(KCS issued the following news release on February 2.)
KANSAS CITY — Kansas City, MO. Kansas City Southern (NYSE:KSU) today reported record consolidated revenues for fourth quarter 2005 of $388.2 million. On a historical basis, this represents an increase of $213.6 million, substantially as a result of the acquisitions of the Texas Mexican Railway Company (Tex Mex) and KCSM.
Consolidated operating expenses for the fourth quarter of 2005 were $341.6 million versus $147.2 million in the fourth quarter of 2004, primarily due to the previously referenced acquisitions and increased fuel costs net of reduced depreciation at KCSM as a result of a depreciation study completed in the fourth quarter.
For the fourth quarter 2005, KCS recorded a net loss available to common shareholders of $4.1 million, or $(0.05) per diluted share, compared with a net loss available to common shareholders of $1.4 million, or $(0.02) per diluted share in the fourth quarter of 2004. Fourth quarter 2005 earnings were negatively impacted by the residual effects of Gulf Coast hurricanes Katrina and Rita, which resulted in an estimated $12.8 million reduction in operating income.
Year-to-Date 2005 Highlights
KCS reported consolidated earnings available to common shareholders of $1.03 per diluted share for 2005 compared with earnings available to common shareholders of $0.25 per diluted share in 2004. Adjusting 2004 earnings per diluted share for the effect of interest income received on certain income tax refunds ($0.10), results in normalized earnings per share of $0.15 for 2004. Similarly, adjusting earnings per diluted share for the gain on the VAT settlement ($1.42), the increase in claims reserves ($0.25), the write off of deferred profit sharing benefits in Mexico (PTU) of ($0.38) and the estimated impact to earnings from the hurricanes of $(0.16) nets to earnings of $0.41 per diluted share in 2005, nearly triple the adjusted 2004 earnings per share.
KCS also achieved record consolidated revenues for the year ended December 31, 2005 of $1.35 billion, which on a historical basis represents an increase of $712.5 million, primarily due to the completion of the acquisition of the Tex Mex on January 1, 2005, and acquisition of a controlling interest in KCSM on April 1, 2005.
Operating income for 2005 was $61.0 million compared to $83.5 million for 2004. The 2005 operating income reflects a third quarter charge of $37.8 million to increase claims reserves, a second quarter non-cash, pre-tax charge of $35.6 million related to the reversal of deferred profit sharing benefits in Mexican operations, and a $24.8 million reduction due to the Gulf Coast hurricanes. Net income available to common shareholders was $84.9 million, $1.03 per share on a diluted basis, compared with 2004 net income of $15.7 million, or $0.25 per diluted share. The 2005 net income incorporates income recognized on the third quarter settlement of the VAT claim in Mexico.
Comments from the Chairman
KCS Chairman, President & Chief Executive Officer Michael R. Haverty stated “Despite some of our U.S. customers suffering considerable residual effects from the two devastating Gulf Coast hurricanes, The Kansas City Southern Railway Company (KCSR), KCS’ primary U.S. subsidiary, achieved overall revenue growth of 8%, with four out of its five commodity groups posting quarter-over-quarter gains.
“The hurricanes had significant impacts on both revenues and expenses in the quarter. Katrina resulted in the rerouting of Class I connecting rail traffic away from the Gulf region, which caused congestion along parts of the KCSR system, as well as disrupting locomotive and freight car positioning and availability.
“Hurricane Rita had an even greater impact on revenues than Katrina. Twenty chemical plants and refineries were closed for varying periods in the fourth quarter and virtually all of the Gulf Coast plants served by KCSR operated at less than full capacity throughout the quarter. The forced closure of the New Orleans and Gulfport intermodal ramps also resulted in lost revenues.
“The total impact to fourth quarter U.S. revenues of the hurricanes was approximately $9.8 million, and the total revenue impact for the final four months of 2005 was approximately $14 million. In the first quarter of 2006, all chemical plants served by KCSR are back in operation, although three remain at less than full capacity.
“Revenues from KCS’ Mexican railroad subsidiary, KCSM, were up 4.8% in the fourth quarter compared with pre-acquisition fourth quarter 2004. Major emphasis during the quarter was placed on streamlining and centralizing key decision-making areas, focusing on improving revenue per car and adding capacity to the KCSM network. These will continue to be key themes in 2006, along with bringing pricing more in line with North American market practices and adding infrastructure to begin developing an International Intermodal Corridor between Lazaro Cardenas and Nuevo Laredo.
“During the fourth quarter KCS and the Norfolk Southern Corporation (NSC) entered into a joint venture partnership that will result in system improvements and capacity enhancements along the 320-mile Meridian Speedway between Shreveport, Louisiana, and Meridian, Mississippi. As part of the joint venture, NS will invest $300 million, which will be used primarily to more than double capacity on the Speedway, as well as improve transit times.
“The upgrade of the Meridian Speedway, along with major capacity expansion projects in the U.S. and Mexico, provide clear evidence of KCS’ commitment to growing cross-border traffic far beyond historical levels. With Asian imports playing an increasingly significant role in the North American economy, and Lazaro Cardenas being identified by maritime carriers as a primary Pacific port destination, the market potential exists for KCS to experience expansive long-term growth serving major Mexican and U.S. population centers.
“During 2006, investors should expect to see KCS make tangible progress in reducing operating costs, enhancing main line and key terminal infrastructure and capacity, and inaugurating expedited long haul service between Mexico and the U.S. The installation of MCS, KCS’ state-of-the-art transportation IT system, at KCSM in the second quarter, along with the implementation of SAP, a powerful resource planning system, which started in first quarter 2006 in the U.S., will provide us with the management tools to improve efficiency across both companies. Every project KCS commits to is designed to contribute to the development and management of a fully coordinated rail system that can handle increasingly greater traffic volumes at lower per unit cost over the next ten years.
“Certainly, 2005 presented challenges as we began to integrate the Tex-Mex, KCSM and KCSR systems into a seamless KCS network stretching from the heartland of the U.S. to the heartland of Mexico and the Pacific coast. Previously, all three railroads were essentially semi-autonomous and, as with any integration of companies, there have been issues involving management philosophy, management structure, changes in responsibility and job security. The good news is that most of these issues have either been resolved or will be resolved during the first quarter of 2006. Operationally, Mexico is improving dramatically and train movements across the U.S. – Mexico border have been more fluid than we have ever experienced in the past.
“When one looks at the complex integration issues which management has contended with during this past year, while also coping with the effects of two devastating hurricanes that hit the heart of our U.S. chemical franchise and severely crippled a major U.S. rail gateway, we are not disappointed with 2005, particularly in view of all of the positive ownership and strategic accomplishments throughout the year, and look forward to significant operational improvements in 2006 and beyond.”