Record Fourth Quarter and Year-End 2004 Performance; Reduction in Future Mexican Tax Rates
Kansas City, MO.Kansas City Southern (KCS or Company) (NYSE:KSU) today reported record fourth quarter and year-end 2004 revenues and operating income led by its primary domestic subsidiary, the Kansas City Southern Railway Company (KCSR), reflecting ongoing operational efficiency and its importance in an expanding North American economy.
Fourth Quarter 2004 Highlights
•
KCS reached record consolidated revenues in the fourth quarter 2004 of $174.6 million, an increase of $26.1 million, or17.6%, over fourth quarter 2003.
•
KCSR revenues for fourth quarter 2004 were a record $173.7 million, increasing $26.7 million, or 18.2%, over fourth quarter 2003.
•
KCS and KCSR have reported 7 consecutive quarter-over-quarter gains in revenues.
•
KCSR’s operating income for the fourth quarter 2004 was a record $31.7 million.
Driven by KCSR’s record fourth quarter revenues of $173.7 million, KCS reported substantial quarter-over-quarter gains in revenues and operating income. Consolidated KCS revenues increased to $174.6 million, a $26.1 million increase over the 2003 period. KCS operating income for fourth quarter 2004 was $27.4 million, compared to an operating loss of $6.8 million in 2003 which was impacted by a $21.1 million pre-tax increase in claims reserves.
All of KCSR’s commodity groups posted quarter-over-quarter revenue gains led by Paper & Forest Products, which increased 33.1%. Paper, wood pulp and military shipments were the primary drivers of the substantial gain. Intermodal & Automotive continued to rebound, recording a 19.2% quarter-over-quarter gain based on strong intermodal growth. Agriculture & Minerals increased 16.4%, led by growth in minerals, stone and export grain. Chemicals & Petroleum increased 11.5 %, driven by the good performance of its petroleum segment. Finally, unit coal train revenues increased 7.0 % with all plants served by KCSR returning to more normalized activity levels.
1
KCSR’s fourth quarter 2004 expenses of $142.0 million were $14.2 million, or 11.1 %, higher than the comparable period in 2003, excluding last year’s $21.1 million adjustment to increase reserves. Fuel costs were responsible for $8.3 million of that increase, and the increase in all other costs was 4.6 %. KCSR’s fourth quarter operating income reached a record $31.7 million. KCSR’s enhanced profitability resulted in a fourth quarter 2004 operating ratio of 81.8 %, a significant improvement over 86.9 % for the fourth quarter 2003.
Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V.’s (Grupo TFM) fourth quarter 2004 carload volumes increased 13.7% quarter-over-quarter, led by a 20 % gain in intermodal business. Grupo TFM’s revenues were $173.5 million in the fourth quarter 2004 compared to $175.2 million in 2003, which included $15.2 million in revenues from its Mexrail, Inc. (Mexrail) subsidiary. Mexrail, which came under KCS control on January 1, 2005, was operated under a voting trust from August 2004, while the U.S. Surface Transportation Board reviewed KCS’ control application.
Grupo TFM operating income was $32.1 million for the fourth quarter 2004 compared to $36.9 million in 2003, which included a $0.8 million operating loss from Mexrail. The primary driver responsible for the lower 2004 operating income was TFM, S.A. de C.V. (TFM) locomotive fuel expense, which was $8.4 million higher than in fourth quarter 2003.
In the fourth quarter, Mexico enacted legislation that lowered future corporate income tax rates. In 2004, the corporate income tax rate in Mexico was 33 %, but that will drop to 30% in 2005, 29% in 2006 and 28% in 2007. The lowering of corporate tax rates in Mexico will benefit Mexican business and Grupo TFM going forward. Under U.S. GAAP FAS 109 treatment, Grupo TFM was required to record a non-cash charge that impacted KCS fourth quarter 2004 equity earnings from Grupo TFM by $8.8 million, or $0.14 per KCS share. This charge was necessary because Grupo TFM carries nearly $690 million net deferred tax deductions as an asset on its balance sheet. The new lower future tax rates resulted in a reduction in the carrying value of those future tax deductions.
KCS recorded net income for fourth quarter 2004 of $0.7 million, including the impact on equity earnings of this non-cash tax provision. This compares with a fourth quarter 2003 net loss of $6.2 million, which was impacted by the $21.1 million pre-tax increase in claims reserves.
2
2004 Year-End Highlights
•
KCS reached record consolidated revenues in 2004 of $639.5 million, an increase of $58.2 million, or 10.0 %, over 2003.
•
KCSR revenues for 2004 were a record $635.7 million, an increase of $60.4 million, or 10.5 %, over 2003.
•
KCSR’s operating income for 2004 was $101.0 million.
KCS 2004 consolidated net income available to common shareholders was $15.7 million, or $0.25 per diluted share in 2004 compared with $6.3 million, or $0.10 per diluted share in 2003. Year-end 2003 results were affected by a $21.1 million adjustment in claims reserves made in the fourth quarter of 2003, which was partially offset by a $8.9 million increase in net income related to the cumulative effect of a required change in accounting. The improvement in KCS earnings year-over-year was attributable to the performance of KCSR, which posted record revenues during 2004.
KCSR’s year-end 2004 revenues of $635.7 million increased $60.4 million, or 10.5%, over the 2003 total of $575.3 million. Traffic volumes increased approximately 5.4% in 2004 compared with the prior year.
KCSR 2004 expenses were $534.7 million, an increase of $25.0 million compared with $509.7 million for the prior year excluding the $21.1 million adjustment to increase claims reserves in 2003. Fuel costs accounted for $18.6 million of that increase. The net increase in all other costs was held to only $6.4 million or 1.3 %. Most of the increase in fuel costs was recovered through fuel surcharges.
KCSR operating income increased to $101.0 million from $44.5 million in 2003. For 2004, KCSR’s operating ratio was 84.1 %, an improvement from 88.6 % in 2003, excluding the impact of a $21.1 million increase in claims reserves the prior year.
For the year ended December 31, 2004, Grupo TFM carloads were up 7 % led by strong year-over-year business growth in chemicals, metals, minerals and industrial products. Grupo TFM revenues totaled $700.4 million compared with $698.5 million for the prior year. Excluding the impact of revenues for Mexrail in both years, 2004 revenues for TFM were $665.5 million, or 3.7% higher than the $641.4 million reported in 2003.
Operating income for Grupo TFM was $132.1 million for 2004 which compares to $140.0 million for 2003. Eliminating the impact of Mexrail for both years, Grupo TFM’s operating income declined 6.3% to $135.1 million in 2004 down from $144.1 million. A $20.6 million increase in locomotive fuel expense was the principal cost variance lowering operating profits in 2004.
3
Equity earnings from Grupo TFM in 2004 were $14.7 million lower due primarily to the non-cash charge to deferred taxes and higher fuel expense.
Comments From the Chairman
KCS’ Chairman, President and Chief Executive Officer, Michael R. Haverty, commented, “After a number of years of improving infrastructure, strengthening operations, and re-energizing marketing and sales efforts, KCSR made good progress toward achieving its principal financial and operational goals in 2004. Not only did it achieve year-over-year revenue growth, the pace of growth escalated as the year progressed, which bodes well as we move into the first half of 2005. In addition, KCSR’s service remained at a high level throughout 2004. The combination of stronger revenues and good operations resulted in an improvement of 4.5 percentage points in KCSR’s operating ratio in 2004. KCSR’s steady improvement is evidenced by its 81.8 % operating ratio in the fourth quarter.
“ The good news from TFM was the 14 % increase in carloads and an 7 % growth in revenues in the fourth quarter of 2004, with good across-the-board traffic growth led by intermodal, chemicals, agro-business, metals and minerals. TFM markets continue to display exceptional potential for future growth that KCS intends to realize. . “On December 15, 2004, KCS and Grupo TMM, S.A. (Grupo TMM) announced the signing of an amended acquisition agreement which, upon completion, will result in KCS being the majority shareholder of TFM. Grupo TMM shareholders approved the acquisition on January 11, 2004. The transaction will be completed upon an affirmative vote of KCS shareholders. The Company has recently received review comments from the U.S. S.E.C. on its preliminary proxy statement. The Company will be responding to these comments in due course and we anticipate the shareholder vote to take place late in the first quarter of 2005.
“Combining KCSR, TFM, and the Tex Mex under the common control of KCS will provide North American shippers with a strong, viable competitive option. KCS has already begun putting a transition team on the ground in Mexico under the direction of our former chief operating officer, Gerald Davies. While TFM will continue to be a separate company operating under KCS, the improved integration between TFM and KCSR will greatly enhance service as well as provide significantly greater growth potential, both within Mexico and for cross-border business. The combination will make KCS a larger, more competitive company, which will provide expanded opportunities for us to grow our franchise and provide enhanced value for our shareholders.
“Finally, KCS was fortunate in the hiring of Arthur Shoener as President and Chief Executive Officer of KCSR, as well as Executive Vice President and Chief Operating Officer of KCS. Art has been in the railroad industry for over 35 years, and is considered one of the premier operations executives in the business. His experience and talents, which include considerable knowledge of the North American rail system, will be invaluable in growing this company.”
Kansas City Southern is a transportation holding company that has railroad investments in the United States, Mexico and Panama. Its primary domestic holdings include The Kansas City Southern Railway Company, founded in 1887, and The Texas Mexican Railway Company, founded in 1885. Headquartered in Kansas City, Missouri, KCS serves customers in the central and south central regions of the United States. KCS’ rail holdings and investments, including TFM, S.A. de C.V., are primary components of a NAFTA Railway system that links
4
the commercial and industrial centers of the United States, Canada and Mexico. Visit www.kcsi.com for more information.
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 the “Risk Factors” and the “Cautionary Information” sections of the Company’s Form 10-K for the year ended December 31, 2003, 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.
5
KANSAS CITY SOUTHERN CONSOLIDATED STATEMENTS OF INCOME (Dollars in millions, except share and per share data) (Unaudited) (Preliminary)
Three Months Ended
Year Ended
December 31,
December 31,
2004
2003
2004
2003
Revenues
$
174.6
$
148.5
$
639.5
$
581.3
Operating expenses
Compensation and benefits
57.1
51.4
213.0
197.8
Purchased services
15.2
17.4
62.3
63.5
Fuel
20.6
12.1
66.4
47.4
Equipment costs
12.5
12.8
50.4
57.4
Depreciation and amortization
14.2
16.2
53.5
64.3
Casualties and insurance
11.9
30.2
42.4
56.4
Other leases
2.9
2.5
11.8
9.8
Other
12.8
12.7
56.2
55.6
Total operating expenses
147.2
155.3
556.0
552.2
Operating income (loss)
27.4
(6.8
)
83.5
29.1
Equity in net earnings (losses) of unconsolidated affiliates:
Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V.
(8.3
)
6.1
(2.4
)
12.3
Other
(1.9
)
(0.3
)
(2.1
)
(1.3
)
Interest expense
(11.4
)
(11.6
)
(44.4
)
(46.4
)
Debt retirement costs
—
—
(4.2
)
—
Other income
5.8
2.0
17.6
6.8
Income before income taxes and cumulative effect of accounting change
11.6
(10.6
)
48.0
0.5
Income tax provision
10.9
(5.4
)
23.6
(2.8
)
Income (loss) before cumulative effect of accounting change
0.7
(5.2
)
24.4
3.3
Cumulative effect of accounting change, net of income taxes
—
—
—
8.9
Net income (loss)
$
0.7
$
(5.2
)
$
24.4
$
12.2
Preferred stock dividends
2.1
1.2
8.7
5.9
Net income (loss) available to Common shareholders
$
(1.4
)
$
(6.4
)
$
15.7
$
6.3
Per Share Data
Basic earnings per Common share
Income (loss) before cumulative effect of accounting change
$
(0.02
)
$
(0.10
)
$
0.25
$
(0.04
)
Cumulative effect of accounting change, net of income taxes
—
—
—
0.14
Total basic earnings (loss) per Common share
$
(0.02
)
$
(0.10
)
$
0.25
$
0.10
Diluted earnings per Common share
Income (loss) before cumulative effect of accounting change
$
(0.02
)
$
(0.10
)
$
0.25
$
(0.04
)
Cumulative effect of accounting change, net of income taxes
—
—
—
0.14
Total diluted earnings (loss) per Common share
$
(0.02
)
$
(0.10
)
$
0.25
$
0.10
Weighted average Common shares outstanding (in thousands)
Basic
62,986
62,053
62,715
61,725
Potential dilutive Common shares
—
—
1,268
—
Diluted
62,986
62,053
63,983
61,725
6
Kansas City Southern Railway Operating Statements Dollars in Millions
Fourth Quarter
Fourth Quarter
Year to Date
Year to Date
2004
2003
2004
2003
Revenues
Chemical and Petroleum
$
34.9
$
31.2
$
135.0
$
123.8
Paper and Forest
48.2
36.2
169.6
146.1
Agricultural and Mineral
35.4
30.4
125.2
108.5
Intermodal and Automotive Revenue
18.3
15.4
66.8
59.1
Unit Coal Revenue
23.9
22.3
90.6
90.9
Haulage Revenue
2.6
2.6
10.6
10.5
Other Revenue
10.4
8.9
37.9
36.4
Total Revenues
173.7
147.0
635.7
575.3
Operating Expenses
Compensation and Benefits
55.6
50.3
208.1
193.7
Purchased Services
13.8
15.5
56.6
57.4
Fuel
20.6
12.3
66.4
47.8
Equipment Costs
12.5
12.8
50.4
57.4
Casualties & Insurance
10.6
28.9
37.7
51.9
Material and Supplies
6.2
5.7
25.2
27.1
Other
2.2
1.2
11.3
7.6
Variable Operating Expenses
121.5
126.7
455.7
442.9
Fixed Expenses
Other Lease
3.0
2.4
11.8
9.7
Depreciation
14.0
16.1
52.7
63.6
Taxes (Other Than Income)
3.5
3.7
14.5
14.6
Fixed Operating Expenses
20.5
22.2
79.0
87.9
Total Operating Expenses
142.0
148.9
534.7
530.8
Operating Income(Loss)
$
31.7
$
(1.9
)
$
101.0
$
44.5
Operating Ratio
81.8
%
101.3
%
84.1
%
92.3
%
Operating Ratio(3)
81.8
%
86.9
%
84.1
%
88.6
%
Note:
(1)Certain prior year amounts have been reclassified to conform to the current year presentation.
(2) Casualties expense includes impact of amounts recorded by the Company’s captive insurance subsidiary.
(3) Operating ratio (excluding $21.1 million claims reserve adjustment.)
7
Kansas City Southern Railway Carloadings By Commodity – Fourth Quarter, 2004 Dollars in Thousands
Carloadings
Revenue
Fourth Quarter
%
Fourth Quarter
%
2004
2003
Change
2004
2003
Change
Coal
49,859
49,110
1.5
%
Unit Coal
$
23,925
$
22,368
7.0
%
620
766
(19.1
)%
Other Coal
360
435
(17.2
)%
50,479
49,876
1.2
%
Total
24,285
22,803
6.5
%
Chemical & Petroleum Products
1,542
1,643
(6.1
)%
Agri Chemicals
1,143
1,053
8.5
%
4,117
3,936
4.6
%
Gases
4,532
4,014
12.9
%
6,922
7,029
(1.5
)%
Organic
6,282
6,268
0.2
%
5,362
5,354
0.1
%
Inorganic
6,335
5,866
8.0
%
14,235
13,334
6.8
%
Petroleum
10,897
9,172
18.9
%
4,617
4,283
7.8
%
Plastics
5,686
4,919
15.6
%
36,795
35,579
3.4
%
Total
34,875
31,292
11.5
%
Agriculture and Minerals
11,010
12,130
(9.2
)%
Domestic Grain
10,710
9,983
7.3
%
7,499
8,059
(6.9
)%
Export Grain
8,094
7,143
13.2
%
7,505
7,036
6.7
%
Food Products
6,889
6,138
12.2
%
7,977
6,641
20.1
%
Ores and Minerals
4,962
3,810
30.2
%
4,919
4,211
16.8
%
Stone, Clay & Glass
4,722
3,328
41.9
%
38,910
38,077
2.2
%
Total
35,377
30,402
16.4
%
Paper & Forest Products
26,796
23,985
11.7
%
Pulp/Paper
23,191
19,541
18.7
%
2,354
2,040
15.4
%
Scrap Paper
1,872
1,226
52.7
%
7,795
7,258
7.4
%
Pulpwood/Logs/Chips
4,478
3,380
32.5
%
7,914
7,380
7.2
%
Lumber/Plywood
8,801
7,148
23.1
%
4,016
4,405
(8.8
)%
Metal/Scrap
3,778
3,536
6.8
%
2,798
1,249
124.0
%
Military/Other Carloads
6,126
1,411
334.2
%
51,673
46,317
11.6
%
Total
48,246
36,242
33.1
%
Intermodal & Automotive
2,112
1,755
20.3
%
Automotive
1,819
1,450
25.5
%
84,757
79,200
7.0
%
Intermodal
16,456
13,885
18.5
%
86,869
80,955
7.3
%
Total
18,275
15,335
19.2
%
264,726
250,804
5.6
%
TOTAL FOR BUSINESS UNITS
161,058
136,074
18.4
%
3,485
6,542
(46.7
)%
Haulage
2,593
2,574
0.7
%
(534
)
(735
)
27.3
%
Adjustments
—
—
0.0
%
Other KCSR Revenue
10,063
8,352
267,677
256,611
4.3
%
TOTAL
$
173,714
$
147,000
18.2
%
Note:
Certain prior year amounts have been reclassified to conform to the current year presentation.
8
Kansas City Southern Railway Carloadings By Commodity — Year ended December 31, 2004 Dollars in Thousands
Carloadings
Revenue
Year to Date
%
Year to Date
%
2004
2003
Change
2004
2003
Change
Coal
192,220
188,227
2.1
%
Unit Coal
$
90,586
$
90,918
(0.4
)%
2,500
3,141
(20.4
)%
Other Coal
1,540
1,756
(12.3
)%
194,720
191,368
1.8
%
Total
92,126
92,674
(0.6
)%
Chemical & Petroleum Products
5,877
5,931
(0.9
)%
Agri Chemicals
3,966
3,911
1.4
%
16,718
15,052
11.1
%
Gases
17,248
15,031
14.7
%
28,415
23,589
20.5
%
Organic
25,426
23,800
6.8
%
21,737
21,845
(0.5
)%
Inorganic
23,977
23,048
4.0
%
56,515
54,610
3.5
%
Petroleum
42,180
37,169
13.5
%
18,653
18,955
(1.6
)%
Plastics
22,183
20,883
6.2
%
147,915
139,982
5.7
%
Total
134,980
123,842
9.0
%
Agriculture and Minerals
45,884
45,002
2.0
%
Domestic Grain
40,583
36,742
10.5
%
25,394
21,279
19.3
%
Export Grain
23,901
17,682
35.2
%
30,234
31,979
(5.5
)%
Food Products
26,823
26,387
1.7
%
29,399
25,755
14.1
%
Ores and Minerals
17,799
14,764
20.6
%
18,469
16,571
11.5
%
Stone, Clay & Glass
16,066
12,916
24.4
%
149,380
140,586
6.3
%
Total
125,172
108,491
15.4
%
Paper & Forest Products
100,079
94,824
5.5
%
Pulp/Paper
82,988
75,784
9.5
%
8,176
7,224
13.2
%
Scrap Paper
5,924
4,445
33.3
%
28,377
30,009
(5.4
)%
Pulpwood/Logs/Chips
14,494
13,816
4.9
%
33,200
30,241
9.8
%
Lumber/Plywood
34,450
29,330
17.5
%
17,726
17,987
(1.5
)%
Metal/Scrap
15,540
15,192
2.3
%
9,773
5,974
63.6
%
Military/Other Carloads
16,190
7,570
113.9
%
197,331
186,259
5.9
%
Total
169,586
146,137
16.0
%
Intermodal & Automotive
6,813
6,980
(2.4
)%
Automotive
5,526
5,595
(1.2
)%
336,023
303,507
10.7
%
Intermodal
61,296
53,474
14.6
%
342,836
310,487
10.4
%
Total
66,822
59,069
13.1
%
1,032,182
968,682
6.6
%
TOTAL FOR BUSINESS UNITS
588,686
530,213
11.0
%
16,523
27,561
(40.0
)%
Haulage
10,560
10,518
0.4
%
(2,337
)
(3,544
)
34.1
%
Adjustments
—
(1,025
)
100.0
%
Other KCSR Revenue
36,432
35,604
1,046,368
992,699
5.4
%
TOTAL
$
635,678
$
575,310
10.5
%
Note:
Certain prior year amounts have been reclassified to conform to the current year presentation.
9
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