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Contact:

Landon H. Rowland
President and Chief Executive Officer
(816) 983-1393

Joseph D. Monello
Vice President and Chief Financial Officer
(816) 983-1213

Kansas City Southern Industries, Inc.
114 West 11th Street
Kansas City, Missouri 64105

NYSE Symbol: KSU

 

February 5, 1997

NEWS RELEASE
KANSAS CITY SOUTHERN INDUSTRIES, INC.
REPORTS STRONG FOURTH QUARTER AND 1996 EARNINGS

Kansas City, Missouri

Kansas City Southern Industries announced fourth quarter 1996 earnings of $32.5 million ($0.87 per share) compared to $27.3 million ($0.66 per share) in fourth quarter 1995, exclusive of the $144.6 million after-tax gain as a result of the DST Systems, Inc. (NYSE: "DST") stock offering in November 1995. Earnings for the year ended December 31, 1996 were $150.9 million ($3.92 per share) versus $236.7 million ($5.41 per share) in 1995. However, exclusive of non-recurring gains related to DST in both years and 1995 unusual costs and expenses (as discussed below), 1996 earnings of $2.68 per share were 28% higher than the $2.10 per share in 1995.

Fourth quarter 1996 earnings reflect continued growth in the earnings of the Financial Asset Management segment, comprised of Janus Capital Corporation ("Janus") and Berger Associates, Inc. ("Berger"), as a result of steady increases in assets under management (7% growth since September 30, 1996). The Kansas City Southern Railway Company ("KCSR") segment also reported higher earnings as compared to fourth quarter 1995. KCSR results were affected by various operating cost reductions, a non-recurring fourth quarter 1996 gain on the sale of real estate, and higher fourth quarter 1995 labor costs for anticipated payments under collective bargaining agreements. KCSI fourth quarter 1996 consolidated revenues increased to $220.9 million from $198.0 million in comparable 1995, primarily due to a 47% revenue improvement in the Financial Asset Management segment. Consolidated operating income for the three months ended December 31, 1996 increased 38% because of lower proportionate growth in Financial Asset Management operating expenses as compared to revenues, and reduced operating expenses at KCSR.

As previously disclosed, in early December Transportacion Maritima Mexicana ("TMM") and KCSI were awarded a 50-year concession for Mexico's highly valued Northeast Railway. On January 31,1997, TMM and KCSI announced financing arranfements for the purchase, and made the initial payment.

Earnings comparisons for the year ended December 31, 1996 versus 1995 were affected by several significant factors:

1) 46% growth in assets under management since December 31, 1995 by the Financial Asset Management businesses;

2) Higher 1996 consolidated operating income due to 1995 unusual costs and expenses at KCSR and other Company subsidiaries, as previously reported, which decreased 1995 consolidated earnings by $0.44 per share;

3) Increased 1996 equity earnings from DST, an approximate 41% owned unconsolidated affiliate, due to a one time gain of approximately $47.7 million (after-tax), or $1.24 per share. This gain represents KCSI's proportionate share of the gain recognized by DST in connection with the August 1, 1996 merger of The Continuum Company, Inc. ('Continuum'), formerly a DST unconsolidated equity investment, with Computer Sciences Corporation in a tax-free share exchange;

4) Reduced 1996 interest expense due to lower average debt balances, largely because of lower year end 1995 debt balances as a result of the repayment of indebtedness using the proceeds received in connection with the DST stock offering.

5) the $144.6 million after-tax gain in 1995 resulting from the DST stock offering, as discussed above.

Fourth quarter and year to date 1996 results also include non-cash acquisition related intangible asset amortization expenses of $0.08 and $0.29 per share, respectively, compared to $0.06 and $0.23 per share, respectively, in fourth quarter and year to date 1995.

Earnings per Share Comparisons:    
                            Three Months Ended    Year Ended
                                  December 31,    December 31,
                                  1996    1995    1996    1995

KCSR                              $ .15   $.12   $ .44   $ .70
Financial Asset Management          .54    .30    1.80    1.00
Corporate & Other                   .18    .24     .44     .84
      Ongoing operations            .87    .66    2.68    2.54

KCSI's Proportionate Share
of DST Gain on Continuum Merger,Net               1.24

Gain on DST Stock Offering,Net            3.45            3.31

Second Quarter 1995 Unusual Costs
and Expenses                                              (.44)

      Total Earnings per Share    $ .87 $ 4.11  $ 3.92  $ 5.41

The Kansas City Southern Railway Company:

KCSR contributed $5.6 million to KCSI's fourth quarter 1996 earnings versus $4.9 million in 1995. Fourth quarter 1996 revenues decreased 3% (to $122.1 million) compared to 1995. Unit coal revenues decreased 9% from fourth quarter 1995 due to the mix of traffic and fewer long hauls to an electric generating plant served by KCSR. Additionally, general commodity revenues were approximately $1.6 million (2%) lower than fourth quarter 1995, largely due to a 7% reduction of revenues in the paper and forest products business unit from volume declines. Revenue gains in the chemicals/petroleum, metal products, food products and export grain business units were offset with declines in the domestic grain and non-metallic minerals units. Fourth quarter 1996 intermodal revenues were slightly higher than prior year.

Although fourth quarter KCSR revenues were lower than comparable 1995, operating income increased slightly, reflecting a $3.5 million decrease in operating expenses. This decrease in operating expenses was due to cost reduction measures during third quarter 1996, coupled with higher fourth quarter 1995 expenses associated with accruals for labor agreements. Although partially offset by higher end of year fuel costs, lower operating costs were evident in salaries and wages, purchased services and car hire costs. Fourth quarter 1996 earnings also include a one time pretax gain of $2.9 million from the sale of real estate.

For the twelve months ended December 31, 1996, KCSR contributed $17.1 million to KCSI's consolidated earnings, 50% higher than 1995. Revenues of $492.5 million for the year ended December 31, 1996 were lower than 1995, primarily due to trends similar to those encountered during the fourth quarter. Despite lower 1996 revenues, operating income increased 11% to $74.1 million, primarily due to unusual costs/expenses and accruals for labor agreements in 1995. Exclusive of the 1995 unusual costs and expenses, operating income for the twelve months ended December 31, 1996 would have been lower than comparable 1995, mainly from reduced revenues and increased costs attributable to adverse winter weather (in first quarter 1996) and from train derailment expenses.

KCSR's operating ratio, a common efficiency measurement among Class I Railroads, was 84.9% for fourth quarter 1996. The operating ratio for the year ended December 31, 1996 was 84.5%, compared to 84.8% for the year ended December 31, 1995. While increasing KCSR's operating ratio by approximately 1%, the Southern Capital Corporation LLC ("Southern Capital") joint venture transaction (completed in October 1996) resulted in overall higher net income.

 

Financial Asset Management (Janus and Berger):

Financial Asset Management fourth quarter 1996 earnings of $20.3 million increased 61% over fourth quarter 1995. Average assets under management during fourth quarter 1996 were $16.0 billion higher than comparable 1995, leading to a $30.6 million increase in revenues and a $14.2 million increase in operating income over fourth quarter 1995. For the year ended December 31, 1996, Financial Asset Management contributed $69.1 million to KCSI consolidated earnings compared to $43.8 million in 1995. Additionally, year to date 1996 revenues grew $90.1 million (38%) compared to prior year, contributing to a 54% increase in operating income.

Assets under management by Janus and Berger increased 46% (to $50.3 billion) during 1996 as a result of sales (net of redemptions) of $9.2 billion during 1996, coupled with market appreciation. Additionally, shareowner accounts grew 8% (from December 31, 1995) to approximately 2.7 million accounts as of year end 1996. Revenue improvements for fourth quarter and year to date 1996 were greater than the higher operating expenses associated with increased business volumes, as well as higher Janus performance-based compensation as a result of achieving improved results.

 

Corporate & Other:

Corporate & Other contributed $6.6 million to consolidated fourth quarter 1996 earnings versus $154.4 million in fourth quarter 1995 ($9.8 million exclusive of the gain from the DST stock offering). For the year ended December 31, 1996, Corporate & Other earnings were $64.7 million versus $181.5 million in 1995. 1996 earnings include $47.7 million associated with the DST Continuum merger and 1995 earnings include the $144.6 million after-tax gain resulting from the DST stock offering.

Equity earnings from unconsolidated affiliates were lower in fourth quarter 1996 versus 1995 due to the absence of earnings from Midland Loan Services and Midland Data Systems (collectively, "Midland") in 1996. Midland was sold in second quarter 1996.

Equity earnings for the year 1996 were significantly higher than 1995 due to the DST gain recorded in connection with the Continuum transaction. Exclusive of this gain, 1996 equity earnings from DST declined as a result of the Company's reduced DST ownership percentage (i.e., 1995 includes 100% of DST earnings through October and 41% thereafter). Other factors affecting DST earnings comparisons in 1996 versus 1995 include: i) the 1995 after-tax gain of $4.7 million associated with DST's sale of its investment in Investors Fiduciary Trust Company; ii) lower fourth quarter 1995 equity earnings due to acquisition related expenses of DST's Continuum investment; and iii) the first quarter 1996 effect of a $4.1 million non-recurring charge related to Continuum. Exclusive of these items, DST's 1996 earnings increased as a result of several factors, including increased mutual fund shareowner accounts serviced and reduced 1996 interest costs.

Corporate & Other earnings were also affected by higher KCSI Holding Company expenses arising from the Company's activities related to the UP/SP merger. These expenses totaled (after-tax) approximately $2.9 million ($0.08 per share) for the year ended December 31, 1996. Interest expense, however, declined in 1996 versus 1995, primarily due to lower year end 1995 debt balances as a result of the repayment of indebtedness using the proceeds received in connection with the DST stock offering. Additionally, the completion of the Southern Capital transaction in October 1996 allowed the Company to repay indebtedness incurred throughout 1996 in connection with common stock repurchases.

 

Business Outlook:

Landon H. Rowland, KCSI President and Chief Executive Officer, commented, "The Company's fourth quarter results confirm the recent trends in both its KCSR and Financial Asset Management segments. Despite lower revenues compared to fourth quarter 1995, KCSR earnings improved in fourth quarter 1996. Assets under management by our Financial Asset Management operations increased more than $15 billion during 1996, due to favorable investment performance, good reception to new products, and a growing investor base. These trends have continued into early 1997.

1996 was a year of strategic achievement for our transportation operations. The most important event was the successful bid with TMM, our partner in Mexico, for Mexico's Northeast Railway, Ferrocarril del Noreste, the premier rail line in that country. The award by the Surface Transportation Board to the Tex-Mex of trackage rights between Beaumont and Corpus Christi, Texas connects the KCS with the Tex-Mex. Our December 1996 acquisition of Gateway Western Railway Company, currently awaiting Surface Transportation Board approval, extends our rail line to East St. Louis and Springfield, Illinois. Gateway's financial results will be included in the KCSR segment beginning in 1997. With connections with all Class I carriers, our rail network makes us the NAFTA Railroad. The spine of the economic integration of the North American marketplace. The realization of these efforts have been and will continue to be helped by our new venture with GATX, arising from the partnership of our transportation financing group with GATX, a leader in transportation equipment financing."



KANSAS CITY SOUTHERN INDUSTRIES, INC.
AND SUBSIDIARY COMPANIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(dollars in millions, except per share data)
(Unaudited)

                             Three Months         Twelve Months
                             Ended December 31,   Ended December 31,    
                               1996       1995      1996      1995

Revenues                     $ 220.9   $ 198.0   $  847.3   $ 775.2

Costs and expenses             145.2     137.2      567.3     541.0
Depreciation and amortization   18.2      19.0       76.1      75.0

    Operating income            57.5      41.8      203.9     159.2

Gain on sale of
equity investment                --      296.3        --      296.3

Equity in net earnings of
unconsolidated affiliates:
  DST Systems, Inc.              4.9       1.7       68.1      24.6
  Other                          0.3       4.7        2.0       5.2

Interest expense               (16.4)    (16.3)     (59.6)    (65.5)
Other, net                      10.6       5.5       22.9      20.3

    Pretax income               56.9     333.7      237.3     440.1

Income tax provision            19.9     158.9       70.6     192.9

Minority interest in
consolidated earnings            4.5       2.9       15.8      10.5
    
    Net income               $  32.5  $  171.9   $  150.9   $ 236.7


Per Share Data:

Primary Common shares
  outstanding (in millions)     37.3      41.9       38.4      43.7

Primary earnings per
Common share                   $ 0.87   $  4.11    $  3.92    $ 5.41

Note: The Consolidated Condensed Statements of Income for the three and twelve months ended December 31, 1995 have been reclassified to reflect DST Systems, Inc. as an unconsolidated affiliate as of January 1, 1995.

 

KANSAS CITY SOUTHERN INDUSTRIES, INC.
AND SUBSIDIARY COMPANIES
UNAUDITED SEGMENT FINANCIAL INFORMATION
(dollars in millions)

                               Three Months         Twelve Months
                             Ended December 31,    Ended December 31,    
                                1996      1995       1996       1995

THE KANSAS CITY SOUTHERN RAILWAY COMPANY

Revenues                  $    122.1  $  125.4    $ 492.5   $ 502.1
Costs and expenses              87.3      91.2      359.3     380.2
Depreciation and amortization   14.5      14.1       59.1      55.3
    Operating income            20.3      20.1       74.1      66.6

Equity in net earnings of
unconsolidated affiliates        0.4       --         0.4        
Interest expense               (12.9)    (13.3)     (49.4)    (50.7)
Other, net                       3.4        0.8       6.1       3.4
    Pretax income               11.2        7.6      31.2      19.3
Income tax provision             5.6        2.7      14.1       7.9

    Net income              $    5.6    $   4.9   $  17.1    $ 11.4


FINANCIAL ASSET MANAGEMENT

Revenues                   $    96.1    $  65.5   $ 329.9   $ 239.8
Costs and expenses              52.9       36.2     175.2     133.9
Depreciation and amortization    3.1        3.4      12.4      13.2
    Operating income            40.1       25.9     142.3      92.7

Equity in net earnings of
unconsolidated affiliates       (0.1)        --      (0.1)      --
Interest expense                (1.5)      (1.2)     (5.7)     (4.9)
Other, net                       3.1        1.6       5.9       4.3
    Pretax income               41.6       26.3     142.4      92.1
Income tax provision            16.8       10.8      57.5      37.8
Minority interest in
consolidated earnings            4.5        2.9      15.8      10.5

    Net income             $    20.3   $   12.6   $  69.1   $  43.8


CORPORATE & OTHER

Revenues                   $     2.7   $    7.1   $  24.9   $  33.3
Costs and expenses               5.0        9.8      32.8      26.9
Depreciation and amortization    0.6        1.5       4.6       6.5
    Operating loss              (2.9)      (4.2)    (12.5)     (0.1)

Gain on sale of
equity investment                --       296.3        --     296.3
Equity in net earnings of
unconsolidated affiliates:                        
    DST Systems, Inc.            4.9        1.7      68.1      24.6
    Other                         --        4.7       1.7       5.2
Interest expense                (2.0)      (1.8)     (4.5)     (9.9)
Other, net                       4.1        3.1      10.9      12.6
    Pretax income                4.1      299.8      63.7     328.7
Income tax provision (benefit)  (2.5)     145.4      (1.0)    147.2

    Net income              $    6.6    $ 154.4   $  64.7   $ 181.5

Note: Financial information for the three and twelve months ended December 31, 1995 has been reclassified to reflect DST Systems, Inc. as an unconsolidated affiliate as of January 1, 1995.


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