Attached files
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EX-31.2 - EX-31.2 - RAILAMERICA INC /DE | g26944exv31w2.htm |
EX-32.1 - EX-32.1 - RAILAMERICA INC /DE | g26944exv32w1.htm |
EX-32.2 - EX-32.2 - RAILAMERICA INC /DE | g26944exv32w2.htm |
EX-31.1 - EX-31.1 - RAILAMERICA INC /DE | g26944exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2011, or
For the quarterly period ended March 31, 2011, or
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
For the transition period from to
Commission file number 001-32579
RAILAMERICA, INC.
(Exact name of registrant as specified in its charter)
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)
(Address of Principal Executive Offices) (Zip Code)
(800) 342-1131
(Registrants Telephone Number, Including Area Code)
(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 x 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 x | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act) Yes o No x
As
of April 27, 2011 there were 52,191,909 shares of the registrants common stock outstanding.
RAILAMERICA, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
QUARTER ENDED MARCH 31, 2011
Page | ||||||||
Part I. | Financial Information | 3 | ||||||
Item 1. | 3 | |||||||
Item 2. | 19 | |||||||
Item 3. | 27 | |||||||
Item 4. | 28 | |||||||
Part II. | Other Information | 29 | ||||||
Item 1A. | 29 | |||||||
Item 2. | 29 | |||||||
Item 6. | 30 | |||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
2
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands, except share data) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 130,054 | $ | 152,968 | ||||
Accounts and notes receivable, net of allowance of $7,440 and $6,767, respectively |
77,931 | 74,668 | ||||||
Current deferred tax assets |
25,809 | 12,769 | ||||||
Other current assets |
19,136 | 15,200 | ||||||
Total current assets |
252,930 | 255,605 | ||||||
Property, plant and equipment, net |
986,188 | 981,622 | ||||||
Intangible assets, net |
140,102 | 140,546 | ||||||
Goodwill |
212,721 | 212,495 | ||||||
Other assets |
12,936 | 13,385 | ||||||
Total assets |
$ | 1,604,877 | $ | 1,603,653 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current maturities of long-term debt |
$ | 290 | $ | 403 | ||||
Accounts payable |
72,780 | 66,258 | ||||||
Accrued expenses |
38,885 | 36,913 | ||||||
Total current liabilities |
111,955 | 103,574 | ||||||
Long-term debt, less current maturities |
1,997 | 2,147 | ||||||
Senior secured notes |
571,750 | 571,161 | ||||||
Deferred income taxes |
218,701 | 202,985 | ||||||
Other liabilities |
18,687 | 19,037 | ||||||
Total liabilities |
923,090 | 898,904 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value, 400,000,000 shares authorized; 53,166,672 shares
issued and outstanding at March 31, 2011; and 54,859,261 shares issued and
outstanding at December 31, 2010 |
532 | 549 | ||||||
Additional paid in capital and other |
603,602 | 636,757 | ||||||
Retained earnings |
69,588 | 65,503 | ||||||
Accumulated other comprehensive income |
8,065 | 1,940 | ||||||
Total stockholders equity |
681,787 | 704,749 | ||||||
Total liabilities and stockholders equity |
$ | 1,604,877 | $ | 1,603,653 | ||||
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)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(In thousands, except per share data) | ||||||||
Operating revenue |
$ | 124,937 | $ | 114,941 | ||||
Operating expenses: |
||||||||
Labor and benefits |
41,617 | 37,751 | ||||||
Equipment rents |
8,666 | 8,499 | ||||||
Purchased services |
9,106 | 8,555 | ||||||
Diesel fuel |
14,167 | 11,244 | ||||||
Casualties and insurance |
2,134 | 3,633 | ||||||
Materials |
5,085 | 3,925 | ||||||
Joint facilities |
2,205 | 2,146 | ||||||
Other expenses |
9,933 | 9,098 | ||||||
Track maintenance expense reimbursement |
(4,150 | ) | | |||||
Net loss (gain) on sale of assets |
207 | (34 | ) | |||||
Depreciation and amortization |
11,764 | 10,923 | ||||||
Total operating expenses |
100,734 | 95,740 | ||||||
Operating income |
24,203 | 19,201 | ||||||
Interest expense, including amortization costs of $4,858 and
$7,304, respectively |
(18,591 | ) | (22,704 | ) | ||||
Other income |
540 | 459 | ||||||
Income (loss) from continuing operations before income taxes |
6,152 | (3,044 | ) | |||||
Provision for (benefit from) income taxes |
2,067 | (530 | ) | |||||
Net income (loss) |
$ | 4,085 | $ | (2,514 | ) | |||
Basic earnings (loss) per common share: |
||||||||
Net income (loss) |
$ | 0.07 | $ | (0.05 | ) | |||
Diluted earnings (loss) per common share: |
||||||||
Net income (loss) |
$ | 0.07 | $ | (0.05 | ) | |||
Weighted average common shares outstanding: |
||||||||
Basic |
54,651 | 54,568 | ||||||
Diluted |
54,651 | 54,568 |
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)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | 4,085 | $ | (2,514 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Depreciation and amortization, including amortization of debt issuance costs classified
in interest expense |
12,945 | 12,151 | ||||||
Amortization of swap termination costs |
3,677 | 6,073 | ||||||
Net loss (gain) on sale or disposal of properties |
207 | (34 | ) | |||||
Equity compensation costs |
2,609 | 1,525 | ||||||
Deferred income taxes and other |
615 | (1,952 | ) | |||||
Changes in operating assets and liabilities, net of acquisitions and dispositions: |
||||||||
Accounts receivable |
(3,025 | ) | (9,980 | ) | ||||
Other current assets |
(3,924 | ) | 6,618 | |||||
Accounts payable |
4,198 | 9,220 | ||||||
Accrued expenses |
2,124 | 4,169 | ||||||
Other assets and liabilities |
(388 | ) | 164 | |||||
Net cash provided by operating activities |
23,123 | 25,440 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of property, plant and equipment |
(15,786 | ) | (11,679 | ) | ||||
NECR government grant reimbursements |
2,400 | | ||||||
Proceeds from sale of assets |
848 | 343 | ||||||
Net cash used in investing activities |
(12,538 | ) | (11,336 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Principal payments on long-term debt |
(263 | ) | (292 | ) | ||||
Repurchase of common stock |
(33,634 | ) | | |||||
Costs associated with sale of common stock |
| (106 | ) | |||||
Deferred financing costs paid |
(119 | ) | (95 | ) | ||||
Net cash used in financing activities |
(34,016 | ) | (493 | ) | ||||
Effect of exchange rates on cash |
517 | 319 | ||||||
Net (decrease) increase in cash |
(22,914 | ) | 13,930 | |||||
Cash, beginning of period |
152,968 | 190,218 | ||||||
Cash, end of period |
$ | 130,054 | $ | 204,148 | ||||
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 months ended March 31, 2011 and 2010, 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 2010 was derived
from the Companys audited financial statements for the year ended December 31, 2010, 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 months ended March 31, 2011 and 2010, basic and diluted earnings (loss) per share are
calculated using the weighted average number of common shares
outstanding during the period. The
basic earnings (loss) 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 net income (loss) available for common stockholders and weighted
average shares outstanding (in thousands):
For the Three Months | ||||||||
Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net income (loss) (basic and diluted) |
$ | 4,085 | $ | (2,514 | ) | |||
Weighted average shares outstanding (basic and diluted) |
54,651 | 54,568 |
6
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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.
Stock-based compensation expense related to restricted stock grants for the three months ended
March 31, 2011 and 2010 was $2.6 million and $1.5 million, respectively.
A summary of the status of restricted shares as of March 31, 2011, and the changes during the three
months then ended and the weighted average grant date fair values are presented below:
Time Based | ||||||||
Balance at December 31, 2010 |
1,476,225 | $ | 12.59 | |||||
Granted |
535,839 | $ | 13.65 | |||||
Vested |
(464,890 | ) | $ | 12.35 | ||||
Cancelled |
(13,088 | ) | $ | 13.86 | ||||
Balance at March 31, 2011 |
1,534,086 | $ | 13.02 | |||||
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.
5. 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 and original issue discount. 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.
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.
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.
$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 March 31, 2011, the Company had no
outstanding balance under the Facility and approximately $20.3 million of undrawn availability,
taking into account borrowing base limitations.
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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 to its ABL Facility improving certain
terms of the ABL Facility. Among other things, Amendment No. 1 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.
On February 23, 2011, the Company entered into Amendment No. 2 to its ABL Facility. This amendment
adjusts certain terms of the ABL Facility and increases the threshold for Restricted Payments, as
defined in the ABL Facility, to allow share repurchases of the Companys common stock in an amount
not exceed $75 million without affecting other Restricted Payment baskets.
6. 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 instruments 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. |
The carrying amounts and estimated fair values of the Companys financial instruments were as
follows (in thousands):
March 31, 2011 | ||||||||
Carrying | Fair | |||||||
Amount | Value | |||||||
Cash and cash equivalents. |
$ | 130,054 | $ | 130,054 | ||||
9.25% Senior secured notes |
$ | 571,750 | $ | 637,444 |
7. 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.
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 March 31, 2011 or December 31, 2010. 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 three months ended March 31, 2011 and 2010,
included $3.7 million and $6.1 million of amortization expense related to the terminated swap,
respectively. As of March 31, 2011, accumulated other comprehensive loss included $10.5 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 $10.0
million, or $6.1 million, net of tax.
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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. COMMON STOCK TRANSACTIONS
During the three months ended March 31, 2011 and 2010, the Company accepted 149,423 and 80,672
shares in lieu of cash payments by employees for payroll tax withholdings relating to stock based
compensation.
Stock
Repurchase Program
On February 23, 2011, the Company announced that its Board of Directors had approved a stock
repurchase program. Under the program, the Company was authorized to repurchase up to $50.0 million
of its outstanding shares of common stock from time to time at prevailing prices in the open market
or in privately negotiated transactions. The timing and actual number
of shares repurchased depended on a variety of factors including the price and availability of the Companys
shares, trading volume and general market conditions. The program was
able to be suspended or discontinued
at any time without prior notice.
During the three months ended March 31, 2011, the Company repurchased 2,065,917 shares in open
market transactions at a weighted average price of $16.25 per share.
On April 18, 2011, the Company completed the stock repurchase program, repurchasing a total of
3,036,769 shares at a weighted average price of $16.46 per share.
9. TRACK MAINTENANCE AGREEMENT
In the first quarter of 2011, the Company entered into a track maintenance agreement with an
unrelated third-party customer (Shipper). Under the agreement, the Shipper pays for qualified
railroad track maintenance expenditures during 2011 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 three months ended March 31, 2011, the Shipper paid for $4.2 million
of maintenance expenditures. The Company incurred $0.1 million of consulting fees related to the
agreement during the three months ended March 31, 2011. The track maintenance tax credit was not
renewed by Congress for 2010 until December 2010; therefore, the Company did not enter into the
2010 track maintenance agreement until December 2010. This resulted in no Shipper reimbursements
in the three months ended March 31, 2010.
10. INCOME TAX PROVISION
The overall income tax rates for the three months ended March 31, 2011 and 2010 for continuing
operations were a provision of 33.6% and a benefit of 17.4% respectively. The overall tax rate for
the three months ended March 31, 2011 was favorably impacted by an adjustment to the deferred tax
balances resulting from a change in tax law ($0.1 million). The Companys overall tax rate for the
three months ended March 31, 2010 was adversely impacted by the jurisdictional mix of operating
income, non-deductible permanent items and an expense relating to stock-based compensation plans
($0.8 million).
A reconciliation of the beginning and ending amount of unrecognized tax positions is as follows (in
thousands):
Balance at January 1, 2011 |
$ | 5,170 | ||
Additions for tax positions of prior years |
9 | |||
Lapse of statute of limitations |
| |||
Balance at March 31, 2011 |
$ | 5,179 | ||
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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. COMPREHENSIVE INCOME
Other comprehensive income 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 March 31, 2011, accumulated other comprehensive income consisted
of $10.5 million of unrealized losses, net of tax, related to hedging transactions, $0.7 million of
unrealized actuarial gains, net of tax, associated with pension benefits and $17.8 million of
cumulative translation adjustment gains. The following table reconciles net income (loss) to
comprehensive income for the three months ended March 31, 2011 and 2010 (in thousands):
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
Net income (loss) |
$ | 4,085 | $ | (2,514 | ) | |||
Other comprehensive income: |
||||||||
Amortization of terminated swap costs, net of
taxes of $1,459 and $2,308, respectively |
2,218 | 3,765 | ||||||
Change in cumulative translation adjustments |
3,907 | 2,930 | ||||||
Total comprehensive income |
$ | 10,210 | $ | 4,181 | ||||
12. PENSION DISCLOSURES
Components of the net periodic pension and benefit cost for the three months ended March 31, 2011
and 2010 were as follows (in thousands):
Pension Benefits | ||||||||
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
Service cost |
$ | 53 | $ | 62 | ||||
Interest cost |
161 | 167 | ||||||
Expected return on plan assets |
(173 | ) | (133 | ) | ||||
Amortization of net actuarial loss. |
33 | 34 | ||||||
Amortization of prior service costs |
6 | 6 | ||||||
Net cost recognized |
$ | 80 | $ | 136 | ||||
Health and Welfare Benefits | ||||||||
For the Three Months | ||||||||
Ended March 31, | ||||||||
2011 | 2010 | |||||||
Service cost |
$ | 10 | $ | 11 | ||||
Interest cost |
30 | 32 | ||||||
Amortization of net actuarial gain |
(21 | ) | (15 | ) | ||||
Net cost recognized |
$ | 19 | $ | 28 | ||||
13. 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 Casualties and insurance on the Consolidated Statements
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 estimate (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.
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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 paid settlements to a substantial number of
affected businesses, as well. All business interruption claims were resolved. Total payments
exceeded the self insured retention, so the IORYs liability for civil matters was 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)
investigated whether criminal negligence contributed to the incident, and whether charges should be
pressed. A series of conferences with the Companys attorneys and the U.S. EPA attorneys took place
through 2009 and into 2011, at which times legal theories and evidence were discussed in an effort
to influence the U.S. EPAs charging decision. The IORY submitted a proffer addendum in May 2009
analyzing its compliance under the Clean Air Act. The statute of limitations was extended by a
tolling agreement as to the IORY only (the Company had been dropped from this violation) through
February 27, 2011. The U.S. EPA attorneys decided not to press charges and allowed the statute of
limitations to lapse resolving this matter. As a result, the Company released approximately $1.2
million previously accrued for this incident, in Casualties and insurance on the Consolidated
Statements of Operations.
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 two years from the grant date. There was no material impact to the Companys financial
statements for the quarter ended March 31, 2011 as a result of this grant. The Company accounts for
grant liabilities as contra-assets within property, plant and
equipment and they are amortized over the
life of the related asset.
14. RELATED PARTY TRANSACTIONS
As of January 1, 2010, 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 Investment Group LLC (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 three
months ended March 31, 2011 and 2010, on a net basis the Company paid FECR $0.3 million and $0.5
million respectively. The remaining lease relates to the sub-leasing of office space by FECR to
the Company. During the three months ended March 31, 2011 and 2010, FECR billed the Company $0.2
million and $0.3 million, respectively, under the sub-lease agreement. As of March 31, 2011 the
Company had a payable of $0.2 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 March 31, 2011, the Company had no amounts due to FECR
under this agreement.
11
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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 months ended March 31, 2011 and 2010, the Company recognized $0.3 million
and $0.1 million of compensation expense and $0.3 million and $0.1 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 which vest 50%, 25%, and 25% over 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 months ended March 31, 2011 and 2010, the Company
recognized $0.2 million and $0.3 million of compensation expense and $0.2 million and $0.3 million
of management fee income related to these consulting agreements, respectively.
15. SUBSEQUENT EVENTS
On April 11, 2011, the Company announced that it signed an agreement to acquire the assets of three
short-line freight railroads in the state of Alabama for a total purchase price of $12.7 million.
The transaction is expected to close in the second quarter of 2011 and is subject to customary
closing conditions including regulatory approvals. The three railroads, known individually as the
Three Notch Railroad (THNR), the Wiregrass Central Railroad (WGCR), and the Conecuh Valley Railroad
(COEH), are currently owned by affiliates of Gulf and Ohio Railways, Inc.
12
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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
16. 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
March 31, 2011
March 31, 2011
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 119,068 | $ | 10,986 | $ | | $ | 130,054 | ||||||||||
Accounts and notes receivable, net of allowance |
3,012 | 64,374 | 10,545 | | 77,931 | |||||||||||||||
Current deferred tax assets |
25,809 | | | | 25,809 | |||||||||||||||
Other current assets |
200 | 16,818 | 2,118 | | 19,136 | |||||||||||||||
Total current assets |
29,021 | 200,260 | 23,649 | | 252,930 | |||||||||||||||
Property, plant and equipment, net |
585 | 901,096 | 84,507 | | 986,188 | |||||||||||||||
Intangible assets |
| 102,431 | 37,671 | | 140,102 | |||||||||||||||
Goodwill |
| 204,679 | 8,042 | | 212,721 | |||||||||||||||
Other assets |
11,917 | 1,019 | | | 12,936 | |||||||||||||||
Investment in and advances to affiliates |
1,255,543 | 1,120,175 | 37,981 | (2,413,699 | ) | | ||||||||||||||
Total assets |
$ | 1,297,066 | $ | 2,529,660 | $ | 191,850 | $ | (2,413,699 | ) | $ | 1,604,877 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Current maturities of long-term debt |
$ | | $ | 290 | $ | | $ | | $ | 290 | ||||||||||
Accounts payable |
7,022 | 62,603 | 3,155 | | 72,780 | |||||||||||||||
Accrued expenses |
15,319 | 20,457 | 3,109 | | 38,885 | |||||||||||||||
Total current liabilities |
22,341 | 83,350 | 6,264 | | 111,955 | |||||||||||||||
Long-term debt, less current maturities |
| 1,997 | | | 1,997 | |||||||||||||||
Senior secured notes |
571,750 | | | | 571,750 | |||||||||||||||
Deferred income taxes |
15,697 | 181,058 | 21,946 | | 218,701 | |||||||||||||||
Other liabilities |
5,491 | 12,658 | 538 | | 18,687 | |||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Common stock |
532 | 1,493 | | (1,493 | ) | 532 | ||||||||||||||
Additional paid-in capital |
603,602 | 2,218,338 | 130,816 | (2,349,154 | ) | 603,602 | ||||||||||||||
Retained earnings |
69,588 | 30,647 | 12,820 | (43,467 | ) | 69,588 | ||||||||||||||
Accumulated other comprehensive income |
8,065 | 119 | 19,466 | (19,585 | ) | 8,065 | ||||||||||||||
Total stockholders equity |
681,787 | 2,250,597 | 163,102 | (2,413,699 | ) | 681,787 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 1,297,066 | $ | 2,529,660 | $ | 191,850 | $ | (2,413,699 | ) | $ | 1,604,877 | |||||||||
13
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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 March 31, 2011
For the three months ended March 31, 2011
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating revenue |
$ | 54 | $ | 107,188 | $ | 17,695 | $ | | $ | 124,937 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Labor and benefits |
7,131 | 30,191 | 4,295 | | 41,617 | |||||||||||||||
Equipment rents |
23 | 8,002 | 641 | | 8,666 | |||||||||||||||
Purchased services |
2,140 | 6,318 | 648 | | 9,106 | |||||||||||||||
Diesel fuel |
| 11,582 | 2,585 | | 14,167 | |||||||||||||||
Casualties and insurance |
221 | 1,514 | 399 | | 2,134 | |||||||||||||||
Materials |
42 | 4,612 | 431 | | 5,085 | |||||||||||||||
Joint facilities |
| 2,197 | 8 | | 2,205 | |||||||||||||||
Other expenses |
781 | 7,656 | 1,496 | | 9,933 | |||||||||||||||
Track maintenance expense reimbursement |
(4,150 | ) | | | | (4,150 | ) | |||||||||||||
Net loss
(gain) on sale of assets |
| 218 | (11 | ) | | 207 | ||||||||||||||
Depreciation and amortization |
4 | 10,838 | 922 | | 11,764 | |||||||||||||||
Total operating expenses |
6,192 | 83,128 | 11,414 | | 100,734 | |||||||||||||||
Operating (loss) income |
(6,138 | ) | 24,060 | 6,281 | | 24,203 | ||||||||||||||
Interest expense |
(4,108 | ) | (13,490 | ) | (993 | ) | | (18,591 | ) | |||||||||||
Equity in earnings of subsidiaries |
9,174 | | | (9,174 | ) | | ||||||||||||||
Other income (loss) |
7,224 | (4,561 | ) | (2,123 | ) | | 540 | |||||||||||||
Income from continuing operations before income taxes |
6,152 | 6,009 | 3,165 | (9,174 | ) | 6,152 | ||||||||||||||
Provision for income taxes |
2,067 | | | | 2,067 | |||||||||||||||
Net income |
$ | 4,085 | $ | 6,009 | $ | 3,165 | $ | (9,174 | ) | $ | 4,085 | |||||||||
14
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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 Cash Flows
For the three months ended March 31, 2011
For the three months ended March 31, 2011
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income |
$ | 4,085 | $ | 6,009 | $ | 3,165 | $ | (9,174 | ) | $ | 4,085 | |||||||||
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
||||||||||||||||||||
Depreciation and amortization, including
amortization costs classified in interest expense |
1,077 | 10,948 | 920 | | 12,945 | |||||||||||||||
Equity in earnings of subsidiaries |
(9,174 | ) | | | 9,174 | | ||||||||||||||
Amortization of swap termination costs |
3,677 | | | | 3,677 | |||||||||||||||
Net gain
(loss) on sale or disposal of properties |
| 218 | (11 | ) | | 207 | ||||||||||||||
Equity compensation costs |
2,609 | | | | 2,609 | |||||||||||||||
Deferred income taxes and other |
615 | | | | 615 | |||||||||||||||
Changes in operating assets and liabilities, net of
acquisitions and dispositions: |
||||||||||||||||||||
Accounts receivable |
(2,896 | ) | 1,546 | (1,675 | ) | | (3,025 | ) | ||||||||||||
Other current assets |
5 | (2,859 | ) | (1,070 | ) | | (3,924 | ) | ||||||||||||
Accounts payable |
(2,426 | ) | 8,441 | (1,817 | ) | | 4,198 | |||||||||||||
Accrued expenses |
11,379 | (9,013 | ) | (242 | ) | | 2,124 | |||||||||||||
Other assets and liabilities |
1 | (448 | ) | 59 | | (388 | ) | |||||||||||||
Net cash provided by (used in) operating activities |
8,952 | 14,842 | (671 | ) | | 23,123 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchase of property, plant and equipment |
(105 | ) | (15,486 | ) | (195 | ) | | (15,786 | ) | |||||||||||
NECR Grant reimbursements |
| 2,400 | | | 2,400 | |||||||||||||||
Proceeds from sale of assets |
| 684 | 164 | | 848 | |||||||||||||||
Net cash used in investing activities |
(105 | ) | (12,402 | ) | (31 | ) | | (12,538 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Principal payments on long-term debt |
| (263 | ) | | | (263 | ) | |||||||||||||
Receipts (disbursements) on intercompany debt |
24,787 | (20,325 | ) | (4,462 | ) | | | |||||||||||||
Repurchase of common stock |
(33,634 | ) | | | | (33,634 | ) | |||||||||||||
Deferred financing costs paid |
| (119 | ) | | | (119 | ) | |||||||||||||
Net cash used in financing activities |
(8,847 | ) | (20,707 | ) | (4,462 | ) | | (34,016 | ) | |||||||||||
Effect of exchange rates on cash |
| | 517 | | 517 | |||||||||||||||
Net decrease in cash |
| (18,267 | ) | (4,647 | ) | | (22,914 | ) | ||||||||||||
Cash, beginning of period |
| 137,335 | 15,633 | | 152,968 | |||||||||||||||
Cash, end of period |
$ | | $ | 119,068 | $ | 10,986 | $ | | $ | 130,054 | ||||||||||
15
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, 2010
December 31, 2010
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 137,335 | $ | 15,633 | $ | | $ | 152,968 | ||||||||||
Accounts and notes receivable, net of allowance |
116 | 65,920 | 8,632 | | 74,668 | |||||||||||||||
Current deferred tax assets |
12,769 | | | | 12,769 | |||||||||||||||
Other current assets |
205 | 13,976 | 1,019 | | 15,200 | |||||||||||||||
Total current assets |
13,090 | 217,231 | 25,284 | | 255,605 | |||||||||||||||
Property, plant and equipment, net |
485 | 898,155 | 82,982 | | 981,622 | |||||||||||||||
Intangible assets |
| 103,935 | 36,611 | | 140,546 | |||||||||||||||
Goodwill |
| 204,679 | 7,816 | | 212,495 | |||||||||||||||
Other assets |
12,401 | 984 | | | 13,385 | |||||||||||||||
Investment in and advances to affiliates |
1,265,556 | 1,119,507 | 33,534 | (2,418,597 | ) | | ||||||||||||||
Total assets |
$ | 1,291,532 | $ | 2,544,491 | $ | 186,227 | $ | (2,418,597 | ) | $ | 1,603,653 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Current maturities of long-term debt |
$ | | $ | 403 | $ | | $ | | $ | 403 | ||||||||||
Accounts payable |
7,311 | 54,150 | 4,797 | | 66,258 | |||||||||||||||
Accrued expenses |
3,939 | 29,362 | 3,612 | | 36,913 | |||||||||||||||
Total current liabilities |
11,250 | 83,915 | 8,409 | | 103,574 | |||||||||||||||
Long-term debt, less current maturities |
| 2,147 | | | 2,147 | |||||||||||||||
Senior secured notes |
571,161 | | | | 571,161 | |||||||||||||||
Deferred income taxes |
(1,087 | ) | 182,747 | 21,325 | | 202,985 | ||||||||||||||
Other liabilities |
5,459 | 13,113 | 465 | | 19,037 | |||||||||||||||
Stockholders equity:
|
||||||||||||||||||||
Common stock |
549 | 1,493 | | (1,493 | ) | 549 | ||||||||||||||
Additional paid-in capital |
636,757 | 2,218,338 | 130,816 | (2,349,154 | ) | 636,757 | ||||||||||||||
Retained earnings |
65,503 | 42,633 | 9,653 | (52,286 | ) | 65,503 | ||||||||||||||
Accumulated other comprehensive income |
1,940 | 105 | 15,559 | (15,664 | ) | 1,940 | ||||||||||||||
Total stockholders equity |
704,749 | 2,262,569 | 156,028 | (2,418,597 | ) | 704,749 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 1,291,532 | $ | 2,544,491 | $ | 186,227 | $ | (2,418,597 | ) | $ | 1,603,653 | |||||||||
16
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 March 31, 2010
For the three months ended March 31, 2010
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating revenue |
$ | 50 | $ | 99,565 | $ | 15,326 | $ | | $ | 114,941 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Labor and benefits |
6,220 | 27,578 | 3,953 | | 37,751 | |||||||||||||||
Equipment rents |
34 | 8,135 | 330 | | 8,499 | |||||||||||||||
Purchased services |
1,768 | 6,246 | 541 | | 8,555 | |||||||||||||||
Diesel fuel |
| 9,293 | 1,951 | | 11,244 | |||||||||||||||
Casualties and insurance |
264 | 3,110 | 259 | | 3,633 | |||||||||||||||
Materials |
41 | 3,506 | 378 | | 3,925 | |||||||||||||||
Joint facilities |
| 2,133 | 13 | | 2,146 | |||||||||||||||
Other expenses |
830 | 7,429 | 839 | | 9,098 | |||||||||||||||
Track maintenance expense reimbursement |
| | | | | |||||||||||||||
Net gain on sale of assets |
| (31 | ) | (3 | ) | | (34 | ) | ||||||||||||
Depreciation and amortization |
51 | 10,127 | 745 | | 10,923 | |||||||||||||||
Total operating expenses |
9,208 | 77,526 | 9,006 | | 95,740 | |||||||||||||||
Operating (loss) income |
(9,158 | ) | 22,039 | 6,320 | | 19,201 | ||||||||||||||
Interest expense |
(6,271 | ) | (15,305 | ) | (1,128 | ) | | (22,704 | ) | |||||||||||
Equity in earnings of subsidiaries |
5,656 | | | (5,656 | ) | | ||||||||||||||
Other income (loss) |
6,341 | (4,799 | ) | (1,083 | ) | | 459 | |||||||||||||
(Loss) income from continuing operations before income taxes |
(3,432 | ) | 1,935 | 4,109 | (5,656 | ) | (3,044 | ) | ||||||||||||
(Benefit from) provision for income taxes |
(918 | ) | 388 | | | (530 | ) | |||||||||||||
Net (loss) income |
$ | (2,514 | ) | $ | 1,547 | $ | 4,109 | $ | (5,656 | ) | $ | (2,514 | ) | |||||||
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 Cash Flows
For the three months ended March 31, 2010
For the three months ended March 31, 2010
Non | ||||||||||||||||||||
Issuer | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net (loss) income |
$ | (2,514 | ) | $ | 1,547 | $ | 4,109 | $ | (5,656 | ) | $ | (2,514 | ) | |||||||
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities: |
||||||||||||||||||||
Depreciation and amortization, including
amortization costs classified in interest expense |
1,189 | 10,217 | 745 | | 12,151 | |||||||||||||||
Equity in earnings of subsidiaries |
(5,656 | ) | | | 5,656 | | ||||||||||||||
Amortization of swap termination costs |
6,073 | | | | 6,073 | |||||||||||||||
Net gain on sale or disposal of properties |
| (31 | ) | (3 | ) | | (34 | ) | ||||||||||||
Equity compensation costs |
1,525 | | | | 1,525 | |||||||||||||||
Deferred income taxes |
(2,341 | ) | 388 | 1 | | (1,952 | ) | |||||||||||||
Changes in operating assets and liabilities, net of
acquisitions and dispositions: |
||||||||||||||||||||
Accounts receivable |
(30 | ) | (9,103 | ) | (847 | ) | | (9,980 | ) | |||||||||||
Other current assets |
(516 | ) | 6,563 | 571 | | 6,618 | ||||||||||||||
Accounts payable |
1,138 | 11,756 | (3,674 | ) | | 9,220 | ||||||||||||||
Accrued expenses |
13,648 | (8,325 | ) | (1,154 | ) | | 4,169 | |||||||||||||
Other assets and liabilities |
9 | 14 | 141 | | 164 | |||||||||||||||
Net cash provided by (used in) operating activities |
12,525 | 13,026 | (111 | ) | | 25,440 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchase of property, plant and equipment |
| (11,326 | ) | (353 | ) | | (11,679 | ) | ||||||||||||
Proceeds from sale of assets |
| 255 | 88 | | 343 | |||||||||||||||
Net cash used in investing activities |
| (11,071 | ) | (265 | ) | | (11,336 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Principal payments on long-term debt |
| (292 | ) | | | (292 | ) | |||||||||||||
(Disbursements)/receipts on intercompany debt |
(106,271 | ) | 109,551 | (3,280 | ) | | | |||||||||||||
Costs associated with sale of common stock |
(106 | ) | | | | (106 | ) | |||||||||||||
Deferred financing costs paid |
(95 | ) | | | | (95 | ) | |||||||||||||
Net cash (used in) provided by financing activities |
(106,472 | ) | 109,259 | (3,280 | ) | | (493 | ) | ||||||||||||
Effect of exchange rates on cash |
| | 319 | | 319 | |||||||||||||||
Net (decrease) increase in cash |
(93,947 | ) | 111,214 | (3,337 | ) | | 13,930 | |||||||||||||
Cash, beginning of period |
122,041 | 54,828 | 13,349 | | 190,218 | |||||||||||||||
Cash, end of period |
$ | 28,094 | $ | 166,042 | $ | 10,012 | $ | | $ | 204,148 | ||||||||||
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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.
In October 2010, we 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.
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
engineering services, 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 and materials to the project. The project is expected to be completed within two
years from the grant date.
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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.
Changes in carloads and revenue per carload have a direct impact on freight revenue. Carloads
decreased slightly in the three months ended March 31, 2011 as compared to the three months ended
March 31, 2010, primarily due to severe weather in the Northeast and Midwest during 2011. 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 and benefits, equipment rents (locomotives and railcars),
purchased services (contract labor and professional services), diesel fuel, casualties and
insurance, materials, joint facilities and other expenses.
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 equipment 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 March 31, 2011,
coal, agricultural products and chemicals accounted for 19%, 15% and 12%, respectively, of our
carloads. As a percentage of our freight revenue, chemicals, agricultural products, metallic ores
and metals, and pulp, paper and allied products generated 17%, 15%, 10%, and 10%, respectively, for
the three months ended March 31, 2011. Freight revenue per carload is impacted by several factors
including the length of haul.
Overview
Operating revenue in the three months ended March 31, 2011, was $124.9 million, compared with
$114.9 million in the three months ended March 31, 2010. The 9% increase in our operating revenue
was primarily due to an increase in our non-freight revenue, negotiated rate increases and change
in commodity mix.
Freight revenue increased $2.8 million, or 3%, in the three months ended March 31, 2011,
compared with the three months ended March 31, 2010, primarily due to negotiated rate increases and
change in commodity mix. Non-freight revenue increased $7.2 million, or 36%, in the three months
ended March 31, 2011, compared with the three months ended March 31, 2010, primarily due to an
increase in engineering services revenue as a result of the acquisition of Atlas, an increase in
other revenue related to the October 2010 OVRR operating agreement, as well as increases in
demurrage and car repair revenue, partially offset by a decrease in
car hire revenue.
Our operating ratio, defined as total operating expenses divided by total operating revenue,
was 80.6% in the three months ended March 31, 2011, compared with an operating ratio of 83.3% in
the three months ended March 31, 2010. This decrease was primarily due to the lack of track
maintenance credits in the first quarter of 2010. Operating expenses were $100.7 million in the
three months ended March 31, 2011, compared with $95.7 million in the three months ended March 31,
2010, an increase of $5.0 million, or 5%.
In 2011, we entered into a track maintenance agreement with an unrelated third-party customer
(Shipper). Under the agreement, the Shipper pays for qualified railroad track maintenance
expenditures during 2011 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
three months ended March 31, 2011, the Shipper paid for $4.2 million of maintenance expenditures.
The track maintenance tax credit was not renewed by Congress for 2010 until December 2010;
therefore, we did not enter into the 2010 track maintenance agreement until December 2010. This
resulted in no Shipper reimbursements in the three months ended March 31, 2010.
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Net income and income from continuing operations in the three months ended March 31, 2011 were
$4.1 million, compared with a net loss of $2.5 million in the three months ended March 31, 2010.
Results of Operations
Comparison of Operating Results for the Three Months Ended March 31, 2011 and 2010
The following table sets forth the results of operations for the three months ended March 31,
2011 and 2010 (in thousands):
Three months ended | Three months ended | |||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||
Operating revenue |
$ | 124,937 | 100.0 | % | $ | 114,941 | 100.0 | % | ||||||||
Operating expenses: |
||||||||||||||||
Labor and benefits |
41,617 | 33.3 | % | 37,751 | 32.8 | % | ||||||||||
Equipment rents |
8,666 | 6.9 | % | 8,499 | 7.4 | % | ||||||||||
Purchased services |
9,106 | 7.3 | % | 8,555 | 7.4 | % | ||||||||||
Diesel fuel |
14,167 | 11.3 | % | 11,244 | 9.8 | % | ||||||||||
Casualties and insurance |
2,134 | 1.7 | % | 3,633 | 3.2 | % | ||||||||||
Materials |
5,085 | 4.1 | % | 3,925 | 3.4 | % | ||||||||||
Joint facilities |
2,205 | 1.8 | % | 2,146 | 1.9 | % | ||||||||||
Other expenses |
9,933 | 7.9 | % | 9,098 | 7.9 | % | ||||||||||
Track maintenance expense reimbursement |
(4,150 | ) | -3.3 | % | | 0.0 | % | |||||||||
Net loss (gain) on sale of assets |
207 | 0.2 | % | (34 | ) | 0.0 | % | |||||||||
Depreciation and amortization |
11,764 | 9.4 | % | 10,923 | 9.5 | % | ||||||||||
Total operating expenses |
100,734 | 80.6 | % | 95,740 | 83.3 | % | ||||||||||
Operating income |
24,203 | 19.4 | % | 19,201 | 16.7 | % | ||||||||||
Interest expense, including amortization costs |
(18,591 | ) | (22,704 | ) | ||||||||||||
Other income |
540 | 459 | ||||||||||||||
Income (loss) from continuing operations before income taxes |
6,152 | (3,044 | ) | |||||||||||||
Provision for (benefit from) income taxes |
2,067 | (530 | ) | |||||||||||||
Net income (loss) |
$ | 4,085 | $ | (2,514 | ) | |||||||||||
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Operating Revenue
Operating revenue increased by $10.0 million, or 9%, to $124.9 million in the three months
ended March 31, 2011, from $114.9 million in the three months ended March 31, 2010. Total carloads
during the three month period ending March 31, 2011 decreased 1% to 209,042 in 2011 from 211,250 in
the three months ended March 31, 2010. The increase in operating revenue was due to the acquisition
of Atlas, negotiated rate increases, change in commodity mix, a $1.0 million increase in fuel
surcharge and an increase in other revenue non-freight related to the new October 2010 OVRR
operating agreement.
The increase in the average revenue per carload to $467 in the three months ended March 31,
2011, from $449 in the comparable period in 2010 was primarily due to negotiated rate increases and
commodity mix.
Non-freight revenue increased by $7.2 million, or 36%, to $27.3 million in the three months
ended March 31, 2011 from $20.1 million in the three months ended March 31, 2010, primarily due to
an increase in engineering services revenue as a result of the acquisition of Atlas, an increase in
other revenue of $1.6 million related to the new October 2010 OVRR operating agreement, as well as
increases in demurrage and car repair revenue, partially offset by a
decrease in car hire revenue.
The following table compares our freight revenue, carloads and average freight revenue per
carload for the three months ended March 31, 2011 and 2010:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||||||||||
Average Freight | Average Freight | |||||||||||||||||||||||
Freight | Revenue per | Freight | Revenue per | |||||||||||||||||||||
Revenue | Carloads | Carload | Revenue | Carloads | Carload | |||||||||||||||||||
(Amounts in thousands, except average freight revenue per carload) | ||||||||||||||||||||||||
Industrial Products |
$ | 51,135 | 92,669 | $ | 552 | $ | 48,427 | 91,265 | $ | 531 | ||||||||||||||
Agricultural Products |
22,026 | 44,346 | 497 | 22,338 | 47,960 | 466 | ||||||||||||||||||
Construction Products |
15,887 | 31,282 | 508 | 14,485 | 29,250 | 495 | ||||||||||||||||||
Coal |
8,587 | 40,745 | 211 | 9,585 | 42,775 | 224 | ||||||||||||||||||
Total |
$ | 97,635 | 209,042 | $ | 467 | $ | 94,835 | 211,250 | $ | 449 | ||||||||||||||
Freight revenue was $97.6 million in the three months ended March 31, 2011, compared to $94.8
million in the three months ended March 31, 2010, an increase of $2.8 million or 3%. This increase
was primarily due to the net effect of the following:
| Industrial products revenue increased $2.7 million, or 6%, primarily due to chemical carload increases of 6% as a result of increased shipments of bio fuels; pulp, paper and allied products carload increases of 11%, and increases in revenue per carload of 4% for the category, due to higher rates and mix, partially offset by decreased carloads of 17% and 3% for motor vehicles and other products; | ||
| Agricultural products revenue decreased $0.3 million, or 1%, primarily due to carload decreases of 8% as a result of lower shipments in the Midwest, due to severe storms in February, grain that remains in storage as producers await better commodity pricing, and a soft export market for feed ingredients, partially offset by higher revenue per carload, due to higher rates and mix; | ||
| Construction products revenue increased $1.4 million, or 10%, primarily due to increased non-metallic minerals and products carloads of 12%, and higher revenue per carload due to higher rates and mix; and | ||
| Coal revenue decreased $1 million, or 10%, primarily due to carload decreases of 5% as a result of a sourcing shift in our Indiana business and weather related delays in shipments in the Northeast. |
Operating Expenses
Operating expenses increased to $100.7 million in the three months ended March 31, 2011, from
$95.7 million in the three months ended March 31, 2010. The operating ratio was 80.6% in 2011
compared to 83.3% in 2010. The decrease in the operating ratio was primarily due to including the
benefit from track maintenance expense reimbursements in 2011 and a decrease in causalities and
insurance, partially offset by increases in labor costs and diesel fuel as a percentage of revenue
in the three months ended March 31, 2011 as compared to the same period in 2010.
The net increase in operating expenses was due to the following:
| Labor and benefits expense increased $3.9 million, or 10%, primarily due to increased salaries and wages as a result of increased headcount ($1.7 million), severance costs ($1.6 million), the acquisition of Atlas ($1.5 million), and restricted stock amortization ($0.7 million), partially offset by decreases in health insurance expense and profit sharing costs totaling approximately $1.3 million; |
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| Equipment rents expense increased $0.2 million, or 2%, primarily due to higher car hire costs of $0.7 million and the acquisition of Atlas ($0.1 million), partially offset by a $0.6 million reduction in railcar lease expense from the expiration of certain leased cars; | ||
| Purchased services expense increased $0.6 million, or 6%, primarily due to contract labor costs as a result of severe weather and an increase in professional fees for special projects, partially offset by a decrease in legal fees; | ||
| Diesel fuel expense increased $2.9 million, or 26%, primarily due to higher average fuel costs of $3.10 per gallon in 2011 compared to $2.33 per gallon in 2010, resulting in a $3.4 million increase in fuel expense, partially offset by a favorable consumption variance of $0.5 million due to slightly lower carload volume; | ||
| Casualties and insurance expense decreased $1.5 million, or 41%, primarily due to the reduction of reserves as a result of the expiration of the statute of limitations related to the Indiana & Ohio Railway (IORY) styrene incident; | ||
| Materials expense increased $1.2 million, or 30%, primarily due to the acquisition of Atlas and a $1.0 million increase in car repair material purchases as a result of an increase in car repair activities; | ||
| Joint facilities expense remained relatively flat as compared to the three months ending March 31, 2010; | ||
| Other expenses increased $0.8 million, or 9%, primarily due to the acquisition of Atlas ($0.4 million), an increase in bad debt expense of $0.3 million, increases in automotive fuel expense and crew transportation of $0.2 million and increases in utilities and communication expenses of $0.1 million, partially offset by decreases in taxes and fines and penalties totaling $0.3 million; | ||
| The execution of the track maintenance agreement in 2011 resulted in the Shipper paying for $4.2 million of maintenance expenditures, partially offset by $0.1 million of related consulting fees; | ||
| Asset sales resulted in a net loss of $0.2 million and net gain of less than $0.1 million in the three months ended March 31, 2011 and 2010, respectively; and | ||
| Depreciation and amortization expense increased $0.8 million, or 8%, due to the capitalization and depreciation of 2010 and 2011 capital projects and the acquisition of Atlas. |
Other Income (Expense) Items
Interest Expense. Interest expense, including amortization of deferred financing costs,
decreased $4.1 million to $18.6 million for the three months ended March 31, 2011, from $22.7
million in the three months ended March 31, 2010. This decrease is primarily due to a decrease in
the principal amount of the senior secured notes as a result of the June 2010 repayment and the
decrease of swap termination cost amortization to $3.7 million during the three months ended March
31, 2011 from $6.1 million during the three months ended March 31, 2010. Interest expense includes
$4.9 million and $7.3 million of amortization costs for the three months ended March 31, 2011 and
2010, respectively.
Other Income. Other income during the three months ended March 31, 2011 and 2010, primarily
relates to 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 March 31, 2011 and 2010
for continuing operations was a provision of 33.6% and a benefit of 17.4%, respectively. The
overall tax rate for the three months ended March 31, 2011 was favorably impacted by an adjustment
of our deferred tax balances resulting from a change in tax law ($0.1 million). Our overall tax
rate for the three months ended March 31, 2010 was adversely impacted by the jurisdictional mix of
operating income, non-deductible permanent items and an expense relating to stock-based
compensation plans ($0.8 million).
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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 are used to fund capital expenditures and debt service requirements. For the three months ended March
31, 2011, there was a net cash inflow from operations of $23.1 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 $23.1 million for the three months ended March 31,
2011, compared to $25.4 million for the three months ended March 31, 2010. The decrease in cash
flows from operating activities was primarily due to changes in working capital accounts, partially
offset by higher income from operations.
Investing Activities
Cash used in investing activities was $12.5 million for the three months ended March 31, 2011,
compared to $11.3 million for the three months ended March 31, 2010. The increase in cash used in
investing activities was primarily due to higher capital expenditures in 2011 at $13.4 million (net
of NECR grant reimbursements) compared to $11.7 million in 2010. Asset sale proceeds were $0.8
million for the three months ended March 31, 2011 compared to $0.3 million for the three months
ended March 31, 2010.
Financing Activities
Cash used in financing activities was $34.0 million for the three months ended March 31, 2011,
compared to $0.5 million in the three months ended March 31, 2010. The increase in cash used in
financing activities in the three months ended March 31, 2011 was primarily due to the
repurchase of common stock of $33.6 million as part of the stock repurchase program that was
announced on February 23, 2011.
Working Capital
As of March 31, 2011, we had working capital of $141.0 million, including cash on hand of
$130.1 million, and approximately $20.3 million of availability under the ABL Facility, compared to
working capital of $152.0 million, including cash on hand of $153.0 million, and $21.4 million of
availability under the ABL Facility at December 31, 2010. The working capital decrease at March 31,
2011, compared to December 31, 2010, is primarily due to the use of cash to repurchase $33.6
million of common stock as part of the stock repurchase plan. 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.
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 of 1933, as amended. The registered
notes have terms that are substantially identical to the privately placed notes.
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.
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$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 March 31, 2011, we had no outstanding balance under
the ABL Facility and approximately $20.3 million of undrawn availability, taking into account
borrowing base limitations.
On June 10, 2010, we entered into Amendment No. 1 to the ABL Facility improving certain terms
of the ABL Facility. Among other things, Amendment No. 1 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.
On February 23, 2011, we entered into Amendment No. 2 to its ABL Facility. This amendment
adjusts certain terms of the ABL Facility and increases the threshold for Restricted Payments, as
defined in the ABL Facility, to allow share repurchases of our common stock in an amount not exceed
$75 million without affecting other Restricted Payment baskets.
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 | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Cash flows from operating activities to Adjusted
EBITDA Reconciliation: |
||||||||
Net cash provided by operating activities |
$ | 23,123 | $ | 25,440 | ||||
Changes in working capital accounts |
1,015 | (10,191 | ) | |||||
Depreciation and amortization, including
amortization of debt issuance costs classified
in interest expense |
(12,945 | ) | (12,151 | ) | ||||
Amortization of swap termination costs |
(3,677 | ) | (6,073 | ) | ||||
Net (loss) gain on sale or disposal of properties |
(207 | ) | 34 | |||||
Equity compensation costs |
(2,609 | ) | (1,525 | ) | ||||
Deferred income taxes |
(615 | ) | 1,952 | |||||
Net income (loss) |
4,085 | (2,514 | ) | |||||
Add: |
||||||||
Provision for (benefit from) income taxes |
2,067 | (530 | ) | |||||
Interest expense, including amortization costs |
18,591 | 22,704 | ||||||
Depreciation and amortization |
11,764 | 10,923 | ||||||
EBITDA |
36,507 | 30,583 | ||||||
Add: |
||||||||
Equity compensation costs |
2,609 | 1,525 | ||||||
Acquisition expense |
72 | | ||||||
Adjusted EBITDA |
$ | 39,188 | $ | 32,108 | ||||
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 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, 2010. 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 of March 31, 2011, accumulated other comprehensive loss
included $10.5 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 $10.0 million, or $6.1 million, net of tax.
Off Balance Sheet Arrangements
We currently have no off balance sheet arrangements.
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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 March 31, 2011, 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 March 31, 2011, the Canadian dollar
increased 3% in value in comparison to the U.S dollar. The average rate for the three months ended
March 31, 2011, was 6% higher than it was for the same period in 2010. The increase in the average
Canadian dollar exchange rate led to an increase of $1.0 million in reported revenue and a $0.2
million increase in reported operating income in 2011, compared to 2010. A 10% unfavorable change
in the 2011 average exchange rate would have negatively impacted 2011 revenue by $1.8 million and
operating income by $0.6 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 11.3% of total operating revenues during the three months ended March 31, 2011. 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 first 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 4, 2011.
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 March 31, 2011, the following purchases of the Companys shares of
Common Stock were 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 March 31, 2011, the Company accepted 149,423 shares in lieu of cash payments
by employees for payroll tax withholdings relating to stock based compensation.
Total Number of | Approximate Dollar | |||||||||||||||
Shares Purchased as | Value of Shares | |||||||||||||||
Part of Publicly | that May Yet Be | |||||||||||||||
Total Number of | Average Price Paid | Announced Plans or | Purchased Under the | |||||||||||||
Period | Shares Purchased | per Share | Programs | Plans or Programs | ||||||||||||
January 1, through January 31, 2011 |
1,264 | $ | 12.95 | | N/A | |||||||||||
February 1, through February 28, 2011 |
184,556 | $ | 14.47 | 77,500 | $ | 48,840,344 | ||||||||||
March 1, through March 31, 2011 |
2,029,520 | $ | 16.58 | 1,988,417 | $ | 16,428,242 | ||||||||||
Total |
2,215,340 | $ | 16.40 | 2,065,917 | $ | 16,428,242 | ||||||||||
On February 23, 2011, we announced that our Board of Directors had approved a stock repurchase
program. Under the program, we were authorized to repurchase up to $50.0 million of our outstanding
shares of common stock from time to time at prevailing prices in the open market or in privately
negotiated transactions. The timing and actual number of shares
repurchased depended on
a variety of factors including the price and availability of the Companys shares, trading volume
and general market conditions. The program was able to be suspended or discontinued at any time without
prior notice.
On April 18, 2011, we completed the stock repurchase program, repurchasing a total of 3,036,769
shares at a weighted average cost of $16.46 per share.
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ITEM 6. EXHIBITS
Exhibits | ||||
10.1 | Amendment No. 2 to the Asset Backed Loan Facility entered into on
February 23, 2011 (incorporated by reference to Exhibit 10.1 to
RailAmerica, Inc.s Form 8-K filed on February 24, 2011) |
|||
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: April 28, 2011 | By: | /s/ B. Clyde Preslar | ||
B. Clyde Preslar, Senior Vice President and | ||||
Chief Financial Officer (on behalf of registrant and as Principal Financial Officer) |
31