(Kansas City Southern issued the following news release on April 29.)
KANSAS CITY — Kansas City Southern (“KCS” or “Company”) reported a $1.9 million increase in net income to $13.6 million (22 cents per diluted share) for the first quarter of 2003 compared to $11.7 million (19 cents per diluted share) for the first quarter of 2002. Net income for the first quarter of 2003 included a one-time favorable benefit of $8.9 million (net of income taxes) relating to the cumulative effect arising from a required change in the method of accounting for removal costs of certain track structure assets. First-quarter 2003 results also included a $5.2 million decline in income tax expense and a $2.1 million increase in equity in net earnings from the Company’s investment in Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. (“Grupo TFM”) compared to the first quarter of 2002. These positive factors were offset by a $6.6 million decline in operating income, a $3.1 million decrease in other income and a $0.2 million increase in interest expense quarter to quarter. Additionally, during the first quarter of 2002, KCS recorded a $4.4 million gain on the sale to TFM, S.A. de C.V. (“TFM”) of the Company’s ownership interest in Mexrail, Inc. (“Mexrail” — a former 49% owned unconsolidated affiliate). Mexrail wholly owns the Texas Mexican Railway Company (Tex-Mex).
Consolidated operating income was $6.8 million for the first quarter of 2003 compared to $13.4 million for the first quarter of 2002. This $6.6 million decline resulted from a $3.7 million reduction in revenues and a $2.9 increase in costs and expenses quarter to quarter. During the first quarter of 2003, revenues from the Company’s principal operating subsidiary, The Kansas City Southern Railway Company (“KCSR”) declined $2.9 million compared to the first quarter of 2002. Revenues from other subsidiaries were approximately $0.8 million lower quarter to quarter due to lower demand.
Revenues for certain commodity groups at KCSR, including paper and forest products, certain chemical products, and intermodal traffic continued to improve during the first quarter of 2003. Paper and forest product revenues increased $1.9 million quarter to quarter due to continued strength in the housing market and strong demand from paper mills served by KCSR. Chemical revenues increased due to certain plant expansions and new business and intermodal traffic increased approximately $0.9 million quarter to quarter. In addition, other KCSR revenues were approximately $1.6 million higher quarter to quarter due mostly to an increase in demurrage (rail car retention) revenue. These improvements, however, were offset by declines for coal, automotive and plastic revenues, which on a combined basis dropped $8.0 million quarter to quarter. Coal revenues declined $4.5 million due in part to the loss of certain business resulting from the expiration of a contract in the second quarter of 2002. Also contributing to lower coal revenues in the first quarter of 2003 was the impact of scheduled maintenance outages at several of KCSR’s electric utility customers, which by comparison, were longer in duration than the maintenance outages in the first quarter of 2002. In addition, most of the utilities served by KCSR were building inventory last year but reducing inventory in the first quarter of this year. Automotive revenues declined $2.3 million due to the loss of certain traffic in May 2002.
First-quarter 2003 consolidated costs and expenses increased $2.9 million compared to first quarter of 2002 due primarily to higher expenses for fuel, purchased services and depreciation. The most significant factor was higher fuel costs, which rose $3.3 million quarter to quarter due to a 42% increase in the average price per gallon arising from market conditions partially offset by a 6% reduction in fuel usage. Purchased services increased $1.1 million quarter to quarter and depreciation expense was $1.0 million higher due to the implementation of the Company’s transportation operating platform, Management Control System (“MCS”) in the third quarter of 2002. These costs were partially offset by dramatic improvements in car hire, which declined $3.0 million, or 58%, quarter to quarter due to the reduction of third party cars on KCSR’s rail lines coupled with improvements in fleet utilization, which reduced utilization lease payments. This improvement is a direct benefit of the implementation of MCS, which has enhanced the effectiveness of KCSR’s operations management. The Company’s consolidated operating ratio was 95.1% for the first quarter of 2003 compared to 90.7% for the same period last year.
Equity in earnings from Grupo TFM increased approximately $2.1 million quarter to quarter. This increase included the impact of the Company’s increased ownership of Grupo TFM to 46.6% from 36.9%, which the Company obtained indirectly through the purchase by TFM of the Mexican government’s former 24.6% ownership of Grupo TFM in July 2002. Grupo TFM’s first-quarter 2003 revenues declined approximately 1% and operating expenses were approximately 1% higher compared to the first quarter of 2002. First-quarter 2003 results for Grupo TFM include a $23.0 million deferred income tax benefit (calculated under accounting principles generally accepted in the United States of America — “U.S. GAAP”) compared to a deferred income tax benefit of $5.3 million in the first quarter of 2002. This variance was caused by fluctuations in the peso exchange rate and benefits derived from the impact of inflation on net operating losses in Mexico. The Company reports its equity in Grupo TFM under U.S. GAAP while Grupo TFM reports under International Accounting Standards.
Other income declined approximately $3.1 million quarter to quarter primarily as a result of higher gains recorded on the sales of property in the first quarter of 2002.
Comments from the Chairman
Michael R. Haverty, KCS Chairman, President and Chief Executive Officer, said: “We have been encouraged by signs of economic growth in certain commodity segments during the first three months of 2003. Overall revenues, however, continued to be unfavorably impacted by the uncertain economy while first-quarter operating expenses were negatively affected, primarily by higher fuel costs. The MCS system, however, is now operating effectively and management expects that, as the Company moves forward through 2003, we will experience increased accessorial revenues and a reduction in costs, as evidenced by reduced car hire expense this quarter, as operating personnel move further down the learning curve and are better able to leverage the benefits of this system.
“Grupo TFM continues to be one of the rail transportation leaders in North America and the most profitable segment of our business. We are very excited about the long-term growth prospects of this rail franchise as evidenced by the recent announcement to place KCSR, Tex Mex and TFM under the common control of a single transportation holding company, NAFTA Rail. We believe that by placing these three railroads together under common control, competition will be enhanced and shippers in the NAFTA trade corridor will have a strong transportation alternative as they make their decisions to move goods between the United States, Mexico and Canada. KCS already owns KCSR and has significant investments in Tex-Mex and TFM, so this is just a natural business progression offering KCS and Grupo TMM shareholders greater value through the operating efficiencies that will come from common ownership and control.
“As we look to the remainder of 2003, KCSR management will be focused on improving its domestic operating results. KCS will also be strategically focused on the transaction to place KCSR, Tex-Mex and TFM under common control in order to realize the shareholder value that this transaction is expected to provide. 2003 is shaping up to be a year filled with great opportunities and we look forward to capitalizing on these opportunities.”
KCS is comprised of, among others, The Kansas City Southern Railway Company (“KCSR”) and equity investments in Grupo TFM, Southern Capital Corporation (“Southern Capital”) and Panama Canal Railway Company (“PCRC”).
This press release includes statements concerning potential future events involving the Company, which could materially differ from the events that actually occur. The differences could be caused by a number of factors, including those factors identified in a Current Report on Form 8-K dated December 11, 2001, filed by the Company with the Securities and Exchange Commission (“SEC”) (Commission file no. 1-4717). The Company will not update any forward-looking statements in this press release to reflect future events or developments.