RAILAMERICA INC /DE - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - RAILAMERICA INC /DE	Financial_Report.xls
EX-31.1 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER - RAILAMERICA INC /DE	d244605dex311.htm
EX-32.1 - PRINCIPAL EXECUTIVE OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 - RAILAMERICA INC /DE	d244605dex321.htm
EX-32.2 - PRINCIPAL FINANCIAL OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 - RAILAMERICA INC /DE	d244605dex322.htm
EX-31.2 - RULE 13A-14(A)/15D-14(A) CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER - RAILAMERICA INC /DE	d244605dex312.htm

UNITED STATES

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 September 30, 2011,

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

For the transition period from to

Commission file number 001-32579

RAILAMERICA, INC.

(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)

(800) 342-1131

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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 x No ¨

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 ¨	Accelerated filer þ	Non-accelerated filer ¨	Smaller reporting company ¨
	(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 ¨ No x

As of October 24, 2011 there were 51,292,272 shares of the registrant’s common stock outstanding.

RAILAMERICA, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2011


			Page
Part I.	Financial Information			3
	Item 1.	Financial Statements		3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		37
	Item 4.	Controls and Procedures		38

Part II.	Other Information			39
	Item 1A.	Risk Factors		39
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		39
	Item 6.	Exhibits		40

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

RAILAMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2011		December 31, 2010
	September 30, 2011		December 31, 2010
	(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	95,774	$	152,968
Accounts and notes receivable, net of allowance of $7,436 and $6,767, respectively		107,364		74,668
Current deferred tax assets		28,146		12,769
Other current assets		22,218		15,200

Total current assets		253,502		255,605
Property, plant and equipment, net		1,007,508		981,622
Intangible assets		135,395		140,546
Goodwill		212,107		212,495
Other assets		13,978		13,385

Total assets	$	1,622,490	$	1,603,653


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	290	$	403
Accounts payable		85,654		66,258
Accrued expenses		44,619		36,913

Total current liabilities		130,563		103,574
Long-term debt, less current maturities		1,997		2,147
Senior secured notes		572,955		571,161
Deferred income taxes		225,547		202,985
Other liabilities		17,829		19,037

Total liabilities		948,891		898,904

Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value, 400,000,000 shares authorized; 51,576,825 shares issued and outstanding at September 30, 2011; and 54,859,261 shares issued and outstanding at December 31, 2010		516		549
Additional paid in capital and other		583,778		636,757
Retained earnings		87,346		65,503
Accumulated other comprehensive income		1,959		1,940

Total stockholders’ equity		673,599		704,749

Total liabilities and stockholders’ equity	$	1,622,490	$	1,603,653

The accompanying Notes are an integral part of the Consolidated Financial Statements.

RAILAMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2011			2010			2011			2010
	(In thousands, except per share data)
Operating revenue	$	139,665		$	128,257		$	403,817		$	362,655
Operating expenses:
Labor and benefits		41,379			38,745			124,855			114,381
Equipment rents		9,046			8,721			26,601			25,857
Purchased services		10,996			9,830			31,429			28,058
Diesel fuel		13,142			9,760			41,887			31,522
Casualties and insurance		4,006			4,816			11,095			13,255
Materials		7,879			6,782			18,892			14,581
Joint facilities		2,459			2,454			7,214			6,545
Other expenses		9,271			8,785			29,876			26,162
Track maintenance expense reimbursement		(3,879	)		—			(13,162	)		—
Net loss (gain) on sale of assets		8			(1,708	)		151			(1,717	)
Impairment of assets		1,949			—			5,169			—
Depreciation and amortization		11,921			11,581			35,421			33,259

Total operating expenses		108,177			99,766			319,428			291,903

Operating income		31,488			28,491			84,389			70,752
Interest expense (including amortization costs of $3,973, $6,020, $13,215 and $20,194, respectively)		(17,792	)		(19,735	)		(54,526	)		(64,592	)
Other (loss) income		(231	)		2,264			804			(5,177	)

Income from continuing operations before income taxes		13,465			11,020			30,667			983
Provision for (benefit from) income taxes		4,407			3,052			8,824			(250	)

Net income	$	9,058		$	7,968		$	21,843		$	1,233


Basic earnings per common share:
Net income	$	0.17		$	0.15		$	0.41		$	0.02

Diluted earnings per common share:
Net income	$	0.17		$	0.15		$	0.41		$	0.02

Weighted Average common shares outstanding:
Basic		52,083			54,872			53,006			54,769
Diluted		52,083			54,872			53,006			54,769

The accompanying Notes are an integral part of the Consolidated Financial Statements.

RAILAMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Nine Months Ended September 30,
	2011			2010
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	21,843		$	1,233
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, including amortization of debt issuance costs classified in interest expense		39,012			36,863
Amortization of swap termination costs		9,625			16,582
Net loss (gain) on sale or disposal of properties		151			(1,717	)
Impairment of assets		5,169			—
Loss on extinguishment of debt		—			8,357
Deferred financing costs expensed		719			—
Equity compensation costs		7,381			5,525
Deferred income taxes and other		4,453			(3,770	)
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable		(33,167	)		(9,565	)
Other current assets		(7,209	)		9,056
Accounts payable		17,048			(2,808	)
Accrued expenses		7,967			10,326
Other assets and liabilities		(1,253	)		(2,210	)

Net cash provided by operating activities		71,739			67,872


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment		(93,518	)		(46,771	)
NECR government grant reimbursements		31,329			—
Proceeds from sale of assets		7,598			3,251
Acquisitions, net of cash acquired		(12,716	)		(23,926	)
Other		(65	)		—

Net cash used in investing activities		(67,372	)		(67,446	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt		(263	)		(391	)
Repurchase of senior secured notes		—			(76,220	)
Repurchase of common stock		(57,664	)		—
Costs associated with sale of common stock		—			(106	)
Deferred financing costs paid		(2,891	)		(224	)

Net cash used in financing activities		(60,818	)		(76,941	)


Effect of exchange rates on cash		(743	)		195


Net decrease in cash		(57,194	)		(76,320	)
Cash, beginning of period		152,968			190,218

Cash, end of period	$	95,774		$	113,898

The accompanying Notes are an integral part of the Consolidated Financial Statements.

RAILAMERICA, INC. AND SUBSIDIARIES

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 RailAmerica’s consolidated subsidiaries are wholly-owned. All significant intercompany transactions and accounts have been eliminated in consolidation. These interim consolidated financial statements have been prepared by the Company, without audit, and accordingly do not contain all disclosures which would be required in a full set of financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). In the opinion of management, the unaudited financial statements for the three and nine months ended September 30, 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 Company’s 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 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 43 individual railroads with approximately 7,400 miles of track in 27 states and three Canadian provinces. The Company’s principal operations consist of rail freight transportation and ancillary rail services.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

2. EARNINGS PER SHARE

For the three and nine months ended September 30, 2011 and 2010, basic and diluted earnings per share are calculated using the weighted average number of common shares outstanding during the period. The basic earnings per share calculation includes all vested and unvested restricted shares as a result of their dividend participation rights.

The following is a summary of the net income available for common stockholders and weighted average shares outstanding (in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2011		2010		2011		2010
Net income (basic and diluted)	$	9,058	$	7,968	$	21,843	$	1,233

Weighted average shares outstanding (basic and diluted)		52,083		54,872		53,006		54,769

RAILAMERICA, INC. AND SUBSIDIARIES

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 September 30, 2011 and 2010 was $2.4 million and $2.0 million, respectively. Stock-based compensation expense related to restricted stock grants for the nine months ended September 30, 2011 and 2010 was $7.4 million and $5.5 million, respectively.

A summary of the status of restricted shares as of September 30, 2011, and the changes during the nine 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		551,441		$	13.67
Vested		(616,167	)	$	12.55
Cancelled		(24,134	)	$	13.83

Balance at September 30, 2011		1,387,365		$	13.01

4. ACQUISITIONS

On May 11, 2011, the Company acquired three short-line freight railroads in the state of Alabama for a total purchase price of $12.7 million. The acquisition was funded from existing cash on hand. The three railroads, known individually as the Three Notch Railroad (TNHR), the Wiregrass Central Railroad (WGCR), and the Conecuh Valley Railroad (COEH), comprise approximately 70 miles and primarily haul agricultural and chemical products. The railroads were acquired from affiliates of Gulf and Ohio Railways, Inc. The results of operations of the railroads have been included in the Company’s consolidated financial statements since May 11, 2011, the acquisition date.

In accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations Topic, the acquisition was accounted for under the acquisition method of accounting. Assets acquired and liabilities assumed were recorded at their estimated fair value.

The allocation of purchase price is as follows (in thousands):


Intangible assets	$	1,212
Property, plant and equipment		11,645

Total assets acquired		12,857

Environmental remediation liabilities		(141	)

Total liabilities assumed		(141	)

Purchase price	$	12,716

RAILAMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Definite-lived intangible assets were assigned the following amounts and weighted average amortization periods (dollars in thousands):


	Value Assigned		Weighted Average Life (Years)
Customer relationships	$	620		10
Lease right of way	$	592		15

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. 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 Company’s 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 purchaser’s fees and original issue discount. The notes are secured by first-priority liens on substantially all of the Company’s and the guarantors’ assets. The guarantors are defined essentially as the Company’s 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. The exchange offer expired on December 2, 2009.

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 was scheduled to mature on June 23, 2013 and bore interest at LIBOR plus 4.0%. Obligations under the ABL Facility were secured by a first-priority lien on the ABL collateral. ABL collateral included accounts receivable, deposit accounts, securities accounts and cash.

The ABL Facility was replaced by the Company’s $75 million Revolving Credit Facility on August 29, 2011.

$75 Million Revolving Credit Facility

On August 29, 2011, the Company entered into a credit agreement (the “Revolving Credit Facility”) among the Company, RailAmerica Transportation Corp. (“RATC”, and together with the Company, the “Borrowers”), the lenders party thereto from time to time, Citibank N.A., as administrative agent and collateral agent, and Citigroup Global Markets Inc., as sole lead arranger and sole bookrunner, that provides for a revolving line of credit of up to $75 million to be used for working capital and general corporate purposes.

The Revolving Credit Facility has a five year term, with a maturity date of August 29, 2016. Amounts available under the Revolving

RAILAMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Credit Facility are available for immediate drawdown, subject to the applicable financial covenants and restrictions, certain of which are described below.

The loans under the Revolving Credit Facility bear interest, at the Borrowers’ option, at a rate per annum of either (a) the Eurodollar Rate plus 3.50% or (b) the Adjusted Base Rate plus 2.50%. In each instance, if certain financial covenants and restrictions are met by the Borrowers, the applicable margin shall be reduced by 0.25%. In connection with the Revolving Credit Facility, the Borrowers will pay a commitment fee of 0.50% based on the daily amount of unused commitments made available under the Revolving Credit Facility.

The Revolving Credit Facility will be fully and unconditionally guaranteed (the “Guarantors” and “Guarantees,” as the case may be) on a joint and several basis by certain existing and future direct and indirect subsidiaries of the Company.

All amounts outstanding under the Revolving Credit Facility (and all obligations under the Guarantees) will be secured on a pari passu basis with the liens under the Company’s 9.25% senior secured notes due July 1, 2017 on: (a) stock and other equity interests owned by Borrowers and Guarantors, and (b) certain (i) real property, (ii) equipment and inventory, (iii) patents, trademarks and copyrights, (iv) general intangibles related to the foregoing, and (v) substantially all of the tangible personal property and intangible assets of the Borrowers and Guarantors. Further, all amounts outstanding under the Revolving Credit Facility (and all obligations under the Guarantees) will be secured on a first priority basis with liens on accounts receivable, deposit and security accounts, and general intangibles relating to the foregoing.

The Revolving Credit Facility contains customary representations and warranties and customary affirmative and negative covenants, including among other things and subject to the exceptions set forth therein, limitations on indebtedness, liens, fundamental changes, sale of assets, investments, restricted payments, debt payments and certain amendments, sale leasebacks, affiliates, restrictive agreements changes in business and issuance of capital stock.

There were no outstanding borrowings under the Revolving Credit Facility as of September 30, 2011.

The Revolving Credit 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.

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC 825, Financial Instruments, 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, Fair Value Measurement, clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument held by the Company:

•

Current assets and current liabilities: The carrying value approximates fair value due to the short maturity of these items.

•

Long-term debt: The fair value of the Company’s senior secured notes is based on secondary market indicators. The carrying amount of the Company’s other long term debt approximates its fair value.

RAILAMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The carrying amounts and estimated fair values of the Company’s financial instruments were as follows (in thousands):


	September 30, 2011
	Carrying Amount		Fair Value
Cash and cash equivalents	$	95,744	$	95,744
9.25% Senior secured notes	$	572,955	$	633,440

7. DERIVATIVE FINANCIAL INSTRUMENTS

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 September 30, 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 quarters ended September 30, 2011 and 2010, included $2.7 million and $4.9 million of amortization expense related to the terminated swap, respectively. Interest expense for the nine months ended September 30, 2011 and 2010, included $9.6 million and $16.6 million of amortization expense related to the terminated swap, respectively. As a result of the $74 million redemption of the notes during June 2010, an additional $1.7 million of unamortized expense was recognized during the nine months ended September 30, 2010. This was the result of the face value of outstanding senior secured notes dropping below the notional amount of the swap. As of September 30, 2011, accumulated other comprehensive income included $6.9 million, net of tax, of unamortized loss relating to the terminated swap. Reclassifications from accumulated other comprehensive income to interest expense in the next twelve months will be approximately $7.1 million, or $4.3 million, net of tax.

8. COMMON STOCK TRANSACTIONS

During the three months ended September 30, 2011 and 2010, the Company accepted 4,557 and 462 shares in lieu of cash payments by employees for minimum statutory payroll tax withholdings relating to stock based compensation. During the nine months ended September 30, 2011 and 2010, the Company accepted 186,304 and 105,246 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 $50 million stock repurchase program. Under the program, the Company was authorized to repurchase up to $50 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 Company’s shares, trading volume and general market conditions. The Company completed this stock repurchase program on April 18, 2011, repurchasing a total of 3,036,769 shares at a weighted average price of $16.46 per share.

On August 30, 2011, the Company announced that its Board of Directors had approved a $25 million stock repurchase program. Under the program, the Company is authorized to repurchase up to $25 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 depends on a variety of factors including the price and availability of the Company’s shares, trading volume and general market conditions. During the three months ended September 30, 2011, the Company repurchased a total of 586,670 shares at a weighted average price of $12.88 per share related to the August 30, 2011 repurchase program. The Company had $17.4 million remaining for the repurchase of outstanding shares, under this program, as of September 30, 2011

RAILAMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 and nine months ended September 30, 2011, the Shipper paid for $4.0 million and $13.4 million of maintenance expenditures, respectively, and $4.1 million of capital expenditures during the nine months ended September 30, 2011. The Company incurred $0.1 million and $0.4 million of consulting fees related to the agreement during the three and nine months ended September 30, 2011, respectively. The track maintenance tax credit was not renewed by Congress for 2010 until December 2010, resulting in no Shipper reimbursements in the three or nine months ended September 30, 2010. The track maintenance tax credit expires on December 31, 2011 and has not yet been renewed by Congress, for 2012 and beyond.

10. INCOME TAX PROVISION

The overall income tax rate for the three months ended September 30, 2011 and 2010 for continuing operations was a provision of 32.7% and a provision of 27.7%, respectively. The overall tax rate for the three months ended September 30, 2011 was favorably impacted by the reduction of tax reserves due to the lapse of the statute of limitations ($0.3 million). The overall tax rate for the three months ended September 30, 2010 was favorably impacted by the jurisdictional mix of operating income along with the reduction of tax reserves due to the lapse of the statute of limitations ($0.8 million).

The overall income tax rate for the nine months ended September 30, 2011 and 2010 for continuing operations was a provision of 28.8% and a benefit of 25.4%, respectively. The overall tax rate for the nine months ended September 30, 2011 was favorably impacted by an adjustment of deferred tax balances resulting from a change in tax law ($1.6 million) and the reduction of tax reserves due to the lapse of the statute of limitations ($0.3 million). The overall tax rate for the nine months ended September 30, 2010 was favorably impacted by the jurisdictional mix of operating income, the reduction of tax reserves due to the lapse of the statute of limitations ($0.8 million) and offset by an expense relating to stock-based compensation plans ($1.1 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		—
Reductions for tax positions of prior years		(13	)
Lapse of statute of limitations		(258	)

Balance at September 30, 2011	$	4,899

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 September 30, 2011, accumulated other comprehensive income consisted of $6.9 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 $8.1 million of cumulative translation adjustment gains.

RAILAMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table reconciles net income to comprehensive income for the three and nine months ended September 30, 2011 and 2010 (in thousands):


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2011			2010		2011			2010
Net income	$	9,058		$	7,968	$	21,843		$	1,233
Other comprehensive income:
Amortization of terminated swap costs, net of taxes of $1,090, $1,853, $3,819 and $6,301, respectively		1,657			3,021		5,806			10,281
Write-off of terminated swap costs, net of taxes of $642		—			—		—			1,047
Change in cumulative translation adjustments		(10,386	)		3,938		(5,787	)		1,883

Total comprehensive income	$	329		$	14,927	$	21,862		$	14,444

12. PENSION DISCLOSURES

Components of the net periodic pension and benefit cost for the three and nine months ended September 30, 2011 and 2010 were as follows (in thousands):


	Pension Benefits
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2011			2010			2011			2010
Service cost	$	54		$	47		$	164		$	141
Interest cost		160			168			485			504
Expected return on plan assets		(185	)		(133	)		(530	)		(400	)
Amortization of net actuarial loss		34			34			101			103
Amortization of prior service costs		6			6			18			17

Net cost recognized	$	69		$	122		$	238		$	365


	Health and Welfare Benefits
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2011			2010			2011			2010
Service cost	$	10		$	11		$	29		$	32
Interest cost		30			32			90			97
Amortization of net actuarial gain		(21	)		(15	)		(62	)		(46	)

Net cost recognized	$	19		$	28		$	57		$	83

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 Company’s 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.

RAILAMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company’s operations are subject to extensive environmental regulation. The Company records liabilities for remediation and restoration costs related to past activities when the Company’s obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance activities to current operations are expensed as incurred. The Company’s 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 Company’s financial position, results of operations or cash flows.

The Company is subject to claims for employee work-related and third-party injuries. Work-related injuries for employees are primarily subject to the Federal Employers’ Liability Act (“FELA”). The Company retains an independent actuarial firm to assist management in assessing the value of personal injury claims and cases. An analysis has been performed by an independent actuarial firm and has been 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 Company’s 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 Company’s 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 Company’s 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 IORY’s 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 Company’s 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. EPA’s 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, in February 2011.

Government grants

In August 2010, the Company’s 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. In September 2011, the grant agreement was amended and NECR was awarded an additional $2.7 million to extend and improve its centralized traffic control system, upgrade communications systems, improve culverts and ditching, and provide passenger bussing in lieu of Amtrak service. The amendment did not require any additional monetary commitment by the NECR. The project is expected to be completed within two years from the grant date. The Company accounts for proceeds from government grants as reductions to expense for expenditures that are expensed or as contra-assets within property, plant and equipment which are amortized over the life of the related asset for expenditures that are capitalized.

14. RELATED PARTY TRANSACTIONS

Investment funds managed by Fortress Investment Group LLC (“Fortress”) own a majority of the Company’s stock. 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. During 2009, the Company entered into five additional lease agreements with the same entity. All but one of these agreements relate to the leasing of locomotives between the companies for ordinary business operations, which are based on current market rates for similar assets. With respect to such agreements, during the quarters ended September 30, 2011 and 2010, on a net basis the Company paid FECR $0.8 million and $0.5 million, respectively.

RAILAMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

During the nine months ended September 30, 2011 and 2010, on a net basis the Company paid FECR $2.0 million and $1.5 million, respectively.

During the three months ended September 30, 2011, the Company purchased 26 of the previously leased locomotives, discussed above, for a total purchase price of $4.5 million, based on current market values. Subsequent to this transaction, the Company continues to lease six locomotives from FECR, which have been consolidated under one master lease agreement.

The remaining lease relates to the sub-leasing of office space by FECR to the Company. This sub-lease was amended and restated in August 2011 to reallocate leased space and update the payment terms. During the quarters ended September 30, 2011 and 2010, FECR billed the Company $0.4 million and $0.2 million, respectively, under the sub-lease agreement. During the nine months ended September 30, 2011 and 2010, FECR billed the Company $0.8 million and $0.8 million, respectively, under the sub-lease agreement. As of September 30, 2011 the Company had no amounts due to FECR under these lease agreements.

Effective January 1, 2010, the Company entered into a Shared Services Agreement with FECR and its affiliates which provides for services to be provided from time to time by certain of our senior executives and other employees and for certain reciprocal administrative services, including finance, accounting, human resources, purchasing and legal. The agreements are generally consistent with arms-length arrangements with third parties providing similar services. The net amount of payments to be made by us under these agreements is expected to be less than $1 million in the aggregate on an annual basis. As of September 30, 2011, there were no amounts due under this agreement.

In October 2009, certain of the Company’s 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 FECR’s revenue and enhance the value of the franchise. Consideration for the executive’s performance is in the form of restricted stock units of FECR common stock that 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 September 30, 2011 and 2010, the Company recognized $0.2 million and $0.1 million of compensation expense and $0.2 million and $0.1 million of management fee income related to these consulting agreements, respectively. During the nine months ended September 30, 2011 and 2010, the Company recognized $0.6 million and $0.4 million of compensation expense and $0.6 million and $0.4 million of management fee income related to these consulting agreements, respectively.

In October 2009, certain of the Company’s 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 FECI’s rail-related assets. Consideration for the executive’s performance is in the form of restricted stock units of FECI common stock that 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 September 30, 2011 and 2010, the Company recognized $0.3 million and $0.3 million of compensation expense and $0.3 million and $0.3 million of management fee income related to these consulting agreements, respectively. During the nine months ended September 30, 2011 and 2010, the Company recognized $0.9 million and $1.0 million of compensation expense and $0.9 million and $1.0 million of management fee income related to these consulting agreements, respectively.

Effective June 1, 2011, the Company’s wholly-owned subsidiary, Atlas, entered into an agreement to provide engineering and construction services to the FECR. As of September 30, 2011, Atlas had recorded revenues of $0.6 million and received payments totaling $0.2 million related to this project.

15. IMPAIRMENT OF ASSETS

During the three months ended June 30, 2011, the Company evaluated its locomotive usage and determined that certain of its surplus locomotives were not expected to be placed back into service. As a result of this determination, the Company engaged a locomotive and railcar market advisor to assist management in evaluating the market value of the identified locomotives based on recent sales and current market conditions. The evaluation resulted in the Company recording an impairment of $3.2 million ($2.0 million after tax, $0.04 per share), in accordance with ASC 360, Property, Plant, and Equipment.

During the three months ended September 30, 2011, the Company recorded an additional impairment of $1.9 million ($1.2 million after tax, $0.02 per share), based on a tentative sale agreement for a significant number of the identified locomotives and further evaluation of the market value for the remaining surplus units.

RAILAMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

16. OTHER CURRENT ASSETS

Other current assets include $10.6 million and $4.8 million of materials and supplies as of September 30, 2011 and December 31, 2010, respectively.

17. OTHER INCOME

In August 2010, the Company entered into a purchase agreement to acquire warrants and other securities of a railroad which was contingent upon that railroad’s principal stockholder not consummating a refusal right to purchase the same securities. The principal stockholder exercised this right and thus based on the terms of the purchase agreement, the Company received a break-up fee of $2 million from the seller. This break-up fee is reflected, net of expenses incurred of $0.2 million, as part of Other (loss) income on the Company’s consolidated statement of operations.

RAILAMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

18. 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 Company’s existing and future wholly-owned domestic restricted subsidiaries, with certain exceptions. All guarantor subsidiaries are 100% owned by the Company. All amounts in the following tables are in thousands.

RailAmerica, Inc.

Consolidating Balance Sheet

September 30, 2011


	Company (Parent)		Guarantor Subsidiaries		Non Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents	$	—	$	82,491	$	13,283	$	—		$	95,774
Accounts and notes receivable, net of allowance		2,599		93,631		11,134		—			107,364
Current deferred tax assets		28,146		—		—		—			28,146
Other current assets		346		19,710		2,162		—			22,218

Total current assets		31,091		195,832		26,579		—			253,502

Property, plant and equipment, net		745		926,409		80,354		—			1,007,508
Intangible assets		—		100,602		34,793		—			135,395
Goodwill		—		204,679		7,428		—			212,107
Other assets		11,016		2,962		—		—			13,978
Investment in and advances to affiliates		1,258,527		1,139,402		41,283		(2,439,212	)		—

Total assets	$	1,301,379	$	2,569,886	$	190,437	$	(2,439,212	)	$	1,622,490

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current maturities of long-term debt	$	—	$	290	$	—	$	—		$	290
Accounts payable		8,763		66,587		10,304		—			85,654
Accrued expenses		16,681		25,044		2,894		—			44,619

Total current liabilities		25,444		91,921		13,198		—			130,563

Long-term debt, less current maturities		—		1,997		—		—			1,997
Senior secured notes		572,955		—		—		—			572,955
Deferred income taxes		24,228		181,058		20,261		—			225,547
Other liabilities		5,153		12,660		16		—			17,829

Total liabilities		627,780		287,636		33,475		—			948,891

Commitments and contingencies
Stockholders’ equity:
Common stock		516		1,493		—		(1,493	)		516
Additional paid-in capital		583,778		2,231,054		127,263		(2,358,317	)		583,778
Retained earnings		87,346		49,573		19,972		(69,545	)		87,346
Accumulated other comprehensive income		1,959		130		9,727		(9,857	)		1,959

Total stockholders’ equity		673,599		2,282,250		156,962		(2,439,212	)		673,599

Total liabilities and stockholders’ equity	$	1,301,379	$	2,569,886	$	190,437	$	(2,439,212	)	$	1,622,490

RAILAMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

RailAmerica, Inc.

Consolidating Statement of Operations

For the three months ended September 30, 2011


	Company (Parent)			Guarantor Subsidiaries			Non Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenue	$	72		$	121,758		$	17,835		$	—		$	139,665

Operating expenses:
Labor and benefits		6,379			31,095			3,905			—			41,379
Equipment rents		29			8,436			581			—			9,046
Purchased services		1,987			8,076			933			—			10,996
Diesel fuel		—			11,046			2,096			—			13,142
Casualties and insurance		185			3,498			323			—			4,006
Materials		42			7,402			435			—			7,879
Joint facilities		—			2,455			4			—			2,459
Other expenses		799			7,599			873			—			9,271
Track maintenance expense reimbursement		(3,879	)		—			—			—			(3,879	)
Net loss on sale of assets		—			8			—			—			8
Impairment of assets		—			1,723			226			—			1,949
Depreciation and amortization		5			10,954			962			—			11,921

Total operating expenses		5,547			92,292			10,338			—			108,177
Operating (loss) income		(5,475	)		29,466			7,497			—			31,488
Interest expense		(3,209	)		(13,579	)		(1,004	)		—			(17,792	)
Equity in earnings of subsidiaries		14,969			—			—			(14,969	)		—
Other income (loss)		7,180			(5,288	)		(2,123	)		—			(231	)

Income from continuing operations before income taxes		13,465			10,599			4,370			(14,969	)		13,465
Provision for income taxes		4,407			—			—			—			4,407

Net income	$	9,058		$	10,599		$	4,370		$	(14,969	)	$	9,058

RAILAMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

RailAmerica, Inc.

Consolidating Statement of Operations

For the nine months ended September 30, 2011


	Company (Parent)			Guarantor Subsidiaries			Non Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenue	$	187		$	351,513		$	52,117		$	—		$	403,817

Operating expenses:
Labor and benefits		19,640			92,617			12,598			—			124,855
Equipment rents		79			24,781			1,741			—			26,601
Purchased services		5,605			23,627			2,197			—			31,429
Diesel fuel		—			34,929			6,958			—			41,887
Casualties and insurance		627			9,396			1,072			—			11,095
Materials		117			17,476			1,299			—			18,892
Joint facilities		—			7,195			19			—			7,214
Other expenses		2,493			23,905			3,478			—			29,876
Track maintenance expense reimbursement		(13,162	)		—			—			—			(13,162	)
Net loss on sale of assets		—			141			10			—			151
Impairment of assets		—			4,943			226			—			5,169
Depreciation and amortization		14			32,583			2,824			—			35,421

Total operating expenses		15,413			271,593			32,422			—			319,428
Operating (loss) income		(15,226	)		79,920			19,695			—			84,389
Interest expense		(10,941	)		(40,578	)		(3,007	)		—			(54,526	)
Equity in earnings of subsidiaries		35,255			—			—			(35,255	)		—
Other income (loss)		21,579			(14,406	)		(6,369	)		—			804

Income from continuing operations before income taxes		30,667			24,936			10,319			(35,255	)		30,667
Provision for income taxes		8,824			—			—			—			8,824

Net income	$	21,843		$	24,936		$	10,319		$	(35,255	)	$	21,843

RAILAMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

RailAmerica, Inc.

Consolidating Statement of Cash Flows

For the nine months ended September 30, 2011


	Company (Parent)			Guarantor Subsidiaries			Non Guarantor Subsidiaries			Eliminations			Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	21,843		$	24,936		$	10,319		$	(35,255	)	$	21,843
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, including amortization of debt insurance costs classified in interest expense		3,258			32,940			2,814			—			39,012
Equity in earnings of subsidiaries		(35,255	)		—			—			35,255			—
Amortization of swap termination costs		9,625			—			—			—			9,625
Net loss on sale or disposal of properties		—			141			10			—			151
Impairment of assets		—			4,943			226			—			5,169
Deferred financing costs expensed		—			719			—			—			719
Equity compensation costs		7,381			—			—			—			7,381
Deferred income taxes and other		4,449			—			4			—			4,453
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable		(2,483	)		(27,712	)		(2,972	)		—			(33,167	)
Other current assets		(140	)		(5,870	)		(1,199	)		—			(7,209	)
Accounts payable		(1,268	)		12,443			5,873			—			17,048
Accrued expenses		12,742			(4,564	)		(211	)		—			7,967
Other assets and liabilities		(340	)		(427	)		(486	)		—			(1,253	)

Net cash provided by operating activities		19,812			37,549			14,378			—			71,739


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment		(274	)		(88,334	)		(4,910	)		—			(93,518	)
NECR government grant reimbursements		—			31,329			—			—			31,329
Proceeds from sale of assets		—			7,358			240			—			7,598
Acquisitions, net of cash acquired		—			(12,716	)		—			—			(12,716	)
Other		(65	)		—			—			—			(65	)

Net cash used in investing activities		(339	)		(62,363	)		(4,670	)		—			(67,372	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt		—			(263	)		—			—			(263	)
Receipts / (disbursements) on intercompany debt		38,191			(26,876	)		(11,315	)		—			—
Repurchase of common stock		(57,664	)		—			—			—			(57,664	)
Deferred financing costs paid		—			(2,891	)		—			—			(2,891	)

Net cash used in financing activities		(19,473	)		(30,030	)		(11,315	)		—			(60,818	)


Effect of exchange rates on cash		—			—			(743	)		—			(743	)

Net decrease in cash		—			(54,844	)		(2,350	)		—			(57,194	)
Cash, beginning of period		—			137,335			15,633			—			152,968

Cash, end of period	$	—		$	82,491		$	13,283		$	—		$	95,774

RAILAMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

RailAmerica, Inc.

Consolidating Balance Sheet

December 31, 2010


	Company (Parent)			Guarantor Subsidiaries		Non Guarantor 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

Total liabilities		586,783			281,922		30,199		—			898,904

Commitments and contingencies
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

RAILAMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

RailAmerica, Inc.

Consolidating Statement of Operations

For the three months ended September 30, 2010


	Company (Parent)			Guarantor Subsidiaries			Non Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenue	$	51		$	111,991		$	16,215		$	—		$	128,257

Operating expenses:
Labor and benefits		4,551			30,346			3,848			—			38,745
Equipment rents		26			8,144			551			—			8,721
Purchased services		1,629			7,508			693			—			9,830
Diesel fuel		—			8,124			1,636			—			9,760
Casualties and insurance		257			4,010			549			—			4,816
Materials		49			6,244			489			—			6,782
Joint facilities		—			2,452			2			—			2,454
Other expenses		801			7,102			882			—			8,785
Net gain on sale of assets		—			(1,601	)		(107	)		—			(1,708	)
Depreciation and amortization		1			10,763			817			—			11,581

Total operating expenses		7,314			83,092			9,360			—			99,766
Operating (loss) income		(7,263	)		28,899			6,855			—			28,491
Interest expense		(2,836	)		(15,762	)		(1,137	)		—			(19,735	)
Equity in earnings of subsidiaries		12,959			—			—			(12,959	)		—
Other income (loss)		8,160			(4,813	)		(1,083	)		—			2,264

Income from continuing operations before income taxes		11,020			8,324			4,635			(12,959	)		11,020
Provision for income taxes		3,052			—			—			—			3,052

Net income	$	7,968		$	8,324		$	4,635		$	(12,959	)	$	7,968

RAILAMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

RailAmerica, Inc.

Consolidating Statement of Operations

For the nine months ended September 30, 2010


	Company (Parent)			Guarantor Subsidiaries			Non Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenue	$	152		$	315,203		$	47,300		$	—		$	362,655

Operating expenses:
Labor and benefits		16,285			86,317			11,779			—			114,381
Equipment rents		88			24,423			1,346			—			25,857
Purchased services		5,304			20,795			1,959			—			28,058
Diesel fuel		—			26,276			5,246			—			31,522
Casualties and insurance		785			10,678			1,792			—			13,255
Materials		122			13,185			1,274			—			14,581
Joint facilities		—			6,523			22			—			6,545
Other expenses		2,447			21,247			2,468			—			26,162
Net loss (gain) on sale of assets		1			(1,667	)		(51	)		—			(1,717	)
Depreciation and amortization		54			30,864			2,341			—			33,259

Total operating expenses		25,086			238,641			28,176			—			291,903
Operating (loss) income		(24,934	)		76,562			19,124			—			70,752
Interest expense		(14,866	)		(46,343	)		(3,383	)		—			(64,592	)
Equity in earnings of subsidiaries		28,063			—			—			(28,063	)		—
Other income (loss)		12,498			(14,425	)		(3,250	)		—			(5,177	)

Income from continuing operations before income taxes		761			15,794			12,491			(28,063	)		983
(Benefit from) provision for income taxes		(472	)		360			(138	)		—			(250	)

Net income	$	1,233		$	15,434		$	12,629		$	(28,063	)	$	1,233

RAILAMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

RailAmerica, Inc.

Consolidating Statement of Cash Flows

For the nine months ended September 30, 2010


	Company (Parent)			Guarantor Subsidiaries			Non Guarantor Subsidiaries			Eliminations			Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,233		$	15,434		$	12,629		$	(28,063	)	$	1,233
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, including amortization of debt issuance costs classified in interest expense		3,375			31,147			2,341			—			36,863
Equity in earnings of subsidiaries		(28,063	)		—			—			28,063			—
Amortization of swap termination costs		16,582			—			—			—			16,582
Net gain on sale or disposal of properties		—			(1,668	)		(49	)		—			(1,717	)
Loss on extinguishment of debt		8,357			—			—			—			8,357
Equity compensation costs		5,525			—			—			—			5,525
Deferred income taxes and other		(4,111	)		360			(19	)		—			(3,770	)
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable		(60	)		(5,655	)		(3,850	)		—			(9,565	)
Other current assets		(212	)		8,327			941			—			9,056
Accounts payable		3,220			(2,027	)		(4,001	)		—			(2,808	)
Accrued expenses		13,057			(1,096	)		(1,635	)		—			10,326
Other assets and liabilities		(866	)		21			(1,365	)		—			(2,210	)

Net cash provided by operating activities		18,037			44,843			4,992			—			67,872


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment		(417	)		(42,174	)		(4,180	)		—			(46,771	)
Proceeds from sale of assets		—			3,035			216			—			3,251
Acquisitions, net of cash acquired		—			(23,926	)		—			—			(23,926	)

Net cash used in investing activities		(417	)		(63,065	)		(3,964	)		—			(67,446	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt		—			(391	)		—			—			(391	)
Repurchase of senior secured notes		(76,220	)		—			—			—			(76,220	)
Receipts / (disbursements) on intercompany debt		(63,240	)		67,993			(4,753	)		—			—
Repurchase of common stock		(106	)		—			—			—			(106	)
Deferred financing costs paid		(95	)		(129	)		—			—			(224	)

Net cash used in financing activities		(139,661	)		67,473			(4,753	)		—			(76,941	)


Effect of exchange rates on cash		—			—			195			—			195


Net (decrease) increase in cash		(122,041	)		49,251			(3,530	)		—			(76,320	)
Cash, beginning of period		122,041			54,828			13,349			—			190,218

Cash, end of period	$	—		$	104,079		$	9,819		$	—		$	113,898

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This management’s 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 management’s 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 4, 2011. 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 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 43 individual railroads with approximately 7,400 miles of track in 27 states and three Canadian provinces. In addition, we provide non-freight services such as railcar storage, demurrage, leases of equipment and real estate leases and use fees.

Recent Acquisitions and Business Development

On July 1, 2010, we acquired Atlas Railroad Construction Company (“Atlas”) and related assets for $23.9 million in cash including closing adjustments for working capital, which were approximately $2.4 million, net of cash acquired. The acquisition was funded from existing cash on hand. 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. In September 2011, the grant agreement was amended and NECR was awarded an additional $2.7 million to extend and improve its centralized traffic control system, upgrade communications systems, improve culverts and ditching, and provide passenger bussing in lieu of Amtrak service. The amendment did not require any additional monetary commitment by the NECR. The project is expected to be completed within two years from the grant date.

Managing Business Performance

We manage our business performance by (i) growing our freight and non-freight revenue, (ii) driving financial improvements through a variety of cost savings and productivity 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 increased in 2010 as the economy improved, but have declined during the first nine months of 2011, primarily due to challenging weather conditions and lower coal shipments. The diversity in our customer base helps mitigate our exposure to severe downturns in local economies. We continue to implement more effective pricing by 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 customer’s facility), storing customers’ excess or idle railcars on inactive portions of our rail lines, engineering infrastructure services, third party railcar repair, and car hire and demurrage (allowing our customers and other railroads to use our railcars for storage or transportation in exchange for a daily fee). Each of these services leverages our existing business relationships and generates additional revenue with minimal capital investment. Management also intends to grow non-freight revenue from users of our land holdings.

Our operating costs include labor, equipment rents (locomotives and railcars), purchased services (contract labor and professional services), diesel fuel, casualties and insurance, materials, joint facilities and other expenses.

Management is focused on improving operating efficiency and lowering costs. Many functions such as pricing, purchasing, capital spending, finance, insurance, real estate and other administrative functions are centralized, which enables us to achieve cost efficiencies and leverage the experience of senior management in commercial, operational and strategic decisions. A number of cost savings initiatives have been broadly implemented at all of our railroads targeting lower fuel consumption, safer operations, more efficient locomotive utilization and lower costs for third party services, among others.

Commodity Mix

Each of our 43 railroads operates independently with its own customer base. Our railroads are spread out geographically and carry diverse commodities. For the three months ended September 30, 2011, coal, agricultural products and chemicals accounted for 17%, 14% and 12%, respectively, of our carloads. As a percentage of our freight revenue, chemicals, agricultural products and pulp, paper, and allied products generated 15%, 15% and 11%, respectively, for the three months ended September 30, 2011. Freight revenue per carload is impacted by several factors including the length of haul.

Overview

Three months ended September 30, 2011

Operating revenue in the three months ended September 30, 2011, was $139.7 million, compared with $128.3 million in the three months ended September 30, 2010. The 9% increase in our operating revenue was primarily due to rate increases, change in commodity mix, higher fuel surcharge and higher non-freight revenue, partially offset by a 6% decrease in carloads.

Freight revenue increased $7.0 million, or 7%, in the three months ended September 30, 2011, compared with the three months ended September 30, 2010, primarily due to rate increases, change in commodity mix and an increase in fuel surcharge, partially offset by a decrease in carloads. Non-freight revenue increased $4.4 million, or 14%, in the three months ended September 30, 2011, compared with the three months ended September 30, 2010, due to an increase in engineering services revenue and increases in demurrage and car repair income.

Our operating ratio, defined as total operating expenses divided by total operating revenue, was 77.5% in the three months ended September 30, 2011, compared with an operating ratio of 77.8% in the three months ended September 30, 2010. This improvement was primarily due to the lack of track maintenance credits in 2010, partially offset by impairment of assets and increased diesel fuel expenses. Operating expenses were $108.2 million in the three months ended September 30, 2011, compared with $99.8 million in the three months ended September 30, 2010, an increase of $8.4 million, or 8%.

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 quarter ended September 30, 2011, the Shipper paid for $4.0 million of maintenance expenditures and we incurred $0.1 million of consulting fees related to the agreement. The track maintenance tax credit was not renewed by Congress for 2010 until December 2010, resulting in no Shipper reimbursements in the three months or nine months ended September 30, 2010. The track maintenance tax credit expires on December 31,2011 and has not yet been renewed by Congress for 2012 and beyond.

Net income in the three months ended September 30, 2011, was $9.1 million, compared to $8.0 million in the three months ended September 30, 2010. Net income in the three months ended September 30, 2010 included $1.8 million of income related to a transaction break-up fee.

Nine months ended September 30, 2011

Operating revenue in the nine months ended September 30, 2011, was $403.8 million, compared with $362.7 million in the nine months ended September 30, 2010. The 11% increase in our operating revenue was primarily due to rate increases, change in commodity mix, higher fuel surcharge and higher non-freight revenue, partially offset by a 3% decrease in carloads.

Freight revenue increased $17.1 million, or 6%, in the nine months ended September 30, 2011, compared with the nine months ended September 30, 2010, primarily due to rate increases, changes in commodity mix and an increase in fuel surcharge. Non-freight revenue increased $24.1 million, or 33%, in the nine months ended September 30, 2011, compared with the nine months ended September 30, 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 income.

Our operating ratio, defined as total operating expenses divided by total operating revenue, was 79.1% in the nine months ended September 30, 2011, compared with an operating ratio of 80.5% in the nine months ended September 30, 2010. This improvement was primarily due to the lack of track maintenance credits in 2010, partially offset by increased diesel fuel expenses and impairment of assets. Operating expenses were $319.4 million in the nine months ended September 30, 2011, compared with $291.9 million in the nine months ended September 30, 2010, an increase of $27.5 million, or 9%.

For the nine months ended September 30, 2011, the Shipper paid for $13.4 million of maintenance expenditures and $4.1 million of capital expenditures and we incurred $0.4 million of consulting fees related to the agreement.

Net income in the nine months ended September 30, 2011, was $21.8 million, compared to $1.2 million in the nine months ended September 30, 2010. Net income for the nine months ended September 30, 2010 included $1.8 million of income related to a transaction break-up fee and $8.4 million of charges related to the extinguishment of $74 million of senior secured notes.

Results of Operations

Comparison of Operating Results for the Three Months Ended September 30, 2011 and 2010

The following table sets forth the results of operations for the three months ended September 30, 2011 and 2010 (in thousands):


	Three Months Ended September 30,
	2011					2010
Operating revenue	$	139,665		100.0	%	$	128,257		100.0	%
Operating expenses:
Labor and benefits		41,379		29.7	%		38,745		30.2	%
Equipment rents		9,046		6.5	%		8,721		6.8	%
Purchased services		10,996		7.9	%		9,830		7.7	%
Diesel fuel		13,142		9.4	%		9,760		7.6	%
Casualties and insurance		4,006		2.9	%		4,816		3.8	%
Materials		7,879		5.6	%		6,782		5.3	%
Joint facilities		2,459		1.8	%		2,454		1.9	%
Other expenses		9,271		6.6	%		8,785		6.8	%
Track maintenance expense reimbursement		(3,879	)	(2.8	%)		—		0.0	%
Net loss (gain) on sale of assets		8		0.0	%		(1,708	)	(1.3	%)
Impairment of assets		1,949		1.4	%		—		0.0	%
Depreciation and amortization		11,921		8.5	%		11,581		9.0	%

Total operating expenses		108,177		77.5	%		99,766		77.8	%
Operating income		31,488		22.5	%		28,491		22.2	%
Interest expense, including amortization costs		(17,792	)				(19,735	)
Other (loss) income		(231	)				2,264

Income from continuing operations before income taxes		13,465					11,020
Provision for income taxes		4,407					3,052

Net income	$	9,058				$	7,968

Operating Revenue

Operating revenue increased by $11.4 million, or 9%, to $139.7 million in the three months ended September 30, 2011, from $128.3 million in the three months ended September 30, 2010. Total carloads during the three months ended September 30, 2011 decreased 6% to 206,975 in 2011 from 219,499 in the three months ended September 30, 2010. The increase in operating revenue was due to rate increases, change in commodity mix, an increase in fuel surcharge, which increased $3.5 million from prior year, and higher non-freight revenue.

The increase in the average revenue per carload to $506 in the three months ended September 30, 2011, from $445 in the comparable period in 2010 was primarily due to rate increases, commodity mix and fuel surcharge.

Non-freight revenue increased by $4.4 million, or 14%, to $35.0 million in the three months ended September 30, 2011 from $30.6 million in the three months ended September 30, 2010, primarily due to an increase in engineering services income and increases in demurrage, car repair revenue and real estate revenue, partially offset by a decrease in storage income and car hire income.

The following table compares our freight revenue, carloads and average freight revenue per carload for the three months ended September 30, 2011 and 2010:


	Three Months Ended September 30, 2011						Three Months Ended September 30, 2010
	Freight Revenue		Carloads		Average Freight Revenue per Carload		Freight Revenue		Carloads		Average Freight Revenue per Carload
	(Dollars in thousands, except average freight revenue per carload)
Industrial Products	$	54,450		94,409	$	577	$	48,501		92,732	$	523
Agricultural Products		23,390		43,076		543		23,333		46,390		503
Construction Products		18,081		34,155		529		15,528		33,201		468
Coal		8,738		35,335		247		10,303		47,176		218

Total	$	104,659	$	206,975	$	506	$	97,665	$	219,499	$	445

Freight revenue was $104.7 million in the three months ended September 30, 2011, compared to $97.7 million in the three months ended September 30, 2010, an increase of $7.0 million or 7%. This increase was primarily due to the net effect of the following:

•

Industrial products revenue increased $5.9 million, or 12%. Within this category, pulp, paper and allied products carloads increased 6% as a result of increases in fiber board and pulp shipments and waste and scrap materials carloads increased 5% as a result of increased scrap metal volume. These carload increases were partially offset by carload declines of 8% and 2% for petroleum and metallic ores and metals, respectively. Revenue per carload increased 10% for the category, primarily as a result of higher rates and mix;

•

Agricultural Products revenue was essentially flat, as agricultural products carloads decreased 11% as a result of fewer shipments of corn and whole grain products. This was partially offset by a 3% increase in carloads for food and kindred products. Revenue per carload in the category increased 8% due to favorable rates and mix;

•

Construction Products revenue increased $2.6 million, or 16%. Forest products carloads increased 7% and revenue per carload increased 13% due to higher rates and mix; and

•

Coal revenue decreased $1.6 million, or 15%. Coal carloads declined 25% mainly due to sourcing shifts impacting our Indiana Southern Railroad and maintenance downtime at a facility that we serve.

Operating Expenses

Operating expenses increased to $108.2 million in the three months ended September 30, 2011, from $99.8 million in the three months ended September 30, 2010. The operating ratio was 77.5% in 2011 compared to 77.8% in 2010. The decrease in the operating ratio was primarily due to the benefit from track maintenance reimbursements in 2011, partially offset by the impairment of assets and increased diesel fuel costs in the three months ended September 30, 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 $2.6 million, or 7%, primarily due to increased headcount and overtime ($1.6 million), increased profit sharing costs ($0.7 million), and restricted stock amortization ($0.4 million);

•

Equipment rents expense increased $0.3 million, or 4%, primarily due to increased car hire ($0.7 million) and increased construction activity for Atlas ($0.3 million), partially offset by a reduction in railcar and locomotive lease expenses ($0.7 million);

•

Purchased services expense increased $1.2 million, or 12%, primarily due to increased construction activity for Atlas ($1.1 million);

•

Diesel fuel expense increased $3.4 million, or 35%, primarily due to higher average fuel costs of $3.32 per gallon in 2011 compared to $2.37 per gallon in 2010, resulting in a $3.6 million increase in fuel expense, partially offset by slightly lower consumption;

•

Casualties and insurance expense decreased $0.8 million, or 17%, primarily due to the settlement of other incidents in the prior year ($0.8 million);

•

Materials expense increased $1.1 million, or 16%, primarily due to the acquisition of Atlas ($0.9 million) and an increase in car repair material purchases ($0.3 million) as a result of an increase in car repair activities;

•

Joint facilities expense was relatively flat, as compared to the same period in 2010;

•

Other expenses increased $0.5 million, or 6%, primarily due to increased construction activity for Atlas ($0.4 million) and increased taxes ($0.3 million);

•

The execution of the track maintenance agreement in 2011 resulted in the Shipper paying for $4.0 million of maintenance expenditures, partially offset by $0.1 million of related consulting fees;

•

Asset sales resulted in a de minimis net loss in the three months ended September 30, 2011 compared to a net gain of $1.7 million in the three months ended September 30, 2010;

•

Impairment of assets was $1.9 million in the three months ended September 30, 2011, related to a tentative sale agreement for various locomotives and the further evaluation of the market value of the remaining units identified for potential fleet reductions; and

•

Depreciation and amortization expense increased $0.3 million, or 3%, due to the capitalization and depreciation of 2011 and 2010 capital projects.

Other Income (Expense) Items

Interest Expense. Interest expense, including amortization of deferred financing costs, decreased $1.9 million to $17.8 million for the three months ended September 30, 2011, from $19.7 million in the three months ended September 30, 2010. This decrease is primarily due to the decrease of swap termination cost amortization to $2.7 million during the three months ended September 30, 2011 from $4.9 million during the three months ended September 30, 2010. Interest expense includes $4.0 million and $6.0 million of amortization costs for the three months ended September 30, 2011 and 2010, respectively.

Other (loss) Income. Other loss during the three months ended September 30, 2011, includes the write-off of $0.7 million in deferred loan costs related to the cancellation of the Company’s ABL facility partially offset by 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. Other income during the three months ended September 30, 2010, primarily relates to $1.8 million of income related to a transaction break-up fee during the third quarter of 2010. Other income also includes the same management fee income discussed above.

Income Taxes. The overall income tax rate for the three months ended September 30, 2011 and 2010 for continuing operations was a provision of 32.7% and a provision of 27.7%, respectively. The overall tax rate for the three months ended September 30, 2011 was favorably impacted by the reduction of tax reserves due to the lapse of the statute of limitations ($0.3 million). The overall tax rate for the three months ended September 30, 2010 was favorably impacted by the jurisdictional mix of operating income along with the reduction of tax reserves due to the lapse of the statute of limitations ($0.8 million).

Comparison of Operating Results for the Nine months Ended September 30, 2011 and 2010

The following table sets forth the results of operations for the nine months ended September 30, 2011 and 2010 (in thousands):


	Nine Months Ended September 30,
	2011					2010
Operating revenue	$	403,817		100.0	%	$	362,655		100.0	%
Operating expenses:
Labor and benefits		124,855		30.9	%		114,381		31.6	%
Equipment rents		26,601		6.6	%		25,857		7.1	%
Purchased services		31,429		7.8	%		28,058		7.7	%
Diesel fuel		41,887		10.4	%		31,522		8.7	%
Casualties and insurance		11,095		2.7	%		13,255		3.7	%
Materials		18,892		4.7	%		14,581		4.0	%
Joint facilities		7,214		1.8	%		6,545		1.8	%
Other expenses		29,876		7.4	%		26,162		7.2	%
Track maintenance expense reimbursement		(13,162	)	(3.3	%)		—		0.0	%
Net loss (gain) on sale of assets		151		0.0	%		(1,717	)	(0.5	%)
Impairment of assets		5,169		1.3	%		—		0.0	%
Depreciation and amortization		35,421		8.8	%		33,259		9.2	%

Total operating expenses		319,428		79.1	%		291,903		80.5	%
Operating income		84,389		20.9	%		70,752		19.5	%
Interest expense, including amortization costs		(54,526	)				(64,592	)
Other income (loss)		804					(5,177	)

Income from continuing operations before income taxes		30,667					983
Provision for (benefit from) income taxes		8,824					(250	)

Net income	$	21,843				$	1,233

Operating Revenue

Operating revenue increased by $41.2 million, or 11%, to $403.8 million in the nine months ended September 30, 2011, from $362.7 million in the nine months ended September 30, 2010. Total carloads during the nine months ended September 30, 2011 decreased 3% to 628,112 in 2011 from 649,017 in the nine months ended September 30, 2010. The increase in operating revenue was due to the acquisition and growth of Atlas, rate increases, change in commodity mix and an increase in fuel surcharge, which increased $7.8 million from prior year.

The increase in the average revenue per carload to $490 in the nine months ended September 30, 2011, from $448 in the comparable period in 2010 was primarily due to rate increases, commodity mix, and fuel surcharge.

Non-freight revenue increased by $24.1 million, or 33%, to $96.0 million in the nine months ended September 30, 2011 from $71.9 million in the nine months ended September 30, 2010, primarily due to an increase in engineering services revenue, as a result of the acquisition and growth of Atlas, demurrage, an increase in other revenue related to the October 2010 OVRR operating agreement, car repair revenue, real estate revenue and other revenue, partially offset by decreases in car hire income.

The following table compares our freight revenue, carloads and average freight revenue per carload for the nine months ended September 30, 2011 and 2010:


	Nine Months Ended September 30, 2011						Nine Months Ended September 30, 2010
	Freight Revenue		Carloads		Average Freight Revenue per Carload		Freight Revenue		Carloads		Average Freight Revenue per Carload


	(Dollars in thousands, except average freight revenue per carload)
Industrial Products	$	159,370		280,662	$	568	$	147,010		277,839	$	529
Agricultural Products		71,036		135,821		523		67,401		140,321		480
Construction Products		52,328		100,867		519		46,690		96,715		483
Coal		25,127		110,762		227		29,661		134,142		221

Total	$	307,861		628,112	$	490	$	290,762		649,017	$	448

Freight revenue was $307.9 million in the nine months ended September 30, 2011, compared to $290.8 million in the nine months ended September 30, 2010, an increase of $17.1 million or 6%. This increase was primarily due to the net effect of the following:

•

Industrial products revenue increased $12.4 million, or 8%. Within this category, pulp, paper and allied products carloads increased 8%, metallic ores and metals carloads increased 3% as a result of increased production at manufacturing facilities we serve in Canada and the Midwest and higher traffic hauled on behalf of other railroads, and chemical carloads increased 2% as a result of increased shipments on behalf of another railroad. These carload increases were partially offset by carload declines of 12% for motor vehicles and 10% for petroleum. Revenue per carload increased 7% for the category, primarily due to higher rates and mix;

•

Agricultural products revenue increased $3.6 million, or 5%. Revenue per carload increased 9% for the category, due to higher rates and mix, partially offset by 3% lower carloads in 2011;

•

Construction products revenue increased $5.6 million, or 12%. Non-metallic minerals and products carloads increased 6%, and revenue per carload increased 7% for the category, primarily due to higher rates and mix; and

•

Coal revenue decreased $4.5 million, or 15%. Coal carloads decreased 17% as a result of a sourcing shift in our Indiana business, partially offset by revenue per carload increases of 3%.

Operating Expenses

Operating expenses increased to $319.4 million in the nine months ended September 30, 2011, from $291.9 million in the nine months ended September 30, 2010. The operating ratio was 79.1% in 2011 compared to 80.5% in 2010. The improvement in the operating ratio was primarily due to including the benefit from the track maintenance reimbursements in 2011, partially offset by an increase in diesel fuel expense in 2011 and impairment of assets.

The net increase in operating expenses was due to the following:

•

Labor and benefits expense increased $10.5 million, or 9%, primarily due to increased headcount and overtime ($5.1 million), increased salaries and wages as a result of the acquisition and growth of Atlas ($4.2 million), severance costs ($1.6 million), and restricted stock amortization ($1.5 million), partially offset by decreases in health insurance expense and profit sharing costs totaling approximately $1.9 million;

•

Equipment rents expense increased $0.7 million, or 3%, primarily due to higher car hire costs ($2.0 million) and the acquisition and growth of Atlas ($0.8 million), partially offset by a $2.0 million reduction in railcar and locomotive lease expense from the expiration of certain leased cars and the purchase of previously leased locomotives;

•

Purchased services expense increased $3.4 million, or 12%, primarily due to the acquisition and growth of Atlas ($3.0 million) and an increase in data processing fees and professional fees for special projects ($1.6 million), partially offset by a decrease in legal fees ($1.1 million);

•

Diesel fuel expense increased $10.4 million, or 33%, primarily due to higher average fuel costs of $3.28 per gallon in 2011 compared to $2.38 per gallon in 2010, resulting in a $11.1 million increase in fuel expense, partially offset by a favorable consumption variance of $0.8 million due to the decrease in carload volume;

•

Casualties and insurance expense decreased $2.2 million, or 16%, 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 ($1.2 million) and the settlement of other incidents in prior years ($1.0 million);

•

Materials expense increased $4.3 million, or 30%, primarily due to a $2.3 million increase in car repair material purchases as a result of an increase in car repair activities and the acquisition and growth of Atlas ($2.1 million);

•

Joint facilities expense increased $0.7 million, or 10%, primarily due to changes in traffic patterns;

•

Other expenses increased $3.7 million, or 14%, primarily due to the acquisition and growth of Atlas ($1.8 million), increases in automotive fuel expense and travel and crew expenses ($0.7 million), increases in rent ($0.5 million), increases in utilities and communication expenses ($0.3 million) and increases in other taxes ($0.2 million);

•

The execution of the track maintenance agreement in 2011 resulted in the Shipper paying for $13.4 million of maintenance expenditures, partially offset by $0.3 million of related consulting fees;

•

Asset sales resulted in a net loss of $0.2 million in the nine months ended September 30, 2011 compared to a net gain of $1.7 million in the nine months ended September 30, 2010;

•

Impairment of assets was $5.2 million in the nine months ended September 30, 2011as a result of plans to reduce the fleet of locomotives; and

•

Depreciation and amortization expense increased $2.2 million, or 7%, due to the capitalization and depreciation of 2011 and 2010 capital projects and the acquisition of Atlas.

Other Income (Expense) Items

Interest Expense. Interest expense, including amortization of deferred financing costs, decreased $10.1 million to $54.5 million for the nine months ended September 30, 2011, from $64.6 million in the nine months ended September 30, 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 $74 million repayment and the decrease of swap termination cost amortization to $9.6 million during the nine months ended September 30, 2011 from $16.6 million during the nine months ended September 30, 2010. Interest expense includes $13.2 million and $20.2 million of amortization costs for the nine months ended September 30, 2011 and 2010, respectively.

Other Income (Loss). Other income during the nine months ended September 30, 2011, primarily relates to management fee income that is recorded in connection with transactions where our employees receive restricted stock awards from related parties, partially offset by the write-off of $0.7 million in deferred loan costs related to the cancellation of the Company’s ABL. As part of the restricted stock transactions, we recorded an offsetting expense in labor and benefits. Other loss during the nine months ended September 30, 2010, primarily relates to $8.4 million of costs incurred in connection with the repurchase of senior secured notes during the second quarter of 2010. These costs are partially offset by the $1.8 million of income related to a transaction break-up fee during the third quarter of 2010 and the same management fee income discussed above.

Income Taxes. The overall income tax rate for the nine months ended September 30, 2011 and 2010 for continuing operations was a provision of 28.8% and a benefit of 25.4%, respectively. The overall tax rate for the nine months ended September 30, 2011 was favorably impacted by an adjustment of deferred tax balances resulting from a change in tax law ($1.6 million) and the reduction of tax reserves due to the lapse of the statute of limitations ($0.3 million). The overall tax rate for the nine months ended September 30, 2010 was favorably impacted by the jurisdictional mix of operating income, the reduction of tax reserves due to the lapse of the statute of limitations ($0.8 million) and offset by an expense relating to stock-based compensation plans ($1.1 million).

Liquidity and Capital Resources

The discussion of liquidity and capital resources that follows reflects our consolidated results and includes all subsidiaries. We have historically met our liquidity requirements primarily from cash generated from operations and borrowings under our credit agreements which is used to fund capital expenditures and debt service requirements. For the nine months ended September 30, 2011, there was a net cash inflow from operations of $71.7 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 $71.7 million for the nine months ended September 30, 2011, compared to $67.9 million for the nine months ended September 30, 2010. The increase in cash flows from operating activities was primarily due to earnings.

Investing Activities

Cash used in investing activities was $67.4 million for the nine months ended September 30, 2011, compared to $67.4 million for the nine months ended September 30, 2010. Cash used in investing activities included cash used for the acquisition of three short line railroads for $12.7 million in 2011 and Atlas Railroad Construction Company for $23.9 million in 2010. Capital expenditures, net of NECR grant reimbursements were higher in 2011 at $62.2 million compared to $46.8 million in 2010, primarily due to our portion of NECR expenditures and the purchase of 26 previously leased locomotives for $4.5 million. Asset sale proceeds were $7.6 million for the nine months ended September 30, 2011 compared to $3.3 million for the nine months ended September 30, 2010.

Financing Activities

Cash used in financing activities was $60.8 million for the nine months ended September 30, 2011, compared to $76.9 million in the nine months ended September 30, 2010. The cash used in financing activities in the nine months ended September 30, 2011 was primarily due to the repurchase of common stock of $57.7 million as part of stock repurchase programs announced on February 23, 2011 and August 30, 2011. The cash used in financing activities in the nine months ended September 30, 2010 was primarily for the repayment of $74.0 million of the senior secured notes in the second quarter of 2010.

Working Capital

As of September 30, 2011, we had working capital of $122.9 million, including cash on hand of $95.8 million, and approximately $75 million of availability under the Revolving Credit 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 September 30, 2011, compared to December 31, 2010, is primarily due to the use of cash to repurchase $57.7 million of common stock as part of stock repurchase plans and the acquisition of three short-line railroads for $12.7 million. 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 purchaser’s 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.

$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 matured on June 23, 2013 and bore interest at LIBOR plus 4.00%. Obligations under the ABL Facility were secured by a first-priority lien in the ABL collateral. ABL collateral included accounts receivable, deposit accounts, securities accounts and cash.

The ABL Facility was replaced by our $75 million Revolving Credit Facility on August 29, 2011.

$75 Million Revolving Credit Facility

On August 29, 2011, we entered into a credit agreement (the “Revolving Credit Facility”) among us and our subsidiary RailAmerica Transportation Corp. (“RATC”, and together with us, the “Borrowers”), the lenders party thereto from time to time, Citibank N.A., as administrative agent and collateral agent, and Citigroup Global Markets Inc., as sole lead arranger and sole bookrunner, that provides for a revolving line of credit of up to $75 million to be used for working capital and general corporate purposes.

The Revolving Credit Facility has a five year term, with a maturity date of August 29, 2016. Amounts available under the Revolving Credit Facility are available for immediate drawdown, subject to the applicable financial covenants and restrictions, certain of which are described below.

The loans under the Revolving Credit Facility bear interest, at the Borrowers’ option, at a rate per annum of either (a) the Eurodollar Rate plus 3.50% or (b) the Adjusted Base Rate plus 2.50%. In each instance, if certain financial covenants and restrictions are met by Borrower, the applicable margin shall be reduced by 0.25%. In connection with the Revolving Credit Facility, the Borrowers will pay a commitment fee of 0.50% based on the daily amount of unused commitments made available under the Revolving Credit Facility.

The Revolving Credit Facility will be fully and unconditionally guaranteed (the “Guarantors” and “Guarantees,” as the case may be) on a joint and several basis by certain of our existing and future direct and indirect subsidiaries.

All amounts outstanding under the Revolving Credit Facility (and all obligations under the Guarantees) will be secured on a pari passu basis with the liens under our 9.25% senior secured notes due July 1, 2017 on: (a) stock and other equity interests owned by Borrowers and Guarantors, and (b) certain (i) real property, (ii) equipment and inventory, (iii) patents, trademarks and copyrights, (iv) general intangibles related to the foregoing, and (v) substantially all of the tangible personal property and intangible assets of the Borrowers and Guarantors. Further, all amounts outstanding under the Revolving Credit Facility (and all obligations under the Guarantees) will be secured on a first priority basis with liens on accounts receivable, deposit and security accounts, and general intangibles relating to the foregoing.

The Revolving Credit Facility and indenture governing the senior secured notes contain various covenants and restrictions that will limit our ability and the ability of our 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.

There were no outstanding borrowings under the Revolving Credit Facility as of September 30, 2011.

Covenants to Senior Secured Notes

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 guarantor’s 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 the ratio of Adjusted EBITDA to the sum of Consolidated Interest Expense and all cash dividend payments, 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.

Covenants to Revolving Credit Facility

The Revolving Credit Facility includes customary affirmative and negative covenants, including, among other things, restrictions on (i) the incurrence of indebtedness and liens, (ii) mergers, acquisitions and asset sales, (iii) investments and loans, (iv) dividends and other payments with respect to capital stock, (v) redemption and repurchase of capital stock, (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, we will be subject to a minimum coverage ratio of Consolidated Senior Secured Debt to Adjusted EBITDA (which for purposes of the minimum coverage ratio will exclude the tax credits available under Section 45G of the Internal Revenue Code) beginning at 5.0 to 1.0 in the third quarter 2011 and gradually reducing to 3.5 to 1.0 beginning in the fourth quarter of 2015, in all cases on a pro forma basis.

The covenants are subject to important exceptions and qualifications described below.

We may, among other things, incur certain indebtedness that (a) provides for a maturity date of no less than 91 days after the maturity date of the Revolving Credit Facility, (b) does not provide for any mandatory redemption or prepayment and (c) on a pro forma basis, the fixed charge coverage ratio, defined as the ratio of Adjusted EBITDA to the sum of Consolidated Interest Expense and all cash dividend payments, for the most recently ended four full fiscal quarters would be at least 2.00 to 1.00; 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 our fixed charge coverage ratio for the most recently ended four full fiscal quarters would be at least 2.00 to 1.00 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.

Adjusted EBITDA, as defined in the indenture governing the senior secured notes and the credit agreement governing the Revolving Credit Facility, 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 September 30,						Nine months Ended September 30,
	2011			2010			2011			2010
	(in thousands)
Cash flows from operating activities to Adjusted EBITDA Reconciliation:
Net cash provided by operating activities	$	19,011		$	9,142		$	71,739		$	67,872
Changes in working capital accounts		13,940			18,975			16,614			(4,799	)
Depreciation and amortization, including amortization of debt issuance costs classified in interest expense		(13,148	)		(12,724	)		(39,012	)		(36,863	)
Amortization of swap termination costs		(2,747	)		(4,874	)		(9,625	)		(16,582	)
Net gain (loss) on sale or disposal of properties		(8	)		1,708			(151	)		1,717
Impairment of assets		(1,949	)		—			(5,169	)		—
Loss on debt extinguishment		—			—			—			(8,357	)
Equity compensation costs		(2,402	)		(2,035	)		(7,381	)		(5,525	)
Financing costs		(719	)		—			(719	)		—
Deferred income taxes		(2,920	)		(2,224	)		(4,453	)		3,770

Net income		9,058			7,968			21,843			1,233

Add:
Provision for (benefit from) income taxes		4,407			3,052			8,824			(250	)
Interest expense, including amortization costs		17,792			19,735			54,526			64,592
Depreciation and amortization		11,921			11,581			35,421			33,259

EBITDA		43,178			42,336			120,614			98,834
Add:
Equity compensation costs		2,402			2,035			7,381			5,525
Impairment of assets		1,949			—			5,169			—
Loss on debt extinguishment		—			—			—			8,357
Financing costs		719			—			719			—
Acquisition expense		203			(1,710	)		518			(1,449	)

Adjusted EBITDA	$	48,451		$	42,661		$	134,401		$	111,267

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.

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. Interest expense of $9.6 million was recognized during the nine months ended September 30, 2011 for the portion of

the hedge deemed ineffective. Pursuant to ASC 815, the fair value balance of the swap at the termination date remains in accumulated other comprehensive loss, net of tax, and is amortized into interest expense over the remaining life of the original swap (through February 14, 2014). As a result of the $74 million redemption of the notes during June 2010, an additional $1.7 million of unamortized expense was recognized during the nine months ended September 30, 2010. This was the result of reducing the face value of the outstanding senior secured notes below the notional amount of the swap. As of September 30, 2011, accumulated other comprehensive loss included $6.9 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 $7.1 million, or $4.3 million, net of tax.

Off Balance Sheet Arrangements

We currently have no off balance sheet arrangements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks from changing foreign currency exchange rates, interest rates and diesel fuel prices. Changes in these factors could cause fluctuations in earnings and cash flows.

Foreign Currency. Our foreign currency risk arises from owning and operating railroads in Canada. As of September 30, 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 September 30, 2011, the Canadian dollar decreased 8% in value in comparison to the U.S dollar. The average rate for the three months ended September 30, 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 $0.9 million in reported revenue and a $0.7 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 $0.8 million.

During the nine months ended September 30, 2011, the Canadian dollar increased 2% in value in comparison to the U.S dollar. The average rate for the nine months ended September 30, 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 $2.8 million in reported revenue and a $0.7 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 $5.2 million and operating income by $2.0 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 Revolving Credit 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 9.4% of total operating revenues during the three months ended September 30, 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.

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 Commission’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive and chief financial officers as appropriate to allow timely decisions regarding required disclosure. Additionally, as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that no changes in our internal control over financial reporting occurred during our third fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 September 30, 2011, the following purchases of the Company’s 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 1934, as amended). During the three months ended September 30, 2011, the Company accepted 4,557 shares in lieu of cash payments by employees for payroll tax withholdings relating to stock based compensation.


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 through July 31, 2011		2,224	$	15.39		-	$	—
August 1 through August 31, 2011		1,699	$	12.34		-	$	—
September 1 through September 30, 2011		587,304	$	12.88		586,670	$	17,437,622

Total		591,227	$	12.88		586,670	$	17,437,622

On February 23, 2011, we announced that our Board of Directors had approved a $50 million 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 Company’s shares, trading volume and general market conditions. On April 18, 2011, we completed this stock repurchase program, repurchasing a total of 3,036,769 shares at a weighted average cost of $16.46 per share.

ITEM 6.

EXHIBITS

Exhibits


10.20		Credit Agreement, dated as of August 29, 2011, among RailAmerica, Inc., RailAmerica Transportation Corp., Citibank N.A. and Citigroup Global Markets Inc. (incorporated by reference to Exhibit 10.20 to RailAmerica, Inc.’s Form 8-K filed on August 31, 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

101		The following materials from RailAmerica’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and (iv) Notes to Condensed, Consolidated Financial Statements*

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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.


Date: October 27, 2011		RAILAMERICA, INC.

		By: /s/ B. Clyde Preslar
		B. Clyde Preslar, Senior Vice President and Chief Financial Officer (on behalf of registrant and as Principal Financial Officer)

RAILAMERICA INC /DE - FORM 10-Q - October 27, 2011

Attached files

RAILAMERICA INC /DE Reports