KSU 10-Q Quarterly Report Sept. 30, 2020

KANSAS CITY SOUTHERN

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020



☐	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			44-0663509
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
427 West 12th Street
Kansas City	,	Missouri	64105
(Address of principal executive offices)			(Zip Code)

816 . 983.1303

(Registrant’s telephone number, including area code)

No Change

(Former name, former address and former fiscal year, if changed since last report.)

____________________________________________________

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Preferred Stock, Par Value $25 Per Share, 4%, Noncumulative	KSU	New York Stock Exchange
Common Stock, $.01 Per Share Par Value	KSU	New York Stock Exchange

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 ý No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files). Yes ý No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ý Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class		October 9, 2020
Common Stock, $0.01 per share par value		93,601,549 Shares

Table of Contents

Kansas City Southern and Subsidiaries

Form 10-Q

September 30, 2020

Index



		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	Consolidated Statements of Income — Three and nine months ended September 30, 2020 and 2019	3
	Consolidated Statements of Comprehensive Income — Three and nine months ended September 30, 2020 and 2019	4
	Consolidated Balance Sheets — September 30, 2020 and December 31, 2019	5
	Consolidated Statements of Cash Flows — Nine months ended September 30, 2020 and 2019	6
	Consolidated Statements of Changes in Equity — Three months ended September 30, 2020, June 30, 2020, March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019	7
	Notes to the Unaudited Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	38
	SIGNATURES	39

Table of Contents

PART I — FINANCIAL INFORMATION


Item 1.	Financial Statements (unaudited)

Kansas City Southern and Subsidiaries

Consolidated Statements of Income



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
	(In millions, except share and per share amounts) (Unaudited)
Revenues	$	659.6		$	747.7		$	1,939.2		$	2,136.5
Operating expenses:
Compensation and benefits	117.4			134.8			354.6			392.0
Purchased services	47.3			53.4			145.2			162.9
Fuel	50.8			87.1			165.2			257.8
Equipment costs	23.9			25.1			63.9			81.8
Depreciation and amortization	89.2			86.5			267.9			262.7
Materials and other	59.0			66.8			184.7			198.5
Restructuring charges	0.5			12.0			17.0			130.5
Total operating expenses	388.1			465.7			1,198.5			1,486.2
Operating income	271.5			282.0			740.7			650.3
Equity in net earnings (losses) of affiliates	( 1.3		)	2.1			( 0.1		)	3.6
Interest expense	( 39.5		)	( 27.9		)	( 111.8		)	( 84.1		)
Debt retirement costs	—			—			—			( 0.6		)
Foreign exchange gain (loss)	7.7			( 3.4		)	( 44.0		)	9.5
Other income, net	0.3			2.0			2.5			2.2
Income before income taxes	238.7			254.8			587.3			580.9
Income tax expense	48.5			74.2			134.5			168.0
Net income	190.2			180.6			452.8			412.9
Less: Net income attributable to noncontrolling interest	0.4			0.4			1.5			1.2
Net income attributable to Kansas City Southern and subsidiaries	189.8			180.2			451.3			411.7
Preferred stock dividends	0.1			0.1			0.2			0.2
Net income available to common stockholders	$	189.7		$	180.1		$	451.1		$	411.5

Earnings per share:
Basic earnings per share	$	2.02		$	1.81		$	4.76		$	4.12
Diluted earnings per share	$	2.01		$	1.81		$	4.74		$	4.10

Average shares outstanding (in thousands):
Basic	93,876			99,296			94,672			99,939
Effect of dilution	504			403			477			405
Diluted	94,380			99,699			95,149			100,344

See accompanying notes to the unaudited consolidated financial statements.

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Kansas City Southern and Subsidiaries

Consolidated Statements of Comprehensive Income



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2020		2019			2020			2019
	(In millions) (Unaudited)
Net income	$	190.2	$	180.6		$	452.8		$	412.9
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate derivative instruments, net of tax of $0.7 million, $(2.2) million, $3.4 million and $(6.3) million, respectively	2.6		( 7.1		)	12.7			( 19.8		)
Reclassification adjustment from cash flow hedges included in net income, net of tax of $0.1 million and $0.4 million, respectively	0.6		—			1.5			—
Foreign currency translation adjustments	0.1		( 0.2		)	( 1.4		)	0.1
Other comprehensive income (loss)	3.3		( 7.3		)	12.8			( 19.7		)
Comprehensive income	193.5		173.3			465.6			393.2
Less: Comprehensive income attributable to noncontrolling interest	0.4		0.4			1.5			1.2
Comprehensive income attributable to Kansas City Southern and subsidiaries	$	193.1	$	172.9		$	464.1		$	392.0

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

Kansas City Southern and Subsidiaries

Consolidated Balance Sheets



	September 30, 2020			December 31, 2019
	(In millions, except share and per share amounts)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	646.0		$	148.8
Accounts receivable, net	256.0			274.2
Materials and supplies	127.9			150.6
Other current assets	63.9			155.0
Total current assets	1,093.8			728.6
Operating lease right-of-use assets	75.8			158.4
Investments	44.1			47.6
Property and equipment (including concession assets), net	8,967.3			8,806.3
Other assets	184.6			45.9
Total assets	$	10,365.6		$	9,786.8
LIABILITIES AND EQUITY
Current liabilities:
Long-term debt due within one year	$	10.9		$	18.0
Accounts payable and accrued liabilities	466.3			473.3
Total current liabilities	477.2			491.3
Long-term operating lease liabilities	49.8			85.7
Long-term debt	3,765.3			3,228.0
Deferred income taxes	1,177.4			1,128.0
Other noncurrent liabilities and deferred credits	102.0			107.9
Total liabilities	5,571.7			5,040.9
Stockholders’ equity:
$25 par, 4% noncumulative, preferred stock, 840,000 shares authorized, 649,736 shares issued; 218,169 and 222,625 shares outstanding at September 30, 2020 and December 31, 2019, respectively	5.5			5.6
$.01 par, common stock, 400,000,000 shares authorized; 123,352,185 shares issued; 93,711,453 and 96,115,669 shares outstanding at September 30, 2020 and December 31, 2019, respectively	1.0			1.0
Additional paid-in capital	925.6			843.7
Retained earnings	3,552.3			3,601.3
Accumulated other comprehensive loss	( 16.3		)	( 29.1		)
Total stockholders’ equity	4,468.1			4,422.5
Noncontrolling interest	325.8			323.4
Total equity	4,793.9			4,745.9
Total liabilities and equity	$	10,365.6		$	9,786.8

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

Kansas City Southern and Subsidiaries

Consolidated Statements of Cash Flows



	Nine Months Ended
	September 30,
	2020			2019
	(In millions) (Unaudited)
Operating activities:
Net income	$	452.8		$	412.9
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	267.9			262.7
Deferred income taxes	45.7			26.8
Equity in net (earnings) losses of affiliates	0.1			( 3.6		)
Share-based compensation	18.6			16.4
(Gain) loss on foreign currency derivative instruments	20.6			( 10.3		)
Foreign exchange loss	23.4			0.8
Restructuring charges	17.0			130.5
Distributions from affiliates	2.5			3.0
Settlement of foreign currency derivative instruments	( 20.4		)	10.8
Cash payments for restructuring charges	( 8.8		)	( 2.9		)
Refundable Mexican value added tax	( 27.2		)	( 38.2		)
Changes in working capital items:
Accounts receivable	12.1			38.3
Materials and supplies	22.6			( 4.7		)
Other current assets	( 21.5		)	5.5
Accounts payable and accrued liabilities	18.0			12.7
Other, net	( 3.5		)	( 1.9		)
Net cash provided by operating activities	819.9			858.8

Investing activities:
Capital expenditures	( 301.6		)	( 468.2		)
Purchase or replacement of assets under operating leases	( 78.2		)	( 38.6		)
Property investments in MSLLC	( 23.4		)	( 25.6		)
Investments in and advances to affiliates	( 6.9		)	( 27.0		)
Proceeds from disposal of property	9.3			18.4
Other, net	( 12.4		)	0.7
Net cash used for investing activities	( 413.2		)	( 540.3		)

Financing activities:
Proceeds from issuance of long-term debt	545.6			—
Repayment of long-term debt	( 11.9		)	( 7.8		)
Dividends paid	( 114.7		)	( 108.6		)
Shares repurchased	( 322.9		)	( 242.5		)
Debt issuance costs paid	( 6.6		)	( 2.5		)
Proceeds from employee stock plans	6.6			4.8
Net cash provided by (used for) financing activities	96.1			( 356.6		)

Effect of exchange rate changes on cash	( 5.6		)	( 0.8		)

Cash and cash equivalents:
Net increase (decrease) during each period	497.2			( 38.9		)
At beginning of year	148.8			100.5
At end of period	$	646.0		$	61.6

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

Kansas City Southern and Subsidiaries

Consolidated Statements of Changes in Equity

(in millions, except per share amounts)

(Unaudited)



	$25 Par Preferred Stock			$.01 Par Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Non- controlling Interest		Total


Balance at December 31, 2019	$	5.6		$	1.0	$	843.7		$	3,601.3		$	( 29.1	)	$	323.4	$	4,745.9
Net income									151.8						0.5		152.3
Other comprehensive income												3.6					3.6
Dividends on common stock ($0.40/share)						—			( 38.2		)						( 38.2		)
Dividends on $25 par preferred stock ($0.25/share)									( 0.1		)						( 0.1		)
Share repurchases				—		( 11.4		)	( 182.8		)						( 194.2		)
Settlement of forward contract for accelerated share repurchases						82.5											82.5
Options exercised and stock subscribed, net of shares withheld for employee taxes				—		( 0.1		)									( 0.1		)
Share-based compensation						10.3											10.3
Balance at March 31, 2020	5.6			1.0		925.0			3,532.0			( 25.5		)	323.9		4,762.0
Net income									109.7						0.6		110.3
Other comprehensive income												5.9					5.9
Dividends on common stock ($0.40/share)						—			( 37.8		)						( 37.8		)
Dividends on $25 par preferred stock ($0.25/share)									—								—
Share repurchases	—			—		( 6.8		)	( 93.2		)						( 100.0		)
Options exercised and stock subscribed, net of shares withheld for employee taxes				—		( 0.3		)									( 0.3		)
Share-based compensation						4.9											4.9
Balance at June 30, 2020	5.6			1.0		922.8			3,510.7			( 19.6		)	324.5		4,745.0
Net income									189.8						0.4		190.2
Other comprehensive income												3.3					3.3
Contribution from noncontrolling interest															0.9		0.9
Dividends on common stock ($0.40/share)						—			( 37.6		)						( 37.6		)
Dividends on $25 par preferred stock ($0.25/share)									( 0.1		)						( 0.1		)
Share repurchases	( 0.1		)	—		( 6.5		)	( 110.5		)						( 117.1		)
Options exercised and stock subscribed, net of shares withheld for employee taxes				—		3.9											3.9
Share-based compensation						5.4											5.4
Balance at September 30, 2020	$	5.5		$	1.0	$	925.6		$	3,552.3		$	( 16.3	)	$	325.8	$	4,793.9

See accompanying notes to the unaudited consolidated financial statements.

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Kansas City Southern and Subsidiaries

Consolidated Statements of Changes in Equity

(in millions, except per share amounts)

(Unaudited)



	$25 Par Preferred Stock			$.01 Par Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Non- controlling Interest		Total


Balance at December 31, 2018	$	5.7		$	1.0	$	946.6		$	3,870.6		$	( 10.9	)	$	319.7	$	5,132.7
Net income									102.8						0.4		103.2
Other comprehensive loss												( 4.9		)			( 4.9		)
Contribution from noncontrolling interest															1.8		1.8
Dividends on common stock ($0.36/share)						—			( 36.3		)						( 36.3		)
Dividends on $25 par preferred stock ($0.25/share)									( 0.1		)						( 0.1		)
Share repurchases	—			—		( 4.4		)	( 45.9		)						( 50.3		)
Options exercised and stock subscribed, net of shares withheld for employee taxes				—		( 2.1		)									( 2.1		)
Share-based compensation						6.0											6.0
Balance at March 31, 2019	5.7			1.0		946.1			3,891.1			( 15.8		)	321.9		5,150.0
Net income									128.7						0.4		129.1
Other comprehensive loss												( 7.5		)			( 7.5		)
Dividends on common stock ($0.36/share)						—			( 36.0		)						( 36.0		)
Dividends on $25 par preferred stock ($0.25/share)									—								—
Share repurchases	( 0.1		)	—		( 7.3		)	( 85.0		)						( 92.4		)
Options exercised and stock subscribed, net of shares withheld for employee taxes				—		2.3											2.3
Share-based compensation						6.0											6.0
Balance at June 30, 2019	5.6			1.0		947.1			3,898.8			( 23.3		)	322.3		5,151.5
Net income									180.2						0.4		180.6
Other comprehensive loss												( 7.3		)			( 7.3		)
Dividends on common stock ($0.36/share)						—			( 35.6		)						( 35.6		)
Dividends on $25 par preferred stock ($0.25/share)									( 0.1		)						( 0.1		)
Share repurchases	—			—		( 7.7		)	( 92.1		)						( 99.8		)
Options exercised and stock subscribed, net of shares withheld for employee taxes				—		2.7											2.7
Share-based compensation						5.2											5.2
Balance at September 30, 2019	5.6			1.0		947.3			3,951.2			( 30.6		)	322.7		5,197.2
Net income									127.2						0.7		127.9
Other comprehensive income												1.5					1.5
Dividends on common stock ($0.40/share)						—			( 38.6		)						( 38.6		)
Dividends on $25 par preferred stock ($0.25/share)									—								—
Share repurchases	—			—		( 29.0		)	( 438.5		)						( 467.5		)
Forward contract for accelerated share repurchases						( 82.5		)									( 82.5		)
Options exercised and stock subscribed, net of shares withheld for employee taxes				—		1.2											1.2
Share-based compensation						6.7											6.7
Balance at December 31, 2019	$	5.6		$	1.0	$	843.7		$	3,601.3		$	( 29.1	)	$	323.4	$	4,745.9

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements

For purposes of this report, “KCS” or the “Company” may refer to Kansas City Southern or, as the context requires, to one or more subsidiaries of Kansas City Southern.

1. Basis of Presentation

In the opinion of the management of KCS, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal and recurring adjustments) necessary to reflect a fair statement of the results for interim periods in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and note disclosures 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, 2019 . The results of operations for the three and nine months ended September 30, 2020 , are not necessarily indicative of the results to be expected for the full year ending December 31, 2020 . Certain prior year amounts have been reclassified to conform to the current year presentation.

During the first quarter of 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “ Financial Instruments - Credit Losses,” which required the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaced the existing incurred loss model and is applicable to the measurement of credit losses on financial assets, including trade receivables. Adoption of the new standard did not have a material impact on the Company’s consolidated financial statements.

During the first quarter of 2020, the Company early adopted the SEC’s, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities rules, which simplify the disclosure requirements related to the Company’s registered securities under Rule 3-10 of Regulation S-X. The final rule also allows for the simplified disclosure to be included within Management’s Discussion and Analysis of Financial Condition and Results of Operations.

2 . Restructuring Charges

COVID-19. In March 2020, the World Health Organization categorized Coronavirus Disease 2019 (“COVID-19”) as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The U.S. and Mexico governments have deemed rail transportation as “critical infrastructure” providing essential services during this global emergency. As a provider of critical infrastructure, Kansas City Southern has an obligation to keep employees working and freight moving. KCS remains focused on protecting the health and wellbeing of its employees and the communities in which it operates while assuring the continuity of its business operations.

On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which includes modifications to the limitation on business interest expense and net operating loss provisions, and provides a payment delay of employer payroll taxes during 2020 after the date of enactment. The Company estimates the payment of approximately $ 11.0 million of employer payroll taxes otherwise due in 2020 will be delayed with 50 % due by December 31, 2021 and the remaining 50 % by December 31, 2022. The CARES Act did not have a material impact on the Company’s consolidated financial statements.

The Company began to experience the impacts of COVID-19 on customer demand in late March 2020. For the three months ended June 30, 2020 and September 30, 2020, revenues declined 23 % and 12 % , respectively, as compared to the same periods in 2019, primarily due to the decrease in overall demand from COVID-19 and lower commodity prices, lower fuel surcharge due to lower fuel prices, and the weakening of the Mexican peso against the U.S dollar. After the significant decline in volumes in the second quarter of 2020, volumes began to rebound rapidly in early June and by the end of September weekly volumes were higher than pre-COVID-19 levels.

As revenues declined in the second quarter of 2020, the Company responded quickly and implemented cost-saving measures and accelerated precision scheduled railroading (“PSR”) initiatives by further consolidating trains, which increased train length and reduced crew costs. In June of 2020, the Company offered a voluntary separation program, which resulted in a restructuring charge of $ 9.2 million for the three months ended June 30, 2020, consisting of severance and benefit costs that will be paid out in either lump-sum payments or incrementally over a six to twelve-month period. Approximately 6 % of management employees were irrevocably accepted into the voluntary separation program. During the three months ended September 30, 2020, additional restructuring charges of approximately $ 0.5 million were recognized as part of the voluntary separation program.

PSR. During 2019, the Company began implementing principles of PSR, which focus on providing reliable customer service, facilitating growth, improving asset utilization, and improving the cost profile of the Company. As a result of the PSR initiatives in 2019, management approved four separate restructuring plans that totaled $ 168.8 million , including restructuring plans of

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Notes to the Unaudited Consolidated Financial Statements—(Continued)

$ 67.5 million , $ 51.0 million and $ 12.0 million in the first, second, and third quarters of 2019, respectively. The restructuring plans were substantially completed in 2019.

During the first quarter of 2020, the Company purchased 91 locomotives for $ 78.2 million that were part of two existing leases. Of the 91 locomotives, 13 were impaired during the fourth quarter of 2019. The purchase of the impaired lease locomotives resulted in $ 6.0 million of make-whole payments recorded as incremental restructuring charges in the first quarter of 2020. During the second quarter of 2020, the Company recognized approximately $ 1.3 million of restructuring charges from the disposal of held for sale equipment.

3. Revenue

Disaggregation of Revenue

The following table presents revenues disaggregated by the major commodity groups as well as the product types included within the major commodity groups (in millions) . The Company believes disaggregation by product type best depicts how cash flows are affected by economic factors. See Note 13 for revenues by geographical area.



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Chemical & Petroleum
Chemicals	$	60.1	$	65.5	$	174.8	$	187.6
Petroleum	95.1		89.1		261.5		253.4
Plastics	36.7		39.6		112.7		110.1
Total	191.9		194.2		549.0		551.1

Industrial & Consumer Products
Forest Products	59.6		64.3		186.3		193.9
Metals & Scrap	41.5		59.6		144.2		176.5
Other	25.3		32.0		75.5		85.6
Total	126.4		155.9		406.0		456.0

Agriculture & Minerals
Grain	74.6		78.3		216.5		224.2
Food Products	38.2		40.0		119.9		110.4
Ores & Minerals	5.5		6.7		16.6		19.0
Stone, Clay & Glass	7.0		8.7		21.2		25.4
Total	125.3		133.7		374.2		379.0

Energy
Utility Coal	28.9		35.1		75.7		95.1
Coal & Petroleum Coke	10.2		11.3		31.3		31.9
Frac Sand	2.3		7.4		7.8		22.1
Crude Oil	5.4		11.2		27.6		34.4
Total	46.8		65.0		142.4		183.5

Intermodal	89.1		100.5		241.3		273.0

Automotive	48.5		64.8		118.0		193.3

Total Freight Revenues	628.0		714.1		1,830.9		2,035.9

Other Revenue	31.6		33.6		108.3		100.6

Total Revenues	$	659.6	$	747.7	$	1,939.2	$	2,136.5

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Notes to the Unaudited Consolidated Financial Statements—(Continued)

Contract Balances

The amount of revenue recognized in the third quarter of 2020 from performance obligations partially satisfied in previous periods was $ 17.7 million . The performance obligations that were unsatisfied or partially satisfied as of September 30, 2020 , were $ 22.2 million , which represents in-transit shipments that are fully satisfied the following month.

A receivable is any unconditional right to consideration, and is recognized as shipments have been completed and the relating performance obligation has been fully satisfied. At September 30, 2020 and December 31, 2019 , the accounts receivable, net balance was $ 256.0 million and $ 274.2 million , respectively. Contract assets represent a conditional right to consideration in exchange for goods or services. The Company did not have any contract assets at September 30, 2020 and December 31, 2019.

Contract liabilities represent consideration received in advance from customers, and are recognized as revenue over time as the relating performance obligation is satisfied. The amount of revenue recognized in the third quarter of 2020 that was included in the opening contract liability balance was $ 9.6 million . The Company has recognized contract liabilities within the accounts payable and accrued liabilities financial statement caption on the balance sheet. These are considered current liabilities as they will be settled in less than 12 months.

The following tables summarize the changes in contract liabilities (in millions) :



Contract liabilities	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
Beginning balance	$	16.1		$	19.0		$	30.5		$	32.4
Revenue recognized that was included in the contract liability balance at the beginning of the period	( 9.6		)	( 11.4		)	( 28.2		)	( 31.4		)
Increases due to consideration received, excluding amounts recognized as revenue during the period	2.1			0.8			6.3			7.4
Ending balance	$	8.6		$	8.4		$	8.6		$	8.4

4. Earnings Per Share Data

Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share adjusts basic earnings 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 under the stock option and performance award plans.

The following table reconciles the basic earnings per share computation to the diluted earnings per share computation (in millions, except share and per share amounts) :



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Net income available to common stockholders for purposes of computing basic and diluted earnings per share	$	189.7	$	180.1	$	451.1	$	411.5
Weighted-average number of shares outstanding ( in thousands ):
Basic shares	93,876		99,296		94,672		99,939
Effect of dilution	504		403		477		405
Diluted shares	94,380		99,699		95,149		100,344
Earnings per share:
Basic earnings per share	$	2.02	$	1.81	$	4.76	$	4.12
Diluted earnings per share	$	2.01	$	1.81	$	4.74	$	4.10

Potentially dilutive shares excluded from the calculation (in thousands):



Stock options excluded as their inclusion would be anti-dilutive	72	—	72	165

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Notes to the Unaudited Consolidated Financial Statements—(Continued)

5. Property and Equipment (including Concession Assets)

Property and equipment, including concession assets, and related accumulated depreciation and amortization are summarized below (in millions) :



	September 30, 2020		December 31, 2019
Land	$	227.5	$	224.9
Concession land rights	141.1		141.1
Road property	8,088.1		7,962.1
Equipment	2,746.0		2,652.6
Technology and other	355.4		345.1
Construction in progress	227.0		170.2
Total property	11,785.1		11,496.0
Accumulated depreciation and amortization	2,817.8		2,689.7
Property and equipment (including concession assets), net	$	8,967.3	$	8,806.3

Concession assets, net of accumulated amortization of $ 690.7 million and $ 678.1 million , totaled $ 2,366.7 million and $ 2,335.5 million at September 30, 2020 and December 31, 2019 , respectively.

6 . Fair Value Measurements

The Company’s derivative financial instruments are measured at fair value on a recurring basis and consist of foreign currency forward and option contracts and treasury lock agreements, which are classified as Level 2 valuations. The Company determines the fair value of its derivative financial instrument positions based upon pricing models using inputs observed from actively quoted markets and also takes into consideration the contract terms as well as other inputs, including market currency exchange rates and in the case of option contracts, volatility, the risk-free interest rate and the time to expiration.

The Company’s short-term financial instruments include cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings. The carrying value of the short-term financial instruments approximates their fair value.

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 carrying value of the Company’s debt was $ 3,776.2 million and $ 3,246.0 million at September 30, 2020 and December 31, 2019 , respectively. If the Company’s debt were measured at fair value, the fair value measurements of the individual debt instruments would have been classified as Level 2 in the fair value hierarchy.

The fair value of the Company’s financial instruments is presented in the following table (in millions) :



	September 30, 2020		December 31, 2019
	Level 2		Level 2
Assets
Foreign currency derivative instruments	$	2.3	$	2.5
Treasury lock agreements	16.1		—
Liabilities
Debt instruments	4,086.6		3,535.7

7 . Derivative Instruments

The Company enters into derivative transactions in certain situations based on management’s assessment of current market conditions and perceived risks. Management intends to respond to evolving business and market conditions and in doing so, may enter into such transactions 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 this risk by limiting its counterparties to large financial institutions which meet the Company’s credit rating standards and

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Notes to the Unaudited Consolidated Financial Statements—(Continued)

have an established banking relationship with the Company. As of September 30, 2020 , the Company did not expect any losses as a result of default of its counterparties.

Interest Rate Derivative Instruments . In March 2020, the Company executed three 30 -year treasury lock agreements with an aggregate notional value of $ 400.0 million and a weighted average interest rate of 1.45 % . The purpose of the treasury locks is to hedge the U.S. Treasury benchmark interest rate associated with future interest payments related to the anticipated refinancing of the $ 444.7 million , 3.00 % senior notes due May 15, 2023 (the “3.00% Senior Notes”). The Company has designated the treasury locks as cash flow hedges and recorded unrealized gains and losses in accumulated other comprehensive loss. Upon settlement, the unrealized gain or loss in accumulated other comprehensive income will be amortized to interest expense over the life of the future underlying debt issuance.

Foreign Currency Derivative Instruments. The Company’s Mexican subsidiaries have net U.S. dollar-denominated monetary liabilities which, for Mexican income tax purposes, are subject to periodic revaluation based on changes in the value of the Mexican peso against the U.S. dollar. This revaluation creates fluctuations in the Company’s Mexican income tax expense and the amount of income taxes paid in Mexico. The Company hedges its exposure to this cash tax risk by entering into foreign currency forward contracts and foreign currency option contracts known as zero-cost collars.

The foreign currency forward contracts involve the Company’s purchase of pesos at an agreed-upon weighted-average exchange rate to each U.S dollar. The zero-cost collars involve the Company’s purchase of a Mexican peso call option and a simultaneous sale of a Mexican peso put option, with equivalent U.S. dollar notional amounts for each option and no net cash premium paid by the Company. The Company’s foreign currency forward and zero-cost collar contracts are executed with counterparties in the U.S. and are governed by International Swaps and Derivatives Association agreements that include standard netting arrangements. Asset and liability positions from contracts with the same counterparty are net settled upon maturity/expiration and presented on a net basis in the consolidated balance sheets prior to settlement. There was no offsetting of derivative assets or liabilities in the consolidated balance sheets as of September 30, 2020 and December 31, 2019.

Below is a summary of the Company’s 2020 and 2019 foreign currency derivative contracts (amounts in millions, except Ps./USD) :



Foreign currency forward contracts
	Contracts to purchase Ps./pay USD						Offsetting contracts to sell Ps./receive USD
	Notional amount		Notional amount		Weighted-average exchange rate (in Ps./USD)		Notional amount		Notional amount		Weighted-average exchange rate (in Ps./USD)		Cash received/(paid) on settlement
Contracts executed in 2020 and outstanding	$	20.0	Ps.	495.5	Ps.	24.8	—		—		—		—
Contracts executed in 2020 and settled in 2020	$	535.0	Ps.	10,758.9	Ps.	20.1	$	511.0	Ps.	10,758.9	Ps.	21.1	$	( 24.0	)
Contracts executed in 2019 and settled in 2020	$	105.0	Ps.	2,041.2	Ps.	19.4	$	108.6	Ps.	2,041.2	Ps.	18.8	$	3.6
Contracts executed in 2019 and settled in 2019 (i)	$	400.0	Ps.	7,892.5	Ps.	19.7	$	410.7	Ps.	7,892.5	Ps.	19.2	$	10.7
Contracts executed in 2018 and settled in 2019 (i)	$	20.0	Ps.	410.9	Ps.	20.5	$	20.9	Ps.	410.9	Ps.	19.6	$	0.9

Foreign currency zero-cost collar contracts
	Notional amount		Cash received/(paid) on settlement
Contracts executed in 2018 and settled in 2019 (i)	$	120.0	$	0.3

(i) During the nine months ended September 30, 2019, the Company settled $ 120.0 million and $ 385.0 million of zero-cost collar contracts and forward contracts, respectively, executed in 2018 and 2019, resulting in cash received of $ 0.3 million and $ 10.5 million .

The Company has not designated any of the foreign currency derivative contracts as hedging instruments for accounting purposes. The Company measures the foreign currency derivative contracts at fair value each period and recognizes any change in fair

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Notes to the Unaudited Consolidated Financial Statements—(Continued)

value in foreign exchange gain (loss) within the consolidated statements of income. The cash flows associated with these instruments is classified as an operating activity within the consolidated statements of cash flows.

The following tables present the fair value of derivative instruments included in the Consolidated Balance Sheets ( in millions ):



	Derivative Assets
	Balance Sheet Location	September 30, 2020		December 31, 2019
Derivatives designated as hedging instruments:
Treasury lock agreements	Other assets	$	16.1	$	—
Total derivatives designated as hedging instruments		16.1		—
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Other current assets	2.3		2.5
Total derivatives not designated as hedging instruments		2.3		2.5
Total derivative assets		$	18.4	$	2.5

The following table presents the effects of derivative instruments on the Consolidated Statements of Income and Consolidated Statements of Comprehensive Income for the three months ended September 30 (in millions) :



Derivatives in Cash Flow Hedging Relationships	Amount of Gain/(Loss) Recognized in OCI on Derivative					Location of Gain/(Loss) Reclassified from AOCI into Income	Amount of Gain/(Loss) Reclassified from AOCI into Income
	2020		2019				2020			2019
Treasury lock agreements	$	3.3	$	( 9.3	)	Interest expense	$	( 0.7	)	$	—
Total	$	3.3	$	( 9.3	)		$	( 0.7	)	$	—



Derivatives Not Designated as Hedging Instruments	Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain/(Loss) Recognized in Income on Derivative
		2020		2019
Foreign currency forward contracts	Foreign exchange gain (loss)	$	6.7	$	( 0.6	)
Total		$	6.7	$	( 0.6	)

The following table presents the effects of derivative instruments on the Consolidated Statements of Income and Consolidated Statements of Comprehensive Income for the nine months ended September 30 (in millions) :



Derivatives in Cash Flow Hedging Relationships	Amount of Gain/(Loss) Recognized in OCI on Derivative					Location of Gain/(Loss) Reclassified from AOCI into Income	Amount of Gain/(Loss) Reclassified from AOCI into Income
	2020		2019				2020			2019
Treasury lock agreements	$	16.1	$	( 26.1	)	Interest expense	$	( 1.9	)	$	—
Total	$	16.1	$	( 26.1	)		$	( 1.9	)	$	—



Derivatives Not Designated as Hedging Instruments	Location of Gain/(Loss) Recognized in Income on Derivative	Amount of Gain/(Loss) Recognized in Income on Derivative
		2020			2019
Foreign currency forward contracts	Foreign exchange gain (loss)	$	( 20.6	)	$	10.3
Total		$	( 20.6	)	$	10.3

See Note 6 , Fair Value Measurements, for the determination of the fair values of derivatives.

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Notes to the Unaudited Consolidated Financial Statements—(Continued)

8. Short-Term Borrowings

Commercial Paper. The Company’s commercial paper program generally serves as the primary means of short-term funding. As of September 30, 2020 and December 31, 2019 , KCS had no commercial paper outstanding. For the nine months ended September 30, 2020 and 2019 , any commercial paper borrowings were outstanding for less than 90 days and the related activity is presented on a net basis in the consolidated statements of cash flows.

9. Long-Term Debt

Senior Notes. On April 22, 2020, KCS issued $ 550.0 million principal amount of senior unsecured notes due May 1, 2050 (the “3.50% Senior Notes”), which bear interest semiannually at a fixed annual rate of 3.50 % . The 3.50 % Senior Notes were issued at a discount to par value, resulting in a $ 4.4 million discount and a yield to maturity of 3.543 % . The Company intends to use the net proceeds from the offering for general corporate purposes, including to repurchase shares of the Company’s common stock, and is actively monitoring macroeconomic conditions, impacts of COVID-19, and weekly volumes to determine the appropriate timing of deployment of the net proceeds, which are currently retained as cash. The 3.50 % Senior Notes are redeemable at the issuer’s option, in whole or in part, at any time, by paying the greater of either 100 % of the principal amount to be redeemed and a formula price based on interest rates prevailing at the time of redemption and time remaining to maturity, plus accrued interest thereon to, but excluding the redemption date.

The 3.50 % Senior Notes include certain covenants which are customary for this type of debt instrument issued by borrowers with similar credit ratings. The 3.50 % Senior Notes are unsecured senior obligations of KCS and are unconditionally guaranteed, jointly and severally, on an unsecured senior basis by each current and future domestic subsidiary of KCS that from time to time guarantees the KCS revolving credit facility or any other debt of KCS or KCS’s significant subsidiaries that is a guarantor.

10 . Share Repurchases

In November 2019, the Company announced a new common share repurchase program authorizing the Company to purchase up to $ 2.0 billion of its outstanding shares of common stock through December 31, 2022 (the “2019 Program”). Share repurchases may be made in the open market, through privately negotiated transactions, or through accelerated share repurchase (“ASR”) transactions.

Under an ASR agreement, the Company pays a specified amount to a financial institution and receives an initial delivery of shares. The final number and total cost of shares repurchased is then based on the volume-weighted average price of the Company’s common stock during the term of the agreements. The transactions are accounted for as equity transactions with any excess of repurchase price over par value allocated between additional paid-in capital and retained earnings. At the time the shares are received, there is an immediate reduction in the weighted-average number of shares outstanding for purposes of the basic and diluted earnings per share computation.

During the fourth quarter of 2019, the Company paid $ 550.0 million under two ASR agreements and received an aggregate initial delivery of shares, which represented approximately 85 % of the total shares to be received under the agreements. The final number and total cost of shares repurchased was then based on the volume-weighted-average price of the Company’s common stock during the term of the agreements, which were settled in March 2020. The terms of the ASR agreements, structured as outlined above, were as follows:



Third Party Institution	Agreement Date	Settlement Date	Total Amount of Agreement (in millions)		Initial Shares Delivered	Fair Market Value of Initial Shares (in millions)		Additional Shares Delivered	Fair Market Value of Additional Shares (in millions)		Total Shares Delivered	Weighted-Average Price Per Share
ASR Agreement #1	November 2019	March 2020	$	275.0	1,511,380	$	233.75	224,244	$	41.25	1,735,624	$	158.44
ASR Agreement #2	November 2019	March 2020	$	275.0	1,511,380	$	233.75	221,692	$	41.25	1,733,072	$	158.68
Total			$	550.0	3,022,760	$	467.5	445,936	$	82.5	3,468,696	$	158.56

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Notes to the Unaudited Consolidated Financial Statements—(Continued)

During the three months ended September 30, 2020, KCS repurchased 662,451 shares of common stock for $ 117.0 million at an average price of $ 176.62 per share. During the nine months ended September 30, 2020 , KCS repurchased 2,653,209 shares of common stock for $ 411.2 million , which includes shares delivered to settle the ASR agreements noted above. Subsequent to the balance sheet date and through October 15, 2020, KCS repurchased 180,256 shares of common stock for $ 33.0 million at an average price of $ 183.07 per share under a Rule 10b5-1 trading plan. Since inception of the 2019 Program and including the Rule 10b5-1 repurchases made in October, KCS has repurchased 5,856,225 shares of common stock for $ 911.7 million at an average price of $ 155.69 per share. The excess of repurchase price over par value is allocated between additional paid-in capital and retained earnings.

During the three months ended September 30, 2020 , KCS repurchased 3,961 shares of its $ 25 par preferred stock for $ 0.1 million at an average price of $ 28.97 per share. The excess of repurchase price over par value is allocated between paid-in-capital and retained earnings.

11. Refundable Mexican Value Added Tax

Kansas City Southern de México, S.A. de C.V. (“KCSM”) is not required to charge its customers value added tax (“VAT”) on international import or export transportation services, resulting in KCSM paying more VAT on its expenses than it collects from customers. These excess VAT payments are refundable by the Mexican government. Prior to 2019, KCSM could offset its monthly refundable VAT balance with other tax obligations. In January 2019, Mexico tax reform eliminated the ability to offset other tax obligations with refundable VAT. Since January 2019, the Company has generated a refundable VAT balance of $ 76.7 million and filed refund claims with the Servicio de Administración Tributaria (the “SAT”) that are still under review. KCSM has a legal opinion supporting its right under Mexican law to recover the refundable VAT balance from the Mexican government and believes the VAT to be fully collectible. As of September 30, 2020, the Company reclassified this asset from short-term to long-term as result of the prolonged refund claim process. As of December 31, 2019, the KCSM refundable VAT balance was $ 60.2 million and was classified as a short-term asset.

12 . Commitments and Contingencies

Concession Duty. Under KCSM’s 50 -year railroad concession from the Mexican government (the “Concession”), which could expire in 2047 unless extended, KCSM pays annual concession duty expense of 1.25 % of gross revenues. For the three and nine months ended September 30, 2020 , the concession duty expense, which is recorded within materials and other in operating expenses, was $ 4.4 million and $ 12.7 million , respectively, compared to $ 4.9 million and $ 14.0 million , for the same periods in 2019 .

Litigation. Occasionally, the Company is a party to various legal proceedings, regulatory examinations, investigations,

administrative actions, and other legal matters, arising for the most part in the ordinary course of business, 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 provisions that management believes are adequate to cover expected costs. The outcome of litigation and other legal matters is always uncertain. KCS believes it has valid defenses to the legal matters currently pending against it, is defending itself vigorously, and has recorded accruals determined in accordance with U.S. GAAP, where appropriate. In making a determination regarding accruals, using available information, KCS evaluates the likelihood of an unfavorable outcome in legal or regulatory proceedings to which it is a party to and records a loss contingency when it is probable a liability has been incurred and the amount of the loss can be reasonably estimated. These subjective determinations are based on the status of such legal or regulatory proceedings, the merits of KCS’s defenses and consultation with legal counsel. Actual outcomes of these legal and regulatory proceedings may materially differ from the current estimates. It is possible that resolution of one or more of the legal matters currently pending or threatened could result in losses material to KCS’s consolidated results of operations, liquidity or financial condition.

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 Clean Water 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 in the following paragraphs.

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Notes to the Unaudited Consolidated Financial Statements—(Continued)

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, 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.

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. 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 statements.

Personal Injury. The Company’s personal injury liability is based on semi-annual actuarial studies performed on an undiscounted basis by an independent third party actuarial firm and reviewed by management. This liability is based on personal injury claims filed and an estimate of claims incurred but not yet reported. Actual results may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation. 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 personal injury liability as of September 30, 2020 , is based on an updated actuarial study of personal injury claims through April 30, 2020, and review of the last five months’ experience. Although these estimates cannot be predicted with certainty, management believes that the ultimate outcome will not have a material adverse effect on the Company’s consolidated financial statements.

Tax Contingencies . Tax returns filed in the U.S. for periods after 2015 and in Mexico for periods after 2012 remain open to examination by the taxing authorities. During the second quarter of 2020, the Internal Revenue Service (“IRS”) initiated an examination of the 2017 deemed mandatory repatriation tax included in the 2017 U.S. federal tax return. In 2018, the IRS initiated an examination of the 2016 U.S. federal tax return. In 2019, the SAT, the Mexican equivalent of the IRS, initiated an audit of the KCSM 2013 and 2014 Mexico tax returns. The Company does not expect that these examinations will have a material impact on the consolidated financial statements. During the first quarter of 2017, the Company received audit assessments from the SAT for the KCSM 2009 and 2010 Mexico tax returns. In 2017, the Company commenced administrative actions with the SAT. During the first quarter of 2018, the audit assessments were nullified by the SAT. In the third quarter of 2018, the SAT issued new assessments and the Company filed administrative appeals with the SAT. The Company believes that it has strong legal arguments in its favor and it is more likely than not that it will prevail in any challenge of the assessments.

KCSM has not historically assessed VAT on international import transportation services provided to its customers based on a written ruling that KCSM obtained from the SAT in 2008 stating that such services were not subject to VAT (the “2008 Ruling”). Notwithstanding the 2008 Ruling, in December 2013, the SAT unofficially informed KCSM of an intended implementation of new criteria effective as of January 1, 2014, pursuant to which VAT would be assessed on all international import transportation services on the portion of the services provided within Mexico. Additionally, in November 2013, the SAT filed an action to nullify the 2008 Ruling, potentially exposing the application of the new criteria to open tax years. In February 2014, KCSM filed an action opposing the SAT’s nullification action. In December 2016, KCSM was notified of a resolution issued by the Mexican tax court confirming the 2008 Ruling. The SAT appealed this resolution. In October 2017, the circuit court resolved to not render a decision on the case but rather to send the SAT’s appeal to the Supreme Court. In February 2018, the Supreme Court decided not to hear the case and remanded the SAT’s appeal back to the circuit court for a decision. In July 2018, the circuit court ordered the tax court to consider certain arguments made by the SAT in the original court proceeding that were not addressed in the tax court’s December 2016 resolution. In October 2018, the tax court issued a decision confirming the 2008 Ruling. The SAT appealed this decision. In September 2020, the Appeals Court dismissed the appeal filed by the SAT and confirmed the ruling issued by the tax court. The decision of the Appeals Court is final.

Contractual Agreements. In the normal course of business, the Company enters into various contractual agreements related to commercial arrangements and 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, product loss or damage, charges, and interpretations related to these agreements. While the outcome of these matters cannot be predicted with certainty, the Company believes that, when resolved, these disputes will not have a material effect on its consolidated financial statements.

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Kansas City Southern and Subsidiaries

Notes to the Unaudited Consolidated Financial Statements—(Continued)

Credit Risk. The Company continually monitors risks related to economic changes and certain customer receivables concentrations. Significant changes in customer concentration or payment terms, deterioration of customer creditworthiness, bankruptcy, insolvency or liquidation of a customer, or weakening in economic trends could have a significant impact on the collectability of the Company’s receivables and its operating results. If the financial condition of the Company’s customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required. The Company has recorded provisions for uncollectability based on its best estimate at September 30, 2020 .

Panama Canal Railway Company (“PCRC”) Guarantees and Indemnities. At September 30, 2020 , the Company had issued and outstanding $ 5.6 million under a standby letter of credit to fulfill its obligation to fund fifty percent of the debt service reserve and liquidity reserve established by PCRC in connection with the issuance of the 7.0 % Senior Secured Notes due November 1, 2026 (the “PCRC Notes”). Additionally, KCS has pledged its shares of PCRC as security for the PCRC Notes.

13 . 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 chief operating decision-maker is the chief executive officer.

The following tables provide information by geographic area (in millions) :



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Revenues	2020		2019		2020		2019
U.S.	$	341.2	$	385.0	$	1,025.5	$	1,114.4
Mexico	318.4		362.7		913.7		1,022.1
Total revenues	$	659.6	$	747.7	$	1,939.2	$	2,136.5

Property and equipment (including concession assets), net					September 30, 2020		December 31, 2019
U.S.					$	5,583.1	$	5,435.9
Mexico					3,384.2		3,370.4
Total property and equipment (including concession assets), net					$	8,967.3	$	8,806.3

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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 within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended and the Private Securities Litigation Reform Act of 1995. In addition, management may make forward-looking statements orally or in other writing, including, but not limited to, in press releases, quarterly earnings calls, executive presentations, in the annual report to stockholders and in other filings with the Securities and Exchange Commission. Readers can usually identify these forward-looking statements by the use of such words as “may,” “will,” “should,” “likely,” “plans,” “projects,” “expects,” “anticipates,” “believes” or similar words. These statements involve a number of risks and uncertainties. Actual results could materially differ from those anticipated by such forward-looking statements. Such differences could be caused by a number of factors or combination of factors including, but not limited to, the factors identified below and those discussed under the captions “Part II - Item 1A - Risk Factors” herein and Item 1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “Annual Report”). Readers are strongly encouraged to consider these factors and the following factors when evaluating any forward-looking statements concerning the Company : public health threats or outbreaks of communicable diseases, such as the ongoing COVID-19 pandemic and its impact on KCS’s business, suppliers, consumers, customers, employees and supply chains; rail accidents or other incidents or accidents on KCS’s rail network or at KCS’s facilities or customer facilities involving the release of hazardous materials, including toxic inhalation hazards; legislative and regulatory developments and disputes, including environmental regulations; loss of the rail concession of Kansas City Southern’s subsidiary, Kansas City Southern de México, S.A. de C.V.; domestic and international economic, political and social conditions; disruptions to the Company’s technology infrastructure, including its computer systems; increased demand and traffic congestion; the level of trade between the United States and Asia or Mexico; fluctuations in the peso-dollar exchange rate; natural events such as severe weather, hurricanes and floods; the outcome of claims and litigation involving the Company or its subsidiaries; competition and consolidation within the transportation industry; the business environment in industries that produce and use items shipped by rail; the termination of, or failure to renew, agreements with customers, other railroads and third parties; fluctuation in prices or availability of key materials, in particular diesel fuel; access to capital; climate change and the market and regulatory responses to climate change; dependency on certain key suppliers of core rail equipment; changes in securities and capital markets; unavailability of qualified personnel; labor difficulties, including strikes and work stoppages; acts of terrorism or risk of terrorist activities, war or other acts of violence; and other factors affecting the operation of the business. For more discussion about each risk factor, see “Part II - Item 1A - Risk Factors” herein and Part I, Item 1A - “Risk Factors” in the Company’s Annual Report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the Company’s Annual Report, in each case as updated by the Company’s periodic filings with the Securities and Exchange Commission (the “SEC”).

Forward-looking statements reflect the information only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statements to reflect future events, developments, or other information. If KCS does update one or more forward-looking statements, no inference should be drawn that additional updates will be made regarding that statement or any other forward-looking statements.

This discussion is intended to clarify and focus on KCS’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 Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 . 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 its 2019 Annual Report.

Overview

The Company is engaged primarily in the freight rail transportation business, operating a single 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 both within its regions and throughout North America through connections with other Class I rail carriers. KCS’s customers conduct business in a number of different industries, including chemical and petroleum, industrial and

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consumer products, agriculture and minerals, energy, automotive, and intermodal transportation. Appropriate eliminations and reclassifications have been recorded in preparing the consolidated financial statements.

COVID-19 Update

With the global outbreak of the Coronavirus Disease 2019 (“COVID-19”) and the declaration of a pandemic by the World Health Organization on March 11, 2020, the U.S. and Mexico governments have deemed rail transportation as “critical infrastructure” providing essential services during this global emergency. As a provider of critical infrastructure, Kansas City Southern has an obligation to keep employees working and freight moving. KCS remains focused on protecting the health and wellbeing of its employees and the communities in which it operates while assuring the continuity of its business operations.

KCS created a dedicated crisis team that proactively implemented its business continuity plans to ensure the ongoing availability of its transportation services, while taking a variety of health and safety measures, including separating dispatching and crew operations, implementing enhanced cleaning and hygiene protocols in its facilities and locomotives, implementing remote work policies, where possible, performing temperature checks and requiring facial coverings. As a result, to date, the Company has not experienced disruptions in its railroad operations.

The Company began to experience the impacts of COVID-19 on customer demand in late March of 2020. For the three months ended June 30, 2020 and September 30, 2020, revenue decreased by 23% and 12% , respectively, as compared to the same periods in 2019, primarily due to the decrease in demand from COVID-19 and lower commodity prices, lower fuel surcharge due to lower fuel prices, and the weakening of the Mexican peso against the U.S dollar. After the significant decline in volumes in the second quarter of 2020, volumes began to rapidly rebound in early June. By the end of September, weekly volumes were higher than pre-COVID-19 levels and had increased by approximately 60% from the lowest levels in the second quarter of 2020.

As revenues declined in the second quarter of 2020, the Company responded quickly and implemented a variety of cost-saving measures and accelerated Precision Scheduled Railroading (“PSR”) initiatives by further consolidating trains, which increased train length and reduced crew costs. For the three months ended June 30, 2020 and September 30, 2020 operating expenses decreased by 27% and 17%, respectively, compared to the same periods in 2019, due to lower fuel price and consumption, fewer headcount and hours worked, decreased restructuring charges, and savings related to PSR initiatives. See Strategic Initiatives for further discussion of PSR savings.

In the second quarter of 2020, the Company offered a voluntary separation program, which resulted in a restructuring charge of $9.2 million for the three months ended June 30, 2020, consisting of severance and benefit costs that will be paid out in either lump-sum payments or incrementally over a six to twelve-month period. Approximately 6% of management employees were irrevocably accepted into the voluntary separation program. Management expects the voluntary separation program reductions to result in annualized savings of approximately $11.0 million. During the three months ended September 30, 2020, additional restructuring charges of approximately $0.5 million were recognized as part of the voluntary separation program.

COVID-19 costs increased total expense in the second and third quarter of 2020 by approximately $4.0 million in each period, primarily due to wages paid to certain high-risk employees that were allowed to stay home pursuant to a Mexican presidential decree, were symptomatic, or in quarantine, expenses related to cleaning and decontamination of locomotives and other workspaces, and costs of protective gear for KCS employees. By the end of the third quarter of 2020, all of the high-risk employees allowed to stay home per the Mexican presidential decree returned to work. Management expects COVID-19 costs to decrease in the fourth quarter of 2020.

KCS believes it has a strong liquidity position to continue business operations and service its debt obligations. As disclosed in the Liquidity and Capital Resources section, the Company has total available liquidity of $1,246.0 million as of September 30, 2020, consisting of cash on hand and a revolving credit facility. Total liquidity increased during the year as a result of the issuance of $550.0 million of 3.50% Senior Notes on April 22, 2020. Furthermore, the Company does not have any debt maturities until 2023. During the second and third quarters of 2020, KCS did not significantly alter the terms of its freight agreements with customers. Cash flows from operations remain strong; however, capital expenditures were reduced by $75.0 million during the second quarter of 2020, resulting in estimated annual capital expenditures of approximately $425.0 million or below. If the Company experienced another significant reduction in revenues, the Company would have additional alternatives to maintain liquidity, including further decreases in capital expenditures and cost reductions as well as adjustments to its capital allocation policy. To date, the Company has not reduced or suspended its share repurchase program or dividend payments. See Liquidity and Capital Resources section for additional information.

KCS continues to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state, and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside KCS’ control requiring adjustments to operating plans. As such, given the dynamic nature of this situation, KCS cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on the Company’s results of operations, financial position, and liquidity. See Part II, Item 1A - “Risk Factors” - “Public health threats or outbreaks of communicable diseases, including the ongoing COVID-19 pandemic, could have a material adverse effect on the Company’s operations and financial results.”

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Strategic Initiatives

During 2019, KCS began implementing principles of PSR, focusing on operational excellence and driving the following improvements:


•	Customer service — improve and sustain consistency and reliability of service and create a more resilient and dependable network;


•	Facilitating growth — additional capacity for new opportunities;


•	Improving asset utilization — meet growing or changing demand with the same or fewer assets; and,


•	Improving the cost profile of the Company — increased profitability driven by volume and revenue growth and improved productivity and asset utilization.

As a result of the PSR initiatives in 2019, management approved four separate restructuring plans that totaled $168.8 million, including a $12.0 million restructuring plan in the third quarter of 2019. The PSR plans included asset impairments, workforce reductions, and contract restructuring, which resulted in 2019 operating expense savings of approximately $58.0 million.

The Company established the following key metrics and goals to measure PSR progress and performance:



	Three Months Ended		Improvement/ (Deterioration)	Nine Months Ended		Improvement/ (Deterioration)	FY 2020 Goal
	September 30,			September 30,
	2020	2019		2020	2019
Gross velocity (mph) (i)	14.5	13.9	4%	15.7	13.0	21%	17.0
Terminal dwell (hours) (ii)	22.9	20.3	(13)%	21.0	21.1	—	18.0
Train length (feet) (iii)	7,043	6,069	16%	6,588	5,948	11%	6,350
Car miles per day (iv)	110.3	116.6	(5)%	116.4	106.0	10%	135.0
Fuel efficiency (gallons per 1,000 GTM's) (v)	1.25	1.29	3%	1.24	1.31	5%	1.24



(i) Gross velocity is the average train speed between origin and destination in miles per hour calculated as the sum of the miles traveled divided by the sum of total transit hours. Transit hours are measured as the difference between a train’s origin departure and destination arrival date and times broken down by segment across the train route (includes all time spent including crew changes, terminal dwell, delays, and incidents).

(ii) Terminal dwell is the average amount of time in hours between car arrival to and departure from the yard (excludes cars that move through a terminal on a run-through train, stored, bad ordered, and maintenance-of-way cars). Calculated by dividing the total number of hours cars spent in terminals by the total count of car dwell events.

(iii) Train length is the average length of a train across its reporting stations, including the origin and intermediate stations. Length of a train is the sum of car and locomotive lengths measured in feet.

(iv) Car miles per day is the miles a car travels divided by total transit days. Transit days are measured from opening event to closing event (includes all time spent in terminals and on trains).

(v) Fuel efficiency is calculated by taking locomotive fuel consumed in gallons divided by thousand gross ton miles (“GTM’s”) net of detours with no associated fuel gallons. GTM’s are the movement of one ton of train weight over one mile calculated by multiplying total train weight by distance the train moved. GTM’s exclude locomotive gross ton miles.

As revenues declined rapidly in the second quarter of 2020 due to COVID-19, management accelerated PSR initiatives by rightsizing resources to volumes and further reduced costs. Train service plans were quickly adjusted as volumes began to decline and trains were consolidated, resulting in longer, more efficient trains. Record average train length reduced the number of train starts and crew costs, leading to operating efficiencies across the organization and record fuel efficiency. As volumes began to rebound rapidly in June and through the third quarter of 2020, the Company remained focused on PSR initiatives and maintained cost reductions from consolidating trains and reducing crew costs. During the third quarter of 2020, the Company experienced back-to-back hurricanes that negatively impacted the operating metrics for the three months ended September 30, 2020.

At the beginning of 2020, the Company estimated incremental annual operating savings of approximately $61.0 million. Due to acceleration of PSR initiatives in the second quarter of 2020, the Company is estimating incremental annual operating savings of approximately $95.0 million. The Company remains focused on executing the strategic initiatives and achieving the operational metric targets noted above, which will deliver improved customer service, facilitate growth, and drive better asset utilization while improving the cost profile of the Company.

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Third Quarter Highlights

Revenues decreased 12% for the three months ended September 30, 2020 , as compared to the same period in 2019 , due to a 9% decrease in revenue per carload/unit and a 4% decrease in carload/unit volumes. Revenues decreased primarily due to lower volumes, lower fuel surcharge due to lower fuel prices, and the weakening of the Mexican peso against the U.S dollar. Carload/unit volumes decreased as a result of reductions in crude and frac sand volumes due to the decline in oil prices and in the automotive business unit due to lower production volumes as a result of the ongoing COVID-19 pandemic. In addition, metals volumes within the industrial and consumer products business unit decreased due to the overall weakness in the energy market. These decreases were partially offset by increased volumes in the chemical and petroleum business unit due to strong recovery in refined fuel product shipments into Mexico.

As revenues declined during 2020 due to COVID-19, the Company responded quickly by implementing cost-saving measures and accelerating PSR initiatives. Operating expenses decreased 17% during the three months ended September 30, 2020 , as compared to the same period in 2019 , primarily due to lower fuel price and consumption, fewer headcount and hours worked, decreased restructuring charges, savings related to PSR initiatives and the weakening of the Mexican peso against the U.S. dollar. Operating expenses as a percentage of revenues was 58.8% for the three months ended September 30, 2020 , compared to 62.3% for the same period in 2019 .

The Company reported quarterly earnings of $2.01 per diluted share on consolidated net income of $189.8 million for the three months ended September 30, 2020 , compared to earnings of $1.81 per diluted share on consolidated net income of $180.2 million for the same period in 2019 , due to reduced income tax expense as a result of lower effective tax rate, an increase in share repurchases, and a foreign exchange gain as compared to a loss in 2019. These increases were partially offset by an increase in interest expense due to the issuance of senior notes in the fourth quarter of 2019 and the second quarter of 2020, and lower operating income.

Results of Operations

The following summarizes KCS’s consolidated statement of income components (in millions) :



	Three Months Ended						Change
	September 30,
	2020			2019
Revenues	$	659.6		$	747.7		$	(88.1	)
Operating expenses	388.1			465.7			(77.6		)
Operating income	271.5			282.0			(10.5		)
Equity in net earnings (losses) of affiliates	(1.3		)	2.1			(3.4		)
Interest expense	(39.5		)	(27.9		)	(11.6		)
Foreign exchange gain (loss)	7.7			(3.4		)	11.1
Other income, net	0.3			2.0			(1.7		)
Income before income taxes	238.7			254.8			(16.1		)
Income tax expense	48.5			74.2			(25.7		)
Net income	190.2			180.6			9.6
Less: Net income attributable to noncontrolling interest	0.4			0.4			—
Net income attributable to Kansas City Southern and subsidiaries	$	189.8		$	180.2		$	9.6

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	Nine Months Ended						Change
	September 30,
	2020			2019
Revenues	$	1,939.2		$	2,136.5		$	(197.3	)
Operating expenses	1,198.5			1,486.2			(287.7		)
Operating income	740.7			650.3			90.4
Equity in net earnings (losses) of affiliates	(0.1		)	3.6			(3.7		)
Interest expense	(111.8		)	(84.1		)	(27.7		)
Debt retirement costs	—			(0.6		)	0.6
Foreign exchange gain (loss)	(44.0		)	9.5			(53.5		)
Other income, net	2.5			2.2			0.3
Income before income taxes	587.3			580.9			6.4
Income tax expense	134.5			168.0			(33.5		)
Net income	452.8			412.9			39.9
Less: Net income attributable to noncontrolling interest	1.5			1.2			0.3
Net income attributable to Kansas City Southern and subsidiaries	$	451.3		$	411.7		$	39.6

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
	September 30,						September 30,				September 30,
	2020		2019		% Change		2020	2019	% Change		2020		2019		% Change
Chemical and petroleum	$	191.9	$	194.2	(1	%)	91.5	87.4	5	%	$	2,097	$	2,222	(6	%)
Industrial and consumer products	126.4		155.9		(19	%)	73.7	81.4	(9	%)	1,715		1,915		(10	%)
Agriculture and minerals	125.3		133.7		(6	%)	64.0	66.0	(3	%)	1,958		2,026		(3	%)
Energy	46.8		65.0		(28	%)	51.5	64.7	(20	%)	909		1,005		(10	%)
Intermodal	89.1		100.5		(11	%)	264.7	260.2	2	%	337		386		(13	%)
Automotive	48.5		64.8		(25	%)	32.1	39.2	(18	%)	1,511		1,653		(9	%)
Carload revenues, carloads and units	628.0		714.1		(12	%)	577.5	598.9	(4	%)	$	1,087	$	1,192	(9	%)
Other revenue	31.6		33.6		(6	%)
Total revenues (i)	$	659.6	$	747.7	(12	%)

(i) Included in revenues:
Fuel surcharge	$	46.2	$	82.3

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	Revenues						Carloads and Units				Revenue per Carload/Unit
	Nine Months Ended						Nine Months Ended				Nine Months Ended
	September 30,						September 30,				September 30,
	2020		2019		% Change		2020	2019	% Change		2020		2019		% Change
Chemical and petroleum	$	549.0	$	551.1	—		258.0	253.7	2	%	$	2,128	$	2,172	(2	%)
Industrial and consumer products	406.0		456.0		(11	%)	225.1	240.5	(6	%)	1,804		1,896		(5	%)
Agriculture and minerals	374.2		379.0		(1	%)	184.8	189.8	(3	%)	2,025		1,997		1	%
Energy	142.4		183.5		(22	%)	153.2	180.2	(15	%)	930		1,018		(9	%)
Intermodal	241.3		273.0		(12	%)	689.3	725.7	(5	%)	350		376		(7	%)
Automotive	118.0		193.3		(39	%)	75.9	118.5	(36	%)	1,555		1,631		(5	%)
Carload revenues, carloads and units	1,830.9		2,035.9		(10	%)	1,586.3	1,708.4	(7	%)	$	1,154	$	1,192	(3	%)
Other revenue	108.3		100.6		8	%
Total revenues (i)	$	1,939.2	$	2,136.5	(9	%)

(i) Included in revenues:
Fuel surcharge	$	161.4	$	219.6

Revenues include both revenue for transportation services and fuel surcharges. For the three months ended September 30, 2020, revenues and carload/unit volumes decreased 12% and 4% , respectively, compared to the same period in 2019. Revenues decreased primarily due to lower volumes, lower fuel surcharge due to lower fuel prices, and the weakening of the Mexican peso against the U.S dollar. Carload/unit volumes decreased as a result of reductions in crude and frac sand volumes due to the decline in oil prices and in the automotive business unit due to lower production volumes as a result of the ongoing COVID-19 pandemic. In addition, metals volumes within the industrial and consumer products business unit decreased due to the overall weakness in the energy market. These decreases were partially offset by increased volumes in the chemical and petroleum business unit due to strong recovery in refined fuel product shipments into Mexico.

For the three months ended September 30, 2020 , revenue per carload/unit decreased by 9% , compared to the same period in 2019, due to mix, lower fuel surcharge, the weakening of the Mexican peso against the U.S. dollar, and shorter average length of haul, partially offset by positive pricing impacts. The average exchange rate of Mexican pesos per U.S. dollar was Ps. 22.1 , for the three months ended September 30, 2020, compared to Ps. 19.4 for the same period in 2019, which resulted in a decrease in revenue of approximately $16.0 million.

For the nine months ended September 30, 2020 , revenues and carload/unit volumes decreased 9% and 7% , respectively, compared to the same period in 2019. Revenues decreased primarily due to lower volumes as a result of COVID-19, the weakening of the Mexican peso against the U.S dollar, shorter average length of haul, and lower fuel surcharge due to lower fuel prices. The volume declines were primarily in the automotive business unit due to plant shutdowns and lower production volumes as a result of COVID-19. Crude and frac sand volumes within the Energy business unit decreased due to the decline in oil prices and industrial and consumer business units was impacted by lower market demand as a result of COVID-19. In addition, intermodal volumes were also affected by overall decline in demand due to COVID-19 and significant declines in auto part shipments.

For the nine months ended September 30, 2020 , revenue per carload/unit decreased by 3% , compared to the same period in 2019 due to the weakening of the Mexican peso against the U.S. dollar, mix, shorter average length of haul, and lower fuel surcharge, partially offset by positive pricing impacts. The average exchange rate of Mexican pesos per U.S. dollar was Ps. 21.8 for the nine months ended September 30, 2020, compared to Ps. 19.3 for the same period in 2019, which resulted in a decrease to revenues of approximately $34.0 million.

KCS’s fuel surcharges are a mechanism to adjust revenue based upon changes in fuel prices above fuel price thresholds set in KCS’s tariffs or contracts. Fuel surcharge revenue 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 revenue may differ.

For the three and nine months ended September 30, 2020 , fuel surcharge revenue decreased $36.1 million and $58.2 million , respectively, compared to the same periods in 2019, primarily due to lower volumes and fuel prices.

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The following discussion provides an analysis of revenues by commodity group:



	Revenues by commodity group for the three months ended September 30, 2020
Chemical and petroleum . Revenues decreased $2.3 million for the three months ended September 30, 2020, compared to the same period in 2019, due to a 6% decrease in revenue per carload/unit, partially offset by a 5% increase in carload/unit volumes. Revenues per carload/unit decreased due to shorter average length of haul, lower fuel surcharge, the weakening of the Mexican peso against the U.S. dollar, and mix, partially offset by positive pricing impacts. Volumes increased due to strong recovery in refined fuel product shipments into Mexico. Revenues remained flat for the nine months ended September 30, 2020, compared to the same period in 2019, as a 2% decrease in revenue per carload/unit was offset by a 2% increase in carload/unit volumes. Revenue per carload/unit decreased due to shorter average length of haul, the weakening of the Mexican peso against the U.S. dollar, and lower fuel surcharge, partially offset by positive pricing impacts and mix. Volumes increased due to refined fuel product shipments to Mexico.



Industrial and consumer products . Revenues decreased $29.5 million for the three months ended September 30, 2020, compared to the same period in 2019, due to a 10% decrease in revenue per carload/unit and a 9% decrease in carload/unit volumes. Revenue per carload/unit decreased due to mix, lower fuel surcharge, the weakening of the Mexican peso against the U.S. dollar, and shorter average length of haul, partially offset by positive pricing impacts. Volumes decreased primarily in metals due to weakness in the energy market. For the nine months ended September 30, 2020, revenues decreased $50.0 million, compared to the same period in 2019, due to a 6% decrease in carload/unit volumes and a 5% decrease in revenue per carload/unit. Volumes decreased primarily due to lower market demand as a result of the ongoing COVID-19 pandemic. Revenue per carload/unit decreased due to mix, the weakening of the Mexican peso against the U.S. dollar, and lower fuel surcharge, partially offset by positive pricing impacts.

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	Revenues by commodity group for the three months ended September 30, 2020
Agriculture and minerals. Revenues decreased $8.4 million for the three months ended September 30, 2020, compared to the same period in 2019, due to a 3% decrease in both revenue per carload/unit and carload/unit volumes. Revenue per carload/unit decreased due to lower fuel surcharge and the weakening of the Mexican peso against the U.S. dollar, partially offset by longer average length of haul and positive pricing impacts. Volume decreases were driven by a decline in ores and minerals shipments due to lower demand as a result of weather delays impacting road infrastructure projects. Revenues decreased $4.8 million for the nine months ended September 30, 2020, compared to the same period in 2019, due to a 3% decrease in carload/unit volumes driven by the shutdown of non-essential business due to COVID-19. This decrease was partially offset by a 1% increase in revenue per carload/unit due to mix, longer average length of haul, and positive pricing impacts, partially offset by lower fuel surcharge and the weakening of the Mexican peso against the U.S. dollar.



Energy. Revenues decreased $18.2 million for the three months ended September 30, 2020, compared to the same period in 2019, due to a 20% decrease in carload/unit volumes and a 10% decrease in revenue per carload/unit. For the nine months ended September 30, 2020, revenues decreased $41.1 million, compared to the same period in 2019, due to a 15% decrease in carload/unit volumes and a 9% decrease in revenue per carload/unit. Utility coal volumes decreased as a result of low natural gas prices and warm weather. Frac sand and crude oil volumes decreased due to the declines in oil prices. For the three months ended September 30, 2020, revenue per carload/unit decreased due to mix, lower fuel surcharge, and the weakening of the Mexican peso against the U.S. dollar, partially offset by positive pricing impacts and longer length of haul. For the nine months ended September 30, 2020, revenue per carload/unit decreased due to mix, lower fuel surcharge, shorter average length of haul, and the weakening of the Mexican peso against the U.S. dollar, partially offset by positive pricing impacts.

Intermodal. Revenues decreased $11.4 million for the three months ended September 30, 2020, compared to the same period in 2019, due to a 13% decrease in revenue per carload/unit, partially offset by a 2% increase in carload/unit volumes. Revenue per carload/unit decreased due to mix, lower fuel surcharge, shorter average length of haul, and the weakening of the Mexican peso against the U.S. dollar. Volumes increased due to cross-border and domestic shipments driven by restocking of inventory, e-commerce and retail business, and tight trucking capacity.

Revenues decreased $31.7 million for the nine months ended September 30, 2020 , compared to the same period in 2019, due to a 7% decrease in revenue per carload/unit, and a 5% decrease in carload/unit volumes. Revenue per carload/unit decreased due to mix, shorter average length of haul, and the weakening of the Mexican peso against the U.S. dollar. Volumes decreased primarily due to COVID-19 and auto plant shutdowns impacting cross-border traffic.

Automotive. Revenues decreased $16.3 million for the three months ended September 30, 2020, compared to the same period in 2019, due to an 18% decrease in carload/unit volumes and a 9% decreased in revenue per carload/unit. Volumes decreased due to lower overall automotive production in Mexico as a result of COVID-19. Revenue per carload/unit decreased due to the weakening of the Mexican peso against the U.S. dollar, lower fuel surcharge, and mix, partially offset by longer average length of haul and positive pricing impacts.

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Revenues decreased $75.3 million for the nine months ended September 30, 2020 , compared to the same period in 2019, due to a 36% decrease in carload/unit volumes due to auto plant shutdowns and lower overall automotive production in Mexico as a result of COVID-19 and a 5% decrease in revenue per carload/unit due to the weakening of the Mexican peso against the U.S. dollar, mix, and shorter average length of haul, partially offset by positive pricing impacts.

Operating Expenses

Operating expenses, as shown below ( in millions ), decreased $77.6 million and $287.7 million for the three and nine months ended September 30, 2020 , respectively, compared to the same periods in 2019, primarily due to lower fuel price and consumption, fewer headcount and hours worked, decreased restructuring charges, and savings related to PSR initiatives. The weakening of the Mexican peso against the U.S. dollar during the three and nine months ended September 30, 2020 , resulted in reduced expense of approximately $11.0 million and $29.0 million, respectively, compared to the same periods in 2019, for expense transactions denominated in Mexican pesos. The average exchange rate of Mexican pesos per U.S. dollar was Ps. 22.1 and Ps. 21.8 for the three and nine months ended September 30, 2020 , respectively, compared to Ps. 19.4 and Ps. 19.3 for the same periods in 2019.



	Three Months Ended
	September 30,				Change
	2020		2019		Dollars			Percent
Compensation and benefits	$	117.4	$	134.8	$	(17.4	)	(13	%)
Purchased services	47.3		53.4		(6.1		)	(11	%)
Fuel	50.8		87.1		(36.3		)	(42	%)
Equipment costs	23.9		25.1		(1.2		)	(5	%)
Depreciation and amortization	89.2		86.5		2.7			3	%
Materials and other	59.0		66.8		(7.8		)	(12	%)
Restructuring charges	0.5		12.0		(11.5		)	(96	%)
Total operating expenses	$	388.1	$	465.7	$	(77.6	)	(17	%)



	Nine Months Ended
	September 30,				Change
	2020		2019		Dollars			Percent
Compensation and benefits	$	354.6	$	392.0	$	(37.4	)	(10	%)
Purchased services	145.2		162.9		(17.7		)	(11	%)
Fuel	165.2		257.8		(92.6		)	(36	%)
Equipment costs	63.9		81.8		(17.9		)	(22	%)
Depreciation and amortization	267.9		262.7		5.2			2	%
Materials and other	184.7		198.5		(13.8		)	(7	%)
Restructuring charges	17.0		130.5		(113.5		)	(87	%)
Total operating expenses	$	1,198.5	$	1,486.2	$	(287.7	)	(19	%)

Compensation and benefits. Compensation and benefits decreased $17.4 million for the three months ended September 30, 2020 , compared to the same period in 2019 , due to a decrease in headcount and work hours of approximately $18.0 million caused by volume declines as a result of the ongoing COVID-19 pandemic, the continued application of PSR initiatives, and the voluntary separation program (“VSP”), the weakening of the Mexican peso against the U.S dollar of approximately $4.0 million and a decrease in incentive compensation of approximately $2.0 million, partially offset by wage inflation of approximately $4.0 million, and approximately $2.0 million of wages related to COVID-19 for employees that were symptomatic or quarantined.

Compensation and benefits decreased $37.4 million for the nine months ended September 30, 2020 , compared to the same period in 2019 , due to a decrease in headcount and work hours of approximately $43.0 million caused by volume declines as a result of COVID-19 and the continued application of PSR initiatives and the weakening of the Mexican peso against the U.S dollar of approximately $12.0 million, partially offset by wage inflation of approximately $13.0 million, approximately $4.0 million of wages related to COVID-19 and an increase in incentive compensation of approximately $1.0 million. Wages related to COVID-19 are paid to employees that were symptomatic, quarantined, or under a stay-at-home order per Mexican presidential decree for COVID-19.

Purchased services. Purchased services expense decreased $6.1 million for the three months ended September 30, 2020 , compared to the same period in 2019, due to decreases in repairs and maintenance expense caused by COVID-19 related volume

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declines and the continued application of PSR initiatives of approximately $5.0 million and the weakening of the Mexican peso against the U.S. dollar of approximately $1.0 million.

Purchased services expense decreased $17.7 million for the nine months ended September 30, 2020 , compared to the same period in 2019, due to decreases in repairs and maintenance and detour expense caused by COVID-19 related volume declines and the continued application of PSR initiatives of approximately $13.0 million, the weakening of the Mexican peso against the U.S. dollar of approximately $4.0 million, and savings from in-sourcing activities in 2019 related to PSR of approximately $2.0 million.

Fuel. Fuel decreased $36.3 million for the three months ended September 30, 2020 , compared to the same period in 2019 , due to lower diesel fuel prices of approximately $10.0 million and $8.0 million in the U.S. and Mexico, respectively, lower consumption of approximately $6.0 million and $4.0 million in the U.S. and Mexico, respectively, caused by volume declines as a result of the ongoing COVID-19 pandemic, the weakening of the Mexican peso against the U.S. dollar of approximately $4.0 million and increased efficiency of approximately $4.0 million.

Fuel decreased $92.6 million for the nine months ended September 30, 2020 , compared to the same period in 2019 , due to lower diesel fuel prices of approximately $26.0 million and $20.0 million in the U.S. and Mexico, respectively, lower consumption of approximately $17.0 million and $10.0 million in Mexico and the U.S., respectively, caused by volume declines as a result of the ongoing COVID-19 pandemic, increased efficiency of approximately $12.0 million and the weakening of the Mexican peso against the U.S. dollar of approximately $8.0 million. The average price per gallon was $1.78 and $1.95 for the three and nine months ended September 30, 2020 , compared to $2.55 and $2.59, respectively, for the same periods in 2019 .

Equipment costs. Equipment costs decreased $1.2 million for the three months ended September 30, 2020 , compared to the same period in 2019 , due to lower lease expense of approximately $4.0 million due to the termination of a locomotive lease during the first quarter of 2020, partially offset by higher car hire expense of approximately $3.0 million.

Equipment costs decreased $17.9 million for the nine months ended September 30, 2020 , compared to the same period in 2019 , due to lower lease expense of approximately $13.0 million due to the termination of locomotive leases during the second quarter of 2019 and the first quarter of 2020 and lower car hire expense of approximately $5.0 million primarily as a result of reduced cycle times due to PSR initiatives.

Depreciation and amortization. Depreciation and amortization expense increased $2.7 million and $5.2 million for the three and nine months ended September 30, 2020 , compared to the same periods in 2019 , due to a larger asset base, partially offset by lower depreciation as a result of PSR initiatives implemented during 2019.

Materials and other. Materials and other expense decreased $7.8 million for the three months ended September 30, 2020 , compared to the same period in 2019 , primarily due to lower employee expenses of approximately $5.0 million, lower derailments and casualty expense of approximately $4.0 million, lower property taxes of approximately $3.0 million, and the weakening of the Mexican peso against the U.S. dollar of approximately $2.0 million, partially offset by a one-time, vendor settlement of approximately $5.0 million in the third quarter of 2019.

Materials and other expense decreased $13.8 million for the nine months ended September 30, 2020 , compared to the same period in 2019 , primarily due to lower employee expenses of approximately $10.0 million, lower materials and supplies expense of approximately $5.0 million, the weakening of the Mexican peso against the U.S. dollar of approximately $5.0 million, and lower derailments and casualty expense of approximately $3.0 million, partially offset by an increase in personal injury expense of approximately $5.0 million and a one-time, vendor settlement of approximately $5.0 million in the third quarter of 2019.

Restructuring charges. During the three and nine months ended September 30, 2020 , the Company recognized $0.5 million and $17.0 million , respectively, of restructuring charges. For the nine months ended September 30, 2020, the charges primarily related to the VSP of $9.2 million and the purchase of impaired, leased locomotives of $6.0 million. For the three months ended September 30, 2020, additional restructuring charges of approximately $0.5 million were recognized as part of the voluntary separation program.

For the three and nine months ended September 30, 2019, the Company recognized $12.0 million and $130.5 million, respectively, of restructuring charges related to the implementation of PSR initiatives, which included the impairment of certain locomotives and rail cars, planned activities for workforce reduction, and contract restructuring activities. Refer to Note 2 , Restructuring Charges for more information.

Non-Operating Income and Expenses

Equity in net earnings (losses) of affiliates. For the three months ended September 30, 2020, equity in net earnings (losses) of affiliates decreased $3.4 million , compared to the same period in 2019, primarily due to a decrease in net earnings from the operations of Panama Canal Railway Company (“PCRC”) as a result of lower container volumes due to a bridge strike in late June 2020 that

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shutdown the railroad for approximately three months, and a decrease in net earnings from the operations of Ferrocarril y Terminal del Valle de Mexico, S.A de C.V. (“FTVM”) as a result of lower volumes.

For the nine months ended September 30, 2020, equity in net earnings (losses) of affiliates decreased $3.7 million , compared to the same period in 2019, primarily due to a decrease in net earnings from the operations of TFCM, S. de R.L de C.V. (“TCM”) due to increased tax expense and foreign exchange losses in the first quarter of 2020. In addition, equity in net earnings from the operations of Panama Canal Railway Company (“PCRC”) decreased as a result of lower container volumes due to a bridge strike in late June 2020 that shutdown the railroad for approximately three months. These decreases were partially offset by an increase in equity in net earnings from the operations of FTVM as a result of higher expenses recognized in 2019 related to the cancellation of Mexico City’s new international airport.

Interest expense. For the three months ended September 30, 2020 , interest expense increased $11.6 million , compared to the same period in 2019, due to higher average debt balances. For the nine months ended September 30, 2020 , interest expense increased $27.7 million , compared to the same period in 2019, due to higher average debt balances, partially offset by lower average interest rates. During the three and nine months ended September 30, 2020 , the average debt balances (including commercial paper) were $3,815.0 million and $3,636.3 million , respectively, compared to $2,707.0 million and $2,709.4 million for the same periods in 2019. The average interest rates during the three and nine months ended September 30, 2020 were 4.1% , for both periods, compared to 4.1% and 4.2% , respectively, for the same periods in 2019.

Debt retirement costs . The Company did not incur debt retirement costs during 2020, or the third quarter of 2019. Debt retirement costs were $0.6 million for the nine months ended September 30, 2019, related to the write-off of previously capitalized debt issuance costs associated with the establishment of the new revolving credit facility in the first quarter of 2019.

Foreign exchange gain (loss). For the three and nine months ended September 30, 2020 , foreign exchange gain was $7.7 million and a loss of $44.0 million , respectively, compared to a foreign exchange loss of $3.4 million and a gain of $9.5 million for the same periods in 2019. Foreign exchange gain (loss) includes the re-measurement and settlement of net monetary assets denominated in Mexican pesos and the gain (loss) on foreign currency derivative contracts. The significant fluctuation in foreign exchange gain (loss) is a result of depreciation in the Mexican peso against the U.S. dollar partially resulting from the increased market volatility driven by the global COVID-19 pandemic.

For the three and nine months ended September 30, 2020 , the re-measurement and settlement of monetary assets and liabilities denominated in Mexican pesos resulted in a foreign exchange gain of $1.0 million and a loss of $23.4 million , respectively, compared to a loss of $2.8 million and $0.8 million for the same periods in 2019.

The Company enters into foreign currency derivative contracts to hedge its net exposure to fluctuations in the Mexican cash tax obligation due to changes in the value of the Mexican peso against the U.S. dollar. For the three and nine months ended September 30, 2020 , the Company incurred a foreign exchange gain and loss on foreign currency derivative contracts of $6.7 million and $20.6 million , respectively, compared to a loss of $0.6 million and a gain of $10.3 million for the same periods in 2019.

Other income, net . Other income, net decreased $1.7 million for the three months ended September 30, 2020 , compared to the same periods in 2019 , due to a decrease in miscellaneous income. For the nine months ended September 30, 2020, other income, net remained flat, compared to the same period in 2019.

Income tax expense. Income tax expense decreased $25.7 million and $33.5 million for the three and nine months ended September 30, 2020 , compared to the same periods in 2019 , due to a lower effective tax rate. The decrease in the effective tax rate was primarily due to the issuance of final global intangible low-taxed income (“GILTI”) regulations that provide for a high-tax exception to the GILTI tax retroactive to 2018, and fluctuations in the foreign exchange rate. See the tax rates reconciliation below.

The Treasury Department issued final regulations in July 2020 that provide for a high-tax exception to the GILTI tax. Specifically, if foreign earnings are subject to a foreign tax rate of at least 90% of the U.S. tax rate, an election can be made to not treat the high-taxed earnings as GILTI income. The final regulations can apply retroactive to tax years beginning after December 31, 2017, and render the GILTI tax immaterial to the consolidated financial statements. The Company recognized a $14.5 million discrete tax benefit in the three and nine months ended September 30, 2020 for the reversal of 2018 and 2019 GILTI tax expense recognized in prior years’ consolidated financial statements. The Company also recognized a $4.2 million tax benefit in the three months ended September 30, 2020 for the reversal of GILTI tax expense recognized in the consolidated financial statements during the six months ended June 30, 2020.

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The components of the effective tax rates for the three and nine months ended September 30, 2020 , compared to the same periods in 2019 , are as follows:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Statutory rate in effect	21.0	%	21.0	%	21.0	%	21.0	%
Tax effect of:
Difference between U.S. and foreign tax rate	5.6	%	6.2	%	5.5	%	6.1	%
Global intangible low-taxed income (“GILTI”) tax, net	(7.8	%)	1.4	%	(2.5	%)	0.9	%
Mexican fuel excise tax credit, net (i)	—		(1.5	%)	—		(1.5	%)
State and local income tax provision, net	1.3	%	1.0	%	1.3	%	1.0	%
Foreign exchange (ii)	0.1	%	0.9	%	(2.0	%)	1.4	%
Other, net	0.1	%	0.1	%	(0.4	%)	—
Effective tax rate	20.3	%	29.1	%	22.9	%	28.9	%


(i)	Not eligible for Mexican fuel excise tax credit for 2020. See discussion in the Mexico Tax Reform section below.

(ii)

Mexican income taxes are paid in Mexican pesos, and as a result, the effective income tax rate reflects fluctuations in the value of the Mexican peso against the U.S. dollar measured by the forward exchange rate. The foreign exchange impact on income taxes includes the gain or loss from the revaluation of net U.S. dollar-denominated monetary liabilities into Mexican pesos which is included in Mexican taxable income under Mexican tax law. As a result, a strengthening of the Mexican peso against the U.S. dollar for the reporting period will generally increase the Mexican cash tax obligation and the effective income tax rate, and a weakening of the Mexican peso against the U.S. dollar for the reporting period will generally decrease the Mexican cash tax obligation and the effective tax rate. To hedge its exposure to this cash tax risk, the Company enters into foreign currency derivative contracts, which are measured at fair value each period and any change in fair value is recognized in foreign exchange gain (loss) within the consolidated statements of income as described above. Refer to Note 7 , Derivative Instruments for more information.

Mexico Tax Reform

In December 2019, the Mexican government enacted changes in the tax law effective January 1, 2020 (“Mexico 2020 Tax Reform”). Mexico 2020 Tax Reform excluded railroads from eligibility for the Mexican fuel excise tax credit. Mexico 2020 Tax Reform also included permanent changes to the Value Added Tax (“VAT”) Law, Income Tax Law and Federal Fiscal Code which, among other things, requires certain VAT withholding, limits the deduction of interest expense and certain payments to related parties in preferential tax regimes, adopts a general anti-avoidance rule, requires mandatory disclosure of reportable transactions beginning in 2021, and permanently eliminates universal compensation, which allowed Mexican taxpayers to offset recoverable tax balances against balances due for other federal taxes. Mexico 2020 Tax Reform did not have a material impact to the consolidated financial statements for the three and nine months ended September 30, 2020.

Liquidity and Capital Resources

Overview

On November 12, 2019, the Company announced its new capital allocation policy (the “Policy”) that was approved by the Company’s Board of Directors (the “Board”). Pursuant to that Policy, the Company intends to deploy available cash in the following manner:

• Approximately 40-50% to capital projects and strategic investments; and


•	Approximately 50-60% to share repurchases and dividends.

In connection with the new Policy, the Board also approved the following actions:


•	An increase in the quarterly dividend on KCS’s common stock from $0.36 to $0.40 per share; and


•	A new $2.0 billion share repurchase program (“2019 Program”), expiring December 31, 2022.

During the nine months ended September 30, 2020 , the Company invested $286.4 million in capital expenditures. See the Capital Expenditures section for further details.

During the third quarter of 2020, the Company repurchased 662,451 shares of common stock for $117.0 million at an average price of $176.62 per share under the 2019 Program. During the nine months ended September 30, 2020, KCS repurchased 2,653,209

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shares of common stock for $411.2 million under the 2019 Program, which includes shares delivered to settle the Company’s accelerated share repurchase (“ASR”) agreements entered into in November 2019. Subsequent to the balance sheet date and through October 15, 2020, KCS repurchased 180,256 shares of common stock for $33.0 million at an average price of $183.07 per share under a Rule 10b5-1 trading plan. Since inception of the 2019 Program and including the Rule 10b5-1 repurchases made in October, KCS has repurchased 5,856,225 shares of common stock for $911.7 million at an average price of $155.69 per share. Management’s assessment of market conditions, available liquidity and other factors will determine the timing and volume of any future repurchases. Refer to Note 10 , Share Repurchases, for additional information on the Company’s common share repurchase program and ASR agreements.

During the third quarter of 2020, the Company repurchased 3,961 shares of its $25 par preferred stock for $0.1 million at an average price of $28.97 per share. The excess of repurchase price over par value is allocated between paid-in-capital and retained earnings.

During the nine months ended September 30, 2020, the Company’s Board of Directors declared a quarterly cash dividend on its common stock of $0.40 per share (total of $113.6 million ). Subject to the discretion of the Board of Directors, capital availability and a determination that cash dividends continue to be in the best interest of its stockholders, the Company intends to pay a quarterly dividend on an ongoing basis.

On April 22, 2020, the Company issued $550.0 million principal amount of senior unsecured notes due May 1, 2050, which bear interest semiannually at a fixed annual rate of 3.50% (the “3.50% Notes”). The Company intends to use the net proceeds from the offering for general corporate purposes, including to repurchase shares of the Company’s common stock. Subsequent to this filing, the Company intends to enter into ASR agreements under the 2019 Program for the repurchase of approximately $500.0 million of its outstanding shares of common stock.

At September 30, 2020 , the Company had $444.7 million principal amount outstanding of 3.00% senior notes that mature May 15, 2023 (the “ 3.00% Notes”). The Company has the intention and ability to refinance the 3.00% Notes into a new long-term debt instrument prior to maturity. The Company has executed treasury lock agreements to hedge the U.S. Treasury benchmark interest rate associated with any future interest payments related to the anticipated refinancing of the 3.00% Notes. See Note 7 , Derivative Instruments for further discussion of the treasury lock agreements.

The Company’s current financing instruments contain restrictive covenants that limit or preclude certain actions; however, the covenants are structured such that the Company expects to have sufficient flexibility to conduct its operations. The Company has been, and expects to continue to be, in compliance with all of its debt covenants.

For additional discussion of the agreements representing the indebtedness of KCS, see Note 13, Short-Term Borrowings and Note 14, Long-Term Debt in the “Notes to the Consolidated Financial Statements” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 .

On September 30, 2020 , total available liquidity (the cash balance plus revolving credit facility availability) was $1,246.0 million , compared to availability at December 31, 2019 of $748.8 million . This increase was due to higher cash balances as a result of the issuance of the 3.50% Notes, partially offset by share repurchases during 2020.

As of September 30, 2020 , the total cash and cash equivalents held outside of the U.S. in foreign subsidiaries was $27.6 million , after repatriating $162.4 million during 2020. The Company expects that this cash will be available to fund operations without incurring significant additional income taxes.

Mexico 2020 Tax Reform permanently eliminated universal compensation that allowed Mexican taxpayers to offset

recoverable tax balances against balances due for other federal taxes. The elimination of universal compensation could negatively impact the timing of KCSM’s cash flow by up to $50.0 million in 2020 while awaiting refunds of value added tax from the Mexican government.

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Cash Flow Information

Summary cash flow data follows (in millions) :



	Nine Months Ended
	September 30,
	2020			2019
Cash flows provided by (used for):
Operating activities	$	819.9		$	858.8
Investing activities	(413.2		)	(540.3		)
Financing activities	96.1			(356.6		)
Effect of exchange rate changes on cash	(5.6		)	(0.8		)
Net increase (decrease) in cash and cash equivalents	497.2			(38.9		)
Cash and cash equivalents beginning of year	148.8			100.5
Cash and cash equivalents end of period	$	646.0		$	61.6

Cash flows from operating activities decreased $38.9 million for the nine months ended September 30, 2020 , compared to the same period in 2019 , primarily due to increased cash paid to settle foreign currency derivative instruments and an increase in advance Mexican income tax payments.

Net cash used for investing activities decreased $127.1 million for the nine months ended September 30, 2020 , compared to the same period in 2019 , due to a decrease in capital expenditures of $166.6 million , partially offset by an increase in the purchase or replacement of assets under existing operating leases of $39.6 million .

Net cash provided by financing activities increased $452.7 million for the nine months ended September 30, 2020 , compared to the same period in 2019 , primarily due to net proceeds from the issuance of long-term debt of $545.6 million during the second quarter of 2020, partially offset by an increase in shares repurchased of $80.4 million .

Capital Expenditures

KCS has funded, and expects to continue to fund capital expenditures with operating cash flows and short and long-term debt.

The following table summarizes capital expenditures by type (in millions):



	Nine Months Ended
	September 30,
	2020		2019
Roadway capital program	$	170.3	$	185.6
Locomotives and freight cars	32.1		173.9
Capacity	40.2		64.5
Information technology	30.6		22.6
Positive train control	10.8		12.4
Other	2.4		5.5
Total capital expenditures (accrual basis)	286.4		464.5
Change in capital accruals	15.2		3.7
Total cash capital expenditures	$	301.6	$	468.2


Total cash purchase or replacement of assets under operating leases	$	78.2	$	38.6

Generally, the Company’s capital program consists of capital replacement and equipment. For 2020 , internally generated cash flows are expected to fund cash capital expenditures, which are currently estimated to be approximately $425.0 million or below, depending on market conditions. In addition, the Company periodically reviews its equipment and property under operating leases. Any additional purchase or replacement of equipment and property under operating leases during 2020 is expected to be funded with internally generated cash flows and/or debt.

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Other Matters

Collective Bargaining

KCSR participates in industry-wide multi-employer bargaining as a member of the National Carriers’ Conference Committee (“NCCC”), as well as local bargaining for agreements that are limited to KCSR's property. Over 70% of KCSR employees are covered by collective bargaining agreements. Long-term agreements were reached voluntarily or through the arbitration process during 2017 and 2018 covering all of the participating unions. The terms of these agreements will remain in effect until new agreements are reached in the next bargaining round. In November 2019, KCSR and its unions commenced negotiations in connection with the 2020 bargaining round.

KCSM Servicios, S.A. de C.V. (“KCSM Servicios”), a wholly owned subsidiary of KCS, provides employee services to KCSM, and KCSM pays KCSM Servicios market-based rates for these services. KCSM Servicios union employees are covered by one labor agreement, which was signed on April 16, 2012, between KCSM Servicios and the Sindicato de Trabajadores Ferrocarrileros de la República Mexicana (“Mexican Railroad Union”), and which remains in effect during the period of the Concession, for the purpose of regulating the relationship between the parties. Over 75% of KCSM Servicios 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 benefits are subject to negotiation every two years. The parties finalized negotiations over compensation terms and benefits that will apply until June 30, 2021, along with other terms.

Union labor negotiations have not historically resulted in any strike, boycott, or other disruption in the Company’s business operations.

Supplemental Guarantor Financial Information

The following is a description of the terms and conditions of the guarantees with respect to senior notes for which KCS is an issuer or provides full and unconditional guarantee.

Note Guarantees

As of September 30, 2020 , KCS had outstanding $3,736.2 million principal amount of senior notes due through 2069 . The Kansas City Southern Railway Company (“KCSR”) had outstanding $2.7 million principal amount of senior notes due through 2045 (together, the “Senior Notes”). The senior notes for which KCS is the issuer are unconditionally guaranteed, jointly and severally, on an unsecured senior basis, by each of KCS’s current and future domestic consolidated subsidiaries that from time to time guarantees certain of KCS’s credit agreements, or any other debt of KCS, or any of KCS’s significant subsidiaries that is a guarantor (each, a “Guarantor Subsidiary,” and collectively, the “Guarantor Subsidiaries”). In addition, the senior notes for which KCSR is the issuer are unconditionally guaranteed, jointly and severally, on an unsecured senior basis, by KCS and each of its current and future domestic consolidated subsidiaries that from time to time guarantees KCSR’s credit agreement, or any other debt of KCSR or any of KCSR’s significant subsidiaries that is a Guarantor Subsidiary. The obligations of each Guarantor Subsidiary under its note guarantee are limited as necessary to prevent such note guarantee from constituting a fraudulent conveyance under applicable law. A guarantee of the Senior Notes by KCS or a Guarantor Subsidiary is subject to release in the following circumstances: (i) the sale, disposition, exchange or other transfer (including through merger, consolidation, amalgamation or otherwise) of the capital stock of the Guarantor Subsidiary made in a manner not in violation of the indenture; (ii) the designation of the subsidiary as an “Unrestricted Subsidiary” under the indenture; (iii) the legal defeasance or covenant defeasance of the Senior Notes in accordance with the terms of the indenture; or (iv) the Guarantor Subsidiary ceasing to be KCS’s subsidiary as a result of any foreclosure of any pledge or security interest securing KCS’s Revolving Credit Facility or other exercise of remedies in respect thereof.

KCSM and any other foreign subsidiaries of KCS do not and will not guarantee the Senior Notes (“Non-Guarantor Subsidiaries”).

The following tables present summarized financial information for KCS and the Guarantor Subsidiaries on a combined basis after intercompany transactions have been eliminated, including adjustments to remove the receivable and payable balances, investment in, and equity in earnings from the Non-Guarantor Subsidiaries.

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Summarized Financial Information



Income Statements	KCS and Guarantor Subsidiaries
	Nine Months Ended		Twelve Months Ended
	September 30, 2020		December 31, 2019
Revenues	$	1,009.8	$	1,472.0
Operating expenses	624.6		1,068.5
Operating income	385.2		403.5
Income before income taxes	276.3		291.7
Net income	247.2		235.0



Balance Sheets	KCS and Guarantor Subsidiaries
	September 30, 2020		December 31, 2019
Assets:
Current assets	$	795.1	$	332.9
Property and equipment (including concession assets), net	4,737.1		4,596.3
Other non-current assets	92.6		156.9

Liabilities and equity:
Current liabilities	$	330.6	$	313.5
Non-current liabilities	4,814.6		4,267.7
Noncontrolling interest	325.8		323.4

Excluded from current assets in the table above are $183.7 million and $95.2 million of current intercompany receivables due to KCS and the Guarantor Subsidiaries from the Non-Guarantor Subsidiaries as of September 30, 2020 and December 31, 2019 , respectively. Excluded from current liabilities in the table above are $189.8 million and $55.0 million of current intercompany payables due to the Non-Guarantor Subsidiaries from KCS and the Guarantor Subsidiaries as of September 30, 2020 and December 31, 2019 , respectively.

The Senior Notes are structurally subordinated to the indebtedness and other liabilities of the Non-Guarantor Subsidiaries. The Non-Guarantor Subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Senior Notes or the indentures, or to make any funds available therefor, whether by dividends, loans, distributions or other payments. Any right that KCS or the Guarantor Subsidiaries have to receive any assets of any of the Non-Guarantor Subsidiaries upon the liquidation or reorganization of any Non-Guarantor Subsidiary, and the consequent rights of holders of Senior Notes to realize proceeds from the sale of any of a Non-Guarantor Subsidiary’s assets, would be effectively subordinated to the claims of such Non-Guarantor Subsidiary’s creditors, including trade creditors and holders of preferred equity interests, if any, of such Non-Guarantor Subsidiary. Accordingly, in the event of a bankruptcy, liquidation or reorganization of any of the Non-Guarantor Subsidiaries, the Non-Guarantor Subsidiaries will pay the holders of their debts, holders of preferred equity interests, if any, and their trade creditors before they will be able to distribute any of their assets to KCS or any Guarantor Subsidiary.

If a Guarantor Subsidiary were to become a debtor in a case under the U.S. Bankruptcy Code or encounter other financial difficulty, under federal or state fraudulent transfer or conveyance law, a court may avoid, subordinate or otherwise decline to enforce its guarantee of the Senior Notes. A court might do so if it is found that when such Guarantor Subsidiary entered into its guarantee of the Senior Notes, or in some states when payments became due under the Senior Notes, such Guarantor Subsidiary received less than reasonably equivalent value or fair consideration and either:

• was insolvent or rendered insolvent by reason of such incurrence;

• was left with unreasonably small or otherwise inadequate capital to conduct its business; or

• believed or reasonably should have believed that it would incur debts beyond its ability to pay.

The court might also avoid the guarantee of the Senior Notes without regard to the above factors, if the court found that a Guarantor Subsidiary entered into its guarantee with actual intent to hinder, delay or defraud its creditors.

A court would likely find that a Guarantor Subsidiary did not receive reasonably equivalent value or fair consideration for its guarantee of the Senior Notes, if such Guarantor Subsidiary did not substantially benefit directly or indirectly from the funding made available by the issuance of the Senior Notes. If a court were to avoid a guarantee of the Senior Notes provided by a Guarantor

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Subsidiary, holders of the Senior Notes would no longer have any claim against such Guarantor Subsidiary. The measures of insolvency for purposes of these fraudulent transfer or conveyance laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer or conveyance has occurred, such that the Company cannot predict what standards a court would use to determine whether or not a Guarantor Subsidiary was solvent at the relevant time or, regardless of the standard that a court uses, that the guarantee of a Guarantor Subsidiary would not be subordinated to such Guarantor Subsidiary’s other debt. As noted above, each guarantee provided by a Guarantor Subsidiary includes a provision intended to limit the Guarantor Subsidiary’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer or conveyance. This provision may not be effective to protect those guarantees from being avoided under fraudulent transfer or conveyance law, or it may reduce that Guarantor Subsidiary’s obligation to an amount that effectively makes its guarantee worthless, and the Company cannot predict whether a court will ultimately find it to be effective.

On the basis of historical financial information, operating history and other factors, the Company believes that each of the Guarantor Subsidiaries, after giving effect to the issuance of its guarantee of the Senior Notes when such guarantee was issued, was not insolvent, did not have unreasonably small capital for the business in which it engaged and did not and has not incurred debts beyond its ability to pay such debts as they mature. The Company cannot predict, however, as to what standard a court would apply in making these determinations or that a court would agree with the Company’s conclusions in this regard.


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, 2019 .


Item 4.	Controls and Procedures

(a) Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the fiscal quarter ended September 30, 2020 , the design and operation of the Company’s disclosure controls and procedures were effective to accomplish their objectives at a reasonable assurance level.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION


Item 1.	Legal Proceedings

For information related to the Company’s legal proceedings, see Note 12 , Commitments and Contingencies, under Part I, Item 1 of this quarterly report on Form 10-Q.


Item 1A.	Risk Factors

Except as set forth below, during the quarter ended September 30, 2020 , there were no material changes to the Risk Factors disclosed in Item 1A - “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Public health threats or outbreaks of communicable diseases could have a material adverse effect on the Company’s operations and financial results.

The Company may face risks related to public health threats or outbreaks of communicable diseases. A widespread healthcare crisis, such as an outbreak of a communicable disease could adversely affect the global economy and the Company’s and its business partners’ ability to conduct business in the U.S. and Mexico for an indefinite period of time. The novel Coronavirus (“COVID-19”), which has been declared a pandemic, has spread to multiple global regions, including the U.S. and Mexico, and has negatively impacted the global economy, disrupted financial markets and international trade, resulted in increased unemployment levels and significantly impacted global supply chains, all of which negatively impacted the rail transportation industry and the Company’s business. In an effort to halt the outbreak of COVID-19, both the U.S. and Mexico have implemented various measures, including but not limited to, voluntary and mandatory quarantines, stay-at-home orders, travel restrictions, border closings, limitations on gatherings of people, and extended closures of nonessential businesses. The implementation of these measures resulted in a decline in demand that had a material impact on the Company’s results of operations and financial condition during the third quarter of 2020. The Company’s revenues decreased by approximately 12% in the third quarter of 2020, as compared to the prior year, and approximately $4.0 million in additional expenses were incurred due to COVID-19 as part of the Company providing a safe and healthy work environment for KCS employees.

Although the Company has taken numerous measures to overcome the adverse impact derived from the COVID-19 outbreak and continued with the Company’s normal business activities, this pandemic could continue to materially impact revenues and profit. The full extent of any such impact to KCS results for the 2020 fiscal year will depend on a number of factors, including the pace of the spread of the virus in the U.S. and Mexico, a possible second outbreak, actions taken by governments and private businesses to attempt to contain the coronavirus as it continues to spread, all of which could:

• continue to impact customer demand of the Company’s transportation services;

• cause the Company to experience an increase in costs as a result of the Company’s emergency measures, and delayed payments from customers;

• continue to cause delays and disruptions in the supply chain resulting in disruptions in the commercial operation dates of certain projects;

• continue to impact availability of qualified personnel; and

• cause other unpredictable events.

The situation surrounding COVID-19 remains fluid and the potential for a material impact on the Company’s results of operations, financial condition, and liquidity increases the longer the virus impacts activity levels in the United States and globally. For this reason, KCS cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on the Company’s results of operations, financial position, and liquidity. The extent to which the COVID-19 pandemic may impact the Company’s business, operating results, financial condition, or liquidity will depend on future developments, including the duration of the outbreak, travel restrictions, business and workforce disruptions, and the effectiveness of actions taken to contain and treat the disease.

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Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities

The following table presents stock repurchases during each month for the third quarter of 2020:



Period	(a) Total Number of Shares (or Units) Purchased ⁽¹⁾	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs ⁽²⁾	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that may yet be purchased under the Plans or Programs ⁽²⁾
Common stock
July 1-31, 2020	165,856	$	155.75	165,856	$	1,212,438,109
August 1-31, 2020	246,551	$	182.89	246,551	$	1,167,346,439
September 1-30, 2020	250,044	$	184.27	250,044	$	1,121,270,673
Total	662,451			662,451
$25 Par preferred stock
July 1-31, 2020	1,280	$	29.51	—	—
August 1-31, 2020	2,681	$	28.71	—	—
September 1-30, 2020	—	—		—	—
Total	3,961			—



(1	)	All $25 par preferred stock repurchases were made other than through a publicly disclosed plan or program. Repurchases of $25 par preferred stock were made through open market purchases and/or privately negotiated transactions.
(2	)	On November 12, 2019, the Company announced that the Board of Directors approved a share repurchase program, pursuant to which up to $2.0 billion in shares of common stock could be repurchased through December 31, 2022. Share repurchases may be made in the open market, through privately negotiated transactions, or through accelerated share repurchase (“ASR”) transactions.


Item 3.	Defaults upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

Not applicable.


Item 5.	Other Information

None.

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Item 6.	Exhibits



Exhibit No.		Exhibits
22.1		List of Issuers and Guarantor Subsidiaries, filed as Exhibit 22.1 to the Company’s Form 10-Q for the quarter ended March 31, 2020, filed on April 17, 2020 (File No. 1-4717), is incorporated herein by reference as Exhibit 22.1.

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.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		Inline XBRL Taxonomy Extension Schema Document.

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104		Cover Page Interactive Data File (formatted as an Inline XBRL document and included in Exhibit 101).

		* Furnished herewith.

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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 October 16, 2020 .

Kansas City Southern

/s/ M ICHAEL W. U PCHURCH

Michael W. Upchurch

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

/s/ S UZANNE M. G RAFTON

Suzanne M. Grafton

Vice President and Chief Accounting Officer

(Principal Accounting Officer)

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Part I Financial Information Item 1. Financial Statements (unaudited)Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

Exhibits

22.1 List of Issuers and Guarantor Subsidiaries, filed as Exhibit 22.1 to the Companys Form 10-Q for the quarter ended March 31, 2020, filed on April 17, 2020 (File No. 1-4717), is incorporated herein by reference as Exhibit 22.1. 31.1 Principal Executive Officers Certification Pursuant to Section302 of the Sarbanes-Oxley Act of 2002 is attached to this Form10-Q as Exhibit31.1. 31.2 Principal Financial Officers Certification Pursuant to Section302 of the Sarbanes-Oxley Act of 2002 is attached to this Form10-Q as Exhibit31.2. 32.1* Principal Executive Officers Certification furnished Pursuant to Section906 of the Sarbanes-Oxley Act of 2002 is attached to this Form10-Q as Exhibit32.1. 32.2* Principal Financial Officers Certification furnished Pursuant to Section906 of the Sarbanes-Oxley Act of 2002 is attached to this Form10-Q as Exhibit32.2.

KSU 10-Q Quarter ended Sept. 30, 2020

Exhibits