Genesee & Wyoming Reports Results for the Third Quarter of 2015

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

Third Quarter Highlights

• Operating revenues increased 26.3% to $546.3 million from $432.5 million.
• Same railroad operating revenues, excluding the $23.6 million negative impact of foreign currency depreciation, declined 10.8%, primarily due to weakness in iron ore, coal and metals shipments.
• Adjusted income from operations (adjusted operating income) decreased 3.5% to $118.3 million; Reported income from operations (operating income) decreased 4.5% to $117.6 million. (1)
• Adjusted diluted earnings per common share (EPS) decreased 9.9% to $1.09; Reported diluted EPS decreased 13.4% to $1.10. Approximately half of the decrease in adjusted diluted EPS was driven by the negative impact of foreign currency depreciation. (1)

Jack Hellmann, President and CEO of G&W, commented, “Our adjusted diluted earnings per share declined 10% in the third quarter of 2015, with approximately half of the decline caused by a weak economic environment for industrial and commodity shipments and the other half due to the negative impact of foreign currency depreciation. Nevertheless, our third quarter adjusted diluted earnings per share were 17% higher than the second quarter of 2015, with stronger than expected performance from each of our three business segments.”

“In North America, our third quarter revenues declined 9% and our operating income declined 10% due to weakness in twelve out of fourteen commodity groups, however good cost management by each of our operating regions enabled us to maintain an operating ratio of 71.2%. In Australia, our third quarter operating income dropped 33%, as the impact of iron ore mine closures and the depreciation of the Australian dollar more than offset effective cost controls and the positive contribution from Freightliner Australia. Finally, in the United Kingdom/Europe (primarily composed of the newly acquired Freightliner Group), our operating income increased sequentially by more than 50% over the second quarter of 2015, as seasonal improvements in U.K. intermodal shipments and good cost management more than offset continued weakness in U.K. coal traffic.”

“Our outlook for the second half of 2015 remains unchanged from August, with third quarter results stronger than planned and fourth quarter outlook expected to be weaker than planned. As we finish the year and look ahead to 2016, our management team is concentrated on optimizing the strong free cash flow that underpins the value of our 120 railroads. In addition, we continue to evaluate potential acquisitions and investments worldwide.” (1)

Financial Results

G&W’s operating revenues increased $113.8 million, or 26.3%, to $546.3 million in the third quarter of 2015, compared with $432.5 million in the third quarter of 2014. G&W’s income from operations in the third quarter of 2015 was $117.6 million, compared with $123.1 million in the third quarter of 2014. G&W’s operating ratio in the third quarter of 2015 was 78.5%, compared with an operating ratio of 71.5% in the third quarter of 2014, including lower operating margins from Freightliner Group Limited (Freightliner). G&W's same railroad operating ratio in the third quarter of 2015 was 71.7%, compared with 71.5% in the third quarter of 2014.

G&W reported net income in the third quarter of 2015 of $63.4 million, compared with net income of $72.7 million in the third quarter of 2014. Excluding the net impact of certain items affecting comparability between periods discussed below, G&W’s adjusted net income in the third quarter of 2015 was $63.3 million, compared with adjusted net income of $69.1 million in the third quarter of 2014. (1)

G&W’s reported diluted EPS in the third quarter of 2015 were $1.10 with 57.8 million weighted average shares outstanding, compared with reported diluted EPS in the third quarter of 2014 of $1.27 with 57.0 million weighted average shares outstanding. G&W’s adjusted diluted EPS in the third quarter of 2015 were $1.09 with 57.8 million weighted average shares outstanding, compared with adjusted diluted EPS in the third quarter of 2014 of $1.21 with 57.0 million weighted average shares outstanding. (1)

G&W’s effective income tax rate was 36.8% in the third quarter of 2015, compared with 33.7% in the third quarter of 2014. 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. G&W's effective income tax rates for both periods included 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.

Items Affecting Comparability

In the third quarter of 2015 and 2014, 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):

In the third quarter of 2015, G&W’s results included business development and related costs of $2.0 million primarily related to the integration of Freightliner and a net gain on the sale of assets of $1.2 million. The third quarter of 2015 also included a tax benefit of $0.4 million related to differences between book income tax expense and the final tax returns filed in September of 2015 related to the previous fiscal year.

G&W’s third quarter of 2014 results included business development and related costs of $0.7 million and a net gain on the sale of assets of $1.2 million. The third quarter of 2014 also included an income tax expense 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 and an income tax benefit of $3.9 million associated with the companies acquired as a result of the RailAmerica acquisition.

Third Quarter Results by Segment

Operating revenues from G&W's North American Operations decreased $30.5 million, or 8.8%, to $314.6 million in the third quarter of 2015, compared with $345.1 million in the third quarter of 2014. Excluding $4.0 million of revenues from new operations and a $5.0 million decrease due to the impact of foreign currency depreciation, North American Operations same railroad revenues decreased by $29.5 million, or 8.7%, primarily due to declines in coal and metals shipments.

North American Operations traffic decreased 42,771 carloads, or 9.3%, to 419,571 carloads in the third quarter of 2015. Excluding 8,683 carloads from new operations, same railroad traffic decreased 51,454 carloads, or 11.1%, in the third quarter of 2015 compared with the third quarter of 2014. The same railroad traffic decrease was principally due to decreases of 15,814 carloads of coal and coke (Ohio Valley, Midwest, Central and Mountain West regions), 15,233 carloads of metals traffic (primarily in the Southern, Ohio Valley and Northeast regions), 8,403 carloads of Other traffic (primarily overhead Class I shipments), 3,680 carloads of minerals and stone traffic (primarily in the Midwest and Northeast regions), 2,375 carloads of lumber and forest products traffic (primarily in the Pacific Region) and 2,336 carloads of auto and auto parts traffic (primarily in the Pacific Region). All remaining traffic decreased by a net 3,613 carloads.

Income from operations from G&W's North American Operations in the third quarter of 2015 was $90.6 million, compared with $100.9 million in the third quarter of 2014. The operating ratio for North American Operations was 71.2% in the third quarter of 2015, compared with an operating ratio of 70.7% in the third quarter of 2014.

Operating revenues from G&W's Australian Operations decreased $20.5 million, or 25.1%, to $61.0 million in the third quarter of 2015, compared with $81.5 million in the third quarter of 2014. Excluding $11.9 million of revenues from the newly acquired operations of Freightliner Australia and a $17.6 million decrease due to the impact of foreign currency depreciation, Australian Operations same railroad revenues decreased by $14.8 million, or 23.1%, primarily due to a decrease in freight revenues resulting from a decline in iron ore shipments.

Australian Operations traffic decreased 9,026 carloads, or 15.7%, to 48,532 carloads in the third quarter of 2015. The traffic decrease was principally due to a decrease of 8,623 carloads of metallic ores traffic. All remaining traffic decreased by a net 403 carloads.

Income from operations from G&W's Australian Operations in the third quarter of 2015 was $15.0 million, compared with $22.4 million in the third quarter of 2014. The operating ratio for Australian Operations was 75.5% in the third quarter of 2015, compared with an operating ratio of 72.6% in the third quarter of 2014.

Operating revenues from G&W's U.K./European Operations increased $164.8 million to $170.7 million in the third quarter of 2015, compared with $6.0 million in the third quarter of 2014. Excluding $165.5 million of revenues from the newly acquired Freightliner U.K./European operations and a $1.0 million decrease due to the impact of foreign currency depreciation, U.K./European Operations same railroad revenues increased by $0.2 million, or 4.3%. U.K./European Operations traffic consisted of 307,453 carloads in the third quarter of 2015, primarily related to traffic from G&W’s newly acquired Freightliner U.K./European operations.

Income from operations from U.K./European Operations in the third quarter of 2015 was $12.0 million with an operating ratio of 93.0%. The prior year is not comparable because over 95% of the revenue and income from operations was generated from the recently acquired Freightliner business. As a reminder, our U.K./European Operations require substantially lower capital expenditures and generate a higher operating ratio than our other segments.

Free Cash Flow (1)

G&W’s free cash flow for the nine months ended September 30, 2015 and 2014 was as follows (in millions):

(a) The 2015 period primarily consisted of net cash used for the acquisition of Freightliner and Pinsly Arkansas as well as $32.0 million in cash paid for incremental expenses related to the purchase and integration of the Freightliner acquisition. The 2014 period primarily consisted of net cash used for the Rapid City, Pierre & Eastern Railroad, Inc. (RCP&E) acquisition.

Conference Call and Webcast Details

As previously announced, G&W’s conference call to discuss financial results for the third quarter of 2015 will be held on Friday, October 30, 2015, at 11 a.m. EDT. The dial-in number for the teleconference in the U.S. is (800) 230-1096; outside the U.S. is (612) 332-0802, or the call may be accessed live over the Internet (listen only) at www.gwrr.com/investors. 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 30, 2015, by dialing (800) 475-6701 (or outside the U.S., dial 320-365-3844). The access code is 345266.

About G&W

G&W owns or leases 120 freight railroads worldwide that are organized in 11 operating regions with 7,500 employees and more than 2,500 customers.

• G&W’s nine North American regions serve 41 U.S. states and four Canadian provinces and include 113 short line and regional freight railroads with more than 13,000 track-miles.
• G&W’s Australia Region provides rail freight services in New South Wales, the Northern Territory and South Australia and operates the 1,400-mile Tarcoola-to-Darwin rail line.
• G&W’s U.K./European Region is led by Freightliner, the U.K.’s largest rail maritime intermodal operator and second-largest rail freight company. Operations also include heavy-haul in Poland and Germany and cross-border intermodal services connecting Northern European seaports with key industrial regions throughout the continent.

G&W subsidiaries provide rail service at more than 40 major 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 2014 Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q under “Risk Factors.” Therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Forward-looking statements speak only as of the date of this press release or as of the date they were made. G&W does not undertake, and expressly disclaims, any duty to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.

1. Adjusted income from operations (adjusting operating income), adjusted net income, adjusted diluted earnings per common share (EPS) and free cash flow are non-GAAP financial measures and are not intended to replace financial measures calculated in accordance with GAAP. The information required by Item 10(e) of Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934 and Regulation G under the Securities Exchange Act of 1934, including a reconciliation to their most directly comparable financial measures calculated in accordance with GAAP, is included in the tables attached to this press release.

* Represents physical railcars and the estimated railcar equivalents of commodities transported by metric ton or other measure, as well as intermodal units.

* Represents physical railcars and the estimated railcar equivalents of commodities transported by metric ton or other measure, as well as intermodal units.

Non-GAAP Financial Measures

This earnings release contains references to adjusted income from operations (adjusted operating income), adjusted net income, adjusted diluted earnings per common share (EPS) and free cash flow, which are “non-GAAP financial measures” as this term is defined in Item 10(e) of Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934 and Regulation G under the Securities Exchange Act of 1934. In accordance with these rules, G&W has reconciled these non-GAAP financial measures to their most directly comparable U.S. GAAP measures.

Management views these non-GAAP financial measures as important measures of G&W’s operating performance or, in the case of free cash flow, an important financial measure of how well G&W is managing its assets and a useful indicator of cash flow that may be available for discretionary use by G&W. Management also views these non-GAAP financial measures as a way to assess comparability between periods. Key limitations of the free cash flow measure include the assumptions that G&W will be able to refinance its existing debt when it matures and meet other cash flow obligations from financing activities, such as principal payments on debt.

These non-GAAP financial measures are not intended to represent, and should not be considered more meaningful than, or as an alternative to, their most directly comparable GAAP measures. These non-GAAP financial measures may be different from similarly-titled non-GAAP financial measures used by other companies.

The following tables set forth reconciliations of each of these non-GAAP financial measures to their most directly comparable GAAP measure (in millions, except per share amounts).