KCS earnings soar, operating ratio plunges

Kansas City Southern reported a second-quarter 2010 profit of $34.6 million, or 34 cents a share, compared with $6.5 million or seven cents a share in last year’s second quarter, thus easily beating Wall Street’s consensus estimate of 46 cents for this year quarter. The company also slashed its operating ratio to 72.4%, a record, from 87.4% a year ago.

(KCS said the temporary interruption of some of its Mexican operations by Hurricane Alex would reduce profits by about five cents per share this year. It said most losses will be covered by insurance.)

Revenue rose to $461.6 million in this year’s second quarter, up 35% from the 2009 period. KC said growth wasstrong across the board, with automotive revenue up 292% over second-quarter 2009 on increased auto production in Mexico. Intermodal revenue increased 54% as new business lanes and organic volume growth continued to improve. Other improvements were 42% for Agriculture & Minerals; 31% for Industrial & Consumer Products; 25% for Coal; and 18% for Chemical & Petroleum.

Operating income for the second quarter was $127.2 million, representing a 195% increase from a year ago. Operating expenses in the second quarter increased 12% from a year ago to $334.4 million.

Chairman Michael J. Haverty (pictured at left) commented:

“A year ago, KCS was in the depths of the worst freight recession since the Great Depression. Over the last year, we have seen a steady improvement in traffic levels … During the quarter, KCS continued to bring on new business and improve operating margins. The reported 72.4% operating ratio is a 15 percentage point improvement from a year ago, and represents a record operating ratio for KCS. Operating expenses excluding fuel were up just 3% on strong increases in volume, demonstrating the continued operating leverage KCS has been able to achieve.

“We raised approximately $215 million from an equity offering during the quarter, and along with existing cash on our balance sheet, we announced plans to reduce our debt levels by $300 million,” Haverty said. “At the end of the second quarter, we had retired approximately $237 million of this debt, and plan to retire the remainder of the announced $300 million during the third quarter. Including the refinancing in January, these transactions significantly improve our financial strength by reducing leverage and lowering our interest expense by approximately $40 million per year. On June 21, 2010, Standard & Poor’s upgraded the company’s long-term ratings to BB- from B and on June 28, 2010, Moody’s Investors Service raised its outlook to positive. Coupled with strong free cash flow being generated by our operations, our financial flexibility has improved substantially.”