Merger money cuts into Kansas City Southern’s Q2 profit

A photograph of a KCS train at a rail yard.

The $700 million fee that Kansas City Southern paid to terminate its merger agreement with Canadian Pacific slashed KCS’ income for the second quarter.

KCS (NYSE: KSU) folded the fee into its operating expenses, which became $1.18 billion for the second quarter. It also led to a second-quarter net loss of $378 million, or $4.17 per diluted share, as well as an operating ratio of 157.6%.

CN (NYSE: CNI) will reimburse the $700 million fee should the CN-KCS merger be approved by federal regulators and shareholders.

Removing the $700 million termination fee from second-quarter results shows a second-quarter net income of $188.8 million, or $2.06 per diluted share, on a non-GAAP basis. Operating ratio would be 61.4%.

In the second quarter of 2020, KCS reported adjusted net income of $109.1 million, or $1.15 per diluted share, as well as an adjusted operating ratio of 65.2%..

Second-quarter revenue rose 37% from a year ago to $749.5 million amid higher volumes, a higher fuel surcharge and the strengthening of the Mexican peso against the U.S. dollar, KCS said.

Service metrics declined in the second quarter, with train velocity down to 12.2 mph from 17.1 mph a year ago. Dwell time averaged 26.1 hours, compared with 20.3 hours year-over-year.

“KCS delivered strong second-quarter volume growth as our franchise benefited from unique growth drivers and the economy recovered from the COVID-19 downturn,” KCS President and CEO Pat Ottensmeyer said. “Although we are pleased with the strong volume growth, we fell short of our own expectations for customer service.”

He continued, “Our operating team is focused on implementing structural and sustainable changes that will improve operational performance and the resiliency of our network. To that end, we have deployed additional assets and crews in support of our service recovery, setting the company up to continue delivering robust volume growth while improving customer service in the second half of 2021.”