KANSAS CITY SOUTHERN
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-Q
|
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
| For the quarterly period ended March 31, 2010 | ||
|
or
|
||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission File Number 1-4717
KANSAS CITY SOUTHERN
(Exact name of registrant as
specified in its charter)
|
Delaware
(State or other jurisdiction of incorporation or organization) 427 West 12th Street, Kansas City, Missouri (Address of principal executive offices) |
|
44-0663509
(I.R.S. Employer Identification No.) 64105 (Zip Code) |
816.983.1303
(Registrant’s telephone
number, including area code)
None
(Former name, former address and
former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes
o
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2
of the
Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest
practicable date.
|
Class
|
Outstanding at April 20, 2010
|
|
|
Common Stock, $0.01 per share par value
|
96,712,467 Shares |
Kansas
City Southern
Form 10-Q
March 31, 2010
Index
Form 10-Q
March 31, 2010
Index
2
Table of Contents
Kansas
City Southern
Form 10-Q
March 31, 2010
| Item 1. | Financial Statements |
Introductory
Comments
The Consolidated Financial Statements included herein have been
prepared by Kansas City Southern, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission
(“SEC”). As used herein, “KCS” or the
“Company” may refer to Kansas City Southern or, as the
context requires, to one or more subsidiaries of Kansas City
Southern. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
U.S. generally accepted accounting principles
(“U.S. GAAP”) have been condensed or omitted,
pursuant to such rules and regulations. The Company believes
that the disclosures are adequate to enable a reasonable
understanding of the information presented. The Consolidated
Financial Statements and Management’s Discussion and
Analysis of Financial Condition and Results of Operations
included in this
Form 10-Q
should be read in conjunction with the consolidated financial
statements and the related notes, as well as Management’s
Discussion and Analysis of Financial Condition and Results of
Operations, included in the Company’s Annual Report on
Form 10-K
for the year ended December 31, 2009. Results for the three
months ended March 31, 2010 are not necessarily indicative
of the results expected for the full year ending
December 31, 2010.
3
Table of Contents
Kansas
City Southern
| Three Months Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
| (In millions, except share and per share amounts) | ||||||||
| (Unaudited) | ||||||||
|
Revenues
|
$ | 436.3 | $ | 346.0 | ||||
|
Operating expenses:
|
||||||||
|
Compensation and benefits
|
90.7 | 78.0 | ||||||
|
Purchased services
|
44.9 | 45.6 | ||||||
|
Fuel
|
60.8 | 43.3 | ||||||
|
Equipment costs
|
38.7 | 39.1 | ||||||
|
Depreciation and amortization
|
45.8 | 46.9 | ||||||
|
Casualties and insurance
|
11.9 | 12.5 | ||||||
|
Materials and other
|
35.3 | 33.0 | ||||||
|
Total operating expenses
|
328.1 | 298.4 | ||||||
|
Operating income
|
108.2 | 47.6 | ||||||
|
Equity in net earnings of unconsolidated affiliates
|
6.4 | 1.0 | ||||||
|
Interest expense
|
(44.4 | ) | (41.8 | ) | ||||
|
Debt retirement costs
|
(14.9 | ) | (5.9 | ) | ||||
|
Foreign exchange gain (loss)
|
2.6 | (5.1 | ) | |||||
|
Other income, net
|
0.5 | 1.5 | ||||||
|
Income (loss) before income taxes and noncontrolling interest
|
58.4 | (2.7 | ) | |||||
|
Income tax expense
|
24.2 | 0.1 | ||||||
|
Net income (loss)
|
34.2 | (2.8 | ) | |||||
|
Noncontrolling interest
|
(1.1 | ) | (0.1 | ) | ||||
|
Net income (loss) attributable to Kansas City Southern and
subsidiaries
|
35.3 | (2.7 | ) | |||||
|
Preferred stock dividends
|
2.7 | 5.4 | ||||||
|
Net income (loss) available to common shareholders
|
$ | 32.6 | $ | (8.1 | ) | |||
|
Earnings (loss) per share:
|
||||||||
|
Basic earnings (loss) per share
|
$ | 0.34 | $ | (0.09 | ) | |||
|
Diluted earnings (loss) per share
|
$ | 0.34 | $ | (0.09 | ) | |||
|
Average shares outstanding
(in thousands):
|
||||||||
|
Basic
|
95,890 | 90,743 | ||||||
|
Potentially dilutive common shares
|
568 | — | ||||||
|
Diluted
|
96,458 | 90,743 | ||||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
Kansas
City Southern
|
March 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
|
(In millions, except
|
||||||||
| share amounts) | ||||||||
| (Unaudited) | ||||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 126.1 | $ | 117.5 | ||||
|
Accounts receivable, net
|
169.0 | 139.4 | ||||||
|
Restricted funds
|
34.0 | 35.8 | ||||||
|
Materials and supplies
|
107.6 | 106.4 | ||||||
|
Deferred income taxes
|
163.6 | 151.7 | ||||||
|
Other current assets
|
61.5 | 63.0 | ||||||
|
Total current assets
|
661.8 | 613.8 | ||||||
|
Investments
|
53.5 | 46.8 | ||||||
|
Property and equipment (including concession assets), net
|
4,757.9 | 4,722.4 | ||||||
|
Other assets
|
75.9 | 71.3 | ||||||
|
Total assets
|
$ | 5,549.1 | $ | 5,454.3 | ||||
| LIABILITIES AND EQUITY | ||||||||
|
Current liabilities:
|
||||||||
|
Debt due within one year
|
$ | 64.4 | $ | 68.1 | ||||
|
Accounts payable and accrued liabilities
|
381.9 | 342.7 | ||||||
|
Total current liabilities
|
446.3 | 410.8 | ||||||
|
Long-term debt
|
1,906.9 | 1,911.9 | ||||||
|
Deferred income taxes
|
583.1 | 558.6 | ||||||
|
Other noncurrent liabilities and deferred credits
|
249.1 | 247.2 | ||||||
|
Total liabilities
|
3,185.4 | 3,128.5 | ||||||
|
Commitments and contingencies
|
— | — | ||||||
|
Stockholders’ equity:
|
||||||||
|
$25 par, 4% noncumulative, preferred stock,
840,000 shares authorized, 649,736 shares issued,
242,170 shares outstanding
|
6.1 | 6.1 | ||||||
|
Series D — cumulative convertible perpetual
preferred stock, $1 par, 5.125%, 210,000 shares
authorized and issued, 209,995 shares outstanding with a
liquidation preference of $1,000 per share
|
0.2 | 0.2 | ||||||
|
$.01 par, common stock, 400,000,000 shares authorized;
110,583,068 shares issued; 96,718,921 and
96,213,346 shares outstanding at March 31, 2010 and
December 31, 2009, respectively
|
1.0 | 0.9 | ||||||
|
Paid-in capital
|
666.9 | 661.4 | ||||||
|
Retained earnings
|
1,411.3 | 1,378.8 | ||||||
|
Accumulated other comprehensive loss
|
(3.5 | ) | (4.4 | ) | ||||
|
Total stockholders’ equity
|
2,082.0 | 2,043.0 | ||||||
|
Noncontrolling interest
|
281.7 | 282.8 | ||||||
|
Total equity
|
2,363.7 | 2,325.8 | ||||||
|
Total liabilities and equity
|
$ | 5,549.1 | $ | 5,454.3 | ||||
See accompanying notes to consolidated financial statements.
5
Table of Contents
Kansas
City Southern
|
Three Months Ended
|
||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
| (In millions) | ||||||||
| (Unaudited) | ||||||||
|
Operating activities:
|
||||||||
|
Net income (loss)
|
$ | 34.2 | $ | (2.8 | ) | |||
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
||||||||
|
Depreciation and amortization
|
45.8 | 46.9 | ||||||
|
Deferred income taxes
|
23.7 | (0.7 | ) | |||||
|
Equity in undistributed earnings of unconsolidated affiliates
|
(6.4 | ) | (1.0 | ) | ||||
|
Share-based compensation
|
3.2 | 2.1 | ||||||
|
Excess tax benefit from share-based compensation
|
(11.7 | ) | — | |||||
|
Other deferred compensation
|
1.5 | (1.6 | ) | |||||
|
Gain on sale of assets
|
— | (1.0 | ) | |||||
|
Debt retirement costs
|
14.9 | 5.9 | ||||||
|
Changes in working capital items:
|
||||||||
|
Accounts receivable
|
(29.5 | ) | 3.5 | |||||
|
Materials and supplies
|
(0.9 | ) | 1.2 | |||||
|
Other current assets
|
0.9 | 2.7 | ||||||
|
Accounts payable and accrued liabilities
|
29.8 | 21.2 | ||||||
|
Other, net
|
6.0 | 2.9 | ||||||
|
Net cash provided by operating activities
|
111.5 | 79.3 | ||||||
|
Investing activities:
|
||||||||
|
Capital expenditures
|
(52.3 | ) | (115.4 | ) | ||||
|
Acquisition of an intermodal facility, net of cash acquired
|
(25.0 | ) | — | |||||
|
Property investments in MSLLC
|
(4.8 | ) | (17.8 | ) | ||||
|
Proceeds from disposal of property
|
1.3 | 3.7 | ||||||
|
Other, net
|
(1.0 | ) | (1.5 | ) | ||||
|
Net cash used for investing activities
|
(81.8 | ) | (131.0 | ) | ||||
|
Financing activities:
|
||||||||
|
Proceeds from issuance of long-term debt
|
295.7 | 214.0 | ||||||
|
Repayment of long-term debt
|
(305.7 | ) | (238.7 | ) | ||||
|
Debt costs
|
(20.6 | ) | (9.3 | ) | ||||
|
Proceeds from employee stock plans
|
0.5 | 0.3 | ||||||
|
Excess tax benefit from share-based compensation
|
11.7 | — | ||||||
|
Preferred stock dividends paid
|
(2.7 | ) | (2.8 | ) | ||||
|
Net cash used for financing activities
|
(21.1 | ) | (36.5 | ) | ||||
|
Cash and cash equivalents:
|
||||||||
|
Net increase (decrease) during each period
|
8.6 | (88.2 | ) | |||||
|
At beginning of year
|
117.5 | 229.9 | ||||||
|
At end of period
|
$ | 126.1 | $ | 141.7 | ||||
See accompanying notes to consolidated financial statements.
6
Table of Contents
Kansas
City Southern
| 1. | Accounting Policies, Interim Financial Statements and Basis of Presentation |
In the opinion of the management of KCS, the accompanying
unaudited consolidated financial statements contain all
adjustments necessary for a fair presentation of the results for
interim periods. All adjustments made were of a normal and
recurring nature. Certain information and footnote disclosure
normally included in financial statements prepared in accordance
with U.S. GAAP have been condensed or omitted. These
consolidated financial statements should be read in conjunction
with the consolidated financial statements and accompanying
notes included in the Company’s Annual Report on
Form 10-K
for the year ended December 31, 2009. The results of
operations for the three months ended March 31, 2010 are
not necessarily indicative of the results to be expected for the
full year ending December 31, 2010. Certain prior year
amounts have been reclassified to conform to the current year
presentation.
During the third quarter of 2009, the Company identified that
changes in accounts payable and accrued liabilities related to
capital spending had not been correctly presented in the
Company’s prior period consolidated cash flow statements.
Changes in these accruals had previously been classified within
cash flows from operating activities and should have been
classified as capital expenditures within investing activities,
in order to report capital expenditures on a cash basis rather
than on an accrual basis. The accompanying consolidated cash
flow statement for the three months ended March 31, 2010
presents capital expenditures on a cash basis. The accompanying
consolidated cash flow statement for the three months ended
March 31, 2009 has been revised to present capital
expenditures on a cash basis. This revision did not impact the
change in cash and cash equivalents as previously reported,
however, net cash provided by operating activities, capital
expenditures and cash used by investing activities increased by
$16.6 million for the three months ended March 31,
2009. This revision did not impact operating income or net
income, working capital, or any earnings per share measures as
previously reported.
During the first quarter of 2010, the Company elected to change
its accounting policy for rail grinding costs from a
capitalization method to a direct expense method. Previously,
the Company capitalized rail grinding costs as an improvement to
the rail. The Company believes it is preferable to expense these
costs as incurred to eliminate the subjectivity in determining
the period of benefit associated with rail grinding over which
to depreciate the associated capitalized costs. The Company has
reflected this change as a change in accounting principle from
an accepted accounting principle to a preferable accounting
principle in accordance with Accounting Standards Codification
250 “Accounting for Changes and Error Corrections”.
Comparative financial statements for all periods have been
adjusted to apply the change in accounting principle
retrospectively.
The following line items in the consolidated statement of
operations were affected by the change in accounting principle
(in millions, except per share amounts):
| Three Months Ended March 31, 2009 | ||||||||||||
| As reported | As adjusted | Change | ||||||||||
|
Purchased services
|
$ | 44.5 | $ | 45.6 | $ | 1.1 | ||||||
|
Depreciation and amortization
|
47.1 | 46.9 | (0.2 | ) | ||||||||
|
Loss before income taxes and noncontrolling interest
|
(1.8 | ) | (2.7 | ) | (0.9 | ) | ||||||
|
Income tax expense
|
0.4 | 0.1 | (0.3 | ) | ||||||||
|
Net loss
|
(2.2 | ) | (2.8 | ) | (0.6 | ) | ||||||
|
Diluted loss per share
|
$ | (0.08 | ) | $ | (0.09 | ) | $ | (0.01 | ) | |||
7
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
The following line items in the consolidated balance sheet were
affected by the change in accounting principle
(in
millions):
| December 31, 2009 | ||||||||||||
| As reported | As adjusted | Change | ||||||||||
|
Property and equipment (including concession assets), net
|
$ | 4,747.2 | $ | 4,722.4 | $ | (24.8 | ) | |||||
|
Deferred income tax liabilities
|
567.1 | 558.6 | (8.5 | ) | ||||||||
|
Other noncurrent liabilities and deferred credits
|
247.7 | 247.2 | (0.5 | ) | ||||||||
|
Retained earnings
|
1,394.6 | 1,378.8 | (15.8 | ) | ||||||||
|
Total equity
|
2,341.6 | 2,325.8 | (15.8 | ) | ||||||||
The change in accounting principle and the revision related to
the classification of capital expenditures on a cash basis
rather than on an accrual basis did not have an impact on the
change in cash and cash equivalents in the consolidated
statement of cash flows; however, the following line items were
affected by these adjustments
(in millions):
| Three Months Ended March 31, 2009 | ||||||||||||
| As reported | As adjusted | Change | ||||||||||
|
Net cash provided by operating activities
|
$ | 63.8 | $ | 79.3 | $ | 15.5 | ||||||
|
Net cash used for investing activities
|
(115.5 | ) | (131.0 | ) | (15.5 | ) | ||||||
As of January 1, 2008, the cumulative effect of the change
in accounting principle on property and equipment (including
concession assets), deferred income tax liabilities, other
noncurrent liabilities and deferred credits and retained
earnings was ($20.5) million, ($7.3) million,
($0.4) million and ($12.8) million, respectively.
| 2. | Accounting Pronouncements |
Effective January 1, 2010, the Company adopted the
Financial Accounting Standards Board (the “FASB”)
Accounting Standards Update (“ASU”)
No. 2009-17,
“Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities” (“ASU
2009-17”).
ASU
2009-17
addresses the elimination of certain exceptions to consolidating
qualifying special-purpose entities, which means more entities
will be subject to consolidation assessments and reassessments.
The new guidance requires ongoing reassessment of whether a
company is the primary beneficiary of a variable interest entity
(“VIE”) and clarifies characteristics that identify a
VIE. In addition, ASU
2009-17
requires additional disclosures about a company’s
involvement with a VIE and any significant changes in risk
exposure due to that involvement. The adoption of ASU
2009-17
did
not have any impact on the Company’s results of operations
and financial condition.
| 3. | Earnings (Loss) Per Share Data |
Basic earnings (loss) per common share is computed by dividing
income (loss) available to common stockholders by the weighted
average number of common shares outstanding for the period.
Nonvested stock awards granted to employees and officers are
included in weighted average shares as they are earned for
purposes of computing basic earnings (loss) per common share.
Diluted earnings (loss) per share adjusts basic earnings (loss)
per common share for the effects of potentially dilutive common
shares, if the effect is not anti-dilutive. Potentially dilutive
common shares include the dilutive effects of shares issuable
upon the conversion of preferred stock to common stock and
shares issuable under the Stock Option and Performance Award
Plan.
8
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
The following table reconciles the weighted average shares used
for the basic earnings (loss) per share computation to the
shares used for the diluted earnings (loss) per share
computation
(in thousands)
:
|
Three Months
|
||||||||
| Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Basic shares
|
95,890 | 90,743 | ||||||
|
Effect of dilution
|
568 | — | ||||||
|
Diluted shares
|
96,458 | 90,743 | ||||||
For the three months ended March 31, 2010, the Company
excluded from the computation of dilutive shares the assumed
conversion of preferred stock to 7,000,000 shares of common
stock which was anti-dilutive and approximately 281,000 stock
options because the impact would have been anti-dilutive as the
option price was higher than the average market price. For the
three months ended March 31, 2009, the assumed conversion
of preferred stock to 7,000,000 shares of common stock and
approximately 561,000 stock options were excluded from the
computation of diluted shares because the impact would have been
anti-dilutive due to the loss reported in the period.
There are no reconciling items between net income (loss)
available to common stockholders for purposes of basic earnings
(loss) per share and net income (loss) available to common
stockholders for purposes of diluted earnings (loss) per share.
| 4. | Property and Equipment (including Concession Assets) |
Property and Equipment.
Property and
equipment, including concession assets, and related accumulated
depreciation and amortization are summarized below
(in
millions)
:
|
March 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
|
Land
|
$ | 176.3 | $ | 162.9 | ||||
|
Concession land rights
|
137.6 | 137.6 | ||||||
|
Road property
|
4,719.9 | 4,644.4 | ||||||
|
Equipment
|
691.0 | 679.3 | ||||||
|
Technology and other
|
127.0 | 125.3 | ||||||
|
Construction in progress
|
120.5 | 165.6 | ||||||
|
Total property
|
5,972.3 | 5,915.1 | ||||||
|
Accumulated depreciation and amortization
|
1,214.4 | 1,192.7 | ||||||
|
Net property
|
$ | 4,757.9 | $ | 4,722.4 | ||||
Concession assets, net of accumulated amortization of
$264.7 million and $259.4 million, totaled
$1,774.7 million and $1,768.0 million at
March 31, 2010 and December 31, 2009, respectively.
| 5. | Fair Value Measurements |
The Company’s short term financial instruments include cash
and cash equivalents, accounts receivable, and accounts payable.
The carrying value of the short term financial instruments
approximates the fair value due to their short term nature.
The fair value of the Company’s debt is estimated using
quoted market prices when available. When quoted market prices
are not available, fair value is estimated based on current
market interest rates for debt with similar maturities and
credit quality. The fair value of the Company’s debt was
$2,050.9 million and
9
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
$2,031.1 million at March 31, 2010 and
December 31, 2009, respectively. The financial statement
carrying value was $1,971.3 million and
$1,980.0 million at March 31, 2010 and
December 31, 2009, respectively.
Assets and liabilities recognized at fair value are required to
be classified into a three-level hierarchy. In general, fair
values determined by Level 1 inputs utilize quoted prices
(unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access.
Level 2 inputs include quoted prices for similar assets and
liabilities in active markets, and inputs other than quoted
prices that are observable for the asset or liability.
Level 3 inputs are unobservable inputs for the asset or
liability, and include situations where there is little, if any,
market activity for the asset or liability. In certain cases,
the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, the level in
the fair value hierarchy within which the fair value measurement
in its entirety falls has been determined based on the lowest
level input that is significant to the fair value measurement in
its entirety. The Company’s assessment of the significance
of a particular input to the fair value in its entirety requires
judgment and considers factors specific to the asset or
liability.
The following tables present the Company’s assets and
liabilities measured at fair value on a recurring basis (
in
millions)
:
| Fair Value Measurements |
Net Assets (Liabilities)
|
|||||||||||||||
| Level 1 | Level 2 | Level 3 | at Fair Value | |||||||||||||
|
March 31, 2010
|
||||||||||||||||
|
Interest rate contracts
|
$ | — | $ | (3.9 | ) | $ | — | $ | (3.9 | ) | ||||||
|
Fuel swap contracts
|
— | 0.6 | — | 0.6 | ||||||||||||
|
Net assets (liabilities), at fair value
|
$ | — | $ | (3.3 | ) | $ | — | $ | (3.3 | ) | ||||||
| Fair Value Measurements |
Net Assets (Liabilities)
|
|||||||||||||||
| Level 1 | Level 2 | Level 3 | at Fair Value | |||||||||||||
|
December 31, 2009
|
||||||||||||||||
|
Interest rate contracts
|
$ | — | $ | (4.9 | ) | $ | — | $ | (4.9 | ) | ||||||
|
Net assets (liabilities), at fair value
|
$ | — | $ | (4.9 | ) | $ | — | $ | (4.9 | ) | ||||||
The Company determines the fair values of its derivative
financial instrument positions based upon pricing models using
inputs observed from actively quoted markets. Pricing models
take into consideration the contract terms as well as other
inputs, including forward interest rate curves. As prescribed by
the guidance, the Company recognizes the fair value of its
derivative financial instruments as a Level 2 valuation.
| 6. | Derivative Instruments |
The Company does not engage in the trading of derivative
financial instruments except where the Company’s objective
is to manage the variability of forecasted interest payments
attributable to changes in interest rates or fuel price risk. In
general, the Company enters into derivative transactions in
limited situations based on management’s assessment of
current market conditions and perceived risks. However,
management intends to respond to evolving business and market
conditions and in doing so, may enter into such transactions
more frequently as deemed appropriate.
Credit Risk.
As a result of the use of
derivative instruments, the Company is exposed to counterparty
credit risk. The Company manages the counterparty credit risk by
entering into contracts with large financial institutions with
which the Company has an established banking relationship. As of
March 31, 2010, the Company did not expect any losses as a
result of default of its counterparties.
10
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
Interest Rate Swaps.
During 2008, the Company
entered into five forward starting interest rate swaps, which
have been designated as cash flow hedges. The forward starting
interest rate swaps effectively convert interest payments from
variable rates to fixed rates. The swaps are highly effective
and as a result there will be de minimus earnings impact
associated with ineffectiveness of these hedges. The hedging
instruments have an aggregate notional amount of
$250.0 million at an average fixed rate of 2.71%, with
forward starting settlements indexed to the three-month LIBOR
occurring every quarter, expiring September 2010 through March
2011.
Fuel Derivative Transactions.
In the first
quarter of 2010, the Company entered into fuel swap agreements,
which have not been designated as hedging instruments. Gains and
losses for derivatives which have not been designated as hedging
instruments are recorded in fuel expense in the consolidated
statement of operations. As of March 31, 2010, the Company
has outstanding fuel swap agreements for 19.7 million
gallons of diesel fuel purchases through the end of 2010 at an
average swap price of $2.23 per gallon.
In January 2009, the Company entered into fuel swap agreements,
which had been designated as cash flow hedges. The effective
portion of the gain or loss on the derivative instruments was
reported as a component of other comprehensive income (loss) and
reclassified into earnings in the same period or periods during
which the hedged transaction affected earnings. Gains and losses
on the derivative representing either hedge ineffectiveness or
hedge components excluded from the assessment of the
effectiveness were recognized in current earnings. During the
second quarter of 2009, it became probable that the hedged
transactions would not occur as forecasted. Therefore, the
hedging relationship was dedesignated on May 31, 2009 and
hedge accounting was discontinued. Changes in the fair value of
the derivative instrument after dedesignation were recorded in
earnings.
The following table presents the fair value of derivative
instruments included in the consolidated balance sheet
(in
millions)
:
| Asset Derivatives | ||||||||||
|
Balance Sheet
|
March 31,
|
December 31,
|
||||||||
| Location | 2010 | 2009 | ||||||||
|
Derivatives not designated as hedging instruments:
|
||||||||||
|
Fuel swap contracts
|
Other current assets | 0.8 | — | |||||||
|
Total derivatives not designated as hedging instruments
|
0.8 | — | ||||||||
|
Total asset derivatives
|
$ | 0.8 | $ | — | ||||||
11
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
| Liability Derivatives | ||||||||||
|
Balance Sheet
|
March 31,
|
December 31,
|
||||||||
| Location | 2010 | 2009 | ||||||||
|
Derivatives designated as hedging instruments:
|
||||||||||
|
Interest rate contracts
|
Accounts payable & accrued liabilities | $ | 3.9 | $ | 3.2 | |||||
|
Interest rate contracts
|
Other non-current liabilities & deferred credits | — | 1.7 | |||||||
|
Total derivatives designated as hedging instruments
|
3.9 | 4.9 | ||||||||
|
Derivatives not designated as hedging instruments:
|
||||||||||
|
Fuel swap contracts
|
Accounts payable & accrued liabilities | 0.2 | — | |||||||
|
Total derivatives not designated as hedging instruments
|
0.2 | — | ||||||||
|
Total liability derivatives
|
$ | 4.1 | $ | 4.9 | ||||||
The following table presents the amounts affecting the
consolidated statement of operations for the three months ended
March 31,
(in millions)
:
|
Location of
|
Amount of
|
|||||||||||||||||||||||||||
|
Gain/(Loss)
|
Gain/(Loss)
|
|||||||||||||||||||||||||||
|
Amount of
|
Recognized in
|
Recognized in
|
||||||||||||||||||||||||||
|
Amount of
|
Gain/(Loss)
|
Income on Derivative
|
Income on Derivative
|
|||||||||||||||||||||||||
|
Gain/(Loss)
|
Location of Gain/(Loss)
|
Reclassified from
|
(Ineffective Portion
|
(Ineffective Portion
|
||||||||||||||||||||||||
|
Derivatives in Cash
|
Recognized in
|
Reclassified from
|
Accumulated OCI
|
and Amount Excluded
|
and Amount Excluded
|
|||||||||||||||||||||||
|
Flow Hedging
|
OCI on Derivative
|
Accumulated OCI into Income
|
into Income
|
from Effectiveness
|
from Effectiveness
|
|||||||||||||||||||||||
| Relationships | (Effective Portion) | (Effective Portion) | (Effective Portion) | Testing) | Testing) | |||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||
|
Interest rate contracts
|
$ | (0.6 | ) | $ | (0.7 | ) | Interest expense | $ | (1.5 | ) | $ | (0.7 | ) | Interest expense | $ | — | $ | — | ||||||||||
|
Fuel swap contracts
|
— | (1.6 | ) | Fuel expense | — | (0.2 | ) | Fuel Expense | — | (2.0 | ) | |||||||||||||||||
|
Total
|
$ | (0.6 | ) | $ | (2.3 | ) | $ | (1.5 | ) | $ | (0.9 | ) | $ | — | $ | (2.0 | ) | |||||||||||
|
Amount of
|
||||||||||||||||||||||||||||
|
Gain/(Loss)
|
||||||||||||||||||||||||||||
|
Location of Gain/(Loss)
|
Recognized in
|
|||||||||||||||||||||||||||
|
Recognized in Income on
|
Income on
|
|||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | Derivative | Derivative | ||||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||||||
|
Fuel swap contracts
|
Fuel expense | $ | 0.3 | $ | — | |||||||||||||||||||||||
|
Total
|
$ | 0.3 | $ | — | ||||||||||||||||||||||||
| 7. | Acquisition |
On March 3, 2010, the Company acquired an intermodal
facility in Mexico. The aggregate purchase price for the
intermodal facility was $25.0 million, which was funded by
existing cash reserves. The Company has determined that the
acquisition is not material to the Company’s consolidated
financial statements; therefore, pro forma financial information
is not presented. In addition, the Company has made a
preliminary purchase allocation as of March 31, 2010, based
on incomplete valuations. The Company expects to complete the
purchase valuation during the second quarter of 2010.
12
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
| 8. | Long-Term Debt |
On January 7, 2010, pursuant to an offer to purchase,
Kansas City Southern de México, S.A. de C.V.
(“KCSM”), a wholly-owned subsidiary of KCS, commenced
a cash tender offer for a portion of its
9
3
/
8
% senior
unsecured notes due May 1, 2012 (the
“9
3
/
8
% Senior
Notes”). On January 22, 2010, the Company purchased
$290.0 million of the tendered
9
3
/
8
% Senior
Notes in accordance with the terms and conditions of the tender
offer set forth in the offer to purchase using the proceeds
received from the issuance of $300.0 million of KCSM
8.0% senior unsecured notes due February 1, 2018 (the
“KCSM 8.0% Senior Notes”). Additionally, on
February 1, 2010, KCSM purchased $6.3 million of the
9
3
/
8
% Senior
Notes. KCSM recorded debt retirement costs of $14.9 million
in the first quarter of 2010. The remaining
9
3
/
8
% Senior
Notes mature on May 1, 2012 and are redeemable by KCSM at
its option.
On January 22, 2010, KCSM issued the $300.0 million
KCSM 8.0% Senior Notes, which bear interest semiannually at
a fixed annual rate of 8.0%. The KCSM 8.0% Senior Notes
were issued at a discount to par value, resulting in a
$4.3 million discount and a yield to maturity of
8
1
/
4
%.
KCSM used the net proceeds from the issuance of the KCSM
8.0% Senior Notes and cash on hand to purchase
$290.0 million in principal amount of the
9
3
/
8
% Senior
Notes tendered under an offer to purchase and pay all fees and
expenses incurred in connection with the KCSM 8.0% Senior
Notes offering and tender offer. The KCSM 8.0% Senior Notes
are redeemable at KCSM’s option, in whole or in part, on
and after February 1, 2014, at the following redemption
prices (expressed as percentages of principal amount) plus any
accrued and unpaid interest: 2014 — 104.000%,
2015 — 102.000%, 2016 — 100.000%. In
addition, KCSM may redeem up to 35% of the KCSM 8.0% Senior
Notes any time prior to February 1, 2013 from the proceeds
of the sale of capital stock in KCSM or KCS and are redeemable,
in whole but not in part, at KCSM’s option at their
principal amount in the event of certain changes in the Mexican
withholding tax rate.
The KCSM 8.0% Senior Notes are denominated in dollars and
are unsecured, unsubordinated obligations, rank
pari passu
in right of payment with KCSM’s existing and future
unsecured, unsubordinated obligations, and are senior in right
of payment to KCSM’s future subordinated indebtedness. In
addition, the KCSM 8.0% Senior Notes include certain covenants
which are customary for these types of debt instruments and
borrowers with similar credit ratings. The KCSM 8.0% Senior
Notes contain certain covenants that, among other things,
prohibit or restrict KCSM from taking certain actions, including
KCSM’s ability to incur debt, pay dividends or make other
distributions in respect of its stock, issue guarantees, enter
into certain transaction with affiliates, make restricted
payments, sell certain assets, create liens, engage in
sale-leaseback transactions and engage in mergers, divestitures
and consolidations. However, these limitations are subject to a
number of important qualifications and exceptions.
On March 16, 2010, KCS and The Kansas City Southern Railway
Company (“KCSR”), a wholly-owned subsidiary of KCS,
entered into a Second Amendment (“Amendment
No. 2”) to KCSR’s Amended and Restated Credit
Agreement dated April 28, 2006, as amended by Amendment
No. 1 dated as of May 31, 2007 (the “Existing
Credit Agreement”), which extends the maturity of the
revolving credit facility of the Existing Credit Agreement from
April 28, 2011 to April 28, 2013. In consideration for
this change, the parties to the agreement agreed to increase the
Applicable Margin (as defined in Amendment No. 2) in
respect of the revolving and swing line credit facilities. In
addition, Amendment No. 2 modified certain covenants of the
Existing Credit Agreement to permit the incurrence of certain
indebtedness and the creation of liens related to such
indebtedness, as well as certain prepayments of existing
unsecured debt. Amendment No. 2 also provides for certain
conforming revisions to the definitions and other terms set
forth in the Existing Credit Agreement. Except as amended and
supplemented by Amendment No. 2, all terms of the Existing
Credit Agreement remained in full force and effect. As the
Company intends to repay the outstanding balance under the
revolving credit facility within the next twelve months, the
outstanding amount of $40.0 million has been classified as
a current liability as of March 31, 2010.
13
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
| 9. | Equity |
The following table summarizes the changes in equity (
in
millions
):
| Three Months Ended March 31, 2010 | Three Months Ended March 31, 2009 | |||||||||||||||||||||||
|
Kansas City
|
Kansas City
|
|||||||||||||||||||||||
|
Southern
|
Southern
|
|||||||||||||||||||||||
|
Stockholders’
|
Noncontrolling
|
Stockholders’
|
Noncontrolling
|
|||||||||||||||||||||
| Equity | interest | Total Equity | Equity | interest | Total Equity | |||||||||||||||||||
|
Beginning Balance
|
$ | 2,043.0 | $ | 282.8 | $ | 2,325.8 | $ | 1,896.6 | $ | 273.7 | $ | 2,170.3 | ||||||||||||
|
Comprehensive income (loss):
|
||||||||||||||||||||||||
|
Net income (loss)
|
35.3 | (1.1 | ) | 34.2 | (2.7 | ) | (0.1 | ) | (2.8 | ) | ||||||||||||||
|
Unrealized gain (loss) on cash flow hedges, net of tax of
$(0.2) million and $(0.9) million
|
(0.4 | ) | — | (0.4 | ) | (1.4 | ) | — | (1.4 | ) | ||||||||||||||
|
Reclassification adjustment from cash flow hedges included in
net income, net of tax of $0.6 million and $0.5 million
|
0.9 | — | 0.9 | 0.4 | — | 0.4 | ||||||||||||||||||
|
Cumulative translation adjustment — FTVM, net of tax
of $0.1 million and $(0.4) million
|
0.4 | — | 0.4 | 0.1 | — | 0.1 | ||||||||||||||||||
|
Comprehensive income (loss)
|
36.2 | (1.1 | ) | 35.1 | (3.6 | ) | (0.1 | ) | (3.7 | ) | ||||||||||||||
|
Dividends on $25 par preferred stock
|
(0.1 | ) | — | (0.1 | ) | (0.1 | ) | — | (0.1 | ) | ||||||||||||||
|
Dividends on series D cumulative preferred stock
|
(2.6 | ) | — | (2.6 | ) | (5.3 | ) | — | (5.3 | ) | ||||||||||||||
|
Options exercised and stock subscribed, net of shares withheld
for employee taxes
|
(9.4 | ) | — | (9.4 | ) | 1.2 | — | 1.2 | ||||||||||||||||
|
Tax benefit from share-based compensation
|
11.7 | — | 11.7 | |||||||||||||||||||||
|
Share-based compensation
|
3.2 | — | 3.2 | 2.1 | — | 2.1 | ||||||||||||||||||
|
Ending Balance
|
$ | 2,082.0 | $ | 281.7 | $ | 2,363.7 | $ | 1,890.9 | $ | 273.6 | $ | 2,164.5 | ||||||||||||
| 10. | Share-Based Compensation |
Market Based Award.
On March 1, 2010 the
Company granted approximately 191,000 stock options and 108,000
shares of nonvested stock (collectively, the “Award”)
under the Kansas City Southern 2008 Stock Option and Performance
Award Plan. The Award contains a market condition that
accelerates the vesting in three tranches if the closing price
of the Company’s common stock is above certain target share
prices, as set forth in the Award Agreement, for a period of
thirty consecutive trading days. If the target share prices are
not met, the Awards will vest in March 2013.
The fair value and service period of each Award is estimated on
the date of grant using the Monte Carlo simulation model. The
weighted average fair value of stock options and nonvested stock
granted during the three months ended March 31, 2010 was
$15.96 and $35.41, respectively, and the derived service period
ranges from 1.1 to 3.0 years.
Stock Options.
During the three months ended
March 31, 2010, 678,494 stock options with an intrinsic
value of $16.6 million were exercised. Cash received from
option exercises during the period was $0.5 million.
Nonvested Stock.
During the three months ended
March 31, 2010, 269,921 shares vested and the fair
value (at vest date) was $9.0 million.
14
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
| 11. | Commitments and Contingencies |
Concession Duty.
Under KCSM’s railroad
concession from the Mexican government (the
“Concession”), the Mexican government has the right to
receive a payment from the Company equivalent to 0.5% of the
gross revenue during the first 15 years of the Concession
period and 1.25% of the gross revenue during the remaining years
of the Concession period. For the three months ended
March 31, 2010 and 2009, the concession duty expense, which
is recorded within operating expenses, amounted to
$1.0 million and $0.7 million, respectively.
Litigation.
The Company is a party to various
legal proceedings and administrative actions, all of which,
except as set forth below, are of an ordinary, routine nature
and incidental to its operations. Included in these proceedings
are various tort claims brought by current and former employees
for job-related injuries and by third parties for injuries
related to railroad operations. KCS aggressively defends these
matters and has established liability reserves, which management
believes are adequate to cover expected costs. Although it is
not possible to predict the outcome of any legal proceeding, in
the opinion of management, other than those proceedings
described in detail below, such proceedings and actions should
not, individually, or in the aggregate, have a material adverse
effect on the Company’s financial condition and liquidity.
However, a material adverse outcome in one or more of these
proceedings could have a material adverse impact on the results
of operations in a particular quarter or fiscal year.
Environmental Liabilities.
The Company’s
U.S. operations are subject to extensive federal, state and
local environmental laws and regulations. The major
U.S. environmental laws to which the Company is subject
include, among others, the Federal Comprehensive Environmental
Response, Compensation and Liability Act (“CERCLA,”
also known as the Superfund law), the Toxic Substances Control
Act, the Federal Water Pollution Control Act, and the Hazardous
Materials Transportation Act. CERCLA can impose joint and
several liabilities for cleanup and investigation costs, without
regard to fault or legality of the original conduct, on current
and predecessor owners and operators of a site, as well as those
who generate, or arrange for the disposal of, hazardous
substances. The Company does not believe that compliance with
the requirements imposed by the environmental legislation will
impair its competitive capability or result in any material
additional capital expenditures, operating or maintenance costs.
The Company is, however, subject to environmental remediation
costs as described below.
The Company’s Mexico operations are subject to Mexican
federal and state laws and regulations relating to the
protection of the environment through the establishment of
standards for water discharge, water supply, emissions, noise
pollution, hazardous substances and transportation and handling
of hazardous and solid waste. The Mexican government may bring
administrative and criminal proceedings and impose economic
sanctions against companies that violate environmental laws, and
temporarily or even permanently close non-complying facilities.
The risk of incurring environmental liability is inherent in the
railroad industry. As part of serving the petroleum and
chemicals industry, the Company transports hazardous materials
and has a professional team available to respond to and handle
environmental issues that might occur in the transport of such
materials. Additionally, the Company is a partner in the
Responsible
Care
®
program and, as a result, has initiated additional
environmental, health and safety management system programs and
has been certified by an outside professional auditing company
in the American Chemistry Council’s Responsible Care
Management
System
®
.
The Company performs ongoing reviews and evaluations of the
various environmental programs and issues within the
Company’s operations, and, as necessary, takes actions
intended to limit the Company’s exposure to potential
liability.
The Company owns property that is, or has been, used for
industrial purposes. Use of these properties may subject the
Company to potentially material liabilities relating to the
investigation and cleanup of contaminants, claims alleging
personal injury, or property damage as the result of exposures
to, or release of,
15
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
hazardous substances. Although the Company is responsible for
investigating and remediating contamination at several
locations, based on currently available information, the Company
does not expect any related liabilities, individually or
collectively, to have a material impact on its financial
position or cash flows. Should the Company become subject to
more stringent cleanup requirements at these sites, discover
additional contamination, or become subject to related personal
or property damage claims, the Company could incur material
costs in connection with these sites.
The Company records liabilities for remediation and restoration
costs related to past activities when the Company’s
obligation is probable and the costs can be reasonably
estimated. Costs of ongoing compliance activities to current
operations are expensed as incurred. The Company’s recorded
liabilities for these issues represent its best estimates (on an
undiscounted basis) of remediation and restoration costs that
may be required to comply with present laws and regulations.
Although these costs cannot be predicted with certainty,
management believes that the ultimate outcome of identified
matters will not have a material adverse effect on the
Company’s consolidated financial position or cash flows.
Environmental remediation expense was $0.6 million and
$1.9 million for the three months ended March 31, 2010
and 2009, respectively, and was included in casualties and
insurance expense on the consolidated statements of operations.
Additionally, as of March 31, 2010, KCS had a reserve for
environmental remediation of $4.5 million. This amount was
derived from a range of reasonable estimates based upon the
studies and site surveys described above and in accordance with
the accounting guidance for the recognition of loss
contingencies.
Personal Injury Claim Reserves.
The
Company’s personal injury claim reserve is based on
semi-annual actuarial studies performed on an undiscounted
basis. This reserve is based on personal injury claims filed and
an estimate of claims incurred but not yet reported. While the
ultimate amount of claims incurred is dependent on various
factors, it is management’s opinion that the recorded
liability is a reasonable estimate of aggregate future payments.
Adjustments to the liability are reflected within operating
expenses in the period in which changes to estimates are known.
Personal injury claims in excess of self-insurance levels are
insured up to certain coverage amounts, depending on the type of
claim and year of occurrence. The activity in the reserve
follows
(in millions):
|
Three Months
|
||||||||
| Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Balance at beginning of year
|
$ | 86.9 | $ | 90.7 | ||||
|
Accruals, net (includes the impact of actuarial studies)
|
5.1 | 5.2 | ||||||
|
Payments
|
(5.2 | ) | (6.5 | ) | ||||
|
Balance at end of period
|
$ | 86.8 | $ | 89.4 | ||||
The personal injury claim reserve balance as of March 31,
2010 is based on an updated study of personal injury reserves
for data through November 30, 2009 and review of the last
four months’ experience. Reflecting potential uncertainty
surrounding the outcome of personal injury claims, it is
reasonably possible based on assessments that future costs to
settle personal injury claims may range from approximately
$83 million to $91 million.
Settlement Agreement.
On February 9,
2010, (i) KCSM and (ii)
Ferrocarril Mexicano, S.A.
de C.V. (“Ferromex”)
, Ferrosur, S.A. de C.V.
(“Ferrosur”), Minera México, S.A. de C.V.,
Infraestructura y Transportes Ferroviarios, S.A. de C.V.,
Infraestructura y Transportes México, S.A. de C.V.,
Líneas Ferroviarias de México, S.A. de C.V., Grupo
Ferroviario Mexicano, S.A. de C.V., and Grupo México,
S.A.B. de C.V. (jointly, the “Ferromex Parties”)
entered into a Settlement Agreement (the “Settlement
Agreement”).
16
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
Pursuant to the Settlement Agreement, the parties agreed to
completely, definitively and irrevocably terminate (i) the
private disputes, procedures and controversies among KCSM and
the Ferromex Parties, in connection with the merger between
Ferromex and Ferrosur, including KCSM’s involvement in such
procedures as an interested party; and (ii) the lawsuit
filed against KCSM and the Mexican Government in connection with
several disputes, procedures and controversies before judicial
authorities with respect to the acquisition of the shares of
Ferrocarril del Noreste, S.A. de C.V. (now KCSM) by Grupo
Transportación Ferroviaria Mexicana, S.A. de C.V., in 1997
(the “Settlement Procedures”). The parties waived
their rights to any future actions derived from or related to
the Settlement Procedures. Further, the parties did not settle
or agree to settle any disputes, controversies or procedures
other than the Settlement Procedures.
Under the Settlement Agreement, Ferrosur agreed to grant KCSM
certain trackage and switching rights within Veracruz,
México, and switching rights in the Puebla-Tlaxcala zone.
In a related agreement, the parties further agreed to amend the
Ferrocarril y Terminal del Valle de México, S.A. de C.V.
(“FTVM”) by-laws to, among other changes, grant
certain veto and voting rights to KCSM at the shareholders’
and the board of directors’ levels.
The Settlement Agreement shall remain in effect until the term
of the concession title of KCSM expires, unless the parties
mutually agree to renew the Settlement Agreement beyond the
expiration of KCSM’s concession title. The Settlement
Agreement may be terminated earlier upon delivery by KCSM of a
notice to the Ferromex Parties indicating any breach by the
Ferromex Parties of any of their respective obligations under
the Settlement Agreement. Notwithstanding, the settlement and
termination of the Settlement Procedures shall not be subject to
rescission or termination.
The Settlement Agreement may be terminated, at KCSM’s
option, before its stipulated term if Ferromex is sold or if it
transfers, directly or indirectly, its concession under its
concession title. A change in control of KCSM or its affiliates,
however, shall not be a cause for termination. Likewise, the
Settlement Agreement will terminate three years after Ferromex
and Ferrosur cease to be under the common control of one person
or group of persons acting jointly or in agreement to adopt
coordinated resolutions (“Common Control”).
Notwithstanding, if for any reason Ferromex and Ferrosur are
under Common Control within five years after the Settlement
Agreement is terminated due to Ferromex and Ferrosur ceasing to
be under Common Control, the Settlement Agreement would
automatically be reinstated.
In November 2005, Ferromex acquired control of and merged with
Ferrosur creating Mexico’s largest railway, though such
merger has been previously rejected by Comisión Federal de
Competencia (Mexican Antitrust Commission),
(“COFECO”). If the COFECO does not authorize the
merger of Ferromex and Ferrosur, the Settlement Agreement shall
be terminated twelve months after the relevant resolution of the
Governmental Authority is issued or when the unwinding is
effective, whichever is later.
Trackage Rights Settlement Agreement with
Ferromex.
KCSM’s operations are subject to
certain trackage rights, switching rights, and interline
services with Ferromex. KCSM and Ferromex entered into a
Trackage Rights, Switching and Interline Settlement Agreement,
dated February 9, 2010 (the “Trackage Rights
Agreement”). Pursuant to the Trackage Rights Agreement, the
parties terminated, in a definitive and irrevocable manner, all
actions and procedures regarding: (a) rates applicable to
trackage rights, switching and interlinear services from
January 1, 2009 onward but not regarding the applicable
rates before January 1, 2009 or the amounts owed by the
parties to one another prior to the execution of the Trackage
Rights Agreement; (b) the scope of certain trackage rights
in Monterrey, Nuevo León, Guadalajara, Jalisco and
Altamira, Tamaulipas, the Long Trackage Right, and
Aguascalientes; and (c) court costs, as well as any other
directly-related issue or dispute that arises from, is related
in any manner directly or indirectly with, the terms and
conditions
and/or
scope
of such mandatory trackage
and/or
switching rights or that arises by reason of the definition of
trackage rights (the “Settlement Controversies”). The
parties waived their rights to any future actions derived from
or related to the Settlement Controversies. Further, KCSM and
Ferromex set the rates applicable for January 1, 2009 for
each party for the use of the other party’s trackage. The
retroactive
17
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
application of these rates to January 1, 2009 did not have
a material impact on the results of operations for the quarter
ended March 31, 2010.
Explicitly excluded from the scope and purpose of the Trackage
Rights Agreement are all procedures, disputes, lawsuits,
remedies, appeals and disagreements that were not expressly
identified in the Trackage Rights Agreement, including without
limitation, the disputes, claims and lawsuits that relate to the
determination of rates for mandatory trackage
and/or
switching rights and for interconnection
and/or
terminal services, accrued prior to January 1, 2009, as
well as the disputes among the parties regarding amounts payable
to one another for trackage rights, interline services and
switching services, that are currently being disputed by both
parties at the Federal Court of Fiscal and Administrative
Justice. Furthermore, the parties did not settle or agree to
settle any other trackage and switching rights not specifically
mentioned in the Trackage Rights Agreement.
The Trackage Rights Agreement shall remain in effect until the
term of the concession title of Ferromex or the concession title
of KCSM expire, unless the parties mutually agree to renew the
Trackage Rights Agreement beyond the expiration of either
party’s concession title. The Trackage Rights Agreement may
be terminated, at KCSM’s option, before its stipulated term
if Ferromex is sold or if it transfers, directly or indirectly,
its concession under its concession title. A change in control
of KCSM or its affiliates, however, shall not be a cause for
termination.
Certain Disputes with Ferromex.
KCSM’s
operations are subject to certain trackage rights, haulage
rights, and interline services (the “Services”) with
Ferromex. Other than the rates to be charged pursuant to the
Trackage Rights Agreement, dated February 9, 2010, between
KCSM and Ferromex, the rates payable for these Services have not
been agreed upon by KCSM and Ferromex for the periods beginning
in 1998 through December 31, 2008. If KCSM cannot reach an
agreement with Ferromex for rates applicable for Services prior
to January 1, 2009 which are not subject to the Trackage
Rights Agreement, the Mexican
Secretaría de
Comunicaciones y Transportes
(“Ministry of
Communications and Transportation” or “SCT”) is
entitled to set the rates in accordance with Mexican law and
regulations. KCSM and Ferromex both initiated administrative
proceedings seeking a determination by the SCT of the rates that
KCSM and Ferromex should pay each other in connection with the
Services. The SCT issued rulings in 2002 and 2008 setting the
rates for the Services and both KCSM and Ferromex challenged
these rulings.
In addition, KCSM is currently involved in judicial, civil and
administrative proceedings and negotiations with Ferromex
regarding the rates payable to each other for the Services for
the periods prior to January 1, 2009. Although KCSM and
Ferromex have challenged these matters based on different
grounds and these cases continue to evolve, management believes
the amounts recorded related to these matters are adequate and
does not believe there will be a future material impact to the
results of operations arising out of these disputes.
SCT Sanction Proceedings.
In April 2006, the
SCT initiated proceedings against KCSM, claiming that KCSM had
failed to make certain minimum capital investments projected for
2004 and 2005 under its five-year business plan filed with the
SCT prior to its April 2005 acquisition by KCS (collectively,
the “Capital Investment Proceedings”). KCSM believes
it made capital expenditures exceeding the required amounts.
KCSM responded to the SCT by providing evidence in support of
its investments and explaining why it believes sanctions are not
appropriate. In May 2007, KCSM was served with an SCT resolution
regarding the Capital Investment Proceeding for 2004, in which
the SCT resolved to impose no sanction. In June 2007, KCSM was
served with an SCT resolution regarding the Capital Investment
Proceeding for 2005, in which the SCT determined that KCSM had
indeed failed to make the minimum capital investments required
for such year, and imposed a minimal fine. KCSM has filed an
action in the Mexican Administrative and Fiscal Federal Court
challenging this ruling. KCSM will have the right to challenge
any adverse ruling.
In May 2008, the SCT initiated a proceeding against KCSM at the
request of a Mexican subsidiary of a large U.S. Auto
Manufacturer (the “Auto Manufacturer”), alleging that
KCSM impermissibly bundled
18
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
international rail services and engaged in discriminatory
pricing practices with respect to rail services provided by KCSM
to the Auto Manufacturer. In March 2009, the SCT issued a
decision determining that KCSM had engaged in the activities
alleged, but imposed no sanction since this was the first time
KCSM had engaged in such activities. On May 6, 2009, KCSM
challenged the SCT’s decision and the appeal is currently
pending in the Administrative and Fiscal Federal Court.
On July 23, 2008, the SCT delivered notice to KCSM of new
proceedings against KCSM, claiming, among other things, that
KCSM refused to grant Ferromex access to certain trackage over
which Ferromex alleges it has trackage rights on six different
occasions and thus denied Ferromex the ability to provide
service to the Auto Manufacturer at this location. On
August 13, 2008, KCSM filed a response to the SCT and final
resolution is pending.
KCSM believes it has defenses to the imposition of sanctions for
the foregoing proceedings and intends to vigorously contest
these allegations. KCSM does not believe that these SCT
proceedings will have a material adverse effect on its results
of operations or financial condition. However, if KCSM is
ultimately sanctioned by the SCT for “generic”
sanctions on five occasions over the term of the Concession,
KCSM could be subject to possible future SCT action seeking
revocation of the Concession.
Disputes Relating to the Provision of Services to the Auto
Manufacturer.
KCSM is involved in several
disputes related to providing services to the Auto Manufacturer.
In March 2008, the Auto Manufacturer filed an arbitration suit
against KCSM under a contract for services to the Auto
Manufacturer’s plants in Mexico, which, as amended, had a
stated termination date of January 31, 2008. Among other
claims, the Auto Manufacturer claimed that the contract was
implicitly extended and continued in effect beyond its stated
termination date. The Auto Manufacturer is seeking a declaration
by the arbitrator that the rates being assessed by KCSM are
discriminatory, even though the rates being charged are within
the legal rate limits set by Mexican law for such freight
transportation. KCSM claimed that the contract did in fact
expire on its stated termination date, and that services
rendered thereafter are thus subject to the general terms and
conditions (including rates) applicable in the absence of a
specific contract, pursuant to Mexican law. Accordingly, KCSM
filed a counterclaim against the Auto Manufacturer to, among
other things, recover the applicable rate difference between the
rates under the contract and KCSM’s rates. The arbitration
was divided in two phases. On May 18, 2009, the arbitrator
issued an award on the first phase of the arbitration
proceeding, ruling that the contract had terminated on
May 8, 2008. As of the date of this filing, the second
phase of the arbitration proceeding, regarding the claim that
the rates assessed by KCSM are discriminatory, is in the
evidentiary stage and has not been resolved. Management believes
the final resolution of these claims will not have any material
impact on KCSM’s results of operations.
Third Party Contractual Agreements.
In the
normal course of business, the Company enters into various third
party contractual agreements related to the use of other
railroads’ or governmental entities’ infrastructure
needed for the operations of the business. The Company is
involved or may become involved in certain disputes involving
transportation rates, charges, and interpretations related to
these agreements. While the outcome of these matters cannot be
predicted with certainty, the Company does not believe, when
finally resolved, that these disputes will have a material
effect on its results of operations or financial condition.
However, an unexpected adverse resolution could have a material
effect on the results of operations in a particular quarter or
fiscal year.
Income tax.
Tax returns filed in the
U.S. from 2004 through the current year and in Mexico from
2003 through the current year remain open to examination by the
taxing authorities. The 2008 U.S. tax return and the 2003
through 2005 Mexico tax returns are currently under examination.
The Company received an audit assessment for the year ended
December 31, 2003 from Servicio de Administracion
Tributaria (the “SAT”), the Mexican equivalent of the
IRS. The Company filed its response to this assessment on
March 8, 2010, and continues to negotiate with the SAT. If
a settlement is not reached, the matter will be litigated. The
Company believes that it has strong legal arguments in its favor
and will more likely than not ultimately prevail in any
challenge of this assessment. The Company believes that an
adequate provision has been made for any
19
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
adjustment (taxes and interest) that will be due for all open
periods. However, an unexpected adverse resolution could have a
material effect on the results of operations in a particular
quarter or fiscal year.
Credit Risk.
The Company continually monitors
risks related to the economic changes and certain customer
receivables concentrations. Significant changes in customer
concentration or payment terms, deterioration of customer
credit-worthiness or further weakening in economic trends could
have a significant impact on the collectability of the
Company’s receivables and operating results. If the
financial condition of the Company’s customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. The Company has
recorded reserves for uncollectability based on its best
estimate at March 31, 2010.
| 12. | Geographic Information |
The Company strategically manages its rail operations as one
reportable business segment over a single coordinated rail
network that extends from the midwest and southeast portions of
the United States south into Mexico and connects with other
Class I railroads. Financial information reported at this
level, such as revenues, operating income and cash flows from
operations, is used by corporate management, including the
Company’s chief operating decision-maker, in evaluating
overall financial and operational performance, market
strategies, as well as the decisions to allocate capital
resources.
The Company’s strategic initiatives, which drive its
operational direction, are developed and managed at the
Company’s headquarters and targets are communicated to its
various regional activity centers. Corporate management is
responsible for, among others, KCS’ marketing strategy, the
oversight of large cross-border customer accounts, overall
planning and control of infrastructure and rolling stock, the
allocation of capital resources based upon growth and capacity
constraints over the coordinated network, and other functions
such as financial planning, accounting, and treasury.
The role of each region is to manage the operational activities
and monitor and control costs over the coordinated rail network.
Such cost control is required to ensure that pre-established
efficiency standards set at the corporate level are attained.
The regional activity centers are responsible for executing the
overall corporate strategy and operating plan established by
corporate management as a coordinated system.
The following tables
(in millions)
provide information by
geographic area in accordance with the accounting guidance on
segment reporting:
|
Three Months
|
||||||||
| Ended March 31, | ||||||||
|
Revenues
|
2010 | 2009 | ||||||
|
U.S.
|
$ | 245.5 | $ | 208.7 | ||||
|
Mexico
|
190.8 | 137.3 | ||||||
|
Total revenues
|
$ | 436.3 | $ | 346.0 | ||||
|
Property and equipment
|
March 31,
|
December 31,
|
||||||
|
(including concession assets), net
|
2010 | 2009 | ||||||
|
U.S.
|
$ | 2,497.2 | $ | 2,482.7 | ||||
|
Mexico
|
2,260.7 | 2,239.7 | ||||||
|
Total property and equipment (including concession assets), net
|
$ | 4,757.9 | $ | 4,722.4 | ||||
| 13. | Condensed Consolidating Financial Information |
KCSR has outstanding $275.0 million of 8.0% Senior
Notes due 2015 and $190.0 million of 13.0% Senior
Notes due 2013, which are unsecured obligations of KCSR, which
are also jointly and severally and fully and
20
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
unconditionally guaranteed on an unsecured senior basis by KCS
and certain wholly-owned domestic subsidiaries. As a result, the
following accompanying condensed consolidating financial
information
(in millions)
has been prepared and presented
pursuant to SEC
Regulation S-X
Rule 3-10
“Financial statements of guarantors and issuers of
guaranteed securities registered or being registered.” The
8.0% Senior Notes were registered by means of an amendment
to KCS’ shelf registration statement filed and
automatically effective as of May 23, 2008. The
13.0% Senior Notes were registered under KCS’ shelf
registration statement filed and automatically effective as of
November 21, 2008.
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
| Three Months Ended March 31, 2010 | ||||||||||||||||||||||||
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||||
| Parent | KCSR | Subsidiaries | Subsidiaries | Adjustments | KCS | |||||||||||||||||||
|
Revenues
|
$ | — | $ | 217.0 | $ | 4.0 | $ | 221.9 | $ | (6.6 | ) | $ | 436.3 | |||||||||||
|
Operating expenses
|
1.1 | 163.1 | 6.7 | 164.4 | (7.2 | ) | 328.1 | |||||||||||||||||
|
Operating income (loss)
|
(1.1 | ) | 53.9 | (2.7 | ) | 57.5 | 0.6 | 108.2 | ||||||||||||||||
|
Equity in net earnings of unconsolidated affiliates
|
31.8 | 3.4 | — | 9.3 | (38.1 | ) | 6.4 | |||||||||||||||||
|
Interest expense
|
(0.1 | ) | (27.4 | ) | — | (28.0 | ) | 11.1 | (44.4 | ) | ||||||||||||||
|
Debt retirement costs
|
— | — | — | (14.9 | ) | — | (14.9 | ) | ||||||||||||||||
|
Foreign exchange gain
|
— | — | — | 2.6 | — | 2.6 | ||||||||||||||||||
|
Other income, net
|
10.3 | 1.0 | — | 0.9 | (11.7 | ) | 0.5 | |||||||||||||||||
|
Income (loss) before income taxes and noncontrolling interest
|
40.9 | 30.9 | (2.7 | ) | 27.4 | (38.1 | ) | 58.4 | ||||||||||||||||
|
Income tax expense (benefit)
|
5.6 | 12.2 | (1.0 | ) | 7.4 | — | 24.2 | |||||||||||||||||
|
Net income (loss)
|
35.3 | 18.7 | (1.7 | ) | 20.0 | (38.1 | ) | 34.2 | ||||||||||||||||
|
Noncontrolling interest
|
— | — | — | (1.1 | ) | — | (1.1 | ) | ||||||||||||||||
|
Net income (loss) attributable to Kansas City Southern and
subsidiaries
|
$ | 35.3 | $ | 18.7 | $ | (1.7 | ) | $ | 21.1 | $ | (38.1 | ) | $ | 35.3 | ||||||||||
21
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Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
| Three Months Ended March 31, 2009 | ||||||||||||||||||||||||
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||||
| Parent | KCSR | Subsidiaries | Subsidiaries | Adjustments | KCS | |||||||||||||||||||
|
Revenues
|
$ | — | $ | 183.9 | $ | 2.9 | $ | 166.2 | $ | (7.0 | ) | $ | 346.0 | |||||||||||
|
Operating expenses
|
1.3 | 153.2 | 3.8 | 147.7 | (7.6 | ) | 298.4 | |||||||||||||||||
|
Operating income (loss)
|
(1.3 | ) | 30.7 | (0.9 | ) | 18.5 | 0.6 | 47.6 | ||||||||||||||||
|
Equity in net earnings of unconsolidated affiliates
|
5.2 | 0.5 | — | 1.0 | (5.7 | ) | 1.0 | |||||||||||||||||
|
Interest expense
|
(0.7 | ) | (18.6 | ) | — | (23.0 | ) | 0.5 | (41.8 | ) | ||||||||||||||
|
Debt retirement costs
|
— | (5.3 | ) | — | (0.6 | ) | — | (5.9 | ) | |||||||||||||||
|
Foreign exchange loss
|
— | — | — | (5.1 | ) | — | (5.1 | ) | ||||||||||||||||
|
Other income, net
|
0.3 | 1.1 | — | 1.2 | (1.1 | ) | 1.5 | |||||||||||||||||
|
Income (loss) before income taxes and noncontrolling interest
|
3.5 | 8.4 | (0.9 | ) | (8.0 | ) | (5.7 | ) | (2.7 | ) | ||||||||||||||
|
Income tax expense (benefit)
|
6.2 | 4.1 | (0.3 | ) | (9.9 | ) | — | 0.1 | ||||||||||||||||
|
Net income (loss)
|
(2.7 | ) | 4.3 | (0.6 | ) | 1.9 | (5.7 | ) | (2.8 | ) | ||||||||||||||
|
Noncontrolling interest
|
— | — | — | (0.1 | ) | — | (0.1 | ) | ||||||||||||||||
|
Net income (loss) attributable to Kansas City Southern and
subsidiaries
|
$ | (2.7 | ) | $ | 4.3 | $ | (0.6 | ) | $ | 2.0 | $ | (5.7 | ) | $ | (2.7 | ) | ||||||||
CONDENSED
CONSOLIDATING BALANCE SHEETS
| March 31, 2010 | ||||||||||||||||||||||||
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||||
| Parent | KCSR | Subsidiaries | Subsidiaries | Adjustments | KCS | |||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Current assets
|
$ | 2.1 | $ | 225.5 | $ | 5.0 | $ | 459.6 | $ | (30.4 | ) | $ | 661.8 | |||||||||||
|
Investments held for operating
|
||||||||||||||||||||||||
|
purposes and affiliate investment
|
1,593.3 | 34.8 | 1.9 | 1,616.2 | (3,192.7 | ) | 53.5 | |||||||||||||||||
|
Property and equipment (including concession assets), net
|
— | 1,733.6 | 210.5 | 2,813.8 | — | 4,757.9 | ||||||||||||||||||
|
Other assets
|
1.2 | 41.9 | — | 65.0 | (32.2 | ) | 75.9 | |||||||||||||||||
|
Total assets
|
$ | 1,596.6 | $ | 2,035.8 | $ | 217.4 | $ | 4,954.6 | $ | (3,255.3 | ) | $ | 5,549.1 | |||||||||||
|
Liabilities and equity:
|
||||||||||||||||||||||||
|
Current liabilities
|
$ | (467.1 | ) | $ | 590.7 | $ | 126.4 | $ | 225.6 | $ | (29.3 | ) | $ | 446.3 | ||||||||||
|
Long-term debt
|
0.2 | 763.6 | 0.4 | 1,142.7 | — | 1,906.9 | ||||||||||||||||||
|
Deferred income taxes
|
(22.7 | ) | 430.1 | 78.6 | 97.1 | — | 583.1 | |||||||||||||||||
|
Other liabilities
|
4.2 | 142.1 | 3.2 | 133.0 | (33.4 | ) | 249.1 | |||||||||||||||||
|
Stockholders’ equity
|
2,082.0 | 77.9 | 8.8 | 3,074.5 | (3,161.2 | ) | 2,082.0 | |||||||||||||||||
|
Noncontrolling interest
|
— | 31.4 | — | 281.7 | (31.4 | ) | 281.7 | |||||||||||||||||
|
Total liabilities and equity
|
$ | 1,596.6 | $ | 2,035.8 | $ | 217.4 | $ | 4,954.6 | $ | (3,255.3 | ) | $ | 5,549.1 | |||||||||||
22
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
| December 31, 2009 | ||||||||||||||||||||||||
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||||
| Parent | KCSR | Subsidiaries | Subsidiaries | Adjustments | KCS | |||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||
|
Current assets
|
$ | 0.5 | $ | 219.1 | $ | 3.4 | $ | 428.8 | $ | (38.0 | ) | $ | 613.8 | |||||||||||
|
Investments held for operating
|
||||||||||||||||||||||||
|
purposes and affiliate investment
|
1,562.0 | 31.7 | 1.9 | 1,616.0 | (3,164.8 | ) | 46.8 | |||||||||||||||||
|
Property and equipment (including concession assets), net
|
— | 1,717.5 | 212.1 | 2,792.8 | — | 4,722.4 | ||||||||||||||||||
|
Other assets
|
1.3 | 42.0 | — | 90.9 | (62.9 | ) | 71.3 | |||||||||||||||||
|
Total assets
|
$ | 1,563.8 | $ | 2,010.3 | $ | 217.4 | $ | 4,928.5 | $ | (3,265.7 | ) | $ | 5,454.3 | |||||||||||
|
Liabilities and equity:
|
||||||||||||||||||||||||
|
Current liabilities
|
$ | (455.7 | ) | $ | 567.6 | $ | 124.0 | $ | 211.7 | $ | (36.8 | ) | $ | 410.8 | ||||||||||
|
Long-term debt
|
0.2 | 793.8 | 0.4 | 1,147.5 | (30.0 | ) | 1,911.9 | |||||||||||||||||
|
Deferred income taxes
|
(27.8 | ) | 416.8 | 79.5 | 90.1 | — | 558.6 | |||||||||||||||||
|
Other liabilities
|
4.1 | 142.0 | 3.0 | 132.2 | (34.1 | ) | 247.2 | |||||||||||||||||
|
Stockholders’ equity
|
2,043.0 | 58.7 | 10.5 | 3,064.2 | (3,133.4 | ) | 2,043.0 | |||||||||||||||||
|
Noncontrolling interest
|
— | 31.4 | — | 282.8 | (31.4 | ) | 282.8 | |||||||||||||||||
|
Total liabilities and equity
|
$ | 1,563.8 | $ | 2,010.3 | $ | 217.4 | $ | 4,928.5 | $ | (3,265.7 | ) | $ | 5,454.3 | |||||||||||
23
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
| Three Months Ended March 31, 2010 | ||||||||||||||||||||||||
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||||
| Parent | KCSR | Subsidiaries | Subsidiaries | Adjustments | KCS | |||||||||||||||||||
|
Operating activities:
|
||||||||||||||||||||||||
|
Excluding intercompany activity
|
$ | 0.8 | $ | 56.8 | $ | (2.0 | ) | $ | 55.9 | $ | — | $ | 111.5 | |||||||||||
|
Intercompany activity
|
(10.0 | ) | 3.4 | 2.6 | 4.0 | — | — | |||||||||||||||||
|
Net cash provided (used)
|
(9.2 | ) | 60.2 | 0.6 | 59.9 | — | 111.5 | |||||||||||||||||
|
Investing activities:
|
||||||||||||||||||||||||
|
Capital expenditures
|
— | (27.9 | ) | (0.7 | ) | (23.7 | ) | — | (52.3 | ) | ||||||||||||||
|
Acquisition of an intermodal facility, net of cash acquired
|
— | — | — | (25.0 | ) | — | (25.0 | ) | ||||||||||||||||
|
Property investments in MSLLC
|
— | — | — | (4.8 | ) | — | (4.8 | ) | ||||||||||||||||
|
Other investing activities
|
— | (4.9 | ) | — | 35.2 | (30.0 | ) | 0.3 | ||||||||||||||||
|
Net cash used
|
— | (32.8 | ) | (0.7 | ) | (18.3 | ) | (30.0 | ) | (81.8 | ) | |||||||||||||
|
Financing activities:
|
||||||||||||||||||||||||
|
Proceeds from issuance of long-term debt
|
— | — | — | 295.7 | — | 295.7 | ||||||||||||||||||
|
Repayment of long-term debt
|
(0.2 | ) | (34.7 | ) | — | (300.8 | ) | 30.0 | (305.7 | ) | ||||||||||||||
|
Debt costs
|
— | (1.7 | ) | (18.9 | ) | — | (20.6 | ) | ||||||||||||||||
|
Excess tax benefit from share-based compensation
|
11.7 | — | — | — | — | 11.7 | ||||||||||||||||||
|
Other financing activities
|
(2.2 | ) | — | — | — | — | (2.2 | ) | ||||||||||||||||
|
Net cash provided (used)
|
9.3 | (36.4 | ) | — | (24.0 | ) | 30.0 | (21.1 | ) | |||||||||||||||
|
Cash and cash equivalents:
|
||||||||||||||||||||||||
|
Net increase (decrease)
|
0.1 | (9.0 | ) | (0.1 | ) | 17.6 | — | 8.6 | ||||||||||||||||
|
At beginning of year
|
(0.1 | ) | 12.7 | 0.3 | 104.6 | — | 117.5 | |||||||||||||||||
|
At end of period
|
$ | — | $ | 3.7 | $ | 0.2 | $ | 122.2 | $ | — | $ | 126.1 | ||||||||||||
24
Table of Contents
Kansas
City Southern
Notes to
Consolidated Financial
Statements — (Continued)
| Three Months Ended March 31, 2009 | ||||||||||||||||||||||||
|
Guarantor
|
Non-Guarantor
|
Consolidating
|
Consolidated
|
|||||||||||||||||||||
| Parent | KCSR | Subsidiaries | Subsidiaries | Adjustments | KCS | |||||||||||||||||||
|
Operating activities:
|
||||||||||||||||||||||||
|
Excluding intercompany activity
|
$ | 64.8 | $ | 62.4 | $ | 1.0 | $ | (48.9 | ) | $ | — | $ | 79.3 | |||||||||||
|
Intercompany activity
|
(53.4 | ) | (103.5 | ) | — | 156.9 | — | — | ||||||||||||||||
|
Net cash provided (used)
|
11.4 | (41.1 | ) | 1.0 | 108.0 | — | 79.3 | |||||||||||||||||
|
Investing activities:
|
||||||||||||||||||||||||
|
Capital expenditures
|
— | (82.9 | ) | (0.8 | ) | (32.7 | ) | 1.0 | (115.4 | ) | ||||||||||||||
|
Return of investment
|
— | — | — | 65.0 | (65.0 | ) | — | |||||||||||||||||
|
Property investments in MSLLC
|
— | — | — | (17.8 | ) | — | (17.8 | ) | ||||||||||||||||
|
Loans to affiliates
|
(8.7 | ) | — | — | — | 8.7 | — | |||||||||||||||||
|
Other investing activities
|
— | 134.3 | — | (131.1 | ) | (1.0 | ) | 2.2 | ||||||||||||||||
|
Net cash provided (used)
|
(8.7 | ) | 51.4 | (0.8 | ) | (116.6 | ) | (56.3 | ) | (131.0 | ) | |||||||||||||
|
Financing activities:
|
||||||||||||||||||||||||
|
Proceeds from issuance of long-term debt
|
— | 33.7 | — | 189.0 | (8.7 | ) | 214.0 | |||||||||||||||||
|
Repayment of long-term debt
|
— | (204.7 | ) | — | (34.0 | ) | — | (238.7 | ) | |||||||||||||||
|
Other financing activities
|
(2.5 | ) | (5.1 | ) | — | (69.2 | ) | 65.0 | (11.8 | ) | ||||||||||||||
|
Net cash provided (used)
|
(2.5 | ) | (176.1 | ) | — | 85.8 | 56.3 | (36.5 | ) | |||||||||||||||
|
Cash and cash equivalents:
|
||||||||||||||||||||||||
|
Net increase (decrease)
|
0.2 | (165.8 | ) | 0.2 | 77.2 | — | (88.2 | ) | ||||||||||||||||
|
At beginning of year
|
— | 177.9 | 0.2 | 51.8 | — | 229.9 | ||||||||||||||||||
|
At end of period
|
$ | 0.2 | $ | 12.1 | $ | 0.4 | $ | 129.0 | $ | — | $ | 141.7 | ||||||||||||
25
Table of Contents
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Kansas City Southern:
We have reviewed the accompanying consolidated balance sheet of
Kansas City Southern and subsidiaries (the Company) as of
March 31, 2010, and the related consolidated statements of
operations and cash flows for the three-month periods ended
March 31, 2010 and 2009. These consolidated financial
statements are the responsibility of the Company’s
management.
We conducted our reviews in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the
expression of an opinion regarding the consolidated financial
statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the consolidated financial
statements referred to above for them to be in conformity with
U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the consolidated balance sheet of the Company as of
December 31, 2009, and the related consolidated statements
of income, changes in equity and comprehensive income, and cash
flows for the year then ended (not presented herein); and in our
report dated February 11, 2010, we expressed an unqualified
opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2009 is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
KPMG LLP
Kansas City, Missouri
April 27, 2010
26
Table of Contents
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The discussion below, as well as other portions of this
Form 10-Q,
contain forward-looking statements that are not based upon
historical information. Such forward-looking statements are
based upon information currently available to management and
management’s perception thereof as of the date of this
Form 10-Q.
Readers can identify these forward-looking statements by the use
of such verbs as “expects,” “anticipates,”
“believes” or similar verbs or conjugations of such
verbs. The actual results of operations of Kansas City Southern
(“KCS” or the “Company”) could materially
differ from those indicated in forward-looking statements. The
differences could be caused by a number of factors or
combination of factors including, but not limited to, those
factors identified in Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” in the Company’s Annual Report on
Form 10-K
for the year ended December 31, 2009, which is on file with
the U.S. Securities and Exchange Commission (File
No. 1-4717)
incorporated by reference and in Part II
Item 1A — “Risk Factors” in the
Form 10-K
and any updates contained herein. Readers are strongly
encouraged to consider these factors when evaluating
forward-looking statements. Forward-looking statements contained
in this
Form 10-Q
will not be updated.
This discussion is intended to clarify and focus on the
Company’s results of operations, certain changes in its
financial position, liquidity, capital structure and business
developments for the periods covered by the consolidated
financial statements included under Item 1 of this
Form 10-Q.
This discussion should be read in conjunction with those
consolidated financial statements and the related notes, and is
qualified by reference to them.
Critical
Accounting Policies and Estimates
The Company’s discussion and analysis of its financial
position and results of operations is based upon its
consolidated financial statements. The preparation of these
consolidated financial statements requires estimation and
judgment that affect the reported amounts of revenue, expenses,
assets, and liabilities. The Company bases its estimates on
historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the
accounting for assets and liabilities that are not readily
apparent from other sources. If the estimates differ materially
from actual results, the impact on the consolidated financial
statements may be material. The Company’s critical
accounting policies are disclosed in the 2009 Annual Report on
Form 10-K.
During the first quarter of 2010, the Company elected to change
its accounting policy for rail grinding costs from a
capitalization method to a direct expense method. Refer to
Note 1, Accounting Policies, Interim Financial Statements
and Basis of Presentation, for further details of this change in
accounting policy. Comparative financial information for all
prior periods have been adjusted to reflect the retroactive
application of this change in accounting principle.
Overview
The Company is engaged in the freight rail transportation
business, operating a coordinated rail network under one
reportable business segment. The primary operating subsidiaries
of the Company consist of the following: The Kansas City
Southern Railway Company (“KCSR”), Kansas City
Southern de México, S.A. de C.V. (“KCSM”),
Meridian Speedway, LLC (“MSLLC”), and The Texas
Mexican Railway Company (“TexMex”). The Company
generates revenues and cash flows by providing customers with
freight delivery services within its regions, and throughout
North America through connections with other Class I rail
carriers. Customers conduct business in a number of different
industries, including electric-generating utilities, chemical
and petroleum products, industrial and consumer products,
agriculture and mineral products, automotive products and
intermodal transportation. Appropriate eliminations and
reclassifications have been recorded in deriving consolidated
financial statements.
First
Quarter Analysis
The Company reported quarterly earnings of $0.34 per diluted
share on consolidated net income of $35.3 million for the
three months ended March 31, 2010, compared to a quarterly
loss of $0.09 per diluted share on consolidated net loss of
$2.7 million for the same period in 2009. This earnings
increase reflects a 26% increase in revenues during the three
months ended March 31, 2010 as compared to the same period
in
27
Table of Contents
2009, driven primarily by the relative improvement in the
economy and positive pricing impacts in certain commodity
groups. Operating expenses increased 10% compared to the same
period in 2009, primarily due to increases in fuel and
compensation and benefit expenses; however, the Company was able
to leverage its cost control program initiated in 2009 as
operating expenses as a percentage of revenues declined to 75.2%
for the three months ended March 31, 2010 as compared to
86.2% for the same period in 2009.
Cash flows from operations increased to $111.5 million as
compared to $79.3 million for the three month periods ended
March 31, 2010 and 2009, respectively. The increase is
primarily due to the relative improvement in the economy.
Capital expenditures are a significant use of cash due to the
capital intensive nature of railroad operations. Cash used for
capital expenditures for the three months ended March 31,
2010 was $52.3 million as compared to $115.4 million
for the same period in 2009. The decrease is primarily due to
the completion of the Victoria-Rosenberg line in the second
quarter of 2009.
Results
of Operations
The following summarizes KCS’ statements of operations
(in millions)
:
|
Three Months Ended
|
||||||||||||
| March 31, | Change | |||||||||||
| 2010 | 2009 | Dollars | ||||||||||
|
Revenues
|
$ | 436.3 | $ | 346.0 | $ | 90.3 | ||||||
|
Operating expenses
|
328.1 | 298.4 | 29.7 | |||||||||
|
Operating income
|
108.2 | 47.6 | 60.6 | |||||||||
|
Equity in net earnings of unconsolidated affiliates
|
6.4 | 1.0 | 5.4 | |||||||||
|
Interest expense
|
(44.4 | ) | (41.8 | ) | (2.6 | ) | ||||||
|
Debt retirement costs
|
(14.9 | ) | (5.9 | ) | (9.0 | ) | ||||||
|
Foreign exchange gain (loss)
|
2.6 | (5.1 | ) | 7.7 | ||||||||
|
Other income, net
|
0.5 | 1.5 | (1.0 | ) | ||||||||
|
Income (loss) before income taxes and noncontrolling interest
|
58.4 | (2.7 | ) | 61.1 | ||||||||
|
Income tax expense
|
24.2 | 0.1 | 24.1 | |||||||||
|
Net income (loss)
|
34.2 | (2.8 | ) | 37.0 | ||||||||
|
Noncontrolling interest
|
(1.1 | ) | (0.1 | ) | (1.0 | ) | ||||||
|
Net income (loss) attributable to Kansas City Southern and
subsidiaries
|
$ | 35.3 | $ | (2.7 | ) | $ | 38.0 | |||||
28
Table of Contents
Revenues
The following summarizes revenues (
in millions
),
carload/unit statistics
(in thousands)
and revenue per
carload/unit:
| Revenues | Carloads and Units | Revenue per Carload/Unit | ||||||||||||||||||||||||||||||||||
|
Three Months Ended
|
Three Months Ended
|
Three Months Ended
|
||||||||||||||||||||||||||||||||||
| March 31, | March 31, | March 31, | ||||||||||||||||||||||||||||||||||
| 2010 | 2009 | % Change | 2010 | 2009 | % Change | 2010 | 2009 | % Change | ||||||||||||||||||||||||||||
|
Chemical and petroleum
|
$ | 89.6 | $ | 71.5 | 25 | % | 62.2 | 55.5 | 12 | % | $ | 1,441 | $ | 1,288 | 12 | % | ||||||||||||||||||||
|
Industrial and consumer products
|
99.8 | 82.0 | 22 | % | 73.4 | 66.1 | 11 | % | 1,360 | 1,241 | 10 | % | ||||||||||||||||||||||||
|
Agriculture and minerals
|
106.0 | 82.6 | 28 | % | 67.3 | 62.2 | 8 | % | 1,575 | 1,328 | 19 | % | ||||||||||||||||||||||||
|
Total general commodities
|
295.4 | 236.1 | 25 | % | 202.9 | 183.8 | 10 | % | 1,456 | 1,285 | 13 | % | ||||||||||||||||||||||||
|
Coal
|
59.0 | 47.3 | 25 | % | 72.0 | 75.0 | (4 | )% | 819 | 631 | 30 | % | ||||||||||||||||||||||||
|
Intermodal
|
42.6 | 30.6 | 39 | % | 150.5 | 114.6 | 31 | % | 283 | 267 | 6 | % | ||||||||||||||||||||||||
|
Automotive
|
21.7 | 12.3 | 76 | % | 17.8 | 10.6 | 68 | % | 1,219 | 1,160 | 5 | % | ||||||||||||||||||||||||
|
Subtotal
|
418.7 | 326.3 | 28 | % | 443.2 | 384.0 | 15 | % | $ | 945 | $ | 850 | 11 | % | ||||||||||||||||||||||
|
Other revenue
|
17.6 | 19.7 | (11 | )% | ||||||||||||||||||||||||||||||||
|
Total revenues(i)
|
$ | 436.3 | $ | 346.0 | 26 | % | ||||||||||||||||||||||||||||||
|
(i) Included in revenues:
|
||||||||||||||||||||||||||||||||||||
|
Fuel surcharge
|
$ | 34.8 | $ | 16.8 | ||||||||||||||||||||||||||||||||
Freight revenues include both revenue for transportation
services and fuel surcharges. For the three months ended
March 31, 2010, revenues increased $90.3 million
compared to the same period in 2009, primarily due to the
overall increase in carload/unit volumes resulting from the
relative improvement in the economy, positive pricing impacts,
increased fuel surcharge and the effect of fluctuations in the
value of the U.S. dollar against the value of the Mexican
peso. Revenue per carload/unit increased by 11% for the three
months ended March 31, 2010, reflecting favorable commodity
mix in addition to the factors discussed above.
KCS’s fuel surcharge is a mechanism to adjust revenue based
upon changing fuel prices. Fuel surcharges are calculated
differently depending on the type of commodity transported. For
most commodities, fuel surcharge is calculated using a fuel
price from a prior time period that can be up to 60 days
earlier. In a period of volatile fuel prices or changing
customer business mix, changes in fuel expense and fuel
surcharge may differ.
The following discussion provides an analysis of revenues by
commodity group:
|
Revenues by commodity
|
||
|
group for the three months
|
||
| ended March 31, 2010 | ||
| Chemical and petroleum. Revenues increased $18.1 million for the three months ended March 31, 2010, compared to the same period in 2009, primarily due to increases in volume and pricing. Petroleum and plastics product volumes increased due to inventory replenishment and new petroleum business. Additionally, petroleum revenues increased in Mexico due to a government initiated oil export program, which resulted in record levels of oil production and storage. Revenues also increased in chemicals used to manufacture glass and paint as a result of the economic improvements in the automotive industry. |
|
29
Table of Contents
|
Revenues by commodity
|
||
|
group for the three months
|
||
| ended March 31, 2010 | ||
|
Industrial and consumer products.
Revenues
increased $17.8 million for the three months ended
March 31, 2010, compared to the same period in 2009,
primarily due to increases in volume and pricing. Metals and
scrap business growth was primarily due to increased length of
haul, growing demand for steel coil due to the rebound in the
automotive industry and the strengthening economy. Forest
products increased primarily due to a restocking of inventory to
meet increased demand. In addition, paper mill demand was at a
three year high and due to the wet conditions in the
southeastern U.S., mills were forced to source from further
distances.
|
|
|
|
Agriculture and minerals.
Revenues increased
$23.4 million for the three months ended March 31,
2010, compared to the same period in 2009, due to increases in
pricing and volume. Grain revenue increased as a portion of the
traffic lost to vessel in 2009 was converted back to rail in
Mexico. Increased length of haul also drove year over year
revenue increases. Food products showed continued strength
primarily due to new business.
|
|
Coal.
Revenue increased $11.7 million for
the three months ended March 31, 2010, compared to the same
period in 2009, primarily due to increases in pricing and fuel
surcharge. Revenue per unit to existing electric generation
customers increased due to re-pricing of coal contracts and
increased fuel surcharge, which was partially offset by lower
unit coal volumes.
Intermodal.
Revenues increased
$12.0 million for the three months ended March 31,
2010, compared to the same period in 2009, primarily due to an
increase in volume. Growth was driven by increased automotive
parts traffic, conversion of cross border truck traffic to rail,
haulage, trans-Pacific container volume due to inventory
replenishment, a rebound in North American demand for
automobiles and improvement in the economy.
Automotive.
Revenues increased
$9.4 million for the three months ended March 31,
2010, compared to the same period in 2009, primarily due to an
increase in volume. The volume increase was driven by strong
year over year growth in North American automobile sales and an
increase in parts and vehicle volume driven by a shift in
production and distribution patterns from the U.S. to
Mexico.
30
Table of Contents
Operating
Expenses
Operating expenses, as shown below (
in millions
),
increased $29.7 million for the three months ended
March 31, 2010, when compared to the same period in 2009,
primarily due to fuel expense, compensation and benefit expense
and the effect of fluctuations in the value of the
U.S. dollar against the value of the Mexican peso for
operating expenses denominated in Mexican pesos.
|
Three Months Ended
|
||||||||||||||||
| March 31, | Change | |||||||||||||||
| 2010 | 2009 | Dollars | Percent | |||||||||||||
|
Compensation and benefits
|
$ | 90.7 | $ | 78.0 | $ | 12.7 | 16 | % | ||||||||
|
Purchased services
|
44.9 | 45.6 | (0.7 | ) | (2 | )% | ||||||||||
|
Fuel
|
60.8 | 43.3 | 17.5 | 40 | % | |||||||||||
|
Equipment costs
|
38.7 | 39.1 | (0.4 | ) | (1 | )% | ||||||||||
|
Depreciation and amortization
|
45.8 | 46.9 | (1.1 | ) | (2 | )% | ||||||||||
|
Casualties and insurance
|
11.9 | 12.5 | (0.6 | ) | (5 | )% | ||||||||||
|
Materials and other
|
35.3 | 33.0 | 2.3 | 7 | % | |||||||||||
|
Total operating expenses
|
$ | 328.1 | $ | 298.4 | $ | 29.7 | 10 | % | ||||||||
Compensation and benefits.
Compensation and
benefits increased $12.7 million for the three months ended
March 31, 2010, compared to the same period in 2009,
primarily due to annual salary rate increases and incentive
compensation, including the Mexico statutory profit sharing
expense. In addition, compensation and benefits increased in
Mexico due to fluctuations in the value of the U.S. dollar
against the value of the Mexican peso. These increases were
partially offset by lower employee headcount as compared to the
prior year.
Purchased services.
Purchased services
decreased $0.7 million for the three months ended
March 31, 2010, compared to the same period in 2009,
primarily due to lower locomotive maintenance as a result of a
newer locomotive fleet and having fewer locomotives covered by
maintenance agreements. Additionally, the opening of the
Victoria-Rosenberg line in the second quarter of 2009 resulted
in decreased use of certain trackage rights. These decreases
were partially offset by volume-sensitive costs including joint
facilities, security, and track and terminal services.
Fuel.
Fuel expense increased
$17.5 million for the three months ended March 31,
2010, compared with the same period in 2009, primarily due to
higher diesel fuel prices and consumption driven by increased
carload/unit volumes, partially offset by increased fuel
efficiency.
Equipment costs.
Equipment costs decreased
$0.4 million for the three months ended March 31,
2010, compared with the same period in 2009. Lower freight car
equipment lease expense was partially offset by the increase in
the use of other railroads’ freight cars.
Depreciation and amortization.
Depreciation
and amortization expenses decreased $1.1 million for the
three months ended March 31, 2010, compared to the same
period in 2009, primarily due to a change in the estimated
useful lives of certain Mexican concession assets, which was
effective as of October 1, 2009. In addition, depreciation
expense decreased due to the impact of lower rates based on the
depreciation study completed in third quarter 2009. The
decreases were partially offset by an increase in depreciation
expense due to a larger asset base. Depreciation expense on the
asset base as of year-end 2009 will be lower on a quarterly
basis by approximately $2.6 million due to the change in
estimated useful lives of certain Mexican concession assets and
approximately $1.0 million as a result of lower rates based
on the depreciation study.
Casualties and insurance.
Casualties and
insurance expenses decreased $0.6 million for the three
months ended March 31, 2010, compared to the same period in
2009, primarily due to lower environmental expense.
Materials and other.
Materials and other
expense increased $2.3 million for the three months ended
March 31, 2010, compared to the same period in 2009,
primarily due to a settlement related to a legal dispute.
31
Table of Contents
Non-Operating
Expenses
Equity in Net Earnings (Losses) of Unconsolidated
Affiliates.
Equity in earnings from
unconsolidated affiliates was $6.4 million for the three
month period ended March 31, 2010, compared to
$1.0 million for the same period in 2009. Significant
components of this change are as follows:
| • | Equity in earnings from the operations of Panama Canal Railway Company was $1.9 million for the three month period ended March 31, 2010, compared to $0.3 million for the same period in 2009. The increase is primarily due to an increase in container volume attributable to the improvement in the economy. | |
| • | Equity in earnings of Southern Capital Corporation, LLC was $4.3 million for the three month period ended March 31, 2010, compared to $1.1 million for the same period in 2009. The increase is primarily due to the gain on sale of railcars and other equipment in 2010. | |
| • | KCSM’s equity in earnings of Ferrocarril y Terminal del Valle de México, S.A. de C.V. (“FTVM”) was $0.2 million for the three month period ended March 31, 2010, compared to a loss of $0.4 million for the same period in 2009. The increase is primarily due to a slight recovery in volumes. |
Interest Expense.
Interest expense increased
by $2.6 million for the three months ended March 31,
2010, compared to the same period in 2009, primarily due to
higher average interest rates, partially offset by lower debt
balances.
Debt Retirement Costs.
Debt retirement costs
for the three months ended March 31, 2010 and 2009 were
$14.9 million and $5.9 million, respectively. In the
first quarter of 2010, KCSM purchased $296.3 million of the
9
3
/
8
% Senior
Notes due May 1, 2012. The Company recorded debt retirement
costs of $14.9 million related to the call premium and the
write-off of unamortized debt issuance costs. In January 2009,
KCSR redeemed its
7
1
/
2
% Senior
Notes due June 15, 2009 and expensed $5.3 million for
cash tender offer expenses and unamortized debt issuance costs.
In addition, in March 2009, KCSM repaid all amounts outstanding
under the 2007 KCSM Credit Agreement and upon termination,
wrote-off the unamortized debt issuance cost related to this
debt.
Foreign Exchange.
For the three months ended
March 31, 2010 and 2009, the foreign exchange gain was
$2.6 million compared to a foreign exchange loss of
$5.1 million for the same period in 2009, due to
fluctuations in the value of the U.S. dollar versus the
value of the Mexican peso.
Other Income, net.
Other income, net decreased
by $1.0 million for the three months ended March 31,
2010, primarily due to gains on sale of land recognized in 2009.
Income Tax Expense.
For the three months ended
March 31, 2010, income tax expense was $24.2 million
as compared to $0.1 million for the same period in 2009.
The effective income tax rate was 41.4% and (3.7%) for the three
months ended March 31, 2010 and 2009, respectively. The
changes in income tax expense and the effective tax rate were
primarily due to higher pre-tax income and foreign exchange rate
fluctuations.
Liquidity
and Capital Resources
Overview
KCS’ primary uses of cash are to support operations;
maintain and improve its railroad; pay debt service and
preferred stock dividends; acquire new and maintain existing
locomotives, rolling stock and other equipment; and meet other
obligations. KCS’ cash flow from operations has
historically been sufficient to fund operations, maintenance
capital expenditures and debt service. External sources of cash
(principally bank debt, public and private debt, preferred stock
and leases) have been used to refinance existing indebtedness
and to fund acquisitions, new investments and equipment
additions. The Company generated $8.6 million of cash and
cash equivalents during the three months ended March 31,
2010 — see “Cash Flow Information” below. On
March 31, 2010, total available liquidity (the unrestricted
cash balance plus revolving credit facility availability) was
approximately $211 million.
The Company believes, based on current expectations, that cash
and other liquid assets, operating cash flows, access to debt
and equity capital markets, and other available financing
resources will be sufficient to
32
Table of Contents
fund anticipated operating, capital and debt service
requirements and other commitments in the foreseeable future.
The Company intends to repay the outstanding balance of
$40.0 million under the KCSR revolving credit facility
within the next twelve months. KCS has no significant scheduled
debt maturities until 2012.
As of March 31, 2010, KCS has a debt capitalization ratio
(total debt as a percentage of total debt plus total equity) of
45.5 percent. Its primary sources of liquidity are cash
flows generated from operations, borrowings under its revolving
credit facility and access to debt and equity capital markets.
Although KCS has had adequate access to the capital markets, as
a non-investment grade company, the financial terms under which
funding is obtained often contain restrictive covenants. The
covenants constrain financial flexibility by restricting or
prohibiting certain actions, including the ability to incur
additional debt for any purpose other than refinancing existing
debt, create or suffer to exist additional liens, make
prepayments of particular debt, pay dividends on common stock,
make investments, engage in transactions with stockholders and
affiliates, issue capital stock, sell certain assets, and engage
in mergers and consolidations or in sale leaseback transactions.
These restrictions, however, are subject to a number of
qualifications and exceptions that provide the Company with
varying levels of additional borrowing capacity. The Company was
in compliance with all of its debt covenants as of
March 31, 2010.
KCS’ operating results and financing alternatives can be
unexpectedly impacted by various factors, some of which are
outside of its control. For example, if KCS was to experience a
reduction in revenues or a substantial increase in operating
costs or other liabilities, its earnings could be significantly
reduced, increasing the risk of non-compliance with debt
covenants. Additionally, the Company is subject to economic
factors surrounding debt and equity capital markets and its
ability to obtain financing under reasonable terms is subject to
market conditions. Volatility in capital markets and the
tightening of market liquidity could impact KCS’ access to
capital. Further, KCS’ cost of debt can be impacted by
independent rating agencies, which assign debt ratings based on
certain factors including credit measurements such as interest
coverage and leverage ratios, liquidity and competitive position.
Standard & Poor’s Rating Services
(“S&P”) rates the senior secured debt as BB-, the
senior unsecured debt as B+, and the preferred stock as CCC.
S&P maintains a corporate rating of B and its outlook
remains stable for all issuers. Moody’s Investors Service
(“Moody’s”) rates the senior secured debt as Ba2,
the senior unsecured debt as B2, and the preferred stock as B3.
Moody’s maintains a corporate rating of B1 for KCS and B2
for KCSM and its outlook remains stable for all issuers.
On January 7, 2010, pursuant to an offer to purchase,
Kansas City Southern de México, S.A. de C.V.
(“KCSM”), a wholly-owned subsidiary of KCS, commenced
a cash tender offer for a portion of its
9
3
/
8
% Senior
Notes. On January 22, 2010, the Company purchased
$290.0 million of the tendered
9
3
/
8
% Senior
Notes in accordance with the terms and conditions of the tender
offer set forth in the offer to purchase using the proceeds
received from the issuance of $300.0 million of KCSM
8.0% senior unsecured notes due February 1, 2018 (the
“KCSM 8.0% Senior Notes”). Additionally, on
February 1, 2010, KCSM purchased $6.3 million of the
9
3
/
8
% Senior
Notes. KCSM recorded debt retirement costs of $14.9 million
in the first quarter of 2010. The remaining
9
3
/
8
% Senior
Notes mature on May 1, 2012 and are redeemable by KCSM at
its option.
On January 22, 2010, KCSM issued the KCSM 8.0% Senior
Notes, which bear interest semiannually at a fixed annual rate
of 8.0%. The KCSM 8.0% Senior Notes were issued at a
discount to par value, resulting in a $4.3 million discount
and a yield to maturity of
8
1
/
4
%.
KCSM used the net proceeds from the issuance of the KCSM
8.0% Senior Notes and cash on hand to purchase
$290.0 million in principal amount of the
9
3
/
8
% Senior
Notes tendered under an offer to purchase and pay all fees and
expenses incurred in connection with the KCSM 8.0% Senior
Notes offering and tender offer. The KCSM 8.0% Senior Notes
are redeemable at KCSM’s option, in whole or in part, on
and after February 1, 2014, at the following redemption
prices (expressed as percentages of principal amount) plus any
accrued and unpaid interest: 2014 — 104.000%,
2015 — 102.000%, 2016 — 100.000%. In
addition, KCSM may redeem up to 35% of the KCSM 8.0% Senior
Notes any time prior to February 1, 2013 from the proceeds
of the sale of capital stock in KCSM or KCS and are redeemable,
in whole but not in part, at KCSM’s option at their
principal amount in the event of certain changes in the Mexican
withholding tax rate.
33
Table of Contents
The KCSM 8.0% Senior Notes are denominated in dollars and
are unsecured, unsubordinated obligations, rank
pari passu
in right of payment with KCSM’s existing and future
unsecured, unsubordinated obligations, and are senior in right
of payment to KCSM’s future subordinated indebtedness. In
addition, the KCSM Senior Notes include certain covenants which
are customary for these types of debt instruments and borrowers
with similar credit ratings. The KCSM 8.0% Senior Notes
contain certain covenants that, among other things, prohibit or
restrict KCSM from taking certain actions, including KCSM’s
ability to incur debt, pay dividends or make other distributions
in respect of its stock, issue guarantees, enter into certain
transaction with affiliates, make restricted payments, sell
certain assets, create liens, engage in sale- leaseback
transactions and engage in mergers, divestitures and
consolidations. However, these limitations are subject to a
number of important qualifications and exceptions.
On March 16, 2010, KCS and KCSR entered into a Second
Amendment (“Amendment No. 2”) to KCSR’s
Amended and Restated Credit Agreement dated April 28, 2006,
as amended by Amendment No. 1 dated as of May 31, 2007
(the “Existing Credit Agreement”), which extends the
maturity of the revolving credit facility of the Existing Credit
Agreement from April 28, 2011 to April 28, 2013. In
consideration for this change, the parties to the agreement
agreed to increase the Applicable Margin (as defined in
Amendment No. 2) in respect of the revolving and swing
line credit facilities. In addition, Amendment No. 2
modified certain covenants of the Existing Credit Agreement to
permit the incurrence of certain indebtedness and the creation
of liens related to such indebtedness, as well as certain
prepayments of existing unsecured debt. Amendment No. 2
also provides for certain conforming revisions to the
definitions and other terms set forth in the Existing Credit
Agreement. Except as amended and supplemented by Amendment
No. 2, all terms of the Existing Credit Agreement remained
in full force and effect. As the Company intends to repay the
outstanding balance under the revolving credit facility within
the next twelve months, the outstanding amount of
$40.0 million has been classified as a current liability as
of March 31, 2010.
Cash
Flow Information
Summary cash flow data follows
(in millions):
|
Three Months Ended
|
||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Cash flows provided by (used for):
|
||||||||
|
Operating activities
|
$ | 111.5 | $ | 79.3 | ||||
|
Investing activities
|
(81.8 | ) | (131.0 | ) | ||||
|
Financing activities
|
(21.1 | ) | (36.5 | ) | ||||
|
Net increase (decrease) in cash and cash equivalents
|
8.6 | (88.2 | ) | |||||
|
Cash and cash equivalents beginning of year
|
117.5 | 229.9 | ||||||
|
Cash and cash equivalents end of period
|
$ | 126.1 | $ | 141.7 | ||||
As compared to the three months ended March 31, 2009, cash
flows from operating activities increased $32.2 million
primarily as a result of increased net income from higher
carload/unit volumes due to the recent improvement in the
economy, partially offset by higher accounts receivable
balances. Net investing cash outflows decreased
$49.2 million primarily due to the completion of the
Victoria-Rosenberg line in the second quarter of 2009. The
decrease was partially offset by the acquisition of an
intermodal facility in the first quarter of 2010. Additional
information regarding capital expenditures is provided below.
Financing cash outflows decreased $15.4 million primarily
due to debt refinancing activities and associated debt costs
payments. During the three months ended March 31, 2010, the
Company repaid $305.7 million of outstanding debt,
including the repurchase of the
9
3
/
8
% Senior
Notes, and paid $20.6 million in debt costs. During the
same period, the Company received proceeds of
$295.7 million from the issuance of the KCSM
8.0% Senior Notes.
34
Table of Contents
Capital
Expenditures
KCS has funded, and expects to continue to fund capital
expenditures with funds from operating cash flows, equipment
leases, and debt and equity financing.
The following table summarizes capital expenditures by type for
the consolidated operations for the three months ended
March 31, 2010 and 2009 respectively
(in millions).
|
Three Months Ended
|
||||||||
| March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Roadway capital program
|
$ | 42.2 | $ | 44.4 | ||||
|
Equipment
|
3.3 | 2.3 | ||||||
|
Capacity
|
0.2 | 44.2 | ||||||
|
Information technology
|
3.4 | 2.7 | ||||||
|
Other
|
2.6 | 5.2 | ||||||
|
Total capital expenditures (accrual basis)
|
51.7 | 98.8 | ||||||
|
Change in capital accruals
|
0.6 | 16.6 | ||||||
|
Total cash capital expenditures
|
$ | 52.3 | $ | 115.4 | ||||
For the three months ended March 31, 2009, approximately
45% of total capital expenditures were related to the
Victoria-Rosenberg line, which was completed in the second
quarter of 2009.
Other
Matters
Employee and Labor Relations.
KCSM union
employees are covered by one labor agreement, which was signed
on June 23, 1997, between KCSM and the
Sindicato de
Trabajadores Ferrocarrileros de la República Mexicana
(Mexican Railroad Union), for a term of 50 years, for
the purpose of regulating the relationship between the parties
and improving conditions for the union employees. Approximately
80% of KCSM employees are covered by this labor agreement. The
compensation terms under this labor agreement are subject to
renegotiation on an annual basis and all other terms are subject
to negotiation every two years. The negotiation of the
compensation terms and all other benefits was started with the
Mexican Railroad Union in June of 2009. As of the date of this
filing, these negotiations, as well as the negotiations with the
union regarding the retirement benefit continue to be discussed.
The anticipated resolutions of these negotiations are not
expected to have a material impact to the consolidated financial
statements. The union labor negotiation with the Mexican
Railroad Union has not historically resulted in any strike,
boycott, or other disruption in KCSM’s business operations.
Approximately 80% of KCSR employees are covered by collective
bargaining agreements. KCSR participates in industry-wide
bargaining as a member of the National Carriers’ Conference
Committee.
Long-term
settlement agreements were reached during 2007 and 2008 covering
all of KCSR’s unionized work force through January 1,
2010. A negotiating process for new, major collective bargaining
agreements covering substantially all of KCSR’s union
employees has been underway since the bargaining round was
initiated in November of 2009. The agreements reached in 2007
and 2008 continue in effect until new agreements are reached.
Contract negotiations with the various unions generally take
place over an extended period of time and have not historically
resulted in any strike, boycott, or other disruption in the
Company’s business operations. The Company does not believe
the expected settlements will have a material impact to the
consolidated financial statements.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
There was no material change during the quarter from the
information set forth in Part II, Item 7A.
“Quantitative and Qualitative Disclosure about Market
Risk” in the Annual Report on
Form 10-K
for the year ended December 31, 2009.
35
Table of Contents
| Item 4. | Controls and Procedures |
| (a) | Disclosure Controls and Procedures |
As of the end of the period for which this Quarterly Report on
Form 10-Q
is filed, the Company’s Chief Executive Officer and Chief
Financial Officer have each reviewed and evaluated the
effectiveness of the Company’s disclosure controls and
procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act). Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have each
concluded that the Company’s current disclosure controls
and procedures are effective to ensure that information required
to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission rules and forms, and include
controls and procedures designed to ensure that information
required to be disclosed by the Company in such reports is
accumulated and communicated to the Company’s management,
including the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure.
| (b) | Changes in Internal Control over Financial Reporting |
There have not been any changes in the Company’s internal
control over financial reporting that occurred during the first
quarter of 2010 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal
controls over financial reporting.
| Item 4T. | Controls and Procedures |
Not applicable.
PART II —
OTHER INFORMATION
| Item 1. | Legal Proceedings |
For information related to the Company’s settlements and
other legal proceedings, see Note 10, Commitments and
Contingencies under Part I, Item 1, of this quarterly
report on
Form 10-Q.
| Item 1A. | Risk Factors |
There were no material changes during the quarter to the Risk
Factors disclosed in Item 1A — “Risk
Factors” in our annual report on
Form 10-K
for the year ended December 31, 2009.
| Item 2. | Unregistered Sale of Equity Securities and Use of Proceeds |
None.
| Item 3. | Defaults upon Senior Securities |
None.
| Item 4. | Reserved |
| Item 5. | Other Information |
None.
36
Table of Contents
| Item 6. | Exhibits |
| Exhibit No. | ||||
|
Description of Exhibits Filed with this Report
|
||||
| 10 | .1 | Settlement Agreement , dated February 9, 2010, between KCSM and Ferrocarril Mexicano, S.A. de C.V. (“Ferromex”), Ferrosur S.A. de C.V., Minera México, S.A. de C.V., Infraestructura y Transportes Ferroviarios, S.A. de C.V., Infraestructura y Transportes México, S.A. de C.V., Líneas Ferroviarias de México, S.A. de C.V., Grupo Ferroviario Mexicano, S.A. de C.V., and Grupo México, S.A.B. de C.V. is attached to this Form 10-Q as Exhibit 10.1.* | ||
| 10 | .2 | Trackage Rights Agreement, dated February 9, 2010, between KCSM and Ferromex is attached to this Form 10-Q as Exhibit 10.2.* | ||
| 15 | .1 | Letter regarding unaudited interim financial information is attached to this Form 10-Q as Exhibit 15.1. | ||
| 18 | .1 | Letter regarding change in accounting principles is attached to this Form 10-Q as Exhibit 18.1. | ||
| 31 | .1 | Principal Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 31.1. | ||
| 31 | .2 | Principal Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 31.2. | ||
| 32 | .1 | Principal Executive Officer’s Certification furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 32.1. | ||
| 32 | .2 | Principal Financial Officer’s Certification furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is attached to this Form 10-Q as Exhibit 32.2. | ||
| 101 | The following financial information from Kansas City Southern’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, formatted in XBRL (Extensible Business Reporting Language) includes:(i) Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009, (ii) Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009, (iii) Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009, and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text. | |||
| Exhibit No. |
Description of Exhibits Incorporated by Reference
|
|||
| 4 | .1 | Indenture, dated January 22, 2010, between Kansas City Southern de México, S.A. de C.V., and U.S. Bank National Association, as trustee and paying agent, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K on January 28, 2010 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.1. | ||
| 4 | .2 | Registration Rights Agreement, dated January 22, 2010, between Kansas City Southern de México, S.A. de C.V., and Banc of America Securities LLC, J.P. Morgan Securities Inc., Scotia Capital (USA) Inc., BBVA Securities Inc. and BMO Capital Markets Corp, filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K on January 28, 2010 (File No. 1-4717), is incorporated herein by reference as Exhibit 4.2. | ||
| 10 | .3 | Second Amendment to the Amended and Restated Credit Agreement, dated March 16, 2010, among KCSR, KCS, the subsidiary guarantors, the lenders party thereto and The Bank of Nova Scotia, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K on March 22, 2010 (File No. 1-4717) is incorporated herein by reference as Exhibit 10.3. | ||
| * | Certain portions of this exhibit have been omitted pursuant to our request for confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. |
37
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized and in
the capacities indicated on April 27, 2010.
Kansas City Southern
/s/ Michael
W. Upchurch
Michael W. Upchurch
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Mary
K. Stadler
Mary K. Stadler
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
38
TABLE OF CONTENTS
Part I Financial InformationprintItem 1. Financial StatementsprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintItem 4T. Controls and ProceduresprintPart II Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sale Of Equity Securities and Use Of ProceedsprintItem 3. Defaults Upon Senior SecuritiesprintItem 4. ReservedprintItem 5. Other InformationprintItem 6. Exhibitsprint