Adjusted diluted earnings per share (EPS) were $1.12, a 10.9% increase in adjusted diluted EPS; Reported diluted EPS were $1.07, a 6.1% decrease in reported diluted EPS. (1)
Total operating revenues increased 3.5% to $414.6 million.
Adjusted income from operations increased 2.6% to $110.4 million; Reported income from operations increased 2.5% to $110.1 million. (1)
Adjusted and reported operating ratio of 73.4% (74.5% North American & European Operations; 69.2% Australian Operations). (1)
G&W’s newly established subsidiary, Rapid City, Pierre & Eastern Railroad, Inc. (RCP&E), completed the acquisition of the west end of the Dakota, Minnesota & Eastern (DM&E) rail line from Canadian Pacific for $217.7 million including the purchase of certain inventory, equipment and vehicles. Freight services commenced on June 1, 2014.
In conjunction with the RCP&E acquisition, G&W amended its credit facility to include a $1,520.0 million U.S. term loan, an A$216.8 million (or $200.3 million at the exchange rate on May 27, 2014) Australian term loan and a $625.0 million revolving loan, and extended the maturity date to May 31, 2019. The amendment resulted in a non-cash write-off of deferred financing fees of $4.7 million.
Jack Hellmann, President and CEO of G&W, commented, “Our second quarter financial results were consistent with our expectations as adjusted earnings per share increased 11% to $1.12. Our total revenue increased 3.5% and we maintained an operating ratio of 73.4% despite severe track washouts in Canada and the Southeast United States. In North America, rail network congestion decreased and the economy remained relatively strong over the course of the second quarter, which resulted in a 7.1% growth in same railroad carloads. In Australia, our second quarter carload traffic was down 9%; however, effective management of our costs resulted in an operating ratio of 69.2%. (1)
In the second quarter, we were engaged in three key initiatives. First, we successfully commenced operations on the RCP&E railroad in June and we are now actively working with our Class I partners to provide the necessary supply of railcars and locomotives to move another strong grain harvest in South Dakota. Second, we completed the refinancing of our credit facility, which now provides us with $625 million of total revolver capacity for acquisitions and investments and also reduces our interest expense. Third, we continued to evaluate multiple acquisition and investment opportunities worldwide.
While our North American business outlook remains favorable in 2014, in Australia a small iron ore mine has informed us that it has exhausted its resources and a larger mine customer has announced plans to close temporarily due to both the low price of iron ore as well as permitting delays for the mine’s planned expansion. As a result, we expect our revenues to decline by approximately $5 million over the remainder of the year. Based on discussions with the customer, the latter mine is expected to reopen in mid to late 2015, although we believe this will be dependent on the global price of iron ore.”
G&W reported net income in the second quarter of 2014 of $60.9 million, compared with net income of $65.1 million in the second quarter of 2013. Excluding the net impact of certain significant items discussed below, G&W’s adjusted net income in the second quarter of 2014 was $63.8 million, compared with adjusted net income of $57.6 million in the second quarter of 2013. (1)
G&W’s reported diluted EPS in the second quarter of 2014 were $1.07 with 56.9 million weighted average shares outstanding, compared with diluted EPS in the second quarter of 2013 of $1.14 with 56.7 million weighted average shares outstanding. G&W’s adjusted diluted EPS in the second quarter of 2014 were $1.12with 56.9 million weighted average shares outstanding, compared with adjusted diluted EPS in the second quarter of 2013 of $1.01 with 56.7 million weighted average shares outstanding. (1) The net depreciation of foreign currency relative to the U.S. dollar reduced second quarter 2014 diluted EPS by approximately$0.03, compared with the second quarter of 2013.
G&W’s effective income tax rate was 34.8% in the second quarter of 2014, compared with 27.9% in the second quarter of 2013. The higher income tax rate in the second quarter of 2014, compared with the second quarter of 2013, was driven primarily by the expiration of the United States short line tax credit onDecember 31, 2013.
In the second quarter of 2014 and 2013, G&W’s results included certain significant items that are set forth in the following table (in millions, except per share amounts).
Business development and related costs$(1.7)$(1.0)$(0.02)
Net gain on sale of assets$1.4$1.0$0.02
Three Months Ended June 30, 2013
Business development and related costs$(1.2)$(0.7)$(0.01)
Net gain on sale of assets$1.0$0.7$0.01
Short line tax credit$—$7.5$0.13
Explanation of Significant Items
In the second quarter of 2014, G&W’s results included the non-cash write-off of deferred financing fees of $4.7 million associated with the refinancing of G&W’s credit facility, business development and related costs of $1.7 million, including RCP&E acquisition and integration related costs and Atlas Railroad Construction, LLC (Atlas) reorganization costs, and net gain on sale of assets of $1.4 million.
During the second quarter of 2013, G&W’s results included $1.2 million of business development and related costs, including RailAmerica acquisition and integration costs, and net gain on sale of assets of $1.0 million. The second quarter of 2013 also included an income tax benefit of $7.5 million associated with the short line tax credit.
In the second quarter of 2014, G&W’s total operating revenues increased $13.9 million, or 3.5%, to $414.6 million, compared with $400.6 million in the second quarter of 2013. The increase included $5.5 million in revenues from the RCP&E for the month of June. These revenue increases were partially offset by a $6.5 million decrease from the net depreciation of foreign currencies relative to the U.S. dollar. Excluding the net impact from foreign currency depreciation, G&W’s same railroad operating revenues, which exclude the RCP&E, increased $15.0 million, or 3.8%.
G&W’s same railroad freight revenues in the second quarter of 2014 were $311.8 million, compared with $299.8 million in the second quarter of 2013. Excluding a $5.1 million decrease from the impact of foreign currency depreciation, G&W’s same railroad freight revenues increased by $17.1 million, or 5.8%.
G&W’s same railroad non-freight revenues in the second quarter of 2014 were $97.3 million, compared with $100.8 million in the second quarter of 2013. Excluding a $1.4 million decrease from the net impact of foreign currency depreciation, G&W’s same railroad non-freight revenues decreased by $2.1 million, or 2.2%, primarily due to less construction revenues as compared to the prior year.
G&W’s traffic in the second quarter of 2014 increased 28,652 carloads, or 6.0%, to 509,631 carloads. Excluding 4,708 carloads from the RCP&E, same railroad traffic in the second quarter of 2014 increased 23,944 carloads, or 5.0%. The same railroad traffic increase was principally due to increases of 9,056 carloads of coal and coke traffic (primarily in the Midwest and Ohio Valley regions), 7,286 carloads of traffic from G&W’s Other commodity group (primarily overhead Class I shipments), 4,927 carloads of agricultural products traffic (primarily in the Pacific Region) and 3,601 carloads of metals traffic (primarily in the Northeast andCanada regions), partially offset by a 3,302 carload decrease in petroleum products traffic (primarily in the Southern and Pacific regions). All remaining traffic increased by a net 2,376 carloads.
G&W’s income from operations in the second quarter of 2014 was $110.1 million, compared with $107.4 million in the second quarter of 2013. G&W’s operating ratio in the second quarter of 2014 was 73.4%, compared with an operating ratio of 73.2% in the second quarter of 2013. Income from operations in the second quarter of 2014 included business development and related costs of $1.7 million, partially offset by net gain on sale of assets of $1.4 million. Income from operations in the second quarter of 2013 included $1.2 million of business development and related costs, partially offset by net gain on sale of assets of $1.0 million. Excluding these items, G&W’s adjusted income from operations increased $2.8 million, or 2.6%, to $110.4 million in the second quarter of 2014, and G&W’s adjusted operating ratio increased 0.3 percentage points to 73.4% in the second quarter of 2014, compared with 73.1% in the second quarter of 2013. (1)
Free Cash Flow (1)
G&W’s free cash flow for the six months ended June 30, 2014 and 2013 was as follows (in millions):
Six Months Ended
Net cash provided by operating activities$200.1$152.7
Net cash used in investing activities, excluding new business investments(302.3)(78.0)
Net cash used for acquisitions (a)220.5 9.6
Free cash flow before new business investments118.384.3
New business investments(61.0)(25.1)
Free cash flow (1)$57.3 $59.1
(a) The 2014 period primarily consisted of cash paid for the RCP&E acquisition. The 2013 period consisted of cash paid for expenses related to the integration of RailAmerica.
Conference Call and Webcast Details
As previously announced, G&W’s conference call to discuss financial results for the second quarter of 2014 will be held on Friday, August 1, 2014, at 11 a.m. EDT. The dial-in number for the teleconference in the U.S. is (800) 553-5260; outside the U.S. is (612) 234-9959, or the call may be accessed live over the Internet (listen only) at www.gwrr.com/investors, by selecting “Q2 2014 Genesee & Wyoming Inc. Earnings Conference Call Webcast.” Management will be referring to a slide presentation that will also be available at gwrr.com/investors. The webcast will be archived at www.gwrr.com/investors, until the following quarter’s earnings press release. Telephone replay is available for 30 days beginning at 1 p.m. EDT on August 1, 2014 by dialing (800) 475-6701 (or outside the U.S., dial 320-365-3844). The access code is 309989.
G&W owns and operates short line and regional freight railroads in the United States, Australia, Canada, the Netherlands and Belgium. In addition, G&W operates the 1,400-mile Tarcoola to Darwin rail line, which links the Port of Darwin with the Australian interstate rail network in South Australia. Operations currently include 112 railroads organized in 11 regions, with more than 15,000 miles of owned and leased track, 5,000 employees and over 2,000 customers. We provide rail service at 37 ports in North America, Australia and Europe and perform contract coal loading and railcar switching for industrial customers.
This press release contains forward-looking statements regarding future events and the future performance of Genesee & Wyoming Inc. that are based on current expectations, estimates and projections about our industry, management’s beliefs, and assumptions made by management. Words such as “anticipates,” “intends,” “plans,” “believes,” “could,” “should,” “seeks,” “expects,” “will,” “estimates,” “trends,” “outlook,” variations of these words and similar expressions are intended to identify these forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast, including the following: risks related to the operation of our railroads; severe weather conditions and other natural occurrences, which could result in shutdowns, derailments or other substantial disruption of operations; consummation and integration of acquisitions; economic, political and industry conditions (including employee strikes or work stoppages); customer demand and changes in our operations, retention and contract continuation; legislative and regulatory developments, including changes in environmental and other laws and regulations to which we are subject; increased competition in relevant markets; funding needs and financing sources, including our ability to obtain government funding for capital projects; international complexities of operations, currency fluctuations, finance, tax and decentralized management; challenges of managing rapid growth including retention and development of senior leadership; unpredictability of fuel costs; susceptibility to various legal claims and lawsuits; increase in, or volatility associated with, expenses related to estimated claims, self-insured retention amounts, and insurance coverage limits; consummation of new business opportunities; exposure to the credit risk of customers and counterparties; decrease in revenues and/or increase in costs and expenses; susceptibility to the risks of doing business in foreign countries; our ability to realize the expected synergies associated with acquisitions; and others including, but not limited to, those noted in our 2013 Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q under “Risk Factors.” Therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Forward-looking statements speak only as of the date of this press release or as of the date they were made. G&W does not undertake, and expressly disclaims, any duty to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.
1. Adjusted net income, adjusted diluted earnings per common share, adjusted income from operations, adjusted operating ratio and free cash flow are non-GAAP financial measures and are not intended to replace financial measures calculated in accordance with GAAP. The information required by Item 10(e) of Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934 and Regulation G under the Securities Exchange Act of 1934, including a reconciliation to their most directly comparable financial measures calculated in accordance with GAAP, is included in the tables attached to this press release.
GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013
* Includes carload and intermodal units ** Represents intermodal units
Non-GAAP Financial Measures
This earnings release contains references to adjusted net income, adjusted diluted earnings per common share, adjusted income from operations, adjusted operating ratio and free cash flow, which are “non-GAAP financial measures” as this term is defined in Item 10(e) of Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934 and Regulation G under the Securities Exchange Act of 1934. In accordance with these rules, G&W has reconciled these non-GAAP financial measures to their most directly comparable U.S. GAAP measures.
Management views these non-GAAP financial measures as important measures of G&W’s operating performance or, in the case of free cash flow, an important financial measure of how well G&W is managing its assets and a useful indicator of cash flow that may be available for discretionary use by G&W. Key limitations of the free cash flow measure include the assumptions that G&W will be able to refinance its existing debt when it matures and meet other cash flow obligations from financing activities, such as principal payments on debt.
These non-GAAP financial measures are not intended to represent, and should not be considered more meaningful than, or as an alternative to, their most directly comparable GAAP measures. These non-GAAP financial measures may be different from similarly-titled non-GAAP financial measures used by other companies.
The following tables set forth reconciliations of each of these non-GAAP financial measures to their most directly comparable GAAP measure (in millions, except percentages and per share amounts).
Reconciliations of Non-GAAP Financial Measures
Adjusted Net Income and Adjusted Diluted Earnings Per Common Share