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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2022
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from
to
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Commission File Number 1-4717
KANSAS CITY SOUTHERN
(Exact name of registrant as specified in its charter)
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Delaware |
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87-3883291 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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427 West 12th Street |
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Kansas City |
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Missouri |
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64105 |
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(Address of principal executive offices) |
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(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:
None
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 ☐ No
ý
(The registrant is a voluntary filer and is not subject to the
filing requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934. However, the registrant 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.)
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
☐
Accelerated filer ☐
Non-accelerated filer
ý
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.
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Class |
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April 25, 2022 |
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Common Stock, $0.01 per share par value |
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100 Shares |
Kansas City Southern and Subsidiaries
Form 10-Q
March 31, 2022
Index
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Page |
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PART I — FINANCIAL INFORMATION |
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Item 1. |
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Item 2. |
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Item 3. |
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Item 4. |
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PART II — OTHER INFORMATION |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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PART I — FINANCIAL INFORMATION
Item 1.Financial
Statements (unaudited)
Kansas City Southern and Subsidiaries
Consolidated Statements of Income
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Three Months Ended |
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March 31, |
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2022 |
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2021 |
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(In millions)
(Unaudited) |
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Revenues |
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$ |
778.2 |
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$ |
706.0 |
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Operating expenses: |
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Compensation and benefits |
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133.0 |
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129.5 |
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Purchased services |
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51.3 |
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53.8 |
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Fuel |
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97.1 |
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70.9 |
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Equipment costs |
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18.6 |
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21.1 |
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Depreciation and amortization |
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96.2 |
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92.0 |
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Materials and other |
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78.1 |
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66.4 |
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Merger costs |
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12.8 |
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19.3 |
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Total operating expenses |
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487.1 |
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453.0 |
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Operating income |
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291.1 |
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253.0 |
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Equity in net earnings of affiliates |
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8.8 |
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6.0 |
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Interest expense |
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(38.9) |
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(39.0) |
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Foreign exchange loss |
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(1.4) |
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(7.3) |
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Other income (expense), net |
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0.9 |
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(0.8) |
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Income before income taxes |
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260.5 |
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211.9 |
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Income tax expense |
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72.5 |
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58.5 |
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Net income |
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188.0 |
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|
153.4 |
|
|
Less: Net income attributable to noncontrolling
interest |
|
|
|
|
0.6 |
|
|
0.4 |
|
|
Net income available to common stockholder(s) |
|
|
|
|
$ |
187.4 |
|
|
$ |
153.0 |
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited consolidated financial
statements.
Kansas City Southern and Subsidiaries
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
|
|
2022 |
|
2021 |
|
|
|
|
|
(In millions)
(Unaudited) |
|
Net income |
|
|
|
|
$ |
188.0 |
|
|
$ |
153.4 |
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized gain on interest rate derivative instruments, net of tax
of $12.6 million and $21.0 million, respectively
|
|
|
|
|
47.3 |
|
|
79.1 |
|
|
Reclassification adjustment from cash flow hedges included in net
income, net of tax of $0.1 million for both periods
|
|
|
|
|
0.5 |
|
|
0.5 |
|
|
Foreign currency translation adjustments |
|
|
|
|
0.3 |
|
|
(0.2) |
|
|
Other comprehensive income |
|
|
|
|
48.1 |
|
|
79.4 |
|
|
Comprehensive income |
|
|
|
|
236.1 |
|
|
232.8 |
|
|
Less: Comprehensive income attributable to noncontrolling
interest |
|
|
|
|
0.6 |
|
|
0.4 |
|
|
Comprehensive income attributable to Kansas City Southern and
subsidiaries |
|
|
|
|
$ |
235.5 |
|
|
$ |
232.4 |
|
See accompanying notes to the unaudited consolidated financial
statements.
Kansas City Southern and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2022 |
|
December 31,
2021 |
|
(In millions, except share and per share
amounts) |
|
(Unaudited) |
|
|
|
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
$ |
104.6 |
|
|
$ |
339.3 |
|
|
Accounts receivable, net |
403.4 |
|
|
271.0 |
|
|
Materials and supplies |
146.6 |
|
|
131.0 |
|
|
Other current assets |
121.5 |
|
|
142.1 |
|
|
Total current assets |
776.1 |
|
|
883.4 |
|
|
Operating lease right-of-use assets |
64.5 |
|
|
69.6 |
|
|
Investments |
59.3 |
|
|
48.3 |
|
|
Property and equipment (including concession assets),
net |
9,236.1 |
|
|
9,209.3 |
|
|
Other assets |
273.2 |
|
|
217.5 |
|
|
Total assets |
$ |
10,409.2 |
|
|
$ |
10,428.1 |
|
|
LIABILITIES AND EQUITY |
|
|
|
|
Current liabilities: |
|
|
|
|
Long-term debt due within one year |
$ |
10.1 |
|
|
$ |
8.8 |
|
|
Accounts payable and accrued liabilities |
481.7 |
|
|
479.7 |
|
|
Total current liabilities |
491.8 |
|
|
488.5 |
|
|
Long-term operating lease liabilities |
43.2 |
|
|
46.4 |
|
|
Long-term debt |
3,772.2 |
|
|
3,768.8 |
|
|
Deferred income taxes |
1,242.4 |
|
|
1,213.7 |
|
|
Other noncurrent liabilities and deferred credits |
155.9 |
|
|
178.1 |
|
|
Total liabilities |
5,705.5 |
|
|
5,695.5 |
|
|
Stockholder equity: |
|
|
|
|
|
|
|
|
$.01 par, common stock, 100 shares authorized; 100 shares issued;
100 shares outstanding at March 31, 2022 and December 31,
2021
|
— |
|
|
— |
|
|
Additional paid-in capital |
860.6 |
|
|
860.6 |
|
|
Retained earnings |
3,446.8 |
|
|
3,524.4 |
|
|
Accumulated other comprehensive income |
67.5 |
|
|
19.4 |
|
|
Total stockholder equity |
4,374.9 |
|
|
4,404.4 |
|
|
Noncontrolling interest |
328.8 |
|
|
328.2 |
|
|
Total equity |
4,703.7 |
|
|
4,732.6 |
|
|
Total liabilities and equity |
$ |
10,409.2 |
|
|
$ |
10,428.1 |
|
See accompanying notes to the unaudited consolidated financial
statements.
Kansas City Southern and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
March 31, |
|
2022 |
|
2021 |
|
(In millions)
(Unaudited) |
|
Operating activities: |
|
|
|
|
Net income |
$ |
188.0 |
|
|
$ |
153.4 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
Depreciation and amortization |
96.2 |
|
|
92.0 |
|
|
Deferred income taxes |
16.0 |
|
|
6.2 |
|
|
Equity in net earnings of affiliates |
(8.8) |
|
|
(6.0) |
|
|
Share-based compensation |
— |
|
|
8.2 |
|
|
Loss on foreign currency derivative instruments |
8.1 |
|
|
2.4 |
|
|
Foreign exchange (gain) loss |
(6.7) |
|
|
4.9 |
|
|
Merger costs |
12.8 |
|
|
19.3 |
|
|
Settlement of foreign currency derivative instruments |
(2.2) |
|
|
(1.9) |
|
|
Cash payments for merger costs |
(27.5) |
|
|
(1.2) |
|
|
Refundable Mexican value added tax |
10.5 |
|
|
(15.5) |
|
|
Changes in working capital items: |
|
|
|
|
Accounts receivable |
(130.6) |
|
|
(27.5) |
|
|
Materials and supplies |
(13.7) |
|
|
(4.0) |
|
|
Other current assets |
21.3 |
|
|
1.1 |
|
|
Accounts payable and accrued liabilities |
(9.3) |
|
|
(9.6) |
|
|
Other, net |
(4.9) |
|
|
4.4 |
|
|
Net cash provided by operating activities |
149.2 |
|
|
226.2 |
|
|
|
|
|
|
Investing activities: |
|
|
|
|
Capital expenditures |
(95.7) |
|
|
(106.0) |
|
|
Property investments in MSLLC |
(16.4) |
|
|
(1.1) |
|
|
Investments in and advances to affiliates |
(5.3) |
|
|
(5.7) |
|
|
Proceeds from disposal of property |
1.7 |
|
|
1.5 |
|
|
Other, net |
(0.1) |
|
|
(2.7) |
|
|
Net cash used for investing activities |
(115.8) |
|
|
(114.0) |
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Repayment of long-term debt |
(2.5) |
|
|
(1.6) |
|
|
Dividends paid |
(265.0) |
|
|
(40.2) |
|
|
Proceeds from employee stock plans |
— |
|
|
2.3 |
|
|
Net cash used for financing activities |
(267.5) |
|
|
(39.5) |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
(0.6) |
|
|
(1.0) |
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
Net increase (decrease) during each period |
(234.7) |
|
|
71.7 |
|
|
At beginning of year |
339.3 |
|
|
188.2 |
|
|
At end of period |
$ |
104.6 |
|
|
$ |
259.9 |
|
See accompanying notes to the unaudited consolidated financial
statements.
Kansas City Southern and Subsidiaries
Consolidated Statements of Changes in Equity
(in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$25 Par
Preferred
Stock |
|
$.01 Par
Common
Stock |
|
Additional Paid-in
Capital |
|
Retained
Earnings |
|
Accumulated
Other
Comprehensive Income |
|
Non-
controlling
Interest |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020 |
$ |
5.4 |
|
|
$ |
0.9 |
|
|
$ |
830.9 |
|
|
$ |
3,219.6 |
|
|
$ |
0.4 |
|
|
$ |
326.4 |
|
|
$ |
4,383.6 |
|
|
Net income |
|
|
|
|
|
|
153.0 |
|
|
|
|
0.4 |
|
|
153.4 |
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
79.4 |
|
|
|
|
79.4 |
|
|
Dividends on common stock ($0.54/share)
|
|
|
|
|
— |
|
|
(49.1) |
|
|
|
|
|
|
(49.1) |
|
|
Dividends on $25 par preferred stock ($0.25/share)
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
Share repurchases |
— |
|
|
— |
|
|
(2.1) |
|
|
(72.9) |
|
|
|
|
|
|
(75.0) |
|
|
Settlement of forward contract for accelerated share
repurchases |
|
|
|
|
75.0 |
|
|
|
|
|
|
|
|
75.0 |
|
|
Options exercised and stock subscribed, net of shares withheld for
employee taxes |
|
|
— |
|
|
(3.0) |
|
|
|
|
|
|
|
|
(3.0) |
|
|
Share-based compensation |
|
|
|
|
8.2 |
|
|
|
|
|
|
|
|
8.2 |
|
|
Balance at March 31, 2021 |
5.4 |
|
|
0.9 |
|
|
909.0 |
|
|
3,250.6 |
|
|
79.8 |
|
|
326.8 |
|
|
4,572.5 |
|
|
Net income (loss) |
|
|
|
|
|
|
(378.5) |
|
|
|
|
0.5 |
|
|
(378.0) |
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
(33.1) |
|
|
|
|
(33.1) |
|
|
Dividends on common stock ($0.54/share)
|
|
|
|
|
— |
|
|
(49.1) |
|
|
|
|
|
|
(49.1) |
|
|
Dividends on $25 par preferred stock ($0.25/share)
|
|
|
|
|
|
|
(0.1) |
|
|
|
|
|
|
(0.1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised and stock subscribed, net of shares withheld for
employee taxes |
|
|
— |
|
|
(2.0) |
|
|
|
|
|
|
|
|
(2.0) |
|
|
Share-based compensation |
|
|
|
|
6.2 |
|
|
|
|
|
|
|
|
6.2 |
|
|
Balance at June 30, 2021 |
5.4 |
|
|
0.9 |
|
|
913.2 |
|
|
2,822.9 |
|
|
46.7 |
|
|
327.3 |
|
|
4,116.4 |
|
|
Net income |
|
|
|
|
|
|
156.2 |
|
|
|
|
0.3 |
|
|
156.5 |
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
(1.4) |
|
|
|
|
(1.4) |
|
|
Dividends on common stock ($0.54/share)
|
|
|
|
|
— |
|
|
(49.1) |
|
|
|
|
|
|
(49.1) |
|
|
Dividends on $25 par preferred stock ($0.25/share)
|
|
|
|
|
|
|
(0.1) |
|
|
|
|
|
|
(0.1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised and stock subscribed, net of shares withheld for
employee taxes |
|
|
— |
|
|
4.4 |
|
|
|
|
|
|
|
|
4.4 |
|
|
Share-based compensation |
|
|
|
|
6.1 |
|
|
|
|
|
|
|
|
6.1 |
|
|
Balance at September 30, 2021 |
5.4 |
|
|
0.9 |
|
|
923.7 |
|
|
2,929.9 |
|
|
45.3 |
|
|
327.6 |
|
|
4,232.8 |
|
|
Net income |
|
|
|
|
|
|
594.5 |
|
|
|
|
0.6 |
|
|
595.1 |
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
(25.9) |
|
|
|
|
(25.9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised and stock subscribed, net of shares withheld for
employee taxes |
|
|
— |
|
|
0.4 |
|
|
|
|
|
|
|
|
0.4 |
|
|
Share-based compensation |
|
|
|
|
59.9 |
|
|
|
|
|
|
|
|
59.9 |
|
|
Replacement of equity share awards with liability
awards |
|
|
|
|
(54.5) |
|
|
|
|
|
|
|
|
(54.5) |
|
|
Cash settlement of stock options |
|
|
|
|
(75.2) |
|
|
|
|
|
|
|
|
(75.2) |
|
|
Recapitalization of stock |
(5.4) |
|
|
(0.9) |
|
|
6.3 |
|
|
|
|
|
|
|
|
— |
|
|
Balance at December 31, 2021 |
— |
|
|
— |
|
|
860.6 |
|
|
3,524.4 |
|
|
19.4 |
|
|
328.2 |
|
|
4,732.6 |
|
|
Net income |
|
|
|
|
|
|
187.4 |
|
|
|
|
0.6 |
|
|
188.0 |
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
48.1 |
|
|
|
|
48.1 |
|
|
Dividend to Canadian Pacific |
|
|
|
|
|
|
(265.0) |
|
|
|
|
|
|
(265.0) |
|
|
Balance at March 31, 2022 |
— |
|
|
— |
|
|
$ |
860.6 |
|
|
$ |
3,446.8 |
|
|
$ |
67.5 |
|
|
$ |
328.8 |
|
|
$ |
4,703.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited consolidated financial
statements.
Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial
Statements
For purposes of this Quarterly Report on Form 10-Q, “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, 2021. The
results of operations for the three months ended March 31,
2022, are not necessarily indicative of the results to be expected
for the full year ending December 31, 2022.
On September 15, 2021, KCS and Canadian Pacific Railway Limited
(“CP”), a Canadian corporation, entered into a merger agreement
(the “Merger Agreement”) and on December 14, 2021, CP acquired the
outstanding common and preferred stock of KCS. Therefore, earnings
per share data is not presented because the Company does not have
any outstanding or issued publicly traded stock. The merger is
further discussed in Note 2, Merger Agreement.
In November 2021, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standard Update (“ASU”) 2021-10, Government
Assistance (Topic 832), Disclosures by Business Entities about
Government Assistance. The standard is intended to increase
transparency of government assistance including the disclosures of
the following: (1) the types of assistance, (2) an entity’s
accounting for the assistance, and (3) the effect of the assistance
on the entity’s financial statements. This ASU was effective for
the Company on January 1, 2022 and the Company adopted the ASU
prospectively. See Note 4, Property and Equipment for the newly
required disclosure.
2. Merger Agreement
On December 14, 2021, CP acquired the outstanding common and
preferred stock of KCS. Each share of common stock, par value $0.01
per share, of KCS that was outstanding immediately prior to the
merger was converted into the right to receive (1) 2.884 common
shares of CP and (2) $90 in cash (together, the “Merger
Consideration”), and each share of preferred stock, par value $25
per share, that was outstanding immediately prior to the merger was
converted into the right to receive $37.50 in cash. The Merger
Consideration value received by KCS stockholders was $301.20 per
KCS common share.
The merger transaction was completed through a series of mergers as
outlined in the Merger Agreement. These mergers ultimately resulted
in KCS being merged with and into Cygnus Merger Sub 1 Corporation
(“Surviving Merger Sub”), a wholly owned subsidiary of CP, with
Surviving Merger Sub continuing as the surviving entity. Pursuant
to the Merger Agreement, Surviving Merger Sub was renamed “Kansas
City Southern” and as successor company of KCS, continued to own
the assets of KCS. Immediately following the consummation of the
mergers, CP caused the contribution, directly and indirectly, of
all of the outstanding shares of capital stock of Surviving Merger
Sub, as successor to KCS, to be deposited into an independent,
irrevocable voting trust (the “Voting Trust”) under a voting trust
agreement (the “Voting Trust Agreement”) approved by the U.S.
Surface Transportation Board (“STB”), pending receipt of the final
and non-appealable approval or exemption by the STB pursuant to 49
U.S.C. § 11323 et seq., of the transactions contemplated by the
Merger Agreement (“STB Final Approval”). The Voting Trust prevents
CP, or any affiliate of CP, from controlling or having the power to
control KCS prior to STB Final Approval. Following receipt of STB
Final Approval and approval from other applicable regulatory
authorities, the Voting Trust will be terminated and CP will
acquire control over KCS’s railroad operations.
On December 14, 2021, the merger of KCS and Surviving Merger Sub
was accounted for as a recapitalization of KCS’s equity. Upon STB
Final Approval, the transaction will be accounted for as a business
combination using the acquisition method of
accounting.
In the first quarter of 2022, pursuant to the Merger Agreement, KCS
paid a cash dividend of $265.0 million to a wholly-owned
subsidiary of CP. Periodic cash distributions may be made to a
wholly-owned subsidiary of CP based upon cash generated, the timing
of capital expenditures and working capital needs of the
Company.
For the three months ended March 31, 2022 and 2021, KCS reported
$12.8 million and $19.3 million, respectively, of
merger-related costs. These merger costs primarily related to
incentive compensation costs in 2022 and bankers’ and legal fees in
2021, and were recognized in merger costs within the consolidated
statements of income.
Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial
Statements—(Continued)
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 10 for
revenues by geographical area.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
|
|
2022 |
|
2021 |
|
Chemical & Petroleum |
|
|
|
|
|
|
|
|
Chemicals |
|
|
|
|
$ |
69.9 |
|
|
$ |
60.6 |
|
|
Petroleum |
|
|
|
|
79.0 |
|
|
135.2 |
|
|
Plastics |
|
|
|
|
38.5 |
|
|
35.5 |
|
|
Total |
|
|
|
|
187.4 |
|
|
231.3 |
|
|
|
|
|
|
|
|
|
|
Industrial & Consumer Products |
|
|
|
|
|
|
|
|
Forest Products |
|
|
|
|
69.1 |
|
|
57.7 |
|
|
Metals & Scrap |
|
|
|
|
56.5 |
|
|
46.3 |
|
|
Other |
|
|
|
|
35.1 |
|
|
30.0 |
|
|
Total |
|
|
|
|
160.7 |
|
|
134.0 |
|
|
|
|
|
|
|
|
|
|
Agriculture & Minerals |
|
|
|
|
|
|
|
|
Grain |
|
|
|
|
105.7 |
|
|
74.7 |
|
|
Food Products |
|
|
|
|
40.2 |
|
|
37.0 |
|
|
Ores & Minerals |
|
|
|
|
8.3 |
|
|
5.2 |
|
|
Stone, Clay & Glass |
|
|
|
|
9.2 |
|
|
7.5 |
|
|
Total |
|
|
|
|
163.4 |
|
|
124.4 |
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
|
|
|
|
|
|
Utility Coal |
|
|
|
|
40.2 |
|
|
31.7 |
|
|
Coal & Petroleum Coke |
|
|
|
|
12.4 |
|
|
10.4 |
|
|
Frac Sand |
|
|
|
|
4.9 |
|
|
3.4 |
|
|
Crude Oil |
|
|
|
|
14.1 |
|
|
12.0 |
|
|
Total |
|
|
|
|
71.6 |
|
|
57.5 |
|
|
|
|
|
|
|
|
|
|
Intermodal |
|
|
|
|
95.9 |
|
|
81.3 |
|
|
|
|
|
|
|
|
|
|
Automotive |
|
|
|
|
54.3 |
|
|
44.1 |
|
|
|
|
|
|
|
|
|
|
Total Freight Revenues |
|
|
|
|
733.3 |
|
|
672.6 |
|
|
|
|
|
|
|
|
|
|
Other Revenue |
|
|
|
|
44.9 |
|
|
33.4 |
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
|
|
|
$ |
778.2 |
|
|
$ |
706.0 |
|
Contract Balances
The amount of revenue recognized in the first quarter of 2022 from
performance obligations partially satisfied in previous periods was
$17.9 million. The performance obligations that were unsatisfied or
partially satisfied as of March 31, 2022, were $23.2 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 March 31,
2022 and December 31, 2021, the accounts receivable, net
balance was $403.4 million and $271.0 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 March 31, 2022 and December 31,
2021.
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 first quarter of 2022 that was included in
the
Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial
Statements—(Continued)
opening contract liability balance was $11.2 million. The Company
has recognized contract liabilities within the accounts payable and
accrued liabilities and other long-term liabilities financial
statement captions on the consolidated balance sheets.
The following tables summarize the changes in contract
liabilities
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract liabilities |
|
|
|
Three Months Ended |
|
|
|
|
March 31, |
|
|
|
|
|
|
2022 |
|
2021 |
|
Beginning balance |
|
|
|
|
|
$ |
68.4 |
|
|
$ |
29.9 |
|
|
Revenue recognized that was included in the contract liability
balance at the beginning of the period |
|
|
|
|
|
(11.2) |
|
|
(12.6) |
|
|
Increases due to consideration received, excluding amounts
recognized as revenue during the period |
|
|
|
|
|
3.9 |
|
|
1.5 |
|
|
Ending balance |
|
|
|
|
|
$ |
61.1 |
|
|
$ |
18.8 |
|
4. Property and Equipment (including Concession
Assets)
Property and equipment, including concession assets, and related
accumulated depreciation and amortization are summarized
below
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2022 |
|
December 31,
2021 |
|
Land |
$ |
244.7 |
|
|
$ |
243.0 |
|
|
Concession land rights |
141.1 |
|
|
141.1 |
|
|
Road property |
8,503.9 |
|
|
8,430.6 |
|
|
Equipment |
2,863.3 |
|
|
2,842.4 |
|
|
Technology and other |
377.1 |
|
|
372.6 |
|
|
Construction in progress |
338.7 |
|
|
335.8 |
|
|
Total property |
12,468.8 |
|
|
12,365.5 |
|
|
Accumulated depreciation and amortization |
3,232.7 |
|
|
3,156.2 |
|
|
Property and equipment (including concession assets),
net |
$ |
9,236.1 |
|
|
$ |
9,209.3 |
|
Concession assets, net of accumulated amortization of $744.7
million and $744.8 million, totaled $2,456.6 million and $2,459.3
million at March 31, 2022 and December 31, 2021,
respectively.
The Company has historically received assistance from governmental
entities, typically in the form of cash, for purposes of making
improvements to its rail network as part of public safety and/or
economic revitalization initiatives. The governmental entity
generally specifies how the monetary assistance is to be spent, and
may include limited conditions requiring the Company to return the
assistance. The Company accounts for this assistance received as
reductions to property and equipment in the period in which the
improvement is made, with the assistance being amortized as an
offset to depreciation expense over the life of the improvement. As
of March 31, 2022 and December 31, 2021, the total
governmental assistance received, net of accumulated amortization,
was $36.7 million and $37.3 million, respectively. For
the three months ended, March 31, 2022, governmental
assistance amortization was $0.6 million.
5. Fair Value Measurements
The Company’s derivative financial instruments are measured at fair
value on a recurring basis and consist of foreign currency forward
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.
Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial
Statements—(Continued)
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 $3,782.3 million and
$3,777.6 million at March 31, 2022 and December 31, 2021,
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
December 31, 2021 |
|
|
Level 2 |
|
Level 2 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
Treasury lock agreements |
|
$ |
117.3 |
|
|
$ |
57.4 |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
Debt instruments |
|
3,886.0 |
|
|
4,311.1 |
|
|
Foreign currency derivative instruments |
|
7.7 |
|
|
1.8 |
|
6. 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 have an
established banking relationship with the Company. As of
March 31, 2022, the Company did not expect any losses as a
result of default of its counterparties.
Interest Rate Derivative Instruments.
In 2020, the Company executed six 30-year treasury lock agreements
with an aggregate notional value of $650.0 million and a weighted
average interest rate of 1.58%. 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 principal amount of 3.00% senior
notes due May 15, 2023 (the “3.00% Senior Notes”) and the $200.0
million principal amount of 3.85% senior notes due November 15,
2023 (the “3.85% Senior Notes”). The Company has designated the
treasury locks as cash flow hedges and recorded unrealized gains
and losses in accumulated other comprehensive income (loss). For
the three months ended March 31, 2022, the total unrealized
gain of $117.3 million recognized in accumulated other
comprehensive income increased by $59.9 million compared to
December 31, 2021, reflecting a change in the value of the
treasury locks as U.S. treasury rates rose. Upon settlement, the
unrealized gain or loss in accumulated other comprehensive income
(loss) 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 in the
consolidated statements of income and the amount of income taxes
paid in Mexico. The Company also has net monetary assets
denominated in Mexican pesos that are subject to periodic
re-measurement and settlement that create fluctuations in foreign
currency gains and losses in the consolidated statements of income.
The Company hedges its net exposure to foreign currency
fluctuations in earnings by entering into foreign currency forward
contracts. The foreign currency forward contracts involve the
Company’s agreement to buy or sell pesos at an agreed-upon exchange
rate on a future date.
Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial
Statements—(Continued)
Below is a summary of the Company’s 2022 and 2021 foreign currency
derivative contracts
(amounts in millions, except Ps./USD):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts |
|
|
|
|
|
|
|
Contracts to sell Ps./receive USD |
|
Offsetting contracts to purchase Ps./pay 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 2022 and outstanding |
$ |
195.0 |
|
|
Ps. |
4,244.5 |
|
|
Ps. |
21.8 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Contracts executed in 2022 and settled in 2022 |
$ |
50.0 |
|
|
Ps. |
1,105.3 |
|
|
Ps. |
22.1 |
|
|
$ |
50.5 |
|
|
Ps. |
1,105.3 |
|
|
Ps. |
21.9 |
|
|
$ |
(0.5) |
|
|
Contracts executed in 2021 and settled in 2022 |
$ |
270.0 |
|
|
Ps. |
5,583.3 |
|
|
Ps. |
20.7 |
|
|
$ |
271.7 |
|
|
Ps. |
5,583.3 |
|
|
Ps. |
20.6 |
|
|
$ |
(1.7) |
|
|
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 2021 and settled in 2021 (i) |
$ |
100.0 |
|
|
Ps. |
1,993.5 |
|
|
Ps. |
19.9 |
|
|
$ |
98.1 |
|
|
Ps. |
1,993.5 |
|
|
Ps. |
20.3 |
|
|
$ |
(1.9) |
|
(i) During the first quarter of 2021, the Company settled $100.0
million of these forward contracts, resulting in cash paid of $1.9
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 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.
Offsetting.
The Company’s treasury lock agreements and foreign currency forward
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.
The following tables present the fair value of derivative
instruments included in the Consolidated Balance Sheets
(in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets |
|
|
|
Balance Sheet Location |
|
March 31,
2022 |
|
December 31, 2021 |
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
Treasury lock agreements
|
|
Other assets |
|
$ |
117.3 |
|
|
$ |
57.4 |
|
|
Total derivatives designated as hedging instruments |
|
|
|
117.3 |
|
|
57.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets |
|
|
|
$ |
117.3 |
|
|
$ |
57.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities |
|
Balance Sheet Location |
|
March 31,
2022 |
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
Foreign currency forward contracts |
Accounts payable and accrued liabilities |
|
$ |
7.7 |
|
|
$ |
1.8 |
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments |
|
|
7.7 |
|
|
1.8 |
|
|
Total derivative liabilities |
|
|
$ |
7.7 |
|
|
$ |
1.8 |
|
Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial
Statements—(Continued)
The following table summarizes the gross and net fair value of
derivative liabilities
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2022 |
|
Gross Liabilities |
|
Gross Assets |
|
Net Amounts Presented in the Consolidated Balance
Sheets |
|
Derivatives subject to a master netting arrangement or similar
agreement |
|
$ |
7.7 |
|
|
$ |
— |
|
|
$ |
7.7 |
|
|
As of December 31, 2021 |
|
|
|
|
|
|
|
Derivatives subject to a master netting arrangement or similar
agreement |
|
$ |
2.8 |
|
|
$ |
(1.0) |
|
|
$ |
1.8 |
|
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 March
31
(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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
2021 |
|
|
|
|
|
|
|
2022 |
|
2021 |
|
Treasury lock agreements |
|
|
|
|
|
|
$ |
59.9 |
|
|
$ |
100.1 |
|
|
Interest expense |
|
|
|
|
|
$ |
(0.6) |
|
|
$ |
(0.6) |
|
|
Total |
|
|
|
|
|
|
$ |
59.9 |
|
|
$ |
100.1 |
|
|
|
|
|
|
|
|
$ |
(0.6) |
|
|
$ |
(0.6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as Hedging Instruments |
|
|
Location of Gain/(Loss) Recognized in Income on
Derivative
|
|
|
|
|
|
Amount of Gain/(Loss) Recognized in Income on
Derivative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
2021 |
|
Foreign currency forward contracts |
|
Foreign exchange loss |
|
|
|
|
$ |
(8.1) |
|
|
$ |
(2.4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
$ |
(8.1) |
|
|
$ |
(2.4) |
|
See Note 5, Fair Value Measurements, for the determination of the
fair values of derivatives.
7. Short-Term Borrowings
Commercial Paper.
The Company’s commercial paper program generally serves as the
primary means of short-term funding. As of March 31, 2022 and
December 31, 2021, KCS had no commercial paper outstanding.
For the three months ended March 31, 2022 and 2021, 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.
8. 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, Mexican companies could offset
their 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, KCSM has generated a refundable VAT balance and filed
refund claims with the Servicio de Administración Tributaria (the
“SAT”) which have not been refunded.
In November 2021, changes to the VAT law were announced and became
effective beginning January 1, 2022. These changes reduced the
recoverability of VAT paid by KCSM on its expenditures that support
international import transportation service revenues that are not
subject to a VAT charge. VAT that is unrecoverable from the Mexican
government results in incremental VAT expense for KCSM. Beginning
in 2022, KCSM changed certain service offerings to either require
VAT to be charged to customers on revenue, or impose a rate
increase to offset the incremental VAT expense. These measures
implemented by KCSM increase the VAT to be collected from customers
and payable to the Mexican government.
Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial
Statements—(Continued)
As of March 31, 2022 and December 31, 2021, the KCSM
refundable VAT balance was $141.2 million and $152.2 million,
respectively. As of March 31, 2022 and December 31, 2021,
$73.0 million and $78.0 million, respectively, of the
refundable VAT balance was classified as a short-term asset, which
represents the estimated amount of VAT to be collected from
customers and payable to the Mexican government in 2022 that will
reduce the VAT receivable balance from the Mexican government. KCSM
has prior favorable Mexican court decisions and 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 recoverable.
9. 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 months ended March 31, 2022, the concession duty
expense, which is recorded within materials and other in operating
expenses, was $4.9 million, compared to $4.5 million, for the same
period in 2021.
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.
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
Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial
Statements—(Continued)
levels are insured up to certain coverage amounts, depending on the
type of claim and year of occurrence. The personal injury liability
as of March 31, 2022, is based on an updated actuarial study
of personal injury claims through October 31, 2021, 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
authority. The Internal Revenue Service (“IRS”) has completed its
examination of the 2017 deemed mandatory repatriation tax included
in the 2017 U.S. federal tax return and the 2016 U.S. federal tax
return with no material impact to the consolidated financial
statements. The SAT, the Mexican equivalent of the IRS, has
initiated examinations of the KCSM 2013 through 2020 Mexico tax
returns and the Financiera Inspira, S.A. de C.V. SOFOM, E.N.R. 2016
and 2017 Mexico tax returns. The Company does not expect that these
examinations will have a material impact on the consolidated
financial statements. During 2017, the Company received audit
assessments from the SAT for the KCSM 2009 and 2010 Mexico tax
returns. The Company commenced administrative actions with the SAT
and the audit assessments were subsequently nullified. In the third
quarter of 2018, the SAT issued new assessments and the Company
filed administrative appeals with the SAT. During the first quarter
of 2022, the Company received an audit assessment from the SAT for
the KCSM 2013 Mexico tax return. The Company intends to file an
administrative appeal of the assessment. 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.
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.
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 credit losses based on its
best estimate at March 31, 2022.
Panama Canal Railway Company (“PCRC”) Guarantees and
Indemnities. At
March 31, 2022, the Company had issued and outstanding $5.7
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.
Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial
Statements—(Continued)
10. 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 |
|
|
|
March 31, |
|
Revenues |
|
|
|
|
2022 |
|
2021 |
|
U.S. |
|
|
|
|
$ |
425.7 |
|
|
$ |
366.9 |
|
|
Mexico |
|
|
|
|
352.5 |
|
|
339.1 |
|
|
Total revenues |
|
|
|
|
$ |
778.2 |
|
|
$ |
706.0 |
|
|
|
|
|
|
|
|
|
|
Property and equipment (including concession assets),
net |
|
|
|
|
March 31,
2022 |
|
December 31,
2021 |
|
U.S. |
|
|
|
|
$ |
5,774.9 |
|
|
$ |
5,744.4 |
|
|
Mexico |
|
|
|
|
3,461.2 |
|
|
3,464.9 |
|
|
Total property and equipment (including concession assets),
net |
|
|
|
|
$ |
9,236.1 |
|
|
$ |
9,209.3 |
|
11. Subsequent Event
Foreign Currency Hedging.
During April 2022, the Company entered into foreign currency
forward contracts with an aggregate notional amount of
$35.0 million, which mature in January 2023. These contracts
obligate the Company to sell a total of Ps.733.5 million at a
weighted-average exchange rate of Ps.21.0 to each U.S.
dollar.
The Company has not designated these foreign currency derivative
instrument as hedging instruments for accounting purposes. The
Company will measure the foreign currency derivative instruments at
fair value each period and will recognize any change in fair value
in foreign exchange gain (loss) within the consolidated statements
of income.
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, 2021 (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 (including its variants) 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.; North American and global 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;
changes in business strategy and strategic opportunities;
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; the
satisfaction of by third parties of their obligations; fluctuation
in prices or availability of key materials, fluctuations in
commodity demand; in particular diesel fuel; insurance coverage
limitations; access to capital; sufficiency of budgeted capital
expenditures in carrying out business plans; services
infrastructure; 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; difficulty attracting,
motivating, and retaining executives and other key employees due to
the uncertainty of the merger transaction with Canadian Pacific
Railway Limited (“CP”); significant demands placed on the Company
as a result of the merger of the Company with CP; 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 March 31, 2022. 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 2021 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 consumer products,
agriculture and minerals, energy, automotive, and intermodal
transportation. Appropriate eliminations and reclassifications have
been recorded in preparing the consolidated financial
statements.
Merger Agreement
On September 15, 2021, KCS and CP entered into a merger agreement
(the “Merger Agreement”) and on December 14, 2021, CP acquired the
outstanding common and preferred stock of KCS. Each share of common
stock, par value $0.01 per share, of KCS that was outstanding
immediately prior to the merger was converted into the right to
receive (1) 2.884 common shares of CP and (2) $90 in cash
(together, the “Merger Consideration”), and each share of preferred
stock, par value $25 per share, that was outstanding immediately
prior to the merger was converted into the right to receive $37.50
in cash. The Merger Consideration value received by KCS
stockholders was $301.20 per KCS common share.
The merger transaction was completed through a series of mergers as
outlined in the Merger Agreement. These mergers ultimately resulted
in KCS being merged with and into Cygnus Merger Sub 1 Corporation
(“Surviving Merger Sub”), a wholly owned subsidiary of CP, with
Surviving Merger Sub continuing as the surviving entity. Pursuant
to the Merger Agreement, Surviving Merger Sub was renamed “Kansas
City Southern” and as successor company of KCS, continued to own
the assets of KCS. Immediately following the consummation of the
mergers, CP caused the contribution, directly and indirectly, of
all of the outstanding shares of capital stock of Surviving Merger
Sub, as successor to KCS, to be deposited into an independent,
irrevocable voting trust (the “Voting Trust”) under a voting trust
agreement (the “Voting Trust Agreement”) approved by the U.S.
Surface Transportation Board (“STB”), pending receipt of the final
and non-appealable approval or exemption by the STB pursuant to 49
U.S.C. § 11323 et seq., of the transactions contemplated by the
Merger Agreement (“STB Final Approval”). The Voting Trust prevents
CP, or any affiliate of CP, from controlling or having the power to
control KCS prior to STB Final Approval. Following receipt of STB
Final Approval and approval from other applicable regulatory
authorities, the Voting Trust will be terminated and CP will
acquire control over KCS’s railroad operations. STB Final Approval
is expected to be granted in the first quarter of 2023, subject to
the regulatory review process.
On December 14, 2021, the merger of KCS and Surviving Merger Sub
was accounted for as a recapitalization of KCS’s equity. Upon STB
Final Approval, the transaction will be accounted for as a business
combination using the acquisition method of
accounting.
In the first quarter of 2022, pursuant to the Merger Agreement, KCS
paid a cash dividend of $265.0 million to a wholly-owned
subsidiary of CP. Periodic cash distributions may be made to a
wholly-owned subsidiary of CP based upon cash generated, the timing
of capital expenditures and working capital needs of the
Company.
For the three months ended March 31, 2022 and 2021, KCS reported
$12.8 million and $19.3 million, respectively, of merger-related
costs. These merger costs primarily related to incentive
compensation costs in 2022 and bankers’ and legal fees in 2021, and
were recognized in merger costs within the consolidated statements
of income.
Ukraine Crisis
The invasion of Ukraine by Russia in February 2022 has led to
disruption, instability, and volatility in global markets and
industries. The U.S. government and other foreign governments have
imposed severe economic sanctions and export controls against
Russia, certain regions of Ukraine and particular entities and
individuals, removed Russia from the Society for Worldwide
Interbank Financial Telecommunication (“SWIFT”) system, and may
impose additional sanctions and controls. The full impact of these
sanctions and controls, as well as responses to them by Russia has
and could in the future result in, among other things, severe or
complete restrictions on exports to and other commerce and business
dealings involving Russia, certain regions of Ukraine, and/or
particular entities and individuals. In addition, this ongoing
invasion has caused energy prices to rise, leading to increased
inflationary impacts. To date, the Company has not experienced a
material impact to operations or the consolidated financial
statements as a result of the invasion of Ukraine; however, KCS
will continue to monitor for events that could materially impact
the Company.
Inflation
U.S. consumer price inflation rose at its fastest pace in over 40
years and Mexico inflation reached levels not seen for 20 years.
Consumer price annual inflation rates as of March 31, 2022 were
8.5% and 7.5% in the U.S. and Mexico, respectively. KCS is closely
monitoring the impact of rapidly increasing inflation on the
Company’s financial results and procurement supply chain. As of
March
31, 2022, higher inflation has not had a material impact on the
Company’s financial results. Additionally, supply chain disruptions
have not materially impacted the Company’s ability to procure
essential materials and services on a timely basis.
First Quarter Highlights
For the three months ended March 31, 2022, revenues increased
10% compared to the same period in 2021, primarily due to a 5%
increase in revenue per carload/unit, and an increase of 4% in
carload/unit volumes. Revenue per carload/unit increased due to
higher fuel surcharge and positive pricing impacts, partially
offset by mix. Volumes increased due to favorable comparable
volumes as a result of network congestion driven by weather impacts
in 2021, improved cycle times, strong demand, and partial recovery
of the global microchip shortage. These increases were partially
offset by decreased volumes in chemicals and petroleum refined fuel
products due to regulatory impacts.
Operating expenses increased 8% during the three months ended
March 31, 2022, as compared to the same period in 2021,
primarily due to higher diesel fuel prices, non-creditable
value-added tax (“VAT”) due to VAT law changes, and increased
materials and supplies expense, partially offset by decreased
merger costs. Operating expenses as a percentage of revenues was
62.6% for the three months ended March 31, 2022, compared to
64.2% for the same period in 2021.
Results of Operations
The following summarizes KCS’s consolidated statement of income
components
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Change |
|
March 31, |
|
|
2022 |
|
2021 |
|
|
Revenues |
$ |
778.2 |
|
|
$ |
706.0 |
|
|
$ |
72.2 |
|
|
Operating expenses |
487.1 |
|
|
453.0 |
|
|
34.1 |
|
|
Operating income |
291.1 |
|
|
253.0 |
|
|
38.1 |
|
|
Equity in net earnings of affiliates |
8.8 |
|
|
6.0 |
|
|
2.8 |
|
|
Interest expense |
(38.9) |
|
|
(39.0) |
|
|
0.1 |
|
|
Foreign exchange loss |
(1.4) |
|
|
(7.3) |
|
|
5.9 |
|
|
Other income (expense), net |
0.9 |
|
|
(0.8) |
|
|
1.7 |
|
|
Income before income taxes |
260.5 |
|
|
211.9 |
|
|
48.6 |
|
|
Income tax expense |
72.5 |
|
|
58.5 |
|
|
14.0 |
|
|
Net income |
188.0 |
|
|
153.4 |
|
|
34.6 |
|
|
Less: Net income attributable to noncontrolling
interest |
0.6 |
|
|
0.4 |
|
|
0.2 |
|
|
Net income available to common stockholder(s) |
$ |
187.4 |
|
|
$ |
153.0 |
|
|
$ |
34.4 |
|
Operating Metrics
The Company has established the following key metrics to measure
precision scheduled railroading (“PSR”) progress and
performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Improvement/ (Deterioration) |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
2022 |
|
2021 |
|
|
Gross velocity (mph) (i)
|
|
|
|
|
|
|
|
15.6 |
|
12.9 |
|
21% |
|
|
|
Terminal dwell (hours) (ii)
|
|
|
|
|
|
|
|
19.7 |
|
26.8 |
|
26% |
|
|
|
Train length (feet) (iii)
|
|
|
|
|
|
|
|
6,467 |
|
6,824 |
|
(5)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel efficiency (gallons per 1,000 GTM's) (iv)
|
|
|
|
|
|
|
|
1.24 |
|
1.26 |
|
2% |
|
|
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|
(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). |
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|
|
|
|
|
(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. |
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|
|
|
|
|
|
(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. |
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|
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|
|
|
|
|
|
|
|
(iv) 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. |
For the three months ended March 31, 2022, the increase in velocity
and decrease in dwell, as compared to the same period in 2021, were
due to efforts to improve network fluidity including reductions in
train length, along with other operating initiatives and new
capacity projects.
Revenues
The following summarizes revenues (in
millions),
carload/unit statistics
(in thousands)
and revenue per carload/unit:
|
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|
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|
Revenues |
|
Carloads and Units |
|
Revenue per Carload/Unit |
|
Three Months Ended |
|
|
|
Three Months Ended |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
March 31, |
|
|
|
March 31, |
|
|
|
2022 |
|
2021 |
|
% Change |
|
2022 |
|
2021 |
|
% Change |
|
2022 |
|
2021 |
|
% Change |
|
Chemical and petroleum |
$ |
187.4 |
|
|
$ |
231.3 |
|
|
(19 |
%) |
|
80.4 |
|
|
101.6 |
|
|
(21 |
%) |
|
$ |
2,331 |
|
|
$ |
2,277 |
|
|
2 |
% |
|
Industrial and consumer products |
160.7 |
|
|
134.0 |
|
|
20 |
% |
|
78.3 |
|
|
72.3 |
|
|
8 |
% |
|
2,052 |
|
|
1,853 |
|
|
11 |
% |
|
Agriculture and minerals |
163.4 |
|
|
124.4 |
|
|
31 |
% |
|
73.0 |
|
|
60.7 |
|
|
20 |
% |
|
2,238 |
|
|
2,049 |
|
|
9 |
% |
|
Energy |
71.6 |
|
|
57.5 |
|
|
25 |
% |
|
67.2 |
|
|
61.6 |
|
|
9 |
% |
|
1,065 |
|
|
933 |
|
|
14 |
% |
|
Intermodal |
95.9 |
|
|
81.3 |
|
|
18 |
% |
|
245.3 |
|
|
232.8 |
|
|
5 |
% |
|
391 |
|
|
349 |
|
|
12 |
% |
|
Automotive |
54.3 |
|
|
44.1 |
|
|
23 |
% |
|
31.0 |
|
|
26.4 |
|
|
17 |
% |
|
1,752 |
|
|
1,670 |
|
|
5 |
% |
|
Carload revenues, carloads and units |
733.3 |
|
|
672.6 |
|
|
9 |
% |
|
575.2 |
|
|
555.4 |
|
|
4 |
% |
|
$ |
1,275 |
|
|
$ |
1,211 |
|
|
5 |
% |
|
Other revenue |
44.9 |
|
|
33.4 |
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues (i) |
$ |
778.2 |
|
|
$ |
706.0 |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
(i) Included in revenues: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel surcharge |
$ |
87.9 |
|
|
$ |
50.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2022, revenues increased
10% compared to the same period in 2021. Revenues increased due to
a 5% increase in revenue per carload/unit and an increase of 4% in
carload/unit volumes. Revenue per carload/unit increased due to
higher fuel surcharge and positive pricing impacts, partially
offset by mix. Volumes increased due to favorable comparable
volumes as a result of network congestion driven by weather impacts
in 2021, improved cycle times, strong demand, and
partial
recovery of the global microchip shortage. These increases were
partially offset by decreased volumes in chemicals and petroleum
refined fuel products due to regulatory impacts. The average
exchange rate of Mexican pesos per U.S. dollar was Ps.20.5 for the
three months ended March 31, 2022, compared to Ps.20.3 for the
same period in 2021, which resulted in a decrease in revenues of
approximately $1.6 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 months ended March 31, 2022, fuel surcharge
revenue increased $37.0 million, compared to the same period in
2021, primarily due to higher fuel prices.
The following discussion provides an analysis of revenues by
commodity group:
|
|
|
|
|
|
|
Revenues by commodity group
for the three months ended
March 31, 2022 |
|
Chemical and petroleum.
Revenues decreased $43.9 million for the three months ended
March 31, 2022, compared to the same period in 2021, due to a
21% decrease in carload/unit volumes, partially offset by a 2%
increase in revenue per carload/unit. Volumes decreased due to
refined fuel product shipments into Mexico being negatively
impacted by supply chain disruptions as a result of increased
regulation. Refer to Mexico Regulatory and Legal Updates for
further discussion. Revenue per carload/unit increased due to
higher fuel surcharge and positive pricing impacts, partially
offset by shorter average length of haul and mix.
|
|
|
|
|
|
|
|
|
Industrial and consumer products.
Revenues increased $26.7 million for the three months ended
March 31, 2022, compared to the same period in 2021, due to an
11% increase in revenue per carload/unit and an 8% increase in
carload/unit volumes. Revenue per carload/unit increased due to
longer average length of haul, higher fuel surcharge, and positive
pricing impacts, partially offset by mix. Metal volumes increased
due to higher demand and new steel plants that opened on the KCSM
network in 2021. Forest product volumes increased due to improved
cycle times, demand, and favorable comparable volumes as a result
of network congestion driven by weather impacts in
2021.
|
|
|
|
|
|
|
|
|
Revenues by commodity group
for the three months ended
March 31, 2022 |
|
Agriculture and minerals.
Revenues increased $39.0 million for the three months ended
March 31, 2022, compared to the same period in 2021, due to a
20% increase in carload/unit volumes and a 9% increase in revenue
per carload/unit. Volumes increased due to improved cycle times and
favorable comparable volumes as a result of network congestion
driven by weather impacts in 2021. Revenue per carload/unit
increased due to higher fuel surcharge and positive pricing
impacts, partially offset by mix.
|
|
|
|
|
|
|
|
|
Energy.
Revenues increased $14.1 million for the three months ended
March 31, 2022, compared to the same period in 2021, due to a
14% increase in revenue per carload/unit and a 9% increase in
carload/unit volumes. Revenue per carload/unit increased due to
higher fuel surcharge, positive pricing impacts, and longer average
length of haul, partially offset by mix. Volumes increased in
utility coal as a result of higher natural gas prices and improved
cycle times. Volumes increased in crude oil due to new business.
Additionally, volumes increased in pet coke due to higher
demand.
|
|
Intermodal.
Revenues increased $14.6 million for the three months ended
March 31, 2022, compared to the same period in 2021, due to a
12% increase in revenue per carload/unit and a 5% increase in
carload/unit volumes. Revenue per carload/unit increased due to
higher fuel surcharge and positive pricing impacts, partially
offset by mix. Volumes increased due to favorable comparable
volumes as a result of network congestion driven by weather impacts
in 2021, improved cycle times, and partial recovery of the global
microchip shortage affecting auto parts shipments.
Automotive.
Revenues increased $10.2 million for the three months ended
March 31, 2022, compared to the same period in 2021, due to a
17% increase in carload/unit volumes and a 5% increase in revenue
per carload/unit. Volumes increased due to partial recovery of the
global microchip shortage. Revenue per carload/unit increased due
to higher fuel surcharge, positive pricing impacts, and longer
average length of haul, partially offset by mix.
Operating Expenses
Operating expenses, as shown below (in
millions),
increased $34.1 million for the three months ended March 31,
2022, compared to the same period in 2021, primarily due to higher
diesel fuel price, non-creditable VAT due to VAT law changes, and
higher materials and supplies expense, partially offset by
decreased merger costs. The strengthening of the Mexican peso
against the U.S. dollar during the three months ended
March 31, 2022, resulted in increased expense of approximately
$1.0 million, compared to the same period in 2021, for expense
transactions denominated in Mexican pesos. The average exchange
rate of Mexican pesos per U.S. dollar was Ps.20.5 for the three
months ended March 31, 2022, compared to Ps.20.3 for the same
period in 2021.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
Change |
|
2022 |
|
2021 |
|
Dollars |
|
Percent |
|
Compensation and benefits |
$ |
133.0 |
|
|
$ |
129.5 |
|
|
$ |
3.5 |
|
|
3 |
% |
|
Purchased services |
51.3 |
|
|
53.8 |
|
|
(2.5) |
|
|
(5 |
%) |
|
Fuel |
97.1 |
|
|
70.9 |
|
|
26.2 |
|
|
37 |
% |
|
Equipment costs |
18.6 |
|
|
21.1 |
|
|
(2.5) |
|
|
(12 |
%) |
|
Depreciation and amortization |
96.2 |
|
|
92.0 |
|
|
4.2 |
|
|
5 |
% |
|
Materials and other |
78.1 |
|
|
66.4 |
|
|
11.7 |
|
|
18 |
% |
|
Merger costs |
12.8 |
|
|
19.3 |
|
|
(6.5) |
|
|
(34 |
%) |
|
Total operating expenses |
$ |
487.1 |
|
|
$ |
453.0 |
|
|
$ |
34.1 |
|
|
8 |
% |
Compensation and benefits. Compensation
and benefits increased $3.5 million for the three months ended
March 31, 2022, compared to the same period in 2021, due to
wage and benefit inflation of approximately $6.0 million, an
increase in headcount and hours worked of approximately $4.0
million, and costs relating to Mexican outsourcing reform of
approximately $2.0 million, partially offset by decreased incentive
compensation of approximately $8.0 million.
Purchased services. Purchased
services expense decreased $2.5 million for the three months ended
March 31, 2022, compared to the same period in 2021, due to
cost reductions of approximately $5.0 million as a result of Mexico
outsourcing reform and lower corporate services of approximately
$2.0 million, partially offset by an increase in software and
programming expense of approximately $3.0 million.
Fuel.
Fuel increased $26.2 million for the three months ended
March 31, 2022, compared to the same period in 2021, due to
higher diesel fuel prices in the U.S. and Mexico of approximately
$18.0 million and $7.0 million, respectively, and increased
consumption of approximately $1.0 million. The average price per
gallon was $3.01 for the three months ended March 31, 2022,
compared to $2.25 for the same period in 2021.
Equipment costs.
Equipment costs decreased $2.5 million for the three months ended
March 31, 2022, compared to the same period in 2021, due to
decreased car hire expense of approximately $3.0 million due to
decreased cycle times and rate. This decrease was partially offset
by higher lease expense of approximately $1.0 million.
Depreciation and amortization. Depreciation
and amortization expense increased $4.2 million for the three
months ended March 31, 2022, compared to the same period in
2021, due to an increase in depreciation rates on equipment as a
result of a depreciation study and a larger asset
base.
Materials and other.
Materials and other expense increased $11.7 million for the three
months ended March 31, 2022, compared to the same period in
2021, due to increased expense of approximately $5.0 million
related to the non-creditable VAT due to VAT law changes in Mexico;
increased materials and supplies expense of approximately $4.0
million; and increased material purchases resulting from Mexico
outsourcing reform of approximately $3.0 million.
Merger costs.
During the three months ended March 31, 2022, the Company
recognized merger costs of $12.8 million, primarily related to
incentive compensation. During the three months ended
March 31, 2021, the Company recognized merger costs of $19.3
million, primarily related to bankers’ and legal fees. See Note 2,
Merger Agreement for more information.
Non-Operating Income and Expenses
Equity in net earnings of affiliates.
For the three months ended March 31, 2022, equity in net
earnings of affiliates increased $2.8 million, compared to the same
period in 2021, primarily due to increased net earnings from
unrealized appreciation of
investments held in a fifteen percent-owned equity investment,
partially offset by a decrease in net earnings from the operations
of TFCM, S. de R.L de C.V. (“TCM”) due to decreased interest and
tax expense in 2021.
Interest expense.
For the three months ended March 31, 2022, interest expense
remained flat compared to the same period in 2021. During the three
months ended March 31, 2022, the average debt balance
(including commercial paper) was $3,812.6 million, compared to
$3,804.5 million for the same period in 2021. The average interest
rate during the three months ended March 31, 2022 and 2021 was
4.1% for both periods.
Foreign exchange loss.
For the three months ended March 31, 2022 and 2021, the
Company incurred a foreign exchange loss of $1.4 million and $7.3
million, respectively. 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.
For the three months ended March 31, 2022, the re-measurement
and settlement of monetary assets and liabilities denominated in
Mexican pesos resulted in a foreign exchange gain of $6.7 million,
compared to a loss of $4.9 million for the same period in
2021.
The Company enters into foreign currency derivative contracts to
hedge its net exposure to fluctuations in foreign currency caused
by fluctuations in the value of the Mexican peso against the U.S.
dollar. For the three months ended March 31, 2022 and 2021,
the Company incurred a foreign exchange loss on foreign currency
derivative contracts of $8.1 million and $2.4 million,
respectively.
Other income (expense), net.
Other income (expense), net increased $1.7 million for the three
months ended March 31, 2022, compared to the same period in
2021, due to an increase in miscellaneous income.
Income tax expense.
Income tax expense increased $14.0 million for the three months
ended March 31, 2022, compared to the same period in 2021,
primarily due to higher pre-tax income.
The components of the effective tax rates for the three months
ended March 31, 2022, compared to the same period in 2021, are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
|
|
2022 |
|
2021 |
|
Statutory rate in effect |
|
|
|
|
21.0 |
% |
|
21.0 |
% |
|
Tax effect of: |
|
|
|
|
|
|
|
|
Difference between U.S. and foreign tax rate |
|
|
|
|
5.5 |
% |
|
6.0 |
% |
|
Inflation |
|
|
|
|
(1.5 |
%) |
|
(0.5 |
%) |
|
State and local income tax provision, net |
|
|
|
|
1.3 |
% |
|
1.2 |
% |
|
Foreign exchange (i) |
|
|
|
|
1.1 |
% |
|
0.4 |
% |
|
Other, net |
|
|
|
|
0.4 |
% |
|
(0.5 |
%) |
|
Effective tax rate |
|
|
|
|
27.8 |
% |
|
27.6 |
% |
(i)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 in the
consolidated income statements and the amount of income taxes paid
in Mexico. The Company also has net monetary assets denominated in
Mexican pesos, that are subject to periodic re-measurement and
settlement that creates fluctuations in foreign currency gains and
losses in the consolidated income statements. The Company hedges
its net exposure to variations in earnings by entering into foreign
currency forward contracts. The foreign currency forward contracts
involve the Company’s agreement to buy or sell pesos at an
agreed-upon exchange rate on a future date. Refer to Note 6,
Derivative Instruments for more information.
Mexico Regulatory and Legal Updates
Hydrocarbons Law.
On May 5, 2021, new legislation pertaining to the transport and
handling of hydrocarbons in Mexico became effective. This
legislation addresses a wide array of issues related to the
storage, transportation and handling of petroleum products, as well
as the illegal import of hydrocarbons. The legislation is being
challenged in the court system by a number of stakeholders and is
currently subject to a court-ordered injunction, resulting in a
suspension of the implementation and enforcement of this new law.
To date, this law has not had a material effect on the Company or
its operations. However, the Company is continuing to monitor this
law and is evaluating the effect on the Company and its business
operations.
Inspections Related to Imports and Terminals.
During 2021, the Ministry of Infrastructure, Communications, and
Transportation (“SICT”) and other relevant Mexican authorities
increased inspections of imports and enforcement of various
regulations and permit
requirements related to terminal operations, with specific focus on
imports of refined products and refined fuel transloading terminals
and freight terminals, in order to prevent the illegal importation
of refined fuel products. These inspections resulted in delays
related to the import of shipments into Mexico as well as the
shutdown of several refined fuel terminals in the second half of
2021. The SICT has instructed KCSM to provide railway service only
to those terminals that have the applicable permits. If KCSM were
to fail to comply with the SICT requirements, the Company could be
subject to fines and potential revocation of the Concession. As a
result, KCS’s freight revenue from refined products decreased in
2021 and continued to decrease in the first quarter of 2022. See
further discussion in the Revenues section.
Value-Added Tax Law.
KCSM is not required to charge its customers 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, Mexican companies could offset
their 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, KCSM has generated a refundable VAT balance and filed
refund claims with the Servicio de Administración Tributaria (the
“SAT”) which have not been refunded.
In November 2021, changes to the VAT law were announced and became
effective beginning January 1, 2022. These changes reduced the
recoverability of VAT paid by KCSM on its expenditures that support
international import transportation service revenues that are not
subject to a VAT charge. VAT that is unrecoverable from the Mexican
government results in incremental VAT expense for KCSM. Beginning
in 2022, KCSM changed certain service offerings to either require
VAT to be charged to customers on revenue, or impose a rate
increase to offset the incremental VAT expense. These measures
implemented by KCSM increase the VAT to be collected from customers
and payable to the Mexican government.
As of March 31, 2022 and December 31, 2021, the KCSM
refundable VAT balance was $141.2 million and $152.2 million,
respectively. As of March 31, 2022 and December 31, 2021,
$73.0 million and $78.0 million, respectively, of the
refundable VAT balance was classified as a short-term asset, which
represents the estimated amount of VAT to be collected from
customers and payable to the Mexican government in 2022 that will
reduce the VAT receivable balance from the Mexican government. KCSM
has prior favorable Mexican court decisions and 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 recoverable.
Carta Porte.
In the second quarter of 2021, KCSM was notified by the SAT that
shipping companies (cargo airlines, trucks, maritime, railroads,
and other similar companies) must include additional bill of lading
information (referred to in Mexico as “Carta Porte”) with the
invoice for all merchandise shipped in Mexico, including
cross-border, international and Mexico domestic shipments. The
Carta Porte requirements and deadline were modified several times
throughout 2021. The effective date of January 1, 2022 included a
three month grace period during which penalties and fines for
inaccurate information would not be imposed. In the first quarter
of 2022, the grace period was extended to September 30, 2022. KCSM
adapted its systems to comply with the Carta Porte requirements,
which delayed KCSM’s invoicing and cash collections by
approximately 30 days in the first quarter of 2022.
Failure to comply with Carta Porte requirements subsequent to the
grace period could result in penalties and fines imposed by the
SAT, shipping delays causing network congestion and delayed
invoicing and cash collections. In addition, in the event of
repeated noncompliance with Carta Porte requirements, the SAT has
the power to preventively shut down operations of a
company.
Liquidity and Capital Resources
Overview
The Company focuses its cash and capital resources on investing in
the business, shareholder returns and optimizing its capital
structure.
The Company believes, based on current expectations, that cash and
other liquid assets, operating cash flows, and other available
financing resources will be sufficient to fund anticipated
operating expenses, capital expenditures, debt service costs,
dividends, and other commitments for the foreseeable
future.
During the three months ended March 31, 2022, the Company
invested $98.7 million in capital expenditures. See the Capital
Expenditures section for further details.
In the first quarter of 2022, pursuant to the Merger Agreement, KCS
paid a cash dividend of $265.0 million to a wholly-owned
subsidiary of CP. KCS plans to make further periodic cash
distributions based upon cash generated, the timing of capital
expenditures and working capital needs of the Company.
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 11, Short-Term Borrowings and
Note 12, 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, 2021.
KCS believes it has a strong liquidity position to continue
business operations and service its debt obligations. The Company
has total available liquidity of $704.6 million as of
March 31, 2022, consisting of cash on hand and a revolving
credit facility, compared to available liquidity at December 31,
2021 of $939.3 million.
As of March 31, 2022, the total cash and cash equivalents held
outside of the U.S. in foreign subsidiaries was $36.7 million,
after repatriating $19.4 million during 2022. The Company expects
that this cash will be available to fund operations without
incurring significant additional income taxes.
On January 1, 2022, KCSM complied with Carta Porte requirements,
providing customers with additional bill of lading information with
the invoice for all merchandise shipped in Mexico. KCSM adapted its
systems to comply with the Carta Porte requirements, which delayed
KCSM’s invoicing and cash collections by approximately 30 days in
the first quarter of 2022. The Company believes cash collections
will normalize in the second and third quarters of
2022.
Cash Flow Information
Summary cash flow data follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
March 31, |
|
2022 |
|
2021 |
|
Cash flows provided by (used for): |
|
|
|
|
Operating activities |
$ |
149.2 |
|
|
$ |
226.2 |
|
|
Investing activities |
(115.8) |
|
|
(114.0) |
|
|
Financing activities |
(267.5) |
|
|
(39.5) |
|
|
Effect of exchange rate changes on cash |
(0.6) |
|
|
(1.0) |
|
|
Net increase (decrease) in cash and cash equivalents |
(234.7) |
|
|
71.7 |
|
|
Cash and cash equivalents beginning of year |
339.3 |
|
|
188.2 |
|
|
Cash and cash equivalents end of period |
$ |
104.6 |
|
|
$ |
259.9 |
|
Cash flows from operating activities decreased $77.0 million for
the three months ended March 31, 2022, compared to the same
period in 2021, primarily due to a decrease in cash collections
from a delay in invoicing and cash collections resulting from
implementation of Carta Porte regulations, partially offset by
increased operating income.
Net cash used for investing activities increased $1.8 million for
the three months ended March 31, 2022, compared to the same
period in 2021, primarily due to increased property investments in
MSLLC of $15.3 million, partially offset by a decrease in capital
expenditures of $10.3 million.
Net cash used for financing activities increased $228.0 million for
the three months ended March 31, 2022, compared to the same
period in 2021, primarily due to the cash dividend payment of
$265.0 million to a wholly-owned subsidiary of CP.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
March 31, |
|
2022 |
|
2021 |
|
Roadway capital program |
$ |
60.0 |
|
|
$ |
55.7 |
|
|
Locomotives and freight cars |
10.3 |
|
|
10.8 |
|
|
Capacity |
14.6 |
|
|
18.3 |
|
|
Information technology |
12.1 |
|
|
9.7 |
|
|
Positive train control |
1.3 |
|
|
4.2 |
|
|
Other |
0.4 |
|
|
0.8 |
|
|
Total capital expenditures (accrual basis) |
98.7 |
|
|
99.5 |
|
|
Change in capital accruals |
(3.0) |
|
|
6.5 |
|
|
Total cash capital expenditures |
$ |
95.7 |
|
|
$ |
106.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Generally, the Company’s capital program consists of capital
replacement and equipment. For 2022, internally generated cash
flows are expected to fund cash capital expenditures, which are
currently estimated to be approximately 16.5% of revenue in 2022,
assuming constant currency and fuel price.
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 March 31, 2022, KCS had outstanding $3,736.2 million
principal amount of senior notes due through 2069. 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.
Summarized Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statements |
KCS and Guarantor Subsidiaries |
|
Three Months Ended |
|
Twelve Months Ended |
|
March 31, 2022 |
|
December 31, 2021 |
|
Revenues |
$ |
420.5 |
|
|
$ |
1,561.3 |
|
|
Operating expenses |
271.9 |
|
|
1,200.8 |
|
|
Operating income |
148.6 |
|
|
360.5 |
|
|
Income before income taxes |
116.7 |
|
|
207.7 |
|
|
Net income |
92.4 |
|
|
182.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheets |
KCS and Guarantor Subsidiaries |
|
March 31, 2022 |
|
December 31, 2021 |
|
Assets: |
|
|
|
|
Current assets |
$ |
281.9 |
|
|
$ |
524.6 |
|
|
Property and equipment (including concession assets),
net |
4,868.4 |
|
|
4,876.5 |
|
|
Other non-current assets |
189.9 |
|
|
125.8 |
|
|
|
|
|
|
|
Liabilities and equity: |
|
|
|
|
Current liabilities |
$ |
313.6 |
|
|
$ |
316.5 |
|
|
Non-current liabilities |
4,945.5 |
|
|
4,942.7 |
|
|
Noncontrolling interest |
328.8 |
|
|
328.2 |
|
Excluded from current assets in the table above are $271.8 million
and $199.8 million of current intercompany receivables due to KCS
and the Guarantor Subsidiaries from the Non-Guarantor Subsidiaries
as of March 31, 2022 and December 31, 2021, respectively.
Excluded from current liabilities in the table above are $227.3
million and $267.5 million of current intercompany payables due to
the Non-Guarantor Subsidiaries from KCS and the Guarantor
Subsidiaries as of March 31, 2022 and December 31, 2021,
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
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.
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. Approximately 72% 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 current national bargaining round. In November 2019,
KCSR and its unions commenced negotiations in connection with the
2020 bargaining round.
KCSM union employees are covered by one labor agreement, which was
signed on April 16, 2012, between KCSM Servicios, a previously
wholly-owned subsidiary of KCS that was merged into KCSM in 2021,
and the Sindicato de Trabajadores Ferrocarrileros de la República
Mexicana (“Mexican Railroad Union”). This labor agreement remains
in effect during the period of the Concession for the purpose of
regulating the relationship between the parties. Approximately 77%
of KCSM employees are covered by this labor agreement. The
compensation terms under this labor agreement are subject to
renegotiation on an annual basis and all other benefits are subject
to negotiation every two years. The parties finalized negotiations
over compensation terms and benefits that applied until June 30,
2021, along with other terms, and will remain in effect until new
terms have been negotiated.
Union labor negotiations have not historically resulted in any
strike, boycott, or other disruption in the Company’s business
operations.
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, 2021.
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
March 31, 2022,
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 March 31, 2022 that have materially affected, or
are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART II — OTHER INFORMATION
Item 1.Legal
Proceedings
For information related to the Company’s legal proceedings, see
Note 9, Commitments and Contingencies, under Part I,
Item 1 of this quarterly report on
Form 10-Q.
Item 1A.Risk
Factors
There were no material changes during the quarter to the Risk
Factors disclosed in Item 1A - “Risk Factors” in the Company’s
Annual Report on Form 10-K for the year ended December 31,
2021.
Item 2.Unregistered
Sales of Equity Securities and Use of Proceeds
None.
Item 3.Defaults
upon Senior Securities
None.
Item 4.Mine
Safety Disclosures
Not applicable.
Item 5.Other
Information
None.
Item 6.Exhibits
|
|
|
|
|
|
|
|
|
Exhibit
No. |
|
Exhibits |
|
|
|
|
|
22.1 |
|
|
|
|
|
|
31.1* |
|
|
|
|
|
|
31.2* |
|
|
|
|
|
|
32.1** |
|
|
|
|
|
|
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. |
|
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|
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). |
|
|
|
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|
* Filed herewith. |
|
|
|
|
|
** Furnished herewith. |
|
|
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized and in the
capacities indicated on April 27, 2022.
|
|
|
|
Kansas City Southern |
|
|
/s/ MICHAEL
W. UPCHURCH
|
|
Michael W. Upchurch |
Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
|
/s/ SUZANNE
M. GRAFTON
|
|
Suzanne M. Grafton |
|
Vice President and Chief Accounting Officer |
|
(Principal Accounting Officer) |
Kansas City Southern (NYSE:KSU)
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