KCS cuts operating ratio as earnings top estimates

Despite the impact of Hurricane Alex on revenue and expenses, Kansas City Southern on Tuesday reported third-quarter net income of $50.2 million, or $0.49 per diluted share (excluding debt retirement costs of one cent per share) and exceeding the estimates of Wall Street analysts by four cents. This compares to $25.4 million, or $0.27 per diluted share, in the third quarter of 2009.

Operating income for the third quarter was $116.0 million, a 38% increase from a year ago. The third-quarter operating ratio dropped to 73.5% from 78.3% in third quarter of 2009. Operating expenses in the third quarter increased 7% from a year ago to $322.3 million.

“The additional costs incurred during the quarter for hurricane damage repair and clean-up were offset by the related expected insurance recovery for these costs,” said a company statement. “The operating ratio would have been approximately 150 basis points better excluding the lost revenue impact from the hurricane and a $6 million gain related to post-employment benefits.

“The company estimates that the effects of Hurricane Alex on the third quarter were approximately $0.14 loss per diluted share. The impact of the gain for post-employment benefits was $0.04 per diluted share. KCS estimates a cumulative $0.09 per diluted share gain in future quarters as insurance recoveries are received and insurance claims related to the hurricane are settled, resulting in a cumulative impact of $0.05 loss per diluted share. The Company expects insurance recoveries to begin in the fourth quarter and anticipates final settlement of the claims in 2011 2010 revenues of $438.3 million. Revenue was reduced by widespread flooding and resultant damage to Kansas City Southern de Mexico’s (KCSM) track and bridge infrastructure caused by Hurricane Alex during the month of July. Based on the initial insurance claim, the impact of the hurricane on volumes was approximately 27,000 carloads resulting in $33 million of lost revenues. Several commodity groups experienced some impact from the hurricane to varying degrees.”

On a reported basis, automotive revenues were up 64% over third quarter 2009 as auto production rebounded from the lows experienced in 2009. Coal revenues increased 29% improved contract pricing. Intermodal revenue was up 25% as KCS entered new markets. Other revenue improvements were 20% for Industrial & Consumer Products and 4% for Agriculture & Minerals. Chemical & Petroleum revenue was down 2% in comparison to a strong third quarter in 2009.The company has produced positive free cash flow of $126.0 million year to date, including $56.6 million in the third quarter.

“Considering the impact of Hurricane Alex on our Mexican and cross-border traffic in July, KCS’s third quarter financial results are impressive,” said President and CEO David L. Starling. “Given the extent of the damage, we recovered quickly from the nearly three and a half week service outage. The operating ratio for the third quarter would have been lower than that of the second quarter if not for the negative impacts of the hurricane. Traffic volumes returned to projected levels by the end of the third quarter and continue to be good in October. As we have previously stated, we believe that KCS’s second half 2010 revenue growth, adjusting for the impact of Hurricane Alex, should be approximately 20 percent. The projected revenue increase combined with the continued operational improvements and cost controls poise KCS for a strong finish to 2010.”

Executive Chairman Michael R. Haverty (pictured at right) pointed to the company’s greatly improved financial position: “KCS continues to produce strong cash flows. The company repurchased the remaining $63.7 million of its 9 3/8% notes due 2012 bringing the total amount of debt reduction in 2010 to $332 million. Including its revolver availability, KCS ended the quarter with liquidity of $289 million, the highest level in more than 10 years.”