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Acquisitions Drive Genesee & Wyoming Inc's Revenue Higher

During the second quarter Genesee & Wyoming (NYSE: GWR) closed two acquisitions, which, when combined with other recent transactions, helped drive revenue growth. Meanwhile, the company's underlying profitability also improved, thanks to those deals as well as a turnaround in its U.K./Europe business, though higher interest expenses and taxes masked that improvement for the time being.

Genesee & Wyoming results: The raw numbers

Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Revenue

$540.4 million

$501.4 million

7.8%

Adjusted net income

$47.0 million

$49.9 million

(5.8%)

Adjusted EPS

$0.80

$0.81

(1.2%)

Data source: Genesee & Wyoming.

Image source: Getty Images.

What happened with Genesee & Wyoming this quarter? 

Recent acquisitions continue to drive results:

  • Revenue in North America edged up 3.6% to $315.7 million versus the year-ago period thanks to the contribution of the Heart of Georgia Railroad acquisition, which closed during the quarter, as well as the recently integrated Providence & Worcester Railroad. The company also benefited from higher revenue from shipping agricultural products, minerals, and stones. That said, despite the bump in revenue, adjusted operating earnings were flat at $81.1 million due primarily to higher labor costs.
  • The company's Australia segment delivered a 38.9% year-over-year increase in revenue, which rose to $76.8 million thanks to the impact of its Glencore Rail joint venture, as well as higher revenue from shipping metallic ores. Those factors drove adjusted operating income up 99% to $20.3 million.
  • The U.K./Europe segment showed some improvements during the quarter as revenue rose 4.5% to $148 million. Driving that increase was a $25.5 million top-line boost from the recently completed Pentalver Transport Limited transaction. However, without that transaction, revenue from the segment would have declined $7.3 million -- even after adjusting for an $11.8 million negative impact from foreign exchange rate fluctuations -- due to the continued restructuring of its ERS Railways operations. The legacy issue aside, the Pentalver deal helped boost the bottom line of the U.K./Europe segment as adjusted operating income jumped 73.5% to $5.9 million.
  • While revenue and adjusted operating income rose thanks to the impact of the company's recent transactions, adjusted net income slumped. One of the culprits was an increase in interest expenses, which rose from $17.7 million to $25.8 million due to the incremental debt needed to facilitate the acquisitions. In addition, the company's income taxes rose from $22 million to $29.6 million as a result of the increased operating income.
  • The company generated robust free cash flow of $94.3 million during the quarter, pushing its year-to-date total to $154.3 million. That's up from $85 million at this point last year.

What management had to say 

CEO Jack Hellmann summed up the company's second-quarter results:

In the second quarter of 2017, we closed on the acquisitions of the Heart of Georgia Railroad in the United States and Pentalver in the United Kingdom, we completed the restructuring of ERS in Continental Europe, and we reported financial results that were modestly stronger than expected, with reported diluted EPS of $0.74 and adjusted diluted EPS of $0.80. In North America, same railroad revenues remained flat overall while we maintained an operating ratio of approximately 75%. In Australia, our 51%-owned business performed well in the second full quarter since the acquisition of Glencore Rail, with higher same railroad shipments of iron ore and manganese and an operating ratio of approximately 74%. In the U.K./Europe, the turn-around in our financial performance became increasingly visible, a trend that we expect to continue through 2017 and beyond.

Genesee & Wyoming has completed several transactions over the past couple of quarters that have strengthened each of its operating areas. Those deals drove a noticeable improvement in revenue during the second quarter and should continue to do so in future periods. Also of note is the progress of the company's U.K./Europe business restructuring, which is on track, and the segment should start seeing improved profitability as a result. These factors lead the company to believe that its financial results should continue chugging along in 2017.

Looking forward 

While the company has its hands full integrating its recent acquisitions, that hasn't deterred it from seeking out new opportunities. Hellmann stated that "our year-to-date free cash flow was strong," which gives the company the capacity to continue evaluating "a range of acquisition and investment opportunities across our global footprint of railroads."

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Genesee & Wyoming. The Motley Fool has a disclosure policy.