Kansas City Southern sets record operating ratio despite Q3 challenges

By Lisa Kerner

Charlotte, N.C., Oct. 16 – Kansas City Southern has posted “meaningful” improvement quarter over quarter despite being confronted with challenges in 2015, according to chief executive officer David L. Starling.

“While the company’s third-quarter revenues increased $46 million over the second quarter, operating expenses grew by only $13 million, Starling said. This improved financial performance contributed to a record third quarter operating ratio of 65.2%.”

Quarterly revenue was down 7% year over year at $632 million.

Starling believes Kansas City Southern will end the year strong, he said during the company’s earnings call on Friday.

“We saw significant negative impact on our revenue growth rate from declining fuel prices and the pace of [currency] depreciation,” noted chief financial officer Michael Upchurch on the call.

Adjusting for fuel and foreign currency, revenues would have increased by about 1%, according to Upchurch.

“We continue to generate positive free cash flows despite significant capital investments to support our growth opportunities,” Upchurch said on the call.

Kansas City Southern expects capital investments for the full year will be between $650 million and $670 million.

Uses of cash

Upchurch said the company is committed to providing “a meaningful return to shareholders.” The annual dividend has “steadily increased” by 69% since it was established in 2012.

The company will return $144 million to shareholders in 2015.

In May, the board approved a $500 million share repurchase program to be funded through cash flows, available liquidity and incremental debt, Upchurch said.

During the third quarter, Kansas City Southern repurchased about 1.24 million shares for $115.7 million at an average price of $93.57. Including purchases made in the second quarter, the company has repurchased about 1.5 million shares for $136 million at an average price of $93.44, according to the CFO.

Also during the quarter, on July 27 the company issued $500 million of 4.95% senior notes due 2045. Proceeds were used for the repayment of commercial paper, share repurchases and general corporate purposes, Upchurch said.

Total liquidity at Sept. 30 was $766.6 million, including cash and cash equivalents of $45.9 million, according to a form 10-Q filed with the Securities and Exchange Commission.

Financial highlights

Kansas City Southern’s operating income was down 4% for the quarter at $220 million.

The Kansas City, Mo.-based freight transportation company had a record third-quarter operating ratio of 65.2%, compared with 66.1% in the prior-year period.

Adjusted diluted earnings per share were down 6% year over year at $1.21.

Net income was down $6 million from a year ago at $132 million.

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