Company Quick10K Filing
Quick10K
Kansas City Southern
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$117.99 101 $11,870
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-17 Earnings, Exhibits
8-K 2019-03-19 Regulation FD, Exhibits
8-K 2019-03-05 Enter Agreement, Off-BS Arrangement, Officers, Exhibits
8-K 2019-02-20 Regulation FD, Exhibits
8-K 2019-01-18 Earnings, Exhibits
8-K 2018-11-28 Regulation FD, Exhibits
8-K 2018-10-19 Earnings, Exhibits
8-K 2018-10-05 Officers
8-K 2018-09-05 Regulation FD, Exhibits
8-K 2018-08-14 Officers, Code of Ethics
8-K 2018-07-20 Earnings, Exhibits
8-K 2018-05-17 Shareholder Vote, Regulation FD, Exhibits
8-K 2018-04-30 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-03-15 Regulation FD, Exhibits
8-K 2018-03-08 Other Events, Exhibits
8-K 2018-03-06 Officers, Exhibits
8-K 2018-01-19 Earnings, Exhibits
PINC Premier 2,110
TRUP Trupanion 1,190
ADTN Adtran 702
MGIC Magic Software Enterprises 455
PTSI PAM Transportation Services 298
TLGT Teligent 46
OPTI Opti 0
WNDM Wound Management Technologies 0
DUOT Duos Technologies Group 0
MRMD Marimed 0
KSU 2019-03-31
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.3 kcsex10303312019.htm
EX-10.4 kcsex10403312019.htm
EX-31.1 kcsex31103312019.htm
EX-31.2 kcsex31203312019.htm
EX-32.1 kcsex32103312019.htm
EX-32.2 kcsex32203312019.htm

Kansas City Southern Earnings 2019-03-31

KSU 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 kcs10q03312019.htm FORM 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to        
Commission File Number 1-4717
KANSAS CITY SOUTHERN
(Exact name of registrant as specified in its charter)
Delaware
 
kcslineslogo2016a11.jpg
 
44-0663509
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer
Identification No.)
 
427 West 12th Street,
Kansas City, Missouri
 
 
 
64105
(Address of principal executive offices)
 
 
(Zip Code)
816.983.1303
(Registrant’s telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since last report.)
____________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  ý Accelerated filer  ¨ Non-accelerated filer  ¨   Smaller reporting company  ¨
Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
April 10, 2019
Common Stock, $0.01 per share par value
 
100,586,999 Shares
 



Kansas City Southern and Subsidiaries
Form 10-Q
March 31, 2019
Index
 
 
Page
PART I — FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II — OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


2


PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements (unaudited)

Kansas City Southern and Subsidiaries
Consolidated Statements of Income
 
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In millions, except share and per share amounts)
(Unaudited)
Revenues
$
674.8

 
$
638.6

Operating expenses:
 
 
 
Compensation and benefits
128.9

 
121.6

Purchased services
52.8

 
47.1

Fuel
83.0

 
81.3

Mexican fuel excise tax credit

 
(9.2
)
Equipment costs
30.4

 
32.2

Depreciation and amortization
88.5

 
83.3

Materials and other
63.4

 
63.6

Restructuring charges
67.5

 

Total operating expenses
514.5

 
419.9

Operating income
160.3

 
218.7

Equity in net earnings of affiliates
1.7

 
1.0

Interest expense
(28.2
)
 
(25.5
)
Debt retirement costs
(0.6
)
 

Foreign exchange gain
4.6

 
27.8

Other income (expense), net
0.1

 
(0.3
)
Income before income taxes
137.9

 
221.7

Income tax expense
34.7

 
76.8

Net income
103.2

 
144.9

Less: Net income attributable to noncontrolling interest
0.4

 
0.4

Net income attributable to Kansas City Southern and subsidiaries
102.8

 
144.5

Preferred stock dividends
0.1

 
0.1

Net income available to common stockholders
$
102.7

 
$
144.4

 
 
 
 
Earnings per share:
 
 
 
Basic earnings per share
$
1.02

 
$
1.41

Diluted earnings per share
$
1.02

 
$
1.40

 
 
 
 
Average shares outstanding (in thousands):
 
 
 
Basic
100,500

 
102,574

Potentially dilutive common shares
415

 
402

Diluted
100,915

 
102,976

See accompanying notes to the unaudited consolidated financial statements.


3


Kansas City Southern and Subsidiaries
Consolidated Statements of Comprehensive Income

 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In millions)
(Unaudited)
Net income
$
103.2

 
$
144.9

Other comprehensive income (loss):
 
 
 
Unrealized gain (loss) on interest rate derivative instruments during the period, net of tax of $(1.7) million and $1.6 million, respectively
(5.1
)
 
4.5

Foreign currency translation adjustments
0.2

 
1.2

Other comprehensive income (loss)
(4.9
)
 
5.7

Comprehensive income
98.3

 
150.6

Less: Comprehensive income attributable to noncontrolling interest
0.4

 
0.4

Comprehensive income attributable to Kansas City Southern and subsidiaries
$
97.9

 
$
150.2

See accompanying notes to the unaudited consolidated financial statements.


4


Kansas City Southern and Subsidiaries
Consolidated Balance Sheets
 
 
March 31,
2019
 
December 31,
2018
 
(In millions, except share and per share amounts)
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
92.7

 
$
100.5

Accounts receivable, net
277.9

 
301.2

Materials and supplies
166.2

 
160.3

Other current assets
117.6

 
73.4

Total current assets
654.4

 
635.4

Operating lease right-of-use assets
199.1

 

Investments
47.8

 
44.9

Property and equipment (including concession assets), net
8,694.3

 
8,691.1

Other assets
42.1

 
98.4

Total assets
$
9,637.7

 
$
9,469.8

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Long-term debt due within one year
$
9.7

 
$
10.1

Accounts payable and accrued liabilities
470.9

 
436.9

Total current liabilities
480.6

 
447.0

Long-term operating lease liabilities
105.6

 

Long-term debt
2,677.6

 
2,679.3

Deferred income taxes
1,085.2

 
1,079.9

Other noncurrent liabilities and deferred credits
138.7

 
130.9

Total liabilities
4,487.7

 
4,337.1

Stockholders’ equity:
 
 
 
$25 par, 4% noncumulative, preferred stock, 840,000 shares authorized, 649,736 shares issued; 226,285 and 228,395 shares outstanding at March 31, 2019 and December 31, 2018, respectively
5.7

 
5.7

$.01 par, common stock, 400,000,000 shares authorized; 123,352,185 shares issued; 100,580,696 and 100,896,678 shares outstanding at March 31, 2019 and December 31, 2018, respectively
1.0

 
1.0

Additional paid-in capital
946.1

 
946.6

Retained earnings
3,891.1

 
3,870.6

Accumulated other comprehensive loss
(15.8
)
 
(10.9
)
Total stockholders’ equity
4,828.1

 
4,813.0

Noncontrolling interest
321.9

 
319.7

Total equity
5,150.0

 
5,132.7

Total liabilities and equity
$
9,637.7

 
$
9,469.8

See accompanying notes to the unaudited consolidated financial statements.


5


Kansas City Southern and Subsidiaries
Consolidated Statements of Cash Flows

 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In millions)
(Unaudited)
Operating activities:
 
 
 
Net income
$
103.2

 
$
144.9

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
88.5

 
83.3

Deferred income taxes
6.9

 
23.9

Equity in net earnings of affiliates
(1.7
)
 
(1.0
)
Share-based compensation
6.0

 
5.8

Settlement of foreign currency derivative instruments
0.7

 
12.1

Gain on foreign currency derivative instruments
(3.6
)
 
(16.5
)
Mexican fuel excise tax credit
(6.8
)
 
(9.2
)
Restructuring charges
67.5

 

Cash payments for restructuring charges
(0.5
)
 

Changes in working capital items:
 
 
 
Accounts receivable
34.6

 
(37.2
)
Materials and supplies
(8.7
)
 
(7.5
)
Other current assets
3.0

 
(22.1
)
Accounts payable and accrued liabilities
(9.5
)
 
(19.2
)
Other, net
(6.9
)
 
(16.7
)
Net cash provided by operating activities
272.7

 
140.6

 
 
 
 
Investing activities:
 
 
 
Capital expenditures
(179.9
)
 
(110.0
)
Purchase or replacement of equipment under operating leases

 
(11.2
)
Property investments in MSLLC
(4.7
)
 
(3.9
)
Investments in and advances to affiliates
(8.4
)
 
(0.2
)
Proceeds from disposal of property
2.2

 
1.4

Other, net
1.1

 
(0.3
)
Net cash used for investing activities
(189.7
)
 
(124.2
)
 
 
 
 
Financing activities:
 
 
 
Net short-term borrowings

 
(4.1
)
Repayment of long-term debt
(2.7
)
 
(8.7
)
Dividends paid
(36.4
)
 
(37.1
)
Shares repurchased
(50.3
)
 
(54.0
)
Debt issuance costs paid
(1.6
)
 

Proceeds from employee stock plans
0.2

 
0.4

Net cash used for financing activities
(90.8
)
 
(103.5
)
Cash and cash equivalents:
 
 
 
Net decrease during each period
(7.8
)
 
(87.1
)
At beginning of year
100.5

 
134.1

At end of period
$
92.7

 
$
47.0

See accompanying notes to the unaudited consolidated financial statements.

6


Kansas City Southern and Subsidiaries
Consolidated Statements of Changes in Equity
(in millions, except per share amounts)
(Unaudited)
 
$25 Par
Preferred
Stock
 
$.01 Par
Common
Stock
 
Additional Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interest
 
Total
 
 
 
Balance at December 31, 2018
$
5.7

 
$
1.0

 
$
946.6

 
$
3,870.6

 
$
(10.9
)
 
$
319.7

 
$
5,132.7

Net income
 
 
 
 
 
 
102.8

 
 
 
0.4

 
103.2

Other comprehensive loss
 
 
 
 
 
 
 
 
(4.9
)
 
 
 
(4.9
)
Contribution from noncontrolling interest
 
 
 
 
 
 
 
 
 
 
1.8

 
1.8

Dividends on common stock ($0.36/share)
 
 
 
 
 
 
(36.3
)
 
 
 
 
 
(36.3
)
Dividends on $25 par preferred stock ($0.25/share)
 
 
 
 
 
 
(0.1
)
 
 
 
 
 
(0.1
)
Share repurchases

 

 
(4.4
)
 
(45.9
)
 
 
 
 
 
(50.3
)
Options exercised and stock subscribed, net of shares withheld for employee taxes
 
 
 
 
(2.1
)
 
 
 
 
 
 
 
(2.1
)
Share-based compensation
 
 
 
 
6.0

 
 
 
 
 
 
 
6.0

Balance at March 31, 2019
$
5.7

 
$
1.0

 
$
946.1

 
$
3,891.1

 
$
(15.8
)
 
$
321.9

 
$
5,150.0


 
$25 Par
Preferred
Stock
 
$.01 Par
Common
Stock
 
Additional Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Non-
controlling
Interest
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
6.1

 
$
1.0

 
$
943.3

 
$
3,611.4

 
$
(12.9
)
 
$
316.5

 
$
4,865.4

Reclassification due to adoption of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
 
 
 
 


 
0.7

 
(0.7
)
 
 
 

Net income
 
 
 
 
 
 
144.5

 
 
 
0.4

 
144.9

Other comprehensive income
 
 
 
 
 
 
 
 
5.7

 
 
 
5.7

Dividends on common stock ($0.36/share)
 
 
 
 
 
 
(36.9
)
 
 
 
 
 
(36.9
)
Dividends on $25 par preferred stock ($0.25/share)
 
 
 
 
 
 
(0.1
)
 
 
 
 
 
(0.1
)
Share repurchases
 
 

 
(4.6
)
 
(49.4
)
 
 
 
 
 
(54.0
)
Options exercised and stock subscribed, net of shares withheld for employee taxes
 
 
 
 
0.6

 
 
 
 
 
 
 
0.6

Share-based compensation
 
 
 
 
5.8

 
 
 
 
 
 
 
5.8

Balance at March 31, 2018
$
6.1

 
$
1.0

 
$
945.1

 
$
3,670.2

 
$
(7.9
)
 
$
316.9

 
$
4,931.4


See accompanying notes to the unaudited consolidated financial statements.




7


Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
For purposes of this report, “KCS” or the “Company” may refer to Kansas City Southern or, as the context requires, to one or more subsidiaries of Kansas City Southern.

1. Basis of Presentation
In the opinion of the management of KCS, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal and recurring adjustments) necessary to reflect a fair statement of the results for interim periods in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The results of operations for the three months ended March 31, 2019, are not necessarily indicative of the results to be expected for the full year ending December 31, 2019. Certain prior year amounts have been reclassified to conform to the current year presentation.
During the first quarter of 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases, which is also known as Accounting Standard Codification (“ASC”) Topic 842, that requires lessees to recognize for all operating leases a right-of-use asset and a lease obligation in the consolidated balance sheet. Expenses are recognized in the consolidated statement of income in a manner similar to previous accounting guidance. Lessor accounting under the new standard is substantially unchanged and is immaterial to the Company. The Company adopted the accounting standard using a prospective transition approach, which applies the provisions of the new guidance at the effective date without adjusting the comparative periods presented, with certain practical expedients available to ease the burden of adoption.
The Company elected the following practical expedients upon adoption: not to reassess whether any expired or existing contracts are or contain leases, not to reassess the lease classification for any expired or existing leases, not to reassess initial direct costs for any existing leases, not to separately identify lease and nonlease components (i.e. maintenance costs) except for fleet vehicles and real estate, and not to evaluate historical land easements under the new guidance. Additionally, the Company elected the short-term lease exemption policy, applying the requirements of ASC 842 to long-term leases (leases greater than 1 year).
Adoption of the new standard resulted in $175.2 million of additional right-of-use lease assets and lease liabilities as of January 1, 2019. The new standard did not have a significant impact on the consolidated statement of income. See Note 4, Leases for additional information.

2. Restructuring Charges
The Company began implementing certain principles of Precision Scheduled Railroading (“PSR”), which focus on providing reliable customer service, facilitating growth, improving asset utilization, and improving the cost profile of the Company. As a result of the PSR initiatives, management approved a restructuring plan during the first quarter of 2019, which coincides with the preparation of the Company’s quarterly financial statements, and recognized restructuring charges of $67.5 million in the consolidated statements of income.
Expenses related to these initiatives are shown in the following table (in millions):
 
 
Three months ended March 31, 2019
Restructuring charges:
 
 
Asset impairments
 
$
62.5

Workforce reduction
 
3.2

Contract restructuring
 
1.8

Total restructuring charges
 
$
67.5

Asset Impairments. The Company committed to a plan to dispose certain locomotives and rail cars to increase operational fluidity, reduce maintenance expense, and improve labor and fuel efficiency. Accordingly, the Company performed an impairment analysis to adjust the carrying amount of the assets to the lower of its depreciated book value or its estimated fair value, less costs to dispose, and stopped recognizing depreciation expense.
Workforce Reduction. The Company recognized severance costs associated with a planned workforce reduction as a result of a lower active locomotive fleet and rail cars online.

8


Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements—(Continued)

Contract Restructuring. The Company terminated certain third party vendor contracts in order to drive operational efficiencies, which resulted in contract termination penalties.
    
3. Mexican Fuel Excise Tax Credit
Fuel purchases in Mexico are subject to an excise tax that is included in the price of fuel. The Company is eligible for and utilizes a credit for the excise tax included in the price of fuel that is purchased and consumed in locomotives and certain work equipment in Mexico. For years 2018, 2017, and 2016, the Mexican fuel excise tax credit (“IEPS credit”) was realized through the offset of the total annual Mexico income tax liability and income tax withholding payment obligations of KCSM, with no carryforward to future periods and recognized as a benefit in operating expenses on the consolidated statements of income. In December 2018, the Mexican government enacted changes in the tax law effective January 1, 2019 (“Mexico Tax Reform”), which, among other things, for 2019 eliminated the option to monetize the IEPS credit by offsetting income tax withholding payment obligations. As a result, the Company will be allowed to offset the 2019 IEPS credit only against its Mexico corporate income tax liability on the 2019 annual income tax return. The elimination of the option to apply the IEPS credit to income tax withholding payment obligations requires the Company to recognize the IEPS credit as a reduction of income tax expense rather than a reduction of operating expenses for 2019. For the three months ended March 31, 2019, the Company recognized a net benefit of $6.8 million in income tax expense within the consolidated statements of income.

4. Leases
The Company leases transportation equipment, as well as office and other operating facilities, under various finance and operating leases. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the implicit rate is not readily determinable in most of the Company’s lease agreements, the Company uses its estimated secured incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease expense is recognized on a straight-line basis over the lease term.
The Company determines if an arrangement is a lease or contains a lease at inception. The Company’s leases have remaining lease terms of approximately 1 year to 15 years, which may include the option to extend the lease when it is reasonably certain the Company will exercise that option. The Company does not have lease agreements with residual value guarantees, sale leaseback terms or material restrictive covenants. Additionally, short-term leases and leases with variable lease costs are immaterial, and the Company does not have any sublease arrangements.
Leases
 
Classification
 
March 31, 2019
(in millions)
Assets
 
 
 
 
Operating
 
Operating lease right-of-use assets
 
$
199.1

Finance
 
Property and equipment (including concession assets), net
 
10.5

Total leased assets
 
 
 
$
209.6

 
 
 
 
 
Liabilities
 
 
 
 
Current
 
 
 


Operating
 
Accounts payable and accrued liabilities
 
$
49.2

Finance
 
Long-term debt due within one year
 
2.3

Noncurrent
 
 
 
 
Operating
 
Long-term operating lease liabilities
 
105.6

Finance
 
Long-term debt
 
8.2

Total lease liabilities
 
 
 
$
165.3



9


Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements—(Continued)

 
 
 
 
Three Months Ended
Lease Cost
 
Classification
 
March 31, 2019
(in millions)
Operating lease cost
 
Equipment costs
 
$
13.8

Finance lease cost:
 
 
 
 
Amortization of finance lease assets
 
Depreciation and amortization
 
0.9

Interest on lease liabilities
 
Interest expense
 
0.3

Total lease cost
 
 
 
$
15.0

Cash Flow Information
 
 
Cash paid for operating leases included in operating activities
 
$
23.1

Cash paid for finance leases included in operating activities
 
0.3

Cash paid for finance leases included in financing activities
 
0.9

Lease Term and Discount Rate
 
Weighted-Average Remaining Lease Term (years)
 
Weighted-Average Discount Rate
Operating leases
 
7.1
 
4.4
%
Finance leases
 
4.5
 
11.1
%
Remaining Maturities of Lease Liabilities
Year Ending December 31 (in millions),
 
Operating Leases
 
Finance Leases
2019
 
$
54.1

 
$
2.8

2020
 
32.4

 
2.7

2021
 
24.3

 
2.7

2022
 
17.7

 
2.7

2023
 
12.3

 
2.4

Thereafter
 
35.1

 
0.1

Total lease payments
 
175.9

 
13.4

Less imputed interest
 
21.1

 
2.9

Total
 
$
154.8

 
$
10.5


As of March 31, 2019, the Company had additional operating leases that have not yet commenced of $2.2 million, which will commence during fiscal year 2019, and carry lease terms of 2 years to 3 years.


10


Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements—(Continued)

5. 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 14 for revenues by geographical area.
 
Three Months Ended
 
March 31,
 
2019
 
2018
Chemical & Petroleum
 
 
 
Chemicals
$
60.5

 
$
57.7

Petroleum
74.3

 
49.0

Plastics
33.8

 
33.0

Total
168.6

 
139.7

 
 
 
 
Industrial & Consumer Products
 
 
 
Forest Products
66.4

 
65.3

Metals & Scrap
57.0

 
53.8

Other
26.4

 
27.2

Total
149.8

 
146.3

 
 
 
 
Agriculture & Minerals
 
 
 
Grain
72.7

 
65.2

Food Products
35.7

 
36.2

Ores & Minerals
6.5

 
4.9

Stone, Clay & Glass
8.0

 
7.1

Total
122.9

 
113.4

 
 
 
 
Energy
 
 
 
Utility Coal
32.5

 
29.3

Coal & Petroleum Coke
10.5

 
10.2

Frac Sand
8.0

 
11.1

Crude Oil
13.6

 
10.7

Total
64.6

 
61.3

 
 
 
 
Intermodal
79.9

 
90.9

 
 
 
 
Automotive
57.6

 
59.8

 
 
 
 
Total Freight Revenues
643.4

 
611.4

 
 
 
 
Other Revenue
31.4

 
27.2

 
 
 
 
Total Revenues
$
674.8

 
$
638.6

Contract Balances
The amount of revenue recognized in the first quarter of 2019 from performance obligations partially satisfied in previous periods was $21.9 million. The performance obligations that were unsatisfied or partially satisfied as of March 31, 2019, were $18.7 million, which represents in-transit shipments that are fully satisfied the following month.
A receivable is any unconditional right to consideration, and is recognized as shipments have been completed and the relating performance obligation has been fully satisfied. At March 31, 2019, and December 31, 2018, the accounts receivable, net balance was $277.9 million and $301.2 million, respectively. Contract assets represent a conditional right to consideration in exchange for goods or services. The Company did not have any contract assets at March 31, 2019, and December 31, 2018.
Contract liabilities represent consideration received in advance from customers, and are recognized as revenue over time as the relating performance obligation is satisfied. The amount of revenue recognized in the first quarter of 2019 that was included in the opening contract liability balance was $15.7 million. The Company has recognized contract liabilities within the accounts payable and

11


Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements—(Continued)

accrued liabilities financial statement caption on the balance sheet. These are considered current liabilities as they will be settled in less than 12 months.
The following tables summarize the changes in contract liabilities (in millions):
Contract liabilities
 
Three Months Ended March 31,
 
 
2019
 
2018
Beginning balance
 
$
32.4

 
$
26.8

Revenue recognized that was included in the contract liability balance at the beginning of the period
 
(15.7
)
 
(11.2
)
Increases due to consideration received, excluding amounts recognized as revenue during the period
 
5.6

 
4.4

Ending balance
 
$
22.3

 
$
20.0


6. Earnings Per Share Data
Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share adjusts basic earnings per common share for the effects of potentially dilutive common shares, if the effect is not anti-dilutive. Potentially dilutive common shares include the dilutive effects of shares issuable under the stock option and performance award plans.
The following table reconciles the basic earnings per share computation to the diluted earnings per share computation (in millions, except share and per share amounts):
 
Three Months Ended
 
March 31,
 
2019
 
2018
Net income available to common stockholders for purposes of computing basic and diluted earnings per share
$
102.7

 
$
144.4

Weighted-average number of shares outstanding (in thousands):
 
 
 
Basic shares
100,500

 
102,574

Effect of dilution
415

 
402

Diluted shares
100,915

 
102,976

Earnings per share:
 
 
 
Basic earnings per share
$
1.02

 
$
1.41

Diluted earnings per share
$
1.02

 
$
1.40


Potentially dilutive shares excluded from the calculation (in thousands):
Stock options excluded as their inclusion would be anti-dilutive
212

 
100



12


Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements—(Continued)

7. Property and Equipment (including Concession Assets)
Property and equipment, including concession assets, and related accumulated depreciation and amortization are summarized below (in millions):
 
March 31,
2019
 
December 31,
2018
Land
$
219.0

 
$
219.3

Concession land rights
141.2

 
141.2

Road property
7,755.5

 
7,720.1

Equipment
2,699.7

 
2,739.5

Technology and other
310.9

 
305.6

Construction in progress
135.2

 
152.5

Total property
11,261.5

 
11,278.2

Accumulated depreciation and amortization
2,567.2

 
2,587.1

Property and equipment (including concession assets), net
$
8,694.3

 
$
8,691.1

Concession assets, net of accumulated amortization of $671.6 million and $653.9 million, totaled $2,281.9 million and $2,260.4 million at March 31, 2019 and December 31, 2018, respectively.

8. Fair Value Measurements
The Company’s derivative financial instruments are measured at fair value on a recurring basis and consist of foreign currency forward and option contracts and treasury lock agreements, which are classified as Level 2 valuations. The Company determines the fair value of its derivative financial instrument positions based upon pricing models using inputs observed from actively quoted markets and also takes into consideration the contract terms as well as other inputs, including market currency exchange rates and in the case of option contracts, volatility, the risk-free interest rate and the time to expiration.
The Company’s short-term financial instruments include cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings. The carrying value of the short-term financial instruments approximates their fair value.
The fair value of the Company’s debt is estimated using quoted market prices when available. When quoted market prices are not available, fair value is estimated based on current market interest rates for debt with similar maturities and credit quality. The carrying value of the Company’s debt was $2,687.3 million and $2,689.4 million at March 31, 2019 and December 31, 2018, respectively. If the Company’s debt were measured at fair value, the fair value measurements of the individual debt instruments would have been classified as Level 2 in the fair value hierarchy.

The fair value of the Company’s financial instruments is presented in the following table (in millions):
 
 
March 31, 2019
 
December 31, 2018
 
 
Level 2
 
Level 2
Assets
 
 
 
 
Foreign currency derivative instruments
 
$
3.2

 
$
0.3

Liabilities
 
 
 
 
Debt instruments
 
2,745.7

 
2,661.3

Treasury lock agreements
 
8.8

 
2.0


9. 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

13


Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements—(Continued)

have an established banking relationship with the Company. As of March 31, 2019, the Company did not expect any losses as a result of default of its counterparties.
Interest Rate Derivative Instruments. In May 2017, the Company executed four treasury lock agreements with an aggregate notional value of $275.0 million and a weighted average interest rate of 2.85%. 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 $275.0 million, 2.35% senior notes due May 15, 2020. The Company has designated the treasury locks as cash flow hedges and recorded unrealized gains and losses in accumulated other comprehensive loss. Upon settlement, the unrealized gain or loss in accumulated other comprehensive income will be amortized to interest expense over the life of the future underlying debt issuance.
Foreign Currency Derivative Instruments. The Company’s Mexican subsidiaries have net U.S. dollar-denominated monetary liabilities which, for Mexican income tax purposes, are subject to periodic revaluation based on changes in the value of the Mexican peso against the U.S. dollar. This revaluation creates fluctuations in the Company’s Mexican income tax expense and the amount of income taxes paid in Mexico. The Company hedges its exposure to this cash tax risk by entering into foreign currency forward contracts and foreign currency option contracts known as zero-cost collars.
The foreign currency forward contracts involve the Company’s purchase of pesos at an agreed-upon weighted-average exchange rate to each U.S dollar. The zero-cost collars involve the Company’s purchase of a Mexican peso call option and a simultaneous sale of a Mexican peso put option, with equivalent U.S. dollar notional amounts for each option and no net cash premium paid by the Company. The Company’s foreign currency forward and zero-cost collar contracts are executed with counterparties in the U.S. and are governed by International Swaps and Derivatives Association agreements that include standard netting arrangements. Asset and liability positions from contracts with the same counterparty are net settled upon maturity/expiration and presented on a net basis in the consolidated balance sheets prior to settlement. There was no offsetting of derivative assets or liabilities in the consolidated balance sheets as of March 31, 2019 and December 31, 2018.
Below is a summary of the Company’s 2019 and 2018 foreign currency derivative contracts (amounts in millions, except Ps./USD):
Foreign currency forward contracts
 
 
 
 
 
 
 
Contracts to purchase Ps./pay USD
 
Offsetting contracts to sell Ps./receive USD
 
 
Notional amount 
 
Notional amount 
 
Weighted-average exchange rate
(in Ps./USD)
 
 
Notional amount 
 
Notional amount 
 
Weighted-average exchange rate
(in Ps./USD)
 
Cash received/(paid) on settlement
Contracts executed in 2019 and outstanding
$
275.0

 
Ps.
5,504.6

 
Ps.
20.0

 
 

 

 

 

Contracts executed in 2019 and settled in 2019
$
75.0

 
Ps.
1,448.6

 
Ps.
19.3

 
 
$
75.4

 
Ps.
1,448.6

 
Ps.
19.2

 
$
0.4

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

 
$
0.3

 
 
 
 
 
 
 
 
 
 
 
Contracts executed in 2018 and settled in 2018 (i)
$
220.0

 
$
3.9

 
 
 
 
 
 
 
 
 
 
 
Contracts executed in 2017 and settled in 2018 (i)
$
80.0

 
$
10.0

 
 
 
 
 
 
 
 
 
 
 
(i)    During the first quarter of 2018, the Company settled $85.0 million and $80.0 million of zero-cost collar contracts executed in 2018 and 2017, respectively, resulting in cash received of $2.1 million and $10.0 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 within the consolidated statements of income. The cash flows associated with these instruments is classified as an operating activity within the consolidated statements of cash flows.

14


Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements—(Continued)

The following tables present the fair value of derivative instruments included in the Consolidated Balance Sheets (in millions):
 
Derivative Assets
 
Balance Sheet Location
 
March 31,
2019
 
December 31, 2018
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency forward contracts
Other current assets
 
$
3.2

 
$

Foreign currency zero-cost collar contracts
Other current assets
 

 
0.3

Total derivatives not designated as hedging instruments
 
 
3.2

 
0.3

Total derivative assets
 
 
$
3.2

 
$
0.3

 
Derivative Liabilities
 
Balance Sheet Location
 
March 31,
2019
 
December 31, 2018
Derivatives designated as hedging instruments:
 
 
 
 
 
 Treasury lock agreements
Other noncurrent liabilities and deferred credits
 
$
8.8

 
$
2.0

Total derivatives designated as hedging instruments
 
 
8.8

 
2.0

Total derivative liabilities
 
 
$
8.8

 
$
2.0

 
 
The following table presents the effects of derivative instruments on the Consolidated Statements of Income and Consolidated Statements of Comprehensive Income (in millions):
Derivatives in Cash Flow Hedging Relationships
 
 
 
Amount of Gain/(Loss) Recognized in OCI on Derivative
 
 
 
 
Three Months Ended
 
 
 
 
March 31,
 
 
 
 
2019
 
2018
Treasury lock agreements
 
 
 
$
(6.8
)
 
$
6.1

     Total
 
 
 
$
(6.8
)
 
$
6.1



Derivatives Not Designated as Hedging Instruments
Location of Gain/(Loss) Recognized in Income on Derivative
 
 
Amount of Gain/(Loss) Recognized in Income on Derivative
 
 
 
 
Three Months Ended
 
 
 
 
March 31,
 
 
 
 
2019
 
2018
Foreign currency forward contracts
Foreign exchange gain
 
 
$
3.6

 
$

Foreign currency zero-cost collar contracts
Foreign exchange gain
 
 

 
16.5

     Total
 
 
 
$
3.6

 
$
16.5


See Note 8, Fair Value Measurements, for the determination of the fair values of derivatives.

10. Short-Term Borrowings
Commercial Paper. The Company’s commercial paper program generally serves as the primary means of short-term funding. As of March 31, 2019 and December 31, 2018, KCS had no commercial paper outstanding. For the three months ended March 31, 2019 and 2018, 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.


15


Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements—(Continued)

11. Long-Term Debt
Revolving Senior Credit Facility
On March 8, 2019, KCS, with certain of its domestic subsidiaries named therein as guarantors, entered into a new five-year, $600.0 million senior unsecured revolving credit facility (the “Facility”), with a $25.0 million standby letter of credit facility which, if utilized, constitutes usage under the Facility. The Facility replaced KCS’s existing $800.0 million revolving credit facility. The Facility serves as a backstop for the commercial paper program, which generally serves as the Company’s primary means of short-term funding.
Borrowings under the Revolving Credit Facility will bear interest at floating rates. Depending on the Company’s credit rating, the margin that KCS would pay above the London Interbank Offered Rate (“LIBOR”) at any point would be between 1.000% and 1.750%. As of March 31, 2019, the margin is 1.25% based on KCS’s current credit rating.
The Facility is guaranteed by KCSR, together with certain domestic subsidiaries named therein as guarantors, and matures on March 8, 2024. The Facility agreement contains representations, warranties, covenants and events of default that are customary for credit agreements of this type. The occurrence of an event of default could result in the termination of the commitments and the acceleration of the repayment of any outstanding principal balance on the Facility and the commercial paper program.
The Facility was categorized as a debt modification and the Company incurred $2.5 million of debt issuance costs, which were capitalized and will be amortized over the life of the related debt instrument. The Company recorded debt retirement costs of $0.6 million to write off previously capitalized debt issuance costs.
As of March 31, 2019, KCS had $600.0 million available under the Facility, with no outstanding borrowings. As of December 31, 2018, KCS had $800.0 million available under its previous revolving credit facility, with no outstanding borrowings.
12. Share Repurchases
During the three months ended March 31, 2019, KCS repurchased 465,523 shares of common stock for $50.3 million at an average price of $108.02 per share. Since inception of the August 2017 common share repurchase program, KCS has repurchased 5,157,205 shares of common stock for $548.6 million at an average price of $106.37 per share. The excess of repurchase price over par value is allocated between additional paid-in capital and retained earnings.
During the three months ended March 31, 2019, KCS repurchased 2,110 shares of its $25 par preferred stock for less than $0.1 million at an average price of $26.40 per share. The excess of repurchase price over par value is allocated between additional paid-in capital and retained earnings.

13. Commitments and Contingencies
Concession Duty. Under KCSM’s 50-year railroad concession from the Mexican government (the “Concession”), which could expire in 2047 unless extended, KCSM pays annual concession duty expense of 1.25% of gross revenues. For the three months ended March 31, 2019, the concession duty expense, which is recorded within materials and other in operating expenses, was $4.2 million, compared to $4.1 million for the same period in 2018.
Litigation. The Company is a party to various legal proceedings and administrative actions, all of which are of an ordinary, routine nature and incidental to its operations. Included in these proceedings are various tort claims brought by current and former employees for job-related injuries and by third parties for injuries related to railroad operations. KCS aggressively defends these matters and has established liability provisions, which management believes are adequate to cover expected costs. Although it is not possible to predict the outcome of any legal proceeding, in the opinion of management, such proceedings and actions should not, individually, or in the aggregate, have a material adverse effect on the Company’s consolidated financial statements.
Environmental Liabilities. The Company’s U.S. operations are subject to extensive federal, state and local environmental laws and regulations. The major U.S. environmental laws to which the Company is subject include, among others, the Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA,” also known as the Superfund law), the Toxic Substances Control Act, the Federal Water Pollution Control Act, and the Hazardous Materials Transportation Act. CERCLA can impose joint and several liabilities for cleanup and investigation costs, without regard to fault or legality of the original conduct, on current and predecessor owners and operators of a site, as well as those who generate, or arrange for the disposal of, hazardous substances. The Company does not believe that compliance with the requirements imposed by the environmental legislation will impair its competitive capability or result in any material additional capital expenditures, operating or maintenance costs. The Company is, however, subject to environmental remediation costs as described in the following paragraphs.

16


Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements—(Continued)

The Company’s Mexico operations are subject to Mexican federal and state laws and regulations relating to the protection of the environment through the establishment of standards for water discharge, water supply, emissions, noise pollution, hazardous substances and transportation and handling of hazardous and solid waste. The Mexican government may bring administrative and criminal proceedings, impose economic sanctions against companies that violate environmental laws, and temporarily or even permanently close non-complying facilities.
The risk of incurring environmental liability is inherent in the railroad industry. As part of serving the petroleum and chemicals industry, the Company transports hazardous materials and has a professional team available to respond to and handle environmental issues that might occur in the transport of such materials.
The Company performs ongoing reviews and evaluations of the various environmental programs and issues within the Company’s operations, and, as necessary, takes actions intended to limit the Company’s exposure to potential liability. Although these costs cannot be predicted with certainty, management believes that the ultimate outcome of identified matters will not have a material adverse effect on the Company’s consolidated financial statements.
Personal Injury. The Company’s personal injury liability is based on semi-annual actuarial studies performed on an undiscounted basis by an independent third party actuarial firm and reviewed by management. This liability is based on personal injury claims filed and an estimate of claims incurred but not yet reported. Actual results may vary from estimates due to the number, type and severity of the injury, costs of medical treatments and uncertainties in litigation. Adjustments to the liability are reflected within operating expenses in the period in which changes to estimates are known. Personal injury claims in excess of self-insurance levels are insured up to certain coverage amounts, depending on the type of claim and year of occurrence. The personal injury liability as of March 31, 2019, was based on an updated actuarial study of personal injury claims through November 30, 2018, and review of the last four 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 2014 and in Mexico for periods after 2012 remain open to examination by the taxing authorities. In 2018, the IRS initiated an examination of the 2016 U.S. federal tax return. During the first quarter of 2019, the Servicio de Administración Tributaria (the “SAT”), the Mexican equivalent of the IRS, initiated an audit of the KCSM 2013 and 2014 Mexico tax returns. The Company does not expect that these examinations will have a material impact on the consolidated financial statements. During the first quarter of 2017, the Company received audit assessments from the SAT for the KCSM 2009 and 2010 Mexico tax returns. In 2017, the Company commenced administrative actions with the SAT. During the first quarter of 2018, the audit assessments were nullified by the SAT. In the third quarter of 2018, the SAT issued new assessments and the Company filed administrative appeals with the SAT. The Company believes that it has strong legal arguments in its favor and it is more likely than not that it will prevail in any challenge of the assessments.
The Company litigated a Value Added Tax (“VAT”) audit assessment from the SAT for KCSM for the year ended December 31, 2005. In November 2016, KCSM was notified of a resolution by the Mexican tax court annulling this assessment. The SAT appealed this resolution to the Mexican circuit court. In September 2017, KCSM was notified of a resolution by the circuit court which ordered the tax court to consider an argument made by KCSM in the original tax court proceeding that was not addressed in the tax court’s November 2016 resolution. In October 2017, the tax court ruled that the arguments made by KCSM asserting that the SAT unduly extended the audit process were not valid, and also annulled the assessment consistent with the tax court’s earlier November 2016 ruling. In December 2017, KCSM and the SAT filed an appeal with the Federal Courts of Appeals. In November 2018, the Appeals Court issued a ruling denying the SAT appeal and permanently annulled the VAT assessment. The SAT is unable to appeal the decision. The Appeals Court also denied KCSM’s appeal. In February 2019, the SAT issued a new assessment that conflicted with the tax court’s guidelines. As such, in March 2019, KCSM filed a complaint with the tax court to require the SAT to follow the guidelines issued by the tax court that would result in no tax being assessed. In addition, in April 2019 the Company filed a nullification lawsuit with the tax court. Therefore, the Company believes any new assessment based on the tax court’s guidelines should not have a material impact to the Company’s consolidated financial statements.
KCSM has not historically assessed VAT on international import transportation services provided to its customers based on a written ruling that KCSM obtained from the SAT in 2008 stating that such services were not subject to VAT (the “2008 Ruling”). Notwithstanding the 2008 Ruling, in December 2013, the SAT unofficially informed KCSM of an intended implementation of new criteria effective as of January 1, 2014, pursuant to which VAT would be assessed on all international import transportation services on the portion of the services provided within Mexico. Additionally, in November 2013, the SAT filed an action to nullify the 2008 Ruling, potentially exposing the application of the new criteria to open tax years. In February 2014, KCSM filed an action opposing the SAT’s nullification action. In December 2016, KCSM was notified of a resolution issued by the Mexican tax court confirming the 2008 Ruling. The SAT appealed this resolution. In October 2017, the circuit court resolved to not render a decision on the case but

17


Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements—(Continued)

rather to send the SAT’s appeal to the Supreme Court. In February 2018, the Supreme Court decided not to hear the case and remanded the SAT’s appeal back to the circuit court for a decision. In July 2018, the circuit court ordered the tax court to consider certain arguments made by the SAT in the original court proceeding that were not addressed in the tax court’s December 2016 resolution. On October 2, 2018, the tax court issued a decision confirming the 2008 Ruling. The SAT has appealed this decision. The Company believes it is more likely than not that it will continue to prevail in this matter. Further, as of the date of this filing, the SAT has not implemented any new criteria regarding the assessment of VAT on international import transportation services. The Company believes it is probable that any unexpected nullification of the 2008 Ruling and the implementation of any new VAT criteria would be applied on a prospective basis, in which case, due to the pass-through nature of VAT, KCSM would begin to assess its customers for VAT on international import transportation services, resulting in no material impact to the Company’s consolidated financial statements.
Contractual Agreements. In the normal course of business, the Company enters into various contractual agreements related to commercial arrangements and the use of other railroads’ or governmental entities’ infrastructure needed for the operations of the business. The Company is involved or may become involved in certain disputes involving transportation rates, product loss or damage, charges, and interpretations related to these agreements. While the outcome of these matters cannot be predicted with certainty, the Company believes that, when resolved, these disputes will not have a material effect on its consolidated financial statements.
Credit Risk. The Company continually monitors risks related to economic changes and certain customer receivables concentrations. Significant changes in customer concentration or payment terms, deterioration of customer creditworthiness, bankruptcy, insolvency or liquidation of a customer, or weakening in economic trends could have a significant impact on the collectability of the Company’s receivables and its operating results. If the financial condition of the Company’s customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required. The Company has recorded provisions for uncollectability based on its best estimate at March 31, 2019.
Panama Canal Railway Company (“PCRC”) Guarantees and Indemnities. At March 31, 2019, the Company had issued and outstanding $5.6 million under a standby letter of credit to fulfill its obligation to fund fifty percent of the debt service reserve and liquidity reserve established by PCRC in connection with the issuance of the 7.0% Senior Secured Notes due November 1, 2026 (the “PCRC Notes”). Additionally, KCS has pledged its shares of PCRC as security for the PCRC Notes.

14. Geographic Information
The Company strategically manages its rail operations as one reportable business segment over a single coordinated rail network that extends from the midwest and southeast portions of the United States south into Mexico and connects with other Class I railroads. Financial information reported at this level, such as revenues, operating income and cash flows from operations, is used by corporate management, including the Company’s chief operating decision-maker, in evaluating overall financial and operational performance, market strategies, as well as the decisions to allocate capital resources. The Company’s chief operating decision-maker is the chief executive officer.
The following tables provide information by geographic area (in millions):
 
Three Months Ended
 
March 31,
Revenues
2019
 
2018
U.S.
$
365.6

 
$
335.2

Mexico
309.2

 
303.4

Total revenues
$
674.8

 
$
638.6

 
 
 
 
Property and equipment (including concession assets), net
March 31,
2019
 
December 31,
2018
U.S.
$
5,407.9

 
$
5,401.3

Mexico
3,286.4

 
3,289.8

Total property and equipment (including concession assets), net
$
8,694.3

 
$
8,691.1


18


Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements—(Continued)

15. Condensed Consolidating Financial Information
Pursuant to SEC Regulation S-X Rule 3-10 “Financial statements of guarantors and issuers of guaranteed securities registered or being registered,” the Company is required to provide condensed consolidating financial information for issuers of certain of its senior notes that are guaranteed.
As of March 31, 2019, KCS, the parent, had outstanding $2,593.5 million principal amount of senior notes due through 2048. The senior notes are unsecured obligations of KCS, and are also jointly and severally and fully and unconditionally guaranteed on an unsecured senior basis by The Kansas City Southern Railway Company (“KCSR”) and certain wholly-owned domestic subsidiaries of KCS (the “Guarantor Subsidiaries”).
As of March 31, 2019, KCSR had outstanding $2.7 million principal amount of senior notes due through 2045. The senior notes are unsecured obligations of KCSR, and are also jointly and severally and fully and unconditionally guaranteed on an unsecured senior basis by KCS and the Guarantor Subsidiaries.
The following condensed and consolidating financial information (in millions) of KCS, KCSR, the Guarantor Subsidiaries and the other KCS subsidiaries that are not guarantors (the "Non-Guarantor Subsidiaries") are being presented in order to meet the reporting requirements under Rule 3-10 of Regulation S-X. Pursuant to Rule 3-10(d) and (f) of Regulation S-X, separate financial statements for the Issuer, the Parent and the Guarantor Subsidiaries are not required to be filed with the SEC as the subsidiary debt issuer and the guarantors are directly or indirectly 100% owned by the Parent and the guarantees are full and unconditional and joint and several.
 
Condensed Consolidating Statements of Comprehensive Income
 
 
Three Months Ended March 31, 2019
 
Parent
 
KCSR
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Revenues
$

 
$
324.2

 
$
11.7

 
$
349.3

 
$
(10.4
)
 
$
674.8

Operating expenses
1.2

 
291.1

 
9.6

 
223.2

 
(10.6
)
 
514.5

Operating income (loss)
(1.2
)
 
33.1

 
2.1

 
126.1

 
0.2

 
160.3

Equity in net earnings (losses) of affiliates
102.4

 
(0.3
)
 
0.7

 
1.3

 
(102.4
)
 
1.7

Interest expense
(26.4
)
 
(21.4
)
 

 
(7.1
)
 
26.7

 
(28.2
)
Debt retirement costs
(0.2
)
 
(0.2
)
 

 
(0.2
)
 

 
(0.6
)
Foreign exchange gain

 

 

 
4.6

 

 
4.6

Other income (expense), net
26.5

 
(0.4
)
 

 
0.8

 
(26.8
)
 
0.1

Income before income taxes
101.1

 
10.8


2.8


125.5


(102.3
)
 
137.9

Income tax expense (benefit)
(1.7
)
 
1.9

 
0.7

 
33.8

 

 
34.7

Net income
102.8

 
8.9


2.1


91.7


(102.3
)
 
103.2

Less: Net income attributable to noncontrolling interest

 

 

 
0.4

 

 
0.4

Net income attributable to Kansas City Southern and subsidiaries
102.8

 
8.9


2.1


91.3


(102.3
)
 
102.8

Other comprehensive income (loss)
(4.9
)
 

 

 
0.2

 
(0.2
)
 
(4.9
)
Comprehensive income attributable to Kansas City Southern and subsidiaries
$
97.9

 
$
8.9

 
$
2.1

 
$
91.5

 
$
(102.5
)
 
$
97.9









19


Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements—(Continued)

Condensed Consolidating Statements of Comprehensive Income—(Continued)
 
Three Months Ended March 31, 2018
 
Parent
 
KCSR
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Revenues
$

 
$
301.8

 
$
8.9

 
$
336.8

 
$
(8.9
)
 
$
638.6

Operating expenses
1.2

 
225.8

 
8.2

 
193.6

 
(8.9
)
 
419.9

Operating income (loss)
(1.2
)
 
76.0

 
0.7

 
143.2

 

 
218.7

Equity in net earnings (losses) of affiliates
154.7

 
(0.2
)
 
0.8

 
0.6

 
(154.9
)
 
1.0

Interest expense
(21.3
)
 
(17.3
)
 

 
(6.9
)
 
20.0

 
(25.5
)
Debt retirement costs

 

 

 

 

 

Foreign exchange gain

 

 

 
27.8

 

 
27.8

Other income (expense), net
19.6

 
(0.3
)
 

 
0.5

 
(20.1
)
 
(0.3
)
Income before income taxes
151.8

 
58.2

 
1.5

 
165.2

 
(155.0
)
 
221.7

Income tax expense
7.3

 
12.4

 
0.4

 
56.7

 

 
76.8

Net income
144.5

 
45.8

 
1.1

 
108.5

 
(155.0
)
 
144.9

Less: Net income attributable to noncontrolling interest

 

 

 
0.4

 

 
0.4

Net income attributable to Kansas City Southern and subsidiaries
144.5

 
45.8

 
1.1

 
108.1

 
(155.0
)
 
144.5

Other comprehensive income
5.7

 

 

 
1.2

 
(1.2
)
 
5.7

Comprehensive income attributable to Kansas City Southern and subsidiaries
$
150.2

 
$
45.8

 
$
1.1

 
$
109.3

 
$
(156.2
)
 
$
150.2


Condensed Consolidating Balance Sheets
 
March 31, 2019
 
Parent
 
KCSR
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Assets:
 
 
 
 
 
 
 
 
 
 
 
Current assets
$
217.6

 
$
256.9

 
$
6.1

 
$
392.0

 
$
(218.2
)
 
$
654.4

Operating lease right-of-use assets


 
170.1

 

 
33.4

 
(4.4
)
 
199.1

Investments

 
3.6

 
5.6

 
38.6

 

 
47.8

Investments in consolidated subsidiaries
4,921.0

 
3.8

 
195.6

 

 
(5,120.4
)
 

Property and equipment (including concession assets), net

 
4,426.2

 
163.2

 
4,112.8

 
(7.9
)
 
8,694.3

Other assets
2,523.1

 
16.2

 

 
23.8

 
(2,521.0
)
 
42.1

Total assets
$
7,661.7

 
$
4,876.8

 
$
370.5

 
$
4,600.6

 
$
(7,871.9
)
 
$
9,637.7

Liabilities and equity:
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
$
247.1

 
$
128.8

 
$
77.9

 
$
247.3

 
$
(220.5
)
 
$
480.6

Long-term operating lease liabilities


 
91.0

 

 
18.1

 
(3.5
)
 
105.6

Long-term debt
2,563.7

 
1,828.3

 

 
806.6

 
(2,521.0
)
 
2,677.6

Deferred income taxes
(4.3
)
 
814.5

 
84.7

 
192.3

 
(2.0
)
 
1,085.2

Other liabilities
27.1

 
96.4

 
0.2

 
15.0

 

 
138.7

Stockholders’ equity
4,828.1

 
1,917.8

 
207.7

 
2,999.4

 
(5,124.9
)
 
4,828.1

Noncontrolling interest

 

 

 
321.9

 

 
321.9

Total liabilities and equity
$
7,661.7

 
$
4,876.8

 
$
370.5

 
$
4,600.6

 
$
(7,871.9
)
 
$
9,637.7





20


Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements—(Continued)

Condensed Consolidating Balance Sheets—(Continued)
 
December 31, 2018
 
Parent
 
KCSR
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Assets:
 
 
 
 
 
 
 
 
 
 
 
Current assets
$
229.8

 
$
257.6

 
$
5.0

 
$
350.4

 
$
(207.4
)
 
$
635.4

Operating lease right-of-use assets

 

 

 

 

 

Investments

 
3.9

 
4.4

 
36.6

 

 
44.9

Investments in consolidated subsidiaries
4,852.8

 
4.4

 
190.2

 

 
(5,047.4
)
 

Property and equipment (including concession assets), net

 
4,429.2

 
165.1

 
4,104.8

 
(8.0
)
 
8,691.1

Other assets
2,523.4

 
59.3

 

 
36.8

 
(2,521.1
)
 
98.4

Total assets
$
7,606.0

 
$
4,754.4

 
$
364.7

 
$
4,528.6

 
$
(7,783.9
)
 
$
9,469.8

Liabilities and equity:
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
$
214.2

 
$
109.2

 
$
80.1

 
$
252.3

 
$
(208.8
)
 
$
447.0

Long-term operating lease liabilities

 

 

 

 

 

Long-term debt
2,563.0

 
1,828.8

 

 
808.5

 
(2,521.0
)
 
2,679.3

Deferred income taxes
(4.4
)
 
812.8

 
84.7

 
188.8

 
(2.0
)
 
1,079.9

Other liabilities
20.2

 
94.8

 
0.2

 
15.8

 
(0.1
)
 
130.9

Stockholders’ equity
4,813.0

 
1,908.8

 
199.7

 
2,943.5

 
(5,052.0
)
 
4,813.0

Noncontrolling interest

 

 

 
319.7

 

 
319.7

Total liabilities and equity
$
7,606.0

 
$
4,754.4

 
$
364.7

 
$
4,528.6

 
$
(7,783.9
)
 
$
9,469.8


21


Kansas City Southern and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements—(Continued)

Condensed Consolidating Statements of Cash Flows
 
Three Months Ended March 31, 2019
 
Parent
 
KCSR
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
KCS
Operating activities:
 
 
 
 
 
 
 
 
 
 
 
Net cash provided
$
65.4

 
$
109.7

 
$
0.1

 
$
137.6

 
$
(40.1
)
 
$
272.7

Investing activities:
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(113.5
)
 
(0.1
)
 
(66.3
)
 

 
(179.9
)
Purchase or replacement of equipment under operating leases

 

 

 

 

 

Property investments in MSLLC

 

 

 
(4.7
)
 

 
(4.7
)
Investments in and advances to affiliates
(5.9
)
 

 
(5.9
)
 
(7.2
)
 
10.6

 
(8.4
)
Proceeds from repayment of loans to affiliates

 

 

 

 

 

Loans to affiliates