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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 September 30, 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 |
, |
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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October 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
September 30, 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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Consolidated
Statements of Changes in Equity — Three months ended September 30,
2022, June 30, 2022, March 31, 2022, December 31, 2021, September
30, 2021, June 30, 2021 and March 31, 2021
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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 Operations
(In millions)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Revenues |
$ |
882.2 |
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$ |
744.0 |
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$ |
2,505.9 |
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$ |
2,199.5 |
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Operating expenses: |
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Compensation and benefits |
154.4 |
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133.3 |
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423.8 |
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391.2 |
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Purchased services |
57.8 |
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51.4 |
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163.6 |
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161.0 |
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Fuel |
121.0 |
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78.0 |
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341.1 |
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227.9 |
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Equipment costs |
25.5 |
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19.6 |
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67.2 |
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64.8 |
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Depreciation and amortization |
98.2 |
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90.5 |
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292.1 |
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273.7 |
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Materials and other |
88.8 |
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82.8 |
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252.4 |
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231.1 |
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Merger costs, net |
11.5 |
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36.5 |
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36.8 |
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776.6 |
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Total operating expenses |
557.2 |
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492.1 |
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1,577.0 |
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2,126.3 |
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Operating income |
325.0 |
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251.9 |
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928.9 |
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73.2 |
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Equity in net earnings (losses) of affiliates |
(0.1) |
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3.8 |
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7.9 |
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13.2 |
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Interest expense |
(38.9) |
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(39.0) |
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(118.0) |
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(117.1) |
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Foreign exchange loss |
(12.3) |
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(0.5) |
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(18.0) |
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(1.0) |
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Other income, net |
0.2 |
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0.5 |
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0.3 |
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0.7 |
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Income (loss) before income taxes |
273.9 |
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216.7 |
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801.1 |
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(31.0) |
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Income tax expense |
72.2 |
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60.2 |
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217.3 |
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37.1 |
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Net income (loss) |
201.7 |
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156.5 |
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583.8 |
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(68.1) |
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Less: Net income attributable to noncontrolling
interest |
0.4 |
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0.3 |
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1.0 |
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1.2 |
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Net income (loss) attributable to Kansas City Southern and
subsidiaries |
201.3 |
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156.2 |
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582.8 |
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(69.3) |
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Preferred stock dividends |
— |
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0.1 |
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— |
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0.2 |
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Net income (loss) available to common stockholder(s) |
$ |
201.3 |
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$ |
156.1 |
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$ |
582.8 |
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$ |
(69.5) |
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See accompanying notes to the unaudited consolidated financial
statements.
Kansas City Southern and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Net income (loss) |
$ |
201.7 |
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$ |
156.5 |
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$ |
583.8 |
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$ |
(68.1) |
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Other comprehensive income (loss): |
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Unrealized gain (loss) on interest rate derivative instruments, net
of tax of $9.9 million, $(0.4) million, $36.7 million and $11.6
million, respectively
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37.5 |
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(1.7) |
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138.1 |
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43.5 |
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Reclassification adjustment from cash flow hedges included in net
income, net of tax of $0.2 million, $0.1 million, $0.4 million and
$0.3 million, respectively
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0.5 |
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0.5 |
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1.5 |
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1.5 |
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Foreign currency translation adjustments |
(0.2) |
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(0.2) |
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0.1 |
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(0.1) |
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Other comprehensive income (loss) |
37.8 |
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(1.4) |
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139.7 |
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44.9 |
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Comprehensive income (loss) |
239.5 |
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155.1 |
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723.5 |
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(23.2) |
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Less: Comprehensive income attributable to noncontrolling
interest |
0.4 |
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0.3 |
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1.0 |
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1.2 |
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Comprehensive income (loss) attributable to Kansas City Southern
and subsidiaries |
$ |
239.1 |
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$ |
154.8 |
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$ |
722.5 |
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$ |
(24.4) |
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See accompanying notes to the unaudited consolidated financial
statements.
Kansas City Southern and Subsidiaries
Consolidated Balance Sheets
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September 30,
2022 |
|
December 31,
2021 |
|
(In millions, except share and per share
amounts) |
|
(Unaudited) |
|
|
|
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
$ |
163.8 |
|
|
$ |
339.3 |
|
|
Accounts receivable, net |
600.9 |
|
|
271.0 |
|
|
Materials and supplies |
169.0 |
|
|
131.0 |
|
|
Other current assets |
359.5 |
|
|
142.1 |
|
|
Total current assets |
1,293.2 |
|
|
883.4 |
|
|
Operating lease right-of-use assets |
86.4 |
|
|
69.6 |
|
|
Investments |
58.9 |
|
|
48.3 |
|
|
Property and equipment (including concession assets),
net |
9,317.9 |
|
|
9,209.3 |
|
|
Other assets |
110.9 |
|
|
217.5 |
|
|
Total assets |
$ |
10,867.3 |
|
|
$ |
10,428.1 |
|
|
LIABILITIES AND EQUITY |
|
|
|
|
Current liabilities: |
|
|
|
|
Long-term debt due within one year |
$ |
455.2 |
|
|
$ |
8.8 |
|
|
Accounts payable and accrued liabilities |
600.1 |
|
|
479.7 |
|
|
Total current liabilities |
1,055.3 |
|
|
488.5 |
|
|
Long-term operating lease liabilities |
60.6 |
|
|
46.4 |
|
|
Long-term debt |
3,326.4 |
|
|
3,768.8 |
|
|
Deferred income taxes |
1,292.2 |
|
|
1,213.7 |
|
|
Other noncurrent liabilities and deferred credits |
140.5 |
|
|
178.1 |
|
|
Total liabilities |
5,875.0 |
|
|
5,695.5 |
|
|
Stockholder equity: |
|
|
|
|
|
|
|
|
$.01 par, common stock, 100 shares authorized; 100 shares issued;
100 shares outstanding at September 30, 2022 and December 31,
2021
|
— |
|
|
— |
|
|
Additional paid-in capital |
860.6 |
|
|
860.6 |
|
|
Retained earnings |
3,642.2 |
|
|
3,524.4 |
|
|
Accumulated other comprehensive income |
159.1 |
|
|
19.4 |
|
|
Total stockholder equity |
4,661.9 |
|
|
4,404.4 |
|
|
Noncontrolling interest |
330.4 |
|
|
328.2 |
|
|
Total equity |
4,992.3 |
|
|
4,732.6 |
|
|
Total liabilities and equity |
$ |
10,867.3 |
|
|
$ |
10,428.1 |
|
See accompanying notes to the unaudited consolidated financial
statements.
Kansas City Southern and Subsidiaries
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
September 30, |
|
2022 |
|
2021 |
|
|
|
Operating activities: |
|
|
|
|
Net income (loss) |
$ |
583.8 |
|
|
$ |
(68.1) |
|
|
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
|
|
|
|
Depreciation and amortization |
292.1 |
|
|
273.7 |
|
|
Deferred income taxes |
41.4 |
|
|
(129.5) |
|
|
Equity in net earnings of affiliates |
(7.9) |
|
|
(13.2) |
|
|
Share-based compensation |
— |
|
|
20.5 |
|
|
(Gain) loss on foreign currency derivative instruments |
18.9 |
|
|
(0.8) |
|
|
Foreign exchange (gain) loss |
(0.9) |
|
|
1.8 |
|
|
Merger costs, net |
36.8 |
|
|
776.6 |
|
|
Distributions from affiliates |
2.0 |
|
|
2.5 |
|
|
Settlement of foreign currency derivative instruments |
(2.2) |
|
|
(1.9) |
|
|
Cash payments for merger costs |
(32.3) |
|
|
(2,125.7) |
|
|
Reimbursement of merger termination fee |
— |
|
|
2,100.0 |
|
|
Refundable Mexican value added tax payments |
— |
|
|
(41.9) |
|
|
Changes in working capital items: |
|
|
|
|
Accounts receivable |
(333.1) |
|
|
(25.9) |
|
|
Materials and supplies |
(40.0) |
|
|
2.2 |
|
|
Other current assets |
75.7 |
|
|
9.2 |
|
|
Accounts payable and accrued liabilities |
82.3 |
|
|
39.5 |
|
|
Other, net |
(3.7) |
|
|
11.1 |
|
|
Net cash provided by operating activities |
712.9 |
|
|
830.1 |
|
|
|
|
|
|
Investing activities: |
|
|
|
|
Capital expenditures |
(381.2) |
|
|
(377.7) |
|
|
Property investments in MSLLC |
(25.1) |
|
|
(22.3) |
|
|
Investments in and advances to affiliates |
(8.3) |
|
|
(7.8) |
|
|
Proceeds from disposal of property |
4.5 |
|
|
5.5 |
|
|
Other, net |
(3.3) |
|
|
(5.0) |
|
|
Net cash used for investing activities |
(413.4) |
|
|
(407.3) |
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Repayment of long-term debt |
(7.7) |
|
|
(5.7) |
|
|
Dividends paid |
(465.0) |
|
|
(138.4) |
|
|
Proceeds from employee stock plans |
— |
|
|
4.2 |
|
|
Net cash used for financing activities |
(472.7) |
|
|
(139.9) |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
(2.3) |
|
|
(1.1) |
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
Net increase (decrease) during each period |
(175.5) |
|
|
281.8 |
|
|
At beginning of year |
339.3 |
|
|
188.2 |
|
|
At end of period |
$ |
163.8 |
|
|
$ |
470.0 |
|
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)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$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 |
|
|
Net income |
|
|
|
|
|
|
194.1 |
|
|
|
|
— |
|
|
194.1 |
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
53.8 |
|
|
|
|
53.8 |
|
|
Contribution from noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
1.2 |
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2022 |
— |
|
|
— |
|
|
860.6 |
|
|
3,640.9 |
|
|
121.3 |
|
|
330.0 |
|
|
4,952.8 |
|
|
Net income |
|
|
|
|
|
|
201.3 |
|
|
|
|
0.4 |
|
|
201.7 |
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
37.8 |
|
|
|
|
37.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend to Canadian Pacific |
|
|
|
|
|
|
(200.0) |
|
|
|
|
|
|
(200.0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2022 |
$ |
— |
|
|
$ |
— |
|
|
$ |
860.6 |
|
|
$ |
3,642.2 |
|
|
$ |
159.1 |
|
|
$ |
330.4 |
|
|
$ |
4,992.3 |
|
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 and nine months ended
September 30, 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 as 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 by requiring 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, 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.
Pursuant to the Merger Agreement, KCS paid a cash dividend in the
first and third quarters of 2022 of $265.0 million and
$200.0 million, respectively, 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 and nine months ended September 30, 2022, KCS
reported $11.5 million and $36.8 million, respectively, of
merger-related costs, which primarily related to incentive
compensation costs. During the three and nine months ended
September 30, 2021, the Company recognized merger-related
costs of $36.5 million and $776.6 million, respectively. For the
three months ended September 30, 2021, the merger costs primarily
related to compensation and benefits costs and legal fees. For the
nine months ended
Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial
Statements—(Continued)
September 30, 2021, merger costs included the fee associated with
the termination of the Canadian National (“CN”) merger agreement by
KCS of $700.0 million, in addition to compensation and
benefits costs and bankers’ and legal fees. For the year ended
December 31, 2021, KCS incurred $1,400.0 million of merger
termination fees, completely offset by the recovery of
$1,400.0 million of merger termination fees recognized in
merger costs, net within the consolidated statements of
operations.
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 |
|
Nine Months Ended |
|
September 30, |
|
September 30, |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Chemical & Petroleum |
|
|
|
|
|
|
|
|
Chemicals |
$ |
76.3 |
|
|
$ |
71.0 |
|
|
$ |
220.9 |
|
|
$ |
196.4 |
|
|
Petroleum |
85.4 |
|
|
93.7 |
|
|
245.8 |
|
|
361.8 |
|
|
Plastics |
42.9 |
|
|
39.4 |
|
|
125.6 |
|
|
109.7 |
|
|
Total |
204.6 |
|
|
204.1 |
|
|
592.3 |
|
|
667.9 |
|
|
|
|
|
|
|
|
|
|
Industrial & Consumer Products |
|
|
|
|
|
|
|
|
Forest Products |
79.2 |
|
|
71.6 |
|
|
221.5 |
|
|
191.9 |
|
|
Metals & Scrap |
70.2 |
|
|
54.1 |
|
|
191.5 |
|
|
151.4 |
|
|
Other |
39.0 |
|
|
33.3 |
|
|
110.6 |
|
|
94.3 |
|
|
Total |
188.4 |
|
|
159.0 |
|
|
523.6 |
|
|
437.6 |
|
|
|
|
|
|
|
|
|
|
Agriculture & Minerals |
|
|
|
|
|
|
|
|
Grain |
99.9 |
|
|
87.0 |
|
|
316.7 |
|
|
250.6 |
|
|
Food Products |
46.9 |
|
|
35.4 |
|
|
130.2 |
|
|
109.0 |
|
|
Ores & Minerals |
9.6 |
|
|
7.5 |
|
|
25.3 |
|
|
18.8 |
|
|
Stone, Clay & Glass |
11.2 |
|
|
9.9 |
|
|
31.3 |
|
|
25.7 |
|
|
Total |
167.6 |
|
|
139.8 |
|
|
503.5 |
|
|
404.1 |
|
|
|
|
|
|
|
|
|
|
Energy |
|
|
|
|
|
|
|
|
Utility Coal |
45.2 |
|
|
45.8 |
|
|
123.3 |
|
|
108.7 |
|
|
Coal & Petroleum Coke |
12.3 |
|
|
12.8 |
|
|
37.3 |
|
|
35.2 |
|
|
Frac Sand |
4.6 |
|
|
4.0 |
|
|
14.4 |
|
|
11.6 |
|
|
Crude Oil |
20.8 |
|
|
12.0 |
|
|
51.4 |
|
|
31.1 |
|
|
Total |
82.9 |
|
|
74.6 |
|
|
226.4 |
|
|
186.6 |
|
|
|
|
|
|
|
|
|
|
Intermodal |
121.9 |
|
|
86.9 |
|
|
335.3 |
|
|
259.3 |
|
|
|
|
|
|
|
|
|
|
Automotive |
70.1 |
|
|
40.1 |
|
|
190.8 |
|
|
133.6 |
|
|
|
|
|
|
|
|
|
|
Total Freight Revenues |
835.5 |
|
|
704.5 |
|
|
2,371.9 |
|
|
2,089.1 |
|
|
|
|
|
|
|
|
|
|
Other Revenue |
46.7 |
|
|
39.5 |
|
|
134.0 |
|
|
110.4 |
|
|
|
|
|
|
|
|
|
|
Total Revenues |
$ |
882.2 |
|
|
$ |
744.0 |
|
|
$ |
2,505.9 |
|
|
$ |
2,199.5 |
|
Contract Balances
The amount of revenue recognized in the third quarter of 2022 from
performance obligations partially satisfied in previous periods was
$28.9 million. The performance obligations that were unsatisfied or
partially satisfied as of September 30, 2022 were $21.8
million, which represents in-transit shipments that are fully
satisfied the following month.
A receivable is any unconditional right to consideration, and is
recognized as shipments have been completed and the relating
performance obligation has been fully satisfied. At
September 30, 2022 and December 31, 2021, the accounts
receivable, net balance was $600.9 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 September 30, 2022 and
December 31, 2021.
Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial
Statements—(Continued)
Contract liabilities represent consideration received in advance
from customers, and are recognized as revenue over time as the
relating performance obligation is satisfied. The amount of revenue
recognized in the third quarter of 2022 that was included in the
opening contract liability balance was $8.0 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 |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Beginning balance |
|
$ |
49.4 |
|
|
$ |
19.7 |
|
|
$ |
68.4 |
|
|
$ |
29.9 |
|
|
Revenue recognized that was included in the contract liability
balance at the beginning of the period |
|
(8.0) |
|
|
(9.6) |
|
|
(30.1) |
|
|
(25.3) |
|
|
Increases due to consideration received, excluding amounts
recognized as revenue during the period |
|
4.7 |
|
|
2.4 |
|
|
7.8 |
|
|
7.9 |
|
|
Ending balance |
|
$ |
46.1 |
|
|
$ |
12.5 |
|
|
$ |
46.1 |
|
|
$ |
12.5 |
|
4. Property and Equipment (including Concession
Assets)
Property and equipment, including concession assets, and related
accumulated depreciation and amortization are summarized
below
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2022 |
|
December 31,
2021 |
|
Land |
$ |
244.7 |
|
|
$ |
243.0 |
|
|
Concession land rights |
141.1 |
|
|
141.1 |
|
|
Road property |
8,630.7 |
|
|
8,430.6 |
|
|
Equipment |
2,868.0 |
|
|
2,842.4 |
|
|
Technology and other |
433.4 |
|
|
372.6 |
|
|
Construction in progress |
393.0 |
|
|
335.8 |
|
|
Total property |
12,710.9 |
|
|
12,365.5 |
|
|
Accumulated depreciation and amortization |
3,393.0 |
|
|
3,156.2 |
|
|
Property and equipment (including concession assets),
net |
$ |
9,317.9 |
|
|
$ |
9,209.3 |
|
Concession assets, net of accumulated amortization of $775.5
million and $744.8 million, totaled $2,475.3 million and $2,459.3
million at September 30, 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 September 30, 2022 and December 31, 2021, the total
governmental assistance received, net of accumulated amortization,
was $35.5 million and $37.3 million, respectively. For the
three and nine months ended September 30, 2022, governmental
assistance amortization was $0.7 million and
$1.9 million, respectively.
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 $3,781.6 million and
$3,777.6 million at September 30, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
|
Level 2 |
|
Level 2 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
Treasury lock agreements |
|
$ |
232.2 |
|
|
$ |
57.4 |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
Debt instruments |
|
3,235.8 |
|
|
4,311.1 |
|
|
Foreign currency derivative instruments |
|
18.5 |
|
|
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
September 30, 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 nine months ended September 30, 2022, the total unrealized
gain of $232.2 million recognized in accumulated other
comprehensive income increased by $174.8 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 operations 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
operations. 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 |
$ |
460.0 |
|
|
Ps. |
9,797.1 |
|
|
Ps. |
21.3 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
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 nine months ended September 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 operations. 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 |
|
September 30,
2022 |
|
December 31, 2021 |
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
Treasury lock agreements
|
|
Other current assets |
|
$ |
232.2 |
|
|
$ |
— |
|
|
|
|
Other assets |
|
— |
|
|
57.4 |
|
|
Total derivatives designated as hedging instruments |
|
|
|
232.2 |
|
|
57.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivative assets |
|
|
|
$ |
232.2 |
|
|
$ |
57.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities |
|
Balance Sheet Location |
|
September 30,
2022 |
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
Foreign currency forward contracts |
Accounts payable and accrued liabilities |
|
$ |
18.5 |
|
|
$ |
1.8 |
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments |
|
|
18.5 |
|
|
1.8 |
|
|
Total derivative liabilities |
|
|
$ |
18.5 |
|
|
$ |
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 September 30, 2022 |
|
Gross Liabilities |
|
Gross Assets |
|
Net Amounts Presented in the Consolidated Balance
Sheets |
|
Derivatives subject to a master netting arrangement or similar
agreement |
|
$ |
18.5 |
|
|
$ |
— |
|
|
$ |
18.5 |
|
|
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 Operations and Consolidated
Statements of Comprehensive Income (Loss) for the three months
ended September 30
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships |
|
|
|
|
|
|
Amount of Gain/(Loss) Recognized in OCI on
Derivative |
|
Location of Gain/(Loss) Reclassified from AOCI into
Income |
|
|
|
|
|
Amount of Gain/(Loss) Reclassified from AOCI into
Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
2021 |
|
|
|
|
|
|
|
2022 |
|
2021 |
|
Treasury lock agreements |
|
|
|
|
|
|
$ |
47.4 |
|
|
$ |
(2.1) |
|
|
Interest expense |
|
|
|
|
|
$ |
(0.7) |
|
|
$ |
(0.6) |
|
|
Total |
|
|
|
|
|
|
$ |
47.4 |
|
|
$ |
(2.1) |
|
|
|
|
|
|
|
|
$ |
(0.7) |
|
|
$ |
(0.6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
|
|
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) |
|
|
$ |
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
$ |
(8.1) |
|
|
$ |
4.9 |
|
The following table presents the effects of derivative instruments
on the Consolidated Statements of Operations and Consolidated
Statements of Comprehensive Income (Loss) for the nine months ended
September 30
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships |
|
|
|
|
|
|
Amount of Gain/(Loss) Recognized in OCI on
Derivative |
|
Location of Gain/(Loss) Reclassified from AOCI into
Income |
|
|
|
|
|
Amount of Gain/(Loss) Reclassified from AOCI into
Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
2021 |
|
|
|
|
|
|
|
2022 |
|
2021 |
|
Treasury lock agreements |
|
|
|
|
|
|
$ |
174.8 |
|
|
$ |
55.1 |
|
|
Interest expense |
|
|
|
|
|
$ |
(1.9) |
|
|
$ |
(1.8) |
|
|
Total |
|
|
|
|
|
|
$ |
174.8 |
|
|
$ |
55.1 |
|
|
|
|
|
|
|
|
$ |
(1.9) |
|
|
$ |
(1.8) |
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
$ |
(18.9) |
|
|
$ |
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
$ |
(18.9) |
|
|
$ |
0.8 |
|
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 September 30, 2022
and December 31, 2021, KCS had no commercial paper
outstanding. For the nine months ended September 30, 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, which prior
to 2022 resulted in KCSM paying more VAT on its expenses than
it
Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial
Statements—(Continued)
collected 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. Over 2019 through 2021, KCSM 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 increased the VAT to be collected from
customers and payable to the Mexican government.
As of September 30, 2022 and December 31, 2021, the KCSM
refundable VAT balance was $98.6 million and $152.2 million,
respectively. 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. KCSM will recover the
refundable VAT balance as VAT billed to customers exceeds
creditable VAT charged by vendors. As of September 30, 2022
and December 31, 2021, $81.0 million and $78.0 million,
respectively, of the refundable VAT balance was classified as a
short-term asset.
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 and nine months ended September 30, 2022, the
concession duty expense, which is recorded within materials and
other in operating expenses, was $5.5 million and $16.0 million,
respectively, compared to $4.7 million and $14.1 million, for the
same periods 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.
Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial
Statements—(Continued)
The Company performs ongoing reviews and evaluations of the various
environmental programs and issues within the Company’s operations,
and, as necessary, takes actions intended to limit the Company’s
exposure to potential liability. Although these costs cannot be
predicted with certainty, management believes that the ultimate
outcome of identified matters will not have a material adverse
effect on the Company’s consolidated financial
statements.
Personal Injury. The
Company’s personal injury liability is based on semi-annual
actuarial studies performed on an undiscounted basis by an
independent third party actuarial firm and reviewed by management.
This liability is based on personal injury claims filed and an
estimate of claims incurred but not yet reported. Actual results
may vary from estimates due to the number, type and severity of the
injury, costs of medical treatments and uncertainties in
litigation. Adjustments to the liability are reflected within
operating expenses in the period in which changes to estimates are
known. Personal injury claims in excess of self-insurance levels
are insured up to certain coverage amounts, depending on the type
of claim and year of occurrence. The personal injury liability as
of September 30, 2022, is based on an updated actuarial study
of personal injury claims through April 30, 2022, 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 Servicio de Administración Tributaria (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 and filed an administrative appeal of
the assessment in the second quarter of 2022.
On April 13, 2022, the SAT used an electronic tax mailbox to
deliver an audit assessment on the 2014 KCSM tax returns, which as
of September 30, 2022 was Ps.5.7 billion (approximately
$280.0 million USD) of tax, interest, penalties and inflation
(the “2014 Audit Assessment”). In 2014, KCSM filed an amparo
lawsuit with the district court, objecting to the SAT’s electronic
accounting requirements, including the SAT’s use of the electronic
tax mailbox, and KCSM was granted a permanent injunction in 2015
preventing the SAT from delivering any notification of assessments
using the electronic tax mailbox. The permanent injunction remained
in effect through the date the SAT issued the 2014 Audit
Assessment. The Company became aware of the 2014 Audit Assessment
on June 30, 2022 and based on the permanent injunction on the
electronic accounting requirements, the Company believed it had
thirty business days from that date to file an appeal. On July 7,
2022, the Company filed an administrative appeal of the 2014 Audit
Assessment with the SAT. During the third quarter of 2022, the SAT
dismissed the administrative appeal of the 2014 Audit Assessment on
the basis it wasn’t filed timely.
The Company plans to challenge in Mexican court the SAT's use of
the electronic mailbox and the dismissal of the administrative
appeal of the 2014 Audit Assessment. The Company believes that it
has strong legal arguments in its favor and it is more likely than
not that the administrative appeal of the 2014 Audit Assessment was
timely filed.
The 2014 Audit Assessment includes tax positions where KCSM has
prior favorable court decisions or strong legal arguments in its
favor. Management believes it is more likely than not it will
prevail in any challenge of the 2014 Audit Assessment.
Historically, the Company has not been required to pay to settle
previous SAT audit assessments or has settled SAT audit assessments
for an immaterial amount.
On July 1, 2022, the SAT froze KCSM’s Mexico bank accounts without
any request for payment of the 2014 Audit Assessment or
notification of the freeze. The Company filed an amparo lawsuit
challenging the legality of the bank account freeze. The district
court issued a permanent injunction requiring the SAT to remove the
freeze subject to KCSM posting a performance bond or other
collateral upon the SAT demonstrating a tax obligation exists. In
August 2022, KCSM posted a performance bond in the amount of
Ps.5.6 billion (approximately $278.0 million USD) and the bank
account freeze was removed. The freeze and cost of obtaining the
performance bond did not have a significant impact on KCSM’s cash
flows or operations. The provision of the performance bond is not
an agreement or concession with regard to the 2014 Audit Assessment
and in no way impacts KCSM’s ability to further defend its tax
position.
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.
Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial
Statements—(Continued)
U.S. 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. For the 2016 bargaining
round, 5-year agreements were reached voluntarily or through the
arbitration process during 2017 and 2018 covering all of the
participating unions. The terms of these agreements remain in
effect until new agreements are reached in the 2020 national
bargaining round. In November 2019, KCSR and its unions commenced
negotiations in connection with the 2020 collective bargaining
round.
On July 15, 2022, President Biden signed an executive order
creating a Presidential Emergency Board (“PEB”) to assist the
railroads and its unions in ongoing national labor negotiations.
The PEB reviewed the parties’ proposals, held hearings and issued
non-binding settlement recommendations to the President. Under the
terms of the PEB, the parties had until September 16, 2022 to reach
a voluntary settlement based on those recommendations. On September
15, 2022, the NCCC and unions reached a tentative agreement
resulting in the Company recognizing estimated retroactive union
wages and bonuses of approximately $9.0 million in
compensation and benefits on the consolidated statements of
operations.
The union ratification began in mid-September and is expected to be
complete by mid-November. As of October 26, 2022, six of the twelve
railroad unions have ratified their respective tentative
agreements; however, the third largest union rejected the tentative
agreement. The NCCC and this union agreed to continue negotiations
through November 19, 2022, before the union seeks other self-help
remedies, including strikes or work stoppages. Under the Railway
Labor Act, Congress can impose a resolution based upon the PEB
recommendations or order trains to operate as usual while the two
sides continue to negotiate and ultimately reach a new agreement. A
strike or work stoppage could result in a significant disruption of
the Company’s operations and have significant financial impacts,
such as lower revenues and higher operating costs.
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.
On July 14, 2022, KCSM reached an agreement with the Mexican
Ministry of Infrastructure, Communications and Transportation
(“SICT”) to fund a new investment in the Celaya-NBA Line Railway
Bypass and related infrastructure in an amount not to exceed
Ps.4.0 billion (approximately $200.0 million USD). In
exchange for the investment, the SICT agreed to amend KCSM’s
Concession Title effective July 14, 2022, to extend the exclusivity
rights granted to KCSM for an additional period of 10 years. Under
this amendment, KCSM’s exclusivity will now expire in
2037.
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 September 30, 2022.
Panama Canal Railway Company (“PCRC”) Guarantees and
Indemnities. At
September 30, 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 |
|
Nine Months Ended |
|
September 30, |
|
September 30, |
|
Revenues |
2022 |
|
2021 |
|
2022 |
|
2021 |
|
U.S. |
$ |
476.0 |
|
|
$ |
409.5 |
|
|
$ |
1,351.6 |
|
|
$ |
1,160.5 |
|
|
Mexico |
406.2 |
|
|
334.5 |
|
|
1,154.3 |
|
|
1,039.0 |
|
|
Total revenues |
$ |
882.2 |
|
|
$ |
744.0 |
|
|
$ |
2,505.9 |
|
|
$ |
2,199.5 |
|
|
|
|
|
|
|
|
|
|
Property and equipment (including concession assets),
net |
|
|
|
|
September 30,
2022 |
|
December 31,
2021 |
|
U.S. |
|
|
|
|
$ |
5,849.2 |
|
|
$ |
5,744.4 |
|
|
Mexico |
|
|
|
|
3,468.7 |
|
|
3,464.9 |
|
|
Total property and equipment (including concession assets),
net |
|
|
|
|
$ |
9,317.9 |
|
|
$ |
9,209.3 |
|
11. Subsequent Event
On October 26, 2022, the Company’s Board of Directors declared a
cash dividend of up to $225.0 million, to be paid to a
wholly-owned subsidiary of CP on October 31,
2022.
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 (the
“SEC”).
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 tax
disputes and 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
SEC.
Forward-looking statements reflect the information only as of the
date on which they are made. The Company does not undertake any
obligation to update any forward-looking statements to reflect
future events, developments, or other information. If KCS does
update one or more forward-looking statements, no inference should
be drawn that additional updates will be made regarding that
statement or any other forward-looking statements.
This discussion is intended to clarify and focus on KCS’s results
of operations, certain changes in its financial position,
liquidity, capital structure and business developments for the
periods covered by the consolidated financial statements included
under Item 1 of this Quarterly Report on Form 10-Q for the quarter
ended September 30, 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, 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.
Pursuant to the Merger Agreement, KCS paid a cash dividend in the
first and third quarters of 2022 of $265.0 million and $200.0
million, respectively, to a wholly-owned subsidiary of CP. On
October 26, 2022, the Company’s Board of Directors declared a cash
dividend of up to $225.0 million, to be paid to a wholly-owned
subsidiary of CP on October 31, 2022. 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 and nine months ended September 30, 2022, KCS
reported $11.5 million and $36.8 million, respectively, of
merger-related costs, which primarily related to incentive
compensation costs. During the three and nine months ended
September 30, 2021, the Company recognized merger-related
costs of $36.5 million and $776.6 million, respectively. For the
three months ended September 30, 2021, the merger costs primarily
related to compensation and benefits costs and legal fees. For the
nine months ended September 30, 2021, merger costs included the fee
associated with the termination of the CN merger agreement by KCS
of $700.0 million, in addition to compensation and benefits
costs and bankers’ and legal fees. These costs were recognized in
merger costs, net within the consolidated statements of
operations.
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 September 30, 2022
were 8.2% and 8.7% in the U.S. and Mexico, respectively. KCS
continues to closely monitor the impact of rapidly increasing
inflation on the Company’s financial results and procurement supply
chain. As of September 30, 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.
Inflation is expected to remain elevated for the near future.
Inflationary factors, such as increases in interest rates, overhead
costs and transportation costs may adversely affect the Company’s
financial results. Although the Company does not believe that
inflation has had a material impact on KCS’s financial results to
date, the Company may experience some effect in the near future due
to supply chain constraints, consequences associated with COVID-19,
and the ongoing invasion of Ukraine by Russia, employee
availability and wage increases.
Third Quarter Highlights
For the three months ended September 30, 2022, revenues
increased 19% compared to the same period in 2021, primarily due to
a 10% increase in carload/unit volumes and an 8% increase in
revenue per carload/unit. Volumes increased due to partial recovery
of the global microchip shortage, strong demand, new business, and
new steel plants that opened on the KCSM network in 2021. These
increases were partially offset by decreased volumes in chemicals
and petroleum refined fuel products due to regulatory impacts.
Revenue per carload/unit increased due to higher fuel surcharge,
positive pricing impacts, and longer average length of haul,
partially offset by mix and unfavorable foreign currency
impacts.
Operating expenses increased 13% during the three months ended
September 30, 2022, as compared to the same period in 2021,
primarily due to higher diesel fuel prices, tentative agreements
with U.S. unions resulting in incremental estimated retroactive
wage and bonus expense, and wage and benefit inflation, partially
offset by decreased merger costs. Operating expenses as a
percentage of revenues was 63.2% for the three months ended
September 30, 2022, compared to 66.1% for the same period in
2021.
Results of Operations
The following summarizes KCS’s consolidated statement of operations
components
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Change |
|
September 30, |
|
|
2022 |
|
2021 |
|
|
Revenues |
$ |
882.2 |
|
|
$ |
744.0 |
|
|
$ |
138.2 |
|
|
Operating expenses |
557.2 |
|
|
492.1 |
|
|
65.1 |
|
|
Operating income |
325.0 |
|
|
251.9 |
|
|
73.1 |
|
|
Equity in net earnings (losses) of affiliates |
(0.1) |
|
|
3.8 |
|
|
(3.9) |
|
|
Interest expense |
(38.9) |
|
|
(39.0) |
|
|
0.1 |
|
|
Foreign exchange loss |
(12.3) |
|
|
(0.5) |
|
|
(11.8) |
|
|
Other income, net |
0.2 |
|
|
0.5 |
|
|
(0.3) |
|
|
Income before income taxes |
273.9 |
|
|
216.7 |
|
|
57.2 |
|
|
Income tax expense |
72.2 |
|
|
60.2 |
|
|
12.0 |
|
|
Net income |
201.7 |
|
|
156.5 |
|
|
45.2 |
|
|
Less: Net income attributable to noncontrolling
interest |
0.4 |
|
|
0.3 |
|
|
0.1 |
|
|
Net income attributable to Kansas City Southern and
subsidiaries |
$ |
201.3 |
|
|
$ |
156.2 |
|
|
$ |
45.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Change |
|
September 30, |
|
|
2022 |
|
2021 |
|
|
Revenues |
$ |
2,505.9 |
|
|
$ |
2,199.5 |
|
|
$ |
306.4 |
|
|
Operating expenses |
1,577.0 |
|
|
2,126.3 |
|
|
(549.3) |
|
|
Operating income |
928.9 |
|
|
73.2 |
|
|
855.7 |
|
|
Equity in net earnings of affiliates |
7.9 |
|
|
13.2 |
|
|
(5.3) |
|
|
Interest expense |
(118.0) |
|
|
(117.1) |
|
|
(0.9) |
|
|
Foreign exchange loss |
(18.0) |
|
|
(1.0) |
|
|
(17.0) |
|
|
Other income, net |
0.3 |
|
|
0.7 |
|
|
(0.4) |
|
|
Income (loss) before income taxes |
801.1 |
|
|
(31.0) |
|
|
832.1 |
|
|
Income tax expense |
217.3 |
|
|
37.1 |
|
|
180.2 |
|
|
Net income (loss) |
583.8 |
|
|
(68.1) |
|
|
651.9 |
|
|
Less: Net income attributable to noncontrolling
interest |
1.0 |
|
|
1.2 |
|
|
(0.2) |
|
|
Net income (loss) available to common stockholder(s) |
$ |
582.8 |
|
|
$ |
(69.3) |
|
|
$ |
652.1 |
|
Operating Metrics
The Company has established the following key metrics to measure
precision scheduled railroading (“PSR”) progress and
performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Improvement/ (Deterioration) |
|
Nine Months Ended |
|
Improvement/ (Deterioration) |
|
|
|
|
September 30, |
|
September 30, |
|
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
|
Gross velocity (mph) (i)
|
|
14.1 |
|
15.3 |
|
(8)% |
|
14.4 |
|
13.4 |
|
7% |
|
|
|
Terminal dwell (hours) (ii)
|
|
23.3 |
|
21.5 |
|
(8)% |
|
21.7 |
|
24.9 |
|
13% |
|
|
|
Train length (feet) (iii)
|
|
6,510 |
|
6,481 |
|
— |
|
6,465 |
|
6,690 |
|
(3)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel efficiency (gallons per 1,000 GTM's) (iv)
|
|
1.26 |
|
1.22 |
|
(3)% |
|
1.25 |
|
1.24 |
|
(1)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) Gross velocity is the average train speed between origin and
destination in miles per hour calculated as the sum of the miles
traveled divided by the sum of total transit hours. Transit hours
are measured as the difference between a train’s origin departure
and destination arrival date and times broken down by segment
across the train route (includes all time spent including crew
changes, terminal dwell, delays, and incidents). |
|
|
|
|
|
|
(ii) Terminal dwell is the average amount of time in hours between
car arrival to and departure from the yard (excludes cars that move
through a terminal on a run-through train, stored, bad ordered, and
maintenance-of-way cars). Calculated by dividing the total number
of hours cars spent in terminals by the total count of car dwell
events. |
|
|
|
|
|
|
|
(iii) Train length is the average length of a train across its
reporting stations, including the origin and intermediate stations.
Length of a train is the sum of car and locomotive lengths measured
in feet. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(iv) 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 September 30, 2022, the decrease in
velocity and increase in dwell, as compared to the same period in
2021, were due to congestion and resource pressure in northern
Mexico. For the nine months ended September 30, 2022, the
improvement in velocity and dwell, as compared to the same period
in 2021, were due to efforts to improve network fluidity and
customer service, along with other operating initiatives,
investments in crew resources and new capacity
projects.
Revenues
The following summarizes revenues (in
millions),
carload/unit statistics
(in thousands)
and revenue per carload/unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
Carloads and Units |
|
Revenue per Carload/Unit |
|
Three Months Ended |
|
|
|
Three Months Ended |
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
September 30, |
|
|
|
September 30, |
|
|
|
2022 |
|
2021 |
|
% Change |
|
2022 |
|
2021 |
|
% Change |
|
2022 |
|
2021 |
|
% Change |
|
Chemical and petroleum |
$ |
204.6 |
|
|
$ |
204.1 |
|
|
— |
|
|
82.6 |
|
|
86.9 |
|
|
(5 |
%) |
|
$ |
2,477 |
|
|
$ |
2,349 |
|
|
5 |
% |
|
Industrial and consumer products |
188.4 |
|
|
159.0 |
|
|
18 |
% |
|
85.9 |
|
|
79.0 |
|
|
9 |
% |
|
2,193 |
|
|
2,013 |
|
|
9 |
% |
|
Agriculture and minerals |
167.6 |
|
|
139.8 |
|
|
20 |
% |
|
68.4 |
|
|
67.1 |
|
|
2 |
% |
|
2,450 |
|
|
2,083 |
|
|
18 |
% |
|
Energy |
82.9 |
|
|
74.6 |
|
|
11 |
% |
|
73.2 |
|
|
73.4 |
|
|
— |
|
|
1,133 |
|
|
1,016 |
|
|
12 |
% |
|
Intermodal |
121.9 |
|
|
86.9 |
|
|
40 |
% |
|
269.8 |
|
|
231.6 |
|
|
16 |
% |
|
452 |
|
|
375 |
|
|
21 |
% |
|
Automotive |
70.1 |
|
|
40.1 |
|
|
75 |
% |
|
34.0 |
|
|
22.4 |
|
|
52 |
% |
|
2,062 |
|
|
1,790 |
|
|
15 |
% |
|
Carload revenues, carloads and units |
835.5 |
|
|
704.5 |
|
|
19 |
% |
|
613.9 |
|
|
560.4 |
|
|
10 |
% |
|
$ |
1,361 |
|
|
$ |
1,257 |
|
|
8 |
% |
|
Other revenue |
46.7 |
|
|
39.5 |
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues (i) |
$ |
882.2 |
|
|
$ |
744.0 |
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) Included in revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel surcharge |
$ |
147.9 |
|
|
$ |
75.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
Carloads and Units |
|
Revenue per Carload/Unit |
|
Nine Months Ended |
|
|
|
Nine Months Ended |
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
September 30, |
|
|
|
September 30, |
|
|
|
2022 |
|
2021 |
|
% Change |
|
2022 |
|
2021 |
|
% Change |
|
2022 |
|
2021 |
|
% Change |
|
Chemical and petroleum |
$ |
592.3 |
|
|
$ |
667.9 |
|
|
(11 |
%) |
|
244.9 |
|
|
291.9 |
|
|
(16 |
%) |
|
$ |
2,419 |
|
|
$ |
2,288 |
|
|
6 |
% |
|
Industrial and consumer products |
523.6 |
|
|
437.6 |
|
|
20 |
% |
|
250.2 |
|
|
225.7 |
|
|
11 |
% |
|
2,093 |
|
|
1,939 |
|
|
8 |
% |
|
Agriculture and minerals |
503.5 |
|
|
404.1 |
|
|
25 |
% |
|
214.6 |
|
|
193.7 |
|
|
11 |
% |
|
2,346 |
|
|
2,086 |
|
|
12 |
% |
|
Energy |
226.4 |
|
|
186.6 |
|
|
21 |
% |
|
203.5 |
|
|
198.1 |
|
|
3 |
% |
|
1,113 |
|
|
942 |
|
|
18 |
% |
|
Intermodal |
335.3 |
|
|
259.3 |
|
|
29 |
% |
|
780.6 |
|
|
714.7 |
|
|
9 |
% |
|
430 |
|
|
363 |
|
|
18 |
% |
|
Automotive |
190.8 |
|
|
133.6 |
|
|
43 |
% |
|
98.1 |
|
|
76.5 |
|
|
28 |
% |
|
1,945 |
|
|
1,746 |
|
|
11 |
% |
|
Carload revenues, carloads and units |
2,371.9 |
|
|
2,089.1 |
|
|
14 |
% |
|
1,791.9 |
|
|
1,700.6 |
|
|
5 |
% |
|
$ |
1,324 |
|
|
$ |
1,228 |
|
|
8 |
% |
|
Other revenue |
134.0 |
|
|
110.4 |
|
|
21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues (i) |
$ |
2,505.9 |
|
|
$ |
2,199.5 |
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) Included in revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel surcharge |
$ |
364.2 |
|
|
$ |
196.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2022, revenues
increased 19% compared to the same period in 2021. Revenues
increased due to a 10% increase in carload/unit volumes and an 8%
increase in revenue per carload/unit. Volumes increased due to
partial recovery of the global microchip shortage, strong demand,
new business, and new steel plants that opened on the KCSM network
in 2021. These increases were partially offset by decreased volumes
in chemicals and petroleum refined fuel products due to regulatory
impacts. Revenue per carload/unit increased due to higher fuel
surcharge, positive pricing impacts, and longer average length of
haul, partially offset by mix and unfavorable foreign currency
impacts.
For the nine months ended September 30, 2022, revenues
increased 14% compared to the same period in 2021. Revenues
increased due to an 8% increase in revenue per carload/unit and a
5% 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 due to partial recovery of the global microchip shortage,
improved cycle times, strong demand, and new steel plants
that
opened on the KCSM network in 2021. These increases were partially
offset by decreased volumes in chemicals and petroleum refined fuel
products due to regulatory impacts.
The fluctuations of the Mexican peso against the U.S. dollar during
the three and nine months ended September 30, 2022, resulted
in a decrease in revenues of approximately $2.0 million compared to
the same periods in 2021, for revenue transactions denominated in
Mexican pesos. The average exchange rate of Mexican pesos per U.S.
dollar was Ps.20.2 and Ps.20.3 for the three and nine months ended
September 30, 2022, respectively, compared to Ps.20.0 and
Ps.20.1 for the same periods in 2021.
KCS’s fuel surcharges are a mechanism to adjust revenue based upon
changes in fuel prices above fuel price thresholds set in KCS’s
tariffs or contracts. Fuel surcharge revenue is calculated using a
fuel price from a prior time period that can be up to 60 days
earlier. In a period of volatile fuel prices or changing customer
business mix, changes in fuel expense and fuel surcharge revenue
may differ.
For the three and nine months ended September 30, 2022, fuel
surcharge revenue increased $72.6 million and $168.2 million,
respectively, compared to the same periods 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
September 30, 2022 |
|
Chemical and petroleum.
Revenues increased $0.5 million for the three months ended
September 30, 2022, compared to the same period in 2021, due
to a 5% decrease in carload/unit volumes, offset by a 5% increase
in revenue per carload/unit. Revenues decreased $75.6 million for
the nine months ended September 30, 2022, compared to the same
period in 2021, due to a 16% decrease in carload/unit volumes,
partially offset by a 6% 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, positive pricing impacts, and mix,
partially offset by shorter average length of haul.
|
|
|
|
|
|
|
|
|
Industrial and consumer products.
Revenues increased $29.4 million for the three months ended
September 30, 2022, compared to the same period in 2021, due
to a 9% increase in both carload/unit volumes and revenue per
carload/unit. Revenues increased $86.0 million for the nine months
ended September 30, 2022, compared to the same period in 2021,
due to an 11% increase in carload/unit volumes and an 8% increase
in revenue per carload/unit. Metal volumes increased for the three
and nine months ended September 30, 2022 due to higher demand and
new steel plants that opened on the KCSM network in 2021.
Additionally for the three months ended September 30, 2022, volumes
increased due to cement shipments in the Mexican market, partially
offset by slower paper and appliance shipments due to customer
rationalization of inventory. Revenue per carload/unit increased
due to higher fuel surcharge, positive pricing impacts, and longer
average length of haul, partially offset by mix.
|
|
|
|
|
|
|
|
|
Revenues by commodity group
for the three months ended
September 30, 2022 |
|
Agriculture and minerals.
Revenues increased $27.8 million for the three months ended
September 30, 2022, compared to the same period in 2021, due
to an 18% increase in revenue per carload/unit and a 2% increase in
carload/unit volumes. Revenue per carload/unit increased due to
higher fuel surcharge, positive pricing impacts, mix, and longer
average length of haul. Volumes increased due to higher
demand.
Revenues increased $99.4 million for the nine months ended
September 30, 2022, compared to the same period in 2021, due
to a 12% increase in revenue per carload/unit and an 11% increase
in carload/unit volumes. Revenue per carload/unit increased due to
higher fuel surcharge, positive pricing impacts, longer average
length of haul, and mix. Volumes increased due to improved cycle
times and higher demand.
|
|
|
|
|
|
|
|
|
Energy.
Revenues increased $8.3 million for the three months ended
September 30, 2022, compared to the same period in 2021, due
to a 12% increase in revenue per carload/unit. Revenue per
carload/unit increased due to higher fuel surcharge and positive
pricing impacts, partially offset by shorter average length of haul
and mix.
Revenues increased $39.8 million for the nine months ended
September 30, 2022, compared to the same period in 2021, due
to an 18% increase in revenue per carload/unit and a 3% increase in
carload/unit volumes. Revenue per carload/unit increased due to
higher fuel surcharge, longer average length of haul, and positive
pricing impacts, partially offset by mix. Volumes increased in
crude oil due to new business, partially offset by a decline in
utility coal as a result of deteriorated interchange cycle times
and utility plant maintenance outages.
|
|
Intermodal.
Revenues increased $35.0 million for the three months ended
September 30, 2022, compared to the same period in 2021, due
to a 21% increase in revenue per carload/unit and a 16% increase in
carload/unit volumes. Revenue per carload/unit increased due to
higher fuel surcharge, positive pricing impacts, and mix, partially
offset by a shorter average length of haul. Volumes increased due
to service interruptions at the Lazaro Cardenas port in Mexico in
2021, new business, a partial recovery of the global microchip
shortage affecting auto parts shipments, and stronger
demand.
Revenues increased $76.0 million for the nine months ended
September 30, 2022, compared to the same period in 2021, due
to an 18% increase in revenue per carload/unit and a 9% increase in
carload/unit volumes. Revenue per carload/unit increased due to
higher fuel surcharge, mix, and positive pricing impacts. Volumes
increased due to stronger demand, a partial recovery of the global
microchip shortage affecting auto parts shipments, new business,
and service interruptions at Lazaro Cardenas port in Mexico in
2021.
Automotive.
Revenues increased $30.0 million for the three months ended
September 30, 2022, compared to the same period in 2021, due
to a 52% increase in carload/unit volumes and a 15% increase in
revenue per carload/unit. Revenues increased $57.2 million for the
nine months ended September 30, 2022, compared to the same
period in 2021, due to a 28% increase in carload/unit volumes and
an 11% increase in revenue per carload/unit. Volumes increased for
both the three months and nine months ended September 30, 2022, due
to partial recovery of the global microchip shortage. For the three
months ended September 30, 2022, revenue per carload/
unit increased due to higher fuel surcharge, positive pricing
impacts, and longer average length of haul, partially offset by
mix. For the nine months ended September 30, 2022, revenue per
carload/unit increased due to higher fuel surcharge, positive
pricing impacts, longer average length of haul, and
mix.
Operating Expenses
Operating expenses, as shown below (in
millions),
increased $65.1 million for the three months ended
September 30, 2022, compared to the same period in 2021,
primarily due to higher diesel fuel prices, tentative agreements
with U.S. unions resulting in incremental estimated retroactive
wage and bonus expense, and wage and benefit inflation, partially
offset by decreased merger costs.
Operating expenses, as shown below (in
millions),
decreased $549.3 million for the nine months ended
September 30, 2022, compared to the same period in 2021,
primarily due to decreased merger costs related to the termination
fee for the termination of the CN merger agreement by KCS of $700.0
million, partially offset by higher diesel fuel prices, tentative
agreements with U.S. unions resulting in incremental estimated
retroactive wage and bonus expense, and wage and benefit
inflation.
The fluctuations of the Mexican peso against the U.S. dollar during
the three and nine months ended September 30, 2022, resulted
in an immaterial change compared to the same periods in 2021, for
expense transactions denominated in Mexican pesos. The average
exchange rate of Mexican pesos per U.S. dollar was Ps.20.2 and
Ps.20.3 for the three and nine months ended September 30,
2022, respectively, compared to Ps.20.0 and Ps.20.1 for the same
periods in 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
Change |
|
2022 |
|
2021 |
|
Dollars |
|
Percent |
|
Compensation and benefits |
$ |
154.4 |
|
|
$ |
133.3 |
|
|
$ |
21.1 |
|
|
16 |
% |
|
Purchased services |
57.8 |
|
|
51.4 |
|
|
6.4 |
|
|
12 |
% |
|
Fuel |
121.0 |
|
|
78.0 |
|
|
43.0 |
|
|
55 |
% |
|
|
|
|
|
|
|
|
|
Equipment costs |
25.5 |
|
|
19.6 |
|
|
5.9 |
|
|
30 |
% |
|
Depreciation and amortization |
98.2 |
|
|
90.5 |
|
|
7.7 |
|
|
9 |
% |
|
Materials and other |
88.8 |
|
|
82.8 |
|
|
6.0 |
|
|
7 |
% |
|
Merger costs, net |
11.5 |
|
|
36.5 |
|
|
(25.0) |
|
|
(68 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
$ |
557.2 |
|
|
$ |
492.1 |
|
|
$ |
65.1 |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
Change |
|
2022 |
|
2021 |
|
Dollars |
|
Percent |
|
Compensation and benefits |
$ |
423.8 |
|
|
$ |
391.2 |
|
|
$ |
32.6 |
|
|
8 |
% |
|
Purchased services |
163.6 |
|
|
161.0 |
|
|
2.6 |
|
|
2 |
% |
|
Fuel |
341.1 |
|
|
227.9 |
|
|
113.2 |
|
|
50 |
% |
|
Equipment costs |
67.2 |
|
|
64.8 |
|
|
2.4 |
|
|
4 |
% |
|
Depreciation and amortization |
292.1 |
|
|
273.7 |
|
|
18.4 |
|
|
7 |
% |
|
Materials and other |
252.4 |
|
|
231.1 |
|
|
21.3 |
|
|
9 |
% |
|
Merger costs, net |
36.8 |
|
|
776.6 |
|
|
(739.8) |
|
|
(95 |
%) |
|
Total operating expenses |
$ |
1,577.0 |
|
|
$ |
2,126.3 |
|
|
$ |
(549.3) |
|
|
(26 |
%) |
Compensation and benefits. Compensation
and benefits increased $21.1 million for the three months ended
September 30, 2022, compared to the same period in 2021, due
to tentative agreements on the U.S. 2020 collective bargaining
round resulting in estimated retroactive union wages and bonuses of
approximately $9.0 million. In addition, compensation and benefits
increased due to wage and benefit inflation of approximately $9.0
million, increased headcount and hours worked of approximately $4.0
million, and increased incentive compensation of approximately $2.0
million, partially offset by lower costs relating to Mexican
outsourcing reform of approximately $3.0 million.
Compensation and benefits increased $32.6 million for the nine
months ended September 30, 2022, compared to the same period
in 2021, due to wage and benefit inflation of approximately $20.0
million, increase in headcount and hours worked of approximately
$9.0 million, and tentative agreements on the U.S. 2020 collective
bargaining round resulting in estimated retroactive union wages and
bonuses of approximately $9.0 million, partially offset by
decreased incentive compensation of approximately $6.0
million.
The Company expects compensation and benefits will increase in
2023, as compared to 2022, by approximately $10.0 million due to an
increase in U.S. union wages as a result of the tentative
agreements on the 2020 collective bargaining round. As of October
26, 2022, six of the twelve unions have ratified their respective
agreements; however, the third largest union rejected the tentative
agreement. Negotiations will continue with this union and any other
union that does not ratify, which could result in compensation and
benefits that differs from current estimates upon settlement. See
the Collective Bargaining section within Other Matters for further
discussion.
Purchased services. Purchased
services expense increased $6.4 million for the three months ended
September 30, 2022, compared to the same period in 2021,
primarily due to increased corporate services expense of
approximately $4.0 million, increased software and programming
expense of approximately $2.0 million, and increases in repairs and
maintenance of approximately $2.0 million, partially offset by cost
reductions of approximately $4.0 million as a result of Mexico
outsourcing reform.
Purchased services expense increased $2.6 million for the nine
months ended September 30, 2022 compared to the same period in
2021, due to increased software and programming expense of
approximately $7.0 million, an increase in repairs and maintenance
expense of approximately $4.0 million, an increase in intermodal
lift services of approximately $3.0 million, and increases in
security costs of approximately $2.0 million, partially offset by
cost reductions of approximately $15.0 million as a result of
Mexico outsourcing reform.
Fuel.
Fuel increased $43.0 million for the three months ended
September 30, 2022, compared to the same period in 2021, due
to higher diesel fuel prices in the U.S. and Mexico of
approximately $26.0 million and $9.0 million, respectively,
increased consumption of approximately $6.0 million and decreased
efficiency of approximately $2.0 million.
Fuel increased $113.2 million for the nine months ended
September 30, 2022, compared to the same period in 2021, due
to higher diesel fuel prices in the U.S. and Mexico of
approximately $74.0 million and $27.0 million, respectively,
increased consumption of approximately $9.0 million, and decreased
efficiency of approximately $4.0 million, partially offset by the
weakening of the Mexican peso against the U.S. dollar of
approximately $1.0 million. The average price per gallon was $3.61
and $3.44 for the three and nine months ended September 30,
2022, respectively, compared to $2.52 and $2.43 for the same
periods in 2021.
Equipment costs.
Equipment costs increased $5.9 million for the three months ended
September 30, 2022, compared to the same period in 2021, due
to increased car hire expense of approximately $5.0 million due to
increased cycle times and volumes, and higher lease expense of
approximately $1.0 million.
Equipment costs increased $2.4 million for the nine months ended
September 30, 2022, compared to the same period in 2021, due
to increased car hire expense of approximately $2.0 million due to
increased volumes.
Depreciation and amortization. Depreciation
and amortization expense increased $7.7 million and $18.4 million
for the three and nine months ended September 30, 2022,
respectively, compared to the same periods in 2021, due to a larger
asset base and an increase in depreciation rates on equipment as a
result of an updated depreciation study.
Materials and other.
Materials and other expense increased $6.0 million for the three
months ended September 30, 2022, compared to the same period
in 2021, due to increased materials expense of approximately $7.0
million, including approximately $3.0 million of material purchases
resulting from Mexico outsourcing reform, increased expense of
approximately $3.0 million related to the non-creditable VAT due to
VAT law changes in Mexico, and higher employee expenses of
approximately $2.0 million. These increases were partially offset
by lower derailments and casualties of approximately $5.0
million.
Materials and other expense increased $21.3 million for the nine
months ended September 30, 2022, compared to the same period
in 2021, due to increased expense of approximately $11.0 million
related to the non-creditable VAT due to VAT law changes in Mexico,
increased material purchases resulting from Mexico outsourcing
reform of approximately $10.0 million and higher employee expenses
of approximately $10.0 million. These increases were partially
offset by a one-time contract dispute of approximately $10.0
million recognized in 2021.
Merger costs, net.
During the three and nine months ended September 30, 2022, the
Company recognized merger costs of $11.5 million and $36.8 million,
respectively, primarily related to incentive compensation. During
the three and nine months ended September 30, 2021, the
Company recognized merger costs of $36.5 million and $776.6
million, respectively. For the three months ended September 30,
2021, the merger costs primarily related to compensation and
benefits costs and legal fees. For the nine months ended September
30, 2021, merger costs included the fee associated with the
termination of the CN merger agreement by KCS of $700.0 million, in
addition to compensation and benefits costs and bankers’ and legal
fees. See Note 2, Merger Agreement for more
information.
Non-Operating Income and Expenses
Equity in net earnings (losses) of affiliates.
For the three months ended September 30, 2022, equity in net
earnings (losses) of affiliates decreased $3.9 million, compared to
the same period in 2021, primarily due to a decrease in net
earnings from the operations of Panama Canal Railway Company
(“PCRC”) resulting from a gain on insurance recoveries recognized
in the third quarter of 2021, and decreased net earnings from
unrealized depreciation of investments held in a fifteen
percent-owned equity investment.
For the nine months ended September 30, 2022, equity in net
earnings of affiliates decreased $5.3 million, compared to the same
period in 2021, primarily due to a decrease in net earnings from
the operations of TFCM, S. de R.L de C.V. (“TCM”) due to higher
interest and tax expense and decreased net earnings from the
operations of PCRC as a result of the aforementioned insurance
recoveries in 2021, partially offset by increased net earnings from
unrealized appreciation of investments held in a fifteen
percent-owned equity investment.
Interest expense.
For the three and nine months ended September 30, 2022,
interest expense decreased $0.1 million and increased $0.9 million,
respectively, compared to the same periods in 2021, due to lower
and higher average debt balances, respectively. During the three
and nine months ended September 30, 2022, the average debt
balance (including commercial paper) was $3,811.7 million and
$3,812.3 million, respectively, compared to $3,812.4 million and
$3,809.1 million for the same periods in 2021. The average interest
rate during the three and nine months ended September 30, 2022
and 2021 was 4.1% for all periods.
Foreign exchange loss.
For the three and nine months ended September 30, 2022, the
Company incurred a foreign exchange loss of $12.3 million and $18.0
million, respectively, compared to a foreign exchange loss of $0.5
million and $1.0 million, for the same periods in 2021. 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 and nine months ended September 30, 2022, the
re-measurement and settlement of monetary assets and liabilities
denominated in Mexican pesos resulted in a foreign exchange loss of
$4.2 million and a gain of $0.9 million, respectively, compared to
a loss of $5.4 million and $1.8 million for the same periods 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 and nine months ended September 30,
2022, the Company incurred a foreign exchange loss on foreign
currency derivative contracts of $8.1 million and $18.9 million,
respectively, compared to a gain of $4.9 million and $0.8 million,
for the same periods in 2021.
Other income, net.
Other income, net decreased $0.3 million and $0.4 million for the
three and nine months ended September 30, 2022, compared to
the same periods in 2021, due to a decrease in miscellaneous
income.
Income tax expense.
Income tax expense increased $12.0 million for the three months
ended September 30, 2022 compared to the same period in 2021,
primarily due to higher pre-tax income.
Income tax expense increased $180.2 million for the nine months
ended September 30, 2022, compared to the same period in 2021,
primarily due to higher pre-tax income resulting from the
recognition of the CN termination fee, which was recognized as a
discrete tax benefit of $147.0 million for the nine months ended
September 30, 2021.
See the discussion regarding the Company’s tax contingencies in
Item 1, Financial Statements and Supplementary Data — Note 9,
Commitments and Contingencies.
The components of the effective tax rates for the three and nine
months ended September 30, 2022, compared to the same periods
in 2021, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
September 30, |
|
September 30, |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Statutory rate in effect |
21.0 |
% |
|
21.0 |
% |
|
21.0 |
% |
|
21.0 |
% |
|
Tax effect of: |
|
|
|
|
|
|
|
|
Difference between U.S. and foreign tax rate |
5.6 |
% |
|
5.5 |
% |
|
5.6 |
% |
|
(123.3 |
%) |
|
|
|
|
|
|
|
|
|
Inflation |
(2.8 |
%) |
|
(0.6 |
%) |
|
(2.2 |
%) |
|
11.2 |
% |
|
State and local income tax provision, net |
1.2 |
% |
|
1.3 |
% |
|
1.3 |
% |
|
(28.1 |
%) |
|
Foreign exchange (i) |
0.8 |
% |
|
— |
|
|
0.9 |
% |
|
(10.2 |
%) |
|
Other, net |
0.6 |
% |
|
0.6 |
% |
|
0.5 |
% |
|
9.7 |
% |
|
Effective tax rate |
26.4 |
% |
|
27.8 |
% |
|
27.1 |
% |
|
(119.7 |
%) |
(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 the second half of 2021 and continued to
decrease for the nine months ended September 30, 2022. See further
discussion in the Revenues section.
Value-Added Tax Law.
KCSM is not required to charge its customers value added tax
(“VAT”) on international import or export transportation services,
which prior to 2022 resulted in KCSM paying more VAT on its
expenses than it collected 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. Over 2019 through 2021, KCSM 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 increased the VAT to be collected from
customers and payable to the Mexican government.
As of September 30, 2022 and December 31, 2021, the KCSM
refundable VAT balance was $98.6 million and $152.2 million,
respectively. 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. KCSM will recover the refundable
VAT balance as VAT billed to customers exceeds creditable VAT
charged by vendors. As of September 30, 2022 and December 31,
2021, $81.0 million and $78.0 million, respectively, of the
refundable VAT balance was classified as a short-term
asset.
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 and in
the third quarter of 2022, the grace period was further extended to
December 31, 2022. KCSM adapted its systems to comply with the
Carta Porte requirements, which delayed KCSM’s invoicing and cash
collections by approximately 60 days in the second and third
quarters 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 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 nine months ended September 30, 2022, the Company
invested $361.1 million in capital expenditures. See the Capital
Expenditures section for further details.
Pursuant to the Merger Agreement, KCS paid a cash dividend in the
first and third quarters of 2022 of $265.0 million and $200.0
million, respectively, to a wholly-owned subsidiary of CP. On
October 26, 2022, the Company’s Board of Directors declared a cash
dividend of up to $225.0 million, to be paid to a wholly-owned
subsidiary of CP on October 31, 2022. 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 $763.8 million as of
September 30, 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 September 30, 2022, the total cash and cash equivalents
held outside of the U.S. in foreign subsidiaries was $89.9 million,
after repatriating $108.3 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 60 days in
the second and third quarters of 2022, resulting in the accounts
receivable as of September 30, 2022 to be elevated compared to
historical balances. The Company is targeting its accounts
receivable balance to begin decreasing in the fourth quarter of
2022 and returning to historical balance levels during the first
quarter of 2023.