(Kansas City Southern issued the following news release on October 29.)
KANSAS CITY — Kansas City Southern (KCS or Company) (NYSE:KSU) reported net income of $4.3 million ($0.02 per diluted share) for the third quarter of 2003, compared to net income of $10.6 million ($0.17 per diluted share) for the third quarter of 2002. Consolidated revenues for the third quarter of 2003 were $146.3 million, compared to $138.9 million for the comparable 2002 period, a 5% increase. Operating income more than doubled to $14.9 million compared to $6.2 million during the third quarter last year. Consolidated KCS results were negatively affected by lower earnings from Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. (Grupo TFM) and a reduction in other income. In addition, KCS earnings per share for the third quarter of 2003 were impacted by the accumulated dividends for the 4.25% Redeemable Cumulative Convertible Perpetual Preferred Stock issued April 29, 2003. These preferred dividends reduced earnings per share by five cents in the third quarter of 2003.
For the nine months ended September 30, 2003, consolidated net income was $17.4 million ($0.20 per diluted share) compared to $36.8 million ($0.59 per diluted share). This $19.4 million decrease was the result of a $20.5 million decline in equity in net earnings of unconsolidated affiliates, a $10.5 million decline in other income, and a $9.0 increase in costs and expenses. Partially offsetting was a one-time $8.9 million benefit (net of tax) booked in the first quarter of 2003 relating to the cumulative effect of a required change in accounting for removal costs of certain track structure assets.
Third Quarter
Consolidated operating income for the third quarter of 2003 was $14.9 million, compared to $6.2 million for comparable 2002, an $8.7 million increase. Third quarter 2003 revenues increased by $7.4 million compared to third quarter of 2002. Consolidated costs and expenses decreased by $1.3 million quarter-to-quarter, principally due to decreases in car hire and compensation expenses, and further boosted by operating gains on property sales of $2.5 million compared to $0.7 million for the third quarter of 2002. Other income declined $4.5 million primarily due to a pre-tax gain of approximately $4.9 million recorded in the third quarter of 2002 related to the sale of the Company’s interest in Wyandotte Garage Corporation.
Third quarter 2003 revenues from the Company’s principal operating subsidiary, The Kansas City Southern Railway (KCSR) were $144.9 million compared to $137.6 million for third quarter of 2002, a $7.3 million (5%) increase. Agriculture & minerals revenues increased by $3.5 million, with strong gains in export grain, food products, and ores and minerals. Paper & forest products revenues grew $2.8 million, attributable to a 12% increase in pulp and paper revenues, and a 17% gain in lumber revenues. Chemical & petroleum products revenues declined $1.8 million quarter-to-quarter attributable to a $2.1 million decline in its plastics business which was due in part to the continued high price of natural gas. Coal revenues declined $0.8 million coming off record volume levels in 2002. Intermodal & automotive revenues were relatively unchanged versus corresponding 2002.
Third quarter 2003 KCSR expenses decreased $3.1 million (2%) compared with third quarter of 2002 primarily due to lower car hire ($2.8 million) and compensation ($2.2 million) expenses. KCSR casualty and insurance costs increased $2.3 million, and fuel costs increased by $2.2 million attributable to a 19% increase in the average price per gallon. KCSR’s third quarter of 2003 operating ratio was 87.5% compared with 94.3% for the comparable 2002 period.
The Company’s equity in earnings from Grupo TFM decreased approximately $8.2 million quarter-to-quarter. Grupo TFM’s third quarter revenues increased $2.9 million (2%) from third quarter of 2002. Operating income decreased $4.6 million quarter-to-quarter. As calculated under U.S. GAAP, Grupo TFM’s operating expenses increased approximately $7.5 million, primarily due to higher car hire, fuel, and purchased services expenses. 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’s consolidated revenues of $432.8 million for the first nine months of 2003 improved by $10.8 million over the prior year’s nine-month period, a 3% increase. Consolidated operating income was $35.9 million, compared with $34.1 million for the 2002 period. KCS’s other income for the first nine months of 2003 was $4.8 million, $10.5 million less than comparable 2002, due to a decline on sales of non-operating property. In the first nine months of 2002, the Company recorded a charge of $4.3 million related to debt retirement costs, and a gain of $4.4 million related to the sale to Grupo TFM of the Company’s ownership interest in Mexrail. Consolidated year-to-date interest expense increased $1.5 million (5%) from the same prior year period as a result of higher interest rates caused by a shift to fixed-rate debt.
Year-to-date 2003 revenues for KCSR were $428.3 million, an increase of $11.4 million (3%) from the previous year’s nine-month period. KCSR’s year-to-date 2003 costs and expenses were $9.1 million higher compared to the prior year primarily due to increased fuel ($7.5 million), purchased services ($4.3 million), and casualty and insurance ($2.8 million) expenses. Partially offsetting these increases was a $6.4 million reduction in car hire expense over the corresponding 2002 period.
The Company’s equity in earnings from Grupo TFM for the nine-month period ended September 30, 2003, decreased by approximately $21.4 million, in part caused by a period to period reduction of $18.4 million related to deferred tax benefits (calculated under U.S. GAAP) recorded by Grupo TFM. Also affecting the nine-month period was a $9.0 million decrease in Grupo TFM revenues, an $11.6 million increase in fuel costs, and a $7.7 million reduction in deferred employee profit sharing credits.
Comments from the Chairman
Michael R. Haverty, KCS’s Chairman, President and Chief Executive Officer stated, “We are encouraged with KCSR’s improved operating performance during the third quarter. Train velocity and on-time performance statistics rank KCSR at the forefront of the rail industry, which is a tribute to both KCSR’s operating personnel and to the substantial benefits achieved through the integration of MCS, the new computer operating platform, throughout the KCSR system.
“We are also cautiously optimistic that KCSR’s 5% percent revenue growth during the quarter is indicative of a strengthening economy and that it can continue to experience top line growth, especially in 2004. A combination of revenue growth and stringent cost controls resulted in KCSR operating income more than doubling over the previous year’s quarter, an acceptable achievement given a 25% increase in fuel costs, and continued high natural gas prices that affected plastics commodity group shipments.
“While Grupo TFM results were not as strong as we have experienced in so many past quarters, we were encouraged that its third quarter of 2003 revenues increased over the corresponding 2002 period, another sign that the North American economy may be gaining strength. We look forward to continued revenue growth at Grupo TFM along with a strong commitment by TFM management to control operating expenses.
“The ruling of the Court of Chancery of the State of Delaware granting KCS’s motion seeking a preliminary injunction preserves the status quo pending resolution of our dispute with Grupo TMM, S.A. (TMM). KCS remains committed to pursuing NAFTA Rail and will continue to aggressively pursue the integration of the three rail franchises.
“During the second quarter of 2003, we saw signs of an improving economy as, simultaneously, our U.S. rail operations were improving. Both of these trends continued during the third quarter, which gives rise to expectations that 2004 may very well be an improved year for KCS.”
KCS is composed 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.