GENESEE & WYOMING INC – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this Annual Report. Our consolidated financial statements were determined in accordance with accounting principles generally accepted inthe United States (U.S. GAAP). Outlook for 2012 Safety Operating safe railroads benefits our employees, our customers, our shareholders and the communities we serve. We have led the railroad industry in safety for the past three years and our goal for 2012 is to continue this trend. A reduction of grade crossing incidents is also an important aspect of our safety programs, and we remain actively involved in this effort through our participation in Operation Lifesaver in the communities where we operate. Financial Expectations We expect the North American and Australian economies to be relatively stable in 2012. We expect the European economy to be somewhat weaker. We expect our revenues to increase due to the full year impact of theArizona Eastern Railway acquisition and growth in same railroad freight revenues. However, during the first quarter of 2012 we expect the same railroad revenues to be negatively impacted by the Edith River Derailment and the interruptions in service on theAdelaide to Darwin corridor. We maintain insurance for damages and claims associated with the Edith River Derailment and expect our insurance recovery to reimburse a portion of the lost revenues and associated expenses during the remainder of 2012. Specifically, we expect same railroad freight revenues to increase in 2012 primarily due to higher average revenues per carload as a result of (1) increases in North American rail pricing, (2) the current strength of the Australian and Canadian dollars versusthe United States dollar and (3) increases in fuel surcharges as a result of higher fuel prices. Finally, we anticipate the start up of a new iron ore contract with Southern Iron in the fourth quarter of 2012 that should contribute approximately$50 million annually in revenue when the customer begins to ship at full capacity. We anticipate same railroad carload volumes will be relatively flat year over year as growth across most commodity groups is offset by a decline in coal traffic. During the first half of 2012, coal traffic is expected to decline primarily due to a combination of warm winter weather inthe United States , low natural gas prices and temporary outages at two of the coal fired power plants we serve for repairs and upgrades. In addition, repairs associated with the Edith River Derailment will be ongoing during the first quarter of 2012, which will negatively impact our carload volumes inAustralia . We expect same railroad non-freight revenues to be relatively flat in 2012. We expect higher industrial and port terminal switching revenues, but we expect same railroad demurrage and storage income to decline, primarily due to fewer third-party cars stored on our railroads. We also closed our drayage (trucking) business in the fourth quarter of 2011. We expect same railroad operating expenses to increase in 2012 primarily due to four factors. First, we expect an increase in transportation expense due to the expansion of our business inAustralia . Second, we expect that diesel fuel expense will be higher in 2012 than in 2011 due to higher fuel prices. Third, we anticipate higher depreciation expense in 2012 due to the higher levels of our capital spending in recent years. Fourth, we expect higher operating expenses as a result of the current strength of the Australian and Canadian dollar and the Euro relative tothe United States dollar. Overall, we believe our operating income will increase in 2012 as a result of the growth in our same railroad revenues and contributions from acquisitions. Further, we expect the final delivery of new high horsepower locomotives in the second quarter of 2012 to increase our operating efficiency. United States Short Line Tax Credit The United States Short Line Tax Credit expired onDecember 31, 2011 . In 2011, the Short Line Tax Credit lowered our effective tax rate by 6.5%. Bipartisan support for an extension of the Short Line Tax Credit exists, but the likelihood of a retroactive extension of the tax credit in 2012 is uncertain. Capital Plan We expect to make capital investments totaling approximately$134 million in 2012. Of this total, approximately$76 million is planned for same railroad track and equipment improvements, approximately$13 million is planned for track and equipment expenditures on our newly acquired properties and approximately$9 million is planned for matching capital spending associated with government grant funded projects. In addition, we expect to spend approximately$36 million on 34 -------------------------------------------------------------------------------- business development related capital, primarily new locomotives forAustralia . Overview We own and operate short line and regional freight railroads and provide railcar switching services inthe United States ,Australia ,Canada ,the Netherlands andBelgium . In addition, we operate the Tarcoola to Darwin rail line, which links thePort of Darwin to the Australian interstate rail network inSouth Australia . Operations currently include 65 railroads organized into 10 regions, with approximately 7,600 miles of owned and leased track and 1,405 additional miles under track access arrangements. In addition, we provide rail service at 17 ports inNorth America andEurope and perform contract coal loading and railcar switching for industrial customers. In 2011 and 2010, we completed the acquisition of theArizona andEastern Railway Company (AZER) inthe United States and the acquisition of FreightLink inAustralia , respectively, in each case described in more detail below. Income from continuing operations in the year endedDecember 31, 2011 was$119.5 million , compared with income from continuing operations of$78.7 million in the year endedDecember 31, 2010 . Our diluted earnings per share (EPS) from continuing operations attributable to our common stockholders in the year endedDecember 31, 2011 were$2.79 with 42.8 million weighted average shares outstanding, compared with diluted EPS from continuing operations attributable to our common stockholders of$1.88 with 41.9 million weighted average shares outstanding in the year endedDecember 31, 2010 . Operating revenues increased$198.9 million , or 31.6%, to$829.1 million in the year endedDecember 31, 2011 , compared with$630.2 million in the year endedDecember 31, 2010 . The increase in our operating revenues included$141.8 million in net revenues from new operations and an$82.9 million , or 13.2%, increase in revenues from existing operations. When we discuss either revenues from existing operations or same railroad revenues, we are referring to the change in our revenues, period-over-period, associated with operations that we managed in both periods (i.e., excluding the impact of acquisitions). Operating income in the year endedDecember 31, 2011 increased$61.4 million , or 47.1%, to$191.8 million , compared with$130.4 million in the year endedDecember 31, 2010 . Our operating ratio was 76.9% in the year endedDecember 31, 2011 , compared with an operating ratio of 79.3% in the year endedDecember 31, 2010 . Our operating income in the years endedDecember 31, 2011 and 2010 included certain significant items that are set forth below (dollars in millions): Significant items: 2011
2010
Net gain on sale and impairment of assets $ (5.7 ) $ (6.4 ) Business/corporate development costs $ 3.5 $
-
Edith River Derailment costs $ 1.8 $
-
FreightLink acquisition-related expenses $ - $
28.2
Gain on legal settlement $ - $
(8.7 ) Reversal of accrued restructuring expenses related to HCRY $ - $ (2.3 )
During the year endedDecember 31, 2011 we generated$173.5 million in cash from operating activities from continuing operations. During the same period, we purchased$178.7 million of property and equipment, including$78.2 million for the investment in new Australian equipment, and we paid$89.9 million in net cash for acquisitions. These payments were partially offset by$22.6 million in cash received largely from government grants as well as other outside parties for capital spending and$9.5 million in proceeds from the disposition of property and equipment. Changes in OperationsUnited States OnSeptember 1, 2011 , we acquired all of the capital stock of AZER. We paid the seller$89.5 million in cash at closing, which included a reduction in purchase price of$0.6 million for the estimated working capital adjustment. Based on the final working capital adjustment, we recorded an additional$0.8 million of purchase price inDecember 2011 , which was paid to the seller inJanuary 2012 . We incurred$0.6 million of acquisition costs related to this transaction throughDecember 31, 2011 , which were expensed as incurred. The results from AZER's operations have been included in our statement of operations sinceSeptember 1, 2011 and are included in our North American & European Operations segment. Headquartered nearMiami, Arizona , with 43 employees and 10 locomotives, AZER owns and operates two rail lines totaling approximately 200 track miles in southeastArizona and southwestNew Mexico that are connected by 52 miles of trackage rights over theUnion Pacific Railroad . The largest customer on AZER is Freeport-McMoRan Copper & Gold Inc. 35 -------------------------------------------------------------------------------- (Freeport-McMoRan ). AZER provides rail service toFreeport-McMoRan's largest North American copper mine and its North American smelter, hauling copper concentrate, copper anode, copper rod and sulfuric acid. In conjunction with the transaction, AZER andFreeport-McMoRan have entered into a long-term operating agreement. Australia OnDecember 1, 2010 , through our subsidiary, <org>GWA (North) Pty Ltd (GWA North), we completed the FreightLink Acquisition forA$331.9 million (or$320.0 million at the exchange rate onDecember 1, 2010 ). The results of operations for GWA North have been included in our consolidated statements of operations since the acquisition date. Pursuant to the Business Sale Agreement, we acquired FreightLink's freight rail business between Tarcoola inSouth Australia and Darwin in the Northern Territory ofAustralia , certain material contracts, equipment and property leases, as well as FreightLink's plant, equipment and business inventory. In addition, as part of the acquisition, we assumed debt with a carrying value ofA$1.8 million (or$1.7 million at the exchange rate onDecember 1, 2010 ), which represents the fair value of anA$50.0 million (or$48.2 million at the exchange rate onDecember 1, 2010 ) non-interest bearing loan due in 2054. As a result of the acquisition, GWA North is now the concessionaire and operator of the approximately 1,400-mile Tarcoola to Darwin rail line, which links thePort of Darwin to the Australian interstate rail network inSouth Australia . The rail line is located on land leased to GWA North by theAustralAsia Railway Corporation (a statutory corporation established by legislation in theNorthern Territory ) under a concession agreement that expires in 2054. GWA North is both a provider of rail haulage to customers on its railroad (above rail services), as well as a track access provider, charging access fees to any rail operators that run on its track (below rail services). The track access rights are regulated under a statutory access regime established by legislation in theNorthern Territory andSouth Australia . Our subsidiary, Genesee &Wyoming Australia Pty Ltd (GWA), historically operated FreightLink's rail haulage services, provided its crews, managed its train operations and leased locomotives and wagons to FreightLink. As a result of the acquisition, for the year endedDecember 31, 2011 ,$33.9 million of GWA non-freight revenues generated from services that have historically been provided to FreightLink were eliminated in consolidation, but this elimination did not have any effect on our operating income. Prior to the completion of the Tarcoola to Darwin rail line in 2004, potential mining projects located in theNorthern Territory had no economically viable transportation link to an export port. Since the completion of the rail line, there has been an increase in mineral exploration and development in theNorthern Territory andSouth Australia along the rail corridor. We believe the FreightLink Acquisition provides us significant organic growth opportunities as it positions us to capitalize on future mineral development in theNorthern Territory andSouth Australia . We financed the purchase of FreightLink's assets through a combination of cash on hand and borrowings of$100.0 million andA$97.0 million (or$94.0 million at theDecember 1, 2010 exchange rate) underthe United States and Australian revolving loans, respectively, of our credit agreement. For a description of the material terms and conditions under our credit agreement, see the discussion under "-Liquidity and Capital Resources-Credit Agreement."Canada InJune 2009 , we announced that our subsidiary,Huron Central Railway Inc. (HCRY), intended to cease its operations in the third quarter of 2009. Consequently, in the second quarter of 2009, we recorded charges of$5.4 million after-tax associated with HCRY. These charges reflected a non-cash write-down of non-current assets of$6.7 million and restructuring expenses of$2.3 million and were partially offset by a tax benefit of$3.6 million . InSeptember 2010 , the governments ofCanada and the Province ofOntario agreed to provideC$30 million (or$29 million at theDecember 31, 2011 exchange rate) to fund infrastructure improvements that, combined with certain customer agreements, will enable HCRY to continue operations on a long-term basis. In addition, HCRY committed to fund approximatelyC$3 million (or$3 million at theDecember 31, 2011 exchange rate) for infrastructure improvements. As a result, we reversed$2.3 million ($1.5 million after-tax) of accrued restructuring expenses related to HCRY inSeptember 2010 , as HCRY no longer intends to cease its operations. Because of the substance of the temporary agreement HCRY was operating under fromAugust 15, 2009 throughDecember 31, 2010 , HCRY's net operating earnings were included within non-freight revenues as other operating income. OnJanuary 1, 2011 , HCRY began operating under a new agreement with certain customers. Because of the substance of the new arrangement, onJanuary 1, 2011 , we resumed reporting HCRY's operating revenues, including freight revenues and corresponding carloads, and operating expenses within each respective line item of our statement of operations. South America OnSeptember 29, 2009 , in conjunction with our partner,UniRail LLC , we sold substantially all of our interests inFerroviaria Oriental S.A. , which is located inEastern Bolivia . We recorded a net gain on the sale of our investment inBolivia of$0.4 million in the third quarter of 2009. Our portion of the sale proceeds totaled$3.9 million , against which we applied the remaining net book value of$3.4 million and direct costs of the sale of$0.1 million . 36 -------------------------------------------------------------------------------- Purchase Price Allocation We accounted for the AZER and FreightLink acquisitions using the acquisition method of accounting under U.S. GAAP. Under the acquisition method of accounting, the assets and liabilities of AZER and FreightLink have been recorded at their respective acquisition-date fair values and have been consolidated with those of GWI as of their respective acquisition dates. The foreign exchange rate used to translate the FreightLink balance sheet toUnited States dollars was$0.96 forone Australian dollar (which was the exchange rate onDecember 1, 2010 ). The acquisition-date fair values assigned to the acquired net assets of AZER and FreightLink were as follows (dollars in thousands): AZER FreightLink USD AUD USD Purchase Price Allocations: Accounts receivable, net $ 3,096 $ 161 $ 155 Materials and supplies - 3,328 3,209 Prepaid expenses and other 2,319 101 97 Property and equipment 90,129 331,201 319,311 Total assets 95,544 334,791 322,772 Accounts Payable 1,794 - - Accrued expenses 3,418 731 705 Long-term debt - 1,806 1,741 Deferred income tax liability - 318 307 Net assets $ 90,332 $ 331,936 $ 320,019 Discontinued Operations InAugust 2009 , we completed the sale of 100% of the share capital of our Mexican operating subsidiary,Ferrocarriles Chiapas-Mayab, S.A. de C.V. (FCCM) toViablis, S.A. de C.V. for a net sale price of$2.2 million , including the deposit of$0.5 million received inNovember 2008 . Accordingly, we recorded a net gain of$2.2 million on the sale within discontinued operations. InAugust 2010 , we recognized income from net insurance proceeds of$2.8 million ($2.8 million after-tax) in discontinued operations related to damage incurred by FCCM as a result of Hurricane Stan in 2005. We utilized capital loss carryforwards, which were previously subject to a full valuation allowance, to offset the tax on this gain. The net assets, results of operations and cash flows of our remaining Mexican subsidiary,GW Servicios S.A. , which were classified as discontinued operations, were not material as of and for the years endedDecember 31, 2011 , 2010 and 2009. We do not expect any material future adverse financial impact from our remaining Mexican subsidiary. Results from Continuing Operations When comparing our results from continuing operations from one reporting period to another, consider that we have historically experienced fluctuations in revenues and expenses due to economic conditions, acquisitions, competitive forces, changes in foreign currency exchange rates, one-time freight moves, fuel price fluctuations, customer plant expansions and shut-downs, sales of property and equipment, derailments and weather-related conditions, such as hurricanes, cyclones, tornadoes, droughts, heavy snowfall, unseasonably warm or cool weather, freezing and flooding. In periods when these events occur, results of operations are not easily comparable from one period to another. Finally, certain of our railroads have commodity shipments that are sensitive to general economic conditions, such as steel products, paper products and lumber and forest products. However, shipments of other commodities are relatively less affected by economic conditions and are more closely affected by other factors, such as inventory levels maintained at customer plants (coal), winter weather (salt and coal) and seasonal rainfall (South Australian grain). As a result of these and other factors, our operating results in any reporting period may not be directly comparable to our operating results in other reporting periods. 37 -------------------------------------------------------------------------------- Year EndedDecember 31, 2011 Compared with Year EndedDecember 31, 2010 Operating Revenues Overview Operating revenues were$829.1 million in the year endedDecember 31, 2011 , compared with$630.2 million in the year endedDecember 31, 2010 , an increase of$198.9 million or 31.6%. The$198.9 million increase in operating revenues consisted of$141.8 million in revenues from new operations and an$82.9 million , or 13.2%, increase in revenues from existing operations. New operations are those that were not included in our consolidated financial results for a comparable period in the prior year. On a consolidated basis, results from new operations reflected the elimination of$25.8 million of non-freight revenues for services provided to GWA North by GWA. The$82.9 million increase in revenues from existing operations included increases of$56.7 million in freight revenues and$26.2 million in non-freight revenues. The$82.9 million increase in revenues from existing operations included$26.5 million due to a 6.3% increase in carloads,$17.8 million due to an increase in railcar switching revenues,$10.1 million due to an increase in fuel surcharge revenues,$3.8 million due to an increase in fuel sales to third parties and a benefit of$16.2 million from the impact of foreign currency appreciation. The following table breaks down our operating revenues and total carloads into new operations and existing operations for the years endedDecember 31, 2011 and 2010 (dollars in thousands): Increase in Total Increase in Existing 2011 2010 Operations Operations Total New Existing Total Currency Operations Operations Eliminations Operations Operations Amount % Amount % Impact
Freight
revenues $ 582,947 $ 133,990 $ - $
448,957
14.5 % $ 7,280 Non-freight revenues 246,149 7,773 (25,794 ) 264,170 237,923 8,226 3.5 % 26,247 11.0 % 8,964 Total operating revenues $ 829,096 $ 141,763 $ (25,794 ) $ 713,127 $ 630,195 $ 198,901 31.6 % $ 82,932 13.2 % $ 16,244 Carloads 997,048 79,181 - 917,867 863,722 133,326 15.4 % 54,145 6.3 % Freight Revenues The following table compares freight revenues, carloads and average freight revenues per carload for the years endedDecember 31, 2011 and 2010 (dollars in thousands, except average freight revenues per carload): Average Freight Revenues Per Freight Revenues Carloads Carload 2011 2010 2011 2010 % of % of % of % of Commodity Group Amount Total Amount Total Amount Total Amount Total 2011 2010
Intermodal*
6.2 % 9,011 1.0 %
20.6 % 202,267 23.4 % 375 365 Farm & Food Products 67,507 11.6 % 55,987 14.3 % 123,326 12.4 % 108,841 12.6 % 547 514
Pulp & Paper 61,350 10.5 % 53,652 13.7 % 96,597
9.7 % 88,852 10.3 % 635 604
Metallic Ores 56,150 9.6 % 8,513 2.2 % 32,682
3.3 % 11,665 1.4 % 1,718 730 Metals 51,461 8.8 % 36,788 9.4 % 90,153 9.0 % 76,343 8.8 % 571 482 Minerals & Stone 47,966 8.2 % 40,947 10.4 % 138,709 13.9 % 129,281 15.0 % 346 317 Chemicals & Plastics 46,444 8.0 % 38,951 9.9 % 60,958 6.1 % 56,515 6.5 % 762 689 Lumber & Forest Products 31,502 5.4 % 28,791 7.3 % 64,914 6.5 % 63,340 7.3 % 485 455
Petroleum
Products 25,915 4.5 % 20,630 5.3 % 30,028 3.0 % 29,032 3.4 % 863 711 Auto & Auto Parts 7,826 1.3 % 6,962 1.8 % 10,425 1.1 % 10,242 1.2 % 751 680 Other 22,065 3.8 % 19,320 4.9 % 81,509 8.2 % 78,333 9.1 % 271 247 Total $ 582,947 100.0 % $ 392,272 100.0 % 997,048 100.0 % 863,722 100.0 % 585 454 * Represents intermodal units 38
-------------------------------------------------------------------------------- Total freight traffic increased by 133,326 carloads, or 15.4%, in 2011 compared with 2010. Carloads from existing operations increased by 54,145 carloads, or 6.3%, and new operations contributed 79,181 carloads. Average freight revenues per carload increased 28.9% to$585 in 2011 compared with 2010. Average freight revenues per carload from existing operations increased 7.7% to$489 . The impact on average freight revenues per carload driven by changes in the intermodal and metallic ores commodity groups were primarily the result of new operations acquired from FreightLink, which have a relatively longer length of haul than our other operations. The increase in average freight revenues per carload from existing operations included a 2.0% benefit from the appreciation of the Australian and Canadian dollars relative tothe United States dollar. In addition, higher fuel surcharges and changes in the commodity mix increased average freight revenues per carload from existing operations by 2.4% and 0.2%, respectively. Other than the impacts from these factors, average freight revenues per carload from existing operations increased by 3.1%. The following table sets forth freight revenues by commodity group segregated into new operations and existing operations for the years endedDecember 31, 2011 and 2010 (dollars in thousands): Increase in Total Increase in Existing 2011 2010 Operations Operations Commodity Total New Existing Total Currency Group Operations Operations Operations Operations Amount % Amount % Impact Intermodal $ 87,657 $ 79,508 $ 8,149 $ 7,851 $ 79,806 >100% $ 298 3.8 % $ 140 Coal & Coke 77,104 - 77,104 73,880 3,224 4.4 % 3,224 4.4 % 25 Farm & Food Products 67,507 - 67,507 55,987 11,520 20.6 % 11,520 20.6 % 4,369 Pulp & Paper 61,350 - 61,350 53,652 7,698 14.3 % 7,698 14.3 % 408 Metallic Ores 56,150 47,052 9,098
8,513 47,637 >100% 585 6.9 % 242 Metals 51,461 1,874 49,587 36,788 14,673 39.9 % 12,799 34.8 % 59 Minerals & Stone 47,966 102 47,864 40,947 7,019 17.1 % 6,917 16.9 % 1,514 Chemicals & Plastics 46,444 2,968 43,476 38,951 7,493 19.2 % 4,525 11.6 % 206 Lumber & Forest Products 31,502 10 31,492 28,791 2,711 9.4 % 2,701 9.4 % 40 Petroleum Products 25,915 2,471 23,444 20,630 5,285 25.6 % 2,814 13.6 % 55 Auto & Auto Parts 7,826 - 7,826 6,962 864 12.4 % 864 12.4 % 177 Other 22,065 5 22,060 19,320 2,745 14.2 % 2,740 14.2 % 45
Total freight revenues
The following information discusses the significant changes in freight revenues by commodity group from existing operations. Changes in average freight revenues per carload in a commodity group can be impacted by changes in customer rates, fuel surcharges, appreciation of the Australian and Canadian dollars relative tothe United States dollar, as well as changes in the mix of customer traffic within a commodity group. Coal and coke revenues increased$3.2 million , or 4.4%. Average freight revenues per carload increased 2.7%, which increased revenues by$1.9 million , and coal and coke traffic volume increased 3,494 carloads, or 1.7%, which increased revenues by$1.3 million . The carload increase was primarily due to increased demand for coal and the return of traffic to power plants that had maintenance and construction-related outages in 2010. Farm and food products revenues increased$11.5 million , or 20.6%. Farm and food products traffic volume increased 14,485 carloads, or 13.3%, which increased revenues by$7.9 million , and average freight revenues per carload increased 6.4%, which increased revenues by$3.6 million . The carload increase was primarily due to an increase in export grain traffic inAustralia and an increase in grain traffic in the midwesternUnited States . The increase in average freight revenues per carload included a benefit of$4.4 million due to the appreciation of the Australian and Canadian dollars relative tothe United States dollar. This benefit was partially offset by a decrease in average freight revenues per carload of 1.4%, which decreased revenues by$0.8 million . Because rates for Australian grain traffic have both a fixed and variable component, the increase in Australian grain traffic resulted in lower average freight revenues per carload. Pulp and paper revenues increased$7.7 million , or 14.3%. Pulp and paper traffic volumes increased 7,745 carloads, or 8.7%, which increased revenues by$4.9 million , and average freight revenues per carload increased 5.1%, which increased 39 -------------------------------------------------------------------------------- revenues by$2.8 million . The carload increase was primarily due to higher pulpboard traffic in the southeasternUnited States and 2,730 carloads from HCRY. Metals revenues increased$12.8 million , or 34.8%. Metals traffic volumes increased 12,495 carloads, or 16.4%, which increased revenues by$7.0 million , and average freight revenues per carload increased 15.8%, which increased revenues by$5.8 million . The carload increase was primarily due to 8,623 carloads from HCRY and an increase in carloads due to the expansion of a plant we serve in the southeasternUnited States , partially offset by a decrease in carloads due to start-up issues and low carbon steel demand at a plant we serve in the northeasternUnited States and truck competition at another plant we serve in the northeasternUnited States . Minerals and stone revenues increased$6.9 million , or 16.9%. Minerals and stone average freight revenues per carload increased 8.9%, which increased revenues by$3.7 million , and traffic volumes increased 9,305 carloads, or 7.2%, which increased revenues by$3.2 million . The increase in average freight revenues per carload included a benefit of$1.5 million due to the appreciation of the Australian and Canadian dollars relative tothe United States dollar. The carload increase was primarily due to the expansion of a plant we serve, an increase in rock salt shipments due to restocking of stockpiles in the northeasternUnited States and the general improvement in the economy. Chemicals and plastics revenues increased$4.5 million , or 11.6%. Average freight revenues per carload increased 7.3%, which increased revenues by$2.8 million , and chemicals and plastics traffic volumes increased 2,318 carloads, or 4.1%, which increased revenues by$1.7 million . The carload increase was primarily due to the general improvement in the economy. Lumber and forest products revenues increased$2.7 million , or 9.4%. Lumber and forest products average freight revenues per carload increased 6.6%, which increased revenues by$1.9 million , and traffic volumes increased 1,567 carloads, or 2.5%, which increased revenues by$0.8 million . Petroleum products revenues increased$2.8 million , or 13.6%. Petroleum products average freight revenues per carload increased 11.7%, which increased revenues by$2.4 million , and traffic volumes increased 513 carloads, or 1.8%, which increased revenues by$0.4 million . Other freight revenues increased$2.7 million , or 14.2%. Average freight revenues per carload increased 9.7%, which increased revenues by$1.9 million , and other traffic volumes increased 3,172 carloads, or 4.0%, which increased revenues by$0.8 million . Freight revenues from all remaining commodities combined increased by$1.7 million . Non-Freight Revenues The following table compares non-freight revenues for the years endedDecember 31, 2011 and 2010 (dollars in thousands): 2011 2010 Amount % of Total Amount % of Total Railcar switching $ 128,326 52.1 % $ 110,544 46.5 % Car hire and rental income 21,851 8.9 % 24,276 10.2 % Fuel sales to third parties 18,002 7.3 % 18,744 7.9 % Demurrage and storage 22,136 9.0 % 24,577 10.3 % Car repair services 8,224 3.3 % 7,233 3.0 % Other non-freight revenues 47,610 19.4 % 52,549 22.1 % Total non-freight revenues $ 246,149 100.0 % $ 237,923 100.0 % 40
-------------------------------------------------------------------------------- The following table sets forth non-freight revenues by new operations and existing operations for the years endedDecember 31, 2011 and 2010 (dollars in thousands). In order to compare our non-freight revenues from existing operations for the year endedDecember 31, 2011 to our total operations for the year endedDecember 31, 2010 , the 2011 existing operations data includes$25.8 million of non-freight revenues for services provided to GWA North by GWA for the 11-month period endedNovember 30, 2011 , which were eliminated in our consolidated results. Increase/(Decrease) in Increase/(Decrease) in Existing 2011 2010 Total Operations Operations Total New Existing Total Currency Operations Operations Eliminations Operations Operations Amount % Amount % Impact Railcar switching $ 128,326 $ - $ (66 ) $ 128,392 $ 110,544 $ 17,782 16.1 % $ 17,848 16.1 % $ 3,724 Car hire and rental income 21,851 117 (6,951 ) 28,685 24,276 (2,425 ) (10.0 )% 4,409 18.2 % 1,508 Fuel sales to third parties 18,002 - (4,518 ) 22,520 18,744 (742 ) (4.0 )% 3,776 20.1 % - Demurrage and storage 22,136 16 (115 ) 22,235 24,577 (2,441 ) (9.9 )% (2,342 ) (9.5 )% 183 Car repair services 8,224 85 - 8,139 7,233 991 13.7 % 906 12.5 % 25
Other
non-freight
revenues 47,610 7,555 (14,144 ) 54,199 52,549 (4,939 ) (9.4 )% 1,650 3.1 % 3,524 Total non-freight revenues $ 246,149 $ 7,773 $ (25,794 ) $ 264,170 $ 237,923 $ 8,226 3.5 % $ 26,247
11.0 %
The following information discusses the significant changes in non-freight revenues from existing operations. Railcar switching revenues increased$17.8 million , or 16.1%. The increase included an$8.7 million increase in industrial switching revenues primarily as a result of new and expanded customer service contracts, a$5.5 million increase in port switching revenues primarily due to an increase in export grain and intermodal container traffic at ourUnited States port operations, as well as new customer shipments in thePort of Rotterdam , and a$3.7 million benefit due to the impact from the change in foreign currency. Car hire and rental income revenues increased$4.4 million , or 18.2%. The increase included a$1.5 million benefit from the appreciation of the Australian and Canadian dollars relative tothe United States dollar and an increase in car hire income resulting from increased carload traffic inNorth America . Fuel sales to third parties increased$3.8 million , or 20.1%, of which$4.0 million resulted from a 21.4% increase in the average price per gallon, partially offset by$0.2 million from a 1.0% decrease in gallons sold. Demurrage and storage revenues decreased$2.3 million , or 9.5%. The decrease was primarily due to a decrease in the number of third-party rail cars being stored. Car repair services revenues increased$0.9 million , or 12.5%. Other non-freight revenues increased$1.7 million , or 3.1%. The increase included a benefit of$3.5 million due to the impact from the change in foreign currency exchange rates and a decrease of$1.9 million primarily due to presenting HCRY's operating expenses as a direct offset within its operating revenues in 2010. Operating Expenses Overview Operating expenses were$637.3 million in the year endedDecember 31, 2011 , compared with$499.8 million in the year endedDecember 31, 2010 , an increase of$137.5 million , or 27.5%. The increase in operating expenses was attributable to$102.8 million from new operations and$60.5 million from existing operations. The appreciation of the Australian and Canadian dollars and the Euro relative tothe United States dollar resulted in a <money>$12.0 million increase in operating expenses from existing operations. Labor and benefits expense from existing operations increased$18.7 million primarily due to the hiring of new employees and increased overtime costs, which resulted primarily from increased traffic volumes, and annual wage and benefit increases in the year endedDecember 31, 2011 . Operating expenses from existing operations were adversely affected by a$16.2 million increase in the price of diesel fuel, all or a substantial portion of which will be recovered through fuel surcharges and rate changes. In addition, operating expenses from existing operations included$4.4 million from an 41 -------------------------------------------------------------------------------- increase in diesel fuel consumption. Operating expenses from existing operations for the year endedDecember 31, 2011 also included$10.5 million from HCRY that were not in the year endedDecember 31, 2010 due to presenting HCRY's operating expenses as a direct offset within its operating revenues in 2010. On a consolidated basis, results from new operations reflect the elimination of$25.8 million of operating expenses for GWA related to services provided to GWA North. OperatingRatio Our operating ratio, defined as total operating expenses divided by total operating revenues, improved to 76.9% in the year endedDecember 31, 2011 from 79.3% in the year endedDecember 31, 2010 . While changes in foreign currency exchange rates can have a material impact on our operating revenues and operating expenses, they should not have a material impact on our operating ratio. The following table sets forth a comparison of our operating expenses in the years endedDecember 31, 2011 and 2010 (dollars in thousands): 2011 2010 % of % of Operating Operating Currency Amount Revenues Amount Revenues Impact Labor and benefits $ 236,152 28.5 % $ 207,736 33.0 % $ 5,154 Equipment rents 43,984 5.3 % 32,491 5.2 % 833 Purchased services 78,710 9.5 % 52,198 8.3 % 3,384 Depreciation and amortization 66,481 8.0 % 51,166 8.1 % 1,046 Diesel fuel used in operations 88,400 10.7 % 45,849 7.3 % - Diesel fuel sold to third parties 16,986 2.0 % 17,322 2.7 % - Casualties and insurance 22,469 2.7 % 14,235 2.3 % 220 Materials 26,419 3.2 % 22,280 3.5 % 290 Net (gain)/loss on sale and impairment of assets (5,660 ) (0.7 )% (6,441 ) (1.0 )% (90 ) Gain on settlement - - % (8,707 ) (1.4 )% - Gain on insurance recoveries (1,061 ) (0.1 )% - - % - Stamp duty - - % 16,369 2.6 % 281 Restructuring - - % (2,349 ) (0.4 )% (24 ) Other expenses 64,437 7.8 % 57,636 9.1 % 859 Total operating expenses $ 637,317 76.9 % $ 499,785
79.3 %
Labor and benefits expense was$236.2 million in the year endedDecember 31, 2011 , compared with$207.7 million in the year endedDecember 31, 2010 , an increase of$28.4 million , or 13.7%, of which$23.9 million was from existing operations and$4.6 million was from new operations. The increase from existing operations consisted of$6.5 million due to an increase in the average number of employees, approximately$5.5 million of benefit increases (primarilyUnited States health care costs),$5.2 million due to the impact from the change in foreign currency exchange rates,$4.0 million from HCRY,$3.0 million from annual wage increases and$2.7 million from an increase in overtime costs. These increases were partially offset by a decrease of approximately$3.0 million in performance-based bonus awards. Our average number of employees during the year endedDecember 31, 2011 increased by 65 employees compared with our average number of employees during the year endedDecember 31, 2010 . Equipment rents expense was$44.0 million in the year endedDecember 31, 2011 , compared with$32.5 million in the year endedDecember 31, 2010 , an increase of$11.5 million , or 35.4%. The increase was primarily attributable to$19.9 million from new operations, partially offset by the elimination of$7.0 million of expenses incurred by GWA related to services provided to GWA North and a decrease of$1.4 million from existing operations. The decrease from existing operations included$2.2 million from reductions in locomotive and freight car rents inEurope andCanada and property rents inAustralia , partially offset by a$0.8 million increase due to the impact from the change in foreign currency exchange rates. Purchased services expense, which consists of the costs of services provided by outside contractors for repairs and maintenance of track property, locomotives, freight cars and other equipment as well as contract labor costs for crewing and drayage services, was$78.7 million in the year endedDecember 31, 2011 , compared with$52.2 million in the year endedDecember 31, 2010 , an increase of$26.5 million , or 50.8%. The increase was attributable to$35.6 million from new operations and a$4.8 million increase from existing operations. On a consolidated basis, results from new operations reflect the elimination of$13.9 million of expenses incurred by GWA related to services provided to GWA North in the year ended 42 --------------------------------------------------------------------------------December 31, 2011 . The increase from existing operations included$3.4 million due to the impact from the change in foreign currency exchange rates. Depreciation and amortization expense was$66.5 million in the year endedDecember 31, 2011 , compared with$51.2 million in the year endedDecember 31, 2010 , an increase of$15.3 million , or 29.9%. The increase was attributable to$10.3 million from new operations and a$5.0 million increase from existing operations. The increase from existing operations included$1.0 million due to the impact from the change in foreign currency exchange rates. The cost of diesel fuel used in operations was$88.4 million in the year endedDecember 31, 2011 , compared with$45.8 million in the year endedDecember 31, 2010 , an increase of$42.6 million . The increase was attributable to$22.0 million from new operations and a$20.6 million increase from existing operations. The increase from existing operations was composed of$16.2 million due to a 35.3% increase in average fuel cost per gallon and$4.4 million due to a 7.1% increase in diesel fuel consumption, primarily relating to a 6.3% increase in carloads. The cost of diesel fuel sold to third parties was$17.0 million in the year endedDecember 31, 2011 , compared with$17.3 million in the year endedDecember 31, 2010 , a decrease of$0.3 million , or 1.9%. On a consolidated basis, results from new operations included the elimination of$4.4 million of expenses incurred by GWA for sales to GWA North in the year endedDecember 31, 2011 , partially offset by a$4.1 million increase from existing operations. The increase from existing operations consisted of$4.3 million resulting from a 24.8% increase in average fuel cost per gallon, partially offset by$0.2 million from a 1.0% decrease in gallons sold. Casualties and insurance expense was$22.5 million in the year endedDecember 31, 2011 , compared with$14.2 million in the year endedDecember 31, 2010 , an increase of$8.2 million , or 57.8%. The increase was attributable to$4.2 million from new operations and$4.0 million from existing operations. The impact from new operations included$1.0 million from our self-insurance retention associated with track wash-outs inAustralia due to heavy rains from Cyclone Carlos in lateFebruary 2011 . The increase from existing operations was primarily due to higher derailment expenses in 2011 compared with 2010, including$1.0 million from our self-insurance retention associated with the Edith River Derailment as a result of flood waters associated with Cyclone Grant inAustralia in lateDecember 2011 , and an increase in insurance premiums. Materials expense, which primarily consists of the costs of materials purchased for use in repairing and maintaining our track property, locomotives, rail cars and other equipment as well as costs for general tools and supplies used in our business, was$26.4 million in the year endedDecember 31, 2011 , compared with$22.3 million in the year endedDecember 31, 2010 , an increase of$4.1 million , or 18.6%. The increase was primarily due to increased locomotive, rail car and track property repairs from existing operations due to increased traffic across most of our regions and$0.9 million from HCRY. Net gain on sale of assets was$5.7 million in the year endedDecember 31, 2011 , compared with$6.4 million in the year endedDecember 31, 2010 . Gain on settlement in the year endedDecember 31, 2010 of$8.7 million resulted from a legal settlement associated with a past acquisition. Gain on insurance recoveries in the year endedDecember 31, 2011 of$1.1 million primarily consisted of a business interruption claim associated with Cyclone Carlos. Stamp duty expense of$16.4 million in the year endedDecember 31, 2010 represents the Australian asset-transfer tax associated with the FreightLink Acquisition. Restructuring of$2.3 million in the year endedDecember 31, 2010 were related to the reversal of restructuring charges associated with the second quarter 2009 impairment of HCRY, as we are no longer committed to a plan to exit HCRY. Other expenses were$64.4 million in the year endedDecember 31, 2011 , compared with$57.6 million in the year endedDecember 31, 2010 , an increase of$6.8 million , or 11.8%. The increase was attributable to$6.8 million from new operations and$0.3 million from existing operations. On a consolidated basis, results from new operations include the elimination of$0.4 million of expenses incurred by GWA related to services provided to GWA North in the year endedDecember 31, 2011 . Other Income (Expense) Items Interest Income Interest income was$3.2 million in the year endedDecember 31, 2011 , compared with$2.4 million in the year endedDecember 31, 2010 . 43 -------------------------------------------------------------------------------- Interest Expense Interest expense was$38.6 million in the year endedDecember 31, 2011 , compared with$23.1 million in the year endedDecember 31, 2010 , an increase of$15.5 million , resulting primarily from higher outstanding debt due to the FreightLink Acquisition. Provision for Income Taxes Our effective income tax rate in the year endedDecember 31, 2011 was 24.4%, compared with 27.7% in the year endedDecember 31, 2010 . The decrease in the effective tax rate for the year endedDecember 31, 2011 was primarily attributable to the tax effects of recent acquisitions and increased earnings inAustralia , which has a lower statutory income tax rate. Income and Earnings Per Share from Continuing Operations Income from continuing operations, net of tax, in the year endedDecember 31, 2011 was$119.5 million , compared with income from continuing operations, net of tax of$78.7 million in the year endedDecember 31, 2010 . Our basic EPS from continuing operations attributable to our common stockholders were$2.99 with 39.9 million shares outstanding in the year endedDecember 31, 2011 , compared with basic EPS from continuing operations attributable to our common stockholders of$2.02 with 38.9 million shares outstanding in the year endedDecember 31, 2010 . Our diluted EPS from continuing operations attributable to our common stockholders in the year endedDecember 31, 2011 were$2.79 with 42.8 million weighted average shares outstanding, compared with diluted EPS from continuing operations of$1.88 with 41.9 million weighted average shares outstanding in the year endedDecember 31, 2010 . Segment Information Our various railroad lines are organized into 10 operating regions. Since all of the regions have similar characteristics, they previously had been aggregated into one reportable segment. BeginningJanuary 1, 2011 , we decided to present our financial information as two reportable segments - North American & European Operations and Australian Operations. The results of operations of our foreign entities are maintained in the respective local currency (the Australian dollar, the Canadian dollar and the Euro) and then translated intoUnited States dollars at the applicable exchange rates for inclusion in our consolidated financial statements. As a result, any appreciation or depreciation of these currencies againstthe United States dollar can impact our results of operations. 44 -------------------------------------------------------------------------------- The following table sets forth our North American & European Operations and Australian Operations for the years endedDecember 31, 2011 and 2010 (dollars in thousands): 2011 2010 North North American & American & European Australian Total
European Australian Total
Operations Operations Operations Operations Operations Operations Revenues: Freight $ 388,797 $ 194,150 $ 582,947 $ 336,771 $ 55,501 $ 392,272 Non-freight 168,824 59,323 228,147 158,016 61,163 219,179 Fuel sales to third parties - 18,002 18,002
- 18,744 18,744 Total revenues
Operating expenses Labor and benefits 186,467 49,685 236,152 171,669 36,067 207,736 Equipment rents 26,460 17,524 43,984 26,898 5,593 32,491 Purchased services 27,880 50,830 78,710 25,583 26,615 52,198 Depreciation and amortization 47,218 19,263 66,481 43,807 7,359 51,166 Diesel fuel used in operations 57,394 31,006 88,400 39,240 6,609 45,849 Diesel fuel sold to third parties - 16,986 16,986 - 17,322 17,322 Casualties and insurance 14,710 7,759 22,469 12,887 1,348 14,235 Materials 24,138 2,281 26,419 20,778 1,502 22,280 Net gain on sale of assets (5,167 ) (493 ) (5,660 ) (6,317 ) (124 ) (6,441 ) Gain on settlement - - - (8,707 ) - (8,707 ) Gain on insurance recoveries (43 ) (1,018 ) (1,061 ) - - - Stamp duty - - - - 16,369 16,369 Restructuring - - - (2,349 ) - (2,349 ) Other expenses 48,918 15,519 64,437 51,396 6,240 57,636 Total operating expenses $ 427,975 $ 209,342 $ 637,317 $
374,885
Operating ratio 76.8 % 77.1 % 76.9 %
75.8 % 92.2 % 79.3 %
Income from operations
Interest expense $ (23,171 ) $ (15,446 ) $ (38,617 ) $ (21,856 ) $ (1,291 ) $ (23,147 ) Interest income
Provision for income taxes $ 26,181 $ 12,350 $ 38,531 $
27,176
Carloads 785,377 211,671 997,048 736,552 127,170 863,722 Expenditures for additions to property & equipment, net of grants from outside parties $ (59,383 ) $ (96,643 ) $ (156,026 ) $ (59,153 ) $ (19,885 ) $ (79,038 ) Revenues from our North American & European Operations were$557.6 million in the year endedDecember 31, 2011 , compared with$494.8 million in the year endedDecember 31, 2010 , an increase of$62.8 million , or 12.7%. The$62.8 million increase in revenues from our North American & European Operations included a$52.0 million increase in freight revenues and a$10.8 million increase in non-freight revenues. The$52.0 million increase in freight revenues consisted of an increase of$45.0 million from existing operations and$7.0 million from new operations. Average freight revenues per carload from existing operations increased 7.0%, which increased revenues by$23.6 million , and traffic volume from existing operations increased 43,793 carloads, or 5.9%, which increased revenues by$21.4 million . The increase in average freight revenues per carload from existing operations included$9.9 million due to a 2.8% increase in fuel surcharge revenues,$1.5 million from the 45 -------------------------------------------------------------------------------- appreciation of the Canadian dollar relative tothe United States dollar and a 0.4% increase from the change in mix. Other than the impacts from these factors, average freight revenues per carload from existing operations increased by 3.4%. The$10.8 million increase in non-freight revenues included an increase of$7.6 million in industrial switching revenues primarily as a result of new and expanded customer contracts, a$5.5 increase in port switching revenues primarily due to an increase in export grain and intermodal traffic at ourUnited States port operations and new customers in thePort of Rotterdam , partially offset by a decrease of$2.3 million in demurrage and storage revenues. Operating expenses from our North American & European Operations were$428.0 million in the year endedDecember 31, 2011 , compared with$374.9 million in the year endedDecember 31, 2010 , an increase of$53.1 million , or 14.2%. The$53.1 million increase in operating expenses from our North American & European Operations included$48.3 million from existing operations and$4.8 million from new operations. The increase in operating expenses from existing operations included$13.5 million due to the increase in the price of diesel fuel,$10.5 million from HCRY and$1.8 million from the appreciation of the Canadian dollar and the Euro relative tothe United States dollar. The increase in operating expenses from existing operations also included an$8.6 million increase in labor and benefits expense, including$4.6 million due to increased health care costs inthe United States , as well as increases due to the hiring of new employees and increased overtime costs, which resulted primarily from increased traffic volumes, and annual wage increases. Operating expenses for the year endedDecember 31, 2010 included an$8.7 million gain from a legal settlement associated with a past acquisition and$2.3 million due to the reversal of restructuring charges associated with the second quarter 2009 impairment of HCRY. Revenues from our Australian Operations were$271.5 million in the year endedDecember 31, 2011 , compared with$135.4 million in the year endedDecember 31, 2010 , an increase of$136.1 million . Revenues from existing operations increased$27.4 million , or 20.2%, and new operations generated$108.7 million in revenues. On a consolidated Australian Operations basis, our results from new operations reflected the elimination of$25.8 million of non-freight revenues for services provided to GWA North by GWA for the year endedDecember 31, 2011 . The$27.4 million increase in revenues from existing operations included a$15.7 million increase in non-freight revenues and a$11.7 million increase in freight revenues. The$15.7 million increase in non-freight revenues from existing operations included a benefit of$7.7 million from the appreciation of the Australian dollar relative tothe United States dollar and a$3.8 million increase from fuel sales to third parties. The$11.7 million increase in freight revenues from existing operations was primarily due to a benefit of$5.8 million from the appreciation of the Australian dollar relative tothe United States dollar and$4.0 million from an increase of 10,352 carloads, or 8.1%. The carload increase was primarily due to export grain traffic. Operating expenses from our Australian Operations were$209.3 million in the year endedDecember 31, 2011 , compared with$124.9 million in the year endedDecember 31, 2010 , an increase of$84.4 million . The$84.4 million increase in operating expenses from our Australian Operations included$72.2 million from new operations and$12.2 million from existing operations. On a consolidated Australian Operations basis, our results from new operations reflected the elimination of$25.8 million of operating expenses for GWA related to services provided to GWA North. The$12.2 million increase in operating expenses from existing operations included$10.2 million from the appreciation of the Australian dollar relative tothe United States dollar. Year EndedDecember 31, 2010 Compared with Year EndedDecember 31, 2009 Operating Revenues Overview Operating revenues were$630.2 million in the year endedDecember 31, 2010 , compared with$544.9 million in the year endedDecember 31, 2009 , an increase of$85.3 million , or 15.7%. The$85.3 million increase in operating revenues consisted of a$76.6 million , or 14.1%, increase in revenues from existing operations and$11.6 million in revenues from new operations. New operations are those that were not included in our consolidated financial results for a comparable period in the prior year. In arriving at our consolidated results, we eliminated$2.9 million of non-freight revenues for services provided to GWA North by GWA for the month ofDecember 2010 . The$76.6 million increase in revenues from existing operations included increases of$47.3 million in freight revenues and$29.3 million in non-freight revenues. The$76.6 million increase in revenues included$29.4 million due to an 8.4% increase in carloads,$4.6 million due to an increase in fuel surcharge revenues,$4.0 million due to an increase in fuel sales to third parties and a net benefit of$16.7 million from the change in foreign currency exchange rates. 46 -------------------------------------------------------------------------------- The following table breaks down our operating revenues into new operations and existing operations for the years endedDecember 31, 2010 and 2009 (dollars in thousands): Increase in Total Increase in Existing 2010 2009 Operations Operations Total New
Existing Total
Operations Operations Eliminations Operations Operations Amount % Amount % Freight revenues $ 392,272 $ 11,282 $ - $ 380,990 $ 333,711 $ 58,561 17.5 % $ 47,279 14.2 %
Non-freight
revenues 237,923 317 (2,894 ) 240,500 211,155 26,768 12.7 % 29,345 13.9 % Total operating revenues $ 630,195 $ 11,599 $ (2,894 ) $ 621,490 $ 544,866 $ 85,329 15.7 % $ 76,624 14.1 % Freight Revenues The following table compares freight revenues, carloads and average freight revenues per carload for the years endedDecember 31, 2010 and 2009 (dollars in thousands, except average freight revenues per carload): Average Freight Revenues Per Freight Revenues Carloads Carload 2010 2009 2010 2009 % of % of % of % of Commodity Group Amount Total Amount Total Amount Total Amount Total 2010 2009
Intermodal*
1.0 % 4,048 0.5 % $ 871 $ 102 Coal & Coke 73,880 18.8 % 70,773 21.2 % 202,267 23.4 % 197,021 24.9 % 365 359 Farm & Food Products 55,987 14.3 % 37,489 11.3 % 108,841 12.6 % 83,299 10.5 % 514 450
Pulp & Paper 53,652 13.7 % 50,882 15.2 % 88,852
10.3 % 89,217 11.3 % 604 570
Metallic Ores 8,513 2.2 % 3,693 1.1 % 11,665
1.4 % 8,938 1.1 % 730 413 Metals 36,788 9.4 % 30,895 9.3 % 76,343 8.8 % 63,802 8.1 % 482 484
Minerals & Stone 40,947 10.4 % 38,751 11.6 % 129,281
15.0 % 130,812 16.6 % 317 296 Chemicals & Plastics 38,951 9.9 % 32,956 9.9 % 56,515 6.5 % 49,008 6.2 % 689 672 Lumber & Forest Products 28,791 7.3 % 27,181 8.1 % 63,340 7.3 % 61,245 7.8 % 455 444
Petroleum
Products 20,630 5.3 % 19,804 5.9 % 29,032 3.4 % 28,553 3.6 % 711 694 Auto & Auto Parts 6,962 1.8 % 4,967 1.5 % 10,242 1.2 % 8,036 1.0 % 680 618 Other 19,320 4.9 % 15,909 4.8 % 78,333 9.1 % 66,230 8.4 % 247 240 Total $ 392,272 100.0 % $ 333,711 100.0 % 863,722 100.0 % 790,209 100.0 % $ 454 $ 422
* Represents intermodal units
Total carloads increased by 73,513 carloads, or 9.3%, in 2010 compared with 2009. The increase consisted of a 66,025 carload increase, or 8.4%, from existing operations and 7,488 carloads from new operations. Average freight revenues per carload increased 7.6% to$454 in 2010 compared with 2009. Average freight revenues per carload from existing operations increased 5.5% to$445 . This increase included a 2.7% benefit from the appreciation of the Australian and Canadian dollars relative tothe United States dollar. In addition, higher fuel surcharges and changes in the commodity mix increased average freight revenues per carload by 1.3% and 0.7%, respectively. Other than the impacts from these factors, average freight revenues per carload increased 0.8%. 47 --------------------------------------------------------------------------------
The following table sets forth freight revenues by new operations and existing operations for the years ended
Increase/(Decrease) Increase in Total in Existing 2010 2009 Operations Operations Commodity Total New Existing Total Currency Group Operations Operations Operations Operations Amount % Amount % Impact Intermodal $ 7,851 $ 7,488 $ 363 $ 411 $ 7,440 >100% $ (48 ) (11.7 )% $ 25 Coal & Coke 73,880 - 73,880 70,773 3,107 4.4 % 3,107 4.4 % 1,110 Farm & Food Products 55,987 - 55,987 37,489 18,498 49.3 % 18,498 49.3 % 1,818 Pulp & Paper 53,652 - 53,652 50,882 2,770 5.4 % 2,770 5.4 % 3,537 Metallic Ores 8,513 3,626 4,887 3,693 4,820 >100% 1,194 32.3 % 431 Metals 36,788 - 36,788 30,895 5,893 19.1 % 5,893 19.1 % 446 Minerals & Stone 40,947 - 40,947 38,751 2,196 5.7 % 2,196 5.7 % 123 Chemicals & Plastics 38,951 - 38,951 32,956 5,995 18.2 % 5,995 18.2 % 109 Lumber & Forest Products 28,791 - 28,791 27,181 1,610 5.9 % 1,610 5.9 % 193 Petroleum Products 20,630 168 20,462 19,804 826 4.2 % 658 3.3 % 402 Auto & Auto Parts 6,962 - 6,962 4,967 1,995 40.2 % 1,995 40.2 % 21 Other 19,320 - 19,320 15,909 3,411 21.4 % 3,411 21.4 % 49 Total freight revenues $ 392,272 $ 11,282 $ 380,990 $ 333,711 $ 58,561 17.5 % $ 47,279 14.2 % $ 8,264 The following information discusses the significant changes in freight revenues by commodity group from existing operations. Changes in average freight revenues per carload in a commodity group can be impacted by changes in customer rates, fuel surcharges, appreciation of the Australian and Canadian dollars relative tothe United States dollar, as well as changes in the mix of customer traffic within a commodity group. Coal and coke revenues increased by$3.1 million , or 4.4%. Coal and coke traffic volumes increased 5,246 carloads, or 2.7%, which increased revenues by$1.9 million , and average freight revenues per carload increased 1.7%, which increased revenues by$1.2 million . The carload increase was primarily due to increased demand for metallurgical coal and higher demand for power generation, partially offset by decreased demand due to existing steam coal stockpiles at certain customers. Farm and food products revenues increased by$18.5 million , or 49.3%. Farm and food products traffic volumes increased 25,542 carloads, or 30.7%, which increased revenues by$13.1 million , and average freight revenues per carload increased 14.3%, which increased revenues by$5.4 million . The carload increase was primarily due to an increase in export grain traffic inAustralia due to an improved grain season in 2010 compared with 2009. The increase in average freight revenues per carload included a benefit of$3.5 million due to the appreciation of the Australian and Canadian dollars relative tothe United States dollar. Pulp and paper revenues increased$2.8 million , or 5.4%. Pulp and paper average freight revenues per carload increased 5.9%, which increased revenues by$3.0 million . However, pulp and paper traffic volumes decreased 365 carloads, or 0.4%, which decreased revenues by$0.2 million . The increase in average freight revenues per carload was primarily due to a change in mix of pulp and paper traffic and a benefit of$1.1 million due to the appreciation of the Canadian dollar relative tothe United States dollar. Metallic ores revenues increased$1.2 million , or 32.3%. Metallic ores average freight revenues per carload increased 19.3%, which increased revenues by$0.7 million and traffic volumes increased 980 carloads, or 11.0%, which increased revenues by$0.5 million . The carload increase was primarily due to the termination of a 51-week strike at a mining operation we serve inCanada . The increase in average freight revenues per carload was primarily due to increased long-haul traffic. Metals revenues increased by$5.9 million , or 19.1%. Metals traffic volumes increased 12,541 carloads, or 19.7%, which increased revenues by$6.0 million . The carload increase was primarily due to a broad-based improvement in the steel industry and increased customer shipments of pipe for the oil and gas exploration industries. Minerals and stone revenues increased by$2.2 million , or 5.7%. Minerals and stone average freight revenues per carload increased 6.9%, which increased revenues by$2.7 million . However, minerals and stone traffic volumes decreased 1,531 48 -------------------------------------------------------------------------------- carloads, or 1.2%, which decreased revenues by$0.5 million . The increase in average revenues per carload was primarily the result of a benefit of$1.8 million due to the appreciation of the Australian and Canadian dollars relative tothe United States dollar. The carload decrease was primarily due to a decrease in rock salt shipments as a result of lower restocking due to mild winter weather in the northeasternUnited States , partially offset by increased shipments from a new aggregates customer. Chemicals and plastics revenues increased by$6.0 million , or 18.2%. Chemicals and plastics traffic volumes increased 7,507 carloads, or 15.3%, which increased revenues by$5.4 million , and average freight revenues per carload increased 2.5%, which increased revenues by$0.8 million . The carload increase was primarily due to increased demand as a result of improving economic conditions and shipments from customer plants that were temporarily idled in 2009. Lumber and forest products revenues increased by$1.6 million , or 5.9%. Lumber and forest products traffic volumes increased 2,095 carloads, or 3.4%, which increased revenues by$1.0 million , and average freight revenues per carload increased 2.4%, which increased revenues by$0.7 million . The carload increase was primarily due to improvements in the export log market and a new customer contract to provide raw materials to a paper mill, partially offset by the loss of inbound raw materials for a pulp and paper mill we serve. Autos and auto parts revenues increased by$2.0 million , or 40.2%. Autos and auto parts traffic volumes increased 2,206 carloads, or 27.5%, which increased revenues by$1.5 million , and average freight revenues per carload increased 10.0%, which increased revenues by$0.5 million . The carload increase was primarily due to an increase in production from the automobile industry inthe United States andCanada . The increase in average freight revenues per carload was primarily driven by a change in our automotive traffic inCanada . Other freight revenues increased$3.4 million , or 21.4%. Other freight traffic volumes increased 12,103 carloads, or 18.3%, which increased revenues by$3.0 million , and average freight revenues per carload increased 2.7%, which increased revenues by$0.4 million . The increase in carloads was primarily due to an increase in haulage traffic of domestic and export coal and additional shipments of municipal solid waste and construction debris. Freight revenues from all remaining commodities combined increased by$0.6 million . Non-Freight Revenues The following table compares non-freight revenues for the years endedDecember 31, 2010 and 2009 (dollars in thousands): 2010 2009 Amount % of Total Amount % of Total Railcar switching $ 110,544 46.5 % $ 98,448 46.6 % Car hire and rental income 24,276 10.2 % 21,579 10.2 % Fuel sales to third parties 18,744 7.9 % 15,127 7.2 % Demurrage and storage 24,577 10.3 % 24,441 11.6 % Car repair services 7,233 3.0 % 8,140 3.8 % Other non-freight revenues 52,549 22.1 % 43,420 20.6 % Total non-freight revenues $ 237,923 100.0 % $ 211,155 100.0 % 49
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The following table sets forth non-freight revenues by new operations and existing operations for the years ended
Increase/ Increase/ (Decrease) in (Decrease) in Existing 2010 2009 Total Operations Operations Total New Existing Total Operations Operations Eliminations Operations Operations Amount % Amount % Railcar switching $ 110,544 $ - $ (6 ) $ 110,550 $ 98,448 $ 12,096 12.3 % $ 12,102 12.3 % Car hire and rental income 24,276 - (543 ) 24,819 21,579 2,697 12.5 % 3,240 15.0 % Fuel sales to third parties 18,744 - (359 ) 19,103 15,127 3,617 23.9 % 3,976 26.3 % Demurrage and storage 24,577 - - 24,577 24,441 136 0.6 % 136 0.6 % Car repair services 7,233 - - 7,233 8,140 (907 ) (11.1 )% (907 ) (11.1 )% Other non-freight revenues 52,549 317 (1,986 ) 54,218 43,420 9,129 21.0 % 10,798 24.9 % Total non-freight revenues $ 237,923 $ 317 $ (2,894 ) $ 240,500 $ 211,155 $ 26,768 12.7 % $ 29,345 13.9 % The following information discusses the significant changes in non-freight revenues from existing operations. Railcar switching revenues increased$12.1 million , or 12.3%. The increase included a benefit of$2.8 million due to the net impact from the changes in foreign currency exchange rates, a$5.9 million increase in industrial switching primarily as a result of a new service contract to haul iron ore inCanada and a$3.4 million increase in port switching revenues due to an increase in export grain and intermodal container traffic at ourUnited States port operations. Car hire and rental income revenues increased$3.2 million , or 15.0%. The increase included a benefit of$1.7 million due to the appreciation of the Australian and Canadian dollars relative tothe United States dollar. The remaining increase in car hire and rental income revenues is mainly due to increased off-line coal car moves in the northeasternUnited States . Fuel sales to third parties increased$4.0 million , or 26.3%, of which$3.5 million resulted from a 23.3% increase in average price per gallon and$0.5 million resulted from a 2.4% increase in gallons sold. Car repair services revenues decreased$0.9 million , or 11.1%, primarily due to the cancellation of certain freight car leases that required car repairs to be performed at one of our maintenance locations inthe United States . All other non-freight revenues increased$10.9 million , or 16.1%. The increase included a benefit of$3.9 million due to the appreciation of the Australian and Canadian dollars relative tothe United States dollar. The remaining increase was primarily due to the temporary operating agreement at HCRY, increases in our Australian crewing services and a new service contract to haul iron ore inCanada . Operating Expenses Overview Operating expenses were$499.8 million in the year endedDecember 31, 2010 , compared with$445.5 million in the year endedDecember 31, 2009 , an increase of$54.2 million , or 12.2%. The increase in operating expenses was attributable to a$31.9 million increase from existing operations and$22.3 million from new operations. Operating expenses from new operations included$16.4 million related to stamp duty (an Australian asset transfer tax associated with the FreightLink Acquisition). The appreciation of the Australian and Canadian dollars relative tothe United States dollar and the depreciation of the Euro relative tothe United States dollar resulted in a$13.7 million net increase in operating expenses from existing operations. Our operating expenses from existing operations for 2010 included$11.8 million of FreightLink acquisition-related expenses, partially offset by an$8.7 million gain associated with a legal settlement related to a past acquisition, a$6.4 million net gain on sale of assets and a$2.3 million reversal of accrued restructuring expenses associated with the second quarter of 2009 impairment of HCRY. Operating expenses for 2009 included$9.0 million due to the HCRY impairment and related charges,$1.1 million of legal expenses associated with the resolution of an arbitration proceeding and a$0.7 million non-cash write-down of non-current assets, partially offset by$3.4 million in net gain on the sale of assets and$3.1 million in gain on 50 -------------------------------------------------------------------------------- insurance recoveries. Operating Ratio Our operating ratio, defined as total operating expenses divided by total operating revenues, decreased to 79.3% in the year endedDecember 31, 2010 from 81.8% in the year endedDecember 31, 2009 . The following table sets forth a comparison of our operating expenses in the years endedDecember 31, 2010 and 2009 (dollars in thousands): 2010 2009 % of % of Operating Operating Amount Revenues Amount Revenues Labor and benefits $ 207,736 33.0 % $ 191,479 35.1 % Equipment rents 32,491 5.2 % 29,272 5.4 % Purchased services 52,198 8.3 % 42,435 7.8 % Depreciation and amortization 51,166 8.1 % 48,110 8.8 % Diesel fuel used in operations 45,849 7.3 % 33,538 6.2 % Diesel fuel sold to third parties 17,322 2.7 % 14,400 2.7 % Casualties and insurance 14,235 2.3 % 14,842 2.7 % Materials 22,280 3.5 % 21,835 4.0 % Net (gain)/loss on sale and impairment of assets (6,441 ) (1.0 )% 3,953 0.7 % Gain on settlement (8,707 ) (1.4 )% - - % Gain on insurance recoveries - - % (3,143 ) (0.6 )% Stamp duty 16,369 2.6 % - - % Restructuring (2,349 ) (0.4 )% 2,288 0.4 % Other expenses 57,636 9.1 % 46,535 8.6 % Total operating expenses $ 499,785 79.3 % $ 445,544 81.8 % Labor and benefits expense was$207.7 million in the year endedDecember 31, 2010 , compared with$191.5 million in the year endedDecember 31, 2009 , an increase of$16.3 million , or 8.5%. The increase consisted of$15.1 million in higher wages and bonuses resulting primarily from our improved operating results,$6.1 million due to the net impact from the change in foreign currency exchange rates and$0.3 million from new operations, partially offset by a decrease of$5.2 million primarily due to savings achieved from cost cutting measures such as furloughed employees. Equipment rents expense was$32.5 million in the year endedDecember 31, 2010 , compared with$29.3 million in the year endedDecember 31, 2009 , an increase of$3.2 million , or 11.0%. The increase was attributable to a$2.2 million increase from existing operations and$1.0 million from new operations. The increase from existing operations consisted of$0.9 million due to the net impact from the change in foreign currency exchange rates and increases in our car hire expense due to new customer contracts inCanada and increased carload traffic inNorth America . Purchased services expense, which primarily consists of the costs of services provided by outside contractors for repairs and maintenance of track property, locomotives, rail cars and other equipment as well as contract labor costs for crewing and drayage services and utility costs, was$52.2 million in the year endedDecember 31, 2010 , compared with$42.4 million in the year endedDecember 31, 2009 , an increase of$9.8 million , or 23.0%. The increase was attributable to an$8.0 million increase from existing operations and$1.8 million from new operations. The increase from existing operations consisted primarily of$3.2 million due to the net impact from the change in foreign currency exchange rates, increases due to greater use of contract drivers and higher equipment maintenance inAustralia in connection with increased traffic and additional operating costs as a result of increases in volumes. Depreciation and amortization expense was$51.2 million in the year endedDecember 31, 2010 , compared with$48.1 million in the year endedDecember 31, 2009 , an increase of$3.1 million , or 6.4%. The increase was attributable to an increase of$2.3 million from existing operations and$0.8 million from new operations. The increase in existing operations consisted primarily of$1.3 million due to the net impact from the change in foreign currency exchange rates. The cost of diesel fuel used in operations was$45.8 million in the year endedDecember 31, 2010 , compared with$33.5 million in the year endedDecember 31, 2009 , an increase of$12.3 million , or 36.7%. The increase included a$10.7 million increase from existing operations and$1.6 million from new operations. The increase from existing operations was composed 51 -------------------------------------------------------------------------------- of$8.8 million from a 26.3% increase in average fuel cost per gallon and$1.9 million due to a 4.5% increase in diesel fuel consumption. The cost of diesel fuel sold to third parties was$17.3 million in the year endedDecember 31, 2010 , compared with$14.4 million in the year endedDecember 31, 2009 , an increase of$2.9 million , or 20.3%. The increase included a$3.3 million increase from existing operations partially offset by the elimination of$0.4 million of expenses incurred by GWA for sales to GWA North in the month endedDecember 31, 2010 . The increase from existing operations consisted of$2.9 million from a 19.9% increase in average diesel fuel cost per gallon and$0.4 million resulting from a 2.4% increase in gallons sold. Casualties and insurance expense was$14.2 million in the year endedDecember 31, 2010 , compared with$14.8 million in the year endedDecember 31, 2009 , a decrease of$0.6 million , or 4.1%. The decrease was attributable to a$0.7 million decrease from existing operations, partially offset by$0.1 million from new operations. The decrease from existing operations was primarily due to lower derailment expense in 2010 compared with 2009. Materials expense, which primarily consists of the costs of materials purchased for use in repairing and maintaining track property, locomotives, rail cars and other equipment as well as costs for general tools and supplies used in our business, was$22.3 million in the year endedDecember 31, 2010 , compared with$21.8 million in the year endedDecember 31, 2009 , an increase of$0.4 million , or 2.0%. The increase was primarily due to the net impact from the change in foreign currency exchange rates. Net (gain)/loss on sale and impairment of assets was a$6.4 million net gain in the year endedDecember 31, 2010 , compared with a$4.0 million net loss in the year endedDecember 31, 2009 . The$6.4 million net gain on sale of assets in 2010 included the sale of excess locomotives, certain track-related assets and property inNorth America and the scrapping of rail cars. The$4.0 million net loss in 2009 included a$6.7 million non-cash write-down of non-current assets, partially offset by a$2.7 million gain from the sale of certain land and track-related assets. Gain on settlement of$8.7 million in the year endedDecember 31, 2010 resulted from a legal settlement associated with a past acquisition. Gain on insurance recoveries of$3.1 million in the year endedDecember 31, 2009 included a$2.1 million gain from a business interruption claim associated with a hurricane in 2008 and$1.0 million for the replacement of assets. Stamp duty expense of$16.4 million in the year endedDecember 31, 2010 represents the Australian asset-transfer tax associated with the FreightLink Acquisition. Restructuring expenses of$2.3 million in the year endedDecember 31, 2009 resulted from the planned shutdown of HCRY's operations. Due to recent commitments by the governments ofCanada and the Province ofOntario , as well as certain customers, we no longer intend to cease operations. As such, in the year endedDecember 31, 2010 we reversed the accrued restructuring expenses of$2.3 million associated with the planned shutdown of HCRY. Other expenses were$57.6 million in the year endedDecember 31, 2010 , compared with$46.5 million in the year endedDecember 31, 2009 , an increase of$11.1 million , or 23.9%. The increase was attributable to$10.4 million from existing operations and$0.7 million from new operations. The increase from existing operations was primarily due to FreightLink acquisition-related expenses. Other Income (Expense) Items Interest Income Interest income was$2.4 million in the year endedDecember 31, 2010 , compared with$1.1 million in the year endedDecember 31, 2009 , an increase of$1.3 million due to higher cash and cash equivalents balances throughout most of 2010. Interest Expense Interest expense was$23.1 million in the year endedDecember 31, 2010 , compared with$26.9 million in the year endedDecember 31, 2009 , a decrease of$3.8 million , or 14.0%, resulting primarily from lower outstanding debt during most of 2010. Provision for Income Taxes Our effective income tax rate in the year endedDecember 31, 2010 was 27.7% compared with 20.9% in the year endedDecember 31, 2009 . The increase in 2010 was primarily attributable to increasedUnited States earnings at a higher marginal tax rate. 52 -------------------------------------------------------------------------------- Income and Earnings Per Share from Continuing Operations Income from continuing operations in the year endedDecember 31, 2010 was$78.7 million , compared with income from continuing operations of$60.1 million in the year endedDecember 31, 2009 . Our basic EPS from continuing operations attributable to our common stockholders were$2.02 with 38.9 million shares outstanding in the year endedDecember 31, 2010 , compared with basic EPS from continuing operations attributable to our common stockholders of$1.66 with 36.1 million shares outstanding in the year endedDecember 31, 2009 . Our diluted EPS from continuing operations attributable to our common stockholders in the year endedDecember 31, 2010 were$1.88 with 41.9 million weighted average shares outstanding, compared with diluted EPS from continuing operations of$1.54 with 39.0 million weighted average shares outstanding in the year endedDecember 31, 2009 . The outstanding weighted average shares for the year endedDecember 31, 2010 and 2009 included approximately 4.6 million and 2.4 million, respectively, weighted average shares issued in conjunction with the public offering of our Class A common stock onJune 15, 2009 . Liquidity and Capital Resources During 2011, 2010 and 2009, we generated$173.5 million ,$171.8 million and$126.9 million , respectively, of cash from operating activities from continuing operations. Changes in working capital decreased net cash flows from operating activities by$36.8 million in 2011 and increased net cash flows from operating activities by$18.5 million and$3.8 million in 2010 and 2009, respectively. Of the$36.8 million for 2011,$25.6 million was due to a reduction in accounts payable and accrued expenses and$12.3 million was due to an increase in accounts receivable driven by an increase in business in 2011. The$25.6 million reduction in accounts payable and accrued expenses included$13.0 million associated with the payment of Australian stamp duty for the acquisition of FreightLink inAustralia and$10.5 million due to the timing of the payment of Australian income taxes. During 2011, 2010 and 2009, our cash used in investing activities from continuing operations was$235.1 million ,$388.9 million and$54.0 million , respectively. For 2011, primary drivers of cash used in investing activities from continuing operations were$178.7 million of cash used for capital expenditures, including$78.2 million for the investment in new Australian locomotives and wagons and$89.9 million of net cash paid for acquisitions, partially offset by$22.6 million in cash received from grants from outside parties and$9.5 million in cash proceeds from the sale of property and equipment. For 2010, primary drivers of cash used in investing activities from continuing operations were$320.0 million in net cash paid for the FreightLink Acquisition and$119.8 million of cash used for capital expenditures, partially offset by$40.8 million in cash received from grants from outside parties and$10.0 million in proceeds from the disposition of property and equipment. For 2009, primary drivers of cash used in investing activities from continuing operations were$88.9 million of cash used for capital expenditures and$5.8 million of net cash paid for acquisitions, partially offset by$24.6 million in cash received from grants from outside parties,$8.3 million in proceeds from the disposition of property and equipment,$4.0 million of insurance proceeds and$3.8 million of net proceeds from the sale of our investment inBolivia . During 2011 and 2010, our cash provided by financing activities from continuing operations was$62.0 million and$140.0 million , respectively, compared to cash used in financing activities from continuing operations in 2009 of$7.3 million . For 2011, primary drivers of cash provided by financing activities from continuing operations were a net increase in outstanding debt of$47.9 million and net cash inflows of$18.9 million from exercises of stock-based awards, partially offset by$4.7 million of debt amendment costs. For 2010, primary drivers of cash provided by financing from continuing operations were a net increase in outstanding debt of$123.2 million and net cash inflows of$19.3 million from exercises of stock-based awards, partially offset by$2.5 million of debt amendment costs. For 2009, primary drivers of cash used in financing activities from continuing operations were a net decrease in outstanding debt of$116.2 million and$4.4 million of cash paid for a change in our ownership of a noncontrolling interest, partially offset by$106.6 million of proceeds from theJune 2009 public offering of 4,600,000 shares of our Class A common stock at$24.50 per share and net cash inflows of$6.6 million from exercises of stock-based awards. We used the offering proceeds along with cash on hand to repay$108.0 million of our revolving credit facility, which represented the entire balance then outstanding. AtDecember 31, 2011 , we had long-term debt, including current portion, totaling$626.2 million , which comprised 39.5% of our total capitalization and$227.2 million of unused borrowing capacity. AtDecember 31, 2010 , we had long-term debt, including current portion, totaling$578.9 million , which comprised 41.5% of our total capitalization and$192.2 million of unused borrowing capacity. Based on current expectations, we believe our cash and other liquid assets, anticipated future cash flows, availability under our credit facility, access to debt and equity capital markets and sources of available financing will be sufficient to fund expected operating, capital and debt service requirements and other financial commitments for the foreseeable future. 53 -------------------------------------------------------------------------------- Cash Repatriation AtDecember 31, 2011 , we had cash and cash equivalents totaling$27.3 million , of which$13.0 million was held in our foreign subsidiaries. We file a consolidatedUnited States federal income tax return that includes all of ourUnited States subsidiaries. Each of our foreign subsidiaries files appropriate income tax returns in each of their respective countries. No provision is made forthe United States income taxes applicable to the undistributed earnings of controlled foreign subsidiaries as it is the intention of management to fully utilize those earnings in the operations of foreign subsidiaries. If the earnings were to be distributed in the future, those distributions may be subject toUnited States income taxes (appropriately reduced by available foreign tax credits) and withholding taxes payable to various foreign countries, however, the amount of the tax and credits is not practically determinable. The amount of undistributed earnings of our controlled foreign subsidiaries as ofDecember 31, 2011 was$155.4 million . Credit Agreement OnAugust 8, 2008 , we entered into the Second Amended and Restated Revolving Credit and Term Loan Agreement (the 2008 Agreement). The 2008 Agreement expanded the size of our senior credit facility to$570.0 million and extended the maturity date of the 2008 Agreement toOctober 1, 2013 . The 2008 Agreement included a$300.0 million revolving loan, a$240.0 million United States term loan and aC$31.2 million ($30.6 million at theDecember 31, 2011 exchange rate) Canadian term loan, as well as borrowing capacity for letters of credit and for borrowings on same-day notice referred to as swingline loans. OnJune 30, 2010 , we entered into Amendment No. 1 and Joinder to the Second Amended and Restated Revolving Credit and Term Loan Agreement (the Credit Agreement Amendment). The Credit Agreement Amendment facilitated the acquisition of the assets of FreightLink by GWA North. Among other matters, the Credit Agreement Amendment (i) amended the definition of Consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) to add back acquisition costs incurred in connection with the FreightLink Acquisition to EBITDA in an aggregate amount not to exceed$25 million ; (ii) amended the restrictions on indebtedness; and (iii) amended the restrictions on investments and restricted payments to permit certain intercompany obligations, investments and guarantees. The Credit Agreement Amendment also changed the definition of Consolidated EBITDAR (earnings before interest, taxes, depreciation, amortization, rental payments on operating leases and non-cash compensation expense) to give pro forma effect to the FreightLink Acquisition, allowed for an additionalUnited States borrower and amended certain covenants to permit the FreightLink Acquisition and the entry into related documentation. OnOctober 15, 2010 , we entered into Amendment No. 2 and Joinder to the Second Amended and Restated Revolving Credit and Term Loan Agreement, which provided, among other things, commitments for ourUnited States and Australian borrowers to draw an additional$50 million revolving loan which effectively increased our revolving loan capacity from$300.0 million to$350.0 million . OnJuly 29, 2011 , we entered into the Third Amended and Restated Revolving Credit and Term Loan Agreement (the Credit Agreement), which replaced the 2008 Agreement and the 2010 amendments. The Credit Agreement expanded the borrowing capacity of our senior credit facility from$620.0 million to$750.0 million and extended the maturity date toJuly 29, 2016 . The Credit Agreement includes a$425.0 million revolving loan, a$200.0 million United States term loan, anA$92.2 million ($100.0 million at theJuly 29, 2011 exchange rate) Australian term loan and aC$23.6 million ($25.0 million at theJuly 29, 2011 exchange rate) Canadian term loan. Under the revolving loan, we can borrow up to$425.0 million inUnited States dollars or we can borrow in Australian dollars, Canadian dollars or Euros, subject to the following sublimits: the Australian equivalent of$200.0 million , the Canadian equivalent of$35.0 million and the Euro equivalent of$25.0 million . The Credit Agreement allows for borrowings inUnited States dollars, Australian dollars, Canadian dollars and Euros. The Credit Agreement and revolving loans are guaranteed by substantially all of ourUnited States subsidiaries forthe United States guaranteed obligations and by substantially all of our foreign subsidiaries for the foreign guaranteed obligations. The Credit Agreement also includes (a) a$45.0 million sublimit for the issuance of standby letters of credit and (b) a sublimit for swingline loans including (i) up to$15.0 million with respect to each ofthe United States revolving loan, the Canadian revolving loan and the Australian revolving loan and (ii) up to$10.0 million with respect to the Euro revolving loan. Provided there is no event of default, on no more than two occasions, we may request an increase in (1) the size ofthe United States revolving loan and/or a term loan be made to us in an amount not to exceed$100.0 million and (2) the size of the Australian revolving loan and/or a term loan be made to our Australian subsidiaries in an amount not to exceed$50.0 million (and, together with the amount in clause (1),$100.0 million in the aggregate). Subject to various conditions, we may, one time per fiscal quarter, increasethe United States revolving loan amount by reducing and reallocating by an equivalent amount all or a portion of the foreign currency sublimits described above or increase any of the foreign currency sublimits described above by reducing and reallocating by an equivalent amount all or a portion ofthe United States revolving loan amount. As ofDecember 31, 2011 , our$425.0 million revolving loan consisted of$191.9 million of outstanding debt, subsidiary 54 -------------------------------------------------------------------------------- letters of credit guarantees of$5.9 million and$227.2 million of unused borrowing capacity. Interest rates for the revolving and term loans are based on theLIBOR rate plus applicable margin forthe United States , Canadian and European loans. The interest rates for the Australian revolving and term loans are based on the AUD BBSW plus applicable margin. As ofDecember 31, 2011 ,the United States , Australian and European revolving loans had interest rates of 1.80%, 6.00% and 2.52%, respectively, andthe United States , Australian and Canadian term loans had interest rates of 1.80%, 6.00% and 2.68%, respectively. As ofDecember 31, 2011 , we had a commitment fee of 0.30% on the unused borrowing capacity ofthe United States , Canadian, Australian and European revolving loans. Financial covenants, which are measured on a trailing 12-month basis and calculated quarterly, are as follows: a. Maximum leverage of 3.5 times, measured as Funded Debt (indebtedness plus guarantees and letters of credit by any of the borrowers, plus certain contingent acquisition purchase price amounts, plus the present value of all operating leases) to EBITDAR (earnings before interest, taxes, depreciation, amortization, rental payments on operating leases and non-cash compensation expense). b. Minimum interest coverage of 3.5 times, measured as EBITDA (earnings
before interest, taxes, depreciation and amortization) divided by interest
expense.
The Credit Agreement contains a number of covenants restricting our ability to incur additional indebtedness, create certain liens, make certain investments, sell assets, enter into certain sale and leaseback transactions, enter into certain consolidations or mergers unless deemed a permitted acquisition, issue subsidiary stock, enter into certain transactions with affiliates, enter into certain modifications to documents such as the senior notes and make other restricted payments consisting of stock repurchases and cash dividends. The Credit Agreement allows us to repurchase stock and pay dividends; provided that the ratio of Funded Debt to EBITDAR, including any borrowings made to fund the dividend or distribution, is less than 3.0 to 1.0 but subject to certain limitations if the ratio is greater than 2.25 to 1.0. As ofDecember 31, 2011 , we were in compliance with the covenant requirements of our Credit Agreement. Subject to maintaining compliance with these covenants, the$227.2 million of unused borrowing capacity as ofDecember 31, 2011 is available for working capital, capital expenditures, permitted investments, permitted acquisitions, refinancing existing indebtedness and general corporate purposes. Senior Notes In 2005, we completed a private placement of$100.0 million of Series B senior notes and$25.0 million of Series C senior notes. The Series B senior notes bear interest at 5.36% and are due inJuly 2015 . The Series C senior notes have a borrowing rate of three-monthLIBOR plus 0.70% and are due inJuly 2012 . As ofDecember 31, 2011 , the Series C senior notes had an interest rate of 1.12%. The senior notes are unsecured but are guaranteed by substantially all of ourUnited States and Canadian subsidiaries. The senior notes contain a number of covenants limiting our ability to incur additional indebtedness, sell assets, create certain liens, enter into certain consolidations or mergers and enter into certain transactions with affiliates. Financial covenants, which must be satisfied quarterly, include, among others, (a) maximum debt to capitalization of 65% and (b) minimum fixed charge coverage ratio of 1.75 times (measured as EBITDAR for the preceding 12 months divided by interest expense plus operating lease payments for the preceding 12 months). As ofDecember 31, 2011 , we were in compliance with these covenants. In 2004, we completed a$75.0 million private placement of Series A senior notes. The Series A senior notes bore interest at 4.85% and matured inNovember 2011 . OnNovember 1, 2011 , we repaid the$75.0 million of senior notes through$67.0 million of borrowings under our Credit Agreement and$8.0 million from cash and cash equivalents. Non-Interest Bearing Loan In 2010, as part of the FreightLink Acquisition, we assumed debt with a carrying value ofA$1.8 million (or$1.7 million at the exchange rate onDecember 1, 2010 ), which represented the fair value of anA$50.0 million (or$51.0 million at the exchange rate onDecember 31, 2011 ) non-interest bearing loan due in 2054. As ofDecember 31, 2011 , the carrying value of the loan was$2.0 million with an effective interest rate of 8.0%. Equipment and Property Leases We enter into operating leases for rail cars, locomotives and other equipment. As ofDecember 31, 2011 , we leased 10,315 rail cars and 21 locomotives. Related operating lease expense for the years endedDecember 31, 2011 , 2010 and 2009 was$19.0 million ,$13.1 million and$12.6 million , respectively. We lease certain real property, which resulted in operating 55 -------------------------------------------------------------------------------- lease expense for the years endedDecember 31, 2011 , 2010 and 2009 of$4.6 million ,$5.0 million and$4.6 million , respectively. In 2011, we purchased certain leased locomotive assets for$0.5 million . We are party to several lease agreements with Class I carriers to operate over various rail lines inNorth America . Certain of these lease agreements have annual lease payments. Under certain other of these leases, no payments to the lessors are required as long as certain operating conditions are met. No material payments were required under these lease agreements in 2011. Grants from Outside Parties Our railroads have received a number of project grants from federal, provincial, state and local agencies and other outside parties (e.g., customers) for upgrades and construction of rail lines and upgrades of locomotives. We use the grant funds as a supplement to our normal capital programs. In return for the grants, the railroads pledge to maintain various levels of service and improvements on the rail lines that have been upgraded or constructed. We believe the levels of service and improvements required under the grants are reasonable. However, we can offer no assurance that grants from outside parties will continue to be available or that even if available, our railroads will be able to obtain them. 2012 Budgeted Capital Expenditures The following table sets forth our budgeted capital expenditures for the year endedDecember 31, 2012 (dollars in thousands): 2012 Budgeted Capital Expenditures: Track and equipment improvements$ 149,100 New business development 36,100 Grants from outside parties (51,800 )
Net budgeted capital expenditures
We have historically relied primarily on cash generated from operations to fund working capital and capital expenditures relating to ongoing operations, while relying on borrowed funds and stock issuances to finance acquisitions and new investments. We believe our cash flow from operations will enable us to meet our liquidity and capital expenditure requirements relating to ongoing operations for at least the duration of the Credit Agreement. Contractual Obligations and Commercial Commitments As ofDecember 31, 2011 , we had contractual obligations and commercial commitments that could affect our financial condition. However, based on our assessment of the underlying provisions and circumstances of our material contractual obligations and commercial commitments, there is no known trend, demand, commitment, event or uncertainty that is reasonably likely to occur that would have a material adverse effect on our consolidated results of operations, financial condition or liquidity. The following table represents our obligations and commitments for future cash payments under various agreements as ofDecember 31, 2011 (dollars in thousands): Payments Due By Period Less than 1 More than 5 Total year 1-3 years 3-5 years years Contractual Obligations: Long-term debt obligations (1) $ 675,773 $ 57,146 $ 64,187 $ 503,198 $ 51,242 Interest on long-term debt (2) 131,280 21,283 39,304 22,521 48,172 Derivative instruments (3) 14,195 11,313 2,882 - - Capital lease obligations 363 22 47 50 244 Operating lease obligations 168,644 19,900 27,863 16,971 103,910 Purchase obligations (4) 91,267 66,217 25,050 - - Other long-term liabilities (5) 14,324 3,957 1,415 551 8,401 Total $ 1,095,846 $ 179,838 $ 160,748 $ 543,291 $ 211,969 56
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(1) Includes anA$50.0 million (or$51.0 million at the exchange rate onDecember 31, 2011 ) non-interest bearing loan due in 2054 assumed in the FreightLink Acquisition with a carrying value of$2.0 million as ofDecember 31, 2011 .
(2) Assumes no change in variable interest rates from
(3) Includes the fair value of our interest rate swap of
fair value of our cross-currency swap of
(4) Includes purchase commitments for future capital expenditures.
(5) Includes deferred compensation of$7.2 million , estimated casualty obligations of$2.0 million and certain other long-term liabilities of
medical and life insurance benefits of
contributions of
Off-Balance Sheet Arrangements An off-balance sheet arrangement includes any contractual obligation, agreement or transaction involving an unconsolidated entity under which we (1) have made guarantees, (2) have a retained or contingent interest in transferred assets, or a similar arrangement, that serves as credit, liquidity or market risk support to that entity for such assets, (3) have an obligation under certain derivative instruments, or (4) have any obligation arising out of a material variable interest in such an entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing or hedging services with us. Our off-balance sheet arrangements as ofDecember 31, 2011 consist of operating lease obligations, which are included in the contractual obligations table above. Impact of Foreign Currencies on Operating Revenues and Expenses When comparing the effects on revenues of average foreign currency exchange rates in effect during the year endedDecember 31, 2011 versus the year endedDecember 31, 2010 , foreign currency translation had a positive impact on our consolidated revenues due to the strengthening of the Australian and Canadian dollars and the Euro relative tothe United States dollar in the year endedDecember 31, 2011 . Since the world's major crude oil and refined products are traded inUnited States dollars, we believe there was little, if any, impact of foreign currency translation on our fuel sales to third parties inAustralia . Currency effects related to operating revenues and expenses are presented within the discussion of these respective items included within this "Management's Discussion and Analysis of Financial Condition and Results of Operations." Critical Accounting Policies and Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to use judgment and to make estimates and assumptions that affect reported assets, liabilities, revenues and expenses during the reporting period. Management uses its judgment in making significant estimates in the areas of recoverability and useful life of assets, as well as liabilities for casualty claims and income taxes. Actual results could materially differ from those estimates. Management has discussed the development and selection of the critical accounting estimates described below with the Audit Committee of the Board of Directors (Audit Committee), and the Audit Committee has reviewed our disclosure relating to such estimates in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." Business Combinations We account for businesses we acquire using the acquisition method of accounting. Under this method, all acquisition-related costs are expensed as incurred. We record the underlying net assets at their respective acquisition-date fair values. As part of this process, we identify and attribute values and estimated lives to property and equipment and intangible assets acquired. These determinations involve significant estimates and assumptions, including those with respect to future cash flows, discount rates and asset lives, and therefore require considerable judgment. These determinations affect the amount of depreciation and amortization expense recognized in future periods. The results of operations of acquired businesses are included in our consolidated statement of operations beginning on the respective business's acquisition date. Property and Equipment We record property and equipment at cost. We capitalize major renewals or improvements, but routine maintenance and repairs are expensed when incurred. We incur maintenance and repair expenses to keep our operations safe and fit for existing purpose. Major renewals or improvements, however, are undertaken to extend the useful life or increase the functionality of the asset, or both. When assessing spending for classification among capital or expense, we evaluate the substance of the respective spending. For example, costs incurred to modify a railroad bridge, either through individual projects or pre-established multi- 57 -------------------------------------------------------------------------------- year programs, which substantially upgrade the bridge's capacity to carry increased loading and/or to allow for a carrying speed beyond the original or existing capacity of the bridge, are capitalized. However, costs for replacement of routinely wearable bridge components, such as plates or bolts, are expensed as incurred. Other than a de minimis threshold under which costs are expensed as incurred, we do not apply pre-defined capitalization thresholds when assessing spending for classification among capital or expense. Unlike the Class I railroads that operate over extensive contiguous rail networks, our short line and regional railroads are geographically disparate businesses that transport freight over relatively short distances. As a result, we typically incur minimal spending on self-constructed assets and, instead, the vast majority of our capital spending relates to purchased assets installed by professional contractors. We also generally do not incur significant rail grinding or ballast cleaning expenses. However, if and when such costs are incurred, they are expensed. The following table sets forth our total net capitalized major renewals and improvements versus our total maintenance and repair expense for the years endedDecember 31, 2011 , 2010 and 2009 (dollars in thousands): 2011 2010
2009
Gross capitalized major renewals and improvements
$ 78,967 Grants from outside parties 22,642 40,802
24,575
Net capitalized major renewals and improvements
$ 54,392 Total repairs and maintenance expense $ 172,396 $ 128,191
We depreciate our property and equipment on the straight-line method over the useful lives of the property and equipment. The following table sets forth the estimated useful lives of our major classes of property and equipment: Estimated Useful Life (in Years) Property Minimum
Maximum
Buildings and leasehold improvements (subject to term of lease) 3 30 Bridges/tunnels/culverts 20 50 Track property 5 50 Equipment: Computer equipment 2 7 Locomotives and rail cars 5 30 Vehicles and mobile equipment 5
10
Signals and crossing equipment 10 30 Track equipment 5 10 Other equipment 3 20 We continually evaluate whether events and circumstances have occurred that indicate that our long-lived tangible assets may not be recoverable. When factors indicate that an asset should be evaluated for possible impairment, we use an estimate of the related undiscounted future cash flows over the remaining life of such asset in measuring whether or not impairment has occurred. If we identify impairment of an asset, we would report a loss to the extent that the carrying value of the related asset exceeds the fair value of such asset, as determined by valuation techniques applicable in the circumstances. Losses from impairment of assets are charged to net (gain)/loss on sale and impairment of assets within operating expenses. Gains or losses on sales, including sales of assets removed during track and equipment upgrade projects, or losses incurred through other dispositions, such as unanticipated retirement or destruction, are credited or charged to net loss/(gain) on sale and impairment of assets within operating expenses. Gains are recorded when realized if the sale value exceeds the remaining carrying value of the respective property and equipment. If the estimated salvage value is less than the remaining carrying value, we record the loss incurred equal to the respective asset's carrying value less salvage value. There were no material losses incurred through other dispositions from unanticipated or unusual events in the years endedDecember 31, 2011 , 2010 and 2009. Grants from Outside Parties Grants from outside parties are recorded as long-term liabilities and are amortized as a reduction to depreciation expense over the same period during which the associated assets are depreciated. 58 -------------------------------------------------------------------------------- Goodwill and Indefinite-Lived Intangible Assets We review the carrying values of identifiable intangible assets with indefinite lives and goodwill at least annually to assess impairment, since these assets are not amortized. We perform our annual impairment test as ofNovember 30 of each year, and no impairment was recognized for the years endedDecember 31, 2011 , 2010 and 2009, as a result of our annual impairment test. Additionally, we review the carrying value of any intangible asset or goodwill whenever such events or changes in circumstances indicate that its carrying amount may not be recoverable. The determination of fair value involves significant management judgment. Impairments are expensed when incurred. For 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 shall be recognized in an amount equal to that excess. For goodwill, a two-step impairment model is used. We first compare the fair value of a respective reporting unit with its carrying amount, including goodwill. The estimate of fair value of the respective reporting unit is based on the best information available as of the date of assessment, which primarily incorporates certain factors including our assumptions about operating results, business plans, income projections, anticipated future cash flows and market data. Second, 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 its implied fair value. Amortizable Intangible Assets We perform an impairment test on amortizable intangible assets when specific impairment indicators are present. We have amortizable intangible assets valued primarily as service agreements, customer contracts or relationships and track access agreements. These intangible assets are generally amortized on a straight-line basis over the expected economic longevity of the facility served, the customer relationship, or the length of the contract or agreement including expected renewals. Derailment and Property Damages, Personal Injuries and Third-Party Claims We maintain liability and property insurance coverage to mitigate the financial risk of providing rail and rail-related services. Our primary liability policies have self-insured retentions of up to$0.5 million per occurrence. With respect to the transportation of hazardous commodities, our liability policy covers sudden releases of hazardous materials, including expenses related to evacuation, as a result of a railroad accident. Personal injuries associated with grade crossing accidents are also covered under our liability policies. Accruals for FELA claims by our railroad employees and third-party personal injury or other claims are recorded in the period when such claims are determined to be probable and estimable. These estimates are updated in future periods as information develops. Our property damage policies have various self-insured retentions, which vary based on type and location of the incident, of up to$1.0 million . The self-insured retentions under our policies may change with each annual insurance renewal depending on our loss history and general insurance market conditions. Stock-Based Compensation The Compensation Committee of our Board of Directors (Compensation Committee) has discretion to determine grantees, grant dates, amounts of grants, vesting and expiration dates for grants to our employees under our Second Amended and Restated 2004 Omnibus Incentive Plan (the Omnibus Plan). The Omnibus Plan permits the issuance of stock options, restricted stock, restricted stock units and any other form of award established by the Compensation Committee, in each case consistent with the Omnibus Plan's purpose. Under the terms of the awards, equity grants for employees generally vest over three years and equity grants for directors vest over their respective remaining terms as directors. The grant date fair value of non-vested shares, less estimated forfeitures, is recorded to compensation expense on a straight-line basis over the vesting period. The fair value of each option grant is estimated on the date of grant using the Black-Scholes pricing model and straight-line amortization of compensation expense is recorded over the requisite service period of the grant. Two assumptions in the Black-Scholes pricing model require management judgment: the life of the option and the volatility of the stock over the life of the option. The assumption for the life is based on historical experience and is estimated for each grant. The assumption for the volatility of the stock is based on historical and implied volatility. The fair value of our restricted stock and restricted stock units is based on the closing market price of our Class A common stock on the date of grant. For the year endedDecember 31, 2011 , compensation cost from equity awards was$7.7 million . As ofDecember 31, 2011 , the compensation cost related to non-vested awards not yet recognized was$8.9 million , which will be recognized over the next three years with a weighted average period of 1.2 years. The total income tax benefit recognized in the consolidated statement of operations for equity awards was$2.6 million for the year endedDecember 31, 2011 . 59 -------------------------------------------------------------------------------- For the year endedDecember 31, 2010 , compensation cost from equity awards was$7.1 million . The total income tax benefit recognized in the consolidated statement of operations for equity awards was$2.5 million for the year endedDecember 31, 2010 . For the year endedDecember 31, 2009 , compensation cost from equity awards was$6.5 million . The total income tax benefit recognized in the consolidated statement of operations for equity awards was$1.8 million for the year endedDecember 31, 2009 . Income Taxes We account for income taxes under a balance sheet approach for the financial accounting and reporting of deferred income taxes. Deferred income taxes reflect the tax effect of temporary differences between the book and tax basis of assets and liabilities, as well as available income tax credits and capital and net operating loss carryforwards. In our consolidated balance sheets, these deferred obligations or benefits are classified as current or non-current based on the classification of the related asset or liability for financial reporting. A deferred income tax obligation or benefit that is not related to an asset or liability for financial reporting, including deferred income tax assets related to tax credit and loss carryforwards, is classified according to the expected reversal date of the temporary difference as of the end of the year. We evaluate on a quarterly basis whether, based on all available evidence, our deferred income tax assets will be realizable. Valuation allowances are established when it is estimated that it is more likely than not that the tax benefit of a deferred tax asset will not be realized. No provision is made forthe United States income taxes applicable to the undistributed earnings of controlled foreign subsidiaries because it is the intention of management to fully utilize those earnings in the operations of foreign subsidiaries. If the earnings were to be distributed in the future, those distributions may be subject toUnited States income taxes (appropriately reduced by available foreign tax credits) and withholding taxes payable to various foreign countries. The amount of undistributed earnings of our controlled foreign subsidiaries as ofDecember 31, 2011 was$155.4 million . Other Uncertainties Our operations and financial condition are subject to certain risks that could cause actual operating and financial results to differ materially from those expressed or forecasted in our forward-looking statements. For a complete description of our general risk factors including risk factors of foreign operations, see "Part 1. Item 1A. Risk Factors" in this Annual Report. Management believes that full consideration has been given to all relevant circumstances to which we may be currently subject, and the financial statements accurately reflect management's best estimate of our results of operations, financial condition and cash flows for the years presented. Recently Issued Accounting Standards See Note 21 to our Consolidated Financial Statements included elsewhere in this Annual Report. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk. We actively monitor our exposure to interest rate and foreign currency exchange rate risks and use derivative financial instruments to manage the impact of certain of these risks. We use derivatives only for purposes of managing risk associated with underlying exposures. We do not trade or use such instruments with the objective of earning financial gains from interest rate or exchange rate fluctuations, nor do we use such instruments where there are no underlying cash exposures. Complex instruments involving leverage or multipliers are not used. We manage our hedging positions and monitor the credit ratings of counterparties and do not anticipate losses due to counterparty nonperformance. Management believes that our use of derivative financial instruments to manage risk is in our best interest. However, our use of derivative financial instruments may result in short-term gains or losses and increased earnings volatility. 60 -------------------------------------------------------------------------------- Interest Rate Risk & Risk Sensitivity Our interest rate risk results from variable interest rate debt obligations, where an increase in interest rates would result in lower earnings and increased cash outflows. The following table presents principal cash flows from our debt obligations, related weighted average annual interest rates by expected maturity dates and estimated fair values as ofDecember 31, 2011 (dollars in thousands): 2012 2013 2014 2015 2016 Thereafter Total Fair Value Fixed rate debt: Series B senior notes $ - $ - $ - $ 100,000 $ - $ - $ 100,000 $ 107,704 Other debt (1) 439 384 392 4,869 221 51,486 57,791 7,775 Average annual interest rate 6.31 % 6.31 % 6.30 % 6.30 % 7.97 % 7.98 % 6.31 % Variable rate debt: Revolving credit facility: Australia $ - $ - $ - $ - $ 64,077 $ - $ 64,077 $ 63,229 Europe - - - - 4,342 - 4,342 4,139 United States - - - - 123,500 - 123,500 119,222 Term loans: Australia 9,415 9,415 9,415 9,415 51,783 - 89,443 88,299 Canada 2,314 2,314 2,314 2,314 12,727 - 21,983 21,226 United States 20,000 20,000 20,000 20,000 110,000 - 190,000 183,869 Series C senior notes 25,000 - - - - - 25,000 24,822 Average annual interest rate 2.96 % 3.25 % 3.70 % 4.17 %
4.41 % 0.00 % 3.05 % Total $ 57,168 $ 32,113 $ 32,121 $ 136,598 $ 366,650 $ 51,486 $ 676,136 $ 620,285 (1) Includes anA$50.0 million (or$51.0 million at the exchange rate onDecember 31, 2011 ) non-interest bearing loan due in 2054 assumed in the FreightLink Acquisition with a carrying value of$2.0 million as ofDecember 31, 2011 with an effective interest rate of 8.0% . The variable interest rates presented in the table above are based on the implied forward rates in the yield curve for borrowings denominated using United States LIBOR, Australia BBSW, Canadian LIBOR and Euro LIBOR (as ofDecember 31, 2011 ). The borrowing margin is composed of a weighted average of 1.50% forUnited States , Australian, Canadian and European borrowings under our Credit Agreement and 0.70% for our Series C senior notes. To the extent not mitigated by interest rate swap agreements, based on the table above, assuming a one percentage point increase in market interest rates, annual interest expense on our variable rate debt would increase by approximately$4.0 million . Furthermore, if we were to refinance all of our debt obligations in the current environment, we believe we would incur interest rates no worse, and potentially better, than our current rates. Fair Value of Financial Instruments We apply the following three-level hierarchy of valuation inputs as a framework for measuring fair value: • Level 1 - Quoted prices for identical assets or liabilities in active
markets that the Company has the ability to access at the measurement
date.
• Level 2 - Quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in
markets that are not active; and model-derived valuations in which all significant inputs are observable market data.
• Level 3 - Valuations derived from valuation techniques in which one or
more significant inputs are unobservable.
Since our long-term debt is not quoted, fair value was estimated using a discounted cash flow analysis based on Level 2 valuation inputs, including borrowing rates we believe are currently available to us for loans with similar terms and maturities. Primary inputs into the model that will cause the fair value of our debt to fluctuate period-to-period include the fixed interest rates, the future interest rates, credit risk and the remaining time to maturity of the debt obligations. We use interest rate swap agreements to manage our exposure to changes in interest rates of our variable rate debt. These agreements are recorded in the consolidated balance sheets at fair value. To value the interest rate swaps, a discounted cash 61 -------------------------------------------------------------------------------- flow model is utilized. Primary inputs into the model that will cause the fair value to fluctuate period-to-period include the fixed interest rates,LIBOR implied forward interest rates, credit risk and the remaining time to maturity of the interest rate swaps. Management's intention is to hold the interest rate swaps to maturity. Changes in the fair value of the agreements are recorded in net income or other comprehensive income (loss), based on whether the agreements are designated as part of a hedge transaction and whether the agreements are effective in offsetting the change in the value of the interest payments attributable to our variable rate debt. OnOctober 2, 2008 , we entered into an interest rate swap agreement to manage our exposure to interest rates on a portion of our outstanding borrowings. The swap has a notional amount of$120.0 million and requires us to pay 3.88% on the notional amount and allows us to receive one-monthLIBOR . This swap expires onSeptember 30, 2013 . The fair value of the interest rate swap agreement was estimated based on Level 2 valuation inputs. The fair value of the interest rate swap represented a liability of$7.0 million as ofDecember 31, 2011 . The one-monthLIBOR was set at 0.27% atDecember 31, 2011 . Foreign Currency Exchange Risk As ofDecember 31, 2011 ,$181.8 million of third-party debt related to our foreign operations was denominated in the currency of the countries in which our subsidiaries operate, includingAustralia ,Canada andEurope . The debt service obligations associated with this foreign currency debt are generally funded directly from those operations. As a result, foreign currency risk related to our debt service payments is limited. However, in the event foreign currency debt service, either interest, principal amortization or repayment due at maturity in <chron>July 2016, if not refinanced, is funded from ourUnited States operations, we may face exchange rate risk if the Australian or Canadian dollar or Euro were to appreciate relative tothe United States dollar and require higherUnited States dollar equivalent cash. We are also exposed to foreign currency exchange rate risk related to our operations, including non-functional currency intercompany debt, typically from ourUnited States operations to our foreign subsidiaries, and any timing difference between announcement and closing of an acquisition of a foreign business. From time to time, we may enter into certain derivative instruments that may not be designated as hedges for accounting purposes. To mitigate currency exposures related to intercompany debt, cross-currency swap contracts may be entered into for periods consistent with the underlying debt. In determining the fair value of the derivative contract, the significant inputs to valuation models are quoted market prices of similar instruments in active markets. To mitigate currency exposures of non-United States dollar denominated acquisitions, we may enter into foreign exchange forward contracts. Although these derivative contracts do not qualify for hedge accounting, we believe that such instruments are closely correlated with the underlying exposure, thus reducing the associated risk. The gains or losses from changes in the fair value of derivative instruments that are not accounted for as hedges are recognized in current period earnings within other income(expense). OnDecember 1, 2010 , we completed the FreightLink Acquisition forA$331.9 million (or$320.0 million at the exchange rate onDecember 1, 2010 ). We financed the acquisition through a combination of cash on hand and borrowings under our credit facility. A portion of the funds were transferred fromthe United States toAustralia through an intercompany loan with a notional amount ofA$105.0 million (or$100.6 million at the exchange rate onDecember 1, 2010 ). To mitigate the foreign currency exchange rate risk related to this non-functional currency intercompany loan, we entered into an Australian dollar/United States dollar floating to floating cross-currency swap agreement (the Swap), effective as ofDecember 1, 2010 , which effectively converted theA$105.0 million loan receivable inthe United States into a$100.6 million loan receivable. The Swap requires us to pay Australian dollar BBSW plus 3.125% based on a notional amount ofA$105.0 million and allows us to receiveUnited States LIBOR plus 2.48% based on a notional amount of$100.6 million on a quarterly basis. As a result of these quarterly net settlement payments, we realized a net expense of$5.9 million within interest (expense)/income related to the quarterly settlements of the Swap for the period endedDecember 31, 2011 . In addition, we recognized a net gain of$0.2 million within other income/(expense) related to the mark-to-market of the derivative agreement and the underlying intercompany debt instrument to the exchange rate onDecember 31, 2011 . The fair value of the cross-currency swap represented a current liability of$7.2 million as ofDecember 31, 2011 . The fair value of the cross-currency swap agreement was estimated based on Level 2 valuation inputs. The Swap expires onDecember 1, 2012 . 62 -------------------------------------------------------------------------------- The following table summarizes the impact of these foreign currency financial instruments on our statement of operations for the years endedDecember 31, 2011 and 2010 (dollars in thousands): Amount Recognized in Earnings Location of Amount Recognized in Earnings 2011 2010 Quarterly settlement under cross-currency swap Interest expense $ (5,935 ) $ (449 ) Mark-to-market of intercompany Other (expense)/income, debt net (216 ) 6,657 Mark-to-market of Other income/(expense), cross-currency swap net 462 (7,632 ) Foreign currency forward contracts Other expense, net - (716 ) $ (5,689 ) $ (2,140 ) Sensitivity to Diesel Fuel Prices We are exposed to fluctuations in diesel fuel prices since an increase in the price of diesel fuel would result in lower earnings and cash outflows. In the year endedDecember 31, 2011 , fuel costs for fuel used in operations represented 13.9% of our total expenses. As ofDecember 31, 2011 , we had not entered into any hedging transactions to manage this diesel fuel risk. We receive fuel surcharges and other rate adjustments that offset the impact of higher fuel prices. As ofDecember 31, 2011 , each one percentage point increase in the price of diesel fuel would result in a$0.9 million increase in our annual fuel expense to the extent not offset by higher fuel surcharges and/or rates. ITEM 8. Financial Statements and Supplementary Data. The financial statements and supplementary financial data required by this item are listed under Part IV. Item 15 following the signature page hereto and are incorporated by reference herein. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. ITEM 9A. Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as ofDecember 31, 2011 . Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as ofDecember 31, 2011 to accomplish their objectives at the reasonable assurance level. There were no changes in the Company's internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter endedDecember 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 63 -------------------------------------------------------------------------------- REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management ofGenesee & Wyoming Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our 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 accounting principles generally accepted inthe United States of America . Internal control over financial reporting includes those policies and procedures that: • pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets ofGenesee & Wyoming Inc. ;
• provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
accounting principles generally accepted in
• provide reasonable assurance that our receipts and expenditures are being
made only in accordance with the authorization of management and directors
of
• provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of assets that could have a
material effect on the consolidated 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. Management assessed the effectiveness of our internal control over financial reporting as ofDecember 31, 2011 . Management based this assessment on criteria for effective internal control over financial reporting described in the Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of theTreadway Commission . The Company's internal controls over financial reporting, established and maintained by management, are under the general oversight of the Company's Audit Committee. Management's assessment included an evaluation of the design of our internal control over financial reporting and testing of the operating effectiveness of our internal control over financial reporting. Based on this assessment, management determined that, as ofDecember 31, 2011 , we maintained effective internal control over financial reporting.PricewaterhouseCoopers LLP , an independent registered public accounting firm, which has audited and reported on the consolidated financial statements contained in this Annual Report on Form 10-K, has audited the effectiveness of the Company's internal control over financial reporting as stated in their report which is included herein under "Part IV. Item 15. Exhibits, Financial Statements and Schedules." 64
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