Kansas City Southern reports record Q3 revenues, 68.7% operating ratio

By Lisa Kerner

Charlotte, N.C., Oct. 19 - Kansas City Southern president and chief executive officer David L. Starling is "very pleased" with the company's third-quarter 2012 results, which include record quarterly revenues of $577 million, up 6% from the prior-year period, on a 7% increase in carloads.

The company also posted a record operating ratio of 68.7% despite "somewhat anemic" U.S. economic growth and "the fallout from the worst drought-ravaged grain harvest in U.S. history," Starling said during a third-quarter earnings call on Friday.

Kansas City Southern would like to refinance debt to take advantage of historically low interest rates and push out maturities, said chief financial officer Mike Upchurch on the call.

Despite receiving an investment-grade rating from Fitch in September, "macroeconomic conditions and the fiscal cliff," both out of the company's control, have been impediments to receiving similar ratings from Fitch and Moody's, Upchurch said.

The company's highest coupon debt is its 12.5% KCSM notes, which are callable on April 1, 2013. According to Upchurch, Kansas City Southern currently plans to retire the notes with cash or possibly refinance them.

If it were investment grade today, Kansas City Southern would possibly refinance the $100 million outstanding on the note at 3.5% on a 10-year note, said Upchurch.

The Kansas City, Mo.-based freight transportation company would save $12.5 million in interest on such a refinancing.

Interest expense was down 25% for the quarter at $24.1 million, the result of refinancing completed during the first half of the year and the retirement of the 13% notes from December 2011, Upchurch said.

For the full-year 2012, interest expense is expected to be down to about $100 million, or 23% from the prior year.

Kansas City Southern's third-quarter adjusted operating income was up 16% compared to one year ago, at $181 million.

Diluted earnings per share rose to $0.82 from $0.78, adjusted, from the prior-year period.

Use of cash

Upchurch said Kansas City Southern's primary use of excess cash is to invest in the business. For example, 18% of revenues was invested in core capital projects. The company has also accelerated the purchase of locomotives and spent $23 million on purchasing assets under lease purchase options.

Kansas City Southern declared a dividend on Aug. 7 of $0.195 per share, for a total of $21.5 million, or a 1% yield. The dividend was paid on Oct. 3.

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