(Kansas City Southern issued the following news release on July 30.)
KANSAS CITY, Mo. — Kansas City Southern reported a net loss of $0.5 million for the second quarter of 2003 compared to net income of $14.5 million ($0.23 per diluted share) for the second quarter of 2002.
Results for the second quarter of 2003 were negatively affected by lower earnings from Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. (Grupo TFM), which reported to KCS, under the equity method, a loss of $2.3 million for the quarter. Grupo TFM’s net income was impacted by deferred tax expense (as calculated under U.S. GAAP) primarily tied to the strengthened Mexican peso versus the U.S. dollar and the impact of lower future Mexican corporate tax rates on Grupo TFM’s deferred tax assets. Grupo TFM reported a deferred tax provision of $8.9 million for second quarter 2003 compared with a $33.6 million deferred tax benefit for the comparable 2002 period. KCS consolidated second-quarter revenues were $146.3 million, a 5% increase over second quarter 2002. KCS earnings per share for the quarter ended June 30, 2003, were impacted by the accumulated dividends for the 4.25% Redeemable Cumulative Convertible Perpetual Preferred Stock issued on April 29, 2003. These preferred dividends reduced earnings per share by two cents.
For the six months ended June 30, 2003, consolidated net income was $13.1 million ($0.19 per diluted share) compared with $26.2 million ($0.42 per diluted share) for the six months ended June 30, 2002. This $13.1 million decrease was the result of a $12.1 million decline in equity in net earnings of unconsolidated affiliates, a $10.3 million increase in costs and expenses, and a $6.0 million decline in other income. Partially offsetting these charges was a one-time $8.9 million benefit (net of tax) booked in first quarter 2003 relating to the cumulative effect of a required change in accounting for removal costs of certain track structure assets. The first six months of 2002 included a $4.4 million gain from the sale of Mexrail, Inc. (Mexrail) to TFM, S.A. de C.V. (TFM) and debt retirement costs of $4.3 million.
Consolidated operating income was $14.2 million for the second quarter of 2003 compared to $14.5 million for the second quarter of 2002. Second-quarter 2003 consolidated revenues increased $7.1 million compared to second quarter 2002. Consolidated costs and expenses increased by $7.4 million quarter to quarter due principally to increases in fuel, casualties and insurance, purchased services, and depreciation. Other income declined $2.9 million quarter to quarter primarily resulting from lower gains recorded on the sales of property in second quarter.
Second-quarter 2003 revenues from the Company’s principal operating subsidiary, The Kansas City Southern Railway Company (KCSR), were $144.6 million, an increase of $7.1 million over second quarter 2002. Revenues improved throughout most commodity groups at KCSR, including agriculture and minerals, paper and forest products, intermodal and coal. Agriculture and mineral revenues increased approximately $3.4 million due to growth in food products, ores and minerals, and domestic grain. Paper and forest product revenues increased approximately $4.3 million propelled by significant increases in pulp and paper, and lumber. Intermodal revenues increased approximately $0.4 million based on continued growth in intermodal traffic with Norfolk Southern and CSX, and coal revenues were approximately $0.5 million higher quarter to quarter on increased volumes. The only commodity group to experience a decline in the second quarter of 2003 was chemical and petroleum products with revenues approximately $3.2 million off those of second quarter 2002. Plastics and petroleum were responsible for virtually the entire decrease quarter to quarter. Persistently high natural gas prices contributed to the shortfall in those two commodity areas.
Second-quarter 2003 KCSR expenses increased $6.4 million compared with second quarter 2002 due primarily to higher expenses for depreciation ($2.2 million), fuel ($2.0 million), purchased services ($1.5 million), and casualties and insurance ($0.6 million). KCSR fuel costs rose quarter to quarter due to a 24% increase in the average price per gallon. KCSR’s fuel conservation program achieved a 1% decrease in fuel consumption quarter to quarter despite a 4% increase in carloadings. Depreciation expense increased principally from the company-wide installation of the Management Control System (MCS) computer operating system in July 2002. KCSR’s second-quarter 2003 operating ratio was 86.9% compared with 86.7% for second quarter 2002, and was improved from the 93.3% operating ratio in first quarter 2003.
Equity in earnings from Grupo TFM decreased approximately $15.3 million quarter to quarter, primarily due to the $42.5 million increase in the U.S. GAAP deferred tax expense reported at Grupo TFM resulting from the impact to the tax provisions of a strengthened Mexican peso versus the U.S. dollar, and lower future Mexican corporate tax rates. Grupo TFM’s second-quarter 2003 revenues decreased $9.7 million (5%) compared with second quarter of last year in part the result of a shift in the U.S. dollar/Mexican peso exchange rate (estimated impact of $4.2 million of $9.7 million decrease). Grupo TFM’s revenues increased 5% compared to the first quarter of 2003. As calculated under U.S. GAAP, Grupo TFM’s operating expenses were approximately $11.2 million (12%) higher quarter to quarter primarily due to an $11.0 million increase in a deferred profit-sharing charge, and a $4 million, or 33%, increase in fuel expense.
Also affecting equity in earnings was the impact of the Company’s increased ownership of Grupo TFM to 46.6% from 36.9%, which the Company obtained indirectly in July 2002 through the purchase by TFM of the Mexican government’s 24.6% ownership of Grupo TFM. Interest expense at Grupo TFM increased approximately $7.2 million in second quarter 2003 compared with second quarter 2002 primarily due to increased financing costs related to the acquisition of the Mexican government’s ownership share. The Company reports its equity in Grupo TFM under U.S. GAAP while Grupo TFM reports under International Accounting Standards (IAS).
Year to Date
KCS’ consolidated revenues of $286.5 million for the first six months of 2003 improved by $3.4 million over the prior year’s six-month period. Consolidated operating income was $21.0 million, compared with $27.9 million for the 2002 period. Year-to-date 2003 revenues for KCSR were $283.4 million, an increase of $4.2 million from the previous year’s six-month period. KCSR’s year-to-date 2003 costs and expenses were $12.1 million higher compared to the prior year resulting primarily from increases in fuel costs ($5.3 million), depreciation ($4.0 million), purchased services ($3.9 million), and compensation and fringes ($2.4 million). Partially offsetting these increases was a $4.2 million reduction in car hire and equipment lease costs for the first six months of 2003 compared to prior year six-month period.
The Company’s equity in earnings from Grupo TFM for the six-month period ending June 30, 2003, decreased by approximately $13.2 million, principally due to a reduction of $24.8 million of deferred tax benefits (calculated under U.S. GAAP) recorded by Grupo TFM. Also affecting the six-month period were a $12 million decrease in revenues, and a $15.0 million increase in operating expenses. Grupo TFM revenues were affected by the approximately $21.9 million impact of the shift in peso/dollar exchange rates, and a 23% decrease in automobile volume related to lower North American automobile sales. Also impacting equity in earnings from Grupo TFM were the Company’s increased ownership percentage of Grupo TFM, and higher interest expense at Grupo TFM due to the July 2002 acquisition of the Mexican government’s 24.6% ownership share.
KCS’ consolidated year-to-date interest expense increased $1.4 million (6%) from the same prior-year period as a result of higher interest rates caused by a shift to fixed-rate debt. Other income for the first six months of 2003 was $2.8 million, $6 million less than comparable 2002, due to a decline on sales of non-operating property. In the first half of 2002, the Company recorded a charge of $4.3 million related to debt retirement costs.
Comments from the Chairman
Michael R. Haverty, KCS’ Chairman, President and Chief Executive Officer, stated: “We are encouraged that during the second quarter, a number of KCSR’s operating and business metrics showed significant improvement. Train operating performance showed steady improvement and we are making headway with our asset utilization. Revenues in almost all of our business groups improved and we are cautiously optimistic that the national economy is strengthening, which we believe will allow us to build on this positive trend. Two items of concern are stubbornly high fuel prices and the current high price of natural gas that is having a negative impact on the plastics and petroleum industries, key components of our chemical and petroleum business.
“While it is clear that Grupo TFM revenues have been impacted by the North American economy, the increase in revenues in the second quarter over the first quarter is an indicator that business is picking up there as well. The reduction in equity earnings from Grupo TFM in the second quarter of 2003 is almost totally the product of U.S. GAAP tax calculations and is not tied to any underlying weakness in the franchise. Grupo TFM continues to strengthen its infrastructure and improve its operations and customer service. We believe it is still the railroad with the greatest growth potential in North America.
“The NAFTA Rail transaction continues to move ahead. During the second quarter, Mexico’s Competition Commission ruled that the change in majority ownership would not adversely affect competition. In August, we expect a ruling from the Foreign Investment Commission, the other Mexican regulatory entity that must endorse the transaction. We were also pleased with the decision of the Court of the First Circuit in Mexico reaffirming TFM’s right to the Value Added Tax (VAT) refund and remanding the case back to the Fiscal Court. We will continue to monitor closely the regulatory, legal and financial developments in the United States and Mexico that have bearing on the proposed NAFTA Rail transaction.
“With MCS now fully integrated into KCSR rail operations and having a significantly positive impact on service and operating efficiencies throughout our system, and with an economy beginning to pick up some steam, KCS looks forward to attaining financial and operational improvements during the second half of 2003.”
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.