued expenses |
10,326 | (1,841 | ) | |||||
Other assets and liabilities |
(2,210 | ) | (20,336 | ) | ||||
Net cash provided by operating activities |
67,872 | 5,128 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of property, plant and equipment |
(46,771 | ) | (34,451 | ) | ||||
Proceeds from sale of assets |
3,251 | 20,071 | ||||||
Acquisitions, net of cash acquired |
(23,926 | ) | | |||||
Deferred disposition costs and other |
| (355 | ) | |||||
Net cash used in investing activities |
(67,446 | ) | (14,735 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from issuance of senior secured notes |
| 709,830 | ||||||
Principal payments on long-term debt |
(391 | ) | (625,677 | ) | ||||
Repurchase of senior secured notes |
(76,220 | ) | | |||||
Costs associated with sale of common stock |
(106 | ) | | |||||
Dividends paid to common stockholders |
| (19,485 | ) | |||||
Deferred financing costs paid |
(224 | ) | (20,018 | ) | ||||
Net cash provided by (used in) financing activities |
(76,941 | ) | 44,650 | |||||
Effect of exchange rates on cash |
195 | 214 | ||||||
Net increase (decrease) in cash |
(76,320 | ) | 35,257 | |||||
Cash, beginning of period |
190,218 | 26,951 | ||||||
Cash, end of period |
$ | 113,898 | $ | 62,208 | ||||
The accompanying Notes are an integral part of the Consolidated Financial Statements.
5
Table of Contents
RAILAMERICA,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The interim consolidated financial statements presented herein include the accounts of RailAmerica,
Inc. and all of its subsidiaries (RailAmerica or the Company). All of RailAmericas
consolidated subsidiaries are wholly-owned. All significant intercompany transactions and accounts
have been eliminated in consolidation. These interim consolidated financial statements have been
prepared by the Company, without audit, and accordingly do not contain all disclosures which would
be required in a full set of financial statements prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP). In the opinion of management, the
unaudited financial statements for the three and nine months ended September 30, 2010 and 2009, are
presented on a basis consistent with the audited financial statements and contain all adjustments,
consisting only of normal recurring adjustments, necessary to provide a fair statement of the
results for interim periods. The results of operations for interim periods are not necessarily
indicative of results of operations for the full year. The consolidated balance sheet data for 2009
was derived from the Companys audited financial statements for the year ended December 31, 2009,
but does not include all disclosures required by GAAP.
In October 2010, the Company entered into a new agreement with Canadian Pacific Railway Company
(CP) to operate portions of the Ottawa Valley Railway (OVRR) line, a previously discontinued
operation. As a result of this new operating agreement, this railroad is no longer considered
discontinued for financial statement presentation purposes and thus, the results of operations of
the OVRR have been reclassified to continuing operations on our statement of operations for all
periods presented.
Organization
RailAmerica is a leading owner and operator of short line and regional freight railroads in North
America, operating a portfolio of 40 individual railroads with approximately 7,300 miles of track
in 27 states and three Canadian provinces. The Companys principal operations consist of rail
freight transportation and ancillary rail services.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
2. EARNINGS PER SHARE
For the three and nine months ended September 30, 2010 and 2009, basic and diluted earnings per
share are calculated using the weighted average number of common shares outstanding during the
year. The basic earnings per share calculation includes all vested and unvested restricted shares
as a result of their dividend participation rights.
The following is a summary of the income from continuing operations available for common
stockholders and weighted average shares outstanding (in thousands):
For the Three Months | For the Nine Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Income from continuing operations (basic and diluted) |
$ | 7,968 | $ | 3,503 | $ | 1,233 | $ | 9,779 | ||||||||
Compensation expense recorded for dividends paid on
unvested restricted shares, net of tax |
| | | 307 | ||||||||||||
Income from continuing operations available to common
stockholders (basic and diluted) |
$ | 7,968 | $ | 3,503 | $ | 1,233 | $ | 10,086 | ||||||||
Weighted average shares outstanding (basic and diluted) |
54,872 | 43,721 | 54,769 | 43,688 |
6
Table of Contents
RAILAMERICA,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. STOCK-BASED COMPENSATION
The Company has the ability to issue restricted shares under its incentive compensation plan.
Restricted shares granted to employees are scheduled to vest over three to five year periods. The
grant date fair values of the restricted shares are based upon the fair market value of the Company
at the time of grant. Prior to the Companys initial public offering in October 2009, the Company
engaged an unrelated valuation specialist to perform a fair value analysis of the Company at the
end of each quarter.
Stock-based compensation expense related to restricted stock grants for the three months ended
September 30, 2010 and 2009 was $2.0 million and $1.2 million, respectively. Stock-based
compensation expense related to restricted stock grants for the nine months ended September 30,
2010 and 2009 was $5.5 million and $3.1 million, respectively.
A summary of the status of restricted shares as of September 30, 2010, and the changes during the
nine months then ended and the weighted average grant date fair values is presented below:
Time Based | ||||||||
Balance at December 31, 2009 |
1,286,329 | $ | 13.10 | |||||
Granted |
660,688 | $ | 11.89 | |||||
Vested |
(359,276 | ) | $ | 12.89 | ||||
Cancelled |
(42,641 | ) | $ | 13.02 | ||||
Balance at September 30, 2010 |
1,545,100 | $ | 12.64 | |||||
4. ACQUISITIONS
On July 1, 2010, the Company acquired Atlas Railroad Construction Company (Atlas) and related
assets for $23.9 million in cash including closing adjustments for working capital, which were
approximately $2.4 million, net of cash acquired. The acquisition was funded from existing cash on
hand. Founded in 1954, Atlas is a railroad engineering, construction, maintenance and repair
company operating primarily in the U.S. Midwest and Northeast. Atlas provides railroad
construction services principally to short line and regional railroads, public-transit agencies and
industrial customers. The results of operations of Atlas have been included in the Companys
consolidated financial statements since July 1, 2010, the acquisition date.
In accordance with ASC 805, Business Combinations Topic, the acquisition was accounted for under
the acquisition method of accounting. Assets acquired and liabilities assumed were recorded at
their estimated fair value. As a result of the consideration paid, an estimated $11.3 million of
goodwill was recorded related to the acquired entity. The main drivers of goodwill were Atlass
historical revenue growth rate as well as expectations for future revenue and Earnings Before
Interest, Taxes, Depreciation and Amortization (EBITDA) growth from organic and strategic
initiatives including synergies from further integration of processes across the RailAmerica
network and leveraging our natural customer, Class I, shortline and governmental relationships.
These expectations of future business performance were key factors influencing the premium paid for
the Atlas business. The goodwill associated with this acquisition is not deductible for tax
purposes.
The preliminary allocation of purchase price is as follows (in thousands):
Current assets |
$ | 6,607 | ||
Intangible assets |
9,430 | |||
Goodwill |
11,326 | |||
Property, plant and equipment |
6,459 | |||
Total assets acquired |
33,822 | |||
Current liabilities |
(4,182 | ) | ||
Deferred tax liabilities |
(5,715 | ) | ||
Total liabilities assumed |
(9,897 | ) | ||
Purchase price |
$ | 23,925 | ||
7
Table of Contents
RAILAMERICA,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Atlas trade name was considered an indefinite-lived intangible asset and was assigned a value
of $1.8 million. Definite-lived intangible assets were assigned the following amounts and weighted
average amortization periods (dollars in thousands):
Value | Weighted Average Life |
|||||||
Assigned | (Years) | |||||||
Customer relationships |
$ | 6,720 | 20.0 | |||||
Project backlog |
$ | 110 | 0.5 | |||||
Non-compete agreements |
$ | 810 | 4.0 |
5. DISCONTINUED OPERATIONS
Alberta Railroad Properties
During the fourth quarter of 2005, the Company committed to a plan to dispose of the Alberta
Railroad Properties, comprised of the Lakeland & Waterways Railway, Mackenzie Northern Railway and
Central Western Railway. The sale of the Alberta Railroad Properties was completed in January 2006
for $22.1 million in cash. During the three months ended September 30, 2009, the Company recorded
an adjustment of $(0.03) million, or $(0.02) million, after tax, as a loss on sale of discontinued
operations related to outstanding liabilities associated with the disposed entities. During the
nine months ended September 30, 2009, the Company recorded an adjustment of $0.2 million, or $0.2
million, after tax, as a gain on disposal of discontinued operations related to outstanding
liabilities associated with the disposed entities.
Freight Australia
In August 2004, the Company completed the sale of its Australian railroad, Freight Australia, to
Pacific National for AUD $285 million (US $204 million). On May 14, 2009, the Company received a
notice from the Australian Taxation Office (ATO) indicating that they would not be taking any
further action in relation to its audit of the reorganization transactions undertaken by the
Companys Australian subsidiaries prior to the sale. As a result, the Company removed the
previously recorded tax reserves resulting in a benefit to the continuing operations tax provision
of $2.5 million related to the accrual of interest subsequent to the Companys acquisition, an
adjustment to the gain on disposal of discontinued operations of $12.3 million and reduced its
accrual for consulting fees resulting in a gain on disposal of discontinued operations of $0.7
million, or $0.5 million, after tax during the nine months ended September 30, 2009.
6. LONG-TERM DEBT
$740 Million 9.25% Senior Secured Notes
On June 23, 2009, the Company sold $740.0 million of 9.25% senior secured notes due July 1, 2017 in
a private offering, for gross proceeds of $709.8 million after deducting the initial purchasers
fees. The notes are secured by first-priority liens on substantially all of the Companys and the
guarantors assets. The guarantors are defined essentially as the Companys existing and future
wholly-owned domestic restricted subsidiaries. The net proceeds received from the issuance of the
notes were used to repay the outstanding balance of the $650 million bridge credit facility, as
described below, and $7.4 million of accrued interest thereon, pay costs of $57.1 million to
terminate interest rate swap arrangements, including $1.3 million of accrued interest, entered into
in connection with the bridge credit facility, pay fees and expenses related to the offering and
for general corporate purposes.
The Company may redeem up to 10% of the aggregate principal amount of the notes issued during any
12-month period commencing on the issue date at a price equal to 103% of the principal amount
thereof plus accrued and unpaid interest, if any. The Company may also redeem some or all of the
notes at any time before July 1, 2013, at a price equal to 100% of the aggregate principal amount
thereof plus accrued and unpaid interest, if any, to the redemption date and a make-whole premium.
In addition, prior to July 1, 2012, the Company may redeem up to 35% of the notes at a redemption
price of 109.25% of their principal amount thereof plus accrued and unpaid interest, if any, with
the proceeds from an equity offering. Subsequent to July 1, 2013, the Company may redeem the notes
at 104.625% of their principal amount. The premium then reduces to 102.313% commencing on July 1,
2014 and then 100% on July 1, 2015 and thereafter. On November 16, 2009, the Company redeemed $74
million aggregate principal amount of the notes at a cash redemption price of 103%, plus accrued
interest thereon to, but not including, the redemption date. On June 24, 2010, the Company redeemed
an additional $74 million aggregate principal amount of the notes at a cash redemption price of
103%, plus accrued interest thereon to, but not including, the redemption date.
8
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RAILAMERICA,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On November 2, 2009, the Company commenced an exchange offer of the privately placed senior secured
notes for senior secured notes which have been registered under the Securities Act of 1933, as
amended. The registered notes have terms that are substantially identical to the privately placed
notes. The exchange offer expired on December 2, 2009.
$40 Million ABL Facility
In connection with the issuance of the senior secured notes on June 23, 2009, the Company also
entered into a $40 million Asset Backed Loan Facility (ABL Facility). The ABL Facility matures on
June 23, 2013 and bears interest at LIBOR plus 4.0%. Obligations under the ABL Facility are secured
by a first-priority lien on the ABL collateral. ABL collateral includes accounts receivable,
deposit accounts, securities accounts and cash. As of September 30, 2010, the Company had no
outstanding balance under the Facility and approximately $21.0 million of undrawn availability,
taking into account borrowing base limitations.
The ABL Facility and indenture governing the senior secured notes contain various covenants and
restrictions that will limit the ability of the Company and its restricted subsidiaries to incur
additional indebtedness, pay dividends, make certain investments, sell or transfer certain assets,
create liens, designate subsidiaries as unrestricted subsidiaries, consolidate, merge or sell
substantially all the assets, and enter into certain transactions with affiliates. It is
anticipated that proceeds from any future borrowings would be used for general corporate purposes.
On June 10, 2010, the Company entered into Amendment No. 1 (the Amendment) to its ABL Facility
improving certain terms of the ABL Facility. Among other things, this Amendment eliminates the
LIBOR-based interest rate floor of 2.5%, modifies the borrowing base calculation and reporting
requirements to require less frequent financial reporting in certain circumstances, adjusts the
limitations on permitted acquisitions and restricted payments and amends the financial covenants to
incorporate cash balances in certain definitions.
$650 Million Bridge Credit Facility
As part of the merger transaction in which the Company was acquired by certain private equity funds
managed by affiliates of Fortress Investment Group LLC (Fortress), the Company terminated the
commitments under its former amended and restated credit agreement and repaid all outstanding loans
and other obligations in full under this agreement. In order to fund this repayment of debt and
complete the merger transaction, on February 14, 2007, the Company entered into a $650 million
bridge credit facility agreement. The facility consisted of a $587 million U.S. dollar term loan
commitment and a $38 million Canadian dollar term loan commitment, as well as a $25 million
revolving loan facility with a $20 million U.S. dollar tranche and a $5 million Canadian dollar
tranche. The Company entered into an amendment on July 1, 2008 to extend the maturity of the bridge
credit facility for one year with an additional one year extension at its option. Under the amended
bridge credit facility agreement, the term loans and revolving loans carried an interest rate of
LIBOR plus 4.0%. Prior to amendment, the bridge credit facility agreement, including the revolving
loans, paid interest at LIBOR plus 2.25%. The outstanding borrowings under this facility were
classified as non-current as of December 31, 2008, as the Company had the intent and ability to
exercise its option to extend the maturity to August 15, 2010. The $25 million revolving loan
facility was available for immediate borrowing if necessary.
In November 2008, the Company entered into Amendment No. 1 to the amended bridge credit facility
agreement which permitted the Company to enter into employee and office space sharing agreements
with affiliates and included a technical amendment to the definitions of interest coverage ratio
and interest expense.
The U.S. and Canadian dollar term loans and the U.S. and Canadian dollar revolvers were
collateralized by the assets of and guaranteed by the Company and most of its U.S. and Canadian
subsidiaries. The loans were provided by a syndicate of banks with Citigroup Global Markets, Inc.
and Morgan Stanley Senior Funding, Inc., as co-lead arrangers, Citicorp North America, Inc., as
administrative agent and collateral agent and Morgan Stanley Senior Funding, Inc. as syndication
agent.
As discussed above, all borrowings under the bridge credit facility were repaid with the proceeds
from the issuance of the senior secured notes.
9
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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective beginning second quarter 2009, ASC 825 requires disclosures about fair value of financial
instruments in quarterly reports as well as in annual reports. For RailAmerica, this statement
applies to certain investments, such as cash equivalents, and long-term debt. Also, ASC 820
clarifies the definition of fair value for financial reporting, establishes a framework for
measuring fair value and requires additional disclosures about the use of fair value measurements.
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument held by the Company:
| Current assets and current liabilities: The carrying value approximates fair value due to the short maturity of these items. | ||
| Long-term debt: The fair value of the Companys senior secured notes is based on secondary market indicators. The carrying amount of the Companys other long term debt approximates its fair value. | ||
| Derivatives: The carrying value is based on fair value as of the balance sheet date. Companies are required to maximize the use of observable inputs (Level 1 and Level 2), when available, and to minimize the use of unobservable inputs (Level 3) when determining fair value. The Companys measurement of the fair value of interest rate derivatives is based on estimates of the mid-market values for the transactions provided by the counterparties to these agreements. For derivative instruments in an asset position, the Company also analyzes the credit standing of the counterparty and factors it into the fair value measurement. ASC 820 states that the fair value of a liability also must reflect the nonperformance risk of the reporting entity. Therefore, the impact of the Companys credit worthiness has also been factored into the fair value measurement of the derivative instruments in a liability position. This methodology is a market approach, which under ASC 820 utilizes Level 2 inputs as it uses market data for similar instruments in active markets. See Note 8 for further fair value disclosure of the Companys interest rate swap. As the Company terminated its interest rate swap agreement in conjunction with the refinancing of its bridge credit facility on June 23, 2009, the swap had no fair value as of December 31, 2009 or September 30, 2010. |
The carrying amounts and estimated fair values of the Companys financial instruments were as
follows (in thousands):
September 30, 2010 | ||||||||
Carrying | Fair | |||||||
Amount | Value | |||||||
Cash and cash equivalents |
$ | 113,898 | $ | 113,898 | ||||
9.25% Senior secured notes |
$ | 570,601 | $ | 650,608 |
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted Derivatives and Hedging Topic, ASC 815-10-65, on January 1, 2009, which
enhances the disclosure requirements about an entitys derivative instruments and hedging
activities. The expanded disclosure required by ASC 815 is presented below.
The Company may use derivatives to hedge against increases in interest rates. The Company formally
documents the relationship between the hedging instrument and the hedged item, as well as the risk
management objective and strategy for the use of the hedging instrument. This documentation
includes linking the derivatives that are designated as cash flow hedges to specific assets or
liabilities on the balance sheet, commitments or forecasted transactions. The Company assesses at
the time a derivative contract is entered into, and at least quarterly, whether the derivative item
is effective in offsetting the changes in fair value or cash flows. Any change in fair value
resulting from ineffectiveness is recognized in current period earnings. For derivative instruments
that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on
the derivative instrument is recorded in accumulated other comprehensive income as a separate
component of stockholders equity and reclassified into earnings in the period during which the
hedge transaction affects earnings.
For derivative instruments in an asset position, the Company analyzes the credit standing of the
counterparty and factors it into the fair value measurement. Fair Value Measurements and
Disclosures Topic, ASC 820 states that the fair value
of a liability must reflect the
nonperformance risk of the reporting entity. Therefore, the impact of the Companys credit
worthiness was factored into the fair value
10
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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
measurement of the derivative instruments in a
liability position. The Company monitors any hedging positions and the credit ratings of its
counterparties.
On February 14, 2007, the Company entered into an interest rate swap with a termination date of
February 15, 2014. The total notional amount of the swap started at $425 million for the period
from February 14, 2007 through November 14, 2007, increased to a total notional amount of $525
million for the period from November 15, 2007 through November 14, 2008, and ultimately increased
to $625 million for the period from November 15, 2008 through February 15, 2014. Under the terms of
the interest rate swap, the Company was required to pay a fixed interest rate of 4.9485% on the
notional amount while receiving a variable interest rate equal to the 90 day LIBOR. This swap
qualified, was designated and was accounted for as a cash flow hedge under ASC 815. This interest
rate swap agreement was terminated in June 2009, in connection with the repayment of the bridge
credit facility, and thus had no fair value at December 31, 2009. Interest expense of $0.3 million
was recognized during the nine months ended September 30, 2009 for the portion of the hedge deemed
ineffective. Pursuant to ASC 815, the fair value balance of the swap at termination remains in
accumulated other comprehensive loss, net of tax, and is amortized to interest expense over the
remaining life of the original swap (through February 14, 2014). Interest expense for the quarters
ended September 30, 2010 and 2009, included $4.9 million and $9.1 million of amortization expense
related to the terminated swap, respectively. Interest expense for the nine months ended September
30, 2010 and 2009, included $16.6 million and $10.0 million of amortization expense related to the
terminated swap, respectively. As a result of the $74 million redemption of the notes during June
2010, an additional $1.7 million of unamortized expense was recognized during the nine months ended
September 30, 2010. This was the result of the face value of outstanding senior secured notes
dropping below the notional amount of the swap. As of September 30, 2010, accumulated other
comprehensive loss included $15.8 million, net of tax, of unamortized loss relating to the
terminated swap. Reclassifications from accumulated other comprehensive loss to interest expense in
the next twelve months will be approximately $13.9 million, or $8.6 million, net of tax.
For the nine months ended September 30, 2009, the amount of loss recognized in the consolidated
statement of operations was as follows (in thousands):
The Effect of Derivative Instruments on Statement of Operations | ||||||||||||||||||||
Amount of Gain | ||||||||||||||||||||
or (Loss) | ||||||||||||||||||||
Recognized in | ||||||||||||||||||||
Accumulated | Location of Gain | Amount of Gain | Amount of Gain | |||||||||||||||||
Other | (Loss) | (Loss) | Location of Gain | (Loss) | ||||||||||||||||
Comprehensive | Reclassified from | Reclassified from | (Loss) Recognized | Recognized in | ||||||||||||||||
Income (AOCI) | AOCI into | AOCI into | in Income on | Income on | ||||||||||||||||
Derivatives in ASC 815 | on Derivative | Income | Income | Derivative | Derivative | |||||||||||||||
Cash Flow Hedging | (Effective | (Effective | (Effective | (Ineffective | (Ineffective | |||||||||||||||
Relationships | Portion) | Portion) | Portion) | Portion) | Portion) | |||||||||||||||
Interest Rate Swap |
$ | 5,322 | Interest Expense | $ | (7,270 | ) | Interest Expense | $ | (278 | ) |
See Note 7 for additional information regarding the fair value of derivative instruments.
9. COMMON STOCK TRANSACTIONS
During the three months ended September 30, 2010 and 2009, the Company accepted 462 and 837 shares
in lieu of cash payments by employees for payroll tax withholdings relating to stock based
compensation. During the nine months ended September 30, 2010 and 2009, the Company accepted
105,246 and 47,691 shares in lieu of cash payments by employees for payroll tax withholdings
relating to stock based compensation.
In June 2009, the Company declared and paid a cash dividend in the amount of $20.0 million to its
common shareholders. Approximately $0.5 million of the cash dividend was paid to holders of
unvested restricted shares. This amount was accounted for as compensation expense and presented as
a reduction of cash flow from operations.
11
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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. TRACK MAINTENANCE AGREEMENT
In the first quarter of 2009, the Company entered into a track maintenance agreement with an
unrelated third-party customer (Shipper). Under the agreement, the Shipper paid for qualified
railroad track maintenance expenditures during 2009 in exchange for the assignment of railroad
track miles which permits the Shipper to claim certain tax credits pursuant to Section 45G of the
Internal Revenue Code. The reduction in maintenance expenditures is reflected in the Transportation
functional category in the consolidated results of operations. For the three and nine months ended
September 30, 2009, the Shipper paid for $4.6 million and $13.1 million of maintenance
expenditures, respectively, and $5.2 million of capital expenditures during the three months ended
September 30, 2009. The Company incurred $0.1 million and $0.3 million of consulting fees related
to the agreement during the three and nine months ended September 30, 2009, respectively. The track
maintenance tax credit has not been renewed by Congress for 2010 and therefore, there was no track
maintenance agreement entered into during the nine months ended September 30, 2010.
11. INCOME TAX PROVISION
The overall income tax rate for the three months ended September 30, 2010 and 2009 for continuing
operations were a provision of 27.7% and a benefit of 286.8%, respectively. The overall tax rate
for the three months ended September 30, 2010 was favorably impacted by the jurisdictional mix of
operating income along with the reduction of certain tax reserves due to the lapse of the statute
of limitations for certain tax years. The Companys overall tax rate for the three months ended
September 30, 2009 was favorably impacted by converting certain operating subsidiaries to single
member limited liability companies and by the adjustment of the Companys deferred tax balances
resulting from a change in estimate of the Companys apportioned state tax rates. Other factors
benefiting the effective tax rate included the reduction of certain tax reserves due to the lapse
of the statute of limitations for certain tax years and the recovery of previously paid states
taxes from filed refund claims.
The overall income tax rate for the nine months ended September 30, 2010 and 2009 for continuing
operations were a benefit of 25.4% and a benefit of 44.9%, respectively. The overall tax rate for
the nine months ended September 30, 2010 was favorably impacted by the jurisdictional mix of
operating income, a reduction of certain tax reserves due to the lapse of the statute of
limitations for certain tax years and offset by an expense relating to stock-based compensation
plans. The Companys overall tax rate for the nine months ended September 30, 2009 was favorably
impacted by the resolution of the Australian tax audit, the conversion of certain operating
subsidiaries to single member limited liability companies and the adjustment of the Companys
deferred tax balances resulting from a change in estimate of the Companys apportioned state rates.
A reconciliation of the beginning and ending amount of unrecognized tax positions is as follows (in
thousands):
Balance at January 1, 2010 |
$ | 6,097 | ||
Additions for tax positions of prior years |
33 | |||
Lapse of statute of limitations |
(551 | ) | ||
Balance at September 30, 2010 |
$ | 5,579 | ||
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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) consists of foreign currency translation adjustments, unrealized
gains and losses on derivative instruments designated as hedges and unrealized actuarial gains and
losses related to pension benefits. As of September 30, 2010, accumulated other comprehensive loss
consisted of $15.8 million of unrealized losses, net of tax, related to hedging transactions, $0.4
million of unrealized actuarial gains, net of tax, associated with pension benefits and $10.3
million of cumulative translation adjustment gains. The following table reconciles net income to
comprehensive income (loss) for the three and nine months ended September 30, 2010 and 2009 (in
thousands):
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 7,968 | $ | 3,483 | $ | 1,233 | $ | 22,710 | ||||||||
Other comprehensive income: |
||||||||||||||||
Unrealized gain on derivatives designated as hedges, net of taxes of $3,262 |
| | | 5,322 | ||||||||||||
Amortization of terminated swap costs, net of taxes of $1,853, $3,440,
$6,301 and $3,809, respectively |
3,021 | 5,614 | 10,281 | 6,217 | ||||||||||||
Write-off of terminated swap costs, net of taxes of $642 |
| | 1,047 | | ||||||||||||
Change in cumulative translation adjustments |
3,938 | 13,424 | 1,883 | 19,338 | ||||||||||||
Total comprehensive income |
$ | 14,927 | $ | 22,521 | $ | 14,444 | $ | 53,587 | ||||||||
13. PENSION DISCLOSURES
Components of the net periodic pension and benefit cost for the three and nine months ended
September 30, 2010 and 2009 were as follows (in thousands):
Pension Benefits | ||||||||||||||||
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Service cost |
$ | 47 | $ | 41 | $ | 141 | $ | 133 | ||||||||
Interest cost |
168 | 145 | 504 | 409 | ||||||||||||
Expected return on plan assets |
(133 | ) | (101 | ) | (400 | ) | (288 | ) | ||||||||
Amortization of net actuarial loss |
34 | 11 | 103 | 30 | ||||||||||||
Amortization of prior service costs |
6 | 5 | 17 | 15 | ||||||||||||
Net cost recognized |
$ | 122 | $ | 101 | $ | 365 | $ | 299 | ||||||||
Health and Welfare | ||||||||||||||||
Benefits | ||||||||||||||||
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Service cost |
$ | 11 | $ | 11 | $ | 32 | $ | 32 | ||||||||
Interest cost |
32 | 31 | 97 | 92 | ||||||||||||
Amortization of net actuarial gain |
(15 | ) | (18 | ) | (46 | ) | (53 | ) | ||||||||
Net cost recognized |
$ | 28 | $ | 24 | $ | 83 | $ | 71 | ||||||||
13
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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. COMMITMENTS AND CONTINGENCIES
In the ordinary course of conducting its business, the Company becomes involved in various legal
actions and other claims. Litigation is subject to many uncertainties, the outcome of individual
litigated matters is not predictable with assurance, and it is reasonably possible that some of
these matters may be decided unfavorably to the Company. It is the opinion of management that the
ultimate liability, if any, with respect to these matters will not have a material adverse effect
on the Companys financial position, results of operations or cash flows. Settlement costs
associated with litigation are included in Transportation expense on the Consolidated Statement of
Operations.
The Companys operations are subject to extensive environmental regulation. The Company records
liabilities for remediation and restoration costs related to past activities when the Companys
obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance
activities to current operations are expensed as incurred. The Companys recorded liabilities for
these issues represent its best estimates (on an undiscounted basis) of remediation and restoration
costs that may be required to comply with present laws and regulations. It is the opinion of
management that the ultimate liability, if any, with respect to these matters will not have a
material adverse effect on the Companys financial position, results of operations or cash flows.
The Company is subject to claims for employee work-related and third-party injuries. Work-related
injuries for employees are primarily subject to the Federal Employers Liability Act (FELA). The
Company retains an independent actuarial firm to assist management in assessing the value of
personal injury claims and cases. An analysis has been performed by an independent actuarial firm
and is reviewed by management. The methodology used by the actuary includes a development factor to
reflect growth or reduction in the value of these personal injury claims. It is based largely on
the Companys historical claims and settlement experience. Actual results may vary from estimates
due to the type and severity of the injury, costs of medical treatments and uncertainties in
litigation.
On August 28, 2005, a railcar containing styrene located on the Companys Indiana & Ohio Railway
(IORY) property in Cincinnati, Ohio, began venting, due to a chemical reaction. Styrene is a
potentially hazardous chemical used to make plastics, rubber and resin. In response to the
incident, local public officials temporarily evacuated residents and businesses from the immediate
area until public authorities confirmed that the tank car no longer posed a threat. As a result of
the incident, several civil lawsuits were filed, and claims submitted, against the Company and
others connected to the tank car. Motions for class action certification were filed. Settlements
were achieved with what the Company believes to be all potential individual claimants. In
cooperation with the Companys insurer, the Company has paid settlements to a substantial number of
affected businesses, as well. All business interruption claims have been resolved. Total payments
to-date exceed the self insured retention, so the IORYs liability for civil matters has likely
been exhausted. The incident also triggered inquiries from the Federal Railroad Administration
(FRA) and other federal, state and local authorities charged with investigating such incidents. A
settlement was reached with the FRA, requiring payment of a $50,000 fine but no admission of
liability by the IORY. Because of the chemical release, the U.S. Environmental Protection Agency
(U.S. EPA) is investigating whether criminal negligence contributed to the incident, and whether
charges should be pressed. A conference with the Companys attorneys and the U.S. EPA attorneys
took place on January 14, 2009, at which time legal theories and evidence were discussed in an
effort to influence the U.S. EPAs charging decision. The meeting concluded before the matters were
fully discussed and a continuance was scheduled for March 13, 2009. The IORY submitted a proffer
addendum in May 2009 analyzing its compliance under the Clean Air Act. The EPA has advised that its
workload has delayed its review and response. The statute of limitations was extended by a tolling
agreement as to the IORY only (the Company has been dropped from this violation) through February
27, 2011. Should this investigation lead to environmental criminal charges against the IORY,
potential fines upon conviction could range widely and could be material. As of September 30, 2010,
the Company has accrued $1.4 million for this incident, which is expected to be paid out within the
next year.
Government grants
In August 2010, the Companys New England Central Railroad (NECR) was awarded a federal
government grant of $50 million through the State of Vermont to improve and upgrade the track on
its property. As part of the agreement, the NECR has committed to contribute up to approximately
$19 million of capital funds and materials to the project. The project is expected to be completed within the
next two years from the grant date. There was no material impact to the Companys financial
statements for the quarter ended September 30, 2010 as a result of this grant.
14
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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. RELATED PARTY TRANSACTIONS
As of January 1, 2009, the Company was party to five short-term operating lease agreements with
Florida East Coast Railway LLC, (FECR) an entity also owned by investment funds managed by
affiliates of Fortress. During 2009, the Company entered into five additional lease agreements with
the same entity. All but one of these agreements relate to the leasing of locomotives between the
companies for ordinary business operations, which are based on current market rates for similar
assets. With respect to such agreements, during the quarters ended September 30, 2010 and 2009, on
a net basis the Company paid FECR $0.5 million and $0.2 million, respectively. During the nine
months ended September 30, 2010 and 2009, on a net basis the Company paid FECR $1.5 million and
$0.4 million, respectively.
The remaining lease relates to the sub-leasing of office space by FECR to the Company. During the
quarters ended September 30, 2010 and 2009, FECR billed the
Company $0.2 million and $0.3 million,
respectively, under the sub-lease agreement. During the nine months ended September 30, 2010 and
2009, FECR billed the Company $0.8 million and $0.8 million, respectively, under the sub-lease
agreement. As of September 30, 2010 the Company had a payable of $0.3 million due to FECR under
these lease agreements.
Effective January 1, 2010, the Company entered into a Shared Services Agreement with FECR and its
affiliates which provides for services to be provided from time to time by certain of our senior
executives and other employees and for certain reciprocal administrative services, including
finance, accounting, human resources, purchasing and legal. The agreements are generally consistent
with arms-length arrangements with third parties providing similar services. The net amount of
payments to be made by us under these agreements is expected to be less than $1 million in the
aggregate on an annual basis. As of September 30, 2010, the Company had a payable of $0.2 million
due to FECR under this agreement.
In October 2009, certain of the Companys executives entered into consulting agreements with FECR.
Under the terms of these agreements, the executives are to provide assistance to the FECR with
strategic initiatives designed to grow FECRs revenue and enhance the value of the franchise.
Consideration for the executives performance is in the form of restricted stock units of FECR
common stock that will vest 25% over four years. Since the consulting agreements are with a
related-party, the Company is required to recognize compensation expense over the vesting period in
labor and benefits expense with a corresponding credit in other income (loss) for management fee
income. During the three and nine months ended September 30, 2010, the Company recognized $0.1
million and $0.4 million of compensation expense and $0.1 million and $0.4 million of management
fee income related to these consulting agreements, respectively.
In October 2009, certain of the Companys executives entered into consulting agreements with
Florida East Coast Industries, Inc., (FECI) an entity also owned by investment funds managed by
affiliates of Fortress. Under the terms of these agreements, the executives are to provide
assistance to FECI with strategic initiatives designed to enhance the value of FECIs rail-related
assets. Consideration for the executives performance is in the form of restricted stock units of
FECI common stock that will vest 50%, 25%, and 25% over the next three years. Since the consulting
agreements are with a related-party, the Company is required to recognize compensation expense over
the vesting period in labor and benefits expense with a corresponding credit in other income (loss)
for management fee income. During the three and nine months ended September 30, 2010, the Company
recognized $0.3 million and $1.0 million of compensation expense and $0.3 million and $1.0 million
of management fee income related to these consulting agreements, respectively.
16. OTHER INCOME
In August 2010, the Company entered into a purchase agreement to acquire warrants and other
securities of a railroad which was contingent upon that railroads principal stockholder not
consummating a refusal right to purchase the same securities. The principal stockholder exercised
this right and thus based on the terms of the purchase agreement, the Company received a break-up
fee of $2 million from the seller. This break-up fee is reflected, net of expenses incurred of $0.2
million, as part of other income (loss) on the Companys consolidated statement of operations.
15
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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17. GUARANTOR FINANCIAL STATEMENT INFORMATION
In June 2009, the Company sold in a private offering $740.0 million aggregate principal amount of
9.25% senior secured notes which mature on July 1, 2017. In October 2009, the Company filed with
the SEC a Form S-4 registration statement to exchange the privately placed notes with registered
notes. The terms of the registered notes are substantially identical to those of the privately
placed notes. The notes are jointly and severally guaranteed on a senior secured basis by all of
the Companys existing and future wholly-owned domestic restricted subsidiaries, with certain
exceptions. All guarantor subsidiaries are 100% owned by the Company. All amounts in the following
tables are in thousands.
RailAmerica, Inc.
Consolidating Balance Sheet
September 30, 2010
September 30, 2010
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 104,079 | $ | 9,819 | $ | | $ | 113,898 | ||||||||||
Accounts and notes receivable, net of allowance |
120 | 70,531 | 11,010 | | 81,661 | |||||||||||||||
Current deferred tax assets |
12,697 | | | | 12,697 | |||||||||||||||
Other current assets |
398 | 11,960 | 1,333 | | 13,691 | |||||||||||||||
Total current assets |
13,215 | 186,570 | 22,162 | | 221,947 | |||||||||||||||
Property, plant and equipment, net |
461 | 898,320 | 79,529 | | 978,310 | |||||||||||||||
Intangible Assets |
| 105,900 | 35,501 | | 141,401 | |||||||||||||||
Goodwill |
| 204,679 | 7,579 | 212,258 | ||||||||||||||||
Other assets |
12,896 | 1,075 | | | 13,971 | |||||||||||||||
Investment in and advances to affiliates |
1,241,610 | 1,104,327 | 35,807 | (2,381,744 | ) | | ||||||||||||||
Total assets |
$ | 1,268,182 | $ | 2,500,871 | $ | 180,578 | $ | (2,381,744 | ) | $ | 1,567,887 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Current maturities of long-term debt |
$ | | $ | 466 | $ | | $ | | $ | 466 | ||||||||||
Accounts payable |
5,311 | 50,437 | 254 | | 56,002 | |||||||||||||||
Accrued expenses |
16,515 | 25,318 | 4,011 | | 45,844 | |||||||||||||||
Total current liabilities |
21,826 | 76,221 | 4,265 | | 102,312 | |||||||||||||||
Long-term debt, less current maturities |
| 2,759 | | | 2,759 | |||||||||||||||
Senior secured notes |
570,601 | | | | 570,601 | |||||||||||||||
Deferred income taxes |
(8,177 | ) | 179,937 | 22,743 | | 194,503 | ||||||||||||||
Other liabilities |
5,969 | 12,924 | 856 | | 19,749 | |||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Common stock |
549 | 1,493 | | (1,493 | ) | 549 | ||||||||||||||
Additional paid-in capital |
634,836 | 2,215,024 | 127,311 | (2,342,335 | ) | 634,836 | ||||||||||||||
Retained earnings |
47,619 | 12,422 | 13,723 | (26,145 | ) | 47,619 | ||||||||||||||
Accumulated other comprehensive income (loss) |
(5,041 | ) | 91 | 11,680 | (11,771 | ) | (5,041 | ) | ||||||||||||
Total stockholders equity |
677,963 | 2,229,030 | 152,714 | (2,381,744 | ) | 677,963 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 1,268,182 | $ | 2,500,871 | $ | 180,578 | $ | (2,381,744 | ) | $ | 1,567,887 | |||||||||
16
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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
RailAmerica, Inc.
Consolidating Statement of Operations
For the three months ended September 30, 2010
For the three months ended September 30, 2010
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating revenue |
$ | 51 | $ | 111,991 | $ | 16,215 | $ | | $ | 128,257 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Transportation |
| 47,555 | 6,942 | | 54,497 | |||||||||||||||
Selling, general and administrative |
7,313 | 20,700 | 1,708 | | 29,721 | |||||||||||||||
Other |
| 5,675 | | | 5,675 | |||||||||||||||
Net gain on sale of assets |
| (1,601 | ) | (107 | ) | | (1,708 | ) | ||||||||||||
Depreciation and amortization |
1 | 10,763 | 817 | | 11,581 | |||||||||||||||
Total operating expenses |
7,314 | 83,092 | 9,360 | | 99,766 | |||||||||||||||
Operating (loss) income |
(7,263 | ) | 28,899 | 6,855 | | 28,491 | ||||||||||||||
Interest expense |
(2,836 | ) | (15,762 | ) | (1,137 | ) | | (19,735 | ) | |||||||||||
Equity in earnings of subsidiaries |
12,959 | | | (12,959 | ) | | ||||||||||||||
Other income (loss) |
8,160 | (4,813 | ) | (1,083 | ) | | 2,264 | |||||||||||||
Income (loss) before income taxes |
11,020 | 8,324 | 4,635 | (12,959 | ) | 11,020 | ||||||||||||||
Provision for (benefit from) income taxes |
3,052 | | | | 3,052 | |||||||||||||||
Net income (loss) |
$ | 7,968 | $ | 8,324 | $ | 4,635 | $ | (12,959 | ) | $ | 7,968 | |||||||||
17
Table of Contents
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
RailAmerica, Inc.
Consolidating Statement of Operations
For the nine months ended September 30, 2010
For the nine months ended September 30, 2010
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating revenue |
$ | 152 | $ | 315,203 | $ | 47,300 | $ | | $ | 362,655 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Transportation |
(3 | ) | 143,738 | 21,044 | | 164,779 | ||||||||||||||
Selling, general and administrative |
25,034 | 60,031 | 4,842 | | 89,907 | |||||||||||||||
Other |
| 5,675 | | | 5,675 | |||||||||||||||
Net loss (gain) on sale of assets |
1 | (1,667 | ) | (51 | ) | | (1,717 | ) | ||||||||||||
Depreciation and amortization |
54 | 30,864 | 2,341 | | 33,259 | |||||||||||||||
Total operating expenses |
25,086 | 238,641 | 28,176 | | 291,903 | |||||||||||||||
Operating (loss) income |
(24,934 | ) | 76,562 | 19,124 | | 70,752 | ||||||||||||||
Interest expense |
(14,866 | ) | (46,343 | ) | (3,383 | ) | | (64,592 | ) | |||||||||||
Equity in earnings of subsidiaries |
28,063 | | | (28,063 | ) | | ||||||||||||||
Other income (loss) |
12,498 | (14,425 | ) | (3,250 | ) | | (5,177 | ) | ||||||||||||
Income (loss) before income taxes |
761 | 15,794 | 12,491 | (28,063 | ) | 983 | ||||||||||||||
Provision for (benefit from) income taxes |
(472 | ) | 360 | (138 | ) | | (250 | ) | ||||||||||||
Net income (loss) |
$ | 1,233 | $ | 15,434 | $ | 12,629 | $ | (28,063 | ) | $ | 1,233 | |||||||||
18
Table of Contents
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
RailAmerica, Inc.
Consolidating Statement of Cash Flows
For the nine months ended September 30, 2010
For the nine months ended September 30, 2010
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | 1,233 | $ | 15,434 | $ | 12,629 | $ | (28,063 | ) | $ | 1,233 | |||||||||
Adjustments to reconcile net income (loss) to net
cash provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization, including
amortization costs classified in interest expense |
3,375 | 31,147 | 2,341 | | 36,863 | |||||||||||||||
Equity in earnings of subsidiaries |
(28,063 | ) | | | 28,063 | | ||||||||||||||
Amortization of swap termination costs |
16,582 | | | | 16,582 | |||||||||||||||
Net gain on sale or disposal of properties |
| (1,668 | ) | (49 | ) | | (1,717 | ) | ||||||||||||
Loss on extinguishment of debt |
8,357 | | | | 8,357 | |||||||||||||||
Equity compensation costs |
5,525 | | | | 5,525 | |||||||||||||||
Deferred income taxes and other |
(4,111 | ) | 360 | (19 | ) | | (3,770 | ) | ||||||||||||
Changes in operating assets and liabilities, net of
acquisitions and dispositions: |
||||||||||||||||||||
Accounts receivable |
(60 | ) | (5,655 | ) | (3,850 | ) | | (9,565 | ) | |||||||||||
Other current assets |
(212 | ) | 8,327 | 941 | | 9,056 | ||||||||||||||
Accounts payable |
3,220 | (2,027 | ) | (4,001 | ) | | (2,808 | ) | ||||||||||||
Accrued expenses |
13,057 | (1,096 | ) | (1,635 | ) | | 10,326 | |||||||||||||
Other assets and liabilities |
(866 | ) | 21 | (1,365 | ) | | (2,210 | ) | ||||||||||||
Net cash provided by operating activities |
18,037 | 44,843 | 4,992 | | 67,872 | |||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchase of property, plant and equipment |
(417 | ) | (42,174 | ) | (4,180 | ) | | (46,771 | ) | |||||||||||
Proceeds from sale of assets |
| 3,035 | 216 | | 3,251 | |||||||||||||||
Acquisitions, net of cash acquired |
| (23,926 | ) | | | (23,926 | ) | |||||||||||||
Net cash used in investing activities |
(417 | ) | (63,065 | ) | (3,964 | ) | | (67,446 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Principal payments on long-term debt |
| (391 | ) | | | (391 | ) | |||||||||||||
Repurchase of senior secured notes |
(76,220 | ) | | | | (76,220 | ) | |||||||||||||
(Disbursements)/receipts on intercompany debt |
(63,240 | ) | 67,993 | (4,753 | ) | | | |||||||||||||
Costs associated with sale of common stock |
(106 | ) | | | | (106 | ) | |||||||||||||
Deferred financing costs paid |
(95 | ) | (129 | ) | | | (224 | ) | ||||||||||||
Net cash provided by (used in) financing activities |
(139,661 | ) | 67,473 | (4,753 | ) | | (76,941 | ) | ||||||||||||
Effect of exchange rates on cash |
| | 195 | | 195 | |||||||||||||||
Net increase (decrease) in cash |
(122,041 | ) | 49,251 | (3,530 | ) | | (76,320 | ) | ||||||||||||
Cash, beginning of period |
122,041 | 54,828 | 13,349 | | 190,218 | |||||||||||||||
Cash, end of period |
$ | | $ | 104,079 | $ | 9,819 | $ | | $ | 113,898 | ||||||||||
19
Table of Contents
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
RailAmerica, Inc.
Consolidating Balance Sheet
December 31, 2009
December 31, 2009
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 122,041 | $ | 54,828 | $ | 13,349 | $ | | $ | 190,218 | ||||||||||
Accounts and notes receivable, net of allowance |
60 | 59,575 | 6,984 | | 66,619 | |||||||||||||||
Current deferred tax assets |
12,697 | | | | 12,697 | |||||||||||||||
Other current assets |
184 | 19,560 | 2,214 | | 21,958 | |||||||||||||||
Total current assets |
134,982 | 133,963 | 22,547 | | 291,492 | |||||||||||||||
Property, plant and equipment, net |
97 | 876,380 | 76,050 | | 952,527 | |||||||||||||||
Intangible Assets |
| 101,913 | 34,741 | | 136,654 | |||||||||||||||
Goodwill |
| 193,353 | 7,416 | | 200,769 | |||||||||||||||
Other assets |
16,051 | 1,153 | (17 | ) | | 17,187 | ||||||||||||||
Investment in and advances to affiliates |
1,155,110 | 1,190,835 | 32,136 | (2,378,081 | ) | | ||||||||||||||
Total assets |
$ | 1,306,240 | $ | 2,497,597 | $ | 172,873 | $ | (2,378,081 | ) | $ | 1,598,629 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Current maturities of long-term debt |
$ | | $ | 669 | $ | | $ | | $ | 669 | ||||||||||
Accounts payable |
5,388 | 48,658 | (98 | ) | | 53,948 | ||||||||||||||
Accrued expenses |
3,448 | 25,837 | 5,390 | | 34,675 | |||||||||||||||
Total current liabilities |
8,836 | 75,164 | 5,292 | | 89,292 | |||||||||||||||
Long-term debt, less current maturities |
| 3,013 | | | 3,013 | |||||||||||||||
Senior secured notes |
640,096 | | | | 640,096 | |||||||||||||||
Deferred income taxes |
(8,807 | ) | 168,530 | 25,279 | | 185,002 | ||||||||||||||
Other liabilities |
6,784 | 12,922 | 2,189 | | 21,895 | |||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Common stock |
544 | 1,493 | | (1,493 | ) | 544 | ||||||||||||||
Additional paid-in capital |
630,653 | 2,214,974 | 127,311 | (2,342,285 | ) | 630,653 | ||||||||||||||
Retained earnings |
46,386 | 21,262 | 3,202 | (24,464 | ) | 46,386 | ||||||||||||||
Accumulated other comprehensive income (loss) |
(18,252 | ) | 239 | 9,600 | (9,839 | ) | (18,252 | ) | ||||||||||||
Total stockholders equity |
659,331 | 2,237,968 | 140,113 | (2,378,081 | ) | 659,331 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 1,306,240 | $ | 2,497,597 | $ | 172,873 | $ | (2,378,081 | ) | $ | 1,598,629 | |||||||||
20
Table of Contents
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
RailAmerica, Inc.
Consolidating Statement of Operations
For the three months ended September 30, 2009
For the three months ended September 30, 2009
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating revenue |
$ | 39 | $ | 95,790 | $ | 14,308 | $ | | $ | 110,137 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Transportation |
(4,522 | ) | 46,170 | 5,876 | | 47,524 | ||||||||||||||
Selling, general and administrative |
7,802 | 17,173 | 1,824 | | 26,799 | |||||||||||||||
Net gain on sale of assets |
| (156 | ) | (3 | ) | | (159 | ) | ||||||||||||
Depreciation and amortization |
52 | 9,526 | 787 | | 10,365 | |||||||||||||||
Total operating expenses |
3,332 | 72,713 | 8,484 | | 84,529 | |||||||||||||||
Operating (loss) income |
(3,293 | ) | 23,077 | 5,824 | | 25,608 | ||||||||||||||
Interest expense |
(27,361 | ) | (148 | ) | 2 | | (27,507 | ) | ||||||||||||
Equity in earnings of subsidiaries |
24,922 | | | (24,922 | ) | | ||||||||||||||
Other income (loss) |
4,371 | (2,961 | ) | (1,386 | ) | | 24 | |||||||||||||
Income (loss) from continuing operations before income taxes |
(1,361 | ) | 19,968 | 4,440 | (24,922 | ) | (1,875 | ) | ||||||||||||
Benefit from income taxes |
(4,844 | ) | (534 | ) | | | (5,378 | ) | ||||||||||||
Income (loss) from continuing operations |
3,483 | 20,502 | 4,440 | (24,922 | ) | 3,503 | ||||||||||||||
Loss on disposal of discontinued business (net of tax) |
| | (20 | ) | | (20 | ) | |||||||||||||
Net income (loss) |
$ | 3,483 | $ | 20,502 | $ | 4,420 | $ | (24,922 | ) | $ | 3,483 | |||||||||
21
Table of Contents
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
RailAmerica, Inc.
Consolidating Statement of Operations
For the nine months ended September 30, 2009
For the nine months ended September 30, 2009
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating revenue |
$ | 138 | $ | 276,350 | $ | 40,132 | $ | | $ | 316,620 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Transportation |
(12,775 | ) | 131,621 | 20,128 | | 138,974 | ||||||||||||||
Selling, general and administrative |
20,893 | 49,074 | 4,976 | | 74,943 | |||||||||||||||
Net gain (loss) on sale of assets |
| 892 | (37 | ) | | 855 | ||||||||||||||
Depreciation and amortization |
157 | 28,552 | 2,222 | | 30,931 | |||||||||||||||
Total operating expenses |
8,275 | 210,139 | 27,289 | | 245,703 | |||||||||||||||
Operating (loss) income |
(8,137 | ) | 66,211 | 12,843 | | 70,917 | ||||||||||||||
Interest expense |
(42,573 | ) | (18,536 | ) | (1,661 | ) | | (62,770 | ) | |||||||||||
Equity in earnings of subsidiaries |
47,205 | | | (47,205 | ) | | ||||||||||||||
Other income (loss) |
12,604 | (10,797 | ) | (3,203 | ) | | (1,396 | ) | ||||||||||||
Income (loss) from continuing operations before income taxes |
9,099 | 36,878 | 7,979 | (47,205 | ) | 6,751 | ||||||||||||||
Benefit from income taxes |
(2,494 | ) | (534 | ) | | | (3,028 | ) | ||||||||||||
Income (loss) from continuing operations |
11,593 | 37,412 | 7,979 | (47,205 | ) | 9,779 | ||||||||||||||
Gain on disposal of discontinued business (net of tax) |
11,117 | 1,651 | 163 | | 12,931 | |||||||||||||||
Net income (loss) |
$ | 22,710 | $ | 39,063 | $ | 8,142 | $ | (47,205 | ) | $ | 22,710 | |||||||||
22
Table of Contents
RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
RailAmerica, Inc.
Consolidating Statement of Cash Flows
For the nine months ended September 30, 2009
For the nine months ended September 30, 2009
Non | ||||||||||||||||||||
Issuer | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income (loss) |
$ | 22,710 | $ | 39,063 | $ | 8,142 | $ | (47,205 | ) | $ | 22,710 | |||||||||
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
||||||||||||||||||||
Depreciation and amortization, including
amortization costs classified in interest expense |
2,008 | 34,940 | 2,910 | | 39,858 | |||||||||||||||
Equity in earnings of subsidiaries |
(47,205 | ) | | | 47,205 | | ||||||||||||||
Amortization of swap termination costs |
10,026 | | | | 10,026 | |||||||||||||||
Net gain on sale or disposal of properties |
1,201 | (992 | ) | (279 | ) | | (70 | ) | ||||||||||||
Foreign exchange gain on debt |
| | (1,160 | ) | | (1,160 | ) | |||||||||||||
Swap termination costs |
(55,750 | ) | | | | (55,750 | ) | |||||||||||||
Write-off of deferred financing costs |
509 | 1,875 | 209 | | 2,593 | |||||||||||||||
Equity compensation costs |
3,146 | | | | 3,146 | |||||||||||||||
Deferred income taxes |
3,025 | 232 | 79 | | 3,336 | |||||||||||||||
Changes in operating assets and liabilities, net of
acquisitions and dispositions: |
||||||||||||||||||||
Accounts receivable |
(2,883 | ) | 2,870 | 1,919 | | 1,906 | ||||||||||||||
Other current assets |
(65 | ) | 1,434 | (54 | ) | | 1,315 | |||||||||||||
Accounts payable |
3,827 | 521 | (4,953 | ) | | (605 | ) | |||||||||||||
Accrued expenses |
14,104 | (15,835 | ) | (110 | ) | | (1,841 | ) | ||||||||||||
Other assets and liabilities |
(21,161 | ) | 565 | 260 | | (20,336 | ) | |||||||||||||
Net cash provided by (used in) operating activities |
(66,508 | ) | 64,673 | 6,963 | | 5,128 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchase of property, plant and equipment |
| (30,587 | ) | (3,864 | ) | | (34,451 | ) | ||||||||||||
Proceeds from sale of assets |
| 19,761 | 310 | | 20,071 | |||||||||||||||
Deferred acquisition/disposition costs and other |
(355 | ) | | | | (355 | ) | |||||||||||||
Net cash used in investing activities |
(355 | ) | (10,826 | ) | (3,554 | ) | | (14,735 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Proceeds from issuance of long-term debt |
709,830 | | | | 709,830 | |||||||||||||||
Principal payments on long-term debt |
(112,000 | ) | (475,677 | ) | (38,000 | ) | | (625,677 | ) | |||||||||||
(Disbursements)/receipts on intercompany debt |
(444,794 | ) | 413,298 | 31,496 | | | ||||||||||||||
Dividends paid to common stockholders |
(19,485 | ) | | | | (19,485 | ) | |||||||||||||
Deferred financing costs paid |
(18,878 | ) | (1,140 | ) | | | (20,018 | ) | ||||||||||||
Net cash provided by (used in) financing activities |
114,673 | (63,519 | ) | (6,504 | ) | | 44,650 | |||||||||||||
Effect of exchange rates on cash |
| | 214 | | 214 | |||||||||||||||
Net (decrease) increase in cash |
47,810 | (9,672 | ) | (2,881 | ) | | 35,257 | |||||||||||||
Cash, beginning of period |
3,204 | 14,737 | 9,010 | | 26,951 | |||||||||||||||
Cash, end of period |
$ | 51,014 | $ | 5,065 | $ | 6,129 | $ | | $ | 62,208 | ||||||||||
23
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This managements discussion and analysis of financial condition and results of operations
contains forward-looking statements that involve risks, uncertainties and assumptions. You should
read the following discussion in conjunction with our historical consolidated financial statements
and the notes thereto. The results of operations for the periods reflected herein are not
necessarily indicative of results that may be expected for future periods. Except where the context
otherwise requires, the terms we, us, or our refer to the business of RailAmerica, Inc. and
its consolidated subsidiaries.
Certain statements in this Quarterly Report on Form 10-Q and other information we provide from
time to time may constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 including, but not necessarily limited to, statements relating to
future events and financial performance. Words such as anticipates, expects, intends,
plans, projects, believes, appears, may, will, would, could, should, seeks,
estimates and variations on these words and similar expressions are intended to identify such
forward-looking statements. These statements are based on managements current expectations and
beliefs and are subject to a number of factors that could lead to actual results materially
different from those described in the forward-looking statements. We can give no assurance that its
expectations will be attained. Accordingly, you should not place undue reliance on any
forward-looking statements contained in this report. Factors that could have a material adverse
effect on our operations and future prospects or that could cause actual results to differ
materially from our expectations include, but are not limited to, prolonged capital markets
disruption and volatility, general economic conditions and business conditions, our relationships
with Class I railroads and other connecting carriers, our ability to obtain railcars and
locomotives from other providers on which we are currently dependent, legislative and regulatory
developments including rulings by the Surface Transportation Board or the Railroad Retirement
Board, strikes or work stoppages by our employees, our transportation of hazardous materials by
rail, rising fuel costs, goodwill assessment risks, acquisition risks, competitive pressures within the industry, risks
related to the geographic markets in which we operate; and other risks detailed in our filings with
the Securities and Exchange Commission (Commission), including our Annual Report on Form 10-K
filed with the Commission on March 26, 2010. In addition, new risks and uncertainties emerge from
time to time, and it is not possible for us to predict or assess the impact of every factor that
may cause actual results to differ from those contained in any forward-looking statements. Such
forward-looking statements speak only as of the date of this report. We expressly disclaim any
obligation to release publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in expectations with regard thereto or change in events, conditions or
circumstances on which any statement is based.
General
Our Business
We are a leading owner and operator of short line and regional freight railroads in North
America, operating a portfolio of 40 individual railroads with approximately 7,300 miles of track
in 27 states and three Canadian provinces. In addition, we provide non-freight services such as
railcar storage, demurrage, leases of equipment and real estate leases and use fees.
Recent Acquisitions and Business Development
On July 1, 2010, we acquired Atlas Railroad Construction Company (Atlas) and related assets
for $23.9 million in cash including closing adjustments for working capital, which were
approximately $2.4 million, net of cash acquired. The acquisition was funded from existing cash on
hand. Founded in 1954, Atlas is a railroad engineering, construction, maintenance and repair
company operating primarily in the U.S. Midwest and Northeast. Atlas provides railroad
construction services principally to short line and regional railroads, public-transit agencies and
industrial customers. The results of operations of Atlas have been included in our consolidated
financial statements since July 1, 2010, the acquisition date.
In August 2010, our New England Central Railroad, (NECR) was awarded a federal government
grant of $50 million through the State of Vermont to improve and upgrade the track on its property.
As part of the agreement, the NECR has committed to contribute up to approximately $19 million of
capital funds to the project. The project is expected to be completed within the next two years
from the grant date.
Managing Business Performance
We manage our business performance by (i) growing our freight and non-freight revenue, (ii)
driving financial improvements through a variety of cost savings initiatives, and (iii) continuing
to focus on safety to lower the costs and risks associated with operating our business.
24
Table of Contents
Changes in carloads and revenue per carload have a direct impact on freight revenue. Carloads
decreased in 2009 due to the global economic slowdown, but have shown growth during the nine months
of 2010. The diversity in our customer base helps mitigate our
exposure to severe downturns in local economies. We continue to implement more effective
pricing by centralizing and carefully analyzing pricing decisions to improve our freight revenue
per carload.
Non-freight services offered to our customers include switching (or managing and positioning
railcars within a customers facility), storing customers excess or idle railcars on inactive
portions of our rail lines, engineering infrastructure services, third party railcar repair, and
car hire and demurrage (allowing our customers and other railroads to use our railcars for storage
or transportation in exchange for a daily fee). Each of these services leverages our existing
business relationships and generates additional revenue with minimal capital investment. Management
also intends to grow non-freight revenue from users of our land holdings.
Our operating costs include labor, equipment rents (locomotives and railcars), purchased
services (contract labor and professional services), diesel fuel, casualties and insurance,
materials, joint facilities and other expenses. Each of these costs is included in one of the
functional departments of transportation, selling, general & administrative or other.
Management is focused on improving operating efficiency and lowering costs. Many functions
such as pricing, purchasing, capital spending, finance, insurance, real estate and other
administrative functions are centralized, which enables us to achieve cost efficiencies and
leverage the experience of senior management in commercial, operational and strategic decisions. A
number of cost savings initiatives have been broadly implemented at all of our railroads targeting
lower fuel consumption, safer operations, more efficient locomotive utilization and lower costs for
third party services, among others.
Commodity Mix
Each of our 40 railroads operates independently with its own customer base. Our railroads are
spread out geographically and carry diverse commodities. For the three months ended September 30,
2010, coal, agricultural products and chemicals accounted for 21%, 15% and 11%, respectively, of
our carloads. As a percentage of our freight revenue, agricultural products, chemicals and coal
generated 17%, 15% and 11%, respectively, for the three months ended September 30, 2010. Freight
revenue per carload is impacted by several factors including the length of haul.
Overview
Three months ended September 30, 2010
Operating revenue in the three months ended September 30, 2010, was $128.3 million, compared
with $110.1 million in the three months ended September 30, 2009. The 16% increase in our operating
revenue was primarily due to increased carloads, negotiated rate increases, change in commodity mix
and an increase in our non-freight revenue.
Freight revenue increased $9.7 million, or 11%, in the three months ended September 30, 2010,
compared with the three months ended September 30, 2009, primarily due to an increase in carloads
of 5%, negotiated rate increases and change in commodity mix. Non-freight revenue increased $8.5
million, or 38%, in the three months ended September 30, 2010, compared with the three months ended
September 30, 2009, primarily due to an increase in engineering services revenue as a result of the
acquisition of Atlas, as well as increases in car repair revenue and real estate revenue, partially
offset by a decrease in other revenue.
Our operating ratio, defined as total operating expenses divided by total operating revenue,
was 77.8% in the three months ended September 30, 2010, compared with an operating ratio of 76.7%
in the three months ended September 30, 2009. This increase was primarily due to the lack of track
maintenance credits in 2010. Operating expenses were $99.8 million in the three months ended
September 30, 2010, compared with $84.5 million in the three months ended September 30, 2009, an
increase of $15.3 million, or 18%.
In 2009, we entered into a track maintenance agreement with an unrelated third-party customer
(Shipper). Under the agreement, the Shipper paid for qualified railroad track maintenance
expenditures during 2009 in exchange for the assignment of railroad track miles which permits the
Shipper to claim certain tax credits pursuant to Section 45G of the Internal Revenue Code. For the
quarter ended September 30, 2009, the Shipper paid for $4.6 million of maintenance expenditures and
$5.2 million of capital expenditures and we incurred $0.1 million of consulting fees related to the
agreement. The track maintenance tax credit has not been renewed by Congress for 2010 and
therefore, there was no track maintenance agreement entered into during the nine months of 2010.
Net income and income from continuing operations in the three months ended September 30, 2010,
were $8.0 million, compared with $3.5 million in the three months ended September 30, 2009. Net
income and income from continuing operations for the three months ended September 30, 2010 included
$1.8 million of income related to a transaction break-up fee. Net income and income from continuing
operations for the three months ended September 30, 2009, included $5.4 million of tax benefits
primarily related to the conversion of
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certain operating subsidiaries to single member limited
liability companies effective September 30, 2009 and the adjustment of our deferred tax balances
resulting from a change in estimate of our apportioned state tax rates.
Nine months ended September 30, 2010
Operating revenue in the nine months ended September 30, 2010, was $362.7 million, compared
with $316.6 million in the nine months ended September 30, 2009. The 15% increase in our operating
revenue was primarily due to increased carloads, negotiated rate increases, change in commodity mix
and an increase in our non-freight revenue.
Freight revenue increased $33.2 million, or 13%, in the nine months ended September 30, 2010,
compared with the nine months ended September 30, 2009, primarily due to negotiated rate increases,
change in commodity mix and an increase in carloads of 4%. Non-freight revenue increased $12.9
million, or 22%, in the nine months ended September 30, 2010, compared with the nine months ended
September 30, 2009, primarily due to increases in engineering services revenue, as a result of the
acquisition of Atlas, car repair revenue, car storage fees, and real estate revenue, partially
offset by decreases in demurrage and other revenue.
Our operating ratio, defined as total operating expenses divided by total operating revenue,
was 80.5% in the nine months ended September 30, 2010, compared with an operating ratio of 77.6% in
the nine months ended September 30, 2009. This increase was primarily due to the lack of track
maintenance credits in 2010, partially offset by a decrease in equipment rent expense in 2010.
Operating expenses were $291.9 million in the nine months ended September 30, 2010, compared with
$245.7 million in the nine months ended September 30, 2009, an increase of $46.2 million, or 19%.
For the nine months ended September 30, 2009, the Shipper paid for $13.1 million of
maintenance expenditures and $5.2 million of capital expenditures and we incurred $0.3 million of
consulting fees related to the agreement.
Net income in the nine months ended September 30, 2010, was $1.2 million, compared with net
income of $22.7 million in the nine months ended September 30, 2009. Income from continuing
operations in the nine months ended September 30, 2010, was $1.2 million, compared with income from
continuing operations of $9.8 million in the nine months ended September 30, 2009. Net income for
the nine months ended September 30, 2010 included $8.4 million of charges related to the
extinguishment of $74 million of senior secured notes and $1.8 million of income related to a
transaction break-up fee. Net income for the nine months ended September 30, 2009, included $3.0
million of tax benefits primarily related to the resolution of the Australian tax audit, conversion
of certain operating subsidiaries to single member limited liability companies effective September
30, 2009 and the adjustment of our deferred tax balances resulting from a change in estimate of our
apportioned state tax rates. In addition, net income for the nine months ended September 30, 2009
includes an adjustment to the gain on disposal of discontinued operations of $12.9 million
primarily related to the resolution of an Australian tax matter.
Results of Operations
Comparison of Operating Results for the Three Months Ended September 30, 2010 and 2009
The following table sets forth the results of operations for the three months ended September
30, 2010 and 2009 (in thousands):
Three Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
Operating revenue |
$ | 128,257 | $ | 110,137 | ||||
Operating expenses: |
||||||||
Transportation |
54,497 | 47,524 | ||||||
Selling, general and administrative |
29,721 | 26,799 | ||||||
Other |
5,675 | | ||||||
Net gain on sale of assets |
(1,708 | ) | (159 | ) | ||||
Depreciation and amortization |
11,581 | 10,365 | ||||||
Total operating expenses |
99,766 | 84,529 | ||||||
Operating income |
28,491 | 25,608 | ||||||
Interest expense, including amortization costs |
(19,735 | ) | (27,507 | ) | ||||
Other income |
2,264 | 24 | ||||||
Income (loss) from continuing operations before income taxes |
11,020 | (1,875 | ) | |||||
Provision for (benefit from) income taxes |
3,052 | (5,378 | ) | |||||
Income from continuing operations |
7,968 | 3,503 | ||||||
Discontinued operations: |
||||||||
Loss on disposal of discontinued business |
(20 | ) | ||||||
Net income |
$ | 7,968 | $ | 3,483 | ||||
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Operating Revenue
Operating revenue increased by $18.2 million, or 16%, to $128.3 million in the three months
ended September 30, 2010, from $110.1 million in the three months ended September 30, 2009. Total
carloads during the three month period ending September 30, 2010 increased 5% to 219,499 in 2010
from 208,271 in the three months ended September 30, 2009. The increase in operating revenue was
due to the acquisition of Atlas, an increase in carloads, negotiated rate increases, change in
commodity mix, an increase in fuel surcharge, which increased $1.9 million from prior year and the
strengthening of the Canadian dollar.
The increase in the average revenue per carload to $445 in the three months ended September
30, 2010, from $423 in the comparable period in 2009 was primarily due to negotiated rate increases
and commodity mix.
Non-freight revenue increased by $8.5 million, or 38%, to $30.6 million in the three months
ended September 30, 2010 from $22.1 million in the three months ended September 30, 2009, primarily
due to an increase in engineering services revenue as a result of the Atlas acquisition, as well as
increases in car repair revenue and real estate revenue, partially offset by a decrease in other
revenue.
The following table compares our freight revenue, carloads and average freight revenue per
carload for the three months ended September 30, 2010 and 2009:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||||||||||
Average Freight | Average Freight | |||||||||||||||||||||||
Freight | Revenue per | Freight | Revenue per | |||||||||||||||||||||
Revenue | Carloads | Carload | Revenue | Carloads | Carload | |||||||||||||||||||
(Amounts in thousands, except carloads and average freight revenue per carload) | ||||||||||||||||||||||||
Agricultural Products |
$ | 16,690 | 32,730 | $ | 510 | $ | 15,370 | 31,405 | $ | 489 | ||||||||||||||
Chemicals |
14,639 | 23,947 | 611 | 12,112 | 20,946 | 578 | ||||||||||||||||||
Coal |
10,303 | 47,176 | 218 | 9,381 | 46,806 | 200 | ||||||||||||||||||
Metallic Ores and Metals |
10,136 | 18,145 | 559 | 6,049 | 10,382 | 583 | ||||||||||||||||||
Pulp, Paper and Allied Products |
9,582 | 17,565 | 546 | 8,162 | 16,267 | 502 | ||||||||||||||||||
Non-Metallic Minerals and Products |
8,819 | 21,421 | 412 | 8,562 | 20,081 | 426 | ||||||||||||||||||
Forest Products |
6,709 | 11,780 | 570 | 6,748 | 12,078 | 559 | ||||||||||||||||||
Food or Kindred Products |
6,642 | 13,660 | 486 | 6,061 | 13,042 | 465 | ||||||||||||||||||
Waste and Scrap Materials |
5,934 | 14,231 | 417 | 5,468 | 14,350 | 381 | ||||||||||||||||||
Petroleum |
4,165 | 9,027 | 461 | 4,648 | 9,909 | 469 | ||||||||||||||||||
Other |
2,492 | 7,175 | 347 | 3,957 | 8,958 | 442 | ||||||||||||||||||
Motor Vehicles |
1,554 | 2,642 | 588 | 1,483 | 4,047 | 366 | ||||||||||||||||||
Total |
$ | 97,665 | 219,499 | $ | 445 | $ | 88,001 | 208,271 | $ | 423 | ||||||||||||||
Freight revenue was $97.7 million in the three months ended September 30, 2010, compared
to $88.0 million in the three months ended September 30, 2009, an increase of $9.7 million or 11%.
This increase was primarily due to the net effect of the following:
| Agricultural products revenue increased $1.3 million, or 9%, primarily due to high demand for animal feed ingredients for domestic production and for export; | ||
| Chemicals revenue increased $2.5 million, or 21%, primarily due to chemical manufacturing keeping pace with increased downstream production demand and growth in consumer products; | ||
| Coal revenue increased $0.9 million, or 10%, primarily due to favorable mix changes and pricing activity; | ||
| Metallic ores and metals revenue increased $4.1 million, or 68%, primarily due to demand from automotive manufacturing and energy production facilities; | ||
| Pulp, paper and allied products revenue increased $1.4 million, or 17%, due to increased demand for U.S. and Canadian pulp and paper products; | ||
| Non-metallic minerals and products revenue increased $0.3 million, or 3%, primarily due to an increased demand for construction aggregate in the Central U.S. and increased production of building products; | ||
| Forest products revenue remained relatively flat primarily due to its close ties housing starts in the Western and Central U.S.; | ||
| Food or kindred products revenue increased $0.6 million, or 10%, primarily due to increased demand for feed ingredients for domestic livestock and exports; |
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| Waste and scrap materials revenue increased $0.5 million, or 9%, primarily due to a favorable mix changes and pricing activity; | ||
| Petroleum revenue decreased $0.5 million, or 10%, primarily due to decreased production of liquid petroleum gas, or LPG, in California; | ||
| Other revenue decreased $1.5 million, or 37%, primarily due to fewer movements for Class I railroads in the Northeast; and | ||
| Motor vehicles revenue increased $0.1 million, or 5%, primarily due to the movement of export automobiles and an increase in production at a manufacturing facility in the Midwest, partially offset by a loss of lower-rated automobile haulage in the Midwest. |
Operating Expenses
The following table sets forth the operating revenue and expenses, by natural category, for
our consolidated operations for the periods indicated. Some items have been reclassified to conform
to current period presentation (dollars in thousands).
Three Months Ended September 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Operating revenue |
$ | 128,257 | 100.0 | % | $ | 110,137 | 100.0 | % | ||||||||
Operating expenses: |
||||||||||||||||
Labor and benefits |
38,745 | 30.2 | % | 35,755 | 32.4 | % | ||||||||||
Equipment rents |
8,721 | 6.8 | % | 8,900 | 8.1 | % | ||||||||||
Purchased services |
9,830 | 7.7 | % | 7,430 | 6.7 | % | ||||||||||
Diesel fuel |
9,760 | 7.6 | % | 8,373 | 7.6 | % | ||||||||||
Casualties and insurance |
4,816 | 3.8 | % | 4,593 | 4.2 | % | ||||||||||
Materials |
6,782 | 5.3 | % | 2,977 | 2.7 | % | ||||||||||
Joint facilities |
2,454 | 1.9 | % | 2,497 | 2.3 | % | ||||||||||
Other expenses |
8,785 | 6.8 | % | 8,337 | 7.5 | % | ||||||||||
Track maintenance credit (45G) |
| 0.0 | % | (4,539 | ) | (4.1 | )% | |||||||||
Net gain on sale of assets |
(1,708 | ) | (1.3 | )% | (159 | ) | (0.1 | )% | ||||||||
Depreciation and amortization |
11,581 | 9.0 | % | 10,365 | 9.4 | % | ||||||||||
Total operating expenses |
99,766 | 77.8 | % | 84,529 | 76.7 | % | ||||||||||
Operating income |
$ | 28,491 | 22.2 | % | $ | 25,608 | 23.3 | % | ||||||||
The following table sets forth the reconciliation of the functional categories presented in
our consolidated statement of operations to the natural categories discussed below. Management
utilizes the natural category format of expenses when reviewing and evaluating our performance and
believes that it provides a more relevant basis for discussion of the changes in operations (in
thousands).
Three Months Ended September 30, | ||||||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||||||
Total | Total | |||||||||||||||||||||||||||
Selling, general | Operating | Selling, general | Operating | |||||||||||||||||||||||||
Transportation | and administrative | Other | Expenses | Transportation | and administrative | Expenses | ||||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||||
Labor and benefits |
$ | 20,323 | $ | 16,947 | $ | 1,475 | $ | 38,745 | $ | 19,539 | $ | 16,216 | $ | 35,755 | ||||||||||||||
Equipment rents |
8,365 | 471 | (115 | ) | 8,721 | 8,799 | 101 | 8,900 | ||||||||||||||||||||
Purchased services |
4,200 | 4,416 | 1,214 | 9,830 | 4,195 | 3,235 | 7,430 | |||||||||||||||||||||
Diesel fuel |
9,756 | 4 | | 9,760 | 8,384 | (11 | ) | 8,373 | ||||||||||||||||||||
Casualties and insurance |
2,335 | 2,458 | 23 | 4,816 | 2,957 | 1,636 | 4,593 | |||||||||||||||||||||
Materials |
3,911 | 284 | 2,587 | 6,782 | 2,779 | 198 | 2,977 | |||||||||||||||||||||
Joint facilities |
2,454 | | | 2,454 | 2,497 | | 2,497 | |||||||||||||||||||||
Other expenses |
3,153 | 5,141 | 491 | 8,785 | 2,913 | 5,424 | 8,337 | |||||||||||||||||||||
Track maintenance credit (45G) |
| | | | (4,539 | ) | | (4,539 | ) | |||||||||||||||||||
Net gain on sale of assets |
| | | (1,708 | ) | | | (159 | ) | |||||||||||||||||||
Depreciation and amortization |
| | | 11,581 | | | 10,365 | |||||||||||||||||||||
Total operating expenses |
$ | 54,497 | $ | 29,721 | $ | 5,675 | $ | 99,766 | $ | 47,524 | $ | 26,799 | $ | 84,529 | ||||||||||||||
Operating expenses increased to $15.3 million in the three months ended September 30,
2010, from $84.5 million in the three months ended September 30, 2009. The operating ratio was
77.8% in 2010 compared to 76.7% in 2009. The increase in the operating ratio was primarily due to
including the benefit from the monetization of the track maintenance credit in 2009 and partially
offset by decreases in labor costs as a percentage of revenue in the three months ended September
30, 2010 as compared to the same period in 2009.
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The net increase in operating expenses was due to the following:
| Labor and benefits expense increased $3.0 million, or 8%, primarily due to the acquisition of Atlas, increased salaries and wages as a result of the increase in volumes, restricted stock amortization and an increase in health insurance expense as a result of experiencing higher average claims during the three months ended September 30, 2010 as compared to the prior year period; | ||
| Equipment rents expense decreased $0.2 million, or 2%, primarily due to a reduction in railcar lease expense from the expiration of certain leased cars; | ||
| Purchased services expense increased $2.4 million, or 32%, primarily due to the acquisition of Atlas and an increase in professional fees for special projects and public company related costs; | ||
| Diesel fuel expense increased $1.4 million, or 17%, primarily due to higher average fuel costs of $2.37 per gallon in 2010 compared to $2.07 per gallon in 2009, resulting in a $1.2 million increase in fuel expense and an unfavorable consumption variance of $0.1 million due to the increase in carload volume; | ||
| Casualties and insurance expense increased $0.2 million, or 5%, primarily due to an increase in reserves for two incidents; | ||
| Materials expense increased $3.8 million, or 128%, primarily due to the acquisition of Atlas and an increase in car repair material purchases as a result of an increase in car repair activities; | ||
| Joint facilities expense remained relatively flat; | ||
| Other expenses increased $0.4 million, or 5%, primarily due to an increase in automotive fuel expense and crew transportation, partially offset by a decrease in bad debt expense; | ||
| The execution of the track maintenance agreement in 2009 resulted in the Shipper paying for $4.6 million of maintenance expenditures, partially offset by $0.1 million of related consulting fees; | ||
| Asset sales resulted in a net gain of $1.7 million and $0.2 million in the three months ended September 30, 2010 and 2009, respectively. The gains on sale of assets are primarily due to land and easement sales along our corridor of track; and | ||
| Depreciation and amortization expense increased $1.2 million, or 12%, due to the capitalization and depreciation of 2009 and 2010 capital projects and the acquisition of Atlas. |
Other Income (Expense) Items
Interest Expense. Interest expense, including amortization of deferred financing costs,
decreased $7.8 million to $19.7 million for the three months ended September 30, 2010, from $27.5
million in the three months ended September 30, 2009. This decrease is primarily due to a decrease
in the principal amount of the senior secured notes as a result of two repayments since September
30, 2009 and the decrease of swap termination cost amortization to $4.9 million during the three
months ended September 30, 2010 from $9.1 million during the three months ended September 30, 2009.
Interest expense includes $6.0 million and $10.4 million of amortization costs for the three months
ended September 30, 2010 and 2009, respectively.
Other Income. Other income during the three months ended September 30, 2010, primarily
relates to a $2.0 million transaction break-up fee, $1.8 million net of expenses, and $0.4 million
of management fee income that is recorded in connection with transactions where our employees
receive restricted stock awards from related parties. As part of the restricted stock
transactions, we recorded an offsetting expense in labor and benefits.
Income Taxes. The overall income tax rate for the three months ended September 30, 2010 and
2009 for continuing operations was a provision of 27.7% and a benefit of 286.8%, respectively. The
overall tax rate for the three months ended September 30, 2010 was favorably impacted by the
jurisdictional mix of operating income along with the reduction of certain tax reserves due to the
lapse of the statute of limitations for certain tax years. Our overall tax rate for the three
months ended September 30, 2009 was favorably impacted by converting certain operating subsidiaries
to single member limited liability companies and by the adjustment of our deferred tax balances
resulting from a change in estimate of our apportioned state tax rates. Other factors benefiting
the effective tax rate included the reduction of certain tax reserves due to the lapse of the
statute of limitations for certain tax years and the recovery of previously paid states taxes from
filed refund claims.
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Table of Contents
Discontinued Operations. In January 2006, we completed the sale of our Alberta Railroad
Properties for $22.1 million in cash. During the three months ended September 30, 2008, we settled
working capital claims with the buyer and as a result recorded an adjustment of $1.3 million, or
$1.2 million after income taxes, through the gain on sale of discontinued operations. In the three
months ended September 30, 2009, the Company recorded an adjustment of $(0.03) million, or $(0.02)
million after income taxes, as a loss on sale of discontinued operations related to outstanding
liabilities associated with the disposed entities.
Goodwill. Subsequent to December 31, 2009, we have had periodic reductions in our total market
capitalization below our book value as of December 31, 2009. A sustained decline in our market
capitalization relative to our book value may result in, or be indicative of, a goodwill impairment
charge in the future. We utilize market capitalization in corroborating our assessment of the fair
value of our reporting units.
Impairment charges could substantially affect our reported earnings in the periods of such
charges. In addition, impairment charges could negatively impact our financial ratios and could
limit our ability to obtain financing in the future. As of September 30, 2010, we had $212.3
million of goodwill, which represented approximately 13.5% of total assets.
Comparison of Operating Results for the Nine Months Ended September 30, 2010 and 2009
The following table sets forth the results of operations for the nine months ended September
30, 2010 and 2009 (in thousands):
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
Operating revenue |
$ | 362,655 | $ | 316,620 | ||||
Operating expenses: |
||||||||
Transportation |
164,779 | 138,974 | ||||||
Selling, general and administrative |
89,907 | 74,943 | ||||||
Other |
5,675 | | ||||||
Net (gain) loss on sale of assets |
(1,717 | ) | 855 | |||||
Depreciation and amortization |
33,259 | 30,931 | ||||||
Total operating expenses |
291,903 | 245,703 | ||||||
Operating income |
70,752 | 70,917 | ||||||
Interest expense, including amortization costs |
(64,592 | ) | (62,770 | ) | ||||
Other loss |
(5,177 | ) | (1,396 | ) | ||||
Income from continuing operations before income taxes |
983 | 6,751 | ||||||
Benefit from income taxes |
(250 | ) | (3,028 | ) | ||||
Income from continuing operations |
1,233 | 9,779 | ||||||
Discontinued operations: |
||||||||
Gain on disposal of discontinued business |
| 12,931 | ||||||
Net income |
$ | 1,233 | $ | 22,710 | ||||
Operating Revenue
Operating revenue increased by $46.1 million, or 15%, to $362.7 million in the nine months
ended September 30, 2010, from $316.6 million in the nine months ended September 30, 2009. Total
carloads during the nine month period ending September 30, 2010 increased 4% to 649,017 in 2010
from 622,574 in the nine months ended September 30, 2009. The increase in operating revenue was due
to negotiated rate increases, change in commodity mix, an increase in carloads, the acquisition of
Atlas, the strengthening of the Canadian dollar and an increase in car repair revenue.
The increase in the average revenue per carload to $448 in the nine months ended September 30,
2010, from $414 in the comparable period in 2009 was primarily due to negotiated rate increases and
commodity mix.
Non-freight revenue increased by $12.9 million, or 22%, to $71.9 million in the nine months
ended September 30, 2010 from $59.0 million in the nine months ended September 30, 2009, primarily
due to an increase in engineering services revenue, as a result of the acquisition of Atlas, car
repair revenue, car storage fees, and real estate revenue, partially offset by decreases in
demurrage and other revenue.
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Table of Contents
The following table compares our freight revenue, carloads and average freight revenue per
carload for the nine months ended September 30, 2010 and 2009:
Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, 2010 | September 30, 2009 | |||||||||||||||||||||||
Average Freight | Average Freight | |||||||||||||||||||||||
Freight | Revenue per | Freight | Revenue per | |||||||||||||||||||||
Revenue | Carloads | Carload | Revenue | Carloads | Carload | |||||||||||||||||||
(Amounts in thousands, except carloads and average freight revenue per carload) | ||||||||||||||||||||||||
Agricultural Products |
$ | 46,580 | 97,704 | $ | 477 | $ | 39,916 | 88,484 | $ | 451 | ||||||||||||||
Chemicals |
43,928 | 71,908 | 611 | 35,135 | 60,977 | 576 | ||||||||||||||||||
Coal |
29,662 | 134,142 | 221 | 28,339 | 136,341 | 208 | ||||||||||||||||||
Metallic Ores and Metals |
29,198 | 51,214 | 570 | 16,854 | 29,919 | 563 | ||||||||||||||||||
Pulp, Paper and Allied Products |
27,809 | 49,050 | 567 | 24,105 | 47,177 | 511 | ||||||||||||||||||
Non-Metallic Minerals and Products |
26,005 | 60,624 | 429 | 24,620 | 58,870 | 418 | ||||||||||||||||||
Food or Kindred Products |
20,821 | 42,617 | 489 | 19,219 | 39,196 | 490 | ||||||||||||||||||
Forest Products |
20,685 | 36,091 | 573 | 20,559 | 36,004 | 571 | ||||||||||||||||||
Waste and Scrap Materials |
17,921 | 43,361 | 413 | 14,791 | 39,762 | 372 | ||||||||||||||||||
Petroleum |
14,492 | 31,006 | 467 | 14,388 | 31,260 | 460 | ||||||||||||||||||
Other |
8,335 | 22,098 | 377 | 15,527 | 43,179 | 360 | ||||||||||||||||||
Motor Vehicles |
5,326 | 9,202 | 579 | 4,154 | 11,405 | 364 | ||||||||||||||||||
Total |
$ | 290,762 | 649,017 | $ | 448 | $ | 257,607 | 622,574 | $ | 414 | ||||||||||||||
Freight revenue was $290.8 million in the nine months ended September 30, 2010, compared
to $257.6 million in the nine months ended September 30, 2009, an increase of $33.2 million or 13%.
This increase was primarily due to the net effect of the following:
| Agricultural products revenue increased $6.7 million, or 17%, primarily due to high demand for animal feed ingredients and favorable commodity prices which encouraged the sale and transfer of stored grain in the Midwest; | ||
| Chemicals revenue increased $8.8 million, or 25%, primarily due to customers rebuilding inventories and increased demand for fertilizer; | ||
| Coal revenue increased $1.3 million, or 5%, primarily due to favorable mix changes and pricing activity and the strengthening of the Canadian dollar; | ||
| Metallic ores and metals revenue increased $12.3 million, or 73%, primarily due to customers bringing production capacity online to replenish low inventories and demand from the automotive and energy markets; | ||
| Pulp, paper and allied products revenue increased $3.7 million, or 15%, due to increased demand for U.S and Canadian paper products and the strengthening of the Canadian dollar; | ||
| Non-metallic minerals and products revenue increased $1.4 million, or 6%, primarily due to an increased demand for construction aggregate in the Central U.S.; | ||
| Food or kindred products revenue increased $1.6 million, or 8%, primarily due to increased demand for feed ingredients for domestic livestock and exports; | ||
| Forest products revenue remained relatively flat; | ||
| Waste and scrap materials revenue increased $3.1 million, or 21%, primarily due to an overall increase in the demand for scrap metal, a favorable change in mix within the category and negotiated price increases; | ||
| Petroleum revenue remained relatively flat; | ||
| Other revenue decreased $7.2 million, or 46%, primarily due to fewer movements for Class I railroads and wind turbine component moves in Illinois; and | ||
| Motor vehicles revenue increased $1.2 million, or 28%, primarily due to a new movement of export automobiles and an increase in production at a manufacturing facility in the Midwest, partially offset by a loss of lower-rated automobile haulage in the Midwest. |
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Operating Expenses
The following table sets forth the operating revenue and expenses, by natural category, for
our consolidated operations for the periods indicated. Some items have been reclassified to conform
to current period presentation (dollars in thousands).
Nine Months Ended September 30, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Operating revenue |
$ | 362,655 | 100.0 | % | $ | 316,620 | 100.0 | % | ||||||||
Operating expenses: |
||||||||||||||||
Labor and benefits |
114,381 | 31.5 | % | 101,216 | 32.0 | % | ||||||||||
Equipment rents |
25,857 | 7.1 | % | 27,327 | 8.6 | % | ||||||||||
Purchased services |
28,058 | 7.8 | % | 23,123 | 7.3 | % | ||||||||||
Diesel fuel |
31,522 | 8.7 | % | 23,285 | 7.3 | % | ||||||||||
Casualties and insurance |
13,255 | 3.7 | % | 13,965 | 4.4 | % | ||||||||||
Materials |
14,581 | 4.0 | % | 8,138 | 2.6 | % | ||||||||||
Joint facilities |
6,545 | 1.8 | % | 4,822 | 1.5 | % | ||||||||||
Other expenses |
26,162 | 7.2 | % | 24,833 | 7.8 | % | ||||||||||
Track maintenance credit (45G) |
| 0.0 | % | (12,792 | ) | (4.0 | )% | |||||||||
Net (gain) loss on sale of assets |
(1,717 | ) | (0.5 | )% | 855 | 0.3 | % | |||||||||
Depreciation and amortization |
33,259 | 9.2 | % | 30,931 | 9.8 | % | ||||||||||
Total operating expenses |
291,903 | 80.5 | % | 245,703 | 77.6 | % | ||||||||||
Operating income |
$ | 70,752 | 19.5 | % | $ | 70,917 | 22.4 | % | ||||||||
The following table sets forth the reconciliation of the functional categories presented in
our consolidated statement of operations to the natural categories discussed below. Management
utilizes the natural category format of expenses when reviewing and evaluating our performance and
believes that it provides a more relevant basis for discussion of the changes in operations (in
thousands).
Nine Months Ended September 30, | ||||||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||||||
Total | Total | |||||||||||||||||||||||||||
Selling, general | Operating | Selling, general | Operating | |||||||||||||||||||||||||
Transportation | and administrative | Other | Expenses | Transportation | and administrative | Expenses | ||||||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||||||
Labor and benefits |
$ | 59,547 | $ | 53,359 | $ | 1,475 | $ | 114,381 | $ | 57,197 | $ | 44,019 | $ | 101,216 | ||||||||||||||
Equipment rents |
25,212 | 760 | (115 | ) | 25,857 | 27,014 | 313 | 27,327 | ||||||||||||||||||||
Purchased services |
13,824 | 13,020 | 1,214 | 28,058 | 14,015 | 9,108 | 23,123 | |||||||||||||||||||||
Diesel fuel |
31,517 | 5 | | 31,522 | 23,292 | (7 | ) | 23,285 | ||||||||||||||||||||
Casualties and insurance |
7,459 | 5,773 | 23 | 13,255 | 9,663 | 4,302 | 13,965 | |||||||||||||||||||||
Materials |
11,275 | 719 | 2,587 | 14,581 | 7,480 | 658 | 8,138 | |||||||||||||||||||||
Joint facilities |
6,545 | | | 6,545 | 4,822 | | 4,822 | |||||||||||||||||||||
Other expenses |
9,400 | 16,271 | 491 | 26,162 | 8,283 | 16,550 | 24,833 | |||||||||||||||||||||
Track maintenance credit (45G) |
| | | | (12,792 | ) | | (12,792 | ) | |||||||||||||||||||
Net (gain) loss on sale of assets |
| | | (1,717 | ) | | | 855 | ||||||||||||||||||||
Depreciation and amortization |
| | | 33,259 | | | 30,931 | |||||||||||||||||||||
Total operating expenses |
$ | 164,779 | $ | 89,907 | $ | 5,675 | $ | 291,903 | $ | 138,974 | $ | 74,943 | $ | 245,703 | ||||||||||||||
Operating expenses increased to $291.9 million in the nine months ended September 30,
2010, from $245.7 million in the nine months ended September 30, 2009. The operating ratio was
80.5% in 2010 compared to 77.6% in 2009. The increase in the operating ratio was primarily due to
including the benefit from the monetization of the track maintenance credit in 2009, partially
offset by a decrease in equipment rent expense in 2010.
The net increase in operating expenses was due to the following:
| Labor and benefits expense increased $13.2 million, or 13%, primarily due to incentive compensation expense, including restricted stock amortization and an increase in health insurance expense as a result of experiencing higher average claims during the nine months ended September 30, 2010 as compared to the prior year period, an increase in salaries and wages as a result of the volume increase and the acquisition of Atlas; | ||
| Equipment rents expense decreased $1.5 million, or 5%, primarily due to a reduction in railcar lease expense from the expiration of certain leased cars; | ||
| Purchased services expense increased $4.9 million, or 21%, primarily due to an increase in legal fees, professional fees for public company related costs and special projects and the acquisition of Atlas; |
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| Diesel fuel expense increased $8.2 million, or 35%, primarily due to higher average fuel costs of $2.38 per gallon in 2010 compared to $1.83 per gallon in 2009, resulting in a $7.0 million increase in fuel expense and an unfavorable consumption variance of $1.1 million due to the increase in carload volume; | ||
| Casualties and insurance expense decreased $0.7 million, or 5%, primarily due to a decrease in Federal Railroad Administration (FRA) reportable train accidents over the last twelve months which has resulted in fewer asserted claims and settlements; | ||
| Materials expense increased $6.4 million, or 79%, primarily due to an increase in car repair material purchases as a result of an increase in car repair activities and the acquisition of Atlas; | ||
| Joint facilities expense increased $1.7 million, or 36%, primarily due to an increase in carload volume and adjustments to accrued joint facility expense in 2009; | ||
| Other expenses increased $1.3 million, or 5%, primarily due to an increase in automotive fuel expense and crew transportation; | ||
| The execution of the track maintenance agreement in 2009 resulted in the Shipper paying for $13.1 million of maintenance expenditures, partially offset by $0.3 million of related consulting fees; | ||
| Asset sales resulted in a net gain of $1.7 million in the nine months ended September 30, 2010 and a net loss of $0.9 million in the nine months ended September 30, 2009. The gains on sale of assets are primarily due to land and easement sales along our corridor of track. In the second quarter of 2009, we sold a portion of track owned by the Central Railroad of Indianapolis at a price set by the Surface Transportation Board of $0.4 million, which resulted in a loss on disposition of $1.5 million. In the first quarter of 2009, we sold a portion of track owned by the Central Oregon and Pacific Railroad, known as the Coos Bay line, to the Port of Coos Bay for $16.6 million. The carrying value of this line approximated the sales price; and | ||
| Depreciation and amortization expense increased $2.3 million, or 8%, due to the capitalization and depreciation of 2009 and 2010 capital projects and the acquisition of Atlas. |
Other Income (Expense) Items
Interest Expense. Interest expense, including amortization of deferred financing costs,
increased $1.8 million to $64.6 million for the nine months ended September 30, 2010, from $62.8
million in the nine months ended September 30, 2009. This increase is primarily due to the increase
in long term debt as a result of the refinancing in June 2009 and $6.6 million of additional swap
termination cost amortization, partially offset by $9.2 million of swap interest expense incurred
during the nine months ended September 30, 2009, while the interest rate swap was active. In
connection with the repayment of the bridge credit facility, we terminated our existing interest
rate swap. Per Derivatives and Hedging Topic, ASC 815, since the hedged cash flow transactions,
future interest payments, did not terminate, but continued with the senior secured notes, the fair
value of the hedge on the termination date in accumulated comprehensive loss is amortized into
interest expense over the shorter of the remaining life of the swap or the maturity of the notes.
Interest expense includes $20.2 million and $19.0 million of amortization costs for the nine months
ended September 30, 2010 and 2009, respectively.
Other Loss. Other loss during the nine months ended September 30, 2010, primarily relates to
$8.4 million of costs incurred in connection with the repurchase of senior secured notes during the
second quarter of 2010. These costs are partially offset by a $1.8 million transaction break-up
fee, net of expenses, and $1.4 million of management fee income that is recorded in connection with
transactions where our employees receive restricted stock awards from related parties. As part of
the restricted stock transactions, we record an offsetting expense in labor and benefits. Other
loss during the nine months ended September 30, 2009, includes a $2.6 million loss associated with
the write-off of unamortized deferred loan costs. This was partially offset by foreign exchange
gains associated with the U.S. dollar term borrowing held by one of our Canadian subsidiaries under
our former bridge credit facility. For the nine months ended September 30, 2009, the exchange rates
increased, resulting in a foreign exchange gain of $1.2 million.
Income Taxes. The overall income tax rate for the nine months ended September 30, 2010 and
2009 for continuing operations were a benefit of 25.4% and a benefit of 44.9%, respectively. The
overall tax rate for the nine months ended September 30, 2010 was favorably impacted by the
jurisdictional mix of operating income, a reduction of certain tax reserves due to the lapse of the
statute of limitations for certain tax years and offset by an expense relating to stock-based
compensation plans. Our overall tax rate for the nine months ended September 30, 2009 was
favorably impacted by the resolution of the Australian tax audit, the conversion of certain
operating subsidiaries to single member limited liability companies and the adjustment of our
deferred tax balances resulting from a change in estimate of the our apportioned state rates.
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Discontinued Operations. In January 2006, we completed the sale of our Alberta Railroad
Properties for $22.1 million in cash. In the nine months ended September 30, 2009, the Company
recorded an adjustment of $0.2 million, before and after tax, as a loss on sale of discontinued
operations related to outstanding liabilities associated with the disposed entities.
In August 2004, we completed the sale of our Australian railroad, Freight Australia, to
Pacific National for AUD $285 million (US $204 million). We were subsequently notified that the
Australian Taxation Office, or ATO, was going to perform an audit of the reorganization
transactions undertaken by our Australian subsidiaries prior to the sale. On May 14, 2009, we
received a notice from the ATO indicating that they would not be taking any further action in
relation to its audit of the reorganization transactions. As a result, during the second quarter of
2009, we removed the previously recorded tax reserves resulting in a benefit to the continuing
operations tax provision of $2.5 million, an adjustment to the gain on sale of discontinued
operations of $12.3 million and reduced our accrual for consulting fees resulting in a gain on sale
of discontinued operations of $0.7 million, or $0.5 million, after tax.
Goodwill. Subsequent to December 31, 2009, we have had periodic reductions in our total market
capitalization below our book value as of December 31, 2009. A sustained decline in our market
capitalization relative to our book value may result in, or be indicative of, a goodwill impairment
charge in the future. We utilize market capitalization in corroborating our assessment of the fair
value of our reporting units.
Impairment charges could substantially affect our reported earnings in the periods of such
charges. In addition, impairment charges could negatively impact our financial ratios and could
limit our ability to obtain financing in the future. As of September 30, 2010, we had $212.3
million of goodwill, which represented approximately 13.5% of total assets.
Liquidity and Capital Resources
The discussion of liquidity and capital resources that follows reflects our consolidated
results and includes all subsidiaries. We have historically met our liquidity requirements
primarily from cash generated from operations and borrowings under our credit agreements which is
used to fund capital expenditures and debt service requirements. For the nine months ended
September 30, 2010, there was a net cash inflow from operations of $67.9 million. We believe that
we will be able to generate sufficient cash flow from operations to meet our capital expenditure
and debt service requirements through our continued focus on revenue growth and operating
efficiency as discussed under Managing Business Performance.
Operating Activities
Cash provided by operating activities was $67.9 million for the nine months ended September
30, 2010, compared to $5.1 million for the nine months ended September 30, 2009. The increase in
cash flows from operating activities was primarily due to the termination of the existing interest
rate swap in connection with the repayment of the bridge credit facility in June 2009 and timing of
interest payments on the senior secured notes and an increase in operating income in 2010.
Investing Activities
Cash used in investing activities was $67.4 million for the nine months ended September 30,
2010, compared to $14.7 million for the nine months ended September 30, 2009. The increase in cash
used in investing activities was primarily due to the acquisition of Atlas for $23.9 million.
Capital expenditures were also higher in 2010 at $46.8 million compared to $34.5 million in 2009.
Asset sale proceeds were $3.3 million for the nine months ended September 30, 2010 compared to
$20.1 million for the nine months ended September 30, 2009. The 2009 asset sale proceeds were
primarily due to the sale of the Coos Bay Line.
Financing Activities
Cash provided by (used in) financing activities was $(76.9) million for the nine months ended
September 30, 2010, compared to $44.7 million in the nine months ended September 30, 2009. The cash
provided by financing activities in the nine months ended September 30, 2009 was primarily due to
the issuance of the 9.25% senior secured notes, partially offset by cash used to repay the existing
bridge credit facility and financing costs associated with the issuance of the notes. The cash used
in financing activities during the nine months ended September 30, 2010, was primarily for the
repayment of $74.0 million of the senior secured notes in the second quarter of 2010.
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Working Capital
As of September 30, 2010, we had working capital of $119.6 million, including cash on hand of
$113.9 million, and approximately $21.0 million of availability under the ABL Facility, compared to
working capital of $202.2 million, including cash on hand of $190.2 million, and $17.1 million of
availability under the ABL Facility at December 31, 2009. The working capital decrease at September
30, 2010, compared to December 31, 2009, is primarily due to use of cash to repay $74 million of
senior secured notes in June 2010 and the acquisition of Atlas for $23.9 million in July 2010. Our
cash flows from operations and borrowings under our credit agreements historically have been
sufficient to meet our ongoing operating requirements, to fund capital expenditures for property,
plant and equipment, and to satisfy our debt service requirements.
Long-term Debt
$740 million 9.25% Senior Secured Notes
On June 23, 2009, we sold $740.0 million of 9.25% senior secured notes due July 1, 2017 in a
private offering, for gross proceeds of $709.8 million after deducting the initial purchasers fees
and the original issue discount. The notes are secured by first-priority liens on substantially all
of our and the guarantors assets. The guarantors are defined essentially as our existing and
future wholly-owned domestic restricted subsidiaries. The net proceeds received from the issuance
of the notes were used to repay the outstanding balance of the $650 million bridge credit facility
and $7.4 million of accrued interest thereon, pay costs of $57.1 million to terminate interest rate
swap arrangements, including $1.3 million of accrued interest, entered into in connection with the
bridge credit facility and pay fees and expenses related to the offering and for general corporate
purposes.
We may redeem up to 10% of the aggregate principal amount of the notes issued during any
12-month period commencing on the issue date at a price equal to 103% of the principal amount
thereof plus accrued and unpaid interest, if any. We may also redeem some or all of the notes at
any time before July 1, 2013, at a price equal to 100% of the aggregate principal amount thereof
plus accrued and unpaid interest, if any, to the redemption date and a make-whole premium. In
addition, prior to July 1, 2012, we may redeem up to 35% of the notes at a redemption price of
109.25% of their principal amount thereof plus accrued and unpaid interest, if any, with the
proceeds from an equity offering. Subsequent to July 1, 2013, we may redeem the notes at 104.625%
of their principal amount. The premium then reduces to 102.313% commencing on July 1, 2014 and then
100% on July 1, 2015 and thereafter.
We may issue from time to time additional debt, without notice to or consent of the existing
senior secured note holders, having identical terms and conditions to the existing senior secured
notes. Any additional notes issued shall be treated as a single class along with the existing
senior secured notes.
On November 2, 2009, we commenced an exchange offer of the privately placed senior secured
notes for senior secured notes which have been registered under the Securities Act. The registered
notes have terms that are substantially identical to the privately placed notes. The exchange offer
expired on December 2, 2009.
On November 16, 2009, we redeemed $74 million aggregate principal amount of the notes at a
cash redemption price of 103%, plus accrued interest thereon to, but not including, the redemption
date.
On June 24, 2010, we redeemed $74 million aggregate principal amount of the notes at a cash
redemption price of 103%, plus accrued interest thereon to, but not including, the redemption date.
$40 million ABL Facility
In connection with the issuance of the senior secured notes on June 23, 2009, we also entered
into a $40 million Asset Backed Loan Facility (ABL Facility). The ABL Facility matures on June
23, 2013 and bears interest at LIBOR plus 4.00%. Obligations under the ABL Facility are secured by
a first-priority lien in the ABL collateral. ABL collateral includes accounts receivable, deposit
accounts, securities accounts and cash. As of September 30, 2010, we had no outstanding balance
under the ABL Facility and approximately $21.0 million of undrawn availability, taking into account
borrowing base limitations.
On June 10, 2010, we entered into Amendment No. 1 (the Amendment) to the ABL Facility
improving certain terms of the ABL Facility. Among other things, this Amendment eliminates the
LIBOR-based interest rate floor of 2.5%, modifies the borrowing base calculation and reporting
requirements to require less frequent financial reporting in certain circumstances, adjusts the
limitations on permitted acquisitions and restricted payments and amends the financial covenants to
incorporate cash balances in certain definitions.
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Covenants to Senior Secured Notes and ABL Facility
The indenture governing the senior secured notes contains certain limitations and restrictions
on us and our restricted subsidiaries (as of the date of this report, all of our subsidiaries were
restricted subsidiaries) ability to, among other things, incur additional indebtedness; issue
preferred and disqualified stock; purchase or redeem capital stock; make certain investments; pay
dividends or make other payments or loans or transfer property; sell assets; enter into certain
types of transactions with affiliates involving consideration in excess of $5.0 million; create
liens on certain assets; and sell all or substantially all of our assets or our guarantors assets
or merge with or into another company.
The covenants are subject to important exceptions and qualifications described below.
We and our restricted subsidiaries are prohibited from incurring or issuing additional
indebtedness and disqualified stock and our restricted subsidiaries are prohibited from issuing
preferred stock unless our fixed charge coverage ratio, defined as Adjusted EBITDA less capital
expenditures divided by fixed charges, for the most recently ended four full fiscal quarters would
have been at least 2.00 to 1.00 on a pro forma basis. In addition, we may, among other things,
incur certain credit facilities debt not to exceed the greater of (i) $60 million and (ii) the
borrowing base; purchase money indebtedness or capital lease obligations not to exceed the greater
of (i) $80 million and (ii) 5.0% of total assets; indebtedness of foreign subsidiaries not to
exceed the greater of (i) $25 million and (ii) 15% of total assets of foreign subsidiaries;
acquired debt so long as we would be permitted to incur at least an additional $1 of indebtedness
under its fixed charge ratio or such ratio is greater following the transaction; and up to $100
million (limited to $50 million for restricted subsidiaries) of indebtedness, disqualified stock or
preferred stock, subject to increase from the proceeds of certain equity sales and capital
contributions.
Furthermore, we and our restricted subsidiaries are prohibited from purchasing or redeeming
capital stock; making certain investments, paying dividends or making other payments or loans or
transfers of property, unless we could incur an additional dollar of indebtedness under our fixed
charge ratio and such payment is less than 50% of our consolidated net income plus certain other
items that increase the size of the payment basket. In addition, we may, among other things, make
any payment from the proceeds of a capital contribution or concurrent offering of equity interests
of us; make stock buy-backs from current and former employees/directors in an amount to not exceed
$5 million per year, subject to carryover of unused amounts into subsequent years (capped at $10
million in any year) and subject to increase for cash proceeds from certain equity issuances to
employees/directors and cash proceeds from key man life insurance; make investments in unrestricted
subsidiaries in an amount not to exceed (i) $10 million and (ii) 0.75% of total assets; pay
dividends following a public offering up to 6% per annum of the net proceeds received by us; make
any payments up to $25 million. Moreover, we may make investments in an amount not to exceed the
greater of (i) $25 million and (ii) 2.0% of total assets, investments in a similar business not to
exceed the greater of (i) $50 million and (ii) 3% of total assets and advances to employees not in
excess of $5 million.
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Adjusted EBITDA, as defined in the indenture governing the senior secured notes, is the
key financial covenant measure that monitors our ability to undertake key investing and financing
functions, such as making investments, transferring property, paying dividends, and incurring
additional indebtedness.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(in thousands) | ||||||||||||||||
Cash flows from operating activities to
Adjusted EBITDA Reconciliation: |
||||||||||||||||
Net cash provided by operating activities |
$ | 9,142 | $ | 48,486 | $ | 67,872 | $ | 5,128 | ||||||||
Changes in working capital accounts |
18,975 | (29,170 | ) | (4,799 | ) | 19,561 | ||||||||||
Depreciation and amortization, including
amortization of debt issuance costs
classified in interest expense |
(12,724 | ) | (11,708 | ) | (36,863 | ) | (39,858 | ) | ||||||||
Amortization of swap termination costs |
(4,874 | ) | (9,054 | ) | (16,582 | ) | (10,026 | ) | ||||||||
Net gain on sale or disposal of properties |
1,708 | 129 | 1,717 | 70 | ||||||||||||
Foreign exchange gain on debt |
| | | 1,160 | ||||||||||||
Swap termination costs |
| | | 55,750 | ||||||||||||
Loss on debt extinguishment |
| | (8,357 | ) | (2,593 | ) | ||||||||||
Equity compensation costs |
(2,035 | ) | (1,204 | ) | (5,525 | ) | (3,146 | ) | ||||||||
Deferred income taxes |
(2,224 | ) | 6,004 | 3,770 | (3,336 | ) | ||||||||||
Net income |
7,968 | 3,483 | 1,233 | 22,710 | ||||||||||||
Add: Discontinued operations loss (gain) |
| 20 | | (12,931 | ) | |||||||||||
Income from continuing operations |
7,968 | 3,503 | 1,233 | 9,779 | ||||||||||||
Add: |
||||||||||||||||
Provision for (benefit from) income taxes |
3,052 | (5,378 | ) | (250 | ) | (3,028 | ) | |||||||||
Interest expense, including amortization costs |
19,735 | 27,507 | 64,592 | 62,770 | ||||||||||||
Depreciation and amortization |
11,581 | 10,365 | 33,259 | 30,931 | ||||||||||||
EBITDA |
42,336 | 35,997 | 98,834 | 100,452 | ||||||||||||
Add: |
||||||||||||||||
Equity compensation costs |
2,035 | 1,204 | 5,525 | 3,146 | ||||||||||||
Foreign exchange gain on debt |
| | | (1,160 | ) | |||||||||||
Loss on debt extinguishment |
| | 8,357 | 2,593 | ||||||||||||
Acquisition income, net of expense |
(1,710 | ) | | (1,449 | ) | | ||||||||||
Non-recurring headquarters relocation costs |
| 408 | | 1,044 | ||||||||||||
Adjusted EBITDA |
$ | 42,661 | $ | 37,609 | $ | 111,267 | $ | 106,075 | ||||||||
Based on current levels of Adjusted EBITDA, we are not restricted in undertaking key investing
and financing functions as discussed above.
Adjusted EBITDA, as presented herein, is a supplemental measure of liquidity that is not
required by, or presented in accordance with, GAAP. We use non-GAAP financial measures as a
supplement to our GAAP results in order to provide a more complete understanding of the factors and
trends affecting our business. However, Adjusted EBITDA has limitations as an analytical tool. It
is not a measurement of our cash flows from operating activities under GAAP and should not be
considered as an alternative to cash flow from operating activities as a measure of liquidity.
The ABL Facility includes customary affirmative and negative covenants, including, among other
things, restrictions on (i) the incurrence of indebtedness and liens, (ii) investments and loans,
(iii) dividends and other payments with respect to capital stock, (iv) redemption and repurchase of
capital stock, (v) mergers, acquisitions and asset sales, (vi) payments and modifications of other
debt (including the notes), (vii) affiliate transactions, (viii) altering our business, (ix)
engaging in sale-leaseback transactions and (x) entering into agreements that restrict our ability
to create liens or repay loans or issue capital stock. In addition, if total liquidity under the
ABL Facility is below $20.0 million, we will be subject to a minimum fixed charge coverage ratio of
1.1 to 1.0.
Interest Rate Swaps
On February 14, 2007, we entered into an interest rate swap with a termination date of
February 15, 2014. The total notional amount of the swap started at $425 million for the period
commencing February 14, 2007 through November 14, 2007, increasing to a total notional amount of
$525 million for the period commencing November 15, 2007 through November 14, 2008, and ultimately
increased to $625 million for the period commencing November 15, 2008 through February 15, 2014.
Under the terms of the interest rate swap, we were required to pay a fixed interest rate of 4.9485%
on the notional amount while receiving a variable interest rate equal to the 90 day
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LIBOR. This swap qualified, was designated and was accounted for as a cash flow hedge under ASC 815.
This interest rate swap agreement was terminated in June 2009, in connection with the repayment of
the bridge credit facility, and thus had no fair value at December 31, 2009. Interest expense of
$0.3 million was recognized during the nine months ended September 30, 2009 for the portion of the
hedge deemed ineffective. Pursuant to ASC 815, the fair value balance of the swap at the
termination date remains in accumulated other comprehensive loss, net of tax, and is amortized into
interest expense over the remaining life of the original swap (through February 14, 2014). As a
result of the $74 million redemption of the notes during June 2010, an additional $1.7 million of
unamortized expense was recognized during the nine months ended September 30, 2010. This was the
result of reducing the face value of the outstanding senior secured notes below the notional amount
of the swap. As of September 30, 2010, accumulated other comprehensive loss included $15.8
million, net of tax, of unamortized loss relating to the terminated swap. Reclassifications from
accumulated other comprehensive loss to interest expense in the next twelve months will be
approximately $13.9 million, or $8.6 million, net of tax.
For derivative instruments in an asset position, we analyze the credit standing of the
counterparty and factor it into the fair value measurement. ASC 820 states that the fair value of a
liability must reflect the nonperformance risk of the reporting entity. Therefore, the impact of
our credit worthiness has also been factored into the fair value measurement of the derivative
instruments in a liability position.
Off Balance Sheet Arrangements
We currently have no off balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from changing foreign currency exchange rates, interest rates
and diesel fuel prices. Changes in these factors could cause fluctuations in earnings and cash
flows.
Foreign Currency. Our foreign currency risk arises from owning and operating railroads in
Canada. As of September 30, 2010, we had not entered into any currency hedging transactions to
manage this risk. A decrease in the Canadian dollar could negatively impact our reported revenue
and earnings for the affected period. During the three months ended September 30, 2010, the
Canadian dollar increased 3% in value in comparison to the U.S dollar. The average rate for the
three months ended September 30, 2010, was 6% higher than it was for the same period in 2009. The
increase in the average Canadian dollar exchange rate led to an increase of $0.7 million in
reported revenue and a $0.3 million increase in reported operating income in 2010, compared to
2009. A 10% unfavorable change in the 2010 average exchange rate would have negatively impacted
2010 revenue by $1.7 million and operating income by $0.8 million.
During the nine months ended September 30, 2010, the Canadian dollar ended relatively flat in
value in comparison to the U.S dollar. The average rate for the nine months ended September 30,
2010, was 13% higher than it was for the same period in 2009. The increase in the average Canadian
dollar exchange rate led to an increase of $5.0 million in reported revenue and a $1.9 million
increase in reported operating income in 2010, compared to 2009. A 10% unfavorable change in the
2010 average exchange rate would have negatively impacted 2010 revenue by $4.6 million and
operating income by $1.9 million.
Interest Rates. Our senior secured notes issued in September 2009 are fixed rate instruments,
and therefore, would not be impacted by changes in interest rates. Our potential interest rate risk
results from our ABL Facility as an increase in interest rates would result in lower earnings and
increased cash outflows. We do not currently have any outstanding balances under this facility, but
if we were to draw upon it, we would be subject to changes in interest rates.
Diesel Fuel. We are exposed to fluctuations in diesel fuel prices, as an increase in the
price of diesel fuel would result in lower earnings and increased cash outflows. Fuel costs
represented 7.6% of total operating revenues during the three months ended September 30, 2010. Due
to the significance of fuel costs to our operations and the historical volatility of fuel prices,
we participate in fuel surcharge programs which provide additional revenue to help offset the
increase in fuel expense. These fuel surcharge programs fluctuate with the price of diesel fuel
with a lag of three to nine months. Each one-cent change in the price of fuel would result in
approximately a $0.2 million change in fuel expense on an annual basis.
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ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of the end of the period covered by this quarterly report on Form
10-Q, our principal executive officer and principal financial officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (Exchange Act)) are effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the Exchange Act, is
recorded, processed, summarized, and reported within the time periods specified in Commissions
rules and forms and that such information is accumulated and communicated to our management,
including our chief executive and chief financial officers as appropriate to allow timely decisions
regarding required disclosure. Additionally, as of the end of the period covered by this report,
our principal executive officer and principal financial officer have concluded that no changes in
our internal control over financial reporting occurred during our third fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
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PART II. OTHER INFORMATION
Items 1, 3, 4 and 5 are not applicable and have been omitted.
ITEM 1A. RISK FACTORS
In addition to the information set forth in this Form 10-Q, you should carefully consider the risk
factors described under the caption Risk Factors in our Annual Report on Form 10-K filed with the
Commission on March 26, 2010. As of the date of filing this Quarterly Report on Form 10-Q, we have
updated and added to those previously discussed risk factors as follows:
An impairment in the carrying value of goodwill could negatively impact our consolidated results of
operations and net worth.
Goodwill is recorded at fair value and is not amortized, but is reviewed for impairment at least
annually or more frequently if impairment indicators arise. In evaluating the potential for
impairment of goodwill, we make assumptions regarding future operating performance, business
trends, and market and economic conditions. Such analyses further require us to make judgmental
assumptions about sales, operating margins, growth rates, and discount rates. There are inherent
uncertainties related to these factors and to managements judgment in applying these factors to
the assessment of goodwill recoverability. We could be required to evaluate the recoverability of
goodwill prior to the annual assessment if we experience disruptions to the business, unexpected
significant declines in operating results, divestiture of a significant component of our business
and sustained market capitalization declines.
Subsequent to December 31, 2009, we have had periodic reductions in our total market capitalization
below our book value as of December 31, 2009. A sustained decline in our market capitalization
relative to our book value may result in, or be indicative of, a goodwill impairment charge in the
future. We utilize market capitalization in corroborating our assessment of the fair value of our
reporting units.
Impairment charges could substantially affect our reported earnings in the periods of such charges.
In addition, impairment charges could negatively impact our financial ratios and could limit our
ability to obtain financing in the future. As of September 30, 2010, we had $212.3 million of
goodwill, which represented approximately 13.5% of total assets.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the three months ended September 30, 2010, there were no purchases of the Companys shares
of Common Stock made by or on behalf of the Company or any affiliated purchaser of the Company
(as such term is defined in Rule 10b-18(a)(3) of the Securities Act of 1933, as amended). During
the three months ended September 30, 2010, the Company accepted 462 shares in lieu of cash payments
by employees for payroll tax withholdings relating to stock based compensation.
Total Number of | ||||||||||||||||
Shares Purchased as | Maximum Number of | |||||||||||||||
Part of Publicly | Shares that May Yet | |||||||||||||||
Total Number of | Average Price Paid | Announced Plans or | Be Purchased Under | |||||||||||||
Period | Shares Purchased | per Share | Programs | the Plans or Programs | ||||||||||||
July 1 through July 31, 2010 |
302 | $ | 9.41 | | | |||||||||||
August 1 through August 31, 2010 |
| | | | ||||||||||||
September 1 through September 30, 2010 |
160 | 10.37 | | | ||||||||||||
Total |
462 | $ | 9.74 | | | |||||||||||
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ITEM 6. EXHIBITS
Exhibits | ||
31.1
|
Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer | |
31.2
|
Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer | |
32.1
|
Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 | |
32.2
|
Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RAILAMERICA, INC. |
||||
Date: November 2, 2010 | By: | /s/ B. Clyde Preslar | ||
B. Clyde Preslar, Senior Vice
President and Chief Financial Officer (on behalf of registrant and as Principal Financial Officer) |
||||
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