ST. AUGUSTINE, Fla.– Florida East Coast Industries, Inc. announced results for the third quarter and nine months ended September 30, 2002.
FECI reported consolidated revenues of $64.5 million for the third quarter 2002, compared to $65.8 million for the third quarter 2001. Revenues included realty sales of $2.6 million in the third quarter 2002 and $4.7 million in the third quarter 2001. The Company reported a net loss of $147.4 million, or $4.04 per diluted share, in the third quarter 2002, compared to net income of $2.0 million, or $0.05 per diluted share, in the prior year period. Third quarter 2002 results include a charge of $146.4 million after taxes, or $4.02 per share, to write down the entire book value of EPIK’s long-lived telecommunications assets.
The Company presents a pro forma statement of income to help show the ongoing performance of FECI’s Realty and Transportation businesses. Pro forma results exclude discontinued operations, EPIK, building and land sales, and certain identified items of a non-recurring or irregularly occurring nature. Pro forma revenues in the third quarter 2002 were $57.0 million versus $58.3 million in the third quarter 2001. Pro forma operating profit was $9.6 million in the third quarter 2002, compared to $13.2 million in the third quarter 2001. The decrease was primarily due to the lease termination and development fee recorded in the third quarter 2001. Pro forma income from continuing operations was $3.1 million, or $0.08 per diluted share, in the third quarter 2002, compared to $7.5 million, or $0.20 per diluted share, in the third quarter 2001, with the decrease reflecting increased net interest expense.
Robert W. Anestis, Chairman, President and Chief Executive Officer of Florida East Coast Industries, stated: “Florida East Coast Industries’ core Railway and Real Estate businesses have been the basis for the Company’s success and together hold a wealth of assets. We expect to capitalize on our unique Railway services in Florida and to continue growing our Florida Real Estate business.
“The Railway maintains the only direct route from Jacksonville to Miami, serving some of the most densely populated areas of Florida. The Railway’s strategy continues to be to grow revenue by acquiring new customers and expanding current customer relationships, while minimizing costs. Flagler, our Realty business, has 55 operating buildings totaling 5.9 million square feet and over 12,000 acres with 14.5 million square feet of entitlements. It benefits from Florida’s favorable demographic trends. Flagler’s business focus will continue to be commercial real estate ownership, management and development, by developing buildings to meet market demand and taking advantage of build-to-suit opportunities. Both the Railway and Flagler also maintain active programs of selling surplus real estate and redeploying the proceeds into growth projects.”
In discussing third quarter results, Mr. Anestis stated: “The Railroad continued to perform well in front of a challenging economic backdrop. The Railway’s operating ratio showed improvement over the prior year as carload revenues continued to improve. On the Real Estate side, we are making progress on several fronts. We closed on $2.6 million of surplus property in the third quarter and more recently closed on another $7.0 million. Currently, we have $76.0 million of surplus property now under contract for sale and expect most of the transactions to close by year-end. In addition, we sold a build-to-suit warehouse in Beacon Station Business Park, north of Miami, recognizing a $5.5 million pre-tax gain on the sale. We designated $19.7 million of property sale proceeds for possible redeployment into new realty investments via tax-free exchanges to further our Realty business growth. On the development front, Flagler will begin construction on a build-to-suit project in early 2003: a 60,000-square foot building in Gran Park at SouthPark in Orlando for Corinthian Colleges, Inc. In addition, construction began on the I-95 interchange to provide additional access to Flagler Center, a 932-acre park located in South Jacksonville, Florida.”
The Company maintained its previously stated guidance of full year 2002 pro forma operating profit and income from continuing operations of $42 to $44 million and $14 to $15 million, respectively. While the Company’s reclassification of trucking to discontinued operations will increase pro forma operating profit and income from continuing operations, this is completely offset by the loss of contributions from the two Flagler buildings, one sold in the third quarter and another placed under contract, due to their reclassification as discontinued operations, as well as the impact of the slow economic recovery on the Railway.
Transportation
Railway Results
Third quarter 2002 Railway segment revenues increased 2.3% to $40.0 million, compared to $39.1 million in the third quarter 2001, driven by consistent growth in carload revenues. The Railway operations’ EBITDA increased 11.8% to $14.3 million, compared to $12.8 million in the prior year. Operating profit improved 14.0% to $9.7 million in the third quarter 2002, compared to $8.5 million in the prior year period. The operating ratio decreased to 75.6% from 78.1% in the third quarter 2001 on greater revenues and reduced expenses.
Third quarter 2002 freight and carload revenues grew 2.4% and 5.7%, respectively, over the same period of 2001. Carload growth primarily reflects higher revenue from aggregate (crushed stone), which is up 4.7% as a result of strong construction demand, and customers achieving greater market share from joint initiatives with the Railway. In addition, revenues from foodstuffs grew 14.3% due to significant new business from Tropicana Products, Inc. and Gold Coast Beverage Distributors. Motor vehicle revenues also contributed to the increase, which is up 15.6% as renewed financing incentives and the introduction of 2003 models increased demand.
In the third quarter 2002, intermodal revenues declined 2.6%, primarily due to decreased demand from international transport customers and LTL (less than truckload) carriers. This was somewhat offset by higher interchange revenues from FLX and the “Hurricane Train,” a joint marketing alliance with Norfolk Southern that began in August 2001.
Operating expenses for the Railway were $30.2 million for the third quarter 2002, compared to $30.5 million for the third quarter 2001. Compared to the prior year quarter, the Company realized favorable car hire expenses of $1.0 million, lower fuel costs of $0.2 million, and a reduction in rail grinding expenses of $0.4 million as they had been incurred earlier this year in 2002. These lower expenses offset higher wages and benefits expenses of $1.0 million, which included an infrequent maximum medical coverage claim and severance costs as part of an ongoing cost reduction program, and increased depreciation expense of $0.3 million.
As previously announced, the results of intermodal drayage operations will be included in the Railway’s financial results during the fourth quarter 2002. As a result, there will be incremental revenues and expenses related to the operation that will be transitioned to the Railway.
For the year 2002, the Railway expects operating profit comparable to 2001, and capital expenditures of between $30-32 million.
Trucking Results
As a result of the Company’s decision to exit the regional long-haul trucking business, the results of Florida Express Carriers, Inc. (FLX) for all periods presented are included in discontinued operations. Of the estimated exit costs of approximately $5.2 million, $3.8 million has been accrued in the third quarter and included in discontinued operations.
Real Estate Results
Flagler’s rental and services revenues decreased to $14.5 million in the third quarter 2002 versus $16.7 million in the prior year period. Third quarter 2001 revenues included a lease termination settlement for $1.5 million and a development fee of $0.6 million. Excluding these items, total rental and services revenues were similar in the third quarter 2002, compared to the third quarter 2001, as revenues from new properties coming on line in 2001 offset a decline in “same store” revenues. EBITDA from Flagler’s operating properties’ rents decreased to $8.8 million for the third quarter 2002 from $11.3 million for the third quarter 2001, which included the previously mentioned lease termination settlement. Excluding the lease termination settlement, EBITDA from operating properties’ rents was $9.8 million in the third quarter 2001. Third quarter 2002 EBITDA from operating properties’ rents decreased primarily due to lower “same store” occupancy rates (84% in the third quarter 2002 versus 93% in the same period a year ago), reflecting a continuing soft market demand for commercial real estate, higher real estate taxes and insurance costs. These effects were only partially offset by the positive impact of new buildings coming on line in 2001.
During the third quarter 2002, Flagler sold an industrial building totaling approximately 300,000 square feet located in Beacon Station Business Park. By exercising an option, the tenant purchased the building for $18.2 million, and FECI reported a pre-tax gain of $5.5 million on the sale. In addition, Flagler entered into a contract to sell a 101,000-square foot building utilized as a call center in Beacon Station Business Park. This sale is expected to close in the fourth quarter 2002. Operating results from both buildings are included in discontinued operations for all periods presented. The gain on the sale of the building is included in discontinued operations for all 2002 periods presented. Further, occupancy for these buildings (100% occupied in both periods) has been excluded from Flagler’s occupancy rates for all periods presented.
Since Flagler has not yet seen a recovery in market demand, estimated 2002 capital investment has been reduced to range between $20 and $30 million from the previous estimate of between $35 and $45 million. Of the 2002 estimated capital investment dollars, $7 to $8 million has been earmarked for business park infrastructure that will position Flagler for further growth as demand for commercial and industrial space strengthens. Part of the infrastructure capital investment will be spent in the fourth quarter on the development of an I-95 interchange that will provide direct access to Flagler Center, formerly Gran Park at Jacksonville. Flagler has reaffirmed its prior guidance for rental and services revenue and EBITDA from operating properties’ rents, except for the impact of discontinued operations accounting for the two Beacon Station sales. As a result, rental and services revenues for the year are expected to range from $60 to $62 million, and EBITDA from operating properties’ rents is expected to range from $37 to $39 million.
In the third quarter 2002, land sales were $2.6 million, compared to $4.7 million in the third quarter 2001. The Company continues to pursue disposal of surplus land owned by the Railway and Flagler as it finds opportunities. Currently, Flagler and the Railway have surplus land listed for sale at asking prices totaling $60.6 million, and surplus property under contract for a total of $76.0. In addition, there is approximately $23.0 million of additional property under contract for sale.
Telecommunications Results
On June 20, 2002, the Company announced that it had retained Morgan Stanley to assist in a review of strategic alternatives for EPIK Communications Incorporated, its wholly owned telecommunications subsidiary. In its announcement, the Company had stated its expectation that if the Company should consummate a transaction involving EPIK, it likely would be for less than the book value, which would result in a non-cash charge to earnings. However, the Company cautioned that there could be no assurance the strategic review would result in a transaction involving EPIK.
The previously announced strategic alternatives review proceeded throughout and past the end of the third quarter, as a result of which the Company obtained new information about deteriorating conditions in the telecommunications industry, the prospects for EPIK’s business, the fair value of the Company’s investment in EPIK, and the alternatives available to the Company in respect of this investment. As a result, the Company has decided to exit the telecommunications business and has written down the entire remaining $238.1 million book value of EPIK’s long-lived telecommunications assets. The carrying value of EPIK’s other assets, consisting primarily of current assets, totaled $11.0 million at September 30, 2002. As required by SFAS 144, the Company has accounted for telecommunications as a continuing operation, though the Company may reclassify telecommunications to discontinued operations in the future if the criteria specified in SFAS 144 for discontinued operations accounting are met.
The Company presently intends to continue to support EPIK’s provision of service pursuant to existing customer obligations while the Company seeks to exit the telecommunications business. However, there can be no assurance that the Company will continue such support indefinitely. Although the Company has been seeking a single purchaser for EPIK or substantially all its assets, EPIK presently intends to seek to sell during the fourth quarter of 2002 those assets not needed to meet existing customer obligations. Given overcapacity and substantial amounts of excess equipment available for sale in the telecommunications industry, success in selling such assets is not assured, the amount of proceeds is not reasonably determinable, and any such proceeds are not expected to be material to the Company.
The Company has recorded a cumulative book deferred tax benefit of approximately $101 million related to EPIK’s long-lived telecommunications’ assets. This deferred tax asset is shown net in the deferred tax liability section of the Company’s consolidated balance sheets.
EPIK’s third quarter 2002 revenues were $4.8 million, compared to $2.9 million in the third quarter 2001. EPIK recognizes certain revenues from credit risk customers only as payments are received. EPIK recognized revenues of $0.2 million in the third quarter 2002 for services provided to credit risk customers in prior periods. Excluded were $0.2 million of services provided to credit risk customers in the quarter that will not be recognized as revenue until paid.
In the third quarter 2002, EPIK’s EBITDA loss from operations, excluding restructuring and impairment charges, was $3.4 million, compared to $4.9 million in second quarter 2002, and compared to $7.1 million in the third quarter of 2001. Operating expenses before depreciation, amortization, restructuring-related charges and impairment charges were $8.3 million in third quarter 2002, compared to $9.6 million in second quarter 2002, and compared to $10.0 million in the third quarter of 2001. These expenses continue to be consistent with the levels anticipated by the Company’s restructuring plan announced in November 2001. Capital expenditures were $1.1 million in the third quarter 2002, also consistent with the November restructuring plan.
At September 30, 2002, EPIK’s contracted revenue backlog stood at $99.0 million, $20.6 million of which is considered at credit risk. From the backlog, EPIK is scheduled to recognize revenues of $4.2 million in the remainder of 2002, $0.7 million of which is considered at credit risk.
Capital Investment and Interest Expense
During the third quarter 2002, the Company made capital investments of approximately $10.5 million, including $5.5 million at the Railway, $3.6 million at Flagler, and $1.1 million at EPIK. Net debt (debt less cash and equivalents and short-term investments) decreased to $243.9 million at September 30, 2002, compared to $269.4 million at the end of the second quarter 2002, primarily due to the receipt of proceeds from property sales, which represents $19.7 million of the $25.5 million reduction. Debt at September 30, 2002 was comprised of $244.4 million of non-recourse, fixed rate mortgage financing, and $28.0 million drawn under the Company’s $300 million revolving credit facility. Cash and equivalents increased to $28.5 million, which includes $19.7 million designated for possible use to purchase real property via tax-free exchange.
Net interest expense for the third quarter 2002 was $5.0 million, compared to $1.3 million in the third quarter 2001. The higher net interest expense resulted primarily from reduced capitalization of interest due to the completion of telecommunications network construction in late 2001.
About Florida East Coast Industries, Inc.
Florida East Coast Industries, Inc., headquartered in St. Augustine, Fla., conducts operations through three wholly owned subsidiaries, Flagler Development Company (Flagler), Florida East Coast Railway, L.L.C. (FECR), and EPIK Communications Incorporated (EPIK). Flagler owns, develops, leases and manages 6.7 million square feet of commercial and industrial space, and owns approximately 966 acres of entitled land and 12,000 acres of additional Florida properties. FECR is a regional freight railroad that operates 351 miles of main line track from Jacksonville to Miami. EPIK, based in Orlando, Fla., is a telecommunications provider. For more information, visit the Company’s website at http://www.feci.com.