Genesee & Wyoming Reports Results for the Fourth Quarter of 2012

Genesee & Wyoming Reports Results for the Fourth Quarter of 2012

GREENWICH, Conn.--(BUSINESS WIRE)-- Genesee & Wyoming Inc. (GWI) (NYS: GWR)

Acquisition of RailAmerica, Inc.

GWI acquired RailAmerica, Inc. (RailAmerica) on October 1, 2012 for approximately $2.0 billion, including the assumption of debt.¹ Immediately following the acquisition, GWI placed the shares of RailAmerica into an independent voting trust pending regulatory approval of the transaction by the U.S. Surface Transportation Board (STB). The STB approved the transaction and permitted GWI to take control of RailAmerica on December 28, 2012. Immediately thereafter, GWI commenced integration activities. As a result, GWI's reported earnings for the fourth quarter of 2012 include after-tax charges of $30.7 million, or $0.61 per diluted common share, associated with the RailAmerica transaction, financing and integration related expenses.

During the pendency of the voting trust in the fourth quarter of 2012, GWI accounted for the earnings of RailAmerica using the equity method of accounting. GWI's initial allocation of the purchase price to the acquired assets and assumed liabilities is included in GWI's consolidated balance sheet at December 31, 2012.

Fourth Quarter Highlights and Recent Developments

• Adjusted diluted earnings per common share (EPS) of $0.79 (adjusted primarily for RailAmerica acquisition and financing-related expenses); Reported diluted earnings per common share of $0.18 (1)

• Revenues increased 8.0% versus fourth quarter of 2011, led by higher Australian iron ore shipments.

• Consolidated adjusted operating ratio of 74.6% (adjusted primarily for RailAmerica acquisition and financing-related expenses); Reported operating ratio of 85.2% (2)

• Australian adjusted operating ratio of 70.0% (adjusted primarily for contract termination expense, business/corporate development costs and net gain on insurance recovery); Reported Australian operating ratio of 71.5% (2)

• Adjusted equity earnings from RailAmerica of $19.1 million (adjusted primarily for integration costs); Reported equity earnings from RailAmerica of $15.6 million (3)

• GWI will convert $350 million of Mandatorily Convertible Preferred Stock with a 5% coupon, issued to The Carlyle Group, into approximately 6 million shares of GWI Class A common stock, effective February 13, 2013; the conversion will eliminate annual dividends of $17.5 million and will not increase GWI's diluted shares outstanding.

Jack Hellmann, President and CEO of GWI, commented, "G&W's financial results for the fourth quarter of 2012 were consistent with our expectations. Our fourth quarter revenues increased 8%, our adjusted operating income increased 28% and our adjusted operating ratio improved 4.0 percentage points to 74.6%. In Australia, where our grain traffic was unusually low due to now-fixed mechanical issues in the Adelaide Outer Harbor, we nevertheless reported an adjusted operating ratio of 70.0% due to the smooth start-up of iron ore shipments from a new mine. Meanwhile, RailAmerica's fourth quarter financial results were solid while it was held in a voting trust, contributing adjusted equity earnings of $19.1 million." (2)(3)

"The integration of RailAmerica is well underway, with new regional management teams largely established, overlapping functions being rationalized and best practices being established in each department. We are optimistic that we will complete the vast majority of the integration work by the end of the second quarter of 2013."

¹ GWI financed the $1.37 billion cash purchase price for RailAmerica's shares, the refinancing of $1.23 billion of GWI and RailAmerica total outstanding debt prior to the acquisition, as well as transaction and financing-related expenses with approximately $1.80 billion in borrowings under its new five-year Senior Secured Credit Facility, approximately $460 million of cash from public offerings of common stock and tangible equity units and $350 million through a private issuance of mandatorily convertible preferred stock to The Carlyle Group.

Financial Results

GWI reported net income in the fourth quarter of 2012 of $13.4 million, compared with net income of $33.3 million in the fourth quarter of 2011. Excluding the impact of certain significant items discussed below that primarily related to the RailAmerica acquisition, GWI's adjusted net income in the fourth quarter of 2012 was $44.2 million, compared with adjusted net income of $29.1 million in the fourth quarter of 2011 (1).

GWI's reported diluted EPS in the fourth quarter of 2012 were $0.18 with 50.6 million weighted average common shares outstanding, compared with diluted EPS of $0.77 with 42.9 million weighted average common shares outstanding in the fourth quarter of 2011. Excluding the significant items discussed below, GWI's adjusted diluted EPS in the fourth quarter of 2012 were $0.79 with 56.6 million weighted average common shares outstanding, including the common stock equivalents associated with the Mandatorily Convertible Preferred Stock Series A-1 on an "if-converted" basis, compared with adjusted diluted EPS of $0.68 with 42.9 million weighted average shares outstanding in the fourth quarter of 2011 (1).

In the fourth quarter of 2012 and 2011, GWI's results included certain significant items that are set forth in the following table ($ in millions, except per share amounts).

Explanation of Q4 2012 Significant Items

In the fourth quarter of 2012, GWI incurred $28.8 million of business development costs, primarily associated with the RailAmerica acquisition and related financing transactions. In addition, because GWI took control of RailAmerica's railroads on December 28, 2012, GWI incurred an additional $11.4 million of integration costs, primarily associated with severance benefits paid to certain RailAmerica senior executives at the end of 2012. In the fourth quarter of 2012, GWI also recorded $1.4 million in net gains on the Edith River Bridge-related insurance recoveries and the sale of assets and incurred $1.1 million of expense associated with the termination of a contract with a track maintenance service provider in Australia. In addition, RailAmerica's reported equity earnings included $3.5 million (after-tax) of expense associated with the integration, primarily related to severance obligations.

Results from Continuing Operations

In the fourth quarter of 2012, GWI's total operating revenues increased $16.9 million, or 8.0%, to $227.3 million, compared with $210.4 million in the fourth quarter of 2011. The increase included $2.8 million in revenues from new operations and a $2.0 million increase from the net appreciation of foreign currencies relative to the U.S. dollar. Excluding the net impact from foreign currency appreciation, GWI's same railroad operating revenues increased $12.2 million, or 5.8%.

Same railroad freight revenues in the fourth quarter of 2012 were $163.1 million, compared with $148.8 million in the fourth quarter of 2011. Excluding $1.6 million from the impact of foreign currency appreciation, GWI's same railroad freight revenues increased by $12.6 million, or 8.5%.

GWI's traffic in the fourth quarter of 2012 was 229,818 carloads, a decrease of 16,976 carloads, or 6.9%, compared with the fourth quarter of 2011. Traffic in the fourth quarter of 2012 included 4,497 carloads from new operations. Same railroad traffic decreased 21,473 carloads, or 8.7%, in the fourth quarter of 2012. The same railroad traffic decrease was principally due to decreases of 8,920 carloads of coal & coke traffic (primarily GWI's Illinois and Ohio regions), 8,763 carloads of farm & food products traffic (primarily grain in GWI's Australia Region), 8,741 carloads of other commodity group traffic (primarily overhead coal in GWI's Ohio Region) and 3,225 carloads of minerals & stone traffic (primarily salt in GWI's New York/Pennsylvania Region). These declines were partially offset by increases of 3,130 carloads of metallic ores traffic (primarily GWI's Australia Region) and 3,125 carloads of lumber & forest products traffic (primarily GWI's Oregon Region). All remaining traffic increased by a net 1,921 carloads.

Same railroad average freight revenues per carload increased 20.1% in the fourth quarter of 2012 compared with the fourth quarter of 2011. Same railroad average freight revenues per carload were impacted by three factors: a change in the mix of commodities, the appreciation of foreign currencies relative to the U.S. dollar and higher fuel surcharges, which increased same railroad average freight revenues per carload by 8.6%, 1.4% and 0.5%, respectively. Excluding these factors, same railroad average freight revenues per carload increased 9.6%. In addition to higher freight rates, same railroad average freight revenues per carload were positively impacted by changes in the mix of customers, primarily within the metallic ores and other commodities groups.

GWI's same railroad non-freight revenues in the fourth quarter of 2012 were $61.4 million, compared with same railroad non-freight revenues in the fourth quarter of 2011 of $61.6 million. Excluding a $0.3 million increase from the net impact of foreign currency appreciation, GWI's same railroad non-freight revenues decreased by $0.5 million, or 0.8%, primarily due to a $4.1 million decrease in third-party fuel sales resulting from GWI's sale of its third party fuel operation in South Australia in the third quarter of 2012, partially offset by a $1.7 million increase in railcar switching and a $1.0 million increase in other income.

GWI's operating income in the fourth quarter of 2012 was $33.7 million, compared with $45.4 million in the fourth quarter of 2011. GWI's operating ratio in the fourth quarter of 2012 was 85.2%, compared with an operating ratio of 78.4% in the fourth quarter of 2011. Operating income in the fourth quarter of 2012 included $24.0 million of RailAmerica-related expenses, primarily associated with closing costs and severance benefits, a $1.1 million contract termination payment in Australia associated with outsourced maintenance of way activities and other business/corporate development costs of $0.5 million, partially offset by $1.4 million of gains on insurance recoveries and the sale of assets. In the fourth quarter of 2011, operating income benefited $3.0 million from the net gain on the sale of assets, partially offset by Edith River derailment costs of $1.8 million and business/corporate development costs of $0.8 million. Excluding these items, GWI's adjusted operating income increased $12.8 million, or 28.3%, to $57.8 million. GWI's adjusted operating ratio improved 4.0 percentage points to 74.6% in the fourth quarter of 2012, compared with 78.6% in the fourth quarter of 2011 (2).

RailAmerica Results

As described above, because GWI did not control RailAmerica until December 28,2012, we accounted for the fourth quarter earnings of RailAmerica using the equity method of accounting. We are providing the following analysis of RailAmerica's fourth quarter 2012 results in order to provide a comparison to their fourth quarter 2011 results.

RailAmerica's revenues in the fourth quarter of 2012 increased 2.6% to $151.1 million, compared with $147.3 million in the fourth quarter of 2011. The increase included $5.9 million from new operations. RailAmerica's same railroad revenues decreased $2.1 million, or 1.5%. Same railroad freight revenues increased 6.5% to $110.0 million, with average revenue per car up 7.6% and carloads down 1.0%. Non-freight revenues declined $6.0 million, or 13.7%, to $38.0 million, primarily due to lower activity at Atlas Railroad Construction Company (Atlas).

RailAmerica's traffic in the fourth quarter of 2012 was 214,272 carloads, an increase of 2,424 carloads, or 1.1%, compared with the fourth quarter of 2011. Traffic in the fourth quarter of 2012 included 4,709 carloads from new operations. Same railroad traffic decreased 2,285 carloads, or 1.1%, in the fourth quarter of 2012. The same railroad traffic decrease was principally due to a decrease of 7,421 carloads, or 18.0%, in coal traffic, partially offset by an increase of 3,127 carloads, or 3.4%, in industrial products traffic (primarily chemicals and petroleum traffic), and an increase of 2,155 carloads, or 4.5%, in agricultural products and food traffic (primarily export soybean traffic). All remaining traffic decreased by a net 146 carloads.

RailAmerica's same railroad non-freight revenues in the fourth quarter of 2012 were $35.1 million, compared with same railroad non-freight revenues in the fourth quarter of 2011 of $44.0 million. RailAmerica's same railroad non-freight revenues decreased by $8.9 million, or 20.1%, primarily due to an $11.5 million decrease in Atlas' construction activity.

RailAmerica's operating income in the fourth quarter of 2012 was $26.1 million, a decrease of $11.1 million, compared with $37.2 million in the fourth quarter of 2011. RailAmerica's operating ratio in the fourth quarter of 2012 was 82.7%, compared with an operating ratio of 74.7% in the fourth quarter of 2011. RailAmerica's operating income in the fourth quarter of 2012 included $1.4 million of incremental depreciation and amortization expense resulting from GWI's acquisition accounting for RailAmerica. If the RailAmerica acquisition had occurred in 2011, RailAmerica's operating income in the fourth quarter of 2011 would have had an incremental depreciation and amortization expense of approximately $1 million. Operating income in the fourth quarter of 2012 also included $5.7 million of acquisition-related expenses. In the fourth quarter of 2011, operating income benefited $3.6 million from the sale of short line tax credits and included $0.3 million of acquisition-related expenses. Adjusting for these items and the estimated acquisition-driven incremental depreciation and amortization expense for the fourth quarter of 2011, RailAmerica's adjusted operating income was $31.8 million in the fourth quarter of 2012, compared with $33.0 million in the fourth quarter of 2011. RailAmerica's adjusted operating ratio was 78.9% in the fourth quarter of 2012, compared with 77.6% in the fourth quarter of 2011 (4).

Recent Developments

On January 2, 2013, the U.S. Short Line Tax Credit (which had previously expired on December 31, 2011) was extended for fiscal years 2012 and 2013. GWI expects the extension of the Short Line Tax Credit to reduce its book income tax expense by approximately $35 million and $25 million, respectively, for fiscal years 2012 and 2013. Since the extension became law in 2013, the 2012 impact will be recorded in the first quarter of 2013.

On February 13, 2013, GWI will convert all of the outstanding Mandatorily Convertible Preferred Stock, Series A-1, par value $0.01 per share (the "Series A-1 Preferred Stock") issued in conjunction with the RailAmerica acquisition, and held by certain affiliates of Carlyle Partners V, L.P. ("Carlyle"). GWI is permitted to convert the Series A-1 Preferred Stock because it has satisfied the conversion criteria, including that the closing price of GWI's Class A Common Stock exceed 130% of the conversion price, or $76.03, for 30 consecutive trading days, which condition was satisfied on February 12, 2013. Upon conversion, each share of Series A-1 Preferred Stock will be converted into 17.0978166 shares of GWI's Class A Common Stock, resulting in the issuance of 5,984,232 shares of the Company's Class A Common Stock. These shares are included in GWI's weighted average diluted common shares outstanding in calculating adjusted earnings per diluted share for the three months ended December 31, 2012. In addition, GWI will be required to pay to Carlyle cash in lieu of fractional shares and all accrued and unpaid dividends in respect of the Series A-1 Preferred Stock on the conversion date. Following the conversion, GWI will not incur the quarterly dividend of approximately $4.4 million that would otherwise have been due on the Series A-1 Preferred Stock.

Consolidated Annual Results - Continuing Operations

GWI reported net income for the twelve months ended December 31, 2012, of $52.4 million, compared with net income of $119.5 million for the twelve months ended December 31, 2011. Excluding the impact of certain significant items listed below that primarily related to the RailAmerica acquisition, GWI's adjusted net income in the twelve months ended December 31, 2012 was $129.7 million, compared with adjusted net income of $105.6 million in the twelve months ended December 31, 2011 (1).

GWI's diluted EPS for the twelve months ended December 31, 2012 were $1.02 with 51.3 million weighted average shares outstanding, compared with diluted EPS of $2.79 with 42.8 million weighted average shares outstanding for the twelve months ended December 31, 2011. Excluding the significant items listed below, GWI's adjusted diluted EPS for the twelve months ended December 31, 2012 were $2.53 with 51.3 million weighted average shares outstanding, compared with adjusted diluted EPS of $2.47 with 42.8 million weighted average shares outstanding for the twelve months ended December 31, 2011 (1).

GWI's 2012 and 2011 results included certain significant items that are set forth in the following table ($ in millions, except per share amounts).

Free Cash Flow from Continuing Operations (5)