Genesee & Wyoming Reports Results for the Third Quarter of 2014

Genesee & Wyoming Inc. (G&W) (NYSE:GWR)

Third Quarter Highlights

• Total operating revenues increased 7.8% to $432.5 million.
• Adjusted income from operations increased 16.7% to $122.6 million; Reported income from operations increased 21.0% to $123.1 million. (1)
• Adjusted operating ratio improved 2.1 percentage points to 71.7%; Reported operating ratio of 71.5% (71.4% North American & European Operations; 72.3% Australian Operations). (1)
• Adjusted income before income taxes (pre-tax income) increased 19.1% to $109.3 million; Reported income before income taxes increased 24.1% to $109.8 million. (1)
• Adjusted diluted earnings per common share (EPS) were $1.21, a 16.3% increase; Reported diluted EPS were $1.27, a 9.5% increase. (1)

Jack Hellmann, President and CEO of G&W, commented, “We are pleased with our results for the third quarter of 2014, as revenue increased approximately 8%, our adjusted operating ratio improved 2.1 percentage points to 71.7%, and our adjusted pre-tax income increased approximately 19%. In North America, our business was strong in the third quarter, with 7% growth in same railroad freight revenue, led by frac sand, salt, steel and agricultural products. Meanwhile, the newly established Rapid City, Pierre & Eastern Railroad (RCP&E) performed well, as we benefited from the record harvest in South Dakota and improved the railroad’s fluidity with connecting carriers.” (1)

“In Australia, our business was slightly weaker in the third quarter, with revenue in Australian dollars down approximately 2%, as intermodal and agricultural shipments weakened and track access income declined due to the previously announced closure of an iron ore mine.”

“Looking ahead, we remain optimistic about the strength of our North American business, which represents 80% of total revenues, and cautious about weakness in our Australian business, which represents 20% of total revenues, due to lower iron ore shipments resulting from a significant decline in iron ore prices. Meanwhile, we continue to actively evaluate several acquisition and investment opportunities in North America and internationally.”

Financial Results

G&W reported net income in the third quarter of 2014 of $72.9 million, compared with net income of $66.2 million in the third quarter of 2013. Excluding the net impact of certain significant items discussed below, G&W’s adjusted net income in the third quarter of 2014 was $69.3 million, compared with adjusted net income of $59.8 million in the third quarter of 2013. (1)

G&W’s reported diluted EPS in the third quarter of 2014 were $1.27 with 57.0 million weighted average shares outstanding, compared with reported diluted EPS in the third quarter of 2013 of $1.16 with 56.7 million weighted average shares outstanding. G&W’s adjusted diluted EPS in the third quarter of 2014 were $1.21 with 57.0 million weighted average shares outstanding, compared with adjusted diluted EPS in the third quarter of 2013 of $1.04 with 56.7 million weighted average shares outstanding. (1)

G&W’s effective income tax rate was 33.6% in the third quarter of 2014, compared with 25.1% in the third quarter of 2013. G&W’s effective income tax rate in the third quarter of 2014 included a $3.9 million tax benefit as a result of receiving IRS consent to change tax accounting methods retroactively for companies acquired as a result of the RailAmerica, Inc. (RailAmerica) acquisition. Excluding the RailAmerica-related tax benefit, G&W’s adjusted effective income tax rate was 37.2% in the third quarter of 2014. (1) The higher adjusted income tax rate in the third quarter of 2014, compared with the third quarter of 2013, was driven primarily by the expiration of the United States short line tax credit on December 31, 2013. G&W’s effective income tax rates also include adjustments to reflect differences between book income tax expense and final tax returns filed in September of each year related to the previous fiscal year.

In the third quarter of 2014 and 2013, G&W’s results included certain items affecting comparability between the periods that are set forth in the following table (in millions, except per share amounts).

Explanation of Items Affecting Comparability

In the third quarter of 2014, G&W’s results included business development and related costs of $0.7 million, including acquisition and integration related costs from RCP&E and reorganization costs from Atlas Railroad Construction, LLC (Atlas), and net gain on sale of assets of $1.2 million. The third quarter of 2014 also included an income tax benefit of $3.9 million associated with the companies acquired as a result of the RailAmerica acquisition and an income tax expense adjustment of $0.7 million related to differences between book income tax expense and the final tax returns filed in September of 2014 related to the previous fiscal year.

During the third quarter of 2013, G&W finalized its assignment of fair values to the assets and liabilities we assumed from RailAmerica, which resulted in additional depreciation and amortization expense of $3.0 million recorded in the third quarter of 2013, of which $2.0 million related to prior periods, and, accordingly, was included as an adjustment to the third quarter results. G&W’s third quarter of 2013 results also included $2.0 million of RailAmerica integration costs and net gain on sale of assets of $0.7 million. The third quarter of 2013 also included an income tax benefit of $6.8 million associated with the United States short line tax credit and an income tax benefit adjustment of $1.7 million related to differences between book income tax expense and the final tax returns filed in September of 2013 related to the previous fiscal year.

Third Quarter Results

In the third quarter of 2014, G&W’s total operating revenues increased $31.2 million, or 7.8%, to $432.5 million, compared with $401.4 million in the third quarter of 2013. The increase included $19.0 million in revenues from RCP&E. These revenue increases were partially offset by a $0.7 million decrease from the net depreciation of foreign currencies relative to the U.S. dollar. Excluding the net impact from foreign currency depreciation, G&W’s same railroad operating revenues, which exclude RCP&E, increased $12.9 million, or 3.2%.

G&W’s same railroad freight revenues in the third quarter of 2014 were $313.9 million, compared with $298.9 million in the third quarter of 2013. Excluding a $0.4 million decrease from the net impact of foreign currency depreciation, G&W’s same railroad freight revenues increased by $15.4 million, or 5.1%.

G&W’s same railroad non-freight revenues in the third quarter of 2014 were $99.6 million, compared with $102.5 million in the third quarter of 2013. Excluding a $0.3 million decrease from the net impact of foreign currency depreciation, G&W’s same railroad non-freight revenues decreased by $2.5 million, or 2.5%, primarily due to less construction revenues as compared to the prior year.

G&W’s traffic in the third quarter of 2014 increased 37,077 carloads, or 7.7%, to 519,900 carloads. Excluding 15,644 carloads from the RCP&E, same railroad traffic in the third quarter of 2014 increased 21,433 carloads, or 4.4%. The same railroad traffic increase was principally due to increases of 8,991 carloads of minerals and stone traffic (primarily in the Ohio Valley and Central regions), 3,851 carloads of traffic from G&W’s other commodity group (primarily overhead Class I shipments), 2,580 carloads of metals traffic (primarily in the Ohio Valley Region), 2,376 carloads of coal and coke traffic (primarily in the Ohio Valley and Central regions) and 2,165 carloads of lumber and forest products traffic (primarily in the Pacific and Southern regions), partially offset by a 2,562 carload decrease in intermodal traffic (due to a 1,460 carload decrease in shipments primarily in the Australia and Canada regions and a 1,102 decrease due to a classification change affecting traffic for a customer in North America that was previously reported in the intermodal commodity group in the third quarter of 2013 and has been reported based on the underlying commodity shipped since December 2013). All remaining traffic increased by a net 4,032 carloads.

G&W’s income from operations in the third quarter of 2014 was $123.1 million, compared with $101.7 million in the third quarter of 2013. G&W’s operating ratio in the third quarter of 2014 was 71.5%, compared with an operating ratio of 74.7% in the third quarter of 2013. Income from operations in the third quarter of 2014 included business development and related costs of $0.7 million, partially offset by net gain on sale of assets of $1.2 million. Income from operations in the third quarter of 2013 included $2.0 million of depreciation and amortization expense not related to the current period resulting from the finalization of G&W’s assignment of fair values to the assets and liabilities we assumed from RailAmerica and $2.0 million of RailAmerica integration costs, partially offset by net gain on sale of assets of $0.7 million. Excluding these items, G&W’s adjusted income from operations increased $17.6 million, or 16.7%, to $122.6 million in the third quarter of 2014, and G&W’s adjusted operating ratio improved 2.1 percentage points to 71.7% in the third quarter of 2014, compared with 73.8% in the third quarter of 2013. (1)

Free Cash Flow (1)

G&W’s free cash flow for the nine months ended September 30, 2014 and 2013 was as follows (in millions):

Conference Call and Webcast Details

As previously announced, G&W’s conference call to discuss financial results for the third quarter of 2014 will be held on Friday, October 31, 2014, at 11 a.m. EDT. The dial-in number for the teleconference in the U.S. is (800) 553-5260; outside the U.S. is (612) 234-9959, or the call may be accessed live over the Internet (listen only) at www.gwrr.com/investors, by selecting “Q3 2014 Genesee & Wyoming Inc. Earnings Conference Call Webcast.” Management will be referring to a slide presentation that will also be available at gwrr.com/investors. The webcast will be archived at www.gwrr.com/investors, until the following quarter’s earnings press release. Telephone replay is available for 30 days beginning at 1 p.m. EDT on October 31, 2014 by dialing (800) 475-6701 (or outside the U.S., dial 320-365-3844). The access code is 309990.

About G&W

G&W owns and operates short line and regional freight railroads in the United States, Australia, Canada, the Netherlands and Belgium. In addition, G&W operates the 1,400-mile Tarcoola to Darwin rail line, which links the Port of Darwin with the Australian interstate rail network in South Australia. Operations currently include 112 railroads organized in 11 regions, with more than 15,000 miles of owned and leased track, 5,000 employees and over 2,000 customers. We provide rail service at 37 ports in North America, Australia and Europe and perform contract coal loading and railcar switching for industrial customers.

Cautionary Statement Concerning Forward-Looking Statements

This press release contains forward-looking statements regarding future events and the future performance of Genesee & Wyoming Inc. that are based on current expectations, estimates and projections about our industry, management’s beliefs, and assumptions made by management. Words such as “anticipates,” “intends,” “plans,” “believes,” “could,” “should,” “seeks,” “expects,” “will,” “estimates,” “trends,” “outlook,” variations of these words and similar expressions are intended to identify these forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast, including the following: risks related to the operation of our railroads; severe weather conditions and other natural occurrences, which could result in shutdowns, derailments, railroad network congestion or other substantial disruption of operations; customer demand and changes in our operations; exposure to the credit risk of customers and counterparties; changes in commodity prices; consummation and integration of acquisitions; economic, political and industry conditions (including employee strikes or work stoppages); retention and contract continuation; legislative and regulatory developments, including changes in environmental and other laws and regulations to which we are subject; increased competition in relevant markets; funding needs and financing sources, including our ability to obtain government funding for capital projects; international complexities of operations, currency fluctuations, finance, tax and decentralized management; challenges of managing rapid growth including retention and development of senior leadership; unpredictability of fuel costs; susceptibility to various legal claims and lawsuits; increase in, or volatility associated with, expenses related to estimated claims, self-insured retention amounts, and insurance coverage limits; consummation of new business opportunities; decrease in revenues and/or increase in costs and expenses; susceptibility to the risks of doing business in foreign countries; our ability to realize the expected synergies associated with acquisitions; and others including, but not limited to, those noted in our 2013 Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q under “Risk Factors.” Therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Forward-looking statements speak only as of the date of this press release or as of the date they were made. G&W does not undertake, and expressly disclaims, any duty to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.