Kansas City Southern (KCS) (NYSE:KSU) reported revenues of
$659.6 million, a decrease of 12% from third quarter 2019. Overall,
carload volumes were down 4% compared to prior year.
Third Quarter 2020
Third quarter revenues were $659.6 million, a decrease of 12%
primarily resulting from lower volumes driven by a decline in
demand due to COVID-19 and lower commodity prices, lower fuel
surcharge, and unfavorable foreign currency impacts.
Third quarter operating expenses were $388.1 million. Operating
income was $271.5 million and the reported operating ratio was
58.8%. Third quarter net income was $190.2 million, or $2.01 per
diluted share. Adjusted third quarter operating income, net income
and diluted earnings per share were as follows:
(in millions, except operating ratio and
diluted earnings per share)
Three Months Ended September
30, 2020
Operating Income
Operating Ratio
Net Income
Diluted Earnings per Share
GAAP Operating Results
$
271.5
58.8
%
$
190.2
$
2.01
Adjustments, Net
0.5
—
(4.7
)
(0.05
)
Adjusted Operating Results (non-GAAP)
$
272.0
58.8
%
$
185.5
$
1.96
See following pages for reconciliations to
GAAP
As KCS' outlook improves, the Company has updated and improved
elements of its 2020 guidance. The Company now expects adjusted
diluted earnings per share to be slightly higher on a year over
year basis, and full-year 2020 adjusted operating ratio to be on
the low end of the 60% to 61% range. Additionally, previously
provided 2020 capital expenditure guidance remains $425.0 million
or below. Guidance for 2021 and 2022 capital expenditures remains
at ~17% of revenue. Finally, the Company expects free cash flow to
be approximately $550 million in 2020. See the following pages for
a reconciliation of historical free cash flow.
The Company intends to enter into accelerated share repurchase
agreements on or around October 16, 2020 for the repurchase of
approximately $500 million of its outstanding shares of common
stock. This will be executed under the Company’s $2 billion share
repurchase program announced on November 12, 2019.
“Kansas City Southern’s strong third quarter results demonstrate
the Company’s resiliency and the tremendous discipline and focus of
our workforce,” stated President and Chief Executive Officer,
Patrick J. Ottensmeyer. “Our service was tested this quarter with
an unprecedented volume recovery and two hurricanes that struck the
heart of our network. KCS responded by steadfastly executing the
lessons learned in its Precision Scheduled Railroading (PSR)
implementation, which included aligning resources with rapidly
increasing demand while maintaining a keen focus on preserving
efficiencies created from PSR principles.
"Our performance this year has been remarkable given the
challenges we have faced. This strong and sustainable operational
performance has given us confidence to reintroduce elements of our
guidance. Our outlook has improved for adjusted operating ratio,
free cash flow and adjusted diluted earnings per share, and the
Company is positioned to deliver superior growth and customer
service.
“It is from this position of solid financial performance,
confidence in the sustainability of our operations, outlook for our
business and our outstanding liquidity and financial position that
we announce our intent to enter into a new $500 million accelerated
share repurchase."
Statement Regarding Non-GAAP Financial Measures
In addition to disclosing financial results in accordance with
U.S. GAAP, the accompanying third quarter 2020 earnings release
contains non-GAAP financial measures. KCS management believes that
certain non-GAAP financial measures used to review and in certain
cases manage the Company's business fall within the meaning of
Regulation G (Disclosure of non-GAAP financial measures) and may
provide its users of the financial information with additional
meaningful comparison when reviewing the Company's results. KCS
management uses non-GAAP information in its planning and
forecasting processes and to further analyze its own financial
trends and operational performance, as well as making financial
comparisons to prior periods presented on a similar basis.
Management believes investors and users of the Company's financial
information should consider all of the above factors when
evaluating KCS's results.
These non-GAAP measures should be viewed as a supplement and not
considered a substitute for GAAP measures. Some of KCS's non-GAAP
measures may differ from similar measures used by other companies,
even if similar terms are used to identify such measures.
GAAP Reconciliations ($ in
millions, except per share amounts)
Reconciliation of Diluted Earnings per
Share to
Adjusted Diluted Earnings per
Share
Three Months Ended September
30, 2020
Income Before Income Taxes
Income Tax Expense
Net Income
Diluted Earnings per Share
As reported
$
238.7
$
48.5
$
190.2
$
2.01
Adjustments for:
Restructuring charges
0.5
0.1
0.4
—
Foreign exchange gain
(7.7
)
(2.3
)
(5.4
)
(0.05
)
Foreign exchange component of income
taxes
—
(0.3
)
0.3
—
Adjusted
$
231.5
$
46.0
185.5
Less: Noncontrolling interest and
preferred stock dividends
(0.5
)
Adjusted net income available to common
stockholders - see (a) below
$
185.0
$
1.96
Three Months Ended September
30, 2019
Income Before Income Taxes
Income Tax Expense
Net Income
Diluted Earnings per Share
As reported
$
254.8
$
74.2
$
180.6
$
1.81
Adjustments for:
Restructuring charges
12.0
3.2
8.8
0.09
Foreign exchange loss
3.4
1.0
2.4
0.02
Foreign exchange component of income
taxes
—
(2.3
)
2.3
0.02
Adjusted
$
270.2
$
76.1
194.1
Less: Noncontrolling interest and
preferred stock dividends
(0.5
)
Adjusted net income available to common
stockholders - see (a) below
$
193.6
$
1.94
GAAP Reconciliations (continued) ($
in millions)
Reconciliation of Operating Expenses to
Adjusted
Three Months Ended
Nine Months Ended
Operating Expenses
September 30,
September 30,
2020
2019
2020
2019
Operating expenses as reported
$
388.1
$
465.7
$
1,198.5
$
1,486.2
Adjustment for restructuring charges
(0.5
)
(12.0
)
(17.0
)
(130.5
)
Adjusted operating expenses - see (b)
below
$
387.6
$
453.7
$
1,181.5
$
1,355.7
Operating income as reported
$
271.5
$
282.0
$
740.7
$
650.3
Adjusted operating income - see (b)
below
272.0
294.0
757.7
780.8
Operating ratio (c) as reported
58.8
%
62.3
%
61.8
%
69.6
%
Adjusted operating ratio - see (b) and (c)
below
58.8
%
60.7
%
60.9
%
63.5
%
Free Cash Flow
Nine Months Ended
September 30,
2020
2019
Net cash provided by operating
activities
$
819.9
$
858.8
Net cash used for investing activities
(413.2
)
(540.3
)
Free cash flow - see (d) below
$
406.7
$
318.5
(a)
The Company believes adjusted diluted
earnings per share is meaningful as it allows investors to evaluate
the Company’s performance for different periods on a more
comparable basis by adjusting for the impact of changes in foreign
currency exchange rates, and items that are not directly related to
the ongoing operations of the Company. The income tax expense
impacts related to these adjustments are calculated at the
applicable statutory tax rate.
(b)
The Company believes adjusted operating
expenses, operating income and operating ratio are meaningful as
they allow investors to evaluate the Company's performance for
different periods on a more comparable basis by adjusting for items
that are not directly related to the ongoing operations of the
Company.
(c)
Operating ratio is calculated by dividing
operating expenses by revenues; or in the case of adjusted
operating ratio, adjusted operating expenses divided by
revenues.
(d)
The Company believes free cash flow is a
useful measure of liquidity as it demonstrates the Company's
ability to generate cash for debt obligations, dividend payments,
share repurchases, and other strategic opportunities. Free cash
flow is considered a non-GAAP financial measure under SEC
Regulation G and Regulation S-K Item 10(e). As such, free cash flow
does not have any standardized meaning prescribed by GAAP and
therefore, may not be comparable to similar measures presented by
other companies. Free cash flow is defined as cash provided by
operating activities less cash used in investing activities. A
reconciliation for the Company's target free cash flow for 2020 is
not provided because, as a forward-looking statement, it is not
available without unreasonable efforts. The Company believes the
information provided is useful to investors as a measure of
liquidity that can be considered together with the Company's
historical disclosures of this measure.
Investor Conference Call and Webcast
KCS will also hold its third quarter 2020 earnings conference
call on Friday, October 16, 2020 at 8:45 a.m. eastern time.
Shareholders and other interested parties are invited to
participate via live webcast or telephone. To participate in the
live webcast and to view accompanying presentation materials,
please log into investors.kcsouthern.com immediately prior to the
presentation. To join the teleconference, please call (844)
308-6428 from the U.S., or (412) 317-5409 from all other
countries.
A replay of the presentation will be available by calling (877)
344-7529 from the U.S., (855) 669-9658 from Canada or (412)
317-0088 from all other countries and entering conference ID
10147562. The webcast replay and presentation materials will be
archived on the company’s website.
About Kansas City Southern
Headquartered in Kansas City, Mo., Kansas City Southern (KCS)
(NYSE: KSU) is a transportation holding company that has railroad
investments in the U.S., Mexico and Panama. Its primary U.S.
holding is The Kansas City Southern Railway Company, serving the
central and south central U.S. Its international holdings include
Kansas City Southern de Mexico, S.A. de C.V., serving northeastern
and central Mexico and the port cities of Lázaro Cárdenas, Tampico
and Veracruz, and a 50 percent interest in Panama Canal Railway
Company, providing ocean-to-ocean freight and passenger service
along the Panama Canal. KCS' North American rail holdings and
strategic alliances with other North American rail partners are
primary components of a unique railway system, linking the
commercial and industrial centers of the U.S., Mexico and Canada.
More information about KCS can be found at www.kcsouthern.com
Forward-Looking Information
This news release contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended,
Section 21E of the Securities Exchange Act of 1934, as amended and
the Private Securities Litigation Reform Act of 1995. In addition,
management may make forward-looking statements orally or in other
writing, including, but not limited to, in press releases,
quarterly earnings calls, executive presentations, in the annual
report to stockholders and in other filings with the Securities and
Exchange Commission. Readers can usually identify these
forward-looking statements by the use of such words as "may,"
"will," "should," "likely," "plans," "projects," "expects,"
"anticipates," "believes" or similar words. These statements
involve a number of risks and uncertainties. Actual results could
materially differ from those anticipated by such forward-looking
statements as a result of a number of factors or combination of
factors including, but not limited: public health threats or
outbreaks of communicable diseases, such as the ongoing COVID-19
pandemic and its impact on KCS’s business, suppliers, consumers,
customers, employees and supply chains; rail accidents or other
incidents or accidents on KCS’s rail network or at KCS’s facilities
or customer facilities involving the release of hazardous
materials, including toxic inhalation hazards; legislative and
regulatory developments and disputes, including environmental
regulations; loss of the rail concession of Kansas City Southern’s
subsidiary, Kansas City Southern de México, S.A. de C.V.; domestic
and international economic, political and social conditions;
disruptions to the Company’s technology infrastructure, including
its computer systems; increased demand and traffic congestion; the
level of trade between the United States and Asia or Mexico;
fluctuations in the peso-dollar exchange rate; natural events such
as severe weather, hurricanes and floods; the outcome of claims and
litigation involving the Company or its subsidiaries; competition
and consolidation within the transportation industry; the business
environment in industries that produce and use items shipped by
rail; the termination of, or failure to renew, agreements with
customers, other railroads and third parties; fluctuation in prices
or availability of key materials, in particular diesel fuel; access
to capital; climate change and the market and regulatory responses
to climate change; dependency on certain key suppliers of core rail
equipment; changes in securities and capital markets;
unavailability of qualified personnel; labor difficulties,
including strikes and work stoppages; acts of terrorism or risk of
terrorist activities, war or other acts of violence; and other
factors affecting the operation of the business; and other risks
identified in this news release, in KCS's Annual Report on Form
10-K for the year ended December 31, 2019, and in other reports
filed by KCS with the Securities and Exchange Commission.
Forward-looking statements reflect the information only as of
the date on which they are made. KCS does not undertake any
obligation to update any forward-looking statements to reflect
future events, developments, or other information.
Kansas City Southern and
Subsidiaries
Consolidated Statements of
Income
(In millions, except share and
per share amounts)
(Unaudited)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Revenues
$
659.6
$
747.7
$
1,939.2
$
2,136.5
Operating expenses:
Compensation and benefits
117.4
134.8
354.6
392.0
Purchased services
47.3
53.4
145.2
162.9
Fuel
50.8
87.1
165.2
257.8
Equipment costs
23.9
25.1
63.9
81.8
Depreciation and amortization
89.2
86.5
267.9
262.7
Materials and other
59.0
66.8
184.7
198.5
Restructuring charges
0.5
12.0
17.0
130.5
Total operating expenses
388.1
465.7
1,198.5
1,486.2
Operating income
271.5
282.0
740.7
650.3
Equity in net earnings (losses) of
affiliates
(1.3
)
2.1
(0.1
)
3.6
Interest expense
(39.5
)
(27.9
)
(111.8
)
(84.1
)
Debt retirement costs
—
—
—
(0.6
)
Foreign exchange gain (loss)
7.7
(3.4
)
(44.0
)
9.5
Other income, net
0.3
2.0
2.5
2.2
Income before income taxes
238.7
254.8
587.3
580.9
Income tax expense
48.5
74.2
134.5
168.0
Net income
190.2
180.6
452.8
412.9
Less: Net income attributable to
noncontrolling interest
0.4
0.4
1.5
1.2
Net income attributable to Kansas City
Southern and subsidiaries
189.8
180.2
451.3
411.7
Preferred stock dividends
0.1
0.1
0.2
0.2
Net income available to common
stockholders
$
189.7
$
180.1
$
451.1
$
411.5
Earnings per share:
Basic earnings per share
$
2.02
$
1.81
$
4.76
$
4.12
Diluted earnings per share
$
2.01
$
1.81
$
4.74
$
4.10
Average shares outstanding (in
thousands):
Basic
93,876
99,296
94,672
99,939
Effect of dilution
504
403
477
405
Diluted
94,380
99,699
95,149
100,344
Kansas City Southern and
Subsidiaries
Revenue & Carload/Units by
Commodity - Third Quarter 2020 and 2019
Revenues
Carloads and Units
Revenue per
(in millions)
(in thousands)
Carload/Unit
Third Quarter
%
Third Quarter
%
Third Quarter
%
2020
2019
Change
2020
2019
Change
2020
2019
Change
Chemical & Petroleum
Chemicals
$
60.1
$
65.5
(8
%)
24.3
25.7
(5
%)
$
2,473
$
2,549
(3
%)
Petroleum
95.1
89.1
7
%
48.5
42.2
15
%
1,961
2,111
(7
%)
Plastics
36.7
39.6
(7
%)
18.7
19.5
(4
%)
1,963
2,031
(3
%)
Total
191.9
194.2
(1
%)
91.5
87.4
5
%
2,097
2,222
(6
%)
Industrial & Consumer Products
Forest Products
59.6
64.3
(7
%)
25.3
26.6
(5
%)
2,356
2,417
(3
%)
Metals & Scrap
41.5
59.6
(30
%)
25.6
30.5
(16
%)
1,621
1,954
(17
%)
Other
25.3
32.0
(21
%)
22.8
24.3
(6
%)
1,110
1,317
(16
%)
Total
126.4
155.9
(19
%)
73.7
81.4
(9
%)
1,715
1,915
(10
%)
Agriculture & Minerals
Grain
74.6
78.3
(5
%)
37.8
37.9
—
1,974
2,066
(4
%)
Food Products
38.2
40.0
(5
%)
15.3
15.7
(3
%)
2,497
2,548
(2
%)
Ores & Minerals
5.5
6.7
(18
%)
7.7
8.9
(13
%)
714
753
(5
%)
Stone, Clay & Glass
7.0
8.7
(20
%)
3.2
3.5
(9
%)
2,188
2,486
(12
%)
Total
125.3
133.7
(6
%)
64.0
66.0
(3
%)
1,958
2,026
(3
%)
Energy
Utility Coal
28.9
35.1
(18
%)
32.9
38.6
(15
%)
878
909
(3
%)
Coal & Petroleum Coke
10.2
11.3
(10
%)
13.5
13.6
(1
%)
756
831
(9
%)
Frac Sand
2.3
7.4
(69
%)
2.0
5.3
(62
%)
1,150
1,396
(18
%)
Crude Oil
5.4
11.2
(52
%)
3.1
7.2
(57
%)
1,742
1,556
12
%
Total
46.8
65.0
(28
%)
51.5
64.7
(20
%)
909
1,005
(10
%)
Intermodal
89.1
100.5
(11
%)
264.7
260.2
2
%
337
386
(13
%)
Automotive
48.5
64.8
(25
%)
32.1
39.2
(18
%)
1,511
1,653
(9
%)
TOTAL FOR COMMODITY GROUPS
628.0
714.1
(12
%)
577.5
598.9
(4
%)
$
1,087
$
1,192
(9
%)
Other Revenue
31.6
33.6
(6
%)
TOTAL
$
659.6
$
747.7
(12
%)
Kansas City Southern and
Subsidiaries
Revenue & Carload/Units by
Commodity - Year to Date September 30, 2020 and 2019
Revenues
Carloads and Units
Revenue per
(in millions)
(in thousands)
Carload/Unit
Year to Date
%
Year to Date
%
Year to Date
%
2020
2019
Change
2020
2019
Change
2020
2019
Change
Chemical & Petroleum
Chemicals
$
174.8
$
187.6
(7
%)
70.1
76.6
(8
%)
$
2,494
$
2,449
2
%
Petroleum
261.5
253.4
3
%
131.7
121.6
8
%
1,986
2,084
(5
%)
Plastics
112.7
110.1
2
%
56.2
55.5
1
%
2,005
1,984
1
%
Total
549.0
551.1
—
258.0
253.7
2
%
2,128
2,172
(2
%)
Industrial & Consumer Products
Forest Products
186.3
193.9
(4
%)
76.9
81.3
(5
%)
2,423
2,385
2
%
Metals & Scrap
144.2
176.5
(18
%)
80.4
91.6
(12
%)
1,794
1,927
(7
%)
Other
75.5
85.6
(12
%)
67.8
67.6
—
1,114
1,266
(12
%)
Total
406.0
456.0
(11
%)
225.1
240.5
(6
%)
1,804
1,896
(5
%)
Agriculture & Minerals
Grain
216.5
224.2
(3
%)
106.2
109.3
(3
%)
2,039
2,051
(1
%)
Food Products
119.9
110.4
9
%
47.0
44.9
5
%
2,551
2,459
4
%
Ores & Minerals
16.6
19.0
(13
%)
22.4
25.0
(10
%)
741
760
(3
%)
Stone, Clay & Glass
21.2
25.4
(17
%)
9.2
10.6
(13
%)
2,304
2,396
(4
%)
Total
374.2
379.0
(1
%)
184.8
189.8
(3
%)
2,025
1,997
1
%
Energy
Utility Coal
75.7
95.1
(20
%)
87.7
102.5
(14
%)
863
928
(7
%)
Coal & Petroleum Coke
31.3
31.9
(2
%)
43.0
43.1
—
728
740
(2
%)
Frac Sand
7.8
22.1
(65
%)
6.6
15.7
(58
%)
1,182
1,408
(16
%)
Crude Oil
27.6
34.4
(20
%)
15.9
18.9
(16
%)
1,736
1,820
(5
%)
Total
142.4
183.5
(22
%)
153.2
180.2
(15
%)
930
1,018
(9
%)
Intermodal
241.3
273.0
(12
%)
689.3
725.7
(5
%)
350
376
(7
%)
Automotive
118.0
193.3
(39)
%
75.9
118.5
(36
%)
1,555
1,631
(5
%)
TOTAL FOR COMMODITY GROUPS
1,830.9
2,035.9
(10
%)
1,586.3
1,708.4
(7
%)
$
1,154
$
1,192
(3
%)
Other Revenue
108.3
100.6
8
%
TOTAL
$
1,939.2
$
2,136.5
(9
%)
View source
version on businesswire.com: https://www.businesswire.com/news/home/20201016005060/en/
KCS: Ashley Thorne, 816-983-1530,
athorne@kcsouthern.com
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