KANSAS CITY, Mo. — Kansas City Southern (KCS) (NYSE:KSU) recorded second quarter 2007 revenues of $427.1 million, a 3.4% increase over second quarter 2006. The quarter-over-quarter revenue growth was primarily attributable to a continued strong pricing environment.
Second Quarter Highlights:
* Revenues of $427.1 million, a 3.4% increase over 2006.
* Operating income of $83.1 million increased 7.2%.
* Operating ratio improved to 80.5% compared with 81.2%.
* Refinancings result in annual $13 million pre-tax savings.
For the quarter, revenues for KCS’ automotive group increased by 17.8% over last year, a reflection of the growing importance of Mexico to the North American automotive industry. Coal revenues also experienced double-digit improvement increasing by 10.4% on strong volume. Chemical & petroleum products grew by 5.1%. Growth in grain business was a key driver leading to a 4.6% increase in agriculture & minerals, and despite a continued slow U.S. new homes market, paper & forest products revenues rose 1.2%. Finally, second quarter intermodal revenues were basically flat, increasing 0.6%. Intermodal continued to be challenged on a year-to-year comparative basis by the loss of certain haulage business. Excluding the impact of the haulage, second quarter 2007 intermodal revenues increased by approximately 14%. It is anticipated that the reduced haulage revenues will be partially replaced with new traffic created from a new haulage agreement that will utilize KCS’ Meridian Speedway beginning in the second half of the year.
Second quarter 2007 operating expenses totaled $344.0 million, a 2.5% increase. Operating income increased 7.2% to $83.1 million, and the second quarter operating ratio improved to 80.5% from 81.2% a year earlier. The Company’s operating ratio has improved in both the first and second quarter compared with the same periods in 2006.
Net income available to common shareholders in the second quarter totaled $25.3 million, or $0.30 per diluted share, compared with $19.2 million, or $0.24, in the second quarter 2006, a 25% increase in diluted earnings per share. Second quarter 2007 pre-tax income includes a cost of $6.9 million, or 6 cents per share on a dilutive basis, related to the refinancing of Kansas City Southern de México (KCSM) 12.5% senior notes and bank credit agreement. Excluding these refinancing costs in the quarter, KCS diluted earnings per share would have been $0.36 for the second quarter. Going forward, the KCSM refinancings will result in a significant pre-tax reduction in interest expense.
Comments from the Chairman
KCS Chairman and Chief Executive Officer Michael R. Haverty stated, “While we appreciate that the Company’s overall performance has remained positive despite a somewhat less robust economy in the first half of the year, KCS is determined to improve its operational and financial results in the second half of 2007.
“Going forward, KCS will benefit from some mid-year new business opportunities, which will strengthen volumes during the remainder of 2007. In addition, KCS will take delivery of 120 new locomotives during the second half of this year. These developments, among others, will contribute to our goal of achieving a full-year operating ratio below 80%.
“Considerable progress was made during the second quarter on two construction projects that have major long-term significance for KCS. Hutchison Port Holdings, which has the concession to operate the Port of Lázaro Cárdenas, has completed the work necessary to install the cranes on dock. The cranes are now on site and the schedule for Phase I operations continues to move toward an opening in late September. In addition, in late May, The Kansas City Southern Railway filed an application with the U.S. Railroad Administration (FRA) for a $100 million Railroad Rehabilitation and Improvement Financing (RRIF) loan to be used for the reconstruction of a rail line between Victoria and Rosenberg, Texas. Construction began immediately after the application was filed. When completed in late 2008, this new rail line will reduce KCS’ route to Mexico by approximately 70 miles and will result in lower costs and improved service, which are critical elements of our cross border intermodal growth strategy.
“Finally, during the second quarter we completed two key refinancings at KCSM, which will generate an annual pre-tax interest savings of $13 million. Since KCS acquired its controlling interest in KCSM in April 2005, KCSM has refinanced all of its senior unsecured indebtedness resulting in annual pre-tax interest savings of over $22 million.”
For the calculation of adjusted EPS, see the Reconciliation to GAAP schedule attached to the Company’s 8-K filing or the Company’s website at www.kcsouthern.com.
Headquartered in Kansas City, Mo., KCS is a transportation holding company that has railroad investments in the U.S., Mexico and Panama. Its primary U.S. holding includes KCSR, serving the central and south central U.S. Its international holdings include Kansas City Southern de Mexico, S.A. de C.V., serving northeastern and central Mexico and the port cities of Lázaro Cárdenas, Tampico and Veracruz, and a 50 percent interest in Panama Canal Railway Company, providing ocean-to-ocean freight and passenger service along the Panama Canal. KCS’ North American rail holdings and strategic alliances are primary components of a NAFTA Railway system, linking the commercial and industrial centers of the U.S., Canada and Mexico.