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EX-31.2 - EX-31.2 - RAILAMERICA INC /DE | g26339exv31w2.htm |
EX-21.1 - EX-21.1 - RAILAMERICA INC /DE | g26339exv21w1.htm |
EX-31.1 - EX-31.1 - RAILAMERICA INC /DE | g26339exv31w1.htm |
EX-32.2 - EX-32.2 - RAILAMERICA INC /DE | g26339exv32w2.htm |
EX-32.1 - EX-32.1 - RAILAMERICA INC /DE | g26339exv32w1.htm |
EX-23.1 - EX-23.1 - RAILAMERICA INC /DE | g26339exv23w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2010, or
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 number 001-32579
RAILAMERICA, INC.
(Exact name of registrant as specified in its charter)
Delaware | 65-0328006 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
7411 Fullerton Street, Suite 300, Jacksonville, Florida | 32256 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (800) 342-1131
Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS | NAME OF EACH EXCHANGE ON WHICH REGISTERED | |
Common Stock, $.01 Par Value | New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes [ ] No [X]
The aggregate market value of voting and non-voting common equity held by non-affiliates of the
registrant at the close of business on June 30, 2009 was $228,803,600 based on the closing sale
price as reported on the New York Stock Exchange.
The number of shares outstanding of the registrants Common Stock, $.01 par value per share, as of
March 3, 2011 was 55,258,060.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12, 13 and 14) will be incorporated by
reference from the registrants Definitive Proxy Statement for its 2011 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.
TABLE OF CONTENTS
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Certain statements in this Annual Report on Form 10-K and other information we provide from
time to time may constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 including, but not necessarily limited to, statements relating to
future events and financial performance. Words such as anticipates, expects, intends,
plans, projects, believes, may, will, would, could, should, seeks, estimates
and variations on these words and similar expressions are intended to identify such forward-looking
statements. These statements are based on managements current expectations and beliefs and are
subject to a number of factors that could lead to actual results materially different from those
described in the forward-looking statements. We can give no assurance that its expectations will be
attained. Accordingly, you should not place undue reliance on any forward-looking statements
contained in this report. Factors that could have a material adverse effect on our operations and
future prospects or that could cause actual results to differ materially from our expectations
include, but are not limited to, prolonged capital markets disruption and volatility, general
economic conditions and business conditions, our relationships with Class I railroads and other
connecting carriers, our ability to obtain railcars and locomotives from other providers on which
we are currently dependent, legislative and regulatory developments including rulings by the
Surface Transportation Board or the Railroad Retirement Board, strikes or work stoppages by our
employees, our transportation of hazardous materials by rail, rising fuel costs, goodwill
assessment risks, acquisition risks, competitive pressures within the industry, risks related to
the geographic markets in which we operate; and other risks detailed in our filings with the
Securities and Exchange Commission (SEC). In addition, new risks and uncertainties emerge from
time to time, and it is not possible for us to predict or assess the impact of every factor that
may cause our actual results to differ from those contained in any forward-looking statements. Such
forward-looking statements speak only as of the date of this report. We expressly disclaim any
obligation to release publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in our expectations with regard thereto or change in events,
conditions or circumstances on which any statement is based. Except where the context otherwise
requires, the terms RailAmerica, we, us, or our refer to the business of RailAmerica, Inc.
and its consolidated subsidiaries.
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a leading owner and operator of short line and regional freight railroads in North
America, operating a portfolio of 40 individual railroads with approximately 7,300 miles of track
in 27 U.S. states and three Canadian provinces. Our railroad portfolio represents an important
component of North Americas transportation infrastructure, carrying large quantities of freight
for a highly diverse customer base. In 2010, our railroads transported over 860,000 carloads of
freight for approximately 1,500 customers, hauling a wide range of products such as farm and food
products, lumber and forest products, paper and paper products, metals, chemicals and coal.
We were incorporated in Delaware on March 31, 1992 as a holding company for two pre-existing
railroad companies. On February 14, 2007, we were acquired by RR Acquisition Holding LLC, an entity
wholly-owned by certain private equity funds managed by an affiliate of Fortress Investment Group
LLC (Fortress). On October 16, 2009, we completed an initial public offering. During the period
from our formation until today, we have grown both through the expansion of the traffic base on our
existing railroads and through acquisitions of additional North American railroads.
Our Internet website address is www.railamerica.com. We make available free of charge, on or
through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to these reports. The SEC maintains an Internet site that
contains reports, proxy and information statements and other information regarding issuers that
file electronically with the SEC at http://www.sec.gov. We also make available on our
website other registration statements, prospectuses, and reports filed with the SEC under the
Securities Act of 1933, as amended (the Securities Act) and the Securities Exchange Act of 1934,
as amended (the Exchange Act), including proxy statements and reports filed by officers and
directors under Section 16(a) of the Exchange Act. These filings may be found by selecting the
option entitled SEC FILINGS in the INVESTOR RELATIONS section on our website. Additionally, our
corporate governance guidelines, board committee charters, code of business conduct and ethics and
code of ethics for principal executive and senior financial officers are available on our website
and in print to any stockholder who requests them. Information contained in or connected to our
website is not part of this report.
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BUSINESS STRATEGY
We plan to grow our revenue, cash flow and earnings by employing the following growth
strategies:
Growing freight revenue: We are focused on growing our freight revenue by seeking new
business opportunities at our individual railroads and by centralizing key commercial and pricing
decisions. We believe that shippers often seek to locate their operations on short lines because of
possible access to multiple Class I railroads and the resulting negotiating leverage it affords
them. To this end, our commercial team actively solicits customers to locate their manufacturing
and warehousing facilities on our railroads. We also seek to generate new business by converting
customers located on or near our railroads from other modes of transportation to rail. Members of
our senior management team have significant prior experience in the marketing departments of both
Class I and short line railroads. Additionally, by centralizing and carefully analyzing pricing
decisions based on prevailing market conditions and competitive analysis, we leverage our expertise
in setting rates for freight services.
Expanding our non-freight services and revenue: We intend to continue to expand and grow the
non-freight services we offer to both our rail customers and other parties. Non-freight services
offered to our rail customers include switching (or managing and positioning railcars within a
customers facility), storing customers excess or idle railcars on inactive portions of our rail
lines, third party railcar repair, engineering infrastructure services and demurrage. These
services leverage our existing customer relationships and generate additional revenue at attractive
margins with minimal capital investment. We also seek to grow our revenue from non-transportation
uses of our land holdings such as land leases, crossing or access rights, subsurface rights,
signboards and cellular communication towers, among others. These sources of revenue are an
important area of focus by our management as such revenue has minimal associated operating costs or
capital expenditures and represents a recurring, high margin cash flow stream.
Pursuing opportunistic acquisitions: The North American short line and regional railroad
industry is highly fragmented, with approximately 556 short line and regional railroads operating
approximately 45,200 miles of track. We believe that opportunistically acquiring additional short
line and regional railroads, or other railroad-related or transportation-related businesses, will
enable us to grow our revenue and achieve a number of additional benefits including, among others,
expanding and enhancing our services, further diversifying our portfolio and achieving economies of
scale by leveraging senior management experience and corporate costs over a broader revenue base.
Continuing to improve operating efficiency and lowering costs: We continue to focus on
driving financial improvement through a variety of cost savings initiatives. To identify and
implement cost savings, we have organized our 40 railroads into five regional groups which, in
turn, report to senior management where many functions such as pricing, purchasing, capital
spending, finance, insurance, real estate and other administrative functions are centralized. We
believe that this strategy enables us to achieve cost and pricing efficiencies and leverage the
experience of senior management in commercial, operational and strategic decisions. To date, we
have implemented a number of cost savings initiatives broadly at all of our railroads targeting
safer operations, lower fuel consumption, more efficient equipment utilization and lower costs for
third party services, among others, and continue to be extremely focused on ongoing opportunities
to further reduce our costs.
INDUSTRY OVERVIEW
The North American economy is dependent on the movement of freight ranging from raw materials
such as coal, ores, aggregates, lumber and grain to finished goods, such as food products, paper
products, automobiles and machinery. Railroads represent the largest component of North Americas
freight transportation industry, carrying more freight than any other mode of transportation on a
ton-mile basis. With a network of over 139,000 miles of track in the U.S., railroads link
businesses with each other domestically and with international markets through connections with
ports and other international terminals.
Industry Structure
According to the Association of American Railroads (AAR), there are 563 railroads in the
United States operating over 139,000 miles of track. The AAR classifies railroads operating in the
United States into one of three categories based on the amount of revenues and track-miles. Class I
railroads, which are individual railroads with over $378.8 million in revenues in 2009, represent
approximately 93% of total rail revenues. Regional and local/short line railroads operate
approximately 45,200 miles of track in the United States. The primary function of these smaller
railroads is to provide feeder traffic to the Class I carriers. Regional and local/short line
railroads combined account for approximately 7% of total industry rail revenues.
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Aggregate | ||||||||||||||||
Miles | % of | |||||||||||||||
Classification of Railroads | Number | Operated | Revenue | Revenues and Miles Operated in 2009 | ||||||||||||
Class I (1) | 7 | 93,921 | 93 | % | Over $378.8 million |
|||||||||||
Regional | 23 | 12,804 | 3 | % | $30.3 to $378.8 million and/or 350 or more miles operated with a minimum revenue of $20 million |
|||||||||||
Local/Short line | 533 | 32,393 | 4 | % | Less than $30.3 million and/or less than 350 miles or more than 350 miles and less than $20 million in revenue |
|||||||||||
Total | 563 | 139,118 | 100 | % | ||||||||||||
(1) | Includes CSX Transportation, BNSF Railway Co., Norfolk Southern, Kansas City Southern Railway Company, Union Pacific, Canadian National Railway and Canadian Pacific Railroad Co. |
Source: Association of American Railroads, Railroad Facts, 2010 Edition.
Class I railroads operate across many different states and concentrate largely, though not
exclusively, on long-haul, high density intercity traffic lanes. The six largest railroads in North
America are BNSF Railway, Union Pacific, Norfolk Southern, CSX Transportation, Canadian National
Railway, and Canadian Pacific Railroad Company. Regional railroads typically operate 400-650 miles
of track and provide service to selected areas of the country, mainly connecting neighboring states
and/or economic centers. Typically short line railroads serve as branch lines connecting customers
with Class I railroads. Short line railroads have more predictable and straightforward operations
as they generally perform point-to-point service over short distances, without the complex networks
associated with the large Class I railroads.
Use of regional and short line railroads is largely driven by interchange traffic between
carriers. In many cases, a short line will originate the freight
transport and hand off to a Class I railroad which will transport the freight the majority of the distance,
usually hundreds or thousands of miles. The Class I will then drop
the freight off with a short line, which provides the
final step of service directly to the customer. Most short line railroads depend on Class I traffic
for a substantial portion of their revenue. Our portfolio of 40 railroads is a mix of regional and
short line railroads.
Regional and Short line Railroads
Short lines and regional railways have always been a part of the rail industry in North
America. In the 1800s, most North American railroads were constructed to serve a local or regional
interest. Todays Class I railroads are descended from hundreds of short lines and regionals that
came together in successive waves of consolidation.
During the 1980s the number of regional and short line railroads increased dramatically.
Deregulation of U.S. railroads simplified abandonment and sales regulations, allowing the major
carriers to gain many of the savings of abandonment while preserving the traffic on the rail lines.
Carriers created through this divestiture process now account for the majority of regional and
short line railroads. Short line and regional railroads today serve important roles in moving
freight within their service areas and function as a critical traffic feeder network for the
Class I railroads.
Over the past decade, the number of regional and short line railroads has remained relatively
constant. While some new entrants were formed through spin-offs or divestitures of Class I
railroads, they have generally been offset by other existing regional and short lines either
exiting the business or being merged with or acquired by other railroads. With the growth of
multi-carrier holding companies, the number of operators of regional and short line railroads has
decreased. The consolidation brought on by multi-carrier holding companies has induced a number of
shippers with private railroads to sell those railroads to the major short line operators.
Similarly, Class I railroads sell and lease rail lines to smaller rail entities in order to address
a range of issues impacting costs and productivity.
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RAIL TRAFFIC
Revenue Model
We generate freight revenue under three different types of service, which are summarized
below.
% of Freight | ||||||||
Service Type | Description | Revenue | ||||||
Interchange | Freight transport between a customers facility and a connection point with a Class I railroad |
87 | % | |||||
Local | Freight that both originates and terminates on the same line |
4 | % | |||||
Bridge | Freight transport from one connecting Class I railroad to another |
9 | % |
For the majority of our customers, our railroads transport freight between a customers
facility or plant and a connection point (interchange) with a national Class I railroad. Each of
our 40 railroads connects with at least one Class I railroad, and in many cases connects with
multiple Class I railroads. Interchange circumstances vary by customer shipping needs with freight
either (i) originating at the customers facility (such as a coal mine, an ethanol production plant
or a lumber yard) for transport by the Class I railroad via the interchange to other North American
destinations or ports or (ii) received from the Class I interchange and hauled to a customers
plant where the freight is subsequently consumed or stored (such as a coal-burning power generation
plant). In other cases, a RailAmerica rail line transports freight that both originates and
terminates on the same line, which is referred to as local traffic, or provides a pass-through
connection between one Class I railroad and another railroad without the freight originating or
terminating on the line, which is known as bridge traffic.
Typically, we provide our freight services under a contract or similar arrangement with either
the customer located on our rail line or the connecting Class I railroad. Contracts and
arrangements vary in terms of duration, pricing and volume requirements. Because we normally
provide transportation for only a segment of a shipments total distance, with the Class I railroad
carrying the freight the majority of the distance, as a convenience, customers are generally billed
once for the movement of their freight, typically by the Class I carrier, for the total cost of
rail transport. The Class I railroad is obligated to pay us in a timely manner upon delivery of
service regardless of whether or when the Class I railroad actually receives the total payment from
the customer.
Our railroads are often integrated into a customers facility and serve as an important
component of that customers distribution or input. In many circumstances, our customers have made
significant capital investments in facilities on or near our railroads (as in the case of electric
utilities, industrial plants or major warehouses) or are geographically unable to relocate (as in
the case of coal mines and rock quarries). The quality of our customers and our level of
integration with their facilities provide a stable and predictable revenue base.
Freight Revenue
Commodities
Products hauled over our network include a dozen major commodity groups, such as coal, forest
products, chemicals, agricultural products, food products, metallic ores and metals, and petroleum
products. Agricultural products traffic represented the largest contributor to freight revenue at
16% in 2010. The top ten commodities represented approximately 95% of total freight revenue earned
in 2010.
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Year ended December 31, 2010 | Year ended December 31, 2009 | |||||||||||||||||||||||
Average Freight | Average Freight | |||||||||||||||||||||||
Freight | Revenue per | Freight | Revenue per | |||||||||||||||||||||
Revenue | Carloads | Carload | Revenue | Carloads | Carload | |||||||||||||||||||
(Dollars in thousands, except average freight revenue per carload) | ||||||||||||||||||||||||
Agricultural Products |
$ | 63,999 | 132,952 | $ | 481 | $ | 56,458 | 126,683 | $ | 446 | ||||||||||||||
Chemicals |
59,038 | 96,105 | 614 | 47,475 | 82,083 | 578 | ||||||||||||||||||
Coal |
39,880 | 178,735 | 223 | 36,914 | 178,028 | 207 | ||||||||||||||||||
Metallic Ores and Metals |
37,825 | 66,626 | 568 | 23,819 | 41,602 | 573 | ||||||||||||||||||
Pulp, Paper and Allied Products |
37,379 | 65,308 | 572 | 32,339 | 62,816 | 515 | ||||||||||||||||||
Non-Metallic Minerals and Products |
34,646 | 80,376 | 431 | 31,622 | 75,766 | 417 | ||||||||||||||||||
Food or Kindred Products |
28,027 | 56,812 | 493 | 25,386 | 52,298 | 485 | ||||||||||||||||||
Forest Products |
27,017 | 47,048 | 574 | 26,698 | 46,999 | 568 | ||||||||||||||||||
Waste and Scrap Materials |
23,765 | 57,121 | 416 | 20,232 | 53,706 | 377 | ||||||||||||||||||
Petroleum |
19,542 | 41,952 | 466 | 19,433 | 41,960 | 463 | ||||||||||||||||||
Other |
10,937 | 29,883 | 366 | 17,737 | 49,613 | 358 | ||||||||||||||||||
Motor Vehicles |
6,694 | 11,553 | 579 | 6,454 | 17,458 | 370 | ||||||||||||||||||
Total |
$ | 388,749 | 864,471 | $ | 450 | $ | 344,567 | 829,012 | $ | 416 | ||||||||||||||
Customers
In 2010, we served approximately 1,500 customers in North America. Although most of our North
American railroads have a well-diversified customer base, several smaller rail lines have one or
two dominant customers. In 2010 and 2009, our 10 largest customers
accounted for approximately 18% and 20%
of our freight revenue, respectively, with no individual customer accounting for more than approximately 5% of
freight revenue.
Pricing
Our contracts typically stipulate either inflation-based or market-based pricing. Market-based
pricing is based on negotiated rates. Pricing and escalation terms for these contracts are
negotiated prior to the signing or renewal of a contract. This type of pricing provides us the
ability to price contracts at prevailing market rates. Inflation-based pricing is based on a fixed
revenue per carload with inflation-based escalators. This type of pricing is common for handling
line railroads where the contract is with an interchanging Class I railroad. These contracts are
typically long-term and were often entered into at the time the short line was purchased from the
Class I.
We operate fuel surcharge programs that vary by railroad and by customer. The goal of these
programs is to offset the majority of fuel price increases by charging customers a fuel surcharge
on top of their regular contracted rates. Fuel surcharge programs are typically either
revenue-based or mileage-based. Revenue-based programs charge a surcharge based on additional
revenue per carload while mileage-based programs charge a surcharge based on miles hauled. Both
programs charge their surcharge based on fuel price per gallon above a threshold price.
Approximately 75% of fuel price increases are offset directly by fuel surcharges, while additional
cost recovery is obtained through increases in revenue per carload upon contract renewal or regular
rate updates.
Contracts
A substantial portion of our freight revenue is generated under contracts and similar
arrangements with either the customers we serve or the Class I railroads with which we connect.
Approximately 68% of our total freight revenue is generated under contracts. Individual contracts
vary in terms of duration, pricing and volume requirements, but can generally be categorized as
follows:
Contracts directly with customers/shippers: In many cases, our individual railroads
maintain a contract with the customer that they directly serve. Typically the customer has
significant rail infrastructure within its facility and is a major shipper or receiver of
industrial freight. Contracts stipulate the term and pricing mechanics and often include minimum
customer volume requirements with liquidated damages paid to us to the extent volumes fall below
certain levels. In general, these contracts are one to three years in length, although in certain
instances the term can be longer.
Contracts directly with Class I railroads: In these cases, our individual railroads act as
an agent for the connecting Class I railroad, with the Class I railroad typically maintaining a
contract directly with the customer/shipper for the entire length of haul.
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The Class I railroad pays us upon providing the service for its portion of the total haul,
and the Class I railroad pays us regardless of whether the customer pays the Class I which
results in low credit exposure and timely payment. These contracts are typically long-term in
nature with an average duration of approximately 25 years.
Published rate, no contract: In the remaining cases, our individual railroads generate
freight revenue using quoted revenue per carload based on the type of freight service and market
environment. In all instances this revenue is generated directly from customers and shippers.
Rates can typically be adjusted as market conditions merit although some of our larger customers
often request a private rate that provides more price certainty over a longer period of time.
While we do not serve customers under signed contracts in these cases, we have longstanding
relationships with our customers and in many instances we are the only rail carrier at that
customers facility. Moreover, the heavy nature of the freight shipped by the customer and/or the
long distances carried competitively positions us favorably versus other modes of transportation.
Non-Freight Revenue
In addition to providing freight services, we also generate non-freight revenue from other
sources such as railcar storage, demurrage, engineering infrastructure
services, leases of equipment to other users (including Class I
railroads), and real estate leases and use fees. Right-of-way income is generated through crossing
licenses and leases with fiber optic, telecommunications, advertising, parking and municipal users.
These sources of revenue and value are an important area of focus by our management as revenue from
real estate and right-of-way has minimal associated operating costs or capital expenditures and
represents a recurring, stable cash flow stream.
Competition
Railroads compete against each other and other forms of freight transportation based on cost,
location and service. The cost of transporting goods and services via different forms of freight
transportation is a major factor in determining which means of transportation a shipper will
utilize. With respect to location, potential customers often experience geographic constraints that
significantly impact the relative freight transportation costs of different alternatives. For
example, a shipper can be constrained by railroads trackage, accessible waterways, access to
pipelines and proximity to major highways. As a result, short line and regional railroad operators
often evaluate the feasibility of other forms of freight transportation available to a customer
when developing their rate and service offerings.
Some short line and regional railroad customers have multiple forms of freight transportation
available. Depending on circumstances, truck, water, or other railroads may be competitive
alternatives for a shipment. In such instances, customers will compare both the relative costs,
reliability of on-time delivery and quality of service when determining what mode(s) of transport
to use.
The railroad industry has increased its share of freight ton-miles compared to other forms of
freight transportation over the past quarter-century. Since deregulation in 1980, the railroad
industry has continually improved its cost structure compared to other forms of freight
transportation as it consumes less fuel and has lower labor costs per ton transported than other
forms of freight transportation. According to the AAR, railroads are estimated to be approximately
four times more fuel efficient than truck transportation and a single train can haul the equivalent
of up to approximately 280 trucks. In 1980, one gallon of diesel fuel moved one ton of freight by
rail an average of 235 miles, versus 2009 where the equivalent gallon of fuel moved one ton of
freight an average of 480 miles by rail representing a 104% increase over 1980. As a result, the
railroad industrys share of U.S. freight ton-miles has steadily increased from 30% in 1980 to 43%
in 2009.
EMPLOYEES
Currently, we have approximately 1,836 employees of which 1,087 are non-unionized and 749 are
unionized. Unions representing our employees are highly-fragmented, with representation at the
railroad-level rather than system-wide. In total, our railroads are party to 31 labor agreements,
which are separately negotiated by the individual railroads.
SAFETY
We endeavor to conduct safe railroad operations for the benefit and protection of employees,
customers and the communities served by our railroads. Our safety
program involves all of our employees and is administered by
each Regional Vice President. Operating personnel are trained and certified in train operations,
hazardous materials handling, personal safety and all other areas subject to federal regulations.
Each U.S. employee involved in train operations is subject to pre-employment and random drug
testing as required by federal regulation. We believe that each of our North American railroads
complies in all material respects with federal, state,
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provincial and local regulations.
Additionally, each railroad is given flexibility to develop more
stringent safety rules based on local requirements or practices. We also
participate in committees of the AAR, governmental and industry sponsored safety programs including
Operation Lifesaver (the national grade crossing awareness program) and numerous American Short
Line and Regional Railroad Association Committees. Our Federal Railroad Administration (FRA)
reportable injury frequency ratio, measured as reportable injuries per 200,000 man hours worked,
was 2.1 in 2010 as compared to 1.8 in 2009. Our total FRA reportable train accidents decreased to
30 in the year ended December 31, 2010 from 34 in the year ended December 31, 2009.
ENVIRONMENTAL
Our rail operations are subject to various federal, state, provincial and local laws and
regulations relating to pollution and the protection of the environment. In the United States,
these environmental laws and regulations, which are implemented principally by the federal
Environmental Protection Agency (the U.S. EPA) and comparable state agencies, govern such matters
as the management of wastes, the discharge of pollutants into the air and into surface and
underground waters, the manufacture and disposal of regulated substances and remediation of
contaminated soil and groundwater. Similarly, in Canada, these functions are administered at the
federal level by Environment Canada and the Ministry of Transport and comparable agencies at the
provincial level.
We believe that our railroads operate in material compliance with current environmental laws
and regulations. We estimate that any expenses incurred in maintaining compliance with current
environmental laws and regulations will not have a material effect on our earnings or capital
expenditures. However, there can be no assurance that new, or more stringent enforcement of
existing, requirements or discovery of currently unknown conditions will not result in significant
expenditures in the future.
In August 2005 incident on the Indiana & Ohio
Railway (IORY), Styrene contained in a parked railcar was vented to the atmosphere, due
to a chemical reaction. Styrene is a potentially hazardous chemical used to make plastics, rubber
and resin. In response to the incident, local public officials temporarily evacuated residents and
businesses from the immediate area until public authorities confirmed that the tank car no longer
posed a threat. As a result of the incident, several civil lawsuits were filed, and claims
submitted, by various individuals, businesses and the City of Cincinnati against us and others
connected to the tank car. Motions for class action certification were filed. Settlements were
achieved in all these matters including all claims of business interruption.
The IORY/Styrene incident also triggered inquiries from the FRA and certain other federal,
state and local authorities. A settlement was reached with the FRA, requiring payment of a $50,000
fine but no admission of liability by IORY. The principal pending
matter was a criminal
investigation by the U.S. EPA under the federal Clean Air Act (CAA). Because of the chemical
release, the U.S. EPA investigated whether criminal negligence contributed to the incident, and
whether charges should be pressed under the CAA. The U.S. EPA has pursued extensive discovery and
engaged our counsel on several occasions. A series of conferences with our attorneys and the U.S.
EPA attorneys took place through 2009 and into 2011, at which times legal theories and evidence
were discussed in an effort to influence the U.S. EPAs charging decision. The IORY submitted a
proffer addendum in May 2009 analyzing its compliance under the CAA. As of December 31, 2010, we
had accrued $1.3 million for this incident.
The statute of limitations was extended by a tolling agreement as to the IORY only (the
Company had been dropped from this violation) through February 27, 2011. The U.S. EPA attorneys
decided not to press charges and allowed the statute of limitations to lapse resolving this matter.
There are
no material environmental claims currently pending or, to our
knowledge, threatened against any of our railroads.
INSURANCE
We maintain liability and property insurance coverage. Our primary liability policies have
self-insured retentions of up to $2.0 million per occurrence applicable as to all of our railroads,
except for Kiamichi Railroad Company L.L.C. and Otter Tail Valley Railroad Company, Inc. where the
self-insured retention is $50,000 per occurrence. In addition, we maintain excess liability
policies that provide supplemental coverage for losses in excess of our primary policy limits of up
to $200 million per occurrence.
With respect to the transportation of hazardous commodities, our liability policies cover
sudden releases of hazardous materials, including expenses related to evacuation, up to the same
excess coverage limits and subject to the same self-insured retentions. Personal injuries
associated with grade crossing accidents are also covered under liability policies.
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Employees of our United States railroads are covered by the Federal Employers Liability Act
(the FELA), a fault-based system under which claims resulting from injuries and deaths of
railroad employees are settled by negotiation or litigation. FELA-related claims are covered under
our liability insurance policies. Employees of our industrial switching business are covered under
workers compensation policies.
Employees of our Canadian railroads are covered by the applicable provincial workers
compensation policy, which is a no-fault compensation system outside of our liability insurance
coverage.
Our property damage policies provide coverage for track, infrastructure, business
interruption, and all locomotives and rail cars in our care custody and control. This policy
provides coverage up to $15.0 million per occurrence, subject to self-insurance retention of $1.0
million per occurrence.
REGULATION
United States. Our subsidiaries in the United States are subject to various safety and other
laws and regulations administered by numerous government agencies, including (1) regulation by the
U.S. Department of Transportation (the USDOT) and the Surface Transportation Board of the USDOT
(the STB), successor to the Interstate Commerce Commission, through the FRA, (2) labor related
statutes including the Railway Labor Act, the Railroad Retirement Act, the Railroad Unemployment
Insurance Act, and the FELA, and (3) some limited regulation by agencies in the states in which we
do business.
The STB, established by the ICC Termination Act of 1995 (the ICC Termination Act), has
jurisdiction over, among other matters, the construction, acquisition, or abandonment of rail
lines, the consolidation or merger of railroads, the assumption of control of one railroad by
another railroad, the use by one railroad of another railroads tracks through lease, joint use or
trackage rights, the rates charged for regulated transportation services, and the service provided
by rail carriers.
As a result of the 1980 Staggers Rail Act (the Staggers Rail Act), the rail industry is
trusted with considerable rate and market flexibility including the ability to obtain wholesale
exemptions from numerous provisions of the Interstate Commerce Act. The Staggers Rail Act allowed
the deregulation of all containerized and truck trailer traffic handled by railroads. Requirements
for the creation of new short line railroads or the expansion of existing short line railroads were
substantially expedited and simplified under the exemption process. On regulated traffic, railroads
and shippers are permitted to enter into contracts for rates and provision of transportation
services without the need to file tariffs. Moreover, on regulated traffic, the Staggers Rail Act
allows railroads considerable freedom to raise or lower rates without objection from captive
shippers, although certain proposed shipper-backed legislative initiatives threaten to limit some
of that pricing freedom. While the ICC Termination Act retained maximum rate regulation on traffic
over which railroads have exclusive control, the new law relieved railroads from the requirements
of filing tariffs and rate contracts with the STB on all traffic other than agricultural products.
The FRA regulates railroad safety and equipment standards, including track maintenance,
handling of hazardous shipments, locomotive and rail car inspection and repair requirements, and
operating practices and crew qualifications.
Canada. Our Canadian railroad subsidiaries are subject to regulation by various governmental
departments and regulatory agencies at the federal or provincial level depending on whether the
railroad in question falls within federal or provincial jurisdiction. A Canadian railroad generally
falls within the jurisdiction of federal regulation if the railroad crosses provincial or
international borders or if the Parliament of Canada has declared the railroad to be a federal work
or undertaking and in selected other circumstances. Any company which proposes to construct or
operate a railway in Canada which falls within federal jurisdiction is required to obtain a
certificate of fitness under the Canada Transportation Act (the CTA). Under the CTA, the sale of
a federally regulated railroad line is not subject to federal approval, although a process of
advertising and negotiating may be required in connection with any proposed discontinuance of a
federal railway. Federal railroads are governed by federal labor relations laws.
Short line railroads located within the boundaries of a single province which do not otherwise
fall within the federal jurisdiction are regulated by the laws of the province in question,
including laws as to licensing and labor relations. Most of Canadas ten provinces have enacted new
legislation, which is more favorable to the operation of short line railroads than previous
provincial laws. Many of the provinces require as a condition of licensing under the short line
railroads acts that the licensees comply with federal regulations applicable to safety and other
matters and remain subject to inspection by federal railway inspectors. Under some provincial
legislation, the sale of a provincially regulated railroad line is not subject to provincial
approval, although a process of advertising and negotiating may be required in connection with any
proposed discontinuance of a provincial railway.
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Acquisition of additional railroad operations in Canada, whether federally or
provincially regulated, may be subject to review under the Investment Canada Act (the ICA), a
federal statute which applies to the acquisition of a Canadian business or establishment of a new
Canadian business by a non-Canadian. In the case of an acquisition that is subject to review, the
non-Canadian investor must observe a statutory waiting period prior to completion and satisfy the
Minister responsible for the administration of the ICA that the investment will be of net benefit
to Canada, giving regard to certain evaluative factors set out in the legislation.
Any contemplated acquisitions may also be subject to the provisions of the Competition Act
(Canada) (the CA). The CA contains provisions relating to premerger notification as well as
substantive merger provisions. An acquisition that exceeds certain financial thresholds set out in
the CA may be subject to notification and observance of a statutory waiting period prior to
completion, during which time the Commissioner of Competition (the Commissioner) will evaluate
the impact of the acquisition upon competition. In addition, the Commissioner has the jurisdiction
under the CA to review an acquisition that is a merger within the meaning of the CA in certain
circumstances, even where notification is not filed.
RAILROAD RETIREMENT
Railroad industry personnel are covered by the Railroad Retirement System instead of Social
Security. Our contributions under the Railroad Retirement System have been approximately triple
those of employees in industries covered by Social Security. The Railroad Retirement System, funded
primarily by payroll taxes on covered employers and employees, includes a benefit roughly
equivalent to Social Security (Tier I), an additional benefit similar to that allowed in some
private defined-benefit plans (Tier II), and other benefits. For 2010, the Railroad Retirement
System required up to a 19.75% contribution by railroad employers on eligible wages, while the
Social Security and Medicare Acts only required a 7.65% contribution on similar wage bases.
ITEM 1A. RISK FACTORS
Risks Related to Our Business
Volatile macroeconomic and business conditions have and could continue to impact our business
negatively.
The global financial markets recently have undergone and may continue to experience
significant volatility and disruption. The sustainability of an economic recovery is uncertain and
additional macroeconomic, business and financial disruptions could have a material adverse effect
on our operating results, financial condition and liquidity. Certain of our customers and suppliers
have been directly affected by the economic downturn and continue to face credit issues and could
experience cash flow problems that have and could continue to give rise to payment delays,
increased credit risk, bankruptcies and other financial hardships that could decrease the demand
for our rail services. Adverse economic conditions could also affect our costs for insurance and
our ability to acquire and maintain adequate insurance coverage for risks associated with the
railroad business if insurance companies experience credit downgrades or bankruptcies.
Given the asset intensive nature of our business, the recent economic downturn increases the
risk of significant asset impairment charges since we are required to assess for potential
impairment of non-current assets whenever events or changes in circumstances, including economic
circumstances, indicate that the respective assets carrying amount may not be recoverable. This
may limit our ability to sell our assets to the extent we need, or find it desirable, to do so. In
addition, our railroads compete directly with other modes of transportation, including motor
carriers, and ship, barge and pipeline operators. If these alternative methods of transportation
become more cost-effective to our customers due to macroeconomic changes, or if legislation is
passed providing materially greater opportunity for motor carriers with respect to size or weight
restrictions, our operating results, financial condition and liquidity could be materially
adversely affected.
Rising fuel costs could materially adversely affect our business.
Fuel costs were approximately 9%, 8% and 14% of our total operating revenue for the years
ended December 31, 2010, 2009 and 2008, respectively. Fuel prices and supplies are influenced
significantly by international, political and economic circumstances. If fuel supply shortages or
unusual price volatility were to arise for any reason, the resulting higher fuel prices would
significantly increase our operating costs.
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As part of our railroad operations, we frequently transport hazardous materials, the accidental
release of which could have a material adverse effect on our operating results.
We are required to transport hazardous materials to the extent of our common carrier
obligation. An accidental release of hazardous materials could result in significant loss of life
and extensive property damage. The costs associated with an accidental release could have a
material adverse effect on our operating results, financial condition or liquidity.
Some of our employees belong to labor unions and strikes or work stoppages could materially
adversely affect our operations.
Many of our employees are union-represented. Our union employees work under collective
bargaining agreements with various labor organizations. Our inability to negotiate acceptable
contracts with these labor organizations could result in, among other things, strikes, work
stoppages or other slowdowns by the affected workers. If our union-represented employees were to
engage in a strike, work stoppage or other slowdown, or other employees were to become unionized or
the terms and conditions in labor agreements were renegotiated, we could experience significant
disruption of our operations and higher ongoing labor costs.
Because we depend on Class I railroads and certain important customers for our operations, our
business and financial results may be materially adversely affected if our relationships with Class
I carriers and certain important customers deteriorate.
The railroad industry in the United States and Canada is dominated by a small number of Class
I carriers that have substantial market control and negotiating leverage. Approximately 87% of our
total freight revenue in 2010 was derived from Class I traffic. In 2010, Union Pacific, CSX
Transportation, Canadian National Railway and BNSF Railway represented 23%, 23%, 17% and 13% of our
total freight revenue, respectively, and the remaining Class I carriers each represented less than
10% of our total freight revenue. Our ability to provide rail service to our customers depends in
large part upon our ability to maintain cooperative relationships with Class I carriers with
respect to, among other matters, freight rates, car supply, switching, interchange, fuel surcharges
and trackage rights (an arrangement where the company that owns the line retains all rights, but
allows another company to operate over certain sections of its track). In addition, loss of
customers or service interruptions or delays by our Class I interchange partners relating to
customers who ship over our track may decrease our revenue. Class I carriers are also sources of
potential acquisition candidates as they continue to divest branch lines. Failure to maintain good
relationships may materially adversely affect our ability to negotiate acquisitions of branch
lines.
Although our operations served approximately 1,500 customers in 2010, freight revenue from our
10 largest freight revenue customers accounted for approximately 18% of our total freight revenues
in 2010. Substantial reduction in business with or loss of important customers could have a
material adverse effect on our business and financial results.
If the track maintenance tax credit is not renewed by Congress past December 31, 2011, we will not
be able to earn or assign credits for track maintenance, after such date.
We are eligible to receive tax credits for certain track maintenance expenditures under
Section 45G of the Internal Revenue Code (the Code), as amended, through December 31, 2011.
Pursuant to Section 45G, these credits are assignable under limited circumstances. In 2010 and
2009, we received approximately $22.3 and $22.4 million from the assignment of these credits,
respectively. Section 45G is set to expire on December 31, 2011, and unless Section 45G is renewed,
we will no longer be able to earn or assign credits for track maintenance expenditures. There can
be no assurance that legislation extending the availability of the Section 45G tax credit will be
enacted.
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We are subject to the risks of doing business in Canada, including changes in Canadian economic
conditions, exchange rate fluctuations and other economic uncertainties.
We currently have railroad operations in Canada. The risks of doing business in Canada
include:
adverse changes in the economy of Canada;
exchange rate fluctuations; and
economic uncertainties including, among others, risk of renegotiation or modification of existing
agreements or arrangements with governmental authorities, exportation and transportation tariffs,
foreign exchange restrictions and changes in taxation structure.
Unfavorable developments related to these risks could have a material adverse effect on our
business and financial results.
We are subject to environmental and other governmental regulation of our railroad operations which
could impose significant costs.
The failure to comply with environmental and other governmental regulations could have a
material adverse effect on us. Our railroad and real estate ownership is subject to foreign,
federal, state and local environmental laws and regulations. We could incur significant costs,
fines and penalties as a result of any allegations, even if such allegations are unsubstantiated,
or findings to the effect that we have violated or are strictly liable under these laws or
regulations. We may be required to incur significant expenses to investigate and remediate
environmental contamination.
We are also subject to governmental regulation by a significant number of foreign, federal,
state and local regulatory authorities with respect to our railroad operations and a variety of
health, safety, labor, maintenance and other matters. Our failure to comply with applicable laws
and regulations could have a material adverse effect on us.
Additionally, future changes in foreign, federal, state and local laws and regulations
governing railroad rates, operations and practices could likewise have a material adverse effect on
us.
Severe weather and natural disasters could disrupt normal business operations, which could result
in increased costs and liabilities and decreases in revenues.
Severe weather conditions and other natural phenomena, including earthquakes, hurricanes,
fires and floods, may cause significant business interruptions and result in increased costs,
increased liabilities and decreased revenue.
We face possible catastrophic loss and liability and our insurance may not be sufficient to cover
our damages or damages to others.
The operation of any railroad carries with it an inherent risk of catastrophe, mechanical
failure, collision, and property loss. In the course of our operations, spills or other
environmental mishaps, cargo loss or damage, business interruption due to political developments,
as well as labor disputes, strikes and adverse weather conditions, could result in a loss of
revenues or increased liabilities and costs. Collisions, cargo leaks or explosions, environmental
mishaps, or other accidents can cause serious bodily injury, death, and extensive property damage,
particularly when such accidents occur in heavily populated areas. Additionally, our operations may
be affected from time to time by natural disasters such as earthquakes, volcanoes, floods,
hurricanes or other storms. The occurrence of a major natural disaster could have a material
adverse effect on our operations and financial condition. We maintain insurance that is consistent
with industry practice against the accident-related risks involved in the conduct of our business
and business interruption due to natural disaster. However, this insurance is subject to a number
of limitations on coverage, depending on the nature of the risk insured against. This insurance may
not be sufficient to cover our damages or damages to others and this insurance may not continue to
be available at commercially reasonable rates. In addition, we are subject to the risk that one or
more of our insurers may become insolvent and would be unable to pay a claim that may be made in
the future. Even with insurance, if any catastrophic interruption of service occurs, we may not be
able to restore service without a significant interruption to operations which could have a
material adverse effect on our financial condition.
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We may face liability for casualty losses which are not covered by insurance.
We have obtained insurance coverage for losses sustained by our railroads arising from
personal injury and for property damage in the event of derailments or other incidents. Personal
injury claims made by our railroad employees are subject to the FELA rather than state workers
compensation laws. Currently, we are responsible for the first $2 million of expenditures per each
incident under our general liability insurance policy and $1 million of expenditures per each
incident under our property insurance policy. Severe accidents or personal injuries could cause our
liability to exceed our insurance limits which might have a material adverse effect on our business
and financial condition. Our annual insurance limits are $200 million and $15 million on liability
and property, respectively. In addition, adverse events directly and indirectly attributable to us,
including such things as derailments, accidents, discharge of toxic or hazardous materials, or
other like occurrences in the industry, can be expected to result in increases in our insurance
premiums and/or our self insured retentions and could result in limitations to the coverage under
our existing policies.
We depend on our management and key personnel, and we may not be able to operate or grow our
business effectively if we lose the services of our management or key personnel or are unable to
attract qualified personnel in the future.
The success of our business is heavily dependent on the continued services and performance of
our current management and other key personnel and our ability to attract and retain qualified
personnel in the future. The loss of key personnel could affect our ability to run our business
effectively. Competition for qualified personnel is intense, and we cannot assure you that we will
be successful in attracting and retaining such personnel. Although we have entered into employment
agreements with certain of our key personnel, these agreements do not ensure that our key personnel
will continue in their present capacity with us for any particular period of time. The loss of any
key personnel requires the remaining key personnel to divert immediate and substantial attention to
seeking a replacement. An inability to find a suitable replacement for any departing executive
officer on a timely basis could materially adversely affect our ability to operate or grow our
business.
Future acts of terrorism or war, as well as the threat of acts of terrorism or war, may cause
significant disruptions in our business operations.
Terrorist attacks, such as those that occurred on September 11, 2001, as well as the more
recent attacks on the transportation systems in Madrid and London, any government response to those
types of attacks and war or risk of war may materially adversely affect our results of operations,
financial condition or liquidity. Our rail lines and facilities could be direct targets or indirect
casualties of an act or acts of terror. Such acts could cause significant business interruption and
result in increased costs and liabilities and decreased revenues, which could have a material
adverse effect on our operating results and financial condition. Such effects could be magnified
where releases of hazardous materials are involved. Any act of terror, retaliatory strike,
sustained military campaign or war or risk of war may have a material adverse effect on our
operating results and financial condition by causing or resulting in unpredictable operating or
financial conditions, including disruptions of rail lines, volatility or sustained increase of fuel
prices, fuel shortages, general economic decline and instability or weakness of financial markets
which could restrict our ability to raise capital. In addition, insurance premiums charged for some
or all of our coverage could increase dramatically or certain coverage may not be available to us
in the future.
The availability of qualified personnel and an aging workforce may materially adversely affect our
operations.
Changes in demographics, training requirements and the availability of qualified personnel,
particularly train crew members, could negatively affect our service levels. Unpredictable
increases in demand for rail services may exacerbate these risks and may have a material adverse
effect on our operating results, financial condition or liquidity.
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We have a substantial amount of indebtedness, which may materially adversely affect our cash flow
and our ability to operate our business, including our ability to incur additional indebtedness.
As of December 31, 2010, our total indebtedness was approximately $573.7 million, which
represented approximately 44.9% of our total capitalization. Our substantial amount of indebtedness
increases the possibility that we may be unable to generate sufficient cash to pay, when due, the
principal of, interest on or other amounts due with respect to our indebtedness.
Our substantial indebtedness could have important consequences for you, including:
increasing our vulnerability to adverse economic, industry or competitive developments;
requiring a substantial portion of cash flow from operations to be dedicated to the payment of
principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to
fund our operations, capital expenditures and future business opportunities;
restricting us from making strategic acquisitions or causing us to make non-strategic
divestitures;
limiting our ability to obtain additional financing for working capital, capital expenditures,
product development, debt service requirements, acquisitions and general corporate or other
purposes; and
limiting our flexibility in planning for, or reacting to, changes in our business or the industry
in which we operate, placing us at a competitive disadvantage compared to our competitors who are
less highly leveraged and who, therefore, may be able to take advantage of opportunities that our
leverage prevents us from exploiting.
The indenture governing the senior secured notes contains a number of restrictions and
covenants that, among other things, limit our ability to incur additional indebtedness, make
investments, pay dividends or make distributions to our stockholders, grant liens on our assets,
sell assets, enter into new or different line of business, enter into transactions with our
affiliates, merge or consolidate with other entities or transfer all or substantially all of our
assets, and enter into sale and leaseback transactions. Credit market conditions could negatively
impact our ability to obtain future financing or to refinance our outstanding indebtedness.
Our ability to comply with these restrictions and covenants in the future is uncertain and
will be affected by the levels of cash flow from our operations and events or circumstances beyond
our control. Our failure to comply with any of the restrictions and covenants under the indenture
governing our senior secured notes could result in a default under the indenture, which could cause
all of our existing indebtedness to be immediately due and payable. If our indebtedness is
accelerated, we may not be able to repay our indebtedness or borrow sufficient funds to refinance
it. In addition, in the event of an acceleration, holders of our senior secured notes could proceed
against the collateral securing the notes which includes nearly all of our assets. Even if we are
able to obtain new financing, it may not be on commercially reasonable terms or on terms that are
acceptable to us. If our indebtedness is in default for any reason, our business, financial
condition and results of operations could be materially adversely affected. In addition, complying
with these restrictions and covenants may also cause us to take actions that are not favorable to
our stockholders and may make it more difficult for us to successfully execute our business plan
and compete against companies that are not subject to such restrictions and covenants.
Our inability to acquire or integrate acquired businesses successfully or to realize the
anticipated cost savings and other benefits of acquisitions could have materially adverse
consequences to our business.
We expect to grow through acquisitions. Evaluating acquisition targets gives rise to
additional costs related to legal, financial, operating and industry due diligence. Acquisitions
generally result in increased operating and administrative costs and, to the extent financed with
debt, additional interest costs. We may not be able to manage or integrate the acquired companies
or businesses successfully. The process of acquiring and integrating businesses may be disruptive
to our business and may cause an interruption or reduction of our business as a result of the
following factors, among others:
loss of key employees or customers;
possible inconsistencies in or conflicts between standards, controls, procedures and policies
among the combined companies and the need to implement company-wide financial, accounting,
information technology and other systems;
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failure to maintain the quality of services that have historically been provided;
integrating employees of rail lines acquired from other entities into our regional railroad
culture;
failure to coordinate geographically diverse organizations; and
the diversion of managements attention from our day-to-day business as a result of the need to
manage any disruptions and difficulties and the need to add management resources to do so.
These disruptions and difficulties, if they occur, may cause us to fail to realize the cost
savings, revenue enhancements and other benefits that we expect to result from integrating acquired
companies and may cause material adverse short- and long-term effects on our operating results,
financial condition and liquidity.
Even if we are able to integrate the operations of acquired businesses into our operations, we
may not realize the full benefits of the cost savings, revenue enhancements or other benefits that
we may have expected at the time of acquisition. The expected revenue enhancements and cost savings
are based on analyses completed by members of our management. These analyses necessarily involve
assumptions as to future events, including general business and industry conditions, the longevity
of specific customer plants and factories served, operating costs and competitive factors, most of
which are beyond our control and may not materialize. While we believe these analyses and their
underlying assumptions to be reasonable, they are estimates that are necessarily speculative in
nature. In addition, even if we achieve the expected benefits, we may not be able to achieve them
within the anticipated time frame. Also, the cost savings and other synergies from these
acquisitions may be offset by costs incurred in integrating the businesses, increases in other
expenses or problems in the business unrelated to these acquisitions.
An impairment in the carrying value of goodwill could negatively impact our consolidated results of
operations and net worth.
Goodwill is recorded at fair value, at the time of an acquisition and is not amortized, but is
reviewed for impairment at least annually or more frequently if impairment indicators arise. In
evaluating the potential for impairment of goodwill, we make assumptions regarding future operating
performance, business trends, and market and economic conditions. Such analyses further require us
to make judgmental assumptions about sales, operating margins, growth rates, and discount rates.
There are inherent uncertainties related to these factors and to managements judgment in applying
these factors to the assessment of goodwill recoverability. We could be required to evaluate the
recoverability of goodwill prior to the annual assessment if we experience disruptions to the
business, unexpected significant declines in operating results, divestiture of a significant
component of our business and sustained market capitalization declines.
A sustained decline in our market capitalization relative to our book value may result in, or
be indicative of, a goodwill impairment charge in the future. We utilize market capitalization in
corroborating our assessment of the fair value of our reporting units.
Impairment charges could substantially affect our reported earnings in the periods of such
charges. In addition, impairment charges could negatively impact our financial ratios and could
limit our ability to obtain financing in the future. As of December 31, 2010, we had $212.5 million
of goodwill, which represented approximately 13.3% of total assets.
Future compensation expense may materially adversely affect our net income.
The compensation that we pay to attract and retain our employees and key personnel reduces our
net income. The compensation paid to our employees for 2010 is not necessarily indicative of how we
will compensate our employees in the future. Any increase in compensation will further reduce our
net income. For example, we have adopted an equity incentive plan that permits the issuance of
share options, share appreciation rights, restricted shares, deferred shares, performance shares,
unrestricted shares and other share-based awards to our employees. We may grant restricted shares
and other share-based awards to our employees in the future as a recruiting and retention tool
based on specific criteria determined by our board of directors (or the compensation committee of
the board of directors).
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The table below compares our net income to our total executive compensation costs (each in
thousands).
Year Ended | Year Ended | |||||||
December 31, 2010 | December 31, 2009 | |||||||
Net Income |
$ | 19,117 | $ | 15,842 | ||||
Executive Compensation Cost(1) |
$ | 6,003 | $ | 5,441 |
(1) | Executive Compensation Cost is computed in the manner computed for purposes of the Summary Compensation Table for 2010 to be included in our 2011 proxy statement. |
Risks Related to Our Organization and Structure
If the ownership of our common stock continues to be highly concentrated, it may prevent minority
stockholders from influencing significant corporate decisions and may result in conflicts of
interest.
As of December 31, 2010, an entity wholly-owned by certain private equity funds managed by an
affiliate of Fortress (the Initial Fortress Stockholder), owns approximately 55.3% of our
outstanding common stock. The Initial Fortress Stockholder owns shares sufficient for the majority
vote over all matters requiring a stockholder vote, including: the election of directors; mergers,
consolidations or acquisitions; the sale of all or substantially all of our assets and other
decisions affecting our capital structure; the amendment of our amended and restated certificate of
incorporation and our amended and restated bylaws; and our winding up and dissolution. This
concentration of ownership may delay, deter or prevent acts that would be favored by our other
stockholders. The interests of the Initial Fortress Stockholder may not always coincide with our
interests or the interests of our other stockholders. This concentration of ownership may also have
the effect of delaying, preventing or deterring a change in control of RailAmerica. Also, the
Initial Fortress Stockholder may seek to cause us to take courses of action that, in its judgment,
could enhance its investment in us, but which might involve risks to our other stockholders or
materially adversely affect us or our other stockholders. As a result, the market price of our
common stock could decline or stockholders might not receive a premium over the then-current market
price of our common stock upon a change in control. In addition, this concentration of share
ownership may materially adversely affect the trading price of our common stock because investors
may perceive disadvantages in owning shares in a company with significant stockholders.
We are a holding company with no operations and rely on our operating subsidiaries to provide us
with funds necessary to meet our financial obligations and to pay dividends.
We are a holding company with no material direct operations. Our principal assets are the
equity interests we directly or indirectly hold in our operating subsidiaries, which own our
operating assets. As a result, we are dependent on loans, dividends and other payments from our
subsidiaries to generate the funds necessary to meet our financial obligations and to pay dividends
on our common stock. Our subsidiaries are legally distinct from us and may be prohibited or
restricted from paying dividends or otherwise making funds available to us under certain
conditions. If we are unable to obtain funds from our subsidiaries, we may be unable to, or our
board may exercise its discretion not to, pay dividends.
We do not anticipate paying any dividends on our common stock in the foreseeable future.
We do not expect to declare or pay any cash or other dividends in the foreseeable future on
our common stock, as we intend to use cash flow generated by operations to grow our business. Our
Asset Backed Loan (ABL) Facility and our senior secured notes indenture restrict our ability to
pay cash dividends on our common stock, and we may also enter into credit agreements or other
borrowing arrangements in the future that restrict or limit our ability to pay cash dividends on
our common stock.
Certain provisions of our stockholders agreement, our amended and restated certificate of
incorporation and our amended and restated bylaws could hinder, delay or prevent a change in
control of RailAmerica, which could materially adversely affect the price of our common stock.
Certain provisions of our stockholders agreement, our amended and restated certificate of
incorporation and our amended and restated bylaws contain provisions that could make it more
difficult for a third party to acquire us without the consent of our board of directors or the
Initial Fortress Stockholder. These provisions provide for:
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a classified board of directors with staggered three-year terms;
removal of directors only for cause and only with the affirmative vote of at least 80% of the
voting interest of stockholders entitled to vote (provided, however, that for so long as the
Fortress Stockholders (as defined below) own at least 40% of our issued and outstanding common
stock, directors may be removed with or without cause with the affirmative vote of a majority of
the voting interest of stockholders entitled to vote);
provisions in our amended and restated certificate of incorporation and amended and restated
bylaws preventing stockholders from calling special meetings of our stockholders (provided,
however, that for so long as the Fortress Stockholders beneficially own at least 25% of our issued
and outstanding common stock, any stockholders that collectively beneficially own at least 25% of
our issued and outstanding common stock may call special meetings of our stockholders);
advance notice requirements by stockholders with respect to director nominations and actions to
be taken at annual meetings;
our stockholders agreement provides certain rights to the Fortress Stockholders with respect to
the designation of directors for nomination and election to our board of directors, including the
ability to appoint a majority of the members of our board of directors for so long as the Fortress
Stockholders continue to hold at least 40% of the outstanding shares of our common stock;
no provision in our amended and restated certificate of incorporation for cumulative voting in
the election of directors, which means that the holders of a majority of the outstanding shares of
our common stock can elect all the directors standing for election;
our amended and restated certificate of incorporation and amended and restated bylaws only permit
action by our stockholders outside a meeting by unanimous written consent, provided, however, that
for so long as the Fortress Stockholders beneficially own at least 25% of our issued and
outstanding common stock, our stockholders may act without a meeting by written consent of a
majority of our stockholders; and
under our amended and restated certificate of incorporation, our board of directors has authority
to cause the issuance of preferred stock from time to time in one or more series and to establish
the terms, preferences and rights of any such series of preferred stock, all without approval of
our stockholders. Nothing in our amended and restated certificate of incorporation precludes future
issuances without stockholder approval of the authorized but unissued shares of our common stock.
In addition, these provisions may make it difficult and expensive for a third party to pursue
a tender offer, change in control or takeover attempt that is opposed by the Initial Fortress
Stockholder, our management and/or our board of directors. Public stockholders who might desire to
participate in these types of transactions may not have an opportunity to do so, even if the
transaction is favorable to stockholders. These anti-takeover provisions could substantially impede
the ability of public stockholders to benefit from a change in control or change our management and
board of directors and, as a result, may materially adversely affect the market price of our common
stock and your ability to realize any potential change of control premium.
Certain of our stockholders have the right to engage or invest in the same or similar businesses as
us.
The Initial Fortress Stockholder and certain other affiliates of Fortress and permitted
transferees, (collectively, the Fortress Stockholders) have other investments and business
activities in addition to their ownership of us. Under our amended and restated certificate of
incorporation, the Fortress Stockholders have the right, and have no duty to abstain from
exercising such right, to engage or invest in the same or similar businesses as us, do business
with any of our clients, customers or vendors or employ or otherwise engage any of our officers,
directors or employees. If the Fortress Stockholders or any of their officers, directors or
employees acquire knowledge of a potential transaction that could be a corporate opportunity, they
have no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us,
our stockholders or our affiliates.
In the event that any of our directors and officers who is also a director, officer or
employee of any of the Fortress Stockholders acquires knowledge of a corporate opportunity or is
offered a corporate opportunity, provided that this knowledge was not acquired solely in such
persons capacity as a director or officer of RailAmerica and such person acts in good faith, then
to the fullest extent permitted by law such person is deemed to have fully satisfied such persons
fiduciary duties owed to us and is not liable to us, if the Fortress Stockholder pursues or
acquires the corporate opportunity or if the Fortress Stockholder does not present the corporate
opportunity to us.
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Risks Related to our Common Stock
The market price and trading volume of our common stock may be volatile, which could result in
rapid and substantial losses for our stockholders.
The market price of our common stock may be highly volatile and could be subject to wide
fluctuations. In addition, the trading volume in our common stock may fluctuate and cause
significant price variations to occur. If the market price of our common stock declines
significantly, you may be unable to resell your shares at or above your purchase price, if at all.
We cannot assure you that the market price of our common stock will not fluctuate or decline
significantly in the future. Some of the factors that could negatively affect our share price or
result in fluctuations in the price or trading volume of our common stock include:
| variations in our quarterly or annual operating results; | ||
| changes in our earnings estimates (if provided) or differences between our actual financial and operating results and those expected by investors and analysts; | ||
| the contents of published research reports about us or our industry or the failure of securities analysts to cover our common stock; | ||
| litigation and governmental investigations; | ||
| changes in market valuations of similar companies; | ||
| speculation or reports by the press or investment community with respect to us or our industry in general; | ||
| increases in market interest rates that may lead purchasers of our shares to seek higher returns; | ||
| announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments; | ||
| changes or proposed changes in laws or regulations affecting the railroad industry or enforcement of these laws and regulations, or announcements relating to these matters; and | ||
| general market, political and economic conditions, including any such conditions and local conditions in the markets in which our customers are located. |
These broad market and industry factors may decrease the market price of our common stock,
regardless of our actual operating performance. The stock market in general has from time to time
experienced extreme price and volume fluctuations. In addition, in the past, following periods of
volatility in the overall market and the market price of a companys securities, securities class
action litigation has often been instituted against these companies. This litigation, if instituted
against us, could result in substantial costs and a diversion of our managements attention and
resources.
Future offerings of debt or equity securities by us may materially adversely affect the market
price of our common stock.
In the future, we may attempt to obtain financing or to further increase our capital resources
by issuing additional shares of our common stock or offering debt or additional equity securities,
including commercial paper, medium-term notes, senior or subordinated notes or shares of preferred
stock. Issuing additional shares of our common stock or other additional equity offerings may
dilute the economic and voting rights of our existing stockholders or reduce the market price of
our common stock, or both. Upon liquidation, holders of such debt securities and preferred shares,
if issued, and lenders with respect to other borrowings, would receive a distribution of our
available assets prior to the holders of our common stock. Preferred shares, if issued, could have
a preference with respect to liquidating distributions or a preference with respect to dividend
payments that could limit our ability to pay dividends to the holders of our common stock. Because
our decision to issue securities in any future offering will depend on market conditions and other
factors beyond our control, we cannot predict or estimate the amount, timing or nature of our
future offerings. Thus, holders of our common stock bear the risk of our future offerings reducing
the market price of our common stock and diluting their share holdings in us.
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The market price of our common stock could be negatively affected by sales of substantial amounts
of our common stock in the public markets.
As of December 31, 2010, there are 54,859,261 shares of common stock outstanding. All issued
and outstanding shares of our common stock are freely transferable, except for any shares held by
our affiliates, as that term is defined in Rule 144 under the Securities Act. Approximately 55.3%
of our outstanding common stock is held by the Initial Fortress Stockholder and can be resold into
the public markets in the future in accordance with the requirements of Rule 144.
Pursuant to our stockholders agreement, the Initial Fortress Stockholder and certain of its
affiliates and permitted third-party transferees have the right to require us, in certain
instances, at our expense, to file registration statements under the Securities Act of 1933, as
amended, covering public resales of their approximately 30,350,000 shares of our common stock. Upon
the effectiveness of such a registration statement, all shares covered by the registration
statement will be freely transferable and the resulting resale of a substantial number of shares of
our common stock into the market could cause the market price of our common stock to decline.
The future issuance of additional common stock in connection with our incentive plans, acquisitions
or otherwise will dilute all other shareholdings.
As of December 31, 2010, we have an aggregate of 345,140,739 shares of common stock authorized
but unissued with approximately 3.7 million shares reserved for issuance under our incentive plans.
We may issue all of these shares of common stock without any action or approval by our
stockholders, subject to certain exceptions. We also intend to continue to evaluate acquisition
opportunities and may issue common stock in connection with these acquisitions. Any common stock
issued in connection with our incentive plans, acquisitions, the exercise of outstanding stock
options or otherwise would dilute the percentage ownership held by holders of our common stock.
We cannot assure you that our stock repurchase program will enhance long-term stockholder value and
stock repurchases, if any, could increase the volatility of the price of our common stock and will
diminish our cash reserves.
On February 23, 2011, we announced that our Board of Directors had approved a stock repurchase
program. Under the program, we are authorized to repurchase up to $50.0 million of our outstanding
shares of common stock from time to time at prevailing prices in the open market or in privately
negotiated transactions. The timing and actual number of shares repurchased, if any, will depend on
a variety of factors including the price and availability of the Companys shares, trading volume
and general market conditions. The program may be suspended or discontinued at any time without
prior notice. Repurchases pursuant to our stock repurchase program could affect our stock price and
increase its volatility. The existence of a stock repurchase program could also cause our stock
price to be higher than it would be in the absence of such a program and could potentially reduce
the market liquidity for our stock. Additionally, repurchases under our stock repurchase program
will diminish our cash reserves, which could impact our ability to pursue possible future strategic
opportunities and acquisitions and could result in lower overall returns on our cash balances.
There can be no assurance that any stock repurchases will enhance stockholder value because the
market price of our common stock may decline below the levels at which we repurchased shares of
stock. Although our stock repurchase program is intended to enhance long-term stockholder value,
short-term stock price fluctuations could reduce the programs effectiveness.
Risks Related to Taxation
Our ability to use net operating loss and tax credit carryovers and certain built-in losses to
reduce future tax payments is limited by provisions of the Internal Revenue Code.
Section 382 and 383 of the Code contain rules that limit the ability of a company that
undergoes an ownership change, which is generally any change in ownership of more than 50% of its
stock over a three-year period, to utilize its net operating loss and tax credit carryforwards and
certain built-in losses recognized in years after the ownership change. These rules generally
operate by focusing on ownership changes involving stockholders owning directly or indirectly 5% or
more of the stock of a company and any change in ownership arising from a new issuance of stock by
the company. Generally, if an ownership change occurs, the yearly taxable income limitation on the
use of net operating loss and tax credit carryforwards and certain built-in losses is equal to the
product of the applicable long-term tax exempt rate and the value of the companys stock
immediately before the ownership change. As a result of transactions that have taken place in the
past with respect to our common stock, our use of our $79 million of federal net operating losses,
our $95 million of tax credits and certain built-in losses is subject to annual taxable income
limitations. As a result,
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we may be unable to offset our taxable
income with losses, or our tax liability with credits, before such losses and credits expire and therefore would incur larger federal income tax
liability.
In addition, it is possible that future transactions (including issuances of new shares of our
common stock and sales of shares of our common stock) will cause us to undergo one or more
additional ownership changes. In that event, we generally would not be able to use our pre-change
loss or credit carryovers or certain built-in losses prior to such ownership change to offset
future taxable income in excess of the annual limitations imposed by Sections 382 and 383, and
those attributes already subject to limitations (as a result of our prior ownership changes) may be
subject to more stringent limitations.
Gain recognized by Non-U.S. Holders on the sale or other disposition of our common stock may be
subject to U.S. federal income tax.
We expect to be treated as a United States real property holding corporation under section
897(c) of the Code (USRPHC). Generally, stock issued by a corporation that has been a USRPHC at
any time during the preceding five years (or a Non-U.S. Holders holding period for such
securities, if shorter) is treated as a United States real property interest (USRPI), and gain
recognized by a Non-U.S. Holder on the sale or other disposition of stock is subject to regular
U.S. federal income tax, as if such gain were effectively connected with the conduct by such holder
of a U.S. trade or business. Shares of our common stock will not be treated as USRPIs in the hands
of a Non-U.S. Holder provided that: (i) our common stock is regularly traded on an established
securities market, and (ii) such Non-U.S. Holder has not owned or been deemed to own (directly or
under certain constructive ownership rules) more than 5% of our common stock at any time during the
5-year period ending on the date of the sale or other taxable disposition. No assurance can be
given that our common stock will continue to be regularly traded on an established securities
market in the future. If gain recognized by a Non-U.S. Holder from the sale or other disposition of
our common stock is subject to regular federal income tax under these rules and our common stock is
not regularly traded on an established securities market at such time, the transferee of such
common stock may be required to deduct and withhold a tax equal to 10 percent of the amount
realized on the sale or other disposition, unless certain exceptions apply. Any tax withheld may be
credited against the U.S. federal income tax owed by the Non-U.S. Holder for the year in which the
sale or other disposition occurs.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We operate a portfolio of 40 individual railroads with approximately 7,300 miles of track in
27 U.S. states and three Canadian provinces. Of our approximately 7,300 total track-miles, we own
approximately 4,300 track-miles and lease approximately 3,000 track-miles.
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The following table provides a brief description of each of the railroads that we owned or
leased as of March 3, 2011. Track miles under operating agreements are excluded:
No. of | Track- | |||||||
Name | Railroads | Miles | Major Commodities Hauled | |||||
Central Region: |
||||||||
Missouri & Northern Arkansas Railroad |
1 | 594 | Coal, Agricultural Products | |||||
Consolidated Dallas Railroads |
2 | 337 | Non-Metallic Minerals and Products | |||||
Kyle Railroad Company |
1 | 625 | Agricultural Products | |||||
Kiamichi Railroad |
1 | 261 | Coal, Non-Metallic Minerals and Products | |||||
Point Comfort & Northern Railway |
1 | 19 | Metallic Ores and Metals | |||||
Otter Tail Valley Railroad |
1 | 80 | Agricultural Products, Coal | |||||
Rockdale, Sandow & Southern Railroad |
1 | 8 | Waste and Scrap Materials, Metallic Ores and Metals | |||||
Bauxite & Northern Railway |
1 | 6 | Metallic & Non-Metallic Ores | |||||
Total Central Region |
9 | 1,930 | ||||||
Northeast Region: |
||||||||
New England Central Railroad |
1 | 396 | Forest Products, Non-Metallic Minerals and Products | |||||
Ottawa Valley Railway |
1 | 179 | Pulp, Paper and Allied Products | |||||
Cape Breton & Central Nova Scotia Railway |
1 | 295 | Pulp, Paper and Allied Products, Coal | |||||
Goderich-Exeter Railway |
1 | 181 | Chemicals, Agricultural Products | |||||
Southern Ontario Railway |
1 | 46 | Petroleum, Chemicals | |||||
Connecticut Southern Railroad |
1 | 42 | Waste and Scrap Materials, Other | |||||
Massena Terminal Railroad |
1 | 4 | Metallic Ores and Metals | |||||
Total Northeast Region |
7 | 1,143 | ||||||
Midwest Region: |
||||||||
Indiana & Ohio Railway |
1 | 570 | Agricultural Products, Motor Vehicles | |||||
Chicago, Ft. Wayne & Eastern Railroad |
1 | 311 | Agricultural Products, Chemicals | |||||
Huron and Eastern Railway |
1 | 384 | Agricultural Products, Chemicals | |||||
Toledo, Peoria & Western Railway |
1 | 247 | Agricultural Products, Chemicals | |||||
Consolidated Michigan Railroads |
3 | 184 | Agricultural Products, Non-Metallic Minerals and Products | |||||
Central Railroad Company of Indiana |
1 | 96 | Motor Vehicles, Non-Metallic Minerals and Products | |||||
Central Railroad Company of Indianapolis |
1 | 64 | Agricultural Products | |||||
Total Midwest Region |
9 | 1,856 | ||||||
Southeast Region: |
||||||||
Alabama & Gulf Coast Railway |
1 | 348 | Pulp, Paper and Allied Products | |||||
Consolidated Virginia Railroads |
2 | 140 | Metallic Ores and Metals, Waste and Scrap Materials | |||||
South Carolina Central Railroad |
2 | 129 | Waste and Scrap Materials, Metallic Ores and Metals | |||||
Indiana Southern Railroad |
1 | 196 | Coal | |||||
Eastern Alabama Railway |
1 | 31 | Non-Metallic Minerals and Products | |||||
Total Southeast Region |
7 | 844 | ||||||
Western Region: |
||||||||
Central Oregon & Pacific Railroad |
1 | 394 | Forest Products | |||||
San Joaquin Valley Railroad |
1 | 382 | Food or Kindred Products, Petroleum | |||||
California Northern Railroad |
1 | 261 | Food or Kindred Products | |||||
Arizona & California Railroad |
1 | 203 | Petroleum, Non-Metallic Minerals and Products | |||||
Puget Sound & Pacific Railroad |
1 | 108 | Waste and Scrap Materials, Agricultural Products | |||||
San Diego and Imperial Valley Railroad (1) |
1 | | Petroleum | |||||
Cascade & Columbia River Railroad |
1 | 148 | Non-Metallic Minerals and Products, Forest Products | |||||
Ventura County Railroad |
1 | 17 | Motor Vehicles | |||||
Total Western Region |
8 | 1,513 | ||||||
Total Company |
40 | 7,286 | ||||||
(1) | No track miles shown as this railroad is exclusively under an operating agreement. |
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Track and Equipment
Track
Of our 7,286 total track-miles, we own 4,331 track-miles and lease 2,955 track-miles. In most
cases, leases involve little to no annual lease payment (but may have involved a one-time, upfront
payment) and have long-term or perpetual durations. In addition, we operate approximately 1,032
track-miles under trackage rights and operating agreements. Generally, trackage rights are rights
granted by other railroads to transport freight over their tracks (but not directly serve customers
on their rail lines) while operating agreements grant us the right to operate (and typically serve
customers) on track owned by third parties. Generally, trackage rights and operating agreements do
not convey any other rights (such as real estate rights) to us.
Locomotives and Railcars
Our locomotive fleet at December 31, 2010 totaled 461 units comprised of 247 owned units and
214 leased units and 7,672 railcars comprised of 524 owned railcars and 7,148 leased railcars. The
average age of our locomotives and railcars is 39 and 42 years, respectively, across our entire
portfolio of railroads.
A summary of the rolling stock owned and leased by us is presented in the table below:
Railcars | ||||||||||||
Owned | Leased | Total | ||||||||||
Covered hopper cars |
35 | 3,192 | 3,227 | |||||||||
Open top hopper cars |
238 | 30 | 268 | |||||||||
Box cars |
35 | 2,623 | 2,658 | |||||||||
Flat cars |
194 | 759 | 953 | |||||||||
Tank cars |
6 | 4 | 10 | |||||||||
Gondolas |
5 | 540 | 545 | |||||||||
Other/passenger cars |
11 | 0 | 11 | |||||||||
Total railcars |
524 | 7,148 | 7,672 | |||||||||
Locomotives | ||||||||||||
Owned | Leased | Total | ||||||||||
Horsepower/unit: |
||||||||||||
Over 3,000 |
101 | 101 | 202 | |||||||||
2,000 to 2,999 |
92 | 81 | 173 | |||||||||
Under 2,000 |
54 | 32 | 86 | |||||||||
Total locomotives |
247 | 214 | 461 | |||||||||
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of conducting our business, we have become involved in various legal
actions and other claims. Litigation is subject to many uncertainties, the outcome of individual
litigated matters is not predictable with assurance, and it is reasonably possible that some of
these matters may be decided unfavorably to RailAmerica. It is the opinion of management that the
ultimate liability, if any, with respect to our current litigation outstanding will not have a
material adverse effect on our financial position, results of operations or cash flows.
Our operations are subject to extensive environmental regulation. There are no material
environmental claims currently pending or, to our knowledge, threatened against us or any of our
railroads.
We are subject to claims for employee work-related and third-party injuries. Work-related
injuries for employees are primarily subject to the FELA. We retain an independent actuarial firm
to assist management in assessing the value of personal injury claims and cases. An analysis has
been performed by an independent actuarial firm and is reviewed by management. The methodology used
by the actuary includes a development factor to reflect growth or reduction in the value of these
personal injury claims. It is based largely on our historical claims and settlement experience. At
December 31, 2010 and 2009, we had $12.9 million and $14.2 million, respectively, accrued for
personal injury claims and cases. Actual results may vary from estimates due to the type and
severity of the injury, costs of medical treatments and uncertainties in litigation.
ITEM 4. (REMOVED AND RESERVED)
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
Our common stock began trading on the New York Stock Exchange (NYSE) on October 13, 2009 under
the symbol RA.
Our Principal Stockholder
RR Acquisition Holding LLC, an entity wholly-owned by certain private equity funds managed by
an affiliate of Fortress, owns approximately 55.3% of our outstanding common stock. RR Acquisition
Holding LLC is referred to in this Form 10-K as our Initial Stockholder. The Initial Stockholder
owns shares sufficient for the majority vote over fundamental and significant corporate matters and
transactions. See Risk Factors Risks Related to Our Organization and Structure.
Description of Common Stock
A total of 400 million shares of common stock are authorized, of which 54,859,261 shares were
outstanding as of December 31, 2010. Each share is entitled to one vote in all matters requiring a
vote of shareholders. As of February 22, 2011, there were approximately 58 holders of record and we
believe at least 5,858 beneficial owners of our common stock. Weighted average common shares
outstanding used in the calculation of diluted earnings per share was approximately 54,793,000 as
of December 31, 2010, and is expected to increase in 2011 due to incentive compensation programs.
In June 2009, we declared and paid a cash dividend in the amount of $20.0 million to our
common stockholders. We do not expect to declare or pay any cash or other dividends in the
foreseeable future on our common stock, as we intend to use cash flow generated by operations to
grow our business, pay down debt or buy back common stock. Our revolving credit facility and our
senior secured notes indenture will restrict our ability to pay cash dividends on our common stock,
and we may also enter into credit agreements or other borrowing arrangements in the future that
restrict or limit our ability to pay cash dividends on our common stock.
Stock Market Results
Set forth below is the high and low price information for our common stock as reported on the
NYSE for each period presented.
2009 | High Sales Price | Low Sales Price | ||||||
Fourth Quarter (October 13 through December 31) |
$ | 14.78 | $ | 10.91 |
2010 | High Sales Price | Low Sales Price | ||||||
First Quarter |
$ | 14.47 | $ | 10.94 | ||||
Second Quarter |
$ | 13.61 | $ | 9.73 | ||||
Third Quarter |
$ | 11.60 | $ | 9.27 | ||||
Fourth Quarter |
$ | 13.13 | $ | 9.16 |
2011 | High Sales Price | Low Sales Price | ||||||
First
Quarter (January through March 3) |
$ | 15.70 | $ | 12.06 |
Stock Repurchase Program
On February 23, 2011, we announced that our Board of Directors had approved a stock repurchase
program. Under the program, we are authorized to repurchase up to $50.0 million of our outstanding
shares of common stock from time to time at prevailing prices in the open market or in privately
negotiated transactions. The timing and actual number of shares repurchased, if any, will depend on
a
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variety of factors including the price and availability of the Companys shares, trading
volume and general market conditions. The program may be suspended or discontinued at any time
without prior notice.
Stock Performance Graph
The following graph compares the cumulative total return for our common stock (stock price
change plus reinvested dividends) with the comparable return of two indices: the Russell 2000 Index
and S&P 1500 Composite Railroads. The graph assumes an investment of $100 in the Companys common
stock and in each of the indices on October 13, 2009, when our common stock first traded on the New
York Stock Exchange, and that all dividends were reinvested. The past performance of our common
stock is not an indication of future performance.
COMPARISON OF 14 MONTH CUMULATIVE TOTAL RETURN*
Among RailAmerica, Inc., the Russell 2000 Index
and S&P 1500 Composite Railroads
Among RailAmerica, Inc., the Russell 2000 Index
and S&P 1500 Composite Railroads
* | $100 invested on 10/13/09 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. |
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ITEM 6. SELECTED FINANCIAL DATA
The consolidated financial information labeled as Predecessor includes financial reporting
periods prior to the merger on February 14, 2007, in which we were acquired by certain private
equity funds managed by affiliates of Fortress (the Acquisition) and the consolidated financial
information labeled as Successor includes financial reporting periods subsequent to the
Acquisition. On October 16, 2009, we completed an initial public offering of 22,000,000 shares of
common stock.
The information in the following tables gives effect to the 90-for-1 stock split of our common
stock, which occurred on September 22, 2009.
In October 2010, we entered into a new agreement with Canadian Pacific Railway Company (CP)
to operate portions of the Ottawa Valley Railway (OVRR) line, a previously discontinued
operation. As a result of this new operating agreement, this railroad is no longer considered
discontinued for financial statement presentation purposes and thus, the results of operations of
the OVRR have been reclassified to continuing operations on our statement of operations for all
periods presented.
The selected consolidated statement of operations data for the Successor years ended December
31, 2010, 2009 and 2008 and the selected Successor consolidated balance sheet data as of December
31, 2010 and 2009 have been derived from our audited financial statements included elsewhere in
this report on Form 10-K. The selected consolidated financial data for the Successor period
February 15, 2007 through December 31, 2007 the Predecessor period January 1, 2007 through February
14, 2007, and for the Predecessor year ended December 31, 2006 and the selected consolidated
balance sheet data as of December 31, 2008, 2007 and 2006 have been derived from our audited
financial statements that are not included in this report on Form 10-K.
Predecessor | Successor | |||||||||||||||||||||||
Year ended | Period from January 1, 2007 to |
Period
from February 15, 2007 to |
||||||||||||||||||||||
December 31, | February 14, | December 31, | Year ended December 31, | |||||||||||||||||||||
2006 | 2007 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
STATEMENT OF OPERATIONS DATA: |
||||||||||||||||||||||||
Operating revenue |
$ | 462,580 | $ | 55,766 | $ | 424,154 | $ | 508,466 | $ | 425,774 | $ | 490,291 | ||||||||||||
Operating expenses |
412,577 | 57,157 | 355,776 | 422,418 | 311,569 | 375,784 | ||||||||||||||||||
Operating income (loss) |
50,003 | (1,391 | ) | 68,378 | 86,048 | 114,205 | 114,507 | |||||||||||||||||
Interest expense, including amortization costs |
(27,392 | ) | (3,275 | ) | (42,996 | ) | (61,678 | ) | (86,878 | ) | (83,775 | ) | ||||||||||||
Other income (loss) |
| 284 | 7,129 | (9,008 | ) | (8,117 | ) | (4,759 | ) | |||||||||||||||
Income (loss) from continuing operations
before income taxes |
22,611 | (4,382 | ) | 32,511 | 15,362 | 19,210 | 25,973 | |||||||||||||||||
(Benefit from) provision for income taxes |
(4,809 | ) | 935 | (1,747 | ) | 1,599 | 16,299 | 6,856 | ||||||||||||||||
Income (loss) from continuing operations |
27,420 | (5,317 | ) | 34,258 | 13,763 | 2,911 | 19,117 | |||||||||||||||||
Discontinued operations |
9,223 | | (756 | ) | 2,764 | 12,931 | | |||||||||||||||||
Net income (loss) |
$ | 36,643 | $ | (5,317 | ) | $ | 33,502 | $ | 16,527 | $ | 15,842 | $ | 19,117 | |||||||||||
Dividends declared and paid per common share |
$ | | $ | | $ | | $ | | $ | 0.46 | $ | | ||||||||||||
Income (loss) from continuing operations per
share of common stock: |
||||||||||||||||||||||||
Basic |
$ | 0.71 | $ | (0.14 | ) | $ | 0.80 | $ | 0.32 | $ | 0.07 | $ | 0.35 | |||||||||||
Diluted |
$ | 0.70 | $ | (0.14 | ) | $ | 0.80 | $ | 0.32 | $ | 0.07 | $ | 0.35 | |||||||||||
OPERATING DATA: |
||||||||||||||||||||||||
Freight carloads (continuing operations) |
1,238,182 | 141,006 | 1,021,657 | 1,056,710 | 829,012 | 864,471 |
Predecessor | Successor | |||||||||||||||||||
As of December 31, | As of December 31, | |||||||||||||||||||
2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
BALANCE SHEET DATA: |
||||||||||||||||||||
Total assets |
$ | 1,125,732 | $ | 1,483,239 | $ | 1,470,447 | $ | 1,598,629 | $ | 1,603,653 | ||||||||||
Long-term debt, including current maturities |
400,638 | 636,941 | 629,580 | 643,778 | 573,711 | |||||||||||||||
Stockholders equity |
472,249 | 512,749 | 471,520 | 659,331 | 704,749 |
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This managements discussion and analysis of financial condition and results of operations
contains forward-looking statements that involve risks, uncertainties and assumptions. You should
read the following discussion in conjunction with our historical consolidated financial statements
and the notes thereto. The results of operations for the periods reflected herein are not
necessarily indicative of results that may be expected for future periods.
In October 2010, we entered into a new agreement with Canadian Pacific Railway Company (CP)
to operate portions of the Ottawa Valley Railway (OVRR) line, a previously discontinued
operation. As a result of this new operating agreement, this railroad is no longer considered
discontinued for financial statement presentation purposes and thus, the results of operations of
the OVRR have been reclassified to continuing operations on our statement of operations for all
periods presented.
General
Our Business
We are a leading owner and operator of short line and regional freight railroads in North
America, operating a portfolio of 40 individual railroads with approximately 7,300 miles of track
in 27 states and three Canadian provinces. In addition, we provide non-freight services such as
engineering services, railcar storage, demurrage, leases of equipment and real estate leases and
use fees.
Recent Acquisitions and Business Development
On July 1, 2010, we acquired Atlas Railroad Construction Company (Atlas) and related assets
for $23.9 million in cash including closing adjustments for working capital, which were
approximately $2.4 million, net of cash acquired. The acquisition was funded from existing cash on
hand. Founded in 1954, Atlas is a railroad engineering, construction, maintenance and repair
company operating primarily in the U.S. Midwest and Northeast. Atlas provides railroad construction
services principally to short line and regional railroads, public-transit agencies and industrial
customers. The results of operations of Atlas have been included in our consolidated financial
statements since July 1, 2010, the acquisition date.
In August 2010, our New England Central Railroad, (NECR) was awarded a federal government
grant of $50 million through the State of Vermont to improve and upgrade the track on its property.
As part of the agreement, the NECR has committed to contribute up to approximately $19 million of
capital funds to the project. The project is expected to be completed within two years from the
grant date.
Managing Business Performance
We manage our business performance by (i) growing our freight and non-freight revenue, (ii)
driving financial improvements through a variety of cost savings initiatives, and (iii) continuing
to focus on safety to lower the costs and risks associated with operating our business.
Changes in carloads and revenue per carload have a direct impact on freight revenue. Carloads
have shown growth in 2010, after declining in 2008 and 2009 due to the global economic slowdown.
The diversity in our customer base helps mitigate our exposure to severe downturns in local
economies. We continue to implement more effective pricing by centralizing and carefully analyzing
pricing decisions to improve our freight revenue per carload.
Non-freight services offered to our customers include switching (or managing and positioning
railcars within a customers facility), storing customers excess or idle railcars on inactive
portions of our rail lines, engineering infrastructure services, third party railcar repair, and
car hire and demurrage (allowing our customers and other railroads to use our railcars for storage
or transportation in exchange for a daily fee). Each of these services leverages our existing
business relationships and generates additional revenue with minimal capital investment. Management
also continues to grow non-freight revenue from users of our land holdings for non-transportation
purposes.
Our operating costs include labor, equipment rents (locomotives and railcars), purchased
services (contract labor and professional services), diesel fuel, casualties and insurance,
materials, joint facilities and other expenses.
Management is focused on improving operating efficiency and lowering costs. Many functions
such as pricing, purchasing, capital spending, finance, insurance, real estate and other
administrative functions are centralized, which enables us to achieve cost efficiencies and
leverage the experience of senior management in commercial, operational and strategic decisions. A
number of cost
27
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savings initiatives have been broadly implemented at all of our railroads targeting lower fuel
consumption, safer operations, more efficient equipment utilization and lower costs for third party
services, among others.
Commodity Mix
Each of our 40 railroads operates independently with its own customer base. Our railroads are
spread out geographically and carry diverse commodities. For the year ended December 31, 2010,
coal, agricultural products and chemicals accounted for 21%, 15% and 11%, respectively, of our
carloads. As a percentage of our freight revenue, which is impacted by several factors including
the length of the haul, agricultural products, chemicals, coal, and metallic ores and metals
generated 16%, 15%, 10% and 10%, respectively, for the year ended December 31, 2010.
Overview
Operating revenue in the year ended December 31, 2010, was $490.3 million, compared with
$425.8 million in the year ended December 31, 2009. The net increase in our operating revenue was
primarily due to changes in commodity mix, negotiated rate increases, increased carloads and an
increase in our non-freight revenue.
Freight revenue increased $44.2 million, or 13%, in the year ended December 31, 2010, compared
with the year ended December 31, 2009, primarily due to change in commodity mix, rate increases and
a 4% increase in carloads. Non-freight revenue increased $20.3 million, or 25%, in the year ended
December 31, 2010, compared with the year ended December 31, 2009, primarily due to increases in
engineering services revenue of $15.1 million (partially due to the acquisition of Atlas), and car
repair revenue of $5.2 million, partially offset by a decrease in other revenue of $4.5 million
related to the termination of the previous OVRR lease during the fourth quarter of 2009.
Our operating ratio, defined as total operating expenses divided by total operating revenue,
was 76.6% in the year ended December 31, 2010, compared with an operating ratio of 73.2% in the
year ended December 31, 2009. This increase was primarily due to a gain associated with a lease
termination in 2009, an increase in materials and diesel fuel expense in 2010, partially offset by
a decrease in equipment rent expense in 2010. Operating expenses were $375.8 million in the year
ended December 31, 2010, compared with $311.6 million in the year ended December 31, 2009, an
increase of $64.2 million, or 21%.
In 2010 and 2009, we entered into track maintenance agreements with an unrelated third-party
customer (Shipper). Under the agreements, the Shipper paid for qualified railroad track
maintenance expenditures during 2010 and 2009 in exchange for the assignment of railroad track
miles which permits the Shipper to claim certain tax credits pursuant to Section 45G of the Code.
For the year ended December 31, 2010, the Shipper paid for $18.0 million of maintenance
expenditures and $4.3 million of capital expenditures. For the year ended December 31, 2009, the
Shipper paid for $17.1 million of maintenance expenditures and $5.3 million of capital
expenditures. We incurred $0.4 million for related consulting fees in each of the years ended
December 31, 2010 and December 31, 2009.
Net income in the year ended December 31, 2010, was $19.1 million, compared with $15.8 million
in the year ended December 31, 2009. Income from continuing operations in the year ended December
31, 2010, was $19.1 million, compared with $2.9 million in the year ended December 31, 2009. Net
income for the year ended December 31, 2009 includes an adjustment to the gain on disposal of
discontinued operations of $12.9 million primarily related to the resolution of an Australian tax
matter.
During the year ended December 31, 2010, we generated $117.2 million in cash from operating
activities. We purchased $62.7 million of property and equipment and received $4.1 million in cash
from the disposition of assets and $4.9 million of grant money for the NECR project.
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Results of Operations
Comparison of Operating Results for the Years ended December 31, 2010 and 2009
The following table sets forth the results of operations for the years ended December 31, 2010
and 2009:
Year Ended | Year Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | |||||||||||||||
Operating revenue |
$ | 490,291 | 100.0 | % | $ | 425,774 | 100.0 | % | ||||||||
Operating expenses: |
||||||||||||||||
Labor and benefits |
153,993 | 31.4 | % | 143,604 | 33.7 | % | ||||||||||
Equipment rents |
34,119 | 7.0 | % | 35,978 | 8.5 | % | ||||||||||
Purchased services |
37,971 | 7.7 | % | 30,914 | 7.3 | % | ||||||||||
Diesel fuel |
43,316 | 8.8 | % | 33,290 | 7.8 | % | ||||||||||
Casualties and insurance |
17,574 | 3.6 | % | 16,795 | 3.9 | % | ||||||||||
Materials |
19,607 | 4.0 | % | 11,399 | 2.7 | % | ||||||||||
Joint facilities |
8,667 | 1.8 | % | 6,942 | 1.6 | % | ||||||||||
Other expenses |
35,226 | 7.2 | % | 33,037 | 7.8 | % | ||||||||||
Track maintenance expense reimbursement |
(17,589 | ) | -3.6 | % | (16,656 | ) | -3.9 | % | ||||||||
Net gain on sale of assets |
(2,191 | ) | -0.5 | % | (25,839 | ) | -6.1 | % | ||||||||
Depreciation and amortization |
45,091 | 9.2 | % | 42,105 | 9.9 | % | ||||||||||
Total operating expenses |
375,784 | 76.6 | % | 311,569 | 73.2 | % | ||||||||||
Operating income |
114,507 | 23.4 | % | 114,205 | 26.8 | % | ||||||||||
Interest expense, including amortization costs |
(83,775 | ) | (86,878 | ) | ||||||||||||
Other income (loss) |
(4,759 | ) | (8,117 | ) | ||||||||||||
Income from continuing operations before income taxes |
25,973 | 19,210 | ||||||||||||||
Provision for income taxes |
6,856 | 16,299 | ||||||||||||||
Income from continuing operations |
19,117 | 2,911 | ||||||||||||||
Discontinued operations: |
||||||||||||||||
Gain on disposal of discontinued business |
| 12,931 | ||||||||||||||
Net income |
$ | 19,117 | $ | 15,842 | ||||||||||||
Operating Revenue
Operating revenue increased by $64.5 million, or 15%, to $490.3 million in the year ended
December 31, 2010, from $425.8 million in the year ended December 31, 2009. Total carloads during
the year ended December 31, 2010 increased 4% to 864,471 in 2010, from 829,012 in the year ended
December 31, 2009. The increase in operating revenue was primarily due to changes in commodity mix,
negotiated rate increases, a 4% increase in carloads and the acquisition of Atlas.
The increase in the average revenue per carload to $450 in the year ended December 31, 2010,
from $416 in the comparable period in 2009 was primarily due to commodity mix and negotiated rate
increases.
Non-freight revenue increased by $20.3 million, or 25%, to $101.5 million in the year ended
December 31, 2010 from $81.2 million in the year ended December 31, 2009, primarily due to a $15.1
million increase in engineering services revenue, partially due to the acquisition of Atlas, and
increases in car repair revenue of $5.2 million, partially offset by a decrease in other revenue of
$4.5 million related to the termination of the OVRR lease during the fourth quarter of 2009.
The following table compares our freight revenue, carloads and average freight revenue per
carload for the years ended December 31, 2010 and 2009:
Year ended December 31, 2010 | Year ended December 31, 2009 | |||||||||||||||||||||||
Average Freight | Average Freight | |||||||||||||||||||||||
Freight | Revenue per | Freight | Revenue per | |||||||||||||||||||||
Revenue | Carloads | Carload | Revenue | Carloads | Carload | |||||||||||||||||||
(Dollars in thousands, except average freight revenue per carload) | ||||||||||||||||||||||||
Industrial Products |
$ | 195,180 | 368,548 | $ | 530 | $ | 167,489 | 349,238 | $ | 480 | ||||||||||||||
Agricultural Products |
92,026 | 189,764 | 485 | 81,844 | 178,981 | 457 | ||||||||||||||||||
Construction Products |
61,663 | 127,424 | 484 | 58,320 | 122,765 | 475 | ||||||||||||||||||
Coal |
39,880 | 178,735 | 223 | 36,914 | 178,028 | 207 | ||||||||||||||||||
Total |
$ | 388,749 | 864,471 | $ | 450 | $ | 344,567 | 829,012 | $ | 416 | ||||||||||||||
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Freight revenue was $388.7 million in the year ended December 31, 2010, compared to
$344.6 million in the year ended December 31, 2009, an increase of $44.1 million or 13%. This
increase was primarily due to the net effect of the following:
Industrial products revenue increased $27.7 million or 17% primarily due to a 60% increase
in shipments of metallic ores and metals as a result of increased demand from automotive
manufacturing and energy production facilities, a 17% increase in shipments of chemicals as a
result of chemical manufacturing keeping pace with increased demand for both intermediates and
final products and increased shipments of waste and scrap material, partially offset by a 38%
decrease in other revenues as a result of fewer movements for Class I railroads;
Agricultural Products revenue increased $10.2 million or 12% primarily due to increased
demand for animal feed ingredients for domestic livestock and exports;
Construction Products revenue increased $3.3 million or 6% primarily due to increased demand
for construction aggregates; and
Coal revenue increased $3.0 million or 8% primarily due to favorable mix changes and pricing
activity.
Operating Expenses
Operating expenses increased to $375.8 million in the year ended December 31, 2010, from
$311.6 million in the year ended December 31, 2009. The operating ratio was 76.6% in 2010 compared
to 73.2% in 2009. The increase in the operating ratio was primarily due to a gain associated with a
lease termination in 2009, increased diesel fuel expenses as a result of increased carloads and
higher costs per gallon in 2010, expenses related to Atlas, and increased materials expense related
to car repair activity. The year ended December 31, 2009 includes a non-cash charge of $6.3 million
in labor and benefits expense related to the initial public offering for the expiration of a
repurchase feature under the former stock compensation agreements. During the year ended December
31, 2009, operating expenses also include $1.4 million of costs related to the restructuring and
relocation of our corporate headquarters to Jacksonville, Florida. The costs incurred during the
year ended December 31, 2009 are included within labor and benefits ($1.2 million) and purchased
services ($0.2 million).
The net increase in operating expenses was due to the following:
Labor and benefits expense increased $10.4 million, or 7% primarily due to the acquisition of
Atlas which contributed $4.7 million, an increase in salaries and wages as a result of the increase
in carload volumes of $4.0 million, an increase in healthcare costs of $3.9 million and an increase
in amortization expense related to the Companys stock-based compensation plan of $3.1 million.
These increases were partially offset by the non-cash initial public offering charge noted above
which was incurred in 2009.
Equipment rents expense decreased $1.9 million, or 5% primarily due to a reduction in railcar
lease expense from the expiration of certain railcar leases;
Purchased services expense increased $7.1 million, or 23% primarily due to a $1.9 million
increase related to Atlas, an increase of $1.5 million in professional fees for special projects
and public company related costs and a $1.3 million increase in legal fees;
Diesel fuel expense increased $10.0 million, or 30% primarily due to higher average fuel costs of
$2.44 per gallon in 2010 compared to $1.94 per gallon in 2009, resulting in an $8.6 million
increase in fuel expense and an unfavorable consumption variance of $1.3 million due to increased
carloads in 2010;
Casualties and insurance expense increased $0.8 million, or 5% primarily due to an increase in
insurance premiums and incident reserves. FRA reportable personal injuries increased slightly to 27
in the year ended December 31, 2010 from 23 in the year ended December 31, 2009. Our FRA personal
injury frequency ratio, which is measured as the number of reportable injuries per 200,000 person
hours worked, was 2.1 at December 31, 2010, compared to 1.8 at December 31, 2009. FRA reportable
train accidents decreased to 30 in the year ended December 31, 2010 from 34 in the year ended
December 31, 2009;
Materials expense increased $8.2 million, or 72% primarily due to an increase of $4.2 million in
car repair material purchases as a result of an increase in car repair activity and additional
expenses of $3.4 million related to Atlas;
Joint facilities expense increased $1.7 million, or 25% partially due to the increased carload
volume;
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Other expenses increased $2.2 million, or 7% primarily due to an increase of $1.4 million in
travel and automotive fuel expense, an increase of $1.0 million for Atlas and an increase in public
company costs of $0.7 million;
The execution of track maintenance agreements in 2010 and 2009 resulted in the Shipper paying $17.6 million
and $16.7 million of maintenance expenditures, net of related consulting fees, respectively;
Asset sales and a lease termination resulted in net gains of $2.2 million and $25.8 million in
the years ended December 31, 2010 and 2009, respectively. The gains on sales of assets in 2010 are
primarily due to land and easement sales along our corridor of track. In 2009, we terminated the
lease of the OVRR line, which resulted in a gain on disposal of $26.8 million and we sold a
portion of track owned by the Central Railroad of Indianapolis at a price set by the STB of $0.4
million, which resulted in a loss on disposition of $1.5 million. We also sold a portion of track
owned by the Central Oregon and Pacific Railroad, known as the Coos Bay Line, to the Port of Coos
Bay for $16.6 million. The carrying value of this line approximated the sale price; and
Depreciation and amortization expense increased $3.0 million or 7% due to the capitalization and
depreciation of 2009 and 2010 capital projects and the acquisition of Atlas.
Other Income (Expense) Items
Interest Expense. Interest expense, including amortization of deferred financing costs,
decreased $3.1 million to $83.8 million for the year ended December 31, 2010, from $86.9 million in
the year ended December 31, 2009. This decrease is primarily due to the redemption of $74 million
of senior secured notes in June 2010 and in November 2009. Interest expense also includes $20.9
million and $16.6 million of swap amortization costs for the years ended December 31, 2010 and
2009, respectively. In connection with the repayment of the bridge credit facility in 2009, we
terminated our existing interest rate swap. Per Derivatives and Hedging Topic, ASC 815, since the
hedged cash flow transactions, future interest payments, did not terminate, but continued with the
senior secured notes, the fair value of the hedge on the termination date in accumulated
comprehensive loss is amortized into interest expense over the shorter of the remaining life of the
swap or the maturity of the notes.
Other Loss. Other loss of $4.8 million and $8.1 million during the years ended December 31,
2010 and 2009, respectively, primarily relate to costs incurred in connection with the repurchase
of senior secured notes during the second quarter of 2010 and fourth quarter of 2009 and the
write-off of unamortized deferred loan costs associated with our former bridge credit facility in
the second quarter of 2009. Other loss also includes $1.8 million and $0.2 million of management
fee income that is recorded in connection with the transactions where our employees receive
restricted stock awards from related parties in the years ended December 31, 2010 and 2009,
respectively. As part of the restricted stock transactions, we recorded an offsetting expense in
labor and benefits. Other loss during the year ended December 31, 2010 was partially offset by a
$2.0 million transaction break-up fee, or $1.8 million net of expenses, in the third quarter of
2010.
Income Taxes. The effective income tax rate for the years ended December 31, 2010 and 2009 for
continuing operations were a provision of 26.4% and 84.8%, respectively. The overall tax rate for
the year ended December 31, 2010 was favorably impacted by a decrease in the valuation allowance
($2.9 million) and a reduction of tax reserves due to the lapse of the statute of limitations ($1.1
million). These favorable tax adjustments were partially offset by an expense relating to change in
estimates of apportioned state tax rates and other adjustments ($1.2 million) and by an expense
relating to stock-based compensation plans ($0.7 million). The overall effective tax rate for
continuing operations for the year ended December 31, 2009 was unfavorably impacted by the
repatriation of OVRRs Canadian earnings ($15.0 million) and by an increase in the valuation
allowance ($4.0 million). These unfavorable adjustments were partially offset by the resolution of
the Australian tax audit ($2.5 million), the conversion of certain operating subsidiaries to single
member limited liability companies ($1.0 million) and the adjustment of deferred tax balances
resulting from change in tax laws and change in estimates of the apportioned state rates ($2.3
million). For the year ended December 31, 2010 and 2009 we paid cash taxes of $7.4 million and $3.4
million, respectively.
Discontinued Operations. In January 2006, we completed the sale of our Alberta Railroad
Properties for $22.1 million in cash. In the year ended December 31, 2009, we recorded an
adjustment of $0.2 million, or $0.2 million, after tax, as a gain on disposal of discontinued
operations related to outstanding liabilities associated with the disposed entities.
In August 2004, we completed the sale of our Australian railroad, Freight Australia, to
Pacific National for AUD $285 million (U.S. $204 million). On May 14, 2009, we received a notice
from the Australian Taxation Office (ATO) indicating that they would not be taking any further
action in relation to its audit of the reorganization transactions. As a result, during the second
quarter of 2009, we removed the previously recorded tax reserves resulting in a benefit to the
continuing operations tax provision of $2.5 million, an adjustment to the gain on disposal of
discontinued operations of $12.3 million and reduced our accrual for consulting fees resulting in a
gain on disposal of discontinued operations of $0.7 million, or $0.5 million after tax.
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Comparison of Operating Results for the Years Ended December 31, 2009 and 2008
The following table sets forth the results of operations for the years ended December 31, 2009
and 2008:
Year Ended December 31, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Operating revenue |
$ | 425,774 | 100.0 | % | $ | 508,466 | 100.0 | % | ||||||||
Operating expenses: |
||||||||||||||||
Labor and benefits |
143,604 | 33.7 | % | 148,789 | 29.3 | % | ||||||||||
Equipment rents |
35,978 | 8.5 | % | 45,020 | 8.9 | % | ||||||||||
Purchased services |
30,914 | 7.3 | % | 38,792 | 7.6 | % | ||||||||||
Diesel fuel |
33,290 | 7.8 | % | 69,974 | 13.8 | % | ||||||||||
Casualties and insurance |
16,795 | 3.9 | % | 22,041 | 4.3 | % | ||||||||||
Materials |
11,399 | 2.7 | % | 10,663 | 2.1 | % | ||||||||||
Joint facilities |
6,942 | 1.6 | % | 12,573 | 2.5 | % | ||||||||||
Other expenses |
33,037 | 7.8 | % | 33,265 | 6.5 | % | ||||||||||
Track maintenance expense reimbursement |
(16,656 | ) | -3.9 | % | | | ||||||||||
Net gain on sale of assets |
(25,839 | ) | -6.1 | % | (1,697 | ) | -0.3 | % | ||||||||
Impairment of assets |
| | 3,420 | 0.6 | % | |||||||||||
Depreciation and amortization |
42,105 | 9.9 | % | 39,578 | 7.8 | % | ||||||||||
Total operating expenses |
311,569 | 73.2 | % | 422,418 | 83.1 | % | ||||||||||
Operating income |
114,205 | 26.8 | % | 86,048 | 16.9 | % | ||||||||||
Interest expense, including amortization costs |
(86,878 | ) | (61,678 | ) | ||||||||||||
Other loss |
(8,117 | ) | (9,008 | ) | ||||||||||||
Income from continuing operations before income taxes |
19,210 | 15,362 | ||||||||||||||
Provision for income taxes |
16,299 | 1,599 | ||||||||||||||
Income from continuing operations |
2,911 | 13,763 | ||||||||||||||
Discontinued operations: |
||||||||||||||||
Gain on disposal of discontinued business |
12,931 | 2,764 | ||||||||||||||
Net income |
$ | 15,842 | $ | 16,527 | ||||||||||||
Operating Revenue
Operating revenue decreased by $82.7 million, or 16%, to $425.8 million in the year ended
December 31, 2009, from $508.5 million in the year ended December 31, 2008. Total carloads during
the year ending December 31, 2009 decreased 22% to 829,012 in 2009, from 1,056,710 in the year
ended December 31, 2008. The decrease in operating revenue was primarily due to the decrease in
carloads and lower fuel surcharges, which declined $17.4 million from the prior period.
The average revenue per carload remained relatively constant at $416 for both years ended
December 31, 2009 and 2008. Lower fuel surcharges and negative commodity mix changes, were
partially offset by rate growth.
Non-freight revenue increased by $12.8 million, or 19%, to $81.2 million in the year ended
December 31, 2009 from $68.4 million in the year ended December 31, 2008, primarily due to
increases in car storage fees of $6.3 million and car repair income of $3.0 million, partially
offset by a decrease in car hire income of $3.7 million. In addition, during the year ended
December 31, 2009, we restructured a Class I contract on one of our Canadian railroads which
resulted in $6.4 million in revenue shifting from freight to non-freight.
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The following table compares our freight revenue, carloads and average freight revenue per
carload for the years ended December 31, 2009 and 2008:
Year Ended December 31, 2009 | Year Ended December 31, 2008 | |||||||||||||||||||||||
Average Freight | Average Freight | |||||||||||||||||||||||
Freight | Revenue per | Freight | Revenue per | |||||||||||||||||||||
Revenue | Carloads | Carload | Revenue | Carloads | Carload | |||||||||||||||||||
(Dollars in thousands, except average freight revenue per carload) | ||||||||||||||||||||||||
Industrial Products |
$ | 167,489 | 349,238 | $ | 480 | $ | 236,375 | 515,348 | $ | 459 | ||||||||||||||
Agricultural Products |
81,844 | 178,981 | 457 | 87,480 | 198,406 | 441 | ||||||||||||||||||
Construction Products |
58,320 | 122,765 | 475 | 78,822 | 165,109 | 477 | ||||||||||||||||||
Coal |
36,914 | 178,028 | 207 | 37,364 | 177,847 | 210 | ||||||||||||||||||
Total |
$ | 344,567 | 829,012 | $ | 416 | $ | 440,041 | 1,056,710 | $ | 416 | ||||||||||||||
Freight revenue was $344.6 million in the year ended December 31, 2009, compared to $440.0
million in the year ended December 31, 2008, a decrease of $95.5 million or 22%. This decrease was
primarily due to the net effect of the following:
Industrial products revenue decreased $68.9 million, or 29%, primarily due to a 55% decrease in
shipments of metallic ores and metals as a result of the temporary closure of a customer facility
and a production curtailment at facilities in Texas, a 31% decrease in waste and scrap materials
carloads as a result of declines in municipal solid waste moves for landfills in the Southeast and
reduced movements of construction debris in the Northeast, a 22% decrease in chemical carloads as a
result of the weakening manufacturing market, and a 49% decrease in bridge traffic in Canada from
the restructuring of a Class I contract in 2009, which resulted in freight revenue shifting to
non-freight revenue;
Agricultural products revenue decreased $5.6 million, or 6%, primarily due to a 12% decrease in
agricultural products carloads as a result of reduced shipments of corn and soybeans in the Midwest
and a 4% decrease in food and kindred products carloads as a result of reduced movements of spent
grain mash from ethanol plants to animal feed facilities and a decrease in production of beet sugar
in the Midwest;
Construction products revenue decreased $20.5 million, or 26%, primarily due to a 34% decrease in
forest products carloads as a result of declines in the Pacific Northwest stemming from the
continued decline in the housing and construction markets and a 19% decrease in non-metallic
mineral and products carloads as a result of decreases in construction activity in Texas and
reduced demand for minerals used in the paper industry; and
Coal revenue was relatively flat for the year ended December 31, 2009 as compared to the year
ended December 31, 2008.
Operating Expenses
Operating expenses decreased to $311.6 million in the year ended December 31, 2009, from
$422.4 million in the year ended December 31, 2008. The operating ratio was 73.2% in 2009 compared
to 83.1% in 2008. The improvement in the operating ratio was primarily due to gains of $25.8
million primarily due to a lease termination, our continuing cost
reduction initiatives, which include
reductions in labor and purchased services expenses, a decrease in maintenance expenditures for
right of way improvements as a result of the track maintenance agreement, a reduction in car hire
expense and a decrease in fuel prices in the year ended December 31, 2009 as compared to the same
period in 2008. The year ended December 31, 2009 includes a non-cash charge of $6.3 million in
labor and benefits expense related to the initial public offering for the expiration of a
repurchase feature under the former stock compensation agreements. The 2009 and 2008 operating
expenses also include $1.4 million and $6.1 million, respectively, of costs related to the
restructuring and relocation of our corporate headquarters to Jacksonville, Florida. The costs
incurred during the year ended December 31, 2009 and 2008 are included within labor and benefits
($1.2 million and $4.2 million, respectively), purchased services ($0.2 million and $1.4 million,
respectively) and other expenses ($0 and $0.5 million, respectively).
The net decrease in operating expenses is due to the following:
Labor and benefits expense decreased $5.2 million, or 4% primarily due to a reduction in labor
force as a result of the decline in carload volumes and additional cost savings initiatives
implemented by management. This decrease was partially offset by the non-
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cash initial public offering charge mentioned above which was incurred in 2009. Other benefits
expense also included restructuring costs during the years ended 2009 and 2008 as mentioned above;
Equipment rents expense decreased $9.0 million, or 20% primarily due to a reduction in car hire
expense as a result of the decline in carload volume;
Purchased services expense decreased $7.9 million, or 21% primarily due to cost reduction
initiatives implemented by management during 2009 and costs incurred in connection with the
restructuring and relocation of corporate headquarters in 2008;
Diesel fuel expense decreased $36.7 million, or 52% primarily due to lower average fuel costs of
$1.94 per gallon in 2009 compared to $3.23 per gallon in 2008, resulting in a $21.1 million
decrease in fuel expense and a favorable consumption variance of $15.1 million;
Casualties and insurance expense decreased $5.2 million, or 24% primarily due to management
initiatives to decrease safety related incidents. FRA reportable train accidents decreased to 34 in
the year ended December 31, 2009 from 44 in the year ended December 31, 2008 while FRA personal
injuries decreased to 23 in the year ended December 31, 2009 from 26 in the year ended December 31,
2008. Our FRA personal injury frequency ratio, which is measured as the number of reportable
injuries per 200,000 person hours worked, was 1.8 at December 31, 2009, compared to 1.6 at December
31, 2008;
Materials expense increased $0.7 million, or 7% primarily due to an increase in car repair
material purchases, partially offset by a decrease of $1.2 million in locomotive and track
materials as a result of fewer repairs;
Joint facilities expense decreased $5.6 million, or 45% partially due to the decline in carload
volume;
Other expenses remained relatively flat for the year ended December 31, 2009 as compared to the
year ended December 31, 2008;
The execution of the track maintenance agreement in 2009 resulted in the Shipper paying for $17.1
million of maintenance expenditures and we incurred $0.4 million for related consulting fees;
Asset sales and a lease termination resulted in net gains of $25.8 million and $1.7 million in
the years ended December 31, 2009 and 2008, respectively. In 2009, we terminated the lease of the
OVRR line which resulted in a gain on disposal of $26.8 million.
In 2009, we sold of a portion of
track owned by the Central Railroad of Indianapolis at a price set by the STB of $0.4 million,
which resulted in a loss on disposition of $1.5 million. We also sold a portion of track owned by
the Central Oregon and Pacific Railroad, known as the Coos Bay Line, to the Port of Coos Bay for
$16.6 million. The carrying value of this line approximated the sale price. The gain on sale of
assets of $1.7 million in 2008 was primarily due to land and easement sales along our corridor of
track;
Impairment of assets of $3.4 million for the year ended December 31, 2008 related to the former
corporate headquarters building located in Boca Raton, Florida and disposed surplus locomotives;
and
Depreciation and amortization expense increased as a percentage of operating revenue to 9.9% in
the year ended December 31, 2009, from 7.8% in the year ended December 31, 2008 due to the
capitalization and depreciation of 2008 and 2009 capital projects and the overall decrease in
operating revenue.
Other Income (Expense) Items
Interest Expense. Interest expense, including amortization of deferred financing costs,
increased $25.2 million to $86.9 million for the year ended December 31, 2009, from $61.7 million
in the year ended December 31, 2008. This increase is primarily due to an increase in the effective
interest rate on our debt beginning in the third quarter of 2008, which includes interest expense
on our interest rate swaps and the amortization of deferred financing costs. The interest rate on
the bridge credit facility increased to LIBOR plus 4.00% from LIBOR plus 2.25%, effective July 1,
2008 as part of the amendment to extend the maturity of the loan. The amortization of deferred
financing costs increased from the prior year as a result of incurring deferred financing costs
associated with the 2008 amendment and extension of the bridge credit facility. Interest expense
includes $26.9 million and $10.1 million of amortization costs for the years ended December 31,
2009 and 2008, respectively. Amortization costs in the year ended December 31, 2009 include $16.6
million of swap termination cost amortization. In connection with the repayment of the bridge
credit facility, we terminated our
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existing interest rate swap. Per Derivatives and Hedging Topic, ASC 815, since the hedged
cash flow transactions, future interest payments, did not terminate, but continued with the senior secured
notes, the fair value of the hedge on the termination date in accumulated comprehensive loss is
amortized into interest expense over the shorter of the remaining life of the swap or the maturity
of the notes.
Other Income (Loss). Other loss of $8.1 million during the year ended December 31, 2009
primarily relates to costs incurred in connection with the repurchase of senior secured notes
during the fourth quarter of 2009 and the write-off of unamortized deferred loan costs associated
with our former bridge credit facility. Other loss of $9.0 million during the year ended December
31, 2008 primarily relates to foreign exchange losses associated with the U.S. dollar term
borrowing held by one of our Canadian subsidiaries. For the year ended December 31, 2008 the
exchange rates decreased, resulting in a foreign exchange loss of $8.3 million.
Income Taxes. Our effective income tax rates for the years ended December 31, 2009 and 2008
for continuing operations were a provision of 84.8% and 10.4%, respectively. The overall effective
tax rate for continuing operations for the year ended December 31, 2009 was unfavorably impacted by
the repatriation of OVRRs Canadian earnings ($15.0 million) and by an increase in the valuation
allowance ($4.0 million). These unfavorable adjustments were partially offset by the resolution of
the Australian tax audit ($2.5 million), the conversion of certain operating subsidiaries to single
member limited liability companies ($1.0 million) and the adjustment of deferred tax balances
resulting from change in tax laws and change in estimates of the apportioned state rates ($2.3
million). The effective tax rate for continuing operations for the year ended December 31, 2008 was
adversely impacted by the tax effects for repatriation of Canadian earnings ($3.3 million), an
increase in the valuation allowance ($3.1 million), an accrual for uncertain tax positions ($1.7
million) and the revaluation of deferred taxes for change in tax laws and change in estimated state
apportionment factors ($1.4 million). The rate for the year ended December 31, 2008 included a
federal tax benefit of approximately $16 million related to the track maintenance credit provisions
enacted by the American Jobs Creation Act of 2004 and extended by the Tax Extenders and AMT Relief
Act of 2008. The rate for the year ended December 31, 2009, did not include a similar federal tax
benefit due to the execution of the Track Maintenance Agreement in 2009 as discussed above. For the
year ended December 31, 2009 and 2008 we paid cash taxes of $3.4 million and $6.7 million,
respectively.
Discontinued Operations. In January 2006, we completed the sale of our Alberta Railroad
Properties for $22.1 million in cash. In 2008, we settled working capital claims with the buyer and
as a result recorded an adjustment of $1.3 million, or $1.2 million, after tax, through the gain on
disposal of discontinued operations. In the year ended December 31, 2009, we recorded an adjustment
of $0.2 million, or $0.2 million, after tax, as a gain on disposal of discontinued operations
related to outstanding liabilities associated with the disposed entities.
In August 2004, we completed the sale of our Australian railroad, Freight Australia, to
Pacific National for AUD $285 million (U.S. $204 million). During the years ended December 31, 2008
and 2007, we incurred additional consulting costs associated with the sale of Freight Australia of
$1.9 million or $1.3 million, after tax, and $1.1 million or $0.8 million, after tax, related to
the ATO audit of the reorganization transactions undertaken by our Australian subsidiaries prior to
the sale. In addition, we recognized foreign exchange gains of $4.0 million or $2.8 million, after
tax, on tax reserves established in conjunction with the ATO audit during the period ended December
31, 2008. On May 14, 2009, we received a notice from the Australian Taxation Office (ATO)
indicating that they would not be taking any further action in relation to its audit of the
reorganization transactions. As a result, during the second quarter of 2009, we removed the
previously recorded tax reserves resulting in a benefit to the continuing operations tax provision
of $2.5 million, an adjustment to the gain on disposal of discontinued operations of $12.3 million
and reduced our accrual for consulting fees resulting in a gain on disposal of discontinued
operations of $0.7 million, or $0.5 million after tax.
Liquidity and Capital Resources
The discussion of liquidity and capital resources that follows reflects our consolidated
results and includes all subsidiaries. We have historically met our liquidity requirements
primarily from cash generated from operations and borrowings under our credit agreements which are
used to fund capital expenditures and debt service requirements. For the year ended December 31,
2010, there was a net cash inflow from operations of $117.2 million primarily due to cash flow
generated by operations. We believe that we will be able to generate sufficient cash flow from
operations to meet our capital expenditure and debt service requirements through our continued
focus on revenue growth and operating efficiency.
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Operating Activities
Cash provided by operating activities was $117.2 million for the year ended December 31, 2010,
compared to $9.5 million for the year ended December 31, 2009. The increase in cash provided by
operating activities was primarily due to cash payments made for the termination of the interest
rate swap in connection with the repayment of the bridge credit facility in June 2009 of $55.8
million.
Cash provided by operating activities was $9.5 million and $83.6 million for the years ended
December 31, 2009 and 2008, respectively. The decrease in cash provided by operating activities was
primarily due to the termination of the interest rate swap in connection with the repayment of the
bridge credit facility in June 2009, the gain on the disposal of OVRR in 2009, and timing of
interest payments.
Investing Activities
Cash (used in) provided by investing activities was $(77.6) million for the year ended
December 31, 2010, compared to $42.2 million for the year ended December 31, 2009. The 2010 results
include $23.9 million in cash used for the acquisition of Atlas. Capital expenditures were $62.7
million in the year ended December 31, 2010, compared to $47.8 million in the year ended December
31, 2009. Asset sale/disposition proceeds were $4.1 million for the year ended December 31, 2010
compared to $90.3 million for the year ended December 31, 2009, primarily due to the termination of
the OVRR lease agreement for $68.6 million and the sale of the
Coos Bay Line for $16.6 million in
2009.
Cash provided by (used in) investing activities was $42.2 million for the year ended December
31, 2009, compared to $(45.7) million for the year ended December 31, 2008. Capital expenditures
were $47.8 million in the year ended December 31, 2009, compared to $61.3 million in the year ended
December 31, 2008. Asset sale/disposition proceeds were $90.3 million for the year ended December
31, 2009 compared to $17.4 million for the year ended December 31, 2008, primarily due to the
termination of the OVRR lease agreement and the sale of the Coos Bay Line.
Financing Activities
Cash (used in) provided by financing activities was $(77.2) million for the year ended
December 31, 2010, compared to $111.2 million in the year ended December 31, 2009. The decrease in
cash provided by financing activities from December 31, 2009 to December 31, 2010 was due to the
common stock proceeds generated from the initial public offering in October 2009 and the issuance
of the 9.25% senior secured notes, partially offset by the cash used to repay the existing bridge
credit facility and financing costs associated with the issuance of the notes. On November 16,
2009, we redeemed $74 million aggregate principal amount of the notes at a cash redemption price of
103%, plus accrued interest thereon to, but not including, the redemption date. On June 24, 2010,
we redeemed $74 million aggregate principal amount of the notes at a cash redemption price of 103%,
plus accrued interest thereon to, but not including, the redemption date.
Cash provided by (used in) financing activities was $111.2 million for the year ended December
31, 2009, compared to $(24.8) million in the year ended December 31, 2008. The cash provided by
financing activities in the year ended December 31, 2009 was due to the common stock proceeds
generated from the initial public offering in October 2009 and the issuance of the 9.25% senior
secured notes, partially offset by the cash used to repay the existing bridge credit facility and
financing costs associated with the issuance of the notes. The cash used in financing activities
during the year ended December 31, 2008 was primarily due to the amendment fee paid in conjunction
with the extension of the bridge credit facility and the repayment of the mortgage on the corporate
headquarters building sold during the third quarter of 2008.
Working Capital
As of December 31, 2010, we had working capital of $152.0 million, including cash on hand of
$153.0 million, and approximately $21.4 million of availability under the ABL Facility (as defined
below), compared to working capital of $202.2 million, including cash on hand of $190.2 million,
and $17.1 million of availability under the ABL Facility at December 31, 2009. The working capital
decrease at December 31, 2010, compared to December 31, 2009, is primarily due to the use of cash
for the paydown of the senior secured notes in June 2010 and the acquisition of Atlas in July 2010.
In June 2009, we declared and paid a cash dividend in the amount of $20.0 million to our common
stockholders.
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Our cash flows from operations and borrowings under our credit agreements historically have
been sufficient to meet our ongoing operating requirements, to fund capital expenditures for
property, plant and equipment, and to satisfy our debt service requirements. We expect to continue
to sufficiently meet our ongoing operating requirements with our cash flows from operations and
borrowings under the ABL Facility.
Capital Expenditures
The following table sets forth our track and related assets capital expenditures by major type
for the years ended December 31, 2010, 2009, and 2008.
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(amounts in thousands) | ||||||||||||
Ties |
$ | 19,594 | $ | 19,472 | $ | 21,822 | ||||||
Bridges |
8,309 | 7,328 | 7,127 | |||||||||
Surfacing |
5,817 | 5,358 | 5,424 | |||||||||
Rail |
12,173 | 3,521 | 3,909 | |||||||||
Crossings |
3,379 | 3,086 | 2,746 | |||||||||
Turnouts |
896 | 1,306 | 734 | |||||||||
Signals |
1,858 | 1,258 | 1,194 | |||||||||
Other |
| 632 | 647 | |||||||||
Casualty related |
1,800 | 92 | 5,217 | |||||||||
NECR grant reimbursements |
(4,884 | ) | | | ||||||||
Capital reimbursements |
(4,686 | ) | (5,478 | ) | | |||||||
Total |
$ | 44,256 | $ | 36,575 | $ | 48,820 | ||||||
The increase in track and related assets capital expenditures in 2010 compared to 2009 was
primarily due to the NECR track upgrade grant project. The decrease in track and related assets
expenditures in 2009 from 2008 was primarily due to capital reimbursements from the track
maintenance agreement and unplanned casualty related capital expenditures in 2008.
The following table sets forth the approximate number of ties installed and replaced, miles of
rail installed and replaced and track miles resurfaced during the years ended December 31, 2010,
2009 and 2008.
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Ties (each, in thousands) |
||||||||||||
Installed |
| 3 | | |||||||||
Replaced |
346 | 346 | 362 | |||||||||
Rail (miles) |
||||||||||||
Installed |
| 1 | | |||||||||
Replaced |
22 | 16 | 14 | |||||||||
Surfaced (miles) |
768 | 873 | 942 |
Long-term Debt
$740 million 9.25% Senior Secured Notes
On June 23, 2009, we sold $740.0 million of 9.25% senior secured notes due July 1, 2017 in a
private offering for gross proceeds of $709.8 million after deducting the initial purchasers fees
and the original issue discount. The notes are secured by first-priority liens on substantially all
of our and the guarantors assets. The guarantors are defined essentially as our existing and
future wholly-owned domestic restricted subsidiaries. The net proceeds received from the issuance
of the notes were used to repay the outstanding balance of the $650 million bridge credit facility,
as described below, and $7.4 million of accrued interest thereon, pay costs of $57.1 million to
terminate interest rate swap arrangements, including $1.3 million of accrued interest, entered into
in connection with the bridge credit facility and pay fees and expenses related to the offering and
for general corporate purposes.
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We may redeem up to 10% of the aggregate principal amount of the notes issued during any
12-month period commencing on the issue date at a price equal to 103% of the principal amount
thereof plus accrued and unpaid interest, if any. We may also redeem some or all of the notes at
any time before July 1, 2013, at a price equal to 100% of the aggregate principal amount thereof
plus accrued and unpaid interest, if any, to the redemption date and a make-whole premium. In
addition, prior to July 1, 2012, we may redeem up to 35% of the notes at a redemption price of
109.25% of their principal amount thereof plus accrued and unpaid interest, if any, with the
proceeds from an equity offering. Subsequent to July 1, 2013, we may redeem the notes at 104.625%
of their principal amount. The premium then reduces to 102.313% commencing on July 1, 2014 and then
100% on July 1, 2015 and thereafter. On November 16, 2009, we redeemed $74 million aggregate
principal amount of the notes at a cash redemption price of 103%, plus accrued interest thereon to,
but not including, the redemption date. On June 24, 2010, we redeemed $74 million aggregate
principal amount of the notes at a cash redemption price of 103%, plus accrued interest thereon to,
but not including, the redemption date.
On November 2, 2009, we commenced an exchange offer of the privately placed senior secured
notes for senior secured notes which have been registered under the Securities Act. The registered
notes have terms that are substantially identical to the privately placed notes. The exchange offer
expired on December 2, 2009.
We may issue from time to time additional debt, without notice to or consent of the existing
senior secured notes holders, having identical terms and conditions to the existing senior secured
notes. Any additional notes issued shall be treated as a single class along with the existing
senior secured notes.
$40 million ABL Facility
In connection with the issuance of the senior secured notes on June 23, 2009, we also entered
into a $40 million Asset Backed Loan (ABL) Facility. The ABL Facility matures on June 23, 2013
and bears interest at LIBOR plus 4.00%. Obligations under the ABL Facility are secured by a
first-priority lien in the ABL collateral. ABL collateral includes accounts receivable, deposit
accounts, securities accounts and cash. As of December 31, 2010, we had no outstanding balance
under the ABL Facility and approximately $21.4 million of undrawn availability, taking into account
borrowing base limitations.
On June 10, 2010, we entered into Amendment No. 1 to the ABL Facility improving certain terms
of the ABL Facility. Among other things, Amendment No. 1 eliminates the LIBOR-based interest rate
floor of 2.5%, modifies the borrowing base calculation and reporting requirements to require less
frequent financial reporting in certain circumstances, adjusts the limitations on permitted
acquisitions and restricted payments and amends the financial covenants to incorporate cash
balances in certain definitions.
On February 23, 2011, we entered into Amendment No. 2 to the Asset Backed Loan Facility.
Amendment No. 2 adjusts certain terms of the ABL Facility and increases the threshold for
Restricted Payments, as defined in the ABL Facility, to allow share repurchases of our common stock
in an amount not exceed $75 million without affecting other Restricted Payment baskets.
Covenants to Senior Secured Notes and ABL Facility
The indenture governing the senior secured notes contains certain limitations and restrictions
on us and our restricted subsidiaries (as of the date of this report, all of our subsidiaries were
restricted subsidiaries) ability to, among other things, incur additional indebtedness; issue
preferred and disqualified stock; purchase or redeem capital stock; make certain investments; pay
dividends or make other payments or loans or transfer property; sell assets; enter into certain
types of transactions with affiliates involving consideration in excess of $5.0 million; create
liens on certain assets; and sell all or substantially all of our assets or our guarantors assets
or merge with or into another company.
The covenants are subject to important exceptions and qualifications described below.
We and our restricted subsidiaries are prohibited from incurring or issuing additional
indebtedness and disqualified stock and its restricted subsidiaries are prohibited from issuing
preferred stock unless our fixed charge coverage ratio, defined as Adjusted EBITDA less capital
expenditures divided by fixed charges, for the most recently ended four full fiscal quarters would
have been at least 2.00 to 1.00 on a pro forma basis. In addition, we may, among other things,
incur certain credit facilities debt not to exceed the greater of (i) $60 million and (ii) the
borrowing base; purchase money indebtedness or capital lease obligations not to exceed the greater
of (i) $80 million and (ii) 5.0% of total assets; indebtedness of foreign subsidiaries not to
exceed the greater of (i) $25 million and (ii) 15% of total assets of foreign subsidiaries;
acquired debt so long as we would be permitted to incur at least an additional $1 of indebtedness
under its fixed charge ratio or such ratio is greater following the transaction; and up to $100
million (limited to
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$50 million for restricted subsidiaries) indebtedness, disqualified stock or preferred stock, subject to
increase from the proceeds of certain equity sales and capital contributions.
Furthermore, we and our restricted subsidiaries are prohibited from purchasing or redeeming
capital stock; making certain investments, paying dividends or making other payments or loans or
transfers of property, unless we could incur an additional dollar of indebtedness under our fixed
charge ratio and such payment is less than 50% of our consolidated net income plus certain other
items that increase the size of the payment basket. In addition, we may, among other things, make
any payment from the proceeds of a capital contribution or concurrent offering of equity interests
of us; make stock buy-backs from current and former employees/directors in an amount to not exceed
$5 million per year, subject to carryover of unused amounts into subsequent years (capped at $10
million in any year) and subject to increase for cash proceeds from certain equity issuances to
employees/directors and cash proceeds from key man life insurance; make investments in unrestricted
subsidiaries in an amount not to exceed (i) $10 million and (ii) 0.75% of total assets; pay
dividends following a public offering up to 6% per annum of the net proceeds received by the us;
make any payments up to $25 million. Moreover, we may make investments in an amount not to exceed
the greater of (i) $25 million and (ii) 2.0% of total assets, investments in a similar business not
to exceed the greater of (i) $50 million and (ii) 3% of total assets and advances to employees not
in excess of $5 million.
Adjusted EBITDA, as defined in the indenture governing the senior secured notes, is the key
financial covenant measure that monitors our ability to undertake key investing and financing
functions, such as making investments, transferring property, paying dividends, and incurring
additional indebtedness.
The following table sets forth the reconciliation of Adjusted EBITDA from our cash flow from
operating activities (in thousands):
Year Ended | Year Ended | Year Ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash flows from operating activities to
Adjusted EBITDA Reconciliation: |
||||||||||||
Net cash provided by operating activities |
$ | 117,169 | $ | 9,540 | $ | 83,572 | ||||||
Changes in working capital accounts |
(10,849 | ) | 32,850 | (11,524 | ) | |||||||
Depreciation and amortization, including
amortization of debt issuance costs
classified in interest expense |
(49,847 | ) | (52,340 | ) | (49,118 | ) | ||||||
Amortization of swap termination costs |
(20,891 | ) | (16,616 | ) | | |||||||
Net gain on sale or disposal of properties |
2,191 | 26,766 | 1,738 | |||||||||
Foreign exchange gain (loss) on debt |
| 1,160 | (8,260 | ) | ||||||||
Swap termination costs |
| 55,750 | | |||||||||
Loss on extinguishment of debt |
(8,357 | ) | (9,499 | ) | | |||||||
Equity compensation costs |
(7,534 | ) | (10,712 | ) | (3,042 | ) | ||||||
Deferred income taxes |
(2,765 | ) | (21,057 | ) | 3,161 | |||||||
Net income |
19,117 | 15,842 | 16,527 | |||||||||
Add: Discontinued operations gain |
| (12,931 | ) | (2,764 | ) | |||||||
Income from continuing operations |
19,117 | 2,911 | 13,763 | |||||||||
Add: |
||||||||||||
Provision for income taxes |
6,856 | 16,299 | 1,599 | |||||||||
Interest expense, including amortization costs |
83,775 | 86,878 | 61,678 | |||||||||
Depreciation and amortization |
45,091 | 42,105 | 39,578 | |||||||||
EBITDA |
154,839 | 148,193 | 116,618 | |||||||||
Add: |
||||||||||||
Impairment of assets |
| | 3,420 | |||||||||
Equity compensation costs |
7,534 | 10,712 | 3,042 | |||||||||
Foreign exchange (gain) loss on debt |
| (1,160 | ) | 8,260 | ||||||||
Loss on extinguishment of debt |
8,357 | 9,499 | | |||||||||
Acquisition income, net of expense |
(1,300 | ) | | | ||||||||
Gain on OVRR lease termination |
| (26,811 | ) | | ||||||||
Non-recurring headquarter relocation costs |
| 1,403 | 6,089 | |||||||||
Adjusted EBITDA |
$ | 169,430 | $ | 141,836 | $ | 137,429 | ||||||
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Based on current levels of Adjusted EBITDA, we are not restricted in undertaking key investing
and financing functions as discussed above.
Adjusted EBITDA, as presented herein, is a supplemental measure of liquidity that is not
required by, or presented in accordance with, GAAP. We use non-GAAP financial measures as a
supplement to our GAAP results in order to provide a more complete understanding of the factors and
trends affecting our business. However, Adjusted EBITDA has limitations as an analytical tool. It
is not a measurement of our cash flows from operating activities under GAAP and should not be
considered as an alternative to cash flow from operating activities as a measure of liquidity.
The ABL Facility includes customary affirmative and negative covenants, including, among other
things, restrictions on (i) the incurrence of indebtedness and liens, (ii) investments and loans,
(iii) dividends and other payments with respect to capital stock, (iv) redemption and repurchase of
capital stock, (v) mergers, acquisitions and asset sales, (vi) payments and modifications of other
debt (including the notes), (vii) affiliate transactions, (viii) altering our business, (ix)
engaging in sale-leaseback transactions and (x) entering into agreements that restrict our ability
to create liens or repay loans or issue capital stock. In addition, if total liquidity under the
ABL Facility is below $20.0 million, we will be subject to a minimum fixed charge coverage ratio of
1.1 to 1.0.
$650 million Bridge Credit Facility
As part of the merger transaction in which we were acquired by certain private equity funds
managed by affiliates of Fortress we terminated the commitments under our former amended and
restated credit agreement and repaid all outstanding loans and other obligations in full under this
agreement. In order to fund this repayment of debt and complete the merger transaction, on February
14, 2007, we entered into a $650 million bridge credit facility agreement. The facility consists of
a $587 million U.S. dollar term loan commitment and a $38 million Canadian dollar term loan
commitment, as well as a $25 million revolving loan facility with a $20 million U.S. dollar tranche
and a $5 million Canadian dollar tranche. We entered into an amendment on July 1, 2008 to extend
the maturity of the bridge credit facility for one year with an additional one year extension at
our option. Under the amended bridge credit facility agreement, the term loans and revolving loans
paid interest at LIBOR plus 4.00%. Prior to amendment, the bridge credit facility agreement,
including the revolving loans, paid interest at LIBOR plus 2.25%.
In November 2008, we entered into Amendment No. 1 to the amended bridge credit facility
agreement which permitted us to enter into employee and office space sharing agreements with
affiliates and included a technical amendment to the definitions of interest coverage ratio and
interest expense.
The U.S. and Canadian dollar term loans and the U.S. and Canadian dollar revolvers were
collateralized by the assets of and guaranteed by us and most of our U.S. and Canadian
subsidiaries. The loans were provided by a syndicate of banks with Citigroup Global Markets, Inc.
and Morgan Stanley Senior Funding, Inc., as co-lead arrangers, Citicorp North America, Inc., as
administrative agent and collateral agent and Morgan Stanley Senior Funding, Inc. as syndication
agent.
Interest Rate Swaps
On February 14, 2007, we entered into an interest rate swap with a termination date of
February 15, 2014. The total notional amount of the swap started at $425 million for the period
commencing February 14, 2007 through November 14, 2007, increasing to a total notional amount of
$525 million for the period commencing November 15, 2007 through November 14, 2008, and ultimately
increased to $625 million for the period commencing November 15, 2008 through February 15, 2014.
Under the terms of the interest rate swap, we were required to pay a fixed interest rate of 4.95%
on the notional amount while receiving a variable interest rate equal to the 90 day LIBOR. This
swap qualified, was designated and was accounted for as a cash flow hedge under ASC 815. This
interest rate swap agreement was terminated in June 2009, in connection with the repayment of the
bridge credit facility, and thus had no fair value at December 31, 2009. Interest expense of $0.3
million was recognized during the year ended December 31, 2009 for the portion of the hedge deemed
ineffective. Interest expense of $0.5 million was recognized during the year ended December 31,
2008 for the portion of the hedge deemed ineffective. Pursuant to ASC 815, the fair value balance
of the swap at the termination date remains in accumulated other comprehensive loss, net of tax,
and is amortized into
interest expense over the remaining life of the original swap (through February 14, 2014). As
a result of the $74 million redemption of the notes during June 2010, an additional $1.7 million of
unamortized expense was recognized during the year ended December 31, 2010. This was the result of
reducing the face value of the outstanding senior secured notes below the notional amount of the
swap. As of December 31, 2010, accumulated other comprehensive
loss included $12.7 million, net of tax, of unamortized loss relating to the terminated
swap. Reclassifications from accumulated other comprehensive loss to interest expense in the next
twelve months will be approximately $11.9 million, or $7.2 million, net of tax.
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On June 3, 2005, we entered into two interest rate swaps for a total notional amount of $100
million for the period commencing November 25, 2005 through November 24, 2008. Under the terms of
the interest rate swaps, we were required to pay a fixed interest rate of 4.04% on $100 million
while receiving a variable interest rate equal to the 90 day LIBOR. These swaps qualified, were
designated and were accounted for as cash flow hedges under ASC 815. One of the interest rate swaps
with a total notional amount of $50 million was terminated on February 12, 2007 while the remaining
amount terminated as planned on November 24, 2008, and thus had no fair value at December 31, 2009.
Interest expense of $0.5 million was recognized during the year ended December 31, 2008, for the
portion of the hedge deemed ineffective.
For derivative instruments in an asset position, we analyze the credit standing of the
counterparty and factor it into the fair value measurement. Fair Value Measurements and Disclosures
Topic, ASC 820, states that the fair value of a liability must reflect the nonperformance risk of
the reporting entity. Therefore, the impact of our credit worthiness has also been factored into
the fair value measurement of the derivative instruments in a liability position.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements.
Contractual Obligations
Two primary uses of the cash provided by our operations are capital expenditures and debt
service. The following table represents the minimum future payments on our long-term debt, and our
existing lease obligations as of December 31, 2010 (in thousands):
After | ||||||||||||||||||||
Total | 2011 | 2012-2013 | 2014-2015 | 2015 | ||||||||||||||||
Senior secured notes |
$ | 592,000 | $ | | $ | | $ | | $ | 592,000 | ||||||||||
Other long term debt |
2,527 | 380 | 605 | 678 | 864 | |||||||||||||||
Interest payments on senior secured notes |
355,940 | 54,760 | 109,520 | 109,520 | 82,140 | |||||||||||||||
Interest payments on long term debt |
768 | 157 | 254 | 274 | 83 | |||||||||||||||
Capital lease obligations |
25 | 25 | | | | |||||||||||||||
Operating lease obligations |
57,466 | 17,318 | 16,801 | 5,021 | 18,326 | |||||||||||||||
Total contractual cash obligations(1) |
$ | 1,008,726 | $ | 72,640 | $ | 127,180 | $ | 115,493 | $ | 693,413 | ||||||||||
(1) | There were no material purchase obligations outstanding as of December 31, 2010. Table excludes any reserves for income taxes under Income Taxes Topic, ASC 740-10-25, because we are unable to reasonably predict the ultimate amount or timing of settlement of our unrecognized tax benefits beyond 2010. As of December 31, 2010, our reserves for income taxes totaled approximately $5.5 million. |
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles in the United States (GAAP) requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. These estimates are based on managements current
expectations and beliefs and are subject to a number of factors that could lead to actual results
materially differing from the estimates. The factors impacting managements estimates are set forth
below.
The critical financial statement accounts that are subject to significant estimation are
reserves for litigation, casualty and environmental matters, allowance for doubtful accounts,
deferred income taxes, property, plant and equipment depreciation methods and goodwill and
intangible assets.
In accordance with Contingencies Topic, ASC 450, an accrual for a loss contingency is
established if information available prior to the issuance of the financial statements indicates
that it is probable that a liability has been incurred or an asset
has been impaired and can be reasonably estimated. These estimates have been developed in consultation with outside
counsel handling our defense in these
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matters and are based upon an analysis of potential results,
assuming a combination of litigation and settlement strategies. Subsequent changes to those
estimates are reflected in our statements of operations in the period of the change.
Deferred tax assets and liabilities are recognized based on differences between the financial
statement carrying amounts and the tax bases of assets and liabilities. We regularly review our
deferred tax assets for recoverability and establish a valuation allowance based on historical
taxable income, projected future taxable income, and the expected timing of the reversals of
existing temporary differences. If we are unable to generate sufficient future taxable income, or
if there is a material change in the statutory tax rates or time period within which the underlying
temporary differences become taxable or deductible, we could be required to establish an additional
valuation allowance against a portion of our deferred tax asset, resulting in an increase in our
effective tax rate and an adverse effect on earnings. Additionally, changes in our estimates
regarding the statutory tax rates to be applied to the reversal of deferred tax assets and
liabilities could materially affect our effective tax rate.
Property, plant and equipment comprised 61% of our total assets as of December 31, 2010. These
assets are stated at cost, less accumulated depreciation. For track and related assets, we use the
group method of depreciation under which a single depreciation rate is applied to the gross
investment. Service lives and salvage values for each group of assets are determined by completing
periodic life studies and applying our assumptions regarding service lives of our property. A life
study is the periodic review of asset lives for groups of assets conducted and analyzed by us with
the assistance of a third-party expert. Upon normal sale or retirement of track assets, cost less
net salvage value is charged to accumulated depreciation and no gain or loss is recognized. As
part of the life studies, we make an assessment of the recorded amount of accumulated depreciation.
Any deficiency (excess), including any deferred gains or losses, will be amortized as a component
of depreciation expense over the remaining useful life of the asset group until the next life
study. In the event that large groups of assets are removed from service as a result of unusual
acts or sale, gains or losses are recognized immediately. Building, equipment and other fixed
assets are specifically identified and we utilize straight line depreciation methods on a per asset
basis.
Expenditures that increase asset values or extend useful lives are capitalized. Repair and
maintenance expenditures are charged to operating expense when the work is performed. For the years
ended December 31, 2010, 2009 and 2008 repairs and maintenance expenditures charged to operating
expense represented approximately 50% of our total spend (including capitalized expenditures) for
track and related assets. We self-construct portions of our track structure and rebuild certain
rolling stock. In addition to direct labor and material we capitalize certain indirect costs. We
periodically review the carrying value of our long-lived assets for impairment. This review is
based upon our projections of anticipated future cash flows. While we believe that our estimates of
future cash flows are reasonable, different assumptions regarding such cash flows could materially
affect our evaluations.
We review the carrying values of goodwill and identifiable intangible assets with indefinite
lives at least annually to assess impairment since these assets are not amortized. Additionally, we
review the carrying value of goodwill or any intangible asset whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable. Management assesses
impairment by comparing the fair value of an intangible asset or goodwill with its carrying value.
Specifically, we test for impairment in accordance with Intangibles- Goodwill and Other Topic, ASC
350. For goodwill, a two-step impairment model is used. The first step compares the fair value of
the reporting unit with its carrying amount, including goodwill. The determination of fair value
involves significant management judgment. If the fair value of the reporting unit is less than the
carrying amount, goodwill would be considered impaired. The second step measures the goodwill
impairment as the excess of recorded goodwill over the assets implied fair value. Impairments are
recognized when incurred.
For the indefinite-lived intangible assets the impairment test compares the fair value of an
intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds
its fair value, an impairment loss is recognized in an amount equal to that excess. The Company has
certain railroad leases that are recorded as indefinite-lived intangible assets.
No circumstances have occurred to indicate an impairment and management believes that goodwill
and the indefinite-lived intangible assets are not impaired based on the results of the annual
impairment test. However, a change in circumstances in the future that may negatively impact cash
flows including, but not limited to, a loss of a key customer, a significant reduction in the
forecast of a reporting units carloadings, regulatory or legislative changes or a decrease in our
market capitalization could result in an interim impairment test. The result of such an impairment
test could result in the write-off of goodwill or indefinite lived intangible assets in a future
accounting period.
For a complete description of our accounting policies, see Note 1 to our consolidated
financial statements.
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Recently Issued Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires some new disclosures and
clarifies some existing disclosure requirements about fair value measurement as set forth in
Codification Subtopic 820-10. ASU 2010-06 amends Codification Subtopic 820-10 to now require (1) a
reporting entity to disclose separately the amounts of significant transfers in and out of Level 1
and Level 2 fair value measurements and describe the reasons for the transfers; (2) in the
reconciliation for fair value measurements using significant unobservable inputs, a reporting
entity should present separately information about purchases, sales, issuances, and settlements,
and (3) a reporting entity should provide disclosures about the valuation techniques and inputs
used to measure fair value for both recurring and nonrecurring fair value measurements. ASU 2010-06
is effective for interim and annual reporting periods beginning after December 15, 2009, except for
the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity
in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASU No.
2010-06 did not have a material impact on the Companys financial position or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks from changing foreign currency exchange rates, interest rates
and diesel fuel prices. Changes in these factors could cause fluctuations in earnings and cash
flows.
Foreign Currency. Our foreign currency risk arises from owning and operating railroads in
Canada. As of December 31, 2010, we had not entered into any currency hedging transactions to
manage this risk. A decrease in the Canadian dollar could negatively impact our reported revenue
and earnings for the affected period. During 2010, the Canadian dollar increased 5% in value in
comparison to the U.S. dollar, while the average rate for the year ended 2010 was 10% higher than
it was for 2009. The increase in the average Canadian dollar exchange rate led to an increase of
$5.7 million in reported revenue and a $2.5 million increase in reported operating income in 2010,
compared to 2009. A 10% unfavorable change in the 2010 average exchange rate would have negatively
impacted 2010 revenue by $5.7 million and operating income by $2.5 million.
Interest Rates. Our senior secured notes issued in June 2009 are fixed rate instruments, and
therefore, would not be impacted by changes in interest rates. Our potential interest rate risk
results from our ABL Facility as an increase in interest rates would result in lower earnings and
increased cash outflows. We do not currently have any outstanding balances under this facility, but
if we were to draw upon it, we would be subject to changes in interest rates.
Diesel Fuel. We are exposed to fluctuations in diesel fuel prices, as an increase in the
price of diesel fuel would result in lower earnings and increased cash outflows. Fuel costs
represented 8.8% of total operating revenues during the year ended December 31, 2010. Due to the
significance of fuel costs to our operations and the historical volatility of fuel prices, we
participate in fuel surcharge programs which provide additional revenue to help offset the increase
in fuel expense. These fuel surcharge programs fluctuate with the price of diesel fuel with a lag
of three to nine months. Each one-cent change in the price of fuel would result in approximately a
$0.2 million change in fuel expense on an annual basis.
Counterparty Risk. We monitor our hedging positions and the credit ratings of our
counterparties and do not anticipate losses due to counterparty non-performance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of RailAmerica, the accompanying notes thereto and the
report of the independent registered certified public accounting firm are included as part of this
Form 10-K and immediately follow the signature page of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES. Based on an evaluation by our management, with the
participation of our chief executive officer and chief financial officer, as of the end of the
period covered by this report, our chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act) are effective to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in SECs rules and forms and that such information is
accumulated and communicated to our management, including our chief executive and chief financial
officers, as appropriate to allow timely decisions regarding required disclosure.
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING. Our management is
responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the
participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control over financial
reporting based on the framework included in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation
under the COSO framework, our management concluded that our internal control over financial
reporting was effective as of December 31, 2010. Ernst & Young LLP, the independent registered
public accounting firm that audited the Companys consolidated financial statements, has issued an
attestation report on the Companys internal control over financial reporting as of December 31,
2010. The report on the Companys internal control over financial reporting as of December 31,
2010, is on page F-3.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any changes in our
internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the last fiscal quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning directors, executive officers and nominees and our code of ethics is
incorporated by reference from our definitive proxy statement relating to our 2011 Annual Meeting
of Stockholders to be filed with the SEC on or before April 30, 2011.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference from our definitive
proxy statement relating to our 2011 Annual Meeting of Stockholders to be filed with the SEC on or
before April 30, 2011.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership and securities issuable under equity compensation
plans is incorporated by reference from our definitive proxy statement relating to our 2011 Annual
Meeting of Stockholders to be filed with the SEC on or before April 30, 2011.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning certain relationships and related transactions, and director
independence, is incorporated by reference from our definitive proxy statement relating to our 2011
Annual Meeting of Stockholders to be filed with the SEC on or before April 30, 2011.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning principal accountant fees and services is incorporated by reference
from our definitive proxy statement relating to our 2011 Annual Meeting of Stockholders to be filed
with the SEC on or before April 30, 2011.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | The financial statements filed as part of this report are listed separately in the Index of Financial Statements on page F-1 of this report. | ||
The information required by Schedule II, Valuation and Qualifying Accounts, is included in Note 1 to the Consolidated Financial Statements. All other Financial Statement schedules are not applicable. | |||
(b) | Exhibits |
Exhibit | ||||
No. | Description | |||
3.1 | Amended and Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to RailAmerica, Inc.s Form
S-4 (File No. 333-162575) filed on October 20, 2009). |
|||
3.2 | Amended and Restated Bylaws of the Registrant (incorporated by reference
to Exhibit 3.2 to RailAmerica, Inc.s Form S-4 (File No. 333-162575)
filed on October 20, 2009). |
|||
4.1 | Stockholders Agreement by and between RailAmerica, Inc. and RR
Acquisition Holding, LLC (incorporated by reference to Exhibit 4.1 to
RailAmerica, Inc.s Form S-4 (File No. 333-162575) filed on October 20,
2009). |
|||
4.2 | Indenture, dated as of June 23, 2009, by and between RailAmerica, Inc.,
the guarantors named therein, as Guarantors, and U.S. Bank National
Association, as Trustee and Notes Collateral Agent (incorporated by
reference to Exhibit 4.3 to RailAmerica, Inc.s Form S-1 (File No.
333-160835) filed on July 27, 2009). |
|||
4.3 | Form of 9.25% Notes due 2017 (included in Exhibit 4.2). |
|||
10.1 | Credit Agreement, dated as of June 23, 2009, among RailAmerica, Inc.,
RailAmerica Transportation Corp., the several lenders from time to time
parties thereto, Citicorp North America, Inc. and Citigroup Global
Markets Inc. (incorporated by reference to Exhibit 10.1 to Amendment No.
1 to RailAmerica, Inc.s Form S-1(File No. 333-160835) filed on
September 1, 2009). |
|||
10.2 | RailAmerica, Inc. 2008 Omnibus Stock Incentive Plan (incorporated by
reference to Exhibit 10.2 to Amendment No. 2 to RailAmerica, Inc.s Form
S-1 (File No. 333-160835) filed on September 22, 2009).+ |
|||
10.3 | RailAmerica, Inc. 2009 Omnibus Stock Incentive Plan (incorporated by
reference to Exhibit 99.1 to RailAmerica, Inc.s Form S-8 (File No.
333-162428) filed on October 13, 2009).+ |
|||
10.4 | Form of Indemnification Agreement with directors and officers
(incorporated by reference to Exhibit 10.4 to Amendment No. 2 to
RailAmerica, Inc.s Form S-1 (File No. 333-160835) filed on September
22, 2009). |
|||
10.5 | Form of Management Shareholder Award Agreement (incorporated by
reference to Exhibit 10.5 to Amendment No. 3 to RailAmerica, Inc.s Form
S-1 (File No. 333-160835) filed on September 29, 2009).+ |
|||
10.6 | Form of Amended and Restated Restricted Share Agreement for Bonus
Restricted Shares under the RailAmerica, Inc. Omnibus Stock Incentive
Plan (incorporated by reference to Exhibit 10.6 to Amendment No. 3 to
RailAmerica, Inc.s Form S-1 (File No. 333-160835) filed on September
29, 2009).+ |
|||
10.7 | Form of Director Restricted Share Agreement (incorporated by reference
to Exhibit 10.7 to Amendment No. 3 to RailAmerica, Inc.s Form S-1 (File
No. 333-160835) filed on September 29, 2009).+ |
|||
10.8 | Employment Agreement, dated as of September 28, 2009, by and between
RailAmerica, Inc. and John Giles (incorporated by reference to Exhibit
10.8 to Amendment No. 3 to RailAmerica, Inc.s Form S-1 (File No.
333-160835) filed on September 29, 2009).+ |
|||
10.9 | Employment Agreement, dated as of September 28, 2009, by and between
RailAmerica, Inc. and Clyde Preslar (incorporated by reference to
Exhibit 10.9 to Amendment No. 3 to RailAmerica, Inc.s Form S-1 (File
No. 333-160835) filed on September 29, 2009).+ |
|||
10.10 | Employment Agreement, dated as of September 28, 2009, by and between
RailAmerica, Inc. and David Rohal (incorporated by reference to Exhibit
10.10 to Amendment No. 3 to RailAmerica, Inc.s Form S-1 (File No.
333-160835) filed on September 29, 2009).+ |
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Table of Contents
Exhibit | ||||
No. | Description | |||
10.11 | Employment Agreement, dated as of September 28, 2009, by and between
RailAmerica, Inc. and Paul Lundberg (incorporated by reference to
Exhibit 10.11 to Amendment No. 3 to RailAmerica, Inc.s Form S-1 (File
No. 333-160835) filed on September 29, 2009).+ |
|||
10.12 | Employment Agreement, dated as of September 28, 2009, by and between
RailAmerica, Inc. and Charles Patterson (incorporated by reference to
Exhibit 10.12 to Amendment No. 3 to RailAmerica, Inc.s Form S-1 (File
No. 333-160835) filed on September 29, 2009).+ |
|||
10.13 | Employment Agreement, dated as of September 28, 2009, by and between
RailAmerica, Inc. and Scott Williams (incorporated by reference to
Exhibit 10.13 to Amendment No. 3 to RailAmerica, Inc.s Form S-1 (File
No. 333-160835) filed on September 29, 2009).+ |
|||
10.14 | Form of FECR Rail Corp. Consulting Agreement (incorporated by reference
to Exhibit 10.14 to Amendment No. 3 to RailAmerica, Inc.s Form S-1
(File No. 333-160835) filed on September 29, 2009).+ |
|||
10.15 | Form of FECR Rail Corp. Restricted Stock Unit Award Agreement
(incorporated by reference to Exhibit 10.15 to Amendment No. 3 to
RailAmerica, Inc.s Form S-1 (File No. 333-160835) filed on September
29, 2009).+ |
|||
10.16 | Form of Florida East Coast Industries, Inc. Consulting Agreement
(incorporated by reference to Exhibit 10.16 to Amendment No. 3 to
RailAmerica, Inc.s Form S-1 (File No. 333-160835) filed on September
29, 2009).+ |
|||
10.17 | Form of Florida East Coast Industries, Inc. Restricted Stock Unit Award
Agreement (incorporated by reference to Exhibit 10.17 to Amendment No. 3
to RailAmerica, Inc.s Form S-1 (File No. 333-160835) filed on September
29, 2009).+ |
|||
10.18 | Amendment No. 1 to the Asset Backed Loan Facility entered into on June
10, 2010 (incorporated by reference to Exhibit 10.1 to RailAmerica,
Inc.s Form 8-K (File No. 1-32579) filed on June 15, 2010). |
|||
10.19 | Amendment No. 2 to the Asset Backed Loan Facility entered into on
February 23, 2011 (incorporated by reference to Exhibit 10.1 to
RailAmerica, Inc.s Form 8-K (File No. 1-32579) filed on February 23,
2011). |
|||
21.1 | Subsidiaries of the Registrant. |
|||
23.1 | Consent of Ernst & Young LLP. |
|||
31.1 | Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer |
|||
31.2 | Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer |
|||
32.1 | Principal Executive Officer Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of
2002 |
|||
32.2 | Principal Financial Officer Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of
2002 |
+ | Executive Compensation Plan or Arrangement. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
RAILAMERICA, INC. |
||||
By: | /s/ B. CLYDE PRESLAR | |||
B. Clyde Preslar, Senior Vice President and | ||||
Chief Financial Officer (Principal Financial Officer) | ||||
Dated: March 4, 2011 | ||||
In accordance with the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURES | TITLE | DATE | ||
/s/ JOHN E. GILES
|
President and Chief Executive Officer | March 4, 2011 | ||
(Principal Executive Officer) | ||||
/s/ WESLEY R. EDENS
|
Chairman of the Board of Directors | March 4, 2011 | ||
/s/ JOSEPH P. ADAMS JR.
|
Deputy Chairman of the Board of Directors | March 4, 2011 | ||
/s/ PAUL R. GOODWIN
|
Director | March 4, 2011 | ||
/s/ VINCENT T. MONTGOMERY
|
Director | March 4, 2011 | ||
/s/ ROBERT SCHMIEGE
|
Director | March 4, 2011 | ||
/s/ RANDY T. PIANIN
|
Vice President and Corporate Controller | March 4, 2011 | ||
(Principal Accounting Officer) |
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INDEX OF CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
F-2 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
F-8 |
F- 1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of RailAmerica, Inc.
We have audited the accompanying consolidated balance sheets of RailAmerica, Inc. and
subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of
operations, shareholders equity, and cash flows for each of the three years in the period ended
December 31, 2010. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of RailAmerica, Inc. and subsidiaries at December 31,
2010 and 2009, and the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), RailAmerica, Inc.s internal control over financial reporting as
of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March
4, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Independent Certified Public Accountants
Independent Certified Public Accountants
Jacksonville, Florida
March 4, 2011
March 4, 2011
F- 2
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of RailAmerica, Inc.
We have audited RailAmerica, Inc. and subsidiaries internal control over financial reporting
as of December 31, 2010, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).
RailAmerica, Inc. and subsidiaries management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, RailAmerica, Inc. and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2010 based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the 2010 consolidated financial statements of RailAmerica, Inc.
and our report dated March 4, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Independent Certified Public Accountants
Independent Certified Public Accountants
Jacksonville, Florida
March 4, 2011
March 4, 2011
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RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
2010 | 2009 | |||||||
(In thousands, except share data) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 152,968 | $ | 190,218 | ||||
Accounts and notes receivable, net of allowance of $6,767 and $4,557, respectively |
74,668 | 66,619 | ||||||
Current deferred tax assets |
12,769 | 12,697 | ||||||
Other current assets |
15,200 | 21,958 | ||||||
Total current assets |
255,605 | 291,492 | ||||||
Property, plant and equipment, net |
981,622 | 952,527 | ||||||
Intangible assets |
140,546 | 136,654 | ||||||
Goodwill |
212,495 | 200,769 | ||||||
Other assets |
13,385 | 17,187 | ||||||
Total assets |
$ | 1,603,653 | $ | 1,598,629 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current maturities of long-term debt |
$ | 403 | $ | 669 | ||||
Accounts payable |
66,258 | 53,948 | ||||||
Accrued expenses |
36,913 | 34,675 | ||||||
Total current liabilities |
103,574 | 89,292 | ||||||
Long-term debt, less current maturities |
2,147 | 3,013 | ||||||
Senior secured notes |
571,161 | 640,096 | ||||||
Deferred income taxes |
202,985 | 185,002 | ||||||
Other liabilities |
19,037 | 21,895 | ||||||
Total liabilities |
898,904 | 939,298 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity: |
||||||||
Common stock, $0.01 par value, 400,000,000 shares authorized; 54,859,261 shares
issued and outstanding at December 31, 2010; and 54,364,306 shares issued and
outstanding at December 31, 2009 |
549 | 544 | ||||||
Additional paid in capital and other |
636,757 | 630,653 | ||||||
Retained earnings |
65,503 | 46,386 | ||||||
Accumulated other comprehensive income (loss) |
1,940 | (18,252 | ) | |||||
Total stockholders equity |
704,749 | 659,331 | ||||||
Total liabilities and stockholders equity |
$ | 1,603,653 | $ | 1,598,629 | ||||
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
(In thousands, except per share data) | ||||||||||||
Operating revenue |
$ | 490,291 | $ | 425,774 | $ | 508,466 | ||||||
Operating expenses: |
||||||||||||
Labor and benefits |
153,993 | 143,604 | 148,789 | |||||||||
Equipment rents |
34,119 | 35,978 | 45,020 | |||||||||
Purchased services |
37,971 | 30,914 | 38,792 | |||||||||
Diesel fuel |
43,316 | 33,290 | 69,974 | |||||||||
Casualties and insurance |
17,574 | 16,795 | 22,041 | |||||||||
Materials |
19,607 | 11,399 | 10,663 | |||||||||
Joint facilities |
8,667 | 6,942 | 12,573 | |||||||||
Other expenses |
35,226 | 33,037 | 33,265 | |||||||||
Track maintenance expense reimbursement |
(17,589 | ) | (16,656 | ) | | |||||||
Net gain on sale of assets |
(2,191 | ) | (25,839 | ) | (1,697 | ) | ||||||
Impairment of assets |
| | 3,420 | |||||||||
Depreciation and amortization |
45,091 | 42,105 | 39,578 | |||||||||
Total operating expenses |
375,784 | 311,569 | 422,418 | |||||||||
Operating income |
114,507 | 114,205 | 86,048 | |||||||||
Interest expense, including amortization costs of
$25,655, $26,889, and $10,083, respectively |
(83,775 | ) | (86,878 | ) | (61,678 | ) | ||||||
Other loss |
(4,759 | ) | (8,117 | ) | (9,008 | ) | ||||||
Income from continuing operations before income taxes |
25,973 | 19,210 | 15,362 | |||||||||
Provision for income taxes |
6,856 | 16,299 | 1,599 | |||||||||
Income from continuing operations |
19,117 | 2,911 | 13,763 | |||||||||
Discontinued operations: |
||||||||||||
Gain on disposal of discontinued business (net of
income taxes (benefit) of $0, $(12,006), and $697,
respectively) |
| 12,931 | 2,764 | |||||||||
Net income |
$ | 19,117 | $ | 15,842 | $ | 16,527 | ||||||
Dividends declared and paid per common share |
$ | | $ | 0.46 | $ | | ||||||
Basic earnings per common share: |
||||||||||||
Continuing operations |
$ | 0.35 | $ | 0.07 | $ | 0.32 | ||||||
Discontinued operations |
| 0.28 | 0.06 | |||||||||
Net income |
$ | 0.35 | $ | 0.35 | $ | 0.38 | ||||||
Diluted earnings per common share: |
||||||||||||
Continuing operations |
$ | 0.35 | $ | 0.07 | $ | 0.32 | ||||||
Discontinued operations |
| 0.28 | 0.06 | |||||||||
Net income |
$ | 0.35 | $ | 0.35 | $ | 0.38 | ||||||
Weighted average common shares outstanding: |
||||||||||||
Basic |
54,793 | 45,979 | 43,443 | |||||||||
Diluted |
54,793 | 45,979 | 43,443 |
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Stockholders Equity | ||||||||||||||||||||||||
Additional | Accumulated | |||||||||||||||||||||||
Number of | Paid-in | Other | ||||||||||||||||||||||
Shares | Par | Capital | Retained | Comprehensive | ||||||||||||||||||||
Issued | Value | and Other | Earnings | Income (Loss) | Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Balance, January 1, 2008 |
43,199 | $ | 432 | $ | 468,762 | $ | 33,502 | $ | 10,053 | $ | 512,749 | |||||||||||||
Net income |
| | | 16,527 | | 16,527 | ||||||||||||||||||
Change in market value of derivative instruments, net |
| | | | (25,812 | ) | (25,812 | ) | ||||||||||||||||
Actuarial gain associated with pension and postretirement benefit plans |
| | | | 1,019 | 1,019 | ||||||||||||||||||
Cumulative translation adjustments |
| | | | (34,782 | ) | (34,782 | ) | ||||||||||||||||
Total comprehensive loss |
(43,048 | ) | ||||||||||||||||||||||
Other equity contributions |
71 | 1 | 1,049 | | | 1,050 | ||||||||||||||||||
Stock repurchases |
(5 | ) | | (23 | ) | | | (23 | ) | |||||||||||||||
Stock based compensation |
266 | 2 | 790 | | | 792 | ||||||||||||||||||
Balance, December 31, 2008 |
43,531 | $ | 435 | $ | 470,578 | $ | 50,029 | $ | (49,522 | ) | $ | 471,520 | ||||||||||||
Net income |
| | | 15,842 | | 15,842 | ||||||||||||||||||
Change in market value of derivative instruments, net |
| | | | 5,322 | 5,322 | ||||||||||||||||||
Amortization of terminated swap costs, net |
| | | | 10,303 | 10,303 | ||||||||||||||||||
Actuarial loss associated with pension and postretirement benefit plans |
| | | | (843 | ) | (843 | ) | ||||||||||||||||
Cumulative translation adjustments |
| | | | 16,488 | 16,488 | ||||||||||||||||||
Total comprehensive income |
47,112 | |||||||||||||||||||||||
Issuance of common stock |
10,500 | 105 | 143,018 | | | 143,123 | ||||||||||||||||||
Dividends paid to common stockholders |
| | | (19,485 | ) | | (19,485 | ) | ||||||||||||||||
Other equity contributions |
| | 819 | | | 819 | ||||||||||||||||||
Stock repurchases |
(49 | ) | | (685 | ) | | | (685 | ) | |||||||||||||||
Stock based compensation |
382 | 4 | 16,923 | | | 16,927 | ||||||||||||||||||
Balance, December 31, 2009 |
54,364 | $ | 544 | $ | 630,653 | $ | 46,386 | $ | (18,252 | ) | $ | 659,331 | ||||||||||||
Net income |
| | | 19,117 | | 19,117 | ||||||||||||||||||
Amortization of terminated swap costs, net |
| | | | 13,306 | 13,306 | ||||||||||||||||||
Write-off of swap costs, net |
| | | | 1,047 | 1,047 | ||||||||||||||||||
Actuarial gain associated with pension and postretirement benefit plans |
| | | | 172 | 172 | ||||||||||||||||||
Cumulative translation adjustments |
| | | | 5,667 | 5,667 | ||||||||||||||||||
Total comprehensive income |
39,309 | |||||||||||||||||||||||
Issuance of common stock |
| | (106 | ) | | | (106 | ) | ||||||||||||||||
Stock repurchases |
(112 | ) | (1 | ) | (1,318 | ) | | | (1,319 | ) | ||||||||||||||
Stock based compensation |
607 | 6 | 7,528 | | | 7,534 | ||||||||||||||||||
Balance, December 31, 2010 |
54,859 | $ | 549 | $ | 636,757 | $ | 65,503 | $ | 1,940 | $ | 704,749 | |||||||||||||
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended | Year Ended | Year Ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income |
$ | 19,117 | $ | 15,842 | $ | 16,527 | ||||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||||||
Depreciation and amortization, including amortization of
debt issuance costs classified in interest expense |
49,847 | 52,340 | 49,118 | |||||||||
Amortization of swap termination costs |
20,891 | 16,616 | | |||||||||
Net gain on sale or disposal of properties |
(2,191 | ) | (26,766 | ) | (1,738 | ) | ||||||
Foreign exchange (gain) loss on debt |
| (1,160 | ) | 8,260 | ||||||||
Swap termination costs |
| (55,750 | ) | | ||||||||
Loss on extinguishment of debt |
8,357 | 9,499 | | |||||||||
Equity compensation costs |
7,534 | 10,712 | 3,042 | |||||||||
Deferred income taxes and other |
2,765 | 21,057 | (3,161 | ) | ||||||||
Changes in operating assets and liabilities, net of
acquisitions and dispositions: |
||||||||||||
Accounts receivable |
(2,435 | ) | 10,873 | 12,257 | ||||||||
Other current assets |
7,512 | (3,093 | ) | (5,861 | ) | |||||||
Accounts payable |
7,574 | (3,182 | ) | (5,016 | ) | |||||||
Accrued expenses |
1,268 | (16,677 | ) | 7,196 | ||||||||
Other assets and liabilities |
(3,070 | ) | (20,771 | ) | 2,948 | |||||||
Net cash provided by operating activities |
117,169 | 9,540 | 83,572 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Purchase of property, plant and equipment |
(62,710 | ) | (47,789 | ) | (61,282 | ) | ||||||
NECR government grant reimbursement |
4,884 | | | |||||||||
Proceeds from sale/disposition of assets |
4,108 | 90,340 | 17,367 | |||||||||
Deferred acquisition/disposition costs and other |
| (355 | ) | (1,736 | ) | |||||||
Acquisition, net of cash acquired |
(23,926 | ) | | | ||||||||
Net cash (used in) provided by investing activities |
(77,644 | ) | 42,196 | (45,651 | ) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Proceeds from issuance of senior secured notes |
| 709,830 | | |||||||||
Principal payments on long-term debt |
(622 | ) | (625,898 | ) | (7,359 | ) | ||||||
Repurchase of senior secured notes |
(76,220 | ) | (76,220 | ) | | |||||||
Sale of common stock |
(106 | ) | 143,123 | 635 | ||||||||
Dividends paid to common stockholders |
| (19,485 | ) | | ||||||||
Deferred financing costs paid |
(224 | ) | (20,175 | ) | (18,075 | ) | ||||||
Net cash (used in) provided by financing activities |
(77,172 | ) | 111,175 | (24,799 | ) | |||||||
Effect of exchange rates on cash |
397 | 356 | (1,558 | ) | ||||||||
Net (decrease) increase in cash |
(37,250 | ) | 163,267 | 11,564 | ||||||||
Cash, beginning of period |
190,218 | 26,951 | 15,387 | |||||||||
Cash, end of period |
$ | 152,968 | $ | 190,218 | $ | 26,951 | ||||||
Supplemental cash flow information: |
||||||||||||
Interest Paid |
$ | 57,986 | $ | 72,641 | $ | 44,784 | ||||||
Income Taxes Paid |
$ | 7,444 | $ | 3,416 | $ | 6,655 |
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
RailAmerica, Inc. (RailAmerica or the Company) is a leading owner and operator of short line
and regional freight railroads in North America, operating a portfolio of 40 individual railroads
with approximately 7,300 miles of track in 27 states and three Canadian provinces. The Companys
principal operations consist of rail freight transportation and ancillary rail services.
On November 14, 2006, RR Acquisition Holding LLC, a Delaware limited liability company (Holdings)
and RR Acquisition Sub Inc., a Delaware corporation and wholly-owned subsidiary of Holdings
(Subsidiary), both formed by investment funds managed by affiliates of Fortress Investment Group
LLC (Fortress) entered into an Agreement and Plan of Merger (Agreement) with RailAmerica, a
Delaware corporation. On February 14, 2007 shortly after the approval of the proposed merger by the
shareholders of RailAmerica, Subsidiary merged with and into RailAmerica, with RailAmerica
continuing as the entity surviving the merger as a wholly-owned subsidiary of Holdings (the
Acquisition).
On October 16, 2009, the Company completed an initial public offering of 22,000,000 shares of
common stock at $15.00 per share. The Company sold 10,500,000 shares of common stock and Holdings
sold 11,500,000 shares of common stock. Proceeds to the Company were $143.1 million net of the
underwriters discount and expenses. The Company did not receive any proceeds from the sale of its
common stock by Holdings.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of RailAmerica and all of
its subsidiaries. All of RailAmericas consolidated subsidiaries are wholly-owned. All intercompany
balances and transactions have been eliminated.
BASIS OF PRESENTATION
In October 2010, the Company entered into a new agreement with Canadian Pacific Railway Company
(CP) to operate portions of the Ottawa Valley Railway (OVRR) line, a previously discontinued
operation. As a result of this new operating agreement, this railroad is no longer considered
discontinued for financial statement presentation purposes and thus, the results of operations of
the OVRR have been reclassified to continuing operations on our statement of operations for all
periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles
in the United States (GAAP) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with a maturity of three months or
less at the date of purchase to be cash equivalents. The Company maintains its cash in demand
deposit accounts, which at times may exceed insurance limits.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowances for doubtful accounts are recorded by management based upon the Companys analysis of
accounts receivable aging, and specific identification of customers in financial distress, e.g.,
bankruptcy or poor payment record. Management reviews material past due balances on a monthly
basis. Account balances are charged off against the allowance when management determines it is
probable that the receivable will not be recovered.
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Table of Contents
Activity in the Companys allowance for doubtful accounts was as follows (in thousands):
2010 | 2009 | |||||||
Balance, beginning of year |
$ | 4,557 | $ | 3,338 | ||||
Provisions |
3,544 | 1,601 | ||||||
Charges |
(1,334 | ) | (382 | ) | ||||
Balance, end of year |
$ | 6,767 | $ | 4,557 | ||||
MATERIALS AND SUPPLIES
Materials and supplies, which are included in other current assets in the consolidated balance
sheet, are stated principally at average cost, which is not in excess of replacement cost.
Materials are stated at an amount which does not exceed estimated realizable value.
PROPERTY, PLANT AND EQUIPMENT
Depreciation Method
Property, plant and equipment, which is recorded at historical cost, is depreciated and amortized
on a straight-line basis over their estimated useful lives. Costs assigned to property purchased as
part of an acquisition are based on the fair value of such assets on the date of acquisition.
Track and Related Assets
For track and related assets, the Company uses the group method of depreciation under which a
single depreciation rate is applied to the gross investment. The Company reevaluated the useful
lives of its track and related assets and established new depreciable lives based on reviews
performed by valuation experts during purchase accounting in 2007.
Depreciation has been computed using the estimated economic useful lives as follows:
Railroad track and ties
|
30-40 years | |
Railroad track improvements
|
3-10 years |
Under the group method, the service lives and salvage values for each group of assets are
determined by completing periodic life studies and applying managements assumptions regarding the
service lives of its properties. A life study is the periodic review of asset lives for group
assets conducted and analyzed by the Companys management with the assistance of a third-party
expert. The results of the life study process determine the service lives for each asset group
under the group method.
There are several factors taken into account during the life study and they include statistical
analysis of historical life, retirements and salvage data for each group of property, evaluation of
current operations, review of the previous assessment of the condition of the assets and the
outlook for their continued use, consideration of technological advances and maintenance schedules
and comparison of asset groups to peer companies.
The Companys policy is to perform life studies every five years for road (e.g. bridges and
signals) and track (e.g., rail, ties and ballast) assets. Since the Companys fixed assets were
recently fair valued as part of purchase accounting in 2007, the first life study will be completed
in 2012. Changes in asset lives due to the results of the life study, if any, will be applied on a
prospective basis and could significantly impact future periods depreciation expense, and thus,
the Companys results of operations.
Building, Equipment and Other Fixed Assets
Building, equipment and other fixed assets (such as locomotives and freight cars) are specifically
identified. The Company utilizes straight line depreciation methods on a per asset basis. The
Company reevaluated the useful lives of its buildings, equipment and other fixed assets and
established new depreciable lives based on reviews performed by valuation experts during purchase
accounting in 2007.
F- 9
Table of Contents
Depreciation has been computed using the estimated economic useful lives as follows:
Buildings and improvements
|
20-33 years | |
Locomotives, transportation and other equipment
|
5-30 years | |
Office equipment and capitalized software
|
5-10 years |
Capital Expenditures
Rail operations are capital intensive and the Company accounts for these costs in accordance with
GAAP. Routine repairs and maintenance costs, for all asset categories, are expensed as incurred.
The Company self-constructs portions of its track structure and rebuilds certain of its rolling
stock. In addition to direct labor and material, certain indirect costs are capitalized.
Expenditures which significantly increase asset values or extend useful lives are capitalized.
Capital spending related to locomotives and freight cars includes purchase costs of locomotives and
freight cars as well as certain equipment leases that are considered to be capital leases in
accordance with the Leases Topic in the ASC. In addition, costs to modify or rebuild these assets
are capitalized if the spending incurred extends the assets useful life or improves utilization.
Improvement projects must meet specified dollar thresholds to be capitalized and are reviewed by
management to determine proper accounting treatment.
The Company incurs certain direct labor, contract service and other costs associated with the
development and installation of internal-use computer software. Costs for newly developed software
or significant enhancements to existing software are capitalized. Research, preliminary project
planning, operations, maintenance and training costs are charged to operating expense when the work
is performed.
Disposals and Retirements
Track and Related Assets
Upon normal sale or retirement of track assets, cost less net salvage value is charged to
accumulated depreciation and no gain or loss is recognized. As part of the life study in 2012, an
assessment will be made of the recorded amount of accumulated depreciation. Any deficiency (or
excess), including any deferred gains or losses, will be amortized as a component of depreciation
expense over the remaining useful life of the asset group until the next required life study. Since
the overall assumption with group method is that the assets within the group on average have the
same life and characteristics, it is therefore concluded that the deferred gains and losses offset
over time.
The Company utilizes a first-in, first-out approach to track and related asset retirements.
Generally, the Company estimates the historical cost of the replaced assets using historical
accounting records and/or inflation indices published by the Bureau of Labor Statistics which are
applied to the replacement value based on the age of the retired asset. These indices closely
correlate with the major cost of the materials comprising the applicable road assets.
In the event that large groups of assets are removed from service as a result of unusual acts or
sales, resulting gains and losses are recognized immediately. These acts are not considered to be
in the normal course of business and are therefore recognized when incurred. Examples of such acts
would be the major destruction of assets due to significant storm damage (e.g. major hurricanes)
and the sale, disposal or abandonment of a rail line segment. There were no abnormal losses during
the periods ended December 31, 2010, 2009 and 2008, respectively.
Building, Equipment and Other Fixed Assets
Upon retirement or disposal of any of the building, equipment and other fixed assets, resulting
gains and losses are recognized in earnings.
Impairment Reviews
The Company periodically reviews its assets for impairment when indicators are present, by
comparing the projected undiscounted cash flows of those assets to their recorded amounts.
Impairment charges are based on the excess of the recorded amounts over their estimated fair value,
as measured by discounted cash flows. No circumstances have occurred to indicate the possibility of
impairment.
F-10
Table of Contents
GRANT LIABILITIES
The Company accounts for grant liabilities as contra-assets within property, plant and equipment
and are amortized over the life of the related asset.
GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS
Goodwill represents the excess of purchase price and related costs over the value assigned to the
net tangible and identifiable intangible assets of RailAmerica.
The Company reviews the carrying values of goodwill and identifiable intangible assets with
indefinite lives at least annually to assess impairment since these assets are not amortized.
Additionally, the Company reviews the carrying value of goodwill or any intangible asset whenever
such events or changes in circumstances indicate that its carrying amount may not be recoverable.
The Company assesses impairment by comparing the fair value of an intangible asset or goodwill with
its carrying value. Specifically, the Company tests for impairment in accordance with Intangibles-
Goodwill and Other Topic, ASC 350. For goodwill, a two-step impairment model is used. The first
step compares the fair value of the reporting unit with its carrying amount, including goodwill.
The determination of fair value involves significant management judgment. If the fair value of the
reporting unit is less than the carrying amount, goodwill would be considered impaired. The second
step measures the goodwill impairment as the excess of recorded goodwill over the assets implied
fair value. Impairments are recognized when incurred. Management believes that goodwill is not
impaired based on the results of the annual impairment test.
For the indefinite-lived intangible assets the impairment test compares the fair value of an
intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds
its fair value, an impairment loss is recognized in an amount equal to that excess. The Company has
certain railroad leases that are recorded as indefinite-lived intangible assets. Management
believes that indefinite-lived intangible assets are not impaired based on the results of the
annual impairment test.
AMORTIZABLE INTANGIBLE ASSETS
The Company has amortizable intangible assets recorded at the fair value of locomotive, railcar and
railroad leases as well as customer relationships or contracts. These intangible assets are
generally amortized on a straight-line basis over the contractual length of the lease or expected
economic longevity of the customer relationship, the facility served, or the length of the customer
contract. For amortizable intangible assets, Property, Plant and Equipment Topic, ASC 360, requires
a company to perform an impairment test on amortizable intangible assets when specific impairment
indicators are present. No circumstances have occurred to indicate the possibility of impairment.
INCOME TAXES
The Company utilizes the liability method of accounting for deferred income taxes. This method
requires recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined based on the difference between the
financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Deferred tax assets are also established for the
future tax benefits of loss and credit carryovers. The liability method of accounting for deferred
income taxes requires a valuation allowance against deferred tax assets if, based on the weight of
available evidence, it is more likely than not that some or all of the deferred tax assets will not
be realized.
REVENUE RECOGNITION
The Company recognizes freight revenue after the freight has been moved from origin to destination,
which is not materially different from the recognition of revenue as shipments progress due to the
relatively short length of the Companys railroads. Other revenue, which primarily includes
demurrage, switching, and storage fees, is recognized when the service is performed. The Company
recognizes engineering revenue on a percentage of completion method.
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Table of Contents
FOREIGN CURRENCY TRANSLATION
The financial statements and transactions of the Companys foreign operations are maintained in
their local currency, which is their functional currency. Where local currencies are used, assets
and liabilities are translated at current exchange rates in effect at the balance sheet date.
Translation adjustments, which result from the process of translating the financial statements into
U.S. dollars, are accumulated in the cumulative translation adjustment account, which is a
component of accumulated other comprehensive income in stockholders equity. Revenue and expenses
are translated at the average exchange rate for each period. Gains and losses from foreign currency
transactions are included in net income. At December 31, 2010 and 2009, accumulated other
comprehensive income (loss) included $13.9 million of cumulative translation gains and $8.4 million
of cumulative translation gains, respectively. For the year ended December 31, 2009, other income
(loss) included $1.2 million of exchange rate gains on the U.S. dollar denominated debt formerly
held by a Canadian entity that has the Canadian dollar as its functional currency.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires some new disclosures and
clarifies some existing disclosure requirements about fair value measurement as set forth in
Codification Subtopic 820-10. ASU 2010-06 amends Codification Subtopic 820-10 to now require (1) a
reporting entity to disclose separately the amounts of significant transfers in and out of Level 1
and Level 2 fair value measurements and describe the reasons for the transfers; (2) in the
reconciliation for fair value measurements using significant unobservable inputs, a reporting
entity should present separately information about purchases, sales, issuances, and settlements,
and (3) a reporting entity should provide disclosures about the valuation techniques and inputs
used to measure fair value for both recurring and nonrecurring fair value measurements. ASU 2010-06
is effective for interim and annual reporting periods beginning after December 15, 2009, except for
the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity
in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASU No.
2010-06 did not have a material impact on the Companys financial position or results of
operations.
2. ACQUISITIONS
On July 1, 2010, the Company acquired Atlas Railroad Construction Company (Atlas) and related
assets for $23.9 million in cash including closing adjustments for working capital, which were
approximately $2.4 million, net of cash acquired. The acquisition was funded from existing cash on
hand. Founded in 1954, Atlas is a railroad engineering, construction, maintenance and repair
company operating primarily in the U.S. Midwest and Northeast. Atlas provides railroad construction
services principally to short line and regional railroads, public-transit agencies and industrial
customers. The results of operations of Atlas have been included in the Companys consolidated
financial statements since July 1, 2010, the acquisition date.
In accordance with ASC 805, Business Combinations Topic, the acquisition was accounted for under
the acquisition method of accounting. Assets acquired and liabilities assumed were recorded at
their estimated fair value. As a result of the consideration paid, an estimated $11.3 million of
goodwill was recorded related to the acquired entity. The main drivers of goodwill were Atlass
historical revenue growth rate as well as expectations for future revenue and Earnings Before
Interest, Taxes, Depreciation and Amortization (EBITDA) growth from organic and strategic
initiatives including synergies from further integration of processes across the RailAmerica
network and leveraging our customer, Class I, shortline and governmental relationships. These
expectations of future business performance were key factors influencing the premium paid for the
Atlas business. The goodwill associated with this acquisition is not deductible for tax purposes.
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The allocation of purchase price is as follows (in thousands):
Current assets |
$ | 6,607 | ||
Intangible assets |
9,430 | |||
Goodwill |
11,326 | |||
Property, plant and equipment |
6,459 | |||
Total assets acquired |
33,822 | |||
Current liabilities |
(4,182 | ) | ||
Deferred tax liabilities |
(5,714 | ) | ||
Total liabilities assumed |
(9,896 | ) | ||
Purchase price |
$ | 23,926 | ||
The Atlas trade name was considered an indefinite-lived intangible asset and was assigned a value
of $1.8 million. Definite-lived intangible assets were assigned the following amounts and weighted
average amortization periods (dollars in thousands):
Value | Weighted Average Life | |||||||
Assigned | (Years) | |||||||
Customer relationships |
$ | 6,720 | 20.0 | |||||
Project backlog |
$ | 110 | 0.5 | |||||
Non-compete agreements |
$ | 810 | 4.2 |
3. EARNINGS PER SHARE
For the years ended December 31, 2010, 2009 and 2008, basic and diluted earnings per share is
calculated using the weighted average number of common shares outstanding during the year. The
basic earnings per share calculation includes all vested and unvested restricted shares as a result
of their dividend participation rights.
The following is a summary of the income from continuing operations available for common
stockholders and weighted average shares outstanding (in thousands):
For the Years Ended | ||||||||||||
December 31, | December 31, | December 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Income from continuing operations (basic and diluted) |
$ | 19,117 | $ | 2,911 | $ | 13,763 | ||||||
Compensation expense recorded for dividends paid to
unvested restricted shares, net of tax |
| 307 | | |||||||||
Income from continuing operations available to common
stockholders (basic and diluted) |
$ | 19,117 | $ | 3,218 | $ | 13,763 | ||||||
Weighted average shares outstanding (basic and diluted) |
54,793 | 45,979 | 43,443 |
4. STOCK-BASED COMPENSATION
Throughout 2010, 2009 and 2008, the Company entered into individual equity award agreements with
employees, including executive officers. During the years ended December 31, 2010,
2009 and 2008, the Company issued 662,296, 401,647 and 358,398 time-based restricted shares to
employees. The restricted shares granted to employees are scheduled to vest over three to five year
periods. The grant date fair values of the restricted shares are based upon the fair market value
of the Company at the time of grant. The Company recognizes stock-based compensation expense for
restricted shares on a straight-line basis. Prior to the Companys initial public offering in
October 2009, the Company engaged an unrelated valuation specialist to perform a fair value
analysis of the Company at the end of each quarter. In addition, as
part of the equity award
agreements entered into in 2008, certain members of management purchased shares of common
stock of the Company at fair market value on the date of purchase, while one was granted common
shares with a value of $0.3 million.
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Stock-based compensation expense related to restricted stock grants for the years ended December
31, 2010, 2009 and 2008 was $7.5 million, $4.4 million and $2.7 million, respectively.
Repurchase provisions that existed in the equity award agreements expired as of the initial public
offering date. As a result, the Company recorded a charge of $6.3 million related to the value of
these repurchase features as of the grant date during the year ended December 31, 2009. The value
of the repurchase features was calculated using the Black-Scholes option pricing model. Expected
volatilities were based on historical volatility of industry peer common stock. Expected lives,
which represent the period of time that repurchase features were expected to be outstanding, were
based on the anticipated amount of time between the grant date of the related equity award and the
anticipated future initial public offering of the Company. The risk free interest rate was based on
the U.S. Treasury rate with a maturity date corresponding to the options expected lives.
At December 31, 2010, there was $12.9 million of unrecognized compensation expense related to
unvested restricted share compensation arrangements, which is expected to be recognized over a
weighted average period of 1.84 years.
A summary of the status of restricted shares as of December 31, 2010, 2009 and 2008, and the
changes during the periods then ended and the weighted average grant date fair values is presented
below:
Time Based | ||||||||
Balance at January 1, 2008 |
1,012,500 | $ | 11.11 | |||||
Granted |
358,398 | $ | 14.48 | |||||
Vested |
(177,480 | ) | $ | 11.11 | ||||
Cancelled |
(92,457 | ) | $ | 11.24 | ||||
Balance at December 31, 2008 |
1,100,961 | $ | 12.20 | |||||
Granted |
401,647 | $ | 15.22 | |||||
Vested |
(196,362 | ) | $ | 12.11 | ||||
Cancelled |
(19,917 | ) | $ | 12.43 | ||||
Balance at December 31, 2009 |
1,286,329 | $ | 13.10 | |||||
Granted |
662,296 | $ | 11.90 | |||||
Vested |
(418,440 | ) | $ | 13.06 | ||||
Cancelled |
(53,960 | ) | $ | 13.38 | ||||
Balance at December 31, 2010 |
1,476,225 | $ | 12.59 | |||||
5. DISCONTINUED OPERATIONS
Alberta Railroad Properties
During the fourth quarter of 2005, the Predecessor Company committed to a plan to dispose of the
Alberta Railroad Properties, comprised of the Lakeland & Waterways Railway, Mackenzie Northern
Railway and Central Western Railway. The sale of the Alberta Railroad Properties was completed in
January 2006 for $22.1 million in cash. In 2008, the Company settled working capital claims with
the buyer and as a result recorded an adjustment of $1.3 million, or $1.2 million, after income
taxes, through the gain on sale of discontinued operations. During the year ended December 31,
2009, the Company recorded an adjustment of $0.2 million, or $0.2 million, after tax, as an
adjustment to the gain on sale of discontinued operations related to outstanding liabilities
associated with the disposed entities.
Freight Australia
In August 2004, the Company completed the sale of its Australian railroad, Freight Australia, to
Pacific National for AUD $285 million (U.S. $204 million). During the years ended December 31, 2008
and 2007, the Company incurred additional consulting costs associated with the sale of Freight
Australia of $1.9 million, or $1.3 million after income taxes, and $1.1 million, or $0.8 million
after income taxes, respectively, related to the Australian Taxation Office (ATO) audit of the
reorganization transactions undertaken by the Companys Australian subsidiaries prior to the sale.
In addition, the Company recognized foreign exchange gains of $4.0 million, or $2.8 million after
income taxes, on tax reserves established in conjunction with the ATO audit during the year ended
December 31, 2008. These amounts are reflected in the gain on sale of discontinued operations.
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Table of Contents
On May 14, 2009, the Company received a notice from the ATO indicating that they would not be
taking any further action in relation to its audit of the reorganization transactions. As a result,
the Company has removed the previously recorded tax reserves resulting in a benefit to the
continuing operations tax provision of $2.5 million related to the accrual of interest subsequent
to the Companys acquisition, an adjustment to the gain on sale of discontinued operations of $12.3
million and reduced its accrual for consulting fees resulting in a gain on sale of discontinued
operations of $0.7 million, or $0.5 million after tax, during the year ended December 31, 2009.
6. OTHER BALANCE SHEET DATA
Other current assets consisted of the following as of December 31, 2010 and 2009 (in thousands):
2010 | 2009 | |||||||
Unbilled reimbursable projects |
$ | 6,073 | $ | 15,434 | ||||
Other current assets |
9,127 | 6,524 | ||||||
$ | 15,200 | $ | 21,958 | |||||
Accrued expenses consisted of the following as of December 31, 2010 and 2009 (in thousands):
2010 | 2009 | |||||||
Accrued compensation and benefits |
$ | 13,554 | $ | 12,028 | ||||
Accrued incident expense |
8,214 | 8,322 | ||||||
Other accrued liabilities |
15,145 | 14,325 | ||||||
$ | 36,913 | $ | 34,675 | |||||
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of December 31, 2010 and 2009 (in
thousands):
2010 | 2009 | |||||||
Land |
$ | 186,688 | $ | 185,991 | ||||
Buildings and improvements |
7,024 | 5,367 | ||||||
Railroad track and improvements |
826,747 | 781,702 | ||||||
Locomotives, transportation and other equipment |
88,545 | 68,893 | ||||||
1,109,004 | 1,041,953 | |||||||
Less: accumulated depreciation |
(127,382 | ) | (89,426 | ) | ||||
$ | 981,622 | $ | 952,527 | |||||
Depreciation expense, including amortization of assets recorded under capital leases, for the
periods ended December 31, 2010, 2009 and 2008, was $37.7 million, $34.6 million, and $31.9
million.
8. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Goodwill, which totaled $212.5 million and $200.8 million as of December 31, 2010 and 2009,
respectively, includes the excess of the purchase price over the fair value of the net tangible and
intangible assets associated with the acquisition of RailAmerica by Fortress in 2007 and the
acquisition of Atlas by RailAmerica in 2010. As described in Note 1, Summary of Significant
Accounting Policies, on February 14, 2007, RailAmerica and Fortress completed a merger in which
RailAmerica was acquired by certain private equity funds managed by affiliates of Fortress.
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The table below reflects the change in the carrying amount of goodwill for the years ended December
31, 2010 and 2009 (in thousands).
Balance at January 1, 2009 |
$ | 199,754 | ||
Impact of change in foreign exchange rates |
1,015 | |||
Balance at December 31, 2009 |
$ | 200,769 | ||
Addition for the acquisition of Atlas |
11,326 | |||
Impact of change in foreign exchange rates |
400 | |||
Balance at December 31, 2010 |
$ | 212,495 | ||
Indefinite-Lived Intangible Assets
Perpetual railroad leases for trackage rights and the Atlas trade name are considered
indefinite-lived intangible assets and were assigned a value of $146.4 million and $1.8 million at
their respective acquisition dates. The gross carrying value of non-amortizing railroad lease
intangibles decreased by $28.7 million during the year ended December 31, 2009. This decrease was
due to the termination of the OVRR lease, which was valued at $33.6 million, partially offset by
$4.9 million of foreign exchange translation adjustments. The carrying value of the non-amortizing
railroad lease intangibles increased by $3.6 million during the year ended December 31, 2010 due to
the Atlas trade name and foreign exchange translation adjustments.
Definite-Lived Intangible Assets
Definite-lived intangible asset classes were assigned the following amounts and weighted-average
amortization periods (dollars in thousands):
Weighted | ||||||||
Value | Average Life | |||||||
Intangible Asset Class | Assigned | (Years) | ||||||
Customer Contracts |
$ | 24,495 | 5.3 | |||||
Railroad Leases |
9,835 | 16.8 | ||||||
Rolling stock Leases |
2,107 | 4.5 | ||||||
Locomotive Leases |
5,943 | 6.2 | ||||||
Customer relationships |
6,720 | 20.0 | ||||||
Project backlog |
110 | 0.5 | ||||||
Non-compete agreements |
810 | 4.2 |
The following table provides the gross and net carrying amounts for each major class of intangible
assets (in thousands):
December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||
Carrying | Accumulated | Net Book | Carrying | Accumulated | Net Book | |||||||||||||||||||
Amount | Amortization | Value | Amount | Amortization | Value | |||||||||||||||||||
Amortizable intangible assets: |
||||||||||||||||||||||||
Customer contract intangibles |
$ | 24,495 | $ | (18,406 | ) | $ | 6,089 | $ | 24,495 | $ | (13,657 | ) | $ | 10,838 | ||||||||||
Railroad leases intangibles |
9,835 | (3,808 | ) | 6,027 | 9,835 | (2,825 | ) | 7,010 | ||||||||||||||||
Rolling stock leases intangibles |
2,107 | (2,061 | ) | 46 | 2,107 | (1,648 | ) | 459 | ||||||||||||||||
Locomotive leases intangibles |
5,943 | (4,663 | ) | 1,280 | 5,943 | (3,776 | ) | 2,167 | ||||||||||||||||
Customer relationships |
6,720 | (168 | ) | 6,552 | | | | |||||||||||||||||
Project backlog |
110 | (110 | ) | | | | | |||||||||||||||||
Non-compete agreements |
810 | (98 | ) | 712 | | | | |||||||||||||||||
Non-amortizable intangible assets: |
||||||||||||||||||||||||
Railroad leases intangibles |
116,555 | | 116,555 | 114,685 | | 114,685 | ||||||||||||||||||
Trade names |
1,790 | | 1,790 | | | | ||||||||||||||||||
Other intangible assets |
1,495 | | 1,495 | 1,495 | | 1,495 | ||||||||||||||||||
Total intangible assets |
$ | 169,860 | $ | (29,314 | ) | $ | 140,546 | $ | 158,560 | $ | (21,906 | ) | $ | 136,654 | ||||||||||
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Table of Contents
The following table sets forth the amortization expense over the next five years (in thousands):
2011 |
$ | 6,014 | ||
2012 |
2,919 | |||
2013 |
1,211 | |||
2014 |
891 | |||
2015 |
793 | |||
Thereafter |
8,878 | |||
$ | 20,706 | |||
9. LONG-TERM DEBT AND LEASES
Long-term debt consists of the following as of December 31, 2010 and 2009 (in thousands):
9.25% Senior Secured Notes (net of original issue discount of $20,839 and $25,904, respectively) |
$ | 571,161 | $ | 640,096 | ||||
Other long-term debt (including capital leases) |
2,550 | 3,682 | ||||||
573,711 | 643,778 | |||||||
Less: current maturities |
403 | 669 | ||||||
Long-term debt, less current maturities |
$ | 573,308 | $ | 643,109 | ||||
The aggregate annual maturities of long-term debt are as follows (in thousands):
2011 |
$ | 403 | ||
2012 |
294 | |||
2013 |
311 | |||
2014 |
329 | |||
2015 |
349 | |||
Thereafter |
592,864 | |||
$ | 594,550 | |||
$740 Million 9.25% Senior Secured Notes
On June 23, 2009, the Company sold $740.0 million of 9.25% senior secured notes due July 1, 2017 in
a private offering, for gross proceeds of $709.8 million after deducting the initial purchasers
fees. The notes are secured by first-priority liens on substantially all of the Companys and the
guarantors assets. The guarantors are defined essentially as the Companys existing and future
wholly-owned domestic restricted subsidiaries. The net proceeds received from the issuance of the
notes were used to repay the outstanding balance of the $650 million bridge credit facility, as
described below, and $7.4 million of accrued interest thereon, pay costs of $57.1 million to
terminate interest rate swap arrangements, including $1.3 million of accrued interest, entered into
in connection with the bridge credit facility, pay fees and expenses related to the offering and
for general corporate purposes.
On November 2, 2009, the Company commenced an exchange offer of the privately placed senior secured
notes for senior secured notes which have been registered under the Securities Act of 1933, as
amended. The registered notes have terms that are substantially identical to the privately placed
notes. The exchange offer expired on December 2, 2009.
The Company may redeem up to 10% of the aggregate principal amount of the notes issued during
any 12-month period commencing on the issue date at a price equal to 103% of the principal amount
thereof plus accrued and unpaid interest, if any. The Company may also redeem some or all of the
notes at any time before July 1, 2013, at a price equal to 100% of the aggregate principal amount
thereof plus accrued and unpaid interest, if any, to the redemption date and a make-whole premium.
In addition, prior to July 1, 2012, the Company may redeem up to 35% of the notes at a redemption
price of 109.25% of their principal amount thereof plus accrued and unpaid interest, if any, with
the proceeds from an equity offering. Subsequent to July 1, 2013, the Company may redeem the notes
at 104.625% of their principal amount. The premium then reduces to 102.313% commencing on July 1,
2014 and then 100% on July 1, 2015 and thereafter. On November 16, 2009, the Company redeemed $74
million aggregate principal amount of the notes at a cash redemption price of 103%, plus accrued interest thereon to, but not including, the
redemption date. On June 24, 2010, the Company
redeemed an additional $74 million aggregate principal amount of the notes at a cash redemption price of 103%,
plus accrued interest thereon to, but not including, the redemption date.
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$40 Million ABL Facility
In connection with the issuance of the senior secured notes on June 23, 2009, the Company also
entered into a $40 million Asset Backed Loan Facility (ABL Facility). The ABL Facility matures on
June 23, 2013 and bears interest at LIBOR plus 4.00%. Obligations under the ABL Facility are
secured by a first-priority lien on the ABL collateral. ABL collateral includes accounts
receivable, deposit accounts, securities accounts and cash. As of December 31, 2010, the Company
had no outstanding balance under the Facility and approximately $21.4 million of undrawn
availability, taking into account borrowing base limitations.
The ABL Facility and indenture governing the senior secured notes contain various covenants and
restrictions that will limit the ability of the Company and its restricted subsidiaries to incur
additional indebtedness, pay dividends, make certain investments, sell or transfer certain assets,
create liens, designate subsidiaries as unrestricted subsidiaries, consolidate, merge or sell
substantially all the assets, and enter into certain transactions with affiliates. It is
anticipated that proceeds from any future borrowings would be used for general corporate purposes.
On June 10, 2010, the Company entered into Amendment No. 1 to its ABL Facility improving certain
terms of the ABL Facility. Among other things, Amendment No. 1 eliminates the LIBOR-based interest
rate floor of 2.5%, modifies the borrowing base calculation and reporting requirements to require
less frequent financial reporting in certain circumstances, adjusts the limitations on permitted
acquisitions and restricted payments and amends the financial covenants to incorporate cash
balances in certain definitions.
On
February 23, 2011, the Company entered into Amendment No. 2
to its ABL Facility. This amendment
adjusts certain terms of the ABL Facility and increases the threshold for Restricted Payments, as
defined in the ABL Facility, to allow share repurchases of the Companys common stock in an amount
not exceed $75 million without affecting other Restricted Payment baskets.
$650 Million Bridge Credit Facility
As part of the merger transaction in which the Company was acquired by certain private equity funds
managed by affiliates of Fortress, the Company terminated the commitments under its former amended
and restated credit agreement and repaid all outstanding loans and other obligations in full under
this agreement. In order to fund this repayment of debt and complete the merger transaction, on
February 14, 2007, the Company entered into a $650 million bridge credit facility agreement. The
facility consisted of a $587 million U.S. dollar term loan commitment and a $38 million Canadian
dollar term loan commitment, as well as a $25 million revolving loan facility with a $20 million
U.S. dollar tranche and a $5 million Canadian dollar tranche. The Company entered into an amendment
on July 1, 2008 to extend the maturity of the bridge credit facility for one year with an
additional one year extension at its option. Under the amended bridge credit facility agreement,
the term loans and revolving loans carried an interest rate of LIBOR plus 4.0%. Prior to amendment,
the bridge credit facility agreement, including the revolving loans, paid interest at LIBOR plus
2.25%. The $25 million revolving loan facility was available for immediate borrowing if necessary.
In November 2008, the Company entered into Amendment No. 1 to the amended bridge credit facility
agreement which permitted the Company to enter into employee and office space sharing agreements
with affiliates and included a technical amendment to the definitions of interest coverage ratio
and interest expense.
The U.S. and Canadian dollar term loans and the U.S. and Canadian dollar revolvers were
collateralized by the assets of and guaranteed by the Company and most of its U.S. and Canadian
subsidiaries. The loans were provided by a syndicate of banks with Citigroup Global Markets, Inc.
and Morgan Stanley Senior Funding, Inc., as co-lead arrangers, Citicorp North America, Inc., as
administrative agent and collateral agent and Morgan Stanley Senior Funding, Inc. as syndication
agent.
As discussed above, all borrowings under the bridge credit facility were repaid with the proceeds
from the issuance of the senior secured notes.
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Table of Contents
Leases
The Company has several finance leases for equipment and locomotives. Certain of these leases are
accounted for as capital leases and are presented separately below. The Company also operates some
of its railroad properties under operating leases. The minimum annual lease commitments at December
31, 2010 are as follows (in thousands):
Capital | Operating | |||||||
Leases | Leases | |||||||
2011 |
$ | 25 | $ | 17,318 | ||||
2012 |
| 10,532 | ||||||
2013 |
| 6,269 | ||||||
2014 |
| 2,773 | ||||||
2015 |
| 2,248 | ||||||
Thereafter |
| 18,326 | ||||||
Total minimum lease payments |
$ | 25 | $ | 57,466 | ||||
Less amount representing interest |
(2 | ) | ||||||
Total obligations under capital leases |
$ | 23 | ||||||
Less current maturities of obligations under capital leases |
(23 | ) | ||||||
Obligations under capital leases payable after one year |
$ | | ||||||
Rental expense under operating leases was approximately $25.8 million, $28.7 million, and $31.5
million for the periods ended December 31, 2010, 2009 and 2008, respectively.
10. DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted Derivatives and Hedging Topic, ASC 815-10-65, on January 1, 2009, which
enhances the disclosure requirements about an entitys derivative instruments and hedging
activities. The expanded disclosure required by ASC 815 is presented below.
The Company may use derivatives to hedge against increases in interest rates. The Company formally
documents the relationship between the hedging instrument and the hedged item, as well as the risk
management objective and strategy for the use of the hedging instrument. This documentation
includes linking the derivatives that are designated as cash flow hedges to specific assets or
liabilities on the balance sheet, commitments or forecasted transactions. The Company assesses at
the time a derivative contract is entered into, and at least quarterly, whether the derivative item
is effective in offsetting the changes in fair value or cash flows. Any change in fair value
resulting from ineffectiveness is recognized in current period earnings. For derivative instruments
that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on
the derivative instrument is recorded in accumulated other comprehensive income as a separate
component of stockholders equity and reclassified into earnings in the period during which the
hedge transaction affects earnings. During the periods ended December 31, 2010, 2009 and 2008, the
Company reclassified $14.4 million, $24.6 million and $11.1 million, respectively from other
comprehensive loss to interest expense. At December 31, 2010, accumulated other comprehensive loss
included $12.7 million, net of income taxes of $8.4 million, of unamortized loss relating to the
terminated swap, as discussed below. At December 31, 2009, accumulated other comprehensive loss
included a loss of $27.1 million, net of income taxes of $16.6 million, relating to the interest
rate swaps.
For derivative instruments in an asset position, the Company analyzes the credit standing of the
counterparty and factors it into the fair value measurement. Fair Value Measurements and
Disclosures Topic, ASC 820 states that the fair value of a liability must reflect the
nonperformance risk of the reporting entity. Therefore, the impact of the Companys credit
worthiness has also been factored into the fair value measurement of the derivative instruments in
a liability position. The Company monitors its hedging positions and the credit ratings of its
counterparties and does not anticipate losses due to counterparty nonperformance.
On February 14, 2007, the Company entered into an interest rate swap with a termination date of
February 15, 2014. The total notional amount of the swap started at $425 million for the period
from February 14, 2007 through November 14, 2007, increased to a total notional amount of $525
million for the period from November 15, 2007 through November 14, 2008, and ultimately increased
to $625 million for the period from November 15, 2008 through February 15, 2014. Under the terms of
the interest rate swap, the Company was required to pay a fixed interest rate of 4.9485% on the
notional amount while receiving a variable interest rate equal to the 90 day LIBOR. This swap
qualified, was designated and was accounted for as a cash flow hedge under ASC 815. This interest
rate swap agreement was terminated in June 2009, in connection with the repayment of the bridge
credit facility, and thus had no fair value
at December 31, 2009 or December 31, 2010. Interest expense of $0.5 million was recognized during
the year ended December 31,
F-19
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2008 for the portion of the hedge deemed ineffective, respectively. Interest expense of $0.3
million was recognized during the year ended December 31, 2009 for the portion of the hedge deemed
ineffective. Pursuant to ASC 815, the fair value balance of the swap at termination remains in
accumulated other comprehensive loss, net of tax, and is amortized to interest expense over the
remaining life of the original swap (through February 14, 2014). As a result of the $74 million
redemption of the notes during June 2010, an additional $1.7 million of unamortized expense was
recognized during the year ended December 31, 2010. This was the result of the face value of
outstanding senior secured notes dropping below the notional amount of the swap. As of December 31,
2010, accumulated other comprehensive loss included $12.7 million, net of tax, of unamortized loss
relating to the terminated swap. Interest expense for the years ended December 31, 2010 and 2009,
included $20.9 million and $16.6 million, respectively, of amortization expense related to the
terminated swap. Reclassifications from accumulated other comprehensive loss to interest expense in
the next twelve months will be approximately $11.9 million, or $7.2 million net of tax.
On June 3, 2005, the Company entered into two interest rate swaps for a total notional amount of
$100 million for the period from November 25, 2005 through November 24, 2008. Under the terms of
the interest rate swaps, the Company was required to pay a fixed interest rate of 4.04% on $100
million while receiving a variable interest rate equal to the 90 day LIBOR. These swaps qualified,
were designated and were accounted for as cash flow hedges under ASC 815. One of the interest rate
swaps with a total notional amount of $50 million was terminated on February 12, 2007 while the
remaining amount terminated as planned on November 24, 2008, and thus had no fair value at December
31, 2010 or 2009. Interest expense of $0.5 million was recognized during year ended December 31,
2008, for the portion of the hedge deemed ineffective.
For the year ended December 31, 2009, the amount of loss recognized in the consolidated statement
of operations was as follows (in thousands):
The Effect of Derivative Instruments on Statement of Operations | ||||||||||||||||||||
Amount of Gain | ||||||||||||||||||||
or (Loss) | ||||||||||||||||||||
Recognized in | ||||||||||||||||||||
Accumulated | Location of Gain | Amount of Gain | Amount of Gain | |||||||||||||||||
Other | (Loss) | (Loss) | Location of Gain | (Loss) | ||||||||||||||||
Comprehensive | Reclassified from | Reclassified from | (Loss) Recognized | Recognized in | ||||||||||||||||
Income (AOCI) | AOCI into | AOCI into | in Income on | Income on | ||||||||||||||||
Derivatives in ASC 815 | on Derivative | Income | Income | Derivative | Derivative | |||||||||||||||
Cash Flow Hedging | (Effective | (Effective | (Effective | (Ineffective | (Ineffective | |||||||||||||||
Relationships | Portion) | Portion) | Portion) | Portion) | Portion) | |||||||||||||||
Interest Rate Swap |
$ | 5,322 | Interest Expense | $ | (7,270 | ) | Interest Expense | $ | (278 | ) |
See Note 11 for additional information regarding the fair value of derivative instruments.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective beginning second quarter 2009, ASC 825 requires disclosures about fair value of financial
instruments in quarterly reports as well as in annual reports. For RailAmerica, this statement
applies to certain investments, such as cash equivalents, and long-term debt. Also, ASC 820
clarifies the definition of fair value for financial reporting, establishes a framework for
measuring fair value and requires additional disclosures about the use of fair value measurements.
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument held by the Company:
| Current assets and current liabilities: The carrying value approximates fair value due to the short maturity of these items. | ||
| Long-term debt: The fair value of the Companys senior secured notes is based on secondary market indicators. The carrying amount of the Companys other long term debt approximates its fair value. | ||
| Derivatives: The carrying value is based on fair value as of the balance sheet date. Companies are required to maximize the use of observable inputs (Level 1 and Level 2), when available, and to minimize the use of unobservable inputs (Level 3) when determining fair value. The Companys measurement of the fair value of interest rate derivatives is based on estimates of the mid-market values for the transactions provided by the counterparties to these agreements. For derivative instruments in an asset position, the Company also analyzes the credit standing of the counterparty and factors it into the fair value measurement. ASC 820 states that the fair value of a liability also must reflect the nonperformance risk of the reporting entity. Therefore, the impact of the Companys credit worthiness has also been factored into the fair value measurement of the derivative instruments |
F-20
Table of Contents
in a liability position. This methodology is a market approach, which under ASC 820 utilizes Level 2 inputs as it uses market data for similar instruments in active markets. See Note 10 for further fair value disclosure of the Companys interest rate swap. As the Company terminated its interest rate swap agreement in conjunction with the refinancing of its bridge credit facility on June 23, 2009, the swap had no fair value as of December 31, 2010 or 2009. |
The carrying amounts and estimated fair values of the Companys financial instruments were as
follows:
December 31, 2010 | ||||||||
Carrying | Fair | |||||||
Amount | Value | |||||||
Cash and cash equivalents |
$ | 152,968 | $ | 152,968 | ||||
9.25% Senior secured notes |
$ | 571,161 | $ | 649,306 |
12. COMMON STOCK TRANSACTIONS
On October 16, 2009, the Company completed an initial public offering of 22,000,000 shares of
common stock at $15.00 per share. The Company sold 10,500,000 shares of common stock and Holdings
sold 11,500,000 shares of common stock. Proceeds to the Company were $143.1 million net of the
underwriters discount and expenses. The Company did not receive any proceeds from the sale of its
common stock by Holdings. On November 16, 2009, the Company redeemed $74 million aggregate
principal amount of the senior secured notes at a cash redemption price of 103%, plus accrued
interest thereon to, but not including, the redemption date. The Company intends to use the
remainder of the net proceeds from the initial public offering for working capital and other
general corporate purposes, including potential strategic investments and acquisitions.
Effective September 22, 2009, the Board of Directors approved a stock split of 90 to 1 and
increased the total authorized shares to 500,000,000, consisting of 400,000,000 shares of common
stock and 100,000,000 shares of preferred stock. All prior period share and per share amounts have
been adjusted to reflect the stock split.
During the years ended December 31, 2010 and 2009, the Company accepted 113,381 and 48,696 shares
in lieu of cash payments by employees for payroll tax withholdings relating to stock based
compensation.
Stock Repurchase Program
On February 23, 2011, the Company announced that its Board of Directors had approved a stock
repurchase program. Under the program, the Company is authorized to repurchase up to $50.0 million
of its outstanding shares of common stock from time to time at prevailing prices in the open market
or in privately negotiated transactions. The timing and actual number of shares repurchased, if
any, will depend on a variety of factors including the price and availability of the Companys
shares, trading volume and general market conditions. The program may be suspended or discontinued
at any time without prior notice.
13. INCOME TAX PROVISION
Income (loss) from continuing operations before income taxes for the years ended December 31, 2010,
2009 and 2008, consists of (in thousands):
December 31, | December 31, | December 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Domestic |
$ | 14,019 | $ | (15,725 | ) | $ | 9,583 | |||||
Foreign subsidiaries |
11,954 | 34,935 | 5,779 | |||||||||
$ | 25,973 | $ | 19,210 | $ | 15,362 | |||||||
F-21
Table of Contents
The provision (benefit) for income taxes for the years ended December 31, 2010, 2009 and 2008,
consists of (in thousands):
December 31, | December 31, | December 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Federal income taxes: |
||||||||||||
Current |
$ | | $ | | $ | | ||||||
Deferred |
4,022 | 13,868 | (10,073 | ) | ||||||||
4,022 | 13,868 | (10,073 | ) | |||||||||
State income taxes: |
||||||||||||
Current |
18 | (333 | ) | 2,243 | ||||||||
Deferred |
103 | 910 | 5,866 | |||||||||
121 | 577 | 8,109 | ||||||||||
Foreign income taxes: |
||||||||||||
Current |
4,073 | 6,279 | 3,214 | |||||||||
Deferred |
(1,360 | ) | (16,431 | ) | 1,046 | |||||||
2,713 | (10,152 | ) | 4,260 | |||||||||
Total income tax provision |
$ | 6,856 | $ | 4,293 | $ | 2,296 | ||||||
The following table summarizes the total income tax provisions (benefits) for the years ended
December 31, 2010, 2009 and 2008 (in thousands):
December 31, | December 31, | December 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Continuing operations |
$ | 6,856 | $ | 16,299 | $ | 1,599 | ||||||
Discontinued operations |
| (12,006 | ) | 697 | ||||||||
Total income tax provision |
$ | 6,856 | $ | 4,293 | $ | 2,296 | ||||||
The differences between the U.S. federal statutory tax rate and the Companys effective rate from
continuing operations for the years ended December 31, 2010, 2009 and 2008, are as follows (in
thousands):
December 31, | December 31, | December 31, | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Income tax expense at federal statutory rate |
$ | 9,091 | $ | 6,724 | $ | 5,377 | ||||||
Foreign tax rate differential |
(379 | ) | (1,726 | ) | 892 | |||||||
Net expense (benefit) due to change in tax law,
apportionment factors and other adjustments |
1,159 | (3,315 | ) | 1,436 | ||||||||
State income tax refunds net of federal benefit |
| (760 | ) | | ||||||||
Non-deductible/nontaxable items |
411 | 318 | 393 | |||||||||
Track maintenance credit |
| | (16,278 | ) | ||||||||
Tax expense on foreign repatriation |
| 14,952 | | |||||||||
Expired tax attributes |
| 1,447 | | |||||||||
Tax contingencies and settlements |
(1,118 | ) | (4,601 | ) | 1,645 | |||||||
State income taxes net of federal benefit |
(174 | ) | (797 | ) | 1,777 | |||||||
Foreign dividend |
| | 3,283 | |||||||||
Stock-based compensation |
720 | | | |||||||||
Change in valuation allowance |
(2,871 | ) | 4,024 | 3,093 | ||||||||
Other, net |
17 | 33 | (19 | ) | ||||||||
Income tax expense |
$ | 6,856 | $ | 16,299 | $ | 1,599 | ||||||
F-22
Table of Contents
The components of deferred income tax assets and liabilities as of December 31, 2010 and 2009 are
as follows (in thousands):
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carryforward |
$ | 38,064 | $ | 56,010 | ||||
Alternative minimum tax credit |
1,459 | 1,356 | ||||||
General business credit carryovers |
94,819 | 94,819 | ||||||
Tax effect of unrecognized tax positions |
740 | 1,010 | ||||||
Hedge transactions |
| | ||||||
Accrued expenses |
20,355 | 17,234 | ||||||
Total deferred tax assets |
155,437 | 170,429 | ||||||
Less: valuation allowance |
(8,076 | ) | (10,947 | ) | ||||
Total deferred tax assets, net |
147,361 | 159,482 | ||||||
Deferred tax liabilities: |
||||||||
Property, plant and equipment |
(326,900 | ) | (322,330 | ) | ||||
Intangibles |
(10,310 | ) | (6,447 | ) | ||||
Other |
(367 | ) | (3,010 | ) | ||||
Total deferred tax liabilities |
(337,577 | ) | (331,787 | ) | ||||
Net deferred tax liabilities |
$ | (190,216 | ) | $ | (172,305 | ) | ||
The Company maintains a valuation allowance on net operating losses in jurisdictions for which,
based on the weight of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. It is managements belief that it is more likely than not
that a portion of the deferred tax assets will not be realized. Based on demonstrated earnings
history, the Companys expectation of future reversing deferred tax liabilities and the reenactment
of Section 45G of the Internal Revenue Code, the Company released a valuation allowance of
approximately $2.9 million related to certain state net operating losses. The Company has
established a valuation allowance of $8.1 million and $10.9 million at December 31, 2010 and 2009,
respectively.
The following table summarizes the net operating loss carryforwards by jurisdiction as of December
31, 2010 (in thousands):
Expiration | ||||||||
Amount | Period | |||||||
U.S. Federal |
$ | 79,124 | 2021 - 2028 | |||||
U.S. State |
252,331 | 2011- 2030 | ||||||
Canada |
961 | 2014 - 2030 |
The following table summarizes general business credits available to the Company in the U.S. as of
December 31, 2010 (in thousands):
Expiration | ||||||||
Amount | Period | |||||||
Track maintenance credit |
$ | 94,742 | 2025 - 2028 | |||||
GO Zone tax credit |
77 | 2026 | ||||||
Total credits |
$ | 94,819 | ||||||
The Companys net operating loss carryforwards and general business credits for federal and state
income tax purposes are limited by Internal Revenue Code Section 382 and Internal Revenue Code
Section 383, respectively.
United States income taxes have not been provided on $32.1 million of undistributed earnings of
international subsidiaries because of our intention to reinvest those earnings indefinitely. The
U.S. tax effects of the permanently reinvested foreign earnings that have not been accrued were
approximately $11.2 million, exclusive of any foreign withholding taxes.
F-23
Table of Contents
A reconciliation of the beginning and ending amount of unrecognized tax positions is as follows (in
thousands):
2010 | 2009 | 2008 | ||||||||||
Balance at beginning of year |
$ | 6,097 | $ | 29,995 | $ | 18,222 | ||||||
Additions based on tax positions related to the current year |
| | 797 | |||||||||
Additions for tax positions of prior years |
43 | 128 | 15,804 | |||||||||
Reductions for tax positions of prior years |
| (497 | ) | (3,521 | ) | |||||||
Settlements with taxing authorities |
| (20,993 | ) | | ||||||||
Lapse of statute of limitations |
(970 | ) | (2,536 | ) | (1,307 | ) | ||||||
Balance at end of year |
$ | 5,170 | $ | 6,097 | $ | 29,995 | ||||||
At December 31, 2010, the Companys liability for uncertain tax positions was $5.2 million, $4.9
million of which would reduce its effective tax rate if recognized. The Company anticipates the
liability for uncertain tax positions will decrease by $0.6 million over the next twelve months.
The Company recognizes interest and penalties related to unrecognized tax positions in its
provision for income taxes. During the year ended December 31, 2010, the Company reduced its
accrual for interest and penalties by $0.5 million as a result of the lapse of statutes of
limitations. During the years ended December 31, 2010 and 2009, the Company recognized
approximately $0.1 million and $0.2 million, respectively, of interest and penalties. The Company
had approximately $0.3 million and $0.7 million for the payment of interest and penalties accrued
at December 31, 2010 and 2009, respectively.
In November 2005, the ATO initiated an audit of the reorganization transactions undertaken by the
Companys Australian subsidiaries prior to the sale of Freight Australia to Pacific National in
August 2004. On May 14, 2009, the Company received a notice from the ATO indicating that they would
not be taking any further action in relation to its audit of the reorganization transactions. As a
result, the Company reduced its previously recorded tax reserves by $21.0 million during the year
ended December 31, 2009. Of this amount, $2.5 million, which related to the accrual of interest
subsequent to the Companys acquisition, resulted in a benefit to the continuing operations tax
provision, with the balance resulting in an adjustment to the gain on sale of discontinued
operations.
During 2008, approximately $10.8 million of the additions for tax positions of prior years was
recorded as an adjustment to goodwill and relates to tax positions that existed prior to the change
in ownership that occurred on February 14, 2007. The $3.5 million of reductions for tax positions
of prior years is attributable to foreign exchange translation gains, substantially all of which
was attributable to the Companys former Australian businesses, and is included in the results from
discontinued operations.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction,
various U.S. state jurisdictions and foreign jurisdictions. With few exceptions, the Company or one
of its subsidiaries is no longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations by authorities for years before 2000.
F-24
Table of Contents
14. PENSION AND OTHER BENEFIT PROGRAMS
Canadian Employees
The Company maintains a pension plan for a majority of its Canadian railroad employees, with both
defined benefit and defined contribution components.
DEFINED CONTRIBUTION COMPONENT The defined contribution component applies to a majority of the
Companys Canadian railroad employees that are not covered by the defined benefit component. The
Company contributes 3% of a participating employees salary to the plan. Pension expense for the
years ended December 31, 2010, 2009 and 2008, for the defined contribution members was $0.6
million, $0.6 million, and $0.7 million, respectively.
DEFINED BENEFIT COMPONENT The defined benefit component applies to approximately 60 employees
who transferred employment directly from CP to a subsidiary of the Company. The defined benefit
portion of the plan is a mirror plan of CPs defined benefit plan. The employees that transferred
and joined the mirror plan were entitled to transfer or buy back prior years of service. As part of
the arrangement, CP transferred to the Company the appropriate value of each employees pension
entitlement.
The assumed discount rate included below is based on rates of return on high-quality fixed-income
investments currently available and expected to be available during the period up to maturity of
the pension benefits. The rate of 5.7% used as of December 31, 2010 is within the range recommended
by PC Bond Analytics. PC Bond Analytics distributes discount rate information to defined benefit
plan sponsors to assist in reporting for pension disclosures. The discount rate data is derived
from the 2010 PC Bond Analytics Database, which consists of data from Standard & Poors
Institutional Market Services database as well as proprietary analysis created by PC Bond
Analytics.
U.S. Employees
The Company maintains a contributory profit sharing plan as defined under Section 401(k) of the
U.S. Internal Revenue Code. The Company makes contributions to this plan at a rate of 50% of the
employees contribution up to $2,500 for Railroad Retirement employees and $5,000 for employees
under the Federal Insurance Contributions Act. An employee becomes 100% vested with respect to the
employer contributions after completing four years of service. Employer contributions during the
years ended December 31, 2010, 2009 and 2008, were approximately $1.3 million, $1.2 million, and
$1.3 million, respectively.
The Company maintains a pension and post retirement benefit plan for 43 employees who
transferred employment directly from Alcoa, Inc. to RailAmerica. The defined benefit portion of the
plan is a mirror plan of Alcoas Retirement Plan II, Rule IIE defined benefit plan. The accrued
benefits earned under the Alcoa Pension Plan as of October 1, 2005 are an offset to the RailAmerica
plan. No assets were transferred as part of the arrangement. However, the Company assumed accrued
post retirement benefits of $2.6 million as part of the Alcoa Railroad acquisition in 2005.
F-25
Table of Contents
The following chart summarizes the benefit obligations, assets, funded status and rate
assumptions associated with the defined benefit plans for the years ended December 31, 2010, 2009
and 2008 (in thousands):
Canadian | U.S. | Total | Canadian | U.S. | Total | Canadian | U.S. | Total | ||||||||||||||||||||||||||||
2010 | 2010 | 2010 | 2009 | 2009 | 2009 | 2008 | 2008 | 2008 | ||||||||||||||||||||||||||||
CHANGE IN BENEFIT OBLIGATION |
||||||||||||||||||||||||||||||||||||
Benefit obligation at beginning of period |
$ | 9,780 | $ | 738 | $ | 10,518 | $ | 6,496 | $ | 572 | $ | 7,068 | $ | 10,781 | $ | 297 | $ | 11,078 | ||||||||||||||||||
Service cost |
119 | 83 | 202 | 101 | 73 | 174 | 168 | 123 | 291 | |||||||||||||||||||||||||||
Interest cost |
621 | 43 | 664 | 487 | 35 | 522 | 604 | 18 | 622 | |||||||||||||||||||||||||||
Plan participants contributions |
74 | 0 | 74 | 84 | 0 | 84 | 122 | 0 | 122 | |||||||||||||||||||||||||||
Actuarial loss (gain) |
342 | 21 | 363 | 1,736 | 59 | 1,795 | (2,894 | ) | 142 | (2,752 | ) | |||||||||||||||||||||||||
Benefits paid |
(846 | ) | (24 | ) | (870 | ) | (306 | ) | (1 | ) | (307 | ) | (126 | ) | (8 | ) | (134 | ) | ||||||||||||||||||
Foreign currency exchange rate changes |
462 | 0 | 462 | 1,182 | 0 | 1,182 | (2,159 | ) | 0 | (2,159 | ) | |||||||||||||||||||||||||
Benefit obligation at end of period |
$ | 10,552 | $ | 861 | $ | 11,413 | $ | 9,780 | $ | 738 | $ | 10,518 | $ | 6,496 | $ | 572 | $ | 7,068 | ||||||||||||||||||
CHANGE IN PLAN ASSETS |
||||||||||||||||||||||||||||||||||||
Fair value of plan assets at beginning of period |
$ | 7,613 | $ | 548 | $ | 8,161 | $ | 5,282 | $ | 343 | $ | 5,625 | $ | 7,575 | $ | 168 | $ | 7,743 | ||||||||||||||||||
Actual return on plan assets |
961 | (7 | ) | 954 | 1,030 | (6 | ) | 1,024 | (1,177 | ) | (2 | ) | (1,179 | ) | ||||||||||||||||||||||
Employer contribution |
1,936 | 93 | 2,029 | 592 | 212 | 804 | 350 | 185 | 535 | |||||||||||||||||||||||||||
Plan participants contributions |
74 | 0 | 74 | 84 | 0 | 84 | 122 | 0 | 122 | |||||||||||||||||||||||||||
Benefits paid |
(846 | ) | (24 | ) | (870 | ) | (306 | ) | (1 | ) | (307 | ) | (126 | ) | (8 | ) | (134 | ) | ||||||||||||||||||
Foreign currency exchange rate changes |
386 | 0 | 386 | 931 | 0 | 931 | (1,462 | ) | 0 | (1,462 | ) | |||||||||||||||||||||||||
Fair value of plan assets at end of period |
$ | 10,124 | $ | 610 | $ | 10,734 | $ | 7,613 | $ | 548 | $ | 8,161 | $ | 5,282 | $ | 343 | $ | 5,625 | ||||||||||||||||||
Funded status accrued benefit cost |
$ | (428 | ) | $ | (251 | ) | $ | (679 | ) | $ | (2,167 | ) | $ | (190 | ) | $ | (2,357 | ) | $ | (1,214 | ) | $ | (229 | ) | $ | (1,443 | ) | |||||||||
ASSUMPTIONS |
||||||||||||||||||||||||||||||||||||
Discount rate |
5.70 | % | 5.30 | % | N/A | 6.40 | % | 5.90 | % | N/A | 7.50 | % | 6.25 | % | N/A | |||||||||||||||||||||
Expected return on plan assets |
6.50 | % | 6.00 | % | N/A | 6.50 | % | 6.00 | % | N/A | 6.50 | % | 6.00 | % | N/A | |||||||||||||||||||||
Rate of compensation increase |
3.50 | % | 4.56 | % | N/A | 3.50 | % | 4.56 | % | N/A | 3.50 | % | 4.56 | % | N/A | |||||||||||||||||||||
COMPONENTS OF NET PERIODIC BENEFIT COST IN PERIOD |
||||||||||||||||||||||||||||||||||||
Service cost |
$ | 119 | $ | 83 | $ | 202 | $ | 101 | $ | 73 | $ | 174 | $ | 168 | $ | 123 | $ | 291 | ||||||||||||||||||
Interest cost |
621 | 43 | 664 | 487 | 35 | 522 | 604 | 18 | 622 | |||||||||||||||||||||||||||
Expected return on plan assets |
(495 | ) | (35 | ) | (530 | ) | (343 | ) | (25 | ) | (368 | ) | (492 | ) | (13 | ) | (505 | ) | ||||||||||||||||||
Amortization of prior service cost |
24 | 0 | 24 | 23 | 0 | 23 | 20 | 0 | 20 | |||||||||||||||||||||||||||
Amortization of net actuarial loss |
126 | 30 | 156 | 21 | 22 | 43 | 127 | 5 | 132 | |||||||||||||||||||||||||||
Net periodic pension cost |
$ | 395 | $ | 121 | $ | 516 | $ | 289 | $ | 105 | $ | 394 | $ | 427 | $ | 133 | $ | 560 | ||||||||||||||||||
(in thousands) | ||||||||||||
Canadian | U.S. | Total | ||||||||||
Expected Employer Contribution in 2011 |
$ | 149 | $ | 87 | $ | 236 | ||||||
Expected Employee Contribution in 2011 |
75 | 0 | 75 | |||||||||
Amortization of Loss in 2011 |
102 | 33 | 135 | |||||||||
Amortization of Prior Service Cost in 2011 |
24 | 0 | 24 | |||||||||
Expected Benefit Payments in |
||||||||||||
2011 |
$ | 291 | $ | 29 | $ | 320 | ||||||
2012 |
291 | 40 | 331 | |||||||||
2013 |
291 | 53 | 344 | |||||||||
2014 |
331 | 61 | 392 | |||||||||
2015 |
388 | 61 | 449 | |||||||||
2016-2021 |
3,102 | 353 | 3,455 |
December 31, | December 31, | |||||||
Adjustments to Accumulated Other Comprehensive Income | 2010 | 2009 | ||||||
(In thousands) | ||||||||
Unrecognized net actuarial loss |
$ | 175 | $ | (1,139 | ) | |||
Foreign currency translation |
277 | | ||||||
Unrecognized transition obligation |
24 | (21 | ) | |||||
Total adjustment to AOCI, before tax |
$ | 476 | $ | (1,160 | ) | |||
Total adjustment to AOCI, after tax |
$ | 329 | $ | (765 | ) | |||
Balance in AOCI, net of tax of $167 and $20, respectively |
$ | 429 | $ | 100 | ||||
Plan Assets (Market Value) for the years ended:
December 31, | December 31, | Target Allocation | ||||||||||
2010 | 2009 | 2011 | ||||||||||
Integra Strategic Allocated Pool Fund |
100 | % | 100 | % | 100 | % | ||||||
Fund holdings by class: |
||||||||||||
a) Equity securities |
59.9 | % | 60.0 | % | 60.0 | % | ||||||
b) Debt securities |
32.7 | % | 40.0 | % | 40.0 | % | ||||||
c) Other (including cash) |
7.4 | % | 0.0 | % | 0.0 | % | ||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Expected long-term rate of return on assets |
6.50 | % | 6.50 | % | ||||||||
Expected rate of return on equity securities |
7.50 | % | 7.50 | % | ||||||||
Expected rate of return on debt securities |
5.50 | % | 5.50 | % |
F-26
Table of Contents
The overall objective of the defined benefit portion of the plan is to fund its liabilities by
maximizing the long term rate of return through investments in a portfolio of money market
instruments, bonds, and preferred and common equity securities while being mindful of the yield,
marketability and diversification of the investments. All assets are currently invested in readily
marketable investments to provide sufficient liquidity. Investments are not permitted in derivative
securities or in any asset class not listed below without the written approval of the Company.
The primary investment objective of the plan is to achieve a rate of return that exceeds the
Consumer Price Index by 4.0% over rolling four-year periods. The secondary investment objectives of
the plan are to achieve a rate of return that exceeds the benchmark portfolio by 0.7% before fees
over rolling four-year periods and to rank above the median manager in comparable funds over
rolling four-year periods.
The initial limits of the proportion of the market value of the portfolio that may be invested in
the following classes of securities are:
Policy | Minimum | Maximum | ||||||||||
Asset Mix Limits: | Mix | Limit | Limit | |||||||||
Canadian Equity |
30 | % | 20 | % | 40 | % | ||||||
U.S. Equity |
15 | % | 5 | % | 20 | % | ||||||
International Equity |
15 | % | 5 | % | 20 | % | ||||||
Real Estate |
0 | % | 0 | % | 10 | % | ||||||
Total Equity |
60 | % | 25 | % | 70 | % | ||||||
Bonds |
40 | % | 30 | % | 75 | % | ||||||
Mortgages |
0 | % | 0 | % | 10 | % | ||||||
Short Term |
0 | % | 0 | % | 20 | % | ||||||
Total Fixed Income |
40 | % | 30 | % | 75 | % |
The following chart summarizes the benefit obligations, assets, funded status and rate assumptions
associated with the Alcoa Post-Retirement Benefit Plan for the years ended December 31, 2010, 2009
and 2008 (in thousands):
January 1, 2010 to | January 1, 2009 to | January 1, 2008 to | ||||||||||
December 31, 2010 | December 31, 2009 | December 31, 2008 | ||||||||||
CHANGE IN BENEFIT OBLIGATION |
||||||||||||
Benefit obligation at beginning of period |
$ | 2,201 | $ | 1,980 | $ | 2,053 | ||||||
Service cost |
43 | 43 | 45 | |||||||||
Interest cost |
129 | 123 | 128 | |||||||||
Actuarial gain |
(92 | ) | 55 | (246 | ) | |||||||
Benefits paid |
(3 | ) | 0 | 0 | ||||||||
Benefit obligation at end of period |
$ | 2,278 | $ | 2,201 | $ | 1,980 | ||||||
CHANGE IN PLAN ASSETS |
||||||||||||
Fair value of plan assets at beginning of period |
$ | 0 | $ | 0 | $ | 0 | ||||||
Employer direct benefit payments |
3 | 0 | 0 | |||||||||
Direct benefit payments |
(3 | ) | 0 | 0 | ||||||||
Fair value of plan assets at end of period |
$ | 0 | $ | 0 | $ | 0 | ||||||
Funded status (accrued) benefit cost |
$ | (2,278 | ) | $ | (2,201 | ) | $ | (1,980 | ) | |||
ASSUMPTIONS |
||||||||||||
Discount rate |
5.30 | % | 5.90 | % | 6.25 | % | ||||||
Current year health care cost trend rate
(ultimate rate reached in 2006) |
N/A | N/A | N/A | |||||||||
COMPONENTS OF NET PERIODIC BENEFIT COST IN
PERIOD |
||||||||||||
Service cost |
$ | 43 | $ | 43 | $ | 45 | ||||||
Interest cost |
129 | 123 | 128 | |||||||||
Amortization of net actuarial gain |
(61 | ) | (71 | ) | (60 | ) | ||||||
Net periodic benefit cost |
$ | 111 | $ | 95 | $ | 113 | ||||||
F-27
Table of Contents
December 31, | December 31, | |||||||
Adjustments to Accumulated Other Comprehensive Income | 2010 | 2009 | ||||||
(In thousands) | ||||||||
Unrecognized net actuarial (loss) gain |
$ | 33 | $ | (126 | ) | |||
Total adjustment to AOCI, before tax |
$ | 33 | $ | (126 | ) | |||
Total adjustment to AOCI, after tax |
$ | 21 | $ | (78 | ) | |||
Balance in AOCI, net of tax of $193 and $181, respectively |
$ | 316 | $ | 295 | ||||
Estimated Future | ||||
Benefit Payments | ||||
(In thousands) | ||||
2011 |
$ | 35 | ||
2012 |
57 | |||
2013 |
94 | |||
2014 |
126 | |||
2015 |
147 | |||
2016 - 2020 |
929 |
15. COMMITMENTS AND CONTINGENCIES
In the ordinary course of conducting its business, the Company becomes involved in various legal
actions and other claims. Litigation is subject to many uncertainties, the outcome of individual
litigated matters is not predictable with assurance, and it is reasonably possible that some of
these matters may be decided unfavorably to the Company. It is the opinion of management that the
ultimate liability, if any, with respect to these matters will not have a material adverse effect
on the Companys financial position, results of operations or cash flows. Settlement costs
associated with litigation are included in Casualties and insurance on the Consolidated Statement
of Operations.
The Companys operations are subject to extensive environmental regulation. The Company records
liabilities for remediation and restoration costs related to past activities when the Companys
obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance
activities to current operations are expensed as incurred. The Companys recorded liabilities for
these issues represent its best estimates (on an undiscounted basis) of remediation and restoration
costs that may be required to comply with present laws and regulations. It is the opinion of
management that the ultimate liability, if any, with respect to these matters will not have a
material adverse effect on the Companys financial position, results of operations or cash flows.
The Company is subject to claims for employee work-related and third-party injuries. Work-related
injuries for employees are primarily subject to the Federal Employers Liability Act. The Company
retains an independent actuarial firm to assist management in assessing the value of personal
injury claims and cases. An analysis has been performed by an independent actuarial firm and is
reviewed by management. The methodology used by the actuary includes a development factor to
reflect growth or reduction in the value of these personal injury claims. It is based largely on
the Companys historical claims and settlement experience. At December 31, 2010 and 2009, the
Company had $12.9 million and $14.2 million, respectively, accrued for personal injury claims and
cases. Actual results may vary from estimates due to the type and severity of the injury, costs of
medical treatments and uncertainties in litigation.
The Company is subject to ongoing tax examinations and governmental assessments in various U.S. and
foreign jurisdictions. Specifically, the ATO initiated an audit, in November 2005, of the
reorganization transactions undertaken by the Companys Australian subsidiaries prior to the sale
of Freight Australia to Pacific National in August 2004. On May 14, 2009, the Company received a
notice from the ATO indicating that they would not be taking any further action in relation to its
audit of the reorganization transactions. As a result, the Company reversed the recorded tax
reserves in the second quarter of 2009 and recorded a benefit to the continuing operations tax
provision of $2.5 million and an adjustment to the gain on disposal of discontinued operations of
$12.3 million.
On August 28, 2005, a railcar containing styrene located on the Companys Indiana & Ohio Railway
(IORY) property in Cincinnati, Ohio, began venting, due to a chemical reaction. Styrene is a
potentially hazardous chemical used to make plastics, rubber and resin. In response to the
incident, local public officials temporarily evacuated residents and businesses from the immediate
area until public authorities confirmed that the tank car no longer posed a threat. As a result of
the incident, several civil lawsuits were filed, and claims submitted, against the Company and others
connected to the tank car. Motions for class action
certification were filed. Settlements were achieved with what the
Company believes to be all
potential individual claimants. In cooperation with the Companys insurer,
F-28
Table of Contents
the Company paid
settlements to a substantial number of affected businesses, as well. All business interruption
claims were resolved. Total payments exceeded the self insured retention, so the IORYs liability
for civil matters was exhausted. The incident also triggered inquiries from the Federal Railroad
Administration (FRA) and other federal, state and local authorities charged with investigating
such incidents. A settlement was reached with the FRA, requiring payment of a $50,000 fine but no
admission of liability by the IORY. Because of the chemical release, the U.S. Environmental
Protection Agency (U.S. EPA) investigated whether criminal negligence contributed to the
incident, and whether charges should be pressed. A series of conferences with the Companys
attorneys and the U.S. EPA attorneys took place through 2009 and into 2011, at which times legal
theories and evidence were discussed in an effort to influence the U.S. EPAs charging decision.
The IORY submitted a proffer addendum in May 2009 analyzing its compliance under the Clean Air Act.
As of December 31, 2010, the Company had accrued $1.3 million for this incident.
The statute of limitations was extended by a tolling agreement as to the IORY only (the Company had
been dropped from this violation) through February 27, 2011. The U.S. EPA attorneys decided not to
press charges and allowed the statute of limitations to lapse resolving this matter.
Government grants
In August 2010, the Companys New England Central Railroad (NECR) was awarded a federal
government grant of $50 million through the State of Vermont to improve and upgrade the track on
its property. As part of the agreement, the NECR has committed to contribute up to approximately
$19 million of capital funds and materials to the project. The project is expected to be completed
within the next two years from the grant date.
16. RELATED PARTY TRANSACTIONS
During 2008, the Company entered into five short-term operating lease agreements with Florida East
Coast Railway LLC, (FECR) an entity also owned by investment funds managed by affiliates of
Fortress. During 2009, the Company entered into five additional lease agreements with the same
entity. All but one of these agreements relate to the leasing of locomotives between the companies
for ordinary business operations, which are based on current market rates for similar assets.
During 2010, these locomotive lease agreements were combined into one master lease agreement. With
respect to such agreements, during the years ended December 31, 2010, 2009 and 2008, on a net basis
the Company paid FECR $2.0 million, $0.6 million and $0.1 million, respectively. At December 31,
2010 and 2009, the Company had no amounts payable to FECR under this
agreement.
The remaining lease relates to the sub-leasing of office space by FECR to the Company. During the
years ended December 31, 2010, 2009 and 2008, FECR billed the Company approximately $1.0 million,
$1.0 million and $0.2 million, respectively, under the sub-lease agreement. As of December 31, 2010
and 2009, the Company had a payable of $0.1 million due to FECR under this agreement.
Effective January 1, 2010, the Company entered into a Shared Services Agreement with FECR and its
affiliates which provides for services to be provided from time to time by certain of our senior
executives and other employees and for certain reciprocal administrative services, including
finance, accounting, human resources, purchasing and legal. This agreement is generally consistent
with arms-length arrangements with third parties providing similar services. The net amount of
payments made by us under this agreement was approximately $0.8 million for the year ended December
31, 2010. As of December 31, 2010, the Company had a payable of $0.2 million due to FECR under this
agreement.
In October 2009, certain of the Companys executives entered into consulting agreements with FECR.
Under the terms of these agreements, the executives are to provide assistance to the FECR with
strategic initiatives designed to grow FECRs revenue and enhance the value of the franchise.
Consideration for the executives performance is in the form of restricted stock units of FECR
common stock that will vest 25% over four years. Since the consulting agreements are with a
related-party, the Company is required to recognize compensation expense over the vesting period in
labor and benefits expense with a corresponding credit in other income (loss) for management fee
income. During the years ended December 31, 2010 and 2009, the Company recognized $0.5 million and
$0.1 million, respectively, of compensation expense and $0.5 million and $0.1 million,
respectively, of management fee income related to these consulting agreements.
In October 2009, certain of the Companys executives entered into consulting agreements with
Florida East Coast Industries, Inc., (FECI) an entity also owned by investment funds managed by
affiliates of Fortress. Under the terms of these agreements, the executives are to provide
assistance to the FECI with strategic initiatives designed to
enhance the value of FECIs rail-related assets. Consideration for the executives performance is
in the form of restricted stock units of FECI common stock that will vest 50%, 25%, and 25% over
the next three years. Since the consulting agreements are with a related-party, the Company is
required to recognize
F-29
Table of Contents
compensation expense over the vesting period in labor and benefits expense
with a corresponding credit in other income (loss) for management fee income. During the years
ended December 31, 2010 and 2009, the Company recognized $1.3 million and $0.1 million,
respectively, of compensation expense and $1.3 million and $0.1 million, respectively, of
management fee income related to these consulting agreements.
The Company utilizes Brown & Associates to provide certain sales and use tax advisory and
preparation services. The son of the Companys President and Chief Executive Officer is an
independent contractor of Brown & Associates. During the years ended December 31, 2010 and 2009,
Brown & Associates billed the Company approximately $0.3 million and $0.7 million for its services,
respectively.
17. RESTRUCTURING COSTS
RailAmerica relocated its corporate headquarters to Jacksonville, Florida during the first quarter
of 2008 and as a result, the Company incurred facility closing costs and relocation expenses for
this move during 2008 of approximately $6.1 million, including approximately $3.2 million of
termination benefits. All cash termination benefits were paid in 2008. As of December 31, 2010 and
2009, the Company had an accrual of $0.0 million and $0.02 million, respectively, relating to
health benefits that extended into 2010 for certain terminated employees.
18. IMPAIRMENT OF ASSETS
During the first quarter of 2008 and in conjunction with the relocation of corporate headquarters
to Jacksonville, Florida, the Company committed to a plan to dispose of the office building located
in Boca Raton, Florida. As a result of the decline in the real estate market in South Florida, and
after having received initial offers, the Company did not expect proceeds from this disposal to
cover the carrying value of the assets and accordingly, recorded an impairment charge of $1.7
million during the year ended December 31, 2008. The building was sold in the third quarter of 2008
for $12.1 million, which approximated the carrying value subsequent to the impairment adjustment.
During the third quarter of 2008, the Company entered into a plan to dispose of surplus
locomotives. Due to deterioration in the value of the assets as a result of the weak economic
conditions, an impairment charge of $1.7 million was recorded during the year ended December 31,
2008. All of the equipment was sold as of December 31, 2008, with the sales proceeds approximating
the remaining book value.
19. TRACK MAINTENANCE AGREEMENT
In the fourth quarter of 2010, the Company entered into a track maintenance agreement with an
unrelated third-party customer (Shipper). Under the agreement, the Shipper paid for qualified
railroad track maintenance expenditures during 2010 in exchange for the assignment of railroad
track miles which permits the Shipper to claim certain tax credits pursuant to Section 45G of the
Internal Revenue Code. The Company entered into a similar agreement in the first quarter of 2009.
During the years ended December 31, 2010 and 2009, the Shipper paid for $18.0 million and $17.1
million of maintenance expenditures and $4.3 million and $5.3 million of capital expenditures,
respectively. The Company incurred $0.4 million of consulting fees related to the agreements in
each of the years ended December 31, 2010 and December 31, 2009.
The track maintenance tax credit has been renewed by Congress through 2011. On February 25, 2011,
the Company entered into a 2011 track maintenance agreement with the Shipper. The terms of the 2011
track maintenance agreement are substantially the same as the terms of the 2010 track maintenance
agreement.
20. OTHER INCOME
In August 2010, the Company entered into a purchase agreement to acquire warrants and other
securities of a railroad which was contingent upon that railroads principal stockholder not
consummating a refusal right to purchase the same securities. The principal
stockholder exercised this right and thus based on the terms of the purchase agreement, the Company
received a break-up fee of $2 million from the seller. This break-up fee is reflected, net of
expenses incurred of $0.2 million, as part of Other income (loss) on the Companys consolidated
statement of operations.
F-30
Table of Contents
21. UNAUDITED QUARTERLY FINANCIAL DATA
All quarterly financial data has been restated to reflect the results of OVRR in continuing
operations. The basic and diluted earnings per share for each quarter will not necessarily add-up
to the amount reported for the entire fiscal year on the Consolidated Statements of Operations due
to a significant change in the basic and diluted shares outstanding during the fourth quarter of
2009 as a result of the Companys initial public offering.
Quarterly financial data for 2010 is as follows (in thousands, except per share amounts):
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Operating revenue |
$ | 114,941 | $ | 119,457 | $ | 128,257 | $ | 127,636 | ||||||||
Operating income |
$ | 19,201 | $ | 23,060 | $ | 28,491 | $ | 43,755 | ||||||||
Income (loss) from continuing operations |
$ | (2,514 | ) | $ | (4,221 | ) | $ | 7,968 | $ | 17,884 | ||||||
Net income (loss) |
$ | (2,514 | ) | $ | (4,221 | ) | $ | 7,968 | $ | 17,884 | ||||||
Basic income (loss) from continuing operations per share |
$ | (0.05 | ) | $ | (0.08 | ) | $ | 0.15 | $ | 0.33 | ||||||
Diluted income (loss) from continuing operations per share |
$ | (0.05 | ) | $ | (0.08 | ) | $ | 0.15 | $ | 0.33 |
The second quarter of 2010 includes a loss on extinguishment of debt of $8.4 million related to the
10% paydown of the senior secured notes (See Note 9). The fourth quarter of 2010 operating income
includes $17.6 million related to the track maintenance agreement the Company entered into as a
result of Congress extending tax credits pursuant to Section 45G of the Internal Revenue Service
Code (See Note 19).
Quarterly financial data for 2009 is as follows (in thousands, except per share amounts):
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Operating revenue |
$ | 103,218 | $ | 103,265 | $ | 110,137 | $ | 109,154 | ||||||||
Operating income |
$ | 21,795 | $ | 23,514 | $ | 25,608 | $ | 43,288 | ||||||||
Income (loss) from continuing operations |
$ | 809 | $ | 5,467 | $ | 3,503 | $ | (6,868 | ) | |||||||
Net income (loss) |
$ | 993 | $ | 18,234 | $ | 3,483 | $ | (6,868 | ) | |||||||
Basic income (loss) from continuing operations per share |
$ | 0.02 | $ | 0.13 | $ | 0.08 | $ | (0.13 | ) | |||||||
Diluted income (loss) from continuing operations per share |
$ | 0.02 | $ | 0.13 | $ | 0.08 | $ | (0.13 | ) |
The second quarter of 2009 includes a loss on extinguishment of debt of $2.6 million related to the
repayment of the former bridge credit facility (See Note 9). The fourth quarter of 2009 included a
charge of $6.3 million related to the initial public offering (See Note 4) and a loss on
extinguishment of debt of $6.9 million related to the 10% paydown of the senior secured notes (See
Note 9).
F-31
Table of Contents
22. SEGMENT INFORMATION
The Companys continuing operations consists of one business segment, North American rail
transportation. The North American rail transportation segment includes the operations of the
Companys railroad subsidiaries in the United States and Canada, as well as corporate expenses.
Business and geographical segment information for the periods ended December 31, 2010, 2009 and
2008 is as follows (in thousands):
North America | ||||||||||||
Year Ended December 31, 2010: | Consolidated | United States | Canada | |||||||||
Revenue |
$ | 490,291 | $ | 427,017 | $ | 63,274 | ||||||
Depreciation and amortization |
45,091 | 41,867 | 3,224 | |||||||||
Income from continuing operations before income taxes |
25,973 | 14,019 | 11,954 | |||||||||
Interest expense |
83,775 | 79,246 | 4,529 | |||||||||
Total assets |
1,603,653 | 1,396,922 | 206,731 | |||||||||
Capital expenditures, net |
57,826 | 51,845 | 5,981 |
North America | ||||||||||||
Year Ended December 31, 2009: | Consolidated | United States | Canada | |||||||||
Revenue |
$ | 425,774 | $ | 370,265 | $ | 55,509 | ||||||
Depreciation and amortization |
42,105 | 39,088 | 3,017 | |||||||||
Income (loss) from continuing operations before income taxes |
19,210 | (16,730 | ) | 35,940 | ||||||||
Interest expense |
86,878 | 82,767 | 4,111 | |||||||||
Total assets |
1,598,629 | 1,402,794 | 195,835 | |||||||||
Capital expenditures |
47,789 | 42,815 | 4,974 |
North America | ||||||||||||
Year Ended December 31, 2008: | Consolidated | United States | Canada | |||||||||
Revenue |
$ | 508,466 | $ | 439,878 | $ | 68,588 | ||||||
Depreciation and amortization |
39,578 | 37,016 | 2,562 | |||||||||
Income from continuing operations before income taxes |
15,362 | 9,403 | 5,959 | |||||||||
Interest expense |
61,678 | 58,693 | 2,985 | |||||||||
Total assets |
1,470,447 | 1,256,731 | 213,716 | |||||||||
Capital expenditures |
61,282 | 53,133 | 8,149 |
F-32
Table of Contents
23. GUARANTOR FINANCIAL STATEMENT INFORMATION
In June 2009, the Company sold in a private offering $740.0 million aggregate principal amount of
9.25% senior secured notes which mature on July 1, 2017. In October 2009, the Company filed with
the SEC a Form S-4 registration statement to exchange the privately placed notes with registered
notes. The terms of the registered notes are substantially identical to those of the privately
placed notes. The notes are jointly and severally guaranteed on a senior secured basis by all of
the Companys existing and future wholly-owned domestic restricted subsidiaries, with certain
exceptions. All guarantor subsidiaries are 100% owned by the Company. All amounts in the following
tables are in thousands.
RailAmerica, Inc.
Consolidating Balance Sheet
December 31, 2010
December 31, 2010
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | | $ | 137,335 | $ | 15,633 | $ | | $ | 152,968 | ||||||||||
Accounts and notes receivable, net of allowance |
116 | 65,920 | 8,632 | | 74,668 | |||||||||||||||
Current deferred tax assets |
12,769 | | | | 12,769 | |||||||||||||||
Other current assets |
205 | 13,976 | 1,019 | | 15,200 | |||||||||||||||
Total current assets |
13,090 | 217,231 | 25,284 | | 255,605 | |||||||||||||||
Property, plant and equipment, net |
485 | 898,155 | 82,982 | | 981,622 | |||||||||||||||
Intangible Assets |
| 103,935 | 36,611 | | 140,546 | |||||||||||||||
Goodwill |
| 204,679 | 7,816 | | 212,495 | |||||||||||||||
Other assets |
12,401 | 984 | | | 13,385 | |||||||||||||||
Investment in and advances to affiliates |
1,265,556 | 1,119,507 | 33,534 | (2,418,597 | ) | | ||||||||||||||
Total assets |
$ | 1,291,532 | $ | 2,544,491 | $ | 186,227 | $ | (2,418,597 | ) | $ | 1,603,653 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Current maturities of long-term debt |
$ | | $ | 403 | $ | | $ | | $ | 403 | ||||||||||
Accounts payable |
7,311 | 54,150 | 4,797 | | 66,258 | |||||||||||||||
Accrued expenses |
3,939 | 29,362 | 3,612 | | 36,913 | |||||||||||||||
Total current liabilities |
11,250 | 83,915 | 8,409 | | 103,574 | |||||||||||||||
Long-term debt, less current maturities |
| 2,147 | | | 2,147 | |||||||||||||||
Senior secured notes |
571,161 | | | | 571,161 | |||||||||||||||
Deferred income taxes |
(1,087 | ) | 182,747 | 21,325 | | 202,985 | ||||||||||||||
Other liabilities |
5,459 | 13,113 | 465 | | 19,037 | |||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Common stock |
549 | 1,493 | | (1,493 | ) | 549 | ||||||||||||||
Additional paid-in capital |
636,757 | 2,218,338 | 130,816 | (2,349,154 | ) | 636,757 | ||||||||||||||
Retained earnings |
65,503 | 42,633 | 9,653 | (52,286 | ) | 65,503 | ||||||||||||||
Accumulated other comprehensive income |
1,940 | 105 | 15,559 | (15,664 | ) | 1,940 | ||||||||||||||
Total stockholders equity |
704,749 | 2,262,569 | 156,028 | (2,418,597 | ) | 704,749 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 1,291,532 | $ | 2,544,491 | $ | 186,227 | $ | (2,418,597 | ) | $ | 1,603,653 | |||||||||
F-33
Table of Contents
RailAmerica, Inc.
Consolidating Statement of Operations
For the year ended December 31, 2010
For the year ended December 31, 2010
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating revenue |
$ | 203 | $ | 426,814 | $ | 63,274 | $ | | $ | 490,291 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Labor and benefits |
21,838 | 116,560 | 15,595 | | 153,993 | |||||||||||||||
Equipment rents |
127 | 32,012 | 1,980 | | 34,119 | |||||||||||||||
Purchased services |
6,414 | 28,716 | 2,841 | | 37,971 | |||||||||||||||
Diesel fuel |
| 36,067 | 7,249 | | 43,316 | |||||||||||||||
Casualties and insurance |
1,003 | 14,499 | 2,072 | | 17,574 | |||||||||||||||
Materials |
169 | 17,662 | 1,776 | | 19,607 | |||||||||||||||
Joint facilities |
| 8,643 | 24 | | 8,667 | |||||||||||||||
Other expenses |
3,096 | 28,471 | 3,659 | | 35,226 | |||||||||||||||
Track maintenance expense reimbursement |
(17,589 | ) | | | | (17,589 | ) | |||||||||||||
Net gain on sale of assets |
| (2,142 | ) | (49 | ) | | (2,191 | ) | ||||||||||||
Depreciation and amortization |
54 | 41,813 | 3,224 | | 45,091 | |||||||||||||||
Total operating expenses |
15,112 | 322,301 | 38,371 | | 375,784 | |||||||||||||||
Operating (loss) income |
(14,909 | ) | 104,513 | 24,903 | | 114,507 | ||||||||||||||
Interest expense |
(17,117 | ) | (62,129 | ) | (4,529 | ) | | (83,775 | ) | |||||||||||
Equity in earnings of subsidiaries |
54,203 | | | (54,203 | ) | | ||||||||||||||
Other income
(loss) |
2,126 | 1,537 | (8,422 | ) | | (4,759 | ) | |||||||||||||
Income from continuing operations before income taxes |
24,303 | 43,921 | 11,952 | (54,203 | ) | 25,973 | ||||||||||||||
Provision for income taxes |
5,186 | (1,726 | ) | 3,396 | | 6,856 | ||||||||||||||
Income from continuing operations |
19,117 | 45,647 | 8,556 | (54,203 | ) | 19,117 | ||||||||||||||
Net income |
$ | 19,117 | $ | 45,647 | $ | 8,556 | $ | (54,203 | ) | $ | 19,117 | |||||||||
F-34
Table of Contents
RailAmerica, Inc.
Consolidating Statement of Cash Flows
For the year ended December 31, 2010
For the year ended December 31, 2010
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income |
$ | 19,117 | $ | 45,647 | $ | 8,556 | $ | (54,203 | ) | $ | 19,117 | |||||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization, including
amortization costs classified in interest expense |
4,419 | 42,206 | 3,222 | | 49,847 | |||||||||||||||
Equity in earnings of subsidiaries |
(54,203 | ) | | | 54,203 | | ||||||||||||||
Amortization of swap termination costs |
20,891 | | | | 20,891 | |||||||||||||||
Net gain on sale or disposal of properties |
| (2,142 | ) | (49 | ) | | (2,191 | ) | ||||||||||||
Loss on extinguishment of debt |
8,357 | | | | 8,357 | |||||||||||||||
Equity compensation costs |
7,534 | | | | 7,534 | |||||||||||||||
Deferred income taxes and other |
1,649 | 2,308 | (1,192 | ) | | 2,765 | ||||||||||||||
Changes in operating assets and liabilities, net
of acquisitions and dispositions: |
||||||||||||||||||||
Accounts receivable |
(56 | ) | (1,201 | ) | (1,178 | ) | | (2,435 | ) | |||||||||||
Other current assets |
(19 | ) | 6,258 | 1,273 | | 7,512 | ||||||||||||||
Accounts payable |
5,105 | 1,846 | 623 | | 7,574 | |||||||||||||||
Accrued expenses |
481 | 2,940 | (2,153 | ) | | 1,268 | ||||||||||||||
Other assets and liabilities |
(1,301 | ) | (219 | ) | (1,550 | ) | | (3,070 | ) | |||||||||||
Net cash provided by operating activities |
11,974 | 97,643 | 7,552 | | 117,169 | |||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchase of property, plant and equipment, net of
NECR government grant reimbursement |
(442 | ) | (51,403 | ) | (5,981 | ) | | (57,826 | ) | |||||||||||
Proceeds from sale of assets |
| 3,948 | 160 | | 4,108 | |||||||||||||||
Acquisitions, net of cash acquired |
| (23,926 | ) | | | (23,926 | ) | |||||||||||||
Net cash used in investing activities |
(442 | ) | (71,381 | ) | (5,821 | ) | | (77,644 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Principal payments on long-term debt |
| (622 | ) | | | (622 | ) | |||||||||||||
Repurchase of senior secured notes |
(76,220 | ) | | | | (76,220 | ) | |||||||||||||
(Disbursements)/receipts on intercompany debt |
(57,152 | ) | 56,996 | 156 | | | ||||||||||||||
Sale of common stock |
(106 | ) | | | | (106 | ) | |||||||||||||
Deferred financing costs paid |
(95 | ) | (129 | ) | | | (224 | ) | ||||||||||||
Net cash (used in) provided by financing activities |
(133,573 | ) | 56,245 | 156 | | (77,172 | ) | |||||||||||||
Effect of exchange rates on cash |
| | 397 | | 397 | |||||||||||||||
Net (decrease) increase in cash |
(122,041 | ) | 82,507 | 2,284 | | (37,250 | ) | |||||||||||||
Cash, beginning of period |
122,041 | 54,828 | 13,349 | | 190,218 | |||||||||||||||
Cash, end of period |
$ | | $ | 137,335 | $ | 15,633 | $ | | $ | 152,968 | ||||||||||
F-35
Table of Contents
RailAmerica, Inc.
Consolidating Balance Sheet
December 31, 2009
December 31, 2009
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current Assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 122,041 | $ | 54,828 | $ | 13,349 | $ | | $ | 190,218 | ||||||||||
Accounts and notes receivable, net of allowance |
60 | 59,575 | 6,984 | | 66,619 | |||||||||||||||
Current deferred tax assets |
12,697 | | | | 12,697 | |||||||||||||||
Other current assets |
184 | 19,560 | 2,214 | | 21,958 | |||||||||||||||
Total current assets |
134,982 | 133,963 | 22,547 | | 291,492 | |||||||||||||||
Property, plant and equipment, net |
97 | 876,380 | 76,050 | | 952,527 | |||||||||||||||
Intangible Assets |
| 101,913 | 34,741 | | 136,654 | |||||||||||||||
Goodwill |
| 193,353 | 7,416 | | 200,769 | |||||||||||||||
Other assets |
16,051 | 1,153 | (17 | ) | | 17,187 | ||||||||||||||
Investment in and advances to affiliates |
1,155,110 | 1,190,835 | 32,136 | (2,378,081 | ) | | ||||||||||||||
Total assets |
$ | 1,306,240 | $ | 2,497,597 | $ | 172,873 | $ | (2,378,081 | ) | $ | 1,598,629 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||
Current maturities of long-term debt |
$ | | $ | 669 | $ | | $ | | $ | 669 | ||||||||||
Accounts payable |
5,388 | 48,658 | (98 | ) | | 53,948 | ||||||||||||||
Accrued expenses |
3,448 | 25,837 | 5,390 | | 34,675 | |||||||||||||||
Total current liabilities |
8,836 | 75,164 | 5,292 | | 89,292 | |||||||||||||||
Long-term debt, less current maturities |
| 3,013 | | | 3,013 | |||||||||||||||
Senior secured notes |
640,096 | | | | 640,096 | |||||||||||||||
Deferred income taxes |
(8,807 | ) | 168,530 | 25,279 | | 185,002 | ||||||||||||||
Other liabilities |
6,784 | 12,922 | 2,189 | | 21,895 | |||||||||||||||
Stockholders equity: |
||||||||||||||||||||
Common stock |
544 | 1,493 | | (1,493 | ) | 544 | ||||||||||||||
Additional paid-in capital |
630,653 | 2,214,974 | 127,311 | (2,342,285 | ) | 630,653 | ||||||||||||||
Retained earnings |
46,386 | 21,262 | 3,202 | (24,464 | ) | 46,386 | ||||||||||||||
Accumulated other comprehensive (loss) income |
(18,252 | ) | 239 | 9,600 | (9,839 | ) | (18,252 | ) | ||||||||||||
Total stockholders equity |
659,331 | 2,237,968 | 140,113 | (2,378,081 | ) | 659,331 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 1,306,240 | $ | 2,497,597 | $ | 172,873 | $ | (2,378,081 | ) | $ | 1,598,629 | |||||||||
F-36
Table of Contents
RailAmerica, Inc.
Consolidating Statement of Operations
For the year ended December 31, 2009
For the year ended December 31, 2009
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating revenue |
$ | 172 | $ | 370,093 | $ | 55,509 | $ | | $ | 425,774 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Labor and benefits |
24,222 | 104,586 | 14,796 | | 143,604 | |||||||||||||||
Equipment rents |
51 | 33,832 | 2,095 | | 35,978 | |||||||||||||||
Purchased services |
5,644 | 23,599 | 1,671 | | 30,914 | |||||||||||||||
Diesel fuel |
| 27,934 | 5,356 | | 33,290 | |||||||||||||||
Casualties and insurance |
606 | 13,067 | 3,122 | | 16,795 | |||||||||||||||
Materials |
82 | 9,749 | 1,568 | | 11,399 | |||||||||||||||
Joint facilities |
| 6,916 | 26 | | 6,942 | |||||||||||||||
Other expenses |
1,990 | 25,938 | 5,109 | | 33,037 | |||||||||||||||
Track maintenance expense reimbursement |
(16,656 | ) | | | | (16,656 | ) | |||||||||||||
Net loss (gain) on sale of assets |
| 936 | (26,775 | ) | | (25,839 | ) | |||||||||||||
Depreciation and amortization |
209 | 38,879 | 3,017 | | 42,105 | |||||||||||||||
Total operating expenses |
16,148 | 285,436 | 9,985 | | 311,569 | |||||||||||||||
Operating (loss) income |
(15,976 | ) | 84,657 | 45,524 | | 114,205 | ||||||||||||||
Interest expense |
(41,169 | ) | (41,598 | ) | (4,111 | ) | | (86,878 | ) | |||||||||||
Equity in earnings of subsidiaries |
53,366 | | | (53,366 | ) | | ||||||||||||||
Other income
(loss) |
3,023 | (5,666 | ) | (5,474 | ) | | (8,117 | ) | ||||||||||||
Income from continuing operations before income taxes |
(756 | ) | 37,393 | 35,939 | (53,366 | ) | 19,210 | |||||||||||||
Provision for (benefit from) income taxes |
(5,482 | ) | 13,861 | 7,920 | | 16,299 | ||||||||||||||
Income from continuing operations |
4,726 | 23,532 | 28,019 | (53,366 | ) | 2,911 | ||||||||||||||
Discontinued operations: |
||||||||||||||||||||
Gain on disposal of discontinued business (net of income taxes) |
11,116 | 1,651 | 164 | | 12,931 | |||||||||||||||
Net income |
$ | 15,842 | $ | 25,183 | $ | 28,183 | $ | (53,366 | ) | $ | 15,842 | |||||||||
F-37
Table of Contents
RailAmerica, Inc.
Consolidating Statement of Cash Flows
For the year ended December 31, 2009
For the year ended December 31, 2009
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income |
$ | 15,842 | $ | 25,183 | $ | 28,183 | $ | (53,366 | ) | $ | 15,842 | |||||||||
Adjustments to reconcile net income to net cash
(used in) provided by operating activities: |
||||||||||||||||||||
Depreciation and amortization, including
amortization costs classified in interest expense |
3,276 | 45,360 | 3,704 | | 52,340 | |||||||||||||||
Equity in earnings of subsidiaries |
(53,366 | ) | | | 53,366 | | ||||||||||||||
Amortization of swap termination costs |
16,616 | | | | 16,616 | |||||||||||||||
Net loss (gain) on sale or disposal of properties |
1,201 | (949 | ) | (27,018 | ) | | (26,766 | ) | ||||||||||||
Foreign exchange gain on debt |
| | (1,160 | ) | | (1,160 | ) | |||||||||||||
Swap termination costs |
(55,750 | ) | | | | (55,750 | ) | |||||||||||||
Loss on extinguishment of debt |
7,415 | 1,875 | 209 | | 9,499 | |||||||||||||||
Equity compensation costs |
10,712 | | | | 10,712 | |||||||||||||||
Deferred income taxes and other |
(1,780 | ) | 14,891 | 7,946 | | 21,057 | ||||||||||||||
Changes in operating assets and liabilities, net
of acquisitions and dispositions: |
||||||||||||||||||||
Accounts receivable |
29 | 9,117 | 1,727 | | 10,873 | |||||||||||||||
Other current assets |
47 | (2,652 | ) | (488 | ) | | (3,093 | ) | ||||||||||||
Accounts payable |
3,361 | 511 | (7,054 | ) | | (3,182 | ) | |||||||||||||
Accrued expenses |
(4,548 | ) | (11,580 | ) | (549 | ) | | (16,677 | ) | |||||||||||
Other assets and liabilities |
(22,865 | ) | 2,320 | (226 | ) | | (20,771 | ) | ||||||||||||
Net cash (used in) provided by operating activities |
(79,810 | ) | 84,076 | 5,274 | | 9,540 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchase of property, plant and equipment |
(44 | ) | (42,771 | ) | (4,974 | ) | | (47,789 | ) | |||||||||||
Proceeds from sale of assets |
| 21,381 | 68,959 | | 90,340 | |||||||||||||||
Deferred acquisition/disposition costs and other |
(355 | ) | | | | (355 | ) | |||||||||||||
Net cash (used in) provided by investing activities |
(399 | ) | (21,390 | ) | 63,985 | | 42,196 | |||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Proceeds from issuance of senior secured notes |
709,830 | | | | 709,830 | |||||||||||||||
Principal payments on long-term debt |
(112,000 | ) | (475,898 | ) | (38,000 | ) | | (625,898 | ) | |||||||||||
Repurchase of senior secured notes |
(76,220 | ) | | | | (76,220 | ) | |||||||||||||
(Disbursements)/receipts on intercompany debt |
(427,167 | ) | 454,443 | (27,276 | ) | | | |||||||||||||
Sale of common stock |
143,123 | | | | 143,123 | |||||||||||||||
Dividends paid to common stockholders |
(19,485 | ) | | | | (19,485 | ) | |||||||||||||
Deferred financing costs paid |
(19,035 | ) | (1,140 | ) | | | (20,175 | ) | ||||||||||||
Net cash provided by (used in) financing activities |
199,046 | (22,595 | ) | (65,276 | ) | | 111,175 | |||||||||||||
Effect of exchange rates on cash |
| | 356 | | 356 | |||||||||||||||
Net increase in cash |
118,837 | 40,091 | 4,339 | | 163,267 | |||||||||||||||
Cash, beginning of period |
3,204 | 14,737 | 9,010 | | 26,951 | |||||||||||||||
Cash, end of period |
$ | 122,041 | $ | 54,828 | $ | 13,349 | $ | | $ | 190,218 | ||||||||||
F-38
Table of Contents
RailAmerica, Inc.
Consolidating Statement of Operations
For the year ended December 31, 2008
For the year ended December 31, 2008
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating revenue |
$ | 214 | $ | 439,664 | $ | 68,588 | $ | | $ | 508,466 | ||||||||||
Operating expenses: |
||||||||||||||||||||
Labor and benefits |
17,585 | 111,741 | 19,463 | | 148,789 | |||||||||||||||
Equipment rents |
30 | 42,741 | 2,249 | | 45,020 | |||||||||||||||
Purchased services |
9,167 | 26,723 | 2,902 | | 38,792 | |||||||||||||||
Diesel fuel |
| 60,354 | 9,620 | | 69,974 | |||||||||||||||
Casualties and insurance |
512 | 19,469 | 2,060 | | 22,041 | |||||||||||||||
Materials |
82 | 9,207 | 1,374 | | 10,663 | |||||||||||||||
Joint facilities |
| 12,554 | 19 | | 12,573 | |||||||||||||||
Other expenses |
2,331 | 26,030 | 4,904 | | 33,265 | |||||||||||||||
Track maintenance expense reimbursement |
| | | | | |||||||||||||||
Net (gain) loss on sale of assets |
| (1,829 | ) | 132 | | (1,697 | ) | |||||||||||||
Impairment of assets |
| 3,420 | | | 3,420 | |||||||||||||||
Depreciation and amortization |
209 | 36,807 | 2,562 | | 39,578 | |||||||||||||||
Total operating expenses |
29,916 | 347,217 | 45,285 | | 422,418 | |||||||||||||||
Operating (loss) income |
(29,702 | ) | 92,447 | 23,303 | | 86,048 | ||||||||||||||
Interest expense |
(19,464 | ) | (39,229 | ) | (2,985 | ) | | (61,678 | ) | |||||||||||
Equity in earnings of subsidiaries |
44,612 | | | (44,612 | ) | | ||||||||||||||
Other
income (loss) |
19,078 | (13,546 | ) | (14,540 | ) | | (9,008 | ) | ||||||||||||
Income from continuing operations before income taxes |
14,524 | 39,672 | 5,778 | (44,612 | ) | 15,362 | ||||||||||||||
Provision for (benefit from) income taxes |
(2,003 | ) | 1,106 | 2,496 | | 1,599 | ||||||||||||||
Income from continuing operations |
16,527 | 38,566 | 3,282 | (44,612 | ) | 13,763 | ||||||||||||||
Discontinued operations: |
||||||||||||||||||||
Gain on
disposal of discontinued business (net of income taxes) |
| 1,548 | 1,216 | | 2,764 | |||||||||||||||
Net income |
$ | 16,527 | $ | 40,114 | $ | 4,498 | $ | (44,612 | ) | $ | 16,527 | |||||||||
F-39
Table of Contents
RailAmerica, Inc.
Consolidating Statement of Cash Flows
For the year ended December 31, 2008
For the year ended December 31, 2008
Non | ||||||||||||||||||||
Company | Guarantor | Guarantor | ||||||||||||||||||
(Parent) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income |
$ | 16,527 | $ | 40,114 | $ | 4,498 | $ | (44,612 | ) | $ | 16,527 | |||||||||
Adjustments to reconcile net income to net
cash provided by (used in) operating activities: |
||||||||||||||||||||
Depreciation and amortization, including
amortization costs classified in interest expense |
1,904 | 43,690 | 3,524 | | 49,118 | |||||||||||||||
Equity in earnings of subsidiaries |
(44,612 | ) | | | 44,612 | | ||||||||||||||
Net gain on sale or disposal of properties |
| (522 | ) | (1,216 | ) | | (1,738 | ) | ||||||||||||
Foreign exchange loss on debt |
| | 8,260 | | 8,260 | |||||||||||||||
Equity compensation costs |
3,042 | | | | 3,042 | |||||||||||||||
Deferred income taxes and other |
(3,166 | ) | 1,695 | (1,690 | ) | | (3,161 | ) | ||||||||||||
Changes in operating assets and liabilities, net
of acquisitions and dispositions: |
||||||||||||||||||||
Accounts receivable |
(144 | ) | 10,681 | 1,720 | | 12,257 | ||||||||||||||
Other current assets |
2,048 | (8,173 | ) | 264 | | (5,861 | ) | |||||||||||||
Accounts payable |
2,151 | (5,903 | ) | (1,264 | ) | | (5,016 | ) | ||||||||||||
Accrued expenses |
3,714 | 3,227 | 255 | | 7,196 | |||||||||||||||
Other assets and liabilities |
98 | 2,320 | 530 | | 2,948 | |||||||||||||||
Net cash (used in) provided by operating activities |
(18,438 | ) | 87,129 | 14,881 | | 83,572 | ||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchase of property, plant and equipment |
| (53,021 | ) | (8,261 | ) | | (61,282 | ) | ||||||||||||
Proceeds from sale of assets |
| 16,016 | 1,351 | | 17,367 | |||||||||||||||
Deferred acquisition/disposition costs and other |
(1,736 | ) | | | | (1,736 | ) | |||||||||||||
Net cash used in investing activities |
(1,736 | ) | (37,005 | ) | (6,910 | ) | | (45,651 | ) | |||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Principal payments on long-term debt |
| (7,359 | ) | | | (7,359 | ) | |||||||||||||
(Disbursements)/receipts on intercompany debt |
18,216 | (16,208 | ) | (2,008 | ) | | | |||||||||||||
Sale of common stock |
635 | | | | 635 | |||||||||||||||
Financing costs |
(3,552 | ) | (13,084 | ) | (1,439 | ) | | (18,075 | ) | |||||||||||
Net cash provided by (used in) financing activities |
15,299 | (36,651 | ) | (3,447 | ) | | (24,799 | ) | ||||||||||||
Effect of exchange rates on cash |
| | (1,558 | ) | | (1,558 | ) | |||||||||||||
Net (decrease) increase in cash |
(4,875 | ) | 13,473 | 2,966 | | 11,564 | ||||||||||||||
Cash, beginning of period |
8,079 | 1,264 | 6,044 | | 15,387 | |||||||||||||||
Cash, end of period |
$ | 3,204 | $ | 14,737 | $ | 9,010 | $ | | $ | 26,951 | ||||||||||
F-40