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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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The following is a discussion of Kansas City Southern’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 8 of this Form 10-K. This discussion should be read in conjunction with the included consolidated financial statements, the related notes, and other information included in this report.
CAUTIONARY INFORMATION
The discussions set forth in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, management may make forward-looking statements orally or in other writings, including, but not limited to, in press releases, quarterly earnings calls, executive presentations, in the annual report to stockholders and in other filings with the Securities and Exchange Commission. Readers can usually identify these forward-looking statements by the use of such verbs as “expects,” “anticipates,” “believes” or similar verbs or conjugations of such verbs. 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 Item 1A of this Form 10-K, “Risk Factors.” Readers are strongly encouraged to consider these factors and the following factors when evaluating any forward-looking statements concerning the Company:
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•
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the outcome of claims and litigation, including those related to environmental contamination, personal injuries and property damage;
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•
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changes in legislation and regulations or revisions of controlling authority;
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•
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the adverse impact of any termination or revocation of KCSM’s Concession by the Mexican government;
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•
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United States, Mexican and global economic, political and social conditions;
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•
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the effects of the North American Free Trade Agreement, or NAFTA, on the level of trade among the United States, Mexico and Canada;
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•
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the level of trade between the United States and Asia or Mexico;
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•
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the effects of fluctuations in the peso-dollar exchange rate;
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•
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natural events such as severe weather, fire, floods, hurricanes, earthquakes or other disruptions to the Company’s operating systems, structures and equipment or the ability of customers to produce or deliver their products;
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•
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the effects of adverse general economic conditions affecting customer demand and the industries and geographic areas that produce and consume the commodities KCS carries;
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•
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the dependence on the stability, availability and security of the information technology systems to operate its business;
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•
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the effect of demand for KCS’s services exceeding network capacity or traffic congestion on operating efficiencies and service reliability;
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•
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uncertainties regarding the litigation KCS faces and any future claims and litigation;
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•
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the impact of competition, including competition from other rail carriers, trucking companies and maritime shippers in the United States and Mexico;
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•
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KCS’s reliance on agreements with other railroads and third parties to successfully implement its business strategy, operations and growth and expansion plans, including the strategy to convert customers from using trucking services to rail transportation services;
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•
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compliance with environmental regulations;
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•
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disruption in fuel supplies, changes in fuel prices and the Company’s ability to recapture its costs of fuel from customers;
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•
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material adverse changes in economic and industry conditions, including the availability of short and long-term financing, both within the United States and Mexico and globally;
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•
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market and regulatory responses to climate change;
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•
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changes in labor costs and labor difficulties, including strikes and work stoppages affecting either operations or customers’ abilities to deliver goods for shipment;
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•
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KCS’s reliance on certain key suppliers of core rail equipment;
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•
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availability of qualified personnel; and
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•
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acts of terrorism, war or other acts of violence or crime or risk of such activities.
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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.
CORPORATE OVERVIEW
Kansas City Southern, a Delaware corporation, is a transportation holding company that has railroad investments in the U.S., Mexico and Panama. In the U.S., the Company serves the central and south central U.S. Its international holdings serve northeastern and central Mexico and the port cities of Lazaro Cardenas, Tampico and Veracruz, and a fifty percent interest in Panama Canal Railway Company provides ocean-to-ocean freight and passenger service along the Panama Canal. KCS’s North American rail holdings and strategic alliances are primary components of a NAFTA railway system, linking the commercial and industrial centers of the U.S., Canada and Mexico. Its principal subsidiaries and affiliates include the following:
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•
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The Kansas City Southern Railway Company (“KCSR”), a wholly-owned subsidiary;
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•
|
Kansas City Southern de México, S.A. de C.V. (“KCSM”), a wholly-owned subsidiary;
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•
|
Mexrail, Inc. (“Mexrail”), a wholly-owned consolidated subsidiary; which, in turn, wholly owns The Texas Mexican Railway Company (“Tex-Mex”);
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•
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KCSM Servicios, S.A. de C.V. (“KCSM Servicios”), a wholly-owned subsidiary;
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•
|
Meridian Speedway, LLC (“MSLLC”), a
seventy percent-owned
consolidated affiliate;
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•
|
Panama Canal Railway Company (“PCRC”), a
fifty percent-owned
unconsolidated affiliate,
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•
|
Ferrocarril y Terminal del Valle de México, S.A. de C.V. (“FTVM”), a
twenty-five percent-owned
unconsolidated affiliate; and
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•
|
PTC-220, LLC (“PTC-220”), a
fourteen percent-owned
unconsolidated affiliate .
|
EXECUTIVE SUMMARY
2016
Financial Overview
Revenues in
2016
decreased
3%
from
2015
, due to a
2%
decrease in revenue per carload/unit and carload/unit volumes.
Revenue per carload/unit decreased due to the weakening of the Mexican peso against the U.S. dollar and lower fuel surcharge, partially offset by positive pricing impacts. Energy revenue decreased by
$49.6 million
due to lower volumes in crude oil as a result of low crude oil spreads and increased pipeline capacity. Volumes also decreased as the decline in new crude drilling operations in the U.S. has reduced the demand for frac sand. In addition, low natural gas prices and high coal inventory levels reduced the demand for utility coal in 2016.
Operating expenses decreased
6%
compared to
2015
, due to a
$62.8 million
Mexican fuel excise tax credit recognized in 2016, the weakening of the Mexican peso against the U.S. dollar and lower fuel prices. Expense reductions resulting from the weakening Mexican peso and lower fuel prices largely offset the revenue reductions driven by these same macroeconomic factors. These expense reductions were partially offset by higher incentive compensation and increased depreciation expense. Operating expenses as a percentage of revenues decreased to
64.9%
in 2016 from 66.8% in 2015.
In 2016, the Company invested
$584.0 million
in capital expenditures. In addition, the Company purchased
$26.6 million
of equipment under existing operating leases or replacement equipment as certain operating leases expired, which was primarily funded with internally generated cash flows and short-term borrowings.
The Company reported
2016
earnings of
$4.43
per diluted share on consolidated net income attributable to Kansas City Southern and subsidiaries of
$478.1 million
for the year ended
December 31, 2016
, compared to annual earnings of
$4.40
per diluted share on consolidated net income attributable to Kansas City Southern and subsidiaries of
$483.5 million
for
2015
.
During 2016, KCS repurchased
2,127,612
shares of common stock for
$185.4 million
at an average price of
$87.15
per share under the
$500.0 million
share repurchase program announced in May 2015. Since inception of this program, KCS has repurchased
4,261,596
shares of common stock for
$379.6 million
at an average price of
$89.07
per share. Management's assessment of market conditions, available liquidity and other factors will determine the timing and volume of any future repurchases.
On May 16, 2016, KCS issued $250.0 million principal amount of senior unsecured notes, which bear interest semiannually at a fixed annual rate of 3.125%. The net proceeds from the offering were used to repay the outstanding commercial paper issued by KCS and for other general corporate purposes.
On October 28, 2016, $250.0 million principal amount of outstanding floating rate senior notes issued by KCS and KCSM matured and were redeemed by the Company at a redemption price equal to 100% of the principal amount using available cash on hand and commercial paper.
RESULTS OF OPERATIONS
Year Ended
December 31, 2016
, compared with the Year Ended
December 31, 2015
The following summarizes KCS’s consolidated income statement components
(in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
Revenues
|
$
|
2,334.2
|
|
|
$
|
2,418.8
|
|
|
$
|
(84.6
|
)
|
Operating expenses
|
1,515.7
|
|
|
1,615.0
|
|
|
(99.3
|
)
|
Operating income
|
818.5
|
|
|
803.8
|
|
|
14.7
|
|
Equity in net earnings of affiliates
|
14.6
|
|
|
18.3
|
|
|
(3.7
|
)
|
Interest expense
|
(97.7
|
)
|
|
(81.9
|
)
|
|
(15.8
|
)
|
Debt retirement and exchange costs
|
—
|
|
|
(7.6
|
)
|
|
7.6
|
|
Foreign exchange loss
|
(72.0
|
)
|
|
(56.6
|
)
|
|
(15.4
|
)
|
Other expense, net
|
(0.7
|
)
|
|
(3.4
|
)
|
|
2.7
|
|
Income before income taxes
|
662.7
|
|
|
672.6
|
|
|
(9.9
|
)
|
Income tax expense
|
182.8
|
|
|
187.3
|
|
|
(4.5
|
)
|
Net income
|
479.9
|
|
|
485.3
|
|
|
(5.4
|
)
|
Less: Net income attributable to noncontrolling interest
|
1.8
|
|
|
1.8
|
|
|
—
|
|
Net income attributable to Kansas City Southern and subsidiaries
|
$
|
478.1
|
|
|
$
|
483.5
|
|
|
$
|
(5.4
|
)
|
Revenues
The following summarizes revenues
(in millions),
carload/unit statistics
(in thousands)
and revenue per carload/unit:
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|
|
|
|
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|
|
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|
|
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|
|
|
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|
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|
|
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Revenues
|
|
Carloads and Units
|
|
Revenue per Carload/Unit
|
|
2016
|
|
2015
|
|
% Change
|
|
2016
|
|
2015
|
|
% Change
|
|
2016
|
|
2015
|
|
% Change
|
Chemical and petroleum
|
$
|
475.4
|
|
|
$
|
474.2
|
|
|
—
|
|
|
258.5
|
|
|
259.7
|
|
|
—
|
|
|
$
|
1,839
|
|
|
$
|
1,826
|
|
|
1
|
%
|
Industrial and consumer products
|
554.0
|
|
|
570.4
|
|
|
(3
|
%)
|
|
317.0
|
|
|
320.5
|
|
|
(1
|
%)
|
|
1,748
|
|
|
1,780
|
|
|
(2
|
%)
|
Agriculture and minerals
|
461.0
|
|
|
429.3
|
|
|
7
|
%
|
|
251.4
|
|
|
238.8
|
|
|
5
|
%
|
|
1,834
|
|
|
1,798
|
|
|
2
|
%
|
Energy
|
202.7
|
|
|
252.3
|
|
|
(20
|
%)
|
|
253.9
|
|
|
280.8
|
|
|
(10
|
%)
|
|
798
|
|
|
899
|
|
|
(11
|
%)
|
Intermodal
|
357.6
|
|
|
381.5
|
|
|
(6
|
%)
|
|
952.8
|
|
|
990.3
|
|
|
(4
|
%)
|
|
375
|
|
|
385
|
|
|
(3
|
%)
|
Automotive
|
189.9
|
|
|
218.7
|
|
|
(13
|
%)
|
|
133.3
|
|
|
126.5
|
|
|
5
|
%
|
|
1,425
|
|
|
1,729
|
|
|
(18
|
%)
|
Carload revenues, carloads and units
|
2,240.6
|
|
|
2,326.4
|
|
|
(4
|
%)
|
|
2,166.9
|
|
|
2,216.6
|
|
|
(2
|
%)
|
|
$
|
1,034
|
|
|
$
|
1,050
|
|
|
(2
|
%)
|
Other revenue
|
93.6
|
|
|
92.4
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues (i)
|
$
|
2,334.2
|
|
|
$
|
2,418.8
|
|
|
(3
|
%)
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) Included in revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel surcharge
|
$
|
103.8
|
|
|
$
|
230.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues include revenue for transportation services and fuel surcharges. For the year ended
December 31, 2016
, revenues and carload/unit volumes decreased
3%
and
2%
, respectively, compared to the prior year. Revenue decreased by $66.0 million or approximately 3%, compared to the prior year, due to the weakening of the Mexican peso against the U.S. dollar for revenue transactions denominated in Mexican pesos. The average exchange rate of Mexican pesos per U.S. dollar was Ps.18.7 for 2016 compared to Ps.15.8 for 2015.
Revenue per carload/unit decreased by
2%
for the year ended December 31, 2016, compared to the prior year, due to the weakening of the Mexican peso against the U.S. dollar and lower fuel surcharge, partially offset by positive pricing impacts.
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.
Fuel surcharge revenue decreased
$126.3 million
for the year ended
December 31, 2016
, compared to the prior year, due in part to the adjustment of certain line haul rates while reducing or eliminating fuel surcharges on those rates. In addition, fuel surcharge revenue decreased due to lower U.S. fuel prices and the impact of fuel prices falling below fuel price thresholds for certain of KCS’s tariffs and contracts during 2016.
The following discussion provides an analysis of revenues by commodity group:
Revenues by commodity
group for
2016
|
|
|
Chemical and petroleum.
Reven
ues increas
ed $1.2 million for the year ended December 31, 2016, compared to 2015, due to a 1% increase in revenue per carload/unit. Revenue per carload/unit increased due to
positive pricing impacts and mix, partially offset by lower fuel surcharge and the weakening of the Mexican peso against the U.S. dollar. Plastic volumes increased due to strong market demand and low commodity pricing environment and petroleum volumes increased as a result of several customers’ business expansion. These increases were partially offset by a decrease in chemical volumes due to oversupply caused by low natural gas prices that drove fertilizer prices down and a customer’s lost business.
|
|
|
|
|
Industrial and consumer products.
Revenues decreased $16.4 million for the year ended December 31, 2016, compared to 2015, due to a 2% decrease in revenue per carload/unit and a 1% decrease in carload/unit volumes. Revenue per carload/unit decreased due to the weakening of the Mexican peso against the U.S. dollar and lower fuel surcharge, partially offset by positive pricing impacts. Paper volumes decreased due to competitive trucking market, global softness in the market, and high inventory levels.
|
|
Revenues by commodity
group for
2016
|
|
|
Agriculture and minerals.
Revenues increased $31.7 million for the year ended December 31, 2016 compared to 2015, due to a 5% increase in carload/unit volumes and a 2% increase in revenue per carload/unit. Grain and food product volumes increased due to improved cycle times. In addition, grain volumes increased due to additional equipment capacity, partially offset by a decrease in ores and minerals volumes due to weather related issues in the southeast region of the United States. Revenue per carload/unit increased due to longer average length of haul and mix, partially offset by lower fuel surcharge and the weakening of the Mexican peso against the U.S. dollar.
|
|
|
|
|
Energy.
Revenues decreased $49.6 million for the year ended December 31, 2016, compared to 2015, due to an 11% decrease in revenue per carload/unit and a 10% decrease in carload/unit volumes. Revenue per carload/unit decreased due to shorter average length of haul and lower fuel surcharge. Volumes decreased as low natural gas prices and high coal inventory levels reduced the demand for utility coal in 2016. In addition, crude oil volumes decreased as result of low crude oil spreads and increased pipeline capacity, and the decline in new crude drilling operations in the U.S. has reduced the demand for frac sand.
|
|
Intermodal.
Revenues decreased
$23.9 million
for the year ended
December 31, 2016
, compared to
2015
, due to a
4%
decrease in carload/unit volumes and a
3%
decrease in revenue per carload/unit. Volumes decreased due to service disruptions related to the flooding in the southeastern United States earlier in the year and protests in Mexico during July of 2016, increased truck conversion, and high retail inventory levels. Revenue per carload/unit decreased as a result of pricing impacts and shorter average length of haul.
Automotive.
Revenues decreased
$28.8 million
for the year ended
December 31, 2016
, compared to
2015
, due to an
18%
decrease in revenue per carload/unit, partially offset by a
5%
increase in carload/unit volumes. Revenue per carload/unit decreased due to the weakening of the Mexican peso against the U.S. dollar and lower fuel surcharge. Volumes increased due to 2015 service-related issues and new customers in 2016, partially offset by customers’ temporary plant shutdowns in the first half of 2016.
Operating Expenses
Operating expenses, as shown below (
in millions
), decreased
$99.3 million
for the year ended
December 31, 2016
, compared to
2015
, due to the Mexican fuel excise tax credit, the weakening of the Mexican peso against the U.S. dollar, lower fuel prices and purchased services, and lease termination costs recognized in 2015, partially offset by higher incentive compensation and increased depreciation expense. The weakening of the Mexican peso against the U.S. dollar resulted in an expense reduction of approximately $63.0 million or 4% for expense transactions denominated in Mexican pesos. The average exchange rate of Mexican pesos per U.S. dollar was Ps.18.7 for
2016
compared to Ps.15.8 for
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
2016
|
|
2015
|
|
Dollars
|
|
Percent
|
Compensation and benefits
|
$
|
462.4
|
|
|
$
|
442.2
|
|
|
$
|
20.2
|
|
|
5
|
%
|
Purchased services
|
208.5
|
|
|
223.0
|
|
|
(14.5
|
)
|
|
(7
|
%)
|
Fuel
|
253.8
|
|
|
306.9
|
|
|
(53.1
|
)
|
|
(17
|
%)
|
Mexican fuel excise tax credit
|
(62.8
|
)
|
|
—
|
|
|
(62.8
|
)
|
|
100
|
%
|
Equipment costs
|
120.0
|
|
|
119.4
|
|
|
0.6
|
|
|
1
|
%
|
Depreciation and amortization
|
305.0
|
|
|
284.6
|
|
|
20.4
|
|
|
7
|
%
|
Materials and other
|
228.8
|
|
|
229.3
|
|
|
(0.5
|
)
|
|
—
|
|
Lease termination costs
|
—
|
|
|
9.6
|
|
|
(9.6
|
)
|
|
(100
|
%)
|
Total operating expenses
|
$
|
1,515.7
|
|
|
$
|
1,615.0
|
|
|
$
|
(99.3
|
)
|
|
(6
|
%)
|
Compensation and benefits.
Compensation and benefits increased
$20.2 million
for the year ended
December 31, 2016
, compared to
2015
, due to higher incentive compensation of approximately $34.0 million and annual wage increases of approximately $14.0 million. Incentive compensation increased due to higher expected achievement of short and long-term incentive performance targets in 2016, as compared to 2015. These increases were partially offset by the weakening of the Mexican peso of approximately $19.0 million compared to 2015, and lower U.S. labor costs of approximately $15.0 million due to reduced volumes and increased productivity.
Purchased services.
Purchased services expense decreased
$14.5 million
for the year ended
December 31, 2016
, compared to
2015
, due to car repair in Mexico being performed in-house starting in October 2016 and the weakening of the Mexican peso.
Fuel.
Fuel expense decreased
$53.1 million
for the year ended
December 31, 2016
, compared to
2015
, due to the weakening of the Mexican peso of approximately $28.0 million and lower diesel fuel prices of approximately $18.0 million and $4.0 million in the U.S. and Mexico, respectively. The average price per gallon, inclusive of the impact from the weakening of the Mexican peso, was $1.95 in
2016
, compared to $2.32 in
2015
. In addition, fuel expense decreased due to improved fuel efficiency and lower fuel consumption.
Mexican fuel excise tax credit.
The Mexican fuel excise tax is used by the Mexican government to control fuel price. Mexico is transitioning to market-based fuel pricing, and the transition is expected to be complete by the end of 2017. The implementation of a 2016 fuel excise tax credit for the Mexico railroad industry effectively moved the industry to market-based pricing in 2016.
For the year ended
December 31, 2016
, the Company recognized a
$62.8 million
credit available under changes in Mexican law for the excise tax included in the price of fuel that is purchased and consumed in locomotives and certain work equipment in Mexico. The Mexican fuel excise tax credit is realized through the offset of the total 2016 Mexico income tax liability and income tax withholding payment obligations of KCSM. Recently enacted legislation extended the fuel excise tax credit to Mexican railroads in 2017.
Equipment costs.
Equipment costs increased $0.6 million for the year ended
December 31, 2016
, compared to
2015
, due to higher car hire expense due to volume mix, partially offset by lower lease expense as a result of the purchase of equipment under existing operating leases and replacement equipment as certain operating leases expired.
Depreciation and amortization.
Depreciation and amortization expense increased
$20.4 million
for the year ended
December 31, 2016
, compared to
2015
, due to a larger asset base.
Materials and other.
Materials and other expense was flat for the year ended
December 31, 2016
, compared to
2015
.
Lease termination costs.
Lease termination costs were
$9.6 million
for the year ended
December 31, 2015
, due to the early termination of certain operating leases and the related purchase of the equipment. The Company did not incur lease termination costs for the year ended
December 31, 2016
.
Non-Operating Expenses
Equity in net earnings of affiliates.
Equity in net earnings from affiliates decreased
$3.7 million
for the year ended
December 31, 2016
, compared to
2015
, due to lower net earnings from the operations of PCRC and FTVM as a result of lower volumes.
Interest expense
. Interest expense increased
$15.8 million
for the year ended
December 31, 2016
, compared to
2015
, due to higher average debt balances and average interest rates as a result of the Company’s issuance of debt during the third quarter of 2015 and second quarter of 2016. For the year ended
December 31, 2016
, the average debt balance (including short-term borrowings) was
$2,492.7 million
, compared to
$2,257.8 million
in
2015
. The average interest rate for the year ended
December 31, 2016
was
4.0%
, compared to
3.7%
in
2015
.
Debt retirement and exchange costs.
The Company did not incur debt retirement and exchange costs during 2016. For the year ended
December 31, 2015
, debt retirement and exchange costs were
$7.6 million
, related to costs that were payable to parties other than the debt holders as a result of the KCSR and KCSM senior notes exchanged for KCS senior notes.
Foreign exchange loss.
For the years ended
December 31, 2016
and
2015
, foreign exchange loss was
$72.0 million
and
$56.6 million
, respectively. Foreign exchange loss includes the re-measurement and settlement of net monetary assets denominated in Mexican pesos and the loss on foreign currency derivative contracts.
For the years ended
December 31, 2016
and
2015
, the re-measurement and settlement of net monetary assets denominated in Mexican pesos resulted in a foreign exchange loss of
$18.5 million
and
$9.4 million
, respectively.
The Company enters into foreign currency derivative contracts to hedge its net exposure to fluctuations in the Mexican cash tax obligation due to changes in the value of the Mexican peso against the U.S. dollar. For the years ended
December 31, 2016
and
2015
, foreign exchange loss on foreign currency derivative contracts was
$53.5 million
and
$47.2 million
, respectively.
Other expense, net.
Other expense, net, decreased
$2.7 million
for the year ended
December 31, 2016
, compared to
2015
, due to lower miscellaneous expenses.
Income tax expense.
Income tax expense decreased
$4.5 million
for the year ended
December 31, 2016
, compared to
2015
, due to lower pre-tax income and a lower effective tax rate. The effective tax rate was
27.6%
and
27.8%
for the years ended
December 31, 2016
and
2015
, respectively. The decrease in the effective tax rate was primarily due to the more significant weakening of the Mexican peso against the U.S. dollar in
2016
, as compared to
2015
.
The weakening of the Mexican peso during 2016 and 2015 decreased the Company’s Mexican cash tax obligation by $49.2 million and $46.4 million for the years ended December 31, 2016 and 2015, respectively. The Company enters into foreign currency derivative contracts to hedge its net exposure to fluctuations in the Mexican cash tax obligation due to changes in the value of the Mexican peso against the U.S. dollar, and losses on these foreign currency derivative contracts are recorded in foreign exchange loss.
Further information on the components of the effective tax rates for the years ended
December 31, 2016
and
2015
, is presented in Note
13
to the Consolidated Financial Statements in Item 8.
Year Ended
December 31, 2015
, compared with the Year Ended
December 31, 2014
The following summarizes KCS’s consolidated income statement components
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2014
|
|
Change
|
Revenues
|
$
|
2,418.8
|
|
|
$
|
2,577.1
|
|
|
$
|
(158.3
|
)
|
Operating expenses
|
1,615.0
|
|
|
1,768.0
|
|
|
(153.0
|
)
|
Operating income
|
803.8
|
|
|
809.1
|
|
|
(5.3
|
)
|
Equity in net earnings of affiliates
|
18.3
|
|
|
21.1
|
|
|
(2.8
|
)
|
Interest expense
|
(81.9
|
)
|
|
(72.8
|
)
|
|
(9.1
|
)
|
Debt retirement and exchange costs
|
(7.6
|
)
|
|
(6.6
|
)
|
|
(1.0
|
)
|
Foreign exchange loss
|
(56.6
|
)
|
|
(35.5
|
)
|
|
(21.1
|
)
|
Other expense, net
|
(3.4
|
)
|
|
(2.2
|
)
|
|
(1.2
|
)
|
Income before income taxes
|
672.6
|
|
|
713.1
|
|
|
(40.5
|
)
|
Income tax expense
|
187.3
|
|
|
208.8
|
|
|
(21.5
|
)
|
Net income
|
485.3
|
|
|
504.3
|
|
|
(19.0
|
)
|
Less: Net income attributable to noncontrolling interest
|
1.8
|
|
|
1.7
|
|
|
0.1
|
|
Net income attributable to Kansas City Southern and subsidiaries
|
$
|
483.5
|
|
|
$
|
502.6
|
|
|
$
|
(19.1
|
)
|
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
|
|
2015
|
|
2014
|
|
% Change
|
|
2015
|
|
2014
|
|
% Change
|
|
2015
|
|
2014
|
|
% Change
|
Chemical and petroleum
|
$
|
474.2
|
|
|
$
|
453.0
|
|
|
5
|
%
|
|
259.7
|
|
|
246.9
|
|
|
5
|
%
|
|
$
|
1,826
|
|
|
$
|
1,835
|
|
|
—
|
|
Industrial and consumer products
|
570.4
|
|
|
623.3
|
|
|
(8
|
%)
|
|
320.5
|
|
|
347.4
|
|
|
(8
|
%)
|
|
1,780
|
|
|
1,794
|
|
|
(1
|
%)
|
Agriculture and minerals
|
429.3
|
|
|
446.6
|
|
|
(4
|
%)
|
|
238.8
|
|
|
233.9
|
|
|
2
|
%
|
|
1,798
|
|
|
1,909
|
|
|
(6
|
%)
|
Energy
|
252.3
|
|
|
326.8
|
|
|
(23
|
%)
|
|
280.8
|
|
|
299.2
|
|
|
(6
|
%)
|
|
899
|
|
|
1,092
|
|
|
(18
|
%)
|
Intermodal
|
381.5
|
|
|
395.8
|
|
|
(4
|
%)
|
|
990.3
|
|
|
1,019.6
|
|
|
(3
|
%)
|
|
385
|
|
|
388
|
|
|
(1
|
%)
|
Automotive
|
218.7
|
|
|
238.4
|
|
|
(8
|
%)
|
|
126.5
|
|
|
127.1
|
|
|
—
|
|
|
1,729
|
|
|
1,876
|
|
|
(8
|
%)
|
Carload revenues, carloads and units
|
2,326.4
|
|
|
2,483.9
|
|
|
(6
|
%)
|
|
2,216.6
|
|
|
2,274.1
|
|
|
(3
|
%)
|
|
$
|
1,050
|
|
|
$
|
1,092
|
|
|
(4
|
%)
|
Other revenue
|
92.4
|
|
|
93.2
|
|
|
(1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues (i)
|
$
|
2,418.8
|
|
|
$
|
2,577.1
|
|
|
(6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i) Included in revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel surcharge
|
$
|
230.1
|
|
|
$
|
334.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues include both revenue for transportation services and fuel surcharges. For the year ended
December 31, 2015
, revenues and carload/unit volumes decreased
6%
and
3%
, respectively, compared to the prior year. Revenue decreased by $79.0 million or approximately 3% due to the weakening of the Mexican peso against the U.S. dollar for revenue transactions denominated in Mexican pesos. The average exchange rate of Mexican pesos per U.S. dollar was Ps.15.8 for 2015, compared to Ps.13.3 for 2014.
Revenue per carload/unit decreased by
4%
for the year ended December 31, 2015, compared to the prior year, due to lower fuel surcharge and the weakening of the Mexican peso against the U.S. dollar, partially offset by positive pricing impacts.
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.
Fuel surcharge revenue decreased $104.6 million for the year ended
December 31, 2015
, compared to the prior year, due to lower U.S. fuel prices.
The following discussion provides an analysis of revenues by commodity group:
Revenues by commodity
group for
2015
|
|
|
Chemical and petroleum.
Revenues increased $21.2 million for the year ended December 31, 2015, compared to 2014, due to a 5% increase in carload/unit volumes. Petroleum volumes increased as a result of new business and plastics volumes increased due to lower commodity prices. Revenue per carload/unit was flat for the year ended December 31, 2015, compared to 2014, as positive pricing impacts were offset by the weakening of the Mexican peso against the U.S. dollar and lower fuel surcharge.
|
|
|
|
|
Industrial and consumer products.
Revenues decreased $52.9
million for the year ended December 31, 2015, compared to 2014, due to an 8% decrease in carload/unit volumes and a 1% decrease in revenue per carload/unit. Metals and scrap volumes decreased due to the decline in new drilling operations in the U.S. and higher imports from foreign sources. Revenue per carload/unit decreased due to lower fuel surcharge and the weakening of the Mexican peso against the U.S. dollar, partially offset by positive pricing impacts.
|
|
Revenues by commodity
group for
2015
|
|
|
Agriculture and minerals.
Revenues decreased $17.3 million for the year ended December 31, 2015, compared to 2014, due to a 6%
decrease in revenue per carload/unit, partially offset by a 2% increase in carload/unit volumes. Revenue per carload/unit decreased due to lower fuel surcharge and the weakening of the Mexican peso against the U.S. dollar. Food products volumes increased as a result of a customer's temporary plant shutdown during the third quarter of 2014. This increase was partially offset by a decrease in grain volumes due to service-related issues in the second and third quarters of 2015.
|
|
|
|
|
Energy.
Revenues decreased $74.5 million for the year ended December 31, 2015, compared to 2014, due to an 18% decrease in revenue per carload/unit and a 6% decrease in carload/unit volumes. Revenue per carload/unit decreased due to lower fuel surcharge, a short-term rate concession provided to a customer during the second half of 2015 and shorter average length of haul. Volumes decreased as low natural gas prices reduced the demand for utility coal and the decline in new crude drilling operations in the U.S. reduced the demand for frac sand. These decreases were partially offset by increased crude oil volumes due to new business.
|
|
Intermodal.
Revenues decreased
$14.3 million
for the year ended
December 31, 2015
, compared to
2014
, due to a 3% decrease in in carload/unit volumes and a
1%
decrease in revenue per carload/unit. Lower volumes due to service-related issues in the second and third quarters of 2015 and the conversion of rail traffic to truck were partially offset by volume growth driven by trans-Pacific imports via the Port of Lazaro Cardenas. Revenue per carload/unit decreased due to lower fuel surcharge.
Automotive.
Revenues decreased
$19.7 million
for the year ended
December 31, 2015
, compared to
2014
, due to an
8%
decrease in revenue per carload/unit. Revenue per carload/unit decreased due to the weakening of the Mexican peso against the U.S. dollar, partially offset by positive pricing impacts. Volumes were flat for the year ended
December 31, 2015
, compared to 2014, due to service-related issues in the second and third quarters of 2015.
Operating Expenses
Operating expenses, as shown below (
in millions
), decreased
$153.0 million
for the year ended
December 31, 2015
, compared to
2014
, due to the weakening of the Mexican peso against the U.S. dollar and lower U.S. fuel prices, partially offset by increased depreciation expense. The weakening of the Mexican peso against the U.S. dollar resulted in an expense reduction of approximately $77.0 million for expense transactions denominated in Mexican pesos. The average exchange rate of Mexican pesos per U.S. dollar was Ps.15.8 for 2015 compared to Ps.13.3 for 2014. Lower U.S. fuel prices reduced 2015 expenses by $71.5 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
2015
|
|
2014
|
|
Dollars
|
|
Percent
|
Compensation and benefits
|
$
|
442.2
|
|
|
$
|
474.5
|
|
|
$
|
(32.3
|
)
|
|
(7
|
%)
|
Purchased services
|
223.0
|
|
|
245.2
|
|
|
(22.2
|
)
|
|
(9
|
%)
|
Fuel
|
306.9
|
|
|
415.9
|
|
|
(109.0
|
)
|
|
(26
|
%)
|
Equipment costs
|
119.4
|
|
|
119.2
|
|
|
0.2
|
|
|
—
|
|
Depreciation and amortization
|
284.6
|
|
|
258.1
|
|
|
26.5
|
|
|
10
|
%
|
Materials and other
|
229.3
|
|
|
216.8
|
|
|
12.5
|
|
|
6
|
%
|
Lease termination costs
|
9.6
|
|
|
38.3
|
|
|
(28.7
|
)
|
|
(75
|
%)
|
Total operating expenses
|
$
|
1,615.0
|
|
|
$
|
1,768.0
|
|
|
$
|
(153.0
|
)
|
|
(9
|
%)
|
Compensation and benefits.
Compensation and benefits decreased
$32.3 million
for the year ended
December 31, 2015
, compared to
2014
, due to the weakening of the Mexican peso of approximately $23.0 million, lower incentive compensation of $22.4 million and a reduction in post-employment liabilities due to changes in discount rates. These decreases were partially offset by annual salary rate increases and a 3% growth in headcount.
Purchased services.
Purchased services expense decreased
$22.2 million
for the year ended
December 31, 2015
, compared to
2014
, due to renegotiation of maintenance contracts during 2015, the weakening of the Mexican peso and lower track maintenance and corporate expenses.
Fuel.
Fuel expense decreased
$109.0 million
for the year ended
December 31, 2015
, compared to
2014
, due to lower U.S. diesel fuel prices of $71.5 million and the weakening of the Mexican peso of approximately $37.0 million. These decreases were partially offset by approximately $12.0 million increase due to Mexican diesel prices. The average price per gallon, inclusive of the impact from the weakening of the Mexican peso, was $2.32 in 2015, compared to $3.03 in 2014. In addition, fuel expense decreased due to improved fuel efficiency and lower fuel consumption.
Equipment costs.
Equipment costs increased
$0.2 million
for the year ended
December 31, 2015
, compared to
2014
, primarily due to higher car hire expense due to longer cycle times, partially offset by lower lease expense as a result of the purchase of equipment under existing operating leases and replacement equipment as certain operating leases expired.
Depreciation and amortization.
Depreciation and amortization increased
$26.5 million
for the year ended
December 31, 2015
, compared to
2014
, due to a larger asset base, including the purchase of equipment under existing operating leases and replacement equipment as certain operating leases expired.
Materials and other.
Materials and other increased
$12.5 million
for the year ended
December 31, 2015
, compared to
2014
, due to an increase in materials and supplies, derailment expense, property taxes, environmental expense and the settlement of a litigation dispute during 2015. These increases were partially offset by the weakening of the Mexican peso, lower employee expenses and a reduction in personal injury expense recognized during 2015 as a result of changes in estimates due to favorable claim experience
Lease termination costs.
Lease termination costs were
$9.6 million
and
$38.3 million
for the years ended
December 31, 2015
and
2014
, respectively, due to the early termination of certain operating leases and the related purchase of the equipment.
Non-Operating Expenses
Equity in net earnings of affiliates.
Equity in net earnings from affiliates decreased
$2.8 million
for the year ended
December 31, 2015
, compared to
2014
. Equity in net earnings from the operations of Ferrocarril y Terminal del Valle de Mexico, S.A. de C.V. decreased due to higher operating expenses. In addition, equity in net earnings from the operations of Panama Canal Railway Company decreased due to lower container volumes.
Interest expense.
Interest expense increased
$9.1 million
for the year ended
December 31, 2015
, compared to
2014
, due to higher average interest rates and average debt balances as a result of the Company’s issuance of debt during the third quarter of 2015. For the year ended
December 31, 2015
, the average debt balance (including short-term borrowings) was
$2,257.8 million
, compared to
$2,174.7 million
in
2014
. The average interest rate for the year ended
December 31, 2015
was
3.7%
, compared to
3.5%
in
2014
.
Debt retirement and exchange costs.
Debt retirement and exchange costs were
$7.6 million
for the year ended
December 31, 2015
, related to costs that were payable to parties other than the debt holders as a result of the KCSR and KCSM senior notes exchanged for KCS senior notes. For the year ended
December 31, 2014
, debt retirement and exchange costs were
$6.6 million
related to the call premiums, original issue discounts and write-off of unamortized debt issuance costs associated with the Company’s various debt redemption activities.
Foreign exchange loss.
For the years ended
December 31, 2015
and
2014
, foreign exchange loss was
$56.6 million
and
$35.5 million
, respectively. Foreign exchange loss includes the re-measurement and settlement of net monetary assets denominated in Mexican pesos and the loss on foreign currency derivative contracts.
For the years ended
December 31, 2015
and
2014
, the re-measurement and settlement of net monetary assets denominated in Mexican pesos resulted in a foreign exchange loss of
$9.4 million
and
$7.6 million
, respectively.
The Company enters into foreign currency derivative contracts to hedge its net exposure to fluctuations in the Mexican cash tax obligation due to changes in the value of the Mexican peso against the U.S. dollar. For the years ended
December 31, 2015
and
2014
, foreign exchange loss on foreign currency derivative contracts was
$47.2 million
and
$27.9 million
, respectively.
Other expense, net.
Other expense, net, increased
$1.2 million
for the year ended
December 31, 2015
, compared to
2014
, due to lower miscellaneous income.
Income tax expense.
Income tax expense decreased
$21.5 million
for the year ended
December 31, 2015
, compared to
2014
, due to lower pre-tax income and a lower effective tax rate. The effective tax rate was
27.8%
and
29.3%
for the years ended
December 31, 2015
and
2014
, respectively. The decrease in the effective tax rate was primarily due to the more significant weakening of the Mexican peso against the U.S. dollar in 2015 as compared to 2014.
The weakening of the Mexican peso during 2015 and 2014 decreased the cash tax obligation by $46.4 million and $27.7 million for the years ended December 31, 2015 and 2014, respectively. The Company enters into foreign currency derivative contracts to hedge its net exposure to fluctuations in the Mexican cash tax obligation due to changes in the value of the Mexican peso against the U.S. dollar, and losses on these foreign currency derivative contracts are recorded in foreign exchange loss.
Further information on the components of the effective tax rates for the years ended
December 31, 2015
and
2014
, is presented in Note
13
to the Consolidated Financial Statements in Item 8.
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, access to debt and equity capital markets, and other available financing resources will be sufficient to fund anticipated operating expenses, capital expenditures, debt service costs, dividends, share repurchases and other commitments in the foreseeable
future. The Company may, from time to time, incur debt to refinance existing indebtedness, purchase equipment under operating leases, repurchase shares or fund equipment additions or new investments.
During
2016
, the Company invested
$584.0 million
in capital expenditures and purchased
$26.6 million
of equipment under existing operating leases or replacement equipment as certain operating leases expired.
During
2016
, KCS repurchased
2,127,612
shares of common stock for
$185.4 million
at an average price of
$87.15
per share under the
$500.0 million
share repurchase program announced in May 2015. Since inception of this program, KCS has repurchased
4,261,596
shares of common stock for
$379.6 million
at an average price of
$89.07
per share. Remaining share repurchases are expected to be funded by cash on hand, cash generated from operations and debt. Management's assessment of market conditions, available liquidity and other factors will determine the timing and volume of any future repurchases.
During the first quarter of 2016, KCS entered into agreements with certain holders of KCSR and KCSM senior notes to exchange approximately $55.6 million of existing KCSR and KCSM senior notes for new securities issued by KCS with the same interest rates, interest payment dates and maturity dates and substantially identical redemption provisions as the corresponding existing senior note.
On May 16, 2016, KCS issued $250.0 million principal amount of senior unsecured notes, which bear interest semiannually at a fixed annual rate of 3.125%. The net proceeds from the offering were used to repay the outstanding commercial paper issued by KCS and for other general corporate purposes.
On October 28, 2016, $250.0 million principal amount of outstanding floating rate senior notes issued by KCS and KCSM matured and were redeemed by the Company at a redemption price equal to 100% of the principal amount using available cash on hand and commercial paper.
The Company’s current financing instruments contain restrictive covenants which 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 was in compliance with all of its debt covenants as of
December 31, 2016
.
For discussion regarding 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 this annual report on Form 10-K.
During
2016
, the Company’s Board of Directors declared quarterly cash dividends of $0.33 per share or
$141.9 million
on its common stock. On
January 26, 2017
, the Company’s Board of Directors declared a cash dividend of
$0.33
per share payable on
April 5, 2017
, to common stockholders of record as of
March 13, 2017
. Subject to the discretion of the Board of Directors, capital availability and a determination that cash dividends continue to be in the best interest of its stockholders, the Company intends to pay a quarterly dividend on an ongoing basis.
On
December 31, 2016
, total available liquidity (the cash balance plus revolving credit facility availability) was
$789.2 million
, compared to available liquidity at
December 31, 2015
of $856.6 million.
As of
December 31, 2016
, the total cash and cash equivalents held outside of the U.S. in foreign subsidiaries was
$133.0 million
. The Company expects that this cash will be available to fund company operations without incurring significant additional income taxes.
KCS’s operating results and financing alternatives can be unexpectedly impacted by various factors, some of which are outside of its control. For example, if KCS were to experience a reduction in revenues or a substantial increase in operating costs or other liabilities, its earnings could be significantly reduced, increasing the risk of non-compliance with debt covenants. Additionally, the Company is subject to external factors impacting debt and equity capital markets and its ability to obtain financing under reasonable terms is subject to market conditions. Volatility in capital markets and the tightening of market liquidity could impact KCS’s access to capital. Further, KCS’s cost of debt can be impacted by independent rating agencies which assign debt ratings based on certain factors including competitive position, credit measurements such as interest coverage and leverage ratios, and liquidity.
Cash Flow Information and Contractual Obligations
Summary cash flow data follows
(in millions):
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2016
|
|
2015
|
|
2014
|
Cash flows provided by (used for):
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|
|
|
|
|
Operating activities
|
$
|
913.3
|
|
|
$
|
909.3
|
|
|
$
|
906.0
|
|
Investing activities
|
(628.2
|
)
|
|
(873.0
|
)
|
|
(982.9
|
)
|
Financing activities
|
(251.1
|
)
|
|
(247.7
|
)
|
|
(4.6
|
)
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Net increase (decrease) in cash and cash equivalents
|
34.0
|
|
|
(211.4
|
)
|
|
(81.5
|
)
|
Cash and cash equivalents beginning of year
|
136.6
|
|
|
348.0
|
|
|
429.5
|
|
Cash and cash equivalents end of year
|
$
|
170.6
|
|
|
$
|
136.6
|
|
|
$
|
348.0
|
|
During
2016
, cash and cash equivalents increased
$34.0 million
as a result of the impacts discussed in the paragraphs below. During
2015
, cash and cash equivalents decreased
$211.4 million
as a result of the repurchase of common stock of $194.2 million and higher dividend payments.
Operating Cash Flows.
Net cash provided by operating activities increased
$4.0 million
for
2016
, as compared to
2015
, due to an increase in cash inflows from working capital items resulting mainly from the timing of certain payments, partially offset by the 2016 Mexican fuel excise tax credit, for which cash will be received in 2017. Net cash provided by operating activities increased
$3.3 million
for
2015
, as compared to 2014, as a decrease in net income was more than offset by higher non-cash depreciation and amortization expense and unrealized foreign exchange loss on foreign currency contracts. Additionally, materials and supplies increased due to timing of construction activities and fuel purchases.
Investing Cash Flows.
Net cash used for investing activities decreased
$244.8 million
for
2016
, as compared to
2015
, due to reduced capital expenditures and reduced expenditures for the purchase or replacement of equipment under existing operating leases. Net cash used for investing activities decreased
$109.9 million
for
2015
, as compared to 2014, due to reduced expenditures for the purchase or replacement of equipment under existing operating leases, partially offset by higher capital expenditures and other investing activities. Additional capital expenditure information is included within the Capital Expenditure section of Liquidity and Capital Resources.
Financing Cash Flows.
Financing cash inflows are generated from the issuance of long-term debt, short-term borrowings and proceeds from the issuance of common stock under employee stock plans. Financing cash outflows are used for the repayment of debt, short-term borrowings, share repurchases and the payment of dividends and debt costs. Financing cash flows for
2016
,
2015
, and
2014
are discussed in more detail below:
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|
•
|
Net financing cash outflows for
2016
were
$251.1 million
due to the the repurchase of common stock of
$185.4 million
, the payment of dividends of
$142.8 million
and the net repayment of long-term debt of $27.7 million, partially offset by the net proceeds from short-term borrowings of $100.8 million.
|
|
|
•
|
Net financing cash outflows for
2015
were
$247.7 million
due to the net repayment of short-term borrowings of
$371.1 million, the repurchase of common stock of $194.2 million, the payment of dividends of
$140.1 million
and the payment of debt costs of $20.3 million. These cash outflows were partially offset by net proceeds from long-term debt of $473.9 million.
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|
|
•
|
Net financing cash outflows for
2014
were
$4.6 million
due to the the net repayment of $333.0 million of long-term debt and the payment of
$116.6 million
of dividends, offset by the net proceeds of $448.6 million from short-term borrowings.
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Contractual Obligations.
The following table outlines the material obligations and commitments as of
December 31, 2016
(in millions):
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|
|
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|
Payments Due by Period
|
|
More than
5 years
|
|
Other
|
|
Total
|
|
Less Than
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
|
Long-term debt and short-term borrowings (including interest and capital lease obligations) (i)
|
$
|
4,037.6
|
|
|
$
|
299.9
|
|
|
$
|
235.8
|
|
|
$
|
472.6
|
|
|
$
|
3,029.3
|
|
|
$
|
—
|
|
Operating leases
|
300.5
|
|
|
66.4
|
|
|
85.0
|
|
|
54.6
|
|
|
94.5
|
|
|
—
|
|
Obligations due to uncertainty in income taxes (ii)
|
3.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.8
|
|
Capital expenditure obligations (iii)
|
249.7
|
|
|
216.6
|
|
|
29.6
|
|
|
3.5
|
|
|
—
|
|
|
—
|
|
Other contractual obligations (iv)
|
455.0
|
|
|
162.4
|
|
|
155.9
|
|
|
78.7
|
|
|
58.0
|
|
|
—
|
|
Total
|
$
|
5,046.6
|
|
|
$
|
745.3
|
|
|
$
|
506.3
|
|
|
$
|
609.4
|
|
|
$
|
3,181.8
|
|
|
$
|
3.8
|
|
_____________________
|
|
(i)
|
For variable rate obligations, interest payments were calculated using the December 31, 2016 rate. For fixed rate obligations, interest payments were calculated based on the applicable rates and payment dates.
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|
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(ii)
|
For amounts where the year of settlement cannot be reasonably estimated, obligations due to uncertainty in income taxes are included in the Other column.
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(iii)
|
Capital expenditure obligations include minimum capital expenditures under the KCSM Concession agreement and other regulatory requirements.
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(iv)
|
Other contractual obligations include purchase commitments and certain maintenance agreements.
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In the normal course of business, the Company enters into long-term contractual commitments for future goods and services needed for the operations of the business. Such commitments are not in excess of expected requirements and are not reasonably likely to result in performance penalties or payments that would have a material adverse effect on the Company’s liquidity. Such commitments are not included in the above table.
The Company is party to four utilization leases covering 616 railcars in which car hire revenue as defined in the lease agreements is shared between the lessor and the Company. The leases expire at various times through 2024. Amounts that may be due to lessors under these utilization leases vary from month to month based on car hire rental with the minimum monthly cost to the Company being zero. Accordingly, the utilization leases have been excluded from contractual obligations above.
The SCT previously required KCSM to submit a five-year capital expenditures plan every five years. As a result of new regulation in 2016, the SCT requires KCSM to submit a three-year capital expenditures plan every three years, once the most recent plan expires. The most recent five-year plan was submitted in 2012 for the years 2013 — 2017. KCSM expects to continue capital spending at current levels in future years and will continue to have capital expenditure obligations past 2017, which are not included in the table above.
Off-Balance Sheet Arrangements
On November 2, 2007, PCRC completed an offering of $100.0 million of 7.0% senior secured notes due November 1, 2026 (the “Notes”). The Notes are senior obligations of PCRC, secured by certain assets of PCRC. KCS has pledged its shares of PCRC as security for the Notes. The Notes are otherwise non-recourse to KCS. The Company has agreed, along with Mi-Jack Products, Inc. (“Mi-Jack”), the other 50% owner of PCRC, to each fund one-half of any debt service reserve and liquidity reserve (reserves which are required to be established by PCRC in connection with the issuance of the Notes). As of
December 31, 2016
, the Company’s portion of these reserves was
$5.5 million
. The Company has issued a standby letter of credit in the amount of
$5.5 million
to fund its share of these reserves.
Capital Expenditures
KCS has funded, and expects to continue to fund, capital expenditures with operating cash flows and short and long-term debt.
The following table summarizes capital expenditures by type for the years ended
December 31, 2016
,
2015
, and
2014
, respectively
(in millions):
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|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Roadway capital program
|
$
|
271.8
|
|
|
$
|
294.0
|
|
|
$
|
304.0
|
|
Locomotives and freight cars
|
112.6
|
|
|
201.2
|
|
|
244.0
|
|
Capacity
|
109.6
|
|
|
86.6
|
|
|
93.0
|
|
Positive train control
|
49.6
|
|
|
34.0
|
|
|
8.6
|
|
Information technology
|
29.3
|
|
|
21.9
|
|
|
31.5
|
|
Other
|
11.1
|
|
|
11.0
|
|
|
21.6
|
|
Total capital expenditures (accrual basis)
|
584.0
|
|
|
648.7
|
|
|
702.7
|
|
Change in capital accruals
|
(20.1
|
)
|
|
39.3
|
|
|
(34.5
|
)
|
Total cash capital expenditures
|
$
|
563.9
|
|
|
$
|
688.0
|
|
|
$
|
668.2
|
|
|
|
|
|
|
|
Purchase or replacement of equipment under operating leases
|
|
|
|
|
|
Freight cars
|
$
|
26.6
|
|
|
$
|
144.2
|
|
|
$
|
224.4
|
|
Locomotives
|
—
|
|
|
—
|
|
|
76.3
|
|
Total purchase or replacement of equipment under operating leases (accrual basis)
|
26.6
|
|
|
144.2
|
|
|
300.7
|
|
Change in capital accruals
|
—
|
|
|
—
|
|
|
1.4
|
|
Total cash purchase or replacement of equipment under operating leases
|
$
|
26.6
|
|
|
$
|
144.2
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|
|
$
|
302.1
|
|
Generally, the Company’s capital program consists of capital replacement and equipment. For
2017
, internally generated cash flows and short-term borrowings are expected to fund cash capital expenditures, which are currently estimated to be between $550.0 million and $560.0 million. In addition, the Company periodically reviews its equipment under operating leases. Any additional purchase or replacement of equipment under operating leases during 2017 is expected to be funded with internally generated cash flows and/or short-term debt.
Property Statistics
The following table summarizes certain property statistics as of December 31:
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|
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2016
|
|
2015
|
|
2014
|
Track miles of rail installed
|
146
|
|
|
177
|
|
|
169
|
|
Cross ties installed (thousands)
|
711
|
|
|
829
|
|
|
880
|
|
Shelf Registration Statements and Public Securities Offerings
KCS has one current, universal shelf registration statement on file with the SEC (the “Universal Shelf” — Registration No. 333-200411). The Universal Shelf was filed on November 20, 2014 in accordance with the securities offering reform rules of the SEC that allow “well-known seasoned issuers” to register an unspecified amount of different types of securities on an immediately effective Form S-3 registration statement. The Universal Shelf will expire on November 20, 2017.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
KCS’s accounting and financial reporting policies are in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management believes that the following accounting policies and estimates are critical to an understanding of KCS’s historical and future performance. Management has discussed the development and selection of the following critical accounting estimates with the Audit Committee of KCS’s Board of Directors and the Audit Committee has reviewed the selection, application and disclosure of the Company’s critical accounting policies and estimates.
Capitalization, Depreciation and Amortization of Property and Equipment (including Concession Assets)
Due to the highly capital intensive nature of the railroad industry, capitalization and depreciation of property and equipment are a substantial portion of the Company’s consolidated financial statements. Net property and equipment, including concession assets, comprised approximately
92%
of the Company’s total assets as of
December 31, 2016
, and related depreciation and amortization comprised approximately
20%
of total operating expenses for the year ended
December 31, 2016
.
KCS capitalizes costs for self-constructed additions and improvements to property including direct labor and material, indirect overhead costs, and interest during long-term construction projects. Direct costs are charged to capital projects based on the work performed and the material used. Indirect overhead costs are allocated to capital projects as a standard percentage, which is evaluated annually, and applied to direct labor and material costs. Asset removal activities are performed in conjunction with replacement activities; therefore, removal costs are estimated based on a standard percentage of direct labor and indirect overhead costs related to capital replacement projects. For purchased assets, all costs necessary to make the asset ready for its intended use are capitalized. Expenditures that significantly increase asset values, productive capacity, efficiency, safety or extend useful lives are capitalized. Repair and maintenance costs are expensed as incurred.
Property and equipment are carried at cost and are depreciated primarily on the group method of depreciation, which the Company believes closely approximates a straight line basis over the estimated useful lives of the assets measured in years. The group method of depreciation applies a composite rate to classes of similar assets rather than to individual assets. Composite depreciation rates are based upon the Company’s estimates of the expected average useful lives of assets as well as expected net salvage value at the end of their useful lives. In developing these estimates, the Company utilizes periodic depreciation studies performed by an independent engineering firm. Depreciation rate studies are performed at least every three years for equipment and at least every six years for road property (rail, ties, ballast, etc.). The depreciation studies take into account factors such as:
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•
|
Statistical analysis of historical patterns of use and retirements of each asset class;
|
|
|
•
|
Evaluation of any expected changes in current operations and the outlook for the continued use of the assets;
|
|
|
•
|
Evaluation of technological advances and changes to maintenance practices; and
|
|
|
•
|
Historical and expected salvage to be received upon retirement.
|
The depreciation studies may also indicate that the recorded amount of accumulated depreciation is deficient or in excess of the amount indicated by the study. Any such deficiency or excess is amortized as a component of depreciation expense over the remaining useful lives of the affected asset class, as determined by the study. The Company also monitors these factors in non-study years to determine if adjustments should be made to depreciation rates. The Company completed depreciation studies for KCSM in 2016 and KCSR in 2015. The impacts of the studies were immaterial to the consolidated financial results for all periods.
Also under the group method of depreciation, the cost of railroad property and equipment (net of salvage or sales proceeds) retired or replaced in the normal course of business is charged to accumulated depreciation with no gain or loss recognized. Actual historical costs are retired when available, such as with equipment costs. The use of estimates in recording the retirement of roadway assets is necessary as it is impractical to track individual, homogeneous network-type assets. Certain types of roadway assets are retired using statistical curves derived from the depreciation studies that indicate the relative distribution of the age of the assets retired. For other roadway assets, historical costs are estimated by (1) deflating current costs
using inflation indices published by the U.S. Bureau of Labor Statistics and (2) the estimated useful life of the assets as determined by the depreciation studies. The indices applied to the replacement value are selected because they closely correlate with the major costs of the items comprising the roadway assets. Because of the number of estimates inherent in the depreciation and retirement processes and because it is impossible to precisely estimate each of these variables until a group of assets is completely retired, the Company continually monitors the estimated useful lives of its assets and the accumulated depreciation associated with each asset group to ensure the depreciation rates are appropriate.
Estimation of the average useful lives of assets and net salvage values requires management judgment. Estimated average useful lives may vary over time due to changes in physical use, technology, asset strategies and other factors that could have an impact on the retirement experience of the asset classes. Accordingly, changes in the assets’ estimated useful lives could significantly impact future periods’ depreciation expense. Depreciation and amortization expense for the year ended December 31, 2016 was
$305.0 million
. If the weighted average useful lives of assets were changed by one year, annual depreciation and amortization expense would change approximately $11.0 million.
Gains or losses on dispositions of land or non-group property and abnormal retirements of railroad property are recognized through income. A retirement of railroad property would be considered abnormal if the cause of the retirement is unusual in nature and its actual life is significantly shorter than what would be expected for that group based on the depreciation studies. An abnormal retirement could cause the Company to re-evaluate the estimated useful life of the impacted asset class. There were no significant gains or losses from abnormal retirements of property or equipment for any of the three years ended December 31, 2016.
Costs incurred by the Company to acquire the concession rights and related assets, as well as subsequent improvements to the concession assets, are capitalized and amortized using the group method of depreciation over the lesser of the current expected Concession term, including probable renewal of an additional 50-year term, or the estimated useful lives of the assets and rights. The Company’s ongoing evaluation of the useful lives of concession assets and rights considers the aggregation of the following facts and circumstances:
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|
•
|
The Company’s executive management is dedicated to ensuring compliance with the various provisions of the Concession and to maintaining positive relationships with the SCT and other Mexican federal, state, and municipal governmental authorities;
|
|
|
•
|
During the time since the Concession was granted, the relationships between KCSM and the various Mexican governmental authorities have matured and the guidelines for operating under the Concession have become more defined with experience;
|
|
|
•
|
There are no known supportable sanctions or compliance issues that would cause the SCT to revoke the Concession or prevent KCSM from renewing the Concession; and
|
|
|
•
|
KCSM operations are an integral part of the KCS operations strategy, and related investment analyses and operational decisions assume that the Company’s cross border rail business operates into perpetuity, and do not assume that Mexico operations terminate at the end of the current Concession term.
|
Based on the above factors, as of
December 31, 2016
, the Company continues to believe that it is probable that the Concession will be renewed for an additional 50-year term beyond the current term.
Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the long-lived assets, the carrying value would be reduced to the estimated fair value. Future cash flow estimates for an impairment review would be based on the lowest level of identifiable cash flows, which are the Company’s U.S. and Mexican operations. During the years ended December 31, 2016 and 2015, management did not identify any indicators of impairment.
Income Taxes
Deferred income taxes represent a net asset or liability of the Company. For financial reporting purposes, management determines the current tax liability, as well as deferred tax assets and liabilities, in accordance with the liability method of accounting for income taxes. The provision for income taxes is the sum of income taxes both currently payable and deferred
into the future. Currently payable income taxes represent the liability related to the Company’s U.S., state and foreign income tax returns for the current year and anticipated tax payments resulting from income tax audits, while the net deferred tax expense or benefit represents the change in the balance of net deferred tax assets or liabilities as reported on the balance sheet. The changes in deferred tax assets and liabilities are determined based upon the estimated timing of reversal of differences between the carrying amount of assets and liabilities for financial reporting purposes and the basis of assets and liabilities for tax purposes as measured using the currently enacted tax rates that will be in effect at the time these differences are expected to reverse. Additionally, management estimates whether taxable operating income in future periods will be sufficient to fully recognize any deferred tax assets. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized.
Income tax expense related to Mexican operations has additional complexities such as the impact of exchange rate variations, which can have a significant impact on the effective income tax rate.
Management believes that the assumptions and estimates related to the provision for income taxes are critical to the Company’s results of operations. For the year ended
December 31, 2016
, income tax expense totaled
$182.8 million
. For every 1% change in the
2016
effective rate, income tax expense would have changed by approximately $6.6 million. For further information on the impact of foreign exchange fluctuation on income taxes, refer to Foreign Exchange Sensitivity in
Item 7A.
OTHER MATTERS
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 that 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 the Company’s management, other than those proceedings described in Note
16
to the Consolidated Financial Statements in Item 8 of this Form 10-K, such proceedings and actions should not, individually, or in the aggregate, have a material adverse effect on the Company’s consolidated financial statements.
Inflation.
U.S. generally accepted accounting principles require the use of historical cost, which does not reflect the effects of inflation on the replacement cost of property. Due to the capital intensive nature of KCS’s business, the replacement cost of these assets would be significantly higher than the amounts reported under the historical cost basis.
Recent Accounting Pronouncements.
Refer to Note
2
to the Consolidated Financial Statements in Item 8 of this Form
10-K for information relative to recent accounting pronouncements.
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|
Item 8.
|
Financial Statements and Supplementary Data
|
Index to Consolidated Financial Statements
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Page
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Financial Statement Schedules:
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All schedules are omitted because they are not applicable, are insignificant, or the required information is shown in the consolidated financial statements or notes thereto.
Management’s Report on Internal Control over Financial Reporting
The management of Kansas City Southern is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). KCS’s internal control over financial reporting was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2016
, based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control — Integrated Framework
(2013)
(commonly referred to as the COSO Framework). Based on its evaluation, management concluded that the Company’s internal control over financial reporting was effective as of
December 31, 2016
, based on the criteria outlined in the COSO Framework.
The effectiveness of the Company’s internal control over financial reporting as of
December 31, 2016
, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their attestation report, which immediately follows this report.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Kansas City Southern:
We have audited Kansas City Southern’s (the Company) internal control over financial reporting as of
December 31, 2016
, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Kansas City Southern maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2016
, based on criteria established in
Internal Control - Integrated Framework
(2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Kansas City Southern and subsidiaries as of
December 31, 2016
and
2015
, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended
December 31, 2016
, and our report dated
January 27, 2017
expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Kansas City, Missouri
January 27, 2017
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Kansas City Southern:
We have audited the accompanying consolidated balance sheets of Kansas City Southern and subsidiaries (the Company) as of
December 31, 2016
and
2015
, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended
December 31, 2016
. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kansas City Southern and subsidiaries as of
December 31, 2016
and
2015
, and the results of their operations and their cash flows for each of the years in the three-year period ended
December 31, 2016
, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Kansas City Southern’s internal control over financial reporting as of
December 31, 2016
, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
January 27, 2017
expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Kansas City, Missouri
January 27, 2017
Kansas City Southern and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(In millions, except share
and per share amounts)
|
Revenues
|
$
|
2,334.2
|
|
|
$
|
2,418.8
|
|
|
$
|
2,577.1
|
|
Operating expenses:
|
|
|
|
|
|
Compensation and benefits
|
462.4
|
|
|
442.2
|
|
|
474.5
|
|
Purchased services
|
208.5
|
|
|
223.0
|
|
|
245.2
|
|
Fuel
|
253.8
|
|
|
306.9
|
|
|
415.9
|
|
Mexican fuel excise tax credit
|
(62.8
|
)
|
|
—
|
|
|
—
|
|
Equipment costs
|
120.0
|
|
|
119.4
|
|
|
119.2
|
|
Depreciation and amortization
|
305.0
|
|
|
284.6
|
|
|
258.1
|
|
Materials and other
|
228.8
|
|
|
229.3
|
|
|
216.8
|
|
Lease termination costs
|
—
|
|
|
9.6
|
|
|
38.3
|
|
Total operating expenses
|
1,515.7
|
|
|
1,615.0
|
|
|
1,768.0
|
|
Operating income
|
818.5
|
|
|
803.8
|
|
|
809.1
|
|
Equity in net earnings of affiliates
|
14.6
|
|
|
18.3
|
|
|
21.1
|
|
Interest expense
|
(97.7
|
)
|
|
(81.9
|
)
|
|
(72.8
|
)
|
Debt retirement and exchange costs
|
—
|
|
|
(7.6
|
)
|
|
(6.6
|
)
|
Foreign exchange loss
|
(72.0
|
)
|
|
(56.6
|
)
|
|
(35.5
|
)
|
Other expense, net
|
(0.7
|
)
|
|
(3.4
|
)
|
|
(2.2
|
)
|
Income before income taxes
|
662.7
|
|
|
672.6
|
|
|
713.1
|
|
Income tax expense
|
182.8
|
|
|
187.3
|
|
|
208.8
|
|
Net income
|
479.9
|
|
|
485.3
|
|
|
504.3
|
|
Less: Net income attributable to noncontrolling interest
|
1.8
|
|
|
1.8
|
|
|
1.7
|
|
Net income attributable to Kansas City Southern and subsidiaries
|
478.1
|
|
|
483.5
|
|
|
502.6
|
|
Preferred stock dividends
|
0.2
|
|
|
0.2
|
|
|
0.2
|
|
Net income available to common stockholders
|
$
|
477.9
|
|
|
$
|
483.3
|
|
|
$
|
502.4
|
|
|
|
|
|
|
|
Earnings per share:
|
|
Basic earnings per share
|
$
|
4.44
|
|
|
$
|
4.41
|
|
|
$
|
4.56
|
|
Diluted earnings per share
|
$
|
4.43
|
|
|
$
|
4.40
|
|
|
$
|
4.55
|
|
|
|
|
|
|
|
Average shares outstanding
(in thousands):
|
|
|
|
|
|
Basic
|
107,560
|
|
|
109,709
|
|
|
110,163
|
|
Potentially dilutive common shares
|
201
|
|
|
206
|
|
|
270
|
|
Diluted
|
107,761
|
|
|
109,915
|
|
|
110,433
|
|
See accompanying notes to consolidated financial statements.
50
Kansas City Southern and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(In millions)
|
Net income
|
$
|
479.9
|
|
|
$
|
485.3
|
|
|
$
|
504.3
|
|
Other comprehensive loss:
|
|
|
|
|
|
Reclassification adjustment from cash flow hedges included in net income, net of tax of less than $0.1 million
|
—
|
|
|
—
|
|
|
0.1
|
|
Amortization of prior service credit, net of tax of less than $(0.1) million and $(0.1) million
|
—
|
|
|
(0.1
|
)
|
|
(0.2
|
)
|
Foreign currency translation adjustments, net of tax of $(1.0) million, $(0.8) million and $(0.7) million
|
(1.5
|
)
|
|
(1.4
|
)
|
|
(1.1
|
)
|
Other comprehensive loss
|
(1.5
|
)
|
|
(1.5
|
)
|
|
(1.2
|
)
|
Comprehensive income
|
478.4
|
|
|
483.8
|
|
|
503.1
|
|
Less: comprehensive income attributable to noncontrolling interest
|
1.8
|
|
|
1.8
|
|
|
1.7
|
|
Comprehensive income attributable to Kansas City Southern and subsidiaries
|
$
|
476.6
|
|
|
$
|
482.0
|
|
|
$
|
501.4
|
|
See accompanying notes to consolidated financial statements.
51
Kansas City Southern and Subsidiaries
Consolidated Balance Sheets
December 31,
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(In millions, except share
and per share amounts)
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
170.6
|
|
|
$
|
136.6
|
|
Accounts receivable, net
|
191.0
|
|
|
171.9
|
|
Materials and supplies
|
152.6
|
|
|
137.9
|
|
Other current assets
|
133.8
|
|
|
90.6
|
|
Total current assets
|
648.0
|
|
|
537.0
|
|
Investments
|
32.9
|
|
|
34.7
|
|
Property and equipment (including concession assets), net
|
8,069.7
|
|
|
7,705.4
|
|
Other assets
|
66.9
|
|
|
63.9
|
|
Total assets
|
$
|
8,817.5
|
|
|
$
|
8,341.0
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Long-term debt due within one year
|
$
|
25.4
|
|
|
$
|
276.1
|
|
Short-term borrowings
|
181.3
|
|
|
80.0
|
|
Accounts payable and accrued liabilities
|
537.7
|
|
|
401.5
|
|
Total current liabilities
|
744.4
|
|
|
757.6
|
|
Long-term debt
|
2,271.5
|
|
|
2,045.0
|
|
Deferred income taxes
|
1,289.3
|
|
|
1,191.1
|
|
Other noncurrent liabilities and deferred credits
|
107.8
|
|
|
122.6
|
|
Total liabilities
|
4,413.0
|
|
|
4,116.3
|
|
Stockholders’ equity:
|
|
|
|
$25 par, 4% noncumulative, preferred stock, 840,000 shares authorized, 649,736 shares issued, 242,170 shares outstanding
|
6.1
|
|
|
6.1
|
|
$.01 par, common stock, 400,000,000 shares authorized, 123,352,185 shares issued; 106,606,619 and 108,461,144 shares outstanding at December 31, 2016 and 2015, respectively
|
1.1
|
|
|
1.1
|
|
Additional paid-in capital
|
954.8
|
|
|
947.1
|
|
Retained earnings
|
3,134.1
|
|
|
2,964.7
|
|
Accumulated other comprehensive loss
|
(6.2
|
)
|
|
(4.7
|
)
|
Total stockholders’ equity
|
4,089.9
|
|
|
3,914.3
|
|
Noncontrolling interest
|
314.6
|
|
|
310.4
|
|
Total equity
|
4,404.5
|
|
|
4,224.7
|
|
Total liabilities and equity
|
$
|
8,817.5
|
|
|
$
|
8,341.0
|
|
See accompanying notes to consolidated financial statements.
52
Kansas City Southern and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
(In millions)
|
Operating activities:
|
|
|
|
|
|
Net income
|
$
|
479.9
|
|
|
$
|
485.3
|
|
|
$
|
504.3
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
305.0
|
|
|
284.6
|
|
|
258.1
|
|
Deferred income taxes
|
104.8
|
|
|
135.8
|
|
|
140.1
|
|
Equity in net earnings of affiliates
|
(14.6
|
)
|
|
(18.3
|
)
|
|
(21.1
|
)
|
Share-based compensation
|
19.2
|
|
|
11.4
|
|
|
10.0
|
|
Excess tax benefit from share-based compensation
|
(5.7
|
)
|
|
0.1
|
|
|
0.7
|
|
Distributions from unconsolidated affiliates
|
13.0
|
|
|
16.5
|
|
|
25.5
|
|
Debt retirement and exchange costs
|
—
|
|
|
7.6
|
|
|
6.6
|
|
Unrealized loss on foreign currency derivative instruments
|
41.1
|
|
|
46.0
|
|
|
4.3
|
|
Mexican fuel excise tax credit
|
(62.8
|
)
|
|
—
|
|
|
—
|
|
Changes in working capital items:
|
|
|
|
|
|
Accounts receivable
|
(18.3
|
)
|
|
12.0
|
|
|
17.2
|
|
Materials and supplies
|
(14.2
|
)
|
|
(26.2
|
)
|
|
9.2
|
|
Other current assets
|
9.9
|
|
|
(10.1
|
)
|
|
(10.0
|
)
|
Accounts payable and accrued liabilities
|
55.8
|
|
|
(31.4
|
)
|
|
(26.1
|
)
|
Other, net
|
0.2
|
|
|
(4.0
|
)
|
|
(12.8
|
)
|
Net cash provided by operating activities
|
913.3
|
|
|
909.3
|
|
|
906.0
|
|
Investing activities:
|
|
|
|
|
|
Capital expenditures
|
(563.9
|
)
|
|
(688.0
|
)
|
|
(668.2
|
)
|
Purchase or replacement of equipment under operating leases
|
(26.6
|
)
|
|
(144.2
|
)
|
|
(302.1
|
)
|
Property investments in MSLLC
|
(33.1
|
)
|
|
(17.4
|
)
|
|
(26.7
|
)
|
Other, net
|
(4.6
|
)
|
|
(23.4
|
)
|
|
14.1
|
|
Net cash used for investing activities
|
(628.2
|
)
|
|
(873.0
|
)
|
|
(982.9
|
)
|
Financing activities:
|
|
|
|
|
|
Proceeds from short-term borrowings
|
8,698.7
|
|
|
10,866.2
|
|
|
15,368.8
|
|
Repayment of short-term borrowings
|
(8,597.9
|
)
|
|
(11,237.3
|
)
|
|
(14,920.2
|
)
|
Proceeds from issuance of long-term debt
|
248.7
|
|
|
623.7
|
|
|
175.0
|
|
Repayment of long-term debt
|
(276.4
|
)
|
|
(149.8
|
)
|
|
(508.0
|
)
|
Dividends paid
|
(142.8
|
)
|
|
(140.1
|
)
|
|
(116.6
|
)
|
Shares repurchased
|
(185.4
|
)
|
|
(194.2
|
)
|
|
—
|
|
Debt costs
|
(2.6
|
)
|
|
(20.3
|
)
|
|
(4.9
|
)
|
Excess tax benefit from share-based compensation
|
5.7
|
|
|
(0.1
|
)
|
|
(0.7
|
)
|
Proceeds from employee stock plans
|
0.9
|
|
|
4.2
|
|
|
2.0
|
|
Net cash used for financing activities
|
(251.1
|
)
|
|
(247.7
|
)
|
|
(4.6
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
Net increase (decrease) during each year
|
34.0
|
|
|
(211.4
|
)
|
|
(81.5
|
)
|
At beginning of year
|
136.6
|
|
|
348.0
|
|
|
429.5
|
|
At end of year
|
$
|
170.6
|
|
|
$
|
136.6
|
|
|
$
|
348.0
|
|
Supplemental cash flow information
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Capital expenditures and purchase or replacement of equipment under operating lease accrued but not yet paid at end of year
|
$
|
64.0
|
|
|
$
|
43.9
|
|
|
$
|
83.2
|
|
Capital lease obligations incurred
|
2.4
|
|
|
4.7
|
|
|
9.1
|
|
Non-cash asset acquisitions
|
4.8
|
|
|
7.6
|
|
|
5.9
|
|
Dividends accrued but not yet paid at end of year
|
35.2
|
|
|
35.9
|
|
|
31.0
|
|
Cash payments:
|
|
|
|
|
|
Interest paid, net of amounts capitalized
|
$
|
84.3
|
|
|
$
|
81.1
|
|
|
$
|
72.5
|
|
Income tax payments, net of refunds
|
40.5
|
|
|
40.3
|
|
|
62.9
|
|
See accompanying notes to consolidated financial statements.
53
Kansas City Southern and Subsidiaries
Consolidated Statements of Changes in Equity
(in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$25 Par
Preferred
Stock
|
|
$.01 Par
Common
Stock
|
|
Additional Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Non-
controlling
Interest
|
|
Total
|
|
|
|
Balance at December 31, 2013
|
$
|
6.1
|
|
|
$
|
1.1
|
|
|
$
|
942.5
|
|
|
$
|
2,422.9
|
|
|
$
|
(2.0
|
)
|
|
$
|
306.0
|
|
|
$
|
3,676.6
|
|
Net income
|
|
|
|
|
|
|
502.6
|
|
|
|
|
1.7
|
|
|
504.3
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
|
|
(1.2
|
)
|
Contributions from noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
0.9
|
|
Dividends on common stock ($1.12/share)
|
|
|
|
|
|
|
(123.6
|
)
|
|
|
|
|
|
(123.6
|
)
|
Dividends on $25 par preferred stock ($1.00/share)
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
(0.2
|
)
|
Options exercised and stock subscribed, net of shares withheld for employee taxes
|
|
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
(2.0
|
)
|
Excess tax benefit from share-based compensation
|
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
(0.7
|
)
|
Share-based compensation
|
|
|
|
|
10.0
|
|
|
|
|
|
|
|
|
10.0
|
|
Balance at December 31, 2014
|
6.1
|
|
|
1.1
|
|
|
949.8
|
|
|
2,801.7
|
|
|
(3.2
|
)
|
|
308.6
|
|
|
4,064.1
|
|
Net income
|
|
|
|
|
|
|
483.5
|
|
|
|
|
1.8
|
|
|
485.3
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.5
|
)
|
|
|
|
|
(1.5
|
)
|
Dividends on common stock ($1.32/share)
|
|
|
|
|
|
|
(144.8
|
)
|
|
|
|
|
|
(144.8
|
)
|
Dividends on $25 par preferred stock ($1.00/share)
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
(0.2
|
)
|
Share repurchases
|
|
|
|
|
(18.7
|
)
|
|
(175.5
|
)
|
|
|
|
|
|
(194.2
|
)
|
Options exercised and stock subscribed, net of shares withheld for employee taxes
|
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
4.7
|
|
Excess tax benefit from share-based compensation
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
(0.1
|
)
|
Share-based compensation
|
|
|
|
|
11.4
|
|
|
|
|
|
|
|
|
11.4
|
|
Balance at December 31, 2015
|
6.1
|
|
|
1.1
|
|
|
947.1
|
|
|
2,964.7
|
|
|
(4.7
|
)
|
|
310.4
|
|
|
4,224.7
|
|
Net income
|
|
|
|
|
|
|
478.1
|
|
|
|
|
1.8
|
|
|
479.9
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
(1.5
|
)
|
|
|
|
|
(1.5
|
)
|
Contributions from noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
2.4
|
|
|
2.4
|
|
Dividends on common stock ($1.32/share)
|
|
|
|
|
|
|
(141.9
|
)
|
|
|
|
|
|
(141.9
|
)
|
Dividends on $25 par preferred stock ($1.00/share)
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
(0.2
|
)
|
Share repurchases
|
|
|
|
|
(18.8
|
)
|
|
(166.6
|
)
|
|
|
|
|
|
(185.4
|
)
|
Options exercised and stock subscribed, net of shares withheld for employee taxes
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
1.6
|
|
Excess tax benefit from share-based compensation
|
|
|
|
|
5.7
|
|
|
|
|
|
|
|
|
5.7
|
|
Share-based compensation
|
|
|
|
|
19.2
|
|
|
|
|
|
|
|
|
19.2
|
|
Balance at December 31, 2016
|
$
|
6.1
|
|
|
$
|
1.1
|
|
|
$
|
954.8
|
|
|
$
|
3,134.1
|
|
|
$
|
(6.2
|
)
|
|
$
|
314.6
|
|
|
$
|
4,404.5
|
|
See accompanying notes to consolidated financial statements.
54
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements
Note
1
.
Description of the Business
Kansas City Southern (“KCS” or the “Company”), a Delaware corporation, is a holding company with principal operations in rail transportation.
The Company is engaged primarily in the freight rail transportation business operating through a single coordinated rail network under one reportable business segment. The Company generates revenues and cash flows by providing its 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 electric-generating utilities, chemical and petroleum products, paper and forest products, agriculture and mineral products, automotive products and intermodal transportation.
The primary subsidiaries of the Company consist of the following:
|
|
•
|
The Kansas City Southern Railway Company (“KCSR”), a wholly-owned consolidated subsidiary. KCSR is a U.S. Class I railroad that services the midwest and southeast regions of the United States;
|
|
|
•
|
Kansas City Southern de México, S.A. de C.V. (“KCSM”), a wholly-owned consolidated subsidiary which operates under the rights granted by the Concession acquired from the Mexican government in 1997 (the “Concession”) as described below;
|
|
|
•
|
Mexrail, Inc. (“Mexrail”), a wholly-owned consolidated subsidiary; which wholly owns The Texas Mexican Railway Company (“Tex-Mex”);
|
|
|
•
|
KCSM Servicios, S.A. de C.V. (“KCSM Servicios”), a wholly-owned consolidated subsidiary which provides employee services to KCSM;
|
|
|
•
|
Meridian Speedway, LLC (“MSLLC”), a
seventy percent
-owned consolidated affiliate. MSLLC owns the former KCSR rail line between Meridian, Mississippi and Shreveport, Louisiana, which is the portion of the rail line between Dallas, Texas and Meridian known as the “Meridian Speedway”.
|
Including equity investments in:
|
|
•
|
Panama Canal Railway Company (“PCRC”), a
fifty percent
-owned unconsolidated affiliate which provides ocean to ocean freight and passenger services along the Panama Canal;
|
|
|
•
|
Ferrocarril y Terminal del Valle de México, S.A. de C.V. (“FTVM”), a
twenty-five percent
-owned unconsolidated affiliate that provides railroad services as well as ancillary services in the greater Mexico City area; and
|
|
|
•
|
PTC-220, LLC (“PTC-220”), a
fourteen percent
-owned unconsolidated affiliate that holds the licenses to large blocks of radio spectrum and other assets for the deployment of positive train control.
|
The KCSM Concession.
KCSM holds a concession from the Mexican government until June 2047 (exclusive service through 2027, subject to certain trackage and haulage rights granted to other concessionaires), which is renewable under certain conditions for an additional period of up to
50 years
(the “Concession”). The Concession is to provide freight transportation services over north-east rail lines which are a primary commercial corridor of the Mexican railroad system. KCSM has the right to use, but does not own, all track and buildings that are necessary for the rail lines’ operation. KCSM is required to pay the Mexican government an annual concession duty equal to
1.25%
of gross revenues during the Concession period.
Employees and Labor Relations.
KCSR participates in industry-wide multi-employer bargaining as a member of the National Carriers’ Conference Committee, as well as local bargaining for agreements that are limited to KCSR's property. Approximately
75%
of KCSR employees are covered by collective bargaining agreements.
KCSM Servicios union employees are covered by one labor agreement, which was signed on April 16, 2012, between KCSM Servicios and the Sindicato de Trabajadores Ferrocarrileros de la República Mexicana (“Mexican Railroad Union”), for an indefinite period of time, for the purpose of regulating the relationship between the parties. Approximately
80%
of KCSM Servicios employees are covered by this labor agreement.
Union labor negotiations have not historically resulted in any strike, boycott, or other disruption in the Company’s business operations.
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note
2
. Significant Accounting Policies
Principles of Consolidation.
The accompanying consolidated financial statements are presented using the accrual basis of accounting and include the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation.
The equity method of accounting is used for all entities in which the Company or its subsidiaries have significant influence, but not a controlling interest. The Company evaluates less-than-majority-owned investments for consolidation pursuant to consolidation and variable interest entity guidance. The Company does not have any less-than-majority-owned investments requiring consolidation.
Use of Estimates.
The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include those related to the recoverability and useful lives of assets, litigation provisions, and income taxes. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates.
Revenue Recognition.
The Company recognizes freight revenue based upon the percentage of completion of a commodity movement as a shipment moves from origin to destination, with the related expense recognized as incurred. Other revenues, in general, are recognized when the product is shipped, as services are performed or contractual obligations are fulfilled.
Foreign Exchange Gain (Loss).
For financial reporting purposes, foreign subsidiaries maintain records in U.S. dollars, which is the functional currency. The dollar is the currency that reflects the economic substance of the underlying events and circumstances relevant to the entity. Monetary assets and liabilities denominated in pesos are remeasured into dollars using current exchange rates. The difference between the exchange rate on the date of the transaction and the exchange rate on the settlement date, or balance sheet date if not settled, is included in the income statement as foreign exchange gain or loss.
Cash Equivalents.
Short-term liquid investments with an initial maturity of three months or less are classified as cash and cash equivalents.
Accounts Receivable, net.
Accounts receivable are net of an allowance for uncollectible accounts as determined by historical experience and adjusted for economic uncertainties or known trends. Accounts are charged to the allowance when a customer enters bankruptcy, when an account has been transferred to a collection agent or submitted for legal action, or when a customer is significantly past due and all available means of collection have been exhausted. At
December 31, 2016
and
2015
, the allowance for doubtful accounts was
$5.3 million
and
$4.9 million
, respectively. For the years ended
December 31, 2016
,
2015
and
2014
, bad debt expense was
$1.2 million
,
$1.0 million
and
$0.4 million
, respectively.
Materials and Supplies.
Materials and supplies consisting of diesel fuel, items to be used in the maintenance of rolling stock and items to be used in the maintenance or construction of road property are valued at the lower of average cost or net realizable value.
Derivative Instruments.
Derivatives are measured at fair value and recorded on the balance sheet as either assets or liabilities. Changes in the fair value of derivatives are recorded either through current earnings or as other comprehensive income, depending on hedge designation. Gains and losses on derivative instruments classified as cash flow hedges are reported in other comprehensive income and are reclassified into earnings in the periods in which earnings are impacted by the variability of the cash flow of the hedged item. The ineffective portion of all hedge transactions is recognized in current period earnings.
Property and Equipment (including Concession Assets).
KCS capitalizes costs for self-constructed additions and improvements to property including direct labor and material, indirect overhead costs, and interest during long-term construction projects. For purchased assets, all costs necessary to make the asset ready for its intended use are capitalized.
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Expenditures that significantly increase asset values, productive capacity, efficiency, safety or extend useful lives are capitalized. Repair and maintenance costs are expensed as incurred.
Property and equipment are carried at cost and are depreciated primarily on the group method of depreciation, which the Company believes closely approximates a straight line basis over the estimated useful lives of the assets measured in years. The group method of depreciation applies a composite rate to classes of similar assets rather than to individual assets. Composite depreciation rates are based upon the Company’s estimates of the expected average useful lives of assets as well as expected net salvage value at the end of their useful lives. In developing these estimates, the Company utilizes periodic depreciation studies performed by an independent engineering firm. Depreciation rate studies are performed at least every three years for equipment and at least every six years for road property (rail, ties, ballast, etc.). The Company completed depreciation studies for KCSM in 2016 and KCSR in 2015. The impacts of the studies were immaterial to the consolidated financial results for all periods.
Under the group method of depreciation, the cost of railroad property and equipment (net of salvage or sales proceeds) retired or replaced in the normal course of business is charged to accumulated depreciation with no gain or loss recognized. Gains or losses on dispositions of land or non-group property and abnormal retirements of railroad property are recognized through income. A retirement of railroad property would be considered abnormal if the cause of the retirement is unusual in nature and its actual life is significantly shorter than what would be expected for that group based on the depreciation studies. An abnormal retirement could cause the Company to re-evaluate the estimated useful life of the impacted asset class.
Costs incurred by the Company to acquire the concession rights and related assets, as well as subsequent improvements to the concession assets, are capitalized and amortized using the group method of depreciation over the lesser of the current expected Concession term, including probable renewal of an additional 50-year term, or the estimated useful lives of the assets and rights.
Long-lived assets are reviewed for impairment when events or circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the long-lived assets, the carrying value would be reduced to the estimated fair value. Future cash flow estimates for an impairment review would be based on the lowest level of identifiable cash flows, which are the Company’s U.S. and Mexican operations. During the years ended
December 31, 2016
and
2015
, management did not identify any indicators of impairment.
Goodwill.
Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in business combinations. As of
December 31, 2016
and
2015
, the goodwill balance was
$13.2 million
, which is included in other assets in the consolidated balance sheets. Goodwill is not amortized, but is reviewed at least annually, or more frequently as indicators warrant, for impairment. An impairment loss would be recognized to the extent that the carrying amount exceeds the assets’ fair values. The Company performed its annual impairment review for goodwill as of
November 30, 2016
and
2015
, and concluded there was no impairment.
Fair Value of Financial Instruments.
Non-financial assets and liabilities are recognized at fair value on a nonrecurring basis. These assets and liabilities are measured at fair value on an ongoing basis but are subject to recognition in the financial statements only in certain circumstances. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company determines the fair values of its financial instruments based on the fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy is broken down into three levels based upon the observability of inputs. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
assessment of the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability.
Environmental Liabilities.
The Company records liabilities for remediation and restoration costs related to past activities when the Company’s obligation is probable and the costs can be reasonably estimated. Costs of future expenditures for environmental remediation are not discounted to their present value. Recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable. Costs of ongoing compliance activities related to current operations are expensed as incurred.
Personal Injury Claims.
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 Company’s personal injury liability is based on actuarial studies performed on an undiscounted basis by an independent third party actuarial firm and reviewed by management. The liability is based on claims filed and an estimate of claims incurred but not yet reported. Adjustments to the liability are reflected as operating expenses in the period in which the adjustments are known. Legal fees related to personal injury claims are recorded in operating expense in the period incurred.
Health and Welfare and Postemployment Benefits.
The Company provides certain medical, life and other postemployment benefits to certain active employees and retirees. The Company uses actuaries to assist management in measuring the benefit obligation and cost based on the current plan provisions, employee demographics, and assumptions about financial and demographic factors affecting the probability, timing and amount of expected future benefit payments. Significant assumptions include the discount rate, rate of increase in compensation levels, and the health care cost trend rate. Actuarial gains and losses determined at the measurement date (December 31) are recognized immediately in the consolidated statements of income.
Share-Based Compensation.
The Company accounts for all share-based compensation in accordance with fair value recognition provisions. Under this method, compensation expense is measured at grant date fair value net of estimated forfeitures, and is recognized over the requisite service period in which the award is earned. The Company issues treasury stock to settle share-based awards.
Income Taxes.
Deferred income tax effects of transactions reported in different periods for financial reporting and income tax return purposes are recorded under the liability method of accounting for income taxes. This method gives consideration to the future tax consequences of the deferred income tax items and immediately recognizes changes in income tax laws in the year of enactment. In addition, the Company has not provided U.S. federal income taxes on the undistributed operating earnings of its foreign subsidiaries because the Company intends to indefinitely reinvest the earnings outside the U.S. or the earnings will be remitted in a tax-free transaction.
The Company has recognized a deferred tax asset, net of a valuation allowance, for net operating loss and tax credit carryovers. The Company projects sufficient future taxable income to realize the deferred tax asset recorded less the valuation allowance. These projections take into consideration assumptions about future income, future capital expenditures and inflation rates. If assumptions or actual conditions change, the deferred tax asset, net of the valuation allowance, will be adjusted to properly reflect the expected tax benefit.
Treasury Stock.
The excess of repurchase price over par value of common shares held in treasury is allocated between additional paid-in capital and retained earnings.
New Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
, which requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration it expects to be entitled in exchange for those goods or services. The new standard will become effective for the Company beginning with the first quarter 2018 and the Company plans to adopt the accounting standard using the modified retrospective transition approach.
The modified retrospective transition approach will recognize any changes from the beginning of the year of initial application through retained earnings with no restatement of comparative periods. The Company has substantially completed a review of the likely impacts of the application of the new standard to the
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
existing portfolio of customer contracts entered into prior to the adoption of the new standard and will continue to review new contracts entered into prior to the adoption of the new standard. Based on this review, the adop
tion of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, which requires lessees to recognize a right-to-use asset and a lease obligation for all leases. Lessees are permitted to make an accounting policy election to not recognize an asset and liability for leases with a term of twelve months or less. Lessor accounting under the new standard is substantially unchanged. Additional qualitative and quantitative disclosures, including significant judgments made by management, will be required. The new standard will become effective for the Company beginning with the first quarter 2019 and requires a modified retrospective transition approach. The Company is currently evaluating the impacts the adoption of this accounting guidance will have on the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting,
which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. The new standard will become effective for the Company beginning with the first quarter of 2017. Upon adoption of the new ASU, the Company plans to account for forfeitures as incurred. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows
, which reduces diversity in practice in how certain transactions are classified in the statement of cash flows. The Company plans to early adopt the ASU beginning with the first quarter of 2017. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16,
Intra-Entity Transfers of Assets Other Than Inventory
, that requires entities to recognize at the transaction date the income tax consequences of many intercompany asset transfers. The Company plans to early adopt the ASU beginning with the first quarter of 2017. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.
3. Mexican Fuel Excise Tax Credit
Fuel purchases made in Mexico are subject to an excise tax that is included in fuel expense. During the second quarter of 2016, the Company determined that it could utilize a credit available under changes in Mexican law for the excise tax included in the price of fuel that is purchased and consumed in locomotives and certain work equipment in Mexico. As a result, the Company recognized a
$62.8 million
benefit during the year ended December 31, 2016. The Mexican fuel excise tax credit is realized through the offset of the current year Mexico income tax liability and income tax withholding payment obligations of KCSM with no carryforward to future periods.
4. Flooding in the Southeastern United States
In March 2016, flooding in the southeastern United States caused damage to the Company’s track infrastructure and interruptions to the Company’s rail service. The Company filed a claim under its insurance program for property damage, incremental expenses and lost profits caused by this flooding event. In December 2016, the Company settled its insurance claim related to the flooding, and as a result, recognized a gain on insurance recovery of
$3.0 million
. This gain primarily represents the recovery of lost profits and the replacement value of property in excess of its carrying value, net of the self-insured retention. The gain on insurance recovery was recognized in Materials and other in the Consolidated Statements of Income.
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note 5. Earnings Per Share
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 Plan and shares issuable upon the conversion of preferred stock to common stock.
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)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Net income available to common stockholders for purposes of computing basic and diluted earnings per share
|
$
|
477.9
|
|
|
$
|
483.3
|
|
|
$
|
502.4
|
|
Weighted-average number of shares outstanding
(in thousands)
:
|
|
|
|
|
|
Basic shares
|
107,560
|
|
|
109,709
|
|
|
110,163
|
|
Effect of dilution
|
201
|
|
|
206
|
|
|
270
|
|
Diluted shares
|
107,761
|
|
|
109,915
|
|
|
110,433
|
|
Earnings per share:
|
|
|
|
|
|
Basic earnings per share
|
$
|
4.44
|
|
|
$
|
4.41
|
|
|
$
|
4.56
|
|
Diluted earnings per share
|
$
|
4.43
|
|
|
$
|
4.40
|
|
|
$
|
4.55
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive shares excluded from the calculation (
in thousands
):
|
2016
|
|
2015
|
|
2014
|
Stock options excluded as their inclusion would be anti-dilutive
|
185
|
|
|
84
|
|
|
57
|
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note 6. Property and Equipment (including Concession Assets)
The following tables list the major categories of property and equipment, including concession assets, as well as the weighted-average composite depreciation rate for each category (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
Cost
|
|
Accumulated
Depreciation
|
|
Net Book
Value
|
|
Depreciation
Rates for 2016
|
Land
|
$
|
219.2
|
|
|
$
|
—
|
|
|
$
|
219.2
|
|
|
N/A
|
|
Concession land rights
|
141.2
|
|
|
(25.1
|
)
|
|
116.1
|
|
|
1.0
|
%
|
Rail and other track material
|
1,925.4
|
|
|
(445.0
|
)
|
|
1,480.4
|
|
|
1.6-3.2%
|
|
Ties
|
1,710.1
|
|
|
(423.8
|
)
|
|
1,286.3
|
|
|
2.0-5.0%
|
|
Grading
|
910.7
|
|
|
(153.9
|
)
|
|
756.8
|
|
|
0.9
|
%
|
Bridges and tunnels
|
739.4
|
|
|
(137.6
|
)
|
|
601.8
|
|
|
1.1
|
%
|
Ballast
|
748.3
|
|
|
(215.1
|
)
|
|
533.2
|
|
|
2.5-4.7%
|
|
Other (a)
|
1,152.1
|
|
|
(332.4
|
)
|
|
819.7
|
|
|
3.0
|
%
|
Total road property
|
7,186.0
|
|
|
(1,707.8
|
)
|
|
5,478.2
|
|
|
2.8
|
%
|
Locomotives
|
1,485.9
|
|
|
(356.9
|
)
|
|
1,129.0
|
|
|
4.5
|
%
|
Freight cars
|
887.7
|
|
|
(152.5
|
)
|
|
735.2
|
|
|
3.5
|
%
|
Other equipment
|
66.2
|
|
|
(23.6
|
)
|
|
42.6
|
|
|
6.4
|
%
|
Total equipment
|
2,439.8
|
|
|
(533.0
|
)
|
|
1,906.8
|
|
|
4.2
|
%
|
Technology and other
|
182.2
|
|
|
(126.2
|
)
|
|
56.0
|
|
|
17.4
|
%
|
Construction in progress
|
293.4
|
|
|
—
|
|
|
293.4
|
|
|
N/A
|
|
Total property and equipment (including concession assets)
|
$
|
10,461.8
|
|
|
$
|
(2,392.1
|
)
|
|
$
|
8,069.7
|
|
|
N/A
|
|
_____________
|
|
(a)
|
Other includes signals, buildings and other road assets.
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
Cost
|
|
Accumulated
Depreciation
|
|
Net Book
Value
|
|
Depreciation
Rates for 2015
|
Land
|
$
|
218.1
|
|
|
$
|
—
|
|
|
$
|
218.1
|
|
|
N/A
|
|
Concession land rights
|
141.2
|
|
|
(23.7
|
)
|
|
117.5
|
|
|
1.0
|
%
|
Rail and other track material
|
1,814.7
|
|
|
(394.6
|
)
|
|
1,420.1
|
|
|
1.8-3.0%
|
|
Ties
|
1,596.2
|
|
|
(357.1
|
)
|
|
1,239.1
|
|
|
2.0-4.1%
|
|
Grading
|
878.4
|
|
|
(144.9
|
)
|
|
733.5
|
|
|
0.9
|
%
|
Bridges and tunnels
|
703.4
|
|
|
(130.7
|
)
|
|
572.7
|
|
|
1.1
|
%
|
Ballast
|
696.6
|
|
|
(187.7
|
)
|
|
508.9
|
|
|
2.5-4.1%
|
|
Other (a)
|
1,095.0
|
|
|
(301.9
|
)
|
|
793.1
|
|
|
3.0
|
%
|
Total road property
|
6,784.3
|
|
|
(1,516.9
|
)
|
|
5,267.4
|
|
|
2.7
|
%
|
Locomotives
|
1,456.6
|
|
|
(302.7
|
)
|
|
1,153.9
|
|
|
4.6
|
%
|
Freight cars
|
809.6
|
|
|
(123.6
|
)
|
|
686.0
|
|
|
3.9
|
%
|
Other equipment
|
59.9
|
|
|
(20.7
|
)
|
|
39.2
|
|
|
6.5
|
%
|
Total equipment
|
2,326.1
|
|
|
(447.0
|
)
|
|
1,879.1
|
|
|
4.4
|
%
|
Technology and other
|
159.3
|
|
|
(120.7
|
)
|
|
38.6
|
|
|
15.6
|
%
|
Construction in progress
|
184.7
|
|
|
—
|
|
|
184.7
|
|
|
N/A
|
|
Total property and equipment (including
concession assets)
|
$
|
9,813.7
|
|
|
$
|
(2,108.3
|
)
|
|
$
|
7,705.4
|
|
|
N/A
|
|
_____________
|
|
(a)
|
Other includes signals, buildings and other road assets.
|
Concession assets, net of accumulated amortization of
$610.7 million
and
$538.0 million
, totaled
$2,131.6 million
and
$2,070.5 million
at
December 31, 2016
and
2015
, respectively.
The Company capitalized
$0.5 million
,
$0.7 million
, and
$0.9 million
of interest for the years ended
December 31, 2016
,
2015
, and
2014
, respectively.
Depreciation and amortization of property and equipment (including concession assets) totaled
$305.0 million
,
$284.6 million
and
$258.1 million
, for
2016
,
2015
, and
2014
, respectively.
Note 7. Lease Termination Costs
During 2016, 2015 and 2014, the Company purchased
$26.6 million
,
$144.2 million
and
$300.7 million
, respectively, of equipment under existing operating leases and replacement equipment as certain operating leases expired. For the years ended December 31, 2015 and 2014, the Company recognized
$9.6 million
and
$38.3 million
of lease termination costs (included in operating expenses) due to the early termination of certain operating leases and the related purchase of the equipment. The Company did not incur lease termination costs during 2016.
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note 8. Other Balance Sheet Captions
Other Current Assets.
Other current assets included the following items at December 31
(in millions):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Refundable taxes
|
$
|
113.2
|
|
|
$
|
71.6
|
|
Prepaid expenses
|
18.2
|
|
|
16.8
|
|
Other
|
2.4
|
|
|
2.2
|
|
Other current assets
|
$
|
133.8
|
|
|
$
|
90.6
|
|
Accounts Payable and Accrued Liabilities.
Accounts payable and accrued liabilities included the following items at December 31
(in millions):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Accounts payable
|
$
|
247.8
|
|
|
$
|
176.7
|
|
Accrued wages and vacation
|
78.7
|
|
|
50.9
|
|
Derailments, personal injury and other claim provisions
|
39.2
|
|
|
40.5
|
|
Foreign currency derivative instruments
|
41.1
|
|
|
46.0
|
|
Dividends payable
|
35.2
|
|
|
35.9
|
|
Income and other taxes
|
36.0
|
|
|
18.8
|
|
Other
|
59.7
|
|
|
32.7
|
|
Accounts payable and accrued liabilities
|
$
|
537.7
|
|
|
$
|
401.5
|
|
Note 9. Fair Value Measurements
The Company’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy as described in Note 2 — “Significant Accounting Policies”. As of
December 31, 2016
, the Company’s derivative financial instruments are measured at fair value on a recurring basis and consist of foreign currency forward and option contracts, 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 fair value of the foreign currency derivative instruments was a liability of
$41.1 million
and
$46.0 million
as of
December 31, 2016
and
2015
, respectively.
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 fair value of the Company’s debt was
$2,303.8 million
and
$2,287.5 million
at
December 31, 2016
and
2015
, respectively. The carrying value was
$2,296.9 million
and
$2,321.1 million
at
December 31, 2016
and
2015
, 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 either Level 1 or Level 2 in the fair value hierarchy.
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note
10
. 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
December 31, 2016
, the Company did not expect any losses as a result of default of its counterparties.
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.
Below is a summary of the Company’s 2016 and 2015 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)
|
|
Maturity date
|
|
Notional amount
|
|
Notional amount
|
|
Weighted-average exchange rate
(in Ps./USD)
|
|
Maturity date
|
|
Cash received/(paid) on settlement
|
2016 contracts outstanding at December 31, 2016
|
$
|
340.0
|
|
|
Ps.
|
6,207.7
|
|
|
Ps.
|
18.3
|
|
|
1/17/2017
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2016 contracts and 2016 offsetting contracts settled
|
$
|
60.0
|
|
|
Ps.
|
1,057.3
|
|
|
Ps.
|
17.6
|
|
|
4/29/2016
|
|
$
|
60.7
|
|
|
Ps.
|
1,057.3
|
|
|
Ps.
|
17.4
|
|
|
4/29/2016
|
|
|
$
|
0.7
|
|
2015 contracts and 2016 offsetting contracts settled
|
$
|
300.0
|
|
|
Ps.
|
4,480.4
|
|
|
Ps.
|
14.9
|
|
|
1/15/2016
|
|
$
|
251.0
|
|
|
Ps.
|
4,480.4
|
|
|
Ps.
|
17.9
|
|
|
1/15/2016
|
|
|
$
|
(49.0
|
)
|
2014 contracts and 2015 offsetting contracts settled
|
$
|
300.0
|
|
|
Ps.
|
4,364.7
|
|
|
Ps.
|
14.6
|
|
|
1/15/2015
|
|
$
|
298.8
|
|
|
Ps.
|
4,364.7
|
|
|
Ps.
|
14.6
|
|
|
1/15/2015
|
|
|
$
|
(1.2
|
)
|
2014 contracts and 2014 offsetting contracts settled
|
$
|
345.0
|
|
|
Ps.
|
4,642.5
|
|
|
Ps.
|
13.5
|
|
|
12/31/2014
|
|
$
|
321.4
|
|
|
Ps.
|
4,642.5
|
|
|
Ps.
|
14.4
|
|
|
12/31/2014
|
|
|
$
|
(23.6
|
)
|
Foreign currency zero-cost collar contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
Maturity date
|
|
Cash received/(paid) on settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 contracts settled in 2016
|
$
|
80.0
|
|
|
1/15/2016
|
|
|
$
|
(10.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 contracts settled in 2015
|
$
|
50.0
|
|
|
9/28/2015
|
|
|
$
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
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 loss within the consolidated statements of income.
The following table presents the fair value of derivative instruments included in the consolidated balance sheets at December 31 (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
Balance Sheet Location
|
|
2016
|
|
2015
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Foreign currency forward contracts
|
Accounts payable and accrued liabilities
|
|
$
|
41.1
|
|
|
$
|
39.8
|
|
Foreign currency zero-cost collar contracts
|
Accounts payable and accrued liabilities
|
|
—
|
|
|
6.2
|
|
Total derivative liabilities
|
|
|
$
|
41.1
|
|
|
$
|
46.0
|
|
The following table presents the effects of derivative instruments on the consolidated statements of income for the years ended December 31
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain/(Loss) Recognized in Income on Derivative
|
|
Amount of Gain/(Loss) Recognized in Income on Derivative
|
Derivatives not designated as hedging instruments:
|
|
|
2016
|
|
2015
|
|
2014
|
Foreign currency forward contracts
|
Foreign exchange loss
|
|
$
|
(49.6
|
)
|
|
$
|
(36.7
|
)
|
|
$
|
(27.9
|
)
|
Foreign currency zero-cost collar contracts
|
Foreign exchange loss
|
|
(3.9
|
)
|
|
(10.5
|
)
|
|
—
|
|
Total
|
|
|
$
|
(53.5
|
)
|
|
$
|
(47.2
|
)
|
|
$
|
(27.9
|
)
|
Note
11
. Short-Term Borrowings
Commercial Paper.
The Company’s commercial paper program generally serves as the primary means of short-term funding. As of
December 31, 2016
, KCS had
$181.3 million
of commercial paper outstanding, net of
$0.1 million
discount, at a weighted-average interest rate of
1.290%
. As of December 31, 2015, KCS had
$80.0 million
of commercial paper outstanding at a weighted-average interest rate of
1.072%
.
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note
12
. Long-Term Debt
Long-term debt at December 31
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Principal
|
|
Unamortized Discount and Debt Issuance Costs
|
|
Net
|
|
Principal
|
|
Unamortized Discount and Debt Issuance Costs
|
|
Net
|
Revolving credit facilities, variable interest rate, due 2020
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
KCS Floating rate senior notes
|
—
|
|
|
—
|
|
|
—
|
|
|
244.8
|
|
|
1.0
|
|
|
243.8
|
|
KCS 2.35% senior notes, due 2020
|
257.3
|
|
|
1.7
|
|
|
255.6
|
|
|
239.5
|
|
|
2.1
|
|
|
237.4
|
|
KCS 3.00% senior notes, due 2023
|
439.1
|
|
|
4.7
|
|
|
434.4
|
|
|
439.1
|
|
|
5.4
|
|
|
433.7
|
|
KCS 3.85% senior notes, due 2023
|
199.2
|
|
|
2.0
|
|
|
197.2
|
|
|
195.0
|
|
|
2.2
|
|
|
192.8
|
|
KCS 3.125% senior notes, due 2026
|
250.0
|
|
|
3.4
|
|
|
246.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
KCS 4.30% senior notes, due 2043
|
448.7
|
|
|
9.6
|
|
|
439.1
|
|
|
437.6
|
|
|
9.8
|
|
|
427.8
|
|
KCS 4.95% senior notes, due 2045
|
499.2
|
|
|
8.0
|
|
|
491.2
|
|
|
476.7
|
|
|
7.9
|
|
|
468.8
|
|
KCSR senior notes 3.85% to 4.95%, due through 2045
|
2.9
|
|
|
—
|
|
|
2.9
|
|
|
40.7
|
|
|
0.6
|
|
|
40.1
|
|
KCSM senior notes 2.35% to 3.00%, due through 2023
|
28.5
|
|
|
0.2
|
|
|
28.3
|
|
|
51.5
|
|
|
0.3
|
|
|
51.2
|
|
RRIF loans 2.96% to 4.29%, due serially through 2037
|
81.4
|
|
|
0.5
|
|
|
80.9
|
|
|
84.9
|
|
|
0.6
|
|
|
84.3
|
|
Financing agreements 5.737% to 9.310%, due serially through 2023
|
102.5
|
|
|
0.4
|
|
|
102.1
|
|
|
119.9
|
|
|
0.5
|
|
|
119.4
|
|
Capital lease obligations, due serially to 2024
|
18.3
|
|
|
—
|
|
|
18.3
|
|
|
21.4
|
|
|
—
|
|
|
21.4
|
|
Other debt obligations
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
0.4
|
|
|
—
|
|
|
0.4
|
|
Total
|
2,327.4
|
|
|
30.5
|
|
|
2,296.9
|
|
|
2,351.5
|
|
|
30.4
|
|
|
2,321.1
|
|
Less: Debt due within one year
|
25.4
|
|
|
—
|
|
|
25.4
|
|
|
276.1
|
|
|
—
|
|
|
276.1
|
|
Long-term debt
|
$
|
2,302.0
|
|
|
$
|
30.5
|
|
|
$
|
2,271.5
|
|
|
$
|
2,075.4
|
|
|
$
|
30.4
|
|
|
$
|
2,045.0
|
|
Revolving Credit Facility
KCS with certain of its domestic subsidiaries named therein as guarantors, has an
$800.0 million
revolving credit facility (the “KCS Revolving Credit Facility”), with a
$25.0 million
standby letter of credit facility which, if utilized, constitutes usage under the revolving facility. The KCS Revolving Credit Facility serves as a backstop for KCS’s
$800.0 million
commercial paper program (the “KCS Commercial Paper Program”) which generally serves as the Company’s primary means of short-term funding.
Borrowings under the KCS Revolving Credit Facility bear interest at floating rates. Depending on the Company’s credit rating, the margin that KCS pays above the London Interbank Offered Rate (“LIBOR”) at any point is between
1.125%
and
2.0%
. As of December 31, 2016, the margin is
1.5%
based on KCS’s current credit rating.
The KCS Revolving Credit Facility is guaranteed by KCSR, together with certain domestic subsidiaries named therein as guarantors (the “Subsidiary Guarantors”) and matures on
December 9, 2020
. The KCS Revolving Credit Facility agreement contains representations, warranties, covenants (including financial covenants related to a leverage ratio and an interest coverage ratio) and events of default that are customary for credit agreements of this type. The occurrence of an event of
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
default could result in the termination of the commitments and the acceleration of the repayment of any outstanding principal balance on the KCS Revolving Credit Facility and the KCS Commercial Paper Program.
As of December 31, 2016 and 2015, KCS had
no
outstanding borrowings under the KCS Revolving Credit Facility.
Debt Exchange
During the first quarter of 2016, KCS entered into agreements with certain holders of KCSR and KCSM senior notes (collectively, the “Existing Notes”) to exchange Existing Notes for new securities issued by KCS. Each KCS note issued in exchange for an Existing Note has the same interest rate, interest payment dates and maturity date and substantially identical redemption provisions as the corresponding Existing Note. The following table summarizes the outstanding notes that were exchanged on March 29, 2016 (
in millions
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer of Existing Notes
|
Series of Existing Notes
|
|
Principal Amount
Outstanding Prior to Exchange
|
|
Principal Amount of
Notes Exchanged
|
|
Principal Amount Outstanding Following Exchange
|
KCSR
|
3.85% Senior Notes due 2023
|
|
$
|
5.0
|
|
|
$
|
4.2
|
|
|
$
|
0.8
|
|
KCSR
|
4.30% Senior Notes due 2043
|
|
12.4
|
|
|
11.1
|
|
|
1.3
|
|
KCSR
|
4.95% Senior Notes due 2045
|
|
23.3
|
|
|
22.5
|
|
|
0.8
|
|
KCSM
|
2.35% Senior Notes due 2020
|
|
35.4
|
|
|
17.8
|
|
|
17.6
|
|
The Company has accounted for this transaction as a debt exchange as the exchanged debt instruments are not considered to be substantially different. The balance of the unamortized discount and issue costs from the Existing Notes is being amortized as an adjustment of interest expense over the term of the KCS notes. There was no gain or loss recognized as a result of the exchange.
Senior
Notes
The Company’s senior notes include certain covenants which are customary for these types of debt instruments issued by borrowers with similar credit ratings.
The KCS Notes are unsecured and unsubordinated obligations of the Company and are unconditionally guaranteed, jointly and severally, by KCSR and each current and future domestic subsidiary of KCS that guarantees the KCS Revolving Credit Facility or certain other debt of KCS or a Note Guarantor (collectively, the “Note Guarantors”).
KCSR’s senior notes are unconditionally guaranteed, jointly and severally, on an unsecured senior basis, by KCS and each current and future domestic subsidiary of KCS that guarantees the KCS Revolving Credit Facility or certain other debt of KCS or a note guarantor. KCSR’s senior notes and the note guarantees rank pari passu in right of payment with KCSR’s, KCS’s and the Note Guarantors’ existing and future unsecured, unsubordinated obligations.
KCSM’s senior notes are denominated in U.S. dollars; are unsecured, unsubordinated obligations; rank pari passu in right of payment with KCSM’s existing and future unsecured, unsubordinated obligations and are senior in right of payment to KCSM’s future subordinated indebtedness.
Senior notes are redeemable at the issuer’s option, in whole or in part, at any time, by paying the greater of either
100%
of the principal amount to be redeemed and a formula price based on interest rates prevailing at the time of redemption and time remaining to maturity. In addition, KCSM senior notes are redeemable, in whole but not in part, at KCSM’s option at any time at a redemption price of
100%
of their principal amount, plus any accrued unpaid interest in the event of certain changes in the Mexican withholding tax rate.
3.125% Senior Notes.
On May 16, 2016, KCS issued
$250.0 million
principal amount of senior unsecured notes due
June 1, 2026
(the “3.125% Senior Notes”), which bear interest semiannually at a fixed annual rate of
3.125%
. The 3.125% Senior Notes were issued at a discount to par value, resulting in a
$1.3 million
discount and a yield to maturity of
3.185%
. The net proceeds from the offering were used to repay the outstanding commercial paper issued by KCS and for other general corporate purposes.
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Floating Rate Senior Notes.
On October 28, 2016,
$250.0 million
principal amount of outstanding floating rate senior notes issued by KCS and KCSM (together, the “Floating Rate Senior Notes”) matured. The Floating Rate Senior Notes were redeemed by the Company upon maturity at a redemption price equal to
100%
of the principal amount using available cash on hand and commercial paper.
RRIF Loan Agreements
The following loans were made under the Railroad Rehabilitation and Improvement Financing (“RRIF”) Program administered by the Federal Railroad Administration (“FRA”):
KCSR RRIF Loan Agreement.
On February 21, 2012, KCSR entered into an agreement with the FRA to borrow
$54.6 million
to be used to reimburse KCSR for a portion of the purchase price of
thirty
new locomotives (the “Locomotives”) acquired by KCSR in the fourth quarter of 2011. The loan bears interest at
2.96%
annually and the principal balance amortizes quarterly with a final maturity of
February 24, 2037
. The obligations under the financing agreement are secured by a first priority security interest in the Locomotives and certain related rights. In addition, the Company has agreed to guarantee repayment of the amounts due under the financing agreement and certain related agreements. The occurrence of an event of default could result in the acceleration of the repayment of any outstanding principal balance of the loan.
Tex-Mex RRIF Loan Agreement.
On June 28, 2005, Tex-Mex entered into an agreement with the FRA to borrow
$50.0 million
to be used for infrastructure improvements in order to accommodate growing freight rail traffic related to the NAFTA corridor. The loan bears interest at
4.29%
annually and the principal balance amortizes quarterly with a final maturity of
July 13, 2030
. The loan is guaranteed by Mexrail, which has issued a pledge agreement in favor of the lender equal to the gross revenues earned by Mexrail on per-car fees on traffic crossing the International Rail Bridge in Laredo, Texas. In addition, the Company has agreed to guarantee the scheduled principal payment installments due to the FRA from Tex-Mex under the loan agreement on a rolling five-year basis.
Locomotive Financing Agreements
During 2008 and 2011, KCSM entered into various financing agreements totaling
$216.0 million
to purchase locomotives. The agreements mature between
December 2020
and
September 2023
, are payable on a quarterly or semi-annual basis and contain annual interest rates ranging between
5.737%
and
9.310%
. KCSM has either granted the lender a security interest in the locomotives to secure the loan or has secured the loans by transferring legal ownership of the locomotives to irrevocable trusts established by KCSM to which the lender is the primary beneficiary and KCSM has a right of reversion upon satisfaction of the obligations of the loan agreements.
KCSM’s locomotive financing agreements contain representations, warranties and covenants typical of such equipment loan agreements. Events of default in the financing agreements include, but are not limited to, certain payment defaults, certain bankruptcy and liquidation proceedings and the failure to perform any covenants or agreements contained in the financing agreements. Any event of default could trigger acceleration of KCSM’s payment obligations under the terms of the financing agreements.
Debt Covenants Compliance
The Company was in compliance with all of its debt covenants as of
December 31, 2016
.
Other Debt Provisions
Certain loan agreements and debt instruments entered into or guaranteed by the Company and its subsidiaries provide for default in the event of a specified change in control of the Company or particular subsidiaries of the Company.
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Leases and Debt Maturities
The Company leases transportation equipment, as well as office and other operating facilities, under various capital and operating leases. Rental expenses under operating leases were
$61.0 million
,
$63.9 million
, and
$76.4 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. Operating leases that contain scheduled rent adjustments are recognized on a straight-line basis over the term of the lease. Contingent rentals and sublease rentals were not significant. Minimum annual payments and present value thereof under existing capital leases, other debt maturities and minimum annual rental commitments under non-cancelable operating leases are as follows
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-
Term
Debt
|
|
Capital Leases
|
|
Total
Debt
|
|
|
|
|
Years
|
Minimum
Lease
Payments
|
|
Less
Interest
|
|
Net
Present
Value
|
|
Operating Leases
|
|
Total
|
2017
|
$
|
22.0
|
|
|
$
|
4.9
|
|
|
$
|
1.5
|
|
|
$
|
3.4
|
|
|
$
|
25.4
|
|
|
$
|
66.4
|
|
|
$
|
91.8
|
|
2018
|
35.2
|
|
|
4.9
|
|
|
1.3
|
|
|
3.6
|
|
|
38.8
|
|
|
45.1
|
|
|
83.9
|
|
2019
|
15.5
|
|
|
3.7
|
|
|
1.0
|
|
|
2.7
|
|
|
18.2
|
|
|
39.9
|
|
|
58.1
|
|
2020
|
299.0
|
|
|
2.7
|
|
|
0.8
|
|
|
1.9
|
|
|
300.9
|
|
|
32.9
|
|
|
333.8
|
|
2021
|
8.8
|
|
|
2.7
|
|
|
0.6
|
|
|
2.1
|
|
|
10.9
|
|
|
21.7
|
|
|
32.6
|
|
Thereafter
|
1,928.6
|
|
|
5.1
|
|
|
0.5
|
|
|
4.6
|
|
|
1,933.2
|
|
|
94.5
|
|
|
2,027.7
|
|
Total
|
$
|
2,309.1
|
|
|
$
|
24.0
|
|
|
$
|
5.7
|
|
|
$
|
18.3
|
|
|
$
|
2,327.4
|
|
|
$
|
300.5
|
|
|
$
|
2,627.9
|
|
In the normal course of business, the Company enters into long-term contractual requirements for future goods and services needed for the operations of the business. Such commitments are not in excess of expected requirements and are not reasonably likely to result in performance penalties or payments that would have a material adverse effect on the Company’s liquidity.
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note
13
. Income Taxes
Current income tax expense represents the amounts expected to be reported on the Company’s income tax returns, and deferred tax expense or benefit represents the change in net deferred tax assets and liabilities. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Valuation allowances are recorded as appropriate to reduce deferred tax assets to the amount considered likely to be realized.
Tax Expense.
Income tax expense consists of the following components
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
Federal
|
$
|
1.0
|
|
|
$
|
—
|
|
|
$
|
(2.5
|
)
|
State and local
|
0.6
|
|
|
0.3
|
|
|
1.2
|
|
Foreign
|
76.4
|
|
|
51.2
|
|
|
70.0
|
|
Total current
|
78.0
|
|
|
51.5
|
|
|
68.7
|
|
Deferred:
|
|
|
|
|
|
Federal
|
92.7
|
|
|
109.3
|
|
|
112.6
|
|
State and local
|
13.1
|
|
|
15.5
|
|
|
16.9
|
|
Foreign
|
(1.0
|
)
|
|
11.0
|
|
|
10.6
|
|
Total deferred
|
104.8
|
|
|
135.8
|
|
|
140.1
|
|
Total income tax expense
|
$
|
182.8
|
|
|
$
|
187.3
|
|
|
$
|
208.8
|
|
Income before income taxes consists of the following
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Income before income taxes:
|
|
|
|
|
|
U.S.
|
$
|
279.9
|
|
|
$
|
315.0
|
|
|
$
|
326.5
|
|
Foreign
|
382.8
|
|
|
357.6
|
|
|
386.6
|
|
Total income before income taxes
|
$
|
662.7
|
|
|
$
|
672.6
|
|
|
$
|
713.1
|
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities follow at December 31
(in millions):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Assets:
|
|
|
|
Tax credit and loss carryovers
|
$
|
70.7
|
|
|
$
|
83.6
|
|
Reserves not currently deductible for tax
|
79.8
|
|
|
84.2
|
|
Other
|
31.6
|
|
|
35.7
|
|
Gross deferred tax assets before valuation allowance
|
182.1
|
|
|
203.5
|
|
Valuation allowance
|
(1.7
|
)
|
|
(1.1
|
)
|
Net deferred tax assets
|
180.4
|
|
|
202.4
|
|
Liabilities:
|
|
|
|
Property
|
(1,389.0
|
)
|
|
(1,314.9
|
)
|
Investments
|
(73.8
|
)
|
|
(71.3
|
)
|
Other
|
(6.9
|
)
|
|
(7.3
|
)
|
Gross deferred tax liabilities
|
(1,469.7
|
)
|
|
(1,393.5
|
)
|
Net deferred tax liability
|
$
|
(1,289.3
|
)
|
|
$
|
(1,191.1
|
)
|
Tax Rates.
Differences between the Company’s effective income tax rate and the U.S. federal statutory income tax rate of
35%
follow
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Dollars
|
|
Percent
|
|
Dollars
|
|
Percent
|
|
Dollars
|
|
Percent
|
Income tax expense using the statutory rate in effect
|
$
|
231.9
|
|
|
35.0
|
%
|
|
$
|
235.4
|
|
|
35.0
|
%
|
|
$
|
249.6
|
|
|
35.0
|
%
|
Tax effect of:
|
|
|
|
|
|
|
|
|
|
|
|
Difference between U.S. and foreign tax rate
|
(17.4
|
)
|
|
(2.6
|
%)
|
|
(17.8
|
)
|
|
(2.6
|
%)
|
|
(23.0
|
)
|
|
(3.2
|
%)
|
Foreign exchange (i)
|
(45.0
|
)
|
|
(6.8
|
%)
|
|
(40.5
|
)
|
|
(6.1
|
%)
|
|
(24.2
|
)
|
|
(3.4
|
%)
|
State and local income tax provision, net
|
8.1
|
|
|
1.2
|
%
|
|
10.3
|
|
|
1.5
|
%
|
|
11.7
|
|
|
1.6
|
%
|
Other, net
|
5.2
|
|
|
0.8
|
%
|
|
(0.1
|
)
|
|
—
|
|
|
(5.3
|
)
|
|
(0.7
|
%)
|
Income tax expense
|
$
|
182.8
|
|
|
27.6
|
%
|
|
$
|
187.3
|
|
|
27.8
|
%
|
|
$
|
208.8
|
|
|
29.3
|
%
|
_____________________
|
|
(i)
|
Mexican income taxes are paid in Mexican pesos, and as a result, the effective income tax rate reflects fluctuations in the value of the Mexican peso against the U.S. dollar. The foreign exchange impact on income taxes includes the gain or loss from the revaluation of the Company’s net U.S. dollar-denominated monetary liabilities into Mexican pesos which is included in Mexican taxable income under Mexican tax law. As a result, a strengthening of the Mexican peso against the U.S. dollar for the reporting period will generally increase the Mexican cash tax obligation and the effective income tax rate, and a weakening of the Mexican peso against the U.S. dollar for the reporting period will generally decrease the Mexican cash tax obligation and the effective tax rate. To hedge its exposure to this cash tax risk, the Company enters into foreign currency derivative contracts, which are measured at fair value each period and any change in fair value is recognized in foreign exchange loss within the consolidated statements of income. Refer to Note
10
Derivative Instruments for further information.
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Difference Attributable to Foreign Investments.
At
December 31, 2016
, the Company’s cumulative undistributed earnings of foreign subsidiaries was
$2,181.8 million
. The Company has not provided a deferred income tax liability on the undistributed earnings because the Company intends to indefinitely reinvest the earnings outside the U.S. or remit the earnings in tax-free transactions. If the foreign earnings were to be remitted in a taxable transaction, as of
December 31, 2016
, the Company would incur gross federal income taxes of
$763.6 million
which would be partially offset by foreign tax credits.
Tax Carryovers.
The Company has U.S. state net operating losses which are carried forward from
5
to
20
years and are analyzed each year to determine the likelihood of realization. The state loss carryovers arise from both combined and separate tax filings from as early as 1999 and may expire as early as December 31, 2017 and as late as December 31, 2036. The state loss carryover at
December 31, 2016
, was
$435.1 million
. In addition, the Company has
$49.6 million
of U.S. federal tax credit carryovers consisting primarily of
$37.2 million
of track maintenance credits which, if not used, will begin to expire in 2025.
The Mexico federal loss carryovers at
December 31, 2016
, were
$7.5 million
and, if not used, will begin to expire in 2025. A deferred tax asset was recorded in prior periods for the expected future tax benefit of these losses which will be carried forward to reduce only Mexican income tax payable in future years. A deferred tax asset is also recorded for an asset tax credit carryover in the amount of
$4.3 million
, which if not used, will begin to expire in 2017.
The valuation allowance for deferred tax assets as of
December 31, 2016
and
2015
, was
$1.7 million
and
$1.1 million
, respectively. The Company believes it is more likely than not that reversals of existing temporary differences that will produce future taxable income and the results of future operations will generate sufficient taxable income to realize the deferred tax assets, net of valuation allowances, related to loss carryovers and tax credits.
Uncertain Tax Positions.
The accounting guidance for uncertainty in income taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance requires the Company to recognize in the consolidated financial statements the benefit of a tax position only if the impact is more likely than not of being sustained on audit based on the technical merits of the position. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (
in millions
):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Balance at January 1,
|
$
|
1.7
|
|
|
$
|
1.7
|
|
Additions based on tax positions related to the current year
|
1.3
|
|
|
—
|
|
Additions for tax positions of prior years
|
2.5
|
|
|
—
|
|
Reductions as a result of lapse of statute of limitations
|
(1.7
|
)
|
|
—
|
|
Balance at December 31,
|
$
|
3.8
|
|
|
$
|
1.7
|
|
All of the unrecognized tax benefits would affect the effective income tax rate if recognized and is not expected to significantly change in the next twelve months.
Interest and penalties related to uncertain tax positions are included in income before taxes on the consolidated statements of income. Accrued interest and penalties on unrecognized tax benefits and interest and penalty expense was immaterial to the consolidated financial statements for all periods presented.
Tax Contingencies
. Tax returns filed in the U.S. for periods after 2012 and in Mexico for periods after 2008 for KCSM and after 2010 for Mexico subsidiaries other than KCSM remain open to examination by the taxing authorities. The Servicio de Administración Tributaria (the “SAT”), the Mexican equivalent of the IRS, is currently examining the KCSM 2009, 2010 and 2011 Mexico tax returns and the 2013 Mexico tax return of KCSM Servicios. An SAT examination was completed during the second quarter of 2016 without adjustment for the 2012 Mexico tax return of KCSM Servicios. 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 has appealed this resolution. The Company believes it is more likely than not that it will continue to prevail in this matter. However, an unexpected adverse resolution could have a material effect on the consolidated financial statements in a particular quarter or fiscal year.
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
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 has appealed this resolution. The Company believes it is more likely than not that it will continue to prevail in this matter. As of the date of this filing, the SAT has not implemented any new criteria regarding this assessment of VAT on international import transportation services.
Note 14. Stockholders’ Equity
Information regarding the Company’s capital stock at December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Authorized
|
|
Shares Issued
|
|
2016
|
|
2015
|
2016
|
|
2015
|
$25 par, 4% noncumulative, preferred stock
|
840,000
|
|
|
840,000
|
|
|
649,736
|
|
|
649,736
|
|
$1 par, preferred stock
|
2,000,000
|
|
|
2,000,000
|
|
|
—
|
|
|
—
|
|
$.01 par, common stock
|
400,000,000
|
|
|
400,000,000
|
|
|
123,352,185
|
|
|
123,352,185
|
|
Shares outstanding at December 31:
|
|
|
|
|
|
|
|
2016
|
|
2015
|
$25 par, 4% noncumulative, preferred stock
|
242,170
|
|
|
242,170
|
|
$.01 par, common stock
|
106,606,619
|
|
|
108,461,144
|
|
Share Repurchase Program.
In May 2015, the Company announced a share repurchase program of up to
$500.0 million
, which expires on
June 30, 2017
. Management's assessment of market conditions, available liquidity and other factors will determine the timing and volume of repurchases. During 2016, KCS repurchased
2,127,612
shares of common stock for
$185.4 million
at an average price of
$87.15
per share under this program. Since inception of this program, KCS has repurchased
4,261,596
shares of common stock for
$379.6 million
at an average price of
$89.07
per share. The excess of repurchase price over par value is allocated between additional paid-in capital and retained earnings.
Treasury Stock.
Shares of common stock in Treasury and related activity follow:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of year
|
14,891,041
|
|
|
12,959,855
|
|
|
13,122,956
|
|
Shares repurchased
|
2,127,612
|
|
|
2,133,984
|
|
|
—
|
|
Shares issued to fund stock option exercises
|
(15,264
|
)
|
|
(89,035
|
)
|
|
(46,100
|
)
|
Employee stock purchase plan shares issued
|
(82,372
|
)
|
|
(52,736
|
)
|
|
(33,402
|
)
|
Nonvested shares issued
|
(179,309
|
)
|
|
(62,936
|
)
|
|
(121,865
|
)
|
Nonvested shares forfeited
|
3,858
|
|
|
1,909
|
|
|
38,266
|
|
Balance at end of year
|
16,745,566
|
|
|
14,891,041
|
|
|
12,959,855
|
|
Change in Control Provisions.
The Company and certain of its subsidiaries have entered into agreements with certain employees whereby, upon defined circumstances constituting a change in control of the Company or subsidiary, certain stock
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
options become exercisable, certain benefit entitlements are automatically funded and such employees are entitled to specified cash payments upon termination of employment.
The Company and certain of its subsidiaries have established trusts to provide for the funding of corporate commitments and entitlements of certain officers, directors, employees and others in the event of a specified change in control of the Company or subsidiary. Assets held in such trusts on
December 31, 2016
and
2015
, were not material. Depending upon the circumstances at the time of any such change in control, the most significant of which would be the price paid for KCS common stock by a party seeking to control the Company, funding of the Company’s trusts could be substantial.
Cash Dividends on Common Stock.
The following table presents the amount of cash dividends declared per common share by the Company’s Board of Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Cash dividends declared per common share
|
$
|
1.32
|
|
|
$
|
1.32
|
|
|
$
|
1.12
|
|
Note 15. Share-Based Compensation
On October 7, 2008, the Company’s stockholders approved the Kansas City Southern 2008 Stock Option and Performance Award Plan (the “2008 Plan”). The 2008 plan became effective on October 14, 2008 and replaced the Kansas City Southern 1991 Amended and Restated Stock Option and Performance Award Plan. The 2008 Plan provides for the granting of up to
2.3 million
shares of the Company’s common stock to eligible persons as defined in the 2008 Plan. The material terms and performance measures of the 2008 Plan were reapproved by the Company’s stockholders on May 2, 2013.
On February 19, 2016 the Company granted
66,320
shares of nonvested stock (“the market-based award”) under the 2008 Plan. The market-based award contains a market condition that accelerates the vesting in
three
tranches if the
twenty
trading day volume-weighted average price of the Company’s common stock is above
$84.14
,
$91.79
or
$99.44
. If the target share prices are met prior to December 31, 2017, the awards would vest on January 5, 2018. If the target prices are met after January 1, 2018 but prior to the fifth anniversary of the grant date, the awards would vest immediately. If the target prices are not met prior to the fifth anniversary of the grant date, the awards would forfeit. The target prices of
$84.14
and
$91.79
were met in the first and second quarters of 2016, respectively. The target price of
$99.44
has not been met as of December 31, 2016. See further details in the nonvested stock summary table below.
Stock Options.
The exercise price for options granted under the 2008 Plan equals the closing market price of the Company’s stock on the date of grant. Options generally have a
3
year vesting period and are exercisable over the
10
year contractual term, except that options outstanding become immediately exercisable upon certain defined circumstances constituting a change in control of the Company. The grant date fair value, less estimated forfeitures, is recorded to expense on a straight-line basis over the vesting period.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average assumptions used were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Expected dividend yield
|
1.60
|
%
|
|
0.94
|
%
|
|
1.19
|
%
|
Expected volatility
|
32.29
|
%
|
|
37.11
|
%
|
|
45.57
|
%
|
Risk-free interest rate
|
1.51
|
%
|
|
1.82
|
%
|
|
1.96
|
%
|
Expected term
(years)
|
6.0
|
|
|
6.0
|
|
|
6.0
|
|
Weighted-average grant date fair value of stock options granted
|
$
|
22.98
|
|
|
$
|
41.49
|
|
|
$
|
38.31
|
|
The expected dividend yield is calculated as the ratio of dividends paid per share of common stock to the stock price on the date of grant. The expected volatility is based on the historical volatility of the Company’s stock price over a term equal to the estimated life of the options. The risk-free interest rate is determined based on U.S. Treasury rates for instruments with
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
terms approximating the expected life of the options granted, which represents the period of time the awards are expected to be outstanding and is based on the historical experience of similar awards.
A summary of stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
Per Share
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
In years
|
|
In millions
|
Options outstanding at December 31, 2015
|
317,745
|
|
|
$
|
73.94
|
|
|
|
|
|
Granted
|
113,127
|
|
|
82.71
|
|
|
|
|
|
Exercised
|
(15,264
|
)
|
|
57.48
|
|
|
|
|
|
Forfeited or expired
|
(805
|
)
|
|
106.52
|
|
|
|
|
|
Options outstanding at December 31, 2016
|
414,803
|
|
|
$
|
76.87
|
|
|
6.4
|
|
$
|
6.0
|
|
Vested and expected to vest at December 31, 2016
|
411,726
|
|
|
$
|
76.77
|
|
|
6.4
|
|
$
|
6.0
|
|
Exercisable at December 31, 2016
|
253,188
|
|
|
$
|
67.60
|
|
|
5.0
|
|
$
|
5.8
|
|
The aggregate intrinsic value in the table above, which is the amount by which the market value of the underlying stock exceeded the exercise price of outstanding options, represents the amount optionees would have realized if all in-the-money options had been exercised on the last business day of the period indicated.
Compensation cost of
$2.5 million
,
$2.0 million
, and
$1.7 million
was recognized for stock option awards for the years ended
December 31, 2016
,
2015
, and
2014
, respectively. The total income tax benefit recognized in the consolidated statements of income was
$0.9 million
,
$0.7 million
, and
$0.7 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Additional information regarding stock option exercises appears in the table below
(in millions)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Aggregate grant-date fair value of stock options vested
|
$
|
1.8
|
|
|
$
|
2.0
|
|
|
$
|
2.3
|
|
Intrinsic value of stock options exercised
|
0.6
|
|
|
6.1
|
|
|
3.3
|
|
Cash received from option exercises
|
0.9
|
|
|
4.2
|
|
|
2.0
|
|
Tax benefit realized from options exercised during the annual period
|
0.2
|
|
|
2.3
|
|
|
1.3
|
|
As of
December 31, 2016
,
$1.1 million
of unrecognized compensation cost relating to nonvested stock options is expected to be recognized over a weighted-average period of
1.0
year. At
December 31, 2016
, there were
562,754
shares available for future grants under the 2008 Plan.
Nonvested Stock.
The 2008 Plan provides for the granting of nonvested stock awards to officers and other designated employees. The grant date fair value is based on the closing market price on the date of the grant. These awards are subject to forfeiture if employment terminates during the vesting period, which is generally
3
year or
5
year vesting for employees. Awards granted to the Company’s directors vest immediately on date of grant. The grant date fair value of nonvested shares, less estimated forfeitures, is recorded to compensation expense on a straight-line basis over the vesting period.
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
The fair value and requisite service period of nonvested market-based awards granted on February 19, 2016 are estimated on the date of grant using the Monte Carlo simulation model. The assumptions used in the Monte Carlo simulation model are consistent with those used to value stock options and were as follows:
|
|
|
|
|
|
|
|
|
|
Nonvested Stock
|
Expected dividend yield
|
|
|
1.58
|
%
|
Expected volatility
|
|
|
31.68
|
%
|
Risk-free interest rate
|
|
|
0.53% - 1.89%
|
|
Expected term
(years)
|
|
|
1.9
|
|
Weighted-average grant date fair value
|
|
|
$
|
70.95
|
|
A summary of nonvested stock activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average Grant
Date Fair
Value
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
In millions
|
Nonvested stock at December 31, 2015
|
146,783
|
|
|
$
|
99.61
|
|
|
|
Granted
|
174,703
|
|
|
80.92
|
|
|
|
Vested
|
(79,618
|
)
|
|
81.55
|
|
|
|
Forfeited
|
(3,858
|
)
|
|
123.02
|
|
|
|
Nonvested stock at December 31, 2016
|
238,010
|
|
|
$
|
91.55
|
|
|
$
|
20.2
|
|
The fair value (at vest date) of shares vested during the years ended
December 31, 2016
,
2015
, and
2014
was
$7.0 million
,
$6.4 million
, and
$8.5 million
, respectively.
The weighted-average grant date fair value of nonvested stock granted during
2016
,
2015
, and
2014
was
$80.92
,
$112.03
and
$105.04
, respectively. Compensation cost for nonvested stock and market-based awards was
$9.6 million
,
$5.1 million
, and
$4.0 million
for the years ended
December 31, 2016
,
2015
, and
2014
, respectively. The total income tax benefit recognized in the consolidated statements of income was
$3.5 million
,
$1.9 million
, and
$1.5 million
for the years ended
December 31, 2016
,
2015
, and
2014
, respectively.
As of
December 31, 2016
,
$11.4 million
of unrecognized compensation costs related to nonvested stock and market-based awards is expected to be recognized over a weighted-average period of
1.4
years.
Performance Based Awards.
The Company granted performance based nonvested stock awards during 2016 (the “2016 Awards”), 2015 (the “2015 Awards”) and 2014 (the “2014 Awards”). The awards granted provide a target number of shares that generally vest at the end of a
3
year requisite service period following the grant date. In addition to the service condition, the number of nonvested shares to be received depends on the attainment of defined Company-wide performance goals based on operating ratio (“OR”) and return on invested capital (“ROIC”) over a
three
-year performance period. The 2016 Awards are also subject to a revenue growth multiplier based on a
three
-year performance period calculated as defined in the award agreement that can range from
80%
to
140%
of the award earned based on the OR and ROIC achieved. The number of nonvested shares ultimately earned will range between
zero
to
200%
of the target award.
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
A summary of performance based nonvested stock activity at target is as follows:
|
|
|
|
|
|
|
|
|
Target Number of Shares *
|
|
Weighted-Average Grant Date Fair Value
|
Nonvested stock, at December 31, 2015
|
141,604
|
|
|
$
|
106.83
|
|
Granted
|
62,866
|
|
|
82.71
|
|
Vested
|
(59,463
|
)
|
|
105.03
|
|
Forfeited
|
(608
|
)
|
|
105.55
|
|
Nonvested stock, at December 31, 2016
|
144,399
|
|
|
$
|
97.08
|
|
_____________________
*
For the 2016 Awards and the 2015 Awards, participants in the aggregate can earn up to a maximum of
125,732
and
70,420
shares, respectively. For the 2014 Awards, the performance shares earned were
36,300
.
The weighted-average grant date fair value of performance based nonvested stock granted during
2016
,
2015
and
2014
was
$82.71
,
$119.35
and
$94.23
, respectively. The Company expenses the grant date fair value of the awards which are probable of being earned over the performance periods. Compensation cost on performance based awards was
$5.7 million
,
$3.0 million
and
$3.7 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. Total income tax benefit recognized in the consolidated statements of income for performance based awards was
$2.1 million
,
$1.1 million
and
$1.3 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
As of
December 31, 2016
,
$3.9 million
of unrecognized compensation cost related to performance based awards is expected to be recognized over a weighted-average period of
1.0
year. The fair value (at vest date) of shares vested for the year ended
December 31, 2016
was
$5.0 million
.
Employee Stock Purchase Plan.
The employee stock purchase plan (“ESPP”) provides substantially all U.S. full-time employees of the Company, certain subsidiaries and certain other affiliated entities, with the right to subscribe to an aggregate of
4.0 million
shares of common stock of the Company.
Prior to January 1, 2015, eligible employees could contribute, through payroll deductions, up to
5%
of their regular base compensation during
six
-month purchase periods. The purchase price for shares was equal to
90%
of the closing market price on either the exercise date or the offering date, whichever was lower.
Effective January 1, 2015, the ESPP plan was amended to allow eligible employees to contribute up to
10%
of their regular base compensation during
six
-month purchase periods at a purchase price equal to
85%
of the closing market price on either the exercise date or the offering date, whichever is lower.
At the end of each purchase period, the accumulated deductions are applied toward the purchase of the Company’s common stock. Both the discount in grant price and the share option purchase price are valued to derive the award’s fair value. The awards vest and the expense is recognized ratably over the offering period.
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
The following table summarizes activity related to the various ESPP offerings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Date
|
|
Received
from
Employees(i)
In millions
|
|
Date
Issued
|
|
Purchase
Price
|
|
Shares
Issued
|
|
|
|
|
|
|
|
|
|
July 2016 offering
|
January 12, 2017
|
|
$
|
72.12
|
|
|
36,108
|
|
|
$
|
2.6
|
|
January 2016 offering
|
July 11, 2016
|
|
62.66
|
|
|
41,895
|
|
|
2.6
|
|
July 2015 offering
|
January 8, 2016
|
|
63.47
|
|
|
40,477
|
|
|
2.6
|
|
January 2015 offering
|
July 6, 2015
|
|
77.52
|
|
|
35,097
|
|
|
2.7
|
|
July 2014 offering
|
January 9, 2015
|
|
96.48
|
|
|
17,639
|
|
|
1.7
|
|
January 2014 offering
|
July 10, 2014
|
|
96.76
|
|
|
17,026
|
|
|
1.6
|
|
_____________________
|
|
(i)
|
Represents amounts received from employees through payroll deductions for share purchases under applicable offering.
|
The fair value of the ESPP stock purchase rights is estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average assumptions used for each of the respective periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Expected dividend yield
|
1.65
|
%
|
|
1.20
|
%
|
|
0.99
|
%
|
Expected volatility
|
23.84
|
%
|
|
17.00
|
%
|
|
19.03
|
%
|
Risk-free interest rate
|
0.46
|
%
|
|
0.10
|
%
|
|
0.10
|
%
|
Expected term
(years)
|
0.5
|
|
|
0.5
|
|
|
0.5
|
|
Weighted-average grant date fair value
|
$
|
17.29
|
|
|
$
|
20.55
|
|
|
$
|
17.13
|
|
Compensation expense of
$1.4 million
,
$1.3 million
, and
$0.6 million
was recognized for ESPP option awards for the years ended
December 31, 2016
,
2015
, and
2014
, respectively. At
December 31, 2016
, there were
3.6 million
remaining shares available for future ESPP offerings under the plan.
Note
16
. Commitments and Contingencies
Concession Duty.
Under KCSM’s
50
-year Concession, which could expire in 2047 unless extended, KCSM pays annual concession duty expense of
1.25%
of gross revenues. For the year ended
December 31, 2016
, the concession duty expense, which is recorded within materials and other in operating expenses, was
$14.9 million
, compared to
$15.4 million
and
$15.8 million
for the same periods in
2015
and
2014
, respectively.
Litigation.
The Company is a party to various legal proceedings and administrative actions, all of which, except as set forth below, are of an ordinary, routine nature and incidental to its operations. Included in these proceedings are various tort claims brought by current and former employees for job-related injuries and by third parties for injuries related to railroad operations. KCS aggressively defends these matters and has established liability 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, other than those proceedings described in detail below, such proceedings and actions should not, individually, or in the aggregate, have a material adverse effect on the Company’s consolidated financial statements.
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
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.
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
December 31, 2016
is based on an updated actuarial study of personal injury claims through November 30, 2016 and review of December 2016 experience. For the years ended
December 31, 2016
and
2015
, the Company recorded a
$1.1 million
and
$6.1 million
reduction, respectively, in personal injury liability, due to changes in estimates as a result of the Company’s claims development and settlement experience.
The personal injury liability activity was as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Balance at beginning of year
|
$
|
23.9
|
|
|
$
|
29.3
|
|
Accruals
|
4.8
|
|
|
6.8
|
|
Changes in estimate
|
(1.1
|
)
|
|
(6.1
|
)
|
Payments
|
(3.8
|
)
|
|
(6.1
|
)
|
Balance at end of year
|
$
|
23.8
|
|
|
$
|
23.9
|
|
Certain Disputes with Ferromex.
KCSM and Ferrocarril Mexicano, S.A. de C.V. (“Ferromex”) use certain trackage rights, switching services and interline services provided by each other. KCSM and Ferromex had not agreed on the rates to be charged for trackage rights and switching services for periods beginning in 1998 through December 31, 2008, or for interline services for periods beginning in 1998 through February 8, 2010. Both KCSM and Ferromex had initiated administrative proceedings seeking a determination by the Mexican Secretaría de Comunicaciones y Transportes (“Secretary of Communications and
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Transportation” or “SCT”) of the rates that KCSM and Ferromex should pay each other. The SCT issued rulings in 2002 and 2008 setting the rates for the services and both KCSM and Ferromex had challenged these rulings based on different grounds. Additionally, KCSM and Ferromex had not settled amounts payable to each other for trackage rights and switching services for the year ended December 31, 2009.
In the first quarter of 2016, KCSM and Ferromex executed a settlement agreement resolving amounts payable to each other for trackage rights and switching services for periods beginning in 1998 through December 31, 2009, and for interline services for periods beginning in 1998 through February 8, 2010. Under this settlement agreement, KCSM and Ferromex also agreed to terminate all related administrative proceedings. This settlement agreement did not have a significant effect on the consolidated financial statements.
Tax Contingencies.
Information regarding tax contingencies is included in Note 13 Income Taxes - Tax Contingencies.
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 does not believe that, when resolved, these disputes will 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 experience, deterioration of customer creditworthiness 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 as of
December 31, 2016
.
Panama Canal Railway Company (”PCRC”) Guarantees and Indemnities.
At
December 31, 2016
, the Company had issued and outstanding
$5.5 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.
Mexican Antitrust Review.
Pursuant to the Mexican Regulatory Railroad Service Law as recently amended and the new Mexican Antitrust Law, on September 12, 2016, the Mexican government’s antitrust commission (Comisión Federal de Competencia Económica or “COFECE”), announced that it would review competitive conditions in the Mexican railroad industry, with respect to the existence of effective competition in the provision of interconnection services, trackage rights and switching rights used to render public freight transport in Mexico. The COFECE review includes the entire freight rail transportation market in Mexico and is not targeted to any single rail carrier. Notwithstanding that it is too early to determine what, if any, impact this review may have on Mexican rail operations in the future, if the COFECE determines there is a lack of effective competition, it could request the new Mexican Agencia Reguladora del Transporte Ferroviario (“Regulatory Agency of Rail Transportation” or “ARTF”), which oversees primary regulatory jurisdiction for the Company’s Mexican operations, to establish new limited mandatory trackage rights and/or rate regulation under the Amendments to the Mexican Regulatory Railroad Service Law. COFECE has extended its own preliminary report deadline to January 30, 2017.
Surface Transportation Board.
On July 27, 2016, the Surface Transportation Board issued a Notice of Proposed Rulemaking in Ex Parte 711 (Sub-No.1) Reciprocal Switching proposing rules related to reciprocal switching. Initial comments on the proposed rule were due by October 26, 2016, and replies to the initial comments were due by January 13, 2017. Until the rule has been finalized, KCS cannot determine what effect, if any, the rule will have on its business.
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note 17. Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
(In millions, except per share amounts)
|
2016
|
|
|
|
|
|
|
|
Revenues
|
$
|
598.5
|
|
|
$
|
604.5
|
|
|
$
|
568.5
|
|
|
$
|
562.7
|
|
Operating income
|
210.9
|
(i)
|
|
199.8
|
(i)
|
|
219.9
|
(i)
|
|
187.9
|
|
Net income
|
130.3
|
|
|
121.0
|
|
|
120.5
|
|
|
108.1
|
|
Net income attributable to Kansas City Southern and subsidiaries
|
129.6
|
|
|
120.6
|
|
|
120.1
|
|
|
107.8
|
|
Per share data:
|
|
|
|
|
|
|
|
Basic earnings per common share
|
$
|
1.21
|
|
|
$
|
1.12
|
|
|
$
|
1.12
|
|
|
$
|
1.00
|
|
Diluted earnings per common share
|
1.21
|
|
|
1.12
|
|
|
1.11
|
|
|
0.99
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
Revenues
|
$
|
598.0
|
|
|
$
|
631.9
|
|
|
$
|
585.8
|
|
|
$
|
603.1
|
|
Operating income
|
218.9
|
|
|
219.9
|
|
|
186.8
|
|
|
178.2
|
(ii)
|
Net income
|
140.0
|
|
|
131.9
|
|
|
112.2
|
|
|
101.2
|
|
Net income attributable to Kansas City Southern and subsidiaries
|
139.3
|
|
|
131.6
|
|
|
111.8
|
|
|
100.8
|
|
Per share data:
|
|
|
|
|
|
|
|
Basic earnings per common share
|
$
|
1.28
|
|
|
$
|
1.20
|
|
|
$
|
1.01
|
|
|
$
|
0.91
|
|
Diluted earnings per common share
|
1.28
|
|
|
1.20
|
|
|
1.01
|
|
|
0.91
|
|
_____________________
|
|
(i)
|
During the second, third and fourth quarters of 2016, the Company recognized
$34.0 million
,
$15.6 million
and
$13.2 million
, respectively, of credits available under changes in Mexican law for the excise tax included in the price of fuel that is purchased and consumed in locomotives and certain work equipment in Mexico.
|
|
|
(ii)
|
During the first quarter of 2015, the Company recognized pre-tax lease termination costs of
$9.6 million
, due to the early termination of certain operating leases and the related purchase of equipment.
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note
18
. 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)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Revenues
|
|
|
|
|
|
U.S.
|
$
|
1,210.8
|
|
|
$
|
1,248.4
|
|
|
$
|
1,372.2
|
|
Mexico
|
1,123.4
|
|
|
1,170.4
|
|
|
1,204.9
|
|
Total revenues
|
$
|
2,334.2
|
|
|
$
|
2,418.8
|
|
|
$
|
2,577.1
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Property and equipment (including concession assets), net
|
|
|
|
U.S.
|
$
|
4,960.6
|
|
|
$
|
4,642.6
|
|
Mexico
|
3,109.1
|
|
|
3,062.8
|
|
Total property and equipment (including concession assets), net
|
$
|
8,069.7
|
|
|
$
|
7,705.4
|
|
Note 19. Subsequent Events
Foreign Currency Hedging
As of December 31, 2016, the Company had outstanding foreign currency forward contracts with an aggregate notional amount of
$340.0 million
. During January 2017, the Company entered into offsetting foreign currency forward contracts with an aggregate notional amount of
$287.0 million
. These offsetting contracts matured on
January 17, 2017
, and obligated the Company to sell a total of
Ps.6,207.7 million
at a weighted-average exchange rate of
Ps.21.63
to each U.S. dollar.
During January 2017, the Company entered into foreign currency option contracts known as zero-cost collars with an aggregate notional amount of
$380.0 million
to hedge its exposure to fluctuations in the Mexican cash tax obligation due to changes in the value of the Mexican peso against the U.S. dollar. The zero-cost collar contracts with an aggregate notional amount of
$130.0 million
and
$250.0 million
will mature on
April 25, 2017
and
January 16, 2018
, respectively. The zero-cost collar contracts have a weighted-average rate of
Ps.21.61
to each U.S. dollar for the Mexican peso call options purchased by KCS and a weighted-average rate of
Ps.23.87
to each U.S. dollar for the Mexican peso put options sold by KCS.
The Company has not designated these foreign currency derivative instruments as hedging instruments for accounting purposes. The Company will measure the foreign currency derivative instruments at fair value each period and will recognize any change in fair value in foreign exchange gain (loss) within the consolidated statements of comprehensive income.
Common Stock Dividend
On January 26, 2017, the Company’s Board of Directors declared a cash dividend of
$0.33
per share payable on
April 5, 2017
, to common stockholders of record as of
March 13, 2017
. The aggregate amount of the dividend declared was approximately
$35.2 million
.
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Note 20. Condensed Consolidating Financial Information
Pursuant to Securities and Exchange Commission (“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
December 31, 2016
, KCS had outstanding
$2,093.5 million
senior notes due through
2045
. 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 KCSR and certain wholly-owned domestic subsidiaries of KCS. As a result, the Company is providing the following condensed consolidating financial information
(in millions)
.
Condensed Consolidating Statements of Comprehensive Income - KCS Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
KCS
|
Revenues
|
$
|
—
|
|
|
$
|
1,101.3
|
|
|
$
|
1,252.5
|
|
|
$
|
(19.6
|
)
|
|
$
|
2,334.2
|
|
Operating expenses
|
4.7
|
|
|
794.7
|
|
|
734.0
|
|
|
(17.7
|
)
|
|
1,515.7
|
|
Operating income (loss)
|
(4.7
|
)
|
|
306.6
|
|
|
518.5
|
|
|
(1.9
|
)
|
|
818.5
|
|
Equity in net earnings of affiliates
|
468.5
|
|
|
7.1
|
|
|
12.7
|
|
|
(473.7
|
)
|
|
14.6
|
|
Interest expense
|
(81.9
|
)
|
|
(83.0
|
)
|
|
(63.1
|
)
|
|
130.3
|
|
|
(97.7
|
)
|
Foreign exchange loss
|
—
|
|
|
—
|
|
|
(72.0
|
)
|
|
—
|
|
|
(72.0
|
)
|
Other income (expense), net
|
104.4
|
|
|
(0.2
|
)
|
|
24.1
|
|
|
(129.0
|
)
|
|
(0.7
|
)
|
Income before income taxes
|
486.3
|
|
|
230.5
|
|
|
420.2
|
|
|
(474.3
|
)
|
|
662.7
|
|
Income tax expense
|
7.1
|
|
|
87.4
|
|
|
89.2
|
|
|
(0.9
|
)
|
|
182.8
|
|
Net income
|
479.2
|
|
|
143.1
|
|
|
331.0
|
|
|
(473.4
|
)
|
|
479.9
|
|
Less: Net income attributable to noncontrolling interest
|
—
|
|
|
1.8
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
Net income attributable to Kansas City Southern and subsidiaries
|
479.2
|
|
|
141.3
|
|
|
331.0
|
|
|
(473.4
|
)
|
|
478.1
|
|
Other comprehensive loss
|
(1.5
|
)
|
|
—
|
|
|
(2.5
|
)
|
|
2.5
|
|
|
(1.5
|
)
|
Comprehensive income attributable to Kansas City Southern and subsidiaries
|
$
|
477.7
|
|
|
$
|
141.3
|
|
|
$
|
328.5
|
|
|
$
|
(470.9
|
)
|
|
$
|
476.6
|
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Comprehensive Income - KCS Notes—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
KCS
|
Revenues
|
$
|
—
|
|
|
$
|
1,135.9
|
|
|
$
|
1,302.3
|
|
|
$
|
(19.4
|
)
|
|
$
|
2,418.8
|
|
Operating expenses
|
4.6
|
|
|
779.7
|
|
|
849.3
|
|
|
(18.6
|
)
|
|
1,615.0
|
|
Operating income (loss)
|
(4.6
|
)
|
|
356.2
|
|
|
453.0
|
|
|
(0.8
|
)
|
|
803.8
|
|
Equity in net earnings of affiliates
|
464.0
|
|
|
7.4
|
|
|
16.5
|
|
|
(469.6
|
)
|
|
18.3
|
|
Interest expense
|
(4.6
|
)
|
|
(84.9
|
)
|
|
(40.1
|
)
|
|
47.7
|
|
|
(81.9
|
)
|
Debt retirement and exchange costs
|
0.1
|
|
|
(5.2
|
)
|
|
(2.5
|
)
|
|
—
|
|
|
(7.6
|
)
|
Foreign exchange loss
|
—
|
|
|
—
|
|
|
(56.6
|
)
|
|
—
|
|
|
(56.6
|
)
|
Other income (expense), net
|
45.9
|
|
|
(3.1
|
)
|
|
1.4
|
|
|
(47.6
|
)
|
|
(3.4
|
)
|
Income before income taxes
|
500.8
|
|
|
270.4
|
|
|
371.7
|
|
|
(470.3
|
)
|
|
672.6
|
|
Income tax expense
|
16.5
|
|
|
98.3
|
|
|
72.5
|
|
|
—
|
|
|
187.3
|
|
Net income
|
484.3
|
|
|
172.1
|
|
|
299.2
|
|
|
(470.3
|
)
|
|
485.3
|
|
Less: Net income attributable to noncontrolling interest
|
—
|
|
|
1.8
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
Net income attributable to Kansas City Southern and subsidiaries
|
484.3
|
|
|
170.3
|
|
|
299.2
|
|
|
(470.3
|
)
|
|
483.5
|
|
Other comprehensive loss
|
(1.5
|
)
|
|
—
|
|
|
(2.2
|
)
|
|
2.2
|
|
|
(1.5
|
)
|
Comprehensive income attributable to Kansas City Southern and subsidiaries
|
$
|
482.8
|
|
|
$
|
170.3
|
|
|
$
|
297.0
|
|
|
$
|
(468.1
|
)
|
|
$
|
482.0
|
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Comprehensive Income - KCS Notes—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
KCS
|
Revenues
|
$
|
—
|
|
|
$
|
1,242.0
|
|
|
$
|
1,353.7
|
|
|
$
|
(18.6
|
)
|
|
$
|
2,577.1
|
|
Operating expenses
|
7.6
|
|
|
901.0
|
|
|
879.1
|
|
|
(19.7
|
)
|
|
1,768.0
|
|
Operating income (loss)
|
(7.6
|
)
|
|
341.0
|
|
|
474.6
|
|
|
1.1
|
|
|
809.1
|
|
Equity in net earnings of affiliates
|
476.7
|
|
|
7.6
|
|
|
18.9
|
|
|
(482.1
|
)
|
|
21.1
|
|
Interest expense
|
(0.1
|
)
|
|
(83.3
|
)
|
|
(39.6
|
)
|
|
50.2
|
|
|
(72.8
|
)
|
Debt retirement and exchange costs
|
—
|
|
|
(2.7
|
)
|
|
(3.9
|
)
|
|
—
|
|
|
(6.6
|
)
|
Foreign exchange loss
|
—
|
|
|
—
|
|
|
(35.5
|
)
|
|
—
|
|
|
(35.5
|
)
|
Other income (expense), net
|
50.1
|
|
|
0.2
|
|
|
(1.2
|
)
|
|
(51.3
|
)
|
|
(2.2
|
)
|
Income before income taxes
|
519.1
|
|
|
262.8
|
|
|
413.3
|
|
|
(482.1
|
)
|
|
713.1
|
|
Income tax expense
|
16.5
|
|
|
99.1
|
|
|
93.2
|
|
|
—
|
|
|
208.8
|
|
Net income
|
502.6
|
|
|
163.7
|
|
|
320.1
|
|
|
(482.1
|
)
|
|
504.3
|
|
Less: Net income attributable to noncontrolling interest
|
—
|
|
|
1.7
|
|
|
—
|
|
|
—
|
|
|
1.7
|
|
Net income attributable to Kansas City Southern and subsidiaries
|
502.6
|
|
|
162.0
|
|
|
320.1
|
|
|
(482.1
|
)
|
|
502.6
|
|
Other comprehensive income (loss)
|
(1.2
|
)
|
|
0.1
|
|
|
(1.8
|
)
|
|
1.7
|
|
|
(1.2
|
)
|
Comprehensive income attributable to Kansas City Southern and subsidiaries
|
$
|
501.4
|
|
|
$
|
162.1
|
|
|
$
|
318.3
|
|
|
$
|
(480.4
|
)
|
|
$
|
501.4
|
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Balance Sheets - KCS Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
KCS
|
Assets:
|
|
|
|
|
|
|
|
|
|
Current assets
|
$
|
0.9
|
|
|
$
|
275.4
|
|
|
$
|
381.2
|
|
|
$
|
(9.5
|
)
|
|
$
|
648.0
|
|
Investments
|
—
|
|
|
3.9
|
|
|
29.0
|
|
|
—
|
|
|
32.9
|
|
Investments in consolidated subsidiaries
|
3,497.7
|
|
|
493.7
|
|
|
—
|
|
|
(3,991.4
|
)
|
|
—
|
|
Property and equipment (including concession assets), net
|
—
|
|
|
4,203.6
|
|
|
3,868.8
|
|
|
(2.7
|
)
|
|
8,069.7
|
|
Other assets
|
2,015.5
|
|
|
43.0
|
|
|
252.6
|
|
|
(2,244.2
|
)
|
|
66.9
|
|
Total assets
|
$
|
5,514.1
|
|
|
$
|
5,019.6
|
|
|
$
|
4,531.6
|
|
|
$
|
(6,247.8
|
)
|
|
$
|
8,817.5
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
(501.3
|
)
|
|
$
|
1,004.0
|
|
|
$
|
252.6
|
|
|
$
|
(10.9
|
)
|
|
$
|
744.4
|
|
Long-term debt
|
1,883.1
|
|
|
1,357.7
|
|
|
1,274.9
|
|
|
(2,244.2
|
)
|
|
2,271.5
|
|
Deferred income taxes
|
26.9
|
|
|
1,075.3
|
|
|
188.0
|
|
|
(0.9
|
)
|
|
1,289.3
|
|
Other liabilities
|
4.0
|
|
|
86.3
|
|
|
17.5
|
|
|
—
|
|
|
107.8
|
|
Stockholders’ equity
|
4,101.4
|
|
|
1,181.7
|
|
|
2,798.6
|
|
|
(3,991.8
|
)
|
|
4,089.9
|
|
Noncontrolling interest
|
—
|
|
|
314.6
|
|
|
—
|
|
|
—
|
|
|
314.6
|
|
Total liabilities and equity
|
$
|
5,514.1
|
|
|
$
|
5,019.6
|
|
|
$
|
4,531.6
|
|
|
$
|
(6,247.8
|
)
|
|
$
|
8,817.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
KCS
|
Assets:
|
|
|
|
|
|
|
|
|
|
Current assets
|
$
|
242.8
|
|
|
$
|
189.5
|
|
|
$
|
359.5
|
|
|
$
|
(254.8
|
)
|
|
$
|
537.0
|
|
Investments
|
—
|
|
|
3.9
|
|
|
30.8
|
|
|
—
|
|
|
34.7
|
|
Investments in consolidated subsidiaries
|
3,108.4
|
|
|
479.6
|
|
|
—
|
|
|
(3,588.0
|
)
|
|
—
|
|
Property and equipment (including concession assets), net
|
—
|
|
|
3,903.2
|
|
|
3,803.0
|
|
|
(0.8
|
)
|
|
7,705.4
|
|
Other assets
|
1,791.1
|
|
|
40.6
|
|
|
19.3
|
|
|
(1,787.1
|
)
|
|
63.9
|
|
Total assets
|
$
|
5,142.3
|
|
|
$
|
4,616.8
|
|
|
$
|
4,212.6
|
|
|
$
|
(5,630.7
|
)
|
|
$
|
8,341.0
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
(566.9
|
)
|
|
$
|
1,066.6
|
|
|
$
|
512.8
|
|
|
$
|
(254.9
|
)
|
|
$
|
757.6
|
|
Long-term debt
|
1,759.8
|
|
|
1,260.0
|
|
|
812.3
|
|
|
(1,787.1
|
)
|
|
2,045.0
|
|
Deferred income taxes
|
20.9
|
|
|
998.4
|
|
|
171.8
|
|
|
—
|
|
|
1,191.1
|
|
Other liabilities
|
3.8
|
|
|
94.4
|
|
|
24.4
|
|
|
—
|
|
|
122.6
|
|
Stockholders’ equity
|
3,924.7
|
|
|
887.0
|
|
|
2,691.3
|
|
|
(3,588.7
|
)
|
|
3,914.3
|
|
Noncontrolling interest
|
—
|
|
|
310.4
|
|
|
—
|
|
|
—
|
|
|
310.4
|
|
Total liabilities and equity
|
$
|
5,142.3
|
|
|
$
|
4,616.8
|
|
|
$
|
4,212.6
|
|
|
$
|
(5,630.7
|
)
|
|
$
|
8,341.0
|
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Cash Flows - KCS Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
KCS
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net cash provided
|
$
|
428.4
|
|
|
$
|
236.0
|
|
|
$
|
482.7
|
|
|
$
|
(233.8
|
)
|
|
$
|
913.3
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
—
|
|
|
(373.1
|
)
|
|
(190.8
|
)
|
|
—
|
|
|
(563.9
|
)
|
Purchase or replacement of equipment under operating leases
|
—
|
|
|
(26.6
|
)
|
|
—
|
|
|
—
|
|
|
(26.6
|
)
|
Property investments in MSLLC
|
—
|
|
|
—
|
|
|
(33.1
|
)
|
|
—
|
|
|
(33.1
|
)
|
Proceeds from repayment of loans to affiliates
|
9,067.7
|
|
|
—
|
|
|
—
|
|
|
(9,067.7
|
)
|
|
—
|
|
Loans to affiliates
|
(9,123.4
|
)
|
|
—
|
|
|
—
|
|
|
9,123.4
|
|
|
—
|
|
Contributions to consolidated affiliates
|
(153.4
|
)
|
|
(6.5
|
)
|
|
—
|
|
|
159.9
|
|
|
—
|
|
Other investing activities
|
—
|
|
|
(12.6
|
)
|
|
6.1
|
|
|
1.9
|
|
|
(4.6
|
)
|
Net cash used
|
(209.1
|
)
|
|
(418.8
|
)
|
|
(217.8
|
)
|
|
217.5
|
|
|
(628.2
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
8,698.7
|
|
|
243.5
|
|
|
—
|
|
|
(243.5
|
)
|
|
8,698.7
|
|
Repayment of short-term borrowings
|
(8,597.9
|
)
|
|
(243.5
|
)
|
|
—
|
|
|
243.5
|
|
|
(8,597.9
|
)
|
Proceeds from issuance of long-term debt
|
248.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
248.7
|
|
Repayment of long-term debt
|
(244.8
|
)
|
|
(3.5
|
)
|
|
(28.1
|
)
|
|
—
|
|
|
(276.4
|
)
|
Dividends paid
|
(142.8
|
)
|
|
—
|
|
|
(230.2
|
)
|
|
230.2
|
|
|
(142.8
|
)
|
Shares repurchased
|
(185.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(185.4
|
)
|
Proceeds from loans from affiliates
|
—
|
|
|
8,879.9
|
|
|
—
|
|
|
(8,879.9
|
)
|
|
—
|
|
Repayment of loans from affiliates
|
—
|
|
|
(8,824.2
|
)
|
|
—
|
|
|
8,824.2
|
|
|
—
|
|
Contributions from affiliates
|
—
|
|
|
153.1
|
|
|
6.8
|
|
|
(159.9
|
)
|
|
—
|
|
Other financing activities
|
4.2
|
|
|
(0.1
|
)
|
|
(1.8
|
)
|
|
1.7
|
|
|
4.0
|
|
Net cash provided (used)
|
(219.3
|
)
|
|
205.2
|
|
|
(253.3
|
)
|
|
16.3
|
|
|
(251.1
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Net increase
|
—
|
|
|
22.4
|
|
|
11.6
|
|
|
—
|
|
|
34.0
|
|
At beginning of year
|
0.2
|
|
|
10.2
|
|
|
126.2
|
|
|
—
|
|
|
136.6
|
|
At end of year
|
$
|
0.2
|
|
|
$
|
32.6
|
|
|
$
|
137.8
|
|
|
$
|
—
|
|
|
$
|
170.6
|
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Cash Flows - KCS Notes—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
KCS
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net cash provided
|
$
|
45.3
|
|
|
$
|
356.6
|
|
|
$
|
526.0
|
|
|
$
|
(18.6
|
)
|
|
$
|
909.3
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
—
|
|
|
(382.8
|
)
|
|
(305.2
|
)
|
|
—
|
|
|
(688.0
|
)
|
Purchase or replacement of equipment under operating leases
|
—
|
|
|
(82.8
|
)
|
|
(61.4
|
)
|
|
—
|
|
|
(144.2
|
)
|
Property investments in MSLLC
|
—
|
|
|
—
|
|
|
(17.4
|
)
|
|
—
|
|
|
(17.4
|
)
|
Proceeds from repayment of loans to affiliates
|
293.9
|
|
|
—
|
|
|
—
|
|
|
(293.9
|
)
|
|
—
|
|
Loans to affiliates
|
(80.0
|
)
|
|
—
|
|
|
—
|
|
|
80.0
|
|
|
—
|
|
Other investing activities
|
(0.8
|
)
|
|
(31.4
|
)
|
|
6.5
|
|
|
2.3
|
|
|
(23.4
|
)
|
Net cash provided (used)
|
213.1
|
|
|
(497.0
|
)
|
|
(377.5
|
)
|
|
(211.6
|
)
|
|
(873.0
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
80.0
|
|
|
10,786.2
|
|
|
—
|
|
|
—
|
|
|
10,866.2
|
|
Repayment of short-term borrowings
|
—
|
|
|
(10,937.3
|
)
|
|
(300.0
|
)
|
|
—
|
|
|
(11,237.3
|
)
|
Proceeds from issuance of long-term debt
|
—
|
|
|
663.7
|
|
|
40.0
|
|
|
(80.0
|
)
|
|
623.7
|
|
Repayment of long-term debt
|
—
|
|
|
(88.4
|
)
|
|
(61.4
|
)
|
|
—
|
|
|
(149.8
|
)
|
Dividends paid
|
(140.1
|
)
|
|
—
|
|
|
(17.8
|
)
|
|
17.8
|
|
|
(140.1
|
)
|
Shares repurchased
|
(194.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(194.2
|
)
|
Repayment of loans from affiliates
|
—
|
|
|
(293.9
|
)
|
|
—
|
|
|
293.9
|
|
|
—
|
|
Other financing activities
|
(4.1
|
)
|
|
(9.2
|
)
|
|
(1.4
|
)
|
|
(1.5
|
)
|
|
(16.2
|
)
|
Net cash provided (used)
|
(258.4
|
)
|
|
121.1
|
|
|
(340.6
|
)
|
|
230.2
|
|
|
(247.7
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Net decrease
|
—
|
|
|
(19.3
|
)
|
|
(192.1
|
)
|
|
—
|
|
|
(211.4
|
)
|
At beginning of year
|
0.2
|
|
|
29.5
|
|
|
318.3
|
|
|
—
|
|
|
348.0
|
|
At end of year
|
$
|
0.2
|
|
|
$
|
10.2
|
|
|
$
|
126.2
|
|
|
$
|
—
|
|
|
$
|
136.6
|
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Cash Flows - KCS Notes—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
KCS
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net cash provided
|
$
|
345.3
|
|
|
$
|
379.1
|
|
|
$
|
495.9
|
|
|
$
|
(314.3
|
)
|
|
$
|
906.0
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
—
|
|
|
(479.5
|
)
|
|
(190.2
|
)
|
|
1.5
|
|
|
(668.2
|
)
|
Purchase or replacement of equipment under operating leases
|
—
|
|
|
(203.6
|
)
|
|
(98.5
|
)
|
|
—
|
|
|
(302.1
|
)
|
Property investments in MSLLC
|
—
|
|
|
—
|
|
|
(26.7
|
)
|
|
—
|
|
|
(26.7
|
)
|
Proceeds from repayment of loans to affiliates
|
70.4
|
|
|
—
|
|
|
—
|
|
|
(70.4
|
)
|
|
—
|
|
Contributions to consolidated affiliates
|
(299.6
|
)
|
|
—
|
|
|
—
|
|
|
299.6
|
|
|
—
|
|
Other investing activities
|
(1.0
|
)
|
|
8.6
|
|
|
5.8
|
|
|
0.7
|
|
|
14.1
|
|
Net cash used
|
(230.2
|
)
|
|
(674.5
|
)
|
|
(309.6
|
)
|
|
231.4
|
|
|
(982.9
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
—
|
|
|
15,068.8
|
|
|
300.0
|
|
|
—
|
|
|
15,368.8
|
|
Repayment of short-term borrowings
|
—
|
|
|
(14,920.2
|
)
|
|
—
|
|
|
—
|
|
|
(14,920.2
|
)
|
Proceeds from issuance of long-term debt
|
—
|
|
|
175.0
|
|
|
—
|
|
|
—
|
|
|
175.0
|
|
Repayment of long-term debt
|
—
|
|
|
(423.6
|
)
|
|
(84.4
|
)
|
|
—
|
|
|
(508.0
|
)
|
Dividends paid
|
(116.6
|
)
|
|
—
|
|
|
(314.3
|
)
|
|
314.3
|
|
|
(116.6
|
)
|
Repayment of loans from affiliates
|
—
|
|
|
(70.4
|
)
|
|
—
|
|
|
70.4
|
|
|
—
|
|
Contributions from affiliates
|
—
|
|
|
300.4
|
|
|
1.4
|
|
|
(301.8
|
)
|
|
—
|
|
Other financing activities
|
1.3
|
|
|
(1.4
|
)
|
|
(3.5
|
)
|
|
—
|
|
|
(3.6
|
)
|
Net cash provided (used)
|
(115.3
|
)
|
|
128.6
|
|
|
(100.8
|
)
|
|
82.9
|
|
|
(4.6
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
Net increase (decrease)
|
(0.2
|
)
|
|
(166.8
|
)
|
|
85.5
|
|
|
—
|
|
|
(81.5
|
)
|
At beginning of year
|
0.4
|
|
|
196.3
|
|
|
232.8
|
|
|
—
|
|
|
429.5
|
|
At end of year
|
$
|
0.2
|
|
|
$
|
29.5
|
|
|
$
|
318.3
|
|
|
$
|
—
|
|
|
$
|
348.0
|
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
As of
December 31, 2016
, KCSR had outstanding
$2.9 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 certain wholly-owned domestic subsidiaries. As a result, the Company is providing the following condensed consolidating financial information
(in millions)
.
Condensed Consolidating Statements of Comprehensive Income - KCSR Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Parent
|
|
KCSR
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
KCS
|
Revenues
|
$
|
—
|
|
|
$
|
1,077.3
|
|
|
$
|
43.7
|
|
|
$
|
1,252.5
|
|
|
$
|
(39.3
|
)
|
|
$
|
2,334.2
|
|
Operating expenses
|
4.7
|
|
|
776.3
|
|
|
38.1
|
|
|
734.0
|
|
|
(37.4
|
)
|
|
1,515.7
|
|
Operating income (loss)
|
(4.7
|
)
|
|
301.0
|
|
|
5.6
|
|
|
518.5
|
|
|
(1.9
|
)
|
|
818.5
|
|
Equity in net earnings (losses) of affiliates
|
468.5
|
|
|
(0.2
|
)
|
|
5.3
|
|
|
12.7
|
|
|
(471.7
|
)
|
|
14.6
|
|
Interest expense
|
(81.9
|
)
|
|
(83.0
|
)
|
|
—
|
|
|
(63.1
|
)
|
|
130.3
|
|
|
(97.7
|
)
|
Foreign exchange loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(72.0
|
)
|
|
—
|
|
|
(72.0
|
)
|
Other income (expense), net
|
104.4
|
|
|
(0.2
|
)
|
|
—
|
|
|
24.1
|
|
|
(129.0
|
)
|
|
(0.7
|
)
|
Income before income taxes
|
486.3
|
|
|
217.6
|
|
|
10.9
|
|
|
420.2
|
|
|
(472.3
|
)
|
|
662.7
|
|
Income tax expense
|
7.1
|
|
|
84.3
|
|
|
3.1
|
|
|
89.2
|
|
|
(0.9
|
)
|
|
182.8
|
|
Net income
|
479.2
|
|
|
133.3
|
|
|
7.8
|
|
|
331.0
|
|
|
(471.4
|
)
|
|
479.9
|
|
Less: Net income attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
Net income attributable to Kansas City Southern and subsidiaries
|
479.2
|
|
|
133.3
|
|
|
6.0
|
|
|
331.0
|
|
|
(471.4
|
)
|
|
478.1
|
|
Other comprehensive loss
|
(1.5
|
)
|
|
—
|
|
|
—
|
|
|
(2.5
|
)
|
|
2.5
|
|
|
(1.5
|
)
|
Comprehensive income attributable to Kansas City Southern and subsidiaries
|
$
|
477.7
|
|
|
$
|
133.3
|
|
|
$
|
6.0
|
|
|
$
|
328.5
|
|
|
$
|
(468.9
|
)
|
|
$
|
476.6
|
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Comprehensive Income - KCSR Notes—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
Parent
|
|
KCSR
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
KCS
|
Revenues
|
$
|
—
|
|
|
$
|
1,112.5
|
|
|
$
|
42.1
|
|
|
$
|
1,302.3
|
|
|
$
|
(38.1
|
)
|
|
$
|
2,418.8
|
|
Operating expenses
|
4.6
|
|
|
760.4
|
|
|
38.0
|
|
|
849.3
|
|
|
(37.3
|
)
|
|
1,615.0
|
|
Operating income (loss)
|
(4.6
|
)
|
|
352.1
|
|
|
4.1
|
|
|
453.0
|
|
|
(0.8
|
)
|
|
803.8
|
|
Equity in net earnings (losses) of affiliates
|
464.0
|
|
|
(1.4
|
)
|
|
5.5
|
|
|
16.5
|
|
|
(466.3
|
)
|
|
18.3
|
|
Interest expense
|
(4.6
|
)
|
|
(84.8
|
)
|
|
(0.1
|
)
|
|
(40.1
|
)
|
|
47.7
|
|
|
(81.9
|
)
|
Debt retirement and exchange costs
|
0.1
|
|
|
(5.2
|
)
|
|
—
|
|
|
(2.5
|
)
|
|
—
|
|
|
(7.6
|
)
|
Foreign exchange loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(56.6
|
)
|
|
—
|
|
|
(56.6
|
)
|
Other income (expense), net
|
45.9
|
|
|
(3.2
|
)
|
|
0.1
|
|
|
1.4
|
|
|
(47.6
|
)
|
|
(3.4
|
)
|
Income before income taxes
|
500.8
|
|
|
257.5
|
|
|
9.6
|
|
|
371.7
|
|
|
(467.0
|
)
|
|
672.6
|
|
Income tax expense
|
16.5
|
|
|
95.2
|
|
|
3.1
|
|
|
72.5
|
|
|
—
|
|
|
187.3
|
|
Net income
|
484.3
|
|
|
162.3
|
|
|
6.5
|
|
|
299.2
|
|
|
(467.0
|
)
|
|
485.3
|
|
Less: Net income attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
1.8
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
Net income attributable to Kansas City Southern and subsidiaries
|
484.3
|
|
|
162.3
|
|
|
4.7
|
|
|
299.2
|
|
|
(467.0
|
)
|
|
483.5
|
|
Other comprehensive loss
|
(1.5
|
)
|
|
—
|
|
|
—
|
|
|
(2.2
|
)
|
|
2.2
|
|
|
(1.5
|
)
|
Comprehensive income attributable to Kansas City Southern and subsidiaries
|
$
|
482.8
|
|
|
$
|
162.3
|
|
|
$
|
4.7
|
|
|
$
|
297.0
|
|
|
$
|
(464.8
|
)
|
|
$
|
482.0
|
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Comprehensive Income - KCSR Notes—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
Parent
|
|
KCSR
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
KCS
|
Revenues
|
$
|
—
|
|
|
$
|
1,215.8
|
|
|
$
|
48.7
|
|
|
$
|
1,353.7
|
|
|
$
|
(41.1
|
)
|
|
$
|
2,577.1
|
|
Operating expenses
|
7.6
|
|
|
881.6
|
|
|
41.8
|
|
|
879.1
|
|
|
(42.1
|
)
|
|
1,768.0
|
|
Operating income (loss)
|
(7.6
|
)
|
|
334.2
|
|
|
6.9
|
|
|
474.6
|
|
|
1.0
|
|
|
809.1
|
|
Equity in net earnings (losses) of affiliates
|
476.7
|
|
|
(0.1
|
)
|
|
5.5
|
|
|
18.9
|
|
|
(479.9
|
)
|
|
21.1
|
|
Interest expense
|
(0.1
|
)
|
|
(83.3
|
)
|
|
—
|
|
|
(39.6
|
)
|
|
50.2
|
|
|
(72.8
|
)
|
Debt retirement and exchange costs
|
—
|
|
|
(2.7
|
)
|
|
—
|
|
|
(3.9
|
)
|
|
—
|
|
|
(6.6
|
)
|
Foreign exchange loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(35.5
|
)
|
|
—
|
|
|
(35.5
|
)
|
Other income (expense), net
|
50.1
|
|
|
0.2
|
|
|
—
|
|
|
(1.2
|
)
|
|
(51.3
|
)
|
|
(2.2
|
)
|
Income before income taxes
|
519.1
|
|
|
248.3
|
|
|
12.4
|
|
|
413.3
|
|
|
(480.0
|
)
|
|
713.1
|
|
Income tax expense
|
16.5
|
|
|
94.7
|
|
|
4.4
|
|
|
93.2
|
|
|
—
|
|
|
208.8
|
|
Net income
|
502.6
|
|
|
153.6
|
|
|
8.0
|
|
|
320.1
|
|
|
(480.0
|
)
|
|
504.3
|
|
Less: Net income attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
1.7
|
|
|
—
|
|
|
—
|
|
|
1.7
|
|
Net income attributable to Kansas City Southern and subsidiaries
|
502.6
|
|
|
153.6
|
|
|
6.3
|
|
|
320.1
|
|
|
(480.0
|
)
|
|
502.6
|
|
Other comprehensive income (loss)
|
(1.2
|
)
|
|
0.1
|
|
|
—
|
|
|
(1.8
|
)
|
|
1.7
|
|
|
(1.2
|
)
|
Comprehensive income attributable to Kansas City Southern and subsidiaries
|
$
|
501.4
|
|
|
$
|
153.7
|
|
|
$
|
6.3
|
|
|
$
|
318.3
|
|
|
$
|
(478.3
|
)
|
|
$
|
501.4
|
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Balance Sheets - KCSR Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Parent
|
|
KCSR
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
KCS
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
$
|
0.9
|
|
|
$
|
271.8
|
|
|
$
|
4.6
|
|
|
$
|
381.2
|
|
|
$
|
(10.5
|
)
|
|
$
|
648.0
|
|
Investments
|
—
|
|
|
3.9
|
|
|
—
|
|
|
29.0
|
|
|
—
|
|
|
32.9
|
|
Investments in consolidated subsidiaries
|
3,497.7
|
|
|
(9.8
|
)
|
|
491.7
|
|
|
—
|
|
|
(3,979.6
|
)
|
|
—
|
|
Property and equipment (including concession assets), net
|
—
|
|
|
4,024.5
|
|
|
179.1
|
|
|
3,868.8
|
|
|
(2.7
|
)
|
|
8,069.7
|
|
Other assets
|
2,015.5
|
|
|
43.0
|
|
|
—
|
|
|
252.6
|
|
|
(2,244.2
|
)
|
|
66.9
|
|
Total assets
|
$
|
5,514.1
|
|
|
$
|
4,333.4
|
|
|
$
|
675.4
|
|
|
$
|
4,531.6
|
|
|
$
|
(6,237.0
|
)
|
|
$
|
8,817.5
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
(501.3
|
)
|
|
$
|
913.2
|
|
|
$
|
91.7
|
|
|
$
|
252.6
|
|
|
$
|
(11.8
|
)
|
|
$
|
744.4
|
|
Long-term debt
|
1,883.1
|
|
|
1,357.7
|
|
|
0.1
|
|
|
1,274.9
|
|
|
(2,244.3
|
)
|
|
2,271.5
|
|
Deferred income taxes
|
26.9
|
|
|
937.7
|
|
|
137.6
|
|
|
188.0
|
|
|
(0.9
|
)
|
|
1,289.3
|
|
Other liabilities
|
4.0
|
|
|
86.2
|
|
|
0.1
|
|
|
17.5
|
|
|
—
|
|
|
107.8
|
|
Stockholders’ equity
|
4,101.4
|
|
|
1,038.6
|
|
|
131.3
|
|
|
2,798.6
|
|
|
(3,980.0
|
)
|
|
4,089.9
|
|
Noncontrolling interest
|
—
|
|
|
—
|
|
|
314.6
|
|
|
—
|
|
|
—
|
|
|
314.6
|
|
Total liabilities and equity
|
$
|
5,514.1
|
|
|
$
|
4,333.4
|
|
|
$
|
675.4
|
|
|
$
|
4,531.6
|
|
|
$
|
(6,237.0
|
)
|
|
$
|
8,817.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Parent
|
|
KCSR
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
KCS
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
$
|
242.8
|
|
|
$
|
182.7
|
|
|
$
|
7.7
|
|
|
$
|
359.5
|
|
|
$
|
(255.7
|
)
|
|
$
|
537.0
|
|
Investments
|
—
|
|
|
3.9
|
|
|
—
|
|
|
30.8
|
|
|
—
|
|
|
34.7
|
|
Investments in consolidated subsidiaries
|
3,108.4
|
|
|
(7.6
|
)
|
|
477.6
|
|
|
—
|
|
|
(3,578.4
|
)
|
|
—
|
|
Property and equipment (including concession assets), net
|
—
|
|
|
3,716.4
|
|
|
186.8
|
|
|
3,803.0
|
|
|
(0.8
|
)
|
|
7,705.4
|
|
Other assets
|
1,791.1
|
|
|
40.5
|
|
|
—
|
|
|
19.3
|
|
|
(1,787.0
|
)
|
|
63.9
|
|
Total assets
|
$
|
5,142.3
|
|
|
$
|
3,935.9
|
|
|
$
|
672.1
|
|
|
$
|
4,212.6
|
|
|
$
|
(5,621.9
|
)
|
|
$
|
8,341.0
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
(566.9
|
)
|
|
$
|
959.6
|
|
|
$
|
107.8
|
|
|
$
|
512.8
|
|
|
$
|
(255.7
|
)
|
|
$
|
757.6
|
|
Long-term debt
|
1,759.8
|
|
|
1,259.9
|
|
|
0.1
|
|
|
812.3
|
|
|
(1,787.1
|
)
|
|
2,045.0
|
|
Deferred income taxes
|
20.9
|
|
|
863.7
|
|
|
134.7
|
|
|
171.8
|
|
|
—
|
|
|
1,191.1
|
|
Other liabilities
|
3.8
|
|
|
94.2
|
|
|
0.2
|
|
|
24.4
|
|
|
—
|
|
|
122.6
|
|
Stockholders’ equity
|
3,924.7
|
|
|
758.5
|
|
|
118.9
|
|
|
2,691.3
|
|
|
(3,579.1
|
)
|
|
3,914.3
|
|
Noncontrolling interest
|
—
|
|
|
—
|
|
|
310.4
|
|
|
—
|
|
|
—
|
|
|
310.4
|
|
Total liabilities and equity
|
$
|
5,142.3
|
|
|
$
|
3,935.9
|
|
|
$
|
672.1
|
|
|
$
|
4,212.6
|
|
|
$
|
(5,621.9
|
)
|
|
$
|
8,341.0
|
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Cash Flows - KCSR Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Parent
|
|
KCSR
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
KCS
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided
|
$
|
428.4
|
|
|
$
|
235.4
|
|
|
$
|
0.6
|
|
|
$
|
482.7
|
|
|
$
|
(233.8
|
)
|
|
$
|
913.3
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
—
|
|
|
(372.5
|
)
|
|
(0.6
|
)
|
|
(190.8
|
)
|
|
—
|
|
|
(563.9
|
)
|
Purchase or replacement of equipment under operating leases
|
—
|
|
|
(26.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(26.6
|
)
|
Property investments in MSLLC
|
—
|
|
|
—
|
|
|
—
|
|
|
(33.1
|
)
|
|
—
|
|
|
(33.1
|
)
|
Proceeds from repayment of loans to affiliates
|
9,067.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,067.7
|
)
|
|
—
|
|
Loans to affiliates
|
(9,123.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,123.4
|
|
|
—
|
|
Contributions to consolidated affiliates
|
(153.4
|
)
|
|
—
|
|
|
(6.5
|
)
|
|
—
|
|
|
159.9
|
|
|
—
|
|
Other investing activities
|
—
|
|
|
(12.6
|
)
|
|
—
|
|
|
6.1
|
|
|
1.9
|
|
|
(4.6
|
)
|
Net cash used
|
(209.1
|
)
|
|
(411.7
|
)
|
|
(7.1
|
)
|
|
(217.8
|
)
|
|
217.5
|
|
|
(628.2
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
8,698.7
|
|
|
243.5
|
|
|
—
|
|
|
—
|
|
|
(243.5
|
)
|
|
8,698.7
|
|
Repayment of short-term borrowings
|
(8,597.9
|
)
|
|
(243.5
|
)
|
|
—
|
|
|
—
|
|
|
243.5
|
|
|
(8,597.9
|
)
|
Proceeds from issuance of long-term debt
|
248.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
248.7
|
|
Repayment of long-term debt
|
(244.8
|
)
|
|
(3.4
|
)
|
|
(0.1
|
)
|
|
(28.1
|
)
|
|
—
|
|
|
(276.4
|
)
|
Dividends paid
|
(142.8
|
)
|
|
—
|
|
|
—
|
|
|
(230.2
|
)
|
|
230.2
|
|
|
(142.8
|
)
|
Shares repurchased
|
(185.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(185.4
|
)
|
Proceeds from loans from affiliates
|
—
|
|
|
8,879.9
|
|
|
—
|
|
|
—
|
|
|
(8,879.9
|
)
|
|
—
|
|
Repayment of loans from affiliates
|
—
|
|
|
(8,824.2
|
)
|
|
—
|
|
|
—
|
|
|
8,824.2
|
|
|
—
|
|
Contributions from affiliates
|
—
|
|
|
146.6
|
|
|
6.5
|
|
|
6.8
|
|
|
(159.9
|
)
|
|
—
|
|
Other financing activities
|
4.2
|
|
|
(0.1
|
)
|
|
—
|
|
|
(1.8
|
)
|
|
1.7
|
|
|
4.0
|
|
Net cash provided (used)
|
(219.3
|
)
|
|
198.8
|
|
|
6.4
|
|
|
(253.3
|
)
|
|
16.3
|
|
|
(251.1
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease)
|
—
|
|
|
22.5
|
|
|
(0.1
|
)
|
|
11.6
|
|
|
—
|
|
|
34.0
|
|
At beginning of year
|
0.2
|
|
|
10.1
|
|
|
0.1
|
|
|
126.2
|
|
|
—
|
|
|
136.6
|
|
At end of year
|
$
|
0.2
|
|
|
$
|
32.6
|
|
|
$
|
—
|
|
|
$
|
137.8
|
|
|
$
|
—
|
|
|
$
|
170.6
|
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Cash Flows - KCSR Notes—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
Parent
|
|
KCSR
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
KCS
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided
|
$
|
45.3
|
|
|
$
|
355.6
|
|
|
$
|
1.0
|
|
|
$
|
526.0
|
|
|
$
|
(18.6
|
)
|
|
$
|
909.3
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
—
|
|
|
(381.5
|
)
|
|
(1.3
|
)
|
|
(305.2
|
)
|
|
—
|
|
|
(688.0
|
)
|
Purchase or replacement of equipment under operating leases
|
—
|
|
|
(82.8
|
)
|
|
—
|
|
|
(61.4
|
)
|
|
—
|
|
|
(144.2
|
)
|
Property investments in MSLLC
|
—
|
|
|
—
|
|
|
—
|
|
|
(17.4
|
)
|
|
—
|
|
|
(17.4
|
)
|
Proceeds from repayment of loans to affiliates
|
293.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(293.9
|
)
|
|
—
|
|
Loans to affiliates
|
(80.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
80.0
|
|
|
—
|
|
Other investing activities
|
(0.8
|
)
|
|
(30.7
|
)
|
|
(0.7
|
)
|
|
6.5
|
|
|
2.3
|
|
|
(23.4
|
)
|
Net cash provided (used)
|
213.1
|
|
|
(495.0
|
)
|
|
(2.0
|
)
|
|
(377.5
|
)
|
|
(211.6
|
)
|
|
(873.0
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
80.0
|
|
|
10,786.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,866.2
|
|
Repayment of short-term borrowings
|
—
|
|
|
(10,937.3
|
)
|
|
—
|
|
|
(300.0
|
)
|
|
—
|
|
|
(11,237.3
|
)
|
Proceeds from issuance of long-term debt
|
—
|
|
|
663.7
|
|
|
—
|
|
|
40.0
|
|
|
(80.0
|
)
|
|
623.7
|
|
Repayment of long-term debt
|
—
|
|
|
(88.3
|
)
|
|
(0.1
|
)
|
|
(61.4
|
)
|
|
—
|
|
|
(149.8
|
)
|
Dividends paid
|
(140.1
|
)
|
|
—
|
|
|
—
|
|
|
(17.8
|
)
|
|
17.8
|
|
|
(140.1
|
)
|
Shares repurchased
|
(194.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(194.2
|
)
|
Repayment of loans from affiliates
|
—
|
|
|
(293.9
|
)
|
|
—
|
|
|
—
|
|
|
293.9
|
|
|
—
|
|
Other financing activities
|
(4.1
|
)
|
|
(9.9
|
)
|
|
0.7
|
|
|
(1.4
|
)
|
|
(1.5
|
)
|
|
(16.2
|
)
|
Net cash provided (used)
|
(258.4
|
)
|
|
120.5
|
|
|
0.6
|
|
|
(340.6
|
)
|
|
230.2
|
|
|
(247.7
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease
|
—
|
|
|
(18.9
|
)
|
|
(0.4
|
)
|
|
(192.1
|
)
|
|
—
|
|
|
(211.4
|
)
|
At beginning of year
|
0.2
|
|
|
29.0
|
|
|
0.5
|
|
|
318.3
|
|
|
—
|
|
|
348.0
|
|
At end of year
|
$
|
0.2
|
|
|
$
|
10.1
|
|
|
$
|
0.1
|
|
|
$
|
126.2
|
|
|
$
|
—
|
|
|
$
|
136.6
|
|
Kansas City Southern and Subsidiaries
Notes to Consolidated Financial Statements-(Continued)
Condensed Consolidating Statements of Cash Flows - KCSR Notes—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
Parent
|
|
KCSR
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
KCS
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided
|
$
|
345.3
|
|
|
$
|
377.0
|
|
|
$
|
2.1
|
|
|
$
|
495.9
|
|
|
$
|
(314.3
|
)
|
|
$
|
906.0
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
—
|
|
|
(477.8
|
)
|
|
(1.7
|
)
|
|
(190.2
|
)
|
|
1.5
|
|
|
(668.2
|
)
|
Purchase or replacement of equipment under operating leases
|
—
|
|
|
(203.6
|
)
|
|
—
|
|
|
(98.5
|
)
|
|
—
|
|
|
(302.1
|
)
|
Property investments in MSLLC
|
—
|
|
|
—
|
|
|
—
|
|
|
(26.7
|
)
|
|
—
|
|
|
(26.7
|
)
|
Proceeds from repayment of loans to affiliates
|
70.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(70.4
|
)
|
|
—
|
|
Contributions to consolidated affiliates
|
(299.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
299.6
|
|
|
—
|
|
Other investing activities
|
(1.0
|
)
|
|
9.7
|
|
|
(1.1
|
)
|
|
5.8
|
|
|
0.7
|
|
|
14.1
|
|
Net cash used
|
(230.2
|
)
|
|
(671.7
|
)
|
|
(2.8
|
)
|
|
(309.6
|
)
|
|
231.4
|
|
|
(982.9
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
—
|
|
|
15,068.8
|
|
|
—
|
|
|
300.0
|
|
|
—
|
|
|
15,368.8
|
|
Repayment of short-term borrowings
|
—
|
|
|
(14,920.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,920.2
|
)
|
Proceeds from issuance of long-term debt
|
—
|
|
|
175.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
175.0
|
|
Repayment of long-term debt
|
—
|
|
|
(423.5
|
)
|
|
(0.1
|
)
|
|
(84.4
|
)
|
|
—
|
|
|
(508.0
|
)
|
Dividends paid
|
(116.6
|
)
|
|
—
|
|
|
—
|
|
|
(314.3
|
)
|
|
314.3
|
|
|
(116.6
|
)
|
Repayment of loans from affiliates
|
—
|
|
|
(70.4
|
)
|
|
—
|
|
|
—
|
|
|
70.4
|
|
|
—
|
|
Contributions from affiliates
|
—
|
|
|
299.3
|
|
|
1.1
|
|
|
1.4
|
|
|
(301.8
|
)
|
|
—
|
|
Other financing activities
|
1.3
|
|
|
(1.4
|
)
|
|
—
|
|
|
(3.5
|
)
|
|
—
|
|
|
(3.6
|
)
|
Net cash provided (used)
|
(115.3
|
)
|
|
127.6
|
|
|
1.0
|
|
|
(100.8
|
)
|
|
82.9
|
|
|
(4.6
|
)
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease)
|
(0.2
|
)
|
|
(167.1
|
)
|
|
0.3
|
|
|
85.5
|
|
|
—
|
|
|
(81.5
|
)
|
At beginning of year
|
0.4
|
|
|
196.1
|
|
|
0.2
|
|
|
232.8
|
|
|
—
|
|
|
429.5
|
|
At end of year
|
$
|
0.2
|
|
|
$
|
29.0
|
|
|
$
|
0.5
|
|
|
$
|
318.3
|
|
|
$
|
—
|
|
|
$
|
348.0
|
|