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  • 10-Q (Nov 4, 2014)
  • 10-Q (Aug 6, 2014)
  • 10-Q (May 9, 2014)
  • 10-Q (Nov 7, 2013)
  • 10-Q (Aug 6, 2013)
  • 10-Q (May 9, 2013)

 
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Genesee & Wyoming 10-Q 2012

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1
GWR.03.31.2012 10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________
FORM 10-Q
________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 001-31456
________________________________________________
GENESEE & WYOMING INC.
(Exact name of registrant as specified in its charter)
________________________________________________
Delaware
 
06-0984624
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
66 Field Point Road,
Greenwich, Connecticut
 
06830
(Address of principal executive offices)
 
(Zip Code)
(203) 629-3722
(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.    x  YES    o  NO
Indicate by check mark whether the registrant has submitted electronically or 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).    x  YES    o  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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer
 
x
  
Accelerated Filer
 
o
 
 
 
 
 
 
 
Non-Accelerated Filer
 
o  (Do not check if a smaller reporting company)
  
Smaller Reporting Company
 
o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    o  YES    x  NO
Shares of common stock outstanding as of the close of business on April 30, 2012:
 
Class
  
Number of Shares Outstanding
Class A Common Stock
  
53,013,610
Class B Common Stock
  
2,112,048
 



INDEX
 
 
Page
 
 
 
 
 
 
 
Part I.
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II.
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 

2


Forward-Looking Statements
This report and other documents referred to in this report contain 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, our business and our performance, management’s beliefs, and assumptions made by management. Words such as “anticipates,” “intends,” “plans,” “believes,” “should,” “seeks,” “expects,” “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, including the following risks applicable to all of our operations: risks related to the acquisition and integration of railroads; economic and competitive uncertainties and contingencies and third-party approvals; 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 associated with estimated claims, self-insured retention amounts, and insurance coverage limits; consummation of new business opportunities; exposure to the credit risk of customers or counterparties; severe weather conditions and other natural occurrences, which could result in shutdowns, derailments or other substantial disruptions of operations; susceptibility to the risks of doing business in foreign countries; and others including, but not limited to, those set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q, if any, and those noted in our 2011 Annual Report on Form 10-K 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 report or as of the date they were made. We disclaim any intention to update the current expectations or forward-looking statements contained in this report.


3


GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2012 and DECEMBER 31, 2011
(dollars in thousands, except share amounts)
(unaudited)
 
March 31,
2012
 
December 31,
2011
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
28,738

 
$
27,269

Accounts receivable, net
163,151

 
165,768

Materials and supplies
16,011

 
14,445

Prepaid expenses and other
15,844

 
13,332

Deferred income tax assets, net
19,231

 
19,385

Total current assets
242,975

 
240,199

PROPERTY AND EQUIPMENT, net
1,680,034

 
1,643,589

GOODWILL
160,964

 
160,277

INTANGIBLE ASSETS, net
229,029

 
230,628

DEFERRED INCOME TAX ASSETS, net
2,389

 
2,342

OTHER ASSETS, net
17,984

 
17,122

Total assets
$
2,333,375

 
$
2,294,157

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Current portion of long-term debt
$
59,340

 
$
57,168

Accounts payable
121,549

 
134,081

Accrued expenses
58,446

 
69,097

Deferred income tax liabilities, net
104

 
925

Total current liabilities
239,439

 
261,271

LONG-TERM DEBT, less current portion
577,692

 
569,026

DEFERRED INCOME TAX LIABILITIES, net
295,922

 
285,780

DEFERRED ITEMS - grants from outside parties
203,001

 
198,824

OTHER LONG-TERM LIABILITIES
19,676

 
18,622

COMMITMENTS AND CONTINGENCIES

 

STOCKHOLDERS’ EQUITY:
 
 
 
Class A Common Stock, $0.01 par value, one vote per share; 180,000,000 shares authorized; 53,010,983 and 52,717,553 shares issued and 40,521,990 and 40,257,656 shares outstanding (net of 12,488,993 and 12,459,897 shares in treasury) on March 31, 2012 and December 31, 2011, respectively
530

 
527

Class B Common Stock, $0.01 par value, ten votes per share; 30,000,000 shares authorized; 2,122,048 and 2,192,473 shares issued and outstanding on March 31, 2012 and December 31, 2011, respectively
21

 
22

Additional paid-in capital
395,714

 
385,473

Retained earnings
763,910

 
741,669

Accumulated other comprehensive income
44,178

 
37,895

Treasury stock, at cost
(206,708
)
 
(204,952
)
Total stockholders’ equity
997,645

 
960,634

Total liabilities and stockholders’ equity
$
2,333,375

 
$
2,294,157

The accompanying notes are an integral part of these consolidated financial statements.


4


GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 and 2011
(in thousands, except per share amounts)
(unaudited)
 
Three Months Ended
 
March 31,
 
2012
 
2011
OPERATING REVENUES
$
207,436

 
$
191,911

OPERATING EXPENSES:
 
 
 
Labor and benefits
65,757

 
58,082

Equipment rents
9,817

 
10,544

Purchased services
18,031

 
17,442

Depreciation and amortization
17,633

 
15,861

Diesel fuel used in operations
21,998

 
21,421

Diesel fuel sold to third parties
4,990

 
4,079

Casualties and insurance
5,547

 
5,438

Materials
6,107

 
6,583

Net gain on sale of assets
(1,230
)
 
(1,010
)
Other operating expenses
17,472

 
14,268

Total operating expenses
166,122

 
152,708

INCOME FROM OPERATIONS
41,314

 
39,203

Interest income
867

 
775

Interest expense
(8,616
)
 
(9,939
)
Other income, net
984

 
568

Income from continuing operations before income taxes
34,549

 
30,607

Provision for income taxes
12,305

 
8,485

Income from continuing operations, net of tax
22,244

 
22,122

Loss from discontinued operations, net of tax
(3
)
 

Net income
$
22,241

 
$
22,122

Basic earnings per share:
 
 
 
Basic earnings per common share from continuing operations
$
0.55

 
$
0.56

Basic loss per common share from discontinued operations

 

Basic earnings per common share
$
0.55

 
$
0.56

Weighted average shares - basic
40,360

 
39,484

Diluted earnings per share:
 
 
 
Diluted earnings per common share from continuing operations
$
0.52

 
$
0.52

Diluted loss per common share from discontinued operations

 

Diluted earnings per common share
$
0.52

 
$
0.52

Weighted average shares - diluted
43,081

 
42,545

The accompanying notes are an integral part of these consolidated financial statements.

5


GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2012 and 2011
(dollars in thousands)
(unaudited)
 
Three Months Ended
 
March 31,
 
2012
 
2011
Net income
$
22,241

 
$
22,122

Other comprehensive income:
 
 
 
Foreign currency translation adjustment
6,246

 
6,676

Net unrealized gain on qualifying cash flow hedges, net of tax provision of $253 and $393, respectively
446

 
690

Changes in pension and other postretirement benefits, net of tax benefit of $232 and $97, respectively
(409
)
 
(171
)
Other comprehensive income
6,283

 
7,195

Comprehensive income
$
28,524

 
$
29,317

The accompanying notes are an integral part of these consolidated financial statements.


6


GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 and 2011
(dollars in thousands)
(unaudited)
 
Three Months Ended
 
March 31,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
22,241

 
$
22,122

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Loss from discontinued operations
3

 

Depreciation and amortization
17,633

 
15,861

Compensation cost related to equity awards
2,290

 
2,148

Excess tax benefit from share-based compensation
(1,746
)
 
(900
)
Deferred income taxes
9,977

 
3,311

Net gain on sale of assets
(1,230
)
 
(1,010
)
Insurance proceeds received
12,521

 

Changes in assets and liabilities which provided (used) cash, net of effect of acquisitions:
 
 
 
Accounts receivable, net
(2,526
)
 
(13,837
)
Materials and supplies
(1,418
)
 
(656
)
Prepaid expenses and other
(2,496
)
 
(1,535
)
Accounts payable and accrued expenses
(27,491
)
 
(20,039
)
Other assets and liabilities, net
(9
)
 
1,819

Net cash provided by operating activities from continuing operations
27,749

 
7,284

Net cash used in operating activities from discontinued operations
(3
)
 
(4
)
Net cash provided by operating activities
27,746

 
7,280

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of property and equipment
(50,318
)
 
(15,725
)
Grant proceeds from outside parties
8,437

 
7,514

Cash paid for acquisitions, net of cash acquired
(837
)
 
(440
)
Proceeds from disposition of property and equipment
1,626

 
1,031

Net cash used in investing activities from continuing operations
(41,092
)
 
(7,620
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payments on long-term borrowings, including capital leases
(56,461
)
 
(55,981
)
Proceeds from issuance of long-term debt
64,716

 
52,967

Proceeds from employee stock purchases
6,210

 
4,006

Treasury stock purchases
(1,757
)
 
(1,029
)
Excess tax benefit from share-based compensation
1,746

 
900

Net cash provided by financing activities from continuing operations
14,454

 
863

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
361

 
(897
)
CHANGE IN CASH BALANCES INCLUDED IN CURRENT ASSETS OF DISCONTINUED OPERATIONS

 
1

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1,469

 
(373
)
CASH AND CASH EQUIVALENTS, beginning of period
27,269

 
27,417

CASH AND CASH EQUIVALENTS, end of period
$
28,738

 
$
27,044

The accompanying notes are an integral part of these consolidated financial statements.

7


GENESEE & WYOMING 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 Genesee & Wyoming Inc. and its subsidiaries (the Company). All references to currency amounts included in this Quarterly Report on Form 10-Q, including the consolidated financial statements, are in United States dollars unless specifically noted otherwise. All significant intercompany transactions and accounts have been eliminated in consolidation. These interim consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). They 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 (U.S. GAAP). In the opinion of management, the unaudited financial statements for the three months ended March 31, 2012 and 2011 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 the interim periods presented. 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 2011 was derived from the audited financial statements in the Company’s 2011 Annual Report on Form 10-K but does not include all disclosures required by U.S. GAAP.
The interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2011 included in the Company’s 2011 Annual Report on Form 10-K.
2. CHANGES IN OPERATIONS:
United States
Hilton & Albany Railroad, Inc.: In November 2011, the Company's newly formed subsidiary, the Hilton & Albany Railroad, Inc. (HAL), signed an agreement with Norfolk Southern Railway Company (NS) to lease and operate a 56-mile segment of NS track that runs from Hilton, Georgia to Albany, Georgia. Operations commenced on January 1, 2012. The HAL handles primarily overhead traffic between NS and the Company's following railroads: The Bay Line Railroad, L.L.C.; Chattahoochee Bay Railroad, Inc.; Chattahoochee Industrial Railroad; and Georgia Southwestern Railroad, Inc. In addition, the HAL serves several local agricultural and aggregate customers in southwest Georgia. The results from HAL’s operations have been included in the Company’s statement of operations since January 1, 2012 and are included in the Company’s North American & European Operations segment.
Arizona Eastern Railway Company: On September 1, 2011, the Company acquired all of the capital stock of Arizona Eastern Railway Company (AZER). The Company paid the seller $89.5 million in cash at closing, which included a reduction to the purchase price of $0.6 million for the estimated working capital adjustment. Based on the final working capital adjustment, the Company recorded an additional $0.8 million of purchase price in December 2011, which was paid to the seller in January 2012. The Company incurred $0.6 million of acquisition costs related to this transaction through December 31, 2011, which were expensed as incurred. The results from AZER’s operations have been included in the Company’s statement of operations since September 1, 2011 and are included in the Company’s North American & European Operations segment.
Headquartered near Miami, Arizona, with 43 employees and 10 locomotives, AZER owns and operates two rail lines totaling approximately 200 track miles in southeast Arizona and southwest New Mexico that are connected by 52 miles of trackage rights over the Union Pacific Railroad. The largest customer on AZER is Freeport-McMoRan Copper & Gold Inc. (Freeport-McMoRan). AZER provides rail service to Freeport-McMoRan’s largest North American copper mine and its North American smelter, hauling copper concentrate, copper anode, copper rod and sulfuric acid. In conjunction with the transaction, AZER and Freeport-McMoRan entered into a long-term transportation agreement.
Results from Continuing Operations
When comparing the Company’s results from continuing operations from one reporting period to another, it is important to consider that the Company has historically experienced fluctuations in revenues and expenses due to changing economic conditions, acquisitions, competitive forces, changes in foreign currency exchange rates, one-time freight moves, fuel price fluctuations, customer plant expansions and shut-downs, sales of property and equipment, derailments and weather-related conditions, such as hurricanes, cyclones, tornadoes, droughts, heavy snowfall, unseasonably warm or cool weather, freezing and flooding. In periods when these events occur, results of operations are not easily comparable from one period to another. Finally, certain of the Company’s railroads have commodity shipments that are sensitive to general economic conditions, such as steel products, paper products and lumber and forest products. However, shipments of other commodities are relatively less affected by economic conditions and are more closely affected by other factors, such as inventory levels maintained at customer

8


plants (coal), winter weather (salt and coal) and seasonal rainfall (South Australian grain). As a result of these and other factors, the Company’s operating results in any reporting period may not be directly comparable to its operating results in other reporting periods.
3. EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted earnings per share (EPS) for the three months ended March 31, 2012 and 2011 (in thousands, except per share amounts):
 
Three Months Ended
 
March 31,
 
2012
 
2011
Numerators:
 
 
 
Income from continuing operations, net of tax
$
22,244

 
$
22,122

Loss from discontinued operations, net of tax
(3
)
 

Net income
$
22,241

 
$
22,122

 
 
 
 
Denominators:
 
 
 
Weighted average Class A common shares outstanding - Basic
40,360

 
39,484

Weighted average Class B common shares outstanding
2,165

 
2,405

Dilutive effect of employee stock grants
556

 
656

Weighted average shares - Diluted
43,081

 
42,545

 
 
 
 
Basic:
 
 
 
Earnings per common share from continuing operations
$
0.55

 
$
0.56

Loss per common share from discontinued operations

 

Earnings per common share
$
0.55

 
$
0.56

 
 
 
 
Diluted:
 
 
 
Earnings per common share from continuing operations
$
0.52

 
$
0.52

Loss per common share from discontinued operations

 

Earnings per common share
$
0.52

 
$
0.52

The following total number of Class A common stock issuable under the assumed exercise of stock options computed based on the treasury stock method were excluded from the calculation of diluted earnings per common share, as the effect of including these shares would have been anti-dilutive (in thousands):
 
Three Months Ended
 
March 31,
 
2012
 
2011
Anti-dilutive shares
200

 
48

4. ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following as of March 31, 2012 and December 31, 2011 (dollars in thousands):
 
March 31,
2012
 
December 31,
2011
Accounts receivable - trade
$
133,124

 
$
130,486

Accounts receivable - grants
17,799

 
20,753

Accounts receivable - insurance claims
15,256

 
17,336

Total accounts receivable
166,179

 
168,575

Less: Allowance for doubtful accounts
(3,028
)
 
(2,807
)
Accounts receivable, net
$
163,151

 
$
165,768


9


5. DERIVATIVE FINANCIAL INSTRUMENTS:
The Company actively monitors its exposure to interest rate and foreign currency exchange rate risks and uses derivative financial instruments to manage the impact of certain of these risks. The Company uses derivatives only for purposes of managing risk associated with underlying exposures. The Company does not trade or use instruments with the objective of earning financial gains on the interest rate or exchange rate fluctuations alone, nor does the Company use derivative instruments where it does not have underlying exposures. Complex instruments involving leverage or multipliers are not used. The Company manages its hedging position and monitors the credit ratings of counterparties and does not anticipate losses due to counterparty nonperformance. Management believes its use of derivative instruments to manage risk is in the Company’s best interest. However, the Company’s use of derivative financial instruments may result in short-term gains or losses and increased earnings volatility. The Company’s instruments are recorded in the consolidated balance sheets at fair value in prepaid expenses and other, other assets, net, accrued expenses or other long-term liabilities.
The Company may designate derivatives as a hedge of a forecasted transaction or a hedge of the variability of the cash flows to be received or paid in the future related to a recognized asset or liability (cash flow hedge). The portion of the changes in the fair value of the derivative used as a cash flow hedge that is offset by changes in the expected cash flows related to a recognized asset or liability (the effective portion) is recorded in other comprehensive income/(loss). As the hedged item is realized, the gain or loss included in accumulated other comprehensive income/(loss) is reported in the consolidated statements of operations on the same line item as the hedged item. The portion of the changes in the fair value of derivatives used as cash flow hedges that is not offset by changes in the expected cash flows related to a recognized asset or liability (the ineffective portion) is immediately recognized in earnings on the same line item as the hedged item.
The Company matches the hedge instrument to the underlying hedged item (assets, liabilities, firm commitments or forecasted transactions). At inception of the hedge and at least quarterly thereafter, the Company assesses whether the derivatives used to hedge transactions are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. When it is determined that a derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting, and any gains or losses on the derivative instrument thereafter are recognized in earnings during the periods it no longer qualifies as a hedge.
From time to time, the Company may enter into certain derivative instruments that may not be designated as hedges for accounting purposes. For example, to mitigate currency exposures related to intercompany debt, cross-currency swap contracts may be entered into for periods consistent with the underlying debt. The Company believes such instruments are closely correlated with the underlying exposure, thus reducing the associated risk. The gains or losses from the changes in the fair value of derivative instruments not accounted for as hedges are recognized in current period earnings within other income/(expense).
Interest Rate Risk Management
The Company uses interest rate swap agreements to manage its exposure to changes in interest rates of the Company’s variable rate debt. These swap agreements are recorded in the consolidated balance sheets at fair value. Changes in the fair value of the swap agreements are recorded in net income or other comprehensive income/(loss) based on whether the agreements are designated as part of a hedge transaction and whether the agreements are effective in offsetting the change in the value of the future interest payments attributable to the underlying portion of the Company’s variable rate debt. Interest payments accrued each reporting period for these interest rate swaps are recognized in interest expense.
The Company formally documents its hedge relationships, including identifying the hedge instruments and hedged items, as well as its risk management objectives and strategies for entering into the hedge transaction. On October 2, 2008, the Company entered into an interest rate swap agreement to manage its exposure to interest rates on a portion of its outstanding borrowings. The swap has a notional amount of $120.0 million and requires the Company to pay a fixed rate of 3.88% on the notional amount. In return, the Company receives one-month LIBOR on the notional amount of the swap, which is equivalent to the Company’s variable rate portion of its interest obligation on the notional amount under its credit agreement. This swap expires on September 30, 2013. The fair value of the interest rate swap agreement represented a liability of $6.3 million as of March 31, 2012 and was estimated based on Level 2 inputs. The Company’s effectiveness testing during the period ended March 31, 2012 resulted in no amount of gain or loss reclassified from accumulated other comprehensive income into earnings.
Foreign Currency Exchange Rate Risk
As of March 31, 2012, $209.1 million of third-party debt related to the Company’s foreign operations is denominated in the currencies in which its subsidiaries operate, including the Australian dollar, Canadian dollar and Euro. The debt service obligations associated with this foreign currency debt are generally funded directly from those operations. As a result, foreign

10


currency risk related to this portion of the Company’s debt service payments is limited. However, in the event the foreign currency debt service is not paid from the Company’s foreign operations, the Company may face exchange rate risk if the Australian or Canadian dollar or Euro were to appreciate relative to the United States dollar and require higher United States dollar equivalent cash.
The Company is also exposed to foreign currency exchange rate risk related to its foreign operations, including non-functional currency intercompany debt, typically from the Company’s United States operations to its foreign subsidiaries, and any timing difference between announcement and closing of an acquisition of a foreign business to the extent such acquisition is funded with United States dollars. To mitigate currency exposures related to non-functional currency denominated intercompany debt, cross-currency swap contracts may be entered into for periods consistent with the underlying debt. In determining the fair value of the derivative contract, the significant inputs to valuation models are quoted market prices of similar instruments in active markets. To mitigate currency exposures of non-United States dollar denominated acquisitions, the Company may enter into foreign exchange forward contracts. Although these derivative contracts do not qualify for hedge accounting, the Company believes that such instruments are closely correlated with the underlying exposure, thus reducing the associated risk. The gains or losses from changes in the fair value of derivative instruments that are not accounted for as hedges are recognized in current period earnings within other income, net.
On December 1, 2010, the Company completed the acquisition of the assets of FreightLink Pty Ltd, Asia Pacific Transport Pty Ltd and related corporate entities (together, FreightLink) for A$331.9 million (or $320.0 million at the exchange rate on December 1, 2010). The Company financed the acquisition through a combination of cash on hand and borrowings under its credit agreement. A portion of the funds was transferred from the United States to Australia through an intercompany loan with a notional amount of A$105.0 million (or $100.6 million at the exchange rate on December 1, 2010). To mitigate the foreign currency exchange rate risk related to this non-functional currency intercompany loan, the Company entered into an Australian dollar/United States dollar floating to floating cross-currency swap agreement (the Swap), effective as of December 1, 2010, which effectively converted the A$105.0 million intercompany loan receivable in the United States into a $100.6 million loan receivable. The Swap requires the Company to pay Australian dollar BBSW plus 3.125% based on a notional amount of A$105.0 million and allows the Company to receive United States LIBOR plus 2.48% based on a notional amount of $100.6 million on a quarterly basis. BBSW is the wholesale interbank reference rate within Australia, which the Company believes is generally considered the Australian equivalent to LIBOR. As a result of these quarterly net settlement payments, the Company realized a net expense of $1.3 million within interest (expense)/income related to the quarterly settlement for the three months ended March 31, 2012. In addition, the Company recognized a net gain of $0.2 million within other income, net related to the mark-to-market of the derivative agreement and the underlying intercompany debt instrument to the exchange rate on March 31, 2012. The fair value of the Swap represented a current liability of $8.5 million as of March 31, 2012 and was estimated based on Level 2 valuation inputs. The Swap expires on December 1, 2012.
The following table summarizes the fair value of derivative instruments recorded in the consolidated balance sheets as of March 31, 2012 and December 31, 2011 (dollars in thousands):
 
March 31, 2012
 
December 31, 2011
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Liability Derivatives:
 
 
 
 
 
 
 
Derivatives designated as hedges:
 
 
 
 
 
 
 
Interest rate swap agreement
Accrued expenses
 
$
4,269

 
Accrued expenses
 
$
4,143

Interest rate swap agreement
Other long-term liabilities
 
2,057

 
Other long-term liabilities
 
2,882

Total derivatives designated as hedges
 
 
$
6,326

 
 
 
$
7,025

Derivatives not designated as hedges:
 
 
 
 
 
 
 
Cross-currency swap agreement
Accrued expenses
 
$
8,502

 
Accrued expenses
 
$
7,170

Total liability derivatives not designated as hedges
 
 
$
8,502

 
 
 
$
7,170


11


The following table shows the effect of the Company’s derivative instrument designated as a cash flow hedge for the three months ended March 31, 2012 and 2011 in other comprehensive income/(loss) (OCI) (dollars in thousands): 
 
Total Cash Flow Hedge
OCI Activity, Net of Tax
 
Three Months Ended
 
March 31,
Derivatives Designated as Cash Flow Hedges:
2012
 
2011
Effective portion of changes in fair value recognized in OCI:
 
 
 
Interest rate swap agreement
$
446

 
$
690

The following table shows the effect of the Company’s derivative instruments not designated as hedges for the three months ended March 31, 2012 and 2011 in the consolidated statement of operations (dollars in thousands): 
 
Location of Amount
Recognized in
Earnings
 
Amount Recognized in Earnings
Derivative Instruments Not Designated as Hedges:
 
 
Three Months Ended
 
 
March 31,
 
 
2012
 
2011
Cross-currency swap agreement
Interest (expense)/income
 
$
(1,318
)
 
$
(1,436
)
Cross-currency swap agreement
Other income, net
 
173

 
22

 
 
 
$
(1,145
)
 
$
(1,414
)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of each class of financial instrument held by the Company:
Derivative instruments: Derivative instruments are recorded on the balance sheet as either assets or liabilities measured at fair value. As of March 31, 2012, the Company’s derivative financial instruments consisted of an interest rate swap agreement and a cross-currency swap agreement. The Company estimates the fair value of its interest rate swap agreement based on Level 2 valuation inputs, including fixed interest rates, LIBOR implied forward interest rates and the remaining time to maturity. The Company estimates the fair value of its cross-currency swap agreement based on Level 2 valuation inputs, including LIBOR implied forward interest rates, AUD BBSW implied forward interest rates and the remaining time to maturity.
Long-term debt: Since the Company’s long-term debt is not quoted, fair value was estimated using a discounted cash flow analysis based on Level 2 valuation inputs, including borrowing rates the Company believes are currently available to it for loans with similar terms and maturities.
The following table presents the Company's financial instruments that are carried at fair value as of March 31, 2012 and December 31, 2011 (dollars in thousands):
 
March 31,
2012
 
December 31,
2011
Financial liabilities carried at fair value using Level 2 inputs:
 
 
 
Interest rate swap agreement
$
6,326

 
$
7,025

Cross-currency swap agreement
8,502

 
7,170

Total financial liabilities carried at fair value
$
14,828

 
$
14,195


12


The following table presents the carrying value and fair value using Level 2 inputs of the Company’s financial instruments carried at historical cost as of March 31, 2012 and December 31, 2011 (dollars in thousands): 
 
March 31, 2012
 
December 31, 2011
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial liabilities carried at historical cost:
 
 
 
 
 
 
 
Series B senior notes
$
100,000

 
$
107,447

 
$
100,000

 
$
107,704

Series C senior notes
25,000

 
24,910

 
25,000

 
24,822

Revolving credit facility
208,874

 
205,083

 
191,919

 
186,590

United States term loan
185,000

 
179,216

 
190,000

 
183,869

Canadian term loan
21,904

 
21,281

 
21,983

 
21,226

Australia term loan
88,325

 
88,096

 
89,443

 
88,299

Other debt
7,929

 
7,890

 
7,849

 
7,775

Total
$
637,032

 
$
633,923

 
$
626,194

 
$
620,285


7. INCOME TAXES:
The Company’s effective income tax rate in the three months ended March 31, 2012 was 35.6% compared with 27.7% in the three months ended March 31, 2011. The increase in the effective tax rate for the three months ended March 31, 2012 was primarily attributable to the expiration of the United States Short Line Tax Credit on December 31, 2011.
The Short Line Tax Credit is a track maintenance income tax credit for Class II and Class III railroads to reduce their federal income tax based on qualified railroad track maintenance expenditures. Qualified expenditures include amounts incurred for maintaining track, including roadbed, bridges and related track structures owned or leased by a Class II or Class III railroad. The credit is equal to 50% of the qualified expenditures, subject to an annual limitation of $3,500 multiplied by the number of miles of railroad track owned or leased by the Class II or Class III railroad as of the end of their tax year. The Short Line Tax Credit had been in existence since 2005 and expired on December 31, 2011.
8. COMMITMENTS AND CONTINGENCIES:
From time to time, the Company is a defendant in certain lawsuits resulting from its operations in the ordinary course. Management believes there are adequate provisions in the financial statements for any probable liabilities that may result from disposition of the pending lawsuits. Based upon currently available information, the Company does not believe it is reasonably possible that any such lawsuit or related lawsuits would be material to the Company's results of operations or have a material adverse effect on the Company's financial position or liquidity.
9. ACCUMULATED OTHER COMPREHENSIVE INCOME:
The following table sets forth accumulated other comprehensive income included in the consolidated balance sheets as of March 31, 2012 and December 31, 2011 (dollars in thousands): 
 
Foreign Currency Translation Adjustment
 
Defined Benefit Plans
 
Net Unrealized Gain/(Loss) on Cash Flow Hedges
 
Accumulated Other Comprehensive Income
Balance, December 31, 2011
$
42,394

 
$
(20
)
 
$
(4,479
)
 
$
37,895

Current period change
6,246

 
(409
)
 
446

 
6,283

Balance, March 31, 2012
$
48,640

 
$
(429
)
 
$
(4,033
)
 
$
44,178

The foreign currency translation adjustments for the three months ended March 31, 2012 related primarily to the Company’s operations with a functional currency in Australian and Canadian dollars.
10. SIGNIFICANT NON-CASH INVESTING ACTIVITIES:
As of March 31, 2012 and 2011, the Company had outstanding grant receivables from outside parties for capital expenditures of $17.8 million and $11.5 million, respectively. As of March 31, 2012 and 2011, the Company also had approximately $14.0 million and $6.2 million, respectively, of purchases of property and equipment that were not paid and, accordingly, were accrued in accounts payable in the normal course of business.

13


11. EDITH RIVER DERAILMENT:
On December 27, 2011, a train operated by the Company's subsidiary, Genesee & Wyoming Australia Pty Ltd (GWA), derailed in the vicinity of the Edith River Bridge in Australia's Northern Territory (the Edith River Derailment). Flood waters associated with heavy rainfall from Cyclone Grant washed away the southern portion of the Edith River Bridge while a northbound GWA intermodal train consisting of three locomotives, an unoccupied crew van and 33 wagons was passing over the bridge en route to Darwin. The locomotives were damaged and the crew van and several intermodal containers and wagons containing copper concentrate were derailed into the river. The railroad segment between Katherine and Darwin remained out of service for approximately 60 days. The Edith River Bridge reopened on February 29, 2012.
In December 2011, the Company recorded a liability of A$15.0 million (or $15.3 million at the exchange rate on December 31, 2011) for the estimated repair and related costs associated with the Edith River Derailment. Since the Company believes substantially all of these costs will be recovered through insurance, the Company also recorded a receivable of A$14.0 million (or $14.3 million at the exchange rate on December 31, 2011), with the difference representing the Company's insurance deductible. During the three months ended March 31, 2012, the Company made cash payments of A$15.0 million (or $15.8 million at the average exchange rate during the period) as a result of the derailment and received cash proceeds from insurance of A$11.3 million (or $12.1 million at the exchange rate on the date received). The Company increased its estimate of costs associated with the Edith River Derailment by A$9.0 million (or $9.3 million at the exchange rate on March 31, 2012) during the three months ended March 31, 2012. Accordingly, the Company increased its recorded liability and insurance receivable by A$9.0 million (or $9.3 million at the exchange rate on March 31, 2012).
The Company believes it is possible that additional claims related to the Edith River Derailment may arise and additional costs may be incurred. The Company is unable to estimate the range of such claims based on currently available information.  However, the Company does not anticipate that these additional claims or costs, if any, will have a material adverse affect on its operating results, financial condition or liquidity.
12. SEGMENT INFORMATION:
The Company's various railroad lines are divided into 10 operating regions. All of the regions have similar characteristics, however, the Company presents its financial information as two reportable segments, North American & European Operations and Australian Operations.
The results of operations of the foreign entities are maintained in the respective local currency (the Australian dollar, the Canadian dollar and the Euro) and then translated into United States dollars at the applicable exchange rates for inclusion in the consolidated financial statements. As a result, any appreciation or depreciation of these currencies against the United States dollar will impact our results of operations.
The following table sets forth our North American & European Operations and Australian Operations for the three months ended March 31, 2012 and 2011 (dollars in thousands):
 
Three Months Ended March 31, 2012
 
Three Months Ended March 31, 2011
 
North American & European Operations
 
Australian Operations
 
Total Operations
 
North American & European Operations
 
Australian Operations
 
Total Operations
Revenues
$
144,073

 
$
63,363

 
$
207,436

 
$
132,307

 
$
59,604

 
$
191,911

Income from operations
31,313

 
10,001

 
41,314

 
26,935

 
12,268

 
39,203

Depreciation and amortization
12,318

 
5,315

 
17,633

 
11,346

 
4,515

 
15,861

Interest expense
(4,765
)
 
(3,851
)
 
(8,616
)
 
(5,956
)
 
(3,983
)
 
(9,939
)
Interest income
805

 
62

 
867

 
716

 
59

 
775

Provision for income taxes
10,539

 
1,766

 
12,305

 
6,072

 
2,413

 
8,485

Expenditures for additions to property & equipment, net of grants from outside parties
12,804

 
29,077

 
41,881

 
7,069

 
1,142

 
8,211


14


The following table sets forth the property and equipment recorded in the consolidated balance sheets as of March 31, 2012 and December 31, 2011 (dollars in thousands): 
 
March 31, 2012
 
December 31, 2011
 
North American & European Operations
 
Australian Operations
 
Total Operations
 
North American & European Operations
 
Australian Operations
 
Total Operations
Property & equipment, net
$1,128,919
 
$551,115
 
$1,680,034
 
$1,120,121
 
$523,468
 
$1,643,589
13. RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which requires entities to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. This guidance relates solely to the presentation of other comprehensive income and does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. The Company adopted this ASU for the interim period ending March 31, 2012, which is the period for which it became effective for calendar year-end entities, and elected to utilize the two consecutive statements presentation.
14. SUBSEQUENT EVENTS:
On May 1, 2012, the Company announced that its newly formed subsidiary, the Columbus & Chattahoochee Railroad, Inc. (CCR), signed an agreement with Norfolk Southern Railway Company (NS) to lease and operate a 26-mile segment of NS track that runs from Girard, Alabama, to Mahrt, Alabama. The CCR will interchange with NS in Columbus, Georgia where the Company's Georgia Southwestern Railroad, Inc. also has operations. CCR expects to begin operating the railroad in July 2012.

15



 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with our consolidated financial statements, related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q, and with the consolidated financial statements, related notes and other financial information included in our 2011 Annual Report on Form 10-K.
Overview
We own and operate short line and regional freight railroads and provide railcar switching services in the United States, Australia, Canada, the Netherlands and Belgium. In addition, we operate the Tarcoola to Darwin rail line, which links the Port of Darwin to the Australian interstate rail network in South Australia. Operations currently include 65 railroads organized into 10 regions, with approximately 7,600 miles of owned and leased track and 1,405 additional miles under track access arrangements. In addition, we provide rail service at 17 ports in North America and Europe and perform contract coal loading and railcar switching for industrial customers. On January 1, 2012, our newly formed subsidiary, the Hilton & Albany Railroad, Inc. (HAL), commenced operations in the United States, and on September 1, 2011, we completed the acquisition of the Arizona Eastern Railway Company (AZER) in the United States, in each case described in more detail below.
Operating revenues increased $15.5 million, or 8.1%, to $207.4 million in the three months ended March 31, 2012, compared with $191.9 million in the three months ended March 31, 2011. The increase in operating revenues included an $8.8 million, or 4.6%, increase in revenues from existing operations and $6.7 million in revenues from new operations. Our operating revenues from existing operations for the three months ended March 31, 2012 were negatively impacted by an estimated $7 million from the Edith River Bridge closure (described in Note 11 to our Consolidated Financial Statements included elsewhere in this Form 10-Q) and by approximately $5 million from lower coal and coal-related haulage traffic. During the three months ended March 31, 2012, the net appreciation of the Australian and Canadian dollars and the Euro relative to the United States dollar increased operating revenues from existing operations by $2.3 million. Other than the net impact from the change in foreign currency exchange rates, revenues from existing operations increased $6.5 million, or 3.4%. When we discuss either revenues from existing operations or same railroad revenues, we are referring to the change in our revenues, period-over-period, associated with operations that we managed in both periods (i.e., excluding the impact of acquisitions).
Our traffic in the three months ended March 31, 2012 was 222,178 carloads, a decrease of 22,378 carloads, or 9.2%, compared with the three months ended March 31, 2011. The traffic decrease consisted of a decrease of 27,163 carloads, or 11.1%, from existing operations, partially offset by 4,785 carloads from new operations. The decrease from existing operations was principally due to decreases of 22,205 carloads of coal traffic and 8,638 carloads of other commodity traffic, partially offset by an increase of 3,188 carloads of metals traffic. All other traffic from existing operations increased by a net 492 carloads. The decrease in coal traffic was driven by customer-specific circumstances (for example, high inventory and an extended maintenance outage) as well as by warm winter weather, low natural gas prices and lower levels of export coal. The decline in other commodity traffic was largely driven by a decrease in coal-related haulage traffic primarily driven by warm winter weather, low natural gas prices as well as by reduced coal exports.
Income from operations in the three months ended March 31, 2012 was $41.3 million, compared with $39.2 million in the three months ended March 31, 2011, an increase of $2.1 million, or 5.4%. Our operating ratio, defined as operating expenses divided by operating revenues, was 80.1% in the three months ended March 31, 2012, compared with 79.6% in the three months ended March 31, 2011. The 60-day closure of the Edith River Bridge reduced our operating income by approximately $5 million in the three months ended March 31, 2012.
Our effective income tax rate in the three months ended March 31, 2012 was 35.6%, compared with 27.7% in the three months ended March 31, 2011. The higher tax rate was driven primarily by the expiration of the Short Line Tax Credit (described in Note 7 to our Consolidated Financial Statements included elsewhere in this Form 10-Q) on December 31, 2011.
Net income in the three months ended March 31, 2012 was $22.2 million, compared with net income of $22.1 million in the three months ended March 31, 2011. Our diluted earnings per share (EPS) in the three months ended March 31, 2012 were $0.52 with 43.1 million weighted average shares outstanding, compared with diluted EPS of $0.52 with 42.5 million weighted average shares outstanding in the three months ended March 31, 2011.
During the three months ended March 31, 2012, we generated $27.7 million in cash flow from operating activities from continuing operations. During the same period, we purchased $50.3 million of property and equipment, including $24.5 million for new locomotives and wagons in Australia. These payments were partially offset by $8.4 million in cash received from outside parties for capital spending and $1.6 million in proceeds from the disposition of property and equipment.

16


Changes in Operations
United States
Hilton & Albany Railroad, Inc.: In November 2011, our newly formed subsidiary, the Hilton & Albany Railroad, Inc. (HAL), signed an agreement with Norfolk Southern Railway Company (NS) to lease and operate a 56-mile segment of NS track that runs from Hilton, Georgia to Albany, Georgia. Operations commenced on January 1, 2012. The HAL handles primarily overhead traffic between NS and our following railroads: The Bay Line Railroad, L.L.C.; Chattahoochee Bay Railroad, Inc.; Chattahoochee Industrial Railroad; and Georgia Southwestern Railroad, Inc. In addition, the HAL serves several local agricultural and aggregate customers in southwest Georgia. The results from HAL’s operations have been included in our statement of operations since January 1, 2012 and are included in our North American & European Operations segment.
Arizona Eastern Railway Company: On September 1, 2011, we acquired all of the capital stock of Arizona Eastern Railway Company (AZER). We paid the seller $89.5 million in cash at closing, which included a reduction to the purchase price of $0.6 million for the estimated working capital adjustment. Based on the final working capital adjustment, we recorded an additional $0.8 million of purchase price in December 2011, which was paid to the seller in January 2012. We incurred $0.6 million of acquisition costs related to this transaction through December 31, 2011, which were expensed as incurred. The results from AZER’s operations have been included in our statement of operations since September 1, 2011 and are included in our North American & European Operations segment.
Headquartered near Miami, Arizona, with 43 employees and 10 locomotives, AZER owns and operates two rail lines totaling approximately 200 track miles in southeast Arizona and southwest New Mexico that are connected by 52 miles of trackage rights over the Union Pacific Railroad. The largest customer on AZER is Freeport-McMoRan Copper & Gold Inc. (Freeport-McMoRan). AZER provides rail service to Freeport-McMoRan’s largest North American copper mine and its North American smelter, hauling copper concentrate, copper anode, copper rod and sulfuric acid. In conjunction with the transaction, AZER and Freeport-McMoRan entered into a long-term transportation agreement.
Discontinued Operations
The net assets, results of operations and cash flows of our remaining Mexican subsidiary, GW Servicios S.A., which were classified as discontinued operations, were not material as of and for the three months ended March 31, 2012 and 2011. The Company does not expect any material future adverse financial impact from its remaining Mexican subsidiary.
Results from Continuing Operations
When comparing our results from continuing operations from one reporting period to another, it is important to consider that we have historically experienced fluctuations in revenues and expenses due to changing economic conditions, acquisitions, competitive forces, changes in foreign currency exchange rates, one-time freight moves, fuel price fluctuations, customer plant expansions and shut-downs, sales of property and equipment, derailments and weather-related conditions, such as hurricanes, cyclones, tornadoes, droughts, heavy snowfall, unseasonably warm or cool weather, freezing and flooding. In periods when these events occur, results of operations are not easily comparable from one period to another. Finally, certain of our railroads have commodity shipments that are sensitive to general economic conditions, such as steel products, paper products and lumber and forest products. However, shipments of other commodities are relatively less affected by economic conditions and are more closely affected by other factors, such as inventory levels maintained at customer plants (coal), winter weather (salt and coal) and seasonal rainfall (South Australian grain). As a result of these and other factors, our operating results in any reporting period may not be directly comparable to our operating results in other reporting periods.
Three Months Ended March 31, 2012 Compared with Three Months Ended March 31, 2011
Operating Revenues
The following table breaks down our operating revenues into new operations and existing operations for the three months ended March 31, 2012 and 2011 (dollars in thousands):
 
2012
 
2011
 
Increase/(Decrease) 
in Total Operations
 
Increase/(Decrease) 
in Existing Operations
 
 
 
Total
Operations
 
New
Operations
 
Existing
Operations
 
Total
Operations
 
Amount
 
%
 
Amount
 
%
 
Currency Impact
Freight revenues
$
144,584

 
$
6,363

 
$
138,221

 
$
132,805

 
$
11,779

 
8.9
 %
 
$
5,416

 
4.1
 %
 
$
1,866

Non-freight revenues
62,852

 
352

 
62,500

 
59,106

 
3,746

 
6.3
 %
 
3,394

 
5.7
 %
 
464

Total operating revenues
$
207,436

 
$
6,715

 
$
200,721

 
$
191,911

 
$
15,525

 
8.1
 %
 
$
8,810

 
4.6
 %
 
$
2,330

Carloads
222,178

 
4,785

 
217,393

 
244,556

 
(22,378
)
 
(9.2
)%
 
(27,163
)
 
(11.1
)%
 
 

17


Freight Revenues
The following table compares freight revenues, carloads and average freight revenues per carload for the three months ended March 31, 2012 and 2011 (dollars in thousands, except average freight revenues per carload):
 
Freight Revenues
 
Carloads
 
Average Freight
Revenues Per
Carload
 
2012
 
2011
 
2012
 
2011
 
 
 
 
Commodity Group
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
2012
 
2011
Intermodal*
$
18,702

 
12.9
%
 
$
17,931

 
13.5
%
 
13,456

 
6.1
%
 
13,718

 
5.6
%
 
$
1,390

 
$
1,307

Coal & Coke
15,062

 
10.4
%
 
18,871

 
14.2
%
 
31,999

 
14.4
%
 
54,204

 
22.2
%
 
471

 
348

Farm & Food Products
19,392

 
13.4
%
 
16,654

 
12.5
%
 
32,727

 
14.7
%
 
30,882

 
12.6
%
 
593

 
539

Pulp & Paper
15,959

 
11.1
%
 
14,779

 
11.1
%
 
24,776

 
11.2
%
 
24,309

 
9.9
%
 
644

 
608

Metallic Ores**
11,815

 
8.2
%
 
12,190

 
9.2
%
 
7,087

 
3.2
%
 
6,969

 
2.8
%
 
1,667

 
1,749

Metals
16,756

 
11.6
%
 
11,337

 
8.5
%
 
26,671

 
12.0
%
 
22,540

 
9.2
%
 
628

 
503

Minerals & Stone
10,729

 
7.4
%
 
9,666

 
7.3
%
 
30,116

 
13.5
%
 
30,727

 
12.6
%
 
356

 
315

Chemicals & Plastics
14,240

 
9.9
%
 
10,464

 
7.9
%
 
17,046

 
7.7
%
 
14,349

 
5.9
%
 
835

 
729

Lumber & Forest Products
7,827

 
5.4
%
 
7,389

 
5.6
%
 
15,838

 
7.1
%
 
15,575

 
6.4
%
 
494

 
474

Petroleum Products
7,578

 
5.2
%
 
6,450

 
4.9
%
 
8,031

 
3.6
%
 
7,788

 
3.2
%
 
944

 
828

Auto & Auto Parts
2,060

 
1.4
%
 
2,146

 
1.6
%
 
2,406

 
1.1
%
 
2,890

 
1.2
%
 
856

 
743

Other
4,464

 
3.1
%
 
4,928

 
3.7
%
 
12,025

 
5.4
%
 
20,605

 
8.4
%
 
371

 
239

Total
$
144,584

 
100.0
%
 
$
132,805

 
100.0
%
 
222,178

 
100.0
%
 
244,556

 
100.0
%
 
$
651

 
$
543

______________________
*
Carload amounts represent intermodal units
**
Carload amounts include carloads and intermodal units in the 2012 period
Total freight traffic decreased by 22,378 carloads, or 9.2%, in the three months ended March 31, 2012, compared with the same period in 2011. Carloads from existing operations decreased by 27,163, or 11.1%, and new operations contributed 4,785 carloads. The decrease from existing operations was principally due to decreases of 22,205 carloads of coal traffic and 8,638 carloads of other commodity traffic, which is primarily the overhead haulage of coal on behalf of a connecting carrier, partially offset by an increase of 3,188 carloads of metals traffic. All other traffic from existing operations increased by a net 492 carloads.
Average freight revenues per carload increased 19.9% to $651 in the three months ended March 31, 2012, compared with the same period in 2011. Average freight revenues per carload from existing operations increased 17.1% to $636. The increase in average freight revenues per carload from existing operations included a 1.7% benefit from the net appreciation of the Australian and Canadian dollars relative to the United States dollar. In addition, changes in the commodity mix increased average freight revenues per carload from existing operations by 3.8% and higher fuel surcharges increased average freight revenues per carload from existing operations by 1.7%. Other than these factors, average freight revenues per carload from existing operations increased by 9.9%. Average freight revenues per carload were also positively impacted by changes in the mix of customers within certain commodity groups, primarily coal, metals and other commodities.

18


The following table sets forth freight revenues by commodity group segregated into new operations and existing operations for the three months ended March 31, 2012 and 2011 (dollars in thousands): 
 
2012
 
2011
 
Increase/(Decrease) in Total
Operations
 
Increase/(Decrease) in Existing
Operations
 
Currency
Impact
Commodity Group
Total
Operations
 
New
Operations
 
Existing
Operations
 
Total
Operations
 
Amount
 
%
 
Amount
 
%
 
Intermodal
$
18,702

 
$

 
$
18,702

 
$
17,931

 
$
771

 
4.3
 %
 
$
771

 
4.3
 %
 
$
858

Coal & Coke
15,062

 
130

 
14,932

 
18,871

 
(3,809
)
 
(20.2
%)
 
(3,939
)
 
(20.9
%)
 
(2
)
Farm & Food Products
19,392

 
72

 
19,320

 
16,654

 
2,738

 
16.4
 %
 
2,666

 
16.0
 %
 
454

Pulp & Paper
15,959

 
310

 
15,649

 
14,779

 
1,180

 
8.0
 %
 
870

 
5.9
 %
 
(48
)
Metallic Ores
11,815

 
1,228

 
10,587

 
12,190

 
(375
)
 
(3.1
%)
 
(1,603
)
 
(13.2
%)
 
509

Metals
16,756

 
1,373

 
15,383

 
11,337

 
5,419

 
47.8
 %
 
4,046

 
35.7
 %
 
(36
)
Minerals & Stone
10,729

 
319

 
10,410

 
9,666

 
1,063

 
11.0
 %
 
744

 
7.7
 %
 
162

Chemicals & Plastics
14,240

 
2,829

 
11,411

 
10,464

 
3,776

 
36.1
 %
 
947

 
9.1
 %
 
(20
)
Lumber & Forest Products
7,827

 
11

 
7,816

 
7,389

 
438

 
5.9
 %
 
427

 
5.8
 %
 
(6
)
Petroleum Products
7,578

 
73

 
7,505

 
6,450

 
1,128

 
17.5
 %
 
1,055

 
16.4
 %
 
14

Auto & Auto Parts
2,060

 

 
2,060

 
2,146

 
(86
)
 
(4.0
%)
 
(86
)
 
(4.0
%)
 
(19
)
Other
4,464

 
18

 
4,446

 
4,928

 
(464
)
 
(9.4
%)
 
(482
)
 
(9.8
%)
 

Total freight revenues
$
144,584

 
$
6,363

 
$
138,221

 
$
132,805

 
$
11,779

 
8.9
 %
 
$
5,416

 
4.1
 %
 
$
1,866

The following information discusses the significant changes in freight revenues by commodity group from existing operations. Changes in average freight revenues per carload in a commodity group can be impacted by changes in customer
rates, fuel surcharges, changes in foreign currency exchange rates, as well as changes in the mix of customer traffic within a commodity group.
Intermodal revenues increased $0.8 million, or 4.3%. Average freight revenues per carload increased 6.4%, which increased revenues by $1.1 million, while intermodal traffic volume decreased 262 carloads, or 1.9%, which decreased revenues by $0.4 million. The increase in average freight revenues per carload included a benefit of $0.9 million due to the net appreciation of the Australian and Canadian dollars relative to the United States dollar.
Coal and coke revenues decreased $3.9 million, or 20.9%. Coal and coke traffic volume decreased 22,205 carloads, or 41.0%, which decreased revenues by $10.4 million, while average freight revenues per carload increased 34.2%, primarily due to a change in customer mix, which increased revenues by $6.4 million. The decrease in carloads was driven by customer-specific circumstances (for example, high inventory and an extended maintenance outage) as well as by warm winter weather, low natural gas prices and lower levels of export coal. 
Farm and food products revenues increased $2.7 million, or 16.0%. Average freight revenues per carload increased 10.2%, which increased revenues by $1.7 million, and farm and food products traffic volume increased 1,636 carloads, or 5.3%, which increased revenues by $1.0 million. The increase in average freight revenues per carload included a benefit of $0.5 million due to the net appreciation of the Australian and Canadian dollars relative to the United States dollar. The carload increase was primarily due to a strong winter wheat season in Canada.
Pulp and paper revenues increased $0.9 million, or 5.9%. Average freight revenues per carload increased 3.9%, which increased revenues by $0.6 million, and pulp and paper traffic volume increased 467 carloads, or 1.9%, which increased revenues by $0.3 million. The carload increase was primarily due to higher pulpboard traffic in the southern United States.
Metallic ores revenues decreased $1.6 million, or 13.2%, primarily due to lower volumes. Metallic ores traffic volume decreased 2,055 carloads, primarily due to the closure of a section of track at the northeastern end of the Adelaide to Darwin rail line in Australia due to the Edith River Bridge closure (described in Note 11 to our Consolidated Financial Statements included elsewhere in this Form 10-Q). Effective January 1, 2012, a metallic ores customer switched its mode of transportation from using wagons to using containers. As a result, our metallic ores traffic volume increased 1,264 carloads for an equivalent volume. The net decrease in metallic ores traffic volume was 791 carloads, or 11.4%.
Metals revenues increased $4.0 million, or 35.7%. Average freight revenues per carload increased 18.9%, primarily due to a change in customer mix, which increased revenues by $2.1 million, and metals traffic volume increased 3,188 carloads, or 14.1%, which increased revenues by $1.9 million. The carload increase was primarily due to an increase in carloads due to the expansion of a plant we serve in the southern United States. The increase in average freight revenues per carload was primarily due to a change in mix of metals traffic.

19


Minerals and stone revenues increased $0.7 million, or 7.7%. Average freight revenues per carload increased 12.1%, which increased revenues by $1.2 million, while minerals and stone traffic volume decreased 1,195 carloads, or 3.9%, which decreased revenues by $0.4 million. The carload decrease was primarily due to a decrease in rock salt shipments due to warm winter weather in the northeastern United States and the temporary closure of a government-owned rail line in Australia, partially offset by increased cement traffic in the Mid-Atlantic region of the United States.
Chemicals and plastics revenues increased $0.9 million, or 9.1%. Chemicals and plastics traffic volume increased 674 carloads, or 4.7%, which increased revenues by $0.5 million, and average freight revenues per carload increased 4.3%, which increased revenues by $0.4 million.
Petroleum products revenues increased $1.1 million, or 16.4%. Average freight revenues per carload increased 13.6%, which increased revenues by $0.9 million, and petroleum products traffic volume increased 184 carloads, or 2.4%, which increased revenues by $0.2 million.
Other freight revenues decreased $0.5 million, or 9.8%. Other traffic volume decreased 8,638 carloads, or 41.9%, which decreased revenues by $3.2 million, and average freight revenues per carload increased 55.6%, primarily due to a reduction in overhead haulage traffic, which increased revenues by $2.7 million. The carload decrease was largely driven by a decline in coal-related haulage traffic primarily resulting from warm winter weather, low natural gas prices as well as by reduced coal exports. The increase in average freight revenues per carload was primarily due to the change in mix of other traffic.
Freight revenues from all remaining commodities decreased by $0.3 million.
Non-Freight Revenues
The following table sets forth non-freight revenues for the three months ended March 31, 2012 and 2011 (dollars in thousands):
 
2012
 
2011
 
Amount
 
% of Total
 
Amount
 
% of Total
Railcar switching
$
33,037

 
52.5
%
 
$
31,016

 
52.5
%
Car hire and rental income
5,328

 
8.5
%
 
5,442

 
9.2
%
Fuel sales to third parties
5,286

 
8.4
%
 
4,419

 
7.5
%
Demurrage and storage
6,205

 
9.9
%
 
5,571

 
9.4
%
Car repair services
1,822

 
2.9
%
 
2,020

 
3.4
%
Other non-freight revenues
11,174

 
17.8
%
 
10,638

 
18.0
%
Total non-freight revenues
$
62,852

 
100.0
%
 
$
59,106

 
100.0
%
The following table sets forth non-freight revenues by new operations and existing operations for the three months ended March 31, 2012 and 2011 (dollars in thousands):
 
2012
 
2011
 
Increase/ (Decrease) in Total
Operations
 
Increase/ (Decrease) in Existing
Operations
 
Currency
Impact
 
Total
Operations
 
New
Operations
 
Existing
Operations
 
Total
Operations
 
Amount
 
%
 
Amount
 
%
 
Railcar switching
$
33,037

 
$
116

 
$
32,921

 
$
31,016

 
$
2,021

 
6.5
 %
 
$
1,905

 
6.1
 %
 
$
148

Car hire and rental income
5,328

 
124

 
5,204

 
5,442

 
(114
)
 
(2.1
)%
 
(238
)
 
(4.4
%)
 
87

Fuel sales to third parties
5,286

 

 
5,286

 
4,419

 
867

 
19.6
 %
 
867

 
19.6
 %
 

Demurrage and storage
6,205

 
46

 
6,159

 
5,571

 
634

 
11.4
 %
 
588

 
10.6
 %
 
3

Car repair services
1,822

 
71

 
1,751

 
2,020

 
(198
)
 
(9.8
)%
 
(269
)
 
(13.3
%)
 
(4
)
Other operating income
11,174

 
(5
)
 
11,179

 
10,638

 
536

 
5.0
 %
 
541

 
5.1
 %
 
230

Total non-freight revenues
$
62,852

 
$
352

 
$
62,500

 
$
59,106

 
$
3,746

 
6.3
 %
 
$
3,394

 
5.7
 %
 
$
464

Non-freight revenues increased $3.7 million, or 6.3%, to $62.9 million in the three months ended March 31, 2012, compared with $59.1 million in the three months ended March 31, 2011. The increase in non-freight revenues included a $3.4 million, or 5.7%, increase in existing operations and $0.4 million from new operations. The increase in non-freight revenues from existing operations included a benefit of $0.5 million due to the net impact from the change in foreign currency exchange rates. Other than the change in foreign currency exchange rates, non-freight revenues from existing operations increased $2.9 million, or 5.0%, primarily due to higher switching revenues in Europe, Australia and Canada.

20


The following information discusses the significant changes in non-freight revenues from existing operations.
Railcar switching revenues increased $1.9 million, or 6.1%. The increase was due to a $2.6 million increase in industrial switching revenues primarily due to new and expanded customer service contracts, partially offset by a $0.7 million decrease in port switching revenues. The decrease in port switching revenues was primarily due to a decrease in export grain traffic at our United States port operations, partially offset by an increase in shipments in the Port of Rotterdam.
Fuel sales to third parties increased $0.9 million, or 19.6%, and included a $0.5 million increase resulting from a 10.7% increase in the average price per gallon and a $0.4 million increase resulting from an 8.1% increase in gallons sold.
Demurrage and storage revenues increased $0.6 million, or 10.6%. The increase was primarily due to an increase in the number of third-party rail cars being stored in the United States.
Operating Expenses
Overview
Operating expenses were $166.1 million in the three months ended March 31, 2012, compared with $152.7 million in the three months ended March 31, 2011, an increase of $13.4 million, or 8.8%. The increase in operating expenses was attributable to an increase of $9.4 million from existing operations and $4.0 million from new operations. The increase from existing operations was primarily due to a $6.1 million increase in labor and benefits due to the hiring of new employees and annual wage and benefit increases in the three months ended March 31, 2012. In addition, the net appreciation of the Australian and Canadian dollars and the Euro relative to the United States dollar resulted in a $1.5 million increase in operating expenses from existing operations.
Operating Ratios
Our operating ratio, defined as total operating expenses divided by total operating revenues, was 80.1% in the three months ended March 31, 2012, compared to 79.6% in the three months ended March 31, 2011. Changes in foreign currency exchange rates can have a material impact on our operating revenues and operating expenses, individually. However, the net impact of these foreign currency translation effects should not have a material impact on our operating ratio.
The following table sets forth a comparison of our operating expenses for the three months ended March 31, 2012 and 2011 (dollars in thousands): 
 
2012
 
2011
 
Currency
Impact
 
Amount
 
% of
Operating
Revenues
 
Amount
 
% of
Operating
Revenues
 
Labor and benefits
$
65,757

 
31.7
 %
 
$
58,082

 
30.3
 %
 
$
446

Equipment rents
9,817

 
4.8
 %
 
10,544

 
5.4
 %
 
181

Purchased services
18,031

 
8.7
 %
 
17,442

 
9.1
 %
 
513

Depreciation and amortization
17,633

 
8.5
 %
 
15,861

 
8.3
 %
 
191

Diesel fuel used in operations
21,998

 
10.6
 %
 
21,421

 
11.2
 %
 

Diesel fuel sold to third parties
4,990

 
2.4
 %
 
4,079

 
2.1
 %
 

Casualties and insurance
5,547

 
2.7
 %
 
5,438

 
2.8
 %
 
94

Materials
6,107

 
2.9
 %
 
6,583

 
3.4
 %
 
(6
)
Net gain on sale of assets
(1,230
)
 
(0.6
%)
 
(1,010
)
 
(0.5
%)