UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
------------------
Commission File Number 0-19150
-------
WISCONSIN CENTRAL TRANSPORTATION CORPORATION
--------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3541743
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6250 North River Road, Suite 9000
Rosemont, Illinois 60018
------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (847) 318-4600
--------------
Indicate by check [X] whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X YES NO
--- ---
Indicate the number of shares outstanding of the
Issuer's common stock as of October 31, 1997: 51,006,842 shares
================================================================================
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION
FORM 10-Q
Quarter Ended September 30, 1997
CONTENTS PAGE
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets.......................................1
Consolidated Statements of Income.................................3
Consolidated Statements of Cash Flows.............................4
Notes to Consolidated Financial Statements........................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................9
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.................................13
Signatures....................................................................14
Index to Exhibits.............................................................15
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
Assets
September 30, December 31,
1997 1996
------------ -----------
(Unaudited) (Audited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................................. $ 6,447 $ 5,637
Receivables, net of allowance for doubtful accounts of $1,050
and $2,256 at September 30, 1997 and December 31, 1996............................. 80,865 74,118
Receivables from insurance companies.................................................. 1,289 7,425
Income taxes receivable............................................................... 592 2,804
Materials and supplies................................................................ 26,269 17,530
Deferred income taxes................................................................. 1,050 1,475
Other current assets.................................................................. 2,631 2,641
---------- ----------
Total current assets............................................................... 119,143 111,630
Investments in affiliates................................................................. 140,699 114,652
Properties:
Roadway and structures................................................................ 583,354 438,101
Equipment............................................................................. 111,336 90,683
---------- ----------
Total properties................................................................... 694,690 528,784
Less accumulated depreciation......................................................... (76,537) (63,791)
---------- ----------
Net properties..................................................................... 618,153 464,993
---------- ----------
Total assets....................................................................... $ 877,995 $ 691,275
========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these financial statements
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share amounts)
Liabilities and Stockholders' Equity
September 30, December 31,
1997 1996
------------ -----------
(Unaudited) (Audited)
<S> <C> <C>
Current liabilities:
Short-term debt....................................................................... $ 1,057 $ 731
Accounts payable...................................................................... 46,859 44,428
Accrued expenses...................................................................... 88,274 74,442
Accrued disputed switching charges and associated interest............................ 19,271 19,271
Other interest payable................................................................ 2,748 731
---------- ----------
Total current liabilities.......................................................... 158,209 139,603
Long-term debt............................................................................ 260,614 164,303
Other liabilities......................................................................... 4,610 4,028
Deferred income taxes..................................................................... 90,264 73,244
Deferred income........................................................................... 10,109 10,951
---------- ----------
Total liabilities.................................................................. 523,806 392,129
Stockholders' equity:
Preferred stock, par value $1.00; authorized 1,000,000
shares; none issued or outstanding................................................. --- ---
Common stock, par value $0.01; authorized 150,000,000 shares;
issued and outstanding, 50,998,742 shares at September 30, 1997
and 50,778,867 shares at December 31, 1996......................................... 510 508
Paid in capital....................................................................... 112,330 108,405
Cumulative currency translation adjustment............................................ 5,412 14,012
Retained earnings..................................................................... 235,937 176,221
---------- ----------
Total stockholders' equity......................................................... 354,189 299,146
---------- ----------
Total liabilities and stockholders' equity......................................... $ 877,995 $ 691,275
========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share amounts)
(Unaudited)
For the Quarter Ended For the Nine Months
September 30, Ended September 30,
------------------------ --------------------------
1997 1996 1997 1996
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Operating revenues:
Operating revenues before disputed
switching charges........................................ $ 85,168 $ 72,903 $ 250,422 $ 208,332
Disputed switching charges.................................. --- --- --- (13,278)
--------- --------- ---------- ----------
Operating revenues....................................... 85,168 72,903 250,422 195,054
Operating expenses:
Roadway and structures...................................... 11,693 8,454 34,524 27,650
Equipment................................................... 15,662 16,228 52,009 50,293
Transportation.............................................. 26,218 21,242 77,739 67,226
General and administrative.................................. 8,283 8,979 26,606 24,981
--------- --------- ---------- ----------
Operating expenses....................................... 61,856 54,903 190,878 170,150
--------- --------- ---------- ----------
Income from operations......................................... 23,312 18,000 59,544 24,904
Other income (expense):
Interest on disputed switching charges...................... --- --- --- (2,493)
Other interest expense...................................... (3,835) (2,573) (10,687) (6,953)
Other, net.................................................. 428 452 1,023 1,451
--------- --------- ---------- ----------
Total other income (expense), net........................ (3,407) (2,121) (9,664) (7,995)
--------- --------- ---------- ----------
Income before income taxes and equity in net income
of affiliates............................................... 19,905 15,879 49,880 16,909
Provision for income taxes..................................... 7,882 6,288 19,752 6,696
--------- --------- ---------- ----------
Income before equity in net income of affiliates............... 12,023 9,591 30,128 10,213
Equity in net income of affiliates............................. 9,378 7,480 29,588 22,452
--------- --------- ---------- ----------
Net income..................................................... $ 21,401 $ 17,071 $ 59,716 $ 32,665
========= ========= ========== ==========
Earnings per common share outstanding.......................... $ .42 $ .34 $ 1.17 $ .65
========= ========= ========== ==========
Average common shares outstanding.............................. 50,982 50,719 50,881 50,608
========= ========= ========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these financial statements
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
For the Nine Months Ended
September 30,
--------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................................... $ 59,716 $ 32,665
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 13,287 9,880
Deferred income taxes.............................................................. 19,657 6,043
Equity in net income of affiliates................................................. (29,588) (22,452)
Gains on property sales............................................................ (605) (849)
Net amortization of deferred gain on sale-leaseback of equipment................... (842) (1,180)
Changes in working capital:
Accounts receivable........................................................... (6,747) (18,364)
Receivables from insurance companies.......................................... 6,136 (8,264)
Note receivable............................................................... --- 13,213
Materials and supplies........................................................ (8,739) (2,481)
Other current assets, excluding deferred income taxes......................... (373) 710
Accrued derailment claims..................................................... (1,228) 3,927
Accrued disputed switching charges and associated interest.................... --- 15,771
Other current liabilities..................................................... 19,508 8,947
Other, net......................................................................... 582 263
--------- ---------
Net cash provided by operating activities.............................................. 70,764 37,829
--------- ---------
Cash flows from investing activities:
Property acquisition................................................................... (91,658) ---
Property additions..................................................................... (76,709) (47,251)
Property sales and other transactions.................................................. 3,708 2,546
Investments in affiliates.............................................................. (8,433) (30,676)
Dividend from affiliate................................................................ 3,374 ---
Deferred costs......................................................................... (800) (1)
--------- ---------
Net cash used for investing activities................................................. (170,518) (75,382)
--------- ---------
Cash flows from financing activities:
Long-term debt issued.................................................................. 96,637 39,091
Issuance of common stock under stock option plans...................................... 3,927 3,394
--------- ---------
Net cash provided by financing activities.............................................. 100,564 42,485
--------- ---------
Net increase in cash and cash equivalents.............................................. 810 4,932
Cash and cash equivalents, beginning of period......................................... 5,637 5,303
--------- ---------
Cash and cash equivalents, end of period............................................... $ 6,447 $ 10,235
========= =========
Supplemental cash flow information: Cash paid (received) during the period for:
Interest .......................................................................... $ 9,333 $ 6,848
Income taxes....................................................................... 95 (247)
The accompanying notes to consolidated financial statements
are an integral part of these financial statements
</TABLE>
-4-
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1997
Basis of Presentation
The consolidated financial statements presented herein include the results
of operations of Wisconsin Central Transportation Corporation ("WCTC") and its
wholly owned subsidiaries, Wisconsin Central Ltd. ("WCL"), Fox Valley & Western
Ltd. ("FV&W"), WCL Railcars, Inc., Sault Ste. Marie Bridge Company ("SSM"),
Wisconsin Central International, Inc. ("WCI"), WC Canada Holdings, Inc. and
Algoma Central Railway Inc. ("ACRI"). WCTC, through WCI, also holds a 23% equity
interest in Tranz Rail Holdings Limited ("Tranz Rail"), which operates a
nationwide railway in New Zealand, and a 34% equity interest in English Welsh
and Scottish Railway Holdings Limited ("EW&S"), whose subsidiaries provide most
of the freight railroad services in Great Britain. WCTC and its subsidiaries are
hereinafter referred to as the Company. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
Accordingly, these unaudited consolidated financial statements should be read in
conjunction with the Company's audited financial statements and the notes
thereto for the year ended December 31, 1996. In the opinion of management, the
information provided in these statements reflects all adjustments necessary to
present fairly such information. All such adjustments are of a normal recurring
nature. The results of operations for any interim period are not necessarily
indicative of the results of operations for the entire year.
Reclassifications
Certain amounts in the 1996 financial statements have been reclassified to
conform to the 1997 presentation. Included in these amounts were $1,078,000,
which was reclassified to operating revenues from non-operating income for the
quarter ended September 30, 1996, and $1,997,000 which was so reclassified for
the nine months ended September 30, 1996.
Duck Creek North Acquisition
On January 27, 1997, SSM completed the purchase of 207 route miles of
railroad track and trackage rights in Wisconsin and the Upper Peninsula of
Michigan from the Union Pacific Railroad Company ("UP"). The rail lines,
commonly known as the "Duck Creek North" lines, extend from North Green Bay,
Wisconsin to Ishpeming, Michigan; from Powers to Antoine, Michigan; from
Quinnesec, Michigan to Niagara, Wisconsin; and from Cascade to Palmer, Michigan.
Freight shipments over the lines consist of materials for the paper industry and
high volumes of iron ore used in steel-making which are shipped from the
Marquette ore range to Escanaba, Michigan for transloading to vessels. The rail
lines, together with contiguous property and associated facilities, were
acquired for approximately an $85.0 million cash purchase price plus provisions
for labor protection and other reserves of $2.8 million and deferred acquisition
costs of $0.8 million. The purchase was funded through borrowings under existing
revolving credit facilities. This acquisition is referred to herein as the "Duck
Creek North Acquisition".
-5-
<PAGE>
On January 6, 1997, two shippers on the Duck Creek North lines, Inland
Steel Company and LTV Steel Company, Inc., filed a petition with the Surface
Transportation Board ("STB") seeking to stay the transaction and seeking
imposition of labor protective conditions. The STB denied the stay, finding a
failure to demonstrate a likelihood of success on the merits. On January 28,
1997, the United Transportation Union also filed a petition seeking imposition
of labor protective conditions. Both petitions are pending at the STB. The
Company does not believe the outcome of either petition will have a material
impact on the Duck Creek North Acquisition.
Safety Compliance Agreement with FRA
On February 7, 1997, WCL and FV&W entered into a voluntary cooperative
Safety Compliance Agreement with the Federal Railroad Administration ("FRA")
pursuant to the Safety Assurance and Compliance Program ("SACP"). The SACP is a
program, initiated by the FRA in March of 1995, to permit railroads and the FRA
to develop and monitor agreed upon programs to improve safety conditions on a
systematic basis throughout a railroad. The SACP is focusing on improving track
conditions, inspection procedures and training for railroad employees. As a
result of the Safety Compliance Agreement, the Company has increased capital
expenditures which will improve safety and increase the utility of its track.
The Company also expects certain operating expenses to increase while the track
improvements are made.
English Welsh & Scottish Railway Holdings Limited
Through December 31, 1996, WCI had invested approximately $45.0 million in
EW&S for an approximate 31% ownership interest. The Company has been granted
performance-based options to acquire additional shares in EW&S to compensate it
for its leadership of the acquisition consortium, and has entered into a
management service agreement with EW&S, under which the Company earned
compensation of $0.6 million in the third quarter of 1997 and $1.8 million for
the nine months ended September 30, 1997. On February 21, 1997, the Company
invested an additional $8.4 million to exercise a portion of these options,
increasing its equity ownership position to approximately 34%. EW&S has issued
options to certain of its officers and directors, and warrants to the investment
banking firm that facilitated the acquisition of EW&S. Assuming that all options
and warrants are exercised, the Company's equity interest in EW&S will be
approximately 34%.
Wausau/Hayward Acquisition
On May 31, 1997, WCL began operations over 18 route miles of rail lines
serving Wausau and Hayward, Wisconsin. WCL acquired the track from the UP for
$3.9 million, subject to certain final adjustments. The Wausau trackage extends
ten miles from Wausau to Kelly, Wisconsin, plus a two-mile branch line from
Kelly to Schofield. The Hayward line extends six miles from Hayward to Hayward
Junction, connecting with WCL's main line between Chicago and Superior,
Wisconsin. The two line segments serve ten principal customers whose principal
commodities include roofing granules, paper products, steel, lumber and building
materials from Wausau and oriented board and wood chips from Hayward.
Tasrail Acquisition
On August 27, 1997, the Company announced that a consortium including WCI,
Tranz Rail, Berkshire Partners, and Fay, Richwhite & Co., Ltd. agreed to acquire
the stock of Tasrail ("TAS") from the Australian government. The total purchase
price is expected to be approximately US$16.5 million. TAS is part of the
Commonwealth of Australia's Australian National rail network. TAS operates a
vertically integrated
-6-
<PAGE>
network wholly within the State of Tasmania, and is the only commercial rail
freight operator in that island state. TAS generated approximately US$16 million
in revenues for its fiscal year ended June 30, 1997. In addition to the purchase
price, the consortium has also committed to spend approximately US$15 million
for capital expenditures over the next four years. WCTC is expected to have an
investment in TAS of approximately US$5 million.
BOCT Arbitration
On June 4, 1993, WCL was served with a complaint filed by the Baltimore and
Ohio Chicago Terminal Railroad Company ("BOCT") in the United States District
Court for the Northern District of Illinois, Eastern Division. In its complaint,
the BOCT claimed that WCL owed BOCT for intermediate switching and car hire
reclaim charges allegedly incurred from July 1988 through February 1993.
Arbitration hearings were held in Chicago from October 24, 1995 to November 9,
1995. On June 10, 1996, the arbitration panel ruled in favor of BOCT. The
arbitration panel's ruling, as supplemented, awarded BOCT $16.8 million of
disputed switching and car hire reclaim charges, and $2.5 million of interest
relating to such charges. Based upon the arbitration panel's ruling, the Company
recorded pretax provisions of $15.8 million in 1996, representing amounts
awarded in excess of previously recorded accruals. Additional interest through
September 30, 1997 of $1,046,000 has been accrued on the unpaid award amount and
is included in other interest expense in the consolidated statement of income.
The litigation between BOCT and the Company continues. The U.S. District
Court issued a final ruling on the case affirming the arbitration award on
August 28, 1997. WCL appealed this ruling to the U.S. Court of Appeals in
September 1997. Along with the appeal, WCL posted a $23.5 million letter of
credit payable to BOCT contingent upon the outcome of the appeal. Separately,
during the U.S. District Court proceedings, WCL was authorized to pursue with
the STB various matters included in the dispute. In April 1997, the Company
filed papers with the STB contesting substantially all BOCT switching charges.
Waukesha Environmental Matter
On April 2, 1996, WCL received a request for documents from the U.S.
Department of Justice ("DOJ") relating to the demolition of a foundry and
roundhouse on the Company's property in Waukesha, Wisconsin, performed by
contractors for WCL in 1993. A request for additional documents was received on
November 21, 1996. WCL has complied with the requests. Previously, in March
1994, WCL had received a notice of violation of the Clean Air Act (the "Act")
and the National Emission Standard for Asbestos (the "Asbestos NESHAP")
promulgated thereunder from the U.S. Environmental Protection Agency ("USEPA")
in connection with the demolition. The Notice of Violation alleged that the
Company violated the Clean Air Act and the Asbestos NESHAP because of the
failure of the demolition contractor hired by the Company to provide notice of
its intent to demolish a building containing asbestos and the failure of the
contractor to have on the site during demolition an authorized representative
trained in NESHAP. The Notice of Violation did not specify any penalty or demand
any relief. The USEPA held a conference with WCL on April 11, 1994 to discuss
the notice prior to a determination of any enforcement action to be taken under
section 113 of the Act. The Company has not been informed whether the 1996
request for documents is related to the 1994 Notice of Violation. In June of
1997, WCL was notified by the EPA that the DOJ had determined there was no cause
to seek criminal prosecution against WCL or any individual employees. The matter
has been referred to DOJ's Environmental and Natural Resources Division. If the
DOJ or the USEPA determines that a civil action should be brought against the
Company, the Company will vigorously defend itself. If it were to be determined
that WCL violated the Asbestos NESHAP or the Act, WCL could be subject to fines
of up to $25,000 per day for each violation for the Act as well as additional
fines for violation of NESHAP.
-7-
<PAGE>
Weyauwega Accident
On March 4, 1996, the Company had a derailment in Weyauwega, Wisconsin
involving thirty-five cars, fourteen of which contained propane or liquified
petroleum gas and two of which contained sodium hydroxide solution. Although no
one was injured in the derailment, all residents within two miles of the site
were evacuated for approximately sixteen days. In addition, many structures
received water damage as a result of frozen pipes. The total cost for the
derailment is currently estimated at $27.3 million. The Company believes that
its insurance policies will cover substantially all these costs, in excess of
the $2.5 million of deductibles. During the first quarter of 1996, the Company
recorded a pretax provision of $2.5 million for the combined deductibles under
its property damage and liability insurance policies. The Company's Consolidated
Balance Sheet includes an insurance receivable of $1.3 million as of September
30, 1997 for remaining unreimbursed claims. A complaint was filed against the
Company on March 26, 1996 by nine individuals seeking to represent the class of
persons who suffered damages as a result of this derailment. The complaint seeks
punitive and treble damages. Any punitive and treble damages may not be covered
by the Company's insurance. The amount of punitive and treble damages sought by
the plaintiff has not been specified. The amount accrued for these damages is
not material. The applicable standard for punitive damages is acting maliciously
or in intentional disregard of the rights of the plaintiff, and the applicable
standard for treble damages is willful and wanton violation of law. The Company
does not believe that the facts of the accident meet these standards. All
potential claimants were notified of the class action, and thirteen families and
two businesses joined the lawsuit which is in discovery phase. In addition, one
business has filed a separate suit for damages in the District Court of Waupaca
County. It is the opinion of management that the resolution of these
contingencies will not have a material adverse effect on the Company's results
of operations or its financial position.
On August 8, 1997, the National Transportation Safety Board ("NTSB")
released the results of its investigation of the incident, determining that the
probable cause of the accident was that a "switch point rail broke due to an
undetected bolt hole crack that progressed from improper maintenance because
Wisconsin Central did not ensure that the two employees responsible for
inspecting the track structure were properly trained." The employees in question
were each 20 year railroad veterans who met Federal Railway Administration track
inspector qualifications.
Union Representation of Certain Employees
On July 18, 1997, the National Mediation Board ("NMB") notified WCL, FV&W
and SSM that its locomotive engineers and conductors had designated the
Brotherhood of Locomotive Engineers ("BLE") and the United Transportation Union
("UTU"), respectively, as their collective bargaining agents. The NMB stated
that among engineers, 29.7% voted in favor of the BLE and 21.6% in favor of the
UTU. Among conductors, 43.6% voted in favor of the UTU and 17.0% in favor of the
BLE. Under the Railway Labor Act, a plurality of votes will elect a union when
50% or more of the employees vote in favor of union representation. The
designation of BLE as representative of 273 engineers and the UTU as
representative of 289 conductors is the first time unions have been elected to
represent employees in the Company's U.S. operations. Engineers and conductors
make up approximately 27% of the approximately 2,118 employees in the Company's
U.S. rail operations.
-8-
<PAGE>
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and related notes included herein.
Results of Operations: Third Quarter 1997 Compared to Third Quarter 1996
The Company's net income for the quarter ended September 30, 1997 was $21.4
million compared to $17.1 million for the same period in 1996.
Operating revenues. Operating revenues for the third quarter of 1997 were
$85.2 million, which was $12.3 million, or 17% higher than the year-ago period.
Gross revenues for the quarter ended September 30, 1997 increased in 10 of 15
commodity groups, compared with the same period in 1996. Volume, as measured by
carloads handled (including as a carload each loaded trailer or container), for
the quarter ended September 30, 1997 approximated 142,600 carloads compared with
approximately 118,900 carloads in 1996.
The business added by the Duck Creek North lines, which were acquired
January 27, 1997, contributed to the Company's overall increases in volume and
gross revenues. Metallic ore volume increased by more than 18,300 carloads, or
123%, from the same period in 1996, primarily as a result of the Duck Creek
North Acquisition.
Other large increases in revenues occurred in clay products, woodpulp,
pulpboard, wood fibers, scrap and intermodal. Volume and gross revenues for clay
products increased by 10% and 21%, respectively, due primarily to increased
consumption of coating clays used in the paper industry. Woodpulp volume and
gross revenues increased by 21% and 33%, respectively, due primarily to
increased demand by the paper industry. Gross revenues for pulpboard increased
by 8% primarily due to distribution changes by a major customer which resulted
in higher revenue per carload. Gross revenues for wood fibers increased by 8%
due primarily to increased demand by the paper industry. Volume and gross
revenues for scrap increased by 7% and 9%, respectively, primarily due to
increased demand for scrap steel by casting producers in the Company's operating
territory, as well as increased overall market share. Intermodal volume and
gross revenues increased by 17% and 28%, respectively, due to increased market
share and growth in the Company's joint rate intermodal service with Canadian
National Railway ("CN") which began on April 1, 1996.
Operating expenses. Operating expenses for the third quarter of 1997 were
$61.9 million, $7.0 million or 13% higher than last year. Increases in labor,
materials, contract services, casualty expense and depreciation were primarily
caused by increased volumes, the cooperative SACP agreement entered into with
the FRA as discussed in the Notes to Consolidated Financial Statements, and the
additional operations of the Duck Creek North lines. The Company's operating
ratio (operating expenses as a percentage of operating revenues) was 72.6% in
the third quarter of 1997, compared to 75.3% in the third quarter of 1996.
Labor expense increased by $2.1 million or 9% in the third quarter of 1997
as compared to the same period in 1996 primarily due to a 10% increase in the
work force and an average 3.5% increase in wages and salaries granted to
employees at the beginning of the year, offset by a reduction in the incentive
provision. Materials expense increased by $0.8 million or 14% primarily due to
increased repair costs for freight cars owned by other railroads, offset by
increased billings to such railroads, as well as the increased trackage and
facilities associated with the Duck Creek North Acquisition. Contract services
increased by $1.7 million or 61% primarily due to increased costs for contracted
train crews in response to the higher volume, as well as
-9-
<PAGE>
increased track and signal maintenance associated with the increased trackage
and facilities. Casualty expense increased by $2.3 million primarily due to
higher personal injury claim costs than in the same period in 1996. Depreciation
increased by $1.3 million or 38% primarily due to the addition of the Duck Creek
North lines.
Interest expense and income taxes. Interest expense increased $1.3 million
in the third quarter of 1997 to $3.8 million, primarily due to the increased
borrowings to finance the Duck Creek North Acquisition.
The income tax provision for the third quarter of 1997 was $7.9 million, an
increase of $1.6 million from the third quarter of 1996, due to the increase in
pre-tax income.
Equity in net income of affiliates. The Company's 1997 third quarter
results included equity in net income of its affiliates of $9.4 million as
compared to $7.5 million for the same period of 1996. The Company's equity in
the net income of Tranz Rail for the third quarter of 1997 was $1.1 million,
versus $1.5 million in the same quarter a year ago. The Company's equity in the
net income of EW&S for the third quarter of 1997 was $8.3 million versus $6.0
million in the same quarter a year ago. The EW&S third quarter 1997 contribution
includes a favorable adjustment of $1.9 million relating to EW&S's finalization
of a new contract which resulted in lower track access charges. The value in US
dollars of the Company's investments in companies outside the United States and
of the Company's equity in the earnings of those companies will fluctuate from
time to time as the value in US dollars of the currencies of those countries
fluctuates. Accordingly the Company's net worth and net earnings may fluctuate
as the value of those currencies fluctuates.
Results of Operations: First Nine Months of 1997 Compared to First Nine Months
of 1996
The Company's net income for the nine months ended September 30, 1997 was
$59.7 million compared with $32.7 million for the same period in 1996. Net
income for the first nine months of 1996 was reduced by $9.5 million due to the
BOCT arbitration award and $1.5 million due to the March 1996 derailment in
Weyauwega, Wisconsin, both discussed in the Notes to Consolidated Financial
Statements.
Operating revenues. Operating revenues during the nine months ended
September 30, 1997 were $250.4 million compared with $208.3 million for the same
period in 1996 (excluding the charges related to the BOCT arbitration ruling),
an increase of 20%. Gross revenues for the nine months ended September 30, 1997
increased in 14 of 15 commodity groups compared with the same period in 1996.
Volume, as measured by carloads handled (including as a carload each loaded
trailer or container), for the nine months ended September 30, 1997 approximated
425,800 carloads compared with approximately 346,700 carloads in 1996, an
increase of 79,100 carloads or approximately 23%.
Metallic ore volume and gross revenues increased by 89% and 62%,
respectively, due primarily to the acquisition of the Duck Creek North lines.
Intermodal volume increased by approximately 10,500 carloads or 24% compared to
the same period in 1996 primarily due to the new joint rate intermodal service
which the Company started on April 1, 1996 together with CN, as well as
increased market share.
Other large increases in WCTC's revenue totals occurred in paper, lumber,
clay products, scrap and woodpulp. Paper volume and gross revenues increased by
4% and 14%, respectively, from the year ago period, primarily due to an overall
strengthening in the paper market. Volume and gross revenues for lumber
increased by 10% and 16%, respectively, primarily due to increased market share
and higher revenues per carload due to longer hauls. Volume and gross revenues
for clay products increased by 19% and 32%,
-10-
<PAGE>
respectively, primarily due to increased demand for raw materials used in the
production of roofing materials, as well as increased demand for coating clays
used in the paper industry. Volume and gross revenues for scrap increased 9% and
13%, respectively, primarily due to increased demand for scrap steel by casting
producers in the Company's operating territory, as well as an increased overall
market share. Volume and gross revenues for woodpulp increased by 15% and 28%,
respectively, primarily due to increased demand by the paper industry.
Also contributing to operating revenues during the nine months ended
September 30, 1997 were management fees received from affiliates of $2.7
million, an increase of $1.0 million from 1996. In addition, operating revenues
during the first nine months of 1997 included rental income from Metra, the
commuter rail system for Northeastern Illinois, of $1.4 million compared with
$0.3 million during the first nine months of 1996. Metra commenced operation of
a commuter service on the Company's tracks between Chicago and Antioch, Illinois
in August 1996.
Operating expenses. Operating expenses for the first nine months of 1997
were $190.9 million compared with $170.2 million for the same period in 1996, an
increase of 12%. Increases in labor, fuel, equipment rents, materials, contract
services and depreciation were primarily caused by increased volumes, the
cooperative SACP agreement entered into with the FRA as discussed in the Notes
to Consolidated Financial Statements, and the additional operations of the Duck
Creek North lines. The Company's operating ratio (operating expenses as a
percentage of operating revenues) was 76.2% compared to 81.7% in the first nine
months of 1996 before the BOCT switching charges.
Labor expense increased by $6.9 million or 10% in the first nine months of
1997 as compared to the same period in 1996 primarily due to a 6% increase in
the work force to handle the increased volumes and an average 3.5% increase in
wages and salaries granted to employees at the beginning of the year. Fuel
expense increased by $1.1 million or 7% in the first nine months of 1997 as
compared with the same period of 1996 primarily due to a 4% increase in fuel
prices over 1996 as well as the increased volumes which led to a 3% increase in
fuel consumption. Net equipment rent expense increased by $2.1 million or 10%
primarily due to increased car hire costs as a result of overall increases in
operating congestion in the Company's operating territory. Materials expense
increased by $3.0 million or 17% in the first nine months of 1997 as compared
with the same period of 1996 primarily as a result of increased costs associated
with maintenance of the Company's car and locomotive fleet, as well as the
increased trackage and facilities associated with the Duck Creek North
Acquisition. Contract services increased by $3.8 million or 47% primarily due to
increased costs for contracted train crews in response to the higher volume, as
well as increased track and signal maintenance associated with the increased
trackage and facilities. Depreciation increased by $3.4 million or 36% primarily
due to the addition of the Duck Creek North lines.
Interest Expense and Income Taxes. Interest expense, excluding the interest
related to the BOCT arbitration ruling, increased $3.7 million in the first nine
months of 1997 to $10.7 million, primarily due to the increased borrowings to
finance the Duck Creek North Acquisition.
The income tax provision for the first nine months of 1997 was $19.8
million, an increase of $13.1 million over the first nine months of 1996, due to
the increase in pre-tax income.
Equity in net income of affiliates. The Company's 1997 first nine months
results included equity in net income of its affiliates of $29.6 million as
compared to $22.5 million for the same period of 1996. The Company's equity in
the net income of Tranz Rail for the first nine months of 1997 was $6.7 million,
versus $7.5 million in the same period a year ago. The Company received a
dividend in March 1997 from Tranz
-11-
<PAGE>
Rail in the amount of $3.4 million which was recorded as a reduction of the
Company's investments in affiliates. The Company's equity in the net income of
EW&S for the first nine months of 1997 was $22.9 million versus $14.9 million in
the same period a year ago. EW&S's 1996 contribution included less than a full
nine months of results for the trainload freight companies which were acquired
from British Rail on February 24, 1996. On February 21, 1997, the Company
invested an additional $8.4 million in EW&S, increasing its equity ownership
position from approximately 31% to approximately 34%. The value in US dollars of
the Company's investments in companies outside the United States and of the
Company's equity in the earnings of those companies will fluctuate from time to
time as the value in US dollars of the currencies of those countries fluctuates.
Accordingly the Company's net worth and net earnings may fluctuate as the value
of those currencies fluctuates.
Financial Condition: September 30, 1997 Compared to December 31, 1996
During the first nine months of 1997 the Company generated cash in the
amount of $77.8 million from operations, the cash dividend received from Tranz
Rail and the sale of assets and also generated $100.6 million from financing
activities. These resources were used to finance the $88.9 million in cash
purchase price for the Company's Duck Creek North and Wausau/Hayward line
acquisitions, the additional investment in EW&S of $8.4 million and other
capital-related expenditures of $76.7 million. The SACP agreement that the
Company entered into with the FRA as discussed in the Notes to Consolidated
Financial Statements has resulted in an increase in its 1997 roadway and
structures capital expenditures.
The Company had $261.7 million of total debt outstanding at September 30,
1997, which constituted 42.5% of its total capitalization, compared to 35.6% at
December 31, 1996. At September 30, 1997, the Company's aggregate unused
borrowing availability under its loan facilities totaled $60.5 million.
Disclaimer Regarding Forward-Looking Statements
This report contains certain statements that are "forward-looking", within
the meaning of Section 21E of the Securities Exchange Act of 1934, including
statements regarding, among other matters, the beliefs, expectations, plans and
estimates of the Company with respect to certain future events, the impact of
governmental regulation, the impact of litigation and regulatory proceedings,
the actions to be taken by others and similar expressions concerning matters
that are not historical facts. Such forward-looking statements are not
guarantees of future performance and involve known and unknown risks,
uncertainties and other factors that could cause actual events to differ
materially from those expressed in those statements.
-12-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The exhibits set forth on the accompanying Index to Exhibits are filed as
part of this report.
The Company filed no reports on Form 8-K during the quarter for which this
report is filed.
-13-
<PAGE>
WISCONSIN CENTRAL TRANSPORTATION CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WISCONSIN CENTRAL TRANSPORTATION
CORPORATION
Date: November 13, 1997 By: /s/ Walter C. Kelly
-----------------------------
Walter C. Kelly
Vice President, Finance
Date: November 13, 1997 By: /s/ Walter C. Kelly
------------------------------
Walter C. Kelly
Chief Accounting Officer
-14-
<PAGE>
INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit No. Description Page
- ---------- ----------- ----
11 Statement re Computation 18
of Per Share Earnings
27 Financial Data Schedule 19
-15-
<TABLE>
<CAPTION>
EXHIBIT NO. 11
Statement re Computation of Per Share Earnings
WISCONSIN CENTRAL TRANSPORTATION CORPORATION
(in thousands, except per share amounts)
(Unaudited)
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1997 1996 1997 1996
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net income................................................... $ 21,401 $ 17,071 $ 59,716 $ 32,665
========== ========= ========== ==========
Weighted average common shares outstanding:
Primary................................................. 50,982 50,719 50,881 50,608
========== ========= ========== ==========
Fully diluted........................................... 51,961 51,952 51,951 51,860
========== ========= ========== ==========
Earnings per common share outstanding:
Primary................................................. $ .42 $ .34 $ 1.17 $ .65
========== ========= ========== ==========
Fully diluted........................................... $ .41 $ .33 $ 1.15 $ .63
========== ========= ========== ==========
</TABLE>
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet at September 30, 1997 (unaudited) and the
Condensed Consolidated Statement of Income for the Nine Months Ended September
30, 1997 (unaudited) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,447
<SECURITIES> 0
<RECEIVABLES> 81,915
<ALLOWANCES> 1,050
<INVENTORY> 26,269
<CURRENT-ASSETS> 119,143
<PP&E> 694,690
<DEPRECIATION> 76,537
<TOTAL-ASSETS> 877,995
<CURRENT-LIABILITIES> 158,209
<BONDS> 260,614
0
0
<COMMON> 510
<OTHER-SE> 353,679
<TOTAL-LIABILITY-AND-EQUITY> 877,995
<SALES> 250,422
<TOTAL-REVENUES> 250,422
<CGS> 0
<TOTAL-COSTS> 190,878
<OTHER-EXPENSES> (1,023)
<LOSS-PROVISION> 167
<INTEREST-EXPENSE> 10,687
<INCOME-PRETAX> 49,880
<INCOME-TAX> 19,752
<INCOME-CONTINUING> 30,128
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,716
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.15
</TABLE>
